By James Lawrence, Partner and Wei Xu, Foreign Legal Advisor

It is often a tempting but risky adventure for foreign companies to do business in China. From an IP perspective, dealing with trade mark squatters and copycats must always be front of mind.

Looking back at some high-profile trade mark disputes in China, quite a few large multinational companies have experienced significant turbulence. Apple had to pay US$60 million to buy back its “iPad” trade mark from a Chinese company; a Chinese individual who is the trade mark owner of the Chinese character versions of the New Balance mark successfully sued the well-known US footwear brand for trade mark infringement.

A recent example also ended in defeat for a well-known brand: the Japanese brand MUJI (loosely-translated as “no-brand quality goods”) was sued by a Chinese company for trade mark infringement and the Chinese court ruled in favour of the Plaintiff, ruling that MUJI did infringe the Chinese company’s trade mark. That is, MUJI was defeated by the pre-emptive attack of a trade mark squatter in China.

Background of MUJI’s 19-year long fight with the trade mark squatter in China

MUJI was originally founded in Japan in 1980, famous for the simplicity of a wide variety of products it offers, including household goods, apparel and food.

Before it officially opened its first retail store in China in 2005, MUJI filed a number of marks in China since as early as 1999 in respect of various goods and services. However, MUJI failed to register its trade marks in class 24 (textiles and substitutes for textiles; household linen; curtains of textile or plastic), as there was an earlier existing application for an identical MUJI mark in Chinese characters filed by a Chinese company which has no association with MUJI at all in 2000.

Since 2001, MUJI has been battling to challenge the validity of the registration of this identical MUJI mark in Chinese characters in class 24 (“Disputed Mark”). Unfortunately, the Trade Mark Office of China, the review board of the Trade Mark Office of China as well as Chinese courts of several levels all dismissed MUJI’s claims and the Disputed Mark is still registered in the name of a Chinese company called Beijing Cottonfield (by assignment from the initial trade mark applicant).

Pre-emptive attack by the trade mark squatter

In 2015, Beijing Cottonfield initiated proceedings against MUJI before the Beijing Intellectual Property Court (Beijing IP Court) for disputes over trade mark infringement, alleging that MUJI, without Beijing Cottonfield’s authorisation, used the Disputed Mark on bed covers, towels and several other related goods, thereby infringing Beijing Cottonfield’s trade mark rights.

The Beijing IP Court ruled in favour of Beijing Cottonfield. The court confirmed that MUJI infringed Beijing Cottonfield’s trade mark rights and ordered that MUJI:

1. stop the alleged infringing acts
2. pay Beijing Cottonfield damages of more than AU$100,000
3. make a statement in MUJI’s online and retail stores in China to eliminate the negative impact that MUJI caused by its trade mark infringing acts.

MUJI appealed the decision to the Beijing High Court. In December 2019, the Beijing High Court made the judgment to overrule MUJI’s appeal and sustain the Beijing IP Court’s ruling. This decision is final and effective unless MUJI is able to persuade the Supreme Court of China to begin a re-trial procedure of this lawsuit.

The primary disputed issue

The primary issue in dispute in this case was whether MUJI has legitimate rights to use the MUJI mark in Chinese characters.

MUJI’s arguments

As introduced above, except being blocked in class 24 by Beijing Cottonfield’s earlier filed Disputed Mark, MUJI is the trade mark owner of a number of MUJI trade marks in China, including the MUJI mark in traditional Chinese characters in various classes covering goods and services that MUJI sells or provides.

In terms of the similarity of the marks, MUJI’s mark in traditional Chinese characters and Beijing Cottonfield’s Disputed Mark are identical. The only distinction is MUJI’s mark is in traditional Chinese characters and the Disputed Mark is in simplified Chinese characters, which have no substantial difference in the perception of Chinese consumers. (In fact, among the four Chinese characters, only the first character is written differently in traditional way and in simplified way)

MUJI’s mark in traditional Chinese characters	Beijing Cottonfield’s Disputed Mark in simplified Chinese characters

The alleged infringing goods claimed by Beijing Cottonfield are bed covers and towels which are classified in class 24 of Nice Classification. MUJI’s mark in traditional Chinese characters covers mats and floor coverings in class 27. MUJI argued that the disputed MUJI mats were made of 100% cotton and should constitute similar products to bed covers and towels considering their identical or similar material, manufacturing methods, and functions.  Therefore, it is MUJI’s right to exploit its own trade mark rights on goods of the same type covered by its own registered mark, rather than such conduct being characterised as an infringing act.

