Much has been written about the role of China as the world's factory and the importance of original equipment manufacturing (OEM) to China's economy. The uncertainty created by the divergent approaches taken by the various Chinese judicial and administrative authorities in relation to the question of whether the use of trademarks on OEM products intended exclusively for export constitutes trademark infringement has caused concern for trade mark owners.

PRETUL

The recent judgment of the Supreme People's Court (SPC) on 26 November 2015 in the "PRETUL" case (Focker Security Products international Limited v Pujiang Ya Huan Locks Co. Ltd – 2015) ended a 4-year battle over the "PRETUL" mark. The judgment has been hailed as a landmark decision, confirming that OEM use of a trademark on goods made solely for export is not an act of infringement. The SPC, relying on the definition of trademark "use" in Article 48 of the Trademark Law (amended in 2014 to include the words "to indicate the source of the goods"), reiterated that the essential function of a trademark is to distinguish the goods and services of one undertaking from another and to identify the source of origin of the goods and services. Since the "PRETUL" mark had been applied to goods designated exclusively for export, it had never served as a badge of origin to Chinese consumers and did not cause any confusion, so there could be no infringement.

The decision has not been without its critics, regarded by some as a double-edged sword which could actually open up a loophole for trademark pirates to export counterfeit goods with impunity by obtaining registrations in another jurisdictions and manufacturing the goods in China for export to those countries. Concern that the logical extension of the decision is that legitimate trade mark owners will be unable to prevent counterfeit products from being exported is understandable. However, fears that the PRETUL decision will be applied broadly may be unfounded. It seems that the Chinese courts may simply be taking a pragmatic, fact-specific approach to try to achieve substantial justice in each case. According to PRETUL, there should be no infringement in situations where:

  • the OEM was authorised to make the products by a foreign trademark owner with valid, prior trademark rights in the country of destination;
  • the OEM had exercised a reasonable duty of care in verifying the IP rights of the foreign purchaser;
  • the products made in China are intended solely for export and are not sold in China.

Historically, the majority of cases involve trademark owners based in foreign countries who do not have trademark registrations in China, either because the mark has already been registered by another party, or China is merely the place of manufacture and they do not intend to put their products on the Chinese market. Such owners need to be able to source their products through OEM factories without being sued and it seems clear that the majority of trademark owners with such "pure" OEM arrangements should take comfort from the decision.

DONG FENG

The PRETUL case did not give rise to the view that all OEM cases would automatically be subject to a "no infringement" rule. The SPC emphasized that the specific facts and circumstances of the PRETUL case were key to its decision. The recent "DONG FENG" case (Shanghai Diesel Engine Co.Ltd v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd – 2015) is an illustration that other factors will be taken into account by the courts. In the DONG FENG case, decided barely 3 weeks after PRETUL, the Jiangsu High Court overturned the decision of the non-infringement by the Changsu Intermediate Court, finding that the OEM factory had committed trademark infringement.

The relevant trademark "DONG FENG and Chinese Characters" was recognized as a well-known trademark in China. The Indonesian consignor registered an identical mark in India in 1987 and engaged Changjia to produce goods bearing the "DONG FENG" mark for export to Indonesia. The Jiangsu High Court concluded that Changjia had not exercised reasonable due diligence by properly verifying the trademark rights of the foreign purchaser. In this case, the OEM factory should have known that the Chinese registered mark is a well-known mark and the Indonesian trademark owner had acted in bad faith.

The Jiangsu High Court appeared to have taken the further step of extending the ambit of the reasonable duty of care to be exercised by the OEM company beyond having to verify the lawful trademark rights owned by the consignor; the OEM company was also required to be aware of that the trademark was well-known in China and to raise queries as to whether the Indonesian trademark had been registered by the consignor in bad faith. On a careful reading of the decision it seems that:

  1. The OEM company should exercise reasonable due diligence to verify whether the consignor has a registered trademark or has obtained a proper licence. If such a duty is not fulfilled, the OEM would be at fault and should bear the civil liability.
  2. However, the OEM company may be subject to a higher duty of care in certain circumstances. If the foreign consignor has pre-emptively obtained a trademark which is well-known or highly reputable in China in bad faith, and engaged an OEM company in China for production of products bearing the well-known mark, then this is an "unjustifiable" act. Therefore, if the OEM company knows, or should know, that the trademark is well known or reputable in China and still engages in the OEM arrangement, then the OEM would be at fault.

Accordingly, rather than imposing an additional duty on the OEM company to verify whether or not a mark is well-known, it seems that it will depend on the facts of the case as to whether the OEM should be fixed with "constructive knowledge" of the consignor's bad faith.

