Trademark Enforcement

Your Trademark has been Stolen in China – What Next?

SIPSKnowledge, Trademark Enforcement

Rampant trademark piracy in China often puts companies manufacturing, exporting from and/or selling their products there at serious risk of actually infringing their own trademarks by encroaching on the pirates’ “exclusive use rights”.

This is not an uncommon occurrence in China. Beyond pre-emptively registering the trademark, pirates regularly and ruthlessly go so far as to organise administrative raids and customs actions or file civil suits against their victims and their People’s Republic of China (“PRC”) business partners. Failure to give in to the pirate’s demands could lead to the seizure of branded products, administrative fines, or, in the most extreme cases, arrest and potentially a criminal conviction for counterfeiting the pirate’s registered trademark.

Positively, recent developments in PRC law and judicial precedents are making it easier for brand owners to defend themselves in these infringement cases and to even turn the tables on trademark pirates.

This update discusses strategies that brand owners might adopt in light of such recent developments. It also suggests best practices that brand owners can employ to prepare for and insulate themselves from potential trademark infringement actions.

Identifying Pirated Marks

Naturally, to anticipate and avoid the risks of potential infringement claims, brand owners should always strive to secure a locally registered trademark before diving into the PRC market, or in any event, at least have an active application on file.

Beyond that, however, diligent searches of the PRC trademark registry prior to wading into the market are also vital. Even after a brand owner manages to secure registrations for its own key trademarks, it is still possible for pirates to target the brand owner by identifying and exploiting any potential gaps that may exist in their portfolio. Budgets are not limitless, and even major brands cannot afford to cover every sub-brand or every given class, to say nothing of SMEs trying to establish their businesses.

Hence, regular monitoring of not only marketplaces (both physical and online) for fakes, but also intellectual property registries for pirated marks, are strongly recommended. This could be done by the brand owner itself (particularly if they have a team member with Chinese-language skills) or IP consultants. Searches on the PRC Customs database are also strongly suggested where a mark is found to have been pirated – where a recordal of that stolen right with Customs is an early warning that the pirate may be actively seeking to seize goods being exported from China.

Attacking Pirated Marks

Once a pirated trademark has been identified, the PRC Trademark Law system provides a range of tools that the true owners can use in an effort to remove any pirated marks. The most common tools include the following:

  • submitting an interference letter (before preliminarily approval);
  • filing an opposition (within three months of preliminarily approval);
  • lodging an invalidation (within five years of registration); or
  • initiating a non-use cancellation (after three years of registration).

Actions on the Ground of Bad Faith

For the first three actions, which all rely on evidence of “bad faith”, it is almost never enough to simply argue that the pirate has copied the brand owner’s mark. Such copying is ubiquitous in China, making proof of an additional level of malice a necessity. In that regard, thorough online research and onsite pretext investigations into the pirate to obtain additional evidence, including proof of manufacturing of fakes, a lack of intent to use, oral admission of bad faith, other IP infringements, history of piracy of other brands, etc., are normally required. Such evidence can also be useful in subsequent enforcement actions against the pirate.

To help shape pretext investigations and arguments surrounding bad faith, China’s National Intellectual Property Administration (“CNIPA”) has published Trademark Examination and Review Guidelines (the “Guidelines”) that provide clues on how bad faith applications are likely to be assessed. Proving the existence of one or more of these factors will help tip the scales in the brand owner’s favour:

  • a large volume of applications in a short period of time that clearly exceeds normal business needs;
  • multiple applications for marks which are used by others and have a certain influence;
  • repeated filings;
  • applications where the applicant knows or should have known of the existence of another’s prior rights (e.g., via prior dealings with the brand owner);
  • applications without genuine intent to use or actual need to obtain exclusive rights (via admissions of warehousing from investigations, for example);
  • multiple assignment applications to different assignees;
  • helping others or trademark agencies to file any of the above abnormal applications; and
  • any other acts which violate the principles of honesty and good faith or disrupt the market order.

