Trademark infringement cases on the increase?

Trademark infringement in China can have a high cost.  This is a relatively new development. The New Balance case set the high water mark and it seems very likely that others will be inspired by the award in that case.

The emerging high cost of China trademark infringement also seems likely to change the behavior of trademark owners – at least some are likely to allow infringement to run for longer so that they can seek higher provable damages.

It is really early days, but already there are cases emerging with plaintiffs seeking substantial damages. If successful they will, in turn, inspire others.  Anyone doing businessin China, Chinese or foreign, needs to be aware of the potential high cost of China trademark infringement.

According to local media, a case seeking substantial damages from OPPLE Illumination (“OPPLE”), a leading illumination manufacturer in China, has been filed at and accepted by the Chaoyang court.

OPPLE has been sued for trademark infringement by three Chinese individuals for infringing their trademark  “欧普 (The Chinese characters for OPPLE) and device” in Class 9 (wire, plug, socket etc.) with the registration number 1423367. The plaintiffs claim damages of RMB 50 million (Approximately USD 7.7 million).

An OPPLE distributor in Beijing is also being sued by the plaintiffs in the same case for selling the infringing products in Beijing.

Background

OPPLE applied to register the Chinese characters for OPPLE (欧普) in all 45 classes in China and has successfully registered in most classes.

However, for reasons unknown, OPPLE only registered this mark on very limited products in Class 9 (i.e. battery, flash light etc.) in 2002, but did not register it on plugs and sockets in Class 9 apparently because it was previously registered by another Chinese company in 2000 (“Prior Trademark”).

The plaintiffs bought the Prior Trademark from its original owner in 2010 and now claim that OPPLE has infringed their trademark rights by selling plugs and sockets using a trademark similar to the Prior Trademark.

An Internet search of OPPLE products indicates that OPPLE did not directly apply the Chinese character OPPLE trademark on its plugs and sockets. However, the package for these items  does show the Chinese characters trademark for OPPLE. This appears to be the basis for the trademark infringement case.

Calculation of damages for trademark infringement

OPPLE is a listed company in China and  it has to publicly disclose its financial reports annually.

OPPLE’s 2013 financial report shows its business revenue generated from “illumination controllers and others” was RMB 492 million, of which, “electric device” accounts for 45.85% with a gross profit ratio of 52.02%.

OPPLE’s 2014 financial report shows its business revenue generated from “illumination controllers and others” was RMB 677 million, of which “electric device” accounts for 37.86% with a gross profit ratio of 50.66%.

Relying on these public accounts, the plaintiffs say that the RMB 50 million damages they claim for trademark infringement is less than the profits unlawfully obtained by OPPLE from the sale of the products that are the subject of their trademark infringement case (plugs and sockets, classified within “electric device” in the financial reports).

The case has not yet been decided, and we will update this report in due course.

Commentary

It must be noted that this case is yet to be heard and the information here summarizes the plaintiff’s case only.  As with any case it is the outcome that is important and often claims made in pleadings are not made out in court.

The case is significant, however, on a number of grounds.  All parties are Chinese, confirming that IP rights are taking their place generally in China commerce, not just foreign related trade; the damages sought are large; and the method for calculating the damages claimed is interesting because it may be difficult for OPPLE to argue against their own accounts.

The status of the plaintiffs, beyond the fact that they own the relevant trademark is not yet known. Similarly the nature of their business, if any is not known to us.

Take away points

  • Trademarks are becoming even more important in China.
  • It is not enough to “just register” a China trademark. Registration needs to be done in the context of a well thought out trademark strategy that takes account of on the ground reality, including the categories of goods covered and the descriptions used in China.
  • Thorough searching is important in the registration process – the cost is money well spent in risk management. A cheap China trademark is likely to be anything but cheap in the long run.
  • You ignore previously registered trademarks at your peril.  The cost of China trademark infringement is high. If you become aware of a relevant prior China trademark do not proceed further with use in China until the issues are resolved.
  • A distributor can be held liable for China trademark infringement.  A prudent distributor in China should ensure that their principal holds relevant, valid and comprehensive China trademark registrations.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei in preparing this article is acknowledged.

 

OEM manufacturing in China with a China trademark – a changed landscape

OEM manufacturing in China with a China trademark was clarified by a recent decision of the Supreme People’s Court of the PRC which held, on the facts of the case before it, that OEM manufacturing in China with a China trademark but solely for export did not infringe the rights of the owner of the China trademark.

