Tackling OEM infringement in China (sponsored discussion)

Huang Hui: Many stakeholders who are in foreign countries use original equipment manufacturer (OEM) factories to produce their products with their trademarks that they own in their country (of destination). However, sometimes they do not own the trademark in China. It is too late for them to do it because the mark has already been filed or even registered by a third party. Maybe the filing of such prior mark was made in bad faith (pre-emptive registration), but it is not always easy to eliminate such obstacles. Meanwhile, they want to continue using the facilities provided by the OEM factory. And there is the risk: being sued by the prior trademark owner. So, they are in favour of making an exception for OEM exports.

Paul Ranjard: This is perfectly understandable. But you also have to take into account the legitimate owners of registered trademarks who wish to be able to take action against any unauthorized use of their trademarks in China. They want to be able to request the Customs to seize any shipment of infringing products going out of the country. If there is such an exception in favour of OEM exports, how could they protect their rights?

Huang Hui: The Trademark Law does not provide anything in this regard (previous drafts had specified that OEM could constitute trademark infringement, but this has not been kept in the final text). However, a small change was introduced at the end of Article 48, which defines the “use” of a trademark. The wording is exactly the same as in the previous law (to affix a trademark on goods etc.), but, in the end, the words “…to indicate the source of the goods” are added.

Paul Ranjard: Actually, the Chinese Trademark Law follows the same protection principles as the TRIPs Agreement and the European Union Trade Mark system, but it does it a different way. In TRIPs and the Community Trademark system, the first articles define what is a trademark and the next articles define what are the rights conferred to the owner of a registered trademark (to prevent others from “using” in the course of trade, without consent etc…). In the Chinese law, the first articles define what is a trademark, then another article (48) defines what is the “use” of a trademark and finally article 52 defines what is an act of infringement (to “use” an identical or similar trademark without consent etc…). This specific article 48 on the definition of “use”, might be the reason why a confusion was made in the famous PRETUL case.

Paul Ranjard: The trademark PRETUL was registered on January 17 2002 by a Chinese individual in class 6 for “fittings of metal for furniture, padlocks, locks of metal, other than electric”. It was then assigned to a Hong Kong company, Focker Security Products International Limited.

In Mexico, a company Truper Herramientas, is the owner of two registered trademarks PRETUL and PRETUL & oval device in class 6.

In 2010, Truper signed an OEM contract with a Chinese factory to manufacture padlocks bearing the PRETUL marks and export them to Mexico.

In December 2010 and January 2011, Focker applied to the Ningbo Customs for the interception of two batches of padlocks exported by the OEM factory. Focker initiated a lawsuit before the Ningbo Intermediate Court on the ground of trademark infringement.

The Court of Ningbo ordered the OEM factory to immediately stop using the infringing PRETUL & oval device trademark and pay Focker a sum of ¥50,000 ($7,700).

Both Focker and the factory appealed to the Zhejiang High Court. The appeal court upheld the decision of the first instance court.

The OEM factory applied for retrial to the Supreme People’s Court.

On November 26 2015, the Supreme People’s Court revoked the Zhejiang Court judgment. The Court reasoned as follows: since the goods are not to be distributed in China, the trademark affixed on them does not fulfil its function of distinguishing the source of the goods, and therefore, is not used, in the sense of Article 48 of the Trademark law (which defines the act of use). In addition, the Court also took into account the fact that Truper owned the mark in the country of destination.

Paul Ranjard: This judgment provoked lots of comments. Not everybody agreed. To base the ruling in an OEM case on the last words added to Article 48 seemed artificial. As mentioned above, these words “…to indicate the source of the goods” correspond to the TRIPs and EU wording “… in the course of trade”, nothing more. Indeed, a trademark can be used for another purpose than indicating the source of goods, (for example, “fair use”, like using the trademark of a product to designate the repair services related to such products). It is only the use defined in Article 48 that is prohibited by article 52. And in the PRETUL case, it was obvious that the act of affixing the mark on the products and exporting them had been done in order to indicate the source of the goods, and not for another purpose. The fact that the goods were exported did not change anything to this reality. It would be easy to demonstrate how artificial the reasoning leading to this non-use finding is: what if the goods are exported and immediately re-imported? Is the “not used” trademark going to be automatically “used” because of this importation? What if they are first sold in China and then exported, is the “used” trademark automatically becoming “not used” ? etc.

Huang Hui: Don’t forget that the Court also took into account the fact that Truper was the legitimate owner of the trademark in Mexico. It seemed only fair to let him obtain his goods, considering that no harm could be done to the Chinese trademark owner.

