China: Asia IP & TMT: Quarterly Review - 2015 Q2

Keywords: China, trade marks, PRC patent law, domain name, Anti-Terrorism Law, Cloud Computing, drones

TRADE MARKS – CHINA

Lost in Translation: The Uphill Battle for Foreign Brand Owners to Protect Chinese Trade Marks in China Continues

By Benjamin Choi, Partner, Mayer Brown JSM, Hong Kong
Maryellen Ko, Trainee Solicitor, Mayer Brown JSM, Hong Kong

In April 2015, the Guangdong Intermediate People's Court delivered a judgment against New Balance for trade mark infringement. New Balance was ordered by the Court to pay an unprecedented sum of 98 million Yuan in damages to the trade mark owner—a businessman in Guangzhou trading in shoes and apparel bearing the mark "新百伦"—and to make a public announcement on its official website to eliminate any prejudice it may have caused to the plaintiff 's mark.

The American footwear manufacturer was found to have used, knowingly and without prior authorisation from the trade mark owner, the mark "新百伦" (pronounced Xin Ba Lun, a Chinese transliteration from English words "New Balance") in connection with offers for the sale of New Balance shoes on Chinese online platforms which were inevitably in Chinese and thus used the Chinese brand to refer to New Balance shoes.

"First to File " Wins

The New Balance case illustrates the importance of the "first to file" principle in China. Unlike other jurisdictions where the registration of a trade mark depends on and must be coupled with evidence of use, the trade mark registration system in China is a "first to file" system. Whoever is the first to obtain trade mark approval in China, owns the rights in the trade mark, even if the successful registrant turns out not to be the official trader of the branded products or services.

The race to obtain trade mark ownership has become more intense in recent years due to an escalation of trade mark squatting. For a more detailed analysis on how to protect your Chinese character trade marks in China please see our previous article entitled "Tips on Protecting Chinese Characters Trade Marks under the New Chinese Trade Mark Law" published in March 20141.

The inevitability of multiple versions of Chinese marks

Whilst foreign brand owners are increasingly looking towards the Chinese market to exploit new business opportunities, the unfortunate reality is that the majority of Chinese consumers do not speak a foreign language. By necessity, Chinese consumers will, sooner or later, devise their own Chinese version of a foreign brand instead of referring to the original Latin script.

Being fined for trade mark infringement is but one troublesome consequence due to the failure to register your Chinese character trade mark in time. One Latin script mark can yield different versions of Chinese character marks, all with the same pronounciation, so consumers will inevitably be confused by the existence of multiple Chinese versions of one's brand.

In the New Balance case, the Court found that on occasions an alternative mark "纽巴伦" (Niu Ba Lun) was used by New Balance throughout the course of its trading activities in China.2 Thus, having multiple versions of the same Chinese brand that is not consistently marketed will inevitably dilute the distinctiveness of a brand image.

Further, Chinese names are imbued with great significance, and the inferences attached to market-invented Chinese marks carry much weight to either build or break a brand name. For example, the Chinese name for Coca-Cola (可口可乐; pronounced "Ke-Kou-Ke-Le") not only sounds like its English counterpart, but conveys the message of "tasty and fun". An off-putting brand name given by the Chinese public may encounter many marketing roadblocks within the Chinese market.

It is therefore prudent for foreign brand owners to retain control of their own brand image and not only register, but take initiative to promote a consistent, official Chinese version of their brand.

The dangers of oppositions

In the New Balance case, the Court found that New Balance was not a mere bystander whilst its transliterated mark was being registered and used by another. In fact, New Balance opposed the mark in December 2007, but without success. It was for this same reason that the Court found bad faith on New Balance's part by continuing to use the mark "新百伦" despite having knowledge that its earlier opposition against the mark's registration had not been upheld. It seemed that New Balance's genuine attempts to prevent its Chinese mark from being used in the market had backfired.

Under the new Trade Mark Law (effective from 1 May 2014), material changes were made to streamline the opposition process intending to curb unmeritorious claims. One such amendment is the ban on any appeals by unsuccessful opponents before the Trademark Review and Adjudication Board. Instead, the mark in question will immediately proceed to registration with the China Trademark Office ("CTO"). If a brand owner loses its first instance opposition before the CTO, the only other recourse it has is to proceed through invalidation of the registered mark, a process introduced under the new law.

This change highlights the fact that brand owners now need to put more thought into their claims at the opposition stage, and submit evidence showing sufficient use or well-known status, because the consequences of an unsuccessful opposition may be dire and can actually be used against a brand owner as evidence of bad faith, as illustrated in the New Balance case.

An unorthodox award of damages ?

Perhaps the most commented aspect of the New Balance case was the fact it resulted in the highest damages award for trade mark infringement in history. New Balance's total profit during the infringement period, between the years 2011-2013, was 195.8 million Yuan. The award of damages was for half of that amount, with costs.

It is now possible under the new Trade Mark Law, if it is "difficult to determine the amount of actual losses" caused by the infringement (as happened to be the case in the New Balance case) that the amount of damages can be determined based on an account of profits. This decision is being appealed by New Balance, and it remains to be seen whether the Court's reasoning on the award of damages will be upheld.

