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China’s challenges explained

Date:2010-05-26 10:44:43

Peter Ollier, Boston

Although China presents many challenges for brand owners, today’s session will show that successful enforcement is possible, provided that you put in the groundwork

One of the more predictable aspects of the USTR’s annual Special 301 Report is the position of China on the Priority Watch List. This year the report stated that the country’s IP enforcement system “remains largely ineffective and non-deterrent” and pointed out that the share of IP infringing products at the U.S. border of Chinese origin was 79% in 2009, only a small drop from 81% in 2008.

But is it really that bad? While brand owners often like to complain that it is “impossible” to enforce IP in China, the truth is that it can be done. “If you are willing to work with Customs officials, build a relationship with outside counsel and work with government agencies then you can get good results,” says Justin Pierce, head of trademark and brand protection for Sony Ericsson Mobile Communications and one of the speakers at today’s session on China.

In addition to building the right relationships, brand owners need to familiarize themselves with China’s legal system in order to be able to deal with some of the difficulties it presents. In particular, there are two key lessons to learn: file first and file as broadly as you can, and, if you want to prove well-known status or that your marks are being infringed, you will need very strong evidence to back up those claims.

The importance of filing first

China has the world’s busiest trademark registry, with over 830,000 applications received last year. Brand owners complain that a large number of these are bad faith filings of trademarks that other companies have already filed overseas, or have filed in China, but only in specific classes. Opposing these marks can take years and, if the bad faith mark is only spotted after registration, a cancellation action is an even more time-consuming and costly process.

But this problem can be avoided. “A foreign trademark owner who fails to properly register their rights in a timely manner should not find fault with the Chinese system,” says Lucy Nichols, Global Director of IPR and Brand Protection for Nokia, who adds that “it is absolutely imperative that rights be registered as soon as possible.” Nichols is in the process of leaving Beijing after two years where she has overseen Nokia’s enforcement effort in China first hand.

In addition to the need to file first, brand owners also need to think carefully about what categories they will file in. China’s classification system is broken down into a complex series of subclasses. This means that similar or identical trademarks can be registered within the same class, so even if you think you are covered for an entire category of goods, this may not be the case. For example, Hong Kong fashion company G2000 left a gap in its trademark portfolio that was filled by an entrepreneur who registered the trademark 2000 for socks, gloves, scarves, ties, belts, sashes and veils. G2000 failed in its attempt to cancel this mark and was then hit with a trademark infringement lawsuit. In October 2007 the firm was asked to pay Rmb20 million (US$2.9 million) in damages. The case is still under appeal.

The problem of bad faith trademark applications can affect even the most vigilant brand owners. “One of our pet peeves is pirate trademark applications,” admits Pierce. His company had to face the additional challenge of protecting a new Chinese brand when Sony and Ericsson launched a joint venture.

Sony had previously used the registration (pronounced suo ni) and Ericsson had the (pronounced ai li xin). Unfortunately for the joint venture, in 2003 a Chinese businessman filed an application for the combination mark ” (pronounced suo ai) for DVD/CD players, mobile phones, speakers and entertainment goods and cassette players. Sony Ericsson opposed the application and lost. The company appealed to the Trademark Review and Adjudication Board (TRAB), where it also lost before emerging victorious in the Beijing Intermediate People’s Court in 2008.

To win, the company had to prove that it had advertised on the Internet in 2002 using the mark and that the businessman had registered the mark in bad faith. Having won that case, Sony Ericsson has been able to successfully oppose other pirate applications.

Becoming well known

Sony Ericsson’s struggles also show the difficulty of proving well-known status in China. Simply being well known internationally, or being a joint venture of two well-known brands is not enough. You have to be well known in China and able to prove that fame. “It can end up being a long and arduous road to recognition,” says Pierce.

It is possible to prove well-known status administratively, at the China Trademark Office or TRAB, or to try and persuade a court to award your brand well-known status during litigation. But in April last year China’s Supreme Court published an Interpretation on Several Issues Concerning the Application of Law to the Trial of Cases of Civil Disputes over the Protection of Famous Trade Marks. This restricts the circumstances in which China’s courts will grant well-known status.

