China: Judgment on "Preemptive Registration by Unfair Means" in Article 31 of the Chinese Trademark Law

* This article is the English translation for Mr. Wang's article in Chinese published on China Trademark magazine (Issue 6, 2013) and Trademark Communications magazine (Issue 5, 2013). China Trademark magazine is sponsored by China Trademark Association under supervision of the State Administration for Industry and Commerce (SAIC) overseeing the Chinese Trademark Office (CTMO) and the Trademark Review and Adjudication Board (TRAB). Trademark Communications magazine is the internal magazine of the CTMO.

In February 2013, the Supreme People's Court (SPC) rendered a decision [The SPC Administrative Order (2012) Zhi Xing Zi No. 9] (the SPC No. 9 Order) on the re-trial case of the trademark "Duck King in Chinese" filed by Shanghai Huai Hai Duck King Roast Duck Restaurant Co., Ltd. (previously named as Shanghai Huai Hai Quanjude Roast Duck Restaurant Co., Ltd., hereinafter as "Shanghai Duck King"). The SPC holds that the opposed mark of "Duck King in Chinese" filed by Shanghai Duck King did not constitute preemptive registration by unfair means under Article 31 of the Chinese Trademark Law 2001. Thus, re-trial application filed by Beijing Duck King Roast Duck Restaurant Co., Ltd. (Beijing Duck King) shall be rejected. This is another judgment in favor of Shanghai Duck King since the first re-trial decision [Beijing High Court Administrative Judgment (2010) Gao Xing Zai Zhong Zi No. 53] rendered by Beijing High Court in December 2010. This case has lasted for over ten years and has undergone multiple twists and turns and all procedures stipulated by the law including two re-trials, from the trademark application filed by Shanghai Duck King in January 2002 to the SPC's rejection decision in February 2013 on the second re-trial. This case fully reflects the administrative and judicial procedures of trademark prosecution from trademark application to final registration. The SPC No. 9 Order regarding preemptive registration by unfair means will definitely provide guidance to subsequent similar cases.

I. The SPC No. 9 Order on the second re-trial

The SPC No. 9 Order holds as follows:

Article 31 of the Chinese Trademark Law is intended to crack down on preemptive registration and compensate for the possible unfair consequences resulted from the strict principle of prior registration. Under the principle of prior registration, only where the unregistered marks of prior use have certain influence, and where the applicant of latter applied mark knows or should know the prior mark AND the applicant has the bad faith of obtaining unjustified interests from goodwill of such unregistered marks, it shall be curbed by Article 31. Rule 18 of the SPC Notice on Several Issues concerning Trial of Administrative Cases involving the Granting and Determination of Trademark Rights (Fa Fa 2010, No. 12) prescribes as follows: "As long as a trademark applicant filing a preemptive registration knows or should know that the trademark is being used and has certain influence by others, it may be deemed as unfair means." This Rule 18 of judicial opinions explains "unfair means" as "knows or should know" without further requiring the intention of free riding and the intention of invading the goodwill owned by others. The reason is that, usually, if the mark of the prior use has certain influence, while the applicant of latter applied mark knows or should know such mark, then it may be presumed that said applicant has the intention to invade the goodwill owned by others, namely, the two facts ("knows or should know" and "intention of invading the goodwill owned by others") are usually coincidence.

However, taking the specific circumstances of this case into account, the SPC No. 9 Order holds that the trademark application "Duck King in Chinese" filed by Shanghai Duck King does not constitute preemptive registration by unfair means. The reasons are as follows:

(1) On December 21, 2000, Beijing Duck King filed a trademark application for "Duck King in Chinese" designating services for "Canteens, etc." in Class 42. On July 30, 2001, the trademark application was rejected by the Chinese Trademark Office (CTMO) for lack of distinctiveness. Beijing Duck King failed to appeal for a review. Later, Shanghai Duck King applied for the opposed mark which was also rejected by the CTMO for lack of distinctiveness. Shanghai Duck King appealed for a review of the rejection and submitted evidence of the trademark use, and was subsequently approved for preliminary publication. The disapproval of Beijing Duck King's mark is to some degree due to the difference of previous administrative procedure it went through, which also verifies that the registration of the opposed mark field by Shanghai Duck King does not fall under the scope of preemptive registration by unfair means.

