Case 1:10-cv-00710-SS Document 33

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IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS AUSTIN DIVISION AUTHENTIC BEVERAGES COMPANY, INC., JESTER KING CRAFT BREWERY, L.L.C., and ZAX, L.L.C. Plaintiffs, v. TEXAS ALCOHOLIC BEVERAGE COMMISSION, et al., Defendants,

CIVIL ACTION NO. 1:10-CV-710-SS

PLAINTIFFS MOTION FOR SUMMARY JUDGMENT TO THE HONORABLE COURT: I. INTRODUCTION AND SUMMARY. Jester King Craft Brewery is a craft brewery located in Austin, Texas. Ex. 1 2. Authentic Beverages Company, Inc., is a licensed distributor of alcoholic beverages. Ex. 2 2. Zax, L.L.C., operates a restaurant licensed to serve alcoholic beverages. Ex. 3 2. The Texas Alcoholic Beverage Commission and its commissioners are charged with administering and enforcing Texas laws governing alcoholic beverages. Plaintiffs bring this lawsuit under 42 U.S.C. 1983 to challenge the constitutionality of certain laws and regulations regulating the advertising, labeling, and sale of malt beverages in Texas. Specifically, Plaintiffs challenge the Texas statutes and regulations that: 1. 2. 3. Prohibit breweries and distributors from telling customers where their products can be bought; Mandate the use of inaccurate statutory definitions of beer, ale and malt liquor to describe malt beverages; Prohibit advertising the alcoholic content of brewery products and using words in advertising and labeling that suggest alcoholic strength;

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4. 5. 6.

Prohibit breweries from selling their products at the point of production while allowing wineries and brewpubs to do so; Prohibit brewpubs from selling their products to distributors and retailers while allowing wineries and microbreweries to do so; and Treat foreign breweries as the first American source of supply of malt beverages while treating importers as the first American source of supply of wine and distilled spirits.1

II.

THE CHALLENGED ADVERTISING AND LABELING LAWS. Plaintiffs first three challenges involve the advertising and labeling of alcoholic

beverages, which is commercial speech protected by the First Amendment. Rubin v. Coors Brewing Co., 514 U.S. 476, 481 (1995); 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 49596 (1996). In Rubin, the Supreme Court held unconstitutional a federal law prohibiting beer labels from displaying alcoholic content, rejecting the argument that the ban was necessary to prevent strength wars among brewers. 514 U.S. at 483-91. In 44 Liquormart, the Court struck down a state law banning the advertisement of retail liquor prices except at the point of sale. 517 U.S. at 516. To withstand First Amendment scrutiny, a government regulation of commercial speech must meet the four-part test of Central Hudson Gas & Electric Corp. v. Public Serv. Commn of N.Y., 447 U.S. 557 (1980): At the outset, we must determine whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest. 447 U.S. at 566. The burden is on the government to meet the Central Hudson test. 44
1

Because the issues raised are largely questions of law, no separate summary of facts is being filed per Local Rule 7(b), but the Plaintiffs rely on the declarations, deposition excerpts and other products of discovery contained in the attached Appendix of Exhibits.

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Liquormart, Inc., 517 U.S. at 516; Thompson v. Western States Medical Center, 535 U.S. 357, 373 (2002) (It is well established that the party seeking to uphold a restriction on commercial speech carries the burden of justifying it.) (internal quotations omitted). See . The speech at issue here concerns lawful activity: Jester King, Authentic and Zax all possess the requisite TABC licenses under Texas law to manufacture, distribute, and sell alcoholic beverages. Ex. 1 2; Ex. 2; Ex. 3. Plaintiffs wish only to communicate truthful, nonmisleading information (1) about where their beer can be bought; (2) describing their beer; and (3) disclosing the alcohol content of their beers. Their speech therefore meets the first part of Central Hudson . Rubin, 514 U.S. at 483. The challenged Texas regulations fail the

remainder of the Central Hudson test. A. The Texas Laws that Prohibit Breweries and Distributors From Naming the Retail Locations Where Their Beer is Sold are Unconstitutional. 1. Texas law gags breweries and distributors, but not wineries.

Believe it or not, the TABC says Texas law prohibits Jester King and Authentic from telling people where their beer can be bought. The Texas Alcoholic Beverage Code prohibits brewers and wholesalers from furnish[ing], giv[ing], or lend[ing] any money, service, or thing of value to a retailer. TEX. ALCO. BEV. CODE 102.07(2). The TABC has adopted rules under this statute prohibiting unlawful inducements, including providing or purchasing, in whole or in part, any type of advertisement benefitting any specific retailer. 16 TEX. ADMIN. CODE 45.110(c)(3). The TABC interprets the Code and its rule to cover any form of advertising by a supplier or wholesaler which draws attention to or promotes a specific retailer or group of retailers. It includes any form of advertising which lists a retailers trade name, logo, trademarks, etc. Ex. 4. The TABC construes Texas law as prohibiting any form of communication that a manufacturer of malt beverages could make to identify to a consumer or potential consumer of

