Liuming International China Business Lawyers

China Software Copyright – Supreme Court awards limited damages

March 25th, 2022

The China Supreme People’s Court (“Supreme Court”) on November 15, 2021 issued its final judgement in a copyright infringement case about the use of royalty-free software. The Supreme Court upheld the decision of the trial court that the defendant was liable for infringing the software copyright owner’s authorship, but not other rights. The end user licence agreement required all “free” users to include the copyright owner’s logo and links to its website on websites created with the software. The defendant did not include the logo or the links on the websites it created using the software. It is an interesting case as the final compensation awarded, CNY 11,000 (approx USD 1,735) is very low.

Background

The Plaintiff, Changsha Mi Tuo Information Technology Co Ltd (“Mi Tuo”) created the software MetInfo V7.0 (“MetInfo”) which is used to create websites. Mi Tuo has a software copyright registration certificate issued by the State copyright bureau. In practice, users only need to download and install the software and add their content to its templates to set up their websites.

Mi Tuo provides MetInfo in two ways: royalty free subject to agreeing to be bound by the particular End User Licence Agreement (“EULA”); and restriction free subject to a one time fee of CNY 6,999 (approx USD 1,104). The fee also includes some website maintenance advice and trouble shooting help from Mi Tuo.

The Supreme Court, in reviewing the facts of the case, described a two step process – the download to the user’s computer after clicking on the “free download” on Mi Tuo’s web page, followed by a pop up licence agreement when the software was installed on the user’s computer. At the latter point, the user could choose free or paid versions.

Copyright: the EULA for MetInfo includes the following:

This Licence Agreement is the agreement between you (natural person, legal persons or other organisations) and Mi Tuo regarding duplicating, downloading, installation and use of MetInfo. This Licence Agreement also applies to any subsequent update and upgrades. Upon duplicating, downloading, installation or otherwise use MetInfo, it indicates you agree to be bound by all terms of this Agreement. If you do not agree to the terms of this Agreement, please do not duplicate, download, install or otherwise use MetInfo.

The rights licensed to you:

  1. Provided that you are fully compliant with the terms and conditions of this agreement, you may use MetInfo on multiple websites, and no royalty shall be paid for your use.
  2. You may modify MetInfo to make it fit for your own website subject to the constraints and limitations provided in this agreement.
  3. For the website you create with the assistance of MetInfo, you have full ownership of the website content and accordingly, you are solely responsible for it.
  4. Constraints and limitations include: as long as all or part of MetInfo is used to create a website, regardless of extent or purpose or how the software is modified, the copyright logo (PoweredbyMetInfo) and the links to Mi Tuo websites (www.metinfo.cn, www.mituo.com) must be shown on such website, unless otherwise approved by Mi Tuo. The page of the mini Apps set up with MetInfo must contain the copyright logo which cannot be removed or modified. Otherwise it will be treated as breaching this agreement and constitutes infringement.

Further, Mi Tuo has the right to take legal actions to protect its rights and claim for compensation against any website or user for any illegal removal of the copyright logo and the links.

The Defendant, Henan Engineering Construction Association (“HECA”) used the free version of MetInfo to create its official website but it did not include the copyright logo and Mi Tuo’s website links, contrary to the terms of the EULA.

Decision of the Trial Court

The trial court decided the case in favour of Mi Tuo and ordered HECA to:

  1. stop the infringement activities;
  2. pay CNY 11,000 (approx USD 1,735) as compensation to Mi Tuo including CNY 6,000 (approx USD 946) as damages and CNY 5,000 (approx USD 789) as compensation for Mi Tuo’s legal costs; and
  3. make a public apology to Mi Tuo by publishing a statement on its own website for a period of 30 days.

The trial court did not uphold Mi Tuo’s argument that HCEA’s infringement activities went beyond the scope of the authorised licence and had also infringed Mi Tuo’s authorship, right to duplicate, modify, and to obtain remuneration, etc.

The trial court held that when HECA obtained the software, it was already consented to by Mi Tuo so its use of the software to build its own website did not exceed the scope of authorisation by Mi Tuo. Therefore HECA only infringed Mi Tuo’s authorship rights but not the right to duplicate.

Appeal to the Supreme Court

Both parties appealed the decision of the trial court. The appeal was accepted by the Supreme Court on August 16, 2021 and concluded on November 15, 2021. The Supreme Court upheld the decision of the trial court on the compensation awarded to Mi Tuo.

HECA denied infringement and its main arguments were that when clicking the “one click installation” button to download the software and install it on its own computer, the alleged EULA did not pop up. Because Mi Tuo did not put up any obvious notification, this agreement should be regarded as a standard or form contract which increased the liabilities of the user and should be regarded as void according to Chinese law. These arguments were rejected by the Supreme Court.

Mi Tuo’s main arguments were that the trial court erred on identifying the various components of copyright infringed. HECA’s infringement had gone beyond the authorised scope of the EULA and had infringed various rights including authorship, the right to duplicate, modify, and to obtain remuneration, etc. Further, the compensation awarded by the trial court is too low, its claim of CNY 70,000 (approx USD 11,040) should be supported.

Review of key issues

Did HECA infringe the copyright of Mi Tuo by not showing the copyright logo and website links?

In this case, the trial court held that the use of MetInfo by the HECA did not infringe the copyright of Mi Tuo because it had obtained the consent of Mi Tuo to download and install the software – the consent is implied by offering a free download. However, removal of the copyright logo without approval of Mi Tuo infringed its right of authorship.

The Supreme Court held that HECA had obtained the consent of Mi Tuo to use the MetInfo software but it breached the EULA when it removed the copyright logo and this infringed the authorship right of Mi Tuo.

The Supreme Court also held that downloading and duplicating the software and the necessary modification is still within the scope of the EULA. Removing the logo and the links mainly infringed the authorship, but not other rights of Mi Tuo. Accordingly, the Supreme Court rejected Mi Tuo’s argument that HECA had infringed the other components of its copyright.

