With nobody meaning to, the state has criminalized the operations of its alcohol distributors, through a combination of outdated laws, lawmakers cozy with the alcohol industry, industry-captured regulators, and a recent Supreme Court decision.
The laws on the books now, if they were enforced as authorities have recently interpreted them, would imperil almost all of the state’s $40 billion alcohol industry.
The reason this hasn’t happened is that the Texas Alcoholic Beverage Commission has not used the laws on the books to do so.
The state’s Prohibition-era law holds that “no person who owns or has an interest in the business of a … brewer… may … own or have a direct or indirect interest in the business of a … retailer.” The high court had approved TABC’s definition of “interest” to mean “any interest.”
The state’s powerful alcohol distribution cartels make hundreds of millions in profit thanks to state rules locking out competitors — one forbids corporations from holding retail permits; another rule on stock ownership makes it practically impossible for outsiders to break into distribution.
The state’s nominally conservative Supreme Court had a chance to review that arrangement last year, but decided to hand state alcohol regulators even more power to make decisions about who gets to sell booze in Texas.
Last month, however, a federal court stepped in to declare Texas’ ban on corporate liquor retailers to be an unconstitutional violation of the Commerce Clause.
Another federal court will have a chance to decide whether the restraints on distributors do the same thing, thanks to a lawsuit filed by Drayton McLane’s $48 billion food and beverage distribution operation.
So how is it that a Republican-appointed federal judge looks at the system and sees an illegal scheme, while six of the nine Republicans on the state high court decide that the state ought to have even more power to restrict competition?
The answer, actually, is simple. U.S. District Judge Robert Pitman looked at the system, and its history. The Supreme Court, on the other hand, saw its job as arriving at just the right definition of two words — “person” and “interest.” The fact that the majority’s decision in a case known as Cadena would, as then-Justice Don Willett cautioned in a dissent, “inevitably” lead “to de facto Prohibition if enforced,” appeared to be of no importance to the majority.
None of the justices on the state high court could be considered a judicial activist. All nine of them profess belief in close adherence to the text of the law. The issue here is that most of them believe that the text is all they must consider — not the purpose of a law, and not the consequences of their interpretations.
The recklessness of refusing to consider reality has never been more apparent.
The rule that swallowed an industry
Just five months after the Supreme Court’s ruling, an administrative law judge in Austin, following that guidance, arrived at a ruling that would effectively ban alcohol distribution in Texas, just as Willett had warned about. The judge himself found his ruling to be “absurd,” but saw little option given how the high court had defined “person” and “interest.”
“Person” meant interconnected group of legally distinct corporate entities, among other things.
Under this interpretation, a large alcohol distribution company called Core-Mark, which had been in business for years, was ineligible for a liquor license because some of its stock was held by institutional investors that also held stock in other businesses that either retail or manufacture alcohol.
But that’s true of “virtually all publicly-traded companies with interests in Texas alcohol licenses,” according to McLane’s attorneys, citing a University of Texas study. That would mean that they are all illegal — all but a few closely held family businesses. The only question is whether the TABC wants to enforce its rule.
In practice, McLane points out, “The TABC does not apply the One Share Rule equally amongst industry participants. To the contrary, the TABC is by all indications engaged in a practice of selective licensing, applying the One Share Rule to new applicants only, and not to incumbent licensees.”
The licensees already entrenched pay good money to keep it that way. From 2013 to 2016, alcohol interests donated $11 million to the state’s top politicians, according to one study. Some $8.8 million of that came just from the distributors, who might go out of business if their services weren’t mandated by law.
State representatives Jason Isaac, R-Dripping Springs, and René Oliveira, D-Brownsville, as well as Republican state Sen. Kelly Hancock of Tarrant County have all filed legislation in recent sessions to end the state’s anti-competitive practices, but none of their bills has even made it out of committee.
Alcohol laws have aged poorly since end of Prohibition
After Prohibition ended, Texas instituted a “three-tier” system meant to separate the retail, wholesale, and manufacturing of alcohol. The law was meant to prevent vertical monopolies, or specifically, “tied houses.” These were pubs or saloons owned by distillers, which were demonized by teetotalers, who thought that structure created too much incentive to get people drunk.
The law has aged poorly. The term “person” hasn’t been updated to something workable in the modern corporate era, and neither has “interest.” Lawmakers haven’t articulated any modern public policy interest the law serves; it’s still apparently meant to keep a tavern operator from pushing his landlord’s beer too enthusiastically.
So Texas tells a Mexican convenience store chain that its parent company can’t hold a minority stake in a Dutch brewery. Otherwise, you might pop into the gas station for a Red Bull and come out with four cases of Heineken.
Critics call TABC’s presumptuous, far-reaching interpretation of its own power the “one-share rule,” and it’s throwing the industry into turmoil.
The TABC denies it has such a rule, but that’s just a semantic defense. In oral arguments, its attorney admitted that the “single-share prohibition” was unenforceable, that it “would result in a lot of cancellation or revocations.”
The TABC is fighting McLane in federal court over the same principle. Ever since the TABC denied McLane a distribution permit because his company is held by Berkshire Hathaway (which has shares in Walmart, which retails beer and wine), he’s been challenging the licenses of other distributors, such as Core-Mark, who run afoul of the one-share rule.
