Jeffry Hill, a former vintner in Napa Valley, plead not guilty last week in Federal Court to eight charges of mail and wire fraud.

Mail fraud is any attempt to commit some type of fraud using the United States Postal Service or private commercial interstate mail carrier. Wire fraud, similarly, involves a scheme to defraud by using wire, radio, or other electronic means of communication in interstate commerce.  Hill was indicted for selling grapes and bulk wine as Napa Valley Cabernet Sauvignon, when in fact the grapes were not grown within the AVA (and sometimes weren’t even Cabernet grapes).  Hill is alleged to have created false records purporting to document the wine as Napa Valley cabernet, intercepted trucks hauling grapes to change paperwork and instructed employees who picked grapes to mislabel the origin and varietal they picked, according to the indictment.  Hill’s victims claim to have paid more than $1.5 Million for the mislabeled grapes and juice.  Hill’s attorney has stated in court documents that the the charges are attributable to miscommunication, confusion and misunderstanding.

An AVA name can only be used on a wine label if:

1. Not less than 75% of the volume of the wine is derived from grapes (or other agricultural commodity) grown in the labeled appellation of origin;

2. The wine is fully finished (except for cellar treatment and/or blending which does not alter the class and type of the wine) in the labeled appellation of origin; and,

3. The wine conforms to the laws and regulations of the labeled appellation of origin governing the composition, method of production and designation of wine produced in the labeled appellation area.

Thus a winery pays a premium for grapes or juice (an “other agricultural commodity”) originating in Napa Valley so that it can use the AVA on its labels, provided the wine is also finished in Napa Valley and conforms to the AVA standards. In a civil suit, the defrauded wineries could seek to recover damages, however, Hill’s company filed bankruptcy after the initial investigation resulted in the surrender of his licenses, and the mail & wire fraud charges could each carry up to a 20 year prison term.

On November 17, the TTB announced a new proposed rule that would open up the grape varieties allowed to be listed on American wine labels.  The new rule would also remove one existing entry and replace it with a slightly different name, and correct the spelling of another existing entry. The purpose of this amendment is to allow wine bottlers to use these additional approved grape variety names on wine labels and in wine advertisements.

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act requires that these regulations, among other things, prohibit consumer deception and the use of misleading statements on labels, and ensure that labels provide the consumer with adequate information as to the identity and quality of the product.  Thus the TTB, under the FAA Act, has the authority to add or remove grape variety names from the list approved for use in wine labels to promote accuracy in labeling.

Any interested person can petition the TTB to add a new variety; in determining whether to include a new variety, the TTB looks at:

• That the new grape variety is accepted;

• That the name for identifying the grape variety is valid;

• That the variety is used or will be used in winemaking; and

• That the variety is grown and used in the United States. Section 4.93 further provides that documentation submitted with the petition may include:

• A reference to the publication of the name of the variety in a scientific or professional journal of horticulture or a published report by a professional, scientific, or winegrowers’ organization;

• A reference to a plant patent, if patented; and

• Information pertaining to the commercial potential of the variety, such as the acreage planted and its location or market studies.

The varieties proposed to be added are: Amigne, Arandell, Aromella, Arvine, Bianchetta Trevigiana,   Black Spanish, Bluebell, Bourboulenc, Brachetto, By George, Caladoc, Caprettone, Chisago, Coda di Volpe, Diana, Esprit Falanghina, Geneva Red, Godello, Gros Manseng, Humagne Rouge, Jacquez, Jupiter, King of the North, Lambrusca di Alessandria, Lenoir, Loureiro, Madeleine Sylvaner, Marquis, Marselan, Mustang, Petite Pearl, Phoenix Picardan, Pinot bianco (as a synonym for Pinot Blanc), Plymouth, Ribolla Gialla, Rieslaner, Riverbank, Rose of Peru (as a synonym for Mission), Saperavi, Schönburger, Sheridan, Southern Cross, Terret Noir, Tinta Amarela, Tinta Cao (as a synonym for Tinto caõ), Tinta Roriz (as a synonym for Tempranillo, Touriga Nacional, Vaccarèse, Valjohn, and Verdejo.  The name to be removed is Geneva Red 7 (being replaced with “Geneva Red”), and the correction is to the name “Madeleine Angevine,” currently misspelled as “Madeline Angevine.”

Public comments on the proposed rule can be submitted through January 17, 2017.

We may soon see NAFTA in the news for reasons other than politics… according to a representative of the California Wine Institute, U.S. trade representatives are preparing to file a formal complaint against a law passed in British Columbia in 2015, which allows grocery stores to sell wine.  The problem, they say, is the law only permits the sale of wines produced in British Columbia.

