Wal-Mart Stores, Inc. et al v. Texas Alcoholic Beverage Commission et al
ORDER DECLARING that: (1) Section 22.16 of the Texas Alcoholic Beverage Code, the public corporation ban, is inconsistent with the dormant Commerce Clause of the United States Constitution, and (2) Section 22.05 of the Texas Alcoholic Beverage Code, the consanguinity exception, is inconsistent with the Equal Protection Clause of the United States Constitution. Signed by Judge Robert Pitman. (klw)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
WAL-MART STORES, INC., WAL-MART
STORES TEXAS, LLC, SAM’S EAST, INC.,
and QUALITY LICENSING CORP.,
TEXAS ALCOHOLIC BEVERAGE
COMMISSION, JOSE CUEVAS, JR.,
STEVEN M. WEINBERG, and IDA
TEXAS PACKAGE STORES
Wal-Mart Stores, Inc. and three of its subsidiaries (collectively, “Wal-Mart”) bring
suit against the Texas Alcoholic Beverage Commission and three of its commissioners (collectively,
“TABC”). Wal-Mart raises a constitutional challenge to four Texas statutes, Tex. Alco. Bev. Code
§§ 22.04, 22.05, 22.06, 22.16, governing the issuance of package store permits, which allow the retail
sale of liquor in the state. Generally, the statutes prohibit public corporations, including Wal-Mart,
from obtaining any package store permits, and prohibit other companies with diffuse ownership
from obtaining more than five package store permits. Wal-Mart asserts claims against TABC
pursuant to 42 U.S.C. § 1983 for violations of the dormant Commerce Clause, U.S. Const. art. I, § 8,
cl. 3, and the Equal Protection Clause, U.S. Const. amend XIV, § 1. It seeks a declaration that the
statutes are unconstitutional and a permanent injunction against their enforcement.
The Texas Package Store Association (“TPSA”) was allowed to intervene as a matter
of right to defend the statutes. See Wal-Mart Stores, Inc. v. Tex. Alcoholic Beverage Comm’n, 834 F.3d 562
(5th Cir. 2016).
On June 5–9, 2017, the Court held a bench trial. In light of the entire evidentiary
record, the Court now issues the following findings of fact and conclusions of law.1
FINDINGS OF FACT
Wal-Mart is a retailer that operates approximately 5,000 stores in the United States.
Wal-Mart currently sells beer or wine in forty-seven states, and liquor in thirty-one states. Wal-Mart
currently sells beer and wine in Texas at 668 locations.
Wal-Mart is a publicly traded corporation. No person owns a majority of its stock.
Wal-Mart has a plan to open liquor stores adjacent to some of its existing Texas
locations. These liquor stores would operate on separate premises from Wal-Mart’s existing retail
stores and would obtain separate package store permits to authorize the sale of liquor. Wal-Mart is
prevented from implementing its plan by the statutes challenged in this lawsuit.
TABC is the state agency charged with issuing permits and enforcing the Texas
Alcoholic Beverage Code. If Wal-Mart were to apply for a package store permit (which would allow
it to sell liquor), TABC would deny Wal-Mart’s application based on the challenged statutes.
TPSA is the trade association of Texas package stores. TPSA only accepts
applications from package stores that are majority-owned by Texans.
All findings of fact contained herein that are more appropriately considered conclusions of law are
to be so deemed. Likewise, any conclusion of law more appropriately considered a finding of fact
shall be so deemed.
Texas’s Off-Premises Retail Permits
To sell alcoholic beverages for off-premises consumption in Texas, retailers must
obtain a separate permit for each physical location where alcohol is sold. Each permit authorizes an
unlimited volume of sales from the permitted location. There are four off-premises retail permits
relevant to this case.
First, a “Package Store Permit,” also referred to as a “P permit,” authorizes the sale
of distilled spirits (commonly referred to as “liquor”), wine, and ale for off-premises consumption.
Tex. Alco. Bev. Code § 22.01. This is the permit held by liquor stores (also known as “package
Second, a “Wine Only Package Store Permit,” also referred to as a “Q permit,”
authorizes the sale of wine and ale for off-premises consumption. Id. § 24.01.
Third, a “Retail Dealer’s Off-Premise License,” also referred to as a “BF license,”
authorizes the sale of beer for off-premises consumption. Id. § 71.01.
Fourth, a “Wine and Beer Retailer’s Off-Premise Permit,” also referred to as a “BQ
permit,” authorizes the sales of wine, ale, and beer for off-premises consumption. Id. § 26.01. The
BQ permit is similar to the combination of the BF license and the Q permit. There are, however,
some technical differences. First, a Q permit allows a retailer to sell wine with a higher alcohol
content than the BQ permit. Second, unlike a BQ permittee, a Q permittee is authorized to apply for
some subordinate permits that would allow the Q permittee to transport its inventory between
stores and to make certain local deliveries. Large grocery stores typically hold BQ permits to
authorize their sales of beer and wine.
The Challenged Statutes
Wal-Mart challenges four Texas statutes governing the issuance of package store
permits. Wal-Mart argues that these statutes, individually and in concert, prevent it from selling
liquor in the state, and challenges the statutes as unconstitutional under the dormant Commerce
Clause and the Equal Protection Clause of the United States Constitution.
First, the “public corporation ban” forbids “any entity which is directly or indirectly
owned or controlled, in whole or in part, by a public corporation” from holding a package store
permit. Tex. Alco. Bev. Code § 22.16(a). A public corporation is defined as a corporation “whose
shares . . . are listed on a public stock exchange” or “in which more than 35 persons hold an
ownership interest.” Id. § 22.16(b). Texas does not forbid public corporations from holding any of
the other seventy-five kinds of alcohol permits it issues. Moreover, Texas is the only state that bars
public corporations from selling liquor solely because of their status as public corporations.
Second, the “five-permit limit” nominally limits a package store permittee to holding
no more than five permits. Id. § 22.04. However, this permit cap is subject to a significant exception,
Third, the “consanguinity exception” to the five-permit limit authorizes a
consolidation process that allows many companies to circumvent the five-permit limit. Id. § 22.05.
The statute provides that if “two or more persons related within the first degree of consanguinity
have a majority of the ownership in two or more legal entities holding package store permits, they
may consolidate the package store businesses into a single legal entity.” Id. The consolidated entity
“may then be issued permits for all the package stores, notwithstanding any other provision of this
code.” Id. The practical effect of the consanguinity exception is that the five-permit limit applies
only to the following classes of package-store permittees: (1) permittees who lack an individual who
owns a majority of the business, and (2) permittees whose majority owner lacks a child, sibling, or
parent who is willing and able to assist with the consolidation process.
A fourth and final statute prohibits BQ permittees from also holding an interest in a
package store permit. Id. § 22.06(a)(2). In contrast to BQ permittees, BF licensees (who sell beer)
and Q permittees (who sell wine and ale) are allowed to hold package store permits. In order to
open a package store, Wal-Mart would first be required to abandon its BQ permits and instead
obtain BF licenses and Q permits for all of its existing retail locations that sell beer and wine.
The Texas Liquor Market Is Served By Large, Competitive Package Store Chains
Out of a total of 2,578 active package store permits issued by TABC, 574 are owned
by a package store chain (meaning, a business holding six or more package store permits). TABC
Ex.-120. There are now 21 such chains. Id. The largest chain, Spec’s Family Partners, holds 158
permits. Id. Since 1944, the chains have greatly increased their number of stores, and their volume of
sales, even as the total number of package stores has stayed approximately the same. Tr. June 5, at
225:1–227:3, 251:13–252:6; WM Ex-130.
Many of Texas’s package store chains operate large stores with broad selections of
products and hundreds of employees. E.g., WM Ex-150; WM Ex-151; WM Ex-178. For example,
Gabriel’s Liquors operates a 20,000 square-foot “big box liquor close-out store” and has a 40,000
square-foot distribution warehouse. Tr. June 7 (Vol. II), at 3:4–8, 19:5–18. In 2012, Gabriel’s had
annual revenues of approximately $105 million, a product mix of 20,000 separate SKUs and nearly
300 employees. WM Ex-263, at 12.
The credible evidence demonstrates that package store chains compete vigorously.
Package stores offer extensive promotions and discounts. E.g., WM Ex-188. Package stores also
compete to be the most convenient to their customers and to offer the largest selection and variety
The credible evidence also demonstrates that package store chains have a very large
share of the Texas market. Dr. Kenneth Elzinga, Wal-Mart’s expert, testified that package store
chains hold between 22% and 40% of the all the package store permits in each of the five most
populous Metropolitan Statistical Areas (“MSAs”) in the state, which together contain two-thirds of
the state’s population. Tr. June 5, at 242:11–244:7; WM Ex-149. This figure likely understates the
market share held by package store chains, because Dr. Elzinga did not have data on the volume of
spirits sold. According to one report, the four largest chains have more than 60% of the total market
share of the retail liquor market in twenty-two Texas cities. Tr. June 5, at 245:18–248.
The Public Corporation Ban Was Enacted With the Purpose of Discriminating
Against Out-of-State Retailers
The credible evidence shows that the public corporation ban was enacted in
response to a successful dormant Commerce Clause challenge to a previous Texas law, which
imposed a residency requirement that restricted alcoholic-beverage permits to Texas residents and to
firms majority-owned by Texans. See Wilson v. McBeath, No. A-90-cv-736, 1991 WL 540043 (W.D.
Tex. June 13, 1991), aff’d sub nom. Cooper v. McBeath, 11 F.3d 547 (5th Cir. 1994) (striking down Tex.
Alco. Bev. Code § 109.53).
In May 1993, after the district court struck down the residency requirement but while
the appeal was pending before the Fifth Circuit, the Texas Legislature passed House Bill 1445. That
law reduced the length of time that the holder of an alcoholic-beverage permit was required to be a
resident of Texas (from three years to one) and eliminated the requirement altogether for mixed
beverage permits and beer-and-wine permits (but not for package store permits). See WM Ex-16
(H.B. 1445), § 6.03(k); Tr. June 7 (Vol. I), at 197:18–24. TPSA viewed the Cooper litigation as part of
a “tug of war between the legislature and the federal courts over the residency requirement.” Tr.
June 7 (Vol. I), at 217:20–24. TPSA supported H.B. 1445. Id. at 201:3–8.
The purpose of H.B. 1445 was to prevent the Fifth Circuit from issuing a merits
decision in Cooper. This purpose was revealed during a floor debate on an amendment proposed by
Representative Mark Stiles. The Stiles Amendment would have retained the residency requirement
for all permits. WM Ex-33, at 4:9–12. During the House debate on this amendment, Representative
Stiles noted that the Cooper lawsuit was the “real reason” for H.B. 1445’s partial elimination of the
residency requirement. Id. at 8:24–25. He urged his colleagues to “try to settle [their] lawsuit”
(referring to the Cooper litigation) rather than “take the whole baby and throw it out with the bath
water.” Id. at 10:3–4. Representative Stiles’s opponents argued that H.B. 1445 would actually save
most of the state’s residency requirements because, by eliminating the residency requirement for
mixed-beverage permits, the bill would prevent the Fifth Circuit from reaching a broader merits
holding in Cooper that would strike down the residency requirement for all permits, including
specifically package store permits. Id. at 6:23–7:11; 16:21–17:15. Some Representatives also stated
that a “deal” had been made with the Cooper plaintiffs, in which those plaintiffs had pledged to
dismiss their case if H.B. 1445 became law. Id. at 18:1–7; 8:22–23. The TPSA opposed the Stiles
Amendment. Id. at 24:3–4.
