Monday, June 18, 2007

Wahaha's China arbitration request granted despite pendency of Swedish and U.S. lawsuits

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.

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