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The federal government and nearly every state have laws on the books that regulate trade practices in the alcoholic beverage industry. One of the most complex categories of these regulations are those known as “tied-house” laws. These laws are intended to prevent the domination of retailers by their suppliers, i.e. the ability of a large company to dominate local markets through vertical (common ownership of supplier, distributor, and retail businesses) and horizontal integration (monopolistic control of “competing” brands). At the federal level, the FAA Act prohibits a supplier from inducing a retailer to purchase its products to the exclusion, in whole or in part, of products from other suppliers (27 U.S.C. 205(b)). Since this provision only applies to transactions in interstate commerce, the states are left to police similar problems in intrastate commerce. California has taken one of the most aggressive approaches to tied-house regulation.

Division Nine of The Business & Professions Code, along with Title 4, Sections 1-150 of the California Code of Regulations,  govern intrastate alcoholic beverage operations. B&P Code sections 23771-23772 and 25500-25512 specifically address tied-house restrictions. The restrictions begin by prohibiting a supplier from owning any interest, directly or indirectly, in a retailer (on-sale or off-sale). It also prohibits ownership of a winegrower (or brewery or distiller) by a retail licensee. This seems to be a much broader prohibition than the federal law and most counterpart laws in other states; there is no requirement, on the language of the statute, that the supplier has actual control of the retailer.  However, the range of exceptions provided in the subsequent sections of the B&P Code have become equally broad.

The statutory exceptions were created based on individual fact situations, and as such, they are narrowly tailored. Rather than being categorical and policy-based, nearly every exception is individualized. Therefore the next time a need arises to allow activity otherwise prohibited by California’s broad tied-house restriction, a new exception must be created. For instance, section 25503.11 permits a supplier to own a diminutive amount of stock in a publicly-traded corporate retail licensee or serve on the board of a publicly-traded corporate retail off-sale licensee, subject to the ABC’s approval (this exception was purportedly created to benefit Joseph E. Seagram by allowing him to serve on the board of Safeway Stores). The converse is also permitted (retail licensee owning a diminutive amount of stock in publicly-traded supplier) by section 25503.12. Another section allows a supplier to own a single retail license within a county with a population of less than 15,000 (section 25500(b)).

More specific to winemakers, section 25503.15(a) allows a winegrower to own on-sale licenses if none of its products are sold at the licensed premises. Obviously, this may defeat the purpose for many winemakers looking to participate in restaurant ownership, so section 25503.15(b) allows small winegrowers (less than 125,000 gallons of wine produced) to own an interest in up to two licenses, subject to a long list of conditions. The legislature later extended this privilege to winegrowers of any size, permitting ownership in any number of on-sale licenses, provided their own wines are sold by no more than two of the licensees and the number of wines produced by the winegrower does not exceed fifteen percent of the wines offered for sale by the retailer (section 25503.30).

The numbering of the examples above may have given away the fact that there are many other exceptions provided by the Code, but each comes with very specific requirements. If you are a winegrower interested in participating in the ownership of a restaurant (or a restaurant looking to own part of a winemaking operation), but thought the tied-house restrictions prohibited you from doing so, an attorney may be able to assist you in understanding whether any of the exceptions applies to you or how to structure your ownership so that they do.

Thanks to the language of the Twenty-first Amendment, the body of laws governing the alcoholic beverage industry is a complex system involving regulations set by local jurisdictions (i.e. cities and counties), the states, and the federal government. Under this system, states are authorized to regulate the delivery and use of alcoholic beverages within their borders (intrastate commerce), while the federal government has control over alcoholic beverages in interstate commerce. As such, there are more than 51 different systems of regulation that can impact the wine industry.

I say more than 51 systems because after Prohibition ended, many states chose to return to the pre-Prohibition practice known as the “local option”, which allowed cities and counties to vote on when and where, or even if, alcohol could be sold within their jurisdiction.  The decision is made by the voters, usually by way of a local ballot measure. The most widely known aspect of the local option is the existence of “dry counties” where the sale of all alcoholic beverages is still prohibited within its borders. The local option is still available in 41 states today, though several of those states no longer have any cities or counties exercising the option. The local option is not available in California.

In addition to deciding whether or not to allow the local option, states also chose between being a “license state” or a “control state”. In a control state, the state has a monopoly on the wholesale and/or retail distribution of alcohol. The number of control states has decreased in recent years; Washington recently voted to privatize their liquor industry, and Idaho is looking at getting out of the business as well. Further, control states do not necessarily control the wholesale and retail sale of all alcoholic beverages; some only monopolize wholesale distribution of spirits, leaving wholesale of wine and beer and all retail sales to private entities, others retain full control. The extent of the government monopoly in the control states seemingly varies to every degree in between these extremes, making it hard to know how wine can be distributed in a given state. Richard Mendelson, in his book Wine in America, provides a useful table of the systems in control states as of 2011, but  even this is already out of date. If you are concerned about distribution in a particular control state, an attorney can advise you as to how to get your product to consumers in that state without violating any local laws.

