China’s new e-commerce law, which took effect January 1, 2019, threatens to upend the entire daigou business model. As we’ve written previouslydaigou are individual shoppers who purchase goods overseas and then bring them back in their luggage for resale in China. Estimates of the value of goods brought into China this way each year ranges from about $6 billion to upwards of $100 billion.

The new e-commerce law requires anyone who sells products online to (1) register in China and in the country where they purchase goods and (2) pay all required taxes. If the law is strictly implemented and enforced, this would be the end of daigou, because the vast majority of daigou sales are online, and with few exceptions the daigou business model requires tax evasion.

Most of the articles about daigou refer to their wares as grey market goods. This is, at best, misleading. The term “grey market” suggests the existence of a legal loophole or ambiguity. But China’s rules on import tariffs, sales tax, and consumption taxes are quite clear: if you import goods into China, they are subject to tariffs. If you resell goods in China, they are subject to tax. If daigou paid the proper duties and taxes, they would have no business because they could not compete on price with legitimate importers. The major exception would be for goods that were difficult or impossible to buy directly in China.

It’s true that from a trademark standpoint, China has no per se prohibition on parallel imports. See China Trademarks: Counterfeit Goods and Parallel Imports. But this is irrelevant to the question of tax fraud.

As we have noted previously:

China has attempted to crack down on illegal grey market importation through a number of means, including (1) higher taxes on goods brought in by travelers as part of their luggage, (2) lower taxes on goods imported through legitimate channels; and (3) increased penalties for those caught falsifying customs declarations.

Will this new attempt be more successful? Early indications are that it has teeth. Customs officials began cracking down on the import side last fall with enhanced inspections of luggage at airports. Rumors began flying on social media, and then, after LVMH informed investors of such inspections in a conference call last October, luxury goods companies’ stock prices slumped across the board, falling somewhere between 3 and 10 percent later that day.

How and when the e-commerce sites will implement the new law is yet to be seen. Many daigou are already migrating away from “classic” e-commerce and into social media or instant messaging, where they describe their products using code words. You would think this, plus the increased scrutiny at the border, would marginalize daigou as a viable sales option – if you make something difficult enough, only the true believers will remain. But I have learned not to be surprised by the ability of Chinese entrepreneurs (and consumers) to turn on a dime in response to changing market/regulatory conditions – to say nothing of their willingness to ignore tax laws.

It may be more difficult for luxury brands to adapt. I had previously posited that although manufacturers might not be concerned about relying on daigou sales, they should be.

It boggles the mind why any company – let alone a major luxury brand – would have a market entry plan dependent on third parties successfully committing tax evasion. See Grey Market Goods and China, Part Two. But that’s exactly what some brands did, and now they’re scrambling to put together a “real” China strategy. Just for the record, my firm’s China lawyers have always advised against relying on this strategy.

Meanwhile, the trade war lurks as subtext. Right now products brought in by daigou are unofficial in every sense. If they are reported and taxed, then China would reduce its trade imbalance by a significant amount AND increase tax revenues. Easier said than done, even in China. But the trend is clear.

China Trademark

Like most countries, China has a use requirement for trademarks: to remain valid, a trademark must be used in commerce at least once every three years. But as we wrote in China Trademarks: When (and How) to Prove Use of a Mark in Commerce:

Unlike the United States, China does not have an affirmative requirement to prove that a trademark is being used in commerce. You do not have to prove use for a trademark application to proceed to registration, and once a trademark is registered you do not have to prove you are still using it to maintain or renew the registration.

China does require proof of use in certain circumstances. The most well-known circumstance is when a trademark is challenged for non-use; at that point a trademark owner has two months to provide evidence of use in the three years prior to the non-use cancellation being filed. (You can’t start using the mark after receiving the notice.) Another circumstance is when a trademark owner is suing a third party for trademark infringement and trying to prove damages. If you can’t show that you have been using the trademark yourself, it’s difficult to convince a Chinese court that you lost money due to another party’s infringement.

In my previous post, I outlined the general sorts of documents that could be used as evidence of trademark use. The Chinese Trademark Office (CTMO) has recently released a document that categorizes acceptable and unacceptable forms of evidence of trademark use in China, helpfully titled Explanations on Submission of Evidence of Trademark Use (提供商标使用证据的相关说明).

