By Sunny Cheng from China IP
Passing-off in China, since its germination in late 1990’s, has rampaged like a wild fire in every business sector across the board in every imaginable disguise, its continuing “success” reflecting the legal feebleness in supplying with a remedy, despite major efforts of delivering ever-increasing judicial and administrative blows upon passing-off activities. Amidst this turbulence, a unique “modernistic” type of passing-off catching most attention and producing most hot topic among the legal practitioners is the practice of registering a well-known trademark in China or elsewhere with a clear intention to cause confusion among the public.
Reality Enactment of Passing-off
The basic feature to pass off a trademark of market reputation is to take advantage of the business registration systems in this country or others by intentionally adopting the marks as a business name, then promote from the false association with the reputable mark through marketing, thereby causing the relevant public (including consumers or traders) to mistakenly believe the products are originated from or associated with the reputable mark.
Some more crafty passers-off would even take the extra steps to obtain trademark registrations, design patents, domain names, wireless IP addresses, or copyright registration of identical or similar marks, product packaging, commercial get-ups or other trade identities, and use them in connection with their own business names in market activities. Such multidimensional cloning will produce an immediate result of misleading the relevant public into mistakenly believing the passing-off products or services to be those under the reputed marks, thence reaping unjust enrichment. One reason of the difficult eradication of passing-off is its complicated processes. For example, a passer-off would set up “shell” or “shadow company” in locations outside China, such as France, Hong Kong or Italy, and make productions in China under the pretence of OEM manufacturing, and even promote the products directly through media or commercialization, to sell the passing-off items to end-users (in stores, street vending booths or wholesale markets). From here we can see that the process involves large numbers of market actors, some of whom are fully aware of the passing-off nature of the products, others are half aware or simply ignorant, and still others may be victims. In such a complicated situation, it’s hard for judicial and law enforcement departments to classify the different infringement actions and take corresponding legal measures.
Legal basis for Cracking down on Passing-off
At the germination of passing-off, it was disputed as to how to define and apply the law on the free-riding of well-known marks, and there was no unified treatment, which was variably based on the Unfair Competition Law, Trademark Law and Administrative Regulations on Registration of Corporations. Courts of different places handing conflicts between business names and trademarks delivered contradicting opinions as to injunctions on infringing use of trademarks or other rights as business names. The confusing judicial opinions lead to a lack of guidance for law enforcements, thus compromising the confidence in the judiciary. In this context, the Supreme People’s Court and the State Administration for Industry & Commerce (SAIC) have issued a series of judicial notes and policies in recent years, with an aim to intensify the fight against free-riding on famous brands. For example, SAIC promulgated the Notice of Carrying out Special Enforcement Actions of Fighting against Famous Brand Free-riding Unfair Competition in August 2007, which provides the directory provisions of applicable laws for various typical free-riding activities. In April 2009, the Supreme People’s Court promulgated the Opinion on Several Issues Concerning the Serving of the Main Objective When Handling Intellectual Property Trials in View of the Current Economic Situation, which both defines the conditions where Anti-unfair Competition Law or Trademark Law is applied, and explicitly stipulates the court’s right to change the defending enterprise’s business name. Article 10 of the Opinions says that “Where an enterprise improperly uses other enterprise’s well-known registered trademarks as its shop name, and it is hard to avoid market confusion either or not by highlighting, the court shall have the right to order the stop of such improper use upon the litigant’s request. Should the infringing party refuse to execute the order; the court may implement compulsory enforcement or increase the compensation for damage.” At that point, the debate on whether a court has the right to order the defendant to change its shop name was seemingly put to rest.
Law Enforcement Difficulties in Fighting against Passing-off and Relevant Suggestions
The above judicial and administrative positive efforts at defining the applicable laws for passing-off, to some degree, alleviated social concerns over the slow pace of law-making, but to take out the “malignant tumor” of the infringing business names, the following acute problems must be solved:
1. Disobeying court or administrative order to change business names
(1) “Shadow companies” outside China “Shadow Companies” are companies incorporated outside China with names very similar to existing reputable trademarks or trade names and often pose as representatives of the owners of such trademarks or trade names to produce counterfeit products. In Hong Kong, due to the slack company registration policies and its geographical relations with China, a significant number of shadow companies have been set up. The names of these companies are so confusing that many people mistake them as having certain international backgrounds. For example, such company names as Italian Red Dragonfly (Hong Kong) Limited, American Red Dragonfly Shoes & Fashion International Group Limited, and French Pierre Cardin Hong Kong International Group Limited, have no production or management abilities, and are actually running no businesses. Therefore, these companies are seen as “shell companies.”
In order to curb such misleading publicities, or to provide supports to the fight against brand free-riding activities in China, many trademark right owners take the following legal actions in Hong Kong:
a. File complaints with the Companies Registry of HKSAR. In accordance with Section 22(2) of Hong Kong Companies Ordinance, the registrar may direct a company to change its name within 12 months after registration if the name gives a misleading indication of the nature of its activities and is likely to cause harm to the public. This is done at registrar’s discretion and many companies simply ignore it.
b. File a lawsuit to the court to request the infringing company to change its name. Practices prove that many shadow companies did not respond to actions at all. Therefore, trademark right owners enjoy high winning rates. But the problem is that, according to the current laws of Hong Kong, although Companies Registry receives orders from the court, it lacks the power to coerce the company to change name.
