On April 23, 2019, China’s National People’s Congress announced the fourth revision to the PRC Trademark Law[i], changes which come into effect on November 1, 2019. The amendments to six clauses are clearly aimed at curbing bad faith piracy in China, including via the introduction of an explicit bad faith ground to be used in oppositions and invalidations, increased compensation and penalties in bad faith-impacted cases, as well as sanctions against trademark agencies which handle bad faith applications.
To date, one root cause of China’s piracy problem is that its trademark system primarily operates on a first-to-file, rather first-to-use, basis. This facilitates two scenarios commonly encountered by foreign brand owners in China: (1) preemptive filing of third-party marks for subsequent bad faith use; and (2) large-scale hoarding of marks with no intent to use, but instead for the purpose of resale.
The current PRC Trademark Law contains a number of provisions which allude generally to bad faith applications, but in practice, those provisions function more like guiding principles and do not grant explicit legal grounds for removing bad faith applications from the trademark register. Moreover, these existing provisions have not been applied consistently by administrative authorities and Courts in overturning bad faith applications.
In the absence of clear or sufficient legislative grounds to prevent and remove the large number of marks already sitting on the register that are likely to have been filed in bad faith, the 2019 revisions aim to make it easier to remove marks already approved or registered, as well as pre-empt and deter bad faith applications in the first place.
Addition of an Explicit Bad Faith Ground
Among the existing provisions of the PRC Trademark Law relating to bad faith and piracy, there are two which arguably impose a de facto “intent to use” and good faith requirements on applicants.
Article 4 provides that:
Any natural person, legal person or other organization that needs to obtain the exclusive right to use a trademark for its goods or services during production and business operations shall apply for trademark registration with the PRC Trademark Office.
In the past, this provision has been argued to imply an “intent to use” requirement on trademark applicants. However, the Trademark Office (“TMO”), Review Board and Courts have interpreted this provision inconsistently and only occasionally relied on it to reject bad faith applications by large-scale pirates or warehousers.
In turn, Article 7 provides that:
The principle of good faith shall be upheld in the application for trademark registration and in the use of trademarks.
This provision, added during the 2014 amendment of the PRC Trademark Law, appears to provide a basis for challenging applications on bad faith grounds, and it has been used to reject such applications, but again, its application has been inconsistent. By and large, it has proven to be more of an “assisting” provision to other grounds for challenging bad faith filings. On its own, its practical utility is limited.
Revised Provisions: Bad Faith as Grounds for Rejection
The 2019 revision now adds to Article 4 an explicit ground for rejection:
An application for registration of a trademark that is filed in bad faith and not intended for use shall be rejected.
This is a welcome revision for brand owners previously frustrated with the lack of certainty or consistency offered by existing provisions. The new clause lays the foundation for the rejection of bad faith filings which Articles 4 and 7 had long promised, but rarely delivered.
One concern that has been raised is whether purely defensive filings by legitimate brand owners, a common practice in China to prevent pirate filings, could be targeted for the lack of intent of use. However, the inclusion of a simultaneous requirement that the mark in question also have been filed “bad faith” confirms that the provision is targeted at trademark pirates, not at legitimate brand owners filing defensive marks.
As well, on April 24, 2019, the Beijing Higher People’s Court issued non-legally binding Guidelines for the Trial of Trademark Rights Granting and Verification Cases[ii] which attempt to characterise Article 4 bad faith. The concept covers applications for trademarks, of either one or multiple entities, which are identical or similar to marks enjoying a certain degree of fame, or have relatively strong distinctive features. It also includes marks which are the commercial logos of another, or marks which are the names of well-known places, scenic spots or buildings.
In each of the specified cases, the circumstances must be “serious”. Additionally, it encompasses pirates who have filed applications for large numbers of trademark without justifiable reason. Regarding intent to use, if the applicant claims to have a true intent to use, but fails to provide relevant evidence demonstrating the same, the application will not be supported.
Interestingly, on February 12, 2019, China’s National Intellectual Property Administration (“CNIPA”) published a draft for consultation entitled Several Provisions for Regulating the Registration of Trademarks[iii]. That document, which may never formally issue, provides further clues on how bad faith applications are likely to be assessed. The provisions set out eight circumstances in which trademark applications may be deemed abnormal, including the following:
- applications for marks which are used by others and have a certain influence;
- applications where the applicant knows or should have known of the existence of another’s prior rights;
- repeated filings;
- a large volume of filings in a short period of time;
- applications without genuine intent to use or actual need to obtain exclusive rights;
- any other acts which violate the principles of honesty and good faith or disrupt the market order; and
- helping others or trademark agencies to file any of the above abnormal applications.
