Legal risks of buying a trademark with a title defect


Author: Zhang Hairuo
Twelve Tables Law Firm

When one"s own brand is preemptively registered by another person, or when one"s well-designed trademark is identical to a prior registered trademark, there are usually two ways of dealing with the problem. The regular remedy is nothing more than actively filing an opposition, invalidation, or withdrawal request to remove the applying barrier or conservatively modifying the original design. However, it can be difficult, costly, and time-consuming to cancel a bad-faith registration. The unconventional measures include short and simple measures such as buying the other party"s registered trademark, buying the other party"s company, etc. The "buy-it-all" strategy is a quick fix for superficial problems and is popular with the rich and powerful.

I.A Judicial Interpretation on Whether Title Defects Could be Treated Through Trademark Assignments

There are two judicial approaches to this issue: one holds that the assignee should bear the title defects of the trademark no matter it"s a bona fide transfer or not, while the other opinion holds that a bona fide assignee should not bear the defects of the trademark. We hereinafter introduce three related cases.

Case 1: "UVISOR" trademark case (2015) - assignment does not clear the cloud on title

  • Title defect: The preemptive applicant violated Article 15 of the Trademark Law.
  • Holding of the court of second instance: Whether the assignee is in good faith or not does not affect the holding that the application for registration of the disputed trademark does not comply with the law and shall be invalidated.
  • Date of judgment: August 11, 2015
  • Docket No.: (2015) Gao Xing (Zhi) Zhong Zi No. 2493
  • Case Summary:

Jiayuan Xingtong Company registered the trademark "UVISOR" No. 9687651 (hereinafter referred to as the disputed trademark) in 2012, after which the disputed trademark was transferred to YWS Company.

In 2013, ABB Company filed an application for cancellation of the disputed trademark based on its prior use of its own "UVISOR" mark and its previous distribution relationship with Jiayuan Xingtong Company, contending that the registration of the disputed trademark of Jiayuan Xingtong Company was malicious squatting conduct and an infringement of its prior rights. In 2014, TRAB ruled that the application of the disputed trademark constituted malicious squatting conduct by the agent, which violated Article 15 of the Trademark Law, and declared the disputed trademark invalid.

YWS Company filed an administrative lawsuit against TRAB"s decision, contending that the disputed trademark had been acquired in good faith and had been used legally and effectively for a long period. The original applicant had not disclosed the fact that it had a sales relationship with ABB. If the disputed trademark was invalidated, it would seriously damage the interests of YWS Company. Both the court of first and second instance upheld the ruling of TRAB that the disputed trademark should be invalidated.

The court of second instance held that:

"The applicant of the disputed trademark, Jiayuan Xingtong Company, having unequivocal knowledge that "UVISOR" is ABB"s fire inspection system trademark, applied for registration of the disputed trademark in its own name without ABB Company"s authorization. The application violated Article 15 of the Trademark Law, and the disputed trademark shall be canceled. Regardless of whether YWS Company has assigned the disputed trademark in good faith or not, it does not affect the holding that the application of the disputed trademark does not comply with the law."

Case 2: "Laduree" Trademark Case (2018) - assignment can clear the cloud on title on conditional ground

  • Title defect: The original applicant has applied for 106 trademarks, which is of high possibility that trademark hoarding intension exists.
  • Holding of the court of second instance: Although it is possible that the original applicant may have engaged in trademark hoarding, the disputed trademark has now been transferred to the assignee. There is no evidence of malicious collusion between the assignee and the original applicant. A declaration of invalidity would have adverse effect on the rightful assignee, thus the disputed trademark should be upheld.
  • Date of judgment: December 12, 2018
  • Docket No.: (2018) Jing Xing Zhong No. 6281
  • Case Summary:

The original applicant (Huishang Company) of the "Laduree" trademark (hereinafter referred to as the disputed trademark) transferred it to Aoshang Company. Besides, Huishang Company registered 106 trademarks, including marks that are similar or identical to well-known brands such as "GIVE NCHY" and "SALUATORE FERRAGAMA", etc. Laduree Company filed an invalidation request to the TRAB on the ground that the disputed trademark violates Article 44(1), and that it is identical to seven "Laduree" cited trademarks used on similar goods. TRAB ruled that the disputed trademark should be maintained.

After the trial of first and second instance, the court of second instance held that: "Although the original applicant has applied for 106 trademarks, and that it may be a trademark hoarding conduct, the disputed trademark has now been transferred to the assignee. Provided that Laduree Company could not prove malicious collusion between the original applicant and the assignee and that the disputed trademark does not violate other provisions of the Trademark Law, it will have adverse effect on Aoshang Company if the disputed trademark is declared invalid." Therefore, the court upheld the disputed trademark.

