Trademark Considerations for U.S. Trademark Owners Working With Chinese Manufacturers or Distributors

By Danielle Brink, Foley & Lardner LLP

This article is part of our Spring 2010 edition of Legal News: China Quarterly Newsletter, Eye on China.

A dispute as to trademark ownership between a dealer and its Chinese manufacturer and/or distributor often presents difficult problems. However, there are several things that U.S. companies do to protect their trademarks under Chinese law when the relationship with a Chinese manufacturer or distributor terminates.

Prior to Termination

Register Your Trademarks Prior to Launching in China. The most effective trademark protection prevention is exercising proper diligence and care. China has a first-to-file trademark system, meaning that the first party to file for a trademark registration has rights to the mark. U.S. companies can therefore take advantage of this system to secure their trademark rights even before they enter China’s market. An international trademark attorney who understands the two legal systems and both languages can play a key role in registering a desirable trademark in Chinese characters in compliance with the cultural and marketable considerations.

Contractual Provisions. For U.S. companies that have home-brand trademarks in the United States, or for those who did not register their trademarks before the Chinese Trademark Office, an original contract that defines the trademark ownership between the trademark owner and its Chinese manufacturer and/or distributor will make the relationship stronger. A counsel who understands both U.S. and Chinese trademark and contract laws and practices can be extremely helpful in negotiating and drafting such a contract, including negotiating provisions regarding the trademark ownership, non-compete restrictions, and licensing issues.

After Termination

Leaning on a Famous Brand. Imagine a scenario in which a relationship between the trademark owner and the Chinese manufacturer and/or distributor is terminated. What happens if a third party — for example, a “pirate” trademark owner or another Chinese manufacturer and/or distributor — in the course of actual use, modified the U.S. trademark owner’s registered trademark or used a registered trademark outside the scope of the goods for which it was approved for the U.S. trademark owner?

Under the PRC Trademark Law, for a mark that is a reproduction, imitation, or translation of a prior well-known trademark, the people’s court shall accept the case in accordance with the law, even if the trademark owner’s marks are not registered in China and will likely cause confusion. In such situations, the infringing or modified marks shall be rejected for registration and prohibited from use. Again, a well-versed counsel who can not only help you navigate the complex Chinese legal system and practice, but also understand your trademark ownership in the United States is important to your best interest.

Harmful Actions Against the Trademark Owner. When a relationship is terminated between the U.S. trademark owner and the Chinese manufacturer and/or distributor, the following actions against the lawful right of the U.S. trademark owner deserve special attention. Such actions may arise from the U.S. trademark owner’s competitors, local or trade partners, employees, and pirate trademark owners.

1. “Passing-Off” Actions. Passing off involves the unauthorized use of a particular name, packaging, or get-up of a well-known product, whereby consumers are misled or deceived into believing that the passing-off products are the same as the well-known products.
2. Trademark Infringement and Unfair Competition
   
   
   1. Unfair Competition. Competitive acts that are not specifically addressed in the Anti-Unfair Competition Law may be determined to constitute acts of unfair competition only if they can be determined to violate its provisions on principles based on generally recognized commercial standards and common sense.
   2. Factors to Weigh for Trademark Infringement Under the New Rules. Under the new rules, without a U.S. trademark owner’s license for his Chinese trademark, if there exists a trademark identical to a registered Chinese trademark, and if the trademark is used on identical goods, then the factor of confusion will not be considered. When determining whether goods are similar and whether the trademarks are similar, consideration is given to the distinctiveness and market notoriety of the registered trademark for which protection is claimed.
3. Dilution. In Several Questions on the Application of Law in Trial of Trademark Civil Dispute Cases Interpretation, the PRC Supreme People’s Court defined certain acts as “acts causing other harm to another’s exclusive right to use a registered trademark” under Article 52 (5) of the PRC Trademark Law.
4. Contract Breach. A breached contract is subject to the PRC Contract Law. It should be noted that when a trademark licensing contract has not been recorded, it will not affect its effectiveness, unless otherwise agreed by the parties.

Legal Remedies
A double-track system, including litigation and administrative protection, can be adopted to enforce trademark rights in China.

Injunction

New Rules on Granting Fewer Injunctions. Chinese courts are cautious in issuing preliminary injunctions under the new rule for granting injunctions. The new rule sets out situations in which the court should consider not granting injunctive relief even after finding evidence of infringement.

Preliminary Injunctions. A registered trademark registrant or any party of interests may petition the people’s court to issue an order to cease the infringement of the trademark and to preserve evidence. Upon receipt of a petition, the people’s court must make its decision within 48 hours, and the petitioning party must file a formal lawsuit within 15 days from the execution of the court’s order.

Civil Liability. A judgment order can be issued against infringers to bear such civil liability, ordering the infringers to stop the infringement, remove obstructions, eliminate dangers, compensate loss, eliminate the effect of the infringement, and so forth. The judgment order also can issue a decision for civil sanctions, where the court can impose fines and/or confiscate infringing goods, forged trademark marks, and property such as materials, tools, and equipment that were used to manufacture the infringing products.

Monetary Damage. When the people’s court makes an overall determination of damages, factors it considers include the nature, period and consequences of the infringement, the reputation of the trademark, the amount of trademark licensing royalties, the types, periods, and scope of trademark licenses for the mark, and the reasonable expenses incurred in stopping the infringement.