OEM products and why you should register your trade mark in China

by John Foster, Spoor & Fisher

If products bearing your trade mark are manufactured and branded in China, it is now more important than ever that you register your trade mark there.

Most South African buyers of OEM products consider it sufficient to register their trade marks in South Africa, as this is where the products are advertised and sold to end-consumers. But problems can arise when trade marks are applied to OEM products made in China, particularly if that trade mark (or a similar trade mark) is registered by a different company in China.

China and OEMs

China has long been popular among South African buyers as a source of “Original Equipment Manufacturer” (OEM) products. To clarify, an OEM is a manufacturer that produces products or parts for its buyers, which on-sell those products to end-customers under their own trade marks.

Generally, an OEM not only manufactures products, but also brands and packages the products with trade marks prescribed by the buyer. The finished products are then collected by the buyer and shipped to the destination country for sale through the buyer’s retail and distribution channels.

Conflicting decisions

There have been some conflicting decisions by courts in China regarding OEM products and whether the trade marks applied to those products are “used” in China.

The view for many years was that OEM manufacturing might constitute “use” of a trade mark, but as long as the use did not lead to a likelihood of confusion, there was no trade mark infringement. This view was expressed in the decisions by the Supreme People’s Court (“SPC”) in Pujiang Tahuan Lock Co Ltd v Focker Security Products International Limited (2015) (“PRETUL case”) and Jiangsu Chang Jia Jin Feng Power Machinery Co Ltd v Shanghai Diesel Engine Co Ltd (2017) (“DONGFENG case”). It appeared from these decisions that the act of affixing trade marks in the course of OEM was “use”, but on assessing the likelihood of confusion in relation to the OEM-manufactured goods, there might not be confusion and therefore, no trade mark infringement.

Things changed in 2019 with Honda Motor Co Ltd v Chongqing Hengsheng Xintai Trading Co Ltd ((2019) Zui Gao Fa Min Zai No 138) or HONDAKIT. In its judgment, the SPC held that there was no special exemption for OEM for export activities. In particular, it defined “relevant public”, for the purpose of determining a likelihood of confusion, to include all business operators and consumers that may have access to the “infringing goods” (OEM-manufactured goods) for export.

The SPC made a number of key findings that affect OEM and trade mark use, namely:

·         It found that there was a possibility of contact with the businesses in transportation and that, given e-commerce and the Internet, even if the OEM goods were exported, it remained possible for the goods to return to China. Therefore, there exists a possibility that the trade mark on the OEM goods functions to distinguish the source of the goods for the relevant public.

·         It found that trade marks enjoy territorial protection and, accordingly, a buyer cannot rely on their trade mark rights in a foreign country (like South Africa) to grant an OEM authorisation to use a trade mark. Therefore, authorised use by a foreign buyer cannot be used as a defence against trade mark infringement proceedings in China.

As a result, the affixing in China of a trade mark registered in South Africa to goods meant only for export to SA can amount to infringement of an identical or similar trade mark registered in China.

Recent developments

The HONDAKIT case, although not necessarily binding on all courts, has become an important reference for courts when dealing with OEM and trade mark use. Several recent decisions by Chinese courts have followed the SPC’s example and held that OEM can lead to trade mark infringement in China.

In addition, and perhaps of more immediate concern to buyers, China Customs has also changed its stance. OEM products that are suspected of having infringed a Chinese trade mark are detained and/or seized at the border, even in circumstances where evidence proves that the goods are for export only. If you have ever had your products detained or seized by Customs, you know the admin hassles, costs and loss of sales that can accompany such an unfortunate situation.

Uncertainty on this issue remains, but there is consensus on one point: that the most effective way to avoid issues with OEM products is to register, in China, any trade marks to be applied to them.

Advice for buyers

If you are a buyer of OEM products and you are concerned about the effects that this issue may have on your business, begin by instructing your trade mark attorneys to conduct a search to see whether there are any prior identical or confusingly similar trade marks already registered in China.

While you are at it, instruct a search in the General Administration Custom of China (GACC) database, to determine whether any prior identical or confusingly similar trade marks, copyright and/or patents (as the case may be) have been recorded with Customs. If so, the risk of detention of your OEM products by Customs is higher.

If your trade mark is available for registration, file a trade mark application as soon as possible, because the registration process takes approximately a year to complete, and you want your trade mark registered as soon as possible.

The good news is this: if your trade mark is used on OEM products that are for export only, the application of the trade mark to the OEM products in China amounts to “use” of the trade mark in China for the purposes of defending a non-use claim. Thus, if you register your trade mark in China and only use it in OEM, your trade mark will not be vulnerable to cancellation based on non-use.