Whiskey Business: The Legal Hurdles to Launching and Operating a Craft Distillery
Enterprising craft distillery owners cannot afford to be absinthe-minded when it comes to the thicket of federal, state, and local laws regulating distilleries. In this introduction to distillery law, we cover some of the major hurdles to launching and operating a craft distillery, including federal licensing, state and municipal permitting, labeling, and trademark. We also introduce hot-button issues and distill some best practices for proactive protection of distillery owners who are navigating the whiskey business of producing craft spirits.
Jason Potter: Welcome to The Legal Hurdles to Launching and Operating a Craft Distillery, handmade by Quimbee. My name is Jason Potter, and I'm a staff presenter at Quimbee. This presentation includes a number of course materials, including today's slides and detailed presenter notes. You can follow along with those slides or just sit back and enjoy our gin-credible introduction to distillery law.
George Washington is a polarizing figure today. On the one hand, Washington is revered for founding our nation, governing with one tooth, farming cannabis, and owning the country's biggest producer of whiskey, the Distillery at Mount Vernon. On the other hand, many of Washington's successes were made possible by the hundreds of slaves he owned and the violent taking of Native-American land.
In 1799, Washington's distillery at Mount Vernon operated by enslaved distillers, Hansen, Peter, Nat Daniel, and Timothy produced 11,000 gallons of clear, unaged Red Eye, which Washington sold for a total of $1,800 around $120,000 by today's standards. Now, there's no indication that Washington shared these profits with his distillers. In fact, even after Washington was legally able to free his slaves, he did not.
It's important to acknowledge this piece of distilled spirit's history. Let's imagine that Hansen, Peter Nat, Daniel, and Timothy wanted to own and operate their own craft distillery today. These gentlemen, like all aspiring distillery owners would need to scrupulously comply with regulation at all levels of government, endure the difficult labeling approval process, and shore up their brand with trademark protection.
This course will help you advise clients during the process of launching and operating a craft distillery, and will provide some spirited updates on developments in the industry. All right, let's begin.
Today's introduction to distillery law begins with a hypothetical. We'll return to this hypo periodically during the presentation to ground and extend your understanding.
Without further ado, I introduce Jim. Jim lives in the fictional date of Hoochachusetts. Say that five times fast. Jim has a dream of becoming a small batch producer of whiskey and joining the growing movement of craft distilling. Jim hopes to launch a distillery and distribute his own craft spirit. What's a craft spirit to answer that we need to break it down a bit. First, what's a spirit? To give you an idea, the federal government's non exhaustive list of spirits includes neutral spirits or alcohol like vodka or grain spirits, whiskey, gin, brandy, blended applejack, rum, tequila, cordials, and liqueurs.
Second, what's craft? Although the definition of the word craft is in the eye of the beholder, according to the American Craft Spirits Association, a craft spirit is one that hails from a distillery that produces less than 750,000 gallons per year, that values transparency, and that is independently owned and operated.
Producing craft spirits is a multi billion dollar industry with thousands of distilleries operating around the country. According to the American Craft Distillery Association's 2018 report, active craft distillers grew by 15.5% over the last year to 1,835 in August of 2018. That year, the craft distillery market took in $3.7 billion in sales, and it achieved an annual growth rate of 29.9%.
There's a complex mash of federal state and local regulations established post-prohibition that shape this burgeoning industry. This makes launching a distillery, an arduous process. So to ease you in, let's cover some foundational terminology in distillery law first.
Under federal law, a distilled spirits plant is an establishment which is qualified under federal law to perform any distilled spirits operation. A distilled spirits plant or DSP is the legal name and license required for all distillers, big or small. A distiller is any person who per reduces distilled spirits from any source or substance. Brews or makes mash, wort or wash fit for distillation or for the production of distilled spirits, other than the making or using of mash, wort or wash in the authorized production of wine or beer, or the production of vinegar eye fermentation. By any process separates alcoholic spirits from any fermented substance. Or making or keeping mash, wort or wash, has a still in his possession or use. So basically, if you make hooch or the stuff of hooch, and it's not intended as beer, wine, or vinegar, you're a distiller.
The terms, distilled spirits, alcoholic spirits and spirits are a substance known as ethal alcohol, ethanol or spirits of wine in any form, including all dilutions and mixtures thereof or whatever source or by whatever process produced.
