Attorney-at-law Xiaoou Yu
With the continuous innovation and development of the e-commerce business, an increasing number of foreign enterprises, willing to enter the Chinese market but constrained by factors associated with traditional model of international trade, such as the cost and customs declaration approval procedures, have successively started to sell their products to Chinese consumers through the import model/channel of cross-border e-commerce in the bonded zone (hereinafter referred to as “the Model”). While obtaining a large amount of business profit, it also gives rise to a series of “lingering” legal risks, including trademark infringement.
The cross-border e-commerce import in the bonded zone, also known as the “Online Shopping’s Bonded Import” or “1210 Cross-Border E-commerce Retail Import” etc., refers to the import part of the customs supervision model code No. 1210 – “Bonded Cross-Border Trade E-Commerce”, added in the official publication “Announcement on Adding Codification of Customs Supervision Models (No. 57 in 2014)”, published by the General Administration of Customs of the People’s Republic of China. The part stipulates that e-commerce enterprises can realize cross-border transactions on platforms approved by the customs, and can sell goods to consumers inside China through the customs’ special supervised zones or the supervised bonded locations. Under this model, overseas goods can enter the bonded zone and stock there in bulk. Then it can be cleared and sent to consumers inside China by post through individually packaged parcels as appropriate. When the goods sold in such manner are returned, they are returned to the bonded zone for sorting and repackaging, after which they can be sold again. The unsold goods, although cannot leave the bonded zone, conveniently save the hassle of customs clearance. The unsold goods can be directly returned to their respective foreign places of origin. Considering both the lower storage and lower labor cost in China, selling through the bonded zone substantially reduces costs and saves the hassle of customs clearance, and considerably decreases the time from an order is placed to the time goods are actually delivered to the consumer in a cross-border online purchase. In addition, according to the official publication by several government agencies including the Ministry of Commerce (Commerce Finance Development [2018] No. 486), such goods also have a range of advantages in the following aspects: ① the protocols and technical specifications, such as on product quality, safety, sanitation, environmental protection, and labeling, should comply with standards of their respective places of origin rather than the standards in China, subject to certain conditions; ② the goods may not be attached with labels in Chinese; and ③ the goods are supervised as being for personal use in the customs inspection process, eliminating the need for import license approval, registration, or recording etc. in the first import instance.
Due to the substantial advantages presented in the Model, many enterprises are eager to devote themselves in and use the Model, overlooking the “lingering” legal risks. Taking trademark right as an example, even if trademarks labelled on the products of many cross-border e-commerce enterprises (“the Enterprises”) have been registered in their respective countries of export, their identical or similar trademarks have already been registered by others in China. If the Enterprises failed to conduct a thorough trademark investigation and prior search before its import, it may run into the legal risk of trademark infringement.
The Principle of Territoriality of the trademark rights is a bedrock principle of trademark laws. Trademark rights acquired in one country or region are only valid in that specific country or region, having the effect of acquiring, maintaining and excluding trademark rights, and cannot be extended to other countries or regions. Accordingly, trademark rights acquired abroad by cross-border e-commerce enterprises do not automatically extend to China. The legal precedents in China related to cross-border e-commerce import also indicate a tendency to respect and emphasize on the Principle of Territoriality, bringing about notable reference values in terms of foreseeing the legal risks under the cross-border e-commerce import model in the bonded zone.
For instance, in the “Freshjive” case ((2013), Shenzhen Futian IP Civil First Instance No. 1257), the court held that trademark right has the characteristic to follow “The Principle of Territoriality”. The defendant, who, without the plaintiff’s authorization, sold to consumers inside China, apparels made in the U.S. and labelled with the trademark “Freshjive” through the cross-border e-commerce website they created. The defendant’s act was found by the court to be infringement of the trademark “Freshjive” owned by the right owner inside China.
Take the “UGG” case as another example ((2016) Zhejiang 0110 Civil First Instance No. 16168), the Primary People’s Court of Yuhang District of Hangzhou City, Zhejiang Province, pointed out that “intellectual property rights have the characteristics to follow The Principle of Territoriality. The products at issue in the case may be legal in Australia, but since it was imported into China from Australia, it must comply with the law of China and must not infringe the rights of the Chinese trademark owners”.
In the “orangeflower” case ((2016) Guangdong 73 Civil Final No. 61), the Guangzhou Intellectual Property Court held that, “based on The Principle of Territoriality of the trademark rights, the exclusive right on the registered trademark enjoyed by the plaintiff Hengli Corporation and its right to prohibit others from using the trademark without authorization, should be protected under the law of China. Without Hengli’s authorization, any entities or individuals shall not use the trademark. Otherwise, their acts would constitute trademark infringement of Hengli Corporation’s exclusive trademark rights. Accordingly, the court found that the conducts of the defendants, ACCOMMATE CO. LTD and its affiliates, selling apparels attached with “orangeflower” trademark manufactured by third-party Korean companies to consumers inside China through Korean style e-commerce websites with servers inside Korea, constituted infringement of the trademark rights of “orangeflower” registered in China.
It can be seen from the above cases that, in the judicial precedents on cross-border e-commerce imports, courts in China have maintained a fair degree of consistent tradition of respecting The Principle of Territoriality of the trademark rights. However, under the Model consisting of “bonded zone + cross-border e-commerce”, are products in the bonded zone subject to the Trademark Law and the relevant laws in China?
