Government Affairs Extra
The Evolving Alcohol
Regulatory System
BY
MARC SORINI
M
ost craft brewers would agree that
an independent and competitive distribution system serves the best interests of the industry and the public.
In a highly regulated industry, that translates to a
framework of laws and regulations governing business practices and the relations between those
businesses. Today, that general legal framework
is often referred to as the “three-tier system”
marked by largely independent suppliers, distributors, and retailers. At its heart are restrictions,
often incomplete or pierced with exceptions, on
vertical integration between the three tiers.
Too often, the three-tier system is characterized as unchanging and unchanged—constructed in one fell swoop upon the repeal of
Prohibition in the 1930s. Many apparently believe our system today is like a masterpiece
painting, conceived by a single mind and then
painted and hung in its glorious perfection in the
statute books of each state.
In reality, the regulation of beer has evolved
substantially since the 1930s. As this article will
demonstrate, there was no three-tier legal framework in place upon repeal. Instead of a masterpiece painting, then, we should think of our
present system as a frame in a movie—a snapshot in time that is a little different from the frame
before or the frame that will follow.
By this point, many readers are likely thinking, “I
know the three-tier system has been around since
the 1930s because I’ve read it so many times.”
Indeed, there are many references to this, such as:
“In 1933, the 21st Amendment to the United
States Constitution repealed Prohibition and
also gave states the authority to regulate the
production, importation, distribution, sale and
consumption of alcohol beverages within their
own borders. A new regulatory system known
as the Three-Tier System was created. This
system was established to eliminate tiedhouse abuses. ‘Tied-houses’ would no longer
exist—instead, beer would be sold through
independent distributors.”—Associated Beer
Distributors of Illinois, “The History of Beer and
The Three-Tier System.”1
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“Realizing that public safety was being compromised and tax collection was virtually non-existent, the Federal Government ratified the 21st
Amendment to the Constitution on December 5,
1933, repealing Prohibition. Prohibiting the manufacture and sale of alcohol proved disastrous, but
what would be the alternative? Alcohol is not like
toothpaste or toilet paper. It is not one size fits
all, but instead requires regulation to safeguard
the public from potential marketplace abuses and
contaminated product. How would the government safeguard its citizens from repeating the
counterfeit and corruption issues that arose during
Prohibition? The answer: the three-tier system.”—
New York State Beer Wholesalers Association,
“The Distribution System: Simple, Yet Effective.”2
But an examination of the actual laws enacted
by state legislatures upon repeal paints a very different picture.
CALIFORNIA
Let’s start with California, America’s largest state
by population. Even today, California extends
generous self-distribution privileges to small and
large brewers alike. But this is no “loophole.”
Instead, it reflects the law as it existed in the immediate post-Prohibition era.
California’s 1935 Alcoholic Beverage Control
Act authorized manufacturers (a category that included California brewers) to sell to any person
holding a license authorizing the sale of alcohol
beverages. Retailers and other manufacturers accordingly were among a California brewer’s lawful customers. Moreover, while the law contained
tied-house provisions prohibiting a manufacturer
or wholesaler (treated equally) from owning an
interest in an on-sale retailer (which would have
created the dreaded pre-Prohibition tied-house
“saloon”), the California law of 1935 contained
absolutely nothing to prohibit cross-ownership between a manufacturer and a wholesaler.
Indeed, the lack of an ownership prohibition between brewers and beer wholesalers extends to
out-of-state brewers that, as is the case today,
can own a California beer wholesaler.3
FLORIDA
Crossing the country to Florida paints a similar picture. Examining the 1934 Cumulative
Supplement to the Compiled General Laws of
Florida, 1927, one quickly sees that a manufacturer could distribute or sell to either “distributors” (for each state we will employ the state’s
statutory term and hence may shift terminology between “wholesaler” and “distributor”) or
“vendors” (the Florida alcohol law term for retailers). That same 1934 enactment permitted vendors to purchase beer from any person or entity
licensed to sell it—not only distributors.
