The Fifth Circuit Court of Appeals recently ruled in favor of a craft beer producer over the Texas Alcohol Control Board (TABC) in a case that asked which brewers can sell beer to customers for off-premises consumption. The plaintiff, CANarchy Craft Brewery Collective, challenged TABC’s interpretation of a 2019 amendment to the Texas Alcoholic Beverage Code, which led TABC to order CANarchy to cease and desist selling beers-to-go to consumers. In an opinion foaming over with beer puns, Circuit Judge Cory T. Wilson ruled against TABC and affirmed the lower court’s holding that the statute in question did not restrict CANarchy’s ability to sell beers for off-premises consumption.

Sales of malt beverages in Texas follow the national model and are generally subject to a three-tier system in which distributors or wholesalers act as an intermediary between producers and retailers. As Judge Wilson notes in his opinion, however, “[o]ver time, the Texas Legislature has carved out exceptions to the three-tier system.” Canarchy CRAFT Brewery Collective, L.L.C. v. Tex. Alcoholic Bev. Comm’n, No. 21-50195, 2022 U.S. App. LEXIS 17005, at *3 (5th Cir. June 20, 2022). The Texas Alcoholic Beverage Code was amended in 2019 to permit brewers to sell malt beverages directly to consumers for off-premises consumption. However, in what Judge Wilson describes as “a bit of a buzzkill,” id. at *1, the Texas Legislature restricted that approval to brewers producing no more than 225,000 barrels per year “at all premises [they] wholly or partly owned.” Tex. Alco. Bev. Code Ann. §§ 62.122(a) (2019), 12.052(a) (2019).

CANarchy is a collective of seven craft beer brands with operations in seven states, making them the sixth largest craft brewery in the country. Two of the breweries operated by CANarchy are located in Texas, and, per a TABC determination, produce in excess of the 225,000 barrels per year at premises leased, but not owned, by the brewers. After ceasing sale of beers-to-go at its Texas locations, CANarchy filed suit against TABC, seeking declaratory relief in order to resume sales.

The case ultimately hinged on the meaning of the word “owned.” CANarchy had initially proceeded on two claims, one asserting a violation of the dormant commerce clause, and the other a statutory construction claim. After TABC removed the case to federal court, the district court granted partial summary judgment and dismissed the commerce clause claim before ruling for CANarchy on the statutory interpretation question.

On appeal, TABC argued that the district court had improperly construed the statute, and that the Texas Legislature had intended to exclude large brewers and manufacturers like CANarchy from the amendment permitting beers-to-go sales. “Owned,” TABC contended, was a term that encompassed a broad array of property rights, including leased properties. TABC supported this reading by referring to the Legislature’s intent to “encourage entrepreneurial and small business development opportunities,” Canarchy, 2002 WL 17005, at *6, and to exclude large producers from the exception.

Judge Wilson disagreed. Applying the traditional tools of statutory construction and noting that “owned” was undefined within the statute, Judge Wilson looked first to the dictionary to find that the ordinary meaning of the word implied the right to possess something, a right that a lessee only has by virtue of the lessor’s own rights. This understanding was confirmed, he wrote, by the “broader statutory context.” Id. at *10. Finding numerous instances in the code in which the Texas Legislature had distinguished between “owned” and “leased” property, Judge Wilson cited Texas Supreme Court precedent to note that “[w]hen the Legislature uses a word or phrase in one part of a statute, but excludes it from another, the term should not be implied where it has been excluded.” Id. at *10-11 (quoting Cadena Commercial USA Corp. v. Tex. Alcoholic Beverage Comm’n, 518 S.W.3d 318, 329 (tex. 2017)). In other words, because the code mentioned both owner and leased properties in other sections, the latter’s exclusion from the amendment had to be read as intentional. TABC was unable to persuade the judge that certain sections of the code, as well as the common law understanding of ownership, supported a definition of ownership that included leased properties. TABC’s final argument — that excluding leased premises from the 225,000-barrel threshold would lead to an unreasonable outcome — was not raised at trial and therefore it was forfeited, but was regarded with a great deal of skepticism by the court nonetheless.

While the Fifth Circuit was unambiguous that brewers that want to sell beers-to-go are not limited by the 225,000-barrel cap so long as they brew the beer on leased property, whether the Texas Legislature will leave that language unchanged is less clear.