After H.B. 1445 was passed, the Cooper plaintiffs moved to dismiss their lawsuit. 11
F.3d at 551. However, the Fifth Circuit rejected the plaintiffs’ suggestion that their case was now
moot. Id. The Fifth Circuit issued its Cooper decision in January 1994. On the merits, it affirmed the
district court and struck down the state’s residency requirement using broad language that, fairly
read, applied not only to mixed-beverage permits but to all other retail permits as well. Id. at 554.
During the next Legislative Session, which convened in 1995, the TPSA drafted the
public corporation ban. Tr. June 7 (Vol. I), at 225:12–226:24. The drafter of the bill was Fred
Niemann, Jr., a lawyer and lobbyist for the TPSA who specialized in legislative affairs. Id. at 225:22–
226:12, 184:9–185:22. Mr. Niemann was the only witness for the bill; he also drafted fliers to be
distributed to legislators and staff explaining the bill. Id. at 237:20–24, 238:19–241:4. At his
deposition, the bill’s Senate sponsor confirmed TPSA’s critical role in the bill’s enactment, stating
that he did not “dream up” the bill himself. See Armbrister Dep., at 105:6–11.
TPSA conceived, drafted and supported the public corporation ban because the
TPSA feared that Cooper would be applied to strike down the residency requirement for package
store permits. Tr. June 7 (Vol. 1), at 192:3–11, 218:20–219:4, 236:14–22. This fear was the “very,
very strongest” reason why TPSA drafted the public corporation ban. Id. 237:8–9. Without the
residency requirement, TPSA was “afraid” that “very large stores could disrupt what had been a very
stable business climate” for TPSA’s members. Id. 220:16–19, 225:8–11. TPSA feared the “WalMartization” of the Texas package store market. Id. 237:8–10. TPSA considered Wal-Mart to be “the
poster child” for the idea that “big stores had come into Texas” and “had driven out of business
most mom-and-pop and local businesses.” Id. 220:20–221:6. The Legislature was aware (from Mr.
Niemann’s legislative testimony) that the public corporation ban was a response to the Cooper
decision. WM Ex-288, at 2–3 (written testimony); WM Ex-78, at 4:11–19 (House Committee
testimony); PX-63, 10:1–2 (Senate Committee testimony).
The credible evidence demonstrates that, if not for the Fifth Circuit striking down
Texas’s residency requirement, TPSA would not have proposed, and the Legislature would not have
enacted, the ban on public corporations holding package store permits.
The public corporation ban did not affect any of the incumbent package store
permittees, all of whom were Texans or were majority-owned by Texans. Tr. June 7 (Vol. I), 220:2–
8. TPSA was not aware of any (Texas-owned) public corporations that held package store permits in
1995. Id. at 219:18–24. Even if a Texas-owned public corporation did hold a package store permit,
that corporation would have been exempted from the ban, due to the ban’s grandfather clause. Id. at
258:13–25; see also Tex. Alco. Bev. Code § 22.16(f). Johnny Gabriel created two Texas-owned public
corporations immediately prior to the public corporation ban taking effect. Tr. June 9 (Vol. II), at
While TPSA’s lawyer and lobbyist testified at trial that the purpose of the public
corporation ban was to preserve a favorable “business climate” for TPSA’s members, Tr. June 7,
220:16–19, in its formal lobbying efforts for the public corporation ban, the TPSA offered a
different rationale. In its testimony to the Legislature, TPSA claimed the public corporation ban was
needed to promote “accountability,” or the need “to have real human beings who are easily
identifiable, who are close to the business, and who ultimately bear personal responsibility for the
actions of the package store.” WM Ex-288, at 2–3 (written testimony); WM Ex-78, at 4:11–19
(House Committee testimony); WM Ex-63, at 10:1–2 (Senate Committee testimony).
TPSA presented no evidence to the Legislature of any actual problems with
corporate accountability in the sale of distilled spirits or of any other product. Tr. June 7 (Vol. I),
251:8–253:5. At trial, Mr. Niemann admitted he was “speculating” when he testified to the
Legislature that public corporations might be less accountable. Id. 252:2–5. The lack of any evidence
is telling because public corporations had been able to obtain package store permits since 1935 (so
long as they were majority Texan-owned) and because out-of-state public corporations had been
allowed to hold both mixed-beverage and beer-and-wine permits since 1993. Id. at 198:14–200:15,
The credible evidence suggests TPSA devised the “accountability” rationale in order
to obscure the ban’s discriminatory purpose. Mr. Niemann, a lawyer, was aware of the Cooper
litigation and knew that the legislative history of the public corporation ban would likely be reviewed
for evidence of discriminatory purpose. Id. at 253:13–254:16. Mr. Niemann admitted that he “knew
that any bill might be challenged” and that his “assignment was to craft a bill which [the TPSA] felt
would survive a commerce clause challenge.” Id. 253:19–22. In light of the absence of any evidence
in the record indicating TPSA was concerned about promoting corporate accountability and Mr.
Niemann’s testimony that TPSA’s chief concern was maintaining the business climate created by the
residency requirement, the Court concludes that the proffered “accountability” rationale was
pretextual. TPSA, in its testimony to the Legislature, speculated that the public corporation ban
would promote corporate accountability in order to conceal the ban’s actual discriminatory purpose
(to protect Texas package store owners from out-of-state competition).
The Senate sponsor of the public corporation ban, Senator Kenneth Armbrister,
confirmed the discriminatory purpose of the law during the Senate floor debate. When asked to
explain the ban’s purpose, Senator Armbrister’s first answer was that the ban means that “you can’t
have a package store inside a Walmart” and “Walmart can’t own the package store.” WM Ex-66,
4:8–15. Senator Armbrister later agreed with a colleague’s statement that the Legislature “wanted to
have somebody from Texas with the license that you get hold of to enforce the Code.” Id. at 7:10–16
Appeals to Discrimination Against Out-of-State Companies Prevented Repeal of the
Public Corporation Ban, the Five-Permit Limit, and the Consanguinity Exception
Bills to repeal the five-permit limit and the consanguinity exception were introduced
in 2009, 2013, and 2015. In addition, two bills introduced in 2015 would have repealed all the
statutes challenged in this lawsuit, including the public corporation ban. TPSA successfully lobbied
against these repeal efforts by making blatantly discriminatory arguments in testimony to the
Legislature. See WM Ex-109, at 19:5-21:15 (2013 Senate testimony); WM Ex-101, at 22:11-26:5 (2009
Senate testimony); see also WM Ex-105, at 11:25-21:2 (2013 House testimony); WM Ex-97, at 12:1814:23 (2009 House testimony).
In 2009, a TPSA representative testified, “[R]epealing the five store limit would open
the door wide for out-of-state big box chains to enter the Texas market and use massive marketing
power to displace Texas liquor stores. The profits of these corporations would then be shipped off
to Arkansas and other states instead of remaining here in Texas.” WM Ex-101, at 24:15–21.
Similarly, in 2013, a TPSA representative testified that repeal would “open it up for [companies]
outside Texas to come in and take the money right out of the state.” WM Ex-109, at 24:16–19.
TPSA also made these discriminatory arguments in its written lobbying materials. See
WM Ex-251; WM Ex-256; WM Ex-275; WM Ex-278. For example, in one piece of legislative
advertising, TPSA asserted that “Wal-Mart wants to take profits that are now going to local Texas
businesses, profits that are now staying in local Texas communities, and instead, Wal-Mart wants to
send those profits to Bentonville, Arkansas!” WM Ex-256. In another handout, entitled “Alcohol
Laws Favor and Protect Texas Liquor Stores,” TPSA argued approvingly that “[t]he Alcoholic
Beverage Code is biased in favor of Texas ownership of liquor stores.” WM Ex-275. The TPSA
handout explained that “all 2,300 liquor stores in the state are still owned by Texas residents”
because of “the prohibition in the Code against a corporation with more than 35 shareholders.” Id.
TPSA warned that because “Wal-Mart has hundreds of thousands of shareholders . . . repealing the
35-shareholder provision would allow Wal-Mart to own and operate liquor stores in Texas.” Id.
The Public Corporation Ban Disproportionately Affects Out-of-State Companies
The credible evidence demonstrates that the public corporation ban
disproportionately affects out-of-state companies. The law disproportionately burdens out-of-state
companies’ ability to enter the Texas retail liquor market. Certainly, the statute has the effect of
preventing both some in-state and some out-of-state firms from entering the Texas retail liquor
market. Yet, only a very small percentage of the in-state firms that would otherwise serve this market
are prevented from doing so by the public corporation ban. On the other hand, a very large
percentage of the out-of-state companies that would otherwise serve this market are blocked. In
fact, the credible evidence suggests that the overwhelming majority of out-of-state companies that
would otherwise sell liquor in Texas cannot do so because of the public corporation ban.
The vast majority of package store businesses operating in Texas are owned by Texas
residents. According to the TABC, there are a total of 1,765 package store firms in the state, holding
a total of 2,579 permits. TABC Ex-73. Only four of those package store firms are out-of-state
entities; those four firms hold a total of five permits. Tr. June 7 (Vol. I), at 102:11–103:1, 103:20–
104:5; TABC Ex-32. Only thirty-seven of those package store firms are held by an entity with a
single out-of-state shareholder; those thirty-seven firms hold a total of forty-eight permits. Tr. June 7
(Vol. I), at 104:6–106:3; TABC Ex-33. Thus, only around 2% of Texas package store firms and
around 2% of Texas package stores have any out-of-state ownership. Ninety-eight percent of Texas
package stores and Texas package store companies are wholly owned by Texans. (Of course, a
package store or package store company that is not wholly owned by Texans may still be majority
owned by Texans.)
Dr. Elzinga’s analysis of Texas’s largest alcoholic beverage retailers also provides
credible evidence that the public corporation ban disproportionately burdens out-of-state
companies. The ten largest package store chains in Texas’s five most populous MSAs are all Texasowned, with a single exception in Dallas (Total Wine & More). Tr. June 6, at 45:14–20; WM Ex-173.
By contrast, the ten largest beer-and-wine retailers in these same MSAs are evenly split between
Texas retailers and out-of-state retailers. Tr. June 6, at 40:9-41:4, 41:22–42:6, 46:8–48:24; WM Ex173. Because beer, wine and spirits are related markets, and because the public corporation ban does
not apply to beer or wine permits, Dr. Elzinga credibly concluded that the dominance of Texasowned firms in the package store market is the result of the challenged statute. Tr. June 6, at 49:6–
Dr. Elzinga also credibly testified about the mechanism by which the public
corporation ban excludes out-of-state entrants. Dr. Elzinga identified twenty-eight out-of-state firms
that might enter the Texas package store market, if the challenged statutes were removed. These are
firms that (1) sell spirits in states other than Texas, or sell beer or wine in Texas; and (2) have over
$1 billion in annual revenues. Tr. June 6, at 49:12–52:4, 56:11–57:14. All twenty-eight of these firms
are likely entrants, and all twenty-eight are blocked by the public corporation ban. Id. at 50:13–
24; PX-174. None of TABC’s or TPSA’s expert witnesses identified any additional likely out-of-state
entrant (other than Total Wine & More) that is not blocked by the law.
Indeed, the weight of the available evidence indicates that very few out-of-state firms
with fewer than thirty-five shareholders are realistic potential entrants to the Texas market.
Expanding into even a neighboring state requires capital and scale. See Tr. June 6, at 56:11–57:14.
Firms with the required capital and scale are almost always firms that have diffuse ownership. See id.
It follows that the out-of-state companies that are most likely to enter the Texas retail liquor
market—those with the necessary capital and scale—are the same companies that are blocked by the
public corporation ban.