And like California, Florida’s 1934 alcohol law
contained a clear tied-house restriction on licensing a vendor as a manufacturer or distributor (once again treated equally). Notably absent,
however, is any restriction on cross-ownership
between manufacturers (wherever located) and
distributors.4 A reader will notice a pattern here:
While the architects of post-Prohibition alcohol regulation did not want “tied houses” and
therefore generally restricted cross-ownership
between retailers and either brewers or beer distributors, they did not prohibit cross-ownership
between brewers and beer distributors.
ILLINOIS
This pattern repeats itself when examining the
Illinois statute entitled, “An Act relating to alcoholic liquors,” approved on January 31, 1934.
An Illinois manufacturer was authorized to sell
to any Illinois licensee (as well as for export), a
category that included distributors (both importing and non-importing), retailers, and several special retail categories (e.g., railroads and boats).
Cross-tier prohibitions were present, but only for
manufacturers owning retailers or distributors
with a retail location for the premises where the
distributor conducted its business.
The final point illustrates another feature of
Illinois law in the immediate post-Prohibition era:
Like many breweries and wineries today, both
Illinois manufacturers and distributors in 1934
possessed limited retail sale rights. In the case of
distributors, an explicit tied-house exception permitted them to obtain a single retail license at its
place of business. Brewers had the right to sell to
consumers by the case or keg for consumption
off the brewer’s premises.5
NEW YORK
New York’s Alcoholic Beverage Control Law
of May 10, 1934 tells a similar story. It authorized licensed brewers to obtain a license to sell
beer at wholesale from premises other than the
brewery premises. And, just as today, an out-ofstate brewer could obtain a wholesaler’s license
that would permit it to sell beer to New York licensed retailers. New York, like the other states
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GOVERNMENT AFFAIRS
examined, did have a tied-house law restricting
cross-ownership or other relations between manufacturers and wholesalers on the one hand, and
retailers on the other. But nothing prohibited manufacturer-wholesaler cross-tier interests.
New York’s immediate post-Prohibition law also
provided brewers with limited retail privileges.
Under the law, sales at retail in bulk by the keg,
cask, or barrel were permitted for resale at outdoor gatherings of more than 50 persons. In addition, by obtaining a special license, a brewer could
sell beer at retail delivered to a person for consumption at home.6 Who knew direct home delivery of beer to consumers had such a long history?
TEXAS
remains a source of great mystery. Neither the
Federal Alcohol Administration (FAA) Act (enacted by Congress in 1935) nor its legislative
history make any mention of a three-tier system
(the FAA Act does, of course, seek to prevent
tied-houses, although it does not prohibit retail
sales at breweries and it presumes that brewers
will conduct business with retailers). Nor does
the FAA Act contain any restriction on cross-tier
ownership between brewers (or other producers)
and wholesalers. Indeed, the FAA Act refers to all
such participants in the alcohol trade as “industry
members,” effectively creating a two-tier system.
The when and why of the alcohol laws we now
have in place were enacted is a complex story for
another day. The important point is that the law has
evolved, and will continue to evolve, to ensure an
independent and competitive distribution system
fair to all players involved, while serving important
policy goals. And this historical fact has significant
implications to the notion of further evolution.
When current law is viewed (wrongly) as a
single painting—composed by a master and unchanging—then the warning not to disturb “the
masterwork” (or, in more prosaic terms, “if it
ain’t broke, don’t fix it”) may have some force.
Even then, the admonition of Oliver Wendell
Holmes is worth repeating: “It is revolting to have
no better reason for a rule of law than that so it
was laid down in the time of Henry IV. It is still
Even Texas—today one of the strictest three-tier
states—failed to separate brewing and distributing
in the immediate post-Prohibition era. The 1935
Liquor Control Act drew a sharp line between
lower-alcohol “beer” (below 4 percent alcohol by
weight or ABW) and beer falling within the definition of “liquor” and containing 4 percent ABW
or more. For “beer” the rules were extremely liberal: a manufacturer of such products could sell
“to others”—a category that not only included
wholesalers and retailers, but also the consuming
public generally. So Texas, like Illinois and New
York, authorized brewers to sell to consumers in
the 1930s. Consistent with the seeming ubiquity
of tied-house statutes, Texas restricted brewer
ownership of licensed retailers, but no similar restriction applied to the ownership of wholesalers.
