New Brewery, Winery or Distillery Start Up

By: Kris Bohm: Distillery Now Consulting, LLC  

Starting up a new beverage alcohol business is hard. Whether making beer, wine, or spirits, the challenges are daunting and upfront costs are huge. No one takes the leap to start a new business knowing it will fail, but many of them will. Based on industry data, up to 40% of new beverage alcohol businesses fail. To create a successful business, there is a common question that arises during the planning phase of launching a new beverage alcohol business.

What is the difference between a successful business and one that fails?

  This massively important question should be answered early on for a new business. In doing so, key strategies will be defined for the business from the beginning as it ventures forward. In the following paragraphs, you will find not only the answer to this question, but also a further analysis of successful business practices.

Defining Success: Let’s take a moment to define and measure success in a beverage alcohol business. This definition applies whether in a brewery, winery, or a distillery. These measurements of success will allow us to look closer at the internal workings of the business. As you look closer you will find common traits among nearly every business that is successful. For the sake of this article we will narrowly define success using the specific individual metrics of profitability, sustainability and velocity.

Profitability: The first key metric and measurement of success is profitability. A business must either be profitable, or at a minimum near self-sustaining, with revenue covering the cost of operating the business. Achieving profitability is one of the biggest metrics that defines success. Reaching profitability is essential, as every successful business must be self-sustaining after a certain amount of time. If a business is not profitable for too long of time, it is almost certain to fail.

Sustainability: A successful business must be sustainable in the capacity to produce the products it intends to sell. To clarify, we do not mean sustainability from an environmental impact or energy usage standpoint. Sustainability in this model means the ability to sustain and meet demand for products through growth. For a business model to be sustainable the equipment must have the capacity to grow and meet new demand as the company grows. The reason this metric is so essential is that most businesses must grow to reach profitability. If your business cannot sustain growth it most likely can not grow to become profitable.

Velocity: A business needs to have regular sales to provide consistent revenue for the business. Velocity is a measurement of how quickly your business is turning raw materials into finished goods and selling those goods. High velocity of product means there will be more consistent cash flow for the business. As product velocity increases it is followed by increases in revenue and often economies of scale. Both of which help a business become successful.

Tripod Business Model: Most businesses achieve some of these measures of success, but not too many will achieve them all. Among those who do succeed in meeting all three, there is a common thread that these successful businesses share. They will usually have three separate divisions that perform distinct business activities. These three divisions are production, sales, and marketing. This concept we will refer to as the tripod business model. If the top of a tripod is a successful beverage alcohol business as measured by our success metrics, then there almost always exists these three divisions in the business that make up equally important legs that hold up the business. If you remove any of the three legs, it only leaves the business on two unstable legs, and in time the business will fall and is likely to fail. It is easy to take this observation and call it as incorrect, but if one was to look closely at established successful beverage alcohol businesses they would find truth in this observation.

  When a sizable amount of time and resources are heavily invested into sales and marketing, the business has a strong probability that it will flourish. Often the business will flourish so strongly that production will often feel constrained in the resources it needs to meet the demand of the business. This is the correct way to invest time, financial resources and manpower to grow. If too many resources are dedicated to production in most instances production will have far too much capacity and there will not be enough demand for product to keep production running near its capacity.

  Now that we have defined some measures of success and the business practices that support them, let’s look closer at the three practices that hold up a successful beverage alcohol business, through the lens of a distillery.

SALES: Sales is essential and paramount to the success of nearly any business that has a product they sell. It can be the easier path for a new distillery to focus on their production with a plan to only sell spirits through a tasting room or cocktail lounge that is part of the distillery. A business plan like this can work, but it has a low ceiling that will often restrict a distillery from growing to a successful level. Real sales of considerable volume come from a distillery selling products in the same market as its competitors. This means working to sell spirits in liquor stores, bars, restaurants and other venues. In this market there is immense competition. The only way to compete in the larger spirits market is by investing into sales. This means having people working for your business who are full time employees whose job is to pull your spirits through the market and drive sales.

MARKETING: Marketing is the driving force that directly links to the success of sales. Marketing can come in a multitude of forms, some obvious and some not so obvious. Public facing platforms, such as social media, websites, billboards, magazines, newspapers, and influencers are all forms of marketing in action. The more a consumer or target consumer encounters a brand, the higher the chance that the consumer will buy your brand. Without an active marketing plan in place, consumers will quickly lose sight of your brand. A strong marketing plan and the person or people to continually implement, monitor, and drive a marketing plan is paramount to achieving success. Marketing is the key difference that will take a brand to the next level and keep pulling it up from there. Although it can be easy to not put an emphasis on channeling resources to marketing, it would be a mistake to do so. Many businesses have launched with little to no resources committed to marketing. Often these launches feel successful, but by our measurements are in fact not truly successful. Oftentimes the business will get going and be selling some amounts of product but in most instances a lack of marketing will cause a business to plateau quickly.

PRODUCTION: This practice of manufacturing is easy to give too much focus in the business of distilling. Whether you are distilling whiskey from scratch or bottling sourced spirits, the production part of this business is extremely important. While production is absolutely paramount to the business, this does not mean that the bulk of resources the business has should be invested into the production of spirits, nor the labor or equipment to produce the spirits. If the bulk of resources go towards production thus starving sales and marketing, there will invariably be a lack of sales to cover the costs of production. Now the manufacturing of distilled spirits is in no way inexpensive. Considerable resources have to go to production for it to function. We are trying to urge you to consider all resources the business has and properly allocate them to all three practices.

The battle between the practices: If you ask most folks who work in this industry, whether they work in sales, marketing, or production, they will all likely tell you that their business function is the most important to the success of the business. To be fair, all these folks can probably make a reasonably sound argument to support that statement. It is normal that there is some friction between all three practices because they all have unique functions and priorities that often do not align with one another. For a business to be successful, production, sales, and marketing must work together to achieve the goals of the business. When common goals are shared it is much easier for each part of the business to work in harmony.

Beware the Franchise Law Lurking Behind Your Distribution Agreement  

By: Louis J. Terminello, Esq. and Bradley Berkman, Esq

No party enters a contract with the expectation that its terms will be unfavorable to them. Having drafted innumerable agreements of all sorts, including beverage alcohol distribution agreements, we have learned that the underlying principle for successful contract negotiations and drafting is fairness. Put another way, the rights and duties of the contracting parties must be clear on the face of the agreement and the detriment or consequences to the non-performing party are clearly stated and actionable. Brewers and their distributors are no exception. Each has their own expectations and definitions of success.

Generally, for the brewer it’s to gain points of distribution at on and off premise venues with the goal of obtaining volume expectations. For the distributor it is to see the long terms benefits of their distribution efforts within its assigned territory.  Distributors generally want a long-term relationship where they know their upfront efforts and costs will come back to them when any given brand attains a level of organic or self-sustained sales success. Brewers beware, however. Within the context of an ideal equitable agreement lies the malt-beverage franchise statute. These laws tend to favor the beer wholesaler and are superior in affect to any agreement executed between the parties. Many established brewers are aware of these statutes but many new brewers and brand owners are not. The purpose of this article is to introduce the new brewer and/or brand owner to franchise law basics and offer a few contract drafting suggestions that they can pass on to their contract lawyers that ultimately will create a brand success story that will benefit all parties to the agreement.

The Beer Franchise Law – the Basics

  First, virtually every state has codified the concept of “franchise” into law. An informal and unscientific survey reveals that only three (3) states in the U.S. do not have beer franchise laws on their books. As a brewer, it’s best to assume, without research, that the new wholesaler you’re considering appointing has the benefit of the law and to negotiate any distribution agreement with that in mind. By now, you’re likely wondering what these laws are.

  The National Beer Wholesalers Association (NBWA) rightfully states that that these laws are creatures of the 21st Amendment which grants the states the rights to regulate the distribution and sale of beverage alcohol within their borders. NBWA on its website states that these laws provide a number of positive regulatory contributions including providing consumers with beer choices by promoting the availability of diverse products,  they allow brewers access to the marketplace while preserving the distributors’ independence and act as a public safeguard by requiring responsible sales through the three-tier system. These benefits indeed may be true.

  But a closer look at the beer franchise laws also reveal that many statutory mandated provisions arguably benefit and favor the wholesaler operation and makes cancellation or termination of any brewer/distributor agreement an overwhelmingly difficult task for the brewer/brand owner. Broadly speaking, many beer franchise laws contain the following common elements:

•    Franchise agreements can be made either orally or written.

•    Franchise agreements appoint the distributor as the exclusive seller within an assigned territory and take effect at the time of first shipment by the brewer to distributor.

•    A franchise agreement can only be terminated or cancelled on a showing of good cause and by the showing of a material breach by a party. Almost always, the brewer bears the burden of the showing of material breach by the distributor.

•    Notice procedures and the timing of the same are explicitly stated in the statute(s) and must be complied with. Put another way, the brewer must notify the distributor that they are not performing according to the terms of the agreement.

