Category: Legal

By Brian D. Kaider, Esq. and Kenneth Y. Lo, Esq.

As I traveled to Sacramento for this year’s Unified Wine and Grape Symposium, I began writing this article, intending to focus on key provisions of Grape Purchase Agreements (GPAs) that parties should negotiate. But, upon arrival at the symposium, I spoke with other conference attendees and it became clear that one thing was on everyone’s minds – smoke taint.

Certainly, I had heard about the fires in October, but living on the East Coast, it was difficult to get any specific information about where the fires were located, what vineyards were affected, and the extent of the damage. I heard anecdotal bits of information from friends who live in the area and were reporting on the latest evacuations and there were, of course, some very dramatic videos posted on social media. But, it wasn’t until I spoke with grape growers, vintners, négociants, and insurance companies that I began to understand the scope of these fires. Or so I thought.

When the conference ended, my wife and I headed toward wine country. Over the course of three days, we visited more than a dozen wineries from the Oak Knoll District to Geyserville. Everywhere we went, there was evidence of the fires. We saw hillsides covered in black and entire neighborhoods destroyed. On one densely forested mountain road, the sickly stench of smoke still hung in the air, months after the fires were gone. In some areas, a house would be reduced to nothing but a cement slab and a chimney, while another house only a few feet away appeared untouched. It was unnerving and terrible and I offer my heartfelt condolences for those who lost their homes, their businesses, and in some tragic cases, their loved ones.

As devastating as these fires were, though, there were some bits of good news. First, with some unfortunate exceptions, the vineyards themselves were mostly spared from direct fire damage, acting as a firebreak that helped prevent further spread of the fires. Second, by the time the fires occurred, about 90% of the grapes in the area had already been harvested and research has shown that exposure of the vines to smoke will not affect the fruit in future harvests. Third, of the remaining grapes on the vine, very few were potentially exposed to smoke from the fires.

So, while only a very small percentage of the 2017 harvest was potentially affected by smoke taint, this season should be a wake-up call to the wine industry in two respects. Foremost, vintners and especially grape growers should recognize that the days of “handshake” deals are in the past. In most states an agreement to purchase grapes for more than $500 is unenforceable unless in writing. This means that without a written contract, a vintner could reject a grower’s fruit even if there was no reasonable threat of smoke exposure and the grower would have no recourse. Secondly, as will be discussed below, the issue of smoke taint is quite complicated and it is essential that the grape purchase agreement address this threat specifically.

With that backdrop, the remainder of this article will focus on areas of a Grape Purchase Agreement where smoke taint may be addressed.

Preamble and Recitals

One commonly overlooked section of a GPA is the Preamble and Recitals section. Typically, though, this is where the source of grapes to be purchased is identified. In some cases, it may be very general (e.g., “20 tons of Merlot grapes from XYZ Grape Grower’s vineyards”), in others very specific (e.g., “all Merlot grapes from XYZ Grape Grower’s Howell Mountain vineyard, Block 6, Rows 1-12”). It is often the vintners making high-end wines that request this level of specificity, because they want to highlight the attributes of a highly specific terroir. But, specificity here can also help with the issue of smoke taint. The grower may have 100 acres of vines, spread across four vineyards in vastly different locations. If the vintner knows that one of those four locations suffered significant smoke exposure and the other three had none, then knowing exactly where the grapes she contracted for are sourced is the first step to knowing whether to accept the grapes as-is or subject them to testing.

Quality

As with sourcing information, the quality of grapes to be delivered may be described with various levels of specificity. A general quality statement might simply require that the grapes be “sound, merchantable, and suitable for making a particular quality of wine.” More specific language may limit the amount of defects in the grapes, such as mold and rot, to less than one percent of the delivered fruit. Similar limitations may be placed on the amount of “material other than grapes” (MOG).

This section is also an opportunity to address the issue of smoke taint. Two of the most commonly tested markers for smoke taint are guaiacol and 4-methylguiacol. These are two of the many thermal degradation products of lignin (the large polymer depicted in the image at the top of this article), which are formed during forest and brush fires and contribute to smoke taint in wine. Unfortunately, when these molecules are absorbed into the skin of a grape, they bind with sugar molecules to form glycosides that are unnoticeable in smell or taste. In the acidic environment of fermented wine, however, these glycosides are oxidized and the volatile forms of the guaiacol phenols are released. The longer the wine sits, the more concentrated these volatile forms become and the more noticeable the unpleasant smoke flavor.

So, the quality section of the GPA may set limits on the amount of detectable guaiacol in the delivered grapes. Most effectively, this quality standard can be tied to the pricing and payment terms. For example, the quality section may specify that if the guaiacol level is below a certain threshold, the grapes will be accepted as is and according to the agreed pricing set forth in the GPA. If they are over that threshold, then a sliding scale of price adjustments will be put into place, reducing the price in accordance with the level of contamination. The language should include a maximum threshold over which the fruit will be rejected entirely. Because the guaiacol is in a bound form in the grape, the quality section may also provide for periodic testing beyond delivery of the fruit with suitable pricing adjustments in accordance with those later test results, as well. Note, however, that this may cause problems in California, due to the Berryhill Act, which requires final prices to be determined by January 10th in the year following the harvest. Accordingly, testing should occur as early as possible.

Ideally, as many phenols as possible should be tested, because while guaiacol and 4-methylguaiacol are good markers for exposure to smoke, meaning that a high level of guaiacol means there was probably significant smoke exposure, they are not good predictors of the sensory perception of smoke, because even if there are low levels of guaiacol, there may be high levels of other compounds that contribute to smoke flavor. The Australian Wine Research Institute (http://www.awri.com/au), for example, offers testing of both wine and grapes for the volatile and non-volatile precursors of guaiacol, 4-methylguaiacol, syringol, 4-methylsyringol, p-cresol, o-cresol, and m-cresol. Results are generally available in ten working days.

