Defending trademarks from non-use cancellations: Strategies for OEM manufacturers in China

In 2019, more than USD470 billion in goods and services travelled from China to the United States. The figure makes China the United States’ largest supplier of goods. For many companies, China is an essential piece of their business, but they may never sell a single product to a Chinese company or consumer. For those companies, China is the source of their manufacturing and products, even if a Chinese consumer never purchases the goods. Those businesses must answer the tricky question of how to protect their brand in a country where consumers never see it. This article provides information on Chinese trademark law, how that law interacts with use and non-use of trademarks, and strategies to help guide US companies in protecting their trademarks in China.

China’s trademark system

China, unlike the United States, is a “first to file” trademark system where trademark rights are (with rare exceptions) established by filing a trademark application which matures into a registration. Thus, in China, a third party can obtain superior rights in a trademark, even over a good-faith user, by simply filing an application first. For this reason, US companies with international offerings or ambitions often protect their trademarks in China.

Trademark non-use dangers

Merely registering a trademark, however, does not solve the problem. If a trademark is not used in connection with the products or services identified in its registration after three years in China, the trademark registration is vulnerable to cancellation based on non-use. The primary issue in such an action is simple – can the registrant prove use of its mark in China in connection with the goods or services in its registration? If not, the mark will be cancelled.

Non-use, therefore, is a significant concern for any US company manufacturing, but not selling, goods in China. This is often called original equipment manufacturing, or OEM. OEM activities without a trademark registration raise the risk that a third party can obtain the trademark appearing on the manufactured good. If this occurs, the registrant, without ever using the mark, can threaten the trademark owner and manufacturer with trademark infringement lawsuits and customs tie ups.

Current state of the law in China

US companies in this situation have a few options. First, US companies can file new applications every three years to avoid a cancellation action based on non‑use. This strategy, however, is expensive and imperfect. Alternatively, the question arises – does OEM manufacturing in China constitute use of a trademark sufficient to defeat a cancellation action based on non-use? Like every good legal question, the answer is “it depends.”

The law in this area has shifted over the last several years, and OEM use has been more consistently recognized as valid trademark use in non-use cancellation proceedings. In Distinct Seasons Sd. Bhd. v. Trademark Review and Adjudication Board, the Beijing Higher People’s Court held in March 2017 that, although the OEM goods had not yet been circulated in the Chinese market and were only exported for sale, the registrant’s use was sufficient to defeat a cancellation action. The court, however, specifically stated that, to successfully defend a non-use cancellation, the registrant is required to provide a clear document trail showing its activities in China. The Supreme People’s Court of China has not made a definite ruling on this issue yet, but its re-trial judgment in Sonneti International S.A. v. Trademark Review and Adjudication Board in December 2018, which ruled that it is wrong to draw the conclusion that a registered trademark is not in use simply because it is used in OEM activities only, strongly indicated that OEM use is sufficient to defeat a cancellation action.

In April 2019, the Beijing Higher People’s Court issued its Guidelines for the Trial of Trademark Right Granting and Verification Cases, which also provide that “if the goods using a trademark are directly exported without being circulated in China and the registrant of the trademark claims to maintain the registration of such trademark, this claim may be supported”.

The above Distinct Seasons Sd. Bhd. v. Trademark Review and Adjudication Board case and some other recent cases provide a clear signal to companies using OEM arrangements in China – have your paperwork in order. Having a clear trail of licensure, purchase orders, and invoices appears crucial to putting structures in place which are intended to combat against a cancellation action based on non-use.

Strategies and guidance for US companies using OEM relationships should, therefore, take at least the following steps:

• License agreement. A license agreement should exist between the trademark registrant and the manufacturer which clearly identifies the manufacturers scope of rights and duties with respect to the trademark.
• Purchase orders. The company should carefully track and retain records of purchase orders, any delivery notes of delivered products, and (if possible) obtain photographs of the manufactured and delivered products.
• VAT invoices. European retaining VAT invoices can also be powerful evidence in demonstrating the exportation of the product from the manufacture or distributor in China to the US (or another country).
• Customs forms. Customs declarations forms, to the extent they are available, can also be valuable evidence to demonstrate the exportation of the product.

The law in this area remains fluid. Taking these steps does not ensure that a cancellation action based on non-use will be defeated. They are, however, relatively simple procedures which can help greatly increase the chance of success in a cancellation action and potentially save a brand from piracy in China.