Trademark Infringement Dispute｜Guangdong Sanjiao Electric Appliance Co., Ltd. v. Foshan XX Electric Equipment Co., Ltd., Zhang XX, Guangzhou XX Electrical Equipment Co., Ltd., et al.

Case Overview

Both the appellant Guangdong Sanjiao Electric Appliance Co., Ltd. (hereinafter referred to as “Sanjiao Company”) and the five appellees including Foshan XX Electric Equipment Co., Ltd., Zhang XX and Guangzhou XX Electrical Equipment Co., Ltd. (collectively referred to as the “Mifeng Parties”) refused to accept the first-instance judgment rendered by the Foshan Intermediate People’s Court and filed appeals with the Guangdong Higher People’s Court.

In 2022, Sanjiao Company obtained six Class 11 registered trademarks of the “DIAMOND” series (including well-known trademarks) through assignment. The series of trademarks enjoys high popularity on fan products and has been included in the Guangdong Key Trademark Protection List.

The Mifeng Parties prominently used the wording “DIAMOND Air Curtain Machine” on the body and outer packaging of their air curtain machines, and adopted the “DIAMOND” logo in product names and detail pages of online stores on multiple platforms including Tmall, Pinduoduo and JD.com. Court-investigated data showed that from March 2019 to June 2022, the involved infringing products achieved over 200,000 completed transactions, with a total sales amount of RMB 64,617,433.63.

In the first instance, Sanjiao Company claimed compensation of RMB 15 million and applied for 1.5-times punitive damages based on the defendants’ infringing profits. The Mifeng Parties defended that the word “DIAMOND” constituted descriptive fair use, the sales data contained a large number of fake brushing transactions, the involved parties did not jointly commit infringement, and the first-instance compensation was excessively high.

The first-instance court confirmed joint trademark infringement by the Mifeng Parties and ordered total compensation of RMB 3 million covering the plaintiff’s economic losses and reasonable enforcement expenses, while dismissing the application for punitive damages.

Dissatisfied with the first-instance ruling, both parties filed appeals. Upon second-instance trial, the Guangdong Higher People’s Court held that as industrial peers, the Mifeng Parties had full knowledge of the high reputation of the “DIAMOND” trademark. They continued the infringing acts after being warned by relevant litigation and administrative investigation, demonstrating obvious subjective malice. The multi-party coordinated infringement involved large scale and wide coverage, constituting serious infringement circumstances that satisfied the application conditions for punitive damages.

Meanwhile, the evidence submitted by the Mifeng Parties to prove fake brushing transactions failed to meet the judicial standard of proof beyond reasonable doubt. The defendants also unjustifiably refused to submit complete account books, constituting evidence spoliation. The court finally determined an operating profit margin of 15% for the infringing products and a trademark contribution rate of 50% for the “DIAMOND” mark, calculating the base infringing profit of RMB 4,846,307.52. A 1.5-fold punitive multiplier was applied, resulting in punitive damages of RMB 7,269,461.28. The court fully supported the plaintiff’s reasonable enforcement expenses of RMB 100,600. The second-instance judgment revised the ruling to order the five Mifeng Parties to bear joint and several liability for the above total compensation while upholding the first-instance injunction against ongoing infringement.

Key Case Difficulties

1. Whether the alleged RMB 40 million fake brushing sales amount claimed by the appellees should be deducted from the total infringing turnover.

2. Whether the appellees constituted evidence spoliation by refusing to submit documentary evidence on the ground of trade secrets.

3. Whether punitive damages are applicable to the appellees’ infringing acts.

4. Judicial determination standards for the profit margin of infringing products in this case.

5. Judicial determination standards for the trademark contribution rate of the involved “DIAMOND” mark.

Second-Instance Judgment Result

1. The first-instance judgment ordering the cessation of infringement is upheld;

2. The total compensation amount is revised to RMB 7.36 million (see the official second-instance judgment for detailed calculation).

