Crimes against a Chinese Lawyer

As reported by the New York Times and elsewhere today, Mr. Li Heping (picture), a Beijing lawyer and human rights activist, was abducted and beaten repeatedly by a group of thugs last Saturday. Based on his own descriptions of the event, he was threatened to leave Beijing with his family, and not surprisingly, he returned home to find his law license stolen.

Without venturing to speculate the hows and whys, I only wanted to express my admiration for his dedication to his profession, his conviction to his beliefs, and his courage to withstand known and unknown dangers ahead. As can be seen, privileges, plush life style, and security do not always accompany the practice of law. I guess lawyers are “hated” everywhere, at times.

Pfizer: Testing the Potency of Chinese IP Law & a Beijing Court

Pfizer, the giant American pharmaceutical company, had its day in the Beijing 1st Intermediate People’s Court twice this year for different causes and with different results. Its experience with the Chinese legal system, to my mind, is a testament to the fact that China does have effective intellectual property laws (trademark law, at least) and competent judges, despite the many doubts and criticism out there on same.

First, let’s look at how Pfizer lost miserably in China in trying to protect its “Viagra” trademark back in February, 2007. The basic facts (in Chinese only) of the case are that a Chinese company named Weierman registered the trademark “Wei Ge” (伟哥) (meaning “Great Man”) in June 1998, and licensed to a third party to manufacture medicine using the said trademark. This manufacturer in turn sold its products to another pharmacy chain. These three companies were joined as co-defendants by Pfizer.

In its lawsuit, Pfizer alleged that Weierman acted in malice when it registered the “Wei Ge” trademark which had become a “famous” mark in China even though Pfizer had not registered it. To prove that the “Wei Ge” mark was a famous one belonging to Pfizer, it offered evidence of widespread media reporting about the function of the wonderful blue pill, commonly known as “Viagra” in the west, but translated into Chinese as “Wei Ge.” It further alleged that Weierman’s use of the “Wei Ge” trademark constituted both trademark infringement and unfair competition. At the same time, Pfizer petitioned the Court to declare its unregistered trademark “Wei Ge” legally famous (sounds just like the Ferrari case). For the sake of brevity, I will omit other details that Pfizer alleged and pleaded for in the lawsuit.

The Court slammed Pfizer. It ruled that evidence of media reporting did not in and of itself prove that “Wei Ge” is a famous trademark. The Court further found that Pfizer, in fact, never officially used the “Wei Ge” trademark (implying “how can you ask us to declare a trademark famous when you haven’t in fact even used it yourself?”). Of course, Pfizer could have argued for protection under the Paris Convention Art. 6bis, but the problem is that “Wei Ge” was practically unknown in the United States and other Western countries. In the West, the blue pill was known as “Viagra.” If “Wei Ge” is not even known in the U. S., Pfizer could not logically claim that “Wei Ge” is thus deserving of protection in China as an unregistered famous trademark. Therefore, “Wei Ge” as a trademark, neither first registered by Pfizer nor famous either in China or the U.S., does not belong to Pfizer. The Court definitely did a great job picking apart Pfizer’s arguments.

Despite the loss in February, Pfizer, in September, returned to the same Beijing 1st Intermediate Court for another infringement lawsuit (in Chinese only) against a Beijing copycat over the very trademark of “Pfizer” in Chinese—“辉瑞.” Same court, same plaintiff, same causes of action, but this time Pfizer came out on top.

Pfizer Products Co., based on undisputed facts, registered multiple trademarks in China beginning in 1995. Its registered trademarks include “Pfizer”, its Chinese translation “辉瑞”, “辉瑞 Products”, “辉瑞 Hui Rui”, and other related symbols and graphics. In 2004, a Beijing company registered its corporate name as “辉瑞” (this is beginning to sound more and more like Starbucks v. Shanghai Copycat). According to notarized court documents, this company later named itself the Beijing 辉瑞 (Hui Rui) Company, and on its company website, it put the Chinese characters “辉瑞” in a very prominent place. And on its website, the defendant claimed that it was an authorized agent of an American bio-medical corporation, that it possessed advanced research capability and skillful management talents, and that it was devoted to the application and promotion of bio-medical products. These claims obviously insinuated that the defendant had some kind of connection or relationship with Pfizer. The records also revealed that the defendant sold detoxification medicine, causing confusion among consumers because they found out that the products they bought were not effective as claimed by the defendant.

