Introduction

On December 18 2015 the Jiangsu High Court issued a significant decision in an original equipment manufacturer (OEM) export case, overturning the non-infringement judgment of the Changshu Intermediate Court and finding that the OEM manufacturer's activities constituted trademark infringement. The decision was issued shortly after the Supreme People's Court took a stand on this controversial matter in PRETUL. In PRETUL the Supreme People's Court ruled that when goods bearing trademarks are exported, the trademark is not 'used' in the sense of Article 48 of the Trademark Law and therefore no infringement is committed (for further details please see "Supreme People's Court rules OEM export does not constitute trademark infringement"). According to the Jiangsu High Court, "whether OEM export constitutes trademark infringement shall be adjudicated case by case, according to the circumstances".

Facts

Plaintiff Shanghai Diesel Engine Co, Ltd (SDEC) owned two registered trademarks for DONG FENG (in Chinese characters and pinyin) in Class 7 for the designated goods "diesel engines" and "diesel engines and fittings for internal combustion engines".

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Plaintiff's trademarks

The plaintiff had been exporting diesel engines bearing the DONG FENG marks since the 1960s to various countries and the marks had accordingly acquired a reputation in Southeast Asia through long-term use. On September 27 2000 the DONG FENG marks were recognised as well-known trademarks by the China Trademark Office.

On January 17 1987 Indonesian company PT ADI PERKASA BUANA (PT ADI) registered the trademark DONG FENG (in Chinese characters and pinyin) in Indonesia in Class 7, with the designated goods covering "a variety of electric generators, AC generators, diesel motors, diesel generators, etc". This trademark was visually identical to the plaintiff's DONG FENG marks. The plaintiff tried to cancel PT ADI's trademark, but ultimately failed after a five-year court battle (the final decision was issued in 2011).

Defendant Jiangsu Changjia Jinfeng Dynamic Machinery Co, Ltd (Changjia) was an OEM manufacturer of diesel engines. On October 1 2013 Changjia signed an OEM contract with PT ADI to manufacture diesel engines and fittings bearing PT ADI's trademark for exclusive distribution in Indonesia.

On October 8 2013 Changjia exported a batch of OEM diesel engine fittings to Indonesia. Changzhou Customs, on SDEC's request, intercepted the shipment, but later released it on the grounds of non-infringement. SDEC filed suit against Changjia before the Changzhou Intermediate Court.

Decisions

The court, which basically followed the same reasoning as that of the Supreme People's Court in PRETUL, ruled in favour of the defendant by finding that:

"the act of affixing trademarks to the OEM products that are solely for overseas distribution without entering the Chinese market, does not fulfil the trademark's function of source indicator in China, therefore does not constitute trademark use in the sense of the Trademark Law."

SDEC appealed before the Jiangsu High Court. In its decision, the appeal court first cited two of its prior cases to make a point on the OEM export issue. In the first case, LACOSTE v Jiangyin Hongxin Garment Co, Ltd ((2007) Su Min San Zhong Zi 0034), the court found the OEM manufacturer guilty of trademark infringement on the grounds that:

"The OEM manufacturer is obligated to examine whether the consignor is the legitimate owner of the registered trademark or other rights involved. Where the OEM manufacturer fails to fulfil its duty of care and is engaged in manufacturing the infringing products, it shall bear the tort liability."

In the second case, YU Dexin vs Shuyang Fenjin Brush Factory ((2012) Su Zhi Min Zhong Zi 0297), the court found the OEM manufacturer not guilty of trademark infringement on the grounds that:

"The plaintiff, as the trademark owner of the Cited Mark SOYODA in China, used to have business relations with the defendant's foreign consignor and knew about the consignor's SOYODA trademark registration in Ecuador before registering the Cited Mark in China."

Based on these two precedents, the court stated:

"Generally speaking, it would be advisable to find the Chinese OEM manufacturer's act not constituting trademark infringement if the OEM products are all for exportation and are not intended for distribution in China. However, such non-infringement finding should be made on the premise that the OEM manufacturer has fulfilled its reasonable attention obligation on (the foreign consignor's right over) the trademark involved."

The 'duty of care' is defined as verifying "whether the foreign consignor owns the trademark involved, or has been licensed by the legitimate owner of the trademark involved".

