Legal issues in foreign-related trademark licensing

The term “foreign-related trademark licensing” refers to the legal act whereby a foreign company licenses use of a trademark that it owns to a company in the PRC. With the growth and internationalization of the PRC economy, legal issues involving foreign-related trademark licensing have become increasingly salient.

At present, trademark licensing in the PRC is primarily governed by the PRC Trademark Law, the PRC Trademark Law Implementing Regulations and relevant judicial interpretations. Additionally, the act of franchising, which also includes trademark licensing, is governed by such administrative laws as the Administration of Commercial Franchising Regulations.

Place of registration

Trademarks licensed in the PRC by foreign companies may have been registered in both the foreign company’s home country and the PRC, or may have been registered in the foreign company’s home country but not yet registered in the PRC (e.g. a trademark that is still at the application stage).

Although the first scenario includes foreign-related elements, it in fact involves the licensing and use in the PRC of a trademark registered in the PRC, and is in no way different from the licensing of ordinary domestic trademarks. In the second scenario, as the trademark concerned has not been granted registration, it is not possible to file a trademark licence contract for the record, but this in no way affects the validity of the trademark licence contract itself. In this respect, the current PRC Trademark Law has improved greatly as compared to the pre-amendment version. For example, the pre-amendment version of the law specified that trademark licence contracts were subject to strict government control, and had to be filed for the record and announced by the Trademark Office, failing which administrative penalties ranging from imposition of a fine up to cancellation of the registered trademark could be imposed. In contrast, under the current Trademark Law and the judicial interpretations of the Supreme People’s Court, even though a trademark licence contract has not been filed for the record, it remains valid, with the caveat that it cannot be used to oppose a bona fide third party.

Accordingly, we recommend to foreign companies intending to license a trademark in the PRC that they should, to the extent possible, first secure trademark registration. However, in specific circumstances, such as where a trademark that is at the application stage is being licensed, as long as the other party is fully apprised of the status of the trademark and the parties have reached a consensus on the matter, the licence will nevertheless be legally valid.

Circumstances of the licensee

It is also important to ascertain the legal status of the licensee before licensing a trademark.

First, it should be ascertained whether the licensee company is incorporated and duly existing in the PRC. In practice, we have encountered situations where a foreign company purports to be a licensee for the whole of the PRC. However, a foreign company, or even a company registered in Hong Kong or Macao, may not directly engage in business activities in the PRC. This situation could make the trademark licence contract impossible to perform.

Second, the business qualifications of the licensee must be ascertained. In particular, attention should be paid as to whether the goods or services for which the licensed trademark is designated fall within a scope restricted by the state. Accordingly, ascertaining the legal status of the licensee can ensure that the lawfulness and validity of the trademark licence contract will be accorded due legal support in the PRC.

Provisions of licence contract

The most important document involved in foreign-related trademark licensing is the trademark licence contract. It is crucially important to include an effective dispute resolution clause in this contract.

Dispute resolution provisions need to take account of three main points: the governing law, the method of dispute resolution and jurisdiction. Generally speaking, either the law of the PRC or the law of the licensor’s home country can be selected as the governing law; the main methods of dispute resolution are litigation or arbitration; and the jurisdiction is either the place where the licensor is located or the place where the licensee is located. With respect to arbitration as the method of dispute resolution, it is not unusual to see parties opting for arbitration by a foreign arbitration institution in a place other that the places where the licensor and the licensee are located.

When deciding on such provisions, consideration must be given to whether the contract can be effectively enforced in the event that a dispute arises in future. Given that in many circumstances enforcement will occur in the PRC, the selection of a competent PRC arbitration institution, such as the China International Economic and Trade Arbitration Commission, can facilitate future enforcement of the award. The Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre are also regularly used. One point that needs to be noted is that at present, PRC courts will generally recognize and enforce only foreign court judgments of those countries with which the PRC has signed bilateral judicial assistance agreements. If the parties provide that a foreign court will have jurisdiction over disputes and the country does not have a judicial assistance agreement with the PRC, it is possible that a judgment from the foreign court will not be able effectively to be enforced in the PRC.

Conclusions

In summary, although in the course of foreign-related trademark licensing the licence agreement may specify the law of a foreign country as the governing law and provide that a foreign institution will have jurisdiction, the ultimate performance of the agreement and the handling of any disputes once they arise will take place in the PRC and will require the support of the PRC judicial authorities. Accordingly, a sound understanding of relevant PRC laws, regulations and judicial practice and securing of the relevant legal support will more effectively safeguard the lawful rights and interests of parties involved.

Spring Chang is a co-founder of and partner at Chang Tsi & Partners. Her practice focuses on intellectual property.

Frank Liu is an attorney at Chang Tsi & Partners

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