Update on the legislation and case law relating to online infringement in China

Online infringement in China – legislation and case law

After six years of preparation, the E-commerce Law entered into force in January 2019. The new law provides, among other things, an important enforcement tool – the ‘notice and takedown’ system, which was introduced in the Civil Code and entered into effect on 1 January 2021.

However, the delisting procedure offered by e-commerce platforms does not seem to be user friendly for stakeholders. Criticism has also arisen regarding the lack of effective actions by major e-commerce platforms to prevent IP infringements. On 12 September 2020, in response to these issues, and following the trade agreement between the United States and China signed in January 2020, the Supreme People’s Court of China released two judicial documents:

• the Official Reply to Several Issues Concerning the Application of Law in Online IP Rights Infringement Disputes, which is generally applicable to all internet service providers (ISPs); and
• the Guiding Opinions on the Trial of Civil IP Rights Cases involving E-commerce Platforms, which targets e-commerce platforms.

Internet service providers

Rights holders may apply for a court injunction ordering the ISP to take measures to remove, block or disconnect the complained about links.

If the user of the online service submits a non-infringement statement in response to the notice of the rights holder, the ISP or e-commerce platform operator may terminate the measures of removing, blocking or disconnecting the complained about links, provided that the rights holder failed to file a civil litigation or an administrative complaint within a reasonable period. Delays that may be caused by circumstances beyond the control of the rights holder, such as notarisation and legalisation of procedural documentation, are not included in the calculation of such reasonable period. However, such period must not exceed 20 working days.

If the non-infringement statement is filed in bad faith, the rights holder is entitled to claim punitive damages.

If the rights owner erred on the factual aspect in the takedown notice but can justify that the complaint was filed in good faith, they should be exempt from liability.

E-commerce platforms

The seller running an operation on an e-commerce platform may also apply for a court injunction ordering said e-commerce platform to restore the link removed upon the request of a rights holder if, given the urgency of the circumstances, its legitimate interests would be irreparably damaged.

Regarding complaints or non-infringement statements involving patents, the e-commerce platform may require the submission of a description of the comparison of the technical or design features. Where a design or utility patent is involved, the e-commerce platform may further request the submission of an appraisal report on the novelty of such patent issued by the China National Intellectual Property Administration (CNIPA).

The Guiding Opinions defines the criteria to be considered when deciding on whether:

• bad faith can be ascertained;
• e-commerce platforms have taken reasonable measures; and
• e-commerce platforms knew or should have known of the infringing activity.

Friendly to rights holders

In general, these two judicial documents are relatively friendly to rights holders. Court injunctions are specifically mentioned, more time is given to taking legal action, punitive damages may be claimed in the case of a bad-faith non-infringement statement, and in the case of a good-faith error the liability of the rights holders in a complaint is waived.

Moreover, the courts also tackled the issue of abusive takedown by allowing, for the first time, the online seller to seek a court injunction to cease the takedown action or restore the removed auctions (also called a ‘reverse injunction’).

Xu Chunshan v Tian Qinghong, Liu Yanbo and Shandong Shibo

On 4 September 2019, Xu Chunshan, an online seller of donkey-hide gelatin cake (a traditional Chinese tonic), applied to the Yuhang District Court for a pre-trial injunction, requesting the court to order the three defendants to immediately cease their takedown actions against his online shop on Taobao.com.

The court organised an urgent hearing and supported Xu’s claim on 16 September 2019, confirming the following:

• Tian Qinghong is also an online seller of donkey-hide gelatin cake and is a direct competitor of Xu.
• Tian had, in total, filed 17 takedown notices based on her alleged copyrights in respect of the cake packaging; however, Tian suspected that the copyright certificates were forged.
• Liu Yanbo and Shandong Shibo filed a further six takedown notices against Xu’s online shop; however, the copyright registration information provided was inconsistent with that recorded at the Copyright Office.
• Evidence showed that Tian, Liu and Shandong Shibo have obvious connections – they used the same agent to preserve the infringement evidence, shared the same email address, and used the same IP address when filing the takedown notices. Therefore, by using partially altered or forged ownership, publication and authorisation certificates, as well as other materials, to file copyright infringement complaints against Xu’s Taobao store several times, the three defendants had successfully removed Xu’s product auctions, so as to achieve the purpose of eliminating a competitor, gaining a competitive edge and seizing market share. Such bad-faith complaints are suspected of jointly constituting acts of unfair competition.

