Lawyers copy.  Let me expound on that.  Lawyers proudly copy.  If I am writing a joint venture agreement on a coal mine in Western China, the first thing I will do is send out an email to everyone in my office asking for our most recent China joint venture agreements, preferably involving a mining operation, even better if it involves coal mining.  I will also go online to various specialized law sites and run a google search seeking out China joint venture agreements involving coal mines.  And hey, believe me, if I see some good provisions in any of those, I will co-opt them (and seek to improve them) for the joint venture agreement I am doing. This is what lawyers do.

And this is what I have done in running my law business.  I do not have an MBA and I do not have time to read MBA type books to get the equivalent of one on the cheap.  So I borrow from what I read/hear and like.  I read once about how Ford Motor Company emphasized standardization because it saves time and money in that it allows for familiarity and swapping out.  All of the desks in our firm are the same.  All of the desk chairs are the same.  All of the guest chairs are the same.  Everyone has either a MacBook Air or a MacPro Desktop or both and an iPhone.  This means if someone forgets a cord or a cord breaks or whatever, we are covered.

I have a tendency to do the same with China.  I see who is succeeding and figure that they are to be emulated.  Despite its recent blip, I still border-line worship what KFC has done in China. I marvel at its ability to provide decent and safe and cheap food at a profit throughout China. That is no small feat and I assume KFC is doing a lot of things right. And if I were to start a fast food company in China, I would read as much as I could about how KFC did and does it, rather than try to re-invent the wheel.

I used to write a lot about individual companies in China, back when newspapers and magazines contained a lot more than they do now in the way of articles setting forth what various companies had done to succeed in China.  I loved those posts because I always have figured that one can learn more (and better copy) from specific examples than from bromides on how to do things.  I am labelling this post “Part 1” because I am planning on this being the first in a long running and irregular series of posts highlighting China success stories/who to copy in China.

So I was delighted to see on my Facebook today that my friend, Ben Shobert, just came out with a two part interview series with with Marie Han Silloway, Starbucks China’s chief of marketing. Starbucks is succeeding in China in many ways.  They are profitable and they are constantly growing. Their stores feel very much like a Starbucks anywhere, and yet they also have Chinese characteristics.  Amazing to me is that their service is so good and pretty much matches the service of Starbucks in more service-oriented countries like Japan and the United States.  In other words, if you doing business in China or thinking of doing business in China, Starbucks would be a good company to copy.  And for that, I recommend you read Will China be Starbucks’ Cup of Tea and Will China be Starbucks’ Cup of Tea, Part 2.

Read ’em and learn.

What do you think?

For many years here in Seattle, a newish/smallish coffee chain called Seattle’s Best Coffee (SBC) was said to choose its locations based on Starbucks.  Supposedly (and I do think this was the case), SBC figured that Starbucks was so successful and so stacked with smart location-choosing people, that SBC’s best location-choosing strategy would be to simply mimic Starbucks. If Starbucks opened somewhere, that location had to be good for a coffee shop, so SBC would open on the same corner or across the street. Its thinking was that would be a good location and once people got there, they would choose the better coffee: SBC’s. Starbucks eventually purchased SBC.

Might that strategy make sense for China, but on a grander scale?  A reader asked me that question today and sent me a link to a Chinese language site called linkshop, that sets out the number of Starbucks stores per city in China.  The site also lists a number of other coffee shops per Chinese city as well.

So my thinking is that there has to be at least some connection between the number of Starbucks (and even other coffee shops and the “readiness” of that Chinese cities for Western companies, at least Western retail companies.  Am I wrong to assume that if a Chinese city is ready for a large number of Starbucks, it is also ready for other Western retailers?  I also think there has to be at least some correlation between a city’s having a Starbucks (or even a lot of Starbucks) and its livability for Westerners. Do you agree? And might it even be the case that those cities with a disproportionate number of Starbucks as compared to competitor stores (such as Xi’an, Ningb0 and Dongguan) are the exact cities at which Western retailers should be looking as they are ready for, yet under-served by Western retailers? Is there anything here that can or should be used to determine where to locate your China retail store?

