An International Litigation Draws Attention From China and Europe - Danone-Wahaha Feud: The Cornerstone of World Equality

HANGZHOU, China - Following the successful completion of the China-EU high-level economic and trade dialogue, Chinese Premier Wen Jiabao recently went to Prague for the China-EU summit, marking that Sino-EU cooperation has returned to the right place after suffering a temporary setback last year.

In China, however, the two-year-long lawsuit between the country’s largest food and beverage giant, Wahaha Group, and famous European-based Groupe Danone is still continuing. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has not made a final decision yet.

For Chinese people, this is the largest international lawsuit concerning a Sino-European JV since its opening up, while also being a landmark case through which Chinese companies verify the fairness of the western judicial system, while European people see it as a touchstone for China’s investment environment and contract spirit.

During the lawsuit war called the “Danone-Wahaha feud,” Danone has lost all 37 court battles in national and local courts of China, the US and Europe. Now, both sides are quietly waiting for the final decision from SCC. Maybe, the international business war between Chinese and European companies can bring new inspiration and chances to the new round of the bilateral economic and trade cooperation.

I

The partnership between Danone and Wahaha, which started in 1996, was once long regarded as a model of Sino-French business cooperation. As a multinational investor into China, Danone has invested less than RMB1.4 billion over 13 years but received over RMB4 billion in cash dividends. In the competition with world-famous companies like Coca-Cola and Pepsi Cola, Wahaha has become one of the most valuable beverage brands in the market. Why did such a “model couple” fall out and go to court? This has baffled both Chinese and Western people.

In 1996, Danone and Wahaha formed five joint ventures, sharing the Wahaha brand, in which Danone had holdings, while Wahaha was responsible for operation and management. Other Wahaha companies, which are not joint ventures, have always existed and developed, using the Wahaha brand.

However, what tore the “marriage” apart was the “status” of these joint ventures and the trademark ownership.

In April 2006, Danone suddenly alleged that its partner Wahaha had breached the contract by establishing non-joint ventures in competition with joint ventures without permission, which had infringed upon the interests of Danone, and abused the Wahaha trademark. It asked Wahaha to transfer a 51% stake in the highly profitable non-joint ventures to it at a cost of RMB4 billion, the value of their net assets. However, the total assets of the non-joint ventures were RMB5.6 billion at that time, with annual profits of RMB1.04 billion. Wahaha rejected the request, considering it as “a hostile takeover,” and hoped Danone would respect the facts and laws.

As the both parties did not give way, the dispute has been involving into a worldwide lawsuit war.

According to their joint venture contract, any dispute between the both parties shall be referred to the SCC for arbitration. In May 2007, Danone filed many arbitration applications with the SCC, accusing Wahaha of horizontal competition and fraud, asking it to stop infringement and claiming a compensation of up to 890 million euros for its expected profit loss in the unexpired contract term of 39 years.

II

Under their JV contract, Wahaha promised “not to pursue any production or operation activities competing with joint ventures,” while Danone agreed “not to damage the interests of joint ventures.” It is the two clauses that caused the current dispute.

According to information disclosed by many Chinese courts, the core cause of action brought by Danone was that Wahaha had breached the non-compete clause. Wahaha defended itself that its companies investing in the joint ventures had no production and operation business, so they were unlikely to be involved in horizontal competition with the joint ventures; as for the non-joint ventures, Wahaha spoke with perfect assurance, “the non-joint ventures were set up for joint ventures, which were advocated by, completely known to and recognized by Danone.”

At the beginning of the Danone-Wahaha “marriage,” Danone just selected four of the 10 subsidiaries of the Wahaha Group for joint ventures, and signed OEM agreements with another six subsidiaries in the name of the joint ventures. Thus, “The joint ventures and non-joint ventures have co-existed from the beginning,” said Wahaha.

