China is often referred to as the factory for the world. Original Enterprise Manufacturing (“OEM”) activities in China have grown to unprecedented levels since China opened up for foreign investment. On one hand, companies are drawn to the relatively low overall manufacturing costs, on the other hand, intellectual property enforcement remain a topic of concern for many foreign companies engaging in OEM activities in China.
The conventional view
One of the earliest landmark Chinese cases in the area of trade mark use is Nike International Ltd v Cidesport & Zhejiang Livestock Products Import & Export Company & Jiaxing Apparel Factory . In this case, the Spanish company Cidesport instructed a local factory in Jiaxing and an Import & Export Company in Zhejiang to manufacture and export clothing articles bearing the “NIKE” trade mark. Notably, the said “NIKE” trade mark had been registered by the Spanish company and the US company Nike International Ltd. in Spain and China respectively, both in relation to clothing. The Shenzhen Intermediate People’s Court in Guangdong province held that the mere act of manufacture constitutes use, such that the manufacture of “NIKE” -branded clothing by the local factory was found infringing of the registered trade mark rights of Nike International Ltd. in China.
The conventional view – revolutionised?
In a recent decision Shanghai Shenda Sound Electronics Co. Limited v Jiulide Electronics (Shanghai) Limited , the Shanghai People’s High Court upheld the decision made by the Shanghai Intermediate Court in finding that pure OEM activities which involved the affixing of trade marks which were not owned by the manufacturer did not amount to trade mark infringement.
Shanghai Shenda is the owner of the registered trade mark “JoLida & device” in China in relation to amplifiers, radios, etc. The defendant Jiulidi Electronics, instructed by its US parent company JoLida Inc., manufactured inter alia, amplifiers in China. Such amplifiers were seized by the Shanghai customs authorities for alleged trade mark infringement when they were about to be exported to the United States. Shanghai Shenda then took action against Jiulidi Electronics for trade mark infringement.
The similarities in the trade marks being used and the goods thereunder were not disputed by the parties.
It is perhaps noteworthy that Shanghai Shenda was in fact set up by the US company JoLida Inc. as a wholly foreign owned enterprise in 1996. Ownership thereof was subsequently changed to an unrelated US company. This is indicative of the prior business relationship between JoLida Inc. and Shanghai Shenda, but was nevertheless not the only determining factor for the Court in finding whether the activities were infringing.
The Intermediate Court decided in the defendant’s favour, having considered that:-
- The first use of its trade marks “JOLIDA” and “device” registered in the United States by JoLida Inc. was earlier than 1996, i.e. before it set up Shanghai Shenda in China.
- Judging from the use of the trade mark by Jiulide Electronics on the allegedly infringing articles and their packaging, it was found that the trade mark being applied thereon by Jiulide Electronics was that registered by JoLida Inc. in the States, and that all such articles were to be exported to the States. Accordingly, Jiulide Electronics was found to be engaged in OEM activities.
- Considering that all the articles were for export to the States and that the trade mark applied thereon was that registered and owned by JoLida Inc., no confusion as to trade origin will be caused to consumers in mainland China in the absence of actual sale in the Chinese market.
Apart from agreeing with the views taken by the Intermediate Court, the Shanghai People’s High Court further clarified that, when determining whether the activities involved are considered as OEM, two considerations should be made:-
First, whether the manufacturing activities are directed by the manufacturer itself, or are made solely to comply with the consignor’s request. That is to say, whether the manufactured products are all to be delivered to the consignor, or are for the manufacturer’s own sale and distribution.
Second, whether the manufacturer has undertaken due diligence in ascertaining whether the consignor has the necessary legal rights in the trade mark concerned.
In light of the foregoing, the Courts held that Jiulide Electronics was engaged in OEM activities and its manufacturing of “Jolida”-branded products did not constitute trade mark infringement.
Foreign companies should be aware that the above (probably isolated) decision does not signify a conclusive shift in views/ approach taken by the Chinese Courts at large. It, however, suggests that there is a trend that judges in the major cities such as Shanghai and Beijing do tend to hold less conservative views, as compared with judges in more remote or less developed cities or provinces.
The draft new Trade Mark Law in China is expected to shed light and to give more certainties in this respect. Until then, companies investing in China are advised to consider carefully securing trade mark rights in China, entering into proper manufacturing arrangements (and agreements) with local entities with clearly defined terms, and choosing wisely an appropriate forum in case of disputes with local counterparts.
While “use” under OEM activities remains of potential dispute, the Supreme Court in China recently issued an Opinion clarifying the scope of trade mark use allowed in defending non-use cancellations. The Supreme Court confirmed that:-
- any use made by the trade mark owner itself, any party authorised by the trade mark owner or in line with the wishes of the trade mark owner will be considered actual use;
- use of a trade mark includes use in a slightly different form which however does not alter the distinctive character of the trade mark in the form in which it was registered; and
- where the trade mark owner has actual intent to use and put in effort preparing therefor, and yet has been unable to begin such use due to objective causes, this is considered as a reasonable excuse justifying non-use.
Use of a trade mark in Hong Kong is statutorily defined to include application of the same to goods or to the packaging of goods in Hong Kong solely for export purposes; and where the trade mark is registered in respect of services, use in relation to services provided or to be provided outside Hong Kong.
To illustrate this, it has recently been clarified by the Registrar that for instance advertising use in Hong Kong of a mark for hotel services, where the hotel services is provided outside Hong Kong would qualify as use. This highlights the importance of securing trade mark registrations in Hong Kong for offensive and defensive purposes.