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Texas and the Walmart lawsuit

Walmart Texas lawsuitThree things are certain in Texas – the Cowboys, brutal summers, and the god-like power of the Texas Package Stores Association, the trade group that represents the state’s liquor store owners. The package store lobby is why liquor stores are closed on Sunday, why we have unbelievably restrictive laws on liquor store ownership, and why we have a fourth tier in the three-tier system.

All that may be about to change.

Later this year, a federal judge could overturn the ownership laws, and once that happens, many of the other restrictions could end, too. We might be able to buy wine in the grocery store before noon on Sunday or even – God forbid – spirits. And yes, that would be like a 72-degree day here in August, and where it gets chilly enough at night to need a jacket.

I never thought this would happen, but after talking to a variety of people who follow Texas liquor law, it looks like the unthinkable will take place. The package store owners, who have pretty much vetted the state’s liquor laws since the early 1970s, will have to compromise or lose all of the advantages they’ve written for themselves.

More, after the jump:

The key is the federal lawsuit, filed by Walmart to overturn a state law that forbids publicly-held companies from owning liquor stores. If Walmart wins, and that looks more and more likely, the package store owners will face their most intense competition since the end of Prohibition. For the first 60 years after repeal, the biggest liquor stores had a gentleman’s agreement not to compete outside of their markets. So Spec’s was in Houston, Sigel’s (no relation) was in Dallas, Pinkie’s was in west Texas, and Majestic was in Fort Worth. Everyone made money, and everyone was happy.

That began to change in the 1990s, when Walmart, Target, Whole Foods, and the like came to Texas, but it didn’t fundamentally alter the dynamic. The package store owners had protected themselves with several laws: First, that public companies couldn’t own liquor stores, which eliminated powerful competition like Walmart. Second, that some smaller retailers, bars, and restaurants had to buy their booze not from distributors, like everyone else, but from the biggest retailers. This Class B law is the infamous fourth tier, and it guaranteed the biggest retailers a captive market regardless of what happened to their regular business.

Third, the so-called just us kinfolks law, which allowed privately-held companies to own as many package stores as they wanted as long as the licenses for the stores were held by different members of the same family. Other retailers, though, were limited to just five stores. Don’t worry if that’s confusing; the state’s biggest family liquor businesses understand it. Spec’s has more than 160 stores; Austin’s Twin Liquors has some 70; and Dallas’ Goody Goody has almost 20 stores.

If Walmart wins, the package stores will lose their public company and kinfolk laws, and will be forced to compromise to keep the rest of the gravy they’ve given themselves. My guess is that they’ll fight hardest for the fourth tier, which is so lucrative that it has kept otherwise failing chains in business. In fact, the package store lobby has beaten off well-funded attempts by the state’s biggest distributors to kill Class B in the last two sessions of the legislature.

Can Walmart win? People who know this stuff better than I do think so, and there is also a sense that the state’s liquor regulators, who must contest the lawsuit, know they’re fighting a losing battle. That’s because this is not another jurisdictional dispute between a retailer and the state, which happens all the time, but turns on a significant point of Constitutional law – whether Texas’ rules for package store ownership violate the 14th Amendment’s equal protection clause. And federal judges love to make Constitutional law.

And it doesn’t hurt, say the attorneys and lobbyists I’ve talked to, that Walmart has the deep pockets necessary to pursue the suit, including lots of money to pay the best lawyers and the ability to overwhelm the state with paperwork and precedent.

The other thing to keep in mind? We’re in a new world for wine, beer, and spirits law in the U.S., as witnessed by changes in Pennsylvania and Colorado this summer. Three-tier isn’t going away, but significant changes are being made within it. In Pennsylvania, the state willingly gave up its monopoly to sell wine, something as remarkable as Wednesday coming before Tuesday instead of the other way around. In Colorado, grocery stores will be allowed to sell wine in the biggest change to its laws since Prohibition – not quite as remarkable as what happened in Pennsylvania, but remarkable enough.

If those laws changed, then anything is possible. And we may see that possible in Texas.

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