STARTING YOUR OWN BREWERY: LEGAL 101

By: Gregory Perleberg, Esq.gperleberg@buchalter.com

(213) 891-5106

 

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Starting Your Own Brewery: Legal 101

Gregory B. Perleberg, Esq. Newsletter

I. Introduction

From the swanky new craft beer and wine bars smack dab in the middle of downtown Los Angeles’ grocery stores, to the burgeoning number of craft breweries and brewpubs opening up across the country, craft beer is fermenting, bubbling and booming with no signs of slowing down. If done right, owning a brewery can be a dream come true. No more routine 9-5’s, toiling in a sea of gray cubicles, or grueling TPS Reports (inside joke for fans of the 1999 comedy film Office Space). The focus of this article is to help you get paid and paid lucratively, for something you love to do: making beer! Starting a brewery or brewpub, however, can be a daunting task. Besides purchasing equipment and supplies (which are often in short supply and very expensive), brewery owners must effectively navigate the myriad of legal issues common to this heavily regulated industry (think of the laws regulating “sex, drugs and rock & roll”). Without proper planning and advice, you may end up back at square one, or worse yet, back in that gray cubicle, having lost your and your investors’ money along the way. Below are a handful of key steps to help you start your brewery business on a sound legal foundation (which you can also apply to starting a new winery or distillery).

II. Form a Business Entity and Craft an Agreement between Co-Owners

Creating a business entity is an absolute must!! There is no better feeling than holding your pint glass up and toasting to your first production beer (Prost!), but days do not get much grayer, cloudier or darker than when you have an ugly dispute over, for instance, difficult personnel decisions, selling the company, or even when successful, how to divide your first million dollars in profits without a plan. Use of a business entity to operate your brewery serves two very important purposes:

1. Your personal assets may be shielded from the liabilities of your new venture (a very inexpensive form of insurance); and

2. In the case of multiple owners, clear and unambiguous agreements amongst the owners as to who owns what, what rights each of the owners have, and what

 

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happens if an owner wishes to leave, help minimize future disputes and costly legal bills (e.g., member control agreements, bylaws, etc.).

Most business owners choose to form as either a limited liability company, or as a Subchapter S Corporation. Use of LLCs or corporations can be a valuable planning and asset protection tool for business owners, and most attorneys can help you form these entities at reasonable cost in a short period of time.

Practice Tip #1: Beyond the fact that an LLC (like an S Corporation) can shield an

owner's personal assets from business liabilities, an LLC can be created with separate classes of membership interests with different rights. For example, the holders of one class of membership interest may hold governance rights (i.e., voting rights) and financial rights (i.e., a share of profits and losses), while another class may hold only financial rights. There are many factors that need to be considered when deciding what type of entity you choose. Some are tax-related and some are structure and income distribution related. First, you need to decide which type of entity works best for the structure you wish to function under, and then you can choose your tax structure. You can have the flexibility of the LLC and still elect to be taxed as an S Corporation. The factors need to be weighed out with each business entity and discussed with your tax or legal professional. And, choose your business partners wisely as if they are not persons who are in it for the long haul but rather for the profits, you may not have them around for long.

III. It’s a Race – Protect your Brewery’s Name and your Styles of Beers Early and Often

With hundreds of breweries churning out new craft beers every year, clever names are in very short supply, and with new craft breweries launching every day, the competition for beer names is fierce. Before any document is filed with a government office, you must first determine if the desired name of your brewery is available. Nothing could be worse than paying additional fees to change a name that conflicts with an already-existing brewery, reprinting business cards, pint glasses and coasters, or worst yet, dealing with a nasty cease & desist demand from another brewery’s attorney. You also need to keep in mind that the race for names is not limited to breweries, but that wineries and distilleries are also competing for the same names – as a general rule, a beer, wine or spirit owned by different companies cannot be marketed under the same brand due to the potential likelihood of customer confusion as to the “source” or the company actually making the beverage (e.g., Delicious IPA versus Delicious Cabernet Sauvignon versus Delicious Bourbon are potentially problematic if each is owned by a different company). I recommend a legal review to determine if trademarks for your brewery’s desired name and style of beers are potentially available (preliminary, sometimes called “knock-out,” searches, are relatively inexpensive.

