A Jurisprudential Analysis of the Case Italian Ferrero Co., Ltd. v. Mengtesha Food Co., Ltd.

By Huang Yong,[Patent]

Summary

The author has noticed that during this trial, Ferrero also filed a lawsuit against the Trademark Review and Adjudication Board (TRAB) of SAIC for its application in China for a three-dimensional mark being denied by the TRAB. In Nov. of 2007, Beijing No.1 Intermediate People's Court rendered a judgment of first instance and revoked the Review Decision on Rejection of the International Registration No. 783985 "Three-Dimensional Mark" made by the TRAB on the grounds that Ferrero's three-dimensional mark has possessed the feature of distinctiveness and the TRAB should approve its application for extended territorial protection in China.4 In this case, attention was paid to Ferrero because its trademark became the first three-dimensional mark approved through litigation in China. In view of the present case, it is not hard to conclude that it is a strategic choice for Ferrero after it encountered various difficulties in the protection of its own rights and interests through the AUCL.

The Ferrero case is a typical one regarding the issue of China's IPR protection and the application of the AUCL. The dispute on this issue suggests that China's IPR protection system is on its way to perfection. This case and the jurisprudential issues triggered by Ferrero's three-dimensional mark application case still deserve further thinking.

 

The case of Italian Ferrero Co., Ltd. (Ferrero) v. Mengtesha Food Co., Ltd. and Tianjin Economic and Technology Developing Zone Zhengyuan Distributing Co., Ltd. arose from a dispute concerning the special packaging of chocolates and trade dress... In 1982, Ferrero Co., Ltd. began manufacturing fine chocolates under the name, Ferrero Rocher. By 1984, the company was selling its products publicly in China. In 1986, it registered the name Ferroro Rocher and its trademark graphics with the Chinese Trademark Office. Ferrero filed a lawsuit against Mengtesha with Tianjin No.2 Intermediate People's Court. The case was tried in 2003. Tianjin High People's Court rendered a judgment of second instance in 2005, and held that Mengtesha (located in Zhang Jia Gang) used the specific packaging and trade dress of Ferrero without its approval.. This constituted unfair competition, and ordered the company to cease and desist infringement and pay compensation of 700,000 RMB. On May 10, 2006, the Supreme People's Court issued a written order at the request of Mengtesha, that the Supreme People's Court shall retry the case.  During the retrial, the original judgment had been suspended.. The outcome is still pending. Whatever the result the issues covered by this case should be given due attention. In the author's opinion, the case is typical in that it has raised several legal issues that deserve discussion.

I. Nature of the Case

A. Trial of Civil Cases Involving IPR and Unfair Competition Dispute Cases

The author holds the view that the Ferrero case is an IPR case concerning unfair competition by market players. There are particular ways to deal with this kind of case under existing laws and practices. According to the Symposium Minutes of the Supreme People's Court on the Trial Work Involving Intellectual Property Rights of Some Courts, the third category of civil cases involving IPR disputes that the court should accept and hear under law, i.e., cases of unfair competition, refers to cases accepted and heard in pursuance of Articles 5, 9, 10 and 14 of the Anti-Unfair Competition Law ("AUCL"). For unfair competition acts tried in IPR cases, these articles can be roughly divided into three categories,

1.  For the competing contents between this law and other laws on IPR, remedy can be sought under different laws for unfair competition acts. For example, concerning unfair competition resulting from the passing off others' registered trademark, the AUCL has provisions that compete with the Trademark Law in the latter's provisions on infringement of trademark rights.

2.  These articles falls into the special provisions of the competition law, but the act of unfair competition is still targeted at a specific right holder. In the Ferrero case, unfair competition was established because of the alleged imitation of the specific packaging and trade dress of a famous commodity. Presently in China, it is hard to acquire remedies under other IPR statutes. However, the right holder of the specific packaging and trade dress can still have remedies by filing litigation against infringers or actors of unfair competition.

