By Srinivas Raman
Last year, Michael Jordan finally received a favorable verdict from the Supreme People’s Court in China. The verdict came after a long drawn out legal battle against Qiaodan Sports, a multi- million dollar Chinese sportswear company who was using the Chinese transliteration of Jordan’s name as its registered trademark.
After losing several cases before the lower courts, this victory comes as a huge relief for Jordan as well as many foreign firms doing business in that are similarly plagued by trademark squatters liked Qiaodan.
However, this case goes to show risks of trademark squatting and the rigors of Chinese legal system – even internationally recognized brands like Jordan’s are not safe in China. Other foreign brands – such as Apple, Google, and New Balance – have also faced similar challenges in China and have lost millions of dollars as a consequence.
While foreign businesses have gotten better at understanding how to manage their intellectual property in China, many fail to anticipate local challenges before entering the market.
RELATED: Intellectual Property in China’s Food & Beverage Industry
What is trademark squatting and why is it common in China?
Trademark squatting is a form of intellectual property rights (IPR) infringement that is especially rampant in China. US firms are typically more vulnerable to trademark squatting in China because unlike the US, China follows the ‘first to file’ system rather than the ‘first to use’.
US firms are often under the wrong assumption that merely by registering their trademarks in the US, they will be recognized in China as well. However, the Chinese system does not recognize trademarks registered in other jurisdictions and will grant protection only to those who file first in China, regardless of the use or intent to use.
Trademark squatters exploit the difference among the legal systems and register international brands in China anticipating their entry China. Once they enter China, the squatters try to sell them back their own trademark for exorbitant sums to earn profits.
Some trademark squatters even use the reputation of the international brand to establish their own companies and make a profit on the original brand’s value. In these instances, the squatter is registered under the Chinese transliteration of the original brand name, which is effective as most Chinese consumers know the brand by the Chinese transliteration.
To date, Chinese Courts have largely followed the strict interpretation of the statute and ruled in favor of trademark squatters
Establishing ‘bad faith’ registration and ‘well-known brand’ claims before Chinese authorities has proved difficult and expensive. These factors have encouraged trademark squatting and made brand protection in China difficult for foreign firms.
Strategies to protect your foreign trademark in China
Business leaders need to identify the right strategies to protect their trademark in China before entering the Chinese market. Below, we outline preventive and ameliorative strategies.
Due to the ‘first to file’ system, the outcome of any trademark dispute primarily hinges on who registered it first in China. Hence, firms anticipating expansion into China should apply for registration at the earliest, particularly as the registration may take considerable time in some cases.
Translate to protect
Registering your brand name as a trademark is more complex in China than in the West. This is because foreign companies often use Chinese transliterations of their original brand name to localize their product to China. For instance, Qiaodan (pronounced “chee-ow dahn”) is the Chinese transliteration of Jordan. In such cases, registering the English name alone is not sufficient and foreign firms must also register their trademarks under the appropriate Chinese transliteration.
In other cases, direct Chinese transliterations may not make sense, and the words need to be tweaked to make sense to consumers. For instance, the Chinese word for Coca-Cola means ‘delicious happiness’. However, this is not a direct transliteration. Rather, Coca-Cola strategically found a descriptive adaptation for its brand that it could promote its products in China by and trademarked this adaptation.
Foreign firms operating in China should ideally invest in finding the right brand name to register their trademark by using a strategic combination of literal translation, phonetic transliteration, and descriptive adaptations. It is definitely advisable to engage the assistance of bilingual experts for this work.
RELATED: Legal & Financial Due Diligence Services from Dezan Shira & Associates
Although many foreign firms successfully register their trademarks in China before trademark squatters, they sometimes encounter problems when expanding their products and services. This is because squatters obtain subsequent registrations in other categories and sub-categories and hold firms to ransom by preventing them from expanding their business.
Companies should therefore register under as many categories and sub-categories as financially feasible. Since a single registration may cost as much as RMB 1,000 (US$150) or more for each category, small and medium enterprises should think ahead and register under strategic categories. Even after registering, firms should regularly monitor the trademark register for potential squatting or infringement
Maintain proper records
Companies need to maintain all trademark related documents and other evidence in each office, including overseas offices, to challenge potential trademark squatters’ applications as well as facilitate renewal, cancellation, and alteration.
Prepare for legal battles
Once a squatter has successfully obtained a trademark, it is almost impossible to avoid significant legal expenses. If you chose to initiate legal proceedings, be prepared for a long and expensive battle.
Negotiation and settlement
Valeria Manunza, International Business Advisory Assistant Manager at Dezan Shira & Associates, warned, “Once a squatter has successfully obtained a trademark, it is almost impossible to avoid significant legal expenses. If you choose to initiate legal proceedings, be prepared for a long and expensive battle.”
Manunza elaborated, “Given the lengthy, expensive, and often unfavorable adjudicatory process in trademark disputes, it may make more commercial sense to negotiate with the squatter to directly purchasing the trademark from the squatter in an out of court settlement. In such cases, it is important to not let personal vendetta and ego influence your decision, and instead think rationally from a commercial perspective. It is also advisable to seek help from legal counsel to assess the feasibility of litigation and negotiation.”
China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at email@example.com or visit us at www.dezshira.com
Dezan Shira & Associates Brochure
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
An Introduction to Doing Business in China 2017
This Dezan Shira & Associates 2017 China guide provides a comprehensive background and details of all aspects of setting up and operating an American business in China, including due diligence and compliance issues, IP protection, corporate establishment options, calculating tax liabilities, as well as discussing on-going operational issues such as managing bookkeeping, accounts, banking, HR, Payroll, annual license renewals, audit, FCPA compliance and consolidation with US standards and Head Office reporting.
China’s Investment Landscape: Identifying New Opportunities
China’s foreign investment landscape has experienced pivotal changes this year. In this issue of China Briefing magazine, we examine how foreign investors can capitalize on China’s latest FDI reforms. First, we outline new industry liberalizations in both China’s FTZs and the country at large. We then consider when an FTZ makes sense as an investment location, and what businesses should consider when entering one. Finally, we give an overview of China’s latest pro-business reforms that streamline a wide range of administrative and regulatory measures.
Dezan Shira & Associates