ABC Enforcement - Trends and Predictions

What wineries should know about beverage law, rules and investigations

By: John Hinman, Rebecca Stamey-White and Jeremy Siegel

As long time supporters of Wine Business Monthly, we are always more than happy to contribute when given the opportunity.  Wine Business Monthly is the wine industry’s leading publication for wineries and vineyards, and they asked us to provide their readers with an overview of the California Department of Alcohol Beverage Control’s current enforcement trends, and what we see in the near future. 

The article, which can be found in the April issue of the magazine, touches on some of the bigger cases we have defended over the past few years, the lessons learned from these cases, and areas where we have been able to effectively negotiate with the ABC to not only avoid costly hearings for our clients but to further their marketing and sales agendas through legally compliant programs.  These areas include social media marketing and advertising, indirect ownership and other interests between retailers and suppliers, as well as the important details and restrictions that flow from events such as winemaker’s dinners.  Looking forward toward this year’s ABC enforcement priorities, we also commented on a recent uptick in ABC enforcement with regards to credit laws, we touched on the growing prominence of unlicensed third parties in the wine space and we noted that the ABC’s trade enforcement unit is enlarging and becoming more active.  You may never know when that knowledgeable new consumer at your event is really an ABC Agent testing compliance. 

We hope that this article highlights the value of understanding the laws and policies that govern activities in our highly regulated space, as well as the value of consulting effective and experienced alcohol counsel when in doubt.  Grappling with the alcohol laws is not for the faint of heart, but with strong compliance programs, direct confrontations with the ABC (in California and throughout the US) should be few and far between. 

The Corruption Chronicles – Volume One: A New Hope

A new publication has emerged on the industry scene, and it promises to be one of the most useful resources we have seen in a long time – Spirited Magazine (the website for the new magazine is www.spiritedbiz.com. There is another site for an old publication called spirited magazine.  Don’t confuse the two). Spirited crosses beverage types (wine, beer, spirits, cider and mead), looks at issues common to all licensed producers, wholesalers and retailers of all beverages and tries to make sense of it all.  We now live in a world where the large and small winery, brewery and distiller are all competing, and are all facing the same marketing and regulatory challenges. 

Many of our clients in each space are involved with other alcoholic beverage products and, as a result, are now experiencing first-hand the fundamentally inconsistent regulatory treatment of the different products.  Something legal for wine is unlawful for beer, something legal for spirits is unlawful for wine, and so forth.  It creates a very frustrating dynamic not only for the industry member but for the regulator who, let’s face it, has a very difficult job.  To add to the chaos, every state is a regulatory island unto itself.  That means national and regional marketing and other programs have to be carefully vetted against multiple different laws and regulations, and narrowly tailored to comply with the strictest.

The challenge with cross-involvement is that while most of the regulatory rules of the road (including licensing, distribution, marketing, event privileges and consumer sale privileges) are different for each beverage type, the penalties for violation of the historic “tied-house” laws, which apply to all beverage types, are almost identical and are often draconian.  We talked to the Spirited Magazine founders about this and the response from us will be the “Corruption Chronicles” – a series of tales of actual violations (and the lessons to be learned from each) published on an occasional basis in Spirited, and republished on Booze Rules for the edification of our friends and colleagues.

Volume One can be found here. Volume Two will be in the next edition of Spirited.

The point of the Chronicles is to illustrate the types of actual violations that regulators in California and around the country are pursuing. Bribery of retail accounts, smuggling of alcohol from one jurisdiction to another to evade taxes, suppliers managing retail account liquor departments and choosing what products the retailer will buy and in the process shutting out their competition; these are all examples of corrupt activities that impact the marketplace, threaten fair competition and justify vigorous regulatory responses.

But, and this is the big BUT, where is the line between clean competition and corrupt activity? When does an innocent act or agreement cross the line?  Is intent required (sometimes yes, sometimes no). Does the “everyone else is doing it” defense ever work? Those are the questions the Corruption Chronicles will explore.  Welcome to the world of Hinman & Carmichael LLP!

New Alcohol Delivery Oversight on the Horizon

By Rebecca Stamey-White and Jeremy Siegel

We’ve been hearing rumblings about possible legislation moving forward in Sacramento that will give the California Department of Alcoholic Beverage Control (“ABC”) more oversight over companies that deliver alcohol products here in California. Last week, we got our first look at Senate Bill 254, which had been a mere placeholder since its introduction on February 7 by Senator Portantino.  The proposed bill would add Business and Professions Code Section 25513 to the Tied-House Restrictions of the California ABC Act (as well as similar sections in the Code pertaining to tobacco, not covered by this blog post), which would for the first time define a “delivery network company,” and would prohibit companies that deliver alcoholic beverages (and/or tobacco products) from delivering these regulated products until receiving ABC approval of their delivery systems and abiding by certain requirements intended to curb access by minors. 

