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The Illusion of Public Policy:

Reanalyzing Kentucky’s Restaurant Liquor Licensing Schemes 1

I)

Introduction

By Andrew Weeks 2

There are more than 7,295 eating and drinking establishments in Kentucky that account for

$6.7 billion dollars in sales a year. 3 Owning a restaurant or bar can be a profitable trade; however,

opening a new restaurant carries significant risks. Many facets of opening a restaurant can cause

delay and cost money, but one of the most common pit falls of a start-up is obtaining a license to

sell alcoholic beverages and the high margins that come with it. 4 In the highly regulated state of

California it takes two years to start a new restaurant due to an exhaustive regulatory process. 5 By

comparison, the average time to open a restaurant and receive all the proper licenses can take as

little as six to eight weeks in the more business friendly and deregulated state of Texas. 6

Start-up budgets are finite and business models require strict deadlines. Extra time and

unanticipated costs inevitably arise, and failure to obtain a liquor license after spending time and

money can doom a start-up before its doors even open. 7 This article examines the alcohol control

regulations and zoning obstacles in obtaining a liquor license for a new restaurant in Kentucky.

1 A version of this article won third place in the Kentucky Bar Associations 2016 Annual Student Writing Competition. This article is not intended to be construed as legal advice.

2 Andrew Weeks is an associate attorney with Lawrence & Lawrence, PLLC in Louisville, Kentucky. He is licensed to practice law in Kentucky. He graduated from the University of Louisville Brandeis School of Law magna cum laude in May, 2016. He can be reached for questions by email at ACWeeks@RealLawKy.com.

3 Kentucky Restaurant Industry at a Glance, NATIONAL RESTAURANT ASSOCIATION, http://www.restaurant.org/News-Research/Research/State-Statistics (last visited February 25, 2015) (based on data from the Bureau of Labor Statistics & U.S. Census Bureau, 2013).

4 See Christopher Egerton-Thomas, How to Open and Run a Successful Restaurant 41-42 (Melissa Oliver et al. eds., 3d ed. 2006).

5 The not so Golden State, THE ECONOMIST, http://www.economist.com/news/business/21594967-all-silicon- valleys-vibrancy-california-can-be-lousy-place-do-business-not-so (last visited February 25, 2015).

6 Id.

7 See EGERTON-THOMAS, supra note 4, at 60.

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How local agencies, regulations and ordinances affect and control the liquor licensing process, as

well as the impact of this process and the public policy behind it will be addressed.

The legal challenges in opening a restaurant can overwhelm the development, and

problems include hidden fees, costs, and most importantly, risks. 8 The first challenge is that the

operator is forced to spend money before even knowing whether a liquor license or any necessary

zoning changes will be granted. These unknown obstacles include zoning requirements, building

permits, parking requirements, and Alcoholic Beverage Control (ABC) rules and regulations and

are the principal sources of hidden fees, costs, and risks facing a start-up restaurant. 9 Other factors

affecting the cost of opening a restaurant include lease agreements, franchising, and financing, and

are not within the scope of this article. 10

In Kentucky, the public policy behind the liquor licensing process stems from post-

prohibition concerns combating organized crime and promoting the perceived public good. In the

years since prohibition the public policy objectives promulgated within the liquor licensing scheme

have been blurred through the lens of history. 11 Although recent developments stemming from the

Kentucky legislature have helped remove the blindfolds from Kentucky’s antiquated licensing

scheme, 12 the vestiges of 20 th century public policies that remain are inadequate in addressing the

evolving needs of the 21 st century.

As a paradigm for the Kentucky liquor licensing process, the article introduces a

hypothetical restaurant called “Restaurant Alpha.” Restaurant Alpha is a planned independent

(non-franchise) dine-in with a full bar developed by the small restaurateur group “Alpha.” How

8 See id.

9 See id. at 41-43.

10 See Richard Ware & James Rudnick, The Restaurant Book 4-5 (Facts on File Publ’n 1984); id. at 13; id. at 111.

11 See Daniel R. Meyer, Liquor Control Laws in a Historical Context, BENCH AND BAR MAGAZINE, KENTUCKY BAR ASSOCIATION, Nov., 2013, at 6-7.

12 See KENTUCKY BAR ASSOCIATION, ALCOHOL BEVERAGE CONTROL LAW UPDATE 5 (2014) [hereinafter ABC LAW

UPDATE], available at http://www.kybar.org/documents/cle/ac_material/ac2014_35.pdf.

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do unforeseen costs and obstacles affect Alpha’s budget and threaten the project before it even

opens? How does the liquor licensing process impact the time and cost of opening a new

restaurant? The Restaurant Alpha hypothetical evaluates the answers to these questions.

II)

History

In 1919, the Eighteenth Amendment to the United States Constitution took all control of

the sale of alcohol out of the state and local governments’ hands when it categorically banned the

manufacture, sale, and transportation of alcohol across the United States. 13 Soon illegal

underground bars known as “speakeasies” sprang up across the United States. This underground

retail market offered black market booze and moonshine to its clientele from all walks of life. As

a result organized crime skyrocketed across the nation and public opinion began to cycle against

prohibition. 14 In response, Congress passed and the states ratified the Twenty-First Amendment

repealing prohibition in 1933. 15 The Twenty-First Amendment effectively ceded federal control of

retail alcohol regulation to the states. Today, states and in many cases, local governments, decide

what restaurants and bars are allowed to serve alcoholic beverages. 16

This process of deciding

who gets the privilege is referred to as the liquor licensing process.

Each state treats this process differently. An overview of the diverse laws and different

state approaches has been satisfactory addressed elsewhere. 17 This article focuses on Kentucky’s

“local option” approach to this issue. In Kentucky, each county, and in many cases each individual

13 U.S. CONST. amend. XVIII (repealed 1933).

14 See Maxwell’s Pic-Pac, Inc. v. Dehner, 739 F.3d 936, 938 (6th Cir. 2014); EGERTON-THOMAS, supra note 4, at 42; MEYER, supra note 11, at 6-7.

15 U.S. CONST. amend. XXI; see Maxwell’s Pic-Pac, Inc., 739 F.3d at 938.

16 See Douglas C. Keister, Food and Beverage Control 376 (Cary Baker ed., 1977).

17 Frank A. Sloan, et. al., Liability, Risk Perceptions, and Precautions At Bars, 43 J.L. & Econ. 473 (2000).

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voting precinct, decides whether to allow the sale of alcohol and to what extent the so-called

local option. 18

Local governments directly and indirectly control this process through zoning ordinances

and policies. Courts have been highly deferential to the enforcement and legitimacy of these laws.

State and local governments and agencies effect overriding control of the process through zoning

authority and land development codes. This extends to city councils at the lowest levels and

Alcoholic Beverage Control agencies. 19

A) Public Policy and Local Power to Regulate the Liquor Licensing Process

The repeal of prohibition gave states total authority over liquor licensing. Many states,

including Kentucky, have delegated that power to local jurisdictions cities and counties. 20 In

turn, many of these local jurisdictions have further delegated controlling authority to local

agencies. 21 The local and state alcohol and beverage agencies often subject restaurants to heavy

regulation that includes double sanctions for violations. In Kentucky, this post-prohibition

regulatory scheme is eerily similar to its pre-prohibition predecessor. As a public policy issue, the

heavy regulation of alcohol was necessary in 1933 to combat the effects of organized crime during

prohibition. But as the process has evolved in the 80 years since repeal of prohibition, the public

policy objectives that originally guided this regulatory scheme seem lost in the haze of history. 22

18 See ABC LAW UPDATE, supra note 12, at 3.

19 See 48 C.J.S. Intoxicating Liquors § 149 (2014); C. R. McCorkle, Zoning Regulations in Respect of Intoxicating Liquors, 9 A.L.R.2d 877 § 2[a] (1950).

