Blog

On April 23, 2019, China announced critical amendments to its Trademark Law that aim to address bad-faith trademark registration. The new amendments are scheduled to take effect on November 1, 2019. Given western brands’ and designers’ vulnerability to targeting by bad-faith applicants in China in recent years, these amendments present a much-welcomed reform. Nevertheless, given the intricacies of China’s enforcement proceedings, and the ambiguity around certain provisions, uncertainty remains as to the effectiveness of these recent developments.

The Trademark Squatting Landscape in China

The 2019 amendments are perceived as a necessary and indispensable development, required to eliminate trademark applications made in bad faith. In recent years, western brands have been plagued with bad-faith trademarks registered in China. Many western companies, both well-established and newly formed, fall victim to trademark hoarding and trademark ransom schemes, which damage their business and stymie their company’s growth.

Trademark squatting in the Chinese market takes several forms, ranging from trademark extortionists seeking to hold trademarks for ransom to bad-faith trademark applicants endeavoring to dominate the Chinese market with counterfeit goods. Although a substantial portion of western brands do not engage in direct business in China, many of these companies have been subject to trademark piracy—and some companies that fell prey to such schemes may have even been unaware.

The prevalence of bad-faith trademarks in China is a consequence of China’s first-to-file system, low filing fees, laissez-faire review, and absence of sufficient procedures to prevent trademarking abuses. While many companies do not see the need in spending the time and/or money registering a trademark in China prior to entering the Chinese market, China-based pirates act quickly and seize the opportunity to register the marks in China despite no intent to use the trademarks. Once such bad-faith trademarks are registered and approved, western brands had been left scrambling with the few remedial options offered by China’s pirate-friendly regime.  Unlike in first-to-use countries like the United States, China’s first-to-file system fosters a hospitable environment for bad-faith applicants since users are not required to demonstrate “intent to use” the trademark. Rather, applicants need only pay a modest filing fee. Absent a requirement for substantial evidentiary support verifying an applicant’s need for the trademark, quick-thinking pirates who identify trends in western markets are able to acquire numerous trademarks, hoarding the trademarks for ransom or using the marks to develop a robust counterfeit market in China. Since China does not impose a maximum cap on the number of trademarks one entity or individual may hold, pirates have been free to exploit the system, amassing an exorbitant number of bad-faith trademarks and profiting off of ransom settlements for each mark. The lack of procedural demands imposed on pirates for responding to invalidation appeals, the absence of penalties and/or fines for pirates, and lawyers’ willingness to represent pirates faced with invalidation suits curated an atmosphere wholly favorable to pirates and utterly disadvantageous to western brands who fall victim to trademark squatting.

The frequency of such piracy has forced western brands to expend exorbitant investigation and litigation costs to invalidate bad-faith marks. In cases where trademark squatters register marks solely for ransom purposes, a non-use cancellation attempt is often an unfruitful path for brand owners, since this route requires waiting numerous years to demonstrate a pattern of non-use. On other hand, in instances where pirates register marks for counterfeiting purposes, non-use cancellation is not a viable option, since the marks are in fact “in use.” Given China’s lack of an established system for invalidating bad-faith trademarks, even the most striking cases of trademark squatting have been difficult to invalidate, generating drawn-out trademark disputes that cost western brands thousands of dollars and last several years. For example, CFDA’s 2018 data indicates that pirates targeting small and mid-sized fashion firms demand from $315,000 to $1.1 million and receive up to $310,000 after extensive negotiation. Taken in conjuncture, the ransom demands, litigation fees and timing delays, render the transaction costs of remedying piracy issues enormous.

Given the injurious effects of China’s trademark laws and the paramount industry concerns raised, reforms were essential.

Starting the Conversation with the Chinese Government

In March 2018, Steven Kolb, President and Chief Executive Officer of CFDA and Douglas Hand of Hand Baldachin LLP travelled to China to meet with representatives of the Chinese National People’s Congress and members of China’s Patent and Trademark Office. During their trip, Mr. Hand and Mr. Kolb sought to shed light on systemic abuses in the Chinese trademark system and advocated for reforms in China’s trademarking procedures. Upon providing insight onto the destructive effects of bad-faith trademarks on western brands, Chinese consumers, and Chinese markets, Mr. Hand and Mr. Kolb offered numerous proposals for improving the Chinese trademark system.

