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Legal Tastings — A Wine Law Blog

Legal and Business Development in the Wine Industry

New SEC Proposals May Make Private Fund Raising Easier for Small Wineries

Posted in The Business of Wine, Uncategorized, Weekend Edition -- Wine, wine

There is always a lot of interest in our posts regarding ways smaller businesses can use reduced regulatory requirements to raise new money.  We have seen clients raise funds needed to enlarge tasting rooms, hire marketing staff, obtain new grape sources and vineyards and open new market possibilities.  Yet more regulatory hurdles may be removed in recent proposals from the regulators. 

The easing of regulations helps create more flexibility in getting funds to new businesses.  In the past, regulations and red tape scared off small companies  from offering a stock interest in a business in exchange for capital to expand the business.  The main alternative for funding was to avoid the red tape of a formal stock offering to investors.  It was far easier and cheaper to get traditional lending from financial institutions than it was to get investor funds for stock in the company.  After all, if you get a loan, you did not have to deal with Securities and Exchange Commission regulations on new offerings.

The Jumpstart Our Business Startups Act of 2012 (JOBS) was designed to make it much easier to get private capital.  The Act required revisions to a number of SEC regulations.   Earlier, we had discussed changes made in Regulation D by the SEC.  Now, changes are proposed to the lesser used  SEC Regulation A.   JOBS required that the SEC develop rules for lesser used Regulation A, expanding the amount of money you can raise from $5 million to $50 million.

These rules have been subject to public comment.  Portions of the proposed rules are likely to make it easier and cheaper for companies to use private placement memorandum to raise funds.  Fund raisers would still be required to file offering statements with the SEC but the financial information required will be simplier and cheaper to prepare.  Importantly, the draft rules would allow small companies the opportunity to “test the waters” with draft offering statements submitted to the SEC, and not open for public review.  These materials can be run by the potential investors before filing with the SEC.  Also, there would be reduced, and electronic, filing of materials with the SEC.

The rules are a bit controversial in that they limit the roles of state regulatory agencies.  The SEC is reviewing a number of comments.  As always, we will keep up with developments.  You should always consult with counsel regarding the various ways to enhance financing.

What’s in a Name? Would Napa By Any Other Name be the Same?

Posted in The Business of Wine, Uncategorized, Weekend Edition -- Wine

Juliet argued to Romeo that his name was his enemy.   She contended that the names of things do not matter and that a rose by any other name would smell as sweet.  In the world of wine, this is far from the truth.

I was able to spend some time with Rex Stults, Government Relations Director of the Napa Valley Vintners.  Rex spends the majority of his time working to protect the name and image of Napa Valley wines around the world.  Last month, the NVV achieved certification mark status for Napa in Taiwan and Australia.   This “win” is but a small fight in a long war.

In 2000, the NVV sponsored California legislation requiring that any brand using the name “Napa” or names of appellations in Napa to at least be 75% from Napa.  Bronco Wine Company, the company producing Napa Ridge and Rutherford Vintners, challenged that statute and it was finally resolved in 2005 when the State Supreme Court ultimately upheld the Napa Name Law and the United States Supreme Court declined to review the appeal.   That same year, Napa joined with representatives from Champagne, Porto, Jerez, Washington State and others to sign a Joint Declaration to Protect Wine Place and Origin.  The Declaration states the intent to protect the place names.  The major wine regions of the world, like Chablis, Burgundy, Rioja and Sonoma have since joined in.

In 2007, Napa became the first region outside of Europe to be granted Geographical Indication (GI) status by the European Union.  And in 2012, China granted GI status in what was a huge accomplishment.  Exports from Napa to China have doubled in the last three years, and many Chinese products were using the Napa name.

Getting more countries to extend GI status is as difficult as getting those countries to enforce that status.  Still, Rex relates that the fight has expanded into the world of the internet.  Napa based names are exploding, including new sites in countries far removed from Napa.  The NVV has petitioned the Internet Corporation for Assigned Names and Numbers (ICANN) to ensure safeguards against abuse of the Napa name in the procuring of domain names.  Rex monitors the internet world for examples of abuse of the name.

If you want to be known for quality products, you have to protect the consumers from inferior imitations.   Rex and the NVV have a huge job that seems to be non-stop.

