How to Judge the Validity of Trademark Transfer without Inner Approval of the Company in China

(By Albert Chen) Abstract:

When a company’s trademark agent transfers a trademark without approval, a judgement of the validity of said transfer requires not only a consideration of the company approval, but also a determination of the third party good faith in the transfer. When a condition is not fulfilled the transfer will invariably be considered invalid.

Case Introduction:

In 2001, Leidi (China) Co., Ltd. (“Company L”) was granted the exclusive right in the use of the trademark “雷迪” (read as “Leidi” in Chinese). In November of 2002, Wu, as the executive director of Leidi China, transferred the trademark to the Hua Qu Duo Investment Company (“Company H”). The State Trademark Office made an announcement regarding the transfer in October 2003. Subsequently, Company H licensed the trademark to the Shanghai-based Leidi Mechanics Co., Ltd. (“Company S,” which had no affiliation with Company L).

In Company L’s point of view, Wu, Company H and Company S’s actions violated its lawful rights to the trademark, and it subsequently filed a lawsuit in court.

The Shanghai No.1 Intermediate People’s Court (“Intermediate Court”) examined the validity of the trademark transfer between Wu and Company H. As verified, the court determined that Wu had abused his post as executive director at Company L, and transferred the trademark to Company H without any license or prior approval from the board of directors. The court stated that these facts damaged Company L’s lawful rights. The Intermediate Court determined that since Company H had employed Wu as its agent and paid no consideration, Company H could not be considered to be a party acting in good faith. Based on these findings, the Intermediate Court judged the transfer invalid, and ordered Company H to return the rights to the trademark to Company L.

The three defendants appealed to Shanghai Higher People’s Court (“Higher Court”)which verified that Company H did not act in good faith in making the trademark transfer, ergo, the transaction involving the mark was invalid. Finally, the Higher Court affirmed the court in the first instance in its finding that due to the invalidity of the transfer of the mark, Company H must return all rights in the mark to Company L.

Lawyer’s Comments:

For the facts in this case, we’ve come to the following conclusions:

1. The disposal of trademarks held by Companies do not necessarily require action through internal procedures

As a major intangible asset of any company, the disposal or transfer of trademarks do not always have to undergo internal procedures to be transferred. But if existent procedures are not followed, the resulting disposal or transfer will likely be considered invalid.As for the form of these inner procedures, most typically include at the very least a meeting of the executive directors and shareholders to confirm such transfers and disposals.

It should be noted that internal decisions are not necessarily binding any outside parties; if a third party has determined that the transfer has been done willingly, and the trademark involved was transferred through a legitimate transfer of rights or through a license to use the trademark, then that trademark transaction could be found to be legitimate and lawful.

2. How to determine the good faith of a trademark assignee

There are two main aspects to be considered with regard to the good faith of the assignee.

First, it shall be determined whether the assignee has made a full investigation of the rights holder’s regarding the disposal of the mark, or whether an agent has handled the business involved in transferring the mark; such facts will refer to the information available to the assignee in acquiring the mark. In some cases, if an assignee is aware of the rules stipulated within a company for IPR transfer, but it deliberately neglect such rules, then it could constitutes.

Second, the assignee shall pay consideration with regard to the trademark transfer thus evidencing the willingness of the transferor to dispose of its trademark. The assignee shall make a suitable payment which shall not be less than the usual price of a trademark in the same class. In this case, Company H received the trademark without any remuneration given, and this fact solely evidenced the bad faith inherent in the trademark transfer.

We posted this article several months ago which might be too long to read it on. Our intern Mr. Le Duc helped us to abstract it again. You may click here for the detailed post, if you prefer to know more on the case.

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