‘Bad Faith’ Trademark Registration in China

October 30, 2014 Posted by China Briefing Reading Time: 6 minutes

Having decided to formally enter the Chinese market several years ago, electric carmaker Tesla was surprised to discover that they could not register or officially use their trademarked name, as another party had already registered it. Faced with no legal grounds for cancellation, the company was forced into prolonged negotiations to purchase it from the Guangzhou-based business man who had been granted the rights in 2009, or otherwise face the prospect of an entire China rebranding campaign. The RMB 2 million (€250,000) Tesla offered to buy the rights was turned down and eventually, after further negotiation, an undisclosed settlement was reached, presumably far higher than the former offer.

This kind of situation is far from out of the ordinary and while stories of large international companies experiencing this problem are common, cases of small and medium sized businesses facing the same difficulties are even more frequent. Prior trademark registrations, also called ‘bad-faith registrations’, involve a Chinese company first registering the trademark of a foreign company in China with the express intention of selling it back to the foreign company at an inflated price. Discovering that a Chinese company has registered a trademark in bad faith is one of the biggest complaints of European Small and Medium Enterprises (SMEs) trying to enter the Chinese market. These prior registrations can limit the foreign company’s freedom to operate by restricting its ability to enter the China market or even to source goods from China.

A sound knowledge of the instruments available to protect your company’s intellectual property is of utmost importance. It is worth remembering that trademarks not only protect particular products, but also the company’s wider reputation.

What is a trademark?

A trademark is a sign that serves the purpose of identifying the goods or services of a producer, thus allowing the consumers to distinguish goods or services of one producer from those of another. The sign may be composed of words, devices, letters, numerals, three-dimensional signs (shapes), combinations of colors or any combinations of the above.

China follows the ‘first to file’ rule, meaning that the company that first files a trademark application in China owns the rights to the specific trademark. Many European SMEs come to do business in China, only to find out that their mark has already been granted to a Chinese company. So when entering the Chinese market, be sure to register your trademark!

Trademark trading

It is important to note that it is legal for the owner of a registered trademark to sell it. In fact, in China there is an officially approved internet-based platform for selling trademarks, a so-called ‘trademark supermarket’ (http://www.gbicom.cn/). But what happens if a European company finds its trademark on the ‘trademark supermarket’ website in China? Selling a trademark is legal, but what about selling one that has been ‘hijacked’ from its owner – bought or registered in ‘bad faith’?

Under the Trademark Law of China, if any trademarks on the aforementioned website are found to be sold in violation of the law, action can be taken to have those trademarks cancelled, and evidence will be needed to do so. A very basic rule of the trademark law in many countries concerns the use of trademarks. In China a registered trademark must be used within 3 years of being registered in China. One can assume that a significant portion of ‘hijacked trademarks’ are revoked in China because they are not used for three consecutive years. Furthermore, well-known trademarks may be given protection even if they have not been registered in other countries but the criteria for attaining this status are very strict.

In the case of ‘trademark supermarkets,’ defending a trademark in the end always depends on the very specific case/trademark in question. The third party buying a trademark from such a ‘supermarket’ should carefully check its legal background; otherwise they might buy an unusable trademark. The seller of these trademarks should also carefully verify the legal situation of the trademarks sold, as he/she might face high compensation claims.

In China a trademark (except very well-known ones) has practically no protection if it is not registered, and it is difficult to object to an already registered trademark, as this entails a formal, legal process. Nevertheless, companies should at least try to defend their rights against ‘hijacked trademarks’ in China rather than simply accepting the infringement. A specialized lawyer should analyze each case to determine whether its merits are strong enough to justify defense. It will also be necessary to collect evidence specific to each case and compile a dossier detailing the information gathered on each trademark, including details of the member’s trademark such as its current registration status, whether it is registered in China, the extent to which the member’s trademark is used in China (if it is used on goods or products manufactured or sold there), and any information on the registration of the offending trademark.

The take-away: steps to take to protect yourself

It is important to register broadly in China – in other words, don’t just consider the immediate ‘class’ (type of good) of the product to be sold, but consider whether the same trademark could be used for related items or for packaging, advertising or even merchandising. Furthermore, Chinese consumers are likely to find a Chinese name for foreign trademarks so it is a good idea to also register a local language version. Take steps to register any key trademarks and logos as soon as possible, and seek the advice of a lawyer or trademark agent to ensure adequate protection in related or other relevant classes.

About Us

The China IPR SME Helpdesk is a European Union co-funded project that provides free, practical, business advice relating to China IPR to European SMEs. To learn about any aspect of intellectual property rights in China, visit our online portal at www.china-iprhelpdesk.eu. For free expert advice on China IPR for your business, e-mail your questions to: question@china-iprhelpdesk.eu. You will receive a reply from one of the Helpdesk experts within seven working days. The China IPR SME Helpdesk is jointly implemented by DEVELOPMENT Solutions and the European Union Chamber of Commerce in China.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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