Launch of China-only brands by international brand owners
This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight
As the world’s second-largest economy and with a population in excess of 1.3 billion, China represents huge potential for many international brands. However, it is also the case that the infringement of IP rights has caused internationally well-known brands to suffer setbacks when exploiting the Chinese market. Although there is no one-size-fits-all strategy for IP protection, this chapter aims to give businesses considering setting up in China some tips for the protection of their intellectual property.
It should go without saying that it is important for a business to register its original trademark or brand name in China before entering the Chinese market, as China has a first-to-file system. Trademark protection should be secured for all brands – not just those that are world famous – to initiate business in China. All shopping malls require trademark certificates issued by the Chinese Trademark Office (CTMO). Brand owners should apply for the registration of their trademarks in China as soon as possible, but what many international brand owners overlook is the importance of creating and registering their Chinese trademark across a number of different classes.
Dangers of no protection
Legitimate trademark owners can no longer manufacture, produce or sell their goods in China if a trademark squatter has registered their brand in a trademark in China. Trademark squatters register the marks of others, and even go so far as to lodge complaints against legitimate brand owners based on their earlier registrations in order to take down listings of goods on e-commerce platforms. Trademark squatters can also record trademarks with Customs and block any exports of the goods bearing the mark, further emphasising the importance of early filing in China.
First registration wins
On 25 October 2017 McDonald’s announced on its official Weibo page that it would change its registered business name to Golden Arches (China) Limited (or 金拱门 (Jin Gong Men) in Chinese). The name ‘Golden Arches’ stems from McDonald’s classic symbol of the golden ‘M’. Immediately after the announcement, many opportunists quickly thought of ways to take advantage of the fast-food giant’s name change. More than 1,000 new trademark applications for 金拱门 (Jin Gong Men) were made following the public announcement. Many worried that McDonald’s would suffer the same fate as Michael Jordan and New Balance, both of which have fought long and costly battles to defend their Chinese brand names against trademark squatters in China. McDonald’s applied for the trademark 金拱门 (Jin Gong Men) on 27 October 2017 (ie, two days after the public announcement was made). Many were surprised that McDonald’s did not apply for this trademark earlier. However, six months earlier McDonald’s had filed another application for Jing Se Gong Men (金色拱门 in Chinese, which translates to ‘golden-coloured arches’ in English) in Class 43. Nonetheless, it shows that trademark pirates act expeditiously. Time is of the essence when it comes to trademark registration in China.
An alternative to filing a mark in China is relying on the well-known status of the mark, thereby alleging bad faith of the trademark squatter or infringer. However, this may be a more difficult route. Relevant factors to be considered in determining whether a trademark is well-known include:
- awareness among the relevant public of the trademark;
- duration of trademark use;
- duration, degree and geographical range of all the publicity operations carried out for the trademark;
- records of protection provided for the trademark as a well-known trademark; and
- other factors related to the trademark’s well-known status.
The claim for well-known status must be supported by substantial evidence of fame within China among the relevant Chinese public, such as the trademark’s reputation in the market, as well as the market share and profits of the goods and services using the mark. Evidence of fame in relation to foreign jurisdictions will be given very little weight in a Chinese court. Many brands, even if they are internationally known, do not meet the threshold in China. In particular, in light of a high-profile anti-corruption case in Guangdong Province involving more than 10 well-known status recognition cases in 2018, the recognition of the well-known status of a trademark in China has become increasingly difficult. Therefore, securing both the original and the Chinese trademark for early filing is vital.
According to the Trademark Law, applicants may also enjoy priority rights. A trademark may claim priority for its application in China if it is filed within six months of the filing date of the first application outside China (Article 25). A priority right is a time-limited right, which is triggered by the first filing of an application for a trademark or first use of a trademark in an official or officially recognised international exhibition (Article 26).
Creating and registering a Chinese mark
Lessons from Hermes
The French luxury brand Hermes lost the trademark rights to its Chinese brand name 爱马仕 (a transliteration of ‘Hermes’ into Chinese) in 2012 to Dafeng Garment Factory, a small Guangdong clothing manufacturing company. The Guangdong company had registered a similar mark 爱玛仕 (a transliteration of ‘Hermes’ into Chinese, except with a different Chinese character) before Hermes obtained registration of its Chinese brand name. The original HERMES trademark was registered in 1977, more than 30 years before the Guangdong company registered its Chinese equivalent in China.
Nevertheless, Hermes did not register its Chinese version of its name.
The court’s view was that Hermes’ Chinese version of its name was not well-known in China. The court ruled that most of the evidence that Hermes had provided related to the periods after the disputed trademark had been registered. The evidence was also mainly related to media reports on the Chinese name of Hermes in Hong Kong. Thus, this did not prove that it was well-known among consumers in mainland China.
Even though a brand may be famous worldwide in the form of its original brand name or logo, it is common for the Chinese public to recognise and refer to a brand by its official or unofficial Chinese name. If a Chinese name is not decided on and used before the brand enters the Chinese market, the Chinese public or media will devise a Chinese name. This unofficial Chinese name will likely spread in use and popularity and may overshadow whatever official brand name is later given. If the connection between the brand and this unofficial but widely used Chinese name develops, the legitimate and original company will lose control over the Chinese name picked by the public and media and will put the protection of the legitimate Chinese name at risk. Even when brand owners have chosen Chinese names for their brands in China, they should monitor the market to see whether there are any unofficial Chinese names that are used by the Chinese public and register the same as soon as possible to avoid squatters taking advantage of the fame built around the unofficial Chinese name.
