Guard Against the “Legalization” of Infringement by Squatting

Issue 31 By Horace Lam and Betty Li,[Patent]


Introduction

Though having been trying hard to strengthen security guard against IP and paying more and more attention to the IP protection of both imported goods and goods at home, China still has loopholes in IP systems exploited by lawbreakers. For example, in China, the legal privilege of trademark belongs to the first applicant, not the first user, thus leading to trademarks hijacking from time to time.  Here is a real case alarming to IP owners about a sly old fox who is famous for infringement. (It’s a real case despite the fake name and related products.)

Mr. Zhou

Mr. Zhou is an ordinary, middle-aged Chinese man with an unremarkable past. In recent years, however, he has made a name for himself in the counterfeiting “industry”.

Mr. Zhou established four companies and named himself as legal representative and operator. In his marketing materials, Mr. Zhou describes the company as “an enterprise which specially produces [sic] various kinds of suspension springs used in automobile [sic], motorcycles and other gasoline motors The company . . . covers an areas [sic] of more than ten thousand square meters, 300 of staffs [sic], and 20 technical staff. . .”

Claims were also made that the company had passed several quality control tests and obtained various certificates.  In addition, Mr. Zhou assures his customers that his products are on the cutting-edge and have excellent performance ratings. Despite the rosy picture Mr. Zhou paints, a visit to the factory reveals that his operation is located in a converted residential courtyard with a few 1970s-generation machines. There are approximately 100 workers in the “factory” and no on-site technical expertise to support and supervise production. 

An in-depth investigation further revealed that the four companies are registered and operated under the same business address, the same business operation, and the same set of accounting books.  These four companies are, in essence, a single operation with Mr. Zhou at the helm.

SMART is one of the largest oil corporations in the world with many international locations, including China. Since its inception, SMART has taken measures to protect its intellectual property. In 1982, it filed trademark applications for the house brand “SMART” with the China Trademark Office (CTMO) in Classes 4 and 12, covering lubricants and auto parts respectively. SMART subsequently filed, and was granted, more than 20 trademark registrations for SMART covering different classes to protect its brand in China.

At some point, Mr. Zhou registered two companies named “SMART Suspension Springs Co., Ltd.” and “SMART Import and Export Co., Ltd.” in Ningbo, Zhejiang province. The companies produced “SMART” branded suspension springs and sold them not only in China, but overseas as well. Mr. Zhou registered “SMART” with the CTMO in Class 7 covering suspension springs, and also registered the domain name www.smart.com using the website to sell infringing automotive parts.

SMART learned of Mr. Zhou’s infringing activities and brought trademark infringement and unfair competition actions against him and his companies at the People’s Court in China. The parties ultimately settled the case on the following terms:  Mr. Zhou was to immediately cease the use of SMART’s trademarks, transfer the hijacked marks and domain name back to SMART, pay damages to SMART, and change his companies’ names. The settlement agreement was then so ordered by the court.

Mr. Zhou moves on to SUPER CLEVER

Although Mr. Zhou agreed to cease infringing SMART’s trademarks, he was undeterred when it came to other companies and, to some extent, he became emboldened. Rather than competing fairly in the marketplace, Mr. Zhou set his eyes on SUPER CLEVER as his next target.

SUPER CLEVER is a world famous auto parts manufacturer with a history of over 100 years.  In 1994, SUPER CLEVER established its first joint venture factory in China, and established more than ten subsidiaries and joint venture factories over the last decade.

SUPER CLEVER owns more than 1000 trademark registrations for “SUPER CLEVER” marks in over 150 countries worldwide, including 20 registrations in China. Since SUPER CLEVER’s core products are automotive parts, it has focused its trademark registrations in subclass 1202, class 12 for automotive parts and components. 

The packaging of “SUPER CLEVER” branded products is also unique and eye-catching.  SUPER CLEVER has used the packaging since 1992. After a long period of use and promotion, SUPER CLEVER branded products and packaging have already gained recognition from Chinese customers.

Having unsuccessfully infringed SMART’s IP rights, Mr. Zhou decided to try again.  In 2001, Mr. Zhou registered the trade mark “SUPER CLEVER 太机灵” in Class 7 subclass 0750 for “suspension springs”. Since he was ordered to stop using SMART’s mark, he simply repackaged his products and sold them under his infringing “SUPER CLEVER” brand.

