Specialist Chapter: Practitioners in China Turn to Civil Litigation to Combat Trademark Squatters

In summary

To tackle trademark squatting applications, the major remedies under the Trademark Law are oppositions and invalidations. Exploring remedies through civil litigation to pursue a trademark squatter’s infringement liability has become a hot topic in China’s IP field, but these cases are limited to trademarks that are being subjected to squatting being used in the market.

Discussion points

• Administrative and civil actions have been leveraged to tackle trademark squatting and hoarding
• Legal remedies provided under the Anti-Unfair Competition Law have been invoked against trademark squatters
• Leading cases have made it clear that market use or abuse of process on the part of trademark squatters has to be found
• Lawmakers considering a separate cause of action in dealing with trademark squatting and hoarding

Referenced in this article

• Trademark verification proceedings
• Element of market practice
• Emerson Electric Co v Hemeiquan Company et al
• Bayer Consumer Care Holdings LLC & Bayer Consumer Care AG v Li Qin
• Draft of Trademark Law (for public opinion)

Brand owners have long been frustrated with the legal bills associated with commencing endless opposition, invalidation or non-use cancellation actions (trademark verification proceedings) against trademarks squatters who filed trademarks on goods or services not covered by the brand owners’ prior marks so that they may demand payment in the future. To avoid being coerced in this way, brand owners commonly employ the defensive filing approach.

An initial trademark filing in China is cheap but, if a registered trademark is sold to a brand owner by a trademark squatter, the squatter’s return on investment could be very high. This was noticed by so-called investors, so a large amount of money flew into the trademark squatting business. A derivative business called trademark hoarding also emerged, which comprises applications for common or generic words that could block subsequent filings from being successful. In such cases, the hoarder could benefit from assigning its hoarded marks to subsequent applicants.

Trademark squatting and hoarding has caused tremendous trouble for brand owners and the China National Intellectual Property Administration (CNIPA), which is the authority responsible for examining trademark filings and adjudicating on trademark verification proceedings. An immense number of applications filed without intent to use and the consequent trademark verification proceedings initiated against those bad-faith applications has consumed many working hours of CNIPA and the judicial system, and has incurred criticism from practitioners.

This article will first cover the measures taken by CNIPA, then discuss leading case law in this area before briefly introducing key provisions present in the draft of the Trademark Law that relate to trademark squatting and hoarding.

Administrative sanctions

To implement the Trademark Law provision that trademark filings that lack intent to use will be rejected,^[1] CNIPA promulgated its Several Rules on the Regulation of Trademark Application Behaviours in October 2019, which provide procedural guidelines and guarantees for CNIPA to tackle both the squatter and any trademark agents who knowingly aids and abets squatters.

In March 2021, CNIPA launched a special operation to search for and crack down on trademark squatting. It defines ‘trademark squatting’ as trademark applications for the names of national projects, major disasters, sport events, attractions, names or nicknames of celebrities, generic terms and commercial signs belonging to others.

CNIPA also maintains a list to identify bad-faith applicants. Once identified on this list, the applicant’s integrity is compromised, trademarks filed by it will be subject to stricter scrutiny and the chance of receiving an ex officio rejection increases significantly. Its lack of integrity will also be considered in ensuing opposition and invalidation proceedings.

In 2022 alone, statistics show that 370,000 trademark filings were rejected ex officio, representing 2.5 per cent of the 7 million trademarks examined by CNIPA.^[2]

Civil actions

The threat of CNIPA sanctions has significantly decreased the volume of trademarks being published for opposition and have suppressed squatters’ motivation to hijack more trademarks. However, a bad-faith application may be successfully registered if the squatter submits a limited number of applications to avoid being labelled as a bad-faith applicant. As squatters have learnt from previous failures and now elect to register companies as vehicles to register a small number of trademarks or target a particular legitimate trademark owner, successful bad-faith filings are now common.

Legal provisions

Anti-Unfair Competition Law

The remedies sought by practitioners are contained in the Anti-Unfair Competition Law. Some plaintiffs have tried to seek remedies under the Chinese laws on tort,^[3] but the courts are reluctant to adjudicate on tort claims resulting from disputes over the ownership of IP rights.

