Foreign enterprises need trademark protection in co-operation contracts

As an important manufacturing and export trading country, China attracts numerous foreign companies and entrepreneurs for business co-operation. If there is no specific agreement on the exercise and protection of trademark rights between the parties in the business co-operation, IP disputes, especially involving trademark piracy, are likely to arise, in the midst or even after the co-operation. In recent years, this author has seen many international enterprises suffer from trademark piracy at the hands of Chinese counterparties in co-operation. Some of these foreign companies found themselves so badly affected by trademark piracy that expanding their business in China proved difficult. To prevent these types of disputes, this author has the following recommendations based on experience and current law.

Register mark promptly

In this author’s experience, there are three main reasons why foreign enterprises suffer from trademark piracy. First, there is lack of awareness of the need for IP protection. This is typical in co-operations with original equipment manufacturers (OEMs), under which circumstances only entrusted production is conducted in China. The foreign enterprises therefore deem it unnecessary to carry out trademark registration in China, leaving their trademarks open to pre-emptive filings by other parties.

Second, they do not recognise the principles of territoriality and the “first to file” rule. Many foreign enterprises have registered their trademarks in their home countries or regions, and some are unaware of the territorial nature of trademark rights. When bringing their brands into China, they do not obtain Chinese registrations, perhaps under the impression that trademark rights can be originally obtained through prior use, while the fact in China is that the exclusive trademark right is obtained through registration.

Finally, they may not notice the uniqueness of China’s classification of similar goods and services, which can result in an inaccurate or incomplete scope of registration. Although China’s classification is based on the classification provided by the World Intellectual Property Organisation, it has its own particular wrinkles. For example, each class is further subdivided into several subclasses, and some goods or services in different paragraphs in the same subclass may not be deemed as similar. If goods or services are not accurately or completely designated at the time of registration, loopholes are created for pirates to take advantage of.

To avoid pirate trademarks registered by others, this author recommends that a local professional firm be engaged, before the brand is introduced into China, to duly carry out a trademark registration assessment and provide a trademark registration and protection strategy, enabling the prompt and comprehensive registration of the trademark.

One more thing deserving attention is the timely registration of the Chinese equivalents of trademarks. Many foreign enterprises overlook the localisation of their trademarks and fail to register their marks in the Chinese language. This can result in the pirate registration of Chinese-equivalent trademarks, making it impossible for them to use the Chinese name for their brand that may already be well recognised in the market, and ultimately driving them, in frustration, to turn to a new Chinese-language trademark.

Sound contract with co-operator

Among trademark pirates or copycats, many once entered into business co-operation with foreign parties to undertake processing, distribution or trade. But in this case, the co-operator files the pirate application of the client’s trademark, knowing that the foreign party’s trademark has not been registered or fully registered in all relevant goods and services in China, and the contract between the parties is silent on trademark-related matters.

If the commercial contract between the parties had well set out IP terms, the pirate problems could have been contained to a certain extent, for if a breach of contract arose, the issue could have been resolved by the contractual terms. Also, the contract is important evidence in a trademark cancellation procedure.

Accordingly, this author recommends that IP terms be added to any commercial contract, expressly stating the content, ownership, method and scope of use of the parties’ IP rights, and preventing one party from applying for or registering the other party’s IP rights including but not limited to trademark, domain name or enterprise name. In case of such a pirate registration, the IP rights in question must be transferred to the other party free of charge, or deregistered in accordance with the contract, and the breaching party should assume corresponding liability for the breach.

Furthermore, a company should pay attention to evidence preservation of such a contract and supporting documents, in case of any dispute when such evidence may be crucial for winning the case.

Once the pirate registration of a trademark has been filed, the affected enterprise should take prompt legal action to recover the rights. In the above-mentioned case that the pirate trademark is already registered by the time the enterprise discovers it, an investigation on trademark use is recommended to find out whether the mark has already been registered for over three years, and whether the trademark has been used on designated goods or services during the past three years. If it was not put into use in the past three years since registration, the affected enterprise may launch a non-use cancellation, and simultaneously file a new application for the mark.

Invalidation procedures

If the pirate trademark has already been put into use, immediate invalidation procedures against the mark are recommended. That is because after registration for five years, a registered trademark can only be invalidated based on the “well known trademark” claim. Given that it is very difficult and there is a heavy burden of proof to meet the requirement of recognising a trademark as well known in China, it is important to discover the pirate trademark and launch invalidation procedures in time.

To well protect clients’ IP rights, it is important to discover the pirate trademark application and registration in time. This author recommends that foreign enterprises engage a professional firm to comprehensively monitor both trademark registrations and the market, in order to discover pirate registrations and infringements, and formulate a timely strategy.

In the end, international business ventures can not only benefit from business co-operation, but also preserve and even increase the value of their brands if they are more familiar with China’s trademark laws and regulations, fully realising the value and importance of trademark registration and formulating a trademark registration and protection strategy.

Tracy Shen is a partner at Chang Tsi & Partners