Dr. Elzinga identified only three Texas-based firms that otherwise would be likely to
enter the package store market but which are blocked from doing so because they are publicly
traded. Tr. June 6, at 52:25–53:18; WM Ex-175. He identified another three in-state firms that are
likely blocked, but, because they are privately held, their exact number of owners is unknown. Id. On
cross-examination, he acknowledged a handful of other in-state companies that might be barred by
the challenged statute. Regardless of the exact number (which is impossible to measure with
precision), it is clear that there are only a handful of potential in-state entrants barred by the public
corporation ban. The handful of barred in-state entrants is dwarfed by the nearly two thousand
Texas-owned firms already serving the package store market. It follows that a very small percentage
of potential in-state entrants are blocked by the challenged statutes.
TABC and TPSA rely on the testimony of Dr. Devrim Ikizler, one of TPSA’s
experts, to argue that the public corporation ban does not disproportionately affect out-of-state
companies. See Tr. June 9 76:6–79:6; TPSA Ex-47. Having considered this testimony, the Court
finds it unpersuasive. Dr. Ikizler compares the top ten package store permit holders (which hold
between 15 and 160 permits each) to the BQ permit holders (beer and wine retailers) that have a
comparable number of permits. He found that 90% of the package store permittees with between 15
and 160 permits are in-state companies, whereas 94% of BQ permittees with between 15 and 160
permits are in-state companies. The problem with this testimony is that beer and wine retailers tend
to hold many more permits than package store companies. One reason for this is that beer and wine
retailers are not subject to Texas’s separate premises requirements, which means that many
businesses (for example, convenience stores) are eligible to sell beer and wine but not liquor.
Consequently, Dr. Ikizler’s analysis compares the very largest package store firms to a set of
relatively small beer and wine retailers, without accounting for the fact larger companies are more
likely to be from out of state. Moreover, with regard to the effect the public corporation ban has on
out-of-state companies, the remainder of Dr. Ikizler’s testimony errs by asking whether the number
of Texas companies in the retail liquor market is comparable to Texas’s share of the population or
Texas’s share of the Top 100 retailers nationwide. E.g., TABC Ex-48. This is not the appropriate
method of assessing whether a statute disproportionately affects interstate commerce. See infra
In some instances, the effects of a law on interstate commerce can be easily
measured by comparing the composition of the market before the law’s introduction to the
composition of the market after the law is in place. Here, Texas enforced its unconstitutional
residency requirement for more than ten years after the introduction of the public corporation ban.
It is thus impossible to know with certitude what the package store market would look like without
the public corporation ban and without the residency requirement. However, the credible evidence
suggests that, without the public corporation ban, a substantially larger share of the firms
participating in the Texas retail liquor market would be from out of state. Because we know that,
with the public corporation ban, the market is overwhelmingly served by companies wholly owned
by Texans, it follows that the ban has blocked the majority of potential out-of-state entrants. At the
same time, it is clear that the ban has blocked only a handful of potential in-state entrants. For that
reason, the Court concludes that the public corporation ban disproportionately burdens out-of-state
VIII. The Challenged Statutes May Affect the Price, Convenience, and Consumption of
The consumption of alcohol can contribute to a numerous health problems
including liver disease, heart disease, strokes, and cancer, and is associated with numerous other
social ills, including drinking and driving, child and spousal abuse, homicides, and suicides. Tr. June
8 (Vol. II), at 18:22–20:13; Tr. June 8 (Vol. I); at 87:3–88:1. The economic costs resulting from
excessive drinking are substantial. Tr. June 8 (Vol. I), at 88:2–89:1.
Alcohol consumption is responsive to price. There is broad consensus that
increasing the price of alcohol is an effective way to reduce the consumption of alcohol and the
harms and externalities associated with alcohol consumption. Tr. June 8 (Vol. I), at 29:19–25, 85:10–
86:3. Additionally, policies limiting the number of retail outlets selling alcohol can be effective in
reducing alcohol consumption, and greater outlet density is associated with an increase in the harms
and externalities associated with alcohol consumption. Tr. June 6, at 170:12–17, 175:1–19, 178:2–6;
Tr. June 8 (Vol. II), at 28:13–31:2.
In enacting the public corporation ban, the Texas Legislature could have reasonably
believed that allowing public corporations to sell liquor in the state would lead to large corporations
entering the market, increasing the total supply of liquor and putting downward pressure on prices.
Similarly, the Texas Legislature could have reasonably believed that allowing public corporations to
sell liquor in the state would lead to more companies selling liquor at retail, increasing the total
number or retail outlets selling liquor in the state. Additionally, the Texas Legislature could have
reasonably believed that public corporations are likely to be larger and have access to more capital
than other retailers, and consequently enjoy a scale advantage that would allow them to sell liquor at
a discount. Tr. June 8 (Vol. I), at 98:2–7; Tr. June 9 (Vol. II), at 201:21–24; 201:24–25.
However, to the extent that the public corporation ban has an effect on the price or
availability of liquor in Texas, this outcome could be achieved through alternative measures,
including the imposition of an excise tax or through regulatory measures that directly control how
and where liquor can be sold and how many outlets are allowed to sell liquor. Specifically, excise
taxes are widely used to reduce alcohol consumption and their efficacy is commonly accepted. All
five experts testified to the efficacy of excise taxes. Tr. June 5, at 261:2–262:12 (Elzinga); Tr. June 6,
at 61:18–63:12; 117:21–119:8; 225:22 to 226:11; 241:8–245:17 (Elzinga); Tr. June 8 (Vol. I), at 69:1–
70:10 (Chaloupka); Tr. June 8 (Vol. II), at 24:1–26:1 (Gruenewald); Tr. June 9 (Vol. II), at 49:9–20,
129:6–130:14 (Ikizler); Tr. June 9 (Vol. II), at 182:14–19 (Magee).
The Challenged Statutes Do Not Promote Corporate Accountability
The credible evidence demonstrates that public corporations are not less accountable
than firms with fewer than 35 owners. Dr. Elzinga testified that the ten largest BQ permittees
(including Wal-Mart) had fewer TABC violations per store than did the ten largest P permittees. Tr.
June 6, at 32:6–38:21. Moreover, he testified that there is no support in the academic literature for
the notion that public corporations are less accountable to regulators than privately held
corporations. Id. at 33:12–34:21. To the contrary, the literature indicates public corporations tend to
be very concerned with compliance and reputation. Dr. Elzinga’s opinion was not rebutted by the
TABC’s or the TPSA’s experts.
TABC already holds public corporations accountable for their sales of beer and wine
at retail, for their sales of spirits in hotels, and for their sales of mixed beverages in bars and
restaurants. Tr. June 7 (Vol. I), at 162:15–163:12; 172:13–25. Neither TABC nor TPSA has shown a
single instance in which the state has been unable to contact or hold accountable a public
CONCLUSIONS OF LAW
Dormant Commerce Clause
The United States Constitution affords Congress the power to “[t]o regulate
Commerce . . . among the several States.” U.S. Const. art. I, § 8, cl. 3. “The Supreme Court has long
recognized that this provision has a necessary, logical corollary: If Congress has the power to
regulate commerce among the states, then the states lack the power to impede this interstate
commerce with their own regulations.” Dickerson v. Bailey, 336 F.3d 388, 395 (5th Cir. 2003). The
“dormant Commerce Clause” serves as “a substantive restriction on permissible state regulation of
interstate commerce.” Dennis v. Higgins, 498 U.S. 439, 447 (1991).
A state regulation can violate the dormant Commerce Clause in one of two ways.
First, a law is presumptively invalid if “it discriminates against interstate commerce either facially, by
purpose, or by effect.” Allstate Ins. Co. v. Abbott, 495 F.3d 151, 160 (5th Cir. 2007) (citing Bacchus
Imports, Ltd. v Dias, 468 U.S. 263, 270 (1984)). A law that so discriminates “is valid only if the state
‘can demonstrate, under rigorous scrutiny, that it has no other means to advance a legitimate local
interest.’” Id. (quoting C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 392 (1994)). Second, a
law that does not directly discriminate against interstate commerce violates the dormant Commerce
Clause only if it imposes a burden on interstate commerce that “is ‘clearly excessive’ in relation to
the putative local benefits.” Id. (quoting Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)). This
more deferential standard of review for laws that burden but do not discriminate against interstate
commerce is known as the Pike balancing test.
Wal-Mart argues that the public corporation ban, the five-permit limit, and the
consanguinity exception discriminate against interstate commerce in both their purpose and their
effect. Alternatively, Wal-Mart argues that the statutes fail Pike balancing.
The Court concludes that the public corporation ban was enacted with
discriminatory intent: one of the legislature’s primary purposes in passing the ban was to exclude
out-of-state companies from participating in the Texas retail liquor market. Neither TABC nor
TPSA argues that the ban can survive the rigorous scrutiny applied to discriminatory statutes. The
ban’s discriminatory purpose renders it inconsistent with the dormant Commerce Clause and
However, the Court cannot conclude that the public corporation ban has a
discriminatory effect. Admittedly, the ban disproportionately affects out-of-state companies. It
serves to exclude from the Texas retail liquor market the vast majority of potential out-of-state
entrants. Consequently, the market is served almost exclusively by in-state companies. Yet, the
public corporation ban nominally treats similarly situated in-state and out-of-state companies
equally. Under controlling precedent, this is sufficient to avoid a finding of discriminatory effect.
Wal-Mart also argues that the public corporation ban fails the Pike balancing test.
The Court agrees. The weight of the evidence suggests that the statutes impose on interstate
commerce a burden that is clearly excessive relative to the laws’ putative benefits. Thus, even if the
statute is not so discriminatory as to warrant strict scrutiny, it nonetheless fails under the more
deferential standard of review applied to laws that incidentally burden interstate commerce.
Finally, the Court declines to find that either the five-permit limit or the
consanguinity exception independently offend the dormant Commerce Clause. The available
evidence is insufficient to conclude that either statute burdens interstate commerce.
The Purpose of the Public Corporation Ban Is to Discriminate Against Outof-State Companies
A state regulation violates the dormant Commerce Clause if it “discriminates against
interstate commerce . . . by purpose.” Allstate, 495 F.3d at 160 (citing Bacchus Imports, Ltd. v. Dias, 468
U.S. 263, 270 (1984)). In determining whether a law purposefully discriminates against interstate
commerce, the Fifth Circuit uses the four factors set forth in Arlington Heights, which include: “(1)
whether a clear pattern of discrimination emerges from the effect of the state action; (2) the
historical background of the decision, which may take into account any history of discrimination by
the decisionmaking body; (3) the specific sequence of events leading up to the challenged decision,
including departures from normal procedures; and (4) the legislative or administrative history of the
state action, including contemporary statements by decisionmakers.” Id. (citing Village of Arlington
Heights v. Metro. Housing Dev. Corp., 429 U.S. 252, 266–268 (1977)). Here, all four Arlington Heights
factors demonstrate that the purpose of the ban was to discriminate against out-of-state companies.
First, “a clear pattern of discrimination emerges from the effect of the” public
corporation ban. Id. The ban has had the effect of barring nearly all out-of-state companies with the
scale and capabilities necessary to serve the Texas retail liquor market. See supra Section VII. Over
98% of Texas package stores and Texas package store companies are 100% Texas-owned. Id. Since
Texas ceased enforcing its unconstitutional residency requirement, only one significant out-of-state
company has entered the Texas market. Id.
