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On Deals and Disagreements: Beer Bills Move Forward

As has been widely reported, a deal was struck late Monday afternoon between The Texas Craft Brewers Guild, distributor groups, large brewers, and Open The Taps.

The final deal includes the following bills, and here is the final version of what they do (items in earlier versions of the bills but not listed below are not part of the final bills):

SB 515:

  • increases annual production limit of brewpubs from 5,000 barrels  to 10,000 barrels
  • allows all brewpubs to sell to wholesalers
  • allows brewpubs who only sell alcoholic beverages made on-site to self-distribute up to 1,000 barrels per year from a single brewpub, and up to 2,500 barrels per year from all brewpubs owned by the same licensee

SB 516 & 517

  • creates a new Brewer Distributor permit, with a fee set at $250, which a production brewer under 125,000 barrels of annual production can obtain to self-distribute up to 40,000 barrels per year

SB 518

  • allows production breweries who are under 225,000 barrels of annual production to sell up to 5,000 barrels per year to ultimate consumers for on-site consumption

SB 639

  • codifies the 2010 TABC Marketing Practices Bulletin against the practice of “Reach-Back Pricing”, which is the practice where a manufacturer will adjust his price to a wholesaler based specifically on the price a wholesaler sells to a retailer. The new language goes on to specifically state that a manufacturer is still free to adjust prices as necessary, however it cannot be based on the wholesaler’s price to the retailer
  • outlaws a manufacturer from accepting payment specifically in exchange for an agreement setting forth territorial rights
  • sets forth language that specifically permits a manufacturer and a wholesaler to enter in contractual agreements that govern ordinary business, including but not limited to, allowances, rebates, refunds, services, capacity, advertising funds, promotional funds, or sports marketing funds
  • states the code does not prohibit a wholesaler from selling territorial rights of a manufacturer to another wholesaler

I am fully aware of the dissatisfaction of some members of our Guild at the provisions contained in the new 639, specifically “outlaws a manufacturer from accepting payment specifically in exchange for an agreement setting forth territorial rights.”

This provision of 639 came into being because wholesalers felt the practice of paying for territorial rights violated the tied-house provisions of the Alcoholic Beverage Code. TABC was asked to clarify such payments did, in fact, represent a violation of the TABC code. TABC’s response was not to say the practice was legal or illegal, but rather to say that they didn’t know and would benefit from legislative clarification. Thus, the original SB 639 contained this provision.

Recently, such payments have occurred in the marketplace and the practice is becoming more common, though certainly not the standard. At the same time, some of my closest colleagues in the industry have confided in me that they never received any payment for their distribution rights, because when they asked TABC, they were told it was illegal. It is important to stress that at no point has TABC or the Legislature specifically said this transaction was legal.

Throughout the course of the debate on this specific provision of 639, I fought tirelessly to earn the right of brewers to be able to sell the distribution rights. No one put up a bigger fight and no one took as much of a beating on this than me. Make no mistake, my position and the position of the Texas Craft Brewers Guild is that a brewer who builds a valuable distribution network through his or her right to self-distribute should be compensated for that value when he or she turns operations over to a distributor.

There was a point when it became very clear to me that this provision of 639 was going to move forward as the Legislature felt this activity should be illegal rather than specifically making it legal. This is up for every person to debate on their own, but I had come to understand with absolutely certainty that this practice was going to be outlawed one way or another. The debate was had, and the debate was lost by my side.

When that moment occurred, we immediately shifted gears to try to make this provision in 639 as palatable as possible (if it could even be done). This is where the language that sets forth other ways in which manufacturers and wholesalers comes from. While the specific payment in exchange for territorial rights was outlawed, for the first time in Texas history, we codified a series of other agreements that often occurred in the marketplace but had questionable legality.

I’m not just saying this to defend myself, but because I believe this is absolutely a true statement: without the work of the Guild, the provisions of 639 would have been a lot worse for Texas craft brewers. Not only did we curb some of the provisions in that bill, we gained rights that myself and some of my colleagues have been working on for almost a decade.

