Piercing the Corporation’s Veil in IPR-Related Litigation in China
By Jiang Qiang, Judge of IP Tribunal of Beijing Higher People’s Court
Disregard of corporate personality can be introduced in litigation concerning IPR infringement. If the corporate personality cannot be disregarded, effective protection can not be granted to IPR, so that the corporation's veil should be pierced. There should be a timely transfer of burden of proof to set a reasonable standard of proof for identification of personality confusion. Jointly and severally liability can be imposed on joint infringement and disregard of corporate personality, on which the legal effects need to be further compared and explored.
There have been a significant increase in cases initiated by obligee against the company, its affiliated companies and (or) proprietary shareholder in IPR infringement litigation, whose defendants are mainly manufacturers for their repeated infringement or repeated infringement in disguise. The obligee investigates the defendants' joint and several liabilities through initiation in order to crack down on infringement at the root. In judicial practice, some courts disregard corporate personality, and some courts affirm joint infringement due to which the defendants are ordered to assume joint and several liability.This is a new phenomenon in IPR litigation, in which there are many problems worth studying. The author expresses personal opinions in the followings.
The system of disregarding corporate personality can be introduced in IPR infringement litigation
Article 20.3 of Company Law of the People's Republic of China stipulates that "shareholders of a company who abuse the independent legal person status of the company and limited liability of shareholders to evade debts and cause damage to the interests of the creditors of the company shall bear joint liability for the company's debts.." The above credits and the debts provided for in this article include contractual and tort obligations. There is no barrier in interpretation legally to introduce personality denial system in IPR infringement litigation, which is used to prevent shareholders from using the system of company's limited liability to maliciously evade legal liability. In judicial practice, it is common for natural persons to commit IPR infringement through the corporate shell by a way of "changing one vest for one shot" in order to evade and even successfully evade legal liability. In order to protect intellectual property rights and combat infringement from the source,the corporation's veil may be pierced in IPR litigation and the key for such piercing is to have a good command of legal and evidentiary standards.
Legal standards for piercing corporation's veil in IPR litigation
According to Company Law of the People's Republic of China, the condition for piercing corporation's veil is that "the shareholder of a company abuses the independent status of the company as a legal person or the limited liability of shareholders, evades debts and thus seriously damages the interests of the creditors of the company". After a consideration of the basic principles embodied in Company Law and the characteristics of IPR litigation, the author thinks that the following conditions should be satisfied for such piercing:
Subjective elements: the company's shareholders deliberately use the company's personality to commit infringement upon intellectual property rights
The words "abuse" and "evade"used in Article 20.3 of Company Law of the People's Republic of China show that the piercing of corporation's veil requires that the shareholder must have subjective fault and he is intentional in terms of subjective state. Company's personality independence and shareholders' limited liability are the cornerstones in Company Law, which can not be shaken because of normal operation, market risk, competition failure, negligence and insolvency.However, where the company is incorporated for the purpose of infringement and the company is used as a shell for intentional torts,repeated or disguised repeated infringement and other obviously malicious acts, Company Law of the People's Republic of China must be interpreted in a flexible way to plug legal loopholes to prevent shareholders from using personality confusion to evade tort liability.
Objective elements: the company substantially lost independent personality
Company Law of the People's Republic of China stipulates no specific standards for corporation's veil. The discussion of personality confusion in judicial practice generally includes three aspects:personnel, business and property. The author agrees that those confusion as the common referential factors to determine personality confusion, but personality confusion should be determined by substantial standard instead of rigid adherence to the above factors. The substantial determination standard starts from the legislative purpose of personality denial system and examines whether the shareholder abuses his domination of the company's power to evade legal liability. In judicial practice, it is necessary to balance the interests of IPR obligees and shareholders: corporate personality should not be easily denied so that shareholder's limited liability becomes unlimited liability and the interest gained from shareholder's malicious act can not be protected so that the company becomes a shell and tool for IPR infringement. In the case of Siemens AG v. Xinchang County Siemens Subsidiary Company, Bangdai Company and Wu Bingjun concerning trademark infringement and unfair competition, WuBingjun and Zhu Qiuzhen, the two shareholders of Xinchang County Siemens Subsidiary Company, were the mother-child relationship, of whom Wu Bingjun has 80% shares. By cybersquatting: www.siemives.com,Wu Bingjun applied for "SIEMIVES" as trademark and authorized Xinchang County Siemens Subsidiary Company to use the above domain name and trademark to produce kitchen appliances. Xinchang County Siemens Subsidiary Company used WuBingjun's personal bank account as its business safekeeping account; the nickname for online customer service of www.siemives.com was "Siemens household appliances Wu Bingjun." Zhejiang Higher People Court rules that Wu Bing was highly confused with Xinchang County Subsidiary Siemens Company in terms of personnel, finance, business, etc.; that Xinchang County Siemens Subsidiary Company had no personality basis for independently assuming tort liability occurred from the infringement act involved in the case; that such act violated the original intent of independent corporate personality system; that the essence and damage effect of such act were equivalent to those circumstances stipulated in Article 20.3 of Company Law of the People's Republic of China. Therefore, it renders a judgment that Wu Bingjun shall assume joint and several liability for the debt occurred from the infringement committed by Xinchang County Subsidiary Siemens Company. Although this judgment has to consider the confusion of personnel,business and property, it does not rigidly adhere to the standard that the argument of such confusion should be satisfied in every aspect, and in particular, it has no sufficient argumentation of personal confusion. However, after an overall analysis of the acts committed by Wu Bingjunand Xinchang County Siemens Subsidiary Company, the verdict rules that Wu Bingjun committed infringement acts by malicious use of Xinchang County Siemens Subsidiary Company as a shell, which satisfies the substantial conditions for the determination of disregard of personality. Such kind of reasoning method is very illuminating.