Mr. Kolb and Mr. Hand emphasized several overarching reform proposals aimed at alleviating piracy concerns and increasing scrutiny on bad-faith applicants. These suggestions generally mirrored the perceived ails of the current Chinese system, offering potential solutions to deep-rooted issues. Mr. Kolb and Mr. Hand encouraged the adoption of a more demanding trademark registration review process, wherein obvious bad-faith applications would be rejected at the outset. They also advocated for increasing transaction costs for pirates, so as to make bad-faith trademarking a less lucrative industry for users. Additionally, proposals for imposing fines for bad-faith trademarking and shifting the burden to applicants to demonstrate “good faith” were suggested. It was also recommended that designers’ personal names be afforded greater protection, given the ease with which emerging designers’ names spread to foreign countries upon their entry into western markets. The reform proposals put forward by Mr. Kolb and Mr. Hand sparked a critical conversation amongst Chinese government officials and laid the groundwork for the amendments adopted in 2019.

2019 Amendments to Article 4, 33, and 44 of the 2013 PRC Trademark Law

In April of 2019, China adopted key new regulations, which will change China’s approach to trademarks in several respects. First, the standards for trademark registration have been heightened. Article 4 of the 2013 PRC Trademark Law’s added the phrase, “Applications for the registration of trademarks in bad faith that are not intended to be used should be rejected,” renders Article 4 the new vehicle for regulating trademark squatters.  Article 7.1 requires applicants have a bona fide intention to use the trademark and demands that applicants provide “demonstrable evidence” of such intention to use. Although this evidence standard is vague, its caveats will likely be determined through the amendments’ implementation process.

Second, punitive and statutory damages will now be imposed for trademark infringers and trademark agents who provide assistance in piracy schemes. The amendments increased statutory damages to approximately $743,000 in instances where calculating precise damages would be too arduous. Additionally, the revised punitive damages scheme no longer calls for treble damages, now providing quintupled damages in instances of “bad faith” or other “serious circumstances.” Although it remains to be seen whether trademark applicants will be subject to fines for bad-faith applications, as opposed to only trademark agents and agencies, this measure imposes costs on pirates that were previously nonexistent, thus providing a deterrent both for individual trademark squatters and their trademark agent aiders.

While these amendments constitute a long-awaited first step in regulating pervasive trademark squatting in China, the scope of their impact remains to be seen. Several concerns remain, such as the possibility that Article 4’s language does not prohibit registration of counterfeit trademarks registered with intent to use. Furthermore, the harshness of the new damages penalties is ambiguous, for China’s courts have previously been hesitant to levy fines. Similarly, the breadth of the fines’ applicability, as between trademark applicants and agents, is unsettled. In the months after the amendments become effective on November 1, 2019, their implementation will serve as a bellwether for the stringency with which they will be enforced.

Impact on Western Brands

Notwithstanding the indeterminate aspects of these amendments’ implementation, these changes have the capacity to provide substantial positive benefits for western brands. The more rigorous trademark application review that Mr. Kolb and Mr. Hand advocated for during their trip to China has the potential of lowering western brands’ transaction costs and litigation expenses. Moreover, a decreased frequency of piracy and trademark squatting will afford western brands the opportunity to enter Chinese markets and take advantage of China’s lower-cost sourcing options. The hope of these amendments for western brands is that emerging designers will face less of a pressing urge to immediately register their trademarks in China upon launching their brands in the U.S. market, since there will ostensibly be less fear of pirates’ ability to successfully register trademarks in bad faith.

Thus, with strict implementation, these amendments may facilitate CFDA members’ ability to increase profits by expanding market reach to Chinese consumers and markets, while saving money on trademark invalidation litigation and disputes. Although the force of implementation and administration is yet to be seen, it appears highly likely that these amendments are a step in the right direction.

