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Manage your Intellectual Property in Mainland China, HongKong, Macao and Taiwan

Customs Recordals – the importance of registering trademarks even if not selling in China

Background/Case

An established German electronics company had been manufacturing their product in China for years. They had signed a strong contract with the Chinese factory manufacturing their goods, however as they did not sell domestically within China, they had not registered their trademarks in China. Recently and out of the blue, they were contacted by Chinese customs telling them that a shipment of their goods from China had been detained as it was suspected of infringing trade mark rights. On further investigation, they discovered that their trade mark had been registered in China by another party and recorded with the customs. This prevented the German SME from exporting their own goods – moreover this was a large shipment and the Customs seizure was causing problems with their supply chain. They suspected that the registrant may have been connected to the factory which they worked with, but they had no proof it.

 

Actions Taken

The German SME contacted the registrant of the trademark and were informed that as they were indeed infringing the trade mark holder’s rights by exporting the product, the trade mark holder was unwilling to release the goods at customs. They were forced either to apply for invalidation of the mark, to change their brand name, or to attempt to purchase the mark from the trade mark owner.

Even if unsuccessful, filing an invalidation request to TRAB may be a useful strategy to persuade trademark holders to sell a trademark at a lower price, however legal fees to do this were estimated at 4000 EUR. The new Trade Mark Law, which came to force on 1 November, allows for requests of trade mark invalidation based on the trade mark being applied in ‘bad faith’. Bad faith trade mark applications are common in China and are normally carried out by the malicious entities with the aim of selling the trade mark back to its original user at an inflated price. The new Trade Mark Law does not clearly define ‘bad faith’ but indicates conditions like applying for a large number (50+) of different trademarks in classes that appear to have little or no relation to the company’s core business to be one indication of a bad faith trade mark application. Establishing bad faith would have given the German SME grounds for trade mark invalidation.    

The timescale for the decision on invalidation would depend upon which grounds the party use in their application, however the shortest timescale for a successful invalidation would be at least 9 months.

 

Outcome

In the end, the German SME decided that the most cost efficient and least disruptive course of action – given their goods were still being held at customs - would be to purchase the mark from the trade mark holder and ask them to release the goods. They negotiated with the trade mark holder and eventually purchased the trade mark at a cost much higher than the initial cost of registration. Since this happened, the company has been careful to register important trademarks in China including names of their product lines.

 

Lessons Learned

  • Registering trademarks in China allows SMEs to record their marks with the Chinese customs and potentially prevent export and import of infringing goods.
  • Companies that fail to register their trade marks in China run the very real risk of their marks being registered by another party, which could lead to their goods being seized by customs even if they are not selling in the Chinese market.
  • Companies manufacturing in China should always register their important trademarks and record them with Chinese customs to deter and crack down on infringement and to prevent other companies from registering them and potentially affecting their supply chain.
  • Companies working with a Chinese manufacturer should always make sure their trademarks and other intellectual property rights are registered in China and to maintain integrity of rights ownership, these rights should be registered in their own name and not by any licensee or other third party.
  • It is important to have strong contracts in place to protect know-how and technology. A valid NNN agreement (non-use, non-disclosure, non-circumvention) is necessary for protection of valuable intellectual property and can be used as a grounds of legal action in case of any issues
  • When purchasing a high-value trade mark, submitting an invalidation request to the Trademark Review and Adjudication Board can be a good strategy to reduce the price of the mark.
  • In addition, when purchasing a high-value trade mark, it can be considerably cheaper to acquire trademarks if a reliable third party negotiates to purchase the right (rather than the “IP owner”) as the cost tends to be higher where the selling party knows it is the legitimate IP owner trying to acquire the right.