China film quotasSince 1994, China has had a quota on the number of foreign films that could be shown in Chinese theaters on a revenue sharing basis (i.e., with the Chinese distributor remitting some percentage of the revenues to the foreign film’s producer). The quota started at 10 per year in 1994, was increased to 20 films per year in 2002, and then was increased again to 34 films per year in 2012 with the proviso that at least 14 of the films be in either 3D or IMAX format.

The exact revenue sharing model has varied, but the current rule, as outlined in the 2012 US and China Memorandum of Understanding (which was a settlement after the US had prevailed in a WTO complaint), allows the foreign film producer to keep 25% of all domestic revenues, without any withholdings or deduction. That percentage has been more aspirational than actualized; money from China is often both too little and too late.

Hollywood has been negotiating a new deal with China for more than a year (the 2012 memorandum expired in 2017), in hopes of raising the quota, increasing the percentage on revenue shares, and gaining more control (or at least transparency) with respect to distribution logistics such as release schedules and blackout dates. But the on-again, off-again US-China trade war has thrown those negotiations for a loop and effectively given China the ability to take whatever position it likes, from slapping a huge tariff on all US films to conceding on all of Hollywood’s deal points. But China is in no hurry to agree to anything. Why should it be? They’re fine with the status quo.

Meanwhile, an alternative to the quota import system has emerged that may render the whole discussion moot. For years, in parallel with the quota-based foreign films, China has also allowed the importation of “buyout” foreign films: films bought for a flat amount, with no required profit sharing. But in recent years, as the Chinese box office has become ever more profitable, the competition for buyout films has gotten increasingly fierce, with many distributors offering better terms, i.e., profit sharing. The most famous example of profit sharing on a buyout film came in January 2017 with Resident Evil: The Final Chapter, which became a smash hit in China to the surprise of all parties involved. Once the film passed RMB 500 million in domestic revenue (which happened on opening weekend), the film producer started getting a piece of the revenue.

As Resident Evil goes, so goes the world. Indeed, strict buyout films are now more the exception than the rule, and the revenue-sharing provisions are getting better and better. The US negotiators must be wondering why they are spending so much time negotiating an agreement for terms that are not appreciably better than what foreign filmmakers are already getting on the open market.

Except it’s not really an open market; China’s theatrical distribution system is dominated by two huge players, China Film Co. and Huaxia, both of which are state-owned. Even the buyout films have to go through those distributors to play in theaters, because foreign companies are legally prohibited from distributing films in China. If there is a convergence between the revenue-sharing terms of buyout films and quota films, it’s only because the Chinese authorities want that to happen (or at least are allowing it to happen).

It’s anyone’s guess how long buyout films will be allowed in on similar terms as the quota films or what the Chinese authorities really think about buyout films. Maybe they’re letting all of this play out to see what happens. Maybe they’re just roiling the waters between the MPAA (which represents the Hollywood studios, who provide most all of the quota films) and the IFTA (which represents non-studio producers, who provide many of the non-quota films). Either way, if you’re an independent producer, it’s a good time to be selling to China.

China movie contracts
Photo by George Baird

Over the past couple weeks, the Chinese Internet has been abuzz with chatter about how Chinese movie stars allegedly underreport income via a dual-contract system in which only one contract is disclosed to the tax authorities.

The ruckus started when television personality Cui Yongyuan uploaded a redacted actor employment contract apparently for Chinese A-list actress Fan Bingbing’s work on the upcoming Bruce Willis film Unbreakable Spirit. (Initial reports stated, incorrectly, that the contract was for Fan’s work on the upcoming Feng Xiaogang film Cell Phone 2.)

Cui complained that Fan was massively overpaid – nearly $1.6M for only four days’ work – and her contract was bad for the Chinese film industry. The contract also detailed some of Fan’s allegedly egocentric contractual demands: screenplay rewrites, her own hairstylist and voice artist, luxury car service, a $200+ daily food allowance, and a requirement that the studio also hire her personal makeup artist at more than $12,000/month. Here in the United States, The Smoking Gun and other websites have posted so many celebrity contracts that we are inured to such terms, but Chinese netizens went berserk. Some penned impassioned defenses of Fan; others bemoaned the country’s skewed priorities.

Cui was just getting started. The next day he published a second redacted contract, this one for $7.8M, and intimated that the two contracts were so-called “yin-yang contracts” for Fan Bingbing: a form of tax evasion under which the smaller contract is reported to the tax authorities as income, and the other is unreported and therefore tax-free income.

