A Series of Cases Concerning the Silk Street: Foreign Brands Attacking Chinese “Counterfeit Goods” and the Liability Problem

2007/6/1By Zhou Xiaobing,[Trademark]

Judgment Summary

Market operators bear the obligation of timely and effectively stopping the infringing conduct upon the exclusive rights of others' for the use of registered trademarks within the market. The market operators that provided favorable conditions for the infringing conduct should be jointly and severally liable for the result of the infringement.

Facts

Louis Vuitton Malletier Co. Ltd. of France (hereinafter referred to as Louis Vuitton) filed an application to the Trademark Office of the State Administration for Industry and Commerce of the People's Republic of China for registration of trademarks of "LV" and "Louis Vuitton" on 18 classes of goods. It obtained the exclusive right to use the trademarks after its application was approved with the duration of validity of the right being from January 15, 1996 to January 14, 2006. The 18 classes of goods upon which Louis Vuitton was granted approval to use the trademarks include satchels, handbags and traveling bags.

Beijing Xiushui Haosen Clothing Market (hereinafter referred to as Xiushui Company) was incorporated on April 27, 2004, and the scope of its operation included undertaking the Xiushui Haosen Clothing Market, as well as being responsible for goods entering the market. Subsequently it undertook to invite investors to participate in the Silk Market and also managed and supervised the Silk Market's operation. On February 19, 2005, Pan and Xiushui Company entered into a contract for the lease of a stall, the term of which was 5 years. Pan obtained the stall numbered F4-58 for his operation, and the rent for two years was 259, 200 yuan, and the goods permitted to be sold were bags. On April 13, 2005, Pan received a business license for a self-employed businessman, and began his operation.

On May 13, 2005, the plaintiff bought one lady's bag bearing the marks of "LV" and "Louis Vuitton" from the stall operated by Pan and the move was notarized. On May 16, 2005, the plaintiff sent a letter to Xiushui Company, informing it that its tenants were selling within the market goods which infringed the plaintiff's exclusive right to use the registered trademarks, and also listed the stall numbers of the vendors, including that of Pan. The plaintiff in its attorney's letter asked Xiushui Company to take vigorous measures to stop the infringing conduct immediately. On June 3, 2005, the plaintiff bought for a second time one handbag bearing the marks of "LV" and "Louis Vuitton" from Pan's stall and notarized the act. On September 15, 2005 the plaintiff brought an action in court. On September 28, Xiushui Company terminated its contract with Pan and placed an announcement within the market. Thereafter, Xiushui Company submitted a written request to the relevant administrative organization for industry and commerce for revocation of Pan's business license for a self-employed businessman. Then on September 29, Xiushui Company once again concluded a guarantee with all the vendors on putting an end to the sale of counterfeit goods. On October 31 of that year, the plaintiff once again bought a lady's bag bearing the marks of "LV" and "Louis Vuitton" from another stall within the Market. In the course of the aforesaid purchase, the market provided the purchasers with a national taxation invoice with the seal of National Taxation Bureau of Chaoyang District of Beijing, but the brand of the goods was not written in the column of the invoice titled "name of goods". 

Moreover, on July 20, 2004, the Beijing Administration for Industry and Commerce issued an announcement strictly forbidding the sale in every market of goods infringing upon others' exclusive right to use of registered trademarks, including the trademarks of "LV" and "Louis Vuitton". Xiushui Company put the announcement on the doorways of the market as well as on each of the stalls. On March 19, 2004, Xiushui Company issued a Notice of Invoice Issuance, requiring the stalls not to provide invoices for goods with famous marks as announced by the Beijing Administration for Industry and Commerce. This notice was put up inside the market. On March 23, 2004, Xiushui Company united several other markets and issued a Proposal for Implementing the Announcement Issued by the Beijing Administration for Industry and Commerce. Additionally, the company also compiled the Collection of Market Management System, putting an end to the sale of infringing goods within the market and actually punished some of the vendors who violated the regulations.