The judgment, issued on November 26, 2015, appears to be the first time that the Supreme People’s Court has directly addressed the issue of OEM manufacturing in China with a China trademark but solely for export.

This decision of the Supreme People’s Court clarifies a previously confusing array of local court judgments in cases regarding OEM manufacturing in China with a China trademark. Some local courts have issued conflicting decisions on apparently similar facts, others have consistent outcomes supported by materially different reasoning.

China is a civil law country and legal precedents have no binding legal effect. Despite this doctrinal position, it is expected that local courts in China will follow the decision of the Supreme People’s Court when facing similar cases regarding OEM manufacturing in China with a China trademark but solely for export, bringing a degree of certainty to this important part of China related business.

Background

The plaintiff, Focker Security Products International Limited (“Focker”) is a Hong Kong company and obtained the China registered trademark No.3071808 “PRETUL with an oval” from an individual on March 27, 2010. This trademark is registered on “hardware, hardware lock, padlock, metal lock and etc.” in Class 6 in China (“TRADEMARK”).

The defendant, Pujiang Yahuan Locks Co., Ltd. (“Yahuan”) is a Chinese manufacturer of locks and other hardware in Zhejiang Province, China.

In 2010, Yahuan signed two contracts with a Mexican company, providing that they wouldmanufacture 684 dozen padlocks for a total price of USD 3,069.79 and 10,233 dozen padlocks at the total price of USD 61,339.03. As required by their Mexican customer, Yahuan would affix “PRETUL” as a trademark on the locks.

Trial at first instance

On January 30, 2011, Focker filed a lawsuit at Ningbo Intermediate Court (“Trial Court”) claiming that Yahuan infringed its TRADEMARK rights by using an identical mark in the manufacture and export of locks. Remedies sought included:

  1. an order that Yahuan immediately stop the infringing activities;
  2. forfeiture of the infringing locks, packaging materials, and tools used in the manufacture of the infringing locks; and
  3. RMB 450,000 (a little more than USD 70,000) compensation to Focker.

Findings of fact

The Trial Court found the following facts:

  1. “PRETUL” was affixed and used on the body of the locks manufactured and exported by Yahuan, the keys of these locks and their product specifications.
  2. “PRETUL with an oval” was affixed and used on the sales package of locks.
  3. In the sales package, the Mexican customer was identified as the consignor with its address, telephone number, fax number, etc. indicated on the package. The words “Made in China” were also shown on the package but there was no information about Yahuan.
  4. The Mexican customer had registered “PRETUL” and “PRETUL with an oval” as trademarks in Mexico in Class 6 and Class 8.
  5. The Mexican customer issued a written authorization to Yahuan on March 24, 2011. In the authorization, it confirmed that it was the legitimate owner of the relevant “PRETUL” trademarks in Mexico and Yahuan was engaged to manufacture locks bearing this mark on its behalf for export only to Mexico.
  6. Yahuan agreed with the Mexican customer that: it should not sell any of the locks in China; the Mexican customer owns all trademarks and related IP rights; it should not apply for or register any trademark or copyright, directly or indirectly; and the Mexican customer was entitled to terminate the transaction at any time.

Trial Court judgment

The Trial Court held that:

  1. Yahuan was an OEM manufacturer for the Mexican customer; and
  2. its use of “PRETUL” on the body of locks, keys and product specifications should not be regarded as infringing the trademark rights of Focker with respect to the TRADEMARK because the mark used was not identical to the TRADEMARK and the goods would not be available in the China market.
  3. Yahuan’s use of “PRETUL with an oval” on the sales package of locks should be regarded as infringement of the TRADEMARK.

The Trial Court ordered Yahuan to immediately stop the use of “PRETUL with an oval” on the lock package and to pay compensation of RMB 50,000 (almost USD 8,000) to Focker.

Appeal of the Trial Court Judgment to the Zhejiang High Court

Both Focker and Yahuan appealed to Zhejiang High Court (“Zhejiang HC”) for review. No additional evidence was submitted by either party and no new facts were found.

Zhejiang HC overturned the decision of the Trial Court regarding the use of “PRETUL” on the body of locks, keys and product specifications holding that it did infringe the TRADEMARK but let the other part of the Trial Court’s findings stand.

Accordingly, Zhejiang HC revoked the trial judgment and held that Yahuan should immediately stop all use of “PRETUL” and “PRETUL with an oval”, and compensate Focker with RMB 80,000 (approx USD 12,500).

