Excuse all the hyphens. Friends and colleagues have been asking me what tied-house laws are and what is this three-tier system, exactly. So let’s step back and explore these terms.

What is a “tied house”?   In simple terms, a tied-house is any retail outlet that is beholden to a particular alcohol manufacturer for any reason. The concept can be illustrated by traditional pubs or saloons prior to Prohibition. Large alcohol manufacturers would provide such retailers with low-interest loans, free draft systems, and even direct payments in exchange for favorable or monopolistic treatment from that retailer. In some cases, a manufacturer might own every retail outlet in town, which outlets would then sell only that manufacturer’s product. So the result of tied houses is a decrease in competition and consumer choice, while providing retailers with every incentive to oversell alcoholic beverages (particularly those made by the retailer’s benefactor). After Congress repealed Prohibition in 1933 through the Twenty-First Amendment, every state in the union enacted some version of laws designed to prohibit and minimize tied-houses.

What is the “three-tier system”? In its purest form, the three-tier system is a market regulation concept whereby each “tier” of alcohol manufacture, wholesale (distribution), and retail must remain completely separate from the others. That is, a manufacturer cannot have an ownership or business interest in a distributor or a retailer and all the vice versas you can imagine. As the California Supreme Court put it, “[m]anufacturing interests were to be separated from wholesale interests, wholesale interests were to be segregated from retail interests. In short, business endeavors engaged in the production, handling, and final sale of alcoholic beverages were to be kept distinct and apart.” California Beer Wholesalers Assn., Inc. v. Alcoholic Beverage Control App. Bd., 5 Cal. 3d 402, 407 (1971). Most states have some version of these regulations to keep each tier independent of the others, mainly for the purpose of prohibiting tied houses and the anti-competitive results and temperance issues they raise. There are many variations on this theme among the states, since the Twenty-First Amendment gave the states the power to create their own regulatory schemes.

So what are “tied-house laws”? These laws and regulations are those enacted by the state legislatures or promulgated by the state agencies for the purpose of creating and enforcing that state’s version of the three-tier system. Again, the purpose was to prohibit (or at least minimize) large manufacturers from unduly influencing wholesalers and retailers. This isn’t a theoretical problem. “In the era when most tied-house statutes were enacted, state legislatures confronted an inability on the part of small retailers to cope with pressures exerted by larger manufacturing or wholesale interests.” California Beer Wholesalers, 5 Cal. 3d at 407-08. There are myriad different tied-house laws that states have enacted and modified over the years—each jurisdiction is different to some degree. California’s, originally enacted in 1935, can be found in the California Business and Professions Code section 25000 et seq. And California has a ton (more on these in later posts). As a specific example, California Business and Professions Code section 25503 provides that it is illegal for a manufacturer to give “anything of value” to a retailer (or wholesaler), to give rebates or kickbacks to retailers, to pay a retailer for advertising in the retail outlet, and to give a retailer any free goods (with some exceptions). So California’s idea was to try to keep separation between the tiers by essentially prohibiting bribes for favorable treatment. There are many more restrictions and exceptions contained in California’s statutes and regulations. As the Supreme Court noted, these regulations were designed to prevent dominance in the market by large-scale players and to maintain independence between the tiers. California Beer Wholesalers, 5 Cal. 3d at 408.

Why do we care? Without these laws, the market would turn into a free-for-all for those with the deepest pockets. Of course international monoliths would take every advantage to squeeze out pesky independent brewers who keep taking market share—dare I say even pay bribes to retailers? And as I have pointed out before, many state three-tier systems and accompanying tied-house regulations are under attack through sophisticated lobbying efforts, legal challenges (see prior blog posts), and even through circumventing the laws in questionable/illegal ways. Are there problems with the three-tier system? You bet. Do the benefits outweigh the problems? That depends on if you favor consumer choice, an even playing field, and good old independently brewed beer in all its glorious iterations.

Let me know what you think. Cheers.