China: An Analysis Of The SPC Judgment On PRETUL

Last Updated: 25 January 2017
Article by Cecilia Lou

Since the Supreme People's Court (the "SPC") handed down its retrial judgment (2014) Civil Retrial No. 38 on the "PRETUL Case"  , the question of "whether the use of a trademark on an OEM  product constitutes infringement" has arisen as a topic of heated debate in 2016. Although the SPC gave an answer to this particular case, it did not provide explanations on other subsequent questions, which are now facing people concerned. This article aims to address these questions by analyzing the SPC's judgment on PRETUL and two similar cases handled by the Beijing IP Court.

1. Background of the OEM-related trademark question

In the first-ever OEM trademark infringement case in China - "NIKE International Ltd. v Jiaxing Yinxing Garments Ltd., etc."  in 2001, the Shenzhen Intermediate People's Court held that "despite that the Spanish company (the licensor) had the legitimate right to use the NIKE trademark, the defendant infringed the plaintiff's trademark rights by producing on an OEM basis in China and exporting NIKE branded male ski jackets for commercial purposes without the plaintiff's consent", citing trademark territoriality and Chinese courts' jurisdiction. In short, the court confirmed that OEM products constituted infringement.

Many people disagree to that view, however, deeming it inappropriate to treat OEM products as infringing, for the following reasons: (1) Trademark infringement essentially undermines a trademark's function of identifying the source of the underlying product and causes confusion among consumers. But OEM products for export will not probably cause consumer confusion as to their sources because they are not circulated in China and will not be accessed by the relevant public . (2) OEM will cause no material damage to the trademark holder's domestic market or his trademark rights. (3) OEM in essence represents a contractual relationship under the PRC Contract Law, and the contractor's processing should not be considered "the use of a trademark" in the sense of trademark law .

The controversy was later reflected in judicial practice: courts in different regions held different views on this question. In "JOLIDA case" , the Shanghai Higher People's Court observed that, "the product in dispute manufactured and exported by the defendant (domestic manufacturer) on the commission of the US-based JOLIDA, an outsider, was not distributed in China, and therefore would not cause consumer confusion or misunderstanding. In addition, although the trademark was actually affixed by the manufacturer in China, it was used in reality by the overseas client. The trademark on the disputed product played the role of identifying the product source in the overseas market rather than in China. Therefore, the defendant did not infringe the plaintiff's exclusive right to the trademark."

The Jiangsu High People's Court presented another logic in (2015) Jiangsu High Court IP Final Judgment 00036 , "although the defendant's conduct belonged to OEM for a foreign company, it was aware that the plaintiff's trademark 'DONGFENG' was a well-known mark. It nonetheless engaged in OEM and knowingly used the same trademark with the plaintiff's on the allegedly infringing product. Without exercising its duty of reasonable care and avoidance, the defendant damaged the plaintiff's interests, and infringed its exclusive right to its registered trademark". 

Meanwhile, a number of judicial guiding opinions contain different views. According to Article 13 of "Answers to Several Questions on Trademark Civil Disputes" issued by the Beijing Higher People's Court on February 18, 2004, OEM is based on the express commission by a party who is entitled to use a trademark, and OEM products should not be determined to be infringing as they are not distributed in China and will not probably cause confusion or misunderstanding among the relevant public. However, the same court expressed a different view in its later edition of "Answers to Several Questions on Trademark Civil Disputes" publicized on February 13, 2006. According to Article 21 thereof, an OEM contractor who processes products bearing a trademark is responsible for examining whether the client has the exclusive right to the registered trademark. Otherwise, the contractor will be considered an infringer as the client's accomplice. In its April 21, 2009 "Opinion on How IP Trial Serves the Overall National Strategy in the Current Economic Conditions", the SPC reaffirmed the OEM contractor's indispensable duty of examination and care, but remained silent about whether OEM generally constitutes infringement. 

2. The PRETUL Case

PRETUL is important in that it produced the first clear-cut judgment about whether OEM is considered "trademark use" under trademark law, and whether trademark use in OEM infringes someone else's trademark rights. The case provides a guide to the trial of subsequent cases.

