Trademark license contract dispute appeal: Shanghai PaFuLuo Stationery Co., Ltd. vs. Shanghai Art Imagine Stationery Co., Ltd. & Picasso International Inc. [Shanghai High People’s Court, (2014) Hu Gao Min San (Zhi) Zhong Zi No. 117 Civil Judgment]

Case Summary

Picasso International Inc. (Picasso) is the owner of registered trademark “Picasso & device”. On September 8, 2008, an exclusive license contract was entered into between Picasso and Shanghai PaFuLuo Stationery Co., Ltd. (PaFuLuo), which allowed PaFuLuo to use the aforementioned trademark on writing instruments in mainland China for a period from September 10, 2008 until December 31, 2013.

On March 12, 2009, this contract was recorded with the China Trademark Office (CTMO). On February 11, 2010, Picasso and PaFuLuo agreed on the extension of the previous trademark license contract for 10 more years, with the renewed contract covering the period of January 1, 2014 - December 31, 2023.

On January 1, 2012, Picasso and PaFuLuo decided to terminate the trademark license recordal at the CTMO, without impacting other arrangements of the said trademark. (The reason for this modification remains unclear. Both parties had their own version of the story and this matter seemed to have been left unaddressed by the court.)

On February 16, 2012, Picasso signed another trademark license contract with Shanghai Art Imagine Stationery Co., Ltd. (Shanghai Art), granting the exclusive right to use the same trademark from January 15, 2012 to August 31, 2017.

PaFuLuo brought an action before the court against Picasso and Shanghai Art, asking for the invalidation of the second license agreement on the ground that the signing of this agreement constituted the circumstance where “there is malicious conspiracy causing damage to the interests of a third party” (Article 52.2 of the Contract Law) and “mandatory provisions of laws and administrative regulations are violated” (Article 52.5 of the Contract Law). PaFuLuo asked for damages of RMB 1 million to be jointly paid by both defendants.

The first instance court Shanghai No. 1 Intermediate Court held that since the litigious trademark license contract was entered into based on the true will of both parties to acquire the exclusive license of the said trademark, both defendants exhibited no intention of harming PaFuLuo’s legitimate interests.  The Court cited Article 3.1 of the “Interpretation of the Supreme People’s Court on Several Matters Concerning the Application of Law in Hearing Trademark Civil Dispute”, which defines the term "exclusive license"as an agreement in which "the trademark registrant licenses a single licensee to use its registered trademark for an agreed period, within a specified territory and in an agreed manner and the trademark registrant, in accordance with the agreement, may not use the registered trademark". The Court found that such provision only provides a definition for the trademark exclusive license as set forth by the Trademark Law and does not fall under the category of mandatory laws and regulations. Therefore, the signing of the second license agreement, even if it did not comply with the aforementioned definition, did not violate any mandatory law or regulation. Thus, the court dismissed all the claims of PaFuLuo.

PaFuLuo and Shanghai Art appealed.

The second instance court, Shanghai High People’s Court found that Picasso and Shanghai Art, when signing the litigious trademark license contract, were both aware of the exclusive trademark license relation between PaFuLuo and Picasso. Shanghai Art was not a third party licensee acting in good faith. However, since there was no sufficient proof to prove that Shanghai Art had any intention to harm PaFuLuo and there was no evidence to prove the conspiracy between Picasso and Shanghai Art, the court found that the defendants’ act did not constitute the circumstances as provided by Article 52.2 of the Contract Law. Nevertheless, since Shanghai Art was not a third party acting in good faith, PaFuLuo’s prior exclusive license could serve as a defense against Shanghai Art, in case Shanghai Art would have sued PaFuLuo. Picasso’s failure to fulfill its obligations as set by the litigious trademark license contract would lead to the consequence that Shanghai Art could not obtain the right to use the litigious trademark based on its contract. The court therefore ruled to dismiss the appeal and upheld the first instance judgment.

Significance

The second instance court clarifies that in order to justify the accusation of “malicious conspiracy causing damage to the interests of a third party” as provided in the Contract Law, PaFuLuo had to prove that the defendants had intention to harm its interests and there was act of conspiracy. In this case, the latter exclusive license contract stayed valid, but the prior trademark exclusive license could serve as defense against the later license contract signed by a third party not acting in good faith. The judgment serves as a point of reference in clarifying the market rules for trademark license transaction and lays the foundation for the trial of dozens of associated cases all over the nation.

WAN HUI DA Comments:

This case is rather awkward. It seems that the entire litigation could have been conducted differently. It is surprising that PaFuLuo only sued for invalidation of the second license agreement and not for an order to cease production and sales, on the ground of trademark infringement.  After all, the second agreement was a violation of the first exclusive agreement, and since the second licensee was deemed not to be in good faith, it could not claim, as a defense, that the first agreement was not recorded.