China: $5M Case Highlights Risk From Chinese Trademark Trolls

Last Updated: 6 December 2013
Article by Paolo Beconcini

Law360, New York (October 17, 2012, 3:11 PM ET) -- Under Chinese trademark law, only a registered trademark enjoys protection and the first person or entity to register it becomes its lawful owner, even if that trademark has already been used by others in China. The only exception to this rule is that of an unregistered trademark which, through its intense and prolonged use in China, has acquired a good reputation among the relevant public or has become famous nationwide at the time of registration of a hostile trademark.

Known as "trademark trolls," certain Chinese companies or individuals are known to actively follow a strategy of registering intellectual property rights in China that arguably belong to their foreign competitors. Aware of the very strict "first to file" principle, they identify, apply and register trademarks belonging competitors who have forgotten or not yet taken steps to register them.

These "stolen" trademark rights create great uncertainty for the foreign investor doing business in China. More worryingly, in some cases the IP rights can be enforced against the foreign investor for opportunistic and unfair motives as was the case this year when a European wine manufacturer, Castel Freres SAS, was ambushed by a Chinese competitor over a "stolen" trademark with catastrophic consequences. In April 2012, Castel was ordered to pay more than $5 million in compensation, one of the largest ever sums of damages in an IP infringement case in China.

Background Facts

Castel Group is one of the world leaders in wines, beers and soft drinks. An internationally recognized name, it has a wide range of brands and presence in more than 130 countries.

Castel Freres SAS entered the Chinese market more than 14 years ago, setting up its filling center in China in 1998.

In 2001, Castel started cooperation with Chang Yu, the largest wine maker in China, under the name "Ka Si Te - Chang Yu Chateau" and with the brand name "Zhang Yu Ka Si Te." Sales grew very well and the brand "Ka Si Te" gained more and more reputation amongst Chinese consumers. However, on March 7, 2000, the name "Ka Si Te" had been registered as a Chinese trademark in class 33 by Wenzhou Wujin Jiaodian Huagong Group. In 2002 it was then transferred to a Li Dao Zhi, a Spanish-Chinese winemaker. In 2008, almost eight years after the original trademark registration, Li established Shanghai Ka Si Te Wine Co. Ltd., which sells wine exported from France to China with the trademark "Ka Si Te."

It was only in 2005, almost 10 years after having started marketing the name "Ka Si Te" in the Chinese market, that Castel became aware of the hostile trademark "Ka Si Te" of Li. At this time, Castel applied for the trademark application "Ka Si Te" in class 33, but this was rejected due to its collision with the prior "Ka Si Te" of class 33 registered back in 2000 and owned by Li.

The Castel Freres Civil Dispute

On July 8, 2005, Castel filed with the Trademark Office a request to cancel Li's hostile trademark "Kai Si Te" for nonuse for three consecutive years. This cancellation dispute lasted for six years and the final ruling came from the Supreme People's Court on Dec. 17, 2011, rejecting the request for cancellation.

In October 2009, parallel to the cancellation action, Li together with Shanghai Banti Wine Company filed a trademark infringement lawsuit against Castel and Shenzhen Castel (its Chinese dealer) with the Wenzhou Intermediate People's Court. In this civil complaint, Li claimed compensation for RMB 40 million (€5,120,000) by alleging that Castel and its dealers had illegally earned such an amount of profit by their unauthorized use of his trademark "Ka Si Te" from January 2007 to October 2009, including using the brand on wine products, advertisement and packaging.

The Wenzhou Intermediate People's Court held three hearings, during which Castel argued that its use of the trademark "Ka Si Te" was in good faith as "Ka Si Te" is long known to be the official translation of the Latin name "Castel" and has served as graphic illustration of the trademark "Castel," rather than being an indication of the origin of the wine sold in China.

