When it comes to securing intellectual property rights in China, foreign companies would be well-advised to take Laurence Thoo’s advice.

“Prevention is very much better than the cure,” said the partner at Hong-Kong-based Letters & Thoo, which specializes in procurement and enforcement of patent, design and trademark rights in Asia. “Unfortunately, many foreign companies don’t seem to have learned from the mistakes of more high-profile companies that have been burned in China by bad-faith trademark registrations.”

One of those high-profile cases involved Italian sports car manufacturer Ferrari SpA, which in 2007 lost a decade-long legal battle over a Chinese department store’s use of a rearing-horse very similar to Ferrari's on a line of athletic clothing. In that case, 10 years of costly legal wrangling failed to cure the problem. A Chinese court ruled that Ferrari could not challenge the local company's trademark because Ferrari was not well-enough known in China.

Western companies consistently encounter problems like this when they set up operations in China, and the situation isn’t likely to change much even though on Friday China’s legislature passed a new trademark law that greatly increases the penalties for trademark violations. Litigators with expertise on the matter all underscore the importance of getting a lead on those seeking to profit off brand identities. This is a game that plays out constantly in mainland China, and elsewhere for that matter, with people or companies seeking to cash in on foreign brand identities by securing local commercial rights to their logos and names.

Fundamentally, the game is a race to see who can get the rubber stamp from the Chinese Trademark Office. Whoever gets a mark registered first usually wins. If the company loses, it’s stuck with two expensive options: Fight it out in court or buy the trademark from the locally registered owner. Last year, Apple Inc. (NASDAQ:AAPL) forked over $60 million to settle a lawsuit brought on by a local tech company that had registered the “iPad” name a decade before Apple released its first tablet computer.

As the Apple and Ferrari examples illustrate, companies end up paying millions more to claim trademark rights later than it costs to secure the rights earlier. For example, registering a company logo and its name, including in Chinese characters (three separate trademarks), would cost about $4,000 for each class of products that would carry the marks. On the other hand, the potential cost of buying rights to these marks claimed by someone else can run into the millions.

The latest high-profile trademark dispute involves U.S. luxury electric car maker Tesla Motors Inc. (NASDAQ:TSLA), which is currently trying to assert its claim in China to its “T”-shaped badge and company logo from Zhan Baosheng, a young Chinese businessman who claims to be a legitimate electric-car entrepreneur seeking to make and market a “Tesla” electric sedan in China.

Back in 2006, Zhan filed two Tesla-related claims with the China Trademark Office. He claimed the rights to the word “Tesla” in English and the phonetic translation of “Tesla” in Chinese characters. Then, in 2009, he filed trademark rights to Tesla Motors’ T-shaped badge (the icon you see on the Tesla Model S sedan’s fascia) and Tesla’s company logo -- which includes the badge, the words “Tesla Motors” and the word “Tesla” in the company’s distinctive typeface.

It’s those last two, the badge and the logo, that are the most egregious; staking the name “Tesla” is one thing; claiming a company’s logo designs is another — but not necessarily in the eyes of the law.

Zhan has claimed in interviews with the Chinese press that he is an admirer of the 19th century Serbian-American electrical engineer Nicolas Tesla, is sincere in his efforts to introduce an electric sports sedan in China, and that he owns the right to the word “Tesla” to make and market vehicles. But critics in China have accused him of simply trying to blackmail Tesla by holding its logo and name hostage, a process casually described as trademark trolling.

Fighting The Trolls

While trolling is illegal under Chinese law, proving that the local owner of a company’s trademark is trolling is more difficult in China than it is in the United States, Britain and even Hong Kong, which operates under a separate legal system than the mainland.

China is a so-called civil code country, which means its trademark law is dictated by statute that can only be revised by changes implemented by executive or legislative powers. This differs from common-law countries, comprised largely of Britain and its former colonies, including the United States, in which changes to the law occur by the courts establishing legal precedents, drawing on past rulings to establish new ones.

“In civil code countries, the law rules, the statute itself rules,” Mary M. Squyres, chair of the International Trademark Practice Group at Brinks Hofer Gilson & Lione in Chicago, told International Business Times. “In most civil code countries, China included, if you are first to file, you win.”

There’s an exception: Under the Paris Convention for the Protection of Industrial Property, a 130-year-old, occasionally updated global accord aimed at protecting “well-known marks,” companies can sometimes overcome local statutes if they can establish that their trademarks are well-known. Most countries in the world abide by the convention, but they reserve the right to determine for themselves if a mark is well-known locally.

“China is really big on saying, ‘If you’re going to prove that your mark is well-known, you’re going to have to prove that it’s well-known in China,’” Squyres observed. “I would guess that is what Tesla is trying to do right now.”

