China: Trademark challenges for luxury companies Zhu diFeng
The news that Burberry, the world famous UK fashion brand, is having problems with the trademark rights over its signature “Haymarket Check” pattern (the “tartan trademark”) in China reached the western hemisphere last month. The provisional trademark revocation by the Chinese Trademark Office has been attributed to factors ranging from the allegedly bad faith of the Chinese “free-rider” to the Chinese legal system. Is Burberry just another innocent victim of an unjust legal system and are other brands open to the risk of experiencing a similar situation?
Burberry facts not known
Not all the facts of the Burberry case are known so this article cannot give an accurate analysis of the still pending legal dispute in object. However, if we look at the general picture for other brands on the use and protection of trademarks in China, what should other foreign brands be aware of when managing their IP portfolio in China? Unlike the typical cases of trademark grabbing, where the Chinese free-rider registers trademarks others have forgotten to register in China, the Chinese rider has used potential weaknesses in the IP management of the right holder to defend itself against an infringement claim. The result of such a counter action by the infringer could not only later deprive the holder of its own exclusive trademark right and cause the likely dismissal of pending enforcement actions, but may spread also its negative effects over other IP rights such as design rights as we shall see below.
What the Chinese press is saying
On November 21, 2013, a Chinese manufacturer unknown to western and Chinese consumers, Foshan POLO SANTA ROBERTA Leather Products Co. Ltd. (“POLO SANTA ROBERTA”), held a press conference to announce that it had successfully obtained the revocation of the international trademark G732879 trademark of Burberry in class 18 for leather goods such as suitcases, bags and wallets, based on ground of non-use for three consecutive years. Polo Santa Roberta is a Chinese bag manufacturer which likes to keep a very low profile. It does not even possess an official website. In its statement, Polo Santa Roberta claimed Burberry had unjustly attacked and harassed it with multiple trademark infringement lawsuits in Hong Kong, Taiwan and mainland China since 2004. According to the same press statements, the successful revocation of the tartan trademark is only be the beginning of a counterstrike by Polo Santa Roberta. The latter intends to claim damages from Burberry for about RMB 500 million (about USD 83 million) as compensation for the commercial losses suffered during the nine year long enforcement by the UK brand. Furthermore, Polo Santa Roberta has invited other companies which allegedly suffered losses due to the enforcement of the provisionally revoked trademark to join Polo Santa Roberta in a class action against Burberry.
The above mentioned press conference immediately drew the attention of the Chinese media which had covered the matter with interest. Pro-Chinese feelings were evident in titles such as “Burberry has lost its tartan trademark” or coverage defining the revocation as the first Waterloo battle for a luxury brand in the intellectual property field in China. Obviously, those journalists have very limited knowledge about the trademark cancellation procedure in China: the ruling by the Chinese Trademark Office is only the first step to a complete revocation of the subject trademark, and far from the final one. In fact, Burberry filed a request for review of the ruling with the Trademark Review and Adjudication Board (TRAB) on November 18, 2013. Any party which is not satisfied with the ruling of TRAB can file an administrative lawsuit, which can also be appealed. It may last years before a final and executive decision on revocation will be issued.
Although the RMB 500 million damage lawsuit threatened by Polo Santa Roberta may be actually a bluff or a mere psychological weapon in this long fought war with Burberry, the revocation is actually a serious set-back and a warning for other foreign brand owners. An analysis of the legal grounds which may have led to the revocation decision by the Chinese trademark Office as well as precedents in China, teach us to be cautious and wait till the final decision before giving final comments. However, the revocation before the Trademark Office alone is sufficient to lift warning flags for all brand owners with trademarks in China. How could such cases happen? How can a brand owner prevent such risks of non-use cancellation? A few notes on non-use cancellation, especially seen in the context of trademark enforcement are essential.
Non-use cancellation: An Introduction
According to the Trademark Law of China in force at the time of the decision, as well as for the new Trademark Law which will enter into force on May 1, 2014, a trademark can be cancelled if it has not been used for three consecutive years. This was the provision used by Polo Santa Roberta to revoke the tartan trademark of Burberry in relation to leather goods of class 18 of the Chinese Classification System. This request was the only defense Polo Santa Roberta could use to obtain a decision of “not infringement” in the main civil proceedings instituted by Burberry.
We notice here that, based on the current Trademark Law which also applies to the Burberry case, a request for non-use cancellation has to be filed with the Trademark office and the defendant must convince the civil court to suspend the infringement litigation. The suspension will last until the final word on the revocation of the enforced trademark right will be issued. According to the new trademark law, non-use cancellation has also become an official civil defense and can be raised directly to the civil judge in charge of the case.
This will increase the negative impact of non-use cancellation in a constellation similar to the one in the Burberry case. We can in fact imagine that many defendants/infringers will make use of it, even a pretentious one to obtain dilatory effects aimed at tiring and confusing the plaintiffs. The final result however, will be the same: If the trademark is cancelled due to non-use, the defendant will no longer be considered as infringing it.
Evidence of use
The Chinese Trademark Law also provides that it is the trademark owner that has to bring evidence of the use of the trademark. According to the law, evidence of “use” is free and it is not pre-ordained in its form. In practice, proving trademark “use” may be a rather complex task. Evidence must be clear and show an effective use in a given time frame. Often, pieces of evidence which are perceived to be good for the task are indeed unclear about many of the facts to be proven. We can take an invoice as a typical example. Although a sales invoice is an authoritative document with a defined date and it is also self-explanatory as an act of sale, which is a form of effective use, it usually does not contain the trademark or the goods’ names or indications which are consistent and referable to the goods bearing the subject trademark. In sum, such evidence alone would completely miss the point of proving that the referred use through sales concerns indeed the trademark under risk of cancellation.
