Jester King v. TABC Plaintiff Motion for Summary Judgement

8/3/2019 Jester King v. TABC Plaintiff Motion for Summary Judgement

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

TEXAS ALCOHOLIC BEVERAGE

COMMISSION, et al., Defendants,

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. Prohibit breweries and distributors from telling customers where their products

can be bought;

2. Mandate the use of inaccurate statutory definitions of beer, ale and malt

liquor to describe malt beverages;

3. Prohibit advertising the alcoholic content of brewery products and using words in

advertising and labeling that suggest alcoholic strength;

Case 1:10-cv-00710-SS Document 33 Filed 10/19/11 Page 1 of 26


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PLAINTIFFS MOTION FORSUMMARY JUDGMENT PAGE 2

4. Prohibit breweries from selling their products at the point of production while

allowing wineries and brewpubs to do so;

5. Prohibit brewpubs from selling their products to distributors and retailers while

allowing wineries and microbreweries to do so; and

6. 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, 495-

96 (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 ofCentral 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 mustconcern 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 notleave 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 itcircular 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 sakand 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 misleadingper 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 maltliquor 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

3 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] (4percent 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), traditionallywith 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 English-

Style 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-

5 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 forcesmislabeling. 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 notbeer. 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

6Note 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 giventhe 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, theagency noted at its 30(b)(6) deposition that Texas imposes different tax rates on distributors for the sale ofmalt 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,prohibitbreweries 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 powerdoes not trump the First Amendment:

[A]lthough the Twenty-first Amendment limits the effect of the dormant Commerce Clause on aStates 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 ofthe Constitution. Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 712 (1984). [T]heTwenty-first Amendment does not qualify the constitutional prohibition against laws abridgingthe freedom of speech embodied in the First Amendment. The Twenty-first Amendment,therefore, cannot save Rhode Islands ban on liquor price advertising.

44Liquormart, 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 ruleprohibits 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 rulepermits 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).

8 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 tokeep 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 isper 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?

A. In other words, advertising over labeling?

Q. 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 thatinterest promoted by a labeling requirement that itself you had testified is

intended to suggest alcoholic strength?

A. Sure.

Q. I mean, youd agree with me theres an inconsistency there?

A. Yes.

Q. That the consumer who buys something labeled ale or malt liquor in Texas isactually being guaranteed by Texass regulatory system that what theyre buying

is going to be higher than four percent alcohol. Correct?

A. Yes.

Q. So Texass regulatory system actually enables consumers to steer towards the

higher alcoholic product. Correct?

A. I mean, if thats their if thats their purchasing choice, then the answer is yes.

Q. And the labeling requirement under Texas law assists the purchasing choice in

helping the consumer identify the product that has the higher alcoholic content?

A. Or I would say as to make an informed decision.

Q. Correct. And theyre informed on the alcoholic content. Correct?

A. Yes.

Q. So isnt it inconsistent, then, to prohibit informing the customer of the alcoholiccontent 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?

A. I would say that could be construed as inconsistent.

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] candirectly 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. F.C.C. v. Beach

Communications, Inc., 508 U.S. 307, 313 (1993). 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. 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?

A. 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 fromselling its products at the point of production to consumers. Correct?

A. I believe thats correct.

***

Q. Can you, as the administrator for the TABC, identify to me and my client whatthe 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?

A. 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.

Ex. 8, pg. 60, ln. 2 pg. 62, ln. 7.

Although the State maystartwith 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 selldirectly to customers on site when a brewpub can?

A. I do not.

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. Right.

Q. But is prohibited from selling to wholesalers or to resellers. Correct?

A. 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?

A. No.

***

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 ofmalt beverages, and a microbrewery, which is also a small manufacturer of malt

beverages?

A. As far as the law goes, no.

Q. 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 forthe justification regarding that distinction?

A. No.

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, T EX. 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 justifydifferent 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?

A. Not that Im aware of today, no.

Q. And would you agree with me if in fact every manufacturer of every beer andmalt 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 asingle nonresident seller permit?

A. It could, yes.

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



24/26


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)

[email protected]

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 - Phone512.479.0882 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 willsend notification of such filing to the following:

Beau EcclesOffice of the Attorney General

State of Texas

General Litigation Division

P.O. Box 12548, Capitol StationAustin, Texas 78711-2548

/s/ Peter D. Kennedy



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APPENDIX OF EXHIBITS IN SUPPORT OF PLAINTIFFS

MOTION FOR SUMMARY JUDGMENT

1. Ron Extract (Jester King) declaration.

2. Rachel Fisher (Authentic Beverage Company) declaration.

3. Mike Baldwin (Zax) declaration.

4. TABC FAQ.

5. Notice of Rule 30(b)(6) depositions of TABC.

6. Rule 30(b)(6) deposition of TABC (Dexter Jones).

7. Specs beer advertisement.

8. Rule 30(b)(6) deposition of TABC (Alan Steen).

9. Dexter Jones survey of state labeling laws.

10. Excerpts from Tasting Beer.

11. Excerpts from Michael Jacksons Beer Companion.

12. Excerpts from Cooking and Eating with BeerandPremium Beer Drinkers Guide.

13. Association of Brewers 2003 Beer Style Guidelines.

14. Excerpts fromEncyclopedia of Beer.

15. Urban Dictionary definitions of malt liquor.

16. Kihm Winship, A Story without Heroes: The Cautionary Tale of Malt Liquor.

17. Letters to TABC from brewers and brewers associations.

18. Lou Bright email.

19. Oktoberfest Lager label.

20. Letter from MillerCoors to Lou Bright, TABC General Counsel.

21. Chip McElroy (Live Oak Brewing) declaration.


Documents

Jester King v. TABC Plaintiff Motion for Summary Judgement