How to Protect Your Business from Trademark Squatters in China

Last year, Michael Jordan finally received a favorable verdict from the Supreme People’s Court in China. The verdict came after a long drawn out legal battle against Qiaodan Sports, a multi- million dollar Chinese sportswear company who was using the Chinese transliteration of Jordan’s name as its registered trademark.

After losing several cases before the lower courts, this victory comes as a huge relief for Jordan as well as many foreign firms doing business in that are similarly plagued by trademark squatters liked Qiaodan.

However, this case goes to show risks of trademark squatting and the rigors of Chinese legal system – even internationally recognized brands like Jordan’s are not safe in China. Other foreign brands – such as Apple, Google, and New Balance– have also faced similar challenges in China and have lost millions of dollars as a consequence.
 
While foreign businesses have gotten better at understanding how to manage their intellectual propertyin China, many fail to anticipate local challenges before entering the market.

What is trademark squatting and why is it common in China?
Trademark squatting is a form of intellectual property rights (IPR) infringement that is especially rampant in China. US firms are typically more vulnerable to trademark squatting in China because unlike the US, China follows the ‘first to file’ systemrather than the ‘first to use’.

US firms are often under the wrong assumption that merely by registering their trademarks in the US, they will be recognized in China as well. However, the Chinese system does not recognize trademarks registered in other jurisdictions and will grant protection only to those who file first in China, regardless of the use or intent to use.
Trademark squatters exploit the difference among the legal systems and register international brands in China anticipating their entry China. Once they enter China, the squatters try to sell them back their own trademark for exorbitant sums to earn profits.

Some trademark squatters even use the reputation of the international brand to establish their own companies and make a profit on the original brand’s value. In these instances, the squatter is registered under the Chinese transliteration of the original brand name, which is effective as most Chinese consumers know the brand by the Chinese transliteration.

To date, Chinese Courts have largely followed the strict interpretation of the statute and ruled in favor of trademark squatters

Establishing ‘bad faith’ registration and ‘well-known brand’ claims before Chinese authorities has proved difficult and expensive. These factors have encouraged trademark squatting and made brand protection in China difficult for foreign firms.

Strategies to protect your foreign trademark in China
Business leaders need to identify the right strategies to protect their trademark in China before entering the Chinese market. Below, we outline preventive and ameliorative strategies.

Early registration
Due to the ‘first to file’ system, the outcome of any trademark dispute primarily hinges on who registered it first in China. Hence, firms anticipating expansion into China should apply for registration at the earliest, particularly as the registration may take considerable time in some cases.

Translate to protect
Registering your brand name as a trademark is more complex in China than in the West. This is because foreign companies often use Chinese transliterations of their original brand name to localize their product to China. For instance, Qiaodan (pronounced “chee-ow dahn”) is the Chinese transliteration of Jordan. In such cases, registering the English name alone is not sufficient and foreign firms must also register their trademarks under the appropriate Chinese transliteration.

In other cases, direct Chinese transliterations may not make sense, and the words need to be tweaked to make sense to consumers. For instance, the Chinese word for Coca-Cola means ‘delicious happiness’. However, this is not a direct transliteration. Rather, Coca-Cola strategically found a descriptive adaptation for its brand that it could promote its products in China by and trademarked this adaptation.
Foreign firms operating in China should ideally invest in finding the right brand name to register their trademark by using a strategic combination of literal translation, phonetic transliteration, and descriptive adaptations. It is definitely advisable to engage the assistance of bilingual experts for this work.

Multiple registrations
Although many foreign firms successfully register their trademarks in China before trademark squatters, they sometimes encounter problems when expanding their products and services. This is because squatters obtain subsequent registrations in other categories and sub-categories and hold firms to ransom by preventing them from expanding their business.

Companies should therefore register under as many categories and sub-categories as financially feasible. Since a single registration may cost as much as RMB 1,000 (US$150) or more for each category, small and medium enterprises should think ahead and register under strategic categories. Even after registering, firms should regularly monitor the trademark register for potential squatting or infringement

Maintain proper records
Companies need to maintain all trademark related documents and other evidence in each office, including overseas offices, to challenge potential trademark squatters’ applications as well as facilitate renewal, cancellation, and alteration.

Prepare for legal battles
Once a squatter has successfully obtained a trademark, it is almost impossible to avoid significant legal expenses. If you chose to initiate legal proceedings, be prepared for a long and expensive battle.

Negotiation and settlement
Given the lengthy, expensive, and often unfavorable adjudicatory process in trademark disputes, it may make more commercial sense to negotiate with the squatter to directly purchasing the trademark from the squatter in an out of court settlement.

In such cases, it is important to not let personal vendetta and ego influence your decision, and instead think rationally from a commercial perspective. It is also advisable to seek help from legal counsel to assess the feasibility of litigation and negotiation.
 
This article was first published on China Briefing.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond.

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