Exporters beware – trade mark infringement by OEM products in China still uncertain

It is a non-disputable fact that the manufacturing industry is a dominant force for economic growth and development in the PRC. OEM (Original Equipment Manufacture) is, and will continue to be, a huge business in the PRC. Whether OEM constitutes trade mark infringement is of great practical significance to the many foreign businesses whose export manufacturing base is in the PRC and the issue has always been the subject of fierce debate.

The usual OEM model adopted by many industries involves a local Chinese OEM being authorised to manufacture certain products on behalf of a foreign brand owner under the foreign brand owner's trademark. Problems frequently arise when the trademarks being applied are registered overseas but not in the PRC. This can lead to the marks being hijacked by the OEM or by third parties. In some cases, the mark may be legitimately owned by a third party.

According to Article 3 of the Implementing Regulations of the Trademark Law, use of a trademark “shall include the use of the trademark on goods, packages or containers of the goods or in trading documents, and the use of the trademark in advertising, exhibition or any other business activities”. The law does not specify whether this includes use of a trademark in OEM activities. However, according to our experience, it has generally been accepted by the trademark authorities (including the TMO, TRAB and local intellectual property bureaux), that use of a trademark in OEM purely for export purposes should be regarded as use in the context of non-use cancellation proceedings. However, various court decisions have indicated a different approach in the context of trademark infringement.

One of the first cases to consider this issue was the Nike International Ltd v Cidesport & Zhejiang Livestock Products Import & Export Company & Jiaxing Apparel Factory case in 2001. The Shenzhen Intermediate People's Court held that the mere act of manufacture constitutes use. Accordingly, the manufacture of clothing bearing the NIKE mark by a Chinese factory, at the request of a Spanish company, was found to be an infringement of Nike's trademark.

In a later decision of the Guangdong Higher People's Court in the case of Guangzhou Green Yingkang Bioengineering Co. Ltd. v Guangzhou Zhenhe Pharmaceutical Co. Ltd. & Yingkang Science and Technology International Holding Co, Ltd. & Zhong Zhi Qiang in 2009, the Defendant was also found to have committed trademark infringement, although it was only manufacturing the goods for export. It is important to note that the Court limited the award of damages to the Plaintiff's reasonable costs incurred in bringing proceedings against the Defendant. The Court held that the Plaintiff should not have suffered any other damage given that the goods concerned were to be exported overseas without local sales.

However, a number of recent cases held that there was no trademark infringement on the part of OEM's if the goods were merely manufactured in China and are offered for sales in the overseas market only. In the Shanghai Shenda Audio Co. Limited v Jolida Electronics (Shanghai) Co. Limited case in 2009, the Shanghai Higher People's Court found that there was no infringement when the goods were merely manufactured in China but were intended for sale in the US. The Court held that the basic function of a trade mark is an indication of origin. Since the products in question were all to be exported and would not be offered for sale in the PRC, it was unlikely that consumers in the PRC would be confused or misled as to the source of the products.

The Shanghai Pudong New Area People's Court shared a similar view in the A4 Wuxi Import & Export Corp. v Crocodile Garments Limited case in 2011. The court held that there was no infringement on the part of the Chinese OEM company. The trademarks used were trademarks legally registered in Korea by the Singaporean licensor. The Chinese OEM company had no subjective intention to infringe as they were duly authorized by the Singaporean licensor to use the trademarks under the OEM arrangement. The court held that, in judging whether there had been infringement, it needs to consider whether the relevant public would be confused or misled. Trademarks may only reveal their function and value when products bearing the relevant marks are actually circulated in the market. Since the products in the Crocodile case were to be exported to Korea and were not offered for sale in the PRC, it was impossible to confuse or misled the public in the PRC.

The findings in the recent Shanghai cases seem to indicate a trend for the courts to find that there is no trademark infringement in OEM situations. This clearly differs from the earlier decisions. The decisions have triggered debate amongst trademark practitioners and raised concerns for trademark owners. It appears that the inclination is to rule that there is no infringement where products are only for export and are not offered for sale in the PRC. The rationale would appear to be because confusion amongst the public is seen as the key element in determining whether there has been infringement. However, this is contrary to some other jurisdictions. In Hong Kong, for example, the application of a trademark onto a product purely for export clearly constitutes use in defence against non-use revocation proceedings and also for the purposes of infringement. At present, there has been no clear interpretation from the PRC trademark authorities or any Supreme Court level judgment, so the People's Courts in different localities are free to come to different conclusions on the issue.

PRC Customs are meant to detain goods found at the borders where the goods bear a trademark which is similar or identical to a trademark registered in the PRC. From our experience, however, Customs in some major cities may release the goods if the exporter can produce evidence to prove that it has registered the trademark overseas. It is not clear if this has become the standard practice throughout the country, or is a matter for the discretion of the Customs authorities in the relevant locality.

It would appear that the developments in trade mark infringement cases may now be influencing the courts when interpreting what constitutes valid trademark use, especially in relation to the non-use cancellation context. Contrary to the previous generally accepted interpretation, recent cases have seen the courts ruling that use of a trademark in an OEM arrangement will not be regarded as valid trademark use where the goods manufactured were purely for export purposes. In particular, in the non-use cancellation case against the mark SCALEXTRIC owned by Hornby Hobbies Limited, the trademark owner did not provide sufficient evidence of use at the TMO and TRAB level, but provided evidence regarding OEM arrangements in China when it appealed to the Beijing First Intermediate People's Court. The Court held that the OEM activities should not be regarded as valid use under the Trademark Law. Since the goods were not sold in China and were not circulated in the Chinese market, such use could not fulfill the function of a trademark namely, to distinguish the origin of goods among Chinese consumers.

However, this view was then overturned by the Beijing Higher People's Court in 2011 where the judge took public policy into consideration. The judge considered that, although the OEM products were not sold in China, it would be “unfair” not to take into account OEM activities. Unfortunately, the judge did not expressly comment on whether OEM use is to be regarded as valid trademark use under Article 3 of the Implementing Regulations of the Trade Mark Law.

The problem is that whether OEM use should be regarded as valid trade mark use, or use in the context of infringement, is not only a question of law. The issue also impacts on trade development and balancing the interests of the business sector. The PRC is a huge market for manufacturers engaging in OEM arrangements. Finding that there is no infringement in pure OEM arrangements is likely to be welcomed by those who wish to encourage the further development of OEM business in China. This will include foreign investors who manufacture their products in China for export but have been unable to obtain a registration in China due to various reasons. Such foreign investors may be able to avoid infringement as long as their products are not offered for sale on the PRC market. However, it is a much more serious issue for those genuine trade mark owners who may not be able to take action against those who manufacture counterfeit products only for export.

It is hoped that a new Interpretation, or amendments to the Trade Mark Law, will be forthcoming to address this issue. Until then, foreign investors are advised to secure and protect their relevant trade mark rights in the PRC.