Who pays for the tests is also up to the parties. If the vintner is concerned with the threat of smoke taint, she may consider the testing part of the cost of doing business to ensure a certain quality of product. If the grower is convinced that there was no smoke exposure, she may elect to have her fruit tested before delivery to ensure she gets full-price. One way to address the matter in the GPA is to shift the cost according to the results. For example, if the vintner requests testing and it comes back negative, the vintner shoulders the cost of the test. If it comes back above a certain threshold, the cost is paid by the grower or subtracted from the price of the grapes if the fruit is accepted by the vintner.

Viticultural Control and Risk of Loss

In some cases, a GPA may simply require that the contracted grapes be grown in a manner that is “consistent with viticultural practices” for the particular location (e.g., Sonoma County). Often, however, the vintner will want more control over the farming practices, particularly for grapes destined for high-priced wines. As an example, vintners often prefer a later harvest date for the grapes, because the extra “hang time” on the vines allows the development of fuller, richer flavor and higher sugar concentrations in the berries. Growers, on the other hand, generally prefer an early harvest because late season rains may promote mold and the berries lose water weight as they ripen, which may affect the grower’s income if the contracted price is based upon tonnage rather than acreage. Typically, these issues are addressed in the GPA by setting a brix and/or pH level in the berries at which the grower will notify the vintner it is time for harvest. If the vintner elects to delay picking, all or some of the risk of loss in the crop will pass to the vintner.

The 2017 fires highlight another aspect to this conflict of interests. As noted above, about 90% of the grapes in the region had been picked before the fires. Of those that remained, if any had been delayed in the harvest according to a vintner’s request, that vintner should bear some responsibility for any smoke taint in those grapes. Accordingly, the GPA should specifically identify smoke taint as one of the threats to late-harvested grapes for which the vintner assumes the risk of loss.

Final Thoughts

Both grape growers and wine makers understand there are risks in this industry, including the possibility of wild fires. Generally, maintaining a positive relationship outweighs the concerns surrounding a single harvest and the parties work together to find a mutually satisfactory solution. In the event of a dispute, however, there are advantages to obtaining expert legal advice and opinions, incorporating the results of phenol testing, as to whether there are violations of express or implied contract conditions regarding the fruit’s suitability for winemaking. These formal legal opinions can make a party’s position more defensible and ensure that only warranted concerns are in play.

It is worth repeating that very little of the 2017 harvest was affected by the horrible fires in October. Nevertheless, while this event is still fresh in everyone’s minds, it is wise to reevaluate existing grape purchase agreements to see whether smoke taint is adequately addressed for the protection of both parties.

Brian Kaider and Kenneth Lo are principals of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry. They have represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation

bkaider@kaiderlaw.com
(240) 308-8032

By Brian Kennon, Midwest Winery Insurance

When I visit a winery for the first time, my number one priority is to first hand observe any exposures. I want to know the risks present for that particular winery. This is done by a number of steps, I meet with the owner and/or winemaker. We walk the facility and I am making notes of anything that might be of particular interest or concern to the underwriters. I have them complete a quick, but thorough supplemental questionnaire that gives me very specific information about their exposures. I also review their current policy for missing coverage or coverage gaps. There are concerns that are unique to wineries that deal with the different stages of the wine making process (with a few risks common to each stage)

1. Vineyard – growing the grapes (Extreme weather or natural disasters, insect infestation, plant disease, chemical drift).

2. Harvesting the grapes (mechanical failure, work comp for pickers).

3. Transporting the grapes (Grapes in transit are crushed).

4. Crushing and pressing (mechanical failure, contamination, leakage).

5. Fermentation (contamination, leakage, spoilage).

6. Clarification (contamination, leakage, spoilage).

7. Aging and bottling (contamination, leakage, spoilage).

You are probably noticing that contamination, leakage and spoilage are a common denominator with several of the steps. This is coverage that can, and should be, added as an endorsement to your insurance policy. Another overlooked endorsement specific to wineries is Wine Stock Market Valuation. Let’s break each of these down individually:

Wine Stock Market Valuation

An good winery policy will cover your wine from the time it is grapes on the vine to when it is finished product, bottled and on the shelf ready for purchase. Ideally, the wine will be valued at it’s finished sales price minus the cost not yet incurred (bottling, labeling, boxing, etc…) if it is still in the early production stages. I will review this again, in more detail, in the Wine Leakage endorsement

Wine Leakage

Wine Leakage should be addressed in a Wine Leakage Endorsement. During wine production, the wine is processed and then stored in numerous large stainless steel containers. Wineries will automatically have leakage exposure for the containers’ valves, fittings or hatches which can malfunction and the product ends up going down the drain. Most companies that offer winery coverage will give some type of “default” leakage exposure. I would venture to say it is not enough. I will look at the winery’s largest tank exposure and take their highest value wine. I will convert it to finished product selling price and use that figure for maximum leakage exposure. I will increase their minimum coverage to the converted maximum figure. This way there are no surprises if there is a worst case scenario with a leakage claim.

Wine Spoilage & Contamination

Wine Spoilage and Contamination should be addressed in a Wine Spoilage and Contamination Endorsement. This covers spoilage or process failure meaning, breakdown or service outage. Breakdown can cause a change in temperature or humidity resulting from mechanical breakdown or mechanical failure of refrigerating, cooling or humidity control apparatus or equipment.

Service outage causes a change in temperature or humidity resulting from complete or partial interruption of electrical power, gas or water supply, either on or off the described premises, due to conditions beyond your control.

