China trademark registration

The month of wine-related posts continues!

We started with China, Wine and Tariffs, continued with China Trademarks: Wine Labels in China, and I will now examine the Nice classes to use on wine-related trademarks in China.

This may seem like an obvious question – if you’re selling wine, then you should register in Class 33, which covers alcoholic beverages (except beer). Class 33 only has one subclass, so you don’t even need to worry about filing in multiple subclasses. A single registration for “wine” will also cover aperitifs, bitters, ciders, sake, vodka and whiskey (and everything in between). And if all you want to do is ensure that you can sell your product in China, then you can stop here.

But for most brand owners, it’s not enough just to ensure that you can continue your operations. You also want to prevent trademark squatters from coopting your mark in other ways. In China, the trademark examination system is quite mechanical: all items in a subclass are deemed similar to every other item in the subclass – and only to those items. There are a few exceptions with certain goods and certain subclasses (i.e., goods in a certain subclass that are considered similar to those in another subclass), but those are predefined and laid out in Chinese Trademark Office (CTMO) publications. Everything else is fair game, because it’s not considered “similar” under CTMO practice.

Also, as we have explained previously in China Trademarks: Register in More Classes, Take Down More Counterfeit Goods, CTMO practice allows (if not encourages) trademark applicants to file in classes far beyond the scope of what they actually manufacture or sell. This is a double-edged sword: it allows trademark owners to extend brand protection as broadly as they like (if cost is no object), but on the other hand it also allows trademark squatters the latitude to engage in mischief, like applying for Star Wars brand instant noodles.

So when you’re filing a trademark application, you should think about two sets of classes: (1) which classes you need to protect your own goods/services, and (2) which classes you want to keep out of the hands of third parties.

If you’re a winemaker, you probably don’t care if someone takes the brand name of your wine and uses it on telescopes. But you probably would care if someone used it (for example) on corks (Class 20) or beer (Class 32). I just did a quick search on the CTMO website and yes, Penfolds has registrations in both classes.

What are you doing to protect your wine brand in China?

China trademark registration costs $
                                                                  What’s in your bottle?

In my last post, I wrote that I could do a whole month of posts about wine. Here’s another.

The Grape Wall of China blog recently assembled a page full of “[f]ake, funny, old or odd” wine labels. The labels are all entertaining, but as someone who regularly deals with counterfeit merchandise, the fake ones are what really caught my eye. Typically, the bottles of fake wine really do contain wine and not some other liquid. However, the wine inside the bottle does not match the label and it is usually low-end plonk that (literally) would not pass the sniff test.

The webpage focuses on two particular faked brands: the legendary French brand Château Lafite Rothschild and the Australian brand Penfolds. Both of these brands have enjoyed worldwide success and are well-recognized in China, which is undoubtedly why they have been counterfeited so often and in so many ways.

Some of the counterfeits are straight copies and are hard to tell apart from the real thing – like the 10,000 bottles of Chateau Lafite that police found last year in a single house in Wenzhou. Lafite only exports 50,000 bottles to China each year and nobody believed that 20% of the bottles were languishing in a house in Wenzhou. But the wine resale market is mysterious enough, and the fake labels good enough, that at the time the wine was seized, no one could definitively say the seized wine was fake.

Other fakes are more “inspired by,” which makes you wonder how hard these counterfeiters are trying – or how hard they need to try. No one who speaks English would think that a wine called “CHATEAU OFFICIALLAFITE” is legitimate. But if your market is people who don’t speak English and don’t know much about wine but have heard of Château Lafite Rothschild, then the bar is pretty low.

Unlike most consumer products, the world contains thousands of wineries and even more brand names. And for those who don’t particularly follow wine, maybe only a dozen are recognizable as wine brands. For Chinese people, the number is even less. Frankly, I doubt the average person in China could name a single winery, with the possible exception of Chateau Lafite. If they know anything about foreign wine, it’s related to geographic areas or appellations (Napa, Bordeaux, etc.). So one response from a foreign winemaker might be: why bother registering a trademark in China? Unless I’m selling thousands of cases, no one knows the name of my winery anyway so there’s nothing to protect. That may be true, but think about it from the perspective of a counterfeiter. They want the biggest return for the least effort. You’ve already built up some brand equity with your brand and your wine label, and even if only a few people in China might recognize your label, it’s a lot easier for a counterfeit wine seller to register your mark and sell “your” wine in China than it would be for them to create a new brand. And all of a sudden you’ve lost the ability to sell wine in China under your own name, which means you’ll need to rebrand to sell in China.

