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The rift between China's largest drinks maker Wahaha and French food and beverage giant Danone is deepening as Wahaha Group's partner filed a lawsuit against a joint venture director of Danone, saying he illegally serves on the boards of competing firms.

For now, the public is convinced that Danone, accusing Wahaha of contract breach and taking the lead to take the matter to an international arbitration body and an overseas court, has the upper hand in the legal battle.

But that apparent advantage shrank after the Chinese company argued its contract with Danone on transfer of the well-known Wahaha brand from Wahaha Group to its joint venture with Danone was invalid, claiming that the partners had joined forces to design a plot to get around the rules. Law circles are split if such a contract, which Wahaha says, was never approved by the authorities in the first place, is valid though they agree that it's the key to the long wrangle involving legal action in three countries.

"Whether their contract is valid is an extremely contentious issue," said Si Weijiang, deputy secretary-general of All China Lawyers Association's intellectual property section.

"The two major battles between Wahaha and Danone will take place in Hangzhou and Stockholm," where they have pleaded arbitrations respectively.

He said other legal actions are only "subsidiary battles" surrounding the contract controversy, referring to Wahaha's recent step of taking joint venture board member Qin Peng from Danone to the court in Shenyang of northeastern China.

Danone also filed a lawsuit in Los Angeles, the US, earlier this year accusing Wahaha of violating contract by using the Wahaha brand on products sold outside their joint ventures.

Danone, the world's largest yogurt maker, signed an agreement with Wahaha in 1996 that required the transfer of the Wahaha brand from the Chinese company to the joint ventures, in which Danone owns 51 percent.

In the contract, the Chinese company was barred from making products that compete with those produced by the joint ventures, or using the Wahaha brand without Danone's consent.

But Zong Qinghou, the charismatic chairman and founder of Wahaha Group, contends the transfer deal is invalid because it was never properly approved by the authorities.

In a reply to Hangzhou authorities recently, the State Trademark Bureau of China said it twice rejected applications for transfer of the Wahaha brand in 1996 and 1997, saying the rules were designed to protect companies' rights to their trademarks.

To cope with the scrutiny of the authorities, the two companies signed a simplified contract stipulating that Wahaha Group authorized the joint ventures to use the Wahaha brand, without changing its ownership, Zong said. This simplified agreement was put on file at the State Trademark Bureau.

Danone lawyers said Wahaha never applied for the transfer properly and that their client repeatedly insisted on it. "Danone is just doing what should have been done 11 years ago to file the application to complete the transfer of the Wahaha trademark," said Tao Wuping, a lawyer representing Danone in China, adding the two contracts are not contradictory.

The two parties entered into a trademark license contract in which it was specifically mentioned that the transfer was pending the approval by the Chinese authorities and that Wahaha Group granted an exclusive right and license to use the trademark before changing its ownership, he said.

"The two parties never completed the proper transfer procedure as required by the authorities. Besides, they had never announced the deal," said Liu Chunquan, an independent lawyer with Guangsheng & Partners law firm.

He said the private contract should be viewed null and void, adding the partnership model was not uncommon in China 10 years ago when most local enterprises were inexperienced in selecting overseas partners.

But most lawyers attending a forum, organized by Shanghai Lawyers Association recently to discuss the dispute, hold the brand transfer contract should be respected as long as it is an authentic reflection of both sides' intent at the time.

"Based on the current information, my judgment is that the likelihood for Wahaha to lose the arbitration in Stockholm and lawsuit in US is about 80 to 90 percent," said Liu Xiaohai, an independent lawyer with Grandall Legal Group, one of the largest law firms in China.

(China Daily July 19 2007)