At Lager-Heads

Harvey McElhannon sells Diamondback Beer, and was the first to file for that trademark. Now Jerry Colangelo and Major League Baseball want him eighty-sixed.

Whether opportunist or victim of coincidence, McElhannon is facing a potentially apocalyptic fight over the trademark--a fight that could pit him not just against the Arizona Diamondbacks and Jerry Colangelo, but also against the Miller Brewing Company and Major League Baseball Properties, which is expert at confronting people who do exactly what McElhannon has been accused of.

McElhannon knows he has a lot of money up against him. And a lot of lawyers.
McElhannon is no stranger to the beer business. While he has never operated a brewery, a few years ago he struck a deal with a Midwest brewer to market a malt liquor in the Southwest. Trying for a desert theme, he named the stuff "Scorpion Malt Liquor" and sold a ton of it.

He says the desert theme--and not any connection with baseball--was also the inspiration for the name "Diamondback."

It was when he began selling Scorpion that McElhannon realized how lucrative manufacturing specially crafted beers--or simply marketing beers brewed under contract for him by others--could be.

He's hardly the only person to come to that conclusion. Nearly 300 microbreweries opened in the United States in 1995, increasing the total to 883, according to the Institute for Brewing Studies in Boulder, Colorado. There are currently 40 specialty "contract" brewers, such as the two that produce McElhannon's Diamondback beers, in the U.S.

Perhaps most encouraging for prospective microbrewers, the failure rate for such operations since 1993 has been only about one in seven, an astonishingly low number.

While the Pacific Northwest and Colorado led the brew-pub push, other regions that lagged behind are catching up, and quickly. The Southeast, Midwest and Northeast, and the state of Texas are all seeing large numbers of openings. With a few notable exceptions, however (Hops! Bistro and Brewery and the Coyote Springs Brewing Company, for example), the brew-pub trend has largely skipped Arizona. McElhannon, with his connections to contract brewers in the Midwest and California, saw in the brew-pub craze a ripe opportunity to raise the profile--and the profitability--of his restaurants.

Countless other investors around the country are putting their money on the growing popularity of craft-brewed beers. Sales in 1995 reflected a 51 percent increase over 1994 production, marking the second consecutive year production rose by at least half.

While the microbrewers are still relatively small players in the major-league beer wars--they held just 2 percent of total U.S. beer sales in 1995--they are gaining market share at a phenomenal rate, both in terms of the amount of beer produced and sold, and the number of businesses started.

If the growth spurt continues, within the next five years, 5 to 10 percent of the entire domestic-beer market could be controlled by craft brewers and the people who sell microbrews--people like Harvey McElhannon.

Although microbrews initially stole most of their customers from imported beer brands, they have begun to take a market share from the major brewing companies. It was only a matter of time before the big boys--Anheuser Busch and Miller among them--took notice; witness the emergence of such faux microbrews as Red Wolf (manufactured by Anheuser Busch) and Icehouse (made by the Plank Road Brewing Company, a division of Miller).

These and other big domestics hope to establish toeholds for their pseudocrafted beers in places such as Phoenix, where the microbrew craze is really just beginning to take off. And the Arizona Diamondbacks, with millions of fans ready to begin swilling suds at Bank One Ballpark, would be in perfect position to take advantage of the micro-beer craze--if Harvey McElhannon hadn't gone to the trouble of applying for a piece of legal paperwork known as a trademark.

Trademark law is tricky stuff, but here are the basics: Once you pick a product to market, you may apply at the United States Patent and Trademark Office to register a trademark that distinguishes your product from other, similar goods or services. Almost anything can be a trademark: names, symbols, even colors. In a landmark case, in fact, Owens-Corning trademarked the color pink (as used for home insulation) so its competitors could not manufacture products of the same color.

But having your application approved (the process takes between a year and 18 months in most cases) does not assure you perpetual rights to a trademark. If you don't use a given trademark for three years, you lose it.

In most trademark-dispute cases, the determining factor is time--who got there first. Even if the government hasn't formally approved your application, if you use a trademark before anyone else in a way that makes it recognizable, you are protected by law. The best way to make a trademark "recognizable" is to put it before the public--as McElhannon presumably has done by selling his beer in stores and at his restaurants.

Federal documents show at least 50 companies or products have trademarks using the "Diamondback" name--on everything from tobacco to hunting knives to the latex backing for carpets. And don't forget the Diamondback Steakhouse at WestWorld in Scottsdale, whose proprietors likely are not pacing the floors at night, losing sleep over any impending trademark battles.

McElhannon, however, has become involved with the lifeblood of Major League Baseball--beer, and big beer money. Sports trademarks are very valuable, very lucrative, very controversial items these days--just ask Dallas Cowboys owner Jerry Jones, who is currently the target of a $300 million lawsuit by the National Football League for striking maverick, trademark-oriented deals. One such deal involves Pepsi-Cola, which would pay an estimated $25 million to $40 million over ten years to sell its soda and display its logo at Texas Stadium. Another pact would bring Jones $2.5 million per year for seven years as compensation for allowing the Nike swoosh trademark to be placed on the Dallas Cowboys' venue.

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