Trademark Squatting in China: What Every American Business Needs to Know

*This article first appeared in Inside Counsel Magazine on September 4, 2014: http://bit.ly/Z8w9t5

Trademark squatting

According to a study conducted by the U.S. Patent and Trademark Office (USPTO), only 15 percent of American small businesses with a presence overseas were aware that a U.S. trademark only receives protection within the United States. This statistic reveals that many businesspeople are unaware that trademarks, like patents, are territorial. Such a lack of understanding of trademark law can have serious consequences, especially if one plans on doing business in China.

Companies that delay the registration of their mark in China may discover that they have fallen victim to "trademark squatting," and that someone else has already legally taken possession of their brand. When this occurs, a company may be prevented not only from selling their goods within China, they may also be prevented from manufacturing products in China for export elsewhere - unless, of course, the business owner pays the trademark squatter to buy their mark back.

What is Trademark Squatting?

Trademark squatting - a.k.a. trademark hijacking - is where an entity registers a brand in bad faith, effectively to hold it for ransom. This practice is certainly not unique to China, but it has been has been greatly facilitated by that country's "first-to-file" system. Under such a system, branding rights are generally granted to the earliest applicant. Under the United States' "first-to-use" system, parties are required to demonstrate "use" or "an intent to use." This is not the case in China.

Therefore, in China, an opportunist will likely have little difficulty obtaining the registration of a mark or, perhaps, even the Chinese version of a celebrity name, like Michael Jordan. Then, when the legitimate brand owner sets foot in China and attempts to do business there, they will suddenly be faced with three choices: 1. give in to the squatters demands, 2. re-brand or, 3. litigate. And of these three options, litigating in China is likely the least desirable option of all.

The Pitfalls of Litigation

A lawsuit in China is not only potentially very expensive, it can cause disastrous delays and missed opportunities. It may take years to reach a final judgment, and during this period, business conditions can radically change. Further, litigating may turn out to be a complete waste of time, as success in China's enigmatic judicial system is far from guaranteed.

Tesla, for example, was ultimately able to achieve a no-cost settlement, but only after many years of court battles. Pfizer, on the other hand, also spent many years litigating and seeking a settlement, but was never able to win the rights to the Chinese version to its popular drug Viagra (Viagra is better known in China as Wei Ge, which means "Powerful Brother").

The difficulty with the "Famous Marks" doctrine

The "Famous Marks" doctrine is a legal concept wherein well-known brands are protected within a country even if the trademark has not been registered or used there. China has formally recognized this doctrine and now allows foreign companies to apply for "Famous Marks" status for their brand. Once such status is granted, a registration for identical or similar goods may be denied or cancelled. American businesses may be shocked, however, to discover how difficult it is to prove the English version of its brand is famous in China.

According to Australian financial Review, Australian wine-maker Treasury Wines Estates' most popular brand, Penfolds, had been trademarked in this way as "Ben Fu," a transliteration that means "rushing towards prosperity." Now the company is in a legal battle and may incur heavy fines for infringement unless it buys its name back or re-launches in China. Another winemaker, Castel, was ordered by a Chinese court to pay 33.73 million Yuan (almost U.S. $5.5 million) for infringement after a rival winemaking company registered its Chinese name.

Recent Amendments to Chinese Trademark Law

On May 1st of this 2014, China amended its trademark laws with measures that are intended to reduce trademark squatting and infringement. One of the changes is that any application or use of a trademark is expressly required to abide by principles of "good faith." If an entity - such as a manufacturer, distributor or agent - applies for a trademark that is similar to an unregistered trademark owned by a company with whom they have a contractual relationship, the application will now be rejected.

The amendments also include increased penalties for infringement, including an increase in the amount of available damages to around RMB 3 million (about U.S. $500,000), which is about six times the prior limit. The question is if this increase will be enough, as infringers may believe the potential rewards from their misdeeds still outweigh the risks. Further, it remains to be seen how, and to what extent, this "good faith" requirement will be enforced.

Prevention is the Best Cure

The best defense, therefore, is to register one's mark early and prevent trademark squatting from occurring in the first place. Unfortunately, filing across each of China's 45 trademark classes - and many other subclasses - may not be feasible. Unlike the United States, China utilizes "single-class" applications, requiring a separate application and separate fee for each class. Knowing this, a squatter may register an automobile brand in the appliance category, and then proceed to make toasters with a luxury car logo. Further, even if a company could afford to register under each and every category, it might not do any good.

China has established a 3-year limit for non-use, so if the firm does not use its mark during that time, trademark protection in that class will be lost. Companies should therefor only register their mark in the classes where it is foreseeable that it will be used, or where the registration of that mark by another could cause consumer confusion. But, regardless of the type of product they are producing, American businesses should register their brand in the apparel/clothing class. Why? Failure to register in this class will likely result in one's logo appearing on shirts, pants or ties - which is exactly what happened to Hermes and Chivas Regal.

There is a nugget of good news in the new law. The 3-year limit for non-use may help prevent trademark squatting because it also works against the squatters as well. Bad faith filers will no longer be able to register a mark and simply hold onto it indefinitely, waiting for the day the legitimate owner comes to China. But this does not mean that trademark protection has been simplified. Business executives are well advised to seek qualified counsel before attempting to tap into the world's largest market.

CONTRIBUTING AUTHOR

Patrick Soon

Patrick Soon

Patrick Soon is an attorney at WHGC, P.L.C. whose practice focuses on intellectual property. Outside of his work at WHGC, Mr. Soon volunteers for the American Bar Association where he works as an editor and multimedia chair for the Technology for the Litigator Committee within the ABA Section of Litigation. PatrickSoon@WHGCLaw.com.