The Brew’s Ready? Wang Lao Ji and Valuing Organic Intellectual Property

By Nestor Gounaris and Limin Zhang

Over twenty years ago, the groundwork for a wholly domestic intellectual property dispute started its long, slow brew. A branded herbal tea product achieved tremendous commercial success, generating significant good will in the design patent and trademark, which were each owned by separate parties. When the commercial relationship started to unravel, each party argued that their respective intellectual property had generated
more value than the other.

The dispute recently came to a head in December 2014 with a decision issued by the Guangdong High Court. However, the fight is not over yet, with the losing party filing an appeal. This case reflects the organic growth of intellectual property in the People’s Republic of China and the increasing domestic need for recognizing, defining and protecting intellectual property. Furthermore, the case also reminds contracting parties to a license agreement to anticipate and clearly articulate how to share the good will that may arise from the licensing of intellectual property.


Background
In March 1995, a top 250 state-owned, Chinese Enterprise operating nation-wide in the Chinese traditional medicine and pharmaceutical arena, Guang Yao, licensed its registered trademark “王老吉” (pronounced Wang Lao Ji) to a licensee (the “Licensee”). The Licensee was granted the right to produce and sell canned herbal tea using the “王老吉” trademark in China until May 2010, together with the right to grant sub-licenses.

In December 1995, the Chairman of the Licensee applied for, and two years later was granted, a 10-year design patent until 2007 for a distinctive red can which could be commercially used in conjunction with the “王老吉” trademark. Subsequently, the Chairman of the Licensee licensed a subsidiary of the Licensee (“Licensee Sub”) to use both the design patent and the “王老吉” trademark to produce and sell herbal tea.

Licensee Sub successfully produced and sold herbal tea, which eventually commanded 70 percent of China’s herbal tea market share. Obviously, this commercial success generated significant brand recognition for the branded herbal tea sold using the design patent and the “王老吉” trademark.

Once the trademark license to the Licensee (and correspondingly, the Licensee Sub) terminated, Guang Yao started to produce and sell canned herbal tea using the “王老吉” trademark on a red can. However, at the same time, Licensee Sub also continued to produce and sell herbal tea in a red can, albeit with a different trademark. Licensee Sub sued Guang Yao for infringement of Licensee Sub’s rights in the trade dress of herbal
tea in a red can. 

Court Decision
The Guangdong High Court decided that even though the particular trade dress of well-known products are recognized and protected under PRC Anti-Unfair Competition Law, the registered trademark component of the trade dress (i.e.,  the “王老吉” trademark on the distinctive red can) takes priority. While the reasoning for why the registered trademark has priority is not expressly set out (recall that the People’s Courts in China do not rely on precedents, nor set precedents, as courts do in common law jurisdictions), the court suggested that the trademark takes priority over the trade dress because the trademark was well-known prior to being incorporated into the trade dress. Expressed differently, the court reasoned that the trade dress without the trademark would not possess as much value or recognition that the trademark without the trade dress would.

The court also indicated that since the Licensee’s (and Licensee Sub’s) right to use the trademark ended with the termination of the trademark license, the trademark (together with the trade dress that, through use and the market-place’s recognition, had become part-and-parcel of the trademark) could no longer be used by the Licensee (nor the Licensee Sub). As such, the right to use the trade dress and trademark resides solely with
Guang Yao.

Looking Forward
In the absence of a contract terms to deal with the issue of the unclaimed good will residing in the trade dress, the court decided that the pre-dated trademark rights trumped the more recently-created trade dress rights.

To date, this appears to be the first case since the economic liberalization started by Deng Xiao Ping in 1978 in which the People’s Courts intervened to deem which intellectual property rights (i.e., trademark ownership or trade dress) trumped for such a commercially high-value dispute. One resolution for future licensors and licensee is to ensure they address this scenario in the terms of the license agreement.

We should also expect that as China’s economy continues its development, the courts will be called on with greater frequency to resolve increasingly complex and increasingly higher-stakes disputes centering around intellectual property. And, as the value of this property will increasingly rest with domestic players, intellectual property rights protection may be seen less and less as a domestic versus foreign issue.