Supreme Court hands down landmark ruling on OEM infringement
November 23, 2012 | BY
clpstaffA Supreme People's Court ruling has brought welcome clarity over whether OEM constitutes trademark use in China. However, it remains to be seen if the Court's finding will be applied to infringement cases
Original equipment manufacturing (OEM) is a commonly used structure, where foreign consignors provide trademark samples and ask businesses in China to make products labelled with the trademark. All the goods are returned to foreign countries for sale.
Over the past decade, the question of whether OEM constitutes trademark use has been met with differing opinions by the courts and administrative authorities. In the past, the administrative authorities have held the opinion that OEM is not trademark use.
In contrast, the Courts have handed down differing interpretations. For example, in the 2010 case Nokia Corporation vs Wuxi Jinyue Technology, a Shanghai court confirmed that OEM products bearing the mark Nokia, with the small suffix Egypt, destined exclusively for Egypt, did constitute infringement.
“It seems that the Supreme Court has decided that use of a trademark on OEM products for export cannot support the claim that that the mark achieved a certain level of influence in China,” said Kenny Wong, an IP partner with Mayer Brown JSM in Hong Kong. This level of influence is often relied upon by overseas trademark owners to oppose a trademark application in China.
Muji's Case
The SPC heard Ryohin Keikaku vs Trademark Review and Adjunction Board earlier this month. Ryohin is the holding company that operates the Japanese chain of Muji stores internationally – the Muji trademark (无印良品) is at the centre of the dispute.
Muji opposed the registration of its marks filed by a Chinese applicant on the grounds that the mark has already achieved a certain level of influence in China through application of the mark on OEM goods manufactured in China for export.
The Supreme People's Court found that because the goods were never circulated, made available or advertised in China, such use could not be considered use to achieve a certain level of influence in China.
“I do not think it is appropriate to say that the Muji case goes as far to say that OEM does not constitute trademark infringement, although it may be interpreted to support such a notion,” said Wong.
Blurring the Trademark Law
The case has also raised issues with the PRC Trademark Law (中华人民共和国商标法), which does not cover OEM. In OEM cases, the Courts turn to Articles 44 and 52 of the Law. Article 44 considers the use of the registered mark not being used for three consecutive years and 51 deals with use of a trademark that is identical or similar to a registered trademark without authorisation from the owner.
This question remains then does OEM solely for export constitute use and therefore infringe upon the rights of the trademark owners? The Law is also silent on what constitutes trademark use, the deciding factor in the Muji case.
Setting precedent?
China is a civil law country, which means in theory cases do not set precedents and lower courts are not bound by judgments handed down by the Supreme Court. In practice,however, SPC rulings are influential.
“Even though China is a civil law country, judgments issued by the SPC still have a significantly instructive meaning for lower courts. Considering identical scenarios, SPC rulings are expected to be followed,” said Chen Jihong of Zhong Lun Law Offices in Beijing.
Wong added: “Unless there are compelling reasons, lower courts should follow the decisions of higher courts.”
Trademark squatting and counterfeiting
The case may also have significance for brand owners who suffer from trademark squatting, as those trademark squatters can no longer prevent them from engaging in OEM. Even though the case was an administrative action, not involving trademark infringement, the Court's finding in relation to use should apply equally to future trademark infringement cases.
“The Muji case and previous OEM cases suggest that there may be a shift of emphasis to the confusion approach, for example, whether anyone in China would be confused by the application of the mark when the relevant goods will all be exported outside of China,” said Wong.
For counterfeiting , the Court's decision that OEM may not constitute infringement of a PRC registered mark if the order is placed by the owner, the production is for export and the OEM manufacturer has made diligent enquiries to confirm that the entity placing the orders has ownership of the mark for the target destination.
In this case, if the entity in the export destination placing the order is a counterfeiter that has registered the mark in the destination jurisdiction, the true trademark owner has to fight the counterfeiter outside China and in a place where the goods appear and where it has better rights.
In this situation, brand owners may find it difficult to stop counterfeiting at the source and will have to bring actions at the target destination.
The Trademark Law is under review and the long-awaited third amendment is expected to be passed next year. However, there is little chance the amended Law will address OEM, as it was included in one of the earlier revisions, but later removed. Until the Law reflects OEM, brand owners will have to rely on various courts' decisions, with the Muji case being the most prominent from the SPC.
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now