Diageo: Rum supplier suit is 'baseless'

ST. CROIX - Diageo has released a brief statement responding to a breach of contract lawsuit that a Puerto Rico rum supplier filed against it on Wednesday.

"Diageo has honored all of its contractual obligations with Distelleria Serralles and properly exited from the supply contract in Puerto Rico," Diageo said in a prepared statement. "Any assertions to the contrary are baseless. Once all relevant facts are disclosed, it will be clear that this case is without merit and Diageo acted appropriately."

Destileria Serralles, Inc., the company that used to supply Diageo with rum for its Captain Morgan brand before Diageo moved production to St. Croix, is suing Diageo North America for more than $5 million in damages.

Destileria Serralles officials did not respond to a Daily News message Friday. Government House spokesman Jean Greaux Jr. also did not respond to a Daily News request for comment on the matter. The V.I. Government is not a party in the lawsuit.

However, Diageo's move from using Destileria Serralles as a supplier for its Captain Morgan rum to manufacturing Captain Morgan at its own facility on St. Croix features prominently in the lawsuit.

The lawsuit centers on an extra million gallons of rum that Destileria Serralles says Diageo agreed to purchase from it to offset any production shortfalls that might occur in its new distillery on St. Croix.

Diageo's move to St. Croix has sparked controversy since 2008 when the governor announced the proposed deal - which included the government issuing bonds backed by future rum tax rebates to finance construction of a distillery and warehouse for Diageo's Captain Morgan brand on St. Croix.

In return, Diageo agreed to produce all its rum for sale in the United States at the St. Croix distillery for the next 30 years.

The move sparked outrage among some Destileria Serralles workers in Puerto Rico, who came to St. Thomas when the Senate was considering the deal to protest, saying that their jobs were being stolen.

It also marked the beginning of what some have dubbed the "rum wars" between the U.S. Virgin Islands and Puerto Rico.

In the lawsuit filed last week, Destileria Serralles contends that Diageo has not yet paid for or taken delivery on the outstanding 900,830 gallons of rum it agreed to buy and has indicated that if it does ever take delivery of the rum, it intends to sell it in Europe.

The selling of rum produced in the territories on the U.S. mainland provides a lucrative revenue stream for the territories, as well as for rum-makers.

For every proof gallon of rum produced in the Virgin Islands or Puerto Rico and exported to the U.S. mainland, the federal government collects $13.50 in excise taxes, of which $13.25 traditionally has been returned to the territory where the rum was produced. That rebated money is also called the rum "coverover."

The territories used to get $10.50 back, but in 1999, Congress passed legislation that temporarily increased that rebate to $13.50 per proof gallon. That measure has been renewed multiple times since then, although it currently is expired and awaiting renewal.

The U.S. Virgin Islands and Puerto Rico give a portion of their rum tax rebates to rum-makers in the form of subsidies and incentives.

Destileria Serralles contends in its lawsuit that selling the rum in the United States was a long-standing part of its agreement with Diageo and that Diageo has no right to sell the rum outside the United States, where the sale would generate no rum tax revenues.

It contends it offered Diageo a lower price on the remaining 900,830 gallons because of the anticipated rum tax rebates.

In addition to asking for more than $5 million in damages, Destileria Serralles is asking the judge for a declaration that Diageo is contractually obligated to purchase the 900,830 gallons and sell the rum exclusively in the United States.

- Contact Joy Blackburn at 714-9145 or email jblackburn@dailynews.vi.

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