China Trademark Disputes: Are Korean Court Judgments Actually Enforceable?

1. Overview of Trademark License Contract Dispute Case

The dispute between Company A and Company B arose from an exclusive distribution contract for Trademark X.

Contracting Parties and Key Terms

Plaintiff Company A holds Trademark X registered in South Korea and several other countries. On October 14, 2021, Company A entered into an exclusive distribution contract for China with Great Corporation, securing related rights.

Defendant Company B entered into a five-year contract with the plaintiff on February 10, 2022, obtaining the right to manufacture and distribute clothing products using Trademark X. This contract specifically restricted the defendant to selling trademark-bearing clothing only on the Chinese online shopping mall ‘Poizon.’

Royalty Payment Terms and Penalty Provisions

The royalty payment terms under the contract were 2% of total sales, with a minimum annual royalty of 650,000 yuan. If 2% of annual sales fell below 650,000 yuan, the defendant was required to pay 650,000 yuan.

A crucial provision was Article 5 of the contract, which stipulated that if the defendant sold trademark-bearing products on platforms other than Poizon and failed to comply with the plaintiff’s cessation request within 10 days, a penalty equal to five times the minimum guaranteed royalty (650,000 yuan) would be imposed.

2. Importance of Governing Law and Jurisdiction Clauses in International Contracts

The most notable aspect of this case is that despite being an international contract between South Korea and China, the governing law was designated as South Korean law and jurisdiction was assigned to South Korean courts. Such clauses are crucial for predictable and consistent legal resolution when disputes arise in international contracts.

Benefits of Governing Law Clauses

By designating South Korean law as the governing law, all legal issues including contract interpretation, penalty calculation, and scope of damages can be determined according to South Korean law. This can yield favorable results for South Korean companies, particularly in areas where Chinese and South Korean law differ, such as trademark protection, penalty limitations, and contract termination requirements.

Strategic Use of Jurisdiction Clauses

Designating South Korea as the jurisdiction provides not only convenience in litigation proceedings but also the advantage of utilizing South Korean courts’ firm stance on trademark protection and strict interpretation of penalty clauses. However, when litigation occurs in South Korean courts, the question remains whether South Korean court judgments can be recognized and enforced abroad.

Consequently, arbitration is often preferred over litigation for resolving international disputes.

3. Service Issues in Litigation Against Chinese Companies

The Treaty on Mutual Legal Assistance in Civil and Commercial Matters between the Republic of Korea and the People’s Republic of China has been in effect since 2005. Accordingly, service of judicial documents was carried out under this treaty.

Service is one of the most challenging procedures in international litigation. In litigation against Chinese companies, various methods are available beyond service under the above treaty, including service through diplomatic channels under the Hague Service Convention, service through agents or branches in China, and service by publication. In practice, it is important to secure contactable addresses or agents in China in advance to minimize service delays.

Service delays can prolong litigation and increase the possibility of defendants concealing or disposing of assets in the meantime. Therefore, it is necessary to clarify service addresses from the contract formation stage and prepare for prompt asset preservation measures when needed.

4. Enforceability of South Korean Judgments in China and Practical Considerations

While enforcing South Korean court judgments in China is theoretically possible, there are various practical constraints.

Recognition Cases in China

In 2017, the Qingdao Intermediate People’s Court in China recognized and authorized enforcement of a final judgment from the Suwon District Court in South Korea. This judgment was recognized based on the principle of reciprocity, considering that the defendant had resided in Qingdao for over 10 years and that South Korean courts had previously recognized a judgment from the Weifang Intermediate People’s Court in Shandong Province, China in 1999. This was the first case of a South Korean judgment being enforced in China, setting an important precedent that increases the possibility of similar enforcement decisions in other Chinese courts.

Application of the Reciprocity Principle

Under Chinese civil procedure law, recognition and enforcement of foreign judgments are determined based on the principle of reciprocity when no international treaty exists. While there is no relevant treaty between South Korea and China, enforcement is possible if reciprocity is proven.

The Weifang Intermediate People’s Court in Shandong Province, China has precedent for recognizing South Korean judgments in 1997, and in 2017, the Qingdao Intermediate People’s Court recognized and enforced a South Korean judgment based on the reciprocity principle. Article 282 of Chinese Civil Procedure Law stipulates that the reciprocity principle should be applied for recognition and enforcement of foreign judgments when no international treaty exists. Since South Korean courts have actually recognized Chinese judgments, Chinese courts can also recognize South Korean judgments.

Securing Enforcement Effectiveness

To increase the possibility of enforcement in China, it is important to secure collateral or guarantees within China from the contract formation stage, or to identify assets within China in advance. Additionally, preparing enforcement procedures through cooperation with local Chinese lawyers is essential.

5. Key Issues and Penalty Clauses in Trademark License Contracts

The defendant’s major contract breaches in this case were as follows:

Non-payment of Minimum Royalty

Company B failed to pay Company A the third quarter 2023 royalty of 250,000 yuan and the first quarter 2023 royalty of 200,000 yuan. In trademark license contracts, minimum royalty clauses are important mechanisms that guarantee minimum business activity by the licensee and stabilize the licensor’s revenue.

Violation of Sales Platform Restrictions

Company B sold clothing bearing Trademark X on other online shopping malls including Taobao and JD.com, beyond the contracted Poizon platform. Although Company A requested cessation of sales on other platforms on January 31, 2023, Company B took no action until February 27, 2023.

Unilateral Contract Termination

Company B unilaterally notified contract termination on January 19, 2023, without just cause. This constitutes a serious breach that undermines contract stability.

6. Practical Guidelines for Preventing International Contract Disputes

To prevent disputes in contracts with Chinese companies and secure effective legal remedies, the following matters should be considered:

Precautions in Contract Drafting

Governing law and dispute resolution method (arbitration, litigation) clauses should be clarified, and service addresses, scope of penalties and damages for contract breaches should be specifically stated. Additionally, securing enforcement power through collateral provision or guarantor establishment within China is important.

Advance Risk Management

Credit investigation of contracting parties, identification of asset status within China, and establishment of networks with local law firms should be prepared to enable prompt response when disputes arise.

Establishing Monitoring Systems

Systems should be established to detect and respond to violations early through regular confirmation of royalty payments, monitoring of license usage scope, and inspection of contract performance status.

7. Conclusion

While obtaining South Korean court judgments in trademark license contract disputes with Chinese companies is possible, comprehensive risk management from the contract stage is necessary when considering actual enforcement. Designating South Korean law as governing law and South Korean courts as jurisdiction is the first step toward obtaining favorable judgments, and additional mechanisms to secure the effectiveness of service and enforcement are essential.

While the increasing number of South Korean judgment recognition cases in China is encouraging, since it still largely depends on the application of the reciprocity principle and discretionary judgment of Chinese courts, establishing multifaceted rights protection measures is important.

Based on our experience in achieving a successful judgment in the trademark license contract dispute between Company A and Company B, Kim & Park Law Firm provides effective legal remedy solutions for international contract disputes with Chinese companies in South Korea, particularly focusing on risk management from the contract stage and prompt response when disputes arise to protect our clients’ interests to the fullest extent.