Chinese courts adopting an ‘anti-squatter’ stance on trademark use for export-only goods

Since China imposed itself as the ‘factory of the world’, companies from all over the globe have had their goods manufactured in the country by an original equipment manufacturer (OEM) and exported for their commercialisation overseas. While only a limited number of foreign companies sell their goods in China, a much larger number have their goods produced in China and shipped abroad.

There are opposing stances on whether the usage of trademarks for manufacturing goods in China for export shall only be regarded as use of trademarks in China. However, to find an explanation to this question, which often arises as a result of contracts, we should consider the ‘anti-squatter’ attitude that Chinese courts at all levels have – finally – adopted.

Decisions in the early 2000s strictly implemented the general principles of trademark protection. The use of a trademark without the owner's consent is an act of infringement; whether the goods were to be sold in China or exported made no difference.

In Nike v Spanish Side (2001) and Guangzhou Hong Xin Co, Ltd v Guangzhou Customs (2005), the Guangdong High Court declared that using a trademark registered by another person, even when the products are exported, is infringement.

In Ningbo Ruibao International Trade Co, Ltd v Cixi Yongsheng Bearing Co, Ltd (2005), the Ningbo Intermediate People’s Court and the Zhejiang High People’s Court held that “territoriality is the basic characteristic of the trademark right… The defendant used a mark identical to the plaintiff’s mark without authorisation, which constitutes trademark infringement.”

Even though this opinion was generally accepted and implemented, some courts dissented and recognised the OEM exception. The Answer to Several Issues Concerning Trial on Trademark Civil Disputes issued in 2004 by the Beijing High People’s Court states in Article 13 that “products made by [an] OEM [that] are not distributed in China… cannot cause confusion and misunderstanding among consumers [and] thus cannot be found [to be] infringing.”

2009 marked the beginning of a new case trend opposite to the position taken by most of the courts in China until that point, with the decision of the case Jolida v Shanghai Shenda. The Shanghai No. 1 Intermediate People’s Court and the Shanghai High People’s Court held that because the OEM products were exclusively exported to the US market without distribution in the Chinese market, Chinese consumers would not be confused as regards the origin of the goods. The judges considered that since the primary function of a mark is to indicate the origin of the goods to avoid confusion, if the goods are not marketed in China, the mark does not fulfil such primary function in China (i.e., there is no confusion in China and therefore no infringement).

Two major cases during this period defined the case-law line followed by most of the people’s courts and established a clear understanding of what was considered trademark infringement in China within OEM activities: the Pretul and the DongFeng decisions.

In Cocker Security Products Inter. Ltd. v Pujiang Yahuan Lock Co, Ltd. (the Pretul case), the owner of the registered trademark in China claimed that the mark affixed to the goods in question infringed its rights over the ‘Pretul’ mark and Chinese Customs detained the goods.

This case attracted widespread attention and in November 2015 the Supreme People's Court (SPC) reversed the Zhejiang High People’s Court's decision. The SPC ruled that “since the mark attached to the goods produced by the OEM did not have the meaning of distinguishing the origins of the produced goods as the products are not for distribution in the Chinese market, the act of attaching the mark to the products shall not be considered as the use of a trademark in the sense of the Trademark Law (Article 48 of the Trademark Law) and therefore such use cannot constitute an infringement of the trademark rights.”

The SPC also clarified that three conditions shall be present:

• The Chinese factory is duly authorised by the foreign brand owner to manufacture the goods;

• The goods are entirely and solely intended for exportation purposes; and

• The foreign company owns a valid right to the trademark(s) in the country of destination.

Still in 2015, a few months after Pretul, the Jiangsu High People’s Court issued a decision in Changjia Company v Shanghai Company (the DongFeng case) that diverged from the SPC’s views in Pretul and found that an OEM’s activities constituted trademark infringement when the issue was examined in light of general principles such as good faith and the duty of care.

In this case, according to the judge, “the exporter should have known that there was a conflict between the trademark owner in China and the buyer of the goods in the destination country; thus, it did not perform a reasonable duty of care.”

Two years later, on December 28 2017, the SPC, in a retrial procedure on the DongFeng case, reversed the Jiangsu High People’s Court's trademark infringement finding.

The SPC started by reiterating its reasoning in the Pretul case: “Trademark use refers to the act of affixing a trademark to a product so as to function as a source identifier… In principle, trademark use that is not purported for source identifying or distinguishing functions does not constitute trademark infringement in the sense of the Trademark Law.”

The SPC further clarified that the exporter had fulfilled its reasonable duty of care and therefore committed no infringement. This duty would be discharged when the OEM receives from the consignee copies of the foreign company’s trademark certificates in the destination country of the goods.

The SPC clarified the requirements to comply with such duty of care and added this duty of care as the fourth requirement for an OEM to comply with in order not to infringe the trademark rights of third parties in China.

In Honda Technology Research Industry Co., Ltd. v Hengsheng Xin Tai Trading Co., Ltd. (the Honda case, in September 2019), the SPC held that manufacturing and exporting 220 motorcycles under the trademarks ‘Hondakit’ and ‘Honda’ to a company in Myanmar infringed Honda’s Chinese trademark right.

What is surprising in this decision is that the exporter had fulfilled the three requirements of the Pretul case and the duty of care of the DongFeng case; however, the SPC held that the “act of [a] trademark use should be assessed as a whole”, therefore OEM activity could well constitute trademark infringement if the use of the trademark in this context could cause confusion among the public in China.

