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Litigation strategy – how to defend against Chinese plaintiffs




Anna Mae Koo and Ann Xu of Vivien Chan & Co advise on how to defend your brand in China

Background

Foreign IPR owners have traditionally found the intellectual property landscape in China challenging. This is compounded by questions over the objectivity of Chinese courts when IPR owners are considering whether and how to enforce rights in China. Although statistics of the IP courts do generally show a relatively equal chance of success for foreign claimants vis-à-vis their domestic counterparts, foreign IPR owners shy away from litigation in China.

An exception is where foreign IPR owners are sued by Chinese plaintiffs. Despite a generally non-litigious culture, there is an increasing trend of litigation as Chinese plaintiffs become more aggressive in protecting their rights and bad faith actors try to hold IPR owners to ransom.

The article aims to highlight a few ways to prevent, as well as to defend against, such litigation.

China adopts a "first-to-file" trade mark registration system which affords trade mark rights to those who file first. Trade mark squatters will therefore look for weaknesses in the portfolio of foreign IPR owners, especially against those yet to enter the Chinese market, and pre-emptively register their marks. These trade mark squatters will then attempt to sell the rights thereof to those respective foreign IPR owners at substantial costs, or threaten to sue the companies for trade mark infringement if they continue to use them. More sophisticated trade mark squatters may not only file in the same class of goods and services but also in a range of popular goods, like clothing and produce merchandise, under the same trade mark.

What arguments can foreign IPR owners rely on when a registered mark owner enforces their mark against them?

Defence arguments and litigation strategies

Challenge the use of the registered mark by the registered owner

One of the strategies that can be adopted by the brand owners against trade mark squatters is to challenge the use of the mark by the registered mark owner. In a recent notable trade mark ruling, the Treasury Wine Estates (TWE), the owner of the famous Penfolds wine brand, successfully challenged the registration of the lucrative 奔富 (Ben Fu) trade mark which had been registered by a trade mark squatter in the Beijing High People's Court. The ruling was successful for TWE on the ground that the registered owner had failed to show genuine use of the trade mark for wine or related activities.

The Guangdong Higher People's Court took a similar stance in a case involving the sportswear brand New Balance, holding that if the trade mark had not been in commercial use, no damages would be awarded to the plaintiff since the general public would not associate the trade mark with the goods or services provided and hence no confusion was caused. In this case, however, the registered mark owner was able to show sufficient commercial use, which caused New Balance to lose the case.

Establish prior reputation of the unregistered mark in China

Another possible defence against registered trade mark owners is to argue that even though a mark is unregistered, the mark has already established a strong reputation in the Chinese market and therefore has already acquired trade mark rights via the well-known mark status.

However, there are certain caveats when using this argument. First of all, foreign IPR owners must not confuse global reputation with reputation in mainland China. Generally, only the latter will be accepted by the Chinese courts, and mainland China excludes Hong Kong, Macau and Taiwan. A notable example would be the automaker Ferrari initiating legal action against a registered owner for their globally known mark. The Court held against Ferrari and concluded that its mark is not considered "well-known" because Ferrari had failed to provide sufficient evidence of advertising and publicity of the device mark in China.

Secondly, foreign IPR owners should note that a large portion of Chinese consumers do not associate brand recognition with English names and instead will generally only recognize the Chinese transliteration of the mark. As such, foreign IPR owners often have to prove the use of the Chinese version of the unregistered mark but not the English one. A classic example is the Pfizer famous trade mark battle in China over the 伟哥 (Weige) mark, which is the Chinese transliteration of Viagra. Here, the Supreme Court found that the English trade mark Viagra and the Chinese mark Weige are two different marks. Although Pfizer was able to show that a vast amount of money and resources was spent in the promoting and marketing of Viagra around the world, the issue was not whether Viagra had achieved fame in China but whether (a) Weige had achieved fame in China, and (b) whether Chinese consumers associated Weige with Pfizer as the owner of the trade mark. Pfizer was not able to prove this, and therefore lost the case.

Another issue is that the evidence of use, promotion and marketing of the unregistered mark by the brand owner should be dated before the filing or the registration date of the mark. In the New Balance case, the court rejected New Balance's claims that it had acquired prior rights over the mark or prior reputation in China partly because the evidence submitted was dated after the filing or registration date of the registered mark.

Avoiding high damages

Chinese Courts notoriously do not award a high amount of damages in IPR cases. The infamous (and anomalous) US$48 million Chint v Schneider (2009) decision was one of highest amount of damages awarded. Most attribute the size of the damages to local protectionism and the fact that it was adjudicated in a local court. When defending against Chinese plaintiffs therefore, brand owners should be wary of local courts, and if possible, choose the more established IP Courts such as Shanghai, Beijing and Guangzhou to obtain a more objective judgment.

Reduction of damages

If it's not possible to avoid high damages, brand owners may seek to appeal lower courts' decision on damages. In the recent Castel and New Balance cases, the higher courts have been willing to substantially reduce the amount of damages awarded by the lower courts.

