Category: Legal

Best Practices: Beer Wholesaler Agreements

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lone beer glass

By: Kary Shumway, Craft Brewery Financial Training

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

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

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

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

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

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

Five Steps to a Better Agreement

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

2.   Know your state laws

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

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

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

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

Basic Agreement Structure and Terms

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

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

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

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

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

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

Know Your State Laws

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

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

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

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

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

Do Your Research

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

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

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

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

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

•    What are the demographics and tourism of the market?

•    What is the pricing landscape?

•    What did you do for craft beer week?

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

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

Play a Game You Can Win

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

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

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

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

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

Self-Distribute: Enter into an Agreement with Yourself

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

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

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

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

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

Wrap Up

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

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

For more information please visit…

https://craftbreweryfinance.com

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How Your Intellectual Property Can Make or Break a Merger

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intellectual property cover

By: Ashley Earle, Attorney, Dinsmore & Shohl

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

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

What Is IP?

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

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

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

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

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

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

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

What IP Do I (and They) Have?

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

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

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

Do Both Sides Actually Own Their IP?

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

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

What Are We Agreeing to In the Deal Terms?

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

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

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

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

Were Things Done Right with the IP by Both Sides?

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

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

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

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

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

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

Intellectual Property for Beverage Manufacturers

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intellectual property law

By: Brian D. Kaider, Esq.

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

Patents Protect Ideas – sort of

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

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

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

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

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

Copyrights Protect Creative Works

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

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

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

Trademarks Protect “Source Identifiers”

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

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

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

Trade Secrets Protect Valuable Confidential Business Information

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

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

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

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

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

Regulatory Accommodations in the Age of COVID-19

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By: Brian D. Kaider, Esq.

state of emergency

The COVID-19 pandemic has affected virtually every industry, from government-mandated shutdowns, to limitations on occupancy, to changes in consumer behavior even in the absence of mandatory restrictions.  Some businesses, such as live theaters, have been completely shuttered; Broadway recently announced it will be dark until at least January 3, 2021.  But, breweries, wineries, and distilleries have the advantage of being both retail centers for their products and also manufacturers.  This dichotomy has allowed many to keep their doors open in some capacity throughout this emergency.  Every U.S. state has allowed alcoholic beverage manufacturing to continue.  How manufacturers have been able to get their products into the hands of consumers, however, has varied widely from state-to-state. 

  This article is not meant to give a complete status of the law in any, much less every, state.  Nor is it to point out that one state is doing more than another for the beverage industry.  Each state is facing its own unique challenges in the face of this pandemic due to differences in infection rates, hospital capacity, population density, economic conditions, political climate, culture, and various other factors.  So, it is not surprising that their approach to these challenges differ, as well.  It is also important to note that as circumstances change, so does the government response, so what is described below may have changed by the time this article is published, and may continue to change.

  Rather, this article is meant to illustrate that there are many options available to help industry members survive the crisis.  As conditions change in any given state, so to do the accommodations needed to help the industry.  So, for industry members who are in a state where the pandemic is growing, the information below may provide suggestions to take to state and local officials to seek further accommodations, as needed. 

Carry-Out

  Nearly every state is allowing manufacturers to sell their products from their licensed premises for off-site consumption.  The details, however, vary widely.  For example, many states require that the carryout alcohol be part of an order for food.  Alabama and Montana have limits on the amount of alcohol a customer may purchase to-go.  Maryland, on the other hand, suspended these limits during the emergency. 

  Most states require carryout alcohol to be in “sealed containers,” though even that definition varies.  In many states it includes growlers, but in Alabama only if the local jurisdiction allows draft beer, in Maine only if with a food order and in the brewery’s own branded growler, and in Nebraska only if the growler has a capacity of no more than 64 ounces.  In Colorado, a to-go cup with a lid may be secured with tape that says: “WARNING: DO NOT OPEN OR REMOVE SEAL WHILE IN TRANSIT.”  In Vermont, manufacturers may sell beverages in a paper cup with a lid that has a hole for a straw…but may not provide a straw.  Nebraska allows these cups and straws can be provided, but not inserted into the cup on the premises.  In Virginia, due to supply chain issues, the state allowed for “alternate/novel” containers, such as flip-top bottles.  Missouri originally required “factory sealed” containers, but changed the rule in June 2020 to allow for “retailer packaged” beverages.

  The manner of carryout sales varies, too.  In Arizona, Montana, and South Carolina, licensees are allowed to operate a drive-thru window for beverage sales.  But, in Washington State, they can have a “walk-up” window, but not a drive-thru.  In Wisconsin, the carryout sale must be conducted face-to-face, not over the phone or internet for pickup.

  Some states, such as Arizona, Arkansas, Idaho, Michigan, Missouri, and Nebraska are also allowing mixed drinks or cocktails to go.  California and Maine require mixed drinks to accompany a food order and Maine and Virginia have limitations on the amount of alcohol in the to-go container. 

Curbside Pickup

  In order to keep patrons from congregating inside the tasting room to pick up beer, some states have allowed curbside pickup, where the customer orders the product online or over the telephone and drives to the licensee’s parking lot.  The licensee then brings the order out to the customer’s car, often putting the order in the trunk so there is no direct contact between employee and customer.  At least Alabama, Alaska, Arizona, Hawaii, Kansas, Maine, Maryland, Missouri, Montana, Nevada, New Jersey, Oregon, South Carolina, Vermont, and Virginia allow curbside pickup.  Tennessee only allows curbside pickup for beer and wine, not spirits.  But, New Mexico expressly forbids it because all sales must be made on the licensed premises, which does not include the parking lot.