Brand owners tend now to prefer the administrative route, because the State Administration for Industry and Commerce published a well-known trademarks list twice a year. The local Administrations for Industry and Commerce are much more likely to conduct raid actions for brands that are on this list, which makes enforcement quicker and cheaper. No list is published of marks that the courts have said are well known.

Enforcement strategy

Long-awaited amendments to China’s Trademark Law will increase the statutory damages available for trademark infringement (see box). But enforcement still remains a complex area that requires a strategy that the management of a company has bought into. For example, Pierce says that pursuing a zero-tolerance policy in a jurisdiction as large as China is a big decision. “You need to be well-financed with a long-term commitment from your board to support you,” he says.

There are three avenues to go down when enforcing brands in China: administrative, civil and criminal. Administrative enforcement can pave the way for a criminal case by allowing the brand owner to compile evidence and uncover information leading to the masterminds behind the counterfeiting.

When asked what enforcement route she prefers, Nichols says that Nokia decides on a case-by-case basis. “For routine infringements where the goal is to address the infringement quickly and economically we generally choose the administrative route,” says Nichols. But for more serious infringements, they will go to court. “To date, we are very pleased the results we’ve had with civil cases brought in China,” she says.

Nokia is not the only company to have decided that civil litigation is worth pursuing in China and case law is developing fast. Session moderator Chiang Ling Li of Jones Day intends to highlight three trademark cases that have made it to the Supreme People’s Court. One of these involves a long-running trademark cancellation dispute between Johnson & Johnson and a Chinese company for the mark (Cai Le). The U.S. pharmaceutical company cancelled the mark at the TRAB at the third attempt, managing at the same time to prove that it was well-known.

Foshan Shengfang, the Chinese company that the mark had been assigned to, appealed and won at the Supreme Court. The court said that second and third cancellation actions cannot be filed without new facts or grounds. The Court put the decision in its Annual Report on IP cases in 2009. Also in that list was a case involving Pfizer’s 3D trademark for the shape of its Viagra tablets. The Supreme People’s Court found that the mark lacks distinctiveness—another case that will be discussed today.

Amendments may lead to nontraditional trademarks

Last summer the State Administration for Industry and Commerce released a new draft set of amendments to the country’s Trademark Law that will allow IP owners to apply to register more nontraditional trademarks and will increase the damages available for infringement.

Three-dimensional symbols and combinations of colors were already eligible for trademark protection under the previous Trademark Law. The amendments will extend the nontraditional marks eligible for protection by including single colors, sounds, smells and animation marks. But the draft states that the China Trademark Office (CTMO) will “choose an appropriate time” to accept sound, smell and animation as trademarks and that the SAIC will issue specific guidelines about how the new rules will be implemented in practice.

In an important change from the first draft of proposed amendments, which was published in August 2007, this draft preserves relative examination of trademarks. The previous draft had abolished relative examination and set a deadline of 12 months for examination of a trademark to be completed.

This draft has maintained an earlier proposal to move opposition proceedings from the CTMO to the Trademark Review and Adjudication Board (TRAB), which also deals with cancellation actions. In addition to shifting the venue for oppositions, the draft limits those who can oppose a trademark to the owner of an earlier trademark or an interested party.

Other changes to the application process include allowing multiple class examinations, although the draft again states that the CTMO will “choose an appropriate time” to accept them. Article 9 also makes it clear that applicants should follow “the principle of honesty and good faith” when applying for trademarks. This will make it easier to oppose registrations on the grounds of bad faith. In enforcement, Article 68 follows the Patent Law amendments passed in December last year by increasing statutory damages from Rmb500,000 ($73,000) to Rmb1 million ($146,000).

On April 20, 2010, INTA submitted detailed and comprehensive comments to China’s State Legislative Council on the latest draft revision of the Chinese Trademark Law. While INTA has been active in providing comments to the CTMO in the past few years, this was the first time the Association was asked to comment at the level of review by the State Legislative Council, which reviews pending legislation before it is sent for debate and passage in the National People’s Congress. INTA commented on a number of aspects of the draft law, and praised the Chinese government for proposing the broadening of the definition of a trademark to include more nontraditional marks.

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