Recent high-profile cases have delivered a jolt to the intellectual property and trademark protection debate. Collin Galloway explores a volatile environment

It seems you can’t open a newspaper these days without a high-profile case over an intellectual property or trademark violation in China springing out from the pages. Just these past few months reads like a who’s who of A-list industry and celebrity. There’s Apple v Proview of course: Goliath, the world’s biggest company, versus a financially puny David armed not with a slingshot, but the iPad’s registered trademark.

Then there’s Michael Jordan taking the court against a sportswear company over his name, his famous number 23, and even the names of his children. The cheek! Even Britney Spears weighed into the legal mire over her own first name and its English and Chinese-registered equivalent. She lost. Hermès’ battle for its name in China has raged since 1997, but recently made headlines – none of them good for Hermès.

So are there more cases, or just more high-profile ones? Should we pity these poor celebs and monstrous multinationals for this scurrilous theft of property or identity – or berate them for their ignorance of local law and lack of due diligence?

And is a sea change coming in the battle that international law firms and in-house counsel have been waging for decades over IP and trademark theft? If recent reports are to be believed, the central government is weighing up changes to its 30-year-old Trademark Law to put a stop to just the kind of high-profile squatting headaches it has seen of late.

Ever since China’s accession to the World Trade Organization (WTO) in 2001, conventional wisdom among IP lawyers in China has been that, while infringement is rampant, the modern-day legal system has evolved to offer an arsenal of effective remedies to rights owners. Those who registered and protected their IP portfolios could generally expect local courts or administrative agencies to enforce their rights.

IP theft and infringements are common in China.
IP theft and infringements are common in China.

Recently, however, this view seems to be changing. The fact that China’s IP laws are now in many respects on a par with the West is not in practice generating an equivalent level of protection, and in many cases the trend seems to be regressive. As a result, some lawyers are questioning whether progress has stalled.

For a number of reasons, foreign companies can feel especially exposed. China is now less open to foreign investment than in the past. In addition, government policy calls for economic development focused increasingly on technological development, meaning foreign investors are pushed to share their hard-earned IP as a precondition for market access, after which their technology is commonly “absorbed” or “digested” by their local partner.

While compulsory transfer of technology from foreign companies to local joint venture partners was outlawed on China’s accession to the WTO, local and central authorities have never completely abandoned the practice. Today it is seeing something of a renaissance, especially at the local government level, where authorities will typically impose tech-transfer conditions, either officially or unofficially, on foreign companies as part of the business licensing process. Companies eyeing China’s huge domestic market often feel they have no choice but to comply.

The growing incidence of corporate espionage is another factor that has foreign companies in China looking over their shoulders. Although many such episodes involve hacking into corporate networks, and are therefore difficult to trace, there is a consensus among computer security experts that a large proportion of such attacks originate from China.

In one recent espionage case, US-based AMSC, a maker of software management systems for the wind turbine industry, discovered its customer Sinovel, China’s second-biggest wind turbine maker, had bribed a former AMSC employee (subsequently convicted and jailed by an Austrian court) to provide it with a copy of the company’s proprietary source code – after which Sinovel stopped buying AMSC products. The incident prompted AMSC to bring multiple software copyright and trade secret lawsuits in Chinese courts, and has also sparked proceedings before the Beijing Arbitration Commission, with Sinovel counterclaiming for breach of contract.

Although these cases are ongoing, one AMSC suit alleging software copyright infringement in February this year has already been rejected by the No.1 Intermediate Court in Hainan province. Chinese police have also declined to pursue criminal proceedings against Sinovel employees.

While it is hard to quantify the extent to which a changing political and business environment in China may be impacting protection of intellectual property in the courts, lawyers interviewed by China Business Law Journal point to one particular area of Chinese IP law which is symptomatic of problems throughout the system that have a negative impact on the ability of rights holders – both foreign and domestic – to protect their IP.

In particular, a string of high-profile recent cases involving trademark “squatting”, in which trademark owners have unsuccessfully challenged bad-faith registration of their marks by third parties, highlight the ways in which rights holders are often short-changed by a system overly focused on rules at the expense of substance.