 

Time Again to Discuss Pa. State Store Privatization?

Posted in The Business of Wine, Weekend Edition -- Wine

MV5BMTU0MzQyNTExMV5BMl5BanBnXkFtZTgwMjA0Njk1MDE@__V1_SX640_SY720_  We often are asked when will Pennsylvania privatize the state stores.  Beginning with Governor Corbett taking office in 2011, proposals for privatization have been floated time and again.  In March, 2013, the Pennsylvania House finally passed a privatization bill only to see it die in the state senate – and not be revived the rest of the year.

Lt. Gov. Jim Cawley, the leader in the legislative effort, stated Wednesday that there “has been some progress (toward a new bill), but we are clearly far from a consensus at this point.”  Not exactly a ringing endorsement of a quick privatization, but a hopeful sign for supporters of privatization. 

The current proposal endorsed by the administration seems to differ from last year.  Last year’s proposal would close the state stores and allow beer distributors to sell six packs of beer (currently they must sell beer by the case).  The current discussion model is for the state stores to phase out over time.  However, there is a major change in last year’s proposals.  The wholesale side of the state operations could be privatized as well, ending the monopoly of one of the biggest wine and beer wholesalers in the country. 

There is also support for some collateral efforts to ease the state out of the market, including a measure to allow direct shipment of wine to residents.   Remember, though, that this is an election year for the Governor’s office.   If something seems to garner the required consensus, we will let you know.

IS THE GOVERNMENT DRUNK WITH POWER? WHOSE RIGHTS ARE THEY ANYWAY?

Posted in Employment Law, The Business of Wine

The practical and legal elements of the wine industry are frequently unpredictable and illogical.  We can blame this on factors other than business or commercial ones.  These results occur when we combine alcohol, agriculture, and social mores.  In today’s marketplace, the agricultural considerations include a system of farm workers performing work others choose not to perform.

HOW IS THIS CONTROLLED?

Previously, we explained that the federal National Labor Relations Act (NLRA), which deals with union organizing and restrictions on employer actions, excludes agricultural workers.  In 1975, California enacted the Agricultural Labor Relations Act (ALRA), with many provisions similar to the NLRA.  The ALRA approximates the NLRA where applicable, and may exercise its own authority where there is a compelling reason to do so. This is largely due to the unique work force composition and the volatile organizing efforts by the unions involved. 

To further strengthen the union’s hand, the ALRA is on course to shorten the time for certain union organizing procedures, eliminating elections altogether, including the establishment of the process for organizing with ‘card check’ efforts.  As of January 1, 2012, the legislature has even codified  the authority of the ALRB to certify a union despite vote results. 

The first case that sought to use this technique was dismissed essentially because of witness credibility issues and the failure of the ALRB General Counsel and the union to support its allegations.  It was not dismissed because the ALRB rejected the authority to take this action and disregard an election. 

To start, challenging the union and the election in the Coralitos Farms case was a very costly process for the employer.  This case and its underlying statutes illustrate the lessons to be learned from these ALRB actions.  No California employer  in the wine industry is immune to the ALRB procedures. These employment practices and old guard HR tactics are traps for the unwary. 

CHALLENGING THE UNION AND THE ALRB

On a personal note, I was retained by a prominent winery to challenge another outrageous ALRA provision via litigation efforts up to the California Supreme Court. We ultimately decided not to undertake the challenge due to the cost to the employer. Instead, we took a more considered option. 

In addition, the employer in my case would have achieved a level of unwanted fame.  First, the other employers who sat on the sideline, watching and waiting during this agonizing process, could gain a significant competitive advantage  by taking no action and waiting for the results of our case without taking any risk. Second, this employer finally realized that the employees and the public would vilify it because of the protracted fight.  The company move toward resolution of this matter was wise, and the baton of union battles was handed off elsewhere.

Labor peace was ultimately achieved, after two years of collective bargaining.  But that is a whole other subject for another time. 

WHAT SHOULD YOU DO?

The lesson here in both cases is that a respectful work place requires a major effort by employers.  Employers need to provide equal and lawful treatment of employees.  Overall, threats and promises to employees are counterproductive. Most importantly, the front line of defense is proper manager training that emphasizes the lessons described and union avoidance.  Train your vines, trellises and managers.  “Prune to the vine!”

