China has the largest population and is also one of the largest markets in the world. Because of its large population and market, a lot of foreign companies are involved in business activities that have some relationship with China. Chinese OEMs are commonly used by foreign brand owners. Some of these foreign brand owners have obtained protection for their trademarks while some still haven’t. What will happen if their trademarks are registered by others while they still need to conduct OEM production in China? Whether trademark use in OEM production constitutes infringement to domestic registered trademark right? What will happen if they have trademark registration in China and conduct OEM production in China however the products don’t circulate in Chinese market? Whether trademark uses in OEM production are able to maintain a registered trademark in non-use cancellation cases?
II. WHETHER TRADEMARK USE IN OEM PRODUCTION CONSTITUTE INFRINGEMENT
It has been a controversial issue whether trademark use in foreign related OEM production constitutes infringement to domestic trademark registration and different courts hold different opinions in China.
For civil cases, usually the court of the second instance is the court of last instance. Only when a party considers that there is an error in a legally effective judgment, it has the opportunity to apply to the people's court at the next higher level for retrial. However, before a contrary decision is made by the higher level court in the retrial procedure, the execution of the judgment of the second instance shall not be suspended. Therefore, judgment in the retrial procedure is the final result of the case and the same is unchangeable. Besides, because there is still no specific legal basis can be relied on for such kind of cases, the judgments and opinions of the supreme people’s court which is the highest level court in China have been important and influential in the profession. Whenever a judgment is made by the supreme people’s court, in later similar cases heard by the other level courts, usually the opinions in the aforementioned judgment will be followed.
Since 2015, the supreme people’s court of China heard three retrial cases concerning trademark dispute caused by foreign related OEM production. Among these three retrial cases, the supreme people’s court holds the same opinion in the first two cases that is trademark use in OEM production didn’t constitute infringement to other’s registered trademark right.
Case 1: Trademark infringement dispute on “DONG FENG 东风 & Device” mark
This case was heard by the Supreme People’s Court and the judgment was made in 2016.
The plaintiff and its trademark registrations in China are as follows:
The defendant is Jiangsu Changjia Jinfeng Power Machinery Co., Ltd.. It conducted OEM production for diesel engine and diesel engine components in China according to the entrustment of Indonesian company PTADIPERKASABUANA. The trademark being used on these OEM products are the same as registered in China by the plaintiff. The Indonesian company holds registration for the same mark in Indonesia and they have agreed that all the OEM products would be exported to Indonesia only.
In the first instance, the Changzhou intermediate people’s court of Jiangsu province considered it didn’t constitute trademark infringement. In the second instance, Jiangsu High people’s court considered it constituted trademark infringement. In the retrial procedure, the supreme people’s court considered it didn’t constitute trademark infringement.
The supreme people’s court considered:
Ø The essential attribute of trademark is its identification or indication, and its basic function is to distinguish the source of goods or services. Generally speaking, the use of trademarks that are not to identify or distinguish the sources of goods or services will not mislead or confuse the sources of goods or services, thus affecting the function of trademarks to indicate the sources of goods or services, and does not constitute infringement in the sense of trademark law.
Ø Chinese manufacturer accepts the entrustment of Indonesian company and produces diesel engine and diesel engine components according to the Indonesian trademark right legally owned by this Indonesian company, and exports all the products to Indonesia for sale.
Ø In the process of production or export, the relevant mark indicates the Indonesian company as the entrusting party, which does not affect the normal distinguishing function of the Chinese trademark registration in the domestic market, and will not cause confusion or mislead the relevant public.
Ø The court considers in view of the fact that OEM is a common and legal form of international trade, unless there is evidence to prove that the manufacturer failed to pay due attention to the entrustment and its entrusted production and processing behavior has caused substantial damage to the registered trademark right, generally speaking, it should not be considered that the behavior infringes the registered trademark right in China.