There may be thousands of possible combinations of different Chinese characters with the same or significantly similar pronunciation. As such, sufficient due diligence should be carried out when choosing a suitable Chinese name for a brand, from both an IP and marketing perspective.
In the unfortunate event that a trademark has already been registered in China by another party, corrective action over these bad-faith registrations must be considered. Brand owners can start cancellation proceedings to request the de-registration of the prior registration on grounds of:
- non-use for three consecutive years (if the trademark has been registered for more than three years);
- bad faith of the prior registrant (eg, where the registrant is a routine trademark squatter making bulk applications for well-known trademarks); or
- breach of the Anti-unfair Competition Law, which forbids the use of trademarks which are confusingly similar to a prior mark which has attained certain influence (which is understood to be a lower threshold than the well-known trademark requirement in bad faith of the prior registrant).
Entering the Chinese market
When entering the Chinese market, brands must inevitably engage different Chinese parties (eg, equipment manufacturers, distributors and advertising companies, among others) and trademark use will be involved in every step. No matter whether a company is selling the goods in China, or merely setting up a marketing page on a social network, proof of due authorisation to use the trademark will be requested.
For brand owners selling their goods in China via Chinese distributors, it is vital to have sufficient rights protected in the joint venture or distribution agreements. Confidentiality, language, governing law, rights to enforce intellectual property and rights to all further inventions and new trademarks created must be addressed.
Under a trademark licensing agreement, the Chinese licensee must make payments to the licensor brand and be supported by relevant licence documents and registration of such documents for authenticity.
Recordal at the CTMO
If a licensor authorises another party to use its registered trademark, it must submit the trademark licence agreement to the CTMO for its records. Although a trademark licence agreement that is not recorded at the CTMO is still valid and enforceable, such trademark licence agreement is valid only between the licensor and licensee and cannot be used as a defence against a third party using the trademark in good faith. Nevertheless, recordals are made mainly for the benefit of the licensee. Brand owners should note that de-recordals require both parties’ signature, and therefore mechanisms should be put in place to allow the licensor to de-record the licence unilaterally, otherwise the licensor can be held to ransom at times of dispute.
Foreign exchange controls
Companies cannot freely move money in and out of China as China maintains foreign currency controls. Therefore, recordals to the State Administrations for Foreign Exchange department or relevant bank will need to be done before money can be remitted out of China. Licensors should make the Chinese party responsible for these arrangements.
Jurisdiction and governing law
China does not honour and enforce foreign judgments. As such, companies should consider using Chinese law as the governing law. However, China is party to the New York Convention, therefore foreign arbitral awards will be honoured in China.
Proof of IP rights required in digital era
According to the China Internet Network Information Centre, there are 802 million active internet users in China. The online shopping mall giant in China, Taobao, recorded $30.8 billion in sales in only 24 hours on 11 November 2018, which was also known as the ‘Singles’ Day’. Taobao now has more than 600 million active users and hosts more than 600,000 stores. The popular application WeChat also allows users to set up micro-stores on WeChat.
If a company sells its goods in China, that company will most likely need to set up an account on these social media and e-commerce platforms. Trademark certificates are required to set up these accounts, as well as a local address and bank account details.
Another way of publicising a brand is to set up an official account on China’s biggest social media platform, Weibo. In order to verify an official account for a brand on Weibo, it is mandatory for the applicant to adduce a copy of the trademark registration certificate along with other documents, including the Chinese business registration licence and internet content provider website record.
Due to the low cost of setting up a store on Chinese e-commerce platforms, infringers regularly sell counterfeit products on online platforms.
To combat these counterfeits, most of the online platforms have put in place a takedown mechanism for brand owners to submit complaints against infringement on their platforms. The takedown mechanism on the larger platforms (eg, Alibaba and JD.com) are relatively comprehensive and comparable to those of eBay and Amazon. Expedited takedowns are also available. However, each online platform may have its own requirements. For example, a complaint to be lodged on Taobao is best to be based on registered trademark rights in China and not foreign registrations. Although other registered IP rights (eg, copyright) in foreign jurisdictions may also be recognised in a Taobao complaint, brand owners should expect that further evidence in support will be required.
Because of increased public scrutiny, Chinese e-commerce platforms, including industry front runner Taobao, have become more efficient in assisting in IP rights enforcement. In general, the platform will respond to the complaint from good-faith users within one to three working days. Further compliance in the industry is expected due to the recently enacted E-commerce Law (2018). The law imposes fines of up to Rmb2 million (approximately $295,000) for non-compliance.
To take advantage of the growing Chinese consumer market, brands should:
- register their marks;
- provide a name in Chinese;
- be sufficiently protected in contractual terms with Chinese distributors; and
- make good use of social media and e-commerce platforms.
These are the basic necessities for a smooth brand launch in China.