Under the bill, a “delivery network company,” defined as an “an organization… that provides prearranged delivery as an act of enrichment, financial or otherwise, of goods or services using an online-enabled application or platform to connect consumers with goods or service [sic] and to have those goods or services delivered directly to the consumer by an individual compensated by the organization,” would be required to submit its “system” to the ABC for review and approval.  That system must also include the following elements:

  1. A means of verifying that the recipient of alcoholic beverages is 21 years of age or over;
  2. Person-to-person delivery;
  3. Delivery drivers that are 21 years of age or over;
  4. The ability for consumers to suspend delivery for any period of time to their designated primary delivery location, and
  5. No delivery to college or university grounds.

As currently drafted, the bill covers unlicensed service providers (Third Party Providers or “TTPs”) as well as current ABC licensees with privileges to sell alcohol directly to consumers that also provide delivery services to its customers.  We think it unlikely that the author’s intention was to include all retail deliveries of alcohol (a subject already covered by existing ABC regulations), but unless delivery network company is more narrowly defined, all licensees with off-sale retail privileges that currently deliver alcoholic beverages to consumers should be watching this bill.

While this is just the first draft of legislation that so far focuses on the ABC’s core constitutional priority of preventing sales to minors, a worthy and important goal, many questions regarding the regulation of delivery of alcohol still remain unanswered by this bill, including many we face in our daily practice:

  1. What types of verification will be required and what kinds of records will the delivery network company need to collect? Signature capture, as required by UPS, Fedex and other shipping providers?  ID scanning?
  2. What does person-to-person delivery mean? Is it a prohibition against deliveries without an adult present to receive the delivery or something else?  What needs to happen to the product or the transaction if no one is there to receive the order?  How must returns be handled?
  3. What does it mean for the consumer to be able to suspend delivery to its primary delivery location and how does that advance the ABC’s interests in preventing sales to minors and encouraging responsible delivery of alcoholic beverages?
  4. Will the ABC also want to see protocols for preventing sales to obviously intoxicated recipients?
  5. Specifically as to TTPs, will the ABC also be reviewing flow of funds, percentage fees, tied-house implications and other hot button issues not covered by this legislation, or will they be restricted to reviewing only the portions of the system that prevent sales to minors?

Up until now, there have been no laws or regulations that specifically cover TPPs, which do not have an ABC license category.  The only substantive guidance for TPP businesses working with alcohol licensees has been ABC regulations concerning retail delivery and the industry advisories issued by the ABC in 2009 and 2011 (the “ABC Advisories”).  These ABC Advisories were originally issued to provide guidance for licensees seeking to leverage the consumer acquisition reach of the various internet and app sales and marketing platforms (Amazon, Groupon, LivingSocial, Lot18 and many others) that did not want to hold alcohol beverage licenses, but instead focused on advertising, customer acquisition, and online tools to facilitate sales and fulfillment of products or experiences including alcoholic beverages.  The ABC Advisories focused on the level of control and responsibility a licensee must maintain when utilizing a TPP as its agent, avoiding indirect unlawful gifts and retail inducements, flow of funds requirements, and avoiding engaging a TPP to conduct activities or taking margins that would otherwise require an independent alcohol license. 

While helpful guidance (for industry members, TPPs, alcohol lawyers and the many other states that have used the ABC Advisories as a model for their own TPP guidelines and laws), the ABC Advisories are not law, and the ABC has thus far declined to pre-approve TPP platforms, including the now ubiquitous delivery systems that are the subject of this bill and make up a large part of our firm’s TPP practice.  We’ve recently seen some uptick in ABC enforcement in this space that has provided some additional guidance on the ABC’s current stance on TPPs, but many TPPs have been operating in a legal gray area, dependent on legal memoranda from law firms focusing on alcohol beverage regulation like our own in order to ease investor concerns about legal compliance. 

We encourage any and all licensees and TPPs involved with alcohol delivery to get involved in the legislative process now to make their voices heard so that this bill can provide appropriate guidance to the ABC in the responsible and appropriate regulation of delivery network companies.  And if this bill becomes law, it’s a good time for businesses involved in this space to call your legal counsel to ensure you have the protocols in place to obtain the ABC’s approval.

Michigan: Canary in the DtC Coal Mine?

A note from John Hinman: The following is a guest blog post by Jeff Carroll. Formerly VP of Compliance at ShipCompliant and a wine industry veteran, Jeff is an astute observer of wine industry trends and continues to stay on top of industry developments while blogging at Obsequium. On breaks from chasing two young kids around, you can find him on the slopes of Colorado or on the tennis court.


