China: First Preliminary Injunction Granted By China IP Court To Christian Louboutin

Last Updated: 8 December 2016
Article by CHOFN Intellectual Property

On June 22, 2016, Guangzhou IP Court granted a preliminary injunction to French designer brand Christian Louboutin per its request, ordering Guangzhou Verteam Trade Co., Ltd. (hereafter Verteam) to stop manufacturing, selling and offering for sale nine infringing lipsticks, and ordering Guangzhou Benefit Cosmetics Co., Ltd. (hereafter Benefit) to stop manufacturing the infringing goods. This is the first preliminary injunction issued by Guangzhou IP court and also the first preliminary injunction issued in regards to to patent infringement since the establishments of specialized IP courts in China since late 2014.

In issuing the injunction, Guangzhou IP Court took the following six factors into consideration: 1. Whether the patents at issue were valid and stable; 2. Whether the ongoing activities of the respondents were infringing the patents; 3. Whether the right holder's interests would be irreparably damaged if no injunction were issued; 4. Whether the loss incurred to the respondents by the issuance of the injunction was smaller than or equivalent to the loss caused to the right holder if no injunction were issued; 5. Whether the injunction would harm public interests; and 6. Whether the right holder afforded an effective and proper bond.

While we all know that Chinese courts had always been cautious in issuing preliminary injunctions before litigations are instituted, it is believed that this injunction from Guangzhou IP Court will herald stronger protection for IP rights in China. More details of the case will be shared below.

In 2015, Christian Louboutin was granted three Chinese design patents ZL201430483611.7 (Cosmetic Lid), ZL201430484500.8 (Cosmetic Container), ZL201430484638.8 (Cosmetic Container). The three designs relate to a same lipstick and are respectively designs of the lid, the tube and the whole lipstick. Christian Louboutin planned to enter the Chinese market in 2016. Unfortunately, earlier this year, before releasing its products in China, Christian Louboutin found that Verteam and Benefit (hereafter the respondents) were manufacturing, selling and offering for sale nine types of lipstick with identical designs to the above patents. Christian Louboutin believed that Verteam and Benefit were manufacturing products infringing its patent rights in large quantity and were planning to distribute these products in China. Christian Louboutin would suffer irreparable damage if such activities were not stopped. As a result, Christian Louboutin requested Guangzhou IP Court to order the respondents to stop the above infringing activities immediately, before Christian Louboutin took legal actions against the infringement.

Guangzhou IP Court issued the injunction per Christian Louboutin's request, taking into consideration the following six aspects when deciding whether to issue the injunction or not.

1. Whether the patents at issue are valid and stable

A prerequisite for obtaining an injunction is that the patent at issue is valid and stable. Article 4 of the Supreme Court's Judicial Injunction on Preliminary Injunction (2001) provides that a patentee seeking a preliminary injunction should supply evidence proving its patent's validity, such as a patent certificate, claims and description of the patent, or receipts of annuity payment and so on. As for a design (or utility model) patent, as it is not examined substantively, the patentee should also provide an evaluation report on patentability of the design patent issued by the Patent Reexamination Board (PRB) of SIPO, or a decision affirming the validity of the design patent issued by PRB or a court, so as to prove that the design patent is valid, stable and therefore enforceable.

In this case, Christian Louboutin submitted notifications of allowance, copies of Patent Register, and evaluation reports on the three design patents at issue. It was therefore proven that Christian Louboutin was the right holder of the patents and eligible to request the injunction. Moreover, the validity of the patents was not challenged since their issuance, showing that the patents are valid and stable.

2. Whether the ongoing activities of the respondents were infringing the patent at issue

A court handling a request for injunction will order a respondent to stop its infringing activities only when it considers that there is the possibility that such activities will be infringing. On the other hand, in evaluating the ongoing or soon to be performed activities of the infringer, as long as the court considers that infringement possibly exists, it can decide to issue an injunction.

In this case, both the alleged infringing products and the patents at issue belong to the same product class and have the same or similar designs. Based on existing evidence, it is decided that it is likely that the respondents are infringing the patents at issue.

3. Whether the right holder's lawful rights interests will be irreparably damaged if no injunction were issued

Preliminary injunctions are considered a severely proactive remedy. Considering the nature of this, Chinese Courts believe that there is no need to issue an injunction in the case that the reputation of a right holder is not harmed, or that damages may be calculated precisely and a respondent has the ability to pay them, meaning that the losses incurred by the right holders may be compensated after an effective decision is reached when the case is closed.

However, during patent enforcement, the right holder's interests will be irreparably damaged if no injunction is issued under the following circumstances: 1. The reputation of the right holder is being harmed; 2. The infringer is financially unable to pay the damages; 3. The damages cannot be determined. It is considered impossible to determine the damages if any of the following scenarios exist: 1. Losses caused by decrease in price and market share are difficult to calculate; 2. Damages to be borne by each infringer are difficult to calculate when there are several infringers; 3. A right holder faces much difficulty in increasing a reduced price to an original level due to malicious competition from an infringer.

Generally, after winning a case, a right holder should have its losses compensated. However, the right holder might not get enough compensation if the infringer does not have enough compensating capability or not compensated at all if the infringer does not have a definite domicile. In these cases, if the infringer's activities are not stopped, originally avoidable losses suffered by the right holder will become irrecoverable. In this case, the respondents did not provide evidence to show its financial status and profitability as to make it possible to fully estimate the losses to the right holder.

