Suttons Bay Law

California boasts the largest wine industry of any state in the country. California’s past success and bright future with respect to its wine industry is primarily the result of two factors. First, the wine growers in California implemented sustainable wine growing practices that meet current needs without compromising the livelihood and needs of future generations. Second, approximately 60% of California’s wineries are family owned and operated and have implemented family business succession planning to protect ongoing viability of the business.

A prime example of a family owned winery that adhered to both of the aforementioned elements that has led to a successful transition of involvement and ownership of family members into a fourth generation is the E&J Gallo Winery which is celebrating its 75th anniversary.

The mistake many family business owners make, no matter what type of business, is not designing and implementing a business succession plan. The predictable consequences of the failure to plan are fights over control between surviving family members and working capital being devoured by having to pay higher estate taxes. While the older generation business owner is alive, the relationships and potential or present problems between the next generation of business ownership is rarely so serious that they cannot be improved and, in some instances, resolved entirely. The process of succession planning may be difficult but the risk associated with the alternative of taking no action to plan or doing nothing carries the greatest possibility of risk. Doing nothing may feel good in the short term, but no succession plan is always a terrible succession plan in the long run.

The lawyers at Wright Penning & Beamer are skilled and experienced in advising family business owners how to develop a succession plan that ensures a continuation of the business for future generations to grow and prosper as a “family business”.

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Wine industry impacts economy

Wine grapes are grown in 46 of California’s 58 counties. Its 10 leading wine regions are Amador, Carneros, Livermore, Lodi, Mendocino, Monterey, Paso Robles, Napa, Santa Barbara and Sonoma. From these regions, more than 43 different varieties and blends are grown and cost from $10 to more than $150 per bottle.

Today, however, wine consumers want to know not only where wine is grown, but how it’s grown.

Although winegrowing terms such as organic and biodynamic have drawn consumer curiosity, most grapes are grown sustainably. “Simply put,” said Karen Ross, President of the California Association of Winegrape Growers (CAWG), “sustainability means that we grow and make wine in a way that meets the needs of the present without compromising the livelihood and needs of future generations.”

In 2002, based on a code of 232 best practices, covering every aspect of winemaking and winegrowing from ground to glass, the Wine Institute and CAWG created a Sustainable Winegrowing Program. Since then, thousands of growers and vintners have adopted socially and environmentally responsible practices. For more information on sustainable winegrowing, log on to sustainablewinegrowing.org.

DID YOU KNOW?

California is the fourth largest wine producer in the world, making more than 90 percent of the wines in the U.S. The following are other facts supplied by the Wine Institute:

-In the U.S., two out of every three bottles enjoyed are California wines.

-The majority of California’s 2,700 wineries and 4,600 grape growers are family-owned and operated.

-Nationwide, California’s wine industry generates 875,000 jobs.

-Overall, California’s wine industry economic impact exceeds $125.3 billion.

-In the U.S. last year, California’s wine industry generated $19 billion in retail sales.

WHERE MICHIGAN STANDS

With 56 commercial wineries (up from 17 in 13 years) producing more than 375,000 cases of wine annually, Michigan has successfully linked two growing industries: agriculture and tourism, under the moniker of agritourism.

Also, according to Michigan Wines official Web site, Michigan’s wine industry accounts for more than 5,000 jobs across the state for a payroll of more than $190 million and contributes $800 million to the state’s economy annually.

More than 1,500 acres are devoted to wine grapes, ranking Michigan eighth in the U.S. In the state, vineyard acreage has increased 25 percent in the last 10 years. Yet, that’s not nearly enough to satisfy growing demand, especially for riesling.

Help the economy – drink more Michigan and California wine!

Eleanor & Ray Heald are Contributing Editors for the internationally-respected Quarterly Review of Wines and Troy residents who write about wine for the Observer & Eccentric Newspapers. Contact them by e-mail at focusonwine@aol.com.

From an article which appeared in the Observer & Eccentric on November 6, 2008. Link to the online article.