(2) Shanghai Duck King's application for the opposed mark and its business activities in Shanghai is not intended to subjectively take advantage of the goodwill of Beijing Duck King, nor deliberately associate with Beijing Duck King to cause confusion among the relevant public. Since the application of the opposed mark to date, Shanghai Duck King and its affiliates have formed its own reputation and brand influence through wide use and promotion, which is the fruit from its own diligent business operation instead of free riding on Beijing Duck King's goodwill.

Based on the above, the SPC No. 9 Order rules as follows: The TRAB decision is affirmed that Shanghai Duck King's trademark application shall be approved for registration as it does not fall under the scope of unfair means. The first and second instance court decisions failed to consider whether the application of the opposed mark had the bad faith of riding on the prior mark's goodwill, thus the application of law is inappropriate. Although the first re-trial judgment rendered by Beijing High Court did not address the application of law for Article 31, it took the interests of both Beijing Duck King and Shanghai Duck King into full account, therefore the first re-trial judgment shall be affirmed.

II. Factors and standards determining "preemptive registration by unfair means" prescribed by Article 31 of the Chinese Trademark Law

According to the Trademark Examination Standard jointly promulgated by the CTMO and the TRAB in 2005, seven factors shall be considered in determining preemptive registration by unfair means prescribed in Article 31 of the Chinese Trademark Law: (1) the applicant of the disputed mark had trading intercourse or cooperation with the user of prior mark; (2) the applicant of the disputed mark and the user of prior mark reside in same area or their goods / services share the same distribution channels and geographic scope; (3) the applicant of the disputed trademark had a dispute with the user of prior mark and may know the prior mark; (4) the applicant of the disputed mark and the user of prior mark had internal personnel exchanges; (5) the applicant of the disputed mark takes advantage of the prior mark which has certain reputation and influence to misleadingly advertise, threatens the user of prior mark to trade with said applicant, and requests the user of prior mark or others for high transfer fee, licensing fee, or other compensations; (6) the mark owned by others is of strong inherent distinctiveness; (7) other situations that may be identified as malicious. The Trademark Examination Standard takes the enumerated legislative technique, and item (7) is a catch-all provision. The abovementioned provisions have undoubtedly provided direct reference for the heavy workload of trademark examination and have achieved positive effects. Particularly, item (6) prescribing "the mark owned by others is of strong inherent distinctiveness," is the summary based on a large amount of actual trial practice and cases. However, enumeration cannot exhaust all possibilities after all, and certain special situations will find it hard to fit in.

Rule 18 of the SPC Notice on Several Issues concerning Trial of Administrative Cases involving the Granting and Determination of Trademark Rights divides the preemptive registration by unfair means into two types (namely, the applicant of the disputed mark "knows" and the applicant "should know"), and holds that if the applicant of the disputed mark knows or should know, then it may be deemed as unfair means. Obviously, Rule 18 is the further summary and conclusion of the Trademark Examination Standard, strengthening the crack down on preemptive registration and curbing the trademark squatting, and effectively preventing the preemptive registration by unfair means. However, this Rule 18 shall be interpreted correctly. First, the wording "may" contained in this Rule 18 is not equivalent to "shall." In order to realize judicial justice, we can neither spare the rat to save the dishes nor throw away the apple because of the core. Likewise, we cannot throw out the baby out of bath water or block the flies out of the window along with the sunshine. Only by avoiding those mistakes, can law truly serve as the filter and realize its function of praising virtue and punishing vice. If the above Rule 18 is understood as it "shall" be deemed as unfair means only if the applicant possess the subjective mind of knows or should know, it would be too arbitrary and too absolute, because this would not exclude the situations falling beyond the scope of curbing prescribed by Article 31 of the Chinese Trademark Law. Second, if "may" were equivalent to "shall," it would be overcorrected. Even if the overcorrection were necessary, it must be put back to the right position in a timely manner after the overcorrection. Otherwise, the "overcorrection" would be a new "error", namely, when one "error" is corrected, it has become another "error."

