Original Equipment Manufacturing(OEM), particularly cross-border OEM, is perhaps most common model in the contemporary manufacturing world. It’s now routine for Western companies to provide design and technology know-how and then to outsource production to China and other Asian countries where the labour needed to manufacture a product is comparatively inexpensive.

The trade marks of Western companies are then affixed to the manufactured good and the final result is shipped back to Western shops. As a result, consumers living in the West can buy iPhones, Levi’s Jeans, Clarks shoes … and so on, at a lower cost than perhaps would be the case had the product been made by domestic manufacturers. And everybody involved is happy; consumers because we can get cheaper goods, producers in the Eastern countries because OEM provides job opportunities, and brand owners too, because profits can be higher thanks to reduced manufacturing costs.

However, there are historical issues that do raise concerns for those enjoying the benefits of OEM, and which may – ultimately ­– take the shine off this seemingly golden solution.

Background

Under the Ordinance on Customs Protection on IP Rights, Customs officials in China are empowered to confiscate goods at the border that possibly infringe IP rights – including registered trade marks – that have been completed with a so-called Customs Recording System. Under this system, the trade mark owner files information of the trade mark and also the legitimate users of it with Customs (China-registered trademarks only). Any identical or similar goods bearing a similar or identical trade mark, when going through customs examination in the import and export, will be seized if either the buyer or the seller are not in the list of legitimate users of the recorded trade mark (even though in almost all OEM-related cases, the foreign buyers are legitimate owners or licensees of a registered trade mark in their own jurisdictions).

Salient cases

In 2000, a Spanish company CIDESPORT, a legitimate licensee of a NIKE trade mark registered in Spain, outsourced the production of clothes to a manufacturer in Jiaxing city, Zhejiang province. The goods were seized by Customs in Shenzhen during a routine export examination, due to suspicion of infringement of the registered trade mark NIKE held by the American company of that name. The case then moved to Shenzhen Intermedium Court, where the court concluded in 2002 that the Defendants, Jiaxing Clothing Manufacturer and CIDESPORTS, had jointly infringed the NIKE mark, by giving the instruction to produce and producing goods of the same class and applying the identical trade mark on the goods – despite the fact that the Spanish company has legitimate right to use the disputed trademark in Spain.

In 2005, American Consumption Products Co outsourced the production of an air cleaner that bore the American registered trademark “De La Ritz” to Yiwu Jubao Chemicals. Ritz Charles is the owner of the registered trade mark RITZ on the same class of goods in China. YiWu Jubao Chemicals sold some “extra” products bearing the mark “De La Ritz” to the local market in China. Ultimately, the YiWu court concluded that the sales of such goods that are similar and that also bear a similar trade mark constitutes infringement of registered trade mark. However, this was relevant only to the sales , but not to the production, and production alone does not constitute infringement Because the goods produced were exported to America, and would not enter into local market in China, there could be no confusion among the relevant public in China, so there was no infringement of the registered trade mark in China for the OEM production alone.

Finally, in 2009, Shanghai High Court concluded that Jiu LiDe did not infringe the registered trade mark of Shanghai Shenda Hi Fi Electronic Ltd. (“Jolida and device”), simply by producing products via OEM for American company Jolida, which was the owner of “Jolida and device” on goods of class 9 in America. Over the years, Jolida in turn set up Shenda and Jiu LiDe in China, with Shenda registering “Jolida and device” on the same class of goods and owning the trade mark in China. Jolida later sold Shenda, but Shenda retained the “Jolida and device” trade mark in China. In 2009, Jolida outsourced the production of the same goods bearing the identical trade mark to Jiu LiDe, another of its subsidiaries, and the goods were seized by the Customs in Shanghai.

After going to appeal, the courts held that no infringement took place, on the ground that the fundamental function of a trade mark is to distinguish the source of the goods or service. If the goods are exported and won’t enter the local market, there will be no confusion among the relevant public in China. Therefore, in this case there was no infringement of the trade mark in China.

For and against

So does OEM leave the window open for accusations of infringement? Those that say yes believe that, first, trade mark protection has a geographic limitation; each jurisdiction can provide protection only on the trade marks that are registered in it. Unauthorised use of a mark similar or identical to a Chinese registered trade mark on similar or identical goods will constitute infringement of the Chinese registered trade mark regardless of the fact that, in the case of OEM, the foreign OEM instructors are legitimate users of their own trade marks in their own jurisdiction.[1] Second, as long as a trader’s action falls into Sub-article 1 of Article 52 of Trademark Law in China, which says “Without the authorization of the registered trademark holder, the use of the identical or similar trademark on the same or similar goods constitutes infringement of trademark”, it should be considered that an infringement is constituted and there is no need to visit the principal of likelihood of confusion among the relevant public. They believe that, in fact, likelihood of confusion is not an indispensable condition for establishing an infringement under Article 52(1)[2]; it is only a condition for deciding if the goods or services are similar.

The “No infringement” supporters believe that the fundamental function of a trade mark is to help consumers to identify the relationship between goods and their providers. When the goods are exported to another market, the use of a similar or identical trade mark during production will not cause confusion among the relevant public in China, because consumers in China won’t have opportunity to meet the goods. Such use of similar or identical trade mark during the production will not cause any damage to the owner of the registered trademark in China, either.[3]

The main difference between these contrary opinions seems to be whether likelihood of confusion is the precondition for constituting infringement. So, does the law provide answers on this question?