Delivery

  Even before the COVID-19 pandemic, Ohio, the District of Columbia, and Missouri allowed manufacturers to deliver beer, wine, and spirits to consumer’s homes.  Since the outbreak, many other states have followed suit, at least on a temporary basis, including Arizona, Arkansas, Colorado, Idaho (beer and wine only), Illinois, Indiana, Iowa, Michigan, Montana, Nebraska, New Jersey (beer and wine only), Oregon, Vermont, Virginia, and Washington.  In Oklahoma, the Alcoholic Beverage Laws Enforcement Commission was allowing breweries and wineries to do home delivery in April/May 2020, but the legislature stepped in and gave that right only to retailers, not manufacturers.  Most states that allow home delivery require that the delivery be made by an employee of the licensee, not by a third party service.  Idaho, Illinois, and New York, however do allow third party services, though in Illinois, mixed drinks can only be delivered by third party from licensed retailers, not from distilleries.

  Most states also require that payment be made in advance either over the phone or online.  California, however, is allowing payment, even in cash, to be made at the point of delivery, but will not permit a “mobile sales apparatus” to sell and deliver in real time in a public space.  In other words, one cannot set up a “food truck” type of service for alcoholic beverages.

  The majority of states also require that the delivery be made directly to a residence or other building.  North Carolina, on the other hand allows breweries and wineries to deliver within 50 miles of the licensed premises and to make deliveries outside a home to any place the customer requests, except to other licensed premises.

  In Maine, New Hampshire, and New York, the delivery must accompany a food order, though, to borrow a phrase from the movie “Pirates of the Caribbean,” some may be treating that requirement “more as a guideline than an actual rule.”  Hawaii has four individual county liquor commissions and liquor control departments.  Three of the counties have allowed brewpubs to deliver beer along with a food order, the fourth has not, as of this writing.

  Maryland is not only allowing manufacturers to deliver their own products directly to consumers, but also products from other manufacturers, who may not have the resources for home delivery.   At least two breweries in another Northeastern state have teamed up to share their delivery resources, though it is unclear whether there is any official or unofficial approval in that state.  In Ohio, if a manufacturer also has an “A-1-A” liquor permit, it may sell and deliver other brands of beer, wine, spirits, and mixed drinks (though mixed drinks must accompany a food order). 

  Some states have also begun to allow breweries, wineries and distilleries to ship their products to consumers within their own state using UPS or Federal Express (not the U.S. Postal Service).  These include at least Vermont, Maryland, New York, and North Carolina.

Other Accommodations

  When the COVID-19 outbreak began to spread in the United States and hand sanitizer quickly went out of stock in retail outlets, many distilleries and breweries sprang into action.  Licensing commissions and legislatures scrambled to provide necessary approvals for these companies to pivot their manufacturing activities.  This created a valuable revenue stream while tasting rooms were closed and provided a service to communities in need of protection.  In some cases, states allowed breweries to transfer fermented wort to distilleries for distillation and mixing with other ingredients and then to take the product back to the brewery for bottling and distribution.  One word of caution, however; at least one brewery in Hawaii received a citation for “inducement,” because they were giving a free bottle of sanitizer to anyone who purchased their beer.

  When taprooms were ordered closed in Ohio, the Department of Commerce recognized that some small breweries did not have bottling or canning capabilities and would struggle more than those who were able to package their products and sell for carryout or delivery.  So, the department created a procedure that would allow a manufacturer to have another manufacturer bottle or can their products for them.  Ordinarily this would be a violation of Ohio law.

  As various states begin their tiered reopening plans, many are still either prohibiting indoor dining/drinking or only allowing a limited percentage of normal seating capacity.  To further accommodate manufacturers, several states, including: Alaska, Arkansas, New Jersey, Ohio, Oregon, Pennsylvania, and Virginia, have been much more lenient about allowing outdoor seating areas to make up for lost capacity inside.  In many cases, states have allowed manufacturers to rope off sections of sidewalks, parking lots, and even closed portions of streets to enable outdoor seating.  New Jersey has even gone a step further and allowed breweries to occupy outdoor spaces that are not directly attached to the brewery, such as nearby parks.

  Finally, most states have been very flexible with licensing renewals and tax filings, extending deadlines and fast-tracking application processing. 

Final Thoughts

  No one knows how much longer this crisis is going to last.  As the number of new coronavirus cases falls in one state, it rises in another and the experts seem to agree that we are still in the midst of the first wave of this virus with a second likely to hit during flu season.  It is reasonable to expect that we will see state and local governments react to changing circumstances with an ebb and flow of restrictions on people congregating. 

  The manufacturers who have fared the best, so far, are the ones who have done two things: 1) applied early for federal, state, and local grant and loan opportunities, and 2) found creative ways to pivot their business to maximize their opportunities under restricted conditions.  Being based in Maryland, I would be remiss if I didn’t give a shout out here to True Respite Brewing Company.  Based in Rockville, Maryland, they were the creators of the craft beverage delivery platform, Biermi, which is now being used in at least 29 states.  This type of innovative thinking both in the private sector and in state and local governments will be critical as we navigate the COVID-19 emergency.  If worsening conditions require tighter restrictions in some states, hopefully the information presented above will be useful in discussions with licensing commissions and legislators as ways they can help accommodate manufacturers. 

  Lastly, with the constantly shifting regulatory structure surrounding this industry, it is essential that licensees stay in contact with their insurance companies and their attorneys.  A state may change the rules to allow a manufacturer to deliver alcohol to consumers’ homes or to serve its products in a parking lot, but that does not necessarily mean that the manufacturer’s insurance policy will cover those activities.  Further, the devil is always in the details.  In each of the states mentioned above, there are conditions and terms that must be satisfied in order to engage in the permitted activities.  Always consult with a knowledgeable attorney before engaging in a newly allowed process.

  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.

