A trademark squatter in China is a type of scammer that exploits legal loopholes to steals trademark, usually to extort ransom. It is the greatest threat to brand equity in China. Thankfully, you can protect your brand from trademark squatters in China by taking enforcement action against bad faith trademark applications.

Squatters create an unacceptable risk of legally sanctioned counterfeiting will and they can paralyze your business operations in China. Thus, you need to fight back in the courts to stop them from causing damage before they ruin your reputation in China.  Below, we’ll go over how to enforce your trademark rights against squatters both at the regulator and in the courts.

Contents

Complaints at regulators

Court claims for intellectual property infringement

Unfair competition claims

File a Complaint with Regulators to Invalidate their Illegitimate Trademark

Chinese trademark law provides for a trademark trial and appeal board with the authority to issue rulings that resolve trademark ownership disputes. To initiate the process, the victim must petition the board to invalidate the squatter’s trademark, obtain a judgment, and then register the trademark in their own name. Under the China Trademark Act, victims are permitted to request administrative remedy.

According to the Chinese government, the act of trademark squatting can be defined as “filing applications to squat on established trademarks, exploit popularity trends, or use public figures’ names to damage or profit from the infringement.” (translated source)

To successfully invalidate a trademark at the regulatory agency in China, you need to demonstrate significant prior use for the unregistered mark. This is because, unlike other jurisdictions, “proof of prior use or intent to use is typically not needed when registering a trademark” as described by Chinese government guidance on trademark registration (translated source). These unregistered trademarks can include trademarks that were never registered or trademarks rights lost due to lapsed registrations.

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Two elements apply to determine whether a respondent improperly exploited the unregistered status of a brand in prior use in a claim filed under China Trademark Act §32:

• Significance of use: the board will consider the extent to which the consuming public was aware of that trademark during its prior use;
• Improper acquisition: the board will consider whether the squatter knew or should have known about the victim’s prior use, typically whether the parties were collaborators, neighbors, or professional colleagues.

A recent case involved an Italian foods company’s successful invalidation of a trademark. The board determined that the company had passed customs and begun importing products to China, sold products throughout most of China, and was promoting the brand in advertisements and on WeChat, and thus was recognized by the consuming public. The Board also noted that the respondent was squatting on several other trademarks, and therefore inferred a pattern of bad faith registrations. Ultimately, the Board ruled that the respondent had improperly obtained the registration based on the Italian company’s demonstration of significant prior use.

Supplier Relationships

If a supplier or partner stole your mark, showing that the business relationship was abused in your claim can help prevent further infringement. The business relationship itself can make proving significant prior use in a claim for infringement much easier, since China Trademark Act §15(a) prohibits taking advantage of an agency, contractual, or business relationship to make a bad faith filing for a contract to obtain trademark rights in their unregistered brand. These claims usually involve one of the following relationships:

• Agent-principal
• Business dealings with elements of agency, such as distributorships; and
• Employment relationships, including positions such as statutory representative, director, or manager.

In a widely reported recent case involving a rice snack startup, the Board discovered that the trademark squatter’s spouse was previously a manager at the victim company, which supported a §15(a) claim. The Board reasoned that this relationship could not be merely coincidental and therefore concluded it was in bad faith, granting relief under §15.

This is an especially powerful avenue for an international brands because local distributors are often indispensable for product sales in China. Insiders within these relationships will tend to be the ones noticing and exploiting vulnerabilities around unregistered trademarks.

Bad Faith Claims

The China Trademark Act deems filing for trademarks with no intent to use as being in bad faith. In recent years, Chinese regulators have made it easier to prevent trademark squatting by broadening the “bad faith” definition to include many activities beyond traditional squatting. According to published government guidance, merely causing “disruptions to the trademark registration system” is sufficient to take administrative action. (See translation)

China Trademark Act §4 mandates the Trademark Trial and Appeals Board  protect brands from trademark squatters. The legal standard is whether the trademark application sought excessive protection relative to its business needs or was filed for the purpose of unjust enrichment. During a trademark trial, the board scrutinizes the original trademark application and any associated sales prices to determine bad faith.

Bad faith may be established by a lack of intent to use the mark, which the Board determines by looking for the following fact patterns:

• Claiming numerous marks spanning unrelated classifications
• Coercing the victim into a business relationship
• Demanding an excessive price in exchange for assigning or licensing the trademark
• Demanding excessive damages for infringement

In its regulatory guidance, the China IP Administration in all lists 10 specific bad faith fact patterns subject to its administrative discretion (See Translation).

