By: Brian D. Kaider, Esq.
I met Christian Layke in April 2016, when he was still the head brewer at the Rockville, Maryland location of Gordon Biersch. Like many others I had spoken to before, and since, he wanted to open his own brewery. But, he wasn’t a homebrewer with romantic ideas of going pro with a 5 barrel system and a shoestring budget. He had many years of education and experience in brewing (in addition to being a homebrewer) and had grandiose ideas of opening a full production brewery with a world-class taproom and launching immediately into distribution. I was skeptical…at first. I quickly came to realize that Christian had already developed a clear vision of what he wanted to build and had concrete plans to get there.
Fast forward to March 2020. Christian and his business partner, Brett Robison, just celebrated the first anniversary of opening Silver Branch Brewing Company in Silver Spring, Maryland. I sat down with them recently to reflect on the legal lessons they had learned in the three years leading up to their opening.
The “Harajuku Moment”
One of the things that impressed me most about Christian was that when he first contacted me, he was already focused on obtaining federal trademark registration of the brewery name. For many people, this thought comes much later. But, Christian and Brett’s story highlights why this should be one of the first decisions.
After conducting a trademark clearance search on their proposed brewery name, I had to give them the bad news that not only was it unlikely they could register the name, but that using it could expose them to legal liability based on another trademark owner’s rights. This set off a back and forth discussion of new potential names that lasted many months. In the meantime, they were moving forward with other phases of their brewery development; we were drafting operating agreements, deciding how to raise capital, and they were looking for commercial space. Many months, many names, and many trademark searches later, we were still kicking around names.
Then they met with their commercial real estate broker and had what Brett refers to as their “Harajuku moment;” an epiphany that turns a nice-to-have into a must-have. Any landlord of the type of property in which they were interested was going to want to know what the branding of the prospective tenant was going to look like and they were going to want to negotiate with a company, not two guys with the idea of a company. They needed a name and a branding image immediately.
They landed on Parallel World Brewing Company and we filed a federal trademark application on January 18, 2017. On July 18, 2017, we received a notice of allowance from the trademark office, meaning that the mark could be registered as soon as they began using it “in commerce.” In the meantime, they formed their LLC, opened a bank account, applied for their brewery permits, and began lease negotiations, all under the name Parallel World.
That is when we got a cease and desist letter from another brewery with a registered trademark that they felt was too similar. Although we believed their claim was without merit and that we would likely prevail if they followed through on their threat to file a cancellation proceeding against the Parallel World mark, it would have cost Christian and Brett money, time, and energy, all of which were precious commodities at that point. Since they were still in the planning and building phase and had not yet opened their brewery, it made more sense to just abandon the name and try again. As Christian put it, “if you’re not in business, you have no business being in this fight… just sigh and move on.”
Ultimately, they feel that this process ended up benefiting them. As they went back to the drawing board for a name, they spent significant time discussing and honing their vision of what they wanted their brewery to be. It was an amalgamation of what they consider four key brewing cultures, Belgium, Britain and Ireland, Central Europe, and the Americas. From this focus, they developed the imagery of their beer labels using cityscapes of those regions and they designed their taproom to have sections that pay homage to each culture. From this concept they also found their new name, Silver Branch; a nod to their home location of Silver Spring, Maryland blended with the old world tradition of putting a branch outside your door to signify that you had beer for sale. Additionally, in developing their new name, they also ended up with an extensive list of unused names, many of which have now become names of their beers.
There are two overarching lessons from this experience. First, start as early in the planning process as possible to develop a clear vision of what you want your customers’ experiences to look like. Use this vision to guide your brand identity and the brewery name. Second, file for trademark registration on the name as soon as possible. Christian and Brett did everything right; they hired an attorney, researched the name, filed for registration, and got approval from the U.S. Patent and Trademark Office, and they still had to rebrand. If they had waited until they were open for business before filing their trademark application and then had to face a cease and desist letter, it could have been devastating.
