Jiang Nan Qin Huimin September 12 2022 IP tribunal awards 3 million yuan to trademark owner in product modification case Wanhuida Intellectual Property | Intellectual Property - China Jiang Nan, Qin Huimin Intellectual Property FactsDecisionCommentOn 26 November 2021, the IP Tribunal of the Qingdao Intermediate Court in Shandong province, China, rendered a decision in favour of Haier's IP arm, Qingdao HSZC Management Consulting Ltd, in a civil suit against a smart laundry machine solution provider, Wuxi Smile IoT Ltd. The Court held Wuxi Smile liable for trademark infringement and unfair competition, ordered cessation and awarded Haier's IP arm damages of 3 million yuan.FactsWuxi Smile modified a slew of legally acquired Haier laundry machines, shoe washing machines and dryers, replacing the original control boards and adding its own signs and Chinese trade name to the control panels. The original Haier QR code, which the user could scan using a mobile device to pay for the laundry services, was also removed and replaced with Wuxi Smile-branded QR code. These modified machines were later sold to an array of universities and installed in laundromats on campuses.Haier sought:a permanent injunction for trademark infringement and unfair competition; anddamages of 10 million yuan from Wuxi Smile.As a rebuttal, Wuxi Smile cited the doctrine of exhaustion and contended that Haier's trademark infringement claim was without merit.DecisionThe Qingdao Intermediate Court opined that:under the doctrine of exhaustion, the trademark right in a product that is legitimately sold by the trademark owner or the licensee thereof become 'exhausted' by the first sale of goods or placing the same in the market . . . The doctrine applies on the premise that the reselling or using of the product . . . is not detrimental to the legitimate trademark rights of the trademark owner.The Court found that the defendant, by selling and operating the modified Haier products, undermined the source identifying and quality guarantee functions of the plaintiff's trademark, as well as its credibility, for the following reasons:The modified products, which altered the original structure and function of the plaintiff's trademarked products, had become "new products".The defendant had added its sign on the modified products without giving an explanation, which was likely to mislead the relevant public into understanding the Wuxi Smile sign as part of the trademarked products, or that the defendant was somehow associated with the plaintiff or its trademark.In general, the modified products were to be maintained by the operator rather than the original manufacturer. In case of malfunction, consumers were likely to attribute the quality and maintenance problem to the trademark owner, thus leading to negative reviews and perceptions of the plaintiff's trademark.The Court therefore threw out the defendant's argument on the doctrine of exhaustion and found that trademark infringement could be established.Regarding the plaintiff's unfair competition claim, the Court elucidated that competition shall be interpreted in a broad sense where the competing interests of one party may be harmed by the other. The defendant's modification, sale and promotion of the plaintiff's trademarked products was likely to hamper the plaintiff's competing interests, including its trading opportunities and competitiveness. The Court therefore confirmed the competitive relationship between the plaintiff and defendant. It then ascertained that the defendant had:promoted its products in a factually incorrect manner by falsely advertising itself as a strategic partner of Haier and labelling its products with the text "Smile – Haier Collaborative Product", which was likely to cause misunderstanding among consumers. This thus constituted false advertising; andrepeatedly underlined "Haier laundry machine" in its promotional campaign on multiple platforms, which was likely to make the relevant public believe the modification was approved by or associated with the plaintiff, thus creating confusion and misidentification.The Court awarded Haier damages of 3 million yuan by taking into account:the reputation of the plaintiff's Haier trademark;the scale of the defendant's business operation;the severity of the defendant's acts; andthe reasonable costs the plaintiff had incurred in stopping the infringement.Both parties appealed but later withdrew their appeals and the first-instance decision has come into force.CommentThe ruling of the case may serve as a frame of reference on the issue of whether the modification of genuine products constitutes trademark infringement. The key question to assess is whether the alleged acts are detrimental to the legitimate trademark rights of the trademark owner.The decision echoes the Supreme People's Court ruling in the December 2020 DOMINO case,(1) reiterating that substantive modification severing the association between the trademark and the products will create "new products", thus causing confusion and constituting trademark infringement. Trademark owners that are harassed by modified products can stop such acts by proving that the modification undermines the source identification and quality guarantee functions of their mark, or its credibility.For further information on this topic please contact Nan Jiang or Huimin Qin at Wanhuida Intellectual Property by telephone (+86 10 6892 1000) or email ([email protected] or [email protected]). The Wanhuida Intellectual Property website can be accessed at www.wanhuida.com.An earlier version of this article was first published by IAM.Endnotes(1)  Zui Gao Fa Min Shen No. 4241.