Protecting Your Trademark: The First Step When Manufacturing in China

Manufacturing in China offers immense opportunities for businesses worldwide due to its cost-effective production capabilities, skilled workforce, and extensive supply chain infrastructure. However, these benefits come with a unique set of legal and intellectual property (IP) challenges. Among these, protecting your trademark should be your first step. Why? Because China’s trademark system operates on a first-to-file basis, and this seemingly minor administrative task can significantly impact your brand's success and security.

The First-to-File System: Why Early Registration is Crucial

China’s trademark law follows a first-to-file system. Unlike the use-based trademark systems in countries like the United States, where rights are established through the actual use of a trademark in commerce, China grants trademark rights solely based on who registers the trademark first. This means that even if your brand has been used and recognized internationally, it holds no legal weight in China unless you’ve registered it there. The first-to-file approach prioritizes administrative clarity but can create challenges for international businesses unfamiliar with this system, making early registration vital to avoid legal complications. This means that the first entity to register a trademark gains the legal rights to it, regardless of whether it has been used by another party elsewhere in the world. This creates a significant risk for international businesses, especially those new to the Chinese market.

Misconceptions About Trademark Relevance: A Costly Mistake

Many international companies mistakenly believe that trademarks in China are only necessary if they plan to sell their products there. This misconception often stems from a lack of understanding of how trademark laws apply to the manufacturing process and global export. Companies may assume that because their products are not entering the Chinese retail market, they are exempt from local IP regulations. However, Chinese trademark law considers any use of a trademark during production—even for goods destined for export—as trademark use within China. This misunderstanding can have far-reaching consequences, disrupting manufacturing operations and exposing businesses to significant legal and financial risks across industries ranging from electronics to apparel. Addressing this misconception is crucial for safeguarding global supply chains and ensuring business continuity. This misconception can be costly. In reality, Chinese trademark rights extend beyond sales to cover manufacturing and global export. Here’s how:

1. Trademark Use During Production Under Chinese law, applying a trademark to a product during manufacturing is considered trademark use. If your brand’s trademark is unregistered, your factory may face legal challenges for producing goods bearing the mark. Even if these goods are destined for international markets, the lack of a registered trademark in China can be used against you.
2. Global Implications Manufacturing in China without a registered trademark can jeopardize your ability to sell products internationally. Trademark owners in China can claim infringement even if you’re exporting the goods to other countries. This can lead to product seizures, costly legal disputes, and significant financial losses.

Risks of Failing to Register Your Trademark

If a third party registers your brand's trademark in China before you do, they can stop and disrupt your manufacturing operations in two significant ways:

1. Demanding Cessation of Trademark Use The registered trademark owner in China can legally demand that your Chinese factory stop using the mark, citing trademark infringement. Typically, this process involves the trademark owner filing a formal complaint with the local Administration for Market Regulation (AMR), which oversees trademark enforcement. The AMR may issue an order for the factory to cease production of goods bearing the disputed mark. This enforcement can happen relatively quickly, often within weeks of the complaint, causing immediate disruptions to manufacturing and financial losses. This can force a halt to your production, causing significant delays and financial losses. Without the ability to use your own brand on manufactured goods, you may find yourself unable to fulfill orders or meet market demand.
2. Customs Seizure The registered trademark owner can record the trademark with China Customs, leading to the seizure of your trademarked products at the port. When this happens, customs officials may inspect and detain shipments containing goods that bear the disputed trademark. This enforcement is swift, often occurring as soon as goods reach the port. Seized products are typically held until the trademark dispute is resolved, which can involve lengthy legal proceedings or costly settlements. For businesses, this can mean significant delays in fulfilling orders, increased storage fees, and strained relationships with clients awaiting delivery. This prevents shipment and can result in substantial financial losses, especially if you've already paid for the production of these goods. Seizures can delay delivery schedules, disrupt supply chains, and strain relationships with clients and distributors.

