New Balance successful on appeal

New Balance was successful in its appeal. The Guangdong High Court of China (“Guangdong HC”) published its judgment regarding the appeal arising from the first instance New Balance case on June 23, 2016. The case was about their use of a Chinese transliteration of New Balance  “新百伦” trademarked in China by others. The lower court previously awarded damages of RMB 98 million to the owner of the Chinese trademark, Mr ZHOU. Our  report on the original case is here.  Although the Guangdong HC reduced the damages to  RMB 5 million, all other findings in the first instance judgement remain unchanged.

Guangdong HC

In deciding to reduce the damages the Guangdong HC Court held that:

  1. New Balance had extensively used “新百伦”in advertising and business. The relevant public already thought that “新百伦” belonged to New Balance or is related to New Balance’s products. This had cut the connection between the “新百伦” trademark and its actual owner ZHOU Yuelun (“Mr ZHOU”), reduced his market scope, and caused him economic damage.
  2.  Mr ZHOU did not submit any evidence to prove the actual loss he had suffered from New Balance’s use of “新百伦”. Because of this the Court refused to determine the damage amount on the basis of ZHOU’s economic loss.
  3. New Balance had registered “N”, “NB” and “New Balance” trademarks in China and had been using them on the packages of shoes sold in China. They never used “新百伦”on those packages.
  4. New Balance used “新百伦” in the product introduction at Tmall and JD e-shops, on the sales slips of authorized stores, in advertisements at its official website, at Sina Weibo, in brochures, and in video advertisements. However, every use of “新百伦” was in conjunction with “N”, “NB” or “New Balance”.
  5. Considering the business size, market share and high reputation of New Balance, it is fair to say that the relevant public distinguished New Balance products by the marks “N”, “NB” or “New Balance” and they purchased New Balance products because of the high quality these marks stand for.
  6. Mr ZHOU proved he had used the “百伦” and “新百伦” trademarks in business in China but failed to prove that those trademarks are famous in China.
  7. To determine the damage amount on the basis of the infringing party’s profits, there should be a direct connection between the infringement activity and the relevant profits. Applying this rule, it is not justified to base the damage amount on the full amount of profits of New Balance in China during the relevant period.
  8.  New Balance submitted a brand evaluation report suggesting that the contribution of “新百伦”to its profits from China market is 0.76%. This means that this Chinese character trademark contributed RMB 1,487,907.97 to New Balance’s overall profits from the China market in years 2011 to 2013 and RMB 1,458,149.81 to New Balance’s profits from shoes in China for the same period.
  9. It is also necessary to consider the following factors in determining the exact damages amount:
    1. bad faith of New Balance in using  “新百伦”with knowledge of Mr ZHOU’s trademarks;
    2. actual damages caused to Mr ZHOU by New Balance; and
    3. the costs Mr ZHOU spent in the case.
  10. The total court filing fees are RMB 1,066,855.  They should be apportioned as RMB 213,380 to Mr ZHOU and RMB 853,525 to New Balance.

Commentary

Overall, the outcome of this appeal is as expected. It remains to be seen whether either party will seek a review by the China Supreme Court and if it is sought whether the Court will accept the case.  The judgment itself is more than 100 pages, unusual for China and mostly reviewing the details of the case.  The findings regarding damages are an important contribution to China jurisprudence and they are consistent with other recent cases.

Choosing and owning the transliteration of a foreign trademark is a very important first step in engaging with China. New Balance decided to persist with using a transliteration of New Balance already registered as a trademark by others. Another transliteration could have been used, and will presumably be used from now on, if an accommodation cannot be reached with Mr ZHOU.

The court held that New Balance’s commercial use of the pre-existing Chinese trademark with actual knowledge was in bad faith.  A clear caution to anyone else facing a similar situation.

There is an emerging China jurisprudence regarding the connection between awarded damages and the infringing use.  This case is consistent with that and other recent cases.

If the time, energy, and actual cost of pursuing these cases is taken into account, it has been a costly exercise for New Balance, despite their win.

Take away points

  • It is always less expensive to register a trademark than it is too try to recover it from others.
  • A Chinese language version of a foreign trademark is an integral part of doing business in China. The Chinese language is as flexible and creative as any other – there is always another possible transliteration if a first choice is not available.
  • A consistent association between the use of the foreign trademark and the Chinese transliteration is important if the foreign brand is to retain its full value.
  • Infringing a Chinese trademark is proving to be a time consuming and costly exercise.

© Graham Brown 2016. All rights reserved.

The assistance of Peng Wei in the preparation of this article is gratefully acknowledged.

Chateau Lafite Rothschild China trademark

Chateau Lafite Rothschild is one of the world’s iconic wine brands, famous for its history and high quality wines.  It is one of the world’s prestigious and well known brands. So far it has not been successful in establishing the power of its brand in an ongoing China trademark dispute.

Chateau Lafite Rothschild (“Chateau Lafite”) and Nanjing Golden Hope Wine Co Ltd (“Golden Hope”) have now been in legal dispute for more than 5 years over sound alike Chinese language trademarks.

Background

In 1996, Chateau Lafite registered the word mark “LAFITE” in Class 33 on “alcoholic beverages, except beer” (Chateau Lafite TM). In 2007, Golden Hope registered “拉菲庄园” (拉菲pronounced as ‘la fei’ in Chinese, 庄园 means “manor”) in Class 33 on goods including “wine”, “alcohol (beverages)” and “fruit extracts, alcoholic” etc. (Golden Hope TM).

In 2011, Chateau Lafite filed a cancellation application against the Golden Hope TM with the Trademark Review and Adjudication Board.

Trademark Review and Adjudication Board (“TRAB”)

Both Chateau Lafite and Golden Hope submitted evidence to support their arguments.

Chateau Lafite’s arguments included:

  • Chateau Lafite is a world famous prestigious wine supplier and it has been operating in China for many years. Both the Chateau Lafite TM and its Chinese translation “拉菲” (‘la fei’) should be recognized as well-known trademarks in China;
  • The Golden Hope TM is the translation of the Chateau Lafite TM, and copies and plagiarises “拉菲” (‘la fei’);
  • The Golden Hope TM, the Chateau Lafite TM and “拉菲” (‘la fei’) are similar trademarks on similar goods;
  • The registration of the Golden Hope TM has infringed Chateau Lafite’s prior name rights on “LAFITE” and “拉菲” (‘la fei’); and
  • Golden Hope registered the Golden Hope TM in bad faith.

