On March 4, 2021, the Shanghai Higher People’s Court (“Shanghai HPC”) upheld a decision by the Shanghai Intellectual Property Court (“Shanghai IP Court”) which found a local company and an outlet mall liable for infringement of Fendi S.R.L.’s trademark registrations for “FENDI” as well as unfair competition due to its use of Fendi’s widely-known trade name.
The case – which was issued based on a request for retrial by the defendants – is noteworthy in the following ways:
- It involved the sale of parallel imports, i.e., genuine products being sold through channels not authorized by the trademark owner, and not counterfeit or otherwise infringing goods. The Shanghai HPC concluded that Fendi’s Class 35 trademark had been infringed when used without Fendi’s authorization on signage despite the fact that the shop was offering genuine goods.
- The Shanghai HPC ruled that the unauthorized use of the “FENDI” trade name on signage constituted unfair competition. The court emphasized that protection for trade names of foreign enterprises should be granted if their names enjoy a certain degree of reputation in the Chinese market and are thereby “known” (知悉) to the Chinese public. The court rejected the proposition that protection is only available for foreign trade names that enjoy a high degree of fame and are well-known (熟知) among the Chinese public.
- The Shanghai HPC explicitly overturned the holding of the lower court that the defendants’ use of the FENDI mark on signage constituted “fair use”.
- The landlord, i.e., the company managing the mall where the “FENDI” signage was displayed, was found jointly and severally liable, together with the operator of the store.
The defendants were Shanghai Yilang International Trading Co., Ltd. (“Yilang Co.”) and Beijing Shouchuang Outlets (Kunshan) Commercial Development Co., Ltd. (“Shouchuang Outlets”).
Yilang Co. had been operating a number of retail stores in an outlet mall managed by Shouchuang Outlets, one of which was selling parallel-imported genuine “FENDI” products and was using the “FENDI” trademark/trade name in its signage.
In its decision in the first instance proceedings, the Shanghai Pudong New District People’s Court (“Pudong Court”) ruled that there was no infringement of Fendi’s trademarks, based largely on the Pudong Court’s conclusion that Yilang Co. was engaging in the retail sale of genuine goods. It viewed Yilang Co.’s use of the “FENDI” trademark in this context as “fair use” and also commented that retail services are not available for protection in China under Class 35 service mark registrations. This is the generally accepted view in China to date, and it is a view shared by the administrative authorities. Market Supervision Bureaus, for example, will generally not regard the use of Class 35 marks as infringing.
The Pudong Court’s judgment was overturned on appeal by the Shanghai IP Court, which considered that Yilang Co. had exceeded the scope of fair use.
When Yilang Co. brought the case to the Shanghai HPC for retrial, the Shanghai HPC considered three main issues:
- Whether Yilang Co.’s use of “FENDI” wording on shop signage infringed Fendi’s exclusive rights to its registered “FENDI” trademark (IR No. 1130243) for Class 35 services;
- Whether Yilang Co.’s use of the “FENDI” logo on shop signage constituted an act of unfair competition, i.e., using Fendi’s enterprise name without authorization; and
- Whether there were errors in the calculation of damages and allocation of liability for damages in the Shanghai IP Court’s second-instance judgment.
Following deliberations, the court concluded that Yilang Co.’s retrial request could not be sustained and it upheld the Shanghai IP Court’s decision.
Infringement of Class 35 Registration for “FENDI”
The Shanghai HPC concluded that Yilang Co.’s use of “FENDI” on shop signage was infringing Fendi’s Class 35 registration, which covers the following services:
“Advertising; business operation and business management; the bringing together, for the benefit of others, of a variety of goods excluding the transport thereof, such as perfumery, cosmetics, eyeglasses, telephone equipment, computers, photographic apparatus, video cameras, jewelery , horological instruments, bags, wallets and other leather goods, furniture, mirrors, picture frames, bed and table covers, towels, clothing, footwear, headgear, personal accessories, enabling customers to conveniently view and purchase those goods; office functions.”
The Shanghai HPC supported its conclusion by explaining that Class 35 mainly covers (1) services provided by individuals or organizations with the aim of providing assistance in the operation or management of commercial enterprises, and (2) providing assistance in the management of business activities or commercial functions of industrial and commercial enterprises. It expressed the view that Class 35 does not include services where the business operator is itself the sales entity engaged in the wholesale and retail of goods (as opposed to providing such services on behalf of a third party).
As Yilang Co. had set up its store to engage in the sale of goods, and as its use of the “FENDI” trademark on shop signage was also pointing to the sale of goods in its own store, the Shanghai HPC did not accept Fendi’s claim that the services being provided by Yilang Co. were identical to those covered by its Class 35 trademark registration.
That said, the Shanghai HPC noted that Yilang Co. had made standalone use of “FENDI” wording on the signage of its store, and that even if the get-up in the store was different from Fendi’s own authorized stores, the use of the term “FENDI” would mislead the relevant public into believing that Yilang Co. and Fendi had a licensing or authorization relationship of some sort.
