The three-year rule in plea of exemption from compensation

In order to encourage trademark owners to actually use them in business activities and to avoid registration of, or applications for, trademarks not intended for use and improper rights protection, article 64.1 under the revised Trademark Law in 2013 established that in a case of trademark infringement, if the owner has not used the registered mark and suffered no other losses from the infringement, the infringer bears no liability for compensation.

Article 64.1 provides that: “Where the exclusive right owner of a registered trademark claims for damages and the alleged infringer raises a counterplea that the right owner has never used the trademark, the people’s court may order the right owner to submit proof of actual use of the trademark over the past three years. Where the right owner cannot provide the aforesaid proof or proof of other losses due to the infringement, the alleged infringer shall bear no liability for any compensation.” There have been many cases where the “three-year rule” has been supported by courts. This article uses case analysis to introduce the potential and notable issues in using the three-year rule to plea for exemption from compensation.

Defining three years. Article 64.1 only refers to “the past three years”, but does not specify whether it means the three years prior to the date of infringement, or of the notarisation and preservation of the infringement, or of the trademark owner filing the lawsuit.

In practice, there are judgments using the three-year period prior to filing the lawsuit, while other judgments use the date the infringement evidence is notarised and preserved as the benchmark. Compared with cancellation cases due to trademarks not being used for three consecutive years, courts take a looser attitude on time nodes. If the trademark owner can submit proof of use during either timeframe, the court will generally accept their claims.

Requirements on proof of use. The exact expression in article 64.1 is “actual use”, but there is no clear provision on the degree of actual use or any specific requirements for the submitted evidence of actual use. In practice, the court generally requires that the proof of use submitted by the trademark owner ought to support public, authentic and effective commercial use of goods approved under the trademark. In the “Peppermint Aqua” (Shuangfeiren) trademark infringement case in 2019, the alleged infringer pleaded for exemption from compensation. The court held that the proof of use submitted by the trademark owner was on class 3 goods, but the trademark it claimed right on was registered on class 5 goods, and the proof of use submitted by it consisted substantially of copies and internal R&D evidence, which could not prove any open use in market circulation.

Therefore, the court ruled that the trademark owner failed to prove its actual use of the trademark in the past three years, and did not support its claim for compensation. In the “AFANTI” trademark infringement case in 2018, the court of second instance held that the trademark owner’s “AFANTI” trademark mainly involved services such as animation production and processing, book publishing, etc. Although the services approved for use under the “AFANTI” trademark included education, the evidence on file failed to prove that the owner actually used the trademark in that field. Thus, the compensation supported by the court of first instance was partially revoked.

The court’s requirements for proof of use submitted in infringement disputes are substantively the same as those in trademark cancellation cases of non-use for three consecutive years. In particular, the trademarks must be used on approved goods, and the proof of use must evidence true and public commercial use. Owners may provide proof with reference to the provisions on trademark use in article 48 of the Trademark Law. In a plea for exemption from compensation, the alleged infringer may refute mainly from the perspectives of whether the proof of use submitted by the trademark owner focuses on the approved goods or services, and whether the trademark has entered market circulation and served to identify the source of goods. Evidently, if the alleged infringer can cancel the trademark in question on the grounds of non-use for three consecutive years, it will certainly help their plea of exemption from compensation with the three-year rule.

It should be noted that the “three-year rule” approach of defence should be brought in the court during first-instance procedure and, even if successful, the alleged infringer is only exempted from making any compensations. They will still be required to cease any trademark infringement.

In addition, the court will generally order the alleged infringer to bear the reasonable expenses for the rights protection of trademark owners. Furthermore, according to article 64.1, even if the trademark owner has not used the disputed trademark during the previous three years, if it can be proven that other losses were sustained due to the infringement, the alleged infringer still has to bear the liability of compensation for such losses.

Conclusion

Enterprises should conduct trademark searches before using unregistered trademarks to avoid infringement risks. If sued for infringement of trademark not actually used by the its owner, the enterprise may attempt the “three-year rule” defense to avoid or reduce its liability for compensation. Trademark owners should note that the Trademark Law seeks to protect the goodwill of trademark registrants gained from their goods or services due to their use of trademarks. We therefore advise them to put their trademarks to active use. Authentic and effective commercial use of registered trademarks is not only solid ground for protecting their rights, but also a prerequisite for obtaining compensation for losses in infringement cases and an important factor in determining the amount of compensation.

Hu Miao is an associate at Wan Rui Law Firm