Liuming International China Business Lawyers

China Trademark Law amended: bad faith indicia set out and infringement compensation increased

November 8th, 2019

Introduction & background

The China Trademark Law underwent its Fourth Amendment on April 23, 2019 (“Amendment”). The Amendment is intended to regulate filings so that bad faith trademark filing is more difficult. It also provides for increased compensation for trademark infringement. The Amendment became effective on November 1, 2019.

On October 11, 2019 the document “Several Rules in the Administration of Trademark Filing and Registration” (“Implementing Rules”) was issued by the China National Intellectual Property Administration of the State Administration for Market Regulation to implement the changes needed by the Amendment. These will become effective on December 1, 2019. Implementing Rules are very important as they set out the formal guidelines for how the law is to be practically administered.

These changes are both good and bad news for those doing business with China. The good news is that the China Trademark Law now has more specific measures to restrict “bad faith” trademark filings and statutory compensation for trademark infringement has been increased. The bad news is for the victims of rent seeking trademark opportunists that have registered foreign trademarks. They may be subject to claims for the increased statutory compensation.

The recent decision of the China Supreme Court that OEM manufacturing in China solely for export can infringe a China trademark should be of particular concern. (Our article about this is here).

The changes to the China Trademark Law

Changes to the China Trademark Law brought about by the Amendment and its Implementing Rules include guidelines for detecting bad faith registration and increased compensation for infringement:

Bad faith

Applications for a trademark with no intention to use may be regarded as a bad faith filing and rejected.

The trademark examiner is required to consider the following factors to determine whether the application is in good faith with the intention to use the applied for trademark:

  1. How many trademarks have been applied for by this applicant and/or its affiliates and in which class(es)? How many of these trademarks have been transferred by the applicant and/or its affiliates to others?
  2. The industry the applicant is engaged in and the operational status of the applicant in it.
  3. Precedents: including administrative decisions, verdicts and judgements in which the applicant was held to be filing trademarks in bad faith or infringing the trademark rights of others.
  4. Is the applied for trademark similar to any famous or well-known mark? If yes, how similar are they?
  5. Is the applied for trademark similar to any celebrity’s name, enterprise trade name, short name or other business logo? If yes, how similar are they?
  6. Other factors the trademark examiner believes to be relevant.

Trademark examiners who believe that a trademark application is not filed for use, can reject the application directly and also impose an administrative penalty on the applicant. Punitive actions can include, a warning, an administrative fine of three times the illegal income but not more than RMB 30,000. If there is no illegal income, not more than RMB 10,000.

Consequences of infringement

The cap on statutory compensation for trademark infringement is raised to RMB 5 million. In the prior version, the cap was RMB 3 million.

Punitive damages for repetitive or serious trademark infringements are higher, and can be 1 to 5 times the compensation amount. In the prior version, punitive damages were 1 to 3 times the compensation amount.

Counterfeit products shall be destroyed if requested by the trademark owner, rather than being sold by the counterfeiter after removing the relevant trademark.

Trademark agents

Trademark agents will be under stricter supervision. Trademark agents must not facilitate bad faith trademark filings and will be punished for breach.

Commentary

These changes to the China Trademark Law are a step in the right direction. The practical context of the huge numbers of China trademark applications – 7,310,000 in 2018, cannot be ignored. Training staff to understand and implement the changes, particularly as they apply to bad faith registrations, is a challenge yet to be met. It is too soon to know how effective the guidelines for examiners will be in practice.

The changes are a direct response to two important issues in the current China trademark system: rent seeking opportunists registering foreign trademarks to extort the offshore owners; and insufficient compensation for trademark infringement.

Bad faith

China has a first to file trademark regime. An applicant for a China trademark is currently not required to prove use or intended use of the mark when the application is filed. As a result numerous rent seeking opportunists have registered foreign trademarks as their own in China. This has been a serious issue for a long time and adversely impacts China trade.

