The battle finally ended with great victory after 12 years efforts
The act of contract termination happened 16 years ago is finally justified by Chinese Court
Recently, an IP licensing company (the “Company P”) of a famous US professional association, represented by James YANG of P.C. & Associates, has won a great victory in the retrial proceeding at Jiangsu High Court, regarding the dispute over trademark licensing contract against a domestic company in Shenzhen active in the sporting goods (the “Company E”). This lawsuit was initiated in October 2008 and lasted for almost 12 years, while Company P ultimately obtained a favorable judgment in July 2020. As a result, both the first and second instance judgments were revoked and all the claims of Company E were totally dismissed. From the full loss in the trial and appeal, to the outright victory in the retrial proceedings ordered by the Supreme People’s Court (“SPC”), this case eventually closed with a perfect ending due to our continuous efforts.
With the authorization of a well-known US professional association, the Company P is in charge of license and promotion activities of the IP rights such as the trademark PGA TOUR. The Company E is a domestic company in Shenzhen and active in the golf related sporting goods. In July, 2003, the Company P signed the Licensing Agreement (the “Agreement”) with the Company E, licensing the Company E to use “PGA TOUR” series trademarks in clothing and package products within Mainland China. The Agreement was effective from July 1, 2003 to December 31, 2006, and it was agreed in the Agreement that the licensee Company E shall provide the sufficient information relating to the sales volume and calculation of royalties. By the end of March 2004, the Company P had not received the royalty statement from the Company E. The Company E had committed a material breach to the Agreement. On May 25, 2004, the Company P sent a breach notice to the Company E, requesting the Company E to correct its multiple breaches including the failure to provide a royalty statement. However, the Company E did not correct such breach within the previously agreed rectification period. On June 11, 2004, the Company P issued a termination notice to the Company E in order to terminate the Agreement according to the termination conditions provided in the Agreement. According to the requirement of the foregoing Agreement, the Company E should have stopped using the PGA TOUR trademark immediately. However, after receipt of the termination notice, the Company E completely ignored the contract provisions and continued to use the PGA TOUR trademark on a large scale for many years, which actually constituted trademark infringement. By 2008, the Company P had preliminarily curbed the infringing acts of the Company E through AIC raids.
In October 2008, the Company E filed a lawsuit with Shenzhen Intermediate Court, claiming the Company P’s breach and demanding compensation of over RMB 18 million. In 2014, the Company E further raised an argument that the Agreement was a franchise contract, while in 2003, according to then effective Catalogue for the Guidance of Industries for Foreign Investment (the “Guidance Catalogue”), franchising was a project restricting foreign investment. Therefore, at the end of 2014, just before the first-instance judgment was made, the Company E further changed their claims to a declaration of contract invalidity and alleged the liability of contracting faults. In January 2015, the first-instance judgment was made by Shenzhen Intermediate Court, in which the Agreement was identified as a franchise contract and declared invalid. The Company P was ordered to compensate for various losses totaling more than RMB 2.7 million.
Both parties were dissatisfied with the first-instance judgment, and then appealed to the Guangdong High Court. In January 2016, Guangdong High Court also declared the Agreement invalid and ordered the Company P to bear all kinds of losses totaling more than RMB 6.2 million. The situations got worse.
The Company P was dissatisfied with the second-instance judgment and applied to the SPC for retrial. In February 2017, the SPC ruled that the Agreement only involved the contents regarding trademark license and was in its essence a trademark license contract, and ordered the Jiangsu High Court to perform the retrial on the other related disputable issues, such as whether the breach of contract existed and whether the termination conditions of the contract were met. At this point, this case firstly greeted a glimmer of light.
In June 2019, Jiangsu High Court held a court hearing. Prior to the retrial hearing, our attorneys prepared a comprehensive retrial statement with more than 13,000 Chinese characters, and after the retrial hearing, our attorneys further supplemented a post-hearing brief with more than 6,000 Chinese characters. We had particularly elaborated the specific provisions in the Agreement on the conditions to enforce the termination right, the material breaches of the Company E, and the specific legal performance of the termination right of the Company P.
In July 2020, Jiangsu High Court made a retrial judgment, fully adopting the above opinions of our attorneys, and ruled that it was completely legitimate for the Company P to terminate the contract. As a result, both the first and second instance judgments are revoked and all the claims of the Company E are ultimately dismissed.
There are two core issues in this case. Firstly, whether a trademark license agreement belongs to a franchise contract or an ordinary trademark license contract; Secondly, how much risk the contractors need to face when they enforce the termination right according to the previously agreed conditions in the contract, namely, to what extent they can justify the termination right.
There is still an outstanding problem remaining unresolved in this case. That is, is it proper for a Chinese court to declare a contract invalid according to the Guidance Catalogue on the “restricted projects” for foreign investigators? As an administrative rule, the Guidance Catalogue is obviously less effective than laws and regulations, which are the only legal basis to declare a contract invalid pursuant the relevant SPC interpretation. If the Guidance Catalogue can also be used as the legal basis for declaring contracts invalid, how many uncertainties will it bring to normal investment or economic activities?
PCA Attorney, James YANG, had participated into this case since he just graduated with a master's degree in 2008 and started his lawyer career. He has witnessed the ups and downs, pains and gains of this case from a junior associate, later a leading attorney and now a partner. After 12 years, this case finally ended with an outright victory. The Chinese court finally justified the termination of the Agreement happened 12 years ago. The Company P does not need to bear any civil liability for any single breach. It is not only a victory for the Company P, but also a victory for the lawyer James Yang, and all his workmates who have used their great efforts in this case.
Now, we are full of confidence in China’s legal environment, and are ready to firmly work with clients to help them win more and greater victories.