In the late 2024, the Supreme People's Court of the People's Republic of China (“SPC”) issued an important ruling in the Retrial procedure of the trademark infringement case involving Nature Republic Co., Ltd ("NR", the trademark holder of "NATURE REPUBLIC" for aloe vera gel) and Wangdu County Jianglin Cosmetics Sales Department (the defendant "Jianglin", a small Chinese company distributing counterfeit aloe vera gel) . In its ruling, SPC emphasized the principle of "defense of lawful sources of products" and "profiting from repetitive litigations is not encouraged." Consequently, the SPC ordered Jianglin to cease its infringement but did not support NR's claims for damages. 

The local news paper reported the case at https://static.nfapp.southcn.com/content/202306/19/c7805826.html 

This SPC ruling is expected to significantly impact anti-counterfeiting initiatives for brand owners, particularly for those who rely heavily on large-scale raids and legal actions to identify and address the key individuals orchestrating counterfeit activities among smaller market participants.

Case Background

The background of the case reveals that Jianglin was selling counterfeit products that infringed on NR's trademark rights. Both the SPC of first and second instances supported NR's claims for compensation and reasonable expenses related to protecting its trademark rights. However, during the retrial, Jianglin presented evidence regarding the source of its products from a Tianjin company and argued that it had exercised reasonable diligence. 

SPC decision 

1. While the trademark owner NR sought compensation for its expenses related to defending its rights, it was unable to present sufficient evidence to justify the claimed amount. This ultimately led to unfavorable legal outcomes for NR.

2. The lawful source defense system is designed to promote transparency among genuine sellers regarding the origins of their products, while also safeguarding their interests during business transactions. In this instance, the low purchase and sales prices of the infringing goods, coupled with Jianglin's willingness to provide information about the source of the infringement, led the SPC to determine that holding Jianglin accountable for NR's expenses would be unjust and contrary to the principles of the lawful source defense.

3. The SPC observed that NR has initiated mass litigation against numerous small and medium-sized sellers across various provinces in China. In these situations, the reasonable expenses incurred to stop infringing activities may overlap, necessitating a thorough evaluation to ensure that compensation amounts do not exceed actual expenses and to prevent unjust enrichment for rights holders.

4. Additionally, the SPC noted that if intellectual property owners exploit their rights for financial gain through litigation, it undermines the fundamental purpose of IP protection and disrupts market stability, ultimately wasting judicial resources. Consequently, the SPC did not endorse NR's damage claims and instead mandated the cessation of infringements and the destruction of stockpiles.

Comments

This ruling represents a significant shift from SPC regarding mass litigations aimed at small and medium-sized vendors of counterfeit goods, as long as these vendors can provide evidence supporting the origins of their products. 

While intellectual property rights holders may have concerns about the fairness of defending their rights in China following this decision, it is important to recognize that the SPC's ruling is consistent with legal standards and the fundamental goals of legislation and government policy.

Additionally, although Jianglin sold infringing products, the new evidence it presented during the retrial, which the SPC acknowledged, constituted a legitimate defense. The reasonable source defense is designed to protect genuine sellers and maintain their trust in market transactions. By requiring small and medium-sized sellers to disclose the sources of their products, SPC considered courts can strike a balance between fairness and justice, assisting rights holders in tracing the origins of infringement while also safeguarding the interests of these smaller enterprises.

Furthermore, the SPC has established a precedent by adopting a more lenient approach in evaluating the validity of reasonable source defenses, taking into account the market practices of affordable cosmetics and the challenges faced by small businesses. Many small vendors have faced substantial liability despite only selling a limited number of infringing products.

It is also important to note that while NR has faced criticism for "exploiting intellectual property rights for profit," such practices are not relatively rare in nowadays anti-counterfeiting actions in China. NR has initiated over 4,000 civil litigations across various courts in China, primarily targeting small businesses with minimal damage claims. The SPC pointed out that NR's claims often overlapped in terms of compensation, and NR did not provide evidence to demonstrate that its reasonable costs were incurred solely for individual cases.

In light of this, trademark owners should carefully assess the pros and cons of different strategies for protecting their intellectual property rights. We are dedicated to conducting thorough investigations to identify upstream merchants and directly target manufacturing plants, thereby preventing future infringements at the source.

Takeaway

In conclusion, this case serves as a reminder for trademark holders relying solely on litigation to resolve infringement disputes. It is crucial for trademark owners to thoughtfully consider their rights protection strategies and to gather evidence promptly to substantiate their incurred expenses. This proactive approach will help ensure that compensation claims are met and that trademark rights are effectively enforced to halt infringements.