New Trends in U.S. Trademark Litigation Involving Chinese Companies

U.S. trademark litigation involving Chinese companies is no longer a one-way street. Historically, Chinese companies were defendants in U.S. trademark litigation. As a low-cost manufacturer, China exports to America myriad goods "Made in China," which are often accused of infringing U.S. trademarks. While the lawsuits have traditionally been before courts of general jurisdiction, a new trend has emerged where Chinese companies are being sued before the International Trade Commission (ITC). There are signs, however, that the historical practice of Chinese companies merely being defendants may be changing such that they now sometimes are bringing trademark litigations in U.S. courts. For example, as part of their global expansion, many large Chinese companies are actively pursuing innovation and taking affirmative steps to protect their trademark rights.

Companies as Trademark Defendants

Chinese companies have long been accused of making counterfeit products that infringe U.S. trademarks. Approximately 81 percent of the value of the counterfeits seized by American customs in 2010 originated in China.¹ While some Chinese companies did appear and defend themselves, many simply ignored these lawsuits. As a result, knowingly or not, many forfeited their access to the American market. For example, in Herman Miller Inc. v. Alphaville Design Inc. et al. (Yongfeng), Herman Miller sued Yongfeng Furniture Corporation, claiming that Yongfeng made fake EAMES lounge chairs and ottomans banded with Herman Miller's registered "EAMES" mark and exported them to the United States.² Herman Miller served Yongfeng in China in conformity with the Hague Service Convention,³ to which China is a signatory. However, Yongfeng did not respond or answer the complaint. Consequently, on Oct. 22, 2009, a California court entered default judgment, permanently enjoining Yongfeng from exporting into the United States counterfeit EAMES lounge chairs and ottomans.

In a trademark infringement suit, a default can have significant consequences under U.S. law. A finding of willful infringement can be inferred from defendant's failure to appear,⁴ and this in turn can justify an award of enhanced damages, up to $2 million per counterfeit mark.⁵ In practice, however, statutory damages awards may be much lower than the maximum allowed under the statute. Thus, in Yongfeng, Herman Miller was granted $250,000 per counterfeit mark, with the court noting that statutory damages are intended to serve as a deterrent, and not provide the plaintiff a windfall. Even so, given the possibly significant consequences, why would a foreign defendant default?

Typically, a Chinese company defaults in an American lawsuit for one of two reasons. First, the Chinese defendant may not know its obligations or rights under U.S. law, and in particular the potential consequences if it fails to respond to a complaint. Second, the Chinese defendant may believe that the benefit of doing business in America is not worth the cost of defending the litigation.

This second reason can in turn be informed by two tactical considerations. First, it can be difficult to establish jurisdiction against a Chinese company with no assets in America. For example, in C.S.B. Commodities v. Urban Trend (HK) Ltd.,⁶ an Illinois court dismissed a trademark action against a Hong Kong based company—Urban Trend—for lack of personal jurisdiction. Urban Trend operated a website promoting its products, including its "Throwzino" knife holders, which C.S.B. alleged caused consumer confusion with its famous "Ex/Voodoo" knife holders.

The court held that merely operating a website and attending an international tradeshow in Chicago (an attendance that did not result in any sales) was insufficient to constitute the "minimum contacts" required to establish personal jurisdiction over the company. The court, however, did hold that the physical presence of an Urban Trend executive at the Chicago tradeshow was sufficient to meet the less demanding jurisdictional standard applicable to a natural person.

Second, even if the plaintiff is able to establish jurisdiction and obtain a favorable court order, enforcing an American judgment in China can be notoriously difficult for multiple reasons: Chinese courts' possible parochial protection of Chinese parties; the lack of judicial interdependence in China; the prevalence of local protectionism; the social consequences of bankrupting state-owned enterprises;⁷ and the lack of treaty between China and the United States that requires the parties to enforce each other's judgment.⁸ In the Yongfeng case, the plaintiff asked the California district court to award a higher amount of statutory damages precisely because of the difficulty of enforcing a judgment in China. But the court declined, explaining that the difficulty of enforcing a judgment cannot justify awarding plaintiff a windfall in statutory damages.⁹ That said, the court did not dispute the very real difficulties plaintiffs encounter when seeking to enforce a U.S. judgment in China.

