Liuming International China Business Lawyers

New Balance successful on appeal

New Balance was successful in its appeal. The Guangdong High Court of China (“Guangdong HC”) published its judgment regarding the appeal arising from the first instance New Balance case on June 23, 2016. The case was about their use of a Chinese transliteration of New Balance  “新百伦” trademarked in China by others. The lower court previously awarded damages of RMB 98 million to the owner of the Chinese trademark, Mr ZHOU. Our  report on the original case is here.  Although the Guangdong HC reduced the damages to  RMB 5 million, all other findings in the first instance judgement remain unchanged.

Guangdong HC

In deciding to reduce the damages the Guangdong HC Court held that:

1. New Balance had extensively used “新百伦”in advertising and business. The relevant public already thought that “新百伦” belonged to New Balance or is related to New Balance’s products. This had cut the connection between the “新百伦” trademark and its actual owner ZHOU Yuelun (“Mr ZHOU”), reduced his market scope, and caused him economic damage.
2.  Mr ZHOU did not submit any evidence to prove the actual loss he had suffered from New Balance’s use of “新百伦”. Because of this the Court refused to determine the damage amount on the basis of ZHOU’s economic loss.
3. New Balance had registered “N”, “NB” and “New Balance” trademarks in China and had been using them on the packages of shoes sold in China. They never used “新百伦”on those packages.
4. New Balance used “新百伦” in the product introduction at Tmall and JD e-shops, on the sales slips of authorized stores, in advertisements at its official website, at Sina Weibo, in brochures, and in video advertisements. However, every use of “新百伦” was in conjunction with “N”, “NB” or “New Balance”.
5. Considering the business size, market share and high reputation of New Balance, it is fair to say that the relevant public distinguished New Balance products by the marks “N”, “NB” or “New Balance” and they purchased New Balance products because of the high quality these marks stand for.
6. Mr ZHOU proved he had used the “百伦” and “新百伦” trademarks in business in China but failed to prove that those trademarks are famous in China.
7. To determine the damage amount on the basis of the infringing party’s profits, there should be a direct connection between the infringement activity and the relevant profits. Applying this rule, it is not justified to base the damage amount on the full amount of profits of New Balance in China during the relevant period.
8.  New Balance submitted a brand evaluation report suggesting that the contribution of “新百伦”to its profits from China market is 0.76%. This means that this Chinese character trademark contributed RMB 1,487,907.97 to New Balance’s overall profits from the China market in years 2011 to 2013 and RMB 1,458,149.81 to New Balance’s profits from shoes in China for the same period.
9. It is also necessary to consider the following factors in determining the exact damages amount:
   1. bad faith of New Balance in using  “新百伦”with knowledge of Mr ZHOU’s trademarks;
   2. actual damages caused to Mr ZHOU by New Balance; and
   3. the costs Mr ZHOU spent in the case.
10. The total court filing fees are RMB 1,066,855.  They should be apportioned as RMB 213,380 to Mr ZHOU and RMB 853,525 to New Balance.

Commentary

Overall, the outcome of this appeal is as expected. It remains to be seen whether either party will seek a review by the China Supreme Court and if it is sought whether the Court will accept the case.  The judgment itself is more than 100 pages, unusual for China and mostly reviewing the details of the case.  The findings regarding damages are an important contribution to China jurisprudence and they are consistent with other recent cases.

Choosing and owning the transliteration of a foreign trademark is a very important first step in engaging with China. New Balance decided to persist with using a transliteration of New Balance already registered as a trademark by others. Another transliteration could have been used, and will presumably be used from now on, if an accommodation cannot be reached with Mr ZHOU.

The court held that New Balance’s commercial use of the pre-existing Chinese trademark with actual knowledge was in bad faith.  A clear caution to anyone else facing a similar situation.

There is an emerging China jurisprudence regarding the connection between awarded damages and the infringing use.  This case is consistent with that and other recent cases.

If the time, energy, and actual cost of pursuing these cases is taken into account, it has been a costly exercise for New Balance, despite their win.

Take away points

• It is always less expensive to register a trademark than it is too try to recover it from others.
• A Chinese language version of a foreign trademark is an integral part of doing business in China. The Chinese language is as flexible and creative as any other – there is always another possible transliteration if a first choice is not available.
• A consistent association between the use of the foreign trademark and the Chinese transliteration is important if the foreign brand is to retain its full value.
• Infringing a Chinese trademark is proving to be a time consuming and costly exercise.

© Graham Brown 2016. All rights reserved.

The assistance of Peng Wei in the preparation of this article is gratefully acknowledged.