Anyway, based on my totally off the cuff theories, I present to you, in translation, the list of Starbucks in each city in China, followed by the total of other “name-brand” coffee shops (McCafé/Costa Coffee/Pacific Coffee/Jamaica Blue/Lavazza Expression/Versus Versace) in those same cities,

  • Shanghai: 142/282
  • Beijing: 91/197
  • Guangzhou: 41/103
  • Shenzhen: 47/107
  • Chengdu: 22/35
  • Hangzhou: 20/32
  • Chongqing: 16/22
  • Tianjin: 15/48
  • Nanjing: 12/33
  • Qingdao: 12/21
  • Dongguan: 11/15
  • Suzhou: 10/16
  • Ningbo: 10/13
  • Xi’an: 10/11
  • Xiamen: 9/18
  • Shenyang: 7/20
  • Dalian: 7 /16
  • Jinan: 5/11
  • Foshan: 4/14

Or am I off base with all my theories?

Earlier this year, I wrote an article for the Alaska Bar Magazine [link no longer exists] on China’s trademark laws, mostly extolling how necessary it is to secure such a trademark and how relatively simple it is. Nothing much in the article that we have not been saying here since our inception, but since it provides a nice summary in one place, I am running the whole thing below.

Members of the media love to write about China’s failure to protect foreign company intellectual property (IP), but those articles can be misleading. These articles often fail to state whether the foreign company actually registered its IP in China at all and they nearly always fail to distinguish between the various types of IP eligible for protection. Both of these shortcomings are meaningful.

China generally does not protect any IP unless it is registered in China. Though there are a few exceptions to this rule, the bottom line is that it will always be cheaper for a company to register its IP than to litigate, whether it comes within any exception or not.

The failure to distinguish among the various types of intellectual property leads companies to believe that enforcement of intellectual property in China is poor across the board, and that simply is not true. China’s patent law system is difficult and spotty, at best. Copyright protection in China–particularly of DVDs, CDs, and software–is downright terrible. But, its protection of trademarks is actually quite good and getting better all the time. China’s better courts (usually found in China’s more commercialized cities) are actually quite good in enforcing trademark rights. There is a widely believed theory that countries start enforcing IP rights when their more powerful domestic companies demand enforcement because they themselves have IP worthy of protection.

With respect to trademarks in China, that time has already arrived. As proof of this, I often talk about an incident in China involving watermelon and rumors of their having been tainted by AIDS. A group of watermelon farmers in Linquan county, (a county in Shandong Province known for the high quality of its watermelons) had registered a trademark for their watermelons and established an association to promote them. The Linquan watermelons had, according to the Shanghai Daily, became “the top sellers, even though their price was much higher than watermelons from other regions.”

Sales of Linquan watermelons then plunged amid rumors they had been injected with HIV tainted blood. The rumors had a devastating impact on sales. The newspaper interviewed one of the farmers who said he planted more than 6.7 hectares of watermelon this year. Before the rumors, he had sold out all of the watermelons harvested. After the rumors, much of the inventory rotted.

It should be clear from this incident that securing a trademark in China can be an effective tool for distinguishing your product from the competition and for allowing you to charge a premium price for it. That is exactly what happened here. The efficacy of trademarks in China allowed the Linquan farmers to charge significantly more than others and yet sell out of their watermelon crop, and it also caused its rivals to feel they needed to spread the vicious AIDS rumor.

So now that I have (I hope) convinced you that it makes sense to protect a trademark in China, the next step is to explain how to do so. Easy. Register it. Plain and simple.

China is a first-to-register country, which means that unless your trademark is a well known mark (and let me assure you it almost certainly is not and you definitely do not want to be litigating this issue in any event), whoever registers it in China first gets it. Put another way, to expect trademark protection in China, foreign companies must register their trademarks in China and the prudent company does this before going in.