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those malt beverages where they could be bought at retail, including websites, social media, and simple word-of-mouth. Ex. 6, pg. 20, ln. 20-25. Violating the Code and TABC rules is a misdemeanor that can result in fines, jail time and loss of license. TEX. ALCO. BEV. CODE 10.5; 5.362; 16 TEX. ADMIN. CODE, Chapter 34. For large brewers, this ban on advertising retail locations may not matter. Budweiser, Miller and Coors can be bought pretty much anywhere. This is not true for small craft brewers like Jester King. New and small breweries beers may be carried by only a handful of stores, restaurants or bars. Ex. 1 3; Ex. 2 4; Ex. 3 3. Since Texas law allows only retailers to advertise where malt beverages can be bought, and it allows retailers to feature one brand of beer over another, Texas law puts the effective marketing of beer into the hands of retailers. See Ex. 6, pg. 28, ln. 7-pg. 29, ln. 18; Ex. 7. The TABC agrees that in Texas the manufacturer of a malt beverage is completely at the mercy of the retailer to communicate to consumers and potential consumers where [its] product can be bought. Ex. 6, pg. 21, ln. 9-14. Significantly, Texas law does not leave wineries at the mercy of retailers. Since 2005 the Texas Legislature has allowed wineries to include information in the winerys advertising that informs the public of where the winerys products may be purchased, so long as the winery does not give compensation to or receive compensation from a wholesaler or retailer for the advertisement. TEX. ALCO. BEV. CODE 108.09. 2. The gag on breweries and distributors does not directly advance any substantial government interest.

The First Amendment requires the government to identify a substantial government interest promoted by its restriction on truthful commercial speech and to show that its restrictions directly advance the government interest and [are] no more extensive than necessary to serve that interest. Rubin, 514 U.S. at 486. The Supreme Court has repeatedly emphasized

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the substantial burden this requirement places on the proponent of a restriction on commercial speech. MD II Entertainment, Inc. v. City of Dallas, 28 F.3d 492, 496 (5th Cir. 1994). When questioned at its Rule 30(b)(6) deposition, the TABC could identify no substantial government interest that is advanced by preventing breweries from telling customers where their beer can be bought. Ex. 8, pg. 14, ln. 3-pg. 18, ln. 19. The TABC agrees that the ban does not promote the welfare, health, peace, temperance or safety of the people of Texas, id. at pg. 27, ln. 15-20, that it does not promote legal and responsible alcohol consumption, id. at pg. 28, ln. 24-pg. 29, ln. 17, and that it does not ensure fair competition with the alcohol beverage industry. Id. pg. 28, ln. 18-pg. 30, ln. 4. The only government interest the TABC could articulate was to [e]nsure consistent, predictable and timely enforcement of the Texas Alcoholic Beverage Code, id. at pg. 30, ln. 22-23. . The TABC frankly recognized that its rational Its the law, and thats the end of it circular reasoning that justifies enforcing the Code simply because it is the Code. Id. at pg. 30, ln. 25-pg. 32, ln. 25. Likewise, the TABC was unable to proffer any rationale for gagging breweries but not wineries. Ex. 8, pg. 16, ln. 7-pg. 17, line 13. The Legislatures willingness to permit wineries to advertise retail locations confirms the absence of any substantial government interest in gagging breweries. In practice, the TABC has had no problems with wineries advertising retail locations. Ex. 6, pg. 23, ln. 22-pg. 25, ln. 6. The TABC does not anticipate any problems if breweries had the same right as wineries. Id., pg. 27, ln. 19-pg. 28, ln. 5. In fact, gagging breweries is contrary to the substantial government interests of ensuring fair competition in a free marketplace and providing consumers useful information about legal products. Texas law gives retailers absolute power over brewers and distributors ability to communicate with customers, and this is particularly harmful to new and small craft brewers,

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who are prevented from effectively promoting their beers. Ex. 1 4-5; Ex. 2 4-5. Current Texas law discourages competition and benefits large, established breweries who have little or no need to advertise retail availability of their beers. Ex. 1 4-5; Ex. 2 4-5. Given that the Defendants have proffered no substantial government interest justifying this ban on truthful commercial speech, this Court should find that the regulation violates the First Amendment and should enjoin the Defendants from taking any adverse action against Plaintiffs or their agents for truthfully disclosing where their products may be bought. B. The Texas Laws Dictating How the Plaintiffs Must Use the Words Beer, Ale and Malt Liquor are Unconstitutional Because they Prohibit Truthful Labeling in Some Instances and Require False Labeling in Others. 1. Texas unique beer/ale/malt liquor distinction.

Texas defines beer to be a malt beverage with at least .5% but not more than 4.0% alcohol by weight (ABW), and ale and malt liquor to be a malt beverage with more than 4.0% ABW. TEX. ALCO. BEV. CODE 1.04(12) & (15). The TABCs rules repeat the statutory definitions in Rule 45.71(1) & (10) and require all labeling and advertising to follow these definitions. See, e.g., 16 TEX. ADMIN. CODE 45.77(a) & (c). No beer may be called an ale or malt liquor, and no ale or malt liquor may be called beer. Id. No malt beverage with more than 4.0% ABW may be called beer. 16 TEX. ADMIN. CODE 45.79(c)(3). No malt beverage with 4.0% ABW or less may be called ale, regardless of style. 16 TEX. ADMIN. CODE 45.79(c)(4); 45.90(c). Malt liquor may be used instead of ale. 16 TEX. ADMIN. CODE 45.77(a). Texas law is unique. No other state nor the federal government distinguishes between beer and ale on the basis of alcohol content. See Ex. 6, pg. 50, ln. 2-pg. 54, ln. 2; Ex. 9.2
2

Federal law provides that Beer, ale, porter, stout, and other similar fermented beverages (including sak and similar products) of any name or description containing one-half of one percent or more of alcohol by
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2.

This Court has already held that using beer, ale and malt liquor according to everyday meaning is not deceptive or misleading.