As usual, it comes down to the same issue in China: if you don’t register your name first, someone else will do it for you. The only reason not to register your wine brand as a trademark in China is if you never intend to sell wine there.

China lawyers ICP license

We are in the midst of a new wave of foreign (European and American, mostly) companies coming to our China lawyers when about 80-90% into their WFOE formation process and asking us what to do about getting a China ICP (Internet Content Provider) license. These companies are coming to us after realizing that getting a WFOE in China is no guarantee for getting an ICP license in China.

In many of these cases, these companies were lured into forming China WFOEs with an ICP license as the carrot. These companies believed that their forming a China WFOE was their ticket to a China ICP license but then when it came time for actually moving forward on securing the ICP license, they started getting stuck in a morass of vagaries and double-talk and stalling.

They then contact one of my firm’s China tech lawyers, still mostly believing it will be easy for them to get the China ICP license they so much want. Thinking that we will immediately and easily be able to tell them exactly who to contact or what to do.

The following is an amalgamation of a fairly typical email:

We are nearing completion of our China WFOE formation and at the stage of wanting our China ICP license. It now appears that our WFOE formation company does not fully understand China’s ICP licensing process and so can you please tell us what you would charge to get that for us and how long that will take.

Our response is usually something like the following:

I’m sorry, but unless and until we know what exactly it is you will want to do with your ICP license we cannot tell you much at all. I suggest we talk briefly and then we can tell you whether we can help and if we can help, we will give you some fee estimates. Much of the time, having a China WFOE has little connection to getting an ICP license and so we very well may have to essentially start at square one on the ICP issue.

Bottom Line: Don’t pay for forming a China WFOE to get your China ICP license unless and until you are at fairly certain that forming that China WFOE will get you that license. In subsequent posts we will talk more about China ICP licenses. I just wanted to throw this post up now (and fast) to stop others from going down this expensive and often pointless WFOE path.

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.

Companies involved in the cannabis industry will sometimes hear about China being a first-to-file jurisdiction and ask if they should file a trademark application in China for their cannabis products. The short answer is no. Cannabis is illegal in China and those who violate the relevant laws are subject to harsh criminal penalties, including the death penalty.

However, it is possible to use the same workaround as in the U.S., where cannabis is also illegal under federal law: register the mark on products that also have legal uses.

China trademark lawyers
China trademark theft is on the rise

Everything China comes in waves and China trademark “theft” is no different. When we first started this blog way back in 2006, we would get about a call a week from someone — usually a U.S. company — wanting us to sue the Chinese company that was blocking the American company’s product from leaving China. We hated those calls because most of the time about all we could do was suggest they try to buy “their” trademark “back” from the Chinese company that now rightfully owned it.

One of our earliest posts (from January 2006), China Trademark “Theft,” talked of how common these calls were back then.

Though troublesome, the damage from domain name usurpation is typically small, particularly as compared to what can happen if someone hijacks your trade name or trademark in China.  We have seen this happen countless times, mostly to American companies who are unfamiliar with the “first to file” trademark law, as opposed to the U.S., British, and Canadian, “first to use” systems.

Though the media love to publish stories deriding China’s intellectual property protection, those articles frequently fail to mention that in most instances involving trademarks, the fault lies with the foreign (American) company, not with Chinese IP enforcement. The reality is that many foreign companies fail to register their trademarks in China and thus have no real right to complain about any “infringement” there. To expect protection, foreign companies must register their trademarks in China and the prudent company does this before going in.

There are actually a number of people in China who make a living (and a good one at that) by usurping foreign trademarks and then selling a license to that trademark to the original, foreign, license holder. Once one comes to grip with the fact that China, like most of the rest of the world is a “first to file” country, one can understand how easy this usurpation is, and also, how easy it is to prevent it.

The fact that you are manufacturing your product in China just for export does not in any way minimize the need for you to protect your trademark. Once someone registers “your” trademark in China, they have the power to stop your goods at the border and prevent them from leaving China. That’s right, they can stop your goods from leaving because they own the trademark, not you. We are aware of companies having to pay hundreds of thousands of dollars to get their trademark “back” and to get their goods flowing out of China again.

As my firm’s lead China trademark lawyers is always saying: the key to protecting trademarks in China is to register them in China before you do business there. This can usually be done at a relatively small cost. You should also consider getting the Chinese language equivalent as well.