At this point the Chinese tax authorities got involved and announced they would be investigating various Chinese film companies and also Fan Bingbing’s own production company. Shares in most of China’s major film companies promptly took a dive, presumably on the assumption that accounting flim-flam was rampant.

Meanwhile, the supposed evidence of Fan’s financial misdeeds unraveled nearly from the beginning. Cui conceded that the second contract had no connection to Fan Bingbing and in fact he had no evidence of any tax evasion on her part. Fan has vehemently denied the allegations of a second contract, and has threatened to sue Cui for damage to her reputation. It’s enough to make your head spin.

Actor compensation is an increasingly touchy subject in China, as the government more control over the film industry while also wanting to exert “soft power” through its cultural exports. With the possible exception of Olympic champions, movie stars probably represent China’s most bankable and least controversial form of soft power. But if the stars shine too brightly (or get paid too much), then the optics start to look bad, especially internally. For this reason, last fall the China Alliance of Radio Film and Television passed guidelines (almost certainly at the behest of the Chinese government) seeking to limit actors’ pay in two ways: capping acting fees at 40% of a project’s budget, and capping any one actor’s fee at 70% of the casting budget.

At this point the only thing that seems (relatively) clear is that Fan Bingbing received $1.6M for four days’ work on Unbreakable Spirit. But let’s imagine for a moment that Fan did receive a separate, larger payment via a second contract. There’s no proof this occurred, but even if it did there’s nothing illegal about it, unless the recipient never reported it. Indeed, all of the criticisms leveled against Fan thus far are similarly uncompelling. Consider:

  1. Fan is being paid too much for her acting services. It’s not difficult to muster a convincing argument that as a policy matter celebrities should not be paid more than, say, teachers or scientists. But the producers of Unbreakable Spirit are the ones who have to pay Fan, not the public, and they have obviously made the calculation that Fan is worth it. She is one of the most popular actresses in China, and they’re not running a charity. Why shouldn’t Fan get as much money as possible for her role? Fame (and the attendant paychecks) can be fleeting, and it’s hard to begrudge anyone who demands to be paid what the market says they’re worth. Especially a female actor, in this age of #metoo. If Unbreakable Spirit were an American film no one would think twice about Fan’s compensation.
  2. The contract is with Fan’s company, not her personally. The vast majority of actors in Hollywood are hired through their own companies, usually LLCs called loanout companies. The main reasons for this are to limit liability and to gain preferential tax treatment. The situation in China is similar. Nothing illegal about it.
  3. Fan (might have) signed two contracts for the same film. Fan has her own production company and it’s quite common for big stars to work as actual or de facto producers on a film. That is: they use their fame, connections, and/or money to help get the film financed, made, and distributed. If someone not  an actor did that, they’d be paid as a producer. Nothing illegal or even unusual about having a second contract for different services.
  4. If she signed two contracts, Fan was paid much more for producing than for acting. Actors take lower fees all the time for various reasons. Maybe they love the movie and take less just to get the movie made. Maybe they believe in the movie and will take less upfront for a piece of the profits (or even revenues, as pioneered by Jack Nicholson in 1989’s Batman). Maybe they’re also directing and producing the film and effectively want to invest their sweat equity in the film. It’s also possible Chinese filmmakers may also be trying to avoid the 2017 rule limiting actor compensation. Such a workaround is arguably a gray area but seems difficult to police, especially with talent that legitimately provides more than just acting services. Who should decide the actual value of their acting services?
  5. Fan’s contract requests are outrageous. By Hollywood standards, Fan’s requests for Unbreakable Spirit are neither outrageous nor particularly diva-like; I’ve received bigger, less rational asks from actors who are much less famous. It’s almost expected for an actor (or their agent) to push the envelope and see how much they can get, not least because it establishes a benchmark for the actor’s next picture. And sometimes a seemingly outrageous request has a legitimate purpose, as most famously embodied by Van Halen’s prohibition of brown M&Ms.

Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.

But if Chinese celebrities are committing tax evasion through two contracts, it’s because they’re not reporting income, not because there’s anything wrong with the two-contract model.

