Amy Hsiao has 10 years of large US law firm experience and has served as the China subject matter expert for various organizations around the world. She has pursued cases through all levels within China’s system, had over 100 opposition wins, and was selected by the officials to work on “Landmark Trademark Cases in China,” the first China trademark textbook for the Western World. She has practiced and worked in USA, Asia, and Europe; has over 30 publications and speaking engagement in 2016-2017 alone.
She spoke recently with Global Sources about the legal landscape in China and how certain changes benefit online sellers.
Global Sources (GS): What’s your professional background and how did you first get involved with China issues?
Amy Hsiao (AH): I started out as a corporate finance attorney; I was involved in complicated finance transactions such as mortgage-backed securities. No worries if you don’t have a clue what this entails: it’s the exact type of transactions that brought down Wall Street in 2008 (I bet you know what it is now!)
After the 2008/2009 meltdown, the deal amount shrank by 90%. My law firm at that time was trying to “re-purpose” the over abundant supply of associates. They asked me if I happened to speak Mandarin Chinese. “Oh yeah – I am a native speaker”.
GS: Do you work with a lot of people sourcing from China?
AH: Yes, all my clients source from China. My client list includes business of all sizes such as the start-up shops on Etsy and Amazon, established Western brands interested in sourcing (but not retailing) from China, to mega Fortune 100 companies, which not only source but also are involved in heavy retailing and marketing in China.
GS: What issues do people sourcing or exporting from China need help with the most?
AH: The following are the top 3 most frequently asked questions when clients approach me about China:
- IP rights: How to make sure my company’s intellectual property rights (e.g., brand, know-how, trade secrets) are protected?
- Counterfeit issues: How to deal with 100+ counterfeits of my or my company’s products listed on b2b and b2c sites such as Alibaba, Taobao, T-Mall etc.?
- Contract issues: How to know if my agreements with Chinese suppliers / distributors are enforceable and will the Chinese court even protect me (local pretension)? What are the key issues to consider to make sure this agreement will not come back and bite me?
GS: What differences between the China and US legal systems are the most widely misunderstood and likely to get people into trouble?
AH: I think there are 3 areas that are most widely misunderstood due to the system difference and most likely to get people into trouble:
- Rights outside & inside China
Infringement is common in China (T-Mall, Taobao, Alibaba etc.) Business are often horrified and extremely distressed when confronting with large number of counterfeits and demand actions.
The immediate reaction is to send out a demand letter, relying on rights in the USA or Europe (outside China). This step, however, will get business into BIG trouble.
Rights outside China do not count! (or rarely count). Prior to taking any actions, it is important to see if the other party has rights in China (takes around 30 minutes to get the answer!) I’ve seen it a couple of times where Western companies take knee-jerk actions and only to find out the “infringer” actually is deemed the brand-owner under the Chinese system. The consequence can be disturbing and quite nasty – This infringer can then cause local Chinese policemen to interrupt your manufacturing facilities or even causing outbound shipment to be seized. This is when the legal team starts to get calls from the business people around 3AM in the morning!
- Use & Common Law Rights
Use is recognized in the Western countries – meaning, one starts enjoying rights over his or her trademark as soon as they start using the mark.
This, however, is NOT the case in China. In most circumstances, rights are recognized ONLY WHEN they are registered locally in China.
Practical business impact? People go to China and start signing contracts with manufacturers, distributors and sometimes retailers. However, they do NOT secure trademark protection first. This means not only the recourse is extremely limited (and very expensive) when the brand is taken by the local partner, you may end up being recognized as the infringer to your OWN brand under China’s system. This is what happened to New Balance in December 2016 – I have a published article discussing this; contact me if you are interested.
Business consequence? Either fight the expensive court battle, pay the ransom to get the brand/identity back, or exit the world’s biggest market.
- China’s subclass system
For people sophisticated enough to hire an attorney to secure rights in China, make sure the attorney is familiar with China’s legal system.
There’s one big difference – subclass practice – this is non-existent in the Western world, but practically everywhere in China and Asia.
For example, shoes and socks may be deemed similar in the Western world (i.e., if your mark covers shoes, an infringer should not be allowed to register your brand for related products such as socks). They are, however, considered formally different under the subclass practice.
This means when your attorney / advisor confirms you are protected in China; make sure you are protected IN THE CHINESE WAY under the CHINESE SYSTEM; not protected in the Western way.