There are actually a number of people in China who make a living by usurping foreign trademarks and then selling a license to that trademark to the original license holder. Once one comes to grip with the fact that China, like most of the rest of the world, is a “first to file” country, one can understand how easy this usurpation is, and also, how easy it is to prevent it.

The fact that you are manufacturing your product in China just for export does not in any way minimize the need for you to protect your trademark. Under China trademark law, once someone registers “your” trademark in China, they have the power to stop your goods at the border and prevent them from leaving China.

China’s trademark requirements are actually quite similar to those in most other countries. The trademark must not conflict with an existing Chinese trademark and it must be distinctive. China allows for registration of all marks for goods, services, collective marks and certification marks.

In deciding what to trademark, foreign companies must consider all sorts of things. Take Starbucks, for instance. Starbucks registered more than 200 trademarks in China. It has registered Starbucks in English and the translation of “star” and “bucks” together in Chinese. Any foreign company strategizing about what to trademark in China must have a fluent Mandarin speaker to assist. Indeed, some of the very largest foreign companies register trademarks in other dialects used in China as well.

China’s Trademark Office maintains a centralized database of all registered and applied-for trademarks. Trademark applications that pass a preliminary screening are published by the Trademark Office and subject to a three-month period for objection. If there are no objections within this three-month period, or if the Chinese Trademark Office rejects the objections as frivolous, the trademark is registered. If the Chinese Trademark Office supports an objection, it will deny the application. Denied applications may be appealed to the State Administration of Industry and Commerce Trademark Review & Approval Board and then to the People’s Court. Based on our experience, objections to trademarks are rare.

A Chinese trademark gives foreign companies a surprising amount of protection in China. If a foreign company learns that its trademark is being infringed in China, it has a number of actions available to it.

We usually advise our clients to pursue a multi-pronged approach to protect an infringed-upon trademark and to pursue the infringer. The foreign trademark owner should usually file a lawsuit against the infringer, seeking damages and an injunction stopping the infringer from continuing to sell the infringing goods. The Chinese courts in the more commercialized regions are actually quite willing to enforce China’s trademark laws, even for foreign companies.

Trademark infringement is a crime in China. For serious cases of infringement, a complaint to the office of the public prosecutor can often result in a criminal prosecution against the infringer. The Chinese police will close the offending operation and seize the counterfeit goods. The courts are authorized to impose both fines and imprisonment. Finally, if the counterfeit goods are destined for export, a notice to the Chinese customs authorities will prevent export of the counterfeit goods.

There is an assumption out there that China’s legal deck is completely stacked against Western companies.  China bad.  South Korea good.

Starbucks just proved it is not that simple.

I have handled at least 100 legal matters in Korea and in many ways I find its commercial legal system more nationalistic than China’s.  Korea’s laws on the books say one thing, but its bureaucrats say another when a foreign company is involved.  I often say that I am better at predicting how Korean courts will rule on a matter than other courts anywhere else in the world.  I ask only one question:  What is best for Korea right now?

The answer to this one question is also the answer to how a Korean court just ruled in Starbucks’ trademark case there.  Look at these two logos.  [link no longer exists] Look at the name.  Think for 30 seconds.  Is there any doubt that Starpreya’s goal here is to create confusion and piggyback off Starbucks’ good name?  Of course not.

But if you ask what is best for Korea in the short term, the ruling favoring Starpreya is no surprise.

The Daily Warthog blog, in a post entitled “Coincidence,” [link no longer exists] analogizes the Starbucks’ and Starpreya trademarks to this line from the Eddie Murphy movie, Coming to America, in which the lead character takes a job at McDowells Restaurant, whose owner, explains the situation as follows:

Look . . . me and the McDonald’s people got this little misunderstanding. See, they’re McDonald’s . . . I’m McDowell’s.  They got the Golden Arches, mine is the Golden Arcs.  They got the Big Mac, I got the Big Mick.  We both got two all-beef patties, special sauce, lettuce, cheese, pickles and onions, but their buns have sesame seeds.  My buns have no seeds.

