Background
Facts
Decision
Comment
Conclusion
The Higher People's Court of Zhejiang Province issued its civil ruling(1) on 4 January 2022 in a retrial case between Weike, the retrial applicant, and Laoshidun, the respondent.
OEM mode of production
The original equipment manufacturer (OEM) mode of production refers to a business model in which an overseas buyer authorises a domestic manufacturer to produce and export goods under the overseas buyer's brand.
Under the OEM model, the overseas buyer usually owns a registered trademark in the export market country. However, due to the territorial nature of trademarks, the trademark rights in the target market country do not naturally extend to the exporting country. This includes China.
In the case before the Higher People's Court of Zhejiang Province, the respondent manufactured STAHLWERK-branded goods for export to Germany. The overseas principal in this case was the German company Stahlwerk, whose owner registered the same mark in Germany. Stahlwerk authorised Laoshidun to manufacture STAHLWERK-branded goods under the OEM model.
The plaintiff, Weike, was an intermediary with prior dealings with Stahlwerk. Weike had registered the STAHLWERK trademark in China (No. 10121635) on 21 December 2012, and, when Laoshidun started manufacturing STAHLWERK-branded goods for export to Germany, Weike sued Laoshidun for trademark infringement.
In its decision on 4 January 2022, the Court ruled that Weike had exercised its trademark rights illegitimately and violated the principle of good faith, adding that the respondent's OEM processing did not infringe the exclusive right of the Weike trademark concerned.
The Court held that Weike was aware both of the existence of the German company Stahlwerk and the German trademark STAHLWERK, and that Stahlwerk had previously entrusted a Weike-affiliated company with designing and processing its branded products in China, but had preemptively applied for registration of the same trademark on the same products in China. When Weike filed an infringement lawsuit against Laoshidun for its authorised OEM processing of the allegedly infringing goods based on the preemptive registered trademark, the Court concluded that Weike had exercised its trademark rights illegitimately and violated the principle of good faith.
The Stahlwerk case explicitly brought the principle of good faith into OEM trademark infringement trials and took it as the sole basis for the judgment. As discussed below, this is an important supplement to the principle affirmed in the Honda case.
Principle established by Honda Case
In the Honda case,(2) the Supreme People's Court made important interpretations on issues regarding OEM cases, such as:
- the use of trademarks;
- the doctrine of liability fixation for trademark infringement;
- the identification of the relevant public;
- the territoriality principle of trademark rights; and
- the uniformity of the application of laws.
The Court in the Honda case made the following findings:
- The use of a trademark is an objective act, which usually involves many components, such as the affixing of a trademark, market circulation, and so on. Whether an act constitutes the use of a trademark pursuant to the Trademark Law shall be:
- interpreted consistently as a whole;
- in accordance with the Trademark Law; and
- not be judged in isolation or according to a specific factor.
- A court should apply the no-fault liability principle to trademark infringement, and actual damage is not a constitutive element of the infringement.
- In the context of the Trademark Law, the "relevant public" should include operators closely related to the marketing of the allegedly infringing goods in addition to consumers of the allegedly infringing goods.
- Trademark rights are subject to territory. Trademarks registered overseas that have not been registered in China do not enjoy exclusive rights of trademarks in China. Correspondingly, trademark authorisation obtained by a civil subject to use a foreign trademark within the territory of China is not a legitimate trademark right protected by the Trademark Law and therefore cannot be used as a defence to infringement of trademarks.
- The uniformity of the legal system should be maintained when applying laws, and certain trade modes (such as the OEM processing concerned in this case) should not be simply solidified as an exception to the infringement of trademarks.
The Honda case also shed light on how understanding trademark infringement issues in OEM cases is evolving and deepening with the transformation of China's economic development. As other OEM trademark infringement cases come to trial, courts should be able to fully consider domestic and international economic development and apply the law accurately, specifically analysing the distinct period, market, and the underlying transaction.
The Honda case also left a question open for debate. Some people rashly concluded that OEM processing constitutes trademark infringement by following the reasoning in the Honda judgment (ie, that the authorisation obtained to use the foreign trademark cannot be used as a defence against the claim of trademark infringement). For example, in the Stahlwerk case, Weike claimed that the Honda case had explicitly denied the non-infringement theory of OEM cases, and that Chinese law should not protect trademarks registered overseas by foreign companies.
