There's been a lot of buzz here in North Carolina regarding legislation pointed at the alcoholic beverage industry. You're likely already aware of House Bill 500's potential impact. If not, hop over and read through our post about it here. 

Yet another piece of legislation currently in front of the North Carolina General Assembly is Senate Bill 155, affectionately known as the "Brunch Bill.” As with each of our Legal Updates, this post takes aim at Senate Bill 155's intended change and what is perhaps more meaningful than when you can imbibe with your eggs Rothko.

The "Brunch" Part

The "Brunch Bill's" short title comes from Section 4 of the bill. Section 4 would allow each North Carolina county to adopt their own respective ordinances permitting licensed restaurants to sell alcoholic beverages for on-premises consumption beginning at 10:00 AM Sunday mornings.

Current law in North Carolina prohibits all alcohol sales before noon on the Lord's day. As you can imagine, granting restaurants the ability to crank out their signature Blood Marys and Mimosas a couple of hours earlier on Sundays will have a pretty substantial impact on customer experience. Not only that, but incentivizing an earlier dining experience on Sundays will certainly create a positive economic impact across the board. While we acknowledge this change to be the easiest sell and perhaps the most intuitive to the North Carolina citizenry, we know Senate Bill 155 to be a bit more ambitious with respect to the growth of the alcoholic beverage industry and its economic impact here in North Carolina. 

The Spiritous Liquor Special Event Permit

The balance of Senate Bill 155 is a direct acknowledgment of the serious growth happening within the craft distilling industry. Senate Bill 155 looks to add Section 18B-1114.7 to the existing ABC framework, which would create a spirituous liquor special event permit. A spiritous liquor special event permit would allow a licensed North Carolina distillery to organize free tastings hosted by off-site locations, including ABC stores, trade shows, conventions, malls, and any other event the Commission feels aligns with the purpose of the provision and balances with public policy. For an industry that is still getting its legs in North Carolina, the ability to offer off-site product tastings is a monumental proposition for current and prospective North Carolina distilleries. Without a doubt, enhancing the ability of individual players to meet their target consumers where they are and to engage with buyers at local ABC branches stands to boost short term growth in an industry still throttled in a big way by government control. 

However, Senate Bill 155 does lay out some specific limitations to these off-site samplings. The application of those limitations is split between the distillery holding the permit and the venue hosting the sampling. To illustrate, the permit-holding distillery must conduct the tasting. The permit-holding venue must pour the samples. Essentially, the person responsible for producing the product cannot be the one handing you the sample. 

Further, each consumer is limited to one .25 ounce tasting sample of each product made available for sampling, not to exceed 1.5 ounces in one day. The purpose is awareness; not to prevent samplers from getting in their cars. And in case you are of the procrastinating variety, its helpful to know that the permit holder must also provide written notice to the ABC Commission at least 48 hours before the tasting. There is a one-year record-keeping accompaniment, too. 

For more ambitious event planners, specific Commission approval is in your future. Senate Bill 155 prevents each sampling venue from hosting more than three individual permit holders at a single tasting. If you're looking to make a distillery tasting a real thing, the local ABC board may grant approval and designate a tasting area for participating consumers. 

On-Site Sales

Our favorite piece of Senate Bill 155 would expand the ability of North Carolina's distilleries to sell directly to consumers. Section 1 of the bill would amend current language under to N.C.G.S. 18B-1105(4) to read in relevant part, "the selling distillery is limited to selling to each consumer, no more than five bottles of spiritous liquor per 12 month period." 

For reference, the current limit on direct sales to consumers is but one bottle per consumer per 12 month period. While five bottles is still modest, we're optimistic approval may imply a more progressive outlook toward the distilled spirits side of the craft beverage industry overall. Given the recent wave of related alcoholic beverage focused bills, Section 1's simple change flows neatly with North Carolina's path toward fostering the type of business and community growth happening all over the country.  

Senate Bill 155 is a welcome addition to North Carolina's 2017 legislative session. The points highlighted above, along with a couple, more subtle proposals (see: auction permits), demonstrate that the growth of craft liquor will over time become free to parallel that of craft beer. At bottom, we acknowledge that North Carolina continues shoot its shot and make itself known as a state where the craft beverage industry can grow and flourish.

Come chat with us on social media (@CraftedCounsel). If you have any questions, please feel free to reach out to us. 

Until next time. Cheers!

On Tuesday, Rep. Bill Brawley, Rep. Chuck McGrady, Rep. John Hardister, and Rep. Pricey Harrison, along with the support of the North Carolina Craft Brewers Guild and Craft Freedom, filed House Bill 500 with the North Carolina General Assembly. 

A 12-point document with the short title, "ABC Omnibus Legislation," House Bill 500 is the equivalent of a software update for North Carolina's alcoholic beverage regulatory framework. Within it, there are simple bug fixes, such as a retail business designation for on-premise retail sales of unfortified wine and brewer sampling for sensory analysis. There are small feature additions like the authorization of crowler sales and an allowance for noncontiguous brewery storage locations. More importantly, there are a couple of underlying algorithm rewrites, ostensibly aimed at increasing competition and encouraging innovation within North Carolina's wholesale distribution tier.

Make no mistake, should House Bill 500 be installed, the North Carolina craft beer industry is looking at a complete paradigm shift. Here's why.

The Self-Distribution Cap

Section 11 of House Bill 500 does two major things.

First, as expected, it portends to raise the production cap on self-distribution from 25,000 barrels per year to 200,000 barrels per year. We've waxed poetic re: North Carolina's self-distribution cap (and the accompanying innovative opportunity) on this blog repeatedly. But for some perspective on how much beer 200,000 barrels really is, check this out. 

That's about as fresh as craft beer statistics get. 

Second, Section 11 of House Bill 500 makes five crucial exemptions from a brewery's production calculation for purposes of the self-distribution limit. The relevant language reads, "[s]ales of malt beverages pursuant to subdivisions (3), (5), (6a), (7) and (8a) of this section shall not count towards to sales quantity limitation set forth in this subdivision." (Emphasis added). Those enumerated subdivisions respectively refer to a brewery's right to:

• Sell beer to independent distributors;
• Sell beer to employees and/or guests of employees;
• Sell beer brewed pursuant to a contract brewing arrangement;
• Sell beer in its taproom; and
• Sell beer at its affiliated retail locations.

Put another way, a successful House Bill 500 would allow breweries to leave out production quantities associated with any one or more of the categories above when calculating annual output under the new cap. Taken together, North Carolina's self-distribution threshold would operate as a function of business strategy and brewery operations, rather than idly sit as a hard number. And that's but one piece of the proposed overhaul. 

Termination of Distribution Agreements

As we've written before, its important to note beer distribution relationships currently favor independent distributors under North Carolina law. By default, a distributor is granted territorial exclusivity and the option to control a brewery's product and brand as long as it wants. In fact, in the absence of what the law defines as "good cause," the only way a small brewery can claw back the rights to its product and brand from a distributor is to pay "fair market value." How that valuation is made and agreed upon is another conversation entirely.

An understanding of this dynamic is what makes the decision to distribute a critical one early in a brewery's lifetime. By engaging an independent distributor under the current North Carolina regulatory framework, a brewery effectively sacrifices margin for volume, and the ability to manage how consumers interact with the brand and product at the point of sale. With the number of existing breweries continuing to climb, control over the latter is paramount. 

House Bill 500 aims to shift that leverage back to North Carolina breweries. Section 12 of the bill grants a small brewery the ability to terminate a distribution agreement for no cause at all, any time it so chooses. House Bill 500 also does away with the "fair market value" requirement. Instead, a brewery and a distributor may predetermine "fair compensation" within the subject distribution agreement to represent what, if anything, the brewery owes the distributor in the event it terminates that distribution relationship.  

Ultimately, through Section 12, House Bill 500 recognizes the most salient perceived failure of North Carolina's current three-tier framework—that beer distributors' do not actively compete at the point of sale for each craft beer brand within their respective control. As Olde Mecklenburg Brewery's John Marino noted during this week's press conference, the average distributor portfolio is "tremendously bloated," which makes such a proposition unrealistic at best.   

By disarming the the current termination framework, House Bill 500 would invite breweries to forge distributor relationships that represent alignment of business and brand values. It stands to reason that barriers to entry into a consolidating wholesale industry may also be reduced, spurring innovative opportunity for those technology and wholesale entrepreneurs so inclined.

Summer Seventeen

With the addition of House Bill 500, there are now three bills before the North Carolina General Assembly that take affirmative stances to modernizing distribution of beer in the state. House Bill 500 is the only bill of the three that aspires for more than a simple increase of the current production cap as applied to self-distribution.

Beyond its individual components, what House Bill 500 articulates is a formula for dignity in the business of beer.  

By raising the self-distribution limit, by exempting production unrelated to bona fide self-distribution, and by affording breweries choice in the risk of beer distribution, House Bill 500 would make the business of beer a more true experience; one the consumer could share in. After all, an enhanced experience is the primary goal of every software update.

As  #HB500 takes us into the heat of the summer, we'll be sure to keep you cool and crisp with the updates. Click "Another One" at the top to read the full bill text. Cheers.

Regardless of whether the cap on production for self-distribution is ultimately lifted, the elements of a decision to distribute are unique to each brewery.  For the young ones, the path to cashflow/break-even is paved with healthy on-premise sales and a brand-centric focus to its wholesale distribution. Irrespective of its timing, a brewery's decision to engage a distributor should come from a position of strength. 

