June 17th, 2014

Stoli Vodka: made in Latvia, lost by Russia

Stolichnaya

Since 2001 there has been a dispute over the rights for the popular Soviet vodka brands Stolichnaya (“Stoli”), Moskovskaya, and others. The conflict is between the Russian Federation, represented by the Federal Treasure Enterprise Sojuzplodoimport (FTE), and the SPI Group owned by Yuri Shefler. No winner has yet emerged, but after 13 years of legal battles the losers are apparent: The FTE, Yuri Shefler, and the disputed vodka brands all continue to lose market share in Russia and abroad each year.
Since 2001 there has been a dispute over the rights for the popular Soviet vodka brands Stolichnaya (“Stoli”), Moskovskaya, and others. The conflict is between the Russian Federation, represented by the Federal Treasure Enterprise Sojuzplodoimport (FTE), and the SPI Group owned by Yuri Shefler. No winner has yet emerged, but after 13 years of legal battles the losers are apparent: The FTE, Yuri Shefler, and the disputed vodka brands all continue to lose market share in Russia and abroad each year.

The Soviet Union started to export Stolichnaya and Moskovskaya in 1960s. The exclusive right to export alcohol at that time belonged to the All-Union Foreign Economic Association Sojuzplodoimport (VVO).

Stoli In 1991 the VVO’s management, inspired by talk of privatization, decided that it would be more profitable to manage the joint-stock company than the company owned by the state. VVO was privatized and became the Foreign Economic Joint Stock Company Sojuzplodoimport (VAO). However, the business failed to grow for two major reasons. First, the Gospatent (the USSR Intellectual Property Agency) temporary cancelled the registration of the vodka trademarks. This caused the uncontrolled growth of production and sales of the alcohol because anyone could produce it and put any vodka brand’s label on the bottle at that time; this decreased of the VAO’s vodka sales. Second, the state stopped subsidizing transport services which created tremendous debt for the VAO because of the costs for its carriers.

In December 1997 Yuri Shefler decided to lend financial support to the VAO. He registered the CJSC Sojuzplodimport (one letter different from VAO SojuzplodOimport) and paid the VAO $300,000 for the trademarks of 43 vodka brands, including Stolichnaya and Moskovskaya. During the following two years he built the business by licensing the rights to the brands to multiple manufacturers in Russia. In 2000 the Prosecutor General’s Office of the Russian Federation determined that the price Yuri Shefler paid for the trademarks in 1997 was undervalued.  However, SPI claimed that the trademarks were purchased at the fair market value, and that the increased value was due to SPI’s development of the brands.

After Vladimir Putin took power in 2000, the state launched a battle to get the rights to the trademarks to itself. By the end of 2001 the rights to a group of SPI’s trademarks were transferred to the FTE through joint action by the Prosecutor General’s Office of the Russian Federation, the Ministry of Agriculture and Rospatent (Federal Service for Intellectual Property). Thus, since 2001 the State has controlled Stolichnaya, Moskovskaya, and other brands in its domestic market by licensing the trademarks to the manufacturers in Russia. But SPI controls the most profitable markets – the US and Europe – because SPI owns the trademarks registered in the US, the EU, and other countries. SPI produces Stolichnaya and Moskovskaya in Latvia and can not sell it in Russia.

The Russian government has always envied SPI for its global success. In 2002, CEO of the FTE, Vladimir Loginov, accused Yuri Shefler of making death threats against him. The Prosecutor General’s Office of the Russian Federation then initiated a criminal case against Shefler. At the time of the accusation Shefler was abroad and was not arrested; he remains in London. In July 2007 Shefler was also accused of having contraband alcohol, creating a criminal community, and illegally using trademarks. Shefler called the charges ludicrous: “All charges are pointless and legally unsound. I view this course of events as the next round of the unscrupulous competition, unleashed by the FTE and personally by its head Loginov, due to ineffective court proceedings which are taking place outside of the Russian Federation in respect of the dispute over the SPI’s rights for the Soviet vodka brands”.

The FTE’s trademark litigation with the SPI has lasted more than a decade. The FTE lost its case in the US but it won in the Netherlands. The FTE recognizes as its main victory: In December 2013 the Supreme Court of the Netherlands refused to review the decisions of the lower courts which had decided that the FTE was the owner of the rights for Stolichnaya and Moskovskaya. This decision confirmed that the FTE has all the rights for those vodka brands in the Netherlands, Luxembourg, and Belgium (the Benelux countries).

Now the case will return to the lower court which will make a decision regarding the transfer of the rights for Stolichnaya and Moskovskaya to the FTE. The FTE believes the Supreme Court’s decision in favor of its rights will be accepted in other countries of the European Union without further court proceedings.

SPI views the decision of the Supreme Court of the Netherlands as an intermediate verdict. The President of SPI, Val Mendeleev, claims that this decision will not lead to the automatic loss of all its trademarks registered in the EU. He states that SPI, which has registered trademarks in almost every country in EU, will defend its trademarks in all those countries.

Without a winner the losers are evident: Yuri Shefler, who lost his business in Russia, and Russia itself, which lost the opportunity to export vodka globally as well as vodka brands including Stolichnaya and Moskovskaya. Without a clear owner of the trademarks, no one wants to finance a global marketing campaign. The vodka brands continue to lose their market share. Russia, represented by the FTE, and SPI Group, continue to lose money. And Russian and international investors have lost faith in the State’s ability to support economic growth and the free market.  

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