This paper was first published in the September Issue of the Korea Institute of Intellectual Property's publication Intellectual Property Research.
【Abstract】 The OEM trade of China, especially of coastal provinces like Guangdong, Jiangsu and Zhejiang, has grown rapidly since the country's Reform and Opening-up, making a great contribution to China's export trade. In the recent dozen years, however, there have been incessant arguments about whether the unauthorized use of trademarks of other domestic exclusive right-holders on OEM Products which are only for export constitutes trademark infringement; A final conclusion on this matter has not reached in both theory and practice. This situation not only demonstrates the absence of legal provisions, but also leaves foreign entrusting enterprises and domestic original equipment manufacturers not knowing what to do. By adopting the empirical research method, this paper discusses the differences in attitudes towards this matter in domestic judicial and law enforcement practice as well as relevant laws and regulations. On one hand, this paper discusses the reasons for the differences on the basis of viewpoints of different circles, which mainly include no authoritative definition of the concept of OEM in China and unclear standards for the determination of infringement in OEM involving foreign elements. On the other hand, this paper analyzes the focus issues of trademark disputes related to OEM involving foreign elements and stresses the definition of "use of trademark" and the application of the confusion theory under Chinese laws. Finally, this paper, based on the current situation of disunity of judicial practices and foregoing analysis, offers practical legal advice to foreign entrusters and domestic manufacturers on how to take effective measures to reduce or avoid the trademark infringement risks in their OEM trade.
Original Equipment Manufacture, or OEM, refers to a cooperation method under which an entruster entrusts a manufacturer to manufacture goods[1] with the entruster's trademark which will then be delivered to the entruster for sale and for which the entruster will pay manufacturing fees to the manufacturer as agreed. If the entruster and the manufacturer are in the same country, OEM can be further divided into domestic OEM and OEM involving foreign elements. With a competitive edge in labour cost, OEM trade involving foreign elements of China, especially of coastal provinces like Guangdong, Jiangsu and Zhejiang, has grown rapidly since the country's Reform and Opening-up, which makes China increasingly become the manufacturing plant of goods of the world. However, trademark infringement disputes in OEM involving foreign elements continually emerge as trade grows, and the issue of standards for the determination of infringement also attracts extensive attention from enterprises and legal circles at home and abroad.
I. Dispute of Chinese courts over the determination of trademark infringement in OEM involving foreign elements
As there are no clear legal provisions in Chinese laws on the trademark infringement issue of OEM involving foreign elements and the Supreme People's Court has also given no clear judicial interpretations and guidance in this regard, there is no unified determination of trademark infringement in OEM involving foreign elements among judicial authorities of different regions in the court system of China. It is not difficult to see this difference from the typical cases below.
Case One[2]
In 1995, Jolida Inc. registered the trademark "Jolida" in the US. Jolida Inc. later established a subsidiary called Shanghai Shenda Sound Electronic Co., Ltd. In 1997, Jolida Inc. sold Shanghai Shenda and established another subsidiary called Jiulide Electronic (Shanghai) Co., Ltd. In 1998, Shanghai Shenda registered the trademark "Jolida" in China. In 2008, when Jiulide Electronic (Shanghai) Co., Ltd. was conducting a customs declaration and exporting a batch of electronic products with the trademark "Jolida", the products were seized by Shanghai Customs on the grounds that the trademark "Jolida" was suspected of infringing the registered trademark of Shanghai Shenda. In the lawsuit, the defendant claimed that both the plaintiff and the defendant were established with investment from Jolida Inc. of the US which had registered and used the trademark "Jolida" in the US in 1995 and that the plaintiff's trademark "Jolida" was the result of vicious trademark squatting in China. The products manufactured by the defendant were not sold in China and were only for export trade with its American parent company, so it should not be determined to be trademark infringement.
The court of first instance held that both the trademark and enterprise name put on the internal and external packing of the products by the defendant were Jolida Inc. of the US, so the consumers in the American market were able to tell that Jolida Inc. of the US was the source of the goods through the trademark. As all products involved in this case were for export to the US and not actually sold in the Chinese market, it was not possible for Chinese consumers to be confused and mistaken with respect to the source of the products, so it did not constitute infringement. The court of second instance maintained the ruling of the court of first instance on the grounds that although formally speaking, the trademark was put on the goods by the domestic manufacturer, in essence, the real user of the trademark was still the foreign entruster. The trademark on the products in this case would only identify the source of the goods as outside China and did not perform the function of identifying the source of the goods in the domestic market.
Case two[3]
In 2010, a Mexican company, which enjoyed the right to the trademark "PRETUL" in Mexico entrusted a company in Shanghai to manufacture two batches of padlocks with this trademark. In the same year, when this company in Shanghai performed the customs declaration formalities with Ningbo Customs for these two batches of goods, Ningbo Customs found out that a Chinese company had already filed with the General Administration of Customs for intellectual property rights protection for the trademark "PRETUL". Upon application and deposit of security money by this Chinese company, Ningbo Customs seized the goods which were suspected to be infringing. Later, the Chinese company launched a lawsuit against the company in Shanghai before the court on the grounds of trademark infringement.
