Anti-Cybersquatting in China: A Judicial Overview

For trademark owners, it is important to know that China does not have a comprehensive law (by the National People’s Congress) or regulation (by the State Council) regarding cybersquatting. Rather, the China Internet Network Information Center (“CNNIC”) and the Ministry of Information Industry (“MII”) both issued rules and measures on the topic of domain name. Among these rules and measures, the most prominent is the Regulations of Internet Domain Name Administration in China (“Domain Name Regulations”) by the MII. In accordance with the Domain Name Regulations, the CNNIC compiled the Detailed Rules of Registration for Domain Names, the Domain Name Dispute Resolution Policy, and the Procedure Rules for CNNIC Domain Name Dispute Resolution Policy.

For a detailed account of the above-mentioned rules and measures, please refer to Professor Mo Zhang’s article on SSRN. The content of this post is attributable to his excellent research and scholarship.

Besides detailing the regulatory framework of domain name registration and dispute resolution thereof, Professor highlighted the judicial standards as set by the Supreme People’s Court of China.

Litigants, seeking to protect their trademark rights in China against cybersquatters, should pay special attention to the Supreme People’s Court’s Explanations to Several Questions on Application of Law in Civil Actions Concerning Internet Domain Names (“Explanations”). The Explanations serves as judicial guidance to all levels of people’s courts in China adjudicating domain-name related disputes.

Jurisdiction

Only intermediate level courts have jurisdiction to domain name disputes, and suits should be brought in courts where the defendant is domiciled. Where the defendant’s domicile cannot be ascertained, the court where the infringing equipment (computer terminal) is located shall have the proper jurisdiction.

Causes of Action

According to Professor Zhang’s article, two most common causes of action for trademark rights are under the Chinese law are trademark infringement and unfair competition.

Legal Test for Infringement or Unfair Competition

Based on the Explanations, if the legal test requirements are met, the plaintiff can plead in the alternative for Trademark Infringement and Unfair Competition.

The determining factors in the legal test are:
1. the plaintiff must have valid and legitimate rights to the interests for which the legal action is being initiated. (in other words, if you are want to protect your trademark rights, make sure your trademark is registered under your name in China, unless your mark is deemed legally famous elsewhere.)

2. the defendant’s domain name must “be found to be either a copy, imitation, translation, or transliteration of the plaintiff’s well-known trademark”, or it must be same or similar to the plaintiff’s “registered trademark” so as to cause confusion to the consuming public. (this is the confusion prong of the test)

3. the defendant does not have a legitimate right or interest to the registered domain name, nor does it have “reasonable grounds for its registration or use of the domain name. (this factor balances the right of the plaintiff against that of the defendant)

4. the court must determine whether there was bad faith on the part of the defendant in its registration of the domain name. (black mailing the plaintiff using the domain name, offering to sell the domain name, registering the domain name using other’s famous marks for commercial purposes are all evidence for bad faith.)

5. in case involving famous trademarks, the likelihood of confusion prong of the test is eliminated because famous trademarks deserve special protection. (this further demonstrates China’s fulfillment to its TRIPS commitment over IP protection)

6. in terms of remedies, people’s courts can only grant damages of cancellation of the infringing domain name, which means transfer of the infringing domain name is not a remedy. (obviously, a trademark owner needs to register the domain name ASAP.)

Granted, a combination of agency level rules and judicial opinions do make the scene of anti-cybersquatting law in China complicated. However, the growing popularity of e-commerce in China makes it imperative for foreign trademark owners to register domain names with their trademarks. The cost of registration is a nano-fraction of what it would cost in a lawsuit against an unscrupulous Chinese cybersquatter. In the same vein, consideration should be given for registration in other commercially significant jurisdictions to which the trademark owners are likely to expand. In order to achieve that, a coordinated and calculated approach to IP protection becomes necessary. It is called IP Strategy. Mr. Godfrey Firth has an excellent article out on this very topic of developing an IP strategy for China, and I think some of his ideas are good for anywhere.

Read Professor Zhang's full article at SSRN.

Trademark Owners Beware: Anti-Cybersquatting in China

Let’s push aside the academic debate about the nature of domain rights, namely, whether the right to register a domain name is an independent form of intellectual property right or just an extension of exclusive rights inherent in the ownership of a trademark. Rather, let’s focus on the practical question of what a trademark owner or domain name holder can do to protect his legitimate rights accordingly in China.

