Why protecting your trademarks is a top priority for doing business in China.

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Protecting your trademarks in China can be tricky, mainly where legal provisions differ from those in your legal environment. But this does not mean that you should refrain from bringing your trademarks to China.

When evaluating the opportunities for doing business in China, most entrepreneurs are more or less aware of the fact that the company’s intellectual property rights (IPR) will be exposed to an unstable legal environment that undergoes considerable changes to this day.

One may find that the level of legal protection offered to IPR in case a dispute arises is different from—and, admittedly, in some instances not entirely on par with—the standard of your jurisdiction. The stories where an “innocent” western company had its trademarks infringed upon in China and consequently learned its lesson the hard way, are all too familiar in western news headlines. Hence, brand owners must consider the available legal options available to pre-emotively strengthen positions and therefore optimise the opportunity to defend IPR from would-be competitors and IPR pirates.

Ultimately, not only does trademark infringement cause financial losses to the trademark owner, but the entire reputation of a brand could be severely damaged due to the low quality of ubiquitous and inferior counterfeits sold in China for a lower price. Or whenever the infringer engages in competitive business but delivers a low level of service quality, respectively.

As unbelievable as it may sound that a consumer would expect cheap counterfeits to match the original product in terms of quality, many examples prove otherwise. In one case, several enraged Chinese consumers contacted the hotline of a foreign manufacturer of golf clubs to make use of “their” warranty after their product broke after just a few months of use. Unbeknownst to the consumers, however, they had purchased inferior counterfeit products.

It is irrelevant if this disappointment goes on account of the consumers’ ignorance – the reputation of the brand suffers nonetheless, and the loser is the trademarks’ owner. It goes without saying that in an even worse scenario, sub-standard fake products like food, beverages and pharmaceuticals may even be harmful to the consumer’s health.

Together with the economic growth, middle-class Chinese consumers have developed certain expectations in terms of product quality, not to mention a level of brand consciousness which is at least on par with, if not exceeding, their Western counterparts. Consequently, protecting the image of your products and services by registering your trademarks is one of the critical aspects to success in the Chinese market.

Registering your trademarks in China

The first step to prevent competitors and counterfeiters from illegally using your trademarks is to identify the trademarks relevant for your business activities and register them in China to secure the exclusive rights.

China, as a member of the WTO, is obligated to ensure that applicable Chinese laws comply with the TRIPS agreement. Furthermore, China has signed several treaties on the international protection of IPR with the World Intellectual Property Organization (WIPO).

However, trademarks registered in one member state are not recognized by another member state. China applies a ‘first-to-file system’: the owner of the trademark shall be the first (legal) person to file its application with the Trademark Office of the State Administration for Industry and Commerce (SAIC). Upon approval, the owner of the trademark enjoys exclusive usage rights in the respective trademark class applied for, and they can enjoin other parties from violation of their rights.

In other words, only the owner of a trademark registered in China can institute administrative or legal enforcement actions against the violator.

This system has led to many cases where the ’rightful’ owner of the trademark found that another individual or entity had already registered their trademark in China.

In that case, the trademark’s owner in other jurisdictions may be prevented from using this trademark in China! Suppose you find yourself in such a scenario. In that case, you should immediately consult your lawyer to discuss whether an appeal with the Trademark Review and Adjudication Board (TRAB) can successfully reclaim your rights.

Besides the registration of the internationally used trademark, an appropriate Chinese translation should be considered, and the application must be filed separately. There are two different approaches to this task:

One possibility is to translate the meaning of the trademark (e.g., Germany’s Volkswagen translates directly to the Chinese equivalent of ‘Da Zhong Qi Che’), while the other is to make a phonetic transcription, preferably with a positive Chinese connotation (e.g. Coca Cola translates to ‘Ke Kou Ke Le’, roughly meaning “delicious and joyful”).

While this procedure may be uncommon or unheard of in Western countries (as usually the same brand name in roman letters is registered as a trademark), it can help to positively influence the image of the trademark, especially when a smart and elegant translation is created to appeal to the Chinese customer.

Moreover, considering that most Chinese consumers (and managers of companies, where the product or service is sold to businesses) do not speak English, it is perhaps not surprising that most foreign brands in China are known by their Chinese names – which therefore should be protected.

Navigation through the broad scope of enforcement methods in China requires knowledge and a sense for the reasonableness of means

Unfortunately, even registered trademarks are far from being safe from infringement. As one marketing expert put it, if your product is not being counterfeited in China, you did a lousy job. Enforcement may be unavoidable depending on the individual case and if the infringement interferes with the company’s business interest.

Several channels can be employed to protect trademarks and IPR in general in China, but which enforcement method is the most suitable for the case highly depends on the risks associated with it, as well as on the infringement and the opponent.

Sometimes the infringement will not inflict real losses to the rights-holder (e.g. when upscale counterfeit commodities are sold on streets and markets in underdeveloped regions with no target market for the product), and it should be deliberated about whether the extent of infringement is worth any legal action.

Not least factors like local protection and corruption of authorities should not be underestimated in the whole process. However, when the infringement directly competes with the plaintiff’s business or the reputation of the trademark may suffer, the situation is different. Therefore it is always inevitable to evaluate the case with a competent legal expert.