Below you'll find a basic brewery guide to beer distribution in North Carolina. It's divided into two sections. The first provides law and context. The second provides a framework for approaching a potential agreement with some helpful considerations. 

North Carolina Beer Distribution and the Small Brewery Carve-Out

Like many other states, North Carolina regulates the production, distribution and sale of beer through the three-tier system. Generally speaking, there are rigid restrictions between the tiers that prevent multi-tier ownership and certain business practices. Most typically, breweries (producers) use beer wholesalers (distributors) to get their product to market (retailers).

However, North Carolina allows a permitted brewery to also obtain a Malt Beverage Wholesaler Permit and self-distribute its own beer to retailers until the brewery produces at or above 25,000 barrels of beer in one calendar year. Once that production threshold has been met, a brewery must then deliver its product to market through the use of at least one licensed and independent wholesaler.

North Carolina’s Franchise Laws require that these newly formed distribution agreements grant a prospective wholesaler exclusivity with respect to the geographical territory and brands contemplated. In addition, though the distribution agreements can recite a natural termination date, North Carolina law allows distribution agreements to embody lifetime arrangements. A brewery producing at or above 25,000 barrels may only terminate a distribution agreement through a showing of good cause.

North Carolina law does recognize a carve-out for a Small Brewery looking to terminate an existing relationship with a beer wholesaler. N.C.G.S. 18B-1305(a1) allows a brewery producing less than 25,000 barrels of beer per calendar year to claw back its authorization to self-distribute by giving written notice to the wholesaler and an accompanying payment of fair market value for the affected brand(s). This carve-out can be vitally important for a Small Brewery looking to reconfigure its approach to distribution and to better individualize its path to market.

Quick Distribution Tips for the Small Brewery

1. Valuation is key. Distribution rights for distributors represent, on average, $6-$8 in margin per case. If your chosen path to market is through the independent wholesale tier, vet multiple distributors. We find that "great deals" are often not.

2. Ask questions. Remember, distribution agreements are essentially lifetime arrangements. Even as a Small Brewery, exercising the above-mentioned carve-out can prove expensive. With so much at stake, take an opportunity to consider:

   1. “Where does my brand fit within the distributor portfolio?” — Many distributor portfolios contain hundreds and sometimes thousands of other beer brands. Have an understanding of who you are to your consumer and consider how your beer will compete with others in that distributor's portfolio.

   2. “Who is in charge of marketing collateral? How am I protecting my brand? How will I continue to educate my consumer?” —  A considerable part of the retail velocity of your beer is brand driven. Have a strategy to continue connecting with your ideal beer drinker. 

   3. “What is the scope of this agreement? Have we construed the territory properly? What about potential changes in the law?” — Once these things are written, it's incredibly difficult to turn back.

3. Have a written document. Make sure your rights, obligations and remedies are clear before you transfer a drop of liquid. Distribution relationships can exist without a written agreement and it's best to be avoid being stuck without one.

Without a doubt, the topic of beer distribution is one of great passion for us. We're here for whatever, be it an informal discussion about your brand or to engage on your behalf. As always, give us a call or shoot us an email. 

Cheers. 

This material is for informational purposes only and not for the purpose of providing legal advice. Please contact an attorney of competent jurisdiction with any particular issue or problem. Use of this material does not create an attorney-client relationship between Carolina Craft Legal and the user.

The Bill

On February 8, 2017, the same day Jim Gardner, Chairman of the North Carolina Alcoholic Beverage Control Commission, resigned, House Bill 67 was filed with the North Carolina General Assembly. 

House Bill 67 is an act to increase the production cap as applied to limits on a brewery's right to self-distribution from 25,000 barrels of beer per calendar year to 100,000 barrels per calendar year. Many among us are aware that the legally imposed limit on a North Carolina brewery's right to bring its own beer to the retail market has become a point of major contention over the last several years. Currently, Chapter 18B of North Carolina's General Statutes requires that its breweries sign rights to offer and sell their respective brands to independent wholesalers, absent the commonly-used Small Brewery exception referenced above. Click here and here for some light reading.

The key takeaway is that House Bill 67 prospectively quadruples the production threshold for self-distribution, affording North Carolina breweries' what is widely regarded as greater autonomy in the path to retail market and business growth. House Bill 67 passed its First Reading on February 9th and was submitted to the Committee on Alcoholic Beverage Control the same day. If the ABC gives a favorable reading, House Bill 67 will move to the Commerce and Job Development Committee; if favorable, House Bill 67 will then proceed to the Finance Committee. 

House Bill 67 is sponsored by Representative Michael Speciale (Primary), Rep. Becky Carney, Rep. Mike Clampitt, Rep. Pricey Harrison, Rep. Phillip A. Lehman, Rep. Chuck McGrady, and Rep. Larry G. Pittman. 

Some Recent Beer Bill History

The premise of House Bill 67 is nothing new. The North Carolina General Assembly has been an especially effective barometer for intra-state beer industry growth for the last several years and the manifestation of three-tier friction points around the state. Within that time, three notable bills have emerged (with only one being signed into law). 

From oldest:

• House Bill 278 — Proposed the increase of the production cap on self-distribution from 25,000 barrels to 100,000 barrels per calendar year. Yes, this is the exact proposition of the currently filed House Bill 67. It even shares the same primary sponsor. HB 278 died in the ABC Committee in mid-March 2015. 
•  House Bill 625 — Proposed, among other things, that beer sold in a brewery to its consumers would not be included in the self-distribution calculation, and contract brewing would be legal. With the proliferation of on-premise retail activity here in North Carolina and around the country, HB 625's production calculation relief seemed to pose an intriguing compromise between brewers and distributors. For reasons unrelated to contract brewing (see the next bill), HB 625 died in the Finance Committee in Mid-April 2015.
• House Bill 909 — This North Carolina ABC Omnibus legislation did a lot. HB 909, unlike its 278 and 625 counterparts, became law in Mid-June 2015. With is ratification, North Carolina formally legalized contract brewing, started a slow on-premise sales trickle in the distilled spirits category, expanded retail sales of cider, legalized growler sales and banned powdered alcohol. HB 909 did not, however, address the self-distribution issue. 

Hurry Up and Wait

If you've got technical questions regarding House Bill 67, its impact on any of the production, wholesale or retail tiers, or any of the past legislation, reach out. We'll make sure to keep you in the loop as things develop in Raleigh. Cheers.

Just before the holiday in its November 16, 2016, press release, the TTB announced that Craft Brewers Guild, LLC, a Massachusetts beer distributor, will pay $750,000 to settle trade practice violations stemming from their role in a pay-to-play scheme with local retailers. CBG admitted to paying bars and other retail outlets upwards of $2,000 per tap handle, and as much as $20,000 annually, for the promise of committed lines. This settlement marks the largest sum ever recovered from a single industry member for this type of violation, and underscores the TTB's renewed commitment to cracking down on the pay-to-play practice on a national level. 

Why is this important?

We largely view the beer industry as a microcosm of free market mechanics. Artificial forces affecting price takers, makers, barriers to entry, information flow, etc. are an objective reality of the alcoholic beverage landscape and also worthy of examination because, well, artificial forces are sort of what we deal in. Last week, we spoke to the emerging regulatory enforcement trend for occupational safety within breweries. This update, however, is more directly connected to the welfare of the beer-loving consumer.

Pay-to-play schemes are an inherent disadvantage to small breweries. When tap and shelf space—finite retail resources—are allocated to the highest bidder(s), new and niche brands have to find alternative, more costly paths to market or forgo retail opportunity altogether. The selection and variety available to the beer-buying public thus becomes quite limited over a period of years. (Note: Consider the role of pay-to-play in a young brewery's decision to sell into a big beer portfolio. Interesting, right?!) With the TTB's restated fervor for stamping out widespread pay-to-play schemes, its logical that regulatory enforcement will continue to rise with the tide of the booming craft beer economy. 

If more aggressive enforcement of current TTB regulations will stay the creation of additional regulations, we're all for it. But be advised, from TTB Director, Robert Angelo:

 "This is not something I intend to walk away from. You're going to see further investigations in this area, I don't want industry members to consider getting caught the cost of doing business. I want them to realize there are significant consequences if we catch you."

Indeed, in spite of all the recent chatter, North Carolina's three-tier framework is a less accommodating market for pay-to-play than Massachusetts, where there is a cap on the number of retail permits ("pouring licenses" as they're called) that may be issued based on population. Still, North Carolina retains its fair share of alcoholic beverage 'artificial forces' that often operate as opportunity for those industry members who consider enforcement the cost of doing business. 

As more develops, we'll keep you in the loop. Until next time. 

Cheers!

From the very beginning, breweries have to answer to a number of regulatory agencies on both the federal and state levels. As the industry continues to grow (North Carolina currently has more than 40 new craft breweries in planning), our alphabet boys will keep gaining traction in their enforcement efforts across the board. One such agency we wanted to spotlight with this post is OSHA (the Occupational Safety and Health Administration). OSHA's stated mission is to "assure safe and healthful working conditions for working men and women by setting and enforcing standards and by providing training, outreach, education and assistance."

