Three ways to rescue the Trademark Law

    Discrimination exists between well-known trademarks recognised in judicial proceedings and through administrative proceedings. Regulations concerning well-known trademarks provide that recognition is done on a case-by-case basis, unless the other party has no objection to the concerning trademark maintaining its well known status in a future case. If the owner needs to use the mark's well-known status in a future situation, they must prove that it is still eligible for recognition all over again. In practice, the administrative authorities enter all the well-known trademarks recognised through administrative proceedings into a database. These include recognition through oppositions, cancellations, and trademark infringement administrative actions. The database automatically excludes new companies from registering their name if it coincides with a well-known trademark in the system. But well-known trademarks recognised in judicial proceedings do not enter the database and are strictly subject to the law, binding only on an individual case. This discrimination has contributed to a craze for well-known trademark recognition through administrative proceedings.

    Large numbers of Chinese companies make a huge effort to get their trademarks onto the well-known list, further crowding an already backlogged application process. The trademark authorities have to limit the quota on the number of well-known trademark recognitions each year. Trademark authorities are also becoming unreasonably tighter than necessary in reviewing cases filed by foreign parties. It is the Supreme People's Court principle that factually well-known trademarks in the public sphere are entitled to a reduced evidence burden to obtain well-known recognition. In practice though, incredibly well-known foreign brands become unknown during this process as the authorities fail to recognise them. The reason for denying well-known status is always the same: the evidence provided by the trademark owner is not sufficient to prove the trademark concerned is well known.

    China possesses the largest number of well-known trademarks in the world – 3,180 recognised by the end of 2011 (not including court recognitions). Less than 5% of these are foreign brands. In the future, it is possible that well-known trademarks will become obsolete in China, as consumers encounter well-known brands they have never heard of before. This obsession with well-known marks also creates doubt about the government's credibility in granting such marks. An article in the law, banning use of the phrase “well-known trademark” in commercial advertising and packaging could easily end this obsession. Well-known trademarks would also revert to their original legal term, rather than the current commercial term. This is not without merit, because strictly speaking, it is deceptive use if the owner refers to its brand as well known in all situations where recognition is binding on a case-by-case basis.

Bad faith filing

CTMO maintains the world's largest trademark registry – 4,754,318 registered trademarks at the end of 2011. Of these registered marks, a large number are bad faith registrations and defensive multiple class registrations by brand owners. Brand reputation coupled with insufficient protection from the Law against bad faith applications, leaves brand owners with little choice. This option is not only costly, but the marks can also be cancelled, due to non-use reasons.

    Originally, there was an article in the first review of the amendments reading, “to apply for a trademark, the applicant must be out of honesty and credibility, which implies the burden to prove good faith is on the applicant if the application is challenged by a brand owner”. However, this article was removed in the second and third reviews. Many believe the article was removed because it was over-protective to trademarks that are neither used nor registered in China, and conflicts with the territorial rules of trademark rights. The good faith rule was replaced by two paragraphs in the third review:

    Where the applied for mark is identical with or similar to a mark that has been prior used in China on identical/similar goods and the applicant has knowledge of the prior used mark either through contract, or business dealings, or geographical locations or other connections, the application shall be refused;

    Where the applied for mark is a copy, on dissimilar goods, of a distinctive prior registered mark with a certain level of reputation, and the registration is likely to cause public confusion, the application shall be refused.

    Compared with the current Law, the first paragraph exempts the burden of prior users to prove the reputation of its prior used mark. The second paragraph reduces the owner's burden of a prior registration to prove that its marks are well known. The amendment tolerates bad faith applicants who pirate other parties' marks that have not been used or registered in China. This is a growing problem considering how easily the internet makes knowledge of foreign brand owners beyond China's borders readily available. Publication of the law under its current review will cause bad faith applications in this area to rise.

The OEM debate

The Apple iPad dispute has refocused attention on the recurring issue of whether applying a trademark to goods in OEM in China, intended exclusively for export constitutes use and infringement of a Chinese trademark. Given that China remains a major manufacturing hub for the world's brands, this question is of material importance to trademark owners worldwide.

    There are two opposing views as to whether OEM constitutes use infringement. The view that OEM constitutes use and/or infringement appears to be held by administrative authorities like the CTMO, TRAB and China customs. The contrary view appears to be supported by a number of court decisions, though there are also many judicial opinions subscribing to the use and infringement view.

    When making determinations, (usually in the course of non-use cancellation applications) the TRAB has the opinion that OEM manufacturing of goods in China, destined exclusively for export, provided there is relevant documentation, constitutes sufficient use to repel a non-use cancellation application. This view has also been reflected in statements made by senior CTMO and TRAB officials. Likewise, China customs has long held the view that for the purposes of border control measures and customs seizures; the territorial principle applies by which the holder of the trademark in China has the right to apply for seizure of OEM products destined for export. In its White Paper on Customs Protection of IPRs in 2007 (2007年中国海关知识产权保护状况 (白皮书), customs acknowledged that infringement resulting in customs seizures often occurs where OEM manufacturers unintentionally infringe by failing to verify whether the principal enjoys the trademark rights relating to the products in question in China.