In the late 1990s when China’s beverage industry was developing rapidly, to gain greater market share, Zong Qinghou, Chairman of the joint ventures, hoped to launch new products quickly to expand business. But Danone did not want to continue to make investments. The head of that time for Danone Asia Pacific said frankly, “We can not afford failure in products.” Facing a gap in capacity, Danone requested Wahaha to seek product processing suppliers and recognized non-joint ventures set up by Wahaha for joint ventures.

In fact, prior to the dispute, all Wahaha products from both joint ventures and non-joint ventures were sold through a single joint venture, and all financial statements and audit reports were disclosed and audited by PricewaterhouseCoopers, as designated by Danone, to which Danone never raised an objection. Wahaha stated, “Danone never said no over 11 years, from which it can be seen that Wahaha did comply with the contract.”

Domestic economists analyzed that the non-joint ventures of Wahaha actually shared sales expenses of the joint ventures and reduced their overall operating costs, from which Danone also benefited as the No. 1 shareholder of the joint ventures.

Data from the joint ventures shows that with the number reaching up to 39 in 2006, the joint ventures have developed more quickly than the non-joint ventures, and operate at full capacity for a full year. Under the management of the Chinese partner, the joint ventures surpass the targets set by their Boards every year. Each joint-venture program boasts a return on investment of some 40% per year. Such results are good enough to be admired by their industry peers.

“It is Danone rather than Wahaha who breached the contract,” Wahaha believes. In early 2000, Danone acquired Robust, which was the largest competitor of Wahaha at that time. Qin Peng, who long served as director of the joint ventures with Wahaha, was appointed as president of the acquired company. Later, Danone acquired beverage companies including Yili and Huiyuan, bringing great loss to Wahaha.

III

The ownership and use right of the Wahaha trademark is another focus of the “Danone-Wahaha feud.”

Danone often insisted that the Wahaha trademark belonged to the joint ventures, so the use of the trademark by non-joint ventures constituted infringement.

But Wahaha Group disagreed with that, and emphasized that it was the true holder of the trademark, and the use of the trademark by non-joint ventures was legal.

At the beginning of the Danone-Wahaha “marriage,” Wahaha signed a transfer agreement on the ownership of the Wahaha trademark with the joint ventures, and filed a trademark transfer application with the State Trademark Office, which, however, was not approved. “It actually declared the termination of the transfer contract, and the Wahaha trademark is still owned by the Wahaha Group,” said Ye Zhijian, a lawyer who knows the case.

Afterward, the two parties signed a trademark licensing contract in 1999 to substitute the original transfer agreement. Both the licensing contract and the consequent No. 1 amendment agreement clarify that the non-joint ventures of Wahaha have the right to use the Wahaha trademark.

“It was known to and recognized by Danone that the non-joint ventures OEM for the joint ventures, so how could it be possible for the non-joint ventures to use a different trademark from the joint ventures?” Ye noted.

To confirm the ownership of the Wahaha trademark, Wahaha referred to the Hangzhou Arbitration Commission for arbitration in accordance with the trademark transfer agreement. In December 2007, the commission made a decision that the trademark transfer agreement between Danone and Wahaha had terminated, and the Wahaha trademark belonged to the Wahaha Group. Later, the Hangzhou Intermediate People’s Court affirmed the ruling.

IV

Why did Danone ignite a war when the joint ventures were highly profitable?

Wahaha believes that the ultimate purpose for Danone provoking the dispute was to take the control of the joint ventures as well as the abundant benefits from Wahaha’s non-joint ventures, which have gone through the market cultivation period and begun to enter the stage of rapid development.

Although Danone and Wahaha initially agreed that the operation and management rights belonged to the Chinese side, and the Boards of the five joint ventures all appointed Zong Qinghou as Chairman. Danone proposed from the start, “a detailed feasibility study report should be prepared for any fixed-asset expense item of more than RMB10,000,” which could not be implemented until approved by the Board. Wahaha believed it was not viable in the ever-changing beverage market in China. Later, although directors of Danone spoke highly of the excellent results delivered by Wahaha and eventually handed the management right over to Zong, they still tried o persuade him to retire early from time to time.

