China: The Application And Limits Of First-Sale Doctrine Against The Distribution Of Unauthorized Alteration Of Products

Last Updated: 16 February 2016
Article by Charles Feng

I. The issue

Apple Inc. v. Mr. Zhang

Apple Inc., a world renowned cell phone manufacturer located in the US, manufactures and distributes cell phones in China under the renowned trademark 'iphone'. The defendant, a Mr. Zhang purchased the used cell phones manufactured by Apple Inc., and subsequently repaired their main boards, ordered spare parts such as cases, and then distributed the refurbished cell phones as new phones to seek profits. Apple Inc. reported Mr. Zhang's conducts, initiating a criminal proceeding, and a subsequent civil proceeding on basis of trademark infringement.1

Zippo Manufacturing Company v. Li Guang-sheng

Zippo Manufacturing Company, a world renowned lighter manufacturer, manufactures and distributes lighters with or without carved patterns in the US and Japan (referred to as 'the US version' and 'Japan version'). The defendant Mr. Li purchased Zippo lights without carved patterns, which had been smuggled to China or brought to China by other illegal means at low price, and subsequently processed the lighters by carving or welding then subsequently resold them as the US version lighter or Japanese version lighter in China to seek profits. Zippo Manufacturing Company initiated a civil proceeding on trademark infringement and unfair competition.2"

The above-mentioned two cases share the same facts that after the products bearing registered trademarks are put into market, other parties purchased and reconstructed the products without the consent of the trademark owner, then resold them as newly manufactured by the trademark owners to seek profits.

The issue here is whether the First-sale Doctrine in trademark law will be applied to the defendant concerning the reconstruction and resale of related products.

II. Diverged Understandings

There are two understandings on whether the above-mentioned reconstruction and resale constitute infringements. One is that such conducts constitute infringement. According to the theory of the trademark law, after the goods bearing marks are distributed or transferred by the trademark owner or its licensee by legal means, the trademark rights are exhausted. The buyers are authorized to dispose the products by resale and other legal conducts. As the refurbishment and reprocessing of such products can be deemed as a part of resale, the distribution of such goods after reprocessing will not mislead the consumers or confuse the consumers on the origin of such products. Thus, such resale and other related acts do not constitute trademark infringement.

The second view is that the refurbishment and reprocess of such products constitute the "use of trademark" stipulated in Article 56.1 of the Trademark Law of the PRC. Therefore, the unauthorized refurbishment and reprocess will constitute infringement as such acts have exceeded the scope of First-sale Doctrine.

The two points of view mentioned above mainly differ in the following two aspects: First, whether the trademark rights are exhausted after the products are distributed, and second, whether the refurbishment and reprocessing of such products constitute infringement.

1. The issue of the First-sale Doctrine

1.1 Definition of the First-sale Doctrine

There is no specific legal stipulation on the 'First-sale Doctrine' or 'trademark exhaustion' in China. The academic interpretation of First-sale Doctrine refers to that for the products put on the market with the consent of the trademark owners or by other legal means, any purchaser of such products is authorized to resell the products bearing the mark or provide such products to the general public by other means, including the advertising without the consent of the trademark owner.3

However, there are specific stipulation on the issue in the legislation of many countries and regions. For example, under Article 13 of Council Regulation (EC) No. 40/94 of 20 December 1993 on the Community Trade Mark a Community trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent. Under Article 23.3 of Trademark Law of Taiwan, a trademark owner cannot claim exclusive right to use the trademark if the trademarked products are put on the market by him or with his consent.

While there is no specific stipulation on the First-sale Doctrine in the Trademark Law of the PRC, there is the stipulation on the issue in the Patent Law of the PRC which can be referred on this issue. Under Article 69. 1 of the Patent Law of the PRC, after a patented product or a product directly obtained by using the patented method is sold by the patentee or sold by any unit or individual with the permission of the patentee, it shall not be deemed to be patent right infringement if any other person uses, offers to sell, sells or imports that product.

1.2 Preconditions for Application of First-sale Doctrine in Trademark Law

From the above-mentioned stipulations, it can be inferred that there are two basic preconditions set for the application of First-sale Doctrine:

First, the products shall be put in the market under the consent of the trademark owner or by other legal means.

