Category: Legal

Enforcing Your Trademarks: How Far Should You Go?

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By: Brian D. Kaider, Esq.

You’ve secured federal registration for your trademarks and you’ve been building your brand recognition.  Per your trademark attorney’s recommendation, you’ve had quarterly searches conducted to find similar marks.  Lo and behold, a new entry to the market is using your trademark.  Now what?  Stop and take a breath; let the initial surprise or anger settle. There is a lot to consider before taking any action.

Take Stock of the Situation

  First, take a look at your own trademark.  Is it the name of your company or of one of your products?  Is it a national brand or one that is distributed in a small geographic area?  In what classes of goods and services is it registered (e.g., class 033 for vodka, class 040 for “rectification of distilled spirits for others,” etc.)?

  Then look at the competitor’s mark.  Is the mark identical to yours or similar?  How similar?  Is it broadly distributed?  Is it used for the same goods and services as your mark?  If not, how similar are the goods and services?  Are your products marketed through the same trade channels?  Are consumers likely to encounter both your products and theirs?  Have they attempted to register their trademark and, if so, where are they in that process?

  No one question will be determinative in any given case, but on balance, they will help develop a sense of how much effort should be expended to enforce your rights.  As discussed below, there are numerous paths, each with its own set of risks and potential rewards.  An international brand that is known throughout the industry, like Jack Daniel’s®, must be far more protective of its marks than a small brewery in Oregon that has a registered trademark for an IPA product only distributed in the Pacific Northwest.

First Contact

  As the owner of a registered trademark, it is your duty to “police” your mark; that is, to monitor unauthorized use of your mark by others and to enforce your right to exclusivity of that mark.  When large corporations learn of potential infringement, their immediate response is generally to have their attorneys send a cease and desist (C&D) letter.  For smaller companies, a personal attempt to contact the owner of the infringing business is often effective.  Sometimes the other party simply did not know about your mark.  If you found their use of the mark before they spent considerable time and money developing it as a brand, they may be willing to simply let it go.

  When making these calls, it is important to maintain a demeanor that is both friendly and firm.  There is no need to accuse the other side of wrong-doing or of violating your trademark knowingly.  However, you should simply let them know that you do have a registration for the mark and that their use is likely to cause confusion in the market as to the source of your respective goods.  If you give them a reasonable amount of time to work through any inventory bearing the infringing mark and to rebrand, this can often be the end of the matter.

Cease and Desist Letter

  If the friendly approach doesn’t work, the next step is generally a cease and desist letter.  This is most effective if drafted and sent by an attorney.  The tone of these letters tends to be more matter-of-fact.  They identify your trademark(s); explain that you have spent a considerable amount of time, effort, and money to build your brand around the mark; identify the other party’s infringing use; state that the use is unauthorized and likely to cause economic harm and loss of goodwill in your brand; and demand that they stop using the mark within a given time frame.

  While these letters can sometimes be effective, especially against smaller companies, they have become so commonplace that often they are simply ignored by more savvy companies who may wait to see if further steps are taken before deciding whether to rebrand.  Accordingly, you should carefully weigh all of your options and decide in advance whether you will escalate the matter if your C&D letter is ignored.

Letter of Protest / Trademark Opposition

  If the other side has attempted to register their mark, there are two ways to try to prevent the registration.  First, you can file a “letter of protest” with the U.S. Patent and Trademark Office (USPTO).  The letter simply informs the trademark examiner of the existence of your trademark and the reasons why you feel that registration of the other party’s mark would damage your mark.  The benefit of this approach is that it is quick, easy, and relatively inexpensive as it generally only takes a few hours for an attorney to prepare and file the letter.  Often filing the letter will prompt the USPTO to issue an office action refusing the registration in light of your trademark, forcing the other side to argue why registration should be allowed.  The downside to the letter of protest is that once it is filed, you have no further opportunity to engage in the process.  If the other side responds to an office action with arguments as to why registration should be permitted, you cannot respond to those arguments. 

  Whether you have filed a letter of protest or not, if the USPTO’s trademark examiner determines that the mark is registerable, it will publish the mark in the Official Gazette.  This publication opens a 30-day window for anyone who believes they will be harmed by registration of the mark to file an opposition to the application.  