Moreover, the right holder normally recovers expenses on research and development by selling products. In this regards, the right holder generally sells the patented product at a price higher than the infringing product, as the infringer affords no expenses on R&D. A higher price will cause market share loss to the right holder. In this particular case, the infringer sold the infringing products at RMB270 per piece, while the patented products were sold at about RMB600 per piece in overseas markets. The respondents selling the infringing products at such a low price would undermine the right holder's market share. If no injunction were issued at this point, once a stable market was formed, the right holder would face incredible difficulty in implementing its regular pricing strategy when entering the Chinese market, which means that its due market share will be permanently reduced. It will be difficult to determine losses incurred, due to the lower price and lost market share, by the right holder.

Moreover, the design patents relate to cosmetics, which enjoy much benefit from their novelty and popularity. Large quantity sales of the infringing products will for certain make people less apt for purchasing the same products, thereby shortening the life cycle of the products.

Considering the above facts, it is urgent to stop the infringing activities. It is noted that though Verteam indicated to the Court that it was willing to stop the infringing activities during the oral hearing, it did not elucidate how it would effectively do so. Such promise takes no part in impeding the issuing of the injunction. In a word, the right holder will suffer irreparable damage if no injunction is issued.

4. Would the loss incurred by the respondent by the issuance of the injunction be smaller than or equivalent to the loss caused to the right holder if no injunction is issued

As a preliminary injunction will affect the economic benefit, most of time significantly, of both parties, a court has to consider the effects upon the respondent as well on the right holder when handling a request for injunction, so as to balance the interests of both parties. A scenario of protecting minor interest of one party while causing much loss and waste of social resource should be prevented from happening, such that interests of the whole society can be maximized. While the interests of the right holder should be warranted, if the loss suffered by the right holder is negligible comparing to that of the respondent when an injunction is issued, it will be against the essence of law. In consideration of the above, a request for injunction shall be upheld in case losses to the respondent by the issuance of the injunction will be no smaller than losses caused to the right holder if no injunction is issued. On the other hand, an injunction shall not be issued if much loss will be incurred to the respondent if the injunction is issued. Still, the right holder shall enjoy protection if the losses to both parties will be equivalent when the injunction is issued.

In this case, if an injunction is issued, the respondent will lose money spent on molding, advertisement and manufacturing of the infringing product, as well as profit loss for not able to manufacturing or selling infringing products. On the other hand, the right holder will suffer much serious losses if no injunction is issued. Such losses will include R&D cost, advertisement cost, lower pricing, lost market share and competitive edge. Therefore, the loss to the right holder will be much higher if no injunction is issued.

5. Whether the injunction would harm public interests

Judicial authorities bear the responsibility of guarding public interests. Courts should in no case make a decision that will harm the public interests, the same goes with an injunction if a patent at issue has significant impact on health, security, environment or other major public interests, such interests should be considered in deciding whether to issue an injunction or not.

In this case, both the patented products and infringing products are cosmetics. The issuance of the injunction is related to the economic interests of the involved parties but not the public interests. At the same time, as the design patent is quite remarkable and distinctive, an injunction will help to prevent confusion in the market. Instead of harming public interest, it will actually safeguard the public interest by helping to maintain a healthy market environment.

6. Whether the right holder put forth an effective and proper bond

Article 66 of the Chinese Patent Law provides that a right holder shall put forth a bond when requesting a court to take measures to stop infringing activities. The request will be rejected if no bond is supplied.

A preliminary injunction serves the purpose of quickly stopping infringing activities. Therefore, the court shall make a decision in a very short time. However, it is possible that the decision to issue an injunction will be contrary to the final decision. In light of the above, the right holder is required to make a deposit when requesting an injunction. Such a requirement will in the first place make the right holder cautious in requesting an injunction, and in the second place help to compensate losses to the respondent in case an injunction is issued wrongly. The bond shall be in a reasonable amount as to be enough to compensate possible losses to the respondent. At the same time, under the general consideration of improving enforcement, the cost for enforcing patent rights shall not be too high. In this sense, the bond can be lowered to a certain extent.

In this case, the court asked both parties to negotiate on the bond amount during the oral hearing. The respondent indicated that the right holder needed not to put forward a bond. At the same time, the court considered that the right holder had a high winning possibility and it is quite unlikely that the injunction will be issued wrongly. Moreover the three design patents relate to the same products. As a result, the court decided that the right holder should pay a bond of RMB1million for injunctions for the three patents.

The right holder paid the required amount. In the case that any further evidence will prove that the respondent will suffer more losses when the injunctions are in force, the right holder shall increase the bond.

Guangzhou IP Court considered all the above factors and granted injunctions on June 22, 2016. The injunctions came into force right away and the respondents were ordered to stop infringing activities immediately.

Chinese courts are normally very cautious in granting injunctions. Actually, according to Judge Cao Liping from IP Tribunal, Beijing Haidian Court, only 2.5 percent of requests for injunctions were granted by courts, while 67.5% were rejected and 30% withdrawn. Together with damages, obtaining an effective injunction is considered an important remedy to right holders. While Chinese Courts are increasing awarded damages, hopefully they will be more willing to grant injunctions as well, such that stronger protection may be provided to the right holders.

(This article was originally published in the IPPro Patents, Conference Special,Page 18-20)

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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