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.

Harvey McElhannon is 65 years old, a tall man with good posture, an open face, a sincere smile and a firm handshake. He is patriotic to a fault, though he'd probably say that no such thing is possible. Hanging on the walls of his office are beautifully framed copies of the United States Constitution, the Declaration of Independence and the Bill of Rights. He often refers, without a whiff of self-righteousness, to his church and the activities that take place there. McElhannon seems to be, and is called by those who know him, a nice guy and a good man.

He just doesn't like lawyers much. He says he's spent too much of his life, not to mention his money, on them, and echoes the widely held sentiment that attorneys exist mainly to line their pockets with money by prolonging conflict, rather than resolving it.

That's too bad for him. Because however good a man he is, Harvey McElhannon is also a man with what may become a very big problem--one that could make the few legal scraps in his past look like nothing more than warm-up bouts.

McElhannon is known in the Valley for his 30-plus years as a successful restaurateur. For years he has owned, among other enterprises, the Pinnacle Peak Patio eatery in north Scottsdale and the T-Bone Steak House in Phoenix. More recently, he purchased the Waterfront, a restaurant that for years was called Charlie Brown's and sits next to a lake in Tempe.

He's put a lot of money into all of his businesses, several hundred thousand dollars into the Waterfront alone of late, and obviously hopes to make it back. Among other things, he is selling his own line of beers, made for him by brewers in Wisconsin and California.

So far, the line consists of just two beers; one is a smooth lager, quite tasty, and the other is a bock, a darker, stronger brew, but also good. Though he is currently involved in a complex legal dispute with two others who claim to be co-owners of Valley Brewing Company, the entity that actually markets his beers, McElhannon hopes eventually to turn Pinnacle Peak Patio, the Waterfront and the T-Bone Steak House into microbreweries, where he and his son will manufacture their own beers on-site.

The beers he sells now, and hopes to sell more of, are called "Diamondback Premium."

Which brings us to McElhannon's problem.
Anyone who follows the business of baseball--or the multiple megadeals that have shaped the rosy financial future of the Valley's new Major League Baseball franchise, the Arizona Diamondbacks--probably recalls what happened last October 9. That day, the new team and the Miller Brewing Company, the nation's second-biggest seller of suds, struck what may be the most comprehensive and lucrative marketing agreement in Major League Baseball.

The deal will span 15 years, an eternity in the sports-marketing business. The Diamondbacks' most visible owner, Jerry Colangelo, has likened it to "a marriage." Although financial terms have not been officially disclosed, people who are supposed to know about such things say the team stands to pocket at least $45 million as a result of the Miller pact. Billboards promoting the Arizona Diamondbacks and Miller Lite beer have already begun popping up all over the Valley--even though the D-backs' first pitch won't be hurled for two more years.

Billboards are just the beginning.
Through the year 2012, Miller will be the exclusive beer advertiser on the team's television and radio broadcasts. Miller ads will also run on video screens at Bank One Ballpark and appear in team publications. Giant signs promoting Miller Lite will be placed in television-friendly spots around the field. Miller will participate in a baseball museum to be built at the stadium.

Scott Brubaker, director of marketing for the Arizona Diamondbacks, says plans are also in the works to build, somewhere on the stadium site, a brew pub. Brew pubs at sporting venues are seen by many as a sports-marketing wave of the future; the Coors Brewing Company, in Colorado, owns and operates an extremely successful brew pub called "The Sandlot" inside Denver's Coors Field, home of the Colorado Rockies.

Brubaker says the Phoenix microbrewery may (and sources at Miller say in all likelihood will) be run by Miller. He also says everyone concerned would like the place to be called the Diamondback Brewery.

McElhannon, however, filed a trademark application for Diamondback Beer with the State of Arizona on March 10, 1995, just one day after the name of the new baseball team was announced. If the trademark is valid, McElhannon--not Miller, not the Arizona Diamondbacks--has the sole right to make and sell Diamondback Beer.

As one might expect, the team and Major League Baseball have since espoused the view that McElhannon is a quick-buck artist, a profiteer seeking whatever the Diamondbacks and MLB will pay to get rid of him. But McElhannon says the timing of his trademark application had nothing to do with Colangelo's baseball team.

Although the date of the trademark application does seem suspiciously convenient, McElhannon has documents--contracts for brewing, packaging and so forth--showing he intended to call his beer Diamondback months before the team announced its name. And all contact he had with the Arizona Diamondbacks--a few uncomfortable calls--took place before the Miller announcement.

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.

McElhannon applied with the state for a Diamondback Beer trademark on March 10, 1995; he submitted a national trademark application to the U.S. Patent Office on April 4, 1995. He has been using the name since then. It would seem he is in a strong legal position to keep the rights to the name.

But there's a convoluted history to the name McElhannon picked for his beer. Colangelo was not the first to pick the name "Diamondbacks" for an Arizona sports team. In 1994, a team in the Arizona Fall League registered a trademark calling itself the Chandler Diamondbacks.

