How Wine Business Law Is Shifting Amid Coronavirus Pandemic Allowances for Virtual Tastings, Direct Sales
Katherine Philippakis, chair of Farella's Wine Industry Group, was featured among wine law experts commenting on trends in wine business law from direct-to-consumer shipping to regulation of winery events amid COVID-19 shutdowns, the current wave of legal disputes, and key measures wineries should take now.
Read the full article, here. Read Kay's responses below.
In the June 2019 Supreme Court ruling - Tennessee Wine and Spirits Retailers Association v. Russell F. Thomas - striking down Tennessee's durational residency requirement for alcohol retailers, has changed the landscape of shipping wines across stateliness, describe how. If not, what barriers remain (and in how many states) regarding shipping California wine across state lines?
The principal outcome of the Tennessee wine case was to uphold the Commerce Clause and say it applies to retailers as well as wineries. There, the Court said Total Wine was entitled to a Commerce Clause defense; in other words, that retailers could object to discriminatory regulations that affected interstate commerce just as wineries are able to so object. Thus, if a state allows an in-state retailer to ship direct to consumers, then it must allow out-of-state retailers also to ship direct. The case could then have a significant impact in liberalizing direct shipping of wine. But I would expect states to continue to put up legal barriers to this, so it will not be a straight and easy path.
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?
Pre-COVID-19, the regulatory focus in Napa and Sonoma had been on what level of marketing was appropriate for wineries: because both counties view wineries as agricultural uses (rather than commercial or industrial), any marketing activities were viewed through the lens of an ‘accessory agricultural use,’ rather than as a purely commercial activity. This approach obviously resulted in limitations on the scope of marketing and hospitality. Now, the regulatory focus has been on helping wineries to survive: how to create a safety protocol that will allow a sustainable level of marketing and hospitality activities without endangering employees, visitors, or the public generally. It remains to be seen whether the limited openings that have been allowed will be either economically sufficient for wineries or safe. Wineries are taking their safety obligations very seriously, but visitors can be difficult to control. And it is unclear whether the limited tastings will be enough for wineries that largely rely on the visitor experience to generate sales. When we are in a position to resume hospitality activities, I believe the counties will be more liberal in their approaches to hospitality and continue some of the practices that have been put in place due to COVID-19: extended opening hours, tasting activities at various locations on a winery property (including outdoors), a greater diversity of retail experience, and a greater variety of tasting experiences. Generally, tougher economic times result in a loosening of the regulatory environment, and I would expect that to be the case in the current situation also.
What are you seeing or anticipating will be the legal fallout triggered by the shutdown and economic downturn? For example, will this event (or has it already) trigger more legal disputes between wineries and suppliers or other groups? If not that, what are issues you see will be contentious going forward?
We have already seen an uptick in legal problems associated with grape contracts, as wineries are rethinking what level of production is appropriate for the uncertain climate of 2020. Similarly, wineries with offsite tasting rooms are generally unable to use them at the moment and for the foreseeable future, and so I would expect some wineries to reconsider whether they want to maintain these offsite premises. Since most of these offsite tasting rooms are leased, rather than owned, I would expect to see negotiations over lease termination, similar to what retailers in other industries have experienced. Finally, some wineries that had plans in the works to expand their administrative and office space onsite are reconsidering that; many wineries have discovered that they can function perfectly well with administrative personnel working from home. So, I would expect that future wineries will have less office space and instead use that square footage for a variety of tasting spaces to host smaller groups.
Describe any recent significant changes coming from the ABC, especially in regards to virtual tastings. Are these regulations that will cause permanent shifts, or just temporary during the shutdown?
We have not seen any objections coming from the ABC relating to virtual tastings. They have acknowledged wineries’ rights to host outdoor wine tastings without the service of food, which has been a necessity during the COVID-19 crisis as otherwise the limited reopening of wineries would not have been possible. I would expect this to be a permanent change, as I do not think it likely that any regulatory agency will be mandating indoor tastings in the near future, nor requiring food service.
This pandemic and resulting shutdown is hardly something any client could have adequately prepared for legally. What are one or two smart things you saw some clients have in place which softened the blow from this event?
The wineries that have done the best during this time had robust communications with their customers and well developed mailing lists. These wineries with one-on-one customer relationships were able to continue to sell wine. Although internet marketing has continued to be important, the personal touch of direct communications by phone has been a lifesaver for many wineries. Similarly, virtual tastings have provided another form of personal connection with customers that has been invaluable to many wineries. Just as people have Zoom cocktail hour with their friends, they can also have a Zoom tasting with a winery, and generally wineries have found these to be very successful.
And on the flip side, for the next time, what are key measures or actions you’d advise clients to take?
I think all wineries should have well developed safety protocols to protect consumers and employees. Although there has been a focus on having customers sign liability waivers in order to participate in tastings, those waivers will only be valid if the wineries are carefully following their protocols. The most important thing wineries can do to insulate themselves from liability is to create (and document) a clear set of safety measures and then ensure that employees are adhering to them. A good dose of common sense can be more important than a legal document. The other important thing that wineries can do is to keep their customer lists up to date, and put time and energy into those relationships and communications. Having loyal customers is the best protection against economic uncertainty.