China: Determination Of Infringement And Use Of Trademark In OEM Business

Last Updated: 16 September 2014
Article by Yan Zhang

Original Equipment Manufacturer, commonly known as "OEM," is and will continue to be a huge business in China. Whether OEM constitutes trademark infringement is of great practical significance to foreign companies whose manufacturing bases are in China, and the issue has always been the subject of hot debates. In OEM business, a local Chinese company manufactures the products on behalf of a foreign brand owner with the foreign brand owner's trademark, but the products are solely for export and not sold in China. Does such use of trademark by the Chinese manufacturer constitute trademark infringement where the rights to the said trademark in China are held by another entity? Can the argument of non-circulation in the Chinese market constitute a reasonable defense against trademark infringement? Is the trademark use in OEM sufficient to meet the requirement of use in the non-use cancellation? This raises the question as to whether using a trademark in OEM constitutes "use" under the Chinese Trademark law.

To date, there is no clear guidance in the statutory law, and no unified conclusions have been reached in judicial practice regarding this issue. Conflicts arise among various Administrative Departments for Industry and Commerce and local Customs in the enforcement proceeding. The local Courts' views also differ widely on this point and are evolving gradually. Beijing High Court holds that a likelihood of confusion shall be considered to establish trademark infringement, and if using a trademark in OEM does not cause confusion, no infringement would be established. The Zhejiang High Court believes that the use of the same trademark would constitute trademark infringement, and if not identical, the determination of infringement shall be strictly controlled. The Fujian High Court also insists on the standard of strict control. In the case of reasonable defense, OEM would not be regarded as infringement, and even if the infringement is determined, without the economic loss, the court would only order the infringer to cease infringing acts and pay reasonable fees. This article summarizes several typical cases involving OEM, and aims to have an overview on the determination of infringement and use of trademark in OEM business.

I. Typical cases and views regarding trademark infringement

1. The "NIKE" case in 2002

In 2000, Jiaxing Yinxing Garments Ltd. (Jiaxing Yinxing) and Zhejiang Animal Products Ltd. (Zhejiang Animal) were entrusted by Cidesport Company of Spain to manufacture clothes bearing the trademark of "NIKE" in China for export to Spain, where Cidesport Company was the proprietor of the "NIKE" mark. Nike International Ltd. (Nike) initiated an infringement lawsuit before the Shenzhen Intermediate Court based on its registered trademark right regarding "NIKE" in China. In December 2002, the Shenzhen Intermediate Court held that the acts of OEM manufacturers involved the use of the "NIKE" mark in China and the acts of the three defendants (Jiaxing Yinxing, Zhejiang Animal and Cidesport Company) infringed upon Nike's trademark right in China. The Court ordered the three defendants to cease infringing acts immediately and compensate Nike's losses for around US$50,000.1

2. The "RBI" case in 2005

Ningbo Ruibao International Trading Co., Ltd. (Ningbo Ruibao) is the owner of the registered mark "RBI" in connection with the goods for bearings in China. In June 2005, Ciyi Yong Sheng Bearing Co., Ltd. (Ciyi Yong Sheng) was entrusted by R.B.I INTERNATIONAL INC. (R.B.I), the holder of the trademark "RBI" in the U.S., to manufacture bearings with the trademark "RBI" in China and export them directly to the U.S. This case was brought to the Ningbo Intermediate Court, and was later appealed to the Zhejiang High Court. The Zhejiang High Court held that trademark protection is territorial. Ciyi Yong Sheng, as a domestic manufacturer, had reviewed the status of the trademark owned by R.B.I when signing the OEM agreement. But as the places for manufacturing and delivery are in China, the relevant provisions of the Chinese Trademark Law shall be binding, and a reasonable duty of care shall be imposed. The Court ruled that Ciyi Yong Sheng's unauthorized use of the trademark identical to Ningbo Ruibao's registered trademark on bearing goods constitutes trademark infringement, and shall bear corresponding civil liabilities.2

As can be seen from the above two cases, the Courts in earlier judicial practice ruled that the acts of OEM manufacturers constitute trademark infringement in accordance with Article 52(1) of the Chinese Trademark Law 2001 which prescribes that "to use a trademark that is identical with or similar to a registered trademark in respect of the identical or similar goods without the authorization from the trademark registrant constitutes trademark infringement." The basic theory to support trademark infringement is trademark regionalism. Manufacturing and export of products bearing the trademark identical with or similar to a registered mark in China owned by a third party shall constitute trademark infringement, even if the OEM manufacturer has been duly authorized by the owner of a trademark registered in the destination jurisdiction.

However, a number of recent cases manifested that there was no trademark infringement on the part of OEM manufacturers, if the products are merely manufactured in China and are offered only for sale in overseas markets.

