X-SPOT GLOBAL LTD v. HUOBI GLOBAL LTD

HCIP 36/2023

[2023] HKCFI 3209

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INTELLECTUAL PROPERTY PROCEEDINGS NO 36 OF 2023

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D E C I S I O N

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Background

1.  Before the Court are two summonses. The first is the Plaintiff’s summons for an interlocutory injunction, to restrain the Defendant from using the name “火幣” or “火币” (“Mark”), or any name or sign confusingly similar thereto, pending the trial of the action (“Injunction”). The second is the Defendant’s summons to set aside the order of the Court made on 12 July 2023 granting leave to issue and serve a Concurrent Writ out of the jurisdiction (“Service Out Order”), and to stay these proceedings to arbitration.

2.  The Plaintiff is a BVI company and it is not disputed that it is owned and controlled by Li Lin also known as Leon Li (“LL”).

3.  The Defendant is a company incorporated in the Seychelles, and a wholly owned subsidiary of a BVI company Huobi International Limited (“HIL”). It is part of the Huobi group of companies (“H Group”), which are the operators and owners of a global online crypto currency exchange (“Exchange”). The Exchange was founded by LL, who held a controlling interest in the H Group through a company known as LL (BVI) Investment Limited (“LL BVI”), until a sale under a Stock Purchase Agreement dated 27 September 2022 (“SPA”). Under the SPA, the controlling interest in the H Group was sold by LL BVI, which was identified as the “Principal Seller”, to the “Buyer” which was identified as About Capital Management (HK) Co Limited and Digital Legend Holdings Limited collectively.

4.  The Mark was registered as a trademark in Hong Kong in 2019, in classes 9, 35, 36, 41 and 42, and in the name of Huobi Global Limited (“HGL”) which was part of the H Group.

5.  HIL was named as a party to the SPA, and the SPA recorded the intellectual property owned by the H Group, as including the Mark amongst a list of other trade mark registrations. However, the SPA expressly provided that the Mark then owned by the H Group was not included in the transaction contemplated under the SPA, but would be transferred instead to certain entities designated by LL BVI (the Principal Seller named in the SPA).

6.  The Mark was accordingly assigned by HGL to the Plaintiff, which was recorded in the Trade Marks Register of Hong Kong on 23 September 2022. This is not disputed.

7.  In the Plaintiff’s application for the Injunction, the Plaintiff claims that the Defendant has no right to use the Mark in Hong Kong, but that on 22 November 2022, the Defendant announced that it was changing its English brand from “Huobi Global” to “Huobi”, and its Chinese brand from “火幣” to “火必”. The Plaintiff further claims that the Defendant had announced in May 2023 that the Defendant was ready to provide crypto currency trading services under the rebranding of its name in Hong Kong. The Plaintiff’s evidence is that the Mark had been used by the Defendant in its website in connection with the crypto currency trading services it proposed to offer in Hong Kong. The complaint of the Plaintiff is that the Defendant’s name or mark “火必” is confusingly similar to the Mark, and that the Defendant’s acts constitute infringement of its trademark, such that it is entitled to the interlocutory Injunction sought pending the trial of the action.

8.  The parties do not dispute, as part of the background, that the operation of online crypto currency exchanges on the Mainland, including the provision of online crypto currency exchange services to residents of the Mainland, was banned some time since 15 September 2021 (“Ban”). It was as a result of the Ban, that LL ceased his crypto currency business on the Mainland, and sold his interest in the H Group under the SPA. According to LL, he had ceased to have any role in the Defendant, or in any other crypto currency business, after the sale of his interest in the H Group. The Mark was assigned to a company controlled by LL/LL BVI, as part of LL’s divestment of all interests in and associated with the crypto currency business of the H Group.

9.  The Plaintiff explained in its evidence, that it was its concern that in view of the Ban on the Mainland, the business of LL BVI and its group of companies should be disassociated and separated completely from the crypto currency business which had formerly been carried on by the H Group under the Mark. The Plaintiff was accordingly anxious that the Mark (which had formerly been used by the H Group in the crypto currency business) should not further be used in any crypto currency business operated or offered to Mainland residents in contravention of the Ban. The Plaintiff further wanted to ensure that the public and the trade should not be confused by the relationship between the Plaintiff and the H Group, or be misled into believing that the services and products offered by the H Group under the Mark are the same as or related to the services and products of the Plaintiff and its associated group of companies, as it would defeat the whole purpose of the assignment of the Mark from the H Group to LL and his companies, and may expose the Plaintiff to potential liabilities on the Mainland for breach of the Ban.