Pan's sale constituted infringement on the plaintiff's exclusive right to use of the registered trademark, and Xiushui Company did not stop his infringing conduct. Instead, it provided him with a site for business operations, and allowed the continuance of the infringing conduct. In accordance with the Regulations for the Implementation of the Trademark Law, its conduct provided favorable conditions for the infringing conduct of others', and therefore, it, together with Pan, committed contributory infringement. For the above reasons, the plaintiff brought an action to court and sought a court order asking Pan and Xiushui Company to stop their infringing conduct, and to jointly compensate the plaintiff for 500, 000 yuan in damages for economic loss and for its incurred reasonable litigation costs.

Judgment

After the hearing, Beijing No. 2 Intermediate People's Court took the view that in this case, the bags sold by Pan bearing the marks of "LV" and "Louis Vuitton" belonged in the same category of goods on which the plaintiff has already registered their trademarks for the 18th class of goods. These bags were not legally authorized, nor did they have legal sources. Therefore, these bags were goods infringing the plaintiff's exclusive right to the use of its registered trademarks.

The Beijing administration for industry and commerce has prohibited explicitly the selling of commodities bearing the trademark unauthorized from the trademark owner in clothing markets or small commodity markets in the administrative region of Beijing. Mr. Pan, a vendor in the Silk Street Market, should have known clearly that the leather bag is an infringing product. Mr. Pan's behavior has constituted an infringement upon the exclusive user's right of the plaintiff and Mr. Pan should bear civil liabilities to stop the infringement and compensate for the plaintiff's loss.
As the operator of Silk Market, Xiushui Company has the obligation to duly and effectively prevent within the market the conduct that infringes the exclusive right of other's registered trademarks. Immediately after purchasing the infringing products, the plaintiff informed Xiushui Company via letter in which Pan's stall number was clearly indicated. However, Xiushui Company did not take any preventive or controlling measure against Pan to stop him from continuing the infringement. In the subsequent period of time, Pan continued his infringing conduct. Although Xiushui Company rescinded the lease contract with Pan after the plaintiff instituted the action, the act of infringement upon plaintiff's exclusive right to use its registered trademarks still existed within the market. Judging from the above facts, it can be seen that although Xiushui Company took some measures to prevent the infringement, from the point of view of an objective analysis, it did not take any measures after the plaintiff first informed it by letter of the infringing conduct and during the course of the proceedings, the infringing conduct still continued.

The above facts show that in this case, Xiushui Company's measures of prevention and control against the vendors infringing others' exclusive rights were not duly taken, and this enabled these vendors to continue selling the infringing products for a period of time, and thus it can be determined that Xiushui Company provided favorable conditions for the vendors' infringing conduct. In accordance with Chinese law, Xiushui Company should be held jointly and severally liable for the consequences of the infringement.

Given the fact that the plaintiff failed to produce the evidence proving the actual damages it suffered or the profits gained by the infringers, the court used its discretion to render a comprehensive determination taking into consideration such factors as the time when the plaintiff registered its trademarks, the extent of the public recognition of the marks, the operating period of the infringers and the extent of their ill-intent, combined with a consideration of the relevant provisions in the Trademark Law. The court upheld the reasonable part of the plaintiff's claim regarding the case's expenses.

In accordance with Articles 51, 52 (2) (5), 56 (1) and (2) of the Trademark Law, Article 50 (2) of the Regulations for the Implementation of the Trademark Law, Articles 130 and 134 (1) and (7) of the General Principles of Civil Law, Beijing No.2 Intermediate People's Court rendered the following judgment on December 20, 2005:

1. Pan and Xiushui Company shall cease the act of infringing the exclusive right to use the registered trademarks of "LV" and "Louis Vuitton" immediately after the judgment becomes effective;

2. Pan and Xiushui Company shall jointly compensate Louis Vuitton 10, 000 yuan for economic losses, and 10, 000 yuan for reasonable expenses for the present case within 10 days after the judgment becomes effective;

3. the plaintiff's other claims are rejected.

