Introduction & background

The China Trademark Law underwent its Fourth Amendment on April 23, 2019 (“Amendment”). The Amendment is intended to regulate filings so that bad faith trademark filing is more difficult. It also provides for increased compensation for trademark infringement. The Amendment became effective on November 1, 2019.

On October 11, 2019 the document “Several Rules in the Administration of Trademark Filing and Registration” (“Implementing Rules”) was issued by the China National Intellectual Property Administration of the State Administration for Market Regulation to implement the changes needed by the Amendment. These will become effective on December 1, 2019. Implementing Rules are very important as they set out the formal guidelines for how the law is to be practically administered.

These changes are both good and bad news for those doing business with China. The good news is that the China Trademark Law now has more specific measures to restrict “bad faith” trademark filings and statutory compensation for trademark infringement has been increased. The bad news is for the victims of rent seeking trademark opportunists that have registered foreign trademarks. They may be subject to claims for the increased statutory compensation.

The recent decision of the China Supreme Court that OEM manufacturing in China solely for export can infringe a China trademark should be of particular concern. (Our article about this is here).

The changes to the China Trademark Law

Changes to the China Trademark Law brought about by the Amendment and its Implementing Rules include guidelines for detecting bad faith registration and increased compensation for infringement:

Bad faith

Applications for a trademark with no intention to use may be regarded as a bad faith filing and rejected.

The trademark examiner is required to consider the following factors to determine whether the application is in good faith with the intention to use the applied for trademark:

  1. How many trademarks have been applied for by this applicant and/or its affiliates and in which class(es)? How many of these trademarks have been transferred by the applicant and/or its affiliates to others?
  2. The industry the applicant is engaged in and the operational status of the applicant in it.
  3. Precedents: including administrative decisions, verdicts and judgements in which the applicant was held to be filing trademarks in bad faith or infringing the trademark rights of others.
  4. Is the applied for trademark similar to any famous or well-known mark? If yes, how similar are they?
  5. Is the applied for trademark similar to any celebrity’s name, enterprise trade name, short name or other business logo? If yes, how similar are they?
  6. Other factors the trademark examiner believes to be relevant.

Trademark examiners who believe that a trademark application is not filed for use, can reject the application directly and also impose an administrative penalty on the applicant. Punitive actions can include, a warning, an administrative fine of three times the illegal income but not more than RMB 30,000. If there is no illegal income, not more than RMB 10,000.

Consequences of infringement

The cap on statutory compensation for trademark infringement is raised to RMB 5 million. In the prior version, the cap was RMB 3 million.

Punitive damages for repetitive or serious trademark infringements are higher, and can be 1 to 5 times the compensation amount. In the prior version, punitive damages were 1 to 3 times the compensation amount.

Counterfeit products shall be destroyed if requested by the trademark owner, rather than being sold by the counterfeiter after removing the relevant trademark.

Trademark agents

Trademark agents will be under stricter supervision. Trademark agents must not facilitate bad faith trademark filings and will be punished for breach.

Commentary

These changes to the China Trademark Law are a step in the right direction. The practical context of the huge numbers of China trademark applications – 7,310,000 in 2018, cannot be ignored. Training staff to understand and implement the changes, particularly as they apply to bad faith registrations, is a challenge yet to be met. It is too soon to know how effective the guidelines for examiners will be in practice.

The changes are a direct response to two important issues in the current China trademark system: rent seeking opportunists registering foreign trademarks to extort the offshore owners; and insufficient compensation for trademark infringement.

Bad faith

China has a first to file trademark regime. An applicant for a China trademark is currently not required to prove use or intended use of the mark when the application is filed. As a result numerous rent seeking opportunists have registered foreign trademarks as their own in China. This has been a serious issue for a long time and adversely impacts China trade.

There have been many signs that the authority responsible for administering the China Trademark Law is determined to tackle “bad faith” trademark filings. For example, an official of the China National Intellectual Property Administration recently said in a public speech that in 2018, about 100,000 abnormal trademark applications were rejected by the China Trademark Office at the registration and opposition stages.