Consider the number of jobs recited above for which the craft brewing industry is responsible. For consumers, retailers and certain other industry affiliates, that hundred-thousand plus jobs represents opportunity almost exclusively. For brewery owners and management teams, however, the increase in employment represents an increasing level of liability exposure within the confines of these manufacturing facilities that are craft breweries. The craft beer industry is thus a prime target for OSHA enforcement.

Take, for example, the rise in workplace injuries. In a period of 3 years, reported workplace injuries jumped from 160 to 530. According to Reuters, safety violations are 4 times higher in craft breweries than in non-craft breweries. We here at Carolina Craft Legal suspect that multiplier may be a bit low, considering many injuries often go unreported and the principle of independence can sometimes manifest itself as less-than-ideal oversight mechanisms in the back of house. But like any other manufacturing vertical, brewery employees face regulatory issues spanning from ergonomics, fall protection and confined spaces to chemical and keg safety, industrial vehicles, thermal hazards and CO2/Nitrogen handling. 

So, not only is the craft beer industry healthy and growing, the craft beer industry is tense. 

The most effective way for craft breweries to protect their employees is to engage and understand their responsibilities and obligations in the eyes of OSHA. Does your brewery have a compliance plan? Do you have protocol for documenting incidents? Have you undertaken to create a comprehensive and sustainable method for training all members of your staff? What measures do you have in place to not only enforce, but improve your compliance efforts as law continues to evolve?

Experts around the country agree that compliance has no linear solution. A brewery's ambitions for workplace safety should be to create and maintain a culture of compliance. Of course, we're poised to help you do just that. Call or email us if you want to get started, change up, or just commiserate. We're always around. 

Have a wonderful Thanksgiving! Until next time.

Cheers!

Until recent years, business owners were limited largely to banks and angel investors for purposes of access to capital. “Blue sky” laws, as they are known in the securities realm, are well-grounded in the notion that companies offering some variety of stock to the public should shoulder the burden of providing their suitors with adequate disclosure about various components of the business. The development of the crowdfunding model, however, has shown proof-of-concept notable enough for federal and state governments to more pragmatically accommodate investment crowdfunding. Most recently, we’ve seen this type of movement respectively with the federal JOBS Act and the North Carolina PACES (“Providing Access to Capital for Entrepreneurs and Small Business”) Act.

The passing of these acts now allows investors so inclined to take true ownership interests in their target breweries, cideries, distilleries and wineries, instead of relying on a “free” glass or opening event access to quell their desire to stabilize a startup’s growth. North Carolina passed PACES this past July. Through what is formally a qualifying exemption from traditional securities registration, motivated individuals may now stand alongside banks, angel and accredited investors in supplying startup capital in exchange for a company’s equity. Prior to PACES, a business’s move to issue its stock to outside investors triggered compliance with the Securities Act of 1933, which obligates a business to certain, very costly financial audits and disclosures absent an exemption.

Our colleagues around the state have done a bangup job of curating all of JOBS and PACES fine details through various blogs and publications. In the interest of avoiding redundancy, we’ll simply link to some of those resources here, here and here. If you’re looking to drink straight from the barrel, however, we’ve tapped the highpoints below.

• The North Carolina PACES Act exemption allows a startup to raise funds from private, “unaccredited” investors.
• Unaccredited investors are those with a net worth of less than $1 million, or an income below $200,000 for each of the last two years (below $300,000 combined for married couples).
• Unaccredited investors may invest up to $5,000 in a single business annually.
• The unaccredited investor must be a resident of North Carolina.
• The business giving equity, the “issuer,” must be incorporated in North Carolina.
• Based on its accounting practices, a startup may raise up to $1 million or $2 million through the exemption annually.

So, how do we “count our PACES” within the craft beverage industry framework? North Carolina has already seen successful execution of crowdfunding campaigns from the likes of Mystery Brewing, Regulator Brewing and Sanctuary Brewing. These campaigns, however, predate the new securities exemption. It is tough to thus categorize the success of those funding efforts as indicators of future success within the bona fide craft beverage investment space. And although the new exemption presumably raises the ceiling on local investment by extending the opportunity to unaccredited individuals, we simply lack the data to support that proposition (and will stop just short of declaring its certainty).

What we can do is speak directly to some of the overlapping securities and alcoholic beverage regulations that will inevitably impact the design of investment funding within the industry. Here are a few things to keep in mind when putting your equity arrangement(s) together.

1. Permitting

In North Carolina, when applying for an ABC permit, a producer must list any individual or entity that has a 25% or greater ownership interest in the permitted operations. Therefore, it is incumbent upon the issuer (the brewery, cidery, distillery or winery) to thoroughly vet prospective investors to ensure they meet the ABC permitting requirements. For example, is the investor of majority age? Is the investor a North Carolina resident? Has the investor been convicted of a felony within the last three years? You get the point. If any of these requirements were to lapse, so would the business’s permitting scheme.

2. Approved Portal Use and Advertising

Most of our professional world today exists in some capacity online. If an issuer utilizes the internet for investment funding, PACES mandates that the web host must be organized under North Carolina law, or at least be operating under the appropriate certificate of authority. To be clear, mainstream crowdfunding websites, like Kickstarter, do not offer an “equity investment” functionality and cannot be used for this variety of transaction.

With respect to advertising, there are attendant disclosure requirements that must accompany any publicity surrounding an investment opportunity. Be wary of social media, too.

3. Compliance

PACES also sets out an array of ongoing compliance protocol concerning investment funding with unaccredited investors that is both complex and time-sensitive. The standards are a bit robust to catalogue here. However, if sourcing local capital for your business is on the horizon, please reach out to a competent attorney to guide your path.

We’re optimistic that PACES will activate an investor base previously unavailable to our quickly developing craft beverage market. With consumer emphasis squarely on innovative products and local dollars, this exemption may poise North Carolina for development of its small business networks like never before. Of course, this blog merely scratches the surface of attendant law and regulation. But hopefully this glimpse gives you hope, too, if not an inclination to more directly invest in your community.

As always, we’re available on every platform for cool discourse, questions and concerns. Just reach out.

Until next week. Cheers!

In the past few years, farm breweries have made their rise within the craft beer community. We’ve seen the likes of Jester King, Rogue, Stone and others purchase and lease farmland in an effort to secure the supply and quality of their ingredients, and to pay homage to the sustaining principle of localism. Through their own efforts and the efforts of other beer community members, the transparently local supply chain has begun to transcend restaurants. Now, “Farm-to-Keg” and “Farm-to-Glass” is legitimately "a thing." But the appeal has even greater upside than just the on-message aesthetics. The tie to agriculture often gives farm breweries greater flexibility with regard to their operating and accounting structure. With that in mind, here are a few tax tidbits that a brewery should know and consider if managing and running a farm is on tap, too.

Farms use Schedule J (Form 1040) to file their taxes

In addition to your normal yearly taxes for the brewery, a Schedule J tax form is necessary. The upside here is that a Schedule J will allow the farming business to elect an income tax average from its base years to stabilize payment during a high-income year if coming off of a low-income year. 

Farm Expenses

Farmers can deduct ordinary and necessary expenses they paid for the business. The IRS defines an ordinary expense as “a common and accepted cost for that type of business.” And a necessary expense as “a cost that is proper for that business.” So if it makes business sense to vertically integrate your brewery business through farming, these deductions can help mitigate overhead expenses.

Net Operating Losses

If a farm’s annual expenses turn out to be greater than its annual income, it can claim a net operating loss. The benefit here is that this loss can be carried forward to the next year and deducted.          

Farm Income Averaging

A Farm can elect to use what is known as Farm Income Averaging. This allows the farm to average all or some of the current year's farm income by shifting it to the three previous years. Connect this concept with the note about Schedule J filings. Farm Income Averaging comes in handy when income from farm activities in a current year is much higher than the income from any source over the previous three years. Electing for Schedule J thus allows the farm to balance its current and ideal tax bracket with the brackets from previous years, so it can avoid being taxed at a significantly higher rate in the current year. However, there are some limitations.

Farm Income Averaging is only available if, in the year of the election, the farm is engaged in the business of farming as an individual, a partner in a partnership, or a shareholder in an S-corporation. Moreover, the IRS states that corporations, partnerships, S-corporations, estates and trusts themselves cannot use farm income averaging. Therefore, Farm Income Averaging would almost certainly be unavailable to the brewery itself. Perhaps, however, some creativity in corporate structure can bridge that gap.

At any rate, if you’re floating the idea of chartering a farm brewery, but feel that it will be necessary to utilize Farm Income Averaging, it may be worth a call to your local beer counsel to strategize. The give-and-take of corporate structure and tax incentives make the farm brewery concept a truly remarkable venture. But it is never one-size-fits-all.

Of course, the law in this area is ever evolving. This article speaks to the growth of the farm brewery trend the changing legal climate from state-to-state, as each attempts to accommodate the growth. As always, we’ll be sure to keep you informed on any changes as they occur here in North Carolina.

Until next week. Cheers!

Fishing

Before you cast your line in North Carolina, you first need to obtain a fishing license if you are 16 years old and over.  Where you decide to fish will determine the type of license you need to obtain, as there are different licenses for fishing the inlands and fishing coastal regions.  Some licenses also require additional privileges which are sometimes free but still need to be secured.  There are many places to obtain a license but one of the easiest ways is to go to the North Carolina Wildlife Resource Commission page and purchase the permit online.  Always remember that there are size requirements for certain fish, catch/bag limits and that some fish might not be in season for harvest. If you’ve never fished before or have let your licenses expire, July 4th is free fishing day! This means that fishers do not need a license to fish anglers in North Carolina on that day (the limits above on size and bag still apply, though!).