The SPC No. 9 Order further clarifies the criteria and standard of "preemptive registration by unfair means" and provides in-depth explanations on the above Rule 18 of the judicial opinions. Namely, only when the applicant of the disputed mark knows or should know the prior mark AND and the applicant has the bad faith of obtaining unjustified interests from the goodwill of trademark, it shall be subject to Article 31 of the Chinese Trademark Law. The reason why "unfair means" is interpreted as "knows or should know" is that "knows or should know" usually coincides with the intention of invading the goodwill owned by others. According to the SPC No. 9 Order, "knows or should know" is insufficient to constitute the criteria and standard of "unfair means." Whether the applicant of the disputed mark intends to free ride on and to invade goodwill owned by others is the substantial standard. The reason is that in some specific conditions, "knows or should know" does not necessarily mean the intention of invading the goodwill owned by others.

From the point of the dialectical materialism, people's awareness takes a spiral, repeated forward process. Just as Judge Xiangjun KONG of the Intellectual Property Tribunal of the SPC comments: "When the legal provisions are not clear and the content needs to be gradually clarified or the law lags behind the social development, or there is legal vacancy, then the court decisions might be very experimental, tentative, or even error-piloting, where exploration and innovation are required."¹ The SPC No. 9 Order has positively complemented and perfected the SPC judicial opinions, on the basis of full understanding of the legislative's intention of the Chinese Trademark Law and the essential spirit of these judicial opinions combined with specific situations. Specifically, the substantial significance of the SPC re-trial decision are as follows: First, judgment on "preemptive registration by unfair means" shall take full account of the inherent distinctiveness of the trademark and the trademark filing histories of both interested parties; Second, judgment on "preemptive registration by unfair means" shall take full account of the objective facts that goodwill of the disputed mark is obtained by use in good faith.

III. The SPC re-trial: Judgment on "preemptive registration by unfair means" shall take full account of the inherent distinctiveness of the trademark and the trademark filing histories of both interested parties

First, unregistered trademarks protected by the clause of "preemptive registration by unfair means" under Article 31 of the Chinese Trademark Lawshall be the "trademarks" which can identify the source of goods and services, rather than any "signs." Different from registered trademarks, the possibility of registration for unregistered trademarks has not been pre-examined by the relevant authorities. Consequently, before applying the "rights conflict" clause like Article 31 of the Chinese Trademark Law, the "distinctiveness" regulated in Articles 9 and 11 thereof shall be examined, and shall be taken as one of the factors in determining "preemptive registration by unfair means." If the trademark is of strong inherent distinctiveness, it will be unreasonable to claim it is a pure coincidence that the disputed trademark resembles the trademark of prior use. Based on this, it is reasonable to presume that it would be extremely difficult for the applicant of the disputed trademark to come up with such words of strong inherent distinctiveness or coined words if it were not the deliberate copy. Subsequently, it may be deemed that the applicant of the disputed mark has the intention of invading the goodwill owned by others. This is fully expressed in item (6)"the mark owned by others is of strong inherent distinctiveness" of the Trademark Examination Standard.

Second, judging from the viewpoints held by the trademark examination authorities during the trademark application process of Beijing Duck King as the user of prior mark, and Shanghai Duck King as the applicant of disputed mark, there is no doubt that designated services of "Canteens, etc." for the trademark "Duck King in Chinese" is of weak inherent distinctiveness and originality. TheTRAB decision for opposition review holds that, the disputed mark "Duck King in Chinese" per se is of weak inherent distinctiveness, therefore, the possibility that Shanghai Duck King and Beijing Duck King coincidentally have the same creativity shall not be excluded, as both of them engage in industry of roast duck restaurant. The essence of this TRAB decision is that the trademark "Duck King in Chinese" is of weak inherent distinctiveness in wording, and therefore the opposed mark does not fall under the scope of "preemptive registration by unfair means." The SPC No. 9 Order fully recognizes the accuracy ofthe TRAB decision for the opposition review.