SUPPORTING “TRADE” DURING COVID-19

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alcohol and tobacco tax and trademark bureau seal

By: Ryan Malkin

  Does the rulebook go out the window during a pandemic? As the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) and states weigh in via guidance and industry advisories, the resounding answer is no. Still, brands seek to support bartenders with, by and large, pure intentions. That is, brands have money and bartenders may not. Bartenders and brands establish important and long-term relationships over the course of, in some cases, decades. If your friend needed a meal, you’d certainly oblige. However, when the funds are coming from an upper tier (manufacturer, supplier, wholesaler) member’s pockets, we must consider whether and how funds can go towards trade. As a threshold matter, we should consider whether the bartender is employed or unemployed. If a bartender is unemployed, arguably that person is no longer considered a retailer within the meaning of the rules. If that’s the case, the rules with regards to how a brand may engage with that person may also go out the window.

  By way of very brief background, it is unlawful to induce a retailer (an on-premise or off-premise licensee) to purchase your brand to the exclusion in whole or in part of another brand’s products. In particular, the federal and most state rules note that, subject to exceptions, “the act by an industry member of furnishing, giving, renting, lending, or selling any equipment, fixtures, signs, supplies, money, services, or other things of value to a retailer constitutes a means to induce within the meaning of the Act.” In short: unless there is an exception, you may consider the giving of any “thing of value” to be impermissible.

  That means, but for exceptions, it is impermissible to acquire or hold any interest in a retail license, pay or credit a retailer for advertising, guarantee a loan to a retailer, require a retailer to purchase a certain amount of products, or provide any items that are not allowed under an exception. Those of us in the alcohol beverage industry may not realize it, but we largely play in the world of exceptions. The exceptions are where you find it permissible to offer point-of-sale materials, conduct tastings/samplings, provide displays, offer educational seminars to retailers, and stock/rotate your products.

  Federally and in many, though not all, states the providing of the “thing of value” must also lead to exclusion. Exclusion is when the practice “puts the retailer’s independence at risk.” To determine that, the TTB will look at the practice and consider, among other things, whether it required an obligation on the part of the retailer to purchase or promote the brand, and whether it resulted in discrimination among retailers. That means the brand did not offer the same thing to all retailers in the area on the same terms without business reasons for the difference in treatment.

  Now that we’re on the same page with regards to the rules, we want to consider whether the person we want to assist is employed by a retailer or unemployed. If the person is employed by retailer (remember that means on-premise or off-premise), the brand will be more limited in how it may engage with that person. In short, follow the pre COVID-19 rules. TTB’s recent guidance on this topic specifically states that “the furnishing of business meals or entertainment to a trade buyer is an inducement under the Act” if the inducement results in the full or partial exclusion of products sold by that brand in the course of interstate or foreign commerce. In other words, according to TTB, “the furnishing of business meals or entertainment to a trade buyer is not by itself a violation of the Act.” In fact, providing retailer entertainment is quite common and many states have specific regulations that permit the practice.

  Typical states rules will require that the brand’s representative be present, that the entertainment be reasonable, and not conditioned on the purchase or agreement to purchase any of the brand’s products. Retailer entertainment rules are how you often see brand’s take bartenders and liquor store owners to ballgames, concerts and dinner.

  Given the social distancing rules, it is impractical and unsafe to get together with working trade. Instead of going to dinner and discussing business, it may be worth considering whether a brand feels comfortable doing so online via, say, Zoom or FaceTime. The brand can send drinks and a meal to the bartender. When the food and drinks arrive, the brand and the bartender can hop online and eat together. The brand representative would be as present as one can reasonably during this time. Of course, the brand should analyze this against the rules in the applicable state(s) and with its own attorney.

  However, if the bartender is no longer employed, one should now consider him or her as just a regular consumer, albeit with above average mixology skills. Now the brand may feel comfortable entering into an agreement with the person to be a brand consultant to perform any number of services. For instance, to create how-to cocktail videos or conduct virtual tastings. The brand would then pay that person whatever the two agree as reasonable. The brand should consider putting an agreement in place with that out-of-work bartender. The agreement should include basic provisions, perhaps paying particular attention to intellectual property (we own it, you’re using it with our permission and we own what you create) and representations around the unemployed bartender’s status. This compliance section should require the person being hired to acknowledge that he or she does not have any direct, or indirect, ownership in any retailer, and, at minimum, that the fee being paid is not conditioned on or being used to induce any retailer to purchase the brand’s products to the exclusion of any competitive products.

  Now that you have a solution for supporting both employed, though perhaps struggling, bartenders and those out-of-work, go out there and keep your brand alive and relevant during these unprecedented times.  Be careful out there.

  Ryan Malkin is principal attorney at Malkin Law P.A., a law firm serving the alcohol beverage industry. Nothing in this article is intended to be and should not be construed as specific legal advice.

For more information contact Ryan Malkin at…

Malkin Law, P.A.

260 95th Street, Suite 206

Miami Beach, FL 33154

Office: (305) 763-8539

Mobile: (646) 345-8639

Email: ryan@malkin.law

Website: www.malkinlawfirm.com

Increasing Brewery Cash Flow: Craft Breweries and the R&D Credit

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A money bag with the word Cash Flow and a chart with an up arrow

By: Wendy Landrum, CPA, Partner and R&D Advisory Leader; Mark Heroux, JD, Principal, Tax Advocacy and Controversy Services Leader; and Brian Haneline,  CPA, Senior Manager, R&D Advisory

Craft brew popularity is at an all-time high in the United States, with explosive industry growth in the past five years. According to the Brewers Association, craft brewers now make up 98 percent of all U.S. breweries. As new craft brewers continue to enter the industry and existing brewers look to keep up with recent trends, significant financial investments must be made before the first brew can reach the consumer. Whether these costs are related to the formulation of the brew, or how to produce or package the brew, costs can be substantial.

