Committee on Ways and Means, Subcommittee on Trade, 4-11-02 Testimony

Statement of Richard A. Edlin, Partner, Greenberg Traurig, LLP,
and U.S. Counsel, SPI Spirits, Ltd., Netherlands

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing to Explore Permanent Normal Trade Relations for Russia

April 11, 2002

Mr. Chairman and Honorable Members of the Committee, my name is Richard Edlin and I am a partner in the law firm of Greenberg Traurig. Thank you for your invitation to appear before this distinguished Committee. I am counsel to SPI Spirits, which is the maker of Stolichnaya Vodka, the principal brand of Russian Vodka and one of the best selling brands of Vodka in the United States and the World. I come before this Committee in order to bring to your collective attention certain facts and conduct by the Russian Government which brings into serious question Russia’s ability to act as a reliable trade partner, to respect the rule of law, and to conduct itself in accordance with the practices we associate with free market economies and reliable trade partners. Rather, recent events highlight a troubling pattern of regression by the Russian Government to the tactics and policies of the Soviet era.

Background to Russian Regression on
International Trade and Russia’s Attempt
To Reverse the Privatization of Russian Vodka

Vodka is the second largest industry in Russia. Prior to the collapse of the Soviet Union, trademarks to Russian vodka products were state-owned. Beginning in 1991 or thereabouts, many Russian industries, including the Vodka industry, were privatized. SPI International NV (“SPI”) and its predecessor entities became the legal owner directly of, or of reversionary interests in, Stolichnaya, one of the most popular brands of Vodka in the world and the principal brand of Russian Vodka sold throughout the United States and the world. Now, utilizing many of the presumably discarded methods of Soviet-era intimidation, disrespect for international legal principles, and raw police power, the government of Russia is attempting to nationalize again the Vodka industry. In effect, this will reverse Russia’s progressive privatization practices of the past and casts significant doubt on Russia’s ability to become a reliable member of the international economic community.

Many of the facts below were recited and recognized as accurate in a lawsuit which took place in 1992 over rights to the Stolichnaya trademark, Financial Matters, Inc. v. PepsiCo, Inc. and Monsieur Henri Wines, Ltd., 806 F. Supp 480 (S.D.N.Y. 1992)(Owen, J.), in which representatives of SPI participated as fact witnesses.

SPI received trademark registration for the Stolichnaya mark in the United States in 1967. In 1969, SPI assigned all its rights in the mark to Kraus Bros. & Co.; SPI designated MHW, Kraus' subsidiary, as SPI's representative in its trademark application. In 1973 PepsiCo entered into an agreement with Sojuzplodoimport (the predecessor to SPI), the Soviet state-controlled bureaucracy that controlled all agricultural exports from the U.S.S.R., to export Pepsi-Cola syrup to the Soviet Union, and to receive in return the exclusive right to import Stolichnaya Vodka into the United States. PepsiCo acquired Kraus and MHW in order to secure its right to import the Stolichnaya Vodka. The mark became incontestable in the United States in 1974 on the filing of the requisite affidavit of continuous use. PepsiCo also owned the mark "Stoli."

Upon its acquisition of the Stolichnaya import rights, PepsiCo set up a system for approving potential suppliers, establishing quality specifications, assisting distilleries in improving their product, testing the final product, and rejecting unsuitable shipments. PepsiCo was thus instrumental, following its trademark assignment from SPI’s predecessor, in creating a domestic American product of consistently high quality and uniform characteristics. Upon acquiring the right to distribute Stolichnaya in the U.S., PepsiCo and MHW spent over $100 million to popularize Stolichnaya vodka in the U.S.[1] PepsiCo approved only seven distilleries in the USSR to produce and export Stolichnaya vodka to the U.S., and imported Stolichnaya vodka had come from those same seven distilleries over the more than twenty years of PepsiCo's control.

In 1983, PepsiCo assigned to SPI the Stolichnaya trademark registration, as well as its pending application to register Stoli. In June, 1991, SPI reassigned to PepsiCo all of its right, title and interest in and to the said marks. That agreement was amended on February 6, 1992, after the dissolution of the USSR, by deleting paragraph 8, which had conferred a right upon the now-defunct Soviet government to request the reassignment of the marks back to SPI at will.

In August, 1991, the USSR patent office cancelled SPI's registration in Russia for Stolichnaya on the ground that Stolichnaya had come to identify a type rather than a brand of vodka in the USSR. However, an opinion by the patent office clarifying that decision notes that under Russian law, the ownership and validity of rights in marks outside Russia is independent of such rights in Russia, and that the cancellation of the mark in Russia should not affect rights outside Russia. Furthermore, pursuant to Article 6(3) of the International Convention for the Protection of Industrial Property, the "Paris Convention," to which Russia is a signatory, a mark duly registered in one country is independent of marks registered in other countries, even including the country of origin.