  This process should not be entered into lightly.  In some cases, simply filing the opposition will be enough to get the other side to give up its mark.  But, if they choose to fight the opposition, you will find yourself in a litigious process that takes time, effort, and money to complete.  As in civil litigation, the parties to an opposition file motions and briefs, request documents from the other side, take depositions, serve interrogatories that must be answered, and present their evidence to the Trademark Trials and Appeals Board for its consideration. 

  If the opposition goes all the way to the trial stage, it will generally take at least 18 months from when the notice is filed to when the last brief is due and will cost each side in the tens of thousands of dollars.  As with civil litigation, most oppositions do not reach the trial stage, because the parties are able to come to terms and settle the dispute on their own.  But, this often does not occur until sometime in the discovery phase, after both sides have spent a considerable amount on legal fees.

  It is important to note that the object of an opposition proceeding is to prevent registration of the other side’s trademark and, if you are successful, that is your sole remedy.  There are no monetary damages awarded, nor can you recover your legal fees from the other side.  Moreover, while they will lose their ability to register their trademark, it does not necessarily mean the other side will stop using the mark on their goods or services.  In that case, you would have to file a trademark infringement litigation (see below) to get them to stop using the mark, entirely.  In practical terms, succeeding in an opposition will often be enough to get the other side to abandon their mark, because if you were to follow through with a civil litigation, they could be on the hook for treble damages for willful infringement.

Trademark Cancellation

  If you discover the other side’s trademark application after the 30-day opposition window has expired, your only option to challenge the mark at the USPTO is to wait until the trademark actually registers and then to file a trademark cancellation proceeding.  Though there are some differences between cancellation and opposition proceedings, particularly if the challenged mark has been registered for more than five years, they are similar in most procedural respects. 

Trademark Infringement Litigation

  As one might expect, filing a trademark infringement case in federal court is the nuclear option.  Depending upon the jurisdiction, the time frame for completing a litigation may be faster or slower than an opposition or cancellation proceeding at the USPTO.  But, whereas those procedures will likely cost the parties tens of thousands of dollars, a civil litigation will likely reach six figures, or more. 

  The reason for this higher cost is that there are more issues to consider in these cases.  If you are successful in a civil litigation, you may not only obtain injunctive relief, foreclosing the defendant from all future use of the mark, but also may obtain monetary damages associated with the defendant’s past use of the mark, as well as attorney’s fees expended in the proceeding.  Moreover, if the defendant is found to have willfully infringed your trademark, they may be required to pay treble damages. 

  These issues, which are not even addressed in an opposition/cancellation, add breadth to the scope of discovery taken, which increases the cost.  Further, whereas most opposition/cancellation proceedings are decided without an oral hearing, a civil litigation generally requires live testimony and argument in front of a judge or jury.  These proceedings require a great deal of attorney preparation, dramatically increasing legal fees.

Conclusion

  As the owner of a valid trademark registration, you are obligated to police your mark and failure to do so can result in a dramatic diminishment of your rights or even outright abandonment of your registration.  But, that does not mean you have to file a civil litigation against every minor infringement.  Determining the appropriate path in any given situation requires a careful evaluation of all the circumstances and balancing the risks of action versus inaction.  It is critical to engage a knowledgeable trademark attorney, who will properly assess these risks, your likelihood of success, and the most effective course of action in your case.  

  Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry.  He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation. 

Breweries Making Hard Cider: Beware a Trap in the Regulations

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By: Brian D. Kaider, Esq.

Breweries are seeing increased demand for alternative products from customers who prefer a beverage other than beer.  Hard ciders are a popular choice both for flavor and because they are typically gluten-free.  However, it is crucial for breweries to familiarize themselves with the specific legal requirements associated with cider production.  In particular, there are three critical characteristics of a cider product that affect how it is regulated: alcohol level, ingredients, and carbonation level.  Moreover, there is an absurd structure to hard cider excise tax rates that results in one popular category of ciders having a dramatically higher tax rate than others.  For those unaware of this distinction, enormous outstanding tax liabilities and penalties could accrue.

Licensing Requirements

  For simplicity’s sake, this article will use the term cider to include both cider made from apples and wine made from pears, i.e., “perry.”  In practice, there are distinctions between these products, particularly when it comes to labeling.

