The term Original Equipment Manufacturer (‘OEM’) designates a company that only makes a part of a product, or a subsystem, to be used in another company’s end product. The extension, also designates the agreement whereby one company commissions another to manufacture products according to certain specifications and to affix a trade mark on such products; the said products are delivered to the commissioner who sells them in the market under his own name. The letters ‘OEM’ therefore designate both the manufacturer and the act of commissioning the finished product to a third party.
China’s OEM sector developed rapidly from its roots in the apparel industry to a sector comprising automotive parts, cosmetics, and ICT equipment. As the world’s leading manufacturer, China attracts manufacturing contracts from global customers, including many European SMEs, in almost every industry by capitalising on Chinese OEM’s core strengths—relatively low labour costs, experienced manufacturers, and skilled workers.
Even though China’s IPR laws and regulations have improved in past years, IP infringements are still commonplace in the country and thus protection intellectual of property rights related to the goods is a crucial element of a successful China OEM strategy.
Protect your Trade Mark
In order to enjoy trade mark protection in China, SMEs need to register their trade mark. China follows a first-to-file system that grants trade marks to the first individual or company to register it. Thus, a foreign trade mark is not automatically protected in China, and vice versa. Before considering OEM production in China and certainly before beginning the OEM process, SMEs should file all trade marks with Chinese authorities either directly in China or through international processes ( through Madrid Agreement). Once the trade mark is registered with China Trade Mark Office (CTMO), SMEs can authorise the OEM factory to begin work safely. In case the trade mark is not registered before the production process begins then SMEs leave themselves vulnerable to IP piracy.
With a valid trade mark registration, SMEs can:
• Grant a license to the OEM factory. Whether the license is ‘exclusive’ (others cannot use the trade mark in China for as long as the contract lasts), ‘sole’ (only the licensee and SME can use it) or ‘normal’ (i.e., nonexclusive) depends on the negotiations and SMEs’ trust in the factory. Generally, a non-exclusive license is slightly safer as that it allows more freedom for terminating a contract and switching to a different factory. On the other hand, the OEM will have more power and more incentive to act against possible counterfeiters if it has an exclusive license.
• Record the trade mark with the General Administration of Customs (GAC – China Customs) and benefit from the Custom’s ex officio protection system, whereby officers survey the inbound and outbound flow of merchandise and warn SMEs of any suspicious shipments. After the warning has been issued, the SME has three days to confirm whether it is an infringement and ask for detention of the goods.
• Take enforcement measures against trade mark infringement. Only registered trade marks enjoy the exclusive right to prevent others from using, manufacturing, selling, storing, etc. products bearing identical or similar marks on identical or similar products without authorisation. The trade mark owner can either file an administrative complaint with the local Administration of Industry and Commerce (AIC) or file a lawsuit before the People’s Court. In general, administrative actions are time- and cost-effective, in particular if SMEs have a straightforward case. For complicated scenarios, or if you are seeking damages, using the courts is a better method.
In order to remain valid, a trade mark must be used. If not used for more than three consecutive years, the mark can be revoked. The OEM need only affix the trade mark to protect the mark from being revoked for non-use. In order to emphasize the function of trade mark, the revised Trademark Law stipulates that the use of trade marks consists in “affixing trademark on goods, packages or containers etc. … to distinguish the origin of the commodities”.
Don’t forget to register the design
Products manufactured by an OEM factory are usually made in accordance with specific drawings, blueprints etc., provided by the foreign company. It is also advisable to file in advance for the registration of design patents in order to protect these industrial designs.
SMEs should be aware that Chinese law requires that design patents be ‘novel’, which means the design must not have been disclosed anywhere in the world before the filing of the application. The registration of a design is a pre-condition for enforcing your rights in an event of an infringement. The European concept of unregistered design, which protects the owner for three years even if there is no registration and which allows a legal action against third parties who reproduce a design, does not exist in China.
Copyright is important in the OEM Industry
Chinese law protects copyright from the moment of the creation of the product. Some products produced via OEM may qualify for copyright protection, however, in China, standards for receiving copyright protection are quite high.
Although copyright is automatically granted, registration is possible and highly recommended to facilitate the submission of evidence of ownership of the copyright in case of a dispute or enforcement action. Copyright should be registered as early as possible as the courts tend to disregard registrations if they have been made after proceedings have begun. Registration of a copyright is a simple and low-cost procedure with the Copyright Protection Centre of China. Proving ownership of the copyright is crucial and will require preservation of original copies of all documents establishing the creation of the work (e.g. sketches, drafts, and various prior iterations of the work) as well as the contractual documents showing the chain of ownership over the rights.