According to Clifford Borg-Marks, special counsel for Bird & Bird in Beijing, the decisions reached in the Chivas Regal and Hermès cases are “completely crazy” but “not atypical” of what is happening in other, less publicised disputes. “In other jurisdictions, trademark examiners would have a fair idea of what constitutes bad faith and be willing to make certain assumptions,” says Borg-Marks. “But in China there is no presumption whatsoever – the trademark office and even the TRAB [Trademark Review and Adjudication Board] on appeal are extremely pedantic and will generally require a very high standard of proof that the mark was filed in bad faith.”

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He Jing, senior consultant at ZY Partners in Beijing, agrees. “For some reason Chinese courts are very reluctant to say a squatter is a squatter,” says He. “One particular problem is that it’s very hard to say someone is acting in bad faith unless the person admits it. Judges would have to step up and say, ‘based on all the circumstances, I am sure you have acted in bad faith’, and very few Chinese judges are willing to do that.”

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But opinions differ. Gu Ping, a partner at Zhong Lun Law Firm, says the IP system in China is relatively young compared with the US and Europe and, well, you can’t expect miracles. “Bad faith trademark registrations happened when China first awoke to IP protection, through international brands [relatively recently] entering the Chinese market.” Chen Jihong, a partner at the same firm, blames a rise in litigation in recent years on a booming economy. “In this sense, we expect that with the rising economy … in the foreseeable future more actions likewise may probably come to the public’s [attention].”

Johnson Li, attorney and litigator at China Patent Agent H.K. says it’s obvious the central government is paying more attention to the protection of IP rights. “In the past several years different government authorities promulgated regulations or initiated campaigns to crack down. All these could be helpful to strengthen the protection of IP rights – but there is a very long way to go.”

In the past, IP litigators in China were able to rely on a provision under Article 10 of the Trademark Law, where marks could be challenged if they were “detrimental to socialist morals” or otherwise caused “unhealthy influences”, a provision the TRAB was willing to construe liberally in order to justify numerous rulings against squatters. However, a Supreme People’s Court interpretation in 2009 put an end to this practice by restricting its application to unhealthy political influences only. This marked a significant decline in firepower available for use against bad-faith filings.

One reason why there is so much scope for local trademark squatters to hijack others’ marks is that China, unlike the US, employs a “first to file” system. Because there is no requirement that applicants must have used or intend to use a mark before filing for registration, opportunistic individuals are able to target foreign companies that have yet to do business in China, or that have failed adequately to protect their brands. According to Connie Carnabuci, partner at the Hong Kong office of Freshfields Bruckhaus Deringer, “this has spawned an industry, because these third parties are holding valuable property rights and they will trade with you to sell the rights back to you for the right price”.

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The problem has been compounded by the sheer length of time needed to complete registration procedures, or to pursue proceedings to dislodge bad-faith registrants. Until recently, a long backlog at the Trademark Office meant that the registration process could drag on for years, following which opposition proceedings might then take another three or four years – and a further appeal via the court system several years more.

The upshot is that the process of challenging a squatter could easily take a decade to complete, leading to spiralling costs and a situation where the relevant events were sufficiently remote by the time a case was tried that facts were often hard to prove. This significantly discourages litigation and several interviewees say demands for payment for the release of hijacked marks continue to increase as a result.

Although efforts of the Trademark Office have meant that the opposition logjam has now been reduced to five or six years, the environment has not improved much for rights owners. In fact, just the opposite according to Richard Bird, IP counsel at Freshfields Bruckhaus Deringer. “They’re trying to pump examinations through more quickly, but I’m not sure that all applications are necessarily meeting the most rigorous standard,” he says. “On the other hand, the timeline for getting opposition and cancellation actions heard hasn’t come down at all – so trademark squatters are getting their marks registered more quickly and with less rigorous examination than before, but it takes just as long to get them off the register.”