There have been many signs that the authority responsible for administering the China Trademark Law is determined to tackle “bad faith” trademark filings. For example, an official of the China National Intellectual Property Administration recently said in a public speech that in 2018, about 100,000 abnormal trademark applications were rejected by the China Trademark Office at the registration and opposition stages.

The changes to the China Trademark Law made by the Amendment and the new Implementing Rules are expected to play an important role in limiting new bad faith trademark filings. But it remains to be seen if the examiners can or will follow the steps set out in the Implementing Rules to identify bad faith filings.

How, for example, will they determine the status of an applicant in their particular industry? Or similarity to “any celebrity’s name, enterprise trade name, short name or other business logo? Training to understand the requirements and additional time to review each application thoroughly would be required.

The Amendment and Implementing Rules are prospective in operation and have no direct effect on trademarks already registered. They do however, strongly suggest the “official” indicia of bad faith filing. This will be useful in challenging a trademark registered under the previous incarnation of the China Trademark Law.

Some bad faith applications will be identified by examiners. It seems likely, however, that these “bad faith” indicia will have their greatest impact in the preparation of oppositions to registration during the gazettal period. Similarly, they can play an important role in challenges to an already registered trademark. Activity in these areas of trademark work will probably increase dramatically.

Unfortunately too many foreign applicants abandon their claims too soon. Far too many winnable cases are lost by being abandoned too soon by foreign applicants.

The present changes with their indicia of bad faith registration provide an additional path to challenge an existing China trademark by establishing that it was registered in bad faith.

Compensation

In 2013, China raised the cap for statutory compensation to RMB 3 million (from RMB 500,000). Now, only 6 years later, the cap for statutory compensation has been increased to RMB 5 million. This provides stronger trademark protection for legitimate business operators. It also substantially increases the potential costs of counterfeiters in trademark infringements.

Unfortunately, the increase in statutory compensation in the China Trademark Law may have unintended consequences. The increased compensation will be also available to rent seeking opportunists that have already registered foreign trademarks in China. If the accused infringer cannot defend itself it will face the risk of the higher compensation amount.

The 2013 version of the China Trademark Law (and continuing) provided that an alleged trademark infringer could have a defence if the trademark owner had not used the trademark in the previous three years. The court could then require the trademark owner to submit evidence of use.

If the trademark owner could not prove required use, the claim for compensation would fail.

 

Take-aways

  • Registering a trademark directly in China remains the most certain and cost effective means to protect a trademark.
  • The real force of the present changes is likely to be in founding arguments for opposition during the gazettal period and for objections to existing trademarks.
  • Examiners may identify some bad faith applications, and that will be welcome, but the sheer number of filings in China is a constraint at that level. China trademark applicants and owners should be proactive in challenging bad faith registrations and applications.
  • Increased compensation will be welcomed by trademark owners but may be a problem for victims of rent seeking opportunists.
  • The China Supreme court has ruled that OEM manufacture solely for export can infringe a China trademark. (Our article about this is here).
  • Ensure that you get advice about contested trademark matters from advisers with real court experience in trademark work. Abandoning a trademark application too soon is a costly exercise.
  • Only licensed Chinese lawyers can appear in a Chinese court.

Posted in Articles, Intellectual Property Rights, Trademark, Trademark damages, Trademark infringement, Trademark litigation, Uncategorized | No Comments »

NNN for China: firing silver bullets or just blanks?

November 4th, 2019

Introduction & background

“… Don’t worry, we have the NNN agreements in place….”

A snippet of a telephone conversation overheard in the lounge of a major hotel in New Orleans. The speaker was American, presumably a lawyer, and speaking confidently to a client about a China manufacturing deal.

Many, including lawyers, now regard the NNN agreements as the key to risk management in dealing with China. That is an error.

NNN agreements

The NNN agreements (non-disclosure, non-compete and non-circumvent) have been the subject of much Internet chatter and numerous articles. Unfortunately, their claimed effectiveness gets fortified only by repetition. Little, if any, of the NNN commentary comes from China licensed local or foreign law firms. Licensed Chinese lawyers are also mostly silent. Why?

