Local risk management in transnational operation —learn from Apple's mistakes

With regard to the ongoing iPad trademark dispute between Proview Technology (Shenzhen) Co., Ltd. (Proview) and Apple, Inc. (Apple), many professors and lawyers criticized the legal work of Apple severely, believing that Apple ignored the IP law system in China and made a stupid mistake.

Is Apple's IP management as bad as is being criticized? Would it have been possible to prevent or avoid this trademark dispute even if it started all over again? If the dispute is preventable, there would be space for improvement in Apple's intellectual property work. But if it is not, the belated remarks would not make much sense to corporate practice. We can only learn from these lessons and improve the skills and standards of enterprises in the intellectual property game.

This article briefly puts together the strategic trademark workflow for the iPad project and summarizes its advantages and disadvantages, with the hope of providing reference for transnational corporations to avoid localized legal risks in China as well as for China's going-out enterprises to control similar risks in cross-border business operations. For readers that are not familiar with multinational business practices, it might help to understand the history and current status of the commercial disputes and provide a third-party angle to learn about the business practices and operations.

Materials quoted by this article include the first instance verdict by the Shenzhen Intermediate People's Court, ban by the Hong Kong High Court and major media reports from the Internet. Combined with the author's personal views based on multinational business practices, this article intends to be neutral as an academic study of the iPad case.

Hidden dangers for Apple

In Chinese business practices, a legal department is more like a supporting sector than a core department. In the United States and other countries, legal department enjoys higher status in corporate organization (legal departments has a significant impact on business decisions. The head of a legal department can serve as Vice President. Many executives are lawyers as well). Of course, its high status must be subordinated to the commercial interests and driven by the business operations. According to the information available and with reference to Jobs' biography, Apple launched the development of tablet PC, known as the “iPad” today, in 2009. That date may even be earlier if we consider that Apple started to make legal preparations, including the retrieval of the trademark registration globally in 2009. It is also possible that the product R&D was launched first but the brand strategy with iPad trademark was not nailed down until August. There might be less than one year from the establishment of Apple's IP Application Development Limited (IPADL) to the formal debut of the product in early 2010. Apple signed a contract with Proview on December 23rd, 2009, which was only 35 days earlier than the debut date of iPad—January 28th, 2010. According to information available, Apple's lawyer made the first contact with Proview UK in August 2009 while the iPad was released in January 2010. There were only five months in between. It was extremely hard to complete the transfer formalities in ten countries without making any mistake in such a short period.

It is undoubtedly essential for a revolutionary global IT product to race against time. However, time was too short and errors resulted from the rush. Without sufficient time for in-depth analysis and transaction, Apple planted the first hidden danger for this trademark dispute.

This kind of risk is quite common in commercial practices because the urgency in commercial operation and the time-consuming legal work are always conflicting with each other. Therefore, legal department should communicate with the business sector as often as possible, and sometimes even quarrels are inevitable. Perhaps the lawyers had reminded Apple of possible dispute already. It suggests that entrepreneurs should listen carefully to the views of the legal department or lawyers before making decisions on major issues and should not turn legal procedures into mere formalities.

According to the testimony of witnesses in the second instance, Apple commissioned a professional intellectual property intermediary to investigate and purchase the trademark and later hired a large global law firm to handle the lawsuit. It is still uncertain if the two firms are the same. Reports said that Apple's IP agent, 41-year-old British man Graham Michael Robinson, first contacted Proview UK in August, only six months earlier than the official debut of iPad. Half a year was too short to complete the development and production cycle for such an unprecedented revolutionary product. Therefore, Apple might have developed the product in the first hand and may not have decided to use the iPad sub-brand until August.

The second hidden danger for Apple lies in the separated workflows in IP creation and management. Its IP preparation was not carried out simultaneously with technology R&D. Apple's trademark strategy lacked long-term planning or its implementation failed to meet the requirements of the business planning. (Apple's trademark strategy of using the “i” series was formed after the release of iPad. Industry did not gain awareness of the iPhone, iPad, and iTV series until iPad came out. When iPhone entered the market people were not aware of this or the industry had not formed a consensus.)

Lessons from “violating the traffic rules”

The iPad was a pioneering product. It was an urgent task to clear up global trademark obstacles in six months without any disclosure. It is understandable if Apple had launched R&D but kept the trademark confidential. The author, according to his own experiences, would apply for a special fund and hire local legal services agencies in the major markets for retrieval and processing. The author would not choose to release the product until all the legal procedures had been completed. Of course, this is based on the author's practices in China and lessons from experiences. In fact, Apple set up an IP Application and Development Limited and acquired the iPad trademark with the excuse that iPad was similar with its abbreviation IPADL. The purchase coincided with the Proview's upcoming bankruptcy and the deal was made at £35,000 under notary. It was undeniable that Apple was quite clever in this deal. With regard to this, the author believed that the criticism of “stupid lawyer” as cited from the microblog was unfair and unfriendly. Can anyone else perform better tricks than Apple? According to another report, Apple hired lawyers from Taiwan, Hong Kong and the UK and completed all the notary procedures. Unfortunately, no lawyer from the Chinese mainland was invited to participate in this transaction while the back door opened right here in Mainland China.

