With COVID-19 hitting the fashion industry hard, many smaller designers are fighting for survival. According to a recent New York Times report, almost 40% of the 477 members of the Council of Fashion Designers of America earned less than $1 million last year.
Expansion into new markets is one way for fashion companies to tackle COVID-19 challenges. China offers a wealth of opportunities for U.S. designers, with Global Data predicting that the country will overtake the United States as the largest apparel market by 2023. China is even more attractive right now. Unlike the West, China has largely reopened after being hit first by the pandemic. Most factories are running at full capacity, and retailers in most areas are fully open.
While entering the Chinese market can help generate much-needed profits, it is imperative to understand the potential risks to your intellectual property before you monetize your brand overseas. Failing to safeguard your valuable trademarks when contracting with partners overseas, particularly in China, can lead to costly lawsuits and other legal headaches.
Trademark Rights in China
For U.S. fashion companies that are considering Chinese trademark registration, it is important to understand that China’s intellectual property laws are significantly different from those in the United States. Under the country’s “first to file” system, trademark rights are generally granted to the first entity to file an application. Conversely, U.S. trademark law requires registrants to demonstrate that they have used, or planned to use, the mark in commerce.
The downside of the Chinese first-to-file system is that brand counterfeiters and hijackers are incentivized to pursue trademark rights before U.S. companies. In recent years, several well-known international corporations, including Tesla, Pfizer and Apple, have expanded into China only to find out that so-called trademark “squatters” had already secured trademark registrations for their brands. These companies have been forced to enter protracted legal battles or pay significant sums to buy back their trademarks.
While China has enacted trademark reforms intended to discourage such predatory practices, it is still imperative to act quickly to protect your brand if you plan to enter the Chinese market. Additionally, given that registration in Roman characters does not automatically protect trademarks against the use or registration of a competing mark using Chinese characters, it is often prudent to also pursue a trademark registration using Chinese characters.
So what if you have a licensing deal in place but have not yet registered your trademark? It is technically possible to license your trademark in China without first securing a trademark registration; however, it is not without legal risks.
While a licensing agreement involving an unregistered trademark is enforceable under China’s contract and IP law, there is nothing to prevent the contract partner or another third party from seeking to register the trademark themselves. Even though you may have founded and developed the brand and/or sold your clothing line for years in the United States, China’s first-to-file system essentially creates a race to the trademark office. Of course, it may be possible to ultimately reclaim your trademark in China. But the legal process is both lengthy and expensive.
Another risk is that the third party that registered your trademark can threaten you with legal action, including trademark infringement. You could face having your product removed from Chinese stores and websites and be required to pay a “ransom” to regain control of your brand. Under your licensing agreement, you may also be required to indemnify your contract partner (i.e. the licensee) if they face lawsuits challenging their use of the trademark.
Given that the cost to register your trademark in China is relatively inexpensive, the cost-benefit analysis will almost always favor registration, even if you may have to temporarily delay entering the Chinese market. If you only plan to register your mark in China, or if you need approval quickly, your best course of action is to submit your application directly to the Chinese trademark office. If you plan to enter several international markets and time is not of the essence, the Madrid Protocol also makes it easier to file for trademark registration in multiple countries. By filing one trademark registration application with the U.S. Patent and Trademark Office (USPTO), U.S. applicants can concurrently seek protection in up to 90 countries.
Steps to Protect Your IP in China
Fashion companies must be aware that operating in China requires knowledge of local laws and regulations, many of which are very different from those in the United States. In addition to retaining a local agent, working with an intellectual property attorney who has skills and experience in this area before you start the negotiation process can help avoid legal headaches down the road.
Due diligence is also essential. Just like in the U.S., there are reputable businesses in China, and there are those you should avoid. It is imperative to know the difference before you enter into a licensing deal. Finally, once you negotiate a licensing deal, it is imperative to monitor your contract partner for compliance with both the agreement and Chinese law. U.S. fashion companies can suffer both reputational and financial harm for what their business partners do overseas.
Howard D. Bader serves as general counsel for clients in a wide range of industries on an international scale. With over three decades’ worth of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights and mergers and acquisitions, as well as numerous corporate transactions and business law matters. He can be reached at hbader@sh-law.com and (212) 784-6926 or via sh-law.com.