Lastly – just a friendly reminder. I have seen more and more companies sending correspondence such as warning letters to infringers in China in English! This approach is guaranteed to fail 95% of the time. Chinese infringers are already notorious in responding to demand letters; let alone a demand letter written in a language they have no clue at all. Just think about what you would do when receiving a legal letter written completely in Mandarin Chinese – it for sure goes straight to the garbage bin.
The Chinese people look different, the language is different – and of course, the system is ENTIRELY different. The biggest mistake is to assume, either consciously or subconsciously, that the Western legal system should just apply and work the same in China.
GS: Is intellectual property a big part of your business in China?
AH: Yes; 99% of my practice is dealing with IP in China.
Although I am a US trained intellectual property attorney, I focus exclusively on IP matters in China and 30+ countries across Asia. I have not only worked with the top law firms in China, but also with the officials within the government to diffuse industry branding crises. As a result of my reputation in this field, for example, I was selected by the Chinese authorities to work on and introduce its landmark trademark cases to the English-speaking world. The resulting book was published by Wolters Kluwer in May 2017 and is now the 1st trademark textbook written in English which helps Western brands to understand China’s trademark laws.
This is a link to Amazon about the book: https://www.amazon.com/Landmark-Trademark-Cases-China-depth/dp/9041168362
I am also the owner of the China trademark blog: www.lastweekinchina.com
GS: How has the legal landscape changed in China in recent years and what are the positives and negatives for people doing business there?
AH: There have been significant changes in China in the recent years, especially in the areas of intellectual property, branding and advertising (since 2014). The key changes that have a positive impact on your audience are twofold:
- The Chinese government is sending strong messages to its local officials to make sure they make ‘protecting IP’ a priority. As everyone knows, one cannot get anything accomplished without a strong government backup in this part of the world. This explains why we have started witnessing less and less local protectionism. This also explains why we have started seeing great victories for the Western brands in cases that were traditionally impossible to win – e.g., China Supreme Court’s granting victories to the Michael Jordan case in 2016.
- Because the Chinese government is in the “mood” to beef up its IP protection, one of the areas in which we will start seeing actions is enforcement. China has been known as a place where a winning victory carries no teeth. For example, in the past, after a Western brand spends big money litigating and winning a case, an infringer can simply refuse to pay, change its name, set up a different shop and essentially continue to do whatever they were doing before the lawsuit; however, things are different now. In fact, China has been openly considering policy changes that would greatly benefit the Western brands, such as, punitive damages and criminal prosecution for IP violations.
Good news aside, below are areas where China remains a challenge when it comes to protecting and enforcing IP rights:
- No effective way to deter bad faith trademark squatters.
The squatter can be the law agent, a factory owner, or your former licensing partner who simply registers and becomes THE brand owner in China.
- The online world has made IP protection in China increasingly difficult. There are more and more ONLINE infringements which are complicated and can only be resolved through an expensive (and time consuming) court proceeding.
We have been pushing for policy changes in this area.
GS: What’s the simplest thing that foreigners should be doing to protect their businesses and products in China?
AH: The answer is simple: Secure registration protection for your IP rights in China.
China does not recognize common law rights. This means no matter how much or how long you’ve been using your IP rights (e.g., 10 years OEM with documents to prove use of the marks with major Chinese suppliers), if there is no registration in China, you have NO rights. This means any third party – such as your once loyal partners in China – may and very likely will register the brand. This means THEY are then the legitimate brand owners; and you, on the other hand, are an infringer.
Here are the following 3 rights that are relevant to people sourcing from China. The 1st number is the cost to register IP rights in China; the 2nd number is the cost to retrieve the rights once they have been taken. In other countries, the cost for the 2nd number may or may not happen. In China, however, the cost for the 2nd number is bound to happen — the question is not IF, but WHEN.
- Trademark – cost comparison: $800 vs. $4000+
It costs around US $$400~800 to file a trademark in China. On the other hand, once the mark is taken by a third party, it costs around $4000 to oppose it, $8000 to invalidate it and at least $30,000 to file a civil action in China.
- Copyright: $1200 vs. $30,000 – cost to protect your logo / design in China’s through copyright is $1200; once it’s taken, the legal action starts around US $20,000 to get it back.