In denying the TABCs motion to dismiss, this Court rejected its argument that because the state has broad authority and discretion to define alcoholic beverages, labeling beer or ale contrary to the state definition is misleading per se. The Court acknowledges that there may be some areas in which TABCs argument is valid. For instance, where commercial speech concerns a legal concept or uses a legal term of art, deviation from the relevant legal definition may indeed be false, deceptive, or misleading. That is not the case here, however. The terms beer, ale, and malt liquor are common terms used in everyday conversation. The Court doubts many people would feel misled or deceived if they were offered a beer and subsequently discovered that it was technically an ale under Texas law because it contained 4.1% alcohol by weight. Order at 7-8 (Doc. #18) (Dec. 22, 2010). This Court has also expressed significant doubts that the asserted government interests encouraging moderate and responsible use of alcohol and ensuring that drinkers do not consume beverages that are stronger than they realize are directly advanced by these labeling requirements or that these interests could not be advanced through a less restrictive means, such as simply requiring a statement of alcohol content on the label. Id. at 8-9. But the Court invited evidentiary submissions, rather than deciding the question on the parties bare assertions. Id. at 9. The evidence is now in much of it from TABCs own files and it confirms that Texas unique beer/ale/malt liquor labeling mandate does not satisfy Central Hudson. 3. The beer/ale/malt liquor distinction does not directly advance any substantial government interest and actually requires mislabeling.

A regulation of commercial speech may not be sustained if it provides only ineffective or remote support for the governments purpose. MD II Entertainment, 28 F.3d at 496 (quoting

volume, brewed or produced from malt, wholly or in part, or from any substitute for malt. Standards for the production of beer appear in 25.15. 27 C.F.R. 25.11.

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Central Hudson, 447 U.S. at 564). If the goal is informing consumers of malt beverages alcohol content, as TABC claims, current Texas law does little or nothing to advance that goal. First, the beer/ale distinction depends upon Texas consumers knowing that beer and ale signify different ranges of alcoholic strength, but TABC admits it has no empirical data showing that consumers perceive the beer/ale distinction to be based on alcohol content, rather than style. Ex. 6, pg. 57, ln. 12-22. No other state makes this beer/ale distinction in its laws, as TABCs own study showed, nor does the federal government. Ex. 6, pg. 50, ln. 2-pg. 54, ln. 2; Ex. 9; 27 C.F.R. 25.11.3 Second, even if some consumers do think ale means more alcohol than beer, TABC has no evidence that consumers know that ales in Texas are above 4.0% ABW while beers are at or below 4.0% ABW. There is evidence, however, that retailers use the term beer to advertise both beer and ale as defined under Texas law, undermining any purported distinction in consumers minds. See, e.g., Ex. 7.4 Third, a malt beverage labeled as an ale may contain any level of alcohol above 4.0% ABW. So, even for the hypothetical consumer who knows that ale starts at 4.1% ABW, the law requires no further disclosure. Any given ale may be 4.1% ABW, similar to beer at 4.0% ABW, or it might be twice as strong, since craft beers often reach as high as 8% ABW or more. Ex. 1 6. As a practical matter, the Texas beer/ale/malt liquor distinction provides the

Humorously, thanks to Texas unique legal definition, the glossary in Randy Moshers Tasting Beer (Storey Publishing 2009) is forced to define ale as Any beer produced with top-fermenting yeast. In the old days, a strong unhopped beer. In Texas, any beer above 5 percent alcohol by volume [sic] (4 percent by weight). Ex. 10 (emphasis added).
4

The Specs advertisement in Exhibit 7 shows four beers three of which are actually ales under Texas law: Dogfish Head 90 Minute IPA (9% alcohol by volume (ABV), Real Ale Firemans 4 (5.1% ABV), and Full Sail Ale (5.5%, 6% or 5.4% ABV, depending on variety). (To convert ABV to ABW, multiply ABV by .8).

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consumer even the rare consumer who is aware of Texas one-of-a-kind law no useful information about relative alcohol content. On the other hand, there is substantial evidence (including from TABCs own files) that Texas unique law requires mislabeling and causes consumer confusion. In the industry and popular culture, beer describes all malt beverages, while ale describes one of two broad styles of beer, the other being lager. What makes a beer an ale is the yeast and fermenting technique, not the alcohol content: The ales are an especially tasty, complex family of beers, often subtle, soothing and moreish, occasionally much more assertive. Their characteristic aromas and flavors, often fruity, derive from a warm fermentation (15-25C/59-77F or higher), traditionally with yeasts that rise to the top of the vessel in the brewery. A lager is a beer which is fermented with a yeast that works at cool temperatures then laid down for cold maturation, or storage, at close to 0C/32F in tanks at the brewery. Michael Jacksons Beer Companion, Running Press (2nd Ed. 1997) at 66, 196 (Ex. 11). See also Ex. 1 6; Ex. 2 7; Ex. 12. The Association of Brewers 2003 Beer Style Guidelines, contained in TABCs files, lists dozens of beer styles used by the Association in judging beers. Ex. 13. At least 30 of those styles could not be accurately labeled or described in Texas. Light ales such as Classic EnglishStyle Pale Ale, English Summer Ale, and Scottish-Style Light Ale could not be called ales, while higher-gravity lagers like American-Style Amber Lager and American Dark Lager would have to be mislabeled as ale or malt liquor. Id. at 6-7, 30-32.5 Many ale styles, such as English-

