Enforcement of Judgments in China: Pretty Good in Urban Areas

Contrary to the popular view that enforcement of judgments is poor in China, Professor Randall Peerenboom stated in his recent article that:

While enforcement is often portrayed as difficult in China, recent studies have found significant improvements in urban areas, where more than half of creditor-plaintiffs receive 100 per cent of the amount owed, and three quarters are able to receive partial enforcement, a situation explored in more detail [citation omitted]. Moreover, the main reason for non-enforcement is that defendants are judgment proof: they are insolvent or their assets are encumbered. No legal system is able to enforce judgments in such circumstances.

Although cross-country comparisons can be misleading, it would appear that enforcement in China may be less problematic than in many jurisdictions, including in rich countries such as the United States, the United Kingdom, or Russia [citation omitted]. In the World Bank’s ‘Doing Business 2008’ survey, China ranked twentieth out of 178 economies in enforcement of contracts. The survey measures the time, cost, and number of procedures involved from the moment a suit is filed until payment is made.

Looking into the reasons behind the improvement in enforcement of judgments, Peerenboom found that:

The main reasons for the improvement in enforcement are changes in the nature of the economy; general judicial reforms aiming at institution building and increasing the professionalism of the judiciary; and specific measures to strengthen enforcement (citation omitted). The economy in many urban areas is now more diversified, with the private sector playing a dominant role. The fate of a single company is less important to the local government, which has a broader interest in protecting its reputation as an attractive investment environment. As a result, the incentive for governments to engage in local protectionism has diminished (citation omitted).

According to Peerenboom, enforcement in less developed areas, i.e. rural China, remains a dire problem for a host of reasons. Competency and quality of judges are still less than satisfactory. Local economy still depend on a few sources; thus, the incentive for non enforcement of judicial judgments remain.

Improving enforcement of judgments in rural areas is likely to be a difficult task as it is not simply a judicial problem. Lax enforcement, as can be inferred from the experience of urban areas, is a complicated institutional issue, linked to economic development, availability of well-educated, professional judges, and very significantly a thriving private business sector. Given the reality in the vast rural areas, better enforcement in these areas probably won’t come any time soon, short of drastic changes to local conditions.

Importers of Poisonous Chinese Toothpaste Indicted

Four exectives of of two Californian import companies have been indicted by the city of Los Angeles, reported by the NY Times.

The Los Angeles city attorney, Rocky Delgadillo, working with the Food and Drug Administration, filed a criminal complaint against two Los Angeles-based importers, Vernon Sales Inc. and the Selective Imports Corporation.

At Selective, Frahad Nazarian, the president, and Yones Ghermezi, the vice president, were charged with two counts of receiving, selling and delivering the tainted products.At Vernon Sales, Kamyab Toofer, the president, and Pejman Mossayi, the vice president, were charged with 14 counts of receiving, selling and delivering an adulterated drug.

The case is the first instance of criminal charges being filed in the United States against any party in the toothpaste scare and comes after a suit filed in Missouri against an American company that had imported tainted ingredients used in pet food.

This is not the first instance of criminal indictment, and it won’t be the last one either. Importing from China has become a little more costly to some who have not been practicing due diligence and caution. An investigative trip to Chinese exporters is a lot more pleasant than being charged with a crime.

Debunking the Myths about Doing Business in China

Debunking the Myths about Doing Business in China

Business Week came out with an article titled, China: Debunking the Myths. The authors, Charles Bien and Brian Renwick, lay out eight common myths, and shed light on them. Very interest stuff.


MYTH ONE: "Western companies should view the rapid development of the Chinese economy as a competitive threat to which they are vulnerable."

[As globalization increasingly link all nations and markets, i.e. U.S. subprime problems, this view seems quite simplisti. But, in an election year in the U.S., this view might generate good will among some voters.]

MYTH TWO: "The position of Asian superpower can be won by either China or India, not both."

[A Chinese saying has it that “there can be only one tiger in a mountain.” Will that be a self fulfilling prophesy?]
MYTH THREE: "China is a huge, single market with weak local competition."
[If investors get beyond the big first-tier cities, this myth will probably disappear real quick.]

MYTH FOUR: "China has a consistent management culture, which is ripe for introducing human-resource best practices."

