Another Front in China’s Economic War: Senate IP Subcommittee Seeks to Solve USPTO’s Fraudulent Trademarks Problem

Senator Thom Tillis (R-NC) yesterday led a hearing of the Senate Committee on the Judiciary’s Subcommittee on Intellectual Property titled “Fraudulent Trademarks: How They Undermine the Trademark System and Harm American Consumers and Businesses.” The hearing included five witnesses from academia, private practice and the business community who testified on ways to declutter the U.S. trademark register, curb fraudulent trademark filings from China, and improve current mechanisms for enforcing trademarks in U.S. courts, among other topics. All agreed that the U.S. Patent and Trademark Office’s (USPTO’s) August rule change requiring that foreign trademark applicants use U.S. counsel has likely only temporarily helped to ebb the flow of fraudulent filings from China, as bad actors are already adjusting their strategies.

Big Problem

Earlier this year, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property, and the Internet considered the same topic. In that hearing, Mary Boney Denison, Commissioner for Trademarks at the USPTO, told the Subcommittee members that the USPTO is aggressively tackling the problem of inaccurate trademark filings via examiner training, the new requirement that foreign applicants use U.S. attorneys, and better technology solutions for identifying fraudulent specimens, among other efforts. She added that, between 2013 and 2017, there was a 1,200% increase in filings from China and that a Task Force has been formed to identify problems as they arise going forward. However, other witnesses at the hearing said that more was needed, included potential legislation to allow the Office to revoke registrations found to be fraudulent after they have been issued.

Professor Barton Beebe, John M. Desmarais Professor of Intellectual Property Law at New York University School of Law, and co-author of the article, “Are We Running Out of Trademarks? An Empirical Study of Trademark Depletion and Congestion” explained that the surge in fraudulent Chinese filings is particularly problematic in the context of the phenomenon of “trademark depletion” that we’re currently experiencing in the United States. “Trademark law has assumed there is an inexhaustible supply of trademarks, but we’ve reached a stage of economic development in which this is no longer true,” Beebe said. According to Beebe’s research, 89% of the time when we speak American English, we are using a word that has either already been registered as a trademark or is confusingly similar with another already registered mark, and at least 68% of Americans carry a surname for which the same is true.  This makes it already burdensome, particularly for small businesses, to effectively choose unclaimed marks, and the fraudulent trademark surge has aggravated this problem.

Beebe’s research involved selecting a random sample of Chinese applications in Class 25 (apparel) in 2017 and personally studying, with his colleague, each application, then coding them according to indicia of fraud. They found that at least one-quarter of applications contained clearly doctored photos; the ultimate estimate was that two-thirds of the applications filed in 2017 in Class 25 were fraudulent in nature, and yet 60% of those were approved for publication and 39% proceeded to registration, thereby contributing to clutter on the register.

Beebe recommended a mix of reforms to address the problem, including having a specialized team of trademark examiners for different classes of goods in order to more accurately and effectively identify fraud over time. This solution is not part of current proposals on the topic, and was championed by other witnesses as a potential addition to the bill.

Restore Injunctive Relief

Douglas A. Rettew of Finnegan explained to the Subcommittee how fixing the trademark bar’s eBay v. MercExchange problem could help to empower legitimate trademark owners. Like patent owners, trademark owners’ ability to obtain injunctive relief in trademark cases has been gradually eroded since eBay. Prior to 2006, courts recognized that trademarks should enjoy a rebuttable presumption of irreparable harm, but after eBay, some circuits have declined to afford such a presumption while others have continued to recognize it. Rettew said that any legislation on trademark clutter and fraudulent marks should include an amendment codifying that this presumption still exists. “The Supreme Court [in eBay] did not once mention trademarks in the decision and admonished courts not to jettison historical practice,” Rettew said. Restoring the presumption would provide clarity for both litigants and courts and would be balanced by the fact that the presumption is rebuttable, he added. While this would not directly help to curb the USPTO’s fraud problem, it would allow trademark owners to stop infringement and dilution by fraudulent registrants after the fact, in the district courts.

