The COVID-19 Pandemic has greatly impacted all businesses worldwide, including the wine industry. The U.S. is the largest wine-consuming country in the world, but its consumers’ habits are quickly changing. Aside from preferences’ considerations (such as experiencing a shift towards wine once the consumer gets older with an increasing preference for premium wines), the sale of wine off-premises is increasing at the expense of on-premises sales. It is, therefore, fundamental for a wine producer to choose importers and distributors with a strong online presence so as to take advantage of this shift in the market.
From the legal and administrative points of view, entering the U.S. wine market can be quite complicated due to its so-called “Three Tier System” where, generally, importer, distributor, and retailer cannot be the same entity.
PROTECT YOUR MARK
Protecting your brand is fundamental when entering any market. The most efficient way to do this is by registering your mark at the United States Patent and Trademark Office (USPTO). Such registration would give you protection at the federal level. You can register your business name as a “wordmark” or your logo or label as a “design mark.”
However, before registering your mark, a thorough search for identical or similar marks is highly recommended to save you time and money. Indeed, a mark could have been registered in a State registry or have acquired a common law protection: this does not bar your mark from registration at the USPTO, but might give rise to an infringement claim against you.
Registering a mark with the USPTO can be achieved through four different bases:
- “Actual Use” basis under Trademark Act Section 1(a), when the applicant has been using the trademark in commerce in the U.S. at the time of filing with the goods/services identified in the application;
- “Intent to Use” basis under Section 1(b), when the applicant has not yet started using the trademark in commerce in the U.S. at the time of filing but has a bona fide intention to do so in the near future;
- “Foreign Application” basis under Section 44(d), when the applicant owns an earlier-filing foreign application filed within 6 months of the U.S. application at the USPTO for the same mark and the same goods/services. In this case, the “priority” filing date for the U.S. application would be the same date as that of the foreign application filing date;
- “Foreign Registration” basis under Section 44(e), when the applicant owns a foreign registration of the same mark and for the same goods/services from the applicant’s country of origin.
In addition, Section 66(b) of the Trademark Act allows registration based upon an international trademark registration under the Madrid Protocol.
The registration fee is in the range of $250/class (based on the simplest application process), unless additional filings are required. If everything goes smoothly and the USPTO officer does not issue any Notice of Action relating to the existence of a similar mark, the registration is usually granted within about 7 to 15 months (depending on the filing basis) from the application date. It is important to note that the precedence on the trademark is acquired once the application is filed. Registration lasts 10 years and can be renewed for a 10 year period as long as the owner continues to use the mark to identify its goods/services and timely files all necessary documents, the first of which is between the fifth and sixth year from registration.
CONTRACTUAL KEY POINTS – THE THREE-TIER SYSTEM
One of the characteristics of the U.S. system for the import and distribution of wine is the fact that, generally, the winery/manufacturer/importer, the distributor/wholesaler, and the retailer/restaurant must be three different entities. This is the so-called “three-tier system.”
It is worth mentioning that each State has its own rules, therefore it is of fundamental importance that the wine producer, willing to enter the U.S. wine market, establishes, first, where he/she wants the wine to be sold and, second, chooses an importer and/or distributor allowed to import/sell wine in that State.
Because of the peculiarity of the system and depending on each States’ laws, a foreign wine producer can either deal with an importer (that will then use its network of distributors) or deal directly with the distributor (that can be also an importer or have its own importer). Often these contractual relationships are not regulated by any contracts or, if they are, they might be more favorable to the U.S. entity (importer or distributor). It might be, indeed, difficult for the wine producer to have a strong commercial power during negotiations.
Generally, the relationship between the wine producer and the importer is an international agency relationship, where the importer becomes the representative of the winery in the U.S. Often, such relationship is not regulated by a written agreement. However, few points should be agreed upon in writing:
- Payment terms, which are usually 60 to 90 days from Bill of Lading, Freight on Board, or Port of Origin. The wine producer might also want to be paid upfront or to have the first shipment under a Letter of Credit.
- Currency.
- The type of wines to be imported should be clearly defined to avoid any confusion in the future (wineries should not give for granted that the importer will import any wine produced by that winery).
- Determination of the States in which the appointment of the importer is effective (this is important for the importer so he can then contact and choose distributors allowed to wholesale wine in that State).
- Preference towards conservative expectations.
- Intellectual property rights protection – The agreement should clarify that any IP rights is property of the winery.
- Exclusivity of the Importer, if allowed by the States in which the appointment is effective.
If the winery deals directly with a distributor, the contract will be an international distribution agreement. In addition to what has been mentioned for the Winery/Importer contractual relationship, it is important to mention the following key points:
- Which distributor to choose from? It is always advisable to choose a financially sound distributor that (i) shares your own general business philosophy; (ii) covers the geographical area you are looking for; (iii) plans to invest in the brands you own or represent; (iv) is not so large so that it can focus as much as possible in your brand.
- Terms. The term is usually five years, with the possibility of renewal.
- Clearly establish the yearly minimum purchase quantities of wine that the distributor will buy and what happens if the distributor goes out of stock with your wine.
- Determine if the distributor will engage in any marketing activities for your products.
- Exclusivity. It has to be allowed by state law – it is usually not advisable as it is seen as a leap of faith towards the distributor.
- Determine if the distributor is allowed to distribute also any “brand extension”, meaning that it will be the distributor for any other type of wine of a certain winery.
- Determine in which cases the contract can be terminated and what are the effects of the termination, especially for pending orders and inventory repurchase. Also, choosing a distributor in one of the so-called “Franchise States” means dealing with laws overprotective of the distributor, to the point that the agreement can be terminated only for good cause and the possibility of amending the agreement are very restricted.
It is important to understand that international commercial relationships are affected by private international law issues, especially when a contract does not regulate every aspect of the commercial relationship. However, because the winery would likely have less contractual power, typical issues of private international law, as the law applicable to the contract or the choice of forum, would be solved in favor of the law and the forum of a U.S. State.