Jiangsu High Court: whether OEM export constitutes trademark infringement shall be decided case-by-case according to the circumstances
On December 18, 2015, the Jiangsu High Court rendered a decision in an OEM export case, overturning the non-infringement judgment made by the Changshu Intermediate Court and finding that the OEM manufacturer’s act constituted trademark infringement. The reason: the exporter did not fulfil its reasonable duty of care. The decision was made shortly after the Supreme People’s Court had taken its stand on this controversial matter in the PRETUL case by judging that, when goods are exported, the trademark is not even "used" in the sense of Article 48 of the Trademark Law, and therefore, no infringement is committed. According to the Jiangsu High Court “whether OEM export constitutes trademark infringement shall be adjudicated case-by-case, according to the circumstances”.
The plaintiff Shanghai Diesel Engine Co., Ltd. (SDEC) is the owner of the registered trademarks “DONG FENG in Chinese Character and Pinyin” (Cited Mark 1) and “DONG FENG in Chinese Character and Pinyin” (Cited Mark 2) in Class 7, with their designated goods covering “diesel engines” and “diesel engines and fittings for internal combustion engines” respectively.
Cited Mark 1 Cited Mark 2
The plaintiff has been exporting diesel engines bearing the Cited Marks since the 1960s to various countries and has acquired a reputation in Southeast Asia through long-term use. On September 27, 2000, the plaintiff’s Cited Marks were recognised as well-known trademarks (WKTM) in China by the CTMO.
On January 17, 1987, an Indonesian company PT ADI PERKASA BUANA (PT ADI) registered the trademark “DONG FENG in Chinese Character and Pinyin” in Indonesia , in Class 7, with the designated goods covering “a variety of electric generators, AC generators, diesel motors, diesel generators, etc.” Such trademark is visually identical to the plaintiff’s Cited Marks.
The plaintiff tried, through a five-year lengthy legal battle to cancel PT ADI’s trademark but failed (final decision in 2011).
The defendant, Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd. (Changjia) is an OEM manufacturer of diesel engines. Changjia signed on October 1, 2013 an OEM contract with PT ADI to manufacture diesel engines and fittings, bearing “DONG FENG in Chinese Character and Pinyin” trademark, for exclusive distribution in Indonesia.
On October 8, 2013, Changjia exported a batch of OEM diesel engine fittings to Indonesia. The Changzhou Customs, upon SDEC’s request, intercepted the shipment, but later released the shipment based on non-infringement.
SDEC brought a lawsuit against Changjia before the Changzhou Intermediate Court.
The Court, which basically followed the same reasoning as the SPC in the PRETUL case, 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 then appealed before the Jiangsu High Court. In the ruling, the Court of Appeal started by citing two of its prior cases to make a point on the OEM export matter.
In the first case of “(2007) Su Min San Zhong Zi No. 0034, LACOSTE vs Jiangyin Hongxin Garment Co., Ltd.”, the court found the OEM manufacturer guilty of trademark infringement based on the reasoning 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 of “(2012) Su Zhi Min Zhong Zi No. 0297, YU Dexin vs Shuyang Fenjin Brush Factory & Shuyang Zhongyuan Import & Export Co., Ltd.”, the court found the OEM manufacturer not guilty of trademark infringement based on the reasoning 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 that: “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:
Where a Chinese OEM manufacturer knows or should know that a trademark that has certain influence in China or a WKTM had been pre-emptively registered by the foreign consignor, and the OEM factory still manufactures products bearing such trademark for this consignor, he shall be deemed as 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 obligation and all the OEM products are for export (like the SOYODA case), the Chinese trademark owner cannot stop the manufacturer from taking 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 then found that Changjia who clearly knew that the plaintiff’s Cited Marks had been recognised as WKTM 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 character and Pinyin in Indonesia instead of using the national 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 infringement act and indemnify the plaintiff RMB 100,000 as damages and another RMB 116,750 to cover its reasonable costs for ceasing the infringement act.
This case is particularly interesting, for several reasons.
The first reason is the citation, by the court, of its own precedents. This is a positive sign that People's Courts are more and 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 Court on the OEM issue. The court could not follow the reasoning that when products are exported, the trademark that is affixed on them is not used. Instead, the court preferred to examine the issue in the light of general principles such as good faith and duty of care.
In this case, the court found that the foreign consignor was acting in bad faith and that the OEM manufacturer should have been aware of this. Therefore, the trademark infringement was constituted.
The decision is fair… It is undeniable. However, one may still question the pertinence of the reasoning. Indeed, in the Trademark Law of China, good faith or bad faith is irrelevant to the definition of trademark infringement. Trademark infringement is a mere fact: to use a registered trademark without the consent of its owner. If the 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 that is the consequence of the act of infringement may depend on the attitude of the infringer. No intention and/or fulfilling a reasonable duty of care can be a reason for not finding the infringer liable to pay compensation to the trademark owner.
But, even in case of no liability, the act of trademark infringement is constituted, which means that the infringing products must be handled accordingly. In this case, the goods had to be stopped from being exported to Indonesia because they were infringing.
The Jiangsu Court did envisage the case where a trademark has been pre-emptively registered, which hurts the interests of the plaintiff. The solution proposed by the court was that, if the OEM factory does not know about such pre-emptive registration (and has fulfilled a reasonable duty of case), the act of using the trademark without the owner's consent is not an act of infringement.
This is arguable, because, as mentioned above, there is nothing in the Law that supports such deduction: even if committed in good faith, an act of trademark infringement remains a trademark infringement.
Meanwhile, on the basis of Article 7 of the 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 could be dismissed. The Supreme People's Court itself showed the way in the ELLASSAY case (2014) Min Ti Zi No. 24. Accordingly, the defendant may challenge the right of the plaintiff, and if sufficient evidence is provided that seriously tarnishes 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 on the defendant's, good faith.
Co-authored by: Mr. Paul RANJARD & Ms. JIANG Nan