trademark registration

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?

 

As often as we write about the need to register your trademarks in China, we have never written about how common it is for your China distributor to take your trademark and of how easy it is to prevent that.  I thought of this last week after receiving yet another phone call where this had happened.

The “this” is something along the lines of the following:

And the US company just stops there.  No contract.  No trademark registration.  No licensing of any trademark. Big mistake.

If you are going to use a distributor of your product in China, you should have a contract with your China distributor that, at the very minimum, protects you from your distributor destroying your reputation in China (or even possibly subjecting you to liability) by providing a terrible product or terrible service and makes clear that you own your name and logo (and whatever IP is important to you) and are merely licensing it to your distributor.  You then must register that licensing agreement with the appropriate Chinese government authorities for it to be valid.

We usually get calls from American SMEs to complain about how they are not getting paid for their product being sold by others in China.  Then when my law firm looks deeper into the situation, we learn that the American company never registered its IP in China and that someone else has — presumably the Chinese distributor.  We then try to get the trademark “back” for our client.

If the Chinese distributor wishes to continue maintaining a relationship with the American company, we usually are able to persuade the Chinese company to assign over the trademark to our American client. This is usually the case when the real money is in the manufacturing of product for the American company for sale by the American company outside of China.  But in a few cases, the Chinese company has refused to assign over the trademark either because it does not manufacture product for the American company at all or because it views its ability to sell the product in China as more valuable than manufacturing product for sale by the American company elsewhere.  Oftentimes the worst thing about this is how the Chinese company now has increased incentive to sell “your” product outside of China as well.

There is one easy solution to prevent your Chinese manufacturer or distributor from “taking” your trademark for China. Register it yourself in China and do not allow anyone to use it without a properly registered license to do so.  This is how to protect your trademark in China from your China distributor and if you do these two things, you should be fine. But, if you do not, you are putting yourself at risk of forever losing your name in China.

What are you seeing out there on this front?

One of the rules for filing a trademark in China is that geographical names are generally off limits.  This can be both good and bad.  If you make Seattle Suckers in China strictly for export from China, this is a good thing.

It is a good thing because it means you do not need to spend money on what is known as a “defensive trademark,” which is a trademark that is filed simply to prevent someone else from filing it and then blocking you from using it.  It is this need to file that prompted us to write the post, China: Do Just One Thing. Trademarks.  But if nobody can file the trademark and you will not be selling your product or service within China, there is little to no benefit in your filing for that trademark.

But it is a bad thing if you are going to sell your product or service in China.  Take Seattle Suckers as an example.  Since nobody can file for a trademark for Seattle Suckers, nobody can secure trademark protection for it andeverybody can use that name for themselves.

But here is where it gets tricky.

China’s trademark law sets forth all sorts of standards regarding which Chinese place names can be registered as trademarks and which cannot. The standards generally say that cities, districts, provinces and special administrative regions (Hong Kong, Macao, and Taiwan) are off limits for trademarking. But the standards also say that no trademark will be accepted if the name will lead to consumer misunderstandings.  So for example, it is very unlikely that anything really close to a well-known Chinese place name will be accepted.

But things really get interesting when it comes to foreign place names.  The standards dictate that “well known” foreign geographical names cannot be registered as trademarks.  But what constitutes well-known?  Surely New York, Istanbul, Hanoi, and Tokyo.  But what about Peoria, Kalamazoo, Ottumwa, French Lick, or Wrigleyville?

Hard to say.  Really hard to say.

We have registered China trademarks containing names of what we thought were really famous places outside of China, but we have also been turned down trying to register names of some pretty obscure places. It really is hit or miss. Or as we lawyers love to say (and our clients hate hearing), this is an interesting area of law.

Now before anyone writes to point out that what we have said above cannot be true and Qingdao beer is proof of that, you should note that there is an exception for trademarks that were registered before China’s Trademark Law was enacted.  The same is usually true for place names that also have meaning separate and apart from their use as a place name. Perhaps most importantly, if the geographical name is just a part of the trademark and is not the primary identifying portion of the name, it is also possible to secure registration.

Confused? Sorry.  This is one tough area and much of the time one does not know what will happen until it happens.

Anyone have any good trademark stories relating to place names?