Second, there is an undeniable “history of discrimination by the decisionmaking
body.” Allstate, 495 F.3d at 160. The Texas Legislature, through a variety of laws (collectively, the
“residency requirement”), has expressly prohibited out-of-state persons and companies from owning
package stores since the passage of the Liquor Control Act. In 1994, the Fifth Circuit found that the
residency requirement, at least as applied to a different type of liquor permit not at issue here, was
discriminatory and inconsistent with the dormant Commerce Clause. Cooper, 11 F.3d at 555–56.
Nonetheless, Texas continued to enforce the residency requirement as applied to package store
permits for another twelve years, ceasing enforcement only when it was permanently enjoined by a
federal district court. Wine & Spirits of Texas, Inc. v. Steen, 486 F. Supp. 2d 626, 633 (W.D. Tex. 2007).
To this day, the residency requirement remains on the books. E.g., Tex. Alco. Bev. Code § 109.53.
Third, the “specific sequence of events leading up to the challenged decision”
evinces discriminatory purpose. Allstate, 495 F.3d at 160. Specifically, the proximate cause of the
Legislature’s decision to enact the public corporation ban was the Fifth Circuit’s decision
invalidating the residency requirement. See supra Section V. If not for the Cooper decision, the public
corporation ban would never have been conceived, drafted or enacted. Id. The Legislature attempted
to strike a deal to moot the Cooper appeal and thus avoid a broad ruling that would jeopardize the
enforceability of all its residency requirements. Id. After this strategy failed, the Legislature enacted
the public corporation ban in the very next session. Id.
Fourth, “the legislative . . . history of the state action” includes direct evidence of
discriminatory purpose. Allstate, 495 F.3d at 160. The Senate sponsor of the public corporation ban
agreed that the purpose of the ban is to make sure that package stores are owned by “somebody
from Texas” and to guarantee that “you can’t have a package store inside a Wal-Mart.” WM Ex-66,
at 4:8–15, 7:10–15. The lobbyist who drafted the bill and served as its sole witness testified that the
purpose of the public corporation ban was to preserve the “stable business climate” created by the
residency requirement.2 Tr. June 7 (Vol. I), at 225:8–11. No reasonable inference can be drawn from
these statements other than that the Legislature enacted the public corporation ban with the purpose
of preventing out-of-state companies from entering the market in the event that the courts extended
Cooper to invalidate the residency requirement as applied to package store permits.
Having reviewed the available evidence in light of the four Arlington Heights factors,
the Court concludes that the purpose of the public corporation ban is to discriminate against out-ofstate retailers in order to protect locally owned package stores.
This conclusion finds additional support from TPSA’s reliance on expressly
discriminatory arguments in its lobbying efforts to prevent the Legislature from repealing the public
corporation ban.3 See supra Section VI. For example, one handout created by the TPSA for the
purpose of lobbying stated that “all 2,300 liquor stores in the state are still owned by Texas
residents” in part because of “the prohibition in the Code against a corporation with more than 35
shareholders.” WM Ex-275. TPSA’s consistent reliance on protectionism as its central argument
against repeal efforts provides circumstantial evidence that in 1995 when TPSA drafted and lobbied
for the public corporation ban it was motivated by a desire to protect Texas-owned package stores
from out-of-state competition. Similarly, these statements provide some circumstantial evidence that
TPSA offered and the Legislature acted on protectionist arguments when drafting and enacting the
public corporation ban.
In assessing the purpose of the public corporation ban, the Court may rely on statements made by
TPSA and its representatives. See Allstate, 495 F.3d at 161 (relying on statements by non-legislator
witnesses in assessing purpose of challenged law); S. Dakota Farm Bureau, Inc. v. Hazeltine, 340 F.3d
583, 596–97 (8th Cir. 2003) (finding discriminatory purpose based on statements made by law’s
proponents, and therefore holding the law violated the dormant Commerce Clause); McNeilus Truck
& Mfg., Inc. v. Ohio ex rel. Montgomery, 226 F.3d 429, 443 (6th Cir. 2000) (same).
The Court’s finding that the public corporation ban was enacted with discriminatory purpose does
not turn on the evidence from subsequent repeal efforts. This evidence is, however, appropriately
considered. See Maine v. Taylor, 477 U.S. 131, 149 (1986) (considering, in assessing the purpose a law
enacted in 1959, statements made by those who opposed an unsuccessful repeal effort in 1981).
TPSA argues that much of the evidence of discriminatory purpose can be construed
as evidence of intent to discriminate against large companies, not out-of-state companies. The Court
is not persuaded. As explained above, the weight of the evidence indicates the Legislature specifically
intended to exclude out-of-state companies in order to benefit incumbent, locally owned package
stores. Moreover, TPSA’s insistence that the public corporation ban was motivated by concerns
about the role of large businesses is belied by TPSA’s repeated efforts to defend the consanguinity
exception, which serves to remove any cap on the growth of most locally-owned package store
companies. If the Legislature, in enacting the ban, was motivated primarily by a desire to limit the
size of package store companies, it is difficult to conceive why it would maintain a provision that
prevents the imposition of a limit on the size of most package store companies.
The Legislature’s discriminatory purpose in enacting the public corporation ban is
sufficient to trigger strict scrutiny. The Fifth Circuit has repeatedly said so. Allstate, 495 F.3d at 160
(citing Bacchus Imports, 468 U.S. at 270) (emphasis added) (“A statute violates the dormant Commerce
Clause where it discriminates against interstate commerce either facially, by purpose, or by effect.”);
Int’l Truck & Engine Corp. v. Bray, 372 F.3d 717, 725 (5th Cir. 2004) (emphasis added) (“A court may
find discrimination based on evidence of discriminatory effect or discriminatory purpose.”); see also
Churchill Downs Inc. v. Trout, 589 F. App’x 233, 234 (5th Cir. 2014) (quoting Allstate, 495 F. 3d at 160).
Moreover, multiple federal courts of appeals have found a law to violate the dormant Commerce
Clause on the basis of discriminatory purpose alone. See S. Dakota Farm Bureau, 340 F.3d at 596–97;
Waste Mgmt. Holdings, Inc. v. Gilmore, 252 F.3d 316, 341, 345 (4th Cir. 2001). Absent some controlling
clarification to the contrary, the Court is compelled to apply strict scrutiny in light of its finding that
the public corporation ban was enacted with discriminatory purpose.
When a law discriminates against interstate commerce, courts apply the “strictest
scrutiny.” Oregon Waste Sys. Inc. v. Dep’t of Envt’l Quality, 511 U.S. 93, 101 (1994). “If a restriction on
commerce is discriminatory, it is virtually per se invalid.” Id. at 99. A discriminatory law “is valid only
if the state ‘can demonstrate, under rigorous scrutiny, that it has no other means to advance a
legitimate local interest.’” Allstate, 495 F.3d at 160 (quoting C & A Carbone, 511 U.S. at 392). Here,
neither TABC nor TPSA argues that the public corporation ban satisfies this burden. Thus, the
Court concludes that the public corporation ban—enacted with the purpose of discriminating
against interstate commerce—violates the dormant Commerce Clause.
The Public Corporation Ban Does Not Have a Discriminatory Effect
A state regulation also violates the dormant Commerce Clause if it “discriminates
against interstate commerce . . . by effect.” Allstate, 495 F.3d at 160 (citing Bacchus Imports, 468 U.S. at
270). The parties disagree as to the appropriate test to measure discriminatory effect. Wal-Mart
argues that a law has a discriminatory effect if it disproportionately benefits in-state interests at the
expense of out-of-state interests. See Churchill Downs, 589 F. App’x at 237 (recognizing that evidence
indicating a law “disproportionately affects out-of-state companies” is evidence of discriminatory
effect). TABC and TPSA argue that even if a law disproportionately affects out-of-state companies,
there can be no discriminatory effect unless the law differentiates between similarly situated in-state
and out-of-state companies. See Allstate, 495 F.3d at 163 (“A state statute impermissibly discriminates
only when it discriminates between similarly situated in-state and out-of-state interests.”). The
question is thus whether a court can properly find a discriminatory effect when a law treats similar
in-state and out-of-state companies equally but as a practical matter disadvantages out-of-state
Wal-Mart’s position draws some support from Supreme Court precedent. In Hunt v.
Washington State Apple Advertising Commission, the Supreme Court considered the constitutionality of a
North Carolina statute that required all closed containers of apples shipped into the state to bear
“no grade other than the applicable U.S. grade or standard.” 432 U.S. 333, 335 (1977). At the time,
many states other than North Carolina had implemented their own grading systems. Id. Among
those states was Washington State, the nation’s largest producer of apples with its apples accounting
for nearly 50% of all apples shipped in interstate commerce. Id. at 336. The Supreme Court applied
heightened scrutiny to the statute because it raised the cost of doing business in the North Carolina
market for out-of-state apple growers and therefore discriminated against them. Id. at 351–352. The
Court acknowledged “the statute’s facial neutrality,” but nonetheless found a discriminatory effect
because the statute’s “practical effect” was to burden out-of-state growers. Id. at 350–352; see also
Bacchus Imports, 468 U.S. 263 (1984) (finding a Hawaii tax exemption for certain wines to have a
discriminatory effect because as a practical matter those wines were more common in Hawaii).
Wal-Mart’s position that a disproportionate impact on out-of-state companies is a
sufficient basis to find a discriminatory effect is bolstered by persuasive authority from two federal
courts of appeals. In Cachia v. Islamorada, the Eleventh Circuit considered a municipal ordinance
banning all “formula restaurants,” defined to include most chain restaurants and fast food
restaurants. 542 F.3d 839, 840–841 (11th Cir. 2008). The ordinance was facially neutral and affected
both in-state and out-of-state companies. Id. at 842. Put differently, the ordinance blocked many instate restaurants and allowed many out-of-state restaurants. Id. Nonetheless, the court determined
that the ordinance had a discriminatory effect because it operated as “an explicit barrier to the
presence of national chain restaurants.” Id. The court reasoned that “[w]hile the ordinance does not
facially discriminate between in-state and out-of-state interests, its prohibition of restaurants
operating under the same name, trademark, menu or style is not evenhanded in effect, and
disproportionately targets restaurants operating in interstate commerce.” Id. at 844. Relying on Hunt,
the court found that the ordinance had “the practical effect of discriminating against interstate
commerce” and instructed the district court to apply heightened scrutiny.
Similarly, in Family Winemakers of California v. Jenkins, the First Circuit considered the
constitutionality of a Massachusetts statute that allowed only small wineries (defined as producing
30,000 gallons or less of wine a year) to obtain a “small winery shipping license.” 592 F.3d 1, 4 (1st
Cir. 2010). The holder of such license could sell wine by shipping directly to consumers, through
wholesaler distribution, or through retail distribution. Id. Large wineries, on the other hand, were
forced to choose between either shipping directly to consumers or using wholesaler distribution.
Unlike small wineries, the law did not allow them to do both, and it did not allow them, under either
option, to sell directly to retailers. Id. While the law did not expressly differentiate between in-state
and out-of-state wineries, the court found discriminatory effect, because it “significantly alter[ed] the
terms of competition between in-state and out-of-state wineries to the detriment of the out-of-state
wineries that produce 98 percent of the countries wine.” Id. at 11. While the law did not outright bar
any winery from distributing in Massachusetts, the court concluded that its “ultimate effect” was to
“artificially limit the playing field in [the] market in a way that enables Massachusetts’s wineries to
gain market share against their-out-state competitors.” Id.
