China has passed a new trademark law that becomes effective May 1, 2014. The new law includes:

  1. A requirement that trademarks shall be registered and used “by the principle of honesty and credibility;”
  2. Some important changes to the trademark application and appeal processes; and
  3. As discussed here, several notable provisions designed to improve trademark enforcement in China.

A. Mechanism designed to discourage trademark hijacking by business partners

Trademark “hijacking” in China refers to the situation in which a third party registers a company’s established trademark in China, often before the company enters the Chinese marketplace, then attempts to sell the trademark registration to the company when the company begins conducting business in China. Trademark hijacking has been a serious problem in China and, in some cases, trademarks have been hijacked by individuals assisting the legitimate trademark owner in manufacturing or otherwise.

Unlike U.S. trademark law, which generally grants trademark rights based on first use of a trademark, Chinese trademark rights are based on the principle of first-to-register; i.e., whoever first registers a trademark with the Chinese Trademark Office (CTO) generally has the rights to that trademark. Under the first-to-register principle, it has been relatively easy for trademark hijackers to register established trademarks of others in China, then sell their rights to these trademarks to the legitimate owners.

The new Chinese trademark law provides a mechanism to discourage trademark hijacking. Under Section 15, a trademark application shall be denied when the trademark applied for is identical or similar to another party’s previously used — but not yet registered in China — trademark, in connection with the same or similar products, if:

  1. The applicant has some contractual or business relationship with the other party and therefore the applicant knows or should have known of the other party’s prior use of the trademark, and
  2. The other party challenges the applicant’s trademark application.

For a U.S. business, Section 15 provides a reasonable level of protection against trademark hijacking by its local Chinese agents or business partners (e.g., agents, distributors, consultants, etc.).

B. Expanded definition of trademark infringement

Under the new law, Section 57 provides a list of the actions that constitute trademark infringement. Among the listed actions, it will constitute trademark infringement if one purposefully facilitates or assists someone’s trademark infringement activities (emphasis added). Therefore, under the new law, for example, if someone helps transport counterfeit Nike® shoes from one city to another, with the knowledge that the shoes are knockoffs, he or she — in addition to the makers and sellers of the shoes — may be subject to penalties for trademark infringement.

C. Civil damages

Section 63 of the new law provides that the amount of compensation for trademark infringement shall be:

  1. The actual financial loss to the legitimate owner caused by the trademark infringement;
  2. The trademark infringer’s profits from the infringement, if the actual loss to the legitimate owner is difficult to assess; or
  3. The reasonable royalties for use of the trademark, if the legitimate owner’s actual loss and the infringer’s profits are difficult to assess.

If someone maliciously infringes another’s trademark, under severe circumstances, the compensation for trademark infringement can be multiplied up to three times the determined loss, profit or reasonable royalty. In addition, such compensation would include the reasonable costs incurred by the legitimate trademark owner in connection with his or her efforts to stop the infringement. Finally, if it is difficult to assess the legitimate owner’s actual loss, the infringer’s profits and reasonable royalties for use of the trademark, a court may determine the amount of compensation to be up to 3 million Chinese yuan (RMB) based on the circumstances of the infringement.

Though the new law will not eliminate trademark infringement in China, it provides additional ways for trademark owners to prevent others from registering their established marks — and to pursue infringers.