To Note Or Not To Note – Promissory Note in Commercial Lending

[Note: This article was originally posted on July 9, 2021.]

“Undesirable” consequence of “confusion & doubt”

In 1976, a UK lawyer questioned the wisdom of the common practice in US to memorize a commercial lending transaction with both a loan agreement and a promissory note:[1]

“[M]any English lawyers regard them [American-style promissory notes] as undesirable. I think most English lawyers would advise strongly against the practice of setting out the obligations as between borrower and lender in two contemporaneous documents expressed in different terms. The opportunities for confusion and doubt and legal difficulty involved in such a practice are something which lawyers are – or ought to be – brought up to avoid.”

Given such an “undesirable” consequence of “confusion & doubt” by using a promissory note and a loan agreement “contemporaneously”, the question is whether it makes sense to continue this practice. To answer the question, it may be useful to find out why US adopted this practice in the first place.

Historical developments – divorce from UK practice

As the UK lawyer noted, because of the “undesirable” consequence associated with the use of “contemporaneous” documents in a transaction, in whole or in part[2], it appears UK bankers have historically avoided using promissory notes in commercial lending, relying instead on bills of exchange primarily.[3] In US, however, as the banking industry began to develop after the revolutionary war, the influence of UK banking practice began to wane, and promissory notes eventually replaced bills of exchange in commercial lending by the 100th birthday of the new nation. (See, eg, Summers, in Footnote 3. “[T]he bill of exchange, so prominent from Colonial times, slowly disappeared and was replaced by the promissory note as the most common credit instrument, a transition largely completed by the end of the Civil War”.)

So, why did US bankers & lawyers ignore the wisdom of their UK counterparts and preferred promissory notes over bills of exchange, in spite of the potential “confusion and doubt” (and any other potential disadvantages) arising from the use of two “contemporaneous” documents?

To answer the question, one NY lawyer proposed a few explanations, again in 1976.[4] First, UK imposed a stamp duty on promissory notes in 1782, which remained effective for almost 200 years. In US, on the other hand, stamp taxes for promissory notes were enacted as wartime emergency measures and repealed relatively quickly.[5] Second, as US became more mobile and less structured, borrowers could relocate to another state easily. US bankers might have preferred a simple piece of paper, without the need to produce the full bank records, to sue borrowers across state lines. Third, prior to the enactment of the Federal Reserve Act in 1913, there was uncertainty whether national banks in US had the corporate power to accept bills of exchange drawn on themselves. And fourth, habit. That is, the participants in US commercial lending – bankers, borrowers, bank regulators, judges, juries, etc – had been accustomed to promissory notes and found no compelling reasons to change.[6]

From the above historical analysis, it’s fair to conclude that the adoption of promissory notes in commercial lending in US served primarily as a substitute of the bills of exchange used in UK. However, in a typical promissory note, the obligor for payment (the borrower) is also a party to the loan agreement. The obligor for payment in a typical bill of exchange, on the other hand, is not the borrower, and therefore not a party to the loan agreement.[7] Therefore, replacing the bill of change by the promissory note results in the “undesirable” consequence of using “contemporaneous documents” in a transaction.

The next question then is whether, in the current environments, such an “undesirable” consequence (and any other additional disadvantages) may outweigh the benefits, if any, that promissory notes can provide, and thus whether it makes sense to continue to use promissory notes in conjunction with a loan agreement.

Modern analysis of pros & cons – noteless syndicated loans

Many commentators have analyzed the advantages & disadvantages of promissory notes under the modern-day legal frameworks for commercial lending in US. (See, eg, here, here, & Bellucci and McCluskey, The LSTA’s Complete Credit Agreement Guide (2nd ed. 2017), pp.200-203.) So, I will only briefly summarize the main points here.

In terms of the advantages of a promissory note, the main one is to “evidence” the associated loan. By my interpretation, this means the ability to show the world (ie, the borrower, regulators, courts, juries, third parties, …) the existence of the loan in a short, simple, and easy-to-understand document, in contrast with the lengthier and more complicated loan agreement. Additional notable advantages include negotiability[8], expedited court proceedings (mainly in NY[9] and some Latin America countries[10]), and the ability to pledge the note to the Federal Reserve at its discount window[11].

On the other hand, the disadvantages of a promissory note include difficulties in safekeeping and locating the note, the need to amend and re-issue the promissory note when the loan agreement is amended or when the loan principal amount changes under the existing loan agreement, the potential for inconsistencies between the promissory note and the loan agreement (as the UK lawyer noted), the additional work required to ensure consistency between the documents, and, particularly for syndicated loans, the logistic burdens created when a lender assigns all or part of its commitment (requiring collection of old notes to issue new notes).

It has been argued, however, that except for the “evidence” advantage, most of the other advantages offered by a promissory note are either not available (negotiability[12]) or can be accomplished by a loan agreement (expedited proceeding & pledge at Federal Reserve[13]) in most instances. This is particularly so for syndicated loans, which involve mostly sophisticated parties in complicated transactions, and the combined disadvantages of the promissory note outweigh its weakened advantages. As a result, in recent years, most syndicated loans have been “noteless”, making promissory notes optional by the request of individual lenders, and relying primarily on the loan agreements to memorize the transactions.[14]

Appropriate use of promissory notes – careful evaluation and practical expectation

Despite the “noteless” trend in syndicated loan transactions, not all commercial lending transactions need to forsake the promissory note. It may still be beneficial to have a short, simple, and easy-to-understand document to “evidence” the existence of the loan. Care & caution must be exercised, however, to reduce, minimize, or avoid the potential disadvantages embodied in the use of two “contemporaneous” documents in a single transaction.

First of all, the reality is a short and simple document, as desirable as it may be, cannot be expected to properly memorize a complicated transaction. This deficiency may be reflected on the availability of the NY expedited proceeding afforded to a promissory note. Under NY laws, the expedited proceeding may not be available to the lender if the promissory note and the loan agreement have become so “intertwined” at the time of breach.[15] Consider the case in Bonds Financial v. Kestrel Technologies[16]. There, the loan agreement of a resolving credit included events of default other than the failure to make payments. The borrower defaulted on a non-monetary term under the revolving loan agreement, which accelerated payment under the promissory note, and the lender instituted an expedited proceeding based on the promissory note. The court held that the expedited proceeding was not available pursuant to the promissory note, because it was necessary to reference an external document, the loan agreement, to determine whether an event of default had occurred.

