Introduction

According to the 'inclusive development' theory, when two similar trademarks have coexisted for some time and are both successful, they should continue to coexist, regardless of whether the first trademark owner agrees. In other words, the status quo is more important than the law. This theory has attracted much controversy.

The source of the theory can be found in the Supreme People's Court Opinion Concerning Trial of Administrative Cases in Respect of Trademark Right Granting and Confirmation, which was released on April 20 2010. Article 1 of the opinion provides:

"When hearing administrative cases of granting and confirmation of trademark rights… with respect to trademarks in dispute that have long been used, have established a good market reputation and have been popular among certain sectors of the public, the People's Courts should precisely grasp the legislative spirit of combining the protection of prior trademarks and the safeguarding of market order enshrined in the Trademark Law, fully respect the reality of the market where relevant members of the public objectively distinguish the trademarks concerned, and make efforts to maintain the stability of the established market order."

On December 16 2011 the Supreme People's Court promulgated the Opinion on Giving Full Play to the Functional Role of Intellectual Property Trials in Advancing the Great Development and Prosperity of Socialist Culture and Promoting Independent and Coordinated Economic Development, which further developed the theory. Article 19 of this opinion provides:

"If both the trademarks concerned have a reputation, or if their co-existence has been formed under special circumstances, the similarity should be determined by considering comprehensively the situation and the history of the use of the trademarks, the perception of the relevant public, and the subjective attitude of the users etc. When making the judgment, the Court should take into consideration, objectively, the respective market positions established by the operators, so as to allow the development of both and avoid that the similarity of the trademarks be decided only on the similarity of the trademarks' elements."

After publication of these two opinions, the angle of assessment in determining similarity between two trademarks changed completely. When assessing whether two trademarks are similar and whether there is a likelihood of confusion between them, judges were no longer asked to rely simply on the traditional method (ie, examining the overall aspect of the trademarks in dispute, the general public response when viewing the trademarks separately and the reputation of the first registered trademark); rather, they must now consider other factors, such as history of use, 'special circumstances' and the subjective attitude of the owner of the second (ie, subsequent) trademark.

The inclusive development theory has been a source of great concern among trademark owners, because it could be interpreted as an encouragement to trademark infringers to expand their business quickly enough to secure a market foothold and subsequently obtain judicial immunity. Many legal disputes between trademark owners and infringers have been adjudicated according to the theory and culminated, without exception, with the plaintiff's failure.

However, a recent retrial judgment of the Supreme People's Court regarding a trademark opposition dispute between Chinese handmade footwear maker Nei Lian Sheng and its competitor Fu Lian Sheng seems to suggest a change in court practice.

Facts

Nei Lian Sheng Shoe Store is the oldest manufacturer of handmade shoes in China. Its name means 'unstoppable promotions in official ranks' in Chinese; 'Nei' literally means 'inside' in the sense of 'inside the imperial court', while 'Lian Sheng' hints that once customers wear the boots produced by the store, they will have good fortune in their careers and receive continuous promotions.

The plaintiff, Beijing Nei Lian Sheng Shoes Co, Ltd, owned (since 1983) the registered trademark NEI LIAN SHENG in Chinese characters (Registration 125412), covering footwear in Class 25 (see Figure 1 below).

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On June 29 2009 Beijing Fu Lian Sheng Shoes Co, Ltd applied to register a combination trademark (device, Chinese characters and pinyin) for FU LIAN SHENG in Class 25, with the designated goods covering "apparel, underwear, footwear etc" (see Figure 2 below).

Click here to view image.

The FU LIAN SHENG trademark – which shares the same Chinese characters for 'Lian Sheng' as the earlier NEI LIAN SHENG trademark – was preliminarily approved for registration on July 27 2010 (Registration 7504400).

On October 19 2010 the plaintiff filed an opposition against the FU LIAN SHENG trademark. On May 29 2012 the China Trademark Office rejected the opposition and approved registration of the FU LIAN SHENG trademark.

On July 11 2012 the plaintiff appealed to the Trademark Review and Adjudication Board (TRAB), claiming that:

  • its NEI LIAN SHENG trademark was highly reputable and the FU LIAN SHENG trademark was similar to it;
  • the NEI LIAN SHENG trademark was well known and the FU LIAN SHENG trademark imitated it; and
  • the FU LIAN SHENG trademark infringed the plaintiff's trade name rights.