10.  In its application for the Injunction, the Plaintiff highlighted the fact that confusion will occur if the Defendant should market its products and services under the Mark, or signs and names similar thereto, and that the distinctiveness, exclusiveness and value of the Mark would be diminished. It has no control over the quality of the services or products provided by the H Group, and the Plaintiff claims that the activities of the Defendant would have adverse impact on the reputation, business and potential liability of the Plaintiff and its associated companies, particularly when the Defendant’s services are being offered to Mainland citizens.

11.  In opposition to the Plaintiff’s application, and in support of its application to set aside the Service Out Order, the Defendant argued that the Plaintiff had, in breach of its duty of utmost good faith, failed to disclose material facts to the Court in its application for the Service Out Order.

Material non-disclosure?

12.  The Defendant claims that the Plaintiff failed to make full and frank disclosure, firstly, of the precise wording of the arbitration clause contained in the SPA, and of the fact that there were covenants contained in the SPA, which restricted the Principal Seller and its affiliates from directly or indirectly operating or acquiring any beneficial interest of more than 10% of the equity in any crypto currency exchange, and from using any trademark owned or used by any of the H Group company, or operating or participating in any crypto currency exchange.

13.  On the question of the arbitration clause contained in the SPA, the Defendant argued that the Court should have been informed of the exact wording thereof, to enable the Court to decide whether the Plaintiff’s claim relating to the use of the Mark amounted to “any dispute, controversy or claim … arising out of or relating to” the SPA, or its interpretation, breach, termination or validity, and ought to be referred to arbitration. The Defendant highlighted the fact that it was not sufficient, to simply exhibit the SPA and to state that it contained an arbitration clause but that it was not applicable to the Plaintiff’s claim, in reliance on trademark infringement.

14.  The Defendant further argued that the Plaintiff should have informed the Court that it had not made any use of the Mark to operate any crypto currency exchange, and that the Plaintiff has no intention to make any use of the Mark in the future in relation to crypto currency exchange services. By virtue of the restrictive covenants contained in the SPA, which restrained the Plaintiff from providing crypto currency exchange services and from using the Mark for such services, the Defendant’s position is that there is no basis for the Plaintiff to claim the Injunction, and no question of any damages being sustained by the Plaintiff as a result of the Defendant’s use of the Mark in Hong Kong.

15.  On full and frank disclosure, the Defendant also claims that the Plaintiff had failed to inform the Court that, in circumstances where the Plaintiff had no intention to use the Mark in Hong Kong, the assignment of the Mark to the Plaintiff was in bad faith and that the Defendant has a valid counterclaim for revocation of the registration of the Mark under section 52(2)(a) of the Trade Marks Ordinance.

16.  By virtue of the above matters, the Defendant claims that there are serious questions as to whether the Plaintiff can in fact rely on any of the gateways of Order 11, to seek the Service Out Order.

Non-use of the Mark

17.  Dealing first with the allegation concerning the Plaintiff’s non-use of the Mark, and the effect on the Plaintiff of the restrictive covenants contained in the SPA, the Plaintiff correctly pointed out that the duty to make full and frank disclosure relates to the Plaintiff’s application for leave to serve the Writ outside Hong Kong. For this application, the Plaintiff only has to show that it has a “good arguable case” that its claim is within one of the Order 11 gateways and that the Court has jurisdiction.

18.  Where the claim is for an injunction and leave is sought under Order 11 rule 1(b), the applicant must not merely make out a good arguable case that it seeks an injunction, but must make out a good arguable case for the injunction (para 11/1/41.1 Hong Kong Civil Procedure 2023). A good arguable case is an argument on jurisdiction with a good prospect of success, and the court must also make a provisional conclusion that the plaintiff is probably right, although such conclusion is only provisional. [See para 11/1/40-11/1/43 Hong Kong Civil Procedure 2023.]

19.  Once the court is satisfied that it has jurisdiction (which under some heads such as rule 1 (b) require an examination of the merits), the standard of proof of a serious issue to be tried on the merits is then required to enable the court to exercise its discretion to grant leave (para 11/1/49 Hong Kong Civil Procedure 2003). It is not necessary to conduct a mini trial on the affidavits.

20.  Hence, it is not necessary for the Court at this stage to be satisfied that the Plaintiff’s claim for infringement of the Mark will likely succeed on the balance of probabilities as required at trial.