MYTH FIVE: "Multinationals wishing to establish operations in China should hire Chinese 'returnees' who have valuable international experience, a non-Chinese perspective, and non-Chinese business education."

[Not all “sea-turtles” d/b/a “returnees” are born equal. An Asian appearance does not make you Chinese, I guess.]

MYTH SIX: "The 'war for talent' is a Western phenomenon. No such war for talent exists in China where supply of talent outstrips demand among leading firms."

[What kind of talent are ye talkin’ about? So, it depends.]

MYTH SEVEN: "Since the reunification of Hong Kong and the People's Republic of China, the administrative and business relationships are seamless."

MYTH EIGHT: "China is a low-cost manufacturer, not a platform for product and service innovation and the development of its own intellectual property."

[Change the “is” into “was.”]

Read the full article here.

Chinese Water Pollution Law Amended for Good

China faces many problems in its modernization. Income gap, aging population, air pollution, inadequate housing, social security/retirement, and the lack of affordable healthcare, to name just a few. But, none is more urgent and worrying than water pollution. Many readers are already familiar with media coverage of extensive pollution in major Chinese waterways and fresh water sources, and it is unnecessary to list them one by one. But, I do want to make an exception, the pollution of the Hanjiang River, as reported in the last few days, because it has touched a personal nerve.

I grew up by the Hanjiang River, along its upper stretches, close to its origin, so I have some emotional attachment to this nurturing, and at times mighty river. About a fifteen- minutes walk away from my home, as a kid, I used to swim and fish in it, search for rocks along its southern bank, graze our family water buffalo by it, and even drink from it. It was not so special while I was there, passing by it thousands of times. But it is when I have left my home that I realized how important a river like that is in shaping who I am today. So, upon hearing that pollution turned the water in the lower stretches of the river, I lament for its suffering. Even more so, I am deeply concerned for the people who live by the river because they rely on it for its life sustaining water, one of the most precious yet underappreciated natural resources on earth.

With that said, I am glad to hear that the Water Pollution Prevention and Control has been amended to abate the almost out-of-control pollution situation in China.

According to this report:

China's top legislature on Thursday passed an amended water pollution law that toughens punishment of company officials through hefty fines.

The Water Pollution Prevention and Control Law, to take effect on June 1, was passed at the 32nd session of the Standing Committee of the National People's Congress (NPC), which concluded in Beijing on Thursday.

"Enterprise heads directly responsible for causing severe water pollution incidents and others with direct responsibility would be fined up to half of their income in the previous year," said the law.

Previously, corporate executives faced only administrative penalties.

Water pollution is among the top environmental concerns of the Chinese government and the public.

A 2006 survey found that surface water generally was classified as containing intermediate levels of pollution, but one third of the 744 samples tested were graded at the worst pollution rating.

Yes, I have my doubts about how effective these amendments will be in the come days and years in alleviating the vast pollution problem facing the Chinese. I cannot help but question: how will monetary fines against executives of polluting companies effectively reduce and curb pollution (does deterrence really work?)? How strictly will this law be enforced? What viable measures and policies are in place to cure the impact of water pollution? Besides administrative penalties, civil fines, can individuals be given a private right of action for injuries due to pollution? If the current anti pollution legal structures are not effective, what solutions, legislative, administrative, or non-government related, could be adopted to abruptly abate pollution and jump start cleaning up process? Answers to some of the questions probably lie in a quick research, which I will do soon; but some questions are beyond my limited scope of knowledge.

The first required book in law school, which is not a casebook, was A Civil Action. It’s an enthralling book about a lawyer taking on two large corporations (W.R. Grace and Beatrice Foods) that allegedly polluted underground water. It is such a powerful book. (I digressed.)

Notwithstanding the questions I have about the amended Water Law, I welcome any step forward by the Chinese government (legislature) to address pollution.

What do you think?

G2000 v. 2000: Do Fear the Domino Effect

In my previous post, I indicated that G2000 has a much bigger problem ahead. Here is why.

