On April 23, 2019, the Standing Committee of the National People’s Congress (NPC) enacted amendments to the PRC Trademark Law mainly to address bad faith trademark registration – including marks targeting other brands as well as large-scale warehousers – as well as to combat counterfeiting through increases in the maximum level of punitive damages that may be awarded by civil courts.
The revised law, which enters into effect on November 1, 2019, was issued suddenly and without undergoing the traditional public consultation process. But it is widely understood that the enactment was rushed through the legislature to support the Chinese government’s efforts to conclude an agreement with the US government over a range of trade issues.
While there are many details that require clarification through further implementing regulations, the provisions on bad faith registration in the revised law respond admirably to concerns expressed by IP owners and their associations, and in ways that appear to go far beyond international standards of protection. They do this in part by allowing Chinese authorities to impose fines and other penalties against both bad faith filers as well as their trademark agents.
The amendments to the law also codify recent practice of the courts and administrative authorities in dealing with malicious filings, thereby helping to ensure more consistent application of the law against pirates.
The State Council is expected to issue draft implementing regulations before the law enters into effect on November 1. And as noted below, it is also possible that the China National IP Office (“CNIPA”) will issue separate rules that may allow for the filing of petitions by IP owners and their associations to add particular pirates to an effective blacklist, thus helping to focus efforts on pirates that are responsible for creating greater harm.
Bad Faith Registration
As noted above, the provisions in the revised law on bad faith registration are clearly intended to deal with both warehousing as well as classic bad faith filings that target other victim brand owners. Specifically:
- (a) Bad Faith and Intent to Use
A new clause was added to Article 4 of the law stating that an “an application for registration of a trademark that is filed in bad faith and is not intended for use shall be rejected."
This provision mainly seems intended to codify recent practice of Chinese courts and the registry in striking down bad faith filings where the pirate fails to present evidence of a bona fide intent to use its marks, in particular in cases where the pirate has filed for marks in large numbers. The new language of Article 4 is also intended to provide a clearer basis for the Trademark Office to reject applications during examination (see below for further comment in this regard).
Meanwhile, Articles 33 and 44 of the law were amended to codify existing practice (not yet uniformly applied) under which oppositions and invalidations may be pursued based upon alleged violations of Article 4.
- (b) Misbehavior by Pirates and Trademark Agents
Article 68 of the revised law provides for warnings, fines and other unspecified penalties against both bad faith filers as well as trademark agents that assist filers in engaging in acts that violate prohibitions in the law against bad faith applications, including the above-mentioned Article 4.
Article 68 also grants Chinese courts the power to impose unspecified penalties against filers and trademark agents for pursuing “malicious trademark litigations”. The exact scope of this phrase is unclear at present, but it could well be intended to deter pirates from using the civil courts to squeeze victims of piracy to enter into purchased assignments or forced licenses, and at extortionate prices. Under Article 115 of the Civil Procedure Law of China, such penalties can include fines up to RMB 1 million (US$140,000) for violations by corporate entities or up to RMB100,000 (US$14,000) where violator is an individual.
Article 19 of the revised law further prohibits trademark agents from assisting pirates where they know or have reason to know that the pirate’s behavior violates Article 4 of the law.
Article 68 was originally designed by the NPC to only address misbehavior by trademark agents – including in particular the filing of bad faith applications by trademark agencies in their own name. As the new provisions within Article 68 (see below) do not specifically refer to either filers or trademark agents, concern has been raised as to whether penalties may only be imposed upon trademark agencies. However, in explanations of the revised law given by senior CNIPA officials on April 28, 2019, it was confirmed that Article 68 will in fact be applied to bad faith filers, and not just to trademark agencies.
Text of Article 68:
"Where applications are filed for registration in bad faith, an administrative penalty shall be made, such as a warning or a fine, etc., according to the circumstances; if a trademark lawsuit is filed maliciously, the People's court [shall/may] impose a penalty according to law.”
Implementation through Draft CNIPA Provisions on Bad Faith Filings?
In February 2019, CNIPA issued draft rules for public comment that suggest an intention to create an effective black-list of bad faith filers and warehousers (described as “abnormal trademark filers”) and provide the following practical consequences:
- Demands by the TMO during examination that the applicant provide evidence of intent to use (something not generally required under current practice, with rare exceptions);
- Rejection of applications deemed to have been filed in bad faith by the examiner; and
- The imposition of “social credit” penalties against bad faith filers.
