Duty of Confidentiality
Confidentiality is the bedrock of an open and trusting relationship between a lawyer and his clients. Confidential information is what a lawyer learns from or as a result of representing a client. Such information should be kept strictly confidential and secret unless exceptions apply. See ABA Rule 1.6
The Current Lawyer’s Law and Ethics prohibit a lawyer from divulging “national secrets, clients’ trade secrets, and privacy of parties” learned by the lawyer during representation. What is protected by confidentiality is, as seen, limited to national secrets, trade secrets, and personal privacy; to further comprise the safeguard of confidentiality, personal privacy is not defined and its scope not delineated. In China, personal privacy does not get as much protection as in the west where a higher premium is placed on it. Additionally, in representations where trade secrets are not of concern (i.e. an ordinary breach of contract case), clients are out of luck in term of confidentiality. Simply put, duty of confidentiality as stated in the Current Lawyer’s Law and Ethics does not provide sufficient protection to clients.
Amendments to the Current Lawyer’s Law expand the scope of information to be protected by confidentiality. Article 42 § One maintains the original confidentiality language; but Section Two inserts the difference. It provides that: “With respect to information gathered during the course of the representation which is adverse to clients’ interests, lawyers have no duty to testify and report such information unless…crime or against public interests…”
Positive step forward this amendment is, but this new provision does not go far enough to impose an affirmative duty to maintain the secrecy of information adverse to the interests of clients. Contrary to the ABA Rules, which allow disclosure under limited conditions, the Amended Law states apparently that a lawyer has no duty to disclose under most circumstances (excepting info about criminal activities and that which affects national security and major public interests), which makes such disclosure permissive. Will permissive disclosure of clients’ confidential foster better communication between clients and their lawyers? One surely hopes so. But if I were a client, I’d hesitate talking about certain things, not even with my Chinese lawyer.
Friday, June 29, 2007
Duty of Confidentiality
Posted by Brad Luo at 6:48 AM
Thursday, June 28, 2007
Undoubtedly, many Chinese lawyers adhere to their code of professional conduct, and they operate with utmost ethical conviction. Co-existing with such honorable professionals in China is, however, an often times unclear set of ethical rules insufficient in regulating a fast growing profession—lawyering. At the end of 2006, China had more than 130,000 lawyers and 13,000 plus lawyer firms. Law on Lawyers of the P. R. China (“Current Lawyer’s Law”) was last amended in 2001. Rules of Professional Ethics and Discipline (“Ethics Rules”) was accordingly revised in 2001 to reflect the changes in the law. On June 24, 2007, amendments to the Old Lawyer’s Law were discussed and some higher standards might be adopted for Chinese lawyers.
Duty of Loyalty
Under the Current Laywer’s Law and Ethics Rule, a lawyer is forbidden to represent both sides of the same conflict. Similar to the American Bar Association Rules (“ABA Rules”), the Chinese rule is a bright line rule, disallowing representation where a concurrent conflict of interests is present.
The new proposed law adds some more restriction to a lawyer’s scope of representation. It requires a lawyer to avoid conflict of interests in joint representations, and to shun conflicts between the lawyer, his close families, and the lawyer’s clients. See Article 43 Draft Amended Law on Lawyers 2007. Obviously, this is a big problem in China where family ties are stronger than those of some other countries, and a close relationship generates a higher possibility for conflict of interests where the lawyer and his client’s interests diverge if the lawyer’s family members are involved in the same transaction in question. This additional requirement is, to my mind, a bold step toward clearly drawing the line in the sand for the lawyer where conflict of interest might surface in his/her practice.
Furthermore, the new amended law expressly calls for lawyers to conduct conflict checks prior to representation. In actual practice, many lawyers probably have already been doing this to avoid conflicts. However, an affirmative duty to run a conflict check sets a bright line rule easier for all to see and follow.
Unfortunately, this amended law still does not address loyalty to former clients. The ABA Rule 1.9 states that a lawyer shall not represent new client in the same or substantially related matter whose interests are materially adverse to a former client absent written informed consent from a former client. Without the affirmative duty of loyalty to former clients, a lawyer can turn on his own clients while not offending his duty of confidentiality to them. Hopefully, this issue would be raised before the formal adoption of the new Law.
Duty of Confidentiality—(to be continued…)
Posted by Brad Luo at 9:46 PM
Wednesday, June 27, 2007
What do getting an American passport and registering a franchise in China have to do with each other? Normally, I would say NOTHING unless you have to register your franchise personally in China (which by the way is totally unnecessary).
Now, I think one word accurately describes them both---hard.
If you are an American and you need a passport to travel this summer, my deepest sympathy goes to you for what will have to endure to acquire it. Images of people encircling a passport office in the summer heat makes me feel lucky about my passport experience in China seven years ago.
The Bush Administration initiated a new security rule requiring all U.S. citizens to show their I.D. and proof of U.S. citizenship at border crossing. (Read about it here.) This requirement threw Americans quiet a bit, and a large number of Americans began to apply for a passport at the beginning of 2007. Passport offices, faced with a sudden increase of applications, are not equipped with the necessary personnel and equipment to process the applications, thus generating a back log of applications. When travelers figured out that if they do not do something to speed up the application process, they would not be able to leave the country as planned. Hence, the long lines.
The root of the problem is governmental regulations without the requisite resources to carry them out.
Chinese franchise regulators have created just the same problem. Three pieces of franchise regulations went into effect on May 1, 2007:
Regulations for the Administration of Commercial Franchising Operations
Commercial Franchise Registration Management Measures
Commercial Franchise Information Disclosure Management Measures
These new regulations did away with pre-approval in order to franchise in most industries in China. However, they impose mandatory registration and disclosure duties on franchisors. For American franchisors, registration and disclosure are nothing new because disclosure is required under the FTC Franchise Rule, and 15 states require registration as well. Registration of franchises, however, is new to both Chinese franchisors and regulators in that it has not been done before, and administrative glitches abound, to say the least.
Both local and central governments are not adequately equipped and prepared to implement the registration rules. Registration of a franchise in China involves a large quantity of paper work to be reviewed by regulators, and documents filed by franchisors are to be archived by the government. In addition, franchisors are required to amend material changes and file annual reports with the regulators. These mandates inevitably necessitate personnel, equipment, office space, and other resources.