For years we probably averaged a call a week from someone who had lost their trademark to China, to someone who had gone ahead and filed it before the non-Chinese company did so. Then, starting maybe 5 or 6 years ago, the number of these calls declined. I have ascribed this decline to two things. First, American companies started getting wiser about the need to get their brands, their logos and their company names registered as trademarks in China, due in small part to this blog even. Second, and of equal importance, China instituted rules to try to stop Chinese manufacturers and trading companies from registering as trademarks the brand names and logos and company names of the foreign companies for whom they were manufacturing or sourcing products. To simplify a bit, your China agent could not hang on to a China trademark that you were using before you brought them on for your manufacturing or product sourcing. We went from one China trademark “theft” call a week to maybe one a month.
But starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a sole in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China it will not go off and register it under its name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as your Toughest Competitor.
Our China trademark lawyers have been getting so many trademark theft calls of late that they now have a somewhat formulaic email response to those. The following is an amalgamation of a few that recently crossed my desk.
I am sorry to hear that someone has registered your brand name as its trademark in China. Our China trademark lawyers have handled many similar situations and they usually do not end well.
The first thing we usually do in these situations is figure out some basis for challenging this Chinese company’s trademark filing. Our favorite challenge is non-usage of the trademark for more than three years, but in this case because the trademark is less than three years old, that will not work. Our second favorite is when a former factory does the filing because there are laws against that. But to show that it is the former factory, we almost certainly would need to show that the company that actually filed is the same company that you formerly used for your production and that is seldom possible.
If we are not able to get you the trademark you want for widgets, the next thing we do is try to figure out whether there might be a workaround. For example, we had a lawn equipment company that had its brand name filed as a trademark for 17 things related to lawn equipment but the trademark “thief” failed to file for small engines, like those you find on lawn equipment. So our workaround was to get our client the trademark for small engines and then put its name in steel on the engine and then add a sticker or two to the lawnmowers once they hit the United States and Europe where our client sold its lawn equipment. [NOTE: I changed the type of product to make it impossible to be able to identify the company for whom we did this intellectual property workaround]
If none of the above look like they can succeed, we can and should try to buy your name from this Chinese company. Unfortunately, this tends to be a tougher and, more importantly, a more expensive than you likely would expect. We do these buys by lining up a Chinese person (not a lawyer or anyone with any apparent connection to our law firm) in China to handle the negotiations. If someone from our firm were to call, they would will immediately suspect/know we are working for an American company and they will ask for a fortune for you to get your trademark back. It sometimes even makes sense to form a Hong Kong company to do the buy.
Another possibility would be for you to come up with a new name or use another of your names — I am sure you have thought of this and I doubt that it is appealing to you, but it may end up being the only way to go. No matter how we end up proceeding on the name taken from you, I strongly advice that we look at what we can do now to protect whatever other names you use and perhaps your designs as well.
As for your attorneys who you thought had filed for your trademark in China but had not, do you have anything that would indicate you asked them to do so or that they said they would or — better yet — that they said they had actually filed for it? If you have something like that, we could ask that they fund all of the above, assuming that you used real lawyers for this work. See Fake China Law Firms Are The Real Deal and Is This a Real China Lawyer?
Anyway, let’s talk to see if we can help you on this.
China IP licensing

On August 23 and August 24, Law Seminars International will be putting on An Advanced Conference on Current Dealmaking Trends for IP and Technology Licensing: Tips for efficiently and effectively monetizing intellectual property. 

This event will be live at the Courtyard Marriott in Pioneer Square in Downtown Seattle and also via webinar wherever you are. Go here to get a pdf of the entire program. I will be speaking on the second day regarding “enforceable contracts as a starting point [for IP protection]: Classic pitfalls foreigners fall into when dealing with Chinese entities, like drafting in English, and other key considerations.”

Per the organizers:

Who Should Attend. Attorneys, business executives, licensing professionals, and others involved with complex licensing transactions.

Why You Should Attend.  Licenses are one way of bringing intellectual property to life. Without licenses, IP rights lay dormant until weaponized in court. Licenses allow IP to be commercialized, accessed and harmonized without resorting to aggressive enforcement. In today’s climate of constant change and tighter budgets, the ability to spot, craft, draft and negotiate license agreements efficiently and effectively is more important than ever for licensors and licensees.