It can be quite difficult for non-attorney distillers to wrap their heads around all of the legal requirements for launching a distillery. Producing spirits requires both the skill of a distiller and the skill of an attorney who can guide owners through the complex process. Let's assume that the enterprising Jim seeks some straight up legal advice from you about his idea.
To bring you up to speed on the developing area of distillery law, we'll first briefly explore the legal history that led to strict federal state and local regulation of distilleries. We'll go from temperance to TTB regulation, the three tiered system, and municipal oversight. And after that apéritif, we will cover the common federal obstacles to launching a craft distillery, like some of the prerequisites to filing a distilled spirits plant license application, the Cola labeling process, and trademark. We'll also cover a number of legal issues to be on the lookout for in your state and local laws and regulations.
Finally, this presentation will flag a few hot button issues in distillery law that are worth educating clients like Jim about.
Well after George Washington's slaves were freed in 1801, liquor was so plentiful and so freely available, it was less expensive than tea. By 1830, the average American over the age of 15 downed nearly seven gallons of pure liquor per year. And around that time, the Temperance movement took off in the United States initiated by Protestant churches. The movement was progressive, first advocating moderation, then urging drinkers to assist other drinkers in resisting, and then demanding the outright prohibition of alcohol at all levels of government. The Anti Saloon League or ASL was a single issue lobbying organization advocating for the Constitutional Amendment to ban the manufacturer, sale and transportation of alcohol. The ASL became an incredibly powerful force in American politics. And in 1917, the 18th Amendment passed in both houses of Congress.
The Amendment was ratified by the states in a mere 13 months. So enter the secret speakeasies and frenetic flappers, right? Well, yeah, and it sounds exciting, but prohibition turned out to be a major buzz kill from an economic enforcement and social perspective. On December 5th, 1933, Franklin Delano Roosevelt signed a presidential proclamation declaring that the 21st amendment had replaced the 18th Amendment. Prohibition was dead. The 21st Amendment repealed prohibition and gave states the power to regulate the manufacture, distribution and sale of alcohol that occurred there.
Post prohibition, the alcoholic beverage industry, including the distillery industry has become highly regulated at both the federal, state and local levels. Post prohibition, the federal government began regulating production of distilled spirits, as well as enforcing an excise tax on liquor. The Alcohol and Tobacco Tax and Trade bureau or TTB, an agency of the US Department of Treasury was established to regulate manufacturing and distribution, handle tax collection and enforcement, and issue labeling requirements for all alcohol. Significant penalties were established for anyone distilling without a permit.
According to these laws and regulations, a permit is required even if distilled alcohol is only for personal sipping. For example, if your client, Jim tests out recipes for his whiskey using the still in his garage, he would violate numerous federal regulations, even if that whiskey is just for his personal use. Let's take a look at just how severe these penalties are. Within the Internal Revenue Code, Title 26 of the United States code section 5601 sets out criminal penalties associated with home distilling. Offenses under this section are felonies that are punishable by up to five years in prison, a fine of up to $10,000 or both for each offense. You'll find the full text of these statutory sections in your course materials.
These offenses include, but are not limited to possession of an unregistered still, engaging in the business of a distiller without filing an application and receiving notice of registration. Distilling on a prohibited premises, unlawful production or use of material fit for production of distilled spirits. Unlawful production of distilled spirits or moonshine. Purchase receipt and/or processing of distilled spirits when the person knows or has reason to know that excise tax has not been paid. And removal or concealment of distilled spirits, subject to unpaid taxes. Other sections of the statute and associated regulations are also implicated by unlicensed distilling. You'll find the full text of these statutory sections in your course materials as well.
These penalties include, but are not limited to engaging in business as a distiller with intent to defraud the United States of tax. That's a felony. Transporting, possessing buying, selling, or transferring any distilled spirit unless the container bears the closure required by title 26 of the United States Code, section 5301, D. Namely, a closure that must be broken in order to open the container. That's a felony. All distilled spirits not closed, marked and branded as required by law and the TTB regulations shall be forfeited to the United States. Unregistered stills or distilling apparatus will also be forfeited. Possessing liquor or property in intended to be used in violation of the law is a misdemeanor.
