The Chinese trademark regime is a first-to-file system. Accordingly, priority is given to the individual or entity that first applies for and registers, rather than uses, the trademark.
Due to this first-to-file system, China has for decades been a hotbed for trademark piracy (also known as trademark squatting), the practice of registering in bad faith trademarks owned by others before the rightful owners can, quite often with the aim of either using these marks on counterfeit products or, more commonly in China, “warehousing” the marks, holding them in the hope they will be purchased by the genuine brand owners for significant sums of money.
Whilst the Chinese Trademark Law does provide brand owners with tools to fight back against pirates, recovering stolen trademarks is inevitably lengthy and expensive, and the outcomes by no means certain. As an example, we note the recent MANOLO BLAHNIK trademark dispute in China, where the true brand owner was finally able to recover their mark after a fight of over 20 years. Worse yet, as purely administrative proceedings, there is no provision for recovery of the costs related to recovery efforts.
Many pirates, particularly dyed-in-the-wool warehousers, often take a scattershot approach to their piracy, filing for dozens or even hundreds of marks owned by third parties in multiple classes. Other pirates, however, are more selective – some would say obsessive – in their piracy, focusing with laser-like precision on a given brand. These pirates will file multiple applications for a single brand in multiple classes (and usually, multiple applications in the same class). Their intention is clear: to entirely co-opt the People’s Republic of China (“PRC”) market for the brand, stealing it out from under the rightful brand owner.
These types of pirates are much more pernicious than the usual warehouser, forcing the foreign brand owner to fight action after action after action to protect their brand and quite often, to salvage their entire business in China.
Given the nature of these attacks, many legal commentators have long viewed the Chinese Anti-Unfair Competition Law (“AUCL”) as a solid potential basis for claims against these pirates, where the AUCL would provide access to both injunctive relief preventing further filings and damages to compensate for the often significant legal fees incurred in these fights. Nevertheless, it has been nearly impossible for victimised brand owners to establish unfair competition claims against trademark pirates in the absence of commercial conduct by the pirate exceeding the mere filing and constant refiling of trademark applications pirating the brands. This is primarily due to the view that such acts have generally been viewed by the courts to only constitute “administrative” acts, not “civil” acts that can be redressed under the AUCL and other PRC tort laws.
The Fujian Higher People’s Court recent judgment in the In-Sink-Erator case,[i] however, represents a significant shift, where the pirate was found to have violated Article 2 of the AUCL without evidence of substantial use of the pirated marks. In other words, the act of trademark squatting in and of itself was sufficient to constitute a civil act worthy of redress under the AUCL.
Facts of the Case
The distinctive trademark in dispute, “IN-SINK-ERATOR”, is a famous global brand dating all the way back to 1938, and now belonging to Emerson Electric Co. (“Emerson”), used by it in conjunction with its instant hot water dispensers and food waste disposal systems.
Emerson had registered the “
” mark in China in classes 7 (for, inter alia, “food waste disposers”) and 11 (for, inter alia, “water purification devices”) back in 2009 (collectively, the “Emerson trademarks”), and had enjoyed a certain degree of fame in the Chinese market as early as 2010. In spite of the fame of the IN-SINK-ERATOR brand in China, the defendants in the case aggressively targeted Emerson’s coined brand.
The first defendant, Xiamen Angel Water Spirit Drinking Water Equipment Co., Ltd. (formerly known as Xiamen Hemeiquan Drinking Water Equipment Co., Ltd.) (“Angel Water”), was established in 2008. Starting from December 2010, Angel Water, with the help of its trademark agent Xiamen Xingjun Intellectual Property Affairs Co., Ltd. (“Xingjun”, the fourth defendant), filed applications for the mark IN-SINK-ERATOR for use on goods and services closely related to those offered by Emerson under its brand.
Emerson filed numerous trademark oppositions, opposition appeals, and even court appeals to defend itself against Angel Water’s bad-faith filings, enjoying initial success in those actions. In spite of multiple decisions in Emerson’s favour, however, Angel Water’s trademark piracy continued unabated. As well, and to skirt the initial findings against Angel Water’s trademark filings, its legal representative, Wang Yiping (the third defendant) established another company, Xiamen Haina Baichuan Network Technology Co., Ltd. (“Haina Baichuan”, the second defendant). Haina Baichuan took up Angel Water’s cause, filing additional applications for trademarks similar to the Emerson trademarks.
As at the date of filing of the civil action against the defendants, Angel Water and Haina Baichaun had filed 48 trademarks which were identical or similar to the Emerson trademarks in 14 different classes, 47 of which were applied through their trademark agent Xingjun.
Summary of First Instance Decision
In March 2020, Emerson brought a civil action against the defendants with the Xiamen Intermediate People’s Court.[ii] Amongst other claims in its complaint, Emerson argued that the defendants’ long pattern of trademark piracy constituted acts of unfair competition pursuant to Article 2 of the AUCL, which states as follows:
Businesses shall, in their production and distribution activities, adhere to the free will, equality, fairness, and good faith principles, and abide by laws and business ethics.
On 22 April 2021, the Court rendered its first instance judgment, ruling in favour of Emerson in relation to its argument based on Article 2 of the AUCL. The Court noted that Angel Water and Haina Baichuan were both engaged in the production of water purification equipment and were therefore competitors of the plaintiff. The Court noted further that Angel Water and Haina Baichuan, as well as Wang Yiping in his individual capacity, had a history of trademark piracy, targeting well-known domestic and foreign brands, including Dow, Daimler, Unilever, etc. Therefore, it was hardly a coincidence that Angel Water and Haina Baichuan applied for the pirated marks, especially considering that Emerson had at the time of their filings already achieved a certain degree of fame. Further to this point, the defendants had failed to provide any reasonable explanation as to how their pirated marks were created, nor did they provide any evidence of use or any reasonable explanation for their intention to register the pirated marks.
