The action of trademark infringement and unfair competition brought by Fuzhou Wan Da Pencil Stationery Ltd Co. (referred to as “Wan Da”), and Fuzhou Pencil Factory against Fuzhou Ren Yu Stationery Ltd Co. (referred to as "Ren Yu") and Fujian Light Industrial Products Import & Export Group Co. (referred to as " Light Industrial") was decided by the High People’s Court of Fujian Province on Dec. 31,1998 in its Min Zhi Chu Zi No.1 Civil Judgment. Light Industrial did not accept this decision and appeal to the Supreme People’s Court of PRC. In accordance with the law, the court established a panel to hear the appeal, now concluded.

The High People’s Court identified facts as follows: On Jan. 1, 1979, Fuzhou Pencil Factory registered with the State Trademark Bureau, a trademark “Kui Hua”, for use with its products such as pencils. The valid period was renewed to Feb. 28, 2003. No. 50403709 <Export Products Customs Declaration> of Huang Gang Customs on Dec, 11, 1996 recorded clearly that Ren Yu as the party of producing, managing and sending products exported 6,600 dozens of color pencils to Panama, and profited ¥3524.40 RMB.

From November of 1996 to February of 1997, Light Industrial entrusted Ren Yu to produce No. 7301 pencil in an amount of 3,600 grosses and No. 7302 pencils in an amount of 5,100 grosses. No. 7301 is the product number of the pencil with an exterior sign of Panda, and No.7302 is the product number of the pencil with an exterior sign consisted of flowers and rhombus. Light Industrial profited ¥13,944.96RMB by selling out No.7301 pencils and gained ¥19,755.36RMB by selling out No.7302 pencils.

"The product quality control of the State Pencil Industry" carried out by the State Pencil Industrial Science & Technology Information Station in 1975 and 1976 records "Fuzhou Yan Zi 7301", "Fuzhou Yan Zi 7302", and their quality testing results of various features. The invoices from 1976 to 1994 kept by Fuzhou Pencil Factory recorded that No.7301 and 7302 pencils were sold to provincial and city foreign trade companies. Fuzhou Pencil Factory claimed that their former art designer Xiong Gong designed the exterior designs of No. 7301 and 7302 pencils supported with the testimony of Mr. Xiong Gong. The advertisements of Light Industrial contained color drawings of "Yan Zi 7301" and "Yan Zi 7302" pencils. The trademark “Yan Zi” was registered by Fuzhou Pencil Factory for use with its products such as pencils and so on, which was recognized as well-known trademark by Fujian Provincial Bureau of Industrial & Commercial Administration in 1980.

The original court also ascertained that: Wan Da is a joint venture established by Fuzhou Pencil Factory and Wan Da Group (UK) in 1995. The joint-venture contract stipulates that the joint venture produces and sells all kinds of pens, using the trademarks of " Yan Zi" and "Kui Hua". The period of joint venture is 50 years. Wan Da's products included No.7301 "Yan Zi" and No.7302 "Yan Zi" pencils after it was established.

Fuzhou Pencil Factory submitted an application to original court during the trial, asserting that it owns the trademarks of "Yan Zi" and "Kui Hua", as well as their trade-dress, therefore, it is entitled to request the original court to affirm these rights and permit it to participate in the lawsuit as co-plaintiff.

During the first instance trial, Wan Da stated that it had paid investigation fee of ¥10,020RMB and counsel fee of ¥35,000RMB, to which Ren Yu and Light Industrial did not object.

Upon the request of Wan Da, the original court adopted preservation measures of property and evidence according to law.

The High People’s Court held that:

1. Fuzhou Pencil Factory registered "Kui Hua" trademark and licensed it to the plaintiff Wan Da for using on its pencil product. However, the defendant Ren Yu used the trademark "Kui Hua" on its pencils without consent of plaintiff, and violated the plaintiff’s lawful rights. The defendant shall cease its infringement immediately and compensate the plaintiff for the damages of actual losses, business reputation and relevant reasonable fee paid in stopping the infringement action.

