Legislation & Policy

Bad Faith Trademark Registration in China – Rejection of Assignments

SIPS Knowledge, Legislation and Policy

Over the last few years, the PRC Trademark Office (“TMO”) under the China National IP Administration (“CNIPA”) has adopted a growing range of measures to address the phenomenon of bad faith trademark registration – the latest being the rejection of applications for assignment of trademarks that were filed by large-scale serial pirates or warehousers. While these rejections are in principle welcomed as a means of deterring future acts of piracy on the high seas of branding, affected trademark owners will now need to factor in the risk of rejections when negotiating for the purchase of marks filed in bad faith.

In China, the assignment of trademarks (both pending and registered) is subject to approval by the TMO, rather than being a mere recordal process, as is the case in most other jurisdictions. Until recently, the approval process has normally been limited to a review of the signature of the assignor (and its official seal, in the case of Chinese companies) to avoid fraudulent transfers and a search of the register to ensure that all similar marks covering similar goods or services are being transferred in tandem. Only on rare occasions has the TMO rejected assignments for other reasons. But by law, the TMO has the right to reject any application for assignment that is deemed to cause “adverse effects” under Article 42 of the PRC Trademark Law.

Recently, and in the wake of the current CNIPA crackdown against pirate trademark filings (see here for details), the TMO has begun issuing examination notices threatening refusal of applications to assign marks suspected of having been registered in bad faith. The TMO has cited “other adverse effects” under Article 42 of the PRC Trademark Law as the basis.

To illustrate, in one recent case, the TMO issued an examination notice to an assignor and assignee stating that:

After investigation, [it has been determined that] the assignor has applied for and registered a large number of trademarks, and it has assigned a large number of trademarks to various assignees.

The assignor is suspected of hoarding trademarks for profit, which has adverse effects. As such, please provide evidence of use or intent to use the trademark being assigned.

If there are no valid reasons for failing to provide evidence or if the evidence provided is invalid, this Office will rule that the aforementioned assignment application is an assignment having other adverse effects, as provided under paragraph 3 of Article 42 of the Trademark Law.

In cases where such examination notices have been issued, the assignor and assignee are required to provide evidence of use or intent to use within 30 days after receiving the TMO’s notice.

Potential Implications for Brand Owners

The fact that the TMO is starting to look more carefully at the filing history of trademarks is clearly a positive development, as it may deter bad faith pirates from filing en masse for other parties’ brands. But brand owners seeking to purchase marks from pirates will need to keep the risk of rejections by the TMO in mind when developing their strategies.

Recommended steps in this regard may include the following:

  • Due diligence against the assignor – If it is clear that the assignor is a trademark pirate that has filed for a large number of trademarks and that the mark being assigned has never been used, the risks of an assignment being rejected will of course be higher.
  • Back-up applications – Given the risk of rejection, it may be advisable for the buyer to file its own applications for the mark, rather than relying entirely on the pirate mark.
  • Consequences of rejection – Any assignment agreement with the pirate should ideally clarify that if the TMO rejects the assignment application, the purchase price will be reduced and the pirate will agree to voluntarily de-register the mark in lieu of assignment. Alternatively, payment could be made in stages, with the final instalment payable only after the TMO has approved the transfer.
  • Other cooperation from pirate – Consideration should also be given to requiring the pirate to provide contractual assurances that it will cooperate with any office actions initiated by the TMO, including providing evidence of use (if any) and allowing the assignee’s trademark agent to respond to the TMO.
Uncharted Waters

It remains unclear whether the TMO will approve an assignment where the assignee is a victim of piracy (or the assignees is an investigation firm representing the victim) and the assignee files evidence confirming that it has a bona fide interest in the mark and that it wishes to purchase the mark notwithstanding the circumstances.

Assuming the TMO rejects such an assignment, and the applicants file an appeal with the Trademark Review and Adjudication Department (“TRAD”) of CNIPA, it is likewise unclear how the TRAD would decide the appeal.

In most cases, the victim brand owner / assignee will likely prefer to advocate for approval of the assignment to secure ownership of the subject mark with minimum delay. But as an alternative, the victim / assignee might instead consider filing an invalidation (assuming the mark is registered). If CNIPA has already taken a clear view on the nature of the pirate’s activities, the likelihood of successfully invalidating the disputed mark should be good. In such cases, the victim/assignee may wish to communicate to the TMO and TRAD its view that the assignment should indeed be refused, thus perhaps helping support efforts to recover any payments already made to the pirate.

Purchases through Investigators

In many (if not most) cases, victim brands engage local investigation firms to handle assignment negotiations with pirates. While the TMO and TRAD may be sympathetic to disclosures by the victim brand as they assess cases, it remains to be seen whether they will comply with the victim’s preference for approval of an assignment or whether instead they will reject such assignments and instead encourage victims to file invalidations. Only time will tell.

Other Risks

Even if the TMO approves the assignment of a pirate mark, the mark may still be vulnerable to attack.

There are numerous reported cases where trademarks have been invalidated following assignment to third parties. In these cases, the authorities have determined that the disputed marks were originally registered in violation of Article 44(1) of the PRC Trademark Law, which permits invalidation of trademarks that were registered “through deceptive or other improper means”.

The fact that an assignment cannot “cure” earlier defects in the registration of a trademark is acknowledged in the 2019 Beijing Higher People’s Court Trial Guidelines for Administrative Cases Involving the Granting and Verification of Trademark Rights (“Trial Guidelines”). Article 7.4 of the Trial Guidelines provides that:

Where the registration application for a disputed trademark violates relevant provisions of the Trademark Law, a claim by the applicant or registrant of the disputed trademark that the trademark should be approved or that its registration should remain valid solely because the applicant or registrant was not at fault when the trademark was assigned, then this claim shall not be supported.

Article 9 of CNIPA’s 2019 Several Regulations on Standardizing the Application and Registration of Trademarks makes a similar point:

The assignment status of a trademark will not affect a determination by the trademark registration department regarding circumstances violating Article 3 of these Regulations [ i.e., those indicative of bad faith].

As Article 44(1) of the PRC Trademark Law is an absolute ground for the invalidation of registered trademarks, it is not subject to the five-year statute of limitations that applies to some other bases for invalidation. This means that the danger of possible attacks will not disappear even if the assigned mark has been registered more than five years, and regardless of how many times it has been assigned.

In light of this risk the purchaser of a mark initially filed in bad faith should consider filing a new application for the mark in its own name. If the new application is approved for registration, it will not have the same priority date as the original registration, but it should not be vulnerable to invalidation on grounds that it was originally registered in bad faith.