A lack of planning and preparation is not the end of the story. At the end of 2006, China has about 26,000 franchise systems in place according to an industry report. Mandatory registration requirement means all of the 26,000 plus franchise systems must be registered before May 2008 to avoid administrative penalties. Imagine the amount of documents, the volume of phone calls, and number of inquiries that the regulators would have to keep up with. I am not even counting all of those foreign franchisors impatiently waiting to cash in before the 2008 Olympic gold rush.
The Chinese franchise regulators are not prepared, if not overwhelmed, to carry out rules made by the government.
With due respect to regulators in China and the U.S or elsewhere, regulating personal or commercial activities ain’t as simple as passing a law (sorry to state the obvious). Before making people do or not do something, it benefits all if the government would do a little bit more planning.
Tuesday, June 26, 2007
The Standing Committee of the People’s Congress read the draft anti-monopoly law for the second time on June 24, 2007. Six new proposals (Chinese only) have been added onto the draft law. Since there is so much hype about the much anticipated law, I will detail what was added in the 2nd read.
1. The central government shall formulate and implement regulations to strengthen and improve macro control, and to effect a unified, open, competitive, and orderly market system.
The overall policy concern underlying this addition is to achieve a balanced and coordinated relationship between anti-monopoly and other economic policies.
2. Operators can legally combine and merge through fair competition and voluntary association to expand the scale of operations, and improve their market competitiveness.
This addition is aimed at achieving a balance between combating monopoly and allowing Chinese companies to join forces against global competition. However, in order to accomplish large scale mergers, operators must face a proposed western-style legislative hearing in order to effectively prevent monopoly.
3. Operator in dominant market positions may not abuse their position to exclude or restrict competition.
This new rule corresponds with # 2. As many developed countries allow companies to gain dominant market positions yet at the same time regulate against the manipulation of such position to the detriment of trade, China sees that it should adopt similar antimonopoly rules that keep companies in check once they become big enough to be able to abuse its market power. During the 2nd read session of the law, the issue of price fixing was also raised.
4. State-owned companies with a national franchise are to be scrutinized in their pricing.
There has been growing dissatisfaction in China with state-owned companies in many industries, i.e, telecom, oil & gas, and other utilities. These companies seem to be immune from market forces in that they charge unreasonable fees for their products and services. This new provision represents an attempt to keep state-owned companies in strategic industries on the national pedestal yet scrutinize their commercial activities relative to consumer protection.
5. Industry associations should strengthen self regulation to guide the operators to compete legally, and to maintain the market competition order.
Industry associations wear a semi-governmental hat. It has been given the responsibility of guiding players in relevant industries to play by the rules of the Pricing Law fair competition regulations.
6. Foreign mergers and acquisitions may not endanger national security
This provision places national security checks on acquisitions of domestic firms. Mr. Paul Jones has a very interesting comment on this, and I quote here in full:
The draft has been amended since the first reading to include provisions regarding a review of mergers and acquisitions with regard to security considerations. The Chinese version of the article on this topic specifically mentions the concern expressed in the U.S. regarding the proposed acquisition of Unocal by a Chinese company. This aspect does not appear in the English language news stories that I have seen.
Friday, June 22, 2007
I am on a “trademark” crusade, so I want to beat this dead horse of a topic again.
If you have not registered your trademark in China (the Chinese translation of your mark, including Chinese characters, pinyin, any proprietary pictures, graphics, etc.), you should not even consider signing any licensing agreement at all. Many China bloggers have repeatedly discussed this topic, and I loathe restating the obvious.
Assuming you have done your homework and registered your trademark with the Chinese Trademark Office (“CTMO”), you still have one more regulatory hoop to jump through—submit your licensing agreement to the CTMO and local Industry and Commerce Administration agencies. (Trademark Law of China Article 43)
Please add the above to your due diligence checklist. The failure to notify the CTMO will result in serious consequences. First, you will be subject to administrative penalty for failure to do so. Second, failure to notify the CTMO will unnecessarily make your attempt to enforce the license agreement more difficult. If you did not even follow the Chinese law while doing business there, invoking the protection of the Chinese law will of course make your life a little more complicated. Third, your trademark is likely the most valuable asset, and not doing what is necessary to protect it is just simply not good business practice.
Further assuming that you have done all of the above, your next job is to vigilantly watch the quality of products or services provided under the trademark license. A failure to monitor the quality of products or services under your trademark also bears consequences. Poor quality of products or services under your trademark might cause your licensing to be considered as naked licensing, which could theoretically strip you of your rights in the trademark. In addition, poor quality associated with your trademark might also subject you to administrative monetary penalties. (See Id.)
Tuesday, June 19, 2007
In my last post about Pepsi’s “Blue Storm” trademark infringement litigation, I summarized the Zhejiang Province People’s Supreme Court’s holding. The Court basically ruled Shanghai Pepsi Co., Ltd. (“SH Pepsi”), one of Pepsi’s joint ventures in China, infringed on Lanye’s rights in the “Blue Storm” trademark, and it ordered SH Pepsi to pay damages in the amount of ¥ 3 million. It also ordered a public apology to be issued by SH Pepsi in a Zhejiang newspaper. The deadline for SH Pepsi to comply with the orders has passed.
SH Pepsi is in the process of applying for the Zhejiang Province People’s Supreme Court to reconsider its decisions. So, it seems that the storm continues.
On the one hand, I understand why SH Pepsi has determined to storm on. It probably has spent millions in the “Blue Storm” advertisement campaign, which might have involved contracts that obligate Pepsi. Given the high stakes, SH Pepsi does not want to and cannot afford to throw in the white tower yet.
On the other, SH Pepsi’s perseverance in this case, judged from the outside, seems misplaced. Litigation of this scale and consequence generates bad press from all sides. Often times, big companies try to avoid bad press at all costs. Pepsi apparently does not share the same PR strategy here.
One more thing about this case that keeps bugging me is why Lanye did not join the other Pepsi joint ventures in China in the lawsuit. They are all involved in the same alleged infringement in various parts of the country. For the life of me, I failed to see the reason behind it other than legal malpractice.