The Plaintiffs do not dispute that malt liquor may be understood by some consumers to be a strong beer, but to define all malt beverages above 4.0% ABW as malt liquor is irrational and forces mislabeling. Malt liquor is a well-defined style of lager (not an ale) that has a minimal taste profile, is lacking hop bouquet, and has only a subthreshold hop level. Encyclopedia of Beer, Christine P. Rhodes, ed., (Henry Holt & Co. 1995) at 312-13. Ex. 14. Craft brewers rarely, if ever, intentionally label their beers malt liquor, because the term does not accurately describe the style and because it may carry the
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Style Brown Ale, straddle the 4.0% ABW line, meaning Texas would require the same style of beer to be called beer or ale, based purely on alcohol content. E.g., id. at 9. Texas law thus gives brewers a perverse incentive to increase the alcoholic content of their ales in order to be able to describe the style correctly. These rules directly and adversely impact Jester King. When Jester King brewed a pale ale that fell below 4.0% ABW, it decided to increase the strength so that it could be properly labeled by style. Ex. 1 9. This increased the cost of grain ingredients by 10%. Id. Jester Kings Commercial Suicide Oaked Dark Mild, an ale, cannot be sold in Texas as an ale because it is less than 4.0% ABW. Id. Likewise, Jester King cannot call its Wytchmaker Rye India Pale Ale, Black Metal Imperial Stout, or Boxers Revenge Farmhouse Provision Ale beer, even though they are beers, because they exceed 4% ABW. Id. Nor can Jester King sell a strong lager without mislabeling it as either ale or malt liquor. Id. Texas can serve its professed interests in a narrower but much more effective way: either by requiring the alcohol content to be displayed on the label or by giving brewers a choice to either display the alcohol content or use the terms beer or ale/malt liquor as defined by Texas law. That way, the same interest could be promoted without forcing brewers to mislabel their beers, confusing consumers and encouraging brewers to increase the alcohol content of their ales. The TABC has recognized the problems with this law. In 2004 the TABC received substantial criticism from brewers and others explaining how its rules forced misleading labeling and created consumer confusion. Ex. 17. The TABC modified its rules defining classes so that brewers could use common styles of beer such as porter or stout, although they were still
connotation of a cheap, strong, flavorless drink. Ex. 1 8. See also Ex. 15 (Urban Dictionary definitions of malt liquor); Ex. 16 (A Story without Heroes: The Cautionary Tale of Malt Liquor).

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required to use the words beer or ale/malt liquor. 16 TEX. ADMIN. CODE 45.77(c). The TABC recognized the inaccuracy of the statutory definitions of beer and ale, but the agency was bound to follow the Code. Ex. 18. The absurdity of Texas law is perfectly illustrated by a letter from MillerCoors to TABCs general counsel. In that letter, MillerCoors told TABC that the 24 oz. cans of its Sparks and Sparks Plus products inadvertently omitted the words ale or malt liquor. Ex. 20. MillerCoors described the frantic steps it took to comply with Texas law, even though the mislabeled Sparks cans twice stated the alcohol content as 7.0% ALCOHOL BY VOLUME in prominent text right below the product name. Id. (D-Supp000287, D-Supp000289).

MillerCoors proposed fixing the problem by adding, in much smaller text next to the UPC code, the words Flavored ale, which MillerCoors had used on the 16 oz. Sparks cans. See id. (D-Supp000286, D-Supp000288).6 It is hard to conceive of a more pointless government

regulation. Even TABCs general counsel, who called the episode as the Beer Bungle in a cover memo, did not follow the law, since in Texas Sparks is not beer. Ex. 20. So, despite TABCs effort to make the law more coherent, Texas unique law still requires mislabeling, prevents accurate description of style, and produces absurdities such as a local seasonal craft Oktoberfest Lager being mislabeled as malt liquor in order to avoid the even more illogical term ale. See 19.7 Texas limitations on the ability to accurately describe

Note that Sparks is 6.0% ABW and Sparks Plus is 7.0% ABW, a use of the word plus to suggest alcoholic strength approved by the TABC, and one that cannot possibly be considered misleading given the prominent disclosure of the alcohol content of the beverage. See Section II.C., below.
7

Although not raised in TABCs motion to dismiss as justifications for the challenged regulations, the agency noted at its 30(b)(6) deposition that Texas imposes different tax rates on distributors for the sale of malt beverages above or below 4.0% ABW, and that by local option Texas communities may elect to prohibit sales of malt beverages above 4.0% ABW. The TABC admitted, however, that it does not use labels or advertisements to determine the tax rate for malt beverages, Ex. 8, pg. 36, ln. 8-17, pg. 49, ln. 12-pg. 54, ln. 4, and thus Texas can achieve its taxing goals without forcing breweries to mislabel their beers. Likewise, while the Twenty-First Amendment may empower a state to let local communities
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products to consumers fail to directly advance a substantial government interest, and therefore should be held to violate the First Amendment and its enforcement enjoined. C. The Texas Laws Prohibiting the Use of Language that States or Suggests Alcoholic Strength are Arcane, Self-Contradictory and Unconstitutional. 1. Existing Texas laws regulating statements of alcohol content are all over the map.

