Texas alcohol agency reverses judge, preserving state booze industry


Highlights

A September court ruling would have prohibited many of the state’s biggest alcohol companies from operating.

Texas Alcoholic Beverage Commission reversed the ruling, saying lawmakers couldn’t have wanted such disruption.

In a billion-dollar game of brinkmanship over the state’s booze business, the Texas Alcoholic Beverage Commission blinked.

Last fall, when an Austin judge issued an opinion he acknowledged could shut down much of the state’s alcoholic beverage industry, he admitted it was ludicrous. But, Administrative Law Judge Robert Jones Jr. explained, he was bound to follow Texas law as it was written — which meant many companies, including such giants as Anheuser-Busch and Molson Coors Brewing, could not legally operate in Texas.

Two weeks ago, however, the agency that regulates alcohol beverages decided that shuttering the state’s booze business was probably not what legislators intended, and reversed the judge’s advisory decision. If it had not, Deputy Executive Director Matthew Chaplin wrote, “it would result in … no legal alcoholic beverage industry in Texas.”

Although a dry-state disaster was averted, the high-stakes game of legal chicken with the $40 billion alcoholic beverage industry is the latest evidence that Texas’s alcoholic beverage rules, many of which have not been updated since the end of Prohibition, are increasingly unworkable. “The greatest challenge is that the Code is not contemporary,” the alcoholic beverage agency wrote late last year in its once-every-10-year evaluation by the Texas Sunset Advisory Commission. “Business models and services evolve, but the Code does not.”

Money has played a role, critics say. Established alcoholic beverage interests are among the state’s more generous campaign contributors, and elected officials have received millions of dollars from companies eager to protect their corner of the business, especially from large newcomers.

Given numerous opportunities in recent years to clarify the outdated rules, Jones wrote, “The Legislature has failed to act.”

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The current dispute started nearly six years ago, when McLane Company, a $48 billion supply chain business based in Temple, applied for a license to distribute alcohol. Another giant distributor that was already operating in the state, California-based Core-Mark, applied to renew its license about the same time.

While the alcoholic beverage commission approved Core-Mark’s application, the agency informed McLane it would oppose its application. The reason was its owner, Omaha billionaire Warren Buffett.

Like many states, Texas after Prohibition adopted rules to thwart the corruption that had plagued the booze business. The so-called three-tier regulation system requires companies that make alcohol, distribute it and retail it to remain independent from each other; a person with an interest in one tier cannot also hold an interest in another.

McLane’s problem was that Buffett’s Berkshire Hathaway had purchased the company in 2003. Berkshire also owned a 2 percent interest in Walmart, which sells alcohol in Texas as a retailer. Berkshire’s stake in the two companies appeared to violate the cross-tier rules.

At one time, identifying tier system violations was simple: If a person made beer, he couldn’t also be a distributor. Yet drawing the boundaries among the various sectors has become increasingly complicated as corporate structures have grown more sophisticated.

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Publicly traded companies, for example, boast multiple layers of ownership and millions of investors. Mutual fund investors might simultaneously own shares in alcohol manufacturers and retailers without even realizing it. What if the same bank lent money to a retailer and a distributor and thus hold an ownership interest in both?

In a separate federal lawsuit, McLane pointed out that most Texas Alcoholic Beverage Commission employees probably violated the cross-ownership prohibition through their retirement funds.

McLane decided to press the absurdity of such logic and lodged a protest against Core-Mark’s application. In its filings, the company noted the publicly traded Core-Mark was owned by large investors, such as Vanguard and T. Rowe Price. They in turn held 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.

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In short, McLane argued, Core-Mark was violating the rules at least as much as McLane was. In his September decision, Jones reluctantly agreed, adding that he “sympathizes with the absurdity of the outcome in this case,” which would disqualify hundreds of companies with shared institutional owners.

State agencies can either accept or reject administrative law opinions. Two weeks ago, the alcoholic beverage commission reversed Jones’s ruling. Court rulings have said laws can’t be interpreted to be absurd and, because allowing the booze industry to crater would be crazy, the beverage officials reasoned that Jones’s interpretation had to be wrong.

“It is not the agency’s belief that the Texas legislature intended to create a statute that through certain interpretations, would lead to large-scale disruption of the alcoholic beverage industry,” TABC Executive Director A. Bentley Nettles wrote in a statement.

So in the future, the agency clarified, it would permit hands-off ownership of different tier companies by institutional investors such as mutual funds. That means Core-Mark and other publicly traded companies could keep operating.

Still, when it came to single owners of companies across tiers, the agency declined to define how much would be unacceptable, saying only that it would review each application as it came in and, like pornography, identify it when it saw it. “It’s going to be case-by-case examination of each company’s business standings,” spokesman Chris Porter said.

That’s fine with existing licensees, said Keith Strama, an attorney for the Wholesale Beer Distributors of Texas. The alcoholic beverage agency’s reversal “accurately articulates what the policy of TABC has always been,” he said.

It a written statement, McLane, which has not decided whether to appeal the agency’s reversal, blasted such reasoning. “Rewriting the Alcoholic Beverage Code to pick winners and losers is exactly the kind of behavior that the Legislature found questionable,” wrote Neftali Garcia, the company’s vice president for governmental affairs. “It is very clear that it’s business as usual at the agency, and that’s very bad news for Texas business.”



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