China lawyers IP
Don’t gift your IP to China

When working on complex contract manufacturing agreements, most of our clients tell us their main goal is to protect their intellectual property. This is particularly true for designers of start-up products where much of of their IP consists of trade secrets and know-how that require a formal agreement with the manufacturer. However, as we work with the client, we frequently learn that the client has already gifted their IP to the Chinese manufacturer. Making a gift to your family and friend is a nice gesture. But no foreign designer of a product intends to make a gift to a Chinese factory owner. The gift is unintended, and the consequences are virtually never good.

Here is what usually happens. We begin drafting the contract manufacturing agreement. In our standard set of questions, we ask about the status of molds. The client then reports something like the following: “We have already provided the designs for our molds to our  Chinese manufacturer and the manufacturer has already fabricated the molds. The current issue is focused on payment for the molds.”

We then ask our client about its plans for commercializing their product idea and fabricating production prototypes. The client then reports: “We have been working with the manufacturer for months to fabricate a production prototype. The manufacturer agreed to engage its own engineers and designers for this process. We now have two prototypes and we are ready to begin production. The only issue now is how to pay for the work on the prototypes.”

In both cases, we ask the following sorts of questions:

  • What form of documentation did you use in connection with providing your confidential design information to the manufacturer?
  • What did you do to formally protect your IP?
  • What did you do to make clear you own the entire design in the molds?
  • What did you do to make sure you own all of the design work that went into the design and manufacture of the prototype?

Far too often, our client answers with something like this: “The only documentation we have in place is a simple purchase order  for the molds. There is no documentation at all relating to the prototype. We were told that using purchase orders at this stage is standard so we did not think about it.”

The above scenario with slight variations is almost standard for start-up companies making their first foray into China’s manufacturing market. We then have to tell our client something like the following: “You indicated your primary goal is to protect your intellectual property. But, by providing your design data to your Chinese manufacturer with no documentation and by allowing the Chinese side to design and fabricate molds and prototypes, you have effectively given your IP to the Chinese manufacturer. The issue for us now is to determine whether or not the manufacturer will agree to return this gift. Sometimes they will, usually they will not.

In this setting, it is possible for the Chinese manufacturer to appropriate the product and to begin producing the product in its own name. When the foreign designer protests, the Chinese manufacturer points out that it did the actual design and fabrication work for the molds and it also did all the design and fabrication work for the product prototype. And since it did all of this work, it owns the design. And here’s the thing: legally, so long as the Chinese manufacturer does not infringe on the registered trademark of the foreign party, it is generally free to manufacture the product and sell it wherever it wants.

Absent formal written agreements, litigation in most countries to determine who owns what in terms of the product is fact intensive with the eventual outcome usually unclear. The lack of clarity simple kills off the chances for most start ups to market its product effectively. So when this situation happens to a foreign start-up, it can mean commercial death. The Chinese side is counting on this. A dead company cannot support litigation required to resolve the issue. Even for well established companies, this situation can cause substantial economic damage, since the effective marketing of a new product is made so difficult.

In most cases, however, the Chinese manufacturer is not interested in selling the product under its own name; what it usually wants is to create a situation where the foreign buyer does not have the option to have its product manufactured by any other manufacturer. The Chinese manufacturer wants to ensure it is the sole entity with the right to manufacture the product. By getting this it essentially has the pricing power of a monopoly on manufacturing the product.

Here is how it works out on the ground. At some point, the foreign buyer decides it wants to change to another manufacturer because a) the manufacturer substantially raises its price, b) the product is consistently defective, or c) the manufacturer cannot keep up with the required production volume. The foreign company wanting to go to a new manufacturer requests its existing manufacturer transfer its molds and the product prototype to the new factory.

The manufacturer refuses to comply with this request. The manufacturer says: “we own the design of the molds and we own the design of the product prototype. We will agree not to manufacture the product for ourselves or for any third party. On the other hand, you are not free to take the molds and prototypes to any other factory. You can only manufacture the product if you use our manufacturing services to do so. In legal terms, the Chinese manufacturer is saying it will provide an exclusive license to the foreign company to manufacture a product for which the design is owned by the Chinese side.

