This memorandum summarizes the contents of a recent decision by the Hangzhou IP Tribunal in a civil dispute involving Bayer and its Coppertone sunscreen and a Chinese pirate that registered two of its designs used on packaging.
The court’s ruling – which is now final – suggests that victims of bad faith trademark registration in China may be able to pursue civil actions for compensation against pirates, at least to the extent that their behavior causes direct harm to the trademark owner.
The decision is also notable in that the court did not suspend proceedings until pending invalidation actions against the pirate’s trademark registrations were concluded. (Indeed, they remain pending even as of this date.)
Whether the Hangzhou court’s decision will be followed by courts elsewhere in China remains to be seen. The questions raised are novel and continue to be the subject of debate among senior judges. But the decision clearly provides a basis for optimism for victims of bad faith registration that seek new strategies. Further experimentation will be required by brand owners to test the reaction of Chinese courts under different fact scenarios as well as in different cities – particularly Beijing, where the courts have exclusive jurisdiction over registry appeals.
In particular, victim brands may wish to consider filing fresh claims or counterclaims against pirates where conditions permit, if only to create more leverage against pirates to facilitate faster settlements and on more reasonable terms.
- Bayer has used graphic designs for a Sun & Rainbow Device and a Surfer Device on packaging for its Coppertone Ultra-Guard and Coppertone Kids brands sun screen since 2011 (the “Bayer Designs”).
- In May 2015, Mr. Li Qing filed trademark applications for highly similar, both covering sun screen. Bayer did not oppose these applications and they both eventually achieved registration in July 2016 under Reg. Nos. 16886091 and 16890535 (the “Pirate Marks”).
- Shortly after registering the Pirate Marks, the pirate began filing trademark infringement complaints against Bayer’s distributors on Taobao.com. As a result, some of Bayer’s distributors were forced to stop selling sun screen bearing the Bayer Designs.
- The pirate later: (a) sent warning letters to Bayer’s distributors demanding compensation; (b) filed trademark infringement complaints with administrative authorities against Bayer’s distributors; (c) filed a trademark infringement complaint against Bayer itself with relevant administrative authorities; and (d) arranged for a civil suit to be filed in the name of a consumer against Bayer’s distributors on the basis this consumer had been cheated and misled regarding the origin of the goods.
- The pirate then offered to withdraw the complaints in exchange for compensation from Bayer’s distributors.
- The pirate also offered to sell the Pirate Marks to Bayer at a price of RMB700,000 (approx. US$110,00 at the time), but Bayer refused.
- In response to the pirate’s actions, Bayer’s lawyer sent two letters to the pirate: (a) declaring there was no infringement by Bayer; (b) providing evidence of prior use and ownership of copyright in the Bayer Designs; and (c) demanding that the pirate acknowledge that the use of the Bayer Designs in China did not constitute infringement and that the pirate accordingly agreed not to pursue litigation against Bayer or its distributors in relation to such use. The pirate did not respond to these letters.
- Bayer then filed two civil actions against Mr. Li, one requesting the court issue a declaration of non-infringement, and another seeking compensation for the pirate’s acts of unfair competition.
- Was Bayer legally entitled to file a civil suit to obtain a declaration of non-infringement?
The court held that an interested party is normally entitled to file a lawsuit to request a declaration of non-infringement if: (a) the party has received a warning letter from the alleged IP rights owner; and (2) if the alleged IP rights owner fails to initiate legal action within a reasonable period of time to confirm that the party has infringed its rights.
In the present case, although the warning letter was only sent to its distributors, Bayer, as the manufacturer, was obviously affected. The court thus decided that Bayer had standing as an interested party.
The pirate did not respond to the letters issued by Bayer’s lawyer requesting that the pirate confirm that use of Bayer’s Designs does not constitute infringement; nor did the pirate commence litigation. Given the uncertainty of the alleged infringement, the court determined that Bayer was entitled to file a civil action seeking a declaration of non-infringement.
- Did use of the Bayer Designs infringe the pirate’s trademark rights in the Pirate Marks?
Bayer argued that there was no infringement for the following reasons:
- No likelihood of confusion and no damage to the pirate, because: (a) the Bayer Designs are dissimilar to the Pirate Marks; (b) customers are not familiar with the Pirate Marks; and (c) Bayer’s goods bear the mark “Coppertone” which indicates the origin of the goods.
