Pfizer: Testing the Potency of Chinese IP Law & a Beijing Court

Pfizer, the giant American pharmaceutical company, had its day in the Beijing 1st Intermediate People’s Court twice this year for different causes and with different results. Its experience with the Chinese legal system, to my mind, is a testament to the fact that China does have effective intellectual property laws (trademark law, at least) and competent judges, despite the many doubts and criticism out there on same.

First, let’s look at how Pfizer lost miserably in China in trying to protect its “Viagra” trademark back in February, 2007. The basic facts (in Chinese only) of the case are that a Chinese company named Weierman registered the trademark “Wei Ge” (伟哥) (meaning “Great Man”) in June 1998, and licensed to a third party to manufacture medicine using the said trademark. This manufacturer in turn sold its products to another pharmacy chain. These three companies were joined as co-defendants by Pfizer.

In its lawsuit, Pfizer alleged that Weierman acted in malice when it registered the “Wei Ge” trademark which had become a “famous” mark in China even though Pfizer had not registered it. To prove that the “Wei Ge” mark was a famous one belonging to Pfizer, it offered evidence of widespread media reporting about the function of the wonderful blue pill, commonly known as “Viagra” in the west, but translated into Chinese as “Wei Ge.” It further alleged that Weierman’s use of the “Wei Ge” trademark constituted both trademark infringement and unfair competition. At the same time, Pfizer petitioned the Court to declare its unregistered trademark “Wei Ge” legally famous (sounds just like the Ferrari case). For the sake of brevity, I will omit other details that Pfizer alleged and pleaded for in the lawsuit.

The Court slammed Pfizer. It ruled that evidence of media reporting did not in and of itself prove that “Wei Ge” is a famous trademark. The Court further found that Pfizer, in fact, never officially used the “Wei Ge” trademark (implying “how can you ask us to declare a trademark famous when you haven’t in fact even used it yourself?”). Of course, Pfizer could have argued for protection under the Paris Convention Art. 6bis, but the problem is that “Wei Ge” was practically unknown in the United States and other Western countries. In the West, the blue pill was known as “Viagra.” If “Wei Ge” is not even known in the U. S., Pfizer could not logically claim that “Wei Ge” is thus deserving of protection in China as an unregistered famous trademark. Therefore, “Wei Ge” as a trademark, neither first registered by Pfizer nor famous either in China or the U.S., does not belong to Pfizer. The Court definitely did a great job picking apart Pfizer’s arguments.

Despite the loss in February, Pfizer, in September, returned to the same Beijing 1st Intermediate Court for another infringement lawsuit (in Chinese only) against a Beijing copycat over the very trademark of “Pfizer” in Chinese—“辉瑞.” Same court, same plaintiff, same causes of action, but this time Pfizer came out on top.

Pfizer Products Co., based on undisputed facts, registered multiple trademarks in China beginning in 1995. Its registered trademarks include “Pfizer”, its Chinese translation “辉瑞”, “辉瑞 Products”, “辉瑞 Hui Rui”, and other related symbols and graphics. In 2004, a Beijing company registered its corporate name as “辉瑞” (this is beginning to sound more and more like Starbucks v. Shanghai Copycat). According to notarized court documents, this company later named itself the Beijing 辉瑞 (Hui Rui) Company, and on its company website, it put the Chinese characters “辉瑞” in a very prominent place. And on its website, the defendant claimed that it was an authorized agent of an American bio-medical corporation, that it possessed advanced research capability and skillful management talents, and that it was devoted to the application and promotion of bio-medical products. These claims obviously insinuated that the defendant had some kind of connection or relationship with Pfizer. The records also revealed that the defendant sold detoxification medicine, causing confusion among consumers because they found out that the products they bought were not effective as claimed by the defendant.

The Court held the defendant liable for trademark infringement and unfair competition. It stated that even though the defendant did not sell medicine under the trademark of “辉瑞”, its prominent use of “辉瑞” in its advertising in fact functioned as an identifying element, linking its products to the source. Therefore, the defendant’s use of “辉瑞” on its website and advertising was in fact trademark usage. Since the use was unauthorized, it constituted trademark infringement. In addition, the defendant’s purposeful registration of its corporate name, using someone else’s trademark “辉瑞”, constituted unfair competition because it was likely to cause consumer confusion and monetary damage to Pfizer.

Examined together, these two Pfizer cases show a great deal about the Chinese law and courts. First of all, its current trademark law and unfair competition law, in combination with the General Principles of Civil Laws, are sufficient in dealing with many complex commercial disputes involving foreign parties. As shown, Pfizer has tried to utilize the Chinese legal system to its advantage repeatedly with varying results. It did not win all the time, not because the law was inadequate or the judges were incompetent, but because of its own mistakes. Secondly, a careful read of both cases clearly demonstrate the judges’ ability to analyze the facts, to apply the law, and to reach well-reasoned and fair decisions. Of course, I have to admit a caveat that Pfizer’s cases were all decided by the same Beijing 1st Intermediate People’s Court, well known for its judicial prowess in adjudicating IP cases. (And not all venues in China are like this court.) Moreover, China’ record on IP protection and the fulfillment of international treaties is by no means perfect. Please read this for an in-depth analysis of China’s WTO-IP compliance.