Chateau Lafite Rothschild China trademark

Chateau Lafite Rothschild is one of the world’s iconic wine brands, famous for its history and high quality wines.  It is one of the world’s prestigious and well known brands. So far it has not been successful in establishing the power of its brand in an ongoing China trademark dispute.

Chateau Lafite Rothschild (“Chateau Lafite”) and Nanjing Golden Hope Wine Co Ltd (“Golden Hope”) have now been in legal dispute for more than 5 years over sound alike Chinese language trademarks.

Background

In 1996, Chateau Lafite registered the word mark “LAFITE” in Class 33 on “alcoholic beverages, except beer” (Chateau Lafite TM). In 2007, Golden Hope registered “拉菲庄园” (拉菲pronounced as ‘la fei’ in Chinese, 庄园 means “manor”) in Class 33 on goods including “wine”, “alcohol (beverages)” and “fruit extracts, alcoholic” etc. (Golden Hope TM).

In 2011, Chateau Lafite filed a cancellation application against the Golden Hope TM with the Trademark Review and Adjudication Board.

Trademark Review and Adjudication Board (“TRAB”)

Both Chateau Lafite and Golden Hope submitted evidence to support their arguments.

Chateau Lafite’s arguments included:

• Chateau Lafite is a world famous prestigious wine supplier and it has been operating in China for many years. Both the Chateau Lafite TM and its Chinese translation “拉菲” (‘la fei’) should be recognized as well-known trademarks in China;
• The Golden Hope TM is the translation of the Chateau Lafite TM, and copies and plagiarises “拉菲” (‘la fei’);
• The Golden Hope TM, the Chateau Lafite TM and “拉菲” (‘la fei’) are similar trademarks on similar goods;
• The registration of the Golden Hope TM has infringed Chateau Lafite’s prior name rights on “LAFITE” and “拉菲” (‘la fei’); and
• Golden Hope registered the Golden Hope TM in bad faith.

Golden Hope defended as follows:

• The Chinese translation of “LAFITE” is “拉斐” (‘la fei’) or “拉斐堡” (‘la fei bao’, 堡 (bao) means “castle”);
• The Golden Hope TM is not similar to either of them; and
• Chateau Lafite has no prior rights over “拉菲” (‘la fei’).

The TRAB ruled in favor of Chateau Lafite and canceled the registration of the Golden Hope TM.

Golden Hope appealed the TRAB decision at the Beijing No.1 Intermediate People’s Court (Intermediate Court).

Trial at first instance

Golden Hope and Chateau Lafite submitted more evidence.

The Intermediate Court held that:

1. The prominent part of the Golden Hope TM “拉菲庄园” is “拉菲” (‘la fei’) because “庄园” (the Chinese for “manor”) is of little distinctiveness when used on wine.
2. According to evidence furnished by Chateau Lafite, the products affixed with the Chateau Lafite TM have been sold in China since 1999.
3. Before the registration of the Golden Hope TM, articles about Chateau Lafite and its products have been published on specialized journals in China. In these articles, “LAFITE” was translated into “拉斐” (‘la fei’), “拉斐特” (‘la fei te’) or “拉菲” (‘la fei’) which are all transliterations of “LAFITE” in Chinese.  (特 (te) here is presumably used for sound, the closing syllable in Lafite, although it does mean “special” in Chinese). Chateau Lafite itself also used “拉菲” (‘la fei’), the substance of the Golden Hope TM, in its marketing and promotion.
4. The relevant public in China recognize that “LAFITE” may be referred to as “拉斐” (‘la fei’), “拉斐特” (‘la fei te’) or “拉菲” (‘la fei’) in Chinese.
5. Golden Hope extensively used the Golden Hope TM in conjunction with “LAFEIMANOR” and indicated that its products were from France, which made it even harder for the relevant public to distinguish its products from those of Chateau Lafite.
6. Golden Hope is a competitor of Chateau Lafite, and should know about the Chateau Lafite TM and the transliterations of “LAFITE”. Therefore, it should not have registered the Golden Hope TM in the first place. In addition, the evidence submitted by Golden Hope is insufficient to prove that the relevant public are able to distinguish the Golden Hope TM from the Chateau Lafite TM despite its use of the Golden Hope TM.

Accordingly, the Intermediate Court held that the registration of the Golden Hope TM misled and confused the relevant public regarding the source of the goods, and upheld the TRAB’s decision.

Appeal to Beijing High People’s Court (High Court)

Golden Hope further appealed to the Beijing High People’s Court (High Court). During the appeal, further evidence was submitted.