The court considered that failure to take injunctive measures would cause irreparable harm to Xu:

• Autumn and winter are the peak sales seasons for donkey-hide gelatin cake. National Day, New Year’s Day, Spring Festival and the e-commerce platform’s ‘Double Eleven’ and ‘Double Twelve’ promotional days during autumn and winter are also peak seasons. If no injunctive measures were taken, it would affect sales and result in sales losses for Xu.
• The loss caused by the takedown complaint is irreversible. Online sales are different from offline sales. The ranking of an auction is the result of continuous advertising input, accumulation of sales volume and positive consumer ratings, directly affecting the probability of successful transactions. Once removed, all the advantages associated with this particular auction are gone and cannot be restored.
• According to Taobao’s rules, once an infringement complaint is established, in addition to removal from the auction, it often triggers penalties such as downgraded store ratings, restrictions on the release of goods or denied access to marketing opportunities, which will affect the sales of the entire store.

Finally, by taking into account the lengthy trial period for unfair competition disputes between the two parties, to balance the interests of both sides, and with reference to the peak sales season of the goods involved, the court decided that the injunction prohibiting the defendants from filing takedown complaint would remain valid until the end of February 2020.

Bosheng Plastic v Lian Rui Company

On 11 December 2019, Bosheng Plastic sued Lian Rui Company for selling mops on Tmall that allegedly infringed its utility model patent and claimed several million renminbi as damages. Lian Rui Company challenged the validity of Bosheng Plastic’s utility model before the CNIPA.

On 10 April 2020, the Ningbo Intermediate People’s Court affirmed the utility model infringement, ordered Lian Rui Company to pay Rmb3.16 million as damages and ordered the immediate removal of the infringing link from Tmall. Lian Rui Company appealed to the Supreme People’s IP Court (the unique appeal court for all patent-related cases).

In the meantime, on 9 September 2020, the CNIPA issued a decision invalidating Bosheng Plastic’s utility model. Bosheng Plastic appealed to the Beijing IP Court.

As the ‘Double Eleven’ date (Alibaba Group’s famous ‘shopping festival’, when the sales figures for an online seller may account for more than half of its annual turnover) was approaching, and in view of the serious challenge concerning the validity of the utility model invoked by Bosheng Plastic, on 4 November 2020 during the appeal procedure, Lian Rui Company requested the Supreme People’s Court order Tmall to restore the mop auction link within 48 hours, due to the urgency of the situation.

After an online hearing, the Supreme People’s Court decided that:

• Tmall must immediately restore the alleged infringing auction link;
• Rmb6.32 million in Lian Rui Company’s Alipay account must be frozen as a bond; and
• if, after the link is restored, the total sales of the alleged infringing products exceeds Rmb12.64 million (twice the bond sum), then Lian Rui Company must ensure that 50% of the exceeding part remains in its Alipay account, which must not be withdrawn until a final decision is rendered.

The Supreme People’s Court explained that such ruling weighs up the interests of each party to the dispute:

• the online seller can operate as usual during the ‘Double Eleven’ period, avoiding irreparable harm to its interests;
• in order to protect the interests of the rights holder, a bond has been posted; and
• the ruling alleviates the potential liability of the e-commerce platform operator in restoring the alleged infringing link – this decision could serve as a point of reference for courts handling similar disputes in the future.

In addition to the reverse injunction, Chinese courts have in recent years gradually developed a consistent practice of dismissing infringement cases filed by bad-faith trademark squatters. The courts have gone even further, siding with rights holders and e-commerce platforms and ordering bad-faith squatters to pay damages.

