TABC Safe Harbor Rule

Last week, the Texas Alcoholic Beverage Commission (TABC) held it’s first quarterly Commissioner’s meeting of 2017.  These meetings are a chance for the public to listen and/or comment on issues that are before the Commissioners, such as new rules or rule changes that are proposed for adoption.  The meetings are also a chance to get a sense of the agency’s current financial and operational priorities.

At the meeting, Ed Swedberg, TABC’s Deputy Executive Director, briefed the commissioners on numerous topics, including a whole slew of statistics on agency operations.  One of the items that I found interesting was a discussion of the agency’s “restrained administrative cases.”  The topic came up in the context of discussing the agency’s recent sting operations, involving both on-premise and off-premise accounts.

A restrained administrative case refers to a legal presumption, codified in Section 106.14 of the Texas Alcoholic Beverage Code, whereby certain actions of an employee will not be attributed to the business of the employer.  The requirements to take advantage of this presumption are more fully explained in Rule 34.4 of the Commission.  This is known as the Safe Harbor Rule.

Under TABC’s Safe Harbor Rule, if an employee either sells or allows the consumption of an alcoholic beverage by a minor or an intoxicated person, a violation may be issued to the employee but, it will not be attributed to the employer — if the employer meets certain conditions, including:

  • The person selling/serving is not the owner or an officer of the company;
  • The person selling/serving holds a current seller-server training certificate from a TABC-approved school;
  • All employees engaged in the sale, service, or delivery of alcoholic beverages, as well as their immediate managers, are certified within 30 days of their hire date;
  • The employer has written policies for responsible alcohol service and consumption and ensures that each employee has read and understands these policies; and
  • The employer does not directly or indirectly encourage the employee to violate the law.

Mr. Swedberg reported that the agency’s “restrained cases” had dropped to 35.8 % in 2017 (to date), from 41 % in 2016.  The drop in the percentage of businesses eligible for Safe Harbor, Swedberg explained, was probably due to the increased presence of TABC agents at on-premise accounts.  The implication being that many businesses either are not aware of, or have not taken advantage of the Safe Harbor Rule.

Food for thought: Swedberg stated that the agency projects 5,500 administrative cases to be brought in 2017.

The bottom line for manufacturers and retailers alike — make it a priority to comply with the Safe Harbor Rule.  It’s relatively painless and, worth the protections afforded your business.

TABC’s One-Share Rule

One Share RuleOn a warm spring day, in March 2011,  McLane Company Inc., applied for the privilege of operating as a wholesaler of alcoholic beverages in Texas.  Roughly 18 months later, the Texas Alcoholic Beverage Commission informed McLane, “no I’m sorry, thanks for applying but, we’re going to protest your application.”  (That was in August 2012, so most likely it was an Africa-hot day in central Texas when McLane got the bad news.)

Almost 4 years on (last month), McLane, along with the Texas Association of Business, filed suit, in federal court, against the TABC, over the agency’s decision.  In their complaint, the plaintiffs’ attorney’s do not do a particularly good job at hiding their frustration with TABC.  That’s putting it mildly.  McLane and the TAB (Texas Association of Business) are calling the TABC to task on what has been termed the One Share Rule — the TABC’s position that it is a tied-house violation for a person to have any interest in a wholesaler or manufacturer, if that person also has a “direct or indirect interest” in a retailer.  The “one share” term comes from testimony, in a different case (see below), from the TABC’s director of licensing, that, hypothetically, even a person owning one share across companies in different tiers, violates the Texas Alcoholic Beverage Code.

McLane’s frustration stems largely from the TABC’s unwillingness, sort of, to back down from its stance, despite numerous glaring examples of cross-tier ownership in the state — under the One Share Rule.  The TABC, I feel, has got itself in a box over this issue.  You see, McLane itself does not have an interest in a retailer.  But its parent company, Berkshire Hathaway, is a roughly 2 percent shareholder in Wal-Mart.  And — you guessed it — Wal-Mart, through a subsidiary, holds retailer permits in Texas.  So, it’s not actually McLane that would supposedly be in violation of a tied-house statute, it would be Warren Buffet’s investment company.  The same issue is playing out in Cadena Commercial USA v. TABC.  That case is mentioned in McLane’s complaint and it has been granted petition for review before the Texas Supreme Court.  (No date set yet for oral argument.)

