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Piercing the corporate veil in Chinese trademark infringement cases

Mar 22, 2019 By Gang Hu

Requesting that the legal representative of a company bear joint and several liability for infringement can be a powerful enforcement tool – but is available only in specific circumstances.

The independence of corporate personalities and the limited liability of shareholders are the two cornerstones of modern companies. Generally, shareholders of a company will be liable to the company to the extent of their capital contributions or shares, whereas a company will be liable for its debts with its whole property. In order to prevent shareholders abusing this limited liability, Paragraph III, Article 20 of the Company Law of the People’s Republic of China provides for a legal personality denial system, whereby “any of the shareholders of a company who evade debts by abusing the independent status of the company as a legal person and the limited liability of shareholders, which results in serious damage to the interests of the creditors of the company, shall bear joint and several liability for the company’s debts”. In fact, China has taken the lead in establishing this system (the so-called ‘piercing the corporate veil’ system) in statutory law.

Over the past two years, under the guidance of judicial policies on combating malicious trademark infringement, courts across China have begun to request that the legal representative of a company and the company bear joint and several liability for damages caused by trademark infringement, in accordance with Paragraph III, Article 20 of the Company Law and the Tort Liability Law on joint tort. As a result, several significant cases have emerged.

Siemens v Siemives

Siemens v Xinchang County Siemives Life Electrical Equipment Co, Ltd (2016 Zhejiang Civil Final 699) was concluded by the Zhejiang Higher People’s Court on 16 December 2016. Plaintiff Siemens AG has been actively carrying out a wide variety of business activities since its entry into the Chinese market in 1872. Moreover, the SIEMENS brand enjoys high popularity in China. Defendant Siemives was established on 14 April 2014 and has two natural person shareholders: Wu XX (holding 80% of shares) and Zhu XX (holding 20% of shares). On 23 January 2014 Wu registered the domain name ‘www.siemives.com’ and then granted Siemives a licence to use it to sell allegedly infringing products. Wu’s personal bank account was used as the company’s operating account and the two parties engaged in numerous combined activities.

According to news reports, some consumers began to mistake the products produced by Siemives for products produced by Siemens under the SIEMENS brand. Siemens filed suit with the Shaoxing Intermediate People’s Court, petitioning it to order that Siemives and Wu cease the trademark infringement and unfair competition and jointly compensate Siemens for its economic losses.

The court of first instance found that, although Siemives’s actions constituted infringement, Siemens had failed to provide sufficient evidence to show that the defendants’ property was combined; therefore, Wu did not bear joint and several liability. Dissatisfied with the judgment, Siemens filed an appeal with the Zhejiang Higher People’s Court.

The Zhejiang court determined that, subjectively, both Siemives and Wu had intended to conduct the infringement and, objectively, they had fully cooperated with each other, thereby contributing to the damage incurred. The court held that the defendants’ respective actions were inter-related and combined to constitute joint infringing acts. Therefore, their personalities were interchangeable and both defendants should bear joint and several liability for damages. The court ordered that Siemives and Wu jointly compensate Siemens for its economic losses (including reasonable costs incurred to stop the infringement), which amounted to Rmb2 million.

Sakura v Yinghua

Sakura Bath & Kitchen Products (China) Co, Ltd v Zhongshan Yinghua Integrated Bath & Kitchen Products Co, Ltd (2015 Jiangsu IP Civil Final 00179) was concluded by the Jiangsu Higher People’s Court on 28 August 2018. Plaintiff Sakura was established on 12 April 1994. Through years of marketing and brand cultivation, its SAKURA trademark for kitchen utensils had come to enjoy a high reputation and market recognition among the relevant Chinese public. The defendants – the Suzhou and Zhongshan branches of Yinghua Technology and the Zhongshan branch of Yinghua Integrated – intentionally conducted business activities using the SAKURA mark and trade name, within the same scope of business as that of the plaintiff. Indeed, the defendants produced and sold products which were the same as, or similar to, those produced and sold by Sakura, and marketed these products under business signs similar to those of the plaintiff.

Sakura argued that such publicity and sales activities:

  • caused confusion among relevant consumers with regard to the origin of the products and market entities;

  • disturbed the market order; and

  • constituted trademark infringement and unfair competition.

Further, it argued that defendant Rongling Tu – a natural person, who was the legal representative of Suzhou Yinghua Technology and the legal representative and principal shareholder (holding 90% of shares) of Zhongshan Yinghua Integrated – had deliberately committed infringement through the aforesaid companies. Therefore, Sakura filed suit with the Suzhou Intermediate People’s Court, petitioning it to order that the defendants cease the trademark infringement and unfair competition and jointly compensate Sakura for its economic losses.

The court of first instance determined that, although the defendants’ actions constituted infringement, Sakura had failed to prove that Tu abused the independent status of the companies as legal persons and the limited liability of shareholders, thereby damaging the interests of the creditors of the company. As such, the court ruled that Tu should not bear joint and several liability. Sakura appealed the judgment to the Jiangsu Higher People’s Court.

The Jiangsu court held as follows:

  • As the legal representative of Suzhou Yinghua Technology and Zhongshan Yinghua Integrated, Tu had infringed Sakura’s trademark rights on establishing the companies, as he should have known the relevant circumstances of the plaintiff’s SAKURA trademarks and trade name.

  • Tu established the three defendant companies successively, thereby demonstrating his subjective malicious intent.

