Commercial Franchise Information Disclosure Management Measures --Chinese Franchise Regulation

商业特许经营信息披露管理办法

As discussed below, this law came out on the same date as the "Registration Measures", and it similarly contains a few areas of ambiguities, which I am in the process of writing.

MINISTRY OF COMMERCE
OF
THE PEOPLE’S RUBLIC OF CHINA
16TH ORDER 2007

Commercial Franchise Information Disclosure Management Measures has been promulgated during the 6th meeting of the Ministry of Commerce. It shall go into effect on May 1, 2007.

Minister of Commerce

Bo Xi Lai
April 30, 2007

Commercial Franchise Information Disclosure Management Measures

Article One To protect the bilateral rights of franchisors and franchisees, the Disclosure Measures have been promulgated pursuant to the Regulations of Commercial Franchising Operations (“Regulations”).

Article Two The Disclosure Measures apply to all commercial franchising operations inside the People’s Republic of China.

Article Three The affiliated companies in the Disclosure Measures refer to franchisor’s parent company, subsidiaries controlled directly or indirectly by the franchisor who owns either all the stocks or the majority of stocks, or companies controlled directly or indirectly by the franchisor who owns either all the stocks or the majority of stocks.

Article Four Pursuant to the Regulations, a franchisor shall provide written disclosure of information in accordance with Article Five of the Disclosure Measures thirty days before the execution of a franchise contract with a franchisee, and shall provide a prospective franchisee a copy of the franchise contract.

Article Five A franchisor shall disclose the following information:

1. Information regarding the franchisor and the franchise.

(1) The name, mailing address, contact information, registered agent, president, registered capital, operational scope of the franchisor; and information about company directly-operated units, including the total number of units, addresses, and telephone numbers.

(2) A brief introduction of the franchisor’s experience in franchising.

(3) The franchisor’s registration status.

(4) If the affiliated companies provide products and services to franchisees, basic information of such affiliated companies shall be disclosed.

(5) Information about the franchisor’s or affiliated companies’ bankruptcy or applications for bankruptcy.

2. Basic information about the franchisor’s operational resources.

(1) In written form, provide a prospective franchisee with information that can show the franchisor’s corporate name and business resources related to franchising operations, such as registered trademarks, corporate logo and symbols, patents, proprietary technologies, and operational model.

(2) If the above-mentioned operational resources belong to the franchisor’s affiliated company, basic information about the affiliated company shall be disclosed. Meanwhile, the franchisor shall disclose and explain how the franchise system will be dealt with if the contract, between the franchisor and the affiliated company granting the franchisor such operational resources, terminates.

(3) Information about the litigation or arbitration involving the franchisor’s (of its affiliated company) operational resources, such as registered trademarks, corporate logo and symbols, patents, and proprietary technologies.

3. Basic information about franchise fees

(1) The types, amount, standard, method of payment of fees charged by the franchisor and third parties. If such information cannot be disclosed, the franchisor shall state the reasons thereof. If the standards for fees are not uniform, the franchisor shall disclose the highest and lowest fees, and state the reasons thereof regarding such discrepancy.

(2) The conditions for collecting and returning security deposit; time and method of return of such security deposit.

(3) If a fee is required of a prospective franchisee prior to the execution of the franchise agreement, the franchisor shall state in writing the purpose, condition of return, and method of return of such a fee.

4. Conditions and prices of products, services, and equipments provided to a franchisee.

(1) Whether a franchisee must purchase products, services, and equipments from the franchisor or its affiliated company; the price, conditions thereof for such purchase.

(2) Whether a franchisee must purchase products, services, and equipments from suppliers designated (or approved) by the franchisor.

(3) Whether the franchisee may choose other suppliers, and conditions for such other suppliers.

5. Information about providing continuous services to franchisees.

(1) The specific content and method of providing professional training as well as the specific plans of execution of such training. In addition, also provide information about the location, method, and length of such training.

(2) Specific content of technical support; information referencing the table of contents as well as the relevant page numbers of the franchise operations manual.

6. Information about the methods and content of a franchisor’s guidance for and supervision on a franchisee.


[to obtain the full text of my translation, please e-mail me or leave a comment with a request for same.]

The full text of the law in Chinese can be accessed here.

Commercial Franchise Registration Management Measures--Chinese Franchise Regulation

商业特许经营备案管理办法

This new law, yet another importance piece of regulation in the Chinese franchise realm, came into effect on May 1,2007. It was signed into law on April 30, 2007, just one day before the effective date of the Regulations of Commercial Franchising Operations of the People's Republic of China. There seems to have quite a few areas of ambiguity, as does the Commercial Franchise Disclosure Management Measures, which I will post next.