An important precondition for the application of First-sale Doctrine is that the distribution of such products must be conducted by the trademark owner, with his consent or by other legal means, i.e. the 'principle of consent' in academic interpretation which means the related trademark rights can only be exhausted after the first-sale of such products relating to IPR by the right holder or under his consent.

The reason for the precondition is that the aim of the First-sale Doctrine is to guarantee the free circulation of the products, and to seek a balance of interest between the trademark owner and the general public. Therefore, in order to guarantee the legitimate interest of the trademark owner, the trademark owner must be entitled to control the first-sale of such products, as well as be entitled to acquire the consideration.

Therefore, any first-sale of such products without the trademarks owner's consent will not lead to the exhaustion of the trademark right.

In the first case discussed above, the purchase of used iphone by illegal means obviously violates the will of the trademark owner, and exceeds the scope of trademark license of the trademark owner with regard to the product. In the second case, the purchase of zippo lights without carved patterns by smuggling or other illegal means obviously violate laws and regulations including the Customs Law of PRC. It will not only bring great legal risk to trademark owner, but also violate its will.

Second, the First-sale Doctrine can only be applied to the distribution, exclusive of changing the state of the products, such as the refurbishment or reprocessing, or at least such refurbishment and reprocess shall be disclosed sufficiently to consumers, in order to prevent the confusion or misleading the consumers.

(1) Changes in the Status of the Products

There are no specific stipulations on the First-sale Doctrine in the Trademark Law of the PRC. The foreign laws and legal precedents can provide certain insights on this issue. Article 7 of First Council Directive of 21 December 1988 to approximate the laws of the Member States relating to trade marks is the latest legal basis of the same issue. It includes:

  1. The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.
  2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialization of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market.4 There are similar stipulations in Article 24 of the Trademark Law of Germany.5

(2) The Obligation of Full Disclosure

According to the main-stream theory of the US, the purchase and resale of the goods which have already been distributed shall not substantively alter the properties of the goods. If there is any material difference, such difference shall be fully disclosed for the consumers to distinguish the new goods from those before altered.6

There are many legal precedents in the judicial practice in the US on this issue.

Champion Sparks Plug Co. v. Sanders7

The defendant purchased used sparks plugs, and subsequently renewed and sold them. The trademark 'Champion' is found stuck on the packaging case of the renewed sparks plugs. The defendant also indicated 'Top Quality Guaranteed' and 'Perfect Process Renewed Spark Plugs ' on the goods, and the word 'renew' on the little box inside. The plaintiff accused the defendant of trademark infringement and unfair competition. The United States Court of Appeals for the Federal Circuit found that the acts of the defendant constitute trademark infringement and unfair competition, and ordered that

  1. The word 'repaired' must be carved on the sparks plugs, and such word shall branded on the sparks plugs with highly distinctive colors by electronic irons. and
  2. The defendant can indicate that the goods are reconstruction by himself on the packaging case, packaging box, business records etc. The Supreme Court of the United States not only affirmed the judgment of the Court of Appeals, but also further stated that the key is the 'full disclosure' on such reconstruction.

Beltronics v. Midwest Inventory Distribution LLC8

The defendant, the distributor of the plaintiff Beltronics violated its agreement with the plaintiff, and distributed the goods to Midwest Inventory Distribution LLC. The defendant removed all the serial numbers on the goods delivered by the plaintiff, and subsequently tag faked serial numbers, or removed all tags with the original serial numbers, then resold the goods. After such goods are resold, the consumers complained to the plaintiff as they had no access to the due guaranty of quality or after-sale service through proper channel, which should be provided by the plaintiff.

Court of Appeals for the Federal, Tenth Circuit has held, that 'the unauthorized resale of a materially different trademarked product can constitute trademark infringement' and 'a materially different product is not genuine and may generate consumer confusion about the source and the quality of the trademarked product'. The Court of Appeals affirmed the judgment of the district court that 'material difference includes the influence on the guaranty of quality and after-sale service', and indicated that 'the full disclosure by the reseller that the reconstruction goods are different from the genuine goods shall help to reduce the consumer confusion'.