China WFOE Rules

What is it about registered capital that makes it so consistently confounding? We hear so many half-truths and misconceptions about registered capital that it’s hard to keep track of them all, let alone dispel them. Not for lack of trying, though: see China Company Law Myths: Registered Capital and Personal Liability, How To Start A Business In China. The Minimum Capital Requirements For A WFOE, Part II — The Goldilocks Rule, and Registered Capital For Chinese Companies. Overrated. Without further ado, following please find 7 rules (both formal and informal) about the registered capital requirement for WFOEs.

  • China has no statutory minimum registered capital amount for WFOEs. This statement has been widely promulgated but is only mostly true. China used to have a statutory minimum applicable to all WFOEs, but when the Company Law and associated regulations were revised as of March 1, 2014, the statutory minimum was waived for almost all types of WFOEs. Certain high-profile business scopes still have statutory minimum registered capital amounts for WFOEs. For instance, a financing and lease company must have at least US$10M in registered capital, and an international forwarding company must have at least US$1M in registered capital.
  • China still has a de facto minimum registered capital amount for all WFOEs. When the Implementing Rules on WFOE Law were amended in 2014, the new rules eliminated the following requirement: “the amount of registered capital of an FIE shall match the company’s operational scale.” Observers hailed this change as allowing foreign investors much greater latitude in determining the proper amount of registered capital for their Chinese subsidiaries, because the Administration of Industry and Commerce could no longer claim statutory authority. The acclaim was short-lived, because the AIC still approves all WFOE applications and the formal requirement has simply been replaced with an informal one.
  • You don’t have to deposit the full amount of registered capital right away. Before the Company Law was amended, the default rule was that foreign investors needed to deposit 15-20% of the full amount of registered capital within 90 days of the business license being issued, and the remainder within 2 years of the business license being issued. And to confirm that the registered capital was in fact paid, the deposit needed to be verified by an accountant and the government. The new default is that the registered capital simply needs to be paid within 30 years of the business license being issued.
  • You do have to deposit the full amount of registered capital at some point. 30 years seems like a long time, and it is, but it’s not forever. And if you ever seek to wind down your WFOE – for any reason – you need to have deposited the full amount of registered capital first. So don’t think you can set the amount of registered capital artificially high just so you can have tax-free operating funds.
  • You don’t have to keep the full amount of registered capital as a reserve. We have covered this extensively in previous posts. The basic rule of thumb is that your registered capital should cover the first year or two of your WFOE’s projected expenses. And not only do you not need to keep the registered capital amount in a bank account, you are expected to spend it. On your WFOE’s expenses for the first year or two.
  • You will have to keep a reserve fund of 50% of the registered capital amount. The corollary to the above rule is that though you are expected to spend your entire registered capital amount on the China WFOE’s expenses, you are simultaneously required by statute to build up a reserve fund equal to 50% of the registered capital amount. This is straight out of Article 166 of China’s Company Law: “When companies distribute their after-tax profits for a given year, they shall allocate 10% of profits to their statutory common reserve. Companies shall no longer be required to make allocations to their statutory common reserve once the aggregate amount of such reserve exceeds 50% of their registered capital.” Note the use of the imperative “shall”: paying 10% of your WFOE’s profits into this fund is not discretionary.
  • The minimum allowable registered capital amount may not be the minimum necessary. Just because the AIC approves a certain registered capital amount for your WFOE does not mean the amount is appropriate. The most common error here is for foreign investors to set their registered capital amount too low in light of what they plan to do with their WFOE. Maybe they want to start with a two-person office, but in two years they expect to open a second office, hire 30 more people and bring several people over from their “home office.” Unfortunately, if a WFOE’s registered capital amount is too low, the WFOE may have limitations on everything from hukous to foreign work permits to its ability to open branch offices. It is possible to increase the amount of registered capital after a WFOE has been formed, but it takes time, and that is often the most precious commodity of all.

 

China trademark requirements
Xnay on the XX, at least for China trademark purposes

China trademark practice is full of standards (both formal and de facto) that lead to strange results, not least because CTMO examiners don’t apply the standards consistently. One of the more confusing standards concerns the relationship between the length of a trademark and inherent distinctiveness. The basic rule is that a trademark must have a minimum of three letters or it may be rejected as not distinctive.

The rationale for this standard is that if a trademark only has one or two letters (plus numbers, perhaps), it looks like a product number, not a brand name. And the CTMO doesn’t want to protect product numbers. So if you have a brand name of just one letter, or one letter and a number, or two letters, or two letters and a number, you should not count on a successful registration.

