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Craft Brewers in Court to Argue Over 'Arbitrary' Distribution Caps
Publisher's note: The author of this post is John Trump, who is managing editor for the Carolina Journal, John Hood Publisher.
Craft brewers are waiting to learn whether a lawsuit seeking a permanent injunction against enforcement of the state's distribution cap and franchise laws will proceed.
The complaint - filed May 15 by Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. - says the distribution cap and franchise laws are inflicting injury and threaten to impose additional damage to the brewers, who can produce no more than 25,000 barrels of beer each year without contracting with a distributor.
A subsequent motion filed by the state says the complaint should be dismissed with prejudice and asserts the challenge, according to statute, must be heard by a three-judge panel of the Superior Court.
On March 7, the brewers filed a brief opposing the state motion to dismiss and transfer the case.
Lawyers for the brewers and the state presented arguments Tuesday, March 20, before Superior Court Judge Allen Baddour in Wake County.
The lawyers for the brewers - Bob Orr and Drew Erteschik - argue the law amounts to economic protectionism and interferes with the plaintiffs' constitutional right to earn a living, which the N.C. Supreme Court has called inalienable. The three-tiered system - producers, wholesalers, and retailers - isn't pure but rather, the lawyers say, cracked and frayed, with myriad exceptions to rules, including those governing home brewers and tastings and sales at festivals and other events.
The rules enrich one party in lieu of another, they argue.
"It's no Holy Trinity," Erteschik said in court March 20.
The plaintiff's latest brief says the "arbitrary" distribution cap punishes craft breweries for their own success by forcing them to relinquish distribution rights if they sell more than 25,000 barrels each year. (A barrel of beer is 31 gallons.) If a brewery exceeds the limit, the rule says, every ounce - including the first - he brews must be sold by a distributor.
The franchise law results in "oppressive, one-sided contractors with distributors that literally last forever. ... "
In its motion to dismiss, the state says the plaintiff's' complaint can't survive dismissal "for multiple reasons."
The state, it says, is immune from the suit, and plaintiffs have failed to establish the state has waived its immunity.
Orr and Erteschik said sovereign immunity can never be a defense to a constitutional challenge, and, furthermore, a state administrative agency can't rule on the constitutionality of a statute. Such a ruling should be left to the courts and, at its base, falls under the umbrella covering the separation of powers.
"It's almost rudimentary civics, in some ways," Erteschik said.
"No law says the state can't provide relief in a constitutional challenge," he said. "There are too many decisions on the books for that to be questioned."
Lawyers are also quick to point out a common misconception of the law involving a three-judge panel, enacted by the General Assembly.
Some types of constitutional challenges go to a three-judge panel, but not all of them. A facial challenge would contend law is always unconstitutional in every instance, to every person. But he vast majority of such lawsuits are "as-applied," which plaintiffs bring on behalf of themselves and are relevant to that specific case. Any doubts about a constitutional challenge should be heard as as-applied, lawyers say.
The case, in the most simplistic form, is about alcohol, and how wide a berth the state has in regulating it, "control" being an appropriate definition. North Carolina is one of 17 states with a government monopoly on liquor.
Special Deputy Attorney General Matt Tulchin on March 20 argued the state, specifically the N.C. Alcoholic Beverage Control Commission, does indeed have far-reaching authority in controlling alcohol consumption and sale. The commission has, over the years, developed a complex statutory scheme toward that end, beginning with the 21st Amendment and the implementation of the state ABC system in 1937.
"The alcohol industry is different and the regulation of the alcohol industry is different," Tulchin said. Decisions regarding those rules, he said, are left to the state.
Tulchin said the plaintiffs have failed to exhaust all administrative remedies toward seeking relief, which is tricky because no precedent exists. A similar challenge to the barrel-limit hasn't been made.
Baddour asked, hypothetically, about specific levels of enforcement and how many barrels over the limit could a brewer go before he's punished. The judge also asked whether brewers would first have to violate the law before finding out.
"Does the agency have a schedule of punishments based on severity?" Baddour asked. Can they violate the law and hope no one complains?
Tulchin couldn't answer and said the issue is unclear.
In their brief, the plaintiffs challenge "the constitutionality of state regulations that do not protect the public, force consumers to pay higher prices, and benefit private beer distributors at the expense of the hardworking craft brewers who have made North Carolina one of the leading craft beer states in the nation."
The complaint challenges two state laws - the distribution cap, "which punishes craft breweries for their own success by forcing them to hand over the rights to distribute their own beer to private distributors if they sell more than 25,000 barrels" - and the franchise law. That law, says the complaint, "forces craft breweries to enter into oppressive, one-sided contracts with distributors that literally last forever, and which require the breweries to give those distributors control of their product - including decisions about pricing."