This conference provides insights on developing issues arising from drafting and negotiating licenses, updates on case law, changes in technologies that impacts licensing, and the rise of new international players in IP licensing.

Join our distinguished faculty as they address the above and additional licensing issues from both outside counsel and in-house perspectives including a panel on problematic clauses and what to do about them.

What You Will Learn. 

  • ~ The anatomy of an effective license agreement
  • ~ NDAs as the courting phase of the licensing relationship
  • ~ Case law update: Recent cases impacting IP licensing values
  • ~ Assigning and licensing trademarks
  • ~ Biopharmaceutical trends including licensing for joint ventures and as a result of collaborative activities
  • ~ Compulsory licensing, Standard Setting Organizations, and FRAND
  • ~ Managing compliance
  • ~ International licensing with China
  • ~ Provisions for resolving licensing disputes
  • ~ Wrap-up: Mock negotiation of a hypothetical licensing agreement

The seminar will consist of the following:

DAY ONE

Introduction & Overview, 9:00 a.m.

Adam L.K. Philipp, Esq.
AEON Law / Seattle, WA

Ramsey M. Al-Salam, Esq.
Perkins Coie / Seattle, WA

 

The Anatomy of an Effective License Agreement, 9:15 a.m.

Core essential terms, including exclusivity, lump sum versus sales-based royalties, royalty bases and rates, exclusions, standard forms and provisions, warranties, indemnities, audit rights, keeping IP from competitors, “poison pill” provisions

Steve Tapia, Esq. , Distinguished Practitioner in Residence
Seattle University School of Law / Seattle, WA

 

NDAs as the Courting Phase of the Licensing Relationship, 10:30 a.m.

The structure and essential terms of non-disclosure agreements; the “new world” of NDAs and how they affect high tech joint ventures; lessons from the Waymo/Uber dispute about protecting trade secrets

Adam L.K. Philipp, Esq.

 

Case Law Update: Recent Cases Impacting IP Licensing Values, 11;15 a.m.

An update on how recent decisions affect the value of IP rights and the enforceability of licensing agreements

Ramsey M. Al-Salam, Esq. , Program Co-Chair
Perkins Coie / Seattle, WA

 

Assigning and Licensing Trademarks, 1:15 p.m.

The need to transfer good will and police the quality of goods sold under a license; the ability of bankrupt licensors to extinguish licensee rights and the impact on pre-bankruptcy negotiations when relations are strained; unique cannabis issues

Jerry A. Riedinger, Esq.
Perkins Coie / Seattle, WA

 

Biopharmaceutical Licensing, 2:00 p.m.

Transactional trends including licensing for joint ventures and as a result of collaborative activities

Gary M. Myles, Esq. , President & CEO
Myles Intellectual Property Law / Issaquah, WA

 

Managing IP Compliance, 3:00 p.m.

Structuring an effective process for counting royalties, tracking work product, regulatory compliance, patent marking, trademark quality control, audit rights, verifying “best efforts”, “most favored” clauses, and anticipating other issues

Neil Zoltowski , Principal
StoneTurn Group / San Francisco, CA

 

Compulsory Licensing, Standard Setting Organizations, and FRAND, 4:15 p.m.

When you have no choice: Where compulsory licensing comes into play including when it’s “necessary” to practice a standard

T. Andrew Culbert, Esq.
Perkins Coie / Seattle, WA

 

Continue the Exchange of Ideas: Reception for Faculty and Attendees, 5:00 p.m.

 

DAY TWO

International Licensing: Adapting to Recent Developments in China, 9:00 a.m.

An enforceable contract as a starting point: Classic pitfalls foreigners fall into when dealing with Chinese entities, like drafting in English, and other key considerations

Daniel P. Harris, Esq.
Harris Bricken / Seattle, WA

New rules on IP transfers; importing & exporting technology; potential impacts from recent trade negotiation; IP enforcement statutory changes, administrative enforcement, and increased damages awarded by courts

Ping Gu, Esq.
Zhong Lun Law Firm / Beijing, China

 

Provisions for Resolving Licensing Disputes, 10:30 a.m.

Choice of resolution technique in the license and choice of technique when enforcing the license: substantive and procedural considerations for choice of law; mediation and arbitration clauses; enforcement stage choice of forum

Mark Wittow, Esq.
K&L Gates / Seattle, WA

 

Wrap-Up: Mock Negotiation of a Hypothetical Licensing Agreement, 11:15 a.m.