Evidently, controversies regarding OEM trademark infringement cases have not disappeared after the Honda case.
Application of principle of good faith in OEM cases
Against this background, the principles affirmed in the Stahlwerk case are noteworthy. The trial court pointed out that, when hearing OEM trademark infringement cases, the people's court should:
- strike a proper balance between the interests of the trademark rights holder and the OEM manufacturer; and
- neither simply solidify the OEM processing as an exception to trademark infringement nor hold that all trademark uses under such a trade mode constitute infringement.
The court also pointed out that article 7(1) of the Trademark Law provides that the registration and use of trademarks should follow the principle of good faith, and trademark infringement trials should also demonstrate its guiding role. The law should not protect any illegitimate exercise of trademark rights in violation of the legislative intent and purpose of the Trademark Law. In this case, knowing the existence of the German company Stahlwerk and the German trademark STAHLWERK, Weike preemptively applied to register an identical trademark for the same kind of goods in China and filed a lawsuit for OEM trademark infringement on the basis of this trademark. This exercise of trademark rights was illegitimate and violated the principle of good faith.
The Higher People's Court of Zhejiang Province first pointed out that not all uses of trademarks in the OEM mode shall be deemed as infringement. This adds significantly to the principle affirmed in the Honda case that one cannot employ the trademark authorisation obtained to use the foreign trademark as a defence to infringement of trademarks. The Court then analysed the Stahlwerk case from two dimensions:
- the illegitimacy of the way to exercise rights; and
- the violation of the principle of good faith.
Whether the way to exercise rights is legitimate
Guiding Case No. 82 of the Supreme People's Court(3) is the most typical case regarding the illegitimacy of the way to exercise rights. The case pointed out that the principle of good faith is a basic principle that all market participants should abide by, and that civil litigation should also follow the principle of good faith.
On the one hand, the principle guarantees that the parties concerned have the right to exercise and dispose of their civil rights and litigation rights within the scope prescribed by law. On the other hand, it requires the parties concerned to exercise their rights in good faith without prejudice to the interests of others and the public.
Any act that goes against the purpose and spirit of the law, damages legitimate rights and interests of others, maliciously acquires and exercises rights, or disrupts the fair competition order of the market, will be deemed as abuse of rights, and is not legally defensible. Therefore, a lawsuit that one party initiates against another's fair use of marks based on a trademark acquired in bad faith constitutes an abuse of rights.
The latest case at Zhejiang Higher People's Court regarding the illegitimacy of the way to exercise rights is Geng Jinxu v Hangzhou Alibaba Advertising Co, Ltd, Yiwu Dongge Trading Co, Ltd and Li Weifeng, from December 2021.(4) The Court pointed out that article 7(1) of the Trademark Law provides that the registration and use of trademarks should follow the principle of good faith, and the trial of trademark infringement cases should also demonstrate its guiding role. Any act will be deemed as an abuse of rights if it:
- violates the legislative intent and purpose of the Trademark Law;
- harms the legitimate rights and interests of others; or
- maliciously obtains and exercises trademark rights.
If an act does any of the above, the law shall not protect the relevant infringement claims. The plaintiff in this case had registered many foreign boardgame logos as trademarks, which it then used as the basis for the infringement lawsuits it filed. The way the plaintiff obtained and exercised the trademark right was against the principle of good faith and constituted an abuse of rights.
The principle established in Guiding Case No. 82 to curb the protection of malicious rights also applies both to general cases and OEM cases. The Stahlwerk case confirms this view.
Whether principle of good faith is followed
The application of the principle of good faith in the trial of OEM cases has long existed. For example, in the Iska case,(5) the Higher People's Court of Fujian Province pointed out that article 4 of the General Principles of Civil Law of the People's Republic of China provides that civil activities must follow the principle of good faith. This principle is the "imperial clause" applicable to all civil activities, including trademark registration and transfer.
The Court held that:
- the motive and purpose of the rights holder, in the registration or transfer of the trademark concerned were illegitimate; and
- Guomao, the OEM manufacturer:
- had fulfilled its obligation of due diligence;
- subjectively had no infringement intention; and
- objectively did not cause actual loss to the rights holder in the domestic market.
This was despite the fact that:
- the registration and transfer of the claimed trademark were carried out in accordance with the statutory procedures; and
- the disputed logo authorised to be used on the OEM products was similar to the claimed trademark.