  Fortunately, federal and state governments offer an often overlooked but valuable benefit to help offset these costs in the form of R&D tax credits for craft brewers engaging in “qualifying activities.” 

R&D credits result in a dollar-for-dollar reduction in income taxes and, if applicable, payroll taxes, providing cash flow for future investments. The R&D credit applies not only to new product development, but also to improvements to existing products and manufacturing processes. Importantly, the activities need only be evolutionary to the organization, not to the industry as a whole, to qualify for the credit.

  Because the R&D credit is nonrefundable, startup companies and other small businesses like craft breweries are often limited in their ability to claim the R&D credit in the current tax year because they do not have current income tax liability to utilize the credit. Despite the credit having a 20 year carry forward if not used currently, the company receives no immediate tax advantage from the R&D credit, especially for years in which R&D activities and investments may be high.

Payroll Tax Offset

  However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 allows certain small businesses to offset the R&D credit against payroll taxes instead of income taxes. PATH allows for up to $250,000 of annual federal R&D credits that can be allocated against payroll tax liability. This applies to tax years that begin after Dec. 31, 2015.

  To qualify for the payroll tax offset in 2019, a business must have gross receipts of less than $5 million in 2019 and may not have had gross receipts for any tax year before the five-tax-year period ending with 2019. For example, if the credit-claiming year is 2019, a company must have had less than $5 million of gross receipts in 2019 and no gross receipts prior to 2015.

  The R&D credit may be applied against the FICA portion of payroll taxes beginning in the first calendar quarter following the date on which the business files the income tax return. If the payroll tax credit portion of the R&D credit exceeds the tax liability for any calendar quarter, the excess is carried to the next calendar quarter and allowed as credit for that quarter. The payroll tax election is limited to five taxable years.

Four-Part Test

  Naturally, the question then becomes, what are “qualifying activities” to be able to claim the credit and what costs can be captured? Generally, activities must meet the following four criteria (referred to as the “four-part test”) to include the related wages, supplies, or contract research costs in the R&D calculation:

1.   The activity must be technological in nature. The activity must be based on the principles of a hard science such as chemistry or engineering.

2.   The activity must be for a permitted purpose. The activity must involve the creation of a new or improved level of: function, performance, reliability, quality, durability or cost reduction for a product or manufacturing process

3.   The activity must involve the elimination of uncertainty. The activity must explore what was not known at the start of the project.

      •   Capability: Can we develop the new or                                improved product or process?

      •   Methodology: How will we develop the new                       or improved product or process?

      •   Design: What is the appropriate design of                            the new or improved product or process?

4.   The activity must involve a process of experimentation. Substantially all activities must include elements of experimentation such as:

      •    Evaluating one or more alternatives

      •    Performing testing or modeling

      •    Examining and analyzing hypotheses

      •    Refining or abandoning hypotheses

  A wide range of technical activities related to product or process development or improvement in the craft brew industry may qualify for the R&D credit. Consider the examples below:

•    Developing new or improved recipes and styles.

•    Brewing experimental or pilot batches of new or improved recipes and styles.

•    Performing lab testing, or other functional testing, on new or improved products or processes.

•    Developing new or improved ingredient mixing methods.

•    Developing new or improved yeast strains or fermentation processes.

•    Developing new or improved manufacturing processes.

•    Researching new or improved production techniques.

•    Automating existing manufacturing processes.

•    Developing new or improved processes or methods to prevent spoilage.

•    Developing new or improved bottling or packaging processes.

•    Developing new or improved methods to minimize or treat wastewater.

  For reference, examples of activities that may not

qualify include:

•    General administrative and managerial functions.

•    Sales, marketing and business development activities.

•    Routing data collection (e.g., management studies, efficiency surveys).

•    Day-to-day production activities.

•    Routine quality control and inspection.

•    Maintenance and installation services.

•    Training (even if related to new equipment or technology).

•    Research conducted outside the U.S.

Qualifying Costs

  As mentioned above, the following costs are included in the R&D calculation:

1.  Wages paid or incurred to employees who are directly engaged in qualified research activities, or who directly supervise or support qualified research activities. Qualified wages are computed by multiplying the percentage of an individual’s annual time attributable to qualified research activities against W-2, box 1 wages.

2.  Supplies include any tangible property, other than land and depreciable property, which is used or consumed during the development process.

3.  Payments to third parties to perform research and development activities on your behalf. The services must be performed within the U.S. and you must have financial risk (with T&M or hourly contract terms paying for the services versus final product).

  There are two calculation methodologies to consider, alternative simplified credit and regular credit, both with alternatives for start-up companies.

Documentation Requirements

  Federal and state regulators focus on whether a taxpayer can document: 1) the process of experimentation, and 2) the development of a new or improved product or process (also referred to in a research credit discussion as “the business component”).

To maximize the credit taxpayers are well-advised to conduct a disciplined, documented research process. It is important to document every step of the research process, particularly the process of experimentation used to eliminate uncertainty and the identification of the business components, i.e., the new or improved product or process. Sales increases and customer surveys will help to identify improved products, but will not be conclusive. It’s the contemporaneous recording of the research activity that will carry the day in an IRS exam.

  It’s also important that breweries identify the amount of time that professionals spend performing qualified research activities. Time tracking software that identifies the various activities that take place when creating a new or improved product or process is the best option to document time spent by professionals in the conduct of qualified research activities. Taxpayers that do not use time tracking software generally use estimates provided by the research professionals, through the use of time surveys, as to the percentage of time that they spend conducting creditable research activities.

