Forget the vineyard, start an urban winery!

Think you need to own a vineyard to start a winery? Think again; the urban winery is on the rise. Winemakers from New York to Seattle are locating their winemaking facilities in the city rather than the traditional rural setting near the winery's vineyards.

Amateur winemakers are taking risks and making award winning wines without having to also maintain a farm. Urban wineries are located in downtown areas, in warehouses, and industrial parks. They often have tasting rooms and retail shops attached. And, they are miles from the farms that produce the grapes. Winemakers rent space in the city, rather than the paying high prices for land in wine country. This new crop of vintners is learning that you don’t need to spend millions on a plot of land, and take the risk of crop failure, to make good wine.

Grapes can be trucked in from regional vineyards, or even from around the country. The urban winery can then crush, ferment, and cellar the wine at their facility in the city. Or, the juice can be processed at a co-op close to the vineyards, and then finished in the city. Winemakers can choose grape varieties, select different appellations, and make the same production decisions for blending, bottling, and labeling as any other winery. And, the wine is just as good as wine made near the vineyards.


Urban wineries benefit the wine consumer as well. Most consumers don’t care where the grapes were crushed, fermented, or aged into wine. Now, connoisseurs can simply walk to a winery rather than traveling miles to the nearest vineyards. The experience in the urban winery is the same as in the tasting room of a vineyard located winery. The consumer can still experience the wine and purchase bottles directly from the source.

There are, of course, local limitations to starting an urban winery: zoning, building, and health codes could make it harder to operate a winery in any given location. Turning a profit may take a while, but many self-taught winemakers are taking the risk and doing what they love.

It's Just Business

A local couple want to buy a café. A grocer wants to acquire a few more stores. A restauranteur wants to purchase several brewpubs. A venture capitalist wants to buy a vineyard and sell some wine. Simple, right? Negotiate a contract for the sale, sign on the dotted line, and accomplish the goal.

What should be simple business transactions become complicated in the alcohol industry. In all the scenarios above, the new owners must be approved by the appropriate alcoholic beverage control board (and the TTB in the case of manufacturers and wholesalers) before they can take over the business. New owners must independently qualify for a license before any alcohol is produced under their ownership. This means going through the initial application process for an alcohol license (including detailed background checks; personal, business, and bank references; and financial statements).

One of the most often overlooked items in business acquisitions is the alcohol license. By the time anyone remembers it, closing is days away. Unfortunately, the new owners will be operating illegally without their own license, and subject to increased taxes and large fines. In the case of the retail license, only state approval is necessary. Manufacturers of alcohol, on the other hand, need both TTB and state approval. This can lead to last minute price re-negotiations and complicated service agreements.

The regulatory maze of alcohol control is a gremlin in alcohol industry business transactions. A brewer unsatisfied with a distributor’s performance cannot simply fire the distributor. A chef cannot simply decide to serve homemade liqueurs. A conglomerate cannot simply purchase a company that owns hotels and restaurants. We will delve into each of the scenarios described above in the coming weeks.

Direct Shipping & Beer

While direct shipping for wineries could stand to see improvement, direct shipping for beer truly has a long way to go. Many states allow direct shipment of wine from a winery directly to consumers; new states are added to the list monthly. The right might be loaded with restrictions depending on the state, but, after jumping through some hoops, a winery in New Hampshire can ship its wine to directly to consumers in California.

Breweries, on the other hand, do not have the same rights. State laws for direct shipment are specifically for wineries. Even in states which are currently passing similar laws, only wineries will benefit from the changes.

The wine industry has fought hard for the rights to sell directly to consumers, at home and in other states. The first changes to the strict three tier system adopted by the states after prohibition was repealed was to allow wineries to sell directly to consumers from the winery premises only. Breweries are now starting to enjoy this privilege in almost every state.

Then came the laws allowing wineries to ship wine directly to consumers in their own state. These laws were enacted to encourage small domestic wineries, and the growth of the state’s wine industry. Those laws often did not afford out-of-state wineries the same privileges, and have since been declared unconstitutional.

Breweries have not yet benefitted from the direct shipping laws. The beer industry has long been dominated by macro breweries, and the large distributors supporting them. Small breweries have fought hard for brewpub and microbrewery legislation to allow smaller breweries to sell directly to consumers. In some states, brewers and consumers have had to fight to simply allow breweries and beer retailers (not just state run liquor stores) to sell beer higher than 6% ABV. The rise of craft brewing in the U.S. is in part due to favorable legislation at the state and federal level (reduced taxes) to allow smaller breweries to compete and sell directly to consumers.