Was it possible for Apple to consider the idea of hiring Chinese lawyers? This transaction covered nine countries including Mexico, Vietnam, Korea, Singapore, Indonesia, Thailand, etc. Apple did not hire local lawyers from these countries and no trademark dispute happened in any of those locations.

The author believes that it was necessary and therefore possible to hire Chinese lawyers. First of all, China is now the world's best market, which no one would deny. China provides OEM for most of the IT products in the world. If anything happens in the IP customs protection process, the global supply chain would be damaged. If the legal department had mentioned these two points, management of multinational companies would probably have paid more attention.

However, Apple did not treat it as an exceptional case despite these factors and chose to deal with it using common procedures. The author believes that there are at least three reasons for this:

The first reason is the high legal cost. Nobody can predict every trademark dispute and certainly no one likes to pay high attorneys' fees. It is estimated Apple spent more on attorneys' fees than on the contract subject of £35,000. It was also an unspoken rule that transnational legal intermediaries prefer not to work with excellent local lawyers because of costs and interest sharing.

Secondly, professional local lawyers are not as obedient as company lawyers. Sometimes clients may even get rid of intermediaries and contact with local lawyers directly. A large number of multinational litigations were commissioned to local law firms. Some of the law firms may not like the field of intellectual property, and their proxy litigations are in fact directed by foreign law firms or IP agencies. Since foreign lawyers are not allowed to appear in Chinese court, local law firms go to court instead.

The last reason, also the point from which many scholars think Apple should learn, is that many multinational companies ignore the laws of China. On the one hand, they believe that Chinese laws are simple. As long as they understand each character in the provision, they think they have comprehended the law, which of course is wrong. On the other hand, many multinational companies believe that China is not ruled by law. As long as they open up the interest channel, nothing is impossible. Scholars suggest that the litigation would buy Apple a high-cost lesson for not obeying the local “traffic rules.”

On March 10th, 2012, a seminar on the iPad trademark case was held jointly by East China University of Political Science and Law, Renmin University of China and Shenzhen Lawyers Association. Not long before, the author also presided over a seminar with the same topic in University of Shanghai for Science and Technology. Although the seminar was filled with conflicting ideas on legal and cultural differences, the legal dispute itself was not complicated and even simple for Chinese experts. For example, the author mentioned that the case might not come out if Chinese lawyers had gotten involved. Then, Professor Tao Xinliang from the Intellectual Property School of Shanghai University asked if Chinese lawyers' participation have anything to do with the case. The author's answer was that the dispute would not exist if Proview (Shenzhen) had sealed on the contract. Any qualified lawyer in China should know that an official seal is the representation of the enterprise and it is common sense to stamp the transaction with an official seal. However, this common sense procedure might not sound familiar to Apple's British lawyer Mr. Robinson. In cross-border and cross-cultural transactions, problems like this seem to be endless. Therefore, the best practice for similar multinational operations is to find a local professional agency to control the risks. This should become a must procedure for business risk prevention and control rather than an optional step. It is also suitable for Chinese enterprises that invest in overseas market. For example, SAIC Motor Corporation Limited has already paid high fees in its acquisition of SSANG YONG Motor Company.

Of course, there is another problem of feasibility in operation, which was also addressed by a company lawyer from a multinational corporation at the seminar the author presided over. If Apple had hired local lawyers from every country where the trademark needs to be traded, it would cost three to five years to complete the legal procedures, which was not feasible in business operation. Therefore, the realistic plan, also the common practice currently, is for the multinational companies to hire a law firm with branches worldwide and to control the legal risks via its local branches. Apple also completed the transactions using this approach.

Reflection on the iPad dispute

As a party in this case, Apple should learn a big lesson. It needs to reexamine China's market, lay more emphasis on the legal differences, and consider the opinions of local lawyers. But the case is different for Chinese enterprises. In China, there is no such global legal service agency, so Chinese enterprises can only rely on foreign legal agencies when investing in overseas markets, as most Chinese enterprises choose in overseas listing. In the process of going global, China's business sector should also consciously foster professional institutions toward internationalization.

In fact, China's enterprises and service organizations should also do the same when going global as foreign law firms follow their clients into the Chinese market.

The “international practice” has almost become a “notorious” term in China because it is often used as an excuse for high charges. However, as a professional, the author still hopes that China's laws would not go too far from international practices. If we do our international counterparts will regard us as “aliens,” especially in the IP field where global commercial rules are widely accepted.

Apple acquired a total of ten trademarks globally. Eight were bought from foreign countries without any dispute while the remaining two were from China and troublesome. Anyhow, the case is worthy of reflection from both Apple and the Chinese side. With regard to its fundamental purpose, the intellectual property system is to protect innovative enterprises like Apple and their innovative products like the iPhone and iPad. IP system would not encourage speculators like Proview, who makes use of Chinese laws and goes against the principle of good faith. Discussions on this case also demonstrate various concepts and values from different parties. Certain remarks may sound partial and pervasive, but do not survive thorough consideration. The academia is no longer a pure land, but justice will live forever.

(Translated by Li Guanqun)

Source: China IP

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