For company seeking alcohol permit, judge’s ‘absurd’ decision is a tonic


A Texas judge conceded his recent decision was “absurd,” but said it unavoidable due to confusing state laws.

The ruling could throw the Texas alcohol landscape into turmoil.

The court case is just one part of a company’s single-minded campaign to attack the alcoholic beverage agency.

In a decision that even the judge who wrote it conceded was ridiculous, a Texas court this month concluded the state’s Byzantine liquor laws prohibit most publicly traded companies from doing business here, including such giants as Anheuser-Busch and Molson Coors Brewing. Experts say the ruling could upend Texas’ $40 billion booze industry.

Administrative Law Judge Robert Jones Jr., acknowledged his legal conclusion — that a large alcohol distributing company in business for years was technically ineligible for a state liquor license — made little sense. “The ALJ sympathizes with the absurdity of the outcome in this case,” he wrote.

But, the judge added, he had little choice in the matter. State lawmakers had failed to clean up vague laws to prevent cross-ownership among alcohol manufacturers, distributors and retailers — potentially defined by as little as one person owning a single share of stock each in companies in different sectors of the booze business.

Given several opportunities to clarify state rules seen as disasters-in-waiting, elected officials chose abstinence. “The Legislature,” the judge wrote, “has decided not to act.”

Although the decision affects only a single company, California-based Core-Mark Midcontinent, experts say it has the potential to throw the state’s oversight of the alcohol industry into turmoil and disrupt some of the most powerful and monied interests in Texas. Alcohol manufacturers, distributors and retailers shower elected officials with millions of dollars every year to preserve their interests.

At one level, the dispute highlights how rules written in a simpler time have failed to keep up with the complexities of modern business. Texas has seen a flurry of recent legal battles featuring industry titans attempting to elbow their way past laws intended to protect consumers, but which they say are now being used to protect entrenched businesses.

Billionaire Elon Musk has clashed with the state’s influential auto dealers in an effort to sell his electric Tesla cars directly to consumers, rather than through dealerships, as currently mandated by Texas law. Warren Buffett, whose Berkshire Hathaway owns both an RV manufacturer and auto dealerships, has challenged laws preventing cross-ownership of automobile industry sectors. Walmart is suing the Texas Alcoholic Beverage Commission over a state law prohibiting businesses from owning multiple liquor stores.

RELATED: Dallas’ Deep Ellum Brewing sues TABC to sell packaged beer to-go

Closer to the ground, the latest court decision is the most recent chapter in a drama in which one jilted, but determined and well-heeled company has waged a scorched-earth campaign to force state regulators to publicly acknowledge the way they applied the law was unfair and, ultimately, ludicrous.

When the Texas Alcoholic Beverage Commission denied McLane Company, a $48 billion supply chain operator, a license to distribute alcohol, the Temple-based company claimed the commission had treated it differently than it did businesses already established in the alcohol trade. In response, over the past several years, McLane has attacked the commission on multiple fronts, in front of and behind the scenes. Now, the offensive might force reluctant lawmakers to act.

A return to Prohibition?

The seeds of Jones’ “absurd” decision were sown in 2012, when McLane Company, one of the state’s oldest continuously operating businesses, applied to the alcoholic beverage commission for a wholesaler’s license. Core-Mark applied for its license at the same time.

While state regulators approved Core-Mark’s application, McLane withdrew its paperwork after the commission said it would oppose its application. The reason was the company’s owner.

Buffett’s Berkshire Hathaway purchased McLane in 2003. Berkshire also owned a 2 percent interest in Walmart, which sells alcohol in Texas as a retailer. The commission said Berkshire’s stake in both companies violated rules prohibiting companies from operating in multiple tiers of the alcohol business.

So-called Tied-House laws date to the state’s emergence from Prohibition. In an effort to thwart both monopolies and the corruption that had plagued the booze business, Texas, like most states, adopted a three-tier regulation system. Companies that made alcohol, distributed it and sold it must remain distinct and independent from each other.

RELATED: Texas brewers lose fight over taproom bill

Yet identifying and maintaining the boundaries has become increasingly complicated as corporate structures have grown more sophisticated. Regulators have struggled to identify where to draw cross-ownership lines, particularly with publicly traded companies boasting multiple layers of ownership and millions of investors. Individuals within giant pension funds can own shares in both alcohol manufacturers and retailers without even realizing it.

In the meantime, the number of businesses seeking Texas alcohol permits has soared, straining regulators’ resources. the commission now processes about 87,000 applications annually. Last year, it received approximately 17,000 new applications requiring the commission to vet the ownership of each business to ensure no tier boundaries were being crossed.