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WHAT CAN WE LEARN FROM RUDY KURNIAWAN?

Posted in The Business of Wine, Uncategorized, Weekend Edition -- Food, Weekend Edition -- Wine

Rudy Kurniawan is a man of firsts. On Wednesday, December 18, 2013, he became the first person ever tried and convicted of selling fake wines in the U.S.  He had been arrested in March of the previous year.  Here are a few things found at the Kurniawan residence.   article-2526909-1A34BA5700000578-649_634x466

Now, we all save labels from our favorite wines, but unpasted, new looking labels going back many years?  And instructions on fabricating labels for 1962 Domaine Ponsot Clos de la Roche?   That and other exhibits lead to a jury verdict of guilty in less than two hours.  It is reported by Wine Spectator that his lawyer stated “He comes up with some wines that were truly rare.  Suddenly people want to be with him.  When he couldn’t find more, he made it.”   Seems as though his lawyer does not plan on an appeal.

Sadly, many people may have bought the fabricated wines.  In 2006, he had set a record for the largest auction total for a single consignor at $24.7 million.  It is not known when he first began his counterfeiting, and we can’t calculate how much people lost due to his acts.

Some counterfeits are obvious and buyers who pay attention can tell.  Take this bottle of Chatelet Margaux.

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Who confuses Chatelet with Chateau and since when is wine from Luxembourg a “Product  of France.”  But were they all so obvious!   For the more savvy counterfeiters, it is often difficult to tell by view.   How are the wineries reacting?  Many wineries are experimenting with laser etching and holographic seals to be placed on wines.  They acknowledge that sophisticated crooks can duplicate those markings as well.  

The key is to understand both the dealer and the bottle history.  Some sophisticated dealers have been duped, so even that can lead to trouble.  Education on what you are buying is essential.  For example, some of Mr. Kurniawan’s wines were in formats not actually produced in the years stated on the label.  Also, if you expect to spend significant money, ask for the backup showing the source of the wine.  Study wines from that producer.  Look for a product chain with the distributor.  AND, get assurances from your seller that they will stand behind the accuracy of the bottle.

Labor and Employment Law in the Vineyards

Posted in Employment Law, The Business of Wine

Over the last 25 years a limited number of labor and employment attorneys have turned their attention and representation  to employers in the vineyards and on the bottling lines of California Wine Makers.  The nature and type of work done in the combined vineyard and bottling work creates a complex interaction with at least two agencies with different laws and jurisdictional power.  Vineyard workers are covered by the State Of California Agricultural Labor Relations Board (ALRB), and the bottling workers are covered by the National Labor Relations Board (NLRB).  Other agencies regulating wages and hours of work and many other employer employee relations will be discussed in following publications.  For now, the ALRB and the NLRB are enough for a preliminary commentary. The counsel of this firm have represented California Wine Makers in all of these competing matters and we welcome our readers.  We seek to unravel some of the mysteries. 

Much of the effort expended in the unions gaining representation of the vineyard workers follows political efforts by the two labor organizations with any sort of ability to organize the workers in the vineyards, while other more traditional  labor organizations may be involved in organizing bottling workers.  The vineyard workers present a unique sort of hybrid work force, coming under the ALRB, with its rules and regulations allowing for maximum exposure of the workers to the union’s organizing efforts.  The ALRB process reasons that the nature of the work, the extent of the disperse and seasonal work force, justifies almost unlimited access to the Vineyard properties for organizing, and protects the rights of union access to the employees over the property rights of the Vineyard owners.  Attempts at interference with these efforts by employers generally put Vineyard owners under the oppressive and onerous ALRB processes and litigation efforts.  The unions will often bring other agencies of the State into play to further their efforts, if thwarted in any way by Vineyard employers. 

The bottling workers fall into the Federal jurisdiction of the NLRB, which provides for union organizing with some different rules, though the ALRB claims to derive much of its structure and process from the NLRB.  Most employers have a sort of understanding of the NLRB processes, though with the newly appointed and approved NLRB Board in Washington, DC, those rules and decisions are heading quickly to the favor of unions and organizing. 

