Does manufacturing in China for export (OEM) constitute use of a trade mark and consequently trade mark infringement in China? – A Brief Overview

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(Author: Dr. Jian Xu, China IP Attorney/Blogger)

A recent Chinese Supreme People’s Court decision has supported the view that manufacturing products in China for export overseas does not constitute use of a trade mark, and so cannot be considered infringement of a mark registered in China. The decision was issued in a case involving the PRETUL trade mark with goods being produced for export to Mexico. The decision follows years of uncertainty over the position of Chinese courts, government and customs authorities over the so-called “OEM” (Original Equipment Manufacturing) principle. Although case decisions in China are non-binding on future decisions, judgements from the Supreme People’s Court are strongly indicative of likely future trends.

A common scenario for trade mark disputes in the OEM situation is that the Chinese manufacturer only produces the goods and affixes the foreign customer’s brands for exporting without domestic sales. The affixed brand is similar to a registered Chinese trade mark. Then there is the question of whether this constitutes trade mark infringement.

There has been a great deal of confusion and inconsistency regarding whether the above scenario should be deemed trade mark infringement in China. Briefly, there are two types of legal rationale behind the judgments.

The judgments for non-infringement deem that such behavior is not trade mark use in the legislative purpose of trade mark law, and there is no confusion caused to the public in China because all the branded goods are exported. The test of confusion is the key to determine trade mark infringement.

The judgments for infringement deem that such behaviour clearly constitutes literal infringement as clearly specified by the trade mark law. The branded goods are put into commercial use for the general public and should properly constitute trade mark use, whose legislative purpose is to differentiate the source of goods.

Over the past three years, there is a clearer trend that various Chinese courts are leaning toward the opinion that manufacturing in China for export is not good evidence of use of trade mark, as highlighted by the Muji case in 2013 by the Chinese supreme court, from the trade mark prosecution and review perspective. In December 2015, the Chinese supreme court, through the subject PRETUL case, further affirmed the importance of “confusion” for the determination of trade mark infringement, as well as the view that manufacturing in China for export is not good evidence of use of trade mark from a trade mark infringement perspective.

In view of the above, it is good news for foreign companies which have Chinese OEM manufacturers that their risk of trade mark infringement in China is ultimately small, provided that it’s a “purely OEM”  situation (meaning that there is no noticeable level of Chinese domestic sales/promotion of the branded products). However, it is still unwise to advise such foreign clients that they don’t need to register trade marks in China. IP registration is still the king in China. A lot of trouble can follow if the key IP is not registered in China if the client has substantial business activity in China. With the assurance of minimal risk of trade mark infringement, the foreign client is advised to have its core brand registered in China only with a much reduced budget, so as to defend against any trade mark squatters as well as make provision for the uncertainty that China is not a case law country. If you worry about trade mark non-use cancellations, then you can adopt the periodic or reactive re-filing strategy. It is always safer to have a trade mark in place in China if your products are mainly sourced from China.