Case Study

  To see how the credit can benefit a craft brewer, the following case study is instructional. In this example, XYZ Brewery in Texas wants to design a new brew from scratch. Once research is conducted to determine the ideal end product (and this research should qualify for the R&D credit), here is the process employed by the brewer (pre-bottling) and who is involved:

  General R&D process including potentially qualifying activities:

1) Mashing – malts are mixed with adjunct flavorings and liquor (pure water) and heated to allow enzymes to break down starch into sugars.

2) Lautering – consists of three steps: mash out, recirculation, and sparging.

3) Hops boiling – once the mash is sparged, the resultant wort is sent to a hops boiler where hops are added for flavor and boiled according to a recipe hops schedule.

4) Fermenting – the wort is sent to a fermentor where the sugars undergo fermentation, via the glycolysis which causes a chemical reaction.

  Who might be involved in the process:

1) Head R&D Brewer

2) R&D Brewery Manager

3) Production Manager

4) Assistant R&D Brewer

5) Brewery Quality Control/Lab

The brewer in this case provides their tax advisor with a W-2 box 1 wage listing and supply expenses for the current and previous three years, and had no contractors that assisted with the development process. Your tax advisor conducts technical interviews with the employees below to help identify the qualifying activities and to allocate a percentage of time to each qualifying activity:

  Assumptions:

•   Head R&D Brewer’s time qualifies at 100%

•   R&D Brewery Manager time qualifies at 100%

•   Production Manager’s time qualifies at 50%

•   Assistant R&D Brewer’s time qualifies at 100%

•   Brewery Quality Control/Lab’s time qualifies at 100%

  Qualified supply expenses by year:

•    2018: $60,000

•    2017: $50,000

•    2016: $50,000

•    2015: $40,000

  Once the data is gathered, analyzed and quantified, your tax advisor calculates a federal and state R&D credit. In this case, the brewer will generate a federal credit of $10k and a Texas state credit of $6k.

  As can be seen from the case study above, the R&D credit can be a valuable tool for craft brewers to help offset startup or other operational costs, either in the way of credits to offset tax liability or refundable payroll tax credits in certain cases.

  While it may not be readily apparent that the R&D credits are in-play for the craft brew industry, many craft brewers have taken advantage of this opportunity. Craft brewers should take notice of the activities that they engage in and consider whether R&D credits might be an option.

For more information, contact the authors at Baker Tilly or 608-240-2334.

Distribution Agreements: Negotiate Your “PreNup” Carefully

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Business people shaking hands, finishing up a papers signing
Business people shaking hands, finishing up a papers signing. Meeting, contract and lawyer consulting concept.

By: Brian D. Kaider, Esq.

Starting a brewery requires learning a lot of new skills and practices that have nothing to do with making great beer.  One of the most confusing and frustrating is the issue of distribution.  If their state allows, most new breweries initially distribute their own products and, if the brewery is content to be relatively local, that might never change. 

But, in many cases, brewery growth necessitates working with a distributor.  This is not a relationship to be entered into lightly. A distributor becomes an ambassador for the brewery’s brand and, once retained, the supplier may have little control over how its beer is marketed. Further, these relationships can be difficult or financially impossible to break once established.

  Supplier/distributor relationships are governed by franchise laws in most states. In the absence of franchise laws, the relationship is defined entirely by a distribution agreement between the parties. But, even in franchise states, the distribution agreement can play a critical role, particularly in the termination of the distributor relationship.

  Too often, however, breweries accept a distributor’s “standard” agreement and when the relationship sours, the supplier finds that they are stuck with no viable option to terminate. The best practice is to engage an experienced attorney to negotiate the terms of the distribution agreement. While even the best attorney cannot evade state franchise laws (which generally prohibit a distributor from waiving its rights), there are ways an attorney may help bring balance to the supplier/distributor relationship.  Some of the key terms to negotiate include termination, territory, brand scope, and exclusivity.

Termination

  The most critical section of the agreement sets forth the manner and circumstances under which a supplier may terminate the distributor. In a franchise state, the law typically says that a supplier may terminate for “good cause.” If good cause is defined in the law, it is paramount that the distribution agreement mirror the language of the law, because in many cases, a contract that contradicts the law will be held invalid, leaving the supplier in the position of effectively not having an agreement at all.

  For example, the Virginia Beer Franchise Act states that good cause includes “failure by the wholesaler to substantially comply, without reasonable cause or justification, with any reasonable and material requirement imposed upon him in writing by the brewery.”  Further, the Act provides, “good cause shall not be construed to exist without a finding of a material deficiency for which the wholesaler is responsible.”  Tracking that language, a distribution agreement in Virginia should clearly define certain of the distributor’s obligations as “material requirements” and explicitly define certain actions as “material deficiencies.” 

For example, the Virginia law identifies failure to “maintain a sales volume” of a brewery’s brands as being a reasonable and material requirement.  But, the law does not specify what volume is required.  So, the distribution agreement should clearly lay out specific minimum sales volumes (preferably on an escalating scale) and identify the requirement to hit those volumes as a material requirement of the contract. 

  When the law does not define good cause, and in non-franchise states, it is essential for the distribution agreement to do so. The contract should clearly set forth the distributor’s requirements that are critical to the business relationship and for which failure to perform will be grounds for termination.

Examples of common requirements include: meeting specified sales and marketing goals, maintaining appropriate records and reports regarding inventory and sales, transporting and storing the product under specified temperature and lighting conditions, exercising adequate quality control measures to ensure product freshness, and paying invoices within a specified time frame. It is also common to include termination rights if the distributor is declared bankrupt, enters a voluntary’ petition for bankruptcy, enters into a compromise or agreement for the benefit of its creditors, or fails to maintain in good standing all Federal and State licenses and permits necessary for the proper conduct of its business.