Identifying what is most important to your opponent; provisions to tailor the agreement to the type of license and situation; anticipating potential problems from changes in control and adverse events; tips for working through problematic provisions

Steven B. Winters, Esq. , Moderator
Lane Powell / Seattle, WA

Licensee perspective

Jeff Harmes, Esq.
Karcher Harmes / Bainbridge Island, WA

Licensor perspective

Hillery L. Nye, Esq. , General Counsel
Zipwhip / Seattle, WA

I know or know of many of these attorneys and I am very much looking forward to hearing their talks and I urge anyone with an interest in IP go here and sign up. If you use HARRIS as your promo code, you will get a 50% discount.

China contract lawyersEarlier this year, in China and Worldwide: Trademarks Good, Patents Bad, I wrote about how patents are overrated as compared to trademarks.

I cannot tell you how many times I’ve had companies swoon over the idea of spending big money to secure a patent and pooh-pooh my suggestion to spend small money to secure a trademark. Honestly, most of these companies don’t really get it.

I went on to write about how patents are usually expensive to get and expensive to protect whereas trademarks are relatively inexpensive to get and inexpensive to protect.

I then talked about how if sending a cease and desist letter to try to get someone to stop violating your patent usually results in their claiming there is no violation. I then mentioned how if you go to the e-commerce sites on which the alleged patent infringer is selling your product — even if that product almost certainly does infringe your patent — and you ask that e-commerce site to take down the infringing product, the odds are good that site will tell you they are not patent lawyers and you will need a court order or a judgment for them to take it down.

All of this means that if you want to stop your competitor from selling what infringes on your patent you must sue and you likely will need to hire an expensive expert to prove the infringement. Few things in life cost more than international patent litigation, and since my law firm does international patent litigation, I know whereof I speak on this.

I then wrote about why trademarks are simpler and cheaper:

  1. Securing a trademark typically costs 1/3 to 1/4 less to secure than a patent. This is true pretty much everywhere.
  2. If you believe someone is violating your trademark and you send them a cease and desist letter to get them to stop doing so, there is a decent chance they will stop, especially if they are not in the counterfeiting business.
  3. If you go to e-commerce sites and request the product infringing on  your trademark be taken down (and it is in fact violating your registered trademark), there is a very good chance it will be taken down. This is generally true of the leading e-commerce sites around the world. It does NOT take a lawyer to know that if I have a registered trademark in China and the United States for “Harris Special Orthopedic Device” (in the right class), anyone else selling “Harris Special Orthopedic Device” in China or the United States (that did not come from me) is violating my trademark. My law firm’s success rate in taking down offending trademarks is super high. Like 99+ percent high.
  4. Should you choose to sue for a trademark violation, proving the trademark violation is oftentimes relatively easy.

All of the above are also why contracts are another key to protecting your IP from China.

Let me explain.

As we have written here so many times, your scariest competitor is your own supplier. See Your China Factory as your Toughest Competitor. Chinese factories will apply what they have learned from making your products and use that information to compete directly with you. My firm’s China lawyers are fond of pointing out to our clients, “since you will essentially be educating your Chinese manufacturer in how to compete with you, you need contracts that will at least limit what it can do when it does so.” And if you believe it does not make economic sense for your China factory to sell your product directly, let me tell you that our China lawyers have seen so many cases where this has happened that we know it often does:

We have gotten more calls in the last year from companies whose China factories are now directly competing with them than in probably the three years before that combined. Chinese factories are more confident now than they have ever been about going out into the world with their own products, and more willing to toss their foreign customers to the curb early. E-commerce sites do not help matters and the US-China tariff war has been like throwing accelerant on the problem. The US company tells its China supplier that it needs lower prices to make up for the tariffs and the Chinese company — usually surreptitiously — then starts competing directly with its US buyer to make up for its falling margins.

Far too often our clients believe they are protected from their Chinese manufacturer if they get patent protection in all of the markets in which they sell their products (usually this means some combination of the US, Canada, Australia, Europe, Japan, Korea, Mexico and Brazil) since their patents will prevent their Chinese manufacturer from being able to sell into those markets using the client’s IP. Legally, this is correct, but practically, patent lawsuits to stop patent violations are incredibly expensive and time consuming. Do you really want to be embroiled in simultaneous patent litigation in Spain, Japan and Brazil?

