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Legal Tastings — A Wine Law Blog

Legal and Business Development in the Wine Industry

Who Decides if a Wine is Acceptable? Courts or People?

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

The recent filing of a lawsuit by Chateau Potelle Holdings, LLC against Denis Malbec, Medlock Ames Vintners and others shows us that, often, a court will have to determine if a wine is acceptable and what parties actually agreed on in its production.   Several months ago, Chateau Potelle filed a Complaint alleging that it hired Denis Malbec to make a high quality new wine, named after the owner, Jean-Noel Fourmeaux.  Chateau Potelle stated that, in 2008, it wanted a high level cult wine to sell in the $150 to $200 range, and that Mr. Malbec promised to hit that mark.

Instead, according to papers filed by Chateau Potelle, Mr. Malbec allegedly took a sabbatical to Burma and left the wine developing on its own, leading to high levels of volatile acidity – levels that Chateau Potelle states were unacceptable.  For his part, Mr. Malbec claims he was not paid the agreed price.

What was missing in this breach of contract and negligence case?  A contract.  There was no written contract setting out what the parties expected in the wine making and what Mr. Malbec was expecting for terms of payment.  Under the law, you can make a contract without putting it in writing, except for a few very, highly limited, areas – primarily the sale of real estate.  Contracts happen all the time without papers being signed.  For example, when you go into a coffee shop and order a coffee, you have made a contract that you will get an acceptable cup of coffee and you will pay for it.  You did not need to write it down and seldom does the purchase of coffee ever lead to a claim of contract breach.

Still, certain situations call out for a written contract.  Here, for example, the Napa Superior Court will hear testimony on what each of the parties expected in the transaction.  Then, the Court, not the parties, will finally determine exactly what those parties expected, and whether one or both parties fell short of those expectations.

The Court may even have to determine more.  The Court may also need to decide whether or not Chateau Potelle is correct in its contention that Mr. Malbec “fail(ed) to produce an elite wine” and that this wine could have made Chateau Potelle profits of over $1.6 million.

Courts are set up to do lots of fact finding.   In this lawsuit, the Court may even listen to experts opine on whether or not the wine produced is elite status.  Still, much controversy could have been saved if there was a written agreement setting out what each of the parties expected would happen.   A contract setting out a payment schedule and details of production would have solved many of these issues for the Court – without the time consuming and potentially incorrect testimony of witnesses to the Court.  Without the Court having to put together testimony that may be contradictory, to decide what the parties actually contracted to provide.

To Chateau Potelle, it could be that $1.6 million hangs on what the Court decides the parties had committed to do.

Redwood Valley Dry for Vineyards

Posted in Uncategorized

In the prior post, we discussed the two major types of water rights and how they co-exist in wine country in California.   But, how is that applicable to Redwood Valley?  As you may have read last month, the Redwood Valley Water District cut off ALL agricultural uses of the water in the area.

Redwood Valley is in the northeast corner of Mendocino County.   It has 2,200 acres of vineyards and average annual wine grape production revenue is $16 million.  It is estimated that total revenues, after turning grapes into wine, is around $60 million.  However, when the municipal water supply is reduced to bare minimum, the growers have to rely on ponds and wells, even tho a large number of acres depend on irrigation and all acres depend on water for frost protection.

When we discussed riparian rights (those existing from early on) and appropriative rights (those taken later), we did not discuss the fact that some things don’t fit nicely into one of the two categories.  It seems that the Redwood Valley is the only California county water district that serves both domestic and agriculture.  The water district normally alllows about 66% of the water for agricultural use and the rest for domestic use.  Due to the drought and the lack of water supplies in Lake Pillsbury, they have to make an allocation – and it is to domestic use – restricted to 50 gallons per person, per day.

What about the riperian uses we discussed?  Sometimes, neither riperian nor appropriative rights apply.  The Redwood Valley water supply is mainly Lake Pillsbury, the primary source of water for Lake Mendocino.   Lake Mendocino was created by the Army Corp of Engineers in 1959 as a flood control project for the Russian River.  How much goes where is totally interconnected.  Sonoma County paid to create Lake Mendocino and has rights set up in the 1950s.  Redwood Valley has to apply to get more water from Lake Pillsbury and send less to Lake Sonoma and, so far, there is not enough to go around.