20 See City of Newport, Ky. v. Iacobucci, 479 U.S. 92 (1986); Philly’s v. Byrne, 732 F.2d 87 (7th Cir. 1984) (sustaining Illinois precinct local option law against due process challenge); Barnes v. Merritt, 428 F.2d 284 (5th Cir. 1970) (in Georgia, city governments have wide discretion and broad powers in control of liquor traffic, these powers are subject to minimal demands of due process and equal protection).

21 See Walker v. City of Carrollton, 20 S.E.2d 600 (1942). See also Prawdzik v. City of Grand Rapids, 21 N.W.2d 168, (Mich. 1946); State v. Snipes, 76 S.E. 243, 244 (N.C. 1912).

22 See ALCOHOL BEVERAGE CONTROL LAW UPDATE, supra note 12, at 2-3; MEYER, supra note 11, at 6-7.

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As a matter of public policy, courts are highly deferential of the governmental agencies

that control the sale of alcohol. 23 In fact, with one exception 24 , courts have found administrative

regulations lawful and enforceable unless in direct conflict with a statute or an overriding public

interest concern. 25 The only limitation has been that “an agency is obliged to interpret its

implementing legislation in a reasonable manner and may not make findings or promulgate

regulations in a manner that is arbitrary or capricious in substance, or manifestly contrary to the

statute.” 26 The Supreme Court stated the relationship clearly in Pike v. Bruce Church 27 saying that

when a local law is burdensome on the restaurant industry, as long as there is a legitimate local

interest involved and its effect is incidental then it will be upheld. 28

If a statute is silent or ambiguous on an issue, a Court must determine “whether the agency's

answer is based on a permissible construction of the statute.” 29 In deciding this a court does not

23 See U.S. v. Mead Corp., 533 U.S. 218 (2001); Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.

837 (1984); Menegassi v. Shinseki, 638 F.3d 1379 (Fed. Cir. 2011); Trafalgar Capital Ass’n, Inc. v. Cuomo, 159 F.3d

21 (1st Cir. 1998); Lighthouse Pointe Prop. Ass’n LLC v. New York State Dep’t of Envtl. Conservation, 924 N.E.2d

801 (N.Y. 2010); Kurcsics v. Merch. Mut. Ins. Co., 403 N.E.2d 159 (N.Y. 1980); Hodge v. Ginsberg, 303 S.E.2d 245,

(W.Va. 1983). But see Sierra Club v. Moser, 310 P.3d 360 (Kan. 2013).

24 Sierra Club, 310 P.3d 360.

25 See generally Mead Corp., 533 U.S. 218; Chevron, 467 U.S. 837; Menegassi, 638 F.3d 1379; Trafalgar Capital Ass’n, 159 F.3d 21; Lighthouse Pointe, 924 N.E.2d 801; Kurcsics, 403 N.E.2d 159; Hodge, 303 S.E.2d 245.

26 Clark Reg'l Med. Ctr. v. United States HHS, 314 F.3d 241, 244 (6th Cir. 2002) (citing 5 U.S.C. § 706(2)(A); Mead Corp., 533 U.S. at 227).

27 Although the criteria for determining the validity of state statutes affecting interstate commerce have been variously stated, the general rule that emerges can be phrased as follows: Where the statute

regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. 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, and on whether it could be promoted as well with a lesser impact on interstate activities. Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970) accord. Great A&P Tea Co. v. Cottrell, 424 U.S. 366, 371-72 (1976); Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 804 (1976).

28 See Clark Reg'l Med. Ctr. At 244 (citing Huron Cement Co. v. Detroit, 362 U.S. 440, 443 (1960)).

29 Id. (quoting Jewish Hosp., Inc. v. Sec'y of Health & Human Servs., 19 F.3d 270, 273 (6th Cir.1994)).

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have to find there was no alternative or even a better alternative. 30 In reality, an agency regulation

will be upheld unless it is “arbitrary, capricious, or manifestly contrary to the statute.” 31

Historically, cities and counties have been afforded deference in the administration of

municipal ordinances on the basis of public health, even if acting in both a legislative and

adjudicative role. 32 This is clearly evidenced in the validity of restaurant smoking bans across the

nation. 33 Other local interests that allow local governments broad authority include maintenance

of order and the protection of persons and property. 34

Local governments control the liquor licensing process through zoning restrictions. 35 As

long as a city is basing its power on a policy designed to promote the “public good” the zoning

ordinances will generally be upheld. 36 Local zoning regulations can effectively end a restaurant

developer’s operation even after a developer has sunk millions of dollars into the startup process

and location development. 37 The silver lining is that courts will sometimes allow the development

of a restaurant to continue if the development was undertaken in good faith and the prohibiting

laws were enacted after the start of development. 38

30 Id. (quoting Jewish Hosp., 19 F.3d at 27374) (alteration in original).

31 See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). But see Sierra Club v. Moser, 310 P.3d 360 (Kan. 2013).

32 See Prawdzik v. City of Grand Rapids, 21 N.W.2d 168, (Mich. 1946).

33 See Jessica Niezgoda, Kicking Ash(Trays): Smoking Bans in Public Workplaces, Bars, and Restaurants Current Laws, Constitutional Challenges, and Proposed Federal Regulation, 33 J. Legis. 99, 99-100 (2006); e.g. Amico’s Inc. v. Mattos, 789 A.2d 899 (R.I. 2002).

34 See e.g. State v. Grant, 216 A.2d 790 (N.H. 1966). But see e.g. City of Jackson v. Murray-Reed-Slone & Co., 178 S.W.2d 847 (Ky. 1944).

35 See Intoxicating Liquors, supra note 19.

36 See Kinney v. Sutton, 53 S.E.2d 306 (N.C. 1949).

37 See MARJAC, LLC v. Trenk, 380 Fed. Appx. 142 (3d Cir. 1010) (Holding that a township was within its rights in enforcing regulations preventing the development of a restaurant operation, even after over $4 million had been sunk into the project in good faith and it was 90% completed.).

38 See generally Sgromolo v. City of Asbury Park, 46 A.2d 661 (N.J. Sup. Ct. 1946) (Holding that an application for a restaurant permit in compliance with a building code and prior to a subsequent enactment of a zoning ordinance that restricted h building of the restaurant entitled applicant to the permit based on the original zoning ordinance).

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A restaurant must be allowed the opportunity to operate within a city and cannot be

completely and arbitrarily excluded from a large populace. 39 However, restrictions through

something even as broad as reduced traffic have been held valid. 40 Local citizens and property

owners are given a powerful voice at hearings that determine licensing and zoning issues, and the

legal requirement of privity is not necessary when arguing adversely to the party seeking a zoning

or restriction change. 41 A mere adverse interest to the one seeking the change is enough for the

complainant’s voice to be heard. 42

B) Alcohol Control and Public Policy Concerns in Kentucky

Kentucky practices a form of alcohol control known as “Local Option” licensing. Initially,

in 1906, Kentucky enacted the “Cammack Act” which contained a “county unit” rule. The county

unit rule allows each individual county to choose whether to allow the sale of alcohol on a limited

or complete basis, or whether to prohibit the sale of alcohol completely. 43

After prohibition was repealed in 1933, Kentucky enacted the “Kentucky Alcoholic

Control Act” in response to a special commission appointed to recommend legislation regulating

the sale of alcohol. Although the Kentucky Alcoholic Control Act was nothing like the Cammack

Act and did not re-codify the county unit rule, Kentucky Courts interpret the law so as to fully

incorporate the “county unit” rule of the Cammack Act into the existing legal landscape. 44

39 See Borough Council of Churchill Borough v. Pagal, Inc., 460 A.2d 1214 (Pa. 1983) (Holding that zoning prohibiting restaurants within any area of the city is invalid.).

