What the latest OEM ruling means for trademark owners

In 2006, the Beijing court amended its 2004 Answers by removing the “confusion and mistake” requirement. Despite the update, various courts continued to give inconsistent judgments.

The 2009 financial crisis hurt the Chinese economy considerably. On April 21 2009, the SPC was quick to issue the Supreme People's Court, Opinion on Several Issues Concerning the Serving of the Main Objective When Handling Intellectual Property Trials in View of the Current Economic Situation (最高人民法院关于当前经济形势下知识产权审判服务大局若干问题的意见) (Opinion), which was aimed at growth, stability and economic development. OEM was one of the issues put forward as a result of the numerous infringement disputes. The Opinion points out that whether the manufacturer has undertaken due diligence is a key consideration in determining his share of liability. It did not clarify what this really means, but the “due diligence” principle can be referred to in the 2006 Answers, which clearly state that the manufacturer will be deemed to be in infringement if he fails to conduct due diligence to verify that the OEM principal entrusting him with the manufacture is the owner of the trademark. Therefore, it has generally been understood that there is no infringement if the trademark is registered in the destination country and the manufacturer is in possession of the relevant registration documents.

A convoluted track record

Although more and more courts have held that OEM does not constitute trademark infringement since the Opinion was issued, there was still no uniform standard. The main arguments in support of OEM not being use of a trademark are the following:

• Confusion and mistake is a pre-condition to infringement. As the average consumer in China does not have the chance to get in contact with the OEM goods, there cannot be infringement. (HUGO BOSS case, Fujian Higher People's Court, December 20 2007)
• The Trademark Law protects the function of a trademark to distinguish itself, which is only manifested through use. This means only goods that are in market circulation can demonstrate their distinction. Trademarks of goods not in the market are merely decorations without a distinctive function. Therefore, trademark use in the Trademark Law refers to the use of a mark in circulation. (CROCODILE case, Shandong Higher People's Court, June 27 2012).

These arguments have, however, received several criticisms.

Firstly, the confusion argument acknowledges that OEM use constitutes use but not confusion, meaning it is not in infringement. This is equal to putting “confusion” into the relevant provisions of the old Trademark Law as well as in the 2014 revision. The new Law in particular only requires proof of confusion in situations where the trademark and goods are not identical to the registered ones.

The circulation argument, on the other hand, denies that OEM constitutes use at all, because the goods have not been circulated in the local market. But this appears to be inconsistent with both the 2001 and 2014 versions of the Trademark Law, neither of which set such criteria. Going by this argument means that any infringing goods in the course of production, storage or transit cannot be actioned upon. Furthermore, the approach has a significant impact on trademark registration examination. The scenarios below show that there are no undesirable consequences caused by trademark use:

• A registered Chinese trademark owner who only sources goods from China but does not sell them locally – a typical OEM arrangement – would not be able to keep the mark because it can be invalidated for non-use. Although he cannot be successfully sued in China (because all the goods are for export), he would not be able to sell the goods in China if, upon invalidation, someone else (like a trademark pirate), registers his trademark.
• The owner cannot successfully oppose the pirate's registration of his trademark on the ground that the pirate has pre-emptively registered and used the mark in China and built up certain influence as a result.

It has also been argued that in non-use cancellation cases, the aim is to ensure that trademark resources are used rather than being laid idle and wasted. Requiring a mark to have been in use and have reached a certain level of influence before it can be used to block registration is a means to ascertain whether or not the trademark application was made in bad faith. In certain cases, the Chinese Trademark Office (CTMO) and the Trademark Review & Adjudication Board (TRAB) have indeed adopted these approaches, maintaining the above owner's registration and upholding his opposition, though they generally still prefer the circulation argument. Amid all these mixed views, the market needed a single authoritative and conclusive answer.

The latest ruling – is it enough?

In the PRETUL case, the SPC used a different approach in arriving at the non-infringement conclusion. Article 48 of the new Trademark Law provides that use means “an act whereby a trademark is used on goods, the packaging or containers for goods and documents for the transaction of such goods, or in advertising, publicity, exhibitions and other commercial activities, in order to identify the source of goods.” This aim “to identify the source of goods” is nothing new – it clarifies that the fundamental function of the Trademark Law is to protect the distinctiveness of a mark. Therefore, a sign has to demonstrate its distinctiveness to be used as a trademark. As OEM goods for export are not to be distributed in China and thus their trademarks cannot serve to identify their origin, the OEM manufacturer in China is simply affixing a sign onto the goods under the authorization of the foreign OEM principal so as to use its own mark in its foreign country.

The essence of the PRETUL case is that the purpose for which the goods are manufactured in China determines the nature of the trademark's use. The function of the sign applied onto goods sold locally is to distinguish source, meaning there is trademark use. On the other hand, in an OEM situation, the sign does not serve this function, so there is no use in China, rendering unnecessary any discussion regarding confusion or circulation of the goods within the market.

The PRETUL case does not mention the relevance of exercising due diligence on the part of the OEM manufacturer. Regardless, this requirement is implicit, because it can't be proved whether the goods in question are solely for export purposes unless the OEM manufacturer can provide proper documentation.

However, it is not clear whether this argument is only valid where the OEM manufacturer can show that the trademark has been registered in the destination country and that the foreign principal has the right to use it. If there is no law mandating the foreign principal to only use a registered trademark in the destination country, it should follow that proof of the “registered” status of the trademark is not necessary. That said, it is desirable to have this condition imposed to prevent vulnerability to counterfeiters. In fact, the 2006 Answers have required OEM manufacturers to examine whether or not the principal has the exclusive right to use the trademark. Similarly, in practice, the Chinese Customs will not release the intercepted goods unless documentation is provided that proves the trademark has been registered in the destination country and the foreign principal holds the right to use.

The PRETUL case appears to have provided reasonable grounds to say OEM for export does not infringe on trademarks in China, without attracting too much of the previous criticisms. The ruling also comes from the SPC, and even though China does not base court decisions on precedents, market participants anticipate that this approach sets the trend and policy for the Chinese courts to follow, insofar as infringements are concerned. This means cases will require proof by the OEM manufacturer that it has exercised due diligence to verify that the principal has the exclusive right to use the trademark, and that it is indeed involved in pure OEM use, as defined above.

The lesson learned from the PRETUL case still shows that the abovementioned hypothetical trademark owner cannot keep and, in fact, will lose out, his registration to a trademark pirate. This is unsatisfactory. Despite that the owner's OEM use benefits the local industry, he must sell his goods in China to keep his trademark.

Did the SPC consider this when rendering the PRETUL decision? Not exactly. It only focused on the infringement aspects without addressing these registration issues at all. (Although in the 2013 MUJI decision involving an opposition against a pre-emptive trademark application, the SPC agreed with the Beijing Higher People's Court that OEM use is not trademark use.) There has been no SPC ruling so far regarding the non-use situation. Notwithstanding, the PRETUL and MUJI rulings confirm that even in trademark registration cases, holding that OEM use does not constitute use may also be a court trend. Having said this, since neither the CTMO nor TRAB is part of the judicial system, in theory, they do have relatively more freedom to depart from the PRETUL judgment and enforce what they believe to be more fair and reasonable, even though their decisions can be judicially reviewed. It is still unknown whether the CTMO/TRAB and the SPC agree on this issue. If not, it won't be surprising to see from time to time inconsistent decisions regarding OEM use insofar as they relate to trademark registration. The debate may not be over just yet.

Howard Tsang and Jean Wang, Wilkinson & Grist, Beijing