China: Brand-Related Intellectual Property Disputes in Outbound Investment

Last Updated: 16 June 2012
Article by Chen Changhui and Jiang Zhipei

Chinese enterprises are progressively pursuing outbound investment strategy by expanding their businesses abroad. How to build the global branding of Chinese manufacturing is a key concern in China's outbound investment strategies. If all Chinese-related exports, either "Made in China" or "Created in China", continue to use the registered trademark of others without paying great attention to cultivating their own brands, Chinese exports are extremely likely to be kicked out by trademark owners in the international market.

Most Chinese enterprises don't have immediate plan for outbound investment, or have sufficient financial strength to register enterprises, trademarks or domain names overseas in their early stage of development, and then find out their enterprise names, trademarks or domain names are already in existence or have been registered by others out of malicious cybersquatting. Typical cases include Hisense Group vs. Bosch-Siemens Home Appliances Group ("Bosch-Siemens") over the trademark of "Hisense" and disputes arising when a famous Chinese enterprise changed its enterprise name. The first dispute reached a settlement under the influence of many interactive factors. Hisense Group has been in a leading position in the Chinese home appliance industry and the Chinese market is one of the main components of the Bosch-Siemens global strategy. With the public, the academic community and the government working together, the Hisense Group finally reconciled the trademark dispute with Bosch-Siemens and took back the trademark right to use "Hisense". However, in the second dispute, the famous Chinese enterprise had to change its name due to the massive abuse of the original one. What's worse, the selected new name led to many difficulties in its promotion, which had proved costly, but most of the efforts turned out to be fruitless. It can be concluded from the above-mentioned two cases that the settlement of disputes related to enterprise names, trademarks or domain names often requires comprehensive consideration and excellent negotiation skills.

As experience shows, the following measures can effectively avoid dispute over enterprise names, trademarks or domain names, or at least minimize losses.

I. High Aspirations and Planning Ahead

Chinese enterprise should have an international vision in the early stage of development, integrate domestic and international markets in their marketing strategy, and set out criteria for inheritance, counterfeiting, and innovation.

In addition to enterprise names beginning with "China", most successful international businesses have resounding names such as "Hisense", "TCL", "Haier", "SANY", "ZTE", "BYD". Apparently, these enterprises design their names based on sufficient research regarding Chinese and English culture. On the contrary, the famous Chinese enterprise described above did not conduct enough research concerning the novelty of the English name and adopted a common word in English culture. Then the enterprise had to give up on its acquisition of the trademarks and domain names as the original English name was extensively used all over the world.

Therefore, it is extremely necessary for an enterprise to conduct careful cultural retrievals, trademark registration retrievals (market retrievals are necessary in countries that implement the "First to Use" Principle) before customizing the enterprise name or trademarks. The retrieval scope should at least cover domain names, trademarks and enterprise names. Such retrievals shall not only analyze the current brand-building situation in the industry to inspire the brand design of the new enterprise, but also estimate the feasibility of registering the enterprise name or trademarks in the target market. The registration applications will be refused by the target market authority if the new brand is easily confused with an existing brand in the target market. Since there are delicate boundaries between inheritance, counterfeit and innovation, mature enterprises generally entrust lawyers to carry out the relevant research.

II. Marketing and Brand Building

Brands are the vehicle as well as the object of marketing, thus enterprise names, trademarks and domain names should be established in light of marketing. Enterprise names, trademarks and domain names that are novel are likely to be promoted by advertisements and accepted by consumers overseas. As experience proves, successful marketing requires an easy-to-remember, catchy and unique brand name. The logo of Apple Inc., with a bitten apple representing an affinity and attraction design for catering to enterprise culture and target customers, contributes to the huge success of Apple products and even forms an "Apple cultural phenomenon." Likewise, iPod and iPhone are more attractive than many rival brands when appealing to "edgier" personality. Many multinational enterprises have brilliant ideas in translating their logos into other language, such as "海信"-"Hisense", "Garrefour"-"家乐福", "Volkswagen"-"大众汽车", "Procter & Gamble"-"宝洁". On contrary, a domestic enterprise that changed its English name to an awkward-sounding word had introduced difficulties in its marketing.

III. Pay Attention to Trademark Registration before Entering a Foreign Market

Once enterprise names, trademarks and domain names are confirmed, enterprises should take legal means to register in other jurisdictions according to the development strategies. If Chinese enterprises ignore trademark registration in other jurisdictions in the early stages, they may encounter serious consequences caused by trademark cybersquatting in outbound investment. For example, the Hisense Group did not foresee that "Hisense" had been registered in Europe, which directly led to trademark disputes with Bosch-Siemens later on; as a result the Hisense Group was forced to delay entry to the European market. There are two main ways for entry to a foreign jurisdiction, the "First to Use" and First Registration systems. The "First to Use" Principle has prevailed in countries with a common law system, it means the enterprise that holds evidence of using the controversial trademark first is deemed as the trademark owner. By contrast, a first registration rule often prevails in civil law countries, where an enterprise should strive to acquire a speedy registration. As well, enterprises shall pay attention to any confusing trademarks in the application process or after the trademark has been granted. If disputes arise, the enterprise should raise objections or withdraw the applications in time.

