Business & Economics

China’s ‘Trademark Squatters’–And Facebook

While researching for yesterday’s post ‘iPad: Apple Versus Proview–Where To Find The Best Analyses,’ I came across many articles about China’s ‘trademark squatters’ and how China’s trademark law allows them to operate.

And, about how Facebook, relatively early and very thorough, wasn’t quite early and thorough enough.

Here’s what I learned.

I first heard of ‘trademark squatting’ about 25 years ago. Rocky Aoki, late founder of the Benihana restaurant chain, invited me to go with him to Seoul to celebrate the opening of his new restaurant. At that time, I was living in Taiwan, and, while we were in Korea, I asked Rocky whether or not he was considering a Benihana in Taipei?

He replied that he would like to open one, but an enterprising Taiwanese had already registered the name and wanted too much money for it. Too bad for Rocky, I thought; pretty slick on the part of the farsighted Taiwanese.

Since then I have followed dozens of such cases. From brand names to domain names, ‘trademark squatting’ and ‘cyber squatting’ are big businesses. And, quickly came to believe that they are needless impediments to the expansion of legitimate business. Not so slick.

The spotlight is now on China’s trademark regime because of the Apple/Proview dispute, even though this is not a case of trademark squatting–Proview registered the trademark ‘iPad’ for its ‘Internet Personal Access Device, a knockoff of a desktop Mac not a tablet, back in 1998.

China is among the largest if not the largest nation of squatters. Many Chinese have special awareness of the value of foreign trademarks. This derives from their experience with foreign manufacturers’ outsourcing production there and with international brands coveting China’s ‘two billion armpits’ (‘Just think, if every Chinese just used Right Guard deodorant everyday….’).

The oft-quoted (but not very well-written or informative) ‘China’s Trademark System Baffles Foreign Firms’ from Reuters noted:

‘These are [Chinese] people who are out there snatching up intellectual property (IP) with no related interest, strictly from the standpoint of owning IP as an investment,’….

Lawyers said trademark squatting was a problem in China, aided by agencies who register hundreds of trademarks in the hope of turning a profit.

.                    .                   .

China ranks near the top in the world “league table” of trademark registrations, with the figure rising more than 40 percent to 1.2 million in 2010 after doubling to 838,000 in 2009, lawyers said.

And, the Chinese trademark regime seems to favor the squatters, as the Reuters’ article describes:

Legal experts say the onus is on companies looking to do business in China to understand how China’s trademark law works, as it differs greatly from that of the United States.

China uses a “first to file” system when it comes to trademarks, meaning that the party who files for registration first gets the trademark, while the United States uses a “first to use” system, meaning a party filing for a trademark has to show that it’s either used the mark in business or intends to use the mark in the future for business.

There are remedies in China for recovering the trademark from squatters, but it is long and cumbersome. And, far from certain, as Pfizer learned (also from Reuters):

[Pfizer] fought a long battle in Chinese courts over the Chinese name of Viagra, which was first registered by a Chinese company. Pfizer eventually lost the suit.

So, if the squatters stay a step or two ahead of these international companies, then the Chinese individuals, companies, and trademark registration agencies might be waiting at the airport to greet the foreign businesspeople when they first arrive in China. And, of course, offer to sell them their trademarks for use in China.

And, here’s something of twist. For foreign outsourcers who don’t register their trademarks in China there is different risk. The Chinese manufacturer under contract to the foreign company might register the company’s trademark and begin selling the pirated, but properly branded, products in China.

Consider finally, Facebook. Even after its failure to enter China three years ago and its being blocked there currently, Facebook, nonetheless, cites, in its IPO filings, its continued interest in entering the market.

But, in addition to issues with Chinese censorship and entrenched Chinese competitors, Facebook also has to deal with trademark squatters. Despite being relatively, it was not early enough.

Facebook began registering its trademark in China in 2006 and so far has applied for more than 60 trademarks in Chinese or English in China. But, as the company discovered, squatters had already registered many iterations of the Facebook trademark in China, including Facebook’s primary Chinese trademark.

Even so, its applications demonstrate an understanding of the Chinese environment. Mr. Luo Yanjie, a Chinese attorney, in a guest post on Tech Node, points out:

…Facebook actually applied for these trademarks [shown in an accompanying chart] in various categories, not just for Internet business:

Class 9 – Software; Class 25 – Clothing; Class – Ads; Class 36 – Finance; class 38 – Telecommunication, Internet communication; Class 41 – Education; Class 42 – Software and Hardware service of PC; Class 45 – Social Service.

It’s quite interesting to see that Class 25 of clothing is also applied by Facebook, which indicates that the company has been fully conscious of any possible free-riding on its trademark’ s reputation. According to our knowledge, the most applied field of the well-known trademark is the manufacturer of clothing and stationery. Therefore Class 16 of stationery is also covered. We would even suggest Facebook to register the trademark in Class 18 of feather products, Class 28 of toy, Class 26 of ornaments and Class 30 of food, which fields are all easy to be infringed. [Feather products?]

And, Facebook further demonstrated an understanding of brand localization:

The applied trademark by Facebook includes not only those in English but also the ones in Chinese, like “脸书”. Although, the most widely spread localized name of Facebook is the phrase of “非死不可”, which means Dooms to Die. Few foreign companies would put attention on the localized trademark of its existing sign before entering the Chinese market, which may hinder the propaganda of its localized brand due to others squatting. But, Facebook’s application shows that foreign investors have realized the importance of the brand localization.

Regarding Facebook’s regaining its primary Chinese trademark, Mr. Luo is optimistic (more so than many other analyses I read):

It’s also found out that the trademark of Facebook has been first applied in Class 9 by other companies, which by our opinion, Facebook could take back the trademark through judicial methods. For any squatted trademark, the relief procedure of the trademark regulated by China laws is available to foreign investors other than the purchase of the trademark as the case of Apple.

If Facebook, as thorough as it appears to have been, faces these trademark challenges, you have to despair of other foreign companies who don’t do a very do good job at trademark due diligence–like say Apple.

Beyond trademark issues, if you would like to know more about Facebook and China, I found an informative interview with Duncan Clark, chairman of BDA China Ltd., where he discusses the prospects for Facebook to partner with a Chinese competitor to enter China.

And, for an interesting and in-depth scholarly analysis for how different theoretical and historical underpinnings cause trademark and IP friction between the U.S. and China, please see: ‘Making Much Ado About Theory: The Chinese Trademark Law’ by Leah Chan Grinvald.

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