The Role of Proactive Trademark Registration

The risks of unregistered trademarks highlight the critical need for early registration. By registering your trademark before beginning any manufacturing activities in China, you:

1. Prevent Trademark Squatting Proactively registering your trademark ensures that potential squatters cannot exploit your brand. This not only safeguards your IP but also eliminates the need for costly and time-consuming legal battles to reclaim your trademark.
2. Ensure Business Continuity With a registered trademark, you protect your manufacturing operations from being disrupted by third-party claims. This allows you to focus on scaling production and meeting market demand without the fear of operational interruptions.
3. Strengthen Legal Defenses A registered trademark provides a solid legal foundation to enforce your rights against counterfeiters and infringers. It allows you to take swift and decisive action in cases of unauthorized use of your brand.

Expanding Beyond Domestic Sales: The Global Importance of Chinese Trademark Registration

Many businesses assume that trademark registration in China is irrelevant if they do not sell products within the country. However, this assumption ignores the broader implications of Chinese trademark laws:

1. Export Protection Goods manufactured in China are subject to Chinese trademark laws, even if they are intended solely for export. Without a registered trademark, you risk being accused of infringement within China, which can disrupt your global supply chain.
2. Preventing Unauthorized Use in Global Markets Trademark registration in China ensures that your brand remains protected during the manufacturing process, preventing unauthorized use or distribution of your products in international markets. This is particularly important for maintaining brand integrity and customer trust.

Why Registering Your Trademark Is a Strategic Necessity

Registering your trademark in China is not just a legal requirement; it is a strategic move that underpins your business’s operational and financial stability. Failure to secure timely registration not only exposes you to legal and financial risks but also contributes to the proliferation of trademark squatting in China. Trademark squatting is a widespread issue, with many opportunistic individuals and entities exploiting the first-to-file system to register trademarks of foreign brands. This practice disproportionately impacts international businesses that rely on China for manufacturing, as it creates barriers to production and export. Squatters often target well-known or rapidly growing brands, leveraging the trademarks to demand high fees for their transfer or to profit from counterfeit goods. The prevalence of this issue underscores the critical need for businesses to act swiftly and secure their trademarks to protect their operations and reputation. Squatters often target brands with global reputations, leveraging the first-to-file system to demand exorbitant fees or profit from counterfeit sales.

By registering your trademark early, you:

1. Safeguard Manufacturing Operations Early registration ensures uninterrupted production by preemptively addressing potential legal challenges. This is particularly critical for businesses with high-volume or time-sensitive manufacturing needs.
2. Mitigate Financial Risks The costs of registering a trademark in China are minimal compared to the potential financial losses from factory shutdowns, product seizures, or legal disputes. Proactive registration protects your investment in manufacturing and supply chain operations.
3. Support Long-Term Growth Trademark registration establishes a legal framework for expanding your presence in China and other markets. It provides the flexibility to explore licensing opportunities, partnerships, and other growth initiatives without legal uncertainties.

Conclusion

Protecting your trademark is a fundamental step when manufacturing in China. The first-to-file system, coupled with the risks of trademark squatting and infringement, makes early registration essential. Many businesses underestimate the significance of trademark registration due to misconceptions about its relevance. However, failure to act can lead to severe operational disruptions, financial losses, and reputational damage. By prioritizing trademark registration, you not only secure your brand but also ensure the smooth execution of your manufacturing and export activities. In a competitive global market, proactive trademark protection is not just a legal safeguard—it is a strategic imperative for sustained success.

Contact us if you need help with drafting of contracts that follows Chinese laws and are enforceable in China, background investigation of Chinese companies, protecting patents, trademarks, verification of contracts to the law in China, or help with other legal challenges that you have in China.

If you require our assistance or have further questions about our services, please do not hesitate to contact our Customer Relationship Managers Jan Erik Christensen, at janerik@ncbhub.com .