Third, both of the trademark applications filed successively by Beijing Duck King and Shanghai Duck King were rejected bythe CTMOfor lack of "distinctiveness." Beijing Duck King abandoned the right to appeal, while Shanghai Duck King made reckless efforts to appeal. It is fair to say, the trademark application process of the disputed parties in the "Duck King in Chinese" case is a very critical objective fact and circumstance that differs from other cases.

Regarding "knows or should know" under Rule 18 of the SPC Notice on Several Issues concerning Trial of Administrative Cases involving the Granting and Determination of Trademark Rights, there are some issues. First, in regard of the mark which lacks distinctiveness or is of weak distinctiveness, even if the applicant of the disputed mark knows or should know, which one is the object of the foregoing "knows or should know", a mark in public domain, or the user of prior mark and his mark of prior use? Second, even though the applicant of the disputed mark knows or should know, the application for the mark that lacks distinctiveness shall not necessarily be deemed as intended to invade the goodwill owned by others. Just imagine, what would be the motive and intention for an interested party to file an application of mark lacking distinctiveness and rejected several times for registration?

IV. The SPC re-trial: Judgment on "preemptive registration by unfair means" shall take full account of the objective facts that goodwill of the disputed mark is obtained by use in good faith

The value of a trademark comes from use, the life of a trademark lies in use, and the essence of a trademark also lies in use. This has been widely acknowledged in theory and actual practice, and the legal basis can be found in the Chinese Trademark Law. Besides, this has been attached great attention and emphasis in the process of the third amendment of the Chinese Trademark Law. With respect to the legislative spirit of coordinating the protection of prior mark right and the maintenance of market order, the SPC has stipulated provisions in the form of judicial opinions in three consecutive years from 2009 to 2011.

Both Rule 9 of the SPC Opinions on Several Issues concerning Intellectual Property Trial Serving the General Situation underCurrent Economic Situations (Fa Fa2009, No. 23) and Rule 1 of the SPC Notice on Several Issues concerning Trial of Administrative Cases involving the Granting and Determination of Trademark Rights (Fa Fa 2010, No. 12) prescribe as follows: If the disputed mark has been used for a relatively long time and enjoyed a higher market reputation among the relevant public, the courts shall precisely master the legislative spirit of the Chinese Trademark Law regarding coordinating the protection of prior mark right and the maintenance of market order, fully respect the fact on the market that the relevant public has objectively distinguished relevant marks, and impose more emphasize on maintaining the well-established and stabilized order of the market. Rule 19 of the SPC Opinions onSeveral Issues concerning Functions of Intellectual Property Trialson Boosting the Development of Socialism Culture and Economy(Fa Fa 2011, No. 18) prescribes that it is necessary to respect the objectively established market order to realize the inclusive development among business operators. Thus, judgment on "preemptive registration by unfair means" shall take full account of the objective facts that goodwill of the opposed mark is obtained by use in good faith.

First, in case the disputed mark is deemed as violation of the clause of "preemptive registration by unfair means" under Article 31 of theChinese Trademark Law, it will be a negative evaluation of the applicant of the disputed mark in both aspects of morality and social value. Thus, for the disputed mark with a long-term and wide-range use, the court shall strictly and cautiously apply Article 31 thereof, taking full consideration of the harmony between the legislative and social effects of its decision.

