Managing infringement threats across the supply chain

As an important form of trade in China, foreign-related original equipment manufacturers (OEMs) contributed to the formation of China’s status as the world’s factory. With the development of the global economy, China’s economic role as the world’s factory is changing, and the judiciary’s understanding of foreign-related OEM trademark infringement issues is also changing and deepening. Typical foreign-related OEMs feature that the domestic manufacturer is entrusted by the foreign trademark owner or authorised trademark user to produce products according to their requirements, affix the foreign client’s trademark to the manufactured products and make sure all the processed products are delivered to the destination designated by the overseas consignors (the products are not sold in China). Regarding whether trademark use in foreign-related OEM manufacturing constitutes trademark infringement, there is no direct and clear regulation in international treaties and Chinese domestic laws. In practice, people should refer to the judicial precedents of higher courts, and judgments will be based on individual cases.

Judicial practice in China in OEM-related trademark disputes

Honda case

In 2019, the Supreme Court made a judgment in the Honda case, affirming that a foreign-related OEM committed trademark infringement and clearly pointing out that foreign-related OEM are not exempt from trademark infringement. As intellectual property rights, trademark rights are territorial. Even if trademark registration is obtained in a foreign country, the company does not enjoy the exclusive right to use the registered trademark in China. Correspondingly, the ‘trademark use authorisation’ obtained by entities in China does not belong to the legal rights of trademarks protected by China’s trademark law and cannot be used as a defence of non-infringement of trademark rights. In terms of the application of the law, it is necessary to maintain the unity of the legal system and not simply deem a certain trade form as an exception that does not infringe on trademark rights. Otherwise, it will violate the basic rule for determining trademark infringement. After the Honda case, the Court mostly followed the judgment of the case, holding that foreign-related OEMs affixed trademarks to products and exported them without the permission of the Chinese trademark owner, constituting trademark infringement.

The courts’ previous decisions

In fact, in the past two decades, Chinese courts have undergone a period of evolution in determining whether foreign-related OEMs constituted trademark infringement. From the Nike case in 2000, which determined that foreign-related OEMs constituted trademark infringement, to the Supreme Court’s determination in the Petrul and Dongfeng cases in 2015 and 2017 that foreign-related OEMs did not constitute trademark infringement, and then to the Honda case in 2019, in which the Supreme Court determined that foreign-related OEMs constituted trademark infringement, it seems like the Court has different attitudes and policies towards foreign-related OEMs; however, each case has its own characteristics, especially the aforementioned three judgments made by the Supreme Court. There is little change in the Court’s attitude towards foreign-related OEMs as it is more likely that the specific circumstances of the case will have affected the judge’s final determination of infringement. For instance, in the Honda case, the court considered that the trademark HONDA of the domestic trademark owner was relatively well known, and the HONDAKIT trademark actually used by the manufacturer was not exactly the same as the overseas registered trademark, as the ‘HONDA’ part was highlighted. So, the trademark actually used was not identical with the trademark registered outside of China but more closely similar to the trademark registered in China. Meanwhile, the Court also considered the changes in global trade and the possibility that products exported overseas may also flow back to China, causing confusion among consumers, and finally determined that the domestic manufacturing party constituted trademark infringement.

It is undeniable that the judgment of the Supreme Court has established the basic rule for whether foreign-related OEM behaviour constitutes infringement to a certain extent. Local courts often refer to the judgment of the Supreme Court when making judgments in subsequent cases. For example, during the period from 2015 to 2019, due to the attitude of the Supreme Court in the Petrul and the Dongfeng cases, for typical foreign-related OEM behaviours, if the domestic manufacturing party has performed its due diligence and checked the trademark registration certificate of the overseas entrusting party, the court normally holds that the OEM will not circulate in the domestic market, will not cause confusion among consumers and will not cause losses to domestic trademark owners, thus not constituting trademark infringement.

Recent cases after the Honda case

After the Honda case in 2019, local courts strictly applied the criteria for determining trademark infringement by following the attitude of the Supreme Court, and mostly determined that foreign-related OEMs constituted trademark infringement.

However, the Honda case does not mean it rings the death knell for foreign-related OEMs, and it does not necessarily mean all the OEMs constitute trademark infringement. The specific facts of the case should still be considered. In recent years, there have also been some cases involving OEMs, where the courts have comprehensively considered factors such as the legitimacy of the trademark registration involved and whether the way of enforcing rights are legitimate, and eventually determined that the cases do not constitute trademark infringement. For example, in the Stahlwerk case, the court held that as the affiliated company of the trademark registrant in China had a former agency relationship with the overseas OEM client, it obviously had known the trademark of the overseas party but it still registered the identical trademark in China and used the trademark as the basis for filing a trademark infringement lawsuit against the Chinese OEM authorised by the overseas entrusting party. The way of exercising the trademark rights was improper and violated the principle of good faith, and the court determined that the OEM did not constitute trademark infringement.