Therefore, when structuring a loan transaction, the parties should carefully evaluate the interactions between the promissory note and the loan agreement (and other loan documents such as the mortgage[17]) and the potential of reduced or lost benefits from the promissory note, weigh the advantages and disadvantages afforded by using the note, and consider the option of a “noteless” loan transaction. This is particularly so when the promissory note references the loan agreement, which adds to the “intertwine-ness” between the documents (thus reducing the availability of the NY expedited proceeding) and also erodes the negotiability of the note.

In the minimum, a control clause should be included in both the promissory note and the loan agreement and specify which document should control in the event of inconsistencies.

[1] Richard G.A. Youard, Promissory Notes in International Loan Transactions: An English View, 4 INT’l Bus. LAW. 259 (1976).

[2] One author suggested that the UK stamp duty imposed on promissory notes in 1782 might have been another reason for the UK practice against promissory notes. Bruce W. Nichols, Some Observations on the American Approach to the Use of Notes in International Lending, 4 INT’l Bus. LAW. 239 (1976).

[3] See, e.g., Youard, supra; Nichols, id. (“English banks […] seem chiefly to have supplied credit by discounting bills of exchange held by customers, not the notes of such customers.”; Bruce J. Summers, Loan Commitments to Business in United States Banking History, Economic Review, vol. 61, September/October 1975, pp.15-23.

[4] Nichols, supra in Footnote 2.

[5] Florida currently imposes stamp taxes on promissory notes.

[6] The NY lawyer also suggested “transferability” of promissory notes (as opposed to loan agreements) as another reason for their continued use, particularly the ability to pledge promissory notes at the Federal Reserve. This reason, however, is now out of date, as most loan agreements are now transferrable, and the Federal Reserve currently accepts loan agreements as collateral. The latter subject will be discussed later in this article.

[7] In a typical bill of exchange associated with a trade, the seller (beneficiary) borrows from the seller bank (which may or may not be the drawee), which is documented by the loan agreement, while the buyer (drawer) orders the buyer bank to pay the seller (beneficiary), which is documented by the bill of exchange.

[8] Under UCC Article 3, an assignee of a “negotiable” instrument who qualifies as a “holder in due course” takes the instrument free and clear of most claims and defenses afforded to the maker of the instrument against the original holder. NY UCC 3-302 & 3-305. See also Footnote 12.

[9] NY CPLR 3213, titled “Motion for Summary Judgment in lieu of Complaint”, provides an expedited proceeding for enforcing an “instrument for the payment of money only”.

[10] See, eg, The LSTA’s Complete Credit Agreement Guide, supra at 201-202.

[11] The LSTA’s Complete Credit Agreement Guide, supra at 202.

[12] Under UCC Article 3, a “negotiable” instrument must include an unconditional promise or order to pay and all essential terms. NY UCC 3-104(1)(b). Most modern day promissory notes refer to the associated loan agreements and thus do not satisfy these requirements. See, eg,

[13] The Federal Reserve began to accept noteless loans as collateral in late 1990s. The LSTA’s Complete Credit Agreement Guide, supra at 202.

[14] The LSTA’s Complete Credit Agreement Guide, supra at 202-203. “[W]ith few exceptions [syndicated loan] lenders today no longer generally request promissory notes of the borrower”.

[15] Mlcoch v Smith, 173 AD2d 443, 444 (NY App Div. 2nd Dept. 1991). (“[T]he general rule is that the breach of a related contract cannot defeat a motion for summary judgment on an instrument for money only unless it can be shown that the contract and the instrument are “intertwined” and that the defenses alleged to exist create material issues of triable fact”.

[16] Bonds Financial, Inc. v. Kestrel Technologies, LLC, 48 AD 3d 230 (NY App Div. 1st Dept. 2008)

[17] In some states, a mortgage (or deed or deed of trust) must recite the amount of debt secured by the mortgage. If the mortgage references a promissory note, and the debt principal amount changes, a new note may need to be issued, and the mortgage will need to make sure to reference the correct note. See,

Trademark Disclosure and Fraud, Part II – Legal Framework

Disclosure by a trademark applicant

In Part I of this 2-part series, I pointed out that the Trademark Law (Lanham Act) requires a trademark (including service mark) registration applicant to provide the following specific info to USPTO (US Patent & Trademark Office) in the registration application[1]:

  • Applicant’s domicile & citizenship;
  • The date of applicant’s first use of the mark;
  • The date of the applicant’s first use of the mark in commerce;
  • The goods / services in connection with which the mark is used;
  • A drawing of the mark;
  • One or more specimens of the mark as used.

Additionally, the Lanham Act also requires the applicant to submit a verified statement, certifying, among others, that he/she is entitled to use the mark, that he/she has a bona fide intention to use the mark, that (to his/her best knowledge and belief) the facts recited in the application are accurate, and that (to his/her best knowledge and belief) no other person has the right to use the mark without causing confusion or mistake, or to deceive.[2] In the USPTO trademark application form, the pre-prepared texts of the verified statement specifically warns that “willful false statements and the like are punishable by fine or imprisonment, or both, under 18 U.S.C. § 1001, and that such willful false statements and the like may jeopardize the validity of the application or submission or any registration resulting therefrom”[3].

The required verified statement makes it plenty clear that submitting “willful false statements” is prohibited by the Lanham Act (besides constituting a federal criminal offense under 18 USC 1001). Many questions, however, remain. – What actions constitute a “willful false statement”? What if the applicant makes a mistake, or omits to submit certain info. Does the applicant have an affirmative duty to provide certain info, even if not specifically required to register a mark? What may be the punishments?

