Importance of IP due diligence in China Author: Toby Mak This case study is about importance of IP due diligence in China.

What happened? IPAD trademark registered and owned by Proview in China before Apple launched iPad Apple needed to acquire the Chinese IPAD trademark Apart from the release of the New iPad in the beginning of 2012, another very big story about Apple’s iPad is that Apple was found guilty of infringing the trademark IPAD in China, and an injunction was granted against Apple. This resulted in the removal of iPad from various iPad retail stores, including the Apple Stores, in China. This case study is about this trademark infringement, which is due to a small mistake in IP due diligence. The story begins more than 10 years ago. In 2000, Proview launched a product called Internet Personal Access Devices, abbreviated IPAD. Here is a picture of Proview’s IPAD. To protect its interest, Proview registered the IPAD trademark in various countries, including China. Therefore, the IPAD trademark was registered and owned by Proview in China before Apple launched iPad in 2010. Therefore, to avoid trademark infringement in China, Apple had to acquire this Chinese IPAD trademark from Proview before launching Apple’s iPad. To read more on this story follow these links: http://www.ft.com/intl/cms/s/2/4e10735e-e1f3-11df-a064-00144feabdc0.html#axzz1vsWc2IZA (covers the beginning of the dispute in 2010) http://www.ft.com/intl/cms/s/2/6bc5ba86-20b7-11e1-8133-00144feabdc0.html#axzz1vsWc2IZA (the evolution of the story in December 2011) http://www.guardian.co.uk/world/2012/feb/16/ipads-seized-china-trademark-dispute (recent article from February 2012) http://business.time.com/2012/02/14/apple-threatened-with-ipad-shipment-ban-in-china-trademark-fight/ (more on the same topic) Proview’s Internet Personal Access Device →

Parties involved Proview side Apple side Proview International Holding Limited – Proview International Apple, Inc. - Apple Proview Electronics Co., Ltd. – Proview Taiwan IP Application Development Limited – IPAD Ltd Proview Technology (Shenzhen) Co., Ltd. - Proview Shenzhen Note: Proview Taiwan and Proview Shenzen are wholly owned subsidiaries of Proview International. All three are separate legal entities, and were under the control of the same boss Yang. IPAD Ltd was formed by Apple as negotiation vehicle to acquire IPAD trademarks from Proview To do so, Apple set up a company called IP Application Development Limited, or IPAD Ltd, to negotiate with the Proview group. The Proview group has many companies, but only three of them are relevant in this case study, namely Proview International, Proview Taiwan, and Proview Shenzhen. Proview Taiwan and Proview Shenzen are wholly owned subsidiaries of Proview International. All three are separate legal entities under control of the same boss Yang. In particular, please note the relationship between Proview Taiwan and Proview Shenzhen – they are separate legal entities. This is highly significant in this case study. On Apple side, Apple formed a company IP Application Development Limited, abbreviated IPAD Ltd, to acquire IPAD trademarks worldwide, without revealing the identity of Apple during the acquisition process.

