A Crushing Defeat for Trademark Trolls

August 21, 2019

A troll is essentially a monster who lives under a bridge and extracts a fee from anyone who attempts to cross the bridge. Trademark holders that do not use a mark in conjunction with the actual sale of goods or services, but that instead generate or attempt to generate the majority of their earnings by enforcing their trademarks through malicious litigation are commonly defined as “trademark trolls.” For years, trolls have applied to register trademarks in China that are created, used and advertised by brand owners in other parts of the world with the purpose of forcing the brand owners to either purchase the marks from them or be sued for infringement and shut out from the Chinese market. The China Supreme Court struck a heavy blow to trademark trolls in its Uniqlo judgement with a finding that bad faith trademark holders and the malicious litigations they initiate won’t be supported by the court. Destined to be one of the landmark trademark rulings that could change the landscape of trademark law, the Uniqlo judgment sends a strong and positive message to brand owners who used to tangle with trademark trolls and lost the battle — maybe it is time to file for retrial? To those who currently fall victim to trademark trolling, this judgment from the China Supreme Court could be the turning point where the momentum is shifted to their side.

Basic Facts

Two Chinese companies rushed to register the “UL” mark in China, a mark used and advertised by Uniqlo on its down products in overseas markets and in China. The two trademark holders filed a series of lawsuits against Uniqlo in many Chinese cities to seek injunction against the use of the mark by Uniqlo stores and also to claim damages and legal expenses. The judgments by courts of the first instance3 and second instance4 recognized the plaintiffs’ trademark rights and confirmed that such rights had been infringed by Uniqlo, but the courts refused to award any damages or legal expenses to the plaintiffs on the grounds that the plaintiffs acted in bad faith and that there was no economic loss because the plaintiffs’ registered trademark had never been put into commercial use.

Dissatisfied with the fact that the courts nevertheless confirmed infringement in this case, Uniqlo filed a retrial petition to the China Supreme Court. The Supreme Court accepted the retrial petition and granted a permission. Then the case made its way to the nation's highest court.

Supreme Court’s Judgment

When hearing this case, the China Supreme Court determined that the following elements constituted bad faith on the part of the plaintiffs:

  1. The plaintiffs had obtained and maintained many trademark applications/registrations — there were more than 2600 trademarks under the plaintiffs’ name.
  2. The plaintiffs demonstrated no intent to use their marks. Instead, they operated a website touting for sale of their marks.
  3. The plaintiffs offered to sell the “UL” mark to Uniqlo for RMB 8 million.
  4. After Uniqlo refused to accept the offer, the plaintiffs filed a series of lawsuits against Uniqlo, showing an attempt to force Uniqlo back to the negotiation table.
  5. The “UL” mark of the plaintiffs’ was later cancelled by a judgment5 made by the Beijing High Court where it was characterized as a bad faith trademark.

In the end, the China Supreme Court handed down the following judgment:

“[T]he plaintiffs’ suing of Uniqlo constitutes malicious litigation that won’t be supported by this court. … Honesty and credibility should be the baseline for all market participants … It is an abuse of rights where one maliciously obtained a right and exercised it in a way that would violate the intent and spirit of law, hurt others’ legitimate rights, and shatter the functioning market competitive environment …The plaintiffs were trying to obtain unjust gains by utilizing the judicial resources … Such act won’t be supported by this court.”

Why is the Uniqlo judgment important?

1. “First to file” leaves the door open to trolling activities

With regard to trademark registration, China adopts a traditional “first to file” system, meaning whoever files first secures the trademark registration. By taking advantage of this system, trolls register marks identical with or similar to other’s brands without intending to use them and then threaten to sue the actual brand owners who use those marks.

At the court level, trolls initiate infringement litigations against brand owners to stop them from using their own brands in China. At the administrative level, troll applications stand in the way of brand owners’ applications.

It is usually very difficult to overcome the citation of the troll applications because evidence of use is required by the trademark authorities to show that one’s mark has generated certain influence in China through commercial use before the filing of the cited mark. Such evidence is often hard to collect. The truth is simple: the trolls squat on the brand owners’ marks before the latter ever lands on the Chinese market. When the actual brand owners try to tap the Chinese market, they find their marks already hijacked. It is therefore difficult to produce evidence of use predating the filing of the trolls’ mark in China. If the brand owners are able to produce evidence of use, the date of use tends to be very recent and in doing so, the brand owners might face claims of infringement by the trolls.

Historically and systematically, trademark trolling is a headache to brand owners who enter China or who contemplate doing so but then find trademark trolls blocking the way.

2. Trolls used to gain the upper hand

The Uniqlo case is one of the very few occasions that a Chinese court denied enforcing a trademark holder’s right in a registered trademark. Previously, some courts in China made judgements that they wouldn’t be proud of now — in these judgments, harsh enforcements of trolls’ registered trademark rights were upheld and enormous damages were awarded to the trolls.

