Each year, the Supreme People’s Court issues a report on intellectual property and unfair competition cases heard during the year and, on the basis of selected cases, provides guidance on application of relevant laws.

In the 2014 Annual Report, 35 typical cases were selected and, on the basis of these, 50 guidelines were established. Guideline 21, based on the Shan'xiMaozhiEntertainment Limited Company (‘Shan'xi Maozhi’) vs. Animation LLC (‘DreamWorks’) & Ors case, relates to the fair use defence.

This article looks at both the fair use defence based on descriptive use, as upheld by the SPC in the Shan'xiMaozhivs. DreamWorks case, and other defences that may be available in trade mark infringement cases.

The Shan'xi Maozhi vs. DreamWorks case

Shan'xi Maozhi registered the composite mark, GONG FU XIONG MAO, Chinese characters and device, in respect of "education services, library services, organization of competitions featuring education and entertainment, publication of books, production of films, animal training, and operating lotteries" in Class 41.

DreamWorks subsequently produced two KUNG FU PANDA (GONG FU XIONG MAO in Chinese) films, which were distributed by Paramount in mainland China.

Shan'xi Maozhi launched trade mark infringement proceedings in the Beijing No. 2 Intermediate People's Court (‘the Court’) in 2011, and the matter was heard in 2012.

The Court confirmed Shan'xi Maozhi’s rights in the mark in relation to services in Class 41, and that unauthorised use of the mark on similar or identical services would constitute trade mark infringement. It considered that the key issue in the case  was whether the Defendants’ use of GONG FU XIONG MAO was use as a trade mark.

The Court held that Dreamwork’s use of GONG FU XIONG MAO was not use as a trade mark: the words were being used to indicate the theme of the film, not the source of the film. There had, therefore, been no trade mark infringement.

Shan'xi Maozhi appealed to the Beijing Higher People's Court and the SPC. Both appellate courts affirmed the Beijing No. 2 Intermediate People's Court's ruling.

In its judgment, the SPC confirmed that, to constitute trade mark infringement, a mark must be used as a trade mark in the course of trade to identify the source of goods or services. The KUNG FU PANDA (GONG FU XIONG MAO in Chinese) film had been shown in cinemas in China in 2008, i.e. before the date of Shan'xi Maozhi's registration and GONG FU XIONG MAO had been used in advertising materials to promote the film as early as 2005. The SPC further affirmed the legal reasoning of the first instance court and second instance courts, and ruled that Dreamwork’s use of GONG FU XIONG MAO was not trade mark use, and did not, therefore, constitute trade mark infringement.

Descriptive fair use defence

In general, a trade mark owner can prevent others using its trade mark and thereby confusing the public as to  the source of the goods or services. There are, however, certain circumstances in which a third party can use the mark without infringing e.g. as in the Shang’xiMaozhi case, where the mark is used descriptively and not as a trade mark. 

Article 48 of China Trademark Law defines trademark use as the use of a trademark on goods, packaging of or containers of the goods, as well as transaction documents of the goods, or the use of a trademark in advertising, exhibition and other business activities, so as to identify the source or origin of the provided goods. In other words, if a symbol is not used as an indicator of origin, such usage is not a trade mark use and will not expose its user to trade mark infringement liability.

Descriptive fair use is to some extent regulated in Article 59 of the China Trademark Law which states that where a registered trademark contains generic name, shape or model number of the goods in respect of which it is used, or directly refers to the quality, main raw materials, function, intended purpose, weight, quantity, or other characteristics of the goods, or contains geographical name, the owner of the registered trademark has no rights to prohibit any fair use of such elements by others.

Where a trade mark consists of a term that has a descriptive meaning in addition to its secondary meaning as a trade mark, use of the term in its descriptive sense will not constitute trade mark infringement, provided that such use accords with honest commercial practices and does not suggest any association with the trade mark owner or his goods or services.

Establishing the descriptive fair use defence

Whether or not the use of another's registered trademark constitutes 'fair use’ will be determined by the courts on a case by case basis, having regard to three main factors: the intention behind the use, the manner of use, and the overall effect of such use.

