25 April 2016

“Good faith” to deter opportunistic trademark litigation——How to Deal with Abusive Trademark Litigation

This article was written by He Wei(partner) and Wang Yaxi(associate)

The principle of good faith applies not only to the manner in which trademark rights are obtained, but also to the manner in which those rights are enforced through litigation.  Trademarks may generate steady income for trademark holders due to the long life span of trademark rights and the increasing value of the rights when the mark becomes recognized by the market through continuous use.  However, registering or otherwise obtaining trademark rights solely in order to profit from litigation or to eliminate competition in a market may constitute an abuse of power or contravene the principle of good faith, and this may well impact on the compensation that a Court is prepared to award for acts that would otherwise constitute trademark infringement.  Prevailing trends of the Supreme Court in dealing with abusive trademark litigation are highlighted in the case presented below. 

Overview of the “Qisehua” (seven-color flower) dispute

In 1999, the founder of the Qisehua fashion accessories store established the “Fashion Girl Accessory Store”.  In 2008, it changed its franchise name to “Qisehua”.  Qisehua was then acquired by a Hong Kong publicly listed company in 2010, at which point it became the first fashion accessories store in China backed by a publicly listed company.  As at 2012 when this litigation was commenced, there were thousands of “Qisehua” branded fashion accessory franchise stores nationwide. 

In 2009, Aiyaya Ltd Co. was founded and it commenced operating a rival fashion accessory franchise under the trademark “Aiyaya”.  Then, on 1 October 2010, Aiyaya obtained an exclusive license from an unrelated third party – Huamao - to use Huamao’s registered logo trade mark which included the word “Qisehua” and an image“Good faith” to deter opportunistic trademark litigation——How to Deal with Abusive Trademark Litigation , for a limited period of 3 years.  Huamao’s trademark was registered in respect of a wide range of goods and services, and Huamao had itself used the “Qisehua and its image” trademark for many years, but never in respect of fashion accessories or similar products.

In 2012, Aiyaya filed a trademark infringement lawsuit against Qisehua as well as two of Qisehua’s corporate affiliates - Huihua and Minghui – and an individual who owned a Qisehua franchise in Fujian - Mr Wang Jun, claiming 100 million yuan in damages. 

In the first instance judgment, the Court ruled that the use of the word “Qisehua” as a trademark by Qisehua infringed Aiyaya’s rights as the exclusive licensee of Huamao’s registered “Qisehua and image” trade mark.  The three corporate defendants were held to be jointly liable for damages worth 30 million yuan.  The Fujian franchisee, Mr Wang Jun, was ordered to pay 500 thousand yuan in damages to Aiyaya.  Qisehua’s use of the trademark was also deemed to constitute unfair competition.  As a result, Qisehua was ordered to rebrand under a deadline set by the Court. 

Controversies of the first instance judgment

The first instance decision was questionable for several reasons.  In presenting the case on appeal, the legal representatives for Qisehua asked the following questions:

  1. In circumstances where Aiyaya already had an established brand of its own (i.e. the trademark “Aiyaya”), why would it acquire a limited 3 year license to use a trademark which incorporated the core brand of its major trade rival from an unrelated third party?
  2. The license agreement Aiyaya signed with Huamao to use “Qisehua and its image” went into effect within 10 days of Qisehua being acquired by a Hong Kong listed company – was the license acquired at this time for opportunistic reasons? 
  3.  Aiyaya started to prepare for litigation in April 2012, the same month that Mr Wang Jun happened to sign his franchise agreement with Qisehua.  Representatives for Aiyaya then went to Wang Jun’s Qisehua store and notarized evidence of Wang Jun’s use of the “Qisehua” trademark for Aiyaya’s use in the litigation – was Wang Jun colluding with Aiyaya for the purpose of the litigation?
  4. Wang Jun’s residence is in Fujian, but his first instance trial attorney was from Guangdong, which is highly unusual.  Aiyaya, on the other hand, is located in Guangdong - could the attorney have been hired by Aiyaya for Wang Jun? 
  5. The corporate defendants and the plaintiff are each located in Guangdong, whereas Aiyaya filed the lawsuit in Fujian.  Could the entire scenario have been orchestrated in an attempt for jurisdictional favoritism by the Courts of Fujian? 

What was the outcome of  the appeal?

On appeal, Qisehua’s legal representatives submitted further evidence which focused on the litigation motive of Aiyaya. 

In order to buttress the proposition that Aiyaya was colluding with the franchise owner, evidence was presented on appeal which suggested that the lawyer for the franchise owner had also acted in similar cases where infringement evidence had been obtained and notarized from the defendants’ premises for use by the plaintiff shortly before the commencement of litigation.  It was submitted that this indicated an opportunistic litigation strategy pattern designed by Wang Jun’s lawyer.

Qisehua also claimed that the evidence suggesting use of the trademark by Aiyaya had been fabricated.  Qisehua claimed that two of Aiyaya’s franchise stores, which opened right before the litigation, didn’t use the trademark in issue at all, whether in signage or on packaging.  The logos used by those new franchise stores were not the same as the trademark in issue in the litigation.  The so-called “use” of the trademark made by Aiyaya was merely attaching adhesive stickers with the word “Qisehua” to membership cards, receipts, containers and packages, shortly before the litigation commenced, where such products otherwise continued to include all of Aiyaya’s branding.  Furthermore, Aiyaya submitted evidence to the Court of shipping orders that had been sent to multiple alleged “Qisehua” branded Aiyaya stores nationwide which, as it turned out, had been fabricated.  The investigation conducted by a commissioned research company suggested there were no “Qisehua” branded Aiyaya stores at the addresses listed in the shipping orders.  Rather, the addresses turned out to be “Aiyaya” branded franchise stores which did not sell any product bearing the “Qisehua” trademark. 

