Walmart In Courtroom Battle With Texas Over “Irrational” Liquor Law

Having spent a large part of my life in a state where getting wine or booze meant going to a state-operated “wine and spirits shoppe,” it doesn’t seem all that awful that Walmart and other publicly trade companies are barred from selling hard liquor in the state of Texas. But for the nation’s biggest retailer, that law makes no sense — and it’s in the middle of a legal battle with the Lone Star state for the right to dispense spirits.

The Texas Alcoholic Beverage Commission is responsible for handing out liquor licenses to retailers and other businesses in the state, but Sec. 22.16 of the Texas state code prohibits just about any company held by a public corporation from obtaining a “package store permit” for selling anything stronger than wine or beer.

“Wal-Mart is therefore irrationally banned from competing with privately owned companies that are, unlike publicly traded corporations, allowed to obtain package store permits,” writes the company in lawsuit [PDF] filed against the TABC in federal court earlier this year.

The retailer notes that even if public corporations were allowed to obtain package store permits, “Texas law irrationally prohibits companies and persons from owning or holding” more than five of these licenses.

“Therefore, even if Wal-Mart were allowed to obtain package store permits, it is irrationally prohibited from owning or holding more than five package store permits.”

While you might say “Hey, five stores with booze is better than none,” Walmart would likely point out that it has 543 stores in Texas that are allowed to sell beer and wine, so those five would represent less than 1% of those locations.

Another “irrational” thing about the Texas law, argues the retailer, is that publicly traded hotel corporations are exempted from this prohibition, meaning hotel stores can get permits to sell liquor, regardless of whether a hotel belongs to a publicly owned chain.

In case you’re wondering how Walmart really feels about this issue (or perhaps as an indication of Walmart’s need for a thesaurus), the company uses some form of the word “irrational” at least 14 times over the course of 24 pages.

Walmart claims the Texas laws that block it from selling booze are “protectionist provisions that unlawfully discriminate against publicly traded companies and interstate commerce, and are unconstitutional under the Equal Protection Clause, Commerce Clause, and Comity Clause of the U.S. Constitution.”

While the stated purpose of the public corporation ban is to ensure fairness in the booze market, Walmart alleges that it’s a legislative effort to favor Texas residents over non-Texans.

Until 1994, getting a liquor permit in the state required at least one year of Texas residency before applying. A federal appeals court struck down that rule and the state subsequently enacted the ban on public corporations.

Interestingly, this ban only applies to corporations that didn’t have licenses before April 1995. That means the Texas-based corporations that were able to meet the previous residency requirement could hold on to their licenses, while out-of-state or new-to-Texas applicants had to be privately owned.

Walmart also taxes exception with a “close family member” loophole in the five permit limit rule that allows blood relatives to continually acquire licenses, consolidate them into a single private entity, transfer ownership of the private entity to one family member, and then repeat the process.

In response, the state argued that it has the authority to restrict the sale of alcohol and promote temperance, and that doing so is not a violation of the Equal Protection Clause. It pointed to a case in Kentucky where a federal appeals court upheld a law banning supermarkets from selling liquor, but permitting drugstores to sell it.

The TABC also cited an appeals court ruling in Missouri that upheld a state regulation allowing the sale of liquor at bowling alleys and soccer stadiums, but not at billiard parlors, on Sundays.

The plaintiffs in both these cases tried, unsuccessfully, to make a claim under the Equal Protection Clause, so Texas argued that Walmart’s case should be dismissed.

Walmart says they don’t directly apply in this matter because these rulings address issues involving when, where, and how alcohol could be sold — not about a permit applicant’s eligibility.

In July, a district court judge denied the TABC’s motion to dismiss the case, pointing out some of the shortcomings in the state’s arguments against giving permits to Walmart and other public companies.

“Defendants suggest allowing public corporations to own package stores would result in the proliferation of these establishments, leading to greater and easier access to liquor,” wrote the judge in his order [PDF]. “But this purported rationale provides no explanation for the Code’s ‘grandfathering’ of public corporations granted permits issued before April 1995, or the exemption of hotels, even if owned by a public corporation. Similarly, while the five-store limit for non-public corporations could conceivably limit the number of package stores, the exclusion permitting consolidation by family members contradicts that asserted rationale.”

Even if you allow that temperance-promotion is a driving intention of the Walmart ban, the judge appears likely to agree with Walmart that this is an arbitrary way of handling the issue, citing a 1985 Supreme Court ruling where the court held that a general interest in avoiding construction on a flood plain was not sufficient to justify a city ordinance specifically forbidding the construction of a home for the mentally ill while allowing for other institutions to be built on the same land.

“The State may not rely on a classification whose relationship to an asserted goal is so attenuated as to render the distinction arbitrary or irrational,” reads the SCOTUS ruling in that case.

The TABC claimed the rationale for the ban is not arbitrary, that the state legislature believed that excluding public corporations from the liquor market encourages family-owned businesses.

But the judge noted that the language of the Texas statute itself undercuts the state’s argument.

“First, the Code does not require an entity holding a package store permit to be ‘family-owned.’ Rather, the Code permits entities with up to thirty-four shareholders, as well as hotels, even if owned by a public corporation, to hold such permits,” wrote the judge. “Second, families, or at least certain close family members, can accumulate an unlimited number of package store permits – hardly a restriction of access to alcohol. Third, as Wal-Mart points out, the family members are in no way required to live in the area where the store is. Indeed, even if a person or entity held a single package store permit, there is no guarantee that person lives in or is otherwise involved in the local community. In addition, Wal-Mart has alleged family-owned “chains” own a significant portion of the package stores in three large Texas counties. In sum, Wal-Mart has alleged sufficient facts which rebut the community involvement justification offered by Defendants.”

The judge did, however, dismiss Walmart’s claim of a violation of the Privileges and Immunities Clause of the Constitution, which prohibits one state from treating the people of other states differently.

Even though recent Supreme Court cases have conferred certain aspects of personhood on corporations, the judge noted that SCOTUS has not yet disagreed with earlier precedent that clearly found this clause only applies to individuals.

So now that TABC’s motion to dismiss has largely been denied, the case can move forward toward trial. The Houston Chronicle recently noted that a trial date has been set, but that it’s still a year away.