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California wine grower report alleges 2020 ‘predatory conduct’ in smoke rejections. Winery attorneys say there’s more to the story

Questions growers should ask in grape contracts

• Sampling of grapes: How will it be conducted? By whom? When? What are the chain-of-custody requirements for samples pulled from a vineyard or truck?

• Testing of samples: How will it be conducted? By a certified third-party lab? When? What methodology will be applied? How will results be shared?

• Smoke exposure standards or criteria: What thresholds for chemical compounds will be applied? What standards or criteria will apply if sensory analysis is part of the winery’s decision to accept or reject grapes, and will sensory analysis be coupled with lab results and not a standalone factor in the decision?

• Test results: How will the results of the tests affect the winery’s right to reject grapes or impose a price adjustment, if at all?

Source: “A legal analysis: 2020 winegrape rejections” by Downey Brand LLP for Allied Grape Growers and California Association of Winegrape Growers, July 7, 2021

A new legal analysis commissioned by two prominent California wine grape grower trade groups pulled back the veil on the chaotic 2020 harvest, including vintners’ rejecting delivery of fruit, asserting that some of those refusals were based on thin or suspect reasoning, and suggesting growers push to have more specific contract language to avoid having their grapes being turned away.

The collision of massive California wildfires before and during harvest last year brought to the forefront a smoke damage problem that has been smoldering for the wine business on the West Coast with greater intensity in the past six years.

In 2020 alone, between 165,000 to 325,000 tons of wine grapes in California were not harvested because of concerns about smoke. Crop insurance claims, covering a portion of contract value for the fruit, totaled $187.9 million, according to industry data cited in a report by Sacramento-based law firm Downey Brand for Allied Grape Growers and California Association of Winegrape Growers.

The 13-page report points to “numerous contracts” the law firm reviewed as well as completing interviews with “several growers.” Downey Brand represents grape farmers, wineries, grape and wine brokers, winery-owned storage cooperatives, and several winery and grower regional trade associations. For the report, the firm spoke with 60–80 growers and reviewed over 30 grape purchase contracts and corresponded with several wineries, according to Dale Stern, partner and co-chair of the its Food and Ag Group.

“It appears to us that the scenarios described in the report were more widespread in 2020 than in any previous vintage,” Stern told the Business Journal in an email.

The firm in the report wrote that it found some winery rejections of grapes were based on inconsistent standards and testing methods, “predatory conduct” in these rejections and refusals to accept deliveries of fruit that was later offered to be purchased or was sold to other buyers that didn’t not significant smoke-related problems.

The tone of the report surprised some attorneys who work on North Coast grape purchase contracts, representing vintners as well as growers.

Carol Kingery Ritter, managing partner of Dickenson Peatman & Fogarty, has spoken about the legal problems highlighted in the report during presentations before local winery and grower trade groups.

“(The report) attempted to paint wineries with a single brush of bad faith,” Ritter said, specifically pointing to the “predatory conduct” report header.

A key point in that section of the report was that the rejections noted came just before harvest, leaving growers little time to find alternative buyers. The rejection is a condition to a crop insurance claim, as the insured must mitigate the loss, if given the opportunity, Ritter noted. On top of this last-minute rejection timing was a long backlog in testing at commercial labs along the West Coast, at the high point of the fires stretching well past harvest, a problem noted in the report.

While the analysis is needed to move the industry toward addressing the problems, Ritter is concerned that the report’s presentation of the problem may hamper efforts for both producers and farmers to address the “spectrum of risk.”

“In the contract, it acknowledges that there is fruit risk the grower is taking on, but that is a little narrow,” Ritter said. “Risk doesn’t end in the vineyard. It goes to the winery too.”

That winery risk is based on having a product to sell, she said. Without salable wine, vintners don’t have a business and collateral to support lines of credit needed to buy the following year’s fruit and barrels as well as support production and marketing costs.

Downey Brand’s grape contract legal analysis does call for the wine industry to collectively balance grower and winery interests to ensure each other’s survival long term. It advocates for “fair and transparent” contracts.

“Risk transfer comes with a cost,” the report said. “For wineries that insist on very high standards for the absence of smoke impact, the cost to obtain grapes should be relatively higher. For wineries that exhibit various tolerances to impacts from smoke exposure, the cost to obtain grapes should be relatively lower. Price and terms discovery during contract negotiations should include considerations regarding smoke exposure risk.”