    The view that OEM constitutes use and infringement of a trademark is derived directly from Article 52(1) of the Trademark Law. It states that using a trademark, which is identical or similar to the registered mark on the same or similar commodities without a licence of the registrant, constitutes infringement of the trademark and the registrants' rights to exclusive use of the mark. This provision forms the basis for the view held by customs and the majority of judicial decisions, which state that OEM constitutes use and infringement of a registered mark in China. The most recent example being the 2010 case of Nokia Corporation v Wuxi Jinyue Technology Co Ltd. A Shanghai Court confirmed that OEM of products bearing the well-known mark Nokia with the small suffix Egypt, destined exclusively for Egypt, where the principal owned the trademark Nokia Egypt constituted infringement of Nokia Corporation's trademarks covering the relevant goods.

    Considering the TRAB decisions where OEM allegedly did not constitute use of a trademark, subject to non-use cancellation applications, the TRAB holds the view that the defect was not in the nature of OEM as use, but rather in the decency of evidence submitted by the trademark owner showing OEM use. There is limited support for the assertion that the TRAB holds the view that OEM does not constitute sufficient use of a trademark for the purposes of repelling non-use cancellation applications.

    The case law on OEM is more equivocal, with a few recent decisions finding that OEM exclusively for export, under licence of a principal who holds a valid trademark in the jurisdiction of exportation, does not constitute infringement. Two notable recent decisions illustrating this view were the Shanghai Shenda Electronic Co Ltd v Jiulide (Shanghai) Electronic Co Ltd. case in 2009 and the Singapore Crocodile v Hong Kong Crocodile case in 2010. In the former case, Shanghai Courts determined that Jiulide (whose parent Jolida owned the Jokida trademark in the US) did not infringe Shenda's China trademark rights on the basis that the goods were OEM intended exclusively for export and that Chinese customers would not be confused (by way of important factual background to the case, the plaintiff, Shenda was formerly also owned by Jolida including during the time which it had registered the Chinese Jolida trademark). In the latter case, a Shanghai court ruled that use of the trademark Crocodile on goods destined for South Korea did not constitute infringement of the Chinese Crocodile trademark. As basis of the decision, the court cited that:

(i) the conduct of the Chinese manufacturer was that of an OEM exclusively for export overseas;

(ii) the OEM was authorised by the legitimate trademark owner in the destination country; and

(iii) there was no risk of confusion in the Chinese market.

    While there remains some uncertainty on whether OEM manufacturing of goods destined overseas:

• foreign companies that own and licence trademarks in China for OEM use, should document OEM use, ensuring that evidence clearly identifying the trademarks used and in respect of the relevant goods is notarised and legalised – this way such companies will be in the best position to show use of their marks to repel non-use cancellation applications;

• foreign companies seeking to enforce their Chinese trademarks against unauthorised manufacturers claiming that they are OEMs exclusively for export to another jurisdiction, should continue to enforce their rights including through border control measures, and learn from cases such as Nokia; and

• foreign companies who find themselves on the receiving end of threats from bad faith holders of trademarks for which the foreign companies own legitimate rights in the jurisdictions to which OEM is to be exclusively shipped, can take a small measure (though probably not sufficient) of comfort from the Jolida and Crocodile line of cases.

China continues to be a manufacturing hub with over 1.2 million new trademark applications in 2011. Both sides of the debate will have plenty of justification to support their stance on whether or not OEM manufacturing exclusively for export should or should not constitute use and or infringement of a Chinese trademark.

Formulating a strategy

The three unaddressed issues are essential to protecting trademark rights in China. Disallowing advertising of well-known trademark status could transform the process, as domestic companies will no longer yearn for something they cannot use to promote their product. Removing good faith filing from the first review, without adding an article to include all possible bad faith situations in the second or third review, the law still fails to address this problem. In the OEM sphere, uncertainly will continue at the judicial level with courts trying to appropriately balance, on the one hand the interests of foreign brand owners with OEM interests in China blackmailed by bad-faith trademark registrants, and on the other hand the interests of legitimate rights-holders seeking to rely on OEM to show use of their trademarks and to pursue infringers claiming the protective cloak of illegitimate OEM-structures. To put the matter beyond doubt, legislative clarification specifically addressing China's need to balance these interests is urgently required. Realising the importance of these issues can help owners to be prepared and vigilant in developing their brand protection strategy, under the current and future legal framework.

Linda Chang and Elliot Papageorgiou, Rouse, Shanghai