Owning a Wine Brand: Alternatives to Investing in a Traditional Winery Model and Their Legal Implications

dreamstime_l_4301935
Many people who love wine often dream about entering the wine business: owning acres of rolling hills, planting vines and celebrating every autumn’s blissful harvest season, and maybe adding a dog or two. But the romanticism of entering the wine business can be far-fetched, hard work, and extremely costly. For many, the dream may be offset by the monetary investment. Absent substantial capital to invest in land, cellar equipment, refrigeration equipment, vines, storage, labor, multiple licenses and permits, and more, taking the jump to start a winery can be extremely risky and may take several years to produce a return on investment.

For those who cannot or may not be able to take the step to open a full-fledged winery, are there other options available for them? This article examines two basic models—the custom crush facility and the alternating proprietorship—that stray from the traditional winery setup, along with their legal ramifications.
Option 1: The Custom Crush Facility

The custom crush facility generally involves working with an existing winery that agrees to produce wine for a third party. In this type of relationship, the third party is often referred to as the “custom crush client” and the winery is called the “custom crush facility.” (The third party may also be referred to as the brand owner.)

In this type of relationship, the custom crush facility produces wine for the client using the facility’s federal basic permit and state license. This option is often attractive for many companies or individuals looking to get into the wine business because it significantly reduces the cost of investment. For example, a brand owner would not need to invest in equipment generally required to start a traditional winery. Further, many (but not all) of the regulatory hurdles may be bypassed as a custom crush client because the requirements will generally be handled by the facility.

When working with a custom crush facility, the winery is generally required to obtain the winery permit (federal, state, and/or local), as well as the Alcohol and Tobacco Tac and Trade Bureau (“TTB”) formula approval (if applicable) and the TTB label approval (COLA). Because a federal basic winery permit can often take months to obtain, working with a facility that is already licensed can save a brand owner significant time. Further, in the custom crush relationship, the custom crush facility is generally required to keep and maintain records and reports required by state and/or federal laws. The custom crush facility is also required to pay excise taxes unless the wine is transferred in bond to another bonded premises for further processing.

The custom crush client in this relationship is discharged from many regulatory hurdles, but it is important to note that the client may be required to obtain independent permits or licenses. For example, a wholesale permit may be required if the brand owner plans to purchase taxpaid wine from the facility and resell the finished wine. A brand owner should obtain counsel to check other relevant local or state laws that may apply.

One of the reasons why the custom crush model is attractive for many companies starting out in the wine business is that it still allows the brand owner to obtain a degree of control over the final product and retain ownership of the marketing, trademark, and other brand materials. The client will also control aspects related to label design and general business decisions.

Custom crush clients should be cautious that many states do not recognize custom crush clients as traditional wineries, manufacturers, suppliers, or producers. As a result, this often means that custom crush clients may not be awarded certain privileges—such as direct shipping or self-distribution—that may be afforded to wineries. Again, custom crush clients should review relevant state or local regulations as such vary significantly.

Option 2: Alternating Proprietorship

The second option for wine lovers seeking to delve into the industry is the alternating proprietorship. The alternating proprietorship model is similar to the custom crush model in that it does not require the third party to purchase most of the equipment used by traditional wineries, but the alternating proprietorship is different from both a production and regulatory perspective.

From a regulatory perspective, the TTB recognizes the alternating proprietorship model as a licensed premise that alternates between multiple owners. Generally, more than one winery is licensed at the same physical location and each will be under separate ownership. The alternating proprietorship model is flexible in that it allows two or more persons (or entities) to take turns using the same space and equipment to produce wine.

In this type of model, there is usually a pre-existing proprietor-owner of a bonded winery who will agree to rent or lease space and equipment to third parties. Generally, the proprietor-owner of the bonded winery is called the “host” winery and the third party renting space may be called the “tenant.” The host will be licensed both federally and with the state, and the tenant will also be required to obtain its own, separate federal basic permit with the TTB and license with the state. In contrast to the custom crush model, the alternating proprietorship model does require the third party to obtain a federal basic winery permit.

Further to that point, alternating proprietorship tenants have greater regulatory requirements than custom crush clients. For example, tenants are required to maintain records and reports. Further, tenants will need to obtain formula approvals (if applicable) and label approvals from the TTB on their own permits. This contrasts from the custom crush model, as the custom crush facility generally obtains formulas and labels (as opposed to the brand owner or client).

The alternating proprietorship model allows for a lot of flexibility for entities or individuals who do not want to invest in equipment, a building, land, or other essentials for establishing a traditional winery.
The model also reflects multiple types of relationships; for example, the alternating proprietorship model can sometimes entail two or more separate entities who agree to independently operate bonded wine premises and will share space and equipment. Irrespective of the exact details, the alternating proprietorship model must be approved by the TTB and the relevant state regulatory agency. Companies or individuals seeking this model should consult counsel for an overview of relevant licensing, record, tax, and regulatory requirements.

The alternating proprietorship model still remains a top choice for many entrepreneurs, especially since it allows business owners to maintain control and management over the wine production.

Lindsey A. Zahn, Esq. is an alcohol beverage and food attorney at Lehman Beverage Law, PLLC. Ms. Zahn has previously counseled wine, beer, and spirits companies on licensing and compliance, federal and state labeling, customs regulations, supplier agreements, and advertising and promotions. She is an award-winning author on wine law, publishes a leading wine law blog called On Reserve: A Wine Law Blog, and has traveled to over a dozen wine regions in the U.S. and Europe. Additionally, she has given talks and instructed classes on wine law throughout the country and in France. In 2014, her blog was nominated as one of the Top 100 Legal Blogs by the ABA Journal.