On 21 April 2015, the Guangzhou Intermediate People’s Court issued the highly controversial decision that Xinbailun Trade (China) Co (New Balance), the Chinese subsidiary of US footwear maker New Balance, had infringed the trade mark rights of Guangdong businessman Zhou Yuelun – who is alleged to have hijacked the New Balance trade marks by registering them first in China - ordering the footwear maker to stop using the Xinbailun trade mark to market its goods in China and to pay Zhou an eye watering 98 million yuan (approx. US$16 million) in compensation. This judgment was the latest in a series of decisions that have caught trade mark owners on the back foot and exposed weaknesses in the protection of their trade marks in China – the deputy chief judge in this case stated that the case reminds foreign brand owners seeking to enter the market in China to “knock at the ‘Intellectual property’ door before entering”. Needless to say New Balance has lodged an appeal against this record-setting decision.

In December 2006, New Balance registered its subsidiary company under the name “Xinbailun”, a Chinese transliteration of “New Balance”. The company also registered the trade mark “New Balance” but neglected to register the Chinese version as well.

Zhou, who owns a footwear company in Guangzhou, selling men’s shoes under the names “Bailun” and “Xinbailun”, had registered the trade marks Bailun in 1996 and Xinbailun in 2008 for goods in Class 25, including footwear. New Balance had unsuccessfully challenged the registration of the latter mark.

Zhou brought an action in July 2013, arguing that New Balance had used the mark "Xinbailun" to promote and sell shoes, which infringed his trade mark rights in "Xinbailun" and "Bailun".

New Balance accused Zhou of hijacking the Chinese mark “Xinbailun” and claimed that it had been using the name Xinbailun in good faith as a part of its company name and that “Xinbailun” is the direct transliteration of “New Balance”. The Court discounted this argument stating that “Xinbailun” was neither a translation nor a transliteration of “New Balance”.

The Court found that Zhou has been using the trade marks Bailun and Xinbailun in relation to the sale of men’s shoes, that New Balance used the name “New Balance” as a trade mark for shoes in advertisement, promotional matter and on invoices, and that New Balance knew about Zhou’s registered trade marks because one of its affiliates had unsuccessfully opposed the registration of “Xinbailun” in 2007. The Court therefore held that New Balance had infringed Zhou’s registered trade mark, issuing an injunction ordering New Balance China to cease use of the Xinbailun mark in relation to the goods. New Balance was ordered to pay costs and compensation to Zhou in the amount RMB 98 million (approximately USD 16 Million), a staggering half of New Balance China’s profits from 2011 to 2013, and to publish notices on its Chinese websites.

The damages awarded have heralded a significant departure from customary levels awarded in trade mark actions in China. In addition, New Balance did not attempt to limit the level of damages by demonstrating that the profits that should have been assessed, as being attributable to the Xinbailun brand, should be much lower because it had used other trading names to market its goods in China.

The judgment highlights the importance of securing comprehensive protection of rights for foreign trade mark owners, particularly those of International brands.

This judgment is in stark contrast to a decision issued by the Beijing IP Court a year earlier to uphold the rejection of an application by another Chinese company to register the trade mark Weixin, the Chinese name of Tencent, the Chinese tech giant’s WeChat messaging and mobile app.

Although the applicant applied to register the Weixin trade mark ahead of Tencent, the Court caught many by surprise by rejecting the application, contrary to the first-to-file principle, citing a public interest exception under Article 10.8.1 in China’s Trade Mark Law. Article 10.8.1 essentially allows a catch-all ban on the registration of marks “detrimental to socialist morals or customs, or having other unhealthy influences”. The application was rejected on the basis that millions of users of the Weixin app would be greatly inconvenienced if Tencent lost the right to use the name in China.

Commentators perceive the decision as being in direct contradiction to previous guidance provided by the Supreme People’s Court, which stated that Article 10.8.1 should not be used to support civil claims where a third party’s use or registration of a trade mark would cause harm to a particular claimant.Article 10.8.1 is seen as a key tool that brand owners could use to protect their trade mark rights. However, until the law in this area is clarified, success in relying on this provision is liable to be “hit or miss”.

Crucially, as befalls many foreign-brand owners, New Balance was wrong-footed by the first-to-file requirement. The company also failed to obtain accurate translations or transliterations of its name – a fact that was not lost on the court.

The critical points that foreign businesses should take away from this decision are:

  • Due diligence is key and one precautionary step is to carry out clearance searches to evaluate the risk of use.
  • Brand owners should routinely apply to register marks in China prior to use.
  • Products and services in China are commonly known by a Chinese name; registering and using both English and Chinese versions of trade marks is therefore critical in protecting rights of foreign-owned businesses in China. Seek expert advice if necessary.
  • Brand owners should take no reasonable options off the table when it comes to protecting business ventures. As well as measures such as opposition, invalidation and cancellation proceedings, strategies should include negotiating co-existence/settlement agreements or purchasing the contested mark.

New Balance has appealed the judgment and, as we await the conclusion of the appeal, foreign business should take note:  if unsuccessful in pursuing the above measures to re-acquire a trade mark, serious consideration must be given to whether goods should be re-branded for the Chinese market. Though this may result in a significant loss of initial investment, the alternative may be an extremely unpalatable prospect of losing a sizeable proportion of your profits – not a position most business owners could easily survive.