Trademarks are a common intellectual property right in China that can be assigned through specific legal procedures. Unlike tangible property assignments, trademark assignments are intangible and have specific procedures that need to be followed to gain legal recognition. This article outlines key background knowledge for anyone buying or selling trademarks in China, enabling you to reduce legal and fraud risks when assigning ownership of Chinese trademarks.

Contents

China’s trademark assignment process.

Title Deficiencies and the Risk of Worthless Trademarks

Atypical Risks in China Trademark Assignments

China’s trademark assignment process

All registered trademarks are eligible for assignment. (See China Trademark Act, § 42) However, the Trademark Act does not explicitly govern salability of pending marks during the time between their filing and registration by the trademark office. Nevertheless, it is generally accepted that pending marks practice may be assigned following the same procedure as registered trademarks, given the possibility of successful examination leading to registration.
On the contrary, unregistered trademarks cannot be assigned. China is a first to file jurisdiction where ownership is based on registration, and use of the mark is secondary. Therefore, you cannot transfer ownership of trademarks that are in use but not registered or that have been refused registration. Only famous marks may receive certain protection without registration, yet protection does not imply exclusive rights to a mark. In the case of a famous trademark, the use of the mark is closely intertwined with the user of the mark, and therefore these marks typically cannot be freely assigned.

Chinese trademark law principles require registration of marks with the trademark office, after which you can transfer ownership of a Chinese trademark by entering into and filing an Assignment Agreement. The trademark office will then publish the assignment in the official gazette. On the date of the publication, the assignee gains ownership of the intellectual property rights. If the assignee wants to resell their trademark to someone else, they have to wait until the first assignment has been published before filing for the new assignment.

Although a full Assignment Agreement is typically required, in practice, the trademark office may accept even a simple memorandum showing intent to assign the mark. Trademark assignment filings are generally processed within approximately six months. Where a trademark agent is involved, both parties are required to sign a power of attorney and both must use the same agent to process the assignment. Both paper and electronic filings are accepted.

There is a risk that the government will not approve the assignment despite an existing agreement.  The China trademark office may refuse to transfer ownership of the trademark even after you’ve paid. While pending marks may be assigned, registration may still be refused during examination. Marks that pass examination and are published in the gazette are still subject to opposition during the first three months after publication. Assignees of pending marks should therefore be prepared for the possibility that registration will be refused.
The assignment in itself could be rejected if the transfer could cause consumer confusion regarding the source of the goods, and the Trademark Office will not allow the assignment of marks that are similar or identical to those of others used for the same or similar goods unless they are held by the same owner.

The trademark troubles begin when attempting to sell some of these marks. The Trademark Office views splitting marks up among different owners likely to cause confusion as to the source of the goods. Thus, the China trademark office will perform a substantive examination to protect the consuming public from possibility of confusion, and administrative regulations require that similar trademarks used for the same or similar goods be assigned together as a package. Failure to do so shall result in the assignment being refused. Other general risks, such as the likelihood of causing confusion, must also be addressed through due diligence and consideration in the Assignment Agreement.

According to the Chinese government, there is a significant risk that your trademark attorney or agent is negligent and leaves you with a worthless trademark due to widespread dishonesty in the industry. Learn more about how to protect your rights as a client by reading CBL’s translation of the PRC’s official guidance.  Below, we’ll cover the trademark ownership right related legal risks.

Title Deficiencies and the Risk of Worthless Trademarks

Trademarks often pass the examination procedure and are registered, while nonetheless having title defects that could lead to a finding rendering the registration erroneous. Thus, and this is more pertinent than in intent-to-use jurisdictions, under Chapter V of the China Trademark Act, registered trademarks are subject to revocation on grounds such similarity to prior marks, squatting, or infringement on priority rights. Nevertheless, problems may occur regardless of whether the revocation is published prior to or after the execution of the assignment agreement.
Common defects include the current trademark owner pledging its trademark as a security interest, licensing the trademark to a third party (requiring a separate filing), or where a third party may have initiated revocation against the trademark.

A good case study of title defects causing chaos for the trademark assignment procedure is the trademark litigation over the Aoni brand in China. In this case, household goods corporation LIBY Group paid about USD $4 million to acquire the Aoni trademark, only to discover that the assignor had granted a sole license to a Hong Kong company, which had been properly filed. This oversight led to costly litigation over rights that could have been avoided had LIBY Group done their due diligence.

Had LIBY Group completed a trademark search prior to their purchase, it would have discovered the encumbrance on the intellectual property, and therefore been able to negotiate a fair price. A simple trademark search could have saved hundreds of thousands of dollars in legal fees.
Another risk specific to trademark assignment in China is concurrent assignments, which occur when an assignor enters into an assignment contract with one party (Assignee #1), and then signs a second contract with another party (Assignee #2) at the same time.

The key focus for managing this risk is on whether assignors misled assignees so they could enter into multiple contracts. Under Chinese contract law, the agreement with Assignee #1 would remain effective and the second voidable if the assignor is found to have misled Assignee #2 about the prior contract with Assignee #1.

Furthermore, the second assignment contract will also be effective should Assignee #2 choose not to exercise the right to void the assignment after learning about the first assignment contract. In this respect, Assignee #1 has the right to enforce its own trademark assignment agreement, i.e., by making the required trademark office filings. Assignee #2 can only hold the original assignor liable for their failure to perform the trademark assignment.
Note that the principle of good faith in trademark applications generally is inapplicable to filing for a trademark to be revoked.

Legal risks involved with a trademark transfer can be mitigated by obtaining a legal opinion about potential title issues and having an effective sale contract. Moreover, both China and international collaborators need to clearly understand what these say. Do that by getting an accurate English language version of the contract by using professional translators and not unprofessional workers like freelancers or in-house staff. Additionally, supervise any local business staff to ensure they comply with attorney legal advice, as non-compliance risks in this jurisdiction are relatively high.

Atypical Risks in China Trademark Assignments

Aside from the common application and title defect risks, there are some unusual risks that occur with registered trademarks. As noted above, the China Trademark Act states the purpose of a trademark is to identify the goods through their use. Thus, there is a risk that a trademark has not been used enough. In China, a trademark that has not been used for three consecutive years can be revoked through an application procedure (see a translated government guidance here).

A trademark can also be lost when it is overused and thus becomes a generic name for a certain class of goods, which is vulnerable to an application to revoke it on those grounds. As an example of what overuse involves, imagine if people within a certain country begin using the verb to “Google” or to “Baidu” something to refer to a web search, to the point where it becomes generic; the mark will enter the public domain. Thus, trademark purchasers should also conduct due diligence into the use frequency of the mark they are purchasing.

Conclusion

Both registered trademarks and pending marks are assignable but both impose a variety of legal risks. Unlike tangible property, the legal characteristics of trademark assets are unique, and thus due diligence is absolutely necessary when purchasing a or assigning trademark, with the necessary provisions to mitigate these risks added to assignment contracts.

FURTHER READING

Get authoritative insights about Chinese foreign investment law from official government guidance in translation:

• Steps to license a trademark at the China IP Administration
• Know Your Rights Against China Trademark Agent Negligence

For a general overview of this topic, see also CBL’s China Trademark Law FAQ.