13 February 2023TrademarksTom Phillips and Sarah Speight

Q&A: OEM’s China win offers TM squatting ‘blueprint’

Significant win for an original equipment manufacturer offers legal route against trademark squatters | ‘Principle of Good Faith’ secures result | Lead lawyers share strategy | Lusheng | Rouse | Juratek.

A significant win for an original equipment manufacturer (OEM) in China will be welcomed by foreign companies on the receiving end of trademark ‘squatters’ that have plagued the country.

Trademark squatting refers to a practice by which companies deliberately register other brands’ trademarks, generally with the aim of selling the trademark back to the original owners for an exorbitant amount; or to sell counterfeit products under the trademark registered in China.

Juratek, a European manufacturer of automotive components, successfully defended itself against Laizhou Baoyi Machinery Co (Baoyi), a Chinese parts manufacturer, in one such case in December last year.

In 2017, Baoyi registered trademarks for Juratek’s company name and logos, despite Juratek using the trademarks in China and overseas since 2000. Baoyi then used the trademarks against Juratek’s Chinese automotive parts supplier, and customs detained the shipments for export.

Principle of good faith

Lusheng, a strategic partner of UK-headquartered IP services firm  Rouse, acted for Juratek in the case. The firm used the ‘Principle of Good Faith’, rather than legal provisions of trademark ownership, to show that Baoyi was aware it was trademark squatting, alongside showing significant evidence.

In the first instance decision, the court ruled that as the owner of the trademark, Baoyi won. However, during the appeal, the High Court placed a greater emphasis on the ‘Principle of Good Faith’ and Juratek won.

Matt Robinson, managing director at Juratek, said in a statement:  “We’re delighted with the end result. We faced some dark moments in the early days when our shipments were being detained, and it was extremely frustrating.

“We have done business in China for 20 years and have been very happy with things, but we were starting to doubt the system. However, we were advised to hold tight and that we would get there in the end—which fortunately we did—and my faith is restored.”

Chris Vale, global head of dispute resolution service at Rouse coordinated the case. He said: "We're delighted for Juratek. Juratek has a long history of manufacture in China and this case was very disruptive to the business.

"[The client] trusted in us and Lusheng, and our team did an amazing job overturning the First Instance decision and getting a win.”

Miriam Yang, senior associate at Lusheng, said disputes like these are common among OEMs in China, but it is unusual for the applicant against the squatting company to win.

“The case can be used as a blueprint precedent for the use of the ‘Principle of Good Faith’ to be used in a trademark squatting case,” said Yang.

“The decision supports the protections of the rights of foreign investors looking to expand or launch their brands in the Chinese market, and should provide confidence for OEMs and other businesses with sophisticated, complex supply chains in protecting their rights in China.”

WIPR asked Lusheng’s  Landy Jiang, head of Beijing Dispute Resolution and Yang about trademark squatting to find out more.

Why has trademark squatting been so prevalent in China? Who is most affected?

Trademark squatting has been particularly prevalent in China largely due to the country’s “first-to-file” trademark registration system, which means that the first party to register a trademark has the legal right to use it – and then of course can prevent others from doing so. This makes it easy for individuals or companies to register trademarks in China belonging to others overseas, in bad faith for commercial gain. Regulation has historically been a challenge.

Overseas companies often do not register their trademarks in China, which makes it straightforward for squatters to register first. International businesses that have yet to develop a presence in China are most likely to be targeted, especially as many are not necessarily aware of the Chinese first-to-file trademark registration system.

These companies often think that manufacturing in China for export only—rather than selling there—means they do not need to register their trade mark. Trademark squatting, therefore, became very common as a costly, time-consuming and very difficult to rectify problem, which meant a lot of companies simply paid to get their rights back.

What is being done to protect victims?

The China National Intellectual Property Administration (CNIPA) has introduced stricter regulations, and has been working to improve the speed and efficiency of handling such cases with the aim of deterring this activity.

The most significant change, however, was the amendment of the Chinese Trademark Law in 2019 to give more emphasis on the Principle of Good Faith in trademark squatting cases. This gives CNIPA the power to reject a trademark application on the basis it was filed in bad faith without genuine intent to use. Prior to the amendment, the CNIPA was only able to consider bad faith if a brand owner or company raised an opposition against the invalid trademark application.

There is more for IP professionals to do to raise awareness of trademark squatting and help companies to avoid becoming victims. They can also help their clients to protect themselves by registering their trademarks in China as early as possible. Regular checks should also be conducted to ensure a company’s trademarks are not being used by squatters.

What are the best practices for lawyers to use during trademark disputes?

It has in the past been very difficult for the companies to win cases at court against the squatters. It is important now for IP lawyers to look at where they can use different methods to protect their clients’ property.

As an example of this, Rouse’s strategic partner in China, Lusheng, recently won a case in which a Chinese company registered trademarks for the company name and logos of Juratek Limited, an OEM from UK. The company then used its trademarks against Juratek’s Chinese automotive parts supplier, and customs started detaining its export shipments, causing considerable difficulty for Juratek.

Lusheng provided significant evidence that the trademarks were filed in bad faith, that the defendant was aware it was trademark squatting and that it was doing so for commercial gain. In the first instance decision, the court found for the owner of the trademark, meaning that the victim, Juratek, lost.

Lusheng had to take the case to appeal, where it argued the ‘Principle of Good Faith’.  The High Court placed a significant emphasis on this principle and it found for Juratek.

What more needs to be done within the courts?

China’s IP landscape is changing, and so is the level of complexity involved in trademark squatting. It is very good that courts and administrative authorities like CNIPA are giving greater attention to cases such as these, and are more willing and able to support and protect foreign brands.

Courts need to continue being open to considering different ways of prosecuting trademark squatting cases— the Juratek case can be used as a blueprint for the use of the ‘Principle of Good Faith’ in cases such as this.

The decision on appeal showcased the Chinese courts support of the protections of the rights of foreign companies in the Chinese market, and should provide confidence for OEMs and other businesses with sophisticated, complex supply chains in protecting their rights and supply chains in China.

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12 June 2023   It was long controversial whether trademark use in the OEM process is valid against non-use cancellation, because that use is just physical attachment of the mark; does not have local sales; and the mark cannot function to identify the source of goods in China.