The changes to the China Trademark Law made by the Amendment and the new Implementing Rules are expected to play an important role in limiting new bad faith trademark filings. But it remains to be seen if the examiners can or will follow the steps set out in the Implementing Rules to identify bad faith filings.

How, for example, will they determine the status of an applicant in their particular industry? Or similarity to “any celebrity’s name, enterprise trade name, short name or other business logo? Training to understand the requirements and additional time to review each application thoroughly would be required.

The Amendment and Implementing Rules are prospective in operation and have no direct effect on trademarks already registered. They do however, strongly suggest the “official” indicia of bad faith filing. This will be useful in challenging a trademark registered under the previous incarnation of the China Trademark Law.

Some bad faith applications will be identified by examiners. It seems likely, however, that these “bad faith” indicia will have their greatest impact in the preparation of oppositions to registration during the gazettal period. Similarly, they can play an important role in challenges to an already registered trademark. Activity in these areas of trademark work will probably increase dramatically.

Unfortunately too many foreign applicants abandon their claims too soon. Far too many winnable cases are lost by being abandoned too soon by foreign applicants.

The present changes with their indicia of bad faith registration provide an additional path to challenge an existing China trademark by establishing that it was registered in bad faith.

Compensation

In 2013, China raised the cap for statutory compensation to RMB 3 million (from RMB 500,000). Now, only 6 years later, the cap for statutory compensation has been increased to RMB 5 million. This provides stronger trademark protection for legitimate business operators. It also substantially increases the potential costs of counterfeiters in trademark infringements.

Unfortunately, the increase in statutory compensation in the China Trademark Law may have unintended consequences. The increased compensation will be also available to rent seeking opportunists that have already registered foreign trademarks in China. If the accused infringer cannot defend itself it will face the risk of the higher compensation amount.

The 2013 version of the China Trademark Law (and continuing) provided that an alleged trademark infringer could have a defence if the trademark owner had not used the trademark in the previous three years. The court could then require the trademark owner to submit evidence of use.

If the trademark owner could not prove required use, the claim for compensation would fail.

 

Take-aways

  • Registering a trademark directly in China remains the most certain and cost effective means to protect a trademark.
  • The real force of the present changes is likely to be in founding arguments for opposition during the gazettal period and for objections to existing trademarks.
  • Examiners may identify some bad faith applications, and that will be welcome, but the sheer number of filings in China is a constraint at that level. China trademark applicants and owners should be proactive in challenging bad faith registrations and applications.
  • Increased compensation will be welcomed by trademark owners but may be a problem for victims of rent seeking opportunists.
  • The China Supreme court has ruled that OEM manufacture solely for export can infringe a China trademark. (Our article about this is here).
  • Ensure that you get advice about contested trademark matters from advisers with real court experience in trademark work. Abandoning a trademark application too soon is a costly exercise.
  • Only licensed Chinese lawyers can appear in a Chinese court.

Introduction & background

“… Don’t worry, we have the NNN agreements in place….”

A snippet of a telephone conversation overheard in the lounge of a major hotel in New Orleans. The speaker was American, presumably a lawyer, and speaking confidently to a client about a China manufacturing deal.

Many, including lawyers, now regard the NNN agreements as the key to risk management in dealing with China. That is an error.

NNN agreements

The NNN agreements (non-disclosure, non-compete and non-circumvent) have been the subject of much Internet chatter and numerous articles. Unfortunately, their claimed effectiveness gets fortified only by repetition. Little, if any, of the NNN commentary comes from China licensed local or foreign law firms. Licensed Chinese lawyers are also mostly silent. Why?

China is a sovereign country

China is sovereign country. It is a Civil Law jurisdiction with its own civil procedure, court system, trial procedures and rules of evidence. As might be expected, it is a little different from other Civil Law jurisdictions. It is totally different from a Common Law jurisdiction. Commercial and legal strategies that might be perfect elsewhere may not be as effective in China.