If the foreign buyer insists that it wants to move its manufacturing elsewhere, some Chinese manufacturers will say that the foreign buyer is free to start from scratch with a new factory. Other Chinese manufacturers will take a harder line and state that manufacturing the product in any other facility is an infringement on its IP and it will take action to prevent that infringement. In the last couple of years, more and more Chinese manufacturers are doing whatever they can (usually via cease and desist letters and litigation) to make manufacturing by others impossible. Either way, if the product is complex in any way, the foreign buyer is in a situation where it is required to work with the original Chinese manufacturer. This then means the foreign buyer can take no practical action to deal with the various issues that caused them to want to move to a new manufacturer. In particular, the foreign buyer is helpless in dealing with a price increase.

Many clients are skeptical when we explain this situation to them. They simply cannot believe they gifted their most valuable asset to another company. Some tell us that their Chinese manufacturer is an honest and upright company that would never act in the ways set out above. Others say that since they paid for the work, it must be the case that the Chinese factory will recognize that the foreign side owns the design and is free to take the molds and prototypes to any other factory for manufacturing.

In our experience, the situation is quite different. In the past decade, in every case on which any of our China lawyers have worked, the Chinese factory took one of the positions outlined above and refused to back down. In other words, once you have gifted your IP, you should not expect the Chinese side will graciously return the gift. Once the gift has been made, the Chinese side will keep the gift and make use of the gift to its advantage.

What does the manager of the start-up tell its investors after having given away the IP at the core of its product and its business? Our China attorneys have had to help with these sort of conversations and we probably hate these conversations almost as much as the managers themselves.

So in an effort to make life easier for product manufacturing start-ups we fervently propose you EARLY ON make use of the following agreements when working with Chinese manufacturers:

These agreements should be executed in advance of any transfer of design information to the Chinese manufacturer. Purchase orders come at the end of the process, not at the beginning. Unless you want to gift your IP to your Chinese manufacturer without realizing it. Oh, and while you are at it, you should seek to register your trademarks in China and look into registering your design patents (and maybe other patents) in China as well.

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 canny trademark squatter may take a couple actions to foreclose the possibility of a non-use cancellation. First, they might sell a handful of supposedly branded goods to a friend or colleague via e-commerce, thus satisfying the use in commerce requirement.

If the trademark is particularly valuable, or the trademark squatter particularly canny, a few branded products will be sold online to foreclose the possibility of a non-use cancellation. But this is quite rare.

This creates an opportunity for the “real” trademark owner. With a trademark squatter, the registration won’t even be vulnerable to a non-use cancellation until 3 years after the registration date. And if the squatter is intent on maintaining those trademark rights, they’ll file another, identical application before the three-year term is up, thereby preserving their rights even if the first registration is cancelled.

But two can play that game. The real trademark owner could file first – even before the three year term is up – and then file a non-use cancellation exactly three years after registration. Sure, the application will probably be rejected at first because it’ll be decided before the cancellation, but then you can 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. Alternately, 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: namely, by trademark oppositions (for pending applications) and invalidations (for existing registrations). Maybe that day will come, but for now trying to take on trademark squatters head-on is a loser’s game. The way to defeat them is by using the Chinese trademark system against them.

Needless to say, this strategy is predicated on the assumption that the trademark squatter has not 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 lawyers for China scamsOur China lawyers have over the last few months have been getting way more emails and phone calls from foreign companies (U.S. and European) either telling us they’ve been scammed or seeking our assistance in determining whether they are about to get scammed.

Anyway, in recognition of this recent in scamming, I am going to write (again) about the sorts of scams we usually see, along with providing tips on how to avoid them. This is part 5 of the series. In Part 1, I wrote about the scam of tricking someone to come to China to sign a deal. Part 2 was on the scam of getting money for supplying products and then supplying nothing or, more commonly, something that isn’t even close to what the foreign company bought and paid for. Part 3 was on the switched bank account, which is — by far — the most difficult to avoid scam. Part 4 was on a scam where a Chinese company gets you to provide it work or services (or perhaps even product) in return for stock or stock options that you can never really own because you are a foreigner.

This part 5 involves a fairly recent, increasingly common, and highly sophisticated scam whereby a Chinese company claims to be interested in investing in a foreign company but in reality it has that interest only so far as it can use it to steal your IP.  The Chinese company usually starts out by claiming a strong interest in sending over a lot of money in return for a small ownership interest in your company. Many times, the Chinese company will talk about how its investment is not for short term profits, but to help you do an IPO from which everyone will get rich. This all sounds good, but with this comes usually comes something like the following from the Chinese company:

Our company will become one of the owners of your U.S. entity. And since we will be co-owners of the technology underlying your product, there is no reason for you to protect the technology from us. There is no reason to enter into any sort of confidentiality agreement (like an NDA or an NNN Agreement). We do not want legal or financial hurdles to get in the way of the IPO that will make us all wealthy.