Contamination can be caused by a contaminant introduced during the storage or during the processing or manufacturing operation of the wine making process. An example of this would be; stainless steel tanks are double-walled with glycol circulating between the two walls to take away heat and cool the juice. Pinholes, cracks or leaks can develop allowing the glycol to corrupt the juice or wine rendering it useless due to contamination.

As with Wine Leakage, I will look at the winery’s largest tank exposure and take their highest value wine. I will convert it to finished product selling price and use that figure for maximum leakage exposure. I will increase their minimum coverage to the converted maximum figure.

Equipmemnt Breakdown

Also known as boiler and machinery insurance, or mechanical breakdown insurance, equipment breakdown insurance helps cover:

The cost to repair or replace damaged equipment, including time and labor, lost income, spoiled inventory, and necessary expenses incurred during the restoration period.

There are five categories of equipment that equipment breakdown insurance typically covers:

1. Mechanical, which includes motors, engines, generators, elevators, water pumps and specialized production and manufacturing equipment.

2. Electrical, which includes transformers, electrical panels and cables.

3. Computers and communications, which includes computer systems, phone systems, voice mail systems, security systems and fire alarm systems.

4. Air conditioners and refrigeration systems

5. Boilers and pressure equipment

Equipment Breakdown
Coverage Examples

Equipment breakdown insurance is smart to have – even if you don’t own your own building, and especially if the success of your business is dependent upon properly-functioning equipment owned and operated by a key supplier, such as a local power company.

For example, if you own a pizza shop that depends on online orders, as well as walk-in customers, your business will suffer if the power goes out due to a power surge. A power outage could result in loss of heat or air, the inability to process online orders, as well as the inability to prepare, cook, serve and sell food. And if the power is out long enough, your food inventory could spoil.

In this example, equipment breakdown insurance may help pay for:

• Business income you lost while the power was out.

• The cost to repair your walk-in refrigerator and to replace a computer that were damaged by a power surge that occurred when the electricity was restored.

• Costs associated with the time and labor to repair and replace your damaged equipment.

• The cost to replace any spoiled food or product.

https://www.nationwide.com/what-is-equipment-breakdown-insurance.jsp

So, in a nut shell, Equipment Breakdown should pay to repair or replace the equipment as well as any business interruption costs that result from it.

Other Considerations

In my home state of Missouri, there are over 125 wineries. The majority of these wineries are smaller and rely on other larger wineries or farmers for products or services, such as grapes or unfinished juice, crushing, etc… These wineries must be careful because most of these farmers or larger winery’s policies will not cover the smaller winery’s offsite storage inventory or winery operation. This would also include liability.

Another very important coverage that may need to be considered is worker’s compensation. Ask your agent what the state requirements are for worker’s compensation to see what coverage would work best for you.

In closing, you should take a look at your current policy and make sure you’ve got the appropriate endorsements to cover loss of wine due to spoilage, contamination or leakage. Equipment Breakdown is another area you should have covered. If you have any questions, contact your agent and set up a policy review. Not every company will underwrite a winery, properly. Look for a carrier with expertise in the winery business. If they properly cover a winery, you should have the endorsements I covered in this article, that are basically exclusive to vineyards and wine production. If they don’t, you will have a problem when you submit a claim. Remember not to choose a carrier based solely on price. Premium is an important part of the policy, just don’t make it your sole deciding factor in choosing.

If you have any questions or concerns about your current policy contact Brian Kennon at…
gbkdysart@sbcglobal.net
660-886-6502

By Lindsey A. Zahn, Esq.

The label approval process is unique to the alcohol beverage industry; most traditional foods (such as cookies, pasta, and sugar) are not subject to government pre-approval before being sold at market. Indeed, well before a wine reaches a store’s shelves or the hands of a consumer, the federal—and possibly even the state—government played a significant role in what must, what can, and what cannot appear on a wine label.

The other unique aspect about wine labels—in comparison to distilled spirit or malt beverage labels—is that while most wine labels are subject to the labeling jurisdiction of the Alcohol and Tobacco Tax and Trade Bureau (TTB), wines under 7% alcohol by volume fall in the labeling jurisdiction of the Food and Drug Administration (FDA). Of course, wines in FDA’s jurisdiction encounter different types of requirements. (For more information, see my prior article in Beverage Master from December 2014 titled “When FDA Takes Control: What Alcohol Beverage Companies Need to Know About the FDA.”) This article focuses on the key elements that must be present on a wine label that falls under TTB’s labeling jurisdiction.

What Does the COLA Process Entail?

An approved label is called a Certificate of Label Approval (COLA). A COLA is required for a product to be sold in interstate commerce (i.e., across state lines or when a product is imported into the U.S.); if a product is being sold only in one state, it may qualify for a COLA Exemption.

Label applications can be submitted to TTB either through paper or through TTB’s electronic system (COLAs Online). Nowadays, most labels are submitted online as opposed to paper applications, which can entail a significant amount of back-and-forth (such as providing explanations to Needs Correction requests, etc.). However, the processing time can vary significantly depending on the time of year, amount of applications TTB receives, and even by labels. A more challenging label may encounter longer processing time, as the specialist assigned to the label application may need to conduct research or look into particular concerns.

When submitting a wine label application to TTB online, one can upload images of the labels. It is usually best to use JPEG format with high resolution (300 dots per inch or more). The applicant must upload images of all the labels that area affixed to the container when the bottle is sold at market. Once submitted, a label application may be approved, rejected, or come back with the “Needs Correction” status. The latter indicates that TTB either needs more information and clarifications or that the label will need editing.

When labels are approved, they appear on a public database that is viewable by anyone. Unlike formulas (or recipes) submitted to TTB, an approved label can be viewed on TTB’s Public COLA Registry. Currently, we can view labels submitted 15 years ago or more (with some limitations).

