Cadena Comercial USA Corp. v. Tex. Alcoholic Beverage Comm'n

Decision Date28 April 2017
Docket NumberNo. 14–0819,14–0819
Citation518 S.W.3d 318
CourtTexas Supreme Court

Debora B. Alsup, Christopher Smith, Danley K. Cornyn, James E. Cousar, Nathan Palmer, Thompson & Knight LLP, Austin TX, for Petitioner.

Joseph David 'Jody' Hughes, Assistant Solicitor General, Charles E. Roy, First Assistant Attorney General, W. Kenneth Paxton Jr., Attorney General of Texas, Robin Sanders, Scott A. Keller, Office of the Attorney General, Judith L. Kennison, TABC Legal Division, Austin TX, for Respondent.

Justice Johnson delivered the opinion of the Court, in which Justice Green, Justice Guzman, Justice Lehrmann, Justice Devine, and Justice Brown joined.

Phil Johnson, Justice

This case requires us to interpret Texas's "tied house" statutes that prohibit overlapping ownership between the manufacturing, wholesaling, and retailing segments of the alcoholic beverage industry.

Fomento Económico Mexicano, S.A.B. de C.V. (FEMSA) owns 20% of the stock in two Heineken companies which in turn own breweries. The brewers hold non-resident manufacturer's permits in Texas. FEMSA also owns, through intermediate holding companies, 100% of Cadena Comercial USA Corp., a company formed to operate convenience stores in Texas. When Cadena sought a retailer's permit to sell alcohol, the Texas Alcoholic Beverage Commission (TABC) protested the permit's being granted on the basis that FEMSA's ownership interests in Cadena and Heineken would violate the tied house statutes if the permit were granted. The county judge in an administrative hearing agreed with the TABC. The district court judge did likewise, and the court of appeals affirmed.

We affirm.

I. Background
A. Underlying Facts

Petitioner Cadena is a Texas corporation and wholly owned subsidiary of FEMSA, a Mexican entity. Before 2010, FEMSA was directly involved in brewing beer. It transferred that part of its business to Heineken N.V. and Heineken Holding, N.V. (collectively, the Heineken Group) in exchange for more than 72 million shares of stock in Heineken N.V. and more than 43 million shares in Heineken Holding N.V.—a 20% combined interest in the Heineken Group. FEMSA's holdings make it the largest shareholder in the Heineken Group except for the parent companies that own the controlling shares. The Heineken Group, through a series of intermediary companies, owns three brewers (the Heineken Brewers).

When FEMSA obtained its interest in the Heineken Group, it entered into a Corporate Governance Agreement that entitles FEMSA to appoint one of Heineken Holding N.V.'s five directors and two of ten members of the Supervisory Board of Heineken N.V. The Agreement also specifies that FEMSA is not given "any right or control or influence or consultation right or other form of cooperation" relating to the Heineken Group. Similarly, L'Arche Green, a parent company of the Heineken Group, reserved all rights to make decisions in its management of the Heineken Group, "independently and at their sole discretion and without any requirement to consult or cooperate with ... FEMSA." The Agreement bars the Heineken Group from acquiring any stock in FEMSA.

FEMSA owns approximately 10,000 convenience stores concentrated in Mexico and Colombia that operate under the name OXXO, and it continues to open more regularly. FEMSA formed Cadena to extend FEMSA's retail convenience store business into Texas. Cadena wanted to sell wine and beer in its stores, which in Texas would require it to have a wine and beer retailer's off-premises consumption permit. When Cadena tried to obtain one of these permits from the TABC, routine financial disclosures it made during the application process revealed FEMSA's 100% ownership of Cadena as well as its significant ownership interest in the Heineken Group, which owns the Heineken Brewers that, in turn, hold Texas non-resident brewer's permits. The TABC protested Cadena's permit on grounds that granting it would result in a violation of the Texas tied house statutes, and rejected its application.

B. Texas's Tied House Statutes

The Texas tied house statutes are found in the Texas Alcoholic Beverage Code. See TEX. ALCO. BEV. CODE §§ 102.01 –.82. The genesis of the provisions was the Liquor Control Act, which the Legislature adopted two years after the repeal of Prohibition. See Texas Liquor Control Act, 44th Leg., 2d C.S., ch. 467, §§ 1–23, 1935 Tex. Gen. Laws 1795. The Liquor Control Act's progeny were eventually codified into the Alcoholic Beverage Code. An Act Adopting the Alcoholic Beverage Code, 65th Leg., R.S., ch. 194, § 1, 1977 Tex. Gen. Laws 391 (codified as amended in TEX. ALCO. BEV. CODE §§ 1.01 –251.82 ). The catalyst for the tied house provisions was a fear of returning to the state of affairs before Prohibition when tied houses played what was thought to be a substantial role in over-intoxicating society. The provisions are designed to prevent certain overlapping relationships between those engaged in the alcoholic beverage industry at different levels, or tiers. See TEX. ALCO. BEV. CODE § 102.01(a)(b).

