A few weeks ago, the China Law internet and listserve (yes, we lawyer-nerds still have a China Law listserve) was abuzz with an article on In-N-Out-Burger’s China trademark troubles. Surprisingly, the article was written by a just graduated law student. I contacted that recent law school grad to request that he do a shortened version for our blog and he graciously agreed. The law grad is Bradley Sova and his vitals are as follows:
Bradley Sova graduated magna cum laude from Truman State University with a degree in Political Science and Chinese Studies. After completing additional language study at Tsinghua University, he earned his law degree from the William S. Richardson School of Law. In law school, Bradley completed extensive coursework on Chinese and international law, served on the board of the Asian-Pacific Law & Policy Journal, completed a semester at Tsinghua University School of Law, and worked for multiple Chinese law firms and international organizations. Bradley is currently preparing for the California bar exam and he hopes to work in China-related commercial law or international arbitration. His full paper on the issues discussed below can be found here and I urge you-all to read it.
Here’s Bradley’s blog post:
In late 2011, burger advertisements from an unnamed source sprang up in Shanghai promoting Double-Double, Animal Style, and Protein Style burgers, all of which are well-known staples of the West coast fast food legend, In-N-Out Burger. The ads, however, were not from In-N-Out, but were posted by a new company called CaliBurger, which had registered these names as trademarks in China and in several other Asian and Eastern European countries. CaliBurger’s restaurant design and business model also closely imitated the American chain.
Although In-N-Out was able to use CaliBurger’s corporate registration in California as a toehold to bring a Lanham Act claim in the United States, this toehold does not appear have given In-N-Out too much leverage. The two parties ultimately reached a confidential settlement, with CaliBurger slightly altering its burger names and décor and In-N-Out presumably paying CaliBurger a decent settlement to retrieve the trademarks out from under its Chinese doppelgänger. CaliBurger continues to operate in Shanghai and Guangzhou and recently signed franchise agreements for locations in Hong Kong and the Philippines. For its part, In-N-Out has been more vigilant in Asia, conducting multiple promotional activities throughout the region since its dust up with CaliBurger.
Trademark squatting is common in China, and American fast food brands have been fertile ground for Chinese copycats, as those who have seen places like Starbox Coffee or Pizza Huh can confirm. As such, it is easy to write this dispute off as yet another squatting squabble where an American company was forced to buy its American trademark names back in China. There are, however, several elements that should cause American brand owners to consider registering trademarks in China, even if they never plan to go there.
Like many companies facing Chinese copiers, In-N-Out had no presence in China nor any immediate plans to enter the Chinese market. Indeed, despite the pleas of many homesick Californians, In-N-Out has never ventured to the East Coast. Yet, In-N-Out ruthlessly pursued CaliBurger and was ultimately willing to pay to secure the Chinese burger trademarks. Its reasons for doing so reveal why Chinese trademark registration in China is important, even for businesses that may never end up doing business in China.
In-N-Out has limited its growth to protect its supply chains, customer loyalty, and, most importantly, its brand reputation. This is why In-N-Out has never left the American west despite over forty years of success and a cult-like following. CaliBurger, on the other hand, had no such quibbles about rapid expansion. Although expectations have since cooled, CaliBurger’s initial plans called for hundreds of locations in China and franchises in almost a dozen other countries. More than the trademarks themselves, the threat to its brand and paradigm that roused In-N-Out to confront CaliBurger. Like any zealous brand owner, In-N-Out could not allow confusion in China and elsewhere to tarnish its meticulously built identity.
Companies without plans in China should also understand the threat that judicious use of Chinese law can pose, especially in the hands of a savvy entity such as CaliBurger. The perception that Chinese IP law cannot be used effectively is wrong and In-N-Out’s dispute with CaliBurger shows that the exact opposite is true: with proper knowledge, China’s IP system can be used very effectively — against foreign brand owners.
In-N-Out never registered its company or burger names in China or extended its protection into China. Although the company is well known in America, a Chinese court would not possibly find that the burger names of an American regional chain meet China’s high standards of being well-known to the relevant Chinese public and thus deserving of trademark protection without registration. Additionally, even though CaliBurger’s American origins might indicate bad faith registration, Chinese law makes proving such conduct very difficult. Finally, China’s first-to-register system gave CaliBurger strong rights once it received its China trademarks. CaliBurger no doubt knew all this. It did not seek to skirt China’s IP law. It actively used the law as a shield, and In-N-Out was left with little choice but to sue in America and ultimately buy out the trademarks.
These facts by themselves are not unique; Chinese trademark squatters exploit the system everyday. What makes CaliBurger unique and what should frighten American brand owners, is that CaliBurger was a sophisticated, American entity capable of raising millions of dollars in capital to carry out its plans to simultaneously execute trademark applications and challenges in several nations. Additionally, its founders had the legal knowledge necessary to fulfill its plans in China. All four of CaliBurger’s founders had law degrees from California law schools and two had IP legal experience. This sort of threat is a far cry from the small-scale squatter or shoddy pirating scheme many envision when considering Chinese IP theft.
Though CaliBurger and In-N-Out’s dispute is just one incident, such activities are ongoing and increasing in frequency and sophistication. With such a threat, even those companies with no plans for doing business in China should at least consider trademark registration there.
What do you think?