2. The exterior design of Panda used on No. 7301 pencil and the exterior design consisting of flowers and rhombus used on No.7302 pencil are designed and used previously along with the trademark “Yan Zi” by the plaintiff Fuzhou Pencil Factory. These trade-dresses are licensed to Wan Da. “Yan Zi” is a well-known trademark. The defendant Light Industrial used unique trade-dress of the well-known commodity without the plaintiff’s permission. These uses constitute unfair competition, therefore, shall be ceased. Light Industrial shall compensate the plaintiff for the damages of actual losses, business reputation damage caused by the infringement and relevant reasonable fee paid in stopping the infringement.

3. The defendant Ren Yu asserts that Wan Da is not qualified as plaintiff. We disagree. Its argument of that “Kui Hua” recorded in < Customs Declaration of Export Products > is a scribble error, is lacking of evidence and cannot be supported. The statement of the defendant Light Industrial that it has the right of prior use of the trade-dresses of No. 7301 and 7302 pencil lacks evidence and can not be supported.

Pursuant to Article 3, Article 38(1), Paragraph 1 of Article 26 of “Trademark Law of the People’s Republic of China”, Article 5 (2), Article 20 (1) of “Anti-unfair Competition Act of the People’s Republic of China”, and Article 118 of “General Principles of the Civil Law of the People’s republic of China”, the High People’s Court ordered as below:

(1) The defendant Ren Yu is ordered to cease its usage of trademark “Kui Hua” on its pencils;

(2) The defendant Ren Yu is ordered to compensate plaintiff for financial damage in an amount of ¥3,524.40RMB, business reputation damage in an amount of ¥1,000RMB and investigation fee in an amount of ¥5,020RMB, totaling of ¥8544.40RMB;

(3) The defendant Light Industrial is ordered to cease its usage of the trade-dress No.7301 (the design of Panda) and No.7302 (the design combined flower and rhombus) on pencils;

(4) The defendant Light Industrial is ordered to compensate the plaintiff’s financial damage in an amount of ¥33,700.32RMB, business reputation damage in an amount of ¥10,000RMB and other reasonable fees such as investigation fee in an amount of ¥40,000RMB, totaling of ¥83,700.32 RMB;

(5) For the court acceptance fee of ¥35,010RMB, Light Industrial shall pay ¥30,000RMB, and Ren Yu shall pay ¥5,010RMB. The preservation cost of ¥25,520RMB should be divided among Light Industrial and Ren Yu evenly.

Light Industrial did not accept this decision of Fujian High People’s Court and appealed to the Supreme People's Court. It alleged:

1. The lower court's holding that the trade-dresses used on No. 7301 pencil and on No.7302 pencil are designed and used previously along with the trademark “Yan Zi” by the plaintiff Fuzhou Pencil Factory, is in conflict with the facts. The trade-dresses used on No. 7301 pencil and on No.7302 pencil are designed jointly by the appellant and Fuzhou Pencil Factory. They made these trade-dresses well known in domestic and foreign market. In early nineties', under the State Trademark Bureau's conciliation, the trademark "Yan Zi" wholly belongs to Fuzhou Pencil Factory. However, the corresponding trade-dresses did not go along with the trademark. Hence, the appellant has the right of prior use of the trade-dresses of 7301 and 7302.

2. In the original decision, awarding attorney fee ¥35,000RMB to Wan Da as part of the investigation cost does not accord with the stipulation of Article 20 of “Anti-unfair Competition Act of the People’s Republic of China” and the equitable and good faith principle established by “General Principles of the Civil Law of the People’s Republic of China”.

3. The original decision’s ordering the appellant to bear enormous amount of court acceptance fee and preservation fee is not in conformity of <The Regulation of Court Acceptance Fee>. Since Wan Da senselessly claims of compensation to ¥5,000,000RMB, the appellant shall bear the reasonable proportion of cost in corresponding with the court decision. The rest should be born by Wan Da. Based on the above, appellant requests to vacate Items 3 and 4 of the original decision and make amendments.

