The new trademark law of China which entered into force on May 1, 2014 has been welcomed by foreign companies as it has indeed improved legislation on some critical issues concerning trademark protection and enforcement. The new law provides norms for a more effective trademark prosecution and has also provided new and hopefully more effective tools against trademark grabbing and trademark trolls, which have literally plagued the business environment in China for the last twenty years.
On the other hand some of the provisions of the new trademark law appear of unclear interpretation and seem to leave room for misapplications which may prove favorable only to Chinese infringers in some special cases. One of these norms is art. 57.2 defining trademark infringement by similarity of the mark or of the goods. The norm has in fact added the requirement that the similarity causes "likelihood of confusion", a requirement which was not present in the older trademark law.
This new legislative requirement may indeed be subject to restrictive interpretations by the enforcement authorities when considered in light of the jurisprudential principle of "use of trademark in the territory of China". In practice a restrictive interpretation of art. 57.2 in light of the above principles may lead to the denial of enforcement when an infringer can prove that his trademark counterfeits were only meant for export and not for use in China, by arguing that the use in China is a necessary and implied requisite for the presumption of "likelihood of confusion" among the Chinese consumers.
Such a restrictive interpretation would allow infringers to freely export products with trademarks similar to those registered in China by a foreign company. The impact of such an interpretation may be quite detrimental to the fight against trademark counterfeiting.
The New Trademark Law and a definition of infringement
Art. 57.2 of the Trademark Law provides that the use of a trademark that is similar to a registered trademark on the same goods, or using a trademark that is identical with or similar to a registered trademark on similar goods, which may be easily confusing, without the license/consent of the trademark registrant, is an act of trademark infringement.
The above provisions leave indeed room to interpretation and there is an ongoing debate among scholars and judges in China about their application to the case of trademark counterfeits meant only for export outside China. Judges and administrative trademark enforcers could indeed take the view that a counterfeit product falling in one of the two scenarios of article 57.2 of the Trademark Law, is not infringing when the product is meant only for export. In this case the literal interpretation of the law allows the enforcer to argue indeed that the likelihood of confusion cannot exist if the product is not used in China as the goods will not be sold in the distribution channels in China, and therefore the Chinese consumers would not be misled as to the source of the goods and the trademark on the goods is not considered as "used in China". How could in fact a Chinese consumer know that there is a trademark similarity (or a good similarity in case of identical trademark) between the counterfeit and the original product, if the former will never make it to the shelves of a Chinese shop?
A compromise solution of the dispute offered by some scholars and judges may be that of excluding from the above interpretative restriction those cases where the buyer in the country of destination of the counterfeits holds that very trademark right used on the goods. This would turn into a case of legitimate product distribution, in which the Chinese seller receives an implied license from the buyer. Where the buyer abroad holds no such trademark, then the export by the Chinese entity would be considered as a trademark infringement. This solution is still far from perfect. In fact, it could not be excluded that the country of destination is not indeed the final country where the goods will be sold, but an intermediate country where the buyer has also "stolen" the trademark of the legitimate owner. They goods so cleaned up can thus legally re-enter the market and can be resold in China or other countries free from trademark infringement thanks to the effect of the international trademark exhaustion's principle.
It is in fact observed that many counterfeits are usually sold from China to countries like Panama or Venezuela, before landing in the US, or in the Middle East before coming to Europe. These triangulations would indeed offer to the Chinese infringers the possibility to overcome the above compromisers' interpretation.
Practical Consequences and subordinated issues
In practice there have already been cases in which raiding administrative officials decided to abandon a raid upon the infringer proving that its trademark infringing products under art. 57.2 were meant for export only.
A related practical problem is also that of determining the type and the degree of evidence required to prove the act of export. Counterfeiters do not operate as normal companies. Their document production and retention policies are either primitive or not existing for the obvious need of hiding their illegal trade. Even if contracts and correspondence are produced, their authenticity is disputable for the very luck of bookkeeping transparency and document production policies. Furthermore, administrative enforcement by raids is normally demanded before products are shipped so there surely will be no custom records available to prove the export. This leads to an obvious risk of unlimited discretion by each single enforcing official in determining when evidence of "exclusively for export" has been given.
This restrictive interpretation of the trademark law may also affect custom enforcement of trademark rights.
This is indeed one of the critical issues introduced by the new trademark law. At present there is no final solution. Enforcement authorities seem however to be inclined towards the restrictive interpretation.
There is little doubt that such an interpretation will allow infringers new avenues to avoid trademark enforcement. Such an interpretation would in fact not only cripple administrative trademark enforcement but also the effective recourse to the judicial system.
The best way to reduce the risk of such a restrictive application of the trademark law in this case constellation, is by having a very thorough and comprehensive trademark portfolio worldwide, which will offer cross border solutions, when an enforcement in China is no longer possible, or to leverage on this trademark portfolio in case the above mentioned compromise interpretation will be alter adopted.
Meanwhile we will need to wait for the Supreme People's Court to take official position on this matter.