Legal considerations for micro-brewery start-ups

by Richard M. Barrett
The craft beverage market is exploding, and a good portion of that growth is in the craft beer segment, defined as less than six million barrels per year in production.
With robust domestic and international industry growth, demand for new brands continues to rise.
One of the most important considerations startup craft brewers should be aware of, according to New York attorney Philip O’Donnell, Jr., is that laws and regulations vary widely state by state.
“Micro- or craft brewing is a highly regulated industry, subject to federal, state and local laws and regulations related to taxation, permitting, zoning, consumer protection and environmental mandates,” he explained.
As a result, law offices across the country are seeing an unprecedented demand for legal counsel and services from growing numbers of craft brewers and other craft beverage producers to help navigate these regulatory waters.
Some are graduates of craft brewing universities where they learned the trade from professional brewers.
Most are amateur home brewers with dreams and aspirations of taking their craft beer to the commercial level.
“We see husband/wife teams and father/son hobbyists who have been tinkering around with home brewing for a few years and are thinking about taking the leap,” he said.
“That’s great. By all means, dream big, don’t be afraid to take a risk, but also be realistic and aware of some of the unique challenges you may face while pursuing your dream. Crafting a top-selling beer is only one of them.”
It’s wise at some point to seek legal counsel for starting up, but also post-launch for ensuring regulatory compliance, vendor contract reviews, license renewals, etc.
O’Donnell says a lot of clients are entrepreneurial DIY’ers who are more than willing and capable of performing the lion’s share of the upfront planning effort. That can help streamline and expedite the process, while saving them money on legal fees. But eventually, they will need some form of professional legal assistance.
O’Donnell provides a few additional points to ponder.

  • Initiate TM and copyright applications, licensing and permit applications, and product labeling applications as early-on in the process as possible since these take the most time to issue.

Intellectual Property (IP) and Trademark (™) protection are highly important issues. They include protecting brand and product names, print and electronic branding materials, food and beverage recipes, business plans and processes, equipment design, and art work, as examples.
O’Donnell says IP should be addressed in an Operating Agreement that explicitly spells out IP assignments and ownerships, identifies confidential and proprietary information, and specifies any non-compete clauses.

  • Try to have a draft business plan ready with goals and strategies outlined, and research applicable laws and regulations beforehand so they can be incorporated into the plan.
  • Think about funding sources — personal, SBA loans, government grants and private investors.
  • Take the time to clearly define your business model and structure.

For example, decide whether you plan to be a production facility with a taproom; a production only operation using distributors; self-distributing, or a producer with a retail or restaurant element.
“Each model has a different impact on licensing, taxing and permitting obligations,” O’Donnell noted. “Trying to be all things to all people tends to make the process more complex, lengthier and more expensive.”
Speaking of costs, he passed on a few ballpark figures for start-up craft brewers trying to formulate their financial and investor plans.
A nano-operation (small brewery, no production): $50-60K;
A production facility (7-10 bbl/mo) with distributors: $250K;
A brew pub with taproom and restaurant (10-15 bbl/mo): $500K;
Packaging and production: $1M.
O’Donnell also states that regulations for wineries, distilleries, cideries and meaderies may not be the same for breweries, so never assume these are one-size fits all. Not only do they vary state by state, but also by industry segment. He advises against simply taking a fellow crafter’s word and to research or seek counsel instead.
In terms of siting a brewing operation, it’s likely that most will require specialized commercial leasing or purchasing options to accommodate structural, plumbing, equipment, ventilation, environmental and zoning considerations.
It’s prudent to investigate this early in the planning process to avoid surprises and undue delays.
In addition, think about selecting a legally defensible brand name and research whether it’s taken before sinking funds into domain names, creating web sites and producing brand materials, only to discover it belongs to someone else.
Product labeling is another area that requires careful investigation, particularly if the beer is distributed across state lines.
There are federal and state requirements and restrictions regarding information printed on the label, including alcohol content and volume, warnings, permissible language, and even the label dimensions and size of text and images.
A COLA Certificate of Label Approval is required for interstate distribution and generally takes about two weeks to obtain, O’Donnell said.
Timelines on licensing and permit processing and approval vary widely from one locality to another, but remember that no part of the business can begin operating without all of them.
“Get that step going either on your own or with an attorney as early as possible in the process, because delays will affect your business planning and costs,” O’Donnell cautioned.
Remember that full disclosure of applicants is also critical in order to facilitate background checks and minimize delays.
“The more thorough you can be, and the more you can do up front in terms of planning, organization, and execution, the better equipped an attorney will be to easily guide you through what can sometimes be an overwhelming process.”
For further information about business planning, go to www.score.org . For information regarding funding, go to www.sba.gov . For more in-depth information regarding brewing and business tools, go to www.brewerassociation.org .

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