Administrative enforcement actions are no longer the most feasible remedies that trademark owners can resort to in China
- While registered trademarks are protected in China, failure to register may leave brand owners vulnerable to squatters
- It is imperative to gather as much evidence of bad faith as possible in order to claim punitive damages and/or invalidate infringing trademarks
- When deciding where to file, brand owners should take account of factors including the length of proceedings and the time taken to reach a judgment
With trademark disputes becoming increasingly complicated, administrative enforcement actions – formerly the most effective deterrents – are no longer the most feasible remedies that trademark owners can resort to in China.
Civil litigation has become the primary tool for handling trademark disputes, especially now that statutory damages at the high end increasing up to Rmb5 million and the punitive damages practice applied more often, which can serve as a deterrent to defendants while recovering legal costs and expenses for plaintiffs.
Legal grounds: everything starts from registration
One: register your rights in China or prove earlier use
China adheres to the principle of protecting registered trademarks, except in the case of recognition for well-known marks. Regardless of whether a brand owner operates in China, it is vital that it registers its marks there in the core classes. Otherwise, trademark squatters may get there first and then charge extortionate fees to assign the rights back – they may even threaten to sue the brand owners or indeed do so as leverage. Planning well ahead of time and pre-emptively managing your trademark portfolio is therefore crucial. It also sets out good legal grounds on which any later civil action can be based.
However, China’s trademark law also emphasises protecting good faith rather than bad faith. If your core trademark is registered by squatters in the core classes, you will need to seek prosecution remedies, including trademark invalidation or opposition. You will also need to acquire sufficient evidence to prove your prior use and that your marks have gained influence in China as your defence against the trademark owner’s infringement claims.
In the top 10 IP cases recently published by the Supreme People’s Court, one case (2020 Supreme Court Retrial 23) demonstrates how prior use can protect good-faith brand owners from trademark infringement claims.
The defendant, the agency of a French pharmaceutical company, managed to find a copy of a 1990s newspaper advertisement that carried the trademarks in dispute. It used this to successfully defend itself from an infringement claim made by the plaintiff, who registered the trademark and packaging in bad faith. The defendant lost the first and second instances but ultimately won the retrial, showing how challenging this process can be.
Bear in mind that a trademark must be registered or else good evidence of its prior use be retained.
Two: build up your trademark use library to prove your brand’s popularity
If your trademark is not registered and you are sued by the trademark owner, proving its prior use provides a solid foundation on which you can defend against an infringement claim. Such evidence can also help invalidate the infringer’s trademark.
In addition, proof that your registered marks are popular in China will support a claim for higher damages. If your trademark is well known, you may even enjoy cross-class protection.
The more famous your mark, the clearer a squatter’s bad faith. According to the Trademark Law and the relevant judicial interpretations, if you can prove trademark infringement took place with bad faith and is serious, you are entitled to claim punitive damages, which multiplies the rightful trademark owner’s actual losses or, alternatively, the infringer’s illegal profits.
In the six typical cases published by the Supreme People’s Court in March 2021, five involved trademark disputes, with all the disputed marks being famous. To prove your trademark enjoys strong popularity, your trademark use library should be built up from when the mark was first launched into China through the key marketing activities along the way, including sales records, advertisement expense and so on. This record may be updated from time to time. Even if a litigation attorney can help locate many of your advertising activities from a public library or other channels, some information will not be accessible by people outside the company.
Three: always ensure that third-party contracts contain sufficient IP clauses
Compared with trade secret or patent disputes, trademark disputes involving original equipment manufacturers (OEMs) or distributors having registered a client’s mark themselves are fairly straightforward. Provided that the rightful trademark owner can prove the connection between the mark and the relevant OEM or distributor, it becomes a simple matter to demonstrate bad faith.
Having good terms specified in your contract also means that you can both claim breach of contract and also consider claiming for punitive damages when the infringer’s bad faith is proven.
Infringement evidence: bad faith and serious circumstances
Four: try to collect as much evidence of the other party’s bad faith as you can
A precondition to claiming punitive damages or invalidating an infringer’s trademarks is proof of bad faith. The question thus becomes what evidence is sufficient to secure such a finding?
Searching an infringer’s trademark prosecution records will reveal whether they have been squatting on your marks or those of another brand owner.
It is also worth considering how an infringer uses its marks and promotes its products. In order to mitigate legal risk, an infringer may occasionally register a trademark that does not appear too similar as a pre-emptive defence. However, its usage of the mark may be intentionally closer to your registered trademarks. Alternatively, an infringer may register a trademark in a dissimilar class to avoid being directly invalidated, even if in practice it then applies it in the exact same classes.
You should also ascertain whether an infringer has previously been involved in legal disputes with other brand owners, or if it has had penalised imposed on it for other acts of IP infringement.
Five: think out of the IP box as to whether the other party has any other transgressions
According to the Judicial Interpretations regarding Punitive Damages issued by the Supreme People’s Court in March 2021, if a defendant’s infringing activities endanger national security, public interest or personal health, these will be considered “serious circumstances” and the punitive damages standard can be applied. This is not exclusive to specific industries such as food, beverages or pharmaceuticals, but can apply to other sectors provided that a connection can be established.
Therefore, when investigating and collecting evidence against a defendant, it is important to monitor its other transgressions, including whether:
- it has the necessary licence to produce the items;
- it had previously been fined for quality issues in its products; or
- whether the infringer’s online stores always receive negative comments from verified accounts.
