China’s Supreme Court Sets Precedent in Finding Infringement in OEMs’ Unauthorized Trademark Use

On 23 September 2019, the Supreme People’s Court (“SPC”) rendered a judgment for Honda Motor Co., LTD. (“Plaintiff”) in its trademark infringement case against two original equipment manufacturers (“OEMs”), Chongqing Hengsheng Xintai Trading Co., Ltd. and Chongqing Hengsheng Group Co., Ltd. (“Defendants”), who were affixing the Plaintiff’s logo on goods exported to a third party without authorization from the Plaintiff.[1] The judgment indicates that OEMs’ affixing of trademarks without authorization from the owner of the trademark in China will constitute trademark infringement, which is an about-face from the SPC’s previous position. While subsequent cases are needed to confirm this latest position, it may have far-reaching impact on the OEM and possibly other industries in China, including empowering trademark owners to cut off the source of unauthorized OEM products manufactured in China. This Newsletter reviews the judgment in context. 

Background on OEMs

Commonly in international trade, an enterprise in one country will manufacture or otherwise process goods at the behest of an enterprise in another country, including by affixing logos, symbols or other trademarks on the goods, and then export the goods. The goods are not put on the market in the country of manufacture/processing—at least not directly. Issues arise, however, when the enterprise engaging the OEM does not have rights over the mark in the country of the OEM and only licenses its rights from other jurisdictions (e.g., of the destination of the exported goods) while another party does have rights over the mark (or a similar mark) in China.

SPC’s Previous Position: OEM Does Not Infringe Trademarks

Over the years, at least some trademark owners have sued Chinese OEMs for trademark infringement, claiming that the OEMs used, on goods they manufactured/processed, the trademark owners’ logos or symbols without due authorization. The PRC courts have as a rule rejected such claims. The main rationale of the OEMs, adopted by the courts, is that they are only “affixing” trademarks on goods, which, moreover, are all exported and do not enter the Chinese market. Thus, first, the OEMs are not “using” the trademarks in the relevant sense under the PRC Trademark Law, and second, the conduct of the OEMs cannot cause confusion on the Chinese market as required for an infringement under the same. The SPC, in the two previous cases it heard on point, supported these stances and held there was no trademark infringement:

• The “PRETUL” case (rendered in 2015):[2] the SPC ruled that the Chinese OEM’s affixing of “PRETUL” onto padlocks exported to Mexico, pursuant to an engagement by the owner of that mark in Mexico, did not infringe the rights of the Chinese party who owned that trademark in China. The main rationale was that the OEM’s conduct did not have the function of identifying the source of the goods and did not constitute trademark “use”.
• The “Dong Feng” case (rendered in 2017):[3] the SPC ruled as in the PRETUL case with regard to a Chinese OEM affixing, onto diesel engine components produced and exported pursuant to an engagement by an Indonesian trademark holder, the logo for which a Chinese company held the Chinese trademark. In addition to the rationales from the perspective of “use” and public confusion, the SPC pointed out that OEM is a legitimate and common form of international trade and no trademark infringement should generally be found unless the OEM did not exercise a “reasonable duty of care” in undertaking its engagement (e.g., checking that its counterparty owned the rights for the relevant mark where the goods would be exported to).

SPC’s New Position: OEM Might Infringe Trademarks

In the case decided on 23 September 2019, the SPC not only held that an OEM infringed a trademark but also did so (i) in the face of facts essentially identical to those of previous cases and (ii) with a rationale that diametrically disagreed with the previously prevailing rationale.

In this case, Meihua Company, which is the registered trademark owner of “HONDAKIT” in Myanmar, engaged the Defendants to produce certain motorcycle parts, affix the “HONDAKIT” trademark on them and export them to Myanmar. The Plaintiff owns the trademark “HONDA” in China and sued the Defendants for trademark infringement. In holding that the Defendants’ conduct infringed the Plaintiff’s trademark, the SPC reasoned as follows:

• Trademark “use”, in the sense of Article 48 of the PRC Trademark Law, is not limited to the action of circulating a trademark in the relevant market but rather can also cover other actions, including physically attaching a trademark onto an item: whether or not an action constitutes trademark “use” in this sense should be considered wholistically. The SPC further stated that if physically attaching a trademark to OEM goods gives rise to the possibility of discerning their source, then the physical attaching should be deemed “using” the trademark.
• In the analysis of the relevant public’s confusion, in addition to end-users, the relevant public should include other business operators involved in the handling of the relevant goods. In OEM work, the operators transporting the goods abroad are part of the relevant public and, in this case, serve to give rise to the possibility of confusion among the relevant public. In addition, the SPC raised the development of e- and other international commerce as a complicating factor: the significant possibilities of exported OEM goods returning to the Chinese market via Internet sales or via the increasing number of Chinese consumers who travel abroad gives rise to the possibility of confusion among the relevant public.
• Finally, the SPC stressed that, for infringement, actual contact and confusion are not required, only their possibility. In this connection, the SPC also noted that the logo “HONDAKIT” on the OEM goods produced by the Defendants accentuated the “HONDA” part and played down the “KIT” part, increasing the possibility of confusion.

Conclusion

The SPC’s judgment is startling, at least in light of its and lower courts’ previous decisions on such facts and issues, and should be viewed prudently. Trademark owners may be able, by initiating trademark infringement litigation following the rationale in the SPC’s latest judgment, to extend the scope of their trademark protection and prevent authorized OEM goods from being manufactured in China and exported to other countries. However, the SPC left a lot of leeway on the issue by emphasizing that its judgment was strictly specific to the facts of the case before it, so even if the case represents the SPC’s general position on trademark infringement by OEMs from now on, it may be some time until the position takes root throughout the lower levels of the PRC judiciary.

[1] (2019) Zui Gao Fa Min Zai No. 138 (（2019）最高法民再138号).

[2] (2014) Min Ti Zi No. 38 (（2014）民提字第38号).

[3] (2016) Zui Gao Fa Min Zai No. 339 (（2016）最高法民再339号).