Trademark Squatting 101

December 1, 2015

This article first appeared in Orange County Lawyer, Vol. 57, No. 12

Despite recent fluctuations, China’s economy continues to outpace that of the United States. This growth is attracting more and more foreign businesses that, understandably, hope to tap into this billion-consumer market. But expanding into the Central Kingdom can be very challenging.

For a firm to succeed in the Chinese marketplace, it must be agile enough to adapt to China’s unique business culture, it must be quick enough to keep up with China’s ever-changing regulations, and it must be strong enough to weather the volatility of China’s financial markets. But, for some companies, the biggest challenge to overcome may simply be holding on to their brand!

A firm that fails to register its trademark with the China Trademark Office (“CTMO”) well in advance of a planned venture into the PRC may be in for a rude awakening. The company may open its doors in China only to discover that someone else already owns their mark. If this happens, a company may find that it will not only be prevented from selling its goods within China, it may also be prevented from exporting them to any other country as well!

Further, customer confidence in the genuine article may be lost if the squatter begins producing inferior goods under the hijacked brand. Such damage may be difficult or impossible to undo; therefore, steps should be taken early on to make sure that such undesirable circumstances never arise. For when it comes to trademark squatting, an ounce of prevention is worth a 10 million RMB cure!

What Exactly Is Trademark Squatting?

Trademark squatting occurs when an individual or business entity registers a trademark (i.e., a name, slogan, symbol, design or any combination thereof) in bad faith ahead of the original owner. The squatter then demands payment for the mark’s return, effectively holding it for ransom.

Such bad faith registration can and does occur in every country, including the U.S., but this practice is facilitated in nations like China that follow a “first-to-file” trademark system.Under such a system, the earliest applicant generally gets the rights to the brand.

The U.S., on the other hand, follows a “use based” trademark system, wherein the rights to a trademark are acquired by priority of use. That is, one may establish rights to a mark by using it in commerce. Federal registration is not even required. However, registering a brand does provide several advantages.

A federally registered trademark serves as constructive notice of the registrant’s ownership of the mark, it allows for the registrant to bring an action concerning the mark in federal court, it can serve as a basis for registration in foreign countries, and it can be filed with U.S. Customs in order to prevent the importation of infringing goods.

And while most people are generally aware of these benefits, many people are apparently unaware that trademark protection is strictly territorial. In a survey conducted by the U.S. Patent and Trademark Office (USPTO), only about 15 percent of small businesses venturing overseas were aware that a U.S. trademark only offers protection in the United States.

The failure to appreciate this fact – and to understand that the rules of the trademark game are very different in countries such as China – can have serious consequences. Just ask companies like Pfizer, Penfolds and Tesla.

Pfizer

Even a pharmaceutical titan like Pfizer can be taken down by trademark trolls. Pfizer failed to register the Chinese transliteration for Viagra, “Weige,” before the rights to this name were acquired by a drug maker in Guangzhou. The damage caused by this misstep is hard to calculate, but it could ultimately be worth hundreds of millions of dollars.

Weige is a Chinese nickname for Pfizer’s peppy purple pill that was coined years ago by the local Chinese media. It is a humorous sounding title that can be loosely translated as “mighty elder brother.” But before you start laughing, consider the market value of a drug brand that is popular with Chinese-speakers all over the world – not just those living in China!

Unfortunately for Pfizer, the realization of the importance of this mark came too late. Pfizer did not attempt to trademark Weige until three months after the name was registered by a local rival. Pfizer did everything it could to wrest away control of this name from the Chinese company, but to no avail. Despite waging a legal battle that spanned 11 years and cost millions, Pfizer’s final appeal was rejected in 2009.

Penfolds

Registered in 1923, Penfolds is one of Australia’s best known trademarks. This popular brand of wine is sold all over the world, but in China it is best known by its Chinese name, “Ben Fu.” Regrettably for Treasury Wines Estates (TWE), the owner of the Penfolds, a Chinese businessman was able to trademark the Ben Fu name ahead of them.

