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China’s Amended TM Law Has Potential To Reduce Squatting

On November 1, 2019 China’s amended trademark law came into force. The Standing Committee of the National People’s Congress has amended six articles of the trademark law focusing on reducing trademark squatting and increasing damages for infringement.

Accordingly, U.S. companies entering China may face less chance of a Chinese entity’s squatting on their preferred brand names. And if there is squatting, the new Chinese trademark law makes it easier to cancel the trademark instead of a long road of negotiating purchase of the trademarks for sometimes extortionate amounts. 

For example, automobile manufacturer Tesla Inc. reportedly offered 2 million RMB (about $288,000 at the time of writing) to purchase its trademark from a squatter but was countered with a 200 million RMB sale price[1]. After four years of negotiation and eventually litigation, Tesla was able to regain rights to its trademark in China. The new law may prevent squatting from occurring, and, in the event that squatting does occur, the law will make it easier and less expensive for foreign companies to recover their trademarks.

Bad-Faith Filing of Trademarks

Article 4, paragraph 1 of the Trademark Law is amended to read:

Where any natural person, legal entity or other organization, in the course of his or its production or business operations, intends to acquire the exclusive right to use a trademark for his or its goods or services, an application should be filed with the Trademark Office for registration of the goods trademark. Applications for trademark registrations in bad faith which are not intended for use shall be refused.

That is, the Trademark Office of the Chinese National Intellectual Property Administration can now reject applications for bad faith during substantive examination before publication. In addition, Article 33 for oppositions and Article 44 for invalidations now make reference to amended Article 4, thereby making bad faith a basis for oppositions and invalidations

This amendment codifies existing practice with respect to examination and invalidations and adds a basis for oppositions. In Wuhan Zhongjun v. Trademark Review and Adjudication Board, both the Trademark Review and Adjudication Board in 2017[2] and later the Supreme People’s Court in 2018[3] ruled that the hoarding of trademarks without intent to use constituted a basis for invalidation under the current trademark law. Since these decisions, People’s Courts and the TRAB have been accepting of bad faith as a basis for invalidation.

This amendment will hopefully stop bad-faith registrations at the source by giving the CNIPA the power to reject applications during substantive examination at an earlier stage instead of requiring third parties to challenge trademarks registered in bad faith after publication.

In addition, Article 19, paragraph 3 is amended to read:

A trademark agency shall not accept the entrustment of a principal if it knows or should have known that the trademark entrusted by the principal for registration application falls under any of the circumstances prescribed by Article 4, Article 15 and Article 32 of this Law.

That is, a trademark agency must firstly refuse representation of a bad-faith filer if the agency knows or should have known that the bad-faith filer was squatting. This implies that a trademark agency must commit at least a minimum level of due diligence of client’s proposed marks before filing.

Article 68, which lists penalties for trademark agencies, trademark applicants and trademark registrants, has been amended to add:

Where an application for trademark registration is filed in bad faith, an administrative penalty such as a warning or fine shall be imposed according to the circumstances; and if a trademark lawsuit is filed in bad faith, the People’s Court shall impose a penalty according to law. 

While it is not explicit which government entity will issue the administrative penalty and against whom, it can be presumed that the CNIPA will issue the administrative penalty against the bad-faith trademark applicant and/or agency that filed the bad-faith mark.

The second clause specifies that the People’s Court will impose a penalty for trademark lawsuits filed in bad faith but, again, doesn’t specify who is subject to the penalty — presumably the attorneys representing the plaintiff and/or the plaintiff itself. Further, it is unclear what is covered by a trademark lawsuit filed in bad faith — for example, presumably lawsuits filed based on bad-faith trademarks, but perhaps and/or nuisance lawsuits based on legitimate trademarks.

Increased Statutory and Punitive Damages

Article 63 is amended to increase statutory damages from 3 million RMB to 5 million RMB (about $710,000 at the time of writing) when “the actual loss suffered by the right holder as a result of the infringement, the profits gained by the infringer from the infringement and the royalties of the registered trademark concerned are difficult to determine” as is often the case in China.

Article 63 of the Trademark Law is amended to increase punitive damages from up to treble to up to quintuple assessed damages when infringement is “committed in bad faith and the circumstance is serious.” However, Chinese courts rarely award punitive damages in trademark infringement litigation, although that is changing with some courts’ awarding punitive damages[4].

Finally, Chinese courts can order the destruction of counterfeit products and equipment used to manufacture the counterfeit products in trademark infringement litigation:

In examining trademark dispute cases, the People’s Court shall, at the request of the rights holder, order the destruction of commodities bearing counterfeit registered trademarks, except in special circumstances; order the destruction of materials and tools mainly used to manufacture commodities bearing counterfeit registered trademarks, without compensation; or, in special circumstances, order the prohibition of the aforementioned materials and tools from entering commercial channels, without compensation.

Commodities bearing counterfeit registered trademarks shall not enter commercial channels after only removing counterfeit registered trademarks.

The above amendments should increase the cost to counterfeiters and form an effective deterrent to them.

Provisions on the Regulation of Trademark Applications

The China National Intellectual Property Administration released a draft of these provisions on what kind of circumstances could be considered a violation of Article 4 of the new trademark law and what kind of additional factors need to be taken into consideration to determine what constitutes a bad-faith application, such as number of trademark applications filed by an applicant, trademark sales records, prior cases holding confirmed bad faith for the same party, etc. The draft also covers potential penalties against trademark agencies including warnings, fines, use of negative credit reports, industrial self-discipline measures, stopping the acceptance of new trademark applications by trademark agencies and other regulatory means.

Clarity Needed

While the amendments are few, the potential impact could be tremendous — or not. For example, will the CNIPA enforce sanctions against trademark agencies and agents that file bad-faith marks on behalf of their clients? Will the CNIPA try to enforce sanctions directly against the bad-faith applicants themselves? Will courts actually award maximum punitive damages (i.e., five times actual damages)? Will squatters simply advance[5] planned use of their registered marks to avoid an invalidation based on bad faith? Will oppositions based on bad faith be available for applications filed before the effective date of the law?

Currently, the CNIPA is asking for opinions from the public on the draft of regulations governing trademark applications. Hopefully, the CNIPA will issue the regulations governing trademark applications and clarify the implementing regulations for the amended trademark law soon to answer the above questions. 

[1] http://www.chinadaily.com.cn/kindle/2013-08/14/content_16893607.htm

[2] Decision No [2016] 87151.

[3] Wuhan Zhongjun v. Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of China, No 4191 [2017], Administrative Retrial, Supreme People’s Court of China, 29 June 2018.

[4] For example, on September 6, 2019, the Shanghai Pudong Court awarded 3 million RMB, including 2 million RMB in punitive damages, to U.S.-based Balanced Body against Yongkang Elina Sports Equipment Co. Ltd. for trademark infringement. This is the first punitive damages award for intellectual property in Shanghai. See http://www.shanghai.gov.cn/nw2/nw2314/nw2315/nw4411/u21aw1401249.html.

[5] Squatters will use their marks within three years of registration to avoid loss of rights via cancellation based on non-use for three years. With the amended law, squatters may ensure usage occurs sooner.

 

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Author:
Director of China Intellectual Property Practice

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