Monday, June 18, 2007
With the promulgation of three pieces of key legislation, the Regulations, the Disclosure Management Measures (“Disclosure Guidelines”), and the Registration Management Measures (“Registration Guidelines”), the Chinese government has made significant strides in creating a systematic, efficient, and predictable franchise regulation regime. Undoubtedly, a well-established regulatory system in a dynamitic and relatively new product/service distribution model—franchise will theoretically lead to greater success for franchisors and franchisees alike.
The recent published 2007 China Franchise Industry Report [Chinese only] provides detailed statistics on the tremendous growth of franchising in China. To illustrate, China boasts of franchise systems in excess of 2,600, and franchised units exceeded 200,000 by the end of 2006. All that growth happened in a matter of nine years, starting in 1997 with the enactment of an interim franchise adminitration regulation.
China currently has already two great things going for exponential growth of the franchise scene: a fairly well-established regulatory regime coupled with a market ripe for affordable, proven business investment opportunities.
So, what is left in the regulatory puzzle?
In comparison with the U.S. franchise regulations, China has not compiled a Uniform Franchise Circular Offering (“UFOC”), which is the standard information disclosure document for franchisors. The FTC has officially adopted the UFOC format with some changes in 2007, and franchisors to franchise in the U.S. will have to comply with the mandatory disclosure requirements by 2008. Will China institute a standard, uniform disclosure document similar in nature to the UFOC? Or will it elect to just let the Disclosure Guidelines and the Regulations serve as the regulatory blueprint for franchisor disclosure? The Chinese Ministry of Commerce issued some opinions during a press conference on June 15, 2007 relative to the implementation of the Disclosure Guidelines and Registration Guidelines.
In the conference, the speaker stated that: “the Ministry of Commerce will continue to improve regulations on disclosure and registration systems…” This is not a definitive answer as to whether a UFOC like document will be instituted in the future.
In addition, the speaker also indicated that on the agenda of the Ministry of Commerce with respect to franchising regulation are the following:
1. to continue research into franchise contract regulation so as to effectively avoid contract fraud;
2. to continue to look for solution to balance the rights and interests of both franchisors and franchisees; and
3. to ensure and guide the healthy development of the franchise industry in China.
While the Ministry of Commerce work on its "to improve-and-renew-agenda", the current regulatory regime should be sufficient to protect the interests of franchisors and franchisees.
Brad Luo's articles have illustrated the escalation of the trademark dispute between China's beverage giant, Wahaha, and the French company, Danone. The dispute centers around the ownership of trademarks used by 39 joint ventures which have evolved contractually between the companies since 1996. Danone claims that Wahaha has been using the trademark to unfairly compete with Danone and the joint ventures; Wahaha claims that the trademark transfer contracts, under which the joint ventures operate, was never approved by China's trademark authority and are void.
Choice of venue issues are complex in multi-national lawsuits and there is no great statutory relief in certain venues which will protect parties from multi-venue fights. This has proven to be a problem for foreign companies contracting with Chinese entities, in particular. An example is the case of China National Metal Products Import/Export Company vs. Apex Digital, 379 F.3d 796 (9th Circuit 2004). Apex Digital (Apex) is a California corporation that imports consumer electronic goods from China which it sells under its own brand name to retailers in the United States. In 2000, Apex entered into a series of contracts to purchase DVD Players from China National Metal Products Import/Export Company (Metal). Each of the contracts contained the following identical arbitration clause:
All disputes from or in connection with this Contract shall be submitted to the China International Economic and Trade Arbitration Commission ("CIETAC") for arbitration which shall be conducted by the Commission in Beijing or by its Shenzhen Sub-Commission in Shenzhen or by its Shanghai Sub-commission in Shanghai at the Claimant's option in accordance with the Commission's arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.
In March 2001, Apex filed a Statement of Claims concerning nine (9) of the purchase orders at the Shanghai sub-commission and the case was accepted. A week later, Metal decided that Beijing would be a better venue and filed a Statement of Claims concerning eight (8) of the purchase orders with CIETAC in Beijing.
Not surprisingly, Apex objected and requested consolidation of all claims into the already commenced Shanghai arbitration. CIETAC rejected Apex's objection and held that CIETAC could entertain both arbitrations at the same time, in different forums because the arbitrations were not "entirely the same." The difference? The Shanghai arbitration involved one additional contract.
The Beijing arbitration panel, unsurprisingly, ruled in favor of Metal as it had predicted. Metal sought enforcement in the United States. The United States District Court held, and the Ninth District affirmed, that the United States had to defer to CIETAC's internal rules to determine the validity of arbitral awards and had to enforce the Beijing decision.
Given the fact that the Wahaha/Danone dispute has been filed in three global forums, it raises serious questions: What do the joint venture contracts say about dispute resolution, venue selection, consolidation of disputes (if anything)? What happens if the Chinese tribunal rules in favor of Wahaha (that the IP transfer wasn't approved by the China Trademark Office) - will it void the contract in full or just negate the trademark transfer issues?
The Apex case exemplifies the impact of the dispute resolution clauses on the relationship and mechanisms to resolve disagreements. The agreement should always specify one institution for dispute resolution and, moreover, the issue of case consolidation should be taken into consideration when drafting contracts between multi-national parties. In Apex, CIETAC was asked to consolidate cases but refused to do so. Such refusal to consolidate cases is not improper in China. Thus, the only protection in these type of disputes is either to include a clause in the initial contract which expressly agrees to the consolidation of any cases concerning the transaction or the parties; or the warring entities can find a way to agree to consolidate the cases after a dispute arises.
In the Wahaha/Danone case, it is unlikely that Wahaha is going to agree to consolidate the cases in any venue other than Hangzhou. Hangzhou is the capital of China's eastern Zhejiang province and is home turf for Wahaha and Zong Qinghou. As the former chairman and founder of Wahaha (in the late 1980's), Zong has been the target of the allegations made by Danone and the primary catalyst for the escalated battle between the companies in the past 2 months.
Ok, this is getting really interesting!
Remember that Danone submitted the whole dispute to the Stockholm Institute of Arbitration on May 9, 2007? The arbitration is pending there in Sweden.
Remember that Wahaha also applied to have the Wahaha trademark transfer portion of the dispute with Danone arbitrated in the Hangzhou Arbitration Commission (“HAC”) on June 13, 2007?
