More on FDA Inspections - Breweries, Distilleries and Questions

BY:  Barbara Snider, Erin Kelleher and John Hinman

We received some great comments and questions regarding the recent (May 22, 2017) blog “Why the FDA is Inspecting Wineries.”

One of the most common questions was “does the FDA inspect breweries and distilleries?  The answer is a resounding yes. If you are a brewery or a distillery, revisit the original post for more detail.

Breweries and Distilleries.

The bottom line is that the rules are the same for all alcoholic beverages.  Most breweries and distilleries, like wineries, sell their products through general commerce and therefore, must register with the FDA and follow the same Good Manufacturing Practices.  All domestic companies must register unless they are considered a “retail food establishment” or “qualified facility” and are exempted from registering as described below in more detail.

Breweries and distilleries, like wineries, are also exempt from Subpart C (Hazard Analysis and Risk-based Preventative Controls) and Subpart G (Supply-Chain Program) but like wineries, must comply with Subparts A and B (related to sanitary conditions and training of employees in personal hygiene) and Subpart F (recordkeeping).

Breweries and distilleries are also subject to FDA inspections and the best practice is to be aware and prepared.  Therefore, the advice and brief checklists provided in the May 22nd blog apply equally to them. 

The one difference for breweries and distilleries is the disposal of spent grains from the manufacturing process.  In 2014 the FDA caused much consternation with its proposed rule that would require breweries and distilleries wishing to send the spent grain for animal feed to additionally comply with the hazard and risk analyses and a supply chain program under the Animal Food regulations.  (This would be in addition to complying with the human food regulations with which all alcoholic manufacturers must comply). 

The good news is that the FDA listened to the outcry against adding this additional regulatory burden and the current rule provides that processors already implementing human food safety requirements do not need to implement additional preventive controls when simply supplying a by-product (wet spent grains) for animal feed.  Breweries and distilleries are expected to assure that there is no physical contamination of the spent grain before shipping.  For example, contamination by placing trash or cleaning chemicals into the container holding the spent grain.  General sanitary conditions apply to transporting the spent grains for animal feed.

It is important to note, however, that any processor who further “processes” the spent grain for use as animal food (for example, drying, pelleting, heat-treatment) must additionally comply with the Animal Food Good Manufacturing Practices which include developing hazard and risk-analyses and developing preventative controls. 

The brewery or distillery may choose which path to take.

How does the FDA exemption for “Retail Food Establishments” apply to wineries, breweries and distilleries?  

We had many questions about how the exemption (which is not exactly a model of clarity) works.  The exemption as it applies to producers (such as wineries in the initial post but also including breweries and distilleries in this post) is very narrow.

The FDA exemption from the registration requirement is for producers that can demonstrate its primary purpose is to sell product directly to the consumer and that sells more than 51% of their product “out the front door” (“Retail Food Establishments”).  So, the question is whether a producer’s business operations are such that it meets the definition of “Retail Food Establishment.” 

First, even though the initial blog was written for wineries, because all alcoholic beverages are “food,” those breweries or distilleries that may qualify as a “retail food establishment” could possibly also fall under this narrow exception. 

As part of the implementation of the Food Safety Modernization Act (“FSMA”), the FDA amended and expanded the definition of “Retail Food Establishment”.  The official definition of a “retail food establishment” in the Code of Federal Regulations is:

“Retail food establishment means an establishment that sells food products directly to consumers as its primary function. The term “retail food establishment” includes facilities that manufacture, process, pack, or hold food if the establishment's primary function is to sell from that establishment food, including food that it manufactures, processes, packs, or holds, directly to consumers. A retail food establishment's primary function is to sell food directly to consumers if the annual monetary value of sales of food products directly to consumers exceeds the annual monetary value of sales of food products to all other buyers. The term “consumers” does not include businesses. A “retail food establishment” includes grocery stores, convenience stores, and vending machine locations.  A “retail food establishment” also includes certain farm-operated businesses selling food directly to consumers as their primary function.” (Highlighting and emphasis added.)

Therefore, any winery, brewery, distillery that can qualify as a “retail food establishment” demonstrating that its primary purpose is to sell its product directly to consumers will be exempted from the FDA registration requirement. 