Hunt, Cachia, and Family Winemakers all instruct that a law discriminates against
interstate commerce if it has the practical effect of disproportionately advantaging in-state interests
at the expense of out-of-state interests. And the Fifth Circuit has acknowledged that evidence
indicating a law “disproportionately affects out-of-state companies” is evidence of discriminatory
effect. See Churchill Downs, 589 F. App’x at 237. If this were this appropriate standard, the Court
would easily find that the public corporation ban has a discriminatory effect: the available evidence
suggests that the ban’s effects are felt disproportionately by out-of-state companies, which are
largely barred from selling liquor in Texas. See supra Section VII; infra Section X.C.
But TABC and TPSA point to a contrary line of cases that define discriminatory
effect much more narrowly. In at least three controlling cases, higher courts have upheld state
regulations as consistent with the dormant Commerce Clause because the regulations treat similarly
situated in-state and out-of-state companies the same, even when those regulations
disproportionately affect out-of-state companies.
In Exxon v. Governor of Maryland, the Supreme Court upheld a state law, which
prohibited companies that produce or refine petroleum products from also operating retail gas
stations, over the plaintiff’s objection that the law disproportionately affects out-of-state petroleum
companies. 437 U.S. 117 (1978). The majority reasoned that the Commerce Clause does not protect
“the particular structure or methods of operation in a retail market.” Id. at 127. The Exxon Court
concluded that the ban on refiners owning retail gas stations was permissible because it did not
“distinguish between in-state and out-of-state companies in the retail market.” Id. “The fact that the
burden of a state regulation falls on some interstate companies does not, by itself, establish a claim
of discrimination against interstate commerce.” Id.
The Fifth Circuit has twice relied on Exxon to uphold statutes that arguably
disproportionately affect out-of-state companies. In Ford Motor Corp. v. Texas Department of
Transportation, the court considered a statute which, as interpreted, prohibited automobile
manufacturers from selling vehicles directly through their website. 264 F.3d 493, 498 (5th Cir. 2001).
The court stated that discrimination under the dormant Commerce Clause does not “include all
instances in which a law, in effect, burdens some out-of-state interest while benefitting some in-state
interest.” Id. at 500. Rather, for a law to have a discriminatory effect it must provide “for differential
treatment based upon their contacts with the State.” Id. at 501. Ultimately, the court upheld the law
at issue because Ford “failed to show that . . . in practical effect, [the law] discriminates according to
the extent of a business entity’s contacts with the State.” Id. at 501. Similarly, in Allstate Insurance Co.
v. Abbott, the Fifth Circuit upheld a law prohibiting insurance companies from obtaining an interest
in a body shop, notwithstanding the plaintiff’s argument that the law disproportionately affects outof-state insurers. 495 F.3d 151 (5th Cir. 2007). The Court determined that Exxon was controlling.
Exxon, Ford, and Allstate allow for the possibility that a law that is not facially
discriminatory may still have a discriminatory effect if it disproportionately impacts out-of-state
companies. For example, the Supreme Court in Exxon acknowledged, at least in a footnote, that “[i]f
the effect of a state regulation is to cause local goods to constitute a larger share, and goods with an
out-of-state source to constitute a smaller share, of the total sales in the market . . . the regulation
may have a discriminatory effect on interstate commerce.” Exxon, 437 U.S. at 126 n.16; but see
Allstate, 495 F.3d at 162 (affording minimal weight to this footnote). But the clear implication of
these cases is that a finding of discriminatory effect requires something close to facial discrimination.
After all, it would seem that a facially neutral statute by definition treats similarly situated entities
In light of the fact that the public corporation ban does not expressly differentiate
between companies based on their ties to Texas, the Court is skeptical that a finding of
discriminatory effect is appropriate. That said, there is arguably a basis to distinguish Exxon, Ford,
and Allstate. Those cases involved narrow regulations that may have disproportionately affected outof-state companies but did not serve to bar most out-of-state companies from entering the market.
For example, in Exxon, the record showed that “there are several major interstate marketers of
petroleum that own and operate their own retail gasoline stations . . . who compete directly with the
Maryland independent dealers, [and] are not affected by [the regulation at issue] because they do not
refine or produce gasoline.” 437 U.S. at 125–126. Similarly, in Allstate, the record was “unclear” as to
“how the new regulations would affect any shift in the current level of business presently enjoyed by
out-of-state suppliers of body shops to in-state shops.” 495 F.3d at 163. Here, the record shows that
the challenged statutes bar the majority of potential out-of-state entrants to the Texas retail liquor
market. Consequently, the market is overwhelmingly served by in-state firms. Unlike in Exxon and
Allstate, the challenged statutes do not simply bar a few particular interstate companies from entering
the Texas retail liquor market; rather, they bar nearly all potential out-of-state entrants, affecting the
interstate market as a whole. See Exxon, 437 at 117 (stating that the dormant Commerce Clause
“protects the interstate market, not particular interstate firms”). But ultimately, the Court is not
satisfied that this distinction, one only of degree, provides an adequate basis to depart from Exxon,
Ford, and Allstate’s counsel.
The Court concludes that Exxon, Ford, and Allstate preclude a finding of
discriminatory effect. Those cases instruct that a law does not discriminate in effect unless the law
differentiates between similarly situated in-state and out-of-state companies on the basis of the
companies’ ties to the state. The public corporation ban does not. Public corporations are banned
from the market whether or not they are based in Texas or owned by Texans. Similarly, corporations
with fewer than thirty-five shareholder are allowed to sell liquor in the state whether or not they are
based in Texas or owned by Texans. The record indicates some Texas companies are blocked from
selling liquor in the state, and, conversely, at least one significant out-of-state company has
successfully entered the Texas market. Thus, the Court finds that while the public corporation ban
was enacted with discriminatory purpose, it does not have a discriminatory effect as defined by
The Court recognizes that this result—finding that the law intentionally discriminates (or at least
attempts to discriminate) against out-of-state businesses but does not produce the effect intended—
may seem bizarre. However, the record demonstrates that it was the Legislature’s intent to
discriminate, but Wal-Mart has not made the requisite showing that the public corporation ban “has
the effect of providing a competitive advantage to in-state interests vis-a-vis similarly situated out-ofstate interests.” Ford, 264 F.3d at 501.
The Public Corporation Ban Fails Pike Balancing
A law that does not directly discriminate against interstate commerce may still offend
the dormant Commerce Clause if it fails the Pike balancing test.5 Pike provides a standard for
assessing state laws that regulate “even-handedly” but nonetheless impose “incidental” burdens on
interstate commerce. Pike, 397 U.S. at 142; see also Wyoming v. Oklahoma, 502 U.S. 437, 455 & n.12
(1992) (quoting Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573, 579
(1986)) (explaining that “a less strict scrutiny is appropriate” when a law “has only indirect effects on
The Pike balancing test has three steps. First, a court must determine whether the
challenged regulation incidentally burdens interstate commerce. Pike, 397 U.S. at 142. Second, a
court asks whether the regulation has “putative local benefits.”Id. Finally, the court must weigh the
The Pike balancing test applies to the regulation of alcoholic beverages. TABC cites a concurring
opinion from the Seventh Circuit to suggest that the Pike inquiry may not be applicable to cases
involving alcoholic beverages due to the Twenty-first Amendment’s conferral of the authority to
regulate the alcohol industry to the states. See Lebamoff Enters., Inc. v. Huskey, 666 F.3d 455, 467 (7th
Cir. 2012) (Hamilton, J., concurring) (“In my view of the applicable law, the Twenty-first
Amendment to the Constitution should foreclose those balancing tests when the state is exercising
its core . . . power to regulate the transportation and importation of alcoholic beverages for
consumption in the state.”). However, the Supreme Court has rejected the argument that the
Twenty-first Amendment forecloses dormant Commerce Clause challenges to state regulations of
the alcohol industry. Granholm v. Heald, 544 U.S. 460, 484–85 (2005) (“The aim of the Twenty-first
Amendment was to allow States to maintain an effective and uniform system for controlling liquor
. . . . The Amendment did not give States the authority to pass nonuniform laws in order to
discriminate against out-of-state goods, a privilege they had not enjoyed at any earlier time.”); see also
Healy v. Beer Institute, Inc., 491 U.S. 324 (1989). Moreover, the Supreme Court has repeatedly cited
Pike in dormant Commerce Clause cases involving alcoholic beverages. Brown-Forman Distillers, 476
U.S. at 579; Bacchus Imports, 468 U.S. at 270. And numerous federal courts of appeals have applied
Pike in cases involving alcohol. Baude v. Heath, 538 F.3d 608, 612 (7th Cir. 2008); Wine & Spirits
Retailers, Inc., 481 F.3d at 15; see also Lebamoff Enters., 666 F.3d at 460 (compiling cases). In the case
cited by TABC, the majority opinions rejects the contention that Pike does not apply to alcohol
cases on the basis that not a single federal appellate court has so held. Lebamoff Enters., 666 F.3d at
460 (internal citations omitted) (“Our Baude decision analyzed Indiana’s alcohol laws under Pike’s
balancing test and invalidated one of them, and other courts have analyzed similar laws similarly. . . .
[W]e find none that rejects that approach.”). Thus, absent any controlling authority expressly
exempting the regulation of alcoholic beverages from Pike’s ambit, the Court is compelled to apply
the Pike balancing test here.
local benefits of the regulation against the burdens the regulation places on interstate commerce. Id.
A law reviewed under Pike balancing “will be upheld unless the burden imposed on such commerce
is clearly excessive in relation to the putative local benefits.” Id.
There is no clear standard for determining whether a law incidentally burdens
interstate commerce. See Churchill Downs, 589 F. App’x at 235 (“We note that the jurisprudence in the
area of the dormant Commerce Clause is, quite simply, a mess. It has failed to produce a readily
discernible standard for distinguishing between statutes that have discriminatory effects and those
that merely create incidental burdens.”); see also Wyoming, 502 U.S. at 455 n.12 (quoting Brown-Forman
Distillers, 476 U.S. at 579) (“[T]here is no ‘clear line’ separating close cases on which scrutiny should
apply.”). The Fifth Circuit has stated that “[a] statute imposes a burden when it inhibits the flow of
goods interstate.” Allstate, 495 F.3d at 163 (citing Ford, 264 F.3d at 503). Elsewhere, the Fifth Circuit
has stated that Pike balancing applies to laws that have a “disparate impact on interstate commerce,”
defined as placing “burdens on interstate commerce that exceed the burdens on intrastate
commerce.” Nat’l Solid Waste Mgmt. Ass’n v. Pine Belt Reg’l Solid Waste Mgmt. Auth., 389 F.3d 491, 501
(5th Cir. 2004) (quoting Automated Salvage Transp., Inc. v. Wheelabrator Envtl. Sys. Inc., 155 F.3d 59, 75
(2d Cir. 1998)).
Here, the public corporation ban places a substantial burden on interstate commerce
by protecting Texas-owned package stores at the expense of potential out-of-state entrants. Because
of the ban, the overwhelming majority (around 98%) of Texas package stores and Texas package
store companies are wholly Texas owned. Supra Section VII. Moreover, the credible evidence
indicates that in the absence of the ban, the Texas retail liquor market would likely be served by
numerous out-of-state companies. Id. Texas’s retail beer and wine market (where the challenged
statutes do not apply) is an instructive comparator. In that related market, out-of-state companies
serve a significant share of the market. Id. Accordingly, the Court concludes that the public
corporation ban acts to block the vast majority of potential out-of-state entrants from the Texas
market, while leaving undisturbed most potential in-state entrants. Thus, the Court finds the public
corporation ban has a “disparate impact” on out-of-state companies and Pike balancing applies. Nat’l
Solid Waste Mgmt., 389 F.3d at 501.
