China has been a factory to the world for nearly four decades since it opened its door to the outside world. During the course, the nature of Original Equipment Manufacture (OEM) has long been a controversial or uncertain issue. Different people hold different views and can hardly reach a unanimous agreement. On November 26, 2015, the Supreme People’s Court (SPC) of China ruled on an OEM case (2014 Civil Retrial No. 38) in favor of the OEM producer and the foreign company who entrusted the local Chinese producer with the OEM production.

This ruling was made at a time when the Chinese economy is slowing down and the country is confronted with increasing pressure of unemployment. Some companies celebrated the ruling and considered it now safe for OEM products to leave mainland China. Others are concerned that even if the OEM products are associated with bad faith copy, so long as no local sales happen, the legitimate owners will be unable to stop the products at the Chinese border, and instead, have to take actions against the OEM products outside China.

From our point of view, nevertheless, it is too early to celebrate or worry. We would analyze the SPC’s case and the Chinese legal system and hope to clarify the matter to some extent.

Case story:

Truper Herramientas S. A. DE C.V. (“Truper”) is the owner of the trademarks PRETUL and PRETUL & Device in classes 6 and 8 in Mexico. Truper entrusted Pujiang Yahuan Locks Co., Ltd. (“Pujiang Yahuan”), a local Chinese company, with the manufacture of locks branded with PRETUL and PRETUL & Device. The products were exported to Mexico directly without any local sales in China.

Focker Security Products International Limited (“Focker”), the owner of the registered Chinese mark PRETUL & Device, No. 3071808, in class 6, filed a lawsuit with Ningbo Intermediate People’s Court, accusing Pujiang Yahuan of trademark infringement. The Court confirmed the infringement in favor of the plaintiff. The case was appealed to Zhejiang Provincial Higher People’s Court and the infringement was finally reaffirmed in the second instance.

Pujiang Yahuan requested the SPC to supervise the case through a retrial and the request was accepted. On November 26, 2015, the SPC ruled that as all of the OEM products are exported without any local sales, the trademark attached thereto could not function to indicate the source of the goods, and consequently, there is no possibility of confusion among local consumers.

SPC’s ruling and reasoning:

The SPC ruled and reasoned that under Article 8 of the Chinese Trademark Law revised in 2001[i] and Article 48 of the Chinese Trademark Law revised in 2013[ii], the definition of trademark and trademark use has been prescribed. Although the prescription “for the purpose of distinguishing the sources of goods” was newly added to the Trademark Law revised in 2013, this does not mean substantial change relating to the use of trademarks. Instead, the new Law has further clarified the issue to avoid classifying actions of non-distinguishing use into use of trademarks and consequently prevent broadened application of Article 52 of the Chinese Trademark Law revised in 2001[iii].

According to the facts ascertained by the original courts, the locks carrying the brand “PRETUL” were all exported to Mexico without local sales in China. That is, the sign could not function to distinguish the sources of the goods in China. There is no possibility that the relevant Chinese public will be confused about the goods to which the sign was attached with the goods produced by Focker. Under Truper’s authorization, Pujiang Yahuan used the sign “PRETUL”. Such use is but physical attachment inside China, a necessary technical condition for Truper to use the mark in Mexico where Truper enjoys trademark exclusive right, and could not distinguish the sources of the goods inside China. The actions of attachment should not be regarded as trademark use in the sense of the Trademark Law.

Whether or not the distinguishing function of trademarks has been damaged is the foundation to determine whether or not the trademarks have been infringed. Where the trademarks cannot function to distinguish the sources or constitute trademark use in the sense of the Trademark Law, it does not make actual sense to determine confusion caused by similar or identical marks on similar or identical goods. The first- and second-instance courts, who determined the infringement on the premise of similar or identical marks and goods, overlooked the use of trademarks in the sense of the Trademark Law and the law was wrongly applied.

Pujiang Yahuan also claimed that the original owner of the Chinese mark No. 3071808, Xu Haorong’s bad faith in pirating the mark PRETUL & Device. However, as Truper failed to attend the retrial and Pujiang Yahuan failed to prove through evidence that Truper claimed its right against Xu Haorong, the SPC did not overturn the previous ruling regarding the piracy issue.

Case study and China’s legal system:

As China is not a case law country, although the case was ruled by the SPC, it is not binding on other future cases to be tried by the SPC or other lower courts. Because of the complicated elements relating to OEM, there is no sign that the SPC will draft and announce judicial interpretation on this issue, though the SPC’s official interpretation shall be binding on all courts. Therefore, the Chinese courts might continue to make contradictory rulings on a case-by-case basis, with different elements to be considered.

At the administrative level, the local trademark enforcing authorities, usually the Public Security Bureaus (PSB), the Administrations for Industry and Commerce (AIC) and the Customs, remain empowered to take ex officio actions against OEM producers, shipping companies, storage companies etc., so long as the relevant marks have been registered by other parties in China. The authorities can also take actions according to reports or complaints, anonymous or not. The parties concerned, if dissatisfied, will have to spend resources coping with the relevant situations, but can hardly obtain compensation or damage from the government or the adverse parties even if the actions are finally deemed wrongly taken.

As a member to the World Trademark Organization (WTO), China is bound by the WTO’s TRIPS agreement. However, it turns out that the TRIPS provides no clear prescription to deem OEM production as trademark infringement or trademark use. Such being the case, the TRIPS actually allows the Chinese courts and administrative bodies concerned to discreetly decide the nature of OEM production on their own. In other words, it is in compliance with the TRIPS for the Chinese courts and administrative bodies concerned to decide either way.

Although the use has been considered as invalid in this trademark infringement case, it remains uncertain whether or not the use will be considered as valid in cases where the marks in question are faced with non-use cancellation. The administrative authorities concerned and the courts will not necessarily follow the example of this case, but are entitled to consider the relevant elements on a case-by-case basis.

Pragmatic conclusion

In this case and some other similar cases, the legitimate ownership of the marks outside China has played an important role in defending the local OEM producers against the plaintiff’s accusation, though the Chinese registration, if any, is more reliable. It is thus advisable for the OEM producers to do prior homework to check the status of the foreign marks. If the marks have been pirated in bad faith in China, the victims’ firm attitude to take actions against piracy might also relieve the victims’ pain and increase their chances of successful defense.

On the basis of the above analysis and the uncertainties relating to the nature of OEM production in China, for the parties concerned, it remains highly advisable to register the marks as early as possible in China, conduct prior search before OEM production, or request for license from the trademark owner(s), to be on the safer side.

(This article was originally published in the MIP 2016 Trademark Handbook)