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


(By Albert Chen) When a company’s trademark agent transfers a trademark without approval, a judgment of the validity of said transfer requires not only a consideration of the presence (or lack of) company approval, but also a determination of whether there was good faith when considering the third party in the transfer. When it can be shown that no inner-company approval was made, and that the transaction was not undertaken in good faith, such a 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 Compay 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, demanding protection of its lawful rights to the mark.

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. Furthermore, the court determined that these actions damaged Company L’s lawful rights over the mark, and violated Wu’s obligation to be loyal to Company L in his position as executive director. The court stated that all of these determined facts damaged Company L’s lawful rights. With regard to whether an unapproved disposal of the mark could bind parties not privy to the initial transfer, 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.

After the hearing in the first instance, the three defendants appealed to Shanghai Higher People’s Court (“Higher Court”); however, the court refused the appeal. The Higher Court 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 it’s 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:

The facts involved in this case are not complicated; the court mainly considered whether the transfer had been approved by the owner of the mark, and whether the third party involved acted in good faith when it subsequently transferred the mark. However, like many aspects of the law, different courts in different jurisdictions throughout China may arrive at different conclusions based on the same set of facts. In today’s post, we’ll discuss the Shanghai Court’s opinions; we’ll share opinions in other areas later. As 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. However, should a company have internal procedures for the transfer and disposal of its trademarks, senior management and executives charged with such duties are obligated to follow the procedures set in place; otherwise, any transfer or disposal of a trademark concluded outside these sets of rules 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 on any outside parties, which essentially means it does not matter whether a company has come to decision or approved an issue through an internal decision; 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, when conducting such business, it shall be determined whether the assignee has made a full investigation regarding the willingness of the rights holder 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 be determined that the party acted in bad faith in taking part in the trademark transfer.

Second, the assignee shall pay consideration with regard to the trademark transfer thus evidencing the willingness of the transferor to dispose of its trademark. To evidence this, the assignee shall not only make a suitable payment, but the payment 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.

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