Typical Case Significance

1. Clarifying the Boundary Between Trademark Use and Descriptive Use to Strengthen Protection for Well-Known TrademarksStrictly in accordance with the Trademark Law, the second-instance court clarified that the core essence of trademark use is to identify product sources. The prominent use of the word “DIAMOND” on products and online store pages by the Mifeng Parties did not constitute legitimate descriptive use of product quality, but intentional trademark use to free-ride on the goodwill of Sanjiao Company’s well-known trademark. Such infringement is established even where the defendants concurrently used their own brand logos. This judgment further clarifies the distinguishing criteria between trademark use and fair descriptive use, demonstrates strict judicial protection for the exclusive rights of well-known trademarks, and regulates market subjects’ free-riding unfair competition behaviors.

2. Refining Constitutive Requirements for Punitive Damages to Empower the Punitive Function of IP ProtectionThis case serves as a typical precedent for the application of punitive damages in trademark infringement disputes. In strict accordance with the Trademark Law and relevant judicial interpretations, the second-instance court confirmed that sustained infringement after right holder’s warning constitutes severe subjective malice, and large-scale, long-term and high-profit infringement constitutes serious circumstances, filling the identification loopholes in the first-instance trial on punitive damages application. The court upheld the 1.5-times punitive damages claim based on the infringers’ fault degree and infringement severity, realizing the disciplinary effect of punitive damages on malicious infringement. It provides clear reference for determining punitive damage multiples in similar cases and promotes the effective implementation of the IP punitive damages system.

3. Establishing Evidential Standards for Fake Brushing Transactions to Standardize the Online Business EnvironmentTargeting the prevalent “fake brushing defense” in online IP infringement cases, the second-instance court clarified that fake brushing transactions, as malicious collusive false transactions, shall be subject to the proof standardbeyond reasonable doubt, stricter than the high probability standard applicable to ordinary civil facts. Incomplete evidence including WeChat chat records and bank transfers submitted by the defendants was inadmissible. The court further held that even if part of the RMB 40 million sales were verified as fake transactions, full deduction was inappropriate, since false sales volume caused indirect economic losses to the trademark right holder. This ruling restricts the common practice of evading compensation liability via fake brushing transactions, unifies the evidential adjudication rules for online transaction data, and facilitates the construction of a fair and credible online business environment.

4. Clarifying Legal Consequences of Evidence Spoliation and Optimizing Burden of Proof Allocation in IP CasesIn view of the typical feature of IP infringement cases that infringing profit evidence is usually possessed and controlled by infringers, the second-instance court ordered the Mifeng Parties to submit production and sales account books. Where the defendants unjustifiably refused to provide complete materials on the ground of trade secrets, the court confirmed evidence spoliation and determined infringing profit parameters with reference to the right holder’s claims and prima facie evidence. This ruling strictly enforces the evidence spoliation rule, reasonably allocates the burden of proof, resolves the long-standing judicial dilemma of “difficult proof for right holders and convenient proof for infringers”, fully protects legitimate IP rights and interests, and compels infringers to fulfill their evidential obligations.

5. Unifying Identification Standards for Joint Infringement and Regulating Coordinated Infringement by Associated PartiesIn response to the defendants’ defense of independent operation and non-joint infringement, the second-instance court comprehensively confirmed the parties’ intentional collusion and joint infringing conducts based on overlapping shareholders, cross-serving legal representatives, mixed business addresses, associated financial accounts and divided infringing responsibilities. The involved parties were found to constitute joint infringement and bear joint and several liability. This judgment clarifies the key identification points of joint trademark infringement, effectively restricts the common malicious practice of evading legal liability through coordinated infringement by multiple affiliated companies, remedies the regulatory loopholes of single-subject liability, and improves the completeness and effectiveness of IP infringement accountability.

6. Standardizing the Logical Determination of Trademark Contribution Rate to Realize Scientific Compensation CalculationIn determining the trademark contribution rate, the second-instance court clarified that trademark goodwill comprehensively covers product appearance, functions, quality and service, and repeated evaluation of the above factors is prohibited. Considering that the reputation of the “DIAMOND” trademark is far higher than the defendants’ own brands, the court adopted the 50% trademark contribution rate claimed by the right holder. Meanwhile, the court distinguished gross profit margin from operating profit margin, and determined a 15% operating profit margin by referring to industrial average standards and the defendants’ operational characteristics, realizing scientific calculation of the infringing profit base. This ruling establishes a standardized judgment logic for profit margin and trademark contribution rate in trademark infringement compensation, avoids excessively high or low compensation awards, and unifies the compensatory and disciplinary functions of IP infringement damages.