Pin It

Monday, May 26, 2014

New proposed state distribution rules would choke the growth of Chicago's biggest craft brewers

Posted By on 05.26.14 at 02:00 PM

As it turns out, I dont have any idea how to illustrate a column like this. So heres a stock photo of the Illinois statehouse in Springfield.
  • Henryk Sadura
  • As it turns out, I don't have any idea how to illustrate a column like this. So here's a stock photo of the Illinois statehouse in Springfield.

On May 15, a helpful reader e-mailed me something that Revolution Brewing founder Josh Deth had just posted on Facebook:

IL Liquor Control Commission staff issues rules that completely screws over Revolution (and Two Brothers, Destihl, Haymarket and more). So who wants to buy either a brewery or a brewpub?

Happy Chicago Craft Beer Week!

http://www.state.il.us/lcc/DOCS/ProposedRules05-14-2014.pdf

That link goes to a PDF of new rules proposed on May 14 by the Illinois Liquor Control Commission—and one of those rules would scuttle Deth's plans to keep growing while hanging on to both of Revolution's facilities. ILCC rules aren't laws but rather guidelines for how to enact existing laws—in this case the Illinois Liquor Control Act of 1934, whose decades-long cycle of revision and reinterpretation has accelerated lately in response to the craft-brewing boom. Any guidelines the ILCC finalizes must be approved by the 12-member Joint Committee on Administrative Rules, a bipartisan organ of the Illinois General Assembly that includes six Democrats and six Republicans, half from the House and half from the Senate.

Deth is specifically exercised about a single bullet point in Section 100.440 of the proposed ILCC rules, which governs brewpubs: "c. A Brew Pub license holder shall not: 1) Annually sell more than 50,000 gallons of its manufactured beer to licensed distributors for off-premises consumption."

The law and the rules that arise from it are supposed to be parallel documents, and on this point Deth thinks they've diverged. He says the portion of the Liquor Control Act interpreted by this rule doesn't mention distributors. "The [ILCC] has added the words 'to [licensed] distributors' to that," he insists. "[The law] doesn't say that anywhere in that sentence."

To be honest, when I started looking into this, I had no idea what the relevant part of the act actually did say. I'm indebted to lawyer Ashley Brandt, of Freeborn & Peters LLP, for helping me get oriented. The text in question is Section 5-1(n), which reads in part:

A brew pub license shall allow the licensee to manufacture beer only on the premises specified in the license, to make sales of the beer manufactured on the premises to importing distributors, distributors, and to non-licensees [consumers] for use and consumption, to store the beer upon the premises, and to sell and offer for sale at retail from the licensed premises, provided that a brew pub licensee shall not sell for off-premises consumption more than 50,000 gallons per year.

Well, the word "distributors" does in fact appear in there a couple times, albeit not in the bit about "50,000 gallons per year." The law would seem to say that no more than 50,000 gallons of beer to go ("for off-premises consumption") can be sold at retail from the brewpub itself. That cap doesn't appear to apply to beer sold through distributors. But you probably knew this wasn't going to be simple.

First off, I'd be remiss if I didn't remind you why this so important to Deth. When I wrote about Revolution's fourth-anniversary party in February, I discussed his plans to sidestep the 30,000-barrel craft production cap: "He says he's considering relicensing the Kedzie facility as a brewpub, so he'll no longer need the restrictive craft brewer's license. . . . Or maybe these regulations will get rewritten before that's necessary."

The regulations have been rewritten all right, but in a way that makes it impractical to relicense a production brewery as a brewpub: 50,000 gallons is fewer than 1,700 barrels, a paltry amount by almost any standard (and less than 4 percent of Revolution's projected output for 2014). Brewpubs don't often sell to distributors, but that doesn't mean they can't—and Deth doesn't believe that state law limits the amount of beer they can move that way. "I think we have a very good argument that there is no statutory backup for this," he says. "They're changing the law, basically. The rule-making process is not to change the law, it's to interpret the law."

Deth insists Revolution wouldn't be the only brewery hurt by the ILCC's current proposed rules, were they to go into effect: he says that Destihl will soon hit the production cap, and that Haymarket's plans for a brewery and Solemn Oath's hypothetical brewpub would both run afoul of state regulations.

