1. Chinese Manufacturers Will Copy and Sell Your Products; It’s What They Do
Literally every single day this past week, the international IP lawyers at my law firm received at least one email from an American/European/Australasian company on how their Chinese manufacturer was selling their products at wholesale and/or at retail to others. These emails usually concluded by asking our lawyers what they would charge to sue these Chinese manufacturers.
Our response would be to ask whether these American/European/Australasian companies had a written contract (or even anything else in writing) forbidding their Chinese manufacturer from copying their product. And then, when none of them had any such writing, we would tell them that we were not interested in suing the Chinese companies.
2. You Need a Written Contract to Protect Yourself from Your Chinese Manufacturers
One of these emails expressed surprise at what their Chinese manufacturers were doing to them, to which our response was as follows:
If your Chinese factory were not stealing your designs and using your name I would have been surprised. Truth is they do that pretty much every time (and it is perfectly legal) unless you have a contract or IP registrations that can prevent that. At this point, my advice would be to find a new factory as soon as you can because once their sales of your product on their own behalf have taken off, you are just a nuisance and their next move will no doubt be to keep raising your prices until your business is completely crushed and you no longer exist as a competitor to their selling what was once your product.
There is probably nothing to do about them making your product (at least nothing that would make economic sense) but – as I always tell people – it’s bad enough when your product is copied and sold for 40 percent less than for what you sell it, but it’s usually lights out for a small business when the Chinese company can sell “your” product for 40 percent less with “your” name on it. So at this point the best thing we can do for you is to seek to secure your brand name as a trademark in China and in those countries in which you are selling your product. I urge you to read Manufacturing in Asia: Let’s Talk United States and Canada and Mexico and EU Trademarks.
Without a written and China-specific contract, there is essentially no good recourse against a Chinese manufacturer that copies and sells your product. It may be possible to bring a trade secret claim but these are really tough and really expensive cases.
In fact, in the last couple years, we have seen a massive increase in Chinese manufacturers taking on new customers with the SOLE intention of selling the products of those new customers. We are seeing a large increase in Chinese manufacturers low-balling their pricing to lure in foreign companies simply to flip around and steal and start selling the foreign company’s product. If you are getting manufacturing pricing that is too good to be true, it probably is and you are probably dealing with a manufacturer that wants your business just so it can steal from you. And as we mentioned in the email above, once the Chinese manufacturer has gone to market with your product, it will usually increase your pricing sky-high or simply refuse to make your product for you any longer.
The same holds true for stealing your trademark.
3. You Also Need a China Trademark to Prevent Your Chinese Manufacturer from Stealing Your Brand Name
In China Trademark Theft. It’s Baaaaaack in a Big Way, we wrote how China trademark theft had massively increased and what companies can do to stop it:
Starting about a year or so ago, our China trademark lawyers started getting a ton of China trademark theft calls and the number of those calls has been accelerating ever since. Why has the tide on trademark “theft” come in again? Two reasons. One, there is hardly a sole in China who does not know how to get around the prohibition on an agent registering the trademark that rightfully should go to the foreign company for whom it is acting as an agent. If your manufacturer in Shenzhen wants to secure “your” trademark in China it will not register it under its own name as it knows that cannot work. So instead of registering the trademark under its own Shenzhen company name, it will ask a cousin or a nephew in Xi’an to register it under its company name, making it nearly impossible for you to invalidate the trademark. Two, many Chinese factories are hurting right now and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American or European brand name — or even just any brand name? See Your China Factory as your Toughest Competitor.
Our China trademark lawyers have been getting so many trademark theft calls of late that they now have a somewhat formulaic email response to those. The following is an amalgamation of a few that recently crossed my desk.
I am sorry to hear that someone has registered your brand name as its trademark in China. Our China trademark lawyers have handled many similar situations and we would love to try to help you with this.
The first thing we usually do in these situations is figure out some basis for challenging this Chinese company’s trademark filing. Our favorite challenge is non-usage of the trademark for more than three years, but in this case because the trademark is less than three years old, that will not work. Our second favorite is when a former factory does the filing because there are laws against that. But to show that it is the former factory, we almost certainly would need to show that the company that actually filed for this China trademark is the same company that you formerly used for your production and that is seldom possible.
