TTB Proposes to Shut Down COLA Exemption Appellation Labeling Loophole

The U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) has proposed amendments to federal wine labeling laws that protect the integrity of the appellation of origin labeling system in its Notice of Proposed Rulemaking No. 160 (NPRM 160).  If adopted, the proposed amendments would close off a loophole that allows certain wines to be labeled with the name of an appellation of origin, including the name of an American Viticultural Area (AVA), even though those wines do not meet the strict legal requirements for appellation labeling.

A winery wishing to sell AVA-labeled wines in interstate commerce must meet strict criteria.  Specifically, not less than 85 percent of the wine must be derived from grapes grown in the AVA and the wine needs to be fully finished in the state (or in the case of a multi-state AVA, in one of the states) in which the AVA is located.  27 C.F.R. §4.25(e)(3)(iv).  The second prong of this test ensures that wines that carry an AVA name also comply with the laws of the state in which the AVA is located regarding wine production, composition and labeling – laws that state legislatures adopted in order to protect and promote their local wine growing regions.

However, under the current system, wineries that choose to sell wine solely within their home state can apply for a Certificate of Label Approval (COLA) exemption for that wine, and benefits from the use of an appellation name to market their wine without having to comply with the federal and state requirements mentioned above.  TTB’s proposed rule would eliminate this loophole and thereby create a uniform system for the use of appellations of origin and AVAs on wine labels.

By creating one set of rules that all wineries must follow in labeling wines with appellation names, the proposed amendment not only prevents unfair competition among wineries, but also protects against consumer confusion.  Let’s say an Indiana consumer comes across a wine labeled with the Napa Valley AVA, produced and by an Indiana winery and sold in Indiana pursuant to a COLA exemption.  Because the wine is marketed and sold under the Napa Valley AVA, the consumer is led to believe that the wine meets all the criteria necessary for the use of the Napa Valley AVA.  But that’s not the case.   That wine, even if made from 85% Napa Valley grapes, was not fully finished in California, which is a requirement for use of the Napa Valley AVA, and it was not subject to California’s production, composition, and labeling laws.  TTB’s proposed amendments would ensure that when consumers are evaluating wines carrying a certain AVA name, they are assured that those wines have all met the same standard.

Furthermore, the proposed rule protects the significant investment states have made in promoting and regulating the use of their regional wine appellations which provide significant financial contributions to their state economies.  If the TTB were to continue to allow wineries in other states to use appellations in disregard of the TTB rules and flout the rules of the states in which the appellations are located, the U.S. would have very little recourse in objecting to the foreign use of those same appellations if the grapes were shipped to other countries and the wine produced overseas.  Surely the U.S. wine industry does not wish to see a wine labeled with the name of a U.S. AVA or appellation produced in China or Australia and shipped throughout the world in direct competition with such same domestically produced wines.  Such a result would severely undermine the integrity and “brand value” of U.S. AVAs and appellations of origin around the world and impair the ability of U.S. wineries to compete in the global wine market.

The adoption of regulations aimed at closing off a loophole will invariably have an impact on those that have relied on the existence of that loophole as part of their business plan.  But that alone is not sufficient to reject reforms needed to create a uniform standard and protect against potential consumer confusion.  The AVA system has been a fundamental component of the growth of the U.S. wine industry, and TTB’s proposed amendments are necessary to protect the integrity of that system.

NOTE – DP&F serves as outside counsel to several regional wine trade associations with interests in protecting the integrity of regional appellations