Any person who willfully attempts to evade or defeat any Internal Revenue Code tax, including the tax on distilled spirits has committed a felony. Any property, subject to tax or raw materials or equipment for the production of such property in the possession of any person for the purpose of being sold or removed in violation of the Internal Revenue laws may be seized and shall be forfeited to the United States. It is unlawful also to possess any property intended for use or which has been used in violation of the Internal Revenue laws. No property rights shall exist in any such property. And finally, operations as a distiller, warehouseman or processor may be conducted only on bonded premises of a distilled spirits plant.
Whoo, now that's a lot to handle. As you can see, post-prohibition, the federal government laid out strict penalties for unlicensed distilling, and it's important to advise your clients as to the serious potential consequences of unlicensed or home brewing. It's just too whiskey.
After prohibition, the TTB was the only federal entity that gained influence over the distillery industry. The USDA, FDA, PTO and copyright offices all played roles in the developing distillery industry. For Jim to make his mark on the craft distillery industry, he will need to comply with rules from numerous federal bodies, but federal law is only one piece of the regulatory puzzle.
After prohibition, states were concerned with maintaining copacetic markets, establishing channels with easier oversight, preventing monopolies, and avoiding the excesses underlying the 18th Amendment. States looked for methods to regulate and control the alcohol industry to prevent the excesses and abuses that led to prostitution. States regulated the alcoholic beverage industry with heavy hands, each introducing a strict three tier system.
The three tier regulatory framework developed throughout the US was created to ensure that pre-prohibition excesses would be avoided, and that regulation and taxation of alcohol could be easily administered. By way of example, the New York legislature in its Alcoholic Beverage Control Law declares as the policy of the state, that it is necessary to regulate and control the manufacturer, sale and distribution within the state of alcoholic beverages for the purpose of fostering and promoting temperance in their consumption in respect for, and obedience to the law, for the primary purpose of promoting the health, welfare, and safety of the people in the state, promoting temperance in the consumption of alcoholic beverages, and to the extent possible, supporting economic growth, job development and the state's alcoholic beverage production industries and its tourism and recreation industries, and which promotes the conservation and enhancement of state agricultural lands. A statute can do all that? For reference, the text of this statute is included in your course materials.
This three tier system creates a framework for preventing one tier from having influence over another. Under this system, licensees could only operate on one of the three tiers in the industry, including supplier or manufacturer, wholesaler, distributor, and retail. A supplier or manufacturer can only sell product to the end consumer by going through a wholesaler or distributor. Three tier frameworks instilled in nearly every state's laws and regulations remain largely undisturbed. And some have only recently been questioned. This system is problematic for craft distillers whose goals are self-distribution, because the three tier system requires the use of a distributor.
Some states have enacted exceptions to the three tier system to aid craft distillers and allow self-distribution. Some states have also enacted exceptions that permit the sale of spirits in a distilleries tasting room, or that lift onerous limitations on the amount of distilled spirits that can be sold in a tasting room.
Since prohibition, changes that modify the three tier system have been piecemeal, and inconsistent among the states. So aspiring distillers like Jim must carefully consider their state's framework. In addition to federal and state regulation, individual municipalities also have influence over the distilled spirits industry.
To illustrate the kind of influence that municipalities have over distilleries, let's consider Jim's place of residence, Hoochachusetts. Let's assume that Hoochachusetts has a statute declaring that all counties in the state are dry, prohibiting sale and consumption, unless a county enacts a local ordinance declaring it a wet county. Also assume that Jim's county has made no such declaration. His county's failure to regulate would affect Jim's business. Although he could probably produce whiskey there, assuming compliance with all other laws, he could not distribute it there. And this is the same issue that Jack Daniels faces in Moore county Tennessee, where the famed distillery may produce, but not distribute its signature swill. Isn't that neat?
To recap, federal, state and local regulation of distilleries are relatively new, largely occurring post-prohibition. Now, due to the complexity and multidimensional character of these regulations, distillery compliance is some whiskey business. It's critical that your client, Jim understands that regulation of distilleries occurs on three levels, and that federal, state and local regulations have the potential to put his business on the rocks.
Next, we'll dive further into this mash of oversight. A client starting a craft distillery will need to solidify a number of business formation matters, such as ownership structure, the nature and source of funds, the legal structure of the business, financing implications, insurance concerns, drafting and negotiating formation agreements, employment matters, and entity formation. Many of these matters must be addressed before a distilled spirits plant license can be issued, but we don't want to tequila you, so we won't cover these today. Instead, we'll take a look at permitting and licensing, labeling and trademark.
