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Apple will have to pay $38M USD and likely be forced to pay new licensing fees unless it can win its appeal

Apple, Inc. (AAPL) is in hot water over its use of the trademarked name "iPad".  In fact, appeals pending, a lawsuit loss has put it at risk of a complete sales ban in the world's largest consumer electronics market -- China.  

Chinese holding company Proview International Holdings ltd. (HKG:0334) sold Apple the Chinese market rights to use the trademark for a mere $55K USD in 2006, via an Apple subsidiary IP Application Development.  Apple has increasingly turned to using shell companies to sue people and buy patents, a traditional method of the patent troll.

Of course Proview, ostensibly had no idea that it was really dealing with Apple, or that Apple would use the trademark towards a billion dollar product.  Of course Apple did exactly that, and today the tablet is a much-coveted piece of electronics in the world's largest nation -- one that some people would (literally) trade a kidney for.

Proview looked to settle with Apple out of court, but Apple's lawyers apparently did not take the company's threats seriously.  So Proview called Apple's bluff and sued it in Shenzhen Intermediate People's Court over the trademarks iPAD (China Trademark No. 1682310)  and IPAD (China Trademark No. 1590557).  Proview sought 10B yuan (RMB) ($1.586B USD) in damages [source].

The iPad 2 launched in China for a whopping 3.688K yuan (RMB) (~$585 USD) for the 16 GB Wi-Fi version [source], $85 USD more than its U.S. retail price.  This is actually slightly lower than the even more inflated price points of the first generation model.  The iPad has suffered slightly from its incompatibility with local 3G standards.  Internationally, the iPad (first gen.) sold 15 million units in 2010.  The iPad 2 sold 40 million units in 2011 [1][2][3][4], keeping Apple far ahead of would-be Android tablet competitors. 

China iPad
The iPad is the hottest tablet in China. [Image Source: EPA/Diego Azubel]

The crux of Proview's argument is that it sold the rights to IP Application Development -- not Apple.

Apple argued that Proview was in the wrong and that it fully owned the trademark, via a transfer.  It sought 4M yuan (RMB) ($634.5K USD) in legal fees, for what it says was a defense against false claims.

But the local court did not see Apple's logic, ruling it to be in infringement.  It is on the verge of ordering a 240M yuan (RMB) ($38.07M USD) fine [source].  Emboldened, Proview has filed more lawsuits against Apple's retail partners, including one that will be heard in court in the Pudong district of Shanghai later this month.

Proview Shenzhen's lawyer Xie Xianghui demands that in addition to paying the fine leveled by the Shenzhen court, Apple must either pay a licensing fee or stop selling the product.  And it wants an apology, for what it sees as Apple trampling its IP rights.

States Mr. Xie in the China Daily, "We ask the court to stop selling and marketing for Apple's iPad in China. We also demand an apology."

Xiao Caiyuan, another lawyer, told the China Daily, "We have prepared well for a long-term legal battle."

But Proview may need outside cash from another Chinese firm or venture capitalists in order to fuel a successful IP war against Apple.  The holdings company, which owns some display manufacturing capacity in Taiwan, appears to have listed its website for for sale.

Proview site for sale
Proview's webpage appears to be for sale -- which could be a sign of cash troubles.

For those who fear the Shenzhen court may be favoring the local firm, consider that Shenzhen is far more reliant monetarily on Apple than on Proview, so the ruling indicates that Proview must have a very strong case.  

Apple is indirectly one of the biggest employers in Shenzhen, using the majority of the manufacturing capacity of the local electronics mega-factory complex -- owned Hon Hai Precision Industry Co Ltd. (2317) subsidiary Foxconn -- to produce its iPhones and iPads.  Apple has been criticized for reportedly ignoring poor labor conditions at the factory, whose employees describe it as a "hellish" sweatshop.  Apple disputes these claims.

Apple assembly
Workers assemble electronics at a Foxconn factory. [Image Source: Kotaku]

One thing is for sure -- the Proview case illustrates the danger of firms dealing with holding companies, as you never know who you're dealing with.  As an IP firm you would expect that would be something Proview would be aware of, given that IP-heavy firms are among the biggest abusers of shell companies.

As this is an oft-occurring headache in the tech industry, the real question his how to stop shell company obfuscation.  

The answer seems simple; just limit the number of subsidiaries that any one corporation can hold.  This would go a long way to preventing this kind of potential abuse and reduce these "he-said-she-said" legal spats.

Sources: China Daily, Global Times, Mondaq

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RE: Silly precedent
By theapparition on 2/7/2012 1:53:58 PM , Rating: 5
The actual indictment reads a bit clearer.

As I understand it, Company X sells rights to Company Y for use of Trademark. Company Y then licenses it to Company Z.

Company X gets royalties for the name for products sold by Company Y, but Company Y didn't actually sell anything, so no royalties need to be paid. Company Z can profit off the name and never have to pay royalties. It's a common tactic using shell companies to get around paying royalties. Technically, its all legal since the contract usually has a transfer clause, but is very specific on when royalties get paid.

Just because a contract gets signed, however, doesn't mean it's binding. Most US courts took this into account 30 years ago and consider the intent to deceive the other party. In this case, if Apple wasn't trying to skip out on royalties, why did they negotiate this with a shell?

It was only last year I started dealing with a company that I found out to be a shell for a foreign entity. At that I broke off the contract and reported it.

Still, its a bit more complicated than the situation you described above.

RE: Silly precedent
By tayb on 2/7/2012 6:12:02 PM , Rating: 2
It isn't really more complicated, though.

Company X owns trademark to the name iPad. Company Z wants to use the name and uses an affiliate named Company Y to secure the rights and then transfer the rights to Company Z. The sequence goes X -> Y -> Z.

Who has the leverage in this instance? If X didn't want a large company such as Apple using the name 'iPad' (without paying, at least) it could have easily inserted language that barred any company from transferring ownership or inserted language that ensured royalties after a transfer. They didn't.

Is it a bit underhanded and predatory by Apple? Sure. This is the business world though, not the Boy Scouts of America. There's a popular saying and I don't know who coined it but it goes along the lines of "Don't interrupt your enemy while they are making a mistake."

RE: Silly precedent
By Theoz on 2/7/2012 6:25:42 PM , Rating: 2
There is no way that the situation you describe could happen without legal malpractice on an astronomical scale. Ignoring the fact that the article states that the rights were sold, i.e. not a royalty-bearing license agreement such as the type of agreement you are referring to, there is no way anyone is writing a license agreement that allows for someone to transfer/sublicense in the way you describe to skirt royalties to the licensor.

If the situation you describe actually occurred, which I highly doubt, the plaintiff is getting their money, just not from Apple. It will come from whatever malpractice insurance company the plaintiff's counsel used.

“And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say?” -- Bill Gates on the Mac ads

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