New England Biz Law Update
With an average annual GDP growth of 9.8 percent, China is predicted to become the world’s second largest economy (behind the U.S.) by 2030.
U.S. companies are understandably looking to China as a major new marketplace. However, they need to be wary of various intellectual property issues.
Considering that China only recently codified private property rights, navigating China’s developing legal system can present tough challenges, particularly in the area of trademark law.
What must U.S. firms watch out for? Many companies selling in China have had their brand identities stolen by counterfeiters selling lower quality products.
Another concern that some of best-known brands (Starbucks, Dell, Disney) have come to China only to discover that others had previously registered their marks (or Chinese language transliterations of their marks) in hopes of “extracting” exorbitant sums from the original mark-holders. Such experiences leave an obvious negative impression of both Chinese trademark law and its enforcement.
Despite such problems, however, the fundamentals of Chinese trademark law don’t appear that different from those in the U.S.
For example, trademark owners register trademarks by filing an application with the Chinese Trademark Office, where new trademark applications are reviewed for distinctiveness, and subjected to a search for conflicting marks. Also, as in the U.S., applications surviving this process are published in a “trademark Gazette.”
Differences abound
However, differences abound too. Unlike the U.S., China maintains a “first-to-file” system that generally grants protection to the first party to file an application for a mark, rather than the first party to actually use it. This opens the door to thieves who can register trademarks without needing to prove they are the rightful owners – a very dangerous possibility for companies with a well-known brand.
Another negative difference is China’s limited ability to enforce its laws. A company discovering that its trademark is being infringed, for example, has three options: administrative adjudication, civil litigation, and criminal prosecution.
Unfortunately, criminal prosecution typically results in fines and prison sentences that, for various reasons, are very difficult to set in motion. Also, trademark owners often must do all investigative work themselves because local police frequently possess too few resources. Further, sanctions ultimately imposed tend to be limited in such a way that trademark owners may find chasing their infringers not worth the time or trouble.
The second option, administrative remedies, offers trademark owners an effective process that typically takes place quickly and cheaply, though the bad news is administrative bodies cannot impose jail sentences or award compensatory damages. And what sanctions can be imposed are often insufficient to deter infringers.
Finally, there is civil litigation, but owners must generally bring an action within two years of the infringement. Statutory damages in cases where compensatory damages are difficult to prove will be limited to RMB 500,000 Yuan (around $65,000 at current exchange rates) – in most situations, too small a number.
On top of all these negative conditions, the effectiveness of trademark remedies is further limited by significant delays in China’s trademark system, particularly at the early stages. An examination of a trademark application alone, for example, could take more than three years to be processed. Even slower are resolutions of opposition review and cancellation proceedings, which can take as much as eight years!
On the bright side
On the brighter side, many Chinese officials seem genuinely interested in stronger intellectual property enforcement, especially as the looming 2008 Olympics generates greater worldwide scrutiny of Chinese business and legal practices. For example, revisions to Chinese trademark law now underway will attempt to simplify the overall process as well as close many enforcement loopholes.
What does all this mean for American companies doing business in China? First, U.S. firms must think through and launch their China legal strategy as early as possible, including registering all useful transliterations of their trademarks so as to avoid potential problems.
In addition, companies should not forget to also register their marks in so-called “Greater China” jurisdictions, such as Taiwan, Hong Kong, and Macao. Finally, American companies without a physical presence in China must remember to select a U.S. counsel and Chinese trademark agents who have the experience to negotiate the trademark process in China.
Though far from ideal, China’s trademark system will likely grow more similar to Western trademark systems rather than less as time goes on. But until this happens, U.S. companies must ensure that their attempts to capitalize on attractive China business opportunities do not leave them exposed to trademark theft or sabotage.
Keeping careful watch over China’s shifting legal landscape offers the best approach to safeguarding a company’s trademarks in China.
Ed Perlman is a shareholder of Wolf Greenfield (www.wolfgreenfield. com) in Boston and co-chair of the firm’s trademark practice group. You can contact Ed at 617.646.8000. Octavian Timar was a Summer 2007 associate at Wolf Greenfield.
