Author: Ason Zhang, Zhiling Zhao, Jun Sun

OEM is short for Original Equipment Manufacturer, and refers to a business mode in which a brand holder does not directly manufacture its products but entrusts another party with the manufacture and then directly applies the trademark of its own brand on the products. A manufacturer who undertakes such work is called an OEM, and its products OEM products.

As everyone knows, manufacturing has always been China's strength. Since China joined the WTO, products made in China have been continuously sold to every corner around the world, and thus China has become known as "the World Factory". As the economic globalization develops and the mass complex production increases, foreign trade based on OEM production will continue to benefit many medium-and small-sized enterprises in China. While foreign trade flourishes in China, the corresponding legal issues gradually surface. For OEM manufacturers and foreign brand owners, the risk of trademark infringement is often misunderstood.

The risk of trademark infringement for an OEM is mainly ascribed to the absence of sufficient awareness of trademark protection by foreign holders of trademark rights. As an entrusting party, brand owners tend to regard China as a region where their products are produced and processed, rather than a sales market. Because of this, they pay less attention to the registration of their trademarks in China. It is such negligence that gives trademark squatters a loophole to exploit.

In practice, such squatters can be divided into two major groups: rivals of foreign brand owners, and their suppliers within China. The first group focuses on foreign trade. They share the same market with foreign brand owners, i.e., markets outside of China, and use their own brands to serve their own foreign clients. The purpose for their trademark squatting is to attack the supply chain of foreign brand owners at the source, to hinder their production within China, or their export from China, thereby forcing the foreign brand owner to abandon their mature supply chain in China. The goal is to force the foreign brand owner to seek a new supply of goods and add cost to the production. The first group of squatters may, in this way, capture new market share from foreign brand owners and increase their own share of the market.

For the other group of squatters, they usually work as Chinese suppliers for foreign band owners. For many enterprises that focus on import and export, an order from a foreign brand owner can guarantee profits. However, as the market matures, competition for import and export intensifies. The result is that foreign trade begins to resemble a cake which has less cream than it used to have. Due to the fact that many foreign brand owners neglect the registration of their trademarks in China, some domestic enterprises will seize upon the opportunity to apply for a mark and thus forestall the registration of their clients' trademark, so as to force these foreign brand owners to engage in long-term cooperation with them. On occasion, these enterprises even manage to use these tactics to help them with price negotiation.

Trademark squatting, regardless of whether it is committed by the first group or the second, becomes a serious impediment to business growth, hinders the scalability of foreign brand owners and interferers with free market competition.

Related Regulations and Changes in the Current Law

In the current Chinese Trademark Law, there is no provision which applies to trademark infringement caused by the OEM. This is because the OEM concept was too vague and these problems were not so prevalent when the Law was first enacted. However, this legal issue has become increasingly urgent as the Intellectual Property protection system in China has matured, especially as the Customs IP protection system has been developed.

Due to the uneven economic development all over China and the wide variety of industries, the Chinese government and the legislative body have not provided any clear guidance on how to address trademark infringement by an OEM. To make matters worse, there has been a relatively large divergence in the determination of this issue by courts in different jurisdictions and at different levels.

Currently, most local courts hold that the registration and use of a mark by an OEM does not constitute acceptable use for trademark purposes, and therefore does not infringe upon the exclusive rights of the trademark owner. This theory has been formed from within the framework of the current Trademark Law. It is based on the fact that all OEM products will be exported overseas and thus a logo or name used on such products cannot function to identify the sources of goods within China. This theory has been strengthened and widely recognized by the Supreme People's Court in a final judgment of the case Pujiang Yahuan Locks Co., Ltd. v. Focker Security Products International Limited (2017)[1] . In this case, the Supreme People's Court decided that the use of logos in OEM production did not qualify as use for trademark purposes according to the Trademark Law, would not result in misleading consumers or cause confusion as to the sources of goods or services, and therefore did not constitute trademark infringement in China.

In the same year, the Supreme People's Court refined the theory in Shanghai Diesel Engine Co., Ltd. vs. Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd (2017) [2]. In the judgment, the Supreme People's Court stressed that because OEM production was a common and legal form of international trade, unless there was contrary evidence to show that an OEM factory owner failed to exercise a reasonable duty of care, and its actions caused material damage to a domestic holder of trademark rights, its conduct will not be deemed to have infringed upon the exclusive rights of the domestic holder of trademark rights.