Case 3: "Americolor" Trademark Case (2020) - assignment does not clear the cloud on title

  • Title defect: The original applicant has applied for 130 trademarks, some of which were copies or imitations of famous foreign brands. This constitutes trademarks hoarding and constitutes "improper means" under Article 44(1).
  • Holding of the court of second instance: The transferee"s acquisition cannot affect the fact that the disputed trademark was registered by improper means.
  • Date of judgment: September 25, 2020
  • Docket No.: (2020) Jing Xing Zhong No. 1108
  • Case Summary:

    Americolor Company, an internationally renowned food coloring supplier, uses the made-up word "Americolor" as its trade name and trademark. Since its establishment, the company has been extensively using its trade name and trademark on its food coloring products and has enjoyed a certain popularity in overseas markets.

    The original applicant of "Americolor" trademark (hereinafter referred to as the disputed trademark) has applied for more than 130 trademarks, including "SHU UEMURA", "NUBY" and other trademarks copied from famous foreign brands. The original applicant assigned the disputed trademark to Hengfang Company. Americolor Company filed an invalidation application with the TRAB on the ground that the registration of the disputed trademark was registered by "other improper means" under Article 44(1) of the Trademark Law, but it was not supported. Americolor Company filed a lawsuit.

    During the trial of first instance, the court found that the original applicant"s large-scale application had exceeded its daily business needs. Without submitting sufficient evidence to prove its true intention to use the said trademarks, its behavior of hoarding a large number of trademarks is an improper use of the trademark registration system and seizure of public resources, which constituted "obtaining registration by other improper means" under Art.44(1). The court of first instance held that the disputed trademark shall be invalidated.

    During the trial of second instance, the assignee Hengfang Company contended that it had acquired the disputed trademark by way of transfer and had made necessary preparation and investment for the use of the mark. As a bona fide assignee, the disputed trademark should be maintained. The court of second instance held that the assignee"s acquisition of the disputed trademark cannot affect the fact that it was registered by improper means. The court of second instance upheld the judgment of the lower court in finding that the disputed trademark should be invalid.

Summary of the Cases
It is thus clear that, in Case 1 and Case 3, the court adopted the theory that assignment does not clear the cloud on title. The court mainly focuses on whether there was any violation of the Trademark Law at the time of registration (the time when the original applicant obtained trademark right), regardless of whether the registration violated relative reasons for not registering (preemptive registration by the agent in Article 15 of the Trademark Law), violated absolute reasons for not registering (registration by improper means under Article 44(1) of the Trademark Law), violated relative rights, or caused damage of public interest. A subsequent act of transfer, whether in good faith or not, cannot change the illegitimate nature of the registration obtained at the time of authorization.

Compared to Case 1 and 3, the court adopted a conditional transfer theory in Case 2, and held that an act of bona fide transfer would help clear the cloud on title and restore the original attribute of the title. It would be unfair to legitimate assignees on using registration as the time point to examine the purpose of registration. Therefore, the court adopted the attitude of strictly examining whether the assignee was bona fide, and if the assignment was made in good faith, the trademark right would then be free of defects.

In the author"s opinion, "good faith" is a subjective condition of human activity that is difficult to measure. Even if measurable and operable standards for bona fide assignments exists, in the context of the proliferation of trademark squatting and trademark trolls growing into jurisperitus, the theory that "a bona fide assignment can clear the cloud on title" will inevitably encourage trademark trolls to speed up the sale, or to transfer trademarks to "friends and relatives" who are not superficially related to each other, in order to treat the title defected of the trademarks under their names and avoid the application and sanctions of Trademark Law. 

II.Latest Judicial Policy, Administrative Regulation

In response to the above different viewpoints, Beijing High People"s Court and the State Administration for Market Regulation have issued relevant judicial policies and departmental regulations one after another to clarify the issue of transferring a trademark with a cloud on title.

1.Guidelines for the Trial of Trademark Right Granting and Verification Cases

  • Effective Date: April 24, 2019
  • Promulgation Authority: Beijing High People"s Court
  • Related articles:

Art.7.4 Acceptance of the transferred trademark not affecting determination of relevant clauses

If an application for registration of the trademark in dispute violates the relevant provisions of the Trademark Law, and the applicant or registrant of the trademark in dispute claims that the trademark in dispute should be registered or remained valid only on the ground that the applicant or registrant has no fault when the trademark transferred, then this claim shall not be supported.