The High Court overruled the Intermediate Court’s judgment and restored the registration of the Golden Hope TM. The detailed reasons given by the High Court can be summarized as follows:

1. When determining whether two marks are similar, in addition to judging only from the composition and the overall similarity, we also need to take into account the distinctiveness and popularity of the two marks, the relevance of the marks and the designated goods, and whether the co-existence of the two marks may mislead the relevant public.
2. When determining whether a Chinese trademark and a foreign language trademark are similar, we need to take into account the recognition of the relevant public in China and whether the Chinese and the foreign words correspond with each other. To determine this, the registration date of the Golden Hope trademark is the key.
3. The Golden Hope trademark is reputable in the market and recognized by the relevant public after being used for a long time, so we need to understand the spirit of the trademark law: coordinating the protection of prior trademark rights and the maintenance of the market order; fully respect the fact that the relevant public is able to distinguish the concerned trademarks; and maintain the existing and stable market order.
4. In this case, the prominent part of the Golden Hope TM is “拉菲” (‘la fei’), and it is different from the Chateau Lafite TM in terms of font and pronunciation.
5. Before the registration date of the Golden Hope TM, the Chateau Lafite TM and “拉菲” (‘la fei’) were only introduced on some specialized journals that have limited readers. Hence, it cannot be concluded that the Chateau Lafite TM was popular in China before the registration of the Golden Hope TM or that the relevant public recognized that “LAFITE” and “拉菲” (‘la fei’) correspond to each other.
6. The Golden Hope TM has been registered and used for 10 years. A stable market order is already in place.

Application for review by the Supreme People’s Court of the PRC (China SC)

Chateau Lafite applied to the China SC for review. The China SC agreed to accept the case and the judgment issued by the High Court is suspended pending the review.

Commentary

It is difficult to reconcile the reasoning in the TRAB and the Intermediate court with the findings of the High Court and we look forward the resolution by the China SC.

This case is yet another example of how lack of attention to detail in entering the China market can have expensive consequences that may be difficult or impossible to rectify. Every product and service will be known by a Chinese name in China.  The only prudent and practical approach is to decide what it is going to be and to register it as a first step in engaging with China.

When a Chinese transliteration of a brand is used, it should be used consistently in all commercial endeavors. It may actually require more effort to achieve this than it does to manage the foreign brand in China. Many foreign trademarks can be transliterated into multiple Chinese versions, as seen in this case, and staff may not be fully aware of the ramifications of using the “wrong” transliteration. The only sound approach is to decide on the transliteration to be used and be vigilant in using it consistently in all commercial and marketing efforts. Unfortunately the evidence in this case revealed that Chateau Lafite had not been totally consistent in its use of Chinese transliterations of its brand.

The clarity of hindsight confirms that it would have been prudent for Chateau Lafite to register a Chinese language transliteration of its word mark at the same time it registered its foreign mark.  It should have registered “拉菲” (‘la fei’) or “拉斐” (‘la fei’) in the first place. If it had registered either one it would have been in a a better position to challenging any application for registration of a similar mark by Golden Hope.

Establishing the reputation of an unregistered mark in China is not easy. The rules for trademark review in China refer to the following as possible evidence to prove reputation: sales contracts; bills of lading; promotional materials; and exhibition brochures etc. In this case, Chateau Lafite furnished a lot of evidence, including an official letter issued by the economic director at the French Embassy in China. The evidence was not sufficient to persuade the High Court.

Take away points

• China is a very aggressive trademark environment.
• Foreign brands are attractive in China but every product and service gets known by a Chinese name.
• Failure to register a Chinese version of a foreign brand is a very costly mistake as this case confirms.
• This is not an isolated case and China trademarks are very important. If you need convincing, more articles here, here, here, and here!
• Registration of your China trademarks is the only cost effective option.

© 2016 Graham Brown. All rights reserved.  The assistance of Zhao Wei in the preparation of this article is gratefully acknowledged.

Castel Wines adopted a new China brand because of trademark issues played out in China’s courts.  China’s Supreme Court (China SC) ruled against Castel Wines on January 11, 2016, ordering them to pay compensation of RMB 500,000 and bringing closure to a legal saga that began in 2002.

As in most long running cases, the facts on the one hand are simple, Castel Wines was found to have infringed the trademark rights of the Chinese owner of a trademark: on the other hand, the back story is more complicated and interesting. In some ways it was a victory for Castel Wines, albeit an expensive one.

Parties

Plaintiffs – LI Daozhi, an individual (“LI Daozhi”); Shanghai Banti Wine Company (“Ban Ti Wines”) licenced by Li Daozhi.

Defendants – Castel Frères SAS (“Castel Wines”); WEI Gaoye, an individual, and Zhejiang You Ma Trading Co., Ltd. (“You Ma”).  Another defendant, the Shenzhen subsidiary of Castel Wines (“Shenzhen Castel”) was wound up early in the saga and ceased to be a defendant.

