China: Dust Unsettled? China's Supreme Court Refines OEM Jurisprudence In Ground-Breaking Honda Judgment

Last Updated: 3 December 2019
Article by Jonathan Liang, Helen Xia and Stefaan Meuwissen

The Chinese Supreme People's Court ("SPC") recently handed down its latest judgment on whether Original Equipment Manufacturing ("OEM") may constitute trademark infringement in China. In its judgment, the SPC refines its earlier jurisprudence, now ruling that affixing trademarks on goods manufactured under an OEM license constitutes trademark use, and may therefore infringe on Chinese trademarks, even if such goods are all exported and not commercialised as such in China. The SPC seems to refine (or even partially backtrack on) the conclusions from its earlier landmark rulings in the Pretul and Dongfeng cases (in which it had ruled that the OEM use did not constitute trademark use), and seems to give more leeway to the courts to continue to decide OEM trademark infringement cases pragmatically, on a case-by-case basis, depending on the factual circumstances of each case.

This latest judgment has important repercussions for both purchasers, buying OEM products from China, and for trademark owners attempting to stop counterfeit goods being manufactured and exported from China. It is essential for companies that are involved in, or faced with, OEM manufacturing in China (whether wanted or unwanted) to devise a comprehensive China IP strategy, adjusted to this latest twist in the OEM jurisprudence.


INTRODUCTION

Original Equipment Manufacturing ("OEM") is a business model whereby a purchaser, most often located outside of China, orders its products from a manufacturer, often located in China, who manufactures and exports those products branded with the purchaser's marks instead of the manufacturer's own marks. In China, which is often branded "the factory of the world", OEM is big business, and therefore of great economic and legal importance. However, from a trademark law point of view, OEM has been a legal maze, with uncertainty whether the mere affixation of a mark by an OEM manufacturer, without any further commercialisation in China, constitutes trademark use of such mark. The Trademark Law does not give any clear-cut answers on the issue, and the judicial and administrative practices on the issue have been inconsistent and divergent.

The issue whether OEM use constitutes trademark use is mainly relevant to two types of procedures: administrative non-use cancellation procedures against trademarks not used for over 3 years, and civil trademark infringement cases.

For the purposes of administrative non-use cancellation actions, the issue of whether OEM constitutes trademark use (i.e. use of the trademark on goods purely for exportation purposes) has been clarified thoroughly by the SPC in its Montfort Services SDN BHD v TRAB judgment: mere OEM use qualifies as use, and does protect a Chinese trademark from non-use cancellations.

However, the parallel question of whether mere OEM use may infringe upon Chinese trademarks in civil infringement procedures has been the subject of a lot of controversy, with the SPC and the lower courts often following conflicting or inconsistent views. The jurisprudence of the SPC on this topic has evolved over the years, with the Honda judgment being the latest chapter in the saga (for now). Below we present the major developments in the SPC's views on this issue over the years.

EVOLUTION IN THE SPC JURISPRUDENCE ON OEM AND TRADEMARK INFRINGEMENT:

The SPC's Pretul judgment (2015): OEM not trademark infringement.

In the Pretul judgment, the SPC ruled that, in principle, pure OEM use of a trademark does not infringe on a Chinese trademark.

The SPC held that as long as the trademarks are affixed on OEM products exclusively designated for exportation, these trademarks are not used to fulfil the basic function of trademarks, which is to distinguish or identify the source of the OEM products in China. In the Court's opinion, the marks affixed in the context of OEM manufacturing are therefore not used as a trademark for the purpose of trademark infringement in China, and, consequently, cannot infringe upon a Chinese trademark. The judgment of the SPC in the Pretul case seemed to be general in nature, and seemed to apply extensively to all trademarks applied in the context of OEM manufacturing.

However, this judgment created a discrepancy between the assessment of OEM trademark use in administrative proceedings (i.e. non-use cancellations) on the one hand, where it was considered to constitute trademark use, and of OEM trademark use in civil infringement proceedings on the other hand, where it was considered not to constitute trademark use.

The SPC's Dongfeng judgment (2017): OEM not trademark infringement, if all conditions are met.

Perhaps the SPC noticed the abovementioned discrepancy between the treatment of OEM trademarks in administrative and in civil proceedings, and it was possibly in order to diminish that discrepancy, that the Supreme People's Court handed down a more nuanced judgment in the Dongfeng case.

