A recent series of arrests in China highlight the difficulties with obtaining trademark “fame” in that country, and the lengths that companies and attorneys may sometimes go to establish that fame. See July 20, 2012 article.

The arrests also serve as a reminder of how critical anti-corruption compliance policies and procedures are to any organization with a global footprint.

Maximizing brand recognition has grown extremely difficult in China, a market flooded with both legitimate and illegitimate marks. Given this competition, establishing a trademark as a “well-known” or “famous” has grown even more important.

In China, such a designation bestows upon the owner certain familiar advantages, including legitimacy and credibility in the eyes of Chinese consumers, and tactical advantages in intellectual property disputes. Read The American Chamber of Commerce People’s Republic of China’s Discussion.

“Well-Known Trademark” Options

Companies seeking a “well-known trademark” designation in China have two options. See King and Wood’s 2008 publication.

First, a company may seek approval from a series of local and national trademark authorities—an often long (up to three years), onerous and expensive process.

Companies can also seek a “well-known trademark” designation through the Chinese judicial system. Chinese courts have the authority to declare a mark “well-known” if the issue is presented in the course of a trademark infringement lawsuit.

More often than not, companies pursue the second option and “fast-track” their efforts, seeking a judicial declaration that their trademark is “well-known.”

“Well-Known Trademark” Exploited in China

It was recently reported that the judicial recourse option has been illegally exploited by a number of attorneys and companies. According to the report, these companies have filed fake trademark infringement lawsuits with the sole purpose of establishing that the trademark is well-known or “famous.” Attorneys for these companies allegedly hired individuals to serve as dummy “defendants” in their lawsuits, accused of infringing the company’s trademark.

The attorneys also allegedly paid bribes to the judges hearing the cases to rule in their favor and declare that the marks are, in fact, well-known. The bogus lawsuits wound their way through the Chinese judicial system at a rapid pace—much more quickly than the potential three-year administrative process—and succeeded in obtaining this designation for several marks.

The scheme came to light when a Taiwanese soy milk manufacturer, whose trademark suffered as a result of a Chinese competitor’s allegedly fake litigation and subsequent well-known designation, “smelled a rat” and alerted the authorities. The authorities apparently received similar allegations from other entities, and initiated an inquiry. During the course of their investigation, one Chinese attorney, Zheng Lifang, apparently confessed to accepting over 1 million  (Chinese yuan) from clients to pursue fake lawsuits, some of which was used to bribe Chinese judges.

To date, at least six judges and three attorneys have been arrested in connection with this scheme, and some have speculated that the problem is far more wide-spread within the Chinese legal community. See July 20, 2012 article.

White Collar Crime Crashes Into Trademark Law

While trademark law may rarely intersect with white collar crime, these arrests provide an excellent example of how the two worlds can collide.

Companies that participate in schemes such as those alleged to have occurred in China could face significant civil and criminal exposure under both Chinese anti-bribery laws, and the U.S. Foreign Corrupt Practices Act (“FCPA”).

The FCPA prohibits giving or authorizing payments or anything of value to non-U.S. officials (e.g., judges) for the purpose of obtaining or retaining business. The statute also subjects companies to punishment for the acts of third-party intermediaries acting on their behalf. This would include the Chinese attorneys hired to prosecute the fake infringement actions and pay bribes to judges. The conduct alleged here would fall squarely within the elements of the FCPA, and could lead to domestic civil and criminal prosecutions of both the company and any individuals that knew about or authorized the activity.

These allegations serve as a reminder to companies of the importance of implementing and supporting robust anti-corruption policies and procedures, to guard against improper conduct in all foreign activities, including intellectual property prosecution. Companies should keep close tabs on the activities of third-party entities acting on their behalf, especially in high risk countries like China.

Sources: Heyan, W.: Fake lawsuits behind China’s ‘famous’ brands, Caixin Online (July 20, 2012); The American Chamber of Commerce People’s Republic of China; Jing, X., Ye, Z.: Judicial Recognition of Well-known Trademarks in China, King & Wood (2008).

This article was prepared by Josh Foster (jfoster@fulbright.com / 212 318 3282) of Fulbright’s White Collar Crime and Intellectual Property and Technology Practice Groups.