When it comes to trademark protection in China, registration is imperative. It is the best way to protect a brand from squatters. However, foreign brand owners my find themselves forced to start civil litigation to handle trademark disputes.
Administrative enforcement actions used to be the most effective deterrents. But trademark disputes are becoming increasingly complicated, and these legal actions are no longer the most feasible remedies that trademark owners can resort to in China.
China has a comprehensive and integrated legal framework for trademark protection based on domestic legislation and international IP treaties and conventions. The Trademark Law and its implementing regulations are the primary sources of law on trademark protection in the country.
Civil litigation is currently the primary tool for handling trademark disputes. In recent years, the courts have decided to apply punitive damages and statutory damages worth millions, which can serve as a deterrent to defendants while recovering legal costs and expenses for plaintiffs.
Factors such as the length of proceedings and the time taken to reach a judgment should be considered before deciding where to file the lawsuit.
Civil litigation involves trademark disputes relating to infringement and unfair competition; ownership; and transfer, licensing, and agency contracts, among other.
China adheres to the principle of protecting registered trademarks, except in the case of recognition for well-known brands. Regardless of whether a brand owner operates in China, it is extremely important to register its marks in all appropriate classes.
The Chinese system works on a first come basis and there have been numerous cases when trademark squatters register a brand first and later demand an exorbitant fee to assign the rights back.
In recent years, trademark squatters have initiated litigation to compel real trademark owners to either pay damages or purchase back trademarks registered in bad faith at very high prices. The courts have gradually developed a consistent practice of dismissing those cases on the grounds that such litigation constitutes abuse of rights by squatters.
It is crucial to plan ahead of time and have a strategy to manage the trademark portfolio. This will help set solid legal grounds on which any later civil action can be based.
China’s trademark law puts emphasis in protecting good faith rather than bad faith. If your trademark is registered by squatters, you can solicit a trademark invalidation or opposition. It is necessary to gather as much evidence as possible to prove the prior use of the brand and that it gained influence in China, to defend it against the trademark owner’s infringement claims.
If your brand is not registered and you are sued by the trademark owner, presenting evidence of prior use is an effective defense against an infringement claim. Additionally, proof that your registered marks are popular in China will support a claim for higher damages. If your trademark is well known, you may even enjoy cross-class protection.
The more famous your mark, the clearer a squatter’s bad faith. According to the Trademark Law and the relevant judicial interpretations, if you can prove trademark infringement took place with bad faith and is serious, you are entitled to claim punitive damages, which multiplies the rightful trademark owner’s actual losses or, alternatively, the infringer’s illegal profits.
Experts advise that a trademark use library should be established, including when the mark was first launched in China, marketing activities, sales records, advertisement expenses and all other related product information. In case of litigation, this information can be used to defend your brands.
Compared with trade secret or patent disputes, trademark disputes involving original equipment manufacturers (OEMs) or distributors having registered a client’s mark themselves are fairly straightforward. The rightful trademark owner must prove the connection between the mark and the relevant OEM or distributor to demonstrate bad faith.
When a contract has clear terms, it is not difficult to prove the infringer’s bad faith. You can claim breach of contract and consider punitive damages.
Proof of bad faith is a fundamental element to claim punitive damages or to invalidate an infringer’s trademark. One way to do this is by searching an infringer’s prosecution records to find out whether they have been squatting on other brand owner’s marks.
Analyzing how an infringer uses its marks and promotes its products is also important. To mitigate legal risk, an infringer may occasionally register a trademark that does not appear too similar as a pre-emptive defense.
However, its usage of the mark may be intentionally closer to your registered trademarks.
Alternatively, an infringer may register a trademark in a dissimilar class to avoid being directly invalidated, even if in practice it applies it in the exact same classes.
According to the Judicial Interpretations regarding Punitive Damages issued by the Supreme Court in 2021, if a defendant’s infringing activities endanger national security, public interest, or personal health, these will be considered “serious circumstances” and the punitive damages standard can be applied. This is not exclusive to specific industries such as food, beverages, or pharmaceuticals, but can apply to other sectors provided that a connection can be established.
Therefore, when investigating and collecting evidence against a defendant, it is important to monitor its other transgressions, including whether it has the necessary license to produce the items; it had previously been fined for quality issues; or whether the infringer’s online stores always receive negative comments from verified accounts.
Such evidence can prove the seriousness of the infringing activity.
In some cases, a distributor may state that it is not selling counterfeits but similar-looking items. According to the Trademark Law, if a distributor can provide evidence that he/she was unaware of the infringing items and that they were obtained from a supplier, he/she may evade liability when it comes to damages.
Courts in some jurisdictions may tolerate such behavior, allowing distributors to sell infringing items and not requiring them to pay damages.
It is recommended that brand owners send out a cease-and-desist letter to a suspicious distributor beforehand, to block its defense. Such a letter will also further prove the distributor’s bad faith and pave the way for punitive damages.
Although civil litigation has become the primary tool for handling IP disputes, not every case can be resolved this way because of time and cost.
A brand owner may consider setting up a case management system to track infringers’ activities. This will reveal the most aggressive infringers or their associated parties, the channels they use and the regions.
Such infringers can be categorized as litigation targets since an administrative enforcement action may not be enough. Repeat infringers continue to do so because they make a substantial profit. Succeeding in court cases against such bad actors ensures that they pay monetary damages.
Plaintiffs are advised to apply for assets preservation to ensure that damages can be collected – although this may not be necessary if the infringer is a legitimate large-scale company.
Statistics show that in more than 90% of IP civil litigation cases, plaintiffs are awarded statutory damages. Other forms of awards – including actual losses suffered or the infringers’ illegal profits – are granted much less frequently.
It can be difficult to provide exact figures of the actual loss or illegal profits. However, with online platforms becoming the most important distribution channels for both legitimate brand owners and infringers, and more accurate online sales figures, plaintiffs can now collect better evidence to calculate loss or illegal profits.
Choosing the right jurisdiction is another critical step. Practices in different municipal jurisdictions may vary, especially in terms of length of proceedings and amount of compensation. For simple cases, brand owners do not need to worry about jurisdiction. But for complex cases different courts may give contrary judgments on the merits of a case.
Brand owners should carefully evaluate what they want to achieve before deciding on the most appropriate jurisdiction in which to initiate a civil lawsuit.
Finally, brand owners must establish a comprehensive litigation strategy before initiating any action. A proper strategy should include objectives, legal grounds, infringement analysis, jurisdiction, likelihood of success, timeline of the process, and cost estimate.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at firstname.lastname@example.org. DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.