Statutory prohibitions – Lanham Act

The Lanham Act sets forth the specific statutory language that defines prohibited violations of the disclosure requirements with respect to a USPTO trademark application, and the respective punishments. Specifically, it prescribes 3 types of punishments: Cancellation of registration; denial of incontestability; and civil action liabilities. Below is the language adopted in the Lanham Act prescribing such prohibitions.

  1. Cancellation of registration (15 USC 1064(3)): “A petition to cancel a registration of a mark […] may […] be filed […] [a]t any time if […] its registration was obtained fraudulently”. (Emphasis added.)
  2. Denial of incontestability (15 USC 1115(b)(1)): “To the extent that the right to use the registered mark has become incontestable […], the registration shall be [incontestable,] subject to the [defense or defects] [t]hat the registration or the incontestable right to use the mark was obtained fraudulently”. (Emphasis added.)
  3. Civil damages (15 USC 1120): “Any person who shall procure registration […] of a mark by a false or fraudulent declaration or representation […] or by any false means, shall be liable in a civil action […] for any damages sustained thereof”. (Emphasis added.)

Under the Lanham Act, therefore, a trademark registration “obtained” or “procured” “falsely” or “fraudulently” may be subject to punishments[4]. The law, however, does not define these terms. It is then up to the USPTO or courts to define them, and thus to define the scope of trademark disclosure required of a trademark applicant before USPTO.

Scope of prohibition – “Fraudulently”

It is beyond the scope of this writing to extensively discuss the court and USPTO cases addressing the definition of the term “fraudulently”[5]. I will only summarize the following 2 holdings.

  1. No affirmative duty to disclose. In the 1961 case, Bart Schwartz v. FTC[6], the Court of Customs & Patent Appeals[7] held that a trademark applicant has no affirmative duty to disclose unrequired info to USPTO, and that “[t]he mere withholding of information” does not constitute a fraudulent act punishable under the Lanham Act. Rather, the Court determined that the Lanham Act only requires that an applicant “will not make knowingly inaccurate or knowingly misleading statements”.  (Emphasis original.) There, the Court held that the mere withholding of the meaning of the mark (FIOCCO) in a foreign language (Italian) was not a fraudulent withholding of info, without more.
  2. Willful intent to deceive required. Addressing the question of whether a trademark registration was obtained fraudulently, the Court of Appeals for the Federal Circuit pronounced in 2009 in the seminal case, In re Bose[8], that “a trademark is obtained fraudulently under the Lanham Act only if the applicant or registrant knowingly makes a false, material representation with the intent to deceive” the USPTO. (Emphasis added.) Particularly, the Court held that “the standard for finding intent to deceive is stricter than the standard for negligence or gross negligence”, and that “[t]here is no fraud if a false misrepresentation is occasioned by an honest misunderstanding or inadvertence without a willful intent to deceive”. In the case, the counsel of the registrant (Bose) represented to USPTO that the mark (WAVE) was in use in commerce for audio tape recorders and players, even though Bose had stopped manufacturing and selling audio tape recorders and players prior to the time of the counsel’s representation. The Bose counsel testified that Bose had continued to repair previously sold recorders & players and that in his belief such repairing activities constituted valid use of the trademark in commerce. The Court held that the Bose counsel’s statement was false but not fraudulent, because it was “not uttered with the intent to mislead” the USPTO. As a result, the WAVE mark avoided the fate of cancellation and remains registered.

In summary, a trademark owner does not have an affirmative duty to disclose unrequired information to USPTO and may be held to have obtained / procured a trademark registration “fraudulently” only if he/she has the intent to deceive the USPTO.

Of course, we are now left wondering what constitutes an “intent to deceive”. But that will wait for another day and another write-up!

Scope of prohibition – “Falsely”

As discussed previously, pursuant to the Lanham Act (15 USC 1120), if a trademark registration is obtained “falsely” (as a separate cause of action from “fraudulently”), the trademark owner may be liable to other persons in a civil lawsuit. (See Footnote 4.)

Therefore, even an honest mistake, a misunderstanding, or a careless omission in communications with USPTO may subject a trademark registrant to civil liabilities, even if it is not considered “fraudulent”. Such undesirable civil liabilities have prompted the courts to hold that “[a]n applicant for registration of a trademark is required to exercise uncompromising candor in his communications with the United States Patent and Trademark Office, lest any registration he obtains will be invalid and/or unenforceable. He must not only refrain from making false representations to the United States Patent and Trademark Office, but must make full disclosure of all facts to his knowledge which might bear in any way on the Office’s decision to grant the registration sought.”[9] (Emphasis added.)

Conclusion – Uncompromising candor

In Daesang Corp. v. Rhee Bros[10], the trademark owner did not inform the USPTO that the English translation of the registered mark, “Soon Chang”, was the name of a Korean province famous for producing the goods (Korean hot bean paste) associated with the mark. Did the non-disclosure of the association constitute a fraud on USPTO? Did the registrant have an affirmative duty to disclose the association? What knowledge must the registrant have possessed about the association for the non-disclosure to constitute intent to deceive? What knowledge must the registrant have possessed about the application requirements?

A trademark applicant or registrant pondering over these questions is best to heed the advise of the court to “exercise uncompromising candor” and “make full disclosure of all facts to his knowledge which might bear in any way on the Office’s decision to grant the registration sought.”

[1] 15 USC 1052(a)(1) & (2).

[2] 15 USC 1051(a)(3). The verified statement described in this paragraph is for an in-use application (under 1051(a)), which is slightly different from that for an intent-to-use application (under 1051(b)).

[3] Pursuant to the US criminal code under 18 USC 1001(a), it is a federal criminal offense to provide a “willful false statement” to any US government branch or agency, including USPTO. (“[W]hoever, in any matter [before the Federal government], knowingly and willfully — (1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact; (2) makes any materially false, fictitious, or fraudulent statement or representation; or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry; shall be fined under this title, imprisoned not more than 5 years or […].”) (Emphasis added.)