By:  Steve Dickinson

Registration of trademarks in China has become essential for doing business in China. We have long advocated prompt China trademark registration with our clients. For companies that manufacture and export from China, registration of the English language trademark is essential. For companies that sell products and services in China, registration of the existing English language marks and also the Chinese language marks for the product is essential.

When we first began to push our clients on trademark registration, we were met with a lot of skepticism. However, as we anticipated, the tide has turned. Recent reports from China claim that China now has the largest number of registrations in the world, with over 1.0 million applications submitted per year. It has now become almost impossible to do business in China without a full portfolio of registered English and Chinese language word marks and logos.

Unfortunately, this flood of applications has had the effect of making trademark registration in China a much more difficult process. When we first started doing trademark registrations in the early 2000 period, about all that was required was to simply submit the application. Virtually every application was approved. In fact, at that time, the Chinese authorities were often criticized for approving too many similar marks. In particular, English language marks were almost always approved except when the exact word was used in the same class.

These days, it has become far more common to receive a rejection. This is true for both English language and Chinese marks. It is no longer appropriate to just assume that every application will simply be approved. Careful evaluation of every mark is required. Since rejections have become common, it is now extremely risky to build business under a new mark or brand before receipt of approval from the trademark office. Since the trademark office is very slow in its decisions, often taking years to make a decision, this can pose extreme difficulty for companies attempting to penetrate the Chinese market.

There are several reasons for this change in the trademark environment in China:

  1. The large number of applications means that there are simply fewer choices for available marks, particularly when the mark is a meaningful word.
  2. The trademark office takes a mechanical approach in determining when there is a conflict. Where the same words appear, the trademark office normally ignores meaning and simply finds a conflict. Thus the trademark office does not allow for adding more words to allow for differentiation. If there is any chance of conflict, the trademark office will find it. For example, if someone already has registered the name “Ace” in a particular class, the trademark office will likely reject “Ace Tool and Die Makers and Fabricators” in that same class.
  3. The trademark office also finds conflicts where words are similar but not identical. Since there are no clear rules on how much similarity is not acceptable, this makes the decisions of the trademark office difficult to predict. For example, registering “Alberta” in a class in which “Albert” has already been registered likely will be rejected.
  4. The Chinese language presents additional difficulty. Though there are over 40,000 unique Chinese characters, only about 2,500 characters are in common use. It is therefore difficult to find a succession of characters that is any way unique. Since there is no way to alter spelling/pronunciation to produce a difference, the opportunity to find a unique combination in Chinese that is also intelligible is difficult.
  5. The PRC trademark office has installed sophisticated search software. This search software fuzzy logic function is excellent and allows the trademark office to find more near matches than previously possible. These near matches then get rejected in situations that would never have been noticed in the past.
  6. As a matter of bureaucratic reality, where there is a close call, it is much safer for the trademark office to reject than to approve.  When a dispute arises, the Chinese courts have shown much more inclination to support trademark office rejections than to support approvals. Since the trademark office was severely criticized for allowing too many approvals in the past, the office has apparently decided to go as far as possible in the other direction to compensate.

None of the reasons for the difficulties with trademark registration are likely to change for the better in the near future. In fact, trademark registration applications will probably continue to increase, making the situation progressively worse, not better.

So what should be done? Since trademark registration is essential for China, foreign businesses must understand and adapt to the changed trademark environment. This requires at least the following:

  1. Trademark registration should not be treated as a mechanical process. Careful planning is required. In particular, a preliminary search should be undertaken and time must be taken to do the search carefully and to deal with the results in a practical manner.
  2. For word marks, the use of meaningful words should be avoided as much as possible. Coined words should be used whenever possible. Of course, a company that is using its existing U.S. name or mark often does not have a choice on the words that will be used. In such a case, the foreign party must understand that if a meaningful word is used there is a decent chance a conflict will be found and your trademark rejected.  This is also true of trademarks of common names. So for example, if your company is called “David’s ties” and someone has already registered David & Goliath in the same class, you will probably be rejected.  We are finding that common name registrations are getting more and more difficult.
  3. Even where the best search seems to show that there will not be a problem with registration, all registrants must understand that it has become difficult to predict how the trademark office will rule on any mark. This uncertainty means that it is not as good idea to build brand identity on a mark until after that mark has been formally approved by the trademark office.
  4. There are numerous ways to deal with trademark conflicts. This usually involves negotiation for a license or related agreement with the holder of the mark that has priority. Most foreign companies have a well-deserved aversion to entering into such discussions with parties in China. However, such negotiation will be increasingly important in the new trademark environment.
  5. Finally, some of the conflicting marks simply are not good marks. Some have never been used. Some have been filed with a bad intent. The Chinese trademark system has available a number of procedures for dealing with these bad marks. The procedures take time and money. However, they must be used in order to deal with these situations. Oftentimes, there simply is no other option.