Distilled spirits in or imported into the US are subject to a tax. Per title 26 of the United States code section 5001, the text of which we've included in your course materials, this tax is at a rate of $13 and 50 cents on each proof gallon, and a proportionate tax at the like rate on all fractional parts of approved gallon. As of 2020, changes to this are pending in Congress, though tax attaches as soon as the substance is in existence. That's under section 5001B.
Spirits producers including craft distillers are licensed or permitted at both the federal, state and local levels. As Jim's attorney, you'll play a key role in distilling down the permitting and licensing process. Now, we'll dive into the regulatory framework on all levels, starting with federal. There are two major federal agencies that require licensing and registration, the TTB and the FDA. First, we'll cover TTB regulation.
The TTB regulates the licensing of distillers, allowable labeling and advertising of spirits, spirit classifications, and formula approvals. The TTB licenses distillers according to the Federal Alcohol Administration Act or FAAA. That's located at title 27 United States Code section 201. At the federal level, a prospective distiller such as Jim will need to seek a federal distilled spirits plant license, or DSP license for short, from the TTB under the FAAA and the associated regulations. The section of the FAAA laying out the permitting process is section 204, which we've also included in the course materials.
A DSP license application is heavy on paperwork and has a lot of requirements. These include incorporation documents, a lease agreement or proof of property ownership, descriptions and diagrams of operations, the plant and major equipment, including serial numbers. Statements, and documentation about security details, distilling procedure, and source of funds, and proof of a bond. Because the TTB requires proof of property ownership or lease as well as the acquisition of equipment and a bond, three of the major hurdles to actually submitting an application are finding a suitable location, acquiring that equipment, and procuring that bond.
So we'll look at each of these a little more closely. Citing a distillery can be challenging and much be achieved before a federal license will be issued. According to federal law, distilleries cannot be located in residences, sheds, yards, enclosures connected to residences, vessels or boats, anywhere beer or wine is produced, anywhere liquor is sold at retail, and anywhere with limited exceptions any other business is conducted.
Also, you'll want to advise your client that distillery equipment will need to be purchased before the TTB will issue a permit. Federal regulations require distilleries identify and disclose all major equipment at the application phase. That's title 27 of the CFR, section 19.75. This regulation pertaining to equipment is included in your course materials. Under this regulation, the DSP license application must include the serial number and capacity of each tank, as well as the serial number, kind, capacity and intended use of each still in the plant.
A person seeking to open a distilled spirits plant needs to provide evidence of a bond as well to the TTB on form 110.56.27. This is under CFR section 19.511A.
There are three types of bonds. Basic bonds, operations bonds, and other bonds. For basic bonds, there are two types, operations and withdrawal. Operations bonds cover tax liability on certain DSP operations and penalties if there are violations regarding any regulated activities covered by the bond. Withdrawal bonds cover the tax liability for taxable distilled spirits taken from the plant on a tax deferred basis. There are a few other types of bonds regarding DSP operations that are adjacent to wine cellars, but we won't be covering those today.
Due to amendments in the Protecting Americans from Tax Hikes Act of 2015, or the PATH Act, there's now an exemption to the bond requirement. Taxpayers that reasonably believe their tax liability for distilled spirits will be $50,000 or less are not required to get a bond, as long as they're reliable for $50,000 or less in such tax hikes in the prior year, and they pay excise taxes semi-monthly, quarterly or annually. This can be located at title 26 of the United States Code, section 5061 and 5051, D4. Taxpayers who want to take advantage of this need to notify the TTB of their intent.
There are numerous other regulations pertaining to the bond requirement for distilleries that we're not covering in today's introduction. Attorneys and clients should familiarize themselves with requirements in the Internal Revenue Code and the Code of Federal Regulations. You should inform Jim that the TTB will perform a background check on him and any other owner operators, and he will be interviewed by a TTB application specialist. The TTB will conduct an inspection of Jim's proposed distillery. Jim's federal application would take at least 65 days to be processed, but don't expect it to be processed nearly that fast.