When the USSR collapsed in December 1991, SPI became a private joint stock company which succeeded to the same rights as its governmental predecessor; these rights were confirmed by the statements of various Russian government officials and trade representatives of the Russian Federation in the United States. PepsiCo, MHW and SPI then continued their business relationship virtually unchanged.[2]

As the official documents of the Ministry of Foreign Economic Relations of the Russian Federation, attached as EXHIBIT A, stated in October 1992, SPI “is a legal entity in the Russian Federation and the successor of its Soviet predecessor VVO ‘Sojuzplodoimport’. [SPI] has the right to export Russian vodka to the USA under the following trademarks: Stolichnaya, Stolichnaya Christall, Pertsovka, Limonnaya, Prievet, Prievet Orange (Apelsinovaya), Russian, Okhotnichya.” It could not be stated any more clearly and legally. And there are numerous such documents. Russia now, acting solely out of its own desire to take back property it has already privatized, has ignored its own official actions during the privatization process. We ask: “By what right?”

Since privatization in Russia took place a decade ago, SPI has sold Stolichnaya vodka to the American and European markets without any claim by the Russian government in any country that SPI did not have the right to do so. After the legally privatized company was sold to its present owners, tens of millions of dollars were invested to successfully rebuild the nearly bankrupt company into one of the world’s leading vodka producers. SPI also requires its distributors in various countries, including the United States, to make significant investments in marketing and advertising the Stolichnaya brand.

All of SPI’s actions were taken with the knowledge of the Russian government and without any suggestion at all that when SPI and its trade partners around the world were spending tens of millions of dollars to build and support the Stolichnaya brand, that the Russian government has any reservations regarding SPI’s right to do so. AND NOW RUSSIA WANTS TO TAKE STOLICHNAYA BACK. Again we ask: “By what right?”

Russia’s Testimony Before the
United States Department of Commerce
Misstates Material Facts Regarding the Government’s
Actions to Nationalize and Monopolize the Vodka Industry

In testimony before the United States Department of Commerce, the Russian Government expressly represented that it would respect its former privatization of industry and that it did not wish to own the means of production of industries other than those typically associated with national security or the fundamental acts of governments, such as printing currency. I do not believe the vodka industry would fall into this category.

Nonetheless, The Moscow Times reported on April 4, 2002 that the Russian Government has set up a federal enterprise through which it intends to nationalize and monopolize the Vodka industry. Deputy Agriculture Minister Loginov, the same individual who has been active in attempting to deny SPI export permits for SPI’s vodka and illegally take back numerous vodka trademarks, is the same person who has been designated to run the new state-controlled vodka company. Obviously this is no accident. These acts with respect to the Russian Government’s continuing and aggressive efforts to nationalize the vodka industry flatly contradicts the Russian Government’s testimony to the Commerce Department. We leave the Committee to reach its own conclusions as to the continuing reliability of the Russian Government’s representations regarding the actual facts of what is taking place in Russia today.

Russia’s Refusal to Respect the Rule of Law
And its Efforts to Politically Manipulate its Court System

We believe that the Committee will also find relevant the rash of litigation within Russia between the Government and SPI. Acting in a manner contrary to its own laws, Russia has attempted to and is in the process of nakedly usurping SPI’s trademarks to Stolichnaya and other brands within Russia itself. Russia is also presently violating Russian court orders requiring the government to allow SPI and its U.S. distributor, Allied Domecq, to ship some 120,000 cases of vodka out of the Russian port of Kaliningrad. Attached as EXHIBIT B is the translation of the February 22, 2002 decision of the Leningrad District Court for the City of Kaliningrad which orders the Russian Government to “cease prohibiting the exiting of the alcoholic products of” SPI that bear, among others, the trademark of Stolichnaya. Again, what could be clearer?

Most disturbingly, there are credible reports that the Russian government has threatened baseless criminal prosecutions and engaged in physical threats against SPI employees.

From the legal point of view, Russia’s “strategy” is doomed to failure. As alluded to above, Russia cannot sell Stolichnaya in the United States, only the registered trademark holder can do that, in this case Allied Domecq. Allied Domecq is obligated to return the U.S. trademark to SPI in 2010 and until that time SPI is Allied Domecq’s exclusive supplier of Stolichnaya in the United States. This analysis is applicable in every country in which SPI or its partners holds the Stolichnaya trademark.