While China still has a long way to go to forge a better legal system (although what constitutes “good” may still be controversial), it is in effect making progress, albeit slowly in a piecemeal and ad hoc fashion. When dealing with an ancient civilization partially cloaked in and still striving for modernity, it is easy to forget that China started to build its modern commercial law only about thirty years ago. So, attacking China in the abstract with allegations that it “does not have a body of civil law” might not only show ignorance and a lack of patience, but also piss some people off.

Franchisors: Beware of Advertising Minefield in China

When I first finished translating China’s new Regulations on the Administration of Commercial Franchise (“Franchise Regulations”) in the spring of 2007, I feared that some franchisors would easily get confused over the provisions relative to advertising. That fear was not unfounded because one franchisor’s battle wounds in Beijing could reveal that dangers lurk in the new Franchise Regulations.

With respect to advertising, Article 17 provides in subsection 2 that:

A franchisor shall not engage in fraudulent and misleading activities in the course of advertising and publicizing a franchise. In its advertising, the franchisor shall not include content concerning a franchisee’s earnings results in the franchise operation. [Please note that the text is extracted from my translation, and it may differ slightly from other versions out there.]

Clearly, the Franchise Regulations prohibit a franchisor from general fraudulent and misleading statements in its advertising. “Don’t promise what you cannot deliver” is the basic message. At the same time, however, a franchisor in China is also forbidden from stating anything about profit margins, or earnings forecast. It translates into--Don’t say anything about how much money a franchisee can expect to make in a given amount of time from running a franchise. Simple enough, right?

Not really, because the same Franchise Regulations require a franchisor to disclose financial performance assessment of the franchise to prospective franchisees in its mandatory disclosure document. See Article 22 (8); see also Measures on the Administration of Information Disclosure of Commercial Franchise (“Disclosure Guidelines”) Article V (8) (ii).

To put the rules on advertising about earnings in a nutshell, a franchisor shall not advertise about the earnings forecast or financial performance of the franchise; but, the franchisor shall make mandatory disclosures about the earnings forecast or financial performance of the franchise to perspective franchisees in a written disclosure document. If a franchisor sticks to the rules in a nutshell, it should be able to stay clear of the mines in the advertising field.

In the United States, this kind of statements about profit margins or financial performance is commonly referred to as earnings claims under 16 C.F.R. § 436.9 (c) (2006) (the “New FTC Franchise Rules”), which is prohibited unless the franchisor has included earnings claims in its Item 19 of the Franchisor Disclosure Document (“FDD”) pursuant to 16 C.F.R. § 436.5 (s). And under the New FTC Franchise Rules, the inclusion of the Item 19 in the FDD is totally optional. Most franchisors stay clear of making earnings claims in Item 19 to avoid the added cost of providing substantiating data, and to shun possible fraud and/or misrepresentation lawsuits by franchisees arising out of such earnings claims.

Last week, a Chinese franchisor in Beijing fell victim to (or got stung by, depending on your perspective) the Article 17 of the Franchise Regulations. According to a Chinese report (Chinese only), the franchisor runs a franchise specializing in children’s haircuts. Allegedly, the franchisor handed out publications containing statements about the franchise, such as, “running a franchise, annual gross income 48, 200 Yuan, annual total costs 10,800 Yuan.” A franchisee signed a franchise agreement with the franchisor, paying a total fee of 22,800 Yuan. After operating a franchise unit for a few months, the franchisee discovered that actual operational results did not measure up to forecasts in the franchisor’s advertisement. So, the franchisee reported the franchisor to the Beijing Haidian District Office of the Administration of Industry & Commerce, which ruled that the franchisor violated Article 17 of the Franchise Regulations.

The final outcome of the case includes a rescission of the contract, return of the 22,800 Yuan, and an administrative penalty of 30,000 Yuan.

I would like to think that this is a simple case of statutory misinterpretation rather than one of corporate greed. Assuming it is the former, I would hope that franchisors remember the rule in a nutshell-- a franchisor shall not advertise about the earnings forecast or financial performance of the franchise; but, the franchisor shall make mandatory disclosures about the earnings forecast or financial performance of the franchise to perspective franchisees in a written disclosure document.

Pepsi’s “Blue Storm” Followed by “Red Passion”

The Wall Street Journal (subscription may be required) reported that Pepsi introduced a newly-minted red can in China.

According to the article, Pepsi’s change of color is based on positive customer feedback, and the “bold move” was calculated to ride on Chinese consumers’ patriotism and national pride in anticipation of the 2008 Summer Olympic Games to be hosted in Beijing.

With due respect to Pepsi’s “bold move” and shrewd marketing strategy, I keep wondering if this self-transformation has something to do with a lawsuit that Pepsi lost in China over its use of the “Blue Storm” [“蓝色风暴” ] trademark. In that case, the Zhejiang Province Higher People’s Court held that Pepsi had infringed on the trademark rights of a little known Chinese beverage company by using the pre-registered “Blue Storm” trademark without permission, thus causing reverse confusion. For more on this, please read my prior posts:

Chinese “David” Brought Down American “Goliath” for Trademark Infringement

Pepsi’s Storm in China Rages on