NNN agreements are just contracts

NNN agreements are just contracts. A contract by definition is an agreement enforceable at law. To have commercial value, a contract needs to be technically and practically enforceable. Enforcement has to be cost effective to be practical. This is rarely addressed by NNN commentary where various remedies are mentioned as if they are items on a menu awaiting selection.

A brief contract refresher

A contract can only bind the parties to it. So your remedy must come from the other party to a contract. Your counter party. If others offend you must be able to prove a material link in the offending to your counter party. Your counter party is the only one that you can sue in contract.

A basic principle in contract is that if it is breached, the innocent party should be restored to the position that they would have been in if the contract had been fully performed. The preferred remedy is damages or monetary compensation.

Sometimes, although it is known that the contract has been breached, there are not yet losses that can be quantified in terms of money. It might be very clear however that there will be real losses in the near future.

Then an injunction (an enforceable court order to do or refrain from doing something) can be sought. These take two forms: an interim injunction restraining the other party until a full court hearing is completed; and a permanent injunction issued at the end of the case as part of the judgement.

To end this very quick and incomplete outline, there are also liquidated damages. Sometimes it is difficult to quantify and prove the actual amount for damages. Parties to a contract might agree, for example, that delayed delivery will result in damages of $5,000 per day. There are jurisdiction specific rules about this.

Each of these remedies is discussed below in the context of NNN agreements.

NNN remedies for breach

The NNN agreements are just contracts for specific purposes. They may also be terms to similar effect in more comprehensive contracts.

Breach scenarios

Weeks, months or years after your China contract has shipped, something very similar or identical appears on the market. Originating from a city that you have never visited and from a company that you have never previously heard of. You suspect that your previous counter party may have something to do with it. What then?

You may have actual losses to support a claim for damages. The issue then is to find and prove the link to your previous counter party so that the NNN agreements can be enforced. All the issues referred to below, except showing actual losses, are there. You have the burden of proof.

Sometimes contracts are breached, but there are no immediate losses. For example, you have just become aware that your miscreant counter party has set about copying your tooling – say a mould for making plastic parts. Or your confidential information has been disclosed, but preparations for use are ongoing. Or your competitor seems to have new knowledge about how to make products very similar to yours.

Do you have to sit back and wait until your business is really harmed so you can show monetary losses? That is one option, but who wants to wait until their business suffers harm? Enter the injunction.

China injunctions

Injunctions are hard to get in China. Funds have to be guaranteed to offset any potential losses of the injuncted party if the case is lost. Except for IP infringement or unfair-competition, interim injunctions are rarely issued by the courts. At the end of a case a final injunction may be issued, but that can be long after the event. Chinese courts are very cautious in granting any injunction and would usually review the actual substance of the whole case for an interim injunction, and would not be easily persuaded. Because of the different role of judges, prior contractual consent to injunctive relief is largely irrelevant.

Liquidated damages

Because of the difficulty in getting an injunction in China, NNN advocates often suggest that substantial liquidated damages be specified. Millions of Renminbi, the Chinese currency, are sometimes suggested as the amount of liquidated damages to induce fear of breach in the other party.

The real problem with that strategy is Chinese law. Chinese law provides that where there is a material discrepancy between the amount of liquidated damages and the actual damages, either party can apply to the court to set the liquidated damages aside or to reduce them to align with the actual harm suffered. If the court finds that the agreed amount is not fair, it will adjust the claim accordingly. In our simple examples above you don’t yet have any actual losses. It is going to be hard to sustain an argument for your liquidated damages.

Freezing bank accounts

NNN advocates also suggest that the counter party will fear having its bank accounts frozen by a Chinese court (an interim remedy analogous to an injunction that is available in China). The advocates are right: they will fear that – to a point! Let’s take a realistic look at this remedy.