Boating

Whether you are floating local on Lake Norman or venturing to another of our beautiful North Carolina waters, make sure you are in compliance with the safety laws that North Carolina and the local municipality have in place.  Notably, if you are born on or after Jan 1, 1988, you typically must take and pass a boater’s safety course when operating a boat powered by 10 horsepower or more on public waterways.  The NC Wildlife Commission offers these in-person courses for FREE all over the state.  You can also take the courses online though another party other than the NC Wildlife Commission for a small fee.  Always be sure to have a life vest for each person on your vessel and that you understand how to correctly navigate the waters by understanding the meaning of different regulatory markers and navigational buoys. If you really live that #LakeLife or #SaltLife, pass this information along. High-traffic times, such as July 4th, are only fun as long as everyone makes it through in one piece . . . and without a court date.

Beach-ing

Our North Carolina coast boasts some of the most picturesque beaches. Depending on the city you're in, each has different applicable laws and regulations. These regulations typically pertain to alcohol consumption, bonfires, driving, pets and beach safety. Some beaches allow the consumption of alcohol on the beach and some do not. Even more, most beach authorities prohibit glass bottles of any sort. This just means you get to raid the can shelf at your local craft beer retailer. Additionally, each beach will typically have a leash requirement and leash length requirement for your dogs and may not even allow your dogs during certain time in the season.  Hop on your phone's browser and conduct a quick search on beach regulations before you venture out to the surf.

Hunting

If throwing on your camo and heading out into the woods this summer, or even looking to get into it come fall, be sure to check the boxes and procure the requisite license(s) before you venture out for your first hunt.  This typically means taking a hunter’s safety course, which is a necessity if you want to obtain a hunting license in North Carolina.  The North Carolina Wildlife Commission also offers these courses for FREE year-round.  Like fishing, you need to obtain a license for the animal you are hunting and must obtain additional privilege licenses, such as a Federal Harvest Information Program (HIP) certification, to hunt migratory birds.

Biking        

Although people under the age of 16 are the only people required to wear a helmet when biking on public roadways or paths, it's no stretch to say that it's still probably in your best interest to wear one.  North Carolina requires you to have a lamp on the front of your bike and to also have either a lamp or a reflective mirror on the rear of your bicycle.  Hop over to the North Carolina Department of Transportation to find the full list of state laws for cyclists. 

If you have any additional questions about permits or safety regulations in place for any of the activities listed above, check the regulating bodies mentioned above. They are all filled with helpful knowledge, checklists and nuggets on how to secure the perfect summer. Our wildlife officers here in North Carolina are, like us, passionate about the diversity of activity this great state has to offer. Just be sure to do your due diligence before casting a line or drawing that bow.  Most of the permits listed above are easy to obtain and can save you from a lot of headache and wasted time.  When preparing for these adventures be sure to check out the local outdoors store because they can always offer useful advice to make a trip truly unforgettable.  All of us here at Carolina Craft Legal hope you have a safe, wonderful summer. And as always, we appreciate you stopping by the blog.

Until next week. Cheers!

Locate your headphones, folks. The Carolina Craft Legal crew had the pleasure of joining Greg Pulscher this week on his podcast, Free to Brew. You can listen to the episode on iTunes, Soundcloud and Stitcher, as well as by simply tapping the play button above.

You may recall that Michael joined Greg back in February for a discussion of North Carolina's cap on the self-distribution of beer. This episode is a deeper dive into that limitation and a conversation about a portion of legislation that might lend itself to some creative, inter-tier collaboration between industry members. We blogged about this a couple of weeks back. Tap here for a quick refresher.

In the back half of the podcast, we dive into the world of trademarks as applied to the beer industry. This topic has gained a lot of traction nationally, as the numbers of breweries continues to climb and the pressure on building and maintaining distinguishable brands peaks. We also exchange some hop puns and give some insight into how Carolina Craft Legal as a practice got its start.

As an update to that trademark discussion, another brewery-related skirmish popped up between Denver Colorado's Great Divide Brewing and Red Yeti Brewpub out of Jeffersonville, Indiana, since our recording. Most of you are likely familiar with one of Great Divide's flagship beers, the Yeti Imperial Stout. Great Divide filed its lawsuit against Red Yeti for an alleged infringement related to Great Divide's iconic yeti silhouette. Great Divide claimed in their complaint that they have "continually used the Yeti Design Mark since at least 2008 to identify its beers, and to distinguish them from the products of other breweries." Accompanying the lawsuit, Great Divide sent a cease and desist letter to Red Yeti applying to all "signs, menus, advertisements, packages" and other promotional materials.

We spoke on the podcast about the importance of collaboration and an eye for coexistence in a crowding industry. While we find it unfortunate that formal legal action has ensued, we emphasize that protecting a trademark requires continuing vigilance and some sort of action in the face of a perceived threat to the validity of a mark. Without any insight into any coexistence efforts between the two breweries, we will reserve commentary about the lawsuit. Sometimes parties reach and impasse and legal action is the only way to sort out allegations of infringement. We sincerely hope for a mutually beneficial outcome for both breweries and will keep you, the readers, updated on how things develop.

As a final note, we want to thank the host, Greg, for being so gracious and continuing to support important discourse and dialogue in the beer industry. We are honored to have had the opportunity to trek east to his Raleigh studio and contribute as meaningfully as possible to our shared mission. Check out Free to Brew on Facebook and Twitter and give a deserving follow.

Smash that play button, y'all. Until next week. Cheers!

My wife is a graphic design student and does a fair amount of freelance work. This got me thinking about licensing agreements and the role of the attorney in helping graphic designers, illustrators, photographers and musicians, whether as individuals or as businesses, confront the licensing of their creative work with confidence. No doubt, there are plenty of people who have a preference for doing work based on a handshake. While we advise against the handshake method regardless of the subject matter, we specifically note that licensing agreements exist to ensure that both the creative entrepreneur and the client understand their relationship to each other, as well as what rights they each have respectively in the final product (the “deliverables”).

This concept is best illustrated via hypothetical. Let’s say you are a graphic designer commissioned to create a patterned graphic specifically for a company’s ad campaign. Let’s also assume you produce and sell the company this graphic for a flat fee and that the details of any negotiation between you are limited to an invoice or, even worse, a handshake. Several months later, said company decides your work is so effective and thus valuable that they develop an entire product line based on your patterned graphic. Boom. Your flat fee ad campaign work turns into a long-term growth driver for the company. While the renewed purpose for your work might be flattering, as your design will be widely recognized by the public, you realize how hard it is to classify flattery as income.

The truth is your original fee represented a fair and reasonable price for the ad campaign contemplated. What it did not represent was fair and reasonable compensation for the development of a highly profitable product line based on that same pattern. The value of your work product, among other things, ultimately depends on its intended use. In this case, where the company will be using the work and getting its value indefinitely, the ideal scenario is for you to either (1) price in the long-term value; or (2) to have some recourse for a client misusing or repurposing the work for a value disproportionately greater than the original negotiations. However, because the only paper trail you have here is at most an invoice, you have transferred the rights to this graphic completely. And because you transferred the rights to the graphic completely, you likely will have no legal recourse. This is why the concept of licensing is so important.

As we have evangelized in the past, written agreements do the heavy lifting for you! If you had put your anticipated work for the company in writing, that licensing agreement would have limited what the company could do with the graphic without your permission. Put another way, if you had licensed the company to merely use your graphic, rather than selling it to them outright, you would still have rights in the deliverable. And with rights come recourse! Here are a few things you should be sure to include in your licensing agreements to protect your work and your long-term income.

(1)  Scope of the Work and of the License. To what end does your client get to use the work you created on their behalf? Are they paying for complete ownership? If not, the scope of use should be broad enough to give the client fair use of the deliverable, but not so broad that you lose the ultimate ownership rights without being fairly compensated for them. At the end of the day, it is your decision as to whether ownership over your work product is as good as money—not the client’s. Consider, too, defining the boundaries of how much work you promise on the front end in delivering the ultimate product. Most designers have horror stories related to clients demanding endless rounds of edits and tweaks that simply render the relationship cost prohibitive in the end.

(2)  Payment. Will there be a one-time licensing fee, or will it be made in installments such as monthly lease payments, or royalties? What is the method of payment? When is payment due? What is your recourse for non-payment? What if the client changes their mind after you’ve done significant work on their behalf? Entrepreneurship is tough enough without the stress of tracking down your due compensation. Having a form agreement addressing all these scenarios can give you great confidence in running your business and some flexibility depending on each client’s circumstances and needs.

(3)  Term of Use. How long does the client rights to use the deliverable? Is it limited to time or frequency of use? This information should be discussed early on as to make sure you are both on the same page.

(4)  Warranties and Indemnification. Give your clients peace of mind! Making warranties to a client is a fantastic way to gain a professional reputation and rewarding referral network. Letting a client know in writing that the product sold is of your unique design, and that if anyone challenges their license use that you will defend them against that claim, is great way to add significant long-term value to your business.  

Of course, this list is not exhaustive by any stretch. There are a number of other provisions that can and should be included to complete the “airtight” licensing agreement. But these aforementioned provisions seem to have the biggest effect on the day-to-day engagements of the up-and-coming designer. Remember, the work you create is yours until you decide otherwise. Your product is your reputation and your legacy in the long run. The commitment to protecting that is just as important in insuring your success as the work itself. We want to make sure you get there and Carolina Craft Legal is committed to doing our part to serve the community of creative entrepreneurs. If you have any questions, just reach out. We’ll be happy to help.

