Cabo Distributing Co., Inc. v. Brady

• Decision Date: 22 October 1992
• Docket Number: No. C-92-2591 DLJ.,C-92-2591 DLJ.
• Citation: 821 F. Supp. 601
• Court: U.S. District Court — Northern District of California
• Parties: CABO DISTRIBUTING CO., INC. and Black Death USA, Plaintiffs, v. Nicolas BRADY, et al., Defendants.

821 F. Supp. 601

CABO DISTRIBUTING CO., INC. and Black Death USA, Plaintiffs, v. Nicolas BRADY, et al., Defendants.

No. C-92-2591 DLJ.

United States District Court, N.D. California.

October 22, 1992.

COPYRIGHT MATERIAL OMITTED

George G. Weickhardt of Adams, Duque & Hazeltine, San Francisco, CA, for plaintiffs.

Peter Modlin, U.S. Dept. of Justice, Washington, DC, for defendants.

ORDER

JENSEN, District Judge.

On September 18, 1992, the Court heard plaintiffs' motion for summary judgment and defendants' motion to dismiss or, in the alternative, for summary judgment. At the hearing, George G. Weickhardt of Adams, Duque & Hazeltine appeared for plaintiffs and Peter Modlin of the Department of Justice appeared for defendants. Having considered the papers submitted and the arguments of counsel, the Court GRANTS plaintiffs' motion for summary judgment and DENIES defendants' motion to dismiss or for summary judgment for the following reasons.

BACKGROUND

The facts of this case are complex and have been described in detail in this Court's order dated July 22, 1992, 821 F.Supp. 582, setting forth the basis of the preliminary injunction it entered on July 10, 1992. Much of the factual background is repeated here for completeness.

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

A. Development of "Black Death Vodka".

"Black Death Vodka" was originally made by the Sigurdsson family in Iceland in the early 1900's. See Cabo Declaration, ¶ 5.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. Id. ¶¶ 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 derelicts would appear to be dead to passersby. The name "black death" was used to describe the bootleg distilled spirits which caused this maudlin condition. See Declaration of Terry Cates, ¶ 10 hereinafter "Cates Declaration" (recounting explanation told to him by Thomas Lines of Cabo Distributing Company).

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

In 1989, Cabo acquired the right to import "Black Death Vodka" into the United States. Id. ¶ 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, 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. Id.

All of the labels are substantially the same. On the front of the bottle, the words "Black Death Vodka" appear in large type surrounding a grinning skull wearing a top hat.¹ 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 began to promote and market "Black Death Vodka" in the United States. Between July 1, 1989 and April 1, 1992, Cabo Distributing Company spent over $1 million promoting and marketing the vodka.² Id. ¶¶ 11-12. In this promotional campaign, Cabo apparently targeted young alcohol drinkers by using such techniques as selling bottles in miniature coffins and associating 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. Weikhardt); 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, who is also known as "Slash" in his role as lead singer of the musical quartet "Guns 'n Roses," to promote "Black Death Vodka." See Cabo Declaration, ¶ 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.³ See Cabo Declaration, ¶ 11.

On April 1, 1992, Federico Cabo incorporated Black Death USA for the purpose of purchasing the rights to "Black Death Vodka" from Valgier 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, ¶ 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 actually 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. ¶ 11.

B. Revocation of the "Black Death" Label.

In early 1992, plaintiffs' advertising campaign began to concern members of the health care community and of the public 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). When the BATF learned of this criticism of "Black Death Vodka," it decided to reexamine its approval of the label. See Cates Declaration, ¶ 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 BATF, 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." Wall Street J., Apr. 3, 1992, B3.

On April 1, 1992, Terry Cates sent a letter to Federico Cabo regarding the label. The letter stated that the BATF had "reexamined the matter" and decided that the labels were in violation of BATF regulations; plaintiffs were given ten days to stop selling vodka under the "Black Death" label.

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).

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). According to Cates, the "Black Death" label mislead the consumer into thinking either (or both) that the vodka was poison or that there are no substantial risks associated with the consumption of alcohol. Letter from Terry Cates to Federico Cabo, dated Apr. 1, 1992, at 2 (Exhibit G to Cabo Declaration). The latter message also had the effect of undermining the message contained in the Surgeon General's warning printed on the rear label. Id.

Plaintiffs arranged to meet with the government regulators on April 7, 1992 in Washington, D.C. At this meeting, plaintiffs were represented by Federico Cabo, Thomas Lines, and James Cooper, who were 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, Candace Moberly, who is the Chief of the 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 their administrative expertise in determining whether a label is misleading on its face. Se...