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Pitfalls to Avoid When Starting a Brewery

by Daniel Christopherson | Jul 09, 2019
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Starting a brewery is a difficult and complicated undertaking that requires compliance with countless federal, state, and local rules and laws. Careful planning can help avoid costly delays or other disadvantages. Below are some of the most common pitfalls that breweries encounter.

Beware tied-house issues

The Alcohol and Tobacco Tax and Trade Bureau (“TTB”) is the federal agency that regulates the production, distributing, and importing of beer in the United States. One branch of TTB deals with unfair trade practices, the most common being “tied-house” violations. TTB defines a “tied-house” as a practice whereby an industry member induces a retailer to purchase its alcoholic beverages.

Tied-house issues often come up within the context of the “three-tiers” of ownership within alcoholic beverage distribution. The three-tier system divides the alcoholic beverage market between producers (i.e., brewers, wineries, and distilleries), distributors, and retailers. While TTB does not outright ban ownership across multiple tiers, most states only permit an individual to have an ownership interest in one tier (e.g., an owner of a brewery may not also own a bar/liquor store). Even worse, some states levy strict penalties on companies that cross into multiple tiers. For example, the New York wine shop Eataly was fined $500,000 in 2014 because one of the owners had an interest in several wineries in Italy.

Tied-house issues also come up when producers offer incentives to distributors or retailers to sell their products. Depending on the state, illegal incentives can include everything from monetary payments to free advertising. For instance, California refused to allow the brand registration of a malt beverage label that used the name of the on-premises retail chain TGI Fridays, and determined that “a beer manufacturer can not [sic] provide free advertising for retail licensees.”

A brewery should exercise great care to avoid tied-house violations. A solution that works in one state may become problematic when a brewery decides to start distributing its beer into a new state. An internal analysis should be made every time a brewery enters into a new state to make sure that the brewery does not run afoul of that state’s tied-house rules.

Consider intellectual property rights issues early

As a brewery grows its brands and develops a reputation for its beers, the brewery’s intellectual property rights will become its most important and valuable assets. If a brewery fails to take early steps to ensure that its brands, logos, and other identifying features are available for use without violating the intellectual property rights of another company, that brewery risks losing out on the good will it creates early in its brands or, even worse, might end up on the wrong end of a trademark infringement lawsuit. Similarly, if a brewery does not take early steps to secure exclusive rights to a brand, it may lose the ability to secure such rights in the long run.

Clear your marks

Federal trademark registration provides an owner with the exclusive right to use a mark in connection with goods described therewith, and with related goods. The trend in US law has been to consider wine, beer, and spirits to be highly related goods, and find a likelihood of confusion between products sold across these goods with similar brands. There has also been a recent trend to find confusion between brands registered for alcoholic beverages and brands registered for bars and restaurants. In determining the extent to which a mark is available for use by a brewery, a person should at least:

  • Utilize search engines on beer, wine, and spirits enthusiast websites to find third-party use of similar marks;
  • Search the United States Patent and Trademark Office’s Trademark Electronic Search System for similar marks registered for beer, wine, spirits, and restaurants/bars, and potentially also for non-alcoholic beverages;
  • Search the TTB’s Public COLA Registry for beer, wine, and spirits labels that have been issued to producers using similar brands; and
  • Search Google and other search engines using language that encapsulates the relevant range of goods and services described above along with the desired mark.

A qualified trademark attorney can also be engaged to perform searches like the above. I recommend using an attorney with specific industry knowledge that will have insight into where to find relevant third-party use of marks. Also, care should be taken to include, where possible, Boolean search expanders (e.g., * or $, depending on the search engine) to include spelling variations for a given mark in a search.

Claim your marks early

Trademark registrations can help a brewery obtain exclusive rights to a beer brand throughout the United States in connection with a set of goods and/or services. A brewery with a product-distinguishing mark in mind (whether that be the brewery’s house name, a flagship beer name, a logo, a slogan, etc.) can lock in an early claim to a mark using a mechanism called an “Intent-to-Use” trademark application, which provides at least 3 years of time to develop products under the brand. Such applications are entitled to priority of their subject marks as of the time of filing. That means that a subsequent alcoholic beverage producer cannot begin selling a new product under that mark after the application is filed without risking infringing upon the applicant’s exclusive rights.

