THREE TIER SYSTEM: The three tier system defines the three levels of entities selling alcohol in the US, and is controlling law at the federal level and within every state. Under the three tier system, an end user can only buy alcohol from a retail licensee, who can only buy alcohol from a wholesaler, who can only buy alcohol from a producer/importer.
Any deviations from this system require a specific act of law. Wineries (producers) being able to ship direct to consumer or sell wine to consumers in their tasting rooms are examples of specific allowances outside of the three tier system. As a result, in order for a winery to get its products into retail outlets, it must contract with a wholesaler to market and sell the products on the winery’s behalf.
VWDC IN LIEU OF TRADITIONAL DISTRIBUTOR: VWDC was created as an alternative to obtaining a traditional wholesaler, which are often reluctant to take on wineries with lower production for distribution. The other benefit of VWDC is that there is a set transactional fee of $6 per transaction, regardless of the size of the transaction, which means that the expense (generally 20-30% markup) of the middle tier is eliminated, and Virginia wines can be priced more competitively against wines made less expensively in other regions. VWDC is an essential part of making Virginia wines more marketable to the retail tier, and increasing the number of Virginia wines and ciders you see on store shelves and wine lists in Virginia.
The VWDC is a licensed wholesaler in Virginia, but doesn’t have a warehouse or store any product. Instead, it licenses space in every participating VA winery or VA farm winery that wants to sell their products to retailers through VWDC. The winery assigns personnel to be VWDC agents, and those people may act on behalf of VWDC in soliciting orders from retailers and delivering any wine purchased through VWDC. Any product sold through VWDC moves from the winery to the on-site VWDC approved space before being delivered to the retail licensee purchasing the wine.
VWDC has created an impressive website that allows retailers from all over the state to view the wine offerings of all participating wineries. The wineries can upload descriptions of the wine, medals won, and food pairings, and also indicate which areas in Virginia the winery is willing to service through VWDC, and place their orders there as well. Remember, the wine has to be delivered by a VWDC agent, which may impact the areas which a winery can realistically service through VWDC.
The process of a sale occurs as follows: A VWDC agent goes to a retail licensee and markets the products or a retailer places an order online through the VWDC website. If in person, the agent takes the order and transmits it to VWDC, which in turn transmits a purchase order to the winery for fulfillment. The winery transmits an invoice back to VWDC and moves the product ordered to the VWDC space in the winery. The product MUST come to rest in this spot. It doesn’t need to stay there for any specific period of time, but it must stop moving within that space. After it comes to rest, it can be taken to a vehicle for delivery to the retail licensee who ordered it. A check will be remitted to VWDC, who will then pay the winery. The winery may not accept payment directly from the retail licensee. An operating manual for VWDC can be found in Resources below.
In order to sell wines through VWDC, a winery needs to sign up with VWDC and amend its premise to allow for the VWDC space. The application process generally takes about 60 days from the time the application is submitted, and does require posting and publishing prior to license issuance. To obtain your VWDC license, complete the following steps:
- Register on the VWDC website (www.vwdc.org) as a winery.
- Complete Part 1 of the VWDC Retail License Application (page 3 – #10-14) which is included in the Appendix and here: Retail License Application.
- Once Part 1 is accepted by VA ABC, VWDC will provide notification to begin Part 2 of the application process.
- Complete Part 2 of the application process using the instructions and completed operating guide example which will be provided to the applying winery in the notification email. A copy can be found in Resources.
One of the first steps in registration is designation of a space within the winery for VWDC. The space needs to be separate and secure from the winery premise, and of a size sufficient to hold the average VWDC order for that winery. Many wineries designate a locking closet or set up a chain link area for VWDC use. If that space is within the winery’s bonded area, the winery will need to amend its TTB Basic Permit to remove the designated space from its federally bonded space. This type of TTB amendment take approximately 45 days to process, and the ABC process cannot begin until the approved TTB amendment is received and submitted to VWDC. If the VWDC space is outside of the bonded area of the winery (i.e. in the retail space), an amendment of the TTB Basic Permit is not required. The VWDC space is for VWDC use only, and nothing else should be in this space, even when it is not being used for VWDC activities.
The license issued by ABC to VWDC for the designated space must be attached to the VWDC space, and copies of invoices and time logs (see below) should be kept there as well. If the VWDC space needs to be relocated for any reason, VWDC should be notified, as they will have to notify ABC of the change. Note as well that if the space is within the bonded space for the winery, an additional amendment to the TTB Basic Permit will have to be completed to effect this change.