In a license state, such as California, a state agency takes responsibility for licensing private entities to import, produce, distribute, and sell alcoholic beverages. The licenses are strictly controlled – that is, they are not freely transferable – and often come with conditions specific to a particular licensee’s operation. The state agency often controls the number of licenses available in a given area; for example, in California, the ABC will not issue a retail license in an area of “undue concentration of licenses” unless the applicant can show that public convenience or necessity requires the additional license (see, e.g., Cal. Bus. & Prof. Code Section 23958). The agency is also responsible for enforcing the state’s laws, regulations, and rules concerning trade practices, and in some states the alcoholic beverage control agency even collects excise taxes due.  The California licensing system is quite complex, so it will be covered in depth in a later post.

As mentioned above, the federal government regulates alcoholic beverages in interstate commerce. The agency charged with enforcing the two primary sources of federal regulation of alcohol (the Internal Revenue Code and the Federal Alcohol Administration Act) is the Alcohol and Tobacco Tax and Trade Bureau, aka the TTB. The laws and regulations enforced by the TTB cover viticultural practices, wine production, distribution, marketing, and even trade practices (by way of tied-house restrictions). Since the regulations in each of these areas are complex and important, coming posts will discuss them individually in further detail.

If you’re thinking of getting into the wine business for yourself, or taking your home winemaking hobby commercial, an attorney can help you understand the regulations that will apply to your new venture. In the mean time, more background information can be found on the TTB website.

With little in the way of recent developments in the area of wine law, now seems an opportune time to discuss some of the basics. We’ll start with the laws governing appellations of origin of wine, or American Viticultural Areas (AVAs) as they are known in the United States.

In 1935, congress adopted the Federal Alcohol Administration Act (FAA Act) to protect consumers by ensuring they get accurate information on wine labels. While the place of production has routinely been included on wine labels for centuries elsewhere, in the post-prohibition recovery era, many U.S. wines did not state an appellation, and those that did use geographic designations typically relied on states or counties with mapped boundaries.

Gradually, however, wines began to use terms like “North Coast” and “California Mountain”, which had no connection to mapped geographic regions. In 1978 that the TTB adopted a regulatory system to ensure customers were not being misled by the geographic information emerging on labels. Section 4.25(e)(1)(i) of the TTB regulations (27 CFR 4.25(e)(1)(i)) defines a viticultural area for American wine as a delimited grape-growing region distinguishable by geographical features, the boundaries of which have been recognized and defined in part 9 of the regulations (27 CFR part 9). The designation of an AVA does not impose any quality controls, as appellation of origin designations do in many parts of Europe, they simply allow a winemaker to designate the wine’s geographic origin on their labels.

Thus the rules set by the TTB in 1978 set up a procedure for establishing an AVA. Any interested party may file a petition, containing the following information (See 27 C.F.R. section 9.3(b)): evidence that the name of the viticultural area is in fact used to refer to the proposed area, either locally and/or nationally; evidence relating to the geographic features, such as climate, soil, and topography, which distinguish the proposed area; specific boundaries of the area based on features found on the topographic maps of the U.S.G.S.; and historic or current evidence in support of the boundaries proposed.

The TTB then commences a public rulemaking process, which requires public notice of the proposed rule, a period for public comment, publication of information for public review so that public commentary is meaningful, and review and response by the agency to significant comment when it issues its final rule. The proposed and final rules are published in the Federal Register (see, e.g., the Final Rule establishing the Calistoga Viticultural Area, or the accumulated comments on the Coombsville Viticultural Area). As of November 28, 2011, there are 200 approved AVAs (see the TTB list).

Many of the 200 AVAs overlap or fall within larger general AVAs. These are known as sub-appellations or nested AVAs.  Last year, the TTB rejected a proposal to prohibit the creation of nested AVAs moving forward. Instead, the rules require that a petitioner must state, in the petition itself, why the proposed AVA is “sufficiently distinct” from the existing one and must explain why the “establishment of the [new] AVA is acceptable.”

Other changes to the regulations last year affect the process for amending boundaries of AVAs.  The 2011 revisions impose more scrutiny of amendment proposals, by requiring detailed evidence of the distinguishing features of expansion area that justify inclusion in the existing AVA, and that those features are not found in surrounding, excluded areas. Names can also be amended if, over time, a region comes to be known by a different name (ex: Temecula AVA became Temecula Valley AVA).