40 See Franchise Realty Interstate Corp. v. Cohalan, 78 A.D.2d 552 (N.Y. App. Div. 1980), order aff'd, 425 N.E.2d 895 (N.Y. 1981); see also McDonald's Corp. v. Village of Elmsford, 156 A.D.2d 687 (N.Y. App. Div. 1989).

41 See e.g. Weeks Restaurant Corp. v. City of Dover, 404 A.2d 294 (N.H. 1979) (Holding that to contest the decision of a local planning board complainant does not have to be an abutting owner but merely needs to have an adverse interest.).

42 Id.

43 See ABC LAW UPDATE, supra note 12, at 1.

44 See Campbell v. Brewer, 884 S.W.2d 638 (Ky. 1994); Howard v. Salyer, 695 S.W.2d 420 (Ky. 1985); Murphy v. Menefee, 155 S.W.2d 753 (Ky. App. 1941).

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Under the county unit rule a county can vote to be “wet” or “dry.” A city, district, or

precinct within a “wet” county can further control the sale of alcohol and decide whether to be

“wet” or “dry” precinct by precinct. Up until 1948, a “dry” county would be controlling for every

city, district, or precinct within that county and be considered “dry” throughout the county. 45

In 1948, with the enactment of KRS 242.125, Kentucky exempted cities of the first through

fourth classes in “dry” counties and allowed these areas to vote to be “wet” separately from the

“dry” county. 46 Since 1948 through the local option laws have evolved to where there are currently

eight different types of local option elections that allow a precinct or city to have varying degrees

of “wetness” or “moistness” even within a “dry” county. 47 These specific types of local option

laws include, but are not limited to, allowing a “wet” golf course in a “dry” county; 48 allowing sale

of alcohol in restaurants that maintain a minimum of 70 percent food sales and a seating capacity

of fifty seats in “dry” counties, 49 and allowing the sale of alcohol at a qualified historic site within

a precinct. 50

The public policy behind “dry” and “moist” counties is highly suspect in the 21 st century.

If the purpose is to limit the availability of alcohol and curb its evils then the laws prohibiting

alcohol have been self-defeating of the public policy. Across the nation, “dry” counties have

significantly higher number of alcohol related motor vehicle fatalities. 51 The public policy behind

45 See ABC LAW UPDATE, supra note 12, at 3.

46 See KY. REV. STAT. ANN. § 242.125 (West 2015); ABC LAW UPDATE, supra note 12, at 3.

47 See KY. REV. STAT. ANN. § 242.127 (West 2015); id. at § 242.129; id. at § 242.1292; id. at § 230.350; id. at § 242.155; id. at § 243.156; id. at § 242.123; id. at § 242.1244; id. at § 242.1242; ABC LAW UPDATE, supra note 12, at 3-4.

48 KY. REV. STAT. ANN. § 242.123 (West 2015).

49 Id. at § 242.1244.

50 Id. at § 242.1242.

51 See Jason Combs, The wet-dry issue in Arkansas, The Pennsylvania Geographer 43(2) (2005), at 66-94; G. Schulte, et al., Consideration of driver home county prohibition and alcohol-related vehicle crashes, Accident Analysis & Prevention 35(5) (1993), at 641-648; Winn, et. al., Effects of county-level alcohol prohibition on motor vehicle accidents. Social Science Quarterly 74 (1993), at 783-792.

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a categorical ban on the sale of alcohol may have seemed legitimate in 1933, but today has become

a symbol of archaic values and contradicting facts. Modern transportation and highway

infrastructure has doomed any concerted effort to keep alcohol out of an area, and, as evidenced

by motor vehicle fatality statistics, actually has increased the dangers of drunk driving.

In Kentucky, cities or consolidated county governments with more than 3,000 people are

required to have a city Alcohol and Beverage Control Administrator who determines whether a

business meets the requirements, both zoning and otherwise, and should be issued a liquor

license. 52 Jurisdictions with less than 3,000 people are allowed to appoint an Alcohol and Beverage

Control Administrator as well, but are not required. 53 The city or county administrators will make

the final determination of license issuance, and their decision will only be overturned on appeal. 54

Most recently, Kentucky has simplified the number and types of different licenses available

within the state. In 2012, there were over eighty different alcoholic beverage license types

available, but with the passage of Kentucky’s House Bill 315 that number has been reduced to

44. 55 Kentucky’s system of allowing counties and even precincts to vote to allow or prohibit the

sale of alcohol has led to a broad and sometimes drastically different licensing process from county

to county and city to city and a confusing ensemble of laws at the state level. 56

There are generally two main categories of licenses in Kentucky, retail drink and retail

package. Retail package licenses are licenses that allow the retail sale of bottles of wine, liquor,

and/or beer for consumption off premises (i.e. liquor stores, gas stations, and more recently grocery

52 Id. at § 241.160(1).

53 Id. at § 241.160(2).

54 See Beverage Warehouse, Inc. v. Commonwealth, Alcoholic Beverage Control, 382 S.W.3d 34, 40 (Ky. App.

2011).

55 See ABC LAW UPDATE, supra note 12, at 5.

56 See Howard v. Salyer, 695 S.W.2d 420, 427 (Ky. 1985) (Leibson, J., dissenting).

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stores, among others). 57 A retail drink license authorizes a restaurant or bar to sell alcohol for

consumption on premises (i.e. a restaurant or bar). 58

Within the above two categories there are two more categories of liquor licenses, quota and

non-quota licenses. The distinction applies to both retail drink and retail package licenses. 59 When

a restaurant or bar has a quota license there are no requirements regarding the sale of food or what

kind of establishment can obtain the license. A business with a quota license could not sell any

food and still sell liquor. This license is generally harder to obtain as local zoning requirements

must be met and any neighborhood or agency concerns must be addressed before the local

administrator will issue the license. 60 Until recently, Kentucky proscribed that in 1 st class cities no

two establishments with quota liquor licenses could be within 700 feet of each other. 61 Kentucky’s

largest city, Louisville-Jefferson County Metro Government (hereinafter Louisville Metro), was

the only city that qualified as a 1 st class city for the purposes of this law. As will be addressed in

the case analysis section, in 2014, the 700 foot rule was held to be unconstitutional by the Kentucky

Supreme Court, although local municipalities can still legally enact and enforce a 700 foot rule

within their precincts. 62

The main limitation imposed by the state of Kentucky on quota retail liquor licenses is that

counties cannot issue more than one quota retail package license per every 2,300 people in the

population. 63 For quota retail drink licenses, the proportion is one quota license to every 2,500

57 Stacy Kula, The ABCs of Alcohol Beverage Control, BUSINESS LEXINGTON, April 11, 2013, available at

http://bizlex.com/2013/04/the-abcs-of-alcohol-beverage-control/.

58 Id.

59 Id.

60 See Applicants for Retail Package Liquor Licenses in Floyd County v. Gulley, 674 S.W.2d 22, 25 (Ky. Ct. App.

1984).

61 KY. REV. STAT. ANN. § 241.075 (West 2015).

62 Louisville/Jefferson County Metro Government v. O'Shea's-Baxter, LLC, 438 S.W.3d 379 (Ky. 2014).

63 804 KY. ADMIN. REGS. 9:010 § 1(1) (2015).

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people in the population. 64 For counties that contain first class cities (technically only Louisville

Metro) the limitation is loosened and one quota retail drink license per every 1,500 people in the

population can be issued. 65

A non-quota license will have various restrictions based on the type of establishment (i.e.

hotel, airport, race track, historical site, or restaurant to name a few). These licenses require a

minimum percentage of food sales to retain the license. In most cases this means a restaurant must

maintain 50% or 70% food sales compared to alcohol sales. 66 This can be problematic for

restaurants that operate on a supplemental license and stay open later to accommodate late night

“bar” patrons. 67

The public policy behind these seemingly arbitrary numerical and class designations is

unclear. The original basis of the population based quota licenses and food sales based non-quota

(e.g. “restaurant”) licenses was to help prevent abuse of alcohol and limit its availability. 68 But this

purpose is easily circumvented in today’s fast-paced and motorized world and effectively renders

the purpose moot. If there were no stipulations such as the food sales percentage then the economy

would still effectively control the number of liquor serving establishments.