What Must Appear on a Wine Label?

Wine labels must contain, at minimum, certain statements and information. These typically include the following:

1. A brand name;
2. Class or type statement;
3. Government Warning Statement;
4. Name of the bottler along with the bottler’s address as it appears on the bottler’s TTB permit (in the case of domestic wines) or name of the importer and importer’s address as it appears on the importer’s TTB permit (in the case of imported wines);
5. Alcohol by volume statement;
6. Net contents statement;
7. Sulfites declaration; and
8. Country of Origin (for imported wines).

The brand label of a wine label is required to contain a brand name along with the class, type, or other designation of the wine. The brand name is usually the name under which the wine will be marketed, such as “ABC Winery” or similar. The class/type statement will vary depending on what the wine is, but includes statements similar to, “RED WINE,” “WHITE WINE,” “ROSE WINE,” “RED TABLE WINE,” “WHITE TABLE WINE,” “RED DESSERT WINE,” and similar.

For a domestic wine, the name and address of the bottler must be included on the label. Per 27 CFFR 4.35(a), the language “Bottled by” or “Packed by” is generally included before the name and address of the bottler. Additional, optional language such as, “Blended by” or “Distributed by” may be included in addition to the bottler statement provided that the information is truthful and not misleading.

Imported wines require that the label include the name and the address of the importer on the label. 27 CFR 4.35(b) requires that the language “Imported by” must precede the importer’s name and address. Additional language may be required or permitted depending on the wine’s exact process.

27 CFR 4.36(a) mandates that an alcohol by volume statement appear on the label of wines containing more than 14% alcohol by volume. For wines at or below 14% alcohol by volume, the alcohol by volume statement may be optional provided that the type designation “table” wine (or “light” wine) appears on the brand label. On most wine labels, it is common to see the alcohol content statement regardless of whether or not the wine is at or below 14% alcohol by volume. The statement generally appears as, “Alcohol __ % by volume” or “__% Alcohol by Volume” or “__% Alc./Vol.” or similar.
The remaining mandatory statements can generally appear anywhere on the label with some exceptions. The Government Warning Statement is mandated by 27 CFR 16.21 and is required on both domestic and imported wine labels. On your standard 750 mL wine bottle, the statement must appear in a minimum of 2 millimeter font and be no more than 25 character per inch. It must also be separate and apart from all other information.

The net contents statement is mandatory label information unless it appears “blown, etched, sand-blasted, marked by underglaze coloring, or otherwise permanently marked” into the glass bottle (in which case you must note such on the application). 27 CFR 4.37(c). Wine bottles can come in various sizes, but the container must conform with standards of fill designated in 27 CFR 4.72(a)-(b).
A declaration of “Contains Sulfites” is required to appear on a wine label if the wine contains 10 parts per million or more of sulfites. The maximum amount of sulfites that can be present in wine is 350 parts per million. 27 CFR 4.22(b)(1). Different standards apply if the wine is organic or 100% organic.

For imported wines, 19 CFR 134.11 requires the labels be marked in a conspicuous place with the country of origin of the article at the time of importation in to the United States.

What is Some Optional Information that Can be Included on a Label?

Optional information on a wine label included vintage years. Vintage years are optional, but if they are used, the wine label must indicate an appellation of origin (a country, state, city, viticultural area, or foreign equivalents). The appellation must be shown in direct conjunction with the class or type designation.

Winemakers may also wish to include a grape variety or multiple grape varieties on a label. Naming a grape variety will trigger the wine label to require an appellation of origin. If naming one grape variety, TTB requires that the wine must be made from at least 75% of the grapes named. If naming two or more grape varieties, the percentage of each grape name must be listed and the total percentages must add up to 100%. There may be other requirements depending on where the wine is produced, so always check local laws to make sure.

Another option is to list an appellation of origin on the label (without a vintage year or grape variety) or an American Viticultural Area (AVA). If using an appellation of origin like a country or state, 75% of the wine must come from the labeled appellation of origin. If using an AVA, at least 85% of the grapes used to produce the wine must come from within the boundaries of the named area. Of course, there may be more specific requirements depending on the wine’s origin. For example, some states, like California, may have stricter requirements when using a particular appellation or AVA.

Of course, there are many other claims or information that can be included on a label, such as organic, gluten free, or even background information about the winery. There are certain regulations or requirements that must be complied with or met for a winery to state such information or claims. For more information, talk to your alcohol beverage attorney on what may or may not be said on a wine label.

Lindsey A. Zahn, Esq. is an alcohol beverage and food attorney at Lehrman 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 has also filed new grape variety petitions with TTB on behalf of her clients. 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 and 2015, her blog was nominated as one of the Top 100 Legal Blogs by the ABA Journal.

Acres of rolling hills covered in fruit-covered vines are an idyllic setting for large gatherings and special events. But, for wineries, there are a host of legal concerns that must be addressed or they could lose their license or even be subject to criminal prosecution.

ARE YOU ALLOWED TO HAVE THE EVENT?

Whether it is a hosted event that is open to the public or a private event, like a wedding or anniversary party, the threshold question is whether the winery is even permitted to hold the event.

Zoning Laws

Zoning laws vary dramatically, not only state-to-state, but even among cities and counties within a state. Most, however, have some limitation on the number and/or size of special events. Wineries need to know how their jurisdiction defines a “special event” and what restrictions are in place. For example, in Placer County, California, a winery is required to have one parking space for every 2.5 attendees of a promotional event.

In Maryland, for any promotional event after 6 p.m., a winery must file a notice with the Comptroller’s office at least 14 days in advance; only 12 such events per year are permitted. Within Maryland, Montgomery County is more restrictive: only 9 days of events per calendar year in an agricultural zone or two special events in a residential zone. Additional events require conditional use approval by a hearing examiner.