Tags: Agribusiness, Business Succession, Wine Industry by Dan Penning
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Dan Penning Commentary:
The article quoted below from the “North Bay Business Journal” by David E. Stoll sets forth several key elements that must be considered by grape growers and wineries and grape contracts. Careful attention to the elements addressed before the contract is executed will undoubtedly save thousands of dollars of litigation fees and wasted time that usually results from “handshake agreements”. The practice of growers selling grapes to wineries to make wine is on the rise across the country as well as in northern Michigan.

As wineries and grape growers in northern Michigan grow both in number and size, there will be a significant increase in the need for experience with multiple legal issues that will confront various participants in the wine industry. Some of the legal issues that will require a lawyer’s knowledge of wine law to address include state and federal beverage licensing and permitting; financing; land acquisition; construction and design; environmental and natural resources; water rights; employment/worker’s compensation/MIOSHA issues; trademark protection; license agreements; income taxation; business succession and estate planning, and litigation. We acquired our northern Michigan location in an effort to provide our legal expertise to assist grape growers, wineries, and distributors in northern Michigan with representation and advice on these issues. All of these issues should be dealt with on a proactive basis to avoid the unforeseen loss of expense, time and possibly the destruction of business itself.

From the North Bay Business Journal:

Wine Law: Understanding the issue of control in grape contracts
DESIGNING AGREEMENTS THAT PROTECT THE RIGHTS OF GROWERS AND BUYERS
Monday, August 11, 2008
BY DAVID E. STOLL

Grape contracts used to be made on a handshake and the reputation of the parties involved. If reduced to writing, they were often limited to one-page letters setting forth the varietal, vineyard source, term and price per ton. As the wine industry continues to mature, growers and buyers are increasingly turning to detailed contracts containing multi-page exhibits on “Viticultural Practices” or “Quality Standards.”

The question is not whether a handshake is better than a ten-page agreement but whether or not the agreement meets your needs. One way to analyze grape contract issues is to focus on control: who controls the viticulture, who decides how much fruit to drop and who decides when to harvest.

The more the grower controls these decisions, the more right the buyer should have to reject grapes that do not meet the agreed-upon standards. However, today buyers are increasingly asking for more control of the viticultural practices and harvest parameters – even the planting or replanting of the vineyard itself. If buyers demand and exercise such control, they should bear responsibility for their decisions.

Focusing on the issue of control, here are some tips:

1) Giving up control can be good for the grower; and taking control can be good for the buyer. The more the buyer dictates viticultural practices and harvest requirements, the less right the buyer should have to reject the grapes. If the buyer has the right to determine the time and date of harvest, then the buyer should bear responsibility for picking too early or picking too late. If the buyer demands that crop loads not exceed four tons per acre, then the grower should ensure that grape prices reflect this limitation. The buyer can also benefit from taking more control. The buyer gains fruit that meets its quality parameters and enhances its ability to plan harvest operations. However, even the best plans and provisions should leave some flexibility for growers to preserve fruit quality and react quickly when required to do so by nature, such as unusual frost conditions, unexpected rains or excessive early heat.

2) Make acceptance criteria as objective as possible. Disputes over payment or rejection of grapes often are framed in terms of quality issues, even if the underlying reasons are economic or market-driven. The more subjective and detailed the quality standards, the more likely a buyer could use these standards as a basis for not accepting delivery, not paying full price or terminating the contract. If a buyer wants to – or needs to – get out of a contract, the buyer will look for grounds to terminate, or claim performance is excused. The tighter and more objective the criteria is in a contract, the less likely such “hooks” can be found to avoid performance or terminate the contract.

3) Have a quick and sensible dispute resolution process in place to avoid disputes at the scale. If the grape contract allows for the buyer to reject grapes at the scale for anything other than purely objective matters, consider designating a mutually agreed upon, independent third party to make a conclusive determination at the time of delivery.

4) Avoid “best efforts” obligations; “commercially reasonable” efforts are better. “Best efforts” can be construed to mean a party must do anything possible, whether commercially reasonable or not.

5) If payment risk is a concern, a grower could shorten payment terms or consider taking a security interest in addition to the automatic statutory growers lien. A security interest perfected under the Uniform Commercial Code (UCC) will give the grower the rights of a secured party under the UCC. A security interest would extend to products and proceeds of the grapes, which may not be covered by the statutory growers lien.