Supreme People’s Court review and judgment

Yahuan applied to the Supreme People’s Court for review of the Zhejiang HC judgment. The Supreme People’s Court approved the application on January 2, 2014, set the hearing date for April 11, 2014 and issued its judgment on November 26, 2015.

In its judgment, the Supreme People’s Court held that, OEM manufacturing in China with a China trademark should not be regarded as use of the trademark under the China Trademark Law because the basic function of a trademark is identifying the source of goods.  It cannot be infringement because there is no possible confusion in the China market.

The use of an identical or similar mark on the same or similar products in OEM manufacturing in China with a China trademark should not be regarded as infringing the rights of the owner   of the China registered trademark, because the goods are not available in the China market.

Based on its findings, the Supreme People’s Court revoked the trial judgment and the judgment of the Zhejiang HC, and rejected all claims by Focker.

Commentary

This decision, although apparently logical is not in accord with the position in some other jurisdictions and to that extent may not be welcomed by many that have their products manufactured in China.

Anybody having goods manufactured in China should ensure that their trademarks are registered in the likely destination jurisdictions because that will probably have to be relied upon if counterfeits are manufactured in China.

Customers with China registered trademarks being applied to OEM goods solely for export may need to develop a strategy to keep their trademarks alive as this decision suggests that they would not meet the “use” test if their trademark is challenged.

It remains to be seen whether this decision will be followed in local and other courts and also whether it will be applied in practice by China Customs.  In the latter case, there is a potential question of liability if goods solely for export are detained at the request of the owners of a China registered trademark.  This is an area to be watched closely.

Take away points

  • Overall, the effect and scope of this decision will take some time to work through the China courts and China Customs.
  • Despite that, we suggest that anyone involved in OEM manufacturing in China needs to reconsider their trademark strategy and OEM documentation to ensure that they are still relevant in the changed China OEM landscape.
  • Action should be taken now because the consequences of inaction are serious.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei is gratefully acknowledged.

 

A Chinese language China trademark is really important. This was emphasised by the recent New Balance case.  In addition to the award of damages amounting to RMB 98 million (approximately USD 16 million), a New Balance affiliate was ordered to publicly apologise to the Chinese plaintiff and to refrain from using the infringing China trademark on its products. An embarrassing and costly result for New Balance, and presumably its advisers.

Importance of a Chinese language China trademark

One of the more interesting aspects of the New Balancde case is that it was about the infringement of a Chinese language China trademark. Many foreign companies have paid too little attention to the Chinese language version of their China trademark, and the Chinese language trademarks of others.

There are many reasons for this, one of them possibly being the use of offshore China trademark agents that lack sufficient direct understanding of the China trademark regime. Another is the lack of understanding of the China business environment and the importance of a Chinese language China trademark. Finally, China trademark agents operate in a very competitive, price driven market.  As with many things in China, low prices often equate with service and advice to match.

Every foreign company should protect its foreign trademark by registering it as a China trademark in China. It should not stop there however. In China every product and service becomes known and identified in the Chinese language. It is good practice for the foreign company to control this process by registering a Chinese language China trademark for use in China.

Meaning and sound of a Chinese language China trademark

To date, most Chinese language renditions of foreign trade marks have followed one of two paths:

  • the Chinese language China trademark is translated phonetically to sound as much like the foreign trademark as possible.  This can result in a China trademark that is meaningless to the reader, or at worst, sends the wrong message about the product or service.
  • the Chinese language China trademark is translated by meaning – an attempt is made to convey the “message” of the product and service in Chinese, even if it sounds totally different from the foreign trademark.

Sometimes a hybrid path is chosen. For example the offending use in the new balance case was 新百倫 pronounced “Xin Bai Lun.” “Xin” means “New” in Chinese and “Bai Lun” is a phonetic translation of “Balance.”

The best, but less used path is to spend the time and effort to choose Chinese characters that sound like the foreign language China trademark and have a good meaning in Chinese. To be done successfully this requires an understanding of the underlying “message” of the product and a detailed knowledge of Chinese language.  Skills that are not readily available at the “bargain” prices that are often sought after by foreign trademark agents and their clients.

“Use” not necessary to register a China trademark

“Use” of a trademark is not required to register a China trademark. China has a “first to file” trademark regime and it would be prudent for any foreign business to consider immediately registering their foreign trademark as a China trademark.  At the same time they should spend the time, money and effort to choose Chinese characters that convey the appropriate brand message and also register that as a Chinese language China trademark.