The Michigan Timeline: a great case study of how DtC marketing and sales are evolving in a key state:

  • 2005: Wineries prevail at the Supreme Court in Granholm v Heald in their case against the states of Michigan and New York, which had prohibited direct shipping.
  • 2005: HB 4959 is signed into law, allowing out-of-state wineries to ship to consumers.
  • 2008: Retailers successfully sue Michigan in Siesta Village Market LLC v Granholm, forcing Michigan to allow out-of-state sales by retailers.
  • 2008: Michigan immediately passes SB 6644, leveling down on DtC shipping by retailers, but with an exception for delivery with a retailer’s own trucks.
  • 2014:MB&WWA issues an RFP for a private investigator to conduct investigation in collaboration with law enforcement
  • 2015: The Wine & Spirits Wholesalers of America (WSWA) invests in Drizly.
  • 2015: MLCC begins sending out warnings and fines for DtC shipping violations.
  • 2015: MB&WWA issues Michigan “Wine Direct Shipping research and Analysis" report
  • 2017: SB 1088 is signed into law permitting local delivery but prohibiting out of state retailer shipping into Michigan.
  • 2017: Retailers sue Michigan on Commerce Clause grounds.

Over the last several years, direct-to-consumer (DtC) wine shipping grew at a blistering pace. According to the recent report issued by ShipCompliant and Wines & Vines, the value of wine shipped by US wineries reached $2.33 billion, representing 75% growth since 2011. No longer a niche channel for high-end wineries, DtC shipping is moving towards maturity.

So, now that 93% of the US population has legal access to direct shipments by wineries, what should we expect in the next phase for the DtC channel?

The Michigan experience is a roadmap. The recent flurry of legislative activity that has resulted in a third important lawsuit against the State of Michigan related to DtC shipping legislation provides both clarity and a better understanding of the motivations of each of the tiers of the wine industry in every state.

Wineries are mostly in clean-up mode

With the passing of DtC legislation in Massachusetts and Pennsylvania over the last few years, wineries can now legally ship wines ordered off-site to 43 states (plus Washington D.C.) representing 93% of the US population. Only Alabama, Delaware, Kentucky, Mississippi, Oklahoma, Rhode Island, and Utah prohibit off-site shipments. Although these states will eventually pass DtC laws (the pressure is on from the winery associations, as well as from consumers), it may take another five or ten years to fully play out in the more conservative legislatures.

Meanwhile, winery advocates are working to tweak some of the more problematic provisions in the states that allow DtC shipments. Michigan’s new legislation (SB 1088) is one such example of a "clean-up" initiative. Going back to the 2005 DtC legislation, the original Michigan statute required wineries to print their direct shipping license number as well as the order number on the shipping label. The MLCC also required the product registration number to appear on invoices. SB 1088 removes the unique requirements for the outside of the box, and also clarifies that registration numbers are required but need not appear on the label or on invoices. Both will greatly simplify compliance for licensees. Cleaning up mostly useless requirements is a positive.

Retailers need a Granholm moment

While wineries have seen tremendous success with DtC legislation since the watershed Granholm ruling, wine retailers have actually moved backwards and today can legally ship to only 14 states, representing only 24% of the US population. This lack of traction and ineffectiveness can be attributed to tremendous pushback and legislative clout from both wine wholesaler and local package store associations.  The issue for both is competition.

In Michigan, for example, while the Michigan Beer & Wine Wholesalers Association (MB&WWA) maintains neutrality when it comes to DtC shipping by wineries, the group opposes DtC shipping by out-of-state retailers. This is reflected in SB 1088, which also creates a new license to allow in-state retailers to ship to consumers but prohibits out-of-state retailers from doing the same. According to Spencer Nevins, President of MB&WWA, there are “only a limited number of wineries in the United States. In contrast, there are hundreds of thousands of wine retailers in the United States."

The prohibition against out-of-state retailers creates at least three challenges for Michigan consumers. First, foreign wines can only be purchased through the inventory available at Michigan retailers. National wine clubs and alternative distribution models like Wine.com will also have a hard time reaching Michigan consumers now without owning a bricks and mortar retailer in Michigan. Finally, out-of-state shipments will be limited to wines from a single winery at a time (no mixed shipments).

Retailers jumped on the discriminatory nature of SB 1088 and filed suit against the Governor, Attorney General, and Chairman of the MLCC in US District Court. Similar to lawsuits filed in Illinois and Missouri, an out-of-state retailer plaintiff seeks a judgement on Commerce Clause and Granholm grounds. Lebamoff Enterprises Inc. v Snyder is the third major court case brought against Michigan regarding the direct shipment of wine following Granholm and Siesta Village Market.

The National Association of Wine Retailers (NAWR) would like nothing more than to replicate the momentum and success that wineries had following the Granholm ruling of 2005 and are hopeful that the three current suits in Michigan, Illinois and Missouri will move them closer to the Supreme Court and a possible landmark ruling to clarify the scope of Granholm. “The Lebamoff case is identical to the Siesta Village Market case Michigan lost in 2008. Once again, wine wholesalers have put their own interests ahead of those of Michigan consumers with this facially discriminatory bill,” said Tom Wark, Executive Director of NAWR.

