China's hidden risk: are you protected?

Comments Comments

K&L Gates' Jonathan Feder advises brands on hidden risks in manufacturing in China.

For years, overseas companies that manufacture goods featuring their brands in China only for export have faced issues where a third party has without a bona fide reason registered their trade mark in China.

A practice adopted by some third parties seeking to extract a payment for the assignment of the trade mark. This is because the Chinese trade mark owner has been able to successfully stop the export of genuine product by the overseas brand owner.

The question of whether the manufacture of product featuring a trade mark for export, known as Original Equipment Manufacturing (OEM), is an infringement of a registered Chinese trade mark was uncertain in China.

However, China's Supreme People's Court (SPC) has recently held that the OEM manufacturing of goods will not infringe a Chinese trade mark so long as the relevant goods are manufactured exclusively for export.

The OEM exception

OEM for export refers to the process by which a foreign party instructs a domestic manufacturer to affix its trade mark to the goods being manufactured.

These goods are then exported to the foreign party instead of being distributed for domestic use and sale.

The foreign party is the rightful owner of the relevant trade mark in the overseas market to which the goods are being delivered.

Let us consider SPC's decision in Focker Security International (Focker) v Pujiang Ya Huan Locks Co., Ltd (Ya Huan).
Ya Huan was the manufacturer of padlocks bearing the PRETFUL mark under instruction from the Mexican company, Truper Herramientas, S.A. DE C.V (Truper).

Focker has been the registered owner of the PRETFUL mark in China since 2003 and had notified Chinese Customs of the registration. Truper has owned the PRETFUL trade mark in Mexico since 2002.

After goods featuring the PRETFUL mark were seized by Chinese Customs, Focker sued Ya Huan for trade mark infringement.

The initial decisions held that the production by Ya Huan of goods bearing the PRETFUL mark for export to Mexico constituted trade mark infringement. Ya Huan consequently appealed to the SPC.

The SPC held that a trade mark will not be infringed where the mark is affixed on OEM products for export, if the person who ordered the goods has a valid trade mark in the exporting country which predates the domestic registration.

The SPC considered the function of a trade mark, which is to serve as a badge of origin for products or services in the Chinese market.

Applied to OEM for export, the SPC held that the trade mark does not function as a badge of origin, since the products never enter the Chinese market.

The SPC held that use of the mark in such circumstances merely made it possible for Truper to exercise its trade mark rights in Mexico.

Whether a mark functions as a trade mark depends on the facts of the case, however, the following factual elements may be influential for OEM to be labelled as non-infringing:

(1.a) the manufacturer exports all the products abroad
(1.b) the instructing foreign party is the owner of the trade mark in the destination countries and the registration of this trade mark predates the Chinese mark
(1.c) the manufacturer was authorised to produce the products by the foreign party
(1.d) the manufacturer undertook searches to ensure the valid ownership by the foreign party of the trade mark.

Remaining questions  from the decision

While this decision confirms the OEM exception, many questions in relation to the wider application of this decision remain unanswered, such as whether companies with a trade mark registration in China who only use OEM for export purposes can be subject to a non-use cancellation.

Whether or not the OEM exception will apply to a certain situation will depend on the individual facts of the case.

Further, it remains to be seen whether exporters will be able to prevent their goods being seized by Customs or if the OEM exception will only be a defence once already embattled in litigation.

Moral of the Story

The safest course for brand owners who have product manufactured in China remains to register their trade marks in China. Achieving trade mark registration is relatively cheap and simple and can be done from Australia.

However if you have not done so it may not be fatal should someone else register your trade mark in China.

For more, contact Jonathan Feder at jonathan.feder@klgates.com. This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.

comments powered by Disqus