As stated in Article 48 of the Trademark Law, the purpose of trademark use is to identify the origin of goods, including any potential or actual identification of its origin. The SPC has affirmed that “as long as there is a possibility of distinguishing the source of the goods, there is 'use of a trademark' under the Trademark Law.”

The court explained that even if the goods are exported, there is still a possibility that the mark affixed to the goods indicates the origin of the goods (hence the use of the mark according to the Chinese Trademark Law).

The SPC considered Chinese consumers, who could be confused when exposed to the goods in foreign markets, as well as those transporting the goods, as the 'relevant public'. The SPC added that “with the development of e-commerce and the internet, products exported overseas may re-enter Chinese territory in a variety of different scenarios and then they are likely to cause confusion among the relevant public.”

The expression “is likely to cause confusion” means that if the relevant public may access the infringing goods, there is likelihood of confusion. It does not require the relevant public to have actual access to the allegedly infringing goods, nor does it require the fact of confusion to be confirmed.

Finally, the court held the following with regard to the rights owned by the foreign company in the destination country: “The trademark right is a regional right applicable to a certain territory. A trademark registered outside China cannot enjoy the exclusive right of a registered trademark in China. Correspondingly, the licensee of such a foreign registered trademark cannot use the right to use the trademark as a defence against the infringement.”

After the Honda decision in 2019, the SPC has not addressed the topic of OEM activities from a trademark use perspective. The lower courts in 2021 and 2022 seemed cautious to evaluate OEM activities directly related to infringement; for example, the right of use of a trademark whose registration in China may belong to a third party.

This is one of the conclusions that can be taken from the decisions of the Zhejiang High People’s Court in two recent OEM cases (the Stahlwerk and Juratek cases).

In the Stahlwerk case, it was proved that the plaintiff (Yiwu Bailian Import & Export Co., Ltd) had a business relationship before the trademark application date with the foreign company (Schweissgeräte GmbH), the owner of the trademark in Germany, which had appointed the defendant and authorised it to use the mark in the products manufactured by this one.

That led the court to conclude that the plaintiff acted in bad faith, as it applied for the registration of the trademark in China while acknowledging that the trademark belonged to the German company that had created and developed the brand many years before its registration in China by the Chinese company.

In the Juratek case, on the other hand, the plaintiff (Laizhou Baoyi Machinery Co., Ltd.) had no prior business relationship with the foreign company (the UK company Unitec) that created the trademark ‘Juratek’ and appointed the defendant to manufacture products using it affixed to them.

However, the court considered that “the registered trademark of Baoyi Company involved in the case is not only the same as the English letters of the company's business name and its ‘Juratek’ series trademarks, but also uses the same font and oval outer frame combination design as the logo previously used by the company. It cannot be a coincidence that the above logo components and composition methods are identical. Baoyi Company is also unable to provide reasonable explanations, and explanations on the origin of the trademark involved.” It could also be proved that the foreign company Unitec had applied for registration of the same trademark in the UK and protected the copyright over that sign years before.

Moreover, the court clarified that the plaintiff had also applied for the registration of other popular foreign brands in the same field of commercial activity, which deepens the assumption of bad faith in its behaviour. And based on the above factors, the court recognised the bad faith of the plaintiff and considered that “the way Baoyi Company exercised the trademark rights involved in the case violates the principle of good faith.”

In both cases, the allegedly infringing acts of the alleged infringers were the production of goods with an affixed trademark for exportation purposes only performed within a regulated commercial relationship with a foreign company owner of the trademark in the country of destination. Those acts were conducted within the scope of the authorisation given by the foreign company, and so in line with the premises and requirements established by the jurisprudence of the SPC in the Pretul and DongFeng cases.

What seems very relevant in both cases is that the Zhejiang High People’s Court recognised that both of them acted in bad faith when applying for the registration of those two trademarks in China (despite the trademarks being registered and not having suffered a favourable invalidation) and rejected their claims considering there could not be infringement of trademarks acquired in bad faith.

In the Honda case, there is a suspicious trademark registration for ‘Honda’ in Myanmar which is used as a shield for the exportation of Honda motorcycles from China to Myanmar. In the Stahlwerk and Juratek cases, the suspicious trademark registrations are in China. In the Honda case, the Chinese judges confirmed the infringement of the Chinese trademark and blocked the exportation of goods to Myanmar. The opposite happened in Stahlwerk and Juratek: the Chinese judges did not confirm the infringement and let the good be exported.

In the Juratek case, the court considered that “as an important way of China's foreign trade, the way of processing trade involving foreign brands is changing and deepening with the transformation of the economic development mode. Therefore, it is necessary to fully consider the overall situation of domestic and international economic development, conduct a specific analysis of trademark infringement disputes in specific periods, specific markets, and specific transaction forms, and accurately apply the law.

“Properly balancing the interests of trademark owners and licensees cannot simply solidify this trade method as an exception to infringement of trademark rights, nor can it be considered that the use of trademarks under this trade method constitutes infringement.”

Although not without hazard, we can conclude that the approach to OEM-related decisions in China denotes a clear anti-squatter attitude, not only when the suspicious trademark registration happens in China but also abroad (in Indonesia for DongFeng, and Myanmar for Honda).

However, it is highly advisable for companies that manufacture products in China for exportation purposes only to register the trademark in China and conduct a risk assessment or freedom to operate check in advance.