China is a huge market for many foreign goods and services but without protecting the brand and its image by registering a suitable China trademark that market may be closed to you. If someone else, including your China distributor or agent, controls your Chinese language China trademark, they control your China business.

A good Chinese language China trademark is a real asset

A good Chinese language China trademark is a real asset to a business and it is worth spending the effort to get this now.  The opportunity may not be there in the future.

Take away points:

  • Now is the time to register your trademark as a China trademark.
  • All products and services end up by being known by a Chinese language name in China – best to register your Chinese language China trademark too.
  • Ideally your Chinese language China trademark should sound like the original and have a good meaning in Chinese. It is worth taking the time, money and effort to achieve this.
  • It is important to act promptly – if you do not register your China trademarks, someone else is likely to and then you will not be able to use your trademark in China.

© 2015 Graham Brown and Wei Xin. All rights reserved.

Chinese media reports that on April 24, 2015, the Guangzhou Intermediate Peoples Court ordered New Balance Trading (China) Co Ltd to compensate a Chinese individual, ZHOU Yuelun, with RMB 98 million (USD 16,029,572 approx at publication) because of trademark infringement. The trademark involved in this case is “新百伦” – a Chinese transliteration of “New Balance”.

ZHOU Yuelun (“Plaintiff”) is the owner in China of the Chinese character mark “新百伦”in Class 25 on “clothes, leather clothes, sport shirts. T-shirt, sandals, boots, shoes, socks, ties and belts” in China. He also owns in China the Chinese character mark “百伦”which was registered on “clothes, hats, socks and shoes” in Class 25 in China.

According to China Trademark Office (“CTO”) records, registration of “新百伦”was applied for on June 4, 2004 and it was registered on January 7, 2008. Registration of “百伦”was applied for on August 25, 1994 and it was registered on August 21, 1996. Both trademarks are still valid.

New Balance Trading (China) Co., Ltd. (“Defendant”) was registered in Shanghai on December 27, 2006 by New Balance International Limited for import and export, wholesale and retail of shoes, clothes and bags, including sport products and leisure clothes.

Plaintiff found the Defendant had been using “新百伦”on shoes without his authorization, so he filed a lawsuit to Guangzhou Intermediate Peoples Court (“Trial Court”) for infringement of his trademark.

Defendant responded that it had been using “新百伦”in good faith as a part of its company name and “新百伦”is the direct transliteration of “New Balance”. It also accused the Plaintiff of squatting the Chinese character mark “新百伦”.

Findings of fact

The Trial Court held in favour of the Plaintiff based on the following findings of fact:

  1. Plaintiff has been using the trademarks “百伦”and “新百伦”on men’s shoes in its business;
  2. Defendant has used “新百伦New Balance” as a trademark in online and offline advertisement and promotion, on invoices to customers etc. for the sale of its New Balance brand shoes.
  3. Defendant is fully aware of the Plaintiff and his registered trademarks “新百伦”and “百伦”because one of Defendant’s affiliates objected to the registration of “新百伦”in Class 25 by the Plaintiff in 2007 but the objection was not upheld.

Verdict

Trial Court ordered the Defendant to publicly apologize for the harm caused to the Plaintiff, pay court costs and compensate Plaintiff with RMB 98 million (USD 16,029,572 approx at publication) .

The total profits of the Defendant from Year 2011 to 2013 were RMB 195.8 million. The Trial Court decided that half of the total profit, RMB 98 million (USD 16,029,572 approx at publication) should be paid to the Plaintiff as compensation.

The case is still within the appeal period and an appeal is expected.

Take away points:

  • Trademarks are very important in China.
  • Every product and service becomes known by a Chinese name – it is best to control this by registering and promoting a Chinese version of the trademark.
  • If someone else owns the Chinese version of “your” trademark the consequences can be really serious.
  • Registering both versions of a trademark is the only sensible option.

© 2015 Graham Brown And Wei Xin. All rights reserved.

 

Foreign investment now permitted in health care in China

Health care in China is a business opportunity that has been recently opened up to foreign investment. Circulars jointly issued by the National Health and Family Planning Commission of China (NHFPC) and the Ministry of Commerce (MOFCOM)  – The Circular on Carrying Out the Pilot Program Establishing Wholly Foreign Owned Hospitals (“Circular”) confirms that opportunities exist for private hospitals and experienced hospital managers to participate in the growing needs of health care in China.