China is a sovereign country

China is sovereign country. It is a Civil Law jurisdiction with its own civil procedure, court system, trial procedures and rules of evidence. As might be expected, it is a little different from other Civil Law jurisdictions. It is totally different from a Common Law jurisdiction. Commercial and legal strategies that might be perfect elsewhere may not be as effective in China.

NNN agreements are just contracts

NNN agreements are just contracts. A contract by definition is an agreement enforceable at law. To have commercial value, a contract needs to be technically and practically enforceable. Enforcement has to be cost effective to be practical. This is rarely addressed by NNN commentary where various remedies are mentioned as if they are items on a menu awaiting selection.

A brief contract refresher

A contract can only bind the parties to it. So your remedy must come from the other party to a contract. Your counter party. If others offend you must be able to prove a material link in the offending to your counter party. Your counter party is the only one that you can sue in contract.

A basic principle in contract is that if it is breached, the innocent party should be restored to the position that they would have been in if the contract had been fully performed. The preferred remedy is damages or monetary compensation.

Sometimes, although it is known that the contract has been breached, there are not yet losses that can be quantified in terms of money. It might be very clear however that there will be real losses in the near future.

Then an injunction (an enforceable court order to do or refrain from doing something) can be sought. These take two forms: an interim injunction restraining the other party until a full court hearing is completed; and a permanent injunction issued at the end of the case as part of the judgement.

To end this very quick and incomplete outline, there are also liquidated damages. Sometimes it is difficult to quantify and prove the actual amount for damages. Parties to a contract might agree, for example, that delayed delivery will result in damages of $5,000 per day. There are jurisdiction specific rules about this.

Each of these remedies is discussed below in the context of NNN agreements.

NNN remedies for breach

The NNN agreements are just contracts for specific purposes. They may also be terms to similar effect in more comprehensive contracts.

Breach scenarios

Weeks, months or years after your China contract has shipped, something very similar or identical appears on the market. Originating from a city that you have never visited and from a company that you have never previously heard of. You suspect that your previous counter party may have something to do with it. What then?

You may have actual losses to support a claim for damages. The issue then is to find and prove the link to your previous counter party so that the NNN agreements can be enforced. All the issues referred to below, except showing actual losses, are there. You have the burden of proof.

Sometimes contracts are breached, but there are no immediate losses. For example, you have just become aware that your miscreant counter party has set about copying your tooling – say a mould for making plastic parts. Or your confidential information has been disclosed, but preparations for use are ongoing. Or your competitor seems to have new knowledge about how to make products very similar to yours.

Do you have to sit back and wait until your business is really harmed so you can show monetary losses? That is one option, but who wants to wait until their business suffers harm? Enter the injunction.

China injunctions

Injunctions are hard to get in China. Funds have to be guaranteed to offset any potential losses of the injuncted party if the case is lost. Except for IP infringement or unfair-competition, interim injunctions are rarely issued by the courts. At the end of a case a final injunction may be issued, but that can be long after the event. Chinese courts are very cautious in granting any injunction and would usually review the actual substance of the whole case for an interim injunction, and would not be easily persuaded. Because of the different role of judges, prior contractual consent to injunctive relief is largely irrelevant.

Liquidated damages

Because of the difficulty in getting an injunction in China, NNN advocates often suggest that substantial liquidated damages be specified. Millions of Renminbi, the Chinese currency, are sometimes suggested as the amount of liquidated damages to induce fear of breach in the other party.

The real problem with that strategy is Chinese law. Chinese law provides that where there is a material discrepancy between the amount of liquidated damages and the actual damages, either party can apply to the court to set the liquidated damages aside or to reduce them to align with the actual harm suffered. If the court finds that the agreed amount is not fair, it will adjust the claim accordingly. In our simple examples above you don’t yet have any actual losses. It is going to be hard to sustain an argument for your liquidated damages.