However, from the point of view of fair international trade practices, Russia has run amok. Russia’s efforts to re-nationalize and monopolize its vodka industry – when it has in the past said that it would respect privatization – and its reversion to the tactics of Soviet-era thuggery to do so, sends an ominous message and poses fundamental questions regarding Russia’s fitness to enter the WTO and to receive normalization of trade relations with our government. It is critical that commercial issues be resolved by the rule of law and that those laws be consistently applied in Russia as they are in international markets.

Russia’s Former Deputy Prime Minister
Criticizes the Present Russian Economic and Political Climate
As Providing Inadequate Respect for Private Property Rights

The problems facing SPI are hardly unique. The unfortunate fact is that SPI’s problems are simply one part of a larger problem. In an April 5, 2002 article in The Wall Street Journal Europe, which is attached as EXHIBIT C, Boris Nemtsov, former Deputy Prime Minister for the Russian Federation and presently a member of the Russian Duma, calls for President Putin to “Stop the Rot.” Mr. Nemtsov identifies “dangerous trends that threaten to undermine the twin pillars of true progress for Russia – democracy and property rights.” Mr. Nemtsov asks a question that this Committee should be equally concerned with: “Why are property rights in Russia so weak?” And the answer which Mr. Nemtsov gives goes directly to the heart of SPI’s present problem with the Russian Government. As Mr. Nemtsov says: “The short, and long, answer is bureaucratic corruption.”

In connection with Russia’s court system, which supposedly provides private parties aggrieved by the Russian Government’s illegal interference with private property rights, Mr. Nemtsov describes decisions issued by Russia’s courts as “shocking” and “Kafkaesque.” A recent decision by Russia’s courts concerning the securities industry was criticized by the prominent English firm Freshfields in this way: “[T]his decision threatens the very idea of securities and the securities markets in Russia. To say nothing of the violations of constitutional principles of private property, freedom to contract and principles of trade.”

Russia’s court system has met with similar disapproval last summer in a decision reached in the United States District Court for the Eastern District of New York. The overall dispute involved efforts by a state-sponsored company to rescind copyrights previously issued to an American company and bears all of the hallmarks of the Russian Government’s tactics to illegally rescind SPI’s property rights to Stolichnaya.

United States District Court Judge Trager conducted an exhaustive review of Russian law and the facts behind the issuance of copyrights to the American company, Films By Jove. Judge Trager upheld Films By Jove’s copyrights and, significantly for the purposes of this testimony and these hearings, described a decision from the Russian Arbitrazh Court, rendered under pressure from the Government, as “incoherent,” “irrelevant,” and “shocking.”[3]

I respectfully submit that SPI’s present problems with the Russian Government, and those of a great many other companies, demonstrate that Russia has not developed a market economy that is reliable in any reasonable manner with respect to protection of property rights, the rule of law, or due process. Rather, old-fashioned, Soviet-era corruption and the tactics of intimidation and threats are all too often the governing principles of the Russian economy.

Conclusion:

Before the United States Rewards
Russia With Normalized Trade
Relations, Russia Must First Put its House in Order and
Make Amends to Those Who Have Been Hurt by its Recent Actions

Until Russia demonstrates that it is willing to be a reliable member of the world economic community, and that it is willing to respect internationally accepted principles of free trade, free markets, and private enterprise free from government persecution, it should be denied normalization of trade relations and admission to the WTO.

[1] In 1977, PepsiCo acquired the Pizza Hut restaurant chain. Since Pizza Hut restaurants served liquor, and since various states forbid a manufacturer, importer or wholesaler of liquor products from retaining any interest in premises where alcoholic beverages are sold ("Tied House" laws), PepsiCo divested itself of the ownership of MHW when it acquired Pizza Hut. However, PepsiCo retained ownership of the Stolichnaya mark, and entered into an agreement with MHW under which MHW agreed to continue importing the vodka made by the same distilleries. PepsiCo, as the trademark owner, continued to monitor the nature and quality of the vodka as it had done before, and it continued to receive a royalty based on sales from MHW.

It is irrelevant that the consuming public does not know that it was actually PepsiCo who owns the mark. Under well-established law it is clear that the public need not know the name of the trademark owner for their to be goodwill in a mark, nor does the name of the owner have to appear on the product itself.

