IPR Squatting

“Patent Squatting” and “Trademark Squatting” (sometimes referred to as “IPR Squatting”) refers to the practice where individuals or companies register patents or trademarks—typically well-known foreign ones—before the legitimate owner or inventor has the opportunity to do so. This often results in legal disputes, extortion for the rightful owners, or challenges for foreign businesses attempting to enter the Chinese market.

“Trademark Squatting” in China

“Trademark Squatting” occurs when a person or entity (often unrelated to the actual brand owner) registers a well-known or unregistered foreign trademark with the intent of selling it back to the rightful owner or preventing the rightful owner from using it in China. This is particularly problematic for foreign businesses that haven’t yet registered their trademarks in China but intend to expand into the Chinese market.

– Why It Happens:

• China operates on a “first-to-file” system rather than a “first-to-use” system for trademark registrations. This means that the first person to register a trademark generally becomes its legal owner, even if they have no prior relationship with the brand or have never used it in commerce.

• Squatters exploit this system to register foreign trademarks before the actual brand owner can do so, then demand hefty sums to transfer ownership back.

– Common Scenarios of “Trademark Squatting”:

• Foreign Brands Entering China: A foreign company may not yet have expanded into China, leaving its brand unregistered. Squatters register the name, forcing the company to either pay large sums to reclaim the trademark or be prohibited from using its own brand.

• Brand Misspellings or Variations: Squatters often register variations or misspellings of well-known foreign brands.

• Celebrities and Personal Names: Squatters register the names of foreign celebrities or public figures to use them on products.

– Legal Remedies for “Trademark Squatting”:

China’s Trademark Law has improved over the years to combat squatting, but challenges remain. Some of the legal remedies include:

1. Opposition and Cancellation Procedures:

   • A company can oppose a squatter’s trademark application before it is granted by filing an opposition during the publication period (usually three months).

   • If a squatter successfully registers the trademark, the rightful owner can file a cancellation action based on non-use (if the squatter does not use the mark within three years) or bad faith (if it can be proven that the squatter filed in bad faith).

2. Bad Faith Provisions:

   • The Trademark Law was amended in 2019 to introduce clearer provisions aimed at curbing bad-faith applications. Article 4 of the law now states that applications not intended for actual use should be refused. This was designed to target bad-faith filings by squatters who have no intention of using the trademark in commerce.

   • In cases where squatting is evident, China’s courts and the China National Intellectual Property Administration (CNIPA) have increasingly ruled in favor of legitimate brand owners.

3. Well-Known Mark Status:

   • If a foreign trademark is recognized as a well-known mark in China, the CNIPA may block applications by squatters attempting to register the same or similar marks, even if the mark isn’t registered. However, obtaining well-known mark status in China is difficult, as it requires evidence of significant use and reputation in China, not just internationally.

4. Defensive Registration:

   • To avoid trademark squatting, foreign companies are encouraged to register their trademarks in China as early as possible, even if they do not plan immediate market entry. This includes registering not only the English version but also Chinese transliterations or Chinese character versions of the trademark.

5. Negotiation and Purchase:

   • If squatting has already occurred, some foreign companies opt to negotiate with the squatter and purchase the trademark, often paying large sums. This is sometimes seen as the fastest way to resolve the issue, though it is not an ideal solution.

“Patent Squatting” in China

Patent squatting refers to the practice of filing patent applications for inventions or technologies that have already been patented or developed elsewhere but have not been filed in China. Squatters capitalize on the “first-to-file” patent system in China, similar to the trademark system, where patent rights are granted to the first person to file an application, regardless of actual invention or use.

– Types of “Patent Squatting”:

• Foreign Inventions Not Filed in China: Squatters monitor foreign patent filings and quickly file equivalent patents in China if the foreign company has not already done so. This can block the foreign inventor from entering the Chinese market or using their own technology there.

• Technical Improvements or Minor Modifications: Squatters may file patents on minor technical improvements or modifications to foreign inventions, claiming rights over these “improvements.”

– Challenges Posed by “Patent Squatting”:

• Blocking Market Entry: Squatters can prevent foreign companies from utilizing their own technologies in China, which forces companies to engage in costly legal battles or pay off the squatters.

• Extortion: Squatters sometimes wait for the foreign company to enter the Chinese market and then demand exorbitant fees for the company to continue using its technology.

• Local Manufacturing and Exports: Foreign companies manufacturing products in China might find themselves unable to export these products if a squatter holds a local patent for the technology involved.

– Legal Remedies for “Patent Squatting”:

1. Invalidation Proceedings:

   • If a squatter registers a patent, the legitimate inventor can file a request for invalidation of the patent with the Patent Reexamination Board (PRB) under the CNIPA. Grounds for invalidation may include lack of novelty or obviousness if the patent is based on an already-known invention.

2. First-to-File Principle and Prior Use Rights:

   • China’s patent system operates on a first-to-file basis, so the party that files first typically gets the rights. However, in some cases, prior use rights can be invoked. If the legitimate inventor can prove that they used the technology in China before the squatter’s filing date, they may retain limited rights to continue using the invention.

3. Patent Review and Litigation:

   • Once a patent is granted, it can be challenged through administrative reviews or litigation in the Chinese patent courts. The foreign company must present evidence of earlier patent filings or prior art to invalidate the squatter’s patent.

4. Non-Use and Compulsory Licensing:

   • If the squatter does not make commercial use of the patent within three years after registration, it may be subject to compulsory licensing or cancellation for non-use.

5. Defensive Patent Filing:

   • As with trademarks, defensive filing is key to preventing patent squatting. Foreign companies should file patents for their inventions in China as early as possible, preferably simultaneously with their international filings.

   • Filing a PCT (Patent Cooperation Treaty) application can be an effective way to extend patent protection to China.

Key Legal Issues:

• Patent Law Amendments (2021): Recent amendments to China’s Patent Law, effective June 2021, have sought to strengthen protections for patent owners and enhance enforcement mechanisms. These updates include provisions for punitive damages in cases of willful patent infringement and stricter regulations for bad-faith patent filings.

• While both trademark squatting and patent squatting pose significant challenges for foreign companies, recent legal reforms in China have sought to improve the situation. Amendments to the Trademark Law and Patent Law, as well as bad faith provisions and expanded cancellation and opposition procedures, are steps in the right direction.

• However, the first-to-file system in China necessitates proactive IP protection strategies. For businesses considering market entry or already operating in China, early and comprehensive trademark and patent registration (including translations and minor variations) is crucial to safeguarding intellectual property and avoiding squatting issues.

Key Strategies for Foreign Companies:

• File early: Register both trademarks and patents in China as early as possible, even before entering the Chinese market.

• Monitor filings: Keep an eye on trademark and patent applications in China to identify any potential squatting attempts.

• Use local counsel: Engage Chinese IP lawyers or agents to handle filings and opposition/cancellation procedures effectively.

• Defensive filings: Consider registering variations or translations of your trademark and filing patents for all key technologies.