First off, what is cybersquatting? It arises in the unique context of a conflict between a domain name holder and trademark owner. If a domain name, containing a recognized trademark, is registered in bad faith for the purpose of infringing on the rights of a mark owner, the holder of the domain name is considered to be a cybersquatter. Four types of squatters exist out there, and a detailed discussion of them is the topic of a law review article. Here, let’s make it almost black and white for ease of discussion—a squatter that purposefully registered the name associated with a trademark with the intention to cause confusion or blackmailing the mark owner; and a suspected squatter whose registration of the a domain name, which having the same name as a recognized brand, was in good faith and does not in essence infringe IP right of the mark’ owner (i.e. the domain name was registered way before the trademark was registered or in use).

In the international arena, pursuant to the Uniform Dispute Resolution Policy (“UDR” Policy) put forth by the Internet Corporation for Assigned Names and Numbers (“ICANN”), a trademark owner can file a complaint against suspected cybersquatters who registered top level domain names in violation of the owner’s trademark rights. Top level domain names (“TLD”) can be exemplified as: .com, .org, .net, etc. Since TLD registrants are bound by the UDR Policy, a plaintiff can file an arbitration complaint thereunder. A favorite venue for such arbitration is National Arbitration Forum. The World Intellectual Property Organization (“WIPO”) also offers arbitration proceedings through which a trademark owner could seek the cancellation or transfer of infringing domain names. Therefore, a trademark owner has two venues to seek redress for a TLD infringer—UDR arbitration or WIPO arbitration, of course in addition litigation in proper jurisdictions.

As to litigation, a trademark owner can sue under the Anti-Cybersquatting Consumer Protection Act or the Federal Anti-Dilution Act, assuming that proper jurisdiction over defendants can be had.

What if a trademark owner finds out that a sub-TLD domain name has already been registered in China, and the domain name used the mark owner’s trademark? Obviously, UDR arbitration is not available since the domain name is not a TLD. Neither is the WIPO arbitration for the same reason. And if the trademark owner happens to be in a country without a judicial treaty with China to enforce judgments against a Chinese defendant, the plaintiff’s right of action in its own jurisdiction is practically meaningless (both the China Law Blog and Korea Law Blog addresed this general topic). With that, a trademark owner’s option is limited to seeking redress in China. And seeking rightful redress and protection in China is fraught with pitfalls due to the fragmented nature of the Chinese law on anti-cybersquatting as China currently does not have a comprehensive law/regulation on point.

Franchising Regulations in Macau (III)

IV. The Franchise Contract

A franchise contract must be in writing, and its term should be no shorter than 3 years if a term is fixed. Absent an agreed term, the contract is presumed to last for an undetermined period of time. And no cooling off period is available for a franchisee, which means that once the contract is signed, a franchisee cannot back out of it without a material breach by the franchisor.

As a general principle, the MCC recognizes a contractual duty of good faith and fair dealing. Thus, the franchisor must:

1. allow the franchisee to use its intellectual property associated with the franchise;
2. allow quiet and peaceful enjoyment of such IP;
3. update the know-how and technology associated with franchise system to ensure its competitiveness;
4. provide adequate training to the franchisee and its associates;
5. conduct advertising of the franchise system at the international and regional level;
6. supply requisite goods or products for the operation of a franchise;
7. compensate the franchisee for a post contract NDA;
8. not compete with the franchisee in the agreed territory absent express agreement to the contrary;
9. inform the franchisee of any changes, modifications that are material to the operation of a franchise.
10. not engage in tying arrangements with respect to the operation of a franchise unless the use of certain goods and equipment are strictly for maintaining the industrial and intellectual property rights of the franchisor; and
11. to the extent such goods and equipment are required, provide warranty for such goods and equipment (critical point for franchisors to consider b/c of liability)

