How to Prevent China Factory Problems and Trademark Theft That is Happening Like Never Before

Chinese factories are hurting these days. Bad. Their sales are way down, especially to the United States. In China’s manufacturing exodus set to continue in 2020, the South China Morning Post made this starkly clear with statistics:

Tariffs saw China’s trade in goods surplus with the US fall by 7.9 per cent in November, according to data released by the US Census Bureau on Tuesday. This was amid a 20.84 per cent fall in Chinese exports to the US from a year earlier, including items like cellphones. US purchases of Chinese goods are now at their lowest point since March 2013.

Of equal importance is that China factory exports are expected to dip even more in 2020:

For every foreign company that left China in 2019, there were two to three more seriously contemplating doing so and we expect more companies to leave China in 2020 than in 2019.

Chinese factories are well aware of these numbers, and they are terrified by them. Chinese factories see American companies reducing their purchases to buy their products elsewhere. “Compared with June 2018, the month before the trade war began, US imports of goods from Vietnam have soared 51.6 per cent, Thailand 19.7 per cent, Malaysia 11.3 per cent, Indonesia 14.6 per cent, Taiwan 30 per cent and Mexico 12.7 per cent.” This massive downturn in American companies manufacturing in China has greatly impacted Chinese factories and greatly influenced how they see things.

Chinese factories believe their existing American clients will be leaving China in 2020, and they also believe their newest American clients are using them as “test kitchens” to develop products and then move production outside China once the product is developed and selling. Our China lawyers know this because Chinese factories have told us this and because we see what Chinese factories are doing.

What exactly are Chinese factories doing? They are getting aggressive with requirements to get started on manufacturing with them. They are getting less concerned with the quality of goods they make and sell. And they are stealing IP (especially trademarks) far sooner and far more often than even a year ago.

Let me explain….

Chinese factories that used to help American companies develop their products without any written guarantee regarding product purchases by the American company are seldom doing this any more. Chinese factories no longer believe it makes economic sense for them to spend time and money developing a product for an American company that may never produce that product in China or will produce it there for only a short time. What our China manufacturing lawyers are seeing now is Chinese companies helping American companies develop their products and then claiming the developed product belongs to the Chinese company, not to the American company. In other words, the American and the Chinese company work together on developing the product and then once the product is developed, the Chinese company refuses to make it for the American company, choosing instead to sell it under its own brand name. The best way to prevent this  is with a China Product Development Agreement.  See also China Product Development: Manufacturing Rights are Key.

Chinese factories have also become much sloppier in terms of product quality. Why should a Chinese factory bust its butt making high quality product for an American company that will likely move its manufacturing to Vietnam or Mexico or Thailand no matter how well it performs? The best way to prevent quality problems with your China factory is with a Manufacturing Agreement that is clear about quality requirements and clear about the damages the Chinese factory must pay if the contractual quality standards are not met.

Perhaps most chilling is how Chinese factories are stealing IP so often and so quickly. In the good old days, Chinese factories typically would wait until their relationship with their customer had declined before selling their customer’s products and registering their customer’s trademark in China as their own. Now, our China lawyers are constantly seeing Chinese factories going off and registering those trademarks literally days after they first learn of them. We are seeing American companies send an email to a Chinese company inquiring about the possibility of having that Chinese company make widgets for it and that Chinese company a day or two later filing to register the American company’s trademark in China. We are seeing Chinese companies sell foreign company products worldwide before they even sell one to their foreign company customer.

The media (and the Trump administration) love to deride China’s intellectual property protections, but what they invariably fail to mention is that in most instances involving trademarks, the fault lies with the foreign company, not with Chinese IP enforcement. Foreign companies too often think they can wait to see how their products do on the market before going all out on protecting them with trademark registrations, but that attitude is just too dangerous today. If you want to protect your trademarks on your brand names or logos you need to file to register them before you reveal them to anybody. And you especially must file to register them before you reveal them to anyone in China. Sending an email that can be traced to your brand name/logo is the equivalent of revealing your brand name/logo. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. To expect trademark protection in China, you must register your trademarks in China, and the prudent company does this before pretty much anything else.