As a manufacturer a or processor of alcohol, craft distillers must register with the FDA per the Bioterrorism Act. Under that act, any domestic or foreign facilities that manufacture, process, pack or hold food for human or animal consumption in the US have to register. The term food though includes alcoholic beverages. Distillers may also be subject to surprise FDA inspections. Also, if there's a health hazard associated with liquor, the TTB and the FDA work together. The TTB and the US Food and Drug Administration have operated pursuant to a Memorandum of Understanding, the 1987 MOU between the two agencies. And it clarifies the enforcement responsibilities of both agencies. In particular, the 1987 MOU recognizes the FDA's authority under the Federal Food, Drug and Cosmetic Act of 1938 to regulate regarding adulterated food products, including spirits.
The 1987 MOU provides that the TTB is responsible for the labeling of spirits, the testing of spirits and the recalling of spirits. If an alcoholic beverage may present a health hazard, the 1987 MOU establishes coordination between the FDA and the TTB to ensure both agencies share necessary data and resources to combat the possible health hazard.
Here are some key takeaways about federal licensing of distilleries. To state it simply, federal licensing and registration is arduous. When advising Jim on his distilled spirits plant application, you should be sure that his submission is complete and accurate, and that all application prerequisites are squared away. Additionally, it's an important to advise clients like Jim that all of his distillery employees should receive education concerning TTB and FDA regulation. Taking the mindset that these two agencies could inspect tomorrow is an excellent way to ensure that Jim's business and its future employees are prepared and proactive. It's also important to remind Jim that interpretation of these regulations during an inspection rests solely on the inspector.
Now, from the federal regulatory scheme to state and local regulatory schemes. Securing a state license is not considered as difficult as the TTB process for those who have already received their federal license. However, every state regulates the manufacture, sale and distribution of spirits differently. For that reason, state licensing requirements vary, and some states are more friendly towards craft distilleries than others. For example, the state of Washington has the nation's greatest number of distilleries due to the state's progressive regulation of craft distilleries. Most state applications require background checks and assurances of adequate planning and funding.
Traditional, regulatory entities at the state level are the alcoholic beverage control agencies or ABCs established after the end of prohibition. At that time, each state, and in some instances, certain localities and counties decided whether to retain complete control over the distribution and sale of spirits, or whether to privatize the practice and act solely as regulators. In many states, in order for a bottle of gin to land on a shelf in a favorite bar, it must go through the three tier system. This has the effect of handing over to distributors, a sizable chunk from a distillery's profit margins. That is unless the state has a craft distillery licensing option that permits self distribution.
For example, in 2019, the state of Illinois enacted a new law creating a class one craft distillers license. Under this license, a class one craft distillery producing no more than 50,000 gallons a year can self distribute up to 5,000 gallon of craft spirits to bars, restaurants, liquor stores, and any other licensed retailers in the state. Under this law, distilleries can establish distill pubs or tasting rooms where customers can sip on house made spirits. Many other states are following suit in recognizing the specific economic needs of craft distillers and creating special regulatory processes for them.
And back to Jim's case, when working with Jim on state licensing, it's important to know which agency is the licensing authority, as well as whether the state's regulatory scheme helps or hinders the establishment of craft distilleries. Local regulation of distilleries varies widely from municipality to municipality. Local regulations impacting distilleries may include, but certainly aren't limited to licensing regulations, zoning regulations, and distance regulations. It's important to consult local zoning laws because many zoning regulations limit distillery operations to industrial districts. An attorney representing a craft distiller in such a locality may need to inquire about the possibility of locating in mixed use areas, or obtaining a variance to place in or closer to locations where it's just easier to get customers.
An attorney representing a craft distiller in such a locality may need to inquire about the possibility of locating in mixed use areas, or obtaining a variance to place in or closer to locations where it's just easier for customers to visit. As a more general matter, it's important to recognize that city officials may not be familiar with the business of craft distilling. Some municipalities, such as the city of Rock Hill, South Carolina have no regulation of craft distilleries, but have passed regulations concerning craft breweries.
As Jim's attorney, you should encourage him to be friendly with local authorities like fire marshals and inspectors. Inspections may be carried out at random, so making friends early on and proceeding gingerly at the local level may prove very handy in the future.