Destihl founder Matt Potts confirms that "soon" means "within a couple years." Pete Crowley at Haymarket says that in order to open a production brewery, his operation would be required to accept the same craft brewer's license that's made such trouble for Revolution. And John Barley at Solemn Oath claims that the proposed ILCC rules "would cause considerable challenges" in his company's plans for a Chicago brewpub.

Deth can't see the logic in such confining regulations. "I'm just trying to grow my business—I'm following the Goose Island model of growth, which is to start a brewpub and then open a big brewery," he says. "Why is that so wrong?"


I don't have any more pictures of government buildings, but this is Beer and Metal, so here you go. Maryland Deathfest went down this past weekend, and its spillover tours bring to Chicago overseas bands that almost never come to the States. On Friday at Beat Kitchen, Russian death-metal band Pseudogod headline a six-act bill. This is "Necromancy of the Iron Darkness," one of my favorites from their sole full-length, 2012's Deathwomb Catechesis.

Crowley has no kind words for the ILCC either. "They seem to want to find ways to crush craft beer production and in-state commerce," he says. "A brewery in Ohio can sell a million barrels here. An Illinois brewer can only sell 30,000 and now a brewpub will be capped at selling 1,500 to a distributor? You tell me how that sounds."

Barley is happy to say how it sounds to him: "The proposed rules are bad for customers, bad for brewers, bad for distributors, and bad for all the businesses and industries that are connected to us."

Distributors have a great deal of power in Illinois's three-tier system, which is in many ways a relic of Prohibition. As Nicholas Day wrote in a 2006 Reader story, "State law says that a distributor can drop (or better yet, sell the rights to) a brewery at any time. But outside of identifying 'just cause' like gross professional misconduct—such as selling beer past its sell-by date—there's no easy way for a brewery to dump its distributor." This sort of arrangement, called a "franchise law," is codified in Illinois as the Beer Industry Fair Dealing Act. When the act was passed in 1982, it was intended to protect little distributors from big brewers who could cripple them by jumping ship, but the beer ecosystem is vastly different now—even though the terms of the Fair Dealing Act have been relaxed, distributors can still make or break breweries. "If you're more than 10 percent of a distributor's beer portfolio by volume, then you cannot leave the distributor to go to another distributor without their permission," says Deth. And in any case, a departing brewer has to pay the distributor fair market value for the brand.

I mention this because craft brewers have historically mistrusted distributors—last year Deth himself told Andrew Gill at WBEZ that he blamed the distribution lobby for the failure of a proposal to raise the craft-beer production cap to 200,000 barrels. But that antipathy seems to have softened, at least with respect to the new ILCC guidelines. "Beer distributors are actually on our side in terms of the interpretation of this rule," says Deth. "So this is a good thing, compared to the past, when we've kind of battled a bit." The success of big craft operations such as Revolution and Two Brothers has certainly contributed to the thaw. "They're selling a lot more of our beer, and they see the value of letting us grow and have some more flexibility."

I reached out to Bob Myers, president of the Associated Beer Distributors of Illinois, to confirm Deth's impressions. "Obviously, the reality of the situation is, craft beer is exploding," Myers says. "We're more than thrilled to see that product doing so, so well. I think last year they counted an 18 percent growth in the industry, which is just unheard-of in any kind of alcoholic beverage, let alone beer."

Myers tells me he wants to hammer out a "long-term plan" that will obviate the current piecemeal process, which seems to force craft brewers to come to Springfield and plead their case every six months. He's even making noises about raising the craft cap from 30,000 barrels: "This is something that we need to look at," he says. "I'm in the process of working with [executive director] Justin Maynard with the Illinois Craft Brewers Guild to sit down and find out what their needs are. I feel very confident that we can address many of their concerns as far as how they can get to that next level and end up making even more product."


At that Pseudogod show on Friday, main support comes from Chilean band Wrathprayer. Here's "Devourers of Light" from 2012's The Sun of Moloch: The Sublimation of Sulphur's Essence Which Spawns Death and Life. Death-metal English is apparently a universal language.