Consequences of HECA’s infringement

The Supreme Court held that it was difficult to calculate Mi Tuo’s actual losses arising from the free use of its software contrary to its EULA.

The trial court decided to use the royalty charged by Mi Tuo for a similar product (ie. one time payment of CNY 6,999 (approx USD 1,104) to determine the damages and ordered CNY 6,000 (approx USD 946) as damages. The trial court also allowed part of the legal costs incurred by Mi Tuo to be reimbursed by HECA – CNY 5,000 (approx USD 789).

The Supreme Court upheld the overall amount of compensation to be awarded to Mi Tuo but commented that HECA had acted in bad faith in the copyright infringement and the damages should be a little higher, for example CNY 10,000 (approx (USD 1,577). The Supreme Court continued that the legal costs should be a little less, for example CNY 2,000 (approx USD 315). The amount determined by the trial court was justified overall and was affirmed.

Comment

This is an unusual case on many grounds.

Very few cases rise to the level of the Supreme Court. Even fewer relatively small commercial disputes. The limited damages awarded could not justify the expense and time involved and it may be, as media speculation suggests, that Mi Tuo had a wider agenda.

On any analysis it looks like Mi Tuo achieved a Phyrric victory. Not only with immediate effect in this case, but likely to impact other cases based on their EULA and business method.

The facts as reported do not make it clear why the two step process: free download, followed after installation by a “choose your licence” step was implemented by Mi Tuo. One explanation open is to maximise the number of downloads. Another is likely breach of the EULA.

The Supreme Court found that Mi Tuo had more than 700 similar cases running for copyright infringement and more than 500 additional cases to be filed. A quick online search indicates that Mi Tuo has many ongoing actions against its end users.

Chinese litigators often have a fee based on the amount of damages sought. Chinese media reports indicate that Mi Tuo had sought large amounts in other matters – in at least one case CNY 50,000 (Approx USD 7,936).

According to an interview by a local newspaper in September 2021 with the actual owner of Mi Tuo, Mr YANG Haijun, Mi Tuo’s original intention was to settle with the end users so they become paid users but Mi Tuo was forced into litigation.

Mi Tuo was also accused by many as “fishing” for court action. Many end users ended up involved in court action for infringement without understanding why.

On any analysis, and leaving aside any punitive element, it is difficult to see any basis for the damages for a EULA breach to greatly exceed the nominated licence fee for unrestricted use.

Take-aways

  • The use of “click to accept” EULA is common practice in China and elsewhere. To be effective they need to comply with the law and take account of human behaviour.
  • One click agreements usually limit the rights of end users, and as such, they need to be given some prominence, often blocking further action until accepted. Chinese law provides for the validity of these provided that terms that exclude or limit the main responsibilities of the software provider are adequately brought to the attention of the end user.

WEI Xin & PENG Wei

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Bad Faith: China Trademark Application Change

October 24th, 2021

Introduction

Bad faith trademark applications are a problem in any first to file jurisdiction, including China. A bad faith trademark application is one where the objective is to improperly acquire the brand recognition and benefit of another party, or to prevent another party from registering their trademark, and so to gain a commercial advantage.

The problem is particularly acute in “first to file jurisdictions” like China because there is usually no enquiry into actual or intended usage in the trademark registration process.

China is a jurisdiction where registering a known trademark has been very profitable and there are many reported instances involving high profile brands.

Trademark registration policies in China have traditionally required such a high level of proof of bad faith that it was extremely difficult to establish. Not impossible, we have had many successes where our client has had the level of proof needed, but very difficult.

China’s bad faith regulatory changes

China has clarified the need for trademark applications to be bona fide for commercial purposes. In 2019 new provision were added to the Trademark Law, among them: “A trademark application that is malicious and not filed for the purpose of use shall be rejected.” Later that year this was amplified by Regulations. In 2021, the China National Intellectual Property Administration (“CNIPA”) announced that it was cracking down on bad faith registrations.

Taken together it is clear that there is an official intention to regulate trademark registration and bring a commercial requirement into China’s first to file regime.

The official message is clear, but opportunists will still try to get their profits. The real message for foreign applicants and registrants is to take action in China.

Recent practical examples of bad faith

Derek’s* case

Derek told a home country friend about his China problems. As it happens, she was a professional colleague and referred him to us.

Derek’s China problem was not uncommon. He found that an OEM he had dealings with had applied to register “his” trademarks in China. He had engaged a China trademark agent to object during the gazettal period, but that had failed, and the trademarks proceeded to registration.

We asked him to send all the documents that he had, reviewed them when received, and came back to him with our recommendations and our fee. His initial reaction? “The other agent was cheaper!”

We explained what needed to be done for a successful case and he agreed to proceed with an action at the CNIPA to invalidate the trademarks.

We examined Derek’s materials in detail and found that the failed objection application lacked focus and that crucial evidence to support his case had not been fully translated into Chinese.

Our invalidation case was built around the relationship between Derek and the OEM and prior use of his trademarks in China:

  • Evidence of the dealings between Derek and the OEM including their signed MOU; Derek’s purchase orders; OEM’s commercial invoices to Derek; and related email correspondence.
  • Secondary evidence showing Derek’s prior use of his trademarks before the OEM trademark application; documents showing Derek’s participation in exhibitions in China; purchase orders placed by Derek with other suppliers; bills of lading; and related commercial documents.

The CNIPA accepted our submission that the evidence proved that Derek and OEM were business contacts; OEM was aware of Derek’s trademarks at the time they applied to register identical trademarks to Derek’s on the same and similar goods; and there had been genuine prior use of the relevant trademarks by Derek within China.

We have received the formal notice of invalidation from the CNIPA.

Maria’s* case

Maria’s company is a global supplier of goods to the fitness and martial arts community. They have valid China trademarks for certain goods in Classes 28 and 25.

