Our China dispute resolution lawyers have been handling way more than the usual number of disputes between Chinese factories and their foreign product buyers. In many of these cases, the foreign companies have come to our law firm after their Chinese factory claims they owe money for bad product. In none of these cases did our client have a good Manufacturing Agreement in place and so the Chinese companies almost invariably have at least some basis for their claims.
1. Your China IP is at risk of being seized
Be that as it may, the Chinese companies (pretty much without exception) threatened to sue our clients and the smarter ones have also threatened to freeze our client’s China trademarks, China copyrights and/or China patents and then take that IP once they prevail. In many instances our client’s only assets in China were its registered intellectual property so the threat to seize that IP was very real.
In a well-known 2011 Chinese court case, the Chinese court allowed a Chinese plaintiff to “freeze” a Chinese trademark belonging to a foreign company, Castel. In French CASTEL (卡斯代尔) Company Frozen out of China? The Re:Marks on Copyright and Trademark Blog wrote of this case and noted the risks that stem from it:
[T]he decision is of particular note for foreign entities who do not have significant assets in China. Typically, such entities may have considered themselves insulated from the risk of litigation in China due to a lack of assets in China. However, even foreign entities without significant assets in China very often have trademarks in China. Those trademarks are now in the firing line if the foreign entity ever gets sued, whether for trademark infringement or for other causes of action, particularly where the foreign entity has limited assets in China. Of course, this equally applies to foreign plaintiffs who seek to recover damages against Chinese defendants.
Our law firm has handled dozens of cases in which China’s export insurance company, Sinosure aggressively (always) threatens our clients to get them to pay off a Chinese factory for moneys allegedly owed. In those cases, one of the first things our dispute resolution lawyers do is try to figure out the best way to protect our client’s assets in China from seizure, including, in particular, its IP. This is a lot more complicated than it may seem and the below is one of my favorite examples of this:
Company X comes to our law firm with a Sinosure problem and we ask whether they have registered their brand names as China trademarks. They tell us that they have not and so we immediately tell them that they must do so because if they do not, there is a good chance the Chinese factory with which it is having the dispute will quickly do so and then use that trademark registration as leverage against them.*
Company X then chooses not to retain our firm, but to go it alone in its negotiations with its Chinese factory and with Sinosure. We just assume this will be the last we hear of them, but about two years later (and without remembering that they had reached out to us when they had their initial problem with Sinosure) this same company reaches out to us again with a major China trademark problem. Turns out this company took our advice regarding the need to protect its brand name with a Chinese trademark, but because they never retained us, never got the advantage of our discussing the benefit — in their case, the need — to secure ownership of those Chinese trademarks in the name of a company other than the one in the midst of a knock-d0wn drag out dispute with a Chinese factory and with Sinosure.
Anyway, to make a long story short (or at least relatively short), Company X had registered its China trademarks in the Company X name and the Chinese factory with which it had a dispute sued Company X in China and prevailed and then seized its Chinese trademarks as part of its victory spoils. Had Company X registered its China trademarks in another company’s name, this almost certainly would not have happened. Our advice to Company X for dealing with having lost their Chinese trademarks was to try to buy them back or start manufacturing their products outside China where they would not be sued for infringing on the Chinese trademarks now owned by their former factory.
2. How to prevent your Chinese IP from being taken from you.
Probably the best way is to put your China IP in the name of a company that does not do business in or with China. You should think about creating a new company (it can be based in the United States or the EU anywhere else) to own “your” IP in China. In turn, this new special purpose company can then license its China IP to your company that does business in or with China. That way, one of your companies will still own the IP in China, but if your company that does business in or with China encounters legal problems with a Chinese company, the Chinese company will not be able to just seize that company’s China-based IP so long as you keep the licensing agreement a secret to China, which is relatively easy to do.
If your IP is already in the name of a company that does business in or with China, you should consider assigning that IP to another company and then licensing it back or not. Doing this is not going to be without its complications and costs, but it beats losing your China IP.
* Chinese law actually provides that if a Chinese factory registers a trademark used by one of its product buyers it cannot hang on to that trademark. China instituted this law because it was embarrassed by how often Chinese companies did this to gain leverage against their product buyers, mostly to prevent them from choosing to have their products made by another company. The problem though is that every Chinese company knows about this law and so they no longer go off and register these trademarks in their own name; they instead have someone else (maybe an employee or a relative) re03gister the trademark so this law does not apply. See China Trademark Theft. It’s Baaaaaack in a Big Way