Original Equipment Manufacturing or OEM is the business model that is used when a trademark owner is "sourcing", i.e., looking for a factory to manufacture its products, using its trademark. China is one of the most favoured countries by business operators sourcing OEM products. If you are one of them and want to ensure the safe exportation of the OEM products, is there anything you need to do? And if, assuming you do not own a registration of the trademark in China, you want to prevent others from registering such trademark, can you rely on your prior OEM export business?
Due to the lack of specific regulation in China, the nature of the trademark use in OEM export business is still an unstable issue. And the opinions of the authorities (CTO/TRAB) and courts vary according to the type of procedure.
So it is better to understand this issue as the way suggested by Oliver Wendell Holmes Jr., that is, "The life of the law has not been logic; it has been experience" (The Common Law, 1881). Below we analyze a few issues based on recent precedents:
Can OEM use protect against a cancellation action for non-use?
If you have already registered your trademark in China, but you only use it for OEM export, anybody could claim that you are not using your trademark in China, since you are not selling anything in the country. Is the use of the trademark in OEM export business sufficient to defend against a cancellation action for non-use？
Before 2010, such cancellations actually happened, for the above reason: no sales in China was considered as no use
This opinion changed after 2010. The Beijing High Court in the "SCALEXTRIC" case, and, more recently the TRAB in the "MIRRO" case (2015) accepted that OEM use, if it reflects the true intention of using the trademark by the registrant, is sufficient to resist a cancellation action for non use. For the purpose of showing such true intention, single or occasional exportations may still be weak. Comprehensive evidence of long-time and consistent OEM exportations is necessary.
Opposition based on article 32: can OEM use generate a "certain influence" ?
Article 32 of the Trademark Law allows the prior user of a (not registered) trademark, which has acquired a certain influence, to oppose the registration, or request the cancellation of a subsequent identical or similar trademark, if such trademark has been filed by improper means (commonly called "pre-emptive application").
The article is very often used, but… what if our prior use is only through OEM business? Does such use count for the application of article 32?
Well… it does not. In the famous MUJI case (2012), the Supreme People's Court held that the use in OEM business is not able to generate "a certain influence" because the OEM products have not entered the local market at all,.
From then on, although there are few cases affirming that OEM business can also bring "a certain influence" in special circumstances, most of the cases followed the principle laid down by the SPC.
Can OEM use be affirmed as trademark infringement ?
If another person has obtained the registration of "your" trademark, and you are using this trademark in OEM practice for export, can you be sued?
The answer to this question is the most controversial and least stable of all. The courts have changed their minds several times; they found that OEM export is an act of infringement and found the exact opposite.
In November 2015, the SPC handed down a "retrial" judgment in the famous Focker v. Yahuan case, also called the PRETUL case, with a reasoning according to which since the goods were exported from China the trademark Pretul that was affixed on such goods was not "used" in the sense of the Trademark law, and therefore, no infringement was committed. The Court noted, further, that the defendant owned the trademark in the country of destination.
It is very unlikely that the Supreme People's Court intended to deliver a message to allow the free exportation of infringing goods from China. Letting the batch of goods be exported to Mexico seemed a "fair" decision in the circumstances. It remains that, if it was systematically followed, this case would deprive all legitimate trademark owners of the right to seek the assistance of the Customs when infringing goods are exported.
Several weeks later, the Court of Jiangsu rendered a judgment in another OEM case Shanghai Diesel v Jiangsu Changjia, which did not follow the SPC's reasoning. The court found that the defendant should have conducted some due diligence and should have known that there was a conflict between the Chinese plaintiff trademark owner, and the Indonesian purchaser of the goods. The OEM factory was, therefore, declared infringing and the good were not exported.
Still, the Jiangsu court declared that "Generally speaking, it would be advisable to find the Chinese OEM manufacturer's act not constituting trademark infringement if the OEM products are all for exportation and are not intended for distribution in China."
Given the above, it can be preliminary concluded, for the time being, that if you have the trademark registration in the destination country and perform OEM business in good faith, there will be little risk of being found infringing.
This being said, the above case law is controversial, for a number of reasons. Affirming that a trademark is not used because the goods are exported can be easily challenged. Likewise, making the finding of infringement or non-infringement contingent on the good or bad faith of the exporter, or on whether the purchaser owns the trademark in the destination country, is also very arguable.
Therefore the best advice is of course to use the trademark in China, and be the first to do so before others try to register it. But if your trademark has been pre-emptively registered by another person and if there is nothing you can do about it, it seems that, for the time being, OEM business is safe.