The explanation for the Korean court’s ruling on the IPKat blog could have come straight from the movie:

The court ruled that:

  • the words looked different
  • Star is commonly used in trade marks and so wasn’t distinctive
  • Neither ‘preya’ nor ‘bucks’ had any special meaning, and so consumers would be unlikely to separate the trade marks into their constituent elements, referring to both sometimes as ‘Star’
  • There was no evidence that Elpreya [the company that uses the Starpreya name] had ‘plagiarized’ Starbuck’s logo

IPKat does not find the court’s analysis convincing:

True, if you analyze each element of the two logos bit by bit it’s possible to highlight many differences between them, but our good friend the moron (or should that be commuter?) in a hurry will just take a quick glance and will be confronted with two logos of green rims containing white writing and a picture in the middle.

The Marmot’s Hole, one of Korea’s leading blogs, in a post, entitled, “Starbucks Loses Korean Logo Fight, noted that Korea’s state-owned news agency Yonhap began its article on the court ruling with “Giant multinational firm Starbucks dropped to its knees today in its courtroom dispute with a native medium-sized firm over ‘knockoff logos.'”

A tongue in cheek comment to the Marmot Hole’s post not so obliquely notes Korea’s history with foreign brands:

Knockoff, schmockoff. Who do those huge multinational brutes think they are? The Korean courts were just as righteous when they wouldn’t let FedEx take www.fedex.co.kr away from a legitimate, hardworking Korean [cough*cybersquatter*cough] firm.

Seoul based attorney, Brendan Carr, posted a comment at Marmot’s Hole, affirming Korean court nationalism:

This is an unusual case (well, not unusual in the sense that Korean courts don’t do this to hapless foreign trademark holders regularly, but weird nonetheless). I’m a little reluctant to talk out my backside and have no information other than what’s in the papers; Starbucks didn’t call us for this matter, or any other. I am still hopeful to get business from Starbucks one day. Starpreya seems like a less-attractive candidate, the multinational’s supine position before the mighty Korean SME notwithstanding.

However, it appears from the story that what happened here is a reversal for Starbucks at an intermediate-appellate level.  It will still be possible to appeal this seemingly erroneous decision to the Supreme Court. (Oh, to make the kind of money Kim & Chang [Korea’s largest law firm] will get in this case! Hundreds of thousands of dollars.) But our friend Sperwer’s notation on the difficulty of prevailing on the ‘famous mark’ doctrine is right on target.  Korea basically follows a standard so onerous that no foreign litigant can meet it if Starbucks is not a famous mark known to the general public, then nothing is. This is a clever end-around international standards, so that Korea can ‘protect intellectual property’ while still winking at the same old ripoff: Adopt the language of the prevailing standard, but then interpret the same language differently so there’s no meaningful protection. Or just do nothing at all, as we see with the ripoff DVD sellers on the streets.

What’s odd in this story is the Yonhap report indicates that the Starbucks mark is senior to the Starpreya mark ‘ Starbucks registered first. The real question, then, is How on Earth did Starpreya get its registration approved? We’re dealing with a case right now where a foreigner’s registration of its mark in the ice cream space has been rejected because a Korean company has a mark which incorporates one of the words. Their market segments are completely different ‘ our client will sell in a restaurant setting only, while the Korean product is a supermarket and corner-store brand.  But there is apparent similarity in the name (the logos, however, are exactly different) and therefore, says KIPO, confusion is inevitable. So, Mr. Foreigner, no registration for you.  But local minnow Starpreya, with the highly similar name and identical logo, congratulations your mark is approved.

For more on the Korean Starpreya case, check out the following:

  1. Starbucks vs. Starpreya the branded beverage battle” on the Phosita Intellectual Property Law Blog.
  2. Starbucks Not a “Preya” in Korea,” at the Likelihood of Confusion IP Blog, which notes Starbucks has “ample grounds”  (pun intended) to appeal.
  3. Koreans – Original?” at the consistently interesting Occidentalism blog, which does an amazing job visually pointing out this is not the first time a Korean company (or band, or movie, or advertisement) has engaged in what looks like copying.

