Managing original equipment manufacturing (‘OEM’) suppliers by brand owners is not an easy process. Typically, contract supply agreements support more control over the production than license agreements do, with the latter generally more permissive. For example, licenses are used in the electronic components industry, whereas supplier agreements are often used for car parts. Careful management of OEM suppliers and licensees is needed, not only under the contract but also through physical and business processes (such as auditing and inspections). Key risks that an OEM manufacturer might expose the licensor to include unauthorised overproduction in breach of an agreement and/or continuing production well after authorisation is terminated. This article shares best practices on how brand owners can use the China Administrative IP enforcement system to deal with such unlawful behaviour. The article highlights a timely and cost-effective approach that can be used to achieve deterrence so operators can have confidence in continued manufacturing investment in the PRC.
In a recent case, the brand owner was a leading electronics component designer of parts for consumer electronics devices. The firm has a global network of manufacturers, sub-manufacturers, and supply chain parties carrying out production, testing, reselling, and installation, all following the brand owner’s specifications and trade mark rules.
Rouse’s China team led a series of cases involving bad faith ex-manufacturers, terminated by a brand owner for not complying with annual audits. The terminated manufacturers were found to have continued manufacturing products with the brand owner’s specifications and logos. Through investigations, it was even discovered that some ex- manufacturers were supplying current manufacturers.
While it seems apparent that producing and selling products bearing the trade marks of a brand owner without authorisation is straightforward intellectual property infringement, law enforcement authorities have been reluctant to act against ex-OEM suppliers due to the complexities behind such disputes, namely:
In a recent case, the Administration of Market Regulation (AMR) conducted a raid against a significant ex-licensed manufacturer in Dongguan, Guangdong, in April 2022, seizing 4530 electronic parts. The successful raid came after several rounds of face-to-face meetings with the AMR. Several key arguments were made:
On 8 June 2022, less than two months after the raid, the AMR issued a Punishment Decision (“PD”) deciding on trade mark infringement, confiscating the infringing goods, requesting cessation of infringement, and imposing a fine of RMB50,000 (USD7,246). Again, the efficiency of the AMR in concluding the case was evident.
With the precedent PD, the brand owner has been able to directly use evidence fixed by the authority to seek civil damages from the ex-manufacturer. More importantly, the PD can be served as either a good referential precedent to enforcement authorities in or outside Dongguan. It acts as a deterrent to existing or potential licensed suppliers from operating in an illegal manner.
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