  Some state licensing bodies regulate hard cider as a beer and do not require breweries to obtain any additional licenses or permits to manufacture hard ciders.  The federal Alcohol and Tobacco Tax and Trade Bureau (TTB), however, regulates hard cider as a wine.  Thus, before a brewery may begin manufacturing hard ciders, it must obtain a winery permit.

Alcohol Level

  When it comes to the alcohol level in finished cider products, there are three important numbers to keep in mind: 0.5%, 7.0%, and 8.5% Alc./Vol. (“ABV”).  Any cider product with an ABV in excess of 0.5% falls under the Internal Revenue Code implementing regulations (27 C.F.R. part 24), must be made at a qualified bonded wine premises, and, under the Alcoholic Beverage Labeling Act (“ABLA”), must include the Government Health Warning Statement. 

  Because the Federal Alcohol Administration Act (“FAA Act”) defines wine as having from 7% to 24% alcohol by volume, if a product is between 0.5% and 7.0% ABV, a Certificate of Exemption is needed, rather than a Certificate of Label Approval.  Further, the product is not subject to other FAA Act requirements, such as, advertising, trade practices, labeling proceedings, standards of fill, etc.  Instead, these products must comply with the applicable FDA food labeling and packing requirements, which include ingredient, nutrition, and allergen labeling requirements; though some small businesses are exempt from the nutrition facts requirements.

  Cider products in excess of 7% ABV, however, must comply with all FAA Act requirements, including COLAs and mandatory labeling requirements. (Note: if a product in excess of 7% ABV is not sold in interstate commerce, it can be covered by a Certificate of Exemption rather than a COLA.) 

As discussed more fully below, only ciders with an ABV below 8.5% are eligible for the hard cider tax rate.  Ciders at or above 8.5% ABV are taxed at a wine rate determined by alcohol content and carbonation level.

Ingredients

  It is generally understood that cider is made from the fermented juice of apples and perry from the fermented juice of pears.  But, even the simple addition of sugar above certain levels affects how a product is categorized, labeled, and taxed.  If other fruits are added, there are different classifications depending on whether the fruit is added before fermentation, after fermentation as a flavoring, or the wine of two fruits (e.g., apples and blueberries) are blended after fermentation.

  Taking the simplest case, a product can be labeled simply “cider,” “hard cider,” or “apple cider” if it is produced by the normal alcoholic fermentation of the juice of sound, ripe apples and is derived wholly (except for sugar, water, or added alcohol) from apples.  Even in this case, excess sugar or water can require special labeling (i.e., “specially sweetened cider”), formula approval, and application of a different excise tax rate.

  Any cider product that is made with fruits other than apple or pear or to which spices, flavoring, or coloring materials have been added will require a more descriptive designation, such as cider with natural flavors.  If two kinds of fruit juice (apple and blueberry) are fermented together, the statement of composition must be “apple-blueberry wine” or “blueberry cider.”  This product would not require a formula, because it would still be considered a natural wine.  A cider to which fruit juices, herbs, spices, natural aromatics, natural essences, or other natural flavorings are added after fer-

mentation would be considered a Special Natural Wine, would require a formula approval, and would require a statement of composition such as, “cider with natural blueberry flavors.”  If fermented cider is mixed with another fermented fruit wine, the product would be considered an “other than standard wine,” would require a formula approval, and would be designated as “apple wine – blueberry wine,” “cider – blueberry wine,” or a similar designation.

Carbonation Level

  A cider with a carbon dioxide level of up to 0.392 grams per 100mL is considered a still wine and may be labeled simply as a cider (assuming it meets the other ingredient requirements mentioned above).  If the carbon dioxide level is above 0.392 grams per 100mL, the cider must be designated as “sparkling” if the CO2 results solely from secondary fermentation within a closed container or “carbonated” if the CO2 is artificially injected into the product.  In order to be eligible for the “hard cider” tax rate, the CO2 level must be below 0.64 grams per 100mL.  For reference, a CO2 level of 0.392g/100mL or 0.64g/100mL is roughly equivalent to 1.98 volumes of CO2 and 3.24 volumes of CO2, respectively.