Second, it is the coordination and balance between Rule 1 and Rule 18 of the SPC Notice on Several Issues concerning Trial of Administrative Cases involving the Granting and Determination of Trademark Rights. Judge Xiangjun KONG had incisive comments and analysis for this and holds the view as follows: "Rule 1 thereof did not impose explicit requirements on the subjective intention (with bad faith or not) of the applicant of the disputed mark, which is not neglect. The intention has been considered indeed at that time. No express attitude on this issue is made, because the situations in practice are complicated and it is difficult to judge whether the applicant has the bad faith or not. Under these circumstances, it may be apprehended and understood as reserving the room for flexibly handling the issue of the intention whenever it is necessary, or even as apprehended and understood no special requirements are imposed. "² Therefore, it is clear that Rule 1 of the SPC Notice on Several Issues concerning Trial of Administrative Cases involving the Granting and Determination of Trademark Rights well expresses the wisdom, the logic, and the value of jurisdiction, and situations prescribed by Rule 1 are essentially an exception of Rule 18 thereof.

Based on the objective facts that goodwill of the opposed mark is obtained by use in good faith, the SPC No. 9 Order holds that Shanghai Duck King did not have the subjective intention to exploit the goodwill of Beijing Duck King. Namely, since the application for registration of the opposed mark to date, Shanghai Duck King and its affiliates have formed its own reputation and brand influence through wide use and promotion of the opposed mark, which is the fruit from its own diligent management rather than riding on Beijing Duck King's fame.

V. Trademark awareness: Enlightenments beyond the "Duck King in Chinese" case

The trademark prosecution case of "Duck King in Chinese" has finally and truly come to the end with the SPC re-trial. There are some enlightenments beyond the case which may have more research value than the legal issues of the case itself.

On the one hand, for Beijing Duck King, it is more of a lesson that it uses the trademark "Duck King in Chinese" with a prior date but fails to obtain registration so far. First, companies shall be discreet when selecting a mark and shall conduct professional analysis in advance on the possibility of registration including the inherent distinctiveness and the potential conflicting prior rights. Second, when a trademark application is rejected, the company shall not abandon its rights and chances rashly; Instead, the company shall make necessary legal analysis before deciding whether to appeal for a rejection review. Actually, the trademark awareness includes not only the awareness of application for registration but also the awareness of rejection appeal. Beijing Duck King abandoned its right of appeal, which, in some degree, was in relation to the then provisions of the Chinese Trademark Law. But it cannot be denied that Beijing Duck King's decision of abandonment of the appeal could have been wrong. It not only deprived its opportunity for trademark registration but also led itself into a dilemma: On the one hand, Beijing Duck King had to prove the wording "Duck King in Chinese" has relatively strong inherent distinctiveness, as it claimed Shanghai Duck King had the bad faith of "preemptive registration by unfair means." On the other hand, however, Beijing Duck King actually acknowledged the wording "Duck King in Chinese" lacks distinctiveness, as it abandoned the right to appeal after rejection. Just imagine, what would be the result if Beijing Duck King had made reckless efforts to appeal when its trademark application is rejected by the CTMO?

On the other hand, in terms of Shanghai Duck King, there are truly some successful experiences deserving attention. Shanghai Duck King underwent four administrative procedures (rejection, rejection review, opposition, and opposition review), and two judicial procedures (the first and second instances), the protest of re-trial presented by the Supreme People's Procuratorate to the SPC, and two judicial re-trials by Beijing High Court and the SPC respectively. The strong trademark awareness of proactively arguing its rights on the side of Shanghai Duck King is worth learning. However, Shanghai Duck King lacks the awareness of risk prevention on trademark, which shall be reflected. Shanghai Duck King's investment of significant amount of capital before obtaining the trademark registration actually placed the company in a bad situation with huge potential legal risks. Frankly, Shanghai Duck King lacks the trademark awareness of "Trademark application comes before market promotion", risks prevention and conflicts of rights. Theoretically speaking, Shanghai Duck King could have cultivated any other trademarks successfully with its amount of money and other resources that invested into the trademark "Duck King in Chinese". However, the trademark "Duck King in Chinese" case has lasted for more than ten years and the uncertainty of the trademark right and potential legal risks and disputes has undoubtedly hindered the development of the company immensely.

Footnotes:

1 Xiangjun KONG, Basic Issues in Applying the Chinese Trademark Law, China Legal Publishing House (1st Edition), Sep. 2004, p. 204.

2 Ibid, p. 214.

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