A word to the wise: pay attention to what your distributors/dealers are doing in China.

So there’s this lawyer from Yunnan who represents media companies, specifically acting as an “entrustment agent” with respect to copyright for specific movie titles, including such stellar theatricals like “Red Cliff” and “Pleasant Goat and the Big Bad Wolf” (wasn’t the latter up for an Oscar?) and the Korean cartoon “Backkom Mug Travel” (something about the misadventures of a polar bear).

Our hero found out that a store in Kunming was bundling pirated movies, music and image files along with some electronic products. Specifically, customers could check out the movies at the store and direct the salesperson to transfer those files onto the purchased device.

Oops. Yeah, the lawyer followed up on this, getting an official from the notary office to witness a purchase (this is standard procedure for IP case evidence collection). They also went to two other stores in Kunming that were doing the same thing – all three stores in question are owned by the same company, Chengdu Xinya Communication Technology Ltd., which is an authorized Apple reseller.

The next step was to sue both Apple and Xinya in Intermediate Court (the court of first instance since the case includes a foreign party) in Kunming for copyright infringement. The plaintiff is the copyright license holder of the “Backkom” cartoon, Shanghai Skynet Asia Culture Communication Co., Ltd.

Skynet (cool name, by the way, particularly if you’re into Terminator) is asking for RMB 500,000 and a public apology. The court accepted the case.

A couple of issues to look at here. I think we can dispose of the copyright infringement issue quite easily. Assuming that Skynet is in fact a valid licensee and that Xinya stores were indeed bundling pirated digital media with these electronic products, copyright infringement certainly took place.

News accounts in the local press suggest that Apple has denied direct responsibility. Apparently they first claimed that Xinya was not affiliated with Apple in any way. I think this argument has gone by the wayside as it appears Xinya is in fact an Apple authorized reseller.

Some of the chatter in the news concerns Apple’s legal responsibility, assuming that the store owner was in fact an authorized reseller. Good question, and one that should interest a great many foreign brand owners with local distributors in China. So what’s the answer — who is responsible? In this case, it could very well be that the distributor will be solely liable, letting Apple off the hook.

This is the default position under China law, which has served foreign exporters and licensors pretty well in China, insulating them from quite a few tort cases. On the other hand, facts that could mean trouble for Apple include direct knowledge of the copyright infringement while it was ongoing (did they try to stop it?) or control over store policies (did Apple have anything to do with content bundled with products?). Just because the store was operating as a distributor, however, is insufficient for liability to attach to Apple.

Let’s assume that Apple has no legal worries in this case. Can they wash their hands of this entirely, after giving a stern lecture to Xinya? I suppose they could, but that is certainly not wise. Now, I don’t know how Apple manages its relationships with resellers, but I assume that in addition to standard legal contracts, they have standard procedures that address training and permissible sales practices.

If Apple was a franchisor, I would expect them to have much more control over sales and promotion policies. With respect to a reseller, I am not shocked to learn that the stores were bundling infringing content (I’ve seen this with game consoles as well); I also wouldn’t be surprised if Apple’s reseller manual/guide/training doesn’t cover this (I would expect that their standard contract does, however).

Depending on the answers to these questions, Apple would certainly be wise to not only get rid of this reseller, but also to order an audit of all resellers in China as to these sorts of sales tactics. Moving forward, they should tighten up their contracts, if necessary, beef up manuals and other materials given to distributors, and institute additional training measures as costs will allow.

Speaking of cost, many companies let this sort of thing slide because it can be expensive. Moreover, if they realize that it’s the distributor that bears primary legal liability in China, then some enterprises are even more apt to disregard these risks when they jump into the market.

Apple’s experience in Kunming is another good lesson in how to deal with your distributor in China. Although you may have a great relationship with your distributor and trust them to do the right thing, if you do not on a regular basis exercise your audit rights and investigate their sales, promotion, labor, and tax practices, the reputational harm will fall most heavily on you, the famous foreign brand owner.

Link: http://tech.sina.com.cn/it/2009-05-18/07263100219.shtml (Chinese only)