Non-Use Actions

Filing non-use cancellations is a simple and cost-effective approach to pirated marks, and can be quite effective against warehousers holding dozens of pirated registrations. Unlike the other three options above, the sole condition here is that the mark under attack has already been registered three years. As well, and positively, the burden to produce use evidence or prove an excusable cause for non-use falls on the registrant. In practice, the Beijing Higher People’s Court (the second-instance court for trademark prosecution cases) requires that there must be actual use of the mark and true intent to use. Scarce, nominal, or occasional use of a mark is not sufficient to maintain the registration.

Hostage Negotiations

Victimised brand owners may also consider confronting the pirate to try to negotiate a voluntary withdrawal (unlikely …) or assignment (for a price …) of the pirated mark. Whilst distasteful, a purchased assignment is nearly always the fastest solution and if low enough, the price could end up significantly cheaper than the longer-term legal costs from a fight.

Last but not least, given the likelihood that the pirate may simply refile in the name of another applicant with cleaner records, brand owners are strongly advised to file their own trademark applications in China as soon as possible in conjunction with any attacks on the pirated mark. Even in cases where settlement is reached, there is always the risk that the pirate may not assign or withdraw the registration quickly, or even that the PRC Trademark Office (“TMO”) might reject an application for assignment of the mark due to the pirate’s bad faith (making the mark invalid ab initio).

Defending Pirates’ Attacks on Supply and/or Distribution Networks

1. Analysis of Risk Factors

a) Threats of Infringement

Any manufacture or sale of products bearing a pirated brand in China puts the brand owner and its commercial partners at risk. For example, the pirate could readily file an administrative complaint against the brand owner’s manufacturers or distributors with the local Market Supervision Bureaux (“MSB”) or criminal complaints with the local Public Security Bureaux (“police”). Raids resulting in the detention and destruction of “infringing” goods and tools, imposition of fines up to five times the amount of illegal sale, and in the worst-case scenario, imprisonment – where the value of seized/sold goods exceed relevant criminal thresholds – could all ensue.

Civil proceedings could also be filed by the pirate, with courts ordering permanent injunctions against further manufacture and/or sale, as well as the payment of compensation. The impact on brand owners varies depending on the nature of their products’ use.

b) Distribution of Products in China

Anyone who has fought a trademark recovery action in China will know that such actions are almost never fast or cheap. Indeed, it is not at all uncommon for trademark fights in China against committed pirates to stretch on for years. For example, the fight for the MANOLO BLAHNIK trademark dragged on for nearly twenty years.[1]

During the fight, the disruption to the brand owner’s supply chain and distribution network could be significant. If the pirate decides to organise a raid against the brand owner’s partners, and even if the MSB is empathetic, significant work will still be required to defend the case, and could require disclosure to authorities of information to prove the true history of use of the brand: information that the brand owner may wish to keep confidential, such as the identity and location of factories, warehouses, and distributors, historical sales records, etc.

Meanwhile, it is possible that the MSB may halt sales of branded products pending a resolution of the dispute regarding a pirated mark. For example, in 2012, Apple’s iPads were pulled off the shelves in cities throughout China due to an administrative complaint filed by the registrant of the “IPAD” trademark. In the end, iPads were effectively unable to be sold in China until Apple settled with the registrant for a stunning US$60 million. This case is clearly an outlier, but when these situations occur, brand owners always need to balance a settlement payment against possible loss of revenue, as well as goodwill, due to delays in delivery of the ordered goods to customers, loss of sales, and of course, the potential loss of reputation and goodwill.

c) Manufacture of Products for Export

Even if the goods are only being manufactured in China for export, recordal of a pirated mark with PRC Customs could always result in a seizure of branded goods when they hit the docks. If PRC Customs identifies and seizes a shipment of branded goods due to a pirated mark, the outcome to the brand owner could be severe – including disruption to the brand owner’s fulfilment of  orders to their customers, significant costs to deal with the seizure of the shipment, forfeiture of the goods and fines on involved parties of up to 30 per cent of value of the shipment, and potential loss of business opportunities. As well, and once that initial shipment has been identified and seized, any future shipments from them are also at risk. This could shut down the brand owner’s entire PRC supply chain.