21.  As Counsel for the Plaintiff rightly pointed out, the Plaintiff’s claim of infringement of the registered Mark (as opposed to a claim in passing-off) does not depend on its use thereof. Any claim of revocation of the Mark on the ground of non-use requires a continuous period of non-use for at least 3 years without valid reasons, which cannot be established in this case. The Mark had been used prior to 23 September 2022.

22.  Accordingly, use, or non-use, of the Mark in this case is not a material fact for consideration by the Court when considering whether to grant leave for service out of the Writ for trademark infringement.

23.  The Plaintiff disputes that it was a party to the SPA, and denies that it is bound by any restrictive covenant in relation to the use of the trade marks owned or used by the H Group, or in relation to the operation or ownership of any crypto currency exchange.

24.  The case of Giorgio Armani SPA v Elan Clothes Co Ltd [2019] 2 HKLRD 313 relied upon by the Defendant is distinguishable on the facts. The manner in which the parties were named and contracted in Giorgio Armani was wide enough to include specifically the affiliates and subsidiaries, as Giorgio Armani SPA as contracting party was named together with its branch offices and affiliates. In the present case, the “Sellers” in the SPA were defined specifically, and did not include the Plaintiff. Only HIL (or the Company) was defined to include its consolidated subsidiaries, and only HIL contracted on its behalf and on behalf of each entity within the H Group.

25.  Although there are references to “Affiliates” of the Principal Seller in the operative parts of the SPA, they are references to the Principal Seller “causing” its affiliates not to operate or acquire any interest in the Exchange or to employ any employee or consultant of the H Group or its Affiliates, as opposed to the affiliates directly covenanting not to do so. There is also reference to the period of the restrictive covenants being extended in the event of a breach of section 5.13 by the Principal Seller or its Affiliates. In my judgment, these references are more neutral, and are not conclusive on the inclusion of the Affiliates as actual parties to the SPA or its covenants.

26.  On the evidence filed at this stage, I am satisfied that there is a case established for leave to be granted for service out under Order 11 rule 1(b), and (f). I am not satisfied that there is any failure on the part of the Plaintiff to make disclosure of any relevant or material fact relating to its use of the Mark in the context of its claim for infringement of trademark.

Application of arbitration agreement

27.  The arbitration clause in the SPA is raised in the context of both material non-disclosure as alleged, and the Defendant’s application for stay of the proceedings to arbitration.

28.  So far as the nature of the Plaintiff’s claims against the Defendant is concerned, upon reading the evidence filed by the Plaintiff in support of the Service Out Order, I am satisfied that the Plaintiff amply explained that its claim and cause of action against the Defendant is infringement of trademark. This is supported by the skeleton submissions filed on behalf of the Plaintiff. The SPA was referred to in the evidence and in the submissions, firstly to discharge the Plaintiff’s duty to make full disclosure (as explained in paragraph 25 of the first affidavit of Henry Wheare (“HW”)), and to show that the Defendant has no right whatsoever to use the Mark even after the purchase and under the assignment contemplated under the SPA.

29.  The first affidavit of HW made in support of the Plaintiff’s application for the Service Out Order also pointed out that the assignment of the Mark was not part of the transaction contemplated under the SPA, and further, stated that the SPA contains an arbitration clause, but that the Plaintiff is relying on the cause of action of trademark infringement, and not suing under the SPA, such that the arbitration clause is not (in the Plaintiff’s opinion) applicable. The SPA was exhibited to the first affidavit of HW.

30.  The arbitration clause was not set out in the first affidavit of HW, but having referred to it and explained the context, I am not satisfied that the failure to set out the language of the clause in full constitutes non‑disclosure of a material fact. The judge was made aware of the nature of the claims made by the Plaintiff in the action, the existence of the SPA, and the fact that the SPA contained an arbitration clause. On the facts of this case, that was sufficient to discharge the Plaintiff’s duty of full and frank disclosure and to alert the judge to the issue.

31.  The Defendant referred to the letters which had been issued before the commencement of these proceedings, and claimed that contrary to what was stated in the evidence and skeleton submissions of the Plaintiff, the Plaintiff had been relying on the SPA when it made its claims against the Defendant. However, as correctly pointed out by Counsel for the Plaintiff, the letter before action dated 26 May 2023 on which the Defendant relies was issued by the lawyers acting on behalf of LL BVI, which was a party to the SPA, in connection with the Defendant’s breaches of the SPA, but not on behalf of the Plaintiff. The letters of 8 June 2023 and 16 June 2023 issued on behalf of the Plaintiff made it clear that the claims of the Plaintiff were for trademark infringement, and not on the basis of the SPA.

