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CABO DISTRIB. CO. v. BRADY

July 22, 1992

CABO DISTRIBUTING CO., INC. and BLACK DEATH USA, Plaintiffs,
v.
NICOLAS BRADY, et al., Defendants.



The opinion of the court was delivered by: D. LOWELL JENSEN

 On July 10, 1992, the Court issued a preliminary injunction in this case in the form of a brief written order. The Court now issues this opinion to more fully explain the basis for the preliminary injunction.

 BACKGROUND

 This is an action over the right to sell vodka in the United States under the "Black Death Vodka" label. Plaintiff Black Death USA is a California corporation which owns all rights to "Black Death Vodka," and plaintiff Cabo Distributing Company, Inc. ("Cabo") is a California corporation which imports and distributes the vodka. See Declaration of Federico Cabo, PP 1, 3 [hereinafter "Cabo Declaration"]. Defendants are the United States Department of the Treasury, the Bureau of Alcohol, Tobacco and Firearms ("BATF" or "Bureau"), and several officials of those agencies.

 A. Development of "Black Death Vodka"

 "Black Death Vodka" is an 81% proof vodka made from beet neutral spirits. See Letter from Jerry Bowerman to Ann Morse, dated July 24, 1989 (Exhibit A to Cabo Declaration) (describing the vodka's chemical composition). This vodka was originally made by the Sigurdsson family of Iceland in the early 1900's. See Cabo Declaration, P 5. The name "Black Death" apparently is a translation of a colloquial name for vodka used in Iceland and Scandinavia and does not refer to the plague which ravaged Europe from 1347 into the Nineteenth Century. *fn1" Id. PP 5-6. According to one of the declarations submitted to the Court, the name developed during Iceland's prohibition era. When people would drink excessive quantities of bootleg vodka, they would sometimes fall in the street and lay there in a drunken stupor. Remaining there for hours or days, these persons would appear to be dead to passersby. The name "black death" was used to describe the bootleg distilled spirits which caused this condition. See Declaration of Terry Cates, P 10 [hereinafter "Cates Declaration"] (recounting explanation told to him by Thomas Lines of Black Death USA).

 The Sigurdsson family recipe emerged from the shadows of Icelandic anonymity in 1975 when Valgier Tomas Sigurdsson moved to Europe. Cabo Declaration, P 6. There, he began to produce "Black Death Schnapps" in 1985 and "Black Death Vodka" in 1986. *fn2" Id. Winning several international awards for quality, Sigurdsson was selling "Black Death Vodka" in over forty countries within a few years. Id. PP 6-7. In every country where it is sold, the "Black Death" label is used. Id. P 7.

 In 1989, Cabo acquired the right to import "Black Death Vodka" into the United States. Id. P 8. Pursuant to federal law, Cabo applied to the BATF for approval of the label. Three applications were submitted to the BATF: one for labels on single liter bottles, one for labels on 750 milliliter bottles, and one for labels on 50 milliliter bottles. See id.; Applications for and Certification/Exemption of Label/Bottle Approval ("COLA's"), submitted July 20, 1989 (Exhibits B-D to Cabo Declaration). After reviewing these applications, the BATF approved the "Black Death" labels on June 24, 1989. *fn3" Id.

 All of the labels are substantially the same. On the front of the bottle, the words "Black Death Vodka" appear in large type around a grinning skull wearing a top hat. *fn4" On the rear of the bottle, there is a mandatory government warning regarding the dangers of alcohol consumption and the statement "Don't Drink and Drive." See id.

 Once the labels were approved, Cabo Distributing Co. began to promote and market the vodka in the United States. Between July 1, 1989 and April 1, 1992, Cabo spent over $ 1 million promoting and marketing the vodka. *fn5" Id. PP 11-12. In this promotional campaign, Cabo apparently targeted young alcohol drinkers by using such techniques as selling bottles in miniature coffins and promoting the vodka with slogans such as "Drink in Peace." See Letter from United States Surgeon General Antonio Novello to William Earle at BATF, dated July 2, 1992 (attached to Exhibit G to Declaration of George G. Weickhardt); Wall Street J., Apr. 3, 1992, at B1 ("Lines [at Black Death USA] agrees that the vodka has a youthful target market"). In addition, Cabo hired Saul Hudson, also known as "Slash" in his role as the lead guitarist of the musical ensemble "Guns 'n Roses," to promote "Black Death Vodka." See Cabo Declaration, P 12. These marketing efforts were successful, and by the beginning of 1992, the spirits were being distributed by Cabo in California, Illinois, Pennsylvania, Maryland, Florida, New Jersey, and New Mexico. *fn6" See Cabo Declaration, P 11.