Beijing Cottonfield’s arguments and the court’s reasoning

It is interesting to note that Beijing Cottonfield as well as the Chinese courts agreed with MUJI’s aforesaid argument that the marks are identical and the goods are similar.

Nevertheless, the court arrived at a different conclusion; namely that consumers would be misled and confused as to the actual source of disputed goods because of their similarities. MUJI’s mark is not registered in class 24 and therefore it is MUJI’s responsibility to be aware of the boundaries of its trade mark rights and avoid acts that cross over those boundaries invade the territory of others’ trade mark rights.

Commentary – lessons we can learn from MUJI’s case

China’s first-to-file principle

China adopts the first-to-file trade mark registration principle, rather than first-to-use principle (as in countries such as Australia and the United States). Even though there are exceptions to this principle where rights of the person who begins to use a trade mark earlier can be protected by laws in China, strict conditions apply – specifically, use of the mark in China must have been substantial to the point that there has been the establishment of a relatively high level of reputation in Chinese market.

In the MUJI case, MUJI did not enter into Chinese market until 2005 which made it near impossible for it to successfully cancel the registration of Beijing Cottonfield’s Disputed Mark filed in 2000, even though MUJI had established its reputation in areas near to China, including Hong Kong, Taiwan, and Singapore at that time.

With that being said, this issue has been more arguable in China in recent years as the Internet may have changed the traditional understanding of the territorial limit of trade mark rights.

Similar goods or services, or closely related goods and services in China

Chinese legislation does provide guidelines in detail regarding how to decide similarity of goods and services, but when looking at courts’ decisions on this issue, the rules are not clear and do not seem consistent. As a statutory law country, Chinese courts’ interpretation and application of statutory provisions can be literal and sometimes digress from facts of each specific case.

In keeping with its first-to-file trade mark registration principal, Chinese courts as well as Trade Mark Office of China tend to heavily rely on Nice Classification when deciding the similarity of goods and services, reluctant to rule that goods and services in different classes can also be similar or closely related.

Lengthy and arduous legal proceedings

In Australia, challenging the validity of a Plaintiff’s trade mark rights can be made in a trade mark infringement litigation in the form of a cross-claim, and the court will determine this issue in the same litigation.

By comparison, challenging the validity of a registered trade mark has to be dealt with independently before the Trade Mark Office of China, an administrative agency, rather than the court, even when the validity of the trade mark becomes an issue that has to be solved first in a trade mark infringement litigation. In other words, in China, the Trade Mark Office and its review board consider the application, registration and associated disputes including non-use cancellation, invalidation/cancellation proceedings, while courts deal with infringement claims. Courts are entitled to review decisions made by Trade Mark Office and/or its review board, but cannot directly decide the validity of a trade mark in advance of such a determination being made by the Trade Mark Office.

Practical takeaways for foreign companies eyeing the Chinese market

• File trade mark applications as early as possible in China, ideally before the early stage discussions about manufacture, licensing or distributing products in China. Even if you have not planned to start business in China at all, some trade mark “entrepreneurs” may file your mark in China for possible profits in the future.
• Conduct availability search before deciding which marks to be filed in China. Get advice from legal professionals regarding the registrability of your mark and how to tackle the barriers revealed at this early stage. It is far cheaper than engaging in future litigation.
• Cover as many classes as possible relevant to your business. Even consider including business areas that you are not currently engaged in but may expand to later. However, bear in mind that if the mark has not been used in China after the registration, any third party has the right to seek cancellation. Seek advice from legal professionals regarding how to meet the use requirements under Chinese laws.
• Strongly consider filing a Chinese language counterpart to your trade mark, which will in any event be understood better by Chinese consumers. When foreign brands enter the Chinese market without a Chinese language name, it is very common for Chinese customers to “name” the brand in Chinese themselves. By the time you realise that such customer-created names of your mark have been spread and accepted broadly, wily “entrepreneurs” may have already registered the mark before you.