Consequential elements:serious damage to the interests of IPR obligee Independence of corporate personality is the principle whereas the disregard of such independence is an exception.Therefore, corporate personality can not be denied only because of the constitution of infringement.However, if IPR can not be effectively protected without such negation because of the special methods and consequences of infringement, the corporation's veil should be pierced in order to re-realize the balance of interests between IPR obligee and shareholders. In the judicial practice, there may be an award that the interest of IPR obligee is seriously damaged if infringement can not be checked without piercing the corporation's veil where there are acts such as making infringement as major business and committing infringement in large scale, from the source (in the process of production and manufacture), with serious consequence or in disguised repetition, which may cause gross damage to IPR obligee, or may compel the IPR obligee to repeatedly bring lawsuits against different companies incorporated by the same actual controller.
Standard of proof and burden of proof
Personal confusion Personal confusion refers to the phenomenon of the same persons working at institutions with different names to the outside. It is difficult to prove the existence of personal confusion if there is only cross offices between and among some staff and ordinary employees. However, it will have stronger weight of evidence if there is confusion of large amount of employees,key positions, senior managers and finance staff in particular.The preliminary evidence of the confusion include the sharing of premises, contact information,and handling personnel, but it is insufficient to ascertain such confusion with only the existence of kinship such as couple, parents and children. Urumqi Intermediate People's Court rules in the case of Nuoda Corporation v. Wanhe Company, Dong Yongxin and LiuJinping concerning the trademark infringement and unfair competition that Wanhe Company's shareholders Dong Yongxin and Liu Jinpingkeep the conjugal relation, but it is insufficient to prove the personality confusion between and among the said three defendants.
Business confusion
Business confusion means that it is difficult to make a distinction between business activities. Evidences for such confusion include the sharing of business scope, promotional materials, contracts, invoices and delivery orders. In addition, the transaction with affiliated companies has weight of evidence to certain extent. Shandong Higher People's Court rules in the case of Honeywell International v. Shanghai Rising Electronics Co., Ltd, Shanghai Zhoudian International Trading Co., Ltd and Kun Hong Business Co., Ltd. that the business scope of Zhoudian Company and Rising Company were basically overlapped and shared the same premises, that the promotional materials released by Zhoudian Company contained Rising Company's production information due to which there was business confusion between the two companies.
Property confusion
Property confusion is the most important factor to determine the confusion of personality, but the accreditation criteria for such confusion should not be too low.The fact of using a personal account to collect money for the company is conducive to the determination of property confusion, but there must be a consideration of whether such collection is occasional or habitual because the latter is more sufficient to prove such confusion in comparison with the former. In the case of Yang Zhaoze v. DongguanShenghuo Gas Energy Conservation Co., Ltd. and Mao Wenguo concerning patent infringement, Guangzhou Intellectual Property Court rules that although the plaintiff remitted the money for the purchase of the allegedly infringing products to Mao Wenguo's personal account,such remittance alone could not prove the confusion between the two defendants. In the dispute case of Wang Yanfang v. Wuhan Gongda Auto Parts and Accessories Manufacture Co., Ltd. and YangBo concerning franchise contract, Wuhan Donghu District New Technology Development Zone Court rules that the defendant not only instructed the plaintiff to remit the franchise fee to Yang Bo's personal account, but also instructed the outsider to remit the franchise fee to Yang Bo's personal account; that such act constituted illegal transfer of the company's property and damaged the interests of creditors;and that the defendant shall bear joint and several liability for the company's debt.
