Licensing Your Trademark in China: One More Thing to Remember

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.)

Chinese Franchise Regulation: What Next?

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.

Freedom of Contract in China (IV): The Role of the People's Court

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.

Freedom of Contract in China: Not So Fast Yet (III)

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.


工商行政管理部门和其他有关行政主管部门在各自的职权范围内，依照法律、行政法规的规定，对利用合同危害国家利益、社会公共利益的违法行为，负责监督处理；构成犯罪的，依法追究刑事责任。

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.

Conclusion

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.

Freedom of Contract in China: Not So Fast Yet (II)

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.

Voidable Contracts

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…

Freedom of Contract in China: Not So Fast Yet

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.