Supreme People’s Court clarifies OEM trade mark question

Despite the recent slowdown in the Chinese economy, there is no doubt that China remains the world's factory as it is still responsible for a quarter of the world's manufacturing activity. The main source of this is original equipment manufacturing (OEM). OEM is the activity of entrusting manufacturers to produce goods on the behalf of brand owners, who commission the manufacturing process but do not take ownership of the manufacturing plants. These OEM goods historically were all made for export, as consumption in more developed western countries far exceeded that in China. The position of OEM goods for export with respect to trade mark laws has been a source of contention under Chinese Intellectual Property Law for many years until a recent breakthrough judgment of the Supreme People's Court (SPC).

The recent judgment discusses the key question of whether OEM constitutes trade mark infringement under the Chinese Trade Mark Law. In addition, the OEM issue also arises in cases of opposition or revocation of other applications or registrations, and when defending against non-use cancellations. It is worth assessing the wider implications of these developments to Chinese IP law and practice.

Here, the issue is whether OEM goods made purely for export should be considered trade mark use in China, thereby constituting trade mark infringement or counterfeiting activity.

Due to China's first-to-file system, trade mark squatting behaviour is prevalent in China. Trade mark squatters can, and have, been holding brand owners to ransom through earlier bad-faith filings. This can happen even when the brand owners do not sell in China, as trade mark squatters have claimed that OEM of goods for export constitutes trade mark infringement in China. There has been a recent trend too for trade mark squatters to record their earlier trade mark registration with China Customs, thereby preventing the brand owners' goods from exiting the country. Further, if the earlier trade mark filing was for an identical mark, local manufacturing counterparts have also been faced with the risk of criminal liability for counterfeiting activity.

"To minimise the risk of losing their trade marks in China, registered owners should maintain at least minimal use of the trade marks in China"

Due to the lack of guidance in China's Trade Mark Law and conflicting decisions by different courts in China, this question has remained an unresolved issue. Pre-2001 cases suggest that OEM goods destined for export should not be considered as trade mark use. However, this position was reversed in 2001. In Nike International Ltd v Cidesport & Zhejiang Livestock Products Import & Export Company & Jiaxing Apparel Factory [2001] (Shenzhen Intermediate People's Court Civil Judgment (2001) Shen Zhong Fa Zhi Chan Chu Zi no 55), a Spanish company, Cidesport, was the registered owner of the Nike trade mark in Spain, instructed a local factory in Jiaxing and an import and export Company in Zhejiang to manufacture and export to Spain clothing articles bearing the Nike trade mark, despite the fact that the relevant Nike trade mark rights in China belonged to Nike International. In this case, the Shenzhen Intermediate People's Court held that OEM constitutes use, such that the manufacturing of clothing with the trade mark Nike by the local factory was found to be trade mark infringement.

Nevertheless, Beijing and Shanghai courts more recently have reverted back to the pre-2001 position. In 2009, the Shanghai Higher People's Court in Shanghai Shenda Audio Electronics Co Ltd v Jiulide Electronics (Shanghai) Co Ltd [2009] (Shanghai High Court Civil Judgment (2009) Hu Gao Min San (Zhi) Zhong Zi no 65) held that the fundamental function of a trade mark is to identify the source of goods and services, and only the confusion of the public as to the origin of goods amounts to trade mark infringement. As such, if all the products were to be exported and not sold in China, no likelihood of confusion exists and such OEM activities would not constitute trade mark use and infringement in China. This position was conclusively supported recently in the landmark decision by the SPC. Although the SPC's decisions are not technically binding on the lower courts, they are generally followed.