You are the plaintiff and have the burden of proving your case. There is no pre-trial discovery and almost all relevant information is in Chinese. There are few publicly accessible registers of business information. You have to prove to the satisfaction of the court that you have losses because of your counter party’s breach of NNN obligations. Stop and think about that for a moment. In China, as everywhere else, there is a big gap between believing something has occurred and being able to prove it in a court of law. Particularly in a court system that prefers documentary evidence that has been notarised. Quite rightly, the first step in freezing a bank account, or preserving evidence, is to file your case. To do that you will need to have evidence linking your counter party to the breach. Filing fees will be based on the amount you claim as compensation – your millions in liquidated damages?

Back to freezing bank accounts. First, you have to be able to identify to the court the bank account and its links to your counter party. Knowing litigation is pending there may be a move to a different bank. You will have to prove to the court that your rights will be irrevocably damaged if the court does not approve your application to freeze the bank account. Then you have to deposit funds with the court or provide a guarantee – 30% of the amount to be frozen is typical. The wisdom of the RMB 10 million specified as liquidated damages in your NNN agreements may not be quite so apparent now. And the difference between actual and liquidated damages is not relevant at this point.

It is also not simply a matter of transferring money in. China is a foreign exchange controlled country. It is very difficult to get the security funds into China. The usual practice is to get a guarantee from a local security company. They charge a percentage of the guaranteed amount for this. They will typically also require security.

Damages

Damages are the routine remedy for breach of contract in China, as elsewhere. The process for proving the amount must take account of China’s rules of evidence, but that is not unduly onerous.

Commentary

The Internet is an amazing source of information. Unfortunately, much of the information about China is incomplete, out of date, or just plain wrong.

Are the NNN agreements silver bullets? Clearly not! But that does not mean that you are always firing blanks. As part of a well thought out and executed China engagement strategy they have a role, but they are not a substitute for real management of the China project.

For example, have you registered all of your registrable IP in China? Calling it IP in a contract does not make it legally so.

Legal and other due diligence is far more important than the NNN agreements because it is preventative, not attempting to be remedial. Who is the other party? What is their reputation in China? Do they have the necessary approvals and licences to make your product? Are they financially sound? Are they really a manufacturer or just a hidden agent for a real manufacturer? Or even worse, are they fraudsters?

Practical China knowledge and experience in the drafting of China specific contracts is important. The often seen verbiage about liquidated damages being a carefully considered estimate of damage, or consent to injunctive relief, or agreement not to oppose injunctive relief, usually suggest that it is not a “China” contract. Understanding where things are likely to go wrong in China and having contract terms and procedures to cover them is important.

If you have done your homework the NNN agreements may be an added security. We use them in appropriate cases but we make sure our clients understand their limitations. Our clients also know that if you have really done your homework, and have contracts drafted specifically for the purpose, the need to rely totally on enforcing NNN agreements will probably not be an issue of great concern.

Take-aways

  • A contractual right without a cost effective remedy, or a remedy at all, is empty.
  • NNN agreements provide little real protection in many common contract situations.
  • China is a sovereign country.  It is a Civil Law jurisdiction. Its civil procedure, court process, rules of evidence and the role of judges follow that system.
  • China legal strategies based on another system are unlikely to be effective. Irrespective of how effective they might be elsewhere.
  • If NNN agreements are unlikely to be practically enforceable in your particular situation, you are just getting empty comfort from moving risk around on paper.
  • There is no substitute for real legal and other due diligence when engaging with China.
  • Legal advice should be supported by on the ground experience in China, not the Internet.

© Graham Brown 2019. The assistance of Peng Wei and our team in the preparation of this article is gratefully acknowledged. Any errors belong to the author.

 

Introduction

On September 23, 2019, the Supreme Court of the People’s Republic of China (”Supreme Court”) gave its decision in an OEM manufacturing trademark case brought by Honda Giken Kogyo Kabushiki Kaisha (“Honda”) against Chongqing Heng Sheng Xin Tai Trading Co Ltd and Chongqing Heng Sheng Group Co Ltd. (“Heng Sheng”). Overall (“Honda Case”).