In the meantime, farmers have to deal with frost issues.  And drip irrigation is ever more complicated.

Paso’s Dry Vineyards – What Exactly is the Law?

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

Paso Robles has been a water battleground.  Following last year’s moratorium by Paso Robles on allowing any new vineyards to use existing water supplies, the fight has only become more intense, moving into the courts and into the public awareness.   Paso Robles may be at the leading edge of what is an increasing fight for existing – and diminishing – water.

Before last summer, existing wells could be pumped as much as the owner wanted.   That all changed when wells started to go dry and many vineyard owners trucked in water or waited on drillers to become available to drill deeper wells.

So, who owns the increasingly scarce water supply?   Properties have water rights – but the holders of the rights do not own the water.   Instead, they can merely use it.  Much of that use requires that property owners have a permit or license from the State Water Resources Control Board.  That Board is charged with insuring that water resources are protected and not wasted.

California employs two types of rights.   Those living in the east have a system of “riparian” water rights  Those rights allow the property owner to use the historic share of water flowing through the property, regardless of how many property ownership changes there may have been.   Most states do not require people to have a permit for this type of use.

California recognizes this system, but also uses an “appropriative” system.  These systems originated with the gold miners who posted their claims to water rights.   They could divert water because they found it first!

Both types of rights were recognized when California first became a state in the 1850s.  Naturally, these rights clashed.   And led to a Constitutional amendment requiring that the use of water be “reasonable and beneficial”.   In 1914, the Water Board became the first “referee” of water rights.

Under the system that developed, during times when water is short, the most recent person to assert a right becomes the first to be required to discontinue its use.   Timing of uses are normally determined by date of the permit.   When the right is riparian and historical, those water rights get elevated – but all riparian users must reduce their usage equally.

There are many types of water disputes in a system that recognizes different kinds of rights.  Establishing riparian rights can be hard when you have to depend on history that may not be well documented.   Also, the timing of rights and proving those rights can be a complex challenge.

But, there is more than that.  The Water Board has to consider multiple types of water use.   Should a farmer’s agricultural use trump the need to have adequate water flow to rivers?  This becomes critical in a state that has had to ban some of the commercial fishing of salmon due to dwindling water.  In fact, at least two of the seasonal salmon runs is predicted to become extinct due to water loss.

We will be considering the impact of the laws and the uses battle in future blogs.  Your comments are welcome!

Private Placements OTOH – 4 Traps

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

We continue to get questions and comments on the private placement technique of raising funds for your vineyard or winery.   Yes, it’s a much more symplified way to get funding for new projects than it used to be.  And, you don’t have the collateral and loan payment issues you have when you get funding from more traditional lending.

But, it is not without it’s complications.

We hear from “angels” (those investors with capital who are assumed by the SEC to be sophisticated enough that extensive public disclosures are not needed) that there are at least four major ways to complicate your private placement and cause them to shy away.

1.  Improper valuation of the company.   Because these investments are much more informal that public placements, sometimes the valuation of the company – used to determine how much money gets you how much equity – can either be missing or faulty.  This is especially true when the new private placement went first to family members and then to more sophisticated investors.   The deals the family members already have must be honored when the sophisticated investor reviews the offering.

2.  Structure of the company.  Situations arise when there are multiple companies and multiple personnel.  Confusion can reign if the private placement blurs lines and complicates the view of the investor in exactly what the investment is.  Is it all related companies?  Does the key employee work for the company that is the subject of the investment?  These complications scare off the sophisticated investor.

3.  Boards of Directors.  What rights does the investor have in making key decisions of the company?   Investors asked to fund large parts of the private placement often want to feel like they have a true role in how the company (and their investments) are managed.

4.  Liquidation and Stock Purchase.  What happens when an investor wants out or when the company is on the rocks?   Does the investor have any rights to participate in either event or make decisions about these events?   What if the investor has contacts who may want to purchase shares if they become available?  Most savvy investors want these investments to be liquid and need to understand how to trade or liquidate their interests.

As with most silver clouds, the private placement has its dark linings.   You need to visit these issues up front when you structure exactly what you plan for your offering.

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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