Case study 27: Mere manufacture for export bearing other’s registered trademark, infringement or not?
When goods are manufactured in China by an original equipment manufacturer (OEM) factory for export, the foreign buyer is not always the owner in China of the trademark that is affixed on the goods.
But what if the trademark is registered in the name of a third party and such third party decides to sue the factory for infringement and stop the export of the goods? This is a long-debated question of which the courts have demonstrated different understandings.
In the early 2000s, decisions strictly implemented the general principles of trademark protection – namely, that use of a trademark without the owner’s consent is an act of infringement. Moreover, whether the goods were to be sold in China or exported made no difference. For example, 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.
However, this opinion was not shared by all of the courts in China. For example, in February 2004 the Beijing High Court issued an ‘Answer to Several Issues Concerning Trial on Trademark Civil Disputes’, which states (in Article 13) that the “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”.
On 2 November 2009, in Jolida v Shanghai Shenda (2008), the Shanghai No 1 Intermediate Court and the Shanghai High 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 origins of the goods. Therefore, the judges considered that since the primary function of a mark is to indicate the origin of the goods in order to avoid confusion, if the goods are not marketed in China, the mark does not fulfil such primary function in China (ie, there is no confusion in China and therefore no infringement).
However, there was still dissenting opinions in other courts. On 13 October 2005 in Ningbo Ruibao International Trade Co, Ltd v Cixi Yongsheng Bearing Co, Ltd, the Ningbo Intermediate Court and the Zhejiang High Court held that “territoriality is the basic characteristic of the trademark right… The defendant used a mark identical to the plaintiff’s mark without authorization, which constitutes trademark infringement”.
In February 2013 the Zhejiang High Court in Focker Security Products International Limited v Pujiang Yahuan Lock Co, Ltd (the Pretul case) (2012) held that:
As long as the acts meet the requirement (Article 52.1 of the Trademark Law defining trademark infringement), the trademark infringement is committed. According to current laws, regulations and Judicial Interpretations, we see no exceptions… Although the Defendant argues that the accused goods are solely for exportation to Mexico without domestic distribution in China, and that this will not cause confusion and misunderstanding among Chinese consumers as well as cause no harm to trademark right of the plaintiff… this argument is not tenable. The defendant’s acts infringed upon the trademark right of the plaintiff.
This case attracted mass attention and the retrial procedure before the Supreme People’s Court was expected to clarify the debate once and for all.
On 26 November 2015 the Supreme People’s Court reversed the Zhejiang High Court’s decision and held that:
since [goods] are not for distribution in the Chinese market, the PRETUL marks do not fulfil the trademark function of ‘distinguishing the origin of the commodities’ in China. Therefore, such marks are unlikely to cause confusion and misidentification among the relevant public in China.
The issue seemed settled, but was not.
On 18 December 2015 the Jiangsu High Court issued a decision (the Dong Feng case) dissenting from the Supreme People’s Court’s views in Pretul and found that an OEM manufacturer’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, 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 28 December 2017, the Supreme People’s Court, in a retrial procedure on the Dong Feng case, reversed the Jiangsu High Court’s trademark infringement finding. The Supreme People’s Court started by reiterating its reasoning in the Pretul case:
Trademark use refers to the act of affixing a trademark to a product, product packaging or container, or using the same in the commodity transaction documents as well as in the advertising, promotion, exhibition or other commercial activities, 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.
However, the Supreme People’s Court did not base its decision on this reasoning, but rather found that the exporter had fulfilled its reasonable duty of care and therefore did not commit infringement.
However, the issue was not settled.
On 22 September 2019 the Supreme People’s Court made a retrial judgment in Honda v Hengsheng, where the Chongqing High Court had strictly followed the Supreme People’s Court’s reasoning in Pretul. The Supreme People’s Court held that since the motorcycles bearing the (infringing) trademark HONDAKIT were exported to Myanmar, the trademark was not used in China, no confusion was possible and therefore no infringement had been committed.
This time, the Supreme People’s Court did not follow its Pretul reasoning. It affirmed that the “act of [a] trademark use should be assessed as a whole. As long as there is a possibility of distinguishing the source of the goods, there is ‘use of a trademark’ under the Trademark Law”. This possibility of distinguishing the source of the goods concerns not only the Chinese consumers (who may have access to the goods when travelling to the destination country), but also all of the operators involved in the transportation of the goods.
Further, the court held the following (where the foreign buyer of the goods owns the trademark in the destination country):
The trademark right is a regional right. 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.
The Pretul reasoning was a consequence of the structure of the Chinese Trademark Law, which is not the same as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) or EUlegislation. In the TRIPS Agreement, as in the European Union, the use of a trademark is not specifically defined; legislation defines only what signs may be registered as a trademark and what rights are conferred by the registration. In the Chinese Trademark Law, Article 48 defines the use of a trademark and uses the words “for the purpose of indicating the sources of goods”.
The Pretul reasoning, which was based on these words, failed to ask one simple question: if the trademark affixed on the goods does not fulfil the function of indicating the source of the goods (because of the exportation), what other function does it fulfil? Is it generic use? Is it fair use? Obviously, the answer to such questions would have been that the mark was indeed affixed on the goods for the purpose of indicating the source of the goods, regardless of the place where the goods were to be sold.
In the recent Honda case, the Supreme People’s Court did not affirm that the simple act of affixing the mark to the goods in itself constitutes the use of the trademark. 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). One of the reasons for this possibility is that, after exportation, it is possible that the goods may re-enter Chinese territory. Another scenario is that the goods may be refused by the purchaser because they are defective or for any other reason, even before they have been exported.
This may sound like bad news to those who have been using OEM manufacturers in China without owning the corresponding trademark. However, in cases where parties are prevented by a third-party trademark owner from obtaining the exportation of goods, they may succeed if they can demonstrate that the third party acted in bad faith. The Supreme People’s Court has established the principle that a trademark that was filed in bad faith should not be enforced.