WHY YOU SHOULD CARE ABOUT INDIANA’S PROBLEMATIC BEER REGULATIONS – PART 2 OF 4.

During Prohibition, booze flowed through unregulated channels and gangsters ruled the roost. In light of that, and some pre-Prohibition concerns, States were eager to adopt regulations that made sure all alcohol flowing into a State was taxed and that organized crime couldn't take control.
During Prohibition, booze flowed through unregulated channels and gangsters ruled the roost. In light of that, and other pre-Prohibition concerns, States were eager to adopt regulations that made sure all alcohol flowing into a State was taxed and that organized crime couldn’t take control.

Back to our regularly-scheduled programming. In our last content post, we promised an exploration of problems with protectionist legislation. In other words, laws that help in-staters while hurting out-of-staters, and why it’s no good for the brewing industry at large. Before getting there, though, today’s part of the discussion involves state concerns leading up to Prohibition, the problems that were still rampant during Prohibition, and how states dealt with it all after Prohibition (including implementing that three-tier distribution system we all know and don’t necessarily love). This is a general post, but you can find much more background in sections I–II here of Brewing Tension: The Constitutionality of Indiana’s Sunday Beer-Carryout Laws.

So, starting Pre-Pro. We didn’t have the Twenty-first Amendment yet (or, of course, that nasty Eighteenth, either). What we did have was the Commerce Clause. We know now that the Commerce Clause lets Congress regulate the instrumentalities and channels of interstate commerce as well as things that, in aggregate, are economic in nature and have an effect on interstate commerce. Well and good. Related to the commerce clause, however, is what’s been dubbed the “Dormant Commerce Clause.” That is, states can regulate things that Congress hasn’t but, in so doing, can’t discriminate against out-of-staters unless Congress says they can. This makes sense. It seems our Framers wanted us to live in the United States, and not a series of little countries that withheld their goods/services/resources or penalized other states for so doing. Anyway. The tricky part is that the Supreme Court has flipped back and forth in deciding whether alcohol is a “special” item exempt from Commerce Clause treatment. Could Washington, if it wanted, forbid out-of-state alcohol from being shipped in state while allowing full-blown production in state? Different answers, depending on the decade you ask the question.

So, go back to Pre-Pro. In 1847 in a series of cases known as The License Cases, the Supreme Court said, hey, alcohol is different and states were free from the restrictions of the Commerce Clause. But then in 1890, in Leisy v. Hardin, the Court struck down an Iowa law that confiscated alcohol shipped into Iowa if the alcohol lacked a proper permit. SCOTUS said that Congress was in charge of regulating interstate commerce, and if Congress hadn’t spoken, then states couldn’t. In response to this, Congress spoke, and passed the Wilson Act then eventually the Webb-Kenyon Act. The net effect of these acts was to basically give back to states the power to do whatever they wanted with respect to alcohol, whether discriminatory against out-of-staters or not.

Then, along came Prohibition. Everyone was “dry” on paper, but we all know about those zany flappers, the speakeasies, the booze that abounded underground. What States really didn’t like, though, was all the crime that went along with it. You had illegal distribution channels, and people like Al Capone vying for territory. No doubt about it, gangsters make for good movies, but States were not a fan. So, imagine the prospect of the Twenty-first Amendment from a State perspective. For years, alcohol was moving all over in ways that the State had zero control over. That booze was not being taxed. So, all of those underground trade networks out there stressed out states because, if they had to deal with grog, at least they could make some coin off of the whole situation. Apart from that, States were really worried about people drinking all the time. Like, all the time. Imagine seeing your people over-indulging with cheap whiskey, then heading off to the factory to operate heavy-duty machinery during the Industrial Revolution. Not a pretty combination, and one altogether too close in memory for State leadership now facing Post-Pro regulatory framework.

Another historic fun fact. You might have heard the term “Tied-house” thrown around. What’s that about? Well, back Pre-Prohibition the breweries figured out that rather than fight it out for tap share at every tavern in town, they could just open up their own tavern. They did, in droves, and some historians regale us with the consequences of all of that. You can imagine if a big out-of-town brewery opens up a tavern in a smaller town, then another big brewery does, then another, there’s not enough booze business to go around (or, if there is, the woman of the day were not fans). Consequently, some of those taverns turned to other forms of income, namely, entertainment of the illegal variety. States did not want to see this happen Post-Pro and they were also fearful that behemoth beverage producers would have so much cash, if they had tied-houses, they would be able to make all kinds of glitzy advertisements and everyone in town would be compelled to drink. Sort of a cute concern, when you think back.

At any rate, States were facing all of these competing concerns, with the realization that if they didn’t deal with it, they’d be back fighting all of the uglies they felt alcohol necessarily brought with it. The Twenty-first Amendment is on the horizon. What’d they do? States adopted the three-tier distribution system, and that’s what we’ll talk more about next time.

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Why You Should Care About Indiana’s Problematic Beer Regulations – Part 1 of 4.

