Danone Group to Make Things Personal

According to a report, on July 19, 2007, four subsidiary companies of Danone, NOVALC Pte. Ltd., Festine Pte. Ltd., Jinja Investments Pte. Ltd. and Myen Pte. Ltd., initiated legal proceedings to file a derivative action against Zong Qingou, the former board chairman of the Danone-Wahaha joint venture. He resigned in June 2007 amid the intensifying disputes with Danone.

Essentially, this new lawsuit will be directly against Zong for his “illegal” activities while serving on the board of directors of the joint venture. The four shareholders of the joint venture will more than likely allege that Zong breached his fiduciary duty as a board member by engaging in competitive activities that injured the interests of the shareholders.

In addition, Danone also asserted claims directly against Zong in its Stockholm arbitration. [But I haven’t heard anything from that case lately.]

Chinese Anti-Dilution Law: Are You Sufficiently Confused?

From Ferrari’s loss to Levi’s victory in their trademark lawsuits in China, one of the common elements, as I see it, is the confusion about the Chinese law on trademark dilution. Maybe it is the Paris Convention and TRIPS Agreement in connection with the Chinese Trademark Law that caused the bewilderment. Once you see the interplay among the three, Chinese anti-dilution law will look pretty clear.

First, dilution goes hand in hand with famous or well-known trademarks. The basic purpose behind anti-dilution is to prevent “free ride” by some of famous trademarks, either nationally or internationally. For example, without anti-dilution law, someone can just take the “Coca Cola” mark and use it to market his/her cars, cigarettes, or clothes simple because of consumer’s identification with the famous brand. Over a certain period of time, the fear is that, without restraining, such use of a mark will dilute its ability to assist consumers in identifying products with their sources.

The Paris Convention is an international treaty that protects intellectual properties. Member countries are supposed to protect a famous trademark of another country. Article 6bis provides that if the legislation of a member allows, such country should prevent a well-known mark of a member country (registered or unregistered) from being used in such a way that “constitutes a reproduction, an imitation, or a translation, liable to create confusion”. It further states that protection of the subject trademark is limited to its being used for identical or similar goods.

TRIPS Agreement expands protection of famous trademarks in two ways. First, the Paris Convention Article 6bis protection applies also to service marks. Secondly, it applies to prohibit the use of a registered famous trademark from being used in another country in dissimilar goods and services.

Article 16
3. Article 6bis of the Paris Convention (1967) shall apply, mutatis mutandis, to goods or services which are not similar to those in respect of which a trademark is registered, provided that use of that trademark in relation to those goods or services would indicate a connection between those goods or services and the owner of the
registered trademark and provided that the interests of the owner of the registered trademark are likely to be damaged by such use.

China is signatory to both treaties, and the Chinese Trademark Law (2001) reflects China’s identification with its obligations under the two treaties. Article 13 prevents anyone from using a registered well-known trademark in China for either similar or dissimilar goods or services.

Article 13 Where a trademark in respect of which the application for registration is filed for use for identical or similar goods is a reproduction, imitation or translation of another person's trademark not registered in China and likely to cause confusion, it shall be rejected for registration and prohibited from use. Where a trademark in respect of which the application for registration is filed for use for non-identical or dissimilar goods is a reproduction, imitation or translation of the well-known mark of another person that has been registered in China, misleads the pub1ic and is likely to create prejudice to the interests of the well-known mark registrant, it shall be rejected for registration and prohibited from use.

So, let’s put all of the above in the context of the Ferrari’s horse symbol case that I wrote about. It should make things look pretty clear.

Under the Paris Convention, the Ferrari horse symbol is not registered in China, and the alleged Chinese infringer tried to register the horse symbol for use in clothing, which is a dissimilar to Ferrari sports cars. The Chinese Trademark Law protects unregistered foreign trademarks only to the extent that it is being infringed for use in similar or like goods or services. Therefore, Ferrari's argument that its unregistered famous trademark enjoys protection beyond the automotible industry failed.

Under the TRIPS Agreement, the Ferrari horse symbol still does not get protection in China since it has not been registered as a famous trademark there.

A short lesson here: if you reckon your trademark is famous in your own country (either registered or unregistered), and you don’t want anyone in China to use your trademark in any goods or services, you must obtain a famous trademark registration with the Chinese Trademark Office in order to get protection.

Even more simply--no registration; no easy protection. If you do not believe me, go ask Ferrari.

Levi’s Looking Pretty in Chinese Court Despite Painful Lesson

As Dan Harris stated repeatedly in his China Law Blog (“CLB”), Chinese trademark law is “simple and effective” when enforced. Clothing giant Levi Strauss & Co.’s (“Levi’s Co.) recent victory in a Shanghai court would further bolster Dan’s averment, but its triumph came with a unique twist. So let’s just call the victory “bitter sweet.”

