Trademark license and packaging right

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(Author: Paul RANJARD; Source: WAN HUI DA)

In July 2017, the Supreme People’s Court of China, acting as Court of Appeal, reversed a judgment made by the Guangdong High Court (December 2014), and declared that a trademark and a packaging, on the same product, may constitute two independent IP rights.

Background of the case

In 1828, a Guangdong doctor called Wong Chat Bong created a Chinese herbal tea brand “Wong Lo Kat”. The tisane, which was initially popular in southern China, is brewed by certain Chinese herbals into a concoction with the effect of clearing away excessive internal heat and removing damp qi in the body and avoiding inflammatory or other lesions.

“Wong Lo Kat”, or “Wanglaoji” in Mandarin, is transliteration of its name.

In 1956, the government nationalized all of Wong’s assets related to the herb drink and transferred them to a company owned by the Guangdong government, Yangcheng Tonic Factory.

In 1991, Yangcheng Tonic Factory began to produce the drink and to sell it in a green packaging labelled with traditional calligraphy.

On January 18, 1992, Yangcheng Tonic Factory applied for the registration of the “王老吉” mark (Wang Lao Ji) no. 626155 in class 32, covering goods “non-alcoholic beverages and powdered drinks”. The trademark was registered on January 20, 1993.

In March 1995 and February 1997, Yangcheng Tonic Factory signed a trademark license contract with a Hong Kong-based company called HUNG TO (Holdings) Company Ltd (HUNG TO). Mr. Chan Hung To, owner of HUNG TO had applied, in December 1995 and June 1996, for design patents called “soda can label” and “can label” (both requiring color protection), which were granted by the State Intellectual Property Office in 1997.

According to the license agreement, the licensor granted to the licensee the exclusive right to use the mark in relation to the manufacturing and sale of the herbal teas, packaged in the red can object of the above design patents. License and licensor were to use different patterns and colors in their respective packagings of the products.

               

Yangcheng →GPH           Hung To→JDB

In August 1997, Yangcheng assigned the Wong Lo Kat trademark to Guangzhou Pharmaceutical Holding (GPH).

In 1998, HUNG TO set up a wholly owned subsidiary Dongguan Jiaduobao Drink & Food Co., Ltd. (later renamed as Guangdong Jiaduobao Drink & Food Co., Ltd. (JDB) in 2000), to produce and market the Wong Lo Kat herbal tea products under the red can design.

The trademark license between GPH and HUNG TO was renewed in 2000 until 2 May 2010.

In 2003, HUNG TO invested heavily to place the Wang Lao Ji commercials during the prime times of the CCTV television channels, for ten years.

In 2003, on the occasion of a lawsuit brought by JDB against a local infringer, the Wang Lao Ji herbal tea was recognized as a “famous commodity” and its red can packaging qualified as “peculiar packaging of a famous commodity” as provided in Article 5 of the Anti-Unfair Competition Law (first instance Foshan Intermediate Court and the second instance Guangdong High Court).

However, in 2005, the situation started to become shaky for JDB: it was found that Li Yiming, GPH General Manager, had received a bribe of 3 million HK dollars from Chan Hung To, as an incentive to renew the license agreement in 2000.

JDB still continued to promote the Wong Lo Kat products and the company established itself at the top of the sales of canned drinks in China since 2008.

However, in April 2011 (six years after the discovery of the bribes) GPH decided to terminate the license agreement. Since JDB did not agree, GPH filed an arbitration complaint with the China International Economic and Trade Arbitration Commission (CIETAC). It argued that the renewed contracts signed by Li Yimin had been influenced by bribes and were therefore invalid.

JDB felt the danger and in December 2011, started marketing a red-can herbal tea bearing “Wang Lao Ji” on one side and “Jiaduobao” on the other (both in mandarin).

In May 2012, JDB launched a red-can herbal tea bearing only the “Jiaduobao” mark on both sides.

On 9 May 2012, the CIETAC ruled that the two additional trademark license contracts were invalid. Therefore, the valid trademark agreement had expired on 2 May 2010, and HUNG TO and its subsidiary JDB had no right to use the “Wong Lo Kat” Chinese trademark after that date.

Immediately, in May 2012, GPH licensed its subsidiary Guangdong Wanglaoji Grand Health Co., Ltd. to exclusively use the “Wang lao Ji” mark using the red can.

Red can version Wong Lo Kat produced by GPH

 

Legal Battles

The issue at stake was the red can.