The petitioner, in Cadena, applied for retailer licenses with TABC but, its applications were also protested/denied by TABC for violation of Section 102.07(a), “Prohibited Dealings with Retailer.”  The reason TABC gave for the violation — and the appeals court agreed — was because Cadena’s great-grandmother’s daughters’ friends’ sons have kids that own Heineken breweries.  I am being facetious but look at the chart at that link and you’ll see what I’m talking about.

The briefs filed in the Supreme Court are enjoyable reads.  (McLane and TAB have filed amicus briefs on Cadena’s behalf and, the Beer Alliance of Texas, a trade group of beer distributors, filed a brief supporting TABC’s position —  side note: does the fact that Texas beer distributors are siding against someone (albeit a rather large someone) that wants to join their club signal economic protectionism?)  Cadena is directly challenging the TABC’s statutory interpretation of 102.07(a), while McLane, in its suit, is challenging the TABC on constitutional grounds — equal protection, due process, and commerce clause violations.

From my reading, McLane has its strongest argument on its equal protection claim, which attacks the TABC’s selective licensing scheme.  (McLane has protested the renewal of another wholesaler’s, Core-Mark, permits — to make it’s point, since a number of investment company’s own Core-Mark stock along with stock in retailers and manufacturers.)

Of particular importance to the beverage industry in Texas, however, will be how SCOTX rules in the Cadena case.  That ruling will likely also decide whether McLane is able to enter the alcohol wholesaler business in Texas.

p.s. I couldn’t find a ‘one share’ traffic sign in downtown San Antonio, so I went for the next easiest option — the one way sign you see above.

Lessons from the California Craft Beer Summit


A little over a week ago I attended the California Craft Beer Summit in Sacramento.  It was such a great visit, on many levels.  For starters, I found Sacramento beautiful and welcoming.  The venues, the Sacramento Convention Center for the bulk of the program, and the capitol mall, for the Brewer’s Showcase, were awesome.

Among some of the great folks that I met during my visit were Bob Strangman from Pacific Islander Beer Co., Carolyn Hopkins-Vasquez from Hermitage Brewing, and Candace Moon, The Craft Beer Attorney.  All were very gracious with their time, and Candace gave me some great advice for my practice.  After watching her interact with brewers, it was so clear to me why she’s been so successful helping the craft industry – her clients love her and her team.

I don’t practice in California, so this trip was not about client development but, rather, it was a great learning experience.  (And, yes, the opportunity to taste some amazing beers!)  Bart Watson kicked off the program, providing insight into the growth trends for craft in the state (and beyond).  Mike Hess put on a great presentation about growing his brewery business.  The presentations and my interactions with people left me with a singular impression.  That being, how much more progress the craft beer industry has made in California, as compared to Texas.  We are steamrolling along but they’ve hit another level.  The fact the Brewer’s Showcase was held on the mall of the capitol building sort of speaks to the advance of the industry in California.

Relatedly, being among California brewers gave me great insight into what is to come in Texas.  So many of their businesses have matured.  We have some of that in Texas but not on the same scale.  As businesses mature, they turn increasingly for advice.  By taking in some of the lessons of California brewers, I hope to be a part of the success of craft in Texas.

Crowlers in Texas

CBP-crowler-hctx 2464x1632

Last month, I bought my first crowlers, at the Collective Brewing Project in Ft. Worth.  I had met Ryan Deyo, co-founder and head brewer at CBP, the week before at an event in San Antonio.  When I visited his brewpub during a Texas Brewers Night, I was really taken by the great vibe of their space and their beers.  They’re located in what I believe is a revitalized area of Ft. Worth and, from what I gather, there’s going to be 1 or 2 other breweries opening very close to them within the year.  I love visiting Ft. Worth and these guys have given me one more reason to return often.

