Hopes Dim on Cuban Oil, Foreign Investment, Havana Club Rum Rights

It’s not been a banner week – or month – for Cuba on the trade, investment and economic front.

After its second attempt in 10 years to find commercial quantities of oil in Cuban deep water in the Gulf of Mexico – its latest well came up dry – Spain’s Repsol is “almost certain” it won’t try again.  Repsol has the option to drill again later this year before the Italian-owned Scarabeo rig – which, due to the U.S. embargo, had to be specially built with no more than 10% of American parts for exploration in Cuba - moves on to Brazil.  Next up are two  Malaysian and Russian firms, whose explorations this summer could be crucial to Cuba’s near-to-mid-term hopes of accessing undersea reserves it estimates to be as high as 20 billion barrels (the U.S. estimates it to have around 5 billion). 

As Jorge Pinon, a former oil executive and an expert on Cuba’s oil prospects, points out, once the only rig in the world that can drill in Cuban waters without violating the U.S. embargo moves on, it could be years before it’s available and another player is willing to invest millions in the gamble – especially when larger reserves beckon elsewhere around the world.  The prospect of an energy-independent Cuba was intriguing from a geopolitical standpoint, and surely a blow to Cuba’s hopes of digging out of its continuing economic troubles.   Just as some wondered if success in the Gulf could derail the economic reforms underway out of necessity, it might soon be time to ask if failure could spur on the painfully slow pace of the reforms.

The pace seems even slower for foreign investments on the island of late.  Cuban officials have cracked down on foreign investors and their domestic partners found to be involved in corruption – two British executives have recently landed in jail.  Other partners such as Unilever and a group of Israeli investors in Cuban citrus are on their way out following unsuccessful contract renewal negotiations.   It’s mystifying to watch Cuban officials working harder to chase off investors than to bring them in when, as one western diplomat put it, such concessions are “inevitable”.  With plans to drastically cut government payrolls (that the small domestic private sector can’t quickly or totally absorb), Cuba’s main benefactor and trading partner, Venezuela’s Hugo Chavez’s health (and hold on power) uncertain, and big bills to pay with not enough hard currency earnings to pay them, it’s hard to understand what’s going on.  And that is exactly the sort of climate that will scare off investors for the time being.

And in perhaps the most bitter news for Cuba, the U.S. Supreme Court has rejected a petition over the U.S. trademark rights to the Havana Club rum name.  Given that the U.S. accounts for 40% of the worldwide rum market, CubaExport and its French distributor partner Pernod Ricard, which distribute Cuba’s flagship rum to more than 80 other countries around the world but not in the U.S. yet, had hoped the U.S. Patent and Trademark Office (USPTO) would hold their seat in the U.S. market until the embargo is eventually lifted.  That’s  because CubaExport had registered the U.S. rights to the name in 1976 (after the prior owner, who’s rum distillery was expropriated by the Cuban government, failed to renew the U.S. trademark rights in 1973), and renewed its rights every ten years thereafter in order to keep its rights current.

Two decades and no U.S. imports from Cuba later,  Pernod Ricard’s competitor (and reigning worldwide rum distributor) Bacardi started bottling its own Havana Club rum.  Pernod Ricard responded by suing Bacardi for the trademark infringement.   Then, in 1998, Bacardi triumphed by getting allies in Congress to pass a rider, Section 211 of the 1999 Omnibus Appropriations Act, to block registration and renewal of trademark rights associated with expropriated Cuban properties  (without “consent” of the “original owner” of the trademark), and to even block a U.S. court from hearing a complaint on their behalf.    

Pernod would likely have argued in court that the new law didn’t apply because the original owner of the Havana Club label had failed to renew their trademark rights in the U.S. and thus was no longer considered the original owner, but it never got the chance, since Section 211 forced a Florida court to throw out the pending suit by Pernod Ricard against Bacardi.  Then, when CubaExport tried to pay for the Havana Club rights renewal in 2006, as it had done for three decades, Section 211 now prevented the USPTO from accepting the payment.

The Havana Club rum dispute remains as obscure as ever to the larger American public.  It’s simply too complicated, and there isn’t a big enough constituency to care.  And that’s the real shame.  Thanks to a backroom deal on a fast-moving, must-pass bill , the intended targets aren’ the only losers.  The United States’ sterling reputation for intellectual property rights protection has taken a hit, and if renewed threats of retaliation by Cuba bear out, U.S. businesses that have nothing to do with the row and enjoy trademark protection in Cuba today could lose that protection.  Whatever one thinks of the Cuban government’s expropriation of businesses in the early days of the Revolution (and the American business community that overwhelmingly opposes Section 211 is surely no fan), it's hard to see how following Cuba’s usurping example is really the answer.