China is an enormous market. It is currently the second largest economy in the world and grows at an annual rate of more than 6%. China is also Australia’s biggest importing and exporting partner, with an annual increase of 6.3% over the past 5 years.
Whilst expanding into the Chinese market may have been a remote thought for small and medium-sized Australian enterprises in the past, the advent of Internet commerce has lowered the barrier of entry significantly. The uptake of online shopping has been particularly robust in China. As of 2017, online retailing constitutes 17% of total retail sales, and this is set to grow to a quarter by 2020.[1] In 2017, online sales experienced a staggering growth of 32%.
Additionally, China has long been a destination for manufacturing jobs. Good infrastructure, affordable labour and relative stability have prompted many companies to move their manufacturing base to China.
Why Register Your Trade Mark in China?
Like all other countries, the courts in China would not enforce an overseas Trade Mark. Hence, for your Trade Mark to be protected in China, it must be registered there.
There are good reasons to apply for a Trade Mark in China as soon as you intend to use your Trade Mark there, however minor the initial uses may be. Unlike Australia and other common law countries, China has a first-to-file Trade Mark rule, as opposed to a first-to-use system. This means that in most cases, any person can become the owner of a Trade Mark, even if another person has already been using that Trade Mark.
Narrow protections are provided for certain unregistered Trade Marks. Firstly, prior rights could be established for unregistered Trade Marks that are well-known or has acquired “a certain influence”. Secondly, a registered Trade Mark would be invalidated if its registration was obtained by “fraudulent or other illegitimate means”. Finally, a pre-existing business relationship between the foreign Trade Mark holder and the applicant could also prevent the new Trade Mark from being registered.
These narrow grounds, however, has not provided foreign companies with much comfort. Britney Spears, for example, could not establish that her Trade Mark was well-known, and hence lost her case against a Chinese clothing company. Apple also found itself in the same situation when it tried to take legal actions against a Chinese company with the Trade Mark “iPhone”.
This Trade Mark regime has led to many Trade Mark squatters, which have troubled many foreign companies greatly. Apple, for example, was forced to pay a Chinese company US$60 million to use the name “iPad”. Likewise, Michael Jordan could not prevent a Chinese sports equipment manufacturer from using the name “Qiaodan”, which is the transliteration of Jordan’s name in Chinese, since the Chinese company has registered the Trade Mark first.
To prevent any risks of that happening, our advice is that you should register your Trade Mark in China as soon as you intend to use the Trade Mark there. Moreover, to turn these Trade Mark squatters on their heads, it may be wise to apply the Trade Mark in relation to more classes of goods and services than is otherwise needed at the initial stages. Nevertheless, if you do not start using your registered Trade Mark in China within the first three years, it risks being cancelled.
Doing Business with Original Equipment Manufacturers (OEMs) in China
The cost of labour, coupled with adequate infrastructure and relative political stability, has long attracted many foreign companies to outsource their manufacturing jobs to China. Many of these businesses choose to engage with local OEMs, which are able to manufacture goods at a fraction of the cost compared with developed countries.
Recent judgments from the highest court in China have cleared up the legal position on whether manufacturing goods in China solely for export could constitute infringement if a similar Trade Mark has been registered in China. The Court held that there would be no infringement, provided that the goods do not enter into the Chinese market, and that the foreign company commissioning the job holds a valid Trade Mark in the destination country of the products.
For businesses seeking to stop these OEMs from manufacturing counterfeit goods, this means that they can only enforce their rights in China if they have registered their Trade Mark in the countries where the goods are to be exported to. As an upshot, however, foreign businesses that find themselves locked out of the Chinese Trade Mark Office because of Trade Mark squatters may nonetheless welcome the fact that they can still engage with local OEMs to produce their goods for export.
In light of this, if your business is only using China as a manufacturing base, there may be no legal reasons to apply for a Trade Mark in China. Nevertheless, there are strong reasons to register your Trade Mark if you ever intend to enter into the enormous Chinese market. Your business’ presence in China would likely alert potential Trade Mark squatters, who may decide to pre-empt your rights and cause you a lot of trouble if you later decide to sell your products in China. As the experience of Muji shows, OEM activities in China are insufficient to elevate your Trade Mark to one that has “a certain influence”, meaning that third-parties are free to register your Trade Mark with the Chinese authorities.