Wholesalers want more enforcement (plus a piece of the pie)

Prior to 2015, wholesaler groups primarily opposed DtC shipping in general without offering much in terms of alternatives. Now, as evidenced by Michigan, they are mostly conceding the battle to wineries but remain adamantly opposed to out-of-state retailer shipping.

But does the 2015 investment in Drizly by the Wine & Spirits Wholesalers of America (WSWA) signal a shift in philosophy?

Allowing (and encouraging) in-state retailers to ship to consumers appears to be part of a new wholesaler strategy to participate in the growing and important DtC channel. Spencer Nevins expanded on the motivation behind the SB 1088 legislation when he cited a "desire to expand access to wines for Michigan consumers in a manner that can be realistically and effectively regulated by the MLCC and by a desire to embrace the recent development of third-party facilitators such as Liquor Limo and Drizly.” SB 1088 also creates a “Third Party Facilitator” license to enable services that create third party apps and websites to advertise wines available, but only through in-state retailers.

At the same time, wholesalers are working with state liquor control agencies in multiple states, including Michigan and Illinois, to seek better enforcement of DtC laws and regulations. In Michigan, the MB&WWA issued an Request for Proposal (RFP) for a private investigator to “research the scope of direct shipping of alcoholic beverages in Michigan” through controlled buys with law enforcement. The RFP identified several companies to target specifically, including the Wall St. Journal Wine Club and Amazon Wine. The resulting report, prepared by The Hill Group, found very low compliance rates, although the selection methodology for the 18 vendors used for controlled buys in the report is fuzzy.

A central component of this effort to crack down on illegal shipments is to adopt new bills like SB 1088 in Michigan and HF 791 in Minnesota that create licenses for common carriers (FedEx and UPS) and requires the carriers to submit detailed periodic reports of all shipments (what, from who, to who, etc.) containing alcohol coming into the state. While this allows liquor control agencies to better monitor, quantify, and enforce tax payments for DtC shipments, it also creates a means to identify shipments from industry members that are legally barred from obtaining permits and paying state taxes.

New battle lines are drawn

We are in a new era of direct wine shipping where laws allow consumers in most states to purchase wines from domestic wineries but not from importers or out-of-state retailers. At the same time, agencies, who now have the tools to do more active monitoring, continue to step up enforcement. With the addition of laws such as SB 2989 in Illinois, the penalties for failure to comply with the requirements include a felony and potential jail time; high stakes indeed. Additionally, the new carrier reporting laws will force FedEx and UPS to create much stricter controls for wine shipments. In turn, wine businesses operating in the “gray” areas of the law will be exposed while wineries and in-state retailers that are legally able to operate compliantly will benefit.

Retailers are gearing for a fight while wholesalers dig in and begin to embrace the DtC trend. The three retailer shipping cases will either provide a boost for retailers or will affirm the status quo. In order for significant change to come about, consumers and rare wine collectors will have to become a significant part of the conversation. Retailers are hopeful they'll demand a broader selection of imported wines, mixed shipments, and innovative business models.

We’ll be watching these trends closely over the next few years, and as the industry turns this interesting corner we see in Michigan the proverbial canary in the coal mine.

Big Bottles For The Holidays - The Highest Calling Of The Winemaker's Art

To kick off the holiday season this year, Hinman & Carmichael LLP celebrated the 30th annual Big Bottle Party on December 1st at the University Club in San Francisco, overlooking the City on a beautiful starlit night.

The purpose of the event was to honor the winemakers of California and throughout the world, whose large formats are generously offered as lots at wine industry charity auctions. These special wines are the highest calling of the winemaker’s art and we consider it our duty to share the large format lots we buy at the charity auctions with our friends and colleagues, and with the winemakers themselves; many of whom were in attendance.

This year a wonderful time was had by all, and the large formats – Jeroboams, Rehoboams, Imperials, Salmanzars, Balthazars, Nebuchanezzar and Melchoirs – were perfect for the evening. Those assembled enjoyed Champagne, Pinot Noir, Rose, Zinfandel, Chardonnay, Cabernet, Syrah, Viognier and many blends, as well as the great food available from the University Club.

The large format wines that were served were all sourced from wine industry charitable auctions (including Sonoma County Vintners, ZAP, Rhone Rangers, Lodi Vintners, Reggae and Rhone, Winesong as well as other events). We urge everyone who has Big Bottles in their cellars to share them generously with their friends and family this holiday season.  Ask the winemakers – that’s why they made the wines!

Please enjoy the video from the H&C 30th Annual Big Bottle Party.  

Cheers and Happy Holidays!

Hinman & Carmichael LLP

FINAL COMMENTS TO TTB NOTICE 160 DUE ON WEDNESDAY DECEMBER 7TH – WE ARE ASKING THE TTB TO EXTEND THE COMMENT PERIOD AGAIN TO ALLOW FOR INDUSTRY NEGOTIATION AND ALIGNMENT OF INTERESTS

As the TTB’s 90-day extension to submit comments on the proposed rule changes governing the use of label exemptions for wine sold intra-state comes to a close, there is only one thing that has been settled.  TTB Notice 160 is very controversial.

