This case note provides a summary and analysis of a recent decision by a Shanghai court which awarded damages based on unfair competition against a local company engaged in piracy at the register – a first in Chinese and arguably global practice as well.
Bad faith trademark registration remains rampant in China, as recent changes in the law and practice (introduced here) have so far failed to provide significant deterrence. Among these changes is the threat of administrative fines and “social credit” penalties, which have to date been imposed in only a handful of cases. As such, victim brand owners have on occasion explored the possibility of securing compensation from bad faith filers in civil proceedings to cover their legal and investigation costs and also to deter pirates from filing, or at least consider selling their marks to the rightful owner at a reasonable price.
To date, Chinese courts have generally been reluctant to acknowledge the right of victim brand owners to file such claims, arguing that the filing of trademark applications does not qualify as a “civil act” and must instead be resolved through opposition and invalidation procedures, which typically take up to five years and involve significant costs.
Industry associations have accordingly begun calling for changes in the PRC Trademark Law to allow aggrieved parties to secure compensation for abusive use of the registration system. However, a recent decision by a district court in Shanghai awarding compensation on the basis of the general provisions of China’s Anti-Unfair Competition Law (AUCL) suggests that the door to such relief against bad faith filers may now be available for those willing to try their luck with the judicial system.
The decision, issued in October 2020 by the Shanghai Minhang District Court and now final following the pirate’s failure to appeal, involved the owner of the famous German brand of water filters, BRITA. In its ruling, the Shanghai court awarded statutory damages of RMB2.3 million (~US$350,000) plus RMB500,000 (~US$80,000) for legal and other expenses incurred in bringing the case.
The defendant, a local company without a record of pirating other famous brands, was found by the court to have engaged in the production, advertising and sale of infringing water filters using the “BRITA” trademark in various formats. While damages were clearly assessed based in part on this infringing behavior, the court’s holding included explicit language indicating that damages also took account of the defendant’s aggressive strategy of both filing for marks containing “BRITA” as well as for filing oppositions and invalidations against the plaintiff’s own marks.
It remains to be seen whether other courts in China will be willing to follow the holding in the BRITA decision. Under China’s Civil Law system, decisions by the courts – particularly those at the regional level – are not binding on other courts, even within the same district. However, this new decision will no doubt offer courts throughout China encouragement in holding registry pirates accountable.
The BRITA decision will no doubt be compared to a ruling by a court in Hangzhou in 2016 involving the “COPPERTONE” trademark owned by Bayer (also of Germany). See SIPS analysis of this case here. In the Bayer case, the court also suggested that bad faith filing by a registry pirate constitutes unfair competition. But the court’s award of damages in that case appeared intended to compensate for damage caused by the pirate’s attempts to enforce its bad faith registrations against sales of Bayer’s genuine products, including via take-down complaints filed with Alibaba.
Facts of BRITA Dispute
- The plaintiffs in this case were BRITA GMBH of Germany and its PRC subsidiary. The defendant was local company Kangdian Co. Ltd. (Kangdian).
- BRITA GMBH first registered “BRITA” trademark in China in 1993. BRITA water filters formally entered the Chinese market in 2008. Following years of advertising, sales and media coverage, the plaintiff’s brand became widely-known to the relevant public in China.
- Beginning as early as 2011, the defendant began selling counterfeit water filters through its Alibaba store, which used the trade name BRITA. The defendant similarly opened a WeChat media account, but with the plaintiff’s trademarks used in its formal account names “britachina” and “EuBrita” and in their profile photo. Its behavior was clearly intended to communicate that it owned the BRITA trademark.
- The defendant filed 21 pirate marks applications for trademarks targeting Brita – all eventually rejected or invalidated following actions by the plaintiff. The defendant ended up unsuccessfully appealing one such invalidation to the Beijing IP Court and Beijing Higher People’s Court. In parallel, the defendant filed its own oppositions and invalidations against the plaintiff’s trademark applications and registrations.
- In 2017, the plaintiff filed a civil action with the Shanghai court, seeking relief on the basis of trademark infringement and unfair competition. As part of its claims, the plaintiff sought compensation for economic losses directly resulting from the defendant’s bad faith filings, together with reasonable enforcement costs, including legal fees and the cost of notarizations, library searches and court filing fees. The plaintiff also demanded a public apology by the defendant through the publication of a notice in China Intellectual Property Newspaper.