Another example: Advertising materials and promotions. What if advertising is conducted in the name of a retailer or carried out in the name of third parties other than the right holder? It can in fact happen that promotion in China is not conducted only by the trademark owner. If the third party doing promotion and advertising does not possess a lawful and registered trademark license, can this type of use be referred to the trademark owner? The risk of revocation remains. The same can be extended to the retail and distribution system. If the use cannot be referred directly or by license back to the trademark owner, use by third parties is not relevant and will not avoid cancellation.
Type of usage of a pattern irrelevant to trademark protection
Given that the authors are not familiar with the evidence filed by Burberry in this case, the above notes are made for general information and to explain the practical difficulties of a brand owner defending against non-use cancellations Independently from what evidence a right holder may provide, it is then important to consider whether this evidence proves a kind of “use” relevant to the Trademark law. In particular, is the use of a pattern on products for mere aesthetic purposes relevant to avoid the cancellation?
We may here hypothesize that, upon considering the reputation of Burberry and the diffusion of its products, Burberry’s own bags showing the tartan pattern may be indeed a good evidence of use of the pattern. Again, the legal question is whether the use of that pattern as an aesthetic element of decoration of a bag fulfils the function of a trademark or that of a design right.
According to the Chinese law, designs and trademarks have very clear and limited functions. The former protects the aesthetic value of an industrial product and awards time limited protection to a certain creative effort which drives higher product sales. The latter serves to identify the origin of a product and the reputation of its maker, but not the product’s aesthetic and commercial values. The use of a pattern on the inner or outer surfaces of the bag, such as it appears in Burberry bags, seems to be first and foremost fulfilling the functions of and the conditions for design protection, but not that of trademark protection. It is indeed a disputable issue and the boundaries of design and trademark protection may become blurry especially in case of famous design patterns. However, from a strict literal interpretation of the law, it can be explained that evidence of use of a pattern as a design on bags or clothes of class 25 may theoretically not fulfill the requirements of use as those set forth by the law.
Polo Santa Roberta’s efforts to cancel the tartan trademark seems also in line with this reasoning. This cancellation is still pending. If the “design use vs. trademark use” theory is confirmed, it may be followed by a partial or full revocation of the Burberry tartan trademark for goods of class 25 as well. This is a risk foreign brand owners should be aware of when dealing with patterns. A pattern used to give a certain look and aesthetic impression to a product may not duly fulfill the function of a trademark, but rather that of a design patent. In that case that type of use may not be relevant to prove the use against a non-use cancellation claim. The best and simplest remedy to avoid such risk is that of using the registered trademark pattern in its legally assigned function to indicate the product origin, in a way which does not give raise to doubts about its usage function. In this way a trademark holder should be safe from the these problems.
Losing a trademark registration is obviously a very bad occurrence for brand owners, especially considering that in force of the “first to file” rule, the exclusive right on trademarks in China only comes into existence with the trademark registration at the Chinese Trademark Office. Unregistered trademarks enjoy protection only if they are well known or enjoy a certain reputation in China. Without the tartan trademark in its exclusive ownership Burberry could not prevent any third parties from using it on the goods of class 18. That trademark would become the prey of anyone willing to use it. This will likely in turn damage the whole retail structure because the underlying license agreements will lose their lawful object. It may in sum result in a disruption of the supply and retail chain in China. Also, there may be similar trademarks currently pending approval. The elimination of the obstacle in class 18 may suddenly open to the registration of the same or similar brand by another Chinese trademark grabber!
Things can get worse, since the loss of the trademark right may influence actions against design patent grabbers, especially when the trademark right holder has failed to file such pattern as a design as well in China. In these latter cases, aside from the possibility of trying to invalidate the design patent based on lack of novelty (under the condition of being able to prove that the pattern was already known to the public at the time of the filing date of the hostile design), another and simpler avenue for the cancellation of such a hostile design is given by the existence of similar prior rights. In the Patent Examination Guidelines of 2010, trademark rights were added as one “prior right usable to invalidate a design patent”. However, from the wording of the Patent Examination Guidelines and that of the Trademark Law, reference is made to a “registered trademark”. An example of such an important use for trademarks was that of the Louis Vuitton case. In this case, WANG Jun, a Chinese individual, had registered several design patents with the LV logo on bags, fabric, etc. The prior registered trademarks of LV were the key evidence for the court to judge that WANG Jun’s designs were invalid and were then cancelled.
In the worst scenario, if a company loses its trademarks, it not only loses its exclusive trademark rights over the pattern, but any third party with a valid design patent “troll” on that same pattern may enforce them against the company for design patent infringement without the risk of being checked by a valid registered trademark. The only defense left to the company would be that of proving the lack of novelty of the design patents in question. The risks indicated here may not be applicable to the Burberry case. However, they are real risks and may be applicable to the situation of other brand owners in the future.
The Burberry case should provide a warning for all brand owners managing trademark portfolios in China. Brand owners are warned in particular to be very cautious and minded about whether they are using their trademark rights properly as trademarks rather than as designs. This is a practical risk when it comes in particular to patterns. Only an effective use of a pattern as a trademark can save the holder from non-use cancellation. Also, use of trademarks should be always well coordinated with the registration and use of the same patterns as design patent in order to optimize the pattern’s scope of protection and maximize its exploitation and enforcement.
Meanwhile we will wait to see how the Burberry case will continue to develop and await for the final decisions which may strongly influence the scope of protection of trademark rights in China.
Dr Paolo Beconcini is a partner at Carroll Burdick & McDonough and Ms Kelly Liu, Associate at Carroll Burdick & McDonough LLP.