Was Stoli Stolen?

                  

Was Stoli Stolen? Unraveling the trademark mystery behind Stolichnaya Vodka By Bernice Yeung. Freelance writer Irina Slutsky assisted in reporting and translating. California Lawyer Magazine  Russians love vodka. A lot. In fact, it's so beloved that there's a word, zapoi, devoted to its overuse. it means "binge" or "hard-drinking," a useful word in a country that annually consumes an estimated 4 billion liters of vodka-or about 35 bottles a year for every person in the country. A little more than a decade ago the Russian government enjoyed a monopoly on the product. That ended with the privatization reforms of President Boris Yeltsin, a vodka lover himself. Since the reforms, the country's most popular brands, including Stolichnaya, known as Stoli, have ended up in the hands of an elusive Russian entrepreneur, Yuri Shefler. Shefler controls the global trademark rights to Stoli and other leading varieties. He also happens to be wanted by the Russian government for allegedly threatening to dismember a government official.

The Russian Federation is now involved in a protracted battle to reclaim the Stolichnaya mark, which may be worth a billion dollars. Last year the Russian government hired Quinn Emanuel Urquhart Oliver & Hedges of Los Angeles, one of the country's foremost litigation firms, to sue Shefler and his company, Spirits International, a Curaçao-based subdivision of a Swiss company Shefler also controls. The firm filed suit in federal court in New York's Southern District, claiming Shefler stole the Stoli trademarks from the Russian people during the country's shift to a market economy. The district court will have to wade through complicated legal arguments, Russian politics, and allegations of violence and extortion to determine whether Stoli was stolen and, if so, who stole from whom. Shefler, in turn, has hired his own heavy-hitting law firm, Covington & Burling. Perhaps more important, he has enlisted the talents of the influential lobbying law firm of Greenberg Traurig, whose message-that its client is the latest victim of the Russian government's efforts to renationalize the country's most profitable industries-has won Shefler valuable allies in the White House and Congress. For all of his high-powered political maneuvering, Shef- ler has arranged to keep a low profile. He has avoided the media and instructed his attorneys not to talk about the case. David Quinto, one of the Quinn Emanuel partners working on the case, says he does not know where Shefler is. And the head of the Russian spirits industry association insists that he doesn't even know what Shefler looks like. But one thing is certain: In the mid-'90s, when Yuri Shefler saw an opportunity to take control of the leading vodka brands, he was very available. Stolichnaya, which translates as "of the capitol," is made from filtered winter wheat and glacial water, and it has been a respected vodka since it was first distilled in Moscow in 1953. Four years after it was introduced to the United States in 1969, PepsiCo acquired the American distribution rights in exchange for providing cola syrup to the Soviets. Pepsi's marketing mavens-who began hawking the vodka as the easier-to-pronounce "Stoli"-turned it into a top-shelf brand and a martini favorite. Russian government control of the brand slipped away when former prime minister Boris Yeltsin pushed for "shock therapy" for the Russian economy, including privatization of government-run industries, despite claims by critics that proper legal and government systems had not yet been put in place. The privatization process jokingly became known as prikhvatizatsiya, which sounds like "privatization" but means "grabfest." Some government industries were overtaken by shrewd oligarchs, whereas others fell into the hands of criminals with Russian mob ties, exacerbating the growing divide between the rich and poor that still plagues Russia today. It was during this time that Stolichnaya and other liquor trademarks were transferred from a state-run import-export company called Sojuzplodoimport to a new company with the same name (which later, confusingly, became a company with a very similar name). And this is where the dispute over the ownership of Stolichnaya vodka begins. According to an investigation by the Russian government launched in 2000, the head of Sojuzplodoimport, a man named Evgeniy Sorochkin, attempted to pilfer the Stolichnaya marks by using forged government documents to transfer the marks to a private company-supposedly Sojuzplodoimport's successor-that he created in 1992. A few years later, the government claims, Shefler snatched the Stolichnaya mark and dozens of other marks from Sorochkin by transferring them to a series of shell companies that Shefler controlled. In the end, the Russian government insists, Shefler "sold" the trademarks-valued at about $400 million at the time-for a mere $300,000 to another company he ran. In 2001 American distribution rights were transferred from PepsiCo to Allied Domecq, which is also a named defendant in the American trademark suit. The Russian government took Shef-ler to court in Russia over the rights to Stolichnaya, and at the end of a two-year legal battle the Russian high court returned the marks to the government. In 2002 the Russian Federation began producing its own state-sanctioned version, which now owns a 1 percent share of Russia's domestic market. With about 5,000 brands of vodka, Stoli is still popular in Russia according to Valery Levin, head of the state-run company that produces it. (He adds that the most popular brand, Putinka-named in honor of President Vladimir Putin-has a 3 percent share of the market.) But Russia's Stolichnaya can only be found in Russia. The country's high court decision has had no impact on who controls the mark abroad, where Shefler is regarded as the legal owner. To reclaim worldwide ownership of the mark, the government must challenge