•    Opportunities to cure must be provided by brewer to distributors in accordance with the statutory timeframes.

•    Buyout provisions and formulas to calculate brand buy-back are often included should the brewer desire to regain control over the brand.

  The above provides the reader with a basic framework of a franchise law. Given that these authors concentrate their legal efforts in Florida, a closer look at the Florida franchise law follows and provides a good example of some of the language that a brewer will likely see in the laws of other states. Florida codifies its franchise law in Florida statute 563.022. That statute is entitled “Relations between beer distributors and manufacturers.” Florida Statute 563.022 is lengthy indeed with over twenty-one (21) parts. To address each part and its subparts exceed this publication’s length requirements for this article. As a caveat, though, to the brewer/brand owner reader, the statute is detailed, carefully drafted and will be relied upon by the courts of Florida in any breach of contract case likely brought by a distributor as Plaintiff and brewer as Defendant.  A summary of the key points of the statute are offered below with an emphasis placed on unfair practices by the brewer/brand owner (supplier) and the grounds and procedures for terminating the distribution agreement.

Florida Statute 563.022

•    “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, for a definite or indefinite period of time in which a manufacturer grants to a beer distributor the right to purchase, resell, and distribute any brand or brands offered by the manufacturer.

•    Any person who enters into agreement with beer distributors in Florida is subject to this section.

•    It shall be deemed a violation by supplier to:

o   Coerce or compel distributor to accept product they have not voluntarily ordered.

o   For supplier not to deliver reasonable quantities within a reasonable time after receiving a distributors order.

o   Coerce or compel or attempt to coerce or compel, a beer distributor to enter into any agreement (written or oral) supplementary to a franchise agreement by the threat of cancelling the franchise agreement.

o   To fix or maintain the price at which a distributor must resell the beer.

•    DISTRIBUTOR’S RESIGNATION, CANCELLATION, TERMINATION, FAILURE TO RENEW, OR REFUSAL TO CONTINUE. Notwithstanding any agreement a manufacturer shall not cause a distributor to resign from an agreement, or cancel, terminate, fail to renew, or refuse to continue under an agreement unless the manufacturer has complied with all of the following:

o    Has satisfied the applicable notice requirements.

o    Has acted in good faith.

o    Has good cause for the cancellation, termination, nonrenewal, discontinuance, or forced resignation. Good cause is defined as all the below occurring:

•    There is a failure by the distributor to comply with a provision of the agreement which is both reasonable and of material significance to the business relationship between the distributor and the manufacturer.

•    The manufacturer first acquired knowledge of the failure described in paragraph (a) not more than 18 months before the date notification was given.

•    The distributor was given written notice by the manufacturer of failure to comply with the agreement.

•    The distributor was afforded a reasonable opportunity to assert good faith efforts to comply with the agreement within the time limits provided for.

•    The distributor has been afforded 30 days in which to submit a plan of corrective action to comply with the agreement and an additional 90 days to cure such noncompliance in accordance with the plan or to sell his or her distributorship consistent with the provisions of this section.

•    BURDEN OF PROOF.—For each termination, cancellation, nonrenewal, or discontinuance, the manufacturer shall have the burden of showing that it has acted in good faith, that the notice requirements under this section have been complied with, and that there was good cause for the termination, cancellation, nonrenewal, or discontinuance.

•    The manufacturer shall furnish written notice of the termination, cancellation, nonrenewal, or discontinuance of an agreement to the distributor not less than 90 days before the effective date of the termination, cancellation, nonrenewal, or discontinuance; in no event shall the contractual term of any such franchise or selling agreement expire without the written consent of the beer distributor involved prior to the expiration of at least 90 days following such written notice. The notice shall be by certified mail and shall contain all of the following:

o    A statement of intention to terminate, cancel, not renew, or discontinue the agreement.

o    A statement of the reason for the termination, cancellation, nonrenewal, or discontinuance.

o    The date on which the termination, cancellation, nonrenewal, or discontinuance takes effect.

General Applicability, Takeaways and Contract Drafting Suggestions

  Although the above is specific to Florida, hopefully it provides the reader with a bit more knowledge concerning these franchise statutes. Once again, many of the concepts codified in Florida law can also be found in similar laws of other states. An essential term in the Florida law that will likely be found in the franchise laws of other states is “Good Cause.” A showing of good cause must be made by the brewer to terminate or cancel a distribution agreement with a wholesaler. In Florida all the elements noted above (see the italicized language) must be present to show good cause. Another essential element which will guide the next part of our discussion is this:

  “There is a failure by the distributor to comply with a provision of the agreement which is both reasonable and of material significance to the business relationship between the distributor and the manufacturer.”

  For the brewer, brand owner or manufacturer, it is elemental that the agreement contains provisions which are both reasonable and of material significance, which if breached and all other requirements are adhered to, may provide them with legally defensible grounds for termination or cancellation of the agreement. Many times distributors try to avoid the inclusion of material terms for obvious reasons by handing over boilerplate agreements for consideration by the brewer. These boilerplate agreements may look reasonable on their face but almost always lack “teeth” and rely solely on the statutory language that overwhelmingly favors the distributor.  But the smart brewer’s attorney will include reasonable material terms such as volume or points of distribution goals over a stated time period. Such material terms may be as simple as stating that the distributor must sell 100,000 cases for the first twelve months from the effective date of an agreement or establishing points of distribution by stating, as a rudimentary example, the distributor will achieve 75 placements (defining “placements” in a reasonable manner) in the first three months of the agreement and another 75 placements in the second three month period. As a contract drafting suggestion it is important to state that if the distributor fails to meet these goals these will be treated by the Parties as a material breach.

  The above recommendations are provided as suggestions only and are not intended as legal advice. The point of this article is to arm the new brewer with useful information so they may level the playing field to a limited degree with their wholesaler partners at the start of the sales and distribution relationship.  After all, the goal is to draft a fair agreement for all parties with the reasonable expectations of all are clearly stated. As a final caveat, beer wholesalers are powerful actors on the state stage. It is of paramount importance that the new brewer hire an experienced alcohol beverage attorney to assist in negotiations and contract drafting.

How to Get a Grant to Support Your Craft Beverage Business

By: Alyssa L. Ochs

Starting a brewery or distillery can typically cost anywhere from $250,000 to $2 million, which is a lot of money to raise if you’re starting your new endeavor from scratch. Craft beverage businesses often need money from outside sources to launch and continue operations, and one potential source to look into is grant money.

  Grants can be hard to come by in this industry, but they do exist and can be worth the time and effort of applying for a sizable sum of no-strings-attached cash. If your brewery or distillery is looking for funding to get off the ground, keep going or make an expansion, a grant may be precisely what you need to achieve your goals.

Common Needs and Financing Options

  There are many reasons a craft beverage business might seek grant money, such as upgrading a brewing or distilling system, building or expanding a taproom or increasing production capabilities. Grants can also be helpful if you are looking to hire more staff, invest in more eco-friendly approaches or save a struggling business from having to close its doors. During the COVID-19 pandemic, the food and beverage industry saw an increase in grant opportunities to help brewers and distillers stay in business despite public gathering restrictions and government-mandated closures. However, those opportunities were somewhat short-lived and not intended to sustain these types of businesses long-term.

  However, grants are just one of the many ways a brewery or distillery might support itself during challenging times. It is possible to solicit donations or loans from family and friends, tap into savings accounts, apply for a Small Business Association loan or connect with professional investors for funding. Mainvest is an example of a specialized investment platform for professional craft brewers. At the same time, crowdfunding campaigns are still popular options for businesses with good outreach skills and a solid social media following. Yet grants are a preferred source of funding in many instances because they do not require repayment but likely just a follow-up report in the future to prove that grantees are putting the funds to good use.

Examples of Craft Beverage Grant Opportunities

  Grantmakers typically make their awards in cycles that occur once or twice yearly. The opportunities are ever-changing, so it is up to brewery and distillery owners to keep up with what is available and the relevant deadlines. Some funders offer grants annually, while others are more responsive to urgent needs and step up to help during times of emergency.

  For example, the Washington Department of Agriculture Relief and Recovery Grant for Wineries, Meaderies, Breweries, Cideries and Distilleries was a response to COVID-19 and intended to support businesses disrupted by the pandemic because they primarily rely on in-person sales. The money for these $15,000 grants came from a Disaster Response Account managed by the State of Washington Office of Financial Management. Aside from government organizations, some corporations award grants in this industry as part of a commitment to the local community. Yelp recently awarded $25 million in total relief to support independent and local restaurant and nightlife businesses impacted by COVID-19, Amazon started a $5 million Neighborhood Small Business Relief Fund to help small businesses in Seattle with fewer than 50 employees or less than $7 million in annual revenue and Facebook launched its Small Business Grants Program that awarded $100 million in grants and ad credits for up to 30,000 small businesses in over 30 countries. The Restaurants Act was part of the American Rescue Plan Act of 2021 and allowed alcoholic beverage trade groups to specifically include tasting and tap rooms in the definition of establishments that were eligible for grants.

