U.S. and European companies that manufacture in China are typically concerned about their Chinese factory or some local competitor stealing their design yet are far too relaxed about protecting their trademarks. This approach ignores the basic facts of the manufacturing world: product designs are relatively difficult to steal but stealing a trademark is easy. So the trademark will almost always be the first thing stolen, while the design will be last. We see this all the time in China. Our China lawyers deal with trademark theft pretty much every day, while a true case of product theft occurs only three to five times a year.
This mistaken conception of risk is then compounded by a lack of understanding of how trademark works in China. U.S. and European companies often wrongly believe China trademarks are relevant only if they are selling their product in China. Since they are just exporting their product, they think a Chinese trademark is not relevant. However, under Chinese law, the exclusive right to use a trademark applies to the manufacture of the trademarked item in China and to the sale of that item to anyone anywhere in the world. So, when the manufacturer applies the trademark during the manufacturing process, that is a use of trademark subject to the trademark law.
When the manufacturer then sells the product to the foreign buyer, that sale is subject to China’s trademark law.
Consider what happens when a U.S. or European manufacturer loses control over its own trademarks. If that happens, the Chinese owner of the mark can completely shut down the Chinese manufacturing operations. First, the Chinese trademark owner can demand the Chinese factory making product for the U.S. or European manufacturer cease using the mark because such use is an infringement. Second, the Chinese owner of the trademark can register the mark with China customs and then have China customs seize the trademarked product at the port, preventing the shipment from leaving China. This is a particularly nasty surprise in those cases where the foreign buyer has already paid for the product.
To see how this can work, consider the following. I recently did a series of lectures in southern China on protecting brand and product in the OEM setting. After the talks, a group of people who manage production for foreign companies took me out to dinner. They said for years they had been urging the foreign companies with whom they work to register their trademark. The foreign companies consistently refused, claiming such registrations were a waste of money. They then told me that after hearing my talk, they had developed a plan:
We all know that our foreign bosses are going to terminate us sooner or later. So we are going to form our own trading company. We will register all the important trademarks in China in the name of that trading company. When we finally get fired, we will register “their” marks with China customs, and completely shut down their Chinese operations. It will serve them right for being so stupid and lazy.
Note that these production managers did not say they were going to steal the product design and market the product in competition with their former employers. That would be difficult and expensive. Instead, as rational actors, they immediately saw the far easier route for them to take. Their only cost would be the trivial expense of registering the marks. But this small expense would give them the power of life and death over their former bosses.
Years ago, we represented a very high level sourcing agent in a dispute with a large U.S. company. The dispute involved allegations of the U.S. company having gone behind the back of the sourcing agent to deal directly with the Chinese factories. The parties settled their dispute, but unbeknownst to the large U.S. company, the sourcing agent in the meantime had gone off and registered all of the U.S. company’s relevant trademarks in China to have “in his back pocket” if the U.S. company ever tried to [bleep] with him again.
The message here is simple. China is a dangerous place and foreign companies need to protect themselves. But in protecting themselves, they should focus on the easy and inexpensive steps first. Take care of those and then move on to taking the more difficult and esoteric steps. If you are manufacturing in China, the cost benefit analysis on trademark registrations is simple. Registration is simple and inexpensive and the result of failing to register can be devastating. So the first step for every company engaging in OEM manufacturing in China should be to register all of its marks and logos in every class that applies. After that is done, you can move on to other important but more difficult measures that must be taken to protect brand and product in China.