Danone-Wahaha: No Sympathy

Posted by Stan on 12/12/07 • Categorized as China Law

I have been having a hard time: 1) keeping track of the facts in this case; and 2) finding any sympathy whatsoever for either side in the dispute.

Certainly Wahaha appears to have engaged in blatant competition against its partner, so they are not looking so good in all of this.

Danone comes across as a victim, yes, but one that made some very serious mistakes. This latest arbitration decision leads me first to a very basic question. Why the hell would you agree to arbitration in Hangzhou, the home base of your very strong JV partner? Come on, did you have absolutely no leverage in the negotiation process or did someone screw this one up?

Aside from this, the recent part of this case involves the Wahaha trademark, which was by agreement supposed to be transferred to the JV many years ago. Remember that there is a contract between the parties to this effect, but the actual transfer is something that is not valid until the Trademark Office approves the assignment application and issues a new registration certificate in the name of the new trademark holder (i.e., the JV) — this never happened, of course.

So what are we to make of this comment from Danone’s local attorney in Shanghai? (from Reuters)

"Danone always thought Wahaha had been making the application, and only recently we realized that Wahaha had never formally done so," lawyer Tao said.

This was supposed to have happened, I think, sometime after 1996. I know that JV setups were a bit loose back in the old days, but no one thought to check on this? Before you think that this is so preposterous that someone must be lying, think again. I’ve seen worse, and the idea that a company would never follow up, even for almost a decade, is entirely possible.

Doesn’t elicit my sympathies, though. And that comment makes Danone look completely incompetent. Someone needs to muzzle that lawyer quickly. Doesn’t anyone hire PR people anymore?

To top things off, here’s a wonderful little comment from the Reuters article on this subject:

The dispute has raised concerns among foreign investors about potential risks involved in investing in joint ventures in China.

I am speechless (almost). Here it is, the end of 2007, and this case is alerting foreign investors to JV risks? I have an unfortunate habit of beating journalists about the head and shoulders once in a while for making stupid comments, but this sentence made me apoplectic when I read it. I am printing it out now for inclusion on the Wall of Shame.

11 Comments

Law Office of Todd L. Platek
Wednesday, December 12, 2007 • 11:46 am

Stan, isn’t trust a beautiful thing?
Stan
Wednesday, December 12, 2007 • 12:28 pm

Makes you want to cry sometimes. Another thing that makes me want to weep is that I can’t remember a time when I was able to trust like that.
AllRoads
Wednesday, December 12, 2007 • 1:54 pm

Stan,

I hate to point this out, but there is a lawyer to blame for this somewhere!

I have been pretty harsh on Danone because they got played and a culture of “beware of your JV partner” has kick in all over again when it should be “beware of your own incompetence”.

From your perspective (I asked on All Roads), what impact does this ruling have on all the other cases pending in CA and Europe? Is the fact that Danone (or its JVP) technically did not have possession (and therefore control) of the trademark material to everything else (i.e. Zong was not supposed to use the trademark without the approval of Danone)?

R
Chris Devonshire-Ellis
Wednesday, December 12, 2007 • 2:31 pm

Stan I think you make a valid point over the length of the relationship. We see many multinationals, who 10-15-20 years ago set up in a bit of a rock’n roll fashion. The engineer did all the documentation and admin, or maybe a new to China lawyer, and it got messy or forgotten about in all the hype and hoo-hah over getting into production. However, now, when that business is far more mature and worth millions, that initial (yet partially understandable) lack of attention to documentary detail is coming back to haunt them. Yes, I would agree that Danone’s legal advisors appear to have been negligent, and have obviously not conducted a legal administrative audit to ensure everything was in its place and present and correct. If not, then they should have advised Danone it needed doing and if Danone disagreed on this then they only have themselves to blame. Savings on lawyers fees in China when it comes to making sure your documentation is in place is a dangerous economy. Message to all Corporate HQ’s: Get your Chinese legal admin checked out. Now. And get it signed off by a law firm in China with a track record of handling foreign investment here with their own offices and legal staff on the ground who know what they are doing. Hiring non-PRC firms who sub-contract such work doesn’t cut it, and possibly neither does hiring Chinese firms used to Chinese clients and not international ones. Where does the common sense go ?
Stan
Wednesday, December 12, 2007 • 3:38 pm

As to Rich’s point, keep in mind that the trademark admin process and the rights and obligations under a JV contract are two different things. Therefore, could the Danone JV sue for trademark infringement under the Trademark Law? No, not without possession. However, if their JV Contract includes a non-compete, that would be enforceable. Moreover, if the JV Contract specified that the local partner was obligated to apply for trademark assignment and then failed to do it, the local partner would be in breach.

All of this assumes many facts that I cannot confirm. Perhaps the most important is whether the JV Contract specifies what happens if a government approval is not forthcoming. Good agreements should outline this “what if” scenario in detail so that both parties know their rights and responsibilities in the case something goes wrong with something like a trademark assignment.

Not sure if I’ve answered the question, but I’m already speculating too much based on incomplete info.

No response necessary to what Chris said. Preaching to the choir here. Sadly, most companies simply do not want to pay anything for a corporate or IP audit until they are engaged in a financial transaction and are forced to do so.
Falen
Wednesday, December 12, 2007 • 11:29 pm

I have read briefly on this dispute and clearly this is further evidence of Danone, according to the allegation by Wahaha, basically put forth no effort in the venture and expect profits. It doesn’t help that the relationship was poisoned from the start by Danone’s little legal maneuvering to gain a controlling stake. I think that episode cleared any qualm from Wahaha’s part to play it dirty. And Danone subsequently provided little oversight of the joint venture, which Wahaha’s was all to glad to pass-aggressively leave the licensing situation in a sort of legal limbo.

Clearly Wahaha was going about its business with impunity with no fear that Danone can do much about it. Danone can only blame themselves for failing to perform due diligence.
AllRoads
Thursday, December 13, 2007 • 12:19 am

Stan,

Thanks.

I think Wahaha has cleared the “we tried” test as both parties readily have admitted that the first application was turned down.

But after so many years, one would have though a second attempt would have been made.

Hopefully they had a “what if” clause and thanks for bringing that up – it definately would allow there case to have more merit.

R
Will
Thursday, December 13, 2007 • 4:22 pm

Stan, the question isn’t whether or not Danone hired PR people (it did — Ogilvy, last I checked, although that was some time ago). It’s more likely a question of whether or not they, and especially their lawyers, *listened* to their PR people.

The Reuters article said the lawyers spoke to “reporters”, which suggests that this was article was generated from a press conference. If so, Danone had some specific messages it wanted to get across. I can’t imagine “we dropped the ball” was one of them. Normally, you would do some preparation on the messaging and Q&A for any press conference, let alone one tied to an enormous, brand-damaging legal disaster. Perhaps someone didn’t spend enough time studying the playbook?
Stan
Thursday, December 13, 2007 • 4:35 pm

Yeah, I know. I was being cheeky. I know from experience that lawyers love to talk to the press, even when they have no idea what they’re doing in that arena. That can often lead to a real train wreck.
Rens
Saturday, December 22, 2007 • 3:34 pm

The Lawyer should be sacked but the journalist printing it as well. What a PR hell this is for a company the size of Danone……..