Brand owners have welcomed a ruling by China’s Supreme People’s Court (SPC) that marks a turning point for trademark enforcement against those producing and exporting counterfeit goods.
The SPC diverged from previous decisions regarding trademark infringement involving original equipment manufacturers (OEMs).
In Honda Motor v Chongqing Hengsheng Xintai Trading, Honda, the owner of ‘Honda’ trademarks in class 12 in China, sued the defendants Hengsheng Xintai and Hengsheng Group. They had allegedly accepted an OEM order from a Myanmar business, Meihua Company, to manufacture 220 sets of motorcycle parts and export them to Myanmar bearing a mark similar to the ‘Honda’ marks in China.
Meihua is the licensee of a registered Myanmar trademark ‘Hondakit’ (in lower case) in class 12. However, the parts manufactured in China were bearing a trademark ‘HondaKit’, where the word ‘Honda’ was highlighted in red capital letters, unlike the simple word mark ‘Hondakit’ (in lower case) in Myanmar.
The SPC, on October 14, found that the link between Meihua and Hengsheng was that of an OEM arrangement. Under Chinese law, trademark use under such an arrangement during the processes of manufacturing and attaching trademarks in factories in China is allowed. The court had to determine whether there was trademark infringement as a result of confusion among the public in China.
Test in law
The standard to determine confusion in trademark use also includes operators of businesses related to the products. Products involved in an OEM arrangement can still be accessed by the public either online or when travelling abroad. The court focused on the test for likelihood of confusion, rather than actual confusion or actual access to the products.
In previous decisions – the Pretul (2017) and Dongfeng (2015) cases – the SPC gave favourable rulings to OEMs because products were exported.
After the Honda case, OEMs may face infringement liability even if they are licensed by foreign clients to manufacture for export purposes only. As long as the Chinese rights holder can prove that the affixing of the marks has the ability to create confusion among the public in China, the OEM will have infringed under Chinese trademark law.
According to Frank Liu, senior IP manager at Emerson Electric based in Shanghai, the longstanding issue of foreign-related OEM processes being excluded from trademark infringement under Chinese trademark law has been the cause of constant infringement problems in the processing of goods by OEMs.
“In previous cases such as Dongfeng, the SPC indicated that unless there is evidence to show that the OEM enterprise failed to fulfil a reasonable duty of care, it should not be deemed as infringing the domestic trademark owner’s rights,” says Liu.
According to Paul Ranjard, partner at Wanhuida Intellectual Property in Beijing, under article 48 of China’s trademark law, which defines use of a trademark, the words “indicating the source of goods” are included. Ranjard says that the Pretul reasoning, triggered by these last words, avoided one simple question: if the trademark affixed to the goods does not fulfil the function of indicating the source of the goods because of exportation, what other function does it fulfil?
“This is precisely what the SPC explained in the Honda case: the act of affixing the mark to the goods creates both the effective indication of origin of the goods and the possibility of indication of origin of the goods,” says Ranjard. “This new decision is a strict application of the trademark protection principles.”
Tough on OEMs
Ranjard adds that it may seem like bad news for those who have been using OEM manufacturing in China without owning the corresponding trademark. However, in cases where they are prevented by a third-party trademark owner from obtaining the exportation of the goods, they might have some arguments if they can demonstrate the bad faith of such third parties. The SPC established the principle that a trademark that was filed in bad faith should not be enforced.
According to an in-house counsel at an international company, from 2006 to 2009 there were three draft amendments targeting OEMs from being engaged by foreign traders to make counterfeit goods. “However, due to the 2008 global financial crisis and economic downturn, all these articles were removed from the drafts,” says the in-house counsel.
The head of IP of a fashion brand adds: “Judicial policies to help promote export trade came out and court decisions shifted from infringement to non-infringement based on the man-made rationale that as long as the goods are to be exported, the Chinese consumers would not have access to the goods.”
He continues: “The Honda decision fundamentally changes the old and wrong views and brings issues on OEMs back on the right track.”
For brand owners, the ruling is favourable as it has shaken up what was established in the Pretul and Dongfeng cases. OEMs can no longer rely on the reasoning that exported products won’t cause confusion in China in order to skirt trademark infringement.