3. The unfair competition act is aimed at an unspecific right holder, including other business operators and consumers in market competition. For example, forging or falsely using one's goods, symbols of quality like symbols of certification and symbols of famous and high-quality goods, and making false advertisements. 

B. Relationship between the AUCL and IPR Statutes

The deeply hidden implication behind the Ferrero case is that it involves the relationship between the AUCL and IPR statutes. Various scholars had once compared the three main statutes of traditional intellectual property (Patent Law, Trademark Law, and Copyright Law) to "three icebergs floating on the surface of the sea and the AUCL to the water under the three icebergs". The inclusion of the abovementioned in the scope of adjudication embodies the AUCL as the supplement to IPR statutes in a specific field. Proven in practice, it is far from adequate to protect intellectual property rights and intellectual products by merely relying on an IPR legal system. Intellectual property laws can only protect intellectual products granted with intellectual property rights, such as works, invention and trademark, rather than those created by workers who could not or failed to acquire intellectual property rights. In some instances, even if one intellectual product possesses intellectual property rights, it does not necessarily mean that the product shall enjoy the protection of IPR laws in every aspect. For example, the trademark of a commodity is by itself entitled to the protection of the Trademark Law, but the packaging and trade dress of the commodity are not under the protection of the Trademark Law.

However, the differences between unfair competition cases and the traditional IPR cases also deserve our attention.

1. Attention should be given to the protection of the specific right holders' interests and the market order. Article 2 of the AUCL states: "unfair competition" in this law refers to acts of operators which contravene the provisions of this law, damage the lawful rights and interests of other operators, and disturb the socio-economic order. This provision expressly points out that the target infringed on by an act of unfair competition includes not only the lawful rights and interests of a specific right holder (one or some market competitors) but also the normal social-economic order. In contrast, the traditional IPR law mainly protects the rights of IP owners.

2. In acts of unfair competition, additional comprehensive legal restraints have been created. Administrative departments for supervision and inspection on their own initiative may investigate unfair competition acts. This is different from the principle of "no trial without right holders' charge" followed in traditional IPR infringement cases. Interested parties may apply for administrative and even judicial remedies, the scope of which is not necessarily limited to specific IP rights holders. Lastly, the manner for cracking down on acts of unfair competition are not limited to the demand of ceasing infringement, but also include administrative penalties.

II. Elements for Consideration in Determining Acts of Imitation

The definitive issues contained in the Ferrero case involve the determination of acts imitation. The following is an analysis by the author in the present case. The issues, applicable laws and judgments are taken into account in both the courts of first instance and second instance.

A. Popularity

Several Provisions on Prohibition of Unfair Competition Acts of Imitation of the Name, Packaging and Trade Dress Unique to Well-known Commodities (the "Provisions on Prohibition of Imitation"), promulgated by SAIC on July 6, 1995, states that "well-known commodities" in this law refer to those that have certain popularity on the market and are known by the relevant public.

The Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition (the "Interpretation"), effective as of 1 February 2007, states that a commodity shall be recognized as well-known under Article 5 (2) of the AUCL if it has certain market reputation in China and is known by the relevant members of the public.

First, the adoption of the definition to the term "well-known commodity" in the Provisions on Prohibition of Imitation may be understood as indicating that a commodity cannot be recognized as well known if it fails to conform to this definition. This definition is a necessary condition for the determination of a commodity as well known by AICs at the time of enforcement of law. However, this provision sets no boundary on the market scope, thus leaving certain room for discretion in the practice of administrative enforcement. In the author's opinion, the interpretation only enumerates a full condition for the determination of a commodity as well known in judicial practices and stressed the geographical scope of reputation, the market within the territory of China.

Nevertheless, this does not mean that a certain commodity cannot be recognized as well known if it is well known in the international market, which also leaves a certain room for discretion for judicial practice.

Secondly, known by the relevant public is an important criterion for the judgment of popularity. Whether the public is "relevant" should be determined in terms of the uniqueness of a disputed commodity as well as business operators, direct consumers and the public that may be covered by such business activities as promotions and sales.
In addition, the Interpretation also sets out specific contents and tests that the people's court will apply when determining whether a commodity is well known, such as sales period, sales region, sales amount, sales target, duration, extent, and geographic region of promotional activities undertaken.