Doing business in China is not for the faint of heart. Dealing with China’s changing trademark environment is one of the many challenges that must be overcome to reach success in an ever changing China.

ABC News is pushing (I received two different emails from ABC on it) a Diane Sawyer/ABC News clip entitled, “‘Made in America’ Products Selling in China.” Though it is the proverbial 3.28 minute puff piece, it is right on the big picture. There are huge opportunities to sell American product and American products are viewed very highly in China.

It starts out noting how “the Chinese spent $104 billion in U.S. exports in the last year — up 542 percent from 10 years ago.”  For more on how China has been greatly increasing its purchases of American goods, check out Selling Into China: The New Wave.  The clip then highlights a number of large and small U.S. businesses that are either trying to sell into China or have succeeded in doing so. Everyone is happy, everyone is at least a little bit jingoistic, and everything looks as easy as simply putting your product on the net and waiting for the hordes of Chinese consumers to come to you. Of course, real life (as opposed to the media’s portrayal of it) is quite different.

The clip completely fails even to touch upon the following extreme basics:

  • Logistics
  • Customs/Duties/Regulations
  • Organizational structures
  • Intellectual property
  • Getting paid

So we will.

Logistics.  We are lawyers, not logistics people, but we know enough to know that if you are going to sell product into China, you need to figure out the best way to get it there and the cost of doing so and whether the costs are prohibitive or not.

Customs/Duties/Regulations. Just yesterday, I received an email from someone asking me why it was having to pay 18% at China customs for its food product, while one of its competitors was paying 7%.  The e-mailer wrote the letter as though we would have an answer right off the top of our heads, but our response was essentially that we had no clue.  We then talked of how it may be because of a difference in processing of the product, it may because of a difference in sizing of the product, it may be because of a difference in from where the product originates or was processed, or it may even be because one of the numbers was wrong.  We would need to know a whole lot more even to guess.  A few weeks earlier, someone had called me because China customs had just refused entry of their product into China because it did not meet China’s safety standards. The caller kept saying how it had “never even occurred” to him that China might have tougher safety standards than the United States.  Well, it should have. The U.S. Government has a very helpful website dealing with China customs.  Check it out before you ship.

Organizational Structures.  How exactly are you going to sell your product into China?  Are you going to do it exclusively from the United States? If so, you will not be able to take RMB unless you use some sort of intermediary.  Are you going to use a distributor in China to get your product sold? If so, will this be an exclusive or non-exclusive arrangement? Who will pay for marketing?  Who will repair the product when something goes wrong? How will you make sure that the distributor does not do something to tarnish your reputation? Or will you set up an entity in China (a Wholly Foreign Owned Entity (WFOE), a Joint Venture (JV) or a Representative Office) to handle your China sales?  Do you have even a basic understanding of how China retail works?

Intellectual Property.  If you want to prevent others from using your brand name or your logo in China, you absolutely must register those as a trademark in China and you should do so before you sell any product there.  For more on registering trademarks in China, check out WHEN To Register Your China Trademark. You face similar issues regarding copyrights and patents as well.

