Brief History of IP in China
IP rights are essential for protecting and promoting innovation. From an individual perspective, IP rights ensure that creators, or those who invest in the creation of goods, earn their deserved credit and remuneration. From a societal perspective, these rights promote innovation and growth. Guaranteed protection and uniform law provide greater incentive to develop new products, which in turn contributes to a more advanced economy. This appears to have been the driving force behind China’s sophisticated IP enforcement regime.
Chinese IP can be traced back many thousands of years, with some of the world’s earliest known trademarks being attributed to Chinese potters and sculptors. Marks of origin carved on pottery from as early as 2700 BC are considered by experts to be some of the first branding practices. During the Shang Dynasty (2000–1500 BC), the crests of kin groups were used to identify the creators and quality of pottery, wine vessels, and cooking pots. Chinese stamping procedures began in 221 BC, where family names were used to indicate product origin. The government then imposed product branding, resulting in the creation of product labels with a symbolic logo and text.
Enforcement of IP in China
Chinese trademark law has come a long way since this early product protection, and brand owner rights can be enforced in the courts if the alleged infringers fail to take notice when told to cease and desist. There are now established IP courts in several provinces and cities in the country, which ensures that they are presided over by a judiciary familiar with IP laws and regulations. The IP protection regime in China is based upon three fundamental considerations—legislative guidance, administrative control, and judicial enforcement—and operates as a dual-track system of enforcement.
The administrative track of the enforcement regime was most recently reformed in March 2018, when the China National Intellectual Property Administration (CNIPA) was established.9 While the administrative procedure is the predominant method for asserting IP rights in China, especially for trademark and copyright infringement, it does not offer the right holder the benefit of compensation by damages. If they are successful in their action against the infringer, injunctions and penalties may be ordered, along with costs. The administrative agencies are also able to seize goods or equipment used in manufacturing products that infringe trademarks. The administrative tribunals may order fines not exceeding RMB 250,000 (USD 35,000) where there is no illegal turnover or the illegal turnover is below RMB 50,000 (USD 7,000), or up to five times the value of the illegal business if the illegal turnover exceeds RMB 50,000.
The judicial track of the enforcement regime handles infringement and litigation, with IP cases considered to have a high level of complexity and specialism. The Civil Procedure Law stipulates that the court of first instance, the Basic People’s Court, presides over civil cases unless they have a significant influence or a higher court has confirmed that they are suitable for hearing by a higher court or are important foreign-related cases. Above these courts are the Intermediate People’s Courts, followed by the Higher People’s Courts. The highest court is the central Supreme People’s Court, which has issued several provisions in respect of the court’s jurisdiction over IP cases. IP tribunals have been established since 1993 and extended to 22 different cities by 2017. The IP tribunal of the Supreme People’s Court began hearing IP cases in January 2019. Of note, the country has been successful in improving the qualifications and expertise of the judiciary who preside over IP cases. Compensation can be ordered, including punitive damages, along with an order to cease the infringing activities. Criminal penalties, including imprisonment, are possible but not commonly used. Judicial awards are either based on the infringer’s profits or, if they cannot be ascertained, on the plaintiff’s profit margin. Alternatively, they can be based on lost profits, calculated as the sales amount of the infringing product times the profit margin of the genuine product. Where it is not possible to calculate the plaintiff’s losses in this way, the law permits the payment of statutory damages up to RMB 5 million (USD 700,000).
Modernization through Treaties and Legislation
China’s Trademark Law has evolved since the country joined the WTO. Adopted in 1982, the Trademark Law was amended in 1993 based on the Madrid Agreement. Further revision came in 2001 as a result of the requirement to adhere to the international minimum standard of enforcement in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), including the granting of greater power to the administrative and judicial tribunals. The TRIPS Agreement created the foundation for China to make major changes to its IP system, paving the way for the country to become a global economic powerhouse. One of the key initiatives of the TRIPS Agreement was to increase the IP enforcement provisions of WTO members, including China, by providing for injunctions. A further aspect of enforcement in which the TRIPS Agreement had an impact was the level of fines imposed by the administrative authorities or damages awarded by the civil courts. Article 41(1) of the TRIPS Agreement provides a general obligation that remedies should “constitute a deterrent to further infringements.”
However, fines for trademark infringement did not appear to increase significantly following China’s WTO entry. Despite an increase in the average fine from RMB 5,761 (USD 800) to RMB 7,414 (USD 1,040) in 2003, it dropped to RMB 5,499 (USD 820) in 2004. Article 42 of the Trademark Law 2001 stated that the fine imposed would not exceed 20% of the illegal business or more than twice the illegal profit earned. Despite those generous limits, authorities seemed reluctant to impose high fines, and the financial penalties that were imposed did not appear to constitute an effective deterrent in line with the TRIPS Agreement. Not only were damages difficult to prove in China, but there also were statutory ceilings on most damages. The problem appeared to be linked to the issue of evidence, with the system reliant on documentary evidence, without inferences allowed to be drawn, thereby putting the burden of proof on the plaintiff.
