Once upon a time, China was a happy place for trademark trolls, those dreadful, monstrous creatures who squat upon trademarks over which they have no legitimate rights. The malevolent spawn of a midnight union between greed and China’s first-to-file trademark registration system, the trademark trolls happily roamed China’s quiet countryside in broad daylight, frightening foreign investors at every turn. Usurping the trademark rights of others did not satiate the trademark trolls’ appetite for evil, oh no. The trolls used their ill-gotten trademark registrations to help them bring counterfeit goods to markets in many ports throughout the world. Sometimes they were even bold enough to file malicious infringement suits against legitimate foreign owners of trademarks the trolls had fraudulently registered in China. This dark time of sorrow and suffering lasted many years, and, for many years, Chinese trademark law behaved like the smallest Billygoat Gruff in the old folktale: when confronted by the troll hoards, it acknowledged their existence, placated them with mere words, and then scampered away to safe pastures while allowing the trolls to continue their pernicious work.
But the dark days of the squatting troll hoards may be done. On August 30, 2013, the Standing Committee of the National People’s Congress forged a gleaming amendment to China’s Trademark Law which China intends to wield against the trademark trolls in at least two significant ways. First, for the first time in history, good faith has become a prerequisite for the filing of an application to register a trademark in China. This means that legitimate foreign mark owners whose marks have been usurped by a squatting troll will have a new legal basis on which to attempt to cancel the squatting registration. More to this, the amended law extends the honest and trustworthy principle to Chinese filing agencies and attorneys, who will no longer have the right to file an application for trademark registration if they know or should have known that the applicant is a squatting troll disregarding the legitimate rights of others. Attorneys and agents who ignore this provision can face administrative fines, bad credit reports, restrictions against representing clients before the Chinese trademark office and even license suspension and revocation. Second, and also for the first time in history, Chinese trademark law will give legal recognition to prior use-based trademark rights, which, under the new amendment, cannot be supplanted by a later registration.
For U.S. trademark owners, who are used to operating in a market in which trademark ownership rights can only be created through the use, a first-to-file system like China’s, in which trademark ownership rights descend upon the person who wins the race to the trademark office, can be bewildering, and many U.S. trademark owners are surprised to learn that the number of first-to-file jurisdictions on the planet outnumber the jurisdictions having first-to-use systems. Both systems have their strengths and flaws. In a first-to-file jurisdiction, it is generally much easier to do an availability search to determine whether a trademark is available or whether it will create conflict with other mark owners, but the trademark register inevitably contains illegitimate registrations which are costly to remove. In a first-to-use system like that of the United States, in which common law unregistered marks are protected by both state and federal law, it can be much more difficult to determine whether a certain mark is going to be available without risk of creating conflict, but – and this is a good public policy – what is really happening in the marketplace is more important for determining trademark ownership rights than what may or may not be happening in the Trademark Office.
The unfamiliarity of many U.S. trademark owners with China’s first-to-file system, combined with their fears about counterfeiting and other practices of the trademark trolls, have frequently had a chilling effect on U.S. business investment in China. But this year, with the new trademark amendment, China is taking significant steps to create a protective environment for foreign business investors who want to launch or expand their brands in China. The new amendment takes effect in May of 2014. Squatting troll hoards beware: the biggest Billygoat Gruff has just stepped onto the bridge.