In the Ferrero case, the judgment of popularity is a focal point. The courts of first instance and second instance respectively rendered factual findings and made legal analysis. The court of first instance mainly based its decision on a popularity comparison of the plaintiff and defendant's products China's domestic market. Though at that time the Interpretation had not been promulgated, it still can be seen that the judgment imposed territorial restrictions on popularity on its own initiative in light of the territorial features of IPR protection. However, we noticed that the court of first instance did not conclude that the plaintiff's commodity was not famous; rather it held that the time that the plaintiff's commodity became famous is after that of the defendant's in China's domestic market. It excluded the determination of popularity of the plaintiff's commodity abroad. By comparison, the court of second instance recognized that the plaintiff's commodity is well known in the foreign markets and included it in its adjudication. In view of the author's previous analysis of the Interpretation, the judgment of the first instance court was improper. After reviewing the popularity in China's domestic market, the court of first instance failed to conclude that the plaintiff's commodity is not well known, but found that its popularity came later than the defendant's did. In the case at bar, it is more important to make a judgment on the popularity of the plaintiff's commodity in the foreign markets and analyze the corresponding consequences.

B. Uniqueness

1. Principle of Prior Use

In accordance with the Provisions on Prohibition of Imitation, the specific name, packaging and trade dress of a commodity shall be determined in light of the principle of prior use. Actually, one reason for the prior use principle is that unlike trademarks and patents the specific name; packaging and trade dress are not entitled to the protection of registration. However, for business operators of a specific commodity, if there is prior use by one business operator, the other business operators are presumed to have noticed this prior use as far as the degree of care in the active participation in market competition is concerned. Thus, if another business operator used the same name, packaging and trade dress, he is deemed to have committed the act of imitation unless he can prove bona fide use. This is why the Interpretation states that where a later user uses the product name, packaging or trade dress identical or similar to a well-known product in a territory different from the territory where the business of such well-known products has been covered, the later user may be free from the claim of unfair competition act under Article 5(2) of the AUCL if he/she can prove that he/she is a bona fide user. The burden of proof lies with the suspected imitator to establish that he/she is a bona fide user of the product name, packaging or trade dress used by another previously.

In the Ferrero case, the court of first instance and second instance are affirmative as to the determination of the prior use and uniqueness of the plaintiff's product packaging and trade dress. In regards to the first issue, the popularity in the foreign market. Had the court of first instance taken the reputation of the plaintiff's commodity in the foreign market into account and incorporated the defendant, a business operator in the same industry, into the scope of the relevant public, then the issue is whether the defendant had, prior to the use of its own packaging and trade dress, already had knowledge of the circumstances of the plaintiff's commodity. Correspondingly, conclusions may differ as to the determination of reputation in the domestic market. On the other hand, in view of the provisions of the Interpretation, further consideration is needed as to whether the defendant is a bona fide user in terms of its use of the packaging and trade dress.

2. Principle of Distinctiveness

The Provisions on Prohibition of Imitation highlights its requirement for the principle of distinctiveness by defining the meaning of the terms "name", "packaging", and "trade dress". Whereas the Interpretation sets out its requirement for the distinctiveness of the specific names, packaging and trade dress by excluding common names, packaging and trade dresses from the scope of protection, stating that the law does not protect common product names, packaging and trade dresses. In the Ferrero case, the principle of distinctiveness was not an issue in dispute because the court of first instance and second instance affirmed that the plaintiff's packaging and trade dress had the function of distinguishing commodities and were not purely for decoration or beautification.