The plaintiff argued that it enjoyed the exclusive right to use the trademark "PRETUL"; the defendant infringed the plaintiff's exclusive right to use its registered trademark by manufacturing and selling padlocks with the trademark "PRETUL" without authorization. The defendant claimed that the goods with the trademark "PRETUL" of this case were OEM goods manufactured by it under the entrustment of the Mexican company which were all for export to Mexico and not actually sold in the Chinese market; it would not lead to confusion or mistake among consumers in China and did not harm the trademark right of the plaintiff.
The court of first instance held that the defendant's putting the trademark "PRETUL" on its manufactured padlock body, key and auxiliary descriptive literature related to the goods as well as its putting the trademark "PRETUL and the ellipse device" on the packing box of the padlocks were obviously acts within the meaning of "use" of trademark under the Trademark Law; and the defendant's use of the trademark "PRETUL" on the same kind of goods without authorization constituted trademark infringement.
The court of second instance upheld the decision of the court of first instance.
On 14 March 2014, the Supreme People's Court decided to take over the case for trial which is still ongoing. The Supreme People's Court's decision to take over the case for trial has drawn extensive attention from the trademark industry and a lot of multi-national companies in China.
The two cases above have something in common, which is that the foreign entrusters enjoy the right to the legally registered trademark in their own countries or countries where the goods will be sold, but the right to the same or a similar trademark on the same or similar goods in China is owned by another party. Furthermore, in both cases, the OEM products manufactured by the manufacturers under the entrustment of the entrusters were all for export, but the rulings were totally different. The two cases demonstrate two major opinions of Chinese courts on the issue of OEM involving foreign elements. One opinion is that OEM involving foreign elements is not "use of trademark" and no infringement is constituted if the goods are not circulated in the Chinese market. The other opinion adopts a "one size fits all" approach and always considers it to be infringing regardless of whether it constitutes "use of a trademark". The Supreme People's Court later gave interpretations on the "use of trademark" in the "MUJI" case, though, due to the nature of administrative proceedings for affirmation of rights instead of infringement proceedings of this case, there is still no unified final conclusion formed within the Chinese court system on similar issues in trademark infringement cases.
Admittedly, different perspectives and mentalities of analysis may lead to diametrically opposite conclusions on the same issue. The ruling of the court affects the trade contacts between foreign licensing enterprises and domestic manufacturers to a large extent. There have always been disputes about the trademark infringement issue in OEM involving foreign elements due to the lack of a set of complete and universal standards for the determination of trademark infringement in OEM involving foreign elements.
II. Attitudes and differences in opinion of the judicial and law enforcement system
(i) Detailed description of attitudes of the judicial system towards the determination of infringement in OEM involving foreign elements
Beijing High People's Court issued the Answers of Beijing High People's Court to Several Issues concerning the Trial of Trademark Civil Dispute Cases (hereinafter referred to as the "2004 Answers") in as early as 2004, which clearly stated that if the OEM goods are only for export, it shall not constitute infringement as it is impossible to cause confusion and mistake among the relevant public.[4] Two years later, however, Beijing High People's Court re-enacted the Answers to Several Issues concerning the Trial of Civil Dispute Cases (hereinafter referred to as the "2006 Answers") in 2006 and stated that the 2004 Answers were repealed simultaneously. The 2006 Answers deleted the answers in the 2004 Answers with respect to the issue of OEM involving foreign elements and amended the same as the manufacturer shall be determined to be infringing if it fails to fulfil the reasonable duty of care with respect to the trademark rights of the entruster.[5]This new answer not only ended the nature determination for OEM activities which are only for export, but also created a new confusion: only under the circumstance that the goods which are entrusted to the manufacturer by the entruster for OEM have themselves already infringed the exclusive trademark right of others, the manufacturer should bear joint and several liability for infringement with the entruster if it fails to fulfil the reasonable duty of care is; then what are the standards to determine whether the entruster's entrustment act is infringing or not? The 2006 Answers failed to give a response in this regard. The 2006 Answers have lost actual reference value for the determination of infringement in OEM involving foreign elements, which may have something to do with the fact that Beijing High People's Court has realized the complexity and disputability of this issue and wants to give some discretion to other courts.