TABC and TPSA insist that the burden the public corporation ban places on out-of-
state companies is not disproportionate to the burden it places on in-state companies. TABC and
TPSA submit evidence they believe shows the share of companies barred by the law that are based
in Texas is roughly proportional to Texas’s share of the national population and national economy.
To illustrate, TPSA’s expert argued that, by his calculation, 19% of potential entrants barred by the
public corporation ban are based in Texas, whereas Texas is home to roughly 8% of the population
and roughly 10% of the top national retailers. See TABC Ex-48. From this perspective, the public
corporation ban appears to treat in-state and out-of-state companies equally, or at best,
disproportionately harm in-state companies. While appealing at first glance, the Court disagrees with
this understanding of what it means for a state regulation to disproportionately affect interstate
TABC and TPSA’s analysis errs by using the wrong denominator.6 Their approach
compares the makeup of the market created by the challenged statutes to the makeup of the national
The parties’ disagreement as to the appropriate denominator and its import is best illustrated by
example. Consider a single state that accounts for 10% of the nation’s economy. Unregulated, the
state’s market for a product is served by 50 in-state companies and 10 out-of-state companies. The
state introduces a law that bars from the local market 1 in-state company and 9 out-of-state
companies. Of all the companies blocked by the new law, 10% are in-state companies, whereas 90%
are out-of-state companies. From one perspective, the law does not have a disproportionate effect
on interstate commerce, because 10% of the companies that are blocked by the law are in-state
companies, a figure which is comparable to the state’s 10% share of the economy. On the other
hand, of all the in-state companies that originally served the market, only 2% are blocked by the new
law; whereas, of all the out-of-state companies that originally served the market, 90% are blocked by
the new law. Consequently, the share of the market held by in-state companies increases as a result
of the law from 83% to 98%. Thus, from another perspective, the new law has a severely
economy. Yet, even absent the challenged statutes, the Texas retail liquor market would not be a
perfect microcosm of the national economy. Unregulated, that market would probably have many
more Texas-owned and Texas-based package stores than California-owned and California-based
package stores, even though California has a larger population and a larger economy than Texas.
This is because only out-of-state companies with the requisite capital and scale are capable of
entering the Texas market. See supra Sections VII & VIII. If the challenged statutes are lifted, a
mom-and-pop package store in Bentonville, Arkansas is unlikely to open a second location in
Austin, Texas. Wal-Mart, however, might.
The proper comparison is to what the market would look like if the challenged
statutes were not in place. In other words, assessing disparate impact requires the Court to measure
the effect the public corporation ban has on the in-state and out-of-state companies that would
otherwise serve the market if not for the ban. This is the analysis typically employed to measure
discriminatory effect when courts compare what a market looks like before and after a challenged
law goes into effect. Here, the analysis is complicated by the fact that, prior to the enactment of the
public corporation ban, an unconstitutional residency requirement was in effect. This means that the
status quo ex ante cannot be used as proxy for what the retail liquor market would look like without
the challenged statutes. But the basic principle holds true: whether a statute burdens interstate
commerce is assessed by comparing the role of out-of-state companies in the market with and
without the challenged law. Applying this principle, the Court readily concludes that the public
corporation ban has a disparate impact on interstate commerce because it disproportionately blocks
out-of-state companies form selling liquor in Texas.
disproportionate effect on interstate commerce. The reason that the two approaches yield such
different results is that the makeup of the unregulated local market bears no resemblance to the
makeup of the national economy.
Having resolved the threshold inquiry of whether the public corporation ban places a
burden on interstate commerce, the Court now turns to the next step of the Pike inquiry, which
requires consideration of whether a state regulation has “a legitimate local purpose” by assessing its
“putative local benefits.” Pike, 397 U.S. at 142. This inquiry requires deference to the state
legislature. See CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 92 (quoting Kassel v. Consol.
Freightways Corp., 450 U.S. 662, 678 (1981) (Brennan, J., concurring in judgment)) (“The Constitution
does not require the States to subscribe to any particular economic theory. We are not inclined ‘to
second-guess the empirical judgments of lawmakers concerning the utility of legislation.’”).
Accordingly, Pike’s second step imposes something akin to a rational basis inquiry. See Int’l Truck &
Engine Corp., 372 F.3d at 728 (5th Cir. 2004) (quoting Ford Motor Co., 264 F.3d at 504 (“[W]e credit a
putative local benefit ‘so long as an examination of the evidence before or available to the lawmaker
indicates that the regulation is not wholly irrational in light of its purposes.’”).
In assessing Wal-Mart’s equal protection claim, the Court has subjected the public
corporation ban to a rational basis inquiry. See infra Section XI.A. In doing so, the Court concludes
that the public corporation ban is rationally related to a legitimate state interest. Most pertinently, the
Court finds that there is a conceivable relationship between the public corporation ban and the
state’s legitimate interest in reducing the availability and consumption of liquor. Because the statute
is not wholly irrational, the Court is required to credit it as having some putative local benefits and a
legitimate local purpose. Finding a legitimate local purpose advances but does not resolve the Pike
The final step under Pike is to weigh the challenged statute’s putative local benefits
against the burden the statute imposes on interstate commerce: “If a legitimate local purpose is
found, then the question becomes one of degree. And the extent of the burden that will be tolerated
will of course depend on the nature of the local interest involved.” Pike, 397 U.S. at 142. It also
depends on whether the local interests served by the regulation “could be promoted as well with a
lesser impact on interstate activities.” Id.; see also Nat’l Solid Waste Mgmt., 389 F.3d at 501 (5th Cir.
2004) (holding that Pike compels consideration of “the nature of the local interest and whether
alternative means could achieve that interest with less impact on interstate commerce”).
In applying this balancing test, the Court first notes that the burdens the public
corporation ban imposes on interstate commerce are substantial. As has been explained, the law has
been enacted and maintained with the express goal of maintaining a business climate created by a
facially discriminatory and unconstitutional residency requirement. The statutes have had this effect:
the vast majority of potential out-of-state entrants are excluded from the retail Texas liquor market,
and that market is consequently almost exclusively served by in-state retailers. See supra Section VII.
Next, the Court finds that however substantial the state’s interest in reducing the
availability and consumption of liquor may be, the weight of the evidence demonstrates that this
interest can be achieved through alternative means with less impact on interstate commerce. On this
point, there is hardly any dispute. The record consistently indicates that any effects the public
corporation ban has on the price, availability, or consumption of liquor could be more easily and
more directly achieved through other regulatory measures, including the imposition of excise taxes
(that raise the price of liquor) or the use of manner-of-sales regulations (that control where and how
liquor can be sold). See supra Section VIII. The available evidence suggests that excise taxes are the
most common and most efficacious policy tool for minimizing externalities associated with liquor
consumption. Id. In fact, all five experts testified at trial that excise taxes are an effective method of
discouraging the consumption of liquor. Id. Indeed, TPSA concedes that a variety of “direct
controls” are available to Texas to reduce liquor consumption (including, for example, “quotas or
hard permit caps”), and that among the available options, “a proven method of reducing
consumption is to increase excise taxes.” TPSA Trial Br., Dkt. 314, at 18. Thus, the record leaves
little room to doubt that if Texas desired to manage the price, availability, and consumption of
liquor without burdening interstate commerce, it could easily do so. And Pike compels the Court to
account for the availability of these alternative measures in weighing the benefits and burdens of the
In balancing these equities, the Fourth Circuit’s holding in Yamaha Motor Corp.,
U.S.A. v. Jim’s Motorcycle, Inc. is instructive. 401 F.3d 560 (4th Cir. 2005). In that the case, the court
considered a Virginia statute that allowed existing motorcycle dealerships to protest and block (or at
least substantially delay) the opening of new dealership franchises anywhere in the state. The court
acknowledged that the Virginia law “is neutral on its face” as it “makes no distinction between instate and out-of-state manufacturers,” and found “no evidence” that the law “would have any
probable or discernible discriminatory effects on interstate commerce.” Id. at 567–569. Accordingly,
the court concluded that the law “does not discriminate against interstate commerce.” Id. at 569.
The court then applied Pike balancing. In doing so, it held that the law “has a
legitimate general purpose: to protect existing motorcycle dealers in Virginia from unfair practices by
manufacturers” and, accordingly, would survive rational basis review. Id. at 568. On the other hand,
the court reasoned that the law is “uniquely anti-competitive” because it creates “a significant barrier
to market entry.” Id. at 571. Critically, it found that any local benefits of the law “could have been
achieved with a less restrictive alternative,” specifically by affording protest rights only to dealerships
within a limited radius of a new dealership’s location. Id. at 573. The Fourth Circuit concluded that
in light of the law’s “unnecessary and excessive breadth,” its “burdens clearly exceed its benefits.” Id.
Here, as in Yamaha, the challenged statutes serve a legitimate local purpose. But the
public corporation ban is also “uniquely anti-competitive,” creates “a significant barrier to market
entry,” and, thus, imposes a “severe” burden on interstate commerce. Id. at 571. Notably, the burden
imposed by the ban is more onerous than the burden imposed by the dealership law at issue in
Yamaha; the public corporation ban outright blocks from the market the vast majority of potential
out-of-state entrants. In Yamaha, the challenged law imposed only a limited and surmountable
obstacle to market entry. See id. (noting that potential market entrants “are forced to play a waiting
game that could take years”). Moreover, like in Yamaha, whatever benefits the public corporation
ban may have can be achieved using alternative, more narrowly tailored regulatory tools. See id. at
569 (“A statute need not be perfectly tailored to survive Pike balancing, but it must be reasonably
tailored.”). Ultimately, the Court concludes that if it were to uphold the protectionist scheme created
by the ban and allow Texas to bar the vast majority of potential out-of-state entrants into the Texas
liquor market “it would jeopardize what the dormant Commerce Clause aims to preserve: ‘a national
[free] market for competition undisturbed by preferential advantages conferred by [individual states]
upon [their] residents or resident competitors.” Id. at 573–74 (quoting General Motors Corp. v. Tracy,
519 U.S. 278, 299 (1997)) (modifications in original).
In sum, the public corporation ban imposes a severe burden on interstate commerce.
While the statute has some putative benefits, those benefits can be easily and more directly achieved
through a variety of alternative regulatory measures. Accordingly, the Court concludes that burdens
the ban places on interstate commerce are clearly excessive relative to its local benefits. Thus, the
challenged statutes fail the Pike balancing test.
The Five-Permit Limit and the Consanguinity Exception Do Not Offend the
Dormant Commerce Clause
Wal-Mart also argues that the five-permit limit independently offends the dormant
Commerce Clause. The Court disagrees.
First, there is insufficient evidence to find that the five-permit limit and
consanguinity exception were enacted with discriminatory purpose. The only evidence in the record
indicating that these statutes were enacted with discriminatory purpose arises out of recent repeal
efforts. See supra Section VI. There is no evidence in the record suggesting the Legislature acted with
discriminatory purpose at the time these laws were enacted. There is no evidence the “historical
background” of the laws or the “specific sequence of events leading up” to the laws’ passage
suggests discriminatory purpose. Allstate, 495 F.3d at 160 (citing Arlington Heights, 429 U.S. at 266–
68). There is also no evidence of “contemporary statements by decisionmakers” indicating
discriminatory purpose. Id. (citing Arlington Heights, 429 U.S. at 266–68). While circumstantial
evidence of discriminatory purpose emanating from subsequent repeal efforts may be helpful in
ascertaining the Legislature’s intent, alone it is insufficient to satisfy Wal-Mart’s burden of
demonstrating discriminatory purpose. See id. (citing Hughes v. Oklahoma, 441 U.S. 322 (1979)) (“The
burden of establishing that a challenged statute has a discriminatory purpose under the Commerce
Clause falls on the party challenging the provision.”).
