Tackling counterfeits can be frustrating and challenging at the best of times. Dealing with their trickier – and more “lawful” – cousin, genuine products that are parallel imported (or genuine branded goods obtained from one market (i.e., a country or economic area) and subsequently imported into another market and sold there without the consent of the owner of the trademark), can be even more challenging. In many countries, parallel importation is legal, and quite often, encouraged. This is often the case in developing countries where genuine goods from authorized distributors may be deemed prohibitively expensive by much of the local market. This is most certainly the case in China, where parallel importation is more than tacitly encouraged by authorities. 

The massive demand for lower cost parallel imports in China is fed by the massive overseas “daigou” system, which literally means “surrogate shopping.” Through daigou networks, overseas purchasers scour foreign markets for cheaper or otherwise hard-to-get genuine goods for shipment back to China. This flood of parallel imports can make life very difficult for foreign brand owners’ authorized distributors in People’s Republic of China (“PRC”), which are forced to compete against cheaper genuine imports available to any reseller that can source them through those daigou channels.  

If dealing with constant inflows of grey-market goods (often supported by authorized overseas distributors happy to supply product in breach of their own territorial restrictions) is not difficult enough, enterprising parallel traders in China often take things a step further. In these cases (and relying on claims of “fair use” stemming from their sale of genuine wares), the traders make extensive use of other intellectual property belonging to the brand owner to enhance their sales pitch, and to try to create the false impression that they are authorized by the brand owner. In the worst cases, the parallel importers open up brick-and-mortar stores under the brand owner’s trademark. These stores often adopt all the trappings of genuine outlets for the brand, including stylized logos, branded packaging materials and shopping bags, identical color schemes and shop fixtures, and copyright-protected marketing content. 

The Limited Utility of Class 35 Registrations in Closing Fake Outlets in China

In most countries, a Class 35 trademark registration, which covering “retailing services,” would be just the ticket to address fake outlets like these. In China, however, Class 35 protection does not extend to “retailing services,” either generally, or with respect to particular goods (save for a few exceptions, including pharmaceuticals and medical supplies). Instead, Class 35 in China only protects the provision of services to assist others in the operation or management of commercial or industrial enterprises, such as advertising and business management services. This is the generally accepted view in China to date, and has been broadly adopted and advanced by the China National Intellectual Property Administration (“CNIPA”), courts, and administrative authorities. 

As a result, and due to their perceived limited utility, many brand owners choose to forego Class 35 filings. And often, even where brand owners do have Class 35 registrations in respect of such infringements, courts have been sympathetic to the “fair use” arguments noted above, finding that even unauthorized sales of genuine goods grant significant trademark use rights to resellers in advertising and selling those goods. With this in mind, brand owners have been forced to rely on other strategies in order to attack these types of aggressive infringers, none entirely satisfactory. For example, Class 16 registrations, if they are in the brand owner’s portfolio, could be used to address the packaging, while copyright registrations could perhaps be obtained to address marketing materials. Finally, claims of unfair competition could be brought to address the broader infringement. 

However, the primary concern with such claims, brought under Article 6 of the PRC Anti-Unfair Competition Law (“AUCL”) is that they are notoriously fact dependent. In respect to a parallel importer running a branded brick-and-mortar store, a brand owner would not only need to prove that the parallel trader’s intent or the likely effect of its conduct was to mislead consumers in believing that the trader was associated with the brand owner; the brand owner plaintiff would also need to present sufficient evidence to demonstrate its brand has achieved a degree of “certain influence” within the PRC market. All of that evidence would also need to be notarized – and in the case of English language materials, translated – in order to be deemed sufficiently reliable for Chinese courts.

The significant hoops required for an AUCL Article 6 case stand in stark contrast to what would be required if Class 35 registrations in China covered “retail services.” If they did, a successful infringement claim against a parallel trader running a brick-and-mortar store would merely require proof the trader was using a similar mark in respect of similar services, with liability assessed on a strict-liability basis. 

The Fendi Decision: A Positive Change in the Role of Class 35 Registrations

A recent decision from the Shanghai Higher People’s Court may reflect a broader shift in protection for Class 35 services, and give brand owners good reason to rethink the role of Class 35 in their filing and enforcement strategies in China. The defendant in the case, Yilang Co. Ltd. (“Yilang”), had been operating a number of stores in an outlet mall managed by Shouchuang Outlets. One of those shops was selling genuine “FENDI” products. Importantly, it was also prominently displaying the “FENDI” trademark in its signage.

In the first instance proceedings, the Shanghai Pudong New District People’s Court (“Pudong Court”) found that Yilang’s retail sale of genuine goods trumped any of LVMH-owned Fendi’s rights, holding that its use of “FENDI” in its signage and business was, indeed, “fair use.” The court noted Fendi’s Class 35 service mark registration, but reiterated the usual view that in China, retail services are not protected by Class 35 registrations. 

The lower court’s judgment was overturned in Fendi’s appeal to the Shanghai IP Court, which considered that Yilang had exceeded the scope of any fair use here through the nature of its conduct and use of the trademark. 