III)

Analysis

The liquor licensing process has a powerful effect on the length of time, unanticipated

costs, and financial risks of opening a restaurant. 69 The controversial issue of over-regulated

64 Id. at § 2(1)(a).

65 KY. REV. STAT. ANN. § 241.060(2) (West 2015).

66 See KENTUCKY DEPARTMENT OF ALCOHOLIC BEVERAGE CONTROL, BASIC APPLICATION FOR ALCOHOLIC

BEVERAGE LICENSE 3-4 (2014) [hereinafter KENTUCKY ABC LICENSE APPLICATION], available at http://abc.ky.gov/Pages/LICapps.aspx; Stacy C. Kula & Steve Humphress, Bridled Spirits, BENCH AND BAR

MAGAZINE, KENTUCKY BAR ASSOCIATION, Nov., 2013, at 10-11.

67 See Louisville/Jefferson County Metro Government v. O'Shea's-Baxter, LLC, 438 S.W.3d 379, 381 (Ky. 2014).

68 See MEYER, supra note 11, at 6-7.

69 See EGERTON-THOMAS, supra note 4, at 42.

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licensing processes is not limited to Kentucky. 70

The woes of highly regulated New York

restaurants, often referred to as the restaurant capital of the world, have been well documented. 71

As previously mentioned, California and Texas are polar opposites in regards to the time, effort,

and cost it takes to sift through the numerous regulations surrounding start-up restaurants. 72 One

California based restaurant chain is committed to opening 300 new restaurants in Texas, but has

no plans for opening any new restaurants in California. 73 As one CEO put it, “‘too much ‘big

government’ regulation… dominate California to its detriment.’” 74

Start-up restaurants wishing to increase their profits with alcohol sales must be aware of

all agencies and laws associated with the liquor licensing process. Developers must be able to

resolve conflicting licensing regulations, respond to and interact with licensing agencies, and keep

current with all regulatory changes within the restaurant industry. 75 Although extensive licensing

regulations may have curtailed moonshiners in the early part of the 20 th century, it has had the

residual effect of curtailing start-ups in the 21 st century.

Although licensing processes can vary drastically from jurisdiction to jurisdiction in

Kentucky 76 , a survey of Kentucky’s three largest cities reveals a strikingly similar process that

reveals the same financial risks from city to city. First, a thorough examination of the typical

process a restaurant must go through to get its liquor license is necessary to understand the risks

underlying a start-up development. Next, an analysis of recent Kentucky cases addressing current

70

New

York

Wage

Theft

Law

Raises

the

Bar,

LABORNOTES

(December

17,

2010),

http://labornotes.org/blogs/2010/12/new-york-wage-theft-law-raises-bar.

71 80% Of New York Restaurants Close In First Five Years, BUSINESS INSIDER (August 8, 2011),

http://www.businessinsider.com/new-york-restaurants-fail-rate-2011-8?op=1.

72 See The not so Golden State, supra note 5.

73 J.P. Donlon, 2014 Best & Worst States for Business, CHIEF EXECUTIVE (August 7, 2014),

http://chiefexecutive.net/2014-best-worst-states-for-business.

74 Id.

75 See Stephen Barth et. al., Restaurant Law Basics 100 (John Wiley & Sons, Inc., 2001).

76 See Howard v. Salyer, 695 S.W.2d 420, 427 (Ky. 1985) (Leibson, J., dissenting).

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issues exposes some of the underlying flaws guiding Kentucky’s licensing schemes and public

policy.

A) An Examination of the Liquor Licensing and Zoning Processes within Kentucky

In Kentucky, local governments down to the lowest level have a significant influence on

the issuance of a liquor license, either through the zoning process or through the licensing process

itself. 77 The process of appeal and judicial review of a local ABC agency’s issuance or denial of a

liquor license follows the same path. The local agency’s decision at the local level is appealed and

review by the Kentucky ABC Board. This decision can then be appealed to the Franklin Circuit

Court. From there judicial appeal flows up through the Court of Appeals all the way to the

Kentucky Supreme Court. 78

To outline the typical licensing process Kentucky’s three largest cities’ liquor licensing

processes were surveyed, Louisville-Jefferson County Metro Government (Louisville Metro),

Lexington-Fayette Urban County Government (Lexington), and Bowling Green. 79

Louisville

Metro and Lexington are both consolidated city-county governments. Bowling Green, by far the

smallest of the three with barely over 60,000 people, is a traditional municipal corporation located

within Warren County. 80

Louisville and Lexington are both “wet” counties, whereas Warren County has voted to

prohibit the sale of alcohol technically making it a “dry” county. However, Bowling Green has

77 See Intoxicating Liquors, supra note 19; MCCORKLE, supra note 19.

78 See Beverage Warehouse, Inc. v. Commonwealth, Alcoholic Beverage Control, 382 S.W.3d 34, 37-38 (Ky. Ct. App. 2011).

79 State of Kentucky, CITYPOPULATION.DE, http://www.citypopulation.de/USA-Kentucky.html (last visited February 25, 2015).

80 Id.

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voted to allow the sale of alcohol within its city limits pursuant to KRS 242.125. 81 This means that

Warren County is technically a “moist” county, meaning a “dry” county that contains a “wet”

city. 82

The first step in the licensing process and the gateway to all liquor licenses is the zoning

process. 83 The granting of a change of zone is often the most risky, time-consuming, and costly

part of the whole process. 84 On paper, the process of going through the necessary zoning changes

to apply for the correct license and continuing through the local and state liquor licensing process

is fairly transparent and can generally be accessed online. 85 In reality this is a much more

complicated process and knowledgeably navigating zoning restrictions is crucial to successfully

opening a new restaurant. Budgeting for and anticipating problem areas could be the difference

between a successful start-up or closing before the doors even open. 86

In Kentucky, the first step in a zoning change is notifying the adjoining property owners

and publicly advertising notice of a neighborhood meeting. 87 A pre-application must be filed along

with the filing fee. The pre-application must include a site plan, proposal, and land development

report. 88

At the neighborhood meeting, interested property owners will cite their concerns regarding

the pending zoning change and proposed purpose of the liquor license. After this a formal

81 KENTUCKY DEPARTMENT OF ALCOHOLIC BEVERAGE CONTROL, WET-DRY-MOIST TERRITORIES (January 16,

2015), available at http://abc.ky.gov/.

82 Id.

83 See Intoxicating Liquors, supra note 19.

84 See Intoxicating Liquors, supra note 19.

85 See LOUISVILLE METRO PLANNING & DESIGN SERVICES, ZONING MAP AMENDMENT PROCEDURES [hereinafter LOUISVILLE METRO ZONING MAP AMENDMENT PROCEDURES], available at

http://louisvilleky.gov/file/zoningprocess/.

86 See Douglas C. Keister, supra note 16, at 376.

87 See LOUISVILLE METRO PLANNING & DESIGN SERVICES, CHANGE IN ZONING / FORM DISTRICT PRE-APPLICATION [hereinafter LOUISVILLE METRO ZONING CHANGE PRE-APPLICATION], available at

http://louisvilleky.gov/government/planning-design/planning-and-design-applications.