A number of other fact patterns can support a §4 claim, such as infringement on a famous mark, a prior copyright, or an individual’s name. Therefore, a victim making a claim should consider any facts that speak to the squatter’s bad faith.

When fighting trademark trolls in China, asserting claims about the accused’s bad faith is one of the most effective strategies available to a business. The Trademark Office reserves basically unlimited discretion and authority to find that a trademark application was made in bad faith, done under the category of “other bad faith trademark registration practices.” (translated source)

File a Lawsuit Against Squatters to Pursue Damages in Court

In China, whoever wins the race to register a mark generally gets full exclusive rights to the trademark. As a consequence, a squatter successfully registering and gaining legal control over your trademark could potentially allow counterfeiters to use your brand on their products. Fortunately, recent Chinese laws allow for judicial enforcement action to prevent continued trademark squatting.

The China Trademark Act explicitly forbids registering a trademark that conflicts with the priority rights of another person. The China Competition Act provides additional protection for businesses, including significant product names, packaging, trade dress, and business entity names. These priority rights are intellectual property rights different from trademarks, and only exist if the conduct precedes the conflicting trademark registration. Additionally, the Competition Act also forbids making false claims about the agent-principal or partnership relationship with the victim, interfering with a trademark registration, or the use of a squatter’s trademark to disrupt a victim’s business operations.

A lawsuit can be filed to protect yourself against these common squatter practices. The cases below illustrate these prohibitions in practice.

Confusing the Consuming Public

An effective method to fight trademark squatters in China is to show that using the mark on counterfeits confuses the consuming public. Squatters and counterfeiters in China often illegally steal trademarks to exploit the goodwill associated with the related brands, getting extra sales by deceiving consumers. Typically, a squatter will imitate the appearance, packaging, trade dress, and advertising of a legitimate brand to mislead consumers into purchasing their own the goods or services.

China Competition Act §6 permits a claim if the trademark squatter infringes on the business’s product name, packaging, trade dress, or business name, provided these two elements are met:

1. The goods or services had a distinctive prior use; and
2. The prior use by the victim was significant because it had achieved recognition among the consuming public.

In addition to showing significant prior use, the victim must prove that the squatter’s actions confused consumers and that confusion actually occurred.

Chinese law considers trademark rights to be an administrative entitlement that must be weighed against fair expectation of rights derived from carrying on a legitimate business. Chinese jurisprudence investigates two distinct sets of facts when balancing the legal policy of encouraging registration against the policy goal of protecting legitimate business:

1. Whether there actually are priority user’s rights;
2. Whether a ruling can prevent confusion.

Consider the following illustrative case precedent. In the Shanghai New Balance case, the court considered whether a trademark squatter’s rights conflicted with the priority rights of the New Balance shoe company.

A squatter named “Niu Balance” was found to have a trademark in the italic “N” logo, similar to the iconic logo used on New Balance shoes. However, New Balance had a prior use in its trade dress. During an enforcement action, the court ruled on the question of whether the Niu Balance logo would be likely to cause confusion among consumers in China due to its similarity to the New Balance trade dress.

The court held that, while Niu Balance had a valid trademark in the N logo, it was strikingly similar to and used in the same manner as New Balance’s own logo with established significant prior use. Therefore, Niu Balance was clearly culpable of exploiting New Balance’s goodwill to mislead Chinese consumers into thinking its own products were the same high quality merchandise. The court found the squatter’s trademark to be objectively confusing to consumers, dishonest, unethical, constitutive of unfair competition,  and an infringement of New Balance’s priority rights.

The reason New Balance seems to have encountered trouble in China is an overreliance on unqualified internal staff or LSP freelancers to translate for its branding. In contract, peers like Nike successfully mitigated these risks simply by using professional translators familiar with trademark law.

In more recent enforcement trends following this case, the Chinese government now sends uniformed officers to investigate and prosecute squatters selling counterfeits. For instance, in Sudao v. Daoxiangcun the government made an administrative finding of unlawful consumer confusion when “the market regulator in Dongcheng District, took consumer surveys from Sudao customers and determined that these buyers had mistakenly believed the products purchased from Sudao were produced by Daoxiangcun.” (translated source)

Fight Trademark Squatters with Unfair Competition Claims

You can prevent trademark squatters from succeeding using deceptive trade practices claims. Under the China Competition Act, false advertising means making false or deceptive claims about the performance, features, or quality of goods or services with the purpose of misleading the consuming public into purchasing certain goods or services.