The “Vegas Clause”
The second thing that struck me as unusual when I first met with Christian and Brett was their focus on drafting an Operating Agreement. Many clients will try to use a form they find online or ask if I have a “standard” operating agreement they can sign. That is a huge mistake, because as Brett pointed out to me, “you don’t write these things for the agreement itself,” rather the value in drafting the agreement from scratch is that you get to know your partners extremely well and quickly learn whether you will be able to work together effectively. In preparing the agreement, as Brett put it, “you put your soul to bare in front of another person and tell them everything embarrassing about yourself.”
In their case, one of the defining moments came when we discussed what would happen if one of them were to die unexpectedly. It’s something most people don’t think about, but led to us drafting what they affectionately refer to as the “Vegas clause.”
The discussion began with two premises: 1) that if one of them died, their ownership interest would pass to their heirs, and 2) if one of them was divorced the ownership may be considered marital property, half of which would pass to the ex-spouse. While that was fine on its face, it meant that the surviving owner could find themselves in a situation where they suddenly had a new partner who had no brewery experience, perhaps no interest, and possibly hostile intent.
So, we divided ownership interest in the business into two classes of LLC membership units; Class A, which were tied to managerial powers to run the business and had greater voting rights, and Class B, which had no managerial powers and lesser voting rights. If one of the partners died, their ownership interest that was passed down to their heirs was immediately converted to Class B. The same was true for any shares given to an ex-spouse in a divorce. So, the heir or ex-spouse maintained the economic interest without the power to run the business.
The problem was that at the time we drafted the operating agreement, Christian was married, but Brett was not. So, when the agreement was to be signed, we could have Christian’s wife sign her acknowledgement of the clause that her interest would revert to Class B shares. But, we could not do the same for Brett. This created a loophole where, purely hypothetically, Brett went on a bender in Las Vegas, found himself unexpectedly married (with or without Mike Tyson’s tiger in his bathroom), and quickly got a divorce or was killed and Christian would be stuck with a new partner with Class A shares, because Brett’s new wife had never signed the agreement.
Thus, the “Vegas clause” was born. It provided that Christian or Brett had to provide the company with a signed acknowledgement of the conversion to Class B clause from their spouse-to-be at least 5 days before entering into a new marriage. Failure to do so would cause their Class A shares to convert to Class B. The converted units could be reinstated to Class A upon receipt of the signed acknowledgement and upon a 2/3 vote of the Members.
The lesson here is not in the details of this clause, but that these issues would never have come up if Christian and Brett had just pulled a “standard” agreement off the internet. There is tremendous value in discussing these issues and ensuring that everyone is comfortable with the relationship. Like an insurance policy, you hope that these clauses never come into play, but if something bad happens, it is a relief to know that there is a plan to allow you to move forward.
Ask anyone who has opened a brewery and they will tell you that EVERYTHING takes more time and money than you expect. With a nod to Helmuth von Moltke, “no business plan survives first contact with the government.” Christian and Brett learned that lesson painfully.
The location they found for their brewery was the bottom level of an office building in downtown Silver Spring. It was a massive undertaking that required significant renovation, including raising the floor of one section of the building to match the rest. After multiple rounds of discussions with architects and engineers, they were literally one signature away from getting their building permit. Just then, the person whose signature they needed last went on vacation. So, their application went to that person’s boss, who decided that because their proposed business required a “change of use” for the premises from office use to light industrial, they were required to bring the entire building up to specification with the new energy code.
What this meant was a very expensive upgrade to the building’s HVAC system and a construction delay of months. After much blood, sweat, and tears (and money), the upgrade was completed and they celebrated in the moment captured in the photograph above; Christian and Brett toasting with a glass of scotch outside the door of what would become their brewery, the building permit in Brett’s hand.
The specific legal lesson is that if your proposed location would require a change of use, ensure that the property is grand-fathered into the old code specifications before signing the lease. More generally, though, think through all of the issues as thoroughly as possible before you get started, but be prepared for the fact that you will be thrown curve balls. Budget for more than you think you will need (it won’t be) and build a team around you to help navigate the unexpected.
A Year Later
Even with extensive experience, Christian and Brett faced a steep learning curve in building their brewery. That didn’t end when Silver Branch opened its doors. Expanding their food service, working with artists to develop product labels, adding or changing vendors, and building their distribution network, they have encountered numerous new challenges. But, it sure is nice to meet those challenges with a glass of world-class pilsner in their bustling taproom.
Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.