Getting Paid. Presumably, you are seeking to do business with China so as to increase your profits. Unfortunately, selling product internationally has a much higher risk of non-payment than does selling product domestically. We discussed this in The Basics Of Getting Paid When Selling To China:

If you are going to sell product into China (or anywhere else internationally), you should consider employing the following to increase your chances of not getting stiffed:

  1. Secure all of the payment in advance. Sophisticated buyers typically will not accept this unless you put up a performance bond or open a standby letter of credit so that it can get its advance payment back. Note, however, that it can sometimes be difficult for Chinese companies to obtain government approval to make full payment in advance.
  2. Conduct due diligence on your buyer.
  3. Secure some of the payment in advance. This obviously will not guarantee you full payment, but it is better to lose some as opposed to all from a sale.
  4. Secure a Documentary Letter of Credit. With this, you will be paid when there is documentary evidence you have shipped the product according to the terms and conditions of the letter of credit. Smart buyers typically require an inspection certificate to ensure the product complies with the specifications in the contract or the purchase order. This sort of letter of credit mitigates your risk because your buyer’s bank has irrevocably guaranteed to pay upon presentation of the required documents.

We generally recommend our clients secure this letter of credit from a major (not a tiny) Chinese bank, such as Bank of China, China Construction Bank, Industrial and Commercial Bank of China, China Development Bank, and Bank of Communications, or a  branch of a known American, Asian or European bank. WARNING:  We have seen more than our share of fake letters of credit.

To encourage exporting, many countries, including the United States, make it fairly easy and cheap to purchase insurance to cover an improper non payment on the letter of credit.

There are all sorts of variations on the above, but these are the basics.

So yes, Ms. Sawyer, selling into China is rife with great opportunities and we would be the last people to say “don’t do it.” But it is not nearly as simple as you portrayed it, at least if you don’t want to lose your shirt.

What do you think?

 

If you are doing business in or with China you should give serious thought to registering your trademarks in China. In particular, you should consider a China trademark registration for your trade-name, your logo and your service marks. Brand identity is critical for success in China (as it is just about everywhere) and if you are going to protect your trademarks in China, you must register them. This is especially true in China where if you do not register your trademarks, someone is almost certain to try to appropriate them.  If you have not taken the necessary steps to protect your brand, this theft will succeed. 

This post explains why trademarks are so important for creating your brand in China. Your trademark is what conveys who you are.

No matter what the drink, if it has Coca Cola’s name on it, you know that the odds are overwhelming that it will have been well made and be safe. Westin on a building tells you before you go in that it is a nice hotel. Think how damaging it would be to Coca Cola or to Westin if everybody could use those two names on their products, be they drinks or hotels. None of this is any different in China.

Unlike the United States, however, China employs a “first to file” system for trademark registration. This means that China does not recognize unregistered trade mark rights. So you must register your trademark to have any trademark protection. Without trademark protection, someone else can register “your” trademark and then prevent you from using it. This is true even if you are not conducting any sales in China. Even if all you are doing is manufacturing product in China, someone else can (and probably will) register “your” trademark and then stop you from exporting anything from China with that trademark on it unless you pay a licensing fee. This happens all the time and it mostly happens to companies from common law “first to use” trademark registration systems. It happens less often to European companies because they usually know better because they come from a first to file system.  

All of this means that you should register your trademark or service mark before someone else beats you to it. In other words, you should register your trademark or your logo before you first start using it in China. If you know you will be using your trademark or logo in China, there is no benefit (other than cost delay) in waiting. 

The first to file an application in China for a particular trademark gets priority to that trademark, but it can take years for the Chinese trademark office to actually issue your trademark. In the meantime, nobody can stop you from using the trademark for which you applied, but you cannot stop anyone else from using it either. So if you are planning to sell a trademarked product or service in China at some point in the future, there are real benefits to going ahead and registering for the trademark right away. That way you will either have it when you start selling or very soon thereafter.

Even if you are just manufacturing a product in China and are not selling it there, you must register your trademarks on that product before anyone else. This is because if someone beats you to “your” trademark, they will be able to stop you from using it in China at all and block your product (with the offending trademark) from leaving China’s ports. 

But what exactly should you trademark and how?

You should trademark anything that identifies your company or your brand or your product or your service that you can. If your company is Premier and your product is Alpha and your logo is a giant A and you sell a special sort of cloth headband, you should at least consider registering the following trademarks:

  • The word “Premier” in Roman script
  • The word “First” in Chinese characters
  • The Mandarin word that sounds closest to “Premier”
  • The logo

If you do not choose a name in Chinese and register it, the Chinese consumer will almost certainly choose a Chinese name for you and you may find you do not like that Chinese name one bit or that the trademark on it has already been taken.

