Home / Issues / Volume 11, Number 2 / Trademark Trolls in China: Reasons and Solutions of the Serious Market Disturbing Problem
Trademark Trolls in China: Reasons and Solutions of the Serious Market Disturbing Problem
By FENG Shujie | Article | 11 Tsinghua China L. Rev. 257 (2019) | Download Full Article PDF

In recent years, trademark trolls have become a serious problem that disturbs the Chinese market. Though trademark trolls are concomitant with the trademark registration system, their overspreading in China is due to particular social and legal factors: the proactive trademark protection policies which value trademark certificates over the goodwill of trademarks that have developed over time; damages, in recent years, to trademark infringements which have increased drastically in an unjustified manner; and, trademark infringement dispute settlement procedures before administrative and e-commerce platforms that are inequitably favorable to trademark holders. The Chinese legislature and courts, cognizant of the seriousness of the problem, have started to take measures against trademark trolls. The 2013 Chinese Trademark Law permits prior legitimate users of a trademark to continue its use within the initial scope even if the trademark has been registered later by a third party. Further, the 2018 Chinese E-Commerce Law doubled the amount of damages granted to the victim in cases of bad faith complaints on e-commerce platforms. The Chinese courts have qualified the existence of trademark trolls as an abuse of rights or unfair competition, an understanding which may give rise to liability against trademark troll entities. In addition, a declaratory judgement of non-infringement is available if the victim simply needs to get rid of the uncertainty or risk in the face of threats from trademark trolls. Finally, the victim can also file an opposition or invalidation action in cases of trademark squatting by trademark troll entities.

I. Introduction

Trademark rights can be acquired either through use or through registration. In common law jurisdictions, such as the United States, trademark rights are recognized on the basis of using a trademark by an individual or enterprise in commerce. The scope of the rights depends on the commercialized products or services and the geographical area covered by the use of the trademark. Where two trademarks are used in the same area, prior use prevails in cases of conflicting trademark use. The advantage of the trademark use system is that the legal rights correspond to and are justified by the legitimate interests of the trademark user’s goodwill. The disadvantage of such a system is that conflicts may often arise when the same or similar kinds of products from different users of the same or similar trademarks meet each other in a new commercial zone. In most countries of the world, trademark rights come from registration. Any individual or enterprise can file an application to the trademark office for the registration of a sign which was chosen on designated goods or services. This application will be examined and published for registration if the conditions of registration are satisfied. This system includes the following advantages: the examination procedure can prevent, to a large extent, conflicting trademark applications; while the publication procedure permits enterprises in the same industry to avoid filing or using conflicting trademarks. The disadvantage is that, as use is not a condition for trademark registration, a trademark currently used but not registered by company A (hereinafter referred to as “Company A”) may be registered as a trademark by company B (hereinafter referred to as “Company B”). As a result, Company A must stop its use and possibly even pay damages to Company B as unregistered trademarks are, in general, not protected in the trademark registration system. This may happen whether Company B registers the trademark in good or bad faith. Good faith registration means that Company B was not aware of the trademark use by Company A when it filed the trademark registration. However, bad faith registration means that Company B has applied for the trademark registration despite being aware of the trademark use by Company A. This is called trademark squatting or trademark piracy. If a trademark squatter sues the prior trademark user in order to obtain a profit, they are considered a trademark troll. A simple trademark registration grants the power to not only prohibit others from using a trademark, but also to receive damages. Some trademark trolls recognize this as a business: they invest in the registration of a large number of trademarks, and then keep watch on the market for the opportunity to sue others and gain profits.

China’s trademark registration system dates back to 1982, when it first adopted its modern trademark law. Unfortunately, some entities have abused the system by taking advantage of the weaknesses of the trademark registration system. Over the years, this has led to the serious problem of trademark squatting, and subsequently the presence of trademark trolls. On one hand, the Chinese Government celebrates the skyrocketing amount of trademark applications and registrations because such large numbers are considered to signify a high level of intellectual property (hereinafter referred to as “IP”) protection and economic prosperity. On the other hand, it is clear that this perspective does not make sense in view of the economic bubbles in the trademark applications. In fact, trademark squatting accounts for a non-negligible percentage of the statistics. For example, a Chinese trading company incorporated on 2 May 2018 filed 5,060 trademarks on 27 June and 5,753 trademarks on 27 July 2018. Here, it can see that trademark trolls behave like a business in the sense that they make important investments when it comes to trademark filing: 5,060 trademark filing represents an official tax of 222,047 USD and 5,753 filings for an official tax of 252,457 USD.

Trademark trolls in China function primarily in two ways. The first is by filing a lawsuit for trademark infringement requesting high damages. In a 2014 example, the Japanese clothing company Uniqlo was sued together with its distributors in more than 40 cases before courts of different regions by two related companies who possessed more than 2,600 registered trademarks. The complainants had registered a logo that Uniqlo had been using on tags. The second way for trademark trolls to function is to negotiate the granting of a license or assignment to use the mark they registered for a high price in the face of litigation threats or complaints involving administrative authorities or e-commerce platforms. Though damages cannot be obtained in these procedures since administrations or e-commerce platforms lack the competency to decide on damages, administrations can order the cessation of infringing activities and platforms can request the withdrawal of products or even close the online stores. Trademark troll operators use this as a tool to further their extortion. These are just two examples, but there are even more creative ways trademark trolls conduct transactions. In one Chinese province, a trademark squatter obtained the status of exclusive distributor for a famous foreign automobile company. As this automobile company could not settle the problem of the trademark squatting, the registered trademarks presented serious obstacles to the business of the company. Other examples concern companies listed as candidates in stock market. Such companies are frequently threatened by trademark infringement lawsuits since the existence of an IP infringement lawsuit would cause the candidate to become unqualified for listing. In such circumstances, the candidate company often pays a high amount of money in order to get rid of the lawsuit.

The current research has described trademark troll cases of recent years and analyzed the applicability of the theory on abuse of right in trademark troll cases and the theoretical possibility of limiting trademark rights with the condition of trademark use. However, deep analysis of the social, political and legal reasons of trademark troll in China is absent; how to use existing legal regimes to deter trademark troll remains an issue to be explored. For the second aspect, the very recent practice of Chinese courts has supplied rich and interesting materials for this research. In this article, we will analyze the social, political legal contexts that have boosted the growth of trademark trolls and then evaluate the different solutions to the trademark troll problem. With regard to social and legal contexts, we will examine the China specific factors that have appeared along with the constantly increasing level of trademark protection. Among the different solutions to the problem of trademark trolls, some are common to all trademark registration systems, such as opposition and invalidation procedures that permit the victim of trademark trolls to challenge the trademark right; and others that have been newly developed in China, such as rights based on prior trademark use or the qualification of trademark trolls as unfair competition or abuse of rights.

Download Full Article PDF
Copyright © 1999-2019 Tsinghua China Law Review. All Rights Reserved.