Liabilities of Group Buying Sites in Trademark Infringement Cases

Group buying has achieved rapid development after entering the Chinese market. Though fierce competitions led to the integration and reorganization among thousands of group buying sites, the transaction volume of group buying still reached 21.632 billion yuan in 2011, according to the 2011 Annual Report on Network Group Buying Industry in China. At the same time, some sites were found selling fake products and infringed the legitimate rights and interests of consumers and brand owners. With reference to the No. 11699 Judgment of Beijing Second Intermediate People’s Court (2011) on Japan Descent Ltd. v. Shenzhen Xiu Network Technology Co., Ltd. (Xiu.com) and Beijing Today Metropolis Information Technology Co., Ltd. (Didatuan) (currently for the second instance), this article tries to analyze and define the role and liabilities of group buying sites in trademark infringement cases, hoping to invoke further discussion.

Facts of the Case

 

The plaintiff Descente owns the exclusive rights of the registered trademark “le coq sportif” and cock graphic trademark for casual shoes, sports shoes, hiking shoes and running shoes in China. Descente found that Didatuan launched group buying in March 2011, offering  “genuine French ‘le coq sportif’ travel shoes at a discount of 99 yuan, from the original of 480” through e-commerce supplier Xiu.com. Didatuan’s record shows that 1,858 pairs of shoes were sold by end of the campaign, with the total sales reaching 180,000 yuan. However, Descente did not authorize Didatuan or Xiu.com in any form to use the trademark on “sports shoes.” Descente found out that the shoes sold at the campaign were neither produced nor authorized by Descente. These poor quality products were infringing products. Descente then brought both Didatuan and Xiu.com to court. During the trial, Xiu.com argued that the “le coq sportif” and cock graphic trademark were originated in France. The alleged infringing products were provided by a company in Hong Kong, and should be deemed as parallel imports. Didatuan argued that it had signed contract with Xiu.com, and reached an agreement that Didatuan was responsible for the sales platform and consumer organization while Xiu.com was in charge of the logistic issues and legal disputes. Didatuan was not involved in the trading process and therefore should not be held liable.

 

 

After three cross-examinations and court hearings, the Beijing Second Intermediate People’s Court made the first instance decision on April 25th, 2012, ruling for joint infringement liabilities against both Xiu.com and Didatuan. For the acts of Didatuan, the court found that: in order to promote the involved products, Xiu.com draws supports from Didatuan in the field of group buying and completes the sale process, which is a new co-operative mode inelectronic commerce field. Consumers paid directly to Didatuan. In addition, if the purchased goods are defective, consumers can return goods back to Didatuan or ask for refund according to the post-sales article. Therefore, the acts of Didatuan and Xiu.com are deemed as co-sales based on the above characteristics.

 

 

In this article the author intends to pay special attention on acts of group buying sites—to see whether the acts of Didatuan violated the relevant provisions of the Trademark Law.

 

Article 52 of the Trademark Law provides that: Any of the following acts shall be an infringement of the exclusive right to use a registered trademark:

 

(1) to use a trademark that is identical with or similar to a registered trademark in respect of the identical or similar goods without the authorization from the trademark registrant;

 

(2) to sell goods that he knows bear a counterfeited registered trademark;

 

(3) to counterfeit, or to make, without authorization, representations of a registered trademark of another person, or to sell such representations of a registered trademark as were counterfeited, or made without authorization;

 

(4) to replace, without the consent of the trademark registrant, its or his registered trademark and market again the goods bearing the replaced trademark; or

 

(5) to cause, in other respects, prejudice to the exclusive right of another person to use a registered trademark.

 

The second paragraph of Article 50 of the Implementation Regulations of the Trademark Law provides:

 

(2) intentionally providing facilities such as storage, transport, mailing, concealing, etc. for the purpose of infringing another person’s exclusive right to use a registered trademark.

 

The “use” term in Article 52 (1) of the Trademark Law should be understood as the behavior of producers. In this case, Didatuan claims and provides proof that the commodities involved come from another source and therefore exclude itself from the producer. Then, does Didatuan violate the provisions of Article 52 (2) of the Trademark Law as a seller, or violate the Article 50 (2) of the Implementation Regulations by intentionally providing convenient conditions, or does it violate Article 50 (5) of the Trademark Law by “causing prejudice to someone else’s registered trademark rights?” The court found that the acts of Didatuan should be deemed as sales behavior, and should apply to the Article 52 (2) of the Trademark Law. The author also agrees with the court on the identification of the nature of act. In the following part, the author will give detailed analysis on the behaviors of Didatuan.

