Why having your trademark registered in China is essential even if your company does not commercialize its product in the Chinese market?
For many foreign companies China keeps playing a crucial role on the production chain of their products.
Usually, these companies have their goods manufactured in this country by an Original Equipment Manufacturer ("OEM") and then have them exported for its commercialization overseas only.
In this scenario, some of those companies may be tempted to think: why should I spend money protecting my brand or technology in China if the Chinese market is not relevant for my products?
To answer that question, we will evaluate the scenario in light of the past and the most recent decisions from the Supreme People's Court ("SPC") regarding OEM activities and trademark infringement.
Indeed, when goods are manufactured in China by an OEM with the only intention to have those goods exported overseas, the foreign buyer is not always the owner in China of the trademark affixed to the goods.
In fact, usually that trademark or a very similar one is registered in China by a third party and such third party may be willing to sue the factory for trademark infringement and stop the exportation of the goods.
This is a long-debated question to which the courts have demonstrated different understandings in last years.
PRETUL CASE
In 2015 this case involved a customs seizure of certain goods manufactured in People's Republic of China ("PRC") for a foreign company.
A local trademark owner in China claimed that the mark affixed to the subject goods infringed its rights in the PRETUL mark. The SPC concluded that OEM manufacture would not constitute trademark use that could form the basis of infringement if these three elements were present:
- The Chinese factory is duly authorized by the foreign brand owner to manufacture the goods (there should be a contract between the Foreign company and the manufacturer regulating the OEM activity, clearly specifying the kind of product to manufacture and which trademark will be used).
- The goods are entirely and solely intended for exporting purpose and they are not and will not be sold in China.
- The foreign company own a valid right to the subject trademark(s) in the country of destination.
DONGFENG CASE
Then, in 2017 the subsequent Dongfeng case affirmed the ruling in PRETUL, adding another element, namely, placing the burden on the OEM manufacturer of checking the foreign party's right to the trademark in the country of destination (duty of care).
As a practical matter, this duty would be discharged when the OEM manufacturer receives from the consignee copies of the foreign company's trademark certificates in the destination country.
LATEST HONDA CASE
In Honda case, however, the SPC did not follow its Pretul reasoning taking a radical departure from the SPC's earlier rulings in prior cases, such as the PRETUL and DONGFENG cases.
Indeed, in September of 2019, the SPC issued an "attitude changing" decision on OEM trademark infringement dispute, brought by Honda Giken Kogyo Kabushiki Kaisha ("Honda") against Chongqing Heng Sheng Xin Tai Trading Co. Ltd and Chongqing Heng Sheng Group Co. Ltd. ("Heng Sheng").
This is the latest decision from SPC in this matter and the SPC held that two defendant's activities – manufacturing and exporting 220 motorcycle bearing trademark "HONDAKIT" (distinctively displaying "HONDA" alone) to Myanmar company – constituted OEM manufacturing and infringed Honda's Chinese trademark right.
In fact, the SPC held that the "act of [a] trademark use should be assessed as a whole" and OEM activity could well constitute trademark infringement if the use of the trademark in this context could cause confusion among the relevant public in China.
The "relevant public" was deemed to include not just local consumers of the allegedly infringing goods, but also operators of businesses involved in the transportation of the goods.
It further affirmed that "as long as there is a possibility of distinguishing the source of the goods, there is 'use of a trademark' under the Trademark Law", and as a result it may cause confusion among relevant public.
Thus, the SPC did not affirm that 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 according to Chinese Trademark Law).
One of the reasons for this possibility is that, after exportation, it is possible that the goods may re-enter Chinese territory in variety of different scenarios and then they are likely to cause confusion among relevant public.
The SPC concluded therefore that goods produced by OEM could still be accessed by the relevant public in the PRC and as a result cause likelihood of confusion with identical or similar trademarks duly registered in China.
Further, the court held the following with regards to the rights owned by the foreign company in the destination country:
"The trademark right is a regional right applicable to a certain territory. 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 defense against the infringement".
CONCLUSION
This may sound like bad news to those who have been using OEM manufacturers in China without owning the corresponding trademark as their activities may be now compromised in light of this new decision.
Obviously, a particular evaluation of each case will have to be conducted as not all scenarios will take us to the same conclusion, nor all OEM activities can be considered as trademark infringement.
However, at this point, it is highly advisable for companies manufacturing their products in China with exportation purposes only to conduct a risk assessment with regards to their activities and search and file an application to register the marks they expect to use, or are using, for this purpose.
And if a search discloses prior applications or registrations that could be considered obstacles to use the registration in China, steps should be taken to clear the registration of such marks by a diverse range of means such as invalidation, opposition, and/or acquisition.
Another practice point is that marks used in connection with OEM should be identical in format and coverage to those for which the manufacturing entity has exclusive rights in the destination jurisdiction(s).
As it is not clear how aggressively this case will be applied going forward, it is important that trademark owners secure advice in particular cases.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