The Court held the defendant liable for trademark infringement and unfair competition. It stated that even though the defendant did not sell medicine under the trademark of “辉瑞”, its prominent use of “辉瑞” in its advertising in fact functioned as an identifying element, linking its products to the source. Therefore, the defendant’s use of “辉瑞” on its website and advertising was in fact trademark usage. Since the use was unauthorized, it constituted trademark infringement. In addition, the defendant’s purposeful registration of its corporate name, using someone else’s trademark “辉瑞”, constituted unfair competition because it was likely to cause consumer confusion and monetary damage to Pfizer.

Examined together, these two Pfizer cases show a great deal about the Chinese law and courts. First of all, its current trademark law and unfair competition law, in combination with the General Principles of Civil Laws, are sufficient in dealing with many complex commercial disputes involving foreign parties. As shown, Pfizer has tried to utilize the Chinese legal system to its advantage repeatedly with varying results. It did not win all the time, not because the law was inadequate or the judges were incompetent, but because of its own mistakes. Secondly, a careful read of both cases clearly demonstrate the judges’ ability to analyze the facts, to apply the law, and to reach well-reasoned and fair decisions. Of course, I have to admit a caveat that Pfizer’s cases were all decided by the same Beijing 1st Intermediate People’s Court, well known for its judicial prowess in adjudicating IP cases. (And not all venues in China are like this court.) Moreover, China’ record on IP protection and the fulfillment of international treaties is by no means perfect. Please read this for an in-depth analysis of China’s WTO-IP compliance.

While China still has a long way to go to forge a better legal system (although what constitutes “good” may still be controversial), it is in effect making progress, albeit slowly in a piecemeal and ad hoc fashion. When dealing with an ancient civilization partially cloaked in and still striving for modernity, it is easy to forget that China started to build its modern commercial law only about thirty years ago. So, attacking China in the abstract with allegations that it “does not have a body of civil law” might not only show ignorance and a lack of patience, but also piss some people off.

Franchisors: Beware of Advertising Minefield in China

When I first finished translating China’s new Regulations on the Administration of Commercial Franchise (“Franchise Regulations”) in the spring of 2007, I feared that some franchisors would easily get confused over the provisions relative to advertising. That fear was not unfounded because one franchisor’s battle wounds in Beijing could reveal that dangers lurk in the new Franchise Regulations.

With respect to advertising, Article 17 provides in subsection 2 that:

A franchisor shall not engage in fraudulent and misleading activities in the course of advertising and publicizing a franchise. In its advertising, the franchisor shall not include content concerning a franchisee’s earnings results in the franchise operation. [Please note that the text is extracted from my translation, and it may differ slightly from other versions out there.]

Clearly, the Franchise Regulations prohibit a franchisor from general fraudulent and misleading statements in its advertising. “Don’t promise what you cannot deliver” is the basic message. At the same time, however, a franchisor in China is also forbidden from stating anything about profit margins, or earnings forecast. It translates into--Don’t say anything about how much money a franchisee can expect to make in a given amount of time from running a franchise. Simple enough, right?

Not really, because the same Franchise Regulations require a franchisor to disclose financial performance assessment of the franchise to prospective franchisees in its mandatory disclosure document. See Article 22 (8); see also Measures on the Administration of Information Disclosure of Commercial Franchise (“Disclosure Guidelines”) Article V (8) (ii).

To put the rules on advertising about earnings in a nutshell, a franchisor shall not advertise about the earnings forecast or financial performance of the franchise; but, the franchisor shall make mandatory disclosures about the earnings forecast or financial performance of the franchise to perspective franchisees in a written disclosure document. If a franchisor sticks to the rules in a nutshell, it should be able to stay clear of the mines in the advertising field.

In the United States, this kind of statements about profit margins or financial performance is commonly referred to as earnings claims under 16 C.F.R. § 436.9 (c) (2006) (the “New FTC Franchise Rules”), which is prohibited unless the franchisor has included earnings claims in its Item 19 of the Franchisor Disclosure Document (“FDD”) pursuant to 16 C.F.R. § 436.5 (s). And under the New FTC Franchise Rules, the inclusion of the Item 19 in the FDD is totally optional. Most franchisors stay clear of making earnings claims in Item 19 to avoid the added cost of providing substantiating data, and to shun possible fraud and/or misrepresentation lawsuits by franchisees arising out of such earnings claims.

Last week, a Chinese franchisor in Beijing fell victim to (or got stung by, depending on your perspective) the Article 17 of the Franchise Regulations. According to a Chinese report (Chinese only), the franchisor runs a franchise specializing in children’s haircuts. Allegedly, the franchisor handed out publications containing statements about the franchise, such as, “running a franchise, annual gross income 48, 200 Yuan, annual total costs 10,800 Yuan.” A franchisee signed a franchise agreement with the franchisor, paying a total fee of 22,800 Yuan. After operating a franchise unit for a few months, the franchisee discovered that actual operational results did not measure up to forecasts in the franchisor’s advertisement. So, the franchisee reported the franchisor to the Beijing Haidian District Office of the Administration of Industry & Commerce, which ruled that the franchisor violated Article 17 of the Franchise Regulations.