So the foreign company provides its technical information to the Chinese company it now sees as its partner and benefactor. In return, the Chinese company starts using your IP and never funds its alleged investment. And for good measure (and to set itself up for a force majeure defense), the Chinese company will often then blame the Chinese government for its inability to get money out of China to fund the investment.

By using this “fake investment” technique, the Chinese company has legally or quasi-legally acquired the technology while paying little or nothing for it and there is nothing the foreign company can do. And it is true that foreign investment from Chinese companies must be approved by the Chinese government. So what is there to say?

On the software side, we usually see the the Chinese company offer to invest a large sum in the foreign company and as part of its grand plan, it will propose to set up a company in China that will eventually be owned by the foreign company. It will then arrange for the software technology to be released to the Chinese entity without restriction. Why should the foreign company spend time and money licensing its software to this Chinese company that it will eventually own a part of in any event. Oh, and this Chinese company will surely be doing an IPO very soon anyway.

In this scheme, there are various delays in getting approval for both the investment in the foreign company and in providing for foreign ownership in the Chinese entity. After two or three years of delay, and after the Chinese company has extracted all of the technology/information it requires, it apologizes for being unable to secure Chinese government approval to invest in the foreign entity and for not being able to give the foreign company any ownership in the Chinese entity because foreign investment in Chinese domestic companies is pretty much prohibited. See yesterday’s post on the China Stock Option Scam.

The end result is that the Chinese company has acquired the foreign technology virtually free of cost and there is usually nothing the foreign company can do about that.

For another common way in which foreign companies are tricked out of their IP, check out China and The Internet of Things and How to Destroy Your Own Company.


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,, 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.

China trademark and patent registration

The title to this post is a gross oversimplification meant to prove a point or, more accurately, disprove a myth. 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.

Let me explain.

  1. Patents are virtually always expensive to get and virtually always expensive to protect.
  2. Trademarks are virtually always inexpensive to get and a lot of the time inexpensive to protect.

Let me further explain, first with patents:

  1. Securing a patent (other than a design patent) typically costs three to four times what a trademark costs. This is true in China, the United States, Europe, Canada, Mexico, wherever.
  2. If you believe someone is violating your patent and you send them a cease and desist letter to get them to stop doing so, there is a pretty good chance they will claim there is no violation. And after you explain to them why there is a violation, there is still a pretty good chance they will  explain to you why you are wrong. If their orthopedic device is exactly like yours but for some relatively unimportant button somewhere, they will claim that relatively unimportant button is actually important and it means they are not violating your patent.
  3. If you go to the e-commerce sites on which they are selling the orthopedic device that almost certainly does violate your patent and you ask that e-commerce site to take down the infringing product, the odds are good that site will tell you that they are not patent lawyers and you will need a court order or a judgment for them to take it down. This is generally true of tall the leading e-commerce sites around the world.
  4. The above means that if you want to stop your competitor from selling what you see as the infringing orthopedic device you must sue and you likely will need to hire an expensive expert to prove the infringement. Few things in life cost more than patent litigation, and since my law firm does patent litigation, I know whereof I speak on this.

But trademarks are much simpler and much 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. If I brand my orthopedic devices “The Harris Special Orthopedic Device” and secure trademarks for that name and someone else uses that very same name, they are going to have a tough time claiming they are not violating my trademarks — assuming I have the registered trademark in the relevant countries.
  3. If you go to the e-commerce sites and request that the product that is violating 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. Take the “Harris Special Orthopedic Device” as the example. It does NOT take a lawyer to know that if I have the 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 really really high.
  4. And should you choose to sue for a trademark violation, proving the trademark violation is oftentimes relatively easy.

Oh, and one more thing. To grossly generalize. patent protection in China courts tends not to be as strong as in either the United States or Europe. Whereas China trademark protection tends to be surprisingly strong.

There. I’ve said my piece.

Your thoughts?

China AttorneysBecause 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 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 super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One question we often get asked is: can I just copy the specification of goods/services from my US trademark to my China trademark? The answer is the classic lawyerly response: it depends.