The original proposal responded to the concerns of wineries in various AVA regions that when grapes from those regions are being sold to wineries outside of the state the resulting wine could then be labeled under the current “in-state sale only” exemption with AVA identifying information; contrary to non-exempt federal AVA labeling requirements mandating that the wine bearing an AVA be produced almost entirely within the AVA. 

The bottom line is that under Notice 160, the exemption would be no longer available and the out of state wineries that buy the grapes from AVA areas would not be permitted to identify on their labels where the wine grapes used in their wine came from.  This would both depress the price and desirability of wine grapes sourced from growers in areas that carry an AVA designation, and result in non-California wineries using out of state grapes from AVA designated areas being unable to tell consumers where their grapes originated.

We extensively summarized the various points of view in our August 15, 2016 blog post before the last extension of the TTB comment period.  The current extension for comments period expires on December 7, 2016 and we are sending this blog to the TTB as a comment. 

What we are asking for is another extension to allow time for the industry to attempt to arrive at a negotiated consensus.  If you agree with us, please copy the blog and email it to the TTB as an endorsed comment.  Here is the Notice as published in the Federal Register with filing instructions.

The purpose in asking for another extension is to permit the different affected participants (wineries and growers) time to arrive at a compromise that both permits the sale of the fruit, and satisfies the consumers right to know where the grapes in their wine came from. Without a compromise one possible outcome is First Amendment litigation that could undermine the entire AVA system.  Another outcome could be widespread scoffing at the AVA system through moving the identifying information that should be on the label on-line.

Is a compromise possible?  The Napa Valley Vintners have been circulating a white paper laying out a possible compromise through a mechanism they called “Grape Source Information” on the back label of a wine. The grape source information could not use the AVA of the area from which the grapes emanated but could use the address of the vineyard from which the fruit came. It is yet to be seen whether or not NVV will file this proposal with the TTB, as their first comment filed in August simply calls for the proposed changes to be approved.  Regardless, this is a very promising approach. However, in its current form (with identification limited to counties) it doesn’t completely accomplish the goal because (among other address related identification issues) viticultural areas (such as Lodi) are often located in different counties or in counties that are not that well known to consumers. 

However it is a framework for compromise and, as such, we believe that the discussions should be continued.

We urge the TTB to keep the comment period open for at least another 90 days.

SONOMA COUNTY WINERY USE PERMITS, EVENT RESTICTIONS AND DTC

BOOZE RULES GUEST BLOG

There have been hundreds of articles and reports in recent months detailing winery marketing event restrictions in Napa, Sonoma and throughout California.  Local authorities from Santa Barbara to Napa to Sonoma have been grappling with the winery and hospitality business need to market their wines to visiting customers against the desire of local residents (many of them new to the wine country) to experience a quiet agricultural countryside. This conflict is not going away and is reflected in applications for new wineries being protested and in applications for use and event permits for existing wineries being denied.  The DTC model is essential to the survival of the small to medium size winery, and entertaining visitors is essential to the DTC model. We and our colleagues at Carle, Mackie, Power & Ross, LLP, (a law firm on the ground in Sonoma County) are tracking Sonoma developments as they occur so that our winery clients and friends can input in the process. Kim Corcoran, an experienced wine business and litigation attorney at CMPR, attends the County Board of Supervisors meetings on these issues.  This is her report.


Latest Developments on Winery Use Permits and Visitor Restrictions

Kim Corcoran, Attorney

Sonoma County wineries have been under attack in the last few years by groups in opposition to winery events, new wineries, and even the direct-to-consumer business model itself.  The vast majority of Sonoma County wineries are good neighbors and work to ensure that their impacts on nearby residents are lessened.  Most of the neighbors understand that they are living on land zoned for agriculture (which includes wineries), but opposition groups are advocating for more residential-oriented rights on ag land.  The wineries have pushed back, stating that without a high value crop such as wine, the land is worth more for housing tracts than it is for agriculture.  To help bring the parties to some resolution, the Board of Supervisors convened a Winery Working Group panel.  After many months of meetings, however the animosity seemed to grow stronger.  The issues were placed back in the hands of the Board of Supervisors.  

Meeting 10/11/16, Sonoma County Board of Supervisors

The Sonoma County Board of Supervisors agreed this week to move forward with zoning code amendments to facilitate clarity for the wine business in the County.  The Board adopted a limited resolution asking County staff to develop specific code amendments as well as standards and siting criteria for areas of local concentration to be adopted either as guidelines or code amendments.

Perhaps the most remarkable thing about this week’s action is that it was on the Board’s “consent” calendar.  This means that there was none of the public comment (read “rancor and discord”) that has attended other public hearings on this subject.  Of course, it takes a lot of work on everyone’s part to get an “easy” result - hats off to all for getting to this point.

