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Apple, contracts, trademarks and due diligence: lessons from the Proview dispute

Apple’s infamous dispute with Proview has more to teach foreign investors about contracts and dispute resolution in China than it does about trademark law

Issue: July/August 2012

Keywords (click to search): Apple Proview trademarks dispute resolution contract law

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The Guangdong Higher People's Court announced on Monday that Apple paid $60 million to end its three-year iPad trademark dispute with Proview Shenzhen. The dispute has been the focus of unprecedented media attention and caused delays in releasing Apple's latest iPad into the China market.

 

"This case is an excellent example of analysing the establishment and enforcement of a contract," said Steven Lin, legal counsel for Shanghai Shanda Networking, a developer and operator of online games.

 

The dispute started in 2009, when Apple used a shell company to purchase the iPad trademarks from Proview for $55,000. According to a lawyer China Law & Practice spoke to, the warning signs should have been clear from the beginning: "when a deal is too good to be true, you always have to pay more down the line".

 

Another lawyer highlighted the need to ensure thorough due diligence right from the beginning when making acquisitions like this: "Get competent local counsel. When Apple was purchasing the trademarks, its counsel should have checked public records for all past registrations, renewals, transfers, pledges and licences".

 

In 2010, Proview claimed that its subsidiary Proview Shenzhen owned the China trademark for the iPad and demanded an additional $1.6 billion for the mark.

 

This kick-started the legal battle before a Hong Kong Court and Shenzhen People's Intermediate Court. Hong Kong ruled in Apple's favour, granting an interlocutory judgment. The Shenzhen Court ruled against Apple, stating that Proview Shenzhen was the legitimate owner of the trademark.

 

"The difference between the Hong Kong decision and the Shenzhen one shows that Chinese judges refused to look at the totality of the circumstances in the entire transaction," said one lawyer.

 

The difference was that the Hong Kong court considered the contract between the two parties while the judges over the border in Shenzhen did not.  Some of China's Administration of Industry and Commerce (AIC) organisations removed iPads from shop floors in north China. At the same time, Apple appealed to Guangdong Higher People's Court.

 

The Higher Court asked Apple and Proview to mediate through in-court discussions. Apple reportedly offered $16 million, with Proview seeking $400 million. Finally, the Court announced on its Sina micro-blog that on June 25 both parties had resolved the dispute and on June 28 Apple applied for the trademark to be transferred.

 

"I hope in the future the Trademark Law will give greater opportunities for those who really established a business's reputation using the trademark, rather than justifying someone who benefitted from filing an application earlier," said Lin.

 

Throughout the dispute, Chinese officials were pushing both parties for a settlement. "They want to foster a good image for IP protection in the international community. In addition, this case involves millions of Apple consumers," said Chen Jihong, an IP lawyer with Zhong Lun Law Firm in Beijing.

 

"The impact on the image of Chinese courts could have been too grave if Apple lost the case," said another lawyer.

 

With $60 million now with Proview (or at least with their creditors), the dispute is over. "It is what I expected for a settlement amount. Proview's creditors get their money back as it covers the $48 million owed to them with some left over for any additional costs," said Elliot Papageorgiou, a partner with Rouse in Shanghai.

 

The resounding message is that there are no guarantees a contract will be upheld before Chinese courts. There are also no certainties courts will look at the bigger picture - only the case at hand and the evidence available. For Apple, the fact that Proview Shenzhen's name stayed on the trademark register has cost them a lot of time and money.

 

By David Tring

Further reading:

Apple's hollow Hong Kong victory

Apple's iPads taken off the shelves in north China

PRC Contract Law (中华人民共和国合同法)