Acceptable trademark use on goods includes:

  1. on goods or their packaging/labeling, or including the mark on product tags, manuals, brochures, or price lists;
  2. in documents relating to the sale of goods, such as contracts, invoices, bills, receipts, import/export documents, inspection/quarantine certificates, and customs clearance documents;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

Acceptable trademark use on services includes:

  1. on the premises where services are offered, including on service brochures, signboards, decorations, staff attire, posters, menus, price lists, coupons, office stationery, letterheads, and other articles related to the services;
  2. on documents associated with the services, e.g., invoices, remittance advice, service agreements, repair and maintenance certificates;
  3. on the radio or television, in widely distributed print publications, or in other media;
  4. on billboards, mail, or other forms of advertisements; and
  5. at exhibitions or trade fairs, including printed matter or other material.

The above is not an exhaustive list, but for good measure the Explanations note that the following does not constitute acceptable trademark use:

  1. documents relating to a trademark’s registration, including any statements by the trademark owner about its exclusive rights to such mark;
  2. use in private commerce (i.e., not openly);
  3. use on complimentary items;
  4. assignment or licensing of the trademark without actual use by the licensee; and
  5. de minimis use of the trademark merely for the purpose of maintaining the registration of the trademark.

The last item is perhaps the most controversial and subjective, because trademark squatters have been known to make a single Taobao sale of an item to themselves (or to a relative) so they have evidence of use in China. In the past, such use, which to most rational people would be considered both de minimis and in bad faith, has sometimes been deemed acceptable by the CTMO. That being said, such lax rules have also redounded to the benefit of legitimate trademark owners who have not been scrupulous about keeping records and find themselves in need of last-minute evidence of use. But the trend now is for the CTMO to be stricter about de minimis use, and not consider it sufficient proof to maintain trademark rights.

All of the above evidence must come from China, which almost always means the evidence must be in Chinese and be capable of authentication by the issuing entity. This makes sense: to prove use in China, you need evidence from China. A purchase order from a US company (even if it includes the trademark) is unacceptable. An invoice from a Chinese company that specifies the goods but does not mention the trademark is similarly unacceptable.

Most companies selling products in China have no problem providing the necessary evidence. It’s the companies that only manufacture in China that have problems, because they often have no acceptable documentation from China that includes the trademark. Don’t be one of those companies. Think about how you can best gather up your evidence and do so. Now.

China movie quotaAs Bloomberg reported last week, China’s propaganda ministry (now in charge of all media-related activity in China) has approved an additional seven foreign films to play in China this year in excess of the 34 film quota. These newly approved films will play theatrically on a revenue-sharing basis, and include the animated films The Grinch and Spider-Man: Into the Spider-Verse and the John Cho thriller Searching.

We have previously expressed our skepticism about China’s film quota system on a number of levels:

  1. As an actual quota (the number of revenue-sharing films each year often exceeds the quota, at the Chinese authorities’ whim).
  2. As a meaningful restriction on foreign films (foreign films are also allowed to play in China on a “buyout” basis, and as that market has become more competitive, the “buyout” terms for stronger foreign films have begun to approach the revenue-sharing terms asymptotically).
  3. As a useful shorthand for the foreign film business in China (the quota applies to all foreign films, but its slots are largely taken up by Hollywood product; China unilaterally controls release dates and imposes unannounced blackout periods; and China has historically been months if not years late in making revenue-sharing payments).

Increasing the number of quota films is seen as a win for Hollywood and perhaps even a sign of conciliation in the ongoing US-China trade war. But those issues are ancillary at best. China does not care one whit about promoting American films and it is actively trying to bolster homegrown films while weaning Chinese audiences off Hollywood blockbusters. That said, Chinese officials deeply care about economic growth and are invested in the narrative that China will soon replace the United States as the top-grossing territory in the world for theatrical box office. And right now China simply does not have enough quality movies ready for theaters, so to meet its own box office projections, its path of least resistance is to bring in more Hollywood fare, because it knows demand for those movies already exists.

