Parrying the risks of trademark infringements from OEM business

By Wang Yadong and Hu Cuiqin, Run Ming Law Office

Original equipment manufacturing (OEM) is a form of trade in which an enterprise in China accepts a commission from an offshore trademark rights holder to process a product and affixes a specific trademark to it for the commissioning party, then delivers the products to the offshore commissioning party and receives a processing fee. There has been a long history of OEM in China, and in conjunction with this, trademark-related legal risks arising in connection with this trade have become an unavoidable practical problem.

Wang Yadong, Executive Partner, Run Ming Law Office
Wang Yadong
Executive Partner
Run Ming Law Office

If the foreign commissioning party has not secured the trademark rights in China to the trademark that it is affixing, and that trademark is identical or similar to a trademark registered on identical or similar goods by a PRC trademark rights holder, there is a strong possibility that the Administration for Industry and Commerce (AIC) or customs will render a finding of infringement in respect of the OEM, pursuant to a filing by the PRC trademark rights holder or ex officio, and impose such penalties as ordering a halt to the infringement, confiscation of infringing products, a fine, etc. There is also a possibility that the OEM will face an infringement charge by the domestic trademark rights holder. Numerous such cases have arisen in recent years.

Laws, such as the Trademark Law, are silent on whether the “act of affixing a brand” in OEM constitutes infringement of China’s trademark rights, and different perspectives on this issue exist in PRC administrative and judicial practice.

Both the AIC and customs hold that OEM falls within the area of trademark use. In addition, with respect to what constitutes an infringement, the Trademark Law neither considers whether the user subjectively acted deliberately nor whether it caused actual harm. Accordingly, once the AIC or customs discovers that a trademark has been used without authorisation, it will determine the same to be trademark infringement.

Judicial perspectives

Perspective 1: trademark infringement is constituted. The basis for this is article 52 of the Trademark Law and the territorial nature of trademarks. As trademark rights are territorial in nature, if the commissioning party does not enjoy the rights in a trademark in the PRC, and the mark and goods involved in the processing are identical or similar to a trademark registered in the PRC then, according to the first paragraph of article 52, the use of a trademark identical or similar to a registered trademark on identical or similar goods without the permission of the trademark registrant constitutes infringement of the exclusive right to use a registered trademark.

Shenzhen findings

In the 2001 Nike v Cidesport et al. trademark infringement case, the Shenzhen Intermediate Court held that trademark rights are territorial in nature and that, within the jurisdiction of PRC courts, the plaintiff had secured the exclusive right to use the trademark “Nike”, and without the permission of the plaintiff, the defendant could not infringe the plaintiff’s exclusive right to use its registered trademark in any manner. Numerous effective judgments in recent years have continued to adopt this perspective.

Perspective 2: trademark infringement not constituted. The basic function of a trademark is the distinguishing and identification of the source of a product or service, and the essence of trademark infringement is the undermining of the identification function of trademarks, causing the public to confuse or misidentify the source of the goods. As OEM products are not sold in China, there is no possibility of confusion or misidentification. Therefore, the “act of affixing a brand” does not constitute trademark infringement. The Supreme People’s Court has expressly provided in relevant regulations that “likely to cause misidentification by the relevant public” is one of the necessary conditions for a determination of trademark infringement.

Hu Cuiqin Lawyer Run Ming Law Office
Hu Cuiqin
Run Ming Law Office

At present, there are also effective judgments that manifest this perspective. For example, in the Shanghai Shenda Sound Electronic v Jiulide Electronics (Shanghai) trademark infringement appeal case heard by the Shanghai Higher People’s Court, the court held that the trademark affixed on the goods involved in the case only served to identify the source of the goods outside China and did not fulfil that function inside China, so trademark infringement was not constituted.

Although different perspectives on the determination of infringement in connection with OEM in China exist, administrative and judicial practice tends toward determinations that infringement is constituted. Accordingly, we recommend that foreign parties that commission OEM business in China adopt different trademark strategies at different stages, based on their own circumstances, to safeguard their interests to the greatest extent possible.

First, foreign commissioning parties should put an emphasis on securing trademark rights in China, securing the appropriate rights to the trademarks affixed in the course of OEM through such means as registration, transfer, licensing, etc. If such a trademark has been pre-emptively registered in bad faith or imitatively registered by another, the foreign commissioning party can eliminate such a trademark obstacle through a trademark opposition or cancellation procedure.

Precautionary measures

Second, in practice OEM products may flow into the Chinese market for a variety of reasons, and if an affixed trademark is identical or similar to a trademark registered on identical or similar goods by a Chinese trademark registrant, it will be found to be infringing, regardless of whether the appearance of the OEM product in the market was based on the intention of the foreign commissioning party. In this regard, a foreign commissioning party should take advance precautionary measures by expressly prohibiting, in the processing contract, the processor from selling any of the product, and specifying its liability for breach of contract.

When a Chinese trademark rights holder brings an accusation of infringement, the foreign commissioning party can defend that the “act of affixing a brand” in the course of OEM is not an act of use as contemplated in the Trademark Law, that confusion among or misidentification by the relevant public was not caused, etc., in hopes of obtaining a favourable judgment.

Wang Yadong is the executive partner and Hu Cuiqin is a lawyer at Run Ming Law Office

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