Grape Quality: In the Eye of the Beholder?

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2/13/= 04

www.= cmprlaw.com

Grape Contracts:
A New View

Napa Valley Grape Growers Association

February 13, 2004

Jay M. Behmke

Carle, Mackie, Power & Ross LLP

100 B Street, Suite 400

Santa Rosa, CA 94101

Tel. 707-526-4200

jmbehmke@cmprlaw.com

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4/23/03 <= /span>

www.= cmprlaw.com

Carle, Mackie, Power & Ross LLP

lWin= e and Food Practice

–Formation

–Investments

–Loans

–Real Estate Purchases

–Land Use and Permits

–Vineyard Leases

–Grape Contracts

–Acquisitions

–Licensing and Compliance

–Trademarks

lAtt= orneys

–Bill Carle

–John Mackie

–Simon Inman

–Phillip Kalsched

–Jay Behmke

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4/23/03 <= /span>

www.= cmprlaw.com

Three Trends

lGrapes as products:

–Commodity è Custom-farmed

lQuality specifications = ;

–Objective standards è Subjective evaluation

lFarming practices

–Left to judgment of grower= è Specified by winery

l<= /span>

lEffect on winery-grower relationship

–Grape purchase agreements = è ???

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4/23/03 <= /span>

www.= cmprlaw.com

A Tale of Two Markets <= /span>

lCommodity products

–Standardized

–Buyer can easily switch = ;

–Price set by market = = conditions

–Growers compete by <= /span>becoming the low cost producer =

–Key to success - efficiency=

–

–Market will trend to small = = number of large growers = ;

–

lCustom-farmed products

–Customized

–= Buyer can’t switch easily

–Price set by private negotiation

–Growers compete by <= /span>understanding and satisfying customer needs&#= 13;

–Key to success -customization

–= Market will trend to large = number of specialized growers

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4/23/03 <= /span>

www.= cmprlaw.com

Concepts of Quality

lObj= ective standards

–Brix

–Total acidity

–Ph

lSub= jective standards

–Flavor ripeness

–Tannin ripeness

–Seed ripeness

–Color development

–Shoot and stem maturity

–

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4/23/03 <= /span>

www.= cmprlaw.com

It’s Not the Definition

<= span class=3DBB style=3D'position:absolute;left:-4.57%;top:.3em'>lThe real issue is:

<= span class=3DBB style=3D'position:absolute;left:-4.57%;top:.3em'>lWho gets to decide when the= y see it?

<= span class=3DBB style=3D'position:absolute;left:-3.89%;top:.3em'>lIs it fair for the winery o= r the grower to decide?

<= span class=3DBB style=3D'position:absolute;left:-4.57%;top:.3em'>lHow do we make this trade-o= ff?

<= span class=3DBB style=3D'position:absolute;left:-4.31%;top:.3em'>lIt’s a question of fi= nancial risk and control.

lThe person who bears the ri= sk should get to make the call.

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	Gra= pe Contracts
	Vin= eyard Leases
	Lic= ensing and Regulation
	Mer= gers and Acquisitions
	Tra= demarks

	Attorn= ey since 1983
	Attorn= ey in Wine and Grape Industry since 1992
	CFO, B= elvedere Winery (350,000 cases) and
	Hambre= cht Vineyards (500 acres) 1988-1992
	Two im= portant achievements
	Sunridge Nurseries, ENTAV = clones
	CAWG, Chardonnay with natu= ral flavors
	Experi= ence on both sides
	Buying= and selling
	Termin= ating and enforcing
	Drafti= ng for winery and grower


	Over l= ast 14 years, there has been a definite evolution

	Concep= ts of quality

	Grapes= are custom farmed

	Wineri= es are more involved with farming

	Grape = contracts have not caught up. We lawyers have work to do with our clients to help them define what the issues are.

	This t= alk is a part of that effort. Because I think the question I was asked to talk about, is itself a mistaken question.
	ItR= 17;s not how to define quality that’s the problem,
	ItR= 17;s who gets to define it, that’s the issue.


	These = categories can be used in many industries.
	Classi= c difference between buying Land’s End or custom tailored.
	In gra= pes, there are two markets

	One fo= r a commodity grape: like a California appellation chardonnay.
	One fo= r custom farmed grapes: single vineyard, ENTAV clone, specific trellis, hillside.<= /font>

	As win= eries compete in the North Coast for quality, they rely more and more on custom farmed grapes to create the quality they need in the bottle. So more and more, grapes in this region are not commodities. And this is reflected in higher prices this region commands over others.

	Grape = contracts evolve as this trend continues. When I started they were one page. Now th= ey usually run 15 pages. Part of the change is the need to specify more of t= he terms which make the grapes a custom-farmed product.


	Differ= ence between objective/subjective: Can you ask an independent third party to perform t= he test for you?
	Winema= kers don’t operate by the numbers.
	They a= re looking for a particular type of ripeness.
	Only b= e found by tasting.
	Will d= epend on the style of wine they want to make.
	Will d= epend on the weather patterns of that season.
	Will v= ary from vineyard to vineyard.
	Will v= ary from year to year.
	No way= to quantify it.


	Here&#= 8217;s where we lawyers can help, in my opinion.

	This i= s where the real issue is.

	And cu= rrent grape contracts don’t define the issue very well.