In recent years, many multinational companies have been facing problems in handling their IP rights because of industrial restructuring, including disputes with domestic distributors.
The pattern of disputes is similar: First, for business reasons, the licence fee could not be paid on time under the licence contract, and then, as the business failed to get back on track and the two parties could not reach a consensus, the rights holder/licensor eventually terminated the licence.
However, the distributor/licensee continued to operate in the capacity of a licensee even after the termination, using the brand of the terminated licence, which eventually resulted in disputes.
In general, foreign brands authorise domestic distributors to operate under licence contracts with complete terms, and the parties agree in advance on various circumstances after licence termination. At this point, if the distributor continues to use the original store sign and trademark after licence termination and to operate in the capacity of a licensee, these actions may easily constitute a breach of the original licence contract.
Meanwhile, after licence termination, the continued use of the trademark and store sign in the capacity of a licensee without the consent of the licensor may constitute trademark infringement or unfair competition against the trademark holder, or may breach the contract and constitute trademark infringement/unfair competition at the same time. A remedy for this problem needs to be considered by the rights holder.
The above-mentioned actions of a distributor or licensee, according to the legal facts, can be divided into the default on licence fee and unauthorised use of trademarks or store signs in the capacity of a licensee. Generally, arrears of a licence fee payment can be asserted only by filing a lawsuit for breach of contract. If the licence has been terminated, the act of using a trademark or store sign without authorisation in the capacity of a licensee often constitutes trademark infringement and unfair competition concurrently.
Although unauthorised use of a trademark or store sign by a licensee breaches the contract and constitutes infringement at the same time, the court will not support a double claim and duplicated damages. Therefore, if a rights holder is to file a claim, it is necessary to choose one of the claimed breaches as a proper cause of action.
How to choose
When choosing between claims for breach of contract and infringement, the key is to consider the actual needs of the rights holder. Although the licence contract, in addition to liquidated damages, will generally agree to cease trading and other activities, in practice, in different scenarios, different claims may yield substantially varying results; improper choices may even hinder the rights holder in accomplishing the primary goal.
Financial compensation is the primary goal. If the rights holder does not give high weight to the domestic operation of its brand and is not keen to stop the infringement but simply wishes to obtain maximum compensation, the case will need to be considered together with the breach of contract clause in the licence contract.
If such a clause provides for a great amount of damages, in particular higher than the maximum statutory damages from IP infringement, a claim for breach of contract may be a better option to obtain compensation. In addition, the outstanding licence fees can also be claimed in the same action, making it more economical and convenient to obtain compensation.
However, if the licence contract provides for a light liability for breach of contract or even for a low limit of damages, a comparison can be made by reference to previous IP awards made by the court of jurisdiction in similar cases. According to local judicial practice, if the awarded damages are higher, filing an IP infringement claim may be a better option.
Cessation of infringement or unfair competition is the primary goal. In another case, if the rights holder is still very concerned about its brand reputation in China despite industrial adjustments, it often chooses to take measures as soon as possible to stop the infringement by the former distributor. In this regard, apart from court proceedings, remedies through lawyers’ letters or administrative complaints may also be considered.
While a lawyer’s letter or an administrative complaint is more efficient and economical, it may not be as effective as litigation. When dealing with a stubborn infringer, a lawyer’s letter may not achieve the intended result.
In the case of administrative complaints, the respondent will often defend itself by claiming to be a lawful licensee and asserting that there is a contractual dispute. In such cases, the failure to persuade the administrative authority because of a lack of clear facts and evidence of infringement also makes it unlikely to stop the distributor from infringement by the route of administrative enforcement.
Even if the administrative authority imposes penalties on the distributor, the rights holder usually still cannot obtain civil damages. Therefore, when curbing infringement through a lawyer’s letter or an administrative complaint, it is necessary to consider the possible effects and devise a backup plan for IP infringement litigation.
In an IP infringement action, for situations where the infringement needs to be stopped urgently, a court injunction may also be considered. Although courts are selective about issuing injunctions, obtaining one against IP infringement is more likely than obtaining one for a breach of contract.
It is worth noting that courts generally do not hear the claim of distributors’ outstanding licence fees at the same time as infringement claims, and the rights holder will need to file a separate claim for such default.
When the distributor is alleged to have committed both a breach of contract and an infringement, the rights holder must choose appropriate remedies based on the priority of its claims. The goal is to maximise the possibility of fully achieving the primary objective by carefully considering the advantages and disadvantages of each claim.
Frank Liu is a partner at Shanghai Pacific Legal
Room 2709, 27/F, Plaza 66 II
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Shanghai 200040, China
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