Initially, it was questionable whether the compensation for trademark infringement complied with the TRIPS Agreement. Article 56 of the Trademark Law 2001 provided two tests for awarding compensation, with the criteria being either the losses to the plaintiff or the profits gained by the infringer, which fell somewhat short of the requirement in Article 45(1) of the TRIPS Agreement that damages must be adequate to compensate for the injury that the right holder has suffered. Further, the IP enforcement system in China lacked preliminary injunctions. This was contrary to Article 44 of the TRIPS Agreement, which provided that injunctions should be available “to order a party to desist from an infringement.” Article 57 of the Trademark Law 2001 permitted preliminary injunctions, but the courts took a tough stance on issuing them. As time went on, the courts began to issue them more frequently, and they became a useful alternative to administrative actions—a positive step for the IP enforcement system.
The third revision of the Trademark Law in 2013 strengthened the enforcement mechanisms and increased the legal compensation for trademark infringement, introducing the concept of punitive damages for infringement based on one to three times the actual damages calculated. Compensation was increased again in 2019 in the fourth revision of the Trademark Law, which also set out the actions that the courts could take in infringement litigation. The method of calculating compensation continued to be set out in the fourth revision.
One of the key features of the 2019 amendment was the regulation of bad faith trademark applications and hoarding. Article 4 of the Trademark Law 2019 states that “when the applications for registration of a trademark are not filed for the purpose of use, such malicious applications shall be rejected.” This provision enables examiners to reject applications at the preliminary stage of examination, and bad faith registration not for the purpose of use is one of the reasons for opposition and invalidation under Articles 33 and 44.
Damages
The 2019 amendment also increased the severity of penalties for infringement of the exclusive right to use a trademark, including an increase in the amount of punitive damages, which are intended to provide a deterrent to further infringing acts. These changes reflect Article 45 of the TRIPS Agreement by providing that the compensation will be determined in accordance with the actual losses suffered by the right holder. Because actual losses are difficult to prove, Article 63 of the Trademark Law 2019 provides an alternative that bases the damages on multiples of the trademark licensing fee. If the infringement is in bad faith and falls under serious circumstances, punitive damages may be assessed at one to five times the calculated damages. The compensation also includes the reasonable expenses incurred by the right holder in attempting to curb the infringement. Even though the right holder must use their best efforts to provide proof of the losses and the infringer must provide materials relating to the infringement, where the infringer fails to do so, the court may determine the compensation based solely upon the right holder’s evidence. If the evidence remains inconclusive or elusive, the court may order statutory punitive compensation not exceeding RMB 5 million, with the criteria being the extent of the infringement.
In January 2023, the CNIPA published a draft fifth amendment to the Trademark Law. Proposed Article 77 still bases damages on the actual loss suffered by the right holder, but also on the “profits gained therefrom by the infringer” as a result of the infringement. Proposed Article 77 is more lucid than Article 63 in providing that if it is difficult to determine the loss and the profits, the amount of damages may be reasonably determined as a multiple of the royalties for use of the trademark. Punitive damages are still one to five times the calculated damages. While the evidential burden remains the same as in Article 63, proposed Article 77 takes into account the situation where the right holder has exhausted its efforts to discharge the burden of proof and the infringer mainly controls the documentary evidence, either refusing to provide it or falsifying it. In that case, the court may award damages based upon the right holder’s evidence. The default position of statutory damages is no more than RMB 5 million (USD 700,000).
With the emphasis of the draft fifth amendment being on bad faith, proposed Article 22 contains a list of circumstances that will be presumed by the CNIPA and the courts to indicate that an application is made in bad faith, with such application serving as a basis for compensation for the trademark owner. A provision that stands out is the mandatory transfer of the maliciously filed trademark to the genuine owner under proposed Articles 45 to 47. The right to compensation under proposed Articles 83 and 84 would permit civil compensation for the losses caused by the trademark squatting activities and any malicious litigation by the infringer against the rightful owner based on squatted registrations.
The Civil Code of the People’s Republic of China, which came into effect on January 1, 2021, also permits punitive damages for infringement of trademark and other IP rights. Article 1185 requires intentional infringement and serious circumstances. An infringer can commit intentional infringement either purposefully (knowing that the conduct would do harm) or recklessly (not directly in pursuit of harm but allowing the harm to be done). This effectively lowers the threshold from bad faith infringement, so it should be easier to claim punitive damages under the Civil Code.