Based on the above facts, Qisehua argued that Aiyaya didn’t actually use the registered trademark which it had licensed from Huamao (nor did it intend to) and that it only obtained the exclusive 3 year license in order to profit from a lawsuit in collusion with the franchise owner Wang Jun.  In terms of the actual usage of the “Qisehua” trademark in respect of fashion accessory products in China, and the reputation and meaning of the “Qisehua” trademark in the minds of the relevant public, Qisehua submitted that it should be deemed the true owner of the mark.

Eventually, on Nov 4, 2015, in the second instance judgment issued by the Supreme Court, the appeal from Qisehua, Huihua and Minghui was allowed and the first instance judgment was set aside. 

In the second instance judgment, the Supreme Court found that Qisehua had submitted sufficient evidence to prove that it had used the “Qisehua” trademark in respect of fashion accessories since 2008.  Before it was acquired in August 2010, there had been over 1000 Qisehua franchise stores with certain prestige and influence in the women’s accessories industry.  Aiyaya, as a trade rival competing in the same city, should have been aware of Qisehua’s business operations.  Shortly after Aiyaya heard word of Qisehua being acquired by a Hong Kong listed company, it signed the trademark license contract but then waited for over 18 months before it opened two stores, started to “use” the trademark (in the manner set out above) and started preparing for litigation.  The evidence supported Qisehua’s submission that Aiyaya was likely colluding with the individual defendant, Wang Jun, by orchestrating the lawsuit and choosing Fujian as a more favorable jurisdiction.  All things considered, on appeal the Court concluded that Aiyaya had no intention of actually using the trademark and had obtained the license solely to commence a lawsuit for financial gain.  The Court held that obtaining the exclusive license to use the trademark was not unlawful per se.  However, Aiyaya’s attempt to claim large sums of compensation from its trade rival through litigation constituted an abuse of the trademark rights which it had obtained, and was against the principle of good faith.  Accordingly, the infringement claim was not be endorsed by the Court with an award of any significant compensation. 

The Supreme Court set aside the previous trademark infringement rulings against Qisehua, Huihua and Minghui, and also dismissed the unfair competition case against Qisehua.  However, considering Qisehua had still violated the trademark rights of another by using the word “Qisehua” in respect of goods for which Huamao’s trademark had been validly registered, and this was its own fault, and considering that Aiyaya had acquired the trademark license at a cost of 1.2 million yuan, Qisehua was nevertheless ordered by the Court to pay 1.2 million yuan in damages to Aiyaya.  In our view, in circumstances where the Court found that Aiyaya had breached the principle of good faith and had not actually used the trademark in issue, but where the court nevertheless awarded Aiyaya a small portion of compensation commensurate to the amount which it had paid to license the rights from Huamao, the case seems to indicate that the Supreme Court tries to strike a balance between protecting the rights of trademark owners and deterring bad faith litigation.

Supreme Court rulings in similar cases

In a similar trademark infringement dispute involving Shenzhen Gelisi Co. Ltd., Mr Wang Suiyong and Hangzhou Yintai Century Store, Mr Wang Suiyong preemptively registered a renowned trademark for which he claimed he had no knowledge.  The Supreme Court published the following submission paper: Gelisi is located in Shenzhen, Guangdong.  Wang Suiyong used to run a leather business in the same city.  Accordingly, the legitimacy of Wang Suiyong registering a trademark with the same text used by Gesili in relation to the same products is highly questionable.  Therefore, the case was dismissed by the court on the ground that it was an abuse of power.

The principle of good faith provides that trademark owners and licensees should cautiously exercise their rights to sue for infringement, and forbids use of the Court process as an improper channel to compete with trade rivals.  The People’s Civil Court can dismiss claims on the basis that they are an abuse of power (as in the Gelisi case) and/or determine compensation by reference to the abusive conduct (as in the Qisehua case). 

Significance of this case

In practice, cases of this nature are now common.  It has become prevalent for plaintiffs to try to profit from lawsuits by obtaining registration of a well-known trademark before its rightful owner does so, and then to “safeguard” those legal rights in court by claiming large sums of compensation. In order to settle and avoid the costs and uncertainty of litigation, some defendants have no choice but to pay a high license fee.  In cases where an agreement cannot be reached, the defendant might be ordered by the court to pay a large amount in damages for trademark infringement. 

The above rulings of the Supreme Court provide useful guidance for similar trademark infringement cases.  As indicated, the Court will first examine the reputation of the trademark in suit.  In circumstances where the trademark owner or exclusive licensee does not actually use the registered trademark and thus fails to establish any reputation in respect of it, the trademark owner or licensee may not receive compensation which is referable to the profit made by the alleged infringer.  In addition, the cases show that trademark rights should only be obtained and enforced for legitimate purposes in compliance with the principle of good faith.  The Qisehua ruling should help to dissuade the improper exercise of trademark rights and to set a limitation on trademark rights which are obtained in this way. 

Please see 2016 World IP Day: Encouraging Connectivity and Protecting Innovation for more articles on 2016 World IP Day.

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