This means that the annual monetary value of sales of food products directly to consumers must exceed the annual monetary value of sales of food products to all other buyers (at least 51% direct to consumer sales).  The term “consumers” does not include businesses unless (as discussed below) you operate within in a small local area in the same state (truly local businesses) and can be characterized a “Qualified Facility.” 

The FDA determined that all “direct-to-consumer sales” (DTC) including Internet and mail order sales are included as part of the calculation to determine whether the primary purpose is to sell directly to consumers.  The FDA stated that there is no requirement that DTC must be a face-to-face sale.  Therefore, sales proceeds from Internet and mail catalog DTC sales may be used in the calculation to determine that the primary function is to sell directly to consumers.  Sales made at farmers’ markets, consumer events, directly from tasting rooms and the like are also considered in the calculation. 

Further, while the earlier blog discussed the size requirement needed to qualify as a “retail food establishment” (less than 11 employees) in adopting the final rule, the FDA did away with any employee size requirement to qualify for the retail food establishment exemption stating:  “Even if some establishments that use mail, catalog, and Internet orders in determining their primary function are larger establishments and can reach consumers on a national level, we do not believe that is inconsistent with section 102(c) of FSMA, which does not specify that FDA’s amendment to the retail food establishment definition only pertains to establishments of a specific size.”  

The principal criteria the FDA will use in determining if an establishment qualifies as a “retail food establishment” is whether its primary purpose is to sell its product direct-to-consumer. The FDA’s basic test is whether an establishment’s annual monetary value of sales of food products directly to consumers exceeds the annual monetary value of sales of food products directly to all other buyers, i.e., more than 51% of its sales are direct-to-consumer.

This appears to be another benefit of the alcoholic beverage industry move to DTC (practically and legislatively) where possible. 

“Qualified Facilities”.

We did receive a comment asking us to explain what “Qualified Facilities” means.  This very narrow exemption from the FDA registration requirement applies only to very small businesses that principally operate locally.  Very briefly, a “qualified facility” status applies to those facilities that sell product to consumers, restaurants or “retail food establishments” located in the same state and not located further than 275 miles from the qualified facility.  There are also monetary limits on the value of product sold during the prior 3-year period (less than $500,000 adjusted for inflation).  Attestations and documentation are required.  Should anyone desire more information on this, please call the FDA, your trade association representative, or your attorney.

Recall Procedures.

We received some inquiries asking whether a winery (or brewery/distillery) needs to develop a “Recall Plan” in the case there is need for the recall of the product.  The first point to make is that the TTB has primary control over any recalls for alcoholic beverages and does not require a company under its jurisdiction to prepare a Recall Plan.  While it might be a good idea and a good business practice to have a plan of action regarding what to do if you need to recall a product from the market, know that it is not required by the TTB and the FDA cannot impose that requirement (at least not yet!). 

You should feel comfortable if the FDA inspector asks about your recall plan and you don’t have one (although we do encourage adoption of a recall plan as a basic best practice). 

Conclusion – Be Compliant!

We encourage our clients and friends to approach FDA compliance in the same orderly way that they approach all compliance topics.  There should be an officer or manager of the facility charged with the principal responsibility of compliance with operating regulations – whether labor and employee related, production facility related (use permits and equipment safety under OSHA for example), alcohol production and sales related (ABC, TTB and local state OSS permits) or food product related (FDA and local food service requirements for example). 

The smaller the enterprise of course the more the burden falls on fewer people.  That is also why we encourage checklists and spending quality time with your industry trade associations, who have a vested interest in making sure that their members know the rules.

This is a complex issue with many moving parts.  We encourage you to contact your trade association representative or your attorney with your questions before you get that call informing you that the FDA inspector is on the way.

WHY THE FDA IS INSPECTING WINERIES

By Barbara Snider* and Erin Kelleher

The FDA is on the march and busy auditing food processors under their jurisdiction. While this leads to angst for the business caught up in the FDA bureaucracy, it is a fact of life for those who handle food and beverages, which are substances that are ingested by the public. No one argues against food and beverage safety and it’s one of the reasons we have the most respected alcoholic beverage industry in the world.  Our products are safe and the world knows it. The FDA is one reason why.