On April 23, 2019, China announced critical amendments to its Trademark Law that aim to address bad-faith trademark registration. The new amendments are scheduled to take effect on November 1, 2019. Given western brands’ and designers’ vulnerability to targeting by bad-faith applicants in China in recent years, these amendments present a much-welcomed reform. Nevertheless, given the intricacies of China’s enforcement proceedings, and the ambiguity around certain provisions, uncertainty remains as to the effectiveness of these recent developments.

The Trademark Squatting Landscape in China

The 2019 amendments are perceived as a necessary and indispensable development, required to eliminate trademark applications made in bad faith. In recent years, western brands have been plagued with bad-faith trademarks registered in China. Many western companies, both well-established and newly formed, fall victim to trademark hoarding and trademark ransom schemes, which damage their business and stymie their company’s growth.

Trademark squatting in the Chinese market takes several forms, ranging from trademark extortionists seeking to hold trademarks for ransom to bad-faith trademark applicants endeavoring to dominate the Chinese market with counterfeit goods. Although a substantial portion of western brands do not engage in direct business in China, many of these companies have been subject to trademark piracy—and some companies that fell prey to such schemes may have even been unaware.

The prevalence of bad-faith trademarks in China is a consequence of China’s first-to-file system, low filing fees, laissez-faire review, and absence of sufficient procedures to prevent trademarking abuses. While many companies do not see the need in spending the time and/or money registering a trademark in China prior to entering the Chinese market, China-based pirates act quickly and seize the opportunity to register the marks in China despite no intent to use the trademarks. Once such bad-faith trademarks are registered and approved, western brands had been left scrambling with the few remedial options offered by China’s pirate-friendly regime.  Unlike in first-to-use countries like the United States, China’s first-to-file system fosters a hospitable environment for bad-faith applicants since users are not required to demonstrate “intent to use” the trademark. Rather, applicants need only pay a modest filing fee. Absent a requirement for substantial evidentiary support verifying an applicant’s need for the trademark, quick-thinking pirates who identify trends in western markets are able to acquire numerous trademarks, hoarding the trademarks for ransom or using the marks to develop a robust counterfeit market in China. Since China does not impose a maximum cap on the number of trademarks one entity or individual may hold, pirates have been free to exploit the system, amassing an exorbitant number of bad-faith trademarks and profiting off of ransom settlements for each mark. The lack of procedural demands imposed on pirates for responding to invalidation appeals, the absence of penalties and/or fines for pirates, and lawyers’ willingness to represent pirates faced with invalidation suits curated an atmosphere wholly favorable to pirates and utterly disadvantageous to western brands who fall victim to trademark squatting.

The frequency of such piracy has forced western brands to expend exorbitant investigation and litigation costs to invalidate bad-faith marks. In cases where trademark squatters register marks solely for ransom purposes, a non-use cancellation attempt is often an unfruitful path for brand owners, since this route requires waiting numerous years to demonstrate a pattern of non-use. On other hand, in instances where pirates register marks for counterfeiting purposes, non-use cancellation is not a viable option, since the marks are in fact “in use.” Given China’s lack of an established system for invalidating bad-faith trademarks, even the most striking cases of trademark squatting have been difficult to invalidate, generating drawn-out trademark disputes that cost western brands thousands of dollars and last several years. For example, CFDA’s 2018 data indicates that pirates targeting small and mid-sized fashion firms demand from $315,000 to $1.1 million and receive up to $310,000 after extensive negotiation. Taken in conjuncture, the ransom demands, litigation fees and timing delays, render the transaction costs of remedying piracy issues enormous.

Given the injurious effects of China’s trademark laws and the paramount industry concerns raised, reforms were essential.

Starting the Conversation with the Chinese Government

In March 2018, Steven Kolb, President and Chief Executive Officer of CFDA and Douglas Hand of Hand Baldachin LLP travelled to China to meet with representatives of the Chinese National People’s Congress and members of China’s Patent and Trademark Office. During their trip, Mr. Hand and Mr. Kolb sought to shed light on systemic abuses in the Chinese trademark system and advocated for reforms in China’s trademarking procedures. Upon providing insight onto the destructive effects of bad-faith trademarks on western brands, Chinese consumers, and Chinese markets, Mr. Hand and Mr. Kolb offered numerous proposals for improving the Chinese trademark system.