Golden Hope defended as follows:

  • The Chinese translation of “LAFITE” is “拉斐” (‘la fei’) or “拉斐堡” (‘la fei bao’, 堡 (bao) means “castle”);
  • The Golden Hope TM is not similar to either of them; and
  • Chateau Lafite has no prior rights over “拉菲” (‘la fei’).

The TRAB ruled in favor of Chateau Lafite and canceled the registration of the Golden Hope TM.

Golden Hope appealed the TRAB decision at the Beijing No.1 Intermediate People’s Court (Intermediate Court).

Trial at first instance

Golden Hope and Chateau Lafite submitted more evidence.

The Intermediate Court held that:

  1. The prominent part of the Golden Hope TM “拉菲庄园” is “拉菲” (‘la fei’) because “庄园” (the Chinese for “manor”) is of little distinctiveness when used on wine.
  2. According to evidence furnished by Chateau Lafite, the products affixed with the Chateau Lafite TM have been sold in China since 1999.
  3. Before the registration of the Golden Hope TM, articles about Chateau Lafite and its products have been published on specialized journals in China. In these articles, “LAFITE” was translated into “拉斐” (‘la fei’), “拉斐特” (‘la fei te’) or “拉菲” (‘la fei’) which are all transliterations of “LAFITE” in Chinese.  (特 (te) here is presumably used for sound, the closing syllable in Lafite, although it does mean “special” in Chinese). Chateau Lafite itself also used “拉菲” (‘la fei’), the substance of the Golden Hope TM, in its marketing and promotion.
  4. The relevant public in China recognize that “LAFITE” may be referred to as “拉斐” (‘la fei’), “拉斐特” (‘la fei te’) or “拉菲” (‘la fei’) in Chinese.
  5. Golden Hope extensively used the Golden Hope TM in conjunction with “LAFEIMANOR” and indicated that its products were from France, which made it even harder for the relevant public to distinguish its products from those of Chateau Lafite.
  6. Golden Hope is a competitor of Chateau Lafite, and should know about the Chateau Lafite TM and the transliterations of “LAFITE”. Therefore, it should not have registered the Golden Hope TM in the first place. In addition, the evidence submitted by Golden Hope is insufficient to prove that the relevant public are able to distinguish the Golden Hope TM from the Chateau Lafite TM despite its use of the Golden Hope TM.

Accordingly, the Intermediate Court held that the registration of the Golden Hope TM misled and confused the relevant public regarding the source of the goods, and upheld the TRAB’s decision.

Appeal to Beijing High People’s Court (High Court)

Golden Hope further appealed to the Beijing High People’s Court (High Court). During the appeal, further evidence was submitted.

The High Court overruled the Intermediate Court’s judgment and restored the registration of the Golden Hope TM. The detailed reasons given by the High Court can be summarized as follows:

  1. When determining whether two marks are similar, in addition to judging only from the composition and the overall similarity, we also need to take into account the distinctiveness and popularity of the two marks, the relevance of the marks and the designated goods, and whether the co-existence of the two marks may mislead the relevant public.
  2. When determining whether a Chinese trademark and a foreign language trademark are similar, we need to take into account the recognition of the relevant public in China and whether the Chinese and the foreign words correspond with each other. To determine this, the registration date of the Golden Hope trademark is the key.
  3. The Golden Hope trademark is reputable in the market and recognized by the relevant public after being used for a long time, so we need to understand the spirit of the trademark law: coordinating the protection of prior trademark rights and the maintenance of the market order; fully respect the fact that the relevant public is able to distinguish the concerned trademarks; and maintain the existing and stable market order.
  4. In this case, the prominent part of the Golden Hope TM is “拉菲” (‘la fei’), and it is different from the Chateau Lafite TM in terms of font and pronunciation.
  5. Before the registration date of the Golden Hope TM, the Chateau Lafite TM and “拉菲” (‘la fei’) were only introduced on some specialized journals that have limited readers. Hence, it cannot be concluded that the Chateau Lafite TM was popular in China before the registration of the Golden Hope TM or that the relevant public recognized that “LAFITE” and “拉菲” (‘la fei’) correspond to each other.
  6. The Golden Hope TM has been registered and used for 10 years. A stable market order is already in place.

Application for review by the Supreme People’s Court of the PRC (China SC)

Chateau Lafite applied to the China SC for review. The China SC agreed to accept the case and the judgment issued by the High Court is suspended pending the review.

Commentary

It is difficult to reconcile the reasoning in the TRAB and the Intermediate court with the findings of the High Court and we look forward the resolution by the China SC.

This case is yet another example of how lack of attention to detail in entering the China market can have expensive consequences that may be difficult or impossible to rectify. Every product and service will be known by a Chinese name in China.  The only prudent and practical approach is to decide what it is going to be and to register it as a first step in engaging with China.

When a Chinese transliteration of a brand is used, it should be used consistently in all commercial endeavors. It may actually require more effort to achieve this than it does to manage the foreign brand in China. Many foreign trademarks can be transliterated into multiple Chinese versions, as seen in this case, and staff may not be fully aware of the ramifications of using the “wrong” transliteration. The only sound approach is to decide on the transliteration to be used and be vigilant in using it consistently in all commercial and marketing efforts. Unfortunately the evidence in this case revealed that Chateau Lafite had not been totally consistent in its use of Chinese transliterations of its brand.

The clarity of hindsight confirms that it would have been prudent for Chateau Lafite to register a Chinese language transliteration of its word mark at the same time it registered its foreign mark.  It should have registered “拉菲” (‘la fei’) or “拉斐” (‘la fei’) in the first place. If it had registered either one it would have been in a a better position to challenging any application for registration of a similar mark by Golden Hope.

Establishing the reputation of an unregistered mark in China is not easy. The rules for trademark review in China refer to the following as possible evidence to prove reputation: sales contracts; bills of lading; promotional materials; and exhibition brochures etc. In this case, Chateau Lafite furnished a lot of evidence, including an official letter issued by the economic director at the French Embassy in China. The evidence was not sufficient to persuade the High Court.

Take away points

  • China is a very aggressive trademark environment.
  • Foreign brands are attractive in China but every product and service gets known by a Chinese name.
  • Failure to register a Chinese version of a foreign brand is a very costly mistake as this case confirms.
  • This is not an isolated case and China trademarks are very important. If you need convincing, more articles here, here, here, and here!
  • Registration of your China trademarks is the only cost effective option.