That brings me back to my crowlers.  Carly, the taproom manager at CBP, told me that my beers would keep for at least 30 days, easily.  It’s been over two weeks since she canned them and my Suspicious Delicious is tasting just as good as I remember from the taproom.  Brewpubs like CBP can keep selling crowlers (filled with their own beer) to customers, for off-premise consumption, without any issue from the Texas Alcoholic Beverage Commission.  Unfortunately, TABC has notified most retail bars using crowler machines that they’ll be cited for violation of Section 11.01 of the Texas Alcoholic Beverage Code if they continue the practice.  The gist of TABC’s reasoning is that if you’re not licensed to manufacture beer, you’re not allowed to can it.  (Thus, technically, holders of a manufacturer’s license can sell crowlers but, only to wholesalers.  Of course, holders of manufacturer’s licenses would use a canning line if they’re going to can, not a crowler machine.)

In my opinion, there are a number of problems with TABC’s argument, not the least of which is that it is an arbitrary application of the beverage code.  And what is arbitrary about TABC’s current policy?  Well, they allow certain retailers (holders of Wine and Beer On-premise permits) to sell beer in growlers (glass containers).  Retailers can sell beer for off-premise consumption in glass bottles but not in aluminum cans.  If you’ve ever seen a retail bar operate a crowler machine and compare it to their fill of a growler, I’ll wager you would question the current policy on crowlers.  It is a stretch to describe either as a manufacturing process.  They both serve the purpose of allowing a retailer to sell beer to go.

In future posts I’m going to attempt to provide some insight into what those in the alcoholic beverage industry in Texas have historically challenged when cited by TABC, the procedural process, the arguments made and some data on outcomes.

Photo by:  A. Tomasino

Texas Brewers Nights

Falls County

Last month I attended the Houston and Dallas area Brewers Nights meetings as a member of the Texas Craft Brewers Guild.  Two things really impressed me:  the welcoming atmosphere of the people in attendance and how many breweries are coming online in Texas!  The hosts, No Label Brewing (Katy, TX) and Rabbit Hole Brewing (Justin, TX), were terrific.

At the Houston meeting, I met folks from some breweries that are about to open, like Under the Radar Brewery and Town in City Brewing Company , and Industry Brewing, which is in the planning stages.  The Houston brewing scene is definitely on the rise!  I also met brewers from Huff Brewing Co. (howdy Susan!) out in Bellville and Blackwater Draw Brewing in College Station.

The Dallas area meeting had two presentations for the attendees.  The first was by Peter Boettcher, who is teaching a Journeyman Brewing course at Eastfield Community College (Mesquite, TX) this summer.  It is a six week course, which Peter’s website describes as geared towards “personnel working within the production side of the brewing industry.  This program will teach basic understanding in all aspects of the brewing process including machinery and equipment for packaging.  It will provide the students with essential knowledge of the raw material used in the brewing process and it will educate the students in technical and technological aspects of the entire brewing process.” Breweries participating in the program are Rabbit Hole, Martin House Brewing, Grapevine Craft Brewery, Rahr & Sons, Shannon Brewing Company, and Texas Ale Project.

The second presentation was by representatives from Pall Corporation, who discussed the details of various filter applications in the brewing process.  I had no idea of the specifics and technical considerations involved in brewing filtration systems.

These were my first exposure to the brewers’ meetings.  What a great way to meet folks in the community – breweries and allied members alike.   I can’t wait for the June meetings in Austin and San Antonio taking place next week!  For anyone with a brewery or brewpub in planning or other allied members, I highly recommend joining the guild and going to these meetings.

Photo by: Stuart Seeger / CC BY 2.0

Planning for Disagreement Among LLC Members


No business owner wants to find him or herself in a situation where the relationship with a fellow owner has turned antagonistic.  Unfortunately, those situations do arise but, rarely are they planned for.  I recently came across a scenario where one member of a limited liability company, or LLC, was being threatened with legal action by a fellow member.  The threatened member was further told he would be ‘fired’ from the company.

What options does each side have in this situation?  In Texas, as in most other states, the answer will largely depend on the company (or operating) agreement that each member signed when the business was formed.

Many Texas LLC members don’t realize this but, if you don’t have a company agreement, most of the transactions and interactions among members are controlled by the provisions in the Texas Business Organizations Code (TBOC).  In addition, the code controls on any issue not specifically addressed by the company agreement (see TBOC 101.052(b)).  This latter point is important to those business owners that opt for a “self-service” legal service for their business formation documents.  You may end up with a “company agreement” but it’s likely not going to address issues of particular importance to your business.

