Previously on China Law Blog…
In Part 1 of this three-part series, we discussed the background of the Talpa-Canxing dispute over The Voice of China. In Part 2, we discussed what happened after Canxing broke Talpa’s heart. Now, in the thrilling conclusion, we discuss some of the things you can and should do if you are licensing content in China and wish to avoid Talpa’s fate.
As a preliminary matter — before you license anything to anyone in China — you should register, in China, any of your intellectual property worth litigating over. That means registering not only your English-language trademarks but also the Chinese-language versions of those trademarks. If the Chinese-language versions don’t exist, it’s time to create them. Because if you don’t, someone else will, and they’ll register it too — just like Zhejiang Television did with 中国好声音, the Chinese version of The Voice of China.
That also means registering copyrights for any meaningful content. For television shows, that means at the very least registering the show bible, scripts, and any produced episodes. It’s true that China is a signatory to the Berne Convention and therefore a valid copyright in the US or Europe is valid in China without registration, but for practical purposes, it’s much easier to enforce a copyright in China if you have registered it in China.
Do not delegate the task of registering your IP in China to your Chinese licensee. The licensee’s interests may not always be aligned with yours.
Once you have registered your IP in China, you should draft an enforceable contract to protect your interests in China as against the Chinese licensee. A contract with the licensee’s Hong Kong affiliate, with disputes resolved by arbitration in Hong Kong (or any other country other than Mainland China), achieves none of these goals. Yet this is what we see again and again from companies who either don’t trust or don’t understand the Chinese court system. I haven’t seen the Talpa-Canxing contract but it appears to have followed this model, as the dispute was submitted to arbitration in Hong Kong. The problem is usually not that Chinese law won’t protect foreign content owners. The problem is usually that content owners (and their lawyers) often decline to take advantage of the protection Chinese law offers. They write contracts designed to be unenforceable in China, and then complain about China’s legal system when their contracts prove to be worthless.
A properly drafted contract would address the following issues:
1. Make sure that the contracting party on the licensee side is the actual Chinese entity that will be licensing the content, and not a Hong Kong affiliate. As a corollary, choose the right law and the right jurisdiction for your dispute. If you want to sue a Chinese company for breaching your contract by using your IP in China, choose Chinese law and dispute resolution via Chinese courts in the hometown of the Chinese licensee. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts. Watching The Jurisdictional Sausage Get Made.
The issue with contracting with a Hong Kong company is not so much that the Hong Kong company may be a shell company with no assets (although that is often the case). Rather, the issue is that any legal resolution in Hong Kong is unlikely to be effective in China. And if you’re licensing content to China, China is where the action is going to be. Hong Kong still has the common law system passed down from its days as a British colony; it favors injunctive relief and disfavors liquidated damages (aka contract damages). China is the opposite. What good is injunctive relief in Hong Kong if you’re trying to get the judgment enforced in China, which disfavors injunctions? You might argue: we will arbitrate in Hong Kong but provide that Chinese law governs. For a variety of reasons that almost never works, particularly if the defendant is a Hong Kong company. Meanwhile, the infringement in China continues.
2. Provide for upfront payment of the license fee in an amount that makes the deal worth it to you even if the contract is terminated early. See China Licensing Agreements: The Extreme Basics. Provide for substantial contract damages for late or non-payment of the license fee, and do not provide the Chinese side with any of your content until it has paid the license fee and the funds are in your bank account.
3. Provide for substantial contract damages for (1) early termination and (2) each instance of infringement. Do not mess around with lengthy provisions about injunctive relief. Unlike the common law systems of the United States, Canada, Great Britain and Australia, contract damages are not disfavored under Chinese law. In fact, use of contract damages is well established in China and favored by statute. On the other hand, though Chinese judges may be legally empowered to issue injunctive orders, they have virtually no power to ensure those injunctions are implemented. There is no Chinese equivalent of the U.S. Marshals Service. For this reason, Chinese judges are hesitant to issue an order they know is likely to be ignored. Instead, they will seek to convert every decision to an order to pay a sum certain in damages. Including a contract damages provision gives a China judge the roadmap. Most importantly, since Chinese companies know well the power of contract damages provisions, your merely having one in your contract greatly increases the odds of your Chinese counter-party abiding by that contract.
4. The contract damage amounts must be a good faith estimate of the actual amount of income that would be lost by the licensor in the event of early termination. These amounts are not guaranteed even if the plaintiff prevails: at trial, the defendant can argue that the contract damage amount is too high and the plaintiff can argue that the amount is too low. The utility of contract damages is that when a plaintiff seeks pre-judgment attachment of assets China’s courts will almost always allow attachment in an amount equal to contract damages if such damage amount is specified in the contract. In contrast, if the contract provides for injunctive relief and monetary damages in an amount to be determined at trial, it is virtually impossible to obtain a writ of attachment. To repeat: Chinese companies do not like putting their assets at risk of being seized and so having a contract damages provision is a great deterrent.
Note also that an arbitration body cannot issue an enforceable assets seizure order and it is also virtually impossible to obtain such a writ from a court outside the district where the assets are located. That is why we normally want to sue in the “home town” of the defendant, even though that sounds counter-intuitive to a most U.S. and European lawyers, who have been taught to avoid getting “home-towned.” The Chinese understand the “home town” issue, which is why there is an automatic right of appeal to a higher court in a different town, and also why such appeals are de novo. Home town favoritism is often reversed at the higher court level.
5. Do not rely on the default provisions of Chinese intellectual property law to protect you against your licensee. Chinese IP law and your IP registrations protect against random third-party infringement. If you want protection against your licensee stealing your IP, put it into the contract. Your contract with your licensee is your best chance to control your Chinese counter-party and to protect yourself. Take advantage of it by using a contract that actually achieves those things.
6. The license term should be relatively long; say, five years. If the term is too short, then the penalty for early termination becomes irrelevant.
If your Chinese counter-party refuses to sign a contract that addresses the above, you know what they have in mind and you should reconsider whether to do the deal.
And so ends our story….