China: How Luxury Brands Can Cooperate with Agents to Protect Their Rights

Last Updated: 21 July 2012
Article by Harry Liu and Sam Li King

The Hemline Index, presented by American economist George Taylor in 1926, suggests that the hemlines on women's skirts and dresses rise and fall with the rise and fall of the economy. Under this theory, the popularity of short hemlines coincides with a booming economy, but in bad times, long skirts and dresses show the modesty that bad economic times seem to require. However, assorted 2009 fashion weeks did not really reflect staying power of this economic theory. Only a few top luxury brands had ankle-length skirts in their fashion lines. This lack of modesty in the face of the recent recession probably has more to do with the fact that the clothes were designed one season before the weight of the recession had come to bear. Yet, even with fashion not reflecting the angst of the economy, people are seriously concerned about how the world will face this economic downturn.1

The Wall Street Journal is predicting that the global sales of luxury goods will plunge 10% in 2009.2 However, many top brands will be able to offset some of this loss by an increase in sales revenue from emerging luxury brands markets like China. During the first 11 months of 2008, revenue from luxury goods sales fell 35% in Japan and North America, but Chinese sales increased 22%. Thus, the world is looking to see if the Chinese markets can stand up with continued economic growth while the rest of the world takes an economic step back.

Many luxury brands have been testing the Chinese market by teaming with local agents to help limit brand risk because wide availability of luxury goods is a new concept to the Chinese market that is subject to entry restrictions. Moreover, many brands felt like they needed the support of an agent because they did not have confidence that their brand would be able to find a foothold in the Chinese market. Now that China has fulfilled its WTO commitments, and opened its retail industry to foreign investors, brand owners, and agents competition for market share is beginning to grow, and the current economic situation will only intensify this competition.3

However, many luxury brands that entered the Chinese market with an agent are abandoning them. The most common reason for a brand and its agent to break up is one of the inherent defects in the brand owner-agent cooperative model. Often, brand owners will completely cede a market to an agent, but when a brand owner feels a market is not being well managed by an agent they attempt to rework their brand agency agreement. Yet, brand owners have a hard time using the terms of the agency contract to discipline an agent because the owner has a limited amount of manpower in the market, and the owner does not want to dampen the agents' enthusiasm for promoting its brand, which could cause the brand to lose what market share it has.

In general, the brand owner-agent cooperative model gives agents a dominant position, especially, when a luxury brand is completely novel in a market. For example, some agents may completely disregard the agency agreement and open stores outside of its stipulated territory when they are the sole agent in a market, or agents may develop a set of sub-agents to market the product without the brand owner's permission. Brand owners are sometimes forced to accept these kinds of breaches or amend an agency agreement to allow these kinds of activities because they want to enter a given market. However, as a country's luxury goods market matures a brand owner will usually try to retrieve some of the control that it ceded to its agent to enter the market, and these attempts to regain control inevitably intensify conflict between brand owners and their agents.

Often, brand owners have found the best way to protect their long term interests is to have an overall understanding of the potential market for their product in a given country, and insure, that they use this knowledge to create a agency contract that will fulfill that potential, and as part of that contract there is a dispute resolution procedure that will make sure the terms of the contract are adhered to.

  1. Brand owners should refine an agency agreement by taking as many dispute scenarios as possible into account when creating the agreement.
    1. Granting Agency Rights
    2. Brand owners should clarify the scope of the agency agreement as much as possible, specifically, the agent's territorial rights and the owner's requirements for the agent. For example:

      1. If the agent is located in a shopping mall, where exactly is the booth located in that mall, and what is that booth's number?
      2. Who will be responsible for the inner decorations of an agent's store?
      3. Who will be responsible for recruiting the staff in an agent's store?
      4. Can the agent redistribute products?
    3. Breach Clause
    4. Brand owners should detail what conditions constitute a breach. For example:

      1. What circumstances constitute compensatory breaches?
      2. When can a brand owner immediately terminate an agency agreement?
      3. How much and what kind of damages will be owed in case of a breach?

      Sometimes it can be difficult for a heavily damaged brand owner to show its exact losses from an agent's breach. Thus, establishing how much damages will be owed in the agency agreement will prevent the brand owner from needing to show how damages should be calculated when an agent breaches.