In addition, under the provisions, applicants for abnormal applications would be required to submit relevant evidence and an explanation to support that the application is legitimate, otherwise their mark would be rejected. The provisions also provide for the creation of what is, effectively, a “blacklist’ of bad faith applicants that would be published on CNIPA’s website. Those pirates would be subject to social credit penalties in China’s social credit system, currently in its trial phase. These provisions were open to public comment until March 14, 2019 and are yet to be implemented.
One apparent shortfall in Article 4 is whether these grounds will be available for use against trademark applications made in bad faith but with an intent to use, which could arguably encompass use in bad faith, such as an intent to manufacture copycat products bearing the true owner’s mark. While the overall nature of the provision arguably suggests that “use” should be in good faith, and should not encompass bad faith counterfeiting activities, it remains to be seen how the provision will be implemented in practice. Hopefully, trademark authorities and courts adopt an interpretation consistent with the overall spirit of the provision. They could, however, end up adopting a narrow interpretation of these provisions, allowing evidence of bad faith use to slip through the cracks. If that occurs, and where the pirate is using the mark in commerce, the brand owner will likely be forced to rely on other provisions in addition to those included in Article 4 to overcome the filing.
The scenario of bad faith use is clearly anticipated, however, given that another revision to the law provides for destruction of counterfeit goods and tools upon the request of a brand owner in a trademark dispute at the People’s Court (discussed further below under “Increased Penalties and Compensation for Brand Owners”).
Revised Provisions: Bad Faith as a Ground for Opposition and Invalidation
The revised Article 4 is also added as an explicit ground for oppositions and invalidations to the existing grounds in Articles 33 and 44, respectively. This removes any uncertainty about the intention of Article 4. It provides grounds both for rejection by authorities, as well as removal by prior rights holders or other interested parties.
Further Accountability on Trademark Agencies
The scale of piracy in China calls into question the responsibility of trademark agencies to verify the good faith of the instructions they receive from clients. At the very least, where clients are obvious trademark warehousers, or the applied for mark is well known, it is a bit galling for involved trademark agencies to be permitted to ignore their client’s bad faith. Clearly, many trademark agencies appear to be fully aware of their client’s misconduct and to be actively assisting the bad faith applicant in executing their schemes. Some even appear to be utilizing their professional knowledge to directly engage in filing of bad faith trademark applications for their own “use”, where they are clearly hoping to be approached by the foreign brand owner to sell the marks for a hefty profit.
Existing Provisions related to Trademark Agencies
Article 19 already imposes certain obligations on trademark agencies, including a general obligation to uphold the principle of good faith.
Article 19.3 specifically provides that a trademark agency should refuse instructions if it “knows or should have known” that the applied for trademark violates Articles 15 and 32 of the PRC Trademark Law. Article 15 prohibits bad faith applications by representatives or those with a prior business relationship to the applicant, while Article 32 prohibits applications which infringe upon another person’s “prior rights” (e.g. copyright, designs) or trademarks which have achieved a certain degree of fame.
Article 19.4 targets rogue trademark agencies, prohibiting trademark agencies from filing for trademarks other than those entrusted to it.
Article 68 stipulates that trademark agencies found in violation of Article 19.3 or 19.4 may face civil and criminal liability.
Revised Provisions: Accountability for Representing Bad Faith Applicants Without an Intent to Use
The revised law expands the scope of Article 19.3 to include marks that violate the provisions of Article 4:
Where a trade mark agency knows or ought to know that the applicant’s applied-for trademark falls under the circumstances prescribed by Article 4, 15 and 32 of this Law, it should not accept instructions.
By virtue of the existing sanctions in Article 68 for contravening Article 19.3, this revision now renders trademark agencies directly accountable, not only in the specific scenarios provided for by Articles 15 and 32, but more generally, for representing clients who file in bad faith and without intent to use.
Revised Provisions: Civil and Criminal Penalties for Article 4 Violations by Trademark Agencies
In addition to Article 19.3 and 19.4, Article 68 now incorporates violations committed by trademark agencies under Article 4 as a ground for civil fines, correction orders and criminal liability, meaning trademark agencies will not only be held accountable for the marks they file on behalf of clients, but also any bad faith filings they file on their own behalf.
Revised Provisions: Rogue Filings by Trademark Agencies as a Ground for Opposition and Invalidation
A further amendment to Articles 33 and 34 incorporates Article 19.4, prohibiting trademark agencies from filing for trademarks other than the ones entrusted to it, as grounds for opposition and invalidation.
This amendment is aimed at agencies that exploit their industry knowledge to file for third-party marks with the intent of selling them to the legitimate brand owner. It is unclear how effective the provisions will be if trademark agencies try to evade the provision by filing in the name of a proxy, however.