From District Courts to ITC

American plaintiffs typically file trademark infringement suits in federal district courts, asserting claims under the federal Lanham Act. Now, in part because of the jurisdictional and enforcement considerations discussed above, some litigants are turning to the ITC, seeking protection under §337 of the federal Tariff Act of 1930. The ITC is an administrative law court with in rem jurisdiction over all goods imported into the United States. It is governed by the Administrative Procedure Act and its own Rules of Practice and Procedure. Section 337 prohibits the import and sales of products that infringe upon protected U.S. intellectual property.¹⁰

More and more Chinese companies are becoming the targets of §337 investigations.¹¹ For example, Zippo, the well-known American lighter manufacture, won a trademark infringement lawsuit before the ITC against a group of Chinese companies who were importing counterfeit lighters into the United States. In July 2007, the ITC issued an exclusion order requiring U.S. customs to block the import of counterfeit lighters from China. Most recently in early 2011, the French luxury goods maker Louis Vuitton Malletier SA asked the ITC to open a §337 investigation on the infringement of its famous Toile Monogram trademarks against various companies and individuals, including T&T Handbag Industrial, Sanjiu Leather and two individual business owners from China. This case is currently in discovery.

A plaintiff might choose the ITC over a district court for at least three reasons:

• Unlike district court cases, an ITC proceeding does not require a plaintiff to establish personal jurisdiction over the defendants(s). Because the ITC has in rem jurisdiction over all articles imported in the United States, the complainant¹² need only: (i) allege ownership of an IP right and infringement of that right; (ii) show that the infringing articles have been imported into America (a single case of importation can be sufficient); and (iii) establish that a "domestic industry" relating to infringing articles exists or is in the process of being established.¹³
• The ITC offers the unique remedy of a general exclusion, which is not available in the district court. A general exclusion bars the entry of all infringing articles, regardless of their source, and allows a complainant to avoid repeated or continuous litigations against numerous infringers, which plaintiffs otherwise have to undertake in the district court.
• It takes less time to get a decision at the ITC. The ITC follows an accelerated procedural schedule that usually is twice as fast as that of a district court. The Administrative Law Judge schedules an investigation that usually takes about eight to 12 months to complete, whereas a proceeding in a district court, by contrast, typically takes two to three years.

 

This forum switch presents Chinese defendants with different challenges in terms of both timing and cost. Keeping up with the fast pace of ITC investigations requires both sides to commit significant resources within a short time frame. As a result, the respondent usually has limited time to develop its defense strategies. Moreover, the ITC places fewer limitations on discovery by allowing more and broader written discovery, and more and longer depositions, leading to higher discovery costs.

Notably, many Chinese companies default in ITC proceedings as well. For example, in early 2011, the American radio transmitter and receiver manufacturer Horizon Hobby requested a §337 investigation against two Chinese companies, Koko Technology and Cyclone Toy & Hobby. Both Koko and Cyclone were served with the complaint and notice of investigation by mail on March 3, 2011, but neither filed a response by the April 4, 2011 due date. On April 22, 2011, the Administrative Law Judge (ALJ) issued an order asking both companies to show cause no later than May 12, 2011 why they should not be held in default, but neither company responded. Accordingly, on May 16, 2011, the ALJ issued an order of initial determination finding Koko and Cyclone in default.

Similarly, six Chinese companies failed to respond to the complaint served by Otter Products on June 24, 2011 in a §337 investigation and were ordered to show cause why they should not be found in default. In its submission in support of Otter's motion for an order to show cause, the Commission Investigation Staff noted that "[ITC] Rule 210.16 does not require personal service of a complaint or notice of investigation as a precondition to default," and found respondents' failures to file a response after refusing service of the Complaint and Notice of Investigation adequately satisfied the conditions of Rule 210.16.¹⁴

From Infringers to Plaintiffs

As the global market continues to change, Chinese companies increasingly are finding themselves victims of global intellectual property pirates. For example, the Financial Times recently reported that two individuals in Canada attempted to register marks belonging to more than 60 Chinese companies with which they had no relationship.¹⁵ Among those were such giants as China Investment Corporation, Bank of China, China Minerals, Sohu and Wang Laoji. In Canada, a registered trademark becomes incontestable, in most respects, five years after registration, reducing the possible scope for challenges to registrations. Another recent example occurred in Germany in 2007, where a Munich court ordered Okai, a German food import and export company, to stop pirating the famous Chinese Wangzhihe Food Group trademark.

