Revised Trademark Law Targets Bad Faith Registration and Infringements

Meanwhile, as explained below, it is also possible that the China National Intellectual Property Administration (CNIPA) will promulgate separate rules that would allow for the filing of petitions by IP owners and their associations to add particular pirates to an effective blacklist that may result in a range of consequences – including imposition of "social credit" penalties.

BAD FAITH REGISTRATION

As noted above, the provisions in the revised law on bad faith registration are clearly intended to deal with both warehousing, as well as classic bad faith filings that target other victim brand owners.

(a) Bad Faith and Intent to Use

A new clause was added to Article 4 of the law stating that an "an application for registration of a trademark that is filed in bad faith and is not intended for use shall be rejected."

This provision mainly seems intended to codify recent practice of Chinese courts and the registry in striking down bad faith filings where the pirate fails to present evidence of a bona fide intent to use its marks, in particular, in cases where the pirate has filed for marks in large numbers. The new language of Article 4 is also intended to provide a clearer basis for the Trademark Office to reject applications during examination (see below for further comment in this regard).

Meanwhile, Articles 33 and 44 of the law were amended to codify existing practice (not yet uniformly applied) under which oppositions and invalidations may be pursued based upon alleged violations of Article 4.

(b) Misbehavior by Pirates and Trademark Agents

Article 68 of the revised law provides for warnings, fines and other unspecified penalties against trademark agents that assist filers in engaging in acts that violate prohibitions in the law against bad faith applications, including the abovementioned Article 4.

Article 68 also grants Chinese courts the power to impose unspecified penalties against trademark agents for pursuing "malicious trademark litigations". The exact scope of this phrase is unclear, but it could well be intended to deter agents and their clients from using the civil courts to squeeze victims of piracy to enter into purchased assignments or forced licenses, and at extortionate prices. Under Article 115 of the PRC Civil Procedure Law (中华人民共和国民事诉讼法), such penalties can include fines up to Rmb1 million (US$140,000) for violations by corporate entities or up to Rmb100,000 (US$14,000) where the violator is an individual.

Article 19 of the revised law further prohibits trademark agents from assisting pirates where they know or have reason to know that the pirate's behavior violates Article 4 of the law.

What about filers?

Article 68 was originally designed by the NPC to only address misbehavior by trademark agents including, in particular, the filing of bad faith applications by trademark agencies in their own name. As the new provisions within Article 68 do not specifically refer to filers, concern has been raised as to whether penalties may be imposed upon filers, or only against trademark agencies.

However, in remarks made to the Chinese media on April 28, 2019, a senior CNIPA official responsible for drafting the revised law stated unequivocally that Article 68 will be applied to bad faith filers, and not just to trademark agencies.

Since April, certain other officials have suggested the opposite – that the above provisions may not be applied to bad faith filers, but that a final decision in this regard will be made by relevant authorities as they debate the contents of the future implementing regulations to the revised law.

Article 68 provides:

"Where applications are filed for registration in bad faith, an administrative penalty shall be made, such as a warning or a fine, according to the circumstances; if a trademark lawsuit is filed maliciously, the people's court [shall/may] impose a penalty according to law."

Implementation through Draft CNIPA Provisions on Bad Faith Filings?

In February 2019, the CNIPA issued the Several Provisions for Regulating the Application for the Registration of Trademarks (Draft for Comments) (关于规范商标申请注册行为的若干规定 (征求意见稿)) that suggest an intention to create an effective blacklist of bad faith filers and warehousers (described as "abnormal trademark filers") and provide the following practical consequences:

• Demands by the Trademark Office during examination that the applicant provide evidence of intent to use (something not generally required under current practice, with rare exceptions);

• Rejection of applications deemed to have been filed in bad faith by the examiner; and

• The imposition of "social credit" penalties against bad faith filers.

It remains unclear whether the draft CNIPA rules will eventually be issued in their current form. But clarification in this regard and the timing for introduction of new blacklisting procedures will likely be forthcoming in tandem with issuance of the future implementing regulations to the revised law. Indeed, certain officials have suggested that the CNIPA rules may be incorporated in whole or in part into the implementing regulations, rather than being issued separately.

New Strategies against Pirates

The foregoing changes, together with recent bold decisions from Chinese courts, open the door to new strategies for victims of bad faith trademark piracy in China.