Ø The people's court should combine the objective reality of the development of the international economic and trade situation to analyze the transaction forms of the specific market in a specific period of time, and accurately judge the actual impact of relevant behaviors on the legitimate rights and interests of trademark owners, so as to apply the law more accurately.
Ø The court also considers that we should not only strictly protect the legitimate rights and interests of trademark owners in accordance with the law, but also prevent improper expansion of protection and hinder the normal trade and competition order.
When we visit the website of China Judgments Online operated by the Supreme People’s Court and we were able to obtain 120 judgments with the key words of civil lawsuit, OEM production and trademark infringement. Among these published judgments, 2 were made by the Supreme People’s Court one of which we have just discussed and the other we will discuss in the following part in this article and 16 were made by High People’s Courts. These judgments are all second instance judgments or retrial judgments and mostly are the final decisions on the cases. After we review all these 16 judgments, it was found that 6 cases are not foreign related trademark dispute concerning OEM production. In the rest 10 judgments that are with respect to foreign related trademark dispute concerning OEM production, non-infringement has been decided in 6 cases and infringement has been decided in 4 cases. All these judgments were made in or before 2019. Generally, during those years, if the OEM products don’t circulate in China, the consignor holds legal right in the target country and the manufacturer in China has paid due attention to consignor’s legal right in target country, the use of trademark probably will be considered as non-infringement.
However, such situation changed after the most recent judgment was made by the supreme people’s court at the end of 2019.
Case 2: Trademark infringement dispute on “HONDA & Device” mark
The plaintiff and its trademark registrations in China are as follows:
The defendants are Hengsheng Xintai Co., Ltd. and Hengsheng Group Co., Ltd. They are parent company and subsidiary. Hengsheng Group conducted the OEM production according to the entrustment and Hengsheng Xintai was in charge of the export related matters. The legal representative of the consignor holds a trademark registration in Myanmar. The trademark registered in Myanmar is for the mark “HONDAKIT”. The trademark being used in the OEM procedure is “HONDAKIT”, but they highlighted and enlarged the text part of “HONDA”, reduced the text part of "kit" and at the same time, marked in red of the letter “H” and the device part which is similar to wing shape. Therefore, the mark actually being used in OEM production is different from the registered one in Myanmar but very similar to the three trademark registrations of Honda.
In the first instance, the Intermediate People's Court of Dehong Dai Jingpo Autonomous Prefecture of Yunnan Province considered it constituted trademark infringement. In the second instance, Yunnan High people’s court considered it didn’t constitute trademark infringement. In the retrial procedure, the supreme people’s court considered it constituted trademark infringement.
The supreme people’s court considered:
Ø In the provisions of the Trademark Law concerning the use of trademarks, "for identifying the source of goods" refers to the purpose of trademark users to identify the source of goods, including the possible role of identifying the source of goods and the actual role of identifying the source of goods.
Ø Trademark use is an objective behavior, which usually includes many parts, such as physical attachment, market circulation, etc. Whether it constitutes "the use of trademark" in the sense of trademark law, overall consistent interpretation in accordance with the trademark law should be made.
Ø The court considers a trademark is used for certain goods, so that the two become the observation object of consumers' identification of the goods and its source. It may not only enable consumers to correctly identify the source of the goods, but also make the consumer identify the source of the goods mistakenly. Complex situation may also be caused that some consumers may identify the source of the goods correctly, while others may mistakenly identify the source of the goods.
Ø Therefore, if a trademark is used on the products manufactured or processed, as long as it has the possibility to distinguish the source of goods, the use status should be considered belonging to the "use of trademark" in the sense of trademark law.
Ø In this case, the court considers that in addition to the direct consumers of the accused infringing goods, the relevant public should also include the operators closely related to the marketing of the accused infringing goods. There is the possibility that the goods are exposed to operators in the transportation and other parts of the whole procedure. Moreover, with the development of e-commerce and the Internet, even if the accused infringing goods are exported to foreign countries, they may flow back to the domestic market. Besides, with the continuous development of China's economy, the number of Chinese consumers traveling abroad and consuming abroad is large, there is also the possibility that the OEM products are exposed to these consumers and confuse them.