  However, one of the best grantmakers to know is the Brewers Association, which regularly awards Craft Beer Research and Service Grants with priorities that include hop and barley research, draught beer quality studies, sustainability-related projects, supply chain programs and applied research opportunities. In a recent year, the Brewers Association awarded 13 of these grants, totaling nearly $400,000. The Brewers Association also awards Diversity, Equity and Inclusion Mini-Grants to support a more well-rounded and welcoming craft beverage industry through media productions, educational trainings and special events.

  Meanwhile, breweries and distilleries may benefit from the USDA grant program that the USDA’s Agricultural Marketing Service administers and that supports research projects to improve marketing, transportation and distributed-related services. The USDA’s Value-Added Producer Grant Program is an opportunity for farmers that grow products for distilleries in rural parts of the U.S.

  Also, on the distillery side of things, there is the Spirit Hub Independent Distillery Preservation Fund that supports independent distillers and the American Distilling Institute Distilling Research Grant. The Kentucky Distillers’ Association Lifting Spirits Foundation and the Nearest & Jack Advancement Initiative offer additional spirit-related funding and resources.

  Early in 2022, the Michigan Craft Beverage Council recommended $335,000 in grant funding for 13 projects related to research and education to advance the efforts for craft beer, spirits, hard cider and wine. The council’s priorities included climate change impacts, pest and disease management, sustainable water use, wastewater discharge projects, new hop varieties and soil health. Meanwhile, Bottleshare Grant Programs has provided emergency assistance to the craft beverage industry for at least 29 breweries, six state guilds and 175 individuals. Bottle Share Inc. is a charitable organization founded by Christopher Glenn and based in Kennesaw, Georgia that supports industry workers and businesses facing adversity and hardship. Other resources to bookmark for potential funding needs in the future are the Michael Jackson Foundation for Brewing & Distilling and the Pink Boots Society New Mexico State University Course for Brewing & Distilling in Belgium and the Netherlands.

Pros and Cons of Grant Funding

  Many breweries and distilleries are unaware of grant opportunities that exist due to limited promotion and public awareness but could very well be eligible to submit an application. Yet there are benefits to seeking a grant rather than pursuing other funding avenues. First, grants do not have to be repaid, which is a significant advantage over applying for a loan. However, grant applications can be time-consuming, and eventually getting the money in hand can take a substantial amount of time. Grants don’t typically cover overhead, indirect and administrative costs, yet each opportunity is unique and may focus on a specific project or equipment upgrade. There are not nearly as many grant opportunities in the craft beverage industry compared to the nonprofit sector. But applying for grants can get your business onto the radar of major corporations and foundations, thereby boosting your networking power with local community leaders and influencers.

  Some of the biggest names to know for brewery and distillery grants are the Brewers Association, distilling associations like the American Craft Spirits Association and American Distilling Institute and the USDA. State departments of agriculture and restaurant organizations also provide grant funding for the industry, as well as private donors who have personal interests in craft beverages and major corporations with a commitment to niche philanthropy.

Applying for a Brewing or Distilling Grant

  A basic internet search can lead you to current and open grant opportunities for breweries and distilleries, although the funding pool is limited, and the competition can be tough. Craft beverage producers should consider getting involved with industry associations and subscribing to publications and mailing lists to be among the first to know about grant opportunities and deadlines.

  Aside from funding in response to disasters and emergencies, one of the biggest trends in craft beverage grantmaking is encouraging diversity. These grants often help educate and employ women, people of color and members of the LGBTQ community in this industry. Promoting sustainability and eco-friendly practices is another current funding trend among grantmakers that care about craft beer and spirits.

  Although some grants have rolling deadlines and chances to apply at any time of the year, most opportunities have a series of established dates that require applicants to pay close attention. Look into the times when grant deadlines occur before your business even needs funding, just for informational purposes, and mark deadlines on a calendar in case an unexpected need should arise.

  If your business is eligible for a grant, read the guidelines closely, including the best ways to contact the funder for follow-up after you submit your materials. As you review grant proposal guidelines, important details to pay attention to include the budget year dates, duration of funding, funding policies and submission process. Use online applications whenever possible to expedite your application, and be specific in your application concerning the project budget and how you will meet measurable goals. In many instances, it is best to introduce your business and an initial description of what you need to a funder before submitting any official paperwork, either by telephone call, general inquiry email or by scheduling an in-person meeting. And if your business is fortunate enough to secure a grant, keep up with reporting requirements in good faith to set yourself up for potential support in the future if and when you might need it.

  Grants are just one piece of the puzzle to keep a brewery or distillery operational and successful, but they are oftentimes an underutilized asset that might be just what you need to get by or take a new direction with your beverage business.

The Indemnification Clause: A Lease Landmine?

Lease Renting Contract Residential Tenant Concept

By: Brian D. Kaider, Esq.

Most breweries and distilleries are built on leased property.  Negotiating the lease can be a daunting task, as these contracts are commonly over fifty pages long and full of dense legal language that can be difficult to understand.  Additionally, many landlords have “standard” leases to which they expect the tenant to agree with minimal changes.  Aside from definitions of rent and the duration of the lease, many tenants simply accept the remainder of the lease, as is.  More savvy tenants may negotiate issues such as the right to penetrate walls or ceilings for equipment ventilation, the use of outdoor space/common areas, or the state to which the premises must be restored following termination of the lease.  But, there is a section in virtually every lease that is typically ignored and has important consequences: the “indemnification clause.”

What is an Indemnification Clause?

  In the simplest terms, an indemnification clause identifies who is responsible if a third party (e.g., a customer) is injured on or around the leased property.  Most often, the injury refers to a physical injury, such as when a customer slips and falls on a wet floor.  The language of the clause typically provides that in such a case, if an injured customer sues the landlord as a result of the fall, the tenant agrees to compensate the landlord for any expense associated with the claim.  This makes sense, because the landlord cannot be expected to supervise every action of the tenant and if the tenant allows a hazardous condition, like a wet floor, to exist, the landlord should not be held responsible for the tenant’s negligence.  Of course, circumstances are often not as simple as this example and there is a lot of gray area in these clauses that may not be immediately apparent.

  After reading this article, it may be tempting to try to negotiate taking the indemnification clause out of the lease entirely.  First, it is unlikely any landlord would agree to the deletion.  Second, it would actually cause more problems that it solves.  Absent the indemnification provisions of the lease, the landlord could still file a legal claim against the tenant under a variety of legal theories to recover any damages they suffer as a result of the third-party claim.  The better course is to negotiate the terms of the indemnification clause to minimize exposure of the tenant and ensure that the terms are clear and unambiguous.

The Guts of an Indemnification Clause

  The typical indemnification clause is composed of very long sentences with multiple subparts that make it difficult to even read, much less understand.  The following is a breakdown of some of the key terms.

  Definition of the Parties – “Landlord Parties” and “Tenant Parties,” or similar terms are defined to include each respective company along with their owners, officers, directors, shareholders, affiliates, agents, employees, representatives, etc.  In other words, if an injured customer sues the owner of the landlord company, this definition includes the owner as an indemnified party, just as if the customer had sued the landlord company, itself.

  Required Actions – Every indemnification clause will use some or all of the following terms: “indemnify,” “defend,” and “hold harmless.”  While at first glance these terms would appear to mean the same thing, they are very different and which terms are used has important consequences.  In particular, “indemnify” and “hold harmless” seem similar and, in fact, the differences between them varies from state to state.  In general, “hold harmless” means that the landlord will not be held liable for any injuries or damages caused by the tenant.  In other words, if the tenant is sued by an injured customer, tenant will not blame the landlord or try to bring the landlord into the case as a separate defendant.  “Indemnify,” on the other hand, means that if the landlord is sued by the injured customer, the tenant agrees to reimburse them for costs incurred as a result of the lawsuit.  “Defend,” however, means that tenant is responsible for defending the landlord from lawsuits.  That word in the clause should then trigger other questions, such as, who chooses the counsel to defend the landlord? Does the landlord have the right to approve the proposed counsel?  And what happens if there is a conflict of interest between the landlord and tenant being represented by the same counsel?  Those issues should all be addressed in the indemnification clause.  If the word “defend” is not in the clause, though, that means the landlord is free to choose its own counsel to represent them and tenant is still responsible for the landlord’s legal fees, meaning tenant may be paying two different law firms to fight the same case.

