Today’s post concludes our three-parter on contract brewing arrangements in Washington State. As we’ve covered in parts 1 and 2, it’s a legal practice for Washington microbreweries. However, it’s certainly subject to certain restrictions and regulations. Most notably, there’s the LCB-regulated side of the contract that we touch on today.
There Must Be a Written Contract Between the Breweries (and LCB Must Approve It)
LCB mandates that to start contract brewing, breweries must enter into a written arrangement, and we’d expect the breweries to do so anyway. LCB doesn’t clamp down and dictate what exactly this arrangement has to do or say, but there are two notable points. First, LCB has to approve the agreement, and any amendments to it. Second, LCB has provided some general limitations on things like how the product can move from place to place plus guidance on record-keeping for these sorts of arrangements. If you’re thinking about doing this, the specific LCB regulations are a must read. Indeed, some of the regs may at first seem unexpected, such as the requirement that the one producing the beer is responsible for getting federal label approval for it whereas the one seeking the beer’s production is responsible for the state label approval.
Ultimately, contract brewing is a permissible practice in Washington state, and likely an under-utilized business option. With demand for craft beer as high as ever, breweries are constantly looking to expand and grow. Rather than suffer growing pains or make tough decisions as a brewery hits its system’s limits, contract brewing can be a way to keep the product flowing, so long as the arrangement makes sense for the brewery agreeing to allow use of its gear for the run of beer. Further, contract brewing offers an enticing option for Washington start-up breweries who want to get their feet wet before raising serious capital for their own big-time production facility. Indeed, start-ups might consider getting licensed up and ready to go, turning to contract brewing arrangements to build an audience and attract investors before gearing up for primetime.
Last time, we provided an intro to contract brewing in Washington state. Today, we continue our three-part series, covering more must-knows about contract brewing, as a viable business option for licensed microbreweries in the state of Washington. Before getting started, be sure to review Part 1, if you haven’t already.
We’ll cover two important aspects to contract brewing in Washington state, as permitted by statute and regulated by the Washington Liquor Control Board. The two today sort of roll together.
LCB Says Both Microbreweries Must Be a Bona Fide Microbrewery and Produce Malt Beverages
This requirement listed by the LCB in its pseudo-guidance here isn’t exactly clear, and it’s not anything that’s inked into or defined by RCW 66.24.244(7), which is the statutory provision that itself permits contract brewing. It’s also not spelled out in WAC 314-20-095, which outlines further LCB requirements for a compliant contract brewing relationship. At any rate, in our view, it doesn’t take a lot to be a “bona fide” microbrewery—after all, every brewery’s business plan/approach is unique. Further, beer is a malt beverage. This hurdle looks like a low one.
Importantly, Contract-Produced Count Toward Both Microbreweries’ 60,000-Barrel Limit
So, if there’s any catch we foresee in setting out to be a microbrewery that mainly produces for other microbreweries, it’s just that you would have to run the numbers and make sure it can be a profitable thing. That is, the beers produced through a contract brewing arrangement actually count toward both breweries’ 60,000-barrel limit for favorable taxation/licensing purposes. So, if Brewery A gets to sell all those beers at retail and Brewery B only earns money by making them, we’d expect the contract price to involve a number that makes both operations happy. Of course, with the lack of a storefront for Brewery B and the lack of a big brewing operation and staff for Brewery A, this sort of symbiotic relationship could just work out. And, of course, for any brewery thinking about taking on a contract run, it’s worth keeping in mind how it’ll affect your own numbers on your license. Still, the lion’s share of Washington microbreweries produce well under the 60,000-barrel annual limit.
Next time, we’ll wrap up this three-parter on contract brewing in Washington State, covering general concerns relating to the contract requirement itself.