For instance, the administrative law judge who found the principle “absurd” was handling a challenge to Core-Mark, and felt compelled to rule that the company couldn’t have a license because of the one-share rule. Some of Core-Mark’s stockholders on Wall Street also hold stock in Bed Bath & Beyond, which holds alcohol retail licenses.
Ironically, the TABC decided two weeks ago not to abide by that ruling (which it’s entitled to do), and is allowing Core-Mark to keep its licenses, saying that it will ignore shares held by institutional investors such as mutual funds.
That’s kept Texas from turning dry overnight, but it has also made a mockery of the rules, which are now anything but uniform. A spokesman confirmed that TABC is going with a “case-by-case examination of each company’s business standings,” rather than a consistent policy.
Willett foresaw exactly that consequence.
“The rules are the rules, and I am unaware of any principled basis, certainly none required by the Code, for applying them differently to different companies,” he wrote. “Alcohol laws are complex, but the Rule of Law requires uniformity, not selective enforcement and anticompetitive favoritism benefitting preferred permittees.”
Trade restraints keep outsiders from challenging cartel families
The coziness between the local alcohol industry and the state of Texas is no secret.
When Judge Pitman ruled last month that the state’s ban on corporate liquor sellers was drafted “with the purpose of discriminating against out-of-state retailers,” he took careful note of the Legislature’s history of trying to circumvent Constitutional law in order to enrich local alcohol interests.
“The credible evidence shows that the public corporation ban was enacted in response to a successful dormant Commerce Clause challenge to a previous Texas law, which imposed a residency requirement that restricted alcoholic-beverage permits to Texas residents and to firms majority-owned by Texans,” he wrote. “In May 1993, after the district court struck down the residency requirement but while the appeal was pending before the Fifth Circuit, the Texas Legislature passed House Bill 1445.”
That bill adjusted the residency requirements in an attempt to keep the court from issuing a binding pro-competition opinion, Pitman wrote. But it was in vain, as the court, “struck down the state’s residency requirement using broad language” that applied to all retail permits.
So during the next legislative session, in 1995, the Texas Package Store Association, the liquor retail trade association, “drafted the public corporation ban” as an alternative way to keep outsiders from challenging the local cartel families.
The TPSA lobbyist who drafted the bill was the only witness to testify in its favor, Pitman noted, and that was all it needed.
Pitman ruled that while the corporation ban didn’t explicitly discriminate against out-of-state interests, it met the standard for unconstitutionality by imposing a burden that “is ‘clearly excessive’ in relation to the putative local benefits.” The proof of that burden: 98 percent of the market is controlled by locally owned companies.
In McLane’s federal lawsuit challenging the restraints on distributors, he’s arguing before U.S. District Judge Sam Sparks that the one-share rule meets the same standard for unconstitutionality.
Striking contrast between federal judges and SCOTX
The contrast between the federal jurists’ reading of the Alcoholic Beverage Code and the state Supreme Court’s reading of the same law is striking.
Where the federal court took note of the express intention of the Legislature — what lawmakers told each other, and the lobby’s role in writing the bill — the state Supreme Court took none, as its philosophy is to stick to the text of the law.
“Our role as a court is limited to determining legislative intent through the words the Legislature selected,” the majority wrote.
As for the one-share rule, Judge Sparks recognized during a hearing that, “the single purpose of the three tier is to protect the retailers, to protect particularly the wholesalers, and to protect the manufacturers. I mean, that’s the whole point of it when you get right down to it.”
The Supreme Court, by contrast, has almost nothing to say about the purpose of the law, other than a reference to the issue of English pubs owned by distilleries.
They did not address the purpose of the law as stated within the text of the law: “to assure the independence of members of the three-tier system.” In his dissent, which was joined by Chief Justice Nathan Hecht, Willett pointed his colleagues to that phrase, arguing that it meant there was no reason to accept a one-share rule if the Legislature was only interested in actual control.
That issue led straight into the heart of the case. Is the law meant to restrict a person from controlling both a distillery and a wholesaler? Or is it meant to be a global ban preventing everyone on earth from holding stock in multiple alcohol companies if any one of them does business in Texas?
SCOTX chose the latter, even after being presented evidence that its standard would disqualify most of the industry. The court apparently stuck its head in the sand, refusing to acknowledge it was endorsing the one-share rule, and insisting that other alcohol companies were somehow in a different situation, although it couldn’t explain how, or by what rule.
Our legal system, of course, is built by generalizing rules out of specific cases, and the rules the court endorsed here were clear to Willett. The “logically inescapable extension of interpreting ‘interest’ to mean any financial interest is the so-called single-share theory,” he wrote.
In the popular imagination, textualism is something like the opposite of judicial activism, as it’s a minimalist approach. But this case demonstrates how that minimalism can work to create maximal government power.
The six members of the majority would all say they’re trying to work forward from principle, not backward from a desired result.
The Supreme Court gave a reason for refusing to consider the consequences of its decision. The court cited that same reason in Hall v. McRaven, a decision with grave consequences for government accountability and transparency, as The Texas Monitor has reported.
In fact, the court even cited Hall in this case, as an example of the wisdom of the reason.
To examine the likely consequences of its decision, the court says, would be to issue an “advisory opinion,” and that’s beyond “the limits of our jurisdiction.”
Jon Cassidy can be reached at [email protected].
Editor’s note: An earlier version of this story attributed a quote to Sen. Kelly Hancock that was actually said by Travis Thomas, the spokesperson for Texans for Consumer Freedom. The Texas Monitor regrets the error.