(3) Conclusion

In China, there are also many cases on whether the First-sale Doctrine can be applied in the resale of goods if there were material difference on the goods put on the market. Similar legal precedent has been found in the trial issued by the Intermediate People's Court in Changsha on Michelin vs. HU, Yaping9 on trademark infringement. The decision indicated that although the tires distributed by the defendant were manufactured by the plaintiff in Japan, after the defendant altered the speed rate originally indicated by the plaintiff on the tires the resale of the tires can still generate consumer confusion, and constitute infringement on the exclusive rights to use the plaintiff's registered trademark.

It can be inferred that the exhaustion of the rights conferred by a trademark are mainly applied to in defense to guarantee the free flow of goods both in law and judicial practice in main jurisdictions of the world. So such principle shall be limited to the sale of goods, excluding the reconstruction, refurbishment and other acts where there is any material difference. If there is material difference, the reconstruction and the difference with the original goods shall be fully disclosed to prevent consumer confusion.

In the two cases mentioned here, the goods on which the trademark are used are refurbished ,carved and reprocessed respectively, thus the design and shape of the goods are changed constituting material difference. Therefore, the exhaustion of the rights conferred by a trademark cannot be used as a plea as the above-mentioned acts exceed its scope.

2.Whether the Renewal or Reprocessing of Goods Constitutes Infringement

2.1 Cutting the Connection between the Trademark and Goods shall Constitute Infringement

From the above-mentioned stipulations it can be inferred that a trademark owner shall not be entitled to prohibit the resale of the goods, but may prohibit the reprocessing and renewal of goods on markets. The ownership of goods is changed as of the date on which the goods are sold. The new owner of the goods shall be entitled to the right of disposing including the resale of the goods. But there are preconditions set for such disposing as trademarked rights attached to the goods still exist. In reality, the goods may be disposed in the following ways: first, to remove the original trademark, stick a new trademark, and subsequently resell the goods, i.e. to replace the trademark of goods with the goods untouched; and second, to reprocess, renew and repack, and subsequently resell the goods, while leaving the trademark unchanged, i.e. to change the goods with the trademark untouched.

Based on the triad structure theory of trademark, trademark is an integration of three indispensable elements, i.e. the users of the trademark as the principle, goods as the subject, and the sign representing the trademark10 The breakage of any link may hamper the function of a trademark, thus constituting an infringement of the exclusive right to use a registered trademark.

Under the first circumstance, mentioned in the last paragraph, under Article 57.5 of the Trademark Law of the PRC, it shall be an infringement of the exclusive right to use a registered trademark to replace, registered trademark without the consent of the trademark registrant, and subsequently resell the goods bearing the replaced trademark. Under the second circumstance, there is no related stipulation in the Chinese legislation, but the internal legal logic is similar to the first case, i.e. like the replacement of the trademark, changing the goods will break the link between the sign representing the trademark and the goods, thus hamper the distinctiveness of the trademark. Thus in the second case, the renewal or carving of the trademarked goods without the consent of the trademark owner may still constitute infringement.

2.2 Renewal and Reprocessing Constitute "the Use of a Trademark"

Under Article 57 of the Trademark Law of the PRC, where any party uses, without the authorization from the trademark registrant, a trademark identical with a registered trademark on identical goods, or a trademark similar to a registered trademark on identical goods, or a trademark identical with or similar to a registered trademark on similar goods, which may easily cause confusion, such conduct shall constitute an infringement upon the right to exclusively use a registered trademark.

Under Article 48 of the Trademark Law of the PRC, the use of a trademark, as referred to in the Trademark Law of the PRC, shall include the use of the trademark on goods, packages or containers of the goods or in trading documents, and the use of the trademark in advertising, exhibition or any other business activities to identify the origin of goods. Under Article 4 of the Trademark Law of the PRC, Any natural person, legal entity or other organization intending to acquire the exclusive right to use a trademark for goods or services in the course of the manufacture or business operations thereof shall file an application for the registration of the trademark with the Trademark Office. So it can be inferred that one can apply for trademark registration for reconstructed or reprocessed goods in the course of the manufacture or business operations thereof. After filing the application, the registrant shall be entitled to use the trademark, and forbid others from using the trademark without his consent. Besides, reconstruction or reprocessing can no doubt be included into the use of a trademark, so reconstruction or reprocessing of trademarked goods without the consent of the trademark registrant may constitute an infringement upon the right to exclusively use a registered trademark.