In this case, the SPC made a decision that is markedly different to its Pretul judgment. The SPC considered in particular that the basic function of trademarks is to distinguish the source of goods or services, and that therefore, marks that are not used to indicate the source (such as in OEM manufacturing) do not mislead or cause confusion to the relevant consumers as to the source of the goods or services. Moreover the SPC also held that OEM manufacturing is a common and legal form of commerce, and that it enables foreign trademark owners to exercise their trademark rights in their respective jurisdictions.

However, importantly, the SPC now also added that a finding of non-infringement of Chinese trademarks depends on a double condition: (a) whether the OEM manufacturer had performed its reasonable duty of care (i.e. it has to review the registration status of the purchaser's trademark in its foreign jurisdiction); and (b) whether the OEM use causes substantial damage in China, e.g. to the Chinese trademark owner.

It is clear from the Dongfeng case that the SPC's reasoning was evolving, slowly but surely. Unlike in the Pretul case, there is no more blanket exoneration from infringement for all use of trademarks in OEM manufacturing. Instead, the SPC emphasizes that this is dependent on whether the OEM manufacturer has fulfilled its reasonable duty of care, and whether the OEM use has caused substantial damage to the Chinese trademark owner. Therefore, the SPC's reasoning in the Dongfeng judgment already suggests that in some cases, OEM use may actually constitute trademark infringement.

The SPC's Honda judgment (2019): OEM may constitute trademark infringement

On 23 September 2019, the SPC handed down its latest judgment on the issue in the Honda case. The case involved the OEM production in China of motorcycles manufactured for a purchaser in Myanmar. The OEM manufacturer affixed the purchaser's brand "HONDAKIT" on those motorcycles, whereby only the "HONDA"-part was displayed in a distinctive manner. Honda therefore brought a trademark infringement case against the OEM manufacturer, winning in first instance, and losing on appeal. It then applied to the SPC for a retrial, which was granted.

In its retrial judgment, the SPC reiterates that if a trademark is used to distinguish the source of a product, it constitutes trademark use. The SPC clarifies that this is an objective act, whereby neither the manufacturer's or purchaser's subjective intent, nor the consumer's actual confusion is relevant or required, i.e. a theoretic likelihood of confusion in China is sufficient.

The SPC also rules that the relevant public is a broad concept, which, apart from end-consumers, also includes the operators involved in the OEM process (e.g. transportation companies, distributors etc., which may be exposed to the OEM trademarks on the products before they are exported). The SPC moreover now rejects the traditional argument that the OEM products were not commercialised in China, and that there is therefore no likelihood of confusion in China, by referring to the ubiquity of international e-commerce (which does not exclude re-importation into China) and potential confusion of Chinese consumers using the Internet or travelling abroad. The SPC therefore held that in this case, the OEM manufacturer had conducted trademark use in China of the mark "HONDAKIT", which is a mark confusingly similar to the registered trademarks of Honda. The SPC therefore held that the OEM manufacturer's acts constitute trademark infringement.

The SPC also rejected the exemption from trademark infringement for OEM manufacturing invoked by the manufacturer, by considering: (1) it is irrelevant whether the purchaser in Myanmar had a trademark for "HONDAKIT" in Myanmar, as trademarks are territorial rights and the purchaser in Myanmar cannot grant a valid license to use such mark in China; (2) referring to macro-economic circumstances, such as the development of China's economy and globalization, the SPC stated that is not possible to grant a blanket exemption from trademark infringement to a certain industry or method of manufacturing. The SPC therefore concluded that the manufacturer's actions were not exempted from trademark infringement.

COMMENTARY

Throughout the years, it can be seen that the SPC's assessment has evolved from a blanket exemption from trademark infringement for OEM manufacturing to a much more factual and case-by-case approach. Such approach is arguably more consistent and getting closer to the spirit of the law, given that the same OEM act may now constitute trademark use for both administrative non-use cancellations, and for civil trademark infringement procedures.

It is likely that following this judgment, affixation of trademarks on goods in the context of OEM manufacturing will generally be deemed trademark use, and therefore possibly trademark infringement by the Chinese courts. However, it remains unclear and to be watched whether once trademark infringement is found, damages would be granted, and what factors may affect the amount of the damages granted. Will the courts consider factors such as whether the OEM manufacturer has fulfilled its reasonable duty of care, and whether the OEM production has caused substantial damages to the Chinese trademark owner, in deciding about granting damages?

NEXT STEPS

This latest judgment will have important repercussions for both purchasers buying OEM products from China, and for trademark owners attempting to stop unwanted OEM manufacturing in China. It is essential for companies that are involved in, or faced with, OEM manufacturing in China (whether wanted or unwanted) to reassess and devise a comprehensive China IP strategy, adjusted to this latest twist in the OEM jurisprudence.

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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