OEM: is the situation becoming clearer?

The chief of the Supreme Court's IP Rights Tribunal has recently authored a treatise which considers whether OEM production constitutes 'trademark use'.

In the past years, OEM has become a hot topic in China’s trademark law practice because three intertwined legal issues involving trademark use are related to it ('OEM' in this article refers to a situation in which a person (natural or legal) organises OEM production in China using their own trademark, but the products are all for export):

1. The maintenance of trademark registrations (Article 44 of China’s Trademark Law): if the person has registered the trademark in China, can such OEM production overcome a challenge on the grounds of non-use?
2. Trademark squatting (Article 31): when opposing the registration of a trademark, can the opponent’s prior OEM business in China be qualified as 'trademark use' that has achieved a 'certain influence' in the country, which is necessary to succeed in a trademark squatting allegation?
3. 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 that third country, can the Chinese trademark registrant claim trademark infringement against the Chinese supplier and/or the third party for such OEM business in China?

Regarding the first issue, the SCALETRIX case (2010) gave a confirmative answer. The Beijing Higher Court (second instance) maintained the registration of the trademark by accepting the registrant’s argument that its OEM production in China solely for export constituted 'trademark use' in China, as is required to maintain a registration (Administrative judgment (2010) Gao Xing Zhong Zi 265). 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 second issue, the Supreme Court gave a negative answer in the re-trial of the MUJI case (Supreme Court (2012) Xing Ti Zi 2). The Supreme Court supported the position of the Beijing Higher Court, stating as followed:

"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 requirement under Article 31 of the Trademark Law that a trademark “has been used and has certain influence”. The court’s holding is in accordance with the original intention of the legislature."

Some trademark practitioners argue that the Supreme Court did not state that OEM production for export never constitutes trademark use, but only maintained that such 'use' cannot bring about any influence, which is required to prove trademark squatting. A review of the court's decision itself does not provide a definite answer. However, it is at least clear that OEM production in China cannot, by itself, be cited against another party’s registration for the same trademark (although other grounds may apply, such as prior copyright in a logo).

Regarding the third issue, before 2009 the answer was clear: a Chinese registrant can stop the OEM business of a third party in China, despite the fact that the third party has a valid trademark registration abroad. Since then, however, 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 mark was not trademark use (Civil Judgment (2012) Lu Min San Zhong Zi 81). In particular, the court held as follows:

“Trademark use in the sense of the Trademark Law should refer to use that can realise the function of the trademark. The most important function of a trademark is to distinguish the trademark registrant’s goods from those of others. Only when the goods have been put on the market can the distinguishing function of a trademark be realised. If the goods have not been put on the market, the trademark is only a decoration, and no distinguishing issue is involved. Therefore, 'trademark use' under the Trademark Law should refer to use related to the flow of the goods in the course of trade.”

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

So far the Supreme Court has not had the opportunity to air its own views in a trademark infringement dispute. However, the position of the Supreme Court may be gleaned from a recent treatise authored by the chief of the IP Rights Tribunal.

In his treatise entitled “Fundamental Issues on the Application of the Trademark Law”, Mr Kong Xiangjun discussed the OEM issue. In explaining the nature of trademark rights, Kong did not mention the SCALETRIX case directly, but he fully agreed with the Shandong Higher Court’s decision in the Crocodile lawsuit. In discussing the territoriality of trademark rights, Kong not only supported the Supreme Court’s holding in the MUJI case, but also commented that, under the MUJI decision, OEM business was not 'trademark use' in the sense of the Trademark Law. Following that logic, one can conclude that OEM production does not fulfil the requirements of 'trademark use' under Articles 31, 44 and 52.

Different interest groups have argued on this issue for years, and the Supreme Court has been cautious in this respect. For the first time, it had a chance to express an opinion on OEM in trademark squatting disputes. In April 2013 the Supreme Court is expected to release the annual IP Rights Report and publish 50 typical cases decided in 2012. It remains to be seen whether the Supreme Court will use this occasion to make the muddy OEM waters clearer.

Shuhua Zhang, Wan Hui Da Law Firm & Intellectual Property Agency, Beijing