The TABC defends the beer/ale/malt liquor distinction because it supposedly signals alcohol strength to consumers, which the TABC admits is useful information. Other provisions of Texas law, however, prohibit breweries from giving consumers this useful information, while sensibly allowing distilleries and wineries to do so. The Texas Alcoholic Beverage Code prohibits manufacturers and distributors from publishing an advertisement of a brewery product that refers to the alcohol content of the product. TEX. ALCO. BEV. CODE 108.01(4). A TABC rule interprets Section 108.01(4)s advertising ban to include any reference to alcoholic content or the original extract of malt beverage or any words or statements likely to be considered as statements of alcoholic content, including strong, full strength, and high proof. 16 TEX. ADMIN. CODE 45.79(f). The Code does not, however, prohibit ads referencing alcohol content for winery products or distillery products, despite those beverages higher alcohol content. See TEX. ALCO.

prohibit alcoholic beverage sales above 4.0% ABW, the Supreme Court has already held that such power does not trump the First Amendment: [A]lthough the Twenty-first Amendment limits the effect of the dormant Commerce Clause on a States regulatory power over the delivery or use of intoxicating beverages within its borders, the Amendment does not license the States to ignore their obligations under other provisions of the Constitution. Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 712 (1984). [T]he Twenty-first Amendment does not qualify the constitutional prohibition against laws abridging the freedom of speech embodied in the First Amendment. The Twenty-first Amendment, therefore, cannot save Rhode Islands ban on liquor price advertising. 44 Liquormart, Inc., 517 U.S. at 516.

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BEV. CODE Chap. 108.8 A TABC rule explicitly recognizes the right to advertise alcoholic content of the strongest beverages distilled spirits even mandating that the alcoholic content shall be stated by proof, except for cordials and liqueurs, cocktails, highballs and such other specialties as may be specified by the administrator, which may be advertized using percentage by volume. 16 TEX. ADMIN. CODE 45.55, 45.26(c). On the other hand, Texas law allows breweries to state the alcoholic content of malt beverages on labels. 16 TEX. ADMIN. CODE 45.79(a). Texas law even requires such statements to be accurate to within a tolerance of 0.3% ABV, and it requires any malt beverage labeled as having more than .5% or more of alcohol to actually have that much alcohol, regardless of any tolerance. 16 TEX. ADMIN. CODE 45.79(c)(1) & (2). Texas law likewise requires that any beverage labeled malt liquor or ale to actually have more than 4% ABW, regardless of any tolerance, presumably to ensure consumers get the full alcoholic bang for their buck. 16 TEX. ADMIN. CODE 45.79(c)(3). Nonsensically, however, a TABC rule prohibits any words or statements on a malt beverage label that are likely to be considered as statements of alcoholic content, such as strong, full strength, extra strength, high proof, prewar strength, and full old-time alcoholic strength. TEX. ADMIN. CODE 45.82(f). Yet another TABC rule permits labels to use low alcohol and reduced alcohol for malt beverages containing less than 2.5% ABV. Id. 16 TEX. ADMIN. CODE 45.79(f).

A TABC rule purports to prohibit advertising alcohol content of wine. 16 TEX. ADMIN. CODE 45.55(a)(2). Because no Texas statute grants TABC authority to prohibit such advertising, its validity under state law is doubtful, see, e.g., City of Sherman v. Public Utility Commn of Texas, 643 S.W.2d 681, 686 (Tex. 1983), and given the absence of legislative authority for this rule, it cannot be said to advance a substantial governmental interest.

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2.

Texas restrictions on informing consumers about alcohol content do not directly advance a substantial government interest.

Brewers have a First Amendment right to disclose the alcoholic content of beer. Rubin, 514 U.S. at 491. The Legislature requires the use of terms the TABC thinks inform consumers of relative alcoholic strength beer, ale and malt liquor. The Code allows wineries and

distilleries to advertise alcohol content. The Defendants proffer no rationale for regulating ads for the weaker drink, beer, more strictly than ads for the stronger drinks, wine and liquor. The TABC concedes that the percent alcohol content is useful information for the consumer and provides more information about alcohol content than the terms beer or malt liquor. Jones Depo. at pg. 76 ln. 7 pg. 77 ln. 3. Craft beer brewers agree. Ex. 1 6. The State, therefore, has effectively conceded it has no substantial interest in keeping consumers of alcoholic beverages ignorant of the alcohol content in their drinks. As the plurality opinion explained in 44 Liquormart, [t]he First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good. That teaching applies equally to state attempts to deprive consumers of accurate information about their chosen products. 44 Liquormart, Inc., 517 U.S. at 503 (Opinion of Stevens, J.) (citing Edenfield v. Fane, 507 U.S. 761, 767 (1993)). See also 44 Liquormart, Inc., 517 U.S. at 518 (Thomas, Jr., concurring) (a purported government interest in keeping legal users of a product or service ignorant in order to manipulate their choices in the marketplace is per se illegitimate .). In practice, TABCs regulation is wildly inconsistent. Although its rule purports to ban statements that may suggest alcoholic strength, the TABC has approved labels using the terms such as imperial, high gravity, and plus, each of which suggests higher alcoholic strength. Ex. 1 10; Ex. 20. Even the TABC agrees that this area of Texas law is self-contradictory:

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Q.

[I]snt it inconsistent, then, for the state of Texas to prohibit advertising that suggests alcohol strength, while at the same time requiring labeling that suggests alcoholic strength? In other words, advertising over labeling? Okay. Excuse me if I mixed the two. But lets go ahead and talk about the two. Okay? If the concern about advertising alcoholic strength is to not disclose to the consumer the strength of an alcoholic beverage in the advertising, how is that interest promoted by a labeling requirement that itself you had testified is intended to suggest alcoholic strength? Sure. I mean, youd agree with me theres an inconsistency there? Yes. That the consumer who buys something labeled ale or malt liquor in Texas is actually being guaranteed by Texass regulatory system that what theyre buying is going to be higher than four percent alcohol. Correct? Yes. So Texass regulatory system actually enables consumers to steer towards the higher alcoholic product. Correct? I mean, if thats their if thats their purchasing choice, then the answer is yes. And the labeling requirement under Texas law assists the purchasing choice in helping the consumer identify the product that has the higher alcoholic content? Or I would say as to make an informed decision. Correct. And theyre informed on the alcoholic content. Correct? Yes. So isnt it inconsistent, then, to prohibit informing the customer of the alcoholic content of a product in an advertisement if at the same time Texas is requiring labeling that assists the customer in making an informed decision about the alcoholic content of a beverage? I would say that could be construed as inconsistent.

