OEM activities in China do not amount to trademark infringement

In Insights, Uncategorized

8 February, 2016

The PRC Supreme People’s Court has decided that OEM activities in China do not amount to trademark infringement (however, this does not seem to be the final word on the issue)

A foreign brand owner has registered its mark in a foreign country, but not in China. Another unrelated entity has registered the same or similar mark in China. Would a Chinese manufacturer be liable for trademark infringement in China if it manufactures in China solely for export purpose products bearing the foreign registered mark upon the authorization of the foreign brand owner?

Although in recent years, there have been more and more cases where the courts ruled that in the above original equipment manufacturer (OEM) scenario the Chinese manufacturer is not liable for trademark infringement, the position has not been clear. The law does not offer a definite answer and different courts have decided the issue differently. The Supreme People’s Court (SPC) had never ruled on this issue. In November 2015 its judgment in the “PRETUL” case was made. The judgment was long awaited as it was expected to offer some guidance on the issue.

TRUPER SA is a Mexican company and it has registered the marks “PRETUL” or “PRETUL & oval device” in Classes 6 and 8 etc. in different countries including Mexico. In China, an individual registered the mark “PRETUL & oval device” in Class 6 in 2003 and assigned this registered mark to Focker Security Products International Limited (Focker) in 2010.

TRUPER SA entrusted Zhejiang Pujiang Yahuan Locks Co, Ltd (Yahuan) to supply and produce goods bearing the marks “PRETUAL” and “PRETUL & oval device” and the goods were only for export to Mexico. Focker sued Yahuan for trademark infringement.

Both the Ningbo Intermediate People’s Court at the first instance and the Zhejiang Higher People’s Court at the second instance ruled against Yahuan. Both courts ruled that Yahuan’s use of the marks was trademark use and the marks and the goods are similar to those of Focker’s registered mark in China.

Yahuan requested the SPC to retry the case. The SPC overturned the previous judgments and found that there was no trademark infringement. The SPC considered that trademark use as referred to in the Trademark Law means use of the trademark for identifying the trade origin. The SPC ruled that the products were only for export to Mexico and were not sold in China and therefore the signs used on the products would not cause confusion in China and would not perform the identifying function within China. The affixation of the signs on the products cannot be regarded as trademark use. The SPC stated that if a trademark does not perform the identifying function and its use is not trademark use, it would not be meaningful to determine if the marks and goods involved are identical/similar.

One issue which the SPC did not deal with is the allegation that the Chinese registration by the individual was made in bad faith because that individual was a shareholder and officer of a supplier of TRUPER SA.

There is no case law (stare decisis) in China, so the courts are not bound to follow the SPC’s judgment, although it is expected that the courts would tend to follow the SPC judgment. This judgment may therefore help foreign brand owners who do not manage to register their marks in China, but want to have their products manufactured in China.

Further, how the courts decide on the issue would depend on the facts of the case and the courts may depart from the judgment of the SPC, if distinguishing facts are found. The Jiangsu High People’s Court, for example, has recently decided differently from the SPC. In that case, the Jiangsu High People’s Court, though recognizing that the activity involved is OEM manufacturing, ruled that there is infringement because the OEM manufacturer should know that the Chinese registered trademark is a well-known mark and the foreign brand owner may have hijacked the Chinese trademark and registered the same in the relevant foreign country (though the relevant authority in the foreign country has decided that the registration is valid). Based on this judgment, the OEM manufacturer has the burden to ensure that the company entrusting it with the manufacturing has the rights to do so.

Commentators have taken the view that the “PRETUL” case still needs to be explored regarding the legal questions surrounding OEM activities and the “PRETUL” case does not represent the final complete opinion of the SPC on OEM. It would be interesting to see how the jurisprudence evolves with further OEM decisions from the courts. It would also be interesting to see whether and how administrative trademark enforcement authorities such as AIC and Customs would be affected by the SPC judgment.  A simplistic pro-OEM approach can be a double-edge sword as this may not be favourable to foreign brand owners who have trademark registrations in China, but would like to stop the manufacture in China of counterfeits by foreign counterfeiters who have registered the marks in the exported countries.

Rhonda Tin, Counsel

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