In PRETUL, Focker Security Products International Limited ("FOCKER") obtained the exclusive right to use the "PRETUL and oval device" trademark (in Class 6) in China on March 27, 2010 by virtue of a trademark holder's assignment, whereas an outsider, Mexico-based TRUPER HERRAMIENTAS, S.A.DE C.V. ("TRUPER"), was the owner of the registered trademarks "PRETUL" and "PRETUL and oval device" (in Classes 6 and 8). In 2011, TRUPER signed an OEM contract with PUJIANG YAHUAN Locks Co., Ltd. ("YAHUAN") licensing the latter to manufacture padlocks bearing the "PRETUL" mark, which would all be exported to Mexico. FOCKER claimed that YAHUAN infringed its exclusive right to the PRETUL trademark.

The SPC heard the case and confirmed that OEM was not "trademark use" and YAHUAN did not infringe TRUPER's trademark rights. According to the SPC, the trademark used by YAHUAN did not perform a trademark's basic function of identifying the product source. It continued, "YAHUAN's use of the trademark was simply a physical affixation of the mark in China, a necessary technical condition provided for TRUPER to use the trademark in Mexico where it was entitled to use. The mark applied to the product was not to distinguish the product from others, nor had the function of identifying its source. Therefore, the mark on YAHUAN's product did not possess the nature of a trademark, and should not be considered the use of a trademark". In addition, determining whether one's trademark rights are infringed is based on whether a trademark's identification function is undermined. When a trademark does not play the role of identifying the product source and trademark use is involved, it is of no practical meaning to find if the same or a similar trademark is on the same or a similar product and would cause confusion.

The above analysis is consistent with the SPC's judgment in (2012) Administrative Retrial No. 2 . The SPC agreed with the second instance court that the act at issue was not trademark use under trademark law, because "OEM products (of the foreign trademark owner) in China were manufactured by Chinese enterprises exclusively for export, and all relevant advertising and media reports happened outside of China, therefore, it cannot be proved that the 'Muji' trademark was actually used in China and known by the relevant public to a certain extent".

3. New questions

While the SPC judgment on PRETUL put an end to the debate over whether OEM constitutes infringement, it did not answer other extended legal questions, which have become more pronounced than before.

A major question for instance is that if under the logic of PRETUL no trademark use is constituted because the product has not entered the domestic market and therefore will not cause confusion, should the affixation of a trademark in production by an exporter who is not an OEM but aims to export all of its products be excluded from trademark use? Similarly, if the branding of products for export is not considered trademark use, how should an exporter maintain registration of its trademark?

In two cases involving processing products for export heard by the Beijing IP Court, i.e., "SODA case" and "DCLSA case" , the Beijing IP Court asserted that the affixation of trademark on products for export in the manufacturing phase constituted trademark use under trademark law. This looks to be in conflict with the SPC's position in PRETUL. But a detailed comparison between the two cases and PRETUL will reveal that they were different in nature, and thus led to opposite conclusions. 

In PRETUL, TRUPER (the client) had the exclusive right to the PRETUL trademark outside of China, and YAHUAN (the contractor) was the Chinese OEM manufacturing completely in compliant with TRUPER's instructions. All products manufactured were sold to TRUPER for distribution in foreign markets. In DCLSA, Zhenjiang Locks Factory as the trademark holder in China manufactured and exported its own products rather than made products on an OEM basis. Zhenjiang Locks Factory's will was demonstrated throughout the course of manufacturing and export. In SODA, trademark holder Mingji signed two contracts, which licensed China-based Xinhonghou to "non-exclusively use the SODA trademark to produce SODA branded clothes and accessories" and "licensed JF Xinhonghou/GF Shengfu to non-exclusively use the SODA trademark in China to produce relevant branded clothes and products for export to Southeast Asia ..." As the existing evidence shows, Mingji never specifically limited the manufacturing and export by its licensees Xinhonghou and JF Xinhonghou/GF Shengfu, and the export of relevant products were all carried out by Xinhonghou itself (the products were first sold to an import-export company in China, which in turn exported them to foreign countries). Throughout the course of manufacturing and export, the independent will of both Xinhonghou and the import-export company was demonstrated in full as well.

