(By You Yunting) Original Equipment Manufacture (the“OEM”) refers to a commercial model where the Principal person is responsible for the brand, research and design, and marketing, meanwhile, the manufacturer is responsible for production. As a big manufacturing country, OEM is an important way for our manufactured products to participate in international competition. Under China’s Laws, however, it is unclear whether OEM constitutes as a trademark infringement, and local courts have handed out different decisions for this problem. According to the author’s information, Fujian higher court, Zhejiang higher court and Shanghai higher court held that OEM manufacturers does not involve trademark infringement, but Guangdong higher court decided that the OEM manufacturers shall take responsibility for trademark infringement in many cases. The Supreme Court has not yet expressed its opinion towards this problem.
Recently, upon reading the judgments, I found that Shanghai local courts, once standing by the side of non-infringement on the said problem, had recently undergone a subtle change. In March 2013, Shanghai No.1 Intermediate People’s Court ruled that an OEM manufacturer constituted a trademark infringement, in violation of the diligence obligation, and were demanded to stop infringement. Although the court did not rule on the tort damages claim for the alleged infringement, the court supported the plaintiff’s reasonable fees for the rights protection.
Compared to previous judgments with regards to this issue, I found that the Shanghai court’s establishment for the diligence obligation has innovative ideas. The nature of China’s OEM trademark problem actually reflects the conflict of the right of intellectual property between the manufacturer and the brand’s owner. However, even the American governments are conflicted about this problem, because American multinational corporations that have famous brands had their own interest different from the small and medium-size company D with their manufacturing base in China. The Shanghai court’s establishment of the diligence obligation is actually to seek a balance between the two parties and to settle the rights with different interests’ conflict with each other.
Introduction to the first case:
An Anhui-based company (the “company A”) registered a trademark “Holiday” (the “dispute trademark”) under the classification of bags and suitcases in 1986, and, said trademark is currently valid upon the renewal of registration. In August 2009, the goods using the said trademark were exported to Japan. The Japanese HOLIDAY Company (the “Japan company”) acquired an combination trademark of “holiday+心型图形, holiday and heart-shaped image” under the classification for bags and suitcases in Japan. The Japanese company authorized a Shaoxing-based company (the “company B”) to produce its product, processing and export with its protected trademark, and the right to access to the exclusive use its protected trademark. In January 2011, due to the company A application to the customs for registration, 577 bags of the Japanese company that exported to Japan were detained by Shanghai Customs on account of said bags of “holiday+心型图形, holiday and heart-shaped image” trademark that may have a totally different trademark with that of the Japanese company registered in Japan. The company A filed a lawsuit, and demanded that company B to immediately stop its trademark infringement and to compensate the former for losses. This case was heard by Shanghai’s Pudong District People’s Court for first instance, and affirmed the original judgment by Shanghai No.1 Intermediate People’s Court over the second instance. The courts held that:
1. When one compares the logo of the company B’s bags with the dispute trademark of company A, both “holiday” logos were the same with regards to pronunciation and meaning of the word, except the difference of letter case for the first letter, and were the main part of two marks. Therefore, the logo on the bags constituted similar to the dispute trademark.
2. In OEM foreign trade, the manufacturer shall perform any necessarily obligations for the diligence obligation, including whether or not the Principal person held lawful rights of the involving trademark, and after strict review of the product, determine whether or not to strictly regulate the use of employing the Principal’s trademark. First, consider the fact that company B confessed at the first trial that it did not require the Principal to present the certificate for the involving trademark registration. As discussed earlier, the court can decide whether the defendant failed to fulfill legal obligations as prescribe above; then, the mark on the accused goods actually was not the trademark registered by the Japanese company, and, at the same time, company B knew about the dispute trademark before obtaining orders from the Japanese company. Therefore, Shanghai court ruled that the appellant’s acts violated the rights of the dispute trademark owned by the company A.
The judgment of this case fails to demonstrate that Shanghai courts changed their attitudes towards determining the trademark infringement for the OEM trade. Because we also found the same collegiate panel of the Shanghai No.1 Intermediate People’s Court make a final decision of trademark non-infringement for another OEM trade totally differentiated from the afore-mentioned case.
Introduction to the second case:
In January 2004, company C registered the “APOSTROPHE” trademark under the classification for clothing, and was approved to use said trademark by the State Trademark Office. In August 2011, 7500 pairs of ladies’ knitted tights with the lowercase letters constituting the “apostrophe” trademark (the “involved goods”) were exported to America by company D, but were detained by Shanghai Customs. Company C filed a lawsuit against company D in October 2011, demanding that company D shall immediately cease infringement and compensate company C for losses incurred by it due to company D’s infringement of its protected trademark rights. In hearing the trial, company D provided a notarial certification of an American trademark printed in August 2011, demonstrating that it was the holder of the “APOSTROPHE” registered trademark, and was authorized to use the relevant trademark in this case.