Excise Tax Rates

  Brewery owners are accustomed to a fairly simple federal excise tax assessment.  The first 60,000 barrels per year are assessed at $3.50 per barrel.  The tax rates for cider are not that simple.  In fact, there is an enormous trap in the tax structure that could cause serious problems for breweries that venture into cider production unaware.

  As explained above, the TTB regulates cider as a wine. It is important to note that the wine tax rates are assessed per gallon, not per barrel.  Although considered a wine, the regulations provide a special tax rate for “hard ciders,” of $0.226/gallon.  Like beer, however, there is a tax credit for small producers, reducing the hard cider rate to $0.164/gallon for the first 30,000 gallons.  But, the scope of products that qualify for this tax rate is very narrow.  It includes only products made from apples and/or pears that contain no other fruit product or fruit flavoring, have an ABV of greater than 0.5% and less than 8.5%, and a carbonation level below 0.64g/100mL (about 3.24 volumes of CO2).  Ingredients that impart flavors other than fruit flavors, such as spices, honey, hops, or pumpkins do not make a wine ineligible for the hard cider rate, according to Industry Circular 17-2 (even though pumpkins are fruit).

  If a hard cider product has any fruit other than apples and pears (and pumpkins) or has an ABV of 8.5% or higher, it does not qualify for the “hard cider” rate, and instead falls under the wine tax structure.  If the product has a carbonation level below 0.392g/100mL, it would be considered a still wine.  The tax rate for a still wine, under 16% ABV is $0.07/gallon for the first 30,000 gallons.  If the product has a carbonation level above 0.392g/100mL the first 30,000 gallons would be taxed as a “sparkling wine” at a rate of $2.40/gallon if the carbonation resulted from secondary fermentation in a sealed container, or as an “artificially carbonated wine” at a rate of $2.30/gallon if the carbon dioxide was injected into the product. 

  What may not be immediately apparent is the absurdity of this tax structure.  The following table should put it into perspective.  It shows five different products, their base tax rate, the tax rate per barrel, and the actual federal excise tax applied to a 6-pack of 12oz bottles.

  Thus, if making a cider product that contains fruit other than apples or pears and that is carbonated above 0.392g/100mL (about 1.98 volumes of CO2), a manufacturer will face a federal excise tax more than 30 times greater than if the carbonation level was below 0.392g/100mL.  Failure to appreciate this distinction and to pay the appropriate tax rate could result in an assessment of stiff penalties and interest and could even result in termination of the manufacturer’s permit.

Conclusion

  Entering the realm of hard cider production requires breweries to navigate a set of regulatory issues that are likely to be unfamiliar.  Beer and cider are treated very differently by the TTB and it is critical to understand the categories that cider products fall into with regard to labelling, formula approvals, and particularly excise tax assessments.  For those considering an expansion into this area, it would be wise to consult with an attorney knowledgeable in these areas to ensure full compliance. 

  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 licensing and regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.

Three Commonly Overlooked Legal Issues for Breweries

Cyndi Leave a comment

By: Brian D. Kaider, Esq.

Breweries have to deal with many legal issues, including licensing requirements from various federal and state agencies, formation of a corporate entity, negotiating contracts, and registering trademarks.  With so many new skills and requirements to learn, it can be easy to miss something.  Below are examples of three legal issues that are often overlooked.

Failing to Require Employment Agreements

  There are a million things to do when starting a brewery.  Finding and hiring staff checks off a significant box on the list and it can be easy to overlook the need for an employment agreement for these early hires.  Later, there is little enthusiasm to impose these agreements retroactively or to apply them to new hires when they were not required for original employees.   Yet, employment agreements serve a variety of functions that are so essential that their omission can cause substantial problems down the line.  

  As a preliminary matter, an employment agreement defines the relationship between the parties.  Often breweries will try to categorize workers as independent contractors as opposed to employees, because this distinction allows the brewery to avoid providing certain benefits that are required for

employees.  But, the IRS does not care about the brewery’s characterization, it cares how the worker is treated, and the key determination is control.  An independent contractor is hired to provide a function, but has significant autonomy to perform that function when, where, and how they see fit.  Often they will provide their own equipment and set their own hours.  By contrast, if the brewery exercises control over the worker by imposing certain work hours, requiring the job to be performed in a certain way, and providing the equipment used, the worker is considered an employee.