Why should Indiana's beer laws matter to brewers across the states (and the globe)? Stick with us in this four-parter for some background, and why evenhanded laws are good for the brewing industry (and safe under the U.S. Constitution).
Why should Indiana’s beer laws matter to brewers across the states (and the globe)? Stick with us in this four-parter for some background, and why evenhanded laws are good for the brewing industry (and safe under the U.S. Constitution).

So, why’s a Seattle-based craft brewery law firm like Reiser Legal pontificating about Indiana beer laws? Actually, it’s because we represent Washington breweries that we care. And, no matter which brewers’ guild you belong to or which state of bountiful craft brews you call home, I’ll explain why this issue of federal constitutional law is worth your attention.

First, a little background. I’m an Indiana native. That means I grew up in a place where you couldn’t buy booze on a Sunday. Technically, you could buy it on a Sunday, but only if you (1) drove to a different state to get it or (2) were okay going to a bar or restaurant to enjoy some libations there. In other words, until 2010, you could not go into the market, buy brews, and bring them home on a Sunday.

What changed in 2010? In that magical year, the legislature made an exception for just about all craft breweries. (It’s no coincidence that in the years leading up to 2010, Indiana breweries were opening at unbelievably awesome rates.) The 2010 exception gave breweries a unique advantage. Suddenly, the only way to buy carryout beer on a Sunday was to stop by your local craft brewery.

As a consumer, the change in the law rocked. For starters, you no longer had to strategically plan your grocery shopping, planning ahead to stock up on swill before Sunday’s game. The change also affected the good folks of Ohio, as us Hoosiers no longer had to visit their glorious drive-through Sunday beer operations by force, but by choice. However, it wasn’t until, from a legal perspective, I started digging into federal constitutional issues affecting the brewing industry that I realized the problem with Indiana’s freshly-changed regulatory scheme.

Indiana’s scheme means that 100% of carryout beer sold on Sundays is made in the state. Put another way, out-of-state brewers have no access to Indiana’s booming Sunday carryout market. I thought about it, researched it, wrote about it, and put it all together into a Law Review Note called “Brewing Tension: The Constitutionality of Indiana’s Sunday Beer-Carryout Laws.” If you’re ambitious, you can read the note now. But, over the next couple of days, I’ll quickly (and painlessly) take you through why Indiana’s beer laws need deeper change, and why laws like these are bad for the entire industry—and might even affront our Constitution.

Stay with me this week as we talk a bit about beer history, including (1) things you might know, such as the bummer of a time that was Prohibition; or things you might not, such as (2) the crime that abounded during those “dry” years; and (3) the aims of the Twenty-first Amendment, as interpreted by the United States Supreme Court throughout the decades. Along the way, I’ll cover some need-to-know background about the common three-tier distribution system, including how far states can go in regulating booze shipped into and out of the state. We’ll touch on the landmark case of Granholm v. Heald, some decisions in the 7th Circuit interpreting it, and we’ll wind up on why Indiana’s law, as it stands, might not be constitutional. Through it all, I’ll pass along key takeaways for those seeking change in their own states.

See you next time.

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Part 3 of 3: Primer on Contract Brewing Arrangements in Washington State

The Washington Liquor Control Board says that in order to start contract brewing, in-state microbreweries have to put pen to paper, coming to a written agreement that also complies with certain regulations.
The Washington Liquor Control Board says that in order to start contract brewing, in-state microbreweries have to put pen to paper, coming to a written agreement that also complies with certain regulations.

Today’s post concludes our three-parter on contract brewing arrangements in Washington State. As we’ve covered in parts 1 and 2, it’s a legal practice for Washington microbreweries. However, it’s certainly subject to certain restrictions and regulations. Most notably, there’s the LCB-regulated side of the contract that we touch on today.

There Must Be a Written Contract Between the Breweries (and LCB Must Approve It)

LCB mandates that to start contract brewing, breweries must enter into a written arrangement, and we’d expect the breweries to do so anyway. LCB doesn’t clamp down and dictate what exactly this arrangement has to do or say, but there are two notable points. First, LCB has to approve the agreement, and any amendments to it. Second, LCB has provided some general limitations on things like how the product can move from place to place plus guidance on record-keeping for these sorts of arrangements. If you’re thinking about doing this, the specific LCB regulations are a must read. Indeed, some of the regs may at first seem unexpected, such as the requirement that the one producing the beer is responsible for getting federal label approval for it whereas the one seeking the beer’s production is responsible for the state label approval.

 
Ultimately, contract brewing is a permissible practice in Washington state, and likely an under-utilized business option. With demand for craft beer as high as ever, breweries are constantly looking to expand and grow. Rather than suffer growing pains or make tough decisions as a brewery hits its system’s limits, contract brewing can be a way to keep the product flowing, so long as the arrangement makes sense for the brewery agreeing to allow use of its gear for the run of beer. Further, contract brewing offers an enticing option for Washington start-up breweries who want to get their feet wet before raising serious capital for their own big-time production facility. Indeed, start-ups might consider getting licensed up and ready to go, turning to contract brewing arrangements to build an audience and attract investors before gearing up for primetime.