Until next week. Cheers!

The question, for local brewery owners and malt beverage suppliers, is why not open their own distribution companies in lieu of signing with independent distributors? Would that not allow each of them the flexibility to continue protecting their respective brands and preserve the jobs they've created in an effort to accommodate their own success and growth?

It's a great inquiry. Before we give you our answer, let us set the stage by laying out a foundation for this post and mentioning first that there is a more comprehensive explanation to our quick summary of the three-tier system in another post on our blog. Feel free to hop to it, or remain here for the skinny before we dive into our thoughts.

North Carolina law creates a three-tier system for, among other things, beer regulation. This system is responsible for the supplier-wholesaler-retailer relationships that manage the production, distribution and sale of all the incredible beers our native brewers brew for us to enjoy. These regulations are laid out in Chapter 18B of the North Carolina General Statutes.

Our focus begins with N.C.G.S. Section 18B-1104, which allows breweries who are brewing less than 25k barrels of beer per year to distribute their own beer to retailers everywhere—to "self-distribute." Many breweries utilize self-distribution as a practical path to growth and wish to continue self-distributing for a variety of reasons best summed up by the movement known as Craft Freedom. Once a brewery produces 25k barrels of beer or more, though, North Carolina law requires that brewery to distribute all of its beer through an independent distributor. This means the brewery must hire at least one distributor to sell and distribute its beer to all restaurants, bottle shops and other retail locations regardless of how close those businesses might be to the brewery.

So why can't the owner of a brewery just start their own distribution company to get around having to hire a third party? Well, they technically can. But for reasons we are about to explain, doing so would not really remedy the problems associated with independent distribution (lack of product control, consumer (mis)education, brand over-exposure, etc.). The rules and limitations to which an owner would be bound in forming his/her own distribution company arguably render such an endeavor even less appealing than simply complying with the self-distribution mandate. But that does not mean the opportunity does not merit consideration.

The North Carolina law that creates the possibility for a brewery owner to open his/her own distributorship is N.C.G.S. Section 18B-1119, labeled "Suppliers Financial Interest in a Wholesaler."

A couple quick definitions: "Supplier" is defined in N.C.G.S. 18B-1301 as a brewer, bottler or importer of malt beverages, including anyone who holds an interest in a brewery. A "wholesaler" is a holder of a malt beverages wholesaler permit—someone licensed by North Carolina law to distribute beer.

Here's where things get interesting. Section 18B-1119 says that a supplier, officer, director, employee or affiliate of a supplier (think "brewery" or "affiliate of a brewery") may have a financial interest in a wholesaler IF he/she creates a limited partnership with a proposed purchaser of a wholesaler, or by offering a business loan in exchange for a security interest in the assets of a wholesaler. Section (a), the limited partnership option, goes on to state that the supplier must be a limited partner and the other owner (the "proposed purchaser") will be the general partner. Both sections (a) and (b) make clear that these agreements can only last for up to eight (8) years and that the limited partner (the supplier) may never become a general partner. If by operation of law the supplier becomes the general partner (think default of the proposed purchaser or something similar), he/she must divest himself/herself of the general partnership interest within 180 days. So what does this tell us?

This statute essentially says that a brewery owner can indeed form his/her own distributorship. But it also says that he/she can only play the role of a limited partner, which really equates to taking a financial interest in the business and nothing more. Put even more plainly, the brewery owner can be, at most, a passive investor in his/her own distribution company. By law, a limited partner has no rights in the management of the partnership, only an interest in the profits or in the losses and only up to their contribution. So the day-to-day operations and managerial decisions are left to the general partner while the limited partner can really only wait for a return on his/her initial investment. Sort of defeats the purpose, right?

Perhaps. However, we offer an alternative stance. This provision does allow a way for a brewery owner to continue earning an income at the wholesaler level similar to that of self-distribution under the 25k barrel cap. Although he/she might not be making the same money, dollar-for-dollar, the limited partnership arrangement would at least provide a short-term alternative to, and soften the blow of, relinquishing total control to an independent distributor. If we are examining a way for a supplier to continue employing loyal folks, maintain some level of certainty about how its brands will be managed in broader regions and ensure a more tolerable production trajectory once over the barrel cap, a little something is certainly better than nothing.

Of course, the new partnership would still have to abide by the same 18B regulation as its independent distributor counterparts. Additionally, limited partners must commit to their roles as limited partners—not only for 18B reasons, but for tax purposes as well. And don't forget that, even if things are going swimmingly, the eight (8) year limitation on such arrangements still applies.

So if the limited partnership arrangement has a definite end point, why'd we offer this commentary? Simply to show that there is room for legal, collaborative creativity within the distribution tier. Carolina Craft Legal is wholly committed to finding ways to facilitate mutually beneficial local collaboration. And we recognize that distribution models are not a one-size-fits-all endeavor. With the legislative climate surrounding North Carolina ABC regulation heating up, this alternative might just be nimble enough for local brewers approaching the self-distribution cap to bide their time. If your thinking aligns without ours and you're motivated, reach out to us. We love exploring opportunities to keep any business nimble, especially our beloved craft beer segment.

Until next week. Cheers!

It’s no secret that the business of Tailor Made Style subsists on a healthy diet of consumer culture and an emerging push for sophisticated attire to be normalized within the younger demographics. It seems as though we are all in an objectively zealous pursuit to “get a fit off.” And it is within those younger, social-media-fluent, fire-fit-chasing demographics that the contexts of life and marketing have converged. That is the phenomenon we know as native advertising. Indeed, from the retail perspective, what better way to urge the purchase of a product than to weave it subtly into consumers’ self-curated timelines? Therein lies the value proposition of DJ’s business and a direct path to his desired growth. Fashion addicts follow DJ. Tailor Made Style scrolls the fix. Corporate brands see opportunity.

At the start of this series, DJ boasted just over 6,000 Instagram followers. Over the course of 4 collaborative drops in about as many weeks, he now curates double-tappable content for over 7,100 folks. That’s trajectory. If this were a business blog, we’d string together a few nuanced sentences basically advising that Tailor Made Style keep doing what it’s doing. But that’s not why you’re here, nor why we write. The reality is that long-term business success is only as certain as the ability to anticipate and mitigate cognizable risk.

The question is: when a successful fashion blogger collaborates with a corporate brand in a native advertising play via social media, what is the anticipated risk?

The simplest answer is a violation of federal law.

A certain federal regulatory body, the Federal Trade Commission (FTC), by and through the FTC Act, does what it can to preclude misleading or deceptive advertising practices in the marketplace. To that end, whenever a corporate brand and social media influencer have some material connection between their advertising efforts, the FTC requires that each party disclose that connection to the consumer (the ever-scrolling influencee). The idea is to ensure that the consumer is aware of the solicitation and that an educated decision about a potential purchase can be made. Hence, when a corporate brand either pays or supplies a social media influencer with complimentary jawns to represent it through a post, failure to disclose that fact can spell liability for one or both parties.  

What of it?

We have two thoughts to offer here. First and foremost, comply. It’s easy. All the influencer has to do is comment “#Ad”, “Ad:” or “Sponsored” in the posted Instagram pic to validly disclose to consumers that the particular post is the type of sponsored content described above. If the campaign is to span several posts, disclose on each one. Moreover, ambiguous language like “in partnership with” or “a collaboration between” will not suffice as unequivocal disclosure. With the excess of hashtaggery we see employed on the daily, thumbing “#Ad” into the mix is shouldn’t be too off-putting.

Second, the potential for liability behind such a violation of the FTC Act illustrates exactly why formal incorporation is a no-brainer. Recall in previous posts the discussion we had about the personal liability shield that accompanies organizing as an LLC or some variation of a corporation. It’s tough to tell whether a benchmark of 7,000+ followers is enough for DJ and Tailor Made Style to show up on the FTC’s enforcement radar. So although direct regulatory enforcement is a risk, it might very well be a low one. However, influencers in DJ’s position are often part of a broader network of individual influencers bearing their own respective followings and thus contracts with the same corporate brand. As we mentioned last week, anytime a contract exists, so does the possibility of breach. One crucial element of big corporate contracting is the concept of indemnity. Basically, big companies draft language in these sorts of agreements to insulate themselves from ultimate liability. While Lord & Taylor may make headlines behind a violation, it is often the independent contractors (the Tailor Made Style’s of the world) who pay the price. Thus, the risk of indirect regulatory enforcement may be much higher.

Without getting too in the weeds, it breaks down like this. A corporate brand will offer some sort of compensation via contract to a social media influencer in exchange for some agreed upon fire-jawn-posting from the influencer’s account. The contract will spell out the rights and obligations and also include an indemnity clause. The indemnity clause will go something like, “If we get sued, you get sued and you’ll compensate us for any losses.” In the event of a suit and resulting unfavorable judgment, an influencer could be on the hook for more than they have the ability to pay. If said influencer did not formally incorporate (and thus fail to secure the liability shield) they could be on the hook personally. We’re talking about the house, the car, the college fund—all at risk. Not fire.

