Commentary: The Nature of OEM Production in China


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Commentary: The Nature of OEM Production in China

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September–October,2015

Vol. 105 No. 5



EDITORS’ NOTE   With this issue of The Trademark Reporter (TMR), INTA is pleased to introduce articles and commentaries in multiple languages. In alignment with INTA’s 2014–2017 strategic goal to bolster international expansion, the TMR will now publish multi-language pieces throughout the year to expose a broader TMR audience to important non-English writing on trademark law issues. Each article and commentary will be offered with an accompanying English translation. Inclusion of these pieces in the TMR will, it is hoped, have the salutary effect of encouraging authors whose native language is not English to share their writing with INTA’s members. Given the TMR’s long history of excellence and rigorous peer review, its editorial board is committed to ensuring that non-English pieces undergo as exacting an editorial process as that for English submissions but is aware that each submission (and corollary translation) may need to be handled differently from the norm. We have elected to approach English translations in a manner that champions fidelity to the author’s voice and favors substance over consistency with TMR style. We believe this is more respectful to authors and more useful for TMR readers. That said, we emphasize that only the native-language version of a multi-language piece should be considered authentic. TMR submission guidelines will be updated soon to reflect this exciting new feature and will include details about our translation process. We include three multi-language pieces in this inaugural issue, all of which have helped INTA to establish a framework for this practice going forward. In 2016, we anticipate having four to five multi-language articles spread throughout the year and expect this number to increase as more authors from around the world submit articles in their native languages. We would like to thank everyone who has helped to achieve this milestone, and hope that TMR readers will learn from and enjoy this new aspect of TMR scholarship.

 



 

THE NATURE OF OEM PRODUCTION IN CHINA 

By Haoyu Feng and Jia Li

 

 

 

 

 I. INTRODUCTION


Different countries hold different views on whether original equipment manufacturing (OEM), or pure production without actual local sales, constitutes infringement of trademarks. As China has grown into a factory of the world, numerous international entities entrust Chinese manufacturers (that is,licensees) with production for other markets and OEM production is becoming increasingly important to China. Through a brief analysis of China’s recent cases, we hope to clarify this issue to some extent.

 

II. THE PROBLEM

 

    Concerning trademarks attached to OEM products, the problem arises when foreign entities own trademark rights in their own countries but not in China while such trademarks are owned by other registrants in China. During the course of production, storage, and/or shipment, if the trademarks are used without authorization of the mark owners in China, can such use be deemed infringement and incur fines or other penalties?

 

III. THREE VERDICTS ISSUED BY THE CHINESE COURTS 


The following three contradictory cases demonstrate that different Chinese courts hold different views on this issue. The authors of this piece translated their work from Chinese to English. INTA staff and members of The Trademark Reporter (TMR) Committee edited the English version, and the authors then carried those edits to the original Chinese version of the piece. INTA staff and members of the TMR Committee have taken steps to ensure that the author’s intended meaning is preserved in both the English and Chinese versions of the piece; however,because of language limitations, INTA has not undertaken its normal editorial process with regard to the Chinese version of the article and does not vouch for absolute translation accuracy between the two versions. INTA’s goal is to expose important non-English writing on trademark law issues to the broader audience of its TMR readership.  Haoyu Feng, Partner, Chofn Intellectual Property, Beijing, China, Associate Member, International Trademark Association; and Jia Li: Partner, Chofn Intellectual Property, Beijing, China, Associate Member, International Trademark Association.

 

 



Case 1: Chinese Trademark CROCODILE, No. 2468981  

 

Court: The Guangdong Higher People’s Court

Verdict: (2011) Yue Gao Fa Min 3 Final No. 467

Date: December 16, 2011

Second Instance

 

The plaintiff, Crocodile Garments Limited, is the owner of the trademark CROCODILE (Registration No. 246898 in Class 25,registered in mainland China), whereas Yamato, a Japanese company, is the owner of the allegedly infringing Crocodile & Device mark (registered in Japan under No. 0571612(01) in Classes 18, 24, and 25 in Japan). Yamato entrusted the defendant,Taishan Lifu Garments Co., Ltd., through another Japanese company, Kumbo, with production of the allegedly infringing products, namely, shirts.

The court decided that the defendant’s manufacture of OEM products in this case did not constitute trademark infringement against the plaintiff’s trademark rights on the following grounds:

To judge trademark infringement, the following two factors should be considered: 1) whether the two parties’ trademarks are confusingly similar with respect to their respective overall appearances, pronunciations, and meanings, etc.;  2) whether there is a likelihood of confusion among Chinese consumers.  In this case, the allegedly infringing products were to be sold only in Japan—never in mainland China—and, accordingly, the alleged infringer’s trademark could never function as a trademark to distinguish the origin of goods in mainland China. As such, the court found there was no likelihood of confusion among Chinese consumers. Moreover, the plaintiff’s market share in mainland China was never improperly impinged upon. Consequently, in the court’s view, its trademark rights had not been infringed.

 

 

Finally, when signing the OEM contract, the defendant had reviewed Yamato’s trademark registration certificate in Japan. Therefore, after exercising the appropriate due diligence, the defendant conducted the production according to the OEM contract and had no subjective intention to infringe the plaintiff’s trademark rights. 1. (2011) Yue Gao Fa Min 3 Final No. 467.