Baddour called a recess and will issue a ruling later.
A legislative move to raise the limit last year failed, in large part because of vehement opposition from the powerful N.C. Beer and Wine Wholesalers Association. The wholesalers say the current arrangement works well, and removing the cap would provide a competitive advantage to a small group of North Carolina breweries to the disadvantage of everyone else, including other small breweries that appreciate the convenience of having a larger company handle direct sales and marketing.
On April 26 of last year, the state House voted 95-25 to approve House Bill 500, a watered-down plan that originally would have raised the barrel limit to 200,000. That provision was stricken from the bill. The political-action committee affiliated with the wholesalers Association gave more than $500,000 to political candidates of both parties and the parties themselves in the five years prior to this election year, according to state campaign finance records and reported by The Associated Press.
"As is typical for middle men whose role is not market-driven, the distributors profit margin has always been, and continues to be, enormous," says the original complaint from the brewers.
Voters, a survey found, don't like the cap.
The survey of 800 likely voters, prepared last year for the industry group Craft Freedom by Strategic Partners Solutions and overseen by Republican political consultant Paul Shumaker, finds the more voters learn about the impact of the production cap on North Carolina breweries, support for the production cap nearly completely vanishes.
That goes for people who voted for President Trump or Hillary Clinton.
"When the voters who favor the production cap learn that producers lose their brand and marketing rights," says the survey, "support for the cap diminishes to 1.6 percent" - two Republicans, three unaffiliated voters and eight Democrats from the 800 voters surveyed.
In a statement when they filed the complaint May 15, the plaintiffs' lawyers said, "Our clients are small craft breweries that are subject to arbitrary laws forcing them to hand over their self-distribution businesses, distribution rights, brand control, and future profits to private distributors. These laws violate multiple provisions of the North Carolina Constitution, including those that prohibit the government from taking private property from one person and giving it to another. Our lawsuit asks the courts to hold that these laws cannot be enforced against our clients, and we look forward to vindicating their constitutional rights in court."
North Carolina has almost 260 breweries, more than any other state in the South. Brewers support other state industries, including farmers who grow and malt barley, wheat, and blueberries. The brewing industry in the state had, according to figures from 2015, an annual economic impact of $1.2 billion, says Craft Freedom, providing $300 million in wages and more than 10,000 jobs. The numbers continue to increase, in spite of the state's rules.
Go Back
Craft brewers are waiting to learn whether a lawsuit seeking a permanent injunction against enforcement of the state's distribution cap and franchise laws will proceed.
The complaint - filed May 15 by Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. - says the distribution cap and franchise laws are inflicting injury and threaten to impose additional damage to the brewers, who can produce no more than 25,000 barrels of beer each year without contracting with a distributor.
A subsequent motion filed by the state says the complaint should be dismissed with prejudice and asserts the challenge, according to statute, must be heard by a three-judge panel of the Superior Court.
On March 7, the brewers filed a brief opposing the state motion to dismiss and transfer the case.
Lawyers for the brewers and the state presented arguments Tuesday, March 20, before Superior Court Judge Allen Baddour in Wake County.
The lawyers for the brewers - Bob Orr and Drew Erteschik - argue the law amounts to economic protectionism and interferes with the plaintiffs' constitutional right to earn a living, which the N.C. Supreme Court has called inalienable. The three-tiered system - producers, wholesalers, and retailers - isn't pure but rather, the lawyers say, cracked and frayed, with myriad exceptions to rules, including those governing home brewers and tastings and sales at festivals and other events.
The rules enrich one party in lieu of another, they argue.
"It's no Holy Trinity," Erteschik said in court March 20.
The plaintiff's latest brief says the "arbitrary" distribution cap punishes craft breweries for their own success by forcing them to relinquish distribution rights if they sell more than 25,000 barrels each year. (A barrel of beer is 31 gallons.) If a brewery exceeds the limit, the rule says, every ounce - including the first - he brews must be sold by a distributor.
The franchise law results in "oppressive, one-sided contractors with distributors that literally last forever. ... "
In its motion to dismiss, the state says the plaintiff's' complaint can't survive dismissal "for multiple reasons."
The state, it says, is immune from the suit, and plaintiffs have failed to establish the state has waived its immunity.
Orr and Erteschik said sovereign immunity can never be a defense to a constitutional challenge, and, furthermore, a state administrative agency can't rule on the constitutionality of a statute. Such a ruling should be left to the courts and, at its base, falls under the umbrella covering the separation of powers.
"It's almost rudimentary civics, in some ways," Erteschik said.
