China: Filing Trademark Applications in Bad Faith May Alone Constitute Unfair Competition

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Recently, a Chinese court confirmed for the first time in Emerson Electric Co. c. Xiamen Water Angels Drinking Water Equipment Co.Ltd. and others that simple trademark squatting may constitute an act of unfair competition against a trademark owner. Case Reference (2021) Min Min Zhong 1129. Previously, a finding of unfair competition required misleading use of the misappropriated trademark or involved filing a malicious complaint or infringement action against the true owner of the trademark. Mark.

Background to the case

Emerson Electric Co.’s (“Emerson”) “In Sink Erator” food waste disposers are popular around the world, including China. The “In-Sink-Erator” trademark was first registered in China in the 1990s and was followed by several other trademark registrations incorporating “In-Sink-Erator” and/or its Chinese character version.

Since 2010, Xiamen Water Angels Drinking Water Equipment Co. Ltd. (“Water Angels”) has applied for registration of over 20 marks incorporating the mark “In-Sink-Erator”. The application was filed through Xiamen Xingjun IP Firm (“Xingjun IP”), a trademark agency. The Chinese company also applied for registration of other famous third-party trademarks, such as DOW, CALGON and DJI ( a well-known Chinese brand for drones) Mr. Wang, the legal representative of Water Angels, applied in his personal name to register “iphone” and others through Xingjun IP.

Emerson has filed oppositions, sought invalidations, and pursued administrative remedies in an attempt to prevent registration of the Water Angels marks. But Mr. Wang set up another company (Xiamen Ocean-Accepts-All-Rivers Network Technology Co. Ltd. – “OAA-Rivers”) in 2015, and using the same agent, Xingjun IP, applied to register more 20 “In-Sink-“Erator” brands since 2017. Emerson again opposed the nominations.

Facts of the case

In March 2020, Emerson filed a lawsuit in the Xiamen Intermediate People’s Court, naming Water Angels, OAA-Rivers, Mr. Wang and Xingjun IP as defendants. She asked the court to declare that the conduct of the first three defendants in filing the motions, and the conduct of the fourth defendant in the hearing, constituted unfair competition. Prior to the trial hearing, Water Angels and OAA-Rivers removed or revoked all of their affected marks.

In April 2021, the court issued its judgment finding that the serial attempts to misappropriate the trademarks constituted unfair competition and that the two companies and their de facto controller, Mr. Wang, had jointly committed an infringement. In addition, Xingjun IP knowingly facilitated the infringement. The court ordered the four defendants to cease seeking registration of marks identical or similar to Ermerson’s trademarks and to indemnify Emerson for its attorneys’ fees and reasonable expenses incurred, and to publish a statement in the national media to eliminate the impact of the offence.

The four defendants appealed this decision to the Fujian Province Higher People’s Court. In September 2021, the Court of Appeal issued its decision, confirming the first instance verdict. The verdict of the second trial was made public in June 2022.

The main issues of the case

1. Is the simple “grabbing” of a trademark an act falling within the jurisdiction of the anti-unfair competition law?

Water Angels and OAA-Rivers argued that they were only engaged in filing applications, an act to initiate administrative proceedings, and that all trademarks had been revoked or withdrawn. None of the trademarks had been put to use and carried on no commercial activity. There was therefore no confusion for consumers or disruption of Emerson’s business operations. As such, their actions should not be subject to the law against unfair competition, nor should they be listed among the acts of unfair competition listed in the law.

However, the courts held that the two companies, by registering numerous identical or similar marks, had forced Emerson to defend its legitimate rights and interests by initiating multiple trademark oppositions, nullity petitions, administrative disputes and civil proceedings, and this doing so, she had incurred significant cost. The trademark filings by the defendant companies had interfered with Emerson’s operations to a significant extent and could therefore be considered to constitute unfair competition.

2. Can the company’s legal representative become co-infringer with the company?

Mr. Wang, the legal representative of Water Angels and OAA-Rivers, argued that he did not seek registration of the In-Sink-Erator related marks in his own name and therefore did not not committed joint infringement, and that the companies had their own independent legal personality. Therefore, companies are responsible for their actions, but the legal representative should not be held jointly and severally liable.

The court held that Mr. Wang, in addition to being the legal representative of the two companies, was also the executive director and general manager, major shareholder and de facto controller of the two companies. Also, after the claims made by the first company were found to be illegal, he then created the second company to prosecute the trademark impersonation attempts. He knew about the violation and intentionally used both companies as tools to carry out the violation. He was therefore a co-author of the offense and should be held jointly and severally liable.

3. Can a trademark agency become a co-infringer following the filing of trademark applications for its clients?

Xingjun IP argued that its acts of filing applications for a client were not illegal and that it was unaware that the principals were involved in trademark squatting. Thus, he did not breach any agency’s good faith obligations and should not be held liable for the breach.

The courts, however, found that Xingjun IP accounted for the vast majority of the two defendant companies’ infringement claims and continued to file infringing trademark claims for the companies even after the acts were found illegal in administrative proceedings. previous. Therefore, his acts of representing both companies constituted acts of facilitation of infringement and should give rise to joint liability for infringement.

This seems to be the most controversial conclusion of the case. After the verdict was made public, it sparked a heated debate among other trademark professionals.

Recently, brand squatting activities have become more sophisticated. These squatting activities may involve different companies controlled by the same group of people with the involvement of intellectual property professionals targeting specific brands. Due to the relatively low cost of filing trademark applications and the lack of an obligation for an applicant to defend or substantiate their claim if challenged, it is increasingly common for squatters to choose not to respond. to disputes presented by trademark owners, but simply to reapply immediately for the registration of the same trademarks. As a result, trademark owners are often caught in the position of dealing with endless infringing applications and incurring considerable time and expense.

The judgment in this case characterized the act of ‘grabbing’ of the mark as unfair competition against the right holder and appropriate remedies were imposed. This groundbreaking decision could help deter trademark theft and cool the phenomenon of squatting, while encouraging more trademark owners to actively defend their rights.

Although the decision in this case has generated debate and controversy among trademark professionals due to fears that filing applications for clients may create liability, it should not have an undue impact on reputable agencies who choose to respect the code of professional ethics.

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