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May 11, 2015

Trademark Infringement and OEM

In this article I cite a case about trademark infringement risk related to OEM (“Original Equipment Manufacturer”, its interpretation subject to PRC law) and how to take advantage of positioning your China factory as OEM to protect your rights and interests.

Below are two basic trademark-related information for you to keep in mind:

  • One of the primary purposes of trademark laws is to protect the consumer from being confused or misled.
  • Exclusive trademark rights are protected regionally, i.e., a registered trademark would only be protected where it was registered.

Case Study

In a recent trademark lawsuit that we consulted on, the plaintiff (hereinafter referred to as “the Shanghai Company”) filed for a trademark registration (“the registered trademark”) in July 2013 and successfully secured a trademark certificate in August 2014. The registered trademark certified that the Shanghai Company held the trademark rights for a series of products under their appropriate trademark category.

A month later, with that trademark certificate prepared, the Shanghai Company filed the registered trademark with the China customs bureau for the purpose of protecting its “legally registered trademark rights”. In doing so, the Shanghai Company would be informed by the customs bureau if any third party tries to import or export such products.

The client (hereinafter referred to as “the Suzhou Factory”) is a factory established by the Shanghai Company’s previous customer (also our consulting services buyer), Mr. G. The Suzhou Factory mainly produces products labeled as the registered trademark and sold the products back to Mr. G’s associated business in the U.S.

“I was planning to form a joint venture to open a factory with [the Shanghai Company], but it didn’t go well as I couldn’t trust them,” Mr. G told us. While providing us with background information, Mr. G also expressed how surprised and angry he was when his factory in Suzhou received a court summons over the matter: “I never thought they’d register our brand and then sue us. It’s unbelievable!”

According to the Shanghai Company, they had received a notice from the local China customs bureau in December 2014 that some goods that were being applied for exporting by the Suzhou Factory may infringe on their trademark rights. At the same time, they claimed that this caused their U.S. customers to become reluctant to purchase goods from them. Hence, the Shanghai Company pled to the People’s Court to rule on the alleged infringement and order the Suzhou Factory to immediately stop its production. They also asked for compensation accordingly.

The Suzhou Factory’s Court Arguments

  • The plaintiff’s (the Shanghai Company’s) trademark registration constitutes a “malicious trademark registration” which infringes on the rights of a third party (Mr. G’s business in U.S.) in fact; i.e., the plaintiff is at fault in its claims.
  • The defendant (the Suzhou Factory) made no sales whatsoever within the jurisdiction of China and only produced products as an OEM entrusted by a foreign company (Mr. G’s) and exported products to areas where the foreign company had a registered trademark on the brand.

According to the above, the plaintiff’s claims should be regarded as lacking both actual and legal facts. Hence, it was requested by the defendant that the court dismiss all of the plaintiff’s claims.

First Instance Court Opinions

  • The main purpose of trademark law is to differentiate the origins of goods and services, and to protect consumers from getting confused and making mistakes due to confusing or misleading origins of those goods and services. Hence, for a trademark to be considered an infringement, the court must consider if such confusion and mistakes took place in fact.
  • In this case, the trademark in question was indeed registered by the plaintiff in China. Nevertheless, the defendant provided evidence to support that a third party (Mr. G’s business in the U.S.) had registered the trademark in the U.S. and authorized the defendant to produce its goods, and that the goods were strictly exported to the U.S. market, so the customers would identify the origin of those goods as the U.S. company.
  • Furthermore, as the goods were never sold in the China market, consumers in China had no possibility of confusing or mistaking the origin of the goods. Hence, the defendant’s OEM production shall not be deemed as infringement.

Lawyer’s Comments & Recommendations

Our general impression of this case is that Mr G was really lucky. If he had sold his products in China, his entrusted China factory would lose its status as an OEM of his U.S. associated business, then the court here very likely would have ruled that his entrusted China factory indeed infringed on the Shanghai Company’s trademark.

The malicious trademark registration still created considerable setbacks for him. He was planning to sell those products soon in China, but now we need to first help him fight to get this brand back by initiating an invalidation action on the Shanghai Company’s malicious registration of the trademark.

As China gradually shifts from the “world’s factory” to the next big thing, it is vital to form and execute a solid legal risk control strategy before a business plan is carried out. We highly recommend all business owners who intend to enter the China market, produce here, or partner with any local entity here, to consider taking the following actions:

  • Register your brand with China’s trademark authority before any Chinese party is made aware of your trademark. The same goes for your intellectual properties which may be filed as inventions, patents, copyrights, etc.
  • Sign as many papers as possible which place non-competition obligations on the other party and make sure such contracts are enforcible.
  • Do not be afraid to take action. Let go of any preconceived notion that your IP rights can’t be protected in China. Educate yourself on the basics of Chinese intellectual property protection.

Each case has different circumstances and the favorable outcome for the client in this case may not necessary be what you’d get with your particular trademark issues. If you find yourself in a similar situation and are seeking legal assistance over such matter, please email us at inquiry@evaslaw.com for more information or directly book a consultation meeting if you are in China. If you are overseas, feel free to provide us with project-related background information and ask for a quote of our consultancy services. We will try to get back to you as soon as possible.

Please prepare as much background information as possible before contacting us. All information and documentation emailed to this office will be kept strictly confidential.

May 11, 2015