Originally published in Reed Smith's Export, Customs and Trade Sentinel Newsletter, Winter 2008
The perils of doing business in China are never more apparent than when it comes to IP rights. Whether your IP rights consist of trademarks, patents, or designs, the number one priority (or at least right up there) should be to get them protected in China. No protection, no rights.
The system is cruel to those who do not register. For example, a wellknown U.S. brand who had been manufacturing its industrial fittings and fixtures in China for export only to U.S. markets suddenly found its products being seized at the Chinese Customs. "What was the problem?" they thought. "We have been manufacturing in China and exporting to the U.S. for years." The problem was that a third party had registered the trademark for the identical word used by the U.S. company. Although the word actually registered was not an identical stylization to the U.S. company's brand, it covered identical goods. A third-party registration of a trademark, even if it is several years after another company has been using the trademark for the purpose of manufacture of their products in China, takes priority over the earlier user and the earlier user, becomes an infringer! For a company that produces its products for export out of China only, and has no separate goodwill or reputation for their products and brand in the Chinese market, there is no relief.
The importance of securing registration as early as possible cannot be underestimated. Even where you have registered your rights, the gall of some Chinese manufacturers cannot be underestimated. Take one U.S. household electrical appliance manufacturer and owner of a number of well-known brands in the United States. This manufacturer designed its new range of household products, secured design registrations at the earliest possible time, luckily, and then entered into contractual relations with a manufacturer in Ningbo, China. A manufacturing agreement was signed and deposits for the tooling paid, with the first purchase order issued and an agreed shipping date established. At the time the shipment was due, the manufacturer announced it had not made the products and would not do so for several weeks, resulting in the U.S. company's loss of its customers' orders and the uncertainty of future orders being satisfied.
Upon failure to resolve the matter, a request was made for delivery of the tooling, for which the U.S. company offered to pay the balance of the cost so both parties could walk away. The Ningbo manufacturer then claimed ownership of the IP rights in the products in question and refused to deliver the tooling. Of course, as the U.S. company owns the design registrations they can stop the manufacturer from exploiting the tooling, but this did not resolve the issue of possession of the tooling, which the manufacturer needed to retrieve. But at least the manufacturer had the design registrations to rely upon in order to get the tooling.
Surely the manufacturer would be able to retrieve the tooling? It became necessary to issue legal proceedings at the local Ningbo Court to secure a Court Order requiring the manufacturer to deliver the tooling. All the papers were in order and ready to be filed. But the Ningbo Court refused to accept the proceedings, claiming that the "non-exclusive jurisdiction of the Hong Kong Courts" provision in the contract meant the proceedings could not be issued in Ningbo. According to PRC laws, the Ningbo Court's refusal is against the law and the proceedings should have be accepted. However, the owner of the Ningbo factory is a well-known and prominent businessman in that district, and the Court Order precluded the U.S. company's ability to recover its tooling.
Situations such as the above are not uncommon, but they are not the norm. If you have registered your IP rights in China and a third party is infringing them, in most cases action can be taken and the infringers can be stopped.
For contracts, choice of law and jurisdiction can be important. For U.S. companies dealing with the PRC, a Hong Kong law and arbitration clause can be a good option (reciprocity between Mainland China and Hong Kong has been agreed in enforcement of arbitration judgments), but in most cases, U.S. companies are best advised to avoid having contracts that defer to U.S. law and jurisdiction. A U.S. judgment against a Chinese party is often hollow, there being no reciprocal enforcement of judgments between the U.S. and China, and a separate set of legal proceedings would be necessary in China to have any prospects of success.
This article is presented for informational purposes only and is not intended to constitute legal advice.