The Circular states that foreign investors may establish wholly foreign owned hospitals in Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan by way of new establishment or M&A. However foreign investors from outside Hong Kong, Macau and Taiwan are not allowed to establish Traditional Chinese Medicine hospitals.

The Circular focuses on the conditions required to be met by foreign investors to establish wholly foreign owned hospitals in China:

  1. the foreign investor applying to establish a wholly foreign owned hospital shall be an independent legal person with direct or indirect experiences of investment in and management of health care; and
  2. be capable of providing international level advanced hospital management and services; or
  3. have world class medical technology and equipment; or
  4. can supplement or improve deficiencies in medical services, technology, funding and facilities.

According to the Circular, the power to examine and approve the establishment of wholly foreign owned hospitals has been delegated to the provincial provincial level.

Existing health care in China

Existing Chinese hospitals, primary providers of health care in China, are inexpensive by developed world standards, but are crowded, lack privacy and frequently require patients to pay well above set rates for “extras”. Overall, their performance does not meet the aspirations of the emerging middle class.

China’s developing middle class have sufficient income to pay for a higher and more patient friendly standard of health care in China. Some go to private hospitals in China established by Chinese investors or the VIP section of existing hospitals. Others, if they cannot get what they want from health care in China, are prepared to go offshore. VIP sections of existing hospitals are typically less crowded and much more expensive, but offer the standard level of expertise.

Increasing numbers of health care tourists from China

An article in the Shanghai Daily about Chinese going to Malaysia for health care illustrates the growing need for improved health care in China. The article states that 22,000 Chinese sought health care in Malaysia in 2013, a big increase from the 8,000 in 2010, and is an example of the unmet demand for superior health care in China.

Medical tourists from China to Malaysia were identified in the article as the middle-aged, seniors, and couples seeking help in fertility treatment. Popular medical services sought were said to include cardiology, cardiothoracic surgery, oncology, infertility, orthopaedics and plastic surgery. Routine but comprehensive health checks are also likely to become important.

Why go outside existing health care in China?

There are probably many factors that influence a decision to seek medical help outside the available health care in China, but quality of service and outcomes are likely to be important. A recent article from Caixin suggests that China’s cancer survival rates are significantly below those in more developed societies.

Other factors that are likely to influence the decision to go outside health care in China include the availability of highly trained foreign qualified medical staff and advanced medical technology.

Another driver influencing development of health care in China is the ageing population coupled with filial obligations to look after parents. China has changed – the filial obligations remain but highly paid younger Chinese are in positions where they cannot take the time off to personally provide care for their ageing parents. Paying for better quality health care in China is one way that filial obligations can be at least partially met. This is likely to be a growing, and profitable trend for health care in China.

Take away points

  • Investing in health care in China is a recent opportunity previously closed to foreign investors.
  • The Chinese middle class are demonstrating their willingness to pay for superior health care in China, and are also willing to seek health care offshore.
  • The number of Chinese willing to pay for perceived superior health care has increased rapidly (for example, from 8,000 visitors to Malaysia in 2010 to 22,000 in 2013). The numbers in China that can afford superior health care are likely to vastly larger than the number accessing offshore health care. Many would prefer to access superior health care in China and have the means to pay for it.
  • Filial obligations to ageing parents will be a strong growth driver for superior health care in China.

GB

© 2014 Graham Brown. All rights reserved.

Translation of a China contract is very important.  I was reminded of this recently when I was reading an article written by another lawyer.  His basic point was that language in contract is very important, and where two languages are involved, it was important that the “language” provision in each version should correctly state the same governing language. To be frank, anything else is just incompetence.

Good translation is difficult to get

Unfortunately the article said nothing relevant about the really key point in China contracts – translation of a China contract. Good translation of a China contract is important, but it is difficult to get. That is one of the reasons why we do all translation of a China contract in-house – to ensure accuracy.  The other reasons is confidentiality, but that topic is for another time.