There are essentially three methods for picking your Chinese name. You can translate your English or other foreign name directly into Chinese. Registering the word “first” in Chinese characters is an example of that. The disadvantage of a literal translation is that you will essentially have two different names for your same product or company and this can cause confusion in the market. The second option is to use a Chinese character name that sounds like your foreign name. If you go with a phonetic version of your foreign name, you must make sure that you know what the Chinese characters you are using actually mean in Mandarin and Cantonese. Otherwise, you might find yourself with a Chinese name that means something you really do not want to be saying. Oftentimes, the best solution is to choose a phonetic version of your name that also conveys something you wish to convey.  Coca Cola is the classic example of this. Its name sounds like  “Ke Kou Ke Le,” which means “delicious” and “happy.” 

You will also need to consider in what category(s) to register whatever trademarks you deem necessary from the above. Returning to the example of the headband, there are at least two categories that make sense: hair accessories and clothing. If you register your trademarks in just one, you leave a massive opening for a competitor to step in and register the your same trademarks on the same product in the category you did not choose. If that happens, both of you will be able to sell the headband using the same trademarks. Not choosing all of the right categories for your trademarks can be as bad as not registering your trademarks at all.

Inc. Magazine just came out with an article today that does a nice job setting out the basics for foreigners starting a business in China. The article is by Issie Lapowsky and it is entitled, “10 Steps to Starting a Business in China.” 

Its ten steps are as follows. I have tried to pull the best parts, but I have to admit to a bit of bias towards those portions that quote me the most.  So if you want the full story (and you should), I urge you to read it here.   

1. Do your homework.  Hard to argue with this. 

2. Pick a location.  Yes.   

3. Choose an entity:  

Before you register with the government, you need to decide what type of business entity to register. The most common for foreign businesses are joint ventures, representative offices, and wholly foreign owned enterprises. Each, of course, has its pros and cons.

A joint venture requires a partnership between a foreign business owner and a Chinese citizen. Though joint ventures may sound like the safest route, experts warn against them. Critics say the most common problem with joint ventures is no more than a classic case of “same bed, different dreams” syndrome.

“They fail nine out of 10 times. You’re working with someone who’s familiar with the territory on their turf, and they will end up with the business,” Harris [that’s me!] says.

Representative offices are an easy, low-cost way to go, but it drastically limits the scope of what you’re allowed to do in China. As Yang says, “A representative office is just there to represent your offshore entity.” In other words, you cannot deliver any services or products, which means you also cannot generate revenue. A representative office affords you little more than the ability to show your face and build your brand name.

The most common type of entity, therefore, is a wholly foreign owned enterprise, known as a WFOE. According to Frisbie, “75 percent of American investment in China these days is 100 percent American-owned facilities,” because it gives business owners maximum quality control.

Not surprisingly, though, a WFOE is much more complicated to set up. It takes more time to get approval from the government, and it requires a minimal capital investment that you must put in a Chinese bank. Harris says. And, he notes: “That amount can vary greatly depending on the nature of your business and where you’re setting it up.”

4. Develop a business plan; 

A detailed five-year business plan is crucial, because once the government approves it, you will be able to operate only within its guidelines. If you start offering a product or service that is not in your business plan, the Chinese government can shut your business down. The same goes for where and how you operate.

“Make sure your business plan is as broad as possible to allow the company to operate freely,” says Collins. “U.S. companies expect to operate in a certain way here and they realize their business license may not allow them to do that.”

While it needs to be broad, it should also be specific. Make sure you include your location, projected revenues, product or service description, expected number of employees and budget requirements in the plan.

It’s also wise to tailor your plan to China’s five-year plan.

“If you’re making a high-tech piece of lawn equipment, and you just apply saying, ‘I’m going to be making lawn equipment,’ they’re not going to look at you very favorably,” says Harris. “But if you say I have this new, software-driven, high-tech piece of lawn equipment that’s going to put 20 software engineers in China to work right away, then it’s a different project.”

5. Find a liaison … or several:

A qualified liaison should be able to tell you where you need to go to register [your business], whether it’s the local, provincial or national government, and should do the talking once you get there. Harris says, “You need somebody who has negotiated that territory a number of times before and you absolutely have to have people who speak Chinese to go meet with the local officials.”

