China: Has China Changed? Brand Owners Face An Evolving And Uncertain Legal Landscape

Companies around the world have long turned to China for its attractive manufacturing capabilities and pricing. Unfortunately, those same resources have been used to fuel a global counterfeiting epidemic.

China, with seemingly endless resources and expertise, is uniquely positioned to produce counterfeit goods on a massive scale. And there is considerable worldwide demand for such goods—driven almost certainly by low prices—including in the West. In 2015 EY surveyed consumers in Germany, Austria, the Netherlands and Sweden, and concluded that over 25% purchased counterfeit goods "from time to time", with 60% of these being fully aware of what they were buying.

Historically, there have been significant hurdles in the way of effective enforcement of trademark rights in China. Even where enforcement actions have been successful, statutory damages were capped at a relatively low threshold and courts rarely awarded punitive damages. In the rare cases where damages were awarded, they were sometimes impossible to collect and seizures of counterfeit products impossible to effect. So Chinese-manufactured counterfeit goods proliferated. Indeed it has been estimated that, over the years, between 70% and 85% of all counterfeit goods seized by U.S. Customs and Boarder Control agents originated in China. (In 2015 it was estimated that 52% of counterfeit goods came from mainland China and 35% from Hong Kong; see here.

However, change appears to be in the works, even if this is at a slower pace than some would prefer. In recent years, China has become home to many globally recognised brands, prompting the Chinese government to take official action to benefit brand owners, which in turn has encouraged more Chinese companies to register their marks. Moreover—and perhaps more significantly—Chinese courts have begun to demonstrate a willingness to take strong action against counterfeiters and infringers.

Situation Before 2010

Looking back, few cases decided before 2010 left brand owners with much to be optimistic about.

In 2004 Ningbo Huachang Electrical Appliances Co, Ltd sold nearly 4,500 vacuum cleaners under the marks SQMSONG, PANASOANIC and BOOSCH over a four-month period. Despite this the company was fined less than $60,000 (little more than $13 per vacuum). In another case, an individual from Zhejiang Province manufactured and sold 9,076 handbags carrying the mark LOUISVUITTON but was fined only $50,000 (approximately $5.50 a handbag). Although these fines may have cut into the infringers' profit margins, they fell far short of the type and amount of relief needed to protect brand owners and discourage future infringements.

Indeed, during this time, counterfeit products were so widely available in China that there was an entire street devoted to them—Xiushui Street in Beijing. Taking a creative approach towards combating this safe haven for infringers, brand owners filed suit against the property owner renting out the retail stores to counterfeiters. While both the lower court and the court of appeals found the property owner liable for contributory infringement, the brand owners' victory netted them little in damages—the five plaintiffs were awarded only $15,000 in total. Infringers continued renting retail stores on Xiushui Street, which still maintains its reputation for selling the best fakes in Beijing.

Similarly, in 2003 adidas sued Adi King Sports Goods (China) Co, Ltd for its use of the ADIVON mark and design. However, after five years of litigation, which progressed all the way to the Supreme People's Court, the case never progressed past issues of venue, leaving the infringement claims untouched.

Further, Lacoste (France) Co, Ltd reached the Supreme People's Court in 2010 in a suit that it had brought years earlier against Crocodile International (Singapore) Pte, Ltd for its use of the crocodile logo. However, Lacoste had an even less satisfactory result than adidas. The Supreme People's Court affirmed the lower court's decision that Crocodile International's logo, with its crocodile facing to the left, did not infringe Lacoste's right-facing crocodile.

Also in 2010, and again in a decision by the Supreme People's Court, Sony Ericsson lost its Chinese brand to a Chinese individual. This case stemmed from the 2001 decision of Sony and Ericsson to join together to manufacture and sell mobile phones. The joint venture chose a Chinese trademark that sounded phonetically like its name Sony Ericsson—SUO NI AI LI XIN (in Chinese, each syllable is represented by a different Chinese character). However, Chinese consumers shortened the name to two characters 'suo ai'—the first part of Sony's Chinese name and the first part of Ericsson's Chinese name. Neither Sony nor Ericsson registered the abbreviation but in 2014 a Chinese individual did. Later, the same individual started a company, Guangzhou Suo Ai Digital Technology, Ltd, and sold consumer electronics including MP3 and MP4 players under the 'suo ai' mark (in Chinese characters). Sony Ericsson petitioned to cancel the registration in 2005 but lost. It then appealed and while it prevailed at the first appellate level (the Beijing First Intermediate Court), it lost before the two higher-level appellate courts (the Beijing Higher Court and the Supreme People's Court), both of which upheld the individual's registration. The Supreme People's Court's decision hinged in large part on whether the individual had acted in bad faith and in concluding that this was not clear, the court said that an individual who rushed to register a mark that had been widely reported in the press to reference another party could not be considered to have acted in bad faith.

In short, before 2010 the climate for trademark owners appeared rather bleak.

