Background

Some of you may have seen or heard a recent TV or radio commercial in Hong Kong in which three famous TV stars announce that the names of the "Lingzhi" Chinese herb products which they have been promoting in a series of advertisements over the last two years have now been changed to "2036".

In fact, the names had to be changed as a result of a recent Hong Kong High Court judgment in April this year. The plaintiffs were Mainland parties including a famous Guangzhou university (the "University") and a company which it set up to market and commercialize products which the former had developed through a research centre (the "Guangzhou Company"). The defendants were the distributor of the "Lingzhi" products (the "Distributor"), a director of the Distributor (the "Director") and a joint researcher for the "Lingzhi" products (the "Joint Researcher"). After the parties’ relationship came to an end in 2002 due to failure to reach agreement on renewing the distributorship agreement, the Distributor continued to use the original names in the sale and marketing of its own new "Lingzhi" products manufactured by another party.

Claim for Passing Off: Foreign Manufacturer vs Local Distributor

One of the claims of the University and the Guangzhou Company was for passing off in respect of the "Lingzhi" names, marks and get-ups (i.e. design of the packaging/container etc.). The passing off claim hinged on whether the ownership of the local goodwill in the marks, names and get-ups were vested in the "foreign manufacturer" or the "local distributor". The judge noted that none of the parties had any goodwill in Hong Kong prior to 1999 before the products were sold here. He found that as there was a binding agreement between the parties as to the ownership of the relevant goodwill, such agreement should be given full effect. It was not the case that local goodwill in a mark would automatically be owned either by a foreign manufacturer or a local distributor. It was always a question of fact to be decided on the evidence before the court. In the end, it was held that although the Distributor had financed most of the advertising costs, the fact that the Distributor was "nobody in the "Lingzhi" field" at the launch of the product, that the University and the Guangzhou Company had provided undeniable assistance in the promotion of the product in Hong Kong, that at least one of the selling points deployed was the advanced technology and research utilized in the production by the University and the Guangzhou Company, that the products were the result of research under the University and the Guangzhou Company’s leadership and that that the University and the Guangzhou Company’s names were repeatedly used in advertising, all combined to show that the University and the Guangzhou Company had played an active part in building up the goodwill of the mark and the name in Hong Kong. Such goodwill accordingly belonged to the University and the Guangzhou Company, and the Distributor, the Director and the Joint Researcher were not allowed to exploit it without consent. The claims in respect of the get-ups were dismissed as they were not distinctive enough.

Infringement of Registered Trademark in the Chinese equivalent of the expression "Germination Activation"

Another claim by the University and the Guangzhou Company was that the Distributor, the Director and the Joint Researcher had infringed their registered trademark in the Chinese equivalent of the expression "Germination Activation". The Defendants argued that the expression "Germination Activation" was wrongly registered because it lacked any distinctive character and applied for a declaration of invalidity.

It was held that although the expression "Germination Activation" was not commonly used in Hong Kong, it had been used in the packaging and advertising materials as a description of the technological process which enhanced the extraction of bio-active substance from "Lingzhi" spore. As such, the expression did not serve as a guarantee to the consumer or end user as to the identity of the product’s origin, and the court allowed the declaration of invalidity.

Personal liability of a director as a joint tortfeasor with his company

Another interesting area of law which was raised in this case concerned personal liability of directors. The court analyzed whether the Director should be made jointly liable with the Distributor as a joint tortfeasor. The court ruled that its duty was to strike a balance between the following two considerations : on the one hand, an incorporated company is a separate and distinct legal entity and, on the other hand, everyone should be made answerable for his tortious acts. The judge decided that a director is unlikely to be treated as being liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company. However, if a director does carry out more than his constitutional role and the circumstances are that he would be so liable if he were not a director or controlling shareholder, then there is no reason why the court should not rule him personally liable.

In the context of intellectual property, the liability of a director as a joint tortfeasor may arise where he "intends and procures and shares a common design that the infringement takes place". In other words, it is necessary and sufficient to find that a director procured or induced those infringing acts to be done by the company, or that, in some way, the director and the company joined together in concerted action to secure those acts to be done.

In the present case, the court found that the Director had played a key part in the infringing activities despite objections from the University and the Guangzhou Company and was doing more than exercising his constitutional function as a director. He was therefore held to be liable for the acts of the company as a joint tortfeasor.

Conclusion

Lawyers in our Litigation Department and Chinese Business Department are experienced with matters relating to registration and enforcement of trademarks in Hong Kong and China. Please contact us if you require any further information on intellectual property matters. In particular, please contact us if you wish to be sent a copy of the somewhat lengthy judgment in the "Lingzhi" Chinese medicine dispute.

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.