  In some cases, sale of the distributor or even a change in the ownership structure may be justification for termination.  In February 2019, Bell’s Brewery of Kalamazoo, Michigan completely pulled all of its distribution in the Commonwealth of Virginia.  The issue was that its distributor in Richmond was sold to a subsidiary of Reyes Beer Division, the largest distributor of beer in the United States.  Per its distribution agreement, the original distributor was to have provided Bell’s with certain information about the sale to Reyes, but it failed to do so and Bell’s believed that because it did not have the opportunity to properly vet the new distributor, termination of the franchise was warranted.  To this day the dispute has not been resolved and Bell’s beer is not available in Virginia.

  In most states, a supplier must compensate the distributor for the lost business even if the supplier is able to terminate for cause.  Sometimes the law simply says the supplier must pay the distributor the “fair market value” of the distribution rights.  There can be an expensive battle just to determine that compensation if fair market value is not defined in the distribution agreement.  Often the value is defined as a percentage of the prior year’s case volume multiplied by some dollar amount per case. The “standard” contracts pushed by some distributors can be very severe in this section. In the beer industry, it is not uncommon to see values set at an entire year’s worth of profits times a multiplier that can range from 1.5 to many times higher. In practice, often a new distributor will buy out the distribution rights from the old distributor, but if the supplier wants to return to self-distribution, this buy-out provision may be cost prohibitive. 

  While the beer franchise laws in most states were written at a time in which large beer manufacturers had significant market power over small distributors, those roles have substantially reversed.  Slowly, state laws are being revised to accommodate this change.  In Maryland, for example, the law changed on January 1, 2020 to eliminate the “for cause” provision of termination for suppliers who manufacture fewer than 20,000 barrels per year and the termination notice was shortened from 180 days to 45.  However, the manufacturer still has to give the terminated distributor fair market value of the franchise.

Territory

  Depending on the size, experience, and reach of the distributor, there may be an opportunity to creatively carve out different territories. Territories are most commonly limited to certain states. However, a supplier may be able to limit a smaller distributor to certain counties or even specific types of establishments (grocery stores, but not restaurants, for example). One of the clearest breaches of the distribution agreement, that may constitute good cause for termination, is for a distributor to make sales outside of its contracted territory. 

Brands

  Generally, when a distributor is hired to carry a brewery’s brand, it has the right to all of the products in that brand. But exactly what constitutes a  ‘brand” is unclear both in the statutory language of most state franchise laws and in many distribution agreements. 

In Maryland’s beer franchise law, for example, “brand” is not explicitly defined, but the law appears to favor the distributor in terms of brand scope. Specifically, section 105 of Maryland ‘s Beer Franchise Fair Dealing Act prohibits a brewery from entering into a beer franchise agreement with more than one distributor for “its brand or brands of beer” in a given territory. One might argue that the language “or brands” means that the first distributor has the right to all brands of the manufacturer in a given territory.

In fact, that very’ issue was litigated in the 1985 case of Erwin and Shafer, Inc. v. Pabst Brewing Co., Inc. and Judge Couch, writing for the panel of The Court of Appeal of Maryland, disagreed. The court held that if a brewery retained a distributor to handle one or more of its brands within a territory, it could not then contract with a second distributor within the territory for those same brands. It could, however, contract with a second distributor to carry a different set of brands.

  How far the court would take its interpretation of what is a “brand” is unclear, however. In the Pabst case, the first distributor was given the right to distribute Pabst brand beers, but Pabst later merged with Olympia Brewing Company and gave the second distributor the right to sell its newly acquired Hamm’s brand beers. Whether the court would have allowed the brewery to contract with one distributor for Pabst and another for Pabst Extra Light it did not say.

Exclusivity

  Even if rights under a distribution agreement cannot be divided by brand (as in the case of the beer franchise law in Maryland), some states may nevertheless allow a supplier to contract with more than one distributor within a territory. If permitted in their state, a brewery should ideally enter into all of its distribution agreements for a given territory simultaneously, providing notice to each distributor. At a minimum, the brewery should ensure that the first agreement entered into is explicitly designated as non-exclusive. Otherwise, the distributor may view the agreement as giving it exclusive rights to the territory and could sue the brewery for diminishing the distributor’s business if it were to engage a second distributor in that territory.

Final Thoughts

  Whether a brewery is in a franchise state or not, it is critical that it review and negotiate its distribution agreements carefully, with the assistance of an experienced attorney. It is also important to remember that the supplier’s diligence does not end when the agreement is signed. No matter how well the terms of the distribution agreement are negotiated and drafted, they are effectively useless if the supplier cannot back up its claims for good cause.

Accordingly, thorough documentation is essential. If a distributor is not meeting sales goals, mishandling product, or failing to provide adequate reports, they must be given written notice of those deficiencies each time they occur.

  There are great distributors out there who become essential partners in a brewery’s business. But, sometimes those relationships can sour and signing an agreement without anticipating complications down the line can make it virtually impossible to sever those ties. A little forethought and planning and a lot of diligence will go a long way toward a successful termination of a bad relationship.

  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.

YIKES! $2,600,000 Fine Against a Beer Wholesaler

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By: Dan Minutillo, Esq., Minutillo Law

Judge pronouncing sentence to man

In March 2019, the Massachusetts Supreme Judicial Court (the Court) affirmed a $2.6 million dollar fine against Craft Brewers Guild (CBG), a wholesaler. The reason, alleged violation of anti-price discrimination statutes and other commercial bribery regulations.

Allegations

  CBG allegedly paid companies money as a rebate in exchange for an agreement to sell CBG product at bars and restaurants. To hide the payments, these companies allegedly billed CBG for services like marketing support and promotional services that never happened.

  The Court held that CBG violated commercial bribery regulations  and participated in a commercial bribery scheme to encourage retailers to supply CBG distributed products. The Court held that this type of commercial bribery falls with the purpose of the Massachusetts Liquor Control Act. CBG’s conduct was allegedly illegal because the regulations prohibit companies like CBG from providing money to induce the purchase of certain alcoholic beverages. When money is given to a company to persuade that company to purchase a product, at that point there is a possible violation of these regulations.