In reducing the damages from US$14 million to US$700,000 in the New Balance case, one of the key considerations of the court was that the trade mark squatter failed to provide any direct evidence of losses caused by the use of its trade mark by New Balance. The court overruled the lower court's decision by setting the damages payable to half of New Balance's profits. The rationale behind this was that not all of the New Balance's profits could be attributed to the use of the registered mark, and instead were also attributable to New Balance's other marks printed on the products and to the intrinsic quality of its products.

Similarly, in the Castel case, where the trade mark squatter sued Castel Freres SAS, a famous French wine producer, for trade mark infringement, the Chinese Supreme People's Court upheld the lower court's finding with regards to infringement but reduced the damages substantially, from US$700,000 to US$73,000. The Court held that although the trade mark squatter had provided evidence showing Castel's sales revenue, he had failed to provide sufficient evidence in relation to Castel's profits. In addition, the Court held that the trade mark squatter failed to prove that all of Castel's sales revenue (amounting to US$4.6 million) was a direct result of the infringement of the registered owner's mark.

In those two cases the Chinese courts would not award all the revenues generated by the brand owners to the registered trade mark owner. The registered owner still needs to prove the causal link between the revenue generated and the use of the registered mark by the brand owner. Hence, brand owners may consider submitting evidence to prove that they have acquired goodwill in relation to some other marks or brands they own to convince the Chinese courts that part of the revenue generated is independent of the use of the registered mark to reduce the any damages awarded to the registered trade mark owner.

Be aware of the implications of filing non-use cancellation and opposition against the cited mark

More likely than not, brand owners will initiate actions such as opposition, invalidation or non-use cancellation against the registered mark. However, brand owners should be aware of the potential implications of filing these actions on the subsequent legal proceedings initiated by the registered trade mark owner (if any), especially after receiving an unfavourable decision. As mentioned above, the damages awarded in the New Balance case (US$700,000) were substantially higher than the Castel case (US$73,000). One of the key reasons is that the court considered New Balance's conduct of continuing to extensively use the registered mark after losing its opposition procedure as wilful infringement. In contrast, Castel ceased using the registered mark when the Beijing Higher People's Court handed down its final decision in the non-use cancellation procedure and rebranded its Chinese name from 卡斯特 (Ka Si Te) into 卡斯黛乐 (Ka Si Dai Le).

After receiving unfavourable decisions when trying to invalidate or oppose the registered mark, brand owners should be cautious about continuing to use the registered mark as this may be seen as wilful infringement and evidence of bad faith by Chinese courts in any subsequent legal proceedings, which may increase the possible damages payable.

Strategic measures to consider

Apart from adopting the litigation strategies outlined above, brand owners may consider taking the following actions:

Register the marks in both Chinese and English

As seen from the Viagra and New Balance cases, any goodwill and reputation established in connection to the English mark will not be considered transferrable to the Chinese marks. To maintain their brand in China, brand owners should consider developing and obtaining a Chinese mark simultaneously. If brand owners do not create a Chinese mark, consumers or the media will themselves create a Chinese mark and brand owners may lose control over their brand.

Consider rebranding earlier

In cases where the brand owners have not used their mark in China for a sufficient period of time and find that their Chinese mark has been registered by others with genuine use, they should consider rebranding their Chinese mark. Although this isn't an ideal option, it could possibly eliminate potential legal risks for brand owners.

Think outside the litigation box

As Chinese consumers become more sophisticated, public sentiment is turning against counterfeits and Chinese brands pretending to be foreign brands. Foreign brand owners can take advantage this and advertise accordingly to avoid the need for litigation.

Conclusion

With the first-to-file system in China, trade mark squatting behaviour will likely persist. Various strategies can be adopted by brand owners including challenging the use of marks by the registered owner, establishing prior reputation or the well-known status of unregistered marks, and managing damages. However, more comprehensive ways to protecting IPR in China include deploying a defensive filing strategy in registering the marks in both Chinese and English, rebranding the marks at an early stage and alerting Chinese consumers about the differences between the brand owner's marks and the registered marks.

Anna Mae Koo
  Anna Mae Koo is a solicitor at Vivien Chan & Co, where she practices non-contentious, contentious and transactional intellectual property law. She was a Prince Philip scholar at the University of Cambridge where she graduated with an MA in law. Anna Mae is a Techstars mentor, and is involved in the litigation committee of the International Bar Association and the internet committee of the International Trademark Association. She is consistently named an intellectual property rising star in Euromoney Legal Media Group’s Women in Business Law Awards. Anna Mae advises on portfolio management and enforcement for the likes of American Airlines, Dreamworks, Yves Saint Laurent, etc.

Ann Xu
  Ann Xu is a trademark attorney at Vivien Chan & Co with more than 20 years’ experience in intellectual property cases in mainland China including trade mark, copyright and designs. She is consistently nominated as an International Who’s Who Trademark Lawyer by Business Research Ltd. Ann regularly advises on prosecution and portfolio management for clients including James Bond, Playboy, Amway, etc.


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