Ø The court considers, the basic function of trademark is to identify the source of goods or services. The essence of trademark infringement is to destroy the identification function of trademark and makes the general consumers confused and misunderstood the source of goods. From the legal point of view, trademark infringement does not take causing actual damage as an element of infringement. "Easy to cause confusion" refers to the possibility of confusion when the relevant public comes into contact with the accused infringing goods. It does not require the relevant public to have actual contact with the accused infringing goods, nor does it require that the confused facts occur.
Ø The court expressed that since the reform and opening up of our country, foreign-related OEM trade is one of the important modes of foreign trades in China. With the transformation of China's economic development mode, people's understanding and settlement on dispute of trademark infringement problems arising from OEM processing are constantly changing and deepening. The judicial settlement of disputes, in the application of law, should maintain the unity of the legal system, we cannot simply fix a certain mode of trade, such as foreign-related OEM processing, as an exception that does not infringe the trademark right because that will violate the basic rules of trademark infringement judgment in the trademark law.
Ø Trademark right has regional characteristics. For a trademark not registered in China, even if it is registered in a foreign country, it does not enjoy the exclusive right of registered trademark in China. Use authorization basing on foreign right obtained by civil subjects in China does not belong to the legal trademark rights protected by the Trademark Law of China and cannot be used as a defense against non-infringement of trademark rights.
In this third judgment the supreme people’s court expressed their opinion that trademark attached to OEM products may be exposed to Chinese consumers through various channels and thus trademark use in OEM production constituted infringement to other’s registered trademark right in China.
This judgment was made in September 2019 and it was published on the website in October 2019. This caused great surprise to the profession. I searched for the courts’ judgments made in 2020 for trademark infringement cases concerning foreign related OEM production through the website of China Judgements Online. When we review the judgments made in 2020, i.e. after the latest Supreme People’s Court, by different levels’ courts, infringement has been decided in more cases which is a different situation from it was before.
Although there are still cases that non-infringement has been decided by some courts, the overall legal environment in China seems becoming more favorable to the trademark owners. For foreign brand owners who still haven’t successfully registered their trademark in China however are conducting OEM production in China, they should be more cautious than before.
III. RECOMMENDATIONS TO INTERESTED PARTIES
As a trademark owner, what can be done? Firstly, it is recommended to choose a distinctive trademark. Usually more distinctive the trademark is, stronger the protection is. It’s also important to maintain the registered trademark right valid so that there is a stable right to enforce. To maintain the right valid, trademark owner needs to conduct sufficient use and preserve use evidences. It’s also important to record the registered trademark right with the Custom since they will be helpful in finding infringing products that will be exported. Furthermore, obtaining trademark registration in target countries to where the OEM products will be exported is also important since it makes the protection on your trademark broader. If the trademark has been preemptively registered by others in foreign countries, take active action against it.
Then as an OEM consignor, what can be done? Usually foreign OEM consignors may not be directly sued by Chinese trademark owners, however, the business will be affected if a dispute arises. Therefore, as an OEM consignor, it’s also important to obtain registration of the trademark in China as early as possible and take active action against preemptive application or registration of the trademark in China.
If any foreign brand owner still hasn’t successfully obtained the trademark registration in China, it should at least obtained registration of the mark in the target country to where the products will be exported. Then make sure the trademark being used on the products are the same as registered in the target country. Besides, the OEM products should be included in the trademark registration in the target country. What’s also important is that it should avoid selling products on overseas websites that can send products directly to China.
IV. WHETHER TRADEMARK USE IN OEM PRODUCTION CAN MAINTAIN A TRADEMARK REGISTRATION IN NON-USE CANCELLATION CASES
Usually, in non-use cancellation cases, the right owners need to prove the sufficient use of their registered trademark in mainland China. When foreign brand owners successfully registered their trademark in China, however the products are all exported and never circulated in Chinese market, what would happen if the trademark registration encounters non-use cancellation attack.