Pre–Prohibition tied houses generally developed from tavern owners selling their taverns to brewers and becoming the brewers' tenants. See generally , D. M. Knox, The Development of the Tied House System in London , 10 OXFORD ECON. PAPERS, NEW SERIES , no. 1, 1958, at 66–83. Financial conditions and other factors made these agreements a near-necessity for tavern owners to survive economically. Most of the agreements included a stipulation that the tavern would only sell the brewer–landlord's products. The brewer then had a vested interest in the tavern selling as much of the brewer's beer as possible, with little or no regard for the personal or societal effects. This tied house phenomenon contributed to the push for Prohibition.

When Prohibition ended, lawmakers started from a relatively clean slate with respect to regulating the alcoholic beverage industry, and their goal was to prevent a return to the pre–Prohibition status. See TEX. ALCOHOLIC BEVERAGE COMM'N, THE HISTORY OF THE TEXAS ALCOHOLIC BEVERAGE COMMISSION 1–2 (2005). One of the targets was tied house relationships. In an attempt to prevent these relationships from forming, the Code provides for "strict adherence to a general policy of prohibiting the tied house and related practices." TEX. ALCO. BEV. CODE § 102.01(b). The Code defines "tied house" as

any overlapping ownership or other prohibited relationship between those engaged in the alcoholic beverage industry at different levels, that is, between a manufacturer and a wholesaler or retailer, or between a wholesaler and a retailer, as the words "wholesaler," "retailer," and "manufacturer" are ordinarily used and understood ....

Id. § 102.01(a). The Code contains numerous provisions designed to achieve this overarching goal by separating the industry into three independent tiers: manufacturing (brewing), distribution, and retail. See id. §§ 102.01 –.82. It attempts to achieve this separation by prohibiting cross-tier relationships. Several of these provisions served as grounds for the TABC's protest of Cadena's application for a permit.

C. Procedural Background and Positions of the Parties

During the retail permit application process, an applicant such as Cadena must submit designated disclosure forms to the TABC. Id. §§ 26.03, 61.31(a). Based on information in these forms, the TABC either protests the application or grants the permit. Id. § 61.31(a). If the TABC finds there are reasonable grounds to protest the permit, then it is required to do so and reject the application. Id.

If the TABC rejects a permit application, the applicant may request an administrative hearing before the county judge in the county in which the applicant desires to conduct business. Id. §§ 61.31–.32. If the county judge finds no legal grounds to refuse the application, the judge orders the TABC to grant the permit. See id. § 61.32. If the judge denies the application, the applicant has thirty days to appeal to the district court. See id. § 61.34.

Here, the TABC determined that Cadena's connection to the Heineken Brewers through FEMSA's 100% ownership of Cadena and large ownership interest in the Heineken Group meant that granting the retail permit would result in Cadena having overlapping interests in the manufacturing and retail levels of the industry in violation of four separate provisions of the tied house statutes. Thus TABC protested and rejected Cadena's application.

The matter then proceeded to an evidentiary hearing before the county judge. At the hearing, the parties stipulated to the corporate relationships between Cadena, FEMSA, and the Heineken companies. The TABC further stipulated that the five statutory provisions at issue were the only grounds for its protesting Cadena's application. During the hearing, the TABC's licensing director and an expert in alcoholic-beverage industry laws testified that if an entity in one tier of the industry owned even one share of stock in a member of another tier, the overlapping ownership would violate the statutory tied house prohibitions. The TABC argued that FEMSA's interests in Cadena and the Heineken Brewers were prohibited "interests" under the Alcoholic Beverage Code under any interpretation. Although the TABC disputed that actual cross-tier control of entities is required to implicate the tied house restrictions, it nevertheless asserted that FEMSA could control the Heineken Brewers because of its ability to appoint directors to the Heineken Group's boards. It also argued the court should impute this connection to Cadena for regulation purposes.

Conversely, Cadena argued that the only "interest" sufficient to violate the tied house prohibitions is one allowing simultaneous actual financial or administrative control of entities in different tiers. Under Cadena's interpretation, its permit application should...

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