A. Q.

A. Q. A. Q.

A. Q. A. Q. A. Q. A. Q.

A.

Ex. 8, pg. 5, ln. 4-pg. 58, ln. 22.

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As the Supreme Court recognized in Rubin regarding the prohibition against disclosing alcohol content on labels, the irrationality of this unique and puzzling regulatory framework ensures that the labeling ban will fail to achieve that end. There is little chance that the [labeling ban] can directly and materially advance its aim, while other provisions of the same Act directly undermine and counteract its effects. Rubin, 514 U.S. at 498. Given the irrational state of Texas regulation, no substantial government interest is directly advanced by prohibiting breweries from disclosing the alcohol content in ads or using words that may suggest alcoholic strength. Those prohibitions should be held to violate the First Amendment and their enforcement enjoined. III. DISCRIMINATORY COMMERCIAL REGULATION. Plaintiffs challenge three particular forms of irrational discrimination embodied in the Texas alcoholic beverage regulatory scheme: 1) discrimination against breweries and in favor of wineries with respect to the right to sell directly to consumers at the point of production; 2) discrimination against microbreweries and in favor of brewpubs with respect to the right to sell directly to consumers at the brewery and into the distribution system; and 3) discrimination against foreign breweries and in favor of wineries by treating the former as the first American source of supply but the latters distributor as the first American source of supply. The first two forms of discrimination violate the Equal Protection Clause of the Fourteenth Amendment while the other violates both Equal Protection and the Commerce Clause of the United States Constitution. Each form of discrimination treats similarly situated

businesses differently, imposing benefits on one and burdens on the other, without a rational basis. Plaintiffs do not challenge the broad authority given the State by the Twenty-first

Amendment to regulate the alcoholic beverage industry in Texas. However, the Twenty-first

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Amendment does not override the Fourteenth Amendment nor, in the case of foreign breweries, the federal governments exclusive right to regulate foreign commence. Womens Liberation Union v. Israel, 512 F.2d 106 (1st Cir. 1975); Bacchus Imps. v. Dias, 468 U.S. 263, 276 (1984). The lack of any rational basis for these discriminatory regulations is so obvious that Alan Steen, the Administrator of the TABC, presented by the agency at its 30(b)(6) deposition to testify to government justifications for these laws, frankly admitted that he could proffer no governmental interest or explanation for the discrimination. The Equal Protection Clause of the Constitution prevents states from making arbitrary classifications. U.S. CONST.
AMEND.

XIV; City of Cleburne v. Cleburne Living Ctr., 473 U.S.

432, 439 (1985). Under the Clause, similarly situated persons must be treated in a like manner. Id. If a challenged state enactment neither violates a fundamental right, nor creates a suspect classification, then the law is subjected to the rational basis test. Communications, Inc., 508 U.S. 307, 313 (1993). F.C.C. v. Beach

That is, the law must bear a rational

relationship to a legitimate state interest. City of Cleburne, 473 U.S. at 440. Regulation of foreign commerce is exclusively a federal power. The federal government must speak with one voice when regulating commercial relations with foreign governments. Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976). A. The State Cannot Defend Denying Breweries The Right To Sell At The Point Of Production While Favoring Wineries With That Right.

Section 16.01(5) of the Texas Alcoholic Beverage Code gives winery permit holders the right to sell their products directly to consumers at the point of production, but microbreweries are not allowed to do the same under Sections 12.01(a) and 62.01(a) of the Code. Though, of course, there are differences between wineries and breweries, these differences do not provide a rational basis for this form of discrimination. Wineries and breweries both produce alcoholic

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beverages of moderate alcoholic strength compared to that of distilled spirits and each operates on the same tier of the three-tier system underlying alcoholic beverage regulation in Texas. Both are small businesses, very similar in many respects, with similar needs concerning access to markets and market development. Ex. 21 3. The TABC recognizes the similarity by lumping the retail sale of malt beverages and wine into a single retail permit, the wine and beer retailers permit, which permits the holder of a wine only retailers permit to sell ales and malt liquor as well as wine (but not spirits). TEX. ALCO. BEV. CODE 24.01(a) & 26.01(a); see Ex. 21 3. Clearly, there is promotional benefit in allowing an alcoholic beverage producer to sell its products directly to the consumer at the point of production; and without question, selling to consumers at the brewery would immediately add to the brewerys revenue stream. By

promoting its products through greater public awareness, encouraging visitation to the brewery and increasing familiarity with the brewerys products, the ability to sell its beers to consumers at the brewery would increase the brewerys overall sales, to retailers (in the case that the brewery self distributes), to distributors and, in turn, the distributors and retailers sales to retailers and consumers, respectively. Ex. 21 4. Texas has shown that it does not have an interest in preventing producers of alcoholic beverages generally from selling to the ultimate consumer at the point of production, because it lets wineries and brewpubs do it. In fact, given that Texas allows the manufacturers of stronger alcoholic beverages wineries sell at the point of production means that encouraging temperance and drunk driving or public intoxication cannot justify prohibiting small breweries from selling a weaker drink, beer, at the point of production. (Texas, of course, licenses the sale of all strengths of alcohol at the retail level, in any case).