MINISTRY OF COMMERCE
PEOPLE’S REPUBLIC OF CHINA
15TH ORDER 2007

Commercial Franchise Registration Management Measures has been promulgated during the 6th meeting of the Ministry of Commerce. It shall go into effect on May 1, 2007.

Minister of Commerce
Bo Xi Lai
April 30, 2007

Commercial Franchise Regisitration Management Measures

Article One To strength the regulatory management of commercial franchising, and to maintain orders in the franchising market, the Measures have been promulgated pursuant to the Regulations of Commercial Franchising Operations (“Regulations”).

Article Two The Measures apply to all commercial franchising operations inside the People’s Republic of China.

Article Three Relevant departments, in charge of commercial regulations in the Ministry of Commerce, Provinces, Autonomous Regions, and Municipalities, are the proper registration agencies. If franchising operations are within Provinces, Autonomous Regions, and Municipalities, shall register the franchise in the departments in charge of commercial regulations; if franchising operations cross boundaries of Provinces, Autonomous Regions, and Municipalities, the franchise shall be registered in the relevant department of the Ministry of Commerce.

The management of franchise registration shall be implemented in a national network. Franchisors in compliance with the Regulations shall register their franchise through the governmental website: www.mofcom.gov.cn

Article Four Any person or entity has the right to report activities in violation of the Measures to agencies in charge of franchise registration.

Article Five A franchisor petitioning for registration shall provide the following documentation to the registering agency:

(1) A brief introduction of the franchise.

(2) A brief introduction of the distribution of all the franchised units in China.

(3) A copy of the franchisor’s marketing plan.

(4) A copy of the franchisor’s corporate business license or other important documents evidencing eligibility.

(5) A copy of the registrations of the franchisor’s trademarks, patents or other business resources related to the franchising operations.

(6) Documents provided by a commercial regulatory department in a city with administrative districts, evidencing a franchisor’s compliance with Article 7 Section 2 of the Regulations; with respect to company-operated units located outside China, a franchisor shall provide documents evidencing same (including Chinese Translation), which shall be notarized and certified by a Chinese Consulate located in the administrative region as such company-operated units.

The above section does not apply to a franchisor in franchising operations before May 1, 2007, but such a franchisor shall provide a copy of the first franchise agreement executed by both the franchisor and a franchisee inside China.

(7) Sample Franchise Contract.

(8) Table of contents of the Franchise Operation Manual (Must include the page number of each chapter and the total number of pages. With respect to Franchise Operation Manual accessible via franchise system intranet, provide the estimated pages after printing.).

(9) With respect to franchising of services or products subject to pre-approval pursuant to relevant laws and regulations, franchisor must provide documents evidencing such approval by relevant government agency.

(10) Franchisor’s affidavit, signed and sealed by legal agent of such franchisor.

The above-listed items (1) through (3) shall be filled out directly on the website; items (4) through (10) shall be submitted electronically via the website in PDF format.

To get the complete translation, please e-mail me or leave a comment with your address. My e-mail address is：bluo@vernongoodrich.com

To access the complete texts of the law in Chinese, go here.

STARBUCKS v. SHANGHAI COPYCAT

The latest news report out of China marks a sweet victory for STARBUCKS in its legal battle with a Shanghai Coffee house--Shanghai Starbuck Coffee Ltd.

After the Shanghai 2nd Intermiediate Court's affirming its own decision to hold Shanghai Starbuck Coffee liable for trademark infringement and unfair competition on January 4,2007, Shanghai Starbuck hesitated to change its business name as ordered. The court followed through on its order and forced it to change its corporate name. After almost four months of game play, Shanghai Starbuck finally did change its name to "Shanghai Fang Yun Coffee Ltd." (上海芳韵咖啡馆有限公司）

This is yet another unprecedented step in Chinese court's progress in enforcing IP rights in China. The court not only handed down a victory to STARBUCKS but also saw through the actual enforcement of its own orders.

To help readers understand the history of the entire case, the following is my brief of this fascinating IP case in China.


In re STARBUCKS

Parties:
Plaintiffs / Appellees: Starbucks Co. and Shanghai Unified Coffee, Ltd.

Defendants/ Appellants: Shanghai Xing Bake Coffee, Ltd. and Shanghai Xing Bake Coffee, Ltd. Nanjing Road Branch.

Facts:

A. Plaintiffs:
Starbucks Co. registered the name and pictures associated with its trademark “STARBUCKS” in 1996 in P.R. China; it then registered 30 types of products associated with “STARBUCKS” in 1997; and it registered more services and products associated with the trademark “STARBUCKS” in China.