The War of Survival (Sheng Si Zhi Zhan), a book telling the inside stories of the “Danone-Wahaha feud,” discloses that after failing to persuade, Danone adjusted its strategy. Since 2000, it acquired a stake in many companies such as Robust, Meilin Zhengguanghe, Bright and Huiyuan. Especially, Robust, the then second-largest beverage company in China, only after Wahaha. It could be obviously seen that Danone’s purpose was to curb Wahaha with Robust. However, due to its poor operations, Robust suffered losses year after year, while the non-joint ventures of Wahaha developed rapidly and generated abundant gains. As a result, Danone turned its eyes to the non-joint ventures of Wahaha. It attempted to merge the non-joint ventures to cover losses from its other investments in China. In view of this, the real intention that Danone ignited the “Danone-Wahaha feud” was to scramble for the operation rights and the benefits.

V

From May 2007 when Danone initiated legal proceedings to the counteroffensive launched by Wahaha, the both sides have carried out several dozen lawsuits worldwide. As of May 2009, Danone not only lost a series of cases against Zong Qinghou and the non-joint ventures in China, but directors of Danone were deemed by many courts to have violated the non-compete obligation of directors, and litigations filed in the U.S., Italy, France and British Virgin Islands (BVI) were also dismissed. Now, Wahaha defeats Danone 37:0 in the lawsuits in and out of China.

Among these, the lawsuits brought by Danone in California, U.S. and BVI having nothing to do with the dispute against Zong’s family member and foreign shareholders of the non-joint ventures are particularly compelling. The BVI court later decided that the case filed by Danone was unactionable and the lawyers of Danone had tried to deceive and mislead the court, so it revoked previously issued freezing and receiving orders against foreign shareholders of the non-joint ventures of Wahaha. And the U.S. court clearly pointed out that the Danone-Wahaha dispute had nothing to do with California where no court should accept the case.

Given its unfavorable position in legal actions, senior executives of Danone declared many times, “the door of negotiation does not shut.” Between December 2007 and April 2008, both parties came to the table. Danone initially expected to sell its shares in the joint ventures to Wahaha for RMB50 billion, which was later reduced to RMB20 billion or less, but it still failed. For Danone’s “buy low and sell high,” Wahaha commented that it had double standards. Some media stated, “Danone is finding a retreat for itself, which has, however, irritated Wahaha.”

Wahaha censured for “no spirit of contract” and still paid several million RMB in dividends for 2006 to Danone under the contract after the “war” broke out, and urged Danone to sign the dividend resolution as soon as possible every year, which is rare in international business wars.

The “Danone-Wahaha feud” is not a national problem but a right and wrong problem. When the SCC is set to make a verdict, as for who will win and who will lose in the “Danone-Wahaha feud,” the lawyer community in China is calm. They disclose that according to the JV contract between Danone and Wahaha, their disputes shall be governed by Chinese laws. In accordance with res judicata in international laws and the doctrine of the international comity, the existing ruling results will be included in references for the SCC. It is believed that the truth will be restored with a fair decision from the SCC.

“Danone may say goodbye to Wahaha, but we do not expect it will say goodbye to China.” This is an opinion of Chinese entrepreneurs on the international business war. It can be foreseen that the verdict on the “Danone-Wahaha feud” will not influence multinational companies to seek business opportunities in China against the backdrop of the increasing Sino-EU economic and trade cooperation and exchange. Chinese companies may not refuse external cooperation, and the solid spirit of contract is the cornerstone of good cooperation.

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The following is a news report from a China leading news portal: en.china.cn/content/d564435,363ac8,d2098_18772.html

Source: Wahaha Group

Baoxiu Ye, +86-10-8886-5353 ext. 8832, bx.ye at insightpr.com.cn, for Wahaha Group