The Supreme Court held that the two Heng Sheng entities manufactured OEM motorcycle kits, (“Motorcycle Kits” – presumably CKD) in China for a Myanmar entity and this had infringed Honda’s China trademarks.

This is a very different outcome from previous Supreme Court decisions on the same issue.

Background

PRETUL

On November 26, 2015, the Supreme Court gave its decision in the “PRETUL” trademark case. In this decision, the Supreme Court, for the first time, made it clear that “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.” Our article about this case is here.

DONG FENG

Shortly after the Supreme Court issued its decision in the “PRETUL” case, Jiangsu High Court issued its decision on another China OEM trademark case, holding that the defendant Jiangsu Changjia Jinfeng Power Machine Co Ltd was liable for trademark infringement because it knew that the plaintiff Shanghai Diesel Engine Co Ltd’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. Our article about the Jiangsu High Court case is here.

This decision was later reviewed by the Supreme Court and gave its decision on December 28, 2017. The Supreme Court reversed the Jiangsu High Court decision finding that the defendant, Jiangsu Changjia Jinfeng Power Machine Co Ltd, had done due diligence to confirm the trademark rights of the Indonesian Company. No infringement of a China trademark had occurred because the goods were OEM manufactured and were all exported.

The Honda Case

Findings of fact

  1. Plaintiff Honda is an international enterprise that manufactures motorcycles and has registered relevant three trademarks in China. All were valid when this case was heard. 314940 the word HONDA, 1198975 the framed H device commonly seen on Honda cars, and 503699 the HONDA with wing device associated with Honda motorcycles.
  2. Defendants Heng Sheng are affiliates. Heng Sheng Trading signed a contract with a Myanmar company on April 3, 2016 for manufacture of Motorcycle Kits with the trademark “HONDAKIT”.Although the contract was named as a Sales Contract it was from its terms actually an OEM manufacturing contract. Heng Sheng Group was the actual manufacturer and Heng Sheng Trading was responsible for the logistics of exporting the Motorcycle Kits.The director of the Myanmar company owns the trademark “HONDAKIT” in Myanmar. He authorized Heng Sheng to use this trademark in its OEM manufacture of the contracted Motorcycle Kits. All Motorcycle Kits manufactured by Heng Sheng for the Myanmar Company were for export to Myanmar.
  3. Kunming Customs contacted Honda on June 30, 2016 with the Notice of Confirmation of the Intellectual Property Rights for Imported and Exported Goods. According to the notice, they had detained 220 Motorcycle Kits bearing the trademark “HONDAKIT” and these products may infringe Honda’s trademark rights. Kunming Customs requested Honda to take action if it wanted to.On July 12, 2016 Honda paid the security deposit and applied to Kunming Customs for further investigation and detaining of the Motorcycle Kits. Kunming Customs issued its investigation decision on August 22, 2016 notifying Honda that the Customs could not decide whether infringement had been established. Honda should therefore file a court case to determine the issue. Kunming Customs also said that they would further detain the Motorcycle Kits for 50 working days and then release the goods unless they received a court order to further detain the Motorcycle Kits.

Honda filed its court case on September 13, 2016.

Trial court

The trial court issued its decision on June 1, 2017. The trial court held that the evidence filed by Heng Sheng could not prove that the contract with the Myanmar Company was really an OEM manufacturing contract so it was a sales contract. In the trademark attached to the Motorcycle Kits the word “HONDA” was bigger than “KIT”. This differs from the trademark registered in Myanmar. Such use by Heng Sheng was apparently to take advantage of “HONDA”. On these facts, Heng Sheng should be regarded as a trademark infringer.

Judgement of the Appellant Court

The appellant court overturned the decision of the trial court and gave its judgement on November 28, 2017.

The appellant court held that the sales contract signed between the Myanmar company and Heng Sheng was, by its terms, actually an OEM manufacturing contract. The owner of the Myanmar trademark “HONDAKIT” had signed the contract and the authorization for Heng Sheng to use the trademark “HONDAKIT” in performing the contract.