When compared with the original theory, this standard for ascertaining infringement introduced a new requirement for an OEM to ensure there was an appropriate duty of care and steps taken to ensure reasonable avoidance of harm to a domestic holder of trademark rights. These two judgments, successively issued by the Supreme People's Court, were seemingly consistent but actually different. Tellingly, also in 2017, the Shanghai Intellectual Property Court issued a second instance judgment in the case of Fujian Quanzhou Peak Sport Products Co. Ltd. vs. Wuxi Zhenyu International Trade Co., Ltd and Issac Morris Ltd.[3] The court determined that OEM production constituted trademark infringement.

Without question, a single theory cannot be applicable to all issues of trademark infringement involving an OEM, and the infringement-ascertaining standard should be applied together with objective reality in the development of international trade, as well as a specific analysis of the form of trade at a particular period in a particular market. The case in Shanghai represents the trend of individual ascertainment.

According to the mentioned facts, a uniform standard has not been established for ascertaining trademark infringement by an OEM. As the economy becomes more globalized and overseas orders become more popular, the standard is likely to be changed. So if the standard is changed, how should one reduce the risk of trademark infringement?

Strategies for Coping with Disputes in OEM

Recently, Chang Tsi & Partners represented a client in a case involving trademark infringement by an OEM. In this case, each time our client's goods were to be exported, a domestic holder of trademark rights would file an application with Chinese Customs for detention of the goods, which caused our client heavy losses and disruption to their supply chain. Furthermore, the domestic holder of trademark rights filed two complaints for trademark infringement against the OEM factory of our client. At the hearing, the domestic trademark owner bought our client's products by means of purchase from overseas, and accordingly intended to prove that these OEM products were also sold within China. Thus, the plaintiff alleged that our client's products constituted trademark infringement.

After communicating with our client, our attorneys discovered that, without our client's knowledge or authorization, its products had been sold to a buyer in China through a third party. To win this case, we recommended to our client to lodge complaints to remove the online links to its products in the overseas sales platform, and to present evidence to show that such sales had nothing to do with our client. We argued that the issue in this case involved OEM products, and use of the logo did not constitute use for trademark purposes. In the end, we were successful in convincing the presiding judge to reject the plaintiff's claims, thereby securing our client's rights and supply chain within China.

According to years of practical experience of Chang Tsi & Partners, foreign brand owners should pay attention to the following when they engage in OEM production in China:

1. Conduct a trademark search of their core brand in the core classes in order to ensure there is no prior application or registration for their mark;

2. File an application for registration with the State Trademark Office in order to avoid claims by a trademark squatter if their core brand has not been registered;

3. If the registration of their trademark has been blocked or forestalled by a trademark squatter, to search for the trademark recordal in the Customs Intellectual Property protection system to ensure their supply chain is not at risk of disruption.

4. If a recordal by a trademark squatter exists in the Customs Intellectual Property protection system, to immediately gather evidence in advance to authenticate the client's OEM activities, including but not limited to the certificate of trademark registration overseas, the documentation for trademark authorization and the OEM contract;

5. Monitor sales channels of products in foreign markets in order to prevent the products flowing back into the Chinese market.

Similarly, OEM factories should also take note of the following:

1. Conduct a trademark search to determine that no prior applications or registrations exist when they accept an OEM order;

2. Remind the foreign brand owner to file an application for trademark registration with the State Trademark Office in order to avoid trademark squatting if the trademark has not been registered;

3. Search for the trademark periodically to monitor its registration status if the foreign brand owner abandons the application for registration of its trademark;

4. Determine whether the squatted trademark is recorded in the Customs Intellectual Property protection system if the registration of the trademark has been found to be blocked or forestalled;

5. If the squatted trademark has been found recorded in the Customs Intellectual Property protection system, to immediately request the foreign brand owner to provide an overseas certificate of trademark registration and a document to prove trademark authorization, in order to exercise the proper duty of care;

6. Taking good care of the evidence for the OEM, such as originals of the OEM contract, the declaration forms and the contract for customs declaration.

As economic cooperation is promoted around the world, the phrase "Made in China" has become an integral feature in various industries, from manufacturing machines to accessories to electronics, and an OEM may appear in many parts of the supply chain. In order to eliminate and reduce the risk of trademark infringement, the collaboration between foreign brand owners and OEM factories is indispensable, as are services offered by senior trademark attorneys.

[1]No. 38 [2014], Review, Civil Division

[2]No. 339 [2016], Retrial, Civil Division, of the Supreme People's Court

[3]No. 37 [2016], Final, Civil Division, 73, Shanghai