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.

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