[4] The phrase “false or fraudulent” has been interpreted by some courts to provide for 2 separate causes of action. See, eg, Citibank N.A. v. Citibanc Group, 215 USPQ 884 (ND Ala 1982) (“’[F]alse’ and ‘fraudulent’ as used in 15 USC §1120 are not synonymous, and that damages are recoverable thereunder where the registration is procured either by a declaration which was incorrect or by a declaration which was a willful attempt to mislead and injury has resulted as a consequence thereof.”), aff’d 724 F.2d 1540 (11th Cir 1984); In re Bose Corporation, 580 F.3d 1240 (Fed Cir 2009) (“the latter involv[es] an intent to deceive, whereas the former may be occasioned by a misunderstanding, an inadvertence, a mere negligent omission, or the like.”)

[5] For more in-depth discussions, see, eg, here.

[6] Bart Schwartz v. FTC, 289 F.2d 665 (CCPA 1961).

[7] The court of Customs & Patent Appeals was the predecessor the Court of Appeals for the Federal Circuit, which was established in 1982 and has nationwide jurisdiction over trademark cases, among others.

[8] In re Bose Corporation, 580 F.3d 1240 (Fed Cir 2009).

[9] T.A.D. Avanti, Inc. v. Phone-Mate, Inc., 199 USPQ. 648 (CD Cal 1978).

[10] Daesang Corp. v. Rhee Bros., 77 USPQ.2d 1753 (D Md 2005).

Trademark Disclosure and Fraud, Part I – Impact and Implications of Surging Chinese Trademark Applications

This Part I of a 2-part series explores the recent exponential growth of the number of trademark applications at USPTO (US Patent & Trademark Office) that originated from China, and its impact and implications with respect to the disclosure by trademark applicants and registrants to USPTO. In Part II, I will review the legal standards and liabilities for trademark disclosure and the importance of “uncompromising candor” in all communications with USPTO.

Incentives for fraud – Attractive benefits of a federal trademark registration

In US, trademarks (including service marks) are protected under both federal and state laws. These protections are predicated on actual use. That is, once a mark is in actual use as an indicator of the source of goods / services, the mark can be protected without having to register the rights with the governments. Federal registration of a trademark, nonetheless, provides several benefits to the trademark owner (see, eg, here.), such as:

  • Presumption of validity and ownership of the trademark;
  • Nationwide priority in the trademark;
  • Public notice of the claim of ownership of the trademark;
  • Listing in USPTO’s online database;
  • Right to use the federal registration symbol “®”;
  • Use of US registration as a basis to obtain foreign registrations;
  • Ability to stop import of goods at the border;
  • Ability to bring a lawsuit in federal courts;
  • Ability to demand statutory damages;
  • Etc.

In the age of e-commerce, the benefits of a federal trademark registration can be even more attractive. A registered trademark owner can request an e-commerce platform, such as, to take down listings that the owner believes to be infringing on the trademark, by presenting the trademark registration as proof of senior rights to use the trademark. To avoid their own liability, e-commerce platforms generally comply with the takedown request relatively quickly, hampering the alleged infringer’s ability to profit from the e-commerce platforms, which have become a critical sale channel for nearly all retail businesses.

Such benefits vested in federal trademark registrations, however, also can serve as a perverse incentive for bad actors to abuse the system, particularly when coupled with the relative ease at present to register a trademark in US. As the rest of this article discusses, in recent years, the number of trademark applications submitted by applicants located in China has risen phenomenally. Unfortunately, the number of fraudulent Chinese applications has also increased proportionally. These growing fraudulent applications pose a serious threat to the integrity of the federal trademark registration system and commercial activities in US. They have also prompted USPTO to scrutinize more carefully all trademark registrations and applications for potential fraud, affecting all trademark owners interested in registering their trademarks.

Vulnerability to abuse – Relatively simple application process

Compared with patents, registration of a trademark at USPTO appears relatively simple and straightforward. The registration application process is prescribed under the Lanham Act. (15 USC 1051 et seq.) Particularly, §1 of the Lanham Act requires a trademark registration applicant to provide the following key info (15 USC 1051(a)(1) & (2)):

  • Applicant’s domicile & citizenship;
  • The date of applicant’s first use of the mark;
  • The date of the applicant’s first use of the mark in commerce;
  • The goods / services in connection with which the mark is used;
  • A drawing of the mark;
  • One or more specimens of the mark as used.

There are a few other info that may also be required, if applicable, such as foreign translation of the trademark wording, special meaning of the trademark in the industry, geographical meaning, use by a licensee, etc. For many applications, however, the key info above is all that is required to register a trademark. Moreover, except for the “one or more specimens”, USPTO generally does not verify the authenticity of the info submitted by the applicant. Even for the specimen(s), although USPTO does examine them for any obvious deficiencies, it does not affirmatively verify their authenticity. Therefore, the trademark registration process adopts a largely honor system, relying primarily on the participants’ voluntary disclosure and the threat of penalty for false or fraudulent disclosure. Given the attractive benefits vested on a federal trademark registration, however, such an honor system may be vulnerable to abuses.

Increasing fraudulent applications and heightened alert at USPTO

In 2019, Ms. Mary Denison, then Commissioner for Trademarks at USPTO, presented a statement to the Congress titled “Counterfeits and Cluttering: Emerging Threats to the Integrity of the Trademark System and the Impact on American Consumers and Businesses.” (See here.) In the statement, Ms. Denison testified that trademark “filings from China have increased exponentially since 2014, jumping from approximately 5,161 applications in fiscal year 2014 to approximately 54,064 in fiscal year 2018. This dramatic rise in applications coincides with the rise in inaccurate and fraudulent claims of use”. In a report dated January 2021, USPTO further extended the timeframe to 2019, which continued to show exponential growth of Chinese applications. (See here and the Figure below.)

Furthermore, in a recent paper, Profs Barton Beebe & Jeanne Fromer examined a sub-set of 345 trademark applications randomly sampled from the set of use-based applications in Class 25 (Clothing) that originated from China and were filed to USPTO in 2017. Based on their analysis, they concluded that more than 2/3 (66.9%) of the applications examined included “fraudulent specimens”. (See here.)

