Options for the USPTO to consider

As the USPTO continues to be inundated with trademark applications from China, Offit Kurman principals Matthew D Asbell and Laura J Winston explore the different paths that the office could take.

Most jurisdictions allow entities to register trademarks and thus claim exclusive rights without having used or even having any intention to use them. While these countries eventually allow third parties to challenge registrations on the grounds of non-use, they do not require registrants to proactively demonstrate use in the absence of such challenges. The United States is an outlier because it generally requires evidence of use in order to obtain and maintain a registration.

Because of this, the USPTO has been highly concerned about the number of trademark registrations that remain active despite the absence of use for all or some goods. Alarm bells are also ringing over the steep rise in new applications from outside the United States, primarily China, a substantial proportion of which are based on claims of actual use in US commerce and include suspect evidence of this.

While greater numbers of filings generate more revenue for the USPTO, they also increase the burden on the agency and slow its processes. In addition, they discourage or even block other parties that are genuinely interested in adopting and registering similar marks from doing so. Given this sharp uptick, alongside overly expansive registrations and applications, interested parties may have less confidence in the trademark register and thus in the results of clearance searches. They often need to expend greater efforts and fees in investigating and challenging previous filings.

Legitimate rights holders also encounter increased requirements and refusals in their own applications and registrations arising from the USPTO’s overzealous attempts to declutter the register. Moreover, such efforts require more resources as the USPTO develops new programmes and proceedings, adopts new technologies and trains its employees. Brand owners bear the burden of rising costs associated with these activities through increased government fees.

Possible reasons for the flood

A quick review of several new US applications filed by Chinese entities suggests that many cover a single class with about 15 different goods or services, and are based on claims of actual use in US commerce. The vast majority were single applications, each made by a different applicant. The scope of the goods and services, as well as the filing basis, appears to be a departure from earlier practices. Previously, Chinese and numerous other foreign applicants would often seek registration based on intent to use and/or a home country application or registration, for an extensive list of goods and services.

In addition, many of the US applications filed by Chinese applicants in 2020 were for marks comprising odd combinations of a relatively small number of characters that frequently form unpronounceable terms. Most comprise just six or seven letters. We identified approximately 3,000 new 2020 applications for marks comprising up to seven letters beginning with the letter ‘A’ (eg, AWNEVZU, AVULZG and ASVZUNY) and 2,000 applications for such marks beginning with the letter ‘B’ (eg, BLLATTA and BNUWQYU), all originating from China.

While these terms would generally be considered fanciful and thus strong on the spectrum of distinctiveness under the principles of US trademark law, their nonsensical nature and the fact that there are so many of them suggests that the applicants care more about having an application or registration on file than about establishing a particular brand.

At first glance, it seems unlikely that such marks could be the name of a product or e-commerce storefront. E-commerce and social media platforms such as Alibaba, Amazon, Facebook and WeChat require trademark registrations for some of their programmes. While this appears to be a growing trend among such sites and undoubtedly encourages brand owners to apply to register their marks if they have not already done so, it is unlikely that brand protection is the driving force here.

If the Amazon Brand Registry were the motivator, a large proportion of these applications for seemingly nonsensical marks would likely be filed through one of the firms or attorneys in the Amazon IP Accelerator programme, which provides a competitive advantage to a limited selection of legal representatives by allowing them to secure their clients’ brands in the Amazon Brand Registry well before the issuance of registrations. However, an analysis of the correspondents of record in these cases does not reveal that significant proportions were filed by Amazon’s selected firms. Further, we could not identify a corresponding IP Accelerator programme in China. For these reasons, we doubted that e-commerce platforms, through their brand protection programmes, were the cause of the problem. However, we could not rule out that e-commerce platforms had some role.

Another candidate might be local government subsidies. In January 2021 the USPTO issued a report examining non-market factors including Chinese government subsidies in the form of direct payments from local governments in enterprise zones to trademark registrants, as well as mandates, bad-faith and defensive registrations, and their impact on trademark filings. The report concludes that the inflated statistics that result from non-market factors may overstate the intensity of China’s brand-creation efforts, arguably creating a misperception that the country or its major industry centres are doing more business than is actually the case.

The report refers to 77 sub-national trademark subsidies in municipalities and special economic zones in China, including in Shanghai and Shenzhen – although several have since expired. It further mentions the China National IP Administration’s January 2020 announcement of plans to eliminate large subsidies for trademarks. In fact, according to the Shenzhen government website, the subsidy that it was offering was lowered in October 2019 from Rmb5,000 to Rmb1,000 (approximately $150) – less than half the official filing fee for a single-class trademark application in the United States. It therefore appears unlikely that these subsidies are driving the influx, at least in Shenzhen, where the highest proportion of Chinese applicants is based.

So what is behind the rise?

According to Maggie Wang, chief representative in China for Ladas & Parry LLP, the main motivators are the buying and selling of Amazon storefronts accompanied by their corresponding trademark registrations. Amazon has two kinds of seller accounts. Individual accounts are free to register and maintain but have associated fees with each sale. Professional accounts have a monthly fee, regardless of the number of sales. Professional sellers with trademarks listed in the Amazon Brand Registry are entitled to branded storefronts and other advertising and sales-bolstering perks at no additional cost. Others have described Amazon’s active efforts to recruit professional sellers in China. Recent estimates put the numbers at between 200,000 and 250,000, with a substantial proportion attempting to take advantage of US consumers by manipulating Amazon’s platform in several ways. The sale or transfer of control of these storefronts is often accomplished through brokers, who negotiate fees of as much as $100,000 each with buyers, who want easy and immediate access to the US market for their products. The branding is of much less consequence than the ability to sell the storefront. Despite our previous doubts, it seems that the Amazon Brand Registry has some responsibility after all.