The fact that you are manufacturing your product in China just for export does not in any way minimize the need for you to protect your trademark. Once someone registers “your” trademark in China, they have the power to stop your goods at the border and prevent them from leaving China. They can stop your goods from leaving because they own the trademark associated with those goods, not you. We are aware of companies having to pay hundreds of thousands of dollars to get their trademark “back” and to get their goods flowing out of China again.

In China Trademark Theft. It’s Baaaaaack in a Big Way I gave the following short history regarding trademark theft in China:

For years we probably averaged a call a week from someone who had lost their trademark to China, to someone who had gone ahead and filed it before the non-Chinese company did so. Then, starting maybe 5 or 6 years ago, the number of these calls declined. I have ascribed this decline to two things. First, American companies started getting wiser about the need to get their brands, their logos and their company names registered as trademarks in China, due in small part to this blog even. Second, and of equal importance, China instituted rules to try to stop Chinese manufacturers and trading companies from registering as trademarks the brand names and logos and company names of the foreign companies for whom they were manufacturing or sourcing products. To simplify a bit, your China agent could not hang on to a China trademark that you were using before you brought them on for your manufacturing or product sourcing. We went from one China trademark “theft” call a week to maybe one a month.

But starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a soul in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China, it will not go off and register it under its name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name? See Your China Factory as your Toughest Competitor.

If your brand name or your logo has been registered as someone else’s trademark in China, things are bad for you but not hopeless. Our China trademark lawyers typically go through the following analysis to determine whether and how they can help.

The first thing our China trademark lawyers usually do is try to figure out some basis for challenging the Chinese company’s trademark filing. Our favorite challenge is non-usage of the trademark for more than three years. This does not usually work if the trademark theft just happened. Our second favorite is when a former factory does the filing because there are laws against that. But to show that it is the former factory, we must show that the company that actually filed is the same company that you used for your production and that is seldom possible because the Chinese factories know about this rule and they usually have someone else file for the trademark so as to avoid it. Sometimes we can claim the filing was in bad faith, but winning on this is tougher than it sounds.

If none of the above are likely to work, the our China trademark lawyers typically next try to figure out a trademark workaround. Many years ago, we had a lawn equipment company that had a “trademark thief” secure a China trademark for the lawn equipment company’s brand name on 17 things related to lawn equipment. But the trademark “thief” failed to file a China trademark for small engines, like those you find on lawn equipment. So our workaround was to get our client the China trademark for small engines and then have it put its brand name in steel on the engine and then add a sticker or two to the lawnmowers once the lawnmowers hit the United States and Europe where our client sold its lawn equipment. This ended up increasing our client’s overall costs, but it was far better than it having to switch out its well-known brand name. [I changed the type of product to make it impossible to be able to identify the company for whom we did this intellectual property workaround.]

If none of the above look like they can succeed, we then try to buy the brand name or logo from the Chinese company that has it. We do these buys by lining up a Chinese person in China to handle these negotiations — not a lawyer and not anyone with any apparent connection to our law firm or our client. We do all this because Chinese companies ask for a lot more money from foreign companies. It sometimes even makes sense to form a Hong Kong company to do the trademark buy.

Sometimes our best advice for a company that has lost its brand name is to sue the attorney that filed for the wrong trademark or gave them bad advice on the need to file at all (both of these things are a lot more common than you might expect). Although this does not work if the company used an online filing company or a fake lawyer, both of which seem to have become more common in the  the last year or so. See Fake China Law Firms Are The Real Deal and Is This a Real China Lawyer?

Lastly, if you want to protect your IP that cannot be trademarked — things like your designs or your customers or really whatever — you should consider filing for a China design patent or a China copyright or, more likely, you should require those who are going to see your IP or trade secrets sign a China-specific NNN Agreement before you show them anything. See also NDAs Do NOT Work for China but NNN Agreements Do.

Protecting your IP from China is complicated but necessary. The key is act early and correctly because doing it late or doing it wrong is what destroys businesses. For a good summary of what to do to protect your IP from China, check out The Four Best Ways to Protect Your IP from China. And finally, please note that pretty much all of the above applies with equal force to the countries other than China to which so many are going and will be going for their manufacturing.