One of the next challenges for the craft beer industry will be direct shipping. The good news is that the regulations are already being tested by the wine industry. For example, a state cannot discriminate against out-of-state producers if it allows its wineries to ship directly to consumers. I look forward to the day a Colorado brewery can also sell its beer on-line and ship to a consumer in Florida.

Colorado State University Beverage Business Institute

     


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Colorado State University recently created the Beverage Business Institute, which "delivers management education and research that focuses on beverage operations, wholesaling, and distribution in the three-tier system." It doesn't hurt that it's located in the middle of craft brewing central in Fort Collins, CO.

So far, BBI has had two workshops dealing with all aspects of management and running an alcohol business.

The third workshop, perfectly timed with American Craft Beer Week, will cover legal issues and public policy generally. And, more specifically include presentations on entrepreneurial leadership, logistics, inventory management, and legal issues in the three-tier system.

Anda will be speaking on Wednesday the 16th on legal issues associated with owning and operating an alcohol business.

Craft Brewers Conference 2012

We are heading to the Craft Brewers Conference in San Diego!

Anda will speak on Distribution and Federal Alcohol Administration Act issues on Friday morning and Employment Law issues on Saturday afternoon.

Below is a brief description of each seminar:

Distribution Agreements and 3-Tier System Issues 

This discussion will allow brewers, marketers and managers to understand various laws regarding distribution and advertising to better understand what steps they must take on the front end to protect their companies from liabilities and disputes. There will be opportunity for questions and discussions to help participants explore common costly mistakes in an effort to minimize risk.

Selling Craft Beer track
Golden Pacific Ballroom Friday May 4 at 8:30 am
Speakers: Anda Lincoln and Melinda Sellers

Employment Law for Brewery Managers 

This seminar will raise awareness of employment issues commonly faced in the brewing industry and provide some helpful tips on how to address these issues up front to avoid costly legal problems.

Government Affairs track
Sunrise Room Saturday May 5 at 2:30 pm
Speakers: Anda Lincoln and Melinda Sellers

If you are at the conference, please come by and say "hi!"

What are your First Amendment Rights?

First Amendment Allowable Restrictions on Advertising

The Supreme Court has held that the government may ban forms of commercial communication, without violating the speaker’s freedom of speech, if the communication is “more likely to deceive the public than to inform it, or commercial speech related to illegal activity.” See Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n, 447 U.S. 557 (1980).

But, commercial speech that is neither misleading, nor related to illegal activities, cannot be banned or restricted unless the Court’s three part test (from the Central Hudson case) is satisfied.

1) the state must have a “substantial” interest
2) the restriction must be directly related to the state’s interest - it cannot be speculative, or theoretically related; and
3) the restriction cannot be excessive - or, if there is a more limited way to meet the state’s interest, excessive restrictions on speech are unconstitutional

The Supreme Court has struck down advertising bans aimed at protecting children that also keep commercial speech from reaching adults. In 2001, the court struck down a Massachusetts regulation that prohibited outdoor advertising of tobacco products within 1,000 fee of a school or playground. See Lorillard Tobacco Co. v. Reilly, 533 U.S. 525 (2001). The outdoor advertising restrictions failed the final prong of the Central Hudson test - the restriction was not a “reasonable fit between the means and ends of the regulatory scheme.”

The state failed to show that the outdoor advertising regulations were “not more extensive than necessary to advance the State’s substantial interest in preventing underage tobacco use.” The Court also stated that because the purchase and use of tobacco products by adults is legal, the interest of tobacco retailers and manufacturers in conveying truthful information to adults must be considered.

“the governmental interest in protecting children from harmful materials . . . does not justify an unnecessarily broad suppression of speech addressed to adults… a speech regulation cannot unduly impinge on the speaker’s ability to propose a commercial transaction and the adult listener’s opportunity to obtain information about products.”

Self Imposed Industry Advertising Codes

In response to the threat of costly FTC investigations, the alcohol industry has devised self regulating advertising codes for its members. The FTC then uses these advertising codes to determine if an advertiser has violated the FTC Act (disseminated advertising that is unfair or deceptive).

One of the requirements in the alcohol industry’s various codes is that 70% of an ad’s viewers must reasonably be over the legal drinking age. Originally, the standard was at 30%. Recently, the FTC has considered raising the requirement to 85%.