While treatment methods for wine with unwanted smoke characteristics can be treated to remove much of them, a number of the methods can strip some of the key qualities of high-end wine: color, flavor and mouth feel.

Questions growers should ask in grape contracts

• Sampling of grapes: How will it be conducted? By whom? When? What are the chain-of-custody requirements for samples pulled from a vineyard or truck?

• Testing of samples: How will it be conducted? By a certified third-party lab? When? What methodology will be applied? How will results be shared?

• Smoke exposure standards or criteria: What thresholds for chemical compounds will be applied? What standards or criteria will apply if sensory analysis is part of the winery’s decision to accept or reject grapes, and will sensory analysis be coupled with lab results and not a standalone factor in the decision?

• Test results: How will the results of the tests affect the winery’s right to reject grapes or impose a price adjustment, if at all?

Source: “A legal analysis: 2020 winegrape rejections” by Downey Brand LLP for Allied Grape Growers and California Association of Winegrape Growers, July 7, 2021

“With this in mind, it may not make economic sense to treat high priced wines because the finished product might lose some of the important flavor profile that justifies a higher price point,” Stern told the Journal. “Whereas, wineries producing lower priced products may not be as concerned.”

Not all wineries act like this

Jeff Bitter, president of Allied Grape Growers, one of the sponsors of the report, said that important to note about the legal analysis is that the situations in the report mentioned in the report are the most egregious actions growers have claimed to have encountered.

“The report is meant to point out that these types of things are happening, and these are situations growers want to avoid becoming a victim,” Bitter said. “Wineries across the board do not act in the same manner.”

Though a lot of research has been done in the last few years on wildfire smoke and wine grape damage, the haze that remains on how closely tied test results are with the quality of the grapes and ambiguity in grape contracts is creating confusion in grower-winery relationships, he said.

“People — wineries and growers — are approaching this like someone who is walking in the dark with hands out so as to not hit the wall,” Bitter said. “People are not operating with standard set of rules and boundaries.”

Without clear boundaries and standards, some are moving to the extremes to protect themselves, when they should be moving closer to each other to work cooperatively, Bitter said.

Winery legal arguments for rejection of fruit

Stoel Rives analyzed grape purchase agreements it works with and found that they generally fall into several tiers, listed here from strongest to weakest legal argument a winery could make for rejection of fruit:

Absolute right to reject. The agreement has express language that grapes need to be of superb quality at the winery’s discretion. The winery can assert that although it didn’t specifically mention smoke taint, the parties agreed that a quality standard would be met, yet the delivery didn’t because of sensory or lab test results.

“These are some of the most difficult for a grower to defeat because of lack of specificity, and the winery has the right to accept or reject,” said Todd Friedman, a Portland, Oregon-based Stoel Rives partner who has hundreds of California winery and grower clients. “Hopefully, the price (in the contract for the grapes) reflects that the winery might reject the fruit.”

Implied right to reject. The contract might say “grower assumes all rights and responsibilities in farming of grapes.” There’s no implication of the quality of the fruit delivered, but if smoke comes into a grower’s vineyard and test data is legitimate, the argument can be made that it’s the grower’s risk.

Acknowledgment that the vintner is making premium wine. The assertion from the winery is that the grower knew what the winery would do with the grapes, so there was acknowledgement that the acceptance tolerance would be higher.

General quality standards. This is the weakest argument a vintner could make, especially if specific thresholds for acidity, sugars and flavor compounds are mentioned but those for smoke aren’t, a grower could say that smoke wasn’t really a quality standard.

Other legal arguments a winery could bring include implied warranties of merchantability or of fitness for use, Friedman said. The merchantability warranty is deployed in contracts involving defective or nonworking projects, and in the wine business the concept would involve the understanding that the grapes could be made into wine.

That hasn’t been tested thoroughly in California courts, outside of a 2003 case in which it was decided that this warranty only extends to making any wine, not just the wine the vintner contemplated, Friedman said.

The implied warranty of fitness for use or appropriate of purpose relies on the buyer’s expectation that the seller has the skill to furnish the product, which would be grapes in the wine business. Friedman said that a problem with this argument is that grape contracts often involve a cooperative agreement between grower and vintner on how the grapes are grown, commonly called “cultural practices.”

“The problem comes if the winery says it is relying on the grower skill but is telling the grower how to prune or pick,” Friedman said.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.

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