Alongside the regulatory framework for licensing and permitting is an equally complex and multidimensional framework for product labeling. As such, clients should be especially careful with labeling their product. In fact, receiving labeling approvals is one of the most difficult steps in launching a distillery. In this area of labeling, there are federal and state requirements to be aware of. TTB regulations outline the use of terms and images on spirits' labels through the certificate of label approval or COLA process. COLA ensures that labels of products are not misleading as to their contents, alcoholic beverage class and type, quantity of manufacturer, traceability and identification of the distiller, and where the product was produced.
Distilled spirits labeling regulations span many facets of labeling and have specific requirements about the brand name, the name and address, the alcohol content, the caloric and carbohydrate representations, the health warning statement, country of origin, class and type, presence of neutral spirits and coloring, flavoring and blending materials, net contents, prohibited practices, statements of age and percentage, and voluntary disclosure of major food allergens.
As a basic introduction to this complex set of regulations, we will take a closer look at brand name, name and address, alcohol content, health warning statement, net contents, and class type designation. We've included some of these materials in your course materials.
Now, we're going to do this in relation to Jim's snazzy whiskey label. Voila, pretty neat huh? Let's check out the brand name. The brand name is used to identify and market a distilled spirits product. According to the TTB, the brand name may not mislead the consumer about the age, identity, origin, or other characteristics of the distilled spirit. How does Jim's brand name, Jim's Juice measure up? Well, it's possible that Jim's product name could be considered misleading. Is it whiskey? Is it juice? Does it contain juice? Is it juicy? An issue worthy of further research.
Now, let's check out the class type designation. The label of a distilled spirit must contain a designation that accurately identifies the bottled product. The regulations are specific as to the ingredients and the processes used to produce a product of a given class or type. For example, the TTB provides that to be labeled as bourbon whiskey, an alcohol must be whiskey produced in the United States at a number not exceeding 80% alcohol by volume or 160 proof, from a fermented mash of not less than 51% corn and stored at not more than 62.5% alcohol by volume or 125 proof, in charred new oak containers. Well, Jim's looking pretty good here, though we know nothing about Jim's ingredients and storage.
Next, let's check out the name and address. The name and address of the bottler or importer must appear on the container. Bottlers or importers may use an authorized trade name in place of its operating name. Jim's got a partial address listed. He'll need to incorporate the business' full address somewhere.
Now, alcohol content. A statement of alcohol content expressed in percent by volume must appear on the label. An additional alcohol content statement expressed in degrees of proof may be shown in addition to the required alcohol by volume statement. Now, Jim's label contains an alcohol content and degree of proof is not mandatory, so he seems to be good there.
Next, the health warning statement. This statement is necessary on all alcohol containing 0.5% or more alcohol by volume. Jim's got a health warning statement, though you would want to confirm that his label warning conforms with the more specific TTB requirements.
Next, net contents. The net contents of a distilled spirits container must be stated in metric units of measure. Distilled spirits must be bottled in sizes of 1.75 liters, one liter, 750 milliliters, 375 milliliters, 200 milliliters, a hundred milliliters or 50 milliliters. Jim's got that covered.
Wait. Wait. What about that word, invigorating? Well, the TTB has set forth regulations identifying what type of information or statements are prohibited. This includes statements that are disparaging to a competitor's product, or that suggests certain health related benefits from consuming the product. It's possible that the word invigorating could be considered a representation about health benefits, but further investigation would be required here. Again, these aren't the only requirements for labeling. They're just illustrations of some of the major requirements. But if these were the only requirements, then the Jim's Juice label would be headed in the right direction.
A lawyer's advice during the labeling process is an excellent protective measure against future litigation. To be sure, a wave of recent class action lawsuits have alleged that claims as to a beverage's artisanal nature are false and misleading. Plaintiffs in these lawsuits have alleged that the label or other advertising associated with the defendant's spirit state that it's handmade or small batch or craft, when in fact it's mass produced through a large mechanized process.
Here are two notable examples of these suits. In Singleton versus Fifth Generation Incorporated, an individual brought a proposed class action against Tito's Handmade Vodka. Tito's had labels on the bottles stating that the vodka is handmade and crafted in an old fashioned pot still. The plaintiff alleged that due to this deceptive marketing, it induced the purchase of the product for a higher price. The plaintiff was not successful in gaining class certification because among other reasons, he was enabled to adduce a sufficiently detailed model for measuring the price premium resulting from the handmade representation. Although class certification was denied, this case is an excellent example of the type of consumer fraud litigation that distilleries must guard against as they consider labeling their spirits.