88 Id.

Page 14 of 30

application is sent to the Planning & Design Commission along with the filing fee. Since

restaurants and bars in a city such as Louisville Metro will require a C2 zoned building to receive

a liquor license 89 the filing fee could be anywhere from $1,350.00 to $5,400.00 alone. 90 For

Louisville Metro there must be reports from Metropolitan Sewer District (MSD) included in the

application. 91 All jurisdictions in Kentucky will require a fully developed project plan. 92

After the Planning & Design Commission receives the application they will release their

official agency comments (staff report) outlining all their concerns including but not limited to

potential issues stemming from traffic and drainage problems. 93 The applicant must then post

public notices and advertisements regarding its intent to apply for a zoning change, liquor license,

and the time and date of the public hearing on the matter. 94

After this a public hearing will be held by the Planning & Design Commission to address

their concerns outlined in agency comments and to give interested property owners an opportunity

to speak out against the proposed zoning change. 95 The Planning & Design Commission will

require the creation of a development plan by the applicant that details responses to local concerns

and proposed future land uses and developments. 96 A successful zoning hearing and development

plan will require the applicant to possess in-depth knowledge of the citys land development code

89 LOUISVILLE METRO PLANNING & DESIGN SERVICES, LAND DEVELOPMENT CODE FOR ALL OF LOUISVILLE -

JEFFERSON COUNTY KENTUCKY, § 2.4.4, at 116-17 (March, 2016). Note that Quota Retail Package Licenses are allowed in C1 zoned areas in Louisville, but no alcohol serving restaurants or bars are allowed in a C1 zoned area. Id. at § 2.4-05 (p. 113). Everything allowed in a C1 zone is also allowed in a C2 zone as well. § 2.4.4 (p. 116).

90 See KENTUCKY ABC LICENSE APPLICATION, supra note 66, at 3-6.

91 Alcoholic Beverage Licenses, LouisvilleKy.gov, http://louisvilleky.gov/government/codes-regulations/alcoholic- beverage-licenses (last visited February 27, 2015).

92 Id.

93 See 21st Century Development Co, LLC v. Watts, 958 S.W.2d 25, 27 (Ky. Ct. App. 1997).

94 See e.g. STEPS INVOLVED IN ZONE MAP AMENDMENTS, STEPS INVOLVED IN ZONE MAP AMENDMENTS, available

at http://www.lexingtonky.gov/index.aspx?page=644.

95 Id.

96 Id.

Page 15 of 30

and its comprehensive plan (i.e. Metro-Louisvilles comprehensive plan is called Cornerstone

2020).

The applicants development plan will be required not only for the zoning change, but also

for the ABC application itself. The detailed site plan should include diagrams and proposed

parking spaces. 97 Significant amounts of money may be spent developing this plan. Restaurants

can be legally denied licenses for a variety of zoning reasons including inadequate parking, street

width, inability to protect the public, and any other reason reasonably related to the city’s purported

pubic policy. 98 A city’s issuance of a license can be declared invalid by the court if issued in a

zone that prohibits those buildings. 99

At the hearing the applicant must address or have a plan to address all agency and

neighborhood concerns before the Planning Commission will approve the zoning change. 100 These

are trial-like hearings to adjudicate facts and take in and evaluate evidence for purposes of

determining whether the zoning change request should be accepted. 101 For example, in Bowling

Green, to receive a zoning change the applicant must describe either why the current zoning is

inappropriate or in the alternative what major changes not anticipated by the city’s comprehensive

plan have developed requiring a zoning change. 102 After the Planning Commission approves a

zoning change it will then be presented to the local legislative body (the city council) for a vote of

approval. 103

97 Id.

98 See Y.D. Dugout, Inc. v. Board of Appeals of Canton, 255 N.E.2d 732 (Mass. 1970); Village of Virginia Gardens v. Johnson, 143 So. 2d 692 (Fla. Dist. Ct. App. 1962).

99 See Intoxicating Liquors, supra note 19.

100 See e.g. Agendas and Minutes, CITY-COUNTY PLANNING COMMISSION OF WARREN COUNTY,

http://www.warrenpc.org/agendas_minutes/index.php (last visited February 26, 2015).

101 Id.

102 See CITY-COUNTY PLANNING COMMISSION OF WARREN COUNTY, ZONE CHANGE APPLICATION (2014)

[hereinafter WARREN COUNTY ZONE CHANGE APPLICATION], available at http://www.warrenpc.org/applications_and_fees.php.

103 KY. REV. STAT. ANN. § 100.197 (West 2015).

Page 16 of 30

At this stage in the licensing process an establishment such as Restaurant Alpha has

exposed itself to great financial risk before even knowing whether the zoning change will be

granted or the liquor license issued. 104 Alpha has already spent money conferring with an architect,

drafting a proposal, accumulating attorney’s fees, addressing MSD concerns (often a costly

process of developing the drainage system), and paying the filing fees. Not to mention that they

will have already bought the property or signed a lease for it. The extraordinary amount of risk

and money and time involved is already impacting Alpha’s business model before they even begin

the licensing process with the ABC. The impact of adverse property neighbors’ concerns is also

unknown and will have to be addressed during the formal adjudication process in front of the

Planning and Design Commission. 105 If Alpha’s budget has not built in an extensive allotment for

these possibilities the doors to the restaurant could never open.

If successful in receiving the zoning change the applicant must then advertise and post

notice of the application for an ABC license. 106

The process is somewhat streamlined as

Kentucky’s basic ABC application will be given to the city administrator along with any additional

requirements imposed by the local government. 107 If approved by the city, the application is then

forwarded to the state ABC for approval. 108 The application to the city must be submitted along

with a copy of the deed or lease, the filing fee, zoning verification, building approval, tax clearance,

104 See EGERTON-THOMAS, supra note 4, at 41-43.

105 See Kaelin v. City of Louisville, Ky., 643 S.W.2d 590, 591 (Ky. 1982).

106 Id. at § 424.130(1)(b).

107 KENTUCKY DEPARTMENT OF ALCOHOLIC BEVERAGE CONTROL, INSTRUCTIONS FOR BASIC APPLICATION 1-2

(2014) [hereinafter KENTUCKY INSTRUCTIONS FOR BASIC APPLICATION], available at http://abc.ky.gov/Pages/LICapps.aspx; Alcoholic Beverage Licenses, supra note 91; BOWLING GREEN, KY., Ord. BG2013-42, December 3, 2013, available at http://www.amlegal.com/nxt/gateway.dll/Kentucky/bgky/cityofbowlinggreenkentuckycodeofordinanc?f=templates$

fn=default.htm$3.0$vid=amlegal:bowlinggreen_ky.

108 Id.

Page 17 of 30

a passing Health Department inspection, and a fire safety inspection. 109 A neighborhood meeting

with the local administrator and public notice are always required. 110 The good news is that if the

local ABC administrator approves the license then the state ABC will generally grant the license.

Citizens or other interested parties can appeal the issuance of the license to the Kentucky ABC

Board, and a business denied a license can appeal to the Board as well. 111

To summarize the impact of the application process on restaurants we turn once again to

Restaurant Alpha. After going through the expensive zoning change process, Alpha, who has

already bought the property or signed a lease, has to spend even more money making sure that its

premises can pass a health inspection including installing all the proper equipment and venting. 112

There are specific equipment standards and required fixtures and safety measures that Alpha needs

before it will receive the passing health inspection grade. 113 This means not only installing the

proper equipment in the kitchen, bar, and restrooms, but also meeting all food storage, handling,

cooking, and sanitation concerns. 114 After all this but before it is known whether the license will

be granted, Alpha still must pay thousands of dollars just to submit its application. 115

The metro ABC agency is generally more concerned with having the proper zoning, but

will still raise concerns that need to be addressed before granting a license. 116

A city ABC

109 See KENTUCKY INSTRUCTIONS FOR BASIC APPLICATION, supra note 107; Alcoholic Beverage Licenses, supra note 91.

110 See BOWLING GREEN ALCOHOLIC BEVERAGE CONTROL, APPLICATION FOR ALCOHOLIC BEVERAGE LICENSE

(2014) [hereinafter BOWLING GREEN LIQUOR LICENSE APPLICATION], available at

http://www2.bgky.org/finance/businesslicensing/pdf/ABC_APPLICATION_FORM_&_INSTRUCTIONS.pdf;

LEXINGTON-FAYETTE URBAN COUNTY GOVERNMENT ALCOHOLIC BEVERAGE CONTROL, BASIC APPLICATION

INSTRUCTIONS [hereinafter LEXINGTON ABC APPLICATION], available at

http://www.lexingtonky.gov/index.aspx?page=2184.