Maria changed to a new China distributor for her goods. She later found that a company associated with her former distributor (“Applicant”) had applied to register her trademarks in Classes 9 and 35, which were not similar goods or services to the Classes 28 and 25 covered by Maria’s registration.

Maria was referred to us near the beginning of the gazettal period for the Applicant’s trademarks. Maria had ample evidence and we assisted her to raise an objection with the CNIPA.

Our submission included evidence of:

  • The previous distribution relationship, including Maria’s documents authorising the previous distributor
  • The relationship between the previous distributor and the Applicant. This included company searches which revealed that the same individuals were the senior management of the previous distributor and the Applicant.
  • The Applicant had also applied to register many other famous brands in addition to Maria’s, showing that their intention was to benefit from the branding and reputation of others.

The CNIPA accepted our submissions and we have received the official notice that the objection was successful.

Commentary

The changes to China’s trademark regime are very welcome and recent experience suggests that they are being implemented.

Derek’s case is conventional and the successful submissions showing bad faith reflect that.

Derek’s experience confirms that price is not everything in trademark work – value is the key. It also confirms, yet again, the importance of translation for China work. Good Chinese translation is important in China. Putting untranslated material before a Chinese court or tribunal is an exercise in futility. In China, as a general rule, if it is not in Chinese it is not there.

Maria’s case was more challenging to show bad faith and the evidentiary burden was higher. Without being able to show the close management link between the previous distributor and the Applicant it would have been much more difficult to succeed. The expense of searches was warranted. Similarly, being able to show that Maria’s experience was not isolated but part of an apparent scheme to register foreign trademarks as their own was important.

As anywhere, successful cases are founded on understanding the law, attention to detail, and admissible, relevant evidence.

Take-aways

  • China has clearly signalled that it is cracking down on bad faith trademark applications.
  • Foreign applicants and trademark owners should take action in China to protect their interests.
  • Contested matters in China are run on documentary evidence. It may take time and effort to gather it, but it is essential for success.
  • Good translation is important in the presentation of a case.
  • Cheap is not always confined to price and is a poor indicator of value.

*Names changed to maintain confidentiality

WEI Xin & ZHAO Wei

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Personal Data Protection in China

October 13th, 2021

Introduction

Personal data is getting increased attention globally. China has enacted a new law to regulate the collection, storage, and use of personal data. It comes as China has turned its attention to technology, Internet and other areas of business where personal data is collected. China is not alone in this: there is increased attention being paid to personal data in many jurisdictions, including, most recently, the US where reports indicate that the FTC is considering strengthening privacy rules. (Alternative link)

Internet related business has probably made greater strides in China than just about anywhere. On-line purchases are the first choice for the aspiring middle class and young people. Almost anything can be delivered to your door. Any city is alive with delivery vehicles of one sort or another. This activity has brought with it many different forms of payment, primarily by phone Apps.

Concurrently, of course, this unification of personal, commercial, and financial data has fuelled a huge trade in and based on personal data collected by whatever available means.

This is the context for the new law. China has decided that this trade based on personal data, Internet based or not, must be regulated.

The Personal Data Protection Law

The Standing Committee of China’s National People’s Congress adopted the Personal Information Protection Law (“Law”) on August 20, 2021, with effect from November 1, 2021. It is a substantial piece of legislation with 74 Articles set out in 8 Chapters. Previously there were only guidelines and regulations governing collected personal data. The Law formalises and unifies the approach to these issues. The Law lacks detail in some of its provisions and the implementing regulations are expected to be put in place to provide this.

Application of the Law

The Law applies to:

  1. any activities in China processing the personal data of an individual; and
  2. any activities outside China processing the personal data of an individual in China where the activities are for:
  • providing products or services to an individual;
  • analysis or evaluation of the behaviour of an individual; or
  • meeting other circumstances provided by law.

“Processing” includes activities to collect, store, use, process, transmit, provide, disclose, or delete personal data.

Personal data as defined in the Law only refers to data that can be used to identify a person. Anonymized personal data is expressly excluded from the scope of the Law.

Processing Requirements

Personal data must be processed:

  • lawfully and in good faith, securely to prevent any unauthorized access to, leakage of, or tampering with, or loss;
  • for a specific and reasonable purpose and only to the necessary extent;
  • according to publicized rules in an open and transparent way; and
  • properly to ensure that the personal data is accurate and complete for the purpose.

Consent

Except for specific circumstances provided by law – necessary for the conclusion or performance of contract where the individual is a party; fulfilling a statutory responsibility; responding to a public health emergency; etc; personal consent is required for processing an individual’s personal data.

Consent should be voluntary, explicit, and on a fully informed basis. The individual may withdraw consent at any time, but only with prospective effect.

Consent from parents or legal guardian is necessary for individuals under the age of 14 for any of their personal data.

Major Obligations of the Data Processor (“Processor”)

Except as provided by law, or in an emergency, the Processor is required to inform an individual, truthfully, accurately and completely using clear and easily understandable language of the:

  • name and contact details of the Processor;
  • purpose and methods of processing personal data, type of personal data to be processed and how long the data will be kept;
  • rights of the individual whose data is collected and how to exercise them; and
  • other matters to be informed as required by law.

Personal Data Protection Officer

The Processor must designate a personal data protection officer (“Protection Officer”) once the personal data it collects has reached a threshold amount. This is not defined by the Law and is likely to be clarified by the implementing regulations or by the National Cyberspace Authority (“NCA”).

The Protection Officer is responsible for supervising the processing of personal data and the actions taken by the Processor to safely protect it.

If a Processor is located outside China, it should either establish a specific body in China or designate a representative there. It is required to submit the name of the body or the name of the representative and their contact details to the NCA.

The Law is silent on appointing an individual to this role. Directly employing a Chinese individual from offshore can be risky for the offshore employer.