- No trademark use. Bayer’s use of the Bayer Designs is not intended to identify the source of Bayer’s goods, and as such, use thereof does not constitute use as a trademark.
- Prior copyrights defense. Bayer owns copyright in the Bayer Designs, which were created long before the pirate filed its applications to register the Pirate Marks.
- Prior use defense. Bayer began using the Bayer Designs on goods long before the pirate filed its applications to register the Pirate Marks.
The court supported Bayer’s defense based on copyright but did not comment on the other three arguments above.
Bayer filed the following evidence to support its copyright claim:
- PRC copyright registration certificates for the Bayer Designs (filed after the registration date of the Pirate Marks) (not commented on by the court).
- A declaration issued by the design firm that Bayer commissioned to create the Bayer Designs (considered by the court).
- A declaration issued by the design firm that Bayer engaged to design the labels and packaging for the sun block products at issue (considered by the court).
- A declaration issued by Bayer’s trademark counsel concerning Bayer’s US trademark application for the Bayer Design “ ” (considered by the court).
Bayer also submitted to the court samples of its sun block and notarized web search records (notarized in May 2014, prior to the application date of the Pirate Marks) as evidence of its use of the Bayer Designs on sun block.
- Is the pirate a competitor (relevant to the question whether unfair competition can be established)?
The court answered this question in the affirmative and on the following bases:
- Although the pirate was not directly employed in the cosmetics/skincare industry, he had filed for many other trademarks covering cosmetics. As such, the court determined that the pirate was sufficiently involved in the cosmetics business to qualify as a competitor. (NB: Courts in China do not already require the existence of a competitive relationship for a finding of unfair competition.)
- The pirate’s complaints resulted in the removal of ads for Bayer’s product from Taobao. In addition, the pirate had received compensation from some of Bayer’s distributors incidental to settlements with them. As such, the court determined that the pirate generated profits by hindering Bayer’s ability to compete in the market, which is indicative of direct competition.
- Was there unfair competition?
Bayer argued for existence of unfair competition because the pirate:
- Filed trademark applications in bad faith;
- Filed trademark infringement complaints in bad faith;
- Offered to sell the Pirate Marks in bad faith;
- Offered to withdraw its complaints in exchange for compensation.
The court held that the core standard for determining whether the pirate’s actions constitute unfair competition is whether the pirate’s conduct violates the principles of honesty and business morality. The court ultimately found that the pirate’s conduct violated these principles, and supported all of Bayer’s claims, emphasizing the following:
- The Pirate Marks violated Bayer’s copyright in the Bayer Designs, because:
- The Bayer Designs were created and published earlier than the application date of the Pirate Marks;
- It is reasonable to assume that the pirate had been exposed to the Bayer Designs; and
- The Pirate Marks are substantially similar to the Bayer Designs.
- The pirate’s motive and purpose in filing the applications for the Pirate Marks was to provide a means for filing complaints, and eventually obtain illegal profit.
- The pirate is a serial trademark pirate, thereby harming orderly and fair competition in the market.
- What relief is available?
The court did not award compensation in the civil action seeking a declaration of non-infringement, as it is appropriate to award compensation only if the pirate’s conduct constitutes an infringement of Bayer’s rights. This issue was not the subject of this proceeding and is dealt with in a separate legal proceeding based on unfair competition.
But in the unfair competition case, the court held that since neither Bayer’s loss nor the pirate’s profits can be calculated, the amount of compensation should be determined by considering considerations, including the legal costs incurred by Bayer, the pirate’s bad faith, and other relevant factors.
The court also decided that an order requiring a public apology is only available in cases concerning personal rights, and that these conditions did not exist in this dispute.
- Might Taobao (Alibaba) be subject to civil liability?
Bayer argued that Alibaba should be held liable, as it was negligent in its handling of complaints filed by the pirate and wrongfully removed ads for Bayer goods managed by its distributors, and thereby causing financial losses and damaging their credit.
The court disagreed. The court held that Taobao processed the pirate’s complaint in accordance with established and standard procedures. Because the Pirate Marks are registered trademarks, it was reasonable to conclude that Taobao did not know, nor should it reasonably have known, that the pirate’s conduct constituted an act of unfair competition.