In an effort to fight the stereotype that Chinese companies are invariably infringers whenever issues of intellectual property infringement arise, the PRC government has been urging Chinese companies to enforce their trademarks overseas. Wang Jianchang, head of China's trademark office, noted that foreign rights holders had applied for 130,000 trademark registration in China by 2008; by contrast, Chinese companies had filed no more than 8,600 trademark applications abroad.¹⁶

The U.S. statistics, however, show a different story. The number of trademark applications filed by Chinese companies in the United States more than doubled from 2004 to 2008 (See Figure 1). The number of trademarks registered by Chinese companies in 2000, 2004 and 2008 were 376, 749 and 2234, respectively. When comparing China to Korea, Japan and Germany, China shows the fastest growth over the past five years (See Figure 2). However, the absolute number of Chinese trademarks is still far below Japan and Germany, suggesting significant potential for future growth.

The data shown above seem to indicate an increasing awareness among Chinese companies of the value of trademark rights. Although registration is not necessary to obtain basic trademark rights in the United States, registration does confer substantial benefits, including a presumption of validity that can be very helpful in litigation. An increasing number of Chinese companies, apparently mindful of these benefits, seem willing to take a more aggressive stance towards their products in the American market. In addition to seeking trademark registrations, they appear to be more active in filing lawsuits against potential infringers. Consider two of the more recent trademark cases brought by well-known Chinese companies: Beijing Tong Ren Tang and Baidu.com.

In January 2010, a Chinese traditional medicine brand company, Beijing Tong Ren Tang USA (Beijing TRT USA), won a preliminary injunction against a California corporation, TRT USA, enjoining it from using the "Tong Ren Tang" mark in marketing and promotional materials.¹⁷ The court held that defendant's use of the identical "Tong Ren Tang" mark was likely to confuse consumers.

Beijing TRT USA is an exclusive licensee of Beijing Tong Ren Tang Group, which owns several marks, including a U.S. registration for the "Tong Ren Tang" mark. Beijing TRT USA and TRT USA had entered into a joint agreement in 2005 to develop Tong Ren Tang-branded products for sale in the United States. Disputes arose, and Beijing TRT USA terminated all outstanding agreements and sued TRT USA and three of its officers and directors in the U.S. District Court for the Northern District of California in February 2009 for common law trademark infringement, unfair competition under the Lanham Act and various state law violations. The defendants counterclaimed, alleging, inter alia, fraud and defamation.

On May 25, 2009, the court dismissed Beijing Tong Ren Tang's common law trademark claim for failure to allege "prior use" of the Tong Ren Tang mark as required under California common law. After a lengthy jury trial, the jury rendered a verdict in favor of the defendants on the unfair competition claim on Sept. 2, 2010.

In another case earlier this year, Chinese search engine giant Baidu sued Internet domain name service provider Register.com in the Southern District of New York for contributory infringement.¹⁸ On Jan. 11, 2010, the Baidu.com domain name was penetrated by hackers, causing its Internet operations to be suspended for over five hours; full operations were not restored for two days. Unsurprisingly, Baidu claimed that the use of the trademark "Baidu" in the Baidu.com domain name by these hackers constituted infringement of Baidu's trademark. On March 16, 2010, Register.com filed a motion to dismiss, which the court granted on July 22, 2010. It found that to hold a service provider liable for contributory infringement requires knowledge or reason to know of the infringement act, which Baidu failed to allege.¹⁹ Significantly, the remaining claims, including gross negligence, were allowed to proceed. The parties eventually settled the case.

A Few Practical Tips

As their businesses have evolved, Chinese companies have increasingly found themselves having to defend foreign lawsuits and affirmatively assert their trademark rights against would-be infringers. Because of the widely varying levels of legal and technical sophistication among Chinese companies, their increasing appearance on both sides of trademark lawsuits is likely to continue for the next decade. Here are some practical tips to aid in addressing those challenges and turning them into opportunities:

• Chinese companies should conduct a trademark search before exporting a new product to the United State to make sure the product is not infringing someone else's marks. A preliminary analysis can be done online via the United States Patent and Trademark Office website.²⁰ Additional searches of both registered marks and common law marks can be done, often with the assistance of an attorney, in order to evaluate the risk of proceeding.
• Chinese companies should defend lawsuits brought against them in the United States in order to retain access to the U.S. market. Although the cost of litigation in the United States can be high, there are many potential exits for a foreign defendant, such as jurisdictional dismissal or early settlement. It is inadvisable to cavalierly forfeit the right to the U.S. market.
• Chinese companies should also take measures to protect their own marks. Because trademarks are territorial in nature, merely owning a mark in one country may not protect it in a different country, with the difficult-to-prove exception of famous international marks. Thus, timely registration is important—Chinese companies should register as soon as possible both in China and in the other parts of the world where they plan to do business.
• U.S. companies should continue to monitor the activities of their Chinese competitors, and consider bringing suits in either a court of general jurisdiction or the ITC. In light of the historical tendency of Chinese companies to default, extra care should be taken in drafting complaints to make sure the relief requested is sufficiently plead should it become necessary to seek a default judgment. In addition, a U.S. company must now be prepared to litigate the defenses a Chinese company may assert, and should also be aware that a Chinese company may bring a lawsuit of its own should it feel a U.S. company is infringing its right.

