China: Improper Use Of Commercial Signs — Proposed Revisions To Article 5 Of The PRC Anti-Unfair Competition Law

On February 25, 2016, The State Counsel Legislative Affairs Office ("SCLAO") released a draft amendment ("Draft Amendment") of the PRC Anti-Unfair Competition Law ("AUCL") for comment by industry and other stakeholders.  Article 5 of the 1993 AUCL provides the basis for claims against Business Operators for unfair trade practices involving the misuse and misappropriation of trade dress, enterprise names, and other commercial signs.  The Draft Amendment of the AUCL contains some interesting and encouraging language, but could benefit from additional clarification and fine tuning.  Industry has until March 25, 2016 to submit comments on the Draft Amendment to the AUCL, and numerous industry organizations have been collecting comments for submission to SCLAO over the last few weeks.  Here are some highlights of proposed changes to Article 5, and some of the open issues that will hopefully be addressed before a final version of the revised AUCL sees the light of day.

"Market Confusion" and "Commercial Signs"

Article 5 prohibits business operators (which under the Draft Amendment would include natural persons) from engaging in 4 enumerated "acts of market confusion" that involve the use of "commercial signs".  The Draft Amendment defines market confusion as "misunderstanding by the general public of product manufacturers, traders or a particular relationship linked to product manufacturers or traders."  A commercial sign is understood as referring to "a symbol that differentiates product manufacturers or traders, including but not limited to the unique names of famous products, packaging, trade dress, shape of goods, trademarks, enterprises and group company names and abbreviations, trade names, main parts of domain names, website names, webpages, personal names, pen names, stage names, channel program and column names, logos, etc."

Comment: The language of the Draft Amendment does not address whether actual evidence of market confusion is required to invoke Article 5 against a business operator, and industry is hopeful that no such requirement is imposed going forward.  The 2007 Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of the Law in the Trial of Civil Cases Involving Unfair Competition ("2007 AUCL JI") provides that evidence of actual market confusion is not required for trade dress infringements under Article 5.  Industry is pushing for this approach to be retained, and for "market confusion" to be addressed in practice similar to the way that "consumer confusion" is handled in cases involving trademark infringements under Article 57 of the Trademark Law.

The very broad list of protected commercial signs is indeed encouraging, and it expands the scope of Article 5 into areas that are not explicitly covered under the language of the current AUCL (such as television channel programs, newspaper column names, and webpage names).  While this list appears intended to be illustrative and not exhaustive, the addition of other signs to this list may actually be difficult in practice unless the Administrations for Industry and Commerce ("AICs") and the People's Courts have additional guidance on the application of Article 5 into new areas.  Industry would thus prefer that the list include the interior decorations of business premises and the distinctive attire worn by a business operator's staff (which are specifically addressed in the 2007 AUCL JI), and to also indicate that the list is merely illustrative and not exhaustive, and that any sign could fall into the purview of Article 5 if use by a third party could lead to market confusion.

"Famous Commercial Signs"

The first of the 4 prohibited acts of market confusion is set out in Article 5.1 in the Draft Amendment.  This provision prohibits the "unauthorized use of the famous commercial sign of another, or using a commercial sign that is similar to the famous commercial sign of another leading to market confusion."  This is a contemplated "catch-all" provision that would arguably be the core of the amended version of Article 5.

Comment: The most common concern voiced about the proposed language of Article 5.1 relates to the term "famous" ("Zhi Ming/知名").  This term is often and erroneously translated as "well-known", which is actually a term of art for the wide protection afforded to certain trademarks that meet a particularly high standard of fame in a relevant market, and is the translation equivalent of the Chinese term "Chi Ming/驰名" .

The standard for "well-known" trademarks is not what is contemplated by the term "famous" in Article 5.  In practice, the AICs and the People's Courts have required considerably less evidence of fame for bringing claims under Article 5 of the AUCL than would be otherwise required for invoking the protection of a well-known trademark under relevant provisions of the Trademark Law.  Article 1 of the 2007 AUCL JI defines "famous" in the context of trade dress protection as "certain market popularity within the territory of China and are known by the relevant public."  It is reasonable to assume that continued reference to the term "famous" in Article 5 of the Draft Amendment contemplates the same or a similar standard as that articulated by the SPC in its earlier AUCL JI, and adopted by the courts and the AICs in practice.  Industry is requesting that the revised AUCL retain a modest standard for proving that a commercial sign is famous, and specifically indicate that evidence of fame is only required in cases involving a likelihood of confusion, and not in cases where a business operator can produce actual evidence of confusion in the market.  Come what may, there is little doubt that the AICs and the courts could benefit from additional clarity on the meaning and implication of the term "famous commercial sign" in the language of a revised Article 5, or in subsequent administrative measures and judicial interpretations.

"Conspicuous and Confusing Use of Commercial Signs"

The second of the 4 enumerated acts of market confusion is addressed in Article 5.2 of the Draft Amendment.  This provision prohibits the "conspicuous use of one's own commercial sign that is identical or similar to the famous commercial sign of another that is misleading to the general public and leads to market confusion."

Comment: The language of Article 5.2 of the Draft Amendment is an important addition to the purview of Article 5, and could be very useful to business operators that seek to address the misappropriation and use of trade names, trade name acronyms, and other identifiers that are adopted and used as the commercial signs of a local business operator. This provision could also cover the conspicuous use of registered enterprise names in commerce that incorporate trade names or other identifiers that are the same or similar to those of business operators with prior use and fame in the market, and that would not fall into the ambit of Article 5.3 (discussed below).