© 2016 Graham Brown. All rights reserved.  The assistance of Zhao Wei in the preparation of this article is gratefully acknowledged.

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.

Introduction – China OEM and trademark use

A China OEM trademark case heard in the Jiangsu High Court (“Jiangsu HC”) imposed higher duties on a China OEM manufacturers. Goods manufactured in China, solely for export to Indonesia had the “Dong Feng”(“东风”) trademark affixed. Jiangsu HC went beyond the reasoning of the China SC in the Focker case, and also beyond what has become convention trademark jurisprudence in that part of China.

China’s Supreme Court, on November 26 2015, handed down its decision in the Focker case, holding that China OEM manufacture solely for export did not constitute use of a China trademark in China.  As the highest court, its decisions are usually expected to be followed by lower courts, but China is a Civil Law country and precedents from higher courts are not binding.

The ink was barely dry on the Focker China SC judgment when the Jiangsu High Court (Jiangsu HC) handed down its decision in Shanghai Diesel Engine Co Ltd (“Shanghai Diesel”) v Jiangsu Changjia Jinfeng Power Machine Co Ltd (“Changjia”). The court acknowledged the reasoning in Focker but effectively distinguished it, holding on the facts of the case before it that a China OEM manufacturer had duties beyond confirming that their client has legal rights to an applied trademark in the destination jurisdiction.

Jiangsu HC’s jugment has been referred to in a number of articles as if it is equal in weight to Focker. In reasoning, or the standing of the court, it is not. We expect the China SC’s position to generally prevail in future China OEM cases.

China’s SC has power to review the decision, but it is not presently known whether an application for review has been filed.

 Background

Some “legal” background also needs to be taken into account when considering this case:

  • Indonesia, like China is a “first to file” jurisdiction. Although there are some  exceptions, prior use or first use is practically irrelevant in both jurisdictions;
  • Indonesia, unlike China is not a signatory to the Madrid protocol.  Trademarks can only be registered there directly through an Indonesian trademark agent.

Shanghai Diesel v Changjia was about the application of the China trademark “Dong Feng” (“东风”) (a well known trademark in China) to diesel engines and parts contracted for by an Indonesian company, Pt Adi Berkasa Buana (“Indonesian Company”).

The contract between the Indonesian Company and Changjia was a processing trade contract, whereby the manufacturer is paid a fee for carrying out the work and is not selling products with a marked up profit. The details of processing trade contracts are not really that important to the discussion of this case, although it is mentioned as such in the judgment: in trademark terms it is a variety of China OEM contract.

The terms of the contract were that Changjia would make certain goods and as part of the process the “Dong Feng” (“东风”) mark would be applied to them.  At the relevant time the Indonesian Company held the trademark rights to “Dong Feng” (“东风”) in Indonesia.

The goods manufactured by Changjia were seized by China Customs at the request of Shanghai Diesel, despite Changjia’s export declaration that the goods were manufactured solely for export to Indonesia.  Shanghai Diesel then filed a case at the Changzhou Intermediate Court.  The court ruled in favour of Changjia.

Shanghai Diesel then appealed to the Jiangsu HC.

Appeal to Jiangsu HC

Key facts found

(The facts, although summarized here, are lengthy but together with the findings in the judgment itself, are important in considering the potential impact of the Jiangsu HC judgment on China trademark jurisprudence).

  1. Shanghai Diesel registered in China “Dongfeng” (“东风”) as a word mark in 1981 and a combined mark including a device in 1992. These trademarks have been recognized by the China Trademark Office as well-known trademarks in China from 2000.
  2. The Indonesian Company registered the “Dongfeng” (“东风”) marks in Indonesia on January 19, 1987.
  3. Shanghai Diesel had a series of disputes with the Indonesian Company regarding the trademark  “Dongfeng” (“东风”) in Indonesia. Details as follows:
    1. In 2006, Shanghai Diesel filed a case at Jakarta court claiming that the Indonesian company registered its world-wide well-known trademark in bad faith but the  Jakarta court ruled against Shanghai Diesel and confirmed the trademark rights of the Indonesian Company.
    2. Shanghai Diesel appealed to the  Indonesian Supreme Court, which overturned the decision of the Jakarta court and supported all claims of Shanghai Diesel on February 19, 2008.
    3. Accordingly, the Indonesian IP Office cancelled the Indonesian Company’s registration of the “Dongfeng” (“东风”) mark and other related trademarks on April 17, 2008. Shanghai Diesel then registered the  “Dongfeng” (“东风”) mark in Indonesia on July 31, 2008.
    4. On November 17, 2008, Shanghai Diesel, having won in the Indonesian Supreme Court and being the owner of the “Dongfeng” (“东风”) mark in Indonesia, came to an agreement about compensation with Changjia, key provisions included: Changjia had used the “Dongfeng” (“东风”) mark without the authorization of Shanghai Diesel in manufacturing and exporting diesel engines to Indonesia; and Changjia promised it would not do this again and agreed to compensate Shanghai Diesel with RMB 100,000.
    5. On April 29, 2009, The Indonesian Supreme Court, after a request from the Indonesian Company to review its prior decision in favour of Shanghai Diesel, held that Shanghai Diesel had failed to prove its mark was well-known world wide and overturned its own prior decision.
    6. Accordingly, The Indonesian IP Office reinstated the trademark registrations of the Indonesian Company.
    7. In December 2009, the Indonesian Company filed a case in the Jakarta court requesting cancellation of the registration of the “Dongfeng” (“东风”) mark by Shanghai Diesel. The Jakarta court decided to cancel the registrations on June 16, 2010.
    8. Accordingly, the Indonesian IP Office cancelled Shanghai Diesel’s registration of the “Dongfeng” (“东风”) mark on February 11, 2011.

Jiangsu HC judgment – additional obligations for China OEM manufacturers

(Translated from the judgment with some adjustments, eg the parties named, but believed to generally provide the flavor of the original).