The bottom line is that social media influencers and fashion bloggers alike should know what they’re signing before they sign it. Don’t be too intimidated by the size or leverage of a corporate brand, or too pressured by the prospect of some short-term money to adequately understand your own obligations and protect your ability to make a business doing something you love. Even if its not one who can properly get a fit off, find an attorney to look over your contract(s) and advise about your social media strategy going forward. Per usual, Carolina Craft Legal is here for just that. Shoot us an email or drop us a line anytime.

Until next week. Cheers!

The information to follow here is not new or groundbreaking by any stretch of the imagination. That is to say that the fabric of legal infrastructure and decision-making is largely the same regardless of the nature of the business at issue or the industry to which it belongs. So why spend time reiterating a topic Carolina Craft Legal has dealt with before? Well, there are a couple of reasons. First, it is to underscore exactly that sentiment—that even a business model as newly casted and social media driven as Tailor Made Style should be hemmed with the entity formation basics. Every business, like every decent look, should have a solid foundation. And secondly, like DJ, our commitment to utilizing innovative techniques in our practice does not diminish the need to apply the fundamentals whenever necessary and proper. To analogize, DJ may have great insight on F/W ’16 trends, but if he can’t throw together a decent four-in-hand every now and again, how does his brand build trust?

As applied to the business formation fundamentals, there are four (4) bits of information gathered from DJ’s consultation that steer our thoughts about how someone in his position should ultimately organize their business:

(1)  DJ is the sole owner and still a student. This really just points to what sort of time and resources he will have to allocate to corporate formalities. Because he has no partners sharing accountability and because maintaining a full class schedule commands on average 15-18 hours per week just on attendance (let alone the accompanying work), DJ’s time to spend on developing Tailor Made Style is limited. The structure of the business should thus minimize the effort it takes to observe the associated formalities—meeting minutes, quarterly filings, audits, etc.

(2)  DJ is signing advertising, sponsorship and marketing contracts with large companies. There’s an interesting duality here. First, formal legal structure almost always signals a level of sophistication within the marketplace inviting other companies to do business. Because DJ has locked down a short-term contract with a corporate partner, he has the ability to convince that partner to think seriously about more long-term deals as well as communicate Tailor Made’s sophistication to other corporate retailers within arms-reach. Second and more obvious is the fact that the existence of a contract is an acknowledgment that an agreement may be breached. DJ thus requires an entity that will give him the personally liability protection we’ve spoken of before in the event things do not go according to plan.

(3)  DJ has clear and predictable operating expenses and a cause for reinvestment. This speaks directly to a small business’s need for a tax structure that maximizes reinvestment dollars and efficiently passes income through the business to the member(s). DJ mentioned the use of software, cameras and other technology, as well as plans for paying employees and independent contractors in short order as his business grows. A common reality with startups is the need for liquidity to continue spending on an as-needed basis in an effort to keep the business growing in the formative stages. The less of this operating cash that is subject to state and federal taxes, the better.

(4)  DJ articulated plans for growth and a desire for product development. Product development takes dollars. Aside from the primary business, there are two basic ways to generate the money needed: taking loans or giving equity. Either way, DJ is better positioned to attract investment funding with formal structure around the business and a blueprint for how any independent funding will ultimately lead to long-term growth for Tailor Made Style. Taking a loan would of course preserve his complete ownership of the business, but giving equity often incentivizes new members to put effort and guidance into the business to insure the success of their investment. Both have their respective upsides, but the one certainty is that formal organization is the key to finding necessary capital.

All told, the limited liability company, affectionately known as the LLC, is perhaps the most advantageous entity choice for businesses like Tailor Made Style. It removes the burden of (most) corporate formalities, provides the benefit of a liability shield, allows for flexible taxation and gives the structure necessary to attract outside funding. To reference the business law basics of LLC formation and its comparison to other corporate varieties, tap here and here. Tailor Made Style and Carolina Craft Legal continue this journey next week with a look at formal brand management and the layers to protecting the business. As always, we sincerely appreciate you scrolling through.

Until next week. Cheers!

Michael: From your vantage, what is the business of fashion in 2016? How does someone in your position monetize business within that framework?

DJ: There's an interesting business model that you have to follow being in the fashion industry. It goes something like: (1) find a platform to express your creativity and expertise; (2) post high-quality content on a consistent basis; (3) find and attract opportunities for monetization—advertising, sponsorships and affiliate marketing. With Tailor Made Style, I worked for 8 months before the first opportunity to truly make money came around through brand sponsorship. Here's a quick breakdown of the ways to get paid as a blogger:

-       Advertising - when large fashion/lifestyle companies come to you and ask to place a banner advertisement on your site. When you have a high number of page views per month, companies will typically pay you a pretty substantial amount of money to catch your readers’ attention.

-       Sponsorships - when you get paid to wear clothes from a certain brand for an extended period of time. During this time period, you’re obligated to post pictures of you wearing the brand’s clothing on your blog and social media along with tagging the brand, providing links to their site, and using certain hashtags. I’m currently in the middle of a brand sponsorship and disclose the fact that I am being sponsored/compensated at the bottom of each post.

-       Affiliate Marketing - posting a link to a product on your site and getting paid a commission every time someone buys that product after discovering it through your blog.

M: What are some of the major costs associated with what you do? Give us a snapshot of some overhead.

 D: The platforms for building and sharing content are pretty transparently low cost. Smart phones are dominating. Because of that, most people overlook the costs of well-curated looks and consistent branding. I was paying for every single piece of clothing that I wore on the blog for a hot minute. Every. Single. One. There's pressure from your readers and from the industry generally to not wear the same thing twice. So sourcing new pieces for the wardrobe, for me, is the most obvious and somewhat unavoidable overhead expense, at least in the short term.

Some other expenses include a decent camera or two (no disrespect to the iPhone camera, but c’mon) and laptop with some good software. Future expenses will involve some employees or independent contractors. I plan on hiring a writer and a photographer to run and maintain the blog once it grows to a certain point. By then I plan to be moving the business forward in other areas, leaving those folks to oversee and review everything that gets posted.

M: What are your goals for Tailor Made Style and where do you see yourself five years from now?

D: My goal for Tailor Made Style is for it to grow into something that’s more than just a fashion blog. I think I’ve taken some steps to ensure that—partnerships with other menswear professionals and an early contract with a pretty notable retail brand. In part, I want Tailor Made Style to play the role of daily resource and sartorial guidance—and confidence boost! As I mentioned, I’ll eventually hire staff for editorial and content creation purposes. And, man, I’ve got my mind on product development as well. Five years from now, I see myself blogging full-time and running a related venture dealing more directly with menswear. It takes time to become a tastemaker, but who am I to set limits? (laughs)

M: How important is your brand to the viability of your business? What assures people that the content they consume is indeed “Tailor Made?”

D: It’s paramount. It is extremely important that people, both in consumer roles and in roles within Tailor Made, understand that the Tailor Made Style brand is the business. Let’s not kid ourselves here—revenue is the lifeblood of business. The brand, though, is directly tied to my sense of self and how I feel I can contribute to an industry I love. How I’m recognized within that is directly tied to the success of the business. The brand is everything. It is something that the people it reaches feel a part of and something they can take pride in. Fashion is visually driven. If I fail in tailoring my presence and creating some elbowroom, the business will…yeah. You know anyone who can help?

M: (Laughs) I might know a guy.

.  .  .

What’s more intriguing than this style of client intake? These conversations are what hem productive professional relationships. Next week’s drop in the Law of Fashion series will represent a distillation of all the above info and a blueprint for how businesses like Tailor Made Style might proceed with organizing to accommodate short term success and protect the ability to realize future milestones.

Until next week. Cheers!

EXPRESSED in “Foreword” as a major tenet of this blog is meaningful collaboration with professionals beyond the legal industry. Indeed, entrepreneurship today is as emergent as the technology we employ in its successful pursuit. This week, DJ Hargrave and I embark on a multi-part series aimed at stitching together the fabrics of our respective businesses.

DJ is one of the up-and-coming entrepreneurs I connected with while sitting as a panelist for High Point University’s March Entrepreneurial Roundtable. He is the founder of Tailor Made Style (tailormade-style.com), a platform for modern menswear influencers to showcase their sartorial inclinations through sponsored posts and editorial contributions. More importantly, DJ is the prototype for the business of fashion in 2016—and an ideal client. His seamless leverage of social media to mobilize more than 6,000 followers not only highlights technology’s role in expediting growth, but also the idea that successful entrepreneurs are looking to legal counsel earlier on to effectively manage and protect that growth. Of course, Carolina Craft Legal’s value proposition from the outset has been to act as such counsel, posturing innovative solutions and urging a level of business sophistication that accommodates our clients’ need for flexibility. 

We spoke at length about our respective experiences with entrepreneurship, the natural evolution of both of our fields and ultimately found collaboration to be an intuitive outlet for us both. The break is perfect: DJ tailors Carolina Craft Legal’s virtual presence to expand our client universe as Carolina Craft Legal takes the legal measures to move the Tailor Made brand from en vogue to heritage. You, the reader, get a transparent view of just how much more there is to the process than meets the eye.

Over the course of the next four weeks, DJ and I will publish this conversation, piece-by-piece. As any consultation would begin, DJ will explain to us the business of Tailor Made Style—its background, its composition, its strengths, its needs and its aspirations. More plainly, how fashion is monetized through social media. The week following, we will pitch legal infrastructure—the mechanisms for independence and liability protection, sound internal management, role delegation and entrepreneurial empowerment. Week 3 will break down the layers of brand protection and how DJ can assure his following and corporate partners that what they consume and contract for is without question Tailor Made. In the final installment of this series, DJ will style Carolina Craft Legal’s social media presence around an attorney’s ethical obligations to depart from their historical absence from mobile platforms.