It remains unclear at present whether the draft CNIPA rules will eventually be issued in their current form (see SIPS’ report on these draft rules here). But clarification in this regard – and the timing for introduction of new blacklisting procedures – could be issued soon in order to set the scene for a successful conclusion of the pending trade dispute with the United States.
New Strategies against Pirates
The foregoing changes – together with recent bold decisions from Chinese courts (see SIPS’ report on one such case here) – open the door to new strategies for victims of bad faith trademark piracy in China.
In the short term, these may include:
- The sending of warning letters to pirates warning of potential penalties, and the sending of similar letters to trademark agents also putting them on notice in order to avoid questions over their knowledge of their clients’ misbehavior;
- The filing of informal interferences and joint petitions by victim brand owners to CNIPA, potentially useful until a more formal system for reporting bad faith filers is introduced; and
- The filing of civil actions against registry pirates – particularly those that have engaged in active use and infringement of the victim’s IP rights and/or filed infringement actions against the victim or its commercial partners in China, including take-downs against online ads or petitions to local customs to seize the victim’s genuine products.
Civil Compensation for Infringement
State Council officials have for some time indicated plans to increase the maximum level of compensation that IP owners can secure through civil proceedings against IP violators. To these ends, Article 63 of the revised Trademark Law contains the following provisions:
- In cases the infringement is deemed “malicious” and the circumstances are deemed “serious”, the maximum level of damages that may be awarded by Chinese courts are increased from 300% to 500% of the relevant base amount (i.e., the infringer’s profits, the victim’s losses or a suitable royalty rate). (The minimum level of damages in such circumstances remains 100% of the base amount.)
- Where the relevant base amount cannot be determined, statutory damages of up to RMB5 million may be awarded (as compared to the RMB3 million under the prior law).
Notably, the NPC introduced identical changes in China’s Anti-Unfair Competition Law, which protects unregistered trademarks, trade dress, trade names and trade secrets, among other IP rights.
While obviously a positive step forward from a legislative perspective, it remains to be seen whether these changes will have any appreciable, deterrent impact on counterfeiting in China.
The prior law had already provided courts with ample powers to impose high damages awards. But in practice, courts in hot-spot regions, such as Shenzhen, Guangzhou, and Hangzhou (the home-base of Alibaba), have proved very conservative in calculating damages – even in relatively serious cases. Many believe that the conservative approach of courts in these regions is borne of fear that higher damage awards will stimulate IP owners to file large numbers of new complaints – thereby adding further unsustainable burdens to their already-busy dockets.
Disposition of Seized Goods and Production Equipment
The revised law indicates a potential step backwards with respect to the handling of infringing goods as well as the raw materials and production equipment used by counterfeiters to make those fakes.
- In the context of civil proceedings, Article 63 conditions the destruction of counterfeit goods on the filing of a request by the trademark owner. This condition did not exist in the prior law.
- Article 63 now suggests that in “special circumstances,” the court may allow for non-commercial use of counterfeit goods, raw materials and production equipment primarily used to make infringing goods.
Clarification will of course be needed as to the definition and scope of “special circumstances” and the types of non-commercial uses of infringing items that will be permitted.
Future rules will also hopefully clarify whether the foregoing limitations are applicable only to Chinese civil courts, or if they will also be applied by criminal courts and/or administrative enforcement authorities, such as the Market Supervision Bureaux and PRC Customs.
The future Implementing Regulations will likely help to clarify how the revised law will be applied to cases that arise before the effective date of the law.
To the extent changes in the law are deemed a mere codification of existing practice, there is a reasonable chance authorities will apply the new law to any case arising before the effective date which has not yet been finally adjudicated.
Other Enforcement Reforms
Over the last few months, State Administration for Market Regulation (“SAMR”) – which now oversees administrative enforcement of all IP rights – has announced a range of new initiatives to strengthen IP enforcement, particularly in the online context. And SAMR officials are now actively reaching out to associations and individual companies for information on their concerns, including leads into infringement cases. No doubt, the government is planning a new “campaign” to focus its efforts on achieving better results.
But achieving more substantial deterrence against counterfeiting in China will require a wide range of coordinated measures, including:
- More sustained political support for anti-counterfeiting, particularly in hot-spot regions and markets (online and physical);
- More sophisticated and aggressive application of administrative enforcement by local MSBs and that enforcement division of SAMR, particularly in online-related cases;
- Greater training and resources for local public security bureau (“PSBs”); and
- Amendment of the IP provisions with China’s Criminal Code - a controversial topic in China for various reasons.