3. The "JOLIDA" case in 2009

Shanghai Shenda Audio Electronic Co., Ltd. (Shanghai Shenda) is the owner of the registered mark "JOLIDA and Design" in connection with the goods for amplifiers, radios, etc. in China. Jiulide Electronics (Shanghai) Co., Ltd. (Jiulide Electronics) was entrusted by its U.S. parent company JoLida Inc. to manufacture amplifiers with the "JOLIDA" mark in China. Shanghai Shenda was established by JoLida Inc. as a wholly foreign owned enterprise in 1996, but was subsequently sold to another U.S. company.

In 2009, the amplifiers manufactured by Jiulide Electronics were seized by Shanghai Customs for alleged trademark infringement when they were exported to the U.S. Jolida Inc. successfully challenged the seizure before the Shanghai Intermediate Court, which ruled that there was no infringement. The Court held that the basic function of a trademark is to indicate the origin. As the OEM products were all for export to the U.S. and would not be offered for sale in China, there could be no likelihood of confusion as to their origin in the Chinese market and, hence, no infringement against Shanghai Shenda's registered mark.3 The Shanghai High Court affirmed the decision of the first instance court.4

4. The "CROCODILE" case in 2011

Crocodile Garments Limited (Crocodile) owns a "CROCODILE" registration in China, which is recorded with the Chinese General Administration of Customs. Taishan Li Fu Garments Limited (Taishan Li Fu) manufactured shirts labeled with "CROCODILE and Design" under the authorization of Yamato International Corporation, which owns a "CROCODILE" trademark registration in Japan. The shirts were detained by the Customs due to suspected infringement. This case was brought to the Zhuhai Intermediate Court, and was later appealed to the Guangdong High Court. The Guangdong High Court held the view that, trademarks may only reveal their function and value when products are actually circulated in the market. Since the products were to be exported to Japan and not sold in the Chinese market, Chinese relevant public had no basis to be confused or misled, and the Chinese market portion of Crocodile would not be occupied either. Considering Taishan Li Fu's subjective intention, and the use situation of the accused trademark as well as other factors, the Court decided that no infringement existed.5

Recent case findings seem to indicate a trend for the Courts to hold that OEM does not constitute trademark infringement, which clearly differs from the earlier decisions. In light of the foregoing, confusion among the relevant public is regarded as the key element in determining whether there has been infringement. As OEM products are solely for export, products with foreign trademarks will not result in confusion among the public in China and consequently, no infringement shall be found. In fact, the Chinese Trademark Law 2013 clarifies the definition of trademark use, and emphasizes that "use" in the sense of Trademark Law with the purpose of "identifying the sources of goods/services." Furthermore, the notion of confusion has been included in the Chinese Trademark Law 2013, which defines confusion as the basis for determining infringement for similar marks/signs on identical goods/services or identical marks/signs on similar goods/services. Therefore, the key function of trademark use is to identify the origin of goods, and the essence of trademark infringement is that the use of the accused trademark hinders the realization of such function, and thus it is likely to cause confusion and misleading.

The China Supreme Court has not yet expressed a clear standard for this issue, and the most likely response may be found in the Notice of the Supreme Court on Issuing the Opinions on Several Issues concerning Intellectual Property Trials Serving the Overall Objective under the Current Economic Situation (No. 23 [2009] of the Supreme Court), which is intended to provide a guidance to the Courts so as to adjudicate IP cases in a manner that is consistent with the advancement of China's national IP strategy. The opinions point out that "we shall properly handle the disputes over trademark infringement arising frequently from the current foreign trade model of OEM processing, and where any trademark infringement is found, the infringement liabilities shall be reasonably determined by taking into account whether the processing party has performed the duty of necessary examination and care." In 2012, Xiangjun KONG, the Chief Judge of the IP Tribunal of the Supreme Court published an article titled "On Eight Relations in Trademark Judicial Practice," which shows the cautious attitudes of the Supreme Court towards such cases. It states that "under the circumstances that the laws are not clear or there are two or more illustrations required to clarify its connotations, or the laws lag behind the needs of social development, or even there is a legal vacancy, the Courts' judgments can be experimental, tentative, or error-and-trial, and even the Courts need to explore and create in many cases. Therefore, different judgments for similar cases are inevitable, that is, the differences do exist in applying laws. Especially for controversial issues where no consensus can be reached, we often hold cautious attitudes without ruling out the attempt and test in individual cases, and when the conditions mature, our standards can be unified. The use of trademark in OEM business is a pretty typical instance." Hence, we can see that the Supreme Court leaves this issue to the lower Courts' discretions, which directly leads to the current situation of different judgments in cases with similar facts and issues.

