Liaoning Provincial High Court Dismisses Danone’s Appeal, Wahaha Defeats Danone 24:0

HANGZHOU, China - Since the claim against Zong Qinghou, Chairman of Hangzhou Wahaha Group Co, Ltd., brought by two subsidiaries of Danone, Myen Pte. Ltd. and Festine Pte. Ltd., was rejected by the Henan Provincial High Court on April 10, 2009, the Liaoning Provincial High Court, on April 27, delivered its final judgment on the “non-compete” obligation case brought by Singapore Novalc Pte Ltd, another subsidiary of Danone, against Zong, in which the claim was rejected and the original judgment was sustained. So far, Danone has been defeated by Wahaha three times consecutively in a single month, with all the 24 ruled cases between the two parties ending against Danone.

Retrospect on first instance: Not reconciled to losing the lawsuit, Danone delivered announcement

In 2007, Novalc Pte Ltd submitted a lawsuit to the Shenyang Intermediate People’s Court in Liaoning province against Zong’s action in setting up Shenyang Wahaha Dairy Co Ltd and acting as the chairman.

On August 10, 2008, the Shenyang Intermediate People’s Court ruled in favor of Wahaha as the court of first instance ((2007), No. 43), with Novalc Pte Ltd’s claim overruled. According to the court, Novalc Pte Ltd and a third party (Xiamen Wahaha Food Co Ltd) were aware of, and agreed with Zong’s position in Shenyang Wahaha Dairy Co Ltd, and that the dairy company did not constitute competition against Xiamen Wahaha. As a result, Zong did not violate the board director’s “non-compete” obligation.

Later, Danone disagreed with the court ruling with a public announcement on August 31, commenting that, “The court erred in failing to identify key facts of the lawsuit”, and appealed to the Liaoning Provincial High Court.

Original judgment was sustained in second instance: Danone suffered its 24th defeat

The key point of the dispute is if the appellee Zong’s action in setting up Shenyang Wahaha Dairy Co Ltd and acting as its chairman has violated the non-compete clause and harmed the interests of its joint venture Xiamen Wahaha.

On March 3, the Liaoning Provincial High Court heard the case brought by Novalc Pte Ltd, whose grounds of appeal were as follows: 1. The first trial made a mistake by ruling that the appellant was aware of, and agreed with Zong’s position and shareholding behavior in the non-joint venture; 2. The first trial slid over facts adverse to the appellee; 3. The first trial erred in deeming there doesn’t exist competition relationships between the non joint-ventures including Shenyang Wahaha Dairy Co Ltd and Zhejiang Wahaha Changsheng, and Xiamen Wahaha; 4. The first trial was made based on wrong legal standing.

On April 27, the court issued the second instance decision, affirming in the (2009) No. 17 judgment that:

1. The accounting statements and audit reports of Hangzhou Wahaha Health Food Co., Ltd. for 2005 and 2006 provided by PricewaterhouseCoopers can ascertain the existence of Shenyang Wahaha Dairy Co Ltd, and showed that they were affiliates controlled by the same key management personnel (i.e. Zong). Novalc Pte Ltd, as a shareholder, should have been aware of Zong’s position in Shenyang Wahaha Dairy Co Ltd when the audit reports were delivered to shareholders.

In addition, it can be seen from the fact “Wahaha Group and the food company inked in October 2005 an amendment agreement to the trademark licensing contract, allowing the non-joint ventures including Shenyang Wahaha Dairy Co Ltd to use the ‘Wahaha’ trademark, and Emmanuel Faber signed on the agreement”, that the appellant was fully aware of the existence of Shenyang Wahaha Dairy Co Ltd.

2. The appellant’s claim of Zong’s violation in other non joint-ventures doesn’t share the legal relationship with this case; therefore, it should not be heard in this case. It was appropriate for the first-trial court to ascertain the trial scope according to the indictment.

3. Horizontal competitions are mainly represented in raw material supply, product manufacturing and marketing. From the audit reports of Hangzhou Wahaha Health Food, we can find that all of the products from Xiamen Wahaha and Shenyang Wahaha Dairy Co Ltd were acquired and sold by Hangzhou Wahaha Health Food. Although their business core registered with the industrial and commercial department intersects, the two companies differ greatly in products and sales areas. For this reason, there is no competitive relationship between them. Shenyang Wahaha Dairy Co Ltd, which made normal incomes in the operation system arranged by the joint ventures, didn’t cause any damage to Xiamen Wahaha.

4. About legal standing. It is not always the case that a board director who holds positions in enterprises engaging in similar business will violate the “non-compete” obligation. It is appropriate for the first trial to judge a board director’s violation of the “non-compete” obligation or not by considering the existence of competitive relationship.

To sum up, the Liaoning Provincial High Court affirms that the judgment of the first trial was made based on “ascertained facts and correct legal standing”, thus rejecting the appeal and sustaining the original judgment.

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The following is a news report from a China leading news portal: en.china.cn/content/d554584,78b830,d2098_18772.html

Source: Wahaha Group

Baoxiu Ye at +86-10-8886-5353 x8832 or bx.ye at insightpr.com.cn