The purpose of this post is to give some comfort to those who are FDA compliant (or are small enough to be outside of the ambit of the FDA’s inspection power but who comply anyway) and to give some guidance to those who may have missed the message until now.

At the end of the post are important checklists. We urge you to pay close attention to the acronyms, and to the guidelines. There will be a test, but hopefully not one that starts with a knock on the winery’s door.

Federal Law, Wineries and the Very Narrow Small Winery Exemption

Under Federal law, wineries are “food manufacturing plants.”  As a food manufacturing plant, every winery must:

(1) Be registered with the FDA under the Bioterrorism Act (BTA),

(2) Re-register every two years, and

(3) Keep records of every source of food received (for example, grapes) and the destination of food (in this case, wine) shipped. 

Wineries with fewer than 11 employees and that sell more than 50% of their product out the front door (direct to consumer is how we interpret this) are exempted from this regulation.

Because the fermentation process kills pathogens and wine is low pH, wineries are categorized to be “low risk” food manufacturing facilities.  Thus, inspections of wineries have been a low priority for the FDA.  Most wineries have never even had an FDA inspection. 

That is now changing because of the FSMA.

The FSMA Priorities

The Food Safety Modernization Act (“FSMA”) was signed into law in January 2011, and made sweeping changes to food safety laws.  The FSMA focus changed food safety regulations from responding to food contamination to preventing food contamination.  Under the new FSMA law, even all “low risk” facilities (such as wineries) must be inspected within seven years of the Act becoming law, which means the FDA has now stepped up winery inspections for 2017. 

The Good Manufacturing Practices (“GMP”) and the Sub-parts Applicable to Wineries

The FSMA also updated the Good Manufacturing Practices (“GMP”) regulations. The FDA notes that wineries are exempted from Subpart C (Hazard Analysis and Risk-based Preventative Controls) and Subpart G (Supply-Chain Program) both of which require a written and documented food safety plan at the facility.  Wineries, however, must specifically comply with Subpart B (education and training of employees in food hygiene and safety) and Subpart F (record-keeping).

FDA Inspections – No Prior Notice Required and What to Prepare for

The FDA is not required to, and generally does not give prior notification of an inspection.  The FDA also partners with state agencies to help get the inspections done; so, for example, in California, the inspection could be made by the California Department of Food and Agriculture (“CDFA”) on the FDA’s behalf.  Other states also have counterpart agencies with the same functions as the CDFA. There can be no doubt that the FDA has geared up for inspecting the wineries, thus, wineries should be prepared. 

The best way for a winery to prepare is to do an internal inspection now, ahead of time, on all compliance requirements.  Here is our suggested checklist:

1.  The winery should designate one or two persons who can be available on-site during an inspection without prior notice. 

2.  The winery should be sure all necessary documents are up-to-date and readily available.  This includes the Bioterrorism reporting on food ingredients received and used in each wine shipped by the winery (see BTA checklist below). Copies of approved COLAs should also be readily available.

3.  Wineries should be aware that one important change under the FSMA for wineries is that education and training in food hygiene and safety is now required for all employees.  The winery must maintain records of the training for two years.  Each employee must be trained as necessary to conduct the winery processes.

4.  It is best to have a written flow chart of the winery processes demonstrating sanitation in the stages of winemaking.  The flow chart should also include monitoring with adequate frequency.

5.  One area of concern raised by the FDA inspections has been outdoor receiving of product, washing and fermentation tanks.  Wineries should document efforts to assure these processes and the area are kept as sanitary as possible (the FDA has specifically raised concerns regarding birds, dogs, cats in the area which could contaminate the grapes/juice).

6. Everything in the winery should be clearly labeled, even sanitizer spray bottles, etc. 

7. The FDA is particularly concerned that bottling rooms/areas be kept clean and sanitized to avoid contamination during bottling.

