On March 20, 2018, a federal district court in Texas issued an opinion in Deep Ellum Brewing, LLC, et al. v. Texas Alcoholic Beverage Commission. The court delivered a blow to Texas craft brewers, upholding Texas’ prohibition on sales of beer by brewers to consumers for off-premises consumption.

Texas authorizes the manufacture and sale of beer by persons holding a: (1) brewer’s permit (allowing the production of beer of more than 4% alcohol by weight (ABW)); (2) manufacturer’s license (allowing the production of beer of 4% ABW or less); or (3) brewpub license. Like many states, Texas’ alcohol beverage laws mandate separation among the three tiers of the alcohol industry: manufacturing, wholesaling and retailing. The three-tier laws generally require alcohol beverages to be sold from manufacturers to wholesalers, from wholesalers to retailers, and finally from retailers to consumers.

Texas treats both brewer’s permittees and manufacturer’s licensees as manufacturers, but treats brewpubs as retailers. Under Texas’ three-tier laws, then, an entity may become licensed as both a brewer and a manufacturer (and many Texas breweries hold both a brewer’s permit and a manufacturer’s license), but not as a brewer or manufacturer and a brewpub. Texas limits brewpubs to producing no more than 10,000 barrels of beer annually, making this license an impractical option for craft brewers seeking to package and expand.

As in most states, the Texas legislature has enacted various exceptions to the laws requiring three-tier separation. Under these exceptions, wineries, distilleries and brewpubs in Texas each may sell the respective alcohol beverages authorized under their licenses directly to consumers for off-premises consumption. Brewer’s permittees and manufacturer’s licensees, however, have not been granted such an exception in order to sell beer for off-premises consumption. Conversely, all of these licensees may sell alcohol beverages for on-site consumption.

Two Texas craft brewers—Deep Ellum Brewing and Grapevine Craft Brewery (collectively, the Brewers)—brought suit against the Texas Alcoholic Beverage Commission (TABC), arguing that the statutes treating brewer’s permittees and manufacturer’s licensees differently than wineries, distilleries and brewpubs with respect to off-premises retail sales violated their (I) equal protection and (II) substantive due process rights under the US Constitution.

Because the challenge involved economic legislation not tainted by a “suspect classification” (e.g., race, ethnicity, gender), the court applied rational-basis review, which involves a strong presumption of validity of the challenged statutes. On the Brewers’ equal protection argument, the court agreed with the Brewers that they are similarly-situated to brewpubs, wineries and distilleries in that they are all subject to Texas’ alcohol beverage laws, produce alcohol and sell their self-produced alcohol to consumers for on-premises consumption. But the court ultimately sided with the TABC, finding that the proffered legitimate state interests—(a) maintaining the integrity of the three-tier system, (b) promoting temperance, and (c) ensuring fair competition in the industry—are rationally related to the challenged scheme.

On the interest of maintaining the three-tier system, the court acknowledged that the system already featured numerous exceptions. But under rational-basis scrutiny, “making one exception and not another exception in this context is not irrational.” By drawing lines, the existing statutes do reduce the number and volume of alcohol sold by manufacturers directly to consumers, thereby helping maintain the three-tier system.

Turning to state’s proffered interest in promoting temperance, the court acknowledged that the Brewers made “an initially appealing argument” by focusing on the legislature’s granting of off-premise privileges to wineries and distilleries, which sell beverages with a higher alcohol content than beer. Nevertheless, the court explained that the challenged law does prevent approximately 190 additional retail outlets, which does reduce the number of outlets selling alcohol and therefore is rationally related to promoting temperance. The court highlighted the limits of rational-basis review, adding:

“Whether it was good governance for the legislature to grant that exemption to wineries and distilleries but not beer producers is not the question before this Court. The Court does not sit in judgment on the effectiveness of the means chosen by the legislature to achieve its goals.”

Turning to the interest of promoting fair competition and consumer choice, the court again found some of the Brewers’ arguments “compelling” but ultimately rejected them. The legislature could have rationally been concerned about disrupting the beer retail market or concerned that it would be unfair to retailers to allow producers to compete directly with retailers. “Again, whether the legislature properly weighed the possible outcomes or came to the correct conclusions about the potential effect on retailers, the Court cannot say it was irrational for the legislature to be concerned about other members of the three-tier system and the effect changes to the three-tier system might have on competition between tiers.” Moreover, the court found unpersuasive the Brewers’ evidence that the legislature’s alleged protectionism in favor of the distribution tier in Texas resulted in the failure of the Brewers to achieve a legislative solution to allow them to make sales for off-premises consumption.

With respect to the Brewers’ substantive due process argument, the court again sided with the TABC. It found that the TABC’s action did not deprive the Brewers of their right to operate their businesses and, for the same reasons explained in the equal protection analysis, that the Brewers could not show no rational relationship between the challenged provisions and the TABC’s asserted governmental interest. The court granted the TABC’s motion for summary judgment.

The court’s opinion demonstrates the low bar rational basis review sets for the challenged statutes. Although an appeal or a legislative change remains possible, for now, non-brewpub craft brewers in Texas will remain unable to reach consumers through off-premises sales.