I note that Starbucks prevailed in China in a somewhat similar case.  For more on that case, go here and here.

As a foreigner is it easier doing business in China or doing business in Korea?

The Street.com did a story on the increasing growth of Chinese consumerism.  The article talks about how China’s growing middle class is translating into a growing customer base and then goes on to recommend the following stocks for those wishing to take advantage of Chinese consumer growth:

  • Starbucks (SBUX)
  • Wal Mart (WMT)
  • Yum! Brands (YUM)

I am NOT going to opine regarding these investments, but I do concur that all three of these companies “have or are in the process of making China central to their expansion strategies.”

The Street.com also recommends Citicorp (C) as “one of the companies showing a major interest in China’s nascent banking system. Currently, only a small segment of the population in China has a credit card or uses loans for purchases.”

If, like me, you are bullish on China, yet skeptical about the corporate governance of Chinese public companies, publicly traded foreign companies that invest heavily in China are a good way to play the China investment card.

This is the third of my posts on the United State’s Patent and Trademark Office’s recently completed two-day conference on “Protecting Your Intellectual Property In China and The Global Marketplace”  The first,”Nike On China IP Protection:  Just Do It With Green Tea,” was based on a speech by Kevin R. Brown, Nike’s Director of Global Brand Protection.  The second, “China: Counterfeiting And Piracy — The Issue And The Challenge,” recounted Timothy Trainer’s speech on preventing piracy.  This post focuses on the speech given by Kim Teraberry, Director and Corporate Counsel at Starbucks.

Full disclosure:  I am a huge fan of Starbucks and have been a shareholder for so long I am not even sure since when.

Ms. Terrabary’s speech focused on the efforts Starbucks has undertaken in China to protect its IP.  Starbucks has a total of 253 pending trademark applications and registrations in China.  In 2002, it had 8 trademark disputes.  In 2006 it has already had 85.  Almost all of these disputes involve oppositions to rival trademarks, not lawsuits.

Ms. Teraberry wisely advised businesses in China to file their trademarks “early.”  She suggested companies look first to filing their core/house marks and then the marks needed to conduct their business.  She also suggested businesses consider filing Chinese character versions of their core marks.  She talked about the slew of defensive filings Starbucks has made in China, including the following:

  •  Variations of word marks (roman alphabet)
  • Variations of Chinese character marks
  • Variations of design marks
  • Expanded/additional classes
  • Nicknames

She went on to say that if you do not choose a Chinese mark, someone else will choose it and she made clear that it is not wise to assume that your Roman script mark will protect you against a Chinese character version.  She talked about how companies should consider registering both a translation of their foreign name and a transliteration (same sound, different or no meaning).  She used Tai Shu (meaning “calm” or “relax”) as an example of a transliteration for Starbucks brand name, TAZO.

According to Ms. Teraberry, in choosing a Chinese trademark, one should consider the following:

  • Marketing Objectives
  • Connotation
  • Appearance
  • Sound
  • Multiple Dialects
  • Traditional and simplified characters
  • Trademark Clearance

I concur with Ms. Teraberry’s advice, but would add that if a foreign company expects to do right by its trademarks in China, it must retain professionals fluent in both Chinese and English with familiarity with both cultures.  Anyone can look up a word and translate it, but as Ms. Teraberry makes clear, that is not likely to be enough to protect your trade-names and trademarks in China.

I am often asked by small companies if it is worth it to do all that is necessary to protect their name and brands in China.  My response is that if their brand, product name(s) and/or logos are valuable to them they really have no choice but to do what it takes to protect them.  If you are doing business in China or with China, you have no real choice but to register your trademarks in China.

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On Wednesday, July 26, I will be taking off on my bi-monthly Asian trip.  As is nearly always the case, I will be spending my first night in Seoul, Korea.  I leave Seoul, on Friday, July 28, for Shanghai, where I will stay until Sunday evening, July 30.  I then fly to Qingdao where I will stay, probably, until the next day.  On Monday, July 31, I will fly to Beijing, where I will stay through Thursday, August 3, at which time I will board a plane for Saigon, Vietnam, where I will be through either August 5 (in which case I will be in Seoul through August 7) or through August 7 (in which case I will go “directly” to Seattle).