The facts

Ownership of “卡斯特” disputed for 9 years

LI Daozhi obtained the Chinese character trademark “卡斯特” (“Trademark”) from Wenzhou Hardware and Electrical Engineering Group Company on April 25, 2002. The trademark was registered on wine, alcoholic beverages etc. in Class 33 and is valid until March 6, 2020. LI Daozhi licensed the use of the trademark to Ban Ti Wines from August 16, 2005 to March 6, 2020.

Ownership of “卡斯特” (Trademark), a sound alike transliteration of Castel with no real Chinese meaning was in dispute for nine years from 2002 until 2011.

In 2002, Castel Wines applied to the CTO for cancellation of the registration of “卡斯特” (Trademark) on the grounds of non-use for three consecutive years.  LI Daozhi did not provide any evidence of use of “卡斯特” as a trademark to the CTO so it cancelled the registration.

LI Daozhi appealed to the TRAB for re-examination of the CTO decision and provided evidence to support use. The TRAB then overturned the CTO’s decision restoring LI Daozhi’s position.

Castel Wines appealed for review, and the Beijing High Court upheld the TRAB’s decision. Castel Wines then applied to the China SC for review of the Beijing High Court’s judgment but the application was rejected on December 17, 2011.

Castel Wines negotiated for rights to “卡斯特”

Concurrently with the above legal activity, Castel Wines and Shenzhen Castel approached LI Daozhi to negotiate for an assignment of the Dispute Trademark. They signed a Letter of Intent for the assignment, but the deal was never closed.

The China business of Castel Wines continued to develop.

Castel Wines signed 18 sales contracts with its Chinese subsidiary, Shenzhen Castel between November 28, 2006 and September 21, 2007. The contracts provided that Castel Wines would sell wines to Shenzhen Castel for them to distribute in China.

The wines involved in these transactions bore only the foreign language mark “Castel”. When importing them into China, a Chinese transliteration of “Castel” 卡斯特, identical to the Trademark, was used in the Customs declaration documents. The sales revenue of the Shenzhen Company for the years 2007 and 2008 was RMB 97,409,954.82.

WEI Gaoye purchased wines from You Ma and sold them in Taishun County, China. The wines involved bore the Trademark “卡斯特” and were identified as coming from Shenzhen Castel. After a complaint, the Administration for Industry and Commerce of Taishun County held WEI Gaoye had breached the trademark laws, ordered him to stop selling the wines and imposed a penalty of RMB 100,000.

During 2007 to 2009, Shenzhen Castel used “卡斯特” as the Chinese transliteration of Castel in its advertisements in China. In 2008, the Castel Wines Representative Office in Shanghai published a statement that all Castel wines were made, bottled and affixed with the front and back labels in France. “卡斯特”, the Trademark, was used as the Chinese transliteration of Castel on the back labels of the wines.

Trial at first instance

The Plaintiffs filed a lawsuit on October 23, 2009, accusing WEI Gaoye, You Ma, Castel Wines and Shenzhen Castel infringing its trademark rights in China and seeking compensation of RMB 40 million.

After the case was accepted by the trial court, Shenzhen Castel was de-registered and with court approval the Plaintiffs withdrew their claims against it.

The Plaintiff’s evidence included advertising materials purporting to show that “卡斯特” was a famous mark in China.   They also used the total value of the wines imported into China from Castel Wines as part of the basis for their claimed compensation. To obtain a profit margin for Castel Wines they relied on the profit margin of a Chinese listed company,  Zhang Yu Wine Company Limited: for Shenzhen Castel, they relied on the profits of another Chinese company, Jian Fa,  as the basis for the compensation claimed.

Castel Wines, the defendants, produced evidence for their case including evidence showing that Castel wines were recommended by many foreign wine magazines; the CEO of Castel Wines was honored as a top 100 French Wine Celebrity by the French Wine Magazine; and he was invited by the Prime Minister of France to visit China as French representative, etc.

The trial court held:

1. Use of the Trademark by WEI Gaoye and You Ma had infringed the trademark rights of the Plaintiffs and therefore ordered them to stop all sale of relevant wines.
2. Their infringing activity did not extend to Castel Wines or Shenzhen Castel because there was no evidence provided to show this.
3. The use of “卡斯特”in the Chinese labels of imported wines and other documents in the Customs declaration process by Shenzhen Castel should be regarded as use of trademark in China and therefore held it liable for infringing the Plaintiffs’ trademark rights.
4. Taking into account the relationship between Castel Wines and Shenzhen Castel; their cooperation in importing the wines; and Castel Wines’ statement in 2008; Castel Wines should be held liable for infringing the trademark rights of the Plaintiff jointly with the Shenzhen Castel. Shenzhen Castel was already de-registered so Castel Wines should assume all liabilities.
5. The use of “卡斯特” in advertising constituted trademark infringement, but this activity was conducted by Shenzhen Castel alone, and Castel Wines should not be held liable for this infringement.
6. Castel Wines should publicly apologize to the Plaintiffs to mitigate the impact of the infringement and compensate the Plaintiffs with RMB 33,734,546.26.