Only one issue might be on appeal at the Zhejiang Higher People’s Court --the 20 million Yuan in damages for Plaintiff. No matter how the Court decides, Defendant G2000 will desperately want another bite at the apple regarding the validity of Plaintiff’s “2000 ” mark, but that is just a fanciful wish. In Chinese trademark litigations, as well as other civil trials, parties only get one appeal, which already occurred at the Beijing Higher People’s Court. Second, Beijing 1st Intermediate People’s Court and the Beijing Higher People’s Court have the exclusive jurisdiction on administrative trademark cases, which renders Defendant’s fanciful wish even more distant from reality. In short, Plaintiff’s “2000 ” mark is valid for the goods/services registered for, and that is written in the stone as of now, unless Plaintiff somehow forfeits it at a later date. But that is not the concern here.

So, what do all these mean to G2000, the big Hong Kong fashion company, the successful and expanding international franchisor?

IT IS ALL BAD NEWS for a number of reasons!

First, obviously, G2000 will be ordered to cease the use of the “G2000” mark on its ties, socks, belts, and scarves. Well, relatively speaking, this is no big deal since what franchisees can do to G2000 is a tremendous headache. Since trademark, in most cases, is the core of a franchise system, uncertainty in the trademark casts a very long shadow on the franchise system itself. If the G2000 mark violates the rights of another with respect to the types of goods complained of, G2000’s franchise system suffers a major loss in its family of trademarks, and that translates into a major loss in revenues.

Second, Chinese franchisees can sue G2000 for violating the Chinese franchise regulations. Pursuant to the Regulations on the Administration of Commercial Franchise, a franchisor must disclose to prospective franchisees the status of its intellectual property, and its disclosures must be complete, accurate, and truthful. See Arts. 22-23. If in the unfortunate event that G2000 did not disclaim or disclose the status of its litigations on the “G2000” mark, it could find itself in a heap of trouble with the Chinese franchise regulators (AICs, and the Ministry of Commerce). The administrative penalties for violation of these Regulations can be substantial. See id., Art. 24-29. What is worse, franchisees could sue G2000 for breach of contract, fraud, and repudiation of the contract because of the failure to disclose. See id.

Third, as part of the domino effect (if number 2, above, occurs), G2000’s entire franchise system in China will be in jeopardy. It will have to deal with possible lawsuits from its some 436 franchisees. In addition, the named co-defendants won’t want to share the blame for the joint and several liability in the original law suit. Furthermore, G2000’s image, no matter how bright and attractive, will have been tarnished not only among its consumers, but more importantly among prospective franchisees. Growth and expansion in China through franchising, the fastest growing method of product distribution in China, will suffer at the minimum a slow down.

As one can see, one big mistake, especially in a company’s overall IP strategies in China, could have far-reaching impact on its bottom line. In this age of globalization and commercialization, intellectual property, trademark in this case, is of utter importance. Without a comprehensive, proactive, and sound IP strategy, franchisors march into China at their own peril.

G2000 v. 2000: Is 20 Million Yuan Enough for Trademark Infringement?

I thought I have blogged about almost everything interesting on Chinese Trademark Law. But, I was wrong. In the case of G2000 v. 2000, the Hangzhou Intermediate People’s Court showed Chinese Trademark Law is still more interesting than the Leifeng Pagoda in Hangzhou, and the Hong Kong star sex scandal.

(Disclaimer: After a reasonable search, I have not been able to locate the actual opinion of the Court. The content of this post is based on multiple news sources, here and here. Surprisingly, the Hangzhou Intermediate Court does not have a website while other intermediate courts of lesser importance in Zhejiang Province have.)

First, this is a somewhat complicated trademark infringement case involving one plaintiff and multiple defendants. And the defendants have appealed the decision to the Zhejiang Higher People’s Court; therefore, the outcome of the case as laid down below could change, depending upon the Court’s prospective decision.

The Parties:
Plaintiff is an individual, Mr. Zhao Hua, in the business of manufacturing and selling socks, ties, and scarves. He acquired by assignment and still owns the trademark “2000” (Registration # 1094814), which was first registered by the original owner in 1997. And it was registered for Class 25 Goods (Clothing, footwear, headgear), including the following categories: socks, gloves, scarves, ties, belts, sashes, and veils.

Defendants:
Defendant is G2000 (纵横二千集团), a Hong Kong company, in the fashion/clothing business with corporate and franchised units scattered in many Asian countries/regions. It manufactures and sells its full lines of products including casual, formal and informal clothing and accessories for men and women. In addition, it also franchises its business concepts internationally.