In the SMART case, the court ordered Mr. Zhou to change the company name “SMART Suspension Springs Co., Ltd.” and “SMART Import and Export Co., Ltd.”  He did so by again hijacking another name: “SUPER CLEVER Suspension Springs Co., Ltd.” and “SUPER CLEVER Import and Export Co., Ltd.”; Mr. Zhou registered the domain name www.cnsuperclever.com as the company website for SUPER CLEVER Suspension Springs Co., Ltd.

Mr. Zhou then filed a design patent application which is distinctly similar to SUPER CLEVER’s product packaging and, since there is no substantial examination for design patent applications in China, the Patent Office approved Mr. Zhou’s application in 2006.  Mr. Zhou then attended and exhibited “his” goods at auto parts shows around the world, including the US, Germany, France and China.

Many consumers believed Mr. Zhou’s products were genuine “SUPER CLEVER” auto parts and placed orders with Mr. Zhou’s companies. Upon delivery, however, consumers realized that there were serious quality defects in Mr. Zhou’s products and complained to SUPER CLEVER headquarters.

Further more, in 2008, Mr. Zhou filed an International Registration for “SUPER CLEVER 太机灵” based on his home country registration. The international registration designated more than 20 countries worldwide.

SUPER CLEVER was very quick to react and immediately took all appropriate legal actions against Mr. Zhou and his companies around the world. 

SUPER CLEVER’s trademark protection in China

Litigation

SUPER CLEVER filed trademark infringement and unfair competition actions against Mr. Zhou and his companies in China.

In the trademark infringement litigation, SUPER CLEVER claimed that, even though Mr. Zhou had a trademark registration for “SUPER CLEVER 太机灵” covering the Class 7 item “suspension springs” for general machines, he did not use the registered mark on that item.  Rather, he used “SUPER CLEVER” -- without the Chinese portion of the registered mark -- on suspension springs for land vehicles.

Although from a lay perspective, there is no significant difference between suspension springs for general machines and suspension springs for land vehicles, the items are considered distinctive, because the two items are categorised under Classes 7 and 12 respectively.

SUPER CLEVER argued that Mr. Zhou and his companies used “SUPER CLEVER” on suspension springs for land vehicles and therefore, Mr. Zhou and his companies infringed SUPER CLEVER’s trademark rights.

In addition, SUPER CLEVER further argued that, according to the relevant provisions of China’s Anti-unfair Competition Law, Mr. Zhou and his companies had engaged in acts of unfair competition by using SUPER CLEVER’s trade name and product packaging that was substantially similar to SUPER CLEVER’s and caused consumer confusion. (As this article goes to press, no decision has been made in this matter.)
 
Patent Invalidation

In February 2008, SUPER CLEVER filed an application to invalidate Mr. Zhou’s packaging design patent with the Patent Review and Adjudication Board (PRAB).  SUPER CLEVER argued that a) Mr. Zhou had previously published and used the packaging before the application date of 21 September 2005; b) SUPER CLEVER had previously published and used similar packaging; and c) Mr. Zhou’s packaging infringed SUPER CLEVER’s trademark rights.

The PRAB examiner ruled in favour of SUPER CLEVER and invalidated Mr. Zhou’s packaging design patent.

Domain Name Recovery

SUPER CLEVER filed a complaint with the Asia Domain Name Dispute Resolution Centre, Hong Kong Office, (“Centre”) to cancel Mr. Zhou’s registered domain name of www.cnsuperclever.com.

The Centre ordered Mr. Zhou to transfer the disputed domain name to SUPER CLEVER, and found that a) the disputed domain name is confusingly similar to SUPER CLEVER’s registered trade mark “SUPER CLEVER”; b) Mr. Zhou does not have legitimate rights and interests over the disputed domain; c) SUPER CLEVER is more proximate to the mark than Mr. Zhou; and d) Mr. Zhou maliciously registered and used the disputed domain.

Other Proceedings and Measures

SUPER CLEVER has taken all possible proceedings and measures wherever appropriate to enforce its trade mark rights, such as filing trademark cancellations with the CTMO against Mr. Zhou’s registered trademark for “SUPER CLEVER太机灵”; filing administrative complaints with the AIC at various auto parts shows in Beijing and Shanghai where Mr. Zhou exhibited the infringing products; filing complaints with various B2B/B2C websites to remove infringing sites; and lobbying with embassies for support to balance local protectionism problems.  Despite these efforts, Mr. Zhou persists.

