There's a question that we've been asked quite a bit lately, by fellow attorneys, industry members and craft beer lovers alike. With the recent swell in interest in the reformation of North Carolina ABC regulations, we're certain others of you likely share the same curiosity. That question pertains to the circumvention of the 25k barrel self-distribution cap North Carolina currently imposes on our native breweries.
The question, for local brewery owners and malt beverage suppliers, is why not open their own distribution companies in lieu of signing with independent distributors? Would that not allow each of them the flexibility to continue protecting their respective brands and preserve the jobs they've created in an effort to accommodate their own success and growth?
It's a great inquiry. Before we give you our answer, let us set the stage by laying out a foundation for this post and mentioning first that there is a more comprehensive explanation to our quick summary of the three-tier system in another post on our blog. Feel free to hop to it, or remain here for the skinny before we dive into our thoughts.
North Carolina law creates a three-tier system for, among other things, beer regulation. This system is responsible for the supplier-wholesaler-retailer relationships that manage the production, distribution and sale of all the incredible beers our native brewers brew for us to enjoy. These regulations are laid out in Chapter 18B of the North Carolina General Statutes.
Our focus begins with N.C.G.S. Section 18B-1104, which allows breweries who are brewing less than 25k barrels of beer per year to distribute their own beer to retailers everywhere—to "self-distribute." Many breweries utilize self-distribution as a practical path to growth and wish to continue self-distributing for a variety of reasons best summed up by the movement known as Craft Freedom. Once a brewery produces 25k barrels of beer or more, though, North Carolina law requires that brewery to distribute all of its beer through an independent distributor. This means the brewery must hire at least one distributor to sell and distribute its beer to all restaurants, bottle shops and other retail locations regardless of how close those businesses might be to the brewery.
So why can't the owner of a brewery just start their own distribution company to get around having to hire a third party? Well, they technically can. But for reasons we are about to explain, doing so would not really remedy the problems associated with independent distribution (lack of product control, consumer (mis)education, brand over-exposure, etc.). The rules and limitations to which an owner would be bound in forming his/her own distribution company arguably render such an endeavor even less appealing than simply complying with the self-distribution mandate. But that does not mean the opportunity does not merit consideration.
The North Carolina law that creates the possibility for a brewery owner to open his/her own distributorship is N.C.G.S. Section 18B-1119, labeled "Suppliers Financial Interest in a Wholesaler."
A couple quick definitions: "Supplier" is defined in N.C.G.S. 18B-1301 as a brewer, bottler or importer of malt beverages, including anyone who holds an interest in a brewery. A "wholesaler" is a holder of a malt beverages wholesaler permit—someone licensed by North Carolina law to distribute beer.
Here's where things get interesting. Section 18B-1119 says that a supplier, officer, director, employee or affiliate of a supplier (think "brewery" or "affiliate of a brewery") may have a financial interest in a wholesaler IF he/she creates a limited partnership with a proposed purchaser of a wholesaler, or by offering a business loan in exchange for a security interest in the assets of a wholesaler. Section (a), the limited partnership option, goes on to state that the supplier must be a limited partner and the other owner (the "proposed purchaser") will be the general partner. Both sections (a) and (b) make clear that these agreements can only last for up to eight (8) years and that the limited partner (the supplier) may never become a general partner. If by operation of law the supplier becomes the general partner (think default of the proposed purchaser or something similar), he/she must divest himself/herself of the general partnership interest within 180 days. So what does this tell us?
This statute essentially says that a brewery owner can indeed form his/her own distributorship. But it also says that he/she can only play the role of a limited partner, which really equates to taking a financial interest in the business and nothing more. Put even more plainly, the brewery owner can be, at most, a passive investor in his/her own distribution company. By law, a limited partner has no rights in the management of the partnership, only an interest in the profits or in the losses and only up to their contribution. So the day-to-day operations and managerial decisions are left to the general partner while the limited partner can really only wait for a return on his/her initial investment. Sort of defeats the purpose, right?
Perhaps. However, we offer an alternative stance. This provision does allow a way for a brewery owner to continue earning an income at the wholesaler level similar to that of self-distribution under the 25k barrel cap. Although he/she might not be making the same money, dollar-for-dollar, the limited partnership arrangement would at least provide a short-term alternative to, and soften the blow of, relinquishing total control to an independent distributor. If we are examining a way for a supplier to continue employing loyal folks, maintain some level of certainty about how its brands will be managed in broader regions and ensure a more tolerable production trajectory once over the barrel cap, a little something is certainly better than nothing.
Of course, the new partnership would still have to abide by the same 18B regulation as its independent distributor counterparts. Additionally, limited partners must commit to their roles as limited partners—not only for 18B reasons, but for tax purposes as well. And don't forget that, even if things are going swimmingly, the eight (8) year limitation on such arrangements still applies.
So if the limited partnership arrangement has a definite end point, why'd we offer this commentary? Simply to show that there is room for legal, collaborative creativity within the distribution tier. Carolina Craft Legal is wholly committed to finding ways to facilitate mutually beneficial local collaboration. And we recognize that distribution models are not a one-size-fits-all endeavor. With the legislative climate surrounding North Carolina ABC regulation heating up, this alternative might just be nimble enough for local brewers approaching the self-distribution cap to bide their time. If your thinking aligns without ours and you're motivated, reach out to us. We love exploring opportunities to keep any business nimble, especially our beloved craft beer segment.
Until next week. Cheers!