Considerations for Collaborations in Florida
A love for collaborations–“collabs”–is among the (many?) things that hip hop artists and craft alcohol manufacturers share in common. In both cases, the final product often appears to be a spontaneous creation of free-flowing, shared artistry. The reality is–or at least should be–a carefully plotted and executed navigation of fundamental questions about ownership, commercialization, and distribution. Whether a record or an alcoholic beverage, the final products of a collaboration take center stage, but the legal agreements that get them require equal artistry and attention.
No alcoholic beverage manufacturer should engage in a collaboration project without a written agreement that addresses the legal fundamentals of the arrangement, particularly questions of ownership, cost and profit sharing, and regulatory compliance. The following discussion centers on Florida manufacturers, but the issues described have their equivalents in other states.
Who Owns a Collab Product?
Every alcoholic beverage product reflects a bundle of intellectual property rights and the question: who owns this? For must alcoholic beverage products, the question has an easy answer. The owner is the company who designs the recipe, sources the ingredients, manufacturers the goods, and handles the packaging. A collaboration project complicates matters. Now, it might be one collab partner that designs the recipe, and a different collab partner that handles the manufacturing and packaging. To sort it out, collab partners need a written contract.
In the absence of written collab contract, the collab product might be jointly owned by the collab partners. That might not sound too bad–this is a collaboration, after all–but pure joint ownership leads to a situation where neither party can act without the consent and approval of the other party. That is impractical in many circumstances.
Where collab partners have a written contract, the owner is whoever the contract identifies. More specifically, the collab contracts should describe what ownership means.
As an antidote to pure joint ownership, collab partners should consider a “one-for-one” arrangement. Instead of collaborating in the creation of one jointly owned product, the partners jointly create two products–one partner owns and controls one product and the other partner owns and controls the other product. The One-for-One Model helps to solve a number of problems, as discussed below.
Who Pays for a Collab Product?
Developing any new product involves paying costs and expenses in advance. There are costs associated with developing the recipe, manufacturing the product, designing the package art, complying with regulatory requirements (more on this below), and bottling or packing the final products. Some of these costs might be internal to collab partners–wages paid to existing employees–while others might be paid to outside contractors.
Collab partners must address who it is that will pay the costs and expenses of producing the collab product. Ideally, collab partners will address who pays for what in a written contract.
Paying the costs and expenses of a collab project is where the One-for-One Model begins to help. Partner A will pay all the costs and expenses associated with the production of Collab Product 1, and Partner B will pay all the costs and expenses associated with the production of Collab Product 2. It might not be entirely level in all cases, but it is a relatively easy way to allocate between the collab partners the cost obligation.
Who Gets Paid from the Sales of a Collab Product?
When collab products are sold–whether to distributors or to retail customers–the seller will receive a revenue. How should that revenue be divided between collab partners? As in the case of allocating responsibility for paying costs and expenses, a written collaboration agreement hopefully addresses how revenue is to be divided by collab partners. However, the laws and regulations that restrain the alcoholic beverage industry plays a role in profit allocation.
In Florida and many other states, an alcoholic beverage manufacturers are limited to selling and delivering final, packaged products to distributors and retail customers. Florida breweries, wineries, and distilleries cannot transport packaged products directly to other manufacturers. For collab products, this means that all products that are packaged by Partner A cannot be delivered to Partner B, and so all sales of those products must flow through Partner A, to its distributors and its retail customers.
Collab partners are not prohibited from sharing revenue from the sale of collab products. If Partner A is the only partner that is permitted to sell and deliver the products to distributors and retail customers, Partner A can still write a check to Partner B for its share of the revenue. Ordinarily, this would be described as a royalty payment to Partner B.
In the One-for-One Model, collab partners have a couple of options for how they share revenues from the sale of collab products. The partners may decide that Partner A will keep all of the revenues from the sale of Product 1, and Partner B will keep all of the revenues from the sale of Product 2. Alternatively, the partners might decide to pool all the revenues from the sale of Product 1 and Product 2 and share the pool equally (perhaps after covering the partners’ respective costs and expenses).
How Can Collab Products be Made Available in each Partner’s Retail Store?
Collab partners are often proud of their collaboration (rightfully so), and they want to offer collab products in their taprooms, tasting rooms, and bottle shops. This can be accomplished in Florida, but it requires different methods depending on the type of product in question–beer, wine or distilled spirits.
Getting a collab product that was manufactured at Partner A’s Florida brewery to Partner B’s taproom is hard–that is, without involving a distributor. The most direct option is for Partner A to sell the collab product to its distributor, and then Partner B purchases the product from the distributor. The downside, of course, is the premium that the distributor charges to Partner B, which will make it more difficult for Partner B to profit from the collaboration (in the absence of a profit sharing or royalty arrangement like those described above).
There is another way. While Florida law prohibits a brewery from selling and transporting “beer and malt beverages” to another brewery, that prohibition does not apply to unfermented wort. Collab partners could work together to mash, lauter, boil, and pitch yeast to the wort at Partner A’s brewery, and then the batch could be split, which 1/2 going into fermenters at Partner A’s brewery and the other half going into the fermenters at Partner B’s brewery. From a regulatory standpoint, each half of the collab beer is owned by the brewery that fermenters it (i.e., turns it into an alcoholic product). This means that both breweries would be required to include its half of the batch on operations reports, pay taxes on the its half, register the brand, and get formula and label approval if required.
Wine and Cider.
The route of collab wine or cider products from Partner A’s winery to Partner B’s tasting room is similar for collab beer. The distribution option should be available, just like it is for breweries, because Florida wineries with a tasting room must have a retail license that allows them to purchase wine from a distributor. Pre-fermented products could also be shipped from Partner A’s winery to Partner B’s winery. But Florida wineries are prohibited from selling and transporting wine or cider directly to other Florida wineries.
Craft distilleries in Florida have a different set of issues when trying to get a collab product from Partner A’s distillery to Partner B’s tasting room. There’s bad news and good news.
The bad news: Since Florida craft distilleries often do not have retail vendor licenses, which are not required for sales of their own products, the distribution option doesn’t work. That is, Partner A could sell the collab products to its distributor, but Partner B cannot purchase the products from the distributor. Distillery B would have to have a 4COP quota license, which are expensive and in short supply.
The good news: Partner A can sell and transfer the collab products–before finally packaged–to Partner B, through transfer-in-bond. Transfers-in-bond are permitted for Florida craft distilleries under both federal and state law. There is one catch: Under Florida law, Partner B would be required to undertake some part of manufacturing the products at its distillery in order to be permitted to sell the products in its tasting room. That is, the products received from Partner A’s distillery must be further “distilled, rectified, or blended” in Partner B’s distillery.
Do you have questions about collaborations between Florida beverage manufacturers? Contact us to schedule a consultation with a beverage attorney.
Because we’re attorneys: Disclaimer. Posted October 16, 2022.