  1. In deciding whether a China OEM manufacturer has infringed China trademark rights, we should consider the law, as well as the need to promote the development of international trade. For this purpose, we need to balance the rights and interests of owner of Chinese trademark, the Chinese OEM manufacturer, and the owner of a foreign trademark.
  2. Generally speaking, if the China OEM manufacturer will not sell any products in China and will export all OEM goods, we should regard that the China OEM manufacturer did not conduct any trademark infringement in China. However, before reaching that conclusion, we need to consider whether the China OEM manufacturer has duly checked the legitimacy of the foreign trademark.
  3. The China OEM manufacturer is required to check whether the foreign customer has legitimate rights to the foreign trademark involved in the OEM arrangement. If it did not duly check this, it will be held as liable for trademark infringement in China.
  4. Where the registration of foreign trademark by the foreign customer is not justified, we think the China OEM manufacturer should be more alert. It means that if the foreign customer breached the good faith principle in registering the relevant trademark offshore, and therefore impacted the trademark rights of Chinese famous or well-known trademark and its owner, the China OEM manufacturer has the obligation to be more careful and has an obligation to avoid causing any trouble to the owner of Chinese famous or well-known trademark. If the China OEM manufacturer knows such facts yet still accepts the OEM order, it should be held as liable for trademark infringement.
  5. We think the above rules will work better with the economic development needs in China, protect normal OEM business, and prevent trademark squatting.
  6. In this case, Changjia knew that Shanghai Diesel’s “Dongfeng” (“东风”) mark is a well-known mark in China, and it did not do what it could to avoid causing trouble to Shanghai Diesel and damaged their interests. Because of this, Changjia should be held liable for trademark infringement.

Detailed reasons

  1. Shanghai Diesel’s  “Dongfeng” (“东风”) trademark is a well-known mark in China, registered in 1962. Shanghai Diesel has been exporting diesels bearing this mark to Indonesia since the 1960s, and this mark is well recognized in that area. The Indonesian company registered the “Dongfeng” (“东风”) trademark in Indonesia after Shanghai Diesel’s China registration and Shanghai Diesel’s first use in Indonesia.
  2. The Indonesian Company was in bad faith in registering their trademark. The official language in Indonesia is Indonesian, but the Indonesian Company registered its trademark with Chinese characters and the Pinyin of Dong Feng being the major part of the mark. Although the Indonesian company won the series of disputes regarding registering the “Dongfeng” (“东风”) trademark in Indonesia, we believe that the trademark registration by this Indonesian company is not justified. In addition, it engaged a Chinese company to do OEM manufacture with a trademark identical to that of Shanghai Diesel, and such activities will cause substantial damage to them.
  3. Changjia promised Shanghai Diesel in their agreement that it would not use its trademark in the future. However, it still accepted the order after making such promise. We think that Changjia breached its obligation of checking the legitimacy of a foreign trademark in taking the OEM order and the obligation of avoiding causing trouble to the owner of a Chinese well-known trademark. Because of this, we decided to hold Changjia liable for trademark infringement.
  4. With respect to the compensation shall be rewarded, we decide that Changjia should compensate Shanghai Diesel RMB 100,000 for the losses suffered by it, and RMB 116,750 for the costs incurred by it in filing this case.
  5. The following factors have been considered in determining the compensation amount:
    1. Changjia only charged processing service fee in this OEM business.
    2. No OEM goods have been distributed in the  China market.
    3. Changjia had reached compensation agreement with Shanghai Diesel in 2008 and in that agreement, they compensated RMB 100,000 to the them.

Commentary

This case warrants close attention because in many reports it has been cited as an example of the lack of impact of the China SC’s Focker decision.  It did not follow Focker, and equally did not follow what had been previous jurisprudence in that part of China, namely OEM manufacture solely for export is not use of a trademark.

The reasoning (as reported) in this case is sometimes difficult to understand:

  1. At one extreme it appears to require a China OEM manufacturer to go beyond the official registration of a trademark in the customer’s home jurisdiction.  In practice it is difficult to imagine what process or documentation could satisfy this requirement if a decision of the highest court in the relevant jurisdiction does not. It was not enough in this case.
  2. It also appears to impose an extra-legal duty on China OEM manufacturers in China: “… an obligation to avoid causing any trouble to the owner of Chinese famous or well-know trademark”.
    Again, something difficult to apply in the form of a practical rule to guide business, Chinese or foreign. “Causing trouble: is a fairly loose definition to apply in this trademark context.

This case is diverges from what has become conventional China OEM jurisprudence in this part of China, and been endorsed by the China SC in Focker.  Previous cases on essentially the same facts and the same protagonists, Shanghai Diesel and the Indonesian Company, have been decided according to what has become the consensus view, as expressed on Focker – namely that China OEM manufacture, solely for export, is not use of a China trademark in China.

The most recent of these cases, prior to this case was decided in the Shanghai Free Trade Zone Court at first instance which held that China OEM manufacture in China, solely for export, is not use of a China trademark. The decision was appealed by Shanghai Diesel to the Shanghai No.1 Intermediate People’s Court, which in December 2014 upheld the first instance judgment.

As interesting asides: Shanghai Diesel only had rights to the “Dongfeng” (“东风” marks in Indonesia from (at best) February 19, 2008 when the Indonesian Supreme Court upheld its claim until February 11, 2011,  when the Indonesian IP office cancelled their registration. A period of about 3 years.

The Indonesian Company has held registration of the “Dongfeng” (“东风”  marks in Indonesia for about 27 years overall. This was not enough to satisfy the Jiangsu HC.

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.
  • A reminder that policy is an important consideration in China, including China courts, not just the letter of the law.
  • The court system in China, as elsewhere, occasionally has cases where the outcome is puzzling, sometimes due to issues in court evidence that may not be fully brought out in the case report.
  • Overall, it seems most likely that the China SC ruling in Focker will be the norm: China OEM manufacture solely for export is not trademark use in China. However, future decisions in particular cases that diverge from accepted jurisprudence cannot be ruled out.
  • Companies using China for OEM manufacturing solely for export should reconsider their China trademark strategy to ensure that it is consistent with this norm.
  • Owners of China trademarks who have in the past relied solely on China OEM manufacture as use of their trademark in China need to quickly reassess their China trademark strategy to ensure that they could meet a lack of use challenge.

© 2016 Graham Brown. All rights reserved.  The assistance of Peng Wei with this article is gratefully acknowledged,

 

 

 

 

 

 

The language used for a China contract is very important. Cross border contracts in general raise many issues beyond those in purely domestic contracts, including those of governing language. China related contracts need special consideration if they are going to be both technically sound and practical in use. The language used for a China contract is particularly important if dispute resolution, arbitration or court, is to take place in China, but that is not the only consideration.

Common approaches to the language used for a China contract

The four common approaches to the language used for a China contract are (for simplicity, here we assume here that the foreign language is English):

  1. Chinese or English only (English only is now relatively uncommon, but still seen);
  2. Chinese only with a “reference” translation to English;
  3. English only  with a “reference” translation to Chinese; and
  4. Both Chinese and English versions of the same contract as a single document or set of documents.

