In China, the legal personality of limited companies generally protects shareholders and legal representatives (i.e. the Chinese equivalent of a managing director) from debts entered into, or liabilities imposed on a company. This principle is also known as the “corporate veil”. However, in a recent trademark infringement case, the Jiangsu Higher People’s Court held that the corporate veil can be pierced under certain circumstances, meaning that legal representatives can be held jointly liable with their company.
In the case at hand, a Taiwanese bath and kitchen supplies company sued three Mainland Chinese companies -with company names identical to that of the Taiwanese company- as well as their legal representatives for unfair competition and trademark infringement.
In its appeal judgment, the Jiangsu Higher People’s Court held, not very surprisingly, that the use of the claimant’s trademark as a company and trade names did infringe upon the claimant’s trademarks (i.e. ‘double identity’) and did constitute unfair competition. Surprisingly though, the court also held that the legal representatives of the companies could be held jointly liable with their companies.
The court based this finding on article 8 of China’s Tort Law (stipulating that if a tort is committed by several tortfeasors, they can be held jointly liable) and on evidence of intentional and malicious infringement by the legal representatives. According to the evidence, the legal representatives set up new companies after their former companies had already, in an earlier case, been found guilty of infringements of the trademarks of the same claimant company. Moreover, the court also held that the legal representatives could be held accountable for the infringement committed by their company because they owned 90% of the shares in their companies, and because the main business conducted by the companies since their incorporation consisted of counterfeiting the same claimant’s marks. For those reasons the court considered that both companies and their legal representatives had committed joint infringements, and could therefore be held jointly liable for the damages granted, i.e. RMB 2 million (approximately USD 300,000). While the judgment focused on the position of legal representatives, it arguably also applies to other types of directors, managers and majority shareholders, as long as there is evidence showing that they were independently and actively involved in the infringing activities.
This case is seen as part of a continuing positive development for IP enforcement in China, because it offers an interesting new enforcement avenue against counterfeiters in China, who have traditionally used and abused the corporate veil to escape direct liability. This approach could in fact efficiently tackle the “cat and mouse”-scenario that counterfeiters and brand owners now frequently find themselves in: the mastermind behind the counterfeiting could be dealt with directly, and would not be able to hide behind a string of maliciously set up companies.
This judgment should encourage IP owners to take a more aggressive approach and to conduct investigations into the corporate structure of counterfeiters, with a view to potentially suing the culpable individuals directly, with much more deterrent effect.