6) If the vineyard name will be used on the bottle, include contract provisions to license the vineyard name as a trademark and to allow the grower to exercise quality control. When it comes to the issue of quality control, actual control is what counts. The right to control is not enough. At a minimum, taste the wines each year and keep records of having done so. If the grower wants to maintain a high quality of wine under the name, make sure the grower has the right to terminate the license to use the vineyard name – short of terminating the entire contract – if the grower determines that wine quality is not up to par.

As the wine industry continues to mature, so do relationships between growers and buyers. Care must be taken to ensure that the rights of both growers and buyers are protected. Our wine industry practice is dedicated to helping clients understand changes occurring in this marketplace so they can be prepared to meet these challenges and carefully navigate through evolving contractual arrangements.

About The Author
David E. Stoll is a business transactions and intellectual property partner at Farella Braun + Martel. He advises wineries and vineyard owners on a variety of legal matters, including grape contracts, mergers and acquisitions and consulting arrangements. He also provides strategic advice regarding the use and protection of wine-related trademarks and trade names, including the names of wineries, wine brands, proprietary names and vineyard designations.

Mr. Stoll advises a variety of clients on development, exploitation and protection of intellectual property. His principal areas of focus are technology licensing, intellectual property counseling and trademark and copyright protection. In addition, he also represents start-up and emerging growth companies in connection with corporate and LLC formation, governance and financing strategies, mergers and acquisitions, as well as strategic partnering and technology-sharing arrangements.

Farella Braun + Martel represents clients in sophisticated business transactions and high-stakes commercial, civil and criminal litigation. The firm is known for its imaginative legal solutions and the dynamism and intellectual creativity of the legal staff. The attorneys in each practice group work cohesively in interdisciplinary teams to advance the clients’ objectives in the most effective, coordinated and efficient manner.

Farella Braun + Martel LLP, 235 Montgomery St., San Francisco, CA 94104 • 415-954-4400 • 899 Adams St., St. Helena, CA 94574 • 707-967-4000 • www.fbm.com

Copyright 2008 – North Bay Business Journal
427 Mendocino Ave., Santa Rosa, CA 95401
Phone: 707-521-5270 – Fax: 707-521-5269

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Dan A. Penning
Farmington Hills and Suttons Bay, Michigan
231-271-4500

Tags: Agribusiness, Wine Industry by Dan Penning
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The recent decision by the Federal District Court in the Siesta Village Market case was the inevitable next step in an evolution of courts removing restrictive laws that restrain Michigan’s residents from engaging in free trade for the purchase of wine.

As the article recites, the first major step in repealing the State’s attempt to block its residents from enjoying the benefits of competition in price breaks when purchasing wine was through the court’s ruling in the Granholm v Heald case in 2005. When that case was decided, Michigan’s attorney general cautioned that the remaining law preventing out-of-state retailers from shipping wine directly to Michigan residents was likely unconstitutional and would, at some point, come under attack. That time came when Siesta Village Market sued the governor and the attorney general and has now prevailed.

The question becomes why the Michigan legislature has been slow to act with respect to addressing laws affecting the purchase and distribution of wine in Michigan when Michigan’s own wine industry has experienced explosive growth within the last five years. The inaction of the legislature which necessitated the filing of expensive and time-consuming lawsuits suggests that there is either a void with respect to the wine industry being heard by state representatives and senators or information is being presented and simply ignored. In either case, the significant increase in shipments by Michigan wineries and retailers to businesses and individuals throughout the country and the receipt of such shipments from out-of-state wineries and retailers necessitates some clear direction from our legislature for the future of the wine industry in our state. The time has come for the legislature to give priority to the wine industry and its related regulatory laws.

From Wine Spectator:

In Michigan, Federal Court Gives Out-of-State Retailers Same Shipping Rights as Wineries
State’s ban on retailer shipping is ruled unconstitutional; judgment is stayed but residents begin ordering wine from out-of-state retailers
Robert Taylor
Posted: Tuesday, October 14, 2008

A federal judge has struck down Michigan’s law permitting in-state retailers to ship wine directly to private residences but banning out-of-state retailers from doing the same, ruling it unconstitutional. The Sept. 30 decision, which effectively throws out Michigan’s retailer shipping regulations, was stayed on Oct. 7 while attorneys for the Michigan Beer & Wine Wholesalers Association considered whether to appeal or begin lobbying for new legislation to bring the state into compliance.