Why is it so difficult to get good translation of a China contract?  There are a number of reasons:

  • Legal translation requires particular skills – of course a high level proficiency in both languages is necessary, but so is an excellent understanding of legal terms in both the base language and the target language.  Both are required for good translation of a China contract.  Language alone is not enough – it is quite a different skill set from that required to translate poetry or a novel where the reader is sympathetic to the writer and trying to find the intended meaning.
  • When the language of a contract comes under scrutiny, it is likely to be in an aggressive context where one party is trying to establish a particular meaning from the words used and the other is trying to deny it.  Very often in a court or at arbitration. That is quite a different test for translation and the one that is really relevant for a China contract.
  • Translation is a skill that is generally not highly regarded in China.  There is a view that anyone can do it, which is another way of saying that it is unimportant work.  A glance at the instruction book supplied with a Chinese made appliance, or local signs, will, confirm this.  Very often translation is contracted out to language students at the nearest university for a pittance.  The result is what you would expect.
  • Good translation of a China contract is hard to do. It takes the skills previously mentioned, a lot of experience, and great attention to detail if an accurate translation is to result.  Some expressions in English (or Chinese) are very difficult to accurately translate into the other language.  Sometimes we have to amend the English (or Chinese) to facilitate accurate translation.  Good translation of a China contract is not something that comes at bargain rates, but the price is well worth paying if it helps get a successful outcome.

Questions you might ask about translation of a China contract.

  1. What is the process followed for translation?
  2. Who does the translation?
  3. What legal experience and training does he/she have?
  4. Who checks the translation?

Each of these questions is important, but those regarding who does the translation and checking are particularly so.  If translation is being contracted out, or being done by the other party, it is something to be concerned about. Translation should be done by someone able to talk directly with the person that drafted the contract so any ambiguities can be resolved and accurate translation obtained.

Checking is actually very important for good China contract translation because translators sometimes make mistakes that they cannot “see” because they created it. It requires fresh eyes.  Checking translation is a bit like proof reading a document, but goes further because a good checker will pick up ambiguities in the translation itself.  Perhaps needless to say, the person checking a translation should have superior skills to the original translator.

It is quite common in law firms operating in China for the person that drafts a contract, although a very competent lawyer,  to have very limited language skills in another language.  In these circumstances the drafter cannot check the translation so there must either be total reliance on the translator, or there has to be a competent checker.

Responses to the questions like “our translator is very experienced” or  “we have been doing this for many years and never had a problem”, or “all of our lawyers are bilingual” simply do not cut it.

Your contractual rights and obligations deserve more than a “trust me” response and there should be a proper process for legal translation.

Some advocate that one language should prevail.  Technically this is quite sound, but some practical realities need to be considered.  Very few people are equally fluent in more than one language. A  Chinese person  will typically be more comfortable with Chinese, an English speaker, with English.

If the governing law and dispute resolution is Chinese law and courts,  it is safe to assume that the Chinese language version is important, and will prevail.  But that is not the end of it.  Contracts have to be performed and it is important that both parties have accurate and authentic versions of the contract to guide their behaviour.

The only really sensible approach is to have good translation of a China contract so that both versions are equally authentic.  The contract can state that one prevails, but that is not a substitute for good translation, and both versions actually being the same.

Take away points

Good translation of a China contract is essential if it is to be legally and practically effective.

  • Good translation is not easy to get, and not every law firm can deliver it, but it is essential.
  • Be prepared to ask questions about the process: who will translate your China contract, who will check it for accuracy, and their qualifications and experience.
  • If you are not satisfied with the answers received it is probably time to seek an alternative source of contract expertise.

WX

© 2014 Graham Brown and Wei Xin. All rights reserved.

 

In a previous post I wrote about the dangers of using contracts drafted for another purpose as China contracts. This is particularly risky with China contracts and I had yet another real life example of a defective China contract this week.

Simple China contracts can be good

A good friend, a small businessman, provides services to large companies in China. He has a simple two and a half page China contract that is governed by Chinese law and provides for Chinese courts as the means of resolving disputes. It is appropriate for the type of work that he does and the sums of money involved.

Recently he approached me with a ten page contract for comment. He had submitted his usual China contract to the local China office of very large multinational company but had been told that “the legal department” had a rule that their China contract had to be used for all transactions. My friend thought that their China contract was overly complicated, but it was an important new client and just wanted me to check it before he signed.

Not all “standard” China contracts are good

I had a quick  look, suggested a couple of minor changes, and smiling to myself, said it was OK for him to sign. I explained that I was smiling because the China contract was unenforceable against my friend, but he could take action and have a judgment enforced against the other party, if it came to that.