Striking a Balance that Won’t Burden

Megan Bannigan of Debevoise & Plimpton told the Subcommittee members that the standard for proving fraud at the USPTO is currently too high. In the last two years, the Trademark Trial and Appeal Board (TTAB) has only canceled one trademark on the ground of fraud, she said. Lowering the standard to prove fraud could go a long way, but there are inherent risks to doing so, such as making the standard so low that innocent mistakes get flagged as fraud. Bannigan’s proposed solutions included requiring that applicants and registrants submit specimens of use for all goods and services applied for and implementing a more streamlined procedure as an alternative to cancellation or lengthy opposition procedures. The former would be the “most comprehensive” solution, said Bannigan, although she acknowledged that this could be very burdensome.

The effect of the USPTO’s fraud problem on small businesses was addressed by Thomas Williams, Lecturing Fellow at Duke Law School. Williams noted that 99.9% of U.S. businesses are small businesses, representing 60 million jobs in the country. Williams’ students help small business clients to register marks using the USPTO’s tools, but “even when we know a trademark is held by someone else, we can’t know if it’s fraudulent or abandoned,” Williams said. And even when confusing marks are identified, the cost of a rebranding effort might be more than the cost of intentional infringement, putting some small businesses in the position of choosing to infringe. “Trademark issues can be the real straw that breaks the camel’s back,” Rettew said, adding that providing a simplified means of challenging fraudulent or stale trademarks would provide greater certainty for small business owners. “We should be striving to create a system with a focus on fairness and making room for new small businesses to gain the protections they need.”

A Cluttered Register Hurts Big Business Too

The final witness was Stephen Lee, Chief Intellectual Property Counsel at Target Corporation. Unlike Williams, Lee’s client has the financial resources to address the fraud problem, but not the time. Since 2017, Target has introduced more than three dozen new brands; the company is one of the top five filers globally and is the leading filer in the United States. “When a cluttered register blocks [a brand launch], all the time to pivot costs time and expense of millions of dollars,” Lee said. With the opposition and cancellation proceeding timeline of 6-8 months, “we just can’t wait,” he added.

Lee added that the recent decline in fraudulent marks since the U.S. counsel requirement does not necessarily herald a permanent change. “It’s too early to tell,” Lee said. There was a massive spike in fraudulent filings just prior to the rule coming into effect and now there is evidence that the bad actors are adjusting their strategies, Lee added. For instance, practitioners have reported emails asking to use U.S. attorneys’ credentials to file trademarks, and credentials are being used without permission. “We think it’s going to continue, and even if it were to stop, that doesn’t address clutter,” Lee said.

Root Causes? China’s Economic War, Lack of Platform Liability

Senator Chuck Grassley (R-IA) raised the question of China’s motivation for these fraudulent filings, a topic that was also addressed during the House hearing earlier this year. All evidence points to local municipal governments in China being overtly incentivized by the central government to provide proof of economic conduct. Boney Denison said during her House testimony that the surge is in response to an edict of China’s Central Committee about protecting intellectual property, after which regional and local governments began subsidizing fees for Chinese filers of U.S. trademarks, leading to large-scale filings. Beebe and Tillis both noted that China has been waging economic war on the United States on several fronts, and this is one of them.

Senator Richard Blumenthal (D-CT) questioned the role of platforms like Amazon in allowing fraudulent marks and counterfeit products to proliferate, but the panelists were noticeably reluctant to place blame. Lee, whose company recently launched its own online marketplace, Target +, told Blumenthal that Target does not independently vet the many products sold on the platform and instead relies on third parties to report and sellers to comply with its protocols. He added that there have been no reports of counterfeits thus far, partly because the average Target+ price point is low to begin with.

Rettew said that asking the platforms to police products is a difficult issue because it can be a game of whack-a-mole but that “more can always be done.”

Ultimately, the panelists gave the Subcommittee the following solutions to consider in any legislative fix to the fraud problem:

• Create specialized teams of examiners for specific classes of goods and services;
• allow the USPTO Director to reexamine marks on his or her own initiative;
• revise the current proposed language allowing for USPTO expungement of marks to close a loophole that would allow for an extension of time to prove use in commerce;
• codify the rebuttable presumption of irreparable harm in the Lanham Act; and
• require specimens of use for all goods and services applied for, rather than just one.

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