We need to think about contracts in principle. A practical definition of a contract is an agreement enforceable at law. A key part of what lawyers do is to ensure that an agreement becomes a contract by being technically and practically  enforceable at law.

The language used for a China contract is not just about enforcement

If the trappings of enforceability are there, but there is no true agreement there may not be a contract at law: even if there is a contract at law, without full understanding of the content, there are likely to be issues with performance. You might wonder how a party can agree to the detailed content of a contract where they lack the language skills to read and understand it. At best, they are relying on an assurance of what it contains, at worst, they do not know the detailed content. Understanding the content of a contract is integral to its performance, and performance issues are usually raised well after signing and in the absence of advisers. At that point, there is just the contract itself.

“Reference” translations

Any suggestion of using either language with a “reference only” translation, whether in writing or delivered orally should be considered carefully and skeptically. “Reference” in this context usually means that the translation is not complete.  At best, “reference” may means something like “we think this is accurate but we are not prepared to include it in the contract itself, just in case it is not completely accurate”.

Of course, there is a chance that the “reference translation” is both complete and accurate, but if it is, why is it not contractual?

In some ways the use of “reference” translations is understandable.  As previously commented, it is not easy to get good contract translation.  It has a cost and requires highly skilled people. Not every law firm can or wants to provide this. Sometimes a party, without fully understanding the risks they are taking, accepts the “reference” approach for economy. It is false economy in most cases.

A rarely discussed issue with translations that are not incorporated in the contract document set is that they lack authority and acceptance and may also be lost. Oral translations are ephemeral and of little practical use.

Our policy is that the only really sensible approach to the language for a China contract is that the contract should be accurately set out in the languages of both parties: ie Chinese and English.

Issues with using more than one language for a China contract

Once the bilingual approach is accepted, it immediately raises the question of what is to happen if there are differences between the language versions.  In most bilingual contracts a “governing language” provision is used to deal with this. Typically, one or the other of the languages is stated to prevail in the case of conflict between versions.  If dispute resolution is to be in China, making the English govern can raise as many problems as it solves, as mentioned below.

Arbitration can be conducted in a foreign language in China, but if the arbitrator(s) are Chinese they will be most comfortable and fluent in Chinese.  Human nature being what it is, and irrespective of the “governing” clause, they are likely to refer to the Chinese language version, at least for guidance;

If a Chinese court is the chosen dispute resolution venue, all evidence, including the English governing version,  will have to be translated into Chinese by a court designated translator. In a bilingual contract this is unnecessary, unproductive, and also a needless cost.

A compromise position, frequently used when the parties are unable to agree on a prevailing language,  is a provision that states that both language versions are equally authentic.  The consequence of this is that the tribunal or court can decide which language version they will use – in China, it will most probably be the Chinese version.

Of course, the contract can provide that the Chinese version governs. Properly explained, a foreign party will usually agree to this.

Overall, if a bilingual approach is to be adopted, accurate translation will be important. Unfortunately it cannot be assumed that all translators will be competent for a legal document. They are not. Legal translation, like legal drafting itself, is a special skill. Never be embarrassed about inquiring who will do the translation and how it will be checked for accuracy.

Practical benefits of bilingual contracts

The most important benefit of using a bilingual contract is that the parties will each have adopted the details of the terms it contains during the negotiations and ultimately by signing. It is the most certain way of ensuring that both parties understand and have agreed to its content, including:

  1. their rights and obligations – who will do what and when;
  2. the processes to be adopted if something unforeseen arises – consultation, notices, etc etc;
  3. the method for the resolution of disputes that the parties are unable to resolve themselves.

Hard to imagine how a contract can function otherwise. Practically, the signing a contract in a language that a party cannot read and understand is likely to lack the personal adoption and commitment that very often is the key to successful performance.

Another often underestimated benefit is that the translation is an inherent part of the contract document.  It cannot be separately misplaced. It is there when, as often happens, the people originally involved in the contracting process have moved on, taking with them their corporate memory including details of the reference translation.

The Language used for a China contract is important because it is the only tool that the parties and the tribunal or court have to work with.  A contract is too important for any party to rely on anything less than a contract that they can read in their own language.

Take away points

  • China related contracts are likely to be most effective if they are bilingual because it is important that both parties understand what is required of them.
  • A bilingual contract requires accurate legal translation, but this is not always easy to get. Why should you accept anything less than accurate translation in a bilingual contract?
  • The consequences of specifying a governing language in a bilingual contract need to be thought through.
  • Overall, any additional costs involved in preparing a quality bilingual contract are likely to be far outweighed by the increased confidence in the contracting process.

© 2016 Graham Brown. All rights reserved.

 

Trademark infringement cases on the increase?

Trademark infringement in China can have a high cost.  This is a relatively new development. The New Balance case set the high water mark and it seems very likely that others will be inspired by the award in that case.

The emerging high cost of China trademark infringement also seems likely to change the behavior of trademark owners – at least some are likely to allow infringement to run for longer so that they can seek higher provable damages.

It is really early days, but already there are cases emerging with plaintiffs seeking substantial damages. If successful they will, in turn, inspire others.  Anyone doing businessin China, Chinese or foreign, needs to be aware of the potential high cost of China trademark infringement.

According to local media, a case seeking substantial damages from OPPLE Illumination (“OPPLE”), a leading illumination manufacturer in China, has been filed at and accepted by the Chaoyang court.

OPPLE has been sued for trademark infringement by three Chinese individuals for infringing their trademark  “欧普 (The Chinese characters for OPPLE) and device” in Class 9 (wire, plug, socket etc.) with the registration number 1423367. The plaintiffs claim damages of RMB 50 million (Approximately USD 7.7 million).

An OPPLE distributor in Beijing is also being sued by the plaintiffs in the same case for selling the infringing products in Beijing.

Background

OPPLE applied to register the Chinese characters for OPPLE (欧普) in all 45 classes in China and has successfully registered in most classes.

However, for reasons unknown, OPPLE only registered this mark on very limited products in Class 9 (i.e. battery, flash light etc.) in 2002, but did not register it on plugs and sockets in Class 9 apparently because it was previously registered by another Chinese company in 2000 (“Prior Trademark”).

The plaintiffs bought the Prior Trademark from its original owner in 2010 and now claim that OPPLE has infringed their trademark rights by selling plugs and sockets using a trademark similar to the Prior Trademark.

