Rum War Threatens to Put U.S. in Policy Bind

MIAMI

Some insiders have called it a modern-day rum war--a five-year battle between the Western Hemisphere’s biggest private distiller and its oldest Communist government.

But the conflict has spread far beyond the 80-proof product that aficionados consider Havana’s finest swill.

As it played itself out in a New York City courtroom and in an act of Congress last year, it threatens to engulf oil and gasoline, computers and rental cars, hamburgers and catsup, lingerie and cologne.

It all climaxed in U.S. federal court in New York in April in a little-noticed decision in the case of Havana Club Holding, a joint Cuban-French venture that makes rum, versus famed distiller Bacardi-Martini U.S.A., which decided to make a rum with the same name.

The Cubans lost--a fact that trade analysts say has potentially sweeping ramifications not only for hundreds of the United States’ largest consumer corporations, but also for the credibility of a U.S. global economic policy that touts itself as the guardian of free trade and intellectual property rights.

At the heart of it are trademarks, the proprietary legal rights companies have to the use of specific brand names that they register with governments. The U.S. has long championed the safeguarding of such protections worldwide, heavily lobbying governments from China to Chile to crack down on trademark pirates who black-market everything from videotapes to Hard Rock T-shirts.

Not this time.

The ruling in favor of Bacardi and against the Cuban government has placed the free-trading U.S. in the seemingly contradictory role of refusing to recognize an apparently legitimate trademark honored in dozens of nations worldwide--all thanks to a law pushed through Congress by anti-Castro forces and Bacardi itself.

Now, Cuba is threatening to retaliate: President Fidel Castro declared last month that he just might start making his own Cuban Coca-Cola.

Especially concerned are more than 400 U.S. corporations--Coca-Cola Co. among them--that have paid the required $300 fee and filed registration papers in Havana in the last two years to guard brand names ranging from McDonald’s, Pizza Hut and Hard Rock Cafe to Playboy, Prodigy and Polo--preparing for a post-embargo era in a Communist land where even Ronald McDonald is protected intellectual property today.

In the case of Cuba vs. Bacardi, the chief appellant was, in effect, Castro himself, a strident Communist and enemy of the U.S. who has remained in power for 40 years despite an American trade embargo meant to drive him out.

As the rum war clearly shows, though, his regime has endured the past decade largely through basic capitalism and a global marketplace that Castro personally reviles.

Since the Soviet collapse and the loss to Havana of billions of dollars in foreign aid, the cash-strapped Cuban government has gone corporate to survive. It has formed state-run corporations within its socialist ministries and joint ventures with private companies from dozens of nations--other than the United States--to market everything from its finest cigars to its most pristine beaches.

So it was that in 1994, Cuba linked up with the French liquor giant Pernod Ricard to market its finest rum, Havana Club. And in its first four years, court records show, the joint venture sold more than 38 million bottles of it, with 30% of the sales in Cuba and most of the rest in Spain, France, Germany, Italy, Canada, Mexico, Bolivia and Panama.

That’s when the rum war began.

Bacardi, one of the world’s largest spirits manufacturers and one that is privately held by Cubans who fled Castro’s revolution in 1959, launched a Havana Club of its own--aimed directly at the U.S. market where Cuba’s version is banned. Between May and August 1996, Bacardi distributed 906 cases of its Havana Club--made in the Bahamas--in seven U.S. states until sales were halted by the legal dispute.

Crusade to Right Historic Wrong

Cuba’s suit claimed that Bacardi was violating its rights to the U.S. trademark, which Havana has faithfully paid since the 1970s to formally protect its place in the American market against the day when the embargo is gone.

But Bacardi countered that Cuba had no right to the name in the first place, arguing that Castro had seized the name and the factory that produced it from another Cuban family soon after the revolution.

Ever since, Bacardi has cast the war as a crusade to right an historic wrong--the seizure of Havana Club from the Arechabala family, which had produced the brand from the 19th century until Castro confiscated it in 1960.

The Arechabalas fled Castro’s revolt and are now scattered through Europe. Yet testimony in the case showed that the family never took steps to renew its trademark rights in the U.S.--or anywhere on the globe--whereas the Cuban government did.

“They had no economic resources to make or distribute Havana Club,” Jorge Rodriguez, Bacardi’s vice president for corporate communication, said in a recent interview with The Times. “To have applied for continued rights to the trademark, they would have had to lie, in effect, and say they would continue manufacturing and selling Havana Club when, in fact, they had no resources to do so.”

