Chinese IP Agency Sanctioned for Acting for Trademark Hijackers

Brand owners in China continue to grapple with recurring problems of trademark squatting, hijacking, and infringement. Some malicious trademark agencies employ complex strategies to assist individuals or entities acting in bad faith to exploit the reputation and goodwill of established brands. Seeking to profit at the expense of brand owners, these bad actors engage in bad faith filings and instances of coercion, subterfuge, and abuse of the corporate form. In a recent judgment by the Zhejiang High People's Court (“Zhejiang Court”), issued in respect of a trademark infringement lawsuit brought by a well-known Chinese cashmere products brand (“Plaintiff”), two trademark agencies found themselves among the defendants (“Defendants”). The Zhejiang Court found that the trademark agencies used their agency services to plan, organise, and lead infringing activities and accordingly held them jointly and severally liable for trademark infringement. This decision demonstrates China’s efforts to combat trademark agencies filing bad faith registrations.

Background

In December 2022, the Plaintiff commenced proceedings before the Hangzhou Intermediate People’s Court, alleging that the Defendants infringed its well-known King Deer / 鹿王(“King Deer” in Chinese) trademarks (“Plaintiff's Trademarks”). Among other things, the Plaintiff claimed that two Chinese trademark agencies should be held jointly liable for their roles in registering and managing the allegedly infringing trademarks (“Infringing Trademarks”). On 26 April 2024, the Zhejiang Court affirmed the decision of the Hangzhou Intermediate People’s Court and found in favour of the Plaintiff.

We set out the parties involved and their roles in this case:

Plaintiff:  Inner Mongolia King Deer Cashmere Co. Ltd. which is the owner of a series of well-known trademarks for King Deer / 鹿王(“King Deer” in Chinese).

1st Defendant:  Beijing Xiruan Zhigu Intellectual Property Agency Co., Ltd. (“Xiruan Zhigu”) which provided trademark agency services to the 6th and 7th Defendants. Xiruan Zhigu assisted with transferring one of the Infringing Trademarks "达鹿王" from the hijacker 2nd Defendant to a newly established Hong Kong company, HK Sky, and subsequently the 7th Defendant. Xiruan Zhigu also assisted with registering three other Infringing Trademarks in the name of HK Sky.

2nd Defendant:  Tongxiang City Caifutong Trademark Agency Co., Ltd. ("Caifutong") which registered “达鹿王” in 2012 and transferred “达鹿王” to HK Sky in 2021. Caifutong also authorized the 3rd and 4th Defendants to use “达鹿王” for business operations in China.

3rd Defendant:  Hangzhou Henglu Clothing Co., Ltd (“Henglu”) which was authorized by the 2nd Defendant to use “达鹿王” and set up shops with the same name in China (“Shops”). Henglu was the distributor of products bearing the Infringing Trademarks.

4th Defendant:  Hangzhou Maikai Clothing Co., Ltd which was authorized by the 2nd Defendant and was also a distributor of the products bearing the Infringing Trademarks.

5th Defendant:  Mr/Ms Ye who was the sole shareholder and legal representative of the 3rd Defendant, as well as the director of HK Sky. Mr/Ms Ye was entrusted by the 6th and 7th Defendants to be responsible for the actual business operation of the Shops.

6th Defendant:  Mr Shang who was the business owner of one of the Shops.

7th Defendant:   Ms Yao who was the spouse of the 6th Defendant. The Infringing Trademark “达鹿王” was transferred from HK Sky to Ms Yao in 2022.

The Zhejiang Court’s Findings

After comparing the Infringing Trademarks and the Plaintiff’s Trademarks, the Zhejiang Court found that the use of the Infringing Trademarks constituted trademark infringement and unfair competition. The issue then arose as to the extent to which each Defendant was to be held liable for such infringement.

Pattern of Infringement

The infringement scheme was as follows. First, the 1st Defendant assisted the 6th and 7th Defendants with incorporating HK Sky which then became a vehicle for the infringing activities. Second, the 1st Defendant purchased the hijacked “达鹿王” trademark from the 2nd Defendant and transferred it to HK Sky, granting HK Sky the exclusive right to use “达鹿王” during the transfer period. Third, the 1st Defendant applied for the other Infringing Trademarks to be registered in the name of HK Sky. On its part, the 2nd Defendant also authorised the 3rd and 4th Defendants to use “达鹿王” for business operations in China.