Li Daozhi registered Ben Fu with the CTMO and then began using this name on wines his company sells. Years of litigation have ensued, with both parties alleging infringement. And although TWE, won in the lower courts, the fight is far from over. Li is appealing this decision and is thereby creating a cloud of uncertainty that is scaring away customers. InterContinental Hotels, for example, has said that it will no longer carry Penfolds for fear of being caught up in legal proceedings.

A few years earlier, Li similarly trademarked the Chinese name for French winemaker, Castel. Like TWE, Castel failed to” register the Chinese version of its brand prior to entering China’s market. Li offered to sell the rights to this mark to Castel for one million euros, but the company refused. Li subsequently sued Castel and, in 2012, was awarded 33.73 million yuan (about US5.5 million). And though this fine has since been suspended by China’s Supreme People’s Court, Castel has registered a new Chinese name just in case the lawsuit ultimately sours.

Tesla

In one of the best-known examples of trademark squatting, Chinese businessman Zhan Baosheng successfully trademarked the English name “Tesla.” Not only that, he also successfully registered Tesla’s “T” logo, the unique font Tesla uses in its mark, and a Chinese transliteration of the name Tesla.

Zhan, who has registered the trademarks of several other famous foreign brands, demanded that the electric carmaker close the doors to its showrooms, stop all marketing activities in China, and pay him 23.9 million yuan (about $3.9 million) in damages.

Fortunately for Tesla, it appears that this will be one of the few instances where the original trademark owner wins. China’s Trademark Review and Adjudication Board ruled in favor of the U.S. company in July, 2013. And though Zhan appealed the decision, the parties have settled for an undisclosed amount. But even this victory comes at a price, as it took years of litigation for Tesla to gain the leverage it needed to achieve a reasonable settlement.

My company’s brand has been hijacked. What can we do?

As mentioned above, trademark squatters in China have historically had little difficulty trademarking an established – but unregistered – brand. An opportunist that wins the race to the CTMO can generally register the brand and then wait for the day the original owner shows up in China to conduct business.

When confronted with such a squatter, a business generally has three options: (1) Pay off the squatter, (2) re-name and re-brand or, (3) litigate. But of these three options – none of which is appealing – litigation is likely the least desirable choice.

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

The Famous Marks Doctrine

Many companies mistakenly believe the “Famous Marks” doctrine will afford sufficient protection. Under this concept, well-known brands are supposed to be protected within a country even if the trademark has not been registered or used there. Once a product is granted “Famous Marks” status, registration for identical or similar goods may be denied or cancelled.

But American businesses may be shocked to discover how difficult it is to demonstrate that Chinese consumers clearly associate their brand with their product or company. Neither Pfizer nor TWE were able to successfully invoke such protection.

Reform Measures

In 2014, China amended its trademark laws with measures that, in addition to a 3-year limit for non-use, are intended to reduce trademark squatting and infringement. The first was the addition of a requirement that anyone applying for a trademark is now expressly required to abide by principles of good faith. Thus, if a manufacturer, distributor or agent applies for a trademark that is similar to one owned by a company with whom they have a contractual relationship – even if that trademark is unregistered – the application will now be rejected.

Secondly, the limit for infringing on a trademark has also been increased to around RMB 3 million (about U.S. $500,000), which is about six times the prior penalty. The problem, of course, is that the original trademark owner can also be hit with this increased penalty if they are successfully sued by the trademark squatter.

Conclusion

Clearly, the sooner one registers one’s mark in China the better when it comes to preventing trademark squatting. But even this common sense solution is not as simple as it sounds. China has 45 trademark classes – and many more subclasses – so filing across each of them may not be feasible, especially for smaller companies with limited budgets.

China utilizes “single-class” applications, requiring a separate application and a separate fee for each class. Further, even if a company could afford to register under each and every category and subcategory, it might not do any good. As mentioned above, there is a 3-year limit for non-use, so if the firm does not use its mark during that time, protection in that class will be lost. Squatters know this, so they may register an automobile brand in the appliance category and then make toasters or coffeemakers with a luxury car logo. Therefore, businesses should only register a mark in those classes where it will actually be used.

However, it is always wise to register one’s mark in the apparel & clothing class no matter what one’s product. Otherwise, one may find one’s logo embroidered on shirts, pants or ties all over China!