Indeed, it is a sign of the times that direction from the Board simply to craft some code amendments is seen as a major milestone.  Opposition groups have pushed hard for an immediate moratorium on any new winery use permits and for an immediate determination of (and prohibitions within) “areas of over-concentration.”  Leaving aside the redundancy of their term, anyone with knowledge of the areas in issue knows that it will not be easy to define areas of the County that may fall into such a category.  Moreover, opposition groups appear to seek County regulation for the express purpose of interfering with the direct-to-consumer marketing model that has made Sonoma County wineries vibrant and prosperous. 

Each of the Supervisors expressed their appreciation for a more deliberative process, one Supervisor referring to the process as “deliberative by design.”  Another Supervisor, with nods of approval from others, reminded the audience that direct-to-consumer sales is an old business model from the time before grapes were even a major crop.  Such a sales model can greatly assist in keeping much of the County’s current land in agriculture. 

The winery supporters have been advocating for the adoption of clear definitions and this week the Supervisors instructed County staff to develop such definitions.   Under the current ordinances, the County is asked to regulate winery “special events” when there is no definition for the term.  The wineries are seeking definitions for “events” and “activities.”  An activity is a normal business activity within the winery’s usual, site-specific capacity (such as a special tasting, a distributor meeting or a winemaker lunch) that would not be counted as a “special event.”  Under the wineries’ proposed set of definitions, new wineries would be limited in the number and scope of special events, but not activities. 

Several of the Supervisors discussed the need for additional enforcement mechanisms with one of them specifically complimenting the wine industry for their proposals in this regard.  The wineries have proposed outside funding for a position that would be available on nights and weekends to assist neighbors and wineries alike, and to coordinate larger winery events with other neighborhood pressures such as marathons and bicycle races. 

While we will need to wait for County’s staff’s recommendation on each of the issues before we’ll know what’s in front of us, the meeting this week was a step forward in that process. 

Please do not hesitate to contact Kim Corcoran at kcorcoran@cmprlaw.com or (707) 526-4200 if you have questions or concerns regarding this article.

New TTB Labeling Requirement Regulations: Out-of-State Bottling Is Not Created Equal and Consumers Right to Know Where the Grapes in their Wine Come from is Compromised

By: Jeremy Siegel and John Hinman

We are going to unpack the impact of the TTB’s proposed rule changes concerning the current exemption available from the normal labeling requirements for wine sold solely in-state made from grapes or wine that are brought in from other states.

The current exemption permits winemakers to include information on in-state labels that they would ordinarily be foreclosed from including on national labels, such as: appellation of origin, varietal and vintage year.  Strict compliance with AVA regulations is being cited by certain vintners who believe it is necessary to eviscerate the in-state exemption in order to protect their valuable AVA’s. This has the consequence of preventing small wineries in remote states from providing their consumers with truthful and accurate information about the wine they are drinking locally.

Regardless of the position of the reader on these issues, we encourage all members of the industry to submit comments to the TTB before the August 22, 2016 deadline.  This is an important debate and worthy of attention.

The TTB Proposed Notice of Rulemaking

There has been a lot of confusion and much spilled ink about this topic since the TTB’s announcement on June 21 that, due to “concerns raised by wine industry members and members of Congress regarding the accuracy of label information” (read the press release here) the TTB is proposing a rule change that places restrictions on what information will be permitted to appear on the labels for these wines.

Winemakers NOT affected

Please note that winemakers who currently apply for certificates of label of approval (“COLAs”) for wines using grapes from the same state where they make their wine will not be impacted by these changes, and they can all stop reading here if they like.  For the rest of the wine industry that does rely on the exemption from label approval process, or cares about the exemption maybe because they are a small winery in a remote state, read on. 

Winemakers who ARE affected

The proposed changes will severely limit the usefulness of the exemption from the normal label approval process for winemakers and bottlers who only sell their wines in-state. 

The current beneficiaries of this exemption fall in to two camps: (1) those who want to include information about the source of the grapes, and the varietal and vintage of their wine but ordinarily may not because the wine is not made in the same or adjacent state as where the grapes are grown, and (2) those who are not concerned with identifying the source of the grapes or wine they purchase from out of state but do want to inform their consumers of the varietal and vintage of the wine they are selling. 

If the proposed changes are adopted, the ability of both of these types of winemakers/bottlers to effectively market their products will be severely hampered, and consumers will be forced to make wine purchasing decisions for locally produced wines without access to such important information as where the grapes came from, the type of grapes used to make the wine, and the year the grapes were harvested. 

