Liuming International China Business Lawyers

Castel Wines adopted a new China brand because of trademark issues played out in China’s courts.  China’s Supreme Court (China SC) ruled against Castel Wines on January 11, 2016, ordering them to pay compensation of RMB 500,000 and bringing closure to a legal saga that began in 2002.

As in most long running cases, the facts on the one hand are simple, Castel Wines was found to have infringed the trademark rights of the Chinese owner of a trademark: on the other hand, the back story is more complicated and interesting. In some ways it was a victory for Castel Wines, albeit an expensive one.

Parties

Plaintiffs – LI Daozhi, an individual (“LI Daozhi”); Shanghai Banti Wine Company (“Ban Ti Wines”) licenced by Li Daozhi.

Defendants – Castel Frères SAS (“Castel Wines”); WEI Gaoye, an individual, and Zhejiang You Ma Trading Co., Ltd. (“You Ma”).  Another defendant, the Shenzhen subsidiary of Castel Wines (“Shenzhen Castel”) was wound up early in the saga and ceased to be a defendant.

The facts

Ownership of “卡斯特” disputed for 9 years

LI Daozhi obtained the Chinese character trademark “卡斯特” (“Trademark”) from Wenzhou Hardware and Electrical Engineering Group Company on April 25, 2002. The trademark was registered on wine, alcoholic beverages etc. in Class 33 and is valid until March 6, 2020. LI Daozhi licensed the use of the trademark to Ban Ti Wines from August 16, 2005 to March 6, 2020.

Ownership of “卡斯特” (Trademark), a sound alike transliteration of Castel with no real Chinese meaning was in dispute for nine years from 2002 until 2011.

In 2002, Castel Wines applied to the CTO for cancellation of the registration of “卡斯特” (Trademark) on the grounds of non-use for three consecutive years.  LI Daozhi did not provide any evidence of use of “卡斯特” as a trademark to the CTO so it cancelled the registration.

LI Daozhi appealed to the TRAB for re-examination of the CTO decision and provided evidence to support use. The TRAB then overturned the CTO’s decision restoring LI Daozhi’s position.

Castel Wines appealed for review, and the Beijing High Court upheld the TRAB’s decision. Castel Wines then applied to the China SC for review of the Beijing High Court’s judgment but the application was rejected on December 17, 2011.

Castel Wines negotiated for rights to “卡斯特”

Concurrently with the above legal activity, Castel Wines and Shenzhen Castel approached LI Daozhi to negotiate for an assignment of the Dispute Trademark. They signed a Letter of Intent for the assignment, but the deal was never closed.

The China business of Castel Wines continued to develop.

Castel Wines signed 18 sales contracts with its Chinese subsidiary, Shenzhen Castel between November 28, 2006 and September 21, 2007. The contracts provided that Castel Wines would sell wines to Shenzhen Castel for them to distribute in China.

The wines involved in these transactions bore only the foreign language mark “Castel”. When importing them into China, a Chinese transliteration of “Castel” 卡斯特, identical to the Trademark, was used in the Customs declaration documents. The sales revenue of the Shenzhen Company for the years 2007 and 2008 was RMB 97,409,954.82.

WEI Gaoye purchased wines from You Ma and sold them in Taishun County, China. The wines involved bore the Trademark “卡斯特” and were identified as coming from Shenzhen Castel. After a complaint, the Administration for Industry and Commerce of Taishun County held WEI Gaoye had breached the trademark laws, ordered him to stop selling the wines and imposed a penalty of RMB 100,000.

During 2007 to 2009, Shenzhen Castel used “卡斯特” as the Chinese transliteration of Castel in its advertisements in China. In 2008, the Castel Wines Representative Office in Shanghai published a statement that all Castel wines were made, bottled and affixed with the front and back labels in France. “卡斯特”, the Trademark, was used as the Chinese transliteration of Castel on the back labels of the wines.

Trial at first instance

The Plaintiffs filed a lawsuit on October 23, 2009, accusing WEI Gaoye, You Ma, Castel Wines and Shenzhen Castel infringing its trademark rights in China and seeking compensation of RMB 40 million.