 On April 1, 1992, plaintiff Black Death USA was incorporated for the purpose of purchasing the rights to "Black Death Vodka" from V. T. Sigurdsson. Sigurdsson agreed to sell the rights to the vodka for approximately $ 3.3 million, of which $ 550,000 in cash was paid in April and $ 2.75 million was guaranteed in royalties. See Cabo Declaration, P 12. Although a copy of the agreement has not been submitted to the Court, plaintiffs assert that the royalty payments are guaranteed regardless of how much vodka is sold. Id. Plaintiffs assert that this purchasing decision, as well as the money invested in the advertising campaign, was made in reliance on the BATF's approval of the "Black Death" labels. Id. P 11.

 B. Revocation of the "Black Death" Label

 In early 1992, plaintiffs' advertising campaign began to lead members of the health care community to believe that "Black Death Vodka" was improperly encouraging alcohol abuse on the part of young people. Among others, the United States Surgeon General, Antonia Novello, made statements on the "Today Show" in which she criticized plaintiffs' decision to market the vodka to young people. See Wall Street J., Apr. 3, 1992, at B1 (Exhibit J to Cabo Declaration). Sometime following the initiation of the advertising campaign and the criticism of "Black Death Vodka," the BATF decided to reexamine its approval of the label. See Cates Declaration, P 12 (". . . while we were looking at the label in and of itself, we were aware of the publicity surrounding the product, and this may have played a role in our decision to take a second look at the label."). Terry Cates, who is Chief of the Industry Compliance Division of the Bureau, was quoted in the Wall Street Journal as stating that "had we known the direction of the point-of-sale advertising was going to take, I submit we wouldn't have approved [the label]." *fn7" Wall Street J., Apr. 3, 1992, at B3.

 Cates stated that the labels violated the regulations in two ways. First, he stated that the reference to the Black Death, which was "a plague which killed millions of people," combined with the skull image, created an impression "that the product is inherently unsafe for human consumption at any level." See Letter from Terry Cates to Federico Cabo, dated Apr. 1, 1992, at 2 (Exhibit G to Cabo Declaration) [hereinafter "April 1 Letter"].

 Second, Cates stated that the label "mocks the real health risks which may result from the consumption of alcohol by making an obviously false claim about the dangers of alcohol consumption." Id. This parody had the "overall effect" of undermining the effect of the Surgeon General's warning on the label of the vodka. Id.

 The Bureau stated that its decision to revoke approval of the label was based on its authority pursuant to the Federal Alcohol Administration Act ("FAA Act"), 27 U.S.C. § 205(e). This statute authorizes the BATF to promulgate regulations of alcoholic beverage labels which will "prohibit deception of the consumer." The BATF's regulations require the Bureau to reject labels which "convey[] erroneous impressions as to the age, origin, identity, or other characteristics of the product." 27 C.F.R. § 5.34(a).

 Plaintiffs arranged to meet with the government regulators in Washington, D.C. on April 7, 1992. At this meeting, plaintiffs were represented by Federico Cabo, Thomas Lines, and James Cooper, who are all shareholders and directors of Black Death USA, and George Weickhardt, their attorney. The Bureau was represented by Terry Cates, John J. Manfreda, who is the Associate General Counsel of the BATF, defendant Candace Moberly, who is the Chief of the Bureau's Product Compliance Branch, and others.

 In their discussion of the April 1 letter, the Bureau officials stood by their reasoning that the "Black Death" label was misleading. They stated that they had made this decision without reference to any consumer survey, but rather on the basis of their administrative expertise in determining whether a label is misleading on its face. See Cates Declaration, PP 8-9; Cabo Declaration, P 16. Plaintiffs stated that they believed the Bureau was not justified in revoking approval of the labels and that they wanted more time to respond to the letter. Cates Declaration, P 7. The Bureau agreed to postpone their revocation of the labels until June 11, 1992 in order to give plaintiffs time "to provide written arguments and evidence to show that the [label approvals] should not be cancelled"; this extension was confirmed in an April 8 letter. See id. P 13; Letter from Terry Cates to Federico Cabo, dated April 8, 1992 (Exhibit J to Cabo Declaration).