  In the present case CBG allegedly did not offer these rebates to all retailers, and rebate amounts differed among the retailers involved so it is held responsible for violating the anti-price discrimination statutes and allegedluy also the commercial bribery regulations.

  A bribe to induce a company to do something in violation of law or anti-discrimination policies is illegal no matter what form the bribe takes or how the paper trail is structured. Rebates, refunds and other incentives to illegally induce a company to sell its products could be construed as a bribe if there is no logical and legal basis for the transfer of money. A bribe is a bribe no matter what form it appears.

US antitrust laws regulate the relationship of companies involved in a supply chain at different levels. There cannot be an arrangement by these companies to reduce competition. Courts will lift the veil behind the name of written documentation (how an agreement is titled), or even behind the words used in documents to determine whether an agreement to pay money is actually a bribe.

  The courts look to substance (the real relationship between the parties and of their conduct) over form (the words in a document). This principle holds true in many transactions when documents are drafted to embody the terms of the transaction. During litigation, substance and conduct will usually trump form (a cleaverly written document disguising a bribe or anti-competitive conduct as something else).

  Massachusetts’ commercial bribery regulations are valid, banning discounts, rebates and other inducements to buy alcohol from only one particular vendor. These regulations help to prevent price discrimination and an even, fair, competitive playing field for all craft-brewing companies trying to sell product based on quality and market price as opposed to “buying” their way to higher sales using illegal practices.

  15 U.S. Code § 13 (15 USC 13), deals with pricing and selection of customers in the supply of products. In accordance with this Code section, It is unlawful for any person engaged in sales or distribution of products either directly or indirectly, to discriminate in price between different purchasers of commodities of the same type of grade and quality of that product if the  products  are sold for use, consumption, or resale within the US if the effect of such discrimination may be substantially to lessen competition.

This Code Section Also Indicates:

   “PAYMENT OR ACCEPTANCE OF COMMISSION, BROKERAGE, OR OTHER COMPENSATION  It shall be unlawful for any person engaged in commerce, in the course of such commerce, to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods, wares, or merchandise, either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf, or is subject to the direct or indirect control, of any party to such transaction other than the person by whom such compensation is so granted or paid.”

  This rule does not apply if there are differences in the cost of manufacture, sale, or delivery relating to one purchaser and not to another. Also the rule does not prohibit price changes from time to time where a price change is in response to changing market conditions of the goods concerned, such as actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales due to the discontinuance of sales of the goods concerned. The US Federal Trade Commission has the power to stop any kind of unfair business practices including but not limited to exclusionary exclusive dealing contracts.

  Anti-bribery regulations are made, published and implemented all over the world. They are becoming more obvious in China, Ireland, and Saudi Arabia. Enforcement in other countries is somewhat irregular. Enforcement in the US is aggressive when the facts warrent investigatioin and punishment.

  The Massachuetts Supreme Judicial Court case discussed in this article will be followed closely by other jurisdictions in the US. This type of kick-back may be viewed as a form of bribery in other jurisdictions with large fines to follow. Be aware.

For more information contact…Dan Minutillo or www.minutillolaw.com

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

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By: Eric 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.

Crafting Marijuana Policies? Managing Employees in the Wake of Legalized Marijuana

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By: Amy Lessa and Nicole Stenoish, Attorneys At Law, Fisher Phillips

Marijuana legalization is on the rise and quickly expanding to all corners of the United States. Nearly 2/3 of the states have legalized marijuana for either recreational or medicinal use.  Currently, 11 states and the District of Columbia allow recreational marijuana, and an additional 22 states allow medical marijuana. These numbers are expected to grow over the next few years as the societal and political perspectives on cannabis continue to shift in favor of legalization.

Despite this shift, marijuana still remains an illegal Schedule I drug under the federal Controlled Substances Act – in direct contrast with legalized marijuana at the state level.  Although federal law is superior to state law, businesses must comply with both – even if federal and state laws conflict with one another. The chronic dispute between state and federal marijuana laws has left many employers confused about how to handle marijuana use in the workplace.  We’re here to clear the smoke.

Legalized Marijuana – What Can-a-Business Do?

Marijuana laws are constantly evolving and continue to be challenged in courts across the country. This makes it difficult to keep up with the requirements and limitations of legalized marijuana under both state and federal law.

Many employers are now questioning whether their workplace marijuana policies and practices should be revised.  Before deciding what policy is best for your company, it is important to understand the law in your state.  A company’s policies should also reflect the specific needs and challenges of the business and workforce.  For example, many craft brewery owners report they can no longer test for cannabis because most of their applicants cannot pass the drug test at the pre-employment stage. That could leave a brewery without a workforce.  As a result, Company’s should decide whether it makes sense to continue testing for cannabis in their pre-employment drug screens.  Other issues relevant to this determination are whether your employees operate heavy machinery or work in safety sensitive positions, and are you having difficulty recruiting qualified candidates for your company?

There are several key issues the keep in mind when determining the best marijuana policies and practices for your workforce:

  1. Maintain a Drug-Free Workplace

Employers are entitled to maintain specific policies related to marijuana use in the workplace, including drug-free workplace and zero-tolerance policies.  Because marijuana remains illegal under federal law, employers can strictly prohibit marijuana at work.  Employees can be disciplined, and even terminated, for coming to work under the influence, possessing marijuana on company premises, or using marijuana while at work – even in states where marijuana is legal.  In most states, companies also have the right to test employees for drug use, and can discipline or terminate employees for violation of the drug-free workplace policy. Before implementing a zero-tolerance policy, make sure your state does not specifically protect medical marijuana users or prevent employers from disciplining workers for legal off-duty conduct. Otherwise, drug-free workplace policies are essential to help protect your business and manage employees in the wake of legalized marijuana.