An Internet search of OPPLE products indicates that OPPLE did not directly apply the Chinese character OPPLE trademark on its plugs and sockets. However, the package for these items  does show the Chinese characters trademark for OPPLE. This appears to be the basis for the trademark infringement case.

Calculation of damages for trademark infringement

OPPLE is a listed company in China and  it has to publicly disclose its financial reports annually.

OPPLE’s 2013 financial report shows its business revenue generated from “illumination controllers and others” was RMB 492 million, of which, “electric device” accounts for 45.85% with a gross profit ratio of 52.02%.

OPPLE’s 2014 financial report shows its business revenue generated from “illumination controllers and others” was RMB 677 million, of which “electric device” accounts for 37.86% with a gross profit ratio of 50.66%.

Relying on these public accounts, the plaintiffs say that the RMB 50 million damages they claim for trademark infringement is less than the profits unlawfully obtained by OPPLE from the sale of the products that are the subject of their trademark infringement case (plugs and sockets, classified within “electric device” in the financial reports).

The case has not yet been decided, and we will update this report in due course.

Commentary

It must be noted that this case is yet to be heard and the information here summarizes the plaintiff’s case only.  As with any case it is the outcome that is important and often claims made in pleadings are not made out in court.

The case is significant, however, on a number of grounds.  All parties are Chinese, confirming that IP rights are taking their place generally in China commerce, not just foreign related trade; the damages sought are large; and the method for calculating the damages claimed is interesting because it may be difficult for OPPLE to argue against their own accounts.

The status of the plaintiffs, beyond the fact that they own the relevant trademark is not yet known. Similarly the nature of their business, if any is not known to us.

Take away points

  • Trademarks are becoming even more important in China.
  • It is not enough to “just register” a China trademark. Registration needs to be done in the context of a well thought out trademark strategy that takes account of on the ground reality, including the categories of goods covered and the descriptions used in China.
  • Thorough searching is important in the registration process – the cost is money well spent in risk management. A cheap China trademark is likely to be anything but cheap in the long run.
  • You ignore previously registered trademarks at your peril.  The cost of China trademark infringement is high. If you become aware of a relevant prior China trademark do not proceed further with use in China until the issues are resolved.
  • A distributor can be held liable for China trademark infringement.  A prudent distributor in China should ensure that their principal holds relevant, valid and comprehensive China trademark registrations.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei in preparing this article is acknowledged.

 

OEM manufacturing in China with a China trademark – a changed landscape

OEM manufacturing in China with a China trademark was clarified by a recent decision of the Supreme People’s Court of the PRC which held, on the facts of the case before it, that OEM manufacturing in China with a China trademark but solely for export did not infringe the rights of the owner of the China trademark.

The judgment, issued on November 26, 2015, appears to be the first time that the Supreme People’s Court has directly addressed the issue of OEM manufacturing in China with a China trademark but solely for export.

This decision of the Supreme People’s Court clarifies a previously confusing array of local court judgments in cases regarding OEM manufacturing in China with a China trademark. Some local courts have issued conflicting decisions on apparently similar facts, others have consistent outcomes supported by materially different reasoning.

China is a civil law country and legal precedents have no binding legal effect. Despite this doctrinal position, it is expected that local courts in China will follow the decision of the Supreme People’s Court when facing similar cases regarding OEM manufacturing in China with a China trademark but solely for export, bringing a degree of certainty to this important part of China related business.

Background

The plaintiff, Focker Security Products International Limited (“Focker”) is a Hong Kong company and obtained the China registered trademark No.3071808 “PRETUL with an oval” from an individual on March 27, 2010. This trademark is registered on “hardware, hardware lock, padlock, metal lock and etc.” in Class 6 in China (“TRADEMARK”).

The defendant, Pujiang Yahuan Locks Co., Ltd. (“Yahuan”) is a Chinese manufacturer of locks and other hardware in Zhejiang Province, China.

In 2010, Yahuan signed two contracts with a Mexican company, providing that they wouldmanufacture 684 dozen padlocks for a total price of USD 3,069.79 and 10,233 dozen padlocks at the total price of USD 61,339.03. As required by their Mexican customer, Yahuan would affix “PRETUL” as a trademark on the locks.

Trial at first instance

On January 30, 2011, Focker filed a lawsuit at Ningbo Intermediate Court (“Trial Court”) claiming that Yahuan infringed its TRADEMARK rights by using an identical mark in the manufacture and export of locks. Remedies sought included:

  1. an order that Yahuan immediately stop the infringing activities;
  2. forfeiture of the infringing locks, packaging materials, and tools used in the manufacture of the infringing locks; and
  3. RMB 450,000 (a little more than USD 70,000) compensation to Focker.

Findings of fact

The Trial Court found the following facts:

  1. “PRETUL” was affixed and used on the body of the locks manufactured and exported by Yahuan, the keys of these locks and their product specifications.
  2. “PRETUL with an oval” was affixed and used on the sales package of locks.
  3. In the sales package, the Mexican customer was identified as the consignor with its address, telephone number, fax number, etc. indicated on the package. The words “Made in China” were also shown on the package but there was no information about Yahuan.
  4. The Mexican customer had registered “PRETUL” and “PRETUL with an oval” as trademarks in Mexico in Class 6 and Class 8.
  5. The Mexican customer issued a written authorization to Yahuan on March 24, 2011. In the authorization, it confirmed that it was the legitimate owner of the relevant “PRETUL” trademarks in Mexico and Yahuan was engaged to manufacture locks bearing this mark on its behalf for export only to Mexico.
  6. Yahuan agreed with the Mexican customer that: it should not sell any of the locks in China; the Mexican customer owns all trademarks and related IP rights; it should not apply for or register any trademark or copyright, directly or indirectly; and the Mexican customer was entitled to terminate the transaction at any time.

Trial Court judgment

The Trial Court held that:

  1. Yahuan was an OEM manufacturer for the Mexican customer; and
  2. its use of “PRETUL” on the body of locks, keys and product specifications should not be regarded as infringing the trademark rights of Focker with respect to the TRADEMARK because the mark used was not identical to the TRADEMARK and the goods would not be available in the China market.
  3. Yahuan’s use of “PRETUL with an oval” on the sales package of locks should be regarded as infringement of the TRADEMARK.

The Trial Court ordered Yahuan to immediately stop the use of “PRETUL with an oval” on the lock package and to pay compensation of RMB 50,000 (almost USD 8,000) to Focker.