In my last post, I was not sure whether HAC would take the case since the matter, on a bigger scale, is pending in Sweden.
But, surprise!! HAC accepted the petition for arbitration the very next day on June 14, 2007.
According to a report, Wahaha wants the HAC to determine whether the trademark transfer agreement, as a matter of law, is void since the Chinese Trademark Law requires such transfer to be approved by the China Trademark Office at the time of transfer (1996).
My hunch is that this might be Wahaha’s strongest argument. Wahaha Group in fact competed against Wahaha-Danone joint ventures; Wahaha Group actually used the trademark without the approval of the joint venture pursuant to the joint venture agreement. Therefore, without attacking the legality of the contract, Wahaha will have a very tough job in convincing the tribunals or a jury.
The next question that I anticipate to be raised after the “verdict” on the transfer issue is whether the contract in its entirety will be held as void. In my previous post, I discussed that Chinese Contract Law allows per se illegal clauses to be stricken in an otherwise enforceable contract. Assuming that the trademark transfer agreement is held as void by the HAC, will the original joint venture agreement (“Original Agreement”) survive the ordeal?
From a legal perspective, the rest of the Original Agreement should stand and continue to be effective given Article 56 of the Chinese Contract Law. But the really issue is what good is there for Danone if the Trademark transfer portion of the contract is void. Without the right to the Wahaha trademark, Danone’s joint ventures in China would only be a shell without its core value with which the Chinese consumers identify. Of course, Danone can rely on its own trademarks acquired elsewhere, but that is the topic of another day.
Friday, June 15, 2007
When Danone Asia Pte Ltd. (“Danon Asia”) and other Danone subsidiaries located in Asia submitted the dispute to arbitration in Sweden, things between the two partners have turned from the good, to the bad, then to the ugly. And Danone has hired the British law firm Freshfields to represent it in the Swedish arbitration deal. As a side note, Article 26 of the Joint Venture Agreement stipulates that disputes between the contracting parties, if unresolved, are to be arbitrated in the Arbitration Institute of the Stockholm Chamber of Commerce.
My research reveals some of the details of Danone’s contentions and complaints in the arbitration. The plaintiffs/petitioners are: Danon Asia, Jinjia Investments Ltd., Myen Ltd., Novalc Ltd. The defendants/respondents are: Wahaha Group Ltd., Wahaha Shiye Ltd., Hangzhou Food Ltd., Hangzhou Wahaha Investments Ltd.
The pith of Danone’s complaints is that Wahaha Group and its non-joint venture companies violated the original Joint Venture Agreement (“Original Agreement”) between Danone and Wahaha Group, and that such violation consequently resulted in the infringement of the trademark transfer clauses of the Original Agreement. Danone alleged that the defendants, without approval from the joint venture companies, manufactured products that are same as those of the joint venture companies. These products competed against the joint venture companies’ products, injuring the interests of the joint venture companies.
In addition to the corporate defendants, Danone also joined Mr. Zong, the former chairman of the board of directors of the joint venture companies and the man behind all the non-joint venture companies, as a defendant in the arbitration. Danone, expectedly, complained of Zong’s violation of the non-compete agreement (“NCA”) and non-disclosure agreement (“NDA”). And it also alleged that Zong created conflict of interests, violating his duty to the joint venture company as a board member.
In an attempted strategic move, Zong submitted the same case to the Hangzhou Arbitration Commission on Wednesday (June 13, 2007), hoping to capture a little bit of the home-court advantage. He avers that the trademark transfer clause in the Original Agreement is void for violation of the Chinese law at the time of contract in 1996, and that Danone fraudulently induced Wahaha into the contract.
From a legal stand point, Zong is caught in a tight spot. First, his choice of venue for arbitration is against the express provisions of the Original Agreement, notwithstanding his “need” of a friendly forum. Second, the disputes have already been accepted by the Stockholm Arbitration Institute, where Zong and the other four non-joint venture companies are defendants. So, whether the Hangzhou Arbitration Commission will dismiss the petition remains a very curious legal and possibly political riddle.
And then, to make thing a little more uncomfortable for Mr. Zong, Danone lit a fire in his back yard where he could not even get to. Danone’s lawsuit in Los Angeles against Ever Maple Trading Ltd., Hangzhou Hongsheng Beverage Co Ltd., and Zong’s daughter & wife really added “insult to injury.” Zong’s immediate response to this suit is to resign his position on the Danon-Wahaha Joint Venture board, which demonstrates how enraged he might have been. Aside from making him comfortable, Danone’ choice of forum in California could not have been better since here Danone is immune from the heat of nationalism manipulated by Zong, local politics in Hangzhou (the city is a shareholder of Wahaha Group, remember?), and unpredictable courts.
Good move, Danone! Smile…
[Tomorrow, I will talk about what I think Danone did wrong. Don’t laugh yet.]
Thursday, June 14, 2007
The Wahaha and Danone dispute appears to have been kicked into high gear.
Following Danone’s lawsuit in California state court against a subsidiary company of Wahaha, the former board director of the Danon-Wahaha Joint Venture, Zong Qinghou, announced on June 13, 2007 in a press conference that he would submit the dispute between Wahaha and Danone to arbitration in China. Specifically, the dispute involves a trademark transfer agreement Wahaha and Danone. The venue of arbitration is the Hangzhou Arbitration Commission.
In order to follow the development of dispute, which has gone global literally, it is better grasp the chronology of the relationship between Wahaha and Danone.
First, the occasion warrants a brief intro of the players. Danone is currently one of the world’s leading global corporations in fresh dairy products and bottled water, and its production and sales spans around the world. Wahaha is a bit more complicated. Wahaha Group consists of three large blocks of corporate entities. The first is the original Wahaha Group Ltd., and the City of Hangzhou owns 46% of the stock, and the rest of stocks of the company are unevenly distributed among Mr. Zong, the management, and employees (before 2000, Wahaha Group was a solely state-owned enterprise). The second one is the Wahaha-Danone Joint Equity Venture Group. Wahaha Group Ltd. Controls 49% of the shares, and Danone holds 51%. The third bunch is a host of non-joint venture companies established and operated in essence by Wahaha Group Ltd. and Hangzhou Wahaha Food Products Ltd.
