WTO Rules on Cuban Rum Controversy
 
October 22, 2001
 

On August 6, 2001, a panel of the World Trade Organization (WTO) decided that a United States law violates international intellectual property rules.

The WTO panel was convened to help resolve a dispute over the use of the "Havana Club" rum trademark. Bermuda-based Bacardi Ltd. and French Pernod Ricard S.A., in a joint venture with a Cuban state liquor firm, both have been using the Havana Club name to market their rum. Bacardi has sold a small amount of Havana Club rum in the United States, while Pernod sold 1.4 million cases of Havana Club in over 80 countries (and has registered the brand in 100 others) last year alone.

The dispute before the WTO panel stems directly from the U.S. law known as Section 211 of Congress' Omnibus Appropriations Act of 1998. Section 211 effectively denies access to U.S. courts to Cuban corporations seeking to protect their registered trademarks. The WTO panel found that the U.S. law is inconsistent with the WTO's convention on Trade Related Aspects of Intellectual Property (TRIPS).

The Havana Club story began in the 1930s when the Arechabala family began distilling Havana Club rum in Havana. In 1960, soon after Castro ousted Batista, the Cuban government expropriated the Arechabala distillery and formed the government-controlled entity named Cubaexport to continue production of the rum under the same name. Meanwhile, the Arechabala family moved to the United States and allowed U.S. registration of the Havana Club trademark to lapse.

In 1976, Cubaexport registered the Havana Club trademark in the U.S. Cubaexport and Pernod Recard later formed a joint holding company-Havana Club International (HCI)-and assigned to it the use of the trademark. In 1995, however, wine and spirits producer Galleon began manufacturing rum in the Bahamas under the Havana Club trademark. Bacardi acquired Galleon and later bought from the Arechabala family any remaining rights the family had in the Havana Club trademark and the goodwill of the business.

Then in 1997, HCI filed suit against Bacardi, alleging that Bacardi's sale of rum in the U.S. under the Havana Club name violated HCI's rights pursuant to its U.S. registration of the Havana Club trademark. At Bacardi's request, Florida's senators urged the passage of the spending bill known as Section 211. The bill prohibits U.S. courts from upholding trademarks used in connection with a business or assets that the Castro government confiscated, unless the original owner of the trademark expressly consented. Last year the Second Circuit Court of Appeals, applied Section 211 to deny HCI the right to bring its trademark suit in any U.S. court.

Contemporaneously, the European Communities (E.C.) requested that the WTO consider the validity of Section 211 in light of TRIPS, of which both the E.C. and the U.S. are members. TRIPS requires that members of the agreement make available civil judicial procedures concerning the enforcement of intellectual property rights covered by the agreement.

The WTO panel found that Section 211 violates this aspect of TRIPS by failing to provide to certain Cuban trademark holders judicial recourse in U.S. courts. The panel recommended that the United States bring its laws into conformity with its obligations under the TRIPS agreement. The panel's decision is not final, but if the WTO's appellate body were to backed the decision, the U.S. would be bound by that decision.

This ruling is significant for several reasons. First, hundreds of United States companies have registered their trademark names in Cuba, where Castro has threatened not to recognize U.S. trademarks if the U.S. fails to acknowledge Cuban trademarks.

Second, the United States has invoked the TRIPS agreement in order to protect its pharmaceutical industry against generic medicines produced more cheaply in developing countries without any trademark licensing agreement. Failure to comply with TRIPS in this instance could threaten the harmonization of international trademark rules. This has the potential to affect all of U.S. industry since the protection of U.S. trademarks abroad results in greater profits for U.S. companies.

Third, the U.S. has acknowledged that the WTO dispute resolution process is effective since members know there will be consequences-such as trade sanctions-if they violate WTO commitments. If the United States failed to comply with WTO rulings, it would not only reduce U.S. credibility, but also weaken the WTO dispute resolution system.

Finally, both Pernod and Bacardi now must determine how to respond to the WTO panel's ruling. For the beverage alcohol industry, the ruling serves as a reminder that certain aspects of the industry increasingly will be governed by rules beyond state and federal jurisdiction.

Upcoming WTO negotiations under the TRIPS agreement also will be important to wine and spirits manufacturers. A dispute continues over the legal authority of a planned international register of geographical names for wine and spirits like "Champagne" and "Scotch." WTO delegates will debate whether the register should be simply informative or whether the use of such names should receive legal protection. "New world" wine producers in the U.S., Australia and New Zealand would like the register to be informative, while the European Union wants full legal protection for regional names. If current discussions do not resolve the issue, it may be discussed at the next WTO summit in November 2002.