With this thumbnail sketch of the complex and double dipped process facing many of the California Wine Makers, it is no surprise that confusion exists over just what should be done when the union comes to the door or the gates, and what law applies, and who is in charge anyway.  On top of these concerns, employment law dealing with the usual hiring, discipline,  and firing decisions, with or  without union involvement, are impacted by the various decisions of the State and Federal courts in the employment arena.  Many employers suffer  from the paralysis brought on by decisions reported in the media and broadcast with various pundits on the air and over the net about the wild and overblown judgments in the courts, following employer actions towards their employees.  These rules and issues are altogether different from the ALRB and NLRB dilemmas, and require their own chapters. This too will follow.

In these pages to come, we plan to take this network of laws, rules, regulations, political impacts and strategic efforts apart in a piece by piece effort to bring some sense to the vineyards.  We know that you would rather be discussing pressing matters like “prune to the vine,” and so would we.  But, for now, let’s get on with our background and strategic analysis.  Inquiries and problems you may face are welcome in our comment section.

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WHEN IS AN ABC ADVISORY JUST ADVICE?

Posted in The Business of Wine, Uncategorized, Weekend Edition -- Wine

Alcohol Beverage Control authorities frequently provide advisory opinions on what the law or regulations provide.   These opinions give the regulated community insight into what the ABC is considering and allows the community to make compliance decisions.

Witness the case with the California ABC when it issued an advisory regarding the sale of alcohol through grocery store self checkout counters.   California grocers had allowed people to buy wine through self checkouts by using a device that  locks out alcohol purchases.  If alcohol is scanned, a clerk must check the buyer’s ID and authorize the sale.  The California ABC issued an advisory stating that it believed this lock out system was improper.  The agency interpreted the statute to require that all alcohol had to be purchased through the normal checkout line.

The California Grocers Association challenged that advisory claiming that the lock out devices met the spirit, if not the letter, of the law.  Even though the ABC advisory was not the law and there was no fine outstanding for any of its members, the CGA wanted to make it clear that its position was correct.  It sued to both void the advisory and to declare that the self-checkout scheme passes statutory muster.

Last month, the Court of Appeal, Third District determined that the ABC advisory had violated the Administrative Procedure Act.  That Act requires that regulations must be accompanied with notice and a chance for public comment.  When the ABC issued the Advisory, it was a “regulation subject to the APA because it was directed to the general class of retail off-sale liquor licensees that employ checkout stands and because its interpretation … is not essentially rote, ministerial or repetitive.”   The Court declined to give ABC any administrative deference in its interpretation, because the Advisory went beyond what was permissible to do without public comment.

However, the Court continued and AGREED with the ABCs interpretation, determining that the alcohol beverage statutes did not allow persons to use self-service checkouts.  Providing a lock out was not sufficient to pass judical scrutiny.  In essence, the Grocers Association won the battle (got the advisory set aside), but lost the war on the interpretation of the statute as applied to self-checkouts.

What does this mean for the future of ABC Advisories in California?  A couple things.  It appears that general administrative advisories that do not interpret the law are fine.   If ABC goes is a step further and enlarges, explains or formalizes the law, the ABC must accept public comment if it intends to enforce its decisions.

That does not mean the advisories will all go away if they go too far.  In fact, an advisory can set out ABC’s position, and ABC can take action related to that advisory.  However, anyone faced with an ABC action can argue that a court need not defer to the ABC.  Instead, a court can interpret the law on its own and decide the issue without giving ABC deference if the advisory is more than “rote, ministerial or repetitive.”

WHAT DO BOUTIQUE WINERIES, CEQA AND SAN DIEGO HAVE IN COMMON?

Posted in The Business of Wine, Uncategorized, Weekend Edition -- Wine

The answer is the Fourth District Court of Appeal….

The County of San Diego, like many California counties and regions, saw merit in encouraging the development of a wine community.   Starting in 2006, the Board of Supervisors explored ways to encourage the growth of local grapes and the development of wine businesses.   The Board decided to adopt an expedited winery approval process allowing small boutique wineries “by right.”  By right zoning allows a use to be permitted without further action from the Board, cutting out significant costs.

Prior to modifying the winery ordinance, the Board conducted an environmental impact report (EIR) pursuant to the California Environmental Quality Act (CEQA).  An EIR was needed to consider the environmental impacts of any proposed amendments to encourage boutique wineries.  In fact, the County’s EIR did find that this revision to the ordinances had significant unmitigated environmental impacts.  But the Board found that there were “overriding considerations” for the project based on economic and permitting reasons and adopted the changes.