2010 Sea Change

In 2008 the new Corporate Income Tax Law came into effect—this included provisions extending favourable treatment to trademark owners and other rights holders. It incentivised Chinese companies to invest in trademarks and thus helped to create an evolving (and hopefully more favourable) climate for trademark protection and enforcement. Further, in 2014 the Chinese government implemented a series of new measures (eg, lowering the barriers to market access and boosting the government's investment in start-ups) and also passed a new trademark law that increased the maximum damages in trademark infringement cases from $75,000 to $450,000. All of these efforts gave a critical boost to entrepreneurship in China and increased the need for an effective trademark enforcement system.

Around 2010 Chinese courts also began issuing decisions more favourable to trademark owners and providing significant relief for them. For example, in that year the Supreme People's Court ruled in favour of the Michelin tire company, preventing a Chinese electric-bike company from using Michelin's Chinese name 'mi qi lin' as part of its trade name. The Chinese bike company had not applied to register any MICHELIN mark, nor had it ever used Michelin's Chinese name on its bikes. Previously, these types of circumstances had raised questions about whether the challenged conduct amounted to trademark use and infringement—but not this time. Instead, the Supreme People's Court expressed its clear intent to extend protection to well-known brands and ordered the Chinese bike company to cease using Michelin's Chinese name as part of its company name.

Over the next three years, trademark owners achieved a number of other successes. For example, Michelin successfully opposed marks that traded off its goodwill, including MI QI LIN, on communication equipment, glasses and batteries. Then in February 2015 Victoria's Secret won a trademark infringement and unfair competition case against a Chinese copycat company. The court awarded Victoria's Secret $75,000 in damages (the statutory maximum at the time) and also granted a permanent injunction, which the appellate court affirmed.

Around the same time, 3M sued a Chinese company in the Hangzhou Intermediate Court for using the mark 3N on reflective marking products for automobiles. The court did not accept that the Chinese company selected 3N in good faith. Instead, it found that such use infringed 3M's rights and ordered the Chinese company to pay 3M $500,000, explaining that due to the defendant's blatant infringement this award included punitive damages and could therefore exceed the new maximum statutory amount. The defendant appealed the decision to the Zhejiang Province Higher Court and later the Supreme People's Court—but the judgment was upheld. Although 3M could not prove any lost profits due to the infringement nor show the actual gains by the infringer, the Supreme People's Court concluded that the Chinese company must have enjoyed considerable profits from its sale of infringing products considering that the 3M mark was well known in China. Moreover, it took a particularly dim view of the defendant's refusal to disclose its financial information and expressed its frustration with the company's actions, concluding that it "should have relied on its own hard work and knowledge... Had it done so, it would have been successful without infringing on the rights of others. Having chosen the path it did, it is now facing huge rebranding costs and all the hard work being undone."

Then in 2016 Under Armour, Inc sued Uncle Martian (China) Co Limited for manufacturing and selling shoes bearing an obvious copy of Under Armour's well-known logo (see Figure 1). The Fujian Province Higher Court issued a preliminary injunction against Uncle Martian and later the Higher Court ordered Uncle Martian to stop using the contested trademarks, destroy all infringing products, pay approximately $300,000 in damages and publish a statement to "eliminate the adverse effect of Uncle Martian's infringement".

Figure 1: Uncle Martian and Under Armour logos

In 2017 New Balance won a $1.5 million damages award in an infringement action against five defendants selling shoes bearing a stylised N15 mark. The court recognised New Balance's trade dress rights over its slanting N logo and accordingly fined the defendants $243,000 for breaching a previously issued injunction prohibiting them from selling shoes with an infringing N logo.

Different Story Under Unfair Competition Law

Trademark owners have experienced success—even before 2010—under China's Unfair Competition Law for violations of non-traditional trademarks, such as product packaging.

In 2003, for example, Ferrero SpA sued the Chinese company Tresor Dore (a subsidiary of Jiangsu Liang Feng Food Group) for mimicking its packaging (a golden wrapper with a white circular sticker on top and brown cup at the bottom). Fererro had not registered its golden wrapper packaging as a trademark at the time of the suit and thus could not bring a traditional trademark infringement action, so it sued for unfair competition instead. In ruling for Ferrero, the Supreme People's Court explicitly recognised its trade dress rights in its distinctive packaging (see Figure 2), and affirmed the lower court's injunction preventing Tresor Dore from selling chocolates in packaging confusingly similar to Ferrero's. The decision was also based on the Unfair Competition Law, which prohibits the use of any packaging or decoration identical or similar to the unique packaging or decoration of well-known merchandise.

Figure 2: Ferrero Rocher's well-known packaging and Tresor Dore's confusingly similar packaging

In 2015 an unregistered trade dress comprising a colour combination was granted judicial protection. For many decades, Andreas Stihl Ag & Co had been using an orange and grey colour combination as its trade dress for chainsaws and other equipment. However, in 2013 a Chinese company started using the same colour combination on its chainsaws. At the time of the suit, Stihl owned no registrations for its trade dress in China. It filed a complaint with the Administration of Industry and Commerce, where it succeeded in obtaining an injunction that prohibited the Chinese company from using Stihl's colour combination. Nonetheless, the Chinese company continued to sell chainsaws with Stihl's colour combination. Stihl then took its fight to the Hangzhou Intermediate Court, pursuing a claim of unfair competition. The court recognised Stihl's trade dress rights in the colour combination—a vitally important decision for brand owners seeking protection for non-traditional marks.