Appeal to Zhejiang High Court

The Plaintiffs and Castel Wines both appealed to Zhejiang High Court, but it affirmed the first instance judgment.

Castel Wines appeal for review by the China SC

Castel Wines applied to the China SC for review. The Supreme Court accepted the application and issued its judgment on January 11, 2016.

Additional facts

Castel Wines stopped using “卡斯特” on its products in 2008.
Castel Wines stopped using “卡斯特” in its company name on December 11, 2011.

The China SC held:

1. The trial judgment, affirmed on appeal regarding the liabilities of WEI Gaoye and You Ma should stand.
2. The trial judgment, affirmed on appeal, holding both Castel Wines and Shenzhen Castel liable for trademark infringement should stand.
3. The finding that Castel Wines should assume all liabilities due to the de-registration of the Shenzhen Castel should also stand.
4. The RMB 33,734,546.26 compensation awarded at trial and affirmed on appeal should not stand.
5. Compensation of RMB 500,000 should be awarded for the trademark infringement.

The reasoning of the China SC

1. The Plaintiff’s evidence failed to establish that “卡斯特” (Trademark) was independently famous in China.
2. Castel Wines had no intention in passing-off LI Daozi’s trademark when using “卡斯特” in business.
3. However Castel Wines and Shenzhen Castel used “卡斯特”in the Customs declaration documents in importing the wines into China.  These documents were provided to Chinese customers for indication of origin and quality of goods so they are transactional documents as provided for in the China’s Trademark Law. The use of “卡斯特” in them is use of a trademark in China.
4. The “卡斯特” trademark belongs to LI Daozhi, and he and Castel Wines did not agree on the assignment or use of this trademark during their negotiations.
5. It follows that Castel Wines and Shenzhen Castel, with full knowledge, breached their obligations to avoid infringing another’s trademark rights when using “卡斯特” in business. They should be held liable for infringing LI Daozhi’s trademark rights in China.
6. Chinese Trademark Law provides that the compensation awarded in a trademark infringement case  be determined according to the profits obtained by the infringing party or the losses caused to the infringed party. Reasonable costs incurred by the infringed party in stopping the infringement activities can also be included.
7. If neither the profits obtained, nor the losses incurred can be ascertained, the court shall determine the appropriate compensation according to the (then) maximum specified amount of RMB 500,000.
8. The trial court was in error when applying the profit rate of Zhang Yu Wine Company to determine the profits obtained by Castel Wines and in applying the profit ratio of another company, Jian Fa, to determine the profits obtained by Shenzhen Castel. These Chinese companies are independent and have no relationship to this case.
9. Where compensation is to be determined according to the profits obtained by the infringing party, the infringed party must prove the profits attributable to the infringing activity. The value of wines imported into China by Castel Wines totalled RMB 31.96 million but the Plaintiffs did not prove that the sale of these wines and the profits generated are relevant or attributable to the Chinese character trademark “卡斯特”.
10. The Plaintiffs failed to prove the losses caused by Castel Wines and Shenzhen Castel’s infringing activities so the (then) statutory compensation provision of RMB 500,000 should apply.
11. In determining the appropriate amount, the disputes between Castel Wines and LI Daozhi regarding the Trademark, the reputation of Castel Wines and their wines, and the fact that Castel Wines had no bad faith in using “卡斯特”  should be considered.
12. Based on all of the above Castel Wines shall pay RMB 500,000 as the compensation to the Plaintiffs.

Commentary

PLEASE NOTE: The statutory maximum compensation amount of RMB 500,000 is set out in the law applicable in this case.  It has since been increased to RMB 3 million.

Challenging a trademark is evidence of actual knowledge of its existence and Chinese courts will take knowledge into account in deciding cases.  It is now very clear that the cost of infringing a Chinese trademark can be very high as the New Balance and Oppel cases show.  In this case the court took into account that Castel Wines had taken steps to change its Chinese brand when the legal challenges were finalized.

This and other cases confirm that progress though the Chinese legal system can take a very long time.  When confronted with a prior registration of a Chinese language sound alike trademark, the most cost effective approach for a foreign party may be to simply choose another Chinese transliteration.  At that early point the only reputation in China is the foreign brand itself.  The selected transliteration can be built into a Chinese brand with a reputation.  Castel Wines ultimately adopted this course of action, but after many year of fruitless legal action.  Similar considerations apply to a Chinese language trademark based on meaning, not sound.

