Does OEM use constitute trademark infringement?

Since the Nike case handled by Shenzhen Intermediate People’s Court, whether original equipment manufacturing (OEM) use constitutes trademark infringement has been a hot topic in the field of trademark law. Many courts around China have also made their own active explorations on this issue from various perspectives.

After the Pretul case (2014) and Dong Feng case (2016), the Supreme People’s Court (SPC) once again interpreted this issue through the Honda case (2019) , the decision of which negated the Pretul trial ideas and attracted extensive attention in the legal community.

In the Pretul case, the SPC insisted on the “trademark use” criteria, holding that OEM use did not constitute trademark infringement because OEM use was not the use of trademark as stipulated in the Trademark Law, and thus did not meet the prerequisite for trademark infringement.

In this case, the OEM contractor manufactured padlocks affixed with the Pretul mark in accordance with requirements of its foreign client, and such padlocks were all exported to Mexico immediately after they were manufactured, instead of being sold on the Chinese market.

The SPC held that affixing the mark onto OEM products by the contractor should not be deemed trademark use, because the affixed mark did not mean to identify the source of the manufactured products, nor did it have the function of identifying the source of such products. Since trademark use is the prerequisite for trademark infringement, the contractor’s acts did not constitute infringement. This view has already been made clear in the SPC’s Reply on Whether OEM Products for Export Constitute Infringement to the General Administration of Customs.

In the Dong Feng case, the SPC abandoned the “trademark use” criteria, and instead specifically discussed the “reasonable due diligence + material damage” criteria put forward in the appeal court’s judgment. Although the SPC finally held that OEM use did not constitute trademark infringement, the underlying logic was changed when compared with the Pretul case.

In the first trial of the case, the court still followed the Pretul logic and concluded that OEM use did not constitute trademark infringement. In the retrial, however, the SPC did not adopt this logic. It first examined whether the contractor had exercised reasonable due diligence, such as whether it examined relevant certificates of the client’s rights, and whether the OEM use caused any material damage to the trademark holder. On this basis, the SPC further examined whether the OEM acts of the contractor caused any material damage to the trademark holder and constituted trademark infringement.

In the Honda case, the SPC negated trial ideas of the Pretul case, further clarified the criteria of “trademark use”, expanded the scope of “relevant public”, and proposed that OEM use should not be simply excluded from trademark infringement in all cases, but should be analysed on a case-by-case basis.

In the Honda case, the SPC confirmed the OEM activities of the contractor as trademark use, and gave the following viewpoints: Subjectively, the purpose of the trademark user using the mark was to identify the source of the product, and such identification includes both possible identification and realistic identification; and objectively, the use of trademark should include physical affixation and circulation in the market, among other aspects. The judgment on whether an act constitutes trademark use should be based on an overall explanation of the act as a whole, rather than consideration of a separable particular aspect of the act. As long as the act carries the possibility of identifying the source of product, it should be deemed as trademark use.

The SPC also expanded the scope of the “relevant public” in the Honda case, holding that the relevant public included not only the consumers of the allegedly infringed products, but also operators closely related to the marketing of these products, such as shippers.

Also, given the possibility that the exported product may be sold back to the domestic market, and the fact that there is a large number of Chinese consumers travelling and shopping abroad, the SPC confirmed the possibility that OEM products may be accessed by, and cause confusion among, the relevant public.

The SPC also specifically mentioned the fact that the contractor enlarged the size of the word Honda, highlighted the letter H and painted the wing-shaped part of the mark in red, believing that there was a possibility of causing confusion and misidentification among the relevant public. To some extent, this aroused the suspicion that the contractor was intentionally and maliciously exploiting the popularity of the alleged infringed trademark.

It can be predicted that the debate over the criteria for identifying OEM use as trademark infringement, and the case-specific conclusion on whether OEM use constitutes infringement, may continue in the short run.

Given the recent changes in the trial ideas shown in judicial cases, all stakeholders are suggested to pay attention to the following points. For domestic trademark holders, compared with the Pretul case, the trial idea and logic used in the Honda case provides a much higher probability of winning. The number of trademark infringement cases may increase significantly in the foreseeable future.

To avoid the risk of trademark infringement, the domestic OEM contractor should conduct necessary examination of the certification of the foreign client’s trademark rights, carry out its manufacturing activity strictly based on the trademark held by the client and the specified scope of products, and export all manufactured products to regions where the foreign client holds trademark rights.

In only a few of the previous cases were foreign clients directly targeted, and standing as defendants in litigation in China. However, to maintain the stability of the supply chain, foreign clients should first register their trademarks in China, check identical and similar trademarks, and remove potential obstacles to their rights, or reduce infringement risks.

Lian Chenghe and Xing Keke are partners at Yuanhe Partners.