  1. Review Drug Testing Policies

Employers can typically require employee drug testing throughout employment. The different types of testing including pre-employment drug testing, random drug testing, reasonable suspicion drug testing, and post-accident drug testing depending on state laws.  Employers with mandatory drug testing policies need to ensure they follow specific state laws restricting disciplinary action based on positive test results.  Additionally, employers are prohibited from administering drug tests as a form of discipline or for retaliatory purposes. There are several other issues to consider when reviewing your company’s drug testing policies.

First, the science used to test for marijuana has been slow to catch up with increased legalization. While there are testing methodologies currently in development, there is no test to determine whether an individual is presently under the influence of marijuana. Marijuana can remain in one’s system for weeks, and an employee could test positive for marijuana even if it was consumed outside of work and had no impact on the employee’s job performance. This creates potential issues for employers when drug testing employees who have medical marijuana prescriptions, or in states where recreational marijuana is allowed.

Also, many states have laws that provide protections for engaging in legal off-duty conduct.  These laws prohibit employers from considering an employee’s lawful conduct outside of work for purposes of making employment decisions.  For example, in states where recreational marijuana is legal, the consumption of marijuana outside of work hours could be considered lawful off-duty conduct, and an employer could be prohibited from using an employee’s positive drug test for purposes of making an adverse employment decision. Although this issue remains largely untested by the courts, and employers are currently allowed to make certain employment decisions based on drug test results, we anticipate that employee drug test results will be challenged by lawful off-duty conduct laws in the years to come.

Furthermore, employers in a limited number of states may need to accommodate medical marijuana usage by employees. In those circumstances, employers are prohibited from making employment decisions based on an employee’s positive test result, depending on the nature of the employee’s particular position and job duties.

Pre-employment Drug Testing

Companies are generally allowed to require drug testing as a condition of employment, and can deny employment based on positive test results.  However, some states limit pre-employment drug testing for medical marijuana users, and other states have anti-discrimination laws for pre-employment drug test results.

Interestingly, an increasing number of companies, including those in the craft beverage industries, are eliminating pre-employment drug testing because of difficulties it can pose in finding employees who can pass the test.  As a result, some employers are softening their drug testing policies or removing marijuana from the list of drugs tested for. However, softening the stance on pre-employment marijuana drug testing may not be a viable option for companies with employees working in safety-sensitive positions, or companies with insurance policies or government contracts that specifically require employee drug testing.

Drug Testing During Employment

Employers may also consider random drug testing, reasonable suspicion drug testing, and post-accident drug testing of employees. Random drug testing is only allowed in some states and often limited to employees in specific, narrowly defined classifications – such as employees working in safety sensitive positions.  Almost all states allow employers to drug test employees if there is reasonable suspicion that an employee is impaired on the job.  Reasonable suspicion must be more than a hunch, and employers should be able to articulate the employee’s specific conduct or behaviors that led the employer to suspect impairment on the job.  Employers can also conduct post-accident drug testing following a workplace injury or accident, but only for employees whose impairment or drug use could have contributed to the incident.

Overall, companies should review state-specific laws and consider the specific needs and challenges of their workforce when reviewing or revising drug testing policies and practices.  And you should always put drug testing policies in writing, distribute to your employees, and enforce the policies uniformly.

  1. Accommodation of Medical Marijuana Varies by State

Generally, employers do not need to accommodate medical marijuana in the workplace. However, this could soon change. Courts in several states have recently indicated that accommodating an employee’s medical marijuana use may be appropriate in certain situations.  Employers already must engage their employees in the interactive process to explore reasonable accommodations for known disabilities of an employee. In some circumstances, this could mean accommodating medical marijuana use if it is determined to be a reasonable accommodation that does not create an undue hardship on the Company. Before doing so, however, employers should consult with qualified legal counsel.

Employers also need to be careful when disciplining medical marijuana users. Several states have specific laws protecting medical cannabis patients from employment discrimination. Medical marijuana patients in Massachusetts, Rhode Island, Connecticut and Pennsylvania, for example, have already won lawsuits against companies that rescinded job offers or fired workers because of positive tests for cannabis. Medical marijuana laws are continuing to evolve, and protections for medical marijuana users are likely to increase.

Conclusion – Best Practices

An increasing number of states have legalized medical or recreational marijuana, yet the federal government continues to classify marijuana as an illegal drug. This conflict between state and federal law is not likely to be resolved anytime soon. In the meantime, employers should follow several best practices to manage employees where marijuana has been legalized.

Companies should carefully review these issues and create policies that balance legal compliance with the specific needs of the business. Until the conflict between state and federal law is resolved, this includes:

  • Stay up to date with evolving marijuana laws.
  • Determine specific requirements for drug testing and medical marijuana in each state in which your company has employees.
  • Develop state-compliant workplace drug policies that are appropriate for your business.
  • Confirm your drug testing policies in writing, distribute to employees, and apply the policies uniformly.
  • Consider eliminating strict drug testing practices in favor of reasonable suspicion drug testing.
  • Determine if you will test applicants for marijuana use or not.
  • Contact legal counsel if any specific concerns or incidents arise within your workforce.

If your company follows these simple guidelines for managing employees in the wake of legalized marijuana, you will be in a good position to adapt while protecting your business as marijuana legalization continues to evolve in the coming years.

For questions on specific state laws, consult with an attorney.

  Amy Lessa and Nicole Stenoish are attorneys in the San Diego office of Fisher Phillips.  Amy and Nicole counsel and defend employers, including breweries in employment law matters. They can be reached at alessa@fisherphillips.com and nstenoish@fisherphillips.com