Second, the following is the chronology of the relationship between Danone and Wahaha.
1. 02/29/1996-----Joint Venture Agreement between Wahaha Group Ltd. and Danone, including trademark transfer agreement, non-compete agreement, and confidentiality agreement
2. 03/28/1996-----Wahaha Group Ltd., Danone, and a Hong Kong enterprise agreed to form five joint ventures in China.
3. 04/1996-----Mr. Zong became the chairman of board of directors of the said five joint ventures.
4. From 1996—2007, the original five joint ventures evolved into 39 joint ventures, and everybody made a ton of money.
5. Problems began to surface in 2000 after the reorganization of Wahaha Group Ltd., which became a private entity with the Hangzhou government holding 46% of its stocks. The reorganized Wahaha Group Ltd. began to establish its own joint ventures and separate subsidiary entities, which totaled 17 entities in a span of six years. Apparently, Wahaha Group Ltd. used the Wahaha-related trademark in violation of the Wahaha-Danone Joint Venture Agreement.
6. Danone kept quiet with respect to Wahaha Group’s use of the trademark and apparent breach of the non-compete agreement inherent in the Joint Venture Agreement.
7. In late 2006, Danone initiated an offer to buy all of Wahaha Group Ltd.’s companies which are developed outside of the Joint Venture Agreement, and Wahaha Group Ltd. rejected the offer. The dispute went public in early 2007, escalating into a full blown fight over the ownership and usage of the Wahaha trademark.
8. 05/09/2007, Danone Asia submitted the disputes with Wahaha Group Ltd. with respect to the Joint Venture Agreement to the Stockholm Arbitration Institute.
9. 06/04/2007, Danone sued, in the Superior Court of Los Angeles County, Ever Maple Trading, a company based in the British Virgin Islands, and Hangzhou Hongsheng Beverage, as well as two individuals related to these companies. The two companies are believed to have ties with Wahaha Group Ltd. and Mr. Zong.
10. 06/05/2007, Mr. Zong tendered his resignation as the chairman of the board of directors of the Wahaha-Daone Joint Venture.
11. 06/13/2007, Mr. Zong announced his plan to submit the trademark dispute arising out of the Joint Venture Agreement to the Hangzhou Arbitration Commission.
As can be seen, the facts of this dispute are complicated and convoluted, and both parties are engaging in interesting tactics to gain procedural advantages. I am trying to get my hands on the Joint Venture Agreement to see exactly what they agreed to in 1996. Tomorrow, I will blog about the thrust of both parties’ contentions in their respective arbitration, trial proceedings.
Wednesday, June 13, 2007
Disputes happen. It certainly happens to foreign companies doing business in China. The multinational company Danone is in a huge one now.
I think it is safe to say that conflicts and disputes are unavoidable in doing business in a foreign country, but one can control the risks involved and minimize the damages thereunder. Choice of law in contracts with foreign parties can be of strategic importance if and when disputes arise in commercial activities.
Article 126 of the Contract Law of China governs foreign-related contracts. It provides that “parties to a foreign related contract may choose the applicable law for the resolution of their disputes, unless the law provides otherwise.” As it is clear from the contract code itself, the contracting parties' express provision on choice of law will be enforceable in case of a dispute later. Whether to choose Chinese law, the law of your own residing jurisdiction, or a neutral third jurisdiction is a difficult decision. The best thing to do is to get competent counsel who understands, comprehensively, the laws and regulations of all the three possible jurisdictions. Only upon a careful examination of all the applicable laws of the various possibilities can one make an educated choice.
The Contract Law of China also contemplates that if the parties fail to expressly state in the contract the choice of law, the disputes between the parties shall be governed by law of the country with the closest connection (nexus) to the contract. Simple it might seem, but the two words “closest connection” have generated voluminous commentaries among contract law and international law scholars. Some suggest that the connection is one that should be assessed in terms of both the quantity and quality of the connections, while other suggest that the presiding judge over the case should have wide discretion to determine by weighing the interest of the parties involved. Still others argue that the contracting parties’ intent warrants some consideration in determining what law governs. My two cents worth on this is that if the scholars cannot figure it out over years of research, the contracting parties REALLY need to expressly provide the choice of law clause for their own good.
Not all contracts in China can be governed by laws selected by the parties. According to the Contract Law, the following three types of contracts shall be governed by the law of P. R. China:
Chinese-foreign joint equity venture contracts to be performed in China
Chinese-foreign cooperative joint venture contracts to be performed in China
Chinese-foreign contracts for joint exploration and development of natural resources in China
If you really do not want a piece of the Chinese law over your contract, consider structuring your business deals around the contract law by avoiding forming a joint venture in China. But a deal, as I understand, is often more complicated than that.
For more on Chinese Contract Law, check out my earlier posts.
Tuesday, June 12, 2007
Pepsi "Blue Storm" Litigation in China
Zhejiang Province Supreme People’s Court rendered its fascinating opinion after months of trial. This case involves yet another two beverage companies. It seems that the beverage industry in China is a highly contentious one in light of the Starbucks case and the Wahaha v. DANONE dispute. Before I digress further, let me get on with the tale of “David” and “Goliath” in modern day Chinese battle ground for market share and trademark protection.
Plaintiff / appellant is a little known alcohol & beverage company named “Lanye Alcohol Beverage Co., Ltd.”, hereafter “Lanye” and/or “Chinese David.”
Defendant / appellee is the well known Shanghai Pepsi Cola Beverage Co., Ltd, hereafter “Pepsi” and/or “Goliath.”
Another Defendant / appellee is a local supermarket that sells beverage drinks, including Pepsi Cola. And the company’s name is Hangzhou Lianhua Group, Ltd. (hereafter “seller”.)
On December 14, 2003, Lanye registered its trademark “蓝色风暴” with the Chinese Trademark Office, which can be translated as “blue storm.” The registered trademark consists of the Chinese characters, phonetic spelling of the characters, and graphic designs associated with the trademark. Lanye produces bear, bottled water, cola, etc.
In 2005, Pepsi began using the Chinese characters in its massive advertising campaign in China. The characters were also printed next to the well known Pepsi trademark itself to promote the Pepsi coke.