 

In sum, as international business expands, U.S.-China trademark conflicts and disputes have escalated and it is important for everyone to be prepared.

Dale Cendali is a partner at Kirkland & Ellis in New York and heads the firm's copyright, trademark, Internet and advertising practice group. Xiaoyan Zhang is an associate in the IP litigation, arbitration and ADR group of Hogan Lovells in New York.

Endnotes:

1. Intellectual Property Rights, Seizure Statistics: FY 2010, U.S. Customs and Border Protection and U.S. Immigration and Customs Enforcement (January 2011). China here includes Mainland (66 percent), Taiwan (less than 1 percent) and Hong Kong (14 percent). In 2009, Mainland China accounted for 79 percent of all IPR seizures by value, while Taiwan and Hong Kong accounted for less than 1 percent and 10 percent, respectively. The reduction in IPR seizure value from Mainland China is mostly due to a decline in footwear seizures during 2010. Despite this decline in value, China continues to be the top source country of IPR violations as it has been for the last 10 years.
2. Herman Miller Inc. v. Alphaville Design Inc., All World Furniture Inc. and Yongfeng Furniture Co., Ltd. (Yongfeng), No. C 08-0347 WHA, 2009 WL 349739, at *1 (N.D. Cal. Oct. 22, 2009).
3. The Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, commonly called the Hague Service Convention, is a multilateral treaty signed in the Hague on Nov. 15, 1965 by members of the Hague Convention. The Hague Service Convention established a more simplified and faster means for parties in signatory states to affect service in other signatory states than the traditional means of a Letter Rogatory, i.e., service by a formal written request to a court. Under the convention, each contracting state is required to designate a "Central Authority" to coordinate with service, including accepting incoming requests for service, serving the defendant in the receiving state, and providing a certificate of service to the requester.
4. Tiffany (NJ) Inc. v. Luban, 282 F.Supp.2d 123, 124 (S.D.N.Y. 2003).
5. 15 U.S.C. §1117(c).
6. C.S.B. Commodities Inc. v. Urban Trend (HK) Ltd., 626 F.Supp.2d 837 (N.D. Ill. 2009).
7. For a detailed analysis of the enforcement of foreign judgments in China, see Arthur Anyuan Yuan, "Enforcing and Collecting Money Judgments in China From a U.S. Judgment Creditor's Perspective," Geo. Wash. Int'l L. Rev., 757, 758 (2004).
8. Elaine Kurtenbach, "Chinese Companies Nearly Immune From U.S. Lawsuits," N.Y. Times, Feb. 7, 2008.
9. Yongfeng, No. C 08-0347 WHA, 2009 WL 349739, at *10.
10. Although the majority of §337 cases involve patents, some involve trademarks and copyrights.
11. Brian Mitchell and Jigang Jin, "Section 337: What Every Chinese Company Should Know," LAW 360, Oct. 31, 2008.
12. In an ITC proceeding, the party initiating the investigation is referred as the complainant and a defending party is known as the respondent. A complainant needs not to be a U.S. corporation or citizen.
13. For a detailed and complete discussion, please see Russell E. Levine, P.C. and James B. Coughlan, "United States Intellectual Property Litigation and the ITC," IP Value 2004, Building and Enforcing Intellectual Property Value: An International Guide for the Boardroom, Intellectual Asset Management.
14. Certain Protective Cases and Components Thereof, Inv. No. 337-TA-780, Comm'n Invest. Staff's Response to Motion (Oct. 13, 2011).
15. Kathrin Hille, "Trademark Pirates Target Chinese Groups," Financial Times, April 21, 2009.
16. Id.
17. Beijing Tong Ren Tang (USA) Corp. v. TRT USA Corp., 676 F.Supp.2d 857, 862 (N.D. Cal. 2009).
18. Baidu Inc. v. Register.com Inc., No: 1:10-cv-00444-DC (S.D.N.Y. filed Jan. 19, 2010).
19. Baidu Inc. v. Register.com Inc., 760 F.Supp.2d 312, 321 (S.D.N.Y. 2010).
20. uspto.gov.

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