111 See KY. REV. STAT. ANN. § 241.200 (West 2015); Id. at § 243.550; Beverage Warehouse, Inc. v. Commonwealth, Alcoholic Beverage Control, 382 S.W.3d 34 (Ky. App. 2011).

112 See WARE & RUDNICK, supra note 10, at 120.

113 See BARTH ET. AL., supra note 75, at 114.

114 See WARE & RUDNICK, supra note 10, at 120.

115 KENTUCKY DEPARTMENT OF ALCOHOLIC BEVERAGE CONTROL, LIST OF LICENSE TYPE AND FEES (2014)

[hereinafter KY LIST OF LICENSE TYPE AND FEES], available at http://abc.ky.gov/Pages/LICapps.aspx.

116 Id.

Page 18 of 30

administrator’s decision is subject to appeal and review by the state agency. 117 Filing fees for the

state application run the range from a mere $620.00 to an intimidating $4,120.00 depending on the

type of liquor license being issued. 118

Though Kentucky has recently reduced the number of available licenses down to 44

different types, choosing what kind of eligible license a restaurant should apply for is confusing in

and of itself. 119 Understanding the differences and limitations of available licenses is important

during the initial planning stages. This factor makes location regarding the availability of licenses

just as important as location choice for customer access and commercial success. 120

Though similar, especially among the bigger cities, there are nuances and

differences among the individual jurisdictions. For example, in Lexington there is an additional

“dance permit” needed for permission to have a dance floor on the premises. The supplemental

dance license requires special Fire Bureau inspection and zoning approval. 121 Permits such as this

are judicially seen as legitimate public health regulations to protect the public (in this case against

the danger of a fire in a crowded building). 122

117 See Beverage Warehouse, Inc. v. Commonwealth, Alcoholic Beverage Control, 382 S.W.3d 34, 40 (Ky. App.

2011).

118 KY LIST OF LICENSE TYPE AND FEES, supra note 115.

119 See Jack Brammer, Want to Buy or Sell an Alcoholic Drink in Kentucky? That'll Depend On Where You Are, LEXINGTON HERALD-LEADER, August 10, 2012, available at http://www.kentucky.com/2012/08/10/2294424_want- to-buy-or-sell-an-alcoholic.html?rh=1; ABC LAW UPDATE, supra note 12, at 5 (In 2012, there were more than 80 different licenses available. After the Kentucky Legislature passed the 2013 House Bill 315 the licensing scheme was simplified down to 44 different licenses.).

120 See WARE & RUDNICK, supra note 10, at 59.

121 LEXINGTON-FAYETTE URBAN COUNTY GOVERNMENT ALCOHOLIC BEVERAGE CONTROL, DANCE PACKET,

available at http://www.lexingtonky.gov/index.aspx?page=2184.

122 See id.

Page 19 of 30

B)

Kentucky Case Law: Current Trends and the Evolution of Public Policy

1)

Standing to Appeal: Beverage Warehouse, Inc. v. Commonwealth, Alcoholic Beverage

Control, 382 S.W.3d 34 (Ky. App. 2011)

This case raises an interesting public policy question concerning standing. 123 In Louisville-

Jefferson County Metro, a Beverage Warehouse liquor store appealed the issuance of a license to

a Liquor Barn store that was opening across the street, claiming that the city administrator was

required to refuse to issue a license to the Liquor Barn because it violated a local St. Matthews city

ordinance requiring 700 feet in between quota liquor package establishments (i.e. liquor stores not

restaurants and bars). 124 The Court of Appeals addressed the issue of whether Beverage

Warehouse, Inc. had standing to appeal the issuance of Liquor Barn’s license. 125

Initially the Kentucky ABC Board and Liquor Barn argued that a full evidentiary hearing

is only required when a license is denied. They claimed that a full evidentiary hearing is not

required when a citizen is appealing the issuance of a license. 126 The Kentucky ABC Board and

Liquor Barn argued that a “citizen has not been deprived of a constitutionally protected interest

and, therefore, is not entitled to a due process type hearing.” 127

In evaluating whether Beverage Warehouse even had standing to appeal the issuance of the

license the Court determined that "[t]he purpose of this subsection of the statute is to notify the

public of the proposed use of specific property so that any member of the public is afforded an

opportunity to file a protest against the issuance of a license for that location." 128 The Court held

that any aggrieved citizen may challenge the issuance of a license, and that after the issuance of

123 KY. REV. STAT. ANN. § 241.075(2) (West 2015) (KRS 241.075 only applies to “combination and business and residential areas” within 1 st class cities or consolidated governments).

124 Beverage Warehouse, Inc. v. Commonwealth, Alcoholic Beverage Control, 382 S.W.3d 34, 39 (Ky. App. 2011).

125 Id.

126 Beverage Warehouse, Inc., 382 S.W.3d at 41-42.

127 Id. at 41.

128 Id. at 40 (emphasis added) (quoting Durbin v. Wood, 369 S.W.2d 125, 126 (Ky. 1963)).

Page 20 of 30

the license they are entitled to an evidentiary hearing on whether the city administrator wrongly

granted the liquor license. 129

The central issue in Beverage Warehouse, Inc. was the way in which the distance between

the two stores was measured. Initially the measurements were made by the most direct route and

the city administrator denied based on the fact that it violated the 700 foot ordinance. 130 The

administrator had measured the distance by the most direct route that a vehicle would travel

between the two locations. 131 Liquor Barn requested a re-measurement using an alternative method

and the administrator subsequently approved the license based on the alternative measurement. 132

The Court of Appeals decision was just the beginning of even more litigation that was

ongoing until 2015 when Liquor Barn closed its doors while its appeal was pending. 133 After ruling

that Beverage Warehouse, Inc. did have standing to appeal the issuance of the liquor license, the

case was remanded for an evidentiary hearing on whether Liquor Barn was violating the local 700

foot ordinance. The Kentucky Alcohol and Beverage Control Board ruled that the liquor store was

in violation of the 700 foot ordinance and must close its doors. 134

In its appeal, the attorneys for the Liquor Barn argued that the 700 foot measurement should

be measured using the shortest pedestrian route, not “as the crow flies.” The wording of the

ordinance specifically refers to “pedestrian routes” and Liquor Barn asserts that this means walking

129 Beverage Warehouse, Inc., 382 S.W.3d at 43 (citing Kentucky Licensed Beverage Ass'n v. Louisville-Jefferson County Metro Government, 127 S.W.3d 647, 650-651 (Ky. 2004). See also Haggard v. City of Dayton, 508 S.W.2d 590, 591 (Ky. 1974).

130 Beverage Warehouse, Inc., 382 S.W.3d at 36.

131 Id.

132 Id.

133 Alicia Kelso, Liquor Barn attorney: St. Matthews store closing unrelated to legal case, LOUISVILLE BUSINESS FIRST (Jul. 31, 2015, 9:38 PM), http://www.bizjournals.com/louisville/news/2015/07/31/liquor-barn-attorney-st- matthews-store-closing.html; Steve Kaufman, Shelbyville Road Liquor Barn Plans to Remain Open While Appeal Is Under Way, INSIDER LOUISVILLE (Jan. 17, 2014, 3:28 PM), http://insiderlouisville.com/business/liquor-barn/.