In 1992, Defendant registered the “G2000” mark in China for use covering clothing, shoes and headwear. (carefully note the different types of goods registered for as compared to those registered for by the Plaintiff under its 2000 mark.)

In 1997, Defendant registered the same G2000 mark for handbags, shopping bags, and straps (手袋、购物袋、背带等).

In 2002, Defendant registered the G2 mark for clothing, neckties, socks, scarves, belts, etc. (服装、领带、袜、围巾、腰带等)

In May 2002, Defendant filed an action in the China Trademark Office to cancel plaintiff’s trademark (2000), then it unsuccessfully appealed to the China Trademark Review and Adjudication Board (the “TRAB”). Finally, it brought an administrative action pursuant to Article 33 of Chinese Trademark Law 2001 in the Beijing First Intermediate People’s Court, challenging the TRAB’s decision, but to no avail. On final appeal in 2005, the Beijing Higher People’s Court affirmed the administrative decision, holding that Plaintiff’s mark is valid for the types of goods so registered under Nice 25 Class.

Co-defendants are Shanghai Heyuan Clothing, Ltd. (上海和缘服装有限公司) and Guangzhou Qianying Clothing, Ltd. (广州千盈服装有限公司), and Zhejiang Yintai Department Store, Ltd. (浙江银泰百货有限公司), all of which are Defendant’s franchisees in China (or they might be area developers, or sub-franchisors. The exact legal relationship between co-defendants and the defendant is not clear to me.).

Brief Facts:

Facts of this legal saga lasting more than eight years are complicated. Back in 2000, Plaintiff sent a demand letter (cease & desist letter) to Defendant and co-defendant Shanghai Heyuan Clothing, Ltd., alleging trademark infringement with respect to the use of G2000 in connection with their sale of socks, gloves, ties and scarves. Between 2000 and 2006, Plaintiff also sought redress by filing multiple complaints with local Administration Industry and Commerce (“AIC”) in Beijing, Guangzhou, and other cities, but apparently achieved little (Doesn’t this make you think twice about the efficacy of AICs?). And to gather evidence, in the span of 10 months from May 2005 to March 2006, Plaintiff purchased allegedly infringing goods at various stores and locations sold by Defendant’s/co-defendants’ G2000 specialty units in Beijing, Shanghai, Hangzhou, Ningbo, and other places.

Plaintiff, I assume, filed this action soon after the Beijing Higher People’s Court handed down its decision against G2000 in 2005. The timing was pretty good on the part of the Plaintiff since the Beijing Court’s decision eliminated some uncertainty as to the validity of his trademark rights in 2000 for the goods registered for.

Additionally, it is important to note that Defendant operates a widespread network of company-owned and franchised units (reportedly 436 units in China), selling goods under the G2000 trademark. Of course, “goods” as referred to include those types that Plaintiff was seeking for relief.

Issue:

Whether Defendants’ use of the G2000 trademark for ties, socks, belts, and scarves (领带、袜子、腰带、围巾) caused confusion with Plaintiff’s goods bearing the 2000 mark among consumers?

Holding:
The Court held that Defendants infringed on Plaintiff’s rights, but for lack of access, no detailed analysis is available (Chinese courts, as do many courts in civil law jurisdictions, do not provide detailed analysis for their decisions, unlike their counterparts in common law jurisdictions. Exceptions, like the Starbucks v. Shanghai Copycat, do exist.).

My Thoughts & Reactions:

The court’s award of damages in this case is intriguing. Plaintiff pleaded for damages totaling 20,000,000 Yuan (that is right, 20 million). And the Court ordered the Defendants to turn over the figures for total sales, profits, etc. for the goods complained of in the relevant period of time, but the Defendant failed to do so. Generally, Chinese courts award damages to a plaintiff in an IP infringement case to the extent of a defendant’s illegal profits as proven, rather than losses sustained by the plaintiff. See Kate C. Hunter, Here There Be Pirates: How China is Meeting Its IP Enforcement Obligations Under TRIPS, 8 San Diego Int’l L. J. 523, 547. In addition, if the illegal profits or plaintiff’s losses cannot be accurately ascertained, the statutory maximum award of damages is 500,000 Yuan. See Chinese Trademark Law, Art. 56. Therefore, in an act rarely seen in Chinese courts, the Court awarded a whopping 20 million Yuan to the Plaintiff. Further, given the intertwined relationships among the Defendants, the Court held them jointly and severally liable. (for more discussion on awarding damages, please visit China Law Blog's post here.)