Evaluate the Impact on Personal Data Protection

Before proceeding with the following activities, the Processor is required to evaluate their impact on personal data protection:

  • processing sensitive personal data such as biometric recognition, religious belief, specific identity, medical and health, financial account, personal location tracking and other data of an individual;
  • use of personal data in automated decision making;
  • engaging a third party to process the personal data on its behalf or providing personal data to other Processors, or disclosing personal data;
  • transmitting personal data to offshore; or
  • other activities provided by law.

Additional Obligations for Major Processors

Processors that provide important Internet platform services, have a huge user base or operate a complex type of business (none defined yet), have the following obligations to:

  • establish a sound personal data protection and compliance system;
  • formulate and set out the policies to be followed;
  • set up an independent body composed mainly of external members to supervise their protection of personal data;
  • develop platform rules in accordance with the principles of transparency, fairness and impartiality;
  • these rules should specify the standards for processing personal data and the obligations to protect personal data to be met by the product or service providers operating on their platform;
  • stop providing service to product or service providers operating on their platforms which seriously breach the laws or regulations for the processing of personal data; and
  • publish social responsibility reports on protection of personal data regularly and accept public scrutiny.

Processors’ Shared Responsibility

If two or more Processors share the processing of personal data, they are jointly and severally liable to the individual. Using a subcontract Processor does not relieve the primary contractor of liability.

The Processor is required to regularly audit its operations to ensure compliance with its legal obligations.

Sensitive Personal Data

If the personal data to be processed includes sensitive data such as biometrics, religion, specific identity, medical and health, financial accounts, personal location tracking and the like, the Processor will be subject to stricter rules. Specific consent is required, and very strict protective measures should be in place to protect this data.

Transfer of Personal Data Offshore

A Processor may only transmit personal data offshore as required and necessary, with specific and informed consent from the relevant individual. Data to be provided when obtaining consent includes the name and contacts of the offshore recipient; the purpose and method of processing; the type of data to be processed and transferred; and how an individual can exercise their rights against the offshore recipient, including the procedure for this.

Offshore transfer requires that the Processor meets one or more of the following:

  • pass the cyber security evaluation organised by the NCA;
  • be certified by a professional institution designated by the NCA;
  • have a contract with the offshore recipient to specify their rights and obligations using the standard contract provided by the NCA; and
  • meet other requirements set out by law.

The China Processor sending personal data offshore is responsible for the offshore Processor complying with China’s legal requirements. These include the Chinese security assessments set out in the Law. If these are not met, the personal data must remain on servers located in China.

Individual Rights

As detailed in the Law and subject to its limitations, an individual has a right to:

  • know about and control the use and processing of of their personal data;
  • access and take copies of personal data held;
  • transfer data held to another Processor;
  • correct and complete personal data; and
  • have their personal data deleted once the purpose for which it was provided has been completed. 

Consequences of Breach

The Processor may face both administrative penalties and civil liabilities for breach of their obligations. Administrative penalties could be up to RMB 1 million (Approx USD 155,000); or for serious cases, RMB 50 million (USD 7,752,000) or 5% of the total revenue of the previous year. Further, the individuals whose rights and interests were damaged can seek remedies against the Processor.

The Protection Officer or any other individual directly liable for the breach could face personal liability. Personal liabilities include penalties between RMB 10,000 (Approx USD 1,550) to RMB 100,000 (Approx USD 15,500). Penalties in serious cases go up to RMB 1 million (Approx USD 155,000) or being banned from taking the position as director, supervisor or other senior management or Protection Officer for a period.

Who can take action?

A wide range of aggrieved persons and entities are empowered to take action for misuse of personal data and other breaches of the Law.

Commentary

This article attempts to summarize the key provisions of a substantial piece of legislation. As such it cannot be a substitute for reading and understanding the Law in its complete form.

The Law, as is common with many Chinese laws, is short on the detail required to actually comply with it. Implementing regulations usually provide the essential details and guide administrative bodies on applying the law. In the absence of this supplementary guidance it is difficult for any business to know exactly what they must do to comply with it.

For example, personal data necessary for the conclusion or performance of a contract is an exception for consent, but personal financial data is sensitive personal data, requiring special handling. Which applies to credit card details supplied for a purchase? Is the test necessity?

The Law requires substantial changes in how personal data is collected and processed, imposing obligations that did not really exist before. Businesses will have to develop wholly new methods to comply. Many of the requirements will need software changes, or new software to be effectively implemented. Software takes time to be written and tested, but it is the only practical means to monitor the processing of personal data held in digital form.

The Law imposes very onerous burdens for personal data acquired by businesses located outside China or sent offshore from China for “processing”.

Foreign companies whose business is large enough will need to consider carefully the obligations imposed by the Law. Among them the need to appoint a Protection Officer and ensure their systems are audited. If the data collected meets the threshold, they must also pass the security assessments set out in the Law or store it on servers within China.

Smaller businesses too cannot ignore the provisions of the Law.

Take-aways

  • The Law is comprehensive, but in its present form lacks detail in some key areas. Despite this, prudence suggests that planning for the obligations imposed by it should commence immediately.
  • The obligations imposed upon cross-border transactions are particularly onerous. Dealing with these and the associated costs will have to be managed carefully.
  • Many of the obligations imposed by the Law will require a technical response via software that may not yet exist. The personal data governed by the Law exists in a digital form and can only be monitored and dealt with digitally.
  • Despite any difficulties, there is an obligation to comply. Those that gather and process personal data in or from China need to be preemptive rather than reactionary.

Graham BROWN & PENG Wei

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Copyright a trademark?

August 22nd, 2021

Copyright can be a valuable adjunct and enhancement to China trademark protection. Copyright does not automatically apply to all trademarks. Word marks, for example lack the essential creative and original aspect that is needed to be a “work” as defined in China’s Copyright Law.

