Diageo's Tequila Litigation: A Threat to Premium Pricing and Market Dominance?

The allure of premium tequilas like Casamigos and Don Julio has long fueled Diageo's growth, but a wave of lawsuits alleging mislabeling now casts a shadow over the spirits giant's flagship brands. With class-action claims and a federal racketeering lawsuit accusing Diageo of fraudulently inflating agave content, the company faces existential risks to its premium pricing strategy, brand equity, and valuation. Here's why investors must pay attention—and how to navigate the fallout.

Legal Risks: A $1 Billion Crossroads

The litigation storm began in 2023 but intensified in 2025 with a RICO lawsuit filed in California, alleging Diageo conspired with Mexico's Tequila Regulatory Council (CRT) to mislabel its tequilas as “100% agave” when independent tests revealed some contained just 33–42% agave-derived ethanol. This violates both the 51% minimum for “mixto” tequila and the company's own labeling claims.

Diageo denies wrongdoing, citing CRT certification as proof of compliance. Yet the CRT's credibility is under fire: its board includes Diageo Mexico and Brown-Forman representatives, raising conflicts of interest. Plaintiffs argue the CRT has compromised standards to protect industry giants, enabling “cold mixing”—a banned practice of blending agave-based tequila with non-agave ethanol.

The stakes are colossal. If courts rule against Diageo, potential class-action damages could exceed $1 billion, covering millions of consumers who paid premium prices for allegedly inferior products. Even if cases are dismissed, the prolonged legal battle strains investor confidence.

Brand Trust Erosion: The Premium Pricing Threat

Diageo's tequilas command 30–50% higher prices than standard brands, a premium justified by their “100% agave” status. But if courts expose mislabeling, consumers may abandon the brands for competitors like Patrón or premium mezcals.

• Consumer Shifts: The RICO lawsuit cites isotopic test results as proof of fraud, which could go viral and trigger boycotts. Agave farmers' protests over mislabeling have already drawn media attention, further damaging Diageo's reputation.
• Market Share Risks: Competitors poised to gain include additive-free brands like Mijenta and Patrón, which have avoided similar allegations. If trust erodes, Diageo may be forced to slash prices or accept volume declines.

Valuation Adjustments: The CRT Wild Card

Diageo's stock (ticker: DGE.L) has shown volatility, dipping sharply after lawsuit filings. Investors now demand clarity on two critical factors:

1. CRT Reforms: If Mexico tightens certification standards—e.g., mandating independent audits or banning CRT members with industry ties—Diageo may face costly reforms to meet agave-content thresholds. Current CRT rules, however, remain unchanged, leaving uncertainty.
2. Legal Outcomes: A favorable ruling for plaintiffs could trigger a chain reaction of lawsuits, further pressuring the stock. Conversely, a dismissal might stabilize valuations.

Investment Strategy: Short-Term Caution, Long-Term Contingency

• Short-Term: Avoid new positions until court rulings clarify risks. Consider shorting the stock if the RICO case gains traction, as it threatens both liability and brand equity.
• Long-Term: Monitor CRT reforms and litigation outcomes. If Diageo settles without admitting fault and restores agave content, its global distribution and brand recognition could enable recovery. However, if reforms force costly changes or trust evaporates, the premium pricing model may collapse.

Conclusion: A Tipping Point for Tequila's Crown

Diageo's tequila litigation is more than a legal battle—it's a test of its ability to sustain premium pricing in an industry demanding transparency. With consumer trust and regulatory oversight at a crossroads, the company's next moves will determine whether its tequila dominance endures or becomes a casualty of its own claims.

Investors should brace for volatility and prioritize downside protection until the fog lifts. For now, the jury is still out—but the stakes couldn't be higher.