On December 2 2013 the TRAB overruled the China Trademark Office's decision, finding that the FU LIAN SHENG trademark's distinctive element 'Fu Lian Sheng' in Chinese characters was similar to the NEI LIAN SHENG trademark in respect of composition, pronunciation and semantic meaning. The TRAB concluded that such similarity would likely lead to misidentification as to the origin of the goods. Citing Article 28 of the Trademark Law 2001 – which prohibits the use of similar trademarks on identical or similar goods – the TRAB accordingly upheld the opposition. The plaintiff's two other arguments (regarding well-known trademark status and infringement of its trade name rights) were overruled.

Intermediate court decision

Fu Lian Sheng appealed to the Beijing No 1 Intermediate Court. It submitted evidence that its own trademark had acquired a reputation through long-term and extensive use and therefore would not cause confusion among the relevant public. The court held that such evidence – although produced after the TRAB decision – was admissible, because it was necessary to ascertain the whole truth of the case, including the events following issuance of the TRAB decision.

The court found that the evidence adequately proved that the FU LIAN SHENG trademark had been used and promoted throughout the litigation proceedings and throughout the country. It also found that the FU LIAN SHENG trademark differed from the NEI LIAN SHENG trademark in several respects:

  • The device of the FU LIAN SHENG trademark had a high degree of originality and was a distinctive part of the trademark, whereas the NEI LIAN SHENG trademark was only a word mark.
  • The two marks were visually distinct, with 'Fu' (the first character of the FU LIAN SHENG trademark) differing significantly from 'Nei' (the first character of the NEI LIAN SHENG trademark) in pronunciation, font style and semantic meaning.
  • The overall semantic meaning of the two marks was different.

The court cited Article 1 of the Supreme People's Court's 2010 opinion to support its finding that the FU LIAN SHENG trademark had established a significant market reputation and had formed its own consumer base, which would enable the relevant public to distinguish it from the NEI LIAN SHENG trademark.

On July 30 2014 the court concluded that the coexistence of the two marks would not cause confusion among the relevant public and therefore revoked the TRAB decision. The TRAB and Beijing Nei Lian Sheng subsequently appealed to the Beijing High Court.

Beijing High Court decision

Before the Beijing High Court, Beijing Nei Lian Sheng submitted supplementary evidence to prove the reputation of its NEI LIAN SHENG trademark and trade name. On December 8 2014 the Beijing High Court reversed the first-instance judgment and ruled in favour of the TRAB and Beijing Nei Lian Sheng, based on the following grounds:

  • Despite their visual differences, the two marks shared the expression 'Lian Sheng'. Since this expression was not a fixed word combination, but rather an original creation of Beijing Nei Lian Sheng, the two marks were thus somewhat similar.
  • Because of the reputation acquired by the NEI LIAN SHENG trademark before the application date of the FU LIAN SHENG trademark, the relevant public was likely to misidentify the two marks as serial marks of the same business operator or mistakenly assume an association between the suppliers of the corresponding goods.
  • The FU LIAN SHENG trademark was a similar mark used on identical or similar goods to those of the NEI LIAN SHENG trademark.

Beijing Fu Lian Sheng applied for retrial to the Supreme Court.

Supreme People's Court decision

The Supreme People's Court first considered whether the FU LIAN SHENG trademark was similar to the NEI LIAN SHENG trademark. It echoed the appeal court's finding that the relevant public viewed the two marks similarly and that the shared component 'Lian Sheng' was the original creation of Beijing Nei Lian Sheng. The Supreme People's Court went on to affirm that the NEI LIAN SHENG trademark was a well-known trademark, which made it eligible for broader protection than that afforded to an ordinary trademark and which meant that competitors had a higher duty of care in respect of trademark use.

The Supreme People's Court subsequently addressed the issue of whether the FU LIAN SHENG trademark met the conditions justifying its coexistence with the NEI LIAN SHENG trademark. The court acknowledged that the FU LIAN SHENG trademark had been used in stores across the country and had gained a degree of market recognition, but considered that this was still insufficient to prove a significant reputation and distinctiveness. Taking into account the significant reputation and distinctiveness of the NEI LIAN SHENG trademark and the similarity between the two marks, the court found that the FU LIAN SHENG trademark had not sufficiently distinguished itself in the market. The relevant public was still likely to confuse or misidentify the source of the goods, or mistakenly assume that there was a specific association between the FU LIAN SHENG trademark and the goods designated by the NEI LIAN SHENG trademark.

