How New Balance Ran Into a Wall in China
Has the Boston-based athletic-shoe maker made a mistake by fighting a two-decade trademark battle?
It was the kind of verdict that makes Western business leaders want to tear out their hair.
The New England shoe company New Balance had been tied up in litigation for a year and a half in the southern Chinese city of Guangzhou, having been sued for trademark infringementâsued for using its own name.
A man named Zhou Lelun had brought New Balance to court for using his trademark, Xin Bai Lun, a rough translation of New Balance. Zhouâs relatives had first applied for a trademark on New Balanceâs translated Chinese name all the way back in 1994. At the time, it was common among a certain class of Chinese entrepreneurs to register foreign company names in the trademark office and then to propose negotiations, or file lawsuits, when the companies expanded to China.
Never mind the fact that Zhou made few, if any, shoes under the name, or that New Balance had been selling shoes out of Bostonâs northwest side since the 1960s. Experts on Chinese trademark law were pretty sure the company was headed for disappointment.
Sure enough, in April 2015, the hammer came down. The Guangzhou court ruled for Zhou. And that was less shocking to the bands of lawyers working for multinationals in China than the damages New Balance was ordered to pay. New Balanceâs business boomed, the judge contended, because of its name, Xin Bai Lun, and that name belonged to Zhou. The judge ordered New Balance to pay half of its profits in China from the time Zhou received the trademark, in 2011, till the time of the lawsuit in late 2013.
The total came to $15.8 million.
New Balance disagreed with the ruling for a host of reasons, one of which was that the company barely used the Xin Bai Lun name except on some advertisements and websites, never on shoes. It said the name hardly constituted a trademark. The company has hired a new counsel and appealed the decision. But so far New Balance has lost the fight it pickedâand as it waits for a higher courtâs ruling, itâs worth asking whether itâs time for them to bow out.
Chinaâs trademark laws, though relatively advanced, break with Western ones in several key ways. The most important one: China is a first-to-file country. âThis means that whomever files a trademark first gets it,â says Dan Harris, a partner at Harris Moure in Seattle focusing on China, regardless of whether another company is already making a product with the same name in, say, America.
New Balance is hardly the only company losing trademark battles in China. Earlier this month a Beijing court ruled that a Chinese leather goods company that has been stamping âIPHONEâ onto its wallets has more rights to the word than the $500 billion maker of actual iPhones. Apple (AAPL) has been fighting a trademark case against Xintong Tiandi since 2012 over the name it coinedâso far to no avail. Last year, Michael Jordan unsuccessfully sued a Chinese shoemaker who expropriated his Chinese name Qiaodan and his famous flying silhouette to create a line of popular basketball shoes. (His Airness has appealed the case to Chinaâs Supreme Court.) And Teslaâs expansion in China was cast in doubt two years ago before it came to an agreement with the Chinese trademark owner of its name.
New Balance stands out, though, for the sheer amount of time it has spent litigating in Chinese courtroomsâalmost two decades. And despite all that history, it now finds itself fresh off its biggest court loss. The case illustrates both how far a foreign brand can go in protecting its name and the downside of an aggressive strategy in China. Other brands might want to pay attention.
New Balance has never had it easy in China. Like other apparel brands, its shoes became prime targets for counterfeiters when Chinaâs rising middle class discovered (and then demanded) Western goods in the 1990s.
In 1995, New Balance licensed a Taiwanese factory boss named Horace Chang to make sneakers for the Chinese market from inside China. Chang found success selling âclassics,â a less-expensive and more stylish alternative to New Balanceâs high-tech running shoes. The shoes were a hit: Soon the companyâs signature slanting âNâ logo was spotted around Chinaâs biggest cities.
In 1999, Chang visited New Balance headquarters in Boston and told executives he was expecting sales inside China to quadruple that year to 250,000 pairs. But the New Balance execs told him to pull back: The company wanted to scale back âclassicâ sales, in order to preserve its identity as a performance running shoe brand.
The response didnât sit well with Chang. The entrepreneur doubled down on making classics once he got back to China, ordering materials to make 450,000 pairs. New Balance sought an injunction against Chang, but the company was handed two legal defeatsâfirst in a Shenzhen court, then on appeal.
By 2000 Chang had started his own brand called Henkees, a copycat of New Balance complete with an approximation of its angled N. And by then a more worrying trend had developed for New Balance: other copycat brands were getting slicker. One appeared in 2005 called New Bar Lun, an obvious imitation of New Balance, complete with store displays and logos whose designs were practically lifted from New Balanceâs U.S. materials.
Since then, the rise of Alibabaâs Taobao shopping site has made earlier counterfeiting efforts in China look quaint. As many as 90% of the New Balance listings on the huge bazaar are for counterfeit or dubious goods, New Balance estimates. In fact, New Balance says it doesnât have any authorized retailers on Taobao: The few genuine listings come from people who may have bought the wrong size shoes. âYou go onto Taobao, you see New Balance had 300,000 listings last time I looked,â says Ed Haddad, New Balanceâs former vice president of intellectual property, now retired. âHow do you fight them all?â
(âWe will take immediate action if any suspicious listings are found out or upon notification,â said an Alibaba spokesperson in a written statement. âWe thus strongly invite rights holders to work with us to identify counterfeit listings.â)
The fakes have made New Balanceâs business prospects in China as mixed as its legal record. The privately held company says that its international revenues rose around 25% in 2015 as total global sales hit $3.7 billion. Legitimate versions of its shoes appear in China. But counterfeits are racking up untold tens of millions of dollars in additional sales.