If we are not able to get you the trademark you want for widgets, the next thing we do is try to figure out whether there might be a workaround. For example, we had a lawn equipment company that had its brand name filed as a trademark for 17 things related to lawn equipment but the trademark “thief” failed to file for small engines, like those you find on lawn equipment. So our workaround was to get our client the trademark for small engines and then put its name in steel on the engine and then add a sticker or two to the lawnmowers once they hit the United States and Europe where our client sold its lawn equipment. [NOTE: I changed the type of product to make it impossible to be able to identify the company for whom we did this intellectual property workaround]
If none of the above look like they can succeed, we can and should try to buy your name from this Chinese company. Unfortunately, this tends to be a tougher and, more importantly, a more expensive than you likely would expect. We do these buys by lining up a Chinese person (not a lawyer or anyone with any apparent connection to our law firm) in China to handle the negotiations. If someone from our firm were to call, they would will immediately suspect/know we are working for an American company and they will ask for a fortune for you to get your trademark back. It sometimes even makes sense to form a Hong Kong company to do the buy.
Another possibility would be for you to come up with a new name or use another of your names — I am sure you have thought of this and I doubt that it is appealing to you, but it may end up being the only way to go. No matter how we end up proceeding on the name taken from you, I strongly advice that we look at what we can do now to protect whatever other names you use and perhaps your designs as well.
As for your attorneys who you thought had filed for your trademark in China but had not, do you have anything that would indicate you asked them to do so or that they said they would or — better yet — that they said they had actually filed for it? If you have something like that, we could ask that they fund all of the above, assuming that you used real lawyers for this work. See Fake China Law Firms Are The Real Deal and Is This a Real China Lawyer?
Anyway, let’s talk to see if we can help you on this.
Many years ago, the Chinese government was so embarrassed by its manufacturers stealing the brand names of its own customers that it enacted a law making do so illegal. The law essentially says that a Chinese manufacturer that registers the brand name or the product name or the logo of one of its customers as a Chinese trademark does not have a valid trademark. Though nominally well-meaning, this law has been 99.9% ineffective because every Chinese manufacturer knows about the law and so it will not go off and register your brand name, product name or logo as its own trademark because to do so would be pointless because of the law. So the owner of your manufacturer in Shenzhen will instead ask her cousin in Qingdao to register your brand name, product name or logo as his trademark and then there is nothing you can do about it.
4. How to Prevent Your Chinese Manufacturer from Selling Your Product with Your Brand Name on it Without Your Permission
So what then should you be doing if you want to protect your product and stop your Chinese manufacturer from competing with you with your own product and then cutting off manufacturing your product for you? Some combination of the below is what typically makes sense:
A. Choose a Good Manufacturer. The more reputable and financially sound your manufacturer, the less likely it is to steal your product. Conduct due diligence on your manufacturer so you know with whom you are dealing.
B. Do Not Reveal Confidential Information without a Signed NNN Agreement in Place. You can learn more about NNN Agreements here. Note that US/Europe/Australasian NDA Agreements do not work. See NDAs Do NOT Work for China but NNN Agreements Do. Note also that it is a good idea to have your Chinese manufacturer put its chop on your NNN Agreement, and on all other contracts as well. See China Company Chops: The Basics.
C. Use a China Manufacturing Agreement When You Are Ready to Start Manufacturing. Once you have chosen your manufacturer, you will need a Contract Manufacturing Agreement (a/k/a OEM Agreement or Product Supply Agreement). You can find out more about Manufacturing Agreements here.
D. Get a China Trademark for Your Brand Name and Maybe Your Product Name and Logo Also. If you plan to put your company name or your brand name or your product name or your logo on your products or on their packaging, you should register those as trademarks in China. As we discuss here, this is true even if you will not be selling your products in China.
E. Get a China Patent if Your Product is Unique.
If you do the necessary combination of the above, your odds of your manufacturer copying your product and/or using your brand name go way way down. If you do not do the necessary combination of the above, at least you will not be surprised when your manufacturer starts selling your product with your brand name on it without your permission.
What are you seeing out there?