Appeal of the Trial Court Judgment to the Zhejiang High Court

Both Focker and Yahuan appealed to Zhejiang High Court (“Zhejiang HC”) for review. No additional evidence was submitted by either party and no new facts were found.

Zhejiang HC overturned the decision of the Trial Court regarding the use of “PRETUL” on the body of locks, keys and product specifications holding that it did infringe the TRADEMARK but let the other part of the Trial Court’s findings stand.

Accordingly, Zhejiang HC revoked the trial judgment and held that Yahuan should immediately stop all use of “PRETUL” and “PRETUL with an oval”, and compensate Focker with RMB 80,000 (approx USD 12,500).

Supreme People’s Court review and judgment

Yahuan applied to the Supreme People’s Court for review of the Zhejiang HC judgment. The Supreme People’s Court approved the application on January 2, 2014, set the hearing date for April 11, 2014 and issued its judgment on November 26, 2015.

In its judgment, the Supreme People’s Court held that, OEM manufacturing in China with a China trademark should not be regarded as use of the trademark under the China Trademark Law because the basic function of a trademark is identifying the source of goods.  It cannot be infringement because there is no possible confusion in the China market.

The use of an identical or similar mark on the same or similar products in OEM manufacturing in China with a China trademark should not be regarded as infringing the rights of the owner   of the China registered trademark, because the goods are not available in the China market.

Based on its findings, the Supreme People’s Court revoked the trial judgment and the judgment of the Zhejiang HC, and rejected all claims by Focker.

Commentary

This decision, although apparently logical is not in accord with the position in some other jurisdictions and to that extent may not be welcomed by many that have their products manufactured in China.

Anybody having goods manufactured in China should ensure that their trademarks are registered in the likely destination jurisdictions because that will probably have to be relied upon if counterfeits are manufactured in China.

Customers with China registered trademarks being applied to OEM goods solely for export may need to develop a strategy to keep their trademarks alive as this decision suggests that they would not meet the “use” test if their trademark is challenged.

It remains to be seen whether this decision will be followed in local and other courts and also whether it will be applied in practice by China Customs.  In the latter case, there is a potential question of liability if goods solely for export are detained at the request of the owners of a China registered trademark.  This is an area to be watched closely.

Take away points

  • Overall, the effect and scope of this decision will take some time to work through the China courts and China Customs.
  • Despite that, we suggest that anyone involved in OEM manufacturing in China needs to reconsider their trademark strategy and OEM documentation to ensure that they are still relevant in the changed China OEM landscape.
  • Action should be taken now because the consequences of inaction are serious.

© 2016 Graham Brown And Wei Xin. All rights reserved. The assistance of Peng Wei is gratefully acknowledged.

 

A Chinese language China trademark is really important. This was emphasised by the recent New Balance case.  In addition to the award of damages amounting to RMB 98 million (approximately USD 16 million), a New Balance affiliate was ordered to publicly apologise to the Chinese plaintiff and to refrain from using the infringing China trademark on its products. An embarrassing and costly result for New Balance, and presumably its advisers.

Importance of a Chinese language China trademark

One of the more interesting aspects of the New Balancde case is that it was about the infringement of a Chinese language China trademark. Many foreign companies have paid too little attention to the Chinese language version of their China trademark, and the Chinese language trademarks of others.

There are many reasons for this, one of them possibly being the use of offshore China trademark agents that lack sufficient direct understanding of the China trademark regime. Another is the lack of understanding of the China business environment and the importance of a Chinese language China trademark. Finally, China trademark agents operate in a very competitive, price driven market.  As with many things in China, low prices often equate with service and advice to match.

Every foreign company should protect its foreign trademark by registering it as a China trademark in China. It should not stop there however. In China every product and service becomes known and identified in the Chinese language. It is good practice for the foreign company to control this process by registering a Chinese language China trademark for use in China.

Meaning and sound of a Chinese language China trademark

To date, most Chinese language renditions of foreign trade marks have followed one of two paths:

  • the Chinese language China trademark is translated phonetically to sound as much like the foreign trademark as possible.  This can result in a China trademark that is meaningless to the reader, or at worst, sends the wrong message about the product or service.
  • the Chinese language China trademark is translated by meaning – an attempt is made to convey the “message” of the product and service in Chinese, even if it sounds totally different from the foreign trademark.

Sometimes a hybrid path is chosen. For example the offending use in the new balance case was 新百倫 pronounced “Xin Bai Lun.” “Xin” means “New” in Chinese and “Bai Lun” is a phonetic translation of “Balance.”

The best, but less used path is to spend the time and effort to choose Chinese characters that sound like the foreign language China trademark and have a good meaning in Chinese. To be done successfully this requires an understanding of the underlying “message” of the product and a detailed knowledge of Chinese language.  Skills that are not readily available at the “bargain” prices that are often sought after by foreign trademark agents and their clients.

“Use” not necessary to register a China trademark

“Use” of a trademark is not required to register a China trademark. China has a “first to file” trademark regime and it would be prudent for any foreign business to consider immediately registering their foreign trademark as a China trademark.  At the same time they should spend the time, money and effort to choose Chinese characters that convey the appropriate brand message and also register that as a Chinese language China trademark.

China is a huge market for many foreign goods and services but without protecting the brand and its image by registering a suitable China trademark that market may be closed to you. If someone else, including your China distributor or agent, controls your Chinese language China trademark, they control your China business.

A good Chinese language China trademark is a real asset

A good Chinese language China trademark is a real asset to a business and it is worth spending the effort to get this now.  The opportunity may not be there in the future.

Take away points:

  • Now is the time to register your trademark as a China trademark.
  • All products and services end up by being known by a Chinese language name in China – best to register your Chinese language China trademark too.
  • Ideally your Chinese language China trademark should sound like the original and have a good meaning in Chinese. It is worth taking the time, money and effort to achieve this.
  • It is important to act promptly – if you do not register your China trademarks, someone else is likely to and then you will not be able to use your trademark in China.

© 2015 Graham Brown and Wei Xin. All rights reserved.

Chinese media reports that on April 24, 2015, the Guangzhou Intermediate Peoples Court ordered New Balance Trading (China) Co Ltd to compensate a Chinese individual, ZHOU Yuelun, with RMB 98 million (USD 16,029,572 approx at publication) because of trademark infringement. The trademark involved in this case is “新百伦” – a Chinese transliteration of “New Balance”.

