Exporters should be aware that with the push by the Chinese Government to educate business people about Intellectual Property (IP), and the incentives they provide to help them secure IP rights, Chinese companies are becoming much savvier. And so are the trolls.
They’re thinking beyond just owning export brands, they’re now also registering New Zealand trade marks that are being applied to goods manufactured in China for export to other countries.
After securing the trade mark rights, these opportunists are filing customs notices to detain any products leaving China which carry their registered trade mark on the grounds that what is being exported infringes their trade mark registration. Under Chinese law, this is legally correct, and the onus is on the true brand owner to prove the troll’s trade mark rights are invalid.
There are plenty of Kiwi companies that manufacture in China, and some are certainly finding it difficult to get their branded products out of China and back to New Zealand, or any other country, because of red tape caused by trolls. While a container load of goods is stuck on the dock in China, stock can be running out in key markets, and distributors and customers will be clamouring for products. It can end up costing plenty in lost revenue and expenses.
For example, a New Zealand company contracts Chinese factories to manufacture farm gates for it via an agent, to import back into New Zealand for sale. The Kiwi company didn’t consider it necessary to own its IP right in China as it never intended to sell its products there. That sounds logical, but this is how the situation panned out when the agent – turned troll – who was used to contract the manufacturing companies in China and maintain the relationships, saw an opportunity in the offing.
The relationship between the Kiwi company and the agent started to run into problems over the quality of the gates being made and the price. The agent then decided to file a design registration for the gates, and a trade mark application for the specific brand of the gates as security. When the Kiwi company decided to pull the pin on the relationship and find another agent in China, the agent filed a border control notice with Customs in Shanghai and the Kiwi company’s gates were impounded on the docks. The agent also warned the manufacturers that if they took orders from the Kiwi company, then they would be infringing his IP rights.
In the end the design registration was relatively easy to challenge because, similar to New Zealand’s requirements for design registration and patents, China requires that a design be novel for it to be registerable. The trade mark issue, however, was much more difficult to resolve due to China’s ‘first to file’ trade mark system. While we managed to negotiate a deal to have the gates released from Customs, it was certainly a costly and delicate exercise.
The Kiwi company suffered damage to its reputation through not being able to maintain supplies and was forced to pay to have the goods released. It was a bitter pill to swallow to also have to continue using the agent as he ‘owned’ the brand, as well as the relationships with the manufacturers. Going forward the Kiwi company has had to consider rebranding or leaving the products (and their packaging) unbranded in China, which isn’t a great option.
While the laws in China have recently been tightened up to give NZ companies the right to invalidate trade mark registrations on the basis they were obtained in bad faith, this only works if you can establish a prior business relationship. It doesn’t work against opportunists – the sort who emails you saying a third party has registered a bunch of domain names using your brand, and would you like to buy them for a tidy sum.
Really, the key to combating trolls is to be aggressive with your IP strategy in terms of plugging any gaps. If you thought like a troll, you’d not just be filing in the class that covers your actual products, but other classes of goods that may be used on goods that are complementary to your products.
Even if you have no intention of developing trade marks for products in those other Goods Classifications, it stops people from using your name on a variation of your core product. Also, the complex subclass system within each trade mark class in China means that you need to cover off all of the subclasses to ensure no confusingly similar marks appear in the same trade mark class.
In many ways trade mark trolling has its basis in culture – the Chinese are well-known to be tough business people and tenacious negotiators, who spot the opportunities and will push everything as far as they can.
To operate successfully in these markets you’ve got to understand and respect the culture, and appreciate that there’s no blanket approach to doing business in China because it differs so much in different areas - whether you’re in northern or southern China, Hong Kong or Taipei. Each of these regions has its own culture, and each approaches business in vastly different ways.
And while we’ve moved on from 10 years ago – when Kiwis thought Asia was one country – refraining from using the general terms China and Chinese, and using basic manners, will go a long way to doing business successfully in China.
For example, in China many business meetings happen over lunch or dinner, and it’s not enough to be able to use chopsticks - you need to know that you don’t play with your chopsticks at the table, don’t hit the side of your bowl with them, and never, ever, stick your chopsticks upright in your rice.
Obviously making deals in China is far more complicated than that, it’s also about relationships.
You can’t learn what you need to know unless you’re there spending time getting to know the people. You also need to go in with the attitude of working together for mutual benefit, not dividing and conquering or getting the best end of the deal. If that’s not your area of expertise, hire the right people to help you – people who know the market, who know who to talk to, who are able to look at the motivation of some of the moves in the negotiation game, and who are neutral and can give you an informed, honest opinion.
The good news is that things are changing in China, and the Government’s focus on several issues, including IP and anti-corruption, is helping change business culture in China. This should lead to fewer trolls in future, but for now, people need to cover all the bases.
Johnathan Chen heads the James & Wells Asia Division. He was born in China but came to New Zealand from a young age, and has close ties to China and Taiwan through both sides of his family.