San Diego Citizenry Group was founded to challenge the decision of the Board.  The Group filed a petition to rescind the ordinance changes on grounds that the final environmental impact report (called a FEIR) did not sufficiently consider a number of factors, including traffic impacts, water supplies and permitting.  Although a number of studies had been performed and environmental issues raised and reviewed by the EIR, the SDCG challenged the Board’s determination that the benefits of streamlining the winery permitting process and the elimination of costly reviews of boutique wineries permits outweighed those environmental issues.

Several weeks ago, the new Small Winery classification (120,000 gallons or less per year) for “of right” permits withstood the scrutiny of the California Court of Appeal in an opinion authored by Judge Nares.  The Court focused on the fact that the Board can override an FEIR even if the environmental impacts are not fully addressed in that report.   The Court approved the Board’s determination that the economic impacts and the permit expediting considerations the Board cited could override the FEIR if the FEIR “adequately apprised” the decision makers of the impacts.   If the FEIR had not attempted to consider a number of environmental issues, presumably the result could have been different.

San Diego’s expedited permitting applies to boutique wineries using a minimum of 75 % San Diego County fruit, and a minimum of 25% of fruit from the premises.  Tasting rooms can be operated seven days a week and are restricted in the types of events that they can hold.  The judicial “green light” is going to lead to the creation of new small wineries in the county.

 

How Do the Top 10 Wine Producing States Stack Up?

Posted in The Business of Wine, Uncategorized, Weekend Edition -- Wine

 

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Clients at California based wineries are looking elsewhere for new wineries.   There seems to be a lot of interest, as demonstrated by Gallo’s recent purchase of Columbia and Covey Run in Washington State.  The Jackson Family bought several new wineries in Oregon this year.  Several wineries are looking eastward to get in on the growing wine industries in the east.  This chart shows the top 10 states for the number of wineries.

Jimmy Buffett’s Advice Applied To Making Excellent Wine in Pennsylvania

Posted in The Business of Wine, Weekend Edition -- Food, Weekend Edition -- Wine

I recently tested Jimmy Buffett’s claim about “changes in latitude, changes in attitude” where “nothing remains quite the same”. To do so, I sat down with Kevin Robinson, an accomplished winemaker with over 27 years of experience in California’s Napa Valley. He recently relocated to the award winning Karamoor Estate, in Fort Washington, Pennsylvania, owned by Nicholas and Athena Karabots. Karamoor Estate has 17 acres of world-class vinifera grapes and has just planted an additional 10 acres, bringing its total to 27 acres. A picture of Karamoor’s vineyards appear below.

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Karamoor produces chardonnay, merlot, cab franc, cabernet sauvignon and other wines. Having recently won a gold medal 2013 Finger Lakes International Wine Competition, Karamoor Estate is aiming high and is seriously focusing on its goal to be among the best wineries in the world.

Over tastings of Karamoor Estate wine, we discussed the similarities and differences between winemaking in California and Pennsylvania. Here is what I learned:WineryBarnPic1.jpg

1. “Winemaking is winemaking”. The same practices are employed on both coasts. These start with good grapes, properly ripened and timely harvested. Similar techniques are used in both locales to produce first rate wine.

2. Pennsylvania grapes ripen at a lower sugar level than do California grapes which generally contributes to a lower sugar content, about 21-22 brix, as compared to 25-26 brix. This, in turn, leads to a slightly lower alcohol content, resulting in a more balanced, elegant wine, closer to a true Bordeaux.

3. Pennsylvania is wetter than California which reduces the need to irrigate, but requires additional spraying.

4. Pennsylvania has warmer nights, such that grapes continue to grow in the warm night air, using the sugar made during the day.

5. Pennsylvania grapes grow all day, by “the moonlight” and until frost, resulting in Pennsylvania wineries “hedging” or “giving haircuts” to their vines late into the season, including into verasion (the grape ripening period). California wines, by contrast, are not hedged during this period.

6. California has skilled farm workers who can “bring in the harvest”, whereas it is more difficult to find experienced vineyard workers on the East Coast.

In short, Jimmy Buffett was partially – but not completely – right. When it comes to winemaking on either coast, “nothing quite remains the same”.