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The Texas-sized battle between brewers and distributors

Big beer isn't the only adversary of indie brewers.
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Much ado has been made in the past few days about the lack of diversity in brewery ownership at sports stadiums and attempts by brewers who’ve been purchased by larger producers to fight fan backlash. These stories—and many, many others—denounce megabrewers like Anheuser-Busch InBev and SABMiller as the main perpetrators of predatory practices that squeeze smaller breweries out of bars, retail shops and restaurants. But is that really the case?

Last week, a Texas judge struck down as unconstitutional a 2013 law prohibiting brewers from selling the rights to distribute their beer in the state. The decision came as a result of a lawsuit brought by Live Oak Brewing Co., Peticolas Brewing Co. and Revolver Brewing.

“Besides relief and elation, the biggest feeling that I had is one of vindication,” Live Oak owner Chip McElroy says of the victory. “All along I’ve been saying that this was an injustice, that it was unfair. Turns out it’s unconstitutional, as well.”

Some background: In Texas, a beer distributor is required to be exclusive within a territory. Once a brewery assigns a distributor a territory, it is effectively gone, and that makes territory rights quite valuable. Prior to the 2013 law change, brewers in Texas had the ability to cash in on that value by selling the rights to distribute their beer in particular cities and counties across the state. Live Oak Brewing Co. in Austin, for example, sold the right to distribute its beer in Houston prior to 2013 for $250,000. The change to the law made this sort of exchange illegal, effectively requiring brewers looking to enter new markets within the state to hand over distribution rights for free. The same rules didn’t apply to distributors, however; they could sell territorial rights to another wholesaler and pocket the cash.

“When you’re talking about distributors, it’s not just the trucks and the computer and the real estate; somewhere around 50 percent of a distributor’s value, maybe more, is that they have territorial rights to certain beer brands,” McElroy says. “This right to sell beer in certain territories is worth a huge amount of money. We have a more modest business here at Live Oak, but ours too is worth some money. The law as it stood took away the value of my business.”

How did such a law even pass? In the days leading up to Texas’ 2013 legislative session, lawmakers brought together a group of stakeholders—the Texas Craft Brewers Guild (TCBG), some larger breweries and a pair of distributors—to review alcohol and beverage laws set to go onto the books. The team came to an agreement on a package of laws, many of which would benefit the state’s small brewers in a number of ways. But at the last minute, the distribution measure was attached, a poison pill that TCBG executive director Charles Vallhonrat says was dropped in at the behest of the Wholesale Beer Distributors of Texas. The guild and small brewers had a choice: fight the addition and torpedo the other laws that could benefit them, or swallow the pill.

“This law didn’t serve any valid purpose,” says Matt Miller, head of the Texas office of the Institute for Justice, which litigated the case on behalf of Live Oak, Peticolas and Revolver. “It didn’t protect the public. It just transferred the wealth of distribution rights from brewers to distributors. But the beer distributors are very sophisticated at working the system.”

Attentive readers may recall the hullabaloo earlier this year over whether brewers in Georgia should be able to sell beers to customers who come to visit their taprooms. Many Georgia brewers believe that controversy, too, was brought about by a distributor group: the Georgia Beer Wholesalers Association.

Obviously, many producers in many states enjoy fantastic, fruitful partnerships with the distributors who carry their beer and support their brands. But they’re also often at odds; what benefits brewers can be detrimental to wholesalers, and vice versa. It’s a complicated relationship which, at times, leads to situations like those in Georgia and Texas that can limit the success of small brewers.

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