Tesla Motors Is Being Sued in China? It Didn't Matter Before and Probably Won't This Time Either

Tesla Motors (NASDAQ: TSLA  ) stock fell more than 2% on Tuesday, after news broke that the electric-car maker is being sued in China over the rights to the Tesla name. However, this isn't a new story and it certainly isn't a surprise development, as some stories today suggest. This problem, in fact, first gained public attention last year when Tesla began accepting reservations for its all-electric cars in China. Here's a brief recap.

The life of a trademark troll
Let me introduce you to Zhan Baosheng, the Chinese businessman who sued Tesla Motors last year for trademark infringement only to get the case dismissed by Chinese authorities. Baosheng is now appealing that decision and demanding that the California-based company close all of its showrooms, service centers, and Supercharger stations in China. He is also seeking 23.9 million yuan ($3.85 million) in compensation.

Importantly, Tesla said it has not actually been notified of the lawsuit thus far, according to Bloomberg. Meanwhile, in a ruling last year, Chinese authorities actually revoked the Tesla trademarks that Baosheng had registered in China in 2006. Reuters is reporting that the Beijing Third Intermediate Court is now set to hear the appeal on Aug. 5. However, investors shouldn't be too worried.

At this point, the Chinese authorities appear to be firmly on Tesla's side -- as they should be. Tesla, after all, is aggressively investing in its Supercharger network in the Asian country and has promised to build a manufacturing centers in China in three to four years.

If you need more evidence that the Chinese government is on team Tesla Motors consider the free license plates doled out during Tesla's official launch in China earlier this year. Tesla's chief executive, Elon Musk, said this a few months ago: "Tesla received further media attention thanks to the Shanghai government's announcement that Model S drivers in the city will be entitled to free license plates, thereby avoiding the usual public auction price of $10,000 to $15,000 per plate."

Tesla's planned Supercharger Stations in China. Source: Tesla Motors.

Nevertheless, this is an important battle for both Tesla Motors and China. In a few years, China could be one of Tesla's largest markets -- making it critical to Tesla's long-term success. Moreover, the company currently has three Supercharger stations open in China already and plans to build many more in the months ahead. For China, this trademark dispute highlights one of the biggest setbacks facing foreign companies trying to do business in China today. In fact, China is notorious for its so-called trademark trolls like Baosheng.

While it is unclear how this will pan out in the near term, Tesla seems to have the upper hand. Moreover, Tesla Motors is giving China something invaluable that Baosheng cannot: dangerously fast, gas-free cars and an unmatched EV infrastructure. That's not to say that this case is going away any time soon. For foreign companies operating in China today these trademark suits often mean tens of millions in settlement fees. Still, in the long run, being able to sell cars in China should far outweigh this small hassle for Tesla Motors.

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Tamara Rutter

I've been an analytical writer for The Motley Fool since 2011. I cover the sectors of Consumer Goods, Technology, and Industrials. Connect with me on Twitter using the handle, @TamaraRutter -- I'd love to hear from you!

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