II. Use of trademark in non-use cancellation

It appears that there is a judicial trend in trademark infringement cases influencing the Courts in interpreting what constitutes trademark use, especially in relation to the non-use cancellation. However, there is still no clear and definitive guidance as to whether OEM activities constitute valid use in a non-use cancellation proceeding. For example, in the cancellation case against the mark "SCALEXTRIC" owned by Hornby Hobbies Limited, Beijing First Intermediate Court held that the trademark use in OEM should not be deemed as valid use under the Chinese Trademark Law. Since the products were not sold in the Chinese market, such use could not fulfill the function of a trademark, that is, to indicate the origin of goods.6 However, Beijing High Court overturned the decision, by holding that although the OEM products were not sold in the Chinese market, it would be unfair not to take into account the use of trademark in OEM and also not consistent with the Chinese policy of expanding foreign trade.7Apparently, Beijing High Court took public policy into consideration, and the OEM issue also has impacts on foreign trade development and balance policy.

Furthermore, in the most recent and typical case of Ryohin Keikaku Co., Ltd. v. the TRAB ("Muji" case), the Supreme Court held that the function of a trademark can only be fulfilled in the circulation of the goods in commerce, which was not apparent in this case, as the goods are neither distributed nor promoted in China. The Supreme Court ruled that evidence of such use in OEM is not sufficient for the purpose of showing that the trademark has been "used and achieved a certain influence in China" as stipulated in Article 32 of the Chinese Trademark Law.8 This decision has caused a great sensation among foreign companies with manufacturing bases in China. Even if the Supreme Court's opinion is not codified in statutory laws, it provides some guidance to the lower Courts in future practice. As such, it can be expected that there might be more and more Courts finding that the use of trademark in OEM is not "use" under the Trademark Law, and foreign companies may face risks of non-use cancellation if they can only provide evidence of OEM activities in China.

However, there has been an ongoing discussion about whether this decision indicates that OEM manufacturing purely for export will likely no longer be deemed as trademark use. It is worth noting that the Supreme Court did not explicitly deny that trademark use can be achieved by way of OEM. The Supreme Court just held that it is difficult for brand owners to prove that a trademark has achieved a certain influence if only providing limited evidence of trademark use in OEM manufacturing. In my view, this decision mainly interprets the use with a certain influence in China under Article 32 of the Chinese Trademark Law and does not address the question of whether OEM manufacturing for exports constitutes trademark "use" for non-use cancellation under Article 49 of the Chinese Trademark Law. The question of whether use in OEM constitutes actual "use" under the Chinese Trademark Law does not have a simple black or white answer. Based on the cases above, the "use" involved in provisions of Article 32 and Article 49 should be interpreted differently in the law application. As can be seen from the "SCALEXTRIC" case, the requirement for use under Article 49 should be considered as relatively low.

Also noteworthy is that the Muji case does not provide definitive guidance on what constitutes trademark "use" under Article 57, or the determination of trademark infringement. Judge KONG also mentioned the Muji case in his article "On Eight Relations in Trademark Judicial Practice," and explicitly indicated that enforcement against OEM manufacturers remains as a topic for discussion, which implies that this issue can be expected to continue to see swaying application of law.

In light of the foregoing and in order to avoid the risk of potential infringement, foreign brand owners are recommended to conduct a thorough search for the registered trademark with the Chinese Trademark Office and recordation information with the General Administration of Customs first. Further, foreign brand owners should clearly express in the OEM agreement that the products are solely for export and provide proof to the OEM manufacturers that it legitimately owns trademark rights in the export destination country. In addition, it is encouraged to make a reasonable defense by taking advantage of other legal provisions, principles, and judicial interpretation, given that there is no clear and specific guidance in the statutory laws.

Footnotes

1Shenzhen Intermediate Court Civil Judgment (2001) Shen Zhong Fa Zhi Chan Chu Zi No. 55

2 Zhejiang High Court Civil Judgment (2005) Zhe Min San Zhong Zi No. 284

3 Shanghai First Intermediate Court Civil Judgment (2008) Hu Yi Zhong Min Wu (Zhi) Chu Zi No. 317

4 Shanghai High Court Civil Judgment (2009) Hu Gao Min San (Zhi) Zhong Zi No. 65

5 Guangdong High Court Civil Judgement (2011)Yue Gao Fa Min San Zhong Zi No. 467

6 Beijing First Intermediate Court Administrative Judgment (2009)Yi Zhong Xing Zi No. 1840

7 Beijing High Court Administrative Judgment (2010) Gao Xing Zhong Zi No. 265

8 The SPC Administrative Judgment (2012) Xing Ti Zi No. 2

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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