Getting back to the scenario where things go awry among LLC members, what can you do to force a member out of the company?  Short of having a provision in the company agreement to the contrary, section 101.107 of the TBOC will control:

Sec. 101.107. WITHDRAWAL OR EXPULSION OF MEMBER PROHIBITED. A member of a limited liability company may not withdraw or be expelled from the company.

Two things should spring to mind after reading 101.107.  The first being that the default in the code stipulates you can’t expel a member.  Secondly, the code doesn’t allow a member to leave the company.  On first reading, the latter might seem odd.  It does, however, make sense when viewed under circumstances where a particular member is key to the ongoing profitability of the business.  In that situation, the remaining members could be left in the lurch, without a viable means to continue.   My point is that the above code section can and should be superseded by a well drafted provision in the company agreement, both suitable to the particular business and, more importantly, reflecting the understanding and relationship among the owners.  Along these lines, consider TBOC section 101.205 as well:

Sec. 101.205. DISTRIBUTION ON WITHDRAWAL. A member of a limited liability company who validly exercises the member’s right to withdraw from the company granted under the company agreement is entitled to receive, within a reasonable time after the date of withdrawal, the fair value of the member’s interest in the company as determined as of the date of withdrawal.

I point out the above section so that you consider the effect this provision can have on your business, in another typical scenario.  Let’s say your brewery, distillery, or retail shop has three owners, all LLC members.  The business is established and you’re all earning income but, not to the point where any real wealth has accumulated.  Then, one of the members decides to break away and start another venture.  Your company agreement allows for withdrawal, via majority vote or some other mechanism, and the member is allowed to resign.  Now, how are the remaining members going to finance the payment of the former member’s “fair value” percent interest?  And can they come up with the money in a “reasonable time”?  In situations where the departure of a member was on less than amicable terms, he or she may very well try to enforce those rights under 101.205.  How do you deal with this scenario?

Again, the answer can and should come from the company agreement that everyone entered into at the outset.  In addition to addressing membership withdrawal, the agreement should also address how a withdrawing member will be paid out, and over what time period.  Professor Elizabeth Miller, at Baylor Law School, offers this advice in her paper, “Practical Issues in Drafting Texas LLC Agreements”:  draft the company agreement to allow for a deferred payment or an installment agreement; alternatively, instead of paying out the former member, you might agree that he or she becomes an assignee upon withdrawal.

The craft beverage industry has a reputation for being exceedingly collegial, even among competitors.  Folks help each other out with advice on operations, dealings with vendors, etc.  Undoubtedly, the vast majority of craft businesses are comprised of owners and partners that continue to get along even as the pressures of running a business place stress on their relationships.   Nevertheless, as in any business, disagreements and changes in circumstances can and do occur.  Establish a specific framework for addressing those situations when you form the business.  And put it in your company agreement.

Illustration by: Aidan Jones / CC BY 2.0

American Craft Spirits Conference – 2015


This past weekend I attended the 2015 Distillers Convention and Vendor Trade Show in Austin, Texas.  This was only the second such conference organized by the American Craft Spirits Association (ACSA).  That in itself tells you how young the craft spirits movement is when compared to craft beer.  I was fortunate enough to learn about the event the week prior — and I’m really glad I attended.

It was a great opportunity to learn about the burgeoning craft spirits industry, meet some of the distillers and the folks that provide services to them:  glass suppliers, distillation equipment vendors, lab equipment vendors, labeling and branding providers, distributors, legal counsel, etc.  Also in attendance were representatives from the Alcohol and Tobacco Tax and Trade Bureau (TTB), whom I had the opportunity to meet as well.

As you might imagine from this type of industry-wide conference, the range of topics covered was broad in spectrum.  They included sessions from the TTB on the labeling and formula application process to technical sessions on fermentation science presented by Chris White of White Labs, to intensive distribution-focused sessions.

My favorite session was titled ‘Craft Market Strategies’, presented by Harry Kohlmann, PhD, of Park Street Imports.  As their website states, Park Street is a provider of back-office solutions to the alcoholic beverage industry, ranging from compliance, logistics, warehousing, importing and distribution.  I felt Dr. Kohlmann did an outstanding job at dissecting market trends and delivering solid advice to distillers on how to market their brands.  I am a data geek so I really appreciate the value of the data Park Street is able to collect and offer to distillers.