Article 2 of the Anti-Unfair Competition Law^[4] articulates that business operators must act in accordance with the law and good practice.^[5] The lack of specificity of the wording of article 2 aims to ensure that any new unfair practices that do not conform to the Law’s provisions are covered. To avoid any abuse of this general clause, in Shandong Foods Imports & Exports Co v Qingdao Shengkedacheng Trading Co,^[6] the Supreme People’s Court clarified the application of article 2 as follows:

• the Anti-Unfair Competition Law does not set forth specific provisions for the particular type of unfair competition at issue in this case;
• the legitimate interests of other competitors have been damaged due to the unfair practice at issue (actual damages); and
• the behaviour at issue was illegitimate because it violated the principle of honesty in industrial or commercial matters (illegitimate nature).

A prerequisite for the application of the Anti-Unfair Competition Law is that the parties must be competitors in the market, which is unlikely to be the case in trademark squatting cases as the brand owner is usually an esteemed corporation and the defendant has filed trademarks belonging to the brand owner in bad faith. Nevertheless, Chinese courts are making this provision available in such cases by interpreting the term ‘competitor’ broadly. This three-factor test has been absorbed and is specifically mentioned in the Understanding and Application of Several Issues on the Application of the Anti-Unfair Competition Law document.

Tort

Article 1165 of the Civil Code stipulates that ‘whoever is at fault in infringing upon others’ civil rights or interests and causing damage thereto shall bear tortious liability’. It is widely accepted that a four-element test needs to be established for assuming tortious liability, comprising infringing up on others’ rights; actual or knowledge of the consequences of infringement; injury; and causation.

These four elements can be applied to many situations, including trademark squatting, but the courts are reluctant to apply tort law in such cases due to the principle of special law repealing general laws; the Anti-Unfair Competition Law is the last resort for protecting IP rights.

Leading cases

The Anti-Unfair Competition Law was enacted to discourage unfair market practices. In trademark squatting cases, if a squatter hijacks a brand owner’s trademark then files an online takedown notice, lodges trademark infringement litigation or starts to use the trademark on its own merchandise, the squatter’s conduct is considered to be market practice; however, attention should be paid to cases in which a squatter merely applies a brand owner’s trademarks.

Four leading cases in this area as well as two cases rendered by Beijing courts in which the plaintiffs’ claims were dismissed for lack of a market practice element are discussed below.

Emerson Electric Co v Hemeiquan Company et al

In Emerson Electric Co v Hemeiquan Company et al (Emerson),^[7] it was established that Emerson was the registrant of the trademarks ‘In-Sink-Erator’ and ‘爱适易’ (or ‘AI SHI YI’) on food waste disposal devices. Hemeiquan filed applications for English and Chinese ‘In-Sink-Erator’ marks on dissimilar goods across 15 classes, including water purification equipment. Emerson opposed those trademarks but the opposition failed. Emerson then lodged a civil action against Hemeiquan, its stakeholder and its trademark agent (the defendants) to Xiamen Intermediate People’s Court in March 2020.

The issues relevant to our discussion include whether the case could be adjudicated in civil proceedings and whether defendants’ behaviour constituted unfair competition or an infringement of civil rights and interests.

Emerson claimed that the defendants’ behaviour violated the principle of good faith, infringed upon its civil rights and interests, resulted in economic losses to it, and constituted unfair competition. The defendants responded that trademark applications did not comprise ‘production and operation’ within the meaning of the Anti-Unfair Competition Law nor any of the unfair practices specified under it, therefore the Law could not be applied.

The Xiamen Intermediate People’s Court did not follow the defendants’ opinion on which acts can be regulated by the Anti-Unfair Competition Law. Instead, the Court returned to the essence of civil law and elaborated that an infringement dispute taking place between equal entities can be adjudicated on by a court in civil proceedings. Emerson contended that the trademark squatting behaviour committed by the defendants violated article 2 of the Anti-Unfair Competition Law and article 6 of the Tort Liability Law (the latter has been repealed and absorbed into the Civil Code).

To establish a competitive relationship, the Court articulated that Emerson’s food waste disposal devices and water purification equipment produced by the defendants were all pieces of kitchen and sanitary equipment. To establish the illegitimate nature of the defendants’ conduct, the Court reasoned that the defendants had hijacked both the English and Chinese ‘In-Sink-Erator’ trademarks and, in view of the fame of Emerson’s mark, the defendants’ application could not be coincident (implying bad faith on the part of the defendants). The defendants had also registered other famous marks without justification, including marks belonging to Dow, Morgan Stanley, Apple, BRITA and UNILEVER, among other companies. As a result, Emerson had to file opposition, invalidation, administrative litigation and civil actions to protect its interests, which attests that Emerson’s ordinary business operation was disturbed (implying actual damages).

