Introduction

On November 26 2015 the Supreme People's Court rendered a civil judgment (Civil Retrial 38/2014) which ended the four-year legal battle over the PRETUL trademark. The case centred on a trademark infringement suit brought against an original equipment manufacturer (OEM) for exported products.

The Supreme People's Court affirmed that the OEM's use of the trademark at issue did not constitute trademark infringement, because it did not qualify as 'trademark use' under Article 48 of the Trademark Law 2013. The Supreme People's Court thus overruled the findings at first instance (before the Ningbo Intermediate Court) and second instance (before the Zhejiang High Court).

Facts

On January 17 2002 a natural person, Xu Haorong, applied to register the combination trademark PRETUL (and device) in Class 6, covering the goods "fittings of metal for furniture, padlocks, locks of metal, other than electric". The mark was registered (Registration 3071808) on May 21 2003 (see Figure 1 below). On March 27 2010 it was assigned to Focker Security Products International Limited, a company incorporated in Hong Kong.

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Figure 1

Truper Herramientas, SA De CV was a Mexican manufacturer and dealer of hardware tools. Truper owned the trademarks PRETUL and PRETUL (and oval device), registered in Mexico and many other countries in Classes 6 and 8 (see Figure 2 below).

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Figure 2

Pujiang Yahuan Locks Co, Ltd (Yahuan) was a manufacturer of copper and iron padlocks in Zhejiang Province, China.

In 2010 Truper signed OEM contracts with Yahuan to manufacture padlocks bearing the PRETUL marks. The products (padlocks, keys and product specifications) bore the PRETUL trademark, while the packaging bore the PRETUL (and oval device) mark.

In December 2010 and January 2011 Focker applied to Ningbo Customs for the interception of two batches of padlocks exported by Yahuan, destined for Mexico. The shipment was detained on January 13 2011. On January 30 2011 Focker filed suit against Yahuan before the Ningbo Intermediate Court on the grounds of trademark infringement.

On March 24 2011 Truper issued a statement declaring that, as the legitimate holder of the registered PRETUL mark in Mexico, it had authorised Yahuan to manufacture – on an OEM basis – the padlocks bearing the PRETUL mark, all of which were to be exported to Mexico.

Before the court, Yahuan claimed that since the accused goods were intended solely for export to Mexico without domestic distribution in China, the trademark was not used in the sense stipulated in the Trademark Law; as such, no confusion or misunderstanding could be caused among Chinese consumers. Therefore, Focker's trademark rights had not been infringed.

On July 23 2012 the Ningbo court rendered judgment in favour of the plaintiff. The court dismissed Yahuan's argument concerning exports, citing Article 3 of the 2002 version of the Implementing Regulations of the Trademark Law(1) and affirming that Yahuan's use of the PRETUL and PRETUL (and oval device) trademarks clearly constituted trademark use in the sense of the Trademark Law. However, a distinction was made between the mark PRETUL (and oval device) used on the packaging and the word mark PRETUL used on the goods. Only the first of these was considered an infringement. The court ordered Yahuan to immediately cease using the infringing PRETUL (and oval device) trademark on the packaging and pay Focker a sum of Rmb50,000. Both Focker and Yahuan appealed to the Zhejiang High Court.

The appeal court rendered its judgment on February 19 2013. It upheld the first-instance decision, but found that use of both marks (PRETUL and PRETUL (and oval device)) constituted trademark infringement. The court ordered Yahuan to immediately cease the infringing acts and pay Focker Rmb80,000. YAHUAN applied to the Supreme People's Court for retrial.

Decision

The Supreme People's Court began its analysis by considering the interpretation of 'trademark use' under Article 48 of the Trademark Law 2013. Article 48 is largely the same as Article 3 of the 2002 version of the Implementing Regulations of the Trademark Law, but includes the words "to distinguish the origin of the commodities". The court explained that the added words aimed to clarify the concept of trademark use, rather than fundamentally change its interpretation. According to the court, any use of a trademark that does not fulfil the function of "distinguishing the origin of commodities" does not constitute trademark use in the sense of Article 48. The court subsequently affirmed that Article 52 of the Trademark Law (which establishes the conditions of trademark infringement) does not apply where the trademark use in question does not fulfil the function of distinction.

