Illinois Attorney Targeting Wineries

Beginning in the middle of 2014, Illinois attorney Stephen Diamond began suing wineries that ship wine directly to consumer in Illinois.  Mr. Diamond argues that wineries should pay sales tax on the shipping fees it charges to Illinois consumers for direct shipments of wine.  These are so called “Qui Tam” lawsuits that allow private citizens to sue on behalf of the state and collect a bounty if the state collects.

Whether shipping charges are taxable in Illinois is not clear.  Wineries have historically relied on individual facts and circumstances to determine whether sales taxes are due on shipping charges.  Some of these include whether shipping is listed separately on invoices, whether the consumer has an option to pick-up wine ordered online at the winery or whether the winery has marked up shipping charges.  After the Illinois Supreme Court’s decision in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009), the Illinois Department of Revenue appears to have taken the position that all shipping charges on internet purchases are taxable.

Mr. Diamond appears to be proceeding against wineries in descending order of size in waves.  His first wave of lawsuits against some of the largest wineries in the industry began in the middle of 2014 and his second wave against somewhat smaller wineries began in late 2014.  We are now hearing from mid-size wineries that Mr. Diamond has begun a third wave of lawsuits in the spring of 2015.  The Wine Institute has been lobbying the Illinois legislature to clarify when sales tax is due on shipping charges, but that process will take some time.

We have two immediate recommendations for our winery clients: Recommendation # 1: Do not accept any orders from, or ship wine to, Stephen Diamond or his associates Matthew S. Burns and Matthew Martin, in Illinois; Recommendation # 2: Until the rounds of lawsuits cease, or the Wine Institute succeeds in finding a legislative solution, or both, charge sales tax on shipping charges for internet orders in Illinois.

If you have any questions, or if you have received a complaint from Mr. Diamond, please feel free to contact Erik Lawrence at (707) 252-9000 or


Custom Crush and AP Agreements – Contract Shortfalls

With the amount of available land for wineries diminishing, more and more wine businesses are turning to custom crush and alternating proprietor (“AP”) arrangements to make their wine.  The contracts that spell out the rights, duties and obligations of each party in these arrangements become paramount in the event of loss or damage to the wine.

We have all heard nightmare stories of a pump over gone wrong or a bad addition in the winery, causing a partial or total loss to a whole vintage’s labor.  Once the dust settles, the question becomes who is liable for the loss and is it covered by insurance?  Liability and insurance provisions in custom crush and AP agreements are often vague and ambiguous.  At the outset of the arrangement, each party should ensure that responsibility for loss and/or damage is adequately addressed.

For the host winery:

When GVM develops form custom crush and AP agreements for its clients, we emphasize the importance of detailed liability provisions to help our clients understand the extent of their potential exposure while making other people’s wine.

For the custom crush client:

To the extent possible, the custom crush client will want to ensure the agreement imposes liability on the host winery for negligence or willful misconduct in the production of the wine which results in damage to or loss of its product.

For both parties:

The devil is in the details.  It is crucial for both parties to understand their insurance policies and exclusion from coverage, as well as the type of insurance, if any, required under the agreement.

For example, does the custom crush client’s policy cover work performed by the host winery?  Does the host winery’s policy cover loss or damage to wine that doesn’t belong to them?  Does the insurance policy cover negligence?  As a practical matter, make sure your broker understands the custom crush or AP arrangement and the risks associated with it.

The use of detailed liability and insurance provisions, on both sides, will ensure that the parties understand their respective rights and responsibilities, will encourage proper insurance coverage, and will incentivize the host winery to maintain a high level of training and supervision in the winery.

Please contact Katy Barfield of GVM’s Wine Law Team at for further discussion of your circumstances.

Interns and Volunteers – When are they Employees?

Wineries and various for-profit businesses often hire interns or solicit the help of volunteers for certain aspects of their business operations as a way to minimize costs and provide opportunities to unemployed individuals.  Recently, however, a question has arisen as to whether these individuals are legally considered employees.  Unless the relationship falls within the below-listed six-factor test, an “intern” or “volunteer” who works without pay for the purpose of gaining work experience is an employee.

According to the Department of Labor, in order for an “intern” or “volunteer” to be considered an unpaid worker, six factors must be established: (1) the training is similar to vocational school, (2) the training is for the benefit of the trainee, (3) the trainee is not replacing normal employees and works under supervision, (4) the sponsor of the trainee does not derive any immediate benefit from the trainee, (5) the trainee is not entitled to a job after completion of training, and (6) the sponsor and the trainee understand that the trainee is not entitled to wages .

In regards to (3), the Department of Labor Standards Enforcement (“DLSE”) considers the actual role of the “intern” or “volunteer” to be one which necessarily requires close supervision, offsetting any advantage perceived to be received by the employer.

A simple way to address some of these issues is with a written agreement, signed by the “intern” or “volunteer,” that makes it clear that the individual, among other things, will not receive benefits or wages and that the training received will be for the educational benefit of the intern, who will be closely supervised by an employee.  If the tasks that the “intern” or “volunteer” are to perform would otherwise be performed by an employee, an employer should consider hiring and paying the individual for risk mitigation purposes.

For more information, please contact one of GVM’s Labor and Employment law specialists.

ABC Considers Naming Retailer in Social Media Post a Violation of Tied House Laws

According to an article published by the Sacramento Bee, eight California wineries and breweries were recently investigated by the California Department of Alcoholic Beverage Control (“ABC”) for “tweeting” or “retweeting” messages on social media that included the name of the retail sponsor of the Grape Escape event held in downtown Sacramento in June.