In 2009, at the "How to Deal with the Impact of Financial Crisis on the Real Economy in Trials of Intellectual Property Right Cases and Legal Forum for Service Outsourcing" (hereinafter referred to as the "2009 IP Forum"),[6] the high people's courts of various provinces expressed their views on the issue of determination of trademark infringement in OEM involving foreign elements. These high people's courts held a relatively uniform attitude towards OEM involving foreign elements of "similar goods" or "like goods" and all believed that the issue of choice of judicial policies and balance of interests should be taken into consideration and the interpretation should be done strictly, namely that the determination of infringement should be made to a less extent. But for the same trademark on the same goods, the views of these courts differed from one another. Chen Jinchuan, then chief judge of the intellectual property court of Beijing High People's Court, said when understanding Paragraph 1 of Article 52 of the Trademark Law and provisions of the Implementing Regulations of the Trademark Law relating to trademark infringement, sufficient consideration should be given to the essence and function of the trademark which are used to differentiate the source of the goods. If the trademark is not put on the market, it is not possible to cause confusion among the relevant public, so it should not be determined to be infringing, which is the case for OEM goods which are only for export. It can be seen that although Beijing High People's Court repealed the 2004 Answers, there is still some person inside Beijing High People's Court who still maintains the original views on the issue of OEM involving foreign elements. Zhejiang Provincial High People's Court, however, pointed out clearly at the Forum that goods should be determined to be infringing if the same trademark is used on the same goods in OEM involving foreign elements. Thus it can be seen that different courts within the judicial system still fail to have a unified view on the determination of trademark infringement in OEM involving foreign elements.
In the "Muji" retrial case of 2012, the Supreme People's Court pointed out that OEM goods which are only for export do not fall within the meaning of "use of trademark" under the Trademark Law, because although the entruster had enterprises in China producing goods with the trademark "Muji", goods bearing this mark were not sold or promoted in China, so it was not actually put into circulation in the Chinese market.
The Supreme People's Court made a determination on whether OEM involving foreign elements constituted "use of trademark" through this case, which will offer guidance to Chinese courts at various levels on their trial of cases in judicial practice. The Supreme People's Court, however, did not put this determination in the form of judicial interpretations; as China is not a country with a case law system, this case cannot act as a legal precedent that courts at various levels must follow. In addition, the Supreme People's Court's determination was aimed at whether OEM goods with a trademark that had not been registered in China constituted "use of trademark", but there is no clear final conclusion with respect to whether the same determination standard of "use of trademark" is applicable to OEM goods with a trademark of others that has been registered.
(ii) Attitudes of the administrative law enforcement system towards the determination of infringement in OEM involving foreign elements
At the 2009 IP Forum, Lv Zhihua, deputy director of the Trademark Office of the State Administration for Industry and Commerce, introduced that in OEM involving foreign elements, the manufacturer should examine whether the trademark of the goods to be manufactured is legally authorized. He also pointed out that OEM was a link in the use of a trademark. When the industry and commerce authorities determine the nature of an OEM manufacturer's unauthorized use of a trademark, it will not consider whether the OEM manufacturer is knowingly engaged in such use or whether actual damage is caused; it will determine the OEM manufacturer to be infringing as long as unauthorized use is found.
At the Forum, Li Qunying, a director from the Politics and Law Department of the General Administration of Customs, noted that as for this issue, the customs authorities adopt the same determination standards as the industry and commerce authorities in their law enforcement. This view of the law enforcement agencies has something to do with the purpose of the administrative law enforcement which is to stop infringements in a timely manner, and this is the difference between administrative law enforcement and the judicature.
(iii) Reasons for differences between Chinese judicial and law enforcement agencies and the problems reflected
It can be seen from the issuance and deletion of the relevant Answers by Beijing High People's Court and the differences among the judicial and law enforcement systems in different regions that there is no unified attitude among and within the judicial and law enforcement systems towards the determination of infringement in OEM involving foreign elements, which directly leads to diametrically opposite results in similar cases in different regions. There are mainly reasons in institutional and legal aspects.
Institutionally speaking, China adopts a dual-track approach to the protection of intellectual property, which means that administrative law enforcement is relatively independent. The higher authority of local industry and commerce enforcement agencies is the State Administration for Industry and Commerce, while the higher authority of local customs is the General Administration of Customs, plus the factor of administrative protection of local economic development, causing courts and law enforcement agencies to make different determinations on the same case. With the increase of administrative litigation, however, the court has made the views of most of the administrative law enforcement agencies follow that of the court by using its judicial power or has caused law enforcement agencies (customs) to begin guiding parties to the dispute to settle the dispute through judicial means
Legally speaking, the reason for this problem lies in:
1. The concept of OEM is not clear
First, there is no authoritative definition of OEM. OEM activities were not all of the same type in past cases. For example, there are manufacturing type, manufacturing and selling type, direct OEM and indirect OEM, etc. Second, there are no uniform provisions regarding issues like the qualifications of the manufacturer and relationship with the entruster (such as investment relationship or authorization relationship). In practice, there are circumstances in which the trademark is granted or goods are sold disguised as OEM. If OEM is made a silver bullet for such false OEM activities, then the actors in such false OEM activities will take advantage of loopholes in the law and evade their liability for infringement, which is also one of the major reasons why Beijing High People's Court deleted the Answers.