How could it be that a large multinational company was insisting on using a China contract that provided them with no real protection?  Standard documents is the simple answer.  Their China contract was created for a different legal environment.  In particular it provided for home country law, and the exclusive jurisdiction of home country courts.  Unfortunately, sovereignty made that provision  practically useless

Sovereignty sounds old fashioned, but it is at the core of international transactions, and cannot be ignored.  Practically, sovereignty just means that each country has the power to do what it likes within its borders. A necessary consequence of this is that a judgment of a court in one country has no effect in another country unless that country agrees to it.  Agreements of this type are typically called treaties – judicial assistance treaties.  Without a treaty in place, or an agreement on a case by case basis, a judgment made in one country will not be enforceable in another country.

If not correctly drafted, China contracts may be unenforceable

To return to the China contract imposed on my friend.  It provided for home country law, and the exclusive jurisdiction of home country courts. In signing, that is what the parties were agreeing to.  But the country concerned has no agreement in place that would permit a judgment against my friend to be enforced in China.  He has no assets in their home country so any judgment there would be empty.  The multinational could not take action in China, because by their own “standard” China contract, they had ruled that out.

My friend however has no such problems.  He can take action in the home country courts and that is where at lest some of the multinational’s assets are located.  His judgment will not be empty.

So how is it that a company with virtually unlimited resources can end up in this position?  A kind response is lack of attention to detail (other responses might be less generous).  The relationships between the parties are such that there is really very little likelihood that either party would resort to litigation if there was a dispute. However the danger with misapplied “standard “ contracts is that they lead to a baseless sense of security – no-one sets out to have unenforceable ten page China contracts, but it happens, as this case illustrates.

Filing cabinets full of unenforceable contracts?

I imagine that the multinational company concerned must have filing cabinets in China full of these signed China contracts, all of them with one thing in common – they are unenforceable against the other party.  At least some are likely to be for matters where failure to perform will have serious consequences.

China, as a sovereign country has its own rules and requirements and ignoring them has consequences.  China contracts drafted without due regard to the laws of China are almost certainly going to be defective, at best and may be totally unenforceable.  This real life example, setting out the most common form of defective contract, confirms that.

Take away points

Here are a few:

  • The legal department does not always get it right with standard China contracts.
  • Attention to detail is important for effective China contracts.
  •  Contracts that are sound elsewhere may be unenforceable in China.
  • There is no substitute for on the ground China contract experience.

GB

© 2014 Graham Brown. All rights reserved.

The China contract

Use a specific China contract for China deals! A useful definition of a contract is an agreement enforceable at law.  If it is not enforceable, it may be an agreement, a memorandum, a note, or a minute, but it is not a contract.

At least 30% of the foreign created China contracts I see in China are technically defective to the point that they are legally or practically unenforceable.  Think about that for a moment.  “Contracts” are being created and signed that are not contracts at all!

How does it happen?

Usually it is because a document that was created for one purpose has been used for a different purpose.  Sometimes it is an attorney lacking in international experience taking on work that he/she should pass on to someone more experienced.  Both of these are not China specific so presumably defective contracts are found whenever there are international transactions. China’s legal system imposes its own requirements and these cannot just be ignored in a contract.

Why does it happen?

Many reasons – here are a few:

  • Inappropriate use of precedents or templates by law firms;
  • Large companies and their in-house legal departments want to have “standard” documents for use throughout the world. Unfortunately there are no “standard” legal systems;
  • companies or individuals want to save on legal costs so they take a contract that was originally created for a transaction in one country and use it as a China contract; and
  • counsel that would otherwise be quite competent, take on a China contract without the China specific background and experience to do so.

The unfortunate aspect of all of this is that the parties involved believe that they have contract and usually find out the truth only when they are facing a loss and want to rely on the “contract”.

Take away points

  • “Standard” documents are likely create more problems than they solve when they are applied to China transactions. There is only one sure path to contract certainty for China – documents competently drafted for use in China. Recycling legal documents for a China transaction without taking China specific advice is just an accident waiting to happen.
  • The cost of having a China contract reviewed by competent counsel is very reasonable, even more so when compared with the costs that can result from a defective contract. Taking a chance on enforceability and effectiveness in China makes no sense at all.

GB

© 2014 Graham Brown all rights reserved.

Plan for China – your trademark is important

Many businesses operate without registering a trademark in their home territory. While this is not a good idea, it is possible in many jurisdictions because at least some legal rights may accrue through use.

Home trademark rights do not extend to China

China is quite a different story. Your accumulated “at home” use of trade names, logos, and the like may accrue the rights previously referred to even without trademark registration.

