PRC Supreme People’s Court recently made a decision in the retrial phase for trademark infringement dispute between Tianjin Zhong Zhuang Supply Chain Management Co., Ltd. (1st instance defendant, a Chinese company distributes counterfeit aloe vera gel, hereinafter referred to as “Zhong Zhuang”) and NATURE REPUBLIC CO., LTD. (1st instance plaintiff, trademark holder of “NATURE REPUBLIC” trademark on aloe vera gel, hereinafter referred to as “NR”).

In the retrial decision, SPC explained spirit of “the defense of lawful sources of products”, and stated that “earning profits by repetitive litigation is not advocated”, and, as a result, only ruling for cease of infringement but did not support the damage claims of NATURE REPUBLIC CO., LTD.

The background of the case is that Zhong Zhuang is selling counterfeit products that’s infringing the trademark rights of NR, and the court supported NR’s arguments of infringement compensation and reasonable expenditure for protecting trademark rights in both the 1st and 2nd instance.

However, during the retrial, Zhong Zhuang provided evidence of the source of products, and made the defense that they have exercised a duty of reasonable attention, and the court stated that:

1. Although NR filed the litigation claim that it should be compensated by Zhong Zhuang for the expenditure on the defense of its rights, it has never provided the relevant evidence, so NR should bear the legal consequences that are unfavorable to them.

2. Lawful source defense system on the exemption of bona fide sellers from liability, on one hand, is to incentivize bona fide sellers to actively disclose information on the source of the goods; on the other hand, is also based on the normal market order of bona fide sellers and protect their trust interests in the market transactions.

In this case, the infringing goods’ purchase price and sales price are both low, the infringement circumstances and infringement consequences are relatively minor, and the company has explained the infringing goods provider, and it is giving favorable clues for NR to trace the source of infringement, and Zhong Zhuang has provided evidence to prove that it had fulfilled its duty of reasonable attention. In this case, if Zhong Zhuang bears the rights expenditure, not only does it contrary to the principle of fairness, but also does not fully reflect the defense of lawful sources system’s incentives and protection of bona fide sellers;

3. According to the database, based on the same infringing goods as in this case, NR has filed lawsuits against a large number of small and medium-sized sellers in more than ten provinces in continental China, and it can be considered as mass litigation.

In view of the fact that in mass litigation cases, the incurred reasonable expenses to stop the infringing acts is likely overlapped, and in order to prevent the compensation amount from being higher than the actual expenses, which resulting in the rights holders’ multiple benefits, the reasonableness of the litigation claims should be assessed when reviewing and determining the expenses of individual cases.

And the court made a paragraph stating that: “if IP owners use IPR ‘protection’ as a tool, ‘litigation’ as a method to make profits, not only doesn’t it meet the purpose of IP protection, but also not conducive to the maintenance of the stability of the order of market transactions, moreover, to a certain extent, a waste of judicial resources, and such behavior should not be encouraged or advocated“.

And as a result, the court did not support the damage claim of NR, and only made the judicial decision to the cessation of infringements and stockpile destruction.

HFG comments

We would consider this decision represents a general attitude from SPC, that mass litigation against small and medium sized vendors of counterfeiting goods is not advocated, as long as these vendors provided solid evidence pointing their fingers to their upstream seller (at least represents its attitude against NR).

First of all, IPR owners might question the fairness of defending their rights in China after reading this judgment, we would consider the court’s decision was made not only in accordance with the law, but also in consideration of the purpose of the legislation and the policies of the government.

In this case, although Zhong Zhuang did sell the infringing products, however, the new evidence it presented of the source of the products in the retrial, which was recognized by the court, gives it a defense of liability. The defense of reasonable source is a protection of bona fide sellers of its trust benefit in the normal order of market transactions.

When the values of fairness and justice are on either arm of the balance, offsetting the damage on small and medium-sized sellers by demanding them to provide the source of their products and helping the right holder to trace the source of infringement helps the right holders to locate the upstream producer or large distributors, while protected the trust benefit of the small and medium-sized enterprises.

In this case, the court lower the bar for determining whether a defense for reasonable source might stand by raising a view of: “in the determination of bona fide seller, the court should not be too harsh”. And the court explained that this is taking the market trading habits of affordable cosmetics and professionalism of small and medium-sized business into account, especially when, some counterfeit product manufacturers will make the fake products having a really authentic appearance, and as a small company that is the distributer of such a product, it is also “frauded”.

In the litigations NR have filed, there are small businesses only have sold less than a dozen of infringing products in a year, but have to bear a greater responsibility for damages.

Secondly, although NR was found to have “exploited intellectual property rights for profit” and was “reprimanded” by the court, from the perspective of an intellectual property practitioner, we find NR’s practice is actually quite rare.

A search in the database revealed that NR has initiated over 4,000 civil litigations in different courts in continental China, and in most of the cases it is claiming small amount of damage, and the defendants are mostly small-sized businesses.

At the same time, the Supreme Court also mentioned that in the process of NR’s rights defense, the scope of compensation for the lawsuits filed against those defendants often overlapped (especially for the part of reasonable cost), and NR failed to provide evidence to prove the reasonable cost is solely spent for one single case.

Therefore, due to the lack of evidence to prove its claim, it is only lawful of the court not to support its claim for the corresponding amount.

Having said that, as trademark owners, what can be learned from the case is that it is important to consider the pros and cons of different ways in protecting the IPR.

HFG would conduct onsite-investigations for our clients, and try to locate the upstream merchants, or even to directly target manufacturing plants, thereby blocking possible future infringements directly at the source.

In conclusion, we can say that this case is a wake-up call for the trademark holders that’s using litigation as their only method for trademark infringement disputes.

Trademark owners should carefully consider the ways of protecting their rights and retain evidence in time to ascertain the expenses incurred in the process, so that to avoid the compensation claims being unsatisfied, and to better exercise the trademark rights and effectively cease the infringements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.