Some online infringers sell a mix of counterfeit and genuine products as a cover for their infringing activity. Not only is this frustrating, it can also cause significant issues for rights holders, as it enables the infringer to circumvent their anti-counterfeiting efforts by making use of their genuine products.

Facts

In early 2014 a number of rights holders met with Alibaba to address the issue of online sellers offering counterfeit products on Alibaba's website 'Tmall.com'. Tmall organised an anti-counterfeiting campaign by making purchases from random Tmall stores and sending the samples to the rights holders for authentication. The products from four stores were confirmed by the rights holders to be counterfeit, after which Tmall shut down the relevant online stores and kept their guarantee deposits.

In June 2014 three online sellers filed civil litigations against one rights holder on the ground of unfair competition:

  • claiming that the brand owner, by making a false statement, had unfairly jeopardised their businesses; and
  • seeking damages.

To prove that the statement had been false, the online sellers supplied source evidence for some genuine versions of the counterfeit products. They challenged the lack of notarisation in the Tmall purchase process and accused the rights holders of having switched the samples sent by Tmall.

The rights holder suggested a stay of proceedings so that independent infringement actions could be launched against each of the online sellers. Two of the online sellers, for fear of being sued, withdrew their cases, while the third, Shunfa, persisted.

Shunfa's case was dismissed in November 2014 after a hearing in which it was demonstrated that Shunfa did not qualify as a 'plaintiff' under the Anti-unfair Competition Law, as it was not in a competitive relationship with the rights holder.

However, Shunfa persisted and in August 2015 filed a non-infringement lawsuit against the rights holder based on the same evidence and the same claim of sample switching. This time, there was no possible argument as to the qualification of Shunfa as a plaintiff.

The rights holder filed an infringement counterclaim, in which it requested that the court order the full disclosure of the sales records for Shunfa's store on 'Tmall.com'. By comparing the total amount of sales of the products in question with the small amount of products for which Shunfa was able to supply evidence of a legitimate source, the rights holder identified a substantial gap between the two which fully justified the trademark infringement.

Settlement

At the end of 2016, faced with having to pay substantial damages, Shunfa finally surrendered and reached a settlement with the rights holder by withdrawing the non-infringement case and paying reduced (but still substantial) damages.

Comment

When faced with similar behaviour by infringers, rights holders should challenge the plaintiff's qualification in case the claim is based on unfair competition and consider a counterclaim strategy based on the inconsistency between the total amount of the sales and the amount that can be supported by legitimate source evidence.

In general, it is unwise for a party simply to accept an infringer's argument and entangle itself in a defence on that basis – only by looking outside the scope of an infringer's claim and proving the existence of infringement (ie, by suing directly or requesting the disclosure of the relevant sales record) can such a problem be solved.

For further information on this topic please contact He Wei at WAN HUI DA - PEKSUNG IP Group by telephone (+86 10 6892 1000) or email (hewei@wanhuida.com). The WAN HUI DA - PEKSUNG IP Group website can be accessed at www.wanhuida.com and www.peksung.com.

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