Can an Arkansas alcohol manufacturer or licensed restaurant own an interest in a microbrewery-restaurant?

Plain-English summary

The Arkansas ABC Division's Director, Michael Langley, asked the AG whether existing alcohol manufacturers (distilleries, breweries) and existing alcohol-permitted restaurants could hold interests in microbrewery-restaurants. The "growing craft beer industry," he noted, had produced applicants and permit holders who already had retail or manufacturing outlets.

The wrinkle: Arkansas's three-tier alcohol distribution system, codified at A.C.A. § 3-3-212 and reinforced by ABC regulations, generally prohibits vertical integration. The three tiers are (1) manufacturers (distilleries, breweries, importers, rectifiers), (2) wholesalers, and (3) retailers. § 3-3-212(a)(1) bars a manufacturer from being interested, directly or indirectly, in any premises selling liquors at retail.

A microbrewery-restaurant is, by design, a vertical integration of tiers 1 and 3: the restaurant produces beer (manufacturing) and sells it on-premises (retail). The Arkansas legislature, when it enacted the microbrewery-restaurant subchapter (A.C.A. §§ 3-5-1201 through -1208), explicitly authorized this combination, but only within the narrow microbrewery-restaurant context.

AG Dustin McDaniel concluded that the legislature's authorization extends to existing manufacturers and existing alcohol-permitted restaurants. The microbrewery-restaurant subchapter does not impose entry barriers based on the applicant's pre-existing commercial activities; it focuses only on what the microbrewery-restaurant can do (produce up to 5,000 barrels per year, sell beer made on-premises, sell wholesale-purchased beer, etc.). A.C.A. § 3-5-1203 directly says that "conflicting beer and malt beverage laws and regulations" do not apply to the operation of microbrewery-restaurants. § 3-5-1202(5) defines "conflicting" laws to include those that prohibit a brewer or retailer "from having any ownership or employment interest in the business of the other." That language directly addresses § 3-3-212 and overrides it within the microbrewery-restaurant carve-out.

So a manufacturer (say, a distillery) can hold an interest in a microbrewery-restaurant. So can a restaurateur with a mixed-drinks permit.

But here is the important narrow scope: the AG pushed back on a broader reading. The exception does not create a general exemption to the three-tier system. The same manufacturer who can hold an interest in a microbrewery-restaurant cannot, for example, also operate a separate retail liquor store. The vertical-integration permission is limited to the microbrewery-restaurant context. Outside that context, the three-tier separations continue to apply with full force.

This narrow reading matters for permit policy. Becoming a microbrewery-restaurant "permit holder" does not transform the holder into an unrestricted player across all three tiers. It just permits one specific combination of manufacturing and retail within the four walls of the microbrewery-restaurant.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is the three-tier system?
A regulatory structure separating alcohol manufacturers, wholesalers, and retailers to prevent vertical integration. Manufacturers cannot own retailers, wholesalers cannot own either, and so on. The structure dates from the post-Prohibition era and is designed to limit market control, promote responsible sale, and ensure tax collection.

Why does the microbrewery-restaurant model break the three-tier system?
Because a microbrewery-restaurant manufactures beer (tier 1) and sells it on-premises to consumers (tier 3). That combination is exactly what § 3-3-212 normally forbids. The microbrewery-restaurant subchapter is the legislature's deliberate exception.

Can an existing distillery hold an interest in a microbrewery-restaurant?
Yes, per this opinion. The microbrewery-restaurant subchapter does not impose pre-existing-business limits, and § 3-5-1203 overrides any conflicting beer or malt beverage law that would otherwise stop it.

Can a restaurant with a mixed-drinks permit hold an interest?
Yes, for the same reason. The opinion specifically addresses this.

Does becoming a microbrewery-restaurant permit holder let me also open a retail liquor store?
No. The opinion is explicit: the exception is limited to the microbrewery-restaurant context. The general three-tier separations still apply elsewhere. A manufacturer with a microbrewery-restaurant interest still cannot run a separate retail liquor store.

What is the production cap for a microbrewery-restaurant?
5,000 barrels per year, aggregate. A microbrewery-restaurant licensee can manufacture and store beer or malt beverage, sell it on-premises, sell it for off-premises consumption to consumers, sell to specified nonprofit entities, and sell to wholesalers, all subject to that 5,000-barrel ceiling.

Background and statutory framework

A.C.A. § 3-3-212(a)(1) is the core three-tier statute. It bars a "manufacturer" (distillers, brewers, blenders, rectifiers, and any producer of alcoholic liquors except wine) from being interested, directly or indirectly, in any premises where malt, vinous, or spirituous liquors are sold at retail, or in any business devoted to such sales. The prohibition covers stock ownership, interlocking directors, mortgages, liens, and "any other means."

The microbrewery-restaurant subchapter (A.C.A. §§ 3-5-1201 through -1208), enacted to allow the on-premises brewery-restaurant model, contains its own override at § 3-5-1203: "Every provision of this subchapter shall be subject to all beer and malt beverage laws and regulations, except that conflicting beer and malt beverage laws and regulations shall be inapplicable to any provision of this subchapter to the extent that they conflict herewith."