 



Case 2: Chinese Trademark HPC, No. 72472982 Court: The Pudong New District People’s Court of Shanghai

Verdict: (2014) Pu Civil 3 (IP) Chu No. 373

Date: July 2, 2014

First Instance

 

The plaintiff, Yuhuan Jiayue Auto Parts Manufacturing Co., Ltd., was the owner of the Trademark HPC No. 7247298, Class 12, registered in mainland China, whereas Hillber Parts Co., Ltd. (“Hillber”), a British company, is the owner of the allegedly infringing mark registered in the United Kingdom. Hillber entrusted the defendant, Chongqing Hongyu Friction Products Co., Ltd., with the manufacture of the allegedly infringing products.

The court concluded that the defendant’s manufacture of OEM did not constitute trademark infringement of the plaintiff’s trademark rights. Although the mark attached to the allegedly infringing products was identical to the plaintiff’s registered mark, and the allegedly infringing products were similar to the plaintiff’s registered goods, the court found that trademark infringement could not be established on the premise that the defendant’s act of attaching the “HPC” mark does not constitute valid trademark use according to the Trademark Law of the People’s Republic of China (the “Trademark Law”).

When defining valid use of a trademark, the most important factor is, of course, the function of a trademark to distinguish the origin of goods. In this case, although the act of attaching the trademark to the allegedly infringing products was carried out by the defendant, the actual user of the mark was the foreign licensor. The allegedly infringing products, when being detained by Customs, had not entered the (Chinese) market, and never had a chance to be known by Chinese consumers. Moreover, all of the allegedly infringing products were sold outside Chinese borders, and the trademark attached to those products therefore never functioned as a trademark to distinguish the origin of goods in mainland China.

Incidentally, though the above ruling was made on July 2,2014 (after the new Trademark Law came into effect on May 1,2014), the ruling was based on the old Trademark Law, as the alleged infringement happened before the new Trademark Law came into effect. 2. (2014) Pu Civil 3 (Zhi) Chu No. 373.

 



Case 3: Chinese Trademark Orion in Chinese Characters, No. 11086363  

Court: Tianjin Second Intermediate People’s Court

Verdict: (2010) Second Intermediate Civil 3 IP Final No. 3

Date: December 16, 2011

Second Instance

 

The plaintiff was the owner of Trademark “好丽友”4 No.1108636, Class 30, registered in mainland China, whereas the alleged infringer attached the trademark “佳丽友”5 to the products, and used package designs confusingly similar to those of the plaintiff.

The court found that the defendant’s OEM production amounted to trademark infringement of the plaintiff’s trademark right, as well as unfair competition on the grounds summarized below:

The defendant, a food manufacturer in the same industry as the plaintiff, should have known the plaintiff’s well-known trademark “好丽友” and the accompanying famous product package, particularly in view of the plaintiff’s large market share.

Therefore, the defendant had not undertaken appropriate due diligence.

In addition to the above three cases, there are many other controversial verdicts, where some OEM production is ruled to be trademark infringement, whereas other OEM production is not.

 

IV. SUMMARY OF DIFFERENT COURTS’ GROUNDS


Different courts’ grounds for finding trademark infringement can be summarized as follows.  1) The alleged infringement is related to identical or similar trademarks on identical or similar goods;  2) The licensees (that is, the OEM manufacturers) have not undertaken the necessary due diligence;  3) Trademark protection should be territorial or regional.  When and if a trademark is registered in China, no third party, without the registrant’s authorization, is allowed to   use an identical or similar trademark on identical or similar products. Different courts’ grounds for holding that trademark infringement has not occurred include the following: 

 

1) If the OEM products are sold in foreign countries, but never in China, there is no likelihood of confusion among

 the Chinese consumers in the Chinese market.

2) The placement of the mark on goods that are manufactured in China, but not sold in China, does not comprise use of a trademark in China.


 



3. (2010) Second Intermediate Civil 3 IP Final No. 3.

4. “Orion” in Chinese characters.

5. Jia-Li-You in Chinese characters are conceptually similar to “Orion” in Chinese characters, with the first character conceptually similar and the last two visually and conceptually identical.

 


 

 V. WHAT LEADS TO THE ABOVE CONTROVERSIAL CONCLUSIONS? 

 

Intellectual property is not only a legal issue, but is also closely associated with China’s macroeconomic policy. When determining whether certain OEM production constitutes infringement, courts also consider economic factors. In China,OEM production can, on the one hand, contribute to earning hard currency and increasing employment and, on the other hand, help local enterprises to learn advanced technology and upgrade their industries. Therefore, generally speaking, Chinese authorities are not anxious to restrict OEM production for the time being.

Accordingly, when verifying trademark infringement, Chinese authorities and Chinese courts discreetly consider these economic factors. At the same time, courts are likely to also consider such factors as the reputation of the allegedly infringed trademark and the due diligence of OEM manufacturers and licensors.

 

VI. FURTHER THOUGHTS

 

In our opinion, though in many courts’ rulings OEM production is deemed as not constituting infringement, there exists the probability that the contrary point of view will become more acceptable to the courts in the future.

  According to the foundation of Chinese civil law, damages are available to compensate for actual harm. However, if no actual harm happens but potential harm is likely to happen, the potential victim remains entitled to require the potential infringer to remove the potential harm or to prevent the potential harm from happening. For example, where a flower pot is placed on a balcony over a road, the passersby are entitled to require the balcony owner or tenant to remove the flower pot. Likewise, the OEM factory’s products, when shipped from the factories to the harbor or airport and then to a different country, are also likely to be misappropriated somewhere on the way to the harbor or airport. If and when the possibility of such misappropriation cannot be ruled out, the trademark (or other intellectual property rights) owners should be entitled to keep the factories liable for potential harm. In other words, OEM products should actually be considered to infringe intellectual property rights, including trademarks, whether or not there is a showing of actual harm.