Freezing bank accounts

NNN advocates also suggest that the counter party will fear having its bank accounts frozen by a Chinese court (an interim remedy analogous to an injunction that is available in China). The advocates are right: they will fear that – to a point! Let’s take a realistic look at this remedy.

You are the plaintiff and have the burden of proving your case. There is no pre-trial discovery and almost all relevant information is in Chinese. There are few publicly accessible registers of business information. You have to prove to the satisfaction of the court that you have losses because of your counter party’s breach of NNN obligations. Stop and think about that for a moment. In China, as everywhere else, there is a big gap between believing something has occurred and being able to prove it in a court of law. Particularly in a court system that prefers documentary evidence that has been notarised. Quite rightly, the first step in freezing a bank account, or preserving evidence, is to file your case. To do that you will need to have evidence linking your counter party to the breach. Filing fees will be based on the amount you claim as compensation – your millions in liquidated damages?

Back to freezing bank accounts. First, you have to be able to identify to the court the bank account and its links to your counter party. Knowing litigation is pending there may be a move to a different bank. You will have to prove to the court that your rights will be irrevocably damaged if the court does not approve your application to freeze the bank account. Then you have to deposit funds with the court or provide a guarantee – 30% of the amount to be frozen is typical. The wisdom of the RMB 10 million specified as liquidated damages in your NNN agreements may not be quite so apparent now. And the difference between actual and liquidated damages is not relevant at this point.

It is also not simply a matter of transferring money in. China is a foreign exchange controlled country. It is very difficult to get the security funds into China. The usual practice is to get a guarantee from a local security company. They charge a percentage of the guaranteed amount for this. They will typically also require security.

Damages

Damages are the routine remedy for breach of contract in China, as elsewhere. The process for proving the amount must take account of China’s rules of evidence, but that is not unduly onerous.

Commentary

The Internet is an amazing source of information. Unfortunately, much of the information about China is incomplete, out of date, or just plain wrong.

Are the NNN agreements silver bullets? Clearly not! But that does not mean that you are always firing blanks. As part of a well thought out and executed China engagement strategy they have a role, but they are not a substitute for real management of the China project.

For example, have you registered all of your registrable IP in China? Calling it IP in a contract does not make it legally so.

Legal and other due diligence is far more important than the NNN agreements because it is preventative, not attempting to be remedial. Who is the other party? What is their reputation in China? Do they have the necessary approvals and licences to make your product? Are they financially sound? Are they really a manufacturer or just a hidden agent for a real manufacturer? Or even worse, are they fraudsters?

Practical China knowledge and experience in the drafting of China specific contracts is important. The often seen verbiage about liquidated damages being a carefully considered estimate of damage, or consent to injunctive relief, or agreement not to oppose injunctive relief, usually suggest that it is not a “China” contract. Understanding where things are likely to go wrong in China and having contract terms and procedures to cover them is important.

If you have done your homework the NNN agreements may be an added security. We use them in appropriate cases but we make sure our clients understand their limitations. Our clients also know that if you have really done your homework, and have contracts drafted specifically for the purpose, the need to rely totally on enforcing NNN agreements will probably not be an issue of great concern.

Take-aways

  • A contractual right without a cost effective remedy, or a remedy at all, is empty.
  • NNN agreements provide little real protection in many common contract situations.
  • China is a sovereign country.  It is a Civil Law jurisdiction. Its civil procedure, court process, rules of evidence and the role of judges follow that system.
  • China legal strategies based on another system are unlikely to be effective. Irrespective of how effective they might be elsewhere.
  • If NNN agreements are unlikely to be practically enforceable in your particular situation, you are just getting empty comfort from moving risk around on paper.
  • There is no substitute for real legal and other due diligence when engaging with China.
  • Legal advice should be supported by on the ground experience in China, not the Internet.

© Graham Brown 2019. The assistance of Peng Wei and our team in the preparation of this article is gratefully acknowledged. Any errors belong to the author.

 

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