This case is one of the Top 10 IP Cases of the Year (2015) selected and summarised by the Supreme People's Court. This update provides an edited translation of the court's case summary and significance, as well as brief commentary as appropriate.
The Shanghai High People's Court recently upheld a first-instance judgment dismissing an appeal to invalidate a conflicting exclusive trademark licence, despite finding that the defendant was not a third-party licensee acting in good faith.
Picasso International Inc was the owner of the registered trademark PICASSO & Device. On September 8 2008 Picasso and Shanghai PaFuLuo Stationery Co Ltd entered into an exclusive licence which allowed PaFuLuo to use the mark for writing instruments in mainland China from September 10 2008 until December 31 2013. The licence was recorded with the China Trademark Office (CTMO) on March 12 2009.
On February 11 2010 Picasso and PaFuLuo agreed to extend the licence for a further 10 years, effective from January 1 2014. However, on January 1 2012 the two parties terminated the trademark licence recordal at the CTMO while upholding all other arrangements concerning the mark. The reason for the termination remains unclear. Both parties maintain their own accounts and the matter was left unaddressed by the court.
On February 16 2012 Picasso signed a new trademark licence with Shanghai Art Imagine Stationery Co Ltd, granting the exclusive right to use PICASSO & Device from January 15 2012 until August 31 2017.
PaFuLuo brought an action against Picasso and Shanghai Art requesting the invalidation of the new licence on the grounds that signing the licence constituted "malicious conspiracy causing damage to the interests of a third party" (Article 52.2 of the Contract Law) and violated "mandatory provisions of laws and administrative regulations" (Article 52.5 of the Contract Law). PaFuLuo sought damages of Rmb1 million to be jointly paid by both defendants.
At first instance, the Shanghai Number 1 Intermediate People's Court held that Picasso and Shanghai Art had entered into the licence with the intention only to establish an exclusive licence to the mark, and had no intention to damage 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 an 'exclusive licence' 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 this provision merely defines the exclusive licence 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 licence – even if it did not comply with the above definition – did not violate any mandatory law or regulation. The court subsequently dismissed all claims.
PaFuLuo and Shanghai Art appealed.
At second instance, the Shanghai High People's Court found that Picasso and Shanghai Art had both been aware of the pre-existing licence between PaFuLuo and Picasso when signing the new licence.(1) Shanghai Art was not a third-party licensee acting in good faith. However, without sufficient evidence that Shanghai Art had intended to damage PaFuLuo's interests or had conspired with Picasso, the court found that the signing of the new licence did not constitute the circumstances provided by Article 52.2 of the Contract Law.
Nevertheless, since Shanghai Art was not a third party acting in good faith, PaFuLuo's previous licence could serve as a defence if Shanghai Art were to sue PaFuLuo. Picasso's failure to fulfil its obligations under the licence could lead to the annulment of Shanghai Art's contractual right to use the PICASSO & Design mark. The court therefore ruled to dismiss the appeal and upheld the first-instance judgment.
The second-instance court clarified that in order to justify the accusation of "malicious conspiracy causing damage to the interests of a third party", PaFuLuo had to prove that Picasso and Shanghai Art intended to harm its interests and conspired to do so. In this case, Shanghai Art's licence remained valid, although PaFuLuo's licence could serve as a defence against the later licence which had been 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 licence transactions and lays the foundation for similar cases across China.
The case is unusual, as it seems that the entire litigation could have been conducted differently. It is surprising that PaFuLuo sued only for invalidation of the second licence and not for an order to cease production and sales, on the grounds of trademark infringement. After all, the second licence was a violation of the first and since the second licensee was deemed not to be in good faith, it could not claim as a defence that the first licence had not been recorded.
For further information on this topic please contact Hui Huang, Paul Ranjard, Huimin Qin or Nan Jiang at Wan Hui Da Law Firm & Intellectual Property Agency by telephone (+86 10 6892 1000) or email ([email protected], [email protected], [email protected] or [email protected]). The Wan Hui Da Law Firm & Intellectual Property Agency website can be accessed at www.wanhuida.com.
(1) Shanghai PaFuLuo Stationery Co Ltd v Shanghai Art Imagine Stationery Co Ltd, Shanghai High People's Court (2014) Hu Gao Min San (Zhi) Zhong Zi 117 civil judgment.