A logo (device in TM speak, but logo here) may satisfy the requirements. Fine art is not needed, just a work with original creative input. When this is satisfied, the logo may be protected as a “device” product or service mark and also by copyright.

Why would you want both? A real world example. We alerted our client, a global supplier of alcoholic beverages, that a Chinese company had applied to register its logo as a trademark for children’s toys. Although trademarked in all relevant classes, our client had no legitimate interest to cover that category with its trademark applications. We successfully opposed the Chinese company’s application on the basis of copyright infringement.

The legal grounds are in the Trademark Law – registration of a trademark shall not infringe the prior rights of others, and that includes prior copyright.

Copyright in China

China is a signatory to the Berne Convention and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In general, copyright in China operates very similarly to other places.

Copyright in a work comes into existence when it is created. It is very important to note this because it has “first to file” implications.

If a logo meets the criteria to be a “work” according to China’s Copyright Law, copyright in that work came into existence at its creation. That is almost certainly before anyone successfully registered, or applied to register it, as a trademark in China! This is very important for China – a “first to file” jurisdiction.

If an application is made to register an identical logo as a trademark, it is relatively easy to apply copyright in opposition. (Assuming that you can establish that it is a “work”). Similarity is more difficult to deal with and the evidentiary burden greater, but it is also a viable option to consider and act on.

Copyright ownership

Copyright ownership must be proved in an infringement case. A logo as a “work” is not enough. Proving that you own the copyright can be more problematical than establishing a work. If you are the artist or creator of the logo, that makes life simple, but in the corporate world that is rarely the case. More usually an outside agency or studio has been engaged to provide the logo as part of the overall branding. It is important that the copyright interest is formally transferred to the brand owner.

It is now quite common for a brand owner to also register a Chinese language version of a logo as a trademark. If the only Chinese input is to add Chinese characters to an existing logo that is probably not enough to make it a work. If it is effectively a separate work then it is likely that copyright will belong to the creator. The contract for this is very important and should formally transfer copyright to the brand owner.

A Chinese court will typically want to see documents recording the formal transfer of the copyright in the work to the claimant. Unfortunately, in many cases this formal step has been omitted or the documents have been lost. China’s Copyright Law allows for works created during employment or under a contract, but the burden of proof is on the claimant. In China, these arrangements are most commonly reduced to writing and that is what a Chinese court expects to see. Attention to detail in this aspect of copyright enforcement is very important.

Copyright registration

Copyright registration is available in China, but is not a requirement for action against an infringer.

Registration, however, is accepted as prima facie evidence of the existence and ownership of copyright in a work. The registration process itself needs to be carefully done, but it can avoid the need to translate a lot of secondary material to be put before a Chinese court to commence an infringement action.

We generally recommend registration of copyright in China and this can be very important for trademark protection.

Copyright registration is also a requirement to record copyright with China Customs. Recordal (as it is known in China) allows China Customs to stop apparently infringing inbound or outbound goods at the border.

Recordal is not just for copyright. It extends to all China IP rights, including trademark. A China Trademark Registration Certificate is needed fot recordal and some brand owners will need to take additional steps before they can do this.

Benefits of Copyright in brand protection

  1. China has 45 classes for trademark registration and protection. If you register a trademark in relevant classes in China, you will be only able to stop others from registering or using the same or a similar trademark on goods or services in those classes. This is not China specific and is the usual situation with trademarks.
  2. Copyright can protect across all classes if the trademark meets the China copyright requirements for a work.
  3. Allegations of trademark infringement are commonly made against Internet sales portals. In our experience copyright can give you protection in circumstances where trademark infringement may be difficult to readily establish.

Take-aways

  • Copyright can be a valuable adjunct to trademark registration in China.
  • Not every trademark can be subject to copyright protection – it must be a work as provided in China’s Copyright Law.
  • Proving copyright ownership of a work is essential for a copyright action against an infringer.
  • Registration of copyright is not essential but has very real practical advantages.
  • As always, it is much less expensive to protect rights than it is to try to recover them from someone else.
  • Copyright is not a “one size fits all” solution. Seek advice on your specific situation before acting.

WEI Xin & PENG Wei

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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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OEM in China: The China Supreme Court changes its TM position

October 20th, 2019

Introduction

On September 23, 2019, the Supreme Court of the People’s Republic of China (”Supreme Court”) gave its decision in an OEM manufacturing trademark case brought by Honda Giken Kogyo Kabushiki Kaisha (“Honda”) against Chongqing Heng Sheng Xin Tai Trading Co Ltd and Chongqing Heng Sheng Group Co Ltd. (“Heng Sheng”). Overall (“Honda Case”).

The Supreme Court held that the two Heng Sheng entities manufactured OEM motorcycle kits, (“Motorcycle Kits” – presumably CKD) in China for a Myanmar entity and this had infringed Honda’s China trademarks.

This is a very different outcome from previous Supreme Court decisions on the same issue.

Background

PRETUL

On November 26, 2015, the Supreme Court gave its decision in the “PRETUL” trademark case. In this decision, the Supreme Court, for the first time, made it clear that “The use of an identical or similar mark on the same or similar products in OEM manufacturing in China with a China trademark should not be regarded as infringing the rights of the owner of the China registered trademark, because the goods are not available in the China market.” Our article about this case is here.

DONG FENG

Shortly after the Supreme Court issued its decision in the “PRETUL” case, Jiangsu High Court issued its decision on another China OEM trademark case, holding that the defendant Jiangsu Changjia Jinfeng Power Machine Co Ltd was liable for trademark infringement because it knew that the plaintiff Shanghai Diesel Engine Co Ltd’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. Our article about the Jiangsu High Court case is here.

