OEM in China: The China Supreme Court changes its TM position

Introduction
On September 23, 2019, the Supreme Court of the People’sRepublicofChina(”SupremeCourt”)gave its decision in an OEM manufacturing trademark case brought by Honda Giken Kogyo Kabushiki Kaisha (“Honda”) against Chongqing Heng Sheng Xin Tai Trading Co Ltd and Chongqing Heng Sheng Group Co Ltd. (“Heng Sheng”). Overall (“Honda Case”).

The Supreme Court held that the two Heng Sheng entities manufactured OEM motorcycle kits, (“Motorcycle Kits” – presumably CKD) in China for a Myanmar entity and this had infringed Honda’s China trademarks.

This is a very different outcome from previous Supreme Court decisions on the same issue.

Background

PRETUL
On November 26, 2015, the Supreme Court gave its decision in the “PRETUL” trademark case. In this decision, the Supreme Court, for the first time, made it clear that “The use of an identical or similar mark on the same or similar products in OEM manufacturing in China with a China trademark should not be regarded as infringing the rights of the owner of the China registered trademark, because the goods are not available in the China market.” Our article about this case is on our website.

DONG FENG
Shortly after the Supreme Court issued its decision in the “PRETUL” case, Jiangsu High Court issued its decision on another China OEM trademark case, holding that the defendant Jiangsu Changjia Jinfeng Power Machine Co Ltd was liable for trademark infringement because it knew that the plaintiff Shanghai Diesel Engine Co Ltd’s “Dongfeng” (“东风”) mark is a well-known mark in China, and it did not do what it could to avoid causing trouble to Shanghai Diesel and damaged their interests. Our article about this case is on our website.

This decision was later reviewed by the Supreme Court and gave its decision on December 28, 2017. The Supreme Court reversed the Jiangsu High Court decision finding that the defendant, Jiangsu Changjia Jinfeng Power Machine Co Ltd, had done due diligence to confirm the trademark rights of the Indonesian Company. No infringement of a China trademark had occurred because the goods were OEM manufactured and were all exported.

The Honda Case

Findings of fact
1. Plaintiff Honda is an international enterprise that manufactures motorcycles and has registered relevant three trademarks in China. All were valid when this case was heard. 314940 the word HONDA, 1198975 the framed H device commonly seen on Honda cars, and 503699 the HONDA with wing device associated with Honda motorcycles.

2. Defendants Heng Sheng are affiliates. Heng ShengTradingsignedacontractwithaMyanmar company on April 3, 2016 for manufacture of Motorcycle Kits with the trademark “HONDAKIT”.

Although the contract was named as a Sales Contract it was from its terms actually an OEM manufacturing contract. Heng Sheng Group was the actual manufacturer and Heng Sheng Trading was responsible for the logistics of exporting the Motorcycle Kits.

The director of the Myanmar company owns the trademark “HONDAKIT” in Myanmar. He authorised Heng Sheng to use this trademark in its OEM manufacture of the contracted Motorcycle Kits. All Motorcycle Kits manufactured by Heng Sheng for the Myanmar Company were for export to Myanmar.

3. Kunming Customs contacted Honda on June 30,2016 with the Notice of Confirmation of the Intellectual Property Rights for Imported and Exported Goods. According to the notice, they had detained 220 Motorcycle Kits bearing the trademark “HONDAKIT” and these products may infringe Honda’s trademark rights. Kunming Customs requested Honda to take action if it wanted to.

On July 12, 2016 Honda paid the security deposit and applied to Kunming Customs for further investigation and detaining of the Motorcycle Kits. Kunming Customs issued its investigation decision on August 22, 2016 notifying Honda that the Customs could not decide whether infringement had been established. Honda should therefore file a court case to determine the issue. Kunming Customs also said that they would further detain the Motorcycle Kits for 50 working days and then release the goods unless they received a court order to further detain the Motorcycle Kits.

Honda filed its court case on September 13, 2016.