Because the US requires proof of use prior to registration, the specification for a US trademark application is narrow in scope and only covers those goods/services actually provided by the applicant. Moreover, because USPTO examiners actively police overbroad language, the specifications are rarely capacious enough to cover any expansion of the client’s business to a new product line or new services. This is in stark contrast to China, which does not require proof of use for registration and implicitly encourages companies to cover a much broader range of goods/services than they actually provide. See China Trademarks: Register in More Classes, Take Down More Counterfeit Goods. Even if you could use the same description of goods/services in China as in the US, you might not want to. Why would you voluntarily diminish the scope of protection for your trademark?\

Similarly, if the final description accepted by the USPTO does not match up with the formal Nice Classification list of goods/services (or the additional formal list propagated by the Chinese Trademark Office), then you are at the CTMO examiner’s mercy when it comes to determining the subclass. If the description is clear and an obvious parallel exists to a listing in the Nice Classification, then you can be fairly confident that your trademark will be in the proper subclass. But if your item is not clearly similar to a listing in the Nice Classification – because it is too new or too unusual or for any other reason – then you’re throwing caution to the winds. This problem is quite similar to the one with Madrid System applications, in which the national applications use the same specification as in the original application. See China Trademarks. Register Them In China Not Madrid.

In short, you can’t just cut and paste your trademark specification and expect it will be treated the same way in China as in the US. You wouldn’t (or shouldn’t!) have that expectation with an OEM agreement or licensing agreement in China. See China Contracts: Make Them Enforceable Or Don’t Bother. In certain situations it will be fine; in many others it won’t. And the only way to tell the difference is to consult with experienced China trademark counsel.

China trademark lawyers
China Trademarks: Not yet billions, but getting there.

I wrote last year about the massive number of trademark applications filed in China in 2016 – 3.6 million, far more than any other country in the world, and increasing at a tremendous rate.

The statistics from 2017 are now available and they are staggering, both in gross numerical terms and in the year-on-year increase. More than 5.7 million trademark applications were filed with the Chinese Trademark Office (CTMO) in 2017, an increase of more than 55% from the previous year, which had already set a record. By comparison, just under 600,000 applications were filed with the United States Patent and Trademark Office (USPTO), which is the world’s second-busiest trademark office. At the end of 2017, China had 14.9 million active registrations overall; the US had only 2.2 million.

What are we to make of these numbers? Why are so many trademark applications being filed in China, and what does it mean for current and future applicants? Keeping in mind that correlation is not the same thing as causation, I nevertheless offer the following hypotheses and predictions:

  1. More CTMO rejection notices. It will become increasingly difficult to register a trademark in China due to simple mathematics: the greater the number of trademark registrations, the greater the chances of a conflict. And it’s still the case that many CTMO examiners are relatively untrained, with a huge backlog of trademarks and a hard 9-month examination deadline. I feel for the CTMO examiners. In all likelihood, their daily workload is governed by the thousands of applications filed 9 months earlier, which must be either approved or rejected by the end of that day. And multiple sources in China have confirmed my own experience: the default CTMO examination standard is “When in doubt, reject.”
  2. Increased value for registered trademarks. As it becomes more difficult to secure a trademark registration, existing registrations will become more valuable. China already has a robust secondary market for trademarks, and this market will only become more relevant.
  3. Greater incentives for trademark squatters. As trademarks become more valuable, the incentives for squatters to file applications will also go up. Yes, such applications will be more likely to be rejected, but trademark squatters are by definition taking a calculated risk. They’re not collecting their favorite trademarks; it’s purely a business proposition for them and some file for hundreds of trademarks at a time.
  4. More non-use cancellations. China’s trademark system allows (and implicitly encourages) trademark owners to file applications covering goods they do not actually use. See China Trademarks: Register in More Classes, Take Down More Counterfeit Goods. Accordingly, when we conduct a trademark search and find a conflict with an existing mark, one of the first things we consider is whether the mark is vulnerable to cancellation (i.e., if it has been registered for at least 3 years) and if so, if the mark is actually in use on the goods that created the conflict. At least half the time we discover that the mark is not and has never been in use on the goods in question, and we are able to cancel the mark and thereby clear a path for our client’s application to be approved.
  5. More proactive filings to forestall non-use cancellations. Some companies opportunistically file applications that specify more goods than they actually sell, as a way to stake out more ground without any added cost. Others do so as an explicit strategy to prevent trademark squatters in any class and on any goods and services. Starbucks and Disney are two companies that follow this strategy, but even their marks are vulnerable to non-use cancellation after three years. That said, nothing’s stopping Starbucks from filing a new application every three years for the same goods. It’s not cheap, but it’s a lot cheaper than dealing with trademark squatters because it means a non-use cancellation would have no effect – they’ve got another trademark right behind the canceled one as if the trademark is just a shark’s tooth.
  6. The tipping point for non-traditional trademarks. Currently, the vast majority of trademarks are either word marks or devices (i.e., graphic images, with or without words). But as it becomes increasingly difficult to register a traditional trademark, companies are starting to look more closely at filing non-traditional trademarks like sounds, colors, and even three-dimensional representations. In part this would be driven by necessity, and in part by technological innovation.
  7. Registered IP matters. It’s hard to see the vast number of trademark applications as anything but a resounding vote in favor of registering IP in China. To paraphrase Colonel Tom Parker, 5.7 million China trademark fans can’t be wrong. If owning a trademark registration in China was meaningless and only provided aspirational rights, people simply wouldn’t pay the money to do it.
  8. China Law Blog FTW. Occam’s razor holds that the simplest hypothesis is usually correct. Could it be that this blog’s clarion calls for companies to register their trademarks in China have finally resounded? Obviously not to the tune of 5.7 million, but still, we like to think we’ve done our part.
China NNN Agreements
China NNN Agreements. So many choices.