Shefler or Spirits International in each country that sells it. It has already sued in a handful of them, including the United States, the Netherlands, Brazil, and Australia. Stoli's biggest market is the United States, where it is supposedly the second most popular vodka brand. So it's here that Shefler's Stolichnaya will be most vigorously challenged and defended. According to the biography on Spirits International's website, Shefler was born in 1967 in Orel, Russia, an industrial city southwest of Moscow located on the Oka River. Though he studied at agricultural and engineering trade schools, his talents clearly lay in business. As a young entrepreneur he helped start Sadko Arkada, an exclusive shopping and entertainment complex in Moscow, before joining the company's board of directors. He eventually sold his shares to a Swiss company, which helped him amass his fortune. Soon afterward he took on a new post as chairman of the board of Vnukovski Airlines in 1995. Over the years, Shefler developed financial interests in both real estate and a television station, while participating in Russia's Union of Right Forces Party, a procapitalist organization. Shefler is perhaps best known for founding Spirits International, a massive alcoholic-beverage exporting firm based in the Caribbean. The company reportedly does about $700 million of business a year, and its ventures range from finance to retail and wholesale operations. But it's the management of dozens of Russian vodka trademarks-which allows it to produce and export millions of liters of vodka each year-that generates much of Spirit International's revenue. The Stolichnaya label is an important part of its portfolio, reportedly accounting for an estimated 80 percent of Spirits International's vodka dealings. Although there's disagreement about exactly how Shefler obtained the Stolichnaya trademarks from Sorochkin, the minutes to a Moscow shareholder meeting obtained by Quinn Emanuel's Quinto reveal that Shefler took control of import-export company Sojuzplodoimport in 1997. Most of the items on the meeting's agenda seemed mundane, but toward the end of the meeting, Shefler, a relatively new shareholder, called for the recall of the company's board members, followed by the selection of a new president. "We, the shareholders, have no exact data of the company financial situation," Shefler said, according to the meeting minutes. "Staff change suggested by us is conducted exclusively and only for the purposes of increasing the efficiency of the company operation and it will enable us to restore the destroyed relations between the company and each of its shareholders." A new panel of directors was chosen, and Shefler was swiftly selected as the new president, ousting Sorochkin by winning nearly 98 percent of the vote. The Russian government believes that this was no coincidence. The Russian Federation alleges in its investigation and in court documents filed in a Netherlands case that, months before the vote, various small shareholders of the company-ranging from primarily small and unsophisticated agricultural co-ops to a major vodka distillery-were supposedly compelled to relinquish their voting rights to proxies, which Shefler then obtained. "Shefler is rumored to have acquired the shares (and proxies) through threats and violence," according to one of the Netherlands court documents. A few months after he took the helm of Sojuzplodoimport in 1997, Shefler supposedly oversaw the incorporation of two companies. This Russian joint venture was called Sojuzplodimport (spelled like the original vodka import-export company, except for lacking the third letter o). Shefler's brother-in-law headed the newly formed Sojuzplodimport. A codefendant in the American lawsuit, Alexey Oliynik, also took a leadership position within the organization. In December 1997 Sojuzplodoimport (the original company) sold the Stolichnaya marks and the marks of 16 additional vodka brands to Sojuzplodimport (the new joint venture) for $300,000. In 1999 the latter company then sold the rights for Stolichnaya to Spirits International, the alcohol-export outfit founded and controlled by Shefler, for an undisclosed amount. By 2002 the Russian government charged Shefler with threatening to dismember a government official who was running the new state agency overseeing vodka exports. The government put out a warrant for Shefler's arrest. After the charge was leveled, the company said Russian investigators barged into the Moscow offices of Spirits International in December 2002 and ordered the employees to lie on the ground as investigators sifted through safes and bookcases, confiscating accounting ledgers and computer disks. Just hours earlier, agents had broken down the apartment door of the company's general director and combed through documents stored there. In both searches the government says it was looking for incriminating evidence related to the alleged death threat. Spirits International, meanwhile, decried the raids as a government campaign to harass and discredit Shefler and the company. On its website it said, "The search has once more confirmed the absence of 'rule of lawfulness' in Russia." The Russian Federation, however, seems to think that Shefler's alleged threat fits into a pattern of behavior. According to the complaint filed in New York's Southern District, associates and competitors of Shefler died under shady circumstances. Without specifically alleging that Shefler committed murder, the Quinn Emanuel complaint lists a series of suspicious events, such as the August 2002 murder of a Russian vodka entrepreneur and Sojuzplodoimport shareholder who sued Shefler to prevent the vodka magnate from transferring the Stolichnaya mark from one company to the other. In one of his rare interviews with the Russian press, Shefler was nonchalant about the allegations against him. "I hide from no one, and I have no intention of hiding," he said. In the past few