Articles

Aaron Kolquist

CRAFT BREW CRAZE

With microbreweries springing up all across Northern Minnesota and Wisconsin, craft beer is something very familiar to folks in the Northland.  Drawing from the area’s superb brewing waters and its firmly-rooted craft beer culture, craft breweries in the Northland are making impressive beverages, and impressive names for themselves.  These local breweries are riding a national trend in which the craft beer market experienced a twenty-two percent dollar sales increase in 2014, and where craft beer is expected to carve out a remarkable fifteen percent market share in the beer industry by the end of 2015.  More and more entrepreneurs are seeking a piece of the proverbial pie, but many are unaware of the legal hurdles associated with entering into and operating within this heavily regulated industry.  This article sheds light on some of the more prevalent regulation issues and explores steps brewers can take to protect themselves and their craft.

Navigating Regulations

One of the primary obstacles craft brewers face from the time they start their business is regulation.  From the Securities Exchange Commission (SEC) and the Alcohol and Tobacco Tax and Trade Bureau (TTB) to the municipality where the brewery is located, brewers deal with regulations from multiple regulators at federal, state, and local levels.  Failure to be aware of, or compliant with, these regulations can bring a quick halt to the brewer’s operations and can even yield harsh penalties.  Thus, it is critical to be proactive in understanding and navigating the regulatory process.

Before the first barrel is brewed, craft brewers are required to submit a Brewer’s Notice and obtain approval from TTB to begin brewing operations.  Obtaining approval of the Brewer’s Notice, a brewery permit, and a certificate of label approval from the TTB is a lengthy and necessary process, but it is only the start.  The Food and Drug Administration (FDA) imposes certain standards and the Internal Revenue Service (IRS) imposes taxes.  The state government will control everything from alcohol licensing to excise and income taxes, to seller’s permits and recycling requirements.  The municipality in which the brewery operates will often have licensing requirements of its own, such as special licenses for taprooms.  These are merely a few examples, and brewers must continuously update regulatory bodies as to changes in the business and stay current with their regulatory obligations.

With regard to the SEC, start-up brewers need to be careful how they raise capital funds.  It can be onerous for new breweries to obtain suitable financing, which often forces the entrepreneurs to seek private funding.  The definition of “security” is broad and, generally, financing arrangements require registration and/or filing with the SEC and likely the state government, as well.  Failure to comply with state and federal securities laws can lead to harsh penalties.

Protecting Self and Craft

Protection stems from diligent business planning, which ought to start long before the brewing process and the licensing and permitting process discussed above.  Forming the proper business entity is one of the first steps, and perhaps the most important.  The type of business entity used will determine, among other things, taxation and personal liability.  Also, the entity will typically have an agreement setting forth the rights, responsibilities, powers, etc. of the owners and how the company is to be run, especially where multiple owners are involved.

With regard to protecting oneself, most business owners opt to use a limited liability company or some type of corporate entity.  There can be taxation differences depending on the specific entity chosen, though they each shield the owner’s personal assets from the liabilities of the business.  To maintain this liability shield, also known as the “corporate veil,” owners must be sure to respect the separateness and existence of the entity.  This includes keeping personal assets separate from company assets, following organizational formalities, and ensuring adequate capitalization, to name a few.  For further discussion on the corporate veil and how to maintain it, please refer to my previous article on “Piercing the Corporate Veil,” which was published in the April Edition of Business North.

With regard to protecting one’s craft, trademarks can be crucial, both for the brewery and the beers to be brewed.  A trademark is any word, name, symbol, or design, or any combination thereof, used in commerce to identify and distinguish the goods of one manufacturer or seller from those of another.  In the beer industry, there are only so many creative ways to use the word “hop” in a beer’s title, so competition for titles can be intense.  Further, what may seem like a creative name or logo for one brewery may wind up being surprisingly similar to that of a brewery on the other side of the country.  With thousands of brands in the U.S. beer market, inadvertent trademark infringement can happen quite easily.  One popular Northland brewery ran into this issue when a symbol they were using on their beer cans was found to infringe on a symbol trademarked by a brewery in Vermont.  Fortunately, the two parties were able to amicably settle the dispute, though other cases are not resolved so easily.

While registering a trademark can be time consuming and tricky, it is often worth the time and effort.  Trademarks are registered through the U.S. Patent and Trademark Office, which undergoes a process to ensure that the mark is distinctive.  Further, the trademark must be used in commerce, or there must be a good faith intent to use the mark in commerce at a future date.  Once a trademark is registered, it essentially serves as a badge of origin, providing the owner of the trademark with significant advantages in pursuing legal action against anyone infringing on the mark.  In theory, a trademark owner’s rights can last indefinitely, as long as the mark is continuously used and any renewal obligations are met.  Ultimately, by obtaining registered trademarks on the brewery’s name and logo, as well as the names and symbols of the individual beers, brewers can stay ahead of potential infringement issues and successfully develop their overall brand.

Conclusion

As craft beer gains a greater foothold in the U.S. beer industry, more and more craft brewers are bound to try their hand at tapping into the market.  Whether a brewery is merely an idea or a fully functioning operation, it is critical for brewers to be aware of the numerous regulations and legal issues they will face, along with the planning and protection measures that can be taken.  Whether a brewer is applying for permits, seeking to raise needed capital funds, trying to determine the most advantageous entity for their particular business, or applying for trademark registration, consulting with a knowledgeable attorney can make it easier to navigate these issues and ensure that both the brewer and his or her business are in good hands.

 

*** DISCLAIMER:  This article should not be deemed legal advice. You should always consult with an attorney about your specific circumstances and legal rights and obligations. ***

 

Aaron Kolquist is an associate attorney with Fryberger, Buchanan, Smith & Frederick, P.A. in Duluth, MN.  He is a J.D. and M.B.A. graduate from the University of North Dakota.