A case study from the China IP SME Helpdesk

Trademark squatting occurs when individuals or a group obtain in another jurisdiction the rights to the marks of a well-known brand or product, for the purpose of selling them to the original brand owner, sometimes at exorbitant prices. This can particularly be an issue for foreign-invested companies attempting to expand into the Chinese market, as China does not recognise trademarks registered in other jurisdictions and also follows a ‘first-to-file’ system. This case study by the China IP SME Helpdesk looks at how one Portuguese small and medium-sized enterprise (SME) discovered its trademark had been ‘squatted’, and the steps it took to deal with the situation.     

Background 

A Portuguese SME, specialising in women’s accessories (purses, waist bags, handbags), decided to internationalise its business. The company was aiming at China’s vast market, among others. Since the SME was a small family-run business that had little experience in international commerce, it decided to join a regional chamber of commerce to participate in their programme aimed at helping small companies to succeed in foreign markets. The SME participated in webinars, training and consultation sessions with experts to learn more about China’s market. As members of the chamber of commerce, they regularly participated in various competitions, winning some awards and often being featured in the chamber’s magazine. 

After some time, the SME was contacted by a law firm in China, claiming that their brand name was being registered as a trademark with the China National Intellectual Property Administration (CNIPA). The law firm suggested that it could be an attempted case of trademark squatting and recommended presenting an opposition for a certain fee. 

The SME had never had any actual business in China, nor had they yet interacted directly with any Chinese supplier, distributor or client. Furthermore, their brand was little known outside of Portugal. However, as China was among the SME’s mid-term target markets, they realised that losing their trademark in China would seriously hinder future market access.  

As the SME was suspicious about a random law firm in China reaching out, they decided to consult with legal professionals in their home country first. The legal expert suggested that the Chinese law firm was simply fishing for clients, but informed the SME that the issue was real – a Chinese entity had indeed initiated a trademark registration process to obtain rights to the SME’s brand name.  

Actions taken 

The SME consulted with Chinese legal experts to learn about the chances of succeeding when presenting an opposition. The legal experts explained that despite the fact that China’s new Trademark Law explicitly prohibits the registration of trademarks in bad faith (Article 44), it was still unlikely that the opposition would eventually succeed. Due to the principle of territoriality, the Portuguese trademark did not enjoy protection in China and proving bad faith in an opposition case would not be an easy task, especially as the Chinese entity was not trying to register many trademarks at a time. Furthermore, oppositions needed to be presented within a three-month window, which left insufficient time for the SME to investigate, collect evidence and have all relevants documents prepared. 

Instead of bringing an opposition, the legal experts recommended two possible ways forward:  

• the SME could start a litigation process to seek cancellation of the bad-faith trademark registration and try to recover the trademark; or 
• the SME could decide to rebrand the trademark in case it planned to enter the China market. 

Weighing the costs involved, the SME eventually decided to translate their original brand name into Chinese as a solution of rebranding for the China market. Through transliteration, the SME designed a new Chinese brand name, phonetically similar to their original brand name (but not exactly), using Chinese characters with positive values.  

After rebranding, the SME started the trademark registration process in China to entire their rights over their new brand in the jurisdiction.   

Lessons learnt 

• Despite the improvements in China’s legislation, trademark squatting is still commonplace, as squatters use it to make money by trying to sell the registered trademarks back to their original owners.  
• When starting the internationalisation process, SMEs should protect their intellectual property in all of their target markets early on, even if they are not immediately planning to start business there (taking into consideration the local period of time for non-use cancellation actions). Often, trademark squatters also attend events organised by chambers or export promotion associations to learn about the brands that are preparing to enter the China market. This is especially the case in regard to online activities, which are cost-effective to attend.    
• Oppositions are usually an effective way to stop bad-faith trademark registrations, but before investing in opposition procedures, SMEs should first consult with legal experts to check the feasibility. 
• Cancellation of bad-faith trademark registrations is possible; however, it takes time and requires an investment in a good attorney and evidence collection. 
• Rebranding can be a cost-effective alternative, especially when the company’s brand is not yet famous in China. Rebranding under Chinese names via transliteration of brand names can be a viable way of working around the squatting of international brands. 

The China IP SME Helpdesk supports SMEs from European Union (EU) Member States and from countries participating in the Singel Market Programme¹ to protect and enforce intellectual property (IP) rights in or relating to China, Hong Kong, Macao and Taiwan, through the provision of free information and services. The Helpdesk provides jargon-free, first-line, confidential advice on IP and related issues, along with training events, materials and online resources. Individual SMEs and SME intermediaries can submit their IP queries via email (question@china-iprhelpdesk.eu) and gain access to a panel of experts, in order to receive free and confidential first-line advice within three working days. The China IP SME Helpdesk is an EU initiative. 

To learn more about the China IP SME Helpdesk and any aspect of IP in China, please visit our online portal: https://intellectual-property-helpdesk.ec.europa.eu/regional-helpdesks/china-ip-sme-helpdesk_en