6. Organize the necessary documents:

“There are the written laws in China and then there’s the reality on the ground,” says Harris. Nowhere does this theory apply more than when it comes to what documents you’ll need to register.

  *      *      *      *

Always prepare for a wildcard, though. “We’ve had local authorities say they want to see exactly what it will be we’re manufacturing, so we bring it in,” Harris says. “We just did one, and they required we write a legal opinion explaining how LLCs worked in the United States. We’d never had that before, but when it happens, don’t fight with them, because you’ll lose, and you’ll waste time.”

7. Trademark your intellectual property:

Intellectual property violations are a big issue for foreign investors in China. Many U.S. manufacturers believe that because they have a trademark at home, it will hold up in China, but that’s not the case. In China, the first person to register a trademark owns the rights to it, regardless of whether or not that person is the first person to use the trademark.

“Somebody could go register what you thought was your trademark,” Harris says. “Then, when you’re about to ship $3 million worth of product, and your product’s held up at the port, you get a phone call from someone saying, ‘You’re using my trademark, and I’d like to sell it to you for $300,000 a year.’ If you don’t pay them for the trademark, your goods will never leave China.”

8. Find a bank: 

This part should be quick and easy, since there are plenty of banks with a huge presence in China. Try HSBC, which is based in Hong Kong, or Bank of America, which you can find all over the country.

“If you’re dealing with a bank that doesn’t have any relationship with banks in the United States, it makes it tough to keep track of your money,” says Wong. “You want to make sure you have a bank in the United States and a bank in China that has some sort of corresponding relationship, so your banking is more transparent.”

9. Hire a staff: 

Hiring in China is a delicate process, especially when it comes to hiring managers. Don’t assume that just because a person’s English is impeccable they’ll be able to run the business properly.

“If all things are equal,” Frisbie says, “the language skills can be greatly beneficial, but it’s far more important to have a smart business person in that role who’s going to run the company the way you want it run.”

 *   *   *   *

Once you have trusted managers in place, they should be able to assist you in hiring the rest of the staff. Remember, though, you need to have a contract for every employee you hire, as well as an employee manual. Without either, says Harris, “it may become nearly impossible for you to fire anyone.”

“In China, you need a reason to fire someone,” he explains. “That reason needs to be set down in your employee manual, otherwise your ex-employees can sue you for a lot of wages.”

10. Take it slow: 

Don’t jump into quick business deals just to turn a profit. It takes time to build business relationships over there. “It’s much different than the U.S. in regards to the amount of time that’s spent developing the business relationship before the actual deal is consummated,” says Wong.

What will win you success in the Chinese market is patience. “The Chinese have been doing business in a certain manner for thousands of years. Don’t even start to think for a millisecond that you’re going to change it.”

What’s the eleventh step?   

Trademarks are among the most important assets of any company. Indeed, if it weren’t for trademarks, customers would be unlikely to even find a company’s products. Naturally, then, most U.S. companies want to protect these essential and valuable assets to the greatest extent possible and therefore make sure that they are registered with the United States Patent & Trademark Office (the “USPTO”).

But many companies stop there, thinking the job complete. It does not occur to them that trademark rights are territorial and that owning a United States trademark registration creates no rights whatsoever outside the U.S. borders. This issue often comes to light only after a problem has been encountered, such as someone selling knockoffs of the trademark owner’s products in another country. If the company is fortunate, corrective action is still possible. For many, however, it may be too late and no legal remedy exists. For such a company, someone else now owns “its” trademarks in that other country (or countries) and the only option, if any, is to purchase them back from the foreign “owner”, usually at a high price.

Though being forced to buy “your” own trademark might sound like extortion, in most countries this is perfectly legal. This is because most countries (but not the United States) grant trademark rights to the “first to file,” not to the “first to use,” as in the United States. The first company to file an application to register a trademark, whether or not someone else is already using it, becomes the trademark owner in that country.

For that reason, trademark registration overseas can be even more important than in the United States. First of all, without a registration in a particular jurisdiction, a U.S. trademark owner will be unable to prevent someone else from using its trademark. Moreover, to add insult to injury, if that other party has registered the U.S. company’s trademark locally, the U.S. company could even be prevented from using the trademark in that country and could be liable for trademark infringement if it were to do so!

