Actions that OEM brand owners must win to protect their market position
IP protection in China has improved dramatically over the years - but that doesn’t mean that all issues have been resolved. It’s a gradual process, and complications and risks still exist, particularly for brand owners seeking to protect their brands in China. Sometimes a brand owner will find itself involved in a ‘must win’ dispute: if it loses, it may not only lose its trade mark rights in China – it may be pushed out of the China market altogether.
This article looks at how to manage these ‘must win’ disputes, or ‘bet the house’ battles. It focuses first on some of the particular complications that exist in China and the risks they pose for brand owners, then on China’s rapidly changing IP landscape, which brand owners must take into account. Then, using a recently decided case by way of illustration, it will show the level of complexity involved in these cases, and the factors that need to be taken into account. In conclusion, it sets out a number of key points for brand owners who may currently be engaged in, or considering, a ‘bet the house’ trade mark battle in China.
Complications in China – Risks for Brand Owners
IP rights are a powerful tool to support business opportunity and development in China. It is, however, becoming increasingly difficult to secure those rights. The rejection rate for new applications is high, largely because of the extremely crowded register. Whereas in the past there were various ways that trade mark owners could overcome these difficulties, such as obtaining letters of consent from the party on the register, these may not work well nowadays. Even if a foreign brand owner does manage to secure registration, it is becoming more difficult to maintain the registration in the face of non-use challenges. The authorities now require a much higher standard of evidence. Also, the Trade Mark Office has recently started rejecting defensive filings on the basis of a lack of intention to use. Meanwhile, large numbers of bad-faith applications continue to be filed, interrupting the business operation of the genuine brand owner, and making it difficult for it to secure registration of its own marks. Under such situation, IP protection in China is becoming more sophisticated and often involves considerable expenditure.
If a brand owner merely operating under OEM circumstances in China (i.e. products manufactured within China will be exported to markets outside China), while its mark has been squatted by someone operating in the same industry, it will be necessary to develop an appropriate strategy and take whatever action is considered appropriate: this is a situation in which a brand owner is likely to find itself in a ‘bet the house’ fight - a fight it needs to win if it wants to remain in the China market. In all such situations, there are likely to be three core issues involved: (1) whether the OEM defence is available; (2) how to deal with bad faith registrations; and (3) what is the appropriate strategy for the fight.
Rapidly Evolving and Developing Local Protection Trends
The evolving and developing local trends are considered below in the context of the OEM defence and bad faith registrations.
OEM disputes have been a hot topic in China for years, generating much debate and controversy. Initially, the decisions of the Courts were relatively straightforward, but there has been a definite trend in recent years towards a more sophisticated analysis. This can be seen from the landmark cases referred to below. The courts now consider cases on a case-by-case basis, making a careful analysis of the issues. A lot of work, therefore, needs to be done to ensure that all arguments are supported by adequate evidence.
In 2015, in the famous Pretul case ((2014)Min Ti Zi No.38), the Supreme People’s Court held that as the goods were being exported from China and not put onto the market in China, the OEM was not ‘using’ the trade mark, and there was, therefore, no infringement. That position was expanded by the Court in the Dong Feng case in 2017 ((2016) SPC Min Zai No.339), when it was decided that the OEM was ‘using’ the trade mark, but it was not use to distinguish the source of the goods in China, as the goods were being shipped out of China, and so there was no infringement – provided the OEM had exercised an appropriate duty of care. In 2019, in the HondaKit case ((2019) SPC Min Zai No.138), the situation was further updated. In this case the Court considered all the facts of the case and found that because ‘Honda’ was very well known, and the Defendant had enlarged the word ‘Honda’ and reduced the word ‘kit’, it had obviously acted in bad faith. Following the Honda case, the courts have generally continued to take a more open and sophisticated approach to the OEM defence, considering and analysing all the facts of the case, although the attitude and approach of individual courts does vary. The Trade Marks Office has, however, been consistent in considering that affixing a mark to a product constitutes trade mark use sufficient to defeat a non-use cancellation action, but not to establish a reputation in the mark, as consumers will not be aware of the mark.
Although there are differences in approach and emphasis among the courts, usually all will take account of the following five factors: whether the defendant has registered or been licensed with the mark outside China; whether the OEM products could return to China; whether, and to what extent, the Plaintiff’s trade mark has a reputation; whether the Defendant has fulfilled its duty of care, or engaged in any bad faith activity; and whether there is a possibility/likelihood of confusion.
An examination of over forty published OEM cases decided since the Hondakit case, reveals that most, not surprisingly, took place in the coastal or border regions, where there are imports and exports and a Customs presence. In 34% of these cases the OEM defence was upheld.
Bad Faith Registrations
Bad faith registrations have been a major problem in China. The Chinese government has been very aware of the problem and has been working to improve the situation and to make improvements generally in the business environment. There have, in fact, been significant improvements in the areas of both trade mark prosecution and enforcement in recent years. On the trade mark prosecution side, the average success rate of disputed cases at the CNIPA from 2019 – 2021 increased as follows: oppositions 30% to 48.27%; invalidation 60% - 73.58%; non-use cancellation appeals 82.27%. In addition, over two million trade marks were taken down from trading platforms; 482,000 bad faith trade mark applications rejected, opposed or invalidated, and over 400 bad faith trade mark assignments rejected. On the enforcement side, the courts have been increasingly deciding against bad faith parties; punitive and statutory damages have increased; bad faith filing is becoming a key factor. Brand owners who spend on prosecution may be able to be rewarded when bad faith activities of the other sides are found.
