Know the Risks Before Licensing Unregistered Trademarks in China
Nov. 1, 2019
Despite the tough talk in Washington D.C., the ability to expand your business internationally to countries such as China is exciting. But what are the steps? How do you do it and what are the issues? Some of the most common starting points include contracting an advertisement agency to run a $2 million marketing campaign on WeChat, opening an online store at JD or TMALL, and/or finding a retailer/distributor to sell your products in exchange for a percentage of each sale.
But here’s the main question: What if your trademark is not registered in China?
Questions to Consider
Here are some examples: Elizabeth owns a jewelry brand in New York, and Jake’s company is the number one brand for drones. Both have registered their trademarks in the United States and Europe but not in China; the trademarks are either taken by a third party or it would take at least six months to know if they have a prayer to get it registered in China. Business cannot afford to wait. China’s retail giant, Mr. Chester, is ready to set up their flagship online stores at JD.com, TMall.com as well as physical stores in department stores in Shanghai and Beijing. Piles of money are almost ready to hit Elizabeth’s and Jake’s bank accounts and then someone asks this question: “We don’t have a trademark registered in China. Is that a problem?”
Is it legal?
The good news here is the answer is mostly yes. There used to be some fraud concerns, but the law has since settled: the governing contract and trademark laws in China do not prohibit licensing of a trademark even if it’s unregistered. This principle also has the China Supreme Court’s backing, as it has confirmed such contracts are valid and enforceable. There are some exceptions, however. For example, in the franchise context involving multiple stores in operation in China for longer than one year, a China registered trademark is a prerequisite in order for the underlying franchise agreement to be recordable with the Ministry of Commerce.
What Are the Legal and Business Risks?
Despite the fact that a situation may be legal, it does not mean it’s risk-free or makes much business sense. Below are some common risks that a business could face in a situation like this:
In less than a month after the products hit the shelf, some third parties would have filed the trademark—yes, your trademark—with China’s Intellectual Property Office. The question is not if, but when, because brand pirating is almost inevitable in Asia, especially in countries like China or Indonesia. This presents an enormous challenge, as well as a drain of financial resources to get the mark back because China is mostly a first-to-file jurisdiction. In other words, it rarely matters that Elizabeth is the one creating her unique logo for her jewelry and has been using it for the past 20 years. If Mr. Chester’s employee, Joseph, files first and gets the trademark through, Joseph is then the trademark owner under the Chinese law (in fact, under most Asian law). There are certainly ways Elizabeth could get the trademark back but it’s not an inexpensive process.
Here’s another problem: When Joseph becomes the trademark owner of Elizabeth’s brand, legal as well as business risks escalate. Joseph could threaten legal actions to cause China law enforcement to take Elizabeth’s shiny items off the shelf unless a ransom payment is made first (and the payment is never small). Similarly, without the protection of a locally registered trademark in China, Jake could face threats that his drones would be “removed” from his popular Alibaba or TMALL online stores because he could not prove—under Chinese law—that he is the trademark owner (note: a U.S. trademark registration bearing Jake or his company’s name does not help in the retail situation in China).
There could also be contractual risks. In the agreement with Chester, both Jake and Elizabeth confirm: (a) they are the owner of their respective trademark and their rights do not violate any third party’s rights; (b) they will indemnify Chester—the licensee, the distributor, the retailer, the local business partner in China, and/or the online platforms—in situations such rights are being challenged. But the reality is that under Chinese law, neither Jake nor Elizabeth is the owner of their respective mark, Joseph is. Therefore, Jake and Elizabeth’s hands are tied, so to speak. They are required to hold their Chinese vendors and partners harmless in situations where Joseph, the legal trademark owner, brings raid actions and/or lawsuits.
What to Do Then?
Granted, not all licensing of unregistered trademarks in China will expose one’s business to legal nightmares. The business might still be okay, as long as the underlying brand is famous—in China’s legal jargon, a “well-known trademark”. But here is the ‘gotcha’: not every brand is BMW or CHANEL. And the cost to prove a brand is “well-known” in China is at least ten times the original filing cost.
The ideal situation is to get the IP rights secured before entering China. It should not be a surprise that China, as well as other countries in the world, has an entirely different set of legal rules with fundamental system differences between Asian law and western law. In fact, the U.S. trademark practice is an exception to the international law because the United States recognizes a brand owner’s rights by simply using the mark; that’s not how most countries in the world—certainly not in Asia—play in the trademark sandbox. In the event you find yourself doing business in China (or Indonesia, Singapore, Thailand, etc.) without local trademark protection, the second-best remedy is to expedite the registration process with the local trademark office. If all else fails, business should be sensitive to the local laws and make sure to “chinatize” an agreement so that the business does not give a blanket guarantee for its trademark and/or patent rights.
As the familiar saying goes, “When in Rome, do as the Romans do.” While businesses do not necessarily need to do as the Chinese do, at least be familiar with the legal rules and play smart!