2. There are no clear standards for determining infringement in OEM involving foreign elements
Although Article 57 of the amended Trademark Law, which came into effect on 1 May 2014, expressly incorporates the "confusion theory" into clauses relating to the determination of trademark infringement and provides that "any of the following acts shall be an infringement of the exclusive right to use a registered trademark: (1) using a trademark that is identical to a registered trademark in respect of the same goods without authorization of the proprietor of the registered trademark; (2) using a trademark similar to a registered trademark in respect of the same goods or using a trademark identical or similar to a registered trademark in respect of similar goods, without authorization of the proprietor of the registered trademark, where such use is likely to cause confusion".
This clause has failed to produce due effect in practice: first, the amended Trademark Law and the amended Implementing Regulations for the Trademark Law failed to refine and explain the determination standards and application clauses of the "confusion theory", making it difficult to grasp in practice; second, seen from the attitudes of the court towards cases after the amended laws were implemented, the court does not determine whether OEM involving foreign elements constitutes infringement according to Article 57 of the amended Trademark Law; instead, it regards OEM involving foreign elements as an exception and makes a determination according to whether it constitutes OEM involving foreign elements and whether the domestic manufacturer has fulfilled the reasonable duty of care. As for whether it constitutes OEM involving foreign elements, the court mainly makes a determination from the perspective of whether the goods of the OEM involving foreign elements will grab market share from the domestic proprietor of the trademark and whether it will have adverse effects on the trademark proprietor. As for whether the domestic manufacturer has fulfilled the reasonable duty of care, comprehensive consideration is made in such aspects as whether the manufacturer has reviewed the right documents of the entruster and whether an OEM contract has been signed. The consistent implementation of this determination mentality in courts of different places is difficult to be ensured due to the lack of support of a legal basis.
III. Due mentality towards determination of trademark infringement in OEM involving foreign elements
As the main element for determining trademark infringement is the use of a trademark, in dealing with the issue of trademark infringement in OEM involving foreign elements, the key point is to fully understand whether OEM activities involving foreign elements are within the meaning of "use" under the Trademark Law.
(i) Relationship between the manufacturer and the entruster
The determination of the legal relationship between the manufacturer and the entruster concerns the determination of the infringing party and the assumption of liability. Some people argue that the act of delivery in OEM is actually an act of purchase and sale, and the relationship between the manufacturer and the entruster is a sales relationship. The Authors hold the view that the premise of a sales relationship is that the parties enter into a purchase contract in oral or written form. What the manufacturer and the entruster enter into is an OEM contract which falls within the scope of a contract for hired work. The contract for hired work is a contract under which the contractor completes the work according to the requirements of the hirer and delivers the work results, while the hirer pays the contractor compensation. The contract for hired work is a kind of labour contract and pertains to the renting of labour.[7] There is no disagreement with respect to the fact that the legal relationship between the manufacturer and the entruster in OEM involving foreign elements is a kind of contractual relationship. The 2006 Answers of Beijing High People's Court also adopted the concepts of "hirer" and "contractor". According to international practice, the renting of labour in transnational contracting activities may be deemed as the labour of the entruster itself, namely that the manufacturer carries out manufacture and production in the country of the entruster, i.e. export of labour service.
(ii) Whether causing confusion is made an essential condition for determining trademark infringement
There is no unified opinion among all circles regarding whether OEM involving foreign elements needs to cite the possibility of confusion. One opinion is that the "possibility of confusion" is a standard to determine whether goods are similar and whether a trademark is similar when the goods and trademark are not the same or not completely the same; it is not a general constitutive element for trademark infringement. The stipulation that use of the same trademark in respect of the same goods (namely "double sameness") shall be determined to be infringing argues that it is not necessary to consider the possibility of confusion. This view is adopted by the European Union: according to the trademark laws of the EU (Paragraph 1 of Article 9 of European Union Trademark Regulation, Paragraph 1 of Article 5 of European Union Trademark Directive), in the case of use of the same trademark in respect of the same goods or services, the protection of the trademark is absolute and no confusion is required; the concept of similarity or likeness only needs to be explained in combination with the possibility of confusion when the trademarks are similar or the goods are alike.[8] Article 6 of the Opinions of the Supreme People's Court on Several Issues concerning Intellectual Property Trials Serving the Overall Objective under the Current Economic Situation which were issued in 2009 provides that, for the use of a trademark which is the same as a registered trademark on the same kind of goods without the permission of the trademark proprietor, except for legitimate and reasonable use, the confusion factor need not be considered in the determination of infringement. This stipulation forms the legal basis for many courts including Zhejiang Provincial High People's Court to determine infringement in OEM involving foreign elements.