On a certain superficial level, this makes sense; product numbers have a certain generic quality to them and trademark law should not allow the registration of generic names. But on closer inspection, the rule is overly formalistic and absurd: three letters good, two letters bad.

According to the CTMO’s rules, Paramount Pictures could protect the Vin Diesel secret agent franchise “XXX” with a trademark registration, but the British band The XX and the seminal Los Angeles punk band X would be out of luck. Also out of luck would be the T-1000 (the shape-shifting liquid metal Terminator introduced in Terminator 2: Judgment Day), the ED-209 robot from Robocop, and Mazda’s once-popular RX-7 sports car.

Article 11 of China’s Trademark Law provides that descriptive, generic, and otherwise non-distinctive marks can acquire distinctiveness through use, which sounds like the exception that will save the day for rationality, but unfortunately this exception is almost solely theoretical. Audi spent a lot of time and money trying to prove that “A4” and “A8” had gained distinctiveness through use in commerce and they had a mountain of evidence to back up their claims because both those models had sold well in China. They still lost.

Meanwhile, you’d think A24 (the film production company that won a Best Picture for Moonlight) would be out of luck, and you’d be right, except that A24 opted to file an application in China solely for their logo, a circle containing a stylized “A24” in the middle. And therein lies the solution. If you can’t register your trademark as a standard character mark, your only realistic chance at registration is to cloak it in the guise of a graphic, and (assuming the graphic is distinctive) file a single application covering both.

Some clients will just roll the dice and hope for a lax or inexperienced examiner. The CTMO’s standard is unpredictable, and on occasion we have been able to register ostensibly non-distinctive marks, particular combinations involving two letters and one number. But this strategy is far from robust; if the desired trademark is not inherently distinctive as a standard character mark, the safe approach is to either file an application that incorporates a distinctive graphic, or select another trademark.

China IP lawyersOn an almost weekly basis, our China IP lawyers field inquiries from foreign companies that have discovered their Chinese manufacturer has registered one or more of their trademarks. The Chinese manufacturer’s rationale for registering these marks ranges from the altruistic (to prevent trademark squatters from doing so first) to the malevolent (to sell counterfeit goods in China), but usually falls somewhere in between The manufacturer always claims its intentions were pure as the driven snow, but this explanation is hard to accept when, as is almost always the case, the manufacturer never told the foreign company what they were doing. Deep down, the manufacturer knows that owning the trademarks gives it leverage in future negotiations.

The best manufacturers operate with full transparency: they ask their foreign company clients if they have already filed for trademarks in China, and if they haven’t, they explain the importance of doing so as soon as possible. See 8 Reasons to Register Your Trademarks in China. If the foreign company then says it can’t or won’t file trademark applications in China, then—and only then—will the manufacturers file trademark applications for the brand owner’s marks, and with the clear understanding that it will assign ownership of the marks to the foreign company upon registration. But again, this almost never happens.

Back to the usual case of manufacturers filing trademark applications unbeknownst to its foreign company client. Once the Chinese manufacturer has been found out, many will claim that they are legally or logistically prevented from transferring ownership of the registrations to the foreign company. We have heard many excuses, including the following:

  1. Only Chinese entities can own a Chinese trademark.
  2. The only way to transfer ownership of a Chinese trademark is for the manufacturer to abandon the mark and then for the foreign company to file a new application, but this is dangerous because third parties might file an application in the time in between.
  3. It is not possible to transfer ownership of a trademark application that is under examination.
  4. In order to assign a trademark, each party must submit a Certificate of Good Standing or a business license that has either been issued by the Chinese government or authenticated by the Chinese Embassy, and the latter process will take several weeks.

Full points for creativity, but none of the above is correct.

  1. Foreign entities can own Chinese trademarks. In fact, foreign companies own millions of Chinese trademarks.
  2. The way to transfer ownership of a Chinese trademark is by filing an assignment statement with the Chinese Trademark Office. It is possible to “transfer” ownership by abandoning a mark and then having a third party file a separate application, but that is costly, inefficient, and risky.
  3. It is possible to transfer ownership of a trademark application that is under examination. That said, if the trademark is ultimately rejected, then the new trademark owner will not own anything at all.
  4. You do need to submit proof of both the assignor’s and assignee’s identities, but nothing needs to be authenticated. The documents required should be readily accessible.