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In principle, there are various ways in which mark owners should be able to challenge squatters. All of them pose problems:

  • Prior rights. Both Article 31 of the Trademark Law and provisions of the Paris Convention oblige courts to protect marks where owners enjoy “prior rights”, including by way of trade names or copyright (e.g. a logo or stylised script). Both the Hermès and Chivas Regal cases raised obvious trade name issues. However, the policy of the trademark authorities and the courts is that trade names will only be protected if they have been used in China prior to the application date of the disputed mark. According to Borg-Marks, “‘used in China’ usually requires you to show that you have either registered a subsidiary, or at least a rep office in China, which uses that trade name. But in most cases that doesn’t work because most companies have never had rep offices or subsidiaries – Chivas doesn’t make whisky in Shandong, for example”.
  • “Well known”. Marks are protected under Article 13 against applicants for identical or similar goods, even if the well known marks are not registered. They are protected against all comers if they are registered. To be well known, however, rights owners must again be able to prove their “well known” status as of the date on which the squatter applies to register their mark. This can be difficult where the appeals take 10 years or so to be heard, because applicant companies may not have records stretching back that far. According to Chinese law, the mark must also be well known in China itself – a requirement apparently at odds with the Paris Convention and with systems in place elsewhere in the world. A final problem, says Borg-Marks, is that “authorities remain extremely reluctant to grant determination of “well known” trademark status for foreign marks, while they continue to issue determinations for Chinese marks that are completely unknown”. Out of the 476 marks recognised as “well known” in China in the second half of 2011, just 15 were foreign owned.
  • Similar goods. Unregistered marks that are well known are only protected against “similar” types of goods. Marks that are registered but are not well known are also protected against similar goods. While this rule is clear enough, the criteria for establishing such similarities have been restrictively defined in recent years. According to Spring Chang, a Beijing-based partner at Chang Tsi & Partners, “the situation foreign brands face is that the trademark authorities rely heavily on [a guide] called the ‘Classification of Similar Goods and Services’ to decide whether goods are ‘similar’, and many goods that are apparently similar are not viewed as [such]”. Clothing and footwear, for example, are not considered similar according to the guide.

The Chivas Regal case

The Beijing No.1 Intermediate Court, one of China’s top IP tribunals, rejected an appeal by Scotch whisky maker Chivas Regal opposing registration by a Zhejiang businessman for the use of its mark on a range of clothing. The squatter’s application was originally filed in 2003.

Chivas had previously registered its mark in a number of classes, including class 33 for alcoholic beverages. However, its opposition was rejected by the Trademark Review and Adjudication Board (TRAB) before its unsuccessful appeal to the Beijing court.

chivas_regalThe basis of the decision appears to have been that use of the mark on clothing, in class 25, was not covered by any of the classes for which Chivas had registered its mark.

In order to challenge the application, Chivas therefore had to show the applicant had acted in bad faith, which in turn required it to establish its brand was “well known” in China before the 2003 application. Perhaps surprisingly, given the amount of Chivas consumed both then and now in China, it was unable to persuade any of the adjudicating bodies that its mark was sufficiently well known. The fact that a different court in another case had held the Chivas mark to be well-known in 2009 was beside the point.

The Hermès case

French fashion designer Hermès registered its mark, “Hermès”, in class 25 in 1977. As commonly happens in China, however, local shoppers preferred to associate a Chinese-language expression – Ai Ma Shi (“爱马仕”) – with Hermès products. Although the company used this name in the local media and in various sponsored activities, it failed to register the mark with the Trademark Office. A local company was therefore able to register the near-identical expression, “爱玛仕”, for itself in class 25 in 1995.

hermes_logoHermès tried and failed to challenge this registration as long ago as 1997. It was again rebuffed by the TRAB in 2009, and its recently heard appeal to the Beijing No.1 Intermediate Court has now been rejected. In a ruling released in February, the court ruled that Hermès was unable to establish bad faith because its evidence of use related to the period after 1995, and was anyway restricted to Hong Kong rather than the Chinese mainland. It therefore failed to prove its mark was well known in 1995. The court was also unable to establish a reason to rule that the squatter’s mark was similar to those registered and used in the market by Hermès.

The root of the problem in all these cases appears to be an institutional failing – Chinese trademark authorities and courts are imposing overly restrictive criteria when analysing whether rights owners should be able to oppose bad-faith registrations, and indeed when applying IP laws generally.