8. The Code of Federal Regulations (21 CFR 110.35) sets forth very specific sanitation issues with which wineries should be sure to comply.  Briefly, the only toxic materials that may be used or stored in a plant where food is processed or exposed include:

(a)    Those required to maintain clean and sanitary conditions;

(b)   Those necessary for use in laboratory testing procedures;

(c)    Those necessary for plant and equipment maintenance and operation;

(d)   Those necessary for use in the plant’s operations.

(e)   Toxic cleaning compounds, sanitizing agents, and pesticide chemicals must be identified, held, and stored in a manner that protects against contamination of food, food-contact surfaces, or food-packaging materials.

(f)    Pest control, and pets. No pests shall be allowed in any area of a food plant. Effective measures must be taken to exclude pests from the processing areas and to protect against the contamination of food on the premises by pests. The use of insecticides or rodenticides is permitted only under precautions and restrictions that will protect against the contamination of food, food-contact surfaces, and food-packaging materials.  With respect to Pets, the CFR states that guard or guide dogs may be allowed in some areas of a plant if the presence of the dogs is unlikely to result in contamination of food, food-contact surfaces, or food-packaging materials.

9. Make sure sufficient water, hot water and water pressure is available for sanitizing and that all drainage and sewage facilities are in working order.

10. The FDA also requires adequate toilet and hand-washing facilities be available for employees with proper signage requiring hand-washing.

Remember the Bio-terrorism Report requirement?  We have a checklist for that also

For immediate previous food sources (yeast, fining, eggs, etc.), the report must include:

●  Name of the firm providing the food source

●  Name of responsible individual

●  Address

●  Telephone number

●  Fax number and e-mail address, if available

●  Type of food, including brand name and specific variety

●  Date received

●  Lot number or other identifier if available

●  Quantity and type and size of packaging (e.g., 750 ml bottles)

●  Name of carrier that brought the item to you

●  Carrier's address

●  Carrier's telephone number

●  If available, carrier's fax number and e-mail address

The winery must also keep track of each ingredient used in each wine that is produced, bottled and shipped by the winery.

The FDA has not prescribed specific penalties, but simply reminds food facility operators and importers that non-compliance with registration, prior notice, or recordkeeping requirements (once they are mandatory) are prohibited acts, and violators are subject to civil or criminal court action. Foods imported from non-registered facilities or without proper prior notice are subject to being detained at the port of entry.

Conclusion: Preventative Maintenance Works

If your eyes aren’t fatigued by reading these checklists, then you haven’t been paying attention! Because these regulations apply to almost all wineries, being prepared is much better than being audited, found wanting, perhaps fined and faced with the possibility of future audits.

*As a former winery owner (and a skilled Hinman & Carmichael LLP attorney), Barbara Snider approaches FDA matters from experience, a realistic compliance perspective, and a thorough appreciation for best practices.

Senate Bill 378—The Proposed Demise of Due Process for Alcohol Licensees

By: John Edwards & John Hinman

This blog post concerns a very significant piece of legislation (Senate Bill 378) currently being considered by the California Legislature.  For over 60 years, licensees have had the right to challenge ABC license suspensions before they go into effect; SB 378 takes away that right. SB 378 removes existing and basic due process rights of all types of alcohol beverage licensees to challenge potentially arbitrary and capricious ABC action in a neutral forum – actions that are often undertaken at the behest of local authorities or neighbors with an axe to grind against the licensee involved.

The tension between local authorities, neighbors and licensed establishments has never been higher and can be seen in licensing and enforcement decisions involving wineries, distilleries, breweries, retail stores and nightclubs throughout the state.  If the basic rules of engagement in place since the 1955 adoption of the ABC Act are going to be significantly changed then at the very least the licensees of this state should be adequately informed of the reasons for basically doing away with the Appeals Board by stripping away the Board’s power to do pre-penalty review.

Historical Background: the ABC Act and the Appeals Board

The ABC Act was adopted in 1955 to create a clear interface between the power of the state to regulate alcohol and the rights of California alcohol licensees to operate their businesses free of discriminatory, arbitrary and unfair enforcement.  This followed a period where establishments (particularly gay bars in San Francisco in the infamous 1950’s era “Black Cat” cases) had been singled out by law enforcement for special undercover State Board of Equalization (then the alcohol licensing and enforcement authority) investigations aimed at wiping out the perceived “immorality” that had started to blossom in the San Francisco entertainment community, and in other places throughout the state.