 

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As brief background, a trademark (or “service mark” depending upon the nature of the use) is any individual or combination of words, phrases, symbols, designs, colors or even sounds that identifies or distinguishes the source of goods or services of one party from those of another (these can even include the shapes of tap handles, or in the case of Coke, the shape of a soda bottle). Trademarks protect the “goodwill” that owners earn with their customer. Unlike other types of intellectual property, trademarks can also exist indefinitely (subject to ongoing use, renewal and additional requirements), and like top-secret beer recipes, are a significant asset of any brewery. Here are a few examples of famous beer-related trademarks:

 

The process of registering a trademark begins by filing an application with the USPTO. The USPTO employs attorneys who will review the application for proper legal and procedural grounds. In many cases, the examining attorney responds to the application with an “Office Action,” and highlights any conflicts with the proposed mark, or any other objections to granting registration. The applicant has the opportunity to respond to any conflicts or problems noted in the Office Action within six months. If the application either receives no objections for registration, or if the applicant overcomes any objections within the six month period, the USPTO publishes the mark for opposition. Any party who wishes to contest the registration of the mark must do so and request an extension within 30-days of the publication date. If no one contests the mark, then the USPTO will register the mark, typically 12 weeks following the publication date. On average, the trademark process from start to finish averages between 12 and 18 months. Thoughtful trademark management can lead to successful brand development and can greatly increase the value of a brewery. Use and registration of trademarks, however, can be complicated. An experienced attorney – particularly in the alcohol-beverage industry – can help you navigate the often murky waters of trademark law, leading you to an outcome of branding success.

Practice Tip #2: Trademarks can be reserved for up to 36-months once allowed,

meaning that you can start to protect your brands well in advance of your anticipated grand opening as long as you have a bona fide intention to use the mark. Many alcohol-beverage industry clients reserve multiple names early on in the process (with a bona fide/good faith intention to use each of the marks) to help ensure that at least one of their brands will be available for long-term use. Also, potential acquirers tend to knock down the prices that they are willing to pay for breweries, wineries, etc., that do not protect their product names.

Practice Tip #3: Monitor and enforce your marks. A requirement for trademark owners

is a duty to monitor and police their trademarks. By tolerating or letting an upstart brewery to use one of your trademarks without

 

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permission – even in a state across the country – could result in the dilution (and eventually loss) of your trademark.

Practice Tip #4: Do not publically promote “proposed” names or logos without either

actually using the marks with the respective goods/services, or having filed an application with the USPTO. A recent example involved a yet-to-be-launched company promoting (in a contest-like manner) a number of names that had not been used or applied-for with the USPTO publically on Facebook®. “Ideas” or “concepts” alone are very difficult to protect once disclosed publicly.

Practice Tip #5: A brewery’s overall valuation may be directly related to its intellectual

property portfolio, which can represent a significant part of a company’s value. In addition to its trademarks, types of intellectual property include copyrights (e.g., original works of authorship such as certain advertising materials, web pages, posters, label artwork for cans and bottles), internet domain names, patents (e.g., any new and useful process, machine, manufacture, or composition of matter, and in some cases, designs), and trade secrets (certain competitively valuable business information, which is not publicly known or available, such as your recipes – think of the formula for Coke or KFC’s top secret “Original Recipe” for chicken).

IV. “Location, Location, Location” – Buying or Leasing a Space for Your Brewery

If you are looking to be the next “neighborhood” brewery, you will need to find a suitable space close to home. Should you have larger ambitions, you will likely need to seek a more strategic location amenable to expansion as demand for your beer grows. Whatever the case may be, you will need to have a space secured in order to complete the licensing process.  

 

Many new brewery owners lease a building at the start, and negotiating a suitable lease is a crucial step in the process. Commercial lease agreements typically come in one of two varieties: “triple net” and “gross.” In a triple net, the tenant pays rent to the landlord, as well as a prorated share of taxes, insurance and maintenance expenses. In the typical triple net lease, the tenant pays a fixed amount of base rent each month as well as an “additional rent” payment which constitutes 1/12 of an

 

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estimated amount for taxes, insurance and maintenance expenses (also called “CAM” or “common area maintenance expenses”). At the end of the lease year, the estimated amounts are compared to actual expenses incurred and adjusted depending upon whether the tenant paid too much or too little through its monthly payments. With this type of lease, CAM charges would likely increase if the building is sold and the buyer/new owner passes increased real estate taxes to its tenants. In a gross lease, the landlord agrees to pay all expenses which are normally associated with ownership. The tenant pays a fixed amount each month, and nothing more.