The other opinion is to interpret the "double sameness" provision of the amended Trademark Law as "presumed confusion", which means that in the circumstance of "double sameness", "possible confusion" is still an implied condition for determining infringement. If there is clear proof proving no possibility of confusion, then it can be determined to be non-infringing. This opinion stems from Paragraph 1 of Article 16 of the Agreement On Trade-related Aspects of Intellectual Property Rights: "In the case of the use of an identical sign for identical goods or services, a possibility of confusion shall be presumed." The Trademark Law of the US also regards the "possibility of confusion" as a necessary condition for determining infringement.
The Authors believe that the amended Trademark Law's provision about the determination of infringement in the circumstance of "double sameness" does not incorporate the requirement of presumed confusion, which reflects the enhanced protection of trademark rights by the Trademark Law. In the circumstance of "double sameness", the trademark rights are granted absolute protection and the possibility of confusion is no longer considered. Presently there are still some people who interpret this provision as presumed confusion instead of understanding the provision from the perspective of abandoning the confusion. This interpretation is obviously questionable. Neither the context of this provision nor China's legislation history for protection of registered trademarks nor the perspective of comparative law supports this interpretation.[9]Certainly, the absolute protection granted to the trademark rights in the circumstance of "double sameness" is also conditional, namely that the requirement of constituting use under the Trademark Law must be met first.
(iii) Definition of "use of trademark" activities in OEM involving foreign elements
The opinions of all circles on whether OEM involving foreign elements constitutes use under the Trademark Law differ from one another. Those who hold a negative attitude argue that goods of OEM involving foreign elements are all sold to foreign countries and not circulated in China, so they will not come into contact with the relevant public of China. As a result, such use of a trademark does not perform the role of identifying the source of the goods and does not constitute use under the Trademark Law. Those who hold a positive attitude argue that the relevant public should include relevant operators who take part in the production and circulation activities of OEM involving foreign elements. Even though the goods of OEM involving foreign elements are all sold to foreign countries, some of the relevant public of China still can come into contact with the goods and identify the source of the goods through the trademark thereon, so OEM involving foreign elements constitutes use under the Trademark Law.
The relationship between the manufacturer and the entruster was discussed hereinbefore because the definition of the nature of the contract between the parties is essential to determining whether the "use of trademark" activities in OEM involving foreign elements constitutes "use" under the Trademark Law. If the relationship between the manufacturer and the entruster is defined as a sales relationship, then the activities of the parties are no doubt commercial activities, and the OEM involving foreign elements constitutes "use" under the Trademark Law. But if the activities of the manufacturer are actually export of labour services, then the manufacturer's delivery of the finished goods to the entruster will not constitute a sale in the circulation field, thus naturally excluding the possibility of constituting use under the Trademark Law by selling goods. In the meantime, as all goods of OEM involving foreign elements are for export and not circulated in the domestic market, although relevant goods also have the trademark, due to the lack of openness and commerciality, OEM activities involving foreign elements under the contracting relationship do not constitute use under the Trademark Law. Since these activities do not constitute use under the Trademark Law, it is not possible for them to constitute trademark infringement.
The Authors believe that whether OEM involving foreign elements constitute use under the Trademark Law should be analyzed from the perspective of open use in combination with the territoriality principle of trademarks.
First, “use under the Trademark Law” should be based on the common understanding of meeting the requirement of public use. So-called public use refers to use of goods or services with the trademark in the commercial circulation field in a way that is known to most non-specific consumers.[10] In the “Kanwan” trademark revocation case of 2007, the Supreme People’s Court pointed out in its reply to questions raised by the hearing court concerning the “use” specified in Item 4 of Paragraph 1 of Article 44 of the Trademark Law that “use under the Trademark Law refers to activities in which the trademark is publicly, truly and legitimately used in commercial activities to indicate the source of the goods so that the relevant public can differentiate the market entities providing the goods from one another”. This reply is supported by the amended Trademark Law. Article 48 of the amended Trademark Law provides that “For the purpose of this Law, use of a trademark shall refer to the use of trademarks on goods, packaging or containers of goods and the transaction documents of goods, or the use of trademarks for advertising, exhibition and other commercial activities for the purpose of identifying the sources of goods”. Therefore, use under the Trademark Law should be use in commercial activities, namely that the relevant goods have entered the circulation field of the market. The entering of the goods into the circulation field not only refers to the factual state that the goods are objectively in the circulation field, but the user of the trademark is also required to have subjective intention to sell such goods. The trademark law of Taiwan, China specifically states that the use of trademarks should be for the purpose of sale.[11] However, relevant operators during the production and transportation of OEM involving foreign elements are not for the purpose of selling OEM goods, so the trademark in these activities clearly does not qualify as public use of the trademark.
Second, a trademark has a territorial nature. It is a very common phenomenon that the same or similar trademarks on the same or similar goods belong to different owners in different jurisdictions, and the effect of a trademark which is registered abroad does not extend to China. It is only the relevant public in mainland China that the use of trademarks specified in the Trademark Law is aimed at. The act of adding trademarks to goods which are all for sale abroad and not circulated in the Chinese market (“OEM”) does not have the function of identifying the sources of goods in China, so it is not use of a trademark.[12]
To sum up, goods of OEM involving foreign elements do not enter the circulation field of China and their trademarks do not perform the identification function, so it is not use of a trademark under the Trademark Law.
