Many Australian businesses utilise Chinese Original Equipment Manufacturers (OEM) to produce their goods. A recent decision of the Supreme Court of the People’s Republic of China is likely to significantly affect those arrangements in the future.
China is a country with an unusual trade mark law. Most countries (including Australia) are “first to use or file” jurisdictions. This means that a trade mark is owned by the first person to either use that trade mark or apply to register it.
China is “first to file”. This means that if person A uses a particular trade mark in China, and then person B applies to register that same trade mark, person B’s later registration rights trump person A’s earlier usage rights. Person B can sue person A for infringement.
Normally, affixing a trade mark to goods at the time of manufacture is considered use of the trade mark. If somebody other than the manufacturer owns the trade mark, then there is an infringement that could lead to legal action. In China, unscrupulous operators can exploit the “first to file” system by registering trade marks belonging to foreign companies. They can then extort licence fees from the foreign companies under threat of infringement proceedings.
Foreign companies utilising OEM arrangements are particularly susceptible to this risk. Often they will not bother registering their trade mark in China because their goods are never destined for the Chinese market.
In 2015, the Supreme Court created a solution to this problem. In the “PRETUL” case it determined that applying a trade mark to goods in OEM manufacturing was not use of that trade mark in China, because those goods are not sold in China.
Reversal of the position
On 23 September 2019, the Supreme Court handed down its decision in a case brought by Honda against two Chinese companies.
Honda had the “HONDA” trade mark registered in China. The Chinese companies engaged in OEM manufacturing for a Myanmar company for the manufacture of motorcycle kits with the “HONDAKIT” trade mark. The Myanmar company owned the “HONDAKIT” trade mark in Myanmar and authorised the Chinese companies to affix it to the goods, which were all exported to Myanmar.
The Supreme Court determined that use in OEM manufacturing is not an exception to the basic principles of trade mark infringement.
The Supreme Court also determined that the registration of the “HONDAKIT” trade mark in Myanmar, the export destination of the motorcycle kits, did not provide a defence to the infringement in China. This recognises the territorial limitations of trade mark registrations, which are country-specific.
The extent to which China’s shift from an export-driven economy to one driven by domestic consumption and the diminished economic importance of the OEM manufacturing sector can only be speculated. However from a trade marks perspective, including to Australian eyes, this latest decision is entirely orthodox.
Implications for Australian businesses
The implication for Australian businesses that utilise OEM manufacturing in China is significant. They should register in China those trade marks that are applied to goods in China, even if those goods are not destined for the Chinese market.
The risk is that otherwise an opportunist may register that trade mark in China and threaten the Australian company with infringement proceedings. At that point, the only options become:
- paying a licence fee;
- shifting production to another country; or
- leaving the goods unbranded and only applying branding once they reach Australia.
In the longer term, there is hope on the horizon. On 1 November 2019 an amendment to the Chinese Trademark Law came into effect that makes bad faith registration of trade marks more difficult. New regulations on the implementation of the Trademark Law came into effect on 1 December 2019. Their effectiveness is yet to be seen.
At the same time, statutory damages for trade mark infringement also increased from CNY 3 millions (A$630,000) to CNY 5 million (A$1.05 million), and punitive damages from three times to five times the actual loss-based damages. For an Australian business, this increases the potential penalty against them if a third party registers their trade mark in China and brings infringement proceedings against them.
If you are an Australian business utilising OEM manufacturing in China, and you have not already registered your trade mark in China, you should:
- verify whether that trade mark has already been registered by somebody else; and
- apply to register your trade mark in China.