- Whether it was the defendant who conducted the alleged infringement?
The defendant denied that the “britachina” and “EuBrita” WeChat media accounts were owned and operated by it. In addition, the defendant claimed that it had never carried out the alleged infringements and that it only sold goods sourced from overseas purchasing agents.
The court ruled that the defendant’s denials were unsupported by evidence. In particular, the business registration number for the defendant shown previously in the national database (the number was changed later on) was an exact match for the one used to register the WeChat accounts and to open an online store on 1688.com. The defendant also failed to prove that the alleged infringing goods were purchased overseas. Further, based on evidence presented by the plaintiff, the court concluded that the infringing goods were manufactured by the defendant.
- Whether the alleged activities constitute trademark infringement?
When compared against the Plaintiff’s trademarks, each of the Defendant’s trademarks was either identical or closely similar to Brita’s trademarks. The defendant’s use of the infringing marks on product packaging, quality test reports and brochures constituted trademark infringement.
- Was there unfair competition?
The court ruled that the defendant had engaged in the following categories of unfair competition:
- False advertising
Among other things, the defendant referred to itself as the official BRITA brand, it used the plaintiff’s own brand history and media reports and passed these off as its own, and it also claimed to be the plaintiff’s long-term “cooperation partner”. During the trial, the defendant admitted to the court that it had in fact never cooperated with the plaintiff.
- Bad faith trademark registration and abuse of procedures
The court noted the defendant’s history of bad faith filings and highlighted its abuse of trademark prosecution procedures. This included appealing an invalidation decision to the Beijing Higher People’s Court and initiating a number of opposition and invalidation actions against the plaintiff’s trademarks.
The court noted that even though the plaintiff’s trademark rights had ultimately been protected, its normal business operations had been severely disrupted and adversely affected as a result.
The court did not dispute that corporate entities have a legal right to file trademark registration applications, or to oppose / request the invalidation of registered trademarks belonging to third parties. However, the court also noted that commercial entities must exercise their rights legally and must not use apparently legal forms to achieve substantively illegal ends.
The court also reasoned that although the Anti-Unfair Competition Law (AUCL) does not explicitly address the abuse of administrative and judicial procedures, such abuse is nevertheless covered by the general provisions set out under Article 2 of the AUCL, which require commercial entities to abide by the principles of honesty and business morality.
Finally, the court held that the defendant’s actions against the plaintiff’s marks served to interfere with the plaintiff’s exercise of its trademark rights and to undermine its competitive advantage. The actions were therefore a type of unfair competition.
- Court Award
The court awarded damages of RMB2.8 million based on the statutory damages provisions under the PRC Trademark Law and the AUCL. The award comprised RMB2.3 million in economic losses and RMB500,000 in enforcement-related expenses.
- Economic losses
The court reviewed the defendant’s opposition against one of the plaintiff’s trademarks, in which the defendant provided notarized evidence that it had sold over 200,000 filters within a 13-month period through its Alibaba store. Although the defendant countered by claiming that it had exaggerated its sales by over two-thirds, the court ignored the explanation as it was unsupported by evidence.
(Note that the decision did not indicate the total revenues or profits generated from the sale of the 200,000 units or reference any other evidence submitted by the plaintiff regarding sales beyond the 13-month period noted above. However, the decision does reference the per-unit price of the counterfeit filters as RMB40, thus suggesting revenues generated of about RMB8 million or US$1.15 million.)
The court also referred to four other factors when calculating the economic loss of the plaintiff, including: (1) the defendant’s bad faith and recidivism, including its reopening of a WeChat account after it had been closed; (2) the high degree of reputation of the plaintiff’s mark; (3) the duration and scope of the infringing behavior; and (4) economic losses caused by the defendant’s bad faith filings.
- Reasonable Expenses
The decision mentioned that the plaintiff claimed to have spent RMB885,316.58 on enforcement-related costs, including notary fees, translation costs and (the bulk) attorney fees of 856,020.58. The court awarded RMB500,000 of this.