John Locke Update / Research Brief

Should North Carolina Craft Brewers “Go To Law?”

posted on in Law & Regulation, Legal Update
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It would be hard to find a more blatant example of cronyism than the North Carolina law that forbids brewers who produce more than 25,000 barrels per year from selling their products directly to retailers. The law serves no legitimate purpose and exists for two reasons only: to enrich the members of the wholesale distribution oligopoly by giving them an exclusive right to distribute beer, and to enrich the national and international beverage conglomerates from local competition by discouraging the growth of small brewers. (For more information, see “Hard to Swallow,” a report released by the John Locke Foundation last fall.)

Two bills to raise the cap on self-distribution were filed in the N.C. House this session. House Bill 67, which was sponsored by Rep. Michael Speciale, would raise the cap to 100,000 barrels. House Bill 500, which was sponsored by Reps. Chuck McGrady, Bill Brawley, Jon Hardister, and Pricey Harrison, would, as originally written, have raised it to 200,000. Unfortunately, because the wholesale distributors constitute such a powerful lobby, there doesn’t seem to be much chance that even this kind of limited reform will be approved. House Bill 67 is going nowhere, and the provision raising the cap was stripped from HB 500 in committee.

The wholesalers and their friends in the legislature shouldn’t be too complacent, however. In recent years, litigators in other states have successfully defended economic freedom on the basis of those states’ constitutions. (I’ve written previously about one such success.) Because it’s such a blatant example of cronyism, the beer distribution cap is vulnerable to a similar challenge based on several provisions in the North Carolina Constitution, including:

Article I, Section 1:

All persons are endowed by their creator with certain inalienable rights [including] the enjoyment of the fruits of their own labor.

Arbitrary interference with private business and unnecessary restrictions on lawful occupations clearly violate the spirit of this clause. By forcing brewers to relinquish the right to distribute their own products as a condition for obtaining essential business licenses and permits, the distribution laws deny them right to enjoy the fruits of their labor.

Article I, Section 19:

No person shall be … deprived of his life, liberty, or property but by the law of the land.

The North Carolina courts have consistently interpreted this clause to guarantee two kinds of rights. The first is the right to due process. The cap on self-distribution violates the right to due process because it is arbitrary and capricious and because it is not rationally related to a legitimate government interest. Why permit a brewer who produces 24,000 barrels a year to self-distribute while forcing one who produces 26,000 barrels to turn its distribution over to the wholesale distributor oligopoly? The law’s purported rationale is to “maintain … healthy competition,” but, in fact, it does the opposite. It protects the members of the distribution oligopoly by giving them an exclusive right to distribute beer, and it protects the big national and multi-national beverage conglomerates by discouraging the growth of craft brewers. This kind of economic protectionism is not a legitimate government interest.

The second right guaranteed by the “law of the land” clause has two parts: the right not to have one’s property taken unless it is required for a valid public use and the right to receive just compensation when it is. The distribution laws violate both parts of this right. The state is not acquiring the craft brewers’ distribution operations for a public use. Instead, it is forcing them to turn those operations over to other private parties. Nor can it be argued that this transfer of property from one private party to another somehow achieves a public purpose, because, as noted above, protecting the interests of wholesale distributors and out-of-state beverage conglomerates is not a valid public purpose. All of this would be bad enough if the craft brewers received just compensation for the loss of their distribution operations, but they do not. They receive nothing.

Article I, Section 32:

No person or set of persons is entitled to exclusive or separate emoluments or privileges from the community but in consideration of public services.

The distribution cap grants the members of the wholesale distribution oligopoly the exclusive privilege of distributing beer in North Carolina. Do they perform a public service in return for this consideration? They do not!

Article I, Section 34:

Perpetuities and monopolies are contrary to the genius of a free state and shall not be allowed. 

The distribution laws grant distributors the exclusive right to distribute beer in perpetuity. While perhaps not technically a monopoly, it is certainly an oligopoly. As such, it is contrary to the genius of a free state, and it is forbidden by the North Carolina Constitution.

Any one of these constitutional claims, if successful, could result in a declaratory judgment striking down the distribution laws, a permanent injunction blocking the enforcement of those laws and an award of money damages and attorneys’ fees to the claimant. I’m sure those possibilities are not lost on North Carolina’s craft brewers. They have, after all, already proven themselves to be a creative and determined group of entrepreneurs.

North Carolina should be encouraging such people, rather than actively holding them back. If the General Assembly won’t protect their economic rights, don’t be surprised if they turn to the courts!

Jon Guze is Senior Fellow in Legal Studies at the John Locke Foundation. Before joining the John Locke Foundation, Jon practiced law in Durham, North Carolina for over 20 years. He received a J.D., with honors, from Duke Law School… ...

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