New Balance ordered to pay $16 million in damages to Chinese businessman

China

A recent court decision involving Xin Bai Lun Trade (China) Ltd, a subsidiary of New Balance International Limited, has created significant controversy and attracted considerable attention. Xin Bai Lun China was sued for trademark infringement and the Guangzhou Intermediate People’s Court awarded Rmb98 million (approximately $15.8 million) to the plaintiff, a Chinese businessman and holder of the registered trademarks BAI LUN and XIN BAI LUN in China.

The plaintiff, Zhou Lelun, is the holder of the Chinese registered trademarks BAI LUN and XIN BAI LUN, and has licensed others to use these trademarks for shoes. New Balance tried to oppose the XIN BAI LUN mark but did not succeed.

Xin Bai Lun China is a wholly-owned subsidiary of New Balance International Limited and the general agent for New Balance sports products in China. Xin Bai Lun China had been using 'Xin Bai Lun 新百伦' in commercial activities promoting and selling New Balance shoes, both online and in physical stores. According to the plaintiff, Xin Bai Lun China had used 'Xin Bai Lun' (on its own or together with 'New Balance' and/or 'NB'):

  • on sales slips/receipts, business cards, price tags, and brochures in physical stores;
  • as a product name in online shops at Tmall and Jingdong; and
  • in promotional videos posted on Youku, Sohu and Letv, and on New Balance's official website, as well as on Sina Weibo.

Xin Bai Lun China defended itself by arguing that:

  • 'Xin Bai Lun' is the Chinese translation and/or transliteration of 'New Balance', which had been put into use prior to the plaintiff’s registration of XIN BAI LUN as a trademark;
  • it had been using 'Xin Bai Lun' as a trade name and/or unique name of a well-known product, rather than as a trademark; and
  • the relevant public would not confuse New Balance shoes with those of the plaintiff.

However, the court found that Xin Bai Lun China’s use of 'Xin Bai Lun' constituted trademark infringement. The court held that 'Xin Bai Lun' was used as a trademark in commercial activities and that there was a likelihood of confusion (especially of reverse confusion).

Further, the court found that:

  • 'Xin Bai Lun' is not the translation of 'New Balance'; instead, 'New Balance' should be translated as 'Xin Ping Heng' in Chinese; and
  • Xin Bai Lun China was or should have been aware of Zhou’s XIN BAI LUN trademark, as Xin Bai Lun China’s affiliated company filed an opposition against the trademark in 2007.

The significant amount of damages awarded in this case is noteworthy. The only other case where the amount of damages came close to this was a utility model patent case in which damages were awarded against Schneider.  As part of the evidence preservation procedure, the court seized evidence relating to Xin Bai Lun China’s financial records dating from 2011 to 2013, including audit reports and income statements.

As the applicable law in this case was the 2001 Trademark Law, the plaintiff chose to have the damages calculated on the basis of the profit made by Xin Bai Lun China from its infringing activities. The court found that the net income of Xin Bai Lun China was approximately Rmb22.23 million in 2011, Rmb61.98 million in 2012 and Rmb156.02 million in 2013. The total net income of Xin Bai Lun China during the 'infringement' years (from 2011 to 2013) was thus about Rmb195.8 million. The court took into account the fact that Xin Bai Lun China was only using 'Xin Bai Lun' in its sales activities, not on the actual shoe products. The court then determined that the damages should be half of Xin Bai Lun China’s net income from 2011 to 2013 - namely, Rmb98 million. 

Arguably, the way in which the Guangzhou court calculated the damages is astonishing, as it essentially awarded 50% of the net profit of New Balance China to the plaintiff. It is unclear why New Balance never registered its Chinese name in the first place, but New Balance is clearly not the first foreign brand to face such issues. Sometimes, the Chinese media or a member of the public comes up a popular name for a foreign brand before the brand owner recognises it as its own. A few years ago, 'Wei Ge' for 'Viagra' and 'Suo Ai' for 'Sony Ericsson' highlighted the issue.

Even though New Balance likely made a mistake, it may not deserve such punishment. Although it is not clear from the court judgment whether there was any bad faith in the plaintiff's registration, the name Xin Bai Lun as registered has been widely associated with New Balance for years. It seems that the court simply followed the text of the old trademark law, without considering issues such as causation and other factors relevant to damages. 

What does this mean for foreign brands? It is clearly a lesson for firms that are expanding quickly in China - they should never underestimate the risks of being attacked in such a way. On a more positive note, it appears that some Chinese courts are trying hard to increase the amount of damages in IP cases.

The case also shows that it is important to secure financial records through evidence preservation. Once the plaintiff has obtained the financial data of the defendant, it may be expecting 50% of the profits as damages, if it is lucky. 

He Jing and Cao Hui, AnJie Law Firm, Beijing

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