Craft brewers say North Carolina is suppressing growth and have filed a complaint saying that two state laws are unconstitutional and nothing more than economic protectionism.
The complaint, filed Monday in Wake County Superior Court, seeks a permanent injunction against enforcement of the state’s distribution cap and franchise laws. It says the distribution cap and franchise laws are inflicting injury and threaten to impose additional damage to the brewers.
The complaint 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. The franchise law results in “oppressive, one-sided contractors with distributors that literally last forever … .”
Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. are named as plaintiffs against the state. Raleigh attorney and former state Supreme Court Justice Bob Orr is representing the plaintiffs.
It wasn’t known as of Monday afternoon who would represent the state.
The state House voted 95-25 on April 26 to night to approve House Bill 500, a watered-down plan that originally would have raised the barrel limit to 200,000. The state’s distributors said the increase would place their own businesses in jeopardy and persuaded lawmakers to eliminate the cap-raising provision.
“We’ve been at the table since day one, but you can’t negotiate with yourself,” John Marrino, who owns Olde Mecklenburg brewery in Charlotte, told Carolina Journal as lawmakers debated the measure. NoDa is in Charlotte, as well.
North Carolina operates under a so-called three-tier system — breweries, distributors, and retailers. The state’s weathered laws reinforce that system and truly define distributors as the middle men.
“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 complaint.
Orr said the complaint doesn’t challenge the three-tier system directly but it definitely implicates it.
“[W]e’ve tried to draw the complaint as narrowly as we could in the interest of our clients.”
“With more than 200 breweries in North Carolina, the industry is experiencing rapid growth and fierce competition,” the complaint says. “Nevertheless, the old laws aimed at preventing a few megabreweries from capturing 100 percent of the market also apply to each of North Carolina’s more than 200 breweries, which hold a tiny percentage of the beer market.
“As a result, the old laws that were intended to promote competition and benefit consumers now actually suppress competition and harm consumers,” the complaint says.
North Carolina didn’t get its first brewpub until 1986, when Weeping Radish began selling its beer in Manteo. Several followed, including Red Oak Brew Pub, which opened in Greensboro in 1991 and at that time was called Spring Garden Brewing. Red Oak owner Bill Sherrill has publicly fought the barrel limit for years.
Similar battles have been fought elsewhere around the county, but, with Monday’s complaint, North Carolina is charting new legal territory.
“As we note in the complaint, the craft brewery industry is really relatively new as a type of industry here in North Carolina,” Orr told CJ.
The barrel cap, say the plaintiffs, takes from brewers distribution rights, brand control, and future profits. Many breweries prefer to self-distribute because, the complaint says, if they don’t “they must relinquish all control over distribution and sales of their beer to the distributor.”
The franchise law then requires the distributor to take “control over all aspects of sales, marketing, delivery, distribution, quality control during transportation, and even pricing.”
“Without self-distribution, there is a tremendous disincentive for entrepreneurs to invest in a craft brewery, because the brewery’s access to market rests in the hands of other private companies that have no vested interest in the success of the brewery.”
The franchise law, the complaint points out, imposes territorial exclusivity, meaning the distributor gets exclusive distribution rights in a certain area. The brewery, then, can’t supply its own products to retailers within that territory. The franchise law also makes distribution rights perpetual, the complaint says.
In other words, “a distributor who acquires distribution rights is entitled to keep them forever … . Even a change in a brewery’s ownership will not permit a change in the distribution rights.”
The law allows termination based on a “good cause” requirement, but, the complaint says, the burden falls on the brewery to show a distributor breached an agreement that was “reasonable, material, not unconscionable and ‘not discriminatory when compared with the provisions imposed, by their terms or in the manner of enforcement, on other similarly situated’ distributors.”
“As a practical matter,” the complaint says, “meeting this standard becomes impossible.”
Further, if a brewery that exceeded the cap but later falls below it, it can only self-distribute again if it agrees to buy back the distribution rights.
As for the N.C. Constitution, the complaint cites several violations, including aspects of the Exclusive Emoluments Clause, the Taking of Private Property, Substantive Due Process, and Fruits of their Labor Clause, which guarantees residents “the enjoyment of the fruits of their own labor.
“So,” said Orr, “even though there hasn’t been a brewery or alcohol-related challenge like this, I think the constitutional principles are longstanding. There’s certainly established precedent for these kinds of economic liberty lawsuits.”
Tim Kent, executive director of the N.C. Beer & Wine Wholesalers, in a text late Monday said he had not read the complaint and would refrain from comment.
Kent has said H.B. 500 would open the barn door the size of a football field toward allowing big brewers such as InBev and MillerCoors to swoop in and take advantage of North Carolina brewers and, in effect, the laws passed specifically to help the state’s craft beer industry.
Representatives for the brewers and distributors reportedly met last week in an effort to compromise. But that effort failed.