Lessons learned

The New Balance case serves as an important reminder for any foreign brand owners with plans to trade in China to act early, and the sooner the better.

Where no official Chinese version of a mark has been devised, in order to retain control of one's brand within the Chinese market, companies should adopt and register an official Chinese mark that appropriately reflects their brand before the Chinese public creates their own version. To avoid confusion between an official Chinese mark and the multiple renditions that inevitably already exist in the market, foreign brand owners should adopt consistent and distinctive marketing strategies of their registered Chinese mark. Use of any trade mark without registration can result in undesirable consequences.

It seems the challenge for foreign brand owners in combating trade mark squatters, whether or not such registrations are obtained in bad faith, will continue for a while yet.

PATENTS – CHINA

Brief Overview of the Draft Fourth Amendment to the PRC Patent Law

By Frank Yang, Senior Associate, Mayer Brown JSM, Beijing

On 1st April 2015, the State Intellectual Property Office (the "SIPO") released a new draft of the fourth amendment of the PRC Patent Law (the "Draft Amendment") for public comment. Compared with the last draft which was sent to the State Council for review in January 2013, this Draft Amendment provides additional changes aiming to enhance patent enforcement, exploitation, and to promote competition.

Scope of Employee Service Inventions Narrowed

Under the current Patent Law, an employee service invention is defined as an invention made by an employee in execution of a specific work assignment or utilizing materials or technical means offered by his employer. The right to apply for a patent of such service invention belongs to the employer. The Draft Amendment, however, redefines employee service invention by limiting it to only those made by an employee in execution of work assignments. When an invention is made outside work assignments, the right to apply for a patent belongs to the creator in the absence of any contract stating otherwise, under which circumstance, the Draft Amendment further requires that the employer give the creator an appropriate reward after the grant of the patent. In-house counsel should thus reassess their companies' invention assignment agreements and establish an invention reward program if such is not already in place.

Protection of Design Patents Expanded

Although the current PRC Patent Law does not expressly exclude a partial design from patent protection, the Guidance for Patent Examination issued by SIPO has specifically denied the patentability of the design of an individual component or part of a product which is inseparable from the product, or cannot be sold and used independently. In practice, only an industrial design made for the overall appearance of a product is patentable. In light of the current trend of innovative elements of an industrial design being more often featured in individual parts of a product rather than its overall appearance (for example, smart phones), patent protection for an innovative partial design has become necessary.

Proposed Article 2 of the Draft Amendment therefore makes it clear that an industrial design made for either the overall or the partial appearance of a product may be patented. Detailed examination rules governing partial designs are also expected to be issued by SIPO in the near future. This change shall definitely help to curb the acts of copying portions of a product design or combining designs of portions of different products which at the moment do not attract liability for infringement of any design patent covering a complete product. Furthermore, the Draft Amendment extends the term of design patents from 10 years to 15 years as part of China's effort to join the Hague Agreement. Companies which are eligible for design patent protection should take advantage of this amendment and re-evaluate their design patent portfolios to identify opportunities for partial design protections.

Patent Enforcement Strengthened

The Draft Amendment has built in additional provisions which aim to further improve China's patent enforcement system:

  1. Reduction of Burden of Proof

    Under the current PRC Patent Law, a patent holder bears the burden of providing evidence for calculating damages either in the form of lost profits or illegal gains. Because China court proceedings do not have a process of discovery, it is very difficult for a patent holder to obtain accurate financial information from the infringer. Article 61 of the Draft Amendment provides that where the patent holder has used its best efforts but failed to provide such proof (e.g. books and accounts relevant to the infringement activities), the court may order the infringer to disclose them instead.
  2. Inclusion of Punitive Damages

    Article 65 of the Draft Amendment allows the court to increase the amount of damages to two to three times of the original amount either claimed and proved by the patent holder or determined by the court, where it is established that the infringer has "wilfully" infringed the patent holder's rights. The standard of "wilful infringement" is not clearly defined although some commentators believe that repeated infringement or mass infringement will fall under this definition.
  3. Imposing Joint Liability for OSPs/ISPs

    The Digital Millennium Copyright Act of the United States has notable safe-harbour provisions which protect internet service providers from the consequences of their users' actions. Similar provisions have also been introduced in the current PRC Tort Law and the Regulations on Protection of Information Network Distribution Rights. Generally, in order to be eligible for safe harbour protection, an internet service provider must terminate the online services to its subscribers or account holders of the service provider's system or network upon notice of their infringing activities being received.

    To restrain the increasing amount of patent infringement on e-commerce platforms, the Draft Amendment introduces a similar safe-harbour provision under proposed new Article 71. According to Article 71, if it is discovered that subscribers are using the services to advertise, offer for sale or sell products which infringe a Chinese patent, or upon receipt of a notice from patent holders or patent authorities supported by evidence of infringement or relevant determinations, an internet service provider must take necessary actions such as termination, deletion or screening of links provided to the infringing products to stop the infringement on the platform. Non-compliance will result in joint liability on the part of the ISP for patent infringement.
  4. Expansion of SIPO's Administrative Enforcement System

    The current Patent Law adopts the same "dual-channel" enforcement system as for China's trademark and copyright sectors. Apart from court proceedings for patent infringement, a patent holder may also choose to enforce its patent rights through an administrative channel by submitting an administrative complaint to local patent authorities.