In the short term, these may include:

• The sending of warning letters to pirates alerting them to the risk of penalties, and the sending of similar letters to trademark agents notifying them of the facts in order to avoid future challenges over their knowledge of their clients' misbehavior;

• The filing of informal interferences and joint petitions by victim brand owners to CNIPA, potentially useful until a more formal system for reporting bad faith filers is introduced; and

• The filing of civil actions against registry pirates particularly those that have engaged in active use and infringement of the victim's IP rights and/or filed infringement actions against the victim or its commercial partners in China, including take-downs against online ads or petitions to local customs to seize the victim's genuine products.

CIVIL COMPENSATION FOR INFRINGEMENT

State Council officials have for some time indicated plans to increase the maximum level of compensation that IP owners can secure through civil proceedings against IP violators. To these ends, Article 63 of the revised Trademark Law contains the following provisions:

• In cases where the infringement is deemed "malicious" and the circumstances are deemed "serious", the maximum level of damages that may be awarded by Chinese courts are increased from 300% to 500% of the relevant base amount (i.e., the infringer's profits, the victim's losses or a suitable royalty rate). (The minimum level of damages in such circumstances remains at 100% of the base amount.)

• Where the relevant base amount cannot be determined, statutory damages of up to Rmb5 million may be awarded (as compared to the Rmb3 million under the prior law).

Notably, the NPC introduced identical changes in China's Anti-unfair Competition Law (反不正当竞争法), which protects unregistered trademarks, trade dress, trade names and trade secrets, among other IP rights.

While obviously a positive step forward from a legislative perspective, it remains to be seen whether these changes will have any appreciable, deterrent impact on counterfeiting in China.

The prior law had already provided courts with ample powers to impose high damages awards. But in practice, courts in hotspot regions, such as Shenzhen, Guangzhou, and Hangzhou (the home base of Alibaba), have proved very conservative in calculating damages – even in relatively serious cases. Many believe that the conservative approach of courts in these regions is borne of fear that higher damage awards will stimulate IP owners to file large numbers of new complaints, thereby adding further unsustainable burdens to their already busy dockets.

DISPOSITION OF SEIZED GOODS AND PRODUCTION EQUIPMENT

The revised law indicates a potential step backwards with respect to the handling of infringing goods, as well as the raw materials and production equipment used by counterfeiters to make those fakes.

• In the context of civil proceedings, Article 63 conditions the destruction of counterfeit goods on the filing of a request by the trademark owner. This condition did not exist in the prior law.

• Article 63 now suggests that in "special circumstances," the court may allow for non-commercial use of counterfeit goods, raw materials and production equipment primarily used to make infringing goods.

Clarification will of course be needed as to the definition and scope of "special circumstances" and the types of noncommercial uses of infringing items that will be permitted.

Future rules will also hopefully clarify whether the foregoing limitations are applicable only to Chinese civil courts, or if they will also be applied by criminal courts and/or administrative enforcement authorities, such as the market supervision bureaus (MSBs) and PRC customs.

RETROACTIVITY

The future Implementing Regulations will likely help to clarify how the revised law will be applied to cases that arise before the effective date of the law.

To the extent changes in the law are deemed a mere codification of existing practice, there is a reasonable chance authorities will apply the new law to any case arising before the effective date which has not yet been finally adjudicated.

OTHER ENFORCEMENT REFORMS

Over the last few months, the State Administration for Market Regulation (SAMR), which now oversees administrative enforcement of all IP rights, has announced a range of new initiatives to strengthen IP enforcement, particularly in the online context. SAMR officials are now actively reaching out to associations and individual companies for information on their concerns, including leads into infringement cases. No doubt, the government is planning a new "campaign" to focus its efforts on achieving better results.

But achieving more substantial deterrence against counterfeiting in China will require a wide range of coordinated measures, including:

• More sustained political support for anti-counterfeiting, particularly in hotspot regions and markets (online and physical);

• More sophisticated and aggressive application of administrative enforcement by local MSBs and the enforcement division of SAMR, particularly in online-related cases;

• Greater training and resources for local public security bureaus (PSBs); and

• Amendment of the IP provisions with China's Criminal Law (刑法), a controversial topic in China for various reasons.

Joe Simone, Partner

SIPS