The appellee, Wan Da, stated in its response that:

1. The facts relied by the High People’s Court are clear, the law applied is correct, therefore, there is nothing “in conflict with the facts”;

2. The lower court decision’s ordering the appellant to bear the costs such as investigation cost (including attorney fee) spent by the appellee is reasonable and lawful;

3. The original decision’s ordering the appellant to bear enormous amount of court acceptance fee and preservation fee is in conformity with law;

4. Because Fuzhou Pencil Factory had already exclusively permitted the appellee to use No.7301 and 7302 trademark of "Yan Zi" and their designs, so the two defendants should pay the compensation of financial damage, business reputation damage and the investigation fee to only to appellee.

The co-appellee, Fuzhou Pencil Factory, did not submit written response and did not attend the hearing. However, the Supreme People’s Court entrusted the lower court to inquire the co-appellee for varying facts in this case.

This Court finds that the facts determined in the original trial are basically true. This Court also identifies that:

As early as seventies’, Fuzhou Pencil Factory cooperated with Light Industrial. In this cooperation, Light Industrial was responsible for foreign pencil market survey, information collection and making draft of the pencil’s design. Fuzhou Pencil Factory was responsible for organizing designers, including Mr. Xiong Gong to design the trade-dress of pencil. Then, they get together to review and select the designed trade-dresses, and finally decided to use the Panda design and the design consisted of flowers and rhombus on No.7301 and No.7302 products. Henceforth, Light Industrial added the trademark “Yan Zi” and “Bai Ge” with these trade-dresses for Fuzhou Pencil Factory to manufacture products. Light Industrial sells these products on foreign market. Thus, they made No.7301 and No.7302 pencil products well known in foreign market. The plaintiff Fuzhou Pencil Factory affirmed the authenticity of these facts mentioned above.

This Court also identified that:

The appellants, Light Industrial and Fuzhou Pencil Factory, had jointly owned the trademark “Yan Zi”. In the early Nineties’, the trademark was recognized to be owned by Fuzhou Pencil Factory under the State Trademark Bureau's conciliation. The joint venture contract between Fuzhou Pencil Factory and Wan Da Group Ltd. Co did not state clearly whether Wan Da’s usage of the trademark “Kui Hua” was exclusive or monopolistic. Furthermore, this agreement did not concern the usage of the Panda design and the design consisted of flowers and rhombus on No.7301 and No.7302 products.

This Court holds:

The trademark registrant enjoys the exclusive rights conferred by registered trademark protected by Trademark Law. The licensee of exclusive trademark license agreement, with the authorization of trademark’s owner, has the right to use exclusively the trademark and prevent others from using the trademark. Therefore, this kind of licensee has right to bring infringement suit alone or jointly with the trademark registrant. The licensee of non-exclusive agreement just has the right to use the trademark. His right has neither monopolistic character nor effect to prevent others from using the trademark. Hence, this kind of right cannot be the base for bringing trademark infringement action. Although the appellant did not challenge the qualification of Wan Da in this appeal, according to the stipulation of the joint venture agreement between Fuzhou Pencil Factory and Wan Da Group Ltd. Co. (English), Wan Da has no exclusive right to use the trademark “Kui Hua” under the non-exclusive license. Therefore, Wan Da has no right for claiming protection of the trademark. The trademark infringement acts of Ren Yu has no legal relationship with Wan Da. Therefore, Wan Da’s claim of protecting the trademark is rejected. The Lower Court is wrong in identifying the fact regarding what rights Wan Da has to the trademark “Kui Hua”. The decision based on that fact-finding is erroneous and should be corrected.

According to the stipulation of “Anti-unfair Competition Act of the People’s Republic of China”, trade-dress of well-known commodity is protected by law. No.7301 and No.7302 pencils produced by Fuzhou Pencil Factory have been sold in domestic and foreign market since the seventies’ with the recognition as well known trademark by Fujian Provincial Bureau of Industrial & Commercial Administration in 1980 and solid reputation among relevant consumers. Hence, it can be recognized as well-known commodity. The Panda design and the design consisted of flowers and rhombuses used on these two kinds of commodities possess distinguish characteristics comparing with other designs of same or similar commodity. They are trade-dresses of well-known commodity and entitled protection of “Anti-unfair Competition Act of the People’s Republic of China”.