It is therefore not surprising that in many countries (particularly in Latin America and Asia) there are people watching out for successful emerging American companies so they can quickly register those American company’s trademarks first in their own country. Later, when the American trademark owner is ready to expand into that country, it learns that someone else already owns its trademarks there. These opportunists then typically seek to sell the trademark “back” to the U.S. company. The negotiated price can vary considerably, but it virtually always will be many times more than it would have cost the U.S. company to register it originally.

The best way for a trademark owner to protect itself from these dangers is by registering its marks in as many jurisdictions as possible. But since there are more than 200 countries in the world today — most with their own trademark registers, application procedures and, of course, costs — registering in all jurisdictions is impossible for all but the largest multinationals.

Until recently, a trademark owner wanting to fully protect its marks around the world had no choice but to file individual trademark applications in each of those jurisdictions. Though there is still no such thing as a “global trademark registration” two developments have helped reduce the burden on trademark owners.

In 1996, the European “Community Trade Mark” (the “CTM”), came into being and allowed trademark owners to secure protection in all 27 European Union member countries via a single trademark application.  The cost of a CTM is roughly the same as filing national applications in three individual European countries so if a company needs trademark protection in at least three EU countries, a Community Trade Mark is the more economical choice. For a company selling product throughout the EU, the CTM is by far the best choice.

The second development occurred in 2003 when the United States joined an international treaty called the Madrid Protocol. Under this treaty, if you own a trademark registration in your “home country,” you can apply for an “International Registration” and designate, in a single application, from one to 76 countries that are have also joined the Madrid Protocol.  Most of the world’s major economies have joined the Madrid protocol, with the notable exceptions of Canada, Mexico, Hong Kong (still a separate jurisdiction for trademark purposes), Taiwan, India and all of South America, where protection still needs to be secured country by country.

In addition to these two relatively new vehicles, the Paris Convention —  to which most of the world, including the United States, belongs — can also sometimes be helpful. Under this Convention, trademark owners can take advantage of a six month “priority period” to file for a new trademark in one member country and then have a six-month window to file for the same trademark in any other member countries and have those later applications treated as if they had been filed at the same time as the first one. By way of example, an American company can file an application with the USPTO today for a new trademark, then wait up to six months to file elsewhere without any concern that some enterprising individual overseas might file a preemptive application for the mark. This delay period can be a useful tool for trademark owners with cash flow issues, such as many startup companies.

All three of these treaties (CTM, Madrid and Paris) can be used together. For example, a company may file an application in the United States for a new trademark and then, under the Paris Convention, wait close to six months before filing with the USPTO an application for an International Registration under the Madrid Protocol and, in that application, designate the European Union as one of the jurisdictions in which protection is desired.

Despite these treaties, protecting every trademark in every country oftentimes is still beyond a company’s budget. So how should a company choose where to seek protection first? When we do this analysis, we analyze a host of factors.  First, where does the company have its greatest foreign sales? Certainly it makes more sense to incur the fees and costs to register a trademark in a country in which sales exceed $1 million than in a country in which sales are less than $1,000. In which countries would the emergence of knockoffs hurt the company the most? Where does the company have manufacturing facilities (especially if the company uses outside vendors to manufacture its products)? Are there countries with notorious counterfeiting problems in the trademark owner’s industry? Finally, and perhaps most importantly, in which jurisdictions would the company suffer the greatest damage if it were precluded from using its trademarks because someone else had registered them first?

Often, once these questions are answered, if the company’s budget does not permit securing all desired protection immediately, the trademark owner will adopt a plan to secure its trademark protection in stages, covering the most important markets first, then another group in six or twelve months, and so on. Though this will mean temporary gaps in protection, they will be the result of a conscious business decision, rather than a failure to identify the issue at all. Ignorance may be bliss but, at least in the trademark world, what you don’t know can indeed hurt you.

For China specific trademark advice, check out “China Trademark Law: Simple And Effective.”