The TTB protects the integrity of AVAs through the label review process (see 27 C.F.R. section 4.50, 4.39(a)(1)). If an applicant can’t justify use of AVA on label, the TTB rejects or revokes its COLA, which prevents the sale of wine under that label in the U.S. If the winemaker sells without approval of their COLA the wine can be seized, and the winery’s federal operating permit can be suspended or revoked.

More information on AVAs and links to proposed rules creating new AVAs can be found on the TTB website.

In 1996, county officials in Washington state told Whitney Farms  to deal with a dangerous condition on their property, after a 16-year old fell into a pit of smoldering grape pomace and was burned so badly his legs had to be amputated. They said that it was permissible for the farm to spread the pomace over their property for use as a soil additive, but argued they were not permitted to store the pomace in pits or piles, where it would be deprived of oxygen during decomposition, giving off heat sometimes raising temperatures in the pit to 500 degrees. The farm settled with the injured 16-year old, and the court opinion as to other defendants whose waste was disposed of on Whitney Farms; property seemed to indicate that the court saw violation of the regulations for dumping solid waste. County officials continued to demand the farm cure the dangerous condition on their property. The county went so far as filing a criminal action against Whitney Farms in 2007 based on their failure to comply with the directives to spread out the waste. However, the charges were later dropped because, according to the county, the statute under which charges were brought only prohibited the storage of solid waste, and because of the beneficial use of pomace as a soil additive, it didn’t seem they could prove that the pomace was waste.

In spite of the lack of a bases for criminal charges, though, Whitney Farms may still face repercussions for the continuing to dispose of pomace in the pits. The issue arises out of traditional premises liability principles. Whitney Farms sold property to a  family in 2010, and according to a complaint filed by the new owner, did not disclose the existence of the pits and their potentially dangerous nature. The owner fell into a hidden pit and suffered second and third degree burns in March, and claims Whitney Farms is responsible for his injuries. Meanwhile, the Environmental Protection Agency is supervising the clean up of the property, and has reportedly already spread 11,000 acres of debris and dug up approximately 2,500 buried pits. The state Department of Ecology has asked Whitney Farms to disclose the location of other pits on the property.

Trial is scheduled for June of next year. Information on the previous case (and information about landowner premises liability in general) can be found on the National Agricultural Law Center’s website.

In 2009, Mexico imposed ‘retaliatory tariffs’ on 99 different US exports across the border, including a 20% tariff on the US wine, purportedly as a result of a dispute between the two countries over the safety of Mexican trucks. For the past two years, that tariff has significantly decreased the value of wine exports to Mexico, while wineries focused on other markets with less restriction. In 2007, US wine exports to Mexico totaled more than $23 million dollars. But after the imposition of the tariff, those numbers dropped. In 2010, the total value of US Wine exports to Mexico was down approximately $2.5 million. Since the beginning of 2011, those exports have slipped an additional 25%.

The truck safety issue was reportedly resolved early this year, and Mexico agreed to lift the tariff. It was dropped to 10% in July and completely eliminated this month.

Recent TTB action also aims to ease US wine exports. On October 20, the US, along with Chile, Argentina, New Zealand, Australia, and Georgia signed a Memorandum of Understanding (MOU) to help reduce barriers to international wine trade and support exporters of wine in each participating country by encouraging the elimination of burdensome requirements and certifications of wine products and ingredients. More information on the MOU can be found on the TTB Website.

The California Water Resources Control Board’s newly enacted regulations to deal with frost protection in the Russian River Watershed are being challenged in court.  A coalition of growers in the region, called the Russian River Water Users for the Environment, along with four individual growers, filed suit in the Sacramento County Superior Court claiming the regulations are unconstitutionally overbroad and that they don’t take into account measures already voluntarily adopted by growers to protect salmon and steelhead populations.

The rules, which were adopted late last month, are intended to protect the salmon and steelhead by placing restrictions on the growers’ practice of spraying their vines with water for frost protection. When temperatures drop below freezing, the growers pump water from the Russian River  to keep the vines at 32 degrees. Federal officials from the National Marine Fisheries Service said that when growers removed water from the river for frost protection in 2008 and 2009 they stranded and killed salmon and steelhead. The plaintiffs say there were only two isolated incidents, and that the regulations go well beyond addressing these concerns.