Mr. Kolb and Mr. Hand emphasized several overarching reform proposals aimed at alleviating piracy concerns and increasing scrutiny on bad-faith applicants. These suggestions generally mirrored the perceived ails of the current Chinese system, offering potential solutions to deep-rooted issues. Mr. Kolb and Mr. Hand encouraged the adoption of a more demanding trademark registration review process, wherein obvious bad-faith applications would be rejected at the outset. They also advocated for increasing transaction costs for pirates, so as to make bad-faith trademarking a less lucrative industry for users. Additionally, proposals for imposing fines for bad-faith trademarking and shifting the burden to applicants to demonstrate “good faith” were suggested. It was also recommended that designers’ personal names be afforded greater protection, given the ease with which emerging designers’ names spread to foreign countries upon their entry into western markets. The reform proposals put forward by Mr. Kolb and Mr. Hand sparked a critical conversation amongst Chinese government officials and laid the groundwork for the amendments adopted in 2019.

2019 Amendments to Article 4, 33, and 44 of the 2013 PRC Trademark Law

In April of 2019, China adopted key new regulations, which will change China’s approach to trademarks in several respects. First, the standards for trademark registration have been heightened. Article 4 of the 2013 PRC Trademark Law’s added the phrase, “Applications for the registration of trademarks in bad faith that are not intended to be used should be rejected,” renders Article 4 the new vehicle for regulating trademark squatters.  Article 7.1 requires applicants have a bona fide intention to use the trademark and demands that applicants provide “demonstrable evidence” of such intention to use. Although this evidence standard is vague, its caveats will likely be determined through the amendments’ implementation process.

Second, punitive and statutory damages will now be imposed for trademark infringers and trademark agents who provide assistance in piracy schemes. The amendments increased statutory damages to approximately $743,000 in instances where calculating precise damages would be too arduous. Additionally, the revised punitive damages scheme no longer calls for treble damages, now providing quintupled damages in instances of “bad faith” or other “serious circumstances.” Although it remains to be seen whether trademark applicants will be subject to fines for bad-faith applications, as opposed to only trademark agents and agencies, this measure imposes costs on pirates that were previously nonexistent, thus providing a deterrent both for individual trademark squatters and their trademark agent aiders.

While these amendments constitute a long-awaited first step in regulating pervasive trademark squatting in China, the scope of their impact remains to be seen. Several concerns remain, such as the possibility that Article 4’s language does not prohibit registration of counterfeit trademarks registered with intent to use. Furthermore, the harshness of the new damages penalties is ambiguous, for China’s courts have previously been hesitant to levy fines. Similarly, the breadth of the fines’ applicability, as between trademark applicants and agents, is unsettled. In the months after the amendments become effective on November 1, 2019, their implementation will serve as a bellwether for the stringency with which they will be enforced.

Impact on Western Brands

Notwithstanding the indeterminate aspects of these amendments’ implementation, these changes have the capacity to provide substantial positive benefits for western brands. The more rigorous trademark application review that Mr. Kolb and Mr. Hand advocated for during their trip to China has the potential of lowering western brands’ transaction costs and litigation expenses. Moreover, a decreased frequency of piracy and trademark squatting will afford western brands the opportunity to enter Chinese markets and take advantage of China’s lower-cost sourcing options. The hope of these amendments for western brands is that emerging designers will face less of a pressing urge to immediately register their trademarks in China upon launching their brands in the U.S. market, since there will ostensibly be less fear of pirates’ ability to successfully register trademarks in bad faith.

Thus, with strict implementation, these amendments may facilitate CFDA members’ ability to increase profits by expanding market reach to Chinese consumers and markets, while saving money on trademark invalidation litigation and disputes. Although the force of implementation and administration is yet to be seen, it appears highly likely that these amendments are a step in the right direction.