Is the new trademark law a missed opportunity?

Amendments to the PRC Trademark Law come into effect on May 1 2014. IP lawyers worldwide have been looking for signs that the revised law and its implementing rules will provide more cost-effective tools for addressing the two biggest trademark problems faced in China: bad faith registration and online counterfeiting. Both issues are of grave concern to Chinese and foreign rights holders alike.

Regrettably, the National People's Congress (NPC) and State Council have offered only half-measures for addressing both of these complex problems.

In the absence of further reform, trademark owners are advised to pursue experiments with the tools offered in the revised Trademark Law and adopt a wider range of best practices for protecting their brands in China.

Online counterfeiting

The revised Trademark Law offers several new provisions that are clearly intended to boost the power of civil courts so higher levels of compensation can be awarded against infringers. The most vaunted improvement in this regard is the six-fold increase in the maximum level of statutory damages – from Rmb500,000 (US$81,300) to Rmb3 million (US$488,000). Courts will also have the power in so-called “serious” cases to award punitive damages of up to three times the standard quantum of compensation.

However, there are no guarantees that Chinese judges – who are already suspicious of lawyers on contingency fee deals – will actually award higher damages once the revised law enters into effect. The same applies to the increased level of administrative fines imposed by local Administrations for Industry and Commerce (AICs).

Even assuming the civil courts and AICs become more aggressive, their powers are limited mainly to economic sanctions, and most counterfeiters go to great lengths to protect their ill-gotten gains from the government and brand owners.

While access to criminal enforcement by the Public Security Bureau (PSBs) has increased dramatically in recent years, the scope of infringement is increasing at an alarming rate, spurred largely by online trade platforms such as Taobao and Alibaba. Companies can typically find hundreds, and in some cases millions, of advertisements for fakes on Taobao.com. Take-down remedies have generally proved impractical and ineffective – a classic cat and mouse game.

The thresholds for criminal prosecution established under the Criminal Code and judicial interpretations of the Supreme People's Court (SPC) and Supreme People's Procuratorate (SPP) remain high at Rmb50,000 (US$8,200) or Rmb150,000 (US$24,600), depending on whether the goods are merely seized from the infringer or whether they have already been sold to another party. Rights holders had expected these thresholds to be reduced by now, given pronouncements in 2011 by then-Premier Wen Jiabao that thresholds would be reduced and steps would be taken towards amending the IP provisions of the Criminal Code. But there is little talk among policy makers of moving these reforms forward. Meanwhile, despite the increasing numbers of successful cases handled by local PSBs and prosecutors, the cost of enforcement to both government and rights holders alike caused by thresholds remains high, the overall level of deterrence remains low, and the scope of counterfeiting – particularly online – is arguably out of control.

Given the problems caused by the current thresholds and limited scope of AIC investigation powers, the State Council recently issued rules to promote greater cooperation and coordination between PSBs and AICs in day-to-day work. These rules are intended to ensure police respond promptly to AIC requests to take over more complex cases. But similar rules issued in 2006 were never effectively implemented, thereby justifying the sceptical reaction of brand owners to the latest rules.

Protecting your online market

Companies can follow a range of best practices to generate more cost-effective results from their enforcement programmes, including:

• more systematic monitoring of online and physical markets;
• targeting repeat offenders in online enforcement work;
• more comprehensive analysis of leads and thoughtful selection of cases for criminal action;
• greater cooperation with other victim brands in investigation and enforcement work;
• pressuring landlords to assist in cleaning up wholesale and retail markets; and
• relying more on civil strategies as a means of generating deterrence, rather than relying mainly on administrative actions.

Brand owners will in any case need to have realistic expectations of what can be achieved under current circumstances.

Bad faith registrations

Brand owners have been spending inordinate resources dealing with pirates that file trademark applications in obvious bad faith for identical marks covering goods or services of direct, peripheral, or even no interest to the brand owners. The problem stems from the absence of a clear line in the law outlawing all forms of bad faith registration, and the lack of a consensus among legislators and ministries on the appropriate standards for such a rule.

Bad faith applications (or preemptive filings) are of particular concern to foreign companies that need registrations to support a product launch in China, as well as to those that manufacture in China and are concerned about seizures by mainland customs and infringement actions by pirates against their suppliers.

US companies are particularly prone to piracy, as US law requires use of a mark as a condition to filing, and trademark lawyers in the US often incorrectly assume that the same rule applies in other countries.

The simplest response to piracy is to buy the application, but Chinese pirates now typically demand anywhere from US$100,000 to US$1 million – double or more what they demanded even five years ago.

A brand owner refusing to pay is normally advised to oppose or cancel the pirated mark, notwithstanding the chances of success are low or uncertain. Where the pirated mark is already registered, brand owners that use their marks in China, including through mere production in the country for export elsewhere, run serious risks of infringement actions by pirates. Such woes involve customs seizures, administrative raids by local AICs, civil courts and even police intent on enforcing the Criminal Code provisions against counterfeiting.

Trademark owners that reject extortionate demands by pirates can avail themselves of the so-called “OEM exception”, under which courts and customs will allow the use of pirate-registered marks by Chinese factories provided all goods are exported. This exception has not been codified in laws and regulations, and there have been cases where its application has proven unreliable. But most companies regard the cost-savings and other advantages of producing in China as too attractive to warrant moving production elsewhere.