Levi’s Co. is known for its jeans in America and beyond. (My first pair of jeans in the U.S was a pair of blue Levi’s, which still go well with my boots.) In 1974, Levi’s Co. registered its LEVI’S trademark with the Chinese Trademark Office and has kept the registration effective by renewing and adding more categories of clothing related to the trademark since then.

Levi’s Co. entered into a distribution relationship with Shanghai Beizi Clothing Company, Ltd. (“Beizi Clothing”) some time before 2005. (I have not been able to verify the exact starting date.) And Beizi Clothing was to be a non-exclusive distributor of Levi’s products, probably in Shanghai (for lack of information, this fact might be a little off.).

In June 2006, a branch office of the Shanghai Administration of Industry & Commerce (“SHAIC”) caught Beizi red-handed in selling counterfeit Levi’s jeans. After investigation, the SHAIC issued an administrative order, penalizing it for selling counterfeit products. Soon after, Levi’s Co. woke up from this nightmare and sued for trademark infringement in the Shanghai 1st Intermediate People’s Court. Levi’s Co. asked for an injunction, civil damages in the amount of 500,000 yuan, and a public apology in the Morning News (a local newspaper).

The Court hammered Beizi Clothing, taking the SHAIC’s administrative order as a prima facie case for trademark infringement. With some feeble attempts to challenge the “famousness” of Levi’s brand, Beizi Clothing was ordered to cease all infringement activities, pay 100,000 yuan, and issued a public apology.

Sounds like a slam dunk for Levi’s Co.? Right! Easy case. But doesn’t this whole thing bother anyone? By now, you might be thinking what I am thinking now—“What the hell was Levi’s Co. thinking in picking this unscrupulous distributor?”

Besides that thought, a few other Chinese idioms keep echoing in my head: “引狼入室” and “同床异梦”.

Let me explain. The first idiom literally means leading a wolf into your bedroom, and if you do that you might have to face the consequences of a devious company (pun intended.) The second one gets even better, which means sleeping in the same bed but with different dreams. It applies to relationships where parties only superficially cooperate, while they actually possess different visions about their relationship.

Ok, I know that Levi Strauss & Co. is incorporated in Delaware and headquartered in San Francisco, and that it is unfair for me to expect it to know traditional Chinese wisdom. But, could Levi’s Co. have done a better job of choosing a local Chinese partner? I think so and I run the risk of Monday morning quarterbacking (hindsight wisdom). However, for the sake of good corporate governance, any foreign company selecting partners in China should bear in mind choosing your partner carefully. Find yourself a friend, not a foe. To do that, you got to abide by Ten Commandments for doing business in China as compiled by ChinaSolved.

BIS Implements New “China Rule”on Dual-use Export Control

The Federal Register published the Department of Commerce’s updated China regulations, which have come to collectively be known as the “China rule.” As commented by Mario Mancuso, the Under Secretary of Industry and Security, it is a “right of balance” and a “model of future cooperation.” BIS intends the China Rule to encourage trade with legitimate civil end-users in the PRC, while further tightening controls on exports that could assist the PRC with its military modernization efforts.

Three main issues have been included in the Rule. First, it imposes additional licensing requirements for exports destined for a military end-use in the PRC; second, it creates the Validated End-User program (VEU); and the third, it revises the existing End-User Statement requirements by improving the threshold from the value of $5, 000.00 to $50,000.00.
This article addresses the VEU and the Threshold increase for End-User Statement issues, which are closely related to our clients’ business operation.

Validated End-User Program

Based on the China Rule, BIS removed individual license requirements for certain authorized customers in China. Under the “Validated End-User” (VEU) program, certain “trusted customers” in China with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain items without individual export licenses. This arrangement shall actually and significantly lower the administrative and regulatory burden of exporting to these “trusted” customers. “VEU will reduce lag time, expense, and uncertainty in the licensing process, helping U.S. exporters to be even more competitive in China. VEU will also act as a powerful market-based incentive for good behavior by rewarding the many firms in China who handle sensitive U.S. technology with care,” as remarked by Mario Mancuso. Currently the VEU program applies only to Chinese companies, with the expectation that it will be extended to India companies and companies in other countries in the future.

The complete procedure to request VEU authorization, as well as the procedures, timelines, and criteria the End-User Review Committee (ERC) will use in considering such requests can be found in Section 748.15 and Supplement Nos. 8 and 9 to Part 748 of the Export Administration Regulations (EAR). The Commerce Department expects to publish an initial list of approved Validated End-Users as early as July. Sectors likely to benefit from VEU include electronics, semiconductor equipment, and chemicals. BIS anticipates that a number of Chinese companies that must currently apply for individual licenses to import many items will seek VEU status to eliminate the burdens associated with repeatedly applying for multiple individual licenses.