A "conflicting beer or malt beverage law or regulation" is defined at § 3-5-1202(5) to include any provision that "prohibits or conflicts with the otherwise legal licensing and operation of microbrewery-restaurants" by, among other things, "prohibiting any brewer or retailer from having any ownership or employment interest in the business of the other." That language is a direct override of § 3-3-212(a)(1) within the microbrewery context.

A.C.A. § 3-5-1201(a) explicitly reaffirms the three-tier policy outside the microbrewery context: the General Assembly "reaffirms the policy of this state of strict enforcement of laws and regulations applicable to the manufacture or sale of beer including, but not limited to, those establishing the three-tier distribution system with prohibitions against ownership and employment interests between the three (3) tiers."

A.C.A. § 3-5-1204 authorizes a microbrewery-restaurant licensee to manufacture beer (up to 5,000 barrels per year aggregate), operate a restaurant as the sales outlet, sell beer to consumers for off-premises consumption (subject to conditions), sell to specified nonprofit entities, and sell to wholesalers.

Arkansas ABC Rules and Regulations Section 2.13.1(2) defines the three-tier system in regulatory terms.

Citations

• A.C.A. § 3-3-212(a)(1) (three-tier prohibition on manufacturer interest in retail)
• A.C.A. § 3-1-102(a)(4) (definition of "manufacturer")
• A.C.A. §§ 3-5-1201 through -1208 (microbrewery-restaurant subchapter)
• A.C.A. § 3-5-1201(a) (reaffirming three-tier policy outside microbrewery context)
• A.C.A. § 3-5-1202(5) (definition of "conflicting" law or regulation)
• A.C.A. § 3-5-1203 (override of conflicting laws)
• A.C.A. § 3-5-1204 (authorized activities, including 5,000-barrel cap)
• Arkansas ABC Rules and Regulations Section 2.13.1(2)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Official summary

Do A.C.A. §§ 3-5-1202(5) and -1203, which create an exception to the three-tier system of alcohol distribution and regulation, see A.C.A. § 3-3-212, permit existing manufacturers and retailers of alcoholic liquors to obtain an interest in a microbrewery-restaurant?

RESPONSE: Yes. Essentially, you have asked whether licensed manufacturers, on the one hand, and restaurateurs holding permits to serve mixed drinks, on the other, are precluded from establishing microbrewery-restaurants under the microbrewery subchapter of the Code. In my opinion, they are not. I believe it would violate A.C.A. § 3-5-1203 to invoke A.C.A. § 3-3-212 as a basis to prohibit an existing manufacturer or alcohol-permitted restaurant from holding an interest in a microbrewery-restaurant.

Original opinion text

STATE OF ARKANSAS

THE ATTORNEY GENERAL
Dustin McDaniel

Opinion No. 2014-128

December 8, 2014

Michael W. Langley, Director
Arkansas Alcoholic Beverage Control Division
1515 West 7th Street, Suite 503
Little Rock, Arkansas 72201

Dear Mr. Langley:

I am writing in response to your request for my opinion on a question I will paraphrase as follows:

Do A.C.A. §§ 3-5-1202(5) and -1203, which create an exception to the three-tier system of alcohol distribution and regulation, see A.C.A. § 3-3-212, permit existing manufacturers and retailers of alcoholic liquors to obtain an interest in a microbrewery-restaurant?

You report that your inquiry relates to the following circumstances:

The growing craft beer industry has prompted an increase in applications for native brewery and microbrewery-restaurant permits. Among those applicants and permit holders are individuals and corporations already in possession of retail or manufacturing outlets. Specifically, owners of a restaurant licensed with a restaurant-mixed drink permit and owners of a manufacturing brewery and distillery have obtained microbrewery restaurant permits under Ark. Code Ann. 3-5-1201 et seq.

RESPONSE

In my opinion, the answer to your question is "yes."

DISCUSSION

Subsection 3-3-212 of the Arkansas Code contains the following proscription:

(a) It shall be unlawful for a manufacturer to:

(1) Be interested, directly or indirectly, in any premises where malt, vinous, or spirituous liquors are sold at retail or in any business devoted wholly or partially to the sale of such liquors at retail, by stock ownership, interlocking directors, mortgage or lien on any personal real property, or any other means.

Subchapter 12 of title 3, chapter 5 of the Code, which sets forth the law governing the operation of microbrewery-restaurants, contains the following exception to this proscription:

Every provision of this subchapter shall be subject to all beer and malt beverage laws and regulations, except that conflicting beer and malt beverage laws and regulations shall be inapplicable to any provision of this subchapter to the extent that they conflict herewith.

The phrase "conflicting beer and malt beverage laws and regulations" in this passage is defined as follows:

"Conflicting beer or malt beverage law or regulation" means any beer or malt beverage law or regulation which prohibits or conflicts with the otherwise legal licensing and operation of microbrewery-restaurants, as authorized in this subchapter, by requiring any brewer to sell only to a licensed wholesaler, or requiring any licensed retailer to sell only beer or malt beverage purchased from a licensed wholesaler, or prohibiting any brewer or retailer from having any ownership or employment interest in the business of the other or the premises of the other, or requiring that the excise and enforcement tax on beer or malt beverage manufactured by a brewer by paid by a licensed wholesaler, or any beer or malt beverage law or regulation of similar direct or indirect effect.

