Hoping to win in court what they lost in the General Assembly, two Charlotte craft brewers sued the state of North Carolina Monday, arguing that state laws that limit their production are unconstitutional.
Olde Mecklenburg and NoDa breweries claim the state’s annual production cap and franchise law stifle competition, “thereby harming consumers by artificially inflating prices and reducing consumer choice,” according to documents filed in Wake County Superior Court.
The Charlotte brewers have spearheaded the so-called Craft Freedom fight, a bid to raise the 25,000-barrel cap on production before craft brewers have to enter a distribution contract with a wholesaler.
The case pits North Carolina’s fast-growing craft beer industry against a distribution system that has roots in the Prohibition era. Former state Supreme Court Justice Bob Orr, who represents the brewers, called it “one of most significant economic liberty cases we’ve seen in the state in a long time.”
The brewers and their allies had turned to the General Assembly with a bill that would have raised the cap to 200,000 barrels. But last month lawmakers gutted the bill before it came to a vote.
“We felt we won on the policy part but the politics and cronyism were more successful than we were,” Todd Ford, owner of NoDa Brewery, said Monday. “Even though we had the support of many members … it didn’t seem like leadership had any interest in allowing this to come to a vote.”
The brewers’ bill was opposed by the N.C. Beer & Wine Wholesalers, who argue that the current system works for brewers as well as consumers.
Tim Kent, executive director of the N.C. Beer and Wine Wholesalers Association, has said the current law works for craft brewers. If they’re willing to work through a distributor, he said, it doesn’t limit how much they can brew. And distributors, he says, can help expand their markets.
Without a self-distribution limit, or cap, distributors say big brewers such as Anheuser-Busch InBev could become their own distributors, squeezing out other brands. Some craft brewers, such as Foothills Brewing of Winston-Salem, have chosen to work with wholesalers.
Kent said Monday he had not seen the suit and declined comment.
Distributors claim nearly 4,000 employees and a $1.9 billion economic impact in North Carolina. They and their political action committee gave lawmakers nearly $1.5 million in campaign contributions over the last four years, according to Democracy North Carolina.
The craft beer industry has exploded in North Carolina and across the country. Craft brews made up 12.2 percent of the beer market in 2015, a share that continues to grow, according to the Brewers Association, a national trade group.
North Carolina has more than 200 craft breweries with an annual economic impact of $1.2 billion. Since Olde Mecklenburg opened in 2009, another three dozen have sprung up in the Charlotte area with more on the way.
But the distribution industry has deep roots in North Carolina and across the country.
The 21st Amendment, which ended Prohibition in 1933, left it to states to regulate alcohol. North Carolina and other states adopted a “three-tier” system of producers, wholesalers and retailers designed to avoid monopolies of giant brewers. In 2001, according to the suit, five brewers controlled 90 percent of the U.S. market.
“Today, with the emergence of North Carolina’s small craft brewery industry, the landscape has changed entirely,” the brewers’ suit says. “The old laws aimed at preventing a few megabreweries from capturing 100 percent of the market also apply to each of North Carolina’s … breweries, which each hold only a tiny percentage of the craft beer market.”
In a report last November, the John Locke Foundation called the distribution system a “profitable oligopoly” that “protects the big producers by giving small producers a powerful incentive to stay small,” it said.
The 25,000-barrel cap, in effect since 2003, means that if a brewer exceeds that self-distribution limit by even a single barrel they must turn over all their distribution rights to a wholesaler.
The franchise law then gives distributors control over sales, marketing, delivery, quality control and even pricing, according to the suit. And the distributor essentially controls the rights in perpetuity.
“If OMB, NoDa, and Craft Freedom’s members exceed the 25,000-barrel cap, they will lose their self-distribution business, distribution rights, and future profits,” the suit alleges.
Craft brewers argue that in addition to that – and having to pay a distributor – their brand would get lost in the scores of products carried by each wholesaler.
No last-minute deal
Monday’s suit came a week after an apparent last-ditch attempt to compromise.
Ford, Marrino and their team met with Kent and his team for three hours at a Raleigh law firm. That’s about all the sides agree on.
Ford said a confidentiality agreement prevents him from sharing details. But he said he thought the two sides had a handshake agreement to support a higher cap, though not nearly as much as they wanted.
But in a text response to a question about any deal, Kent said, “Not true.” He said “as agreed by both parties,” he took the offer back to his board, which said, “no thanks.”
“We were notified on Wednesday afternoon that they had pulled their deal and we had to no agreement,” Ford said. “And we were back to square one.”