Guess what? Lanye sued Pepsi for trademark infringement. One of the reasons for initiating the suit was that local Industry & Commerce Administration where Lanye is located seized its beverage drinks because Lanye was suspected of infringing on Pepsi’s trademark. (How can anyone stomach that?)
The Hangzhou Intermediate People’s Court held for Pepsi on two operative issues:
a. whether Pepsi’s use of “Blue Storm” constitutes trademark infringement according to the Trademark law since Pepsi utilizes its own well-known trademark in connection with the Lanye’s trademark in question
b. whether Pepsi’s use of “Blue Storm”caused confusion among consumers, thus injuring the plaintiff.
On appeal, the Supreme People’s Court reversed the lower court’s holding on both issues. On the first issue, the court cites Article Three of the Implementation Measures of the Chinese Trademark Law, stating that trademark use is a broad concept, which encompasses the use on product, product packaging, company stationery, product advertisement, and trade shows. Therefore, Pepsi’s use of the “Blue Storm” falls within the purview of trademark use.
In addition, whether a logo constitutes a trademark is determined by the function of the logo in commercial activities. If the logo is capable of assisting consumers in distinguishing products or the origins of services received, the logo is a trademark. Based on discovery, Pepsi’s use of the “Blue Storm” did function as a tool for consumer to identify the logo with the overall brand name of Pepsi, irrespective of the Pepsi trademark.
With respect to the issue of consumer confusion, the court concluded that Pepsi’ use of “Blue Storm” as a trademark did create confusion among consumers relative to Lanye’s registered trademark. The Court noted that because of Pepsi’s extensive use of “Blue Storm” Lanye’s registered trademark has all but lost its value and function—brand name identification for Lanye.
In its conclusion, the court ordered Pepsi to pay ¥ 3,000,000 to Lanye and to issue public notice of the infringement. The Seller was, according to the court a bona fide purchaser, not liable for monetary damages, but has the responsibility to stop selling any infringing products manufactured by Pepsi. Curisously enough, the Court did not order the destruction of the existing infringing Pepsi cokes; it reasoned that would be impractical and would constitute waste.
For some reason, this case did not generate a lot of hype. Maybe Pepsi has done a good job of P.R. so that the embarrassment will not expand back home. After all, being held accountable for infringing on the trademark of a little known local company is not as tasty as a Pepsi Coke.
A few observations about the case:
a. Not all Chinese courts are willing to bend over backwards to protect foreign companies if they do not follow the Chinese law.
b. Chinese companies are getting savvy about protecting their IP rights.
c. Why Pepsi failed to perform a basic check on the “Blue Storm” with the Chinese Trademark Office totally and completely beats me.
d. Even if you own your own registered trademark and you are a big company, you still cannot take the trademark of another small company without due process of law. Not in America, not in China either.
e. Don’t assume anything, especially when you are a foreign company in China.
Saturday, June 9, 2007
Friday, June 8, 2007
Don’t get me wrong. Freedom of contract is one of the fundamental principles of the Chinese contract law promulgated in 1999. However, as Professor Hsu states in his article Contract Law of the People’s Republic of China, the freedom of contract “is not absolute.” The freedom is restricted to contracting within the metes and bounds of the law, societal values, and basic public policy. Provided that such freedom veers off course in the eyes of the Contract Law, the people’s courts (tribunals, alternatively) have jurisdiction and authority to invalidate the contract or illegal clauses therein.
One conspicuous question here is what standard a people’s court or tribunal applies in determining whether a contract or its clauses are per se void for violating other laws or regulations. This question, very naturally, turns on the issue of conflict of laws. Where the law of a locale comports with the law of the land on a particular issue, no concerns arises in terms of the conflict of laws; where the law of a locale conflicts with the law of the land, the concern for inconsistent judicial decisions is well-founded.
In response to the above question, the Supreme People’s Court opined and ordered that when invalidating a contract or clause, the courts must consider the laws and/or administrative regulations adopted by the National People’s Congress, its Standing Committee, State Council, and various underlying ministries, commissions of the State Council. No local regulations or rules should be applied by the courts while invalidating contracts. This Supreme Court rule symbolizes a bold step toward unifying judicial standards across the country. But I’d caution contracting parties about relying exclusively on this Supreme Court opinion.
Assuming that Chinese law is the law of choice in a contract, here is what I suggest in this regard:
1. Get local counsel and know the local law governing all aspect of the contractual relationship;
2. Make sure that your contract and its clauses comply with the laws and regulations of the Republic;
3. Harmonize the contract and the relevant form contracts drafted by local Industry and Commerce Administration.
Thursday, June 7, 2007
To continue my musing on the topic of governmental, executive intrusion to the freedom of contract in China, I intend to discuss the origin of such power to regulate contract formation, and to shed a little on how the power has been exercised in some locales in China.
Legislative Designation of Executive Power to Regulate Contracts
Article 127 of the Contract Law of the P. R. China designates contract enforcement authorities to departments of the Industry and Commerce Administration and other relevant administrative agencies. However, such authority and power is restricted to “monitoring and handling illegal acts that harm the State or public interests through the conclusion of a contract, in accordance with the relevant laws and regulations.” See 16 Minn. J. Int’l L. 115, 142.
In other words, these administrative institutions and agencies are granted a restrictive authority to monitor and handle illegal activities associated with contracts. By inference, they do not have the power to invalidate either contracts or contract clauses unless a crime or illegal acts are involved which injure the State or public interests.
The Exercise of Executive Power in Regulating Contracts
In practice, however, local Industry and Commerce Administration departments enjoy greater power and authority than what is defined in Article 127 of the Contract Law. “Monitor” and “handle” were the two key words that define powers designated, but the power and authority exercised by the Beijing Municipal Department of Industry and Commerce, to my mind, far exceed powers granted by the Contract Law.
For instance, the Circular Regarding Intensifying the Supervision of Contract Terms and Provisions (“Beijing Order”) mandates the usage of form contracts drafted by Department of Industry and Commerce alone or along with other administrative agencies. Such form contracts cover a wide range of commercial agreements:
1. landlord-tenant contracts;
2. home renovation contracts;
3. utilities contracts;
4. business operations training contracts;
5. TV, communications services contracts;
6. Consumer loans, life and property insurance contracts;
7. Travel, transportation contracts;
8. Automobile purchase, lease, and repairs contracts;
9. franchise contracts;
10. Supermarkets transactions contracts.
These contracts, according to the Beijing Order, are under scrutiny. And the governmental scrutiny manifests in two ways. First, contracting parties are encouraged to adopt the form contracts already drafted and circulated for use. Second, parties engaged in the above-list commercial activities can expect to be targeted in inspection. Violations of local enforcement regulations can result in heavy penalties.