However, the legitimacy of the trademark at issue may be controversial, in which case the court considered that "the OEM manufacturer must apply a higher level of duty of care". The court gave two examples in this regard:

  • Where a Chinese OEM manufacturer knows or should know that a trademark which has certain influence in China or a well-known trademark has been pre-emptively registered by the foreign consignor and the OEM factory still manufactures products bearing such trademark for this consignor, it will be deemed an infringer and bear civil liability.
  • Where a foreign trademark is pre-emptively registered but there is evidence that the Chinese OEM manufacturer has fulfilled its attention obligations and all of the OEM products are for export (eg, as in SOYODA), the Chinese trademark owner cannot stop the manufacturer from undertaking such OEM business.

The court therefore concluded that "whether OEM export constitutes trademark infringement depends on the circumstances".

Applying this principle to the case, the court found that Changjia – which clearly knew that the plaintiff's marks had been recognised as well-known trademarks in China and still used an identical trademark on the OEM products – failed to fulfil its duty of care, which damaged the plaintiff's interests and constituted trademark infringement. The court laid out its reasoning as follows:

  • The plaintiff had registered its trademark in China and launched its products in Indonesia before PT ADI's trademark registration in Indonesia.
  • PT ADI could not justify why it registered identical marks in Chinese characters and pinyin in Indonesia instead of using Indonesia's official language.
  • Changjia should have known that the plaintiff's trademark was well known and should have known about the legal battle between the plaintiff and its consignor in Indonesia.

The Jiangsu High Court therefore ordered Changjia to immediately stop its trademark-infringing activities and indemnify the plaintiff for Rmb100,000 as damages and another Rmb116,750 to cover its reasonable costs for ceasing the infringing acts.

Comment

This case is particularly interesting for several reasons. The first is the court's notable citation of its own precedents. This is a positive sign that people's courts are increasingly more inclined to analyse previous decisions and build stable jurisprudence.

The second reason is that the high court clearly dissented from the views of the Supreme People's Court on the OEM issue. The court could not follow the reasoning that when products are exported, the trademark that is affixed to them is not 'used'. Instead, the court preferred to examine the issue in light of general principles, such as those of good faith and duty of care. The court found that the foreign consignor had acted in bad faith and that the OEM manufacturer should have been aware of this; this constituted trademark infringement.

The decision is fair and reasonable. However, its pertinence is questionable, as under the Trademark Law the question of good faith or bad faith is irrelevant to the definition of trademark infringement. Trademark infringement is a mere fact: it is the use of a registered trademark without the consent of its owner. If this fact is established, there is no need to prove that the act was intentional (contrary to establishing a criminal act or an act of unfair competition). On the other hand, the civil liability triggered by the act of infringement may depend on the attitude of the infringer. Having had no intention to infringe or fulfilling a reasonable duty of care can be grounds for finding the infringer not liable to pay compensation to the trademark owner. Even in such cases, the act of trademark infringement nonetheless stands, which means that the infringing products must be handled accordingly. In the case at hand, the export of the goods to Indonesia had to be stopped because they bore infringing marks.

The Jiangsu court did envisage a scenario in which a trademark is pre-emptively registered which hurts the interests of the plaintiff. In such case, the court concluded that if the OEM factory does not know about the pre-emptive registration (and has fulfilled a reasonable duty of care), the act of using the trademark without the owner's consent is not an act of infringement. This conclusion is arguable because, as mentioned above, the Trademark Law contains no provision supporting such a deduction – even if committed in good faith, an act of trademark infringement remains an act of trademark infringement.

Meanwhile, on the basis of Article 7 of the Trademark Law (principle of good faith), it is possible for the court to decide that whenever a trademark owner is acting in bad faith, its claim can be dismissed. The Supreme People's Court showed the way in this regard in ELLASSAY ((2014) Min Ti Zi 24). Accordingly, the defendant may challenge the plaintiff's rights and if sufficient evidence is provided that casts a negative light on the intentions of the plaintiff in filing and enforcing the trademark, the claim maybe dismissed and the goods may be delivered.

The idea is the same: to decide according to the circumstances. But the focus is on the plaintiff's – rather than the defendant's – good faith.

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

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