CHINA ESQUIRE

Right when I had taken my stance with the Seattle Trademark Lawyer and Dan Harris of China Law Blog that IP damages for lost profits just don’t work, I have to eat my words. Brad Luo recently did some very interesting posts about a trademark case in the Hangzhou Intermediate People’s Court ( here and here), where the court awarded 20 million yuan in damages… in what appears to be lost profits. So I take back what I said, that you can never expect lost profits in Chinese courts. I still believe they are rare. But when you deal with a case this litigious, and with a Defendant who defies a court order, then expect a court to exercise its power–whether in China or America.

I will take straight from China Business Law Blog at this point because Brad does a good job covering it:

The Parties:

Plaintiff is an individual, Mr. Zhao Hua, in the business of manufacturing and selling socks, ties, and scarves. He acquired by assignment and still owns the trademark “2000” . . . , which was first registered by the original owner in 1997. And it was registered for Class 25 Goods, including the following categories: socks, gloves, scarves, ties, belts, sashes, and veils.

Defendant is G2000, a Hong Kong company, in the fashion/clothing business with corporate and franchised units scattered in many Asian countries/regions. It manufactures and sells its full lines of products including casual, formal and informal clothing and accessories for men and women. In addition, it also franchises its business concepts internationally.

In 1992, Defendant registered the “G2000” mark in China for use covering clothing, shoes and headwear.

In 1997, Defendant registered the same G2000 mark for handbags, shopping bags, and straps.

In 2002, Defendant registered the G2 mark for clothing, neckties, socks, scarves, belts, etc.

[Procedural Background:]

In May 2002, Defendant filed an action in the China Trademark Office to cancel plaintiff’s trademark (2000), then it unsuccessfully appealed to the China Trademark Review and Adjudication Board (the “TRAB”). Finally, it brought an administrative action pursuant to Article 33 of Chinese Trademark Law 2001 in the Beijing First Intermediate People’s Court, challenging the TRAB’s decision, but to no avail. On final appeal in 2005, the Beijing Higher People’s Court affirmed the administrative decision, holding that Plaintiff’s mark is valid for the types of goods so registered under Nice 25 Class.

Brief Facts:

Facts of this legal saga lasting more than eight years are complicated. Back in 2000, Plaintiff sent a demand letter (cease & desist letter) to Defendant and co-defendant Shanghai Heyuan Clothing, Ltd., alleging trademark infringement with respect to the use of G2000 in connection with their sale of socks, gloves, ties and scarves. Between 2000 and 2006, Plaintiff also sought redress by filing multiple complaints with local Administration Industry and Commerce (“AIC”) in Beijing, Guangzhou, and other cities, but apparently achieved little (Doesn’t this make you think twice about the efficacy of AICs?). And to gather evidence, in the span of 10 months from May 2005 to March 2006, Plaintiff purchased allegedly infringing goods at various stores and locations sold by Defendant’s/co-defendants’ G2000 specialty units in Beijing, Shanghai, Hangzhou, Ningbo, and other places.

My Thoughts & Reactions:

The court’s award of damages in this case is intriguing. Plaintiff pleaded for damages totaling 20,000,000 Yuan (that is right, 20 million). And the Court ordered the Defendants to turn over the figures for total sales, profits, etc. for the goods complained of in the relevant period of time, but the Defendant failed to do so. Generally, Chinese courts award damages to a plaintiff in an IP infringement case to the extent of a defendant’s illegal profits as proven, rather than losses sustained by the plaintiff. See Kate C. Hunter, Here There Be Pirates: How China is Meeting Its IP Enforcement Obligations Under TRIPS, 8 San Diego Int’l L. J. 523, 547. In addition, if the illegal profits or plaintiff’s losses cannot be accurately ascertained, the statutory maximum award of damages is 500,000 Yuan. See Chinese Trademark Law, Art. 56. Therefore, in an act rarely seen in Chinese courts, the Court awarded a whopping 20 million Yuan to the Plaintiff. Further, given the intertwined relationships among the Defendants, the Court held them jointly and severally liable.

On appeal, the bone of contention, as I expect, would be that award of 20 million in damages to plaintiff. Of course, Defendants will try to set aside that amount, citing that it exceeds the statutory maximum; whereas, the plaintiff might argue that the 20 million award is appropriate given the scope and extent of violations, in addition to their failure to turn over documents within their control to ascertain the exact amount of damages.

A very interesting case indeed. Did the court go against Chinese statutory law? It appears it does. So did the court royally screw up this one? I don’t think so… at least, from a U.S. practitioner’s viewpoint. It means that courts can grant larger damages, which will make it worthwhile for American companies to pursue IP lawsuits in China. It also makes sense to me because of G2000’s wilfulness in not turning over documents.

Here is my read on why something like this could happen. (though it is speculation) Imagine the scene: the parties have been fighting for 8 years. AIC complaints. Trying to invalidate a trademark and appealing that decision. Probably some nasty letters between the two sides throughout this entire ordeal. I surmise there is a lot of fighting over everything. And then after losing, the Defendant refuses to turn over financial information…

I don’t pretend to know how a Chinese judge would look at something like this, but I think a federal judge here in the U.S. would look at this as a zoo. And knowing federal judges here, who hate dealing with messes this big, and then to have your order defied on judgment–that is a big NO-NO. If you don’t believe me, see this article from the Denver post where some prominent American attorneys ignored the court’s order regarding claims construction ( h/t to ATL):

A federal judge recently got so infuriated by the conduct of two highly regarded trial attorneys that he overturned a jury’s $51 million verdict, then ordered the lawyers to pay the fees and costs of the opposing lawyers, a sum that could total several million dollars.

U.S. District Senior Judge Richard P. Matsch sanctioned attorneys Terrance McMahon and Vera Elson of the firm McDermott, Will and Emery, of Chicago and San Francisco, for “cavalier and abusive” misconduct and for having a “what can I get away with?” attitude during a 13-day patent infringement trial in Denver.

Terry McMahon among IP litigators is quite a big name. But even when he crossed a federal judge the wrong way, things go bad.

Frankly, I am not all that surprised by G2000’s conduct. Chinese companies often think they can flaunt Chinese or American law and court orders. (And discovery too… I have a post coming this weekend about that, so stay tuned) No, I am not being racist. This has been the case for actual clients that I have had. And if you play with fire long enough, you are going to get burned. I believe G2000 got burned because they wouldn’t cooperate. Yes, there are probably other factors too. But I see this as the straw that broke the camel’s back.

Will this be overturned on appeal? Probably a good chance to it due to the statute, but IP Dragon had a post about the Supreme People’s Court ordering full compensation in IP cases:

“Courts should fully apply logical reasoning and everyday life experiences, and comprehensively and objectively examine the evidence for calculating the amount of compensation,” SPC vice-president Cao Jianming told a national work conference on IPR trials in Jinan on February 20, 2008, according to the China Daily.

Perhaps the 500,000 yuan statutory cap on damages will fall by the wayside as courts begin to apply principles of equity to determine damages. Maybe the Hangzhou court actually got it right then.

Bottom line: cooperate with the legal process, even when you don’t want to. Trust me, the law is the law and you may well get burned if you don’t.

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