Practice Tip #6: In any real estate transaction, be sure to consider issues such as

necessary or helpful easements (e.g., access to water, drains, etc.), adequate parking, use of the premises and grounds for events (e.g., beer festivals, concerts, etc.), and any other restrictions related to patio/outdoor use.

V. When Raising Money, Comply with Federal and State Securities Laws Finding suitable financing for a startup venture such as a new brewery can be difficult. Perhaps that’s why many startup brewery operators are turning to private funding sources for their new venture. When private funds are sought, you must comply with federal and state securities laws. The definition of a “security” is very broad and not limited to shares of stock. It includes partnership and LLC interests, promissory notes and many other financing instruments. Securities must either be “registered” or “exempt” from the registration requirements of state and federal laws. Certain written disclosures and information must be made or made available to investors so they can have the appropriate information to make an investment decision. Whenever possible, focus on “accredited investors,” which are essentially those persons who have a million dollar net worth excluding their house. The disclosure requirements are the least for these sophisticated investors. Even if you have an exemption from registration, liability for any fraud by the issuer still remains. While new technology and social networks may make raising capital easier, securities laws still prohibit certain activities in order to protect unsophisticated investors. So, if you are trying to raise funds via postings on social media websites such as Facebook, Twitter® or LinkedIn®, only approach friends and connections with whom you have “substantive, pre-existing relationship.” The consequences for not complying with federal and state securities laws are severe and can include administrative, civil and criminal penalties. In 2012, President Obama signed the Jumpstart Our Business Start-ups Act, otherwise known as the JOBS Act. The law purported to open up the capital markets and create jobs by loosening regulations on initial public offerings and allowing for “crowdfunding.” Approximately three years later, the Securities and Exchange Commission (SEC) still has not published the final rules, and it may be 2016 before we have JOBS Act crowdfunding. In the interim, a number of services (often times referred to as “collaborative funding via the web”) exist to help raise money, each subject to their own separate terms and conditions. A number of the more popular services include: CROWDFUNDER, CROWDRISE, GOFUNDME, INDIEGOGO, INVESTEDIN, KICKSTARTER, PATREON, ROCKETHUB, SOMOLEND, TEESPRING. Also see

 

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CRAFTFUND (Own Your Food, Drink and Place), CROWDBREWED (The Craft Beer Financing Marketplace. Some breweries have started programs using a membership model (e.g., “pint-a-day” clubs), where the brewery customer pays a membership or subscription fee for certain rights (e.g., beer, swag, etc.), instead of purchasing traditional equity on the company (applicable laws for these sorts of programs should be scrutinized to avoid being forced to give the money back and/or face other legal ramifications).

Practice Tip #7: Before seeking private financing for your new brewery, be sure to

consult with an attorney who is qualified to handle securities matters.

VI. Apply for Your Brewer’s Notice with the TTB

Perhaps the most important – and time consuming – step along the path to owning and operating your own brewery is the process by which you obtain a license for the brewery from the Alcohol and Tobacco Trade and Tax Bureau (TTB). The TTB collects federal excise taxes on alcohol, tobacco, firearms, and ammunition and assures compliance alcohol permitting, labeling, and marketing requirements to protect consumers. If you intend to make beer for other than family or personal use, the TTB must approve your operations, recipes, beer labels, and the like. You have to send in a Brewer’s Notice and a Brewer’s Bond, and the TTB must approve your operations before you begin to make beer. The TTB may initiate an on-site inspection of the proposed premises and operations prior to the issuance of your Brewer’s Notice. Background checks on directors, officers and significant owners are also required. This process typically takes 6 to 12 months to complete, and you will also need to have your recipes and packaging/labels approved (COLAs (Certificates of Label Approval) Online is the TTB's system for completing the Federal label certification and approval process online).

The TTB provides dedicated websites for beer, wine and distilled spirits.