Alarmed and alerted by this exponential rise in the number of potentially false, inaccurate, or fraudulent trademark applications, and the consequential harm to the trademark registration system and commerce, USPTO has implemented several measures to arrest this rising tide, including (derived from 2019 Denison Statement):

  • Requiring foreign-domiciled applicants to be represented by US counsel (effective 8/31/2019);
  • Auditing post-registration maintenance filings (initiated in 2012; made permanent in 2017);
  • Updating examination guidance and issuing refusals based on lack of evidence of use in commerce (2019); and
  • Piloting programs to allow third parties to provide evidence in examination and expedite inter partes non-use challenges (2018).

Furthermore, Congress has introduced bipartisan bills that would make it easier for the public or USPTO to expunge or re-examine a trademark registration that has not been in-use or has been abandoned. (See, eg, here.)

Trademark owners required to exercise “uncompromising candor”

All these agency and legislative actions and changes mean that all communications between trademark owners and USPTO will likely be scrutinized more closely than before, not only by USPTO but also by courts, competitors, opponents, and even the general public. Even before these changes, the courts have consistently required a trademark registration applicant to exercise “uncompromising candor” in communications with USPTO. With the new measures and changes, this “uncompromising candor” will likely be subject to scrutiny under an even stronger magnifying glass. All trademark owners should carefully review all their past and future disclosures to USPTO to make sure they have satisfied the “uncompromising candor” requirements.

In Part II, I will discuss the legal framework governing trademark disclosure and liabilities for violations.

US Sanctions Against China – Information for Risk Assessments

During the past 2 years, the US government has intensified its economic sanctions against China. These sanctions have been enacted & imposed by several government branches and executive departments, including Congress, President, Commerce, Treasury, Defense, & Justice, and were based primarily on the following federal statutes:

  • International Emergency Powers Act of 1977
  • National Emergencies Act of 1976
  • Export Administration Act of 1979
  • Export Control Reform Act of 2018
  • Global Magnitsky Human Rights Accountability Act of 2012
  • United States-Hong Kong Policy Act of 1992
  • Hong Kong Human Rights and Democracy Act of 2019
  • Hong Kong Autonomy Act of 2020
  • Section 1237 of the National Defense Authorization Act for Fiscal Year 1999
  • Defense Production Act of 1950
  • Holding Foreign Companies Accountable Act of 2020
  • Section 307 of the Tariff Act of 1930

It has been questioned whether prior economic sanctions were effective against smaller authoritarian regimes such as Iraq, Iran, or N Korea. (See, eg, here & here.) The effectiveness of these sanctions against China, the second largest economy in the world, can be even more uncertain, particularly considering the potential counter measures by China. (See, eg, here & here.)

Moreover, sanctions may be subject to changes in politics and enforcement variations. For example, on 5/16/2019, the Commerce Department added Huawei and its subsidiaries to the export blacklist, but a few days later granted a temporary general license to the sanctioned entities for more than a year, until 8/17/20, when the temporary general license was replaced by more limited but permanent authorizations. Additionally, many of the sanctions imposed by the Trump administration are expected to be modified by the upcoming Biden administration.

Regardless of their level of effectiveness, these sanctions do minimally provide certain information contents – those actions & actors that have been determined by the US government (Congress, President, & executive agencies) to “constitute an unusual and extraordinary threat […] to the national security, foreign policy, or economy of the United States”. (§1701(a) of the International Emergency Powers Act.) Such information may be valuable in risk assessments, for example with respect to business transactions, even if not for compliance purposes.

Below is an incomplete list of some of the sanctions against China imposed by US in the past 2 years, grouped into 6 categories: Technology (Huawei), Xinjiang, Hong Kong, Defense, Technology, & Investment. The citations of the sanction statutes, orders, & rules (in Pub L or Federal Register), if available, are included, so one can readily find more info, such as the identities of the sanctioned entities.

CategoryDateGovernment Branch / AgencyDescriptionSource
Technology (Huawei)5/15/19PresidentProhibited purchase & use of telecommunication equipment made by companies posing national security risk84 FR 22689
 5/16/19CommerceAdded Huawei & 68 affiliates to export blacklist84 FR 22961
 8/19/19CommerceAdded 46 Huawei affiliates to export blacklist84 FR 43493
 5/15/20CommerceRequired foreign semiconductor makers to obtain license to ship Huawei-designed semiconductors produced using US technology to Huawei85 FR 29849
 8/17/20CommerceAdded 38 companies to export blacklist85 FR 51596
Xinjiang10/8/19CommerceAdded 28 companies, government entities & security bureaus to export blacklist84 FR 54002
 6/17/20CongressEnacted Uyghur Human Rights Policy ActPub L 116-145
 7/9/20TreasuryAdded 4 individuals & 1 entity to OFAC sanction list85 FR 42981
 7/22/20CommerceAdded 11 companies to export blacklist85 FR 44159
 7/31/20TreasuryAdded 2 individuals & 1 entity to OFAC sanction list85 FR 47838
 1/13/21Homeland SecurityProhibited entry of cotton & tomatoes from Xinjiang 
Hong Kong11/27/19CongressEnacted Hong Kong Human Rights and Democracy ActPub L 116-76
 7/14/20CongressEnacted Hong Kong Autonomy ActPub L 116-149
 7/14/20PresidentRevoked HK special status85 FR 43413
 8/7/20TreasuryAdded 10 HK officials to OFAC sanction list85 FR 55073
 12/8/20TreasuryAdded 14 high-level Chinese officials to OFAC sanction list 
Defense6/12/20DefenseAdded 20 companies to list of “Communist Chinese military companies” 
 8/27/20CommerceAdded 24 state-owned companies to export blacklist85 FR 52898
 8/28/20DefenseAdded 11 companies to list of “Communist Chinese military companies” 
 12/3/20DefenseAdded 4 companies to list of “Communist Chinese military companies” 
 12/18/20CommerceAdded 59 individuals & companies to export blacklist85 FR 83416
Technology8/6/20PresidentProhibited transactions with TikTok & WeChat85 FR 48637; 85 FR 48641
 9/24/20CommerceIdentified prohibited transactions with TikTok85 FR 60061
 1/5/21PresidentProhibited transactions with persons developing or controlling Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office86 FR 1249
Investments11/12/20PresidentProhibited purchase of securities of “Communist Chinese military companies”85 FR 73185
 12/18/20CongressEnacted Holding Foreign Companies Accountable ActPub L 116-222

Hong Kong Sanctions Create Fissures Between US & Chinese Financial Systems – A Quagmire for Foreign Banks in US

[Update: The President said he had signed the Hong Kong Autonomy Act into law.]