According to opponents of the law, NAFTA and the WTO Agreement require signatories to treat imported and domestic products equally, which they assert is clearly violated by the B.C. law.  NAFTA does permit monopolies and state enterprises subject to certain restrictions, including that a party must ensure that any designated monopoly, “does not use its monopoly position to engage, either directly or indirectly, including through its dealings with its parent, its subsidiary or other enterprise with common ownership, in anti-competitive practices in a non-monopolized market in its territory that adversely affect an investment of an investor of another Party, including through the discriminatory provision of the monopoly good or service, cross-subsidization or predatory conduct.”

If a complaint is filed, it may receive more attention than under previous administrations, which U.S. trade lobbies certainly hope to capitalize on.  We will update this post in the future if a formal complaint is filed.

Unlike other alcoholic beverages, a fairly limited list of ingredients and substances are allowed to be used in the production of wines sold in interstate commerce.  The authority to promulgate regulations pertaining to wine is found under 26 U.S.C. Chapter 51 of the Internal Revenue Code (IRC).  IRC Section 5382 provides that proper cellar treatment of natural wine constitutes those practices and procedures that produce a finished product acceptable in good commercial practice as prescribed by regulation. That Section also authorizes the promulgation of regulations setting forth limitations on the preparation and use of methods and materials for clarifying, stabilizing, preserving, fermenting, and correcting wine and juice.  The Alcohol and Tobacco Tax and Trade Bureau (TTB) is the agency given the authority to come up with those regulations.

27 C.F.R. 24.246 provides, “[m]aterials used in the process of filtering, clarifying, or purifying wine may remove cloudiness, precipitation, and undesirable odors and flavors, but the addition of any substance foreign to wine which changes the character of the wine, or the abstraction of ingredients which will change its character, to the extent inconsistent with good commercial practice, is not permitted on bonded wine premises.”  That section goes on to list materials that are approved as being consistent with good commercial practices for the production of wine, although the TTB also has the authority to administratively approve the use of treating materials and processes not listed in the regulations under certain circumstances, such as where a proprietor wishes to conduct an experiment (although all experiments must be kept separate from wine operations and thus, should not end up in the bottle you buy).

A full list of the materials administratively approved for use in the production, cellar treatment, or finishing of wine can be found here.

Recently filed court documents allege that the plaintiff, a former employee of Thomas Keller Restaurant Group, was “discriminated and retaliated against, terminated, falsely promised and then denied a job” after management at Napa Valley’s French Laundry learned of her pregnancy and maternity leave plans.  The Plaintiff in this case had worked for the restaurant group’s NYC location – Per Se – before being offered a position in California.  The Plaintiff asserts that she and her family relocated to California for her new position, only to have the offer rescinded after her pregnancy was disclosed. The Complaint includes claims for fraud and deceit, sex discrimination, violation of pregnancy disability leave law, negligent misrepresentation, misrepresentation in violation of labor code and other allegations, according to the court filing.

California’s Fair Employment and Housing Act (FEHA) prohibits harassment and discrimination in employment because of race, color, religion, sex, gender, gender identity, gender expression, sexual orientation, marital status, national origin, ancestry, mental and physical disability, medical condition, age, pregnancy, denial of medical and family care leave, or pregnancy disability leave (Government Code sections 12940,12945, 12945.2).  It also prohibits retaliation against an employee for protesting illegal discrimination related to one of these categories.  California law further requires an employer to allow an employee disabled by pregnancy, childbirth or related medical conditions to take a leave of absence and to maintain her health insurance during the leave.  The leave need not be taken all at once – a pregnant employee is entitled to take intermittent leave as needed, and an employer cannot take any adverse employment action based on the need for leave, intermittent or otherwise.  The employee should give 30 days’ notice of any leave request, when the need for leave is foreseeable, however if she does not know she will need to take leave 30 days in advance, notice just has to be provided as soon as practicable.  In addition to the requirement to allow pregnancy-related leave, an employer must allow reasonable accommodations as needed for a pregnant employee while they are working.  (Govt. Code §§ 12926, 12940.)

Whether or not the allegations against the French Laundry prove true, the case serves as a reminder to California employers that it is imperative to stay informed of the state’s laws designed to protect workers, and also to educate all personnel involved in hiring and termination decisions, and/or  supervision of employees, lest their conduct unknowingly create a claim for which the employer will be held responsible.