Aside from wanting to listen in on the topics of importance to craft distillers, I attended the conference because it was an opportunity to meet one of the leading attorneys that serves the craft beverage industry, Ryan Malkin of Malkin Law P.A.  I contacted Ryan before the conference and he was more than willing to meet up and chat about his practice and the services he provides to his beverage clients.  He was also a panelist on the export issues roundtable at the end of the conference.  Through his practice and blog, Ryan offers really solid and current information to those in the industry.  You can see an interview with Ryan, conducted by, on his latest post here.  You’ll get an idea of the types of legal and regulatory issues distillers frequently encounter.

Most of the craft distillers attending the conference had entries in this year’s ACSA Craft Spirits Judging.  Winners were announced on the first night of the conference.  I’m happy to report that Ranger Creek Brewing and Distilling, from my home city of San Antonio, won the Best in Show Award.  Congratulations guys!

Lastly, I want to acknowledge two of the terrific people that I met at the conference, Bob Braxton and Chris of Yukon Brewing.  (They came all the way from Whitehorse, Yukon, Canada!)  I shared a table with them during the two-day event and they were extremely gracious in answering my questions about the industry.  Mostly though, I enjoyed and appreciated the conversation and their company.  Looking forward to tasting their beer and spirits someday.  I told my daughter about them this morning and she agreed we need to drive up to the Yukon for a visit!

The BIFDL and Contracting for Distribution Rights


In Texas and other states, when a distributor contracts with a brewer for the latter’s distribution rights, the agreement has to conform to the state’s Beer Industry Fair Dealing Law (BIFDL).  Texas’ law is codified in sections 102.71-82 of the Texas Alcoholic Beverage Code.  The law addresses:  conditions under which these agreements can be terminated, notice requirements of the parties, transfer of rights, remedies of the parties, and prohibited conduct.

In 2013, Texas’ BIFDL was amended to add the following as prohibited conduct:  “No manufacturer shall … accept payment in exchange for an agreement setting forth territorial rights.”  See section 102.75(a)(7) of the code.  This effectively prevents brewers from being compensated in exchange for granting a distributor exclusive distribution rights in a territory.  In my last post, I alluded to the horse-trading that brought about this change in the law.  Texas craft brewers are not happy with this provision because it eliminates a source of revenue for them while allowing a distributor to sell those distribution rights to another distributor.  Three Texas breweries — Live Oak Brewing Company, Peticolas Brewing Company, and Revolver Brewing — have filed suit against the Texas Alcoholic Beverage Commission (TABC), arguing that the provision is an unreasonable interference with their property rights and economic liberty.  As relief, the brewers are asking the court to declare the ‘sale restriction’ unconstitutional and enjoin TABC from enforcing it.

The brewers’ fairness argument is a strong one.  “Why give away the rights to distribute my product but allow my distributor to profit from it if he sells those rights?”  This got me to thinking about how to draft a contract provision that addresses this particular concern and, not run afoul of the sale restriction.  The answer may be to negotiate a provision in the contract that would compensate the brewer if and when the distributor sells the distribution rights to another distributor.  Disclaimer:  I have not vetted this with TABC.  Nevertheless, from my reading of the statute, it can be argued that such a provision is not prohibited conduct.  As a basis for my argument, I point out another paragraph that was added to the BIFDL in 2013, section 102.75(a)(6), which reads:

Nothing in this section shall interfere with the rights of a manufacturer or distributor to enter into contractual agreements that could be construed as governing ordinary business transactions, including, but not limited to, agreements concerning allowances, rebates, refunds, services, capacity, advertising funds, promotional funds, or sports marketing funds.

This indicates to me that manufacturer and distributor can negotiate terms around other “ordinary business transactions” (i.e. the sale of rights by the distributor), as long as there is no “payment in exchange for…territorial rights” (i.e. the initial transaction which grants those rights).