Will the fissures turn into a gorge?

The question is whether the fissures may coalesce into a deep gorge dividing the financial systems of the 2 largest economies of the world.

Quagmire for financial institutions

Less than 2 weeks ago, on 7/2/2020, the US Congress unanimously passed the Hong Kong Autonomy Act (HKAA), which was the Congress’ response to the HK National Security Law (HKNSL) that the Chinese government enacted a few days prior on 6/30/2020 (see my previous post). The legislation should become a law soon, likely by midnight today.[1]

The HKAA generally will ban financial institutions (FIs)[2] from engaging in certain transactions with those foreign FIs (primarily Chinese FIs, but can be any non-US FIs) that have done “significant” businesses with certain sanctioned persons who have “materially” contributed to the erosion of autonomy in HK. (For more info about the definitions of the terms under HKAA, please see here.) To comply with such sanctions, however, a FI may run afoul of Article 29 of the HKNSL, which makes it a crime for any person (anyone in the world) to “conspire” with a foreign country to impose such sanctions. (See, also, here.) Hence, a FI can be penalized in US if it does not comply with US sanctions[3], but face the quagmire of being prosecuted in HK/China if it so complies.[4]

Picking side, US or China, but not both – a Hobson’s choice

For FIs currently having exposures in both US & HK/China, this quagmire may force them to decide whether to conduct business in either US or HK/China, but not both. For example, consider a Taiwanese bank (or a German, British, French, Canadian, Japanese, S Korean, Indonesian, Brazilian or any foreign bank) that conducts banking in both US and HK/China. If its HK/China operations are identified as having conducted significant transactions with sanctioned persons under HKAA, its US operations may be prohibited from engaging in transactions with its HK/China operations, or even with the bank headquarter. But, by complying with the US prohibitions, the US operations of the Taiwanese bank may be found to have violated Article 29 of the HKNSL, and hence the bank’s HK/China operations may be prosecuted, because both the US operations and the HK/China operations belong to the same bank. Under such circumstances, the Taiwanese bank may have no choice but to pick where it wants to do business in, either US, or HK/China, but not both.[5] That may be a Hobson’s choice that is not a choice at all.

An outlier black swan

In a US election year, and amidst the fallout from the COVID-19 pandemic, tensions between US and China have escalated. Financial sanctions such as the HKAA & national security laws such as the HKNSL are but a part of the complicated web of conflicts and brinkmanship involved in this new cold war. However, the Hobson’s choice facing down global financial institutions and the potentially unfathomable impact on the global financial systems may tamper the practical effects of these laws and orders.

For example, after the HKAA becomes law, the President has up to 120 days to identify the foreign financial institutions to be subject to sanctions, and up to 1 year to implement the sanctions. That means in the short run, no sanctions under HKAA will likely be enforced before the US election. After the US election, the political tensions may ease, allowing fine-tuning of the laws & regulations and their implementations, which may reduce the risks involved.

On the other hand, the severe erosion of HK autonomy and civil liberties under the HKNSL are frighteningly real for the people of HK. The prospect of great disruptions to the current financial systems arising from the US-China tensions, even if a low-probability outlier at this point, can also be real. It can be a black swan testing humanity’s ingenuity!

[1] The legislation has been sent to the President, who is required to sign the legislation within 10 days (except Sundays) or return it to the Congress. (“If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law”, US Constitution, Article I, Section 8, Clause 2). If the president takes no action by the 10-days deadline, the legislation automatically becomes a law. On the other hand, if the President returns it, the Congress should have the 2/3 votes required to override the veto, required under the same Section of the Constitution.

[2] “Financial Institution” under HKAA has the same definition as in FDIC (31 USC 5312(a)(2)), which includes a broad spectrum of institutions, including insured banks, commercial banks or trust companies, securities brokers & dealers, foreign bank branches or agencies, etc.

[3] Violations of HKAA can carry civil penalties of the greater of $250k or twice the amount of transaction. Criminal penalties include fines up to $1m, or imprisonment for up to 20 years for a natural person, in addition to the fine. (50 USC 1705)

[4] Penalties under HKSNA generally implicate imprisonment of various terms, up to 10 years, and/or fines.

[5] It’s not clear whether compliance of sanctions by US subsidiaries of the Taiwanese bank (not branches or agencies) may subject the HK/China operations or the parent bank to prosecutions under HKNSA. However, because the US subsidiaries may be subject to the prosecution, meaning its personnel may be at risk if they enter the “influence zone” of HK/China, it will be difficult for the Taiwanese bank to communicate with and maintain control of the US subsidiaries, even if its HK/China operations and headquarter are not implicated.

Hong Kong’s National Security Law – Implications in Business Risk Assessments

On June 30, 2020, the Chinese government enacted Hong Kong’s National Security Law (Chinese | English), which was not officially published until the same time when it became effective, at 11 pm local time, foreclosing any meaningful public input (at least from the HK public) to the new law. Within hours after the publication of the law, several commentators have made an effort to dissect and analyze the new law, such as the note by Professor Donald Clarke, and the videoconferencing sessions organized by Hong Kong Democracy Council. More analyses should become available as the international communities scrutinize and analyze the new law in greater scope and depth.

At a quick glance, the new law imposes several measures that severely restrict or eradicate the autonomy and civil rights previously vested in HK. Without going into great details, and not meant to be complete, I have summarized these measures below.

