Outsourcing manufacturing to China can be a good strategy for reducing overhead. This is particularly true for low profit margin products. Most of us are aware of the country’s reputation for flooding the market with knock off products. We typically associate knock offs with large, well known, international brands. A Chinese individual registered the name of teen idol Justin Bieber. Another took the name and logo of the popular computer game Angry Birds. The Facebook trademark has been registered for a variety of products.
Less established companies tend to assume that because they are relatively small, or that because they only sell products in the United States, there is little risk involved in manufacturing in China. However, this outsourcing can spark a secondary market of knock offs that, once created, can be difficult to shut down. Reactive legal strategies, such as filing a lawsuit, can be very expensive. Fortunately, there are several inexpensive, proactive steps that companies can take to protect themselves.
I recently met a business owner that believed that she was too small to have to worry about knock offs. She is the owner of a fashion accessories company. Her products retail in department stores, but under the stores’ labels. She has an e-commerce site that she operates under her own brand, but this is not a significant source of revenue for her. She manufactures in China through a company brought to her by a sourcing agent. This scenario is not unusual in the fashion industry. Unfortunately, neither are her legal issues in China. A Chinese company has tried to register the company’s trademark in China. The question becomes what the Chinese company intends to do with that trademark registration.
One important step a company can take to protect itself in China is to register its US brand in China. Because trademark infringement can result in serious civil and criminal penalties in China, a Chinese trademark registration can provide a US brand owner with a significant tool for preventing the manufacture of infringing products. However, trademark rights in China are generally granted to whomever files the first trademark application. If a Chinese company beats a US company to the trademark office, the Chinese company can prevent the US company from registering its own trademark in China. The Chinese company can also prevent the US company from selling its products in China and can even try to use the registration to interfere with the US company’s rights to manufacture products in China that will be sold in the US. Earlier in 2014, a Chinese businessman reportedly sued U.S. electric car manufacturer Tesla for using its own name, and demanded that the company stop all car sales in China. Apple paid millions of dollars to settle a lawsuit involving its right to use “iPad.”
The concept of trademark “squatting” goes hand in hand with this issue. Trademark squatting refers to the situation in which a third party registers a company’s trademark in China, or elsewhere, and attempts to sell the trademark registration to the company. Trademark squatting has been a serious problem in China. In some cases, the squatting is carried out by individuals hired to assist the US trademark owner with manufacturing.
There are several proactive, inexpensive steps that US companies can take to reduce the risks associated with manufacturing in China:
- Register your intellectual property (trademarks, copyrights, patents) in China. Fortunately, legal costs in China are typically lower than they are in the US. Your US legal counsel likely has relationships with law firms in China and can work with the local law firm directly on your behalf.
- Record your registered US trademarks and copyrights with US Customs & Border Protection. The US government will help you prevent infringing products from entering the US.
- Enter into written agreements with your Chinese manufacturers that identify your ownership rights in your intellectual property. Again, this can be done through Chinese legal counsel at a reasonable cost.
Lastly, China is not the only country with a reputation for knock offs and trademark squatting. South America, for example, is another region where trademark squatting has become a common practice. If you are manufacturing in a country specifically because it’s known for low cost manufacturing, take a minute to think about the potential risks and make an informed decision about how to proceed.