With the key words, i.e. administrative lawsuit, OEM production, trademark cancellation, we were able to obtain 42 judgments that trademarks have been used in pure exporting OEM products from the website of China Judgments Online. According to the contents of these judgments, trademark registrations have been maintained in 30 cases which means in most of the cases trademark use in OEM production has been considered as sufficient use in China although the products didn’t circulate in Chinese market.
For the evidences submitted in the cases that trademarks have been maintained, according to the judgments, they are able to prove that goods bearing the trademarks have been produced and exported to foreign countries although there is no evidence in proving the products have been sold in Chinese market and to Chinese consumers.
Basically the courts consider:
Ø The legislative purpose of the relevant provisions of the trademark law is to activate the trademark resources, clean up the idle trademarks, and urge the trademark owners to continuously perform the duty of using the trademarks. Therefore, as long as the trademark owner has the intention to use the trademark actively, it is inappropriate to cancel the trademark because of the geographical distribution of the goods.
Ø Considering that OEM production and export trade are long-standing economic forms in China and occupy an important position in China's overall economy, there must be the behavior of producing products, attaching trademarks and exporting to foreign countries in the above economic forms.
Ø Whether the trademark is used should be judged according to the characteristics of these economic forms and the legislative purpose of non-use cancellation system.
Ø Therefore, although the exported products do not circulate in China, they still play an objective role in distinguishing the source of goods to a certain extent, which should be considered as public, real and effective commercial use. Such production behavior is an active use of trademarks, and does not shelve and waste trademark resources. If such kind of behavior is not considered as the use of trademarks, it may be unfair and contrary to the policy of expanding foreign trade.
From the courts’ opinions, we can basically conclude that if the trademark owners are able to prove that right products bearing right trademarks have been produced through OEM productions, although the products have been exported to foreign countries and haven’t been sold in mainland China, the registered trademark probably will be maintained by the court. This is also the practice with CNIPA so far.
However, there are still 12 judgments in which the trademark registrations have been cancelled. What are the cancellation reasons?
According to the contents of these judgments, the reasons can be summaried as follows:
Ø Evidences were not related to the use of the trademark;
Ø Trademark or goods on the evidence was different from the registration;
Ø Evidences were not formed within the prescribed period or without necessary information, such as the trademark, the goods;
Ø Contracts, order forms or license agreement without related document proving their performance;
Ø Pictures, advertising leaflet, product manual or other self-made evidences, it’s difficult to confirm the forming time and authenticity;
Therefore, for these cases, the marks have been cancelled because the evidences themselves are unable to prove the concerned mark has been used on the concerned goods during the concerned period in real business activities rather than the business form is foreign related OEM production.
On April 24, 2019, the Beijing High People’s Court issued “Guidelines for the Trail of Trademark Right Granting and Verification Cases” which includes an article “If the goods using the trademark in dispute are directly exported without being circulated in China, and the registrant of the trademark in dispute claims to maintain the registration of such trademark, this claim may be supported”. Thus, for future non-use cancellation cases, if the mark has been used in OEM production and exported to other countries, although the products haven’t been circulated in Chinese market, we are confident if sufficient evidences can be provided the mark is highly likely being maintained.
Accordingly, for foreign brand owners who have already obtained trademark registrations in China, it is recommended to preserve sufficient use evidences from time to time.
From the courts’ judgments, it can be concluded that if a trademark is used on foreign related OEM products and if the trademark has been registered by other parties in China although the products don’t circulate in Chinese market, such use probably will be considered as infringement to the Chinese trademark registration. For trademark registrants, if they use their registered trademark in the same way, i.e. products bearing the trademarks don’t circulate in Chinese market, if sufficient evidences can be provided, the trademark registration probably will be maintained in non-use cancellation cases.