At the end of last year leading alcoholic drinks producer Diageo North America Inc. (Diageo) and Intercontinental Brands Limited (ICB) settled their dispute concerning the sale by ICB of its VODKAT drink.1 VODKAT is a mixture of vodka and neutral fermented alcohol with an ABV (alcohol by volume) of 22 percent. It is not classified as a “vodka” under the EU regulations on spirits, which require that vodka be a minimum of 37.5 percent ABV and be produced from distilled alcohol. The duty payable on a liter of VODKAT is considerably less than is payable on a liter of vodka2 due to the much lower ABV of VODKAT, giving ICB the opportunity to undercut the market.

After two years of litigation ICB has agreed to change the VODKAT brand name and its packaging to ensure it is clear to consumers that it is not vodka, and to pay Diageo a substantial, but undisclosed, sum in damages and legal costs. ICB planned to launch a new product by February 2011. They were permitted to continue selling VODKAT to wholesalers and retailers until January 31, 2011.

Background

VODKAT went on sale in April 2005. Since then, the branding and descriptions used on the bottles have undergone numerous changes due to pressure from regulatory and industry bodies. In February 2006 the words “alcoholic vodka blend” were removed due to an objection by Trading Standards that they were not appropriate under the relevant regulations. The Gin and Vodka Association, of which Diageo is a member, pressured Trading Standards to force ICB to change the product name. This was not achieved, but several minor changes to the appearance of the product were made. By July 2008 there had still not been sufficient changes to satisfy Diageo and so it commenced proceedings.

The High Court Decision

In January 2010 the High Court3 ruled in favor of Diageo.4 It found that the sale of a product that was not vodka under the name VODKAT constituted the extended form of passing off. Passing off in its classic form exists where there is a misrepresentation as to the origin of a product which attempts to hijack the goodwill attached to another brand. Examples include using a similar color scheme and font on packaging, giving the product a name similar to existing products or the use of confusing advertising.

Extended passing off takes this concept one stage further. Rather than applying to the brand, extended passing off can relate to the nature of the product itself. If a term applying to a product (rather than a brand) is sufficiently descriptive, any product which is wrongly represented as falling within the description could give rise to a claim for extended passing off. Some examples of products which have led to extended passing off claims include “sherry,” “Spanish champagne” and “old English advocaat.”

In its claim, Diageo, producer of the UK’s best-selling vodka SMIRNOFF, had concentrated on the assertion that VODKAT had passed off the descriptive term “vodka” rather than Diageo’s own trademarks. In order to establish extended passing off, Diageo had to establish that the term vodka described a “clearly defined class of goods” and that this class of goods had a reputation which gave rise to goodwill amongst a significant section of the public.

The judge held that vodka was a distinctive term that denoted a class of goods with a reputation and protectable goodwill. Vodka, thereby, joined champagne, whisky and sherry as a name of a drink that is protected from “lookalike” drinks.

The court decided that ICB had misrepresented VODKAT as a vodka. This finding was assisted by the bottle and labeling design initially used to sell the product, which was seen as attempting to give a “Russian” feel to the product, and the failure of ICB to make it clear to consumers that the product was not vodka. The fact that retailers sold VODKAT on the same shelf as vodkas and other spirits rather than with the specialty drinks and liqueurs, and that ICB had done nothing to change this, further assisted the finding of a misrepresentation. Considerable evidence of actual confusion was found amongst both consumers and retailers.

Damage to Diageo was found to have occurred. First, there was evidence that bars and pubs had been selling VODKAT as a house vodka, thereby adversely affecting sales of Diageo’s SMIRNOFF brand. Second, even if there had been no evidence of actual lost sales, damage would have been established due to the fact that the use of the term VODKAT was likely to erode the distinctiveness of the term vodka.

The Court of Appeal Decision

ICB appealed the High Court decision5 on the ground that only products that had a special cachet should be protectable by the extended form of passing off and that vodka was a generic term that did not have the requisite cachet. This argument was dismissed by the Court of Appeal, which confirmed that a product did not have to have a cachet in order to be protected by extended passing off.

The Court refused ICB permission for leave to appeal to the UK Supreme Court. However, the injunction that prohibited ICB from continuing to sell VODKAT did not come into force pending an application by ICB to the Supreme Court for permission to appeal. At the time of the settlement, ICB had reportedly not yet received a decision from the Supreme Court.

The Wider Implications

This case may assist other vodka producers, as vodka is now protected from lookalikes. This in turn may help to maintain the long-term integrity of the vodka market in the UK. It may also assist other alcoholic beverage brand owners in their battle against lookalike diluted versions of their products. However, VODKAT is an extreme example of confusion, as a result of the brand name (differing from vodka only by the addition of a “t” at the end), the bottle design and labeling, market positioning and the failure to properly differentiate the product. All future attempts to invoke the extended form of passing off will be decided on their own facts and rarely will they be so disposed to a finding of confusion  

Interestingly, the High Court itself commented that, as VODKAT did contain some vodka, it would have been relatively easy for ICB to have used the name without it constituting passing off if they had taken sufficient care to clearly inform consumers what the product was and to differentiate it from vodka.

Whilst producers of “lighter spirits” should be on their guard, there is a great deal that they can do to reduce the risk of similar legal action. The key would appear to be to adduce evidence that sufficient measures have been taken to differentiate the product from the class of products they may be accused of passing off.