China is too big a market to ignore, and has become a top global priority for brands. Many foreign brand owners have business in China. Checking the legitimacy of a business partner is important for a successful business in China, and it is equally important to prevent your trademark from being squatted by a local business partner.
Many foreign brand owners do not know the territorial nature of trademark rights. Protection derived from trademarks exists only within the country that has granted the rights. Many foreign brands, particularly some small to medium-sized enterprises (SMEs) do not know that a domestic trademark provides protection within their home countries only. This lack of knowledge about territoriality may cause problems for them.
China adopts the “first to file” principle for its trademark registration system. Unregistered trademarks enjoy very limited or even no protection. Before entering China, a business not having a successful trademark registration, or at least a trademark application, is exposed to high risk.
A typical risk is a trademark being squatted by a familiar “helpful” business partner – your own supplier or distributor in China. The business partner, after “squatting” the trademark, may blackmail you to accept unreasonable or unacceptable terms of agreement. It is often difficult and costly to cancel bad-faith trademarks, particularly if the act of “squatting” happens before any formal agreement is reached, or if the squatting act is not done by the business partner itself, but by a third party that has a hidden relationship with the business partner.
Prevention is the best strategy. Here are some tips to prevent your business partners from squatting your trademarks.
- File trademark application(s) in China as necessary. A foreign brand owner should consider registering trademark(s) in China if: (i) your goods are sold, or services are provided, in China; (ii) your products are manufactured or packed in China; (iii) your research and development centres or facilities are located in China; (iv) your products cross the border of China during shipment; and (v) you have the plan to expand your business to China. The earliest-filed application can triumph over a later application of an identical a similar trademark in respect of identical or similar goods or services.
- Sign a well-drafted agreement with your business partner. The agreement should contain provisions that state clearly: (i) the trademark, including its Chinese equivalent(s), belong to the real trademark owner; (ii) the Chinese business partner may use the mark in China, but will in no way file any competing trademark applications, or take any adverse actions like opposition or invalidation; (iii) limitations of trademark rights on the business partner during the term and after expiration of the agreement; and (iv) limitations are also binding upon the successors, stockholders, directors, officers and employees of the Chinese partner.
- Do not forget to create a Chinese brand name and register it. The registration of a trademark in roman characters does not automatically protect the trademark against the use or registration of the same or similar trademark written in Chinese. Furthermore, if there is no existing Chinese character name for a foreign brand, the local Chinese business partners are likely to register one either by way of translation or by transliteration, and not necessarily with the right connotation or image that you would wish to convey. What is worse, if the Chinese partner has put the Chinese trademark into use and established market identifiability, one day, when the business agreement comes to an end and the Chinese business partner refuses to assign the Chinese mark back, the situation will be troublesome. You will either have to consider a name or trademark change, lose the established market recognition, or risk consumers’ confusion from the Chinese partner’s continued use of that Chinese mark.
- Keep the evidence that can prove the existence of a business relationship with your business partners (e.g. e-mails, purchase orders, contracts, invoices and other documentation). Under article 15 of the China Trademark Law, prohibition against pre-emptive registration by agents or representatives has been extended to cover contractual, business or other relationships. If you have strong evidence, it is quite likely the squatter will be forced to give up the registration and assign it back to you, or at least you can successfully oppose or invalidate the squatted trademark.
It is possible that a business partner may infringe upon the rights of a foreign trademark owner’s trademark, while the simple acts of registering trademarks and preparing a well-drafted intellectual property clause can save you from trouble. The suggested preventative measures are useful when a foreign brand owner plans to expand its business through a Chinese local partner.
Maggie Yang is a partner at Corner Stone & Partners
Corner Stone & Partners
1905, Tower B, Tian Yuan Gang Centre,
No. 2 Dongsanhuan North Road, Chaoyang District,
Beijing 100027, China
Tel: +86 10 8446 4600 (Ext 802)