[2] In Financial Matters, Judge Owen accepted PepsiCo’s testimony that PepsiCo continued to do business with the same SPI staff in the same manner as it had done when the USSR was extant, and that the new SPI operated out of the same physical facilities as the old state-run SPI. With respect to the position that SPI did not undertake the requisite privatization procedures authorized by the Russian government, Judge Owen noted that the situation in Russia was volatile – a statement that could be made with equal relevance today. As Judge Owen concluded: “Nobody knows precisely what procedures were undertaken by SPI to privatize, but all the evidence seems to indicate that this new private joint-stock company is indeed carrying on the functions of the old SPI.”

[3] We refer the Committee to Films By Jove, Inc. v. Berov, et al., 2001 WL 967781, August 27, 2001 (E.D.N.Y.)(Trager, J.).

[EXHIBIT A IS BEING RETAINED IN THE COMMITTEE FILES]

EXHIBIT B

[Document 1]

RULING

On February 22, 2002 the Leningrad District Court of the city of Kaliningrad
represented by:
the Chief Judge L. G. Kilienko
has considered a petition with respect to the complaint entered by Rinat Akbarovitch Zuparov as to the illegal actions of the Kaliningrad Customs Office, and

HAS DETERMINED:

The petitioner in the case has submitted a complaint to the court as to the illegal actions of the Kaliningrad Customs Office and has requested that the actions of the Kaliningrad Customs Office, which manifested themselves in a prohibition against the exiting of the export products applied for by OAO SPI-RVVK in accordance with the State Customs Declaration Nos. 10205030/040202/0003034, 10205030/140202/0004179, 10205030/140202/0004180, and 10205030/140202/0004181 (four documents, in total), on the basis of the absence and non-submittal of the licensing agreement with the Ministry of Agricultural Products of Russia, be deemed to be illegal.

The court has received a petition that requests that, for the purposes of the securing of the submitted demands pending the conclusion of the legal proceedings in the case, the Kaliningrad Customs Office is to be ordered to cease prohibiting the exiting of the alcoholic products of OAO SPI-RVVK, which bear the trademarks in accordance with the state customs declarations mentioned above, from the customs territory of the Russian Federation.

The court deems it feasible, for the purposes of the securing of the demands submitted in the petition, to order the Kaliningrad Customs Office to cease prohibiting the exiting of the alcoholic products of OAO SPI-RVVK that bear the trademarks SOVIET, SPARKLING, STARKA, YUBILEYNAYA, KUBANSKAYA, SUBROVKA [sic], STOLICHNAYA, RUSSKAYA [in the Cyrillic alphabet], OKHOTNICHYA/PERTSOVKA, MOSKOVSKAYA, LIMONNAYA [in the Cyrillic alphabet], KREPKAYA, STOLOVAYA, SIBIRSKAYA, BALTIYSKAYA, KRISTAL, and SPI in accordance with State Customs Declaration Nos. 10205030/040202/0003034, 10205030/140202/0004179, 10205030/140202/0004180, and 10205030/140202/0004181 (four documents, in total) from the customs territory of the Russian Federation on the basis of the absence and non-submittal of the licensing agreement with the Ministry of Agricultural Products of Russia.

In accordance with Articles 133 and 134 of the Code of Civil Procedure of the Russian Soviet Federated Socialist Republic, the court

HAS RULED:

To order the Kaliningrad Customs Office to cease prohibiting the exiting of the alcoholic products of OAO SPI-RVVK that bear the trademarks SOVIET, SPARKLING, STARKA, YUBILEYNAYA, KUBANSKAYA, SUBROVKA [sic], STOLICHNAYA, RUSSKAYA [in the Cyrillic alphabet], OKHOTNICHYA/PERTSOVKA, MOSKOVSKAYA, LIMONNAYA [in the Cyrillic alphabet], KREPKAYA, STOLOVAYA, SIBIRSKAYA, BALTIYSKAYA, KRISTAL, and SPI in accordance with State Customs Declaration Nos. 10205030/040202/0003034, 10205030/140202/0004179, 10205030/140202/0004180, and 10205030/140202/0004181 (four documents, in total) from the customs territory of the Russian Federation on the basis of the absence and non-submittal of the licensing agreement with the Ministry of Agricultural Products of Russia.

The present ruling may be appealed within the term of 10 days to the Kaliningrad Regional Court through the Leningrad District Court of the City of Kaliningrad.

