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Challenge to TABC One Share Rule

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Challenge to the TABC One Share Rule

I’m Mary Martin with an update on developments in Texas Administrative law that may affect other administrative regulations.

Texas prohibits alcohol manufacturers, wholesalers and retailers from owning even a single share of one another’s business. The Texas Association of Business has joined with McLane Co., a trucking company and food and drink distributor to challenge Texas’ One Share Rule. The suit against the state challenges the One Share Rule arguing that it serves no perceptible governmental or societal interest of any kind. The lawsuit was filed in June of this year in federal Court against the Texas Alcoholic Beverage Commission.

Texas regulates alcohol drinks under a three-tier system: manufacturers, wholesalers and retailers. A key principle of its Alcoholic Beverage Code is that the three tiers operate independently of each other, so “tied houses” are illegal. According to the lawsuit, “it is illegal for a person or business that operates in one tier to own even a single share of stock in a company that operates in another tier — even in the absence of any control or influence over the other company.” Some have likened this system to prohibition because since the end of prohibition Texas has prevented huge corporations from selling retail hard liquor inside the state.

The forces behind this lawsuit have a large interest in this decision. McLane, which runs 80 distribution centers across the United States and “one of the nation’s largest trucking fleets,” says it applied for a Texas alcohol wholesale permit, but the TABC rejected it because McLane’s parent company, Berkshire Hathaway, owns about 2 percent of Wal-Mart’s stock. Wal-Mart, under the TABC’s reading of the Code, is an alcohol retailer and McLane, if granted a permit, would be an alcohol wholesaler. Thus, the TABC determined that, if it granted McLane’s application, Berkshire Hathaway would be in violation of the tied-house provisions of the Code, because Berkshire Hathaway would own shares in both McLane (a would-be wholesaler) and Wal-Mart (a retailer).

On the other side, along with the TABC, is The Texas Package Stores Association, a trade group of TABC-permitted liquor stores. The fifth circuit recently ruled to allow the association to intervene after having previously been denied that right by the trial court. The association claims that they need to protect their own business model as well as 80 years’ worth of law originally intended to keep the mob out of the state of Texas.

Of particular interest is a report that is cited in the Plaintiffs’ federal court complaint. University of Texas economist Dr. William Charlton, Ph.D., examined overlapping ownership of companies that are involved in the three-tier system, and four Texas public pension funds: the Permanent University Fund, the Employees Retirement System of Texas, the Teacher Retirement System and the Texas Permanent School Fund. “‘All four funds held equity positions in companies licensed to manufacture alcoholic beverages by Texas, companies licensed to retail alcoholic beverages by Texas as well as companies that owned premises on which franchisees held licenses to retail alcoholic beverages,'” Charlton wrote in the report.
“Yet the TABC has not applied its One Share Rule to these Texas public pension funds, or to the licensees in which the funds hold stock,” the complaint states. “If the TABC actually applied the One Share Rule consistently across all licensees, few, if any, publicly traded companies would be able to manufacture, distribute, or retail alcoholic beverages in Texas.”

The outcome of this lawsuit may affect state pension funds as well as spill over into other areas such as legal ownership/law firm ownership.