North Carolina Breweries Sue State Over Distribution Cap

As expected, two North Carolina breweries have filed a constitutional challenge to a state law that requires breweries producing more than 25,000 barrels annually to contract with a wholesaler.

Olde Mecklenburg and NoDa breweries, acting under the Craft Freedom LLC corporate banner, followed up their pledge last month to pursue legal action by filing a lawsuit today accusing the state of North Carolina of engaging in “economic protectionism.”

Last month, lawmakers stripped a provision out of House Bill 500 that would have increased the self-distribution production cap to 200,000 barrels a year. Legislators also removed a provision that would have allowed smaller brewers to more easily break their contracts with their wholesale partners. The bill’s sponsor, Rep. Chuck McGrady, told reporters that the N.C. Beer & Wine Wholesalers refused to let the legislation move forward with those provisions attached to the craft modernization bill.

NoDa Brewing Company co-owner and president Suzie Ford told Brewbound that the committee started as balanced with pro-distributor and pro-self-distribution lawmakers — but six pro-distributor lawmakers were later added to the committee, and the two meatiest provisions were removed from the bill

“The committee was stacked against us,” Ford said, adding that she believed that “politics are trumping policy.”

“Our government should be about free-market growth and principles,” Ford said. “We got into this business to brew beer, not be in politics.”

Last year, NoDa produced about 16,000 barrels of beer, and the company is projecting about 20,000 barrels of production this year, Ford said.

“We’re taking it slow [to avoid hitting the cap],” she said. “Olde Mecklenburg Brewery is pushing on limit this year. We’ll be pushing on it next year.”

The lawsuit comes as negotiations between the members of Craft Freedom and the wholesaler group broke down last week. Ford told Brewbound that the two groups had reached “a handshake deal” but 48 hours later the wholesalers “changed their minds and reneged” on the deal, leading to the legal action against the state.

Tim Kent, executive director of the N.C. Beer and Wine Wholesalers Association, did not return messages from Brewbound as of press time. However, Kent told the Charlotte News & Observer that a compromise had not been reached last week. In a message to the outlet, he wrote that he took the deal to his board, which rejected it.

The lawsuit alleges that North Carolina’s distribution cap and franchise laws are unconstitutional and “artificially suppressing” the state’s craft beer industry, which is estimated to have an annual economic impact of $1.2 billion.

“First, North Carolina’s ‘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 — a cap that is arbitrary and ensnares small but successful craft breweries,” the lawsuit states. “Second, North Carolina’s ‘Franchise Law’ forces craft breweries to enter into oppressive, one-sided contracts with distributors that literally last forever, and which require the breweries to turn over control of their product — including pricing — to the distributors.”

The plaintiffs’ attorneys, Bob Orr and Drew Erteschik, released a joint statement today echoing those sentiments: “Today, we filed a lawsuit challenging a set of unconstitutional laws that punish our State’s craft breweries for their hard work and success. Our clients are small craft breweries that are subject to arbitrary laws forcing them to hand over their self-distribution businesses, distribution rights, brand control, and future profits to private distributors. These laws violate multiple provisions of the North Carolina Constitution, including those that prohibit the government from taking private property from one person and giving it to another. Our lawsuit asks the courts to hold that these laws cannot be enforced against our clients, and we look forward to vindicating their constitutional rights in court.”

The lawsuit argues that “franchise laws leave the breweries powerless in an oppressive and illusory ‘contractual’ relationship with no recourse. Craft brewers who question their distributors’ efforts face the real and legitimate prospect of the distributor intentionally ignoring that craft brewery’s brand and promoting competing brands — effectively extinguishing the craft brewery’s business. The craft brewery, meanwhile, has no remedy. Craft brewers have no choice but to submit to their distributors’ will, or else face financial ruin.”

The complaint seeks a permanent injunction of the laws.

The North Carolina state Senate has yet to vote on the surviving version House Bill 500, which has passed the House.

A call to Olde Mecklenburg was not returned as of press time.

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