When you find out that your Chinese manufacturer has registered your trademarks, you may need to negotiate the terms under which they will assign the marks to you – and that may take some time. But the actual assignment process is easy and relatively inexpensive and don’t believe anyone who tells you otherwise.

China trademark lawyersOne of the reasons we are always harping on the need to register your trademark in China is that in addition to being a first-to-file jurisdiction, China does a lousy job policing bad-faith trademark registrations. As a result, trademark squatting has been a profitable and low-risk activity in China for several years.

Those who are unfamiliar with Chinese trademark practice might think the problem is China’s trademark law. Not so. China’s Trademark Law has a number of provisions that could easily be invoked to combat trademark squatting, including the following:

Article 10.7 prohibits any trademark “in the nature of fraud in advertising that easily confuses the public with the quality or other characteristics or origins of the goods, or the place of origin of the goods.”

Article 10.8 prohibits any trademark “detrimental to socialist morals or customs, or having other unhealthy influences.”

Article 13 states that registration shall be denied and use prohibited for any mark that is a “reproduction, imitation, or translation of a third party’s famous trademark which has not been registered in China and where the goods are identical or similar, which may cause public confusion and damage the interests of the registrant of the famous mark.”

Article 15 states that “Where an agent or representative, without the authorization of the principal, seeks to register in the agent’s name the principal’s trademark and where the principal objects, registration shall be refused and the use of the mark shall be prohibited.”

Article 32 states that “No trademark application shall infringe upon another party’s existing prior rights. Nor shall an applicant rush to register in an unfair manner a mark that is already in use by another party and enjoys substantial influence.”

The problem is that the Chinese Trademark Office (CTMO) does not interpret the Trademark Law in a way that constrains trademark squatters. As a practical matter, the only time aggrieved IP owners have a good chance to prevail in an opposition on the first try is if (1) the trademark squatter is an obvious and well-known squatter with hundreds of applications for other people’s trademarks or (2) the trademark squatter has (or had) a business relationship with the “real” owner.

The former can be shown by printing out the search results from the CTMO database along with a few annotations (and even then it’s basically a coin toss). The latter depends on the facts of the situation; the better the facts, the better the odds. In an ideal situation, the Chinese party would have executed (using their chop) a formal agreement in which they agreed not to register or otherwise interfere with any of their partner’s IP. Such an agreement could be used both as evidence for a trademark opposition and as the basis for a lawsuit. But the ideal is rarely attained, in large part because Chinese parties who execute formal agreements don’t go out and register their business partners’ trademarks – and if they do they are willing to assign them.

Most of the time, a trademark opposition against a former business partner is instead supported by a sheaf of circumstantial evidence demonstrating the business relationship. The best circumstantial evidence consists of documents issued by the Chinese side and bearing their company chop (like an invitation from them for purposes of a business visa), or documents issued by a third party clearly identifying both the foreign buyer and the Chinese party (like shipping or customs documents). But even those are often hard to track down. Many business relationships – even with millions of dollars of product exchanging hands – are based on generic purchase orders that could easily be forged and are exchanged with a factory owner’s personal email account. Add to that the fact that orders are often placed with or shipped by another entity, and it’s no surprise that the dots are often quite difficult to connect.

Over the years, our China trademark lawyers have included the following sorts of documents as evidence in trademark oppositions:

  1. The business card of the Chinese side.
  2. The Chinese side’s business license
  3. Emails from the Chinese side
  4. The Chinese side’s passport.
  5. Purchase orders from the foreign buyer
  6. Invoices from the Chinese side
  7. Bank receipts from the Chinese side’s bank showing payment from the foreign buyer.
  8. Bank receipts from the foreign buyer showing payment to the Chinese side
  9. Shipping documents showing the Chinese side as the exporter of record and/or the foreign buyer as the consignee.
  10. The foreign buyer’s corporate Certificate of Good Standing
  11. Photographs of the foreign buyer visiting the Chinese party, or vice versa
  12. Visa invitation letters from the Chinese party to the foreign buyer, or vice versa.

With a circumstantial case, you never know what is going to turn the tide with the CTMO examiner, so it’s usually best to err on the side of excess. The more evidence the better.

But it’s even better to register your trademarks first so you don’t have to deal with this situation at all.