  There are many important sections of an employment agreement, including designation of at-will employment, requirement to abide by rules set forth in the employee handbook, etc.  But two often-overlooked sections relate to confidentiality and assignment of intellectual property.  Although the brewing industry is far more collaborative and congenial than most, it is still a competitive business and certain information should be treated as confidential and/or trade secret.  Employees should be made aware that unauthorized disclosure of business plans, growth plans, customer and supplier lists, recipes, and marketing ideas, to name a few, can cause harm to the business.  This section of the employment agreement not only serves that notice function, but can set up more enforceable consequences if the terms of the agreement are breached.

  Breweries generate a significant amount of material that can be protected by trademark or copyright registration.  Label designs, beer names, domain names, and social media accounts are all valuable assets that should belong strictly to the business.  An assignment of intellectual property section in an employment agreement sets forth the understanding that anything created during the term of employment is the sole property of the business.  As an example, if an employee has artistic talents that are used to develop designs for labels, those artistic designs should be assigned to the company.  Otherwise, the employee would have the right to sell the same designs to other companies or individuals who may use them in a way that is detrimental to the brewery’s brand.

Failing to Secure Music Licenses

  Music is such a common part of the brewery experience that many people take it for granted.  However, breweries must obtain the proper licensing to play copyrighted music in their establishments or they could face a copyright infringement suit and potentially crippling statutory damages that could be as much as $150,000 per instance.

  Under U.S. copyright law, the owner of a piece of music has the exclusive right to control its use, including whether or not it may be played in a public setting.  Typically, however, while the artist may own the copyright, s/he delegates the task of licensing its use to a Performing Rights Organization (PRO) such as the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI).  In some cases, a single artist may have some of its songs licensed by one PRO and others licensed by another.

  So, is a license required for every song played in a brewery?  Generally, yes, in order to publicly play any piece of music, a brewery must obtain a license from the PRO that has the piece in its catalog.  Below are some common situations where a license is required, followed by some exceptions to the general rule, and one very simple way to stay in compliance.

  Disk Jockeys by their very nature play a variety of pre-recorded music.  Although it may be the DJ that selects the pieces it plays, because the venue derives the benefit of the music, it is responsible for obtaining all necessary licenses. 

  Bands that play “cover songs” written by another artist fall under the same category as DJs.  But, what about bands that play only original songs?  The brewery should ask the band whether it is affiliated with a PRO.  If so, even if the band is playing its own music, the venue needs a license for the performance.

  Purchased music is only licensed for private use.  Many people assume that when they buy a record, CD, or digital audio file that they own the music and can do anything they want with it.  In reality, the purchase price of that music only covers private use and does not entitle the owner of that copy to broadcast it to the public.  So, even if the brewery owner brings in her own collection of vintage vinyl, she must obtain a license to play the records in the taproom.

  Generally, music licensing fees are not terribly expensive, but vary according to the size of the establishment and the type of music being played.  In some cases, discounts may be available.  For example, the Brewers Association has negotiated a discount with BMI of up to 20% for its members.  

  There are a few exceptions that will enable music to be played without a license, but they are narrowly construed and must be followed carefully.  Music that is broadcast to the general public over the radio, television, cable, or satellite services may be played in a brewery without further license if the establishment is smaller than 3,750 gross square feet, including all interior and exterior spaces used for customer service.  Larger spaces may also qualify for license-free performance, but other restrictions apply, such as: the music may not be played over more than six loud-speakers or more than four in one room; there may not be a cover charge to enter the establishment; and audiovisual content may not broadcast over more than four televisions or more than one in a single room.  Music may also be played in the brewing space or offices for the benefit of employees, as long as it is not audible to the patrons in the tasting room.

  By far, the simplest way to get music in the brewery is to use a commercial streaming service, such as Pandora For Business or Sirius XM For Business.  The fees for these services include performance royalties and do not require any additional license.

Failing to Report Changes in Proprietorship or Control

  It should come as no surprise that when forming a brewery the TTB will want to know exactly who owns the business and who is in charge.  It should be equally unsurprising, then, that if there is a change in ownership or control of the business, the TTB must be informed.  Yet, this is an often-neglected requirement and failure to adhere to the letter of the law can have serious consequences. 

