News: CJ Exclusives

Hearing date set for lawsuit challenging beer distribution, franchise laws

Suit filed by craft brewers says three-tiered system and distribution limits are unconstitutional restraint on commerce and 'take' brewers' property

Todd Ford, co-owner of NoDa Brewery in Charlotte, is part of a group of N.C. craft brewers who say state laws eventually will prevent their expansion. (CJ file photo)
Todd Ford, co-owner of NoDa Brewery in Charlotte, is part of a group of N.C. craft brewers who say state laws eventually will prevent their expansion. (CJ file photo)

Editor’s note: This story was updated at 10 a.m. Friday, March 9

The plaintiffs in a complaint challenging the constitutionality of two state laws involving beer distribution and franchise laws have filed a brief opposing a state motion to dismiss and transfer the case.

The brief filed by the plaintiffs — Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. — was filed Wednesday, March 7, in Wake County Superior Court. The initial hearing is set for March 16.

The original complaint sought 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.

It 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.) The franchise law results in “oppressive, one-sided contractors with distributors that literally last forever. … ”

In its motion to dismiss, the state says the plaintiffs’ 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. Second, the state says the plaintiffs’ claims “are barred by the applicable statutes of limitations, which ran years ago. Third, plaintiffs lack standing to pursue their claims and seek injunctive relief. And fourth, their pleading fails to adequately state a claim for which relief may be granted.”

The motion 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.

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.”

The plaintiffs’ brief includes a deposition by N.C. ABC Commission Administrator Robert Hamilton. “In his deposition,” the brief says, “the state’s top beer regulator offered a number of damning revelations.”

According to the deposition:

  • “When pressed whether he or the ABC Commission had ‘any evidence, actual or anecdotal, that the cap ought to be 25,000 [barrels] versus 250,000 versus 2.5 million,’ he responded, ‘I don’t believe that we do.’ … When pressed further whether any state agencies had ‘any evidence that the cap ought to be at 25,000 barrels as opposed to 250,000 or 2.5 million,’ he responded, ‘I know of no agencies that would — other than the legislature and the legislative research division.’”
  • “He admitted, ‘I don’t know the reason for [the legislature] setting any threshold.’ … When presented with a statement by a legislator that the previous legislature simply ‘picked a number,’ he admitted, ‘I have no idea how the previous legislature picked that particular figure. …’

The plaintiffs also said Hamilton admitted some of today’s alcohol sales and distribution laws were based on practices taking place before Prohibition, more than a century ago — “an admission that supports plaintiffs’ allegations that the outdated laws cannot be justified in the present-day alcohol market. …”

Brewers, Hamilton said in the deposition, “have ‘many choices’ under the challenged laws.”

Thus the following exchange:

Q: [Brewers] really only have two choices, right? They can enter into an agreement with a distributor or they can stunt their growth by producing fewer than 25,000 barrels. … Is there another choice that I’m missing?

A: They could become a distributor and not be a brewer.

Q: So they could change professions, essentially?

A: There’s a lot of different opportunities. People do it all the time.

Q: They could become barbers too, right?

A: Absolutely.

Attorneys Bob Orr and Drew Erteschik are representing the plaintiffs. Erteschik said the lawyers won’t comment about the case in view of the upcoming hearing.

When they filed the complaint May 15 of last year, the lawyers released the following statement: “Today, we filed a lawsuit challenging a set of unconstitutional laws that punish our State’s craft breweries for their hard work and success.  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.”

On April 26, 2017, 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. The state’s wholesale 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 last year. 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 original complaint.