The Motorcycle Kits made by Heng Sheng for the Myanmar Company were all for export to Myanmar. Chinese customers would have no access to these products. Because of this there was no trademark infringement.

Appeal by rehearing at the Supreme Court

The Supreme Court decided to reconsider this case on September 14, 2018, and concluded its review just over a year later on September 23, 2019. The Supreme Court overturned the decision of the appellant court and held that Heng Sheng had infringed Honda’s trademark rights.

Reasons

  1. It is not right to regard “use of a China trademark in OEM manufacturing” as an exception to trademark infringement because this is against the basic principles of deciding trademark infringement.
  2. Trademark registration and protection is territorial and a trademark registered in a foreign country is not protected in China. It follows that an authorization for a domestic OEM manufacturer to use an offshore registered trademark should not be regarded as a legitimate right to be protected in China. Nor a defense to infringement of a China registered trademark.
  3. The key function of a trademark is to identify the source of goods or services. Use of a trademark consists of many processes including attaching the trademark to the goods, distributing the goods in the market, their sale etc. In an OEM manufacturing case, the relevant public includes the customers and the business operators involved in the manufacture and logistics processes. A business operator such as a logistics company can access the relevant trademark and products. Because of this, the possibility of causing confusion of the relevant public still exists in an OEM arrangement.Further, with the development of e-commerce and the Internet, OEM manufactured products may come back to the China market in some way. The Chinese consumers may travel abroad and there come into contact with the OEM manufactured products. All of these have increased the possibility of confusion of the relevant public.

Commentary

This decision effectively removes the certainty that prior decisions had so recently established for China OEM manufacturers and their customers.

It is not clear from the judgement what concerns the Supreme Court sought to address, or what deficiencies resulted from their previous decisions that needed to be remedied.

The reasons given by the Supreme Court in its judgement are not so strong that the underlying purpose is self evident.

The confusion that might arise among logistics operators and others handling the goods as part of the OEM manufacturing process is speculative and definitely very limited. It stretches the concept of “relevant public” a long way. Almost anyone, whether they recognise the trademark or not, would be included by that expanded definition.

OEM manufactured goods bearing a trademark may come back to China and could conceivably result in some marketplace confusion. But a more specific, and legally congruent remedy would be to target the goods on their way back into China, not on their journey out.

Further, the fact that Chinese consumers may come into contact with OEM manufactured goods outside China is not a China trademark issue at all. That reasoning compromises the territorial restrictions on trademark protection, including that the “relevant public” would usually be thought of as people in the trademark territory: in this case China.

The Supreme Court, has to some extent given Honda implied protection against the possible infringement of its China trademark outside China. A contradiction in terms.

Take aways

  • China is not a case law country but decisions of the Supreme Court have the effect of “judicial guidance” and decisions are usually followed by local courts. If a court does not follow the Supreme Court’s decision the Supreme Court still has the right to revoke that lower court’s decision on appeal as happened in the “Dongfeng” trademark dispute.
  • Clearly this change in approach has extensive potential consequences for those that source OEM manufactured goods from China and those that manufacture them.
  • The only realistic protection for OEM manufacturing now is to register trademarks in China before contracting OEM production
  • In many cases this is not possible because opportunists have already registered the foreign trademark in China. That was the problem that the previous decisions alleviated.
  • Despite all of the uncertainty raised by this case, one thing is clear. Registering trademarks with China Customs assists in preventing infringing activity

© Wei Xin 2019. The assistance of our team in the preparation of this article is gratefully acknowledged. Any errors belong to the author.

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.

 

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.

Translation of a China contract is very important.  I was reminded of this recently when I was reading an article written by another lawyer.  His basic point was that language in contract is very important, and where two languages are involved, it was important that the “language” provision in each version should correctly state the same governing language. To be frank, anything else is just incompetence.

