Big Beer, Craft Beer, and Trademark Infringement: Harm to Premium Brands

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As the craft beer market continues to expand in popularity and threaten the market share of older “macrobrewery” giants like Molson Coors and Anheuser Busch, courts have seen increased legal disputes in the beer industry as brands fight for both their independence and the attention of consumers.  Most recently, Molson Coors has been sued in federal court in San Diego by Stone Brewing Co., one of the oldest and largest independent craft brewers in the United States.  In its complaint, Stone Brewing claims that Coors is infringing the “STONE” trademark by rebranding Coors’ sub-premium, low cost “Keystone” brand as “KeySTONE,” with a particular emphasis on the single word “STONE” in packaging and marketing materials.  Because of this, Stone Brewing alleges, Coors is sowing consumer confusion between the two brands.

Keystone Rebranding Comparison from Stone Complaint

Unless there is a swift settlement, one can assume that Stone Brewing will make good on the threat in its complaint that it will move for a preliminary injunction in order to stop the sale of Coors’ “KeySTONE” branded products during the pendency of the lawsuit.  A motion for a preliminary injunction is often a critical juncture in such trademark infringement lawsuits, and Stone Brewing will need to show that it will be “irreparably harmed” if the injunction is not granted.  This showing has in recent years become more difficult, as courts no longer presume irreparable harm when the plaintiff shows that consumers are likely to be confused by trademark infringement, but rather require an additional showing of likely irreparable harm.  “Irreparable harm” (also known as “irreparable injury”) generally means injuries that cannot be readily compensated by money damages, and since money damages are usually available for trademark infringement this standard presents special hurdles for infringement plaintiffs that can be difficult to overcome early in a case.

To show irreparable harm, one argument Stone Brewing will likely make is that its “premium brand” is being tarnished by confusion with Coors’ “value brand.”  This argument is presaged throughout Stone Brewing’s complaint (referring to Keystone’s beers as “watered down” and “fizzy yellow offerings,” as opposed to Stone Brewing’s “bold” and “artisanal” products).  The argument, which has been judicially adopted in relatively few cases, is essentially that the premium or niche brand is irreparably harmed by the association with the value, mass-market brand, which usually is of lesser quality.

Conkle, Kremer & Engel, which has experience in both trademark litigation and issues specific to beer production, distribution, and marketing, has succeeded in making this premium-vs.-value argument in federal courts in California.  For example, in Moroccanoil, Inc. v. Zotos International, Inc. (230 F. Supp. 3d 1161 (USDC C.D. Cal. 2017)), a 2017 trademark infringement case with similarities to the dispute between Coors and Stone Brewing, CK&E represented the manufacturer of Moroccanoil Treatment, a luxury oil-infused hair care product sold in distinctive packaging.  The defendant Zotos, part of a large personal care products conglomerate, had created a low-cost “value” hair oil product called “Majestic Oil” that, in addition to its similar name, used packaging that was a close likeness of Moroccanoil’s trade dress.

CK&E, in its successful motion for preliminary injunction, argued that sales of low-cost “value” Majestic Oil products would erode Moroccanoil’s carefully-built premium image.  The presentation included evidence establishing that once a product is no longer perceived by consumers as “premium,” it is difficult or even impossible for the seller to regain that perception.  The court agreed with CK&E and Moroccanoil, finding a likelihood of irreparable harm and granting a preliminary injunction against further sale of the Majestic Oil products.

Preliminary injunctions can be dramatic turning points in infringement cases.  In Moroccanoil’s case, the court’s preliminary injunction prevented Zotos from any further sales, advertisement or distribution of its infringing products, and required Zotos to recall all of its infringing products already in the market.  As could be predicted, the case settled swiftly thereafter and Zotos made permanent substantial changes to its product name and packaging to avoid infringing Moroccanoil’s intellectual property rights.

Click here to learn more about CK&E’s Moroccanoil v. Zotos matter or contact CK&E attorneys who work on beer industry matters, such as the brand protection that can make or break participants in the crowded craft beer market, including John Conkle, Evan Pitchford and Zachary Page.

