Over the past few years original equipment manufacturer (OEM) production(1) has become a hot topic in Chinese trademark practice. because three intertwined trademark issues are related to it:

  • Maintenance of trademark registration (Article 44 of the Trademark Law) – if the trademark has been registered in China, can OEM production sustain a challenge of non-use of that trademark?
  • Trademark squatting (Article 31) – in opposing the registration of a trademark, can the opponent's prior OEM business in China be qualified as trademark use that brings about certain influence, which is necessary in the event of trademark squatting allegations?
  • Trademark infringement (Article 52) – if a third party has registered the same trademark in a third country and places orders with a Chinese supplier for OEM production, and the goods are all intended for export to the third country, can the trademark registrant in China claim trademark infringement against the Chinese supplier or the third party for the OEM business in China?

Regarding the issue of trademark maintenance, the 2010 SCALECTRIX case answered in the affirmative. The second instance Beijing Higher Court maintained the registration status of the trademark by accepting the rights holder's argument that its OEM production in China, which was solely intended for export, constituted trademark use within China, as was required to maintain registration status.(2) One important consideration was the national policy to encourage foreign trade. The Trademark Review and Adjudication Board has since followed this precedent in similar cases.

Regarding the issue of trademark squatting, the Supreme Court gave a negative response in the re-trial of the MUJI lawsuit.(3) In that decision the court supported the position of the Beijing Higher Court:

"MUJI entrusted factories in China Mainland to produce the goods in class 24 solely for export. The advertisement and news coverage of the brand all occurred outside China. The court of second instance (Beijing Higher Court) held that such evidence does not meet the request of Article 31 of the Trademark Law on a trademark that "has been used and has certain influence". The court's holding is in accordance with the original intention of the law making."

Some trademark practitioners argue that the Supreme Court did not preclude OEM production from constituting trademark use altogether, but maintained only that such use cannot bring about any influence, which is required in actions against trademark squatters. However, a definite conclusion cannot be reached from the wording of the decision. It is at least clear that pure OEM production in China cannot be cited against another party's registration of the same trademark (although other grounds may be conceived, such as prior copyright on the reprint of the logo).

With respect to the issue of trademark infringement, before 2009 the answer was quite clear: the Chinese rights holder could stop the OEM business of a third party in China, even if the third party maintained a valid trademark registration abroad. Since 2009 several key courts in China have changed their positions. For example, in Crocodile T-shirt v Rui Tian & Espoir the Shandong Higher Court held that the defendants' OEM production of T-shirts bearing the CROCODILE trademark did not constitute trademark use.(4) The court held that:

"Trademark use in the sense of the trademark law should refer to the use that can realize the trademark function. The most important function of a trademark is to distinguish the trademark registrant's goods from others. Only after the goods have flown into the course of trade can the distinguishing function of a trademark be realized. If the goods have not entered the course of trade, the trademark is only a decoration, and no distinguishing issue is involved. Therefore, the trademark use in the Trademark Law should refer to the use related to the flow of the goods in the course of trade."

If OEM production solely intended for export is not regarded as "use in the sense of the trademark law", a logical conclusion is that such OEM business cannot maintain the registration status of the trademark involved.

The Supreme Court has not yet had the opportunity to air its views in a trademark infringement dispute. However, in his September 2012 treatise "Fundamental Issues on Application of the Trademark Law", Chief of the Supreme Court IP Rights Tribunal Kong Xiangjun discussed the OEM issue. In expounding on the nature of trademark rights, he did not mention the SCALECTRIX case directly, but fully agreed with the Shandong Higher Court decision on the CROCODILE lawsuit. In discussing the territoriality of the trademark, he not only supported the Supreme Court's re-trial decision in the MUJI trademark squatting dispute, but also commented that the MUJI case negated OEM business as trademark use in the sense of the Trademark Law. Following that logic, it may be concluded that OEM production does not fulfil the requirement of trademark use in Articles 31, 44 and 52.

Different interest groups have argued on the OEM issue for years, but the Supreme Court has been cautious in handling such issues. Now it has a chance to express its opinions on OEM production in trademark squatting disputes. In April 2013 the Supreme Court is expected to release the annual IP Rights Report and publish 50 typical cases from 2012. It remains to be seen whether the Supreme Court will use this event to make the muddy waters regarding OEM production clearer.

For further information on this topic please contact Shuhua Zhang at Wan Hui Da Law Firm & Intellectual Property Agency by telephone (+86 10 6892 1000), fax (+86 10 6894 8030) or email (zhangshuhua@wanhuida.com).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.Endnotes

(1) In the context of this update, 'OEM' refers to the situation in which a person (natural or legal) organises OEM production in China using its own trademark, but exports all products.

(2) Administrative judgment (2010) Gao Xing Zhong Zi 265.

(3) Supreme Court (2012) Xing Ti Zi 2.

(4) Civil Judgment (2012) Lu Min San Zhong Zi 81.