Bayer v Li Qing

In May 2015, an individual, Li Qing, filed and obtained Class 3 registration in July 2016 for two device marks mimicking the distinctive part of Bayer’s copyrighted designs used on its Coppertone sunscreen products.

Starting in September 2016, Li targeted distributors and small and medium-sized vendors on Taobao who were offering to sell Bayer’s Coppertone sunscreen products using the copyrighted designs by repeatedly filing takedown notice with the platform operator. The complaints resulted in the removal of the product’s auction links and degraded ratings for the vendors. Li also sent cease and desist letters to Bayer’s dealers, demanding cessation of infringement and negotiation for damages, even threatening to resort to criminal or administrative enforcement action or court action if the recipients did not comply. After failing to intimidate Bayer into buying his trademarks, Li launched numerous complaints against 121 Taobao vendors and blatantly offered to withdraw his complaints if the vendors agreed to pay damages.

In 2017, Bayer initiated two actions against Li Qing before the Yuhang District Court, seeking for declaratory judgment of non-infringement, cessation of unfair competition acts and payment of damages.

In its judgment of 8 March 2018, the court cited Article 2.1 of the Anti-unfair Competition Law and observed that where a litigious act breaches the good-faith principle and recognised business ethics, such act constitutes unfair competition.

The court ascertained that:

• evidence was sufficient to prove that Bayer is the copyright owner of the Coppertone sunscreen designs, which pre-dates the application of Li’s trademarks;
• Bayer’s use of such copyrighted designs does not infringe Li’s exclusive right to use his registered trademarks; and
• based on his bad-faith trademark registration, the defendant, by exploiting unfair means, undermined Bayer’s competitive edge and profits from the process, which constitutes an act of unfair competition.

The court also ordered the cessation of Li’s unfair competition acts and the payment of Rmb700,000 as compensation for Bayer’s financial losses.

Taobao v Beijing Weihai

On 4 June 2018, Beijing Weihai filed a takedown notice with Taobao against an online seller and submitted a judgment rendered by the Chaoyang District Court of Beijing affirming that the online seller had infringed its trademark. Taobao removed the alleged infringing auctions and imposed other penalties on the said seller according to its internal rules. Was this the end of the story? Not quite. The online seller protested the penalties and provided evidence showing that the judgment had been forged.

Taobao initiated a civil action before the Beijing Internet Court, contending that Beijing Weihai’s malicious complaints severely damaged its business environment, encroached on its managerial interest and caused economic losses, and should therefore bear tort liability.

On 31 March 2020, the court rendered a decision supporting Taobao’s claims. In the judgment, the court ascertained that:

• by submitting forged judicial documents, the defendant induced the plaintiff to delete the online seller’s auction and to impose other punitive measures against the seller, causing damage to this seller;
• such an abusive complaint also severely affected the plaintiff’s normal business management, and objectively increased the plaintiff’s management expenses;
• the plaintiff’s punitive measures, which were ascribed to the defendant’s false complaint may result in a court action or an administrative complaint filed by the online seller, which could jeopardise the plaintiff’s goodwill; and
• the defendant’s false complaint presented the plaintiff with a conundrum – the plaintiff is forced to be more stringent in assessing the takedown notice to protect legitimate online sellers, yet stricter criteria will in turn impede rights holders’ valid delisting requests, contravening the platform’s objective of strengthening IP rights protection.

Competent courts

In principle, an infringement civil action may be lodged at the place where the effects of the infringement are produced. This should include the place where the goods – ordered online – are delivered. However, in several decisions, the Supreme People’s Court has denied the possibility to start litigation at the place where the online purchased goods are delivered. The rights holders’ choice for a competent court is therefore limited to courts where the e-commerce platform operators are located (eg, the Hangzhou Court for Alibaba, the Beijing Court for JD and the Shanghai Court for Pinduoduo). However, these courts are usually heavily overloaded, which may result in a very time-consuming legal process.