OEM Liability Decision Protects against Bad-faith Trademarks, but Leaves Border Protection Questions Unanswered
China's Supreme People's Court (SPC) recently held that an original equipment manufacturer (OEM) may not be held liable for trademark infringement for exporting products bearing a trademark that is registered outside China. The SPC ruled that the trademarks used on exported OEM products are not intended to serve as an indication of origin to Chinese consumers; therefore, there is no likelihood of confusion and such use does not constitute trademark use under the Trademark Law.
The decision is the latest in a series of court rulings on OEM-related trademark issues. Back in 2004, Nike prevailed in a case in which the Shenzhen court confirmed that the export of goods bearing unauthorized marks constitutes infringement. But in recent years, courts in various locations have decided in favour of OEMs, especially in the context of border protection seizures. Chinese courts and Customs have discussed these issues regularly with industry players, but no consensus has been reached.
This case was being closely watched by the trademark community because of the potential implications. The issues were whether the defendant's manufacturing infringed the plaintiff’s exclusive trademark rights and constituted trademark use under the Trademark Law.
The suit was filed by Chinese company Focker Security Products International Limited, owner of the China- registered trademark PRETUL and device mark. Defendant Zhejiang Pujiang Yahuan Locks Co, Ltd. was an OEM which exported goods to Mexican company TRUPER SA, which owned a registration for the PRETUL trademark and device mark in Mexico.
Focker was said to have been a distributor for the Mexican company for some time previously.
Focker sued Yahuan for trademark infringement in the Zhejiang Ningbo Intermediate People's Court, which ruled in favour of the plaintiff, awarding damages of Rmb50, 000. Both parties appealed to the Zhejiang High People's Court, which affirmed the decision and increased the damages to Rmb80, 000. Yahuan applied for a retrial to the SPC as the last resort.
The SPC stated that under the Trademark Law, 'trademark use' refers to the use of a trademark on goods, packaging or containers and similar, or in advertisements, exhibitions and other commercial activities, in order to indicate the origin of the products. The SPC further explained that as in this case the products were all exported to Mexico and would not be sold on the Chinese market, the mark did not serve to distinguish their origin in China, as a trademark normally does. The relevant public in China thus would not confuse these products with those of the plaintiff.
The SPC further observed that as the mark did not serve as an indication of origin, it was not necessary to compare the similarity of the marks at issue and the respective goods they covered. The SPC overturned the entire decision.
Brand owners may have ambivalent feelings about this result. To some extent, the exemption for OEMs - at least in certain circumstances - helps companies which have fallen victim to bad-faith registrations in China, allowing their OEM partners to export their products without hindrance. This may be particularly helpful for medium-sized brand owners that primarily source their goods from China, but have somehow failed to register their marks in China. The SPC decision allows these companies to continue their activities.
But many brand owners are also concerned that a broad reading of the SPC ruling could open up a big loophole for counterfeiters. What if counterfeiters or infringers managed to register a well-known trademark somewhere in the world and then came to China to order OEM' goods? At a deeper level, the decision even undermines the legal foundations of the IP border protection regime. Chinese Customs has been stopping significant numbers of exports of counterfeit goods. If the court really means that export-only goods are not infringing, exporters will be able to challenge every customs seizure order in the courts. Predictably the Supreme Court may have to either figure out a way to deal with these problems or clarify the scope of the decision in some form in the near future.