Enhanced by Zemanta

This is the second of my posts on the United State’s Patent and Trademark Office’s two-day conference on “Protecting Your Intellectual Property In China and The Global Marketplace” I attended last week.  My first post, “Nike On China IP Protection:  Just Do It With Green Tea,” was based on a speech by Kevin R. Brown, Nike’s Director of Global Brand Protection.  This one is about Timothy Trainer’s very informative speech on preventing piracy.

Timothy Trainer is the President of the Global Intellectual Property Strategy Center in Washington, D.C.  Before that, he was the president of the International AntiCounterfeiting Coalition (IACC) and before that he was with INTERPOL’s IP Crime Action Group.  He is also the author of the book, Border Enforcement of Intellectual Property.  Both Mr. Trainer’s experience and his speech indicate he knows whereof he speaks when it comes to global intellectual property protection.

Mr. Trainer began his speech by discussing China’s present situation regarding intellectual property protection.  He talked about the many steps the Chinese government has taken to reduce counterfeiting and he cited statistics indicating these efforts were having an impact.  But he was also able to cite statistics indicating the problem is worsening.

He then set out the following methods companies in China can employ to go after those who counterfeit their products:

  • Criminal Action
  • Administrative Enforcement
  • Civil Action
  • Enlisting the aid of local, provincial, and/or national authorities.

Mr. Trainer then talked about how companies must take a global view of their IP and how they must ask themselves questions such as, “Where are our strategic pressure points?  Where are we selling our products and where do we intend to sell our products?”  In other words, if a counterfeit version of your product is being sold in Rwanda and you have no intention of ever selling in Rwanda, you probably do not want to put money into stopping it.  If, however, your product is being counterfeited in China and being sent to the United States, even if you have no intention of selling your product in China, you probably will want to examine your Chinese options as a way to protect your U.S. market.

Mr. Trainer then put up a PowerPoint slide titled, “SMEs, SOL?”  His next PowerPoint slide set forth some of the peculiar difficulties small and medium sized businesses face in trying to protect their intellectual property globally:

  • “SMEs lack resources to man and fund lots of civil actions.
  • “SMEs do not ‘own’ IP in dozens of countries like large multinational companies.”
  • “Lack of IP ownership in a country = NO enforcement of IP”

His next PowerPoint highlighted the Catch 22 IP situation for SMEs and suggested how to try to resolve it:

  • Too small to obtain trademarks and patents abroad, but successful enough for counterfeiters to steal and market goods using your IP where you don’t have rights

Suggestions:

  • Countries where you own rights, be aggressive
  • Countries where you don’t own rights, engage the US government (embassies abroad and agencies in the US); explore other legal grounds to justify trading partners taking criminal enforcement actions against organizations that import, smuggle goods into a country

During the Q&A section following Mr. Trainer’s lecture, I asked what he saw as the biggest mistake SMEs make in seeking to protect their IP from Chinese counterfeiting.  I expected Mr. Trainer to answer “failing to register their IP in China,” because as a China lawyer, that is definitely the mistake I see most often.  Mr. Trainer’s answer was completely different, but hugely insightful.  According to him, the biggest mistake is to provide too much information on the internet, which makes it easy for someone in China to start duplicating.  This makes great sense, because though registering one’s IP in China does reduce the likelihood of your product being duplicated, it cannot be as effective as preventing counterfeiters from even knowing what to copy.

I agree with Mr. Trainer that SMEs have it much rougher in the global IP arena than do huge companies like Starbucks or Nike, which have the resources to register hundreds of trademarks, patents, and copyrights in hundreds of countries around the world, including those in which they may not yet be doing any business at all.  SMEs simply cannot do this.  Nonetheless, my advice for SMEs with respect to China differs somewhat from Mr. Trainer’s global advice.

In dealing with China, I suggest SMEs do the following:

  • Before your company goes to China, you must register your IP there to protect it.
  • Monitor what is happening to your IP in China and move aggressively to protect it.
  • Even if your company is not going to be doing business in China, if Chinese copying of your product is a real possibility, you should conduct a cost benefit analysis on registering your IP in China.
  • If you have not registered your IP in China it probably will not be worth your time or money to try to stop copying of your product or using of your trademarks in China.  However, you can and should do everything you can to prevent copied goods from entering into those countries where you do have IP registrations to protect you.

Oh, yeah, and do be careful about what you put up on your web site.