  It is important to understand the distinction between a change in proprietorship and a change in control.  A change in proprietorship occurs when there is a change in the entity that owns and operates the brewery.  The obvious example is if the brewery is sold to a new company.  Clearly in that situation, the TTB must be made aware of the new ownership and the law requires that the notification be made well in advance of the proposed change.  Specifically, 27 C.F.R. §25.72 requires that the successor brewer “qualify in the same manner as the proprietor of a new brewery” before beginning operations.  Less obvious examples might be the conversion of an LLC to an S-Corporation or the folding of the brewery business under the umbrella of a parent corporation that has the same owners and officers as the brewery business.  Both those situations involve changes to the proprietorship and must be cleared with the TTB before operating under the new structure.

  By contrast, a change in control occurs when there are changes in stock ownership, LLC membership unit ownership, or major changes in the corporate officers or directors of a corporation.  The same business entity continues to operate the business, so there is no change in proprietorship, but there is a change in who controls the business within that entity.  In this situation, an amended Brewer’s Notice is required to be submitted within 30 days of the change.  Further, if a new LLC member or stockholder holds more than 10% interest in the business, a new Personnel Questionnaire must also be filed.  Common situations that involve a change of control may include the removal of a founder, death of a member, addition of a new corporate officer with ownership interest, addition of new members through a round of fund-raising investments, or the buy-out of previous investors.

  Failure to abide by the notice requirements for changes in proprietorship or control can have serious consequences, including forced shutdown of operations until the licensing matters are resolved and possible monetary penalties.

Conclusion

  These are just three of the legal issues that breweries often overlook.  There are, of course, many more.  Engaging an attorney that understands the industry early in the process of starting a brewery and maintaining the relationship throughout the life of the business is the best practice to ensure compliance with all requirements.

  Brian Kaider is the principal of KaiderLaw, a law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.

Fractional General Counsel: A Flexible Solution for Legal Services

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By: Brian D. Kaider, Esq.

Every business has legal needs that require the assistance of an attorney. Like other small businesses, most breweries and distilleries do not have the resources or the need to hire a full-time, in-house general counsel. But, with the high cost of legal services, many owners only contact an attorney as a last resort.  A fractional general counsel arrangement offers a flexible solution.

What is a Fractional General Counsel?

  In broad terms, a corporate attorney can be an in-house counsel, which is a full-time employee with a salary and benefits, or an outside counsel, which is an independent contractor.  Outside counsel work under a variety of fee structures, such as an hourly rate, a flat fee, a retainer, or some combination thereof.  Flat fee arrangements are typically used for a specific, defined project, to be completed at an agreed upon price, often paid in advance.  Retainers are often a fee charged in advance by the attorney and held in an escrow account.  As the attorney completes work, fees are transferred from the escrow account to the attorney. In some cases, when the retainer drops to a certain level, the client is billed to replenish the funds. 

  A fractional general counsel is slightly different.  In this arrangement, the client pays a fixed fee for a certain amount of the attorney’s time, usually on a weekly or monthly basis.  What happens if the attorney works more or less than the allotted time can vary significantly, as discussed, below. 

Benefits of a Fractional General Counsel

  The benefit of a fractional general counsel versus a full-time in-house counsel is obviously a lower cost both in terms of salary and associated benefits.  But, it also has advantages over other forms of outside counsel.  Typically, the fees are lower than the attorney’s standard hourly rate.  More importantly, the arrangement gives the client a predictable cost it can include in its budget.  This certainty benefits the attorney, as well, particularly for solo practitioners and members of small law firms.  As legal workflow is often cyclical, the certainty of income associated with a fractional general counsel arrangement helps to balance slow periods in the practice.    

  Many small business owners only seek the advice of their attorneys when a situation is critical, because when working with an outside attorney on an hourly rate, they think about how much it will cost every time they pick up the phone. By contrast, when working with a fractional general counsel, a certain amount of the attorney’s time is already reserved to the client.  This results in a much more collaborative relationship, in which the attorney becomes an integral member of the team and has a deeper understanding of the business. Over time, the attorney develops institutional knowledge about the company that fosters better legal advice. 