Failing to claim rights to a trademark early can have disastrous consequences. Oftentimes another party will be more proactive about claiming rights to a brand, which may lock a company into the geographic areas where the products have been sold and may prevent the brewery from securing future trademark registrations for related marks. If a brewery misses out on claiming rights to a mark before a later user, there may be an opportunity for the brewery to initiate a proceeding to claim priority, but such proceedings are very expensive and may take years to reach a resolution.

One caveat to staking a claim to a mark early is that a mark that is the subject of trademark application is largely locked into place after filing. With few exceptions, marks cannot typically be amended after filing. Instead, an applicant for a mark is usually stuck with the version of the mark they applied for. This often comes up with logos that are early concepts, which may be tweaked between the time of filing and the time the brewery starts selling beer with the logo. Applications for marks that do not end up being used are largely useless, and necessitate filing a new application for the new logo, giving up the early priority date that was claimed in the first application.

Make sure the lease you sign is fair and suits your needs

A brewery’s lease agreement is probably the most important legal document that will be signed by the brewery. It will guide how the space can be used and modified, what the rent and costs will be, what will happen if the space is not suitable for the intended purpose. While most states have protections in place to protect residential tenants, commercial/manufacturing tenants are often left to rely only on the terms of the lease agreement for protection.

Absolute requirements for the lease

The lease must be signed in the name of the entity that is going to be licensed at the state and federal levels. If a business is new, the landlord will almost always require that business owners sign as guarantors on the lease, meaning the owners will be liable for the lease in the event the company defaults. Including such guarantors is fine from a licensing standpoint, but the party that is the named tenant in the lease must be the company getting licensed.

The lease must also provide a provision that specifically permits for use of the space as a brewery. The permitted purpose should also include whatever types of activities the tenant plans to engage in, such as serving alcoholic beverages for on-premises consumption and selling for off-premises consumption, selling promotional paraphernalia, serving food or snacks (as appropriate), and playing music or having live musicians perform.

Things to ask for in a lease negotiation

Most landlord lease templates will include a clause requiring a tenant to return the premises in the same condition it was received. A preferred clause would allow the premises to be returned in the condition it is in at the end of the lease, so long as the landlord provided prior approval for modifications (such as internal walls and flooring), and such modifications remain in good condition at the termination of the lease.

Another important clause relates to a requirement that the premises be in a condition that allows the tenant to use the space for the permitted purposes. In the event that an interruption in sewage, water, utilities, or access to any portion of the leased premises causes the tenant to have to stop producing beer, causes beer to spoil, forces the closure of the tasting room area, or otherwise restricts the tenant from performing its normal business operations, the tenant should have some recourse such as rent abatement to allow the non-payment of rent until such issues are rectified.

Other important clauses relate to rent escalation and common area expenses (usually shared proportionally with other tenants in the development). An experienced commercial realtor should be able to provide feedback as to how such clauses compare to other properties in the same or similar areas.

In no event should you sign a lease agreement that you are not completely comfortable with. Many brewery owners feel desperate about trying to find the perfect space, and give up a great deal of bargaining power when they choose a space (emotionally or otherwise) before negotiating for reasonable lease terms.

Starting a brewery is a complicated endeavor that involves a great deal of decisions large and small. Keeping the above issues in mind will help avoid potentially significant setbacks that could mean the death of a vulnerable new business.

Daniel ChristophersonDaniel Christopherson is a beer and trademark attorney at Christopherson Brew Law (www.brew.law). He is an avid craft beer enthusiast who helps new and established breweries with their legal needs. He can be reached at dan@brew.law.

Dan will share more legal considerations for starting and running a brewery at the Bottles, Brews & Buds Conference on August 2 in Bellevue. Learn more and register today here.

This article appeared in the summer 2019 issue of the WashingtonCPA Magazine. Read more here.

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