However, the words "to distinguish the origin of the commodities" were introduced in the 2013 version of the law, while the Pretul case was subject to the 2001 version of the law and its 2002 implementing regulations (which did not contain these words). Nevertheless, the court declared that the 2013 version of the Trademark Law should serve as an important reference for the interpretation of Article 3 of the 2002 implementing regulations.

The court subsequently analysed Yahuan's use of the PRETUL marks. It held that:

"since the padlocks manufactured by YAHUAN are not for distribution in the Chinese market, the PRETUL marks do not fulfil the trademark function of 'distinguishing the origin of the commodities' in China. Therefore, such marks are unlikely to cause confusion and misidentification among the relevant public in China between the products to which they are affixed and the source of the goods manufactured by FOCKER."

The court centred its reasoning on trademarks' function as source indicators. It held that:

"The primary function of a trademark which the Trademark Law intends to protect, is to be a source indicator. When determining whether the act of using an identical trademark on identical goods, or a similar trademark on identical goods or an identical or similar trademarks on similar goods, is likely to cause confusion, the Court shall base its finding on the fulfilment or possible fulfilment of the source indicator function of the trademark. The Court should base its finding on whether trademark infringement is constituted on whether the source identifying function of the trademark is fulfilled or undermined. There is no practical significance in judging that there is a likelihood of confusion where the trademark involved fails to fulfil its identifying function and does not constitute trademark use in the sense of the Trademark Law."

Based on this reasoning, the court ruled that the lower-instance courts had erred in applying the law, as they had based their assessment of infringement solely on the fact that an identical or similar trademark was used without authorisation; in doing so, they had ignored the prerequisite that the allegedly infringing act first constitute trademark use in the sense of the Trademark Law. The court thus ruled in favour of Yahuan and revoked the judgments of the lower-instance courts.

Comment

This case is a typical 'glass half full, glass half empty' scenario. On the glass-half-full side, the decision will benefit good-faith purchasers of goods manufactured in Chinese OEM factories. If such a purchaser has been unable (for whatever reason) to register the trademark in China, it may be protected against attacks in China from the trademark owner. That said, the glass can also be seen as half empty for the same reason. If the mere export of the goods eliminates the possibility of infringement, an entire set of legislation (and Customs' capacity to act against trademark violations on exported goods) becomes pointless; there will no longer be controls at the border. As a result, trademark owners will be unable to prevent containers of fake goods from being exported.

The court's affirmation that the OEM factory did not use the trademark because of the destination of the relevant products is difficult to accept. Questions immediately arise: what if half of the production is sold in China and the other half is exported? Does this mean that the trademark is used only on half of the production and not on the other half? What if the production is exported, but eventually re-imported into China? Does this mean that the trademark was initially not used, but is used after re-importation? The consequences of the half-empty side of the decision are so serious that an in-depth analysis of the court's reasoning becomes necessary, to determine whether it truly conforms to the wording and spirit of the law.

General concept of trademark and trademark use

All legal frameworks for the protection of trademarks follow the same basic principles, but do not necessarily proceed in the same way. For example, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) first defines 'trademark' (eg, a sign capable of distinguishing) and subsequently defines the rights conferred on the trademark owner (eg, to prevent third parties from using the mark in the course of trade without the owner's consent). The same structure is found in the European system – the definition of 'trademark' is followed by the definition of the rights conferred.

Both TRIPs and the European system limit the rights conferred by the trademark under the 'fair use' principle. Further, in both systems the unauthorised use of a trademark can be deemed an act of infringement only if such use is made "in the course of trade" and "in order to distinguish the origin of the goods". Therefore, if a trademark is used for a purpose other than to distinguish the origin of the goods, the issue is to be treated according to another set of laws.