Even within a jurisdiction, different rules may apply to different properties. When a winery first applies for permission to operate at a specific location, it is not uncommon for the local zoning board to negotiate certain restrictions on the property, including the number of events, the maximum number of people at an event, what type of entertainment and/or food may be present, etc.

These zoning laws must be taken seriously. Royal Oaks Vineyard & Winery in Lebanon, Pennsylvania opened for business in June 2017 and soon began holding events such as open mic nights, paint and sip nights, and terrarium parties. Two months later, the North Cornwall Township issued a cease and desist order, contending that the accessory building on the property was only approved to be used for the display and sale of wine. The order forbid the winery from having indoor and outdoor recorded music, live music, open mic nights, terrarium parties, paint and wine nights, private dinner events, or a variety of other activities. Bill Hartmann, the owner of the winery, says he is not even allowed to play a radio inside the building under the order. He is appealing the decision, but it is a lengthy process and in the meantime, the Township’s restrictions are hurting his business. “Most people think we’re closed,” he said.

Limitations in Leases and Deeds

For wineries that do not own their properties, another source of restrictions on events may be their lease. Common terms include the number of events that may be held on the property, the days and times that the events may be held, the number of people allowed to attend, the portion of the property that may be used for the events, etc. Sometimes a landlord will require advance notice and/or the right to approve or disapprove a proposed event. The default clauses in many commercial leases are harsh and wineries would do well to avoid even the appearance of violating the terms to avoid sometimes draconian remedies.

Even for those who own their properties, there may be easements or restrictive covenants that are attached to the land and restrict certain activities. For example, if the winery shares a privately owned access road with other properties, there may be limitations on the number of vehicles allowed on the road. In order to preserve the quiet character of a rural area, a restrictive covenant may prohibit the use of amplified music outdoors. Owners should check their deeds for any limitations that may be in place.

Noise Ordinances

Noise ordinances may be another source of legal trouble. Local rules may govern the number of people allowed to attend an event, whether music is permitted, whether that music may be amplified, the maximum decibel level, and during what hours the event may be held.

Guy Fieri, one of The Food Network’s most famous celebrity chefs, bought a five acre vineyard in Sonoma County, California in 2012. But, when he applied to open a 10,000 case winery and taproom, he met with some unexpected resistance. Even though the application specifically indicated that no amplified music would be involved, the neighborhood was concerned about possible noise, traffic, and the spectacle surrounding the 14 events per year Fieri planned for the space. More than 150 residents attended his zoning hearing to protest his application. In the end, the planning commission voted 5-0 to deny his permit.

License Restrictions

Finally, the type of license held by the winery may dictate the kind of events it may hold. For example, in California, holders of a type 02 winegrower’s license may conduct Winemaker’s Dinners or provide food and wine free of charge to consumers at Invitation-Only events, provided certain conditions are met. But, holders of a type 17/20 license (e.g., custom-crush clients) may not conduct these events.

RESPONSIBILITIES AT THE EVENT

Determining that a winery may hold an event is only the beginning. Local laws also dictate who the winery may serve, what it may serve, and what activities are allowed.

Who May Be Served

Once again, these laws are very state and locality-specific. For example, while every state prohibits serving alcohol to a person under the age of 21 or a person who is perceived to be intoxicated, some go much further.

Maryland’s alcoholic beverage code, §6-309(a) provides that a winery “may not allow on-premises consumption or possession of alcoholic beverages by an individual under the age of 21 years, regardless of who purchased or obtained the alcoholic beverages.” The code, therefore, puts an affirmative duty on the licensee to monitor alcohol consumption on the entire property, not just the taproom. This can be challenging for wineries with large grounds where people tend to picnic.

Virginia Code §4.1-304.A. prohibits the sale of alcoholic beverages to a person the licensee knows or has reason to believe is interdicted. Interdiction is a legal process in which the Commonwealth declares a person to be a “habitual drunkard” or convicted of driving under the influence. Tennessee Code §57-4-203(c)(1) prohibits selling or furnishing any alcoholic beverage to a person who is “known to be insane or mentally defective” or to any person who is “known to habitually drink alcoholic beverages to excess, or …known to be an habitual user of narcotics.” Violation of this law is a criminal misdemeanor.

What May Be Served

In order to draw a broader customer base, wineries will sometimes serve drinks other than the wine they produce. Here too, the winery must be cautious. California Code §23358(5)(b) allows a winery to serve to guests at a private event not open to the public, wines, beers, and brandies, regardless of source, so long as those products not produced by or for the winery are purchased by the winery from a licensed wholesaler. In New York, the Alcoholic Beverage Control Law §76 allows a winery to sell wines manufactured by the licensee or “any New York state labelled wine.”

Maryland alcoholic beverage Code §6-308(b) provides that the “license holder may not allow an individual to consume on the licensed premises an alcoholic beverage that is not purchased on the premises from the license holder.” Thus, if a wedding party wants to have a champagne toast or wants to serve wine not produced by the host winery to its guests, the licensee must purchase the wine from a licensed wholesaler and sell it to the wedding party. This law can also be tricky with regard to picnickers. Though quite rude, it is not uncommon for people bringing a picnic lunch to a winery to bring an outside wine with them. If a Maryland winery allows this practice, it is in violation of the law.

What Activities Are Allowed

As noted above, many local laws govern the use of live music or the number of people attending an event. But, there are many other laws dealing with very specific issues of which the winery must be aware. New York’s alcoholic beverage control law §106, for example, goes into fairly graphic detail about parts of the human body that a winery may not allow customers to display on the premises. That same section of New York law also provides that “[n]o retail licensee for on-premises consumption shall suffer or permit any contest or promotion which endangers the health, safety, and welfare of any person with dwarfism.” While these laws may seem obscure, the fact is that a winery has to ask a lot of questions of guests looking to book private events.