China trademark registration
       Same same but different

One of the annoying quirks (or endearing features) of the Chinese trademark system is that the Chinese Trademark Office (CTMO) and the Chinese court system have different standards for what makes one trademark “confusingly similar” to another, which is the statutory basis for determining whether one trademark conflicts with another. To make things even more confusing, neither the CTMO nor the Chinese court system has a uniform, clearly articulated standard.

That being said, experienced practitioners know CTMO examiners are generally more strict than Chinese judges. As discussed in these pages before, the CTMO continues to hire vast numbers of inexperienced trademark examiners who are under tremendous time pressure to crank through a mind-blowing number of trademark applications. They’re following a playbook, just like an offshore customer service representative, and they aren’t rewarded for making appropriate judgment calls. I haven’t been to one of their training sessions, but I have to believe the mantra drilled into new recruits is “When in doubt, reject.”

None of the CTMO examiners are native English speakers and many don’t speak English particularly well. They are trained to look for similarities in phonetics, pronunciation, appearance, and meaning, which can lead to absurd results for English-language marks that superficially appear similar. For instance, “Big Work” and “Big Dork” might well be considered confusingly similar brand names by the CTMO even though there isn’t a single native English speaker who would ever confuse the two. In fact, the CTMO would probably consider “Work Big” and “Big Dork” to be confusingly similar. At a very high level, you can see why: the order of the words is flipped and one letter is different, but otherwise they are identical.

It’s possible to rationalize the CTMO’s unsophisticated approach to English-language trademarks by noting that many Chinese consumers have limited English-language skills and might indeed think that “Work Big” and “Big Dork” brands were produced by the same company. But this argument doesn’t hold up under further scrutiny, because the CTMO examiners take the same approach with logos (that are not in any particular language).

The Trademark Review and Adjudication Board (TRAB) hears appeals of trademark rejections, and they have a more objective and sensible approach to the “confusingly similar” standard. But they, too, are overworked and understaffed, and far more often than you might expect, they will uphold a ridiculous CTMO decision. So it is entirely possible that in real life, an existing registration for “Work Big” would block an application for “Big Dork.”

Meanwhile, the Chinese court system would almost certainly not find that the “Big Dork” brand infringed upon the “Work Big” registration. The owner of “Work Big” could not get an injunction or damages, and would be hard pressed to take any action at customs. Frankly, it probably wouldn’t even occur to them because the marks are so different.

So where does that leave the owner of the “Big Dork” brand? They are unable to secure a trademark registration in China, but they can’t be sued for infringement either. Effectively, they’re in the same position as anyone using a descriptive trademark: nobody can stop them from using it, but they can’t stop anyone else from using it either.

Whether this is acceptable to the “Big Dork” brand owner largely depends on what they want to do in China. If all they want to do in China is manufacture goods and be assured that their goods will not be seized at Customs for alleged trademark infringement, they should feel reasonably confident. It’s not ideal, though, since CTMO’s decisions are not binding and if a trademark squatter files an application a couple years down the line and gets a CTMO examiner with a more relaxed standard, that squatter might be able to secure a registration after all. The best decision would be to use a trademark that they could definitely register in China, whether by appealing the CTMO’s rejection or by picking a new trademark. Better safe than sorry.

And if they plan to sell goods in China, they absolutely need to find another trademark, because it’s guaranteed that someone else would copy the “Big Dork” brand name and they wouldn’t be able to do a thing about it. See Make China Trademarks a Priority.

China trademark registration
How many China trademarks do you need?

Our trademark clients often ask how many trademarks they ought to register in China. The answer is not as straightforward as it may seem.

As an initial matter, companies should register the brands that they are actually using and on the goods or services that are actually in use in China. But sometimes clients are unable to register their actual trademark (either because it was too descriptive or too similar to an existing registration) and instead opt to file applications for a similar trademark they have no intention of ever using. Their rationale is that if they can register the similar trademark, it would block any applications for their actual trademark. This is not an approach we recommend, but it’s not as crazy as it sounds. Just because their application was rejected doesn’t mean a trademark squatter’s application for the exact same mark would be rejected. CTMO examiners are not bound by previous decisions and their decisions do not always make sense. More on this below.

The more famous the brand, the more likely a trademark squatter will attempt to file a phonetically or orthographically similar mark, so as to take advantage of credulous consumers. This is especially common with the Chinese version of a foreign brand; the Chinese brand name is often new and not well known, so who’s to say which Chinese name is accurate? Companies that can afford it should apply for as many similar trademarks as you can afford, especially Chinese-language marks. See Chinese Brand Names, Copycats, and Soundalikes.