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Part 2 of 3: Primer on Contract Brewing Arrangements in Washington State

Contract brewing is legal in Washington state, but only in certain situations and under certain circumstances. This three-part series covers the basics.
Contract brewing is legal in Washington state, but only in certain situations and under certain circumstances. This three-part series covers the need-to-know basics.

Last time, we provided an intro to contract brewing in Washington state. Today, we continue our three-part series, covering more must-knows about contract brewing, as a viable business option for licensed microbreweries in the state of Washington. Before getting started, be sure to review Part 1, if you haven’t already.

We’ll cover two important aspects to contract brewing in Washington state, as permitted by statute and regulated by the Washington Liquor Control Board. The two today sort of roll together.

LCB Says Both Microbreweries Must Be a Bona Fide Microbrewery and Produce Malt Beverages

This requirement listed by the LCB in its pseudo-guidance here isn’t exactly clear, and it’s not anything that’s inked into or defined by RCW 66.24.244(7), which is the statutory provision that itself permits contract brewing. It’s also not spelled out in WAC 314-20-095, which outlines further LCB requirements for a compliant contract brewing relationship. At any rate, in our view, it doesn’t take a lot to be a “bona fide” microbrewery—after all, every brewery’s business plan/approach is unique. Further, beer is a malt beverage. This hurdle looks like a low one.

Importantly, Contract-Produced Count Toward Both Microbreweries’ 60,000-Barrel Limit

So, if there’s any catch we foresee in setting out to be a microbrewery that mainly produces for other microbreweries, it’s just that you would have to run the numbers and make sure it can be a profitable thing. That is, the beers produced through a contract brewing arrangement actually count toward both breweries’ 60,000-barrel limit for favorable taxation/licensing purposes. So, if Brewery A gets to sell all those beers at retail and Brewery B only earns money by making them, we’d expect the contract price to involve a number that makes both operations happy. Of course, with the lack of a storefront for Brewery B and the lack of a big brewing operation and staff for Brewery A, this sort of symbiotic relationship could just work out. And, of course, for any brewery thinking about taking on a contract run, it’s worth keeping in mind how it’ll affect your own numbers on your license. Still, the lion’s share of Washington microbreweries produce well under the 60,000-barrel annual limit.

 

Next time, we’ll wrap up this three-parter on contract brewing in Washington State, covering general concerns relating to the contract requirement itself.

 

 

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Part 1 of 3: Primer on Contract Brewing Arrangements in Washington State

Is contract brewing allowed in the state of Washington? The answer is yes, but only in certain situations and with certain limitations. Our three-part post covers helps provide the big picture.
Is contract brewing allowed in the state of Washington? The answer is yes, but only in certain situations and with certain limitations. Our three-part post covers helps provide the big picture.

In some states, contract brewing or “gypsy brewing” is a popular way to get started. For those unfamiliar with the term, contract brewing typically refers to an arrangement where one brewery uses another brewery’s equipment and sometimes staff to produce a batch of beer. It’s understandable why these arrangements are so popular in states that allow them. That is, start-up breweries can test the waters without sinking capital into equipment, while also relying on a fellow brewer’s well-calibrated, predictable brew setup along with its experienced team. On the flip side, contract brewing arrangements are attractive to existing breweries as a way to rake in a bit more cash, so long as the brewing obligations don’t get in the way of a brewery’s own ability to grow.

We frequently get questions from start-up breweries about whether contract brewing is a feasible or even permissible option to start brewing in Washington. Additionally, though we haven’t fielded such a question or run the numbers, we can wager that some out there might be curious about starting up a big brewing operation with a de-emphasized taproom, with the aim of landing contracts from breweries lacking the ability to easily scale their own operations.

Over the next few days, we’ll provide a rundown on what the Washington legislature and Liquor Control Board, so far, have had to say about contract brewing in the state of Washington. As a preview, you can view the LCB’s own quick-hitting and basic list here, though we’ll be filling it out with our own thoughts and comments over the next couple of days.

The first thing to know is this:

Washington Microbreweries Can Contract Produce for Other Washington Microbreweries

Washington limits contract production to fellow Washington-licensed microbreweries. That means out-of-state breweries are out of luck, in terms of setting up a contract arrangement in Washington to easily get product in the state. However, this does open up a lot of possibilities and business arrangements for in-state brewers. Nothing in the Washington regs expressly requires a Washington microbrewery to have its own big brewing gear to obtain its microbrewery license. Feasibly, a start-up could outfit a smaller taproom space, spending less cash to get up and running, while relying on a contract arrangement to generate its product. As an aside, there are some critics of contract brewing out there, contending the production arrangement somehow takes away from the “craft” of craft brewing. But, let’s also be honest: Evil Twin provides a damn good example of gypsy brewing that generates a premium product that we still identify as spawned from that brewery’s imagination and talent. And, after all, nothing in the law or code forbids a brewery from being intimately involved in the production of its contracted-for brews. In fact, we’d all probably expect these breweries to be hands on.

Next time, we’ll dive into other aspects and business considerations involved with contract brewing in Washington State, as permitted by the legislature and regulated by the Washington LCB.

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