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China’s fashion and luxury brand challenge: trademark squatting and parallel imports
date: 2018-08-29Sarah Song

Regionality is a well-known characteristic of trademark protection and brings particular jurisdictional challenges for fashion and luxury brands. In China, these challenges include trademark squatting and parallel imports.

Fashion and luxury brands generally appeal to consumers through their exquisite and seasonal products, and attractive history or heritage. Traditionally, fashion and luxury brands have been relevant only to local consumers. Today, the geographical boundaries of fashion and luxury brands have been transformed as a result of innovative market expansion, the increasing digital economy, well-developed social media and the constant growth of global economic integration. Considering that one of the most well-known characteristics of trademark protection is regionality, this conflict has brought different jurisdictional challenges for fashion and luxury brand protection in different countries. In China, these challenges include trademark squatting and parallel imports.

Trademark squatting

It is necessary to confirm in advance a trademark’s exclusive rights in the region before entering the market. The recognition and acquisition of exclusive rights for trademarks are governed by different regulations in different countries, including the registration principle, the use principle and the mixed principle. The registration principle determines the ownership of trademark rights according to the order in which a trademark is registered – whoever applies first will be granted the right to exclusive use of the trademark, regardless of whether the trademark has already been used. The trademark application is thus the only legal fact that forms the right to exclusive use of a trademark. Corresponding to this is the principle of use, whereby the first to use a trademark will enjoy exclusive rights over it – applying to register a trademark is not an inevitable requirement. At present, most countries use the principle of registration to obtain and confirm the right to exclusive use of a trademark. Only the United States and a few other countries adopt the principle of use.

According to Article 3 of the Trademark Law, China operates under the registration principle, with a trademark application the legal basis for exclusive rights over it. Accordingly, even if a trademark user has already used a mark commercially, it cannot obtain exclusive rights over it unless it files an application for registration with the State Intellectual Property Office (SIPO). However, this system creates lucrative opportunities for trademark squatters.

Before entering the Chinese market, most foreign fashion and luxury brand owners will apply to register trademarks in order to obtain enforceable protection in China. Sometimes these applications will be rejected by SIPO due to an existing similar or identical trademark registration, which in many cases is held by a trademark squatter. However, under certain circumstances and with sufficient evidence, well-known foreign trademark owners can overcome this challenge. According to Article 13 of the Trademark Law, in the event of an application to register a trademark that is a reproduction, imitation or translation of another’s well-known trademark not registered in China for the same or similar goods, and is consequentially likely to create confusion, the application will be rejected and the trademark prohibited from use. However, in practice, the authorities’ recognition of well-known trademarks is limited and only a few trademarks reach these requirements

Trademark law

According to Articles 9 and 32 of the Trademark Law, a trademark application will not prejudice any pre-existing rights belonging to others. Therefore, if the trademark to be squatted has sufficient distinctive features and can be protected as a copyright work, the prior rights holder is entitled to file an invalidation application within five years of the registration date of the squatted trademark. This must be accompanied with sufficient evidence to prove that the copyright work had been published before the trademark application date.

Article 32 prohibits the use of improper means to forestall the registration of a trademark that is already being used by another party to produce a certain influence. Therefore, the rights holder may file an invalidation application within five years after the squatted trademark’s registration date, along with sufficient evidence to prove the prior trademark use in China and that significant reputation had been obtained through its use.

According to Article 15, if the squatted trademark is identical or similar to an unregistered trademark already being used by another party and the applicant clearly knows of its existence (eg, due to contractual, business or other relationships with the prior use party), the prior use party is entitled to file an invalidation application within five years after the squatted trademark’s registration date. Such an application must be accompanied with sufficient evidence to prove that the squatter had a business relationship with the prior use party before the application date.

According to Article 49, any entity or individual may apply to the SIPO to cancel a registered trademark that has not been in use for three consecutive years without justification.

Parallel imports

Parallel imports refer to the import of a product by third parties, without the consent of the rights holder or authorised user where the product’s rights are protected in two or more countries. It is a common phenomenon in international trade practice with some countries (eg, the United States) allowing so-called ‘grey market’ imports.

The Trade-Related Aspects of Intellectual Property Rights Agreement and other international conventions have no explicit provisions regarding parallel imports. Due to the need to balance the interests of both rights holders and the general public, this issue has become a dilemma across many countries. If a country allows parallel imports, the interests of the rights holder may be harmed. However, banning parallel imports can lead to a monopoly, which will affect the freedom of international trade, thus affecting the public interest. As far as trademark rights are concerned, the laws of different countries have differing opinions on whether the application of the principle of exhaustion of rights should be limited to exhaustion within a specific region or worldwide.

In China, there is no clear legal provision for the parallel import of goods bearing trademarks. However, Chinese courts tend to determine that if the same trademark is registered in different countries and owned by the same entity, then the relevant parallel import does not constitute trademark infringement.

The basic function of a trademark is to distinguish the source of goods. Considering that parallel import goods are also produced and sold by the same rights holder, the circulation of the goods will not cause confusion or misrecognition by consumers or damage the trademark’s reputation. Therefore, the parallel import will not be deemed to infringe the trademark’s exclusive right.

The absence of legal prohibition allows for more freedom, as the current trademark law and other laws do not explicitly prohibit parallel imports. Therefore, third-party imported goods which are legally circulated on the extraterritorial market to China for sale do not violate Chinese trademark law and related provisions.

Case law

The Supreme People’s Court of China has issued a guiding decision with regard to parallel imports in a case between a foreign plaintiff and a domestic defendant ((2012) Hu Er Zhong Min Wu (Zhi) Chu Zi 86).

Plaintiff Victoria’s Secret had registered several VICTORIA’S SECRETS and VICTORIA’S SECRET trademarks in China. Defendant Jintian Company declared that the plaintiff’s general distributor carried out business activities in China without authorisation, directly or in franchised form, and used the plaintiff’s VICTORIA’S SECRETS and VICTORIA’S SECRET trademarks and trade name to sell goods. The defendant’s activities infringed the plaintiff’s exclusive trademark right and constituted unfair competition.

The goods sold by the defendant came from Limited Brands Inc, the plaintiff’s parent, and were genuine. The defendant argued that the plaintiff’s exclusive trademark right had been exhausted and that it had the right to resell the goods in question and to carry out necessary publicity. Since the plaintiff did not operate a retail business in China, the defendant was the distributor of Limited Brands Inc and was the only dealer of Victoria’s Secret branded goods in mainland China. The defendant’s claim as a general dealer was not faulty; therefore, the defendant did not engage in unfair competition.

The defendant purchased genuine products bearing the Victoria’s Secret brand from the plaintiff’s parent, Limited Brands, and sold the goods to multiple retailers in a wholesale manner. It breached the agreement of “remarketing by traditional retail only (wholesale and online sales are forbidden)” between the defendant and Limited Brands. However, the goods sold by the defendant were genuine products, not counterfeit goods, purchased from Limited Brands and imported through formal channels. The defendant used the plaintiff’s registered trademark in the process of selling the goods on product tags, hangers, bags and brochures. These activities caused no confusion or misrecognition among the relevant public with regard to the products’ origin. Therefore, the defendant’s sale of the allegedly infringing goods to retailers did not constitute an infringement of the plaintiff’s exclusive trademark right. However, the Shanghai Intermediate People’s Court found that the defendant had no evidence to prove that it was the only designated general distributor of Victoria’s Secret branded goods. Thus, the defendant had subjective malice in misleading the public, which constituted false advertising and unfair competition.

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