The Supreme People's Court finally assessed the bad faith of Beijing Fu Lian Sheng, finding as follows:

  • Beijing Fu Lian Sheng had intentionally imitated Beijing Nei Lian Sheng in respect of its trademark, place of incorporation and business name.
  • 'Lian Sheng' – the main distinctive element of the NEI LIAN SHENG trademark – was first used by Beijing Nei Lian Sheng on "cloth shoes". Beijing Fu Lian Sheng therefore could not justify its use of 'Lian Sheng'.
  • Beijing Fu Lian Sheng displayed obvious bad faith not only in applying to register the FU LIAN SHENG trademark, but also in applying for a dozen other trademarks with the same component in other classes.
  • Although the FU LIAN SHENG trademark had gained a degree of market recognition through use, such use mostly occurred after the application date for its registration and before it had been registered. Before extensively using the mark, Beijing Fu Lian Sheng should have been fully aware of the risk that its trademark might not be approved for registration due to its similarity to the NEI LIAN SHENG trademark, and that it might consequently face trademark infringement charges for using the mark. Beijing Fu Lian Sheng failed to fulfil its duty of reasonable care and had to bear the adverse consequences.

The Supreme People's Court ultimately concluded as follows:

  • Beijing Fu Lian Sheng, as a competitor of Beijing Nei Lian Sheng, knew or should have known about the significant reputation and distinctiveness of the NEI LIAN SHENG trademark. However, it still applied for and used in bad faith a trademark that was similar to the NEI LIAN SHENG trademark.
  • With these circumstances in mind, if the court were to take into account the alleged market recognition and reputation established by use of the FU LIAN SHENG trademark, this would encourage competitors to violate the good-faith principle by ignoring the legitimate prior rights of others and expanding their business. If the court were to allow this, it would be detrimental to the market environment, which requires distinctiveness in trademark registration and use. It would also severely prejudice the legitimate rights of prior trademark owners and the interests of consumers, in contravention of both the good-faith principle and the intent of the Trademark Law.

On November 18 2015 the Supreme People's Court dismissed Beijing Fu Lian Sheng's application for retrial.

Comment

This decision constitutes a significant, progressive step away from the controversial inclusive development theory. Considering consumer interests, the Supreme People's Court emphasised the need to maintain clear distinctions between trademarks, both at the China Trademark Office registry and in the marketplace. As such, the court aimed to discourage applicants and users of similar trademarks from expanding their business; doing so will not save them from the consequences of lawsuits.

This is a positive development, even if some comments in the court judgment raise questions. The first comment in this regard related to the size of the business conducted using the FU LIAN SHENG trademark. In this case, it was considered insufficient; does this mean that, had the business been sufficiently big, the court might have decided in favour of the FU LIAN SHENG trademark? This would contradict the final statement of the court, which aimed to discourage the expansion of business under such circumstances.

The second questionable comment concerned the reputation of the NEI LIAN SHENG trademark and the bad faith of Beijing Fu Lian Sheng. The court found that, in view of said reputation, Beijing Fu Lian Sheng should have known of the existence of the NEI LIAN SHENG trademark and should have refrained from filing and using its own trademark. This raises concerns, because it seems to imply that the decision might have been different if the NEI LIAN SHENG trademark had not been well known. According to the law, a trademark does not need to be well known in order to be protected against the filing and use of similar trademarks on the same or similar goods; all it needs is to be registered. Moreover, knowing of the existence of a registered trademark is extremely easy – a check of the China Trademark Office registry is simple and straightforward. Finally, if two trademarks are similar and if use of the subsequent trademark is likely to cause confusion, good or bad faith is irrelevant.

For further information on this topic please contact Paul Ranjard at Wan Hui Da Intellectual Property Agency by telephone (+86 10 6892 1000) or email (ranjard@wanhuida.com). The Wan Hui Da Intellectual Property Agency website can be accessed at www.wanhuida.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.