The term "conspicuous use" ("Tu Chu Shi Yong/突出使用") is also a term of art, but one that continues to beg for clarification.  This term is perhaps most famously referenced in the 2002 Interpretations of the SPC of Several Issues Concerning the Application of the Law to the Trial of Civil Disputes Involving Trademarks ("2002 TM JI").  Article 1 of the 2002 TM JI provides that the conspicuous use of an enterprise trade name that is the same or similar to a registered trademark for the same or similar goods is an act of trademark infringement if it could easily cause mistaken recognition by the relevant public.  The People's Courts have generally applied a fairly flexible standard for determining when use is "conspicuous" – one that focuses on whether relevant consumers would notice use of the trade name on the goods in question and thus potentially be deceived.  Industry has long wished for further clarification on the "conspicuous use" standard in the context of the 2002 TM JI, and the fact that this standard is being referenced in Article 5.2 of the Draft Amendment makes need for further clarification all the more acute.

The language of Article 5.2 in the Draft Amendment, as well as the language of Articles 5.3 and 5.4 (discussed below), appear to articulate a two-prong confusion standard that entails (1) misleading the general public, and (2) leading to market confusion.  Market confusion is a defined term (see discussion above) that implies a misunderstanding as to source or affiliation, but it is unclear what is meant by "misleading to the general public", and what additional evidence would have to be mustered to meet this element of the apparent two-prong standard.  As Article 5 is focused on commercial signs that differentiate product manufacturers or traders in the market, the confusion standard should focus on the relevant market when gauging likelihood of confusion.  With this in mind, industry is recommending that the confusion standard be defined as "leading to a likelihood of confusion in the relevant market," and that the application of this standard be aligned with the "likelihood of confusion" standard in trademark practice as mentioned above.

"Registered Enterprise Names"

The third of the 4 enumerated acts of market confusion is addressed in Article 5.3 of the Draft Amendment.  This provision prohibits "using a registered trademark or unregistered well-known trademark of another as the trade name in its enterprise name that is misleading to the general public and leads to market confusion."

Comment:  This specific provision is intended to bring the AUCL in line with Article 58 of the Trademark Law, which provides that "cases involving the use of another's registered trademark or registered well-known trademark as a trade name in its enterprise name, where such use is liable to mislead the public and constitutes unfair competition" are to be handled under relevant provisions of the AUCL.

Article 18 of the Draft Amendment sets out the possible administrative fines for violations of Article 5.  For Article 5.3, AICs are required to order business operators that engage in the use of infringing enterprise names to change their names within one month. If the business operator fails to do so, the AICs are to issue  a punishment decision and fine, and if it refuses to change the name after issuance of a punishment decision, the business operator will have its name changed by the AIC to a placeholder number, and be put on the "abnormal business operations" list.  In serious circumstances, the AICs can revoke the operator's business license.

Local AICs act as both the enterprise name registry and the enforcers of Article 5 in the local market, and under the current regime, they have very little guidance for the handling of disputes involving conflicts between locally registered enterprise names and registered trademarks.  Because of this, many AICs have been very reluctant to take strong measures against companies in their jurisdictions that register and use enterprise names that contain third party trademarks.  Article 5.3 of the Draft Amendment seeks to address this issue, and Article 18 provides a specific timeline for the AICs to take action, and fairly clear guidance on the handling of such cases.  This is a welcome development for a conflict of rights issue that has caused significant frustration for brand owners in China, and one that is very much supported by industry.

"Trade Names and Trade Name Abbreviations in Trademarks and Domain Names"

The last of the 4 enumerated acts of market confusion is addressed in Article 5.4 of the Draft Amendment.  Article 5.4 prohibits business operators from "using a trade name or the abbreviation of a trade name for a famous enterprise or group company in its trademark or in the main part of its domain name that is misleading to the general public and leads to market confusion."

Comment: This provision is targeting a very specific and common practice employed by business operators in China – the practice of using third party trade names or trade name acronyms as a trademark or as the distinctive part of a domain name.  While the acts contemplated under this provision would arguably fall within the purview of Article 5.1 discussed above, the drafters have opted to create a separate and specific prohibition involving trademark and domain name use, most likely because the AICs have traditionally been reluctant to handle such cases in light of overlap and possible conflict with the trademark law, and the dispute resolution policies governing certain gTLDs.  For example, in cases involving the misleading use of a trade name in a trademark, the AICs (and the People's Courts as well) have traditionally insisted that an aggrieved party challenge the validity of the trademark in opposition or invalidation proceedings, and to seek administrative recourse or an injunction on use only after having successfully knocked the trademark off the registry.

This provision would arguably allow for aggrieved business operators to obtain administrative or civil injunctive relief for acts that cause confusion in the market under a theory of unfair competition while seeking to challenge the validity of a third party trademark or domain name in a parallel proceeding.  While this provision could indeed prove helpful to aggrieved business operators, there is no doubt that industry stakeholders, as well as the AICs and People's Courts would benefit from additional clarification as to how and when this provision can be invoked against a third party in practice.

Sheppard Mullin will be watching developments in the AUCL space in the coming months, so stay tuned.

In the meantime, see here for the Draft Amendment in Chinese, and here for a courtesy translation.

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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