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Vine Notes

Katherine Philippakis (kp@fbm.com, 707-967-4000) is a partner with Farella Braun + Martel LLP, chairs the firm’s wine industry practice group and is based in the St. Helena office. Karen Yuen (kyuen@fbm.com, 415-954-4483) is a partner in the business transactions practice and is based in the San Francisco office.

Vine Notes (nbbj.news/vinenotes) is recurring column by Rabobank, Farella Braun + Martel and Heffernan Insurance Brokers.

Following on last year’s Northern California firestorm in Napa, Lake, Sonoma, Mendocino, Butte and Solano counties, various North Bay regions have also seen wildfires in 2018. A large wildfire in Mendocino and Lake counties in August was followed a few weeks later by a smaller fire on the Napa/Lake county border.

For the vintners and growers in Northern California’s wine country, wildfires pose an additional risk that has lately received widespread attention: the risk of smoke taint in wine made from smoke-exposed grapes.

Approximately 90 percent of Napa’s grape crop had been harvested at the time of the 2017 fires, leaving only a relatively small amount of grapes that were exposed to the smoke. But those grapes were predominantly cabernet sauvignon, the varietal most affected by smoke. Researchers at University of California, Davis, have been conducting experiments with 2017 wine made from their experimental station in Oakville. Some of the wine was made with grapes harvested just before the fire, some made with grapes harvested immediately after.

Researchers have been testing these wines for volatile phenols from smoke that can permeate the grape skins and result in a smoky, or “campfire,” flavor in the wine. Methods such as blending, filtration, fining and reverse osmosis may help to minimize the effects of the smoke exposure but do not appear to provide a cure. And more alarmingly, researchers say that smoke-affected wine changes over time and the extent of smoke taint may not become apparent until after wine is bottled.

After last year’s fires, many vintners adopted a wait-and-see attitude, crushing smoke-exposed grapes into wine and segregating this wine from unaffected wines. The results remain to be seen. This year, however, wineries have become more proactive, rejecting smoke-exposed grapes outright. For both vintners and growers dealing with smoke-exposed grapes, questions arise regarding what legal strategies are available for addressing the issue.

The first strategy adopted by some vintners was a contractual approach: many vintners utilized new grape contracts that included express provisions allowing them to reject smoke-exposed grapes. Generally included among the quality standards in the contract, provisions were incorporated to make smoke one of the markers that a vintner could use to determine that a wine was of inferior quality and could be rejected.

Other vintners continued to rely on the more subjective quality provisions in their existing contracts to argue that smoke-exposed grapes could be rejected. A similar approach was to rely on the provisions in the Uniform Commercial Code allowing a buyer to reject inferior or non-conforming goods. The potential problem with this approach, however, is that acceptance of the goods generally transfers the risk to the buyer and waives the protections of the UCC, including the right to reject the goods later.

The difficulty for vintners is that at the time of the harvest, the extent of any possible smoke taint is not necessarily apparent. Many wineries will want to accept the grapes provisionally, crush them and then determine whether they are acceptable. This approach entails more complicated legal strategies.

One approach is to document with the grower that the grapes are being accepted provisionally and may be rejected later. In such cases, vintners may ask growers to contribute to the cost of the possible remediation of the wine, with such contribution usually taking the form of a discount on the price of the grapes. In other words, vintners may ask growers to accept a lower price for the grapes up front and then attempt to remediate the resultant wine.

Vine Notes

Katherine Philippakis (kp@fbm.com, 707-967-4000) is a partner with Farella Braun + Martel LLP, chairs the firm’s wine industry practice group and is based in the St. Helena office. Karen Yuen (kyuen@fbm.com, 415-954-4483) is a partner in the business transactions practice and is based in the San Francisco office.

Vine Notes (nbbj.news/vinenotes) is recurring column by Rabobank, Farella Braun + Martel and Heffernan Insurance Brokers.

In some cases, we have seen wineries ask growers to bear the cost of the remediation, up to a certain percentage of the grape cost. In this situation, the winery would withhold a percentage of the payment for the grapes and use this to pay the cost of any remediation needed on the wine. Any leftover funds would be paid to the grower.

In other cases, we have seen wineries negotiate an upfront discount for the grapes, leaving it in the winery’s sole discretion (and cost) to determine what, if any, remediation is needed. If the winery subsequently rejects the wine, then the grower is paid the discounted price for the grapes; if the winery accepts and chooses to bottle and sell the wine, then the grower receives the full undiscounted price.

The difficulty here is that under the Berryhill Act, final grape prices need to be determined by Jan. 10 of the year following the harvest, at which time wineries may not yet know whether or not the wine is tainted, making it in many cases easier for the winery simply to reject the grapes outright.

Many wineries recognize that these types of approaches (both rejection of grapes and withholding payment for grapes) have a damaging economic effect on growers. In a spirit of partnership with growers, we have seen wineries who reject grapes offer to prepay growers for a percentage of the next year’s harvest. This hopefully allows growers to cover their farming costs and keeps the grower-vintner relationship intact.

In almost all cases wineries will choose to have chemical analysis of the grapes and/or wine completed in order to support their decision. Similarly, growers with smoke-exposed grapes may choose to have the lab analysis done preemptively, in order to rebut any attempt to reject the grapes. Verifying the presence or absence of volatile phenols from smoke exposure can help to document the facts and guide the negotiations between vintner and grower, even though the chemical analysis may not ultimately be determinative of whether a wine is smoke tainted.

Wineries should understand that accepting and crushing smoke-exposed grapes may result in the winery bearing a larger risk than if they rejected those grapes outright. That being said, because the extent of smoke damage cannot generally be determined at the time of harvest, and because wine made from such grapes may still be saleable, some wineries will choose to accept that risk – both in solidarity with their growers and in the hopes that the wine will be of sufficient quality that it can either be sold under the winery’s own label or sold off as bulk wine.