Furthermore, even though Yilang Co. was also using its own trademark on covered walkways, shopping bags, shop windows, etc., this was deemed insufficient to eliminate the possibility of confusion. The court concluded that Yilang Co.’s use of the “FENDI” wording on its shop signage constituted the use of an identical trademark in connection with services similar to those covered by Fendi’s Class 35 trademark, and that this amounted to an infringement of Fendi’s trademark.
When considering the issue of fair use, the Shanghai HPC considered whether Yilang Co.’s use of the “FENDI” wording was both necessary and reasonable. It thought that, in the context of convenience for consumers shopping in outlet malls, it can be both necessary and reasonable for retailers to display the trademarks of the products they sell on the outside of the shops. Nevertheless, the court still concluded that Yilang Co.’s use of “FENDI” wording would easily cause consumers to be confused as to the relationship between Yilang Co.’s store and Fendi. Such confusion directly damaged the source identification function of Fendi’s trademark.
On balance, the Shanghai HPC chose the “lesser of two evils”, thinking it inappropriate to damage the basic function of a trademark in exchange for the convenience of an outlet mall and its customers. It therefore concluded that Yilang Co.’s use of “FENDI” wording on the signage of its shop did not constitute fair use of a trademark and was in fact infringing.
The Shanghai HPC noted that Article 5 of the 1993 PRC Unfair Competition Law (this was the version of the law in effect when the dispute arose) prohibits business operators from damaging competitors by making unauthorized use of their enterprise name, thereby misleading people into believing that the goods are from the third party.
The court also considered Article 6 of the 2007 Interpretation of the Supreme People’s Court on Some Issues Concerning the Application of Law in the Trial of Civil Unfair Competition Cases (the “Unfair Competition Judicial Interpretation”), which provides that foreign enterprise names used for business purposes within China will be protected under Article 5 of the Unfair Competition Law. It further provides that the trade name parts (字号) of enterprise names can be protected in cases where the enterprises in question enjoy a certain market reputation and are known (知悉) by the relevant public.
Yilang Co. argued that Fendi’s “FENDI” trade name should not enjoy protection as it had no market reputation in China. The Shanghai HPC dismissed this claim, noting that Fendi had submitted evidence that its trade name had been promoted and used extensively in China over a considerable period of time, but also clarifying that there is no requirement that trade names be required to achieve a high degree of fame or be deemed “well-known” to the relevant public as a condition to protection.
Looking at Yilang Co.’s use of the “FENDI” trade name, the court thought that use on shop signage was liable to cause people to believe, mistakenly, that the Yilang Co. store was somehow connected to Fendi. In addition to the Unfair Competition Judicial Interpretation, the court also referred to Article 10bis of the Paris Convention for the Protection of Industrial Property, which provides that any act of competition contrary to honest practices in industrial or commercial matters constitutes an act of unfair competition, and should be prohibited.
Liability for Damages under the Second-Instance Judgment
The Shanghai IP Court found Yilang Co. guilty of trademark infringement and unfair competition and concluded that the landlord, Shouchuang Outlets, was also liable.
In making its determination of damages, the Shanghai HPC noted that the Shanghai IP Court had comprehensively considered the fame of Fendi’s “FENDI” trademark, the nature and duration of Yilang Co.’s conduct and the consequences and reasonable expenses that Fendi had incurred in the case. It thus concluded that the RMB350,000 compensation awarded (~US$55,000) was reasonable and should be upheld.
As for Shouchuang Outlets, the court noted that Article 9(1) of the PRC Tort Liability Law provides that anyone who instigates or assists (教唆、帮助) others to commit tortious acts shall be jointly and severally liable. Shouchuang Outlets was well aware that Yilang Co. was not authorized by Fendi, but it failed to correctly convey information on the operator of the Yilang Co. store to the public, causing confusion regarding the relationship between the store and Fendi. For this reason, it could be considered as instigating or assisting Yilang Co.’s acts of trademark infringement and unfair competition.
Brand owners have been frustrated in China because of the lack of options for shutting down unauthorized stores selling parallel imports. The Fendi case suggests that brand owners may be able to act where the seller is using the brand owner’s registered trademark / trade name without authorization, based on trademark infringement and unfair competition principles. This underscores the importance of registering trademarks in Class 35, even while specific coverage for retail and wholesale services is not permitted in China.
The Fendi case is also of interest from the perspective of landlord liability. In China, landlords are often held liable only if they have been put on notice of a likely violation of trademark rights and then failed to take prompt action to stop the infringement.
There is no indication in the Shanghai HPC decision that Yilang Co.’s landlord (i.e., Shouchuang Outlets) had received a cease and desist or other notice that Yilang Co. was infringing Fendi’s trademark. The Shanghai HPC’s conclusion that Shouchuang Outlets was well-aware that Yilang Co. lacked authorization may suggest that mall operators are now expected to proactively check that store operators are authorized by trademark owners to use names as the principal trademark on retail signage.