OEM (Original Equipment Manufacturing) also referred to as “label manufacturing” or “label processing” in China involves a business model in which an overseas product owner (“consignor”) engages a domestic manufacturer (“consignee”) to manufacture products on which a foreign trademark owned by that consignor will be labelled. All the OEM products are then exported. In China, the OEM manufacturing model is adopted in so many industries, including electrical appliances, garments, toys, lightings and ironwares, that the Pearl River Delta and the Yangtze River Delta districts have become the largest OEM base in the world. However, an issue arises as to whether a domestic consignee will be held liable for trademark infringement when it applies a foreign trademark, which has been registered in China by a third party, onto products during the OEM labeling process.
1. Potential Trademark Disputes
In an OEM business, the trademark used is usually originated from and registered overseas. The trademark is therefore protected in that overseas jurisdiction. If a trademark identical or similar to the foreign trademark has been registered in China by a third party, a domestic consignee may risk trademark infringement if it applies that foreign trademark onto its products during the OEM labeling process.
2. Legal Issues
According to the Explanation of the Beijing Supreme People’s Court on Certain Issues Concerning Trademark-Related Civil Proceedings, “when processing products bearing a registered trademark belonging to another, the consignee should investigate whether the consignor has exclusive right to use that registered trademark. Where the consignee fails to discharge this duty of care and processes infringing products, the consignee shall be regarded as a joint infringer with the consignor. Such consignee and consignor shall jointly be liable for damages. If the consignee has no knowledge that such products infringe a registered trademark and is able to produce the relevant trademark certificate, he shall not be liable for damages.” Based on this Explanation, provided that the consignee does not know that the product is an infringing product and is able to produce the relevant trademark certificate, he will not be liable for infringement. However, neither the Explanation nor the Supreme Court has specified whether the consignee has to produce a local or an overseas trademark certificate.
In determining whether the consignee can be held liable for using the foreign trademark in the course of OEM labeling, we need to examine the word “use” in article 52 of the Trademark Law.
Article 52(1) of the Trademark Law does not define “use”. However, article 3 of the Rules of Implementation of Trademark Law (the “Rules”) provides that the use of trademark referred to in the Trademark Law and the Rules includes the use of a trademark on product, its package or container, its trading documents, advertisements, exhibition and other commercial activities. OEM labeling therefore clearly falls within the ambit of the Rules and the meaning of the word “use”.
A further question is whether confusion should be an absolute condition of finding trademark infringement. Identification is the fundamental function of a trademark. A trademark denotes the connection between a specific product supplier and its product and the trademark assists consumers to differentiate various products. Yet, it is not expressly stated in the Trademark Law that the causing of confusion is one of the conditions of finding trademark infringement.
The definition of “use” in the Rules is consistent with the general principals adopted for trademark infringement under the Trademark Law. However, OEM labeling involves an innovative business model of assigning and division of work, which would likely not have been contemplated when the legislation was first drawn up. A hard-and-fast application of the laws in such cases would be against the relevant legal principals.
In the light of the foregoing, it is submitted that a restrictive approach should be used for trademark protection and any infringement should be found only if there is finding of confusion. As all OEM products are solely for export, products with foreign trademarks should not result in confusion to the public in China and for this reason, no infringement should be found against the consignees. This approach will not only be in line with the correct implementation of the Trademark Law, but will also serve as a great support to export processing manufacturers in China.
If you have any questions of the above or other issues on foreign direct investments, joint ventures, mergers and acquisitions or doing business in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.