Dissent In Texas Three-Tier Case Contains Powerful Indictment Of Strict Enforcement Of Cross-Tier Ownership

As you all probably have heard, in Cadena Commercial v. Texas Alcoholic Beverage Commission, the Texas Supreme Court recently weighed in on the Texas Alcoholic Beverage Commission’s decision to deny a license for retail sales to a group of convenience stores that wanted to sell alcohol because through a chain of ownership, one of the entities that owns companies that own the convenience stores has a roughly 20% stake in some companies that own breweries that make Heineken.  The Texas Craft Beer Law Blog has a great link to the chart from one of the appellate briefs showing the ownership structure.

There are plenty of articles out there regurgitating what the Court said.  It doesn’t matter. The bottom line is that they upheld the unfettered discretion of the Texas Alcoholic Beverage Commission to deny an application given tenuously related minority ownership of other businesses on a different tier.  The Court did leave open the possibility that a smaller interest might generate a different outcome, and those issues are currently working their way through the Texas Court system.

What is interesting about the opinion? Two things: the first is the Supreme Court’s description of the justification for the three-tiered system:

The Texas tied house statutes are found in the Texas Alcoholic Beverage Code. See TEX. ALCO.BEV.CODE §§ 102.01–.82. The genesis of the provisions was the Liquor Control Act, which the Legislature adopted two years after the repeal of Prohibition. … The catalyst for the tied house provisions was a fear of returning to the state of affairs before Prohibition when tied houses played what was thought to be a substantial role in over-intoxicating society. The provisions are designed to prevent certain overlapping relationships between those engaged in the alcoholic beverage industry at different levels, or tiers. … Pre-Prohibition tied houses generally developed from tavern owners selling their taverns to brewers and becoming the brewers’ tenants. … Financial conditions and other factors made these agreements a near-necessity for tavern owners to survive economically. Most of the agreements included a stipulation that the tavern would only sell the brewer–landlord’s products. The brewer then had a vested interest in the tavern selling as much of the brewer’s beer as possible, with little or no regard for the personal or societal effects. This tied house phenomenon contributed to the push for Prohibition. When Prohibition ended, lawmakers started from a relatively clean slate with respect to regulating the alcoholic beverage industry, and their goal was to prevent a return to the pre-Prohibition status. … One of the targets was tied house relationships. In an attempt to prevent these relationships from forming, the Code provides for “strict adherence to a general policy of prohibiting the tied house and related practices.”

Yes, they plainly stated the justification for three-tiered separation was just to keep people from drinking as much as it was perceived they did back before women could vote.  No kidding. They looked straight at this complex regulatory scheme, said it had origins and a singular justification that arose prior to a time when we had cars, televisions, satellites and before people really started exercising – back when there were more saloons than churches and people could cash their paychecks in a bar – and said there was too much drinking back then, and we want to ensure we don’t go back to that much drinking … so “three-tiered” … without even criticizing or commenting on that inane justification, or the fact that the world has changed significantly and so have people’s drinking habits, and questioning whether the basis for the law even exists today.  So the march against restrictions that lack a rational basis continues…

But the second cool part of this opinion is the dissent.  I’m surprised more articles about this case haven’t at least mentioned Justice Willett’s dissenting opinion which starts with this historical quote regarding a British case upholding a brewery’s challenge to a bar-owner’s one-man / one-drink policy in an attempt to limit drinking – a quote that highlights that it is the use of the tied-house by unscrupulous persons and not the tied-house that is inherently vile:

When this shameful transaction is published to the world it will be seen what a vile system this brewing monopoly may become in the hands of unscrupulous persons. Thank God the tied house contains the seeds of destruction within itself, and the day will come—perhaps not in my time or in yours, but it will come to a certainty— when this shameful monopoly will be tolerated no more. “One Man One Drink—Landlord’s Novel Methods—Objected to by Brewers,” Ashburton Guardian, July 24, 1906

The dissent makes a well reasoned case for allowing a 20% ownership interest between these two corporations – based solely on the actual public policy and justification for the law – that it is “control” of the different entities functioning at differing tiers and not simply “ownership” that matters.  Hence the use of the word “interest” in the statute.  How persuasive is this – very, just check out this summary from the dissent’s introduction:

