China’s highly anticipated trademark reforms, which will make significant changes to its trademark registration process and substantially increase penalties for trademark infringement, are set to go into effect next week – on May 1, 2014.  It is important for brand owners to understand these amendments as China is likely to remain a key battleground for rights holders despite the additional protections afforded by the new law and other efforts by the country to crack down on trademark violations.

The amendments include a number of provisions, but, for the purposes of this summary, we will focus on the following key changes addressed in the new law:

  1. Efforts to deter “trademark squatting” through the imposition of new good-faith filing requirements;
  2. Increased penalties for trademark infringement under both statutory and non-statutory damages frameworks, the availability of punitive damages, and other meaningful changes to the remedies available against infringers;
  3. A new defined timeframe for all aspects of the trademark registration process;
  4. The new defense of “non-use” by the trademark owner available to accused infringers;
  5. The eligibility of sound marks for trademark protection;
  6. Amendments and stronger protections for “well-known marks” (i.e. famous); and
  7. New administrative protocols, including e-filing and the ability to file single applications for multiple classes.
  1. MEASURES AGAINST BAD FAITH APPLICATIONS

Trademark squatting is the practice of filing trademark applications for another party’s mark in a country where that party does not already hold a trademark registration.  This typically occurs in first-to-file jurisdictions, such as China, where the first party to file an application is awarded trademark rights.  China’s first-to-file system has attracted an abundance of trademark squatters, and many well-known brand owners have been unable to obtain Chinese trademark registrations for well-known marks because of this practice.1

One of the most significant changes in the new rule is the addition of the good-faith filing requirement.  The law will now require that “[a]ny application or usage of a trademark shall abide by principles of good faith.”  Theoretically, this provision could be used to help curb bad-faith applications and the problem of trademark squatting.  However, the extent to which this provision will be enforced remains to be seen.

The new rules will also require that trademark agencies, which are required for foreign businesses that do not have a presence in China, abide by principles of good faith.

Additionally, in circumstances where an application is filed for a mark that is similar or identical to another party’s unregistered trademark on identical or similar goods—and where the applicant is aware of such prior mark because the applicant has a contractual or other relationship with the party—the application will be rejected.

  1. REMEDIES FOR INFRINGEMENT

The new law will also allow trademark owners to recover higher damages from infringers in an attempt to fix what has long been considered a weakness in the Chinese law: the fact that the penalties for infringement were generally considered too low to serve as a significant deterrent.

Determining Damages

The law provides that damages should be calculated based on the plaintiff or trademark owner’s actual loss.  When this cannot easily be determined, damages are then based on profits earned by the infringer as a result of the infringement.  If the infringer’s profits are not easily determined, damages are then based on a royalty rate for the registered mark.  Importantly, the new rule also provides that a party may recover up to three times the amount of actual damages, profits, or royalty as well as its enforcement expenses for acts of malicious infringement or in “serious” circumstances.

Statutory Damages

Where damages cannot be established based on the above criteria, parties may elect to recover statutory damages for trademark infringement.  The law raises the amount available for statutory damages from RMB 500,000 (approximately US $82,000) to RMB 3 million (approximately US $500,000).  Although this represents a six-fold increase in the amount of statutory damages, it is unclear whether this heightened remedy will be sufficient to deter infringement and counterfeiting activity given the extremely high profit margins enjoyed by counterfeiting enterprises.

Fines for Illicit Business

Further, the new rule provides for additional administrative penalties.  Where illicit business revenue is over RMB 50,000 (US $8,000) fines of up to five times the profit value may be levied; while infringers showing illicit business profits under that amount may be fined up to RMB 250,000 (US $41,000) by the Chinese trademark authority.

Punitive Damages

Additionally, if an infringer commits trademark infringement more than once in a five-year period, or if other “serious” circumstances exist, the infringer may be subjected to heavier punishment in the form of punitive damages.

Destroying Manufacturing Instruments 

Apart from monetary penalties, the trademark authorities will now have the power to confiscate and destroy instruments generally used to manufacture infringing or counterfeit goods. Previously, only instruments specifically used to manufacture the infringing goods could be seized or destroyed.  The new provision, if enforced, has the potential to be a powerful tool against counterfeiters and infringers since it will cut direct to the heart of the manufacturing process.

Inspecting Accounting Ledgers and Records

Administrative authorities will be permitted under the new law to inspect accounting books, invoices, contracts, or other materials pertaining to alleged trademark infringement, which could prove useful in situations where infringers attempt to hide sales and accounting records.

  1. TIME FRAMES FOR EXAMINATION

Previously, the law did not provide a timeframe for trademark registration and examination.  Under the new law, however, each stage of the registration process is governed by time limits:

  • A preliminary examination must be issued within nine months of the application date;
  • A decision concerning a review of a refusal before the Trademark Review and Adjudication Board (TRAB) must issue by nine months from the date the party sought review, although this may be extended by three months in special cases;
  • Opposition proceedings are to be decided within 12 months from the expiration of the publication date but may be extended by an additional six months in certain circumstances; and
  • A review of an opposition decision by the opposing party must be decided within 12 months of the review request but may be extended by up to six months in certain circumstances.

Generally, this means that an application that does not hit any bumps in the application process should mature into a registration approximately 15 to 18 months from the application filing date.

  1. NEW DEFENSE OF NON-USE

An alleged infringer will now be able to raise a defense of non-use, meaning that if the trademark owner did not use the registered mark in China in the past three years and cannot offer evidence to prove its damages from the infringing activities, the infringer cannot be liable for infringement damages.

Trademark owners should therefore make sure to use their marks in China regularly and maintain evidence of their use in order to fully recover for infringements.

  1. SCOPE OF PROTECTION

Under the new framework, sound marks will now be eligible for registration.  Although previous legislative drafts discussed allowing a single color to serve as a trademark, this provision was not incorporated into the amendment.  Color combinations do remain eligible for registration.

  1. PROTECTION OF WELL-KNOWN MARKS

The new provisions also address protections for well-known marks.  The rule clarifies that the owner of a well-known mark in China may apply for well-known mark status when the owner believes its rights are being infringed.  Well-known mark status affords several critical protections.  First, where a trademark is filed for identical or similar goods for a well-known mark not registered in China and is likely to cause confusion, registration will be refused. In addition, where a trademark application is filed for use on non-identical or dissimilar goods that is a translation, imitation or other reproduction of a well-known mark registered in China, misleads the public, and is likely to create prejudice to the interests of the owner of the well-known mark, the application will likewise be rejected.  The latter represents a potentially powerful mechanism for fending off copycats, even for markets where the mark holder does not actively participate.

Recognizing the preponderance of products sold in China bearing the term "well-known mark" or similar translations as an adjective intended to connote high quality products and services, the new rule also prohibits use of well-known mark designations on products, packaging, and commercial activities.

Lastly, it is now defined as an act of unfair competition to use a registered or unregistered well-known mark of another as a trade name contained in the enterprise’s name in a manner that misleads the public.

  1. UPDATES TO FILING SYSTEM

Among other procedural changes, the amended law provides for a streamlined application process, including the ability to file applications electronically and to file single applications for multiple classes of goods/services.