The People’s Congress through the Contract Law grants Industry and Commerce Administration and other agencies the power to monitor and handle illegal acts associated with contracts. In reality, however, the power has been expanded beyond its designated sphere of law enforcement. It morphed into the power to draft form contracts for use in a wide range of commercial transactions. Although the use of such draft contracts is not yet mandatory, it surely would not surprise a business person in China when they do some day.
Wednesday, June 6, 2007
In yesterday’s post, I examined local rules affecting the freedom of contract, especially the Beijing and Shanghai Orders that declare certain contractual terms and provisions per se illegal and void. The local municipal governments' power to interfere with parties’ contract in this fashion led me to conclude that the basic spirit of freedom of contract has been violated by the Orders. Today, I want to continue the discussion by observing the stipulations on the topic of contract validity in the Contract Law of the P. R. China. [note: my comments are largely based on the article written by Professor Steven Hsu published in the Minnesota Journal of International Law. See 16 Minn. J. Int’l L. 115]
Per Se Void Contracts
Contracts, pursuant to Chapter Three of the Contract Law of P. R. China, can be invalid and void in the following five circumstances:
1). Contract executed through fraud or under duress, thereby harming the interest of the State;
2). Contract between parties who have colluded in bad faith, thereby harming the interest of the State, the collective, or an innocent 3rd party;
3). The contracting parties have hidden an illegal purpose under the disguise of a legitimate contract;
4). The contract harms public interests; or
5). The contract violates a mandatory provision of laws or administrative regulations.
Per Se Void Contract Clauses/Terms
Individual contract clauses, likewise, can also be per se invalid if they violate public policy or interests. Even though the rest of the contract can remain enforceable, clauses that meet the following description are per se invalid according to Article 53 of the Contract Law of P. R. China:
1). Clauses that exclude a party’s liability for personal injury sustained by the other party; and
2). Clauses that exclude a party’s liability for damages sustained by the other party through the other party’s intentional misconduct or gross negligence.
Some contract, in contract with per se invalid contract, may be invalidated or voided by the injured parties through either judicial action or arbitration. Void contracts are, pursuant to Article 54, the following type of contracts:
1). The ones that are entered into with material mistake;
2). The ones that are clearly unfair upon execution.
3). The ones entered into when one party was under duress or was defrauded by the other.
The aggrieved party may petition a people’s court to either reform or cancel the contract. Alternatively, the same party may pursue redress through arbitration. But, the petitioned court or tribunal cannot cancel the contract if the remedy sought is a reformation.
Who Has the Authority to Invalidate Contracts?
Obviously, tribunals and courts with proper jurisdiction have the authority to invalid contracts or contract clauses. But the sticky question is—What legal standard shall the adjudicating institution apply where the local statutes/regulations differ from those of the central government?
To be continued…
Tuesday, June 5, 2007
Freedom of contract plays a crucial rule in most commercial activities, and the basic idea is that both parties get the benefit of their bargain in exchange for the imposed contractual duties. Simply put, you “pay” for what you bargained for in the contract. In order for this basic form of commercial tool to work effectively and efficiently, the parties to the contract must have the freedom to decide what is good and bad for itself, free of other interferences and influences.
However, things do not work 100% well in reality. In the United States, courts sometime step in to declare certain terms and provisions null and void because the enforcement of which violates equity, fairness, or public policy in general. A detailed discussion of this topic is beyond the scope of this post.
In the same vein, contracts can be under scrutiny in China, thus being subject to governmental, administrative interference under the umbrella of consumer rights protection.
For example, the City of Shanghai enacted a municipal statute on July 13, 2000. (ordinance)—Regulations on the Supervision of Contract Terms and Provisions. (上海市合同格式条款监督条例) Similarly in Beijing, the Municipal Administration of Industry and Commerce issued an administrative order, which was blessed by the city government. Titled Circular Regarding Intensifying the Supervision of Contract Terms and Provisions, the order resembles the Shanghai statute. (关于加强北京市合同监督管理若干意见的通知) Hereafter, I refer to the above-mentioned municipal rules as “orders.”
According to the Orders, the following terms and provisions are per se illegal:
A. Terms and provisions that shield the drafting party from the following liability:
1. Liability arising out of personal injury to consumers;
2. Liability arising out of damages to consumer’s property due to intentional tort or gross negligence;
3. Warranty liability provided to consumers along with sale of products or services;
4. Liability due to the drafting party’s breach of contract;
5. Other liabilities under the law due to the drafting party’s breach of contract
B. Terms and provisions that increase consumers’ liability:
1. Unreasonable amount of liquidated damages or contractual damages;
2. Responsibility of operational risks that rightfully belong to the drafting party;
3. Other terms or provisions that unlawfully increase consumers’ liability
C. Terms and provisions that extinguish the following consumers’ rights:
1. The right to lawfully amend or rescind the contract;
2. The right to demand liquidated damages or actual damages;
3. To exercise the right of contract interpretation;
4. The right to litigate in the event of a dispute.
5. Any other consumers’ rights guaranteed under the law.
As a consumer, I am not against the protection of consumer rights. But the pervasive hand-on, in-you-face type of governmental interference in the contractual process, in my humble opinion, is an affront to the basic idea of freedom of contract. Even if there are instances of fraud, unfair contractual practices, governmental interference, like the Orders, is arguably not the most efficient means of correction, and I’d argue that the market itself is in the long term, which includes the consumers at large in a burgeoning market economy.
As a lawyer friend always says:"A litigation lawyer would die for a good argument." However true that might be, the reality of doing deals in China, especially in two of China's largest and important cities Beijing & Shanghai, demands foreign and domestic companies alike to draft contracts carefully so as to avoid the contracts being deemed void.