During the VWDC registration process, a winery also designates who will be its VWDC agents. The agents do not need to be winery employees. It is also permissible for wineries to cross-designate VWDC agents to share the burden of delivery of products to retailers in various areas. Delivery can be made in a business or personal vehicle without additional transportation licenses required. In order to designate additional VWDC agents, notify VWDC prior to that individual assuming any VWDC agent duties. Remember, however, these agents will be marketing and selling your products on behalf of VWDC, so should be familiar with all rules related to advertising, pricing, payment, and prohibited practices to ensure that they remain compliant with the law while doing this work. Violations of the law while acting as a VWDC agent will subject your participation in the VWDC program to revocation.
It is important to be mindful that a winery employee is wearing two separate hats in VWDC transactions: one as a winery employee and another as an agent of a licensed wholesaler. The activities performed under these two functions need to be kept separate. All VWDC agents should keep a time log recording all time spent on VWDC activities.
Only a wholesaler can make sales calls to retailers, and offer them samples as a way to educate them on the products and interest them in carrying the products on their shelves or wine lists. Wine can be provided as samples in bottles up to 1.5 liters in size, but this wine needs to come through the VWDC and be properly invoiced prior to use as samples. All sample bottles also need to be labeled “Sample – Not for Resale”.
FRANCHISE LAW: If Ford suddenly decided to pull its vehicles from the local dealership, or McDonalds revoked a restaurant’s right to display the golden arches without warning, the result would be financially devastating to the local businesses, heavily invested in supporting the brands. To protect the local operators from the whims of the national brand owners, Virginia and most other states passed franchise laws, making it impossible for the brand owner (franchisor) to arbitrarily leave the local outlet (franchisee) high and dry. Franchise laws generally require some minimum notice of cancellation of a franchise agreement, and provide some limitations on the rights of franchisors to unilaterally terminate or amend a franchise agreement.
Virginia’s wine and beer wholesalers claimed a similar need more than 30 years ago, when they persuaded the General Assembly to pass the Virginia Wine and Beer Franchise Acts. They argued that franchise legislation was necessary to protect them from the manufacturers, who could pull a brand into which the wholesaler had put considerable time and effort, and cause a wholesaler a devastating financial loss with no recourse. While this argument might be valid for their relationships with conglomerates like Gallo or Constellation which wield considerable economic power, the majority of wineries today are the less powerful partners financially in their dealings with distributors.
Virginia has one of the toughest wine franchise laws in the nation. Make no mistake, the Wine Franchise Act is designed to favor wholesalers. One of its stated purposes is “to prohibit unfair treatment of wine wholesalers by wineries.” Once a winery enters into a distribution agreement with a wholesaler, getting out of the relationship is like getting out of a marriage was 50 years ago, before the rise of no-fault divorce. You can expect to have to prove your wholesale partner’s deficiencies, and if not careful, extraction from the agreement might involve hefty “alimony” payments.
The Virginia Wine Franchise Act provides that if a winery enters into an agreement with a wholesaler for the distribution of its product, it must assign that wholesaler a “primary area of responsibility” in connection with the agreement. The primary area of responsibility is a non-exclusive sales territory. While the wholesaler is not limited to sales within its primary area of responsibility, a winery cannot appoint more than one wholesaler to any territory. Wineries are required to notify ABC of all territorial designations. Any changes must be reported to ABC within 30 days. ABC requests this information in connection with all label approval applications.
The Act applies whether or not you have a written agreement with a distributor. In fact, the law provides that selling and shipping product to a wholesaler is prima facie evidence of the existence of an agreement. If there is no written agreement, the other side in any future litigation is free to allege whatever terms they want, and the hearing officer or court is required to try and determine the intent of the parties from the often conflicting evidence presented in the case. Often, the hearing officer or judge is left trying to figure out the terms of the agreement based upon the pattern of the course of business between the parties. For example, you enter into an oral agreement with a wholesaler, assigning it one county. Since a wholesaler is not restricted from selling outside its assigned territory, the wholesaler picks up some restaurant and gourmet shop accounts in other counties or cities. As part of its promotional efforts, it asks you to participate in tastings or wine dinners in some of these accounts. At some point, you want to assign the previously unassigned counties to another wholesaler, or the relationship crashes, and you end up in franchise litigation. Although you have only assigned the wholesaler one county, when the case is heard, the wholesaler claims its territory also includes the other jurisdictions where it has been selling. They use the promotional activities you have assisted with to argue that you have also appointed them for the additional jurisdictions. You could end up not being able to assign the additional jurisdictions to your chosen distributor. If you end up having to pay the value of the franchise, it becomes a much larger number based upon the expanded sales territory. Get the entire distribution agreement in writing, with a clause that requires any amendment also be in writing. If you make an occasional sale to a wholesaler, not intending to create any distribution agreement with the purchaser, make sure that there is language to that effect in the corresponding paperwork–something signed by the wholesaler would be best. If you provide promotional assistance for sales outside a wholesaler’s assigned territory, make sure there’s something in writing showing there is no intent to expand the territory.