In Focker Security International Co Ltd v Zhejiang Yahuan Lockset Co Ltd (2015) (The SPC Civil Judgment (2014) Ming Ti Zi no 38 – the Pretul case), Yahuan, the local manufacturer, entered into a contract with a Mexican Company, Truper, to produce padlocks bearing the Pretul mark, solely for export to Mexico. Although Truper is the registered owner of those trade marks in Mexico, the equivalent Chinese trade marks in Classes 6 and 8 were owned by Focker. It was submitted in evidence that Focker's shareholder was previously employed in a company which was Truper's previous long-time exclusive agent. The unfortunate case came to light when Yahuan's goods were seized at Ningbo Customs as Focker had recorded its Chinese trade marks with Customs. Focker then sued Yahuan for trade mark infringement.

In this case, at both the first and second instances (Zhejiang Intermediate People's Court Civil Judgment (2011) Zhe Yong Zhi Chu Zi no 56 and Zhejiang Higher People's Court Civil Judgment (2012) Zhe Zhi Zhong Zi no 285), the Zhejiang Courts held that due to the territorial nature of trade mark rights, Focker's exclusive rights to the Pretul marks in China were infringed by the manufacturing of the Pretul padlocks by Yahuan. Nevertheless, the SPC overruled the lower courts' decisions and held that the use of the mark Pretul on the products solely for export does not constitute trade mark use under the Chinese Trade Marks Law. It is also the SPC's view that the Law aims to protect the basic function of a trade mark, which is to distinguish goods or services of one undertaking from another in the market and differentiate the source of origin of the goods or services. The basis of determining whether an activity is a trade mark infringing act is whether such an activity destroys the fundamental function of trade mark in serving as a badge of origin in the market. As the goods manufactured in the case are all for export, the trade mark cannot serve as a badge of origin in the domestic market, there is therefore no trade mark use. The act of affixing the trade mark Pretul on the products by Yahuan therefore does not cause any confusion and therefore there is no infringement.

"This recent decision by the SPC has wide ranging effects on trade mark squatters and also on anti-counterfeiting efforts in China"

This recent decision by the SPC has wide ranging effects on trade mark squatters and also on anti-counterfeiting efforts in China.

On one hand, the decision is helpful for foreign brand owners facing a domestic trade mark squatter, as it means that any goods for exports may not be blocked by domestic trade mark registrations. However, it calls into question the Customs' current practice of blocking export of goods it suspects to be counterfeit products. As OEM goods are not considered trade mark infringement anymore, there is no reason why Customs should seize goods that are suspected to be counterfeit. Customs has historically been the most effective administrative measure combating counterfeiting, and this decision calls into question the Customs' practice. The Customs Department in China in fact is deliberating this issue internally and we are awaiting their response on whether they will be following the SPC decision. Should the Customs Department follow the decision, this will be most detrimental to brand owners who wish to stop counterfeit goods from being exported from China.

This SPC decision also illustrates the importance of having a sound litigation strategy when relying on the ground of bad faith. Given the prior dealings and relationship in trade between Truper and Focker's shareholder, Yahuan had argued bad faith to appeal against the registration of Focker's marks in China. However, as Truper was not joined as a party to the litigation and Yahuan could not adduce evidence proving that Truper had exercised its trade mark rights against Focker, the SPC held that Yahuan's appeal against the registration was dismissed appropriately based on the lack of supporting evidence of bad faith. This highlights the importance of exercising rights in China, and also in having the right parties in place for litigation.

Another area where trade mark use is important is where it is needed to prevent or revoke the registration of a trade mark in an opposition or declaration of invalidity proceedings where there is bad faith. Article 32 of the Chinese Trade Marks Law allows for this where the trade mark use goes to prove a certain degree of influence has been attained in China.

The leading case here is the SPC case of Ryohin Keikaku Company Limited v Trademark Review and Adjudication Board (2012) (The SPC Administrative Judgment (2012) Xing Ti Zi no 2 – the Muji case) whereby it held that the evidence of use of a trade mark in export-only OEM alone was insufficient to show that a mark has been used and achieved a certain amount of influence in China.