Here’s a rough sketch of a contract provision that would address the fairness argument:

The parties agree that at execution of this contract the fair market value of the Manufacturer’s distribution rights in relation to the affected brand or brands is $X.  The parties further agree that upon sale of these rights by Distributor to another entity, subject to other provisions in this contract, Distributor will compensate Manufacturer in the amount of $Y ($X + some interest rate).  Alternatively, the parties may agree upon some other value…

This type of provision accomplishes a few things:  1) allows the brewer to recover the equity he or she built by establishing the brand through their marketing and self-distribution, 2) allows the parties the freedom to contract while potentially steering clear of the sale restriction, and 3) allows a distributor to acquire the initial rights to a brand, without payment, while profiting for the value he adds to those distribution rights, should he wish to sell those rights in the future.  I’d be happy to hear your comments.

Photo source: NYPL Digital Gallery.

Texas Brewery and Brewpub Growth

Texas Brewery Growth

The data geek in me decided to look at the growth of the craft beer industry in Texas over the past few years.  For this, I turned to licensing data from the Texas Alcoholic Beverage Commission as a barometer for the growth of the industry in my state.  The numbers in the above graph represent licenses issued and does not account for situations where a brewery or brewpub obtained a license but never opened.  Also, I only looked back 10 years so the numbers do not include breweries/brewpubs that were licensed prior to 2005 (the Brewers Association notes that there are currently 96 breweries in Texas).

In Texas, brewers generally apply for either a Brewer’s Permit (B), entering the manufacturing tier, or a Brewpub License (BP), as part of the retail tier.  The latter is a subordinate license to a Wine and Beer Retailer’s permit (BG).  The numbers in the graph encompass holders of either type of authorization.

As you would expect, the growth trend in Texas mirrors the growth pattern across the U.S., as was recently reported by Christopher Ingraham of the Washington Post.  The year 2010 clearly marks a surge in the number of breweries and brewpubs.

It’s worth noting that the number of brewpubs licensed in Texas in 2014 was over twice that of the previous year (11 in 2013 to 25 in 2014).  This can almost certainly be attributed to the passage of Texas Senate Bill 515 in 2013.  The bill authorized holders of a Brewpub License (BP) to sell directly to retail locations (up to 1,000 barrels annually or 2,500 barrels for all brewpubs operated by the same licensee).  If you’re interested in learning more about what this bill and its accompanying bills authorized, have a look at Scott Metzger’s (owner of Freetail Brewing) post here.  His article provides great insight into the political struggle faced by Texas craft brewers leading up to this legislation, and beyond.


The Rime of the Ancient Mariner

Ship in Ushuaia

Yesterday I attended a luncheon organized by the Free Trade Alliance (FTA) in San Antonio.  The topic was “Anatomy of an International Contract: Shipping Terms (INCOTERMS).”  That acronym stands for INternational COmmerce TERMS.  The talk was given by Debra Weiss , attorney and adjunct professor at St. Mary’s University School of Law (my alma mater), and Balo Elizondo, sourcing manager at H-E-B.

Debra and Balo put on a great presentation that explained the terms in international shipping contracts, such as Ex Works, FOB, DDP.  In a nutshell, these standard industry terms address:

  • Which party incurs which costs
  • Who bears the risks at various points of transport
  • Who undertakes obligations for delivery of shipments

A recurring theme that was emphasized by both speakers is the crucial aspect of having sufficient insurance for those portions where you bear the risk.

In the alcoholic beverage context, these nuances in international shipping contracts would likely be left for distributors to iron out.  However, I can see a scenario where a brewer negotiates directly with a foreign importer under Ex Works terms.  This is a term where the seller is responsible for placing the goods (beer) in a condition suitable for shipping and, the buyer is responsible for all costs and bears all risk after the beer is picked up at the seller’s place (i.e. the brewery).

Another great nugget of information I learned about at the luncheon is the Free Trade Alliance’s International Business Development Center (IBDC) program.  Here’s the description of the program from the FTA’s website:

The IBDC is a one-year business accelerator, providing support to foreign companies seeking to establish or expand the market for their products in the United States. Companies participating in the program have access to office facilities, training, business counseling, and a series of value-added services designed to assist new companies to develop the infrastructure to distribute their products. The objective is to provide the necessary support during the development stage of the company, which is often the most difficult period. The IBDC reduces startup costs and provides access to shared resources and useful services at little to no cost.

According to the FTA, there’s currently 35 companies in the program.  This is a great resource for foreign craft breweries that want to start doing business in Texas and the rest of the U.S.

Photo by: Marco Enzo Squillacioti / CC BY 2.0