By Cher Yang
For businesses, few disputes are more challenging than those involving former commercial partners.
A recent judgment from the Zhejiang High People’s Court provides a typical example. The case involved the well-known Chinese education and training brand “Shanxiang Education” and addressed trademark infringement, unfair competition, and punitive damages.
For companies operating through franchise, licensing, or distribution models, the judgment provides valuable insight into how Chinese courts assess continued brand use after a business relationship has ended, as well as how damages may be calculated when multiple forms of infringement arise from the same conduct.
The Dispute Began After the Business Relationship Ended
At the heart of the dispute was the continued use of signs associated with “Shanxiang Education” after the franchise relationship had been terminated.
Situations like this are not uncommon in franchise and licensing disputes.
Some former franchisees may believe that, having invested substantial time, money, and resources in developing a local market, they should be entitled to continue benefiting from the goodwill associated with the brand. From the brand owner’s perspective, however, once the commercial relationship has ended, continued use of the brand may amount to an unauthorized appropriation of its commercial reputation.
The key legal question therefore becomes: Is the former partner simply continuing its own business, or is it improperly appropriating the trademark owner’s commercial identity?
Why Former Franchisees Face Greater Legal Risks
Trademark disputes involving former franchisees are often more complicated than those involving ordinary infringers.
The issue is especially significant in service industries.
Unlike physical products, businesses such as education and training, consulting, and hospitality often build their competitive strength around commercial reputation, customer trust, and brand recognition. Consumers may have difficulty determining whether a particular operator remains affiliated with the original brand owner.
As a result, courts may look beyond whether the trademark itself continues to be used and examine whether the overall presentation of the business creates a misleading impression that the former relationship is still in place.
Trademark Infringement and Unfair Competition Can Overlap
One of the most notable aspects of the case is that it involved both trademark infringement and unfair competition claims.
This overlap is common in disputes of this nature.
Trademark infringement primarily concerns the unauthorized use of a registered trademark.
Unfair competition addresses a broader range of market conduct, including behavior that may mislead consumers or improperly capitalize on another business’s commercial goodwill.
From a business perspective, this distinction is important because different legal rules may apply to different claims, particularly when it comes to calculating damages.
An Important Clarification on Punitive Damages
In recent years, the application of punitive damages has become increasingly common in China’s intellectual property litigation.
Punitive damages are intended not only to compensate the rights holder, but also to punish particularly serious misconduct and deter future infringement.
However, the Zhejiang High People’s Court emphasized an important principle in this case.
Because the case involved both trademark infringement and unfair competition, the court did not apply punitive damages indiscriminately to the dispute as a whole. Instead, it distinguished between the different unlawful acts and applied punitive damages only to the portion attributable to trademark infringement.
This reflects the Chinese courts’ cautious approach to punitive damages and their emphasis on staying within the boundaries established by legislation.
A More Refined Approach to Calculating Damages
Another notable aspect of the judgment was the court’s approach to calculating damages.
In trademark cases involving physical goods, an infringer’s profits may be relatively straightforward to identify. In service industries such as education and training, however, the calculation can be considerably more complicated.
The revenue generated by a training business does not depend solely on its trademark. Course quality, teaching staff, operational management, marketing investment, customer relationships, and other factors may all contribute to the business’s profitability.
Against this background, the court adopted a more refined approach.
For companies operating in education and training, consulting, online platforms, and other service-based industries, this concept may become increasingly important in future litigation.
What the Judgment Reveals About a Broader Judicial Trend
The significance of the case extends beyond the education and training sector.
In recent years, Chinese courts have continued to strengthen judicial protection for established brands and take a firm approach toward former business partners who seek to free-ride on, or continue benefiting from, the goodwill developed during a previous commercial relationship.
At the same time, courts are adopting increasingly sophisticated approaches to damages in cases where intellectual property infringement overlaps with unfair competition, particularly in service industries.
The judgment also reflects an attempt to balance two objectives.
On the one hand, rights holders should receive meaningful remedies when their trademarks are deliberately infringed. On the other, damages should not exceed the actual contribution made by the intellectual property at issue.
As China’s economy continues to shift toward services, the digital economy, and brand-driven business models, this balance is likely to become increasingly important.
Key Takeaways for Brand Owners
For companies operating in China through franchise, licensing, or distribution networks, the case serves as an important reminder: intellectual property risks do not disappear when a commercial relationship ends.
Ultimately, the case highlights a simple truth of modern brand management: Building a successful franchise network requires trust. Protecting a successful brand requires planning for what happens when that trust comes to an end.