Intellectual property

IP rights

How can franchisors protect their intellectual property (eg, trademarks and copyright)?

Franchisors should consider registering their trademarks in the People’s Republic of China (PRC)  as soon as possible and before entering the Chinese market. In addition to any English or other non-Chinese language marks and logos, franchisors should create and register a trademark in Chinese characters before a squatter can register it. Having a Chinese language trademark also mitigates the risk of a franchisee registering the mark in its own name and ‘breaking away’ from the franchise system. Localising a foreign brand is important to increase the recognition and reputation of the brand among Chinese customers, as English is rarely spoken in mainland China.

China is a first-to-file jurisdiction and trademarks registered abroad are generally not protected. Trademark registration with the China Trademark Office takes between one and two years (assuming that there are no oppositions or complications). The registration is valid for 10 years with an option to renew.

Copyright is protected under the Copyright Law. While registration with the Copyright Protection Centre of China is optional, it may be useful as a record of ownership in copyright infringement claims.

The Anti-unfair Competition Law protects ‘protected commercial marks’ (eg, name, packaging, domain name and website name used for a particular product) by prohibiting acts of confusion intended to mislead customers into believing that a product or service is a branded one or is connected with a brand.

Must IP licences be registered?

If the franchisor licenses the Chinese trademarks (eg, from the group’s IP holding company), the licence must be recorded with the China Trademark Office. Otherwise, registration of a licence agreement is optional.

Know-how

How can franchisors protect their know-how and trade secrets?

Although the Anti-unfair Competition Law contains provisions aimed at protecting trade secrets, contracts remain the most important means of protecting the trade secrets. Franchisors should ensure that their non-disclosure agreements with Chinese franchisees are properly initialled, signed and sealed, and reference the franchisee’s legal name in Chinese. Franchisors should collect evidence of the information that has been disclosed and the time of disclosure. Identifying a clear scope of information in the non-disclosure agreement also enhances the chances of enforcement.

Breach

What are the consequences of a franchisee’s breach of the franchisor’s IP, know-how or trade secret rights and what remedies are available to the franchisor in this regard?

Franchisors should monitor the market and their franchisees to identify possible infringement as soon as possible. Franchise agreements should allow the franchisor to terminate the agreement if the franchisee infringes on the franchisor’s IP rights. Franchisors should bear in mind that the PRC is a civil law jurisdiction, so there is no discovery. Therefore, franchisors should endeavour to collect or secure the evidence that they need for infringement proceedings before sending cease and desist letters or launching lawsuits.

In addition to termination rights under the franchise agreement, franchisors may seek recourse in the courts and launch administrative proceedings.

Infringement lawsuits can be based on either the Trademarks Law or the Anti-unfair Competition Law. Franchisees may seek orders to stop infringing activities and award damages. Historically, damages awarded in IP infringement cases have been low; however, there seems to be a trend towards raising the damages awarded to IP rights holders. 

Administrative proceedings before the State Administration for Industry and Commerce can be useful to seek orders to:

  • seize counterfeit goods;
  • impose fines on infringers; and
  • conduct raids.

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