In fact, during the amendment of the Trademark Law, the infringement issue of OEM involving foreign elements had been reflected in the initial amendment draft, but it was deleted eventually. The deletion had something to do with the fact that the issue of OEM involving foreign elements itself relates to multiple factors, but if this issue is not clearly defined in written laws, the phenomenon of different results for similar cases will still occur in practice.
Therefore, the Authors suggest that judicial interpretations be used to include the main content of the determination issue of infringement in OEM involving foreign elements, such as whether the entruster enjoys the trademark right outside the jurisdiction, whether the export country is the same as the country of the trademark and whether the OEM goods are circulated within the jurisdiction, as factors that should be considered in determining infringement so that the law is clearly stated and the unity of application of law is ensured.
IV. Latest attitudes of the judicial and law enforcement systems
(i) Latest attitudes of the judicial system towards the determination of infringement in OEM involving foreign elements
Based on analysis of court decisions since 2013, it can be seen that for OEM cases involving foreign elements, the court system has changed its stance from uniformly determining them to be infringing or non-infringing to conditionally determining them to be non-infringing. If the manufacturer is able to prove that it has fulfilled the duty of examining the trademark right of the entruster and all goods which are suspected to be infringing are to be exported to foreign countries where the entruster enjoys the trademark right and not sold within China, then courts will determine that trademarks on goods which are suspected to be infringing do not perform the role of identifying the source of the goods and will not harm the interests of domestic trademark right holders, so no trademark infringement is constituted.
Case three[13]
In 2013, in the case in which Suzhou Xie An Trading Co., Ltd. sued Crocodile Garments Limited for confirmation of no trademark infringement, the plaintiff’s garments with the trademark “CROCODILE” which were exported to Japan were seized by Shanghai Customs which, after investigation, issued a Notice on Determination of Intellectual Property Status of Suspected Infringing Goods stating that it could not determine whether this batch of goods of the plaintiff infringed the defendant’s exclusive right to use the trademark “CROCODILE” or not. After being informed of the seizure, the defendant did not take any legal action. Shanghai Customs released the goods of the plaintiff after the period for legal action expired. The plaintiff instituted a lawsuit before the court for confirmation of no infringement in order to prevent seizure in the future. After trial, the court of first instance held that the manufactured goods of the plaintiff were all exported to the Japanese entruster and not sold within China, so it was not possible for the relevant public of China to come into contact with the goods of the case in China. The trademark on the goods concerned could only identify the source of the goods outside China, but not in the domestic market of China. In addition, there was no information about the plaintiff on the hang tag and the washing and ironing sign. Therefore, the sale of the goods in Japan would not cause confusion among the relevant domestic public with respect to the source of the garments. The court of first instance finally determined the plaintiff to be non-infringing.
Case four[14]
In the appeal case of 2013 in which Crocodile Garments Limited sued Qingdao Ruitian Garments Co., Ltd. for “CROCODILE” trademark infringement, Shandong Provincial High People’s Court shared the same attitude as that of the Shanghai court in Case one. Shandong Provincial High People’s Court held that goods of OEM involving foreign elements which were not circulated in the Chinese market did not constitute trademark infringement.
In the appeal case of Jiang Meifeng v. Changlin Hardware Co., Ltd.,[15] Guangdong Provincial High People’s Court determined the defendant to be not infringing on the ground that the OEM activities of Changlin Hardware Co., Ltd. did not constitute use of a trademark.
(ii) Latest attitudes of the law enforcement system towards the determination of infringement in OEM involving foreign elements
Although the attitude of the judicial authorities towards whether OEM involving foreign elements constitutes infringement is becoming gradually clear, their standards for determination have yet to be defined in the form of law. In order to avoid unnecessary administrative proceedings, presently the Customs will uniformly issue a Notice on Determination of Intellectual Property Status of Suspected Infringing Goods for OEM goods seized in their law enforcement which will state that the goods cannot be determined to be infringing, forcing domestic trademark proprietors who are dissatisfied with such decision to settle the dispute through civil proceedings. This principle was reflected well in the case in which Suzhou Xie An Trading Co., Ltd. sued Crocodile Garments Limited for confirmation of no trademark infringement.
Certainly, the Customs will not automatically make a decision of “determining not to be infringing”; they will take into consideration the following conditions: first, the person who is entitled to the goods seized (namely the OEM manufacturer) has fulfilled the duty of reasonable care, such as verification of the entruster’s trademark right abroad; second, the goods seized are all for export to foreign countries where the entruster enjoys the trademark right.