Similarly, a franchisee is also obligated by contract to perform its duties and obligations in good faith, to wit:
1. pay royalties to the franchisor;
2. use the intellectual property of the franchisor in a manner consistent with the rights conferred upon the franchisee;
3. maintain the quality of goods and services in a uniform fashion as required in the franchise system;
4. obtain permission from the franchisor prior to changing the premise of the franchise unit;
5. furnish information that may be requested by the franchisor concerning the operation of the franchised unit;
6. comply with the recommended price for goods and /or services as recommended by the franchisor;
7. allow the franchisor and /or its agents to inspect the premise;
8. attend training sessions as required by the franchisor;
9. grant and authorize the franchisor the right to use any improvement know-how gained in the course of operating the franchised unit;
10. submit all adverting material to the franchisor for pre-approval;
11. keep confidential the information related to the operation of a franchised unit;
12. report to the franchisor any breach or misuse of the intellectual property of the franchisor; and
13. maintain minimum volume of sale as required by the franchisor in the contract.

(note: the above are all based on the MCC)

V. Registration

As far as I know, there is no administrative registration requirement to franchise in Macau.

Franchising Regulations in Macau, SAR (II)

III. Mandatory Pre-sale Disclosure

Pre-sale disclosure by a franchisor to prospective franchisees is mandatory. As is the norm in many franchise regulations in the world, a franchisor must deliver a written disclosure document detailing the franchised business in accordance with Article 680 of the MCC. A franchisor, however, must note that the MCC does not stipulate a bright-line rule on how many days the disclosure must predate the execution of a franchise contract. The code only requires “adequate advance” disclosure. In comparison with a bright-line 30-day rule in China’s franchise regulation, the flexibility inherent in this rule could potentially cause trouble for a franchisor because a franchisee could always allege that disclosure was not adequately advance. Therefore, a franchisor should keep detailed records of the date when initial negotiations for a franchise, the date of delivery of disclosure, and of course the date of contract. In fact, for those franchisors used to the old FTC Rule (with a tricky trigger disclosure requirement), this MCC requirement should not be difficult to keep up with.

Information disclosure under Macau’s franchise regulation, to a certain extent, resembles that of the disclosure requirements under the Chinese franchise Disclosure Guidelines. The MCC does not prescribe a rigid format for disclosure, such as the Uniform Franchise Offering Circular ("UFOC") in the United States new FTC Rule; rather, it only stipulates a few categories of information to be provided in a truthful manner to prospective franchisees. Here they are:

a) the identification of the franchiser;
b) the franchiser's annual accounts of the last two accounting periods;
c) any judicial proceedings in which the franchiser, the holders of trademarks, patents and other industrial or intellectual property rights related to the franchise are or have been involved, as well as their sub-franchisers, which may directly or indirectly come to affect or render impossible the functioning of the franchise;
d) a detailed description of the franchise;
e) the profile of the ideal franchisee regarding previous experience, level of education and other characteristics that compulsorily or preferably he must have;
f) the necessity and extent of the franchisee's personal and direct participation in the exercise of the franchise;
g) the specifications as to the estimated sum of the initial investment needed for acquisition, installation and entry into functioning of the franchise;
h) the value of the periodic payments and other amounts to be paid by the franchisee to the franchiser or to third parties indicated by him, specifying the respective bases of calculation and what these remunerate, or the purpose for which they are destined;
i) the composition of the franchise network, lists of franchisees, sub-franchisees and sub-franchisers of the network, as well as of those who have left the network in the last 12 months;
j) the profitability of the franchisees' enterprises and the incidence of bankruptcies;
l) the professional experience gained, his know-how and entrepreneurial methods;
m) any services that the franchiser obliges himself to render to the franchisee for the duration of the contract.

See Article 680 (1).

In addition, a franchisor should also provide a sample contract (including relevant addendum) to a prospective franchisee in connection with the disclosure document. A failure to disclose information required in this article constitutes breach by the franchisor of the commercial code, which entitles a franchisee to annulment of the franchise contract. See Article 680 (3).

Relatively speaking, information disclosure as required in Article 680 is by no means expansive in comparison with disclosure in the United States and China. (A detailed comparison is beyond the scope of this post.)

--to be continued...

Franchising Regulations in Macau, SAR

Rivaling Las Vegas in grandeur, Macau is poised to be a major tourist attraction in Asia for those eager to try their fortune. Critical to the formation of a tourist hot spot is the growth of complementary service industry, and a proven method of growth in the service industry is franchising. I want to introduce the basics of franchising regulations in Macau in a few posts.

