Trademark squatters get smarter in China – a look at the latest tactics

Trademark squatting has been a constant concern for foreign companies trying to enter the Chinese market. China’s first-to-file system requires no proof of use in order to register. Squatters take advantage of this and register foreign brands as trademarks in order to free ride on the brand’s reputation or profit by selling trademarks back to the original rights holders. While the new Trademark Law, effective from November 2019, has provisions designed to combat this, squatters have also improved their game.

Ramping up activities

Squatters escalate their activities when the rights holder takes action against them by applying for the same marks in other related classes and sub-classes. They are aware that the owner must now spend a great deal of time and money opposing the marks, which puts pressure on it to settle.

China has a rigid classification system – goods and services in one class are divided into sub-classes, in which they are usually considered to be dissimilar. Even if the rights holder has secured registration for its goods and services in China, it often finds that other parties register the same marks for related goods or services in other classes or sub-classes. In order to prevent this, it is important to broaden the classes and scope of specification to cover the those of related goods or services. It is advisable to think ahead and register marks to cover:

• core goods or services;
• goods or services that could be offered as the business expands; and
• goods or services, for which the company wishes to prevent third parties from registering.

Use of multiple entities and foreign shadow companies

Professional trademark squatters recruit employees and set up companies to hold the marks. This is in response to trademark authorities inferring bad faith from the large number of marks that they hold.

Rights holders should conduct an extensive background search against the applicant to uncover affiliated companies and show the total number of bad-faith filings. It is recommended that rights holders use the publicly available database to do this.

Sophisticated squatters may also set up shadow companies, which incorporate the names of famous brands in foreign jurisdictions and use them to hold marks in China. At first glance, these companies give legitimacy to the squatter’s trademark filings. Rights holders must take action against these companies in the jurisdiction in which they is incorporated and gather evidence to show that they no longer exist and have changed their name.

In Hong Kong, if a shadow company has been incorporated for less than 12 months, rights holders can lodge a complaint with the Hong Kong Companies Registry to persuade it to change its name on the ground that it is the same or similar to that of the mark owner’s prior company there. Alternatively, it can initiate civil proceedings on the grounds of passing off and/or infringement for an injunction to restrain the company from using its name. In most cases, rights holders are able to obtain judgment by default as shadow companies seldom contest the proceedings as they often have no legitimate defence. Upon receiving the judgment, a rights holder should request that the Companies Registry direct the shadow company to change its name and use such evidence to support the action in China.

Filing malicious complaints and litigations against rightful owners

Trademark squatters can be aggressive. In order to disrupt the mark owner’s business as a leverage to sell their marks at a higher price, they may file malicious complaints against the rightful owners’ product listings on e-commerce platforms (eg, Taobao and JD.com). Given the complexity of the nature of these complaints, it may be more efficient to liaise directly with the IP protection platform to persuade them to permit the rights holder’s listings.

In order to shift from a defensive to an offensive position when faced with malicious complaints, the rights holder can file an unfair competition case against squatters. In a case before the Yuhang District Court in Zhejiang Province involving Bayer Consumer Care, the court held that the squatter’s malicious trademark registration and its complaints against the rights holder’s listings of Coppertone products on an e-commerce platform amounted to unfair competition.

Some squatters go so far as to file for litigation against rights holders on the grounds of trademark infringement. It is thus crucial to file administrative actions (opposition, invalidation and non-use cancellations) against the squatters’ marks. It is possible to request that the court handling the infringement action suspend the case pending invalidation and the non-use cancellation, especially when the decision on the squatter’s mark is soon to be issued.