Diageo loses first round of Diddy legal battle over tequila venture

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Diageo has lost the first step of a legal battle with US rapper Sean Combs over their tequila joint venture, after a New York court denied the company’s attempt to resolve the dispute behind closed doors.

Combs, also known as Diddy, is suing Diageo for allegedly failing to honour their joint venture agreement for DeLeón, a premium tequila brand the two sides acquired in 2014.

Combs’s lawyer, John Hueston, called the decision, “an important step in the right direction”, adding: “Diageo tried to end this action. Today the judge soundly rejected that effort.”

New York’s supreme court on Thursday denied both Diageo’s motion to dismiss Combs’s case, and to compel the case to arbitration. The company has been asked to file a response within 21 days.

The ruling means the case could now proceed to trial in a state court, in which details of Diageo’s negotiations and correspondence with Combs could be exposed.

“While we are disappointed with today’s procedural decision, it is important to underscore that this is not a ruling on the merits of the claims, which we maintain are false and baseless. We are currently considering all legal options,” Diageo said.

The rapper filed a lawsuit in May against the drinks giant, alleging that the company had underinvested in DeLeón and the vodka brand Cîroc, and typecast them as “black brands” that should be targeted at “urban” consumers.

Combs accused the company of racial discrimination, claiming that one of Diageo’s US executives, Stephen Rust, told him that “if he were Martha Stewart his brands would be more widespread”.

DeLeón was distributed in 3 per cent of all possible outlets, compared with 34 per cent, 36 per cent and 14 per cent for rival tequilas Casamigos, Don Julio and 21 Seeds respectively, according to the rapper’s filing.

Diageo has vehemently denied the allegations, calling them “false and reckless”, and “a transparent attempt to pressure Diageo into an early settlement of a planned parallel arbitration process”.

The company, which makes Johnnie Walker Whisky and Smirnoff vodka, also accused Combs of failing to fulfil his duty as a 50 per cent owner, alleging he only invested $1,000, while Diageo put in more than $100mn.

Combs, who appeared in court in person on Thursday, said in a statement: “I’m fighting for fair and equal treatment for everyone. This isn’t just about me. I look forward to continuing this fight in court.”

A public trial will be an unwelcome distraction for Diageo’s new chief executive, Debra Crew, who stepped into the role earlier than planned following the death of Ivan Menezes in June.