Strategy against legal actions initiated by trademark squatters

As trademarks in China are subject to the first-to-file principle, the problem of preemptive registration is relatively salient. Many trademark squatters will use the preemptively registered trademark to take legal action against the foreign rights holder to demand a large transfer price.

As a result, if the rights holder simply responds passively each time to an action taken by the trademark squatter, the rights holder will fall into the trap set by the squatter and ultimately be compelled to agree to unreasonable demands. To avoid this, the rights holder needs to map out a plan in advance.

Common means used by trademark squatters. After the successful preemptive registration of a trademark, some trademark squatters will directly contact the foreign rights holder, offering to transfer the trademark at an exorbitant price. Other trademark squatters will use the preemptively registered trademark on related goods or services so as to confuse consumers, but also seek an opportunity to transfer the trademark for a high price.

If direct negotiations with the foreign rights holder prove unsuccessful, the trademark squatter may, with the intent of increasing the pressure on the foreign rights holder, carry out recordal of the preemptively registered trademark with customs to disrupt the normal import and export of goods by the foreign rights holder.

Other squatters may even use the trademark rights that they control to file an administrative complaint so as to have the goods produced or sold by the foreign rights holder in China investigated and dealt with. Some will even go as far as to use the trademark to file an infringement suit against the foreign rights holder.

Disadvantages of passive responses. The reason many foreign rights holders have had their trademarks preemptively registered by trademark squatters is that they do not have a sound IP strategy in China. Some rights holders consider that they are only having OEM (original equipment manufacturer) production done in China, and that their products are not being sold in the country, so they may never even have thought of registering the relevant trademarks in China. Once they encounter a legal action initiated by a trademark squatter, and not having prepared in any manner, they will panic and exhaust themselves responding, while their normal business and trading is affected.

In the past this firm had a client whose trademark and domain name were both preemptively registered by a third party, but the client only intended to engage us to take action in respect of the domain name. However, if the trademark that the other party had successfully registered were not invalidated or cancelled, the domain name that that party had preemptively registered would have the support of a foundation of lawful rights, making the chances of success for the client very small if only the domain name were targeted.

On the one hand, in recent years the trend in IP protection in China has strengthened, and protective efforts have also intensified. With respect to OEM products that bear trademarks lawfully registered overseas, and that are destined for export in their entirety, the Supreme People’s Court (SPC) has confirmed by way of precedents that such products do not constitute infringement against domestic trademarks. In its guiding cases, the SPC has also expressly indicated that infringement suits involving trademarks preemptively registered in bad faith, and targeting the reasonable use of trademarks by others, will not be supported.

On the other hand, as long as a trademark squatter has a trademark under its control, it can take legal action against the production or sales activities in China of the foreign rights holder at any time. Taking customs recordal as an example, even if a foreign rights holder achieves success through discussions with customs or subsequent litigation after a batch of goods has been seized, it has no way to prevent future batches of goods being detained by customs. Discussions with customs or subsequent legal action to protect one’s rights also require a fair amount of time, and during this period the goods remain in detention. So even if the foreign rights holder ultimately succeeds in protecting its rights, its business will still be affected.

Comprehensive, proactive response plan. When a foreign rights holder discovers that a trademark squatter has taken legal action, it cannot merely respond passively, but needs to adopt a proactive response plan.

Of greatest importance in proactive response is preventing long-term disruption by the trademark squatter, and focusing on taking action against the foundation of the trademark squatter’s rights. If only a trademark is registered by the trademark squatter, action to invalidate or vacate it needs to be considered; registration of one’s own trademark in relevant classes also needs to be carried out to avoid giving the trademark squatter or another person a gap to file a new application, should invalidation or vacation of the trademark be successful. If multiple foundations of rights, e.g., trademark, domain name, etc., are preemptively registered, it is necessary to formulate a plan to take action against the multiple foundations of rights.

Taking action against a foundation of rights usually requires plenty of time. It is also necessary to consider how to resolve the more pressing legal action initiated by the trademark squatter. If goods have been detained by customs, it is necessary to actively and effectively communicate with customs and provide the relevant overseas registration materials and OEM certificate to ensure that customs can promptly release the goods.

Consideration may be given to file a legal action for confirmation of no infringement, to make it easier to promptly and effectively communicate with customs once the case is won. Furthermore, if the trademark squatter has committed other acts of unfair competition that confuse consumers, or infringed the foreign rights holder’s copyrights, consideration may also be given to initiating an infringement and unfair competition action to put further pressure on the trademark squatter to smoothly clear the obstacles.

If, while taking the above-mentioned actions, the trademark squatter shows a willingness to transfer the preemptively registered trademark, domain name or other such IP rights at a more reasonable price, it can be considered to resolve the issue through a settlement to save time and money.

In short, to respond to legal actions initiated by a trademark squatter against the production and sale in China of the foreign rights holder, it is necessary to comprehensively consider the trademark squatter’s objective in preemptively registering the IP and the specific circumstances of the case, formulate a specific plan in consequence, and proactively respond to achieve a more favourable outcome.

Frank Liu is a partner at Tiantai Law Firm