Bringing in more American movies to satisfy latent demand infuriates Hollywood, because it is patently obvious they could have a larger market share if China would only let American films play without restriction. A China free of content restriction will never happen and perhaps it shouldn’t. France and Canada (to name a couple longtime American allies) both have long-established and uncontroversial rules favoring local content. Canadian radio stations are required to ensure that a significant percentage of the content they play is by Canadian artists; for instance, commercial radio stations must have at least 35% Canadian content between 6am and 6pm on weekdays. This is also known as the Bryan Adams Guaranteed Employment Regulation. It cuts like a knife, but it feels so right.

But I digress. The point is that we shouldn’t expect China to grant American films unfettered access to the China film market, even when China does not have enough quality film content of their own.

Why doesn’t China have enough content right now? In part, this may be an unforeseen consequence of the Fan Bingbing scandal. Once it became clear that China’s film and television productions would be under greater government scrutiny for tax evasion and other financial improprieties, a significant number of motion pictures either postponed or shut down production. I will leave it as an exercise for the reader to divine the reasons, but we are now several months out and theaters don’t have enough Chinese-language films that they want to exhibit.

The lack of Chinese content won’t last, but Hollywood still owes Fan Bingbing a big thank-you. They can start by getting Jessica Chastain’s 355 back on track.

China trademark registration

In a recent Quick Question Friday, I addressed whether a trademark application for a color device (aka logo) should be in color or black-and-white. As I wrote,

According to trademark practice in China, registration of a black and white device in China would protect the logo regardless of the actual color scheme used on the device, and for that reason we typically recommend our clients file an application for the black-and-white version of their trademark.

The exception is if the color scheme for the device is part of the trademark, such as UPS’ brown-and-beige, FedEx’s purple-and-orange, John Deere’s green-and-yellow.

But you know what can’t be protected in China? A single color. Article 8 of China’s Trademark Law reads as follows:

An application may be made to register as a trademark any mark, including any word, device, any letter of the alphabet, any number, three-dimensional symbol, colour combination and sound, or any combination thereof, that identifies and distinguishes the goods of a natural person, legal person, or other organization from those of others. [bold added for emphasis]

We’ll ignore the quaint British spelling of “color” and focus instead on the important word: “combination.” What this means is that China will only approve a trademark registration for a combination of colors, i.e., two or more colors used together. So Tiffany blue is not protectable in China. Or T-Mobile magenta. Or Owens-Corning pink. Or UPS brown (aka Pantone Matching System 462C), which is protected in the U.S. by U.S. Trademark Reg. No. 2,901,090 for transportation and delivery services, as applied to the surface of delivery vehicles and uniforms.

For most companies that use color marks, the requirement of a color combination isn’t an issue. For most, the color isn’t itself an essential part of the trademark. And for those that do consider color an essential part of the trademark, the color is already in a combination or can be easily made to be part of a combination.

So though UPS can register the color brown by itself as a trademark in the United States, in China it would have to use the brown-and-beige color combination. And though Caterpillar may want a trademark for the particular shade of yellow it uses on its logo and equipment, it could instead register the yellow-and-black combination that appears on its “Cat” logo as a China trademark.

To register a color combination as a trademark in China, the application must include a color sample as well as a Pantone color. And the color combination must be sufficiently distinctive with respect to the covered goods/services. Trying to register red-and-gold as a color combination on wedding services in China would not get you far.

China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One question we almost always receive from clients who are seeking to protect a logo (or “device,” as it is called in the trademark world), is whether they should register their device in color or in black and white.

According to trademark practice in China, registration of a black and white device in China would protect the logo regardless of the actual color scheme used on the device, and for that reason we typically recommend our clients file an application for the black-and-white version of their trademark.

The exception is if the color scheme for the device is part of the trademark, such as UPS’ brown-and-beige, FedEx’s purple-and-orange, John Deere’s green-and-yellow. In that case you would in fact want to claim the color scheme, because it’s an integral part of the brand identity. But these are the exceptions, not the rule. For most companies, a black and white device is both appropriate and sufficient.

China trademark lawThe purpose of a trademark, from both a legal and branding perspective, is to identify the source of goods. It follows, therefore, that the best trademark is one that is both memorable and distinctive. You want people to associate your brand with your company, not confuse your brand with other brands. You also want to make sure that your brand is more than just a description of the product.

