China's SPC finally takes a stand: pure OEM use in principle does not
infringe upon Chinese trademarks
China IPMT Alert - 3 February 2016
Summary
After years of controversy surrounding the legal status
1
of original equipment manufacturing ("OEM") , China's
Supreme People's Court has finally handed down what
may become a landmark judgment in the Focker v Ya
2
Huan case.
Introduction
The controversy regarding the status of OEM
infringement initially arose because the Trademark Law
does not give any clear-cut answers on the issue, and
the judicial and administrative practice on the issue
have been - somewhat deliberately - inconsistent.
Political, macro-economic, social and public interest
factors have so far heavily influenced the jurisprudence,
as have the specific factual circumstances of each
case. You can find earlier newsflashes here: Nokia
prevails over OEM in trademark infringement lawsuit,
OEM Jiulide Shenda case, OEM Revisited, The Muji
Case).
In short, in this case, the SPC ruled that a trademark,
affixed on OEM products exclusively designated for
exportation, where the person who ordered the goods
has a valid trademark, does not function as a badge of
origin of those products in China. In the Court's opinion,
the mark is therefore not used as a trademark in China,
and, consequently, cannot infringe upon a Chinese
1
Background
Focker's trademark
was registered in
China in 2003 for household metal products and locks.
Mexican company Truper, on the other hand, has
owned the Pretul word mark in Mexico and in various
other countries since 2002. Truper instructed Ya Huan,
an OEM manufacturer based in Pujiang, to produce
locks, keys, instructions and packaging bearing the
Pretul mark. Both the packaging and the instructions
produced by Ya Huan contained the description in
Spanish that Truper was the importer of the goods in
Mexico, and that the goods were made in China.
Neither the packaging, nor the product instructions bore
any information about Ya Huan.
Following the recordal by Focker of his Pretul trademark
with Chinese customs, a number of products were
seized by customs at the Port of Ningbo. Subsequently,
Focker filed a civil trademark infringement action
against Ya Huan, who was labeled as the consignor of
the goods.
Both the first instance and appeal courts held that the
production by Ya Huan of goods bearing the
mark constituted trademark
infringement. Ya Huan consequently applied to the SPC
for a retrial of the case.
The SPC's Reasoning
OEM (short for 'Original Equipment Manufacturing') is a process whereby a
manufacturer produces another company's product under that latter
company's own name and branding.
2
trademark. Whilst the decision is intended to be fact
specific, the concern is it will become widely applied.
Focker Security Products International Limited (莱斯防盗产品国际有限公
司,"Focker") v Pujiang Ya Huan Locks Co., Ltd.(浦江亚环锁业有限公司,
"Ya Huan")
In its judgment, the SPC reiterated that the essential
function of a trademark is to serve as a badge of origin
for certain products or services. The SPC held that the
courts, when called upon to decide on trademark
infringement, should in principle first focus on whether
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the sign alleged of infringement in fact functions as a
trademark in China, i.e. as a badge of origin for
products or services in the Chinese market, before
determining whether such use causes confusion and
infringes upon the registered trademark. The SPC held
that if the actual use of a sign does not indicate
product/service origin to the Chinese market, such use
is not trademark use, since it does not harm the
registered trademark's function to identify the origin of
products to Chinese consumers.
When applying this rationale on the facts of the case,
the SPC held that Ya Huan only affixed the Pretul mark
on OEM products exclusively designated for
exportation, and that it therefore never functioned as a
badge of origin in the Chinese market, since those OEM
products never entered China for retail or trade.
Moreover, the Court held that such use merely made it
technically possible for the Mexican importer Truper to
exercise its trademark rights in Mexico. The SPC
therefore held that there was no use of Pretul as a
trademark in China, and hence no trademark
infringement, and reversed the decisions by the lower
courts.
b. Have trademark registrations in China and
wanted to stop a manufacturer from
manufacturing goods for a market where they
do not own the trade mark (and so would be
disappointed to learn that it would now be
difficult to stop such OEM manufacturing unless
there is use or sale of the products in China).
However, this judgment was clear that it should be fact
specific. It is expected that the following factual
elements will generally be required for OEM use of
trademarks to be labelled as non-infringing:
•
•
•
•
Remarks
This judgment is ground-breaking in that the SPC held
for the first time that the use of a mark only constitutes
trademark use if it realizes its essential function: serving
as a badge of origin in the Chinese market. Pure OEM
manufacturing, whereby the goods produced in China
are not put on the Chinese market at all, therefore does
not constitute trademark infringement in China.
The case has clarified a large amount of the uncertainty
for brand owners who either:
a. Have their mark hijacked in China (and so
would be relieved to know that provided the
goods are purely for export, OEM
manufacturing with a clear indication that it is
for export, is not considered as trademark use
and hence no infringement of the hijacked
mark).
The OEM manufacturer exports all of its
products abroad;
The foreign purchasers are the rightful owners
of the trademarks in the country of destination
prior to the filing date of the Chinese mark;
The OEM manufacturer performed its
reasonable duty of care by verifying the IP
rights of foreign purchasers and have
documentary evidence supporting the same;
and
The OEM manufacturer was authorized to
produce OEM products by foreign right
holders.
This is consistent with previous cases.
It is furthermore unclear how "entry on the Chinese
market" will be interpreted in practice while determining
whether a mark has been used as a trademark in
3
China. In fact, several courts have held in the past that
the "relevant public" for trademark use encompasses
not only the relevant consumers but also the market
operators who have a close relation with the
marketing/distribution of OEM products (e.g. logistics
companies). In that latter case, the marks on OEM
products can be held to be used with those operators,
which would then constitute trademark use and, hence,
could still lead to a finding of infringement.
Another way to nuance this case is to examine the use
by the SPC of the expression the "essential function" of
a trademark. Would this mean that there could be other
3
E.g. the Fujian, Zhejiang and Guangdong Higher People's Courts.
"non-essential" functions for trademarks in China? If so,
could such functions be infringed even if products were
not directly marketed to Chinese consumers?
In any event, what is clear for now is that according to
the SPC, the affixation of a trademark on OEM goods
purely destined for exportation is not sufficient to
infringe upon the origin function of a trademark in
China. We expect that the dust on this topic has not yet
settled with this case, and will provide you with further
updates when new cases become available. It will also
be of interest to observe Customs seizures moving
forward, and the previous practice of using customs
seizures as evidence of infringement would no longer
be sufficient. Evidence that locates sales/acts of
infringement targeting Chinese consumers would
become more important.
Last, but not the least, the SPC's decision in this case
does not touch upon other disputes and issues
concerning the affixation of a trademark on OEM
products. For example, does the affixation of a
trademark on OEM products constitute the trademark
use to defend the registration of the trademark against
non-use cancellation action if the trademark owner uses
the trademark on OEM products only in the Chinese
market?
We will provide you with further updates when new
developments become available.
Further information
If you would like further information please contact a
lawyer mentioned below or the lawyer with whom you
usually deal.
Contact
Beijing
Deanna Wong*
Partner
[email protected]
T +86 10 6582 9419
Rae Yan*
Partner
[email protected]
T +86 10 6582 9528
Shanghai
William Fisher
Partner
[email protected]
T +86 21 6122 3850
Feng Zhen*
Partner
[email protected]
T +86 21 6122 3826
Hong Kong
Alan Chiu
Partner
[email protected]
T +852 2840 5619
Eugene Low
Partner
[email protected]
T +852 2840 5907
* Partners or Directors of the Hogan Lovells Intellectual Property
Service Co. Ltd.