Second, the five-permit limit and the consanguinity exception do not have a
discriminatory effect for the same reasons as the public corporation ban. See supra Section X.B. The
consanguinity exception, like the public corporation ban, discriminates against companies with
diffuse ownership. It is possible that this classification disproportionately affects out-of-state
companies. However, the consanguinity exception does not expressly differentiate between similarly
situated companies and does not have the practical effect of discriminating against out-of-state
companies based on their contacts with the Texas. It thus does not have a discriminatory effect.
Exxon, 437 U.S. at 127; Allstate, 495 F.3d at 163; Ford, 264 F.3d at 501.
Third, there is inadequate evidence to find that the five-permit limit and
consanguinity exception burden interstate commerce. The record indicates that the cumulative effect
of the challenged statutes is to disproportionately block out-of-state companies from entering the
Texas retail liquor market. However, all of the available evidence explaining how the statutes achieve
this effect focuses on the role of the public corporation ban. See supra Section VII. Given that both
statutes discriminate on the basis of a company’s ownership structure, there is a basis to infer that
the consanguinity exception likely has a similar effect as the public corporation ban. But, there is no
specific evidence in the record demonstrating that the consanguinity exception disproportionately
excludes out-of-state companies. Thus, the Court declines to apply Pike balancing to these statutes.
However, the Court notes that even if the Court were to review the five-permit limit and
consanguinity exception under Pike balancing, the inquiry would be similar to the rational basis
inquiry, which the Court conducts below. See Int’l Truck & Engine, 372 F.3d at 728 (explaining that
under Pike a court credits a regulation’s putative benefits as long as the “regulation is not wholly
irrational in light of its purposes.’”).
Equal Protection Clause
The Equal Protection Clause of the Fourteenth Amendment states that “[n]o State
shall . . . deny to any person within its jurisdiction the equal protection of the laws.” U.S. Const.
amend. XIV, § 1. Wal-Mart argues that the challenged statutes compel differential treatment of
similarly situated entities and thus violate this constitutional guarantee of equal treatment. See Mahone
v. Addicks Util. Dist. of Harris Cty., 836 F.2d 921, 932 (5th Cir. 1988) (“The equal protection clause
essentially requires that all persons similarly situated be treated alike.”). Because Wal-Mart is not a
member of a protected class, and the challenged statutes do not infringe upon fundamental
constitutional rights, the Court applies rational basis review.7 Hines v. Alldredge, 783 F.3d, 202–03 (5th
Wal-Mart argues that the public corporation ban ought to be assessed using heightened scrutiny
because it was enacted with animus toward public corporations generally and animus toward WalMart in particular. In support, Wal-Mart cites a single case involving same-sex marriage. See Bishop v.
Smith, 760 F.3d 1070, 1099–1100 (10th Cir. 2014) (Holmes, J., concurring) (discussing a line of cases
where upon a finding of animus courts have applied a more rigorous variant of the rational basis
inquiry). All of the cases compiled in the Bishop concurrence cited by Wal-Mart involve animus
toward people. Wal-Mart does not cite any case where heightened scrutiny has been applied on the
basis of animus toward a corporation or some species of corporations. This Court declines to
To survive rational basis review, a law must be “rationally related” to “a legitimate
state purpose.” Mahone, 836 F.2d at 932. To determine whether a law is rationally related to its
purpose, courts asses the “fit” between the classification the law imposes and the ends the law
serves. Id. The determinative question is “whether the state could rationally determine that by
distinguishing among persons as it has, the state could accomplish its legitimate purpose.” Id. Put
differently, a law survives rational basis review “if there is any reasonably conceivable state of facts
that could provide a rational basis for the classification.” Madris-Alvarado v. Ashcroft, 383 F.3d 321,
332 (5th Cir. 2004) (quoting FCC v. Beach Commc’ns, 508 U.S. 307, 313 (1993)); see also Romer v. Evans,
517 U.S. 620. 631 (1996) (holding that a law survives rational basis review “so long as it bears a
rational relation to some legitimate end”).
Rational basis review is a highly deferential inquiry, but it is nonetheless a fact-
intensive one. The Fifth Circuit’s opinion in St. Joseph Abbey v. Castille, 712 F.3d 215 (5th Cir. 2013),
is instructive. In St. Joseph Abbey, the court struck down a Louisiana law requiring that caskets be sold
only by licensed funeral directors at licensed funeral homes. Id. The Fifth Circuit explained that
“although rational basis review places no affirmative evidentiary burden on the government,
plaintiffs may nonetheless negate a seemingly plausible basis for the law by adducing evidence of
irrationality.” Id. at 223. The court counseled that under rational basis review the examination of the
fit between a law and its purported purposes should not proceed in abstraction but rather should be
“informed by the setting and history of the challenged rule.” Id. The St. Joseph Abbey panel framed
become the first. Wal-Mart also argues that the consanguinity exception should be assessed under
heightened scrutiny because it discriminates on the basis of family status. See, e.g., Cox v. Schweiker,
684 F.2d 310, 320 (5th Cir. 1982) (applying “a standard of review that is more exacting than a
rational relations test” to a case involving discriminatory treatment of illegitimate children). Here, the
Court is somewhat more sympathetic. But because the consanguinity exception fails even rational
basis review, the Court need not decide whether a more exacting standard is appropriate.
“the pivotal inquiry” as “whether there is a rational basis . . . that can . . . be articulated and is not
plainly refuted by the [plaintiffs] on the record compiled by the district court at trial.” Id.
Wal-Mart argues that, at trial, it plainly refuted the contention that the challenged
statutes serve any legitimate purpose. With regard to the public corporation ban, the five-permit
limit, and the prohibition on BQ permittees holding P permits, the Court disagrees. These statutes
are all conceivably related the state’s legitimate purpose reducing the availability and consumption of
liquor. Accordingly, these statutes survive rational basis review.
However, the Court concludes that the consanguinity exception to the five-permit
limit imposes an arbitrary classification that is not rationally related to any legitimate state purpose.
This statute thus fails rational basis review. Moreover, when a classification is deemed
unconstitutional, lower courts are instructed to craft a remedy that expands rather than restricts
access to the rights or benefits at issue. Thus, the appropriate remedy here is to enjoin enforcement
of both the underlying the five-permit limit and its constitutionally infirm exception.
The Public Corporation Ban Survives Rational Basis Review
The Court begins with the public corporation ban. TABC and TPSA contend that
the state’s decision to prohibit public corporations from selling liquor at retail serves a number of
purposes. Primarily, they argue that the ban reduces the consumption of liquor by increasing prices
and limiting the density of retail liquor outlets. It is undisputed that the state has a legitimate interest
in moderating the consumption of liquor and minimizing liquor-related externalities. For the reasons
that follow, the Court concludes that there is a conceivable relationship between prohibiting public
corporations from retailing liquor and the state’s legitimate interest in discouraging the consumption
of liquor. Because the state’s interest in moderating the consumption of liquor provides the public
corporation ban adequate support to survive rational basis review, the Court need not address the
other proffered rationales (which include promoting small businesses and corporate accountability).
There is a conceivable relationship between the public corporation ban and the
state’s legitimate purpose of moderating the consumption of liquor and reducing liquor-related
externalities. The state could reasonably believe that excluding public corporations from the market
would artificially inflate liquor prices (and thus reduce consumption) for at least two reasons.
First, the state could reasonably believe that excluding public corporations would
reduce the total number of firms participating in the market, shift the supply curve, and, as a matter
of economic principle, drive up prices. See supra Section VIII. Wal-Mart insists that the market, even
without the participation of public corporations, has reached competitive equilibrium and thus
argues that allowing public corporations to enter the market would have no effect on price. Even
assuming Wal-Mart is correct on this point, it simply shows that Texas misjudged the
competitiveness of the liquor market. Wal-Mart’s burden is to show that there is no reasonably
conceivable state of facts that might provide a basis for the law. The record indicates it is reasonable
for the state to believe that excluding a large number of suppliers from the market might inflate
Second, the state could reasonably believe that public corporations have the
necessary scale and capital to offer aggressive discounts. See supra Section VIII. Wal-Mart argues
that Texas’s three-tier system prevents even extremely large companies from exerting any scale
advantage. Again, this proves too little. White it may be the case that elements of the three-tier
system mitigate the ability of large companies to use scale to their advantage, this simply shows that
the putative benefits of the ban are unlikely to fully materialize. It does not show that the state’s
proffered basis for the law lacks any rational basis. To the contrary, the record indicates that there is
reasonable basis for Texas to conclude that public corporations are likely to be larger and betterresourced, and that these sorts of companies are, at least plausibly, more likely to offer competitive
Notably, Wal-Mart’s contention that there is no rational basis to believe that the
public corporation ban inflates liquor prices is undercut by its own repeated assertions to the
contrary. In an internal document spelling out “Key Messages” with regard to this litigation and
related lobbying efforts, Wal-Mart stated, “The current law’s ban on public corporations selling
spirits . . . serves to prevent competition and limit choice and convenience, as well as keep the price
of spirits artificially high, all of which harm Texas consumers.” TABC EX-40. In its complaint in
this very lawsuit, Wal-Mart alleges, “[T]he ban against public corporations negatively impacts Texas
consumers, who are forced to pay non-competitive prices because fair competition is prevented.”
Orig. Compl. Dkt. 1, ¶ 28.
Wal-Mart responds that even if there is a reasonable basis to believe that the public
corporation ban will indirectly inflate liquor prices, the classification is still too attenuated and
arbitrary to survive rational basis review. To the extent the ban drives up prices—the argument
goes—it does so simply by excluding a subset of retailers from the market and thus reducing
aggregate supply. Wal-Mart argues that the same effect might be achieved by excluding companies
whose owners have blond hair or were born on an odd-numbered day or by some other totally
arbitrary classification. Yet, here the classification is not totally arbitrary. The record indicates that
Texas could reasonably believe public corporations tend to be larger and better resourced than their
closely-held competitors. So, the state could conceivably predict that, because of their scale,
excluding public corporations would have a larger effect on prices than excluding some other subset
of retailers. See supra Section VIII.
The Court notes that, in the context of its dormant Commerce Clause claim, Wal-
Mart has (persuasively) argued that public corporations are precisely those companies that are likely
to have the scale and resources to enter the Texas market from out of state. Wal-Mart cannot have it
both ways. It cannot both be the case that the public corporation classification is entirely arbitrary
and yet, at the same time, an effective proxy for the subset of companies that have the resources to
compete across state lines.
In sum, Texas could reasonably believe that excluding public corporations from the
retail liquor market would artificially inflate prices, thereby moderating the consumption of liquor
and reducing liquor-related externalities. Wal-Mart has adduced evidence that casts doubt on
whether the law will have this effect. But Wal-Mart has not proven that the state’s theory that
excluding large, well-resourced companies from the market might drive up prices is pure “fantasy.”
St. Joseph Abbey, 712 F.3d at 223. Thus, the public corporation ban, while constitutionally infirm
under the dormant Commerce Clause, does not offend the Equal Protection Clause.