Legal action may increase the value of an opportunistic Chinese language trademark because it increases awareness of its existence.  Using another Chinese brand allows the foreign party to get on with business while effectively devaluing the opportunist’s trademark: in many cases probably to zero.  The real questions that are not often asked or satisfactorily answered in a commercially real way, are: “is this a battle worth fighting?” and “what is the real commercial benefit of winning?” For a newcomer to the Chinese market, and for many already here, the answer should be obvious.

Entering the Chinese market has many challenges, some of which can be predicted and dealt with, others that occur in the daily marketplace.  The trademark environment in China is well known.  Newcomers will need to register their foreign trademark in China and also a Chinese version. Neither is optional for a prudent business.  Both should be registered as a first step on the path to China.

The decision of the China SC also has a message for trademark opportunists. The message is that the burden of proof is on them to establish losses claimed and that they must link those losses to the Chinese brand. Hopefully that message will filter down to courts lower in the system.

Take away points

• China is a Civil Law country. Case reports can provide insights into how legal issues are viewed by the courts, but precedents are not binding.
• Registering foreign language and Chinese language trademarks in China should be the first step in engaging with China.
• Comprehensive searching is important in the registration process.  Providers of a cheap China trademark may not do adequate searching.
• If confronted with the existence of a prior Chinese language trademark, consider carefully whether  the most cost effective course of action is to register an alternative Chinese language trademark (there will almost always be an alternative). Already doing business in China?  Same considerations.
• Ignoring a pre-existing Chinese trademark can be very costly in money, time, and energy.

© 2016 Graham Brown. All rights reserved.

The assistance of Wei Xin and Peng Wei with this article is gratefully acknowledged.

Introduction – China OEM and trademark use

A China OEM trademark case heard in the Jiangsu High Court (“Jiangsu HC”) imposed higher duties on a China OEM manufacturers. Goods manufactured in China, solely for export to Indonesia had the “Dong Feng”(“东风”) trademark affixed. Jiangsu HC went beyond the reasoning of the China SC in the Focker case, and also beyond what has become convention trademark jurisprudence in that part of China.

China’s Supreme Court, on November 26 2015, handed down its decision in the Focker case, holding that China OEM manufacture solely for export did not constitute use of a China trademark in China.  As the highest court, its decisions are usually expected to be followed by lower courts, but China is a Civil Law country and precedents from higher courts are not binding.

The ink was barely dry on the Focker China SC judgment when the Jiangsu High Court (Jiangsu HC) handed down its decision in Shanghai Diesel Engine Co Ltd (“Shanghai Diesel”) v Jiangsu Changjia Jinfeng Power Machine Co Ltd (“Changjia”). The court acknowledged the reasoning in Focker but effectively distinguished it, holding on the facts of the case before it that a China OEM manufacturer had duties beyond confirming that their client has legal rights to an applied trademark in the destination jurisdiction.

Jiangsu HC’s jugment has been referred to in a number of articles as if it is equal in weight to Focker. In reasoning, or the standing of the court, it is not. We expect the China SC’s position to generally prevail in future China OEM cases.

China’s SC has power to review the decision, but it is not presently known whether an application for review has been filed.

 Background

Some “legal” background also needs to be taken into account when considering this case:

• Indonesia, like China is a “first to file” jurisdiction. Although there are some  exceptions, prior use or first use is practically irrelevant in both jurisdictions;
• Indonesia, unlike China is not a signatory to the Madrid protocol.  Trademarks can only be registered there directly through an Indonesian trademark agent.

Shanghai Diesel v Changjia was about the application of the China trademark “Dong Feng” (“东风”) (a well known trademark in China) to diesel engines and parts contracted for by an Indonesian company, Pt Adi Berkasa Buana (“Indonesian Company”).

The contract between the Indonesian Company and Changjia was a processing trade contract, whereby the manufacturer is paid a fee for carrying out the work and is not selling products with a marked up profit. The details of processing trade contracts are not really that important to the discussion of this case, although it is mentioned as such in the judgment: in trademark terms it is a variety of China OEM contract.

The terms of the contract were that Changjia would make certain goods and as part of the process the “Dong Feng” (“东风”) mark would be applied to them.  At the relevant time the Indonesian Company held the trademark rights to “Dong Feng” (“东风”) in Indonesia.

The goods manufactured by Changjia were seized by China Customs at the request of Shanghai Diesel, despite Changjia’s export declaration that the goods were manufactured solely for export to Indonesia.  Shanghai Diesel then filed a case at the Changzhou Intermediate Court.  The court ruled in favour of Changjia.

Shanghai Diesel then appealed to the Jiangsu HC.