Supreme Court interpretation

In fact, Chinese Trademark Law and its Implementation Rules are silent on whether likelihood is a precondition in establishing infringement.

The first Supreme Court Interpretation[4] that touches upon the principal of likelihood was issued in October 2002 (“Supreme Court Interpretation 2002”), in which Article 11 provides that “Similar Goods refer to goods [that] have the same function, usage, production, sales channel and consumer, or [because of which the] relevant public will generally believe there are special relationships between two similar goods hence confusion is caused among relevant public”. In the same article, the definition of Similar Service encompasses confusion among the relevant public as a precondition to decide if the services are similar.

On whether likelihood of confusion is the precondition for constituting infringement, the Supreme Court was silent until 21 April 2009 when it issued an “Opinion on Several Issues relating to the Trial of IP cases under the Current Circumstance”(“Supreme Court Opinion 2009”). Here Article 6 states: “…without the authorization of the right holder of a registered trademark, the use of the identical trade mark on identical goods, unless the use is proper and reasonable, shall be considered as infringement, without a need to consider likelihood of confusion as an element. [emphasis added]”. In this Opinion, the Supreme Court excludes likelihood of confusion from being an element of constituting infringement in the case where both disputed goods and trade marks are identical.

Article 6 of the Supreme Court Opinion 2009 echoes the prescription on Article 16 (1) of the WTO’s TRIPs, stating that: “the owners of a registered trade mark shall have the exclusive right to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs for goods or services which are identical or similar to those in respect of which the trade mark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed.”

However, Article 6 of Supreme Court Opinion 2009 does not specifically address OEM production. So to what does the phrase “use is proper and reasonable” refer? Does it include cross-border OEM production where the foreign brand owners are legitimate users of the trade marks in their own jurisdiction and where all goods produced are exported? These questions remain largely unanswered.

As a result, we believe the Supreme Court’s interpretations are not sufficient in dealing with cross-border OEM cases. First, because they do not directly and expressly state whether likelihood of confusion is a pre-condition of constituting infringement. Second, they do not cover all the situations in which identical/similar trade marks in disputes are applied to similar/identical goods/services. Finally, where a similar trade mark is used on identical goods, the Supreme Court is completely silent.

The only situation in which the law is quite clear is when a similar or identical trade mark is used on similar goods/services. In this situation, Supreme Court Interpretation 2002 requires a visit of the principle of likelihood of confusion in deciding if the goods/services are similar and very likely, the conclusion will be that goods/services are not similar and there is no confusion since the sales channel and consumers will be completely different. If goods/services bearing identical/similar trade marks are not similar, the no infringement will be constituted according to Article 52(1) of Trademark Law.

Interestingly, just as this artical is finalized, Supreme Court issued a quite contradictory decision on the use of trade mark in the OEM production. In Ryohin Keikaku Co., Ltd v. Trademark Appeal Board case, [2012 Xing Ti zi No2.][5] Ryohin Keikaku Co., Ltd lost its case against Trademark Appeal Board despite it is the legitimate owner of Muji trade mark worldwidely and has used the trade mark in China for quite a few years during OEM production, prior to the application of the trade mark registration., Administrative Trial Department of Supreme Court, (not the IP Trial Department), ruled that the use of trade mark during OEM production shall not be considered as the use of trade mark under Trademark Law as the goods are 100% exported and will not enter into Chinese market, and therefore the previous use in the OEM alone cannot challenge a third party registering the identical trademark on identical goods.

So, if the use of trademark during OEM production is not considered as Use of Trade Mark under Trademark Law, then can we conclude that the use certainly would not infringe registered trademarks?! Supreme Court as a whole, its position in the use of trade mark in cross-border OEM production really needs some clarification.

Our advice

Where OEM production had been deemed to infringe a registered trade mark, the damage awarded to registered trade mark holders is usually relatively low. Also, only in a few cases the foreign brand owners were ruled to jointly infringe the trade mark. However, the greatest potential loss for the foreign companies facing this matter is sustained in the loss of goods produced by the Chinese manufacturer, the loss of a supplier, and the loss of future use of the disputed trade mark in China. Prevention, therefore, should be considered before an OEM instruction is given and when an OEM contract is being drafted, including:

  • Undertake a registered trade mark search. If no similar or identical trade mark applied on similar or identical goods is registered in China, consider registering it.

  • If the search result shows that previous registrations are similar or identical, search furter to see if the trade mark is in active use. If a trade mark is not used for three consecutive years, a request can be made for cancellation.

  • If an active similar or identical trade mark is found, undertake a Custom Filing Search. Companies whose goods are only sold in the local market will not usually file, and it can be easy to negotiate with these companies, if required.

  • If an active similar or identical trade mark is filed with Customs, and the trade mark holder is active in import and export, do not conduct OEM in China, or do not affix the trade mark on the goods produced in China. Negotiation with a company that is active in import and export and expanding its market worldwide is almost impossible.

  • If the evidence suggests the trade mark holder is only interested in the local market, proactive negotiation may be necessary. The purpose of negotiation is to have a mutual understanding and agreement that the use of the similar or identical marks in different markets will not damage and shall not damage either party’s interest in its own market.

OEM to China, therefore, can be a golden plan, it just requires a bit of extra work to make it shine.

[Note: This article was first published by UK journal ITMA Review in its 2013 February edition]