How to Determine Joint Liabilities of shareholder for IPR Infringement in China?

(By Wang Ting and You Yunting)The limited liability of the shareholders means that the liability of the shareholder to the company are limited to its capital contribution, and the independent personality of corporation means that the Company shall fulfill its external liabilities by all of its properties. Therefore, the shareholders usually do not take personal responsibility in IPR infringement cases even when the long-term business of the company is infringement of the intellectual property rights (“IPR”) in most cases. However, today we will introduce a recent case, in which the shareholders were determined to take such joint liabilities for the IPR infringements.

Introduction to the Case:

Appellant (Plaintiff at first instance): SAKURA BATH & KITCHEN PRODUCTS (CHINA) Co.LTD (Referred to as “SAKURA CHINA”)

Appellant (Defendant at first instance): SUZHOU YINGHUA Technology Development Co.LTD (Referred to as “SUZHOU YINGHUA”)

Appellant (Defendant at first instance): ZHONGSHAN SAKURA INTEGRATED KITCHENS LIMITED (Referred to as “ZHONGSHAN INTEGRATED”)

Appellant (Defendant at first instance): ZHONGSHAN YINGHUA WEICHU Co.LTD (Referred to as “ZHONGSHAN WEICHU”)

Respondent (Defendant at first instance): SUZHOU YINGHUA Technology Development Co.LTD, ZHONGSHAN BRANCH (Referred to as “ZHONGSHAN BRANCH of SUZHOU YINGHUA”)

Respondent (Defendant at first instance): TU Rongling

Respondent (Defendant at first instance): YU Liangcheng

Court of First Instance: Suzhou Intermediate People’s Court, Jiangsu Province  No.:(2013)苏中知民初字第0322号

Court of Second Instance: Jiangsu High People’s Court  No.:(2015)苏知民终字第00179号

SAKURA CHINA enjoys the rights of prior registered trademarks of “SAKURA”(“樱花” in Chinese characters and “Yinghua” in Chinese Pinyin) and trade name, which have high popularity in the products such as bath and kitchen. SAKURA CHINA filed a law suit against SUZHOU YINGHUA, ZHONGSHAN BRANCH of SUZHOU YINGHUA, ZHONGSHAN INTEGRATED, ZHONGSHAN WEICHU, TU Rongling and YU Liangcheng for trademark infringement and unfair competition, claiming that these defendants deliberately applied and obtained the enterprise-registrations with the trade name and business scope as same as those of SUKURA CHINA, and deliberately manufactured and sold products similar to or even same as those produced by SUKURA CHINA with intention of taking advantages of the famous brands. In addition,  the commercial logos these defendants used and advertisements they made are similar to those of SUKURA CHINA, causing consumers confused with the sources or manufacturers of such products, which seriously disrupted the market order and constituted trademark infringement and unfair competition.

Jiangsu High People’s Court determined that these four companies constituted the unfair competition and trademark infringement. As to Tu Rongling and YU Liangcheng, whether such two natural persons shall take the joint liabilities of this case or not , Jiangsu High People’s Court concluded the following:

  1. Subjective Faults

As TU Rongling is the legal representative of the Suzhou Yinghua Electric Co., Ltd. which had the history of intellectual property infringements against SAKURA CHINA, thus TU Rongling shall be aware of the trademarks of “SAKURA” and the enterprise name of “SAKURA” registered by the SAKURA CHINA. After the court confirmed that Suzhou Yinghua Electric Co., Ltd had conducted infringement, Tu Rongling established the four companies as mentioned above which shows his malicious intention of infringement. Since SAKURA CHINA has already flied opposition against three “YINGHUA” trademarks of ZHONGSHAN INTEGRATED, which indicates that YU Liangcheng, the legal representative of ZHONGSHAN INTEGRATED, shall also be aware of the distinctions between the trademarks of ZHONGSHAN INTEGRATED and the trademarks owned by SAKURA CHINA.

  1. Control of Business Operation

The shareholders’ structure of SUZHOU YINGHUA, ZHONGSHAN INTEGRATED and ZHONGSHAN WEICHU are quite simple. To be specific, the shareholders of SUZHOU YINGHUA are TU Rongling and HUANG Haohua; the shareholders of ZHONGSHAN WEICHU are TU Rongling and ZHENG Guangjun, and in both of these two companies, TU Rongling holds the 90% of the equity and acts as the legal representative. The shareholders of ZHONGSHAN INTEGRATED are YU Liangcheng and WEI Changbo. YU Liangcheng holds the 90% of the equity and takes the position as the legal representative. These four companies are mainly managed by TU Rongling and YU Liangcheng.