Use contracts to protect your IP
OEM contracts, like all contracts, need to be properly drafted by legal professionals in order to avoid interpretation issues or omission of important points. IP-related clauses should definitely be included and carefully defined in the contract to protect your interests. To ensure these issues are addressed, before signing an OEM contract, some basic questions should be raised and should be discussed between the commissioner and the OEM factory to clarify, for example:
• Who owns the prototype produced by the OEM factory based on the design provided by the commissioner
• Who is responsible for final products infringing a third party’s IP (e.g. trade mark, design etc.)
• Handling of certain contingencies, for example if the factory does not destroy returned or flawed products and instead circulates them in market.
SMEs should require the candidate OEM factory to sign a Non-Disclosure Agreement (NDA) to maintain the secrecy of their business plan and IP information disclosed in conversations or email chains, etc. However, NDAs are not fool-proof and may fail to prevent information leaks or trade mark squatting. Registering IP before entering negotiations, let alone entering China, will be the key to avoid these issues in terms of trade mark and design protection. It’s recommended to ensure the appropriate protection of trade secrets and know-how via contractual and other means.
In order to mitigate IP risks in OEM contracts, the following points should be considered carefully:
Definition of the commissioned product: The definition of the product to be commissioned is a key element of the contract. It is absolutely necessary to define in meticulous detail the products that are to be produced by the OEM factory, including qualities and quantities. Designs or drawings, and in some cases moulds and toolings, should be checked or provided, and validated by the commissioner to confirm that products follow the specifications required.
Overproduction and defective products: In case of over-production, the contract should state that production shall be stopped and excess goods or defective goods shall be destroyed at the expense of the OEM factory unless the commissioner gives prior consent to purchase or stock them.
IP use and confidentiality: To prevent unauthorised use, contracts should determine to what extent the OEM factory is authorised to use the IP rights of the commissioner. This should include the use of designs, patents, trade marks and know-how. A monetary penalty for violation of the IP restrictions mentioned in the contract is often the best way to mitigate risks and can prevent the circulation of counterfeit or unauthorised products which ruin your brand reputation and credibility.
IP enforcement: In China, the licensee is considered an “interested party” and, as such, allowed to take action against infringers. Your agreement may specify that the OEM factory has a duty or right to survey the market and to take whatever actions are necessary. However, in an OEM relationship where all the products are exported, OEM factories are often not sufficiently proactive and may not monitor the domestic market for infringement.
Termination of the contract: is a key consideration. The contract must provide post-termination obligations, particularly in relation to inventory liability, continuity of supply, and records retention. For example, tooling disputes are among the most common sources of contention in manufacturing agreements. Manufacturers commonly refuse to return tooling unless compelled to by, for example, a significant lump sum penalty for such a refusal.
Arbitration vs. domestic courts: To resolve disputes between the commissioner and OEM factories, the parties have the choice between local courts or arbitration. To ensure that neutrality will be fully respected, SMEs are advised to choose arbitration. Arbitration centres used could be either abroad or in China. China now has arbitration centres capable of guaranteeing a fair arbitration trial, such as the China International Economic and Trade Arbitration Commission or the Shanghai International Arbitration Commission. The parties involved may also agree on an arbitration centre located outside of China without legal issues as China is a member of the New York Convention and arbitration awards granted by foreign arbitration centres are enforceable in China.
China IPR SME Helpdesk
The China IPR SME Helpdesk supports small and medium sized enterprises (SMEs) from European Union (EU) member states to protect and enforce their Intellectual Property Rights (IPR) in or relating to China, Hong Kong, Macao and Taiwan, through the provision of free information and services. The Helpdesk provides jargon-free, first-line, confidential advice on intellectual property and related issues, along with training events, materials and online resources. Individual SMEs and SME intermediaries can submit their IPR queries via email (email@example.com) and gain access to a panel of experts, in order to receive free and confidential first-line advice within 3 working days.
The China IPR SME Helpdesk is co-funded by the European Union.
To learn more about the China IPR SME Helpdesk and any aspect of intellectual property rights in China, please visit our online portal at www.ipr-hub.eu/