The latter issue seems to trip up a number of companies. If you have a cleaning product, you can call it “The Best Household Cleaner” but you can’t register that as a trademark because “Household Cleaner” is just a description of the product and “The Best” is (in theory) descriptive of the product’s performance. Look at it from the perspective of other market participants: if you could register “Household Cleaner” as a trademark, that means no one else could use the term “household cleaner” on their products and that wouldn’t make sense at all. The same logic applies to the phrase “The Best.”

In China, trademark examiners have always been strict on the issue of descriptiveness; they will reject anything remotely descriptive, whether it’s descriptive of the product, the materials used to make the product, or the function of the product. CTMO examiners will also reject many trademarks that in the US would be considered suggestive (and therefore distinctive enough to be registered).

When we inform clients that their trademark will most likely be rejected by the Chinese Trademark Office (CTMO) as being descriptive, many respond by saying that they can’t or won’t change their trademark (some are already selling products bearing the mark) and they want to know what their options are, because they are still concerned about protecting their mark from trademark squatters in China.

The odds are the same no matter who files for a mark: the “real” company or a trademark squatter. And while the odds are low for descriptive (or suggestive) marks, they are not zero. So should you still try to register a descriptive mark? If you try and fail, it will give you a small amount of added protection, as the decision would be accessible to a trademark examiner. That said, neither the CTMO nor Chinese courts are bound by prior decisions so it’s not guaranteed that a trademark squatter’s future application would be rejected on the same grounds. It’s quite likely, but not guaranteed.

The most likely outcome with a descriptive mark is that the application would be rejected initially and every time thereafter, which would mean that the trademark would effectively be in the public domain in China. Everyone would be free to use the mark, and no one would be able to stop anyone else from using it. If a company’s sole concern is being able to export safely, having an unregistrable trademark is probably okay. But if the company ever wants to market or sell in China, then it could have a thousand copycats and couldn’t do a thing about it.

China trademarkA couple weeks ago, the online Chinese magazine Sixth Tone ran a story titled “China Founds Trademark Office to Protect Domestic Brands.” The gist of the story is that on Oct. 17, 2018, a new trademark office was established in Shanghai for the sole purpose of helping Chinese companies protect their intellectual property overseas:

The Shanghai Trademark Overseas Protection Office will support Chinese companies in international copyright disputes by providing guidance, training, and legal services. It will also create a think tank of experts to share their professional suggestions with businesses.

Though China is rife with bootleg DVDs, shoes with backward Nike swoosh logos, and countless imitations of other foreign products, its own time-honored brands fall victim to copycats too, according to the State Administration for Industry and Commerce.

The piece goes on to note that “on more than 80 occasions since 2004, well-known domestic [Chinese] brands have filed trademark infringement cases against foreign companies.”

Really? China is forming a new trademark office because of 80 instances of infringement in 14 years? Upon reading this story, I checked the calendar to see if it was April Fool’s Day. Not even close. I then checked with some trademark lawyers in China and they were unaware of this story, skeptical that the office actually existed, and unclear what would be achieved even if it did.

It goes on. The story received scant coverage in the Chinese press, and didn’t even rate a mention on the Chinese Trademark Office’s website – which is not surprising, because this purported office seems to have no connection with the Chinese Trademark Office. It appears to be a project solely of some subset of the Shanghai Administration of Industry and Commerce, ostensibly to demonstrate Shanghai’s prominence as a defender of Chinese intellectual property. It’s also a useful bit of propaganda, countering the prevailing narrative of China as a country that lets its companies steal foreign IP with impunity and without consequences. The old “let he who is without sin cast the first stone” strategy!

I have no doubt that some Chinese brands have had to deal with infringement overseas. I also have no doubt that the relative scale and dollar value of such infringement is miniscule as compared to the infringement of foreign brands in China. Moreover, when Chinese brands are ripped off overseas, they can pursue meaningful, robust remedies – at least in large markets like the U.S., Canada, Australia, and the EU.