In Nowrouzi versus Maker's Mark Distillery Incorporated, which we've included in your course materials, the plaintiffs alleged that they bought Maker's Mark because the label stated the spirit was handmade, which the plaintiffs alleged made them think the product was superior to others on the market and induced them to spend more on the product than other products in the class. The plaintiffs further alleged that the product was manufactured through an automatic or mechanized process. Some of the plaintiffs' claims survived a motion to dismiss. So needless to say that the new wave of false advertising and consumer fraud litigation places additional importance on distillers to be extremely careful regarding the words and phrases used on their labels, as well as in their advertising.
When Jim is labeling his brew, he can't afford to be absentminded regarding the words and phrases used on his labels and advertisements. Labeling oversight of distilled spirits products may not be limited to the TTB. For example, distilleries may also be subject to the labeling requirements of other federal agencies like the US Department of Agriculture, the USDA. The USDA has concurrent jurisdiction with the TTB in the area of labeling of organic foods. In 2010, the USDA and the TTB entered into a memorandum of understanding, the 2010 MOU, setting forth requirements for the labeling of alcoholic products as organic or made with organic ingredients.
Specifically, the 2010 MOU states that the TTB is responsible for implementing regulations to ensure any organic labeling complies with the Organic Food Production Act of 1990, and the National Organic Program established by the USDA. We've included a link to the 2010 MOU in the course materials.
As another layer to the regulation of distilled spirits labels, states also oversee the labeling of distilled spirits. State laws concerning labeling general early exist to ensure that labeling and advertising of alcoholic beverages provide enough information to the consumer concerning the identity and quality of the product. These state laws have significant variations, and it's important to closely examine these requirements in conjunction with TTB requirements when designing a distilled spirits label.
The regulatory framework for labeling is complex and multidimensional and attorneys reviewing labeling for compliance need to be familiar with federal and state regulations, as well as case law concerning false and misleading claims on labels.
Another major issue in launching a craft distillery is filing for trademark protection. Craft distillers typically seek a unique trademark or logo for their product to protect the brand name, product packaging and identity of the distiller's product, so it doesn't cause confusion in the marketplace. Branding is complex and legally fraught. Trademark disputes involving distilled spirits are increasingly common. These suits can give attorneys valuable information that may prevent future issues involving trademarks selection, protection and enforcement.
One current issue pertains to relatedness. Relatedness of products is a major factor in determining whether two trademarks conflict. The US Patent and Trademark Office or PTO takes the position that all alcoholic beverage are related. Let's look at two recent cases involving class relatedness. We've included links to public domain versions of these in our course materials.
In the 2018 case of Justin Vineyards & Winery versus Crooked Stave, LLC, the Trademark Trial and Appeal Board TTAB found that there was no likelihood of confusion between hop savant for beer and savant for wine. Although the TTAB found the marks were similar, which weighed in favor of a finding of likelihood of confusion, the TTAB ultimately dismissed the opposition because the savant trademark registrant hadn't provided evidence to show that the goods were related. The registrant merely relied on past TTAB and federal court decisions, determining that beer and wine were related. The TTB stressed that the relatedness of goods must be determined by facts and evidence in each particular case. Past decisions on the issue were not dispositive.
The determining of relatedness is just one trademark issue that craft distillers like Jim might encounter. The name of Jim's whiskey, as well as his logo and label design might be vitally important to his brand's identity in the future. Additionally, in the Brewery, LLC, the TTAB affirmed the PTO's refusal to register the mark, 5 golden rings for beer or malt liquor, deciding that the mark will likely cause confusion with the registered mark, gold ring for wines. The board concluded that the goods were closely lated.
A second recent issue involving trademark and trade dress are disputes involving signature styles. In 2018, Jack Daniels filed a lawsuit against two Texas distilleries, alleging that their Lonehand whiskey infringes on Jack Daniels' trademark and trade dress. Jack Daniels alleges that Lonehand infringed on its brand by copying the packaging of Jack Daniels' signature style, including the square bottle with angled shoulders, the beveled corners, which Jack Daniels argues are signature traits, which Jack Daniels has displayed for many years.
While this case continues to make its way through the courts, it is notable in as much as it shows the changing character of trademark disputes as the field of craft distilleries grows more crowded. This case also serves as a reminder that just because a craft distiller receives trademark protection, doesn't make it immune from trademark disputes, including disputes that don't even involve the actual product name.
