Battle brews over state beer laws
By Michael Abramowitz
The Daily Reflector
Sunday, June 17, 2018
An affidavit that is part of a lawsuit filed by a group of craft beer brewers against North Carolina reveals the punitive practices of beer distributors and inequities upheld by unfair state rules, the brewers’ lawyer said. A spokesman for the distributors, meanwhile, said their practices are lawful and beneficial to consumers.
The complaint filed last year in Wake County Superior Court by Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. says the distribution cap and franchise laws injure and threaten to impose additional damage on brewers, according to reporting by the Carolina Journal News Service. The law says breweries including many than have started up in the Greenville area can produce no more than 25,000 barrels of beer each year without contracting with a distributor.
Superior Court Judge Allen Baddour on May 15 allowed the case to proceed toward a trial, denying a motion filed by the state that the complaint should be dismissed and to bar any further action on the claim. Now, discovery will continue, subpoenas will be issued, and members of the N.C. Beer and Wine Wholesalers will be deposed.
“Our initial discovery has already uncovered illegal activity,” said Drew Erteschik, a lawyer for the plaintiffs, told Carolina Journal. “Now that we have the right to conduct full discovery, we expect to uncover even more evidence of illegal activity. We are confident we will prevail.”
The complaint says the distribution cap “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.” It says the franchise law “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.”
Current craft beer industry efforts are aiming to lift the manufacturing limit, but have not gained much momentum. In 2017, House Bill 500, which would have raised the cap to 200,000 barrels, was gutted.
An affidavit from an eastern North Carolina beer maker reveals how the state law penalizes small brewers, Erteschik said. Dustin Canestorp, a retired Marine, started Beer Army Combat Brewery in Craven County as a nonprofit benefiting charities, including those that help veterans.
Canestorp expanded to Wake County, as well as Carteret, Pitt and Onslow. It did well enough the company decided to contract with a distributor so it could exceed the 25,000 barrel limit, although it kept the right to self-distribute in Craven. Greensboro-based Freedom Beverage Company (FBC) paid Canestorp $25,000 for distribution rights.
After 90 days, sales declined, the court document says. Canestorp asked why.
“We heard various excuses from FBC — for example, it was just the particular time of year, we needed to be packaged in bottles, etc.,” he said in the affidavit. “Notably, however, at this same time in Craven County ... we were still extremely successful. It was a mystery to us that the one portion of our business that was self-distributing was so successful, while the remaining portions of our business that were using a third-party distributor were not.”
Beer Army then hired Global Beverage Group to expand into neighboring states. Its distribution and sales in North Carolina fell even further, Canestorp said in the affidavit.
FBC’s manager Greg Leone explained to Canestorp that FBC was not using its best efforts to distribute Beer Army beers “as punishment for our decision to engage Global. In May 2014, Mr. Leone at FBC sent me an email saying that FBC’s President, Tim Booras, was ‘very angry’ about Beer Army’s engagement of Global.”
As a result, Booras directed that Beer Army’s brands be removed from a “focus list” of brands it wanted sales reps to push.
Beer Army wanted to terminate the contract, but state law requires the contracted brewer to repurchase self-distribution rights from the distributor for fair market value, defined as “the highest dollar amount at which a seller would be willing to sell and a buyer willing to buy at the time the self-distribution rights revert back to the brewery.”
FBC asked $400,000 from Beer Army, 16 times the $25,000 paid in the original contract, the affidavit said.
Erteschik and co-counsel Bob Orr argued in court the law amounts to economic protectionism and interferes with the plaintiffs’ constitutional right to earn a living, which the N.C. Supreme Court has called inalienable. The rules enrich one party in lieu of another, they say.
“If our General Assembly were to vote with its conscience and embrace its conservative free-market ideals, it would change these laws proactively, rather than wait for the courts to strike them down,” Erteschik told Carolina Journal.
Tim Kent, executive director of the N.C. Beer and Wine Wholesalers Association, said that the courts have correctly determined the wholesale distributors’ practices to be lawful and beneficial.
“Our courts in North Carolina and throughout the country have continually recognized that these laws have unquestionably been upheld as legitimate,” Kent told The Daily Reflector. “The provisions being challenged in this case actually are exceptions to the regulatory system that was created specifically for craft breweries. Those exceptions are being challenged by only the two breweries located in Charlotte, and the N.C. Breweries Association is not named in the lawsuit.”
Kent responded to the argument among many small craft brewers that challenging distributors, or even speaking openly against their influence, is too dangerous a line to cross.
“North Carolina unquestionably has the most favorable and most permissive laws for craft breweries of any state from Virginia to Texas,” Kent said. “It is a primary reason why this state has more than 250 breweries and continues to grow rapidly. Our favorable laws include the ability for craft breweries to distribute up to 25,000 barrels a year. It also provides them the opportunity to own and operate three retail operations in addition to the one at their brewery, privileges not afforded to craft brewers in other states. Our neighbors in South Carolina do not allow self-distribution of product.”
Kent said limits exist in North Carolina for effective tax collection and accountability of a regulated product.
“North Carolina has taken the position that alcohol, as a regulated product, needs an independent entity managing the distribution of products,” he said.
Canestorp turned in his brewers’ license April 30, 2015. He continues with his philanthropic work and has opened a craft-beer-themed burger restaurant in New Bern. He hopes to again open a brewery.
“If we do,” he says in the affidavit, “we will never use a distributor so long as the State of North Carolina enforces its misguided beer distribution laws.”
Cam Medina, a brewer at Greenville's Pitt Street Brewing Company, said the state law doesn't offer much help to those who wish to compete and stay small at the same time.
He said that he and many other independent craft brewers take pride in going up against the global mega-production manufacturers and distributors and promote their work with the seal of the Independent Craft Brewers Association, identifying it as small, traditional and independent.
Medina qualified his thoughts on the issue as his own and not necessarily representative of his brewery or any other.
“When you go into a shop in the market, up to 30 percent of those independent-appearing labels mislead consumers into thinking they are independently owned,” Medina said. “Without that seal, people might think their purchase of a particular craft beer is helping out the small, local independently-owned business. In reality, those companies have been bought by major distributors, and you're just redistributing that money to a larger corporation that ultimately doesn't want you to be in business, or if you are, they want the money.”
That is why the Craft brewers association seal is important, Medina said.
“In eastern North Carolina, no matter how popular craft breweries seem to be, most people drink Bud, Miller or Coors,” he said. “When you're trying to bring a beer culture to places like Greenville, the big breweries that (undercut) the smaller ones are taking away the option for people to explore their local craft breweries. When that happens, they're screwing the little guy.”
Contact Michael Abramowitz at firstname.lastname@example.org or 252-329-9507.