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Relationships Between Producers, Wholesalers, and Retailers: Beer Distribution and Franchise Laws in California (Part 2)

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In a recent blog post, we discussed beer self-distribution rules in California.  While the self-distribution laws in California are generally quite accommodating, and self-distribution works for a start-up craft brewery with limited funds, on a practical level it can only serve a relatively small geographical area.  As a brand increases in local popularity and the beer producer wants to expand its footprint and accelerate its competition with brands and beers outside its home region, usually the producer will choose to enter into a distribution agreement with an established third-party wholesaler.  When a beer producer chooses to contract with a distributor, then it is important to be aware of the applicable beer franchise laws (which also vary from state to state).  Beer franchise laws control the relationship between the brewer and the wholesaler and will generally trump contract terms that do not comport with such laws.

Beer franchise laws stem from a decades-old period when relatively few national-level breweries (like Budweiser and Miller) were able to exert significant power over the beer distribution industry, which at the time was chiefly comprised of numerous small mom-and-pop outlets.  As an example, the macrobreweries would impose stringent requirements for their distributors that necessitated significant investment (such as construction and maintenance of a sophisticated refrigerated warehouse), but there was nothing to protect the distributor when the macrobreweries decided to switch to a competitor, leaving the distributors with little recourse to recoup their investment.  To protect the distributors from this predicament, strong state franchise laws were enacted that made it difficult for the breweries to terminate contracts with distributors.

At their most draconian, beer franchise laws can marry a brewer to a distributor even if the brewer only sends a small initial amount of beer to the distributor for resale without any written agreement whatsoever.  In some cases distributors can even have the power to transfer the distribution rights to successors-in-interest without the brewer’s consent.  In many states, a brewer can only cancel a distribution contract for “good cause,” which may not include failure to reach sales quotas.  Further, many states require a brewer, in order to break a distribution contract, to pay the wholesaler Fair Market Value (“FMV”) for the lost business.  Of course, these rules have shifted a significant share of power to the distributors.

As the franchise laws weren’t enacted with the microbrewing phenomenon in mind, they can make distribution difficult for craft brewers that don’t have the clout of a national macrobrew and who don’t impose stringent requirements on their distributors.  In certain situations, a small brand may feel that a distributor is paying attention to other more established brands and that it is not getting the benefit of its bargain with the distributor.  However, many beer franchise laws have been softened over the past several years, allowing for more competition in the wholesale market and giving fledgling breweries more choice and control over the terms of their third-party distribution.  For example, some states exempt breweries that produce less than certain annual volumes from the franchise laws.  Of course, exemptions like this mean that brewers need to be conscious of their plans to grow and potentially exceed those volume limitations, and consider how it will affect their distribution agreements.

California’s beer franchise laws are some of the most accommodating in the country, because California allows the distribution agreement itself to control most of the important terms and dealings between the brewer and the wholesaler.  In California, a brewer must enter into exclusive written territorial agreements with distributors that are filed with the ABC (Cal. Bus. & Prof. Code § 25000.5).  California’s franchise laws do not restrict brewers to only “good cause” terminations (though the distributors themselves may very well fight for some type of good-cause requirement in contract negotiations).  Further, a brewer can terminate a distribution agreement if the wholesaler fails to meet a “commercially reasonable” sales goal or quota (Cal. Bus. & Prof. Code § 25000.7), and many beer distribution agreements call for the distributor itself to come up with an annual business plan that establishes sales goals based on certain data.  Except in certain situations, a brewer does not need to pay FMV to terminate the relationship (though again, a distributor may insist on a termination payment as a contract term).  While a brewer is not automatically bound by contract to a purchaser or transferee of its distributor, the brewer cannot unreasonably withhold consent or deny approval of such a transfer without incurring certain charges (Cal. Bus. & Prof. Code § 25000.9).

In California, the parties must be attuned to several important issues in creating the agreement, such as territory, term, change in ownership and transfer rights, termination rights, terms of sale, commercially reasonable sales goals, post-termination provisions, intellectual property licensing and advertising issues, dispute resolution, and other rights and duties of the parties.  Such contract terms are just as important for a brewer as finding a distribution team that is the right “fit” for a growing brand.

Overall, it is no surprise that the states with the most friendly self-distribution and franchise laws are the states with the most active and diverse beer business communities.  For example, California now has around 900 active breweries, far more than any other state, adding over 500 breweries in the last two years alone.

Conkle, Kremer & Engel has experience representing both breweries and distributors.  If you are launching a brewery in California, looking to expand your brand’s sales through self-distribution or with a third-party distributor, or have found yourself in a distribution-related dispute, contact Conkle, Kremer & Engel for assistance with those and other beer industry-related issues.

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