SUPER CLEVER’s trademark protection in other jurisdictions

USA

In 2007, SUPER CLEVER sued Mr. Zhou and his companies in the Nevada District Court for wilful trademark infringement, unfair competition, trademark dilution, cyber squatting, common law trade mark infringement, and deceptive trade practices.  Mr. Zhou did not appear to defend his business practices.  In the final judgment, the Court concluded that all of “the elements required to prove SUPER CLEVER’s claims of federal trademark infringement and dilution, cyber squatting, and federal unfair competition have been sufficiently alleged and the motion for entry of default judgment is granted.”

The Court awarded SUPER CLEVER US$3.1 million damages.  The Court also awarded permanent injunctions against Mr. Zhou and his companies from, inter alia, infringing SUPER CLEVER’s trade marks and using its infringing domain name cnsuperclever.com.  Recently, the Court issued a bench warrant for Mr. Zhou’s arrest for failure to comply with the court’s judgment.  Mr. Zhou’s personal ID is recorded with the US Marshal and Customs and he will be arrested upon arrival to the United States.

France

While exhibiting at the France Auto Parts Show, Mr. Zhou and his companies were raided.  As a result, SUPER CLEVER sued Mr. Zhou and his companies for infringement upon SUPER CLEVER’s trademarks. Again, Mr. Zhou defaulted.  The Court issued a permanent injunction against Mr. Zhou and granted judgment in favour of SUPER CLEVER.  In addition, the Court ordered Mr. Zhou and his companies to pay EUR 40,000 to compensate SUPER CLEVER’s losses from the trademark infringement.

Germany

SUPER CLEVER filed a trademark infringement suit before the Regional High Court of Frankfurt against Mr. Zhou and his companies.  This time Mr. Zhou interposed a defence arguing for non-infringement. The Court rejected his defence and ordered him and his companies to a) provide relevant information in relation to the sales of his infringing products; b) pay SUPER CLEVER EUR 4,721.60; and c) pay court costs.

SUPER CLEVER also identified Mr. Zhou’s German distributor and filed a trademark infringement action against it. The Court issued an injunction preventing the distributor from distributing Mr. Zhou’s products. 

Italy 

SUPER CLEVER sued Mr. Zhou’s Italian distributors for selling Mr. Zhou’s infringing products in Italy.  An interlocutory injunction was granted against the distributors. 

Mr. Zhou’s actions against SUPER CLEVER’s affiliate company in China

In response to SUPER CLEVER’s defence of its intellectual property rights, Mr. Zhou is recalcitrant and, instead of admitting defeat, he has responded by counter-suing SUPER CLEVER’s affiliate company in China.

Trademark infringement and unfair competition litigation

Mr. Zhou filed two lawsuits against SUPER CLEVER’s Chinese subsidiary based on trademark infringement and unfair competition, going so far as to copy the arguments interposed by SUPER CLEVER in its lawsuits against Mr. Zhou and his companies. The Court dismissed Mr. Zhou’s claims in both instances and ordered him to pay court costs.  

Patent infringement case

Mr. Zhou filed a patent infringement action against SUPER CLEVER’s China affiliate for using Mr. Zhou’s patented packaging. The court papers for this case were never served on the affiliate company, which, therefore, did not respond and the first instance court issued a default judgment in favour of Mr. Zhou.  After the affiliate company found out about the judgment, it filed an appeal with the relevant higher people’s court. Mr. Zhou thereafter withdrew all of his claims.

Bribery allegations

During the pending of the above actions, SUPER CLEVER received an email from cnsuperclever@cnsuperclever.com.The sender claimed to have evidence to prove that SUPER CLEVER had bribed judges to win its cases and would submit the materials to the relevant authorities.

SUPER CLEVER immediately submitted the email to the relevant court. Mr. Zhou denied that he sent the email. The court took no further action on the matter.

How to reduce the risk of hijacking

The underlying legal issues in these disputes are not complicated.  This matter, however, tells us how sophisticated and aggressive an infringer can be. Nowadays, infringers learned from their failed infringing actions and turn to attempt to legalize their actions by hijacking. Things always happen in practice that infringers claim to be the right owner with all kinds of registration documents, and some countersue the victim. Sometimes, the only way to solve this problem is to purchase back from the hijackers, which means the legal acknowledgement of hijacking.

Above all, right owners should be fully aware of the existing high risks of hijacking in China, and take corresponding measures. Multinational enterprises should regularly check and update their global IP portfolio, even if they have not started business in China yet. Since once counterfeiting issues occur, companies must act quickly using a combination of enforcement actions to protect the companies’ intellectual property rights.

About the author:

Horace Lam is a partner heading the intellectual property practice in Lovells Beijing office.
Betty Li is an Associate of the intellectual property practice in Lovells Beijing office. 

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