Practical tips for battling bad-faith filers in China

The fight against bad-faith filings continues to be one of China’s top trademark challenges.

Bad faith in trademark filings is often seen where a trademark is registered in Country A but not yet registered in Country B, and a third party (not the true trademark owner) applies for an identical or similar trademark in Country B. In China, such bad-faith filing is all too common. In general, the intent of these bad-faith filers is to bully the rightful trademark owner into buying back its own mark, but some use bad-faith registrations to sell their own goods or services. Bad-faith filings may force brand owners to:

• delay their entry into the Chinese market;
• cease or significantly alter existing activities;
• defend against infringement lawsuits or administrative actions;
• spend time and money on offensive action taken against the bad-faith registrations;
• deal with delays of shipments from China; and
• control negative impact on their brands in China and possibly elsewhere.

Facing bad-faith filers is not ideal – so what is being done to enhance protection in China? The most recent revision of the Trademark Law was enacted in May 2014 and introduced the general principle of good faith, giving Chinese trademark practice a face lift. Article 7 states that “[t]he application for registration and the use of a trademark shall be made in good faith”. Unfortunately, the amended law lacked a clear definition of ‘bad faith’ and a more practical and straightforward means to defeat bad-faith filers is still needed. However, change comes slowly and the tools available must be implemented along with smart strategies tailored for this often challenging market.

Cover your bases, then cover more – filing broadly

China is a first-to-file jurisdiction. There are limited rights for prior use, but the most efficient way to avoid problems is to register trademarks in as many classes as possible. Brand owners should consider defensive filings (eg, filing in additional classes and sub-classes beyond their normal coverage). Filing broadly can create additional expense beyond the original budget; however, doing so (and possibly re-filing after three years to avoid non-use cancellation) may be a lower-cost alternative to having to oppose bad-faith applications regularly.

What makes China particularly difficult is that it has its own sub-class system. Goods and services in the same class but different sub-classes will usually be considered dissimilar and thus other parties may look for opportunities to file in any sub-classes left unregistered. Blocking these opportunities is a good defensive measure.

Break the sub-class system – finding connections across classification

The general rule is that classes are dissimilar to one another and sub-classes within each class are also dissimilar. However, the China Trademark Office has made bad-faith filings more difficult by updating the Classification of Goods and Services to make some related goods similar. For example, before the adjustment, ‘clothing’ and ‘layette’ under Class 25 were considered dissimilar and a prior mark registered for clothing could not block the registration of the same mark on layettes.

In addition to updating the Classification of Similar Goods and Services, the trend has been for the authorities to consider viewing certain classes and sub-classes as similar on a case-by-case basis, thus giving brand owners more opportunities to fight bad-faith parties that have filed or try to file in any areas not already covered. For example, the Trademark Review and Adjudication Board found that Class 43 (restaurants) and Class 30 (foods such as hamburgers and sandwiches) may be viewed as similar. Another example is Class 28 (toys) and Classes 9 and 41 (relating to online computer game software and online game services), where the board held that when deciding whether the goods or services are similar it should take the relevant public’s general opinion as standard – that toys have a close connection with online computer games because many computer games usually expand into the toy sector with toys modelled after computer game characters. Similar marks in Class 28 and Classes 9 and 41 would therefore cause confusion among the relevant public.

The point here is to try to find and argue connections between classes and sub-classes in order to fight bad-faith filers when a mark is registered in one class or sub-class but not in another.

Know your enemy – prior relationship may show bad faith

It is not uncommon to discover that existing or old business partners have hijacked your trademark. An action may be filed on the basis of bad faith due to a prior relationship with the registrant, proving that they were obviously aware of the trademark beforehand. Article 15.1 addresses clear former and existing agent and representative relationships, while Article 15.2 is broader and addresses contract and business dealings, as well as other relationships not covered by Article 15.1. While Article 15.2 casts a fairly wide net for identifying a bad-faith party with which a business has had a relationship, there are added required elements to be met – the most problematic being ‘prior use’, which is not required by Article 15.1.   

Prior use is limited within mainland China and must be generated before the application date of the disputed mark. This is a challenge for many foreign brand owners not yet active in the Chinese market. However, it is prudent to bear in mind that ‘preparation activities’ (eg, signing contracts, negotiating for investment, sponsorship, advertising and licensing trademarks) may be evidence that can be used.