Good sourcing agents are both hard to find and worth their weight in gold. And they operate in many different ways. On one extreme, a sourcing agent will find a factory, take a finder’s fee and then bow out, letting you deal with the factory directly. On the other extreme, a sourcing agent will act as your exclusive point of contact: you order from them, communicate with them, and pay them, and are expressly precluded from having contact with the factory. Most, however, fall somewhere in between.

The multitude of potential arrangements creates uncertainty about the appropriate contractual protections. That is: should you have an agreement with the sourcing agent, the factory, or both? And what type of agreement?

We are big fans of using NNN agreements in China with potential business partners (especially factories). Knowing this, our clients will sometimes come to us and say that they are having goods manufactured in China and they need an NNN agreement for use with everyone. It’s not that this is per se incorrect, but it’s often putting the cart before the horse. An NNN agreement is not the proper agreement in every situation.

If you don’t know the identity of the factory manufacturing your goods, an NNN agreement with them is out of the question. You can’t enter into a contract with an unknown company! And if you have a complicated arrangement with a sourcing agent or a factory, then an NNN agreement won’t go nearly far enough.

In short, the arrangement you have with your sourcing agent will determine the agreements you need, and with whom. We addressed these issues last year in China Manufacturing: To Broker or not to Broker, That is the Question, with particular attention to the question of whether you could (or should) have a contract solely with your sourcing agent. It will probably not surprise you to hear that the answer is: it depends.

In an ideal world, if you are dealing with factories directly, you would want NNN agreements with the factories with which you have initial talks, development agreements with the factories that develop products for you, and OEM agreements (aka contract manufacturing agreements) with the factories that actually manufacture products for you. In this situation, the agreement with the sourcing agent would be fairly simple because they aren’t doing much – it’ll basically be an NNN agreement with some additional verbiage to cover the finder’s fee. You don’t want the sourcing agreement to be the only agreement in place, because it offers so little protection.

If you are dealing exclusively with your sourcing agent, then you won’t – can’t – have any agreements with the factories. You will need to look to the sourcing agent exclusively for everything: non-competition, non-circumvention, non-disclosure, quality control, ordering, warranty, etc., because you have no contractual privity with the Chinese factories and no way to hold them responsible for anything. This can be useful if the sourcing agent is based in the United States because it is a lot easier to go after a US company. But this presupposes that the US company has assets, and that your agreement with them allows you to hold them responsible for the actions of the Chinese factories. In this situation, the sourcing agreement is all-important and must be carefully drafted, because many sourcing agents will attempt to avoid responsibility for everything from delays to quality issues to IP infringement. Working with these agents is taking a huge risk: if the sourcing agent isn’t responsible for the actions of the Chinese factories, and you don’t even know the identity of the Chinese factories, you’ve got no recourse if things go south.