Based on the above, the Court found Angel Water, Haina Baichuan, and Wang Yiping to be jointly liable for the harm done here, and also held Xingjun, the trademark agent, to be contributorily liable for that harm. Accordingly, the Court issued an order enjoining the four defendants from filing any further trademarks identical or similar to the Emerson trademarks. The Court also awarded damages totalling Rmb640,000 (around US$96,000) to compensate Emerson for the reasonable expenses incurred by Emerson in relation to battling the defendants’ trademark piracy. Lastly, the Court ordered the defendants to publish a statement distributed over “nationally-issued media” to eliminate the negative effect of their actions.
Ruling of the Fujian Higher People’s Court
Not deterred by the lower court’s finding, the defendants appealed the first instance decision to the Fujian Higher People’s Court. On 27 September 2021, the Court dismissed the appeal and upheld the first instance decision.
In dismissing the pirates’ appeal, the Court held that it was difficult to categorise the trademark squatting behaviour of the defendants as being in good faith and necessary for normal business activities or for the maintenance of their own intellectual property rights. Instead, the ongoing acts of maliciously acquiring and exercising trademark rights that “directly infringed the prior rights of Emerson violated the principle of good faith, disrupted the normal order of trademark registration and management, disrupted the market order of fair competition, and damaged the legitimate rights and interests” of Emerson. As a result, their actions were properly characterised as acts of unfair competition.
Interestingly, the Court made this finding although Emerson was only able to establish limited ancillary use of the pirated mark by Angel Water – Angel Water had only used a single In-Sink-Erator logo on the banner of the front page of its website. There was no continuous use of the pirated marks on any other goods or services – a fact that one would normally expect to be the death knell for an AUCL claim in this type of case.
In supporting its decision upholding the first instance decision, the Court’s rationale was supported by the recognition that trademark piracy disrupts the market transaction order, and that cost to the defendants of engaging – and continuing to engage in this behaviour – was insignificant. As result, the Court found that if it did not legally enjoin the defendants from filing further trademark applications, they would only continue to do so. As a result, the true brand owner would be forced to continue an endless legal battle against the defendants’ and their pirate filings if it was to protect its legitimate rights and interests. This would not only lead to the genuine brand owner incurring significant costs, but also result in a significant waste of public resources, including the time of the Trademark Office (“TMO”) and the Trademark Review and Adjudication Division in handling those cases.
The Court also found that Wang Yiping, being the legal representative, executive director, and controlling shareholder of both Angel Water and Haina Baichuan, clearly had subjective knowledge of Angel Water and Haina’s unlawful acts. Accordingly, it was correct for the lower court to pierce the corporate veil and hold Wang Yiping jointly and severally liable.
Xingjun, the trademark agent behind the pirate filings, was also held contributorily liable as it should have been obvious to it that its clients’ actions were in bad faith and therefore in violation of the Chinese Trademark Law. In spite of that, Xingjun still accepted and continued to accept its clients’ entrustment, acting as their trademark agent for 47 of the 48 pirated trademark applications and registrations. Accordingly, it was appropriate for Xingjun to bear joint legal responsibility with the other defendants.
Takeaway
Unfortunately, as China is a civil law country, the ruling in this case will not have direct precedential effect, we may not see other courts issuing similar rulings, even in Fujian Province. That said, the decision clearly demonstrates a shift in the usual approach to these cases, with a higher-level Chinese court willing to recognise the practical harmful impacts caused by unchecked trademark piracy. The decision is also in step with the PRC Government’s recent reforms to the Trademark Law and related regulations placing ever-greater emphasis on the targeting of bad faith trademark registrations and the parties that file for them, including through the increased actions against the trademark agencies that suborn such filings.
As promising as this case is, however, it should be kept in mind that, generally speaking, AUCL cases in China are notoriously fact specific. Indeed, absent a laundry list of facts similarly egregious to those present here (nearly 50 separate trademark filings, efforts of the corporate defendants’ legal representative to escape Emerson’s administrative victories at the TMO by establishing a new corporate vehicle to continue its piracy, the blind eye turned to this broad course of illegal conduct by its trademark agent, etc., etc.), we are sceptical that other PRC courts will be as receptive to claims such as this. Cases tied strictly to repeated trademark filings, without accompanying counterfeiting, infringement threats against the real brand owner’s distributors and/or other similarly aggressive conduct, will most likely continue to be viewed as purely “experimental” by courts.
Still, in light of the PRC Government’s increasing recognition of trademark piracy’s negative impact on China’s reputation and brand owners’ businesses, it is hoped that more and more courts will be persuaded by reasoning akin to that of the Fujian Higher People’s Court. This makes it more worthwhile than ever to consider taking the fight directly to the pirates themselves, as opposed to just their bad-faith filings, particularly where their conduct is considered outrageous even by the standards of your run-of-the-mill trademark squatter.
[i] Case Docketing Number: (2021) Min Min Zhong No. 1129 [(2021)闽民终1129号].
[ii] Case Docketing Number: (2020) Min 02 Min Chu No. 149 [(2020)闽02民初149号].
