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Keisler: “We are forced to give our territorial rights ... away.” Vishal Malhotra
Keisler: “We are forced to give our territorial rights ... away.” Vishal Malhotra

Making beer is a heady process, so to speak, full of rich smells and flavors and delicate arts.

Making beer law, on the other hand, apparently follows another time-tested rule — like making sausage, it’s a process you don’t want to watch.

Last year, while bills were moving through the Texas Legislature aimed at helping the state’s craft brewing industry, a powerful group of beer distributors managed to insert a provision that eliminates millions of dollars in potential income for small breweries and transfers it to the distibutors’ own pockets.

The provision has to do with breweries granting exclusive rights to distributors for selling their beer to retailers and bars in certain areas of the state or even the whole state. Essentially, the new law prevents breweries from requiring distributors to pay them for those territorial rights — but allows the distributors, once they have secured the territory, to sell them to one another.

State Sen. John Carona of Dallas added the provision to Senate Bill 639 at the behest of Wholesale Distributors of Texas at the last hour of a lengthy negotiation session in March 2013. Others involved in the negotiating process said they felt they had to accept that provision in order to get helpful legislation passed.

Keith Strama, attorney for Wholesale Distributors, did not respond to inquiries from Fort Worth Weekly. In a Houston Chronicle article in 2013, he said the territory provision would clear up “confusion in the marketplace.

However, his description of the bill was anything but clear. The new provisions, he said, were “housekeeping [measures] that would clarify what already is not allowed by the state’s alcoholic beverage code. Since the code does not explicitly authorize selling distribution rights, it should not be legal.”

The distributors group may have overplayed its hand. On Dec. 10, three Texas craft breweries filed suit against the Texas Alcoholic Beverage Commission, seeking to have the provision declared unconstitutional. Craft brewers said the territorial exclusivity payments from distributors have been important in allowing them to buy equipment and otherwise grow their businesses.

The Institute for Justice, a national, nonprofit libertarian public interest law firm, filed the suit on behalf of Revolver Brewing of Granbury, Dallas-based Peticolas Brewing, and Austin’s Live Oak Brewing.

Lead plaintiffs’ attorney Matt Miller said a brewery owner’s territorial distribution rights are a type of property. By stripping that right from brewers, the government is placing an “unconstitutional condition” on them, he said. The suit does not seek damages.

In the liquor industry, distributors, also called wholesalers, act as middlemen, providing breweries with access to regional and national markets. The three-tiered system of brewers, distributors, and retailers has been staunchly enforced in the United States since the end of Prohibition.

In Texas, until the new law passed, breweries would build their brand locally, then, when they were ready to expand, they could enter into a contract with one distributor. In exchange for giving that distributor exclusive rights to sell their product, the brewery would receive a payment that it could use to further grow the  business. Distributors specialize in transporting beer over large distances to a vast market of grocery stores and bars. And brewers can focus on making beer.

Because of the new law, “If we want to work with a distributor in a place like Houston or San Antonio, we are forced to give our territorial rights to that area away for free,” said Rhett Keisler, co-founder of Revolver, in an e-mail to the Weekly. “If the distributor is willing to return those territorial rights to us, they can force us to pay for them.  It makes no sense to us, and we believe the law is unconstitutional.”  His brewery only opened in 2013.

The Institute for Justice said in a statement that the new law was a concession to

“politically connected beer distributors.”

A spokesperson for the Texas Alcoholic Beverage Commission said the agency would not comment on pending litigation.

Rick Donley, president of the Beer Alliance of Texas, a separate trade association representing several Texas distributors, said his group cautioned against the provision last year. The alliance has taken a neutral stance on the lawsuit.

The new law, Donley said, came at the insistence of Carona and the Wholesale Distributors of Texas. He said final negotiations for the bill occurred in a frantic one-hour session.

“All the stakeholders [for SB639] got summoned to a meeting,” he recalled. “We had an hour to get a deal done. All the craft beer legislation was hanging in the balance. Sen. Carona had made it clear that if we didn’t come to an agreement, nobody was going to be happy.”

Carona did not reply to interview requests for this story.

The pressure to pass the comprehensive package of craft beer laws was high. The legislature in 2011 had failed to pass significant reforms at a time when Texas was experiencing rapid growth in its craft beer industry. The 2013 bundle of laws raised the production cap for breweries and brewpubs while allowing breweries to sell on-site for the first time, among other reforms.

“And so we negotiated that particular language even though members of the Beer Alliance and I cautioned that we didn’t think it was a very good idea,” Donley said.

The addition of the last-minute ban on territory payments, Miller said, was a shameless example of political horse-trading.

“It was kind of a nasty tactic — everything passes or nothing passes,” he said. “The law is stifling new breweries’ ability to grow. Typically, breweries sell these territorial rights, and they reinvest that money to increase capacity [to supply the new territory].”

Keisler said the territory payments “can be used to buy new brewing equipment [and] new trucks to deliver the beer, and [to] hire additional people to make it all happen.”

David Wedemeier, co-founder of Fort Worth-based Martin House Brewing, is not a party to the lawsuit, but he supports it.

“The logic behind the current law just doesn’t stand up,” he said in an e-mail to the Weekly.  “It’s our thinking [at Martin House] that if something has value and can be sold, then it makes no sense to prohibit the creator [from selling it].”

“With [so] much lip service paid to Texas [for] being a business-friendly, free-market state, the current laws don’t seem to make sense,” he said.

The new law is pitting some distributors and breweries against each other when the real focus should be on the two groups working together, Donley said.

“Part of the recent [craft beer growth] has come because beer distributors give them the ability to access the marketplace,” he said. “Brewers need to be focused on making beer.”

From a national perspective the recently passed law is an abnormality, Miller said. “Kentucky passed a similar law in 2014, and while two doesn’t make for a trend, it is a worrisome sign for the beer industry.”

For Miller and the owners of Revolver, Peticolas, and Live Oak, the case isn’t about placing blame on TABC or any other group.

`“A win for us would benefit all craft brewers,” Miller said.

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