32.  The Endorsement of Claim on the Writ was confined to claims of infringement of the Plaintiff’s registered Marks.

33.  It is the Defendant’s assertion that the claims made by the Plaintiff in this action fall within the scope of the arbitration clause of the SPA, to bind the Plaintiff to arbitration of such claims, and that the action should be stayed.

34.  First, I am not satisfied that the Defendant has made out a prima facie or plainly arguable case (PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309) that the Plaintiff is a party to the SPA to be bound by the arbitration clause. The matters referred to in paragraphs 24 and 25 above are repeated. Not being a party, the Plaintiff is simply not bound by the arbitration clause in the SPA – no matter how wide its scope.

35.  Moreover, it is highly pertinent in this case that the SPA expressly states that the Mark is not included in the transaction contemplated by the SPA, and that as opposed to the assets and intellectual property being included in the transfer or sale, the Mark is to be transferred to entities designated by the Principal Seller, ie LL BVI, and this transpired to be the Plaintiff in this case. If the parties agreed to exclude the Mark from the SPA and the transaction thereunder, there is no reason for them to agree that disputes and claims relating to the Mark, the use and any alleged infringement thereof should be governed by the SPA. This is sufficient indication of the contrary intention of those parties to the SPA, to rebut the presumption referred to in Fiona Trust & Holding Corp v Privalov [2007] 4 All ER 9512].

36.  Each case turns on its own facts and on the terminology of the arbitration clause contained in the relevant contract. The facts of this case are totally distinguishable from those of Sesderma, SL v Seeky International Limited [2023] HKCFI 1619 which is relied upon by the Defendant.

37.  For all the above reasons, I am not satisfied that there is a plainly arguable case of the Plaintiff’s claims being subject to an arbitration agreement, and refuse to grant the stay sought.

The Injunction

38.  There is clearly a serious question to be tried as to the Plaintiff’s claim that the Mark has been infringed by the Defendant.

39.  The Defendant has not shown any substantive defence to the Plaintiff’s claim of trade mark infringement. Apart from the assertion of material non-disclosure, which has not been established, the Defendant’s essential claim is that by reason of the fact that the Plaintiff admits to not having operated any crypto currency business, and the fact that the Mark has not been used in relation to any crypto currency business, it cannot be said that the Plaintiff has suffered any damage by reason of the Defendant’s use of the Mark.

40.  As the Plaintiff has pointed out, the Mark is registered not only in respect of cryptocurrency trading but for a wide variety of goods and services. The distinctiveness, exclusiveness and value of the Mark will inevitably be diminished by the Defendant’s unauthorized use thereof, for its business and activities which are not connected with the Plaintiff and over which the Plaintiff has no control.

41.  I also accept the submissions made for the Plaintiff, that the Defendant’s use and promotion of the Mark in its crypto currency business is very likely to cause confusion amongst members of the public and the trade that the Plaintiff, as the registered owner of the Mark, is behind the crypto currency business to be carried on by the Defendant, and that this would expose the Plaintiff to potential liabilities and serious sanctions under Mainland law for contravention of the Ban. That is evidence of likely damage to the reputation of the Plaintiff and its group of companies, which is irreparable.

42.  None of the other assertions made by the Defendant can affect the validity of the Mark, to show that there is no serious question to be tried on the Plaintiff’s claim. The assertion that the registration of the Mark was made in bad faith is totally unsubstantiated, particularly when the registration was originally procured and obtained by the Defendant. Nor is there sufficient evidence to show how the assignment from the Defendant to the Plaintiff was registered in bad faith, particularly when the context and provisions of the SPA are considered. As referred to above, it has not been established that there are currently grounds to seek a revocation of registration of the Mark for non-use. In any event, the fact that the Plaintiff may not have used the Mark for any crypto currency business does not mean that the Defendant has the right to do so.

43.  At this stage, I am unable to see any arguable defence to the Plaintiff’s claim of trademark infringement, and as Counsel for the Plaintiff submitted, there is no need to consider the adequacy of damages or the balance of convenience for the grant of the Injunction sought.

Disposition

44.  The Defendant’s application to set aside the Service Out Order and to stay the action to arbitration is dismissed, with costs to be paid by the Defendant to the Plaintiff.

45.  The Plaintiff’s application for the Injunction is granted in terms of paragraphs 1 to 4 of the summons, with costs to be in the cause of the action.

46.  The orders for costs include any costs reserved, with certificate for Counsel.