For all of the sourcing agents in between, you’ll want a robust sourcing agreement and at the very least NNN agreements with the factories. Whether the development and manufacturing agreements are with the factories or the sourcing agent will depend on the particulars of how you deal with the various parties, and also your ability to hold them responsible when things go wrong. If the sourcing agent is a well-established company with multiple employees and a real office and sizable assets, it’s reasonable to look to the sourcing agent for everything. If it’s one guy with a virtual office in Los Angeles who spends most of his time overseas, not so much. Of course, the ideal situation from a legal standpoint is not always possible in the real world, so you need to adjust to the situation on the ground.

Some clients ask our China lawyers if they can just have NNN agreements “with everyone” and leave it at that? Certainly, it does not hurt to have NNN agreements with every party on the sourcing agent/manufacturer side. But it won’t cover all potential forms of liability – not even close. It will only hold counter-parties liable for misuse of your IP. For some clients, this is enough, particularly during initial phases when they are unsure whether their IP can really be commercialized.

And no matter what agreements you sign with your sourcing agent and factories, you still need to register all of your IP (patents, trademarks, copyrights) in China. You could have an ironclad agreement with a great sourcing agent who only uses wonderfully compliant factories, and it won’t mean a thing if some third party registers your trademark or copies your patented goods.

China Trademark RegistrationIn part one of this two-part post, I presented six China trademark resolutions for 2018:

  1. Register the trademarks you are using in China for the products/services you are using.
  2. Register your trademarks in additional classes/subclasses.
  3. Register more trademarks than you are currently using.
  4. Monitor your trademarks.
  5. File non-use cancellations against squatters.
  6. Come up with a Chinese name for your mark and register it.

Now, in part two, I present six more resolutions.

  1. Register similar Chinese names.

As we have written, a foreign company’s Chinese brand name usually falls into one of the following categories:

  1. A direct translation of each word in the name. This is what Microsoft has done: 微软, Chinese characters for “micro” and “soft.”
  2. A transliteration, in which the Chinese characters approximate the sound of the English-language name. This is what Google has done: 谷歌, Chinese characters that make the sounds “gu” and “ge.”
  3. A new name with a positive connotation with no obvious connection to the English-language antecedent. This is what Pfizer has done: 辉瑞, Chinese characters that make the sounds “hui” and “rui” and mean “brilliant and auspicious” (more or less).
  4. A combination of the above. This is what Starbucks has done: 星巴克, the Chinese character for “star” and Chinese characters that make the sounds “ba” and “ke” (“bucks,” more or less).

No matter what method is used, because Chinese has so many homonyms (i.e., characters with the same sound) it is all too easy to come up with alternative Chinese brand names that sound exactly the same but use different characters. The possibilities are even greater when you include characters with similar (but not identical) sounds. And a soundalike mark is good enough for a counterfeiter.

The Chinese Trademark Office (CTMO) is likely to block Chinese brand names that are only one character away from your registered mark and cover the same goods/services. But it’s far from guaranteed they’ll do so. A better approach is to identify the Chinese brand names that are similar enough to yours that you wouldn’t want them to be registered by a third party, and register them yourself before someone else does.

  1. Have your Chinese business partners execute a formal agreement.

Having your Chinese business partners execute (i.e., sign and chop with the company seal) a formal agreement is a good idea for all kinds of reasons, whether that agreement is an OEM agreement, an NNN agreement, a licensing agreement, or otherwise. Such an agreement establishes the basic terms of the business relationship, clarifies the expectations on both sides, and provides a basis for a lawsuit should things go awry. And in the trademark context, a signed, chopped agreement can be the difference between winning and losing when you discover that your former Chinese business partner has filed an application for “your” trademark.

Our agreements always have a separate IP section forbidding the Chinese party from taking any actions to interfere with your IP rights (e.g., filing applications for “your” trademarks or opposing/attempting to invalidate your existing trademarks). Such language, when formally agreed to by a Chinese entity, is relatively easy to enforce, and often will prevent spurious trademark applications in the first place. And if you do need to take action against your former supplier either in court or before the CTMO, having an original signed, chopped agreement in which your Chinese business partner agrees to respect your IP is powerful evidence in your favor.

Needless to say, the time to execute these agreements is at the beginning of the relationship when everyone’s happy – not when your Chinese supplier has proven incompetent or worse and you are no longer on speaking terms.

  1. Keep copies of all documents to/from your Chinese business partner

Many companies still do business in China solely on the basis of purchase orders written in English and English-language emails sent to their Chinese business partners’ personal email account. This arrangement is ideal for the Chinese side and horrible for the foreign side because it creates great ambiguity about both the terms and the Chinese side’s identity, and thereby minimizes their liability. It’s difficult to hold a Chinese company liable when you don’t even know their real name.

