Chinese Trademarks and Unexpected Liabilities: Don’t Get Hustled

This blog post is authored by guest contributor Anderson J. Duff, Partner at Revision Legal, PLLC dba The Law Offices of Anderson J. Duff, PLLC in New York City. See his personal bio at bottom.

 

In the United States (U.S.), trademark law is, for the most part, supposed to protect consumers. With this purpose in mind, it makes sense that trademark rights arise as soon as you start using a trademark in commerce in a manner that causes your consumers to view the mark as a source indicator.

We refer to rights based solely on use of a trademark as “common law” rights in the U.S. If you sold custom bike frames using the mark LONG PORTAGE FRAMES in the tiny city of Gainesville, Florida, and after three years of steadily increasing sales a well-financed purveyor of cheaply made bicycles with crummy components opened shop in Gainesville using LONG PORTAGE BICYCLES, consumers would understandably be confused and may believe that your finely crafted bike frames were used in the cheesy newcomer’s bicycles.

If that same well-financed purveyor set up shop in Cuyahoga Falls, Ohio, your common law rights would probably be insufficient to prevent it from building its own regional stronghold.  

Assuming both parties continued to grow, the regions in which consumers who see LONG PORTAGE FRAMES as a source indicator pointing to you and consumers who view LONG PORTAGE BICYCLES as a source indicator pointing to the cheeseball who may have ripped off your mark will get bigger and bigger until their borders are drawn like battle lines through litigation or negotiation.

With only common law rights, you and your highly crafted frame building company would probably be unable to force your way into regions where consumers already knew of LONG PORTAGE BICYCLES but not LONG PORTAGE FRAMES.  

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Common law versus registered trademark

If, however, you had the foresight to befriend a lot of nerds while building your custom frame empire, you may have benefitted from an occasional rant about the power of a brand and the importance of a federal trademark registration. In the U.S., a federal trademark registration grants its owner several protections, including a presumption of use throughout the country, notice of your rights to third parties, and prevention of third-party registrations for confusingly similar marks for confusingly similar goods and services.

Compared to the cost of litigation, or even negotiating an agreement with another party using a similar mark, obtaining a federal trademark registration is one of the most cost effective ways to ensure your brand will have the open road it needs to ride into the minds of discerning consumers across the country.

The power of a federal trademark registration in the U.S. makes them essential as more businesses abandon brick-and-mortar shops for the e-commerce space. Your custom frame building shop in Gainesville, Florida can instantly establish a national presence from the grease covered, filled-with-reclaimed parts shack you also live in with the right website. If you do not build the right website, you can be sure the cheeseball running LONG PORTAGE BICYCLES will hire someone to build a website.

Losing ground to an e-commerce website can happen almost overnight, and it highlights the importance of valuing your trademark and investing in its protection.

 

Trademarks for global business

The paragraphs above discuss some of the differences between common law trademark rights and federal registrations in the U.S. They also give one example of how a changing marketplace can put even small business owners at unexpected and significant disadvantage if they do not protect their brands in the U.S. The foregoing was, however, merely a preamble and introduction to the unexpected perils awaiting your frame building company as you expand globally.  

You might not use your trademark outside of the U.S., but there is a cottage industry of aggressive trademark applicants in some countries that could cost you a lot of money.

With few and limited exceptions, neither common law trademarks nor federally registered trademarks in the U.S. offer protection in another country. Many enterprising citizens in other countries have found ways to exploit the gap between the territorial nature of trademark protection and the global nature of most businesses.

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The most egregious example, encountered more frequently than I would like to admit, occurs in countries where manufactured goods are produced for export. While this happens in many countries, often because those countries have started taking intellectual property more seriously, this article will use China as an example in light of Under Armour’s early August victory in the People’s Higher Court of Fujian Province in which Under Armour shut down a Chinese company as it launched a line of knockoff athletic wear.

While China has begun taking intellectual property seriously in recent years, the country’s legal system makes victories such as Under Armour’s deceptive. Neither the court that issued this opinion, nor other courts in China are bound by this precedent.

Despite a decision from the Supreme People’s Court of China that should have closed the exploit referenced above, parties in China continue to obtain Chinese trademark registrations for marks identical to those used by foreign companies that have goods manufactured in China. These registrations are then used to prevent exportation of the respective foreign company’s goods.

I have, unfortunately, worked for businesses whose goods have been held in China and other countries at the mercy of the owner of a trademark registration for the businesses’ marks. Depending on the country, there are only a few options in this situation, and they are all costlier than you would like them to be.  