The final outcome of the case includes a rescission of the contract, return of the 22,800 Yuan, and an administrative penalty of 30,000 Yuan.

I would like to think that this is a simple case of statutory misinterpretation rather than one of corporate greed. Assuming it is the former, I would hope that franchisors remember the rule in a nutshell-- a franchisor shall not advertise about the earnings forecast or financial performance of the franchise; but, the franchisor shall make mandatory disclosures about the earnings forecast or financial performance of the franchise to perspective franchisees in a written disclosure document.

Pepsi’s “Blue Storm” Followed by “Red Passion”

The Wall Street Journal (subscription may be required) reported that Pepsi introduced a newly-minted red can in China.

According to the article, Pepsi’s change of color is based on positive customer feedback, and the “bold move” was calculated to ride on Chinese consumers’ patriotism and national pride in anticipation of the 2008 Summer Olympic Games to be hosted in Beijing.

With due respect to Pepsi’s “bold move” and shrewd marketing strategy, I keep wondering if this self-transformation has something to do with a lawsuit that Pepsi lost in China over its use of the “Blue Storm” [“蓝色风暴” ] trademark. In that case, the Zhejiang Province Higher People’s Court held that Pepsi had infringed on the trademark rights of a little known Chinese beverage company by using the pre-registered “Blue Storm” trademark without permission, thus causing reverse confusion. For more on this, please read my prior posts:

Chinese “David” Brought Down American “Goliath” for Trademark Infringement

Pepsi’s Storm in China Rages on

Anheuser-Busch: How Good Does a Slam Dunk in Chinese Court Feel?

Anheuser-Busch, the world’s largest brewer, recently won a trademark infringement lawsuit against a Chinese infringer, obtaining substantial damages and an injunction.

The opinion of this case has not been reported in China, or at least I have not been able to find it on the Internet after substantial searching efforts. So, the facts of the case are based on a news report in Chinese (if any part of the facts is inaccurate, please kindly inform me by leaving a comment.).

The lawsuit involved Anheuser-Busch’s registered trademark, Budweiser, which in Chinese is “百威.” And in pinyin, it is pronounced “Baiwei.” In addition to the character, Anheuser-Busch also registered two other related marks in symbols. One of them is the “Wheat + Sash” graphic; and another is a combination of the graphic and the Chinese characters “百威.”

Around April of 2006, Anheuser-Busch began to see an infringing type of beer brewed by a Chinese company named Putian Golden Key Company (“PGKC”). What Anheuser-Busch found was a product titled “New Generation Beer,” bearing the very “Wheat + Sash” graphic. What is more, PGKC packaged its beer with boxes with large font Chinese characters—“American Budweiser International Beer Group, Ltd.” (“美國百威啤酒國際集團有限公司”). This type of beer was being sold in Shanghai, Jiangsu Province, and Jiangxi Province. Anheuser-Busch was not alone in discovering these copycat activities; in fact local branches of the Bureau of Industrial and Commerce fined four companies that distributed the beer made by PGKC.

Then, Anheuser-Busch went after PGKC and the afore-mentioned four distributing companies, suing PGKC for trademark infringement in the Shanghai First Intermediate People’s Court. Anheuser-Busch also sought an injunction against PGKC for manufacturing the infringing product in addition to damages in the amount of 500,000 Yuan. Further, it asked the Court to prohibit the four distributing companies from selling the “infringing beer.”

The plaintiff’s victory did not come as a surprise for a number of reasons. First, Anheuser-Busch registered its flagship trademark “Budweiser” in China in Chinese properly in 1998, and it even registered marks related to the “Budweiser” mark. Second, Anheuser-Busch signed a trademark use agreement with Wuhan Budweiser Co., making the latter the only party in China with permission to use its registered trademarks (I assume that the trademark license agreement was appropriately recorded with relevant government agencies). Third, the plaintiff had a very strong case from the beginning given the ample evidence of infringement, such as the similarity between the infringer’s “trademark” and that of Anheuser-Busch. And quite significantly, PGKC did not appear in Court even upon proper service of process by the Court (in China, courts have the authority to serve defendants), thus basically handing Anheuser-Busch a default judgment.

Besides the relative ease of the plaintiff’s ability to obtain the win, another element of this legal dispute seems significant to me. The Court took special notice of the misleading packaging used by PGKC, which, in the Court’s view, evidenced infringement with obvious malice. As a result, the Court imposed a civil penalty on PGKC.