C. Confusion and Mistake

Does the provision of the AUCL that "so that his commodities are confused with the well-known commodities of another person, causing buyers to mistake them for the well-known commodities" stress the actual occurrence of the consequences of the confusion? Is it based on this confusion that buyers completed their purchasing acts? The Provisions on Prohibition of Imitation and the Interpretation differs slightly on this point. The former states "sufficient to cause buyers to mistake them for the well-known commodities", and the latter states "sufficient to cause relevant members of the public to mistake the origin of a commodity, including misrepresenting the relationship or association, such as suggesting licensing relations or business affiliations, with the business operators of well-known commodities. Obviously, both are definite that it is not necessarily only when the actual confusion and misunderstanding resulted that the act of imitation can be identified. In the meantime, to objectify the criterion for judging whether it is "sufficient" to cause confusion and mistake, both use the "buyer" and "the relevant public" respectively as the judgment criterion for subjects and provide the following bases for judgment:

1. The Provisions on Prohibition of Imitation: use of the name, packaging or trade dress proximate to that of a well-known commodity shall be deemed if the main parts and overall image of the two commodities are proximate and ordinary buyers may mistake them if they exercise ordinary care. Where mistake or confusion has already occurred on the part of ordinary buyer, proximity can be deemed.

2. The Interpretation: use of, on the same commodity, same or basically visually same name, packaging and trade dress of a commodity shall be deemed sufficient to cause confusion with the well-known commodity of another person. The determination of identical or similar to the name, packaging and trade dress peculiar to a well-known commodity may refer to the judgment principle and method for identical or similar trademarks (Articles 9 and 10 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the Law to the Trial of Civil Dispute Case Arising from Trademarks.)

This element for consideration is also the focus of dispute in the Ferrero case. The court of first instance adopted a popularity comparison method, determining that the packaging and trade dresses of the two commodities are sufficient to cause confusion and mistake because the defendant's commodity enjoys a higher reputation than the plaintiff's commodity. However, it failed to make any judgment as to the existence of the likelihood of confusion and mistake between the packaging and trade dresses of the two commodities from the perspective of visual comparison. By contrast, the court of second instance held that the defendant used the packaging and trade dress similar to that of the plaintiff's commodity, and then challenged the bona fide use of the packaging and trade dress on the part of the defendant.

D. Violation of Honesty and Good Faith and Generally Accepted Business Ethics
In the Ferrero case, Tianjin High People's Court held the view that a well-known commodity should be the fruit of honest business. Hence, business fruits reaped by means of unfair competition cannot in law be used as popularity evaluation of products. There is no express provision in the AUCL, the Provisions on Prohibition of Imitation and the Interpretation that acts of imitation are in violation of the principle of honesty and good faith. However, Article 2 of the AUCL expressly states that an operator shall, in transactions in the market, follow the principle of voluntaries, equality, fairness, honesty, and credibility, and observe generally recognized business ethics. "Unfair competition" in this law refers to acts of operators which contravene the provisions of this law, damage the lawful rights and interests of other operator, and disturb the socio-economic order.  Thus, it can be deemed that acts of competition committed by an operator in violation of the principle of honesty and good faith and generally accepted business ethics should fall into the category of unfair competition acts.

The direct application of the general articles of the AUCL by the court should be duly recognized. The general articles with the feature of abstractness and equity endow a judge with "the right to create supplementary rules within a certain scope"2, but we need to pay attention to the matter of affirming the "generally accepted business ethics" when making a specific analysis. To be specific, for the application of this provision, attention should be given to three issues: first, the ethics must be about business; second, the ethics must be generally accepted; third, whether the effect of the general articles can be realized. The latter two are the core issues that need to be solved in judicial practice.

1. "Generally Accepted" Standard

Two aspects, territory and industry, need to be considered in determining whether business ethics are generally recognized. From the perspective of territory, it is believed that the "generally accepted" territory scope should be global and international. Certainly, there may be some exceptions peculiar to an industry of a special territory. From the perspective of industry, some business ethics generally accepted by an industry involve not only such general terms as "honesty" and "no fraud" but also specific industry conventions. Thus, in certain circumstances, the uniqueness of an industry needs incorporation into the scope of the "generally accepted" consideration. In addition, the author maintains that such documents as the guide to uniform business ethics formulated by international organizations or chamber of commerce should also be included into the scope of consideration. With respect to the "generally accepted", what standard shall ultimately be used to ascertain territory and industry should be given consideration. It is the author's belief that based on the accumulation of judicial experiences, a combination mode, such as generalization of principles and enumeration, be adopted to ensure rigorous expression for the connotation of the generally accepted business ethics and simultaneously keep greater elasticity and fit for application in judicial discretion.

