Customers order beer at the Jester King Craft Brewery. The brewery is fighting to be allowed to sell its products directly to the public on site. PHOTO by FORREST BURNSON

by FORREST BURNSON
For Reporting Texas

Jester King Craft Brewery is ready to fight again — whether in the Texas Legislature or in court — for the right to sell its products directly to the public.

Amid the craft brewing boom in Austin and around the state, Jester King and other breweries have their sights set on regulations that they say are detrimental to their industry. The Texas Craft Brewers Guild, which represents Jester King and 36 other breweries and brewpubs in the state, plans to lobby during the next legislative session for legislation it believes will enable such businesses to better compete.

And if those efforts are unsuccessful, as they were during the last session, Jester King Managing Partner Ron Extract will look into another lawsuit against the state.

Last December, Jester King was only partially successful in a lawsuit it filed against the Texas Alcoholic Beverage Commission claiming that several of the commission’s regulations were unconstitutional.

Jester King was disappointed that the district court upheld certain restrictions on where and how breweries can sell their products.

The state code makes a distinction between breweries and brewpubs. Breweries must sell their products through a wholesaler and are barred from selling on-site, whereas brewpubs can only sell on-site – though breweries that manufacture less than 75,000 barrels of beer a year may sell directly to retailers. The lawsuit argued that these restrictions violated the Equal Protection clause of the 14th Amendment, citing that wineries in the state — but not breweries — are allowed to sell directly to the public. The court, however, found no violation on these grounds.

Jeffrey Stuffings, president of Jester King, believes lifting the restriction would increase the brewery’s sales volume by at least 20 percent and increase revenue by as much 80 percent. In 2011, the brewery produced nearly 1,000 barrels of beer, generating about $850,000 in revenue. The brewery hopes to increase production to 2,000 barrels by the end of 2012.

For now, however, the brewing industry in Texas is tightly regulated by a three-tiered system that separates manufacturers from wholesalers and retailers, and prevents overlapping ownership of them. The system was put in place in 1935 to ensure that no entity could have a “tied house,” according to the TABC. The middle layer of distributors prevents manufacturers from having undue influence over retailers, said Carolyn Beck, director of communications at the TABC.

“The three-tier system was put in place after Prohibition was overturned to keep the criminal element out of the alcoholic beverage industry,” she said.

Nevertheless, Extract believes the system needs to evolve to accommodate the changing industry, despite fierce resistance from the wholesalers’ lobby.

Since 2001, the Wholesale Beer Distributors of Texas political action committee has contributed more than $2.5 million to Texas politicians.

“The wholesalers are generally resistant to change,” Extract said. “Their big fear is, if we have the right to sell our beer on site, then the large breweries would be able to do the same. Then people could drive to the local Anheuser-Busch plant and stock up on cases of Budweiser and bypass the whole distribution system.”

Other craft brewers believe such fears are misplaced.

“If we sell more beer, it’s good for the wholesalers, the breweries and the public,” said Adam Gonzalez, marketing director for Independence Brewing Co. in Austin. Independence was not part of the lawsuit against the TABC.

Extract is willing to do whatever he can to make that a reality.

“We’re absolutely never going to give up on this,” he said. “We’re either going to get the changes through, or we’re going to die trying.”

Meanwhile, the court sided with Jester King in some areas of the lawsuit. It overturned the TABC’s prohibition on breweries telling consumers where to buy their products, which King Jester had argued violated the First Amendment’s protection of free speech.

The court also voided certain restrictions on brewers’ product labels. Jester King’s lawsuit targeted peculiarities in the Texas Alcoholic Beverage Code, which defines “beer” as any malt beverage with less than 5.1 percent alcohol by volume, while anything above 5.1 percent is considered a “malt liquor” or an “ale.”

The court struck down the regulations mandating that labeling on such beverages reflect the state’s definitions.And while bottles of liquor are required to show the alcoholic content, bottles and cans of malted beverages were prohibited from doing so. Breweries were also prohibited from advertising the alcohol content of their products – which the court also ruled as unconstitutional.

“The labeling was misleading to consumers and was not consistent with what could be found throughout the rest of the world,” Extract said.

The TABC is amending its code to comply with the court’s ruling.

“We were happy to have some direction from the judge on these complicated issues,” Beck said.

FORREST BURNSON reports for Reporting Texas, an initiative of the University of Texas’ School of Journalism. He wrote this article for the Reporting Texas and the Austin Business Journal, where it was originally published.