Increased Penalties and Compensation for Brand Owners
Revised Provisions: Administrative and Court Penalties for Bad Faith Filings and Litigation
For the first time, bad faith filers are explicitly subject to sanctions. An additional clause is added to Article 68 which provides:
Where applications for trademark registration are filed in bad faith, administrative penalties such as warnings and fines shall be imposed depending on the circumstances; and if a trademark lawsuit is filed in bad faith, the people’s court shall impose penalties according to law.
Article 68 in its current form solely relates to sanctions against trademark agencies, but since the amendment does not specify trademark agencies in particular, there has been some confusion as to whether it also applies to bad faith applicants, too. Officials from China’s National Intellectual Property Administration have informally offered conflicting interpretations in this regard, with a few confirming that the provision applies to all bad faith filers, and not just trademark agencies, but others indicating precisely the opposite. We expect revisions to the Implementing Rules of the Trademark Law will provide further clarification in this regard.
The targeting of malicious trademark litigation, i.e., litigation brought against the real brand owner by the pirate, is another welcome revision, as brand owners increasingly find themselves the victims of large compensation demands for licensing or transfer of a pirated mark in order to prevent threatened litigation.
Revised Provisions: Increased Statutory Damages Ceiling and Punitive Damages
The revisions also increase the maximum level of compensation that brand owners can secure in civil proceedings. In cases of bad faith infringement and where the circumstances are deemed “serious”, Article 63 has been amended to allow Chinese courts to award punitive damages up to five times (increased from three times under the earlier law) the amount of damages determined by one of the prescribed calculation methods: actual loss, profits or royalties.
Where the damages calculation by the above methods is difficult to determine, the law imposes a ‘statutory ceiling’ on damages, which has been increased from RMB 3 million to RMB 5 million.
Revised Provisions: Destruction of Counterfeits at Request of Brand Owner in Court Dispute
The new law also introduces a provision for brand owners to request the destruction of counterfeit goods, materials and tools, or under special circumstances, to seek the materials and tools being prohibited from entering commercial channels. This follows a similar, but less comprehensive, provision in Article 60 where disputes are handled by the Administrative Department for Industry and Commerce.
Two new clauses added to Article 63 state:
The people’s court that tries a trademark dispute case shall, at the request of the right holder, order destruction of goods on which a registered trademark is falsely used, except under special circumstances; order destruction of materials and tools primarily used for the manufacture of such goods without compensation; or under special circumstances, order prohibition of the said materials and tools from entering commercial channels without compensation.
Goods on which a registered trademark is falsely used may not enter commercial channels merely after removal of the counterfeit registered trademark.
On its face, this clause seems to be a step forward by granting brand owners legal grounds in civil disputes to have counterfeit goods, as well as moulds and machinery used in their manufacture, destroyed. On the other hand, this right existed before, only it was implicit and did not have associated restrictions. The revision now appears to impose a requirement on brand owners to specifically request destruction of the goods. It also suggests that in “special circumstances”, the court may allow the materials and tools to be used for non-commercial use.
Another proviso is that the tools will need to be shown to be “predominantly” used for the manufacture of counterfeits. Infringers will no doubt try to use this limitation to argue otherwise.
Therefore, it remains to be seen how the provision will be effectively implemented to adequately protect the rights of brand owners.
The above provisions make headway in strengthening protection for IP owners in China, and in some cases, arguably go well beyond similar standards of protection found in other countries. This is positive, as it shows that the scale of the measures adopted by China here proportionate to the overwhelming scale of the problem. The revisions were introduced very, very suddenly, however, and with no real public consultation on them beforehand, apparently meant to be seen as a show of China’s commitment to IP protection in support of efforts to conclude an agreement with the US over trade issues. Given that, corresponding revisions to the Implementing Rules are eagerly awaited for the provision of further clarification on the ambiguities outlined in this article.
Dan Plane and Joshua Miller
[i] 《中华人民共和国商标法(2019修正) 》 [Trademark Law of the People’s Republic of China (2019 Amendments)] (People’s Republic of China) National People’s Congress, April 23, 2019.
[ii] 《关于规范商标申请注册行为的若干规定（征求意见稿）》[Several Provisions for Regulating the Registration of Trademarks (Consultation Draft)] China National Intellectual Property Office, February 12, 2019.
[iii] 《北京市高级人民法院 商标授权确权行政案件审理指南》[Beijing Higher People’s Court Guidelines for the Trial of Trademark Right Granting and Verification Cases] Beijing Higher People’s Court Intellectual Property Division, April 24, 2019.