The Current Labeling Regulations

Under the current regulations, a wine producer may apply for and receive an exemption from the standard labeling requirements if their wine will NOT enter interstate commerce. See 27 CFR § 4.50(b).  Ordinarily, prior to a wine that is more than 7% alcohol by volume being labeled and sold, the winemaker must apply for a COLA from the TTB if it wants to list on the label, among other things, the grape varietal (§4.23), the appellation of origin (§4.25), the vintage (§4.27) and the type designation of varietal significance (§4.28).  Each of these labeling attributes has specific requirements that must be met before the TTB will issue the COLA.  For example, in order for a wine label to list an appellation of origin, “[a]t least 75 percent of the wine [must be] derived from fruit … grown in the appellation area indicated, [the wine] must be fully finished … if labeled with a State appellation, within the State or an adjacent state; or if labeled with a county appellation, within the State in which the labeled county is located; and it [must conform] with the laws and regulations of the named appellation area governing the composition, method of manufacture, and designation of wines made in such place.” 

In order to include grape varietal, vintage and/or designation of varietal significance, the label must ALSO include an accurate appellation of origin, meaning appellation of origin is really the baseline labeling requirement.

The Hole (some consider it a hole anyway) in the Regulations that the Proposed Rule Change would close – Use of the Technique of selling the wine only within the state in which the winery exists

Currently, if the bottler or winemaker of a given wine can show to the TTB’s satisfaction “that the wine to be bottled or packed is not to be sold, offered for sale, or shipped or delivered for shipment, or otherwise introduced in interstate or foreign commerce” then the bottler/winemaker can apply to be exempt from the above listed requirements, and may include information on the wine label that would not normally conform with the baseline appellation requirements for information.  This is very useful for the small winery with limited access to good fruit from its own vineyard because of bad weather, bad crop years or other causes that routinely plague small wineries in remote states outside of the major grape growing states.

For example, in the ordinary course, if a winemaker in New York purchases and ships pinot noir grapes from a vineyard in Sonoma County to make and bottle the wine in New York, the wine could not be labeled as Sonoma County Pinot Noir, nor could it be labeled as New York Pinot Noir.  This is because, while the wine was derived from grapes grown in Sonoma County, it was finished in New York, so the wine ends up somewhat of a TTB pariah that neither state can claim as its own. The wine was not “fully finished” in Sonoma County but rather in New York.  If this winemaker wishes to label the wine as Sonoma County Pinot Noir, however; he or she can apply for an exemption from the COLA requirements so long as the wine was sold solely in New York and is labeled “For Sale in New York Only.”  This exemption process permits the winemaker to indicate the provenance of the wine made even though it does not meet the strict federal labeling requirements of 27 CFR §4.25.  A prime example of a winery that would be impacted by these rule changes is Brooklyn Winery, which makes well-received Cabernet Sauvignons from grapes sourced from the Napa Valley. 

Labeling with the current exemption, and without the current exemption

Without the exemption: Currently, a winemaker or bottler that doesn’t want to apply for the intrastate exemption from the requirement that the appellation of origin be listed, while still listing grape varietal and vintage, may use the national appellation.  For example, if the New York winemaker above doesn’t feel that it is important to disclose that he or she is using California grapes or wine, but still wants to include the grape varietal and vintage, without an exemption, the label would have to indicate at a minimum that the wine was an “American” Pinot Noir, 2016 vintage, which is the most general appellation of origin allowed. 

With the exemption: However, with an exemption, the label for this wine could include the varietal and vintage, and a descriptive name such as “Big Apple Winery” without any actual appellation of origin. The concern here is that this type of labeling could lead consumers to believe that the wine was in fact made in New York from New York grapes.  This type of exemption is widely used in Texas by wine bottlers who purchase wine in bulk from California (where fully 85% of wine is produced in the United States) and bottle it in Texas “for sale in Texas only” and call it something like “Lone Star Winery 2016 Pinot Noir” without an appellation of origin. Again,the concern here is that this type of labeling may mislead consumers into believing that it is a Texan wine.    

Grape Sourcing Safe Harbor Not Affected by the Proposed Rule Change

It is worth reiterating that wineries that must source grapes from out of state because of weather, grape availability or other reasons may still label their wines as “American” and include the varietal and vintage date under regular COLA regulations.  So, a wine made in New York with pinot grapes from Sonoma in 2016 could be labeled as “American Pinot Noir, 2016 vintage” without applying for an exemption. 

Why is the Change Being Proposed?

The intended effect of this proposed change is to limit the ability of out-of-state winemakers with grapes or wine from a state like California to reap any of the identification benefits of using grapes from California and other well-known appellations.  This is an extension of the successful legislative efforts by California winemakers in Napa, Sonoma and other AVA areas that heavily market their AVAs to protect their geographical appellation rights.  For example, California state law (the “conjunctive labeling” laws found at B&P §§ 25241 and 25242) currently mandates that wineries located outside of specific AVAs may not use certain geographical terms on their labels unless all steps of the winemaking process take place within the specific AVA. 