134 Id.

Page 21 of 30

across every crosswalk. 135 In other words, the proper measurement would mean measuring a

significant distance up the main thoroughfare separating the two establishments, crossing the

crosswalk and then measuring back to the Liquor Barn. Liquor Barn’s attorney argued that the

Kentucky Alcohol and Beverage Control Board’s ruling “was arbitrary, oppressive and prejudicial,

and they don’t have the facts right.” 136

The ABC’s decision was in contrast to a nearly identical earlier case that differed only

because it was adjudicating a quota retail drink, not retail package, license. In that case,

Louisville/Jefferson County Metro Government v. TDC Group, LLC, the ABC ruled that the

distance must be measured by using every legal crosswalk and issued the license. The ABC’s

decision in that case was upheld by Kentucky’s Supreme Court. 137 The contrasting decisions

highlight the indecisiveness and unknown factors that cannot be fully evaluated by a restaurant

developer attempting to obtain a liquor license.

In the end, the 700 foot rule would be overruled as unconstitutional in a subsequent case

decided by the Kentucky Supreme Court and Liquor Barn would be allowed to keep its doors

open. 138 Although this issue was resolved, it was not because of a flaw with the spacing rule, but

merely because the rule focused exclusively on Louisville Metro to the exclusion of every other

city in Kentucky. Many local jurisdictions have similar spacing rules to this day.

Although the

700 foot issue from Beverage Warehouse, Inc. would be rendered moot, the holding regarding who

may challenge the issuance of a liquor license remains good law and is an important take-a-way

from Beverage Warehouse, Inc.

135 KY. REV. STAT. ANN. § 241.075(3) (West 2015).

136 KAUFMAN, supra note 133.

137 See Louisville/Jefferson County Metro Government v. TDC Group, LLC, 283 S.W.3d 657 (Ky. 2009).

138 See Louisville/Jefferson County Metro Government v. O'Shea's-Baxter, LLC, 438 S.W.3d 379 (Ky. 2014).

Page 22 of 30

2)

The

Special

Legislation

Rule:

Louisville/Jefferson

County

Metro

Government

v.

O’Shea’s-Baxter, LLC, 438 S.W.3d 379 (Ky. 2014).

In Louisville/Jefferson County Metro Government v. O'Shea's-Baxter, LLC, the Kentucky

Supreme Court ruled that KRS 241.075 was unconstitutional. KRS 241.075 was a spacing rule

that prohibited quota retail licenses from being within 700 feet of each other if within an area

designated as a “combination business and residential areas” by the Planning and Design

Commission. But KRS 241.075 only applied to cities of the 1 st class, which meant Louisville,

Kentucky was the only city to fall within its scope. This ruling did not affect the Beverage

Warehouse, Inc. case described above because it was based on a city ordinance. The O’Shea’s-

Baxter case only applies to the state statute that singled out 1 st classes cities (which meant only

Metro Louisville).

In 2007, O’Shea’s-Baxter, LLC, d.b.a. Flanagan’s (hereafter “Flanagan’s”) applied for a

quota retail drink license to replace its restaurant drink license. The Louisville Metro ABC

administrator denied the application, relying on the 700 foot restriction of KRS 241.075. 139

Flanagan’s challenged the constitutionality of this statute and the ABC and the Franklin Circuit

Court upheld the statute on appeal. 140 The Court of Appeals invalidated the statute on the basis

that it violated the special legislation rule because only areas within Louisville Metro were affected

by the statute as Louisville Metro is the only city to qualify as a 1 st class city or consolidated

government. 141

The Kentucky Supreme Court granted discretionary review and affirmed. The Court relied

on Section 59 of Kentucky’s Constitution which provides that “where a general law can be made

139 Id. at 381.

140 Id.

141 Id. at 382.

Page 23 of 30

applicable, no special law shall be enacted.” 142 The purpose of this part of the Constitution is to

prevent legislation that does not “operate alike on all individuals and corporations.” 143 This

situation often arises when different classes of cities are treated differently. 144

To be constitutionally valid when discriminating against different classes of cities two

conditions must be met:

(1) the act relates to the organization and structure of a city or county government or (2) the classification bears “a reasonable relation to the purpose of the Act.” 145

The Kentucky Supreme Court explains that the sale of alcoholic beverages is never related

to the organization and structure of a city or county government. 146 Giving a strong presumption

of constitutionality to the statute and applying the rational basis standard, 147 the Court explained

that “there must be a rational basis for assuming that a concentration of retail drink licenses in a

consolidated local government (Louisville Metro) will present different consequences than a

similar concentration of licenses in other classes of Kentucky cities and urban governments.” 148

The Court determined that there was no reasonable or rational reason why there should be

a more limited concentration of retail liquor drink licenses within “combination business and

residential areas” as opposed to the lack of density restrictions within “downtown business

areas.” 149 The Court rejected Louisville Metro and the ABC’s reasons for the distinction and stated

that they could see no difference between “combination business and residential areas” in

142 Id. at 382 (quoting KY. CONST. § 59).

143 O'Shea's-Baxter, LLC, 438 S.W.3d at 382 (quoting Jefferson Cnty. Police Merit Bd. v. Bilyeu, 634 S.W.2d 414,

416 (Ky. 1982)).

144 O'Shea's-Baxter, LLC, 438 S.W.3d at 383.

145 Id. at 383 (quoting Mannini v. McFarland, 172 S.W.2d 631, 632 (1943)).

146 See O'Shea's-Baxter, LLC, 438 S.W.3d at 382; Mannini, 172 S.W.2d at 634.

147 See O'Shea's-Baxter, LLC, 438 S.W.3d at 384 (citing Temperance League of Kentucky v. Perry, 74 S.W.3d 730,

733 (Ky.2002)).

148 See O'Shea's-Baxter, LLC, 438 S.W.3d at 384.

149 See id.

Page 24 of 30

Louisville that were subject to that statute and similar areas in cities such as Bowling Green and

Lexington that were not subject to the statute.

This case is important, because the special legislation rule used to invalidate KRS 241.075

could be used again to invalidate many other rules directed at 1 st class cities, which in reality means

only directed at Louisville Metro. But there is even more importance to this case because it shows

the

willingness

of

Kentucky’s

judicial

system

to

move

beyond

traditional

20 th

century

jurisprudence of alcohol control. The seeds of dissent against outdated prohibition-era public

policies manifest themselves within this case.

3)

Arbitrary Classifications and Irrational Public Policy: Maxwell’s Pic-Pac, Inc. v. Dehner,

739 F.3d 936 (6th Cir. 2014)

The emphasis of this article has been on restaurants and bars and the associated liquor

licenses. Yet the important public policy and general liquor licensing issues presented in Maxwell’s

Pic-Pac, Inc. make it an important issue for the current legal landscape of Kentucky liquor

licensing. The case began in 2009, when the Food With Wine Coalition used Maxwell’s Pic-Pac,

Inc. as a test case to sue the Kentucky Department of Alcoholic Beverage Control to allow the sale

of wine in grocery stores on grounds of equal protection. 150

Initially, Judge John Heyburn, United States District Court, for the Western District of

Kentucky, ruled in favor of the plaintiffs. Judge Heyburn reasoned that there was no rational

explanation for “why a grocery-selling drugstore like Walgreens may sell wine and liquor, but a

pharmaceutical-selling grocery store like Kroger cannot.” 151 He rejected all of the ABC’s

rationalizations including control of high potency liquor. Despite using the highly deferential

150 Maxwell’s Pic-Pac, Inc. v. Dehner, 739 F.3d 936, 938 (6th Cir. 2014).

151 Id.

Page 25 of 30

rational basis standard, Judge Heyburn found the statute restricting the sale of wine in grocery

stores to be unconstitutional. 152

The 6 th Circuit reversed. In its opinion, the 6 th Circuit asserted that “the state indisputably

maintains a legitimate interest in reducing access to products with high alcohol content.” 153 In

explaining how the subject statute was rationally related to the state’s interest, the 6 th Circuit

explained:

