what we think

China has become a huge market for international consumer goods. Many larger international brands have established their own brick and mortar retail outlets, but even more foreign companies are trying to reach Chinese consumers through the Internet. After all, China’s is the world’s biggest e-commerce market, with no less than 7% of total retail sales (approx. USD 200 billion) being completed online.

Trademark Challenge

One key legal challenge hindering the expansion of successful international brands to China is trademark protection – or lack thereof. The problem can be summarized as follows:

• To protect a trademark in China, it must be registered in China (protection abroad does not translate into protection in China);
• China’s system is based on the first-to-file principle, which means that the party that files first will have priority in obtaining the trademark rights;
• As a result, for mid-sized brands that are new to China, it is very common to find that another party – either a professional trademark squatter or an “entrepreneur” in the same industry – has already obtained the exclusive rights to its brands in China.

Challenges to Sell in China without Trademarks

If another party has registered the trademark, the foreign brand owner will face a number of distinct challenges when selling in China:

• It may not be able to sell its goods on certain online platforms such as Tmall, as these often require proof of ownership of the relevant trademark rights;
• Continued use of the trademark may lead to legal action by the trademark squatter, including injunctions, customs / port seizures, and even civil lawsuits;
• The trademark squatter can freely use the trademark to compete with the foreign brand owner.

Invalidating Bad-faith Trademarks

The best way to prevent trademark squatting is to file for trademarks in China before a trademark squatter has the chance to do so. But if it is already too late, then legal steps will be needed to challenge the bad-faith filing. Trying to invalidate an existing trademark is difficult and can be costly, and will require as much evidence as possible to prove:

• That the trademark was in use in China prior to the bad-faith application, and had gained a certain reputation;
• That the applicant knew of the foreign brand, e.g. because they were in a distributor relationship or there is some other kind of direct link;
• That the foreign brand owner holds the copyright to the trademark; and/or
• That the applicant is a professional trademark squatter, i.e. because it has applied for many other brands as well.

Applications for invalidation based on bad faith are not easy to win, as they place the full burden on the foreign brand owner to prove the bad faith. The good news is that the China Trademark Office (CTMO) and Trademark Review Board (TRAB) are increasingly finding against trademark squatters if some of the conditions above have been met.

If bad faith cannot be proved then the other options are to file an application to cancel the trademark for non-use (if the trademark has been granted for at least three years, but has not been used); try to negotiate for a transfer of the trademark, either directly or through an (anonymous) third party; or come up with a new brand name (including in Chinese characters) for the Chinese market.

New Hope: Michael Jordan to the Rescue

At this point in time, the system remains stacked in favor of bad-faith applicants. The large case-load of the CTMO (more than three million applications in 2016!) and the relatively strict policy standards that it currently applies, make it easier for the CTMO to support existing trademarks than to find against them. However, there is hope. In a recent decision, the Supreme People’s Court found in favor of Michael Jordan in his quest to get the rights to his Chinese name 乔丹, which was first registered by Chinese retailer Qiaodan. By doing so, China’s highest court took a stance against bad-faith registrations, which hopefully may lead to more recognition in the future of the rights of foreign brand owners.