On Tap: Beer Distribution Rights

On Tap: Beer Distribution Rights

There’s trouble, right here in River City. Earlier this month, the Institute of Justice and three Texas-based breweries filed a complaint in Travis County against the Texas Alcoholic Beverage Commission, claiming the state’s forcing of brewers to give up their distribution or territorial rights to distributors is unconstitutional.

Per the complaint, prior to 2013, brewers could negotiate with their distributors for payment for their territorial rights. During the 83rd Texas Legislative Session in 2013, however, this practice ceased upon the passage of Senate Bill 639. While brewers would no longer be compensated for these rights, distributors could turn around and sell the rights to another distributor and accept subsequent payment. If a brewer wishes to reacquire the territorial rights, he or she would have to pay the distributor, even though they were initially received for free.

“The burden of the Sale Restriction falls squarely on craft brewers, the benefit squarely with distributors. What brewers previously sold for compensation, they are now required to give away. What distributors previously had to negotiate for on the open market, they now receive for free. And distributors are even allowed to take those territorial rights and resell them for compensation.”

Also according to the complaint, the law not only denies brewers an important property right, but also makes it more difficult and expensive to expand their businesses.

Chip McElroy, president of Live Oak Brewing, one of the plaintiffs in the case, was quoted in Inside Counsel.

“For the last 18 years, I’ve poured my life into this business. I’m proud to have been part of the Texas craft beer Renaissance. When Texas passed this law, not only did it give away part of what my employees and I built — it took my beer off the shelves in Dallas-Fort Worth, San Antonio and other parts of Texas where Live Oak beer would otherwise be available.”

Since the law passed, Mr. McElroy has not entered into any contracts with distributors. Instead, he self-distributes and will do so until his brewery reaches the size (more than 125,000 barrels of beer per year) where it is no longer legally permissible.


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