  Scope of Covered Claims – The clause should have some description of the types of expenses that are covered.  In some cases, it is extremely broad, such as “any and all costs suffered by or claimed against landlord, directly or indirectly, based on, arising out of, or resulting from tenant’s use and occupancy of the premises or the business conducted by tenant therein.”  The description may be limited to only physical injury, death, or damage to property.  In some cases, it may refer to “reasonable claims.”  Of course, what is reasonable is a subjective question and likely to spur additional legal battles.  In some cases, the lease may require the tenant to warrant that they do not and will not infringe on another party’s trademark rights.  The tenant should always try to limit the scope of such terms to only “knowingly” infringe or infringing “known” trademark rights.  Otherwise, it would impart on the tenant an obligation to scour the earth for all trademarks that could possibly be asserted against it; an impossible task.

  Scope of Covered Property – It should be clear exactly what property is covered by the indemnification clause.  Often a lease will make a distinction between the “Premises” and the “Property.”  Premises usually refers to the actual unit that the tenant is renting, whereas Property refers to the entire parcel of real estate owned by the landlord, which may include other rented units and common areas.  Obviously, a tenant should not be required to indemnify the landlord against something done by another tenant in a separate unit.  But, common areas are much more tricky.  Often, either explicitly in the lease or by oral agreement, a landlord will permit a brewery tenant to occupy common areas, including parking lots, to serve beer and/or allow customers to eat and drink.  If someone drops a glass in the parking lot and the brewery does not clean it up promptly and a customer is cut by the broken pieces, the indemnification clause should protect the landlord if the customer sues.  But, if the landlord is responsible for snow removal in the parking lot and fails to adequately perform its obligations and a customer slips and falls when getting out of her car, the tenant will want such incidents to be outside the scope of indemnification.  If the clause is not worded carefully, that distinction may not be recognized by a court.

  Carve-Outs for Landlord’s Activity – This raises the broader issue of carve-outs in the indemnification clause for landlord’s activity that contributed to the injury.  For example, if the landlord was responsible for the build-out of the premises and was negligent in the installation of the electrical system, then if a customer is electrocuted, the tenant should not be required to indemnify the landlord against such latent defects.  Even then, the choice of wording in the clause is important.  Some leases only carve out “gross negligence,” “recklessness,” or “willful misconduct.”  In that case, if the injury is caused by landlord’s “ordinary negligence” that does not rise to the level of gross negligence, the tenant would still be required to indemnify the landlord against such claims.  It is worth noting, however, that some states hold such clauses to be against public policy, void, and unenforceable.  Those cases, however, often turn on whether the part of the property in question was under the exclusive control of the tenant.

Conclusion

  Landlords generally provide the first draft of a commercial lease and, not surprisingly, they are drafted heavily in favor of the landlord.  While a tenant’s focus may be on maximizing building improvement allowances and minimizing rent, they should review the entire lease thoroughly, and preferably with assistance from an attorney knowledgeable about the beverage industry.

Often, the landlord will be in a position with greater bargaining power than the tenant, but the law will view both parties to a commercial lease as being sophisticated enough to negotiate the terms of the agreement they consider important.  A court is unlikely to be persuaded that the tenant did not understand the terms or had no choice but to accept them.  The indemnification clause should clearly set forth the responsibilities of each party in clear and unambiguous terms, including: the covered property, the scope of covered claims, what actions the tenant is required to perform in the event of a complaint, and what landlord activity is excluded from the indemnification.

  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.

A Legal Checklist for the Startup Brewery

By: Brian D. Kaider, Esq.

For those hoping to realize their dream of starting a craft brewery, the number of tasks can be overwhelming and it may be difficult to know where to begin.  Building the right team to help achieve each objective can smooth the path considerably.  One of the first members of that team should be an attorney knowledgeable in the industry.  The information below is not a comprehensive list of everything a brewery needs to do, but is intended to provide a rough estimation of the time and expense required for the major events that may require an attorney, as well as identifying opportunities to save expense by doing some tasks in-house.  These items are listed in a sequential order that may be useful, but is certainly not a requirement. 

Form Corporate Entity

  In most cases, a limited liability company (LLC) is the best structure for a startup brewery, though it is wise to first consult a CPA or tax professional familiar with breweries.  Secretary of State offices often have simple online forms for the Articles of Organization of an LLC that do not require the services of an attorney.  However, some States, such as California, New York, and Delaware, require an LLC to have a signed operating agreement.  As explained below, the operating agreement should be drafted by an attorney and in some cases the attorney may offer a package that includes creation of the operating agreement along with creating and filing the articles of organization.  Though it varies state-to-state, the filing fees for Articles of Organization are typically $100-200 and it generally takes 2-3 weeks for the application to be accepted by the state, though it can sometimes be expedited for an additional fee.

Once the corporate entity is formed, the business can apply for an Employer Identification Number (EIN) using the free online form on the IRS website.  The EIN is needed to then open a bank account in the name of the business. 

Trademarks

  There are two reasons why filing for federal trademark registration should be the next step.  First, prior to the COVID pandemic, it generally took at least eight months to secure trademark registration.  Post-COVID, it is now taking closer to one year, at a minimum.  Second, if there is going to be a problem getting the mark registered or a competitor in the market is going to oppose the application or use of the mark, it is better to find out as soon as possible and preferably before spending money on developing a brand image, signage, and customer recognition of the name.

  Many breweries attempt to register their trademarks themselves and sometimes they are successful.  But, even registration of the mark does not ensure freedom-to-operate using the name.  Competitors may attempt to cancel the mark post-registration or may have developed common law trademark rights based on prior usage of the name even though it was never federally registered.  A skilled trademark attorney will conduct a thorough “clearance search” before filing an application to uncover potential obstacles to registration or problematic common law usage.

In addition, there are many technical requirements governing how applications for trademark registration must be filed.  It is common for trademark applications filed without an attorney to be rejected based on a technical flaw and then abandoned because the applicant did not know how to fix the problem.

  The costs to obtain federal trademark registration can vary significantly.  In most cases, the application can be filed online using pre-existing descriptions of the associated goods and services.  The filing fees for such applications are $250 per class of goods and services (i.e., international class 032 for beer, class 043 for taproom services, etc.).  Additional government fees will depend on whether the application is filed as “actual use” versus “intent-to-use,” whether extensions of time are requested before filing a Statement of Use, etc.  Also, attorneys’ fees for conducting a clearance search, filing and prosecuting the application can vary dramatically.  As a very general guide, one should anticipate about $2,000 total cost per trademark, but discuss each mark with an attorney for a specific estimate.

Operating Agreement

  All LLC’s should have a written operating agreement.  For single-member LLCs, they help to distinguish the business financial interests from the owner’s personal financial interests.  For multi-member LLC’s they are critical; they are essentially a “pre-nup” for the business owners. 

  There are three reasons why breweries should hire an attorney to draft an operating agreement from scratch.  First, online or “standard” operating agreements are generally drafted very poorly.  Second, states vary in terms of what is required to be included in an operating agreement, so using one from the internet may not satisfy the law in a particular state.  Third, and most important, drafting and negotiating an operating agreement forces the owners to discuss issues that might otherwise be left unaddressed.  The resulting document is tailored to the owners’ specific needs and can prevent unnecessary expense, disagreement, and hardship if problems develop in the business relationship down the line.

  The legal fees for drafting the operating agreement will depend on the number of members and the level of agreement between the members on important issues.  Five to ten hours of attorney time is a good starting estimate.

Financing

  Given the expense, very few breweries are built purely from the owners’ savings.  Whether the project will be funded by friends and family, through loans, through investors, or some combination thereof, having a knowledgeable CPA involved is essential.  In addition, if funds will be raised from investors, an attorney should be part of the team, to ensure that the owners do not run afoul of securities laws.

Lease

  Most breweries are built on leased property.  Often a commercial landlord will have a “standard” lease that they want the brewery to sign.  But, unless a landlord has already had a brewery tenant, they are likely unfamiliar with the particular needs of a brewery and their standard lease will reflect this lack of understanding.  Having an attorney that not only understands commercial leases, but is familiar with brewing equipment and operations, can prevent the costly mistake of signing a long-term lease for a property that will not meet the brewery’s needs.  Some of the issues that should be addressed include water and electrical supply, puncturing walls and ceilings for ventilation, sloped floors and trench drains, noise levels, odors, use of outdoor space, etc.  It is impossible to estimate the cost of an attorney’s involvement in this process as every lease and situation is different.  But, getting the attorney involved in the beginning is the most cost effective option as it is easier to prevent a disagreement than to resolve one.

Equipment Purchasing

  Breweries have a lot to buy:  a brew house and fermenters, furniture, glassware, grain and hops, and much more.  Generally, owners make these purchases on their own, but for large expenses or long-term supply agreements, it’s never a bad idea to have an attorney review the terms.

File Brewer’s Notice with TTB

  Some breweries have their attorney prepare and file the Brewers Notice and accompanying documentation with the TTB and certainly that can take some weight off the owners’ to-do list and ensure things get filed correctly the first time.  But, for those looking to save on legal fees, this is one area that it makes sense to DIY.  The forms are long and detailed, but they are not especially difficult.  The TTB has excellent online resources and guidance and the personnel at the TTB are quite friendly and helpful on the phone. 