We conclude that reasonably conceivable facts support the contention that grocery stores and gas stations pose a greater risk of exposing citizens to alcohol than do other retailers. A legislature could rationally believe that average citizens spend more time in grocery stores and gas stations than in other establishments; people typically need to buy staple groceries (for sustenance) and gas (for transportation) more often than items from retailers that specialize in other, less-frequently-used products. Consider the district court's pharmacy example. Kentucky could believe that its citizenry visits grocery stores and gas stations more often than pharmaciespeople can survive without ever visiting a pharmacy given that many grocery stores fill prescriptions. On the other hand, most people who object to confronting wine and liquor conceivably cannot avoid grocery stores and gas stations. Though some modern pharmacies sell staple groceries, grocery stores may remain the go-to place for life's essentials. And though Kentucky otherwise reduces access to wine and liquor by capping the number of places that supply it, the state can also reduce access by limiting the types of places that supply itjust as a parent can reduce a child's access to liquor by keeping smaller amounts in the house and by locking it in the liquor cabinet. 154

The 6 th Circuit decision ominously reinforces Kentucky’s power to regulate the sale of

alcohol. It also reinforces the Supreme Court’s highly deferential and nearly automatically valid

rational basis test stating, “[w]e must uphold an economic regulation ‘if there is any reasonably

conceivable state of facts that could provide a rational basis for the classification.’” 155 In the

152 Id.

153 Id.

154 Id. at 940-41.

155 Id. at 940 (quoting F.C.C. v. Beach Commc'ns, Inc., 508 U.S. 307, 31314 (1993)).

Page 26 of 30

modern era of readily available transportation does this distinction between pharmaceutical selling

grocery stores and grocery selling pharmacies really make since? What public policy is being

promulgated through this law?

IV)

Resolution

So what is the public policy behind Kentucky’s liquor licensing scheme? The “public

good” is an ambiguous public policy that does not have the same meaning in the 21 st century as it

did in 1933. A start-up restaurant faces extreme financial risks navigating the murky regulatory

waters to obtain a liquor license. The heavy regulation of the licensing process stems in part from

the effort to battle organized crime that arose as a direct result of prohibition. It is a public policy

from 1933 that is now regulating a 21 st century industry. 156

Kentucky has taken steps towards a more modern and simplified licensing scheme with

the passage of House Bill 315, but the vestiges of an antiquated public policy still remain. 157 A

special supplemental license is still required to serve alcohol on Sundays costing an additional

$520.00 a year. 158 Another supplemental license is required to add more than one bar within a

restaurant. 159 Even a special license is required just to be allowed to keep a bar open until the legal

closing time. 160

What is the public policy being promulgated with these and similar regulations? Are they

really controlling the evils of alcohol and limiting its consumption or are they merely financially

punishing restaurants and bars based on an outdated interpretation of the “public good”? The

156 See MEYER, supra note 11, at 6-7.

157 See ABC LAW UPDATE, supra note 12, at 5.

158 See KENTUCKY ABC LICENSE APPLICATION, supra note 66, at 6.

159 Id.

160 E.g. Alcoholic Beverage Licenses, supra note 91.

Page 27 of 30

current system is not based on any rational and coherent form of public policy, but is operating

under an illusory scheme that has held over from the 19 th and 20 th centuries. The current system

makes little sense for the 21 st century. The solution is to overhaul the regulatory system and public

policy surrounding restaurant policy and licensing schemes.

Maxwell’s Pic-Pac, Inc. revealed just how distorted Kentucky’s public policy has become.

Is there really a legitimate and rational basis for the differentiation between a grocery-selling

drugstore and a pharmaceutical-selling grocery store? 161 The legal mechanism used by the 6th

Circuit to justify its decision has little place in today’s modern society. Most people have vehicles

and can easily travel across the city limits. Is prohibiting the sale of liquor or wine at a grocery

store really keeping people from abusing alcohol? Likewise, what purpose do regulations such as

the still used 700 foot rule serve in the modern era of mobility? Would it not be better to let the

market economy self-regulate the location of liquor selling establishments?

The solution is to formulate a new public policy surrounding liquor control in restaurants

that caters to the 21 st century. An oppressive regulatory scheme that stands on outdated prohibition-

era public policy simply cannot serve the needs of this century. Governor Beshear took a step in

the right direction with his focus group that recommended the simplified licensing scheme

contained in House Bill 315, but that was only one small step in the right direction. 162 The next

step is to overhaul the regulatory licensing scheme from the top down and let the market have more

influence on the licensing process.

First, there is no need for a “dry” county in the modern era. The public policy behind “dry”

counties has been self-defeating as numerous studies and reports show that alcohol related motor

161 Maxwell’s Pic-Pac, Inc., 739 F.3d at 940.

162 See ABC LAW UPDATE, supra note 12, at 5.

Page 28 of 30

vehicle fatalities are much higher in “dry” counties. 163 A new approach that allows the economy

to act as its own form of regulation would serve the public better than the inherently flawed “dry”

county and local option system.

In addition, increasing transparency of the process will correlate to a decrease in financial

loss among start-up restaurants. Checking city and county ordinances, and state agency regulations

that contradict and overlap is a frustrating and confusing experience. A developer must check with

two, three, or possibly four (if a neighborhood or subdivision has ordinances of its own) governing

authorities on all issues from zoning, building permits, liquor licenses, operating and health

permits, and start-up fees. This means researching the KRS, KAR, the local Planning and Design

Commission, the local ABC, the Kentucky ABC, the local Land Development Code, and local

county, city and neighborhood ordinances.

If Kentucky and its local jurisdictions removed the

smoke and mirrors behind the regulatory and liquor licensing process then it would decrease a

developer’s hidden costs and risks.

As noted above, a developer faces extreme financial risk when developing a new location

for a restaurant or bar. Not only will they have already bought the property or signed a long-term

lease, but they will often have had to perform extensive construction, development, and

remodeling to comply with all zoning requirements, building ordinances, and health codes. 164 A

solution to help alleviate this risk would be to have a pre-application process that coordinates with

local agencies and authorities and determines the likelihood of a liquor license being granted before

extreme financial risks are taken. This way a developer would alleviate some of the risk and be

163 Jason Combs, The wet-dry issue in Arkansas, The Pennsylvania Geographer 43(2) (2005), at 66-94; G. Schulte, et al., Consideration of driver home county prohibition and alcohol-related vehicle crashes, Accident Analysis & Prevention 35(5) (1993), at 641-648; Winn, et. al., Effects of county-level alcohol prohibition on motor vehicle accidents. Social Science Quarterly 74 (1993), at 783-792.

164 See EGERTON-THOMAS, supra note 4, at 42.

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more aware of potential pitfalls before purchasing a property, signing a lease, and/or initiating

extensive construction and development projects.

Completely eliminating the local option system and loosening restrictions on current

regulations would not only boost the local economy, but it would level the playing field between

local businesses and out-of-state corporate developers. The judicial system needs to step in and

overrule categorical county bans on alcohol by declaring them irrational and unrelated to any

legitimate public policy. The quota license system and its arbitrary population restrictions should

also be eliminated, and the market economy should regulate the number of establishments that

serve alcohol. Overruling outdated schemes such as the quota license system would be appropriate

for legislative action and judicial interference.

V)

Conclusion

Local option schemes and quota liquor licenses are antiquated regulatory systems that need

to be eliminated. The prohibition-era public policies that Kentucky’s licensing processes are based

upon are ill-suited to 21 st century business needs. Absolute bans on the sale of alcohol should be

judicially struck down as “arbitrary and capricious.” This requires a complete, yet necessary,

abandonment of prior jurisprudence on the issue. Liquor licensing regulations should be loosened,

and the market economy should be allowed to act as its own form of alcohol control.

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