In the trademark context, this issue comes up most often when a foreign company learns that their former Chinese business partner has filed an application for “their” trademark. (Typical generic scenario: Chinese manufacturer experiences quality fade; foreign buyer refuses to pay for defective merchandise; quality fade gets worse; foreign buyer stops purchasing altogether; Chinese manufacturer engages Sinosure to collect unpaid money and files trademark applications for the foreign buyer’s marks.)

China actually does a decent job policing bad faith trademark applications from foreign companies’ Chinese business partners. But in order for the CTMO to rule against the Chinese manufacturer who coopted “your” mark, you first need to prove the existence of a business relationship. As described in the previous resolution, the easiest way to do this is with a signed, chopped agreement. Failing that, you need to prove the relationship by circumstantial evidence, and the more original documents you have the better. The best evidence is documents issued by your business partner 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). Most of the time, foreign buyers don’t pay much attention to the documents from the Chinese side (perhaps because the Chinese side is so cavalier), and so the more documents that you keep on hand, the more likely you’ll have a document that could actually help.

  1. Keep evidence of trademark use in China.

Unlike the US, China does not require affirmative proof of use in commerce to register or maintain a trademark. But you still need to collect and maintain evidence that you are using your trademark in China. Every trademark in China is vulnerable to a non-use cancellation starting three years after the registration date. And with the vast number of trademark applications being filed, more and more existing registrations are being cited as obstacles to new applications, which only increases the chance of a cancellation being filed against your mark.

The CTMO does not pursue non-use cancellations sua sponte; only a third party would file a non-use cancellation against your registration. But it happens all the time, and when it does you need to provide evidence that your trademark has been used in China during the past three years on the covered goods/services, or else your trademark registration will be cancelled.

Evidence can take many forms. If you are actively selling products in China, then proof should be easy: advertisements, packaging, website screenshots, and other publicly available marketing and sales ephemera. If all you do is manufacture in China, then you’ll need to reply on third-party documents that clearly demonstrate your use of the mark in China on the covered products: invoices, shipping documents, quality inspections, customs export declarations, and the like. Photographs (say, from your factory) are helpful to provide context but, standing alone, are usually insufficient to demonstrate use. This is another area where a business relationship evidenced solely by English-language purchase orders and emails to a personal email account are going to come back to haunt you, because neither one is likely to be sufficient evidence of trademark use.

  1. Secure copyright registration for your trademark logo.

Copyright law protects creative works, and many trademarks that are mere standard character marks (aka word marks) do not qualify as creative works because they are too short. However, almost all trademarks expressed as a logo could also be protected by copyright in China. Some practitioners refer to a China trademark registration and a copyright registration together as a “super trademark.” The theory is that because copyright is not governed by the Nice Classification system, a copyright registration applies to all goods and services, and therefore means that no one besides you can ever use your logo for anything.

It doesn’t always work out that easily – and the remedies for copyright infringement aren’t nearly as robust as those for trademark infringement – but a copyright registration can definitely be useful when trying to take down Alibaba listings for fake branded products.

  1. Record your trademarks with customs.

Every year, Chinese customs gets a little better about sussing out counterfeit goods. It’s a massive job, considering how much of the world’s goods (authentic or not) originate in China. Most countries, the US included, only check imported goods for counterfeits. China checks both, and they deserve credit for that.

But they don’t check everything; actually, they hardly check anything at all on their own. And unless your brand is as well known as Nike, your average Chinese customs inspector isn’t going to have any idea whether goods are authentic or not.

Really, the only way to get Chinese customs to pay attention at all is to have a valid trademark registration in China and then record that trademark registration with customs.

China Trademark RegistrationIn the spirit of starting out 2018 on the right foot, I have compiled a list of 12 trademark-related resolutions for any company that does business in China and has at least one brand that they care about.

To the resolutions!

1. Register the trademarks you are using in China for the products/services you are using. This is as close to a no-brainer as there is in China IP. But nearly every week we hear from folks who have discovered that someone else registered their trademark in China, so here goes: China is a first-to-file jurisdiction for trademarks and does not have robust enforcement against trademark squatters. A foreign trademark registration has no relevance in China, because every country has its own trademark system. And no matter how well-known you may think your trademark is, it’s not well-known enough in China to gain protection without registration. The bottom line is that if you don’t register your own trademark, someone else will do it for you – and then you’ll be faced with the unpleasant choice of either paying them off or selecting a new brand name for China. Think of it this way: if you lived on the San Andreas Fault and earthquake insurance was really cheap, wouldn’t you buy insurance?