The new regulations require growers who engage in this type of frost protection between March 15 and May 15 to submit a water management plan to the state or to be part of a larger water plan developed by a “governing body”. The plans are due at the beginning of February, and opponents argue that if the plans are rejected, there will be little time to come up with a solution before the frost comes. Others are working on alternative frost protection methods; the group Trout Unlimited has been working with growers to create off-stream storage pond to pump from and installing fans to prevent frost. They lauded the passage of a bill that streamlined the permitting process for such ponds earlier this month.

Case information can be found through the Superior Court of Sacramento County, case number 2011-80000984.

Congress has approved the Korea-U.S. Free Trade Agreement, which will eliminate 95% of tariffs and other barriers to trade between the U.S. and South Korea within three years, with the remainder to be eliminated within 10 years. One of the first to go is a 15% tariff on US wines imported to South Korea, along with the 45% tariff on grape juice concentrate.

Industry groups hope this will allow California wineries to become more competitive in a growing market, which has seen a 177% increase in import consumption since 2000.  U.S. imports to Korea rank third in wine imports behind France and Chile. 90% of the wine imported from the U.S. comes from California. The eliminated tariffs will also decrease excise and other taxes paid on wine imports as well, further decreasing the costs of US wines in the Korean market.

More information on the treaty is available on the Office of the United States Trade Representative Website.

Los Angeles Food & Wine, a new annual epicurean event, begins today at L.A. Live and runs through Sunday, with the Red Carpet Premiere scheduled to kick off tonight at 7pm. PWPC founding attorney Jeannette Witten will be on hand to experience the events, featuring more than 100 celebrity chefs and over 300 wineries at more than 70 events. There will be wine seminars, cooking demonstrations, grand tastings, twelve collaborative lunches  and three extravagant dinners at L.A. Live and other locations around the Los Angeles area.

More on the events, participants, and locations, as well as tickets can be found at www.lafw.com.

Personalized labels are special products offered by some importers, bottlers, and wholesalers directly to a consumer who wants a bottle, for example, to commemorate a special event such as an anniversary or wedding. They are distinct from private labels, which are created for purchasers other than the ultimate consumer of the wine (i.e. a house label wine in a restaurant).

Every wine label must be approved by the TTB and this approval is represented by a COLA obtained by the producer. However, personalized labels by their nature will be different for each customer, and as such the TTB has allowed producers of personalized labels to change the salutation, event dates, and names on the label without submitting each label to the COLA process. The previous guidelines did not allow changes to the artwork or graphics on personalized labels, however, without resubmission for approval. The TTB has now decided to permit such changes to the graphics or artwork on a previously approved personalized label without requiring a new application for a COLA, to better accommodate consumers in the market for a commemorative personalized labeling.

In order to obtain approval from the TTB to make changes for personalized labels, the applicant must indicate their intention on their initial COLA application. The applicant should submit a template that will be modified that, at a minimum, contains all of the mandatory information (as required by 27 CFR parts 4, 5, 7 and 16). Additionally, “the application must contain in item 19 of the paper application, or in the special wording section found in Part II/Step 2 in COLAs Online, a description of the specific personalized information that may change.” Further, “personalized statements, graphics, pictorial or emblematic representations that are not allowed on labels that undergo TTB review”  cannot be added to the template in creating the personalized label.

For more information, visit the labeling section of the TTB’s website.

Governor Jerry Brown signed two bills last week that impact alcoholic beverage sales. The first, AB 623, creates a limited direct-to-consumer license for wineries in California. As of January 1, wineries can apply for the new license, which will permit direct sales to consumers, provided the licensee meets several conditions. The conditions require the winery to restrict sales to those solicited and accepted via direct mail, internet, or telephone orders and not operate retail premises open to the public; further, the licensee must take title and possession of all products it sells, and deliveries to purchasers must come from either the licensee’s premises or a type 14 licensed public warehouse. Holders of 17/20 licenses will have the option of transitioning to this new license if they choose to only make direct consumer sales going forward.

The second bill originated in the senate,  and was proposed in response to enforcement action taken by the ABC in San Francisco last year, penalizing the licensee at an on-sale location for infusing spirits for specialty drinks at the premises. The problem was the definition of “rectifier”, which did not formerly exclude infusing wine or spirits with flavors or blending processes. The amended definition, found in Section 23016 of the Business and Professions Code, now reads, ““Rectifier” means every person who colors, flavors, or otherwise processes distilled spirits by distillation, blending, percolating, or other processes. “Rectifier” does not include an on-sale licensee that colors, flavors, or blends distilled spirits or wine products on the on-sale licensed premises to be consumed on the licensed premises.”

The full text of the bills and additional information can be viewed on the Legislative Counsel’s website by entering the bill numbers (AB 623 and SB32).

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