OMG! Has China’s Supreme Court Reversed Its Position On OEM Trademark Infringement? The Implications Of The HONDAKIT Case.

26 June 2020
 

Foreign brand owners have often questioned whether they need a trademark registration in the PRC when engaging PRC factories for Original Equipment Manufacturing (OEM) activities. Previously, a pure OEM arrangement with proper authorisation from the owner of a trademark registration in the exporting country, would generally not be considered infringement of identical or similar PRC trademarks. However, in the recent judgment handed down in Honda Motor Company Ltd and Chonqing Hengsheng Xintai Trading Co Ltd. (the HONDAKIT case), the Supreme People’s Court (SPC) seems to have changed its position on whether branded products, produced through OEM in the PRC, but intended to be exported elsewhere for sale, constitutes trademark infringement. In light of the HONDAKIT case, brand owners may need to revisit the importance of securing trademark registrations in the PRC. 
 

Court’s position after the PRETUL and DONG FENG cases
 

Whether OEM use of a trademark on goods made solely for export, constitutes an act of infringement, has always been a controversial issue in China and the divergent approaches taken by the judicial and administrative authorities has caused concern for trademark owners. Following the judgments in the DONG FENG case (April 2018) and the PRETUL case (November 2018), we observed a trend as to how the PRC courts approach OEM infringement cases;  generally, the Court will consider a number of factors before concluding whether there is infringement:
 

1.	Whether the OEM was authorised to manufacture the products based on a valid, prior trademark right in the exporting country;
2.	Whether the OEM has exercised a reasonable duty of care in verifying the IP rights of the foreign purchaser;
3.	Whether the products manufactured are entirely for export and not circulated in the PRC market;
4.	The OEM will be subject to higher duty of care subject to specific facts, such as whether a well-known trademark is involved, and whether there are obvious signs of bad faith.

 

These factors allow the PRC courts to take a pragmatic, fact-specific, approach to achieve substantial justice in each case but, on the whole, a trademark applied to goods designated exclusively for export was not regarded as a badge of origin to Chinese consumers and did not cause confusion. In the HONDAKIT case, the SPC has again emphasized the case-by-case approach taken by the earlier courts, but a significant development is the adoption of a much broader consideration of what constitutes “likelihood of confusion” when determining infringement.
 

The HONDAKIT Case
 

In the HONDAKIT case, motorcycle parts bearing the “HONDAKIT” mark, manufactured in the PRC, were exported to Myanmar with the authorisation of the owner of the “HONDAKIT” mark in Myanmar. Honda Motor Co Ltd lodged infringement proceedings against the OEM in the PRC. The first instance court ruled in the plaintiff’s favour to find infringement, which was overturned by the high court, given that the products had not circulated in the PRC market. The plaintiff then appealed to the SPC which affirmed that there was infringement of Honda’s PRC trademarks.
 

The SPC took into consideration the constantly changing business environment and held that the application of the law needs to be flexible to take account of these changes. In the circumstances, OEM activities should not be exempted from infringement. The SPC found that the application of a mark, in the context of OEM for export, should be regarded as use of a trademark, as long as it serves to identify the source of the products. It is still necessary to show a likelihood of confusion amongst the “relevant public” and the SPC expanded this concept by holding that this includes any persons who may access the OEM goods in the course of production, as well as post-production.
 

In addition, the SPC rejected the argument that there can be no likelihood of confusion if the goods are not intended for sale in the PRC. In light of the rapid development in ecommerce and the internet, and increasingly frequent overseas travel, the SPC felt that PRC manufactured products, although intended for export and sale in foreign markets, might well be exposed to PRC consumers and return to the domestic market, giving rise to the possibility of confusion. Actual confusion is not required. Therefore, the OEM’s act of affixing a trademark on OEM products, which is similar to a PRC registered mark, is an act of infringement, even if the products are intended for solely for export.
 

It is important to note that the prominent display of “HONDA” in the “HONDAKIT” mark was an indication of bad faith which undoubtedly affected the court’s decision in finding infringement and this case confirms the SPC’s pragmatic approach in an ever-evolving market environment. This should be welcomed by genuine trademark owners with registrations in the PRC, who have been seeing OEM used as a loophole for infringers to export counterfeit products elsewhere. However, the decision could be a double-edged sword as it also means that trademark owners without their own Chinese registrations, could be at risk of infringing prior registered marks. It remains to be seen how the Chinese courts will handle such cases.
 

Customs
 

Deacons has been in contact with Customs on this issue and the preliminary feed-back is that there are currently no new directives in response to the HONDAKIT case. As long as the OEM companies can adduce the necessary documents to prove that the goods are for export and the proper authorisation has been obtained, Customs will not detain the goods. The practice of local Customs authorities may vary and we will provide an update if an across-the-board practice to treat OEM use as trademark infringement is imposed.
 

Non-use cancellation

 

No discussion on OEM activities would be complete without looking into non-use cancellation proceedings. OEM use has been more consistently recognised as valid trademark use in non-use cancellation proceedings after the PRETUL case. We do not expect any change in approach in the context of defending non-use cancellation cases based on OEM use since the legislative purpose of non-use cancellation is to encourage genuine use and reduce the number of idle trademarks. If the broad approach taken by the SPC, in finding that OEM products could still reach PRC consumers via non-traditional channels is consistently applied, this would be in line with the position taken in non-use cancellation cases.
 

Conclusion
 

Since the PRC is a first-to-file jurisdiction, the risk of conflict with prior marks, bad faith or otherwise, remains a real one. PRC OEM manufacturers may themselves impose requirements on foreign brand owners to secure registrations in order to minimize their risk of infringement.
 

In light of HONDAKIT, it is all the more important for foreign brand owners to secure trademark registrations in the PRC. The amendment to the Trademark Law last year made clear the PRC’s commitment to curb bad faith trademark applications and it is hoped that a fact-specific approach will allow the courts flexibility where a legitimate trademark owner, conducting OEM activities, comes up against a Chinese trademark registered in bad faith. However, this has not yet been tested under the HONDAKIT principles. With PRC factories gradually resuming production, foreign brand owners are advised to review their portfolios and consider extending protection to the PRC, even if they have only been engaging in OEM activities.