The history of alcohol enforcement up until that time had been marked by the indiscriminate, and often arbitrary, use of the state police power to punish those whose activities were deemed “immoral,” a phrase that covered a lot of activities, including personal sexual preferences. The result after reform was Article XX, Section 22 of the California State Constitution. This article created an independent agency (the Department of Alcoholic Beverage Control or “ABC”), which itself was to be checked by an oversight board called the “Alcoholic Beverage Control Appeals Board,” which was made up of three members appointed by the Governor, who serve at the Governor’s pleasure. The purpose of the Appeals Board was to establish limited review as a matter of right of ABC decisions in cases assessing punishment where the decision was alleged to be unlawful, unfair, arbitrary or capricious. The following constitutional standard now applies to Appeals Board review:

“Review by the board of a decision of the department shall be limited to the questions whether the department has proceeded without or in excess of its jurisdiction, whether the department has proceeded in the manner required by law, whether the decision is supported by the findings, and whether the findings are supported by substantial evidence in the light of the whole record. In appeals where the board finds that there is relevant evidence which, in the exercise of reasonable diligence, could not have been produced or which was improperly excluded at the hearing before the department it may enter an order remanding the matter to the department for reconsideration in the light of such evidence. In all other appeals the board shall enter an order either affirming or reversing the decision of the department.” Article XX, Section 22, California Constitution.

This articulation of the ABC Appeals Board review power is as basic a description of “due process” rights as one can imagine. Who can argue with requiring findings, or substantial evidence, or prohibiting punishment based on evidence improperly excluded? Without this level of available review the ABC could proceed in an arbitrary and capricious manner, could punish licensees based upon the whim of whoever was in power at the time or, even worse, based on false allegations from disgruntled local neighbors and authorities.  Testing allegations of misconduct before punishment is imposed in a fairly conducted judicial hearing is a fundamental right.

The system has worked well for the last 60+ years, but not without occasional tension between the ABC and the Appeals Board. Even though the ABC probably prevails in 95%+ of the appeals that are filed, the ABC still does not like being overruled by the Appeals Board. In recent years, the ABC has made clear on many occasions its displeasure with Appeals Board decisions requiring that the ABC observe basic legal rights (including its own regulations). In fact, as explained below, the ABC currently takes the position that the Appeals Board decisions cannot be relied upon by licensees seeking guidance as to what is and is not lawful in an increasingly complex world.  That itself is a serious issue.

What Does Senate Bill 378 Do?

This brings us to State Senator Anthony Portantino’s Senate Bill 378. This bill threatens the livelihoods and due process rights of alcoholic beverage licensees throughout California.  Senate Bill 378:

●      Empowers the ABC to issue “temporary” restraining orders suspending licenses;

●      Provides that the “temporary” restraining orders can last up to 22 days (or even longer) before a hearing is held by the Department (which itself has just issued the order) on whether to expand that order to a preliminary injunction, which, in turn, would last until a hearing on the merits, which is scheduled at the discretion of the ABC (which in our experience, usually takes three to four months to calendar);

●      Strips the Appeals Board of its constitutionally-created power to review “temporary” restraining orders of the ABC and, instead, relegates licensees to petitioning a Court of Appeal to issue a discretionary writ of review;

●      Allows “temporary” restraining orders to be issued at the behest of the Department or a city attorney; and

●      Allows the ABC to issue the “temporary” restraining order on the strength of an affidavit signed under oath by a police chief, county sheriff or mayor/city manager.

What Could Go Wrong?

The bill would make possible the following scenario:  A city official reacts to a local resident who complains about an establishment by filing an affidavit accusing the licensee of violating the ABC laws.  The Department issues a “temporary” restraining order suspending the license, and the first opportunity that the license may challenge that order does not occur for 22 days, during which its business is shut down.  The Department can then issue a preliminary injunction continuing the shut-down until a hearing on the merits, which will be scheduled at the Department’s discretion—could be a month, could be a year.  Even if the charges are ultimately proven to be false at the hearing on the merits, few licensed businesses are likely to survive the prolonged shut-down.  A licensee’s only avenue of redress is to seek review from a Court of Appeal, which may or may not grant the petition, and certainly not until the damage from the shut-down has already happened.

