When Mark H. Allenbaugh took over his father's company, MAG Engineering & Manufacturing, in 2003, all appeared to be going gangbusters. The Huntington Beach (Calif.) maker of locks and security equipment had about 50 employees and $40 million in annual revenues, and counted Home Depot (HD ), Ace Hardware, and True Value among its customers.
But early in 2004, shipments from several of MAG's suppliers in the Southern Chinese province of Guangdong were held up by local customs officials. Allenbaugh couldn't understand why, as MAG had been working successfully with Chinese suppliers for a decade.
After some sleuthing, Allenbaugh, a former lawyer, discovered that one of his suppliers had registered MAG's trademark in China as its own. That company, Taixing Lock Industry Manufacturing, had told customs that it owned the Chinese-registered trademark and that other suppliers weren't authorized to produce MAG products. "They were trying to force us to buy more from them and not from any other sources," says Allenbaugh. "It scared the hell out of me. I had no clue that this was possible."
When contacted by BusinessWeek SmallBiz, Taixing's head of sales, Jackie Lam, said the company had never supplied MAG and that it did not hold MAG's trademark.
While Chinese authorities have yet to make a final decision regarding Allenbaugh's case, entrepreneurs working in China would do well to be wary. "Trademark theft is a common problem for well-known brands [in China], but smaller guys are vulnerable, too," says Sebastian Hughes, an intellectual-property lawyer with Jones Day in Hong Kong. Before selling -- or even sourcing -- in China, American companies are wise to register their intellectual property in that country. That's particularly important because Chinese law generally respects not first use of a trademark, as in the U.S., but first registration, says Mitchell Dudek, a partner in the Shanghai office of law firm Paul, Hastings, Janofsky & Walker.
Your first move should be to log on to the Web site of the State Administration on Industry and Commerce Trademark Office in Beijing, www.ctmo.gov.cn, to make sure your company's trademarks haven't been registered by someone else. Then you can file an application for about $350. You'll need to work with a China-based law firm or an international firm with offices there. The U.S. Embassy Web site has a link to the State Intellectual Property Office with a list of firms. In all, the process runs about $1,000, says Hughes. "For the cost of applying for your trademarks and other intellectual property in China, the benefits you gain in terms of protecting yourself against this kind of headache are priceless," he says. Another bit of insurance, says Dudek, is adding a clause to your contracts that prohibits suppliers or other contractees from violating your trademark. (Allenbaugh says he believes he did have such a clause.)
Allenbaugh began by working with law firms in both the U.S. and Taiwan. He spent close to $40,000 in legal fees without solving the problem. In April, 2004, he traveled to Beijing and filed a formal opposition to the trademark registration that had been granted to Taixing in 2002. He asked the trademark office to do a Google (GOOG ) search for MAG's products and to locate them on Home Depot's site as well. Then he gave the office packaging and invoices that predated Taixing's trademark application.
The Chinese authorities suspended Taixing's trademark, though MAG will have to wait another two to three years before Beijing decides whether to revoke it for good. In the meantime, Allenbaugh isn't taking any chances. He's spent about $15,000 to file nearly 350 separate trademark applications for all his products with Beijing. "I went bananas to make sure we were protected now and forever," he says. "It's insurance."
By Frederik Balfour