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.