 The parties met a second time on April 30 to discuss revocation of the label approval. At this meeting, plaintiffs were represented by Cabo and Lines and the Bureau was represented by Cates, Moberly, and a Bureau staff attorney. According to the Bureau, plaintiffs approached this meeting with an eye to negotiating a settlement of the dispute rather than setting up litigation. See Cates Declaration, P 14 ("At the outset of this meeting, Mr. Lines noted that they had not brought their counsel to this meeting, and that they hoped that this matter could be resolved without resorting to expensive and time-consuming litigation."); see also Cabo Declaration, PP 18-19 (outlining suggested compromises offered by plaintiffs).

 Plaintiffs offered to do three things to correct any misconceptions created by the "Black Death" label. First, they offered to put a qualifying statement on the back of the bottles explaining that "Black Death Vodka" was not associated with the bubonic plague and which would encourage consumers not to drink and drive. See Cabo Declaration, P 18; Exhibit K to Cabo Declaration (text of proposed statement). Second, they offered to include a warning against alcohol abuse and underage drinking in future advertising. See Cabo Declaration, P 19; Exhibit L to Cabo Declaration (text of proposed statement). Third, they offered to distribute copies of "Black Death's Survival Guide" to "social hosts and hospitality professionals." This pamphlet would provide information about the health effects of alcohol abuse and make suggestions about how to identify underage drinkers. See Cabo Declaration, P 19; Exhibit M to Cabo Declaration (draft of the pamphlet).

 The Bureau officials rejected these offers. According to Cates, plaintiffs were told that such efforts would be laudable in and of themselves but would be insufficient to overcome the negative impressions created by the label. See Cates Declaration, P 15. The Bureau claims that its decision was not yet final at this point, however, and that they would continue to consider offers from plaintiffs. Id. P 16. A temporary license was issued by the Bureau in order to permit plaintiffs to sell off existing stocks of vodka bottled under the "Black Death" label; plaintiffs were given until September 11, 1992 to do so. See Cabo Declaration, PP 20, 24; Exhibits S-T to Cabo Declaration (temporary permits); Declaration of Candace Moberly, PP 16-19 [hereinafter "Moberly Declaration"].

 Plaintiffs present a different account of this meeting. They state that Cates rejected these offers out of hand, and told them that "Whatever you say doesn't make any difference to me. Your label is dead. I have already decided to cancel it." See Cabo Declaration, P 20. Plaintiffs also claim that Cates told them that the Bureau had already made its final decision on the labels and that further papers would be futile. Id. Cates allegedly also backed off the Bureau's claim that consumers would believe that the vodka was associated with the bubonic plague, and stated that the Bureau's problem with the label focused around the word "death." Id. at 20, 23.

 Once the Bureau had rejected the offer of corrective labeling and advertising, the parties began to discuss alternative names for the product. See Cates Declaration, P 17 (stating that plaintiffs "expressed willingness to consider changing the brand name"); Moberly Declaration, P 7 (same). Plaintiffs stress in their papers that they only began to suggest alternative names when it became clear that the BATF would not permit them to continue using the name "Black Death Vodka." See Second Declaration of Thomas Lines, P 6 [hereinafter "Second Lines Declaration"]. Plaintiffs suggested that the name "Black Hat" could be used. See Moberly Declaration, P 7. When the Bureau received applications for labels under that name on May 7, 1992, they were approved the next day. Moberly Declaration, PP 9-10; Applications for and Certification/Exemption of Label/Bottle Approval, dated May 8, 1992 (Exhibits P-Q to Cabo Declaration).

 Plaintiffs claim that this entire process violated their rights to procedural due process. They claim that the BATF made its decision without receiving any input from them, before both the April 1 letter and the April 30 meeting. This early regulatory decision came in spite of the fact that plaintiffs claim that they never waived any of their rights to the name "Black Death." See Cabo Declaration, P 23; Second Lines Declaration, P 6.

 The Bureau apparently believed, on the other hand, that the parties had settled the dispute in the April 30, 1992 meeting. This is reflected in statements by Candace Moberly, see Moberly Declaration, PP 11, 13, the expedited approval of the "Black Hat" label, see id. PP 8-11, and plaintiffs' failure to actually submit anything in writing contesting the cancellation of the label prior to June 11, 1992. *fn8" On June 17, 1992, the BATF formally notified plaintiffs that the 1989 "Black Death Vodka" label approvals had been cancelled. ...


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