Civil penalties are not commonly handed down in most civil cases. Normally, in a trademark infringement case, Article 59 of the Trademark Law of China controls in terms of damages and penalties:

Where any party uses, without the authorization from the trademark registrant, a trademark identical with a registered trademark, and the case is so serious as to constitute a crime, he shall be prosecuted, according to law, for his criminal liabilities in addition to his compensation for the damages suffered by the infringed party.

As one may notice, nothing in the language of the statute mentions civil penalties in a trademark infringement case. However, the absence of a court’s power to impose civil penalties in the Trademark Law does not mean that a court does not ever have the authority to do so. Because a trademark infringement action is a civil action, the General Principles of Civil Law of China (1986) (also referred to as the “Civil Code”) is also operative in the adjudication of such a case. Pursuant to Article 134 of the Civil Code, a people’s court has the discretion to “impose fines or detentions as stipulated by law” while at the same time awarding civil damages and granting injunctions. Thus, the imposition of civil fines and penalties, although unspecified in the Trademark Law, is strictly within a court’s discretional power as granted by the Civil Code.

Naturally, the Court’s decision to fine PGKC 10,000 Yuan begs the question—why did the court go out of its way to exercise the discretional power? In my opinion, it just demonstrates the overall judicial trend, especially in economically more developed areas of China, to step up intellectual rights protection. And civil fines may operate as another deterrent to infringement.

Ramen Noodles, Price Fixing, and Beyond

After a month-long investigation into complaints of price fixing, the National Development and Reform Commission of China (“NDRC”) delivered its verdict for the China Ramen Noodle Association (“Association”)—guilty (report in Chinese only).


Investigation:

Governmental investigations revealed that the Association organized three meetings in a span of about 6 months (from 2006 to 2007). During the meetings, the Association and its members strategized on uniform price increases across the Ramen noodle industry in response to price hikes in raw materials, such as oil and flour. Of particular importance in the investigation was that the Association published minutes of its meetings in its industry magazine, and the news of price increase caused a panic among consumers who rushed to buy large quantities of Ramen noodles.

The NDRC acknowledged that higher production cost could lead to an increase in price in Ramen noodles, but price fixing by an industry association violates the Price Law of China, specifically Article 7, 14, and 17.

Current Law on Price Collusion:

Article 14 of the Price Law of P.R.China [full text of the law in English] provides:

Business operators must not act whatsoever in the following ways to effect abnormal price behaviors:

1. To work collaboratively with others to control market prices to great detriments to the lawful rights and interests of other business operators or consumers;

***
3. To fabricate and spread price rise information for pushing up the prices to
excessively high level;

***
6. To disguisely raise or lower prices at irrational ranges by artificially raising or lowering grades of merchandises or services;

7. To seek exorbitant profits in violation of laws and regulations; and

8. To effect other illicit price behaviors that are forbidden by law or administrative decrees

Furthermore, the NDRC charged that the Association breached Article 4 of the Interim Provisions on Preventing the Acts of Price Monopoly (Text in Chinese; subscription required for English text) which states:

Business operators shall not fix, maintain, or modify prices through agreement, resolution, coordination or any other means of collusion.

Agency Order:

Since the NDRC found the Association guilty of violating the law (and price regulations), it ordered the Association to immediately “change its wrongful ways, make public notices to rectify negative impact of the price fixing, and to delete from its minutes contents regarding collective price increases…”

While at it, the NDRC sent a warning to other industry associations too, admonishing them to enhance their “sense of the rule of law.”

Other Remedies:

Curiously enough, no consumers sued either the Association or Ramen noodle companies that colluded in price fixing. Article 41 of the Price Law provides a private right of action to injured consumers, to wit:

Whereas business operators have caused overpayment by consumers or other business operators in violation of price law, the part in excess of the due payment shall be returned. If damages are done, the business operators shall undertake to compensate for the losses.

If a suit were to be filed, a plaintiff could invoke the NDRC’s administrative order as evidence of wrongdoing. Upon a showing of actual damages, victory in such a suit would be reachable. But lawsuits in China are costly, as are in the United States. Chinese consumers, however, could turn to class action as a way to pool their resources in order to seek their justice and redress for damages. See Class Action Litigation As a Means of Enacting Social Change in China, 75 UMKC L. Rev. 227 (2006); Class Action Litigation in China, 111 Harvard Law Review 1523 (1998).

In the present situation, class action does not seem to be a viable option for probably two reasons: 1) the damages are not great enough; 2) Chinese courts’ unwillingness to hand out large amounts in damages.

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.