Chinese law also allows (if not implicitly encourages) trademark applicants to file in multiple classes, covering a range of goods and services far beyond what the applicant actually provides. We often cite Starbucks as a prime example of a company that has taken full advantage of this strategy by (for example) registering “STARBUCKS” as a trademark in all 45 classes of goods and services. See China Trademarks: Register in More Classes, Take Down More Counterfeit Goods.

Another question is whether companies with a logo that contains some text should file separate applications for both the logo and the text itself. The short answer is yes: filing separate applications for both the logo and the word mark provides more protection than just the logo by itself. You can use the word mark with all fonts and in all contexts, and you won’t need to file a new word mark application if you change your logo (which happens all the time). And although a logo that includes text is typically considered more distinctive than a word mark by itself – and therefore more likely to be registered – the CTMO examiners are unpredictable enough that even this isn’t always true. I was reminded of this recently when we received different decisions on two almost-identical trademarks. One was a word mark; it was approved without incident. The other was a slightly stylized version of the word mark; it was rejected due to a perceived conflict with a preexisting mark. It makes zero sense that the CTMO issued these two decisions, but consistency has never been that agency’s strong suit.

You never know for sure what will work with the CTMO, but on a sheer numbers basis, the more trademark applications you file, the more likely one is to be registered.

China trademark lawyersIn part one of this two-part series, we discussed the general strategy when filing a non-use cancellation, and the steps you can take to increase your odds of success. In this concluding second part, we’ll discuss the timing of non-cancellation filings, and a specific strategy when dealing with a trademark squatter.

Unless motivated by spite, people file non-use cancellations to eliminate trademarks that stand in the way of their own trademark applications. They do so at one of two times: before filing an application (to eliminate potential obstacles) and after their application has been rejected (to eliminate cited obstacles).

In an ideal world, you would link a cancellation to a trademark application so that the CTMO examiner (or TRAB panel, as the case may be) would note the linkage and suspend their efforts until the cancellation was decided. But we do not live in an ideal world, and the CTMO does not suspend examinations or appeals until cancellations are decided. Instead, you have to work out the timing yourself and play the odds that the non-use cancellation will be decided first.

It’s an inexact science. If you are appealing a rejection, the window to file an appeal is so short that you have little choice but to file the appeal and non-use cancellation at the same time. But if you haven’t filed an application yet, the best way to ensure that the cancellation will be decided first is to file the non-use cancellation, wait a few months, and then file an application. Don’t wait too long, though: once the trademark owner has been notified (usually within 2-3 months of filing the non-use cancellation), they might file their own (new) application. Many applicants don’t bother trying to game the system; they file a non-use cancellation and a trademark application at the same time, and if they are unlucky enough to have the application examined first, they just file an appeal, secure in the knowledge that the cancellation will definitely be decided before the appeal is.

Filing a non-use cancellation against a trademark squatter has some unique challenges. Many trademark squatters never use the mark in commerce: their sole goal is to monetize the trademark by selling it to the “real” trademark owner, or to the highest bidder on the secondary market.

A trademark squatter could take a couple actions to foreclose the possibility of a non-use cancellation. First, they might sell a few branded goods via e-commerce, thus satisfying the use in commerce requirement. The CTMO does not require much evidence to satisfy the use requirement, and in my experience they won’t look past the basic facts to determine whether the evidence reflects a bona fide arms-length transaction (versus a fake sale to a friend or relative). Still, it takes some effort to create and maintain this evidence, and not all trademark squatters do it.

Second, the trademark squatter could file another, identical application before the three-year term is up, thereby preserving their rights with a new application even if the first registration is cancelled. But two can play that game. The real trademark owner could also file an application before the three year term is up – and then file a non-use cancellation exactly three years after registration. Sure, the application may be initially rejected if it’s decided before the cancellation, but you can then file an appeal, and the cancellation should be complete by the time the appeal is decided. This strategy takes time to execute, and it is not without risks. (What if the trademark squatter filed a new application before you? What if the cancellation fails because the trademark squatter actually had used the mark in commerce?) But if it works, you can retrieve the mark at a much lower cost, without involving the courts, and without having to pay off a trademark squatter. Or if you don’t want to wait for the various proceedings to wrap up, you could use the pending filings as leverage to negotiate a lower price from the trademark squatter.