Although this certainly is not an exhaustive review of the issues that may arise in selecting, protecting and enforcing a craft distiller's trademark, it is an introduction to some of the hot button issues currently percolating in the craft distillery industry.
Let's assume that with your help, navigating the federal, state and local regulatory schemes, Jim receives his federal DSP license. Cheers, Jim. This is a big accomplishment, but there will still be a number of other hurdles before Jim can open his distillery. These include seeking a state permit and receiving any local licenses, which he will also need your help with. Even after launch, there will still be plenty to do as Jim's attorneys. Distilleries face the same general liabilities that business owners face to operate a business. These liabilities include comprehensive insurance coverage, dram shop insurance, tax payments, employment related matters, and more.
There are a number of reporting requirements too. Attorneys should ensure that monthly, quarterly and yearly reports are provided to federal and state regulators. They should also advise owners about the distillery's obligation to notify the food and drug administration if it becomes aware that one of its products has become adulterated. Attorneys may also need to educate and advise owners as to other alcohol related laws at the state level, like dram shop laws and social host liability statutes, as well as the ramifications of not paying relevant state and federal taxes, and the distilled spirit's income tax credit.
There are a number of hot button legal and regulatory issues currently percolating in the distillery industry that should be on your radar. If a spirit contains a non-traditional ingredient like CBD or cannabis, the manufacturer must get formula approval from the TTB before distillation occurs. According to TTB guidance, the TTB is currently not approving formulas containing CBD or THC. The TTB works closely with the FDA on the issue, and recent documentation from the FDA suggests that the FDA is slow peddling on the issue. Despite the move among states to legalize cannabis, there is currently resistance to permitting cannabis and derivatives in other consumer products.
Some states like Oregon are acting on the recent craze of adding CBD or THC to foods and beverages. Oregon recently changed its regulations to prohibit products containing CBD, THC or other cannabis terpenes. In late 2019, the Craft Beverage Modernization and Tax Reform Act was introduced in the US House of Representatives. This act would lower the federal excise tax to $3 and 50 cents per barrel. On the first 60,000 barrels for brewers in the US with an output of less than 2 million barrels per year. It would lower federal excise tax to $16 per barrel for all other brewers and all beer importers regarding the first six million barrels. It would also retain the current rate for producers of more than six million barrels. This may prove a new milestone in federal support for the craft distillery industry.
Finally, state Farm-to-Flask laws, which serve as exceptions to the three tier distribution system, and to certain licensing requirements. Allow farmers to produce distilled spirits using crops from their own lands, without having to get a license or sell through a distributor, and even to conduct tastings on their farms. Per New York's Farm-to-Flask law, the Craft New York Act, which was one of the first of its kind when it was passed in 2014, farmers may seek a special farm distillery license, which has allowed farmers in rural areas to add a new revenue to their operations and participate in the distillery industry. In fact, since the 2014 passage of the state's Farm-to-Flask law, the number of farm distilleries in New York nearly doubled. Many states have followed suit, and this sub-industry is wrapped developing.
These are by no means the only hot button issues in the craft distillery industry, but they are a few major ones to be aware of as you continue to represent Jim, during the operation of his licensed whiskey distillery.
Today, we've distilled the law as it relates to launching and operating a craft distillery. In the distillery industry, compliance is of the utmost importance. Helping the clients understand the mash of statutes and regulations impacting their distillery may be the most important task for a distillery law attorney. In fact, in Jim's case, mapping out a compliance program would be an excellent way for you to educate and proactively protect him.
President, hemp farmer distiller and slave owner, George Washington once said, "Perseverance and spirit have done wonders in all ages." At that time, it was the perseverance and spirit of Washington's experienced and enslaved distillers, Hansen, Peter Nat, Daniel, and Timothy, who made Mount Vernon's famed whiskey flow. Today, perseverance and spirit can do wonders for virgin distillers navigating the whiskey business of craft distilling.
Thank you for joining us for this introduction to distillery law by Quimbee. To learn more about the content of today's presentation, please check out the accompanying course materials, which includes today's slides and associated presenter notes. We thank you for choosing Quimbee for your CLE needs, and we hope you'll join us again soon. Cheers.