Those rights are of no practical use in China, because trademarks are territorial. Rights outside China are not applicable inside China, the exception being where a local registered trademark is formally extended to China through the Madrid protocol.  China trademark registration is very important for China success.

China is first to register – why wait?

There is another complication: China is a “first to register” trademark jurisdiction, not “first to use”. Put another way – you do not have to show any prior use at all to register a trademark in China. China is a developing country with lots of budding entrepreneurs looking for ways to get ahead. Some of them have taken to registering foreign trademarks in China, either to use as the name for their own business, or to sell to the rightful user outside China, In some cases it is just a tactic to prevent the rightful user from using its trademark in China. Irrespective of motivation, there is a real chance that someone in China will register your “brand” as a trademark in China.

China trademark registration protects you

There is an easy and relatively inexpensive way to prevent this – register your own trademark in China before others do. Chinese can register directly, but others must use an agent in China for this. It takes a little time, but it is the surest way to protect your brand in China. China trademark registration is therefore  very important.

As with everything else, “cheap” is not usually the best value, so it is best to ensure that you get a complete service, not some bargain basement deal. It is your business future that is a stake here.

You could lose your China opportunity if you do not register your trademark in China.

An example might make the picture clearer. Imagine you are a well known wine producer, (say) “Alpinia Wines”. Every bottle you produce proudly bears the “Alpinia” mark at the top of the label, the masthead brand if you like. In the usual way the label then identifies the particular vineyard, the variety etc etc. Even the corks have the Alpinia brand on them.

Alpinia Wines decides that it wants to sell into China, one of the fastest growing markets for quality wines. The first shipment of wines is dispatched to their importer. Unfortunately, there is a problem. The importer advises that the shipment has been detained by China Customs because the labels infringe trademarks held by others. Alpinia has already been registered as a trademark for wine in China! China Customs warehousing charges are mounting and the wines will probably have to be destroyed. There could also be fines.

The owner of the Alpinia trademark in China for wines can request the China Customs to detain infringing goods . If products get past the China Customs undetected, as might happen, the trademark owner can still take action further down the line.

In the short term Alpinia Wines has no real options if China Customs has detained the goods. They might be able to quickly negotiate a licence with the trademark owner, but that is probably not very likely.

In the medium term, Alpinia Wines has limited options: it can re-brand for the China market, an expensive and unwanted course of action; it can try to obtain a licence or buy the China trademark from the China trademark owner; or it can try to find a legal ground that would permit them to have the China trademark cancelled or invalidated, allowing Alpinia Wines to apply for it.

Each of these options has common factors – they are inconvenient, expensive, uncertain, and time consuming. The time and cost invested in registering a trademark in China is trivial by comparison.

The example above has been drawn from our experience in this area. It is just an example on these pages, but for the business people involved it is devastating. The cost is not just the actual money costs, but the secondary cost of being diverted from developing the business and lost business opportunities that may be taken up by others. All preventable by timely trademark registration in China, which is what we have been recommending for a long time.

Take away point: China trademark registration is very important

  • To answer our own question, on any rational analysis, having registered China trademarks is very important for anyone that may do business with China, even if doing business in or with China looks a long way off now.
  • At the very latest, China trademarks should be registered as one of the very first steps in actually engaging with China.
  • The likely cost of failing to register far outweighs the cost of registration.

GB

© 2014 Graham Brown and Wei Xin. All rights reserved.

Welcome to our articles!

I first went to China in 1984, commuted every six weeks or so from 1995 – 1997, and have lived and worked in Beijing for just  a tad less than 17 years.  Wei Xin is a Beijing native with extensive offshore experience.  We have been working together on Chinese legal and business issues for more than 20 years.

Change, usually rapid, is the norm in China.  It creates opportunities and challenges at all levels of society but even living in the midst of it it is sometimes hard to keep up. The pace of change is particularly difficult for foreign business because much of the available China information is out of date, at least to some extent. Some of it, of course is just wrong.  In the legal area, many of the changes are predictable if a longer view is taken of the developing system, more or less natural evolutions to match the changes that have, are or will take place.

China is going to continue to develop as it sees best for itself.  Any engagement with China has to be on the basis that China must be accepted as it is, not as you would like it to be.  If that is done, and done carefully with good advice and support, China has many opportunities.

We will use this area to post on changes that we see that affect foreign business or just find interesting.  We hope that you will find the information posted here useful.

Graham Brown, Beijing