SUMMARY

Because state laws vary so significantly, it would be impossible to identify every legal hurdle faced by wineries that host special events. But, the issues discussed above should get owners thinking about the types of issues they may need to address. For advice relating to a specific situation, consultation with an attorney is strongly recommended. Part 2 of this article, which will appear in the July/August 2018 issue, will discuss various types of events and the legal issues they raise.

Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.
bkaider@kaiderlaw.com
(240) 308-8032

By Brian Kaider, Esq.

Special events are a valuable source of supplemental income for wineries, but they also present a variety of legal concerns, which if not properly addressed may have significant consequences. In the first part of this article, we discussed limitations on holding special events as well as the winery’s responsibilities at such events. In this second part, we will discuss various types of events and the specific issues they raise.

Weddings and Family Gatherings

Vineyards provide an attractive backdrop for weddings, family reunions, and company retreats. Many wineries also have indoor event space perfect for receptions and other gatherings. While visiting a winery recently, I spoke with the owner who told me the following story.

One Saturday afternoon, she was in the tasting room, which was about half full at the time. Suddenly, the room filled with people in suits and dresses and in walked a bride and groom followed by an entourage of groomsmen, bride’s maids, a photographer, and a videographer. As the owner approached the bridal couple, she noticed two people in the parking lot unloading a wedding cake from a catering truck. When she finally cut through the commotion to ask the bride and groom if she could help them, the bride matter-of-factly said that they were holding their wedding reception there. After an uncomfortable and somewhat heated conversation, the owner and the couple reached an agreement that they could use the winery’s event space, which had not been booked for that day.

While things worked out in this case and everyone was happy in the end, many things could have gone badly. Because arrangements had not been made in advance, the winery had no idea how many people were attending this reception or whether they would be in violation of fire code restrictions. Depending on the jurisdiction, the reception may have been considered a “special event” and required a permit to be obtained in advance. If food was provided to the guests, some states require that it be provided by a properly licensed and permitted caterer. These are only a few examples.

When a winery agrees to host an event, it is granting a license to use the property. It is extremely important to negotiate the exact terms of the event in advance through a license agreement. At a minimum, the license should include: a clear identification of the parties, including addresses; a description of the portion of the premises the licensee is permitted to use; the number of attendees allowed; the specific time frame of the license including circumstances under which that time frame will be cut short; payment terms; the responsibilities of each party, including who will provide various services and amenities; and provisions that the licensee will monitor its guests alcohol consumption, prevent guests from driving intoxicated, and be liable for any damages to the premises incurred during the event.

Additionally, the license should identify the specific purpose and actions allowed under the license. For example, some jurisdictions have laws about what parts of the human body may not be exposed on a licensee’s premises. If the purpose of the event is a bachelor/bachelorette party, certain forms of “entertainment” may violate these laws. If the licensee wants to have a live band or dancing at the event, some jurisdictions, such as Washington State, require the winery to obtain a permit from the local government.

For events such as a wedding, where it may be the bride and groom who contract with the winery, it is also a good idea to have a designated liaison from the licensee, who is not the primary focus of the event. If there is an issue with a guest being rowdy or intoxicated, it is much easier for the winery to approach “Uncle Fred” to deal with the issue than it is to bother the bride during the father-daughter dance.

Passport Events

In areas where there are a lot of wineries near one another, “passport” or “wine trail” events are very popular. These can take many forms, but commonly, customers purchase access to the event, which may take place over the course of a few days, weeks, or even a year. With the purchase, the customer gets a passport and/or map and sometimes a souvenir wine glass. They then go to each winery associated with the event and present the passport, often getting it stamped. Benefits of the passport may include free tastings, discounts on purchases, or the opportunity to enter a drawing for prizes when the passport is completed. The events are generally marketed and coordinated through a third party, such as a winegrowers association.

Wineries interested in organizing or participating in these events should check their local law to avoid any possible violations. Laws vary state-to-state in terms of what may be included in the purchase of the passport (free tastings or only discounts) and who may benefit from the sales. In California, for example, a third-party organizer of a passport event can only sell access to the experiences or activities, which the wineries must provide under their existing licenses. The organizer may not receive any portion of proceeds from the sale of wine, because that would effectively be selling alcohol without a license.

Most states have laws about how contests, drawings, or sweepstakes must be operated, including; how they may be advertised and what words or phrases may be used, how the drawing is to be conducted, and what records relating to the contest must be maintained and for how long. If the winery is in any way involved in the planning or execution of the contest, it must abide by these laws.

Invitation-Only

Invitation-only events generate a lot of interest and help build brand reputation and loyalty, but they come with a lot of rules and wineries should check their local regulations before planning such an event. As a threshold matter, the winery should determine if it is even allowed to host an invitation-only event. In California, for example, only holders of type 02 winegrowers licenses may hold these events, not virtual wineries under a type 17/20 license. The next question is where the event may be held; only at the winery, at an associated taproom, at a restaurant, at a festival, etc. Some states place limitations on whether invitations to an event may be sent to the general public or only to specific addresses. Others have rules that cap the number of attendees or dictate how admittance must be controlled.

In states that allow invitation-only events off-site, winemaker’s dinners are a great option for consumers who want a more personal relationship with a winery. Typically held at a restaurant or private club, attendees get a special, “insider” type of experience and the opportunity to interact with the people who best know the wine.

In most cases, the winery may take orders for wine sales, but they may not actually sell wine at the event. Likewise, consignment sales are generally not allowed; any wine sold to attendees must be purchased from the winery by the host facility and it may not return unsold bottles. Local rules may also limit the amount of samples that are provided to attendees and whether full glasses or bottles may be sold at the event.