    However, compared with the broad powers of local administrations of industry and commerce in handling trademark cases, the powers of local patent authorities to handle patent infringement cases are relatively limited. This explains why some patent holders choose to enforce their rights through court proceedings rather than through the administrative route.

    The Draft Amendment aims to expand the administrative patent enforcement system by means of:

    • empowering SIPO and local IPOs to confiscate or destroy the infringing products, the parts, tools, modules or equipment that are used to manufacture infringing products or seize the infringing products where patent infringement is ascertained; (proposed Article 60)
    • where wilful patent infringement (including massive and repetitive infringement) is found, SIPO and local IPOs are empowered to impose administrative fines up to five times of the amount of the illegal business turnover which exceeds RMB 50,000, and RMB 250,000 versus the illegal business turnover of less than RMB 50,000; (proposed Article 60)
    • allowing SIPO and local IPOs to investigate and impose penalties for a patent infringement that has a "significant impact" and to engage in "market supervision" work; (proposed Article 3) and
    • allowing SIPO and local IPOs to seal up and detain products suspected of wilful patent infringement during the course of an investigation of the same; (proposed Article 64)
    These provisions will substantially expand the powers of patent administrative authorities whose functions were previously limited to identification and punishment of patent infringements. Concerns have been raised by foreign patent holders regarding the discrepancies in expertise of the local IPOs in determining patent infringement. How this will carry out in practice remains to be seen.
  5. Prompt Publication of Patent Invalidation Decisions

    Under the current Patent Law, as a patent invalidation decision from SIPO is subject to appeal to the PRC courts. Patent infringement cases are usually suspended until the issuance of final court decisions as to the validity of the patents at issue. The Draft Amendment requires SIPO to publish patent invalidation decisions as soon as the same are made by its Patent Re-examination Board even when an appeal is pending. Revised Article 60 requires the court and relevant patent authorities to resume their court and administrative proceedings immediately upon the publication of such decision. This change will hopefully speed up infringement proceedings by streamlining the invalidity and infringement portions of the case.

General Requirement Imposed to Prevent Abuse of Patent Rights

Proposed new Article 14 of the Draft Amendment imposes a general principle to prevent abuse of patent rights which provides that the patent rights shall be exercised in accordance with the good faith principle and shall not be exercised in a manner that would jeopardize public interests, improperly exclude or restrict competition, or impede technology development.

This amendment essentially derives from a similar clause of the current PRC Contract Law. While SIPO's explanatory note indicates that its purpose is to keep consistency with requirements under TRIPs, the effect of the broad wording of this provision may go far beyond the restrictions permitted by TRIPs, thus unreasonably prejudicing the legitimate interests enjoyed by patent owners during the normal exploitation of their patent. In other words, this general requirement used to prevent abuse of patent rights might be abused by Chinese courts or local administrative patent authorities under the pretext of local protectionism. Foreign holders of Chinese patents might find themselves embroiled in disputes stemming from the interpretation and enforcement of this new Article regarding abuse of patent rights. Particularly in a licensing transaction with a Chinese party involving PRC patents, while a foreign licensor needs to consider adequate ways of protecting its patent rights, it should also be mindful to avoid the pitfalls of an "abuse of patent rights".

Development of Patent Licensing System

To encourage patent exploitation transactions in China, the Draft Amendment proposes to introduce a new chapter "Patent Implementation and Exploitation". Among other changes, the following developments should be noted:

  1. Establishment of Voluntary Licensing System

    The proposed new Articles 79~81 intends to provide a framework for voluntary licensing under which a patent owner may voluntarily offer to license its patents to members of the public by completing certain registration formalities with SIPO.
  2. Inclusion of Implied Licensing System During National Standard Formulation Process

    The proposed new Article 82 imposes an implied licensing obligation on patent holders who participate in the formulation of national standards. Where a patent owner fails to disclose any of its standard essential patents, such patented technologies will be deemed as being licensable by the patent owner to prospective entities seeking to implement this national standard. As this new Article 82 seems to only deal with "national standards" defined under the PRC Standardization Law, it may not govern the activities of all standard development organizations in China, including those sponsored by foreign companies. This draft provision thus remains nebulous and its effect remains to be determined.

To read this Review in full, please click here.

Originally published June 2015

Footnotes

1. The article can be accessed via this link: http://www.mayerbrown.com/files/Publication/e8e17e07-4f6d-4862-a8a6-ba15cc7b2d4c/Presentation/PublicationAttachment/c6d1f518-adbe-407e-b3cd-de70f34d367c/IP_TMT_QuarterlyReview_2014Q1.pdf

2. Interestingly, the Court was also of the opinion that the transliteration "新百伦" (Xin Bai Lun) was not actually a direct translation of the New Balance brand. It instead suggested "新平衡" (Xin Pin Heng) as a more appropriate transliteration.

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Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.

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