V. Conclusion: Suggestions to entruster and manufacturer in OEM involving foreign elements
As mentioned above, the view that OEM activities involving foreign elements do not constitute trademark infringement is a view supported by most Chinese courts in their current judicial practice, but due to the hysteretic nature of laws and disunity of judicial practice, foreign enterprises should take effective measures to reduce or avoid the risk of trademark infringement when conducting OEM trade with Chinese enterprises. When a trademark infringement dispute arises, foreign enterprises should hire specialized lawyers to help them strive for the best court rulings.
(i) Countermeasures of entruster
Case five
An American gift company entrusted Chinese companies to produce goods with an English trademark on a long-term basis. One of these Chinese producers later registered this trademark in China in its own name and demanded the American gift company buy the trademark back at a high price, failing which it would launch an infringement complaint against the American company for its production and export activities in China. This incident severely affected the American company’s production in China and sales in the US. This type of case is not uncommon in the industry of OEM involving foreign elements.
In order to avoid the relevant legal risks, the Authors suggest that entrusters which have OEM business in China take the following measures:
First, conduct trademark registration in China with a proactive attitude.
Under the Trademark Law of China, prior application of a trademark prevails over prior use of a trademark, so in practice, it has been a frequent phenomenon that manufacturers viciously register trademarks that have first been used by the entrusters.
Usually, vicious trademark registration squatting refers to circumstances in which the manufacturer, without prior communication with the entruster, has the entruster’s trademark registered before the entruster does so. Most of the manufacturers have come to know the entrusters well during their trade cooperation with the latter and realized the potential value of their trademarks. In this circumstance, the manufacturer commits trademark registration squatting to seek unfair gains. After their trademark registration squatting, these manufacturers will mainly do the following acts to seek gains: force the entrusters to cooperate with them on a long-term basis or demand that the entrusters buy back trademarks at a high price, or manufacture or sell products of the same type as those of the entrusters on their own. If a foreign enterprise intends to conduct long-term OEM trade with Chinese enterprises, then registering the trademark will be an effective measure to prevent vicious trademark registration squatting by the manufacturers or third persons.
Second, agree with the manufacturers on terms for dealing with defective products.
If the entrusters fail to agree with the manufacturers on how to deal with defective products with OEM trademarks that occur during the manufacturing process, then the manufacturers may bring such defective products into the circulation field for sale. This fact may become evidence of the disadvantage of the entrusters in future possible infringement proceedings. Therefore, agreeing on terms for the destruction or recycling of defective products in the processing contract will be an effective means to avoid the occurrence of such event.
Third, choose the Customs through which the goods will be exported.
The Customs through which the goods will be exported decides the court with competent jurisdiction. Given the fact that courts in different places have inconsistent standards in determining whether OEM activities involving foreign elements constitute trademark infringement, when exporting the goods, the entrusters should carefully choose the Customs through which the goods will be exported. It is advisable that they choose the Customs in places where the courts there have clear attitudes that OEM activities involving foreign elements do not constitute trademark infringement, which will be an effective means to reduce risks.
Fourth, avoid the occurrence of disputes through contractual agreements.
To facilitate trade, many foreign enterprises have set up subsidiaries in China. These subsidiaries usually apply for the registration of their parent’s trademarks after their establishment. Due to the independent legal person status of the subsidiaries, their parents will not be able to use trademarks registered by them without authorization, which directly led to the occurrence of Case one above. Therefore, the Authors suggest that when foreign enterprises set up subsidiaries in China, they should have in place special agreements for the registration issue of their trademarks in China to avoid the occurrence of disputes.
(ii) Countermeasures of domestic manufacturers
Case six
A Nigerian company entrusted a factory in Changzhou city to manufacture a batch of automobile accessories with the trademark “MARK”. The entruster provided the registration certificate and authorization letter for use of such trademark in Nigeria. The factory in Changzhou city considered these documents to be sufficient and arranged for the production. After a short while, an American company launched a complaint against this factory in Changzhou city for suspected infringement of its exclusive right to use its registered trademark in China. The industry and commerce authority of Changzhou city investigated the matter and determined that the factory had constituted trademark infringement. The infringing products were then sealed up. The factory was confused, as the American company had no trademark registration in Nigeria and all automobile accessories manufactured would be exported to Nigeria causing no actual loss to the American company, so why would it constitute infringement? There is no clear conclusion to this question considering that there are no clear provisions in China’s Trademark Law regarding whether OEM activities involving foreign elements constitute infringement.
As a professional in intellectual property, we suggest Chinese manufacturing enterprises take the following measures to avoid the risks mentioned above.
First, enhance their awareness of the law.
The first thing the manufacturers should do is establish the idea of doing business with honesty and integrity and strengthen the legal awareness and awareness of risk control of their employees by hiring legal counsel, organizing trademark law training and other means so that infringement of the trademark rights of others can be avoided.
Second, enter into and properly store a written OEM contract.