Under such defective legislation, many companies swarm to Hong Kong to register a name and then come back to China to counterfeit registered marks. This problem has captured headlines of authorities in China, Japan, EU and the U.S. After two years of work, the Companies (Amendment) Bill , aiming at strengthening the registration system of companies in Hong Kong, passed the third reading by the HKSAR Legislative Council on July 7, 2010, and went into effect after being signed by the Chief Executive and promulgated. In the Bill, the registrar is empowered to direct companies to change name. Examples of the registrar’s new powers are as follows:
(i). If the shadow company fails to comply with the Registrar’s direction given in accordance with Section 22(2) of Companies Ordinance (refer to the above-stated item of legal actions), the Registrar has the right to substitute the company’s name with its registration number.
(ii). The Bill empowers the Registrar of Companies to act pursuant to court orders to direct a shadow company to change its name. The Registrar may substitute the company’s name with its registration number if it fails to comply with the Registrar’s direction to change its name. Since the registration number contains no brand words, shadow companies can not authorize the actual controllers in Mainland China.
(iii). As stated in the above (i) or (ii), if the Registrar of Companies has ever directed a shadow company to change its name, the Registrar is entitled to refuse any registration application of names identical to the infringing name. The Bill not only solves the feeble law enforcement problem, but also makes an in-depth exploration of the incorporation of shadow companies, thus providing powerful legal weapons for the anti-shadow struggle in Hong Kong.
(2) Registration of a business name using another’s reputable trademark in China
Under the classification management system of enterprise name registration in China, passers-off take advantages of the vast fields of the country to survive. And in the absence of a cyber-search center as in Hong Kong, trademark right owners have no way to know the incorporation information of passing-off companies in full and in a timely manner, and have to trace them through market operations, or by filing trademark monitoring applications, or via the local industrial and commercial network platforms. If trademark right owners find their names infringed, they may file a lawsuit in court or complain to the industrial and commercial administrative organs to request infringing companies be ordered to change their names. However, the actual implementation of this faces the same situation as the fight against shadow companies, i.e., if the infringer does not change its name, the administrative organ for registration of enterprise names has no right to actualize the change, but use some auxiliary measures, such as refusing to allow the enterprise to pass the annual inspection, to execute the direction in a distorted form. To a certain degree, the absence of a compulsory execution system provides an opportunity to passers-off, and enables them to raid the market for a long period of time.
Hong Kong’s amendment to the Companies Ordinance provides a good example to China on how to amend laws and regulations. If we simply resort to locally programmed law enforcement campaigns or market clearing, we will never radically crack down on brand free-riding, and the “cat and mouse” games will never end. We need to amend the Provisions on Administration of Enterprise Name Registration, the associated laws, and grant the administrative authority for enterprise registration the legal right to change the impropriate business names. What’s more, developed countries will use this as evidence of China’s IP protection.
2. Local Industrial and Commercial Administrative Organs shall Understand the Nature of Brand Free-riding and Intensify Law Enforcement
With the various disguises of passing-off activities, many local industrial and commercial law-enforcement offices are bewildered on the basis and measures of law enforcement when faced with the certificate of incorporation issued by the Hong Kong Companies Registry, the letter of authorization, and the proof of trademark registration application provided by local trademark offices. They may even require trademark right owners to first solve the shadow company’s illegal registration problem outside China. Actually, such passers-off have no right to infringe other people’s trademark right or other civil rights with the excuse of the company being registered in Hong Kong or other places outside China. In this situation, law enforcing officials should have a clearer understanding of the nature of brand free-riding, improve their ability to identify the different representations of “fake brand names,” and enhance the consciousness and level of law enforcement.
Meanwhile, considering the serious impact that free-riding has on market order and the intentional misleading purpose, local industrial and commercial administrative organs should give more severe punishment to passers-off. This would help change peoples’ opinion about the insufficient administrative punishment of industry and commerce.
3. Strengthen Publicity, Try to Eliminate the Tricks of Brand Free-riding and Establish a Black-list System; Further the Information Communication and Cooperation with Relevant Countries and Areas; Build a Good Image of the Country with Good IP Protection
(1) When those who pass-off are prosecuted, government or media should publicize and notify the public as a reminder for consumers. If any infringing company refuses to change its name, it should be posted on national level government or media websites, and consumers should be encouraged to file complaints against passers-off, so they have no place to hide.
(2) For the shadow companies centralized in places outside of China, the Chinese government should, with the support of trademark right owners, talk with the relevant national organizations through official channels. This would deepen the understanding of each others ‘legal systems, and enhance the international communication and cooperation in a friendly and trustful way.
By Ma Ning, Attorney of Beijing Wan Hui Da Law Firm
(Translated by Hu Xiaoying)
