Danone-Wahaha and Why You Need a Real Lawyer for China.

The China Business Law Blog just posted on a recent Chinese court decision in the never-ending conflict between Wahaha and Danone. The post is Wahaha” Ain’t French, and It Belongs to China, and it once again shows why I earlier remarked on how “we love that dispute because within it lies just about every China business or business law issue one might confront.” This new ruling touches on two important legal issues, one very particularized and one very general.

Let’s start with the particulars.

The recent court decision is the Hangzhou Intermediate People’s Court’s ruling upholding the Hangzhou Arbitration Commission’s December, 2007, ruling that the “Wahaha” trademark belongs to the China based Wahaha Company, not to the joint venture between Danone and Wahaha, of which Danone is the majority shareholder. Both this ruling and that of the Arbitration panel are believed to have been based on Danone’s failure to secure Chinese government approval to transfer the “Wahaha” trademark to the joint venture:

I will restate the facts briefly. In 1996, the two parties signed a trademark agreement, transferring the “Wahaha” trademark from the Wahaha Co. to the then newly formed joint venture. However, the Trademark Office of China disapproved this transfer. So in the eyes of Chinese law, the transfer was never consummated, and there was no deal to speak of in terms of an IP transfer.

In 1999, the parties got creative about the trademark “transfer.” Instead of calling it a “transfer,” they signed another agreement, titling it “Trademark Use Agreement.” And of course, this deal was done under the table, irrespective of Chinese law. Things went along smoothly and well for seven years, until 2006 when Danone found that it was not getting all the money that it should, and that its Chinese partner was competing against the JV. To end all the “trickery,” Danone decided to buy out the Chinese partner, Zong Qinghou, but only to be rejected.

As Brad puts it, this latest ruling is “to nobody but Danone’s surprise.” Quite some time ago, a reporter called me to ask if I thought “Danone was really as stupid as EVERYONE is making it out to be.” My response (and probably the reason why I was never quoted by that reporter) was that I could not answer that question without more facts. One of the facts I would need to have is how much money Danone made in the meantime. I say this because companies make decisions every day to press forward even through murky laws, figuring the potential rewards justify the risks. For all we know, Danone knew exactly the risks it was taking, but chose to take them. And for all we know, Danone for a long time did very well in China.

Brad views Danone’s going forward without a valid trademark transfer to the joint venture as a mistake that will “haunt Danone for a long time” and he sees the “biggest ‘takeaway’ from this” being the need to “follow the law no matter what your Chinese partner says, and regardless of the amount at stake.”

Yes and no.

Yes, because if you are doing business in China, you must not blindly go along with what your Chinese partner says, and the reasons for this should be obvious.

First, your Chinese partner’s interests are bound to be different from yours, no matter how similar they may appear. Second, your Chinese partner is neither a lawyer nor an expert on Chinese laws relating to foreign businesses.

But as stated above, there will be times when even after you have come to understand the Chinese laws and enforcement standards you will still decide that the potential rewards outweigh the risks. In other words, the biggest takeaway from this portion of the Danone-Wahaha dispute should be to make sure you understand the risks and the rewards you will be facing and to engage in a sensible analysis before deciding how to proceed. So though this is not very quotable, I have to admit I do not know if Danone did that here and I also do not know if, even with the benefit of hindsight, Danone made the right decision.

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