This situation has created an incentive for individuals and businesses to file applications, while bypassing efforts at brand development and the corresponding costs. It also helps to explain why so many of the filings are based on claims of actual use, which often proceed to registration more quickly and cheaply without need to wait for approval to submit evidence of use. Given the prospect of extensive revenues from a single sale and the relatively minimal costs of applying, combined with the disinterest in brand development, it is a minor leap to arrive at the concept of using an algorithm to come up with nonsensical marks to use in applications.

Using an algorithm to generate a trademark that an applicant can legitimately put to use before filing its application does not necessarily run afoul of US trademark law. If the applicant sets up a storefront from which it actually sells goods bearing the mark, this constitutes legitimate use, even if its intention is to sell the trademark and business to the highest bidder as quickly as possible. However, if the applicant simply aims to make a single sale in the United States in order to file an application or statement of use and obtain a registration, it would be open to the challenge that this constitutes mere token use. Some applicants have not used their marks at all and instead support their applications with fraudulent evidence. It appears that many Chinese applicants view US trademark applications as a relatively inexpensive investment compared to the significant income that can result from the sale of a storefront.

What is being done about it?

Efforts by the USPTO to address the issue have been piecemeal and not completely successful. The agency has, at least until recently, been limited in its authority, as well as the resources that it can dedicate to tackling the problem. Recent fee increases will help it to implement technology to better identify fraudulent specimens and to expand its use audit programme so as to narrow or cancel registrations with insufficient evidence of use.

In addition, the USPTO has released guidelines surrounding the examination of allegedly digitally altered specimens, although many US practitioners – including the authors – have received refusals contending that real, legitimate specimens were somehow falsified, with clients having to bear the costs. Many of us are now taking extra steps to ensure that legitimate specimens will not be questioned.

The agency has also placed some of the burden of addressing the cluttered register on legitimate brand owners, requiring them to challenge applications and registrations that serve as obstacles. The Trademark Modernisation Act 2020, for example, will equip parties to inform the USPTO of certain registrations that should be expunged or re-examined due to non-use or to directly seek cancellation on similar grounds. However, utilising these new options against a significant portion of concerning registrations not only will be costly for stakeholders but it will also place a major burden on the USPTO in managing the proceedings. The new law does not address the influx of applications apart from formalising the procedures for filing letters of protest and setting a requirement for the USPTO to take action within a set time limit.

What should the USPTO do next?

There appears little hope in the short term of achieving a clean trademark register consisting only of marks that are – or at least will soon be – in use. While reaching a consensus on what should be done has been a challenge, and e-commerce platforms would be welcome to play more of a role in the solution, the USPTO and the trademark bar should consider the following options.

Gather more information about use in commerce

The USPTO’s requirements for use specimens are essentially limited to showing that the applied-for mark is used as a source indicator. It has traditionally relied on the applicant’s declaration under penalty of perjury that the mark is in actual use in US interstate commerce, purportedly because it did not have the resources to examine this element.

Recent increases in official fees should enable the USPTO to begin to address these aspects of use. However, as it would be burdensome on legitimate applicants to have to provide additional evidence, the USPTO could instead require each applicant to include a statement attesting to how its use qualifies as use in interstate commerce, when the use shown in the specimen and described in the statement occurred, and how much use has occurred as of the date of filing the claim of use, whether as a use-based application or as a statement of use. Such statements would enable examining attorneys to raise refusals and third parties to challenge applications or registrations more easily.

Gather more information about subsidies

While subsidies do not appear to be the current driving force, they have been in the past and could be again in the future. By proactively gathering information about subsidies, the USPTO would be better positioned to determine whether these affect the quality of filings on the register. The agency should include a request for information in all applications in order to learn whether applicants have received – or will become entitled to receive – one or more governmental subsidies for their application, and the amounts, limitations and requirements of each. An affirmative and honest answer should not be grounds for refusal or objection, but a false answer should be considered a fraud on the USPTO and raise a presumption of a lack of bona fide use.

Provide an incentive for disinterested parties

In establishing implementing rules for the Trademark Modernisation Act, the USPTO could consider refunding some or all official fees in successful expungement and re-examination cases, or even providing a small reward as an incentive. This should not be enough to encourage a flood of specious claims, but possibly enough to encourage people to invest some time and money in a claim that they believe is appropriate and likely to succeed. The USPTO might also be able to mobilise its various law school IP clinics to make these kinds of submissions.

At the time of writing, there has been no discernible slowdown in the number of US trademark applications coming from China, even with the increase in fees that came into effect at the beginning of 2021. As long as there is an economic advantage, the applications will continue, and many will be ill-gotten and detrimental to legitimate filers and brand owners. However, these disadvantages can be mitigated if brand owners, trademark practitioners and the USPTO work together to ensure that they are addressed at the policy level.

The authors would like to thank Chris Frangiosa of Eckert Seamans Cherin & Mellott LLC, Eric Perrott of Gerben Perrott PLLC and Maggie Wang of Ladas & Parry LLP for their contribution to this piece.

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