These differences make the three cases receive different qualitative assessments. PRETUL is a typical OEM case, where products were manufactured by the domestic company on the commission of the foreign trademark holder. No independent will of the manufacturer was demonstrated. It was not a process in which products were manufactured and then sold to the client, the manufacturer only offered the labor of processing. As a contractor, the domestic OEM manufacturer completed its work as per the client's instructions, delivered work results and got paid. Although the SPC does not mention this explicitly in its judgment, the wording "physical affixation" implies such a conclusion. 

DCLSA and SODA, however, were of a different type. In DCLSA, manufacturing and export were performed at the sole discretion of Zhenjiang Locks; in SODA, the licensee Xinhonghou also independently manufactured and exported its products. Their relations with the overseas importers were simply contractual purchase and sale ones. In these two cases, they manufactured and branded the products, and the whole processes were independent and controlled by themselves. The independent will of the trademark holders and licensees were demonstrated in full.

In addition, although none of the three cases involved retail in China, they were different in nature as to whether the trademarks performed the function of identifying the sources. It should be noted that so far as the question of whether "trademark use" was constituted is concerned, the "Chinese market" is not confined to the "retail market", but includes the "wholesale" and "export" markets. 

In PRETUL, YAHUAN manufactured products on the commission of TRUPER and delivered them to TRUPER for export to overseas markets. Except for the payment of processing fees, the whole transaction had nothing else to do with China. Because of the nature of OEM and subject to the agreement with TRUPER, YAHUAN was not, is not, and will not be able to have relations with any third party at home and abroad in connection with the products. Therefore, it can be concluded that a trademark applied in OEM cannot fulfil the function of identifying the product source, does not constitute "trademark use" under Trademark Law, and will not cause confusion among domestic consumers.

In DCLSA and SODA, however, the exporters were engaged in foreign trade and their sales to the importers occurred in China. Although a single transaction involved specific parties, this did not preclude the possibility that the trademark holder and the licensee who controlled the manufacturing and exports would choose other third parties in their upcoming deals. Therefore, the selling or exporting of products was essentially for unspecified third parties. In addition, as foreign importers imported products, they relied on the trademarks to distinguish Chinese exporters, and therefore the trademarks had fulfilled the function of identifying product sources. 

The judgment in DCLSA provides detailed explanations. The court said, "So-called 'trademark use' refers to an act that fulfils the essential function of a trademark, which is identification of product sources (i.e. using a trademark or service mark to identify the provider of a product or service). Usually, a trademark will not fulfil its identifying function until the underlying product enters the market." As "exporting means the product enters the market", exporting as a general rule is an act of "trademark use".

In summary, although the Beijing IP Court rendered judgments in DCLSA and SODA that were different from that of the SPC in PRETUL, they were not contradictory with the latter. DCLSA and SODA represented another form of exports involving trademark affixation, i.e. exports at the discretion of the manufacturers themselves. It was appropriate for the Beijing IP Court to determine such acts as "trademark use in the sense of trademark law", and it can be considered a supplement to the SPC judgment.

4. Conclusion

The SPC judgment on PRETUL is important in that lays down the principle that "the use of trademarks on OEM products does not constitute infringement", putting an end to confusing rulings on OEM trademark infringement disputes, and clarifying the relations between "trademark use" and "non-trademark use". However, to explain the term "physical affixation" in the judgment, "Chinese market" should not be understood simply as the "retail market in China", nor should it be rigidly understood in the way that all acts of affixing trademarks in manufacturing products for export are "physical affixation" and therefore constitute no trademark use.

The analysis of the Beijing IP Court judgment in DCLSA and SODA shows that, the acts of export at the discretion of manufacturers are completely different with OEM. Even though all the products are manufactured for export, the acts of affixing trademarks in the course of manufacturing still constitute trademark use in the sense of trademark law. In determining whether the acts of affixing trademarks in the course of manufacturing are "physical affixation", and whether such acts constitute "trademark use in the sense of trademark law", the specific details of a case should be considered, and attention should be given to two questions: 1. whether the acts of manufacturing and marking demonstrate the independent will of the manufacturer in full; and 2. whether the export sales are directed to unspecified third parties?

Editor's note: this article was simultaneously published on Chinalawinsight.com

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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