SUMMARY

As with part 1 of this article, because the laws vary significantly from state-to-state, and because there are so many variations on the types of special events a winery may host, it would be impossible to identify every legal issue to be considered. But, while the myriad of laws and regulations may seem daunting, once a winery understands the rules in its jurisdiction, compliance is not overly complicated or burdensome. Given that these special events play a big role in promoting a brand and can be a significant source of revenue, learning the do’s and don’ts is a small price to pay.

Overall, there are several broad questions a winery should ask while planning a special event. Is the winery allowed to host the event (are there any zoning, lease or deed, noise ordinance, or license issues that would restrict the ability to hold the event)? What limitations are there on setting up the event (such as what licenses or permits are required, who may attend, how may it be advertised, how many people will be permitted, and how will attendance be controlled)? Finally, what limitations are there on the event itself (who may be served, what may be served, can product can be sold, what activities are allowed/not allowed)? The answers to these questions are often scattered throughout various sections of state and local statutes and regulations. For advice relating to a specific proposed event, consultation with an attorney is strongly recommended.

Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.

Email: bkaider@kaiderlaw.com
Phone: (240) 308-8032

By Brian D. Kaider, Esq.

The Alcohol and Tobacco Tax and Trade Bureau (TTB) has the authority to regulate the production and importation of wine in the United States.  In some cases, the TTB requires approval of the formula before a manufacturer may make certain wines.  The rules relating to whether a formula is required, however, can be confusing.  For example, is a formula required for a wine made from both apple and raspberry?  What about a dry-hopped mead? ere is a well-known joke among lawyers:

  A law school professor said to a graduating class, “Three years ago, when asked a legal question, you could answer, in all honesty, ‘I don’t know.’  Now you can say with great authority, ‘It depends.”

Thus it is with wine formulas; the answer to both questions above is… it depends.

What is a Formula and Why Does It Need Approval?

In simple terms, a formula is a recipe for the wine.  It tells the TTB the total yield or batch size, provides a quantitative list of ingredients, describes how the product is produced, and quantifies the alcohol content of the finish product.  As the agency charged with ensuring the safety of alcoholic beverages, the TTB needs this information to ascertain any potential health threats.  While wine made solely from the juice of ripe grapes (see “Natural Wines,” below) is well understood and does not require submission of a formula, manufacturers like to push the boundaries of flavor and impact, fermenting whatever they determine to be fermentable.  Submitting formulas for such wines enables the TTB to determine whether those boundaries may have been pushed too far.

Types of Wine

While there are many types of wine defined in Title 27, Section 24.10 of the Code of Federal Regulations (27 CFR §24.10), for the purposes of this article, we will focus on four.

Natural Wine – “The product of the juice or must of sound, ripe grapes or other sound, ripe fruit (including berries) made with any cellar treatment authorized by … this part and containing not more than 21 percent by weight (21 degrees Brix dealcoholized wine) of total solids.”

Special Natural Wine – “A product produced from a base of natural wine… to which natural flavorings are added, and made pursuant to an approved formula in accordance with… this part.”

Agricultural Wine – “Wine made from suitable agricultural products other than the juice of grapes, berries, or other fruits.”

Other than Standard Wine – this catchall category encompasses wines that either don’t fit another category or fall outside a regular category by exceeding some defined limitation (e.g., a natural wine that contains more than 21 percent by weight of total solids).

Natural Wine

Most wines on the market are made from ripe grapes using standard production and cellaring practices and, therefore, fall within the category of Natural Wines, which do not require the submission of a formula for approval.  Natural Wines may be ameliorated, chaptalized, or sweetened and may only be fortified with wine spirits.  Before or during fermentation, the following ingredients may be added: sugar or concentrated fruit juice from the same kind of fruit, yeast, yeast nutrients, malo-lactic bacteria, sterilizing agents, and water (so long as the added water does not reduce Brix below 22 degrees (SG 1.092).

A list of the specific materials used in the process of filtering, clarifying, or purifying wine and the amounts that are permitted to be used in Natural Wines is listed in 27 CFR §24.246.  Use of these materials outside of the specified ranges, or use of unapproved treatment materials, may render the product an Other Than Standard Wine, requiring a formula approval, see below.

Included in Natural Wines are also products made from the fermentation of a blend of fruit juices.  For example, a wine made from fermenting apple juice and raspberry juice or grape juice and cherry juice are Natural Fruit Wines and do not require a formula.  However, a blend of two finished Natural Wines of different fruits (e.g., apple wine and raspberry wine) is considered an Other Than Standard Wine, requiring a formula.

Special Natural Wine

A Special Natural Wine begins with a base of Natural Wine, but is then flavored with natural herbs, spices, fruit juices, natural aromatics, natural essences, or other natural flavorings.  The quantities or proportions of these additions must result in character and flavor that is distinctive from the base wine and distinguishable from other natural wine.  Only 100% natural flavors may be used.  Examples of Special Natural Wine include wine made from apple juice and flavored with hops or wine made from pear juice and flavored with honey.  For coloring purposes, only caramel is permitted.

Interestingly, under 27 CFR §24.197, the natural flavoring materials may be added before or during fermentation.  For example, one might add natural cinnamon to an apple wine during fermentation.  In that case, the wine would require a formula, because it is a Natural Wine to which a natural flavor was added (i.e., a Special Natural Wine).  But, if the natural flavor is itself a fermentable, like raspberry juice, then whether a formula is required depends on when the raspberry juice is added.

