China: China’s OEM’s Manufacturing Solely for Export receive Supreme People’s Court’s Guidance on what Constitutes Trademark "Use"

Last Updated: 10 November 2012
Article by Richard Wigley

In China today, companies which have invested resources in developing their marks encounter numerous problems in protecting and enforcing their trademark rights. First and foremost, they face counterfeiters who without authorization use their marks on the same or similar goods. In addition, certain companies or individuals will become "trademark pirates" or "trademark squatters" and register marks of a famous brand in China. While some trademark pirates do this to "free ride" on the brand equity of the brand owner, some trademark squatters may do it in an attempt to "negotiate" payment from the brand owner in exchange for the mark. However, if the holder of a mark in a foreign market contracts with an original equipment manufacturer ("OEM") in China for the manufacture of goods bearing said mark solely for export where the rights to said mark in the P.R.C. are held by another entity, are such actions (i.e. the manufacture solely for export of said goods) an infringement upon the P.R.C. trademark holder's rights?

In any case, there is a framework for legal protections under the Trademark Law of the P.R.C. ("Trademark Law") i upon which a rightful trademark owner can draw upon. The Trademark Law was originally adopted in 1982, with subsequent amendments in 1993 and 2001. ii The Regulations for the Implementation of the Trademark Law of the P.R.C. ("Trademark Regulations") iiiare among other accompanying legal guidelines, such as Interpretations from the Supreme People's Court.

Under Article 52 of the Trademark Law, unauthorized "use" of a trademark is grounds for an infringement claim. iv This raises the question as to whether OEM manufacture done solely for export overseas to a country where the exporting party holds the rights to the mark at issue is indeed "use" under the Trademark law. Article 3 of the Trademark Regulations defines "use" of a trademark such that it shall include "affixing trademarks to commodities, commodity packaging or containers, as well as commodity exchange documents, or using trademarks in advertisements, exhibitions or other commercial activities." v The statutory law contains no clear guidance on whether OEM manufacture of goods solely for export constitutes "use". As such, the application by China Customs (or an Administration of Industry and Commerce ("AIC") branch office or a People's Court) of the Trademark Law regarding whether "use" applies for manufactured OEM goods solely for export where there is a conflict between trademark ownership in the originating (China) country and the destination country has been inconsistently applied throughout China. In some cases, China Customs has shown that it may release goods if the OEM goods exporter can prove trademark ownership in the destination country, while in other cases, the P.R.C. trademark owner may be successful in having the goods seized. This, in essence, indicates that this may be seen as a "grey area" of the law and, as such, an administrative agency such as China Customs (or an AIC) may choose to not act on a claim of alleged infringement of a P.R.C. owner's trademark rights—-or it may. What is needed is some clear guidance from the courts and in that regard, some progress is being made.

As China is the "workshop to the world" and OEMs abound for virtually any class of products, it is not surprising that there are a large number of cases which have dealt with the subject issue. Court decisions to date have been somewhat inconsistent in their interpretation of whether OEM solely for export constitutes "use" under the Trademark Law, with the courts looking as factors such as whether there was subjective intent to infringe and whether there was a real opportunity for the Chinese buying public to be confused about the origin of the goods depending on whether the goods were actually released into the stream of commerce in China. The former highlights the burden on the rights owner to ensure that it is clear in OEM agreements that the goods are solely for export and, also, that the rights owner has offered to the OEM definitive proof of ownership of the trademark rights at issue in the destination country/countries.

China is a civil law country and, as such, does not follow a stare decisis or case precedent system, though court decisions (especially higher court decisions) are likely to be followed in their home jurisdiction and they, also, may have some persuasive value in other jurisdictions. There is still no clear, definitive statutory guidance as to whether OEM manufacture solely for export constitutes "use" under the Trademark Law. The more recent case law, however, appears to be trending towards favoring the view that OEM manufacturing solely for export is likely to not be deemed as "use" under the Trademark Law.

This leads us to the most recent and most important case to date on the subject issue – the Supreme People's Court case of Ryohin Keikaku Co., Ltd. v. TRAB of the SAIC. vi The mark at issue was the "Muji" mark ("无印良品" – Chinese language characters for "Muji") on products solely for export. This matter (also referred to hereinafter as the "Muji case") was an administrative litigation challenging the TRAB's decision on an Objection to the granting of a trademark. vii The Objector claimed that as part of its argument that it had "prior use" of the mark at issue in China and that its "use" was based on OEM manufacturing of goods solely for export. viii In this case, the Supreme People's Court held that OEM manufacturing solely for export was not "use" (in relation to the claim of "prior use") under the Trademark Law, as though the exporter had engaged Chinese OEM factories for manufacture of the relevant products, it neither distributed the products in China nor advertised/promoted the products in China. ix The Court did not deem this OEM solely for export as "use", as it deemed that the function of a trademark can only be fulfilled during the circulation of the commodity in the stream of commerce, which was not apparent in this case, as the goods were not circulated in the stream of commerce of China. x

Though the Supreme People's Court's views on whether OEM manufacture solely for export constitutes "use" in the "Muji case" have not been codified into the statutory Trademark Law, the Supreme People's Court views on issues are taken by lower courts as the definitive word on legal issues. As such, it may be that going forward there will be a growing consensus among courts in the P.R.C. that OEM manufacture solely for export is not "use" under the Trademark Law. It is also likely that, based on a collective view of previous court guidance, that for these OEM solely for export activities to not qualify as "use" under the Trademark Law, the overseas rights holder should make clear in the OEM agreement that the goods are solely for export and provide clear proof to the OEM that the contracting party has the requisite trademark rights in the destination country. Furthermore, the overseas rights holder would likely be required to in addition to not distributing the marked products at issue in China, to also not advertise or promote the products in China.

That said, however, until there is clear, specific guidance in the statutory law, it can be expected that there will continue to be uneven application of the law on the subject issue, especially with regards to application of the law by administrative agencies such as the AICs and China Customs. For instance, some courts/administrative agencies reviewing claims of trademark infringement may place little weight on Court's opinion in the "Muji case", even though it was a Supreme People's Court opinion, with respect to what constitutes "use" under the Trademark Law simply because it was an opinion rendered in relation to an administrative litigation and not an infringement action and, also, it is not a formal Interpretation. The Supreme People's Court's recent opinion in the "Muji case", however, does appear to provide some degree of welcome clarity from the Supreme People's Court on the subject issue.

Note: this publication is for informational purposes only and it does not in any way constitute a legal opinion.

Footnotes

i Trademark Law of the P.R.C. (promulgated on August 23, 1982, amended on February 22, 1993 and October 27, 2001).

ii Id.

iii Regulations for the Implementation of the Trademark Law of the P.R.C. (promulgated on September 15, 2002).

iv Supra 1 at Article 52.

v Supra 3 at Article 3.

vi Ryohin Keikaku Co., Ltd. v. TRAB of the SAIC (2012) XingTiZi No. 2.

vii Id.

viii Id.

ix Id.

x Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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