The relationship can only be severed (1) if the wholesaler agrees and provides a written release from the created franchise agreement, or (2) upon 90 days notice and if the winery can show good cause to terminate or amend the agreement. If you have expectations with respect to your distributor’s performance, such as sales goals, chain store efforts, the use of refrigerated trucks, etc., include them in the distribution agreement. One of the grounds for termination of a distribution agreement under the Act is the failure of the wholesaler to comply with any “reasonable and material” requirement imposed upon him in writing by the winery. Putting requirements in the distribution agreement puts the wholesaler on notice of the winery’s expectations and also creates concrete parameters which make a subsequent showing of good cause easier. Providing them at the outset rather than later also avoids the argument that issuing written requirements at a later time constitutes a unilateral amendment to the agreement.
Some wineries include release agreement clauses, arbitration agreements, and other provisions that call for dispute resolution in a manner other than that prescribed in the Act. Most of these have not been tested before ABC or the courts. There is a provision in the Act which says that wholesalers cannot be forced to forgo their rights under the Act, and that agreements to the contrary are unenforceable. While such clauses may not be a “silver bullet,” they may be effective if the wholesaler feels the moral responsibility to live up to the terms of his agreement.
Neither wineries nor wholesalers want the expense of franchise disputes. Everyone is better served by selling product, rather than expending time and effort on arguments. If a wholesaler is not living up to your expectations, let them know about it and request an improvement plan or ask for them to provide you with a written release from the franchise relationship. You’ll need to provide a copy of that written release to ABC in order to be able to assign the territories to another distributor in the future.
If ultimately diplomacy fails, there are some specific mechanics and timeframes that are essential to successfully terminating a franchise relationship. The first step in termination under the Act is for the winery to give notice to the wholesaler. Send a letter to the wholesaler, with a copy to the ABC Board Secretary, notifying the wholesaler of the winery’s intent to terminate the distribution agreement at the end of 90 days from the notice. Include all the reasons for which the termination is being made. Take care to include everything, because the reasons in the notice will be the only “good cause” the hearing officers or court will consider if a hearing is requested. Don’t make the notice conditional or vague. Just say you intend to terminate in 90 days because of the following deficiencies. You need to make it clear to everyone that this is a termination notice, not just another negotiation.
Once you give notice, the burden shifts to the wholesaler. The wholesaler may take one of several actions. It may attempt to further negotiate with an aim to either keep the brand or get some level of compensation for surrendering it. Within the first 60 days following the notice, it may attempt to “cure” the deficiencies that give rise to the termination. If it feels that it has accomplished a cure, it must send a letter claiming that to the winery within the 60-day period, with a copy to ABC. It is imperative that the winery be ready to respond to such a cure letter. If a cure is claimed, the winery has 15 days following the 60-day period to request a hearing on the issue of whether the wholesaler has actually corrected the problems. If the winery does not request a hearing on the issue, the deficiencies are considered cured, and the agreement is not terminated. Finally, at any time within the 90-day notice period, the wholesaler can request a hearing on the issue of whether good cause exists for the termination. If either the winery or wholesaler requests a hearing, ABC’s Hearings Division will conduct the initial hearing and issue a decision, which either party may appeal to Circuit Court.
PRICE CHANGES: Under 3 VAC 5-70-150, a winery may lower the wholesale prices of its products without notice to wholesalers, but must provide a minimum of 30 days written notice to the wholesaler signed by an authorized officer or agent of the winery, brewery, bottler or importer which shall contain the amount and effective date of the increase at least 30 days in advance of any price increase. A copy of this notice should also be sent to ABC at pricechg@abc.virginia.gov to advise them of any price changes.
DISCOUNTS: The only discount that is permissible in Virginia is a discount for purchasing a certain quantity of product in a single purchase. This discount must be available uniformly from the winery to any assigned wholesaler (or from a wholesaler to any retailer) in Virginia making a single purchase of that size. The winery sets the quantity level at which they will offer this price for each product to the wholesaler, and the wholesaler does the same for sales to the retail tier. The basis behind this discount is that there is a lower cost to the seller to sell 10 cases as one sale than there is in making 10 sales of 1 case each. The other 2 situations where a wholesaler can offer different prices to different retailers are when: (1) the wholesaler can show a bona fide difference in the cost of sale or delivery; and (2) the wholesaler charges a lower price in good faith to meet an equally low price charged by a competing wholesale licensee on a brand and package of like grade and quality
LICENSES TO SELL TO WHOLESALERS IN OTHER STATES: While your Virginia Winery or Farm Winery License permits you to sell to Virginia distributors, you will need an additional license (often referred to a Suppliers Permit, an Importers Permit, or a Non-Resident Dealer’s Permit) to distributors in other states. This permit is issued by the ABC-equivalent in the receiving state. In many states, product registration is also required before any product may be shipped into the state. These permits have ongoing requirements, such as renewal, product renewals, and periodic reporting.