TM Acquisition Pitfall and Tips in China

By Mr. Xiaoming Liu of Chofn IP 

Trademark piracy or trademark squatting has been a headache in China for long. Almost all big brands suffered from trademark pirates or squatters. The Chinese Trademark Office (CTMO) and other authorities like the courts have made great efforts to curb the trend, but the effects are not always satisfactory, particularly because of the high threshold for recognizing “bad faith”.

The newly revised Chinese Trademark Law, effective as from November  1, 2019, and newly enacted The Rules for Regulating Trademark Registration Applying Conducts[i], effective as from December 1, 2019, have begun to lower the threshold of recognizing “bad faith”, which is widely welcomed by brand owners.

Even so, it sometimes remains feasible to solve the problem of bad-faith trademark filing through buying the mark from the trademark squatter, which often enables the legitimate owner to acquire the trademark(s) sooner, in comparison with a time-consuming opposition and/or invalidation procedure.

If you choose to negotiate with the trademark squatter to buy back the trademark, you need bear in mind some risk posed by Rules 3 and 9 of the aforesaid The Rules for Regulating Trademark Registration Applying Conducts, as prescribed below.

Rule 3 An application for trademark registration shall follow the principle of honesty and shall not carry any of the conducts below.

1)    A bad faith application for trademark registration without the purpose of use under Article 4 of the Trademark Law;

2)    Reproduction, imitation or translation of another party’s well-known trademark under Article 13 of the Trademark Law;

3)    An agent or representative’s application, without authorization of the client, for the registration of the client's trademark, or an application for the registration of a trademark which is clearly known to be another party’s earlier used trademark in existence through contractual, business or other relationships under Article 15 of the Trademark Law;

4)    An application harming another person's existing prior rights or an unfair application for an influential trademark in use by another person under Article 32 of the Trademark Law;

5)    An application for trademark registration filed in a deceptive or other unfair means; or

6)    An application against the principle of honesty and creditability, the public order, or carrying other indecent influence.

Rule 9 Assignment of a trademark shall not influence the trademark registration organ’s decision on whether or not the trademark violates Rule 3 of these Rules.

According to Rule 9, assignment of a trademark shall not influence the trademark registration organ’s decision on whether or not the trademark violates Rule 3. That is, if a company acquires a trademark, which is later found by the Trademark Office of the CNIPA filed in bad faith, the acquired trademark can be rejected, invalidated or disapproved of registration. As such, the assignee should be more careful to buy a trademark or even require the assignor to guarantee the legitimacy of the registration and refund the acquisition fee, if the trademark is later effectively deemed by the authorities concerned as filed in bad faith.

In fact, similar risk was indicated under Article 7.4 of the Guide for Trial of Administrative Cases Involving Trademark Grant and Affirmation, enacted by Beijing High Court, effective as from April 24, 2019.

7.4 Acceptance of the transferred trademark not affecting determination of relevant clauses 

Where an application for registration of a trademark in dispute violates the relevant provisions of the Trademark Law, and the applicant or registrant of the trademark in dispute claims that the trademark in dispute should be registered or maintained valid only on the ground that the applicant or registrant has no fault when the trademark is transferred, this claim shall not be supported.

In practice, many pirated trademarks have been invalidated even if they have already been assigned to third parties. Many third parties are on the same side of the trademark squatters. As they are relatives or affiliated companies or have other relationship with the squatters, it is reasonable to disregard such third parties’ interests when invalidating the trademarks.

However, some pirated trademarks were also invalidated even if they were assigned to bona fide third parties, such as the legitimate owner of the pirated mark. For such bona fide third parties, especially for the third parties who are the legitimate owners of the pirated trademarks, it seems unreasonable to still invalidate the trademarks for the reason of the “bad faith” associated with the original applicants, namely the trademark squatters.

Therefore, even if the legitimate owners spent substantial resources and time in getting back the squatted trademarks, the risk of invalidation cannot be ruled out because of the initial “bad faith” of the original applicants. As some invalidation cases can be filed by any third party for absolute grounds, an agreement from the assignor not to take any action against the assignee cannot eliminate the pitfall, though the risk is not very large in reality.

A solution to avoid the risk is to file a new application again for the same trademark, as this newly filed trademark will be cleaner, without record of bad faith. Based on the above, if your budget permits, it is advisable to re-file a new application for the trademark, preferably in a broader scope. In China, duplicate applications for the same trademark and same specification by the same applicant is not forbidden so long as the applicant can afford.

In addition, as most of the squatted trademarks might not be used after registration, they are vulnerable to three-consecutive-year non-use cancellation. Therefore, if the acquired trademark has been registered for three years or nearly three years, there is really a need to avoid the non-use cancellation risk by filing a back-up application soon.

To sum up, when you wish to solve the trademark piracy problem by negotiating with the trademark squatter to buy back the trademark, be careful and bear in mind the following two tips:

  1. Require the assignor to guarantee the legitimacy of the registration and/or refund the acquisition fee, if the trademark is later invalidated due to the assignor’s fault; and

  2. Even if you successfully acquire the trademark, re-file the application in your own name to clear the bad faith and avoid non-use cancellation.