  As a rough guide, it will take about 1-2 weeks to learn what information the TTB needs, gather the materials, and fill out the forms.  As of January 2022, the average processing time for a new application at the TTB was 34 days. 

  For those that do have their attorneys prepare the application, a rough estimation would be two to five hours of attorney time.  The more complete the information provided to the attorney the first time, the lower the cost.

File for State Manufacturing License

  As with the TTB application, the application for a manufacturing license from the state, and any necessary local licenses or permits, are something that can be done by the brewery owners to save legal fees.  Though it varies state-to-state, the online resources tend not to be as complete or user friendly as those of the TTB and the response to telephone inquiries can be… inconsistent.  However, with a bit of patience the forms are not terribly onerous.  Being on good terms with other breweries in the area can be valuable, too, as they may be willing to help with any questions about the local forms. 

Distributor Agreement

  Most breweries start with taproom sales and some keg sales to nearby bars and restaurants, especially if they can self-distribute, but growth eventually leads to the need for a distributor.  Breweries should never sign a distribution agreement without it being reviewed by an attorney.  State laws on the subject are heavily slanted in favor of distributors and the contracts can be nearly impossible to terminate even if the distributor is failing to meet its obligations.  A knowledgeable attorney can help to level the playing field as much as possible, particularly though negotiation of what constitutes “good cause” for termination and how to calculate the fair market value of the distribution rights.  The legal fees will depend on the circumstances, but this is one area where breweries should not try to cut costs.

Conclusion

  Successful entrepreneurs do not try to do everything alone. They surround themselves with experts to help navigate difficult issues.  Bringing an experienced attorney onto the team at the beginning of the process of starting a brewery can save time and money by preventing costly mistakes. 

  Brian Kaider is a 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.

Lots, Codes, and Life: Dating in the Beer Industry

By: Erik Myers

As the number of active breweries in the country exceeds 7000 and roars toward 8000, it’s more important than ever to consider one of the crucial facets of your packaged product: shelf life, and how to communicate it to your customer. It’s not just marketing; date lot coding and traceability is required by the U.S. Food and Drug Administration under the Bioterrorism Act of 2002. However, the exact method of recording date lot codes is ultimately up to each individual brewer, and there is a vast array of practices in the industry that can ensure that your customer knows how fresh your beer is, and that you’re in compliance with federal code at the same time. 

Why Is Date Coding Important?

  The easiest answer to this question is because you must. It’s the law. In the unfortunate situation that your brewery – or one of your suppliers – might have to recall product from the market, having date lot coding that is on every package, is easy to find, and easy to understand will allow your staff and every downstream partner, whether it’s a distributor or a retailer, to comply with the recall efficiently and ultimately save you headaches and money.

  It’s also a great tool that your sales force–or your distributor–can use to be sure that beer in the market is as fresh as possible, it can help with FIFO inventory control and create an accountability tool for you to use with all of your downstream partners.

  Finally, it’s an extra layer of transparency for your customer, as well as an educational tool, allowing you to provide them with the best–and freshest–possible product, and the best possible customer experience.

How to Code

  For better or worse, there is no standard way or best practice guide to follow for date coding your beer. From a practical, legal standpoint, as long as there is a code on your package that is traceable to a batch at your particular factory and you can track that batch back to its component ingredients, you’ve complied with FDA standards. However, esoteric or confusing coding can be a problem in the marketplace and lacks customer transparency.

  Many food and beverage manufacturers use a Julian Code to signify what date an item was manufactured or packaged. Julian Code is a system designed by the U.S. Military to easily date MREs and is easy to track and assign with simple programming tasks. It uses the last digit of the year in question followed by the day of the year.  (For example, a product dated with December 15, 2018 the Julian Code would be 8349.  December 15 is the 349th day of the year in non-leap-years.)  While this provides a standard format that is unique per day and easily traceable on a package and within a database, it is not easy for a customer to read and gain information from. An eager beer drinker looking for a fresh IPA would have no way of knowing what information was being presented to them and might end up looking elsewhere.

  However, a standard date might not be the easy go-to answer that it seems. A report by the Natural Resources Defense Council (NRDC) and Harvard University’s Food and Law Policy Clinic (The Dating Game, 2013, NRDC) notes that confusing date labeling leads to a tremendous amount of food waste in the United States as “open dates can come in a dizzying variety of forms, none of which are strictly defined or regulated on a federal level” and that “although most date labels are intended as indicators of freshness and quality, many consumers mistakenly believe they are indicators of safety.” Putting information on your package that isn’t well thought out may create more harm than good.

Finding the Right Date

  Back in 1996, Anheuser-Busch launched a marketing campaign in a bid to show that their beer was the freshest on the market and coined the term, “Born on date.” It has become a ubiquitous term in the beer industry, regardless of the fact that the date was dropped from all Budweiser labeling in 2015 in favor of a “Freshest before” date. Just because the biggest brewery in the land does it hardly makes it an industry standard, however. It’s not even standard across their entire company.

  Megan Lagesse of Anheuser-Busch InBev’s “The Higher End” craft division notes, “Some of [our] partners (Goose Island, [and] Wicked Weed) are doing dual date coding (brewed on and best by) but everyone isn’t because not all of our production equipment has the capability to dual date code,” she says. “So, we chose best by date coding [for] broader consistency, because everyone understands an expiration date but not everyone is educated enough to know IPAs should be drank as fresh as possible, but you can age wild beers and stouts.”

  Jeremy Danner, Ambassador Brewer of Kansas City’s Boulevard Brewing, notes proudly that Boulevard prints, “both packaged on and best by dates on all cans, bottles, keg rings and exterior boxes. If you’re going to only print one,” he says, “it should be the packaged-on date, as thoughts vary when it comes to shelf life.”

  That shelf life–the basis of rationale behind a best by date–can be difficult, if not impossible, for a small brewery to determine. While larger breweries have the benefit of tasting panels, labs, and a vast number of data points, many small breweries get by with a microscope and a handful of jack-of-all-trade production team members. In small breweries, with limited, sometimes unique, production batches, shelf life is often the product of an educated guess, rather than a robust statistically significant tasting panel. Even pressure from a distributor can affect what date goes onto a package and in many cases a brewer will resort to relying on a packaged-on date and using phrases like, “Do not age” or “Best when its fresh” in lieu of a best by date.

  Doing so, however, relies on the customer to be educated about your product, and that might not always be as easy as it sounds. Pete Ternes of Chicago’s Middle Brow beer notes, “90% of consumers don’t know what it means for a particular beer to have been packaged on a particular date.” While there are many craft beer fans who are incredibly well-educated and can ascertain which beer styles can handle age and which can’t, most beer-drinkers don’t know the implications of a beer’s brewed or packaged-on date.

  Complicating the issue is lack of consistent temperature control once product leaves the brewery. A brewery may post a shelf life of 45 days for an IPA, but not the conditions under which that shelf life has been ascertained or should be maintained. A beer with a shelf life of 45 days at 38F has a shelf life of only 11 days at room temperature.

No Easy Answers

  Unfortunately, until an industry standard or federal regulation is put into place, there is no easy answer about how to best approach lot and date coding. Ultimately, it is up to you to choose the method that you think will both comply with the FDA and provide information to your customers. Regardless of what format you do choose, providing context and information to your customers–whether that customer is the distributor, the retailer, or the end consumer–as to how you arrived at the decision of what lot and date coding method you’ve chosen is the best path and can double as an excellent marketing and education tool for your brewery.

Legal Implications of Playing Music at Your Brewery

By: Tarah K. Remy, Dinsmore & Shohl, L.L.P.

Visiting a brewery is meant to be an experience, and customer engagement plays a large role in creating a great one. As the owner, you know your brews are unparalleled, and your goal is not only to share them, but to keep customers coming back. One way to do this is to establish an inviting atmosphere. In most cases, that involves music.

  Music and beer go way back. In 1800 B.C.E., the Sumerians composed the “Hymn to Ninkasi,” which served as not only a song of praise to their goddess of beer, but also as an ancient recipe for brewing.  So, it is safe to say when a customer walks into your brewery, they’ll expect to hear music playing over the loud speakers, or even to see a live band. However, there are serious intellectual property considerations every brewery must take into account when choosing music to create that perfect experience.

What the Copyright Act Protects

  As a general matter, the Copyright Act lays out the basic rights of a copyright owner. Among other things, it protects a songwriter’s and their publishers’ (the copyright holder) musical composition or written work, also known as a musical work. When a musical work is performed or broadcasted in a public space, the copyright holder is entitled to receive a performance royalty, which is the money paid to the copyright holder in exchange for the right to publicly perform their musical work.

Why Your Brewery Needs a Performance License to Play Music

  Copyright is a form of property, and once music is written down or recorded, it is copyrighted. The copyright holder is the owner of that copyright and is granted a performance right to the copyrighted materials. If you want to publicly perform a musical work, you need to pay a performance royalty to the copyright holder. The performance license acts as written permission to play a copyright holder’s musical work in a public space.

