FAQs format on OEM
Q. OEM Definition: What is OEM?
A. OEM is short for original equipment manufacturer. OEM is somewhat of a misleading term for a company that has a special relationship with another company which manufacture products then commercialized with the brand of the previous one, or a company having special relationship with different producers. OEMs are not actually the "original manufacturer" of the equipment, but are actually a company who has a relationship with the original manufacture to resell that manufacturer's product under its own name and branding. While an OEM is similar to a VAR (value-added reseller), it refers specifically to the act of a company rebranding a product to its own name and offering its own warranty, support and licensing of the product. The term is really a misnomer because OEMs are not the original manufacturers; they are the customizers of the product.
Q. Why OEM is associated to IPR infringement ?
A. OEMs face counterfeiters who without authorization use their marks on the same or similar goods. In addition, certain companies or individuals will become “trademark pirates” or “trademark squatters” and register marks of a famous brand in China. While some trademark pirates do this to “free ride” on the brand equity of the brand owner, some trademark squatters may do it in an attempt to “negotiate” payment from the brand owner in exchange for the mark. However, if the holder of a mark in a foreign market contracts with an original equipment manufacturer (“OEM”) in China for the manufacture of goods bearing said mark solely for export where the rights to said mark in the P.R.C. are held by another entity, such actions (i.e. the manufacture solely for export of said goods) are not (always) considered an infringement upon the P.R.C. trademark holder’s rights.
Q. What does it mean Trademark Infringement in the PRC?
A. Trademark infringement in the PRC may occur by using a trademark (e.g. selling a product bearing a trademark or reproducing a trademark) that is similar or identical to a trademark registered by another party in the PRC. Importantly, PRC law currently does not squarely answer whether the PRC-based manufacture of trademark-bearing products for exclusive export from the PRC infringes on the exclusive use rights of the party that has registered the trademark in the PRC.
Q. What is the legal framework to be considered for possible infringement?
A. There is a framework for legal protections under the Trademark Law of the P.R.C. (“Trademark Law”) upon which a rightful trademark owner can draw upon. The Trademark Law was originally adopted in 1982, with subsequent amendments in 1993 and 2001. The Regulations for the Implementation of the Trademark Law of the P.R.C. (“Trademark Regulations”) are among other accompanying legal guidelines, such as Interpretations from the Supreme People’s Court.
Q. What is the ground for an infringement claim?
A. Under Article 52 of the Trademark Law, unauthorized “use” of a trademark is grounds for an infringement claim. This raises the question as to whether OEM manufacture done solely for export overseas to a country where the exporting party holds the rights to the mark at issue is indeed “use” under the Trademark law. Article 3 of the Trademark Regulations defines “use” of a trademark such that it shall include “affixing trademarks to commodities, commodity packaging or containers, as well as commodity exchange documents, or using trademarks in advertisements, exhibitions or other commercial activities.” The statutory law contains no clear guidance on whether OEM manufacture of goods solely for export constitutes “use”. As such, the application by China Customs (or an Administration of Industry and Commerce (“AIC”) branch office or a People’s Court) of the Trademark Law regarding whether “use” applies for manufactured OEM goods solely for export where there is a conflict between trademark ownership in the originating (China) country and the destination country has been inconsistently applied throughout China. In some cases, China Customs has shown that it may release goods if the OEM goods exporter can prove trademark ownership in the destination country, while in other cases, the P.R.C. trademark owner may be successful in having the goods seized. This, in essence, indicates that this may be seen as a “grey area” of the law and, as such, an administrative agency such as China Customs (or an AIC) may choose to not act on a claim of alleged infringement of a P.R.C. owner’s trademark rights—-or it may.
Q. What is the position of Chinese judicial system about alleged infringement in the OEM structure?
A. In the past, Chinese courts took the view that applying a trademark in the context of original equipment manufacturing (OEM) constituted trademark ‘use’ for the purposes of China’s Trademark Law. However, a number of recent civil judgments have led to speculation that a different view may be evolving. Despite recent suggestions to the contrary, the courts still consider that OEM involves trademark use, although in legitimate cases of OEM solely for export, this is a form of ‘reasonable use’. However, in trademark infringement cases involving reasonable use, it seems that use alone is no longer sufficient to determine whether trademark infringement has taken place; to find infringement, it is now necessary to establish a likelihood of confusion in the Chinese market.
Q. Does OEM manufacture solely for export constitute “use” under the Trademark Law?
A. China is a civil law country and, as such, does not follow a stare decisis or case precedent system, though court decisions (especially higher court decisions) are likely to be followed in their home jurisdiction and they, also, may have some persuasive value in other jurisdictions. There is still no clear, definitive statutory guidance as to whether OEM manufacture solely for export constitutes “use” under the Trademark Law. The more recent case law, however, appears to be trending towards favoring the view that OEM manufacturing solely for export is likely to not be deemed as “use” under the Trademark Law.