Appeal to Jiangsu HC

Key facts found

(The facts, although summarized here, are lengthy but together with the findings in the judgment itself, are important in considering the potential impact of the Jiangsu HC judgment on China trademark jurisprudence).

1. Shanghai Diesel registered in China “Dongfeng” (“东风”) as a word mark in 1981 and a combined mark including a device in 1992. These trademarks have been recognized by the China Trademark Office as well-known trademarks in China from 2000.
2. The Indonesian Company registered the “Dongfeng” (“东风”) marks in Indonesia on January 19, 1987.
3. Shanghai Diesel had a series of disputes with the Indonesian Company regarding the trademark  “Dongfeng” (“东风”) in Indonesia. Details as follows:
   1. In 2006, Shanghai Diesel filed a case at Jakarta court claiming that the Indonesian company registered its world-wide well-known trademark in bad faith but the  Jakarta court ruled against Shanghai Diesel and confirmed the trademark rights of the Indonesian Company.
   2. Shanghai Diesel appealed to the  Indonesian Supreme Court, which overturned the decision of the Jakarta court and supported all claims of Shanghai Diesel on February 19, 2008.
   3. Accordingly, the Indonesian IP Office cancelled the Indonesian Company’s registration of the “Dongfeng” (“东风”) mark and other related trademarks on April 17, 2008. Shanghai Diesel then registered the  “Dongfeng” (“东风”) mark in Indonesia on July 31, 2008.
   4. On November 17, 2008, Shanghai Diesel, having won in the Indonesian Supreme Court and being the owner of the “Dongfeng” (“东风”) mark in Indonesia, came to an agreement about compensation with Changjia, key provisions included: Changjia had used the “Dongfeng” (“东风”) mark without the authorization of Shanghai Diesel in manufacturing and exporting diesel engines to Indonesia; and Changjia promised it would not do this again and agreed to compensate Shanghai Diesel with RMB 100,000.
   5. On April 29, 2009, The Indonesian Supreme Court, after a request from the Indonesian Company to review its prior decision in favour of Shanghai Diesel, held that Shanghai Diesel had failed to prove its mark was well-known world wide and overturned its own prior decision.
   6. Accordingly, The Indonesian IP Office reinstated the trademark registrations of the Indonesian Company.
   7. In December 2009, the Indonesian Company filed a case in the Jakarta court requesting cancellation of the registration of the “Dongfeng” (“东风”) mark by Shanghai Diesel. The Jakarta court decided to cancel the registrations on June 16, 2010.
   8. Accordingly, the Indonesian IP Office cancelled Shanghai Diesel’s registration of the “Dongfeng” (“东风”) mark on February 11, 2011.

Jiangsu HC judgment – additional obligations for China OEM manufacturers

(Translated from the judgment with some adjustments, eg the parties named, but believed to generally provide the flavor of the original).

1. In deciding whether a China OEM manufacturer has infringed China trademark rights, we should consider the law, as well as the need to promote the development of international trade. For this purpose, we need to balance the rights and interests of owner of Chinese trademark, the Chinese OEM manufacturer, and the owner of a foreign trademark.
2. Generally speaking, if the China OEM manufacturer will not sell any products in China and will export all OEM goods, we should regard that the China OEM manufacturer did not conduct any trademark infringement in China. However, before reaching that conclusion, we need to consider whether the China OEM manufacturer has duly checked the legitimacy of the foreign trademark.
3. The China OEM manufacturer is required to check whether the foreign customer has legitimate rights to the foreign trademark involved in the OEM arrangement. If it did not duly check this, it will be held as liable for trademark infringement in China.
4. Where the registration of foreign trademark by the foreign customer is not justified, we think the China OEM manufacturer should be more alert. It means that if the foreign customer breached the good faith principle in registering the relevant trademark offshore, and therefore impacted the trademark rights of Chinese famous or well-known trademark and its owner, the China OEM manufacturer has the obligation to be more careful and has an obligation to avoid causing any trouble to the owner of Chinese famous or well-known trademark. If the China OEM manufacturer knows such facts yet still accepts the OEM order, it should be held as liable for trademark infringement.
5. We think the above rules will work better with the economic development needs in China, protect normal OEM business, and prevent trademark squatting.
6. In this case, Changjia knew that Shanghai Diesel’s “Dongfeng” (“东风”) mark is a well-known mark in China, and it did not do what it could to avoid causing trouble to Shanghai Diesel and damaged their interests. Because of this, Changjia should be held liable for trademark infringement.