For beers that contained 4 percent ABW or
greater, Texas’ 1934 rules were somewhat more
restrictive. Sales were restricted to permit holders
so, unlike the case with lower-ABW beer, a brewer
could not sell directly to the Texas public. Moreover,
retail permit holders could only purchase higher-strength beer from wholesalers, not directly from
manufacturers. But Texas did not prohibit a manufacturer from owning an interest in a wholesaler of
stronger beer. Consistent with the other five states
examined, Texas’ 1935 Liquor Control Act included a tied-house provision preventing manufacturers
and wholesalers (treated equally) from owning an
interest in a retailer’s business or premises, but did
not place any restrictions on cross-ownership between manufacturers and wholesalers. For out-ofstate brewers only, another obstacle to owning a
Texas wholesaler could arise, based on residency
requirements placed on all classes of licensees at
that time and which the state still imposes on some
classes of licensees today (although some of the
state’s restrictions have been found unconstitutional under the Commerce Clause).7
THE EVOLVING LAW
In short, the beer distribution legal framework
immediately post-Prohibition did not feature a
three-tier system at all, and in some cases even
permitted brewer direct-to-consumer sales. Why
so many observers get this historical truth wrong
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more revolting if the grounds upon which it was
laid down have vanished long since, and the rule
simply persists from blind imitation of the past.”8
But particularly when current law is properly understood as a single frame in a long movie, legislators, the public, and the industry are freed from the
dead hand of (a false) history so they can critically
look at the law through a clear policy lens. In short,
we are liberated to examine the law with an eye
toward crafting a system that works for the public and all members of the industry by promoting
responsible consumption, reasonable prices, good
product selection, and other policy goals.
Craft brewers have a role in painting the next
frames of the movie. There will be many disagreements about what changes represent the best way
forward. Should individual states permit more taprooms? Should they reform franchise laws? Should
they permit stronger beer sold in more retail outlets? The list of issues is long. But let this history
lesson remind us that good policy begins and ends
with careful consideration of the means and ends
of the law, not a slavish adherence to a false past.
REFERENCES
1. abdi.org/public/history.htm
2. nybeer.org/three-tier-system/
3. 1935 Alcoholic Beverage Control Act, Act
3796, §§ 6, 16 & 54.
4. 1934 Cumulative Supplement to the Compiled
General Laws of Florida, 1927, § 7648.
5. An Act relating to alcoholic liquors, Articles
V, VI, and VII.
6. Chapter 478, Chapter 3-B of the Consolidated
Laws, Laws of the State of New York, 157th
Legislature (1934), §§ 3, 51, 52, 54, 55, 100,
101, 105, and 106.
7. Liquor Control Act, Chapter 467 of the
General and Special Laws of the State
of Texas, passed by the Forty-Fourth
Legislature, Second Called Session (effective Nov. 15, 1935), Articles I and II.
8. Holmes, Jr., Oliver Wendell. “The Path of the
Law,” Harvard Law Review, Vol. X, No. 8, p.
61 (March 25, 1897).
Marc E. Sorini is a partner in the law firm
of McDermott Will & Emery LLP, based in
the firm’s Washington, D.C. office. He leads
the firm’s Alcohol Regulatory & Distribution
Group, where he concentrates his practice
on regulatory and litigation issues faced by
supplier-tier industry members. His practice
for craft brewers includes distribution
agreements, distribution counseling and
litigation, beer formulation, labeling,
promotional compliance, compliance
strategy, and federal and state tax and trade
practice enforcement defense. Marc would
like to thank his colleague Vanessa Burrows
for the research that made this article
possible. Nothing in this article should be
construed as legal advice.
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