2. Effect of General Articles and Realization

The author believes that for the realization on the effect of general articles, three aspects need consideration. First, the precondition for the application of general articles to a pending case is to crystallize business ethics into norms of judgment and to turn abstract principles into specific system constraints. This process is to be completed through judges' interpretation and argumentation. Thus, it becomes more urgent and necessary for a judge to explain this process. The judge bears the obligation to demonstrate to both parties and the social community the "lawfulness" of the general articles, i.e., the outcome of the judgment is consistent with and does not deviate greatly from that the public would get if following their moral habits and values. Second, general articles are generalized provisions, the content of which depends almost on judicial interpretation. For a long time, some countries had tried to realize the effect of general articles by giving definitions to and fixing standards for general articles in legislation and judicature, but no desirable effect had been achieved. Scholars in various countries began to turn their attention to cases studies and set up case types, to analyze the individual cases in accordance with the general articles and then classify them into different types. It is expected that these different category of cases will be used as a comparison basis for other cases awaiting trial.3 Third, the independence of general articles should be guaranteed and in the meantime, the compulsory nature of these articles should be highlighted. These articles cannot be made merely as legalized morals in form and the compulsory force of these articles should be strengthened in the form of judicial judgment. 

III. Application of the Paris Convention for the Protection of Industrial Property in China

In matters regarding the application of law, the court of second instance applied both the AUCL and the Paris Convention for the Protection of Industrial Property (the "Paris Convention") to the instant case. The provisions of the General Principles of the Civil Law of the PRC concerning the application of law to civil relations with foreigners may account for the application of the Paris Convention to the Ferrero case. Moreover, both China and Italy are member states of the Paris Convention and where the provision of the Chinese law differs from that of the Paris Convention, the provision of the Paris Convention applies.

The AUCL defines unfair competition acts by way of enumeration. In contrast, Article 10 (2) of the Paris Convention cited by the court of second instance defines unfair competition acts in principle, stating that any act of competition contrary to honest practices in industrial or commercial matters constitutes an act of unfair competition. All acts of such a nature as to create confusion by any means whatever with the establishment, the goods, or the industrial or commercial activities, of a competitor, shall be prohibited. People in academic circles generally believe that the Paris Convention is the first statute to govern unfair competition acts in the IPR field. After one hundred years, the provisions of the Paris Convention still have important practical significance. In the Ferrero case, both the citing of Article 2 of the AUCL and the citing of the Paris Convention can lead to the same conclusion. The act of a defendant in violation of the principle of honesty and good faith and business ethics shall be determined as an act of unfair competition. Nevertheless the establishment of the application of international laws in the judicial practice in matters concerning IPR disputes among the member states of the Paris Union is a positive stance as to the judicial system and should be given due recognition. 

Endnotes:
1. For the details of the case facts, the courts' judgments and the basic analyses, please see Huang Yong & Cen Zhaoqi, An Analysis of the Chinese and Foreign Classic Cases Involving the Anti-Unfair Competition Law, China Citic Press, 2007, pp.124-132.
2. Xu Guodong, Explanation of the Basic Principles of Civil Law, China University of Political Science and Law Press, 2004, p.13.
3. Xie Xiaoyao & Wu Sihan, "On Certainty of General Articles", Law Review, 2004, 3rd issue.
4. Guo Jingxia, "Italian Brand Ferrero's Three-dimensional Mark Granted Extended Territorial Protection Through Litigation", see http://www.chinacourt.org/html/article/200711/21/275437.shtml (2008-1-15).

                                                                               (Translated by Zhang Meichang)

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