Keep in mind, that the requirement is contained in self imposed standards, rather than through legislation or regulations created by the FTC. The standard, however, is imposed on alcohol advertisers in a back-handed way. Rather than directly promulgate regulations, the FTC, essentially, requires advertisers to self impose the requirement.

Many of the alcohol industry’s advertising codes would not pass the Supreme Court’s tests for unreasonable restrictions on commercial speech. But, while the government cannot unreasonably inhibit useful advertising claims aimed at legal purchasers in its attempt to protect children, an advertiser can voluntarily restrict its speech.

This is one of the reasons FTC’s authority and position in alcohol advertising has not been challenged. The FTC has not created legislation on the matter. There is little standing to challenge the constitutionality of a government restriction on speech.

If the FTC does begin to require an 85% standard, this might effectively prevent alcohol advertisers from advertising in certain traditional media formats. If this does become the standard, how long will it be until, like tobacco product advertisers, alcohol advertisers are completely prohibited from advertising on TV or other forms of media? It is a slippery slope, and alcohol advertisers should consider the potential future ramifications of adopting more and more restrictive advertising codes.

FTC and Alcohol Advertisements: Unchallenged Authority

As we’ve mentioned before, the FTC takes the position that advertisements that may encourage underage or irresponsible drinking are a violation of the FTC Act. This position has never been challenged by an alcoholic beverage advertiser. But, is it a stretch of authority?

What is unfair and deceptive?

The FTC is charged with protecting consumers in interstate commerce from unfair or deceptive statements, acts, and trade practices - not with generally protecting consumers.

More specifically, the FTC may declare an act or practice in unlawful if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 USC § 45(n).

This means that FTC will find deception if there is a representation, omission, or practice that is likely to mislead a consumer acting reasonably in the circumstances, to the consumer’s detriment.

The statement, act, or practice is considered from the perspective of a reasonable consumer. If the ad is targeted to a specific audience, the FTC will determine the effect of the ad on a reasonable (i.e. ordinary) member of that group. So, if the ad is targeted towards pre-school aged children, an ordinary 4 year-old would be the standard.

One of the legal requirements to the FTC’s findings of unfairness or deception is that the statement, act, or practice must be material - it must be likely to affect a consumer’s choice or conduct, leading to injury to the consumer. Also, recall that the practice is not unlawful if it can be “reasonably avoid[ed] by consumers themselves.”

The FTC’s position that advertisements that may encourage underaged or irresponsible drinking is a far stretch from the legal requirements for deceptive and unfair advertising.

Underaged Drinking

The theory is that children are much more easily deceived by advertisers than are adults. Is anything that encourages them to drink alcohol deceptive advertising? Or, unfair advertising because they cannot reasonably avoid drinking alcohol?

While we do not advocate that Mickey Mouse be used to sell alcoholic beverages, what is the line? Could simply seeing an alcohol ad encourage underaged drinkers to drink alcohol?

Even if you concede the point that children are likely to be deceived by alcohol ads, the truth is that alcohol ads do not target children. Much of alcohol advertising is about brands: educating consumers, convincing drinkers to switch to your brand from the competition. The target consumer is one that can purchase the product.

Irresponsible Drinking

What about the nebulous requirement that alcohol advertising not encourage irresponsible drinking? Is the FTC’s position that the ordinary person cannot understand the effects of alcohol? That the ordinary consumer cannot reasonably avoid irresponsible drinking? Or that the reasonable consumer is not aware that he or she should not operate a vehicle of any kind while inebriated? What is it that consumers cannot protect themselves against?

Requirements that correct alcoholic content be printed on labels or in any ads (which is already required by the TTB), or making unlawful ads that show people engaged in illegal acts while drinking, more clearly fall under the FTC’s authority. The vague sentiment against irresponsible drinking, however, does not. Rather than punish the product, why not punish the act and make the consumer responsible for his or her actions?

Self Regulation

In response to the FTC’s positions, industry groups have created self regulating advertising codes. The FTC’s report on the alcohol industry’s self regulation codes states that “self-regulation is a realistic, responsive and responsible approach to many of the issues raised by underage drinking. It can deal quickly and flexibly with a wide range of advertising issues and brings the accumulated experience and judgment of an industry to bear without the rigidity of government regulation.”

Self regulation also avoids having to satisfy First Amendment standards for restrictions on free speech that legislation or government regulations would otherwise have to meet. When the FTC calls for certain standards to be met in industry advertising codes, is it really an end-run around the First Amendment?