  Doing so without a performance license, (without legal permission) places your brewery at risk for litigation. Though the Copyright Act limits the award for copyright infringement to between $750 to $30,000, it is within the court’s discretion to award between $200 to $150,000, not including attorney’s fees and costs. Whether the court can increase or decrease the award depends on whether you knew you were violating copyright law. No matter the circumstance, if you violate copyright law, you will be required to pay, and the gamble of just how much is not worth the risk. Acquiring a license removes the guesswork and allows you to maintain control over your brewery’s finances.

When You Need to Consider Acquiring a Performance License

  You will need a performance license or permission from a copyright holder under at least the scenarios below:

1.  The musical work is played in your brewery using Spotify, Amazon music, Pandora, Apple Music, or any other streaming service. Though you are covered bunder your personal subscription to play music for yourself or in very small spaces, once you plug your device into a loud speaker to be played in a large space where a substantial number of people are present, this triggers the performance license requirement.

2.  The musical work is played in your brewery using CDs, records, or anything similar. Buying the CD or record does not count as obtaining a performance license. Once you decide to play your favorite CD or record inside your brewery to be heard by a substantial number of people, in most cases, you must obtain a performance license.

3.  A live band is hired to play covers of music originally written by a third party in your brewery. In this case, the venue, not the cover band, is required to acquire the performance license.. If you hire a band to play in your brewery and they plan to play covers, make sure your brewery has a performance license covering the songs on the band’s set list before hiring. Keep in mind, however, this generally does not apply if the band is playing music it has composed or is playing music in the public domain.

How to Obtain a Performance License

  Contact a Performance Rights Organization (PRO):  You can obtain a performance license through a Performance Rights Organization such as BMI , ASCAP, and SESAC. These entities function as middle men between the copyright holder and the entity acquiring the performance license. Given the rate at which music is played and experienced around the world, it is virtually impossible for copyright holders to keep track of performing rights. Acting as facilitators, PROs acquire rights from these copyright holders and grant a performance license covering their entire music set to businesses and requesting parties. So not only do PROs simplify the process for copyright holders to receive their performance royalties, but business owners no longer need to contact individual copyright holders to acquire performance licenses.

  Each PRO covers specific musical works by various copyright holders. By obtaining a performance license through just one PRO, you are limited to that PRO’s specific list of music. Be sure to review each list covered by each PRO to determine whether you need a license from one or all. You can also consider acquiring a blanket license that covers all three of the main PROs (BMI, ASCAP, and SESAC) to reduce the chance of potential copyright infringement claims from these organizations. A blanket license is convenient, as it likely covers a large list of music, which in turn reduces the need to carefully review a cover band’s set list and further gives you the freedom to stream music without a second thought.

  Sign Up for a Streaming Service Business Account:  Some streaming services, like Spotify and Pandora, offer business accounts. Simply by signing up and paying a subscription fee, business accounts provide access to fully licensed songs. Via their business platforms, these streaming services have obtained performance licenses from PROs on your behalf, and in most cases, they have performance licenses from more than one PRO, which broadens your music list options.

How much a Performance License will Cost

  The cost of obtaining a performance license through a PRO may vary depending on various factors, including how many breweries you have, the square footage of your brewery, your brewery’s customer capacity, how often music is played, whether the music is recorded or live, and more. The costs start at $500 and increase from there. Streaming service business account costs can be found directly on their websites, where they periodically provide discounts. At the end of the day, though obtaining a performance license may seem pricey or a low priority, the costs of arguing a copyright infringement claim are significantly higher. Budgeting in the cost of a performance license will save your brewery money in the long run.  Here is a link to help you learn more. https://www.bmi.com/digital_licensing/more-information/business_using_music_bmi_and_performing_rights

  Finally, keep in mind the Copyright Act covers exceptions to the performance license requirement, meaning it’s possible your brewery may not require a performance license. So before you sign up or register for anything, we always recommend reaching out to an attorney to review the performance license agreements and your circumstances. Additionally, if you are not sure whether your business meets the requirements, or whether your business might be exempt from the performance license requirement, for peace of mind, reach out to your attorney or the Dinsmore Beer, Wine and Spirits team. We are here to help!

Best Practices: Beer Wholesaler Agreements

By: Kary Shumway, Craft Brewery Financial Training

The wholesaler agreement can be a point of contention between breweries and wholesalers. Before any beer is delivered, the agreement must be reviewed, negotiated, and signed.

  The challenge with many agreements is that both parties want the terms to be in their favor. Breweries want options to get out of the agreement, and freedom to move their brand if the business relationship isn’t working.

  Wholesalers want the brewery to be committed to them indefinitely. From the wholesaler perspective, they invest millions or tens of millions, in infrastructure and want to be sure that brands stay on the trucks to pay for all the investment.

  Both parties want the advantage, but at a minimum, neither party wants to get taken advantage of in the agreement.

  With so much emphasis on the wholesaler agreement, what steps are you taking to ensure you get the best arrangement possible?

  Below are five steps you can take to improve your agreements, and contractual relationships.

Five Steps to a Better Agreement

1.   Seek first to understand (Basic agreement structure and terms)

2.   Know your state laws

3.   Do your research, ask questions, determine the wholesaler options

4.   Play a game you can win (Develop your own standard agreement)

5.   Self-Distribute (Enter into an agreement with yourself)

  Since we’re talking legal contracts, here is the important disclaimer: I’m not an attorney, and this is not legal advice. The guidance here should be used for informational purposes only.

Basic Agreement Structure and Terms

  As any business textbook will tell you, the primary purpose of agreement law is to enforce an agreement between parties. In this case, the parties are the wholesaler and craft brewery. For there to be an agreement, an agreement must exist, and the parties must have freely intended to be legally obligated. A breach occurs when one party breaks a big promise in the agreement.

  The requirements of a legally binding agreement are: 1) offer, 2) acceptance, 3) consideration, 4) obligations by parties, 5) competency and capacity, and 6) a written document.

  In other words, a wholesaler offers to distribute the beer of a craft brewery, and the brewery accepts. The brewery agrees to brew beer and sell it to the wholesaler. The wholesaler agrees to pay for it. The brewery is obligated to make a saleable product, and the wholesaler is obligated to sell it.

  Both brewery and wholesaler state they are competent and have the capacity to fulfill these obligations. All this is then wrapped up in a written agreement.

  The wholesaler agreement contains a variety of clauses and terms that you should understand: Trademarks, Terms of Sale, Assignment, Transfer, Ownership Changes, and Termination to name a few. A typical wholesaler agreement can be 20 pages in length and contain a dozen or more different clauses. It’s a lot to understand, but very important to do so.

  To begin, read over the agreements that you already have in place. Highlight any items that you don’t understand and start asking questions. What you don’t know can hurt you in a contract situation.

Know Your State Laws

  Thanks to the 21st amendment, we have 50 different sets of laws related to alcohol distribution. Many of those laws are difficult to understand and a giant bore to read. Get a lawyer and get a commonsense interpretation of what your state laws are. Specifically, know your rights and obligations.

  The Brewer’s Association does a nice job in summarizing the various state laws. However, the summary only scratches the surface of what you’ll need to know about the rules of engagement. Know the rules, use them to your advantage, and build them into an agreement that works best for your brewery.

  Agreements and State Laws: Agreements and state laws are often intertwined. There may be sections of the wholesaler agreement that refer to the applicable state laws. For example, ‘wholesaler or supplier may terminate this agreement in accordance with applicable state laws.’ An understanding of the state laws in combination with a working knowledge of agreement rules will give you a leg up when negotiating your wholesaler agreement.

  Lastly, there is a common assumption that the agreement really doesn’t matter that much because the state law will over-ride the agreement anyway. For instance, in a case where an agreement says one thing and the state law says another, the state law wins.

  I’m not a lawyer, but I’ve hired lawyers to deal with this issue. What I’ve found is that the question doesn’t have a clear answer. Bottom line – the agreement still matters.

Do Your Research

  When opening up new sales territories do your homework to find the best wholesaler partner. Talk to other craft breweries, talk to retail accounts (on and off premise), and of course meet with prospective wholesalers. Do your research to find your best match. There’s no point in learning about agreements and state laws if you wind up with a lousy partner.

  Many of the larger craft breweries hire consultants to conduct market research in advance of opening a new territory. The consultants talk to retailers, learn the nuances of the market, and find out who the best wholesaler is. Then they gather information and report back to the brewery with a recommendation.

  Key Questions to Ask Your Wholesaler:  You may not have the resources to hire a consultant, but you can do some leg work yourself. Below are sample questions to ask wholesalers during the research phase:

•    How do you assess opportunities for my brands at retail?

•    What is a recent example of a brand launch success?

•    What are the demographics and tourism of the market?

•    What is the pricing landscape?