In addition, where product development takes place, there is usually an innovation or improvement your Chinese supplier will claim gives them independent rights in the improved product. Since the Chinese side does the work, they are often correct about this, particularly under the civil law patent approach which allows for minimal innovation as the basis for an independent patent claim.

well written contract with your Chinese manufacturer that makes clear that your manufacturer cannot copy your product (beware: these provisions are not easy to write) and makes clear that a breach will lead to real-life and enforceable consequences can give you massive and far-reaching and low cost protection. To the point that your manufacturing contract will likely be more valuable for protecting you even in those countries in which you have a patent,

A well-crafted manufacturing contract also has another powerful benefit that your patents in the US, Canada, Australia, Europe, Japan, Korea, Mexico and Brazil lack: your contract can work worldwide. So yes, getting expensive patents in these places is great, but they do not give you protection in India or Indonesia or Peru or New Zealand, etc., whereas your manufacturing agreement with your Chinese manufacturer can.

So though patent protections can be valuable, they are not the end-all for China or the rest of the world, by any means. Protecting your product against counterfeiting requires a holistic approach tailored to your specific product and situation, usually involving some combination of patents, trademarks, and contracts and more.

For more on the sort of contracts you can use to protect yourself from China counterfeiting, check out the following:

china attorneys
Love is a many splintered thing.

I recently wrote about how the China attorneys at my firm often hear something like the following from our clients:

“I am not worried about this deal/contract/transaction with this Chinese company because” [choose one or more]:

  • “The owner and I are great friends.”
  • “I trust the owner implicitly.”
  • “There is no way they [the Chinese company] would do this because it would destroy their business.”

I went on to write how I like to start one of my “how to protect your IP from China” speeches with the following:

“Big companies in China want to steal your IP. Small companies in China want to steal your IP. Private companies in China want to steal your IP. Public companies and SOEs in China want to steal your IP. Oh, and that company whose owner you like so much and whose son’s or daughter’s wedding you attended, that company also wants to steal your IP.”

I then wrote how our response to our clients who say these things is not to question the strength of their relationship with the Chinese factory or the honesty of the factory’s owner, but to say that even if all they are saying about their Chinese counterparty is true, there are still substantial risks. And then we tell them about the countless instances where we have seen things go badly wrong even when the American or European company was entirely right in trusting their Chinese counterparty or the economics of the situation.

After I wrote this piece I was reminded of a specific situation we had with a European company that had a 20+ year “great” relationship with its Chinese factory before it learned that this factory was selling the European company’s products around the world for half of what the European company was charging. And when the European company confronted the Chinese company about this, the Chinese company lectured the European company about how it had every moral and legal right to do what it was doing and how sick it was of Chinese companies being exploited by European companies and that it barely made any money at all from this European company.

The Chinese company then proceeded to tell the European company that it would not only continue making and selling the European company’s product wherever it could do so, it would stop making anything for the European company, including the product the European company had already paid for and not yet received. Oh, and just to top it off, it turns out that the Chinese company registered all of the European company’s trademarks in China seven years earlier and it warned the European company that if the European company made its own products in China under the European company’s own name, the Chinese company would have those products seized for violating the Chinese company’s trademarks. The European company ended up shifting its production out of China entirely both because it pretty much had to do so and because it pretty much wanted to do so.

As stark as it is, this story about the European company is not the usual way problems with “trusted” Chinese companies ordinarily arise.

We are always pointing out to our clients that just because you are friends with the owner or just because the owner can be trusted or just because it would not make economic sense for the company to cross you, this does not apply to 1) the company’s employees, 2) the company’s vendors/suppliers; 3) the company’s subsequent owners, or to a 4) changed economic situation.

The problems usually stem not from the owner of the company, but everyone else who gets access to your IP or your trade secrets. These are the sort of things our China lawyers see all the time:

  1. Everything is going great with the Chinese company and then the son or someone else takes over for and everything completely changes. Our China lawyers must have dealt with this at least a dozen times.
  2. Everything is going great with the Chinese company and then the General Manager of the Chinese company or someone else goes off and starts a competitor of the Chinese company and this new competitor steals our client’s IP or trade secrets and starts competing with our client. Our China lawyers must have seen this at least two dozen times. See Inside a Heist of American Chip Designs, as China Bids for Tech Power.
  3. Everything is going great with the Chinese company and then a vendor or a supplier of the Chinese company starts competing with the Chinese company by using our client’s IP or trade secret.
  4. Everything is going great with the Chinese company but then the economics of the industry change and the Chinese company can now make a lot more money by stealing our client’s IP or trade secrets and so it does.

