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

Pepsi’s Storm in China Rages on

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.

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

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.