In its Notice of Proposed Rulemaking No. 160 (NPRM 160), the TTB proposes amendments to existing appellation of origin rules that would close a loophole that has allowed certain wineries to produce wine labeled with the name of an appellation of origin, including protected American Viticultural Area (AVA) names, even though the wines did not meet the normally stringent requirements for appellation labeling.

AVA-labeled wines sold in interstate commerce must contain no less than 85 percent of wine derived from grapes grown in the AVA, and the wine needs to be fully finished in the state of origin.[1] State legislatures adopt rules regarding wine production, composition and labeling to protect the quality of the product and promote their AVAs, which have always been incorporated into the federal rules for wines sold interstate. Under the current system, though, wineries that sell within their home state exclusively are able to apply for an exemption from the normal requirements for a Certificate of Label Approval (COLA) for use of an appellation name, and thus market wine that is not necessarily finished in the state where the appellation is located. In other words, a Texas winery could purchase grapes from Napa Valley, make wine in Texas, and so long as they only market the wine in Texas, they could label their Texas-made wine with Napa Valley AVA, without having to comply with the other production requirements imposed on Napa Valley winemakers.  The new proposed rule would eliminate this loophole, imposing the same standards for use of appellations in labeling, whether or not the wine is sold in interstate commerce.

The rule is also seen as a way to protect and incentivize states’ investment in promoting and regulating wine production within the state. Further, proponents argue that closing the loophole strengthens the case for enforcing AVA regulations internationally, where countries with little or no regulation of wine production and labeling could undermine the integrity of U.S. AVAs by competing in the global market by attaching AVA names to low quality wine. While there is certainly opposition to the proposed changes, many in the industry see this as an overdue acknowledgement of the value in the AVA system, and the importance of protecting it.

[1]  27 C.F.R. §4.25(e)(3)(iv).

Whether an employee is considered exempt or non-exempt depends on the employee’s salary and their duties. In California, an employee will be classified as a non-exempt employee for purposes of California overtime laws, regardless of their duties, if they earn an annual salary less than two times the minimum wage (currently $41,600 per year). In addition to this salary requirement, there is a duty requirement that must be satisfied to be classified as exempt.  Generally, if the duties require the employee exercise discretion and independent judgment in performing their job the employee can be considered exempt, but the rules governing the duties test are a topic for a future post.

New federal regulations are coming that impact the “white collar” exemptions (e.g. administrative and executive exemptions) for federal overtime law purposes (hours worked over 40 in one work week).  Effective December 1st, to utilize the white collar exemptions, an employee would have to make a minimum salary of $47,476.00 per year to be considered exempt for purposes of federal overtime laws.  The new rule also provides that the salary threshold will be revisited every three years, to see if adjustments need to be made.

Keep in mind that California minimum wage is set to increase over the next five years, and if no changes are made to the new federal regulations, California will again surpass the federal minimum salary threshold on January 1, 2019.  But for now, employers should review their salaried employees’ compensation plans, and determine whether they need to be re-classified as non-exempt for federal overtime purposes on December 1st.

 

The California Legislature recently adopted changes to its Labor Code which impacts employers who pay employees on a piece rate basis. A “piece rate” system is one where an employee is paid a fixed amount of money for a given piece of work.  For instance, a picker who is paid a certain amount per pound of grapes picked would be considered a piece rate worker.  The new law provides that California piece rate workers must also be compensated for “other nonproductive time,” which is defined in the statute as “time under the employer’s control, exclusive of rest and recovery periods, that is not directly related to the activity being compensated on a piece rate basis.” For example, if an employer directed a piece rate worker to drive to another section of the vineyard to pick up equipment, this could be considered “other nonproductive time.”

The statute also provides an affirmative defense for employers to any claim for recovery of wages, damages, or other penalties based solely on the employers failure to pay the employee compensation due for rest and recovery periods and other nonproductive time for time periods prior to and including December 31, 2015. To qualify for the affirmative defense the employer must make payments to its employees for previously uncompensated or under-compensated rest and recovery periods and other non-productive time from July 1, 2012 – December 31, 2015. The payments must be either the actual amount due to each employee or 4% of the employees gross earnings in pay periods in which any work performed was on a piece-rate basis during the applicable time period.

However, the statute also provided that in order to qualify for the affirmative defense, the employer must provide written notice to the Department of Industrial Relations (“DIR”) of its plans to make payments to its current and former employees in accordance with the terms of the statute. Initially, this notice had to be given by no later than July 1, 2016.  However, that deadline was put on hold while the Courts heard a challenge to the new law.