It is for these reasons (and more) that my firm’s China lawyers (and pretty much every other China attorney we know) constantly stress the benefit of having an enforceable contract that covers ownership changes and employees and vendors and suppliers and changing economic situations. For more on what is needed to have an enforceable China contract, check out China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts That Work.

Beyond the contract, you need the registrations required to protect your product/technology/IP. This often means registering your trademark in China in English and in Chinese, registering the copyright in your software and anything else that applies in the PRC and maybe Taiwan elsewhere and registering a design patent in China. These will give you protection against those beyond just the Chinese company with which you are doing business.

 

China IP lawyer

Our China intellectual property lawyers spend about 99 percent of their time working on protecting our clients’ intellectual property. The above PowerPoint slide for the most part explains how this is done, with the below three PowerPoint slides going into a bit more detail.

1. Structural protections. Essentially, what can the client do in the real world to protect its IP from China? This involves asking questions like what IP must I take to China? What IP must I reveal to do the deal or get my widgets made or sold? What IP or trade secrets must or should I reveal to my own employees? Have I done enough due diligence on this Chinese company to be comfortable working with them? How should I structure this deal to protect my IP not just now but into the future? The questions here tend to be very much related to the client’s specific transaction, specific business, specific products or services and specific industry.

How to Structure Your China Deal

2. Good contracts. Getting the client a China NNN Agreement before the client reveals anything confidential to anyone is usually the sine qua non of China IP protection. But there are all sorts of other contracts in which provisions regarding IP protection can be essential. China contract manufacturing agreements, China employment contracts (and China Employer Rules and Regulations), China distribution agreements, China joint venture agreements, and China trademark and technology licensing agreements are just some of the China contracts that can implicate your IP and therefore typically require provisions that address IP protection.

China IP Contracts

3. China IP Registrations. Last, and certainly not least, are the China trademark, China patent, China copyright and China licensing agreement registrations you need to consider undertaking in China to protect your IP from China.

China IP registrations (Patents, Trademarks, Copyrights and Licensing Agreements)

The above are the sorts of things on which our China IP lawyers are always focused. But to a lesser extent they also often need to address the issue of protecting our clients from infringing on someone else’s IP.

By way of a quick example: Ten years ago, when an American or European or Australian company would come to us for a China trademark, our China trademark lawyers would usually not even bother conducting a search to determine whether the desired trademark was already registered to someone else or not. This was because doing a good search took so long (among other things, it entailed going to the China trademark office and manually poring through stacks of books) and, most importantly, because the odds were so slim that the trademark had already been taken. That has radically changed. See this week’s post, China Trademarks: The Hits Just Keep on Coming. So now it is important that you register your company name/brand name/product name/logo in China, it is also important you make sure you are not using someone else’s trademark in China.

The same is true on the patent front where Chinese and foreign companies have gone from having hardly any China patents to having millions and millions of them. Many of our clients — especially those with their own in-house IP lawyers and those whose regular patent counsel or IP counsel retain our China IP lawyers for the China side of things — are aware of the change and explicitly ask for our assistance in protecting their company from infringing on someone else’s China IP. The below is a composite of a number of emails our China IP lawyers have written in response to client requests for assistance on protecting against their own company infringing on someone else’s China IP.

1. You are purchasing a product designed by the Chinese side.

2. This product may infringe on designs/IP held by other Chinese manufacturers.

3. This product may infringe on designs/IP held by entities in the market in which you are selling: the U.S., Canada the E.U., Japan, and Australia.

What can you do to protect yourself from infringement claims from parties in the market in which you sell the product?

The answers are as follows:

1). Most U.S. buyers simply ignore this issue. That is, U.S. buyers generally are so concerned about protecting their own IP, they don’t consider that the product they are buying from their Chinese manufacturer may infringe on the IP of some unrelated third party.

2. Even though our clients don’t normally indicate any concern with the issue, we usually include the following in our China contract manufacturing agreements:

a. A warranty stating that your Chinese supplier owns the IP for the product it will be making and selling to you.

b. A provision stating that the factory will be liable for any losses you suffer from an IP infringement action being brought in the sales market relating to the product. Note though that many of our clients end up asking we  remove even this basic provision since many Chinese manufacturers will not sign a manufacturing agreement that includes just this very basic level of IP protection for the buyer.