Based on the Rule, either Chinese companies, or exporters on behalf of intended import Chinese Companies may apply for VEU status. According to the template designed to assist the application in preparing and submitting their requests for Validated End-User (VEU) authorization, some initial information and documentation should be included in the filing for an Advisory Opinion Request for Authorization Validated End-User (VEU). This includes general information such as candidate company name, operating name, destinations, company physical address and contact information, information about submitting company; structure, ownership and business activities of the candidate company; recording keep and compliance information; certification which can be an original statement with candidate company letter head containing required statements and other additional information. The deadline for the End-User Review Committee (ERC) to make a decision on the request is 30 calendar days after the application is circulated to all ERC agencies.

End-Use Certificate Threshold Improvement

The China Rule expanded the range of items for which U.S. exporters must acquire End-User Statements (“EUSs”) from the Chinese Ministry of Commerce (“MOFCOM”). However, the China Rule also addresses industry concern about additional administrative burdens relating to end-use certificates by raising the dollar threshold for obtaining an end-use certificate to $50,000 (from $5,000). However, the value limitation does not apply to the transfers of particularly sensitive items or technology to the PRC, in which case, the exporters or re-exporters shall still need to get a EUS.

Additional Links for Reference

The links below contain some helpful information and the full text of the Rule:

http://www.bis.doc.gov/News/2007/Mancuso06182007.htm

http://www.bis.doc.gov/validated_End_User.pdf

http://a257.g.akamaitech.net/7/257/2422/%2001jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11588.pdf

Wahaha & Danone Dispute: “The Good, The Bad, and The Ugly”

To my fellow Texans, “the good, the bad, and the ugly” may mean the University of Texas at Austin, the Texas A & M University at College Station, and the University of Oklahoma, depending on where your loyalty lies.

To those following Danone’s dispute with Wahaha Group, this unique expression bears extraterritorial meaning.

Back in 1996, the Danone + Wahaha joint venture (“Marriage” as the Chinese media puts it) seemed rosy, promising, and “good”. Danone had the capital, international management know-how, a world renowned brand name, and much more; Wahaha Group, on the other hand, had an evolving Chinese brand, the local market, and Zong Qinghou, Wahaha’s charismatic chief. As expected, the joint venture grew into something quite respectable, 39 sub-joint ventures and controlling market share in China’s beverage business.

A lot of “bad” surfaced ever since early spring 2007. Arbitration claims have been filed by both sides in China and Sweden; Danone sued Wahaha in a state court in Los Angeles. In response to attacks from Danone on both sides, Danone threatened to sue three foreign board members on the joint venture board, alleging breach of fiduciary duty.

The “ugly” is coming in like waves in this growing international show of will and force. First, responding to Wahaha’s arbitration petitions in the Hangzhou Arbitration Commission, Danone has filed counter claims. [full report here] According to Danone’s attorney Randal Lewis, so far
“there has been no circumstance or event that is sufficient to result in the termination of the rights and obligations of the parties under the Trademark Transfer Agreement.”

Second, Danone’s litigation lawyer in the case pending in Los Angeles, which is against Ever Maple Trading and Hangzhou Hongsheng Beverage Co, said that Danone has a witness who can testify against Zong. [full report here.] The witness, named Chen Zhonghua, claims that Zong forged Chen’s signature to set up companies overseas that compete against the Danone-Wahaha joint venture. If the “marriage” metaphor about the joint venture has any merits, this would the stage of the divorce where parties dig out as much dirt as possible against each other. [by the way, as of July 13, 2007 based on this Chinese report, Zong’s wife and daughter sued individually in L.A. have refused service of process.] Boy, this is getting ugly or what.

Third, Wahaha has joined forces with another party in another lawsuit against Mr. Qin Peng of Danone in the Intermediate People’s Court in Shenyang, Liaoning Province. [read about it here.] Wahaha Beverage Ltd. and Shenyang Lingdong Shiye Development, Ltd., respective shareholders of Wahaha Group, filed derivative suit against Qin Peng for breaching his fiduciary duty by serving on the board of other companies competing against the joint venture. They base their complaint on Article 149 and 152 of the Company Law of the P. R. China (2005), which provides shareholders a right to file a derivative suit against board members for breaching their fiduciary duty to the company.

More dirt out there?

Wikipedia has a pretty good entry on this dispute.

Hepatitis B Carriers: Will Chinese Law Protect Your Job & Dignity?

Hepatitis B is the nemesis of more than 100 million people in China. Having this disease often means you face blatant discrimination in your job, career, and education. Due to the large number of people affected by the disease and the “disgrace” associated with it, more and more people have begun to speak out against discrimination of Hepatitis B carriers in China. Thus, on May 18, 2007, the Ministry of Labor & Social Security and the Ministry of Public Health jointly issued an administrative document. Bearing the title, Opinions on the Employment Rights of Hepatitis B Carriers, this document represents the first step taken by the Chinese government in protecting the rights of more than 100 million of its own people. (Applaud!)