It’s been an absolute pleasure taking creative agency over the substance of our lifestyles. We look forward to taking you on this journey and exposing you to the intersection between form and function.

Until next week. Cheers!

This week I had the opportunity to ease my way into Hickory, North Carolina, and sit down with Jeff Neuville, the Director of the Small Business Center at Catawba Valley Community College, and Gary Muller, the Businesss Programs Department Head of Catawba Valley Community College and long time CPA. Their podcast, Entrepreneur Exchange, connects business owners, entrepreneurs, and business experts with the goal of sharing tools and tips to assist new businesses get up and running and existing small business grow and prosper in a challenging and constantly evolving economy. Here's a direct link to our episode.

Our discussion covered a lot of ground in a relatively short amount of time. We began the podcast with a look at technology's role in encouraging successful entrepreneurship and moved into an overview of Carolina Craft Legal as a firm and the types of clients we represent. Jeff and Gary quizzed me on what sorts of legal issues startup businesses should be thinking about as they get up and running, the distinctions between the various types of entity choices, and the function of what many business owners understand as the "corporate veil." As we moved through these topics, I took a stab at explaining the importance of governing documents in creating operational stability for any company and what steps businesses should take in an effort to get formally organized.

Of course, the podcast would not be complete without a look at craft beer and spirits and the legal road map necessary forming a successful operation. We spoke here about the distinctions between businesses in each of the three tiers in North Carolina and just how tricky compliance with alcoholic beverage laws can sometimes be.

The show rounded out with my personal experience with entrepreneurship. Jeff gave me some airtime to discuss what its like running a startup and working with startups at the same time. I talked about my own difficulties with regard to marketing as an attorney, as well as some of the other challenges I've faced as a startup business. I tried my best to consolidate those thoughts into some practical advice for the listeners. I even attempted to answer whether I ever see myself working in a big corporate firm.

Click the play button above and share your feedback with us on Facebook, Twitter and LinkedIn.

My offering for their Small Business of the Month segment is Beer Co., in downtown Greensboro. The owner, Josh, has been very cool to me since I landed here and began setting the foundation for Carolina Craft Legal. If you're in the area, I urge you to stop by one afternoon, grab a beverage and enjoy the small family of patrons he's assembled.

As always, Carolina Craft Legal is committed to providing startups and entrepreneurs with business counsel on a variety of legal issues, from forming the business to protecting the brand. Drop us an email, schedule a consultation, or give us a call. We're passionate about entrepreneurship and happy to provide you with confidence in your legal status so your business can focus on growth.

Until next week. Cheers!

Since launching Carolina Craft Legal in November, it was the first opportunity I’ve had to put my experience as an entrepreneur at the forefront with my experience as a young attorney as the anchor. I almost always approach these concepts in reverse. This post is a continuation of that entrepreneur-forward dynamic. I felt it blogworthy for a couple of reasons. One, entrepreneurship is often quite daunting. The emotional peak-and-trough is exhausting and the irregular workweeks can be isolating.  But it helps to know that the concerns and insecurities are pretty universal. Second, Carolina Craft Legal is premised on embodying its own ideal client. A mainstay of the practice is delivering value that extends beyond the traditional practice of law. Sometimes that takes the form of business strategy; other times the form of network building. No matter the form, it is always a function of empathy.

The Roundtable was unbelievably fluid—so much so that the printed questions in the middle of my designated table went untouched. Before leaving, I thumbed through a few. I have included below five questions, the answers to which I felt would most effectively address the two tenets above. I want to thank the members of the Entrepreneurship Club for their hospitality. I thoroughly enjoyed my time there. I am grateful for the chance to continue learning about the evolving landscape of entrepreneurship and a bit more about myself, too.

What was your biggest challenge or struggle and how did you overcome it?

The low-hanging fruit here is client acquisition, more broadly understood as growing a customer base. And while that is a struggle for nearly every entrepreneur, I believe the source of such frustration varies. For me, the biggest challenge was and will continue to be confidence. I have a profound respect for the legal profession and being admitted to the North Carolina Bar was undoubtedly my proudest moment. Even still, practicing law while learning to practice law and running a business of practicing law commands a lot of attributes only experience can develop. I am conscientious of not only how prospective clients perceive me, but also how my reputation is developing within my professional community. Personally, overcoming the confidence challenge has been a two-part process. First, I focus on the things I do well—writing, research, and communication—and I devote a portion of every day to doing one or more of those. To some degree, offsetting the emotional lows of the unfamiliar or difficult is easier done when I juxtapose things I have some level of confidence in. Second, I focus on building true relationships with my clients. I do not mind a bit doing more than what is required to gain the trust and respect of the people giving me an opportunity to grow. I’m finding the stress of having the proverbial chip on my shoulder is willing me, albeit slowly, toward becoming the attorney I have in my mind’s eye. At bottom, I think confidence is earned in the aggregate. Before entering law school, a family friend and retired judge wrote to me, “Just remember: a man can move a mountain if he does so one stone at a time.” That’s how I approach each day.

What sparked your interest in entrepreneurship and that field specifically?

I sort of backed into entrepreneurship, so to speak. As my time in law school began to wane, I realized what many students realize in that I had no real idea what I wanted to do or who I wanted to be. That sort of existential angst is expensive, too. In my final semester, I applied for and joined my school’s entrepreneurship clinic. I fell in love. Playing the attorney role for entrepreneurs is fulfilling for me. I am given the chance to leverage my competencies in an effort to help other inspired people create. I’m relatively right-brained, so the concept of counseling on strategic decision-making satisfies my thirst for creativity. Moreover, I get to continue learning. Entrepreneurship is an inherently diverse field. My clients bring ideas and concepts to the table that I get to go home and learn about. Without knowing it at the time, that element of continued learning and self-education was important to me as I graduated and began studying for the bar. With regard to the alcoholic beverage industry, there’s literal science to both the production and the business. Charlotte has one of the most deeply rooted and fastest growing craft beverage scenes in the region. I naturally gravitated toward that culture, forged true bonds and friendships through it, and found a convenient intersection between my skills as an attorney-to-be and my passion for facilitating local business. Ultimately, I saw entrepreneurship as my path to facilitating entrepreneurship.

Do you include family members in your business? Why or why not?

I’m going to be that guy and equivocate on this question. It depends. As an attorney, my client is almost always the business itself—not the individual(s) running it. In my previous posts tackling business creation, I made it clear that we humans are fickle creatures. We tend to let the joviality of a new idea blind us to the tough questions that should be answered up front, namely those concerning decision-making authority and what happens when partners inevitably reach an impasse. When it comes to disputes over money, the half-life on most relationships is extremely short. I think the biggest question when one is dealing with family is whether the relationship can survive business failure. That answer takes a lot of honest self-disclosure. However, I do not advise against including family in business per se. There are many examples of husband-wife, father-son, and sibling duos realizing great success in the brewery business specifically. Justin and Sarah over at Sycamore Brewing are the folks that come immediately to mind. They are brewing a beautiful business over there. In legal parlance, these matters should be handled on a case-by-case basis. Speaking personally, my answer remains the same. Family adds an interesting twist to a decision that is difficult in its own right.

What do you think about the stories of young entrepreneurs today? Do you think things are different now than ten years ago?

I read a statistic recently that stated somewhere around 65% of children in primary schools will have jobs that are not yet in existence. Amazon is now piloting a drone program boasting two-hour delivery service. I think young entrepreneurs are the stories of today. I lump myself in with a generation of people who have entered or will enter the workforce fluent in technology. There is no question that things are different now than from a decade ago. The evolution of the Internet into a ubiquitous daily tool is the most obvious way to appraise that story. Things happen instantaneously now. I think the young entrepreneurs of today are nimble in that way and develop business models that reflect the role of informational agility. I certainly have endeavored to position Carolina Craft Legal as an innovative law practice, utilizing as much technology as possible. Look, we were able to launch this firm without brick and mortar—merely a website. Young entrepreneurs focus on efficiency, connectivity and transparency. They are shaping the evolution of every industry, including the practice of law. And I think it’s awesome.

If you were advising the college student going forward, what general advice would you give?

Having lived the overwhelming majority of my twenty-six years as a student, my advice is simple. Treat all educational experiences as ends unto themselves, not merely as a means to one. I learned a lot substantively in law school, from constitutional law to antitrust. But the most valuable aspect of my legal education was realizing what skills I was acquiring and how they could be applied in a real world setting. Having a degree is great. Having the ability to create, to me, is functionally better. In my limited experience, taking accountability for my educational experience—placing the burden of turning rote knowledge into application—has fostered professional opportunity. At its core, entrepreneurship is the manifestation of some proportion of applied education and intelligence. Considering the above-mentioned stat, perhaps the best strategy for students going forward is to maintain the mind of a student long after graduation. I talked briefly above about seeing my experiences with clients as vessels for continued learning. We never know when that next light bulb is going to turn on. But we can make sure there’s something for it to illuminate.

