Constitutional Challenge to North Carolina Distribution Laws Moves Forward

A lawsuit brought by two North Carolina breweries that challenges the constitutionality of the state’s distribution laws is inching toward a trial.

Last Thursday, Superior Court Judge Allen Baddour denied the state’s motions to dismiss the case or send it to a three-judge panel.

A trial date has not been set.

Acting under the Craft Freedom LLC corporate banner, Olde Mecklenburg Brewery and NoDa Brewing Co. filed the lawsuit one year ago alleging that North Carolina’s 25,000 barrel self-distribution cap, as well as franchise laws that lock breweries into contracts with their wholesalers, are unconstitutional and “artificially suppressing” the craft brewing industry.

In a press release praising the Superior Court’s decision, Olde Mecklenburg Brewery founder John Marrino said, “Today’s victory upholds the basic principle that the government cannot enrich one group of private parties at the expense of another.”

Following the decision, Craft Freedom’s attorneys, Drew Erteschik and Bob Orr, filed subpoenas seeking documents and communications, including emails, between North Carolina’s beer wholesalers and lawmakers and lobbyists. The attorneys are also seeking records from the North Carolina Alcoholic Beverage Control Commission that outlines agreements between large brewers and wholesalers.

Erteschik and Orr released a joint statement Tuesday saying they are “pleased” that the court “rejected the state’s arguments for dismissal and held that we sufficiently alleged that these laws are unconstitutional.”

“Our craft brewery clients, the entire craft beer community, and craft beer consumers across North Carolina can all share in this major victory,” Erteschik and Orr said, via the release.

For his part, North Carolina Beer & Wine Wholesalers Association executive director Tim Kent told Brewbound that the state’s distributors “remain confident that the state will successfully defend the state alcohol laws that are being challenged in this case.”

“Our courts in North Carolina and throughout the country have continually recognized that these laws that we have on the books are unquestionably legitimate,” he said.

Kent added that the state’s craft brewers could not self-distribute their beer prior to 1989. He also noted that the North Carolina Legislature increased the cap to 25,000 barrels annually in 2003.

“The provisions being challenged in this case are actually exceptions to the regulatory system that were created just for craft brewers, and those provisions are now being challenged by two breweries.”

Asked whether he would agree that the beer market has changed since 2003, Kent said, “It’s certainly become more competitive.”

Kent, who is among those subpoenaed in the case, said he had not yet received the document.

The state of North Carolina allows breweries to sell their distribution rights to wholesalers, he added, but the price varies depending on the brand.

In a sworn affidavit filed in Craft Freedom’s case, Dustin Canestorp, a Marine veteran who opened Beer Army Combat Brewery in April 2013, said he sold his brewery’s statewide distribution rights for $25,000 to Freedom Beverage Company (FBC), with the exception of Craven County where Beer Army was allowed to self-distribute.

When the relationship soured and sales began to decline, however, Canestorp said Freedom refused to return his brewery’s distribution rights without receiving a “fair market value” of $400,000.

“Without this ransom payment, it appeared that FBC intended — and, under North Carolina’s misguided laws, was encouraged — to hold our distribution rights hostage,” he said.

According to his affidavit, Canestorp said he recorded Freedom Beverage Company president Tim Booras saying Beer Army was “absolutely” being punished and deemphasized for adding out-of-state distribution via Global Beverage Group.

“It was definitely punitive,” Booras told him on the tape in 2014. “I’m a mercurial guy, you know? My temperature goes hot and cold.”

Also captured on the tape was an admission that the state’s franchise laws were “biased,” and written by a “beer wholesaler.”

“This Franchise Law… a beer wholesale wrote it, and it’s quite frankly biased,” Booras said at the time.

Beer Army went out business in April 2015.

In their lawsuit, Craft Freedom argues that craft breweries surpassing the 25,000-barrel threshold are being punished for their own success by being forced to sign with a wholesaler.

In 2016, Olde Mecklenburg sold more than 21,000 while NoDa produced more than 15,000 barrels. The beer companies also argued that the state’s franchise laws force craft breweries into “oppressive, one-sided contracts with distributors that literally last forever” and require them to turn over control of their products and pricing to wholesalers.