Monday, June 4, 2007
There are four major regimes of intellectual property: trademark, patent, copyright, and trade secret. Trade secrets are the oldest and probably not most recognized form. Your trade secret is likely one of the most important things that gives you an edge in your success and survival amongst fierce competition. If you take your business into China, that still rings true. Thus, an understanding of the law of trade secrets in the P. R. China is essential in order for your to protect your trade secrets.
Unlike the United States, China does not have an unified body of law addressing the protection of trade secrets; in stead, trade secret protection laws are scattered in a few pieces of legislation, and the complexity of which warrants dedicated attention.
Definition of Trade Secret
Trade secret is defined as, pursuant to Several Regulations on Prohibiting Actions of Infringing Trade Secrets (《关于禁止侵犯商业秘密行为的若干规定》)
any formula, pattern, device, machine, process, technique, compilation of information, or program (referred to collectively as proprietaryinformation)
Regulations/Laws on Trade Secret
An article I ran into succinctly and accurately lays out the relevant laws on trade secret, I will try to shorten the pithy parts of it.
1. Article 10 of the Anti-Unfair Competition Law states that a competitor is prohibited from using the following measures to infringe upon another's trade secrets:a) To acquire the owner’s trade secret by theft, intimidation, or other improper approaches;b) To disclose, use, or allow others to use the owner's trade secrets that have been obtained through the above methods;c) To disclose, use or allow others use the trade secrets which breach the agreement or requirements of the owner.
It is considered a trade secret infringement for any third party to acquire, use or disclose another's trade secrets under the condition that he acknowledges the existence of illegal behavior as set forth in the above clauses.
Article 25 of the Anti-Unfair Competition Law further stipulates the penalties for violations under Article 10.
2. Article 22 of Labor Law of the P. R. China allows an employer to include a clause in an employment contract clause that affords protection for the employer's trade secrets. And a typical such clause appears in the form of a confidentiality agreement, which prohibits an employee from disclosing the employer’s trade secrets at the end of his/her employment.
3. Article 118 of the General Principle of Civil Law, Article 43 of the PRC Contract Law, and Article 219 of the Criminal Law.
The same article quoted above suggests excellent ways to protect your trade secrets. It states:
it is important to keep the trade secrets conforming to the special features that are prescribed by the law, that is, unknown to the public, with business value and kept in secret. In the event of a breach, this allows for a legal basis for prosecution. For example, if a company leaves the trade secrets in unlocked file cabinets in unrestricted areas of the company, or leaves the documents disclosing trade secrets in garbage cans without shredding the documents, then they have more difficulty establishing that the trade secret was to remain unknown to the public or has high commercial value. It is sometimes surprising how many companies are susceptible to such a simple mistake. It is quite easy and inexpensive to establish such internal protective measures and with a documented policy on how such materials are to be handled, there becomes a point of reference for a court to base prosecution on.
Then, it provides practical steps to safeguard your trade secrets:
A. Maintain documentation that you are the legitimate owner of the trade secrets that you seek to protect.
B. Establish an internal trade secrets protection system:
Have a written trade secret plan and follow the plan
Train your employees on the protection of trade secrets
Sign and enforce confidentiality agreements
Friday, June 1, 2007
On the heels of the Starbucks v. Shanghai Starbuck case, another foreign trademark holder doing business in China had its day in court and won. Of course, this is only in the trial court; appeals might follow.
In this case the plaintiff is the French company Lacoste, trademark holder of the famous “Crocodile” clothing trademark. Lacoste registered the “Crocodile” mark in October 1980, and the China Trade Mark Office, according to a Chinese report, put this mark in question on the list of “Famous Trademarks to Be Targeted for Protection.” (《全国重点商标保护名录》)
Defendants are three Chinese companies: Guangzhou Tai Crocodile Clothing Co., Ltd. (“Guangzhou Crocodile”), and two other sellers of Guangzhou Crocodile’s clothes. Curiously enough, Guangzhou Crocodile had its trademark “Golden Crocodile” registered, which can be described as a crocodile crouching in water waves, and with the Chinese Character “金鳄”next to them, which means “golden crocodile.” According to the facts of the case, Golden Crocodile places the crocodile portion of its mark in the prominent areas of clothes, while sews on the water wave and the Chinese characters in the background, which bear the same colors as the materials used for clothes as a whole. The intention of this, I guess, is to display the crocodile prominently, and let the rest of the mark fade away into the background.
Lacoste sued, joining the three defendants, in Beijing’s First Intermediate People’s Court for trademark infringement and trademark dilution, and it further pleaded for an injunction, public notice of such infringement, seeking also damages in the amount of ￥1,000,000.
Congratulations to Lacoste. It pretty much wrote its own ticket in its pleadings because the Court gave it basically all it asked for: infringement and dilution of the Crocodile mark by Guangzhou Crocodile; cessation of production by Guangzhou Crocodile; destruction of all infringing clothes; damages in the amount of ￥760,000; a public apology to be issued by the three defendants on the China Industry & Commerce Times.
Yes, this is a sweet victory for Lacoste and its lawyers. While the board members of Lacoste celebrate with French wine, I celebrate this case with this blog post for the following reasons:
1. The court carefully examined the circumstances of Defendant Guangzhou Crocodile’s use of its own mark; it focused on Guangzhou Crocodile’s misuse of its mark, and held that the misuse of a legitimate trademark, in certain circumstances, could constitute infringement of another’s trademark.
2. The Court cited a case out of Changchun Intermediate People’s Court. In that case, the Crocodile trademark was held to be a “famous mark.” The Court cited this holding in part to bolster the fact that Lacoste has an indeed famous mark, which is entitled to legal protection in China.
3. The Court extended infringement liability to sellers of products that infringed on the trademark holder’s rights. In its opinion, the Court expressed in strong language that the two co-defendants, as sellers of clothing, failed to investigate thoroughly the legitimacy of Guangzhou Crocodile’s use of its trademark, and such an obviously subjective failure to investigate resulted in sales that violated the rights of Lacoste. And such a gross failure to investigate warrants civil liability (negligence, tort liability).
4. The remedies handed out by the Court are appropriate. Even though the Court did not grant the full amount sought in damages by Lacoste, it imparted more value to Lacoste and trademark holders than the ￥24,000 can buy in China—a clear message that reads: “Don’t Mess with Legitimate Trademarks of Others!”
Cheers! À votre santé ! 干杯!!