Good news about bad faith: China amends its Trademark Law

Trademark squatters have been a protracted source of vexation for brand owners in China. The “first-to-file” system has often resulted in trademarks being awarded to first filers, regardless of use, or intent to use. Although the current Trademark Law (TML) does provide methods to fight bad faith trademarks, the narrow interpretation of bad faith, and the need to challenge such marks through lengthy and expensive opposition and invalidation proceedings, has made brand protection difficult in China particularly, for foreign entities. IP theft and infringement have been major contentious issues in the ongoing US-China trade dispute and on 23 April 2019 the Standing Committee of the National People’s Congress approved important amendments to the TML aimed at tackling bad faith applications. 

In fact, the authorities have been stepping up their efforts to prevent trademark squatting for a while now.  The Supreme Peoples’ Court (SPC) indicated its disapproval of bad faith registrations in the landmark Shanyin vs Zhongjun case, decided at the end of 2018, where the SPC indicated that a trademark applicant should possess an “intent to use” and that the stockpiling of a large number of trademarks, without intention to use, may be prohibited under the TML. The amendments will come into force on 1 November 2019 and will allow the rejection of bad faith applications along with sanctions for the bad faith applicants and their trademark agents and enhanced penalties for trademark infringement. 

The good news

Rejection of bad faith applications without intention to use

A new provision has been added to Article 4 of the TML making clear that applications filed in bad faith without an intention to use should be rejected. It is significant that the amendment empowers the China Trademark Office (TMO) to reject bad faith applications at the examination stage and is in line with the recent practice of examiners rejecting bad faith applications on their own initiative.

In addition, violation of Article 4 will be an independent ground for opposition and invalidation. It is important to note that anyone, not just the trademark owner, can initiate proceedings.

Sanctions against trademark agencies

Article 19 of the TML already provides that trademark agencies should not represent applicants if they know, or should know, that the application is being filed by an unauthorised agent or representative, or the mark is the same as, or similar to, the mark of a third party and there is a contractual or business relationship between them. The amendments add a provision that a trademark agency should not represent an applicant if it knows, or should know, that the applicant is acting in bad faith and has no intent to use the trademark.

Article 68 has also been revised to include warnings, fines and other administrative penalties against both bad faith applicants and trademark agencies that assist them for pursuing applications in violation of the law Article 4, which is unique to China.  It also provides that the People’s Court can impose penalties against the applicant and trademark agencies for pursuing “malicious trademark litigation”.

Increased penalties for trademark infringement

A major complaint against China’s IP system is that the damages awarded in IP cases are too small which discourages brand owners from enforcing their rights in the Chinese courts. The amendment to Article 63 addresses this problem by increasing the damages that may be claimed:

  • In case of “malicious” and “serious” trademark infringement, the maximum punitive damages have been increased from 1-3 times the relevant base amount to 1-5 times. The base amount is determined by the actual loss, the infringer’s profits, or reasonable royalty rate.
  • Where it is not possible to calculate the base amount, the maximum statutory damages have been increased from RMB3 million to RMB5 million.

Destruction of counterfeit goods and manufacturing tools

Article 63 now also provides for the compulsory destruction of goods bearing counterfeit trademarks at the request of the trademark owner and, apart from in “exceptional circumstances”, the courts can also order the destruction of tools and materials used predominantly for manufacturing the goods bearing counterfeit registered trademarks. Although Chinese courts do have extensive powers under the Civil Law to grant remedies to eliminate the effects of infringement, which can include ordering the destruction of infringing products and relevant tools, the amendment provides an explicit remedy for brand owners under the TML.   

It remains to be seen how the authorities will interpret the words “exceptional circumstances” but the amendments also address a long-standing concern of trademark owners, by prohibiting counterfeit goods from being put back into commercial channels after removing the counterfeit trademark.