In July 2012, JDB sued GPH before the Beijing No.1 Intermediate Court, asking for an injunction to stop the use of the red can design and claiming damages for an amount of RMB 3.096 million.

Meanwhile, GPH arguing that the design was inseparable from the trademark, also sued JDB, but before the Guangzhou Intermediate Court, and asked for an injunction to stop using the red can design and damages for RMB 150 million.

The Guangzhou Intermediate Court, aware of the other case in Beijing, apparently reported to the Guangdong High Court to seek guidance. The High Court then referred the case to the Supreme People’s Court, proposing to appoint the Guangzhou Intermediate Court to hear the two cases in combination.

In December 2012, the SPC appointed, the Guangdong High Court to hear both cases.

In December 2014, the Guangdong High Court ruled the two cases in favor of GPH.

The court found that the red can packaging cannot be separated from the Wang Lao Ji trademark. Therefore, the red can packaging belongs to the owner of the Wang Lao Ji trademark. The Court dismissed JDB’s claims and ordered JDB to stop using the red can packaging and to pay damages RMB 150 million.

JDB appealed to the Supreme People’s Court. The SPC, after hearing the case on June 16, 2015, rendered its decision, a 70 pages long judgment, two years later, on July 27, 2017.

The SPC reversed the decision of the Guangdong High Court and declared both parties were entitled to use the red can packaging.

The SPC reasoning may be summarized as follows:

●The SPC agrees with the Guangdong Court that the packaging, composed of the combination of the Wang Lao Ji characters in yellow font, on the red background of the can, falls under the category of “peculiar packaging”, and is protected as such under the Anti-unfair Competition Law.

●The SPC echoes Guangdong Court’s view that the main reason for this dispute is that the trademark license contract between GPH and HUNG TO did not specify the ownership of the litigious packaging. The parties did not foresee the situation at the end of the trademark agreement and did not provide who would own the rights generated during the life of the agreement, on that specific packaging.

●The SPC, then, describes the contributions made by both parties to the value of the packaging:

  1. Wang Lao Ji has been using the Wang Lao Ji Chinese character in a consistent, stable and continuous manner. As a result, the characters have been integrated into the packaging which has become a source identifier of the product. The SPC therefore concludes that Wang Lao Ji characters are a vital component of the litigious packaging.
  2. As for JDB, it has made a huge contribution through years of consistent and extensive promotion of the packaging, so that it is clearly identified by the consumers as the operator of the red can herbal tea.

●The SPC affirms that the identifying function of a trademark and of a famous packaging may work independently for different right owners. So, the litigious packaging, due to its reputation and uniqueness, has generated independent rights from the trademark itself. For the SPC, the consumers do not differentiate from a legal perspective, a trademark right from the right of a peculiar packaging, and therefore, will associate the herbal tea with GPH and JDB simultaneously. The SPC concludes that the litigious packaging does combine the brand awareness of Wang Lao Ji and the reputation and distinctive features acquired by JDB.

●Based on the above findings and reasoning, the SPC holds that it would be unfair and may be detrimental to the public interest if the litigious packaging is awarded to either side. Therefore, the SPC declared that both parties were entitled to use the litigious packaging, and dismissed both claims.

COMMENTS

The SPC was facing a situation which could have been anticipated but was not.

A product (the herbal tea) known under trademark, is commercialized in two very different packagings: a green carton (by the trademark owner), a red/gold can (by the licensee). The red can packaging has been created by the licensee.

What happens when, for any reason, the trademark license is terminated?

If the packaging becomes famous and a “source identifier” of the product that it contains, which is known under the trademark, it is undisputable that the packaging is inseparable from the trademark. Therefore, the trademark licensee, at the end of the license, should not be able to use neither the trademark nor the packaging, since they cannot be separated. This was the Guangzhou High Court’s decision.

On the other hand, if the packaging is protected as such, and in particular, if it is the object of a design registered in the name of the licensee, it might be argued that the trademark licensor has no right to continue using the packaging without the authorization of the ex-licensee.

In other words, no one could use the packaging.

The SPC preferred to say that both may continue using it.

From the trademark licensor’s perspective, it seems that there is a lesson to learn from this case. If the products sold by the trademark licensee are commercialized under a packaging, different from the licensor’s own packaging, that might be claimed by the trademark licensee as an independent IP right, it is necessary to provide, in the license agreement, that at the end of the trademark license, the packaging right will remain attached to the trademark and that its use shall be discontinued by the trademark licensee.

 

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