Battle of the Herbal Teas

Background to the Case

One of the cases before the SPC involves misrepresentation and unfair competition claims filed by GZ Pharma. Having lost the right to use the Wanglaoji trademark as a result of the arbitration, JDB started marketing its herbal tea products under the Jiaduobao (加多宝) brand. At the same time, JDB created a number of marketing slogans to promote the change, including "the national sales-leading red can herbal tea has changed its name to Jiaduobao" (全国销量领先的红罐凉茶改名加多宝, referred to below as the "Slogan"), and for a period overwhelmed various media outlets with the Slogan. GZ Pharma sued, claiming that, among other things, the Slogan misled consumers into believing that the Wanglaoji brand had been inherited and replaced by Jiaduobao, when it was in fact owned and operated by GZ Pharma.

At the center of GZ Pharma's case is its argument that the term "red can herbal tea" is synonymous with Wanglaoji herbal tea due to the long term use of the Wanglaoji trademark on red drinks cans, and therefore consumers would come to expect that "red can" and "Wanglaoji" represent products from the same source. When consumers see or hear "the national leading-sales red can herbal tea has changed its name to Jiaduobao", the argument runs, they would understand it to mean "Wanglaoji has changed its name to Jiaduobao", causing harm to GZ Pharma as the owner and current operator of the Wanglaoji brand. In response, JDB argued that the popularity of the red can derived from its own marketing and sales efforts and consumers would link the red can with herbal tea produced by JDB, not necessarily the one bearing the Wanglaoji trademark. Both the Guangzhou Intermediate Court and the Guangdong High Court ruled against JDB, holding that the Slogan constituted unfair competition. JDB then petitioned for retrial with the SPC.

The SPC Decision

In a highly anticipated decision, the SPC vacated and reversed the lower courts' judgments. The SPC recognized the strong relationship between "red can" and the Wanglaoji trademark due to their long term association with the same products. However, unlike both of the lower courts, the SPC did not deny JDB's right to use the Slogan simply due to that relationship. Instead, the SPC pointed out that, as in any unfair competition cases, the court should take a comprehensive view on the background of the dispute, the purpose behind the alleged unfair competition activities, and how the activities affect market competition. Based on its analysis, the SPC held that the Slogan served a legitimate purpose and did not constitute unfair competition.

According to the Guangdong High Court, the long term use of the Wanglaoji mark on red can herbal teas has made both an integral part of how the particular herbal teas were perceived by the consumers. The arbitration decision only resolved the dispute over the license of the Wanglaoji mark between GZ Pharma and JDB, and did not separate the goodwill and reputation associated with the Wanglaoji trademark from the trademark itself. As the owner of the trademark, GZ Pharma also owns the entire goodwill and reputation of the trademark, and JDB should not take actions that may call GZ Pharma's ownership into question. As the Slogan implies the Wanglaoji mark being changed to a different mark (i.e. Jiaduobao) instead of staying with its owner, this therefore causes confusion among the relevant consumers.

The SPC disagreed. Despite the close connection between "red can" and the Wanglaoji trademark, the SPC looked beyond the simple relationship and delved into the purpose behind JDB's use of such term. In particular, the SPC noted that the Slogan was presented in good faith. JDB was the company that marketed and sold Wanglaoji herbal teas during the term of the license. As the arbitration decision prohibited JDB from continuing using the Wanglaoji trademark, JDB had an obligation and need to inform consumers of such development through a marketing campaign. While more information could be added to the Slogan at issue to bring about more detail and clarity, the SPC found that the content of the Slogan was reasonable considering the options that JDB had in conveying the information, and the limitation on messages suitable for an advertisement. In other words, the SPC found the wording in the Slogan permissible in light of the circumstances in which it was presented to the consumers.

JDB's contribution to the goodwill and reputation of the Wanglaoji trademark also weighed heavily in SPC's analysis. The SPC noted that, during term of the license, JDB spent Rmb8.45 billion (US$ 1.18 billion) on capital investment, marketing and promotion relating to Wanglaoji herbal teas. While GZ Pharma regained full control over the trademark as the result of arbitration, JDB's contribution in the preceding decade to the popularity of the trademark could not be ignored. Unlike in cases involving purely free-riding infringers, JDB should have more leeway in communicating with consumers about its decision to terminate the use of Wanglaoji trademark.

In situations where the operator of a popular trademark changes, confusion may be unavoidable, in particular if the new operator was not perceived to be connected to the trademark before the transaction. In this case, GZ Pharma did not market or sell Wanglaoji red can herbal teas during the period when the mark was under JDB's control. Thus, GZ Pharma was not in particular danger of losing the Wanglaoji trademark's goodwill and reputation due to JDB's Slogan since at least parts of the goodwill and reputation were associated with JDB in the first place.

In its decision, the SPC did, however, recognize that some consumers do associate a red can with the Wanglaoji brand so that the Slogan may have a negative impact on GZ Pharma's businesses. The SPC nonetheless rejected GZ Pharma's unfair competition claim because such negative impact was outweighed by the benefits that the Slogan brought to the consumers to clarify any confusion resulting from the arbitration decision. The situation is dynamic and the balance will not always tilt in JDB's favor, however. The SPC thus did not give JDB free rein to use the Slogan at any time it wanted. The Slogan's benefit to consumers decreases over time, which will unavoidably reach a point at which JDB's continuing use of the Slogan could not be justified. According to the SPC, as the purpose of the Slogan is to inform the consumers of the impact of the arbitration decision, JDB should stop its use when such need no longer exists. That said, since JDB had in fact stopped using the Slogan before the case reached the SPC, this was apparently not an issue for this part of the decision.

Trademark Infringement

In another case, GZ Pharma sued for trademark infringement relating to JDB's use of the Wanglaoji mark after termination of the original license agreement between May 2, 2010 and May 12, 2012. The Guangdong High Court ruled in favor GZ Pharma, awarding Rmb1.44 billion (US$ 202 million) in damages, mostly relying on a report issued by an accounting firm. On appeal, the SPC vacated the case, pointing out that there were clear errors in the report, and sent the case back to the Guangdong High Court for further consideration.

However, this case also raises an important legal issue about the scope of liability for a trademark licensee where the license is later invalidated. The licensee can be said to rely on the license in good faith when it is binding on the parties. When the agreement was later invalidated in a legal proceeding, which can retroactively render the licensee's past use unlicensed, an interesting issue arises as to how much the licensee's good faith reliance during the period can be factored into a damage calculation. If in the infringement case the correct owner is awarded the licensee's overall gains, in an amount similar to situations where there is no license, this may harm a normal trademark license relationship as the licensee may hesitate to invest in the licensed trademark out of concern that, if the license later becomes invalid, all its past investments will become fruitless. Unfortunately, the SPC did not address this issue in its decision.

Conclusion

After the license agreement was invalidated by arbitration, GZ Pharma and JDB have been fighting each other by way of a number of lawsuits concerning their post-invalidation rights and interests in the Wanglaoji trademark and related marketing activities. On one hand, these cases are unique as there have never been similar situations in which the goodwill and reputation of a trademark skyrocketed in the same way at the hands of a licensee. On the other hand, the legal issues being dealt with can be found in many trademark disputes. The SPC's decision in the Slogan case, for example, struck a balance between the interests of the former licensor and those of the former licensee. This practical approach prioritizes protection of consumers and market competition over rights of the trademark owner and may have a profound impact on the lower courts' handling of broader unfair competition disputes as well as similar trademark cases.

Danlei Wu, Associate Fangda Partners