To gain rights to the Havana Club label, Rodriguez said, Bacardi paid the Arechabala family more than $1 million upfront and promised millions more in royalties, which they figure to pay after they again begin selling Bacardi’s version of Havana Club--which Rodriguez said will be “as soon as we can.”

But Bacardi appears to be one of the few parties pleased with the court ruling--and the law it helped push through Congress that made the ruling almost inevitable.

The outcome has raised the ire not only of corporate America but also of the European Union, where Pernod now is lobbying to elevate the case into yet another major transatlantic dispute by challenging the U.S. statute before the World Trade Organization.

There’s an even deeper dimension to the rum war: The fallout from the ruling illustrates a new common interest by strange bedfellows--corporate America and Communist Cuba.

Both now wish to tear down the Cold War-era trade embargo across the Florida Straits. And for them, the case also shows how a relatively small group of Cuban American special interests have succeeded in keeping the barriers there long after the Cold War ended.

The ruling, in fact, came at a time when American companies appeared to be positioning themselves as never before for the embargo’s end. Hundreds are scrambling to renew their trademarks with a Cuban government that--until the rum-war ruling--had vowed to honor them.

“U.S. companies have become far more active in registering their intellectual property in Cuba than they were for the past decade,” said John Kavulich, head of the Washington-based U.S.-Cuba Trade and Economic Council, which monitors trade relations between the two estranged neighbors and favors free U.S.-Cuba trade.

Strange Fallout Feared

The ironies intrigued even U.S. District Judge Shira Scheindlin, who noted in her 37-page decision:

“There is no doubt that plaintiffs [Cuba and its leaders] seek a laudable capitalist goal--to compete fairly, to maximize their sales and perhaps even to protect American consumers.”

But the judge ruled that Cuba’s inability to do so is caused not by Bacardi’s new product, but rather by the decades-old embargo and by the law Bacardi got Florida legislators to tack onto last year’s federal omnibus budget act.

The judge concluded that the embargo and the law--inserted along with other special-interest legislation into last year’s 4,000-page budget bill by Sen. Connie Mack (R-Fla.) at the behest of Bacardi’s Miami-based U.S. subsidiary--left her with no option but to rule in Bacardi’s favor.

The law, which has come to be known simply as “Section 211,” specifically invalidates U.S. trademark rights connected to property that was confiscated by Castro’s government. Mack recently issued a one-line statement justifying it: “The law covering property stolen by Fidel Castro did not apply to trademarks, and I sought to address this deficiency and am pleased that we succeeded.”

Clinton administration trade officials and analysts such as Kavulich say the law might violate America’s obligations under the international intellectual-property treaties that the U.S. so stridently defends.

But it handed Bacardi a victory in the Havana Club case.

Even before the ruling, which Cuba plans to appeal, Cuba’s National Assembly president, Ricardo Alarcon, hinted at retaliation for Section 211:

“There are U.S. trademarks here [in Cuba]. . . . The owners of those trademarks and patents should be concerned at the recklessness of a government which can carry out actions that would not be left unanswered.”

And they are indeed concerned, according to Kavulich, the U.S. Chamber of Commerce and several executives of corporations that are maintaining trademarks for future use in Cuba.

“Bacardi may have gone a bridge too far in this case,” said one source familiar with the case who asked not to be named. “Major U.S. corporations have now been dragged into what essentially was a rum war.”

Added John Howard of the U.S. Chamber of Commerce, which formally opposes the Cuban embargo: “We are concerned that under international law, Cuba now has the right to retaliate in ways that could hurt these 400 or so corporations.”

In recent weeks, U.S. trade officials privately have hinted they may not honor Bacardi’s right to market Havana Club for a wholly separate reason: that the name and packaging of Bacardi’s product, which features a picture of Havana’s Malecon seafront corniche on the bottle, are deceptive because it is not made in Havana.

Still, the ruling and the law that helped sanction it have won an equal share of praise in Miami, the bastion of anti-Castro Cuban-Americans who have lobbied heavily through the decades for legislation that has reinforced the embargo--and against all legislative efforts to ease it.

Even Judge Scheindlin indirectly credited such forces in explaining her decision to dismiss Cuba’s basic assertion: that a Bacardi-made Havana Club would hurt its future sales in the U.S. market. It is an empty claim so long as the embargo remains in effect.

“The embargo is, admittedly, designed to be temporary,” Scheindlin stated. “Despite widespread criticism of the embargo, however . . . it has now been in place for over 35 years.

“There is no way for this court to reasonably foresee when these changes will occur, whether in the near future or in another 35 years.”