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BusinessWeek: January 15, 1996 |
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Legal Affairs: TRADEMARKS
WHO OWNS THE SMIRNOFF NAME? In the post-Soviet era, an heir contests Heublein's rights
The problem is that Boris' lineage may not be enough of a claim to let him pick up where his ancestors left off. In the intervening decades, since 1939, Heublein Inc., a subsidiary of London-based International Distillers & Vintners (IDV) and its parent, food giant Grand Metropolitan PLC, became the exclusive distributor of Smirnoff vodka. The company says it paid $14,000 for the rights to the Smirnoff name from an American businessman who acquired them in 1933 from Vladimir Smirnoff, one of Pyotr's three sons. Today, the brand is worth an estimated $1.4 billion. With registered trademarks in 138 countries, Heublein isn't about to give up the brand that is outsold only by Bacardi rum. "We acquired the rights in good faith and subsequently built the brand through our efforts and investments alone," says Heublein spokesman Jack Shea. "Boris Smirnoff is simply attempting to profit from the enormous investments Heublein has made." Shea estimates that Heublein has spent "hundreds of millions of dollars" over the past 50 years plugging the Smirnoff brand. In 1995 alone, he says, the company poured more than $10 million into advertising just in the U.S. The contested ownership of the Smirnoff brand is one of a growing number of legal battles in the U.S. and Russia. The cases could signal the way in which post-communist Russia addresses an increasingly familiar problem: Who owns the rights to former Soviet state enterprises? "Where is it that you draw the line with respect to restoration of private interests?" asks Jeffrey A. Burt, a Russian-law expert at Arnold & Porter in Washington. "Everything in the entire country was owned by somebody before the revolution." Other former communist-bloc countries have tried to deal with reclamation issues by passing new intellectual-property laws or by paying nominal amounts to individuals whose property was seized. That hasn't solved every problem. Anheuser-Busch Cos. has been fighting in the Czech Republic for years over the Budweiser beer trademark. But in Russia, virtually all heirs seeking rights to prerevolutionary possessions must resolve their disputes on a case-by-case basis. FAMILY SPLIT. Consequently, a diverse and growing number of claimants is taking the offensive. World-renowned cellist Mstislav L. Rostropovich, for one, has sued two U.S. companies for selling recordings made in the 1960s before his defection to the U.S. The Anglican Church is trying to regain ownership of a church in Moscow now used by a recording studio. "There's the potential for a huge amount of litigation and mischief," says Michael A. Epstein, an intellectual-property lawyer in New York. "The Communist government appropriated all sorts of inventions and businesses from individuals." Adds Oleg Garsov, director of the Society of Russian Merchants & Industrialists, a group that tries to protect owner interests: "The problem is that there are no laws." Boris Smirnoff and his American business partners aren't deterred--at home or abroad. On Dec. 8, they sued Heublein for fraud and consumer deception in a Delaware federal court in an effort to invalidate the company's U.S. trademark. The argument: Vladimir had no right to sell the Smirnoff trademarks back in 1933, because he already had sold his stake in the family business to his brother in 1904--for 500,000 rubles. Therefore, they claim, Heublein's use of the brand and its various quality awards, emblems, and medals has been based on a fraudulent transaction. "Heublein has misled generations of Americans into believing that their vodka has something to do with Pyotr Smirnoff," says William N. Walker, president of Russian American Spirits Co., an outfit that hopes to sell Smirnoff vodka in the U.S. and elsewhere. Walker and Boris Smirnoff are so confident of their position that they have invited the 10 largest international spirits companies to bid by Feb. 16 for the rights to market Smirnoff vodka in Russia. They're charging $50,000 up front just to participate in the auction. Their optimism has some basis. On Sept. 11, a court in Krymsk, Russia, declared Heublein's use of the Smirnoff trademark to be unlawful and barred the company from making any claims that its products are related to the original Smirnoff vodka, including its treasured distinction as the "Official Purveyor to the Russian Imperial Court." A court in Krasnodar upheld that decision on Dec. 19. In addition, the Russian Patent Office Chamber of Appeals has invalidated Heublein's trademarks. Heublein and its big-name owners concede nothing, however, and vow to appeal the decisions. That's not surprising given that Smirnoff is the companies' single largest liquor brand, selling some 15 million cases worldwide. Heublein is banking on three key arguments to prove that its ownership is legitimate. First, Heublein contends that Vladimir had every right to sell the Smirnoff name when he did. After the Bolshevik revolution, the trademark, like many others, was abandoned by the Soviet government. That left Vladimir, who had fled, free to revive the business in Poland. "There was nobody else from whom to acquire the Smirnoff rights," says Heublein's Shea. "The company was dormant after the revolution." In addition, through the three-year-old Smirnoff Foundation, funded by Heublein and its parent companies with $200,000 annually, numerous family members have been tracked down who oppose Boris' crusade. IDV says that so far, 34 Smirnoffs have signed declarations stating that they back Heublein's claims and object to what they view as Boris' selfish efforts to win exclusive rights to Pyotr Smirnoff's legacy. "Justice will prevail, and the undertaking of Boris will finally collapse," says Kira Vladimirovna Smirnova, a direct descendant of Vladimir who admits to receiving a small salary as an employee of the foundation. An IDV spokesman denies buying the support of Smirnoffs and notes that only half of the signatories have received compensation from the company--most of them earning "less than five-figure sums" annually. CRUCIAL CONNECTION. Last, Heublein argues that Boris Smirnoff is not entitled to take control of a product that it has largely created through marketing campaigns and other investments. Smirnoff was selling 5,000 cases a year in the U.S. when Heublein first took over the brand. In 1995, the company says it sold more than 5 million cases. "It's a well-established principle that if one claimant lets a [trademark] sit fallow and another puts a lot of energy and investment into it, then that can be the basis for awarding the mark to one claimant over another," says Michael A. Newcity of the Center for Slavic, Eurasian & Eastern European Studies at Duke University. Heublein had better hope that courts in the U.S. and elsewhere see it that way. Industry experts say the company would have difficulty holding onto market share if it loses its connection to Pyotr Smirnoff. "It's a little bit like finding out that your mom and dad aren't your real mom and dad and that you were adopted," observes Tom Pirko, president of Bevmark PLC. "It's hard to come up with a value for the brand if it can't claim that Russian heritage anymore." That seems to be the one thing on which both sides agree. Return to top | |
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 TABLE PRIVATE PROPERTY--WHAT'S THAT? Heublein's trademark dispute raises important legal issues in post-communist Russia: OWNERSHIP With the collapse of the Soviet state, ownership of some property and former government enterprises is up for grabs. Should they belong to citizens, descendants, emigres, or deep-pocketed companies? STATUS OF INTELLECTUAL PROPERTY Under communism, many patents, copyrights, and trademarks remained unused. Are those rights still valid years after foreign interests have assumed control? CREATING VALUE Prerevolutionary businesses had a certain value. But are would-be inheritors entitled to those businesses after foreign investments in marketing have greatly increased their value? Return to top  Return to top |
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