    5. Dispute Resolution Clause

    Brand owners should need to create a procedure that will address all disputes that could rise between it and the agent. It must try to uniformly address issues, including, trademark licensing and other relevant contracts. If the owner allows for more than one procedure to resolve disputes then the inconvenience and intensity of the brand owner-agent dispute will probably increase as the party's relationship grows.

    Furthermore, if a brand owner decides that it would like to use an agency agreement template provided by non-PRC based lawyers. The brand owner must be sure to have Chinese lawyers examine the agreement because PRC law will govern the agreement even if the agreement attempts to allow non-PRC law to govern it.

  2. Brand owners need to properly supervise their agents' and they need to preserve any evidence of breach they observe an agent committing during the agency agreement.
    1. Brand owners need to properly supervise their agent's performance, no matter how detailed the agency agreement is. For example:
      1. They should frequently inspect an agent's store.
      2. They should maintain a good relationship with the shopping malls where their agents' are located to insure that the shopping mall will assist the brand owner in making sure the agency agreement is adhered to.
      3. They should save all purchase orders, invoices, and communications with their agents to help provide evidence in case the agent breaches the agency agreement.
      4. When brand owners do find that an agent is in breach of its agency agreement, they should collect and preserve additional documentation, including, photos and certifications from their shopping mall location notifying the agent that it is in breach and must rectify its acts.
  3. Brand owners need to take the proper steps to protect their rights and resolve disputes with agents.

If a dispute appears likely or inevitable, a brand owner may protect its rights by applying one or a combination of the following strategies:

  1. Review the agency agreement and looks for behavior that constitutes breach.
  2. Generally, an agent's obligations are specified in the agency agreement, which is equivalent to breaching a contract. The most common agency breaches in the Chinese luxury goods market include:

    • Opening stores outside the agent's territory;
    • Developing sub-agents that directly sell the brand's products;
    • Using distribution channels outside of the agreement to sell branded products;
    • Breaching retail price clause requirements;
    • Distributing a competing brand of luxury goods in breach of the agency agreement;
    • Mixing counterfeit goods into the branded products.
  3. Collect and Preserve Evidence
  4. As soon as the brand owner has discovered a breach, it should immediately collect and preserve evidence of the breach. For instance the owners should investigate if the agent has established any sub-agent relationships, seek the cooperation of the shopping mall where the breaching agent is located, check correspondence with that agent for evidence of additional breaches. Finally, the brand owner should consider notarizing any evidence it collects to authenticate the information.

  5. The brand owner should inform the agent it knows about the breach, and immediately request that the breach be remedied or the owner must take legal action.

Initiating a lawsuit or an arbitration may not be the best way for the brand owner to resolve an agent's breach. The main reason it may not be the best decision is because a litigation or arbitration will probably have a negative impact on the brand's sales and goodwill in the Chinese market. Therefore, the brand owner's best course of action is usually to work with the agent to resolve the breach and maintain as much brand goodwill as possible. If the brand owner can quantify how much damage the agent's actions did to it may want to try to collect the damages by working out a way to allow the agent to pay them while still allowing the agent to market the branded product. However, if the agent's breach is a fundamental breach of contract and the loss or the working relationship is irreparable, the brand owner may terminate the agreement. Yet, the brand owner may still need to negotiate with the agent about issues like store handovers and product buy-back. In circumstances where negotiation is not realistic, a brand owner must initiate a lawsuit or arbitration to protect the brand's best interest.

Overall, brand owners need to be smart about who they choose as their agents in China. Using a PRC lawyer to will insure that any potential agents are properly vetted and brand agency agreements are established in a way that gives the brand owner advantageous position in disputes with an agent and completely protect the brand's interests in the Chinese market.

(The article was originally written in Chinese, the English version is a translation.)


1"The Four Major Fashion Weeks Under the Economic Crisis," Sina eLadies, posted 23 March 2009, available at (last visited on April 14, 2009).
2The Wall Street Journal Digital Network, "Sales of Luxury Goods Seen Falling by 10%", posted 11 April 2009, available at (last visited on 14 April 2009).
3Economic Information Daily, "How Can Luxury Brand Agents in China Bear 'the Pain of Growth'", Liu, Dan, posted 2 March 2009, available at (last visited on April 14, 2009).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions