Plight of protection of merchandising rights and breakthrough in practice

By Kevin Nie, China IP,[Comprehensive Reports]

It is well known that currently there is no uniform global system in place that protects merchandising rights, to say nothing of mature international legislation, but exploration is underway. China has neither put in place a complete system for the merchandising rights nor recognized the rights in legislation. At present the rights are not fully covered through the protection methods set forth copyright, trademark right and patent right law. In judicial practice, the protection of the merchandising rights mainly lies in copyright protection. Some judges have also taken a comprehensive approach to merchandising rights by combining copyright as the core with general principles of the civil law, the trademark law and the anti-unfair competition law, but this approach has its inadequacies.

Inadequacies of the civil law

The civil law protection approach has some positive aspects, but the mode has some problems when it comes to the merchandising rights.

IP counsel Liu Shijie explained that the merchandising rights originated from the right to protect personal privacy and the traditional merchandising rights arose more out of the core rights to one’s name and portrait. Therefore, the rights are first protected by the civil law which is used as a last but reasonable resort. However, this approach has problematic limitations.

Firstly, in terms of the source of rights, the traditional personality right is a basic right, while the merchandising rights are not limited to the basic rights of human beings.

Secondly, in terms of the protection scope, the traditional personality right is restricted to factors such as the use of a real person’s name and likeness and provides for a limited range of damages arising out of infringement. The right does not include protection for sounds, virtual images and non-image objects. Therefore, it provides little to no protection for the merchandising rights.

Thirdly, in terms of the nature of rights, the traditional personality right lays emphasis on the right to exclusivity. It is an inherently individual right which can not be inherited, abandoned, transferred, nor licensed. What’s more, since all personalities are considered equal, use of the civil law to protect merchandising rights leads to a series of questions. For example: since the merchandising rights are mainly rights to property, if the rights cannot be inherited, transferred or licensed, then how can the civil law be used to fully protect the rights? In addition, well-known characters or well-known virtual images have much greater value than ordinary people and unknown virtual images. In this case, if we resort to the personality right for protection, shouldn’t all damages be the same? If all personalities are equal, what on earth is the reason that yours has greater value than mine? Can we award greater damages where there is greater financial harm? Would we have to tell them, “sorry, under the principle of equality of personality all damages are identical?” This does not make sense.

Fourthly, in terms of the period of protection, the personality right only exists while the person is alive. The merchandising rights require a longer period of protection, just like a work of art. The work of art is not generally worth much while an artist is alive and commonly increases in value after the artist dies. This also occurs when it comes to the merchandising rights.

Inadequacies of the copyright law

The copyright law protects intellectual achievements which are original and replicable in some tangible forms in literary, artistic and scientific fields. As regards some types of the merchandising rights, such as virtual characters, resorting to copyright protection does not pose any problem.

According to Dr. Lin Hua, an IP expert with years of experience, virtual characters were born out of cartoon works as objects under the copyright law and thus natural protection from copyright was needed. It has been widely acknowledged in legal theory and judicial practice that virtual characters, as part of cartoon works though, may be deemed as independent works of art capable of being distinguished and separated from the entire works of art and protected by the copyright law. The fact that cartoons are protected as a whole by copyright does not disqualify individual virtual characters contained in cartoon works from copyright protection.

Originality is the necessary condition for a work of art to be an object of copyright protection. But in real life, virtual characters depicted in works often cannot meet the requirements of constituent elements of works, and cannot become the object of copyright protection, thus making copyright law powerless in the protection of such rights.

IP attorney Niu Shijie also pointed out that in many cases it is difficult for the copyright law to protect the merchandising rights. The purpose of copyright protection is to encourage creation, and promote cultural transmission, but the actual purpose of merchandising rights protection lies in protection against infringement upon rights and the commercial value associated with those rights. The copyright law emphasizes a series of protection principles such as “the idea-expression dichotomy” and originality, but even if carriers of the merchandising rights have been transformed into works, they cannot easily fall within the scope of protection for such works. The copyright law protects works, while the merchandising rights protect factors which are either identifiable or intangible but share common tendencies. Moreover, use of the merchandising rights is not the use from the perspective of copyright. Therefore, the copyright law has inadequacies in the protection of the merchandising rights.

Inadequacies of the trademark law

According to Dr. Lin Hua, protection of virtual characters under the trademark system satisfies the requirements and characteristics of merchandising of characters. Trademark protection has its own advantages compared with copyright protection. Firstly, trademark registration can be renewed in every country in the world, at least in theory a registered trademark can have an infinitely extended period of protection. Secondly, as China adopts the dual-track IP protection system, namely through both judicial and administrative means, right holders may ask the Administration for Industry and Commerce (AIC) to investigate and handle trademark infringement. The AIC obviously has greater human and material resources than copyright enforcement agencies. Thirdly, calculation of damages of trademark infringement lies in the value of goods or services for use by a trademark, rather than separately in copies of infringing works, such as packaging. The calculation method accords with the nature of the infringement and actual results of the infringement, which is more conducive to protection of the right holder of commercialized virtual characters.

Some believe that since Chinese law does not have any provision on the newly emerged merchandising rights, in practice objects of the right such as a real person’s name and likeness, name and role of works, special names of works and other special signs, are protected by the trademark law. However, merchandising is a special type of act and the trademark law also has its own characteristics. Many rules in the trademark law are not targeted to resolve merchandising problems. Therefore, the trademark law is not able to provide comprehensive protection for the merchandising rights.

Liu Shijie said that if we combine external identifying factors of the merchandising rights with external elements to form a trademark and develop commercialization from the perspective of the trademark law, then trademark protection will not be a problem. However, there are some shortcomings in the trademark protection.

The first is limitation on the scope of objects, such as sounds and long phrases like “dances with wolves, a great hero,” which have merchandising value, but cannot be used to register as trademarks. Such applications would not proceed past the preliminary stage. It should be noted that during the latest revision of the trademark law that sounds have been added and now qualify for trademark registration. This is a step forward in protection of the merchandising rights in every slip law in the absence of separate legislation on the merchandising rights.

The second is the plight of the application for three-dimensional trademarks, such as images of Pleasant Goat and Big Big Wolf. Currently merchandisers can only file for two-dimensional trademarks. However, it is obvious that the trademark law cannot extend its reach when it comes to protection ranging from two-dimensional to three-dimensional images. At present the door remains shut for applications for three-dimensional trademarks, but the new trademark law advocates a step forward.

The third is limitations on objects of use. As we know, objects of use for a registered trademark are limited to approved goods and don’t extend to similar goods and services. If we seek broader protection, we need to file for separate applications. However, the cost is high for trademark applications. Though the fee is 1,000 yuan for a trademark with no more than 10 goods or services within subcategories, often times a category has more than 10 subcategories, an additional 100 yuan will be charged for each additional subcategory. As a result, if we seek full-round protection of the merchandising rights, we have to apply for all categories in the classification of goods and services and the cost will amount to several hundred thousand yuan.

Then comes limitation on continued use. Trademarks will be canceled if they have not been used for set number of consecutive years. Certainly, the merchandising rights cannot be easily canceled as they are natural rights.

Finally there is the difference of criteria over infringement. The criteria over infringement lie in the possibility of confusion that may be caused, but the criteria for protection of the merchandising rights are identifiable. All characters and virtual images, well-known or not, have the natural merchandising rights, but whether they can be commercialized and profitable, or the amount of profits is another issue. In case of infringement, if we demand high amount of damages arising from the merchandising rights, we are obliged to prove that the right has a high value or an equivalent value.

Inadequacies of the patent law

Can the merchandising rights seek patent protection by filing for design patents?

Sun Cheng, a lawyer from Shanghai DeBund Law Offices, held that the merchandising rights for virtual characters may be protected by applying for a design patent. The positive protection of virtual characters from the patent law lies mainly in the fact that the creator of virtual characters may obtain exclusive protection by applying for design patents for use in goods bearing the images of virtual characters. However, judgment of the substantial sameness involved in design patent protection is only limited to identical or similar goods. In practice, it is obviously uneconomical and unrealistic for the creator to seek design patent protection of virtual characters by applying for all goods in all sub-categories in International Classification for Industrial Designs. Therefore, generally creators seek the exclusive right of exploration for design patents for use in a limited number of goods. While the negative protection of virtual characters in the patent law is mainly reflected in the fact that the creator may prohibit others from applying for design patents of its virtual characters on the ground of ownership of copyright to the images of virtual characters in accordance with the third paragraph of Article 23 of the Patent Law.

According to Niu Shijie, the protetion provisions on merchandising rights and design patent in the Patent Law have something in common. However, there are a number of reasons why it is clear that there is almost no feasible way to use the design patent law for protection. Firstly, the application for design patents must satisfy the requirements of novelty, but if we want the merchandising rights to realize the value, we must continue to make the rights known to gain more value. In so doing, the novelty is lost and it is not possible to apply for a design patent. Secondly, even if the novelty is not lost, objects of the merchandising rights such as titles of the work, actions and names of well-known characters may lose their external impressions and fail to obtain a design patent due to lack of the condition. Thirdly, the application process for a design patent is costly, time-consuming and laborious, but the protection period is limited. What’s more, the process involves application fees and high maintenance fees, which will hinder the ability of holder of the merchandising rights to commercialize and develop the right.

Inadequacies of the anti-unfair competition law

Research has shown that the Anti- Unfair Competition Law, as the fallback law in the IP legal system, has many inadequacies in protection of the merchandising rights.

Firstly, the Anti-Unfair Competition Law limits subjects of unfair competition to “operators engaging in trading of goods or profit-making services.” This renders it impossible for operators not engaging in profit-making commercial activities or merchandising rights holders not in direct competition with other operators to resort to the Anti-Unfair Competition Law to protect their rights. Obviously subjects of the merchandising rights are usually not operators, they are natural persons and individuals. Even if they are operators, they are often practitioners engaged in cultural and creative industries, and are not in the same operating field as subjects who actually use or infringe their merchandising rights.

Secondly, the Anti-Unfair Competition Law is applicable only if the plaintiff and the defendant are in direct competition, whereby if the holder of the merchandising rights is not an operator engaged in profit-making activities or is not in direct competition with other operators, the law will not be applicable in protection of the merchandising rights.

Thirdly, the Anti-Unfair Competition Law protects objects which are the name, packaging or decoration peculiar to “well-known goods or services,” actually negating a lot of ordinary, unknown characters.

Fourthly, the Anti-Unfair Competition Law adopts a list to define its range of jurisdiction, but the range is too broad to reflect its principle to protect free and fair competition.

Fifthly, the nature of the Anti-Unfair Competition Law determines that only in the event of confusion, the Anti- Unfair Competition Law can provide afterwards relief for the violated rights. This means that the law will provide relief only after infringement has occurred and cannot provide advance prevention.

Selection of protection paths

In summary, all of the existing protection options available under the civil law, namely the Personality Right Law, the Copyright Law, the Trademark Law, the Patent Law and the Anti-Unfair Competition Law, all have some shortcomings or inadequacies. Consequently, for the time being it is more feasible to adopt a cross-protection approach which uses laws such as the Personality Right Law, the Copyright Law and the Trademark Law as the core and the Anti-Unfair Competition Law as the fallback.

Niu Shijie proposed that at present either we independently enact norms on the merchandising rights, ensuring more comprehensive and systematic protection of the right, or we categorize the merchandising rights and incorporate each right in different laws and regulations for protection.

Zhang Xuejun, vice-president of the IP division of Higher People’s Court of Guangdong Province, said of the protection of animations that “The key lies in recognition of the existence of the merchandising rights to images of animations, on the basis of which the legal system will be built. The most important role the merchandising rights of works plays is to introduce images, plots and personality of characters into the protection range, greatly enhancing the IP protection of animations. The protection methods for copyright, trademark right and patent right are currently unable to cover the range.”

IP counsel Sun Cheng states that the merchandising rights of virtual characters, which originated from literary and artistic creations, can be regarded as a derivative copyright of original literary and artistic creations. The characters, due to their features of identifiability, distinctiveness and commercial value, can be independent of the original literary and artistic creations for protection. Therefore, it is recommended the ongoing revision of copyright law add chapters concerning merchandising of virtual characters, setting forth clear definitions and determinations on the merchandising of virtual characters, determination of infringement and liabilities, and the reasonable range of use.

Some experts state that before promulgation of the relevant legislation, it is relatively realistic and effective to promptly and effectively address the emerging issues by means of relevant judicial interpretations.

For now, though, it is too premature to discuss how to establish the protection regime for the merchandising rights. Due to the objective circumstances, the relevant departments should timely enact relevant rules and norms to ensure more direct and effective protection of the interests of the holder of the merchandising rights.

Judicial practice seeking a breakthrough

With the social and economic development over the recent years, the market practice has witnessed various issues relating to infringement upon the merchandising rights and an increasing number of domestic disputes relating thereto. However, due to a lack of support from the substantive law, the plaintiff’s cause of action is often varied, and it is difficult to get a satisfactory verdict.

The law will never be able to keep up with the pace of the times, as Cardozo, former Justice of the US Supreme Court has put it, “Hardly is the ink dry on our formula before the call of an unsuspected equity - the urge of a new group of facts, a new combination of events - bids us blur and blot and qualify and even, it may be, erase.”

The legislative process is relatively long, but the judicial practice will not pause for a moment and can only head forward in a positive and problem-saving direction.

It is noteworthy that in recent judicial practice, Chinese judges with courts at different levels have begun to address the issue of the merchandising rights of images and uphold more adequate protection. For example, in the “Ultraman Tiga” copyright dispute case, the court ultimately based its verdict on current Chinese laws and protected the character as a work of art, and at the same time held theoretical discussions over direction of the merchandising rights for virtual images.

In 2012, Shanghai courts concluded two cases related to disputes over establishment of copyright for works of art by Shanghai Animation Film Studio which were created before the implementation of the copyright law. In one case, the court held that at the time of the creation of the Monkey King animated image, the creator thereof was not an employee of the plaintiff Shanghai Animation Film Studio, and the creator had already previously published works of art incorporating images similar to the Monkey King. Therefore, the court found that the property right of the Monkey King animated image was jointly owned by the studio and the creator. In another case, the plaintiff was an employee of the studio, claiming ownership of copyright of “Calabash Boys” animated images.

Article 31 of China’s Trademark Law provides that “An application for trademark registration shall not prejudice any prior right of others.” There are different understandings over the content of “prior rights” both in practice and theory. Professor Zhang Ping of Peking University held that the current trademark law divides prior rights into three types: the first is other prior IP rights, including prior copyright, design patent, trade name right, packaging and decoration rights peculiar to well-known goods; the second is other prior civil rights, including the right to a corporate name, a portrait and a name; the third is other new rights, such as domain names and the merchandising rights.

Kong Xiangjun, chief judge of the IP Tribunal of the Supreme People’s Court, pointed out in his article Application of Creativity and Initiative of Trademark Law that “prior rights” set forth in Article 31 of the Trademark Law has been narrowly understood to include trade name right, copyright and few other rights, excluding prior right to a registered trademark and legal interests specifically set forth by law. In practice, the interests similar to the merchandising rights like virtual characters are not protected on the ground of lack of legal bases, or protected, to a certain extent, without justifiable citations. Lack of protection of such interests is obviously unjustified, and the evasive protection leads to “sometimes hot, sometimes cold and fickle behavior.”

