Justice Minister Ross Landry confirmed Thursday the Nova Scotia Liquor Corp. must drop its request for injunctions against Wine Kitz Halifax and Water 'n' Wine in New Glasgow.
Landry said the government had to reverse course because so many people had come forward to protest the agency's approach.
"Nova Scotians have spoken out loudly," said Landry, whose district includes New Glasgow. "As a government, we have been very open to the idea that if the status quo is not working, we look at new ways of moving forward."
It was an abrupt turnaround for a government that only weeks earlier had insisted the liquor agency was justified because the law had to be upheld.
Employees at Wine Kitz Halifax cheered when they learned of the news.
"I'm thrilled beyond belief because it's been a bit of a nightmare," owner Ross Harrington said in an interview.
However, Harrington said he was skeptical of the government's motives.
"It's an about-face to save face. The reality is it's been handled poorly from the beginning," he said.
"The NSLC, at the hand of the NDP government, has been unduly empowered to take this action. They're a huge corporation. I'm not a threat. For them to be so petty, it's disturbing."
As well, Harrington said the government's about-face doesn't soothe the sting of lost business since he stopped offering in-store brewing. He pegged the loss at about $18,000 plus about $10,000 in legal fees.
"To be out of pocket to defend your livelihood and then they admit they're wrong or they made a mistake, and not compensate me for it?" he said. "That's just insult to injury."
Liberal Leader Stephen McNeil said the government should have acted sooner, considering the liquor agency had also hired undercover agents to make wine at the stores before launching the court action.
"If this was really about listening and supporting small businesses, it would have never gone this far," he said. "There's a level of common sense that should have been applied to this and they don't seem to have any of that."
The government introduced regulatory changes in 2011 giving the agency the authority to seek a court order to prevent businesses from allowing customers to use brew kits on their premises.
Three weeks ago, the liquor agency launched legal actions against the two firms, arguing the in-store brewing and wine-making process was unregulated and unsafe.
The ensuing court case uncorked a torrent of condemnation among opposition parties, entrepreneurs and hobbyists who argued the law was anti-competitive and picked on small businesses.
Landry said the government will study the law in other provinces and develop new regulations that will allow on-site fermenting.
According to the Nova Scotia government, in-store wine and beer production is permitted in five provinces: Prince Edward Island, New Brunswick, Ontario, Saskatchewan and British Columbia.
Conservative Leader Jamie Baillie said the store owners and their customers are owed an apology from the government.
"It's a sign of a much larger problem, which is a government that causes real hardship and expense to our small businesses, treating them and their customers like criminals," he said.
"This government wasn't listening to the people. They were listening only to the Nova Scotia Liquor Corporation, which wanted to squash some small, independent home-brew companies."