The Court will consider whether the disputed mark has been used by the defendant in good faith to describe the characteristics of its goods or services or whether the intention has been to free-ride on the reputation of the trade mark owner and the mark. 

Secondly, the manner in which the disputed mark is being used by the defendant must be ‘fair’. The courts generally consider whether the disputed mark is being used separately, or highlighted in some way, whether the defendant's own trade mark and/or trade name is clearly and/or prominently displayed, and whether others in the market are also making use of the mark or a similar symbol. 

The courts then look at the effect of the defendant’s use i.e. whether it leads, or is likely to lead, to customer confusion.

In the case Fujian Septwolves Group Corporation (‘Septwolves’) vs. Jiangsu Zhangjiagang Rice Wine Limited Company (‘Zhangjiagang Rice Wine’), Septwolves sued Zhangiagang Rice Wine for infringement of its mark  HUA KAI FU GUI in Chinese registered in relation to "wines, cocktails, and etc." in Class 33. Jiangsu Suzhou Intermediate People's Court found that the use of HUA KAI FU GUI by Zhangjiagang Rice Wine was fair use, and did not infringe Septwolves’ trade mark rights. The appellate court Jiangsu Higher People's Court affirmed the first instance court's ruling.

In this case, both courts ruled:

  1. HUA KAI FU GUI was a descriptive term in Chinese, its primary meaning being a reference to a peony blossom, a symbol of prosperity;
  2. Zhangjiagang Rice Wine's use of HUA KAI FU GUI was not in bad faith since it predated the license period granted by Septwolves to its licensee for the use of Septwolves' registered mark;
  3. Septwolves and its licensee failed to prove their use of HUA KAI FU GUI;
  4. The words, HUA KAI FU GUI, accompanied by the image of a peony, on the label of Zhangjiagang Rice Wine's products would be likely to be perceived by the public as merely a reference to  flourishing and prosperity, and not as an indication of origin;
  5. Because Zhangjiagang Rice Wine's own registered mark ‘Shang Zhou’ was clearly displayed on the product label, there was no likelihood of consumer confusion.

In contrast, in Yibin Wu Liang Ye Incorporation (‘Wu Liang Ye’) vs. Beijing Yin Wu Bao Alcohol Limited Company (‘Yin Wu Bao’), Beijing No. 2 Intermediate People's Court and the appellate court Beijing Higher People's Court did not support Yin Wu Bao's descriptive fair use claim, and ruled its use of QI LIANG YE infringed Wu Liang Ye’s rights in the WU LIANG YE marks.

The main legal rationale of the courts was:

  1. Yin Wu Bao had not established how QI LIANG YE was beingused descriptively to indicate the raw materials of its products;
  2. WU LIANG YE had obtained a high level of reputation through long term use and promotion;
  3. Yin Wu Bao had displayed QI LIANG YE prominently its the product packaging.

Other non-infringement defences

The other substantive non-infringement defences often employed against trade mark infringement claims are:

  1. Nominative fair use defence i.e. using another party's trade mark to refer to the genuine goods or services;
  2. Prior rights defence. This defence relies on the defendant holding relevant prior intellectual property rights, such as prior registered trade mark rights, trade name rights, copyright, patent rights; and
  3. Prior use defence. Article 59 of the China Trademark Law provides ûtthat a senior user is allowed to continue to use its mark within the original use scope, provided its use predates the application date of a later registered trademark, and has obtained a certain level of influence.

Due consideration should be given to the infringement defences

The SPC’s recent comments on the Shang’xiMaozhi case have brought the descriptive fair use defence into focus. It is important that both plaintiffs and potential defendants consider whether or not any of the trade mark infringement defences could be available. The actual use situation should be carefully checked when formulating a litigation strategy. 

Awareness of the defences is also relevant when adopting a trade mark and investing substantially in its development.

If the proposed mark possesses a high level of distinctiveness, conducting appropriate clearance searches should enable prior conflicting rights to be identified and future challenges on the basis of prior rights to be overcome.  Where the mark is to some extent descriptive, and the level of distinctiveness relatively low, it is important to remember that potential defendants may be able to rely on the fair use defence.