In this case, the Japanese company, Ryohin, owns the Muji mark and its equivalent Chinese trade mark 无印良品 (Muji in Chinese characters) in several classes other than Class 24. In 2001, Ryohin attempted to oppose the registration of the same Chinese trade mark in Class 24 by adducing evidence of use of its mark in the context of export-only OEM in China, including but not limited to its OEM agreement with the local manufacturer and the relevant maritime insurance policy in respect of the relevant goods in Class 24. However, Ryohin failed in its opposition and finally appealed to the SPC.

The SPC agreed that the relevant evidence submitted can prove the existence of an export-only OEM in respect of goods in Class 24. However, to rely on Article 31 (now Article 32) in an opposition; the opponent has to satisfy the two-prong test that the mark has been used and the mark has attained a certain influence in the relevant class in China. As export-only OEM products are not made available to or distributed among the general public in the domestic market, the SPC held that the mark will never have an opportunity to develop a reputation in Class 24 among the Chinese end-consumers and evidence of OEM use alone is therefore insufficient to satisfy the two-prong test under Article 32 and this also makes the adjudication of whether there is bad faith irrelevant.

This decision demonstrates the SPC's consistent approach in ruling that OEM activities in China for export only cannot be relied upon as sufficient evidence of use to prove the relevant trade mark had attained a reputation in China or trade mark infringement.

Despite this decision, there may be one scenario where OEM use may come in useful in China.

Evidence of trade mark use is required to defend and maintain the registration of a trade mark against a non-use cancellation. Although there has not been an SPC interpretation of the law in this area, the Beijing Higher People's Court had previously held in Hornby Hobbies Limited v Trademark Review and Adjudication Board (2010) (Beijing Higher People's Court Administrative Judgment (2010) Gao Xing Zhong Zi no 265) that export-only OEM constitutes trade mark use for the purposes of sustaining a trade mark registration.

Overturning the lower court's decision, the Beijing Higher People's Court was of the view that although the products manufactured in China had not been put into circulation in the domestic market, if the exclusive rights of the relevant trade mark registrations are cancelled because OEM activities are not regarded as a valid trade mark use, it would be unfair and in conflict with international trading policy. The policy reason behind this was that the Courts should be slow to cancel marks as an effort has been made to register marks in the first place.

Nevertheless, given the new line of cases for infringement, we question whether the Courts will continue to follow this line of reasoning. Cases in China are not binding generally, and we do find some Courts being more stringent, especially on non-use cancellation cases. Further, Hornby Hobbies may be distinguished too, as apart from submitting evidence of OEM use in China, the brand owner also submitted evidence to demonstrate that the product has been sold at a Chinese shopping mall and entered the Chinese market with use.

Strictly speaking, to minimise the risk of losing their trade marks in China, registered owners should maintain at least minimal use of the trade marks in China, such as dated promotional materials in China, to guard themselves against bad-faith non-use cancellations against their marks. Such evidence of use should be duly preserved, and notarised to increase the evidentiary weight.

The Pretul case is a double-edged sword for brand owners. Although a welcome clarification of the law, the uncertainty it now casts over Customs' practice in seizing counterfeit goods for exports awaits urgent clarification. We will continue to monitor this area for brand owners.

Anna Mae Koo
		Anna Mae Koo is a solicitor at Vivien Chan & Co practising non-contentious, contentious and transactional IP law. Anna Mae regularly advises on all areas of intellectual property including licensing, franchising and other transactional intellectual property, IP due diligence and strategic acquisitions, prosecution, technical assistance and technology transfer agreements, trade practices and unfair competition law in China and Hong Kong. Anna Mae is a Techstars Mentor, and is involved in international associations, including the Litigation Committee of the International Bar Association and the Internet Committee of the International Trademark Association (INTA). She was named the Intellectual Property Rising Star Lawyer in the Asia’s Leading Lawyers Award by Euromoney Legal Media Group in both 2013 and 2015. Anna Mae was a Prince Philip Scholar at the University of Cambridge where she graduated with an MA in law. She has also obtained a masters in real estate from the University of Hong Kong.