The Court also found that the trademark agent had knowingly aided and abetted the squatter as it had failed to exercise its reasonable duty of care, so it had committed contributory infringement.

At appeal before the Fujian High People’s Court, the defendants again raised the fact that trademark filing does not comprise a production or business operation, which is the prerequisite for the application of the Anti-Unfair Competition Law. However, the appellant court found that, in one piece of evidence, the mark ‘In-Sink-Erator AI SHI YI’ (in English and Chinese) had been used on Hemeiquan’s website, which satisfied the market practice prerequisite. Notably, the Xiamen Intermediate People’s Court did not comment on the production or business operation prerequisite.

Emerson received much attention, but it is not the first case of its kind. The case below, the decision in which was rendered by a trial court in 2017 and was not appealed, found that enacting malicious online takedowns satisfied the market practice element.^[8]

Bayer Consumer Care Holdings LLC & Bayer Consumer Care AG v Li Qin

Bayer Consumer Care Holdings LLC & Bayer Consumer Care AG v Li Qin (Bayer)^[9] concerned Bayer-manufactured sun cream, for which Bayer acquired a registration the word mark ‘COPPERTONE’. Two image marks were also used on ‘COPPERTONE’ sun cream packaging, but had not yet been registered. The two image marks were later copied and registered by the defendant, Li Qin.

Li Qin served Bayer’s authorised distributors with infringement notices and lodged up to 294 online takedown complaints, causing ‘COPPERTONE’ sun cream to be removed from an online platform. Li Qin advocated that, if the distributor paid 50,000 yuan, the complaint would be withdrawn. Li Qin had intended to sell the two marks to Bayer for 700,000 yuan and implied that the two marks were an investment. Li Qin had also hijacked other well-recognised brands.

The Hangzhou Municipality Yuhang District Court first concluded that the defendant’s actions – including registrations for cosmetics, soliciting business for pay-and-withdraw and causing the removal of Bayer’s products from an online platform – damaged Bayer’s competitive advantage (implying actual damage), also proving the existence of a competitive relationship between the parties.

With respect to the illegal nature of the conduct, the Court opined that Li Qin had registered two image marks for which Bayer owned the copyright and Li Qin’s application for those marks constituted plagiarism. Further, Li Qin’s pay-and-withdraw business model was aimed at exploiting illegal profits from bad-faith registrations, and Li Qin’s registration for other brands exceeded business needs and constituted trademark hoarding. Li Qin’s acts had violated the honesty principle and disturbed ordinary market order in violation of article 2 of the Anti-Unfair Competition Law.

In Bayer, Li Qin’s high number of malicious online takedown and infringement notices were treated as business operations within the meaning of the Anti-Unfair Competition Law. An unusual aspect of Bayer was that the Court determined that the registration of the two image marks had infringed Bayer’s copyright, which should have been decided by CNIPA.

In December 2018, CNIPA invalidated the two image marks through a finding of copyright infringement (article 32 of the Trademark Law) and that the trademark had been registered improperly (article 44 of the Trademark Law).

Alpha LLC v Beta LLC et al

Alpha LLC v Beta LLC et al (Alpha)^[10] concerned Alpha, a leading chemical company, that had registered the coined word mark ‘ALALPHA’ in Classes 1 and 4. Beta hijacked more than 70 trademarks for both the English and Chinese versions of ‘ALALPHA’, but Beta did not use any of those marks in the market.

In November 2019, Alpha filed civil action against Beta and its trademark agent, invoking both the Tort Liability Law and the Anti-Unfair Competition Law. Alpha requested the transfer of all 70 trademarks and sought a permanent injunction to ban any further filings by Beta.

In the civil ruling,^[11] the trial court declared that the trademark applications at issue did not constitute trademark infringement and thus penalising such conduct fell outside the court’s judicial power.

At appeal, Alpha pointed out that it had not claimed that trademark infringement had occurred, but tortious and unfair competition conduct had, and the trial court had erred in comprehending the nature of the dispute. Further, Alpha contended that, from a policy standpoint, it was the Supreme People’s Court’s belief that the trademark verification process was incapable of curbing trademark squatting and hoarding, and that the Supreme People’s Court had expressed its opinions in several instances that Chinese law should be flexibly adopted to crack down on squatting.

