The Trump Administration is Investigating the “Theft of IP” by China: What You Need to Know About Trademarks in China

A couple of weeks ago, the Trump administration formally launched a “Section 301” investigation into the “theft of intellectual property” by China.  According to US Trade Representative Robert Lighthizer, the investigation will “look into Chinese laws, policies, and practices which may be harming American intellectual property rights…”  China is a large market for many American companies, not only for production, but also sales.  Chinese laws and policies with regard to trademarks may be confusing to many, but there are some key concepts to know and consider regarding trademarks in China.

China’s trademark law is based on the concept of “first-to-file”.  Meaning, the first person to file a trademark application for the mark in China with respect to a specific subclass has priority.  The subclass system is something that is peculiar to China.  While China also uses the Nice Class system to classify the goods and services offered under certain trademarks, it also has its own subclass system which is confusing for many.  Essentially, one can register the same mark in the same Nice Class, so long as the goods are listed under different subclasses.  For example, while typically clothing and footwear items are under Class 25, China uses the same Nice Classification, but breaks goods down into sub-classes, such as 2501, 2502, 2503, etc.  Technically, you could obtain a registration for a mark for clothing in subclass 2501 and someone else could obtain a registration for the same exact mark in subclass 2507 for shoes or 2508 for hats in China.  This is often times in conflict with the United States and other countries’ trademark laws who base their priority on who used the mark in commerce first and use a test of “likelihood of confusion” rather than subclasses to establish whether a trademark would be in conflict.

This is often times problematic for established companies who have been using their mark for quite some time but are only now looking to enter China.  Unfortunately, often times, a “squatter” in China will have already filed for the trademark and thus will block the rightful owner from obtaining the registration of their trademark in China.  In most instances, these companies have been using their trademark in the United States and in other countries for quite some time and the squatter who filed for the mark in China is not using the trademark and has no legitimate purpose for filing the trademark other than to hold it ransom for an outrageous sum.  There are methods under Chinese law to fight these squatters, but they are long, complicated and costly.

If a squatter owns a registration for the mark in China, there are two options available—1) to file an invalidation proceeding; or, 2) if the mark has been registered for more than three years and has not been used, a non-use cancellation.  In order to prevail in an invalidation action, one must prove that the mark was applied for in bad faith.  While for many companies that sounds like a simple task, due to the laws in China, it is not.  The party seeking invalidation has the burden of proving that the application was filed for in bad faith and that the squatter knew of the prior trademark.  Thus, one has to prove that they used the mark in China and that it was well known in China prior to the application date of the squatter’s trademark application.  This is often times difficult to prove.  While the mark may have been used online and in other countries, the use has to be targeted towards and been seen in China.  Also, even if the products have been made in China, Chinese courts have been inconsistent in their actions and opinions that “OEM manufacture” constitutes prior use in these proceedings (the law regarding OEM manufacture is still somewhat new, so the courts are still establishing precedent).

If a squatter owns an application for the mark in China, the option is an opposition or to wait for the mark to register and file an invalidation.  Oppositions rely on a similar burden of proof as an invalidation—the opposing party must prove that the mark was applied for in bad faith.  Oppositions are generally not the best avenue to take.  In 2016, only 5% of all oppositions filed in China were successful.  Furthermore, there no longer an avenue to appeal an opposition decision as that was removed by China’s reformed trademark laws.

Often times, the most effective way is to attack a squatter’s mark is to attack the registration on the basis of non-use after it has been registered for more than three years.  The burden of proof is switched to the squatter to prove that they have been using the registered mark on the applied for goods.  In practice, one sees that there is no proof, but in other instances, evidence is fabricated or, while it has not happened very often, there can be actual use.

The aforementioned is a simplistic, brief, overview of the trademark process in China as there are many additional factors and considerations to take into account.

It will be interesting to see what the investigation yields.  However, even if the laws do not change, companies must be prepared when they enter China.  What is a company to do?  At the early stages of the formation of the company, file your trademark in China in all the relevant subclasses.  It may seem overkill, but it’s cheap insurance.  Consult with your intellectual property attorney about formulating a worldwide filing strategy.  If someone already has your mark in China, then consult with counsel that not only has experience, but has relationships in China that can help see you through the process.


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