Trademark Infringement in OEM: Trends, Risks, and Strategies

Although China’s status as the “factory of the world” was rapidly evolving even before the COVID-19 pandemic, and 2022 may turn out a pivotal year for the future status, the country is still a prime destination for original equipment manufacturing (“OEM”), i.e., foreign parties engaging domestic manufacturers to produce goods purely for export to markets outside China. PRC law specifically on OEM-related trademark infringement, lacking codification and thus based on jurisprudence, has changed dramatically several times over the last two decades, and current inconsistencies in judicial practices may be both alarming and re-assuring. This insight paper seeks to inform foreign parties and their local manufacturers regarding the risks of – and mitigation measures against – being found by a PRC court to have infringed a China trademark in OEM activity.

Background to the Notorious “HONDA Case”: To Protect or Not to Protect OEM

Until around 2015, manufacturing in China under an OEM model did not afford special protection against claims of trademark infringement. Trademarks, after all, have traditionally been territorial: a trademark from outside China generally cannot serve to protect its holder or licensee in China. A typical example is the 2001 “NIKE case”:[1] a licensee of a “NIKE” trademark registered in Spain licensed a PRC party to manufacture and export men’s ski jackets with that mark, and Nike (the U.S.-based international sportswear brand) sued the foreign trademark holder and its OEM manufacturer in China for infringement of Nike’s trademark registrations obtained in China. The Shenzhen Intermediate People’s Court, like most courts in China until around 2015, found infringement notwithstanding the bona fide OEM nature of the infringing activity.

Then, several cases starting in 2015 marked an almost one-eighty degree shift to the view that use of trademarks for OEM purposes, in general, did not constitute trademark infringement. The 2015 “PRETUL case” was the most notable at the time:[2] the Supreme People’s Court (“SPC”) ruled that the defendant, the PRC manufacturer, had not infringed the plaintiff’s trademark, primarily because the court found the trademark was not used in China (except being physically attached to goods for direct export), thus did not serve within China to identify the source of the goods, and therefore could not cause confusion in China. The SPC maintained its position in the “Dongfeng case”,[3] further taking into consideration a duty of reasonable care and the occurrence of material damage: it held that the domestic OEM manufacturer fulfilled its duty of reasonable care and did not cause material damage to the plaintiff, primarily in light of the facts that the manufacturer had undertaken certain examinations of the relevant trademark rights and that the plaintiff did not have rights to its own trademark in Indonesia, the destination of the OEM products, so (the court reasoned) it was not deprived of sale opportunities there.

However, even in that period, some rulings refrained from treating OEM as an exemption in trademark infringement claims. In the “PEAK case”,[4] for example, the Shanghai IP Court carried out a lengthy analysis of cross-border e-commerce, in this case of t-shirts sold on Amazon.com (but also accessible by searching through Amazon’s e-commerce platform hosted in China), to conclude that consumers in China could be exposed to and confused by the infringing trademark; the court further found the mark used by the OEM manufacturer was not identical to the foreign-registered one but rather more similar to the one registered in China; and, finally, the court determined that the plaintiff had long registered and used the trademark in China – indeed it was famous in China and arguably abroad – which the defendants knew or should have known. Based on these findings, the Shanghai IP Court ruled that the OEM manufacturer and foreign trademark holder infringed the PRC trademark.

The “HONDA Case”: A Hard Line against Protecting OEM?

In the 2019 “HONDA case”,[5] the SPC did a one-eighty. The plaintiff, a Japanese automobile manufacturer that had registered “HONDA” and relevant device marks in China since the 1980s and 1990s sued a PRC party that manufactured motorcycles with the mark “HONDAKIT” pursuant to specifications and orders from a Myanmar party. The ruling was not only in favor of the plaintiff, it also included a detailed review of the nature of OEM and other considerations.