Trademark protection – enforcement methods demand letters

Preparing a demand letter with your lawyer sends a signal to the infringer that you are determined to take legal steps if they fail to cease the act of violation immediately. Depending on the circumstances, the infringer may conclude that the illegal business activities are not worth the struggle with courts and legal expenses as well as the publicity of the trial. On the other hand, a demand letter has no legal force. On the contrary, in some cases, it may even complicate the collection of evidence for a civil action since the infringer has been given enough time to “miraculously” let the evidence disappear.

Customs

The General Administration of Customs (GAC) offers two methods of protection from the import and export of fake commodities: A trademark owner may request the GAC to retain a shipment if the products to be shipped are suspected of violating IPR. A security deposit and relevant documents proving the applicant to be the rightful owner of the trademark must be submitted to customs. If it is determined that its IPR have indeed been infringed upon, Chinese law provides for seizure and destruction of the merchandise.

Alternatively, you may preemptively register and submit relevant information regarding the IPR to be protected with Chinese customs. Under this condition, customs officials can hold back shipments of counterfeit goods during spot checks, and report to the trademark owner who can then prepare for action. Therefore it is always advisable to register the trademarks with the GAC, as it simplifies the examination procedures and is the best way to circumcise export of counterfeit goods out of China.

Administrative authorities

In China, the holder of rights can apply to administrative authorities to carry out raids to confiscate counterfeits. Several different authorities are entitled to perform raids and seizures, depending on the kind of IPR involved.

If this method is considered, legal counsel should be retained to determine which administrative authority should be contacted, and to coordinate with such authority to ensure optimum results. Raids are arranged relatively quickly and can lead to quick results (i.e., immediate seizure of fake goods, destruction of equipment used to produce counterfeits, and imposition of a fine).

In some cases, however, the fines may be insufficient to de-motivate the infringers, in which case administrative actions will be inadequate as an effective long-term deterrent. Moreover, the plaintiff will neither achieve any compensation for the damages suffered nor for the legal and enforcement fees, as the imposed fines are administrative only. However, an administrative action is easy and fast to arrange to take immediate action. It can serve as a good and safe way to secure inculcator evidence, which then can be used in litigation.

Civil action

Another way to combat trademark infringement is to institute legal proceedings with the people’s courts. While some western companies may be reluctant to rely on the reasoning and impartiality of Chinese courts, it should be noted that China established special IPR tribunals in most of the higher people’s courts and the developed, wealthier regions.

Nonetheless, litigation demands for careful preparation, as the burden of proof lies on the plaintiff, and the legal system does not provide for discovery. Therefore it is essential to gather and provide the proper evidence and documentation such as notarised samples of the counterfeit products (oral testimonies are generally not sufficient). If the plaintiff wins the case, the compensation awarded is usually low compared to western standards.

Compensation is solely related to the losses suffered from the infringing act, while the imposition of punitive damages as an effective deterrent is unknown in Chinese law. Moreover, it is usually challenging to prove for the plaintiff to deliver an accurate estimation of the suffered damages. In this case, the Chinese court may impose a sum that it considers reasonable, and within a statutory limit of RMB 500,000 for trademark infringement.

In rare cases, the courts may evoke the infringer’s business license, but this probably does not impress a smaller company that does not have to worry about its reputation. Sometimes, the infringers just set up another business next door and continue with the infringement.

For a company of a decent size or with other business activities (besides the infringing ones) though, this could cause considerable damage. In any case, even though many foreign companies may find the statutory compensation to be insufficient concerning the scope of infringement, it should be noted that it may be deterrent enough to hamper the infringer’s activities since they often operate on a small scale.

Furthermore, it is possible to identify the infringer’s assets and bank accounts and then apply the court to freeze them while simultaneously filing the lawsuit. This makes sure the infringer does not have the chance to transfer their assets to defy any order from the court, and thus increases the likelihood that the plaintiff receives some compensation.

Criminal action

Criminal complaints should be filed with the Public Security Bureau (PSB). At least, in theory, the PSB then reports all criminally relevant cases for prosecution to the people’s courts. As powerful a deterrent a criminal suit may be (the maximum penalty for the unauthorised use of registered trademarks in severe cases amounts to 7 years imprisonment), the current liability thresholds for criminal prosecution are subject to harsh international critics.

The criminal liability thresholds are calculated on a base of illegal turnover and income. However, due to the high thresholds and the significantly low prices of counterfeit goods, criminal relevance is seldom given. Nevertheless, successful criminal action is gratifying and provides for the most robust deterrence, as in many cases infringers not only may be sentenced to up to three years in prison or be fined, but the holder of rights also can simultaneously file a civil lawsuit to obtain compensation.

Conclusion

Branding becomes increasingly essential in the world’s biggest consumer market, and one must make use of all available legal means to prevent others from illegal use of your property, the consequences of which could severely damage your brand’s reputation. To achieve the best possible degree of protection, you should register trademarks with the Chinese authorities as early as possible, and ideally BEFORE you intend to enter the Chinese market.

Why protecting your trademarks is a top priority for doing business in China

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