 

 

Group buying is an emerging e-commerce model. The business model of e-commerce can be divided into B2C and C2C. The former is the network channel derived from traditional retail model, more like online stores such as Amazon. The latter is e-commerce between individuals, such as eBay. In the B2C model, the network operator bears the same responsibilities for the sale of goods and services as the real stores, whereas, suppliers in C2C model are treated as “service providers for Internet trading platform,” and assume relatively weaker liabilities for online display of goods and services.

 

In China, Article 36 of the Tort Law provides that “a network user or a network service provider who infringes upon the right or interests of another through network shall assume liabilities in tort actions.

 

Where a network user commits a wrong through the network services, the victim of the tortious act shall be entitled to notify the network service provider to take such necessary measures as deletion, block or disconnection. If, after being notified, the network service provider fails to take mitigating measures in a timely manner, it shall be jointly and severally liable with the network user for any aggravating harm.

 

Where a network service provider knows that a network user is infringing upon a rights or interests of another person through its network services, and fails to take necessary measures, it shall be jointly and severally liable for any additional harm with the network user.” The principle in defining liabilities of service providers for Internet trading platforms in the second paragraph is similar to the “safe harbor rules” in the Copyright Law while the principle in the third paragraph is similar to the “red flag principle.”

 

At the same time, Article 24 of the Interim Measures for the Management of Network Commodity Trading and Related Services provides that “network operators providing trading platform services shall take the necessary measures to respect the registered trademarks and corporate name rights. When right holders have shown by evidence that the network trading platform operators infringe the registered trademark rights or corporate name rights, or conduct acts of unfair competition and cause damages to their legitimate rights and interests, necessary measures should be taken in accordance with the Tort Law.”

 

In trial practices for such trademark infringements, courts do consider the “safe harbor” and “red flag” rules. For example, in most trademark infringement cases against Taobao, courts often find Taobao not liable when it carries the responsibilities of “formal preview and postsale removal and remedy (notification and removal).” In the typical case of Rudolph Dassler Puma v. Taobao trademark infringement, court first defined Taobao as the “IT service provider for Internet information release” according to the "Management Regulations for Internet Electronic Bulletin Services” and then found that Taobao has fulfilled its obligation of removing and compensating, and therefore should not assume the tort liability according to the provisions of Article 16 of the Internet Information Services Management Approaches.

 

In the Eland v. Taobao case, the court found at the second instance that appellant Taobao, as the network operator who only provides Internet trading platform for codefendant Du Guofa who sold infringing goods in this case, was not a direct seller of infringing goods but a network service provider. Generally, network service providers do not have the ability to foresee and avoid the infringement acts of their network users. Therefore, Taobao was not liable for violations of their network users. However, if the network service provider has knowledge or should have known that the network users were making use of their network services to conduct infringing acts, but still provides network services for the infringers or fails to take appropriate measures to mitigate the violation, the network operators should bear joint liability for the infringement. The principle of attribution in the judgment is the “red flag” principle. Taobao deleted the information of the infringing goods seven times after receiving the notices but fails to effectively prevent infringer from posting the information. Though Taobao removes the information of infringing goods, it should know that the shop’s acts constitute infringement considering the constant complaint from the right holder. In other words, the fact of infringement was obvious. If Taobao still turns a blind eye and does not take adequate preventive measures of the infringing acts, it intentionally lets the tort acts unchecked and should be held accountable.

 

The above cases may be different from each other, from which, however we still can tell that China’s relevant laws and regulations that these trademark infringement cases only differ from the preview and filter obligations borne by the trading platform service providers under the C2C model. However, the definition of this obligation is consistent, i.e. the trading platform service provider is responsible of management instead of transaction itself. Furthermore, even if the platform service provider is found accountable for infringement, its liability should be reduced to tort liability defined in Article 50 (2) of the Implementation Regulations rather than the seller’s liability defined by Article 52 (2) of the Trademark Law. The question is whether group buying model and is C2C or B2C in nature.

 

 

With regard to C2C model, Ministry of Commerce clearly pointed out in the Specifications on Third-party E-commerce Transaction Platform Services, “third-party e-commerce transaction platform is the information network system that provides dealmakers and related services for two or more trading parties.” The roles in e-commerce activities include platform operators and online store operators. Platform operators are the “the main body who providing services to both sides of the online operators” while online store operators refer to "the parties who engaging in real transactions and related trading activities on e-commerce trading platform.”

 

Should group buying sites be defined as C2C platform operators or online operators or even B2C model? At present, besides “Sina House” who organizes scene show for group buying, most group buying sites organize purchase activities directly on the Internet. Their profit models are as follows: (1) Direct sales. They register and sell the commodities directly online in the name of “group buying.” The commodities may come from self-purchase or consignment but they will get the sales profits directly. (2) Sales rebate. On the one hand, the group buying sites negotiate with the suppliers to get a discount price if the purchase amount reaches a certain level; on the other hand, the sites publish the information to call on consumers for the group buying. When participants reach a certain number, the deal can be achieved. Then the suppliers will pay commission or technical services fees to the sites according to the agreed proportion. The first model is no doubt the B2C model, but can we define the role of group buying sites in the second model as network platform operators? With regard to the activities of Didatuan in this case, we believe that though the e-commerce models are complex and diverse, e-commerce service providers in most cases are both platform operators and online store operators. According to the behavioral characteristics of the group buying sites, their business model is neither platform operator nor online store operator, but can be defined as new online stores in the form of “intermediary services.”

