Johnson & Johnson (J&J; New Brusnwick, New Jersey) is one of few multinational giants with a dominant position in China's medical device market but after decades of benefiting from preferential policies for foreign investment the company is now facing some potentially expensive legal headwinds.
The latest blow came on Dec. 27, 2013, when the Trademark Review and Adjudication Board (TRAB) of the State Administration of Industry and Commerce (SAIC) ruled against J&J on a long-standing trademark dispute.
The company's "OneTouch" trademark for blood glucose test strips, which has the largest market share in the country, may now be revoked. The change could lead to a reshuffle in the blood glucose monitoring market.
TRAB found that the phrase "One Touch" is already in common use as a medical term, it expresses the feature of a glucose meter and should not be trademarked. J&J's trademark is too close to "One Touch", which Guilin Zhonghui Biotech had used their product description before J&J's registration. The only difference between two terms is the space between the two words.
J&J had previously sued Zhonghui for trademark infringement, and on Jan 8, Zhonghui held a press conference, to announce the verdict in the case.
Zhonghui is a producer of glucose test strips but it has almost vanished from the China market since the lawsuit.
"Johnson & Johnson is very disappointed with the decision," the company said in a statement it sent to Medical Device Daily. "Johnson & Johnson shall apply to a competent court for judicial review and cancellation of the decision according to applicable law." The statement didn't specific the date of the appeal. According to Chinese regulations, J&J has 30 days to appeal the decision.
The multinational also declined to comment on rumors that it could sell its blood glucose monitoring business in China.
"This case is fact-specific and means no more than what the facts provide. Our constant struggle is that foreign companies do not understand that they need to register early and that they need to determine whether there is a competing mark," Steven Dickinson, a partner at Harris Moure and author of the China Law Blog, told Medical Device Daily.
"China is a first to 'file' not a first to 'use' jurisdiction. This is quite different from the common law trademark system (U.S., Canada, England), but is standard in civil law jurisdictions like France, Germany, Japan and China. So the case means nothing more that the civil law approach prevails in a way that is often surprising to companies like J&J that hail from a common law jurisdiction," said Dickinson.
There had been speculation that Yuyue Medical Equipment, a Jiangsu-based medical device company, might buy the business from Johnson & Johnson, but Yuyue said it had no such plans. Still, the company's stock rose from ¥22.30 on Jan 6 to ¥26.30 on Jan 14, near its 52-week high.
Another leading Chinese blood glucose meter maker, Sinocare, said on Jan. 14 that it expects Johnson & Johnson to adjust its strategy soon.
The cost and time required to change a trademark and recall products would give an advantage to domestic competitors, which have become increasingly competitive in pricing and quality. Glucose test strips are the consumables used with blood glucose meters and have larger profit margins. Given the already large, and growing, segment of the Chinese population that suffers from diabetes, the market is significant.
Beyond affecting J&J's operations in this particular segment, the ruling creates concerns for other multinational companies.
"I found it disappointing," said Tomas Barry, vice president and Asia Pacific director at Cook Medical, a medical device company based in Bloomington, Indiana.
"This should not be the message that China sends to the world, encourage investment at the same time and come up with something like that," Barry told Medical Device Daily.
The dispute could date back to 2005, when J&J was ordered to recall its blood glucose meters twice in U.S. because the test strips were providing inaccurate readings. The next year LifeScan, a subsidiary of J&J, claimed fake OneTouch glucose test strips produced by Zhonghui had been exported and sold in 17 markets, including the U.S. and that was the cause of the faulty readings.
In 2007, a Chinese court sentenced the Chinese distributor who exported the fake test strips to three-and-a-half years of imprisonment. In July 2012, a U.S. court sentenced two distributors that sold the fake test strips to five years probation and a fine of $2,000 and ordered they pay damages of $128,823.
In 2009, Johnson & Johnson sued Zhonghui and its General Manager Yiu Cong De for passing off the company's trademark and obtaining benefits of ¥4.7 million ($800,000) through illicit sales.
In 2011, as a strategy against J&J's accusation, Zhonghui's lawyer applied to TRAB under his personal name to cancel J&J's trademark. Johnson & Johnson registered the "OneTouch" trademark in China in 2004 for blood glucose meter test strips. It also obtained the same trademark in other countries.
But Zhonghui provided evidence showing they had been using the phrase "One Touch" as a medical term before J&J's trademark was granted.
But now the situation appears to be reversed in favor of Zhonghui.
Under the TRABs' rules, J&J will have to take all "OneTouch" products off the market, while Zhonghui said it would consider applying to revoke the J&J trademark and to sue the multinational for profits it may have earned since the trademark was granted.
Notably, in August 2013, New York Eastern District Court made a permanent judgment against a Pakistani distributor for infringing on the OneTouch trademark and assessed damages of $3.3 million.
This is the second lawsuit that J&J lost in China in the past year.
In August 2013, the company was on the losing end of an anti-monopoly case and was ordered to pay compensation to Chinese distributors to the tune of $85,800 for setting minimum price and taking advantage of a dominant market position.
J&J was also questioned in regards to the company's product recalls, because 48 cases of 51 global recalls the company has put in place since 2005 did not involve China. In June 2013, China Food and Drug Administration (CFDA) contacted J&J to urge them "improve product quality."