PRC Supreme Court Revisits OEM Manufacturing Defense to Trademark Infringement


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Over the last few years, various courts in China have looked at the Original Equipment Manufacturer ("OEM") defense for trademark infringement. In April, the Supreme Court handed down yet another decision, providing further clarity to trademark owners and manufacturers.

On 8 April 2018, the PRC Supreme Court issued an eye-catching decision, determining that Jiangsu Changjia Jinfeng Power Machinery Co., Ltd. (Changjia)’s OEM activity did not constitute trademark infringement, on the grounds that Changjia had fulfilled its due care and attention obligations and had not caused substantial damage to Shanghai Diesel Engine Co., Ltd. (Shanghai Diesel), the owner
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of the well-known “Dongfeng” trademark at issue, which overturned the second instance judgement issued by the Jiangsu Provincial Higher People’s Court and maintained the first instance judgement issued by the Changzhou Municipal Intermediate People’s Court (Changzhou Intermediate Court).

Case History

Shanghai Diesel is the registrant of China well-known trademark “Dongfeng” Registration No. 100579 and 624089, in relation to diesel engines in class 7. Shanghai Diesel filed a lawsuit with the Changzhou Intermediate Court, claiming that Changjia used the trademark that was identical with or similar to its registered trademarks in relation to diesel engines without authorization, and manufactured a large number of fake Dongfeng diesel engines and other products, which infringed its exclusive right to use its registered trademarks, under Paragraph 1 of Article 52 of the PRC Trademark Law 2001. It required Changjia to compensate its economic loss of RMB 1.05 million.

Changjia argued that it did neither implement the acts of trademark infringement, nor cause any economic loss to Shanghai Diesel, and that it carried out OEM as per an effective Indonesian trademark registration certificate obtained by PTADIPERKASABUANA (PTADI), one of its customers located in Indonesia, and the all the products were exported, which means the products did not enter the domestic market and would not cause any confusion. It accordingly requested the court to reject all claims of Shanghai Diesel.

First instance: NON-INFRINGEMENT, as determined by Changzhou Intermediate Court

Changzhou Intermediate Court considered that Changjia manufactured diesel engine parts, as per the Indonesian certificate for trademark “DONGFENG” Registration No. IDM000089328 provided by its client (PTADI, an Indonesian company) and all of the products were exported to Indonesia. The products did not enter into the market circulation in the territory of China, and Changjia’s trademark labeling did not have the function of identifying the source of goods in China, so this did constitute trademark use under the PRC Trademark Law, so Changjia’s acts did not constitute trademark infringement. Accordingly, the court rejected Shanghai Diesel’s lawsuit requests. This is consistent with previous reported cases, especially the “PRETUL” case reviewed and determined by the Supreme Court in 2015 (Pujiang Yahuan Lock Industry Co., Ltd. vs. Focker Security Products Internatioanl Limited), in which the Supreme Court mainly focused on the fact if the products were sold in China market or for export only.

Second instance: INFRINGEMENT, as determined by Jiangsu Higher Court

The Jiangsu Higher Court mainly adopted the adjudication standard on “necessary reviewing duty of care”, that is, Changjia failed to perform reasonable attention and avoidance obligations, since it engaged in OEM in the case of knowing that the Dongfeng trademark was a well-known trademark owned by Shanghai Diesel and that the Indonesian trademark holder was suspected of squatting, which substantially damaged the interests of Shanghai Diesel and infringed upon its registered trademark exclusive rights. The Higher Court accordingly ordered Changjia to pay the discretionary compensation to Shanghai Diesel for an economic loss of RMB 100,000 and a reasonable expenditure of RMB 116,750 for the purpose of stopping the infringement.

Retrial: NON-INFRINGEMENT, as determined by Supreme Court

The Supreme Court held that under the current situation of the ever-widening globalization of economic development and the increasingly close division of international trade and economic and trade cooperation, the courts should carry out a specific analysis on the trading patterns in specific markets during a specific period of time, in accordance with the objective reality of the development of international economic and trade situations, when reviewing cases of disputes over trademark infringement and deal with specific markets during specific periods, so they can apply the law more accurately.

For the purposes of this case, Changjia signed a commissioned processing agreement with Indonesian PTADI, manufactured diesel engines and components, and then completely exported the products to Indonesia for sale. In the process of production and exportation of Changjia, all the relevant identification pointed to Indonesian PTADI, as the authorizer, but did not affect the normal identification and differentiation function of Shanghai Diesel’s registered trademark in the domestic market and will not lead to the relevant public’s confusion. Considering that OEM is a common and legal form of international trade, unless there is contrary evidence showing that Changjia failed to exercise due care when accepting the OEM orders and that its OEM practices caused substantial damage to Shanghai Diesel’s trademark rights, generally it should not be determined that Changjia’s OEM practices infringe upon Shanghai Diesel’s trademark rights.

Based on the above, the Supreme Court concluded that the second instance decision on Changjia’s infringement upon Shanghai Diesel’s trademark rights were made based on insufficient facts and biased applicable laws, so it should be corrected.

Cases Analysis

Actually, in the “Dongfeng” retrial case, the Supreme Court recognized the “reasonable duty of care + substantial damages” standard established by the Jiangsu Higher Court. This moderately modified its decision in the “PRETUL” case in 2015, as mentioned above. In that case, the Supreme Court directly determined that OEM did not constitute trademark use referred to in the Trademark Law, and accordingly did not constitute infringement.

However, specifically for the “Dongfeng” case, the Supreme Court did not recognize the Higher Court’s judgement regarding Changjia’s foreign-related OEM practices have caused substantial damage to Shanghai Diesel’s trademark rights, and therefore, it concluded that Changjia did not constitute infringement. Regarding the “substantial damage”, in the “PEAK” case in 2016 (Fujian Quanzhou Peak Sporting Goods Co., Ltd. vs. Wuxi Zhenyu International Trade Co., Ltd. and Isaac Morris Limited), Shanghai Intellectual Property Court determined the respondent’s clothes processing constituted trademark infringement, since the appellant submitted the evidence showing that Chinese consumers can search and purchase the OEM clothes on the official Amazon website, after the products were exported to the US. In that case, the Shanghai IP Court held that even if the products were all exported to the US, based on the global nature of the Internet, the exported products still had a greater chance of returning to the domestic market which constituted a “substantial damage” to the domestic trademark right owner and accordingly constituted infringement.

Conclusions

Based on the “Dongfeng” and other cases referred to above, we can draw the following conclusions on OEM cases:

1) OEM “conditionally” constitutes trademark use referred to in the Trademark Law.

2) OEM dose not constitute infringement, when the following two requirements are met at the same time:

i) The domestic processing party has done a “reasonable duty of care”. Namely, the processing party needs to confirm the entrusted party’s trademark registration status and also check whether the authorization chain is complete and effective.

ii) The processing act does not cause “substantial damages” to the domestic trademark owner. Namely, the OEM practice does not affect the normal identification and differentiation function of domestic registered trademarks in the domestic market and will not lead to confusion.

ABOUT THE AUTHOR: Matthew Murphy and Yu Du
Yu Du and Matthew Murphy are Partners in the MMLC Group.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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