China: China Law Update: Does OEM Manufacturing Constitute Trade Mark Use Or Infringement?

China has long been an attractive location for companies to manufacture goods for distribution elsewhere (original equipment manufacturing or OEM). However, many businesses struggle with the uncertainty of whether applying a mark to goods destined only for export constitutes trade mark use in infringement or non-use cancellation proceedings in China.

In this article, we summarise the key developments in this area, which culminate in a 2019 decision of the Supreme People's Court (SPC).

Background

Since 2015, the "PRETUL" case¹ had been widely regarded as the leading decision in China on the issue of trade mark infringement by OEM companies. In this case, the SPC concluded that an OEM company's application of a mark to goods did not infringe the registered owner's rights in China, as the marks are not exposed to the public in China and, as a result, confusion could not arise.

Subsequently, the Jiangsu High Court introduced a modified approach in the "DONG FENG" case.² This Court imposed a higher duty of care on OEM companies to verify that foreign consignors have rights in the relevant marks, particularly if the marks are well-known in China. Applying this test, the OEM company was held liable for infringement of the registered "DONG FENG" mark, on the basis that it should have known about the reputation of the mark in China.

However, the Jiangsu High Court's decision was overruled upon appeal to the SPC in 2018.³ The SPC held that an OEM company would have discharged its duty of care by checking a foreign consignor's certificate of registration for the relevant mark in the country of export.

The principles established in "PRETUL" have also been applied in non-use cancellation proceedings. For example, in the 2016 "MANGO" case⁴, application of the "MANGO" mark to goods destined for export was not considered use of the mark sufficient to maintain the registration in China. The Court also stated that there should be a consistent interpretation of "trade mark use" in relation to both non-use cancellation and infringement proceedings.

2019 "HONDA" case

One year after the "DONG FENG" appeal, the SPC revisited these issues in the 2019 "HONDA" case⁵. In this case, a Chinese OEM company manufactured motorcycle parts under a "HONDAKIT" mark for export to Myanmar. Honda Motor Co (Honda) commenced infringement proceedings on the basis of its registered "HONDA" marks in China.

The SPC held the OEM company liable for infringement, notwithstanding that the goods were only destined for export, and despite the foreign consignor's director having duly recorded a declaration of ownership of the "HONDAKIT" mark in Myanmar. In doing so, the SPC established a revised approach to assessing use and infringement in an OEM situation.

The SPC held that for the purpose of determining whether a mark has been put to use, consideration should be given to the entire chain of production and export. The SPC concluded that use of the mark may be established if the mark is applied in a way that distinguishes the source of the goods during this process. However, no further elaboration was given.

Turning to the question of whether there had been infringement, the SPC reiterated that this depends on whether there is a likelihood of confusion on the part of the public, but expanded the definition of what constitutes the "public". First, the SPC stated that the "public" includes operators who are closely involved in handling the goods for export. Second, the SPC stated that with the growth of e-commerce and travel, the "public" should also encompass Chinese consumers who are likely to encounter the relevant goods online or while traveling, even if the goods were initially exported overseas.

Applying these principles, the SPC held the OEM company liable for infringement of Honda's registered "HONDA" marks in China. The SPC also noted the importance of protecting intellectual property as China's economy has shifted from "a stage of high-speed growth to a stage of high-quality development".

Key takeaways

There now appears to be a greater scope for registered proprietors to establish infringement against OEM companies, even if the goods are only destined for export. However, much will depend on the facts of each case and there remains considerable uncertainty. Our recommendations for brand owners engaging OEM companies in China are as follows:

1. Secure registration for your marks early

Under the new approach set out in "HONDA", registered proprietors are in a stronger position to restrain distribution at the source of manufacture. This gives brand owners a further reason to ensure that their marks are registered in China. Filing early is crucial as it will take time to navigate objections and oppositions on the crowded Chinese register (approximately 7.5 million trade mark applications were filed in China in 2019).

This revised approach also appears to benefit brand owners when it comes to maintaining their registrations. Even if the proprietor only engages an OEM company to manufacture goods for export, it may be possible to resist non-use proceedings with evidence of public exposure during the manufacture and export process.

2. Work with customs authorities

Brand owners should also consider working with Chinese customs authorities. China enforces customs seizure in respect of both imports and exports. This can be an effective mechanism for controlling the movement of infringing goods. For example, Honda had been alerted to the intended export of motorcycle parts bearing the "HONDAKIT" mark by Kunming Customs.

In order to record a mark with China's customs authorities, a company must provide proof of registration. Once any goods are seized, there is a short time frame to conduct inspections and commence proceedings, so having agents on the ground will be useful in expediting the enforcement process.

3. Develop a multi-jurisdictional enforcement strategy

Finally, it is also important to monitor and investigate the movement of infringing goods outside China. There may be other opportunities for enforcement at choke points in the supply chain. For example, brand owners can try to seize infringing goods which are in transit through shipping hubs such as Singapore, if they also have trade mark rights in those jurisdictions.

Footnotes

1 Focker Security Products International Limited v Pujiang Ya Huan Locks Co. Ltd.

2 Shanghai Diesel Engine Co. Ltd v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd.

3 Retrial of Jiangsu Changjia Jinfeng Power Machinery Co., Ltd. v Shanghai Diesel Engine Co., Ltd.

4 Second Instance Administrative Judgment of Artist Portfolio Company, Sonatti International Co., Ltd. and Trademark Review and Adjudication Board of the State Administration for Industry and Commerce of the People's Republic of China.

5 Honda Motor Co., Ltd. v. Chongqing Hengsheng Xintai Trading Co., Ltd. et Chongqing Hengsheng Group Co., Ltd