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Given that Texas law itself negates such government interest as backing the discrimination against breweries in favor of wineries, what could be the rational basis for playing favorites with wineries? See Ex 21 6. Mr. Steen, the Administer of Defendant TABC, frankly admitted there was none: presented as the TABCs 30(b)(6) witness, Mr. Steen was entirely unable to articulate a government interest in the discriminatory treatment of breweries: Q. A. Mr. Steen, its my understanding that in Texas the holder of a winery license is permitted to sell their wine at the point of production. Is that correct? Thats correct. *** Q. Now, in contrast under Texas law, a microbrewery like my client, Jester King, which holds a manufacturers license and a brewers permit, is prohibited from selling its products at the point of production to consumers. Correct? I believe thats correct. *** Q. Can you, as the administrator for the TABC, identify to me and my client what the government interest is that draws a distinction between a winery and a brew pubs right to sell directly to customers at the point of production and my clients legal inability to sell its product to customers at the point of production? Well, no different than where we started this conversation with at 1:30, is Im not aware of what that was when those statutes were made at that particular time. And certainly today I cant articulate what those were at that time or even what they are today.

A.

A.

Ex. 8, pg. 60, ln. 2 pg. 62, ln. 7. Although the State may start with a presumption that an economic regulation not directed as speech is constitutional, when its own 30(b)(6) witness and the administrator of the agency charged with enforcing its laws cannot explain the states irrational discrimination, the states law fails even the rational basis standard of review.

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B.

The State Cannot Defend its Prohibition Against Selling Brewpub Products Into the Distribution System While Favoring Small Brewery Products With that Right.

Texas discriminates against brewpub and in favor of breweries by allowing the latter to sell to retailers and wholesalers, but prohibiting the former from doing so. Although

brewpubs may sell food, they do not have to, and therefore they are for all practical purposes the same as small breweries. In Texas, brewpubs are craft brewers operating under a TABC issued brewpub license which allows them to sell their beers directly to consumers at the brewery, TEX. ALCO. BEV. CODE 74.01(a)(2). However, holders of a brewpub license are precluded from selling their beers into the distribution system, that is, to retailers and wholesalers. TEX. ALCO. BEV. CODE 74.01(f). Fundamentally, a brewpubs brewing facility is no different from any small brewerys facility. Federal regulation makes no distinction between breweries and

brewpubs. 26 U.S.C. 5401(a). The TABC Administrator agrees there is no difference: Q. But sitting here today, can you [Mr. Steen] do you see a distinction between my client, a small brewery, and a brewpub with regard to why my client cant sell directly to customers on site when a brewpub can? I do not.

A.

Ex. 8, pg. 62, ln. 11-15. Nonetheless, Texas law forces a brewer to make a choice, either sell beer to consumers at the brewery but not into the distribution system, or sell beer into the distribution system but not to consumers at the brewery. What possible governmental interest could support forcing such a choice? Again, the TABCs 30(b)(6) witness and chief administrator of Texas alcoholic

beverage laws was wholly unable to articulate any governmental interest in the laws which make this distinction: Q. Now, the holder of a brewpub license under Texas law is, as we discussed before, allowed to sell to consumers at the point of production. Correct?

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A. Q. A.

Right. But is prohibited from selling to wholesalers or to resellers. Correct? Thats correct. ***

Q.

Can you, as the administrator of the TABC, articulate the governmental reason behind prohibiting brewpubs from selling into the distribution chain while allowing microbreweries to have that right to sell into the distribution chain? No. ***

A.

Q.

And you dont know the reason or justifying -- the reason or justification underlying that distinction between a brew pub, which is a small manufacturer of malt beverages, and a microbrewery, which is also a small manufacturer of malt beverages? As far as the law goes, no. And I appreciate that, but you made a distinction, as far as the law goes. Is putting the law aside, do you have something additional to add to the answer for the justification regarding that distinction? No.

A. Q.

A.

Ex. 8, pg. 64, ln. 9 pg. 65, ln. 20. Again, when the State is unable to articulate a governmental interest in or offer any explanation for substantially different treatment of similarly situated entities, there is no rational basis for the discrimination. C. The State Cannot Defend Its Discrimination Against the Importation of Products of Foreign Breweries While Favoring the Importation of Products of Foreign Wineries and Distilleries.

Foreign breweries, who typically do not transact business in the United States at all, much less in Texas, insofar as they sell their products F.O.B. brewery or foreign port,

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nevertheless, are required by Defendant TABC to have at least two and usually three permits issued by the TABC in order for their products to be sold in Texas, TEX. ALCO. BEV. CODE 13.03 & 63.01, whereas, foreign wineries and distilleries are required to have no permits, because their U.S. importer is recognized by the TABC as the primary American source of supply. TEX. ALCO. BEV. CODE 37.01(a) & 37.05. In this regard, Texas law and federal regulation of malt beverages are in significant conflict. Under federal law, the U.S. importer of any alcoholic beverage, distilled spirits, wine or malt beverages, is recognized as the primary American source of supply. 27 U.S.C. 203(c). Small foreign breweries, and their importers, whose beers are otherwise widely available in the U.S., often decline to enter the Texas market because they find it prohibitively bureaucratic and expensive to have their products sold in Texas. Ex. 1 13; Ex. 2 3. As with the other challenged regulations, Defendant TABC was unable to state any governmental interest in or explanation for Texas discriminatory treatment of foreign breweries. Q. Okay. Now, assuming Im correct on that distinction, and since were assuming this, I think I know the answer, you dont have -- as the administrator of the TABC, you cant articulate to me today a government interest that would justify different treatments of manufacturers of malt beverages on one hand, versus manufacturers of wines and distilled spirits with regard to a requirement to obtain a nonresident seller permit? Not that Im aware of today, no. And would you agree with me if in fact every manufacturer of every beer and malt beverage is required to obtain a nonresident seller permit, that imposes a greater burden on the importation of malt beverages versus the importation of wines and distilled spirits which would come in through an importer which has a single nonresident seller permit? It could, yes.