The Nisei Farmers League (NFL), an organization representing the interests of many California farmers and grape growers, recently brought and action for Preliminary and Permanent Injunctive and Declaratory Relief against the California Labor and Workforce Development Agency seeking to invalidate the statute on a number of grounds, including vagueness and retroactive punishment.  A temporary order was issued that put off the deadline to give notice to the DIR until the NFL’s challenge could be heard on the merits.  That hearing took place on July 18, 2016, and the Court issued its ruling yesterday denying the NFL relief on the grounds that it was unable to show a likelihood of success on the merits. The Court ruled that Labor Code 226.2 was the codification of existing case law imposing the same obligations on employers. The court stated that, “insofar as activities prior to its enactment are concerned, no new obligations were created; either employers had fully compensated their employees for their work or they had not been fully compensated.” If the employer chooses not to take advantage of the affirmative defense, the court reasoned the employer could still argue that it does not owe any back pay to its employees.  The Court’s ruling thus reactivated the notice requirement, and all employers choosing to take advantage of the safe harbor provision must give notice to the DIR by no later than July 28, 2016.

It is important for all California employers who use a piece rate system to make sure they understand Labor Code section 226.2 and that they are in compliance with the new rules.

In late May, a federal grand jury in Maryland indicted Republic National Distribution Company, LLC and its three employees on charges of wire fraud conspiracy, wire fraud, and money laundering. If convicted the three employees could each face up to 20 years in prison and a $250,000 fine. Further the Government seeks forfeiture of funds traceable to the offense, which the indictment estimates to be $9 million.

The charges result from a scheme to transfer liquor from Maryland, where the excise tax is $1.50 per gallon, to New York City, where the excise tax is $7.44 per gallon. Republic National is a wholesale distributor of liquor located in Maryland. The indictment alleges that Republic National’s employees knowingly sold liquor in Maryland to New York retailers for retail sale in New York City. The New York retailers then sold the liquor they obtained from Republic National without paying New York excise taxes. Further, Republic National allegedly filed false reports with the Maryland State Comptroller’s Office indicating that all liquor sold was intended for resale in Maryland.

This case illustrates the importance of understanding excise taxes. The typical reason for imposing an excise tax is to discourage consumption of the type of good in question. For this reason excise taxes are often referred to as “sin taxes.” Also, as one would expect, excise taxes raise a substantial amount of revenue for the state. Excise taxes are imposed on a specific good, such as alcohol, gasoline, or cigarettes. Unlike sales tax, which impose a tax on the total amount spent by the consumer, excise taxes are imposed per unit of good regardless of price. All fifty states impose an excise tax on alcohol. In California the excise tax is $3.30 per gallon of liquor (100 proof or less). In Oregon the excise tax is $1.00 per gallon. In Nevada the excise tax is $3.60 per gallon of liquor. Generally, the tax is paid by distilled spirits wholesalers based on sales to in-state retailers. In recent years, there have been calls on California’s legislature to increase the California excise tax. Proponents hope that it would raise additional revenue for the state, and also deter people from drinking which they claim will result in fewer drunk-driving accidents. However, the measures have been unsuccessful due in large part to the argument that the alcohol taxes are regressive, or in other words that they disproportionately affect the poor. Whether California decides to increase the excise tax or not, there is no denying that excise taxes greatly influence the economy, white collar crime, and our society as a whole.

In the heavily-regulated, three-tiered system that governs America’s alcohol sales, staying on top of all of the protocols can be tricky. Even well-meaning licensees can inadvertently exceed the privileges allowed by their license if they aren’t very careful. One tricky relationship to navigate is that between a distributor and a retail location. The law is pretty clear that distributors are not allowed to provide anything “of value” to a retailer. In theory, such laws minimize the potential for unfair business practices in the industry. In reality, however, they just cause headaches for people in the industry trying to figure out if something is “of value.”

The TTB recently issued a ruling that attempted to clear up one gray area in the “of value” debate—shelf plans and schematics provided by distributors to retailers. Apparently, some distributors had been providing these schematics to retailers in an attempt to get better shelf-position for their products (and therefore, worse shelf-position for their competitor’s products). One distributor even went so far as to provide the schematic to a retailer, and then also provide the labor to implement said schematic.

TTB Ruling 2016–1 clarifies what is allowed and what is prohibited. While a distributor may provide a shelf plan or schematic to a retailer, it is not allowed to do anything further. Prohibited activities include (but are not limited to):

– Providing labor to perform merchandising (other than general stocking and rotation)

– Furnishing a retailer market data from third-party vendors

– Receiving or analyzing (on behalf of the retailer) any confidential and/or proprietary competitor information

– Assuming a retailer’s purchasing or pricing decisions

For the complete ruling, visit https://www.ttb.gov/rulings/2016-1.pdf.