Trial Court
The trial court issued its decision on June 1, 2017. The trial court held that the evidence filed by Heng Sheng could not prove that the contract with the Myanmar Company was really an OEM manufacturing contract so it was a sales contract. In the trademark attached to the Motorcycle Kits the word “HONDA” was bigger than “KIT”. This differs from the trademark registered in Myanmar. Such use by Heng Sheng was apparently to take advantage of “HONDA”. On these facts, Heng Sheng should be regarded as a trademark infringer.

Judgement of the Appellant Court
The appellant court overturned the decision of the trial court and gave its judgement on November28, 2017.

The appellant court held that the sales contract signed between the Myanmar company and Heng
Sheng was, by its terms, actually an OEM manufacturing contract. The owner of the Myanmar trademark “HONDAKIT” had signed the contract and the authorization for Heng Sheng to use the trademark “HONDAKIT” in performing the contract.

The Motorcycle Kits made by Heng Sheng for the Myanmar Company were all for export to Myanmar. Chinese customers would have no access to these products. Because of this there was no trademark infringement.

Appeal by rehearing at the Supreme Court
The Supreme Court decided to reconsider this case on September 14, 2018, and concluded its review just over a year later on September 23, 2019. The Supreme Court overturned the decision of the appellant court and held that Heng Sheng had infringed Honda’s trademark rights.

Reasons
1. It is not right to regard “use of a China trademark in OEM manufacturing” as an exception to trademark infringement because this is against the basic principles of deciding trademark infringement.

2. Trademark registration and protection is territorial and a trademark registered in a foreign country is not protected in China. It follows that an authorization for a domestic OEM manufacturer to use an offshore registered trademark should not be regarded as a legitimate right to be protected in China. Nor a defense to infringement of a China registered trademark.

3. The key function of a trademark is to identify the source of goods or services. Use of a trademark consists of many processes including attaching the trademark to the goods, distributing the goods in the market, their sale etc. In an OEM manufacturing case, the relevant public includes the customers and the business operators involved in the manufacture and logistics processes. A business operator such as a logistics company can accessthe relevant trademark and products. Because of this, the possibility of causing confusion of the relevant public still exists in an OEM arrangement.

Further, with the development of e-commerce and the Internet, OEM manufactured products may come back to the China market in someway. The Chinese consumers may travel abroad and there come into contact with the OEM manufactured products. All of these have increased the possibility of confusion of the relevant public.

Commentary
This decision effectively removes the certainty that prior decisions had so recently established for China OEM manufacturers and their customers.

It is not clear from the judgement what concerns the Supreme Court sought to address, or what deficiencies resulted from their previous decisions that needed to be remedied.

The reasons given by the Supreme Court in its judgement are not so strong that the underlying purpose is self evident.

The confusion that might arise among logistics operators and others handling the goods as part of the OEM manufacturing process is speculative and definitely very limited. It stretches the concept of “relevant public” a long way. Almost anyone, whether they recognise the trademark or not, would be included by that expanded definition.

OEM manufactured goods bearing a trademark may come back to China and could conceivably result in some marketplace confusion. But a more specific,and legally congruent remedy would be to target the goods on their way back into China, not on their journey out.

Further, the fact that Chinese consumers may come into contact with OEM manufactured goods outside China is not a China trademark issue. That reasoning compromises the territorial restrictions on trademark protection, including that the “relevant
public” would usually be thought of as people in the trademark territory: in this case China. The Supreme Court, has to some extent given Honda implied protection against the possible infringement of its China trademark outside China. A contradiction in terms.

Take aways
• China is not a case law country but decisions of the Supreme Court have the effect of “judicial guidance” and decisions are usually followed by local courts. If a court does not follow the Supreme Court’s decision the Supreme Court still has the right to revoke that lower court’s decision on appeal as happened in the “Dongfeng” trademark dispute.

• Clearly this change in approach has extensive potential consequences for those that source OEM manufactured goods from China and those that manufacture them.

• The only realistic protection for OEM manufacturing now is to register trademarks in China before contracting OEM production.

• In many cases this is not possible because opportunists have already registered the foreign trademark in China. That was the problem that the previous decisions alleviated.

• Despite all of the uncertainty raised by this case, one thing is clear. Registering trademarks with China Customs assists in preventing infringing activity.