By: Brian D. Kaider, Esq.
Breweries have to deal with many legal issues, including licensing requirements from various federal and state agencies, formation of a corporate entity, negotiating contracts, and registering trademarks. With so many new skills and requirements to learn, it can be easy to miss something. Below are examples of three legal issues that are often overlooked.
Failing to Require Employment Agreements
There are a million things to do when starting a brewery. Finding and hiring staff checks off a significant box on the list and it can be easy to overlook the need for an employment agreement for these early hires. Later, there is little enthusiasm to impose these agreements retroactively or to apply them to new hires when they were not required for original employees. Yet, employment agreements serve a variety of functions that are so essential that their omission can cause substantial problems down the line.
As a preliminary matter, an employment agreement defines the relationship between the parties. Often breweries will try to categorize workers as independent contractors as opposed to employees, because this distinction allows the brewery to avoid providing certain benefits that are required for
employees. But, the IRS does not care about the brewery’s characterization, it cares how the worker is treated, and the key determination is control. An independent contractor is hired to provide a function, but has significant autonomy to perform that function when, where, and how they see fit. Often they will provide their own equipment and set their own hours. By contrast, if the brewery exercises control over the worker by imposing certain work hours, requiring the job to be performed in a certain way, and providing the equipment used, the worker is considered an employee.
There are many important sections of an employment agreement, including designation of at-will employment, requirement to abide by rules set forth in the employee handbook, etc. But two often-overlooked sections relate to confidentiality and assignment of intellectual property. Although the brewing industry is far more collaborative and congenial than most, it is still a competitive business and certain information should be treated as confidential and/or trade secret. Employees should be made aware that unauthorized disclosure of business plans, growth plans, customer and supplier lists, recipes, and marketing ideas, to name a few, can cause harm to the business. This section of the employment agreement not only serves that notice function, but can set up more enforceable consequences if the terms of the agreement are breached.
Breweries generate a significant amount of material that can be protected by trademark or copyright registration. Label designs, beer names, domain names, and social media accounts are all valuable assets that should belong strictly to the business. An assignment of intellectual property section in an employment agreement sets forth the understanding that anything created during the term of employment is the sole property of the business. As an example, if an employee has artistic talents that are used to develop designs for labels, those artistic designs should be assigned to the company. Otherwise, the employee would have the right to sell the same designs to other companies or individuals who may use them in a way that is detrimental to the brewery’s brand.
Failing to Secure Music Licenses
Music is such a common part of the brewery experience that many people take it for granted. However, breweries must obtain the proper licensing to play copyrighted music in their establishments or they could face a copyright infringement suit and potentially crippling statutory damages that could be as much as $150,000 per instance.
Under U.S. copyright law, the owner of a piece of music has the exclusive right to control its use, including whether or not it may be played in a public setting. Typically, however, while the artist may own the copyright, s/he delegates the task of licensing its use to a Performing Rights Organization (PRO) such as the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). In some cases, a single artist may have some of its songs licensed by one PRO and others licensed by another.
So, is a license required for every song played in a brewery? Generally, yes, in order to publicly play any piece of music, a brewery must obtain a license from the PRO that has the piece in its catalog. Below are some common situations where a license is required, followed by some exceptions to the general rule, and one very simple way to stay in compliance.
Disk Jockeys by their very nature play a variety of pre-recorded music. Although it may be the DJ that selects the pieces it plays, because the venue derives the benefit of the music, it is responsible for obtaining all necessary licenses.
Bands that play “cover songs” written by another artist fall under the same category as DJs. But, what about bands that play only original songs? The brewery should ask the band whether it is affiliated with a PRO. If so, even if the band is playing its own music, the venue needs a license for the performance.
Purchased music is only licensed for private use. Many people assume that when they buy a record, CD, or digital audio file that they own the music and can do anything they want with it. In reality, the purchase price of that music only covers private use and does not entitle the owner of that copy to broadcast it to the public. So, even if the brewery owner brings in her own collection of vintage vinyl, she must obtain a license to play the records in the taproom.
Generally, music licensing fees are not terribly expensive, but vary according to the size of the establishment and the type of music being played. In some cases, discounts may be available. For example, the Brewers Association has negotiated a discount with BMI of up to 20% for its members.
There are a few exceptions that will enable music to be played without a license, but they are narrowly construed and must be followed carefully. Music that is broadcast to the general public over the radio, television, cable, or satellite services may be played in a brewery without further license if the establishment is smaller than 3,750 gross square feet, including all interior and exterior spaces used for customer service. Larger spaces may also qualify for license-free performance, but other restrictions apply, such as: the music may not be played over more than six loud-speakers or more than four in one room; there may not be a cover charge to enter the establishment; and audiovisual content may not broadcast over more than four televisions or more than one in a single room. Music may also be played in the brewing space or offices for the benefit of employees, as long as it is not audible to the patrons in the tasting room.
By far, the simplest way to get music in the brewery is to use a commercial streaming service, such as Pandora For Business or Sirius XM For Business. The fees for these services include performance royalties and do not require any additional license.
Failing to Report Changes in Proprietorship or Control
It should come as no surprise that when forming a brewery the TTB will want to know exactly who owns the business and who is in charge. It should be equally unsurprising, then, that if there is a change in ownership or control of the business, the TTB must be informed. Yet, this is an often-neglected requirement and failure to adhere to the letter of the law can have serious consequences.
It is important to understand the distinction between a change in proprietorship and a change in control. A change in proprietorship occurs when there is a change in the entity that owns and operates the brewery. The obvious example is if the brewery is sold to a new company. Clearly in that situation, the TTB must be made aware of the new ownership and the law requires that the notification be made well in advance of the proposed change. Specifically, 27 C.F.R. §25.72 requires that the successor brewer “qualify in the same manner as the proprietor of a new brewery” before beginning operations. Less obvious examples might be the conversion of an LLC to an S-Corporation or the folding of the brewery business under the umbrella of a parent corporation that has the same owners and officers as the brewery business. Both those situations involve changes to the proprietorship and must be cleared with the TTB before operating under the new structure.
By contrast, a change in control occurs when there are changes in stock ownership, LLC membership unit ownership, or major changes in the corporate officers or directors of a corporation. The same business entity continues to operate the business, so there is no change in proprietorship, but there is a change in who controls the business within that entity. In this situation, an amended Brewer’s Notice is required to be submitted within 30 days of the change. Further, if a new LLC member or stockholder holds more than 10% interest in the business, a new Personnel Questionnaire must also be filed. Common situations that involve a change of control may include the removal of a founder, death of a member, addition of a new corporate officer with ownership interest, addition of new members through a round of fund-raising investments, or the buy-out of previous investors.
Failure to abide by the notice requirements for changes in proprietorship or control can have serious consequences, including forced shutdown of operations until the licensing matters are resolved and possible monetary penalties.
These are just three of the legal issues that breweries often overlook. There are, of course, many more. Engaging an attorney that understands the industry early in the process of starting a brewery and maintaining the relationship throughout the life of the business is the best practice to ensure compliance with all requirements.
Brian Kaider is the principal of KaiderLaw, a 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.