MeasuresDescriptionsArticle #
Mainland ControlThe Chinese government (National People’s Congress) has the sole “power of interpretation” of the law.65
 The law “prevails” over any HK laws.62
 The law creates a “Committee for Safeguarding National Security” (CSNS) to oversee implementation of the law. CSNS “shall be under the supervision of and accountable to the” Chinese government.12
 The head of the secretariat of CSNS, who supposedly will be in charge of the real work at CSNS, must be appointed by the Chinese government.13  
 The Chinese government will designate a “National Security Adviser” to “provide advise” to CSNS.15
 The law creates a “National Security Department” (NSD) within the HK police force to investigate violations against the law. The head of the NSD must be appointed with approval by the Chinese government.16
 NSD can be staffed by “professionals and technical personnel” from outside of HK (ie, China).16
 The law creates a “Specialized Prosecution Division” in the Department of Justice to prosecute violations. The head of the division must be appointed with approval by the Chinese government.18
 The law creates an “Office for Safeguarding National Security” (OSNS), a Chinese government body staffed directly by Chinese government, tasked, among others, with “collecting and analyzing intelligence and information” in HK. OSNS is funded directly by the Chinese government.48, 49, 51
 OSNS has the power to exercise jurisdiction over any case involving national security, usurping the HK jurisdiction, and send the case to China for prosecution and sentencing according to Chinese laws.55, 57
 OSNS is not subject to the jurisdiction of HK.60
Vague & Broad CrimesThe law criminalizes the acts categorized under “Secession”, “Subversion”, “Terrorist Activities”, & “Collusion with a Foreign Country or with External Elements”, which are vaguely and broadly defined.20-30
Extraterritorial ApplicationThe law applies to offences committed by any “person who is not a permanent resident” of HK.38  
SecrecyThe work of CSNS will be kept secret and not disclosed to the public.14
No Judicial ReviewDecisions made by CSNS “shall not be amenable to judicial review”.14  
Trial without JuryA case can be tried “without a jury by a panel of three judges”, on broadly stated grounds.46
Unaccountable Broad PowersAny person, be it an institution, organization, or individual must “comply with measures taken by” OSNS. Further, OSNS is not subject to HK jurisdiction or law enforcement.57, 60

Inevitably, the new law will have significant international ramifications, not limited to HK only, evidenced by the sanction legislation passed promptly by US Congress in response to the new law. Notably, the new law is applicable to ANY person on the earth, a/k/a extraterritorial application. (Article 38. See the table above.) That means, for example, a foreigner non-HK resident may be found to have violated the new law by posting on twitter the words, “Fight for Freedom! Stand with Hong Kong!” In such cases, the person may be prosecuted under the new law if he/she is present in HK or China. Or, in a worst-case scenario, if the person resides in a country having an extradition treaty with China, he/she may face the specter of having to defend an extradition request from China.

What is more, the law creates the Office for Safeguarding Nation Security (“OSNS”), which is an agency of the Chinese government, but stationed within HK. This agency has tremendous powers, including “collecting and analyzing intelligence and information concerning national security” (Article 49(3)) and “handling cases concerning offence endangering national security” (Article 49(4)). It can take over jurisdiction from local HK government (Article 55) and send the case to China for prosecution and sentencing according to Chinese laws (Articles 56 & 57). Moreover, any person, be it an institution, organization, or individual must “comply with measures taken by” OSNS (Article 57). And yet, despite the tremendous powers OSNS wields, it is not subject to HK jurisdiction or law enforcement (Article 60). According to Professor Clarke, OSNS is not subject to Chinese law either. No wonder Professor Clarke lamented that the OSNS was “untouchable” and “Gestapol-level stuff”!

Considering its vague and broad scope, the extraterritorial application, the creation of such an unaccountable yet powerful agency as OSNS, and other authoritarian aspects of the new law, the business risks for international communities doing business with HK and China have increased substantially. It is unclear at this point how the new law will be enforced. Also, potential economic gains from the China markets and trades will likely remain an important factor in business risk assessments, which is itself a complicated undertaking. If we have learned anything about global risk assessments from recent events, however, it is that underestimating the risks in the early stage may prove to be unforgiving!

Black Lives Matter!

All human lives matter!

Civil liberties matter!

Political rights matter!

Democracy matters!

Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Abraham Lincoln

It is still a long way to go before the words “all men” uttered by President Lincoln more than 150 years ago can truly mean “all humans”!!!

Just Laws of a Nation


Just laws of a nation must limit the powers of the government against the people.

“The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny.”

James Madison

The road to just laws of a nation can be long and arduous. The fight for civil liberties and political rights for the people in UK & US started no later than 800 years ago, and is still ongoing.

“It is rather for us to be here dedicated to the great task remaining before us – […] that government of the people, by the people, for the people, shall not perish from the earth.”

Abraham Lincoln
YearSome UK & US Civil Liberty Laws
1215UK – Magna Carta
1628UK – Petition of Rights
1679UK – Habeas Corpus Act
1689UK – Bill of Rights
1776US – Declaration of Independence
1777US – Articles of Confederation
1787US – Constitution
1791US – Bill of Rights
1865US – 13th Amendment
1868US – 14th Amendment
1920US – 19th Amendment
1968US – Civil Rights Act

Global Risk Events Require Global Risk Assessments – Virus Pandemic & Climate Change

The current COVID-19 pandemic is a powerful reminder that our world is riddled with abundant uncertainties and risks.

In an uncertain world, without the help of hindsight (or a clairvoyant crystal ball), our policy decisions can at best be based on our assessments of the risks. That means probabilities, averages, variations, distributions, ranges, etc. By definition, risk assessments carry uncertainties themselves. So, we will never know for sure whether our decisions made according to the risk assessments are the right ones. But, that’s the best we can do!

For global risk events, such as virus outbreaks, climate changes, or even financial crises, which can have far-reaching global ramifications, risk assessments on a global scale are necessary for optimal policy decisions and responses. Assessments limited to local perspectives will not be enough. This can be clearly seen in the COVID-19 pandemic.

