China Trademark: SPC reverses its precedent on original equipment manufacturing
Original equipment manufacturing in China is a very popular business model in which an overseas company engages a Chinese domestic manufacturer who is typically called an original equipment manufacturer (OEM) to manufacture products based on the instructions and requirements of the overseas company, label the overseas company's trademark on the products, and export all products to an overseas destination designated by this overseas company. This business model has thrived for decades and helped China become the world's factory. However, a dispute frequently arises when the Chinese OEM labels a foreign trademark which has been registered in China by a third party.
Neither statutory law nor official judicial interpretation in China provide a definitive solution to the issue. At central level, rulings made by China Supreme People's Court (SPC) evolved over years, while the Chinese courts in localities made contradictory rulings.
On November 26 2015, the Supreme Court reversed the judgment rendered by the appellant court in Focker Security Products International Limited v Pujiang Ya Huan Locks Co. Ltd [Min Ti Zi No.38/2014]. In this case, the plaintiff owned the registered Chinese mark "Pretul & Device", while the defendant had been engaged by a Mexican company who owns registered mark "Pretul" and "Pretul & Device" in Mexico to manufacture the products under the model of OEM manufacturing. The products were exported to Mexico directly without any local sales in China. Declining local courts' holdings in favour of the plaintiff, the SPC found that whether or not the function of trademarks has been damaged is the foundation for determining whether or not the trademarks have been infringed. Given that the products labelled with the mark "Pretul" were all exported to Mexico without local sales in China, the SPC concluded that rather than having the function of identifying the origin of the goods and distinguishing the goods from others within the territory of China, the attachment of the "Pretul" trademark in China was only a physical attachment in China, which provided necessary technical preparations for proper functioning of the trademark registered in Mexico, and would not cause public confusion in the relevant Chinese public. Therefore, labelling the mark on the products does not constitute a trademark use in the context of Chinese trademark law, let alone constitute an infringement.
In December 2017, in Shanghai Diesel Engine Co. Ltd v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd [Zui Gao Fa Min Zai No. 339/2016], the SPC further reiterated its position but added a "reasonable duty of care" test. In this case, the plaintiff owns the "Dong Feng" mark registered in China. The defendant was engaged by an Indonesian company who had registered an identical mark in Indonesia. The SPC held that unless 1) the OEM accepted the engagement without reasonable duty of care; and 2) OEM's activities had caused substantial damage to the trademark rights of the plaintiff, trademark infringement could not be established.
Interestingly, by handing down a judgment in Honda Motor Co., Ltd. v. Chongqing Hengsheng Xintai Trading Co., Ltd. et [Min Gao Fa Zai No. 138/2019] (Honda) which was published on October 14 2019, the SPC changed its position. In Honda, the plaintiff who owns a series of "Honda" trademarks registered in China claimed that the defendant's act constituted trademark infringement by affixing the mark "Honda" on motorcycle parts that the defendant manufactured and exported.
The defendants argued that, engaged by a Myanmar company to manufacture the goods, they affixed a Myanmar registered trademark "Hondakit" based on OEM manufacturing. Following the above-mentioned SPC rulings, the appellant court found that since all the products were to be exported to Myanmar, the plaintiff's act did not constitute the use of a trademark in the context of the Chinese Trademark Law, and thus infringement was not established.
Surprisingly, the SPC reversed the appellant court's judgment. Its view is summarised as follows:
Whether an act constitutes the use of a trademark in the context of China trademark law should be interpreted in accordance with trademark law as a whole. When a trademark is used on manufactured or processed products by labelling or other means, as long as there is a likelihood of distinguishing the origin of the goods, this should be deemed as the "use of a trademark" in the context of China trademark law.
To determine the confusion caused among the relevant public, the court should interpret the "relevant public" broadly, which should not only include consumers but also business operators related to the products, for instance, the operators involving in transporting the products. In addition, with the growth of e-commerce and the internet, exported products may later return to China and Chinese consumers are likely to have access to these products. In particular, Chinese consumers may access the exported products and become confused when travelling abroad. In other words, products involved in an OEM manufacturing can still be accessed by the relevant public in PRC.
To determine the confusion, the court should test "likelihood of confusion", which means that neither actual access to the exported products nor the occurrence of actual confusion is required to establish a trademark infringement.
The SPC eventually concluded that the defendant's use of "Hondakit" should be deemed as "use of a trademark". Given that the mark is similar to the plaintiff's registered trademark in China and there is a likelihood of confusion, the plaintiff's activities constituted trademark infringement.
In response to the rise and growth of China's new economy, this recent ruling may indicate the policy trend which will be adopted in future rulings. The courts may no longer presume that OEM manufacturing is an exception to trademark infringement. Such change will make a Chinese OEM and its foreign principal increasingly difficult to defend in lawusits concerning OEM manufacturing, which will ultimately cause substantial uncertainty about the outcome of lawsuits, and may discourage adoption of the OEM manufacturing model.
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