Timeline Time Event 10 Jan 2000 Proview Shenzhen applied for IPAD trademark in China 21 June 2001 IPAD trademark registered in China under the name of Proview Shenzhen 2006 - 2009 Apple planned to launch iPad 2009 Apple identified Proview has IPAD trademarks Apple used IPAD Ltd to negotiate with Proview to acquire Proview’s IPAD trademarks Written agreement signed in Dec 2009 incorrectly identifying Proview Taiwan as the owner of the Chinese IPAD trademark Jan 2010 Apple launched iPad Apple found out that in fact Proview Shenzhen is the correct owner of the Chinese IPAD trademark after announcement of launch of iPad Mar - Apr 2010 Proview Shenzhen refused to correct the error, and Apple sued Proview for breach of contract in Hong Kong Aug 2010 Yang went bankrupt, and Proview Shenzhen went into the hands of debt holders Dec 2011 Shenzhen court decided that Proview Shenzhen’s trademark was infringed by Apple Feb 2012 Shenzhen court awarded injunction to Proview Shenzhen against Apple Here is the timeline of the events happened. In early 2000, Proview Shenzhen applied for the IPAD trademark in China, which was registered in mid 2001. In 2006 to 2009, Apple planned to launch iPad. In 2009, Apple identified that Proview has IPAD trademarks, and Apple has to acquire such trademarks from Proview to avoid trademark infringement by Apple’s iPad. Apple formed the company IPAD Ltd, and used this to negotiate with Proview to acquire Proview’s IPAD trademarks. The negotiation was successful, and Proview agreed to sell its IPAD trademarks in various countries including China to IPAD Ltd at £35,000, without knowing Apple was behind the scene. To close the deal, written agreements between Proview and IPAD Ltd were signed in Dec 2009, including formal assignments to assign the Chinese IPAD trademark to IPAD Ltd. However, for unknown reason, the ownership of the Chinese IPAD trademark might not be checked, and Proview Taiwan was incorrectly identified as the owner of the Chinese IPAD trademark in the signed agreements. Such signed agreements will not be accepted by the Chinese Trademark Office for assignment of the Chinese IPAD trademark to IPAD Ltd, as Proview Shenzhen and Proview Taiwan are different legal entities. In China, accuracy of signed documents is vital, and the Chinese Trademark Office will not accept the written agreement signed in December 2009 to assign the Chinese IPAD trademark to Apple. The Chinese Trademark Office will also not accept Declarations/Affidavits from Apple stating and explaining the error on the basis of self-generated evidence. Apple must ask Proview Shenzhen to sign another correct assignment document to assign the Chinese IPAD trademark to Apple. However, this mistake was not discovered until Apple announced the launch of iPad in January 2010. Naturally, Apple then asked Proview Shenzhen, more specifically the boss Yang, to sign the correct agreements to rectify the error. However, at that time Yang knew the IPAD trademark is valuable, and refused to sign new agreements to rectify the error. Apple then sued Proview and Yang for the breach of contract in Hong Kong, and Apple won. On the other hand, Yang went bankrupt in August 2010, and Proview Shenzhen went into the hands of Yang’s debt holders. This matter was then out of the control of Yang, and because of the potential huge money, the debt holders did not accept Apple’s request, partly on the basis that Apple deceived Proview by setting up and using the company IPAD Ltd to acquire the IPAD trademark in the first place. Proview Shenzhen then sued Apple for trademark infringement in China, naturally in Shenzhen. The Shenzhen People’s Court decided that Apple did infringe Proview Shenzhen’s trademark in December 2011, and awarded injunction to Proview Shenzhen against Apple in February 2012. This resulted in the removal of iPad from iPad retail stores in China, including the Apple Stores. For Apple, it is unfortunate that Yang went bankrupt and his debt holder took over Proview Shenzhen shortly after the error in IPAD trademark owner in the written agreements was discovered. Yang’s bankruptcy partly contributed to the error in the written agreement signed in Dec 2009 could not be rectified. However, all these issues will go away if Apple checked the ownership of the Chinese IPAD trademark more carefully when signing the written agreements in December 2009. Apple loses many selling opportunities because of this simple mistake. Further, Apple is facing huge damage claim in China due to infringement of the IPAD trademark.

Take-away Messages A simple error or omission on due diligence at IP transaction can be disastrous Identify key IP with focused resources Rectifying incorrectly signed documents in China is very difficult Checking the ownership is in fact only one of the many issues involved in IP due diligence. Other issues include checking whether the scope of the IP is appropriate, whether license from a 3rd party is required, and whether there are risks of IP dispute. A simple error or omission on due diligence at IP transaction can be disastrous. Mistakes can range from very simple one, like identifying the incorrect IP owner as in this case study, to very complex one, like the scope of a patent does not cover the licensed activities or the patent is invalid. All these can result in very high business and/or financial loss. However, it is economically unrealistic to review all IP issues with high level of care, as it will become prohibitively expensive to do so. Instead, the key IP, regardless whether such is trademark, copyright, patent, design or trade secret, should be identified, and resources should then be focused on the identified key IP. Once identified, the remaining issues are relatively simple and not too costly. Like in the present case study, the key issue is who actually owns the IPAD trademark in China in the official Register at the Chinese Trademark Office, which can be checked relatively easily. In particular, as Chinese practice puts heavy reliance on official records, any deviation from the official records in signed agreements will result in such agreements become useless. One should always bear in mind that rectifying incorrectly signed documents in China is very difficult. This further enhances the importance of proper IP due diligence for any deals involving China.