The Long and Winding Road of IPR Protection in China

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By Mary Field

SHANGHAI — A sign at the entrance to the Han City Market in downtown Shanghai reads: “Enhance the protection of intellectual property rights to legitimize and standardize the order of the market economy.” The irony of the message is obvious to anyone who has set foot inside Han City, better known as “the Fake Market,” where the majority of goods on sale are counterfeit, including everything from Longchamp handbags, to Apple accessories, to OPI nail polish. Markets like Han City are emblematic of the issues faced by international brands in China, which remains the largest manufacturer of counterfeit goods worldwide.

The tools used by China for the protection of intellectual property are the same as in most other countries—patents, copyright, and trademarks—but their effectiveness has historically failed to inspire confidence among foreign investors.  This is poised to change, however, in light of China’s new Trademark Law (in effect since May 1, 2014), which has streamlined trademark application procedures, expanded the scope of trademarks and improved the opposition procedure.

As the recent case of U.S.-based electric car manufacturer Tesla Motors illustrates, there are still hurdles to jump for multinational companies to effectively manage their intellectual property (especially trademarks) in China. As a result, optimism amongst foreign businesses regarding trademark protection in China has recently taken two steps forward and one step back.

When to File

Trademark registration in China is governed by a “first to file” system. This principle was behind a recent case in which Chinese businessman Zhan Baosheng sued Tesla Motors for use of the name “Tesla” (特斯拉in Chinese)—which Zhan claimed he had registered in China in 2006.  While the case has recently been settled “completely and amicably” according to reports, it was certainly a headache that the automaker could have done without.

Riccardo Benussi of Dezan Shira & Associates offered this advice for trademark registration in China, “Ideally companies should register their trademarks before they enter the China market; in fact, a company should file its trademarks here as soon as they actively plan to distribute in China, work with Chinese partners, engage in global promotion or attend trade fairs with the brand.”

As more and more companies realize the need to curb IP risk in China, the number of trademarks filed in country has been rapidly increasing. Nearly two million applications were filed in 2013, a more than 14 percent increase on a year-on-year basis. By the end of 2013, a total of 8,652,358 trademarks had been registered in China—an impressive figure for a country whose Trademark Law has only been in place since 1982.

“While other countries enjoyed the luxury of maturing over more than a century of amendments and sophisticated case law, China has been catching up in as little as thirty to thirty-five years,” added Benussi. This achievement of progressing from virtually no IP protection at mid-century, however, has been marred by China’s checkered history of IP enforcement—itself the outcome of a broad and difficult-to-control market, combined with insufficient resources, widespread protectionism and a shortage of competent judges.

How to File

Trademark applications in China must be filed with the Trademark Office (TMO) at the State Administration for Industry and Commerce (SAIC) in Beijing. Foreign companies will need to hire an authorized trademark agency to apply on their behalf.  Benussi explained, “There are numerous issues such as the subclasses to protect the mark in, that are singular to the Chinese trademark system, that can put the entire extension to China process on hold for months or years and is not necessarily envisaged in the ‘click & file’ registration process offered by the international trademark filing system through WIPO.”

The process for registering a trademark in China is not as quick and painless as many foreign investors might prefer. Companies eyeing the Chinese consumer from their home shores need to take into account the lengthy timeline of the filing process when planning their China entry strategies. In the case of Tesla, the company delivered its first automobiles to Chinese customers in April, five years after the “Tesla” trademark was granted to Zhan Baosheng in 2009.

Continued growth in the Chinese economy has made the market too big for most multinational companies to ignore. Meanwhile, the country’s trademark system means that many discover they are too late to the game despite even the best of market entry strategies.

What Can Go Wrong

Problems in bringing an international trademark into China can arise either during the filing procedure or through the market reception of the trademark name. The new Trademark Law, which went into effect on May 1, 2014, has made it more difficult to preemptively file in bad faith (aka “trademark squatting”). According to Benussi, however, “[there are still] people who have made a profession of keeping an eye on what is a success abroad and filing their trademarks here.”

Many international companies mistakenly believe that filing their trademarks through the WIPO will be sufficient protection for when they choose to enter the China market. A client of Dezan Shira & Associates, for example, had done just that and thought that they would be covered internationally. In fact, the client’s trademark was only “partially approved” by the Chinese authorities. When the firm looked into the matter, it was discovered that a European shell company had filed a very similar trademark name several years prior. Fortunately for the client, the European company now appears defunct, allowing for the cancellation of the impeding claim.

For other companies whose trademark filing is only “partially approved,” Benussi recommends, “the time to take action is now, not when [the company] actually enters the China market.” However, there are caveats to an early filing: “Too early a filing could harm the business in China instead of favoring it: as in other jurisdictions, the Chinese Trademark Law allows for a cancellation for non-use if the trademark is not used for three consecutive years.”

How to Enforce

Trademark protection in China can be pursued through two tracks: administrative and judicial. Administrative action against trademark infringement is enforced by the state and local iterations of the Administration for Industry and Commerce (AIC). The SAIC is empowered to conduct raids, seize goods and business licenses, destroy infringing goods, and impose fines on violators.

If the applicant is seeking compensation, however, this must be brought to the courts. Choosing the jurisdiction where the goods in question are sold is usually more effective than the area of manufacture, where courts are more likely to side with the defendant.Foreign companies who wish to do business in China should be aware that compared with the U.S. and Europe, damages awarded for trademark infringements tend to be much lower.

However, the new law now provides for a six-fold increase in statutory damages of up to RMB 3 million in the event that the compensation criterion cannot be satisfied. For American and European companies accustomed to strong protection for trademarks and high awards in the event of infringement, this figure might not bring much comfort.

Optimism for Intellectual Property Protection

While recently Chinese law has certainly made strides to do more to protect intellectual property, the experience of Tesla Motors indicates that it still pays to register trademarks early. There remains a large gap between the intellectual property protection that international companies enjoy in their home markets versus in China.

The good news is there are plenty of available resources to assist foreign investors, including tailor-made strategies offered by the IP experts of Dezan Shira & Associates. Meanwhile, the increasingly sophisticated Chinese consumer now buying premium electric cars, will be less and less willing to tolerate fake products. As proof in point, on a typical day, Han City Market in Shanghai is filled with foreign tourists, rather than locals, picking up knock-off handbags and phone accessories which read: “Designed by Abble in California.”

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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