Good luck to the investors in that business.

Even aside from the substantial question of whether Senate Bill 378 violates the California Constitution, it would make dangerous and unnecessary changes to California law for the following reasons:

1.      The ABC already has the power to act quickly to forestall violations by filing accusations and scheduling prompt hearings.  There is no need to empower it unilaterally to issue suspension orders on the say-so of city officials operating in a political arena.  There are many cases on the books in which the Appeals Board or the courts have rejected the allegations of complaining local officials after they had been tested under oath in a contested hearing, or discovered a lack of evidence to prove a local resident or ex-employee’s allegation. 

2.      As noted above, the Appeals Board has a constitutionally-created role of appellate jurisdiction over actions of the Department.  The drafters of the California Constitution wisely decided that some direct oversight of the enormous discretion vested in the ABC was necessary.  That judgment has been vindicated by many years of practice.  The advantages of Appeals Board review are that appeals can be taken as a right, the process takes far less time than a typical appeal to the busy Courts of Appeal and the members of the Appeals Board are well-versed in industry practice and ABC law.

The Courts of Appeal are already busy and often reject appeals from the ABC Appeals Board as it is.  Senate Bill 378 would require licensees whose licenses have been suspended by a “temporary” order to seek review in a Court of Appeal, with the Court having the discretion to grant or deny such review.  The Courts of Appeal have general appellate jurisdiction over all civil and criminal appeals, and their dockets are crowded. 

How likely are the Courts to put aside appeals from murder convictions and multi-million dollar civil cases to give expedited treatment to the “temporary” suspension of an ABC license, even though the consequences to the licensee’s livelihood may be devastating?  To ask that question is to answer it.

What, Then, Is the Motivation Behind This Bill? 

SB 378 appears to be a continuation of the ABC’s ongoing effort to free itself from appellate oversight by the Appeals Board.  Last year, the ABC took the position that decisions of the Appeals Board are not “precedent” and that referring to prior decisions is illegal and unethical.  The Appeals Board rejected that fatuous argument in a lengthy opinion, noting that:

[T]he only potential beneficiary in a world where prior decisions of the Board must be ignored and the Department has issued no precedential decisions itself, is the Department….  ‘If no one can cite or rely upon decisions of the Board, the Department is free to disregard them and create its own “shadow world” of unrestrained discretion—precisely what the Legislature sought to eliminate’….[1]

Senate Bill 378 appears to be yet another attempt by the ABC to achieve unrestrained and effectively unreviewable discretion.  This attempt is as unmeritorious and dangerous as the prior one.

How significant is this? As the first section of the ABC Act provides:

Section 23001 . . . It is hereby declared that the subject matter of this division involves in the highest degree the economic, social, and moral well-being and the safety of the State and of all its people. All provisions of this division shall be liberally construed for the accomplishment of these purposes.

You can’t get much more important than that.

Licensees should not have their livelihoods put at risk on the unchallenged say-so of municipal officials usually operating based on local political beefs, without any means of redress for at least 22 days and, more likely, much longer, and without any guarantee of the timely appellate review that has been a hallmark of ABC practice for many years.  Senate Bill 378 would put the entire alcoholic beverage industry at the mercy of municipal officials, angry neighbors and the unrestrained discretion of the ABC.  Licensees and their trade associations should make every effort to ensure that it does not become law. 

What Can You Do about This? 

Call or write State Senator Anthony Portantino and share your view on the merits (or lack thereof) of SB 378 and then call your trade association leaders and let them know your views.  Here’s a likely incomplete list of some of the alcohol industry trade groups we have supported in the past to get you started.

[1] BMGV, LLC v. Dept. of Alcoholic Bev. Control (Appeals Board 11/17/16) AB-9568, p. 25.  The ABC, represented by the Attorney General, has petitioned for a writ of review of portions of the Appeals Board’s decision, excluding the portion addressing the issue of the Board’s prior decisions as precedent.