•    What did you do for craft beer week?

•    Tell me about your draft line cleaning process and personnel. If line cleaning is not allowed by state law, ask what they do to ensure lines are cleaned (surveys, education) and to determine if they are cleaned (logs, vendor, and frequency of service)

  Invest the time upfront and do you research on your wholesaler options. An agreement helps define a partnership. It’s up to you to find the best wholesaler to partner with.

Play a Game You Can Win

  A wise friend once told me: “always write the agreement.” In other words, if there is an option, don’t let the other side present you with the agreement. Do it yourself.

  Writing the agreement ensures you have control over what gets included or excluded. It allows you to shape the language and create an agreement that works best for your brewery. Have your lawyer develop your own standard agreement. Talk with them about what’s important to include and what isn’t. Use your working knowledge of agreement law and state laws to shape an agreement that works.

  Use Your Leverage: When you meet with a wholesaler, simply present the document as a matter of fact: “This is our standard agreement.” They may negotiate certain points, or counter with their own standard agreement, but they might just sign what you give them.

  Many craft breweries have their own agreement these days, even the smaller guys. Craft breweries have leverage with wholesalers. If you have a brand that multiple wholesalers would like to have, they will make concessions on the terms of the agreement to ensure they get your brand.

  Recognize and understand where you have leverage and use it to your advantage. Develop your own standard agreement, include the terms you want, and insist that it is used to govern the wholesaler relationship.

Self-Distribute: Enter into an Agreement with Yourself

  Another option related to wholesaler agreements is to avoid them altogether and self-distribute your own beer. State laws will dictate whether you can do this, and what the guidelines are.

  There are many advantages of distributing your own beer: you keep the gross profit that normally goes to the wholesaler, you control where and how the brands are presented at retail, and you ensure the brands get 100% focus and attention. Despite best efforts, a wholesaler with hundreds of brands can’t possibly present your beer during every sales call. But you can.

  There are many challenges with self-distribution: increased capital costs for trucks and warehouse space, more people needed to sell and deliver the beer, and a new business model that you need to learn. Nothing wrong with learning, but it can be expensive.

  The fundamental question to ask is whether self-distribution can be profitable. To answer the question, check out the short guide on creating a financial pro forma for self-distribution. This will walk you through the steps of putting together your sales projections, expected margins, operating costs, and capital investments needed.

  Research your state distribution laws, do the financial analysis, and determine if self-distribution is the right move for your brewery.

Wrap Up

  The wholesaler agreement is important, and it’s important that you get it right. Understand the agreement terms and know the state laws. Do your research on the market and the wholesaler options. Create your own standard agreement and use your brand leverage to get the wholesaler to sign it. Lastly, explore whether a self-distribution option makes sense for your craft brewery.

  It’s up to you to find a great wholesaler partner. It’s up to you to ensure you have a good agreement that governs the relationship. Use the steps outlined here, talk to other craft breweries, and consult your attorney. A good wholesaler agreement is within your power to achieve. Now, go and get it.

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How Your Intellectual Property Can Make or Break a Merger

By: Ashley Earle, Attorney, Dinsmore & Shohl

Like a good recipe, a good brand name for a beer, wine, or other beverage can drive sales. That recipe, distilling process, bottle design, or logo is all a form of intellectual property that helps define who you are in the industry. It can also be a defining and important part of any transaction.

  In today’s COVID world, breweries, wineries and distilleries of all types are doing what they have to in order to survive and one day thrive. Some are turning to mergers and acquisitions as potential strategies for survival and success. It’s important to know how your intellectual property (IP) can make a difference, good and bad, to a potential deal. Below are the five things you need to know about IP in a merger or acquisition. 

What Is IP?

  Before we get there, it’s important to quickly define the different types of IP that exist:

•    Trademarks: A trademark is the most common form of IP protection in the alcoholic beverage industry. It protects anything that functions as a source identifier, (product names, company names, logos like the NBC peacock, bottle or can designs like the Coca-Cola bottle, or even sounds like the ESPN tones). Trademarks can be registered and unregistered, though unregistered marks are limited in geographic scope.

•    Patents: This protects a unique invention (a brewing process, a novel distillation column), a unique design (bottle designs), or a unique plant (strains of yeast or grapes). Patents must be registered and issued to be enforceable, though pending applications will be relevant in an M&A deal.

•    Copyrights: Copyright protection arises automatically as soon as an original work of authorship is “fixed” into something tangible. Basically, once you draw the artwork for your bottle or can, write the code for your website, or draft up a piece of marketing material, it is protected by copyright. Registration affords several key benefits but is not required to claim ownership in a work.

•    Trade secrets: A trade secret is something that gives you value because it is secret. Examples include customer or vendor lists and recipes.

  Additionally, when you go through a merger or acquisition, you will often be asked to list out all of your domain names, social media, and in some cases, any software that is material to your business. It is important to make sure you keep a list of these assets in case an opportunity arises.

  Now that we’ve covered the basics, let’s dive into the top five things you need to know in a merger and acquisition when it comes to your IP.

What IP Do I (and They) Have?

  Start by taking an inventory of everything you have that is protectable – beer names, wine names, logos, artwork, packaging, unique brewing processes or recipes, social media accounts, and domain names – to name a few. This should include anything you registered, anything you are trying to register (like pending applications), and anything unregistered but material to your business. Disclosure schedules are used to list all of the IP and what is to be transferred in the transaction (if not everything). Be clear to fully disclose what you have without overstating.

  The same should be true of the other side. You should ask them to disclose all of their IP assets that will be a part of the deal, all the way down to their social media accounts and domain names.

  As you and the other side are pulling this together, you also want to collect all of your documentation to evidence the IP. This could include trademark applications and registrations, copyright registrations, patent applications, patents, email accounts, and social media accounts. You will also want to pull any licenses you have to use IP, independent contractor agreements regarding creation of IP, liens on IP (if applicable), and any documentation relating to disputes or claims of infringement involving your IP (if applicable). Make sure you have clear documentation of the chain of title (meaning who owned it at each point) from origination to present day.

Do Both Sides Actually Own Their IP?

  The next question you need to ask yourself in any deal is: Do we actually own that IP? The answer may not be as simple as you think. You need to be sure that all assets are owned by the company and not an employee, owner, or even a third party. A lot of companies don’t realize that if they hire an independent contractor to make something, whether a website, logo, or marketing materials, unless they have the contractor expressly assign the finished product to their organization, the contractor owns it. Employee-created works should automatically transfer to the employer, but it is still good practice to include an assignment in your employment agreements. 

  Ownership issues can derail or even terminate what would otherwise be a great deal. Make sure that the ownership of IP on both sides is clearly documented and validated as you move forward.

What Are We Agreeing to In the Deal Terms?

  Within the deal documentation, there will be a number of representations and warranties and indemnity provisions that relate solely to IP and the disclosures and transfers being made in the deal. This is why it’s so important to make sure you have your ducks in a row with your IP as you move forward.

  These reps and warranties will range from confirming ownership of the IP to promising your IP does not infringe the rights of others. You can also see reps and warranties that ask you to declare that your employees have not created any IP that is not owned by the company. Your legal counsel can help to finesse the reps and warranties to match your circumstances and protect you as best they can, but it’s important you ensure everything stated is accurate. A broken rep and warranty in a transaction can be expensive and arise after the deal is done.

  You may also be asked to indemnify the other side for any claims of infringement of the IP, even if you are selling your business to them and walking away. Typically, indemnity provisions should only last for a particular time period following the sale and have a few caveats of what does and does not trigger indemnity. It’s important to make sure you understand them and how they may impact you in the future.

  It’s also important that you understand what will happen to your IP or the other side’s IP after the deal is done. Who will end up as the owner? Who has control? Will any IP be left behind with either party? Are there any pitfalls with the IP that need to be addressed (like prior enforcement matters that resulted in Coexistence Agreements or liens)? Given the importance of IP to any business, it’s doubly important to understand what happens to the IP in the deal as you look to the future.

Were Things Done Right with the IP by Both Sides?

  While you want to believe all assurances a party makes in fostering the deal, both sides must do their due diligence. Did an employee copy and paste images from Google that are infringing someone’s copyright? Did you use unauthorized background music in a promotional video or advertisement? Did you see a great idea at a trade show and implement something similar, not realizing it was patented or trademarked? As the brewery, distillery, or winery grows and expands, so do the footprint and the risk for claims against you.

  Similarly, data privacy can be another pitfall. If any customer information is kept, such as names, birthdays, addresses, or credit card information, (or more abstract information such as IP address or use of cookies, beacons, and pixels), you have to be sure that this information is kept safe and confidential. Ensure there are no data breaches and never have been any breaches.

Likewise, if you are keeping any data, a clear privacy policy must be in place. Do not be tempted to copy and paste a privacy policy found online. The Federal Trade Commission (FTC) often comes down hard on businesses for having a policy that does not match what they are actually doing. Copying and pasting can lead to a policy that misleads consumers as to how you handle their data – and that’s a big problem.

