Craft distilleries are often interested in introducing barrel programs. These can be a regulatory quagmire because distilleries generally can’t sell at retail to the public in the three-tier system. Distillery owners see others doing it but just don’t know how to do it the right way. They hear from some people it is legal and others it is not and there just isn’t much reliable information on the internet on this topic. New York has been passing legislation to support the craft beverage industry, easing the laws and making it easier to make a viable business in this industry. New York’s farm distillery license eliminates the complex barriers to barrel programs. Since farm distilleries are able to sell at wholesale and retail, the distillery can directly transact with its customers. It can do special barrels for a retailer like a restaurant or bar using its wholesale privileges or a barrel program for an individual person via its retail privileges.
New York farm distillers have a great market advantage without the complications and costs most other distilleries have in other states. I hope New York farm distilleries appreciate the significant advantage the state laws have given them and they support the legislators, Governor and Liquor Authority that made this possible.
Now, what regulations or legal issues do New York farm distilleries have to comply with in creating a legal barrel program? Let’s look at the issues.
Naming Your Barrel Program:
Title can’t transfer until the product is bottled and excise taxes have been paid. That is why many distilleries call it a “barrel adoption” program. This nomenclature makes it clear that that the whiskey is not owned during the manufacturing process, only at the end when the bottled whiskey is delivered. You need not call it an adoption program – you can name or brand your program anything you want as long as the disclosure to the customer explains when ownership happens. I have seen barrel programs with lots of great names. Choose the name that matches your brand personality and marketing plan.
You need to detail the rules you want for your program. You are creating a binding contract with the customer. Here are some minimum situations you need to address in your program contract:
- What if they change their mind? Can they get a refund?
- If you permit payment in installments, what happens if they don’t pay on time?
- What happens if their custom product is done but they don’t come in for bottling at the right time range? Is it forfeited? Do you bottle it and set it aside for them? How long do you store it before it is forfeited?
- Do they design the mash or just blend batches of whiskey you have already made?
There may be other issues that you feel the need to address. The important part is to get it reduced to writing so there are no misunderstandings.
If the barrel will have a custom recipe, there are some additional issues to address when designing your program. Who will create the recipe? Will there be an extra charge for this service? Who will own the recipe? Can it be used again by the distillery for other purposes (used to make batches for others?)? How will the recipe be recorded in written form for future use? What records need to be provided the customer if it will own the recipe?
If your customers want something special added to the basic recipe, you’ll need a formula approval for the modified recipe. Your contract should discuss the regulatory restrictions as to what can and can’t be added and who will bear the cost of the new formula approval. If this is akin to contract manufacturing, you should provide for how the formula is transferred to another producer and whether any cost will be incurred.
You’d need approval on custom labels unless they agree to use a “standard template” that you have approved already and personalization is limited to the items that can be changed without new label approval being required. Your contract should discuss the regulatory restrictions as to what can and can’t be added/removed and who will bear the cost of the new label approval. If this is akin to contract manufacturing, you should provide for how the label COLA is transferred to another producer and whether any cost will be incurred. This may require filing or dissolving dba’s and terminating trademark licenses related to the brand assets.
If the label includes a proprietary image (label design or logo) or brand name, your agreement needs a license to use the copyright or trademark on the label for them but for no other purpose.
If you get into custom recipe for the barrel owners, there are issues as to ownership of the recipe and how different any other recipe you produce must be. Should new formulations be 5% different, 10% different, more?
Designing the program up front will ensure a successful experience for both the distillery and the customer. These are often the best experience the distillery offers because of the collaboration between artist and customer is relationship building over a shared passion for good distilled spirits.