Pledge of Trademark Rights in China

Since the outbreak of the COVID-19 pandemic, China has further accelerated the process of exploring intellectual property rights as a tool of financing guaranteein order to support the resumption of work and production of enterprises and to promote the development of a knowledge-based economy.

 At a regular press conference held on July14, the China State Intellectual Property Office (the “CNIPA”) announced thatin the first half of 2021, the amount of financing through trademark pledges inthe country had reached RMB 21.2 billion, an increase of 5.0% year on year; and the number of pledged projects was 698, an increase of 37.7% year on year.

From a quantitative point of view, the country is developing rapidly in taking security interests over trademarks. From a proportional point of view, however, the scale of trademark pledge financing is too small to meet the financing needs of SMEs. Statistics show that trademarks and other IPRs are seldom used to access credit by Chinese companies - only 2.5% of high-tech enterprises and technology-based SMEs in the country have registered patents and trademark pledges.

Recently, a number of actions led by the CNIPA have reflected China's determination to promote the popularity of IP-secured financing and development of aknowledge-based economy.

In June this year, the CNIPA, together withthe China Banking and Insurance Regulatory Commission, and the National Development and Reform Commission jointly issued a policy-guided action plan, proposing to achieve an annual increase of more than 20% in the number of pledged IPs as well as the amount of financing in more than 100 industrial parks within the next three years. On June 30, 2021, the CNIPA then issued four measures, ranging from improving consulting and inquiry services, further improving registration efficiency, to providing fast registration green channel services, and strengthening business capacity, aiming to comprehensively improve the accessibility and convenience of trademark pledge registration services.

Under the Chinese legal framework, trademark owners can pledge the property rights oftheir IPRs as security for financing and other forms of transactions. To enforce any security rights over a trademark, the pledge must be properly registered with the CNIPA. After the registration, the owner of the pledged trademark will no longer be free to assign or license the same without the pledgee’s consent.

 Article 440 of the PRC Civil Code stipulates that the alienable registered trademark rights, patent rights,copyrights and other property rights in intellectual property rights can be pledged.

 Further, in accordance with Article 444 ofthe PRC Civil Code and the Provisions on Registration Procedures for Pledge of Exclusive Use of Registered Trademarks, the pledge of exclusive use of atrademark is subject to a written agreement between the pledgor and the pledgee. It is worth noting that the right of pledge is not created when the parties conclude the agreement; it is created when the pledge is registered with the CNIPA.

After the right to exclusive use of atrademark is pledged, the pledgor shall not transfer or permit others to useit, unless the pledgor and the pledgee agree through consultation. The payment obtained by the pledgor from transferring or permitting others to use the property rights in the pledged trademark rights shall be paid off or depositedwith the pledgee in advance.

Unlike countries where security over IPRs is commonplace, China is still building up itslegal mechanism and tools to supply IPRs as security in financing. In view the immaturity of various systems, the relevant stakeholders are advised to fully consider the feasibility and difficulty of fulfilling or realizing the rightsin a pledged trademark before reaching an agreement for the transaction.

 Before taking a trademark as security, thelending party is recommended to conduct a due diligence on the other party andits trademark assets. Some practical issues have to be addressed. For example:

Validity of the pledged trademark: The pledged trademark must be within the validity period and havenot been cancelled or invalidated, deregistered or lost the exclusive right touse the trademark. During the period of trademark pledge, the trademark ownerneeds to maintain the validity of the pledged trademark, including timely renewal, active response when the registration of the pledged trademark isattacked by a third party, and active use of the pledged trademark, etc.

Possible defects in the rights of the pledged trademark: Whether the pledged trademark can be normally used, whether it is frozen by a court, whether it is restricted from assignment, licenseor pledge. In addition, it is also necessary to know whether the pledged trademark has been previously pledged.

The market value of thepledged trademark: In addition to evaluating the market value of the pledged trademark before the registration, the trademark owner also needs to ensure that the value of the pledged trademark is effectively maintained before theloan is settled. It should be taken into account that throughout the term ofthe pledge, the value of the pledged trademark may be diminished due to rightsdisputes, inactive use, third party infringement or product liability claims.

Furthermore, according to the requirementsof the "Procedures for the Registration of Pledge of Exclusive Use ofRegistered Trademarks," the identical or similar trademarks registered bythe same trademark owner on the identical or similar goods/services shall be registered for pledge together. In case of breach of the settlor’s obligations and enforcing the pledge, the identical or similar pledged trademarks shall be assigned together to avoid the situation that the identical or similar trademarks registered on the identical or similar goods/services are held by different entities after the assignment.

On the one hand, using trademarks as asecurity for financing can enrich financing methods for enterprises and reducethe financing costs, thereby increasing the overall efficiency; on the otherhand, trademark pledge can help explore the monetary value of the brand, and at the same time urge enterprises to attend to use and maintain their registered trademarks and optimize brand building, thereby raising the awareness of brand protection.

It is foreseeable that under the exploration of a knowledge-driven economy, China will vigorously promote the role of trademarks and other intangible assets in economic activities in thefuture. To this end, related supporting legal mechanism and tools will have to be further improved to meet the increasingly complex business transaction models. Such developments will also drive the development of intermediary services such as trademark valuation and trademark transactions.