As known as the “corporate veil”, the legal personality of a company of limited liability is separated from the personalities of its shareholders, which protects shareholders from being personally liable for the company's debts and other obligations. However, this is not always the case. In Siemens Vs. Xinchang Siemens, etc. in relation to trademark infringement [case number: (2016) Zhe Min Zhong No. 699], Zhejiang Province Higher People’s Court held that, the shareholders of limited companies, especially legal representatives, may take the companies as a tool or facade to conduct infringement, obtaining unjust benefits by controlling the companies and escaping tort liability by utilizing the corporate veil. This situation mostly occurs at the source of infringement, namely, manufacturers of counterfeits, which greatly damages the interests of intellectual property holders and violates the generally accepted principles of good faith and business ethics.
Jiangsu Higher People’s Court also held that the corporate veil can be pierced under certain circumstances, meaning that legal representatives can be held jointly liable with their company. In this case [case number: (2015) Su Zhi Min Zhong No. 179], Sakura Bath & Kitchen Products(China) Co., Ltd.(hereinafter referred to as “Sakura”), the holder of the registered trademark “樱花Sakura” (No.1209675) in China, sued Suzhou Sakura Technology Development Co., Ltd. and other two companies with “Sakura” as their company names, as well as the two legal representatives of the three companies, for unfair competition and trademark infringement.
In its second-instance judgment, Jiangsu Higher People’s Court ruled that the use of “Sakura” as trade names and trademark by the three companies infringed upon Sakura’s trademark rights and constituted unfair competition. Furthermore, the court also ruled that the legal representatives of the companies shall be held jointly liable with their companies for trademark infringement and unfair competition.
The court applied Article 8 of China’s Tort Law about the joint liability and based its finding on evidence of intentional and malicious infringement by the legal representatives. The court emphasized that, one of the legal representatives set up new companies with “Sakura” as the company names after its former company had already been punished for infringements of Sakura’s trademarks in an earlier case heard by the same court; the other legal representative ever filed trademarks similar as Sakura’s trademarks but cancelled by the TRAB which proved the other legal representative also had full knowledge about Sakura’s trademarks. Besides, the legal representatives had significant control on their companies for they owned 90% of the shares in the companies and therefore could be held accountable for the infringement committed by their companies. Further, the main business conducted by the companies had been involved in infringement activitiesconsisting of counterfeiting Sakura’s marksall the timesince their incorporation for which the legal representatives shall be responsible. For the above reasons, the court ruled that the companies and their legal representatives had committed joint infringements, and should therefore be held jointly liable for the damages granted, i.e. RMB 2 million (about USD 320,000).
This case seems to have expanded the scope of the joint liability of the shareholders, but it is generally seen as a part of a continuing positive development for trademark enforcement in China and a milestone in protecting trademark rights, for it apparently offers an encouraging new enforcement approach against infringers in China, who have traditionally hidden behind a string of maliciously set up companies and abused the corporate veil to escape direct liability.
This case is of typical significance in a bid to prevent the infringement at the source. The corporate veilpiercing could in fact efficiently tackle the “cat and mouse” scenario: this judgment may encourage both trademark owners and courts to take a more aggressive avenue against trademark infringements with much more deterrent effect, in whichboth the infringing company and the mastermind behind the scene can be targeted at the same time, where it requires the trademark owners to investigate and collect sufficient evidence showing that the culpable individuals were independently and actively involved in the infringing activities, or that thelimitedcompanies were just a façade for infringing activities.