Since the landmark 2005 Supreme Court ruling Granholm v. Heald declared that a state would be in violation of the Constitution’s Commerce Clause if it treated in-state and out-of-state wineries differently in regard to shipping rights, state legislators have been gradually drafting new laws—some of which have triggered new suits. The 2005 decision did not address the rights of retailers, however. In many states, it is illegal for an out-of-state retailer to ship wine to residents. And while many large retailers have been fighting for legislation giving them the same rights wineries now have, many others have simply ignored the laws, which are inconsistently enforced.

Florida-based wine retailer Siesta Village Market, along with Michigan residents Joseph Chess and Terry Fowler, filed the lawsuit in United States District Court against Michigan Gov. Jennifer Granholm and Michigan Attorney General Mike Cox, challenging Michigan’s ban. (Siesta Village Market was the plaintiff in a similar case decided in Texas this past January; Gov. Granholm was also the defendant in the Supreme Court’s Granholm v. Heald decision.)

In her September decision, Federal Judge Denise Page Hood wrote, “The state’s argument that the 21st Amendment [repealing Prohibition] gives it the authority to regulate alcohol coming into the state and the three-tier system it has designed for regulatory purposes is flawed. Plaintiffs have shown that Michigan’s ban on direct shipments of wine from out-of-state retailers to consumers discriminates against out-of-state interests.”

Indianapolis-based attorney Robert Epstein, who represented the plaintiffs and has worked on the case for two years, agreed to the stay, and called any decision to begin shipping to Michigan residents to be “presumptive.” (Epstein was also involved in last year’s Siesta Village Market v. Perry decision in Texas, which also ruled that states could not discriminate between in- and out-of-state retailers but is currently under appeal because the presiding judge in that case instituted a new law with his ruling, which critics have called untenable.)

Others had a different interpretation of the ruling. “[Michigan] is enjoined from enforcing any laws whatsoever concerning the prohibition on out-of-state retailers, which means out-of-state retailers may begin shipping into Michigan,” said Tom Wark, executive director of the Specialty Wine Retailers Association.

For Michigan and Texas residents, however, the stays and appeals appear to be irrelevant, as out-of-state retailers such as Wine.com are shipping to them directly, despite the interpretation of many that the practice is still technically illegal.

“We’re already serving Michigan customers,” said Wine.com CEO Rich Bergsund after the ruling was handed down. That Michigan residents can now legally receive wine shipments from out-of-state retailers is “absolutely our interpretation [of the ruling]. This is a federal court finding that it’s unconstitutional to treat outside retailers differently from in-state retailers on direct shipping,” he said. (Wine.com is one of the few online retailers that does set up a brick-and-mortar warehouse in many of the states to which it ships, though it did not ship to Michigan residents prior to the Sept. 30 ruling.)

“More important than the legal [issues are] the practical issues: [In] most states that don’t allow direct shipping from out of state, it’s happening anyway,” Bergsund said. “By opening up, [those states] can charge sales tax, and you can require people to get a license so you have some control over what’s going on.”

Michigan residents aren’t the only ones benefiting from the confusing state of shipping laws. Residents in many “no-ship” states have little difficulty receiving shipments from out-of-state retailers despite the laws. “There’s been people [shipping wine to Michigan residents] illegally forever,” said Mike Lashbrook, president of the Michigan Beer and Wine Wholesalers Association. “That’s nothing new. Some of these folks, their disregard for the laws are truly amazing.”

“[We] believe that between the wine brands currently approved for sale in the state and the currently 420-some wineries throughout the country that have direct-shipping permits, the consumers have tremendous variety and choice,” Lashbrook said.

While the virtual lack of enforcement of wine-shipping laws is a boon to residents and retailers willing to practice civil disobedience (and enjoy wine), it makes the cause of retailers working to enact proper legislations and play by the rules more difficult—retailers willingly subverting shipping laws are less likely to draw attention to themselves by joining the retailer association.

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Dan A. Penning

Farmington Hills and Suttons Bay, Michigan
231-271-4500

Tags: Suttons Bay Depot, Wine Industry by Dan Penning
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