This decision was later reviewed by the Supreme Court and gave its decision on December 28, 2017. The Supreme Court reversed the Jiangsu High Court decision finding that the defendant, Jiangsu Changjia Jinfeng Power Machine Co Ltd, had done due diligence to confirm the trademark rights of the Indonesian Company. No infringement of a China trademark had occurred because the goods were OEM manufactured and were all exported.

The Honda Case

Findings of fact

  1. Plaintiff Honda is an international enterprise that manufactures motorcycles and has registered relevant three trademarks in China. All were valid when this case was heard. 314940 the word HONDA, 1198975 the framed H device commonly seen on Honda cars, and 503699 the HONDA with wing device associated with Honda motorcycles.
  2. Defendants Heng Sheng are affiliates. Heng Sheng Trading signed a contract with a Myanmar company on April 3, 2016 for manufacture of Motorcycle Kits with the trademark “HONDAKIT”.Although the contract was named as a Sales Contract it was from its terms actually an OEM manufacturing contract. Heng Sheng Group was the actual manufacturer and Heng Sheng Trading was responsible for the logistics of exporting the Motorcycle Kits.The director of the Myanmar company owns the trademark “HONDAKIT” in Myanmar. He authorized Heng Sheng to use this trademark in its OEM manufacture of the contracted Motorcycle Kits. All Motorcycle Kits manufactured by Heng Sheng for the Myanmar Company were for export to Myanmar.
  3. Kunming Customs contacted Honda on June 30, 2016 with the Notice of Confirmation of the Intellectual Property Rights for Imported and Exported Goods. According to the notice, they had detained 220 Motorcycle Kits bearing the trademark “HONDAKIT” and these products may infringe Honda’s trademark rights. Kunming Customs requested Honda to take action if it wanted to.On July 12, 2016 Honda paid the security deposit and applied to Kunming Customs for further investigation and detaining of the Motorcycle Kits. Kunming Customs issued its investigation decision on August 22, 2016 notifying Honda that the Customs could not decide whether infringement had been established. Honda should therefore file a court case to determine the issue. Kunming Customs also said that they would further detain the Motorcycle Kits for 50 working days and then release the goods unless they received a court order to further detain the Motorcycle Kits.

Honda filed its court case on September 13, 2016.

Trial court

The trial court issued its decision on June 1, 2017. The trial court held that the evidence filed by Heng Sheng could not prove that the contract with the Myanmar Company was really an OEM manufacturing contract so it was a sales contract. In the trademark attached to the Motorcycle Kits the word “HONDA” was bigger than “KIT”. This differs from the trademark registered in Myanmar. Such use by Heng Sheng was apparently to take advantage of “HONDA”. On these facts, Heng Sheng should be regarded as a trademark infringer.

Judgement of the Appellant Court

The appellant court overturned the decision of the trial court and gave its judgement on November 28, 2017.

The appellant court held that the sales contract signed between the Myanmar company and Heng Sheng was, by its terms, actually an OEM manufacturing contract. The owner of the Myanmar trademark “HONDAKIT” had signed the contract and the authorization for Heng Sheng to use the trademark “HONDAKIT” in performing the contract.

The Motorcycle Kits made by Heng Sheng for the Myanmar Company were all for export to Myanmar. Chinese customers would have no access to these products. Because of this there was no trademark infringement.

Appeal by rehearing at the Supreme Court

The Supreme Court decided to reconsider this case on September 14, 2018, and concluded its review just over a year later on September 23, 2019. The Supreme Court overturned the decision of the appellant court and held that Heng Sheng had infringed Honda’s trademark rights.

Reasons

  1. It is not right to regard “use of a China trademark in OEM manufacturing” as an exception to trademark infringement because this is against the basic principles of deciding trademark infringement.
  2. Trademark registration and protection is territorial and a trademark registered in a foreign country is not protected in China. It follows that an authorization for a domestic OEM manufacturer to use an offshore registered trademark should not be regarded as a legitimate right to be protected in China. Nor a defense to infringement of a China registered trademark.
  3. The key function of a trademark is to identify the source of goods or services. Use of a trademark consists of many processes including attaching the trademark to the goods, distributing the goods in the market, their sale etc. In an OEM manufacturing case, the relevant public includes the customers and the business operators involved in the manufacture and logistics processes. A business operator such as a logistics company can access the relevant trademark and products. Because of this, the possibility of causing confusion of the relevant public still exists in an OEM arrangement.Further, with the development of e-commerce and the Internet, OEM manufactured products may come back to the China market in some way. The Chinese consumers may travel abroad and there come into contact with the OEM manufactured products. All of these have increased the possibility of confusion of the relevant public.

Commentary

This decision effectively removes the certainty that prior decisions had so recently established for China OEM manufacturers and their customers.

It is not clear from the judgement what concerns the Supreme Court sought to address, or what deficiencies resulted from their previous decisions that needed to be remedied.

The reasons given by the Supreme Court in its judgement are not so strong that the underlying purpose is self evident.

The confusion that might arise among logistics operators and others handling the goods as part of the OEM manufacturing process is speculative and definitely very limited. It stretches the concept of “relevant public” a long way. Almost anyone, whether they recognise the trademark or not, would be included by that expanded definition.

OEM manufactured goods bearing a trademark may come back to China and could conceivably result in some marketplace confusion. But a more specific, and legally congruent remedy would be to target the goods on their way back into China, not on their journey out.

Further, the fact that Chinese consumers may come into contact with OEM manufactured goods outside China is not a China trademark issue at all. That reasoning compromises the territorial restrictions on trademark protection, including that the “relevant public” would usually be thought of as people in the trademark territory: in this case China.

The Supreme Court, has to some extent given Honda implied protection against the possible infringement of its China trademark outside China. A contradiction in terms.

