Texas Supreme Court Weighs In on Tied House

By on May 8, 2017
Posted In Trade Practices

Late last month, the Texas Supreme Court issued a ruling in Cadena Comercial USA Corp. d/b/a OXXO v. Texas Alcoholic Beverage Commission, finding in favor of the Texas Alcoholic Beverage Commission (TABC) and weighing in for the first time on the application of Texas’ tied house law. In a 6-2 decision, the court upheld the TABC’s denial of a retail permit to a foreign corporation whose parent company also holds a 20 percent ownership interest in a foreign brewer.

Fomento Económico Mexicano, S.A.B. de C.V. (FEMSA) holds both a 20 percent interest in the stock of two Heineken entities, as well as–through intermediate holding companies–100 percent of the ownership of Cadena Comercial USA Corp. (Cadena), a company that operates convenience stores. In 2011, Cadena sought licensing as a beer and wine retailer in Texas.  During the license application process, the TABC discovered FEMSA’s ownership of Cadena and interest in Heineken and rejected Cadena’s permit application on tied house grounds. Texas’ alcohol beverage laws define “tied house” as prohibiting any overlapping cross-tier ownership interest.

Upon the denial of its permit application, Cadena requested and received an administrative hearing before a county judge. At the hearing, the TABC’s director of licensing testified that that the TABC would consider even one overlapping share of stock across tiers to violate Texas’ tied house laws. (This principle is referred to as the “One Share Rule.”) The judge denied Cadena’s retail permit application, finding that because of Cadena’s interests in a brewer/manufacturer, issuance of the permit would violate the tied house laws. On appeal, both the district court and the court of appeals affirmed the denial of the permit.

The Texas Supreme Court opinion addressed three central issues:

  1. The reach of one tied house provision (Section 102.07(a), which the court of appeals solely addressed and found dispositive) prohibiting a person with an interest in a brewer from having an interest in the business, premises, equipment or fixtures of a retailer. The court focused on the meaning of the phrase “an interest in the business of a brewer.” The court interpreted the term “interest” broadly to include both direct and indirect interests, as well as interests based on “corporate stock, affiliate-subsidiary relationships, and a level of control,” whether or not significant, provided the interests are “commercial or financial” in nature and provide a stake in the financial performance of a brewer. Citing to the Texas Legislature’s purpose of maintaining strict three-tier separation, the court determined that the phrase applies both to entities actually engaged in brewing as well as their stockholders (even if the stockholders themselves are not Texas permittees).
  1. Whether the TABC’s veil-piercing with respect to the FEMSA/Cadena entities was proper. The court found that in a regulatory context (as opposed to, for example, a tort liability context), a statute may authorize regulatory agencies to pierce the corporate veil, and here the Texas Legislature “intended that the TABC and courts look beyond corporate separateness status in enforcing the tied house provisions.” Specifically, here, Texas’ alcohol beverage laws gave the TABC the authority to deny Cadena’s retail permit application when granting the application would have led to a tied house violation based on its parent company’s cross-tier ownership interest.
  1. Whether the denial of the retail permit violated Cadena’s equal protection rights. Although Cadena pointed to examples of existing cross-tier holdings in Texas (including several Texas pension funds with cross-tier ownership interests), the court found that Cadena failed to show that those entities were similarly situated to Cadena. In support of its conclusion, the court primarily cited the scale of FEMSA’s “multi-million share interest” in Heineken.

The court declined to reach a conclusion as to the TABC’s theoretical application of the One Share Rule. Although the court stated it was “not unsympathetic toward the industry’s desire for clarity” as to whether any cross-tier ownership is permitted under the Texas tied house laws, the court opined that it lacked jurisdiction to issue an advisory opinion on the matter as the facts before it involved a much more significant cross-tier ownership interest.

Although the case is a win for the TABC, FEMSA’s/Cadena’s cross-tier ownership interests were fairly significant. How courts will construe Texas tied house laws, and particularly the One Share Rule, with respect to less substantial cross-tier interests remains to be seen, but may be addressed in the near future: the ongoing litigation between McLane Company (a food and beverage distributor)/the Texas Association of Business and the TABC in federal district court involves a cross-tier ownership interest of just 2 percent.