Common practices in other industries illegal; including brand protection

[caption id="attachment_17634" align="alignleft" width="121" caption="Jay Behmke"][/caption]

[caption id="attachment_17636" align="alignright" width="139" caption="Katja Loeffelholz"][/caption]

NORTH BAY -- The industry has been looking to consumer product promotional know-how from outside the business for fresh ideas, particularly as producers of higher-end wine look to move slow-selling inventory in an economy with high unemployment and trimmed expense accounts.

However, some marketing ideas for stimulating sales that would be perfectly legal in other industries are illegal in the highly regulated realm of alcoholic beverages, according to Jay Behmke, an attorney with Carle Mackie Power & Ross in Santa Rosa. Such promotional strategies include certain coupons, giveaways, contests, joint marketing with retailers and free shipping.

"You see 'free shipping' everywhere, but it is wrong," Mr. Behmke said.

In a June 2009 industry advisory on the need for third-party service providers to be licensed, the state Alcohol Beverage Control Department reiterated that premiums, gifts or free goods such as shipping costs are prohibited in the sale, distribution or marketing.

A common way of dealing with the restriction on free shipping is to reduce the bottle price of the wine by the cost of shipping and state that shipping is included, according to Mr. Behmke.

Free shipping is an increasingly important direct-sales promotional tool, particularly for a heavy product such as glass bottles full of wine. Free shipping increased from 31 percent of U.S. retail sales over the Internet in the first quarter of 2008 to 42 percent in the third quarter of last year, according to online sales tracker comScore of Reston, Va.

The legal line of what is allowed in marketing wine can be tricky to see because of the myriad of local, state and federal "tied-house" laws in the U.S. since the end of Prohibition. Such rules are structured to keep the retail part of the three-tier system independent from having too much influence over producers and distributors in promoting alcohol consumption.

Generally, suppliers such as wineries and distributors are restricted from directly or indirectly providing something of value to retail license holders such as stores and restaurants free of charge. It also reaches into content of and payment for store advertising as well as ownership relationships between the production, distribution and retail tiers.

But California as a major wine-producing state has a web of “tied-house” exceptions that can leave it unclear what is and isn’t allowed, according to Mr. Behmke. He’s had to dissuade clients from “tied-house” marketing ideas such as a contest with a trip to the winery for a club member who received a specially marked bottle and a retailer that wanted to allow a winery to pay to set up promotional displays in the store.

For details on what is allowed in wine promotions, contact the Alcoholic Beverage Control Department Trade Enforcement Unit at 916-419-2500 or www.abc.ca.gov/trade/tradeenforcement.html.

Effective marketing also should include brand protection, according to Katja Loeffelholz, a wine intellectual-property law specialist with Napa-based Gaw Van Male.

“In a down economy, your reputation is of great importance,” she said. “People recognize your brand and develop feelings about it. From the consumers’ standpoint, if they are going to be spending money to go with a brand known to be on the higher end, they want to know what they are getting.”

Getting a federal certificate of label approval, or COLA, isn’t enough to protect slogans, logos, proprietary names or trade dress, or the distinctive shelf appeal of a brand package, according to Ms. Loeffelholz.

That's why she suggests careful research upfront. For instance, to conduct a trademark search can cost roughly $2,000. However, the cost of revising packaging, marketing materials, licenses and Web sites upon a claim of trademark violation costs a lot more, she noted.

While wineries have had to get creative in the selling of their wines within the parameters of the law, winegrape growers may have to start thinking outside the bin when it comes to preparing for legal challenges over grape contracts, according to Mr. Behmke.

“The industry is awash in grower-winery disputes,” he said. “It’s not anything new, but you have a tough economic climate now and some wineries are trying to reduce inventories by not taking grapes by arguing over the quality or have taken the grapes and are not able to pay.”

The matter of how much “hang time” is needed for grapes on the vine has been a steaming industry disagreement for the past several years, flaring up at times like the past harvest when a surprise heavy rainstorm in October came at a time when a good number of red grapes remained in certain North Coast vineyards.

With the potential for legal battles, growers should have a backup plan for third-party documentation of the condition of grapes a winery rejects for quality reasons as the grower scurries to find a new home for the grapes, according to Mr. Behmke.

“We’ve found an interesting issue that many of the people you’d like to have come out, such as viticulturists and lab technicians, don’t want to get involved and be reported as testifying against potential clients,” he said.

Adding to the complications of enforcing a grape contract are provisions of the Uniform Commercial Code that could lead to the uncomfortable conclusion that a grower should attempt to deliver contracted grapes to the winery and have them rejected there before scrambling to find another buyer or a custom winery that will produce juice or bulk wine for sale, according to Mr. Behmke.

A dispute a couple of years ago with a Russian River Valley grower trying to deliver fruit infected with botrytis, or “noble rot,” ended up revealing during arbitration that a grower may breach the contract themselves. Another common reason for not taking grapes is that certain key measures of ripeness – such as degrees brix used to measure sugar – aren’t to the winemaker’s liking.

“If a grower does not attempt to deliver the grapes, they can’t make a claim for payment,” he said.