Even as New Balance mulls the daily question of when and how to fight counterfeits, thereâs been the long-running headache of the Zhou case.
In 2003, as the Boston footwear companyâs revenues continued to grow, it began using Xin Bai Lun as its company name in advertisements. That name was slightly different than Bai Lun, the translated name Zhouâs relatives had filed for back in the â90s. But in 2004, Zhou went back to the trademark office to apply for New Balanceâs new name. The company fought to block his registration, but it lost the case, and in July 2011, Zhou was granted rights to Xin Bai Lun. With New Balance continuing to use Xin Bai Lun in advertisements and other materials, Zhou sued New Balance for trademark infringement.
(Fortune left several messages with a person in Zhouâs Guangzhou office who said she would report the interview requests to Zhou, but Zhou never responded. The magazine also sent an interview request to Zhouâs listed home address and received no response.)
New Balance knew using the same name that Zhou had trademarked could open it to trouble. Harris, the Seattle attorney, puts it this way: âIf someone else registers what you think to be âyourâ trademark, you should not use that trademark or you are setting yourself up to be suedâŠand you will almost certainly lose that case.â
Many companies have avoided using âtheirâ trademark if someone beats them to it in China. An intellectual property lawyer working in China, who asked not to be identified, was baffled that New Balance hadnât simply picked a different Chinese translation for its brand name. Oracle and BMW, for instance, have chosen Chinese brand names that sound nothing like their English ones. BMWâs, Bao Ma, means âprecious horse.â Oracleâs is Jia Gu Wen, a reference to one of the oldest languages in China.
New Balance could have avoided liability, attorneys say, by simply stripping Xin Bai Lun from the few ads and materials it appeared on.
The reason New Balance didnât settle or change names traces back to the brandâs desire to fight for change in China. âIn the end you have two choices,â says Dan McKinnon, the companyâs head of global brand protection, who is based in Boston. âYou play by whatâs fair and ultimately get to the point to fight the fight. Or you try to play by the Chinese rules, which make no sense in the context of global trademark laws. Just because someone claims they own our house ⊠sorry, this is ours.â In other words, settlement isnât in New Balanceâs DNA.
That way of thinking works well in developed markets like the U.S., where trademark laws are old and backed by a mature court system. But it can backfire in China. âTaking a legal aggressive strategy like people do in the U.S. sometimes doesnât work very wellâ says Shaun Rein, founder of China Market Research Group in Shanghai. âYou have to adhere to the Chinese codes, not what the international norms are. The questions in China are: Do you want to prove youâre right? Or do you want to make money?â
In court, Zhouâs argument was perfectly straightforward: New Balance knowingly violated his trademark. After all, it had fought him earlier in the decade to prevent him from getting it in the first place. That was the argument that appeared to win the day with the Guangzhou court in April 2015.
âThose are good arguments,â admits Gordon Gao, a partner at Fangda Partners in Beijing and New Balanceâs new outside counsel in China. Gao is working on New Balanceâs current appeal, and he says that it has become clear that New Balanceâs side didnât have all the information it needed during the previous round of litigation.
Gao found evidence that Zhou had accumulated trademarks for loose translations of several famous international brandsâDunhill, Hugo Boss, Enzo, and othersâproving that New Balance wasnât an isolated target.
He also found that Zhou had registered a phony company in Hong Kong, a common practice in the 1990s in China by businessmen who then used their âforeign companyâ to win trademarks or bank loans inside China. If Zhou told customers inside China that his products were foreign-made, he probably didnât mention that the foreign owner was himself.
Why this didnât persuade Guangzhou court falls on New Balance. âIt was our own fault a little bit,â Gao says today. The new points made in the appeals case seem to support New Balanceâs argument today that Zhou entered his trademark in bad faith. Bad faith is an exception in Chinese law targeting so-called trademark squatters. It holds if someone registers a trademark knowing the name is being used by others, as New Balance was using Xin Bai Lun in 2003, the trademark can be invalidated.
However, several IP lawyers today in China say the bad faith exception is difficult to prove in Chinese court, and that in this case, itâs complicated by the fact that Zhou has held Bai Lun since back in the 1990s. These lawyers generally think that New Balanceâs best strategy may have been to pay Zhou for his trademark and move onâsomething New Balance says it has never considered.
The reason New Balance fakes are ubiquitous in China is because of the brandâs growing popularity among consumers like Wen Fei. The 44-year-old recently bought one genuine pair and one fake pair of New Balance. âI know they are copycats,â she says, âbut who cares, if they are similar?â
Counterfeit consultants say Nike (NKE), Adidas, and Under Armour (UA) all suffer from roughly the same degree of counterfeiting in China. âPart and parcel, it is because of the increase in our market share in China,â McKinnon says of the rise of New Balance fakes.
New Balance admits that unpleasant reality, but denies another: its name was copied for the same reason. Just as it canât close all the counterfeiters, it canât stop all its trademark copycats.
The companyâs appeal was supposed to have been decided by December 2015, but as of this May New Balance was still waiting. Still, the company recently got some potentially good news in a related ruling that concerned another foreign trademark case. In 2012, the largest vintner in Europe, Castel Group, was ordered to pay $5 million for violating a Chinese trademark of the translated Castel name, owned by a Chinese Spanish national. But on appeal earlier this year, Chinaâs Supreme Court reduced the damages to $80,000, signaling that the previous fine was excessive. New Balanceâs judgment could be similarly cut.
Nonetheless, a reversal of the earlier decision remains a longshot. And even if its fine is reduced, New Balance will need to change its nameâand pay for a fight it didnât need to start.