To be very clear: we did not “trade” the provisions of SB 639 in exchange for SB 515-18. Rather, we were able to greatly scale back 639 (including defeating the proposed severability language and mandated uniform pricing) while also gaining the rights enumerated in 515-18. For this, I will contend until the day I die that this was a victory for Texas craft brewers – and that first such victory since Brewpubs were legalized in 1993.

I welcome and encourage your feedback and discussion on this issue.

16 Responses

  1. Fred Nemecek

    Thanks for all your hard work Scott!

    March 14, 2013 at 11:47 am

  2. Damon

    Thanks for putting all this together in one, easy-to-read place.

    March 14, 2013 at 12:39 pm

  3. Tim Schauer

    Scott, as the advocate in the room for Open the Taps, I have to commend you for your strength in the face of a very difficult negotiation. I wholeheartedly agree with your perception that the Legislature was going to make this practice (sale of territorial rights) illegal regardless, as it would have clearly spelled the end of the sacred three-tier system. You will likely take some heat for not winning on every point, but as a witness to the process, I think you got the best deal that could have been made at this time. You know that we will continue to advocate for craft brewery sales for off-premise consumption, but at this time, you have done a great job at moving further than most would have thought you could when this legislative session started in January. I look forward to continuing to work with you!
    Best,
    Tim

    March 14, 2013 at 12:40 pm

  4. Mark

    Policymaking is about incremental wins. By that benchmark you more than won the day. Thanks again for all your hard work and setting up a better system for craft brewers in Texas.

    March 14, 2013 at 1:14 pm

  5. matt smith

    outlaws a manufacturer from accepting payment specifically in exchange for an agreement setting forth territorial rights… states the code does not prohibit a wholesaler from selling territorial rights of a manufacturer to another wholesaler

    Sounds like a man can come over on a boat looking for work but can not sell his labor, but the slave holder, i mean job site can sell his labor….

    Men pour heart and soul in to creating something only to be controlled by uneducated men picking up and dropping off…

    March 14, 2013 at 1:17 pm

  6. John

    Glad you explained that to those of us not in the room. Understand and appreciate your point regarding the sale of territorial rights. Of course, up until recently it was illegal according to TABC for a brewery to inform the public where they could find their beer, so we should never stop pushing for our rights (and common sense). What was the reasoning behind lowering the amount a brewery can self distribute, FORCING the involvement of a distributor earlier on. Obviously that is also a step backwards for some and another victory for the distributors. And I need to research SB 516 & 517 as it seems like that is taking away some rights a Brewers Permit already includes. It will be interesting to see how long it takes for every brewery to turn into a Live Music Venue/Club/Pub & Brewery as being able to sell 5,000 bbls retail is a game changer. And while some aren’t as excited about basically competing with the restaurants and bars they supply beer to, it would be silly not to take advantage of that one gain for production breweries who lost in other areas. Will also be interesting to see what happens within the Texas Craft Brewers Guild since not all members are in the same situation, deal with the same challenges and have the same vision for the future. I predict there could be multiple organizations or guilds next go around based on the numbers of new breweries in the pipeline and the fact they all aren’t necessarily in the same situation as, say, a regional brewery like Saint Arnold. But overall I give you a thumbs up and know you had been laying the ground work with your projections on the state economy and such that helped make this the first time the distributors and Big Beer didn’t totally run over the state’s Craft Breweries even if it does seem some breweries lost more than others. Bottom line it was a victory and job well done Scott. So will Freetail remain a Brewpub or switch to a production brewery now that the difference between the two has changed? I still haven’t totally wrapped by head around the soon-to-be difference between the two except Brewpubs can sell growlers for off-premise consumption, correct? Cheers!

    March 14, 2013 at 2:14 pm

    • smetzger

      John, thanks for the comments.

      On 516 & 517 and the lowering of the self-distribution amount, we lowered how much could be self-distributed (from 75k to 40k) but raised how long a brewery could self distribute (from 75k to 125k). It is important to remember that 40k is a HUGE number. Right now, only Real Ale and St. Arnold are above that number, and no one else is even close. For a brewery to self-distribute 40k barrels would be unheard of, in my opinion.

      As for Freetail, I guess we’ll just have to wait and see!

      Thanks,

      Scott

      PS: I’ll never stop fighting for the rights of Texas breweries.