Imagine that your frame building company is so successful that you open a factory in China with skilled craftsmen who, thanks to the high quality of the frames, you can afford to pay quite well. For reasons only your accountant understands, however, you still only sell LONG PORTAGE FRAMES in the U.S.

Now imagine that a large shipment of your frames is being held by customs at the Chinese border one week before the Tour de Georgia where the cycling team you sponsor is waiting for their time trial frames because an enterprising individual obtained a Chinese trademark registration for LONG PORTAGE FRAMES for eyeglasses. To put it mildly, you would not be negotiating from a position of power.

Litigation is always an option if you want to send a message, but it is usually the most expensive option and you may not get the result you want. 

In China, for example, judicial opinions, even those issued by the Supreme People’s Court of China, are not binding precedent. In practice, that means the same court could issue contradictory opinions back to back. A study of 34 cases considering this issue decided in China from 2013 to 2014 found that 20 of the resulting opinions went against the foreign company in favor of the owner of the Chinese trademark registration, and only 14 opinions were in favor of the foreign company trying to export the goods they had manufactured in China.

The cost and unpredictable nature of litigation in many foreign jurisdictions is well-known to the parties who might register your U.S. trademark to prevent you from moving your goods past the borders of their respective countries. It pains me to write this, but these parties are sophisticated enough to offer a second undesirable option that is faster and cheaper than litigation.

 

Trademark hustle

The owners of such foreign trademark registrations make their money selling the registrations to foreign businesses at a price point lower than the cost of litigation but still offensively high. They also offer a certainty that litigation cannot. If you own the Chinese trademark registration, your goods are released and you can move forward and attempt to forget the shake down.

While this sounds like a scam, it might be more accurately described as a hustle because it is, according to many courts, entirely legal if not entirely friendly. I can at least respect the ingenuity. If you have ever been lured into a hustle, you might know that the only way to walk away feeling good is to beat the hustler at his or her own game. In this context, counting cards, spending time in smoky pool halls, and memorizing chess openings will not help. Often, the most efficient way to win this game is to beat third parties to their punchline.

Talking to attorneys might not be fun. It often is not. I am something of an expert on the subject. Like medical work, however, a little bit of preventative legal work goes a long way. To avoid getting hustled as described above, you should first find a good trademark attorney who you like and do not mind speaking with.

This is surprisingly important for many reasons, but in this case, it is crucial because you need your attorney to understand how your business operates. If you source goods or components from China or another country outside of the U.S., your attorney should suggest filing trademark applications in countries where this hustle is known to happen. I have used China as an example, but there are other countries that might surprise you.

Using the Madrid System, your U.S. attorney can file a trademark application seeking protection in any of the 115 countries that participate using your U.S. federal trademark application or registration as the basis. If you file through the Madrid System within six months of the filing date of your U.S. application, the foreign registrations obtained will have the priority date of your U.S. application, which means that even if you decide to file through the Madrid System several months after you have decided to obtain federal trademark protection in the U.S., the foreign applications will be treated as though they were filed at the same time as your U.S. application.

Since trademark rights are based on priority, meaning the party who obtains trademark rights first wins in a dispute between parties that both claim rights in a mark, an earlier priority date can make the difference between getting hustled and being ahead of the game.

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To keep your edge in this arena, you should do your best to avoid mentioning a new brand publicly until you have a federal U.S. trademark application pending. The U.S. Trademark Office accepts applications before a trademark has been used, and it often makes sense to take advantage of this application procedure.

If your application is pending before you launch any marketing announcing your new brand, you will have several months to determine if seeking protection in foreign countries makes sense for your needs and still retain your priority date. If someone files a trademark application in a foreign country to run your pockets, your later filed application (if filed within the priority window) will make your rights superior. There are few things as satisfying as walking away from a rigged card game with all your chips.  

There are many other reasons to seek a trademark registration in foreign countries like China, South Korea, and Taiwan. You should feel comfortable discussing them with your attorney before you end up in an unwinnable situation. The situation discussed above using China as an example is one of the most frustrating reasons. Your trademark attorney should have strong relationships with local counsel in China and other countries to provide a realistic assessment of your options should you find your business grinding to a halt because someone is sticking you up using a Chinese trademark registration for your mark as a weapon.

 

 

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Anderson Duff litigates on behalf of and advises clients on a wide range of media related matters, including, trademark and copyright infringement, licensing issues, domain name disputes, right of publicity, libel, and advertising matters. He spends his free time mucking stalls for an aging horse named Huck, honing his Superman/IP presentation, serving as a board member for The Learning About Multimedia Project (LAMP), and ranting about comic book related IP cases to anyone who will listen.