China: OEM In China: Trademark Tips For International Traders

Last Updated: 1 September 2017
Article by Yue Zheng and Lei Fu

In China, a local original equipment manufacturer (OEM) will make products for a foreign trademark proprietor or entity with the authorisation to use its trademark and then export the finished products.

The products are processed and labelled according to the requirements of the foreign party. All the products will be delivered to the foreign party or designated consignees, who then pay processing fees to the Chinese manufacturers. Products under OEM for export do not enter the Chinese market.

Due to the thriving OEM business in China, trademark infringement issues arise. It happens that a foreign party who has the trademark rights in its local area and/or in other foreign countries may not have any trademark rights in China.

Chinese trademark law adopts the first-to-file principle. Therefore, when there is a registered trademark in China, the proprietor may claim that attaching the specific trademark on the OEM products constitutes trademark infringement. It may file an application for customs seizures, initiate administrative raid actions and/or civil litigations against the Chinese manufacturing enterprise, which will then seek support from the foreign party.

Whether OEM constitutes trademark infringement is not clearly set forth in the law and it remains controversial in judicial theories and practices. At the end of 2015, the Supreme Court handed down its decision in a retrial case and held that OEM for export does not infringe a Chinese trademark as long as the relevant products are exclusively for export.

The main basis for the Supreme Court's ruling is that attaching a trademark on the OEM products for export will not constitute trademark use under the trademark law. The reason being that as the products will not appear in the Chinese market, they cannot confuse Chinese consumers. The Supreme Court's retrial case originates from a customs seizure. The trademark registrant in China initiated civil litigation after the seizure, while the foreign party had a prior registered trademark in the destination country of the OEM products.

"The Supreme Court handed down its decision in a retrial case and said OEM for export does not infringe a Chinese trademark as long as the relevant products are exclusively for export."

Observations

When handling litigation similar to the Supreme Court's case, we noticed that the following factual elements are taken into consideration by the courts in determining whether trademark infringement is constituted.

First, whether the business activity falls into the category of OEM for export. In OEM, the foreign party should provide designs and trademarks while the Chinese party processes the products and returns all the products to the foreign party.

In practice, in order to prove that the business activity falls into the category of OEM for export, Chinese manufacturers should file certain evidence with the court. This includes trademark registration certificates (notarised, legalised and translated copies) in the destination country; the entrusting contract/authorisation letter (notarised, legalised and translated); as well as information relating to the destination of the exported goods and the identity of the consignee. If it is determined that the business activity belongs to OEM for export, it means that the products will not appear in the Chinese market. The trademark attached to the products does not "distinguish the origin of the products", and therefore does not have the "nature of a trademark". In this way, attaching the trademark to the OEM products for export is not regarded as use of a trademark under Chinese law and would not constitute infringement.

Some courts will also look into another factual element: whether the Chinese party fulfils its duty of reasonable examination. This duty requires the Chinese party to a) check that the foreign party owns a valid trademark registration covering the OEM products in the destination country; b) check that the trademark attached on the OEM products is identical with or very similar to the registered trademark owned by the foreign party; and c) obtain an authorisation letter issued by the foreign party. Some courts also require that the trademark registration owned by the foreign party be registered before the Chinese trademark registration, to further prove that the foreign party has no bad faith registration in the trademark in the destination countries.

Tips for foreign parties

Taking into consideration of the above mentioned, we have made the following suggestions for foreign parties seeking to use a trademark for OEM purposes in China:

  1. File trademark applications on time. Although recently the Chinese courts have been inclined to determine the trademark use in OEM would not constitute infringement, it is still necessary to file trademark registrations in China proactively. This better protects rights and prevents third parties from squatting and then taking legal actions against the foreign party's use of the trademark in OEM. The trademark registration in China will secure the use of the trademark in OEM.
  2. Prepare documents for future trademark disputes. For example, while entrusting Chinese manufacturers for OEM, the foreign party should ensure that the trademark registration in the destination country is valid, covers the OEM products and that the trademark used on the OEM products is very similar to or identical with the registered trademark.
  3. If, unfortunately, the trademark proprietor in China initiates legal actions against the OEM for export, the foreign party should support the Chinese manufacturer and actively prepare for the legal actions to protect its own legal rights and interests.

The foreign party we refer to in this article should have trademarks registered in good faith in the destination countries. It is quite a different situation if the trademark registrations in the destination countries are obtained in bad faith.

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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