Chinese trademark law has the same major objectives as these systems, but operates under a different structure. It first defines 'trademark' and 'trademark use' and subsequently sets out the activities that constitute infringement (eg, use and sale). However, Chinese law does not contain 'rights conferred' and 'fair use' articles. Instead, Article 48 (definition of use) of the Trademark Law was revised in 2014 to include the words "(use)… to distinguish the origin of the goods". The additional wording was intended to make a distinction from cases where a trademark is used for a purpose other than to distinguish the origin of the goods. For example, under Article 58 of the Trademark Law, where another person's trademark is used as a trade name or enterprise name (and therefore used to identify a person, rather than to distinguish the origin of goods), the case is to be handled according to the Anti-unfair Competition Law. The real issue is thus not whether a trademark is used (if it were not used, there would be no case in the first place), but rather the purpose for which the trademark is used.

Trademark use in Pretul

Based on the considerations above, it is possible to look at Pretul from a completely different perspective from that of the Supreme People's Court. The question at hand was whether the OEM factory had used the trademark for a purpose other than to distinguish the origin of the products. The answer is no – even if the OEM factory had simply followed the purchaser's instructions, the use of the trademark was still intended to distinguish the origin of the products. The trademark was thus used – in China.

The Supreme People's Court reached the opposite conclusion based on the geographical location of the consumers to whom the products were to be sold. According to the court's reasoning, the determination of whether a trademark is used depends on where the products are sold, rather than how or why the trademark is used. In other words, the issue was decided on the basis of geographical criteria. No provisions in the law appear to support such a reasoning.

Trademark user and related liability

It has been established that, apart from the exceptions under the fair use principle, the use of a trademark without its owner's consent constitutes an act of infringement. However, OEM export is a specific issue that needs to be addressed. As mentioned above, the OEM factory was simply executing instructions. The real user was in fact the purchaser. This raises the question: if a registered trademark is infringed in the process, how should the case be handled?

It seems possible to draw a solution from Article 60 of the law regarding the so-called 'innocent seller' ("the seller who does not know that the goods infringe a trademark… shall be ordered to stop selling the goods") and Article 64 ("the seller shall not bear the liability to make compensation if he does not know"). If these two provisions were applied to the OEM exporter, the answer would be simple: the goods would still be considered infringing and would still be detained and treated by Customs accordingly, but the liability of the OEM factory would depend on its knowledge of the infringement.

Trademark use and revocation for non-use

What if a trademark registrant in China exports all of its goods and thus sells no goods in the country? Is there a risk of losing trademark protection if another party claims – based on the recent Supreme People's Court decision – that the mark has not been used?

In the past, OEM use has been considered as 'use' in the sense of the Trademark law.(2) The court stated that revoking a trademark for non-use where it is used through OEMs is unfair and conflicts with the government's policy of developing foreign trade. However, the decision in Pretul seems to contradict this finding.

TRIPs

It remains to be seen whether the Supreme People's Court decision is compatible with TRIPs. Article 51 of TRIPs provides that member states must adopt procedures that allow rights holders to require customs authorities to detain goods suspected of violating trademark rights registered in the country of import. Article 51 further stipulates that "[m]embers may also provide for corresponding procedures concerning the suspension by the customs authorities of the release of infringing goods destined for exportation from their territories". The phrase "infringing goods destined for exportation" necessarily implies that the act of infringement is committed regardless of the geographical location of the relevant consumers. This raises the question of whether the Supreme People's Court decision conflicts with TRIPs, since China does provide for such corresponding procedures under Article 51 in detailed regulations governing the powers of the General Administration of Customs.

As can be seen, Pretul raises many questions and it would be helpful to know the real intentions of the Supreme People's Court in reaching its conclusion. Is it a purely circumstantial decision destined to remain an isolated case? Or is it a strategic choice, aiming to boost Chinese exports by any means necessary – even at the cost of trademark protection?

For further information on this topic please contact Paul Ranjard at Wan Hui Da Intellectual Property Agency by telephone (+86 10 6892 1000) or email (ranjard@wanhuida.com). The Wan Hui Da Intellectual Property Agency website can be accessed at www.wanhuida.com.

Endnotes

(1) Article 3 states:

"The use of a trademark, as referred to in the Trademark Law and these Regulations, shall include the use of the trademark on goods, packagings or containers of the goods or in trading documents, and the use of the trademark in advertising, exhibitions or any other business activities."

(2) Beijing High Court in Scalextric (731233/2010).

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