In recent years, companies around the world have moved or expanded their manufacturing operations to China. Many such companies have reduced their manufacturing costs by taking advantage of China’s affordable labour, technical expertise, and industrial infrastructure. However, some unwary foreign companies have found themselves ensnared by Chinese law — and Chinese trade-mark law in particular. This article highlights two trade-mark risks faced by companies manufacturing goods in China, including those doing so solely for export to other countries.
Navigating the landscape of Chinese trade-mark law can frustrate even the most sophisticated companies. For example, in 2011, a Chinese company owning the Chinese registration for the trade-mark “iPad” sued Apple for $1.6 billion USD in damages for alleged trade-mark infringement and sought to prevent Apple from selling its popular iPad product in China. This dispute was resolved when Apple paid a $60 million USD settlement.
As noted, even companies that manufacture goods in China solely for export to other countries risk running afoul of Chinese trade-mark law. Chinese courts have decided against such companies in several cases, even though they were not selling any goods in China. These cases have resulted in substantial fines, seizures of products, injunctions against continued operations, and awards for damages.
This article focuses on two particular risks faced by such companies:
- the risk of infringing a trade-mark registered in China to another company; and
- the risk of violating Chinese trade-mark laws prohibiting “false marking.”
Companies manufacturing goods in China should be mindful of these risks and take steps to reduce their exposure to them as detailed below.
Trade-mark infringement risk. Liability for trade-mark infringement may arise when a company manufactures goods in China bearing a trade-mark that has been registered in China to someone else.
Several decisions by Chinese courts have held that mere manufacturing of goods bearing a registered trade-mark constitutes use of that trade-mark in China. Accordingly, some Chinese courts have found trade-marks to be infringed by companies manufacturing goods solely for export, even when there have been no sales in China. In such situations, the fact that the company is the owner of the trade-mark in its home country has provided no defence.
In the case of Nike v CIDE Sports (2001), the defendant, CIDE Sports, owned the Spanish rights to the “swoosh” trade-mark while Nike owned the Chinese rights. The Chinese court found that the manufacture of products branded with the “swoosh” trade-mark for export to Spain constituted infringement of Nike’s rights. Although CIDE was not selling any goods in China, it was nonetheless ordered to halt production, destroy the goods and pay damages to Nike.
In the case of Hongxin v Guangzhou Custom (2006), Hongxin was engaged to manufacture “HENKEL” tungsten lamps for export to the United Arab Emirates. Customs officials asserted that the cargo was infringing the exclusive right of the Chinese registrant of the “HENKEL” trade-mark. Hongxin’s cargo was confiscated and the company was fined.
Similar findings were made in the cases of Ruibao v Yongsheng (2005), Deckers v Guangyu Leather (2011), and Nokia v Wuxi Jinyue (2011).
In view of the trade-mark infringement risk illustrated by these cases, companies manufacturing goods in China should also be mindful of the fact that China is a “first-to-file” jurisdiction with respect to trade-mark registrations, meaning that rights are granted to the first party that files for registration. Moreover, there is no need for the registrant to demonstrate that it has used the trade-mark or intends to use the trade-mark. This registration system has allowed less scrupulous Chinese entities to register trade-marks opportunistically to use against foreign companies.
False marking risk. Companies manufacturing goods in China also run the risk of violating Chinese trade-mark laws prohibiting “false marking.”
“False marking” occurs when an unregistered trade-mark is represented as a registered trade-mark. A company manufacturing goods in China may wish to labels those goods with a trade-mark accompanied by the registered trade-mark symbol (®) to denote that the trade-mark is registered in another country, e.g., the country to which the goods will be exported. However, if the company has not registered a corresponding trade-mark in China, it may be found to be in violation of “false marking” laws. This violation may occur despite the fact that the goods are manufactured solely for export.
Where violation of “false marking” is found, Chinese authorities may stop the use of the trade-mark and impose a fine that can potentially be significant: the maximum is set at 20% of the volume of the business or not more than two times the profit earned.
Risk mitigation strategies. Given the risks discussed above, foreign companies manufacturing goods in China, including those that manufacture goods in China solely for export, should work with counsel to develop strategies to mitigate these risks.
For example, companies may consider obtaining Chinese registrations for their trade-marks, which would reduce exposure to both trade-mark infringement and “false marking” risks. Proactively filing trade-mark registrations may be less costly than downstream litigation or government fines. When a trade-mark has already been registered by someone else, companies may consider obtaining a licence from the Chinese registrant. Ideally, such a licence should be negotiated before the company has entrenched its manufacturing operations in China. Alternatively, where feasible, a company could seek to affix its trade-mark in a jurisdiction where it is not at risk for trade-mark infringement or false marking.
As always, an ounce of prevention is worth a pound of cure.
Jeffrey J. Kang, Toronto
Brian Chau, Toronto (Articling Student)