North Carolina ABC Omnibus Legislation – House Bill 500

The North Carolina General Assembly is considering a number of alcohol-related bills in the 2017 long session.  The most significant of these bills is the ABC Omnibus Legislation, House Bill 500, which proposes to allow North Carolina breweries to self-distribute up to 200,000 barrels per year and would make it easier for small breweries to terminate distribution agreements under the Beer Franchise Law, among modernizing other alcohol laws, including laws on crowlers and homebrewing. 

The ABC Omnibus Legislation was filed on 28 March 2017, passed its first reading, and was referred to the Committee on Alcoholic Beverage Control, where, if favorable, it will be referred to the Rules, Calendar, and Operations Committee of the House.  If ultimately passed by the legislature and signed by the Governor, the bill would become law effective immediately. 

This bill would make various changes to the North Carolina alcohol laws as detailed below:

• Brewery Self-Distribution.  Section 11 of the bill raises the self-distribution cap on breweries from 25,000 barrels of beer per year to 200,000 barrels per year.  Notably in calculating the 200,000 barrels, the bill excludes sales the brewery makes to wholesalers and exporters, excludes sales made at the brewery taproom, excludes sales to employees and their families and guests, excludes gifts of malt beverages made to employees and guests for consumption on the premises, and excludes sales of beer received from a contract brewery.  In other words, under the proposed bill, a brewery can obtain a wholesale permit to self-distribute up to 200,000 barrels of its own beer to retailers in North Carolina per calendar year, no matter how many barrels of beer it manufactures and sells.
   
• Brewery’s Three Additional Retail Locations.  Section 11 of the bill allows any brewery to operate three additional retail locations, no matter how many barrels of beer it sells.  This is a change from current law which states that a brewery can only operate three additional retail locations if the brewery sells less than 25,000 barrels per year.  This change also puts breweries more in line with wineries, which can operate three additional retail locations regardless of how much wine they produce or sell.  Notably, the statutory exemption process in G.S. 18B-1116 has already been used to allow breweries to operate, or have ownership interests in, more than three retail locations, but this bill clarifies that there is no barrelage limitation to this.  Importantly, the bill also clarifies that beer manufactured by the brewery, as well as contract beer received by the brewery, can be sold at the three additional retail locations.  The bill provides that a brewery operating an additional retail location under a different business name shall sell a reasonable selection of competitive malt beverage products.  Sales of beer in the additional retail locations would not be considered as wholesale sales (part of the 200,000 barrel allotment for self-distribution) under the bill. 
   
• Beer Franchise Law.  Section 12 amends the Beer Franchise Law to define a small brewery as one that “produces” fewer than 200,000 barrels per year and to provide additional, special exceptions for small breweries.  The Beer Franchise Law regulates the commercial relationship between a brewery and a wholesaler and generally provides that a brewery cannot terminate a wholesaler without showing “good cause.”  “Small breweries” in North Carolina currently have a special exception under the Beer Franchise Law and can terminate a wholesaler upon providing five days written notice and paying the wholesaler “fair market value” for the brand.  Under this bill, small breweries producing fewer than 200,000 barrels per year would be able to terminate a wholesaler without good cause effective immediately, with “fair compensation” to be negotiated and paid by the small brewery at a later date “if agreed upon.”  The bill also provides that fair compensation may be determined by the parties in advance and set forth in a distribution agreement.  If the small brewery and wholesaler are unable to agree upon fair compensation within 12 months from the date of termination, the parties shall submit the issue to arbitration.  Such changes were designed to make it easier for a small brewery to terminate a wholesaler and to avoid expensive litigation costs over a determination of fair market value.  Further, while the North Carolina ABC Commission would retain the right to mediate disputes, the bill would eliminate the ability of the North Carolina ABC Commission to determine “fair compensation” relating to small breweries.
   