Obtaining sufficient damages in IP infringement cases is of paramount importance, if not the paramount one. After all, without proper compensation, a plaintiff’s glorious victory in the people’s courts can only be a “feel-good” occurrence, without much substance. (However, that is not to say that winning is not important.) Perspective and purpose affect one’s reactions to a major score in the courts. If a plaintiff’s main goal is to make a statement to actual and prospective infringers, and to enjoin current infringements, a win deserves much celebration. However, if a plaintiff’s main goal is to seek redress and obtain monetary and equitable relief, a win unsupported with lost profits waters down sweetness.

On appeal, the bone of contention, as I expect, would be that award of 20 million in damages to plaintiff. Of course, Defendants will try to set aside that amount, citing that it exceeds the statutory maximum; whereas, the plaintiff might argue that the 20 million award is appropriate given the scope and extent of violations, in addition to their failure to turn over documents within their control to ascertain the exact amount of damages.

Insofar as infringement is considered, it is a classic example of reverse confusion issue. According to Joel R. Feldman,

[i]n reverse confusion cases, a junior user (defendant) adopts a mark already in use by the senior user (plaintiff). However, the junior user dwarfs the senior user through advertising and other expenditures used to promote the mark. While the senior user has a “property” interest in protecting the mark, the public may benefit more from the junior user’s adoption of the mark because they only identify the mark with the junior user and are not confused by the dual uses of the mark.

Like any trademark infringement case, the key for Plaintiff is to establish confusion. Here, the fact is that the Defendant registered the G2000 before Plaintiff (his predecessor) registered the “2000” mark, but Defendant’s mistake was not to register its mark to cover more types of goods, specifically ties, socks, belts, and scarves. Instead, it only registered it for clothing, shoes and headwear. It is very easy to see what happened here. As Defendants’ business grew and expanded in China, it wanted to use the mark for ties, socks, belts and so forth, but found out, albeit regrettably, that it was too late to register. However, it was too lucrative not to go ahead with the expansion into more products with the coveted and profitable “G2000” mark. The fact it filed an objection/cancellation action with the Trademark Office speaks for itself. Although one might contend that plaintiff might have had ulterior motives when it registered the “2000” for the categories of goods under Class 25, plaintiff (or its predecessor) did so within the bounds of the Chinese Trademark Law at that time. And it did so because Defendant had failed to obtain trademark rights large and extensive enough to exclude others like the plaintiff from using the “2000 ” mark for any reason. And it did so, arguably, on account of Defendant’s failure to develop a comprehensive IP strategy before G2000 became highly profitable.

On the topic of a comprehensive IP strategy, G2000, I think, failed miserably. In addition to what I discussed above, it relied too heavily on the legal approach for its overall IP enforcement/strategy. Once its opposition/cancellation action failed through the entire legal process, it should not have pretended that “2000” problem does not exist. (This is simply for the sake of argument since I am assuming that Defendants did not attempt to buy out Plaintiff.) Should it have employed other means and strategies to make this headache go away? Should it have reached some kind of settlement agreement with respect to damages, or the use of the “2000” / “G2000” mark?

I think it should have done something more proactive to avoid a much, much bigger problem that is waiting for G2000. And if the appeal gets affirmed, or vacated on the issue of damages (assuming that is the only issue on appeal), the legal standing of Defendant’s “G2000” mark is still in doubt with respect to the categories of goods in question, thus jeopardizing its entire franchise system in China.

Next post will discuss the impact of this case on G2000’s franchise system.

The Supreme People's Court's 2-18-08 Judicial Explanation on Trademarks, Enterprise Names, and Other Prior Existing Rights

(The following is my attempt at translating the SPC's latest Judicial Explanation regarding the issues/conflicts between registered trademarks, enterprise names and other prior existing rights. If I have mis-interpreted any part of the Judicial Explanation, please kindly point out in your comments. Thanks! In addition, I will write a following post on the impact of this Judicial Interpretation.)