I. Introduction

Franchising is permissible in Macau, and an entire Title in the Macau Commercial Code (“MCC”) is devoted to the regulation of franchising. (Title VIII). Compared to franchise regulations in mainland China and other Asian countries, such as South Korea and Malaysia, Macau’s regulation seems pretty straight forward. The regulation can be roughly divided into three sections: franchisor disclosure, franchise contract, and franchisor-franchisee relationship.

II. Definition of Franchising

Franchising in Macau, in essence, is a form of expansion through a contract, and, under the MCC, a franchise contract is defined as:

A franchising contract is that by which one of the parties, against a direct or indirect payment, grants to the other, in a certain zone and in a stable manner, the right to produce and or to sell certain goods or services under his entrepreneurial image, according to his know-how, with his technical assistance, and subject to his control. See Article 679

A commercial franchise contract bears three basic features, a grant to use intellectual property of the franchisor, control by the franchisor, and a fee element. From the above definition, one can easily spot the IP and control elements (“entrepreneurial image”, “know-how”, “subject to his control”). Article 692 provides the fee element, as it states: “A franchiser is obliged to adequately compensate the franchisee for new experience gained, in accordance with article 697, in the running of the franchise.”

III. Mandatory Pre-sale Disclosure

(to be continued…)

China Anti-Monopoly Law Research Paper

If you have not read Professor ELEANOR M. FOX 's resent paper on China's Anti-Monopoly Law, I highly recommend you read it.

Her paper focuses on administrative monopoly in China, and she puts the topic in the context of how the U.S., Europe, and the WTO dealt with it. Truly illuminating. Without further compromising her superb scholarship, I'd direct you to read the full article.

An Anti-Monopoly Law for China – Scaling the Walls of Protectionist Government Restraints

Wahaha v. Danone: My Arbitration is Better Than Yours (II)

Remember that Danone joined Wahaha’s chief Zong Qinghou personally as a defendant in the Stockholm arbitration (in May 2007)?

Remember that Wahaha filed for arbitration in Hangzhou Arbitration Commission in June 2007?

Have you been wandering how exactly Zong Qinghou can file a parallel arbitration in China while the original joint venture contract between Wahaha and Danone designated Stockholm as the venue for mandatory arbitration?

Apparently, Zong Qinghou, through the Chinese media, is shedding some light on his lawyer’s strategies behind this legal maneuver. His legal team points out a possibly lethal defense to Danone’s Stockholm arbitration against Zong personally.

As most American lawyers know, the first line of defense is through procedural challenge: jurisdiction or venue. And that is exactly what Zong’s lawyers are doing. They claim that the alleged breach of non-compete and non-disclosure agreements by Mr. Zong falls within the purview of the Chinese labor law, not commercial law since Mr. Zong was in a employment relationship with the Wahaha-Donone joint venture.

They further claim that the Chinese Labor law controls when labor disputes between parties within the boundaries of the P.R.China. See Article 2:

This Law applies to all enterprises and individual economic organizations (hereinafter referred to as employing units) within the boundary of the People's Republic of China and laborers who form a labor relationship therewith.

Upon establishing the proper law to be applied in the dispute between Danone and Zong personally, Zong’s lawyers employed their sharp weapon—arbitration arising under a labor dispute should be inside China pursuant to Article 79:

Where a labor dispute takes place, the parties involved may apply to the labor dispute mediation committee of their unit for mediation; if the mediation fails and one of the parties requests for arbitration, that party may apply to the labor dispute arbitration committee for arbitration. Either party may also directly apply to the labor dispute arbitration committee for arbitration. If one of the parties is not satisfied with the adjudication of arbitration, the party may bring the case to a people's court.

How about that?! Stockholm arbitration suddenly sounds irrelevant with respect to claims against Zong personally.

So what is Danone’s response to that? They countered, according to the report (Chinese only), that the non-compete and non-disclosure agreements were supported by nifty consideration and they should be enforceable. (note: this really makes no sense. Maybe the reporter did not understand Danone’s argument. Let’s assume that Danone did not respond.)

What are its possible responses?
--get around the employment relationship argument
--argue that Zong’s role in the joint venture was multi-faceted and being an employee was a minor part (weak)
--argue that even if the labor law applies, the parties’ original intent was to arbitrate all disputes in Stockholm

Anything else, folks?