Supreme Court decision on whether OEM constitutes trademark infringement

By Shi Yakai, Sanyou Intellectual Property Agency
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The Supreme People’s Court has rendered a retrial judgment on 8 April 2018 on the high-profile “Dongfeng” OEM case, in which the court affirmed that the OEM act does not constitute a trademark infringement. The Supreme People’s Court renders its opinion on OEM infringement issues once again after the PRETUL retrial case.

Original equipment manufacturer (OEM) refers to a circumstance in which a Chinese manufacturer accepts the entrustment of a foreign trademark holder or a foreign trademark user and processes products as required, attaching the trademark provided, and delivering all the products processed to the foreign trademark holder or the foreign trademark user. Whether or not the act of production of goods identical or similar to the designated goods of the registered trademark of a domestic trademark holder and attachment of a trademark is identical or similar to the registered trademark of a domestic trademark holder in OEM constitutes an infringement against the exclusive right of the said domestic trademark holder has been a controversial question for a long time in the field of justice.

石亚凯  SHI YAKAI  三友知识产权代理有限公司  律师  Attorney-at-law  Sanyou Intellectual  Property Agency
石亚凯
SHI YAKAI
三友知识产权代理有限公司
律师
Attorney-at-law
Sanyou Intellectual
Property Agency

First statement. The Supreme People’s Court has made its first official statement on whether the OEM constitutes a trademark infringement in the PRETUL retrial case. It takes the act of use in the sense of trademark law as the precondition of an infringement. In this case the court affirms that the domestic manufacturer accepted the entrustment of Mexican “PRETUL” or “PRETUL and oval devices” registered trademark holder to manufacture the padlocks bearing the “PRETUL” marks as required, all of which were to be exported to Mexico. These padlocks were not manufactured for distribution in the Chinese market, so the PRETUL marks do not distinguish the origin of the goods or fulfil the trademark function of “distinguishing the origin of the goods.” Therefore in China, the marks attached do not have the attribute of trademark and the act of attaching marks on the goods cannot be affirmed as an act of use in the sense of trademark law. The primary function of a trademark which the trademark law intends to protect is to be a source indicator. Whether or not the source indicator function is broken is the basis for determining whether or not a trademark infringement has occurred. So, the act of attaching marks by the entrusted manufacturer is not a use of trademark in the sense of trademark law and therefore does not constitute a trademark infringement.

Second statement. In the Dongfeng retrial case, the Supreme People’s Court continued to use the act of use in the sense of trademark law as the precondition for the determination of infringement. Meanwhile, with due consideration of the duty of reasonable care and material harm, the Supreme People’s Court affirmed in this case that the essential attribute of a trademark is its function of source identification or indication, that its primary function is to distinguish the source of the goods or services. Generally, the act of using a trademark that is not intended to identify or distinguish the source will not mislead or confuse the source of the goods or services. Therefore, it does not constitute an infringement in the sense of the trademark law. At the same time, given that OEM is a common and legal form of international trade, unless there is contrary evidence showing that the domestic manufacturer did not fulfil its duty of reasonable care after accepting the entrustment and its act of entrusted processing has caused material harm to the trademark right of the domestic trademark holder, the above-mentioned act will not generally be affirmed as having infringed on the trademark rights of the domestic trademark holder.

Then, the Supreme People’s Court held that the domestic manufacturer had already fulfilled its duty of care and diligence regarding the rights of related trademarks when it engaged OEM in business. Since the domestic trademark holder cannot legally export its goods bearing the trademark in dispute to Indonesia, the engagement with OEM by the domestic manufacturer does not cause real effect on the business opportunities and market interests of the domestic trademark holder in Indonesia based on the trademark in dispute.

The judgment ideas of the Supreme People’s Court in the PRETUL case and the “DONGFENG” case should be adopted by the judicial branches at all levels in the future. In the “Dongfeng” case, the Supreme People’s Court decided that, after considering the “duty of reasonable care” issue, the domestic manufacturer had already examined relevant certificates and documentations and paid full attention to the rights of the trademark of the entrusting party when it engaged in business with OEM. As to the requirement of “duty of reasonable care”, the author believes that requiring the domestic manufacturer to conduct formal examination against trademark certificates of the entrusting party and to know the status of the trademark right will be sufficient. If the domestic manufacturer is required to examine whether the foreign trademark is a malicious registration or to examine its other legitimacy and validity, it will certainly overburdened the domestic manufacturer with substantive examination obligations, which often exceeds its own judgment ability.

To avoid trademark infringement disputes, the domestic manufacture should ensure that all of its OEM products are for exportation and will not be sold in China. For a foreign trademark holder, it should try to perfect the layout of its intellectual property rights, including trademark, and apply for trademark registration in China as early as possible.

In the previous OEM cases the author used to represent, there is no shortage of domestic trademark holders that conduct malicious preemptive registration and then initiate an infringement proceeding by means of customs seizure to obtain money or other commercial interests. In this case, the infringement defence can be considered from the aspects of the prior use and that OEM is not in violation in the sense of trademark law according to the actual circumstances. If there is evidence to prove that the trademark of the domestic trademark holder is a malicious registration that violates the “good faith”, the court may, according to the ruling ideas of the Supreme People’s Court in related cases, not give legal support and protection to the said domestic trademark holder on the grounds of the abuse of trademark rights.

Shi Yakai is an attorney-at-law at Sanyou Intellectual Property Agency

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