By King & Wood’s Trademark Group
There has been a long debate on whether an unregistered trademark can be the subject of a franchise contract in China. Proponents argue that an unregistered trademark is the franchiser’s property and is thus eligible for being franchised so long as it is of economic value in the eyes of the franchisee. Opponents of this argument see an unregistered trademark as not legally owned by a franchiser without going through the trademark registration process and therefore not eligible for being licensed in a franchise contract. The Regulation on Administration of Commercial Franchises ("Regulation on Franchises") (商业特许经营管理条例) enacted by the State Council of the PRC on February 6, 2007, while clearly including registered trademarks, enterprise marks, patents and know-how into the checklist of business resources that a franchiser "possesses" for franchising, fails to touch on the issue of unregistered trademarks. However, it leaves room by putting the catch-all of "any other business resource" undefined.
As a result, courts have led the way in clarifying this issue. In Zhou Hongjun v. Beijing Jumeizhijia Lighting Co., Ltd. (周洪军与北京居美之家灯饰有限公司特许经营合同纠纷一案), 2008-10863-Civil-1stInstance (丰民初字第10863号), the People’s Court of Fengtai District, Beijing Municipality found that although the mark at issue was not registered when the contract was formed, there was neither fraud nor concealment of truth involved in the case, and therefore, the plaintiff’s request to invalidate the franchise contract on grounds of the unregistered status of the mark was not supported. In Yang Guowei v. Beijing Lianglixinshijie Beauty Care Co., Ltd. (杨国伟诉北京亮丽新世界美容有限公司特许经营合同纠纷一案), 2009-00594-No.2Inter.-Civil-1stInstance ((2009) (二中民初字第00594号), the Beijing Municipal No. 2 People’s Intermediate Court held that the mere fact that the mark was not registered when the contract was entered into does not give rise to a breach of contract claim. In Zhang Jia v. Shanghai Saiya Trading Co., Ltd. (张甲与上海赛雅商贸有限公司特许经营合同纠纷一案), 2010-46-No.2Inter.-Civil5-IP-Final (沪二中民五(知)终字第46号), the Shanghai Municipal No. 2 People’s Intermediate Court also upheld the first instance court’s finding that an unregistered trademark is not prohibited by law from being licensed in a franchise contract.
On February 24, 2011, Beijing Municipal People’s Higher Court issued the Guiding Opinions on Some Issues Concerning the Application of Laws in Hearing Cases of Commercial Franchise Contractual Disputes ("the Guiding Opinions") (北京市高级人民法院关于审理商业特许经营合同纠纷案件适用法律若干问题的指导意见). For the first time, a "business resource" prescribed in the Regulation on Franchises is interpreted as including an unregistered trademark that has been used and bears a certain level of influence and can bring a certain type of advantage to market competition. Consequently, the long debate was over in the Beijing Municipal area where the Guiding Opinions governs.
However, absent a nationally binding interpretation by the Supreme People’s Court of the PRC or from the State Council, the debate is still live among other parts of the country, although courts seem to have the tendency of finding an unregistered trademark licensable in a franchise contract. (Written by Huang Xuefang)