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Legal Update

Proposals to Amend PRC Trademark Law may Impact on Trademark Squatting

9 January 2013
Mayer Brown JSM Legal Update

The PRC government recently published the latest revised proposals to amend its Trademark Law (“Proposal”), many of which already appeared in earlier drafts. Following our email update Light at the End of the Tunnel, this update examines the latest proposed amendments which may help to deal with trademark squatting or bad faith applications.

In early December 2012, the Beijing No. 1 Intermediate Court acknowledged that trademark squatting has attracted professional squatters and even lawyers and trademark agencies. The Court was critical of this because such a phenomenon not only contracts the basic ethics of honest trading, disrupts fair competition and damages legitimate business interests, but also hampers China’s efforts to convert its economy from manufacturing to brand building and blemishes China’s image in IPR protection. The Proposal suggests adding a general requirement that those who apply for and use trademarks must do so under the principles of honesty and integrity. Such principles should also apply to the trademark agency profession, and the Proposal contains suggestions for disciplinary penalties and administrative fines if a trademark agency acts in breach.

Currently, if a former agent or distributor applies for its principal’s trademark, the application will fail if the principal opposes it. It is now proposed that this protection should be extended to third party marks (but only in respect of identical or similar goods) if there has been a contractual relationship, business dealings and other contact between the parties which show that the applicant was aware of the third party mark.

Many trademark owners have been forced to pay exorbitant sums of money to obtain a licence or assignment from squatters. It has been proposed that if a trademark is an abusive registration because it: reproduces, translates or imitates a well-known mark; is registered by an agent or previous/prospective business partner who ought to have known about the true owner of the mark; is a pre-emptive registration of a third party mark which is already in use and has a certain degree of influence; such registration will be deemed void ab initio once it is successfully revoked. Although this generally does not retrospectively affect court or administrative decisions or assignments or licences concluded, the Proposal suggests that if the non-return of trademark infringement damages, licence fees or assignment fees is obviously against the notion of fairness, the whole or part of it should be returned. Further if the registrant caused any damage to others in bad faith, he or she should compensate for such damage. Depending upon how liberally this is interpreted, this may mean that mark owners who were held at ransom may have a potential financial claim against the squatter for the licence or assignment fee paid.

One of the difficulties many trademark owners have had with PRC trademark squatters is that the squatters often threaten to take administrative, customs and court actions to disrupt the true owner’s productions or trademark activities in China. This poses an immense threat when many of these owners well utilise China as a manufacturing base to produce and supply products to their many overseas markets. It is unsettled whether OEM activities in China constitute trademark infringement in China. In an earlier draft of the Trademark Law amendments, OEM was expressly said to be regarded as infringement. Yet, the approach has changed since the financial tsunami, and increasingly there are court cases which decide that, as OEM for export would not cause confusion within China, there has been no infringement. (See the article “Does OEM Constitute Trademark Infringement in China”, published in World Trademark Report, October 2011.) The Proposal includes a provision which says that if a person has used a mark which is similar or identical to a registered trademark prior to the date of application for registration in respect of the same or similar goods, that person may continue to use the mark in respect of the original scope of use, but the trademark registrant can ask the person to include an appropriate sign to further distinguish the mark. Further, the Proposal repeats that if a registrant has not used its registered mark for three years and cannot prove loss from infringement, an “infringer” may not have to pay infringement damages. This may lessen the threat that a squatter may represent to the true owner of the mark.

On the other hand, it should be noted that the definition of use has been elaborated to cover use on products, packaging, containers and business papers, or use in advertisements, at exhibitions and for other business activities to designate the origin of the products. This may lessen the onus on the part of squatters to prove use if their registration is challenged for non-use.

The PRC government welcomes comments on its latest Proposal by 31 January 2013.

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