These regulations were put in place to protect the concept that “for more than a century certain California counties have been widely recognized for producing grapes and wine of the highest quality” and to ensure that consumers are not “confused or deceived” by these geographical terms appearing on labels of wines that were not produced completely within the confines of the AVA.  Because California state law does not apply beyond California borders, the conjunctive labeling laws are not binding on winemakers in other states.  This is one of the problems that the TTB Rule change appears to be intended to address.

The Current exemption as a work-around

The current exemption process provides an in-state work-around for winemakers that purchase grapes from remote AVAs to indicate the source of their grapes and to provide consumers with accurate information about what is actually  in their wine, no matter where the grapes were actually grown or ultimately fermented into wine. The proposed rules will completely eliminate this exemption.

This change has the additional effect of preventing winemakers and bottlers who are not concerned with disclosing the source of the grapes they use to make wine from still being able to call out the varietal and vintage except through the identification of the wine as “American.”

Consumer and Winery Concerns

One major concern is that both camps of winemakers and bottlers (typically small wineries) could soon be faced with holding significant inventories of wine that, because they lack the type of information on their labels that consumers rely to make their purchases, will be worth much less money and will be difficult or impossible to sell even within their local market area.   Consumers, for their part, generally have the right to know basic information about what it is that they are consuming, and where it comes from.  This Rule change affects those rights.

Alternatives for comment – there is no middle ground

We encourage all involved in the current system of wine production to make their views known to the TTB right away.  While we are proponents of truth in labeling and full disclosure, we also understand the importance of protecting AVA rights. There are most definitely two sides here.

If this rule change is adopted there will be no middle ground for small wineries to disclose the source of out of state grapes used in their wine. Thus, maintaining the current exemption is one alterative that should be seriously considered.

The Potential First Amendment Impact of the Proposed Regulation

Another alternative if the proposed regulatory changes are adopted, which the TTB is aware of from its experience with the Cabo Distributing “Black Death” First Amendment case, would involve potential First Amendment litigation on behalf of small wineries in remote states asserting a winery right to inform consumers of truthful information under 27 CFR 4.38 (a) [“…In addition, information which is truthful, accurate, and specific, and which is neither disparaging nor misleading may appear on wine labels.”] and general First Amendment jurisprudence. Right now Section 4.38(a) disclosure is limited by the caveat that no additional information provided may conflict with other required label information.  

For example, if a winery includes narrative information on the back label of an “American wine” providing the consumer with disclosures about where the grapes that went into the wine were sourced, it would be in violation of the law.  These restrictions would also impact any advertising and marketing materials wineries put out because,under Section 4.64(g), advertisements of wine cannot include any “statements indicative or origin” unless that same information appears on the label. Thus a winery website, blog or twitter post that discloses the source of grapes in the wine is also a violation of the law under the proposed regulation.

It is currently unclear what position the TTB would take if a First Amendment claim was asserted following the denial of a back label narrative submission, or following advertising (which has the same restrictions and privileges) that informs consumers of where grapes for a particular wine were sourced.  It is quite clear that communication of the constituent ingredients in food products is commercial free speech and the test would then be to weigh the winery right to communicate truthful information to consumers against the TTB policy of protecting AVA designations by squelching information that conflicts with the labelingregulations, regardless of the truthfulness of such information.

This may be a situation where the proponents of the rule change should be careful what they ask for, because they might get it.

Interested parties can file comments with the TTB regarding the proposed changes here.  

Isn't A Written Agreement With A Distributor Worthless In A Franchise State?

We get this question all the time from clients, and we understand the pessimism. Why bother to draft an agreement when state law would trump any contract that conflicted with franchise laws designed to protect distributors?

If you’re a producer who sells your products in multiple states, you are probably already acquainted with alcohol franchise laws –legislation protective of distributors that seems more appropriate for, say, a McDonald’s franchisee whose entire livelihood rests on its right to use the McDonald’s name than for an alcoholic beverage distributor that sells dozens or even hundreds of brands.

Lawmakers might once have been able to make the dubious claim that alcoholic beverage franchise laws were needed to counter the “intimidation, bullying and abuse” (as one franchise state’s law puts it) of the small and powerless distributor at the hands of the big bad supplier.

Of course that notion is laughable now, when distributor consolidation and the proliferation of small craft producers have flipped that power dynamic on its head. Now it’s the giant distribution companies that wield the power, and suppliers find themselves without leverage or even a route to market in many states. Yet these outdated protectionist laws remain on the books in many states – in fact they have been recently added to the books in certain jurisdictions -- in part due to robust lobbying by the distributor tier. It’s no wonder our clients have resigned themselves to thinking the only way out in these states is through protracted litigation or expensive buyouts.

But that’s not the whole story. In the August issue of Practical Winery & Vineyard, we lay out in detail some of the reasons why a written distribution agreement can provide important protections even in franchise states, and we provide real-life tips for tracking distributor performance and managing your brand in franchise states.  Read more here.