What’s ahead for California wine industry with laws and regulations

More than wine, area lawyers specializing in the wine business have been forced in the past year to take on a number of critical issues.

That includes regulations were put in place to help the industry because of the pandemic. Will they be retained? (Answer: Maybe. It depends on lawmakers.)

Or that winery wildfire insurance is suddenly hard to find. Will it continue? (Answer: It is a whole new ballgame.)

Here’s a sampling of the thoughts of some attorneys on these topics and others. This content has been edited.

Regulation of winery events had been a hot topic in Napa and Sonoma counties until the COVID-19 inspired shutdowns. How will the economic losses suffered by wineries influence regulations, and when do you see this issue becoming front and center again?

Scott Greenwood-Meinert: The economic losses are shared between the counties and the wineries.

And the economic fallout from the wineries flows outward to the entire hospitality industry. When you add in the disastrous and seemingly endless fires… there should be a change in focus from wineries being a regulatory concern to wineries being supported by regulations.

A lot was done to help businesses survive COVID-19, and temporary regulations that helped wineries and other businesses make it through should be preserved so these businesses can move forward toward thriving.

Katherine Phillippakis: We expect to see a continued emphasis on outdoor events: outdoor tastings, vineyard tours, garden tours, and other outdoor hospitality. The United States in general has seen a surge in RV-related leisure activity, and we are curious whether overnight camping will become a feature at North Bay wineries.

The Sonoma regulations in many areas could likely accommodate overnight camping at wineries with only minor changes to the rules. In Napa the process would be a bit more complicated because of the Agricultural Preserve, but we believe it should be possible.

California beverage alcohol regulators on June 30, barring legislative action, planned to roll back many of the temporary allowances during the pandemic, namely virtual wine tasting and returns of unsold inventory from trade accounts. How legally challenging would it be for some these temporary measures to be made permanent?

Greenwood-Meinert: This is a matter of legislative wherewithal. Local legislators should be using virtual wine tasting and inventory returns as ‘common sense’ changes to alcohol beverage regulations that help wineries (which are just small businesses) continue to thrive. Virtual wine tasting is a piece of cake… this is the 21st century and the regulations are in the 19th century.

Michael Brill Newman: First and foremost, to make any of the temporary allowances permanent, it will take legislation. It is far easier in California to get legislation passed in California, particularly if there is industry consensus in support of (or at least not opposed to) the legislation than to petition the California ABC to go through a lengthy regulatory process.

Absent legislation or regulation, the ABC will not go out on a limb to extend temporary allowances that no longer have the Governor’s state emergency order behind it.

And, if vintners continue to act as if the temporary allowances are permitted, they will risk suspension of their licenses or, at the very least, significant fines.

This pandemic and resulting shutdown are hardly something any client could have adequately prepared for legally.  What are one or two smart things you saw some clients have in place that softened the blow from this event?

Phillippakis: Wineries that had well developed social media presence and strong customer relationships definitely weathered the pandemic effects better than those that did not. I saw several clients pivot to online tasting activities, such as sending out tasting kits in advance and then having a guided online tasting via Zoom.

Many wineries successfully emphasized the wine-food connection, and included a cooking component to their online marketing activities. This worked very well, particularly early in the pandemic when people were inside more and cooking more.

Some wineries also used their existing customer relationships as a way to build a more intimate relationship with their customers: sending out carefully curated materials online that offered a behind-the-scenes glimpse at life at the winery.

Overall, those wineries that were able to connect authentically with customers were able to continue to sell wine successfully throughout the pandemic.

What are key measures or actions you’d advise clients to take as the result of the pandemic?

Greenwood-Meinert: Because COVID-19 came with horrendous fires, key measures should include re-evaluating grape contracts to address both types of issues. Continue to evaluate staffing scenarios and grape sources, both grape purchase agreements and vineyard leases.

Phillippakis: We would encourage clients to take a look at their use permits and consider what changes might need to be made in order to allow for outdoor hospitality activities on an ongoing basis.

This could include more permanent outdoor facilities such as tasting bars, pavilions or shaded areas, and outdoor cooking areas. In addition, we would encourage all wineries to look at emergency resilience measures: hardening of structures against wildfire risk, additional water storage, backup power sources, access improvements, and the like.

How have the insurance challenges for wineries and vineyards in high-fire-risk areas changed legal strategies for how operational plans are crafted and how grape, custom crush and warehousing contracts are drafted?

Greenwood-Meinert: Insurance issues are forcing lenders and wineries into awkward positions. Self-insuring is a new ballgame, and a scary one at that, and some folks are just going to want to do that and they will make business decisions accordingly. It’s pretty easy to say every contract and the property related to it needs to be reviewed and perhaps amended.

John Trinidad: Wildfire issues and resulting insurance challenges have had a significant impact in a number of key contractual relationships for wineries, including grape purchase agreements, vineyard leases, and custom crush and alternating proprietorship agreements.