- Design patent: $1200 vs. $20,000 – The cost to register a design patent in China is around $1200; trying to get it back when an infringer starts to copy the unique features about your products or packaging is at least $20,000
GS: One of the biggest issues in sourcing from China right now is having a competitor beat you to market during the research and development phase. Have you encountered this with a client and what can people do to protect their products?
AH: China actually has an easy fix to this problem – secure registrations at least 3 ~ 6 months before a project is released.
This can be a real issue in the Western system because use is often required; in China, however, this is not required. As a result of the system difference, this means the legal actions in the Western world can wait until the R&D step is finished or close to finish – in China, however, the legal action needs to take place prior to or are simultaneously with the business plan.
GS: Can you share any success stories of people who were able to successfully litigate their cases and protect their businesses in China?
AH: Sure – I will share 2 recent cases. Both of them have been selected as one of the Top 10 cases by the Chinese courts.
Case #1 – the Uniqlo Case
Essentially, a trademark squatter got the brand owner’s mark and threatened a lawsuit unless the brand owner paid over US $1M to get its brand back. The brand owner refused to be blackmailed; and the trademark squatter sued.
Although trademark infringement was recognized in the court decisions, the court refused to grant the plaintiff’s wishes either for monetary damages or reasonable legal expenses. This is because the court recognized the plaintiff, rather than the defendant, as a bad faith trademark squatter.
This was the first time that a Chinese court recognized a plaintiff as the bad faith party. This decision also shows that the Chinese courts are now willing to look deeper, past the letter of the law and find intent.
If this case were litigated in the past, say 2000, the legitimate brand owner would be recognized as an infringer to its own brand; it would also be asked by the Chinese courts to pay monetary damages.
Case #2 – the RIMOWA Case
This is the landmark case where the Chinese courts agreed to protect the LOOK of a product.
Infringers in China are getting smarter; rather than copying the exact trademark, they are copying the unique distinctive features of a product and thereby, causing confusion. Take a look at below examples. Even though I do not share their trademarks; most of your audience will still be able to immediately identify the associated brands:
The same thing happened to the RIMOWA brand – a luxury luggage brand. Its distinctive grove design has been famous since the 1950s. A comparision between the infringer’s luggage products and the genuine RIMOWA luggage are shown below. As you can see, they are almost identical.
In the past, this type of case was almost impossible to win in China. This is because China, unlike most of the western world, does not have a specific trade dress law. The only law that one can depend on to win this type of case is the unfair competition law. However, the law sets the threshold so high that it’s almost impossible for most Western brands to meet the requirement in order to utilize the law. Fortunately, in 2016, the court recognized this dilemma and the urgent need to protect distinctive features associated with a product.
I’m glad to share that the Chinese court, in 2016 and 2017, was finally willing to “loosen” up the standards and thereby, started to protect unique product shapes in China. Also, my affiliated law firm in Beijing was actually the team that won this landmark case – so it’s definitely worth mentioning!
GS: Looking forward, what do you see as the next big challenge from a legal standpoint for people sourcing from China? Will IP protection still be a big problem a decade or two from now?
AH: Yes. IP protection will remain a key challenge for people sourcing from China and I expect this trend to continue in the next decade. This is not because China refuses to change – in fact, China has been undergoing major reforms in its IP laws and the Chinese authorities have been receptive to critical comments. (One high-level Chinese official confided to me during dinner that they enforced IP rights so much that even the officials could no longer have access to their favorite US show: House of Cards). The reason is strictly because of one word: volume.
The sheer number of IP applications, disputes, and litigation cases is huge in China. Taking trademark as an example, the number of filings in 2017 is expected to be around 4 million. In fact, China has been processing more trademark filings than any other country in the world for the past 15 consecutive years. The number of trademark filings in China in 2015 was three times the US and EU filings combined.
I know a lot of people are frustrated with China’s system. Particularly frustrating is why it doesn’t recognize common law rights and also, why it’s so rigid and formalistic in its subclass approach. Although I am not here to defend one side over another, the huge volume in China does play a role – and the fact that China’s IP system is relatively young, only around 30 years old, is another factor! This explains why it needs to have an easy and fast way to examine and process IP rights. Currently, the way they are doing it, is not producing good results.
So, simply put, yes, IP will continue to be big issue and headache for people and companies sourcing from China precisely because of the volume. I don’t expect to see the volume drop in the next 10-15 years.