Diageo PLC, the world’s largest alcoholic beverage company, has been taken to court in Armenia by the former Armenian distributor of a major Russian vodka brand now belonging to the British giant.
In an ongoing case heard by a court in Yerevan, the Armenian firm MF Spirits is seeking nearly $3.5 million in damages for Diageo’s refusal to honor contractual obligations of the previous, Russian owner of the Smirnov brand.
MF Spirits became the vodka’s exclusive distributor in Armenia after a five-year supply agreement that was signed in 2005 with the Smirnov Trading House, then a subsidiary of the Russian business conglomerate Alfa Group. Less than a year later, Diageo paid the Russians $50 million to settle a long-running dispute over the rights to the Smirnov and Smirnoff trademarks.
The settlement took the form of a joint venture in which Diageo gained a commanding 75 percent share. (The liquor group bought the remaining 25 percent from Alfa Group in 2008). The venture, called D Distribution, has since been selling Smirnov, Smirnoff and other world-famous Diageo drinks -- including Johnnie Walker whisky, Gordon’s gin and Guinness beer -- in the former Soviet Union.
The MF Spirits owner, Georgi Mkrtchyan, claims that D Distribution executives visited Yerevan later in 2006 to assure him that the Smirnov distribution contract remains in force and urge him to continue promoting the brand in the local market. He says that he received more such assurances, both in person and through extensive e-mail correspondence, in the next two years, even though Diageo stopped supplying vodka to MF Spirits.
According to Mkrtchyan, D Distribution notified him in early 2009 that it will not resume those supplies anytime soon because of the small size of the Armenian market and its primary focus on Russia. “If I knew that beforehand I would not have kept spending money on the Smirnov distribution,” the Yerevan-based businessman told RFE/RL’s Armenian service (Azatutyun.am). He claimed to have spent over $260,000 on advertising and wages of MF Spirits personnel and logistics from 2006-2008, in line with understandings reached with D Distribution.
Mkrtchyan said he decided to sue Diageo after its Russian subsidiary refused to cover even half of the advertising expenses which he put at around $60,000. “I don’t know why they refused to pay any compensation,” he said. “I can’t understand the logic behind it.” “I was also ready to accept other arrangements with them that would allow me to recoup some of my expenditures,” he added.
MF Spirits filed a lawsuit against Diageo and D Distribution in 2011, demanding about 1.5 billion drams ($3.4 million) in compensation. The bulk of the sum is the amount of revenue which the Armenian distributor says it would have earned from Smirnov sales in 2006-2010.
Diageo denies any wrongdoing. Armenian lawyers representing it in the litigation say that the alcohol producer, which posted a net profit of $4 billion last year, acquired only the vodka brand and is not liable for the obligations of the previous Smirnov owner. MF Spirits says, however, that Diageo is refusing to prove the absence of such liability with documentary evidence of corresponding details of the 2006 settlement.
A district court in Yerevan opened hearings on the lawsuit late last year despite the Diageo lawyers’ claims that it has no jurisdiction over the case. They again said at the last court session on November 19 that only a Russian court can rule on the dispute. The presiding judge, Zaruhi Nakhshkarian, dismissed their objections.
D Distribution insisted afterwards that Armenian courts “do not have legal authority over these claims.” “We continue to look forward for the proceedings to be concluded competently, fairly and with due process,” it said in a statement e-mailed to RFE/RL’s Armenian service. “We also deny that the claims being made would be valid in any other court should they be made.”
The Diageo subsidiary declined to elaborate on its denial. The multinational company’s head office in London, for its part, did not reply to a written request for comment.
Both Armenia and Russia are signatories to the 1993 Minsk Convention that commits 12 ex-Soviet states to recognizing and enforcing each other’s court verdicts. MF Spirits lawyers say a possible Armenian ruling against D Distribution would therefore have to be enforced by Russian authorities.
Mkrtchyan, 39, is no stranger to dealings with big Western corporations. Other firms owned by him are the exclusive distributors in Armenia, including through their own stores, of Swiss watch brands like Tissot and Longines, U.S. cosmetics maker Avon Products and Danish furniture retailer JYSK.
“I’ve never had any problems with those companies,” Mkrtchyan said. “They have fulfilled not only what they promised but even what they didn’t.”