Some manufacturing enterprises conduct OEM trade solely based on an oral agreement without entering into a basic contract. Therefore, a written contract should be made to clearly define the rights and duties of the parties, and an agreement on the assumption of liability should be made in case of infringement of the entruster’s trademark so that the protection of the manufacturer’s interests can be maximized. In the meantime, proper safekeeping of the written OEM contract can effectively reduce the manufacturer’s burden of proof for evidencing that it has fulfilled the duty of examination during future possible proceedings.
Third, examine the trademark ownership certificates of the entruster.
Before entering into an OEM contract with the entruster, the manufacturer should examine the trademark right of the entruster. As far as specific operations are involved, first, the manufacturer can ask the entruster to provide the original ownership certificate of the registered trademark; second, verify the trademark on the website of the trademark office according to the trademark number on the certificates and examine the approved scope for use of goods to ensure that the processed goods are within the approved scope for use of goods; finally, inspect the validity period of the trademark certificates to ensure that the trademark registration certificates are valid. If the OEM trademark of the entruster has been registered by others in China, the manufacturer needs to ask the entruster to provide other certificates of right which usually comprise related licensing contracts for the use of a trademark and foreign trademark registration certificates. As for a licensing contract, examinations should be made in such aspects as whether the category of the registered goods is consistent with the OEM goods, the territorial scope of licensed use and whether the time for licensed use has expired or not.
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[1] There are disputes regarding whether the products of OEM involving foreign elements constitute “products of labour for sale” (namely goods), but this topic is not within the scope of discussion of this paper, so the word “goods” will be used uniformly hereinafter.
[2] Please see the Paper of Civil Judgment of Shanghai High People’s Court, (2009) LU GAO MIN SAN (ZHI) ZHONG ZI NO.65.
[3] Please see the Paper of Civil Judgment of Zhejiang Provincial High People’s Court, (2012) ZHE ZHI ZHONG ZI NO.285.
[4] Article 13 of the 2004 Answers provides that: “Where OEM goods manufactured under the entrustment of an overseas trademark proprietor are only for export, if such trademark is the same as or similar to the registered trademark of the claimant, do such OEM activities constitute infringement? Causing confusion among the relevant public is a precondition for constituting infringement of the exclusive right to use a registered trademark. OEM is based on clear entrustment of the trademark proprietor and the OEM goods are not sold in China, so it is not possible to cause confusion among the relevant public, and it should not be determined to constitute trademark infringement.”
[5] Article 21 of the 2006 Answers provides that: “In the case of contracting the processing of goods with registered trademarks of others, the contractor should examine whether the hirer has the exclusive right to use the registered trademark. If the contractor fails to fulfil its duty of care and processes goods which infringe the exclusive right to use the registered trademark, the contractor and the hirer shall constitute joint infringement and shall be jointly liable for damages.”
[6] “The Intellectual Property Protection Policy of China in the Wake of Financial Crisis - Summary of How to Deal with the Impact of Financial Crisis on the Real Economy in Trials of Intellectual Property Right Cases and Legal Forum for Service Outsourcing”, http：//rmfyb.chinacourt.org/public/detail.php?id=12539；quoted from Wu Pengbin, Second Discussion on Determination of Trademark Infringement in OEM Involving Foreign Elements.
[7] Wang Hongliang, Contract of Hired Work and Construction Engineering Contract, 2000 Edition of China Legal Publishing House, P1-2.
[8] Zhang Weijun, Wei Lizhou and Zhao Yong, Legal Nature of OEM Involving Foreign Elements in Trademark Law - Discussion on Determination of Trademark Infringement Constitution, 2nd Issue of 2014 of China Intellectual Property.
[9] Kong Xiangjun: Several Issues concerning the Application of the Newly-amended Trademark Law (Part II), People’s Court Daily, 25 June 2014.
[10] Dai Yiting, It is Inadvisable to Consider OEM as Use under Trademark Law - Thinking from Perspective of Article 32 of the Amended Trademark Law, 7th Issue of 2014 of China Trademark.
[11] Article 5 of the Trademark Law of Taiwan provides that: “The use of trademarks referred to in this Law means, for the purpose of sale, use of trademarks in respect of goods, services or related items, or use of flat image, digital audio and video, electronic media or other media which are sufficient to make consumers recognize the same as trademarks.”
[12] Kong Xiangjun: Several Issues concerning the Application of the Newly-amended Trademark Law (Part II), People’s Court Daily, 25 June 2014.
[13] Please see the Paper of Civil Judgment of Pudong New District People’s Court, Shanghai, (2013) PU MIN SAN ZHI CHU ZI NO.336.
[14] Please see the Paper of Civil Judgment of Shandong Provincial High People’s Court, (2012) LU MIN SAN ZHONG ZI NO.81.
[15] Please see the Paper of Civil Judgment of Guangdong Provincial High People’s Court, (2013) YUE GAO FA MIN SAN ZHONG ZI NO.148.
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