Does original equipment manufacturing constitute use of a trademark?
Echo Xu of Kangxin examines a number of cases which consider whether original equipment manufacturers are “using” a trademark when they affix it to a product which will be exported from China
The dispute regarding the use of a trademark concentrates on OEM manufacturing exclusively for export from China. What constitutes "use" of a trademark in China? The definition of "use" of a trademark can be found in Article 48 of China's Trade Mark Law. Use of trademarks as stipulated in this law refers to the "affixation of trademarks to commodities, commodity packaging or containers, as well as commodity exchange documents or the use of trademarks in advertisements, exhibitions, and for other commercial activities, in order to identify the source of the goods." However, OEM (original equipment manufacturer) is not a legal concept, but rather a form of international processing trade. OEM generally refers to an arrangement whereby domestic production and processing enterprises are directly entrusted by an overseas ordering agent, and all the OEM products produced and processed are delivered to the designated agent and subsequently sold abroad instead of in the Chinese market. The issue of trademark infringement in the context of OEMs is whether the act of domestic production and processing enterprises attaching the same or similar trademarks to the owner of a Chinese registered trademark's same or similar goods can be deemed "use" and therefore constitute trademark infringement.
The recent Supreme People's Court judgment of Honda Motor Co.,LTD v Hengsheng Xintai Co.,LTD & Hengsheng Group Co.,LTD (hereinafter referred to as the Honda case) delivered in October 2019 has brought this important issue back into the public spotlight. Right at the outset we should state that the view held in Honda was different from both the Supreme People's Court judgments in the Pretul case (2015) and 东风 case (2017) respectively. The judgment in Honda deems the use of a trademark in OEM manufacturing exclusively for export as infringement, while the previous views did not treat it as "use of a trademark" in the context of Chinese trademark law and therefore not constituting trademark infringement.
Judgments in favour of OEMs
Prior to the delivery of the Honda judgment, our law firm received a favourable judgment from the Shanghai Pudong New District People's Court in September 2018 in the context of OEM manufacturing exclusively for export. We filed two cases on behalf of our client, who has a registered trademark in America. Its products are manufactured in China and all the products manufactured are imported from China. We filed one case to confirm non-infringement and the other to seek compensation on behalf of our client regarding OEM goods detained by customs against the owner of the non-bona fide registered trademark in China. The office of customs in Shanghai requested the non-bona fide owner of the registered trademark to respond and take certain further actions but they ultimately failed to respond. We therefore secured the case and goods of our client and it was confirmed that our client did not infringe the registered trademark in China. Thus, it was held that our client's action of exporting its own products did not constitute trademark infringement. This in turn put us in a stronger position in relation to our claims for compensation which put the non-bona fide owner under intense pressure. The non-bona fide owner of the Chinese trademark agreed to transfer the trademark to our client. The position held by the judge in this case with respect to OEM matters is the same as the cases of Pretul (2015) and 东风 ( 2017).
Regarding the case of Pretul in 2015, the Supreme People's Court held that the Truper Company is the owner of the "Pretul" trademark in Mexico. The Yahuan Company was entrusted by the Truper Company to produce rocks bearing the "Pretul" logo in China and all the products would be exported to Mexico, not sold in China (i.e. they were not for the domestic China market). That meant the logo on the products did not work to identify the source of the goods in our country, with no possibility of causing confusion with Focker's products (the owner of the registered trademark in China) in the relevant public. The trademark served to distinguish the source of goods or services, and its basic function was identification. The action of the Yahuan Company to use "Pretul" with the authorisation by the Truper Company is merely a physical attachment, which provides the necessary technical conditions for the use of the trademark in Mexico where Truper has the exclusive right to use the trademark. Such action does not have the function of identifiying the source of the goods in China. Therefore, despite authorisation being given for the logo on the products produced by Yahuan, this was held not to serve as identification of the source or origin of the goods and thus the action of attaching the logo even with authorisation could not be considered as use of trademark in the context of China's trademark law.