Regarding the higher bar, the Guidelines on the Determination of Damages and Statutory Damages in Disputes over Intellectual Property and Unfair Competition issued by the Beijing Higher People’s Court on April 21, 2020, considered bad faith infringement to be repeated or continued infringement after warning letters or administrative decisions. It also included counterfeiting registered trademarks, squatting or free riding on well-known trademarks, use of well-known trademarks on identical or similar goods, destruction or covering up evidence of infringement, and refusal to comply with injunctive orders.
Serious circumstances include the defendant being a professional infringer without operating any legitimate business, an extensive scale or duration of the infringement, a large amount of illegal profits, or harm to personal safety, the environment, or the public interest. For example, in the case of John Deere (China) Investment Co. Ltd. v. John Deere (Beijing) Agricultural Machinery Co. Ltd., the court found that the defendant’s infringement of multiple well-known trademarks belonging to the plaintiff and continuous infringement even after an administrative penalty had been issued constituted serious circumstances of infringement and awarded the plaintiff RMB 5 million (USD 725,690).
The Civil Code’s codification of punitive damages for IP infringement has been described as “quite revolutionary” and a “game changer.” Where there is culpability and large-scale infringement, punitive damages will offer a deterrent to the infringer and send a message that China is offering strong protection to brand owners, translating to increased foreign investment and an even stronger economy.
Injunctions
On January 1, 2019, the Regulations of the Supreme People’s Court on Several Issues concerning the Application of Laws in Adjudication of Action Preservation Cases Involving Intellectual Property Disputes (Regulations) came into force, applying to applications for interim injunctions. The Regulations codified the existing practice on preliminary and interlocutory injunctions, clarifying the existing procedures and standards, with illustrative cases. They also included two new procedures, permitting injunctions to be applied for before or during parallel arbitration procedures, and introduced the wrongful application concept.
Injunctive relief in China is based on quite stringent rules and will not be granted on an ex parte basis unless the court is satisfied that the alleged infringement will have a significant impact upon the IP right holder and there is an urgency requirement. Article 6 of the Regulations lists typical factors signifying urgency: (1) the right holder’s trade secret is about to be illegally disclosed; (2) the right holder’s personal right, such as a publication right or a privacy right, is about to be infringed; (3) the IP in issue will soon be illegally disposed of; (4) the right holder’s IP is under or will suffer infringement in time-sensitive occasions, such as trade fairs; (5) time-sensitive and popular shows are being or about to be infringed; and (6) other situations calling for an immediate injunction. The overriding criterion appears to be that the threat to the right holder is time-sensitive, requiring an injunction within 48 hours from the judgment permitting the relief. This is a somewhat arbitrary limit and for genuinely urgent cases provides the infringer sufficient time to complete the infringing act. There is an onus upon the right holder to apply for injunctive relief as early as possible if the urgency requirement is to be satisfied, as any unjustified delay will result in the court refusing the application.
When the court has received the right holder’s application for the injunction, it will consider the factors set out in Articles 7 and 8 of the Regulations, including whether the application has a factual and legal basis for an injunction and whether the validity of the applicant’s underlying IP right is stable. In assessing the validity of the right, the court will look at the type of IP right that is at issue in the litigation; whether the right was subject to substantial examination before grant; whether it is being challenged, for example, by way of pending invalidation proceedings; whether there is any dispute over the ownership of the right in question; and any other factors that make the validity of the right unstable. The Regulations replaced the draft criteria for granting the relief, which was “the likelihood of success on the merits,” with the term “factual and legal basis.” Likelihood of success on the merits would have provided the courts with a wide and unfettered discretion.
The Regulations expect evidence that there is a likelihood of infringement, but this is not defined. The need to prove that the applicant will suffer irreparable harm if the order is not granted may assist in satisfying the court that there is a likelihood of infringement. Article 10 provides some guidance in the assessment of irreparable harm: the infringement causes harm to the applicant’s personal rights, such as goodwill or the right to publication or privacy; the infringer’s conduct will cause uncontrollable infringement and is liable to significantly increase the damages available to the applicant; or the infringement will cause a decrease in the applicant’s market share in the relevant market. The Chinese courts have imposed a high threshold for establishing such harm, and there is a wide margin of discretion.
The Regulations stipulate a balance of harm test, and the injunction will only be granted where the court is satisfied that the harm suffered by the applicant is more significant than the harm that the infringer would sustain as a result of the injunction being imposed and that implementation of the relief will not harm the public interest.
