Many foreign companies engage original equipment manufacturer ("OEM") in Mainland China to manufacture their products exclusively for exports purpose only and do not distribute their products for the Chinese domestic markets. Hence, most of these foreign companies do not bother registering their trademarks in Mainland China and it is not uncommon for unrelated third parties to register these trademarks (or similar trademarks) there.
There is a continuous debate as to whether OEM activities constitute trademark infringement in Mainland China. Protection afforded by trademark registration is territorial by nature. Therefore, it is unclear whether the OEMs can legally affix trademarks on the products merely for export purposes when the foreign companies only own valid trademark registration overseas but not in the Mainland China where the trademarks had been registered by others. Previously, following the decision of Supreme People's Court ("SPC") in Mainland China on the Pretul case (Focker Security Products international Limited v Pujiang Ya Huan Locks Co. Ltd – 2015) and the Dongfeng case (Shanghai Diesel Engine Co. Ltd. v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd – 2017), OEM activities supported by a valid oversea trademark registration and proper government authorizations generally would not be considered as trademark infringement. Over the past few years, SPC was of the view that since the OEM products were all exported to overseas countries instead of being used for domestic consumptions, the OEM model should be simply defined as "an act of affixing the trademark to a product", thus it should not be considered as "use of a trademark" and would not constitute trademark infringements as the products will not be exposed to and confuse consumers in Mainland China.
Notwithstanding the above, this mainstream opinion was overturned by SPC in the HONDAKIT case (Honda Motor Company Ltd and Chonqing Hengsheng Xintai Trading Co Ltd – 2019) where it was held that trademark infringement might be found in OEM activities in cases that a third party had obtained an identical or similar trademark registration in Mainland China.
The Plaintiff HONDA has registered the trademarks , and on motorcycles, etc. in class 12 since 1988. Meihua Company Limited ("Meihua") was a Burma company and owned the trademark registrations for the mark "HONDAKIT" in Burma. The two Defendants were authorized by Meihua to manufacture motorcycles bearing the "HONDAKIT" trademark in Mainland China and export the finished products to Burma. In 2016, a batch of "HONDAKIT" products were seized by the Kunming Customs (the provincial capital of Yunnan Province) on the ground of infringement of HONDA's trademark registrations. As the Customs could not decide whether the OEM products constituted infringement, HONDA commenced litigation with the Intermediate Court of Dehong Dai and Jingpo Autonomous Prefecture against the two Defendants for trademark infringement.
The first instance court made a ruling in favor of HONDA and ordered the 2 Defendants to pay RMB 3 million compensation, which was then overturned by the High Court of Yunnan Province in the second instance following SPC's earlier opinion on OEM activities in the Pretul and Dongfeng cases. HONDA then appealed to SPC, which finally revoked the second instance judgement and upheld the first instance judgement.
SPC held that the 2 Defendants had used the "HONDAKIT" mark on motorcycles with "HONDA" in bigger font than "KIT" and highlighted the letter "H" and a wing device in red, which were similar to HONDA's registered trademarks in Mainland China and might cause confusion among the public, thereby damaging the trademark rights of HONDA. SPC further expressed in the judgement that:
- As long as the mark used in a product had the function of identifying the source of goods, it should be deemed as "use of a trademark" under the PRC Trademark Law;
- Even though the OEM products were not specifically manufactured for the domestic market, with the development of e-commerce, the products may circulate back to the domestic market and Chinese consumers may access and be confused by the products when traveling abroad; and
- The court may find trademark infringement as long as there was likelihood of confusion while actual access to the products and actual confusion were not required.
SPC affirmed for the first time that OEM could not be simply classified as an exemption of trademark infringement and departed from its earlier opinion that exported products did not have the function of identifying the source of goods. This is important because the earlier opinion has often been used by the local courts as a reference to determine trademark infringement in OEM disputes.
The HONDAKIT judgement illustrated that Mainland China will adopt more flexible ways to regulate the use of trademark in OEM activities. This trend is likely to continue as the products will be able to freely flow in and out China with the signing of the Regional Comprehensive Economic Partnership thus weakening the "relevant public" argument. It is anticipated that domestic trademark owners may benefit from the new judgment as they can now take more aggressive enforcement measures against OEMs and the foreign companies may no longer rely on their overseas registered trademarks as a defence. Having said that, SPC's standard of deciding whether an OEM activity constitutes "use of a trademark" and trademark infringement remains unclear. It is possible that this is a standalone case as there is strong bad-faith element involved. In the near future, it is likely that OEM Trademark infringement cases continue to be dealt with in a case-by-case basis.
Following the HONDAKIT case, brand owners who have been using OEM manufacturers in Mainland China without registered trademark will face huge challenge on their business models. As Mainland China adopts a first-to-file principle, it is crucial for brand owners to secure the trademark registration and customs recordal in Mainland China as soon as possible even if they do not commercialize their products in the Chinese market.
It is also important to conduct regular trademark monitoring in Mainland China. Many squatters have pirated the trademark or other core elements of some foreign brands in Mainland China with no intention to use. In cases that there are prior registrations on the identical or similar trademark by a third party, brand owners should initiate non-use cancellation or invalidation at early stage to clear the obstruction.
Originally Published 14 January 2021
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