In 2016 Rimowa GmbH, a premium luggage brand, obtained two favourable rulings protecting its trade dress. Indeed, in one of these the court recognised Rimowa's grooved design as a unique ornament of a famous commodity, bringing it within the scope of China's unfair competition laws. While the damages award of $25,000 was not particularly high, the decision can be seen to reflect the continuing evolution of the judicial environment in China (ie, well-informed and sophisticated judges making continued if careful efforts to provide greater protection against copycats).

Although these cases give cause for optimism, it remains to be seen whether we are in the midst of a sustained trend. In the meantime, brand owners must continue to take extra measures in China to protect their legal and business interests in one of the world's most challenging IP environments.

Strategies for Brand Owners to Consider in China

File Early and Broadly

Given that China is a first-to-file country, it is crucial to register your brands early and across different classes. In doing so, it behoves brand owners to understand how the Chinese market views and uses their marks (and variations of them in Latin and Chinese characters). In this regard, communicating with Chinese distributors, business partners and marketers, as well as observing social media trends, can provide critical insight into which variants of your brands warrant registration and protection. Often, the Chinese-character brand adopted by the market differs from the version created and registered by the brand owner.

Strike a Balance in Your Defensive Filings

As a registration-based trademark system, China does not require use for a trademark registration to be granted. Therefore, defensive filings (ie, filings beyond the scope of the goods or services offered) can be an effective way to protect your brand. That said, the registrations may eventually become vulnerable to cancellation on non-use grounds, and consideration should be given to a balanced approach in light of such vulnerabilities and the overall cost of filing and maintaining registrations for numerous marks across classes.

Monitor the Register, Business Names, Websites and the Market

Monitoring in China is critical. Even with a robust defensive filing programme, infringing marks may still be approved for registration. Preventing the registration of these marks can provide important legal advantages when it comes to confronting the infringer through administrative agencies and courts. In addition to the Trademark Register, keeping an eye on business name registrations (both in mainland China and Hong Kong), as well as Chinese shopping websites and other popular platforms, can help brand owners to detect infringements in their infancy—before they morph into more significant commercial and legal problems.

Alibaba, like other online retailers, has its own IP rights enforcement platform, which allows brand owners to submit takedown notices requesting the removal of product listings and shops. Alibaba says that once such a notice is submitted, it will respond within seven business days. According to Alibaba's 2017 Anti-counterfeiting Report , it shut down approximately 180,000 shops in 2016 and 240,000 in 2017.

Moreover, through 2017 Alibaba frequently disclosed information concerning infringements to the Administration of Industry and Commerce (AIC) (the government branch that is responsible for conducting seizures and raids)—resulting in 1,606 arrests, 1,328 facilities being raided and the seizure of goods with a reported value of $600 million.

Alibaba has mapped out (literally) its enforcement results, identifying Guangdong, Fujian and Zhejiang provinces as the origin of most counterfeit products, followed by Jiangsu, Shandong and Hunan. Alibaba has also analysed where knock-off products are made within China, finding that a significant amount of fake watches come from Guangdong province, shoes from Fujian province and women's apparel from Jiangsu and Zhejiang provinces.

In addition to online platforms, actions through the AIC can be an effective means of combating counterfeit and infringing products. According to AIC statistics, 28,000 AIC complaints were accepted in 2016 and 130,000 in the first half of 2017. Generally, AIC raids are quicker and less expensive than court proceedings but are better suited for fairly straightforward infringement and counterfeiting matters. Also, relief is limited to the AIC's geographic jurisdiction. Although it can issue fines, those payments are made to the government—not brand owners.

Record Trademark Registrations with Chinese Customs

As discussed above, a reported 70% to 85% of counterfeit products seized at the U.S. borders were manufactured in China. Recording your trademarks with Chinese Customs can help significantly towards impeding the entry of counterfeits into the global market.

Build Strong Evidentiary Records

Investing in the development and maintenance of strong evidentiary records reflecting the use of your brands in China can yield significant benefits, including pursuing litigation against infringers, defending non-use cancellation actions and achieving recognition for well-known marks (ie, marks given cross-class protection). Because the best evidence should be from the Chinese market directly and brand owners often face tight deadlines to produce evidence in Trademark Office and court proceedings, getting ahead of the curve by establishing protocols and processes for gathering local advertising, sales data, press, awards and recognitions on a routine basis (rather than in response to an immediate legal need) can alleviate significant pressure on brand owners and better position them for important legal proceedings.

Comment

The circumstances in China appear to have improved and recent decisions signal a desire by China's courts to take decisive action against infringers. Only time will tell whether favourable rulings and increased penalties will continue and ultimately yield long-term change. In the meantime, it is incumbent on brand owners to continue to evolve their approach to brand protection in China.

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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