And who, exactly, is infringing Chinese trademarks overseas? My sense is that few Chinese brands have cachet overseas, except among the overseas Chinese community, which suggests that foreign IP infringement is mostly (if not wholly) driven by Chinese entities. I don’t know if this is actually true, but would love to see a study. If only there was a think tank that could address these issues…

I hope I’m wrong about the Shanghai Trademark Overseas Protection Office and that it’s more than just a propaganda talking point. Because the truth is that Chinese companies do need help protecting their IP overseas, and it makes complete sense to have a China-based resource (like the EU’s uniformly fantastic IPR helpdesks). I can’t tell you how many times we see Chinese companies enter the U.S. market and do just about everything wrong, whether it be corporate formation or employee management or IP protection. And then it takes twice as long and costs five times as much to clean things up instead of just doing it right the first time.

China trademark movies

In the entertainment industry, documenting a film’s chain of title is extremely important. It’s how you show that the putative owners of the film rights do in fact own those rights, and it is essential to securing “errors and omissions,” or E&O insurance. And because a film is comprised of a number of elements, a number of things must be documented, such as: (1) that the underlying rights to the source material were validly acquired, whether the source material be a book or a play or a song or an original screenplay or otherwise; (2) that all the people who appeared in or worked on the film did so as a work for hire; (3) that all the music, still images, and film clips in the motion picture were purchased or appropriately licensed; (4) that the ownership of the completed film was clear and undisputed; and (5) that any entity with a right to derive revenue from the film, or make a substantive decision regarding the film has been identified and documented.

The last thing a producer, financier, or anyone exploiting the film in any way wants is for some third party to come out of the woodwork on the eve of release, asserting heretofore unknown rights and threatening interfere with the release of the film. Timing is crucial for film projects, and a last-minute delay (e.g., via injunction) can spell the difference between success and failure.

Most chain-of-title analyses focus, appropriately, on the copyright to the film (and any elements thereto). Because of the Berne Convention, for practical purposes, copyrights are international and technically do not need to be registered to be effective. As we have written, though, registration is often highly advisable in order to enforce a copyright, particularly in China. See China Copyright Law: We Need to Talk.

Most chain of title analyses will include a title report, which will include a list of trademarks that are identical and/or similar. But making sure that your title doesn’t run afoul of any trademarks is not the same as actually registering trademarks, and many film producers never register their title as a trademark. For most films, the title does not serve the purpose of a trademark, i.e., a way to identify the source of goods. (The main exception to this is with film franchises.) And in the U.S., you don’t need to register a film’s title as a trademark in order to exploit the film. Looking at the top 10 films in the U.S. from the past weekend, only Goosebumps had a trademark registration. None of the following had film-related trademark registrations or pending applications before the USPTO: Halloween, Venom, A Star Is Born, First Man, The Hate U Give, Smallfoot, Night School, Bad Times at the El Royale, The Old Man & The Gun.

Unlike copyrights, trademarks are country-by-country, so what is true in the U.S. is irrelevant in China. Could a trademark squatter register a trademark for a film and prevent it from being released in China? I don’t know that anyone has tried yet, not least because by the time a film’s title is announced, there’s usually not enough time to secure a trademark registration in China. But that may not always be true, and from my perspective, falls into the “why risk it?” category.

Having your film prevented from being exhibited in China is the worst outcome, but it’s not the only risk. The film’s title could also be registered by a third party attempting to capitalize on the film’s popularity by selling branded consumer products. If the film is at all popular, this is almost certain to happen — and we have seen it more than once. And although this may not affect the film release directly, it could certainly affect merchandising or other ancillary revenues. Instead of making money from consumer products, film producers could find themselves having to spend money in the hopes of squelching counterfeit lunchboxes.

If you’re releasing a film in China, it’s cheap insurance to register the film’s title as a trademark, and also to have the registration cover all of the goods that you either want to release yourself, or don’t want to see someone else release using the title as a brand name.

Last but not least, you’ll need to register both the English and Chinese versions of the film title.

China trademark registrationLast week, the Foshan Intermediate People’s Court awarded RMB 10 million (nearly $1.5 million) in damages to the well-known British luxury goods brand Alfred Dunhill, finding Chinese copycat brand Danhuoli liable for trademark infringement and unfair competition.

