Who Owns Your Trademark in China? The Fast Food Edition

Ezell’s Fried Chicken is a well-known Seattle fried chicken restaurant, made more so by Oprah Winfrey once naming it her favorite fried chicken. Seattle Trademark Lawyer Blog is a well-known and great IP Blog, made more so by the fact that its author, Michael Atkins, is a friend of mine. This is all relevant because Mike did a blog post on a lawsuit involving Ezell’s, entitled, Ezell’s Case Illustrates Need to Decide Who Owns Mark Before Dispute Arises.

The post describes “a struggle over use of the restaurant name Ezell’s Fried Chicken between its founder, Ezell Stephens — now separated from the company — and the company’s board. Both parties now sell fried chicken in the Seattle area under the Ezell name.” The post talks about how company founders often fail “to put licenses between themselves and their company in writing. They just assume that the company can use the technology [or other intellectual property] they create. But what happens when they are no longer associated with the company? Can the company continue to use the technology? Can the founder?”

Mike then goes on to call out the need for clarity of ownership from the outset:

Decide from the outset who owns the trademark. The founder or the company? Then decide what happens if the company breaks up. Who will own it then?

Just last week I traded emails with a small business owner faced with this very problem. His partnership operated under a single brand. The partnership split up, and the partners are on their own. They now compete against each other offering the same services on the same turf. And both partners continue to operate under the partnership’s brand. Confusing to consumers? You bet.

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Don’t roll the dice with the court. That’s expensive and disruptive. Control your own fate and get these issues hammered out between partners, shareholders, and joint venturers when times are good. It might cost a bit in legal fees up front, but it’ll save you lots more down the road.

Just last week, The New York Times did its own story on a trademark dispute between owners of a fast food chain, entitled, Z-Burger Case Shows Value of Trademark Protection. These same issues are at least equally true regarding intellectual property internationally and my law firm’s international IP lawyers see the same problems Mike and the New York Times see in the United States.

This issue arises in China but in an entirely different form. In the U.S., a trademark is created by use, not by registration. In China, the situation is the opposite. In China, NO ONE owns a trademark until the trademark has been registered. You can use it. Someone else can use it. But, no one owns it until it is registered, and the first one to register it is the owner.

Thus, in China, the Ezell’s issue would have been resolved by asking the following two questions:

1. Has the mark been registered? If the mark has not be registered, no one owns the mark.

2. If the mark has been registered, who registered? Whoever registered first owns the mark.

The analysis is that simple.

Where U.S. companies run into trouble is when they fail to register. When they fail to register, this provides the opportunity for another company to register and then gain the right to the mark. Our China lawyers have seen this sort of thing happen in all sorts of situations, with the following most common:

  • A foreign company is using a distributor of its product in China. The foreign company does not register its trademarks. This failure to register is a direct threat agains the legitimate business interests of the distributor. So the distributor registers, not to steal the mark but rather to protect its own legitimate business interests.
  • A foreign company is using a Chinese factory as its OEM manufacturer. The parties begin to have problems and the Chinese factory fears that it will be replaced by a different Chinese factory. So the Chinese factory registers the marks and then registers those marks with China customs. Then, when the Chinese factory is terminated, it tells the foreign company that just terminated it: You can terminate us, but you should realize that you cannot legally make use of your trademark in China or export any product from China using that mark. This causes many foreign manufacturers to stick with a Chinese factory that they would otherwise terminate. Our China Lawyers deal with this one all the time.
  • The product of the foreign company becomes well known and so to gain a business advantage, competitors of the Chinese factory that is making the product register the marks and then register those marks with customs. These registrations are then used as leverage either to shut down the production or to force the foreign manufacturer to shift production to the factory that registered.

Note that I have not even discussed the classic trademark squatter. This is because trademark spotters are in some respects easy to deal with: they want a certain amount of money and then they will go away. The examples I discussed above are much more difficult to deal with because the Chinese side has legitimate business reasons for doing their registration. In these circumstances it is usually difficult or even impossible to just pay them off, which can result in devastating consequences for the foreign company.

So the message is clear. Make sure YOU are the one who owns your trademarks in China. This means registering your brand names and your product names and your logos as trademarks in China in the right categories covering the right items. Register in the Chinese language if you plan to sell in China. If you wait, or if you do it wrong, the consequences are not just confusion. The consequences can be that you get shut down, a far worse result than what happened in the Ezell’s matter.