So seriously, just today I taught a class on dispute resolution issues for China foreign invested enterprises. Went through the whole discussion on sources of disputes, including the many fights that can erupt between JV partners.

This one is classic for Sino-foreign JVs. Gotta print the article out and bring it to class Wednesday:

A domestic soft-drink maker is suing the Chinese unit of Pepsi because the company says its former joint-venture partner is illegally using its brand and business secrets.

A fight over a brand between JV partners in the beverage industry? Do we have another Danone-Wahaha dispute in the making?

Chongqing-based China Tianfu Cola Group Corp also said yesterday it is preparing additional legal action charging the beverage giant with contract breaches that caused the JV to go into debt.

The relationship between Tianfu group and Pepsico China Investment Co Ltd began in 1994 when they set up Chongqing Pepsi-Tianfu beverage Ltd Co to produce soft drinks under both the Tianfu and Pepsi brands.

Tianfu group contributed land, factories and production facilities valued at about US$7.32 million and took a 40 percent stake in the JV.

But the venture failed to turn a profit, and in 2006 the Chinese company sold its stake to Pepsi for 130 million yuan (US$19 million). Now it wants its product back so it can resume making the brand on its own.

“The formula and some manufacturing know-how behind Tianfu Cola were not included in the investment, and Pepsi never paid us anything for using them during our cooperation,” Qian Huang, general manager of Tianfu Cola Group, said in a telephone interview yesterday.

“The core business technologies of Tianfu Cola have been retained by Pepsi, and even after we quit the venture, it is still producing the products, which is illegal.”

Let me get this straight. This domestic cola company is alleging that Pepsi, one of the largest cola companies in the world, which has been in the industry for a very long time, appropriated technology/know-how from a regional enterprise from Chongqing? They might have had an impressive market share and distribution network in the 1990s, but “core business technologies” that would have been valuable to Pepsico? Hmm.

Do you find that as hard to believe as I do?

“We are also preparing to file a series of lawsuits against Pepsi for breaching partnership contracts and transferring profits that caused the joint venture to fall into deep debt,” Qian said.

Government regulators said in 1995 that the output of Tianfu-brand beverages should be no less than 50 percent of the JV’s total output.

Government regulators? I can see the split in output being part of the JV Contract, but a mandate from the government? Wow.

“Pepsi increased the production of its own products while cutting the output of Tianfu beverages,” Qian said. “Pepsi turned the venture into its own bottling plant.”

OK, reasonable issue, assuming that the JV Contract stated clearly what the operational limitations were on production of each brand. If not, and Pepsi owned 60% of the equity of the JV, then the answer becomes much murkier.

“We gained nothing from the JV,” Qian said. “The Chinese company is near collapse.”

I’m waiting for more information on this case. If the venture was set up to bottle and distribute under both brands, then it’s not a simple thing to claim that Pepsi breached its fiduciary duty to the JV.

If the claim is that Pepsi abused its power as majority equityholder, then we have to assume that something to that effect is stated in the Joint Venture Contract. Perhaps the government was also involved somehow in regulating this venture, but I’d need to know a lot more info on what the limitations were.

Somehow I get the feeling that this JV wasn’t doing all that well, at least in pushing Tianfu’s brand(s), but that since the buyout, things have improved. Perhaps Tianfu sold its equity for a fairly low price and now are having second thoughts in light of the company’s current fiscal position. I’m speculating, but it’s an educated guess.

It’s a classic JV dispute, but there are some wrinkles in the case. Having a JV that runs the brands of both its investors is interesting. How does one determine what the proper duty to the JV is? What would bad faith look like?

I think it will be quite difficult for Tianfu to prove that Pepsico purposely ran the company into the ground to drive down the equity price. What kind of evidence would be sufficient?

We’ll see what my students think of this case on Wednesday.

This entry was posted on Monday, November 2nd, 2009 at 8:53 pm and is filed under China Law. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.