      March 14, 2013 at 3:00 pm

  7. Woody C. Harrison

    Scott, thanks again for your hard work. It’s tough enough to be a brewer AND business owner AND a voice for an industry. Now, excuse my ignorance, but just to be sure, the new bills allow brewpubs to sell beers by the pint directly to the customer? Thanks.

    March 14, 2013 at 6:20 pm

    • smetzger

      Woody,

      A brewpub can already sell pints directly to customers. The bills would allow a brewpub to sell their beer to distributors (which is currently not allowed) and production breweries (like Saint Arnold) to sell pints to consumers (which is currently not allowed).

      Cheers,

      Scott

      March 15, 2013 at 9:09 am

  8. TTindall

    The question that begs an answer is how the legislature and the panel could not secure equality for brewers and wineries in the on site sale of their product. Two equivalent products with completely separate regulatory positions. You can buy it here but just dont take it home. Perhaps another round in the courts will get that insanity ended.

    March 14, 2013 at 8:50 pm

    • smetzger

      First, let me state that earning the right for breweries to sell to consumers for take-home continues to be a priority for the Guild and me personally. This session, it just isn’t something that was achievable.

      As for the legal route (on this subject), past cases have shown the courts do not consider “beer” and “wine” to be equivalent products and therefor equal protection isn’t necessary. That isn’t to say a case can’t be made, but that has been the result in the past.

      March 15, 2013 at 9:13 am

      • Woody C. Harrison

        Thanks Scott, that’s what I thought.

        March 15, 2013 at 10:48 am

  9. In summary, we strongly support SB 515-518. We also strongly oppose SB 639, and would love to see it left in the dust as our bills sail through the remainder of the legislative process. If that doesn’t happen, we’ll be understandably upset about the loss of our property rights and will work with other brewers who feel similarly to do everything in our power to see them restored. In the end, though, if all five bills pass, we’ll have a lot more to celebrate than we will to lament. If you disagree, well, maybe sometime in the not too distant future, we can discuss it over a pint at Jester King.

    June 22, 2013 at 9:26 am

  10. Unfortunately, the message that we’ve been given is that the TABC has insisted upon receiving guidance from the legislature on whether the practice of brewers selling their distribution rights is legal or illegal, and those of us who feel that it is currently and should continue to be legal simply do not have the necessary power or influence to prevail. The passage of this law will be a terrible injustice, which we believe will ultimately be overturned, but if opposing it is not a battle that we can win right now, we agree with Scott Metzger that it’s better to win the battles we can, gather momentum, and live to fight another day. Scott, Brock Wagner, and the other representatives of the Texas Craft Brewers Guild, along with their allies, Open the Taps, and the Beer Alliance of Texas, were also able to mitigate the damage of SB639 somewhat by lobbying successfully for the inclusion of a section that would formally codify the legality of other means by which distributors are able to support brewers without running afoul of this or other sections of the code. We sincerely thank them for their efforts in this regard, and for all of their hard work throughout this process.

    June 26, 2013 at 7:54 pm

  11. While anti-craft beer bill 639 prohibits a brewer from selling its own distribution rights, it does not prohibit a wholesaler from selling those same rights to another wholesaler. In other words, a brewer could not sell its territorial rights, but a distributor holding such rights could freely sell them to another distributor. Further, once a brewer signs with a wholesaler, it arguably cannot break the distribution agreement without compensating such wholesaler for the fair market value of the brewer’s distribution rights. So under anti-craft beer bill 639, a brewer cannot receive payment from a wholesaler for the brewer’s distribution rights, a wholesaler can receive payment from another wholesaler for a brewer’s distribution rights, and a brewer may actually have to pay a wholesaler to buy back its own distribution rights. The free market exists for wholesalers under anti-craft beer bill 639, but not brewers.

    June 30, 2013 at 9:49 am

  12. If you choose to not support the bills because of 639 in support of the one brewery who has spoken out against it, that is your choice. Be aware that with the “rights” you are defending for that single brewery, you are stripping rights from 25 other breweries when you deny them the changes in SB 516-519. When we don’t have better brewpubs in 2 years. (or longer) thats on you. When brewers can’t sell their beers at tours, thats on you.

    July 18, 2013 at 5:19 am

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