months, David Quinto has traveled to Russia twice to search for witnesses and legal documents, which are not part of the public record in Russia. Still, he's been able to hunt down a number of documents-minutes from shareholders meetings of the various incarnations of Sojuzplodoimport, contracts between the company and its American distributors, the alleged forged letters that Sorochkin created, and some bogus balance sheets that had supposedly been doctored by Sorochkin. Quinto believes these papers will help him prove that the Stolichnaya mark has belonged to the Russian Federation all along. But to recover worldwide ownership of it, he and the Russian government still face an uphill battle. Unable to ship its version of Stolichnaya vodka outside the country because of the trademark dispute, a distillery aligned with the government has tried to register the mark "Stolnaya" in various countries, conceivably, Spirits International says, as a way to export the prized product under a similar brand name. The Russian government has also registered the Stolichnaya mark with the World Intellectual Property Organization in the hope that trademark offices around the world will recognize Russia as the official owner of the mark. But so far at least a half dozen countries have declined to shift the ownership to Russia. The Russian government has also filed lawsuits in several countries, though it has focused most of its litigation energy on cases in the Netherlands and the United States, the outcome of which may affect its litigation strategy elsewhere. "The United States case is of massive significance," says Chris Brook-Carter of just-drinks.com, an England-based international spirits industry website. "Stoli is a global brand of great importance. Russia is one of the world's most important producer markets, and the U.S. is the world's most profitable spirits market." In the end, the Russian government's most convincing legal argument may focus on relatively mundane matters and not the allegations of Shefler's fraud. In its filings, the government asserts that the defendants have engaged in false advertising and unfair competition because they advertise Stolichnaya as "Russian Vodka," and a "Product of Russia" when the vodka is allegedly produced in Latvia. Spirits International says its vodka is distilled in Russia, although the Russian government disputes that claim. But both the alleged graft and the Latvian connection are irrelevant, according to a motion to dismiss filed by the Washington, D.C., office of Kenyon & Kenyon, which represents the American distributor, Allied Domecq. "While the ownership and control of the foreign trademarks and certain contractual reversionary rights may be difficult at times to ascertain, the ownership chain of the United States Stolichnaya trademark is clear," the motion states. American legal experts agree. "The Russian government is going to have to overcome that title of record to prove that in 1997 there was a fraudulent transfer of the trademark," says J. Thomas McCarthy, a law professor and the founding director of the University of San Francisco's McCarthy Institute for Intellectual Property & Technology Law. "It's going to be difficult, if not impossible." In addition to a formidable legal defense, Shefler and his representatives have exploited the current chill between the American and Russian governments. In recent years the United States has criticized the Putin administration's campaign to return the country's largest industries to state control while selectively pursuing and punishing certain oligarchs, like the imprisoned Mikhail Khodorkovsky of Yukos Oil. With this tension as a backdrop, Shefler's defenders have argued that he is yet another victim of Putin's renationalization efforts. In 2002 Shefler hired the lobbying law firm of Greenberg Traurig. A few months later Richard Edlin, a partner at the firm, testified before the U.S. Subcommittee on Trade of the House Committee on Ways and Means on behalf of his client. "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," Edlin said. "We ask: By what right?" Edlin concluded by arguing that the vodka dispute could have some international trade consequences: "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." Soon after Edlin's testimony a number of mostly Republican senators sent a letter to then-U.S. Trade Representative Robert Zoellick warning that the Stolichnaya conflict casts "significant doubts on Russia's ability to become a reliable member of the international economic community." In July 2004 Congressman Tom Lantos (D-Calif.) continued to express concern about the ongoing Stolichnaya dispute in a speech on the House floor. According to the Russian press, the issue has even been raised during private conversations between Putin and President Bush. Meanwhile, the case is more than a year away from trial, if it even gets that far. In its motion to dismiss, Allied Domecq argues that it has uncontested rights to the brand in the United States and that it has had no role in the alleged theft of the trademarks. Shefler and his attorneys haven't yet filed a response with the American courts, and they've been unsurprisingly tight-lipped about the lawsuit. One of Shefler's attorneys, Oscar Garibaldi, a Covington & Burling partner, says that the multimillionaire vodka tycoon is living in Geneva and has not yet decided on a media strategy. He also was not interested in speaking publicly about the case. And though Garibaldi has generally denied the allegations against his client, he said he had been instructed not to comment directly on the suit. But Garibaldi did agree to reveal one key piece of information about the mysterious Yuri Shefler: He does occasionally enjoy a glass of his own top-flight Stolichnaya Elit, and he likes to mix it with a little champagne. Bernice Yeung is an associate editor at California Lawyer. Freelance writer Irina Slutsky assisted in the reporting and translating.