2. Registry Actions Against Pirated Marks Essential

If the victimised brand owner has any commercial ties to China whatsoever, then preparing for and filing actions against the pirated mark is vital. Having appropriate registry actions in place against the pirated mark (and perhaps the pirate itself) will give enforcement authorities the discretion to suspend the investigation of any forthcoming infringement claims against the brand owner/its partners, ideally not resuming until any actions to determine the validity of the pirated registration are concluded. Such discretion is explicitly provided for in the law. As well, and in practice, enforcement authorities are generally inclined to suspend review of these cases and defer to the determination of the registry actions, particularly where the facts surrounding the pirate’s maliciousness is clear.

3. Civil Suit for Declaration of Non-Infringement / Applicability of Article 59 Defence

Chinese law also allows the prior user to pre-emptively file a lawsuit seeking a declaration of trademark non-infringement where they can show the following:

  • the pirate has threatened the prior user with an action for infringement (which the prior user affirmatively denied);
  • the pirate delayed bringing the threatened action without good reason; and
  • the prior user or its licensee has suffered harm as a result of the pirate’s threat.

Once filed, a request for a declaration for non-infringement should preclude other courts (and administrative agencies) from reviewing the same claim raised by the pirate or imposing preliminary injunctions on the brand owner/its partners.

Brand owners could also seek judgment under Article 59(3) of the PRC Trademark Law in this suit (as well as in defence of a pirate’s own infringement suit). Article 59(3) permits a brand owner to continue to use an unregistered mark within its original scope of use if it can prove that:

  • it commenced use of the concerned mark and/or sales of its branded goods in China prior to the filing date of the registered mark, and before the registered owner started to use the mark;
  • the unregistered mark acquired a certain level of influence before the registered mark was filed; and
  • the prior use was made in good faith.

If the victimised brand owner meets these conditions, then its past use/sell was not infringement.

However, even if the victimised brand owner succeeds in its Article 59(3) claim, some restrictions still apply.

  • The continued use cannot exceed the original scope of use. In practice, this may include imposition of a prohibition/restriction on enlarging the scale of sales, licensing the mark, expanding product lines or geographic coverage, etc.
  • The pirate may demand adding a distinctive note on the unregistered mark to distinguish the two marks. Subject to the registered owner’s demand, the prior user may not alter the design, word, colour, structure of mark in any way in the future.

4. OEM Exception

In the event of Customs detention or seizure, victimised brand owners may be able to rely on the “original equipment manufacturer (“OEM”) Exception” to defend themselves and their shipments. The OEM Exception is not codified in the law, but was instead developed by Chinese courts addressing seizures involving pirated trademark registrations.

Further, the OEM Exception is a still-developing judicial construct, and it is constantly subject to changes and differing interpretations by different courts. Previously, courts have generally recognised that placement of a trademark on goods intended solely for export purposes does not constitute “use” of the mark in China, where they will not enter the PRC stream of commerce and therefore cause confusion amongst Chinese consumers. However, after the Supreme People’s Court issued the HONDAKIT decision, the situation appears to have shifted.[2]

For instance, recent judgments have refused application of the OEM Exception where the exported goods have been found to flow back into China, or where Chinese consumers travelling could come into contact with the goods during their travels. This doesn’t mean that the brand owner can no longer rely on the OEM Exception principle as a defence, but the shift in judicial practice indicates that courts will apply stricter criteria when considering whether to apply the OEM Exception in a particular case.