The appellant court, after carefully analysing Alpha’s petition, affirmed the dismissal, meaning that both the trial court and the appellant court decided not to adjudicate on trademark squatting but did not specify their legal reasoning.

Omega LLC v Sigma LLC et al

Omega, a leading energy company, had registered the word mark ‘OMOMEGA’ in Class 4, which is widely known in China. The conduct at issue Omega LLC v Sigma LLC et al (Omega)^[12] was that Sigma hijacked the ‘OMOMEGA’ trademark in five classes but did not use the trademark prior to the launch of the civil action. Omega raised two causes of actions against Sigma and its trademark agent, claiming trademark infringement and unfair competition.

The trial court rejected the trademark infringement claim because market use had not been readily proven. This decision was affirmed by the appellant court.

Regarding unfair competition, the trial court reasoned that the Anti-Unfair Competition Law was enacted to regulate production or business operations, so trademark applications were not subject to the Law.

After the first-instance trial, Sigma started to use the hijacked ‘OMOMEGA’ trademark in commerce. Surprisingly, the appellant court rejected new evidence of this conduct. It explained that the alleged market use had not been adjudicated on by the trial court, so the hearing of any new facts would compromise the parties’ procedural rights.

Although the dismissal of an unfair competition aspect was also affirmed by the appellant court, it condemned Sigma’s bad-faith filings in its opinion.

In Omega, the courts suggested that the regulation on bad-faith trademark applications or registrations should be governed by CNIPA, rather than the civil courts. However, if post-registration use exists, the Anti-Unfair Competition Law can play a role and the court can take part.

Conclusion

It seems that market practice is a must-to-have element; case law suggests that commercial use of the trademark on products is not necessary, provided that post-registration behaviour disturbs a brand owner’s business. The court can interpret ‘practice’ broadly in favour of the plaintiff.

Our experience suggests that a civil action can be an option if:

• owned marks have been hijacked by squatters in many classes or for multiple times, and the legal battle seems endless;
• a civil action is more cost-efficient than opposition or invalidation;
• owned marks have been hijacked in remote classes and there is virtually no chance of invalidating the bad-faith marks;
• the owner wants to ban any further trademark filings by a particular squatter (akin to a permanent injunction);
• owned marks are being used by squatter and cause confusion in the market (a preliminary injunction is an option); or
• trademark verification proceedings are costly, and the owner wants to stop losing money and be reimbursed (ie, claim damages in a civil action).

Another benefit of civil action is the facilitation of oppositions and invalidations, which means that, if the civil court reaches favourable judgment, CNIPA would normally invalidate the trademark that has been hijacked. This is extremely important because, in the evidence exchange and legal debate, the bad faith of the trademark squatter can be exhibited in full, meaning that the civil action is more likely to prevail in cases of obvious wrongdoing. In turn, this would also help to secure a favourable decision in trademark verification proceedings.

Outlook

Under the Anti-Unfair Competition Law, the courts need to broadly interpret the relationship between the parties and find market practice evidence for the application of the Law.

On 13 January 2023, CNIPA released its Draft of the Trademark Law, which proposed provisions relevant to trademark squatting or hoarding as follows:

• an open-ended definition of ‘malicious applications’ (including a high number of trademark registrations without intent to use or registering others’ well-known trademarks);
• the compulsory transfer of malicious applications (a new proceeding in which a brand owner can request the transfer of the trademark at dispute during the trademark verification proceedings);^[13]
• retroactive power (ie, if the malicious registration is revoked, the registrant (squatter) shall be liable for the infringing use that commenced when the trademark was still in force);^[14]
• an administrative penalty against squatters (the administrative authority may issue written warnings or impose a fine of up to 250,000 yuan against squatters and confiscate illegal income, if any);
• a damages claim against squatters to provide a separate cause of action to brand owners who suffer damage as a result of malicious filings (the amount of the damage shall include, at minimum, the reasonable costs incurred by preventing the bad-faith trademark from being registered); and
• a damages claim (counter-claim) for a malicious lawsuit (ie, the brand owner is entitled to request damages compensation in a counter-claim if the squatter sues the brand owner for infringement).^[15]

This draft has been made only for public opinion, meaning that it constitutes the first stage of amendment and the final version will be subject to significant change.

Footnotes