The press coverage (which apparently took its cue from the PR release) trumpeted the size of the award and the groundbreaking nature of the victory. To an observer unfamiliar with China trademark practice, both of these claims might seem odd in that the infringement was obvious, outrageous, and longstanding. The infringing company selected a name (“Danhuoli”) similar to Dunhill and then mimicked the elongated vertical lines and lower-case lettering of the Dunhill logo to create a copycat brand identity. And they were apparently successful at it, with more than 200 low-budget clothing stores (franchises, according to the South China Morning Post) in more than 61 cities across China. And just in case there was any doubt about their intent, the infringing company also created a Hong Kong parent company called Dunhill Group.

In the U.S. this kind of nonsense would last about as long as it took to file a TRO, but in China the road to enforcing trademark rights is long and frustrating. Chinese judges are reluctant to find trademark infringement unless the marks are identical, and even then it’s not guaranteed. Chinese judges are also reluctant to award high monetary damages because of the speculative nature of anything that can’t be proven with written evidence. So Dunhill is absolutely justified in feeling vindicated by the verdict.

But a landmark? I beg to differ. A landmark verdict is one that signals a change in the way cases are being decided. But this decision is no landmark, or if it is, it is too early to tell. Nor does this decision show that China is really serious about enforcing IP rights, because this decision is still the exception, not the rule. Check back in a year and let me know if every other decision since this one followed the same logic and came out in favor of the trademark owner.

Still, one detail about the Dunhill decision bears repeating: both companies had registered trademarks, but Dunhill’s was registered first (by decades). That fact alone signifies that Dunhill has had an active and forward-thinking trademark strategy for years. And they would never have emerged victorious in the latest dispute without superior trademark rights. See 8 Reasons to Register Your Trademarks in China.

A quick search of the CTMO database reveals that Danhuoli, whose entire business model is based on ripping off Dunhill’s trademark, is itself the subject of trademark squatting. It seems karmically appropriate.

China IP lawyer

Time for another entry in what has become a running series of posts about wine in China. Thus far, the series includes:

  1. China, Wine and Tariffs
  2. China Trademarks: Wine Labels in China
  3. China Trademarks – The (Mis)Classification of Wine

I’ve written previously about the rampant counterfeiting of foreign wine in China, especially with well-known brands like Château Lafite, Château Latour, and Screaming Eagle. Because counterfeiting only comes to light when it is discovered by authorities (or brand owners), the data is sketchy on the actual amount of counterfeit wine on the market – it’s either anecdotal or extrapolated, which leads to widely divergent conclusions. Maureen Downey, often cited as the leading expert on wine fraud, said back in 2014 that the majority of counterfeits were limited to a few vintages of a few labels, and that the top 16 counterfeit wines were all European. Meanwhile, another wine fraud investigator stated last year that 20% of all wine in the world is counterfeit, which would mean approximately 6 billion bottles of counterfeit wine are sold each year – a lot more than a few vintages of a few labels.

For many wineries, the design of the label — that is, in addition to the name of the winery – is also an indication of the source of goods. A bottle of Château Lafite doesn’t just bear the name “Lafite”; it also has a picture of the château. The obvious way to protect the wine label from infringement is via a trademark registration for the label design (or at least the graphic elements common to each label). But almost every wine label would also be considered a creative work in fixed form, and therefore eligible for copyright protection.

As we wrote in China Copyright Law: We Need to Talk:

Copyright is an essential part of any substantive IP protection plan in China, but many companies fail to take an extremely important step: registering their copyrights in China. One of the most common misconceptions our China IP lawyers hear is that copyright registration in China is optional, because you do not have to file anything to have a valid copyright in China.

The moral of that post is just as true for wineries as for any other company – the best way to enforce your copyright in China is to register it. Counterfeiters are creative in their own way, and I’ve seen some fakes that combine one winery’s label design with a new (often fake) winery name. A trademark registration for your label may be sufficient to stop such a fake, but why not give yourself more ammunition?

As with any business decision, wineries should conduct a cost-benefit analysis before registering a copyright in China. If you are a small winery and/or don’t sell wine in China and never expect to, I wouldn’t bother registering any IP in China, let alone a copyright. But if you’re big enough to export wine to China, you’re big enough to protect your IP. And that means trademarks for your name and your label, and also a copyright for the label.