Practically speaking, and where an OEM Exception request might need to be made, early preparation of required paperwork is vital. This includes sending a letter to the Chinese manufacturer/exporter explaining the situation vis-à-vis the pirated mark, and the registered status of the brand owner’s mark in the destination country. The letter also needs to clarify that the manufacturer is expressly prohibited from selling the branded products in China. The letter should be bilingual as well as notarised and legalised, putting it in a format that will be immediately understandable to Chinese Customs, and immediately admissible in Chinese courts.

Attacking the Pirate – Lawsuits for Unfair Competition

Given the relatively low cost to pirates of (a) filing and refiling applications for a pirated trademark; and (b) defending attacks against those marks, pirates regularly rely on endless registry actions to wear down the victimised brand owner’s appetite to continue fighting. Forced to file costly additional applications, appeals of rejections, oppositions, invalidations, non-use actions, etc. (and with the Trademark Review and Adjudication Department (“TRAD”) and courts obstinately refusing to suspend rejection appeals pending outcomes in related cases against the pirated marks), brand owners regularly grow entirely disillusioned with the process and throw in the towel. This outcome is all the more likely where there is no provision in PRC Trademark Law that provides for recovery of trademark prosecution-related costs.

That said, the PRC Anti-Unfair Competition Law (“AUCL”) provides a potential basis for civil claims against pirates by victimised brand owners, including both injunctive relief – preventing further filings by the pirate – and damages to compensate (albeit likely only partially) for the legal fees incurred in these actions. Nevertheless, a small number of decisions from courts in Beijing, Shanghai, Hangzhou, Xiamen and Guangzhou released in the last five to ten years have confirmed a right to compensation for legal fees incurred in combatting trademark piracy. Until recently, however, it generally required actual use of the mark by the pirate, particularly use of the mark as a weapon to harm the brand owner or its licensees. Most (if not all) courts have refused to grant compensation in the absence of such aggressive action by the pirate. This is because mere filing of trademark registry actions has always been viewed to constitute only “administrative” acts, not “civil” acts that can be redressed under the AUCL and other PRC tort laws.

Two recent civil cases present a significant shift of the PRC courts’ position on whether trademark squatting behaviour alone, with or without substantial use, can be characterised as an act of unfair competition.

Beijing Gubei Water Town Travel Case

A recent civil case decided by the Beijing IP Court illustrates how the Court not only awarded compensation based on enforcement actions sought by the bad faith pirate against the victimised brand owner, but also made clear that the victim can claim compensation of legal costs incurred in registry actions necessitated by the bad faith behaviour, including the cost of pursuing an invalidation, appeal of the refusal of the victim’s own trademark applications, and even subsequent court appeals in those actions.

The plaintiff in this case was Beijing Gubei Water Town Travel Co., Ltd. (“GWT”), a village-sized tourist resort near the Great Wall of China established in 2010. Since that time, GWT had been making continuous use of “Gubei Water Town” as its trade name and trademark, generating annual revenues in excess of AU$2.2 million. In spite of its success, however, it failed to register its trademark for two key products: clothing and alcoholic beverages.

The defendant Beijing Xiaohao Technology Co., Ltd (“BXT”) was established in 2014, with a scope of business focused on “trademark assignment and agency services”.  A mere two weeks after its incorporation, it applied for “Gubei Water Town” as a trademark in the two classes neglected by GWT, Classes 25 and 33. After the marks were registered in 2016, BXT delivered a cease and desist notice to GWT and filed an administrative infringement complaint with the local MSB.

In response, GWT filed invalidations against BXT’s trademark registrations with the TRAD, asking the MSB to suspend enforcement pending the TRAD decisions. The TRAD eventually rejected GWT’s invalidations, sustaining the trademark registrations. GWT appealed the decisions to the Beijing IP Court, which concluded that BXT filed for the marks in bad faith, thus invalidating them. BXT further appealed the case to the Beijing Higher People’s Court, which sustained the Beijing IP Court’s decisions.

The MSB conducted its own investigation, confirmed that GWT was indeed using the trademark on clothing and alcoholic beverages, but fortunately agreed to suspend review of the complaint pending the final outcome of the invalidations mentioned above. After the marks were finally invalidated, the MSB formally decided there was no infringement and closed its file on the complaint.