• Crowlers.  Section 1 of the bill authorizes the on and off-premise sale of “crowlers” by retail permittees.  Crowlers are combinations of “cans” and growlers” and are large 32 oz. aluminum cans that can be filled by a draft tap line and then sealed with a lid for one-time use.  Current North Carolina law authorizes retailers to sell growlers, which are defined as “cleaned, sanitized, and resealable” containers.  This bill eliminates the requirement that a growler be “resealable,” which expands the definition of growler to include a crowler, which is not resealable, but is a “one and done” container.  Retailers want the opportunity to sell crowlers because canned beer is popular, often can be sold cheaper than growlers, and may keep beer fresher.  Crowlers can also be taken to places like swimming pools where glass or growlers may not be allowed.  The bill also authorizes the North Carolina ABC Commission to adopt temporary rules to implement crowlers within 60 days after the bill becomes law.
   
• Brewery Taprooms and Sales of Other Alcoholic Beverages.  Section 8 of the bill clarifies that a brewery may sell not only its own beer at its on-site taproom, if it obtains the appropriate retail permit, but may also sell beer produced by other breweries and “any other alcoholic beverages approved by the Commission” at the on-site taproom, upon obtaining appropriate retail permits.  Many breweries already do this, but some claimed the wording of the existing statute was not clear.  Breweries are already required under state law to sell a competitive selection of beer products at their three additional retail locations.
   
• Breweries with Out-of-State Production Facilities.  Section 9 authorizes breweries with production facilities in other states to receive shipments from their out-of-state facilities to sell to wholesalers in North Carolina.  Current law only allows breweries to receive beer from out-of-state facilities for shipments to wholesalers in other states.
   
• Farm Breweries.  Section 10 allows a farm brewery, or a brewery that produces agricultural products, including barley grapes, hops, or fruit, used by the brewery to manufacture its beer, to sell its beer at retail at its taproom on-site for on or off-premise consumption, even if the brewery is located in a dry city or county that has voted to prohibit the retail sale of beer.  Farm Wineries are already allowed to sell wine in dry cities and counties.
   
• Brewery Employee Sampling.  Section 5 clarifies that a brewery’s employees or agents may sample alcohol on the premises for purposes of sensory analysis, quality control, or education. 
   
• Homebrewing.  Section 6 allows homebrewers and home winemakers to make, possess, and transport their beer and wine at “organized affairs, exhibitions, or competitions” which includes homebrewers’ contests, tastings, and judgings.  Homebrewers and home winemakers can do this without obtaining an ABC permit, but cannot sell any beer or wine without obtaining an ABC permit.
   
• Brewery’s Transactions with its Own Taproom and Retail Locations.  Section 7 clarifies that breweries do not violate the tied house rules that prohibit breweries from giving things of value to retailers, when breweries interact and deal with their own on-site retail taproom or their additional retail locations.  This provision was needed because law enforcement had sometimes cited or admonished breweries for providing beer trailers, equipment, glasses, and other things to their own on-site taproom and retail locations.
   
• Noncontiguous Storage Locations for Breweries, Wineries, and Distilleries.  Section 2 clarifies that breweries, wineries, and distilleries can store any alcohol they manufacture at a noncontiguous storage location approved by the federal agency that regulates alcohol, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”).  The off-site storage location becomes part of the permittee’s defined “premises.”  Current North Carolina law does not provide a process for off-site storage.
   
• Sale of Unfortified Wine by Retailers.  Section 3 provides that retail businesses may obtain ABC permits to sell unfortified wine on-premises.  Current law provides that most retailers must sell food or qualify as an eating establishment to hold an on-premises unfortified wine permit.  Under the bill, retailers that do not sell food, such as bottle shops, could obtain permits to sell unfortified wine on-premises, including cider, which is defined as unfortified wine in North Carolina.
   
• Tastings During Brewery Tours.  Section 4 clarifies that a brewery may give products, including samples or glasses, to customers and visitors who visit the brewery as part of a paid or complimentary tour. 
   
• Legislative Study of Alcohol Laws.  Section 13 provides that the Legislative Research Commission shall study whether a rewrite of the alcoholic beverage laws in Chapter 18B of the General Statutes is necessary to reflect the “rapidly changing alcoholic beverage industry.”  The LRC shall report its findings and recommendations to the 2018 Regular Session of the General Assembly.
   
• North Carolina ABC Commission to Implement Rules.  Section 14 provides that the North Carolina ABC Commission shall adopt temporary rules to implement the provisions of the bill.