[rubber-stamped seal with emblem of the Russian Federation :]

Leningrad District Court of the City of Kaliningrad

[Document 5]

[script in English]

[rubber stamp:] COPY

RULING

March 21, 2002

The Leninsk-Kuznetsk City Court represented by:
the Chief Judge E. Yu. Erokhina,
and the Court Clerk Naydenova,

has considered, for the purposes of pre-trial preparation, a petition from Galina Leonidovna Naumova as to the implementation of measures for the securing of the claims submitted in the complaint, and

HAS DETERMINED:

That Galina Leonidovna Naumova, a shareholder of the joint stock company of the closed type ZAO Sojuzplodimport, requests that the actions of the Patents and Trademarks Agency of Russia in the process of the re-registration of the rights to seventeen trademarks from ZAO Sojuzplodimport to the Russian Federation, represented by the Ministry of Agriculture of the Russian Federation, are to be deemed by the court to be illegal, and that the Patents and Trademarks Agency of Russia is to be obligated to reinstate ZAO Sojuzplodimport as the owner of the disputed trademarks, on the grounds of the violation of its rights and legal interests as a shareholder due to the actions of the Patents and Trademarks Agency of Russia that led to the change in the name of the owner of the trademarks in the register, as a result of which ZAO Sojuzplodimport and, therefore, the shareholders, suffered financial losses.

The court is of the opinion that the petition is to be granted due to the fact that a lack of implementation of measures for the securing of the demands would make it difficult or impossible to implement a decision by the court due to the following circumstances.

A failure to implement measures for the securing of the demands would enable the Ministry of Agriculture of the Russian Federation to exercise ownership rights and enable Rospatent to carry out registration activities with respect to the disputed trademarks. All of this may lead to future multiple changes of owners of the trademarks as a result of their alienation and to burdening them with the making of the licensing agreements and carrying out of other activities.

In accordance with Articles 133, 134, and 136 of the Code of Civil Procedure of the Russian Soviet Federated Socialist Republic, the court

HAS RULED:

I. To prohibit the Ministry of Agriculture of the Russian Federation from exercising the rights of an owner, that is, the rights to own, use, and dispose, with respect to the following trademarks:

1. Starka (label), Registration Certificate No. 38384 of 10/10/69, with a priority date of 3/12/69.

2. Yubileynaya [in the Latin alphabet] (label), Registration Certificate No. 38385 of 10/10/69, with a priority date of 3/12/69.

3. Kubanskaya [in the Latin alphabet] (label), Registration Certificate No. 38386 of 10/10/69, with a priority date of 3/12/69.

4. Zubrovka [in the Latin alphabet] (label), Registration Certificate No. 38387 of 10/10/69, with a priority date of 3/12/69.

5. Stolichnaya [in the Latin alphabet] (label), Registration Certificate No. 38388 of 10/10/69, with a priority date of 3/12/69.

6. Russkaya (label), Registration Certificate No. 38389 of 10/10/69, with a priority date of 3/12/69.

7. Okhotnichya [in the Latin alphabet] (label), Registration Certificate No. 38391 of 10/10/69, with a priority date of 3/12/69.

8. Pertsovka [in the Latin alphabet] (label), Registration Certificate No. 39231 of 2/12/70, with a priority date of 3/12/69.

9. Moskovskaya [in the Latin alphabet] (label), Registration Certificate No. 38237 of 9/9/69, with a priority date of 3/12/69.

10. Limonnaya (label), Registration Certificate No. 39232 of 2/12/70, with a priority date of 3/12/69.

11. Krepkaya (label), Registration Certificate No. 40207 of 8/15/70, with a priority date of 9/23/69.

12. Stolovaya [in the Latin alphabet] (label), Registration Certificate No. 40208 of 8/15/70, with a priority date of 9/23/69.

13. Sibirskaya [in the Latin alphabet] (label), Registration Certificate No. 68655 of 7/29/81, with a priority date of 3/4/81.

14. Baltiyskaya [in the Latin alphabet] (label), Registration Certificate No. 38390 of 10/10/69, with a priority date of 3/12/69.

15. Kristal [in the Latin alphabet] (word), Registration Certificate No. 49140 of 3/13/74, with a priority date of 9/3/73.

16. Soviet Sparkling [in the Latin alphabet] (label), Registration Certificate No. 38383 of 10/10/69, with a priority date of 3/12/69.

17. SPI (graphic), Registration Certificate No. 34475 of 12/23/67, with a priority date of 2/17/67.

II. To prohibit the Ministry of Agriculture of the Russian Federation from preventing the exercise by ZAO Sojuzplodoimport of the rights of an owner, that is, the rights to own, use, and dispose, with respect to the following trademarks, until the termination of the proceedings in the case:

1. Starka [in the Latin alphabet] (label), Registration Certificate No. 38384 of 10/10/69, with a priority date of 3/12/69.