In the meantime, GWT had filed its own applications for the same mark. In Class 25, the application was refused due to BXT’s pirate registrations. GWT appealed, first to the Beijing IP Court, then the Beijing Higher People’s Court, and finally, to the Supreme People’s Court with a request for a retrial.

At the end of all this insanity, GWT sued BXT for unfair competition, seeking damages consisting of: (a) the legal expenses incurred in dealing with the MSB complaint, the invalidations and court appeals; and (b) damages to GWT’s goodwill and normal business operation. The Court of First Instance decided in favour of GWT and BXT (naturally …) appealed.

Eventually, BXT was ordered to compensate GWT for economic losses in the amount of RMB280,000 (~AU$61,000) plus reasonable expenses of RMB35,000 (~AU$7,600), and to issue a public apology in the China IP News.

Importantly, and when calculating damages, both Courts explicitly supported not only GWT’s claims for court appeals, but also for the underlying trademark registry actions as well (including actions against the pirate’s marks and appeals for the rejections of GWT’s trademark applications). Both Courts’ reasoning relied on the pirate’s bad faith in registering the underlying pirate marks to justify the damages award.

The In-Sink-Erator Case

In another case, the Fujian Higher People’s Court found the pirate to have violated Article 2 of the AUCL in the absence of evidence of substantial use of the pirated marks. This means the act of filing trademark applications in bad faith itself was sufficient to constitute an act of unfair competition.

In that case, the distinctive trademark in dispute was “IN-SINK-ERATOR”, a famous global brand used in conjunction with its instant hot water dispensers and food waste disposal systems. The plaintiff, Emerson Electric Co. (“Emerson”), had registered the mark in China in Classes 7 and 11 as early as 2009, subsequently acquiring a certain degree of fame in China since 2010. In spite of this, the defendant had filed 48 trademarks which were identical or similar to the plaintiff’s trademarks in 14 classes. As a result, Emerson had to file numerous trademark oppositions, opposition appeals, and even court appeals to prevent the pirated applications from becoming registered.

Unlike past AUCL cases, where defendants have made extensive use of the pirated registrations and initiated enforcement actions against genuine brand owners, in this case the defendant had made only random use of the pirated registration. Still, the Court awarded damages of RMB640,000 (~ AU$140,000) to compensate the plaintiff for the reasonable expenses incurred in relation to battling the defendant’s trademark piracy.

Notably, the Court also held the trademark agent to be contributorily liable for the damages, and issued an order enjoining all four defendants from filing any further trademarks identical or similar to the plaintiff’s trademarks.

Upcoming developments

While the GWT and In-Sink-Erator cases appear hopeful, it must be remembered that China is a civil code country where rules from individual courts – even superior courts – do not represent binding precedent in future cases. As well, AUCL cases are notoriously fact specific, and the great weight of jurisprudence on these claims leans in favour of rejecting claims for attorney’s fees as “damages” therein.

That said, in August 2022, the CNIPA recently noted that it is actively exploring statutorily mandated liability for civil damages arising from bad faith trademark applications, along with an increase in fines for bad faith conduct and provision for counterclaims against malicious litigation involving attempted enforcement of pirated trademarks. Hopefully in the meantime, the CNIPA’s public support for the premise of civil liability for registry piracy helps persuade courts hearing such cases to follow CNIPA’s lead, extending victim’s rights to force pirates to bear the natural consequences of their bad faith conduct.

Dan Plane, Grace Chen and Yixin Chai


Endnotes

[1] See Reuters, ‘Manolo Blahnik wins decades-long trademark battle in China’, The Guardian (online, 20 July 2022).

[2] See Dan Plane and Grace Chen, ‘Reducing Infringement Risks in China following the HONDAKIT OEM Exception Decision’, SIPS (onlinee, 1 August 2020).