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RABBIT RIDGE RESPONDS TO ATF SETTLEMENT
What permit violations did the ATF find?
In 1990 the owner of the winery (on the advice of his accountants) transferred the
inventory and personal property of the winery (but not the real estate or trademarks) into
a corporation he owned. However, he did not also transfer the BATF Basic Permit. This
was a technical violation of the FAA Act, even though the same person was the holder
of the Basic Permit and the owner of the assets. The permits have now been
transferred into the proper entity.
What did the Hawaii incidents involve?
In September and November of 1997 Rabbit Ridge’s Hawaiian Distributor requested
white zinfandel, a variety of wine not then produced by Rabbit Ridge. As an
accommodation, Rabbit Ridge placed an order through a wine broker for 112 cases
(two pallets, on two different occasions) of white zinfandel wine with a large north coast
winery (“selling winery”) that specialized in custom orders. The wine was not to be
labeled as Rabbit Ridge, but was to bear a trade name (Meadow Glen) owned by
Rabbit Ridge. The selling winery was responsible by contract for labeling, removing
from bond, tax paying and shipping the wine.
With respect to the first order for 56 cases, the selling winery did not apply the Meadow
Glen labels to the first lot of wine (56 cases – one pallet) before the wine was shipped.
Rather, the wine was shipped with a label that no one recognized. The wine was picked
up by the Distributor at the selling winery in California and shipped by it directly to
Hawaii. Rabbit Ridge had no prior knowledge that the wine was improperly labeled and
never saw or handled the wine before it was shipped. When the Distributor notified
Rabbit Ridge that the wine was not properly labeled, Rabbit Ridge gave it the option of
either returning the wine to the selling winery, or applying Meadow Glen labels (those
that should have been put on the wine by the selling winery in California before the wine
was removed from bond) in Hawaii. The Distributor chose to apply the Meadow Glen
labels, which Rabbit Ridge provided to them. This option should never have been given
to the Distributor, and resulted in a technical violation of the FAA Act (applying new
labels to tax paid wine).
In response to the Distributor’s subsequent request for a re-supply of Meadow Glen
white zinfandel (a month later), Rabbit Ridge again went through the Broker and the
selling winery, again as an accommodation. Unbeknownst to Rabbit Ridge, the wine
that was shipped to Hawaii after being picked up at the selling winery turned out to be
“unlabeled.” The selling winery was responsible for labeling, removing from bond and
tax-paying this wine. Rabbit Ridge had no prior knowledge that the wine was shipped
“unlabeled” to Hawaii, and never saw or handled the wine before it was shipped. These
two transactions were the only two times Rabbit Ridge purchased bottled wine from the
selling winery and Rabbit Ridge stopped buying anything from the Selling Winery as a
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result of these incidents. There was never a question about the integrity of the wine
itself. It was white zinfandel, and the appellation and varietal information was correct.
The Failure to properly file tax returns allegations:
In 1997, because the harvest was large and Rabbit Ridge did not have a separately
bonded warehouse, tax payments were delayed because taxes were paid as wine was
bottled. This caused the small producers tax credit to be miscalculated. These were
technical violations of the FAA Act that carried through to subsequent reporting periods
because the baselines were incorrect.
In response to this situation, Rabbit Ridge set up a tax-paid warehouse, hired two
experienced compliance and record-keeping consultants (one for regular reporting and
one – a retired BATF inspector - to complete an overhaul of the winery record keeping
and compliance systems), and agreed to pay outstanding tax amounts, penalties and
interest to the BATF.
No Rabbit Ridge wine was found by the BATF to have the wrong varietal or
vintage information on the label:
The BATF inspectors went through years worth of cellar records and label approvals in
their quest to find violations. Here’s examples of the kind of errors they found:
(1) 80 to 250 cases of 1997 Napa Valley Sauvignon Blanc were labeled and shipped out
as 1997 “Russian River” Sauvignon Blanc. This was simply a mistake. The wrong labels
were inadvertently ordered and originally applied to 1,603 cases of wine. When the
winemaker learned that the wrong labels had been applied, shipments of that wine were
immediately stopped. At that time, most of the mislabeled cases were still in the
warehouse. The cases were then relabeled (after receiving BATF COLA approval for
correct new labels), and the wine was distributed with the new COLA approved label.
From 5 to 15% of the total production run of this wine (80 to 250 cases) was actually
shipped with wrong labels.
