Guangzhou Pharmaceutical Company triumphantly built a moat with hundreds of red cans at the Great Wall of China on June 3 to mark their “regaining” of China’s top herbal drink Wong Lo Kat.

During the publicity fanfare, it declared it would rake in Rmb30 billion in annual sales in five years and double that number by 2020. It has also unleashed an advertizing blizzard across the nation and touted the drink as the official beverage of Guangzhou government’s functions.

The state-owned drug maker’s unabashed approach to revitalize this household name, whose ownership is still in dispute at the PRC court, is not as indefensible as one would assume.

The fight over this drink, which sells more than Coca Cola in China, centres on the validity of two supplementary licensing agreements inked between Guangzhou Pharma which owns the Wong Lo Kat trademark and its licensee JDB, a subsidiary of Hong Kong’s Hung To Holdings Company, to extend the licensing period to 2020.

Both parties arbitrated their dispute at China International Economic and Trade Arbitration Commission (CIETAC) which handed down an award on May 9 stating the supplemental contracts between the two parties were invalid and at such, JDB should stop using the Wong Lo Kat trademark.

Guangzhou Pharma sought to nullify the licensing agreements since its former general manager Li Yimin was convicted by Guangzhou Intermediate Court in 2005 for accepting bribes amounting to HK$3 billion paid by Hung To’s former director Chan Hung-to over the negotiation of the licensing deal. Li is still behind bars but Chan disappeared after he paid the bail.

Nonetheless, JDB objected the arbitrator’s decision and filed for an appeal which was accepted by a Beijing court in early June. JDB said in a press statement dated June 3 that its parent company had signed many licensing agreements with Guangzhou Pharma and one of them is valid till Jan 19, 2013.

Wang Xiang, an IP partner of Orrick Herrington & Sutcliffe’s Beijing office, says it is “unlikely” the Beijing court will overturn the decision. “The bribery case was a fatal error of JDB and Hung To. If the court rules differently it will send out the message that taking bribes is ok for doing businesses in China.”

For years, both companies had been producing the drinks in different packaging. JDB churned out the drink in the signature red cans, while the Guangzhou drug company in green. Once the favourable arbitral award was made, Guangzhou Pharma re-launched the drink in a red can that is strikingly similar to the one used by JDB. They both claim the right to produce their tea using the same design.

Although JDB and Hung To have often regarded themselves as the surrogate mother who establishes the Wong Lo Kat brand, Wang cautions businesses not to spend time and energy to build a brand they license. “At the end of the day, you are not going to own the trademark you license, so all your efforts can be futile when your licensing agreement is up.”

As this article goes to print, calls made to Guangzhou Pharma and JDB were not returned.

More than an IP dispute

The stakes in this dispute are high. UNESCO recently designated herbal tea as an intangible cultural heritage and Wong Lo Kat joined China’s league of prestigious “national” brand names that include the likes of Wahaha.

“This is more a case about business ethics (if indeed the allegation of bribery was founded) and validity of contract (whether the resultant contract is void or can be rescinded) than a trademark dispute,” says Kenny Wong, a partner of Mayer Brown JSM’s Hong Kong office.

Since the alleged bribery was cited as the reason to invalidate the licensing contract, Wong reminds contracting parties that the PRC contract law requires compliance with the principle of fairness and good faith in determining and exercising the parties’ respective rights and obligations.

Wong cautions trademark licensor to ensure the licensing terms are clear and that all rights generated from the licensee’s use of the mark accrues to the benefit of the licensor, and that there should be no claims from the licensee for any compensation for assisting to build the brand upon termination of the license.

Arbitration: opaque process

Unlike a court ruling that is in the public domain, arbitration allows the parties to resolve their dispute behind closed doors and the management of both sides would be the first ones to know the result.

A dispute under arbitration can easily be turned into a “he says she says” fiasco where conflicting news reports flare and give room for both companies to wage a smearing campaign, much like  the Wong Lo Kat case.

The confusion over who owns the red can and its contents and inconsistency over the companies’ claims have undoubtedly tarnished their public images.

With the squabble now thrown back to the court, speculators and investors are probably kicking the cans down the road as the year-long legal feud is back at square one. It’s about time for PRC enterprises to realize that there’s a premium to be earned for upholding good corporate governance.