Starbucks Corporation has been in a long running dispute with coffee shops in Shanghai and Qingdao over the use of the Starbucks trademark in China. Starbucks has prevailed in both actions. On November 16, 2005, the Qingdao court ruled in favor of Starbucks and it recently published that decision (in Chinese only) on its intellectual property law website. [link no longer exists]
On January 4, 2006, a Shanghai court also ruled in Starbucks’ favor, but because that decision is not yet up on that court’s website, I will be focusing only on the Qingdao decision in this post. I will summarize the Qingdao decision, discuss my on the scene observations of the offending Qingdao coffee shop and then give trademark advice to companies doing business in China.
The Qingdao court decision sets forth Starbuck’s history in China. Starbucks began doing business in China in 1999. By 2003, Starbucks had registered all its major trademarks in China, including its Chinese name, xingbake.
The defendant coffee shop started business in Qingdao on October 23, 2003 under the name Qingdao xingbake kafei canting youxian gong si, which means Qingdao Xingbake Coffee Shop Company Limited. It thus made use of the Starbucks’ registered name, xingbake, in its company name. The defendant Qingdao company also used the English name, “Qingdao Star Sbuck Coffee,” on its napkins, menus and business cards. Within its shop, the defendant used Starbucks trademarks such as “frappucino” and “Yukon blend,” and it sold coffee beans clearly labeled as Starbucks Coffee. The beans were packaged in bags identical to those used by Starbucks in its legitimate shops. The Qingdao company’s logo is a round circle with stars just like Starbucks, but it replaced the Starbucks mermaid with a coffee cup and eliminated the company name.
Starbucks filed suit against the Qingdao company, claiming it was infringing on its xingbake and English language trademarks. The Qingdao defendant asserted the following defenses:
- A trademark that has been registered but never used cannot be enforced. Though Starbucks registered xingbake as its trademark in China, it never actually used the term. It uses only its English language trademarks. Accordingly, defendant is free to use the term xingbake as its business name.
- There is a difference between a business name and a trademark. A company is free to use its legal business name in conducting its business activities, so long as it does not infringe on someone else’s trademark. The relevant Chinese authorities approved the Qingdao company using the xingbake business name and since Starbucks does not actually use that name, defendant has the right to use it in its normal business activities.
The Qingdao company’s only defense for using the English language Starbucks trademarks was the clearly unsupportable argument that the plaintiff did not actually own the marks in question.
The Qingdao court quite properly summarily rejected the argument that Starbucks does not own its own English language marks. It also rejected both defenses regarding the xingbake name.
The court found that Starbucks had in fact used the Chinese term xingbake in identifying its business in China. Second, and more importantly, the court held that the Qingdao defendant was not using xingbake as a business name; it was using xingbake as a trademark to identify its business as a coffee shop. The xingbake name was prominently displayed throughout the shop and on the sign identifying the shop from the street. This confused customers as to the identity of the ownership of the coffee shop.
The court was clearly influenced by defendant’s having used the English language Starbucks trademarks to identify its products. The defendant also copied the Starbucks color scheme and decorations in its interior and exterior design. The defendant even went so far as to copy the green color Starbucks uses in its signage and logo. All of this convinced the court that this defendant had not simply innocently taken on the name xingbake, but rather, had deliberately copied Starbucks’ entire trademark system, along with Starbucks’ look and feel. The defendant’s English name of Star Sbuck was used to copy the Starbucks name.
The court therefore held in favor of Starbucks, and issued the following order:
- Defendant must remove the term xingbake from its legal name;
- Defendant must cease using any Starbucks trademarks, including the Chinese term xingbake;
- Defendant must cease using the green circle logo as it is confusingly similar to Starbucks’ logo;
- Defendant must pay Starbucks 500,000 RMB (~$62,000) in economic damages.
This Qingdao decision was based on the facts and the law and nothing indicates Starbucks was shown any favoritism as a large multinational. The Qingdao defendant was clearly operating a business openly infringing on Starbucks’ trademarks. All of Starbucks’ trademarks were properly registered before the infringing Chinese business even incorporated. Defendant’s only plausible argument was that it was using the Chinese name as a company name, not as a trademark. However, as a factual matter, this was simply not true. The Qingdao Starbucks was an open rip-off of Starbucks, and the xingbake name was openly used to identify the business to customers. Starbucks’ success in the case was in complete accord with Chinese law and it shows no favoritism towards Starbucks at all.
It is important to note that the defendant in this case is also a foreign owned company. The owner of the Qingdao defendant company is an overseas Chinese who only recently returned to Qingdao to open a cafe. Accordingly, this case was a dispute between two foreign entities, not a dispute between a U.S. company and a local Chinese company. This actually is quite typical in China. Much copying in China is organized and carried out by overseas Chinese based in Taiwan, Hong Kong, Canada, or the United States. This increases the complexity of dealing with intellectual property (IP) infringement in China.
Starbucks’ victory in this case is not complete. The defendant has appealed on the issue of using the xingbake name, using the name Star Sbuck and using its logo. The defendant has conceded on the use of the Starbucks English language trademark. The appeal will go to the Shandong High Court and may take another year to resolve. This is a major case and the court will no doubt take a very careful approach to the appeal.
Since I live in Qingdao, I went to visit the defendant’s shop to evaluate this case on the ground. Here is what I found. The defendant’s business is a traditional Chinese style coffee shop. It does not resemble a typical Starbucks cafe. The shop is located in a somewhat seedy hotel on a busy street in Qingdao. The offerings are typical of a Chinese style coffee shop: the place is really a combination coffee shop, tea parlor, ice cream parlor, restaurant and bar all rolled into one. This “do it all” approach is fairly typical in China. Personally, I had a beer and peanuts and avoided the coffee. The other customers were drinking tea, eating fruit and ice cream or enjoying a beer. There was a great U.S. country and western singer on the stereo. I stayed about an hour and I had a good time. I never once saw anyone order a coffee or drinking a coffee.
The defendant has removed all reference to the Starbucks English language trademarks. However, the old references to Yukon Blend, Frappucino and the rest are clearly visible between the white outs on the menu. The defendant has not changed anything, however, on the use of the xingbake name, the Star Sbuck name, or the design and shape of its logo. This will be resolved pending appeal.
Nobody familiar with Starbucks would ever confuse this shop with a real Starbucks outlet. In fact, there is a real Starbucks outlet located about ten blocks up the street from the defendant. The real Starbucks is an absolutely perfect clone of a Starbucks from the United States and it bears no resemblance whatsoever to defendant’s establishment. Of course, this is the reason Starbucks is concerned about coffee shops such as that of the defendant. The sloppy service, shabby decor and mixed message on the product served all are damaging to Starbucks’ image and brand identity. This is particularly important in China, where Starbucks is working to create its image.
The message from this case to foreign companies involved with China is clear:
- Register your trademarks early.
- Register your Chinese name even if you do not plan to use it right away. This is especially important if your Chinese name is different from your company name, as was the case with Starbucks.
- Registering your trademarks in China is a necessary start towards protecting them, but it may not be enough. The Chinese government will not protect your trademark for you. You must enforce the trademark yourself.
- If you properly register your trademarks in China you will probably succeed in an enforcement action. However, you must be prepared to incur the legal costs of enforcement. China is a huge and complex country. If your product is successful, there is a good chance it will be copied. You will need to vigorously defend your rights from the very start to prevent this.
The good news we can take from the Starbucks case in Qingdao is that China’s legal system has developed to the point where intellectual property rights can be successfully defended by pursuing IP litigation in a Chinese court.