The Zhejiang Court found the 1st Defendant to have systematically planned, organised, and implemented the infringing activities. In so doing, the Zhejiang Court drew parallels to another case in May 2020 before the Hangzhou Xihu People’s Court in which the Plaintiff sought to enforce its “九色鹿王” ("Jiuse Luwang" in Chinese) trademark against the 6th Defendant (Mr Shang), Hong Kong Jiuse Luwang Group Garment Co., Ltd (“HK Jiuse Luwang”), and others (“Jiuse Luwang Case”). The 1st Defendant was not named in the Jiuse Luwang Case but was implicated as it had provided agency services to the 6th Defendant, assisting with the incorporation of HK Jiuse Luwang and registrations of the infringing trademarks in the name of HK Jiuse Luwang. The Zhejiang Court also noted that the 6th Defendant (and also the 7th Defendant) re-engaged the 1st Defendant shortly after the Jiuse Luwang Case and that HK Sky and HK Jiuse Luwang shared the same registered address.

In the circumstances, the Chinese Court agreed with the Hangzhou Intermediate People’s Court and found there was a pattern of infringement in relation to the 1st Defendant’s conduct and its provision of agency services – specifically, it established Hong Kong shell companies to hold infringing trademarks and had Chinese distributors authorised to use these infringing trademarks for business operations in China, generating illegitimate gains.

Liability of Trademark Agencies

The Zhejiang Court determined that the 1st Defendant played a leading role and was liable for trademark infringement on the following grounds:

• The 1st Defendant planned and participated in the infringing activities, violating the principle of good faith under the Trademark Law. As a professional agency, the 1st Defendant was obliged to deliver its services in full compliance with the relevant legal requirements and the principle of good faith. The 1st Defendant was expected to have high professional standards and was held to a greater duty of care in assessing potential trademark infringement.
• The 1st Defendant should have conducted trademark searches and preliminary reviews when accepting the commission from its clients. Indeed, having offered similar services in the Jiuse Luwang Case and seen its outcome, the 1st Defendant knew of the popularity of the Plaintiff’s Trademarks and the high likelihood that its conduct amounted to trademark infringement. Yet, the 1st Defendant persisted in offering its agency services and, in so doing, deviated from standard or lawful trademark agency operations.

As for the 2nd Defendant, the Zhejiang Court held that its registration of “达鹿王” was in bad faith, and therefore not subject to the five-year statutory time limit for invalidation. The 2nd Defendant had applied for numerous registrations of trademarks containing the words “鹿王”, including “达鹿王” in Class 25. The Zhejiang Court held that the applications amounted to trademark squatting in that they were “not in good faith with the intent to use” and rather attempts to free ride on the Plaintiff's goodwill. This was especially since the business scope of the 2nd Defendant did not cover Class 25.

The Plaintiff did not provide evidence to prove its economic loss or the Defendants' illegal gains. Nevertheless, the Zhejiang Court ordered the Defendants (including the 1st Defendant) to pay RMB1,000,000 (approx. USD141,000) as compensation for the Plaintiff's economic loss and reasonable expenses incurred on evidence collection and legal fees. For its part, the 2nd Defendant was held jointly and severally liable to pay a portion of the compensation ordered, capped at RMB800,000 (approx. USD113,000).

Conclusion

The ruling of the Zhejiang Court sends a clear message to trademark agencies – those who act for the trademark squatters/infringers may be held liable for infringement. With China’s ongoing efforts to crack down on trademark hijackers and trademark squatting, pursuing legal action against trademark agencies which play a substantial role in infringement schemes is proving to be an effective tool to combat these recurring issues.

The ruling should also be viewed in light of proposed amendments to China’s trademark law in 2023, aimed at combatting trademark squatting and other bad faith filing behaviours by, for example, introducing financial penalties for such conduct and providing avenues for recourse in Chinese Courts. Overall, brand owners may shift from a reactive approach to a more proactive stance in addressing persistent unscrupulous trademark hijackers. On the flip side, it will be interesting to see to what extent the trademark agencies should take a duty of care in assessing the potential infringement in their agency services.

The authors would like to thank Roslie Liu, Intellectual Property Officer at Mayer Brown, for her assistance with this article.