China's SPC hands down its Castel Judgment  

Summary

On 12 January 2016, China's Supreme People's Court ("SPC") handed down its final judgment in the controversial Castel case. This judgment was long-awaited, as it provides the first SPC response to what can be called a 'new generation' of worrying trademark squatting cases. In the case at hand, the SPC seems to step up its efforts to fence in this new and quickly proliferating practice, by using both procedural and more policy-related arguments, reducing the damages imposed on Castel.

Facts of the case

Castel Frères SAS ("Castel"), a French wine producer, entered the Chinese market by establishing a joint venture with local wine producers in 1998.

On 7 September 1998, a trademark application for "卡斯特" (pronounced: "kǎ sī tè") was filed, covering wine. The registration was granted on 7 March 2000, and assigned to an individual, Li Dao Zhi, on 25 April 2002.

On 2 August 2002, Castel used "卡斯代尔 · 弗雷尔股份有限公司" ("Kǎ sī dài ěr fú léi ěr gǔfèn yǒuxiàn gōngsī") as the Chinese translation of its company name in its trademark application for the "CASTEL" mark (in Latin letters). On 8 July 2005, it used "法国卡斯特兄弟股份有限公司" ("Fàguó kǎ sī tè xiōngdì gǔfèn yǒuxiàn gōngsī") as its company name when it registered its representative office in Shanghai.

In 2003, Castel jointly launched a product with Chinese wine producer Changyu ("张裕" in Chinese) and marketed it as "张裕卡斯特" ("Zhāngyù kǎ sī tè"). A trademark application for that name was however refused by the CTMO on the basis of similarity to Li's prior "卡斯特" ("ka si te") mark.

In 2005, Castel contacted Li to explore the possibility of assignment of the "卡斯特" trademark. However, the consultation failed because the price Li demanded for the mark was unacceptable to Castel.

Instead, on 8 July 2005, Castel filed a non-use cancellation action against Li's "卡斯特" trademark. In the cancellation application, Castel still used "卡斯代尔 · 弗雷尔股份有限公司" as the Chinese translation of its company name. In response to the cancellation action, Li submitted evidence of use, including a license to his company Banti Wine on 1 June 2002, as well as Banti's sales invoices. The Trademark Review and Adjudication Board therefore decided to uphold the registration of the mark in 2007. However, pending the appeal against this decision, Castel continued to use "卡斯特" as its Chinese mark.

Procedural history

Li and Banti filed a civil infringement action against Castel in October 2009, claiming that Castel infringed Li's  "卡斯特" mark by selling wine products bearing "法国卡斯特" ("French Castel” in English), or "法国卡斯特出" ("produced by French Castel" in English).

Meanwhile, after losing the appeal in its non-use cancellation action before the Higher People's Court in 2008, Castel provisionally stopped using "卡斯特" as its Chinese mark, and filed for a retrial before the SPC. However, on 17 December 2011, the SPC rejected this retrial procedure and upheld the registration of Li's "卡斯特" mark.

Subsequently, on 10 April 2012, the Wenzhou Intermediate People's Court awarded Li a staggering RMB 33.73 million (about USD 5.11 million) in damages, based on Castel's sales revenues. Upon appeal, the Zhejiang Higher People's Court upheld this decision. Castel then applied for re-trial by the SPC.

Moreover, in March 2013 -after the final decision in the non-use cancellation procedure was issued- Castel announced that it would finally rebrand its Chinese name into "卡思黛乐" ("Kǎ sī dài lè") and that it would change its Chinese company name into "卡思黛乐兄弟简化股份公司" ("Kǎ sī dài lè xiōngdì jiǎnhuà gǔfèn gōngsī").

The SPC's decision

In its final judgment, the SPC upheld the lower courts' finding of infringement, but decided to reduce the damages substantially to the statutory damages of RMB 500,000 (about 76,000 USD), on the basis of the following procedural and policy reasons:

  • Procedural: although Li Dao Zhi provided evidence showing Castel's sales revenues, the SPC held that LI failed to provide sufficient evidence on Castel's profit rate. The SPC held that merely referring to the profit structure of another other wine producer was insufficient to establish Castel's profit structure. In addition, the SPC also held that Li's evidence was not sufficient to prove that all of Castel's sales revenue (amounting to RMB 31.9 million) was a direct result of the infringement of Li's trademark. Therefore, the SPC held that the lump sum statutory damages had to be applied;
  • Policy-good faith: The SPC considered that whether Castel used the "卡斯特" mark in bad faith must be given significant weight when determining the amount of damages. The SPC held that Castel did not use the "卡斯特" mark in bad faith for the following reasons:
    • Castel, as the trade name, is also the family name of Castel's founder.
    • The evidence shows that "卡斯特" is the common transliteration of "Castel" as a personal name. Therefore, it is reasonable for Castel to use "卡斯特" as its Chinese mark. The evidence shows that Castel, established in 1949, is well-known in the wine industry, while Li failed to produce sufficient evidence to prove that its "卡斯特" mark obtained a certain reputation during the period of infringement. It can therefore not be concluded that Castel used the "卡斯特" mark in bad faith, to free-ride on Li's goodwill associated with the "卡斯特" mark. 
    • Both parties frequently changed their strategies according to the results of their negotiations regarding the assignment of the "卡斯特" mark, the non-use cancellation proceedings and the litigation proceedings. This history between the parties must also be taken into account in the determination of bad faith. Particularly, Castel did not receive any notice from Li to cease the use of the "卡斯特" mark while the parties were negotiating the assignment of the mark. Furthermore, Castel stopped using the "卡斯特" mark when the Beijing Higher People's Court handed down the final decision in the non-use cancellation procedure.
    • Castel's behavior also shows that it did not use the mark in bad faith. The bottles of Castel's wine bore labels showing they were produced in France. Castel also published an announcement that Castel is a French company. Therefore, the clarification sufficiently showed that Castel did not intend to mislead the public, and did not try to establish any business or other connection to Li's products.

Conclusions

This case is a welcome change to the previous worrying trend which worldwide IP owners have noticed, involving large damages given in possible trade mark squatting cases. This is the first case where the SPC seems to clamp down on the recent unreasonable awards in 'new generation' Chinese trademark squatting cases.

This new generation of cases often has a common thread: a possible or likely opportunistic China plaintiff ("squatter")  (most often an individual or small company) looks for weaknesses in the IP protection of large companies. The squatter then targets (one of) the key Chinese brand(s) of that latter company, and launches (bad faith) procedures against it. Subsequently, after long legal battles of attrition, the squatter sues the company for trademark infringement, and uses the increased penalties under the new Trademark Law and recent cases to claim enormous compensatory (or even punitive) damages from that company, for using the mark it– at least initially- owned.

In this case however, the SPC seems to be willing to consider damages reasonably, taking into account a variety of factors in considering damages and "bad faith", by using both procedural (evidence) and policy/good faith arguments (history of the parties, good faith etc.) to reduce the damages to a more acceptable level.  

This case has all the elements to serve as a milestone case with regard to the myriad of similar pending cases recently launched by squatters, and will hopefully give some comfort to worrying IP owners who have been targeted by opportunistic squatters of different types of IP rights.