(2) Wine purchased from other wineries for blending was identified as “produced and
bottled by” when the label should have said, “cellared and bottled by.” 1,562 cases of
1997 Sonoma County Chardonnay purchased from another winery and blended was
labeled as 1997 Sonoma County produced Chardonnay. 3,032 cases of 1996 Amador
County zinfandel purchased from another winery and blended was labeled as 1996
Rabbit Ridge Amador County produced zinfandel. These were mistakes, and were
technical violations of the FAA Act. The wine should have been identified as “cellared
and bottled by” rather than “produced and bottled by.” Every one of these wines was of
the vintage, variety and appellation stated on the label. In addition, 2,940 cases of 1997
Amador County zinfandel purchased from another winery was allegedly originally
labeled as 1997 Rabbit Ridge Amador County produced zinfandel. Fortuitously, this
wine actually ended up being properly labeled as “cellared and bottled by” because the
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incorrect “produced and bottled by” label (even though it had been applied for) was
discarded and never used because it did not have the “Amador County” designation.
(3) Other claimed violations involved disagreements with the BATF over what the
available cellar records showed: For example, the BATF alleged that for 820 cases of
1996 Rabbit Ridge Wine Makers Reserve Sonoma County zinfandel, only 74.6%
produced by Erich Russell and 74.6 % from Sonoma County could be verified based on
available cellar records. The standard is 75%. The problem is believed to be attributable
to the ATF inspection not taking into account 8 kegs of “pump out lees” that were racked
and filtered into the blend on two occasions, accounting for the extra 30 gallons of
zinfandel on the bottling report but not in the cellar records. In another case, 12,007
cases of 1997 “Mystique” table wine allegedly bore a “North Coast” appellation rather
than a proper “California” appellation. However, that error was caught before the wine
was distributed and the 1997 Mystique actually bore a COLA approved generic
“California” appellation of origin, an appellation whose use was commenced in 1996. In
a third case, 417 cases of 1997 Rabbit Ridge Winemakers Reserve Sonoma County
zinfandel were allegedly entitled only to a California appellation of origin. There were
two bottlings of this wine. The 417 cases was the smaller one, and the calculation from
the cellar records does not take into account 30 gallons of racked lees which, when
added to the blend, accounts for the discrepancy and justified the Sonoma County
appellation. In a fourth case, the BATF claimed that 3,129 cases were improperly
labeled as 1997 Rabbit Ridge Sonoma County zinfandel when, based on cellar records
examined by the BATF, it was only 24.2% produced by Erich Russell and 75.2% from
Sonoma County. Again, there were two bottlings of this wine. Moreover, the wine was
in fact labeled “cellared and bottled by” rather than “produced and bottled by,” and the
appellation of origin was substantiated because the bottling report showed that only the
one of the zinfandels used in the blend was 45% from Sonoma County, not the other
wines listed.
Again, these are all technical violations, and were not alleged by the BATF to at all
affect the varietal or vintage integrity of the wine.
(4) The BATF and Rabbit Ridge disputed how the “produced and bottled by” designation
versus the “cellared and bottled by” designations should be justified. The dispute did not
affect the varietal, vintage or appellation integrity of the wine involved. A former
employee of Rabbit Ridge, in an unrelated dispute, removed several years worth of
original weigh tags from the winery records. Thus, Rabbit Ridge was required to justify
cellar records from secondary sources. Rabbit Ridge offered this proof to the BATF.
For example, a “gross accounting” (comparing the amount of grapes produced from the
winery owned vineyards in the year in question plus available weigh tags plus checks to
growers where weigh tags are not available to total “produced by” production) will
substantiate the label claims. Further, because the usual cellar practice was to put
received tonnage on the record corresponding to the date the grapes were crushed,
another secondary verification mechanism exists. Finally, bottling records serve as a
third independent source of verification.
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Why did Rabbit Ridge settle this case with the BATF?
Rabbit Ridge admitted that multiple violations of the technical provisions of the
FAA Act occurred. We very much regret these violations, have taken extensive
steps to prevent a reoccurrence, and are pleased to have reached agreement
with the ATF. As was stated in the ATF press release, this settlement closes the
matter. The choice was to try the case in court, a process that would take several
years and cost hundreds of thousands of dollars in legal fees in addition to
consuming the time of winery management, or to settle the case and move on to
doing what the winery does best – making wine. Making wine was the clearly
preferable choice.