Legislative Gifts

Daniel Croxall (University of the Pacific), Legislative Gifts (2022):

The United States has a strange relationship with alcohol. Alcohol is the only specific subject that can claim two constitutional amendments (the Eighteenth Amendment and the Twenty-first Amendment), and alcohol is one of the most heavily regulated industries in the country. The Twenty-first Amendment left it to the states to regulate the three tiers of the alcohol market: manufacturing, distribution, and retail sales. Of course, disparate laws appeared among the states and created a morass of inconsistency. 

American craft breweries are particularly susceptible to state laws that favor other industry stakeholders, such as distributors, because craft breweries have no appreciable power to motivate state legislators to change unfair or archaic laws that have existed since Prohibition. Distributors, on the other hand, have massive wealth and powerful lobbies that have been highly successful in passing law after law that unjustifiably favor the distribution tier over small breweries. Specifically, most states currently have laws that make it impossible for a small brewery to terminate a contract with an underperforming distributor, grant the distributor with a statutorily mandated geographic monopoly, and prevent a craft brewery from transferring distribution rights from an underperforming distributor to another distributor.

This article examines the current state of distribution in the beer market and how distributors have been able to manipulate legislators into providing them with legislative gifts that serve only protectionist purposes. Such laws are premised on the notion that distributors lack market power and are thus subject to unfair treatment from large manufacturers. That justification stems from a time when there were few breweries in the U.S. and an abundance of distributors; thus, the few had power over the many. This article argues that the modern market structure is completely flipped due to extreme distributor consolidation and numerical brewery growth. Further, this article argues that laws protecting distributors from a perceived power imbalance are unjustified as a matter of law and policy in the modern market. Distributors are now the gatekeepers for success in the beer market and have created a chokehold on what beer consumers can purchase and where. Finally, this article proposes solutions that state legislatures should consider in reimagining their alcoholic beverage control laws. 2022 was the first year since the craft beer boom that the craft segment saw triple-digit closures. Many were due in part to barriers in the distribution tier that were created by legislative gifts. Without reconsideration of state laws, craft breweries will continue to be squeezed out of the market, and consumers will be left with little choice beyond mass produced, corporate products.