IV. Discover and Handle the Disputes in a Timely and Reasonable Manner

When entering a foreign market, if the enterprise finds the enterprise names, trademarks and domain names being used or to be used are existing marks, the enterprise has to design corresponding strategies on a case-by-case basis.

The domestic and international experiences indicate two ways to solve the first registration issue.

A. Repurchase

Repurchase applies to the following circumstances: The brand operation will be seriously affected by abuse of the enterprise names, trademarks and domain names or it is too costly to change the logo. Repurchase has to be flexible and abide by the local law. For example, in certain countries, enterprises could control or sign an agreement to delegate a third person to repurchase the enterprise name, trademark and domain name secretly; while in other countries, the repurchase process has to be operated by the acquiring enterprise itself. Timing is important in repurchasing as well, the acquiring enterprise had better repurchase before the value of the enterprise name, trademarks or domain names becomes established.

If the owner of the enterprise names, trademarks or domain names occupies a small market share and the acquiring enterprise is capable of developing a foreign market, the acquiring enterprise may consider cooperating with the local enterprise (by participation or agency), or conducting acquisition of the whole business. The acquiring enterprise can access local resources and promote its brands easily this way.

B. Confrontation

If prior applications should not be granted with corresponding rights, the acquiring enterprise may raise an objection or apply for the revocation of trademark registration. Sometimes the acquiring enterprise might be sued for trademark infringement.

In trademark infringement litigation, the acquiring enterprise tends to fight and negotiate at the same time. According to a business goal, the acquiring enterprise chooses to litigate against or negotiate with the counter parties, such as a quick or drawn-out litigation, a counterclaim or a separate lawsuit. In the end, business considerations are the decisive factor when determining to compromise or not.

It is understandable to compromise in a case where quick negotiation as a whole is beneficial. For example, if a product has earned a good reputation and the manufacturer doesn't want any litigation to tarnish the product image, a quick litigation or negotiation is feasible for the enterprise. The enterprise can use some tactics in the process: The enterprise can exert pressure to the counter party, offer benefits to encourage negotiation or initiate private negotiations. All the tricks are conventional strategies under the above-mentioned circumstances.

The other choice is litigation. Should the acquiring enterprise have a great chance to win the lawsuit and there is no interim injunction risk, a vigorous lawsuit could actually raise brand awareness and improve product reputation. Besides, a reasonable lawsuit rhythm could attract more marketing concerns: if the counter party bids too high, or the profit amount far exceeds litigation cost and the product cycle is shorter than the litigation period, a drawn-out litigation might be more favorable. Another situation is for the enterprise that has a small market scale and wants to be remembered, a drawn-out litigation can be adopted before negotiation.

In the negotiation process, the following counter measures could serve as bargaining chips off the table, such as filing a counterclaim; exposing defects and unfair competition conducts of the counter party by media; affecting the counter party's reputation in the domestic market; affecting the counter party's long-term interest in domestic market with the help of an industry association; threatening to cancel or delay cooperation projects in the domestic market; seeking help from legal policy. The above-mentioned counter measures are extremely useful in the case that the acquiring enterprise faces transnational giants, but quite another case for a small target enterprise with different expectations. Among the measures, negotiation skill plays a dominant role. When dealing with a small enterprise, it is useful for the acquiring enterprise to differentiate the rivals, bargain with the counter party and act decisively at appropriate times. It is also an international common practice to grant the counter party a dealership within a certain range or other considerations.

V. Management Team

A powerful management team will ensure the sound development and implement of an enterprise's intellectual property ("IP") strategy, resolving IP disputes well. As an important IP right, trademark's management supported by the management team is connected with every move in an enterprise operation, e. g., printing business cards, designing advertisements, managing public relations, and developing trademark protection strategy. Losses of IP rights and infringements over IP rights triggered by poor IP management often take place by accident in case the elements of a trademark may have offensive religious meanings to certain segment of the public or a trademark becomes a common name through improper use. On the contrary, a powerful management team plays an important role in deciding brand strategies, establishing anti-counterfeiting trademarks, preserving trademark reputation, supervising rivals, registering trademarks and estimating trademark repurchase.

VI. Cost Effectiveness with Regards to Law Firm

Expensive international litigation cost prevents some domestic enterprises from going further in outbound investment disputes, thus dispute resolution cost is a necessary factor for domestic enterprise to consider. Hiring an internationalized PRC law firm is a highly cost effective way to solve the cost issue. An internationalized PRC law firm has both domestic and international experiences and is fluent in Chinese and English, and can communicate well with domestic clients. Some internationalized PRC law firms have established many branch offices overseas. In addition, a few internationalized PRC law firms have formed a close alliance with the famous international law firms and can view the disputes in an international perspective. In practice, more and more domestic enterprises are inclined to entrust an internationalized PRC law firm to handle all their legal issues, and correspondingly, the firm also makes great progress in the process both on quality and cost control.

When promoting a domestic brand to a foreign market, the domestic enterprise must realize the importance to abide by the local law and international business rules. No matter how superb the enterprise's dispute resolution skills are, a brand cannot genuinely be accepted by a foreign market if the enterprise disrespects the local laws or regulations, or ignores the local employees' rights. In short, brand is an enterprise's face and an honest and amiable image will help the enterprise in many ways in the outbound investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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