The “bonded zone”, under the cross-border e-commerce import model in the bonded zone, refers to the special inspection zone of customs and the bonded logistic center, that have been approved to carry out trial runs in cross-border trade e-commerce import, and have a nature or privilege of “being within the border but outside the customs”. Although the bonded zone has brought much convenience and reduction policies to the Enterprises and other entities in taxation and customs clearance procedures, it is still located within the border of China, it does not mean that all the customs inspection and the application of the domestic laws of China are excluded. Unless the regulations related to the establishment and management of the bonded zone clearly and specifically ruled out the application of the laws and regulations of China, the laws and regulations of China must apply to the bonded zone in the same manner.
Article 48 of the Trademark Law of China stipulates that the use of a trademark on goods, the packaging or containers of goods and the transaction documents of goods, as well as the use of a trademark in advertising, exhibition, and other commercial activities, for the purpose of identifying the sources of goods, is an act of trademark use. Accordingly, where a prior registration of an identical or a similar trademark exists in China, it is highly probable that the importing activities of the Enterprises using its trademark with respect to the identical or similar goods and product packaging in the bonded zone would constitute trademark infringement stipulated in Article 57 of the Trademark Law of China.
However, if we collate the relevant precedents, it may be seen that there seems to be few trademark infringement lawsuits filed against the Enterprises formed outside China on the conducts stated above and where the plaintiff eventually won. Winning precedents are commonly lawsuits where the domestic trademark registrant sued e-commerce platform operators, surrogate shoppers, or domestic e-commerce shops cooperating with the Enterprises. It is also stipulated in the publication of Commerce Finance Development [2018] No. 486 that the domestic service providers of the Enterprises are the legal entities to accept follow-up inspections of customs, market supervision and other departments, and to bear corresponding legal responsibilities. As such, it may paint a wrong picture to some cross-border e-commerce enterprises that, because of the cross-border nature of their e-commerce business operating under the Model, it is rather difficult for them to be held liable for trademark infringement.
Base on the following premises, such acts of the Enterprises located overseas may still constitute trademark infringement.
1. Under the Model, whether it is a cross-border e-commerce enterprise, an operator of e-commerce platform, or a domestic service provider of the Enterprises, it is respective components of the whole business model. The standard in determining trademark infringement under the Model should be consistent. It should not be the case that under the same conditions, the operators of the e-commerce platforms and the domestic service providers are liable for trademark infringement on one hand, but the cross-border e-commerce enterprises are not, on the other hand. Even if some of the Enterprises may have only manufactured the products overseas and delivered the same from overseas to China under the Model, the model where products are imported and entered into China through cross-border e-commerce business operators in bonded zone may be deemed as sales act extended to China.
2. The reason why the Enterprises overseas are seldom sued for trademark infringement and lost the cases, and there exist the stipulations that the domestic service providers as the subject to bear the legal liabilities, is that it is rather inconvenient to collect evidence of the cross-border e-commerce enterprises and supervise these overseas entities. Generally speaking, due to the overseas location of the cross-border e-commerce enterprises, there are high thresholds in investigation and evidence collection, service of documents, case execution, and enterprise supervision. With regard to the investigation and evidence collection, some of the relevant evidence is formed abroad, this fact alone sets a high bar in terms of the language ability, cost of litigation, etc. for the subject carrying out the evidence collection. As the Civil Procedure Law in China stipulates that evidence formed abroad should be notarized and legalized, this further increases the time and monetary costs for right holders in enforcing their rights. At the same time, it is difficult for administrative departments with supervisory function, such as the customs in China, to provide effective supervision on overseas enterprises. Instead, the supervision is provided indirectly, by intensifying the supervision of the domestic service providers, realizing a reverse promoting effect on the the overseas cross-border e-commerce enterprises. Therefore, the emergence of such issues only means there are difficulties in executing the rights and supervising the behavior in practice. It does not mean, however, that the behavior of the Enterprises can never constitute trademark infringement at the legal level. Furthermore, once the domestic partner and the domestic cooperation platforms collaborating with the Enterprises are sued and found liable, they may sue and seek indemnification from the Enterprises according to the contract signed between the two parties. In such circumstances, some cross-border e-commerce enterprises will further increase the difficulty for trademark holders to enforce their rights, by devising more complicated and delicate designs of the whole business model, and meanwhile by specifying, in advance in the relevant contract, the legal liabilities attributed to each party at the time when a dispute arises, in order to avoid the risk of infringement litigation. On the other hand, the domestic service providers and e-commerce platforms cooperating with the Enterprises usually consider using the legal source defense to avoid risks. However, it remains controversy in practice whether such argument can be supported by Chinese courts.
In conclusion, under the Model, if prior trademark registrations on identical or similar products are already in existence in China, even if the imported product has attached trademark registered legitimately overseas, when entering China under the import model of cross-border e-commerce enterprises in the bonded zone, there is a high possibility that the act thereof constitutes trademark infringement of the existing registrations in China. Therefore, whether it is a practitioner of an e-commerce platform, a domestic service provider inside China, or an overseas cross-border e-commerce enterprise, when engaging in cross-border e-commerce import activities in bonded zones, the “lingering” legal risk of trademark infringement should be taken seriously and cautiously. It is recommended that they perform trademark search as appropriate to minimize the risk of trademark infringement.