Effects on Use of a Trademark as OEM in China

It has been disputed whether using a trademark as OEM with no

selling/circulation of the products in the Chinese marketplace would constitute trademark infringement in China...

China's opening up policy has attracted many international brand owners to manufacture their

products in China, called Original Equipment Manufacturers ("OEMs"). We will examine whether OEM amounts to trademark infringement or valid use to defend a non-use cancelation below.

OEM ≠ Infringement

It has been disputed whether using a trademark as OEM with no selling/circulation of the products in the Chinese marketplace would constitute trademark infringement in China.

We find some practical guidance by reference to some precedents, in particular the landmark PRETUL case (Supreme People's Court - No. 2014 – 38). The Supreme People's Court ("SPC") re-tried the case, and ruled that use of PRETUL trademark as OEM does not constitute trademark infringement, on the grounds that the act of affixing the trademark to the manufactured goods is not deemed as valid use of a trademark because such act does not function as an identifier distinguishing the source of goods under PRC Trademark Law (Article 48).

Further, in the PRIME GUARD case (Ningbo Intermediate People's Court - No. 2017- 02 – 4182), Ningbo Intermediate People's Court also ruled that use of the trademark as OEM does not constitute trademark infringement, which mainly follows the reasoning in the landmark PRETUL case.

Moreover, in one of our client's cases, our client's OEM manufacturer was sued for trademark infringement by a local company which registered a trademark similar to our client's trademark in respect of the same/similar goods in China. We have submitted the following evidence with Ningbo Beilun District Court in the first instance to support our case:
1. Registration Certificate of trademark ("Local Reg.") in the country to which the Exported Goods were shipped;

2. OEM/Commissioned Manufacturing Contract entered between the manufacturer and trademark owner of Local Reg.; and

3. Other evidence showing that the client has the legitimated trademark rights (Local Reg). on the Manufactured/Exported Goods, and the Exported Goods are solely sold to the owner of Local Reg., but not in China.

We received a favorable Judgment from Ningbo Beilun District Court, ruling that their manufacturer affixing the client's trademark is an OEM act, which did not constitute infringement of the Plaintiff's trademark rights.

The Plaintiff appealed before the Ningbo Intermediate People's Court. In the second instance, apart from evidence 1-3 above, we supplemented evidence to enhance the manufacturer use of the client's mark as an OEM act and the client, who registered the Local Reg., has trademark rights on the Exported Goods. Besides, we cited the two precedents, i.e. PRETUL and PRIME GUARD cases to support

our client's OEM's case.

We have just received a favorable Appeal Decision, in which the Ningbo Intermediate People's Court ruled that the plaintiff's appeal is without merit and the facts affirmed in the first instance are certain and the laws applied are correct. Hence, the Plaintiff's Appeal is dismissed and the first instance Decision is maintained.

Comment

In brief, to assess infringement, the Courts primarily take into consideration the following factors:
- authorization from the trademark owner;

- manufacturer's duty of reasonable care;

- Any confusion on the customers as to trade origin of the

products when using the mark;

- manufacturer's intention to infringe the Plaintiff's

trademark rights.

Based on current practice and precedents, including the aforesaid cases, it is very likely that the Chinese court will rule that the use of trademarks as OEM does not constitute trademark infringement if the manufactured goods are solely exported to the country of origin of the Local Reg. and the goods are not sold/circulated in the China market.

OEM in Non-use Cancelation

The issue of whether use of a registered trademark as OEM is adequate to defend a non-use cancelation is disputed in China.

There are contrasting precedents, while some earlier

precedents show that a registered trademark used on OEM is considered as valid use, which could defend a non-use cancelation, whereas, some recent precedents show such use was deemed as invalid, resulting in the registration of the trademark be canceled and removed from the register.

OEM = valid use

In the SCALEXTRIC appeal case (Beijing High People's Court - No. 2010 – 265), the Beijing First Intermediate People's Court ruled that the TRAB's decision be maintained and the registration be removed from the register on grounds that the manufacturer use of the trademark as OEM does not comply with the use requirement of trademarks under PRC Trademark Law. However, in the second instance, the Beijing High People's Court overturned the first instance Decision by taking into consideration of the user evidence of the OEM submitted and ruled that:
- Beijing First Intermediate Court's Decision be withdrawn;

- TRAB's decision be withdrawn;

- Trademark Office re-visit the non-use cancelation on registration; and

- TRAB bears all the official fees incurred.

In this case, the Beijing High People's Court ruled that the manufacturer use of the trademark as OEM is valid, thus maintained the registration on the register

One interesting point to note is that the Beijing High People's Court also ruled that: if use of a trademark as OEM is regarded invalid, it will become grounds for third parties to challenge the trademark via non-use cancelation. If so, this may result in the legitimate trademark being canceled and removed, and prejudice to the registrant/genuine brand

holder's rights.

OEM ≠invalid use

Nevertheless, in the latest MANGO case (Beijing High People's Court - No. 2016 – 5003), Beijing High People's Court re-affirmed that use of the trademark "MANGO" as OEM is invalid and maintained the Decision canceling/removing registration of trademark from the register under the PRC Trademark Law on the following grounds:
- Use of trademark "MANGO" as OEM did not function as

an identifier of the source of goods;

- All evidence submitted in both instances is inadequate to prove the manufacturer use of the trademark and market circulation requirement; and

- The Beijing First Middle Court's Decision to cancel/remove registration of trademark "MANGO" from the register is not without merits.

Comment

It is arguable that only manufacturing is sufficient to defend a non-use cancelation. However, according to the MANGO case, to effectively defend non-use cancelation, actual sales/circulation of the goods bearing the registered trademark in China market is advisable. Otherwise, only use of a trademark as OEM is unlikely to be prevailed in non-use cancelation proceedings. Therefore, if there is no sales' evidence in China, re-registration of the mark at every 3-year interval is advisable.

One key point to note is that the Beijing High Court cited the landmark PRETUL case to support the reasoning of the MANGO case, addressing that though the applicable

articles of the PRC Trademark Law for these two cases are different, the nature of the legal concepts stipulated under the same law shall be applied in the same way; otherwise contradictions/conflicts will be inevitably caused. Thus, under the same concept of use of trademark, use of the

trademark as OEM in PRETUL case is invalid, so does it in the MANGO case.

Although China adopts case-by-case principle and the Courts' practice is unpredictable, we believe that the trend of citing precedents to support similar cases is increasing, and will play a significant role, especially those ruled by the SPC.

Lastly, to obviate the risk of trademark infringement and protect trademark rights in China, it is always advisable to seek professional advise before starting OEM.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.