My law and blog partner, Steve Dickinson will be with me for most of the China portion of the trip.

Steve and I are interested in meeting up with our loyal (or even not so loyal) readers in any and all of the cities listed above (Seoul, Shanghai, Beijing, Qingdao, Saigon) to talk China, China business, Vietnam, Vietnam business, Korea, Korea business, or whatever.  Please contact us if you would like to meet with us.  Drinks (including, but definitely not limited to, green tea and Starbucks) will be on us.

The best way to contact us is by e-mail to firm@harrismoure.com.

We are looking forward to it.

The Motley Fool, a hugely popular investment advice site, recently did an article on Home Depot’s planned expansion into China, entitled, “Home Depot Sells Fine China.”  The article talks about how Home Depot is looking to buy a 49% stake in Orient Home, a leading do-it-yourself China retailer.

The article correctly notes that for big companies going into China, “it often pays to piggyback on established regional players to gain the necessary localized expertise and consumer acceptance.”  The article then veers off course by saying that in China “it’s practically an imperative,” and cites Starbucks as an example of this:

In China, it’s practically an imperative. When Starbucks opened its first store in China in 1998, it sought out a local partner. Even though the majority of the company’s stateside stores are wholly company-owned, Starbucks has gone on to broker partnerships in Beijing, Shanghai, Hong Kong, and southern China.

This approach isn’t limited to the retail world, of course. Even though the Internet is seen as the great leveler, many of our own country’s most successful Net companies had to find an established partner in China. Last year, Yahoo! paid $1 billion for a 40% stake in Chinese auction site Alibaba. That came after eBay had entered the market through the acquisition of Alibaba rival EachNet.

The article concludes by stating that Home Depot shareholders should “be thankful that it [Home Depot] isn’t thinking of going in alone.” I am a quite happy Depot shareholder, but the Motley Fool has it wrong.  I am not challenging Home Depot’s decision to go in to China with a partner, but I am challenging the Motley Fool’s contention that a partner is imperative. I also have to believe that Home Depot did seriously consider going into China alone, before deciding to seek to join up with a Chinese company.  The need for a partner was true years ago when China’s laws required foreign companies in most instances to come in as part of a joint venture, but in most sectors, that is not the law today.

Contrary to the Motley Fool’s assertions, many companies are eminently capable of going into China on their own, without being part of a joint venture.  I am not trying to minimize the need for assistance on the ground in China from a whole slew of people who know and understand China business.  I am merely staking out the position that in most cases it makes better sense to go into China as a wholly owned foreign entity (WFOE) than as part of a joint venture.

I previously blogged on the pros and cons of WFOEs and joint ventures, but am doing so again because I see the purported need to “always joint venture” as one of the most persistent misconceptions about China.  About half our calls from companies seeking to go into China begin with their telling us they want to enter China as part of a Joint Venture.  When we ask them why, they typically say it is because they are under the impression that is the only way they can go into China or because one of their competitors did it and so they assume that must be the best way.

In January, 2005, and again in January, 2006, China greatly liberalized the types of companies that can come in as a wholly foreign owned entity and our advice to any business seeking to enter China is to consider all options.  Sometimes the best way is as a WFOE.  Sometimes it is as part of a joint venture.  And sometimes, the old fashioned way of going in through a representative office is still best.

Last week, The China Daily, quoting from a recent AmCham survey, noted that Amcham members in Chna are “increasingly more likely to have WFOEs, with 60 per cent reporting to have one in 2005, versus 33 per cent in 1999. Conversely, the percentage of AmCham members with joint ventures dropped to 27 per cent in 2005, versus 78 per cent six years prior.”

Bottom line:  Don’t be, well, foolish.  Your company and its needs in China are unique. There is no one size fits all solution to China entity formation and you should examine all options.