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Guest blog: China and the first-to-file exception

Many foreign brand owners have been caught out by China's first-to-file trade mark rules. But could a recent decision indicate more flexibility about how the law is applied, at least for some companies? Tom Carver explains

The advice most frequently repeated in relation to trade marks in China is that brand owners should file early. China operates a first-to-file system, which means as the name suggests that the first person to file for a trade mark is the owner, irrespective of prior use. A business model commonly known as trade mark squatting takes advantage of this system, whereby squatters file for trade marks they have seen in use on the internet or at trade fairs in the hope of later selling them to the rightful owner. Famous companies have fallen foul of this, including New Balance and Tesla, as well as innumerable small companies. In the past there have been three options for resolving the situation: (1) wait three years and hope that the squatter does not use the mark, enabling the rightful owner to cancel for non-use; (2) apply to cancel the mark on the ground that it was registered in bad faith (This has been very difficult, requiring a prior sales agency between filer and rightful owner, but should be easier following the latest trade mark law revision); or (3) buy the mark.

So when Trunkbow Asia Pacific (Shandong) applied for a trade mark "weixin" in classes 9, 38 and 42, apparently intending to use it for a communication program, it probably assumed it would soon be the unassailable owner. At the time of filing (November 12 2010) there was nothing called Weixin on the market and no relevant registrations. Fast forward to January 21 2011, and Shenzhen-based technology company Tencent launched its Weixin ("WeChat" in English) messaging app. As anyone who has been to China will know, almost everyone with a smartphone uses Weixin. It is the equivalent of Facebook, WhatsApp and Instagram rolled into one and now has 500 million users.

Back to Trunkbow: all seemed to be proceeding smoothly. On July 26 2011 the China Trade Mark Office (CTMO) gave preliminary approval. Later that year, however, a third party named Zhang Xinhe submitted an objection to the application. That objection was based on Article 10.1(8) of the Trade Mark Law, which reads: "The following signs shall not be used as trade marks ' those detrimental to social morals or customs, or having other negative influences'."

Social morals

It is not immediately obvious why Weixin (not a rude word!) should be detrimental to social morals or customs, or have other negative influences. The Supreme Court has previously indicated that this exception is to be interpreted narrowly and is not to be used to protect private rights. CTMO, however, decided that granting the Weixin mark to Trunkbow would lead to confusion among customers thereby causing a negative social influence. Accordingly, and extraordinarily, the mark was refused. Trunkbow's appeal to the newly formed Beijing IP Court was dismissed, the Court holding that public interest should be taken into account in deciding whether to grant trade marks. Trunkbow's application, if successful, would have caused inconvenience and had a negative impact on the public.

This is a serious departure from the first-to-file rule and brings into question China's commitment to the rule of law. Tencent could, like all brand owners before, have paid Trunkbow for the mark or rebranded. A company with such phenomenal market penetration should have no difficulty in informing its customers that henceforth it would be known by a new name (it would probably be national news, and certainly the main topic of conversation at the office water cooler).

Looking to the future and the ramifications of the decision, will Article 10.1(8) become a more widely usable back door attack on trade marks not susceptible to bad faith and non-use attacks, or will only companies as famous as Tencent benefit? It is hard to think of many foreign brands (bar KFC and McDonalds) with the market penetration of Weixin, and certainly the innumerable small victims of the squatters are not going to be able to take advantage.

I assume Trunkbow will appeal to the High Court and I await the decision with great interest. Will the High Court maintain the Tencent exemption, or will it overturn it and maintain the stable and predictable first-to-file rule, leaving Tencent and Trunkbow to negotiate an appropriate price for the transfer of the mark. Any improvements on $60 million (the price Apple paid for the iPad trade mark in China)?

Tom Carver is a director in the IP department at Wragge Lawrence Graham & Co.

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