OEM Manufacturing and Trademark Infringement in China

“Made in China 2025” policy forced Supreme People’s Court to Change Direction on OEM Manufacturing Exception to Trademark Infringement

Introduction

For years Western companies have relied on Chinese factories to manufacture their products at low cost and export them back to other markets to be sold with high margin of profit. This is normally referred to as OEM manufacturing, where OEM stands for Original Equipment Manufacturer. This was for decades the main business model for China’s industrial and economic development and it earned China the nickname of “World’s Factory”. In recent years, things have changed. China is now a market with hundreds of millions of consumers buying foreign products online or traveling and shopping abroad, while cheap manufacturing is moving elsewhere to be replaced by High-Tech businesses. In this evolving socio-economic landscape, OEM manufacturing has lost its prior standing in the government policies. China is now projected towards a further integration of its economy into the global capital system. Aside from the already renown “Belt & Road” initiative, China has recently launched “Made in China 2025”, a new grand plan to showcase China’s own brands and industries to the world and move away from being the world’s “factory” to an economy producing higher value products and services.

This policy change embodied in the “Made in China 2025” program, is also reflected in the recent legal developments concerning the relation between OEM manufacturing and trademark infringement. This article will explore the evolution of such relation and will comment on the most recent leading decision on this topic issued by the Supreme People’s Court this October 2019.

OEM manufacturing and Trademark Infringement

First of all, China is a first to file country, where IP rights are owned by those who register them first. It is therefore not uncommon, that a Chinese OEM may be manufacturing products upon commission of foreign clients, which bear a trademark that has already been registered in China by another person or entity. In the most typical case, the commissioning party owns that very same trademark in the country of destination of the OEM products. The question is whether affixing such trademarks of others by the OEM on such products meat for export constitutes an act of infringement of the third party’s registered rights in China.

Neither the Trademark Law of China, nor its implementing regulations provide an answer to this question. Therefore, the task of addressing this issue has been left to the People’s Courts. For a long time, courts adopted conflicting interpretations. Some courts deemed that affixing registered marks of others on products meant for export to a country where the consignee owns those same trademarks was not a “use” of the trademark in China and therefore could not cause confusion among the relevant Chinese public. Others held the opposite position. In 2015 and again at the end of 2017, the Supreme People’s Court stepped into the debate and issued a judgments that formed mandatory precedents to all civil judges facing the same type of issues.

The Pretul (2015) and the Dongfeng Cases (2017)

In 2015, the Supreme Peoples’ Court issued a landmark ruling on this issue, known as the PRETUL case (“Fokker Security Products international Limited v Pujiang Ya Huan Locks Co. Ltd.”). The case reviewed by the court concerned a custom seizure action about the export of a number of products manufactured by the OEM of a foreign company. In this case, the holder of the Chinese mark affixed on these products meant for export claimed that this was an act of unauthorized sale of its registered mark and was therefore infringing its exclusive right. The Court eventually disagreed with this opinion and carved out the conditions and limits for an OEM to raise a successful defense against an infringement claim. In particular, the court concluded that, present the following conditions, an OEM act of manufacturing does not constitute a trademark use in the sense of the Chinese trademark Law and cannot therefore be an infringement:

  • the OEM was authorised to make the products by a foreign company;
  • the authorization was clearly limited to the manufacturing for the sole purpose of exporting the products abroad;
  • the foreign party owns a valid right on the marks affixed on the commissioned products in the country of destination.