The prohibitions listed in this definition characterize what has been termed the "three-tier system" generally applicable to alcohol sales outside the microbrewery context, a system whose continuing applicability the legislature declared as follows in the microbrewery subchapter itself:

The General Assembly reaffirms the policy of this state of strict enforcement of laws and regulations applicable to the manufacture or sale of beer including, but not limited to, those establishing the three-tier distribution system with prohibitions against ownership and employment interests between the three (3) tiers, or the "three-tier system."

This "three-tier system," as you point out in your correspondence, is defined by regulation as follows:

The three-tier system of alcohol distribution consists of the three broad categories of the marketing chain. Alcoholic beverage manufacturers, including distilleries, breweries, importers or rectifiers, whether or not they hold a permit issued by the Arkansas Alcoholic Beverage Control Division, are considered the first tier of the distribution system. Alcoholic beverage wholesalers, licensed by the State of Arkansas, are considered the second tier of distribution. Alcoholic beverage retailers, licensed by the State of Arkansas, are considered the third tier of distribution.

You summarize as follows the microbrewery exemption to the proscription against vertical integration across these three tiers:

The crux of the three tier system is that ownership and employment interests are prohibited between the three tiers. ABC Rules and Regulations prohibit any shared interests among the tiers, and Ark. Code Ann § 3-3-212 prohibits interests between the first and third tiers. A micro-brewery restaurant, by its nature, is a co-mingling of the first and third tiers. The intent of the exemption is clear as it pertains to the existence of micro-brewery restaurants, and the ability to operate a manufacturing and retail facility on the same premises and under the same ownership.

Essentially, you have asked whether licensed manufacturers, on the one hand, and restaurateurs holding permits to serve mixed drinks, on the other, are precluded from establishing microbrewery-restaurants under the microbrewery subchapter of the Code. In my opinion, they are not.

I base this opinion on the fact that the subchapter of the Code devoted to microbrewery-restaurants, which, pursuant to A.C.A. § 3-5-1203, expressly trumps any contrary law set forth elsewhere in the Code, imposes no conditions upon entry into the market. Rather, it is concerned exclusively with operations within that limited market itself, at no point imposing barriers to entry based upon an applicant's unrelated commercial activities. Specifically, A.C.A. § 3-5-1204 (Repl. 2008) authorizes any entity operating in a "wet" area of the state to produce up to 5,000 barrels per year for sale either on site or to wholesalers, subject to certain specified conditions on sales.

Your factual recitation suggests that the Alcoholic Beverage Control Board (the "Board") concurs in this opinion. You report, for instance, that the class of "permit holders" in the "growing craft beer industry" includes "individuals and corporations already in possession of retail or manufacturing outlets", a condition consistent with your suggestion that the statutes setting forth the microbrewery-restaurant exemption "have been interpreted," presumably by the Board, "to extend beyond the conflict that is inherent to the micro-brewery restaurant, so that they serve as an exemption to the three-tier separations, in general, and specifically to Ark. Code Ann. § 3-3-212."

Despite our concurrence on the issue of who may participate in the microbrewery-restaurant industry, however, I question that allowing parties "already in possession of retail or manufacturing outlets" to hold interests in microbrewery-restaurants would create a general "exemption to the three-tier separations." These separations continue to apply outside the microbrewery-restaurant context despite an existing manufacturer or retailer's having become a "permit holder" in the "craft beer industry." A manufacturer would still be precluded, for instance, from operating a retail liquor store. What you term the "conflict that is inherent to the micro-brewery restaurant", namely, being able both to produce and to engage in retail sales of beer and malt beverages, would thus remain restricted to the narrow market of microbrewery-restaurants.

I believe my opinion on this score is compelled by the statutes set forth at the beginning of my discussion. Section 3-5-1203 provides that "conflicting beer and malt beverage laws and regulations" will not apply to otherwise authorized microbrewery-restaurants. Section 3-5-1202(5) defines a "conflicting beer and malt beverage law and regulation" as one that "prohibits or conflicts with the otherwise legal licensing and operation of microbrewery-restaurants." Obviously, to apply A.C.A. § 3-3-212 as a basis to deny an existing manufacturer or alcohol-licensed restaurant any interest in a microbrewery-restaurant would be to give effect to a "conflicting beer and malt beverage law" in derogation of the statutes just quoted. Simply put, then, I believe it would violate A.C.A. § 3-5-1203 to invoke A.C.A. § 3-3-212 as a basis to prohibit an existing manufacturer or alcohol-permitted restaurant from holding an interest in a microbrewery-restaurant.

Assistant Attorney General Jack Druff prepared the foregoing opinion, which I hereby approve.

DUSTIN McDANIEL
Attorney General

DM/JHD:cyh