The world of entrepreneurship is a continuing learning process. As with life generally, there are ups and downs. The true challenge is extracting value from both, shortening the wavelength, and trending upward. Carolina Craft Legal is committed to assisting entrepreneurs and small businesses with this in every way we can. Just reach out. We look forward to collaborating with the educational sector in the future and extend a final “Thank You” to Ms. Kathy Elliott and the whole High Point University Entrepreneurship Club.

Until next week. Cheers!

In North Carolina, contracts between breweries and distributors are quite regulated. It is thus prudent for both parties to understand the statutory framework for local distribution and what terms standard distribution agreements typically address. This post aims to (1) give an overview of the most common distribution agreement provisions, (2) explain how termination of these agreements functions in North Carolina, and (3) explore how considerations of craft beer may alter negotiations between local brewers and distributors in the near future.

Standard Provisions

Below are the most common elements of distribution agreements between brewers and wholesale distributors. This is certainly not an exhaustive list, as each agreement contemplates its own set of facts and circumstances. In addition, keep in mind that, based on the goals and resources of each party, bargaining power will vary and thus so will the respective obligations (to the extent they are not statutorily imposed).

Qualifications—usually a quick description signaling that the parties possess the necessary state and federal alcoholic beverage licenses.

Exclusivity*—this is wildly important. In North Carolina, pursuant to N.C.G.S. § 18B-1303, a brewery cannot execute a distribution agreement with more than one distributor for the same brand in the same territory. Each agreement must be filed with the ABC Commission.

Term*—this is also big. In North Carolina, once a distribution agreement has been executed, it is for perpetual duration. Of course, language can be inserted to periodically renegotiate price schedules and the like. However, subject to a very narrow carve out, a brewery must be mindful that the decision to hand over distribution of its beer in a given territory to a particular distributor is to do so permanently.

Brewery Obligations—all the specifics surrounding when, how and in what quantities a brewer will supply the distributor with its beer.

Distributor Obligations—all the specifics regarding the distributor’s efforts to move the product to various points of sale and its efforts to properly represent the brewery in the course of its business.

Transfer of Ownership—success often brings new money to the table. This provision is common because brewers and distributors alike need consistency. If the brewery is bought out, the distributor needs to know the new owner will fulfill its obligations under the existing agreement. Likewise, should a distributor change ownership, a brewery must know that its beer will be managed as the original parties agreed upon.

Termination*—this, too, is wildly important. For a brewery to validly terminate a distribution agreement in North Carolina, it must meet a standard of “good cause.” We’ll speak more to this down below.

Fair Market Value—small breweries (those producing less than 25,000 barrels of beer per year) have a limited ability to reclaim distribution rights from a distributor in exchange for the fair market value of those rights. There are a number of ways to calculate this value. Additionally, even beyond the scope of small breweries, parties should have a general idea of damages should one of them breach their obligations under the contract. A sound fair market value calculation is an important piece of a potential damages number.

Label Requirements—federal and state law impose their own overlapping labeling requirements. If beer is being shipped out of state, it is crucial that the parties to the agreement outline the responsibilities regarding proper beer labeling.

Warranty of Alcohol Content—the cap on alcohol by volume also varies from state to state. Although it is difficult to anticipate enforcement efforts, a distributor will want assurances that what is advertised on the label is accurate to the extent that any margin of error in the bottle will not violate a destination state’s laws.

Again, the above list should not be taken as a comprehensive list of distribution agreement provisions or a complete description of any one or more individual provisions. In particular, the sections devoted to brewery and distributor obligations require patient and thorough attention.

The Function of Termination in North Carolina

N.C.G.S. § 18B-1305 informs us that distribution agreements in North Carolina have a certain permanence. Once executed, it takes a brewery’s showing of “good cause” to alter or terminate a distribution agreement. The statute goes on to explain that “good cause” to terminate an agreement exists only when the distributor “fails to comply with provisions of the agreement which are reasonable, material, not unconscionable, and which are not discriminatory” as compared to other, similarly situated distributors. Moreover, the statute does not allow parties to create their own standard of “good cause.”

A reading of this provision alone sheds some helpful light on why distribution regulation is currently so hotly contested in North Carolina. Simply stated, these agreements are exclusive, continuous, and nearly impossible to break off. There is, however, some redeeming justification in the form of enforceability. Distribution, as a business, requires a great amount of overhead expense on the part of the distributor and imposes a bigger burden to ultimately close the transaction loop. At its core, distribution regulation thus aims to account for that overhead and level expectations, as breweries are often in a better position to make more nimble changes than a distributor (not the least of which being the impromptu decision to switch to another distributor before the loop is complete). This is exactly why the negotiation process is so crucial and why there is no substitute for an airtight, well-drafted agreement. As it pertains to breweries looking to distribute, beer quality is often only as good as its presentation to consumers.

Innovative Opportunity

At the beginning of this post, we mentioned that the brewery segment of the beer industry has fragmented. That is what we know today as craft—emergent styles appealing to new palettes. That is also to say that the distribution segment has remained largely consolidated nationwide. This presents an interesting conundrum for both parties: traditional distribution processes must accommodate an evolving portfolio of beer. More poignantly, a handful of regional distributors have the task of effectively placing literally thousands of local and hyperlocal beers into new markets, to unfamiliar consumers. Concerns about maintenance of quality and product education certainly abound.

Even with legislative change on the horizon in North Carolina, we at Carolina Craft Legal maintain that a mutually beneficial balance can be reached through contract alone. Distribution will continue to be an invaluable resource for breweries with respect to growth opportunity. But the longer traditional distribution models take to adapt to the unique demands of craft, the more the power dynamics of negotiation will shift back toward brewers. Right now there is widening opportunity in the beer industry for independent distributors willing to individualize paths to retail market. Though North Carolina prohibits us from creating a new standard of “good cause,” brewers and distributors may still agree on what conduct is “reasonable, material, not unconscionable, and which [is] not discriminatory” in an evolving industry. What’s more, the innovative distributor and the ambitious brewer will undoubtedly align on what is most important: beer quality, oversight, and education.

If you are a brewery contemplating distribution within North Carolina, an existing distributor aiming to rebrand, or a businessperson looking to contribute meaningfully to the craft segment, give us a call or shoot us an email. Carolina Craft Legal would love to assist with your agreement drafting, negotiation, and related business needs.

Until next week. Cheers!

But alas, where our laws were designed to regulate business relationships in a competitive economy, North Carolina’s legislature, perhaps with remarkable foresight, also outlined certain relief valves to preserve the incentives of a collaborative economy. Because a couple of our previous posts have noted the inherently collaborative nature of craft-inspired businesses, we feel it necessary to highlight when these two concepts intersect.

Today we look specifically at N.C.G.S. § 18B-1116, affectionately regarded as one of North Carolina’s “tied house” provisions. In context of the three-tier framework—manufacturer, wholesaler, retailer—section (a) prohibits, among other things, a manufacturer or wholesaler from taking a financial interest in a retailer. For reference:

Ҥ 18B-1116. Exclusive Outlets Prohibited.

(a)   Prohibitions. – It shall be unlawful for any manufacturer, bottler, or wholesaler of any alcoholic beverages, or for any officer, director, or affiliate thereof, either directly or indirectly to:

…

(2) Have any direct or indirect financial interest in the business of any alcoholic beverage retailer in this State or in the premises where the business of any alcoholic beverage retailer in this State is conducted . . .” (Emphasis added)

This limitation on existing industry members’ potential investments in retailers can be traced to a well-founded government concern for maintaining a fair competitive marketplace and preventing exclusive distributive outlets leading to unearned monopolies. And that’s easy to understand. Big beer has recently made headlines across the country behind the rollout of its wholesaler incentive program. It is thus reasonably foreseeable that an alcoholic beverage manufacturer with millions of expendable incentive dollars might allocate them to retailers, too, in an effort to suffocate competition at the point of sale.

However, very few industry members (craft brewers, for example) have the resources capable of disrupting fair commercial competition, let alone the inclination to do so. These same industry members, though, are the ones responsible for identifying collaborative opportunity, conceiving innovative ideas, and ultimately enhancing public welfare by strengthening local economy.

When such a scenario exists that involves a manufacturer or wholesaler taking an interest in a retailer, how does an industry member get around the § 18B-1116 limitation?

Simply stated: by asking.

Subsection (b) of § 18B-1116 articulates the power of the North Carolina Alcoholic Beverage Control Commission to grant a petitioning party an exemption from the tied house prohibition referenced above. In making its determination, “the Commission [considers] the public welfare, the quantity and value of articles involved, established trade customs not contrary to the public interest, and the purposes” of the section as a whole.

At a time when the conversation around North Carolina ABC regulation is dominated by proposed change, § 18B-1116(b) is a legislative respite for growing local businesses. It recognizes the importance local entrepreneurs play in the collaborative economy. It also provides the Commission with the ability to allow successful business owners and/or investors to continue facilitating that growth, without being confined to one tier in particular or forcing their exit from one tier to pursue an interest in another. So long as the petitioning party can properly the show to the Commission the factors above, members of local alcoholic beverage manufacturers and distributors can gain limited exempted status under the statute to also revitalize and innovate within a retail business setting.

If you are a business owner or investor in the alcoholic beverage space with concerns about your legal status under § 18B-1116, or clever ideas about how to influence this collaborative economy, reach out to a North Carolina attorney. Of course, Carolina Craft Legal would be happy to speak with you about your ideas to brainstorm efficient and effective ways toward achieving exempted status.

Until next week. Cheers!