In taking on Yilang’s appeal of that decision, the Shanghai Higher People’s Court (“Shanghai HPC”) reconsidered both lower courts’ rejection of Fendi’s infringement claims based on its Class 35 registration, among other issues. Interestingly, the Shanghai HPC concluded that Yilang’s FENDI signage did indeed infringe Fendi’s Class 35 registration, which covers the following services …

“Advertising; business operations and business management; the bringing together, for the benefit of others, of a variety of goods excluding the transport thereof, such as perfumery, cosmetics, eyeglasses, telephone equipment, computers, photographic apparatus, video cameras, jewellery, horological instruments, bags, wallets and other leather goods, furniture, mirrors, picture frames, bed and table covers, towels, clothing, footwear, headgear, personal accessories, enabling customers to conveniently view and purchase those goods; office functions.” [Emphasis added]

Practically speaking, a finding that Fendi’s Class 35 registration was infringed would have required the Shanghai HPC to conclude: (1) that Class 35 covers retail services as a commercial activity in its own right; or (2) the defendant’s retail activities fell within Class 35.

On the first point, the Shanghai HPC maintained the status quo, taking the view that Class 35 mainly covers services provided by individuals or organizations with the aim of providing assistance in the operation or management of commercial enterprises or in the management of business activities or commercial functions of industrial and commercial enterprises. The Shanghai HPC did not try to recharacterize the defendant’s activities (e.g., using the mark on store signage) as some type of service provided for the benefit of others, as such a conclusion was not supported by the facts. Finally, it also confirmed its support of the CNIPA’s view that Class 35 services do not include services where the business operator, itself, is the sales entity engaged in the retailing of goods. 

In spite of its unwillingness to decide in Fendi’s favor on these two points, the Shanghai HPC nevertheless applied a more flexible, holistic view of what constitutes infringement to determine that Fendi’s Class 35 registration was, indeed, infringed by Yilang. In reaching this relatively novel decision, the Court noted that Yilang had set up the store for the purpose of selling goods, and that its use of the FENDI trademark on shop signage merely pointed to the sale of goods at its own store. In other words, its activities in that regard were ancillary to its underlying business of selling genuine Fendi products. 

Next, the Court compared Yilang’s retailing activities to the services covered by Fendi’s Class 35 registration to see if Yilang’s use of Fendi’s signage and other conduct would, nonetheless, give rise to confusion amongst the relevant public – and thus, infringe Fendi’s trademark – in spite of ancillary retail activities not falling squarely within Class 35. In that regard, the Shanghai HPC cited article 11(2) of the Supreme People’s Court Interpretations on Several Issues Concerning the Application of Law to the Trial of Civil Trademark Disputes (“Supreme People’s Court Interpretations”), which provides that “similar services” refer to services whose purpose, content, method of provision, target users, etc., are identical, or services that the relevant public would normally consider to have a certain connection and therefore easily cause confusion. 

The Court held that Yilang’s use of the FENDI trademark on store signage was, indeed, enough to cause the relevant public to believe, incorrectly, that control, licensing, or other types of connections existed between its store and Fendi, and that such activities would easily give rise to the type of confusion discussed by the Supreme People’s Court Interpretations. As such, the Shanghai HPC ruled that there was infringement of Fendi’s Class 35 registration on this basis.

The Shanghai HPC also found that Yilang had engaged in acts of unfair competition on similar grounds regarding likely confusion (also soundly rejecting Yilang’s ludicrous assertion that Fendi had “no reputation” in China). In the end, Fendi was awarded around $55,000 for the infringement and its expenses in halting the same, and Yilang was enjoined from making further use of the FENDI mark in this fashion.

Filing Strategy for Class 35 Trademark Applications

Although the Shanghai HPC court’s decision is not binding precedent on any other courts, the decision in the case – and the fairly widespread phenomena of parallel traders opening unauthorized online and physical shops festooned with the brands they are importing – should at least prompt brand owners to rethink the role Class 35 should play in their filing strategy in China, even to the extent they, themselves, do not have immediate plans to open retails outlets in the PRC. 

As demonstrated by the Fendi case, a Class 35 registration covering retail-like services may provide a basis to attack parallel traders that try to expand the use of a brand to retailing activities. The CNIPA permits only standardized goods in national applications, so careful crafting of services specifications under local rules in conjunction with local counsel will be important. There may be more flexibility in developing a services description in an international registration, but brand owners should seek the advice of local counsel to ensure descriptions will not be rejected by the CNIPA and coverage is adequate.

In general, the following service descriptions could potentially be considered quasi-retail services that would be worth considering in a PRC-specific specification:

– sales promotion for others (替他人推销); 

– display of goods and services through electronic means to facilitate TV shopping and home shopping (通过电子手段展示商品服务以便于电视购物和居家购物);

– presentation of goods via communication media, for retail purposes (为零售目的在通讯媒体上展示商品); 

– advertising (广告); and 

– business management assistance (商业管理辅助).

Retailers that sell pharmaceutical, veterinary and sanitary preparations or medical supplies can obtain direct protection under “retail or wholesale services for pharmaceutical, veterinary and sanitary preparations and medical supplies.” However, this item only helps a small number of retail business for obvious reasons as most retail businesses are not focused on such products.

In light of the Fendi decision, and given the rampant trademark piracy and infringement in China and the huge flow of daigou-sourced parallel goods into the market, applications for trademark rights in Class 35 – in spite of the fact that specific coverage for retail and wholesale services is not expressly permitted in China – are an increasingly important part of a strategy to combat piracy and parallel goods in China.

Source: The Fashion Law