 

Platform operators, such as Taobao and eBay provide the trading platforms, and will not participate in specific transactions. They merely perform the platform management functions. Sellers, after registering on the platform with true identities, can self-publish product information. Buyers choose merchandise by virtue of their own brand awareness and preferences based on their own judgment. Sellers release information on the platform and buyers get access to the information via the platform. Both sides expect the platform to guarantee access to information as well as the security of the whole transaction process rather than the real quality of the merchandise. Platform operators cannot control the information released by sellers and have difficulties in identifying the counterfeits. Under this circumstance, if the right holders monitor these commodities information and identify them as infringing, they can send notice to the platform operators, ordering the sites to “delete” commodity information. Therefore, infringement liabilities for platform operators only apply to the “safe harbor rules.” If the “red flag principle” is adopted here, right holders need to provide evidence for the existence of obvious infringement. In the new e-commerce model, group buying sites play a more dominant role in the entire transaction process. It can be said that they organize the transaction activities rather than merely provide the trading environment.

 

First of all, group buying sites promote commodities and become the leader and first-mover in the transactions. At the beginning of group buying campaign, the sales volume and price are uncertain. Suppliers provide certain commodities with possible price, while the number of consumers remains unknown. According to business agreement, when purchase reaches a certain amount, the deal can be nailed down at the discount price. If the purchase amount is less than the agreed number, the deal will not be achieved. Although it seems like intermediary services, most group buying sites do not contact suppliers on basis of the demand submitted by consumers online. Instead, they first contact the suppliers and then release information for the goods/services. Therefore, consumers tend to believe that these commodities are selected and examined and then published by the sites. Particularly different from intermediary services, it is the sites rather than the suppliers that accept payment. Suppliers are only in charge of providing commodities.

 

Secondly, the most essential characteristics of group buying are “group purchasing power.” The premise is that the commodity is authentic. The unit profit is thin but the quantity is large, so that the overall profit is high. If the “authentic” premise does not exist, there is no ground for low-price advantage in group purchase compared to the normal price.

 

Furthermore, another characteristic of group buying is that the transaction is transient. For example, Groupon launches a promotional product every day. Group buying sites in China also promote commodities in limited period of time. So consumers do not have enough time to learn, compare and balance to make a good choice. The organizers of such transient transactions are group buying sites. Few suppliers can complete the process independently.

 

Finally, because of the transient nature of group buying transaction, even if no trademark holders notify the sites to remove items, the product information will turn invalid after the accomplishment of the campaign. If the rights holders find out their goods have been infringed and then notify the sites, it may also be too late because the deal may be completed. In this case, thousands of infringing goods have been sold, so that it is too late to do the “notification and removal” acts according to the “safe harbor rules.”

 

It can be concluded that it is unreasonable and impractical to identify group buying sites as “platform operators” and adopt “safe harbor or “red flag” rules from aspects of product information release, consumer awareness, payment method or in terms of accountabilities in trademark infringement. If the “safe harbor rules” are applied to define the tort liability of group buying sites, the premise should be “do not know or should not know” the fact of infringement. Since the sites select the commodities and organize the group buying campaign, it should have fulfilled the obligations of review and examination. It is impossible to describe the sites as “do not know or should not know.”

 

Another possible way is to define the behavior of group buying sites as advertising. However, advertisers generally do not involve in sales, or release sales information on their own behalf, or accept consumer payments. Advertisers basically do not profit according to the sales volume.

 

 

In summary, the author believes that though the business model of group buying is different from traditional B2C model, this difference is in form rather than in substance, which is due to the inherent characteristics of the group buying model. Since group buying sites profit from this business model, and even directly profit from such sales practices, they should assume corresponding responsibilities. Identification on trademark infringement liability follows the fault presumption principle. Also, in accordance with paragraph 3 of Article 56 of Trademark Law, the operators may be exempted from liability only when they “do not know has infringed the trademark rights” and “indicate the legal sources” of the commodities. The two conditions are considered together with a variety of factors such as the cognitive ability of sellers and trademark visibility. It is suggested that group buying site should clarify responsibilities and fulfill statutory review obligations when releasing goods/services information, so as to protect the legitimate interests of consumers and trademark holders and to promote the healthy development of group buying industry.