Industry members need to review those contracts carefully to understand risk and exposure should a wildfire threaten their grape sources or production operations. In addition, they should be exploring what sort of insurance coverage is available to support their specific operations.

Finally, wineries should be considering what contingency plans are in place should wildfires threaten their main grape source region or production facility.

What are signs that states are ramping up or down enforcement on wine shipping?

Newman: Some states are not deterred and have been ramping up enforcement. Both Michigan and Ohio attorney generals this past year successfully brought injunction actions against retail direct wine shippers, obtaining consent decrees in multiple cases against retailers shipping in violation of their state laws.

It’s likely more states will become aggressive and do the same, supported by recent cases in federal courts that have largely gone the states’ ways.

California beverage alcohol regulators on June 30, barring legislative action, plan to roll back many of the temporary allowances during the pandemic, namely virtual wine tasting and returns of unsold inventory from trade accounts.

Trinidad: We have seen an increase in enforcement activity by state agencies in combating illegal interstate shipments by wineries that do not have the necessary state DTC license to ship into those states as well as shipments by out of state retailers.

This pandemic and resulting shutdown are hardly something any client could have adequately prepared for legally.  What are one or two smart things you saw some clients have in place that softened the blow from this event?

We’ve seen a number of wineries struggle to hire tasting room staff recently. Wineries that were able to keep a significant part of their staff employed throughout, sometimes by shifting duties and responsibilities, have been able to hit the ground running once the pandemic-related restrictions were lifted.

Also, wineries that were actively engaged in rich social media efforts were able to make the transition to virtual tastings much more quickly. In addition, since those wineries were already versed in the marketing and advertising regulations that impact the wine industry, they were able to avoid certain issues as they transitioned into virtual tasting experiences.

What are the most significant legal questions remaining for California wineries that want to ship across state lines?

Trinidad: For fully licensed, producing wineries, there are only a handful of states that flat-out prohibit out-of-state wine shipping.

But there are states that have regulations that create limitations on how much or what wines a winery can ship, or otherwise render direct-to-consumer shipping cost prohibitive. So the biggest remaining issue for wineries is in combating those market access restrictions.

Regulation of winery events had been a hot topic in Napa and Sonoma counties until the Covid-19 inspired shutdowns. How will the economic losses suffered by wineries influence regulations, and when do you see this issue becoming front and center again?

Phillippakis: We expect to see a continued emphasis on outdoor events: outdoor tastings, vineyard tours, garden tours, and other outdoor hospitality. The United States in general has seen a surge in RV-related leisure activity, and we are curious whether overnight camping will become a feature at North Bay wineries.

The Sonoma regulations in many areas could likely accommodate overnight camping at wineries with only minor changes to the rules; in Napa the process would be a bit more complicated because of the Agricultural Preserve, but we believe it should be possible.

What other significant legal issues are emerging for the wine industry?

Greenwood-Meinert: Impending building code tightening due to fire may make it more difficult to get wineries permitted or modified when they aren’t on valley floors.

Newman: Franchise protection and distributor relationship issues remain significant for vintners in their relationships with distributors. There does seem to big a great deal of movement however in brands moving from distributors to distributors.

There also seems to be increasing pressure to liberalize (or ignore) tied-house laws, which have been designed to provide a level playing field for industry members – particularly the smaller producers and brands – and prevent “pay to play” scenarios.

Phillippakis: One other issue has arisen recently that readers may not know of, and that is the new FireSafe regulations being proposed by the California Board of Forestry. It’s a fairly complicated regulatory scheme, and it’s possible that it will be impacted by Senate Bill 12, led by Senator McGuire. SB 12 sets forth a broader planning process for addressing wildfire and flood risks, and it may have some impact on the scope of the Board of Forestry’s jurisdiction and authorization.

That being said, the Board of Forestry is currently reviewing a draft set of FireSafe regulations, and these regulations will have far-reaching implications in areas with severe fire risk.

Most significantly, development on these properties would require substantial road improvements from the subject property to the nearest collector road; in many cases, depending on the length of the roads in question, these types of road improvements could cost millions of dollars.

In addition, the regulations would limit the local agencies' ability to issue road exceptions, which makes it harder for these agencies to react to individual situations and to create alternative standards that have the same practical effect as the state standards.

The Board of Forestry received over 300 public comments on the proposed regulations, so it is possible that they may make further changes to them. In addition, it is possible that SB 12 may circumscribe some of the BOF’s authority. Nevertheless, this is a potentially significant issue and one that landowners may wish to follow.

Trinidad: The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (“TTB”) has proposed significant revisions and amendments to the advertising and labeling regulation for wine, beer, and spirits.

We know a number of industry members are eagerly awaiting the finalization of that rule making process.

Relatedly, we’ve seen a significant number of questions about advertising and labeling claims from certain alcohol beverage brands that are marketing themselves as “good for you”. We expect there will be ongoing questions about whether such claims are compliant with federal regulations.