Under this doctrine, a trademark squatting victim can obtain protection under the  Competition Act on grounds of confusing the consuming public if the squatter:

• Abused the business relationship to win the race to file the trademark
• Intentionally deceived or misled consumers into believing that goods or services were provided by the victim or through a legitimate relationship with the (such as a distributorship).

Such claims have relatively low evidentiary requirements and victims are not required to show significant prior use of the trademark, provided they can demonstrate that the squatter’s practices are deceptive and confusing.

A recent enforcement case in Shanghai centered on a defendant who registered almost two dozen trademarks associated with the famous water filter brand Brita. The defendant also registered a WeChat Official Account using both the English and Chinese names of Brita to sell pitchers and filter cartridges, falsely claiming that it had a business relationship with the parent company, Brita. The court held that this constituted false advertising under the Competition Act.

Particularly dispositive for the Shanghai trial court was the defendant’s use of the name “Brita Flagship Store” for its WeChat Official Account and its misrepresentation as the official WeChat site for Brita in China. The defendant also appropriated Brita’s brand story for the Chinese market. During the trial, the defendant admitted to lacking any relationship with Brita, despite using several different brand names associated with the Brita company. Therefore, the court reasoned that the defendant’s advertising practices intended to deceive the public about their relationship to Brita and the authenticity of the goods being sold.

Note several unique cultural factors in China’s Internet ecosystem: a registered trademark is needed to open a WeChat Official Account, meaning that without it, Brita would not be able to operate on WeChat at all. In China, an online “flagship” store generally implies direct management by the brand owner, unlike brick-and-mortar flagship stores that can be operated by third parties — a distinction well-known to the consuming public in China.

Thus, the trademark registration in this case was a powerful enabler that allowed the squatter to hijack Brita’s business. Under this cultural context and the commercial experience of the consuming public in China, one can easily see how the court would conclude that the defendant deliberately sought to confuse the public. In this case, there was a strong legal basis to find that the defendant’s false advertising constituted unfair competition, and we can expect courts to rule similarly in the future.

Business Disruption

You can allege that a trademark troll is using the registered trademark to disrupt a legitimate business. In China, trademark trolls often file oppositions against trademarks filed by a victim or otherwise exploit trademark office procedures to frustrate legal attempts to obtain a trademark, thereby disrupting the victim’s business operations. While the Competition Act on its face does not seem to prohibit these trolling tactics, Chinese courts have established precedents that aim to reach fair results.

In trademark troll cases, courts apply a multi-factor test to assess whether a party’s practices constitute deceptive practices that violated the principles of good faith and fair dealing, focusing on whether such practices harm market integrity or the legitimate interests of others. In a 2017 case, the Shanghai trial court for the Minhang District held that a squatter who abused trademark opposition filings to disrupt another business’s legitimate trademark registration attempts violated China Competition Act §2.

The court reasoned that, while there was no direct infringement on trademark rights, the plaintiff’s normal business operations were severely disrupted. In addition to findings of false advertising and infringement on prior rights, the court held that the squatter’s use of opposition filings constituted unfair competition, and that these practices undermined the plaintiff’s competitiveness and demonstrated bad faith.

Possible Alternatives to Expensive Enforcement Costs

The above cases noted that trademark trolls in China are hoarding large numbers of trademarks. Their business model is effective because it forces legitimate businesses to incur exorbitant legal fees to fight them off. There may, however, be cheaper alternatives. One theory recently put forth by practitioners is to file for seizure of the mark. According to Supreme Court rules, a registered trademark is a kind of property. Therefore, if a plaintiff suspects a trademark troll doesn’t have sufficient assets to pay for potential damages in a trademark case, they may instead file for a seizure of the trademark, effectively taking title to the mark directly.

Conclusion

China’s laws have been amended in recent years to greatly expand the remedies available to victims of trademark squatting, and recent cases demonstrate the legal system’s increased willingness to enforce basic business ethics. In the current legal climate, trademark squatting victims need to holistically consider all the facts to develop an effective strategy for dealing with trademark squatters. Proactively securing protection for your trademark is nonetheless still the most cost effective approach for avoiding trademark squatting problems in China.

FURTHER READING

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

• Fighting Trademark Theft at the China IP Administration
• How China trademark infringement litigation actually works

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