"No law says the state can't provide relief in a constitutional challenge," he said. "There are too many decisions on the books for that to be questioned."
Lawyers are also quick to point out a common misconception of the law involving a three-judge panel, enacted by the General Assembly.
Some types of constitutional challenges go to a three-judge panel, but not all of them. A facial challenge would contend law is always unconstitutional in every instance, to every person. But he vast majority of such lawsuits are "as-applied," which plaintiffs bring on behalf of themselves and are relevant to that specific case. Any doubts about a constitutional challenge should be heard as as-applied, lawyers say.
The case, in the most simplistic form, is about alcohol, and how wide a berth the state has in regulating it, "control" being an appropriate definition. North Carolina is one of 17 states with a government monopoly on liquor.
Special Deputy Attorney General Matt Tulchin on March 20 argued the state, specifically the N.C. Alcoholic Beverage Control Commission, does indeed have far-reaching authority in controlling alcohol consumption and sale. The commission has, over the years, developed a complex statutory scheme toward that end, beginning with the 21st Amendment and the implementation of the state ABC system in 1937.
"The alcohol industry is different and the regulation of the alcohol industry is different," Tulchin said. Decisions regarding those rules, he said, are left to the state.
Tulchin said the plaintiffs have failed to exhaust all administrative remedies toward seeking relief, which is tricky because no precedent exists. A similar challenge to the barrel-limit hasn't been made.
Baddour asked, hypothetically, about specific levels of enforcement and how many barrels over the limit could a brewer go before he's punished. The judge also asked whether brewers would first have to violate the law before finding out.
"Does the agency have a schedule of punishments based on severity?" Baddour asked. Can they violate the law and hope no one complains?
Tulchin couldn't answer and said the issue is unclear.
In their brief, the plaintiffs challenge "the constitutionality of state regulations that do not protect the public, force consumers to pay higher prices, and benefit private beer distributors at the expense of the hardworking craft brewers who have made North Carolina one of the leading craft beer states in the nation."
The complaint challenges two state laws - the distribution cap, "which punishes craft breweries for their own success by forcing them to hand over the rights to distribute their own beer to private distributors if they sell more than 25,000 barrels" - and the franchise law. That law, says the complaint, "forces craft breweries to enter into oppressive, one-sided contracts with distributors that literally last forever, and which require the breweries to give those distributors control of their product - including decisions about pricing."
Baddour called a recess and will issue a ruling later.
A legislative move to raise the limit last year failed, in large part because of vehement opposition from the powerful N.C. Beer and Wine Wholesalers Association. The wholesalers say the current arrangement works well, and removing the cap would provide a competitive advantage to a small group of North Carolina breweries to the disadvantage of everyone else, including other small breweries that appreciate the convenience of having a larger company handle direct sales and marketing.
On April 26 of last year, the state House voted 95-25 to approve House Bill 500, a watered-down plan that originally would have raised the barrel limit to 200,000. That provision was stricken from the bill. The political-action committee affiliated with the wholesalers Association gave more than $500,000 to political candidates of both parties and the parties themselves in the five years prior to this election year, according to state campaign finance records and reported by The Associated Press.
"As is typical for middle men whose role is not market-driven, the distributors profit margin has always been, and continues to be, enormous," says the original complaint from the brewers.
Voters, a survey found, don't like the cap.
The survey of 800 likely voters, prepared last year for the industry group Craft Freedom by Strategic Partners Solutions and overseen by Republican political consultant Paul Shumaker, finds the more voters learn about the impact of the production cap on North Carolina breweries, support for the production cap nearly completely vanishes.
That goes for people who voted for President Trump or Hillary Clinton.
"When the voters who favor the production cap learn that producers lose their brand and marketing rights," says the survey, "support for the cap diminishes to 1.6 percent" - two Republicans, three unaffiliated voters and eight Democrats from the 800 voters surveyed.
In a statement when they filed the complaint May 15, the plaintiffs' lawyers said, "Our clients are small craft breweries that are subject to arbitrary laws forcing them to hand over their self-distribution businesses, distribution rights, brand control, and future profits to private distributors. These laws violate multiple provisions of the North Carolina Constitution, including those that prohibit the government from taking private property from one person and giving it to another. Our lawsuit asks the courts to hold that these laws cannot be enforced against our clients, and we look forward to vindicating their constitutional rights in court."
North Carolina has almost 260 breweries, more than any other state in the South. Brewers support other state industries, including farmers who grow and malt barley, wheat, and blueberries. The brewing industry in the state had, according to figures from 2015, an annual economic impact of $1.2 billion, says Craft Freedom, providing $300 million in wages and more than 10,000 jobs. The numbers continue to increase, in spite of the state's rules.
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