ABC alleged violations of state tied house laws and threatened to suspend the producers’ licenses for posting social media messages such as: “Two days till @SaveMart Grape Escape in Downtown #Sacramento! Get tickets and info here:”  ABC considered these messages a promotion of a retailer by a producer.

Under California’s tied house laws (see California Business & Professions Code Section 25502), producers are prohibited from giving anything of value to a retailer, including free advertising.  Tied house laws were developed after Prohibition in order to create independence between producers, wholesalers, and retailers of alcoholic beverages.  Much of the concern associated with the overlap between the three tiers arose from producer-owned saloons that offered “free lunch” to patrons so long as they ordered a drink.  The “teetotalers” of the post-Prohibition era felt that these offers encouraged people to drink.

As the use of social media becomes more and more important to the wine, beer, and spirits industries, producers must educate themselves and their staffs on tied house laws to avoid possible suspension of their licenses.  For more information, please contact a member of GVM’s Business and Wine Law teams.

GVM Hosts Wine Export Seminar at City Winery

On November 12, 2014, GVM hosted a Wine Export Seminar at City Winery.  Representatives of numerous wineries in the valley came to hear presentations by the U.S. Commercial Service, the U.S. Small Business Administration, and the Wine Institute.

Elizabeth Krauth, the Director of the U.S. Commercial Service’s North Bay U.S. Export Assistance Center discussed a variety of services offered by the U.S. Commercial Service to businesses seeking to enter foreign markets and create relationships with local partners.  Some of these services include trade counseling, market intelligence, business matchmaking, due diligence, trade events, and in-country promotion of products.

Jeff Deiss, the Regional Export Finance Manager of the SBA Office of International Trade detailed various options for structuring overseas transactions and the various pros and cons of each.  Some of these structures include asking the buyer for cash in advance, seeking a letter of credit from the buyer’s bank, or maintaining an open account with the buyer.  Because the “open account” structure has become the most frequently employed by U.S. businesses exporting their products, Mr. Deiss also discussed Export Credit Insurance and how to obtain such insurance to cover products shipped overseas.

Finally, Linsey Gallagher, Vice President of International Marketing at the Wine Institute described various efforts by the Wine Institute to promote California wines abroad and several international tools available to their members.  These tools include a global social media campaign, a website translation project, and an educational PowerPoint presentation on California wines that is available for download by wineries that want to share information on the state’s winemaking history, geography, climate, soils, American Viticultural Areas, and wine varietals with international buyers.

If you were unable to attend GVM’s Wine Export Seminar and would like further information on these topics, please contact a member of GVM’s Wine Law Team.

TTB to Grant Tax Breaks to Wineries with Earthquake Damage

On August 29, 2014, the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) published an announcement entitled “Napa Earthquake: Frequently Asked Questions,” which addresses many questions and concerns raised by wineries in the wake of the August 24th earthquake.

TTB announced that retailers, wholesalers and importers of wine [Read more…]

California Legislature Adopts Sustainable Groundwater Management Act

For the first time in California’s history, groundwater extraction and usage will be comprehensively regulated.  At the end of August, the California legislature adopted a package of bills (SB 1168, SB 1319 and AB 1739), collectively known as the “Sustainable Groundwater Management Act.”  On September 16th, Governor Brown [Read more…]

What does your Lease, Custom Crush, or Alternating Proprietorship Agreement say about Earthquake Damage?

The Napa earthquake of August 24, 2014, reminded us of how we can never be too prepared for such an event, from safety in our homes to security in our business interests.  Given the earthquake’s effect on various commercial and agricultural interests in Napa, we have prepared the following list of 5 things commercial landlords and wineries with custom crush or alternating proprietorship arrangements should determine [Read more…]

Winery Audit Finds Violations of Use Permit Restrictions:

Napa County’s random audit of twenty wineries last year found that eight failed to comply with their use permits.  The violations were primarily based either on exceeding permitted production limits or having more visitors than allowed under the permit.

Every year, the Napa County Planning Department randomly selects twenty wineries and conducts an audit to determine whether each winery’s total gallons of wine produced is within its limit; whether the winery is complying with the requirement that the wine be made with at least 75 percent Napa County grapes; and whether its visitation and marketing plans are up to code. 

The results were discussed by the Napa County Planning Commission on Wednesday, August 6th.  Among the topics of conversation was whether the county was doing enough to ensure that wineries are complying with their use permits.

The results of the most recent audit could lead the county to pursue more stringent enforcement.  Wineries in Napa County should be cognizant of their use permit restrictions and ensure that their operations are in compliance.

North Coast Growers Appeal Russian River Water Ruling to California Supreme Court:

On Friday, Redwood Valley grape grower Rudy Light asked the California Supreme Court to review a June 16th ruling by a San Francisco appellate court that reversed Mendocino County Judge Ann Moorman’s ruling, and restored the California State Water Resources Control Board’s authority to prohibit grape growers in the Russian River Valley from drawing water from the river during times of frost.  That ruling was described in a Wine Trio post published last month, which can be found here.  

The lengthy legal dispute stems from an incident in 2008 when approximately 25,000 young salmon were found dead along the banks of the Russian River, which the National Marine Fisheries Service attributed to sudden decreases in water levels due to spraying by growers to protect their crops from frost.

Light and another group of plaintiffs, the Russian River Water Users, who also planned to file an appeal in a different proceeding this past week, want the lower court ruling to stand.  Trial court Judge Ann Moorman said in her decision that the Board’s regulations infringed on the growers’ water rights and wrongly required farmers to gather information and create regulations themselves at a great expense.  In overturning her decision, the appellate court found that several sections of the state’s water code give the Board the authority to prevent unreasonable water use.