The SPC held it incorrect to regard “use of a China trademark in OEM manufacturing” as an exemption to trademark infringement. It stressed that protection of trademark rights has a territorial constraint, and that trademarks (not to mention a license or use authorization of such trademarks), even if registered in a foreign country, cannot be accorded protection in China without a valid registration in China. Further, some of the SPC’s reasoning reflected that of the Shanghai IP Court in the “PEAK case”, based on the cross-border nature of e-commerce, adding that the products at issue might flow back to the Chinese market after they were exported, and in the meantime, many consumers in China travel abroad and also can be exposed to infringing trademarks that way. The SPC also reasoned that the “relevant public” did not consist only of target end users but rather also business operators closely related to the marketing of the products, and in this specific case, operators involved in logistics processes of the product at issue and such relevant public could also be confused by the infringing trademarks.

The “HONDA case” was the last in which the SPC weighed in on the issue of trademark infringement in an OEM context, but while that case suggests a strong position against using OEM alone as a basis for protecting manufacturers and foreign parties whose products run afoul of PRC trademarks, the rulings of lower courts since 2019 reveal far more nuanced and balanced positions.

Recent Judicial Practices: Inconsistent and/or Balancing

Although China is not a jurisdiction in which cases have strict precedential, i.e., binding, force (setting aside debatable special cases, mainly the roughly 200 so-called “Guiding Cases”), decisions of higher courts – let alone stand-out cases of the SPC – are generally treated deferentially. Nevertheless, several courts have issued rulings that seem to deviate from the “HONDA case”, not only in the decision but also aspects of the reasoning.

In the 2021 “VONEC case”,[6] the plaintiff registered the PRC mark “VONEC” in 2019 and sued an OEM manufacturer of electrical switches and related products bearing the same mark, and the first-instance court (Guangdong Province Foshan City Chansheng District People’s Court) found infringement. On appeal, however, as the defendant argued that its engagement dated from 2017 (and the trademark it was using had been registered, in Saudi Arabia, before that), the Guangdong Province Foshan City Intermediate People’s Court overturned the lower court’s ruling and dismissed the plaintiff’s claim. The appellate court found that the defendant had not violated its duty of reasonable care, whereas the plaintiff had registered the trademark with “subjective malice”, had not actually used it, and its purpose in filing suit was not to prevent confusion to the public, but rather to abuse trademark rights in order to harm, in bad faith, competitors. The court went further, focusing on what it considered the essence of trademark infringement, and held that the issue of confusion to the relevant public, in the context of OEM, depended at least in part on the degree of fame of the trademark allegedly being infringed: the less well-known a mark, the less likely the products at issue will flow back into China after having been exported by the OEM manufacturers to foreign markets. Ultimately, the appellate court held the evidence insufficient to prove that the products had been imported back into the domestic market for sale or even that the products had acquired a significant degree of fame so as to make such flow-back likely.

The 2021 “STAHLWERK case”[7] went even further in its deviation from the “HONDA case”. Unlike in the “VONEC case”, the plaintiff had registered its mark in China long before the OEM manufacturing began, although still two years after the foreign trademark was registered. The second-instance court (Zhejiang Province Ningbo City Intermediate People’s Court) dismissed the plaintiff’s claims and the Zhejiang Province High People’s Court dismissed the plaintiff’s retrial petition. While the courts did find some bad faith in the plaintiff’s registration or at least lawsuit (based on earlier, then soured, cooperation between affiliates of the parties), the matter of protecting legitimate OEM activity was pronounced as equally and explicitly important. Specifically, the Zhejiang Province High People’s Court reasoned as follows:

"When trying trademark infringement disputes involving foreign-related OEMs, the people’s courts should fully consider the overall situation of domestic and international economic development, conduct specific analyses of trademark infringement disputes under the background of the specific period, specific market, and specific transaction form, accurately apply the law, properly balance the interests of trademark right holders and those of OEM manufacturers, and promote the standardized and healthy development of the foreign trade industry.

The mode of foreign-related OEM trade is an important mode of the country’s foreign trade. With the transformation of the country’s economic development methodologies, the understanding of trademark infringement issues in foreign-related OEM is also constantly changing and deepening. This type of trade cannot be simply solidified as an exception to infringement of trademark rights, and it cannot be considered that all use of trademarks under this type of trade constitutes infringement either."