Judging from the current judicial practice, the courts mostly adopt expanded interpretations for existing provisions in the trademark law to protect the interests relating to the merchandising rights in the absence of clear legal bases. Especially as regards the prominent phenomenon of trademark squatting, the courts have made full and flexible use of the relevant principles to effectively curb the phenomenon in the existing legal framework.

As regards protection of “prior rights” in Article 31 of the Trademark Law, Beijing courts proceeded from the legislative intent of the law and expanded application of the article.

For rights and interests which have not been expressly protected by laws, regulations and judicial interpretations, as long as the parties have legitimate rights and interests thereof, then the article can be cited to protect prior rights in order to prohibit acts of trademark squatting.

For example, in the trademark administrative case over “Bond in Chinese pinyin 007 BOND,” Beijing Higher People’s Court ruled that both the well-known film characters “007” and “JAMES BOND,” should be protected as prior rights. It is understood that this is the first time the merchandising rights of characters have been found to be a “prior right” as set forth in Article 31 of the Trademark Law.

In the Guo Jing v. Trademark Review and Adjudication Board (TRAB) case, the court did not apply Article 30 of the Trademark Law, but cited item (8) of Paragraph One of Article 10, which states signs which are “detrimental to socialist morality and custom or having other adverse effects” shall not be used as trademarks, because use of names of well-known characters as a registered trademark would mislead the public and lead to adverse effects.

In 2006, Guo Jing filed for the trademark “Guo Jingjing” in Chinese characters for goods in Class 25 before the China Trademark Office and was later rejected. Guo then applied for a review before the TRAB and was also rejected. The TRAB ruled that the trademark designated for use in clothing, swimwear, swimming cap and other goods would be easy to make the relevant public mistakenly believe that the trademark application has been authorized by the wellknown Chinese diver Guo Jingjing or there is some association therewith, thus having adverse effects of misleading the public. Therefore, the applying trademark is a sign having adverse effects as set forth in item (8) of Paragraph One of Article 10 of the Trademark Law, and Guo cannot obtain registration of the trademark. Dissatisfied with the ruling, Guo filed an administrative lawsuit before the court. Both the first and second instance courts upheld the TRAB ruling and did not support Guo’s claims.

In the case, the courts held that because of the high profile of public figures in the relevant public, if their names have once been registered and used as trademarks by others, the relevant public might believe that goods using the trademarks may have some association with the public figures, thereby causing confusion and misunderstanding. Therefore, registration of names of public figures by others will fall into the circumstance of “having adverse effects” as described by item (8) of Paragraph One of Article 10 of the trademark law, and thus cannot obtain registration for use.

In the case the TRAB held that the actual use of the applying trademark could easily cause harm to the lawful rights and interests of the vast number of consumers and famous athlete Guo Jingjing, but “lawful rights and interests” had not been described in detail. The courts held that whether the diver Guo Jingjing has used her own name for commercial activities will not affect the consequence of misleading the public by the applying trademark.

Some held that the grounds for the rulings of the TRAB’s and Beijing First Intermediate People’s Court’s are contrary to the views expressed by the Supreme People’s Court in 2008 in the “Chuanglian” in Chinese characters case. The Supreme People’s Court expressly stated in the case that violation of Article 10 of the Trademark Law is the absolute ground for cancellation of trademark registration, damaging public order or interests, or hindering trademark registration order. If the public misunderstand that the trademark has been authorized by a celebrity or has some association identified to has adverse effects as set forth in item (8) of Paragraph One of Article 10 of the Trademark Law, the trademark will be rejected or canceled on the absolute grounds, then trademarks which conflict with business names, copyright and other prior rights may also cause such misunderstanding. Therefore, it is debatable as to whether it is justifiable to use the possibility of public misunderstanding as the absolute grounds over authorization of the trademark from a celebrity.

Others held that traces of the merchandising rights can be found in the case, and we will have to wait and see if the judicial authorities will make some breakthrough in the merchandising rights on the basis of such cases.

(Translated by Wang Hongjun)


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