In addition to the stringent application process for preliminary relief, there is an absence of an appeal procedure against the imposition of an order. Article 14 provides the only remedy available to a dissatisfied party, which is to apply back to the court that granted the injunction, and the court has 10 days to reconsider its decision. As the appellant court is also the court that made the initial decision, it will be a rare occasion that the injunction is lifted. The only circumstance might be that the infringer provides overwhelming proof that the injunction should not remain in force for the period of time that was initially granted. The right holder will be expected to post a bond equal to the damages that the infringer could sustain as a result of the injunction order, including the proceeds of the alleged infringing products, storage expenses, and any other reasonable expenses. While this may result in very high bonds, the courts accept many different types of security, such as real estate, cash, or confirmation of a guarantee from an approved company.
The Regulations introduced two new provisions for injunctive relief. The first provision is that the existence of arbitration proceedings or an arbitration agreement is not a bar to the court ordering a preliminary injunction. This is the case even where there is specific interim relief available via the arbitration procedure. Very little information is provided in the Regulations, and it is likely that the courts will exercise wide discretion in each case. The second provision is the introduction and clarification of the concept of wrongful application for interim injunctions under Article 16. If the court accepts an application that was wrongfully filed, it can order the right holder to pay compensation to the infringer. Circumstances where an application may be found to be wrongful include where it relates to invalid IP rights, the defendant’s conduct fails to constitute infringement or unfair competition, or the applicant fails to file a civil action or arbitration on the merits of the case within 30 days of the injunctive relief being granted. The courts may now be more willing to order a preliminary injunction, as this provides some protection for the alleged infringer.
The Regulations have been described as old wine in a new bottle, with unclear standards of awarding injunctive relief in IP cases, issues with the civil law tradition and procedure when applying for injunctions, and a potentially disproportionate scope of injunction. It has been recommended that China should publish judicial interpretations to clarify that the U.S. eBay test can be applied to both preliminary and permanent injunctions and that permanent injunctions should be available immediately, even in the first instance, with a proportionate method adopted in the determination of cases involving IP injunctions. The eBay test is four-pronged, with the applicant needing to demonstrate that it has suffered an irreparable injury; that the remedies available at law, such as damages, are inadequate to compensate for that injury; a consideration of the balance of harm between the parties and that a remedy in equity is warranted; and a finding that the public interest would not be disserved by a permanent injunction being ordered. An alternative view is that while the eBay case was a great development in patent and copyright law, trademark law is different, where proof of future injury can be elusive. The courts have expanded eBay in trademark cases at the same time that they have denied damages, which allows confusion to continue. Equitable application of the eBay factors should provide that injunctions are more common in core cases where confusion is a real risk.
An interesting illustration of the rare preliminary injunction in China where the risk of confusion was a major consideration is Burberry Ltd. v. Xinboli Trading (Shanghai) Co. Ltd., where the Suzhou Intermediate People’s Court issued an injunction on the application of Burberry, the luxury British clothing label. The court held that a Shanghai-based company, Xinboli Trading, had infringed Burberry’s logo and trademarked patterns. The defendant owned two trademarks in Class 25 in China for clothing, which covered its name, Baneberry, and a similar pattern to Burberry’s distinctive checked pattern. The infringing trademarks were approved in 2009 and 2011, even though Burberry was a well-known label. In granting the injunction, the court ruled that Baneberry was unfairly competing with Burberry, intentionally causing market confusion. Baneberry increased sales by online trading, which, in turn, reduced Burberry’s market share. The online sales weakened Burberry’s distinctiveness, and the injunction was of real urgency, with its necessity outweighing the disadvantages. The balance of interest favored Burberry as an internationally renowned brand with a high reputation and a stable status. On the facts, there was likely to be a finding of infringement, and the possible damage caused to the infringer was controllable, while failure to issue the injunction could cause irreparable damage to Burberry and a lot of confusion and misunderstanding among consumers. The injunction would safeguard the public interest, and Burberry was guaranteeing an undisclosed amount for the bond.
There is clearly work to do in the clarification of the application of injunctive relief, but the Regulations represent a great leap forward in halting infringement before its continuance inflicts irreversible damage on the brand owners, which cannot always be rectified by monetary compensation.
Conclusion
Accession to the TRIPS Agreement appears to have paid great dividends to China in respect of its IP enforcement regime. The remedies have evolved to offer brand owners satisfactory compensation for infringement of their trademarks and other rights, while acting as a deterrent to the infringers, who get the message that China will not tolerate piracy and bad faith practices. It also sends the message that the country is willing to protect foreign right holders, as well as local right holders, which can only be beneficial for an already strong economy.