Castel also argued that it is their Shenzhen dealer who labels the imported wine with the trademark "Castel" together with the Chinese characters "Ka Si Te" and therefore the dealer should be the only defendant in this case. The Wenzhou Intermediate People's Court judged that Castel had always had knowledge of the registered Chinese trademark "Ka Si Te," and that the wine Castel produced in France would have been labeled with the infringing mark "Castel Ka Si Te." Therefore, Castel and Shenzhen Castel were to be seen as joint infringers.

The Civil Judgment

On April 10, 2012, the Wenzhou Intermediate Court issued the first instance judgment regarding the trademark infringement lawsuit between LI Dao Zhi and Castel & Shenzhen Ka Si Te Wine. The court judged that the conduct of the two defendants infringed upon the trademark rights of Li and condemned the defendants to pay damage compensation for RMB 33,734,546.26 (more than $5 million). To date, this is one of the largest damage compensations for an IP infringement case in China.

Collateral Damage

Li and his company also started enforcing their registered trademark "Ka Si Te" against Castel and its distributors, wholesalers and retailers in China, through what may be defined an anti-counterfeiting strategy. For instance:

  • Li sued Beijing Yansha Yonyi Mall, Carrefour and Wal-Mart Stores Inc. for selling fake "Ka Si Te" wines.
  • In the litigation against Beijing Yansha Youyi Mall No. , the Beijing Higher People's Court ordered Beijing Yansha Yonyi Mall stop selling 14 types of wines bearing the "counterfeit" Chinese trademark "Ka Si Te."
  • Most recently, on April 23, 2012, Shanghai Ka Si Te sued four companies selling wine bearing with the "fake" Chinese trademark "Ka Si Te" in three courts in Shanghai and has been coordinating with other relevant enforcement departments to raid and penalize the infringers.

Li is ultimately lawfully enjoying the benefit of an exclusive IP right that really should have belonged to Castel, following years of investment in building up their brand in China. In sum, with the cooperation of local trademark enforcing administrations, Li has been able to raid Castel wines in 50 cities in China.

Brief Analysis

In this case, it was clear in 2000 when Li registered "Ka Si Te" that the same name had been used enough by Castel to become famous in China.

The word "Castel" sounds similar with the Chinese word "Ka Si Te," and rarely will Chinese consumers be able to tell the difference between the two, since Chinese customers are more pronunciation-oriented and would tend to deem the two trademarks to sound identical.

Although Castel set up its own business in China early in 1998, and cooperated with one of the top three wine makers-Zhangyu in China to produce wine bearing with the brand "Zhang Yu Ka Si Te," it failed to apply immediately the Chinese name "Ka Si Te" in class 33 when it started marketing the brand "Ka Si Te" and "Castel" together.

Recognizing this mistake, Li recognized the opportunity and has ultimately exploited it to his advantage. Unlike many trademark grabbers, who register trademarks of others without intention of using it, in this case it was registered with the intention of preventing a competitor's brand gaining lawful access to the Chinese market.

Conclusion

Clearly Castel should have registered "Ka Si Te" immediately before or at the latest upon entering the Chinese market in 1998.

Any enterprise seeking to sell their products or services in China needs to plan the construction of an appropriate trademark portfolio as early as possible.

Ideally, trademarks should be registered in China even when the foreign enterprise is currently using China only for manufacturing its products. This category of enterprise is particularly at risk as it raises awareness of the brand in China among trademark trolls looking for this sort of opportunity. Companies who later decide to sell these same products China can find their trademarks already "occupied" by competitors (sometimes even their Chinese business partners). Also, if they do not plan to sell in China at all in the foreseeable future, Chinese competitors may still register their trademarks in China and use them to shut down their manufacturing operations.

Another lesson to learn from such a case is that when applying for a Latin name in China as a trademark, a suitable Chinese translation or transliteration, or transposition should be immediately conceived and registered along with the Latin name. Failure to plan ahead to protect your trademarks in China may cost dearly as the Castel case shows, or you may find yourself unable to sell products in the world's fastest growing market under the brand name that you have invested so heavily in building elsewhere.

Originally published in Law 360, October 17, 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Paolo Beconcini
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