Guidelines to help determine bad faith

The Certain Provisions for Regulating Applications for Trademark Registration (draft) (Draft Provisions), published in February 2019 by the China National Intellectual Property Administration (CNIPA) for public comments, set out guidelines to assist the TMO in identifying and taking action against bad faith applications (described as “abnormal trademark applications” in the Draft Provisions). The following provisions are of particular practical significance:

  • “Abnormal applications” include:
    • applying for trademarks that are widely recognised by the relevant public, or have attained a certain degree of fame, and riding on the goodwill of others;
    • pre-emptively applying for trademarks identical or similar to trademarks belonging to a third party where the applicant knew, or should have known, of the other’s prior rights;
    • applying for an unreasonably  large number of trademarks within a short period of time;
    • repeatedly filing applications with a clearly improper purpose; and
    • applying for trademarks without a real intent to use and without any actual need.   
  • The CNIPA may create a blacklist of bad faith applicants and publish the information on their website.  The CNIPA may also enter the names of the bad faith applicants on the National Enterprise Credit Information Sharing Platform, the backbone of China’s controversial “social credit system” that will rate and impose consequences on citizens’ behaviour.  It is early days as the system is in its testing phase but penalties under the social credit system may be an effective deterrent or, at least, give brand owners additional leverage when negotiating with trademark squatters;
  • Any organisation or individual may report abnormal applications to the CNIPA which appears to encourage the public to petition the CNIPA, but also suggests that brand owners may file reports individually, or through industry groups or associations.  Joint petitions by brand owners may be particularly effective to get habitual trademark squatters put on the blacklist;
  • If the examiners identify a suspicious application, they may require evidence and an explanation from the applicant.  Failure to provide adequate evidence or explanation will result in the rejection of the application.

The Draft Provisions suggest that examiners may (i) refer to the blacklist; (ii) consider petitions filed by third parties; as well as (iii) rely on their own research (e.g. proprietorship searches and internet searches) to filter bad faith applications from genuine ones. 

In addition, the Guidelines for the Trial of Trademark Right Granting and Verification Cases issued by the Beijing Higher People’s Court (Beijing Guidelines) and effective since 24 April 2019, set out a number of bad faith scenarios including:

  • Applying for registration of a trademark  which is identical or similar to a trademark, commercial sign, name of any place, scenic spot, or building, which has a certain degree of reputation or is highly distinctive and the circumstances of the application are serious; and
  • Applying for registration of a large number of trademarks without good reason.

In line with the Draft Provisions, the Beijing Guidelines also provide that an applicant suspected of bad faith, but claiming a genuine intention to use a trademark, needs to present evidence to support such a claim. Accordingly, whilst it remains uncertain whether the Draft Provisions will be promulgated in their current form and the Beijing Guidelines are not legally binding, both should be highly relevant to the application of the revised TML.

What does this really mean?

In the past year, the TMO has already been proactively rejecting trademarks that have obviously been filed in bad faith. The current amendments to the Trademark Law, combined with Draft Provisions and the Beijing Guidelines, are a welcome sign that China is formalising the legal standards and basis for rejecting bad faith applications.  

However, the possibility of applicants being required to show an intention to use, especially where there are multiple applications, could have implications for brand owners.  It is not clear what kind of evidence may be required but, after the amended law comes into force, it may be difficult for legitimate brand owners to file widely for defensive purposes. In particular, applications in all 45 classes may come under scrutiny.  However, it is hoped that effective implementation and enforcement of the new law will reduce the need for defensive applications. 

It is implicit in the revised TML that the TMO will conduct preliminary vetting to identify and reject bad faith applications during the trademark examination process. However, it will be important for brand owners to use watch services to proactively monitor the Chinese register in order to report bad faith applications promptly to the TMO so that the applications may be rejected at an early stage. 

Warning letters should also be sent to trademark squatters and their agents to put them on notice so that it will be easier to establish bad faith.

With regard to requesting the compulsory destruction of infringing goods, brand owners should note that the amended law refers to goods bearing counterfeit registered trademarks which suggests that there needs to be an identical mark on identical goods. This makes the remedy more narrow than would first appear. The emphasis on “registered” trademarks also means that unregistered well-known marks should not be covered by this provision. These issues may be further clarified by the implementing regulations. 

Conclusion

There are still many uncertainties in the practical implementation of the amendments but the changes are positive for both domestic and foreign brand owners and we are cautiously optimistic that they will help to deter bad faith applications in China.