Show off your fame – high reputation and well-known status

Where the reputation of the trademark is high, bad faith may be presumed unless the applicant can prove good faith for its filing. For those that have more widespread activities in China (eg, across 10 provinces for five or more years), seeking well-known status may provide protection with a greater reach over dissimilar goods and services, trade names and domain names. Well-known recognition may be sought during opposition, an Administration for Industry and Commerce action, invalidation, infringement litigation and administrative reviews. However, it is important to choose the right case, prepare the right evidence and have patience. Well-known status is not easily gained in China, but with the right history of activity and a good strategy there may be a legitimate path to success. From there, it can be a powerful tool to use against bad-faith parties.

Use non-use against them – cancellation and denied damages

Often bad-faith filers that are merely trademark squatting will not spend money on putting their marks to use. This leaves open the option of seeking cancellation for non-use after three years – it is a quick and efficient solution, although the three years must pass for the door to open. Nevertheless, fake-use evidence is not unheard of, meaning that it would be wise to appeal a lost non-use cancellation to ensure that there is an opportunity to review the use evidence submitted by the other party and question its authenticity.

Moreover, no damages will be awarded to aggressive bad-faith filers, which attempt to sue true brand owners for infringement when these brand owners use their own marks – provided that there was no use of the bad-faith party’s registered mark for three years. This limits opportunities for bad-faith parties to obtain money from their registrations.

Keep on exporting – bad faith and manufacturing in China 

China is the manufacturing capital of the world. For some brand owners, this may be their only link to China. So how does this come into play when trying to overcome bad-faith filings? And do bad-faith filers have a right to stop goods from being manufactured and then exported from China?

The primary concern is to make sure goods that can be manufactured and reach their destination without delay. Unfortunately, bad-faith filers have used China’s system of checking for infringing goods both coming into and going out of China to their advantage. For years the country was split on this issue and sometimes bad-faith filers would harass brand owners by having branded goods detained at the ports. The Supreme People’s Court has clarified that export-only shipments (or original equipment manufacturer (OEM) activities) are not considered ‘use’ in China, as the goods are not for the Chinese market. Therefore, while shipments can certainly be stopped by the bad-faith party, the brand owner can seek an OEM exception to have the shipment released. It is important to have the relevant documents available, which generally include:

• the contract with the manufacturer or exporter; 
• the trademark registration certificate from the destination country; and
• authorisation for the manufacturer or exporter to use the mark.

While the issue of getting goods to where they need to be can be addressed, does merely exporting goods affect the chance of winning a legal action to get a trademark back in China? It is a good question, seeing that the court found that OEM goods are not considered ‘use’, and often ‘prior use’ of a trademark may be needed to win back rights. It will certainly be more difficult to win a legal action under these circumstances, but in some cases the authorities have allowed evidence of OEM activity use to be considered to prove bad faith. Brand owners should work with local counsel to try to develop a good strategy.

Uncover the hoarding – bad faith for obvious trademark squatters

Article 44 has been used against bad-faith filers that have filed:

• numerous trademarks identical or similar to marks with strong distinctiveness;
• numerous trademarks identical or similar to famous trade names, company names, association names, specific well-known product names, packaging or decoration unique to well-known goods; or
• large quantities of trademarks with no intention of using these marks.

It is easy to check the trademark database to see whether the bad-faith party has registered a number of other trademarks. This can be used as an excellent basis from which to argue bad faith.

Negotiate with the enemy – assigning trademark rights

While it may not be an attractive route for some, negotiating with the bad-faith party for assignment of their registered trademarks (and contracting against any further filings or bad-faith activities) may be the quickest way to settle the issue.

Most trademark squatters want to sell back the mark, but rights holders should consider whether the price can be kept low by negotiating anonymously or filing legal action to add some leverage against the other party and put some pressure on them to accept reasonable terms. In some cases, negotiation may not be proper; therefore, it is wise to keep in mind what the actual impact on your business will be if you do not get the mark back and how many potential bad-faith filers there may be across various classes and sub-classes.

While bad-faith filings continue to be a major challenge in China, a number of tools are available while further growth of Chinese trademark regulation and practice is awaited. Over the next few years, this toolbox is expected to grow, but with patience and good planning trademark owners can come out ahead.