It is important that brand owners keep up with local trends, developments, and court attitudes and that they update their IP strategy accordingly. It is also important that they are aware if the changing practices of bad faith operators; in recent years, for example, bad faith parties have been becoming more aggressive, no longer limiting their activity to filing, but also taking aggressive action to interrupt the business of the genuine brand owner.
The trends that have been developing in the courts in recent years fall into four stages: Stage 1: as early as 2014, in the case of Ge Li Si, the Supreme People’s Court held that bad faith squatters should not be protected; as a result the genuine brand owner would not be infringing. Stage 2. Then in 2017 and 2018, in two cases: Coppertone and Paula’s Choice, the Court went further and awarded compensation for damage caused by the malicious actions of the bad faith squatter against the business operations of the genuine brand owner. After the Coppertone case, brand owners began, for the first time, to seek compensation for economic loss in these situations. Stage 3. In 2020, in the Brita case, the bad faith squatter filed malicious applications as well as oppositions to Brita’s applications. It also used similar marks on its own products to complete with Brita. This was the first case in China where the Court clearly held that, under general principles of Anti-Unfair Competition Law, the misuse of opposition proceedings should be regarded as a type of unfair competition. Stage 4. In the Emerson case, the bad faith squatter had, over the years, repeatedly applied to register various Emerson trade marks, forcing Emerson into continuous battles involving the commitment of huge resources to defend its rights and interrupting its business operation. The difference between this and the Coppertone case, is that here the Court found that the malicious filing activity alone, without any use of the trade mark, constituted unfair competition.
The Emerson case is controversial and has generated a lot of discussion. It should, however, encourage brand owners to consider all possibilities and, where appropriate, seek to push the boundaries of the law. In a case with similar facts it would be worth considering action, particularly before a Court that is willing to be creative. In this context, an important factor will always be endeavouring to find the appropriate Court if forum shopping is feasible, a Court willing to explore new ways of tackling the bad faith situation.
Fighting and winning the ‘Bet the House’ battle
Following is a note of a recent case we have conducted. The background and steps taken provide a useful illustration of both the issues and the complexities that arise in these cases, and of the specific actions that can be considered.
The owner of the brand, JURATEK, is a company established in the UK in 1982. It created the JURATEK brand, and registeredjuratek.com domain name in 1999. In 2000 it changed its company name to JURATEK Limited and began using the mark JURATEK. In 2006, it registered the JURATEK mark in Europe. From 2000 to 2013, it used the JURATEK trade mark and entrusted OEM factories in China to manufacture the product, with evidence from at least 2008. In 2013, it amended the JURATEK mark by adding a border or frame (the updated mark ).
In 2011, the adverse company was established in China and in 2014 it set up a company in the UK. In 2018, the Chinese company registered the updated mark in China. So the updated trade mark was registered not by the genuine trade mark owner, but by a trade mark squatter. The squatter proceeded to take a very aggressive approach. It applied for a Customs detention order to prevent the OEM goods being exported; it commenced trade mark infringement proceedings against the OEM factories; it attempted to extend its trade mark registration to other classes; and, finally, it began promoting itself as the international JURATEK brand.
In response, the brand owner filed a defence to the trade mark infringement action; commenced an unfair competition action based on malicious trade mark registration and legal action; commenced a trade mark invalidation action; and, being practical, opened settlement negotiations in an attempt to resolve all issues as soon as possible.
The brand owner had to establish that the OEM goods were not likely to return to China; that it had been using the mark prior to the adverse party; and that the adverse party had acted in bad faith. Initially, it was not successful, either before the Court or the Trade Mark Office, but on appeal, the Court took a broader and more sophisticated approach. In relation to the OEM defence, it looked at the nature of the product and concluded, for several reasons, that it was not a product that would be purchased on the internet, and there was no evidence that it was otherwise likely to return to China. It had some concerns, however, because the mark being used in China was not the same as the mark registered in Europe, and the prior use was arguable to establish sufficient reputation in China market since all the products were exported out of China. There was, however, a clear finding of bad faith. JURATEK was a created word and not the sort of thing that the adverse party would have arrived at by coincidence; further, the adverse party was operating in the same field as JURATEK brand owner and in the same geographical area as the OEM factories. It was also imitating JURATEK’s products packaging, and attempting to register trade marks of other overseas brand owners with similar approach. Finally, we were successfully established bad faith claim against the adverse party, and obtained favourable non-infringement judgment for the genuine JURATEK brand owner. Further, with the help of the Court we were able to convince the adverse party to enter into early settlement negotiations. As a result, it agreed to transfer the trade mark registration and to cease all infringing activity.
Key takeaway points
1. Do not be afraid of escalation – be prepared to invest; make use of PR and control PR risk where appropriate; take account of any relevant geopolitical considerations.
2. Be prepared for possible retaliation from bad faith party – consider evidence preservation; prior use; reputation; global perspective.
3. Work with local firm to come up with overall strategy – take action to remove bad faith registration (opposition, invalidation and non-use cancellation); build up your own portfolio in parallel.
4. Consider more aggressive action to deter bad faith party – e.g. civil litigation.
For more information on the Juratek case, please see our press release piece ''Landmark win for OEMs in China' and reflection piece from our legal experts 'Judicial Decisions of OEM-related Trade Mark Infringement Cases in China'.