Yes, it would be nice if China provided recourse against trademark squatters by more straightforward means. The letter of the Trademark Law provides remedies against trademark applications filed in bad faith: trademark oppositions (for pending applications) and invalidations (for existing registrations). But in the real world, trying to take on trademark squatters head-on has a very low chance of succeeding. Unless you’re willing to pay tens of thousands of dollars to retrieve “your” trademark, using the Chinese trademark system against them is usually the best hope.

Needless to say, cancelling a trademark squatter’s registration is predicated on the assumption that the squatter hasn’t used the mark in commerce. The more research you can do before filing a non-use cancellation, the better. Because if the squatter has in fact used the mark such that they can defeat a non-use cancellation, they’ll probably increase the sale price, figuring that you must really want the trademark.

China Trademarks
China Trademarks. Timing is everything.

Increasingly often, pre-application trademark searches and post-application notices from the China Trademark Office (CTMO) reveal conflicts with preexisting rights (i.e., trademark registrations or pending trademark applications). It’s not surprising, given the vast number of trademarks being filed. See China Still Has Too Many Trademarks.

But a cited conflict, whether in a search or from the CTMO examiner, isn’t necessarily the end of the road for a trademark application. Chinese trademark law and practice offer a potential solution: the non-use cancellation. In China, any trademark that has been registered for more than 3 years is vulnerable to a non-use cancellation as of three years after the registration date.

Almost every country has a use requirement for trademarks: trademarks that aren’t used in commerce for a given period of time (usually about 3 years) are deemed abandoned and may be cancelled. In the U.S., when a registered trademark is cited as a conflict, the odds are fairly high that the trademark is still in use, especially if the mark has been registered for 10 years or less. The U.S. requires the trademark owner to provide sworn proof of use at the time of registration, between 5 and 6 years after registration, and again between 9 and 10 years after registration. That doesn’t leave a large window of time for the mark to be abandoned.

Meanwhile, China has no affirmative use requirements to register, maintain, or renew a mark and many trademark applicants take advantage of this loophole to register in additional subclasses and thereby cover a wider range of goods. See China Trademarks: Register in More Classes, Take Down More Counterfeit Goods. The only way that a Chinese trademark registration will be cancelled for non-use is if a third party files a non-use cancellation and the trademark owner is unable to provide proof of use in commerce during the previous three years. See China Trademarks: When (and How) to Prove Use of a Mark in Commerce. Accordingly, the vast majority of Chinese trademark registrations that have been effectively abandoned are nonetheless still valid.

Determining whether to file a non-use cancellation turns on whether a conflicting trademark is actually being used in commerce. Here, the ubiquity of e-commerce in China comes in handy. With few exceptions, any product or service deemed valuable enough to protect with a trademark registration will be marketed and sold online. And a thorough Internet search will reveal the traces. And I do mean thorough: for starters, going several pages deep on search engine pages (Baidu, Bing, etc.); checking company registrations; scouring social media pages (Weibo, WeChat, etc.); and poring through e-commerce sites (Alibaba, JD.com, etc.). If you find something credible, stop – one documented use in commerce is sufficient to defend a trademark against a non-use cancellation. But much of the time, our searches reveal no evidence that the trademark was ever used.

When you file a non-use cancellation, you indicate whether you wish to cancel the entire registration, or just with respect to certain subclasses. If your goal is to eliminate an obstacle to your own trademark, a partial non-use cancellation with respect to the subclass that matters to you is sufficient – and also more likely to succeed. If you attempt to cancel an entire trademark registration, the trademark owner only needs to demonstrate use on a single item in order to defeat the non-use cancellation. Why overreach when it doesn’t gain you anything?

After you’ve done all the research and determined whether to file, it’s just matter of completing the paperwork and waiting the 9+ months to hear back from the CTMO. Sometimes you can shortcut this timeline by contacting the owner of the conflicting mark. This option is most applicable when a conflicting mark covers a number of subclasses but is not being used on any of them, and you only need coverage in one or two subclasses. You could file a cancellation against the entire mark, but the owner of the conflicting mark would undoubtedly prefer to keep some protection. If you are appealing a rejection, the cooperation would work like this: the trademark owner would provide a letter agreeing that your trademark can coexist with theirs, and in exchange you don’t file a non-use cancellation against the full registration.

In part two of this two-part series, we’ll look at the timing of non-cancellation filings in general, and in the specific case when dealing with a trademark squatter.