In other words, the McDonald’s golden arches, Mickey Mouse and the Ford Motor Company blue oval logo have had considerably more trademark protection in China, but a Chinese court can decide whether or not a mark is well-known locally – which puts newer companies like Tesla at a disadvantage compared with known and long-established global brands.

High Burden Of Proof

China’s trademark law places a high burden of proof on a company trying to prove that the owner of a trademark is acting in bad faith. Tesla must convince an administrative court that Zhan is simply trying to extort money from the company, which will not be easy.

“It is extremely difficult to regain any trademark from a trademark ‘troll’ unless the foreign company’s mark is well-known in China prior to the filing of the mark or the trademark ‘troll’ has prior dealing with the foreign company so that bad faith can be established,” Catherine Zhang, an intellectual property lawyer and partner at Deacons, a Hong Kong-based commercial law firm, told IBTimes.

In other words, Tesla must prove the register-holder had some direct connection with the company in the past and knew it was planning a move into mainland China. Then, it must also convince the court that its brand was well-known in China at the time the defendant registered the trademark. Zhan could argue that in 2006, when he registered his trademark claims, the Tesla brand was not well-known in China. Tesla was founded in 2003 and went public three years ago. Zhan also had no previous connection to Tesla.

May Chan, an intellectual rights litigator for Ella Cheong, a law firm with offices in Hong Kong and Beijing that specializes in China patent, design and trademark issues, says companies that cannot convince a court that their trademarks are well-known in China could be out of luck. “Without valid evidence of actual use and fame in China, it would be a difficult if not impossible to attack and cancel an improper registration,” she told IBTimes by email.

Is Tesla Motors Legally Using Its Own Logo In Beijing Right Now?

For the time being, both Zhan and Tesla are using Tesla trademarks in China: Zhan on his “Tesla” website, which is hosted through three “tesla” Web addresses, and Tesla on its website announcing it will open its first showroom in Beijing by January. It’s not currently clear which party has legal rights to these marks because the Trademark Office has put Zhan’s registration on hold, claiming an unnamed party (presumably Tesla) requested adjudication.

Whether Tesla will win the right to call its car “Tesla” and legally use the logo and badge it created will partially rest on whether it can convince a judge it was known well enough in 2006 that Zhan strategically planned to grab its trademark in order to force the company to fork over cash. Tesla CEO Elon Musk reportedly offered Zhan about $300,000 in 2009 for the trademarks, but Zhan responded by brazenly offering Musk the opportunity to be a co-investor in his company for more than $3 million. In court, Tesla could argue that Zhan attempted to grab trademarks for at least three other companies in recent years, but that might not be sufficient to prove bad faith was involved. Tesla spokesman Alexis Georgeson told IBTimes on Wednesday that the company is not commenting on the issue at this time.

China's New Trademark Law Is A Step In The Right Direction, But...

Because China is a civil code country, any changes to its trademark law come from the National People’s Congress Standing Committee rather than through legal precedents in the courts, as it’s done in common-law countries.

After two years and three revisions, China’s legislature on Friday passed a new trademark law. The reforms increase the penalty for trademark infringement from 500,000 yuan (about $82,000) to 3 million (nearly $500,000), according to the official Xinhua news agency.

China’s trademark law has been revised two other times since it was established in 1982. In 2001, when China joined the World Trade Organization, the law was amended to recognize the Paris Convention rules for elevated protections of “well-known” brands.

The new law puts greater responsibility on trademark agents, under threat of fines and suspension of business, to avoid working with clients whom they know, or should know, are infringing on the trademark rights of others. It also protects well-known trademarks even if these brand names have not been locally registered.

However, the high-profile trademarks must be well-known in China, not just in the West or in the United States, and so the law does little to help start-ups like Tesla claim rights to their own logos.

Moreover, the law still requires companies challenging trademark holders to prove that the defendants had prior interactions with them, and that they acted in bad faith by using their knowledge of a planned entry into the mainland to extort money from the company by staking claim to their trademarks. But the reforms do indicate that China is becoming more proactive in trying to address its bad reputation as the world’s largest patent and trademark infringer.

China is a major world player now, and local brands such as Baoding-based auto maker Great Wall Motors and computer hardware maker Lenovo Group of Beijing will encounter their own trademark hassles in other civil code countries. As they face the same issues that foreign companies have faced in China, we may see further revisions to their trademark law that will help boost protections.

“As Chinese companies go global, which they are, and they find this same problem in another civil code country, they’re going to lobby their people to change the law in China, so that’s a piece of good news,” said Squyres. “Nonetheless, that will take some time. China is not nearly as bad as it used to be, but it’s still one of the worst in stealing marks and holding companies like Tesla [at] ransom.”

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