Detailed reasons

1. Shanghai Diesel’s  “Dongfeng” (“东风”) trademark is a well-known mark in China, registered in 1962. Shanghai Diesel has been exporting diesels bearing this mark to Indonesia since the 1960s, and this mark is well recognized in that area. The Indonesian company registered the “Dongfeng” (“东风”) trademark in Indonesia after Shanghai Diesel’s China registration and Shanghai Diesel’s first use in Indonesia.
2. The Indonesian Company was in bad faith in registering their trademark. The official language in Indonesia is Indonesian, but the Indonesian Company registered its trademark with Chinese characters and the Pinyin of Dong Feng being the major part of the mark. Although the Indonesian company won the series of disputes regarding registering the “Dongfeng” (“东风”) trademark in Indonesia, we believe that the trademark registration by this Indonesian company is not justified. In addition, it engaged a Chinese company to do OEM manufacture with a trademark identical to that of Shanghai Diesel, and such activities will cause substantial damage to them.
3. Changjia promised Shanghai Diesel in their agreement that it would not use its trademark in the future. However, it still accepted the order after making such promise. We think that Changjia breached its obligation of checking the legitimacy of a foreign trademark in taking the OEM order and the obligation of avoiding causing trouble to the owner of a Chinese well-known trademark. Because of this, we decided to hold Changjia liable for trademark infringement.
4. With respect to the compensation shall be rewarded, we decide that Changjia should compensate Shanghai Diesel RMB 100,000 for the losses suffered by it, and RMB 116,750 for the costs incurred by it in filing this case.
5. The following factors have been considered in determining the compensation amount:
   1. Changjia only charged processing service fee in this OEM business.
   2. No OEM goods have been distributed in the  China market.
   3. Changjia had reached compensation agreement with Shanghai Diesel in 2008 and in that agreement, they compensated RMB 100,000 to the them.

Commentary

This case warrants close attention because in many reports it has been cited as an example of the lack of impact of the China SC’s Focker decision.  It did not follow Focker, and equally did not follow what had been previous jurisprudence in that part of China, namely OEM manufacture solely for export is not use of a trademark.

The reasoning (as reported) in this case is sometimes difficult to understand:

1. At one extreme it appears to require a China OEM manufacturer to go beyond the official registration of a trademark in the customer’s home jurisdiction.  In practice it is difficult to imagine what process or documentation could satisfy this requirement if a decision of the highest court in the relevant jurisdiction does not. It was not enough in this case.
2. It also appears to impose an extra-legal duty on China OEM manufacturers in China: “… an obligation to avoid causing any trouble to the owner of Chinese famous or well-know trademark”.
   Again, something difficult to apply in the form of a practical rule to guide business, Chinese or foreign. “Causing trouble: is a fairly loose definition to apply in this trademark context.

This case is diverges from what has become conventional China OEM jurisprudence in this part of China, and been endorsed by the China SC in Focker.  Previous cases on essentially the same facts and the same protagonists, Shanghai Diesel and the Indonesian Company, have been decided according to what has become the consensus view, as expressed on Focker – namely that China OEM manufacture, solely for export, is not use of a China trademark in China.

The most recent of these cases, prior to this case was decided in the Shanghai Free Trade Zone Court at first instance which held that China OEM manufacture in China, solely for export, is not use of a China trademark. The decision was appealed by Shanghai Diesel to the Shanghai No.1 Intermediate People’s Court, which in December 2014 upheld the first instance judgment.

As interesting asides: Shanghai Diesel only had rights to the “Dongfeng” (“东风” marks in Indonesia from (at best) February 19, 2008 when the Indonesian Supreme Court upheld its claim until February 11, 2011,  when the Indonesian IP office cancelled their registration. A period of about 3 years.

The Indonesian Company has held registration of the “Dongfeng” (“东风”  marks in Indonesia for about 27 years overall. This was not enough to satisfy the Jiangsu HC.

Take away points

• China is a Civil Law country. Case reports can provide insights into how legal issues are viewed by the courts, but precedents are not binding.
• A reminder that policy is an important consideration in China, including China courts, not just the letter of the law.
• The court system in China, as elsewhere, occasionally has cases where the outcome is puzzling, sometimes due to issues in court evidence that may not be fully brought out in the case report.
• Overall, it seems most likely that the China SC ruling in Focker will be the norm: China OEM manufacture solely for export is not trademark use in China. However, future decisions in particular cases that diverge from accepted jurisprudence cannot be ruled out.
• Companies using China for OEM manufacturing solely for export should reconsider their China trademark strategy to ensure that it is consistent with this norm.
• Owners of China trademarks who have in the past relied solely on China OEM manufacture as use of their trademark in China need to quickly reassess their China trademark strategy to ensure that they could meet a lack of use challenge.

© 2016 Graham Brown. All rights reserved.  The assistance of Peng Wei with this article is gratefully acknowledged,