Comment and Analysis

This case is one of the five lawsuits in which world-famous international luxury brands brought actions against Silk Street Market for cracking down on Chinese counterfeit goods. The plaintiffs of these five cases are respectively: Louis Vuitton Malletier from France, Guccio Gucci from Italy, Burberry from Britain, Prada from Luxemberg and Chanel from France, and the trademarks involved are respectively "LV", "GUCCI", "BURBERRY", "PRADA", and "CHANEL". The first instance judgment rendered by Beijing No. 2 Intermediate People's Court was mentioned by the Western media as a "landmark". Another publication commented, "China launched a series of moves for protecting the rights and interests of the world-famous international brands, including the case in which the Silk Market lost its suit. It clearly shows that China is gradually establishing an international IPR protection system."

The significance of the case is that it established the liability of market operators and effectively normalized the conduct of market operators. It also played a positive role in guiding the development of this line of trade and demonstrated that the Chinese government is actively fulfilling its international commitment, as well as its determination to equally safeguard the interests of domestic and foreign obligees to protect intellectual property.

Because of its special significance, this case was selected as No. 1 of "10 Typical Intellectual Property Cases in Beijing in 2006". At the same time, it was chosen by China Intellectual Property News as one of China's "Top 10 Typical Intellectual Property Cases in 2006", and was selected by the Supreme People's Court as one of the "Top 10 Typical Civil Cases in 2006".

1. Background and Special Significance of the Silk Street Cases

The old Xiushui Market located in Yong'anli, Chaoyang District of Beijing was established in 1985. It found favor with many foreign tourists because it was adjacent to the diplomatic quarter. The slogan "climbing the Great Wall, visiting the Forbidden City, and shopping in Xiushui" was once a fixed itinerary to solicit foreign tourists in Beijing. The New Silk Street Market opened for business again on March 2005, and "Silk Street Market" became a brand name that Chaoyang District, Beijing exerted efforts to build.

Like Xiangyang Road in Shanghai and Luohu Commercial City in Shenzhen, the Silk Street Market also found favor with domestic and foreign consumers because of its sale of lower-priced "famous brand" goods.

However, after only half a year of operation, Silk Street Market was sued by 5 world-famous luxury brands , the first time in its history since 1985 that it was charged with infringement for its selling of counterfeit goods.

For a long period of time, it has been the strategy of foreign businesses like Louis Vuitton to attack Chinese counterfeit goods and to race to control the market for consumer goods in China. However, most foreign businesses believe that the time needed for Chinese courts to try cases is too long and the amount of compensation is too low. Therefore, they primarily choose to proceed with administrative organizations addressing the Chinese counterfeit goods problem rather than bringing lawsuits. Only when they confront Chinese enterprises that have influence and a certain scale of operations in the same line of business, do they elect to choose litigation to safeguard their rights. 

The Chinese government has made positive efforts in IPR protection and the judicial environment has been further improved since China entered the WTO.

In this new situation, foreign businesses have also changed their way of safeguarding their rights. They have developed from taking individual actions to forming guilds and trade unions for safeguarding their rights in order to produce a large-scale effect, and to further advance the safeguarding of their rights in depth and scope. Some countries even make intellectual property protection as part of their strategic national policy. Meanwhile, foreign businesses have also changed their means for safeguarding their rights. They have gradually extended their focus from the makers of the counterfeit goods to the sellers, and have further focused their attention on the large market operators.