After the case was accepted by the trial court, Shenzhen Castel was de-registered and with court approval the Plaintiffs withdrew their claims against it.

The Plaintiff’s evidence included advertising materials purporting to show that “卡斯特” was a famous mark in China.   They also used the total value of the wines imported into China from Castel Wines as part of the basis for their claimed compensation. To obtain a profit margin for Castel Wines they relied on the profit margin of a Chinese listed company,  Zhang Yu Wine Company Limited: for Shenzhen Castel, they relied on the profits of another Chinese company, Jian Fa,  as the basis for the compensation claimed.

Castel Wines, the defendants, produced evidence for their case including evidence showing that Castel wines were recommended by many foreign wine magazines; the CEO of Castel Wines was honored as a top 100 French Wine Celebrity by the French Wine Magazine; and he was invited by the Prime Minister of France to visit China as French representative, etc.

The trial court held:

1. Use of the Trademark by WEI Gaoye and You Ma had infringed the trademark rights of the Plaintiffs and therefore ordered them to stop all sale of relevant wines.
2. Their infringing activity did not extend to Castel Wines or Shenzhen Castel because there was no evidence provided to show this.
3. The use of “卡斯特”in the Chinese labels of imported wines and other documents in the Customs declaration process by Shenzhen Castel should be regarded as use of trademark in China and therefore held it liable for infringing the Plaintiffs’ trademark rights.
4. Taking into account the relationship between Castel Wines and Shenzhen Castel; their cooperation in importing the wines; and Castel Wines’ statement in 2008; Castel Wines should be held liable for infringing the trademark rights of the Plaintiff jointly with the Shenzhen Castel. Shenzhen Castel was already de-registered so Castel Wines should assume all liabilities.
5. The use of “卡斯特” in advertising constituted trademark infringement, but this activity was conducted by Shenzhen Castel alone, and Castel Wines should not be held liable for this infringement.
6. Castel Wines should publicly apologize to the Plaintiffs to mitigate the impact of the infringement and compensate the Plaintiffs with RMB 33,734,546.26.

Appeal to Zhejiang High Court

The Plaintiffs and Castel Wines both appealed to Zhejiang High Court, but it affirmed the first instance judgment.

Castel Wines appeal for review by the China SC

Castel Wines applied to the China SC for review. The Supreme Court accepted the application and issued its judgment on January 11, 2016.

Additional facts

Castel Wines stopped using “卡斯特” on its products in 2008.
Castel Wines stopped using “卡斯特” in its company name on December 11, 2011.

The China SC held:

1. The trial judgment, affirmed on appeal regarding the liabilities of WEI Gaoye and You Ma should stand.
2. The trial judgment, affirmed on appeal, holding both Castel Wines and Shenzhen Castel liable for trademark infringement should stand.
3. The finding that Castel Wines should assume all liabilities due to the de-registration of the Shenzhen Castel should also stand.
4. The RMB 33,734,546.26 compensation awarded at trial and affirmed on appeal should not stand.
5. Compensation of RMB 500,000 should be awarded for the trademark infringement.