This leads us to the most recent and most important case to date on the subject issue – the Supreme People’s Court case of Ryohin Keikaku Co., Ltd. v. TRAB of the SAIC. The mark at issue was the “Muji” mark (“无印良品” – Chinese language characters for “Muji”) on products solely for export. This matter (also referred to hereinafter as the “Muji case”) was an administrative litigation challenging the TRAB’s decision on an Objection to the granting of a trademark. The Objector claimed that as part of its argument that it had “prior use” of the mark at issue in China and that its “use” was based on OEM manufacturing of goods solely for export. In this case, the Supreme People’s Court held that OEM manufacturing solely for export was not “use” (in relation to the claim of “prior use”) under the Trademark Law, as though the exporter had engaged Chinese OEM factories for manufacture of the relevant products, it neither distributed the products in China nor advertised/promoted the products in China. The Court did not deem this OEM solely for export as “use”, as it deemed that the function of a trademark can only be fulfilled during the circulation of the commodity in the stream of commerce, which was not apparent in this case, as the goods were not circulated in the stream of commerce of China.
Though the Supreme People’s Court’s views on whether OEM manufacture solely for export constitutes “use” in the “Muji case” have not been codified into the statutory Trademark Law, the Supreme People’s Court views on issues are taken by lower courts as the definitive word on legal issues. As such, it may be that going forward there will be a growing consensus among courts in the P.R.C. that OEM manufacture solely for export is not “use” under the Trademark Law. It is also likely that, based on a collective view of previous court guidance, that for these OEM solely for export activities to not qualify as “use” under the Trademark Law, the overseas rights holder should make clear in the OEM agreement that the goods are solely for export and provide clear proof to the OEM that the contracting party has the requisite trademark rights in the destination country. Furthermore, the overseas rights holder would likely be required to in addition to not distributing the marked products at issue in China, to also not advertise or promote the products in China.
Q. What the basis for requirement of confusion for finding of trademark infringement?
A. The notion of confusion has been a part of Chinese trademark law since the Supreme People’s Court Interpretation on Application of Law in Trademark Civil Cases was issued in 2002 (Article 9, Fa Shi (2002) No 32), which refers to confusion as the basis for determining whether trademarks, goods or services are similar.
However, neither the interpretation nor a literal reading of Article 52(1) makes confusion, or a likelihood of confusion in the marketplace, a necessary element of trademark infringement. It is therefore unsurprising that the earlier trademark infringement cases involving OEM did not consider confusion in the marketplace to be relevant.
Q. On what basis do recent cases suggest that confusion in the China market is a relevant consideration in determining whether OEM constitutes trademark infringement?
A. The most likely answer to this question may be found in the Opinions of the Supreme People’s Court on Several Issues Concerning the Trial of Intellectual Property Rights Cases Serve the Overall Objectives of China Under the Current Economic Situation (Fa Fa (2009) No 16), issued in 2009.
The opinions, as issued by the Supreme People’s Court, are intended to help China’s courts to adjudicate IP rights litigation in
a manner that is consistent with the advancement of one of the main objectives of China’s National IP Strategy: the development of a knowledge-based economy. The opinions also contain the first
indication from the court that confusion in the marketplace should be considered when adjudicating trademark infringement.
Article 3 of the opinion provides as follows:
Enhancing the protection of business logos, actively promoting the development of brand economy, regulating market order and safeguarding the principles of fair competition.
In addition, protection of the core exclusive right of trademark shall be enhanced on the basis of certified commodities and certified and approved trademarks, and the sphere of exclusion of trademark right shall be properly defined in light of market confusion, so as to set clear and definite separation lines for the use of trademark and to provide sufficient legal space for the creation and development of self-owned brands. Where in the absence of due authorization by the
registrant of a trademark, another party uses the trademark for the same kind of commodities, under the condition that the trademark is registered, such infringement may be determined without considering the factor of confusion, except where such use is deemed reasonable.
Q. What is the meaning and reasoning of art. 3 of this opinion?
A. Article 3 therefore provides three key points of reference for trademark infringement:
• The scope of protection afforded to a registered trademark shall be defined with reference to confusion in the market.
• When a person uses a trademark that is identical to another person’s mark on the same goods or services without authorization, there is generally no need to consider whether there is confusion in the market.
• When a person uses a trademark that is identical to another person’s mark on the same goods or services without authorization and the use is deemed ‘reasonable’, the courts should consider whether there is confusion in the market.
The first and third points are relevant when assessing whether OEM for export constitutes infringement.