Supreme People's Court: OEM manufacturing for export does not constitute 'use'

The Supreme People’s Court has upheld a Beijing Higher Court’s decision in an administrative litigation case, and essentially rejected Muji's attempt to recover its hijacked mark by adducing evidence of use of its mark in the context of OEM manufacturing products for export. The court held that evidence of such OEM use is not sufficient for the purposes of showing that a mark has been "used and achieved a certain amount of influence in China", as stipulated in Article 31 of the PRC Trademark Law.

Japanese company Ryohin Keikaku Co Ltd is a holding company that operates the exclusive Muji stores internationally.

Article 31 states as follows:

"An application for registration of a trademark shall not be of such a nature as to infringe the existing earlier right of another person. An application shall not be made with intent to register a trademark which is used by another person and enjoys a certain reputation."

Muji was seeking to recover its hijacked mark on this basis.

There has been some discussion as to whether this decision indicates that, for infringement actions, OEM manufacturing purely for export will no longer be deemed as trademark use and, therefore, no trademark infringement can be proven. Arguably, a more reasonable reading would be to consider this only as an interpretation of the phrase "has been used and achieved a certain amount of influence in China", and not as an interpretation of what constitutes trademark use in general.

The decision does not directly refer to the use of a mark in OEM manufacturing per se and does not comment on the other articles in the Trademark Law that pertain to use. Also noteworthy is that the Muji decision involved an administrative review - it was not an infringement action and not a formal judicial interpretation, which influences its level of importance.

The mark at issue was 无印良品 ('Muji' in Chinese characters). Muji filed its Chinese character trademark in 1999 in several classes (16, 20, 21, 35 and 41). In 2001 无印良品 was registered by Hainan Nan Hua Co Ltd and later assigned to a Beijing-based company, Beijing Mian Tian Fang Zhi Pin Co Ltd. Muji, who does not have a registration for 无印良品 in Class 24 in China, opposed the mark based on its 'prior use' of the mark in China, and evidenced use of the mark on its OEM-manufactured goods for export. Muji lost at the administrative level (the China Trademark Office and the Trademark Review and Adjudication Board (TRAB)) and filed an administrative review appeal in 2009, challenging the TRAB’s decision. Muji lost the case in both the first instance (Beijing Number 1 Intermediate Court) and the second instance (Beijing Higher Court) in 2010. Muji thus challenged the decision before the Supreme People’s Court.

The Supreme People’s Court upheld the Beijing Higher Court’s decision to maintain the registration held by Beijing Mian Tian Co Ltd. While the result was the same, it becomes clear - when looking at the Supreme People’s Court's reasoning and comparing it to that of the lower court - that the Supreme Court reached its conclusion on slightly different grounds. The court avoided addressing directly the issue of whether OEM manufacturing purely for export constitutes trademark use under Article 31.

The court held that:

“Article 31 is aimed at preventing hijackings, but not to protect all unregistered marks. Only a mark that has been previously used and achieved a certain amount of influence in China should be denied registration as stipulated under Article 31.”

In order to reach the conclusion that the required elements of “prior use and a certain amount of influence” had not been fulfilled, the court stated that evidence of use of a trademark in OEM manufacturing activities in China for export is insufficient to show that the mark has achieved a certain amount of influence in China through use. It is noteworthy that the court did not actually deny that trademark use can be achieved by way of OEM manufacturing.

The court relied on the theory that the basic function of a trademark is to distinguish the origin of goods or service, and that a trademark can play a role of origin indicator only in its area of distribution. Without explicitly stating so, the Muji case seems to demonstrates the court’s position that it is difficult to prove that a mark has achieved a certain amount of influence if the brand owner provides only limited evidence of trademark use in OEM manufacturing of products meant purely for export. In such cases, where the OEM products are not made available to the general public in the domestic market, the court would have to consider whether a "certain influence" has been achieved within the supply chain and among parties in the industry. The burden of proving that influence within the supply chain and others in the industry would be a heavy one - this is consistent with previous decisions in China.

The courts have discussed in several cases the application of other articles (primarily 44 and 52) of the Trademark Law and the relevant regulations concerning trademark use. At this stage, there is little indication that the Muji case was intended to affect existing doctrine under those articles.

Article 44 of the Trademark Law provides as follows:

“Where any person who uses a registered trademark has committed any of the following, the Trademark Office shall order him to ratify the situation within a specified period or even cancel the registered trademark:... (4) where the use of the registered trademark has ceased for three consecutive years.”

Can OEM manufacturing solely for export be deemed as 'use' under Article 44(4) of the Trademark Law that is sufficient to maintain the registration of the trademark? The Beijing Higher Court clarified this issue in Hornby Hobbies v TRAB in December 2010. Essentially, the court held that Article 44(4) aims to encourage the actual use of trademarks. In determining whether a registered trademark has been used, the court mentioned that one should not cancel a registered trademark to create prejudice towards the legitimate rights and interests of the registrant. The court found that use of the trademark on assembled finished toys for export constituted use.

Article 52 of the Trademark Law provides as follows:

“Any of the following acts shall be an infringement of the exclusive rights to use a registered trademark: (1) to use a trademark that is identical or similar to a registered trademark in respect of identical or similar goods without the authorisation from the trademark owner.”

Does OEM manufacturing solely for export constitute 'use' and therefore infringement of the prior trademark rights of others under Article 52? This question is the subject of ongoing discussions among local and national judges, as well as administrative enforcement authorities.

The Muji case mainly discusses Article 31 and, as such, does not provide definitive guidance on what constitutes trademark 'use' under Articles 44 and 52 as regards OEM manufacturing in China solely for export.

Rather than considering recent cases as an indication that the courts are departing from the common understanding that unauthorised use of a trademark in OEM manufacturing constitutes infringement of a Chinese registered trademark, they could more reasonably be considered as anomalies and, therefore, should be less of a concern to foreign brand owners involved in OEM manufacturing. In notable cases, including Nike International v Cidesport & Zhejiang Livestock Products Import & Export Company & Jiaxing Apparel Factory, Nokia v Wuxi Jinyue and Deckers Outdoor v Guangyu Leather Industry, the courts deemed that OEM manufacturing could constitute trademark use and trademark infringement. Even though cases such as Shanghai Shenda Audio Electronics v Jiulide Electronics and A&A Wuxi Import & Export Corp v Crocodile Garments Ltd have affected the conventional doctrine and potentially created ambiguity both in civil and administrative enforcement proceedings, those views do not necessarily signify a conclusive shift in the reasoning of the Chinese courts at large.

Therefore, as far as brand owners are concerned, the more prudent approach would still be to consider that unauthorised use of marks in OEM manufacturing constitutes infringement and is considered as trademark use, on a prima facie basis. There will be cases where, in the current Chinese legal environment, policy and political considerations will occasionally have an influence on the decisions, but these should be viewed more as an exception rather than the rule.

As we see it, Customs and other administrative enforcement authorities which are against OEM manufacturers will continue to exert their strength in the IP protection regime in China, at least for now.

Deanna Wong and Yang Tao, Hogan Lovells, Beijing and Hong Kong