On February 1, 1999, Starbucks Co. first registered the Chinese version of Starbucks—“Xing Bake” [星巴克] in Taiwan, however it did not begin the registration of “Xing Bake” in China until 1998. While waiting for an approval for the registration of “Xing Bake”, Starbucks began its massive advertising with the trademark “STARBUCKS” and “Xing Bake”. In addition, the first Starbucks chain store began operation in Beijing in January 1999.

Starbucks Co. registered the “Xing Bake” [星巴克] trademark on December 28, 1999.

On March 23, 2000, Starbucks entered into a contract with co-plaintiff Shanghai Unified Coffee, allowing it the legal right to use the trademarks “STARBUCKS”, “Xing Bake” [星巴克], and other unregistered trademark.


B. Defendants:
While Starbucks Co.’s application for the trademark “Xing Bake” [星巴克] was pending, the defendants pre-registered the corporate name “Xing Bake” [星巴克] and gained approval. On March 9, 2000, Shanghai Xing Bake Coffee, Ltd. was incorporated, whose principal business is the sale of beverages, western style meals, and retail alcoholic drinks. And it formed its branch office, the co-defendant, on July 1, 2003.

They printed “Starbuck Coffee” on its price list, and they used characters “Xing Bake Coffee” in their store front and advertising billboards.

C. Lawsuit:
The plaintiffs sued the defendants for trademark infringement and unfair competition in the trial court, Shanghai Intermediary Court.

D. Procedural History:
The trial court held that the defendants violated the plaintiffs’ trademark rights and engaged in unfair competition.

On appeal, the Supreme Court of Shanghai affirmed and required the appellants to issue a public apology, pay damages and attorneys fees to the appellees.

On motion to reconsider by the appellants, the Supreme Court again affirmed.

Issues:
1. Whether the appellant’s successful pre-registration of the corporate name “Xing Bake” defeats the appellees’ claim of trademark infringement?

[Holding: No.]

2. Whether the appellant’s usage of the corporate name “Xing Bake” and “Starbuck Coffee” constitute unfair competition?

[Holding: Yes.]

Analysis:

1. Pre-registration of the corporate name “Xing Bake” [星巴克]
a. This pre-registration of corporate name constitutes subjective bad faith because the president of the future company Shanghai Xing Bake Coffee, Ltd. acknowledged to a major Chinese newspaper in 2003 that the trademark and name “Xing Bake” [星巴克] is very famous and the Starbucks Co. has been very successful. So he decided to race the Starbucks Co. to the corporation name registration office.

b. The trademarks “STARBUCKS” and “Xing Bake” [星巴克] have been widely known in China prior to the appellants’ corporate name registration.

c. Starbucks Co.’s usage of and attainment of relevant rights to “Xing Bake” [星巴克] are earlier than Shanghai Xing Bake Coffee, Ltd. Further, the appellant’s registration of the corporate name “Xing Bake” [星巴克] with the express knowledge that such registration was inconsistent with rights of others violated Trademark Law of China. And the appellant’s behavior violated the basic commercial ethics—equality, honesty and good faith.

2. Unfair Competition
a. The appellants’ use of “ Starbuck”, although different from the appellees’ trademark “STARBUCKS” constituted a confusion considering prominence and reputation of the appellees’ trademark. In addition, “Starbuck” is the key element of the appelees’ trademark.

b. The appellants’ pictorial emblems—one small circle inside a bigger one, green background color, and two stars embedded inside the overlapped area of the two circles generated confusion with the appellees’ trademark “STARBUCKS” and other registered trademarks.


Brad Luo’s Comments:

1. Why didn’t Starbucks Co. register the Chinese version of “STARBUCKS”-- “Xing Bake” [星巴克] at the same time it did in Taiwan? Why didn’t it register as soon as such a trade name became known in Chinese? It could have avoided all these litigation had it done so.

Coupled with Pfizer’s recent loss in a Chinese court for failing to be the first one to register the Chinese version of “Viagra”—“Weige” [伟哥] (meaning “Great Man”), the Chinese courts are speaking clearly and loudly—REGISTER YOUR TRADEMARKS EARLY, BOTH IN ENGLISH AND CHINESE. Also, it is important to know that the trademark registration regimes in mainland China, Taiwan, Hong Kong and Macau are independent of each other, and that a trademark owner needs to register the mark throughout the Greater China area.

2. It is settled law that China is a “first register first served” jurisdiction with respect to trademarks. However, the Supreme Court of Shanghai mentioned in dicta that Starbucks Co. did use the Chinese version “Xing Bake” [星巴克] first. Does this mean that courts in China will start looking into who first used a trademark or trade name? It is too early to tell. But the safest thing is to REGISTER FIRST!