2. Register your trademarks in additional classes/subclasses. For better or worse, trademark protection in China is limited to the subclass(es) in which a given trademark is registered. With a few minor exceptions, if you have a trademark for a single good in a given subclass, that registration will also cover ALL other goods in that subclass, but no other goods in any other subclass. And because China does not have an affirmative use requirement, it is possible to register your trademark to cover goods and services beyond those you are actually using in China. It could be for goods/services that you hope to use in China one day, or it could be for goods/services you simply don’t want anyone else to use in China using your name. Most companies conduct a cost-benefit analysis and select a few high-priority classes in which they would like protection. If you make swimwear, you probably don’t care too much about someone selling motor oil or microscopes using your brand name. But if you’re a company with deep pockets and/or a deep-seated aversion to seeing someone else use your logo, think about the Starbucks approach: register your trademark in all 45 classes and all of the related subclasses.

3. Register more trademarks than you are currently using. The logic here is similar to the previous resolution. China doesn’t require proof of use to register (or maintain) a trademark, so you can register trademarks that you have never used in any classes (and may never use). These could be marks that you hope to use in China one day, or they could be marks that you simply don’t want anyone else to use in China. Usually the latter category includes trademarks that the China Trademark Office (CTMO) would not deem to conflict with yours, but that you would consider objectionable.

4. Monitor your trademarks. The CTMO is not the most communicative bureaucracy. Absent a challenge (e.g,, based on use or validity) to your trademark, after registration you won’t hear from them for another 10 years, and that’s assuming you renew the mark. You won’t hear from them if a third party tries to register a mark that is similar to yours and in the same subclass(es). You also won’t hear from them if a third party tries to register the exact same mark that you have registered in the U.S. In either case you may have grounds for a successful opposition, but it will depend on the identity of the third party. (Your best shot is if the applicant is a current or former business partner.) But the window of opposition is relatively short – three months from the date of publication – and it’s hard to oppose a trademark you don’t hear about until too late. You can also attempt to invalidate a mark after registration, but at that point you’re fighting a rearguard action against a mark that will be valid unless and until you succeed in invalidating it. The best solution, of course, is to file applications yourself before third parties can do so. But failing that, regularly monitor the CTMO database and the Trademark Gazette for potential conflicts.

5. File non-use cancellations against squatters. Has “your” mark has been registered by a trademark squatter in China? Some squatters have no intention of ever using their registered trademarks in commerce; their sole goal is to sell the mark to the highest bidder. The good news is that three years after registration, all trademarks are vulnerable to cancellation for non-use. If you have the patience to wait three years (or only recently found out about the existence of such a mark), this could be a great option. As an initial step, you should conduct a thorough Internet search to see if the mark is being used. It’s not foolproof, but given the preeminence of e-commerce in China, if someone is legitimately using a mark in China, the Internet will contain signs of such use. If the search comes back clean, file a non-use cancellation against the squatter and also file a new trademark application of your own. (Cancelling a trademark does not transfer ownership of the cancelled mark; it just renders the mark invalid.)

6. Come up with a Chinese name for your mark and register it. If you care about your brand in China, it’s not enough just to register the English-language version. You also need to protect your Chinese brand – even if you don’t even have one yet. The minute your English-language brand gets attention in China, it will be given a Chinese name by the local media and consumers. Without exception. And the minute that happens, someone will register the Chinese name as a trademark, and you’ll have forfeited not only the right to use your Chinese brand name, but the ability to choose it in the first place. This story has played out a number of times throughout the years, with companies from Pfizer to Hermes to Penfolds.

But knowing that you need a Chinese name is different from actually selecting one. As I wrote just a few months ago:

Picking a Chinese name is tricky, and simply being fluent in Chinese does not make someone an expert in Chinese-language branding any more than being fluent in English makes a random American an expert in English-language branding. Far too often we see companies delegate this important decision to their “guy in China,” with predictably middling results. Yes, it’s better than having a non-native speaker pick the Chinese brand name by using Google Translate, but that’s not saying much. We work with several branding companies that specialize in this work.

In the conclusion of this two-part post, I’ll present six more resolutions. Happy new year, everyone!