The cases concerning the Silk Street Market are the best illustration of this change.
For instance, in early 2005, just before the Silk Street case, a series of trademark infringement lawsuits brought by Montblanc-SimploGmbH of Germany, owner of the "MONTBLANC" brand, named the self-employed vendors as defendants. The plaintiff found such goods as pens, purses, leather bags and watches counterfeiting the brand of "MONTBLANC" in the small commodity markets in Beijing. After filing an application to the administration for industry and commerce for investigation, this German company made use of the result of the investigation and disposition, and brought court actions respectively against 12 self-employed vendors in the Silk Street Market, Hongqiao Market and Tianyi Market, seeking to order the vendors to stop their infringing conduct and to each compensate the plaintiff 100, 000 yuan for its loss.

With this suit, they transferred their focus from self-employed vendors to market operators, and chose the famous "Silk Street Market" of Beijing as their first target for safeguarding rights.

It should be clearly realized that fickleness and regret couldn't be avoided in the course of establishing Chinese brands. Counterfeit goods once had very good sales in the markets and became the "weak point" for Chinese IPR protection.
After entering into WTO, economic globalization has shortened the distance between China and the world. Therefore, it is imperative under the current situation to further perfect the Chinese IPR protection system so that it can possess international standards without further delay.

It deserves special notice that at present China has come into "the frequently-occurring period of international trade frictions", and IPR protection has become a hotspot in disputes between China and other countries. It not only involves international trade relations, but also has become a major issue affecting diplomacy and fundamental state interests. How to safeguard the interest of "famous brands" according to law is not only a legal issue, but also an economic and sensitive political issue.

2. Problem of Determining the Liability of Market Operators

The focus in this case is how to determine the liability of market operators. It can be analyzed from the following two levels:

(1) The problem of whether the Silk Street Market bears the obligation of timely and effectively preventing infringement on the exclusive right to use the registered trademark within the markets.

As to the question on the first level, in this case Xiushui Company entered into a lease contract with Pan, and provided a place of business operation, collected rents and an operation guaranty. Judging from the rights and obligations of Xiushui Company stipulated by the lease contract, on the one hand, Xiushui Company has the right to conduct uniform management and supervision, to decide the time, variety of goods and scope of operations, to make adjustments in accordance with the needs of the market, and to supervise the business activities of Party B. On the other hand, Xiushui Company bears the contractual obligation of maintaining market order, preventing illegal conduct and reporting such conduct to the relevant administrative departments.

Second, the Regulations for the Implementation of the Trademark Law provides that intentionally providing facilities such as storage, transport, and mailing for the purpose of infringing another's exclusive right to use a registered trademark shall constitute an infringement on the exclusive right to use a registered trademark.

Xiushui Company provided a place for business operations, and, as the manager and supervisor of the Silk Street Market, it should be aware that intentionally providing storage, transport and mailing facilities for the purpose of infringing another's exclusive right to use a registered trademark constituted an infringement on the exclusive right. Therefore, upon receiving the attorney letter from the Louis Vuitton, it should have known that conduct infringing the exclusive rights of Louis Vuitton existed within its market, and accordingly should have taken timely and effective measures to stop the infringing conduct. Otherwise, it should be held responsible for all relevant liability.

 (2) The question of whether Xiushui Company possessed the common intent of infringement, and whether it provided favorable conditions for defendant Pan to carry out his infringing conduct in the case.

Judging from the facts of the case, the attorney's letter sent by Louis Vuitton to Xiushui Company clearly indicated the specific numbers of stalls selling infringing goods, and asked Xiushui Company to take active measures, and provided detailed ways of communication if there were any problems about which they needed to contact the attorneys. However, after receiving the attorney letter, Xiushui Company did not contact the attorneys in time, nor did it take any effective measures to prevent the sale of infringing goods, which enabled Pan to continue his conduct of selling the infringing goods. Xiushui Company possessed subjective intent. Therefore, it can be determined that Xiushui Company provided favorable conditions for Pan's infringing conduct involved in the case. In accordance with Chinese laws, Xiushui Company should bear joint liability for the infringing consequences caused by Pan.


The author is from Beijing No.2 Intermediate People's Court

 

 

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