With respect to the case of 东风 in 2017, the Supreme People's Court held that the Changjia Company was commissioned to produce diesel engines and its components for the PTADI company, the owner of "东风" trademark in Indonesia. In terms of the OEM arrangement , all the products bearing the "东风" logo would be exported to Indonesia. The logo on the goods identified with the PTAD Company during the processing and exporting did not affect the Chinese registered trade mark's normal function of identification and would not lead to confusion and misidentification by the relevant public in the domestic market. Considering OEM is a common and legal form of international trade, unless there is contrary evidence to prove that the ChangJia Company did not dispense with its duty of reasonable care by accepting the commission, and subsequently causing substantial damage to the Chinese registered trademark's rights, such actions in general should not be deemed as trademark infringement
It can be seen in the case of 东风 that the Supreme People's Court essentially held the same perspective as in the Pretul case. That is the marks on products regarding OEM were connected to the trademark owners overseas who had entrusted the appropriate manufacturer to produce the goods in question. Further, such use of trademarks would not affect the normal recognition and differentiation function of the registered trademark in the domestic market. Furthermore, the judges of the 东风 case also held that whether the trustee in the OEM has fulfilled a reasonable duty of care should be taken into consideration as well as and whether substantial damage has been caused to the domestic trademark owner.
With the above two cases issued by the Supreme People's Court as a reference point, and considering that OEM processing is an important component of China foreign-related processing trade, foreign OEM processing behaviour is not regarded as trademark infringement in general, though the court will hear each case according to its own facts and circumstances.
However, the trend regarding OEM manufacturing cases and disputes may change after the Honda case issued in 2019, where the Supreme People's Court treated foreign OEM processing behaviour as trademark infringement. Below are the main reasons offered by the Supreme People's Court in that case.
The court considered that the use of trademarks is objective, usually including many aspects, such as physical attachment, market circulation and so on. Whether it constitutes use in the context of trademark law should be explained in a consistent way according to trademark law. The use of a trademark means a trademark is applied to the goods, which may or may not conform to the common intention of the provider of the goods and the owner of the trademark. The combinations of the trademark and the goods must serve as a way to identify the source of the goods for consumers. Some may enable consumers to correctly identify the commodity source, but in other circumstances it could also cause consumers to misidentify the goods' source. This phenomenon is complex, but this kind of use should be recognised as use of a trademark and governed by trademark law. Therefore, use of a trademark on a manufactured or processed product shall be deemed to be use of a trademark in the context of China's trademark law, as long as there is the possibility of distinguishing the source of the commodity.
The court also considered that in addition to the consumers of the infringing products the relevant public should include operators closely related to the marketing. It is possible that the operators of the various links, such as those involved in the transportation of infringing goods, have access to the infringing products. Moreover, with the development of e-commerce and the internet, even if the goods accused of infringement are exported to foreign countries, it is entirely possible for them to return to the country of manufacture for consumption. With the continuous development of China's economy, a large number of Chinese consumers go abroad for travel and consumption, and there is also the possibility of contact and confusion of goods relating to OEM.
Although China is not a country based on and bound by case law principles like other jurisdictions, it is still actively exploring and gradually establishing a case guidance system to avoid similar cases with different outcomes. Therefore, the Honda case may play a guiding role in judicial practice and customs enforcement of similar cases all over the country in the future. However, due to the differences in the local economy, judicial environment and special factors of each case, the actual circumstances may be a little different for each case, which should protect honest operators by directly going through the superficial form and grasping the nature of trademark use.
Echo Xu specialises in litigation relating to trademark infringement, and can assist clients in developing IP strategies in China, IP investigation, IP administration, unfair competition, arbitration and protection from customs. She also offers anti-infringement services to clients.
Before joining Kangrui Law Firm (Kangxin Partners) in 2018, Ms Xu worked at other intellectual property-oriented law firms for about seven years where she gained abundant practical experience in IP litigation and familiarity with IP-related judicial proceedings.
Ms Xu obtained her Master of Law degree from Beijing Institute of Technology and was admitted as a lawyer in China in 2014.