Fortune Apple falls on the head of Proview— Proview Shenzhen sees a new way to get out of its debt

By Evelyn Li

Apple’s successful marketing on its product “iPad” may be facing a big loss in China when a court in China rejected its claim on ownership of the iPad trademark in the country. The court ruled for its rival Proview Technology (Shenzhen) Company Ltd. (Proview Shenzhen), a struggling company that registered trademarks for the name IPAD in mainland China long before Apple conceived its smash hit tablet computer.

Following the court’s decision, Proview Shenzhen has sought to halt sales of Apple’s iPad in two Chinese cities. A court in Shanghai refused its request on preliminary injunction on “all sales of ‘iPad’ by Apple Computer Trading (Shanghai) Company Ltd.” due to “the uncertainty of the decision which will be made by the High People’s Court of Guangdong on trademark ownership over ‘iPad’.” Although Apple was able to stop the preliminary injunction, the appeal to the High People’s Court of Guangdong does not look optimistic.

One big problem for Apple on its appeal is the proof of existence of a valid contract between Proview Shenzhen and Apple’s shell company IP Application Development in Britain on the transfer of the ownership on “iPad” trademark in mainland China. Apple believed that a 2006 agreement between Apple and Proview Electronics Company Ltd. (Proview Taipei) to sell Apple the “global trademark” for the iPad name for around $54,000 includes mainland China. Proview Shenzhen claimed that it was not involved in such negotiation.

Based on the facts presented by Proview Shenzhen, it arguably holds the “iPad” trademark registration on record with State Trademark Office in mainland China since 2001. Therefore, the inference would be that Apple was not careful enough to follow up on the procedural requirements after signing the contract with Proview Taipei to make sure that Proview Shenzhen transferred its ownership on two registrations. It is possible that the lawyers of Apple did not understand very well while dealing with Proview Taipei that the two companies are treated as two different entities under the Contract law of mainland China, even though both companies are subsidiaries of a parent company, Proview International Holdings Ltd. Or it is also possible as Proview Shenzhen claimed that Apple’s counsel was confused about the authorities of certain employees from Proview Shenzhen during the communication through e-mails. According to the evidence admitted by the Chinese court on contract for sales of ownership on ten registered “iPad” trademarks, Proview Taipei only had ownership on eight of those registrations in a number of countries not including mainland China. And Proview Shenzhen was most likely the owner of the other two registrations in mainland China. Therefore, without Proview Shenzhen’s consent and signature, Proview Taipei could not transfer the two trademark registrations.

Moreover, under Article 39 of the Trademark Law of China, where a registered trademark is assigned, “the assignor and assignee shall conclude a contract for the assignment, and jointly file an application with the trademark Office.” Also under that statute, “The assignment of a registered trademark shall be published after it has been approved, and the assignee enjoys the exclusive right to use the trademark from the date of publication.” Therefore, even if Apple could prove on appeal that the contract of all ten trademark registrations on the “iPad” from Proview Taipei had Proview Shenzhen’s official consent and signature, Apple would still need to show that it has fulfilled those procedural requirements under the Trademark Law of China before it started selling iPads in mainland China.

It should be noted that assignment contracts of trademark ownership are characterized as “consensual contract” instead of “real contract” in mainland China. More specifically, under Article 44 of the Contract Law of China a lawfully formed contract usually becomes effective upon its formation. However, “Where effectiveness of a contract is subject to any procedure such as approval or registration, etc. as required by a relevant law or administrative regulation,” such provision applies. Thus even if Apple could prove that a contract was formed between Apple and Proview Shenzhen, Proview Shenzhen could still claim that the contract has not become “effective” under the Trademark Law of China and therefore could still be terminated by the parties under certain circumstances.

Many believed that Apple would settle the case with Proview Shenzhen, and Proview Shenzhen has stated many times that it is willing to settle with Apple on the case. However, Apple also worries that doing so would likely encourage more frivolous lawsuits from companies like Proview Shenzhen. Whatever Apple decides, the litigation situation does not look good. If the High People’s Court in Guangdong rules for Proview Shenzhen on Apple’s appeal, under the The Regulation for the Implementation of the Trademark Law of the People’s Republic of China, Apple will be liable for “the infringements on registered trademark rights,” and be fined “no more than three times of the amount of profit made on such illegal business.” In addition to that, Proview has asked for damages on lost profits and attorneys’ fees.

There are cases and opinions from the Supreme People’s Court of China and some Provincial High People’s courts establishing relevant principles in deciding on trademark infringement cases. Those principles suggest that courts should rarely support claims of damage on unused registered trademarks. Also, on deciding issue of damage on such cases, instead of calculating the unjust enrichment of the infringer, courts should only look to actual loss of trademark holders who are able to prove the amount of damage. In addition those opinions also suggested a requirement for trademark owners to provide evidence on use of the trademark within three years of their infringement lawsuit. Therefore if Proview has not been using the trademark in fact in the course of commerce, its chance of getting a huge amount of damage from Apple is very little on the appeal.

The following are a few take-away points to be gleaned from the matter:

First, to confirm trademark ownership in China, businesses must look to the official Gazette of the State Trademark Office of China. Counsels must make sure the procedure for transfer of trademark ownership required by the Office has been satisfied. Otherwise the transfer is not complete and the earlier owner still holds the trademark as its own.

Second, the authority of employees from Proview Shenzhen who communicated through e-mails with Apple during the contract negotiation with Proview Taipei was one of the focuses on the appeal. Apple brought up this issue first in the trial court to help its argument on formation of the contract. There, Apple claimed “apparent agency” during the negotiation process. However, on the appeal level Apple changed its theory to “undisclosed principal”.

First of all, those two theories are contradictory to each other under the Contract Law of China. And it is unclear whether Apple was being a bit careless on its arguments for the trial level, or Apple did it on purpose for strategic reasons. Secondly, Apple should have been more careful in checking the authority of those employees they were negotiating with through e-mails. It should have been aware that the signing party on the contract was only “Proview Taipei”, and should have asked for clarifications from Proview Taipei on its authority to transfer the two registered trademark rights in mainland China. Apple tried “group transactions” theory to try to convince the court on the appeal that the deal it made with Proview Taipei includes all of the ten trademarks because both Proview Taipei and Proview Shenzhen are subsidiaries of the same parent company. But, such theory does not exist under Chinese law. Even if applying the concept here, Apple mostly likely would still need to show every party’s consent and signature in the “group” for the transfer.

Although Apple tried to bring Article 402 of the Contract Law of China to help establishing the applicability of “undisclosed principal” theory, it is highly likely that the court will deny the argument for more evidence is needed to prove Proview Taipei acted as an agent for Proview Shenzhen during the contract negotiation. (Article 402 states “Where the agent, acting within the scope of authority granted by the principal, entered into a contract in its own name with a third person who was aware of the agency relationship between the principal and agent, the contract is directly binding upon the principal and such third person, except where there is conclusive evidence establishing that the contract is only binding upon the agent and such third person.”)

Third, it is wise for Apple to move timely in stopping the preliminary injunction Proview Shenzhen sought in the Shanghai Court after Apple lost its first case on the trial level. Otherwise, when provincial administrations for industry and commerce take actions under the courts’ decisions, Apple’s loss could be much greater than it would have imagined.

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