Brand owners are also advised to investigate the pirate's background and assess whether it is likely to use the pirated mark or take aggressive action against the trademark owner or its suppliers in China. Very often, the conclusion can be drawn that the risks of both are low, thereby suggesting that the pirated registration will eventually be vulnerable to cancellation for non-use after three years. Many therefore play the waiting game, but at potentially enormous peril.

Protection from bad faith

Article 31 of the current Trademark Law permits oppositions and cancellations against pirated marks only if the petitioner can prove that it has used its mark in China and that the mark enjoyed a “definite degree of influence” before the pirate's filing date. Action is also possible where a pirated mark incorporates a design deemed protected by copyright legislation.

The Trademark Office (TMO), Trademark Review and Adjudication Board (TRAB) and Beijing courts have rejected pirated marks on the basis that either their registration would create “unhealthy influences” in society or that the pirate had no good faith intent to use the mark. But rules issued by the SPC over the last several years have attempted to limit the application of these provisions, for instance by protecting the genuine brand only where the pirated mark covers “similar” goods or services and excluding evidence of the victim brand's use of the mark in the production of goods intended only for export.

Brand owners can of course argue that their marks are well-known and therefore deserving of broader protection under Article 13 of the Trademark Law. But the TMO and TRAB have long been extremely conservative in awarding this well-known status to foreign brands, and there are no clear indications this will change any time soon.

In many cases over the last few years, the TMO, TRAB and courts have rebelled against SPC restrictions in bad faith trademark disputes to achieve a just outcome. But their support for brand owners has been sporadic and inconsistent, thereby leaving the pirate community optimistic over their chances of prevailing as well as in their ability to eventually squeeze a healthy settlement from the legitimate owner of the mark.

The revised Trademark Law offers new tools to address trademark piracy, but only under narrow circumstances. These include cases where it can be demonstrated that there was some sort of association between the pirate and the brand owner, and not just direct commercial dealings, such as a distribution or sourcing arrangement, as well as cases where a local trademark agent filed for the mark or knowingly assisted the pirate in filing.

Draft SAIC rules recently circulated for public comment suggest these new provisions will be applied retroactively in any opposition that remains pending before the effective date of the revised law, May 1 2014. They will not be applicable to pending cancellations.

Catching pirates under Article 7

Article 7 of the revised law requires that all applications for registration be subject to the principle of “good faith.” Trademark lawyers welcomed this new provision as a god-send that could offer the long-sought after catch-all. But Article 7 is not specified elsewhere in the law as a provision under which oppositions and cancellations can be based.

Moreover, last autumn the State Council officials involved in the drafting revealed that the lack of enabling such provisions was intentional, and it is now expected that SPC will soon issue a judicial interpretation that confirms this limitation.

Authorities dealing with cases on the ground have been known to ignore national policies – even express SPC guidelines – on bad faith registrations. If they continue to do so, brand owners may well prevail in their actions against bad faith marks. But in difficult cases it would be reasonable to budget robustly for lengthy and potentially expensive appeals. The pirate community will no doubt be aware of this and will continue filing and defending their applications in the expectation that pay-day is just around the corner.

Alternative solutions

As noted above, the revised Trademark Law offers protection against pirated marks under limited circumstances, and given the new Article 7, it is sensible to deeply investigate pirates to ensure that all possible evidence of bad faith is available to support oppositions and cancellation petitions.

In cases where the pirated mark includes a distinctive design or highly-stylised font, efforts should always be made to assert copyright under the new Article 32. The right to rely on copyright was recently confirmed in an opinion issued in January 2014 by the Beijing Higher People's Court, which also sets out specific conditions for proving the existence and ownership of copyright.

This opinion also codifies the holdings in recent case decisions against pirates using companies with suspended business licences. After three years of suspension, an opposed application may be deemed invalid based on Article 4 of the Trademark Law, which effectively requires that applicants have the legal ability and intent to use the mark.

New strategies may also be available against offshore “shadow companies” used by pirates as a vehicle for filing applications. In a recent case, an American brand owner was able to persuade the PRC Trademark Office to assign scores of pirated applications based on an Illinois court decision that confirmed the filings constituted infringement under US law. The pirate was a Chinese national that had established a shell company in Illinois that had no operations in the US and had not filed its annual reports for several years. Whether such solutions can be replicated in other American states and other countries remains to be seen, but they clearly represent an avenue worth exploring in high-stakes cases against overseas shadow companies.

Be proactive

The above analysis of bad faith registrations underscores the importance of filing trademark applications early in China – even if there are no immediate plans to produce or sell in the country. Foreign companies are also well-advised to monitor whether their goods are already being sold in China via Taobao and other B2C and C2C trade platforms. This dramatically increases the likelihood of piracy.

It is unlikely that the new remedies in the Trademark Law will generate the sort of deterrence needed to reverse the tide of counterfeiting and bad faith piracy in China. Given the stakes, foreign and domestic rights holders should work together, including through their respective industry associations, to map the problems and lobby Chinese authorities to pursue more fundamental reforms. This may ultimately require further changes to the Trademark Law and Criminal Code – a process which could take years. In the meantime, the SPC remains open to input from rights holders as they draft new judicial interpretations on these issues, and deeper dialogue with the SAIC and State Council is crucial to this process.


Joe Simone and Troy Rice, Simone IP Services, Hong Kong / Shanghai


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