In the Juratek case, although there was no direct evidence to prove that the trademark registrant in China knew the trademark JURATEK of the overseas entrusting company and applied for the registration of the same trademark in China, the Zhejiang Higher People’s Court considered that the foreign OEM’s entrusting party used and registered a series of JURATEK trademarks in other jurisdictions outside of China and conducted business cooperation with Chinese OEM companies, and the Chinese trademark registrant’s awareness of the series of JURATEK logos and its subjective intentions, including the fact that it simultaneously registered several trademarks identical or similar to other well-known auto parts brands. The Court held that the trademark registrant’s way of exercising the trademark rights violated the principle of good faith, and at the same time, the OEM manufacturer performed its due diligence by checking and reviewing the relevant trademark registration certificates, and then determined that the OEM manufacturer did not constitute trademark infringement, and revoked the first instance judgment.

Generally, after the Honda case, the courts no longer simply believe that foreign-related OEMs are an exemption from trademark infringement. In some cases, the facts and evidence of the case will be comprehensively considered, especially the legitimacy of the registered trademark and the exercise of rights of the trademark registrant in China, to determine whether the OEM constituted trademark infringement. Therefore, the judgment of the Supreme Court and the subsequent Stahlwerk and Juratek cases all show that foreign-related OEMs, as a form of trade, cannot be used as a defence against trademark infringement. Whether it constitutes trademark infringement or not is still judged in the frame of the general principles of determination of trademark infringement, combined with the specific circumstances of individual cases.

Judging criteria for foreign-related OEM trademark infringement disputes

Similar to the standards of other trademark infringement cases, the trials of trademark infringement disputes involving foreign-related OEM cases are also heard from the following aspects:

• whether the use of the trademark belongs to trademark use, namely to identify the source of goods;
• whether it constitutes the same or similar trademark;
• whether it causes consumer confusion or misunderstanding; and
• the grounds for defence of infringement.

Regarding whether it is trademark use, or whether the trademark is used to identify the source of goods, previously, there have been different views in judicial precedents. For example, in the Petrul case, the Court held that affixing a trademark on the goods by the manufacturer is not trademark use as it does not function to identify the source of goods. Currently, the criteria are almost the same that the OEM behaviour affixing a trademark on the goods manufactured, even without entering into China’s domestic market, constitutes trademark use, which is also consistent with the criteria for the cases concerning cancellation of a trademark based on non-use for three consecutive years. In cases of cancellation of a trademark on the basis of non-use for three consecutive years, the China National Intellectual Property Administration and courts tend to accept the use evidence for foreign-related OEMs, as they view the use of the trademarks in foreign-related OEM trade as trademark use. Thus, if the trademark owner submitted trademark use evidence in foreign-related OEM trade, trademark registration can be maintained. Regarding the second point, whether they constitute the same or similar trademarks is not a controversial issue in foreign-related OEM trademark infringement cases, as the trademarks involved are normally the same or highly similar.

Whether it causes consumer confusion is another key factor in determining whether foreign-related OEMs constitute trademark infringement. In some previous cases, such as the Dongfeng case where no trademark infringement was established, the Court held that it would not cause confusion as the OEM products would not enter into domestic markets and would not cause damage to the domestic trademark owner. However, at present, the courts generally believe that the words “likely to cause confusion” stipulated in the Trademark Law refer to the possibility of confusion. If the relevant public has access to the accused infringing goods, then it meets this requirement, and it does not require the relevant public actually access the infringing goods, nor does it require that the confusion occurred. In the aforementioned Honda case, the Court pointed out that:

in a foreign-related OEM trademark infringement dispute, the relevant public should include not only consumers of the accused infringing goods but also operators closely related to the marketing of the accused infringing goods. Even if the accused infringing goods are exported abroad, there is a possibility that they may return to the domestic market. At the same time, with the continuous development of China’s economy, there are a large number of Chinese consumers traveling and purchasing abroad, and there is also the possibility of encountering and confusing OEM products.

Finally, the court will examine whether there is a defense of non-infringement. For example, in the aforementioned Stahlwerk and Juratek cases, the Court held that the right holder’s trademark registration and exercise of rights were improper, and finally determined that no trademark infringement was established. In these two cases, the Court did not discuss the trademark use and confusion issues but determined that the domestic trademark right owner registered the trademark and enforced its rights in an improper way, which is similar to the ‘unclean hands’ defence.

Suggestions for foreign-related OEM processing enterprises

From the current cases involving foreign-related OEM trademark infringement disputes, we can see that the courts generally believe that affixing a trademark in foreign-related OEM cases should be deemed trademark use, and there is also a possibility of confusion. Although there are some cases successfully defending infringement, especially when defending the plaintiff’s trademark registration and that their actions for trademark right protection are improper, the cost is often too high.

Therefore, based on the current judgments of the Supreme Court on foreign-related OEM cases and local judgments normally following the attitude of the Supreme Court, it is recommended that overseas entrusting parties conduct necessary trademark clearance searches before entrusting Chinese companies to engage in OEM business in China. Applying for registration of a trademark or obtaining permission from a prior trademark owner in China is still very important to avoid possible infringement risks. Meanwhile, it is better to keep relevant communication records and documents for business dealings in a timely manner in order to deal with future possible legal disputes. When you are unfortunate enough to encounter a trademark dispute, consult a professional lawyer in time to seek a proper solution.