Section 22.06(a)(2) Survives Rational Basis Review
Next, the Court turns to section 22.06(a)(2), which prohibits the holder of a wine
and beer retailer’s off-premise permit, known as a BQ permit, from also holding a package store
permit. Most grocery stores in the state hold BQ permits, which allow them to sell both beer and
wine. Wal-Mart’s existing retail stores in the state all hold BQ permits. Accordingly, before Wal-Mart
could obtain any package store permits, it would be required to convert its BQ permits into separate
BF licenses (for beer) and Q permits (for wine). The rights conferred by the BQ permit are nearly
identical to the rights conferred by the combination of the BF and Q permits, with a few minor
differences. (The most relevant distinction is that a Q permittee may sell wine with up to 24%
alcohol content, whereas a BQ permittee may only sell wine with up to 17% alcoholic content.) WalMart contends that the process of converting its permits would require significant time and expense.
In addition to being burdensome, Wal-Mart believes that this restriction is arbitrary. It thus argues
that the restriction fails rational basis review because it differentiates between entities that hold BQ
permits and those that do not, without basis. The Court disagrees for two reasons.
First, section 22.06(a)(2) does not impose a classification cognizable under the Equal
Protection Clause. “Because the clause’s protection reaches only dissimilar treatment among similar
people, if the challenged government action does not appear to classify or distinguish between two
or more relevant persons or groups, then the action does not deny equal protection of the laws.”
Mahone, 836 F.2d at 932. Here, section 22.06(a)(2) treats all entities the same: they may elect to
obtain a BQ permit or not. Any entity that chooses to obtain a BQ permit is not allowed to obtain a
package store permit. Wal-Mart contends that the law discriminates against the holders of BQ
permits, while favoring entities that do not hold BQ permits. Yet, the beneficiaries of this
purportedly preferential scheme (entities that do not hold BQ permits) are treated no differently
than Wal-Mart or other BQ permittees—they have simply made a different decision. The law itself
applies to all parties equally.
Second, section 22.06 is rationally related to limiting the number of retail liquor
outlets and moderating liquor consumption. The law forces retailers to choose between the
privileges of selling less potent alcoholic beverages using a single streamlined BQ permit or, if it
wants to sell more potent beverages, to endure the time and expense of obtaining more permits at a
higher cost and to be subject to more regulatory strictures. Wal-Mart’s objection that converting its
BQ permits into BF licenses and Q permits will be a costly process simply underscores that section
22.06 effectively discourages retailers (particularly those already selling beer and wine) from entering
the package store market. Thus, there is a conceivable relationship between section 22.06 and the
state’s legitimate interest in reducing the number of retailers in the liquor market and reducing the
number of retail liquor outlets. The Court is not persuaded that there is no rational basis for Texas’s
decision to prevent BQ permittees from procuring package store permits.
The Five-Permit Limit Survives Rational Basis Review
The Court next turns to the five-permit limit, which (subject to the consanguinity
exception discussed below) prohibits any entity from holding an interest (“in” or “in an entity
holding”) more than five package store permits. The five-permit limit is rationally related to the
state’s legitimate interest in limiting the number and density of retail liquor outlets in order to reduce
the availability and increase the price of liquor. Numerous states impose similar permit limits, see
TABC Ex-67, and these limits have been repeatedly upheld by other courts, e.g., Parks v. Allen, 426
F.2d 610, 614 (5th Cir. 1970) (upholding an Atlanta ordinance that prohibited issuance of more than
two liquor licenses to single family); McCurry v. Alcoholic Bev. Control Div., 4 F. Supp. 3d 1043, 1047
(E.D. Ark. 2014) (upholding Arkansas’s one-permit limit). The five-permit limit, standing alone,
survives rational basis review.
The Consanguinity Exception Fails Rational Basis Review
Finally, the Court turns to the consanguinity exception to the five-permit limit. Tex.
Alco. Bev. Code. § 22.05. Under this statute, two family members within the first degree of
consanguinity that each have a majority interest in an entity that holds package store permits may
consolidate their package store businesses into a single legal entity. The new, consolidated entity may
retain all of the package store permits, notwithstanding the five-permit limit. There is no limit to the
number of times that a permittee may use the same relative to obtain and consolidate additional
permits. A single consolidating relative is enough to enable a business to obtain an unlimited
number of permits. Texas’s largest package store companies all have substantially more than five
permits because of the consanguinity exception.
This consolidation process, however, is not available to everyone. To be eligible for
consolidation, both family members must have a majority interest in their respective entities. No
single person owns a majority interest in Wal-Mart, meaning Wal-Mart, if it were allowed to hold
package store permits, would be limited to five permits. The same is true for many companies with
diffuse ownership. Other companies may not have access to the consolidation process not because
they lack a single majority interest holder, but because their majority interest holder lacks a child,
sibling or parent who is willing to assist with the consolidation process.
It is helpful to begin the rational basis inquiry by identifying the legal classification at
issue. Here, the consanguinity exception differentiates between companies that are majority owned
by a single natural person who has a family member within the first degree of consanguinity who is
willing and able to assist in the consolidation process and companies that do not. Wal-Mart argues
that there is no rational basis for such an unusual classification. The Court agrees.
TABC offers a variety of rationales in support of the consanguinity exception,
including that it: (1) promotes family businesses, (2) promotes small businesses, (3) enables estate
planning, and (4) creates an opportunity for package stores to grow in certain areas, such as large
cities. None of these rationales is persuasive.
First, there is no rational relationship between the consanguinity exception and
promoting family businesses. Assuming that promoting family-owned or family-managed businesses
is a legitimate state interest, the consanguinity exception does the exact opposite. To begin with, the
statute does not favor family owned businesses; it favors businesses that are owned by people with
certain types of family members. For example, a package store company wholly owned by a single
person whose family members have no involvement in the company whatsoever (either as owners,
managers or employees) may still use the consanguinity exception to obtain more than five permits
as long as the owner has a single child, sibling, or parent who is willing to complete the necessary
consolidation paperwork. Yet, such a company—wholly owned by a single person—is surely not a
More to the point, under the consanguinity exception, the consolidating relative may
not be employed by the current permittee or have any ownership in the permittee’s business. The
five-permit limit prohibits any person from “directly or indirectly” having an interest in more than
five permits, and a company’s “stockholders, managers, officers, agents, servants, and employees”
are all considered to have an interest in the company’s permits. Tex. Alco. Bev. Code. § 22.05.
Exceeding the five-permit limit therefore requires a family member with no involvement in the
package store company who can independently obtain more permits and then consolidate them into
the existing business. The law thus discourages family members from becoming involved in the
business, because by doing so a family member would disqualify herself from obtaining and
consolidating more permits. Unsurprisingly, there is not a scintilla of evidence in the record
suggesting that the consanguinity exception has had any effect on the number of package store
companies that are “family businesses,” however that term may be defined.
Second, there is no rational relationship between the consanguinity exception and
promoting small businesses. The five-permit limit promotes small businesses by restricting the
number of permits any company may hold and thus placing a ceiling on the growth of any one
package store company. The consanguinity exception does the exact opposite: it exempts some
companies from the five-permit limit, allowing them to circumvent the ceiling that the limit imposes.
The exception creates an opportunity for a limited class of businesses to avoid the five-permit limit
and thus promotes the growth of large package store chains. If it were not for the consanguinity
exception, no package store company in the state would own more than five package stores. Yet,
because of the exception, Texas has several large package store chains, one of which owns over 150
package stores. See supra Section IV.
Third, there is no rational relationship between the consanguinity exception and
estate planning. TABC suggests that the exception provides a succession mechanism that is
somehow helpful in estate planning. Yet, it is entirely unclear how this consolidation procedure aids
the process of estate planning. As with any other type of business, there are many tools available to a
package store owner who wants to ensure her business assets are appropriately transferred after her
death. Even if some form of consolidation procedure may serve estate planning purposes, TABC
does not even attempt to explain why allowing a consolidated entity to avoid the five-permit limit
has any relationship to estate planning. Moreover, assuming the consanguinity exception is somehow
helpful in the estate planning process, TABC does not explain why it should be limited to such a
narrow class of package store permit holders. The owners of package store companies that do not
have a child, sibling or parent who is able to assist in the consolidation process also have estates that
require resolution. In the Court’s view, this rationale borders on nonsensical and cannot save the
consanguinity exception from constitutional scrutiny.
Fourth, there is no rational relationship between the consanguinity exception and
allowing for package store companies to grow in targeted areas. There is nothing in the law that
limits package store companies that utilize the consolidation process to opening new stores in areas
where growth is needed. Companies which use the consolidation procedure can and do open new
package stores wherever they please. If Texas believes the five-permit limit is overly restrictive, it is
free to raise it. Similarly, if Texas believes there are certain underserved areas in need of more retail
liquor outlets, it is, of course, free to create a tailored exception. But the notion that the
consanguinity exception—as blunt and arbitrary as it is—somehow serves a targeted growth strategy
simply beggars belief.
In sum, the consanguinity exception creates an unusual and entirely arbitrary
classification. There is no reason to believe that the exception bears any relation to the promotion of
family business or small business or serves any other legitimate state interest. It thus fails rational
Having resolved that the consanguinity exception fails rational basis review, the
question remains what relief is warranted. The Fifth Circuit instructs,
When a statute conferring benefits on a certain class of persons is held
unconstitutional due to violation of the equal protection clause, then the unlawful
discrimination must be eradicated, either by granting the benefits to the
inappropriately excluded class, or by denying them to the class theretofore benefitted
unlawfully. In such cases where a sovereign has intentionally conferred some type of
benefit upon one group and thereby unconstitutionally deprived another, the normal
judicial remedy is to extend the benefits to the deprived group. Otherwise the result
is an imposition of hardship on a number of persons whom the legislature intended
Cox v. Schweiker, 684 F.2d 310, 317 (5th Cir. 1982) (internal citations omitted) (citing Califano v.
Westcott, 443 U.S. 76 (1979)); Welsh v. United States, 398 U.S. 333 (1970); see also Califano, 443 U.S. at 89
(quoting Welsh, 398 U.S. at 361) (holding that “[w]here a statute is defective because of
underinclusion,” the appropriate remedy is “extension rather than exclusion”).
The consanguinity exception is unconstitutional because it extends a benefit (the
right to have more than five package store permits) to some persons while withholding it from
others without a rational basis. In light of the above-stated law, the appropriate remedy is to “extend
the coverage of the statute to include those who are aggrieved by the exclusion.” Califano, 443 U.S. at
89. Here, that means allowing all persons to hold more than five package store permits. This result is
achieved by enjoining enforcement of both the consanguinity exception and the five-permit limit to
which it applies.
For the foregoing reasons, the Court concludes and hereby DECLARES that: (1)
Section 22.16 of the Texas Alcoholic Beverage Code, the public corporation ban, is inconsistent
with the dormant Commerce Clause of the United States Constitution, and (2) Section 22.05 of the
Texas Alcoholic Beverage Code, the consanguinity exception, is inconsistent with the Equal
Protection Clause of the United States Constitution.
Defendants in this action are hereby permanently ENJOINED from enforcing
Section 22.16 of the Texas Alcoholic Beverage Code.
Defendants in this action are hereby permanently ENJOINED from enforcing
Section 22.04 of the Texas Alcoholic Beverage Code.
Defendants in this action are hereby permanently ENJOINED from enforcing
Section 22.05 of the Texas Alcoholic Beverage Code.
This order and all relief granted herein are hereby provisionally STAYED for a
period of sixty days. Any party intending to seek a stay for the duration of a forthcoming appeal
shall so move the Court within ten days of the date of this order.
Finally, the Court concludes it is appropriate to defer consideration of whether
Plaintiffs are entitled to reasonable attorneys’ fees and costs until after the resolution of any appeals.
Accordingly, the Court will consider a motion for reasonable attorneys’ fees and costs only after all
appeals have been fully and finally resolved.
SIGNED on March 20, 2018.
UNITED STATES DISTRICT JUDGE
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