12 legal pitfalls wineries should avoid with hospitality and marketing events

Richard Van Duzer is a partner in law firm Farella Braun + Martelís San Francisco office, focusing on the construction, real estate and wine industries. (FARELLA BRAUN + MARTEL) Dec. 8, 2011

RICHARD VAN DUZER,

FARELLA BRAUN + MARTEL LLP

Winery consolidation and brand proliferation — hallmarks of the California wine market over the past 10 years — both continue to grow. With nearly 5,000 wineries and some estimate over 15,000 wine brands now competing for a modestly growing consumer base, market survival for small- to mid-sized independent wineries in particular increasingly depends on strong brand identity, robust direct-to-consumer sales and enthusiastic customer support and loyalty.

As wineries seek out better ways to connect with their consumers on a personal level, distinguish themselves from their competitors and provide more meaningful guest experiences, hospitality and marketing events, at which winery ambassadors have the opportunity to interact personally (not just electronically) with existing and prospective customers, have become indispensable tools.

Like all aspects of a winery’s sales and marketing operations, however, hospitality and marketing events are subject to a host of complex — and sometimes nonsensical — regulatory restrictions, which if violated, can subject an unwary winery to serious administrative penalties, including monetary fines and license suspension or revocation. Although they were adopted nearly 100 years ago and are believed to be antiquated and unnecessary by many in the industry, California’s “tied house” laws — and the regulations they have spawned — are alive and well.

Wineries today are more creative than ever. They are sponsoring, organizing and participating in a variety of hospitality and marketing events, including “passport” events, winemaker dinners, nonprofit charitable events (including those with retail sponsors), invitation-only events, autograph signings, and tastings and sales at certified farmers’ markets. The regulations governing three of the more common and effective of these tools — passport events, winemaker dinners and invitation-only events — exemplify the type of restrictive framework within which wineries must operate.

PASSPORT EVENTS

Passport events are popular among consumers because they permit them to visit, taste wine and meet vintners at a number of nearby wineries over an extended period of time. For the most part, they are conducted over a weekend, but nothing prevents them from being held over a longer period of time.

Essentially, passport events are conducted by wineries under their existing licenses but marketed and coordinated through a third party, which in most cases is a local or regional winegrower association. Consumers purchase access to the event and t0 the participating wineries — oftentimes, receiving a wine glass, area map and “passport” in return — from the third-party.

To be legal, and not require the wineries or third-party organizer to obtain a separate license, passport events must satisfy several requirements, such as these:

• The third-party organizer must only sell access to experiences or activities that the wineries themselves can lawfully provide to consumers.

• Wineries can do nothing more than sell or provide tastes of wine under the authority of their existing licenses.

• There can be no commingling of funds or sharing of revenue between the wineries and the third-party organizer. All proceeds from the sale of access to the event must go to the third-party organizer, and all proceeds from the sale of wine or tastings must remain with the wineries.

Vintners with California type 17/20 alcohol-beverage licenses — operations sometimes called “virtual wineries” — cannot participate in passport events, unless the third-party organizer obtains an appropriate license and actually controls the licensed venue and the activities conducted during the event.

WINEMAKER DINNERS

Winemaker dinners can be held at several types of on-sale premises, including restaurants and private clubs. They are typically well-attended by consumers, who find the opportunity to personally interact with winemakers and winery owners to be a unique, behind-the-scenes look at the world of wine.

Although wineries are prohibited from advertising for retailers, vintners are free to advertise the wines to be featured at the dinner, as well as the date, time and location of the event, using the name and address of the retailer. The winery, however, cannot advertise the retail prices of the featured wines or share in any of the costs incurred by the retailer in connection with the event.

Three rules are particularly important and often ignored:

• No sales can be made at the event by the winery, but orders can be taken.

• No consignment sales are permitted. The retailer cannot sell wine brought to the event by the winery to attendees without first paying the winery for the wine, nor can the retailer return unused bottles of wine to the winery.

• Only three 1-ounce tastings can be provided to each attendee. Full glasses of wine cannot be served, nor can bottles of wine be given to attendees.

Again and unfortunately, winemaker dinners may not be conducted by type 17/20 producers.

INVITATION-ONLY EVENTS

Vintners with the type 02 winegrower license, but not type 17/20, are authorized to provide food and wine free of charge to consumers at invitation-only events, provided a variety of conditions are met:

• The event can be held at the winery’s licensed premises, a licensed on-sale hotel premises or at any other location for which a caterer’s permit has issued.

• Invitations must be sent only to consumers over age 21 and be directed to specific street or email addresses. No general advertising or other dissemination is permitted.

• Attendance at the event must be limited to consumers who affirmatively accept the invitation and one guest.

• Admittance must be controlled through the use of a list of names at the door to the event, and the event must be limited in size (no more than 600 consumers and guests) and duration (no more than four hours).

• Again, the winery can advertise the date, time and location of the event using the retailer’s name but must not make any laudatory comments about any retail licensee.

• If the event is held at a hotel or at a location for which a caterer’s permit has been obtained, any wine served at the event must be purchased from the hotel or caterer.

BENEFITS OUTWEIGH COMPLEXITY

The bottom line for wineries trying to chart their way through these regulatory waters is to know and understand the rules. Although the regulations governing hospitality and marketing events can seem complicated and overwhelming, the tremendous upside to conducting these types of events far outweighs the effort required to understand and comply with them.

Consumers of wine today want more than tastes of wine at a crowded tasting room. They want to feel special and appreciated, experience the type of “insider” access they can go home and brag about, and experience unique and different things. Wineries that satisfy those basic consumer needs and desires will stand out in a very crowded field of competitors.