Practice Tip #8: Early in the process, complete form TTB F 5000.8 which provides a

power of attorney (gives the TTB permission to speak to your attorney when and if any issues arise). The TTB accepts this form through Permits Online. Completing this form will streamline the process and allow you to focus on what you do best – make beer! You will need to register with the U.S. Food and Drug Administration (FDA) for a “Food Facility Registration,” which is typically done after receiving a Brewer’s Notice (you can now

 

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complete this process online). The FDA has provided a Small Entity Compliance Guide to help businesses understand their obligations.

Practice Tip #9: Besides approvals from the TTB, a new brewery will need to apply

for a state wholesaler’s license as well as any licenses required by the municipality in which the brewery will operate, for example, a taproom license (to sell pints, prowlers, etc.). For example, in some states, if the brewery intends to construct and operate a taproom where patrons can purchase pints of beer onsite at the brewery, the taproom license must be issued through the municipality, not the state.

VII. Have Your Brewer and Other Key Employees Sign Employment Agreements

Most employees are “at will” employees, meaning, they can leave, or have their employment terminated, for any reason or no reason. If a business owner has key personnel that are integral to the brewery’s success (master brewer), that employee may have a written employment agreement that provides for a fixed term of employment and/or an agreement for providing some form of ownership stake in the brewery (often contingent upon certain performance criteria, e.g., beer production milestones, award-winning, beers, etc.). In certain circumstances (subject to the laws of the applicable state), a covenant not to compete or other contractual terms can be included to deter key brewery personnel from quitting to work for a competitor. Note, however, that some jurisdictions such as California severely restrict or prohibit post-termination non-compete, and the brewery should check counsel before including such a provision in an employment agreement. Where permissible, covenants not to compete must be narrowly tailored to balance the interests of brewery and employee. The brewery must show: (1) the covenant not to compete was supported by consideration when it was signed (if the consideration for the covenant is the continued employment of the employee, then the covenant must be signed prior to the start of employment to be valid); (2) the covenant protects a legitimate business interest of the brewery; and (3) the covenant is reasonable in duration and geographic scope to protect the brewery without being unduly burdensome on the former employee's right to earn a living.

Practice Tip #10: A written non-disclosure agreement is imperative for personnel who have access to the brewery’s formulas, recipes, etc., who could do the most damage to the brewery by going to work for the competition. Always treat beer formulas and other sensitive materials as “trade secrets” and take the appropriate contractual, technological and physical safeguards to protect your brewery’s property (and mark them “CONFIDENTIAL & PROPRIETARY”). In addition to employment and non-disclosure/confidentiality agreements, every brewery should have an employee handbook, and agreement for volunteers (volunteering within the brewery or, for instance, pouring beer at festivals), and for independent contractors. Although a determination that a person is an independent contractor rather than an employee is very fact specific and not resolved by a label in an employee handbook. Check with your labor counsel. Note also that the circumstances are very limited where a person can perform

 

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services without compensation, especially when it involves a for-profit business. It is critical that the chain of title on works such as logos or label are be clearly owned by the brewery when using third parties for this work.

Practice Tip #11: No exceptions – all ID`s must be checked at brewery tours and

events – guests must be of legal drinking age (some breweries check patrons' identification at the door and then give wristbands to those of drinking age to wear throughout the event). On the marketing side, create an e-mail list of all visitors to your brewery, but be sure all e-mail or text communications comply with the CAN-SPAM Act, the Telephone Consumer Protection Act (TCPA), and other applicable laws (you may even want to retain the services of a company that specializes in e-mail and mobile technology marketing and advertising campaigns).

VIII. Distributor Agreements

Distribution is one of the most important, yet commonly overlooked components in the operation and success of a craft brewery. One option breweries have is to self-distribute. Self-distribution has the advantage of providing personal, hands-on selling that distributors cannot afford to give to most accounts, particular the smaller ones. Self-distribution is very time and resource intensive, but in many cases, small breweries start with self-distribution for the first few years to gain good product traction and placement in their geography, and then later turn distribution over to one or more distributors as sales and demand for their beers increase. The Brewers Association’s website includes a database of U.S. self-distribution laws.