So how about that 50,000-gallon brewpub rule? "It's very, very clear that the commission is in error on this interpretation," Myers says. "This is not what the intent of the law is." He's in an unusually good position to make such a claim—he's been with the ABDI for more than 20 years, and he helped negotiate the present language of Section 5-1(n) in 1997. Back then Illinois had only two or three brewpubs, to Myers's recollection, and the owner of one had asked for a new law governing to-go sales.

"At no time did we talk about how much he could sell to a distributor—that would be ludicrous," says Myers. "Nor did we even bring up the fact that they had a limit at all, as far as how much these brewpubs could manufacture. It's always been our opinion that there's no limit on how much they can manufacture, and there's no limit on how much they can sell to a distributor. The only limit that they had was how much they can sell to a consumer to carry out." He explains further in a letter that the ABDI, as part of a joint protest with the ICBG, intends to present to the ILCC. This is an excerpt from an early draft:

This change was done at the request of Scott Archer, who at the time owned the Walter Payton Roundhouse in Aurora. He asked for specific language to allow him the opportunity to sell beer "to go" in the form of growlers, and six-pack bottles. ABDI specifically asked him how much beer he manufactured at that time. Mr. Archer stated that he manufactured 50,000 gallons. We included that amount in the legislation to allow him to sell that amount for carryout purposes. At no time were we limiting the amount a brew pub could manufacture or sell to a licensed distributor or importing distributor. . . . We think you will agree, once the Commission reads the bill's history and the amendment that was incorporated in the bill, that the added language "from the licensed premises, provided that a brew pub licensee shall not sell for off-premises consumption more than 50,000 gallons per year" applies to the "sale at retail" not to the sale of the beer manufactured to importing distributors, distributors or the amount the brew pub can manufacture.

The ILCC rules process is relatively open and transparent, which means you can have a say in it. During the current public-comment period, which ends on Friday, May 30, you're welcome to make your concerns known by e-mailing ILCC chief legal counsel Richard Haymaker at Richard.Haymaker@Illinois.gov. You can also attend the ILCC hearing at which these rules will be considered, at least if you have unconventional work hours or a tolerant boss: it's from 10 AM till 1:30 PM on Wednesday, June 4, in the James R. Thompson Center at 100 W. Randolph, suite 9-040.


New Zealand war-metal band Diocletian were supposed to play at Beat Kitchen on Saturday. But I hear they've scuttled their whole U.S. tour due to a family emergency, which sucks for them and for us. Occasional Reader contributor Kim Kelly described their Maryland Deathfest set on Twitter: "Diocletian just destroyed everything, okay guys time to go home."

"The meeting on the fourth is for the commissioners to listen to interested parties, talk about what might work, what might not work, what needs to be changed," says ILCC spokesperson Susan Hofer. "We're a long way from final rules here."

Even after these rules are finalized by the ILCC, filed by the Secretary of State, and published in the Illinois Register, there's another 45-day public-comment period, after which the ILCC makes any necessary amendments; then they go to the Joint Committee on Administrative Rules for a 45-day review, ending in formal adoption or rejection.

The ILCC doesn't take a position on the brewpub rule that Deth and the ABDI find so worrisome. "At this point, we're in listening mode," says Hofer.

Hofer explains that the creation of the craft brewer's license has been the biggest factor necessitating a revision of the rules associated with the Liquor Control Act. "The language in the statutes clearly leaves some room for interpretation," says Hofer. "The commissioners feel the need to provide that interpretation in a formal way."

Even Deth can get on board with that. "Though they're making these rules that are screwing me and I disagree with, the general intent here is just to have clearer rules," he says. "And as a business owner, I like clear rules."

Correction: This post has been amended to reflect the correct time of the ILCC hearing on June 4.

Philip Montoro writes about beer and metal, singly or in combination, every Monday.

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Find out how you can help

Comments (5)

Showing 1-5 of 5

Add a comment

 
Subscribe to this thread:
Showing 1-5 of 5

Add a comment

More by Philip Montoro

Agenda Teaser

Music
The 1975, Dua Lipa House of Blues
July 29
Music
Robbie Fulks Hideout
August 01

Tabbed Event Search

The Bleader Archive

Popular Stories

Scientists Created A Dino-Chicken