Take aways

  • China is not a case law country but decisions of the Supreme Court have the effect of “judicial guidance” and decisions are usually followed by local courts. If a court does not follow the Supreme Court’s decision the Supreme Court still has the right to revoke that lower court’s decision on appeal as happened in the “Dongfeng” trademark dispute.
  • Clearly this change in approach has extensive potential consequences for those that source OEM manufactured goods from China and those that manufacture them.
  • The only realistic protection for OEM manufacturing now is to register trademarks in China before contracting OEM production
  • In many cases this is not possible because opportunists have already registered the foreign trademark in China. That was the problem that the previous decisions alleviated.
  • Despite all of the uncertainty raised by this case, one thing is clear. Registering trademarks with China Customs assists in preventing infringing activity

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

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Trademark infringement – Opple Illumination faces RMB 50 million claim.

March 13th, 2016

Trademark infringement cases on the increase?

Trademark infringement in China can have a high cost.  This is a relatively new development. The New Balance case set the high water mark and it seems very likely that others will be inspired by the award in that case.

The emerging high cost of China trademark infringement also seems likely to change the behavior of trademark owners – at least some are likely to allow infringement to run for longer so that they can seek higher provable damages.

It is really early days, but already there are cases emerging with plaintiffs seeking substantial damages. If successful they will, in turn, inspire others.  Anyone doing businessin China, Chinese or foreign, needs to be aware of the potential high cost of China trademark infringement.

According to local media, a case seeking substantial damages from OPPLE Illumination (“OPPLE”), a leading illumination manufacturer in China, has been filed at and accepted by the Chaoyang court.

OPPLE has been sued for trademark infringement by three Chinese individuals for infringing their trademark  “欧普 (The Chinese characters for OPPLE) and device” in Class 9 (wire, plug, socket etc.) with the registration number 1423367. The plaintiffs claim damages of RMB 50 million (Approximately USD 7.7 million).

An OPPLE distributor in Beijing is also being sued by the plaintiffs in the same case for selling the infringing products in Beijing.

Background

OPPLE applied to register the Chinese characters for OPPLE (欧普) in all 45 classes in China and has successfully registered in most classes.

However, for reasons unknown, OPPLE only registered this mark on very limited products in Class 9 (i.e. battery, flash light etc.) in 2002, but did not register it on plugs and sockets in Class 9 apparently because it was previously registered by another Chinese company in 2000 (“Prior Trademark”).

The plaintiffs bought the Prior Trademark from its original owner in 2010 and now claim that OPPLE has infringed their trademark rights by selling plugs and sockets using a trademark similar to the Prior Trademark.

An Internet search of OPPLE products indicates that OPPLE did not directly apply the Chinese character OPPLE trademark on its plugs and sockets. However, the package for these items  does show the Chinese characters trademark for OPPLE. This appears to be the basis for the trademark infringement case.

Calculation of damages for trademark infringement

OPPLE is a listed company in China and  it has to publicly disclose its financial reports annually.

OPPLE’s 2013 financial report shows its business revenue generated from “illumination controllers and others” was RMB 492 million, of which, “electric device” accounts for 45.85% with a gross profit ratio of 52.02%.

OPPLE’s 2014 financial report shows its business revenue generated from “illumination controllers and others” was RMB 677 million, of which “electric device” accounts for 37.86% with a gross profit ratio of 50.66%.

Relying on these public accounts, the plaintiffs say that the RMB 50 million damages they claim for trademark infringement is less than the profits unlawfully obtained by OPPLE from the sale of the products that are the subject of their trademark infringement case (plugs and sockets, classified within “electric device” in the financial reports).

The case has not yet been decided, and we will update this report in due course.

Commentary

It must be noted that this case is yet to be heard and the information here summarizes the plaintiff’s case only.  As with any case it is the outcome that is important and often claims made in pleadings are not made out in court.

The case is significant, however, on a number of grounds.  All parties are Chinese, confirming that IP rights are taking their place generally in China commerce, not just foreign related trade; the damages sought are large; and the method for calculating the damages claimed is interesting because it may be difficult for OPPLE to argue against their own accounts.

The status of the plaintiffs, beyond the fact that they own the relevant trademark is not yet known. Similarly the nature of their business, if any is not known to us.

Take away points

  • Trademarks are becoming even more important in China.
  • It is not enough to “just register” a China trademark. Registration needs to be done in the context of a well thought out trademark strategy that takes account of on the ground reality, including the categories of goods covered and the descriptions used in China.
  • Thorough searching is important in the registration process – the cost is money well spent in risk management. A cheap China trademark is likely to be anything but cheap in the long run.
  • You ignore previously registered trademarks at your peril.  The cost of China trademark infringement is high. If you become aware of a relevant prior China trademark do not proceed further with use in China until the issues are resolved.
  • A distributor can be held liable for China trademark infringement.  A prudent distributor in China should ensure that their principal holds relevant, valid and comprehensive China trademark registrations.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei in preparing this article is acknowledged.

 

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Infringement of Chinese “New Balance” trademark costs RMB 98 million

April 30th, 2015

Chinese media reports that on April 24, 2015, the Guangzhou Intermediate Peoples Court ordered New Balance Trading (China) Co Ltd to compensate a Chinese individual, ZHOU Yuelun, with RMB 98 million (USD 16,029,572 approx at publication) because of trademark infringement. The trademark involved in this case is “新百伦” – a Chinese transliteration of “New Balance”.

ZHOU Yuelun (“Plaintiff”) is the owner in China of the Chinese character mark “新百伦”in Class 25 on “clothes, leather clothes, sport shirts. T-shirt, sandals, boots, shoes, socks, ties and belts” in China. He also owns in China the Chinese character mark “百伦”which was registered on “clothes, hats, socks and shoes” in Class 25 in China.

According to China Trademark Office (“CTO”) records, registration of “新百伦”was applied for on June 4, 2004 and it was registered on January 7, 2008. Registration of “百伦”was applied for on August 25, 1994 and it was registered on August 21, 1996. Both trademarks are still valid.