  1. Infringement Conducts

These four defendant companies deliberately use the trade name as same as SAKURA CHINA while registering the company name, misuse the trademarks in their business and provide similar advertising slogans. These four defendant companies run their business mainly by infringements, therefore TU Rongling and YU Liangcheng shall be liable for such conducts.

To conclude, it is sufficient to determine that TU Rongling and YU Liangcheng, who clearly know the serial trademarks of SAKURA CHINA and its commercial reputation, still conduct the infringements via four defendant companies. These two natural persons take significant roles in the whole process of infringement. Based on above, the court determined that, TU Rongling and YU Liangcheng conducted joint infringement and shall take the joint liabilities with four companies being sued.

Lawyer’s comments:

  1. Relevant provisions on joint liabilities of shareholders and Company in the Company Law.

The operating structure of modern companies is to separate their ownership and management. If the company is operated independently, the liability of the shareholders to the Company is limited to the amount of its capital contribution.

According to the laws and regulations in China, the premise of applying joint liabilities to shareholders is the abuse of independent legal personality of corporation and limited liability to shareholders, which often happens when the business and finance are mixed up between shareholders and Company. For example, the shareholders and the Company share a same bank account and financial records, thus the remittances that should have been credited to the Company’s account might be credited to the shareholder’s personal account. Furthermore, as generally it is the Company, not any shareholder, which has rights to deal with its own properties, however, in fact, the shareholders may dispose of the properties at their own discretion. Meanwhile, the parent company and its affiliates share the same management, employ the same directors on Board and employees, and use the same policy of profit distribution, but only with different licenses. In other words, if the shareholders abuse the independent legal personality of corporation in order to conduct the intellectual property infringements, such shareholders shall take the joint liabilities. However, if the shareholders haven’t abused such independent personality, such shareholders should not be asked to take joint liabilities.

In our website, we have provided the cases, in which the shareholders shall take the joint liabilities when the Company is under the process of bankruptcy liquidation:

Guiding Case by China Supreme Court: JV’s Minority Shareholders May Undertake All Company’s Debt

How to Ascertain a Director’s Liability in Chinese Bankruptcy Liquidation?

  1. Shall the shareholders take the joint liabilities for intellectual property infringements conducted by Company?

As set forth, if the shareholders do not abuse the independent legal personality of corporation, then it comes the question how to determine the certain liabilities of shareholders for infringements performed by Company. Besides the provisions in the Company Law, there are provisions on joint tort in the Tort Law of the People’s Republic of China (Referred to as “Tort Law”). In this case, Jiangsu High Court applied such provisions as well to determine that the shareholders take the joint liabilities together with Company. For the conducts of the shareholders and Company to be identified as joint tort, basically the following requirements shall be met:

(1) There shall be two or more independent operating subjects who conduct infringements

As to the parties who conduct such infringements, there shall be two or more independent operating subjects. Meanwhile such conducts shall not be categorized as joint tort when the shareholders conduct infringement on behalf of their Company, and thus under this situation the Company Law shall be applied. To determine whether such conduct is joint tort or not, there shall be different independent infringements conducted by the shareholders and their Company.

(2) Commonalities on the subjective faults

Referred to the subjective aspect, shareholders and Company shall have common subjective faults. In other words, the shareholders and Company shall have faults on infringements, regardless of whether it’s joint intention or joint negligence. In this case, the shareholders have the prior history of infringing SAKURA CHINA’s IPR, and subsequently established several other companies for further infringements against SAKURA CHINA, which obviously reflected their intentional faults. Meanwhile with the corporate structure of these companies, such shareholder is the legal representatives and has the majority equities, which have made significant roles on infringements in this case.

(3) The shareholders shall have the conducts of infringements

Referred to the conducts of infringements, the main businesses of these defendant companies are to conduct infringements upon its establishment, thus the legal representatives shall account for such conducts as well. However, if the joint liabilities of shareholders are based on the conducts of joint tort, every conduct shall be identified whether it is to represent the Company or such shareholders themselves, which is quite difficult in practice. Furthermore, any decision of Company is conducted by natural persons as shareholders, and the liabilities of infringements shall be taken by Company when such natural persons are working as representatives. Under this circumstance, such shareholders do not need to take the joint liabilities.

The judgement of this case will expand the joint liabilities of shareholders to Company, so that in other situations the shareholders and Company might be determined as joint tort as well. Though Jiangsu High Court has applied joint tort to determine the liabilities of shareholders, each case shall still be decided on a case-by –case basis. And the court might make a different judgment even when the main business of the company is infringement.

 

Lawyer Contacts

You Yunting86-21-52134918  youyunting@debund.com/yytbest@gmail.com

Disclaimer of Bridge IP Law Commentary

 


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