Trademark transfer issues for previously licensed trademarks

By Shi Yakai and Hu Miao, Sanyou Intellectual Property Agency
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Trademark licensing and trademark transfer are key ways for a trademark rights holder to realize the value of its trademark. In practice, the number of trademark infringement and contractual disputes arising where a conflict between the right to use the trademark and the ownership of the mark arises following the transfer of the previously licensed trademark is significant.

trademark
Shi Yakai
Partner
Sanyou Intellectual
Property Agency

From the perspective of the entities that could be involved, this article will, in the light of relevant cases, analyze the issues that can arise in connection with the transfer of a trademark that has been licensed, and put forward certain recommendations on the design of the terms in the trademark licence agreement and transfer agreement.

As can be seen from judicial practice, a dispute may arise between any of the three parties involved where a trademark that has been licensed is transferred, the most common being an infringement dispute between the trademark assignee and the original licensee. This is the type of dispute that this article seeks to analyze. In our next column article, the authors will analyze other types of disputes and provide some suggestions.

Dispute in which the trademark assignee sues the original licensee for trademark infringement

trademark
Hu Miao
Associate
Sanyou Intellectual
Property Agency

Article 20 of the Interpretations of the Supreme People’s Court of Several Issues Concerning the Application of Law in the Trial of Cases of Civil Disputes Arising from Trademarks specifies that, “the transfer of a registered trademark shall not affect the validity of a trademark licence contract that entered into effect before the transfer, unless the trademark licence contract provides otherwise”.

This provision has been deemed to be a manifestation in the intellectual property field of the principle of “sale and purchase do not break lease” in traditional civil law theory, i.e., “assignment do not break licence”.

Notwithstanding this provision, in practice, disputes between the original licensee and the trademark assignee arising in connection with the transfer of a licensed trademark still exist and, particularly in cases where recordal was not carried out for the prior licence contract, as the trademark assignee usually has no way of knowing whether the trademark it acquired was licensed or encumbered with other such rights, this type of dispute is particularly noticeable.

The second paragraph of article 19 of the interpretations specifies that, “where a trademark licence contract has not been recorded with the Trademark Office, such contract may not defend against a bona fide third party”. However, article 20 does not expressly state that recordal is required.

In the “奥妮” (“Aoni”) trademark case, the Supreme People’s Court held that the genuineness of the trademark licence contract provided by the alleged infringer, Aoni Co, could not be confirmed, and it furthermore held that even if the trademark licence contract was genuine, as the contract had not been recorded with the Trademark Office it could not serve as defence grounds for non-infringement to defend against Baokai Co.

From the actual text of article 20, it does not require the recordal of a prior licence contract for such contract to be unaffected by a trademark transfer. At present, judicial practice also tends to hold that the law does not require that a prior effective licence contract must be recorded, but there still remains a divergence of opinion as to whether the continued use of a trademark by the original licensee after the transfer of the licensed trademark constitutes infringement.

In the “米蘭” (“Milan”) trademark infringement case, the court held that, “where recordal has not been carried out for the contract, on the one hand, it should be confirmed that the trademark licence contract did not enter into effect as far as the other unaware licensees, including the trademark assignee, are concerned, so as to ensure that the lawful rights and interests of the other licensees and the assignee are not infringed.

On the other hand, it should be confirmed that even the trademark in question has been transferred, the validity of the existing licence contract is not affected, and the licensee may, subject to the approval of the assignee, continue to perform the relevant contract, or alternatively it may, depending on the circumstances, seek relief in accordance with the law by such means as pursuing the liability for breach of contract of its contract counterparty, i.e., the original licensor.

Additionally, the court, considering that the use of the trademark in question by the defendant, the original trademark licensee, was based on a licence from the original trademark rights holder, and that it had not carried out recordal of the trademark licence contract, nor had it promptly disclosed the relevant grant of the licence to the plaintiff, Xinyu Aiqingdao Co, the original licensee was not at fault, based on the principles of fairness and reasonableness. The court ultimately rendered a judgment ordering the defendant to cease the infringement, but exempted it from bearing liability to compensate the losses of Xinyu Aiqingdao Co.

In Zhou Liu Fu Jewelery Co Ltd v Shenzhen Zhouyuxiang Jewelry Co Ltd and Yangchun Zhouliufu Shijia Gold Shop, a trademark infringement dispute, the plaintiff executed a trademark transfer agreement with Hong Kong Zhou Liu Fu in 2017, acquiring the registered trademark in question, and the defendant, Yangchun Zhouliufu Shijia Gold Shop, was a Zhou Liu Fu Jewelry boutique established pursuant to the settlement agreement executed between Hong Kong Zhou Liu Fu and Zhang Jianbin on 17 June 2013, one of the affiliated stores as per the agreement, and their use of the trademark “Zhou Liu Fu” had legitimate source.

The court ultimately held that the alleged infringement was use of the series of related trademarks in question as provided for in the settlement agreement, and as such did not constitute trademark infringement.

With respect to the circumstances set out in the above-mentioned cases, the authors are of the view that, where the prior licence and later transfer are both valid, both the original licensee and the subsequent trademark assignee are entities with the right to use the trademark, and such use should not be found to constitute trademark infringement.

If either of the parties incurs a loss, it should pursue the liability for breach of contract of the original trademark rights holder in accordance with the trademark licence agreement and trademark transfer agreement.

Shi Yakai is a partner and Hu Miao is an associate at Sanyou Intellectual Property Agency

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