Chinese Factories Committing More Trademark Theft as US Trade Decouples

News Analysis

Chinese factories are stealing intellectual property much faster after the signing of the Phase One trade deal with the United States, as the decoupling with U.S. supply chains is accelerating.

The China Law Blog reports that Chinese factories in the past would “wait until the relationship with their customer had declined before selling their customer’s products and registering their customer’s trademark in China as their own,” but now are “going off and registering those trademarks literally days after they first learn of them.”

Once a U.S. company’s trademark is registered by a local company, Chinese law gives the local ownership rights to stop products from being produced for international export at the border and prevent them from leaving China. Several U.S. companies have been forced to pay significant dollars to get trademarks “back” and to get goods flowing out of China again.

American attorneys working on new cross-border deals in China are warning that American companies tend to send emails to a Chinese company inquiring about the possibility of having that firm manufacture its products; and then after a day or two later, that Chinese company will file to register the American company’s trademark in China. Several Chinese companies have sold foreign patented and trademarked products worldwide before they even sell one of the products to their foreign corporate customer.

At the height of the Sino-U.S. trade war in November, the goods deficit with China fell by 7.9 per cent, according to data released by the U.S. Census Bureau. With the 20.84 per cent fall in Chinese exports to the United States versus a year ago, American purchases of Chinese goods are the lowest since March 2013.

American corporate supply chains have substantially “decoupled” from China. Just before the start of the trade war in July 2018, imports to the United States from Vietnam went up 51.6 percent; Taiwan up 30 percent; Thailand up 19.7 percent, Indonesia up 14.6 percent, Mexico up 12.7 percent and Malaysia up 11.3 percent. Almost all of these gains have come at the expense of Chinese factories.

International lawyers doing business in China can see that local factory sales are still way down, despite the trade truce. The China Law Blog states: “For every foreign companies that left China in 2019, there were two to three more seriously contemplating doing so and we expect more companies to leave China in 2020 than in 2019.”

Chinese factories expect that many of their current American clients will be leaving China in 2020; and any new U.S. clients will only be using them as “test kitchens” to develop products and then move production to another off-shore site when the product is fully developed and selling in volume.

As a result of expecting to be used and cast aside, Chinese factories “have also become much sloppier in terms of product quality.” China Law Blog argues that it is now absolutely required to have detailed and signed “manufacturing agreements” that force Chinese factories to pay penalties if quality standards are not met.

China trademark lawyers comment that with local manufacturers desperately wanting to improve their profit margins, “what better way to do so than to sell a product under a prestigious or well-known American brand name.”

Once a U.S. trademark is registered by a local individual or company, the only guaranteed way to regain control of the intellectual property is to try to buy the brand name and logo from the Chinese party that has control of it.