Trademark squatting: Brands beware

The opening up of China’s economy in the past few decades has created a lot of opportunities for Western brands to target a whole new group of consumers. Technology, car and pharmaceutical companies are some of those that have entered the market and they found varying degrees of success with China’s growing middle class.

As the economic wind continues to blow east, many more brands are expected to follow in an assembly line of big Western names looking to reach a new audience. But while that line could continue at an unstoppable pace, there are interruptions and roadblocks that are causing brands headaches. Apart from the logistical difficulty of creating a presence in a new jurisdiction, brand owners have had to contend with the problem of protecting their intellectual property.

China’s trademark system operates on a first-to-file basis and that has meant brands that are not watching events in China too closely are vulnerable to a phenomenon called trademark squatting. This is defined as a party registering a brand as a trademark in bad faith.

Trademark squatters have proved to be quite a formidable foe for Western brands. In the last couple of years, Apple, Penfolds, Tesla and Pfizer have all found themselves in a battle against a party that has registered a trademark for their company name or product in what they claim was bad faith.

Success has been hard to come by at times. In 2012, for instance, Apple handed over just under RMB 400 million ($65 million) to a company that had registered ‘iPad’ as a trademark. Pfizer, too, failed in its 2012 opposition to a trademark application for ‘Little Viagra’.

Brands have, however, recorded some victories against trademark squatters. Electric car maker Tesla retrieved the trademark for its company name from a Chinese businessman after it agreed a fee that was reportedly less than the RMB 23.9 million the businessman originally demanded (although the exact figures have not been publicly disclosed).

The same forces that drive brands to China are incentivising people to take advantage of brands’ failure to watch the Chinese market closely and make bad faith trademark applications.

Laura Young, partner at law firm Wang & Wang, says: “Since first-to-use is not sufficient for trademark protection, success against squatters requires showing either that the mark was famous in China or that there was bad faith by the squatter.

“Unfortunately, neither of those is as easy as many international brands think. First, famous in China is a high bar. International companies often believe their brand to be famous and believe that it should be famous in China when that is not the case.

“Western brands rarely qualify as famous with Chinese consumers,” she adds.

As Young identifies, most brands cannot rely on an argument that they are well-known in China. It is a claim available only to a small group of brands that have reached mass levels of consciousness.

"International companies often believe their brand to be famous and believe that it should be famous in China when that is not the case."

But is it China’s trademark system that causes squatting?

Young doesn’t think so. “The cause of squatting is not gaps in China’s Trademark Law: it is economic forces. China has a massive manufacturing capacity in search of ready markets. Big brands have built markets they intend to fill with their own products. However, products will flow to where there is consumer demand, so manufacturers will try to supply, and do not care that someone else built that demand, or that they are taking a free ride on the marketing efforts of others.

“Even the 2014 amended Trademark Law will have only a minor impact,” she continues. “Yes, it states a prohibition on trademark agencies acting as trademark squatters, but it doesn’t stop incentives for trademark squatting.”

More to be done

The recent changes to China’s Trademark Law came into effect last April and were meant to be tougher against trademark squatters. Courts are now allowed to issue fines of up to RMB 3 million for people found guilty of infringing an existing trademark.

In addition, the new law emphasises the importance of a rapid turnover of applications, requiring them to be examined within nine months of their submission to the China Trademark Office, the body responsible for handling trademark applications in China.