In some states, contract brewing or “gypsy brewing” is a popular way to get started. For those unfamiliar with the term, contract brewing typically refers to an arrangement where one brewery uses another brewery’s equipment and sometimes staff to produce a batch of beer. It’s understandable why these arrangements are so popular in states that allow them. That is, start-up breweries can test the waters without sinking capital into equipment, while also relying on a fellow brewer’s well-calibrated, predictable brew setup along with its experienced team. On the flip side, contract brewing arrangements are attractive to existing breweries as a way to rake in a bit more cash, so long as the brewing obligations don’t get in the way of a brewery’s own ability to grow.
We frequently get questions from start-up breweries about whether contract brewing is a feasible or even permissible option to start brewing in Washington. Additionally, though we haven’t fielded such a question or run the numbers, we can wager that some out there might be curious about starting up a big brewing operation with a de-emphasized taproom, with the aim of landing contracts from breweries lacking the ability to easily scale their own operations.
Over the next few days, we’ll provide a rundown on what the Washington legislature and Liquor Control Board, so far, have had to say about contract brewing in the state of Washington. As a preview, you can view the LCB’s own quick-hitting and basic list here, though we’ll be filling it out with our own thoughts and comments over the next couple of days.
The first thing to know is this:
Washington Microbreweries Can Contract Produce for Other Washington Microbreweries
Washington limits contract production to fellow Washington-licensed microbreweries. That means out-of-state breweries are out of luck, in terms of setting up a contract arrangement in Washington to easily get product in the state. However, this does open up a lot of possibilities and business arrangements for in-state brewers. Nothing in the Washington regs expressly requires a Washington microbrewery to have its own big brewing gear to obtain its microbrewery license. Feasibly, a start-up could outfit a smaller taproom space, spending less cash to get up and running, while relying on a contract arrangement to generate its product. As an aside, there are some critics of contract brewing out there, contending the production arrangement somehow takes away from the “craft” of craft brewing. But, let’s also be honest: Evil Twin provides a damn good example of gypsy brewing that generates a premium product that we still identify as spawned from that brewery’s imagination and talent. And, after all, nothing in the law or code forbids a brewery from being intimately involved in the production of its contracted-for brews. In fact, we’d all probably expect these breweries to be hands on.
Next time, we’ll dive into other aspects and business considerations involved with contract brewing in Washington State, as permitted by the legislature and regulated by the Washington LCB.
Regulations aren’t fun to read. They’re cryptic. Often, it can seem like they were intentionally written to confuse you. Recently, we were reminded of that when we reviewed the Washington Liquor Control Board regs relating to when you can give away free beer. The general rule is that you can’t. But, here’s a quick rundown of what the LCB says about free beer, for those strategic or charitable times a brewery wants to pass out the good stuff, gratis.
Keep in mind, the beer given away under the exceptions below would all be subject to taxation.
1. A brewery can give away beer to licensed places like retailers or distributors for the purposes of negotiating a sale to them, subject to other LCB regs.
2. A brewery can give away beer for instructional purposes, such as educating the brewery’s employees or employees at other licensed places like bars and restaurants. This exception isn’t limited to sales staff or bartenders, and the LCB expressly calls out chefs as the sort of employee a producer might want to educate. Bring on the pairings!
3. A brewery can give away beer to certain nonprofits, so long as the use of the free beer is going to be consistent with the reason the nonprofit is a nonprofit.
4. Of course, a brewery can hand it out on its premises, subject to some quantity restrictions (and also the obvious, no over-serving). Keep in mind that when a brewery has set up shop at a farmers market, the stall/space there temporarily becomes an extension of the brewery’s premises. Click here for more on beer at farmers markets.
And, that’s the gist of the free beer exceptions. You can read the relevant LCB regulation in full here (have fun!).
Our new breweries often seek legal and business advice about ways to get brand exposure, while building a connection with their community. And, one question that comes up is whether it’s a good idea to sell or sample beer at a farmers market. As you’d expect, a farmers market is a great place to engage consumers and other producers in conversation, in a fun and less formal way than even the most casual taproom environments allow. Still, although farmers markets are an awesome venue for talking beer, selling it, and introducing new friends to your brewery, Washington state law is really, really particular about when and how you can go about selling your beer at a farmers market.