Distilled down, the issue is simply stated: What is a prohibited “interest” under section 102.07(a)(1)? Does Texas law forbid any degree of commercial connectedness, however trifling and attenuated, or are only certain cross-tier relationships prohibited, namely those that raise the specter of marketplace influence or coercion? I would reverse and hold that FEMSA, Cadena’s far-removed parent, does not have an “interest” in the business of a brewer within the meaning of section 102.07(a)(1). Reading the statute neither nonliterally nor hyperliterally, but contextually, as we must, it is apparent that “an interest” cannot mean “any interest” or “an interest of any kind”—two all-encompassing formulations used elsewhere in the Code. Texas tied-house law expressly proclaims the overriding objective of the three-tier system: “to assure the independence of members of the three-tier system.”9 This is the textually manifest “public policy,” enshrined into the Code itself. The Legislature used a specific term with a specific meaning: “independence,” defined by Black’s Law Dictionary as “[t]he state or condition of being free from dependence, subjection, or control.”10 We need not deduce when we can derive. The most textually plausible interpretation is that “interest” connotes the ability to control, coerce, or influence business operations in another tier.

This record is devoid of any such cross-tier subjection. The corporate actors here remain independent, incapable of flexing monopolistic tendencies. The Corporate Governance Agreement expressly denies FEMSA “any right or control or influence or consultation right or other form of cooperation” relating to the Heineken Holding Companies.11 There is no verboten cross-tier coercion, or otherwise-illicit retailer-manufacturer overlap that amounts to a tied-house violation—not unless corporate structures are discounted, company agreements are disbelieved, and contextual statutes are disregarded.

The 56 pages of the impassioned dissent do not just stop and start with interpretation of the language.  The dissent bolsters the justification for its findings by couching the determination it reaches in the very historical context the majority cited and was so quick to just accept as a plausible justification.  It also discusses a common-sense approach to statutory interpretation that would allow the regulations here to account for granting the license to this chain of convenience stores that have no control over the actions of the brewer they are economically related to through some forms of common ownership.  

The opinion correctly takes issue with the TABC’s interpretation of the statute given the historical context and the obvious determination that it was “control” of an actor in another tier that the statutes were designed to prohibit, not simply an economic interest.

The Court’s error here is two-fold: (1) it improperly ignores corporate separateness (collapsing distinct legal entities across multiple levels throughout the FEMSA and Heineken corporate families based solely on stock ownership), and then (2) interprets “interest” so openendedly that it prohibits nonprohibited relationships. TABC erred in treating far-removed entities as one interconnected business enterprise and the Court compounds that error here. Cadena and FEMSA are not a single retailer entity, nor are the Heineken Brewers and Heineken Holding Companies a single brewer entity. The majority’s free-wheeling interpretation, disregarding distinct legal identities, confers limitless power upon TABC. Unanchored in statutory text, the Court’s interpretation grants TABC the authority to selectively and arbitrarily permit similar applicants dissimilarly.

In all, while the dissent is, I believe, longer than the briefs were allowed to be, you will not find a more compelling argument for statutory interpretation allowing cross-ownership absent “control” outside of the work of an actual paid advocate looking to achieve that result.  

As a final point of academic interest, in the dissent’s discussion of the historical justifications for allowing the three-tiered prohibition on ownership points out that it didn’t just benefit saloon owners and the public, but that brewers also had an interest in achieving some form of prohibition:

Self-interest existed on all sides. The refrains of the temperance movement and a general desire to cure society of the evils of alcohol may have prompted the legislation. But the brewers, too, understood that strict tied-house prohibitions would reduce competition among brewers—no more would there be endless vying for new real estate and saloon acquisitions because tied-houses would be prohibited. The brewers also knew that tied-house prohibitions would allow them some degree of plausible deniability regarding the negative public perception of saloons. Brewers that owned saloons in a tied-house system were, in a sense, directly connected to and responsible for any perceived drunkenness and debauchery. But under a tied-house-less system, brewers can sell their goods, while disclaiming any participation in or responsibility for the happenings in the saloons. Indeed, the U.S. Brewers Association attempted to use this precise argument regarding many brewers’ lack of ownership of saloons. The Association disclaimed “a popular misconception” that brewers often owned all the rights in saloons. To the contrary, said the Association, brewers typically only lend money to saloon owners or take mortgages on saloon property; they don’t own the saloons themselves. Therefore, the Association concluded, brewers largely cannot be considered responsible for saloons.