Issues to Consider

  Despite the many benefits of a fractional general counsel arrangement, there are several issues that should be considered before taking the leap.  First, estimating how many hours of legal services per week/month are needed can be difficult and different attorneys handle overages and shortages of those hours in different ways.  Some will roll over unused hours to the following term.  That model is essentially an agreement for pre-paid legal services.  Others take the view that the agreement requires the attorney to allocate a certain number of hours to be available to the client during that month, so the fee is earned whether the hours are used or not. 

  If the attorney works more than the allocated hours, they are often billed at an agreed hourly rate.  Alternatively, there may be a built-in buffer of ten percent, for example.  So, if the contract is for 20 hours per month, the fee would cover 18-22 hours of legal services.  If fewer than 18 hours were used, they would roll over to the following month and if more than 22 hours were used, they would be billed at the attorney’s hourly rate.  It is also a good idea to build into the agreement a periodic review of usage to determine whether it makes sense to increase or decrease the estimated need.

  This raises another issue to consider when deciding whether a fractional general counsel arrangement is a good fit; they usually require a commitment to a minimum term, such as; 12 months, 6 months, or at least 3 months.  This is because the purpose of the arrangement is to promote an attorney-client relationship that fosters a deeper understanding of the business.  If the client’s goal is simply to lower the cost of legal services for a specific, short-term project, the better approach is to negotiate a flat fee with the attorney.  Typically, if a client terminates a fractional general counsel arrangement before the minimum term, the fee structure will revert to the attorney’s standard hourly billing rate, which will become immediately due. 

  Regarding the types of legal services they will likely need under the fractional general counsel agreement, the client should carefully consider the expertise and experience of the attorney or firm.  As the name suggests, a “general counsel” has broad knowledge of a wide variety of legal issues a business needs.  But, there will likely be gaps that have to be filled with other attorneys.  The agreement should be clear about the fractional general counsel’s role in managing these outside attorneys.  Because of this issue, it may seem that a large firm would be the best candidate for the role, because with more attorneys there are likely to be fewer gaps.  There is a risk, though, of losing one of the primary benefits of a fractional general counsel, which is having a single attorney with a deep understanding of the business.  The bigger the firm involved, the more likely the attorney in charge of the representation will be out-of-touch with the actual work being performed by other, usually junior, attorneys. 

Who Should Consider a Fractional General Counsel?

  When is the right time for a brewery or distillery to consider a fractional general counsel?  While most small businesses can benefit from these arrangements, there are two stages when they can be particularly useful; at start-up and before a planned growth.  At the earliest stages of the business, there are a wide variety of legal needs, including; formation of the entity, creating operating agreements and other contracts, obtaining licenses and permits, registering trademarks, negotiating a lease or land purchase, etc.  Having an attorney that can handle and/or manage all of these areas can alleviate stress and allow the owner to focus on the many other issues requiring attention.  For first-time owners, there will also be many questions along the way.  Having an attorney who is on the team allows those questions to be answered without having to worry about getting a bill every time they pick up the phone.

  An established brewery or distillery that is entering a growth phase presents many of the same types of issues.  They may need to restructure the company or negotiate new leases or land purchases.  Changes will need to be made to their licenses and permits, etc. 

  Does this mean that companies falling in between start-up and expansion are not right for a fractional general counsel?  Absolutely not.  This is the stage when the deep understanding coming from a long-term relationship can really shine.  An attorney who is familiar with the business can more accurately audit existing contracts to assess any legal exposure or where improvements can be made.  If the business has registered trademarks, routine monitoring should be undertaken to ensure they are not being infringed by other companies.  Internal regulatory compliance audits can identify vulnerabilities before action is taken by the government.  In other words, the fractional general counsel can focus on more in-depth legal issues for the business once it is outside the frenetic start-up stage.

Conclusion

  Eventually, some breweries and distilleries may need to hire a full-time in-house general counsel.  Most will never get that big.  But, having an attorney who is deeply familiar with the business and can handle most of the company’s legal needs is a tremendous benefit.  Traditionally, outside attorneys are hired on an hourly or flat fee basis.  But, the fractional general counsel arrangement offers several advantages, including, lower fees, predictability of legal costs, and development of institutional knowledge in the business.

  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.

New Brewery, Winery or Distillery Start Up

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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  

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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

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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?

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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

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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

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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.