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”

Mondaq Advice Centre (MACs)
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.