Shutdown on hold, North Coast wineries and distilleries hope approvals begin to flow soon

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Shutdown may mean an increase in legal expenses

The federal government shutdown may result in alcoholic beverage producers spending more on legal services this winter and spring. Since many producers cannot release their beverages by the expected date, they may need the services of attorneys to re-negotiate contracts.

“A change in bottling schedule may impact other contractual relationships, such as a distribution agreement, or delay planned marketing around anticipated wine release dates,” said John Trinidad, attorney with Dickinson, Peatman & Fogarty, a Napa law firm.

David Balter, also an attorney with Dickinson, Peatman & Fogarty, said it is unlikely that an alcoholic beverage producer could successfully sue the federal government for damages allegedly incurred due to the shutdown.

“First, there are procedural issues such as the requirement that a claimant file a claim form prior to any litigation, jurisdictional issues (i.e., one might be required to sue in the Federal Court of Claims in Washington, D.C.,) and, of course, (a producer would have to) prov(e) the factual nexus between the shutdown and the claimed damages. (These) are required to be proven with specificity, e.g. no estimated damage claims. Finally, governmental agencies have broad immunity for tort claims arising out of the exercise of their discretionary powers,” said Balter.

The federal government shutdown had a negative impact on the North Bay’s wineries, distilleries and breweries, with producers who need label approvals from the Alcohol and Tobacco Tax and Trade Bureau (TTB) facing the most serious financial consequences. Beverages without a label approval cannot be released for sale.

With the government shutdown set now to be lifted, at least until Feb. 15, producers expect to have to continue to wait, allowing the TTB to work through a 36-day backlog of applications. The agency continued accepting applications for approvals through its website during the shutdown.

“We can’t be sure how long it will take the TTB agents to process through the now huge queues of formula and certificate of label approval (COLA) applications. I won’t be able to predict (the date of) our releases until I have those approvals in hand. I still expect that to be a few months from now,” said Ashby Marshall, owner and distiller at Spirit Works Distillery in Sebastopol. Spirits Works Distillery submitted several new labels to TTB before the shutdown.

Jeremy Grenert, marketing director for Bear Republic Brewing in Cloverdale, said his company hopes to be “towards the front of the line” for label approval. Bear Republic submitted several new beers for approval before the shutdown.

“We understand that TTB will be very busy going through applications for approval once they get back to work, so we are prepared to be a little behind on a release or two. We are happy the government will be open again,” said Grenert.

Brian Hunt, owner of Moonlight Brewing Company in Santa Rosa, said the shutdown impacted his company’s ability to market a beer co-produced with Petaluma-based Lagunitas Brewing Company.

“We submitted a crude label for a springtime Bock, and now we’re stuck with it. We wanted to create a better design, but (during the shutdown) we (were not able to) submit it to TTB (for a timely release),” said Hunt.

Hunt was also concerned that the shutdown resulted in an additional three-week backlog to Moonlight Brewing’s relationships with its regulators.

“I am afraid that the morale of these people will have plummeted and these are people we need to feel proud of what they do. That is now gone,” said Hunt.

John Trinidad, an attorney with Dickinson, Peatman & Fogarty, a Napa law firm that has producers as clients, said he hoped TTB can commit the necessary amount of staff to efficiently work through the backlog of COLA, formula and basic permit applications resulting from the shutdown.

“I understand that the Wine Institute and other alcohol beverage trade organizations have been in contact with TTB to that end,” said Trinidad.

BEVERAGES IN LIMBO

Trinidad said all types of alcoholic beverage producers which did not get a label approval before the shutdown could not sell unapproved products. While distilleries and breweries are not bound to a harvest schedule, many wineries bottle rosés between the end of January and late February. They are set to bottle certain whites in the spring.

“2018 reds are not going to be bottled for a while, so they’re safe for now. If you’re an established winery which has been operating for a few years, you have no need to get a new COLA approval (as long as) you’re only changing the vintage date on the approved label. It’s the wineries that are releasing their inaugural rosés and whites which may have to…delay their anticipated release dates,” said Trinidad.

Shutdown may mean an increase in legal expenses

The federal government shutdown may result in alcoholic beverage producers spending more on legal services this winter and spring. Since many producers cannot release their beverages by the expected date, they may need the services of attorneys to re-negotiate contracts.

“A change in bottling schedule may impact other contractual relationships, such as a distribution agreement, or delay planned marketing around anticipated wine release dates,” said John Trinidad, attorney with Dickinson, Peatman & Fogarty, a Napa law firm.

David Balter, also an attorney with Dickinson, Peatman & Fogarty, said it is unlikely that an alcoholic beverage producer could successfully sue the federal government for damages allegedly incurred due to the shutdown.

“First, there are procedural issues such as the requirement that a claimant file a claim form prior to any litigation, jurisdictional issues (i.e., one might be required to sue in the Federal Court of Claims in Washington, D.C.,) and, of course, (a producer would have to) prov(e) the factual nexus between the shutdown and the claimed damages. (These) are required to be proven with specificity, e.g. no estimated damage claims. Finally, governmental agencies have broad immunity for tort claims arising out of the exercise of their discretionary powers,” said Balter.

Trinidad said TTB could financially penalize and suspend the licenses of producers that bottle and sell an alcoholic beverage without a label or exemption.

Gladys Horiuchi, director of media relations for California Wine Institute, a San Francisco-based wine industry association, said during the shutdown, the Wine Institute educated policymakers in the Trump administration and Congress on the negative impacts the TTB closure had on the wine industry.

Wine, spirits and brewery tourism also suffered, said Robert Eyler, professor of economics at Sonoma State University.

“The chokepoints in different airports (caused by the long lines related to Transportation Safety Administration staff shortages) result(ed) in visitors delaying or canceling trips. Travelers look(ed) at the lines at the airports and (said), ‘Oh, I’ll make that trip to Napa or Sonoma when this is over,’” said Eyler.

CRUSH REPORT AND PEST CONTROL

The United States Department of Agriculture’s (USDA) closure of certain offices during the shutdown will likely to delay the California Grape Crush Report by weeks or months. The preliminary report on production and selling price of grapes is usually published on Feb. 8, with the final report being published on March 8. The report is paid for by California’s estimated 6,000 wine grape growers. The report is used to set the prices for wine grapes for the coming year. It is vital to the wine industry because it allows growers to negotiate contracts, request loans and budget ahead.

“USDA’s National Agricultural Statistics Service (NASS) office in Sacramento is the agency that collects and compiles data to create the report,” said John Aguirre, president of the California Association of Winegrape Growers.

The shutdown led to NASS workers being placed on unpaid furlough for the duration of the closure.

“The California Department of Food and Agriculture contracts with USDA because USDA has the statistical expertise and the mailing database to complete the project,” said Aguirre.

Aguirre said USDA’s partial closure also meant the interruption of service and work regarding animal and plant health inspection, such as detection of the glassy winged sharpshooter in California’s Central Valley.

The Central Valley is the largest grape-growing region in the state. The uncontrolled spread of invasive pests could negatively affect its vineyards, causing the 2019 crop statewide to decrease.

The federal government shutdown also negatively impacted the administration of other federal agricultural research regarding hops, grains, and wine grapes, as well as crop insurance and rural and regular loans. Financial institutions may be delayed in getting the information needed from the federal government to process loans to growers and alcohol producers.

DELAY ON NEW BEVERAGES LOWERED SALES

Alcoholic beverage producers use new products to generate interest in their companies, encourage visitors to come to their facilities, increase their number of club memberships, and promote local tourism.

Marshall said Spirit Works Distillery submitted labels for an unsweetened sloe gin and a blended wheat and rye whiskey it planned to release this quarter.

“We planned to provide the new spirits to our spirits club members and promote it to visitors. Now we cannot offer these beverages until later in the year. It’s a letdown for everyone,” said Marshall.

Marshall said in her experience when things are running smoothly, the TTB takes five days to process a submission for a formula and 12 days to process a submission for a label.

Arthur Hartunian, cofounder of Napa Valley Distillery in Napa, said he planned to launch a distiller’s blend of vodka, gin, whiskey, and brandy in January. He submitted the formula and two labels for approval in early December before the shutdown.

“We invested heavily into raw materials, distilling and production, bottles, labels, packaging, equipment, marketing, and staffing. The new positions we added were national wholesale manager and marketing assistant. (We) will not be able to see a return on investment until we launch the products…blocked by the government shutdown,” said Hartunian.

Hartunian said his products are destined for distribution and wholesale markets.

“We were just entering into wholesale markets and wanted to have a new product ready. We try to release a new product every quarter and plan six months ahead. Now our projections are going to fall flat. It is likely that we’ll have to scale back (on expenses and marketing),” said Hartunian.

Grenert, marketing director for Bear Republic Brewing in Cloverdale, said the shutdown impacted his ability to distribute its new beers in out of state markets.

“Fortunately, we can distribute our beers in state as long as we register them in California. As a brewery, we are agile enough to adjust our timing for new product launches,” said Grenert.

Hunt said he is hoping for a timely shot to submit the fine-tuned label for Moonlight Brewery and Lagunitas’s collaboration, “Secret Agenda Pale Bock.”

“It is a pale, delicate Bock. It is a cross between a Bock (which is traditionally dark and robust) and a lager (which is lighter in color and taste). It’s a one-time beer made just for springtime. (Until we can get an approval,) we are stuck with the old label’s wording,” said Hunt.

PAYROLL TAXES AFFECTED

The IRS’s temporary failure to accept payroll taxes was another result of the shutdown.

Jeremy Abbott, a partner in Winery Accounting & Compliance Company, a Napa-based firm, said alcoholic beverage producers should submit all their federal taxes on time.

“I don’t advise not making payments or making payments late. Tax agencies will look at your submittal dates. You should keep records to show you tried to make the submission when you were supposed to. If the authorities understand they’re the ones at fault, they are unlikely to penalize for late payment. The greater consequence to all producers is the holdup of business because permits and approvals are not being processed,” said Abbott.

Although many alcoholic beverage producers can continue selling beverages for which they had an approved label, they expressed interest in solutions that would keep agencies like TTB open.

“What do we have to do as a country to stop this from happening? It’s so disruptive,” said Hartunian.

Hunt agreed, saying, “All of the costs of the shutdown add up astronomically.”

Trinidad said the shutdown showed “just how dependent alcoholic beverage industry operations are on a functional and efficient federal regulatory system.”

Hunt said lawmakers should look to create an agreement not “to do this again.”

“(Some of) the things that the government does for us…are not political things. There’s a political war going on and the civilians are the collateral damage. That’s wrong,” said Hunt.

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