ZHOU Yuelun (“Plaintiff”) is the owner in China of the Chinese character mark “新百伦”in Class 25 on “clothes, leather clothes, sport shirts. T-shirt, sandals, boots, shoes, socks, ties and belts” in China. He also owns in China the Chinese character mark “百伦”which was registered on “clothes, hats, socks and shoes” in Class 25 in China.

According to China Trademark Office (“CTO”) records, registration of “新百伦”was applied for on June 4, 2004 and it was registered on January 7, 2008. Registration of “百伦”was applied for on August 25, 1994 and it was registered on August 21, 1996. Both trademarks are still valid.

New Balance Trading (China) Co., Ltd. (“Defendant”) was registered in Shanghai on December 27, 2006 by New Balance International Limited for import and export, wholesale and retail of shoes, clothes and bags, including sport products and leisure clothes.

Plaintiff found the Defendant had been using “新百伦”on shoes without his authorization, so he filed a lawsuit to Guangzhou Intermediate Peoples Court (“Trial Court”) for infringement of his trademark.

Defendant responded that it had been using “新百伦”in good faith as a part of its company name and “新百伦”is the direct transliteration of “New Balance”. It also accused the Plaintiff of squatting the Chinese character mark “新百伦”.

Findings of fact

The Trial Court held in favour of the Plaintiff based on the following findings of fact:

  1. Plaintiff has been using the trademarks “百伦”and “新百伦”on men’s shoes in its business;
  2. Defendant has used “新百伦New Balance” as a trademark in online and offline advertisement and promotion, on invoices to customers etc. for the sale of its New Balance brand shoes.
  3. Defendant is fully aware of the Plaintiff and his registered trademarks “新百伦”and “百伦”because one of Defendant’s affiliates objected to the registration of “新百伦”in Class 25 by the Plaintiff in 2007 but the objection was not upheld.

Verdict

Trial Court ordered the Defendant to publicly apologize for the harm caused to the Plaintiff, pay court costs and compensate Plaintiff with RMB 98 million (USD 16,029,572 approx at publication) .

The total profits of the Defendant from Year 2011 to 2013 were RMB 195.8 million. The Trial Court decided that half of the total profit, RMB 98 million (USD 16,029,572 approx at publication) should be paid to the Plaintiff as compensation.

The case is still within the appeal period and an appeal is expected.

Take away points:

  • Trademarks are very important in China.
  • Every product and service becomes known by a Chinese name – it is best to control this by registering and promoting a Chinese version of the trademark.
  • If someone else owns the Chinese version of “your” trademark the consequences can be really serious.
  • Registering both versions of a trademark is the only sensible option.

© 2015 Graham Brown And Wei Xin. All rights reserved.

 

Foreign investment now permitted in health care in China

Health care in China is a business opportunity that has been recently opened up to foreign investment. Circulars jointly issued by the National Health and Family Planning Commission of China (NHFPC) and the Ministry of Commerce (MOFCOM)  – The Circular on Carrying Out the Pilot Program Establishing Wholly Foreign Owned Hospitals (“Circular”) confirms that opportunities exist for private hospitals and experienced hospital managers to participate in the growing needs of health care in China.

The Circular states that foreign investors may establish wholly foreign owned hospitals in Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong and Hainan by way of new establishment or M&A. However foreign investors from outside Hong Kong, Macau and Taiwan are not allowed to establish Traditional Chinese Medicine hospitals.

The Circular focuses on the conditions required to be met by foreign investors to establish wholly foreign owned hospitals in China:

  1. the foreign investor applying to establish a wholly foreign owned hospital shall be an independent legal person with direct or indirect experiences of investment in and management of health care; and
  2. be capable of providing international level advanced hospital management and services; or
  3. have world class medical technology and equipment; or
  4. can supplement or improve deficiencies in medical services, technology, funding and facilities.

According to the Circular, the power to examine and approve the establishment of wholly foreign owned hospitals has been delegated to the provincial provincial level.

Existing health care in China

Existing Chinese hospitals, primary providers of health care in China, are inexpensive by developed world standards, but are crowded, lack privacy and frequently require patients to pay well above set rates for “extras”. Overall, their performance does not meet the aspirations of the emerging middle class.

China’s developing middle class have sufficient income to pay for a higher and more patient friendly standard of health care in China. Some go to private hospitals in China established by Chinese investors or the VIP section of existing hospitals. Others, if they cannot get what they want from health care in China, are prepared to go offshore. VIP sections of existing hospitals are typically less crowded and much more expensive, but offer the standard level of expertise.

Increasing numbers of health care tourists from China

An article in the Shanghai Daily about Chinese going to Malaysia for health care illustrates the growing need for improved health care in China. The article states that 22,000 Chinese sought health care in Malaysia in 2013, a big increase from the 8,000 in 2010, and is an example of the unmet demand for superior health care in China.

Medical tourists from China to Malaysia were identified in the article as the middle-aged, seniors, and couples seeking help in fertility treatment. Popular medical services sought were said to include cardiology, cardiothoracic surgery, oncology, infertility, orthopaedics and plastic surgery. Routine but comprehensive health checks are also likely to become important.

Why go outside existing health care in China?

There are probably many factors that influence a decision to seek medical help outside the available health care in China, but quality of service and outcomes are likely to be important. A recent article from Caixin suggests that China’s cancer survival rates are significantly below those in more developed societies.

Other factors that are likely to influence the decision to go outside health care in China include the availability of highly trained foreign qualified medical staff and advanced medical technology.

Another driver influencing development of health care in China is the ageing population coupled with filial obligations to look after parents. China has changed – the filial obligations remain but highly paid younger Chinese are in positions where they cannot take the time off to personally provide care for their ageing parents. Paying for better quality health care in China is one way that filial obligations can be at least partially met. This is likely to be a growing, and profitable trend for health care in China.

Take away points

  • Investing in health care in China is a recent opportunity previously closed to foreign investors.
  • The Chinese middle class are demonstrating their willingness to pay for superior health care in China, and are also willing to seek health care offshore.
  • The number of Chinese willing to pay for perceived superior health care has increased rapidly (for example, from 8,000 visitors to Malaysia in 2010 to 22,000 in 2013). The numbers in China that can afford superior health care are likely to vastly larger than the number accessing offshore health care. Many would prefer to access superior health care in China and have the means to pay for it.
  • Filial obligations to ageing parents will be a strong growth driver for superior health care in China.

GB

© 2014 Graham Brown. All rights reserved.