A privacy policy can be fairly simple and straight forward: Explain what information you collect, where you keep it, how long you keep it, and how it is stored, and provide an option for customers to opt out (such as an email address to contact). The more information (and the clearer the information) the better – and when in doubt, ask for affirmative consent.

  With these five things in mind, you can approach a deal with confidence and find the perfect fit to expand and secure your brewery, distillery, or winery. When in doubt, consult your attorney – we’re here to help!

  Ashley Earle is an attorney at Dinsmore & Shohl who focuses on branding protection through trademark and copyright law. Dinsmore represents breweries, distilleries, wineries, cider companies and other alcoholic beverage producers in business, regulatory, intellectual property and litigation matters. Dinsmore attorney represent these entities in every stage of their business, from formation to operation to final sale or closure.  Ashley can be contacted at…513-977-8522 or ashley.earle@dinsmore.com

Intellectual Property for Beverage Manufacturers

By: Brian D. Kaider, Esq.

While many people are familiar with the four main types of intellectual property: patents, copyrights, trademarks, and trade secrets, often they don’t know the distinctions between them or what they are meant to protect.  This article is meant to cut through the confusion and explain these distinctions and how each property right applies to the beverage industry.

Patents Protect Ideas – sort of

  Most people have a general understanding that a patent protects an “invention” or an idea.  In a very general sense, that’s true.  But, even though the Congressional authority to grant patent rights comes directly from the U.S. Constitution (Article 1, Section 8, Clause 8), exactly what is patentable is the subject of tremendous confusion among the U.S. population, examiners at the U.S. Patent and Trademark Office, lawyers, and even judges; sometimes requiring clarification from the U.S. Supreme Court.  The purpose behind the grant of a patent is to encourage innovation by granting exclusive rights to one’s discoveries for a limited time.  In other words, it gives the patent holder a short-term (20 years from the date of filing) monopoly on his invention.  Generally, new machines, chemicals, electronics, methods of production, and in some cases, methods of doing business, are eligible for patent protection.

  But, not all ideas are patentable.  In fact, ideas alone cannot be patented.  They must first be “reduced to practice,” meaning that either you must have actually created your invention or have described it in sufficient detail that someone skilled in that area could follow your disclosure and create it themselves.  So, you can’t get a patent on a time machine, because (at least for now) no one has figured out how to defy the time-space continuum.  In addition, to be patentable, ideas must be novel, meaning that no one else has ever disclosed that idea before, and non-obvious, meaning that your idea cannot be an obvious variant on someone else’s invention.

  Given that humans have been making beer for thousands of years, one might think that coming up with something novel in the brewing process would be impossible.  Not so.  In preparation for this article, I ran a quick search of patents containing the word “beer” in the title and got 491 hits.  Some recent examples include U.S. Patent No. 10,570,357 – “In-line detection of chemical compounds in beer,” U.S. Patent No. 10,550,358 – Method of producing beer having a tailored flavor profile,”  and U.S. Patent No. 10,400,200 – Filter arrangement with false bottom for beer-brewing system.” 

  Improvements in any area of the alcoholic beverage industry may be patentable including, new types of bottles, cans, growlers, and kegs; new types of closures and caps; improved methods of separating hops from bines and leaves; new processing equipment, improved testing procedures and equipment, improved packaging, etc.  Essentially, anything that lowers costs between the farm and the consumer, improves the quality of the beverage, or enhances the consumer experience is worth considering for patent protection.

  One word of caution, however; time is of the essence.  The America Invents Act, effective March 16, 2013, brought the U.S. in line with most other countries in being a “first to file” system, meaning if two people develop the same invention, the first to file for patent protection wins, regardless of who first came up with the idea.  Also, any public disclosure of your idea (such as at a trade show) starts a 1-year clock to file or you may lose your eligibility for patent protection.

Copyrights Protect Creative Works

  The authority for copyright protection stems from the same section of the U.S. Constitution as patent protection, discussed above.  Our founding fathers recognized the valuable contribution made to society by authors and artists and, therefore, sought to encourage creative expression by providing protection for artistic works.  Examples of copyrightable materials include, books, paintings, sculptures, musical compositions, and photographs.

  Unlike inventive ideas, which are only protected when the government issues a patent to the inventor, copyrights attach at the moment the artistic work is “fixed” in a tangible medium.  So, for example, if a composer develops a new musical score in her head it isn’t protected, but the moment she translates that tune to notes on a page or computer screen, it becomes protected by copyright.  In order to enforce that copyright in court, however, it must be registered with the U.S. Copyright Office.  While it is possible to wait until an infringer comes along before filing for registration, doing so can severely limit the damages that may be available to the author of the creative work.  So, early registration is the better course. 

  In the beverage industry, copyright issues often crop up with regard to labels and advertising materials.  But often disputes arise relating to who owns the artwork contained within a label, for example.  Generally, the author of a work owns the copyright.  But, if an employee of a brewery, acting within the scope of their employment, creates an image that the brewery owner incorporates into its labels, that picture is considered a “work made for hire” and is owned by the brewery.  Where disputes often arise, however, is if the brewery hires an outside artist or a branding agency to develop the artwork.  In that case, the brewery should include language in its contract requiring assignment of all copyrights to the brewery for the created artistic works.  The same would apply for any artwork commissioned for use inside the brewery tasting room or for marketing materials.

Trademarks Protect “Source Identifiers”

  People generally associate trademarks with the protection of a brand.  In fact, I have often described trademarks as an “insurance policy for your brand.”  But, in more technical terms, what a trademark protects is a “source identifier.”  The purpose of trademark law is to protect consumers from being misled or mistaken as to the source of a product.  So, for example, if a consumer sees a pair of shoes with a certain famous “swoosh” image on the side, they should be reasonably able to assume that pair of shoes was manufactured by Nike, Inc. and was made with the same degree of workmanship and quality that they have come to expect from that company.  That “swoosh” symbol, therefore, acts as a source identifier to tell the public that the product was made by Nike, Inc. 

  What may function as a trademark can be quite broad, including: the name of the business (e.g., Triple Nickle Distillery®), a logo (e.g., the “swoosh”), a color (e.g., the Home Depot orange or the UPS brown), even a scent (e.g., Verizon owns a trademark on a “flowery musk scent” it pumps into its stores to help distinguish them from competitors’ environments).  Not everything can be trademarked, however.  Slogans, words, and images that appear merely as decoration as opposed to a means of identifying the supplier will not qualify for protection unless the applicant can demonstrate that the item has achieved “secondary meaning,” i.e., that the public has come to associate that item with the manufacturer.  As an example, in the 1970’s McDonalds used the slogan, “You deserve a break today” in its commercials and other advertising.  People came to associate this phrase with McDonalds and in 1973 they were granted a trademark registration.  Incidentally, McDonalds briefly let this trademark go abandoned in 2014, but quickly re-filed and the mark is still active today, more than 45 years after it first registered.

  In general, marks also cannot be descriptive of the product or geographically descriptive of the source in order to be registered as a trademark.  For example, one could not obtain a registration for just the words “India Pale Ale.,” because it simply describes the product and does nothing to differentiate it from every other IPA on the market.  Similarly, an attempt in 2019 to register the name “Philly City Brewery” was refused as “primarily geographically descriptive,” because the applicant could not demonstrate that people had come to associate that name with its business as opposed to the many other breweries in Philadelphia. 

Trade Secrets Protect Valuable Confidential Business Information

  Unlike other forms of intellectual property, there is no registration system for trade secrets, because, by their very nature, they must be protected from all unnecessary disclosure.  Trade secrets can be just about anything that is confidential to your business and gives you a competitive advantage.  Some examples, include recipes, client lists, manufacturing processes, marketing plans, and client lists.  These are things that, if publicly disclosed, would harm the competitive position of the company and, therefore, must be vigorously protected. 

  One of the most famous trade secrets is the formula for Coca-Cola.  This formula has been protected for more than 130 years, sometimes through extraordinary measures.  In 1977, The Coca Cola Company withdrew its product from India, because in order to sell there, they would have had to disclose the formula to the government.  They decided it was more prudent to forego sales to one of the biggest populations on earth rather than risk disclosure of their secret recipe.

  Protecting trade secrets requires constant vigilance in two ways.  First, the information should only be disseminated to people within the company, or outside consultants, who need the information in order to perform their duties for the company.  In other words, the information is on a strictly “need-to-know” basis.  Second, those few people who are given access, should sign non-disclosure agreements with harsh penalties for breach of their duty of confidentiality.  Once the information gets out, it’s nearly impossible to un-ring that bell, so there must be severe financial consequences to someone who leaks the information.

  Brian Kaider is a 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.

For more information please contact Brian Kaider at…
240-308-8032; BKAIDER@KAIDERLAW.COM; www.KaiderLaw.com