The French winery Castel Frères SAS, for example, was sued over the use of the Chinese name of CASTEL, a name commonly used by Chinese consumers to address the brand name CASTEL in Chinese. The registration for this name was held by a Chinese business man who obtained it through assignment. CASTEL eventually lost the suit and was ordered to pay an astonishing amount in damages to the plaintiff — RMB 33.73 million (about US$5.11 million).6 After retrial, the China Supreme Court affirmed the lower court’s finding of infringement, but decided to substantially cut the damages down to the then statutory damages — RMB 500,000 (about US$76,000).7

There was another sad story: New Balance China (Trading) Co., the Chinese affiliate of New Balance Athletic Shoe Inc., was ordered to pay RMB 98 million (about US$16 million) to an individual for infringing his registered BAI LUN and XIN BAI LUN Chinese trademarks. New Balance China (Trading) Co. was accused of using the XIN BAI LUN name to promote New Balance’s sneakers, a name that the company’s general distributor in China had registered as its trade name before the registration of the plaintiff’s BAI LUN and XIN BAI LUN trademarks. New Balance China (Trading) Co. claimed that it was the first one to put such name into commercial use in China and that the plaintiff acted with malicious intent to acquire high gains through litigation. However, the court rejected such arguments and awarded a substantial RMB 98 million judgment8 in favor of the plaintiff. After appeal, the second instance court upheld the lower court’s finding of infringement, but eventually decided to reduce the damages to RMB 5 million (about US$760,000).9

These judgments, with the glittering award of damages, have perhaps provided an incentive for trademark trolling activities, allowing trademark squatting and trolling to become prevalent. By merely taxing others who actually use the trademark to provide goods or services to the public, the trademark trolls made good fortunes. In the meantime, the courts’ ignorance of the bad faith elements on the part of the trolls caused a chilling effect on the actions against the trolls. Hijacked businesses tended to give up when held up by trolls — they either considered rebranding or paying the ransom instead of relying on legal procedures to claim back their name.10

3. The Game Changer

On-the-rise trolling activities, the perceivable destructive effects of such activities on foreign businesses and the domestic market, and increasing concerns from the public put China under pressure to reform the system. The 2013 amendments to the China Trademark Law showed the reflection on the system by the law makers — the amended trademark law provided exemptions from the liability to compensate infringement of a registered trademark, including in situations where “the owner of the registered trademark is neither able to prove its actual use of the registered trademark in the last three years (prior to the litigation) nor able to prove that it has suffered other losses from the infringement.” Though this is a much-welcomed change, the trademark trolls could continue to levy a fee across the negotiating table, if not from the damages awarded by the court, as long as the trolls maintain the right to seek injunction against the use of the hijacked mark.

The ruling in the Uniqlo case could be a real game changer, which would wind up having a significant effect on the trademark trolling problem in China. The rule set by the Supreme Court in this case is that enforcement of a trademark troll’s registered mark will not be supported in every aspect — no infringement found, no damages awarded and no injunction granted. Losing the enforceability of their registration literally means that the trademark trolls no longer have the ability to extract a fee from others, which could effectively stifle the development of trademark trolling activities in China.

Keeping pace with the Supreme Court, the legislative enacted critical amendments11 to the China Trademark Law in April 2019 that were set to address bad faith trademark registration. Under the 2019 amendments, if an individual, company or organization files a malicious trademark application without an intent to use the mark, the application shall be rejected and also constitutes a ground for opposition and invalidation. The amendments further provide that if trademark agencies know or should have known that their client is filing a malicious trademark application without an intent to use the mark, the trademark agencies should decline to file the application for their client or they will be subject to fines. Furthermore, malicious trademark applications are punishable by the administrative authorities and malicious trademark litigations are likewise punishable by the courts.

Though it remains unclear how intent to use a trademark could be supported by demonstrable evidence, the addition of a use requirement is a step in the right direction — it adds difficulty to trademark squatting and therefore provides a deterrent for trademark trolls.

Practical Tips on Fighting Trolls

If your business falls prey to a troll, here are some practical tips: 

  • A proactive strategic filing program is the best way to ward off trolls, seeking registration for all relevant goods and services.  
  • Notarized evidence of bad faith has a unique and important probative value before the court. 
  • Consider having communications with the troll notarized, and bringing notaries to meetings with the troll.  
  • Review the troll’s trademark filings for evidence that it has applied for illegitimate trademarks, a fact that increases the possibility that a court will find bad faith.  
  • Check the troll’s litigation history to see if the troll has a prior record of filing malicious lawsuits against legitimate brand owners.  
  • Review corporate records to see if the troll was a previous trading partner of your business.  
  • Consider whether you have other intellectual property rights that can be asserted against the troll, such as copyrights, trade name rights, or an individual’s right of publicity.  
  • If the troll has not used the registered mark for three years after registration, it is subject to challenge via a non-use cancellation action.  
  • With sufficient evidence of bad faith, a declaratory judgment action can be an effective weapon. 

Conclusion

The Uniqlo judgement of the China Supreme Court is a crucial milestone in the long struggle by businesses and advocates to remedy the ways that trolls can use the absolute priority system to their advantage. This decision and recent amendments to the China Trademark Law strengthen the position of legitimate trademark owners against trolls. 

Footnotes

1) See Michael S. Mireles, Trademark Trolls: A Problem in the United States?, 18 CHAP. L. REV. 819, (2015).
2) Uniqlo Trading Co. Ltd. vs Guangzhou Compass Exhibition Service Co. Ltd. and Zhongwei Enterprise Management & Consultancy Co. Ltd., China Supreme Court: (2018) Zui Gao Fa Min Zai No. 396.
3) Shanghai No. 2 Intermediate Court: (2014) Hu Er Zhong Min Wu (Zhi) Chu Zi No. 149.
4) Shanghai High Court: (2015) Hu Gao Min San (Zhi) Zhong Zi No. 45.
5) Beijing High Court: (2017) Jing Xing Zhong Zi No. 5603.
6) Zhejiang High Court: (2012) Zhe Zhi Zhong Zi No. 166.
7) China Supreme Court: (2014) Min Ti Zi No. 25.
8) Guangzhou Intermediate Court: (2013) Sui Zhong Fa Zhi Min Chu Zi No. 547.
9) Guangzhou High Court: (2015) Yue Gao Fa Min San Zhong Zi No. 444.
10) See https://jingdaily.com/how-luxury-brands-can-deal-with-chinas-infamous-trademark-trolls.
11) The new amendments to the China Trademark Law are scheduled to come into force on November 1, 2019.