As of today (4/14/2020), US has reported over 600k infections nationwide, and more than 25k lives lost. We will never know for sure whether we could have responded to the virus outbreak better, or worse. It has become clear, however, that information and data about the virus from other regions, countries, states, and cities can greatly help to improve our own risk assessments and responses. Be it the virus genome codes, strain variations, mortality rates, spreading rates, spreading mechanisms, human-to-human transmission paths, incubation periods, asymptomatic transmission, known effective treatments, known effective policies, potential vaccines, supply chain managements, governmental coordination, economic preparations, …, etc. All these information and data have proven instrumental, if not critical, in assessing the risks associated with the virus. Because the virus spreads without regard to political boarders (nations, territories, states, provinces, prefectures, counties, cities, towns, …), collecting the information and data globally can help to maximize the data collected and minimize the time required.

This need for global risk assessments, i.e., assessing the risks by examining global data, not limited to local data, similarly applies to climate changes. The weather or temperature patterns in New York or Texas or California, for example, will most likely be insufficient to assess the risks associated with global climate changes. – I have made the mistake numerous times of concluding it was global warming / cooling because of an abnormally warm / cool day in New York. (To be critical, one photo of a skinny polar bear on a floating ice may not be conclusive either, by itself.)

Even with real-time access to extensive global data, it may still be difficult to assess the risks and determine the responses. Rather, different people can assess the risks differently, sometimes substantially, and reach different decisions. (Witness the spars between New York governor, New York City mayor, and US president on re-opening of the economies, even after months of global data exchanges and collections on the COVID-19 virus.) Additionally, in reality, it is unlikely decision-makers will have at their disposal a complete set of global risk data at any particular time.

Therefore, given the complexities of the earth’s weather systems, I do not expect a uniform policy response to climate change in the foreseeable future, unless imminent dangers due to climate changes becomes clear and present, such as the case for the COVID-19 virus.

The stakes associated with climate change, or other global risk events, however, can be high, and the potential losses of lives, properties, or welfare can be tremendous. Recognizing the potential shortfalls and uncertainties in the risk assessments of global risk events, we should strive to make sure our best scientists and professionals, trained to objectively study and analyze risk events, receive the fullest attention possible in the public discourse and debates of such global risk events, undisturbed by politics and other subjective factors. That way, even if there are uncertainties associated with the risk assessments, we can claim to have done our best.

It is my hope that the need for global open information sharing regarding global risk events will lead to greater opening of authoritarian regimes, particularly those who desire to further integrate themselves into the global economy. If the global economy slows, however, I am also wary of the possibility that these authoritarian regimes may instead resort to even harsher surveillance and oppression to retain domestic control and powers, and inflame populist nationalism in and conflicts with foreign players. Even in more open societies, surveillance and centralized control may also intensify, in the name of public security and safety. But, that’s another story!

LIBOR Replacement – Analyzing & Assessing Alternative Rates

NYDFS requirements

In December last year, the NYDFS (New York Department of Financial Services) required each of the regulated financial institutions supervised by NYDFS to submit a plan for addressing the LIBOR cessation and transition risks. Reflecting the urgency of the regulator’s concerns, the institutions were required to submit the plan within less than 2 months, by early February this year. (The deadline was later postponed by 45 days to late March.)

Specifically, NYDFS required the plan to include the following 5 items, without providing further details:

  1. Programs that would identify, measure, monitor and manage all financial and non-financial risks of transition;
  2. Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties;
  3. Processes for communications with customers and counterparties;
  4. A process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition; and
  5. The governance framework, including oversight by the board of directors, or the equivalent governing authority, of the regulated institutions.

Analyzing & assessing alternative rates – What is required?

Financial institutions subject to the requirements are likely scrambling to put together a LIBOR transition plan to meet the deadline. Toward this effort, the 2nd required item (“processes for analyzing & assessing alternative rates) seems to pose the lowest hurdle. After all, the ARRC (Alternative Reference Rates Committee), with the implicit approval & supports by the FRB, has chosen SOFR to replace LIBOR; more than $300b of cash instruments have been issued; the daily trading volumes of the SOFR futures contracts set a record, exceeding 80k contracts, recently; and LCH cleared more than $200b of SOFR swaps in January 2020. Moreover, Fannie Mae & Freddie Mac announced on 2/5 that they would no longer accept ARMs based on LIBOR by the end of 2020, and that they planned to begin accepting ARMs based on SOFR later in 2020.

Choosing SOFR, therefore, seems to be a path of the least resistance, particularly for budget-constrained institutions. In that case, the descriptions for item #2 should be simple and straightforward.

However, it is not clear at this point what additional information NYDFS will require for item #2 even if an institution simply decides to choose SOFR to replace LIBOR, as recommended by ARRP. Does the plan need to describe how the institution reached the decision to choose SOFR? Does the plan need to compare, analyze and assess the benefits & risks of other alternative rates? Does the institution need to discuss with its customers and counterparties and incorporate their positions and preferences into the analyses & assessments? Does the plan need to analyze and assess compliance with the 19 IOSCO principles?

Regardless of what the regulator(s) will specifically require in the LIBOR transition plan regarding alternative rates, and notwithstanding the fact that ARRC has recommended SOFR, it should be recognized that one size may not fit all. SOFR may not be the most appropriate replacement for LIBOR for some institutions, such as community and regional banks that depend substantially on unsecured funding. Furthermore, the regulator(s) may require an institution to develop and describe an independent and complete process & framework for analyzing and assessing alternative rates, even if the institution chooses SOFR to replace LIBOR. The spike in the repo market volatility in mid-September last year exemplified some of the shortcomings of SOFR, and demonstrated the need to be abreast of the pros & cons of other alternative rates.

Other alternative rates

If an institution desires or is required to analyze and assess alternative rates, what would be the right approach? In April last year, the Federal Reserve gave a broad-stroke clue that a bank should “conduct at least as much due diligence on the reference rates that they use as they conduct on the creditworthiness of the borrowers”.

To get started on this due diligence process, the table below lists information associated with some of the alternative rates. The information may be helpful to form the basis for developing a due diligence process to analyze and assess the alternative rates for replacing LIBOR, as required by NYDFS & FRB. Other currently available alternative rates not listed in the table include OIS, Effective Fed Funds, PRIME, Certificate of Deposit, Cost of Savings Index, etc.

Click image to view the full-sized table.