Paul Ranjard: This is true. And this judgment is probably a fair decision, under the circumstances. However, since it is now considered as a “precedent” that will inevitably influence the future decisions of People’s Courts in future OEM cases, it is only fair to expect that the decision be based on solid legal grounds. You can easily imagine that an infringer in China could register the trademark of another person in a remote and improbable country of the third world and export its infringing goods to such country and then re-route them to anywhere it wishes. If the PRETUL doctrine were to be systematically applied, this infringer would be totally free to do so.

Huang Hui: It is very unlikely that the Supreme People’s Court intended to deliver a message allowing the free exportation of infringing goods from China. It probably intended to give a fair solution to a case where, for reasons that may not be precisely explained in the case, the plaintiff was viewed as having acted in bad faith, with the sole intention of exploiting a pre-emptive registration. I agree that letting the batch of goods be exported to Mexico seemed a “fair” decision, in the circumstances. It remains that, if it was systematically followed, this case would deprive all legitimate trademark owners of the right to seek the assistance of the Customs when infringing goods are exported.

Huang Hui: This judgment made by the Jiangsu High Court (selected as one of the top 50 IPR cases of the year) follows the PRETUL case by a few weeks only. It is interesting to see that, even though it took the precaution of declaring that, in principle, if the goods are exported, there should be no finding of infringement, the court did not apply the reasoning of the Supreme People’s Court (about “use or “non use”). Instead, the court looked into the background of the case. The foreign consignor was considered as having acted in bad faith and the OEM factory was liable for not having conducted a reasonable amount of due diligence. The reasoning of the court, which switched from a radical analysis of the “use” to a factual examination of the circumstances of the case, was welcome.

Paul Ranjard: However, the reasoning was not without weakness. Indeed, infringement of a trademark is constituted regardless of whether it is committed in bad or in good faith. The related civil liability following an act of infringement may be affected by good faith, but not the act of infringement itself. Using the trademark of another ­person without consent is an act of infringement… period. Good or bad intentions are irrelevant.

Huang Hui: However, the Jiangsu court showed the way: examine the good or bad faith background of the case. It should have focused on the trademark owner/plaintiff instead rather than on the defendant. If the bad faith of the trademark owner/plaintiff is established, then the case can be dismissed and the goods can be exported. If the plaintiff is not acting in bad faith, the goods must remain seized. The Supreme People’s Court in 2014 (the Ellassay case) showed the way when it dismissed a trademark infringement claim on the ground of the bad faith application by the plaintiff (and before the trademark was even invalidated).

In general, what are the key issues to consider when undertaking OEM practice involving goods manufactured in China?

Huang Hui: The key issue is, obviously, to own the trademark in China. A risk only arises if the trademark is owned by another person. The case law discussed above is for the time being in favour of the OEM system user. But we cannot guarantee that this jurisprudence will remain stable. If it is impossible to oppose or invalidate the prior registration, if no revocation for non-use can be considered, and no evidence of bad faith in the trademark application can be argued, it seems safer to abstain and arrange if possible the products to be exported without trademark.

Huang Hui, JD in trademark law, is a Senior Partner at WAN HUI DA. Dr Huang is a multi-faceted intellectual property counsel with stellar academic credentials on China’s trademark legislation and practice and a veteran lawyer who represents clients in all levels of courts up to the Supreme People’s Court in a wide variety of litigations, some of which have become landmark cases.

Lauded as the first doctor in trademark law in China, Dr Huang has been vigorously involved in the initial drafting and subsequent amendments to China’s major trademark-related laws, regulations, judicial interpretations, as well as regulatory documents on a frequent basis. He is also a prolific writer who has authored or co-authored a dozen IPR-related publications as well as scores of treatise published in Chinese, English and French.

Dr Huang served INTA in the capacity of subcommittee Chair of the Association’s China Trademark Office Subcommittee of the Trademark Office Practices Committee (TOPC) for the 2014/15 term. He now chairs the Special Committee on Piracy and Counterfeiting of AIPPI Chinese National Group for the 2015-2017 term.

Paul Ranjard is a French lawyer based in China since 1997. Since that date, he has been representing in China the French association Union des Fabricants (Unifab) for the protection of intellectual property, and since the creation of the European Chamber of Commerce, he has co-chaired the IP Working Group. In this capacity, he has been involved in the drafting of all the EUCCC IP Position Papers and all the comments submitted by the Chamber concerning drafts of IP legislation. Since 2008, Paul Ranjard is Of Counsel to WAN HUI DA Law Firm & Intellectual Property Agency.