By guest authors Annachiara Biondi from Vogue Business
The tide is changing in China. International brands, largely powerless against counterfeiters in the country, have long battled a lack of enforcement and long-winded proceedings. But a recent ruling by the Shanghai Huangpu District Court signals an important shift for luxury brand protection.
On January 5, 2021, American sportswear brand New Balance was awarded RMB 25 million in damages (USD 3.85 million) after four and a half years of litigation against New Barlun (China) Co. Ltd and Shanghai Shiyi Trade Co. Ltd. The court ruled the two companies had infringed New Balance’s trademark rights through the manufacturing and distribution of shoes marked with the brand’s recognisable “N” symbol. The compensation sum, subject to appeal, is one of the largest awarded to an IP owner in the sports sector in the history of Chinese IP lawsuits. New Balance had asked for RMB 30 million ($4.6 million). New Barlun (China) Co. Ltd and Shanghai Shiyi Trade Co. Ltd couldn’t be reached for comment.
“The New Barlun victory represents years of hard work in the fight against parasite and counterfeit brands. The win is encouraging on two fronts; the increased level of damages should help act as a further deterrent to future bad actors, and also serves as a notice of the increased power of our N trademark in China and beyond,” Dan McKinnon, senior counsel, IP and global brand protection for New Balance, told Vogue Business.
Lawyers consider the ruling a sign that China is taking IP infractions and their enforcement more seriously, which could lead international brands to regain trust in the country’s legislative system after years of grievances and challenging cases. China has been improving its IP rights legislation, adding specialised IP courts and a new e-commerce law that makes e-commerce platforms responsible for the sale of counterfeits on their site. Amendments to the trademark law last year increased damages from RMB 3 million to RMB 5 million, intensified punitive damages to a maximum of five times the actual damage, and added more legal ground for brands to challenge bad faith trademark applications.
“China as a jurisdiction for brand owners has always been troubled because it has always been difficult to police copycat manufacturers and to actually get anywhere in the courts,” says Ben Mark, partner at law firm RPC. “The excitement and the hope around this decision is that it will act as a deterrent, if enforced.”
A lack of confidence in the system has not stopped brands from initiating litigation, which in turn has pushed progress forward, says Julia Dickenson, of counsel at Baker McKenzie who works with a broad range of luxury brands. “It’s good to see a court ordering a large payment like that”, though recovering the sum itself is not always the ultimate aim of these litigations. “Luxury brands want to stem the production and flow of counterfeit goods coming from China and large compensations hit [infringers] where it hurts.”
In the past it hasn’t always worked. Hermès lost a trademark suit against Dafeng Garment Factory in 2012. The Chinese company had trademarked the name Ai Ma Shi (爱玛仕), which shared the same pinyin transliteration as Hèrmes Chinese name Ai Ma Shi (爱马仕).A trial decision by a Shanghai district court awarded a record damages payout to New Balance, spelling change for IP protection.
For New Balance, providing an estimate of the scale of the infringer’s online and offline sales, was key in proving to the judge that they far exceeded the higher end of the statute of damages (RMB 5 million).
But it was a long-running battle. Disputes between New Balance and a number of Chinese companies have been going on since 2004 when an infringer first registered the “N” logo as a trademark in China. Because Chinese law usually protects the entity that first files the trademark, New Balance went through a series of litigations and appeals that delayed its own full trademark registration. New Balance published its trademark application in 2010 but didn’t receive it until 2016, says Carol Wang, principal and head of Shanghai litigation group at international IP firm Rouse, which includes New Balance’s litigation counsel Lusheng.
Following the trademark registration, proceedings sped up for the brand. In 2017, the Suzhou Intermediate People’s Court ordered three companies to pay $1.5 million in damages to New Balance for trademark infringement. A judgement by Shanghai Pudong District Court in April 2019 established that New Barlun’s use of the “N” logo was unfair competition and required damages of RMB 10.8 million to be paid to New Balance. In July 2019, the Beijing High Court also recognised New Balance “N” logo as a famous product decoration and thus worthy of protection.
Through interim injunctions, which have traditionally been difficult to obtain in similar cases, New Balance was able to freeze the defendants assets while seizing 30000 trademark-infringing shoes. The court also froze the defendants trademarks, meaning that they weren’t able to assign them to other parties and continue to trade with it under another name, a practice that Wang says is widespread. “The other parties suffered a lot even before they received the first instance judgement,” says Wang.
Wang says the Shanghai Huangpu District Court applied the new trademark law amendments to establish the RMB 25 million punitive damages.
According to Wang, the latest ruling shows that China is committed to improving its IP systems and will continue to do so. “Overall, the Chinese government has given more attention to the protection of IP rights not only because international brands have suffered, but also domestic companies,” she says. Amendments to China’s patent law and copyright law that will also start this June include raising the statutory damages to a maximum of RMB 5 million, increasing punitive damages and extending patent protection for designs from 10 to 15 years.
The country, however, remains the “priority 1” country for scale and persistence of issues related to IP rights protection and enforcement, according to a European Commission report, with 80 per cent of pirated and counterfeit goods being seized by EU customs authorities originating from China and Hong Kong. Strengthening intellectual property protection was also a key part of the US China phase 1 trade deal signed in January 2020.
“We are seeing movement in the right direction and we are hearing some of the right things coming from those in charge, but the key will be seeing that filter down to actual decisions on the ground across China, to the courts outside the very large cities and that’s where there is still skepticism,” says Dickenson, adding that smaller local courts could be more subject to the pressure of looking after local Chinese interests as opposed to multinational brand interests.
According to Baker McKenzie’s Dickenson, to best protect their interests in China, luxury brands need to make sure that they have as strong as possible IP rights in the first place, registering all relevant trademarks before launching brands for example, and then be very strategic about enforcing those IP rights, and being prepared to litigate where the case is right. “I think it is a good recipe for success in China,” she says.