According to the Chinese Trademark Law, the question of bad faith is not technically relevant to the issue of infringement; any unauthorised use of the mark should be regarded as infringement. The court's consideration of bad faith in DONG FENG allowed it the flexibility to distinguish the case from the circumstances of PRETUL and indicates that the Chinese courts will not rigidly apply existing principles and that each OEM case should be considered on its own facts.

Of course, it has been noted that DONG FENG involved a Chinese well-known trademark and some have queried whether the same decision would have been reached if the relevant mark had been a foreign trademark that was only well-known internationally. Indeed, would bad faith be sufficient if the relevant mark was not well-known, either in China, or the country of destination of the goods? This remains to be seen, but the courts do seem to be trying to strike a balance between the unavoidable economic interest of preserving business opportunities for Chinese manufacturers, and the rights of trademark owners both domestic and foreign.

Customs

One current unknown is the approach that will be taken by Customs in light of these decisions. If OEM use is not trademark infringement, then some trademark owners are concerned that Customs may no longer have grounds to seize suspected counterfeit products that are intended for export only. Deacons has been in contact with Customs on this issue and the preliminary feedback is that there are some new draft internal guidelines in light of the SPC decision but these have not yet been officially implemented. However, in the interim, it seems likely that the Customs offices will follow the SPC decision and take the view that there is no infringement in pure OEM cases. Therefore, if the OEM company can adduce all the necessary documents to prove all goods are for export and that the proper authorization has been obtained, then Customs will not detain the goods.

It is still not clear whether there will be scope for first detaining the goods and then only releasing upon submission of relevant evidence to prove OEM on behalf of a legitimate trademark owner. This would be inconvenient in some cases but would at least offer some comfort to those trying to prevent the export of counterfeits. We are still following up with our contacts on this point.

Non-use cancellation

The SPC decision in PRETUL has also re-opened the inevitable debate over what constitutes valid trademark use and whether OEM use is sufficient to defend a non-use cancellation case. Before the SPC decision in PRETUL, most trademark owners have relied on the ruling of Beijing Higher People's Court in the "SCALEXTRIC" case (Hong Bi Fu Bi Co Ltd v Trademark Review and Adjundication Board -2015) in 2010 where public policy was key factor. In SCALEXTRIC, the court ruled that, although the OEM products bearing the mark were not sold in China, it would be unfair and conflict with China's foreign trade policy to revoke the registrations for non-use.

Similar conclusion was reached months before the SPC decision in PRETUL. In the "DCLSA" case (Zhenjiang Locks Factory Co. Ltd. v Trademark Review and Adjudication Board – 2015), the goods manufactured by Zhenjiang Locks Factory Co. Ltd. ("Zhenjiang Locks") were not sold in China, but were merely exported for sale. The Beijing IP Court was satisfied that the act of mere export for sale was sufficient to defend a non-use cancellation as the act of sale between Zhenjiang Locks and the overseas importer took place in China. Overseas importers would be able to distinguish the origin of goods based on the Chinese exporters' trademarks. The Beijing IP Court also gave further explanations that such recognition would be important to provide the trademark protection stipulated under Madrid Protocol and Madrid Agreement.

The SPC decision in PRETUL has the potential to influence the outcome in similar non-use cancellation proceedings. The logical conclusion of PRETUL would be that, if OEM use is not use in the context of infringement, it cannot defend against cancellation for non-use.

However, Deacons has recently represented a client in a non-use cancellation action where only evidence in relation to OEM activities in China was submitted. The Beijing IP Court rendered a decision, shortly after the SPC decision in PRETUL, confirming that OEM use is sufficient in defending non-use cancellation. The IP Court emphasized that the legislative purpose of a non-use cancellation action is to encourage genuine trademark use and prevent trademark resources lying idle. Although the OEM products were not sold in China, the IP Court recognised that the registered mark is being actively used in the course of manufacturing activities. The IP Court also echoed the findings in SCALEXTRIC that such a decision is fair and consistent with the national policy of developing foreign trade.

However, the IP Court imposed strict requirements in relation to the evidence submitted. For example, the purchase orders, invoices and customs declaration forms submitted had to establish a complete chain, from the initial production order, to the export of the products. The authenticity of the evidence had been verified by an independent source to the satisfaction of the IP Court that there was genuine and bona fide use of the trademark rather than token use. Apart from the normal hearing, the IP Court also convened a special inquiry session where the parties were allowed to make further submissions, in particular, on the OEM issues.

The IP Court's decision is currently pending appeal, so we will report further as soon as there are more developments in the case. In the meantime, we are encouraged that our client's case and the recent decisions, indicate a fluid approach being taken by the courts in relation to OEM cases to achieve a fair result.