A Texas Supreme Court decision six months ago only muddled matters. In it, the state’s highest court sided with the commission’s decision to deny Cadena Comercial’s application for a permit to sell retail alcohol. Cadena, which operates convenience stores, is owned by a publicly traded company, FEMSA — which, through several corporate layers, also has an interest in Heineken breweries.

The justices agreed that FEMSA’s stake in both companies was enough to violate the state’s rules about separated tiers. Yet they refrained from distilling precisely how much cross-ownership — 20 percent? 5 percent? one individual stockholder? — was enough to deny a license.

READ: ‘PUSH! PUSH!’ How a bungled private contract cost Texans $130 million

In a lengthy dissent, Justice Don Willett said, taken to its conclusion, such logic meant a single person owning one share each in an alcohol manufacturing company and a retailer would be reason to deny either company a Texas license. One entity that would be excluded from doing business under such an interpretation, he noted, was the state of Texas, whose public universities hold permits to sell alcohol at sporting events.

The state, through its pension funds and other investments, also has an interest in publicly traded alcohol manufacturers. “In other words,” Willett wrote, “the State of Texas (as regulator) says the State of Texas (as regulated) is operating illegally and thus at risk of forfeiting its permit.”

Such an interpretation also invited meddling, Willett pointed out, and could ultimately reduce Texas to a dystopianly dry landscape: “The consequences of the Eighteenth Amendment could again be realized if modern-day teetotalers obtained interests in different tiers of the industry in order to shut down the Texas alcohol trade.”

‘Powerful and entrenched interests’

From McLane’s standpoint, the commission’s opposition to its license because of Buffett’s ownership looked arbitrary. Licensed at the same time, the publicly traded Core-Mark was also owned by large investors, such as Vanguard and T. Rowe Price. Those companies, in turn, had small stakes in Nordstrom’s and Bed, Bath and Beyond— holders of state permits to sell alcohol — and Molson Coors Brewing Co., which owns a Texas manufacturer’s permit.

Furious, McLane embarked on a methodical campaign to highlight what it saw as the agency’s hypocrisy.

The company’s first move (a spokesman declined to comment on its interactions with the commission) was filing a slew of open records requests with the liquor licensing agency, seeking voluminous information on the commission and currently licensed companies.

The commission declined to comment on the requests, but in an April public hearing, the commission’s former general counsel, Emily Helm, said of them, “We are talking this side of a million sheets of paper.” One example: McLane requested all communications between the agency and the Legislature “since the beginning of time,” Helm said.

She added that the commission had hired three staffers and retained an outside law firm just to handle McLane’s ongoing public information requests. Three lawsuits over the requests are pending in state District Court.

The second prong of the company’s attack was through federal court. In June 2016, McLane joined forces with the Texas Business Association to sue the Texas Alcoholic Beverage Commission. The lawsuit claims the agency was taking its three-tier separation to “an absurd and unlawful extreme.” The suit is ongoing.

The final flank of the company’s offensive was to disrupt the applications of other publicly traded companies seeking permission to traffic alcohol in Texas. Anyone can oppose a license application, and in late 2016 McLane protested Core-Mark’s application to renew its wholesaler license, citing the minor cross-ownership ties of its institutional investors.

“The TABC has made clear that there are no exceptions to the tied-house provisions for small interests,” McLane wrote in a court filing last March.

In his Sept. 8 decision, Judge Jones reluctantly agreed. He noted that while elected officials had at least two opportunities in recent years to prevent such a potentially disruptive interpretation of the law, they had “failed to act.”

The bills, introduced in 2013 and 2015 by state Rep. René Oliveira, D-Brownsville, would have set minimum ownership levels before the cross-ownership rules were triggered. But each died an early death, never making it out of committee.

Critics have long complained that such efforts to update state liquor laws have been blocked by powerful lobbies representing existing alcohol business that spend freely to promote their interests — more than $11 million in state campaign contributions over the past four years, the Texas Tribune reported in June.

Texas Ethics Commission records show that then-Rep. Wayne Smith, who was chairman of the House Licensing and Administrative Procedures committee, where Oliveira’s bills died, received more than $100,000 in contributions from beverage distributors and their political action committees between 2012 and 2016. Half of that was from two of the state’s largest alcohol distribution companies, Southern Glazer’s and Silver Eagle Distribution.

“There are very powerful and entrenched interests that do not want to change the status quo,” Oliveira said.

Both sides can appeal Jones’ findings. Meanwhile, the Texas Alcoholic Beverage Commission is scheduled for its once-a-decade, top-to-bottom agency review by the state Sunset Advisory Commission. Earlier this month it released its self-evaluation.

Among its greatest challenges, the agency acknowledged, was its nearly 100-year-old rules: The Alcoholic Beverage “Code is not contemporary. Business models and services evolve, but the Code does not.”

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