A more recent judgement of the Supreme People’s Court in December 2017, further confirmed the PRETUL exception, but added an additional probatory burden to the OEM. In the case “Shanghai Diesel Engine Co. Ltd v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd.“ (“DONG FENG”), the plaintiff’s trademark “DONG FENG and Chinese Characters” had been recognized as well-known in China. At the same time, the products under the “DONG FENG” mark, were manufactured upon commission of an Indonesian company who had registered an identical mark in Indonesia in 1987. In this case, the lower court had found for infringement stating that the OEM duty of care stretched to examine and find out the well-known status of the mark “DONG FENG” and to determine whether the Indonesian mark had been filed in bad faith. The Supreme People’s Court rejected this view and concluded that the reasonable duty of care should be deemed discharged when the OEM manufacturer has verified the trademark rights of the foreign purchaser, unless there is evidence proving the contrary. In practice, this duty is discharged once the OEM receives from the consignee a copy of the relevant trademark certificates in the countries of destination. Overall, DONG FANG restated the teaching of PRETUL by confirming that once it is proved that the products are only meant for export, this will not infringe the relevant trademark because there is no use of this trademark in China among Chinese consumers. Therefore, they won’t be confused by the act of manufacturing that is confined to a factory and then the result is sealed and immediately shipped outside China.

Inversion of Direction in 2019

On October 14, 2019 the Supreme People’s Court published a judgment issued on September 23, 2019 in the case Honda Motor Co., Ltd. v. Chongqing Hengsheng Xintai Trading Co., Ltd. et Chongqing Hengsheng Group Co., Ltd. [Min Gao Fa Zai No. 138/2019] (“HONDA”). In this judgment, the Supreme People’s Court has come back to the OEM manufacturing exception, giving the whole matter a second thought and reaching conclusions that overcome PRETUL and DONG FENG.

In this case, Honda Motors, the owner of “HONDA” trademarks in class 12 in China, sued the defendants, Hengsheng Xintai and Hengsheng Group for having accepted an OEM order from a Myanmar company, Meihua Company Limited (“Meihua”), to manufacture 220 sets of Motorcycle parts and export them to Myanmar bearing a mark similar to the “HONDA” marks in China. In particular, Meihua is the licensee of a registered Myanmar trademark “hondakit” in class 12. However, the parts manufactured in China were bearing a trademark “HONDAKit”, where the word HONDA was highlighted in capital letter and in red color, unlike the simple wordmark “hondakit” in Myanmar.

The Supreme People’s Court found that:

  1. The relation between the Myanmary Meihua and the defendant Hengsheng group was that of an OEM arrangement.
  2. However, there can be trademark use in the sense of the trademark law also in case of an OEM arrangement during the processes of manufacturing and attaching trademark in the factory in China. 
  3. Therefore, such use can be scrutinized as to whether it is infringing. To determine such OEM use as infringing, the involved enforcer will have to determine whether it can cause confusion among the relevant public in China.
  4. The relevant public standard to determine “confusion” in the trademark use analysis also includes operators of businesses related to the products. Products involved in an OEM arrangement can still be accessed by the relevant public of the PRC either online or when traveling abroad.
  5. Likelihood of confusion is the test, actual confusion or actual access to products is not required.

In sum, PRETUL and DONG FANG have been overruled. While in the prior jurisprudence of the Supreme People’s Court OEM manufacturing was always presumed not to be a “use” of a trademark in the sense of the Trademark Law, in HONDA, this presumption has been flipped around. After HONDA, the OEM may face infringement liability even if it was licensed by the foreign client to manufacture for export purpose only, and the foreign client can prove he validly owns the same mark in the country of destination. As long as the Chinese right holder can prove that the affixing of the marks in that specific case has the ability to create confusion among the relevant public in China, the OEM will have infringed the Chinese Trademark Law.

At the heart of this inversion is a reinterpretation of the role of OEM manufacturing in the current Chinese economy and development planning. In the past, when OEM manufacturing was the main driver for economic development, China needed to secure it from any risk of disruption. With PRETUL the court had insulated OEM manufacturing from being challengeable under the Trademark Law. After HONDA, OEM manufacturing is open to trademark infringement claims under the relevant provisions of the Trademark Law of the PRC. The court has expressly recognized that in the new economic context and in light of new government policies, it is no longer justifiable to put OEM manufacturing automatically above the trademark law and that other interests, such as those of the consumers or other right holders (including Chinese right holders) are to be weighed into the infringement equation.

