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:

• Such disputes are often more a breach of contract, which is regarded as better solved between both parties privately rather than through the government authority’s involvement.
• It is also sometimes partly the fault of brand owners who fail to manage their supply chain well. Some brand owners fail to renew the authorisation and supplier contracts in time as they expire, but suppliers continue to manufacture as they are orally or impliedly authorised by the brand owner. There are also times when authorised sub-contractors, for unknown reasons, fail to be on the whitelist of legitimate suppliers held by the brand owner. These situations lead to enforcement authorities raiding the wrong targets, a mistake no authority wishes to make a second time.
• An even more troublesome scenario from the authority’s point of view is when a brand owner makes a complaint to the enforcement authority against an ex-OEM supplier for trade mark infringement after the termination of authorisation. Yet, their real and ultimate purpose is to force the ex-OEM supplier back to the negotiation table to reach a new agreement. It means that enforcement authorities then find they must dismiss a case after a raid based on the brand owner’s further submission of statements explaining that they have settled the issue with the supplier privately and that verify/confirm in retrospect that the goods seized in the raid are genuine. Such is a clear waste of official resources, and brand owners have been asked not to use them as a tool/weapon for private business disputes.

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:

• The AMR has the power and duty to investigate trade mark infringement, regardless of the contractual issues between the two parties.  
• An offer of full support to the AMR in guaranteeing the illegitimacy of the current production. The brand owner undertook not to consider extending any authorisation to the ex-manufacturer before a punishment decision is made against and executed by the ex-manufacturer. Then the ex-manufacturer had no way to avoid a penalty for their infringement activity.
• It is common practice that the Dongguan AMR rarely allows brand owners or their agents to attend raids due to safety risks. The brand owner expressed their concern about the lack of transparency. After discussions, the AMR allowed a team from the brand owner to be present in the factory during the raid for assistance. This was critically important when the target provided contracts and authorisation papers (which had turned out irrelevant to the current case). Explaining the contractual issues in real-time to the AMR officials was vital; otherwise, the AMR probably would not have seized the goods.
• After the raid, the AMR had internal conflicting opinions about whether trade mark infringement could be established. However, providing legal analysis and opinions and precedent cases gave them the confidence to proceed.

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.

For more information about Rouse’s enforcement service please contact enforcement@rouse.com

TAGS

• enforcement
• Trade Mark Infringement
• CHINA