Burden of proof
Article 63 of Company Law of the People's Republic of China stipulates that "A shareholder of a one-person limited liability company who is unable to prove that the company's assets are independent of the shareholder's personal assets shall bear joint liability for the company's debt.." However, this provision can only be applied to a one-person company instead of ordinary companies. Civil Procedure Law establishes the principle of"Who advocates, who has to put to the proof", and the reversal of the burden of proof as prescribed in the Several Provisions of the Supreme People's Court on Evidence in Civil Proceedings (the Provisions) makes no stipulation on the disregard of corporate personality. It should be noted that the evidences for personality confusion are in the hands of the company, making it difficult for the plaintiff to obtain.Therefore, a rigid application of rules for evidences would require that the plaintiff to bear the burden of all proofs in terms of confusion concerning the defendants' personnel, business and property,which may be unfair in the end.
Article 7 of the Provisions stipulates that "Where there are no explicit statutory provisions and it is not possible to define who shall be responsible for producing evidences according to the present Provisions or other judicial interpretations, the people's court may determine the burden of proof according to the principle of fairness and the principle of honesty and credit and taking such elements as the ability to produce evidences into consideration" Thus,the court may exercise discretion to allocate the burden of proof and the factors for such discretion are mainly the ability to burden of proof and the principles of fairness and good faith if there are no clear provisions for application legally.
Real conditions should be the basis for the determination of standard of proof and allocation of burden of proof. The plaintiff should submit evidences such as the defendants' premises, contact information, handling personnel, promotional materials and sales contracts to prove that there is a high possibility of confusion between the defendants in terms of persons and business. If so, the burden of proof should be transferred to the defendants, who should submit financial records and other evidences to negate such alleged confusion. If so, the burden of proof is transferred to the defendant, and the defendants submitted financial evidence to prove their personality is not mixed.In the case of Honeywell International v. Shanghai Rising Electronics Co.,Ltd, Shanghai Zhoudian International Trading Co.,Ltd and Kun Hong Business Co., Ltd. Concerning infringement on trademark rights, Shandong High People's Court rules that there is a business confusion between the two defendants Rising Company and Zhoudian Company;that it was difficult for the plaintiff to know the said two defendants' financial conditions; that the said two defendants had all capabilities to prove their inter-independence in finance; and that Rising Company shall undertake the results from its failure to submit no effective evidences. Shandong Provincial Higher People's Court is a good example in discretion of ability to adduce evidences and has achieved good legal results.
Disregard of Personality and joint infringement
In addition to the application of disregard of personality,some courts also rules that the defendant and the company shall bear joint and several liability for joint infringement according to Tort Liability Law of the People's Republic of China Article 8 of this law stipulates that " If two or more persons jointly commit a tortious act, thereby causing injury to another, they shall bear joint and several liability." In the case of Siemens AG v. Xinchang County Siemens Subsidiary Company, Bangdai Company and Wu Bingjun concerning trademark infringement and unfair competition, Zhejiang Provincial Higher People's Court rules that the purpose for WuBing's registration of the allegedly infringing domain names, signs and his incorporation of Xinchang County Siemens Subsidiary Company was to, using the Company as a tool, commit the allegedly infringing act of playing up to the registered trademark of Siemens AG and the latter's enterprise name; and that WuBingjun and Xinchang County Siemens Subsidiary Company has, as a result, committed joint infringement. In the case of Sakura Bath & Kitchen Products (China)Inc. v. Suzhou Sakura Science and Technology Development Co., Ltd., Zhongshan Sakura Integrated Bath & Kitchen Products Co., Ltd., Zhongshan Sakura Bath & Kitchen Products Co., Zhongshan Branch of Suzhou Sakura Science and Technology Development Co., Ltd.,Tu Rongling and Yu Liangcheng concerning trademark infringement and unfair competition, Jiangsu Higher People's Court rules that, as legal representatives of their companies, Tu Rongling and Yu Liangcheng knew that another person's trademark has higher goodwill; that although the court ruled that their acts constituted infringement and they should bear the responsibilities therefrom, they still incorporated new companies for the sake of infringement; that they committed malicious and repetitive infringement through the companies they controlled; that their personal acts were significant in the constitution of infringement in the case; and that they should bear joint and several liabilities for the infringement of their companies. In terms of requirements for standards of proof, joint infringement approach requires relatively lower standard of proof because it stresses connection of intent and subjective fault and directly imposes joint and several liabilities without considering the standard for personality confusion; The approach for disregard of personality requires stronger argument and higher ability to adduce evidences because it respects the principles of the company's independent personality and shareholder's limited liability and imposes joint and several liabilities with personality confusion as an exception. Further exploration and studies are needed to assess the legal effects of the two approaches in practice.
(Translated by Yuan Renhui)