New Balance Trading (China) Co., Ltd. (“Defendant”) was registered in Shanghai on December 27, 2006 by New Balance International Limited for import and export, wholesale and retail of shoes, clothes and bags, including sport products and leisure clothes.

Plaintiff found the Defendant had been using “新百伦”on shoes without his authorization, so he filed a lawsuit to Guangzhou Intermediate Peoples Court (“Trial Court”) for infringement of his trademark.

Defendant responded that it had been using “新百伦”in good faith as a part of its company name and “新百伦”is the direct transliteration of “New Balance”. It also accused the Plaintiff of squatting the Chinese character mark “新百伦”.

Findings of fact

The Trial Court held in favour of the Plaintiff based on the following findings of fact:

  1. Plaintiff has been using the trademarks “百伦”and “新百伦”on men’s shoes in its business;
  2. Defendant has used “新百伦New Balance” as a trademark in online and offline advertisement and promotion, on invoices to customers etc. for the sale of its New Balance brand shoes.
  3. Defendant is fully aware of the Plaintiff and his registered trademarks “新百伦”and “百伦”because one of Defendant’s affiliates objected to the registration of “新百伦”in Class 25 by the Plaintiff in 2007 but the objection was not upheld.

Verdict

Trial Court ordered the Defendant to publicly apologize for the harm caused to the Plaintiff, pay court costs and compensate Plaintiff with RMB 98 million (USD 16,029,572 approx at publication) .

The total profits of the Defendant from Year 2011 to 2013 were RMB 195.8 million. The Trial Court decided that half of the total profit, RMB 98 million (USD 16,029,572 approx at publication) should be paid to the Plaintiff as compensation.

The case is still within the appeal period and an appeal is expected.

Take away points:

  • Trademarks are very important in China.
  • Every product and service becomes known by a Chinese name – it is best to control this by registering and promoting a Chinese version of the trademark.
  • If someone else owns the Chinese version of “your” trademark the consequences can be really serious.
  • Registering both versions of a trademark is the only sensible option.

© 2015 Graham Brown And Wei Xin. All rights reserved.

 

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Health care in China: new business opportunity for foreign investors

November 14th, 2014

Foreign investment now permitted in health care in China

Health care in China is a business opportunity that has been recently opened up to foreign investment. Circulars jointly issued by the National Health and Family Planning Commission of China (NHFPC) and the Ministry of Commerce (MOFCOM)  – The Circular on Carrying Out the Pilot Program Establishing Wholly Foreign Owned Hospitals (“Circular”) confirms that opportunities exist for private hospitals and experienced hospital managers to participate in the growing needs of health care in China.

The Circular states that foreign investors may establish wholly foreign owned hospitals in Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan by way of new establishment or M&A. However foreign investors from outside Hong Kong, Macau and Taiwan are not allowed to establish Traditional Chinese Medicine hospitals.

The Circular focuses on the conditions required to be met by foreign investors to establish wholly foreign owned hospitals in China:

  1. the foreign investor applying to establish a wholly foreign owned hospital shall be an independent legal person with direct or indirect experiences of investment in and management of health care; and
  2. be capable of providing international level advanced hospital management and services; or
  3. have world class medical technology and equipment; or
  4. can supplement or improve deficiencies in medical services, technology, funding and facilities.

According to the Circular, the power to examine and approve the establishment of wholly foreign owned hospitals has been delegated to the provincial provincial level.

Existing health care in China

Existing Chinese hospitals, primary providers of health care in China, are inexpensive by developed world standards, but are crowded, lack privacy and frequently require patients to pay well above set rates for “extras”. Overall, their performance does not meet the aspirations of the emerging middle class.

China’s developing middle class have sufficient income to pay for a higher and more patient friendly standard of health care in China. Some go to private hospitals in China established by Chinese investors or the VIP section of existing hospitals. Others, if they cannot get what they want from health care in China, are prepared to go offshore. VIP sections of existing hospitals are typically less crowded and much more expensive, but offer the standard level of expertise.

Increasing numbers of health care tourists from China

An article in the Shanghai Daily about Chinese going to Malaysia for health care illustrates the growing need for improved health care in China. The article states that 22,000 Chinese sought health care in Malaysia in 2013, a big increase from the 8,000 in 2010, and is an example of the unmet demand for superior health care in China.

Medical tourists from China to Malaysia were identified in the article as the middle-aged, seniors, and couples seeking help in fertility treatment. Popular medical services sought were said to include cardiology, cardiothoracic surgery, oncology, infertility, orthopaedics and plastic surgery. Routine but comprehensive health checks are also likely to become important.

Why go outside existing health care in China?

There are probably many factors that influence a decision to seek medical help outside the available health care in China, but quality of service and outcomes are likely to be important. A recent article from Caixin suggests that China’s cancer survival rates are significantly below those in more developed societies.

Other factors that are likely to influence the decision to go outside health care in China include the availability of highly trained foreign qualified medical staff and advanced medical technology.

Another driver influencing development of health care in China is the ageing population coupled with filial obligations to look after parents. China has changed – the filial obligations remain but highly paid younger Chinese are in positions where they cannot take the time off to personally provide care for their ageing parents. Paying for better quality health care in China is one way that filial obligations can be at least partially met. This is likely to be a growing, and profitable trend for health care in China.

Take away points

  • Investing in health care in China is a recent opportunity previously closed to foreign investors.
  • The Chinese middle class are demonstrating their willingness to pay for superior health care in China, and are also willing to seek health care offshore.
  • The number of Chinese willing to pay for perceived superior health care has increased rapidly (for example, from 8,000 visitors to Malaysia in 2010 to 22,000 in 2013). The numbers in China that can afford superior health care are likely to vastly larger than the number accessing offshore health care. Many would prefer to access superior health care in China and have the means to pay for it.
  • Filial obligations to ageing parents will be a strong growth driver for superior health care in China.

GB

© 2014 Graham Brown. All rights reserved.

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