Good translation is difficult to get

Unfortunately the article said nothing relevant about the really key point in China contracts – translation of a China contract. Good translation of a China contract is important, but it is difficult to get. That is one of the reasons why we do all translation of a China contract in-house – to ensure accuracy.  The other reasons is confidentiality, but that topic is for another time.

Why is it so difficult to get good translation of a China contract?  There are a number of reasons:

  • Legal translation requires particular skills – of course a high level proficiency in both languages is necessary, but so is an excellent understanding of legal terms in both the base language and the target language.  Both are required for good translation of a China contract.  Language alone is not enough – it is quite a different skill set from that required to translate poetry or a novel where the reader is sympathetic to the writer and trying to find the intended meaning.
  • When the language of a contract comes under scrutiny, it is likely to be in an aggressive context where one party is trying to establish a particular meaning from the words used and the other is trying to deny it.  Very often in a court or at arbitration. That is quite a different test for translation and the one that is really relevant for a China contract.
  • Translation is a skill that is generally not highly regarded in China.  There is a view that anyone can do it, which is another way of saying that it is unimportant work.  A glance at the instruction book supplied with a Chinese made appliance, or local signs, will, confirm this.  Very often translation is contracted out to language students at the nearest university for a pittance.  The result is what you would expect.
  • Good translation of a China contract is hard to do. It takes the skills previously mentioned, a lot of experience, and great attention to detail if an accurate translation is to result.  Some expressions in English (or Chinese) are very difficult to accurately translate into the other language.  Sometimes we have to amend the English (or Chinese) to facilitate accurate translation.  Good translation of a China contract is not something that comes at bargain rates, but the price is well worth paying if it helps get a successful outcome.

Questions you might ask about translation of a China contract.

  1. What is the process followed for translation?
  2. Who does the translation?
  3. What legal experience and training does he/she have?
  4. Who checks the translation?

Each of these questions is important, but those regarding who does the translation and checking are particularly so.  If translation is being contracted out, or being done by the other party, it is something to be concerned about. Translation should be done by someone able to talk directly with the person that drafted the contract so any ambiguities can be resolved and accurate translation obtained.

Checking is actually very important for good China contract translation because translators sometimes make mistakes that they cannot “see” because they created it. It requires fresh eyes.  Checking translation is a bit like proof reading a document, but goes further because a good checker will pick up ambiguities in the translation itself.  Perhaps needless to say, the person checking a translation should have superior skills to the original translator.

It is quite common in law firms operating in China for the person that drafts a contract, although a very competent lawyer,  to have very limited language skills in another language.  In these circumstances the drafter cannot check the translation so there must either be total reliance on the translator, or there has to be a competent checker.

Responses to the questions like “our translator is very experienced” or  “we have been doing this for many years and never had a problem”, or “all of our lawyers are bilingual” simply do not cut it.

Your contractual rights and obligations deserve more than a “trust me” response and there should be a proper process for legal translation.

Some advocate that one language should prevail.  Technically this is quite sound, but some practical realities need to be considered.  Very few people are equally fluent in more than one language. A  Chinese person  will typically be more comfortable with Chinese, an English speaker, with English.

If the governing law and dispute resolution is Chinese law and courts,  it is safe to assume that the Chinese language version is important, and will prevail.  But that is not the end of it.  Contracts have to be performed and it is important that both parties have accurate and authentic versions of the contract to guide their behaviour.

The only really sensible approach is to have good translation of a China contract so that both versions are equally authentic.  The contract can state that one prevails, but that is not a substitute for good translation, and both versions actually being the same.

Take away points

Good translation of a China contract is essential if it is to be legally and practically effective.

  • Good translation is not easy to get, and not every law firm can deliver it, but it is essential.
  • Be prepared to ask questions about the process: who will translate your China contract, who will check it for accuracy, and their qualifications and experience.
  • If you are not satisfied with the answers received it is probably time to seek an alternative source of contract expertise.

WX

© 2014 Graham Brown and Wei Xin. All rights reserved.