The lawful user of well-known commodity’s trade-dress shall enjoy the right to prevent others from using the trade-dress and protect his legitimate interests. When identifying the right holder, the fact of actual use is the essential factor. The right holder shall be the person who first uses the trade-dress on the well-known commodity. As early as in the seventies, the Panda design and the design consisted of flowers and rhombus were produced and used. Under the foreign trade system of those days, Fuzhou Pencil Factory and Light Industrial both sold No.7301 and No.7302 pencils bearing the trade-dresses mentioned above in the domestic and foreign markets. Together, they made No.7301 and No.7302 pencils well known in the relating domestic and international market as well as among relevant consumers. Therefore, No.7301 and No.7302 pencils’ well-known commodities status is the consequence of these two enterprises’ efforts. The right holder of the two trade-dresses should be these two enterprises. Wan Da used the trade-dresses on the ground of licence with Fuzhou Pencil Factory. Therefore, Wan Da is neither the first user of these trade-dresses nor the contributor making the commodity well known. Although Wan Da has the right to exclude others’ unfair competition, this right could not exclude Light Industrial as right holder of these trade-dresses from using these trade-dresses. Its claim for enjoying Light Industrial from using these trade-dresses is rejected. The Lower Court is clearly wrong in not identifying Light Industrial as the right holder of the subject trade-dresses and should be corrected. We agree with appellant’s claim on this issue.

As discussed above, Light Industrial and Fuzhou Pencil Factory are the co-owner of the subject trade-dresses. Without a clear contrary agreement among them, each co-owner has the right to use it himself or license others to use. Hence, Fuzhou Pencil Factory’s claim of Light Industrial’s action is unfair competition is rejected. The lower court’s decision is erroneous in ruling that the subject trade-dressed belongs to Fuzhou Pencil Factory, as well as Light Industrial’s action constitutes unfair competition. We found these rulings are baseless on the facts and should be corrected. We agree with the appellant on this issue.

In summary, the facts finding of the lower court are erroneous except that Ren Yu infringing the right of trademark of Fuzhou Pencil Factory. Therefore, these errors should be corrected. Pursuant to the first paragraph (1) of Article 38 of “Trademark Law of the People’s Republic of China” and the first paragraph (3) of Article 153 of “Civil Procedure Law of the People’s Republic of China”, we order:

1. The first item of the decision of the Civil Judgment Min Zhi Chu Zi No.1 (1997) by High People’s Court of Fujian Province is sustained.

2. The second item of the decision of the Civil Judgment Min Zhi Chu Zi No.1 (1997) by High People’s Court of Fujian Province is corrected to: Fuzhou Ren Yu Stationery Ltd. Co. is ordered to compensate Fuzhou Pencil Factory’s financial damage in an amount of ¥3,524.40RMB, business reputation damage in an amount of ¥1,000RMB and other reasonable fees such as investigation fee in an amount of ¥5,020RMB, totaling of ¥ 8,544.40, and make the payment within 30 days from the effective date of this judgment.

3. The third and forth items of the decision of the Civil Judgment Min Zhi Chu Zi No.1 (1997) by High People’s Court of Fujian Province is vacated.

4. All the claims of Fuzhou Wan Da Stationery Ltd. Co. are denied.

5. Other claims of the Appellee Fuzhou Pencil Factory are denied.

The court acceptance fee of the first instance is ¥35,010RMB and preservation fee is ¥25,520RMB, totaling ¥60,530RMB. Fuzhou Wan Da Stationery Ltd. Co. and Fuzhou Pencil Factory shall pay 70% of the totaling money, namely ¥42,371RMB. Fuzhou Ren Yu Stationery Ltd. Co. shall pay 30% of the totaling money, namely ¥18,159RMB. The court acceptance fees of the appeal is ¥3,021RMB and shall be born by Fuzhou Wan Da Stationery Ltd. Co. and Fuzhou Pencil Factory.

This judgment is final.

Chief Judge Zhipei Jiang

Judge Tianping Dong

Acting Judge Hui Zhang

Clerk of the Court Yanfang Wang

(jiang zhipei proofreaded)

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