Is there a way to bypass the problems? One possibility is to avoid following the normal opposition or appeal procedures altogether. According to Eric Liu, an attorney at Han Kun Law Offices in Beijing, “usually we suggest that clients file a civil lawsuit against the mark owner in tort, in order to prevent use of the mark in the first place. If the mark registered cannot be used in business promotion, the client will have plenty of time to revoke and a much more advantageous position to negotiate assignment”.%e5%88%98%e5%86%ac-%e6%b1%89%e5%9d%a4%e5%be%8b%e5%b8%88%e4%ba%8b%e5%8a%a1%e6%89%80-%e5%8c%97%e4%ba%ac%e5%8a%9e%e5%85%ac%e5%ae%a4-%e5%be%8b%e5%b8%88-eric-liu-attorney-han-kun-law-offices-beijing

Otherwise, there are signs that both the courts and the government are now alive to the issue. “It’s a little bit embarrassing for China, politically, to be in a situation where brands that are very well known internationally are effectively unable to be asserted by the rightful originator of that brand,” says Carnabuci.

Whether as a result of political pressure or otherwise, the Supreme People’s Court has also weighed in, with the Associate Chief Justice releasing an opinion in November last year that sent a strong signal to lower courts for IP judges to be more proactive in addressing trademark squatters. In particular, it “encouraged lower courts to creatively evaluate the similarity between the squatter’s and the brand owner’s mark to determine the likelihood of confusion”, notes He Jing. This may have been instrumental in the welcome but contradictory decision reached in the LVMH case in January (see box). However, it remains to be seen whether there has been a real change in approach.

The LVMH case

A Hong Kong company applied in April 2002 to register an “LVMH” mark in respect of domestic appliances such as rice cookers, and received preliminary approval. LVMH opposed the mark in September 2003, but the TRAB ruled against it on the basis that the squatter’s mark was not similar and (again) that LVMH was unable to show its mark was well known at the time.

lvmhOn appeal, the Beijing No.1 Intermediate Court overturned the TRAB decision in February this year. The court held that the both LVMH marks were identical given that the acronym has no independent meaning and the font used was the same. It also held that the goods involved were similar to those already registered by Louis Vuitton and were therefore likely to cause confusion. The case has now been sent back to the TRAB, which is expected to cancel the registration.

According to data compiled by Ran Ruixue, a partner at Jun He Law Offices in Beijing, there were 660,000 concluded IP cases at all levels of people’s courts in 2011, an increase of 37.7% on 2010. The Supreme People’s Court took 30 measures in 2011 to enhance IP protection via guidance to all levels of people’s courts.

Beyond this, there is hope among practitioners that proposed amendments to the Trademark Law, which are expected to be introduced this year or next, may help address the problem. Unfortunately, there is currently little indication of what changes, if any, might be introduced.

The initial revised draft, introduced in 2010, included a specific provision requiring good faith on the part of the applicant as a condition for registration. This was removed from the most recent draft released in September 2011, and replaced by an option that states a mark may not be registered where:

  • it is identical or similar to another’s trademark that has prior use in China in respect of the same or similar goods; and
  • the applicant has a contract, business contacts, geographical or other relationship with the prior trademark user, and is therefore aware of the existence of that user’s mark.

Such a provision would remove the need for a rights owner to show its mark is well known. However, its scope is narrow because it requires both prior use in China and the existence of some connection between the bad-faith registrant and the mark owner. As Annie Tsoi, a partner with Hong Kong firm Deacons says: “the draft amendment does not address the problem where the genuine owner’s mark has no influence in the Chinese market prior to the filing of its mark by third parties.” Most practitioners would prefer at the least to see the requirement for use within China to be removed.

In the meantime, foreign companies can protect themselves by taking a longer-term view of the market and making defensive registrations of a range of marks. “The guiding principle for clients is really to think ahead, look into their three- to five-year business plan and even make applications that may be abandoned because plans change,” says Carnabuci. Up-front costs may be higher, but such a strategy preserves the option to use various brands in the market should they be needed, and will be a far smaller investment than the potential alternative of a six-year court battle with a squatter. In the current environment, “you can’t be leaving the filing of trademarks until almost the last step, as you can in some jurisdictions where you just don’t face these delays.”