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Bar News - June 21, 2013

Intellectual Property Law: Chinese Trademark Trolls Mean Trouble for US Companies


First-to-file trademark law in China is causing headaches for US companies as trolls register names already in use.

After selling wine for years in China under a trademark it thought it had the right to use, renowned French winemaker Castel Freres SAS and its Chinese agent were ordered by a Chinese court to stop all sales under the brand and pay US $5 million in compensation to a Shanghai wine company for trademark infringement.

The trademark in question, “Ka Si Te,” is the known transliteration of “Castel.” So, why couldn’t Castel use the transliteration of its own well-known name? The answer is uncomplicated, yet perplexing to many US companies.

Unlike American trademark law, Chinese trademark law, with few exceptions, states that the first person to register a trademark becomes its lawful owner, even if that trademark has previously been used by others in China. In Castel’s case, this resulted in disaster.

Castel entered the Chinese market in 1998. In 2001, it began distribution of wine under the name “Zhang Yu Ka Si Te.” Sales were strong, and the brand “Ka Si Te” became known among Chinese customers. In 2002, Castel applied for registration of its “Castel” trademark. This registration was granted in 2007.

Meanwhile, in 2005, Castel became aware of a 2000 Chinese trademark registration for “Ka Si Te” in the name of Li Dao Zhi (Li), a Spanish-Chinese winemaker. Castel concluded that Li had recognized and acted on an opportunity to register the trademark, with the only intention of preventing a competitor’s brand from gaining lawful access to the Chinese market.

Castel filed a request to cancel the registration based on the registrant’s non-use of the trademark. The cancellation action lasted six years, before the Supreme People’s Court ultimately ruled in Li’s favor. During this time, Li had begun selling wine in China under the “Ka Si Te” trademark.

In 2009, Li filed a trademark infringement lawsuit against Castel and its agent. The court held three hearings during which Castel argued that its use of the “Ka Si Te” trademark was in good faith, particularly since it is the transliteration of its well known name. The court ruled in favor of Li and ordered Castel and its agent to pay Li $5 million. Meanwhile, Li began enforcing its trademark against Castel and its Chinese distributors.

In at least one instance, the court has ordered cessation of sales of Castel’s “counterfeit” “Ka Si Te” wines. In other disputes, Li has been working with Chinese law enforcement departments to raid and penalize the sellers and resellers.

This “first to file” trademark system in China has allowed for a growing trend of “trademark trolls” – Chinese companies or individuals who strategically register trademarks belonging to others who have delayed or failed to register their marks in China. By registering, these trolls become the lawful owner of the hijacked trademark. As a result, they can then demand large sums of money to sell the mark back to the original owner, or worse, bring an infringement action to enforce their rights as the lawful owner of the registration against the original owner, who has made plans to use its mark or has already invested in using the mark in China.

Viewed as an effort to address this problem, the Legislative Affairs Office of China’s State Council has released draft amendments to the current trademark law, with respect to opposition practices. Among other things, the amendments provide that if a trademark applicant, due to a contractual relationship, business contacts, geographic location or other relationship, obtains knowledge of another party’s prior rightful use of a trademark in Mainland China and nonetheless applies for registration of that other party’s mark in bad faith, such an application may be rejected or be vulnerable to cancellation by the prior user. The existence of a prior relationship would relieve the prior owner of the difficulty and extremely high burden of proving bad faith. The draft amendments do not address circumstances where the prior user’s trademark has become known in China, but there is no relationship between the parties, as was the situation with Castel and Li.

The new law is not expected to go in to effect for many months and may be amended before promulgation. It is not expected to be retroactive. Nor is it expected to have a great impact on the “trademark troll” situation, unless the troll has had some kind of relationship with or resides in close proximity to the trademark user.

Entities and individuals that do business in China, either by selling or sourcing products, should be aware of the advantage of promptly registering their trademarks in China, including in Chinese characters. Ideally, this should be undertaken before products are sold or manufactured in China.

If is it discovered that a trademark has already been registered by a third party, steps to obtain the cancellation of that registration, to the extent available, should be considered. Until the law is reformed to quell the abusive practices of trademark trolls in China, the best offense remains a good defense.

Teresa C. Tucker manages the trademark and copyright practice group of Grossman Tucker Perreault & Pfleger in Manchester, and has practiced in the areas of trademarks and copyrights for 20 years.

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