8 February, 2016
Summary
After years of controversy surrounding the legal status of original equipment manufacturing ("OEM")1, China's Supreme People's Court has finally handed down what may become a landmark judgment in the Focker v Ya Huan2 case.
Introduction
The controversy regarding the status of OEM infringement initially arose because the Trademark Law does not give any clear-cut answers on the issue, and the judicial and administrative practice on the issue have been – somewhat deliberately – inconsistent. Political, macro-economic, social and public interest factors have so far heavily influenced the jurisprudence, as have the specific factual circumstances of each case.
In short, in this case, the SPC ruled that a trademark, affixed on OEM products exclusively designated for exportation, where the person who ordered the goods has a valid trademark, does not function as a badge of origin of those products in China. In the Court's opinion, the mark is therefore not used as a trademark in China, and, consequently, cannot infringe upon a Chinese trademark. Whilst the decision is intended to be fact specific, the concern is it will become widely applied.
Background
Focker's trademark was registered in China in 2003 for household metal products and locks. Mexican company Truper, on the other hand, has owned the Pretul word mark in Mexico and in various other countries since 2002. Truper instructed Ya Huan, an OEM manufacturer based in Pujiang, to produce locks, keys, instructions and packaging bearing the Pretul mark. Both the packaging and the instructions produced by Ya Huan contained the description in Spanish that Truper was the importer of the goods in Mexico, and that the goods were made in China. Neither the packaging, nor the product instructions bore any information about Ya Huan.
Following the recordal by Focker of his Pretul trademark with Chinese customs, a number of products were seized by customs at the Port of Ningbo. Subsequently, Focker filed a civil trademark infringement action against Ya Huan, who was labeled as the consignor of the goods.
Both the first instance and appeal courts held that the production by Ya Huan of goods bearing the mark constituted trademark infringement. Ya Huan consequently applied to the SPC for a retrial of the case.
The SPC's Reasoning
In its judgment, the SPC reiterated that the essential function of a trademark is to serve as a badge of origin for certain products or services. The SPC held that the courts, when called upon to decide on trademark infringement, should in principle first focus on whether the sign alleged of infringement in fact functions as a trademark in China, i.e. as a badge of origin for products or services in the Chinese market, before determining whether such use causes confusion and infringes upon the registered trademark. The SPC held that if the actual use of a sign does not indicate product/service origin to the Chinese market, such use is not trademark use, since it does not harm the registered trademark's function to identify the origin of products to Chinese consumers.
When applying this rationale on the facts of the case, the SPC held that Ya Huan only affixed the Pretul mark on OEM products exclusively designated for exportation, and that it therefore never functioned as a badge of origin in the Chinese market, since those OEM products never entered China for retail or trade. Moreover, the Court held that such use merely made it technically possible for the Mexican importer Truper to exercise its trademark rights in Mexico. The SPC therefore held that there was no use of Pretul as a trademark in China, and hence no trademark infringement, and reversed the decisions by the lower courts.
Remarks
This judgment is ground-breaking in that the SPC held for the first time that the use of a mark only constitutes trademark use if it realizes its essential function: serving as a badge of origin in the Chinese market. Pure OEM manufacturing, whereby the goods produced in China are not put on the Chinese market at all, therefore does not constitute trademark infringement in China.
The case has clarified a large amount of the uncertainty for brand owners who either:
a. Have their mark hijacked in China (and so would be relieved to know that provided the goods are purely for export, OEM manufacturing with a clear indication that it is for export, is not considered as trademark use and hence no infringement of the hijacked mark).
b. Have trademark registrations in China and wanted to stop a manufacturer from manufacturing goods for a market where they do not own the trade mark (and so would be disappointed to learn that it would now be difficult to stop such OEM manufacturing unless there is use or sale of the products in China).
However, this judgment was clear that it should be fact specific. It is expected that the following factual elements will generally be required for OEM use of trademarks to be labelled as non-infringing:
- The OEM manufacturer exports all of its products abroad;
- The foreign purchasers are the rightful owners of the trademarks in the country of destination prior to the filing date of the Chinese mark;
- The OEM manufacturer performed its reasonable duty of care by verifying the IP rights of foreign purchasers and have documentary evidence supporting the same; and
- The OEM manufacturer was authorized to produce OEM products by foreign right holders.
This is consistent with previous cases.
It is furthermore unclear how "entry on the Chinese market" will be interpreted in practice while determining whether a mark has been used as a trademark in China. In fact, several courts3 have held in the past that the "relevant public" for trademark use encompasses not only the relevant consumers but also the market operators who have a close relation with the marketing/distribution of OEM products (e.g. logistics companies). In that latter case, the marks on OEM products can be held to be used with those operators, which would then constitute trademark use and, hence, could still lead to a finding of infringement.
Another way to nuance this case is to examine the use by the SPC of the expression the "essential function" of a trademark. Would this mean that there could be other "non-essential" functions for trademarks in China? If so, could such functions be infringed even if products were not directly marketed to Chinese consumers?
In any event, what is clear for now is that according to the SPC, the affixation of a trademark on OEM goods purely destined for exportation is not sufficient to infringe upon the origin function of a trademark in China. We expect that the dust on this topic has not yet settled with this case, and will provide you with further updates when new cases become available. It will also be of interest to observe Customs seizures moving forward, and the previous practice of using customs seizures as evidence of infringement would no longer be sufficient. Evidence that locates sales/acts of infringement targeting Chinese consumers would become more important.
Last, but not the least, the SPC's decision in this case does not touch upon other disputes and issues concerning the affixation of a trademark on OEM products. For example, does the affixation of a trademark on OEM products constitute the trademark use to defend the registration of the trademark against non-use cancellation action if the trademark owner uses the trademark on OEM products only in the Chinese market?
We will provide you with further updates when new developments become available.
[1] OEM (short for 'Original Equipment Manufacturing') is a process whereby a manufacturer produces another company's product under that latter company's own name and branding.
[2] Focker Security Products International Limited (莱斯防盗产品国际有限公司, "Focker") v Pujiang Ya Huan Locks Co., Ltd.(浦江亚环锁业有限公司, "Ya Huan")
[3] E.g. the Fujian, Zhejiang and Guangdong Higher People's Courts.