Granted, even reprocessing does not equal to manufacture, it is a kind of service, for which one can apply for trademark registration. Under SAIC Class on Similar goods and services (10th edition), 'metal finishing and processing' is included in head no.40. It is particularly stated in the note of head no.40 that this head include 'service on materials in the manufacture of substance or in the construction of building, such as cutting, molding, polishing or coating.'

So the re-processor can apply for trademark registration for the processing thereof. In another sense, the re-processor is obliged to demonstrate or indicate the reprocessing thereof, or else, it may mislead the consumers to confuse the origin of goods or services, thus infringing the trademark right of others on related goods or services.

2.3 Renewal and Reprocessing that harm the Function of a Trademark

As is known to all, the key in trademark infringement is the hamper on the function of a trademark. Unauthorized renewal and reprocessing may damage the function of a trademark in many aspects.

First, it harms the distinctiveness of a trademark. As is mentioned above, there is no description and indication on such renewal and reprocessing, so the consumers may misinterpret the origin of the reprocessed goods, i.e. misinterpret that the goods they purchase are manufactured or processed by the trademark owner, or at least under his authorization.

Second, it harms another function of a trademark, i.e. the guaranty of quality. Under Article 7 of the Trademark Law of the PRC, any user of a trademark shall be responsible for the quality of the goods in respect of which the trademark is used. So the trademark owner is obliged to guarantee the quality of goods manufactured or distributed by him. To be specific, the manufacturer indicates the origin of goods by use of a trademark, and consumers also identify the origin of goods or services, and thereby identify the quality thereof by use of a trademark. For this issue, under the Written Response to whether the Victim of Trademark Infringement can Proceed a Legal Litigation against Owner of the Trademark issued by the Supreme Court of PRC (Legal Interpretation (2002) No.22), any party who represent its name, trademark or other identifiable indication on goods to indicate it is the manufacture of the goods shall be deemed as the manufacture stipulated in the General Principles of The Civil Law of PRC and the Product Quality Law of PRC. So the party who indicates the trademark on goods shall guarantee the quality of goods.

However, the trademark owner has no access to control and know the details of unauthorized renewal and reprocessing, and guarantee the quality and rights thereof, therefor its goodwill is also at risk.

III. Conclusion

Based on the discussion mentioned above, the renewal and reprocessing, and the subsequent distribution of goods already sold don't satisfy the preconditions set for the First-sale Doctrine, thus such doctrine isn't applicable herein. Besides, such renewal and reprocessing constitute trademark infringement stipulated in the Trademark Law of the PRC, damages the function of a trademark, threatens the legal interests of the consumers, and constitute trademark infringement,

Footnotes

1 Zhu, Jianjun. (2014). 'Using as a Trademark 'should be the Precondition to Determine Trademark Infringement -Thinking led by the case of the trademark of Apple Inc. Intellectual Property. The related civil cases includes No 47, Shenzhen Intermediate People's Court, (2007), No 421, Shenzhen Intermediate People's Court, (2007)

3 WANG, Qian. A Course on Intellectual Property Rights, 4th ed. Beijing: Peking University Press, page 464.

4 LI, Mingde. e.t al. Intellectual Property in European Union, 1st ed. Beijing: Legal Press, 2010: 513-514.

5 Teaching and Researching Institute of IPR, Renmin University of China and Intellectual property Academy of Renmin University of China: Trademark Law in Twelve Countries, 1st ed. Beijing: Tsinghua University Press, 2013: 26.

6 Gilson on Trademark Chapter 11.08.

7 Champion Sparks Plug Co. v. Sanders United States Supreme Court 331 U.S. 125 1947 Trademark and Unfair Competition, David Hilliard et al., pp.517 and 518.

8 Beltronics v. Midwest Inventory Distribution LLC, 562 F.3d 1067 (10th Cir. 2009)

9 Changsha Intermediate People's Court, (2009), No. 0072.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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