New Development in Combating Trademark Squatting in China: Taking the Squatters to Court for Bad Faith Filings

Bad faith filings have always caused disruption to the business plans of brand owners, and traditionally, brand owners may only try removing the same by administrative actions or even buying back.  Even if the brand owners succeed in the administrative actions, no costs could be claimed from the squatters.  This makes bad faith filings to be low costs activities with no adverse costs consequences, but instead may bring “returns” as brand owners may be forced to buy back for furtherance of their imminent business plans.

A good news for brand owners is that there is now a trend for the Chinese courts to recognize bad faith filings actionable under the Anti-Unfair Competition Law, meaning that apart from challenging and removing the bad faith filing through administrative actions, it may be possible for brand owners to take the squatters to court for seeking loss and damage as a result of the squatters’ bad faith filings.

The tradition position: business activities required to constitute unfair competition

Under Article 2 of the Anti-Unfair Competition Law of the People’s Republic of China (“AUCL”), “act of unfair competition” is defined to mean an act of a business operator, which in its production or business activities, disrupts the order of market competition and causes damage to the lawful rights and interests of the other businesses or consumers, in violation of the AUCL.  Article 6 of the AUCL further lists specific types of acts which constitute acts of unfair competition, and they all relate to acts leading the others into believing that a commodity is one of or otherwise connected to another person.

However, many squatters usually may only make pre-emptive filings with the intention to sell them back to the legitimate brand owners for a profit, and may not engage in actual business activities under the bad faith filings at all. Traditionally, such mere act of trademark filings would generally be insufficient to be considered as an act of unfair competition.

Brand owners therefore have to resort to administrative actions, such as opposition, invalidation and non-use cancellation to challenge and remove the bad faith filings.  However, it may take time before the administrative actions could finally be resolved (the squatters may exhaust the review procedure, together with two instances of appeals, to keep the bad faith filings alive for a longer period of time).  Further, even if the brand owners succeed in the administrative actions, under the current legal framework, no costs can generally be claimed by the brand owners.  This keeps the costs of squatters low in bad faith filings, in contrast to the time and costs to be spent by the brand owners in tackling this problem.

The shift in position: bad faith filings and malicious administrative actions constituting acts of unfair competition

It is therefore a welcoming development that the Chinese Courts have start recognizing bad faith filings to be an act of unfair competition actionable under the AUCL.

The BRITA case

In Brita GmbH v. Shanghai Kangdian Industrial Co., Ltd[1] (the BRITA case), the Shanghai Minhang District People’s Court ruled that squatter’s filing of bad faith applications and malicious administrative actions may constitute acts of unfair competition in breach of the AUCL.

As a background, the Plaintiff registered its first “BRITA” trademark in 1993 and “碧然德 (the Chinese translation of BRITA)” in 2010 in China. The Plaintiff started selling water filters in the Chinese market since 2008.

The Defendant was a squatter which sold and promoted counterfeit water filters using marks identical or similar to the Plaintiff’s trademarks and trade name.  In addition, the Defendant filed numerous trademark applications relating to “BRITA” English and Chinese marks, and even filed opposition and invalidation actions against the Plaintiff’s trademarks applications and registrations, as an attempt to delay or otherwise interfere with the operation of the Plaintiff.

While the Plaintiff successfully opposed/invalidated the Defendant’s marks and defended the administrative actions launched by the Defendant, a vast amount of time and costs were expended by the Plaintiff.  The Plaintiff therefore took the Defendant to court for both trademark infringement and engaging in conduct constituting unfair competition.

The Court ruled in favour of the Plaintiff.  It is noteworthy that the Court held that the Defendant’s bad faith filing activities and abuse of the administrative proceedings constituted acts of unfair competition in breach of the AUCL.

The Court pointed out that although commercial entities are entitled to file trademark applications, oppositions and invalidations, they must legitimately exercise such rights and should not use the same for illegal purposes.  While the Court stated that the filing of bad faith applications and lodging of malicious administrative actions were not expressly specified under the AUCL as acts of unfair competition, they violated the good faith principle and business ethics, and disrupted the order of market competition as stipulated under Article 2 of the AUCL.  In deciding the damages to be awarded to the Plaintiff, the Court explicitly took into account the loss suffered by the Plaintiff due to the Defendant’s trademark squatting activities.

Significance of the BRITA case

One step further: bad faith filings alone constituting acts of unfair competition

In a recent case of Emerson Electric Co. v. Xiamen Anjier Water Angel Drinking Water Equipment Co., Ltd and others [2](The In-Sink-Erator case), the Xiamen Intermediate People’s Court held, and the Fujian Higher People’s Court affirmed, that mere trademark squatting activities violated Article 2 of the AUCL.

The In-Sink-Erator case

The Plaintiff first registered its ‘IN-SINK-ERATOR” mark in China back in the 1990s.  The Defendant was an aggressive squatter, and the Defendant and its affiliated companies filed hundreds of trademarks that are identical or similar to famous brands, among which 48 trademarks were imitations of the Plaintiff’s trademarks.

The Plaintiff filed numerous administrative actions, including oppositions, invalidations and administrative appeals to combat the Defendant’s malicious filings.  That said, the Defendant continued to make further bad faith filings even after the Court found in an administrative appeal that its activities constituted bad faith squatting.  The Plaintiff thus commenced court action against the Defendant based on AUCL.

The Court ruled that the Defendant’s trademark squatting activities violated Article 2 of the AUCL. The Defendant’s affiliated companies, legal representative and trademark agency were also held liable for assisting in the Defendant’s squatting activities.

There was no evidence suggesting that the Defendant had used the Plaintiff’s trademarks on its goods or services (therefore no actual business activities), and the Court also recognized that mere bad faith squatting activities are not specifically listed under the AUCL.  That said, the Court still ruled that the Defendant’s ongoing bad faith filings directly infringed upon the prior rights of the Plaintiff, disrupted the Plaintiff’s business operations to a material extent and damaged the Plaintiff’s legitimate rights and interests.  The aforesaid was held to have constituted unfair competition under Article 2 of the AUCL.

The Court awarded damages in the amount of RMB1,600,000 (approximately USD250,000) to compensate the Plaintiff’s loss and damages.  The Defendant was also ordered to issue a public statement to rectify the negative effects caused by its squatting activities.

Key Takeaway

For safeguarding their legitimate intellectual property rights, brand owners are often left with no choice but to spend huge amount of money and time in lodging endless administrative actions against the bad faith filings made by squatters.  Brand owners may even be dragged into the battlefield by aggressive squatters initiating malicious administrative proceedings against their trademark applications and registrations.

This new development is highly encouraging as it offers a new approach where the brand owners may take the squatters to Court directly under the AUCL in resolving the issue once and for all (instead of commencing numerous administrative actions) and possibly recovering loss and damage from the squatters, which would include the costs so spent.  It is also to be hoped that the recent court rulings may have a deterrent effect on squatters as the squatting activities would now bring adverse costs consequences.  This development is also in line with the reforms taken by the Chinese government in actively tackling bad faith filings and combating trademark squatters, and we will keep you posted of any further advancement in assisting the brand owners in entering/developing in the Chinese markets.

© Vivien Chan & Co., Newsletter issue 11, November 2022

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Vivien Chan & Co. is a full-service law practice with offices in Hong Kong (1985) and Beijing (1993). We are consistently recognized as a premier law firm for and in Greater China. With over 35 years of doing business in Greater China, our Hong Kong and China teams have an in-depth understanding and knowledge of the legal culture and market dynamics.