With the above context, the first step in the Zhejiang Province High People’s Court’s application of law was determining that the defendant’s activities at issue constituted foreign-related OEM activity within the scope of legitimate authorization. Only then did the court examine the plaintiff’s bad faith, ultimately concluding that the claim for protection of such a mark against the authorized manufacturer of the genuine foreign brand owner was unfair.

On the other hand, some cases have followed – or at least turned out similar to – the “HONDA case”. For example, in the 2021 “CATA case”,[8] a plaintiff who had a PRC registration of the mark “CATA” since only 2020 sued an OEM manufacturer producing “CATA”-branded hand lanterns for a Turkish company that held the trademark in that jurisdiction since 2002. The first-instance court (Guangdong Province Jiangmen City Pengjiang District People’s Court) ruled in favor of the plaintiff, primarily on the bases that trademark protection is territorial and that there was likelihood of confusion, both from products flowing back into China and from Chinese residents traveling abroad. The appellate court upheld the judgment and the reasoning regarding the territorial nature of trademark protection, though it seems to have refrained from commenting on the second major basis of the lower court, instead simply holding that there was insufficient evidence and basis to support the defendant’s argument against risk of confusion.

Takeaways & Recommendations: Defending OEM against Trademark Infringement Claims

With cases such as that of “CATA”, as well as more straightforward findings against OEM manufacturers (and the foreign parties engaging them), e.g., the “MILLER STEEL case” (where facts such as the OEM authorization letter not pre-dating relevant conduct and the trademark used by the OEM being more similar to the PRC mark may have steered courts to find infringement),[9] the significant risk of trademark infringement in OEM heralded by the SPC in the “HONDA case” remains. Yet cases such as that of “VONEC” and “STAHLWERK” leave more than a little room for OEM manufacturers (and foreign parties) to defend against trademark infringement claims in China.

Based on the above and related jurisprudence, parties to OEM in China can (and should) use several strategies to reduce the risk of being sued locally for trademark infringement – or at least increase the chances of defeating local trademark holders’ claims in PRC court. The best defense consists in advance preparation:

• Conduct full clearance searches in China before the OEM activities, so as to ensure the brand is available for use in China (even for manufacturing purposes only).
• Seek trademark registration for the brand as early as possible in China.
• Avoid marketing or promotional activities in China before a registration has been obtained for the brand, and make no changes or variations to the mark used in manufacturing in China.
• Take proactive steps to protect the brand from hijacking, including by monitoring the trademark register and filing defensive trademark applications.
• Seek advice from counsel when an identical or similar trademark is identified in the trademark register.
• Keep a substantial record of the OEM business and be prepared for production of evidence in support of arguments in court; this is particularly important when the products are seized by customs (due to a conflicting trademark registration in China), as there is usually only a small time window to submit arguments and supporting evidence.

Ultimately, in court, whether all, some, or none of the above preparations have been made, the best defense to an infringement claim will likely run along one of several lines that the allegedly infringing mark does not cause confusion to the relevant public. Among other things, a good faith OEM manufacturer (and/or the foreign party engaging it) should aim to prove:

• all products are for exportation only, and none of the products has been or will be offered in the Chinese market;
• there is a valid trademark registration in the country of the destination port;
• there is a valid trademark authorization issued by the trademark registrant in the destination country;
• the trademark is being used in exactly the same form as registered; and
• a proper due diligence process was conducted upon acceptance of manufacturing orders, in a way to prove that the manufacturers have performed their reasonable duty of care.

[1] (2001) Shen Zhong Fa Zhi Chan Chu Zi No. 55.

[2] (2014) Min Ti Zi No. 38.

[3] (2016) Zui Gao Fa Min Zai No. 339.

[4] (2016) Hu 73 Min Zhong No. 37.

[5] (2019) Zui Gao Fa Min Zai No. 138.

[6] (2021) Yue 06 Min Zhong No. 12408.

[7] (2021) Zhe Min Shen No. 4890.

[8] (2021) Yue 07 Min Zhong No.7190.

[9] (2022) Zhe 03 Min Zhong No. 1294.