People's Republic of China The Supreme People's Court Notice
Law Explanation (Fashi)(2008)(3) Provisions on Several Issues in Hearing Cases Regarding the Conflict between Prior Existing Civil Rights and Registered Trademarks & Enterprise Names adopted on February 18, 2008 by the Supreme People's Court Judicial Committee meeting No. 1444. It is hereby announced that it will go into effect on March 1, 2008.

February 20, 2008中华人民共和国
最高人民法院公告
法释〔2008〕3号

《最高人民法院关于审理注册商标、企业名称与在先权利冲突的民事纠纷案件若干问题的规定》已于2008年2月18日由最高人民法院审判委员会第1444次会议通过。现予公布，自2008年3月1日起施行。

二○○八年二月十八日

To correctly resolve civil disputes involving the conflict between registered trademarks & business names and prior existing civil rights, these provisions are hereby instituted in accordance with the PRC Civil Procedure Law, General Principles of Civil Law, the PRC Trademark Law and the PRC Anti-Unfair Competition Law, as well as trial practices.

为正确审理注册商标、企业名称与在先权利冲突的民事纠纷案件，根据《中华人民共和国民事诉讼法》、《中华人民共和国民法通则》、《中华人民共和国商标法》和《中华人民共和国反不正当竞争法》等法律的规定,结合审判实践，制定本规定。

Article One Provided that requirements under Article 108 of the PRC Civil Procedure Law are met, People’s Court should accept cases filed by plaintiffs on the basis that defendants’ use of letters, graphics in defendants’ registered mark violated Plaintiffs’ existing copyright, patent right in packaging design, rights in business names, etc.

Where Plaintiff brings a lawsuit on the ground that another’s registered mark used in approved categories goods/services are similar or identical to her mark, People’s court should refer plaintiff to relevant administrative bodies for resolution, in accordance with Article 111 (3). However, where plaintiff bring a lawsuit on the grounds that another’s use of its registered mark is beyond the categories of goods/services registered for, or where another uses a registered mark by transforming its distinctive features, disassembling it or re-configuring it, the people’s court shall accept such cases.


第一条 原告以他人注册商标使用的文字、图形等侵犯其著作权、外观设计专利权、企业名称权等在先权利为由提起诉讼，符合民事诉讼法第一百零八条规定的，人民法院应当受理。

　　原告以他人使用在核定商品上的注册商标与其在先的注册商标相同或者近似为由提起诉讼的，人民法院应当根据民事诉讼法第一百一十一条第（三）项的规定，告知原告向有关行政主管机关申请解决。但原告以他人超出核定商品的范围或者以改变显著特征、拆分、组合等方式使用的注册商标，与其注册商标相同或者近似为由提起诉讼的，人民法院应当受理。

Article Two Where Plaintiff brings lawsuits, pursuant to PRC Anti Unfair Competition Law Article 5 (3), on the ground that another’s use of a business name is same or similar to her prior existing business name, which use is sufficient to cause consumer confusion as to the source of the goods/service, the people’s courts should accept such cases.

原告以他人企业名称与其在先的企业名称相同或者近似，足以使相关公众对其商品的来源产生混淆，违反反不正当竞争法第五条第（三）项的规定为由提起诉讼，符合民事诉讼法第一百零八条规定的，人民法院应当受理。

Article Three The people's court shall, in accordance with the plaintiff's claim and the nature of controversial legal relationship under civil law, and in accordance with the Civil Causes of Action (Provisional), ascertain the cause of the conflict in civil disputes between registered trademarks or enterprises and prior existing civil rights, and apply appropriate law accordingly.


第三条 人民法院应当根据原告的诉讼请求和争议民事法律关系的性质，按照《民事案件案由规定（试行）》，确定注册商标或者企业名称与在先权利冲突的民事纠纷案件的案由，并适用相应的法律。

Article Four Where the use enterprise name complained of infringe on the exclusive right of registered marks, or constitute unfair competition, the people's court, in accordance with the plaintiff's petition and specific circumstances of the case, may assign civil liabilities, such as enjoining defendant from using such name, correcting such use, etc.

第四条 被诉企业名称侵犯注册商标专用权或者构成不正当竞争的，人民法院可以根据原告的诉讼请求和案件具体情况，确定被告承担停止使用、规范使用等民事责任。