I’ve been reading up on the Wahaha-Danone case, looking for something bloggable. I’m both a corporate and IP lawyer, so there are several choices here. The case is, at its heart, a JV dispute, and it should be used in business school as a guide on how not to deal with a Chinese partner. From a Sino-foreign management standpoint, the JV was, if I may use a technical legal term, an abortion.

But that’s not too exciting. Lots of examples out there of failed JVs, some real ugly ones. I had a client a long time ago that was even worse as a foreign investor, but unfortunately I can’t disclose the fun financial details. Those darn ethics rules again.

So instead of the corporate issues, how about the IP side of things? Well, that is a little more interesting. What happened here included a failed trademark assignment, a poor licensing strategy, and a company that never followed up on its legal options until it was too late.

Let’s first take a look at the failed trademark assignment. Note that the picture painted by some commentators on this aspect of the dispute is not entirely clear. I’m not really sure if the assignment was rejected by the Trademark Office on its own or from some outside pressure, and I’m not sure about the exact timing on some of this.

Either way, let’s assume that the TMO essentially stopped this because it would have resulted in a well-known mark being transferred to a Sino-foreign JV, one controlled by the foreign side. This is not a shocking rule - take a look at Article 12 of last year’s M&A law to get an idea of the thrust of government policy in this area:

In case that a foreign investor merges and acquires a domestic enterprise and obtains the defacto controlling power, if it involves the key industries, has the factors which influence or may influence the national economic security, or may result in the transfer of the defacto controlling power of any domestic enterprise which owns famous trademark or China time-honored brands, the parties shall report it to the Ministry of Commerce.

So is this a good policy or not? (yes, I was going somewhere with this post . . .)

If we take this at face value, the protection of certain kinds of IP by a government is not always a case of undesirable protectionism. One of the most famous international cases is the fight in India over basmati rice. Geographic Indications (e.g. champagne, parma ham) are often at issue in these kinds of IP disputes - the designations and the products themselves are part of national identities. This argument has also been extended to indigenous rights, including formulations for medicines, following some well-publicized instances where MNCs have “swooped down” on developing nations and patented local IP.

Another strand of this policy is the disposition of State assets. I don’t want to make a long post even longer by discussing development economics, but anyone who has read one of those lovely Russia vs. China development papers understands the argument over speed of economic reform and the proper method of State asset disposition. Suffice it to say that: 1) wholesale stealing of State assets is a bad way to privatize; 2) careful privatization whereby the State gets sufficient value in return is good. Well, perhaps a bit of an oversimplification, but it makes my point adequately.

So there are some assets that should not be transferred at all, perhaps, and others that can be privatized as long as the State is properly compensated. OK, now we finally get to the point. Should a well-known mark, such as Wahaha, be protected within this sort of policy framework?

I say no way. First, a well-known mark like Wahaha is not analagous to a Geographic Indication or indigenous property right. It is not a “time-honored brand” like Tongrentang. It’s a corporate trademark for a beverage company, an enterprise that dates back to (hang on, I’m gonna Google this) . . . only 1987!

Second, according to the press reports, the Wahaha mark underwent a proper valuation analysis by a licensed Chinese appraisal firm, as it had to do under law for the mark to be considered as registered capital for the JV, which appraised the mark at a hundred million RMB. If that value was converted into equity in a JV, can we agree that the State-owned asset was being disposed of in a reasonable fashion?

In conclusion: the policy at issue here is not necessarily bad, but using it to protect a mark like Wahaha, if that’s what really happened — not so great.

Well, this post went on way too long, so I think I will delay my thoughts on the licensing side of this for another time.

For some good background reading on the JV dispute:

Steve Dickinson’s article in CER

IHT article

Jeremy Gordon’s comments

Bill Bishop’s comments

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