Fruit juice added after fermentation is a natural flavor that is acceptable for Special Natural Wine. However, fruit juice added before or during fermentation will ferment and will be considered a fermentable instead of a flavor and the product is considered a Natural Wine, not requiring a formula.

One other wrinkle arises in the context of blending Special Natural Wines.  If two Special Natural Wines, each having their own previously approved formula are then blended together, it will require the approval of a formula for the blend; unless, the two Special Natural Wines are of the same type.  For example, producing a sweet vermouth by blending two sweet vermouths, each produced under an approved formula, the submission and approval of an additional formula is not required.  See 27 CFR §24.198.

Agricultural Wine

Agricultural Wine is made from non-fruit agricultural products, such as carrots, onions, rhubarb, or dandelions.  Honey wine (mead) and rice wine (sake) are also Agricultural Wines.  With the exception of rice, however, fermented beverages made from grains, cereals, malts, and molasses are considered malt beverages (i.e., beer) and not Agricultural Wines.

Pure dry sugar may be added to agricultural wines provided that the weight is less than the weight of the water and the agricultural product.  The Agricultural Wine may only be sweetened if the alcohol content is below 14% ABV.  No added natural or artificial flavors or colors are permitted, with the exception that hops may be added to honey wine, so long as the hops do not exceed one pound per 1,000 pounds of honey.

While, as a category, Agricultural Wines require prior formula approval, the TTB has made certain exceptions.  In view of the nearly 4,000 wine formula applications submitted in 2015, the TTB sought to streamline the approval process.  One of these efforts resulted in the issuance of TTB Ruling 2016-2, which approved general formulas for certain “standard” agricultural wines.  So long as the production guidelines set forth in 27 CFR §§24.202-204 are met, no formula is required for the following Agricultural Wines: carrot wine, dried fruit wine, honey wine (mead), maple syrup wine, onion wine, pepper wine, pumpkin wine, rhubarb wine, sweet potato wine, and tomato wine.  If one of these wines is produced outside the guidelines in the regulations, however, it will be classified as “Other Than Standard Wine,” as discussed, below.

Other Than Standard Wine/Wine Specialty

More of a catch-all category, this group of wines generally falls outside the bounds of other groups either by containing ingredients not permitted in those categories or by exceeding the permissible range for one or more allowed ingredients.  Specifically, wines in this category include: high fermentation wine, heavy bodied blending wine, Spanish type blending sherry, and wine products not for beverage use.

Further, wines made with sugar and/or water outside the limitations prescribed for standard wine; wine made by blending wines produced from different kinds of fruit; wines made with sugar other than pure dry sugar, liquid pure sugar, or invert sugar syrup; and wine made with materials not authorized for use in standard wine fall into this category.  Distilling material and vinegar stock are also considered part of the category, but unlike the others, they do not require formula approval.

Although these wines may be produced on a bonded wine premises, they must remain segregated from standard wine.  These wines must also be labeled with a statement of composition.  The statement must include the source of alcohol (including any spirits added), the flavors, the colors, and artificial sweeteners.  Certain ingredients, such as FD&C Yellow #5 and carmine/cochineal must be listed explicitly.  For example, “carbonated apple wine with cherry brandy, artificial flavors and cochineal extract.”  If different fermentables are combined before fermentation, the statement of composition will list them all followed with the word, “wine.”  E.g., “Apple-grape-pineapple wine.”  If different types of finished wines are combined, then the statement of composition lists them as separate wines.  E.g., “A blend of apple and rhubarb wines.”

Summary

In general, a wine formula is required if flavors, colors, or artificial sweeteners are added to the wine or if the base wine is not produced according to regulatory requirements.  It is important to note that once a formula is approved, if a manufacturer wants to change the recipe, through the addition or elimination of ingredients, changes in quantities used, or changes in the process of production, she must file a new formula application.  After a change in formula is approved, the original formula must be surrendered to the appropriate TTB officer. See, 27 CFR §24.81

As for our questions from above, if apple and raspberry juices are combined and then fermented, the product is a Natural Fruit Wine and does not require a formula.  If the apple juice is fermented and then the raspberry juice is added as a flavor, it is a Special Natural Wine, which does require a formula.  And if a finished apple wine is mixed with a finished raspberry wine, it is an Other Than Standard Wine and also requires a formula.  As for the dry-hopped mead, a formula is only required if the recipe exceeds one pound of hops per one thousand pounds of honey.

A Note About Cannabis

As the trend to marijuana legalization continues to grow, it seems that cannabis and alcohol are on a collision course, particularly with beer, but also with ciders, meads and other types of wine.  In states where marijuana has been legalized, homebrewers have begun to experiment with adding marijuana to their products, but can commercial breweries and wineries do the same?

No.  Certainly any winery that wanted to include some form of cannabis in its products would require a formula approval, because the additive would be either a natural flavor or an agricultural product.  The TTB issued FAQ No. A29 on May 23, 2018, stating, “TTB will not approve any formulas or labels for alcohol beverage products that contain a controlled substance under Federal law, including marijuana.”

Substances, such as tetrahydrocannabinols (THC), cannabidiols (CBD), or terpenes that are derived from any part of the cannabis plant that is not excluded from the Controlled Substances Act definition of marijuana are controlled substances, regardless of whether such substances are lawful under State law.

Certain portions of the cannabis plant, however, may be permitted.  Specifically, hemp seed oil, sterilized hemp seeds, and non-resinous mature hemp stalks may be included in alcoholic beverages, subject to formula approval, which requires submission of certain lab analyses.  The product label, however, must accurately identify the ingredient such that it is clear the ingredient is not a controlled substance.  The label also may not mislead the public into believing the product contains a controlled substance or has effects similar to those of a controlled substance.

  Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry.  He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation. 

Email: bkaider@kaiderlaw.com

Phone: (240) 308-8032