Whilst in the past, there had been instances where foreign businesses had their Trade Marks cancelled for non-use on the basis that their manufactured goods were for export only, recent cases show that this is no longer the case. Even though it may seem irreconcilable with the legal position that there is no infringement in manufacturing goods solely for export, the courts in China have maintained a distinction, however arbitrary it may seem. In short, a Trade Mark holder conducting the same activity would be taken to have established sufficient use to resist the Trade Mark from being cancelled.
Given the law on Trade Marks in China, we strongly advise businesses who intend to contract with local OEMs to manufacture goods to apply for a Trade Mark in China. Whilst you may not have any plans to sell your goods in the Chinese market yet, it is much better to have the option left open for you. The alternative scenario may be that you would either be locked out of the Chinese market by Trade Mark squatters or have to pay an exorbitant amount to have your Trade Mark back. The good news is, as long as you continue to manufacture your goods through the local OEM, your Trade Mark would not be at risk of being cancelled for non-use.
How to Apply for a Trade Mark in China?
There are two avenues to apply for Trade Mark protection in China.
Firstly, you may file for protection in China through the World Intellectual Property Organisation (WIPO), if you already have a registered Trade Mark in any of the countries party to the organisation. WIPO covers 191 countries and the only notable exception is Taiwan (Republic of China).
This method is relatively straight-forward and allows for applications in English, French and Spanish. Registration, however, is expensive. The basic fee is 653 Swiss Francs, in addition to the individual fee for China, which is CHF 249.
Alternatively, you may apply directly to the Chinese Trade Mark Office. Compared with WIPO, the fee is substantially lower, at only RMB 300. However, individual applicants often face difficulties in filing the application in Chinese, as well as navigating through the Trade Mark laws of China.
Enforcing Your Trade Mark Rights in China
It is true that China does not have the best reputation when it comes to enforcing Trade Mark rights. Nevertheless, in recent years, China has made significant changes to improve the level of protection offered to Trade Mark holders.
The most significant step took place in 2014 when the Chinese government established three Intellectual Property Courts in Beijing, Shanghai and Guangzhou. Its rationale was to enhance IP protections as well as address concerns that intermediate courts tend to favour companies from the area.
At the same time, several issues that are endemic in Trade Mark protections in China have also been addressed in recent years. Historically, damages awarded in Trade Mark infringement cases tended to be very low by international standards. Prior to 2014, damages awarded in the majority of cases tended to be below $75,000. However, damages have steadily increased since with the introduction of a new legislation. The average amount of damages awarded for Trade Mark infringement cases is now RMB 1.7 million. In a high-profile case last year, New Balance was awarded the US $1.5 million in damages and legal costs.
This direction was also echoed in the opinion issued by the State Council earlier this year, which called for stronger protections for IP rights. It opined that damages awarded in IP infringement lawsuits should be guided by the primary principle of compensating the plaintiff and the auxiliary principle of punishing the infringer. Additionally, in cases of repeated, malicious or serious infringement, the infringer should be liable for the plaintiff’s cost in enforcing its rights.
Another common complaint is that, unlike other common law jurisdictions, China does not have a formal process of discovery. Instead, parties seeking to enforce their Trade Mark rights often had to resort to more informal measures, such as private investigators. In 2015, however, the Supreme People’s Court released an Interpretation, which provides that a party may request the Court to order the other party to provide documentary evidence that is under their control.
The aforementioned opinion by the State Council also touched on the need to alleviate this problem. It opined that the government should explore the possibility of establishing rules for discovery and exclusion of evidence obstruction. At the same time, in rather vague terms, the opinion also mentioned the possibility of shifting the burden of proof as well as giving the courts more power to investigate and collect evidence.
On the whole, Trade Mark protections in China are set to become much stronger in the future. Whilst protectionism may have contributed to weak Trade Mark protections in the past, the opinion by the State Council seems to acknowledge the importance of protecting such rights as the Chinese economy matures.
Talk to one of our IP experts in relation to Intellectual Property protection in China!
[1] Goldman Sachs, China E+Commerce, shopping re-Imagined (2017)