The reasoning of the China SC

1. The Plaintiff’s evidence failed to establish that “卡斯特” (Trademark) was independently famous in China.
2. Castel Wines had no intention in passing-off LI Daozi’s trademark when using “卡斯特” in business.
3. However Castel Wines and Shenzhen Castel used “卡斯特”in the Customs declaration documents in importing the wines into China.  These documents were provided to Chinese customers for indication of origin and quality of goods so they are transactional documents as provided for in the China’s Trademark Law. The use of “卡斯特” in them is use of a trademark in China.
4. The “卡斯特” trademark belongs to LI Daozhi, and he and Castel Wines did not agree on the assignment or use of this trademark during their negotiations.
5. It follows that Castel Wines and Shenzhen Castel, with full knowledge, breached their obligations to avoid infringing another’s trademark rights when using “卡斯特” in business. They should be held liable for infringing LI Daozhi’s trademark rights in China.
6. Chinese Trademark Law provides that the compensation awarded in a trademark infringement case  be determined according to the profits obtained by the infringing party or the losses caused to the infringed party. Reasonable costs incurred by the infringed party in stopping the infringement activities can also be included.
7. If neither the profits obtained, nor the losses incurred can be ascertained, the court shall determine the appropriate compensation according to the (then) maximum specified amount of RMB 500,000.
8. The trial court was in error when applying the profit rate of Zhang Yu Wine Company to determine the profits obtained by Castel Wines and in applying the profit ratio of another company, Jian Fa, to determine the profits obtained by Shenzhen Castel. These Chinese companies are independent and have no relationship to this case.
9. Where compensation is to be determined according to the profits obtained by the infringing party, the infringed party must prove the profits attributable to the infringing activity. The value of wines imported into China by Castel Wines totalled RMB 31.96 million but the Plaintiffs did not prove that the sale of these wines and the profits generated are relevant or attributable to the Chinese character trademark “卡斯特”.
10. The Plaintiffs failed to prove the losses caused by Castel Wines and Shenzhen Castel’s infringing activities so the (then) statutory compensation provision of RMB 500,000 should apply.
11. In determining the appropriate amount, the disputes between Castel Wines and LI Daozhi regarding the Trademark, the reputation of Castel Wines and their wines, and the fact that Castel Wines had no bad faith in using “卡斯特”  should be considered.
12. Based on all of the above Castel Wines shall pay RMB 500,000 as the compensation to the Plaintiffs.

Commentary

PLEASE NOTE: The statutory maximum compensation amount of RMB 500,000 is set out in the law applicable in this case.  It has since been increased to RMB 3 million.

Challenging a trademark is evidence of actual knowledge of its existence and Chinese courts will take knowledge into account in deciding cases.  It is now very clear that the cost of infringing a Chinese trademark can be very high as the New Balance and Oppel cases show.  In this case the court took into account that Castel Wines had taken steps to change its Chinese brand when the legal challenges were finalized.

This and other cases confirm that progress though the Chinese legal system can take a very long time.  When confronted with a prior registration of a Chinese language sound alike trademark, the most cost effective approach for a foreign party may be to simply choose another Chinese transliteration.  At that early point the only reputation in China is the foreign brand itself.  The selected transliteration can be built into a Chinese brand with a reputation.  Castel Wines ultimately adopted this course of action, but after many year of fruitless legal action.  Similar considerations apply to a Chinese language trademark based on meaning, not sound.

Legal action may increase the value of an opportunistic Chinese language trademark because it increases awareness of its existence.  Using another Chinese brand allows the foreign party to get on with business while effectively devaluing the opportunist’s trademark: in many cases probably to zero.  The real questions that are not often asked or satisfactorily answered in a commercially real way, are: “is this a battle worth fighting?” and “what is the real commercial benefit of winning?” For a newcomer to the Chinese market, and for many already here, the answer should be obvious.

Entering the Chinese market has many challenges, some of which can be predicted and dealt with, others that occur in the daily marketplace.  The trademark environment in China is well known.  Newcomers will need to register their foreign trademark in China and also a Chinese version. Neither is optional for a prudent business.  Both should be registered as a first step on the path to China.

The decision of the China SC also has a message for trademark opportunists. The message is that the burden of proof is on them to establish losses claimed and that they must link those losses to the Chinese brand. Hopefully that message will filter down to courts lower in the system.

Take away points

• China is a Civil Law country. Case reports can provide insights into how legal issues are viewed by the courts, but precedents are not binding.
• Registering foreign language and Chinese language trademarks in China should be the first step in engaging with China.
• Comprehensive searching is important in the registration process.  Providers of a cheap China trademark may not do adequate searching.
• If confronted with the existence of a prior Chinese language trademark, consider carefully whether  the most cost effective course of action is to register an alternative Chinese language trademark (there will almost always be an alternative). Already doing business in China?  Same considerations.
• Ignoring a pre-existing Chinese trademark can be very costly in money, time, and energy.

© 2016 Graham Brown. All rights reserved.

The assistance of Wei Xin and Peng Wei with this article is gratefully acknowledged.