Comments

[Alex B.]

I have not read all your of yoru book. But you should really get some things clear.

Russias government is corrupt. Right now Putin is putting all the same old communists back to office. They dont want soyuzplodimport for the sake of helping its own people.

Just some person in Moscow or now St. Petersburg will end up with the money in his/her pocket.

Therefore, Mr. Shefler did everything right. He did the same thing everybody else did. (or at least, the smart ones at the right time and place).

All i want to say is that legally its LEGAL what yuri did. And putin can go fuck himself for he is a little chicken.

And by the way, were you ever thinking about the lifes of the people that work for Mr. Shefler? They are ordinary people and you put their lifes at risk by publishing highly critical information.

I, myself, find that you should either take the side of Mr. Shefler, whose side by the way the good one is, or devote your time to something lets say more interesting.

Free trade not back to communism?

Have you ever been to Russia? Have you lived during in Russia in in the 60s,70s,80s? Well, let me tell you that Vladimir Putin and his government are as bad as it gets.

Please reply to me so maybe I can give you more insight.

[irina slutsky]

hi alex, pls leave me another comment again after you have "read all of my book" (by that i mean, my blog) and you will get many answers to your questions! thanks for reading... irina

[Alex]

Seems like S.P.I. has won the case against Soyuzplodoimport! The decision was made suprisingly quickly given the Judge is known accuracy.

Either way. Our way. The Stoli Way. The Russian Way.

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