The court held that the focuses of the disputes in this case were the following:
I. Was the authorization obtained by company D legally valid?
Company D manufactured goods with a foreign trademark registered by the rights holders of the foreign trademark. Based on this legal authorization, it returned all goods to the Principal’s country, and never sold those goods in China, thus fulfilling the required actions of an OEM manufacturer. Although company D’s manufacturing was completed without the rights holder’s prior authorization, subsequent acts of manufacturing by company D were ratified by the rights holders of the foreign trademark. Furthermore, the processing productions of involved goods were in validity of the authorization. Obviously, then, company D had the right to manufacture the relevant goods.
II. Whether did company D’s actions constitute trademark infringement?
First, in this case, the OEM goods were all sold to the U.S. market, and the rights holder’s mark was located on all the relevant goods; thus, therefore the relevant consumers in the US markets would be able to distinguish the source of the two goods through their respective trademarks. Considering the fact that all the goods in question were exported to the United States and not actually sold on the Chinese market, China’s domestic consumers would not likely be confused by a source of goods that aren’t available to them to begin with.
Second, according to the regional characteristics of trademarks in general, Chinese domestic trademark holders and foreign trademark holders may enjoy independent exclusive rights to use their trademarks within the territory of trademark registration. If a party is opposed to the trademark rights of another party, the party should pursue administrative remedies in accordance with the trademark law of their respective jurisdictions and places of trademark registration.
The decision on the disputes between companies C and D handed down by the court can actually be applied to the cases between companies A and B for the following two reasons: First, considering that company B’s goods were all exported to Japan, Chinese consumers could not be confused between company A and company B’s goods; second, Chinese trademark rights could be compatible with Japan’s trademark rights in different territory of trademark registration. Similarly, the decision of the first case handed down by the court can be partly applied to the second case, for the mark on company D’s goods had a slight difference with that of the Principal registered in the United States. With regard to the fact that the time when the decision of the first case was made s about half a year later than that of the second case, the court added two obligations of diligence with regard to OEMs in the first case:
1. An OEM manufacturer shall review whether the Principal has legal foundations to make use of the relevant trademark;
2. An manufacturer in OEM shall review whether the relevant goods strictly used the regulated Principal’s trademark.
With regard to the above obligations, at first glance, it is difficult to understand for the following reasons: First, the aforesaid obligations do not make much sense in protecting the intellectual property rights of OEM goods. Based on the fact that most applications for OEM are mainly in the fields of clothing, electronic goods, and so forth, no country in the world would stipulate a provision that any such goods be sold with a registered trademark, but that at the same time actual use of a trademark differentiating from a registered trademark would be considered illegal use of a registered trademark.
Second, domestic goods exported overseas with a Chinese registered trademark would be subjected to the trademark law and judicial jurisdiction of the export target country, and will not receive any sort of protection from domestic resources. If an OEM manufacturer producing goods is considered guilty of trademark infringement as handed down by the courts in this case, simply due to not fulfilling obligations to observe due diligence, such a decision in fact expands the scope of protection for a registered trademark within the country, and is therefore irrational.
Since the aforesaid obligations have no protective function for overseas infringement of OEM goods, why did the courts then insist upon such an obligation? Upon carefully thinking over this question, we found that the diligence obligation set by the court implies a premise that OEM goods dedicated to overseas markets have the possibility to conflict with domestic trademark holders. The significance of setting these obligations would only be effective if one accepts such a premise, because the obligations set forth by the court requires a review as to whether the Principal obtained legal rights in the relevant trademark, and whether the OEM goods make strict use of such a regulated trademark. Pursuant to this obligation, if an OEM manufacturer reviews a certificate of registration of an overseas trademark obtained by the Principal, and such mark is used strictly by the OEM manufacturer, then said manufacturer should be exempt from liability for trademark infringement.
With further consideration, the purpose of setting these obligations is clearly to protect domestic market order and prevent OEM goods from leaking into the domestic markets and thereby possibly infringing upon a domestically registered mark. In our experience, it is rare to see China’s domestic OEM manufacturers breach an agreement with foreign principals by manufacturing extra goods and selling them in the domestic market. In China’s markets, the amount of infringing goods in the name of “foreign trade leftover goods” is quite extensive, including some infringing goods with counterfeit trademarks, as well as some utilizing parts of real leftover OEM parts. These so-called leftover goods obviously disturb domestic market order, but when the manufacturers are held liable for trademark infringement, the manufacturers may attempt to avoid liability by claiming to be OEM manufacturers. In any case, setting these obligations in place would destroy the use of any such defense, and especially for OEM products, which are typically exported from the manufacturing market to a foreign one.
To conclude, these obligations set out by the courts in Shanghai attempt to find a balance between supporting the domestic manufacturing industry centered on OEM commercial models and protecting the trademark rights of those who register their trademarks in China. Of course, without having the opportunity to speak with the presiding judge personally, this analysis is one that is purely our own and based on the facts available.