Craft brewers sue to overturn state regulation

A group of Texas craft brewery owners is suing to overturn a state law that affects their distribution rights.

Until a few years ago, beer distributors in Texas paid craft breweries for the right to sell their products. But in 2013, state lawmakers passed a bill that brought sweeping changes to the industry. Breweries could no longer accept payment for their “territorial rights” – in other words, for the right to distribute their beer.

Chip McElroy is the owner of the Live Oak Brewing Company in Del Valle. It’s one of three breweries that are suing the Texas Alcoholic Beverage Commission to overturn the law.

“The ability to sell our distribution rights was taken away, and we now must give it to them for free, and they’re very valuable, and everybody recognizes that,” McElroy said.

McElroy said he can no longer profit from selling his distribution rights, yet distributors can still turn around and sell those rights to others. Restaurants and bars around Austin sell Live Oak beer, but McElroy said he can’t afford to expand to new markets without generating revenue from selling his distribution rights.

Attorney Arif Panju is with the Virginia-based Institute for Justice, which is representing Live Oak, Revolver Brewing and the Peticolas Brewing Company.

“The state has no legitimate interest in preventing craft breweries from selling their distribution rights,” Panju said. “They should be free to go to the negotiating table, and if distributors want to pay for their rights, that’s between the distributor and the craft beer company.”

Those who support the law say it prohibits the unfair practice of so-called “reach-back pricing” – basically, manufacturers hiking what they charge distributors based on what the distributors are charging retailers. Proponents say the law allows distributors to remain independent and operate without pressure from brewers, but Panju said the law unfairly favors one group over the other.

“The truth in the record before the court is quite clear, and that is that the constitutional rights of Live Oak Brewing, Revolver and Peticolas are being violated by the state of Texas, and the court should rule in the plaintiff’s favor and allow them to exercise their right to earn an honest living,” he said.

A ruling is expected within the next two weeks.

Photo by Jorge Sanhueza-Lyon/KUT. This story was produced as part of the Austin Monitor’s reporting partnership with KUT.

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