  • The composition of the shareholders of Suzhou Yinghua Technology and Zhongshan Yinghua Integrated was relatively simple, with Tu holding 90% of the shares and acting as the legal representative of both companies. As a result, Tu had a strong influence over the business activities of both companies.

The three defendant companies intentionally:

  • used a trade name that was identical to that of the plaintiff;

  • failed to use their trademarks in a normal way in business operations;

  • used slogans that were similar to the slogan used by the plaintiff; and

  • operated products that were similar to those of the plaintiff.

As such, the companies had infringed the plaintiff’s mark in order to conduct their main business, for which Tu bore corresponding liability.

Ultimately, the court concluded that Tu had committed infringement by controlling the defendant companies while being fully aware of the plaintiff’s registered SAKURA trademarks and business reputation. As an individual, he played a key role in all of the infringing acts. Therefore, the court determined that the actions of Tu and the other defendants constituted joint infringement and that all parties should bear joint and several liability. The court ordered the defendants to jointly compensate Sakura for its economic losses (including reasonable costs incurred to stop the infringement), which amounted to Rmb2 million.

Zhang Zhimin v Exxon Mobil

In Zhang Zhimin v Exxon Mobil Corporation (2016 Beijing Civil Final 544) plaintiff Exxon Mobil is the owner of the trademarks MOBIL and ‘美孚’, which it has used on lubricating oil products for many years in the Chinese market. As a result, the trademarks have gained high recognition and influence, thereby constituting well-known marks in China. Defendants Beijing Beinong Guoxin Technology Development Co, Ltd and Langfang Zhongke Agricultural Technology Development Co, Ltd used the MOBIL and ‘美孚’ marks on pesticide and chemical fertiliser products. Exxon Mobil argued that the defendants’ marketing and sales activities:

  • caused confusion among relevant consumers with regard to the origin of the products and market entities;

  • disturbed the market order; and

  • constituted trademark infringement and unfair competition.

In addition, Exxon Mobil argued that Zhimin Zhang – a natural person and the legal representative and principal controlling shareholder (holding 80% of shares) of Beinong and the legal representative of Zhongke – had deliberately committed infringement through the aforesaid companies. Moreover, it argued that Dandan Zhang – Zhimin Zhang’s daughter – was responsible for marketing the businesses through the Beinong website, which was registered under her name.

Exxon Mobil filed suit with the Beijing IP Court, petitioning it to order that the defendants cease the trademark infringement and unfair competition and jointly compensate Exxon Mobil for its economic losses. The court of first instance confirmed that the defendants had committed trademark infringement and that they should bear joint and several liability. The defendants filed an appeal with the Beijing Municipal Higher People’s Court.

The appeal court determined that Zhimin Zhang had been aware of Exxon Mobil’s registered trademarks and business reputation and had therefore committed infringement by controlling Beinong and Zhongke while fully aware of the production, sale and promotion of the companies’ infringing products. Indeed, Zhimin Zhang communicated ideas with the companies and played a key role in all of the infringing acts. As such, Zhimin Zhang, Beinong and Zhongke were liable for joint infringement.

The court also held that Dandan Zhang, who used to be an employee at Beinong and was the registered owner and operator of the Beinong website, should bear liability for infringement conducted on the website. Since the public actions conducted on the website aimed to market the infringing products produced and sold by Beinong and Zhongke, they were deemed to be jointly committed; therefore, Dandan Zhang should also bear joint and several liability. The court concluded that the behaviour of the four defendants constituted infringement and that Zhongke, Beinong, Zhimin Zhang and Dandan Zhang should jointly compensate Exxon Mobil to the amount of Rmb3 million, while Dandan Zhang should also bear joint and several liability to the amount of Rmb300,000.

Comment

The Beijing, Zhejiang and Fujian higher courts have all explored piercing the corporate veil in the aforementioned trademark infringement cases and have determined that the legal representative of a company should bear joint and several liability for such an infringement. Given the professional competence and guiding role of these courts in civil judgments on IP rights, if the above cases can be quoted and used as a reference by local Chinese courts, infringers will be prevented from taking advantage of corporate personality independence and the limited liability of shareholders in order to profit through improper means such as causing confusion and riding on the business operations of other rights holders. Indeed, infringers will no longer get away with using a company with almost no enforceable property as a shield to protect them against personal liability. Nor will they be able to commit repeated infringement by establishing new companies.

To prove that the shareholder of a company has used the company as a tool for infringement, has acquired illegitimate interests by controlling the company’s operation and has attempted to evade liability for the infringement by taking advantage of corporate personality independence, plaintiffs must submit evidence of the following:

  • The infringer knows of the plaintiff’s status in the market and its well-known trademarks.

  • The infringer’s business is mainly or wholly based on the manufacture or sale of products that infringe the rights of the plaintiff.

  • The infringer is often engaged in such obvious acts of unfair competition as deliberately using trade names or slogans which are the same as those of the plaintiff.

  • The composition of shareholders of the company controlled by the infringer is simple and the capital of the company is relatively small (the infringer is often both the controlling shareholder and the legal representative of the company).

  • The financial affairs and business of the infringer and the company controlled by them are, to a great extent, combined.

  • The infringer is likely to have committed repeated infringement.

The last thing to note is that piercing the corporate veil and requesting that the legal representative of a company bear joint and several liability is a means of assuming liability only in cases of severe infringement. It cannot be generalized and may apply only to acts of malicious infringement of IP rights. Rights holders should entrust experienced agents with case analysis in view of the specific circumstances, as well as specific exploration and investigation – only in this way can we protect IP rights more effectively.