Under this approach, the infringing product is treated in the same way as the general repair and replace warranty covering defects. An IP infringement is treated like any other defect: you don’t have to pay for the defective product and you obtain a credit for amounts you have paid. In the terms of the contract language, the Chinese side is also liable for your other losses. You could make a claim for those losses against the Chinese factory, but this sort of claim will rarely succeed in China. One reason for this is that Chinese factories oftentimes do not have sufficient assets to pay major claims. So in real life the matter is typically worked out with the repair and replace approach we previously discussed.

3. We do not usually include an elaborate indemnity provision in our contracts that requires the Chinese side defend against all infringement claims because these sort of provisions are not customary for China and because the Chinese side likely cannot or will not perform. And yet if the Chinese side does agree to such a provision, it will probably charge you at least as much for it as it would cost you to secure your own (more effective) insurance in your home country. This means that in most instances, the practical way for you to protect yourself is to secure cover with insurance purchased from your insurance carrier. The same applies to product liability. Western buyers that want coverage against product liability and product recall risks usually should purchase their own comprehensive products liability/IP infringement insurance policy.

If pressed on this IP infringement issue, most Chinese factories will simply refuse to sign an agreement that will put them on the hook for IP infringement. The factories that take the time to consider the issue carefully will usually say something like  “We are selling to you at the China price. If you want coverage for IP/products liability issues, what you really need is insurance in the U.S. If you want us to pay the insurance premium, inform us of the amount and we will raise the price of our product to include the cost of the insurance premium. We will load the premium payment onto the initial product purchase deposit.” It is the rare case where it makes sense to pay a Chinese manufacturer 5 cents extra per widget to have a Chinese company try to protect you by securing insurance from a Chinese insurance company in China as opposed to your paying 5 or 6 cents extra per widget to get your own coverage in your own country.

The China price is low for many reasons. One reason is that the risk of IP infringement and product liability claims (both of which are real) are two of many risks that are not included in the price. If foreign buyers insist on loading all these considerable risks onto the Chinese factory the China price would disappear and Chinese manufactured products would become too expensive to be commercially viable. Foreign buyers of Chinese products that operate uninsured are themselves assuming these risks to compete on price. You cannot get rid of the risks with a page in a Chinese contract.

China trademarkAs a result of reshuffling announced during the 2018 National People’s Congress back in March, the Chinese Trademark Office will now become part of the State Intellectual Property Office (SIPO), which had previously only handled patents. SIPO is also taking over responsibility for geographical indications (e.g., Basmati rice, Parmagiano Reggiano cheese, Cognac brandy), but copyrights will remain under the purview of the Copyright Protection Centre of China. Which may seem odd at first – why consolidate IP registrations in one agency but leave out one form of IP? – but that’s how the US does it with the USPTO and the U.S. Copyright Office.

Although early reports are that SIPO is having some growing pains, the integration has progressed enough so that when SIPO released the mid-year statistics on July 10, 2018, it included statistics for patents, trademarks, and geographical indications.

Faithful readers of the blog will remember that we have expressed a combination of incredulity and bemusement at the massive numbers of trademark applications being filed in China over the past few years. See, for instance, Does China Have Too Many Trademarks? and China Still Has Too Many Trademarks. Well, the hits just keep on coming.

During the first six months of 2018, 3,586,000 applications for trademark registration were filed in China. As of June 30, 2018, 31.5 million total trademark applications had been filed, 19.4 million trademarks had been registered, and 16.8 million trademarks remained as valid registrations. To provide some context, slightly more than 5.7 million trademark applications were filed in all of 2017; if the numbers for the second half of 2018 stay at the same level (which seems overly conservative) then the number of applications in 2018 will have increased by nearly 25% from the previous year.

Meanwhile, the CTMO is making a decent showing on its pledge to reduce the time spent examining trademarks. According to its statistics, the average examination time is now about 7 months. I don’t have access to all of the data, but anecdotally that number seems generous (although I will concede that the tempo has picked up). But the quality of the decisions isn’t any better, which raises a bit of a conundrum. If you’re going to get a ridiculous decision, do you want it made quickly or slowly?

One of these days we’ll hit peak trademark – we have to – but we sure aren’t there yet. In the meantime, what with all the trademarks that are being filed  in China, it’s more important than ever that you secure the trademarks that matter to you before anyone else does. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.

In the meantime, stay tuned for updates on China’s trademark statistics.