2.Several Provisions on Standardizing Application for Trademark Registration

  • Effective Date: December 1, 2019
  • Promulgation Authority: State Administration for Market Regulation
  • Related articles:

Art.9: The circumstance of trademark assignment does not affect the trademark registration department"s determination of a violation of Article 3 of these Provisions.

Art.3: Application for trademark registration shall follow the principle of good faith, and none of the following acts may be conducted:
(1) A mala fide trademark registration application not made to use the trademark under Article 4 of the Trademark Law.
(2) A reproduction, imitation, or translation of a well-known trademark of another party under Article 13 of the Trademark Law.
(3) Where an agent or representative, without authorization of the client, seeks to register in its own name the client"s trademark, or where the agent is clearly aware of the existence of the trademark of such another party due to contractual, business, or other relationships with the other party under Article 15 of the Trademark Law.
(4) A trademark registration that infringes upon another person"s existing prior rights, or a rush registration of a trademark that that is already in use by another person and has certain influence with illegitimate means.
(5) An trademark registration application that is made by fraudulent or other illegitimate means.
(6) Any other act violating the principle of good faith, the public order, and good customs or having other adverse effects.

The above two documents made it clear that, when registration is obtained in violation of the relevant provisions of the law, regardless of whether the trademark infringes relative rights of an individual or damages public interest, the trademark assignee, no matter he or she is in good faith or not, has to bear the title defect of the trademark, which is the embodiment of strictly adopting the viewpoint that "assignment does not clear the cloud on title".

III.Feasibility and Risk Management of Purchasing Trademarks with Cloud on Title

The above-mentioned judicial policies and departmental regulations are conducive to combat malicious registration and unifying the trial standards, but at the same time bring legal risks to bona fide trademark assignees, leading to difficulties in anticipating the stability of the assigned trademark rights. After the introduction of the above-mentioned two documents, we provide the following suggestions as to whether the "buy-it-all" strategy is still feasible and what schemes can reduce legal risks:

1. What can I do before purchasing a trademark? Conduct sufficient due diligence. Carefully buy trademarks from trademark trolls, and duly conduct risk assessments of the legality of trademarks from a Trademark Law perspective.

As trademark trolls often hoard a large number of trademarks, and that trademark registration records and transfer records are available from public channels, the purchase of the trademark with a title defect from the trademark troll, even after the transfer procedures, still lurks the risk of invalidation and may face a severe crisis at any time. In particular, when the trademark registration of the original damages public interest (e.g. violates Articles 10, 11, 12, 44, etc. of the Trademark Law), the Trademark Law provides that any person has the right to initiate invalidation proceedings without any time limit. Therefore, there are always hidden risks after the transfer of this kind of trademark, and it is necessary to fully assess the risks before deciding whether to purchase.

2. How can I manage the risk if I have made up my mind to buy a trademark with a cloud on title, or if I have already purchased a trademark with a cloud on title?

Although the Trademark Law has been revised as time changes and the efforts to combat malicious trademark registration continue to rise, but in practice, there will always be cases of trademark squatting and brand owners are unable to resolve through taking legal actions. Taking into account the time cost, the cost of taking legal actions, and other factors, the "buy-it-all" solution still has irreplaceable advantages as long as the price is acceptable. As for how to reduce the risk of facing severe crisis after purchasing trademarks with title defect, we suggest analyzing the types of title defects and treating them differently.

(1) Trademarks that infringes relative rights or should not be registered on the ground of relative reasons:

Due to the five-year time limit for filing an opposition or invalidation, and the requirement that the applicant should be an interested party, if the brand owner buys back a preemptive registration of its own brand, it is less risky. After 5 years of registration, the trademark enters the safe zone.

(2) Trademarks that damage public interest or should not be registered on the ground of absolute reasons:

As for this kind of trademark, invalidation application is not subject to the five-year limit, and applicants are not subject to qualification restrictions. That is to say, anyone can file such an application. Therefore, the risk of buying such trademarks is relatively high, and it is recommended to take corresponding measures to reduce legal risks.

Taking the violation of Article 44 of Trademark Law as an example, it is suggested to submit one or more identical or similar trademark applications after the trademark transfer is completed. On the one hand, the assigned trademark serves as a shield that helps block others from registering identical and similar trademarks and increases the transferee"s chances to successfully apply for identical or similar trademarks in the future. On the other hand, once the assigned trademark is invalidated, a series of latter registered trademarks can take over and prolong the rights of the assigned trademark.

The above is the discussion of our case-handling experience around the legal risks of trademark transfer. On top of this, when a company plans for a merger or investing in shares, the trademark rights of the target company or invested company often becomes one of the core assets of the transaction. The corresponding trademark cases and legal risks related to this will be analyzed in subsequent articles.