John Farmer's Column: 2010 Leading-Edge Law Group, PLC Attorneys Richmond Virginia

China has earned a reputation for flouting the intellectual property rights of non-Chinese companies. Surely you’ve heard of Chinese knock-offs of famous Western brands of consumer goods and software.

But here’s a twist: Some bad actors in China use Chinese intellectual property rights – trademarks specifically – to try to stick up Western companies for payoffs.

The problem arises when a non-Chinese company – let’s say a U.S. company – goes to China to have something manufactured for export and sale outside of China. Such outsourcing of the making of a company’s products is called “contract manufacturing.”

Many U.S. businesses, including some headquartered in the Richmond area, use Chinese contract manufacturers to have their products made at low cost. Some companies use “sourcing agents” to find appropriate Chinese manufacturers and to have quality control performed on the manufacturing.

Usually the Chinese contract manufacturer affixes a trademark to the manufactured goods in the manner specified by the U.S. customer. For example, if my company hired a Chinese contract manufacturer to make my company’s FLASHWAKE-brand swim fins, I’d want that trademark embossed on the fins exactly as I specify.

If I’m not careful with my trademark, legal troubles could arise in China. In one scenario, a bad actor in China could discern that I plan on having my product contract manufactured in China. That bad actor could obtain a Chinese trademark registration for FLASHWAKE and then use that trademark to block me from having my product contract manufactured in China. Or that bad actor might use its Chinese trademark registration to prevent me from exporting the branded swim fins to the U.S. In either case, that bad actor then could demand that I pay him to get out of the way.

In another scenario, the Chinese contract manufacturer that I hired might obtain a trademark registration in its own name for the FLASHWAKE trademark. No problem might arise as long as I continue to use that contract manufacturer’s services. But if I decide to switch to another Chinese contract manufacturer, the first contract manufacturer might assert its Chinese trademark registration to block me from switching. That first contract manufacturer might even use this leverage to try to raise its prices.

If these things happen, there are legal remedies available in the Chinese legal system, in theory at least. You might be able to get the illicit, blocking Chinese trademark registration cancelled. If you detect that trademark registration effort before it’s complete, you may be able to oppose it. Yet, in addition to being potentially expensive, these processes can be slow. If you’re in a hurry to get your product to market, you don’t have the time to wait on the Chinese legal system.

The key to avoiding such problems is to obtain your own Chinese trademark registration for the trademark that will be embossed on your goods. You should register your trademark both in English and in Chinese translations. This will require hiring a Chinese trademark agent. And, before you seek a Chinese trademark registration, you should have your Chinese trademark agent check to make certain your chosen trademark will not be problematic based upon trademarks that already are registered or applied-for in China.

You should do this as early as possible. Bad actors in China are on the lookout for stick-up opportunities. They may pounce as soon as they discern that a company may be headed for contract manufacturing in China.

You may wonder how someone in China who has no connection to a trademark can obtain a trademark registration for it. The reason lies in the difference between U.S. trademark law and the trademark law of most of the rest of the world. The U.S. has a first-to-use system, while most other countries have a first-to-register system.

In the U.S., trademark rights are created by use. The first party to use a trademark for certain goods gets the trademark. Trademark registration just strengthens your rights. To get a trademark registration in the U.S., generally you have to prove you are using your trademark on the claimed goods.

Outside of the U.S., such as in China, generally you can obtain a trademark registration just by applying. No proof of usage of the trademark is necessary. Thus, it’s wise to apply for trademark registration in non-U.S. countries ASAP.

You can use a U.S. trademark registration application to buy six months before having to apply in foreign countries. There also are ways to submit an international trademark registration application to multiple foreign countries with one central filing.

That’s sophisticated stuff. The key takeaway is that, if you don’t take action to secure trademark registration before going to China, your cost-savings plans could backfire.

If I had a nickel for every time I’ve said this, I’d be retired already: You don’t create a trademark by registering it. Registration just strengthens the common-law rights you obtain by using a trademark on the goods or services you sell.

Yet, you can file a federal trademark registration application that reserves your right to a trademark before you begin using it. This is called an “intent-to-use” application, or “ITU” in trademark-speak.

An ITU is a wonderful business tool because it allows you to get dibs on a trademark – a product or service name – before you launch it as your new brand. In fact, going through the ITU application process may detect some (but not all) of the objections others might raise to your new trademark.

You can apply for an ITU on the website of the U.S. Patent and Trademark Office – www.USPTO.gov. Yet, as with many legal things, in theory you can do this without a lawyer, but there are pitfalls.

One particular ITU pitfall has claimed many victims recently. At the time you apply, you must have a genuine intent to use your trademark on every good and service you claim in your application. (You can’t register a trademark for everything under the sun; you have to declare the goods and services you will brand with your trademark.)

Thus, you can’t use an ITU to reserve a trademark without having a plan to use it on goods or services that either you will sell or that will be sold by folks working with you, such as licensed manufacturers.

For example, you can’t use an ITU to reserve the trademark PULSEPUSH for swim fins for the sole purpose of selling your naked trademark rights to a swim fins manufacturer.

Often, applicants who have their ITU’s shot down over a violation of this genuine-intent rule are trying to run a trademark stick-up, so they get what they deserve. They’re trying to lock up desirable product names in hopes of selling those names.

But sometimes legitimate entrepreneurs sow fatal flaws into their ITU’s because they don’t document their plans to use the applied-for trademark on every good and service claimed in the ITU application. Anyone filing an ITU should create this documentation contemporaneously with the filing of the application.

The best way to document your branding intentions is to write a business plan that shows how you intend to utilize the trademark. You aren’t bound by that plan. You only need to be able to show that you had a plan.

If you can’t prepare a full business plan, at least write a memo (perhaps even an email) that outlines your plans for using the trademark. You could send the memo to someone who can verify the date of receipt, such as a business associate or your lawyer.

Your plan needs to show how you intend to use your trademark on every good and service covered by your ITU. Thus, don’t overreach in your ITU by claiming goods or services that aren’t in your marketing plan.

The U.S. Patent and Trademark Office has rules for what qualifies as use of a trademark for goods and for services. You eventually will have to prove usage of your trademark to get a trademark registration.

The rules are harder to satisfy for goods. For example, using a trademark only in advertising for goods and not on the goods themselves generally won’t suffice. The details of these trademark-usage rules are a complex topic for another day.

Overall, there’s no reason for falling into this ITU pitfall once you know about it. It’s easy to quickly put something in writing that will prove your good faith intent regarding future trademark usage. Doing so could save your future trademark registration from being cancelled someday after you have made a significant investment in it.

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