A. Q.

A.

Ex. 8, pg. 66, ln. 22 pg. 69, ln. 7.

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D.

Constitutional Violations.

The Twenty-first Amendment does not override the Fourteenth Amendment the Commerce Clause. Womens Liberation Union, 512 F.2d 106 (1974); Craig v. Boren, 429 U.S. 190, 206, 209-10 (1976); Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 714 (1984). With respect to each of the three particular forms of irrational discrimination set out above, it is Plaintiffs burden to show that the discrimination lacks a rational relationship to a legitimate state interest. City of Cleburne v. Cleburne Living Ctr., 473 U.S. 440 (1985). However, in each of the three forms of discrimination set out in this Section III., there is no difference between the entities involved that could provide a rational basis for the discrimination. See Ex. 21 3. Moreover, how do Plaintiffs show the lack of a rational basis when the governmental interest cannot be articulated by the government? To establish the lack of a legitimate governmental interest Plaintiffs can do no better than to ask the government what that interest is; and when the answer is, I dont know, or I cannot state or there is no governmental interest, the presumption of validity fails. It is not that the State is required to give reasons for the

classification or differential treatment, but, rather that, for Plaintiffs to carry their burden to negate a rational nexus between the law and the reasons for the law, Plaintiffs cannot be expected to speculate as to what the reasons might be. The best that Plaintiffs can do is to inquire, as Plaintiffs did of Mr. Steen. In each case, the State was unable to articulate any interest whatsoever. No legitimate governmental interest and no rational basis exists for allowing wineries to sell their wines directly to consumers for on and off premise consumption at the winery while precluding breweries from doing the same. No legitimate governmental interest and no rational basis exists for discriminating between brewpubs and other craft brewers, allowing brewpubs to

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sell at the point of production, while precluding other breweries from doing the same, and allowing other breweries to sell into the distribution system while precluding breweries operating under a brewpub permit from doing the same. The discriminatory treatment of craft brewers is a violation of the Equal Protection Clause of the Fourteenth Amendment of the United States Constitution. No legitimate governmental interest and no rational basis exists for discriminating against foreign breweries, treating foreign breweries, unlike foreign wineries and distilleries, as the primary American source of supply and, thereby, requiring them to obtain expensive TABC issued permits in order for their beers to be sold in Texas, rather than treating their U.S. importer as the first American point of supply, consistent with federal law. The TABC treatment of foreign breweries is a violation of the Supremacy Clause, Article VI, Section 2 of the United States Constitution, and an infringement or the federal governments exclusive right to regulate foreign commerce in violation of the Commerce Clause Article 1, Section 8, of the United States Constitution. IV. CONCLUSION AND PRAYER. For the foregoing reasons, Plaintiffs respectfully request that this Court enter judgment in favor of the Plaintiffs and against the Defendants declaring the challenged provisions of the Texas Alcoholic Beverage Code and TABC regulations unconstitutional, enjoin the Defendants enforcement of such provisions, award the Plaintiffs their reasonable attorneys fees and costs, and grant such other and further relief to which the Plaintiffs may be justly entitled.

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Respectfully submitted, Graves, Dougherty, Hearon & Moody, P.C. 401 Congress Avenue, Suite 2200 Austin, Texas 78701 (512) 480-5764 (Phone) (512) 536-9908 (Fax) pkennedy@gdhm.com By: /s/ Peter D. Kennedy Peter D. Kennedy State Bar No. 11296650 Law Office of James O. Houchins P.O. Box 40028 Austin, Texas 78704 512.479.0777 - Phone 512.479.0882 Facsimile By: /s/ James O. Houchins James O. Houchins State Bar No. 10032300 ATTORNEYS FOR PLAINTIFFS CERTIFICATE OF SERVICE I hereby certify that on October 19, 2011, I electronically filed the foregoing Plaintiffs Motion for Summary Judgment with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following: Beau Eccles Office of the Attorney General State of Texas General Litigation Division P.O. Box 12548, Capitol Station Austin, Texas 78711-2548 /s/ Peter D. Kennedy

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APPENDIX OF EXHIBITS IN SUPPORT OF PLAINTIFFS MOTION FOR SUMMARY JUDGMENT 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Ron Extract (Jester King) declaration. Rachel Fisher (Authentic Beverage Company) declaration. Mike Baldwin (Zax) declaration. TABC FAQ. Notice of Rule 30(b)(6) depositions of TABC. Rule 30(b)(6) deposition of TABC (Dexter Jones). Specs beer advertisement. Rule 30(b)(6) deposition of TABC (Alan Steen). Dexter Jones survey of state labeling laws. Excerpts from Tasting Beer. Excerpts from Michael Jacksons Beer Companion. Excerpts from Cooking and Eating with Beer and Premium Beer Drinkers Guide. Association of Brewers 2003 Beer Style Guidelines. Excerpts from Encyclopedia of Beer. Urban Dictionary definitions of malt liquor. Kihm Winship, A Story without Heroes: The Cautionary Tale of Malt Liquor. Letters to TABC from brewers and brewers associations. Lou Bright email. Oktoberfest Lager label. Letter from MillerCoors to Lou Bright, TABC General Counsel. Chip McElroy (Live Oak Brewing) declaration.

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