Therefore, the Court found that the relevant OEM processing in this case was not trademark infringement.
The Intermediate People's Court of Suqian City, Jiangsu Province, in the Soyoda case(6) stated that civil activities, including trademark registration and the exercise of trademark rights, must abide by the principle of good faith. This indicated that the protection for trademark registration and the exercise of trademark rights should consider whether:
- any party has conducted relevant acts in an illegitimate way;
- the market order for fair competition has been damaged; and
- the legitimate rights and interests of others have been damaged.
The registration of the SOYODA trademark in China constituted malicious preemptive registration of a foreign trademark and therefore violated the principle of good faith. The malicious preemptive registration of a foreign trademark must not hinder the reasonable use of the foreign trademark by means of OEM processing in China.
As the Higher People's Court of Jiangsu Province noted in the Dongfeng case:(7)
If an overseas enterprise or individual, violates the principle of good faith and maliciously registers a domestic trademark with certain influence, especially a well-known trademark, and entrusts a domestic enterprise with OEM processing, the act of the overseas principal shall be deemed as illegitimate and substantially damaging to the legitimate rights and interests of Chinese trademark holders. In this regard, domestic OEM processing enterprises shall, as industry operators, fulfill [the] higher duty of due diligence. If a domestic OEM processing enterprise knows or should know that the overseas principal is suspected of malicious preemptive registration of a domestic trademark with certain influence or a well-known trademark, and it still accepts the entrustment, the domestic OEM processing enterprise shall be deemed to be at fault and shall bear the corresponding civil liability. Similarly, where a domestic trademark holder, in violation of the principle of good faith, is suspected of malicious preemptive registration of a foreign trademark, and there is evidence that the domestic OEM processing enterprise has fulfilled its obligation of due diligence, and all OEM products are exported, the domestic trademark holder, on the basis of the principle of good faith, may not prevent the domestic OEM processing enterprise from using the foreign trademark.
Unfortunately, applying the principle of good faith has not been the mainstream view in OEM trademark infringement disputes over the past 20 years.
The Stahlwerk case will have an impact on judicial trials for OEM trademark infringement and market operations in the future.
It adds significantly to the Honda case, especially regarding the principle it established that some trade modes should not simply become embedded as exceptions to the infringement of a trademark. The Stahlwerk case further clarified that the courts should not regard all uses of trademarks in OEM mode as infringement.
The application of Guiding Case No. 82 and the principle of good faith to the judicial adjudication of OEM trademark infringement cases can better balance the interests of all parties.
The principle of good faith should have a positive influence on trials of similar cases and gradually become the mainstream view in judicial adjudication in the future.
Compared with the principles established in other OEM cases, such as the constitution of trademark uses and the duty of due diligence, the illegitimacy of the exercise of trademark rights and the principle of good faith established by the Stahlwerk case are easier for market participants to understand and grasp. They set a clear benchmark for internal compliance review, and the guiding function of law.
For further information on this topic please contact Zihan Shi or Bruce Yu 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.
Shuangling Shang assisted in the preparation of this article.
An earlier version of this article was published by INTA Bulletin.
Endnotes
(1) Shenzhen Stahlwerk Welding Technology Co, Ltd v Zhejiang Laoshidun Technology Co, Ltd (2021) Zhe Min Shen No. 4890.
(2) Honda Motor Co Ltd v Chongqing Hengsheng Xintai Trading Co Ltd et al (Hengsheng), SPC (2019) Min Zai No. 138, September 2019.
(3) Shenzhen Ellassay Fashion Co, Ltd v Hangzhou Yintai Century Department Store Co, Ltd, (2014) Min Ti Zi No. 24.
(4) (2021) Zhe Min Shen No. 5338.
(5) Merry Food International Co Ltd v I Schroeder KG (GmbH & Co) and Xiamen International Trade & Industrial Co, Ltd (2012) Min Zhong Zi No. 378, June 2012.
(6) Yu Dexin, Jiangsu Jiahong International Trading Co, Ltd, et al, v Shuyang Zhongyuan Import & Export Co, Ltd, et al, (2011) Su Zhong Zhi Min Chu Zi No. 0008, June 2012.
(7) Shanghai Diesel Engine Co, Ltd v Jiangsu Changjia Jinfeng DYNAMIC Machinery Co, Ltd, (2015) Su Zhi Min Zhong Zi No. 00036, December 2015.