Most markets are served by at least two to three major distributors who do business with virtually all of the restaurants, bars and liquor stores. This is part of the liquor industry’s three tier system that followed the repeal of Prohibition, separating the industry by manufacturing, distribution, and retail. These distributors typically have excellent contacts within the retail trade, including important chain store buyers. The disadvantage for the craft or microbrewery is that most distributors manage huge portfolios of beer, and your beer may be just one of many hopeful wannabees vying for precious end cap space at local liquor stores. Of particular note, the laws in most states often make it very difficult to terminate brewery/distributor agreements (leaving the brewery owner with limited rights).

 

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When selecting a distributor, choose one that not only suits your needs now, but that will also be appropriate down the road. These can be very lucrative deals. Before letting a distributor promote your beer, however, talk to retailers to gain insight into which distributor they prefer dealing with, and ask questions about service, product knowledge, enthusiasm, etc., of the salespeople, and which distributors understand and sell craft beers the best. Visit retail accounts and attend beer festivals to find out which distributor seems have the more meaningful presence, have the most tap handles in bars and restaurants, and best shelf positioning for craft beers in liquor stores. Talk with other craft brewers in that market to get their opinion from the supplier side. Once you have chosen a distributor willing to carry your products, be sure to have your attorney draft (or help negotiate) a written distribution agreement (otherwise, you may find yourself in a permanent distribution arrangement that will be very difficult to get out of).

Practice Tip #12: When considering a potential distribution partner, ask the following questions: Will they carry your entire product line? Will they feature your beers at festivals? Do they have adequate refrigeration space for you? Will you have a specific brand manager How will your agreement work 5, 10, 20 years from now? What are your termination rights?

Practice Tip #13: HAVE YOUR ATTORNEY REVIEW ALL CONTRACTS. Your

service providers should hold you harmless for any bad acts, and should live up to any committed service levels (e.g., time frames to repair broken refrigeration units, etc.). All of your contracts, even the short ones, should be reviewed by your lawyer for critical provisions involving warranty disclaimers, limitations of liability and indemnification obligations (which can have the effect of creating an end-of-days for your brewery if ever triggered). Your attorney should be able to quickly identify trouble spots on agreements, hopefully alleviating the need for expensive litigation down the road.

IX. Miscellaneous Resources

Below are a few helpful industry-related resources:

Magazines Ale Street News All About Beer Magazine Beer Magazine Beer West Magazine BeerAdvocate Craft Beer & Brewing DRAFT Magazine Great Lakes Brewing News

Northwest Brewing News Rocky Mountain Brewing News The Beer Connoisseur The Celebrator Beer News The Growler Yankee Brew News Brew Your Own Arizona Craft Brewers Guild Minnesota Craft Brewers Guild

 

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Associations American Brewers Guild American Homebrewers Association Beer Marketer’s Insights Beverage Trade Network Brewers Association CCBA California Craft Brewers

Association

Global Association of Craft Beer Brewers

Master Brewers Association of the Americas

MN Beer National Beer Wholesalers

Association North American Brewers Association The Beer Institute

X. Conclusion

The ever-changing legal requirements for properly launching a new brewery are numerous and complex, and if not careful, they can become a distraction, both time-wise and financially, and pull you away from core business operations if not handled properly. Again, working with an attorney knowledgeable in these areas is essential, and allows you to focus on manufacturing great beer, catering to customers and growing your business. Cheers!

Greg Greg Perleberg is a member of the Master Brewers Association of the Americas, and is an attorney in Buchalter Nemer’s Intellectual Property and Corporate Practice Groups. He represents breweries and related business throughout the United States, and can be reached at 213.891.5106 or gperleberg@buchalter.com. Greg has represented breweries from concept stage to full production, was a speaker at last year’s All Pints North – Minnesota Craft Brewers Guild convention for members discussing “The Do’s and Don’ts of Distribution Agreements and Building and Protecting Brand Equity,” and has even helped his brewery clients get their beers included as product placements in films. All products, name brands, trademarks, service marks, internet domain names, logos and copyrights are the property of their respective owners. This newsletter is published as a service to my clients and friends. The material contained here is provided for informational purposes only and is not intended to constitute advertising, solicitation or legal advice. The views expressed herein are solely those of the author and do not necessarily reflect the views of Buchalter Nemer or its clients.

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