This opinion provides that:

Employer shall not refuse to employ or cease to employ a worker for being Hepatitis B positive except for fields of employment as provided in the laws, administrative regulations, and mandates issues by the Ministry of Public Health.

国家法律、行政法规和卫生部规定禁止从事的易使乙肝扩散的工作外，用人单位不得以劳动者携带乙肝表面抗原为由，拒绝招用或辞退乙肝表面抗原携带者。

It also gives the employees a right to privacy and employers even though it recognizes that employers have the right to conduct physical exams.

Overall, this opinion is a feeble measure in light of the magnitude of the problem. For those 100 million plus Chinese folks, it is not just the torture of the disease itself that wears them down; what is worse is the stigma associated with Hepatitis. And the worse of all, their livelihood is in jeopardy just because they have the disease. Stronger and more comprehensive legislation must be introduced to protect the rights of more about 1/10 of the Chinese population.

Currently, a new law, Employment Enhancement Act (Draft) (《就业促进法》（草案)）(Chinese only), which is under debate and consideration in the National People’s Congress, does contain prospective measures aimed at employment discrimination in Article Five:

Employees shall not be discriminated on the basis of nationality, race, sex, religion, age, and physical disability.

草案第五条第二款规定：“劳动者就业，不因民族、种族、性别、宗教信仰、年龄、身体残疾等因素而受歧视。”

Prominently missing from protection under this proposed law is discrimination of people with Hepatitis B.

These 100 million strong people deserve equal treatment, a right to employment, a right to a decent livelihood, and most importantly social dignity which often flows from employment, education, and a decent livelihood.

Besides ending with a plea for protection for these folks, I also want to recount one of my personal encounters with a Hepatitis B carrier. It is one that I shall never forget.

She [to protect her identity, I will not reveal her identity] was my best friend’s girlfriend. Young, pretty, diligent, and smart. After years of study, and after passing the grueling Chinese college entrance exams, she made it into her dream college in the wondrous city of Wuhan, Hubei Province.

One day, I got an emergency phone call from my best friend, who was in a state of shock and panic. He pleaded for help for her girl friend, who just arrived in Wuhan for official enrollment. When she got to Wuhan, the school notified her that she had to go through a physical exam. That notice was like lightening out of the blue, or in Chinese, a bucket of cold water over her head that chilled her burning desires to embark on a path to a bright future for a country girl. The notice had put her hopes, dreams, and the possibility of a decent life in jeopardy because she is a Hepatitis B carrier. If the physical revealed her little secret, her acceptance to the college would be revoked.

In China, when your best friend calls for help, you do whatever you can to help. As simple as that. I had to find a solution for my best friend’s girlfriend. [Before I proceed further, I plead 5th Amendment protection. ] Someone came up with the brilliant idea of finding someone that looks like my best friend’s girlfriend, and let the look-alike go for the Hepatitis B part of the physical…

Yes, you guessed it. A replacement was found and my best friend’s girlfriend kept her little secret and a chance to a better future.

Years have passed since the date of that physical exam. I have always struggled with that incident. Something seemed wrong and out of place. She should not have to hide a medical condition probably caused by an incompetent doctor or nurse. She should not be robbed of a chance to a better life if she had not committed fraud.

So, will the Chinese law protect people like her in their employment and safeguard their sense of dignity?

It should. But I don’t know.

China’s New Labor Contract Law (II)

After the promulgation of the Labor Contract Law of the P. R. China, the legal community interested in Chinese law is abuzz with excitement and curiosity. For those who have not been able to view the full text in English, get it here. If you can read it in Chinese, get it here. Further, I suggest that you read the Labor Contract Law in conjunction with the Labor Law of P. R. China, and for that in Chinese view it here. (English version, here.) If you are a labor and employment lawyer in need of a thorough understanding of Chinese labor law, you might also want to read the Ministry of Labor’s Several Opinions on the Implementation of the Labor Law of the P. R. China (Chinese only). For regulations on minimum wage in China, you may want to read the order issued by Ministry of Labor and Social Security in 2003. (Read it here.)

Sweeping the New Labor Contract Law is on paper, but I agree with the sentiment expressed by Dan Harris of China Law Blog where he stated “Enforcement is Key.” As the law aims to extend protection to multitudes of workers from China’s vast countryside, enforcement of this law would be more problematic since so many of those from the countryside sleep on their rights for many reasons. They might simply not know what their rights are; or, they might not care to have their rights protected for the sake of getting or keeping a job.

For another comment I wrote on China's Labor Law, please read:

What Foreign Companies Need to Know About Chinese Labor Law