The Proof of Confusion

For the holder of a Chinese trademark, these can be good news. Unlike PRETUL, he will have now a chance to stop the OEM from exporting those products and pay compensation in spite of the latter fulfilling all the PRETUL criteria. However, in order to succeed, the right holder must still prove that the OEM act of affixing his trademark on the commissioned products, can cause confusion among the relevant Chinese public for that type of products. Although HONDA does not require the proof of an actual “confusion”, this is still a difficult task. In OEM cases, there are no direct end users of those products in China because the OEM products are meant to be directly shipped abroad. How could this use then cause confusion? In order to lighten the burden of proof of the Chinese right holder, the Court has stretched the scope of “relevant public”. In particular, the Court has stated that Chinese users of the kind of products in question can theoretically see and buy them online or when they travel abroad. In both cases, it is abstractedly possible that the exported OEM production may find its way back to China. The court has stressed out the fact that nowadays Chinese people have access to the Internet and are online shoppers as well as travel abroad more often than before. Furthermore, the Court in HONDA has added that when determining the relevant public, we should not only look at the end user of the product, but, in case of spare parts like in HONDA, to the intermediate users, i.e. the people involved in the export logistic or any other person involved in the business of these spare parts. This will therefore help right holder in China build a case of “confusion” against an OEM.

Is there any room for an OEM to defend itself after HONDA?

Although it is going to be a much tougher battle than it was under PETRUL, an OEM still has defenses. First of all, the OEM must fulfill the PETRUL standards. This is in fact the starting point. Without an order from a foreign right holder (i.e. a foreigner that legitimately owns that same mark in the country of destination), the manufacturing and the export of the trademarked products would be an act of open infringement by counterfeiting.

Furthermore, there must still be at least a high similarity or identity between the foreign trademark affixed on the goods and the one registered in China by the third party. In HONDA, the OEM affixed a mark that was different from that registered by the foreign consignee in Myanmar and was more similar to that owned by HONDA MOTORS in China. Had the defendant used the mark in the exact font and type as the one registered in Myanmar, they may have had a better chance to argue for non-identity of the marks in dispute. Therefore, mark similarity may be a defense line depending on the specific case. Eventually, in HONDA the court found for infringement because the mark “HONDA” in class 12 in China was recognized to be a well-known mark. This teaches us that the likelihood of infringement increases with the degree of notoriety of the Chinese mark. OEMs will therefore have a good chance of repelling attempts at enforcement of those Chinese marks that are little or not used by their holders in China and have not built any reputation among the relevant Chinese public. In that case, it is obvious that there won’t be any risk of confusion.

OEM may also try to build a defense around the delimitation of “relevant public” in each specific case. Although the HONDA interpretation of relevant public is rather broad and favors the Chinese right holder, it cannot stretch without limits and the facts of the case may offer natural and logical limitation to the creation of that test, which may help the OEM prove that there cannot be confusion in that specific case.

Conclusions

So, what is the practical impact of this decision? Certainly, it will make the holders of a registered trademark in China more inclined to sue an OEM once they find out it is manufacturing products with that trademark even if upon a legitimate commission by a foreign party. It is also clear that any administration (e.g. Customs, MSA or Police) or civil court called upon in a trademark enforcement action, will be less inclined to apply a blanket OEM exception as in PRETUL. The HONDA decision seems to provide now an assumption that OEM manufacturing is a trademark use and therefore potentially infringing as long as the China trademark holder can prove confusion of the relevant Chinese public. We can expect an increase of this type of litigation in the near future and an increase in the cases favorable to the Chinese right holder rather than the OEM and its foreign partners.

It is clear that the courts in particular, will be keen to implement this new jurisprudence in light of the final policy goals set forth in the “Made in China 2025” agenda. Likely, the ongoing trade wars will make judges even more sensitive about their policy enforcing role when confronted with OEM manufacturing cases of trademark infringement. It seems that a new IP front has now been opened!

 

This article was written by our China IPR expert Paolo Beconcini

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