Such evidence can prove the seriousness of the infringing activity, and hence add weight if you are trying to claim more damages.
Six: send out a cease and desist letter to the distributor upon securing evidence
Conventional wisdom holds that a brand owner should not send out a cease and desist letter to an infringer if it intends to escalate to more serious claims, because doing so will put an infringer on notice and prompt it to conceal its infringing activity, making it more difficult for the brand owner to effectively address the infringement later on – particularly when it comes to administrative or criminal enforcement action.
However, when it comes to civil litigation, especially with regard to action against a distributor, this level of caution is unnecessary.
In such instances, a distributor’s defence will be that it is not selling counterfeits but similar-looking items. According to the Trademark Law, if a distributor can provide evidence proving it is unaware of that items are infringing and that these were obtained from a supplier, they may evade liability when it comes to damages. Courts in some jurisdictions, tend to tolerate such behaviour and hence distributors selling tens of thousands of infringing items may not actually be required to pay the damages for which they ought to be liable.
It is recommended that brand owners send out a cease and desist letter to a suspicious distributor beforehand, to overcome its defence. Such a letter will also further prove the distributor’s clear bad faith and pave the way for punitive damages.
However, the plaintiff should bear in mind that before sending out any letter, it ought to consider securing evidence by website notarisation and notarised purchase. Upon sending out the letter, it should also secure evidence in a timely manner.
Seven: keep detailed records of aggressive infringers and apply for preservation of assets
Although civil litigation has become the primary tool for handling IP disputes, not every single case can be resolved this way because it is neither time nor cost effective.
A brand owner may consider setting up a case management system to track each infringer’s activities. This will reveal the most aggressive infringers or their associated parties, because they may repeatedly infringe or their infringing items may appear in different channels or regions.
Such infringers can be categorised as litigation targets, because clearly a cease and desist letter or administrative enforcement action are not effective deterrents. Repeat infringers continue to infringe simply because they can continue to make a profit from by doing so. Succeeding in court cases against such bad actors ensures that they pay monetary damages. In addition, punitive damages may be applicable due to repeated instances of infringement or scale of infringement over a period of time.
Plaintiffs are advised to apply for assets preservation to ensure that damages can be collected – although this may not be necessary if the infringer is a legitimate large-scale company.
Eight: collect and sort evidence that proves any actual losses or illegal gains, or the existence of a trademark licence agreement
Statistics show that in more than 90% of IP civil litigation cases, plaintiffs are awarded statutory damages. Other forms of awards – including actual losses suffered or the infringers’ illegal profits – are granted much less frequently.
This is because it is difficult to provide precise figures of the actual loss or illegal profits, especially if these date from before e-commerce became so popular. The judge will apply statutory damages in accordance with the scale of infringement, its history and other elements.
With online platforms becoming the most important distribution channels for both legitimate brand owners and infringers, and with figures for online sales becoming more accurate, plaintiffs are now finding it easier to marshal evidence to calculate loss or illegal profits.
Further, in the Typical Judgements regarding Punitive Damages published by the Supreme People’s Court in 2021, some courts have clarified that, if part of the compensation base is accurate but overall compensation is difficult to ascertain, courts should not simply refuse to apply the punitive damages standard and favour statutory damages. Thus, if some of the illegal profits or actual loss can be determined (eg, the infringers’ online sales profits), this can serve as the base for punitive damages.
In addition to the sales volume from online platforms, brand owners may also consider applying to retrieve other official records at court. This includes the seized value of the infringing items from the criminal or administrative enforcement actions and the exported value of the infringing items from the customs. These figures can only be obtained when the plaintiff has prima facie evidence proving the seizure or export of the infringing items.
Aim to collect evidence that proves actual loss or illegal profits, with the goal of increasing the likelihood of being awarded punitive damages.
Nine: jurisdiction is always critical
Even though the Supreme People’s Court will issue judicial interpretations from time to time that aim to give clear guidance to all courts, practices in different municipal jurisdictions may vary, especially in terms of the length of proceedings and amount of compensation.
For straightforward cases, brand owners need not worry about jurisdiction except with regard to the amount of compensation, which in many cases is relevant to local economic circumstances. However, in extremely complex cases different courts may give contrary judgments on the merits of a case (ie, whether infringement is established or not).
In addition to variations in examining facts and applying laws, some courts are more willing to try new practices (eg, interim injunctions). Others strictly follow deadlines, meaning that they issue judgments swiftly. On the other hand, a few may reach judgment slowly as they require multiple hearings to examine every detail in a case.
Brand owners should carefully consider what they want to achieve before deciding on the most appropriate jurisdiction in which to initiate a civil lawsuit.
Ten: do not rush into starting lawsuits unless you have a feasible litigation strategy
Last, but not least, brand owners are always advised to develop a comprehensive litigation strategy before initiating any action. This will align a brand owner’s business, in-house counsel and external attorneys on the cases’ objectives, while providing a clear roadmap to achieve these. Normally, a strategy includes objectives, legal grounds, infringement analysis, jurisdiction, likelihood of success, timeline of the process, cost estimate and so on. This will also help manage the relevant stakeholder’s expectations and ensure that everyone is on the right track during discussions.
This article was first published on World Trademark Review in June 2022.