Foreign Trademarks in China: Why Registering for One is Necessary
The current court battles between Apple and Proview Technology Shenzhen over the iPad trademark in China certainly have heightened the general awareness in the U.S. business community of the importance of obtaining full and comprehensive trademark protections in China. While the iPad controversy focuses on whether Apple obtained the proper trademark registration for the sale of their product in China, many of the U.S. businesses that we advise are confronted with a unique and challenging trademark issue that U.S. companies face when engaging in the common business practice of sourcing from China, or Original Equipment Manufacturing, often referred to as OEM. This is an area where even the most prudent and prepared business person may not fully appreciate the significant trademark infringement risk of doing business in China.
Sourcing, or OEM, refers to a business model where a U.S. product owner engages a Chinese-based manufacturer to manufacture products labeled under the trademark or brand owned by the U.S. product owner. A typical commercial relationship is where all of the OEM products are exported out of China to the product owner’s home country (the U.S.) and distribution market (Europe, for example). In China, such a model is also referred to as “label manufacturing” or “label processing.” The business complication arises where a third party becomes the first to register the overseas trademark(s) in mainland China. In such an instance, the product owner and manufacturer are both at risk of possible trademark infringement liability in China. As will be explored in this article, the courts in China are not uniform in recognizing a precise legal standard for trademark infringement in the OEM setting. The article will also evaluate several critical features of Chinese trademark laws particularly relevant for U.S. companies doing business in China.
China’s “First to File” Registration System
In order for a foreign business to assert trademark rights in China, the first and most important step to take is to register the specific trademark. China recognizes a “first to file” system, which generally means that the trademark right belongs to the first person who properly registers the mark in China. Unlike the United States, in China there is no prior-use or intent-to-use requirement needed before registering a trademark nor are common law rights recognized. In other words, any party, whether or not it intends to use the mark in the stream of commerce, may register a trademark in China.
Additionally, unless the mark is well-known, China law provides little protection for U.S. companies that properly register their marks in the U.S. and use their marks or brand in commerce for a significant period of time, yet fail to properly register their trademarks in China. It is not uncommon for a Chinese party to register a trademark because it anticipates that the U.S. owner of that trademark may one day use the trademark in China. In this way, the Chinese party positions itself for an infringement claim against the U.S. owner, seeking financial gain by way of a settlement that could include a license with royalties or transfer of the mark to the U.S. owner for a price.
Trademark Registrant’s Rights
Once a trademark is registered in China, the trademark registrant has the right to sue the domestic manufacturer or the U.S. owner of the OEM products, or both, for trademark infringement if the OEM products (or packaging) include the same or a similar mark, even if such products are not being sold in China. In such cases the trademark registrant has the right to seek monetary damages, injunctive relief and reasonable attorney fees. This can be the case even if the holder of the China trademark is not actively engaged in business with such mark.
Further, even if a U.S. company is merely sourcing from China and has been using its foreign trademark for some time, its products may be held at the China port of exit if the trademark is first registered by a third party (typically China-based) and that party records its trademark rights with the Chinese Customs Office. Once the trademark owner records its right with the Customs Office, the owner will enjoy protection at over 300 Chinese ports. The local Customs Office will inform the trademark owner or its agent when it finds suspected infringing goods, and will detain the goods and stop the shipment at the border.
Because of China’s first-to-file registration system, the “prior-use” defense is generally not available under Chinese law. However, whether the Chinese trademark registrant has used the mark is one of the circumstances the court may consider in assessing the penalty of the infringement. If the registered mark in China has not been put into commercial use, injunctive relief is the primary remedy and the court may award the registrant reasonable costs and fees in defending the trademark rights. Further, based on the review of available case law decided by Chinese courts addressing this issue, if the registrant or licensee does not have the intent to use the mark or has not used the mark for three consecutive years, but has instead acquired the mark for the sole purpose of asserting a claim, the court will generally not award monetary damages.
As mentioned above, both the manufacturer and the U.S. product owner could be found jointly liable for trademark infringement in an OEM setting if the third party claimant obtained the trademark or brand in China. Article 52 of China’s Trademark Law states that without the permission of the trademark owner in China, the use of marks similar or identical to the registered trademark, on the same type of commodity or similar commodities, is actionable trademark infringement. Although OEM trademark infringement scenarios generally fall under Article 52, the legal community in China continues to debate how Article 52 should be interpreted and under what circumstances a court should impose liability. Furthermore, the challenge under the current law is compounded by the fact that the terms “use” and “commodity” are not defined under Article 52 or under related statues and rules.
The major defense for not considering OEM products infringing trademark rights is the legal argument that the term “use” as referenced under Article 52 should not be interpreted to include simple labeling activity for export, and the term “commodities” should not include those manufactured goods that are not expected to and do not enter the marketing and sales channels in China. Additionally, many legal commentaries argue that as long as the manufacturer does not advertise, exhibit, sell or involve any other commercial activities targeted at the domestic market, there should be no trademark infringement. The arguments in favor of this position include: (i) that products intended for export do not cause trademark confusion in the Chinese market, and (ii) no damage is inflicted on the Chinese trademark owner if the products are sold outside the country. Proponents of this interpretation contend that in an OEM setting, the manufacturer does not intend to profit for sale of products in China. Instead, it only receives compensation for its labor and costs in manufacturing the goods. Therefore, they argue, the labeled products intending for export only should not be considered commodities as referenced in the statute, and such labeling should not be considered as trademark infringement for purpose of Article 52 of the Trademark Law.
Uncertainty of the Courts’ Decisions
As a result of the lack of clarity under Article 52 of the China Trademark Law, the local and provincial courts in practice have issued inconsistent rulings on this issue. Since most OEM activity occurs in the coastal cities and southern regions of China, courts in Beijing, Shanghai and Guang Dong Province are currently the most experienced in trademark dispute litigation. The decisions from other cities and regions are quite inconsistent in the approach and interpretation taken by those courts. It is not uncommon that local and appellate courts in the same municipality will issue conflicting decisions on this critical legal issue. Even the appellate courts of some regions will issue contradictory opinions on the same issue. Since China’s judiciary is not a common law system that places controlling precedential value on prior opinions, the current state of the law is unpredictable as court rulings in this area are not always a reliable indicator of how a future court will rule.
“The Best Protection is Prevention”
In sum: (i) China is a “first-to-file” country, (ii) prior use of an unregistered mark affords little or no protection, and (iii) it is not mandatory for courts to follow judicial precedents that are well reasoned from coastal city courts with the most experience in dealing with trademark infringement cases. Therefore, we highly recommend that any U.S. company doing business in China, even if it is just sourcing from the country, register its trademark in China as soon as it is practicable. Additionally, after the mark is approved by the Trademark Office in China, the U.S. company should record the trademark right with the Chinese Customs Office and remain proactive and aggressive in defending any potential trademark infringement.
It is also advisable that before doing business in China under a particular mark, the U.S. company should conduct a trademark search so that the company is aware of any prior, similar or identical use or registration and work with counsel to confirm whether the mark creates a conflict with existing filings and to develop an appropriate strategy before investing in production under the mark at issue. This advice is also consistent with the lesson stemming from the Apple case: do your due diligence and take all reasonable efforts to acquire full and comprehensive trademark rights before doing business in China.
For additional information regarding our China Practice, please contact Gary Biehn (215.864.7007 or firstname.lastname@example.org) or Chunsheng (Tony) Lu (215.864.7006 or email@example.com). For additional information regarding our Intellectual Property Practice, please contact Randy Friedberg (212.714.3079 or firstname.lastname@example.org).