With that trademark, the team--part of the fall league, which is owned by Major League Baseball--tried to protect itself against the unauthorized use of the name or logo on no less than 76 items and types of items. The trademark covers everything from bumper stickers and jackets to, curiously, one- and two-piece cloth-diaper sets, and chefs' hats.

Jerry Colangelo "bought" the trademark from the Chandler Diamondbacks to use for his own major league team, as a part of the $130 million he paid for the expansion franchise. But nowhere on the Chandler licensing document is any reference made to using the trademark for beer or any other liquor. And nowhere is such a reference made on the trademark application the Arizona Diamondbacks filed with the federal government last September--almost six months after McElhannon applied for his federal trademark.

No one at Major League Baseball, the Arizona Diamondbacks or the Miller Brewing Company has ever said flatly that Colangelo's purchase of the Chandler Diamondbacks' trademark means McElhannon's sale of Diamondback Beer would violate the law.

But his communications with the team and baseball have not been congenial, either.

McElhannon called Colangelo early last September, about a month before the Diamondbacks-Miller marketing deal was announced. At first, McElhannon says, the two talked genially, not about business or specifics, more like one guy inviting another over to try a beer. And that is exactly what McElhannon planned to do: quaff a couple of frosty Diamondbacks with Jerry, see if the big guy liked it.

Soon into the conversation, however, its tenor changed; McElhannon says that the instant he told Colangelo that he possessed the trademark for Diamondback Beer, the man who is arguably the Valley's most powerful business force "went into shock" and said he'd have to call McElhannon back. He never did.

McElhannon called Colangelo once more, again before the Miller deal was announced. This time, he says, the sports mogul was hostile.

"We found out when you filed it [the trademark]," McElhannon recalls Colangelo saying, with an obvious implication: Harvey was trying to hustle Jerry, Jerry didn't like it and Jerry wasn't going to let it happen.

McElhannon says he is no more a hustler than he is an astronaut.
"I wanted to see if Colangelo liked the beer," McElhannon says, "but that's all. I wasn't asking for his permission to sell my beer; I don't need it."

A few more unpleasant conversations with Arizona Diamondbacks staffers ensued, all of them preceding the announcement of the Miller deal. McElhannon says Rich Dozer, president of the team, called him "litigious" and more or less accused him of trying to put the squeeze on for some fast cash.

Eventually, McElhannon was instructed to cease contacting anyone affiliated with the Arizona Diamondbacks. Henceforth, he was told, he would be dealing exclusively with Major League Baseball's trademark arm--and its battalions of lawyers.

Since then, there have been letters to McElhannon from Major League Baseball giving vague but ominous warnings that the battle over Diamondback Beer is just beginning.

Last November, McElhannon received a letter from MLB's attorneys demanding that he cease and desist manufacturing and selling his beer, destroy whatever quantities of it remained, and rid himself of all labels, boxes or packages bearing the Diamondback Beer name or logo.

McElhannon sent back a letter saying that there were plenty of other products out there using the trademark "Diamondback." He asked whether MLB thought they constituted trademark violations and on what grounds.

The response he received, in January, was not encouraging. MLB's lawyers said McElhannon's request was disingenuous and burdensome, and that he was obviously trying to leverage himself into whatever baseball deal he could get.

Since then, all's been quiet on the baseball front. McElhannon thinks that means something. Whether that something is good or bad, he's not sure.

As murky as trademark law is generally, in this case in particular, a few things are at least as clear as a glass of Diamondback Premium Lager: Miller and the Diamondbacks both want a brew pub at the stadium, and they both want to call it the Diamondback Brewery, or something similar. Major League Baseball wants to keep people from stepping on its trademark toes, and has demonstrated many times that it will engage in litigation to stop such activity. McElhannon has brew-pub dreams but hates spending time with lawyers and in court.

It is true that McElhannon has been using his Diamondback trademark for beer for some time. That could help his legal position, if the Diamondbacks or Major League Baseball sue.

But Deborah Lyon, a trademark attorney with the Phoenix law firm of Brown & Bain, says courts tend to side with the consumer in deciding trademark cases. If a court thinks consumers are being "fooled" into thinking a product is affiliated with a company it isn't, the party doing the fooling usually loses.

Although the logos of Diamondback Beer and the Arizona Diamondbacks bear almost no resemblance to one another, it is virtually impossible to predict whether a court would decide they are similar enough to confuse consumers.

No one in this . . . well . . . this brewing conflict possesses a crystal ball, McElhannon least of all. So how will it play out?

Major League Baseball could continue its attempts to intimidate McElhannon, although threatening letters have had little effect on his beer-selling ways so far.

Or baseball could roll over and try to buy the trademark from McElhannon, just to avoid the expense and inconvenience of a legal fight. But he says that he wouldn't sell, that despite his distaste for attorneys, he truly is in for the long haul.

Or baseball, Miller Brewing and the Arizona Diamondbacks may decide to sue, which could keep McElhannon tied up in court for years.

Regardless of how much grit Harvey McElhannon has--and almost regardless of whether he is the rightful owner of the Diamondback Beer trademark--if it comes to protracted court action, there doesn't seem to be much doubt which side will have the experience, tactical expertise, money and--most of all--lawyers to win a snaky Arizona beer war.

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