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Keli ZONG
Chinese Trademark Attorney
Trademark Department
Linda Liu & Partners

 
At present, China does not have explicit laws or regulations related to the definition of Original Equipment Manufacturing (OEM). Generally, it refers to a form of trade in which a domestic enterprise, entrusted by a foreign enterprise, processes products with trademarks designated by the entrusting enterprise, delivers all products to the entrusting enterprise for sales overseas, and receives processing fees from the entrusting enterprise.
 
With the continuous implementation of China’s reform and opening-up policy, OEM has been a main form of trade in the economic development of China, and has made great contribution to China’s position as the “world factory”. In recent years, however, with the gradually improving awareness of IPR protection among the society, whether or not OEM acts constitute the use of trademark has become a hot and difficult issue in the IP field. Particularly, under the situation that another party has already registered an identical or similar trademark on the identical or similar goods in China, it has been controversial among the court judgments and scholars’ points on whether or not the act of using such trademark in OEM constitutes the act of trademark infringement. Moreover, the revised Trademark Law of China in 2013 does not answer this question either. This question brought plenty of troubles to domestic processing enterprises and foreign entrusting enterprises for long time.
 
In November 2015, the Supreme People’s Court of China (SPC) made the final judgment¹ for a dispute over infringement of “PRETUL” trademark in OEM that lasted for five years (hereinafter referred to as “PRETUL retrial”), explicitly clarified its position on this issue for the first time by determining that OEM acts did not constitute trademark infringement, drawing heated attention and discussion among the IP field.
 
By introducing the SPC’s judgment of PRETUL retrial, this article is to analyze the influence of the 2013 Revised Trademark Law on this judgment and inspirations therein for your easy reference.
 
I. Summary of PRETUL retrial
 
On March 27, 2010, Focker Security International Co., Ltd. (hereinafter referred to as “Focker”) obtained the trademark “PRETUL & oval device” No. 3071808 from a third party through trademark assignment. This trademark was designated on the goods “fittings of metal for furniture, metal hardware, metal locks (non-electric), etc.” in Class 6.
 
Trademark No. 3071808
 
On August 10, 2010, Pujiang Yahuan Lockset Co., Ltd. (hereinafter referred to as “Yahuan”) entered into an agreement with Truper Herramientas S.A. DE C.V. of Mexico (hereinafter referred to “Truper”), authorizing Yahuan to process and provide padlock products to Truper, with all products being exported to Mexico without selling any of them in Chinese market. Truper, an enterprise established in Mexico, registered the trademark “PRETUL” (Class 6) in Mexico on November 27, 2002.
 
Ningbo Customs of Zhejiang Province seized two batches of the accused infringing padlocks exported by Yahuan to Mexico in December 2010 and January 2011 respectively. The two batches of padlocks all bore the trademark “PRETUL” on their bodies, keys and product manuals, while the packing boxes of the padlocks were all labeled with trademark “PRETUL& oval device”.
 
Focker sued Yahuan to court, claiming that Yahuan infringed its exclusive right to use a registered trademark by producing and selling padlocks bearing the trademark “PRETUL” without the authorization from Focker.
 
The Intermediate People’s Court of Ningbo, Zhejiang held in the first instance that Yahuan and Truper had contractual relationship of OEM based on the evidence on the record. As for the issue whether or not acts of Yahuan constituted infringement, the court of the first instance made respective determinations according to the trademarks used as follows:  the trademark labeled on the padlock bodies, keys and product manuals was different from the registered trademark of Focker, and as the products were all exported to Mexico without selling in Chinese territory, the use of this trademark was unlikely to cause confusion among consumers in China. Thus the court determined they did not constitute similar trademarks and no infringement was constituted; while the trademark labeled on the packing boxes of padlocks was identical with the registered trademark of Focker, and the goods used are identical, the use of which constituted infringement to the exclusive right to use a registered trademark of Focker. Thus, the court of first instance made a judgment and ordered Yahuan to cease the act of using the trademark “PRETUL & oval device” on the packing boxes of padlocks and pay a compensation of 50,000 yuan to Focker for economic loss.²
 
Both Focker and Yahuan were unsatisfied with the judgment of first instance and appealed to the High People’s Court of Zhejiang Province respectively.
 
The High People’s Court of Zhejiang Province held in the second instance that according to the principle of territoriality of trademark, the trademark right of Truper in Mexico was not protected by Chinese laws and regulations. According to Article 3 of the Trademark Law Implementing Regulations of China (2002 revision), the use of the trademark  “PRETUL & oval device” on the packing boxes of padlocks and the use of the trademark “PRETUL” on the padlock bodies, keys and product manuals without authorization from Focker, continued trademark use. Although the trademark “PRETUL” used by Yahuan is of certain difference from the registered trademark of Focker to some extent, it was identical with the registered trademark of Focker in the main part “PRETUL”. Thus, it constituted similar trademark to the registered trademark. According to Article 52(1) of the Trademark Law of China (2001 revision), the act of “using a trademark that is identical with or similar to a registered trademark in respect of the identical or similar goods without the authorization from the trademark registrant” is an act of infringement to the exclusive right to use a registered trademark. The act of Yahuan met with the legal elements provided in the above law, therefore constituted trademark infringement.³
 
Unsatisfied with the judgment of the second instance, Yahuan requested the retrial by the SPC.
 
The SPC held in the judgment of retrial that the relevant “PRETUL” trademarks used by Yahuan with authorization from Truper did not play the role of identifying the origin of the goods in China. Therefore, the use of the relevant “PRETUL” trademarks by Yahuan on the padlocks it produced did not belong to the use of trademark, hence did not constitute infringement to the registered trademark of “PRETUL & oval device” of Focker.
 
So far the dispute of trademark infringement lasting for five years has come to a close.
 
II. Analysis
 
In the PRETUL case, the court of first instance, the court of second instance and the SPC all hold different viewpoints as partial infringement by the court of first instance, whole infringement by the court of second instance and whole non-infringement by the SPC, which was a reflection of typical opinions of judicial authorities on OEM acts in recent years, and each opinion has a strong basis in theory. The SPC’s retrial judgment made a conclusion to the controversial opinions in this issue. From this perspective, the PRETUL retrial has its unique significance.
 
As a matter of fact, the judgment of SPC in PRETUL retrial is not the first judgment made by the Chinese courts in which the use of an identical or similar trademark in OEM production was determined as non-infringement .
 
Other typical cases in recent years include the second-instance judgment of the High People’s Court of Fujian Province in the dispute over infringement of “NEW BOSS COLLECTION” trademark⁴ in 2007, the second-instance judgment of the High People’s Court of Shanghai in the dispute over infringement of “JOLIDA” trademark in 2009⁵, the second-instance judgment of the High People’s Court of Shandong Province in the dispute over infringement of “CORCODILE” trademark in 2012⁶, and the second-instance judgment of the High People’s Court of Jiangsu Province in the dispute over infringement of “SOYADA” trademark in 2012⁷. The main objective reasons of non-infringement determined in these judgments were: 1) The products involved are all exported to overseas without entering circulation field in Chinese market. The relevant public in China will not have access to the products. Thus, no confusion or misidentification would not be caused; 2) The basic function of trademark is to identify the origin of the goods, which can be realized only when the products entering the circulation field As the products involved do not directly enter the circulation field in China, the trademark labeled on the  products does not play the role of identifying the origin of the goods, thus does not belong to the use of trademark; 3) Since the domestic processing and export of the products would not lead to reduction of market share or impairment to the reputation of the trademark owner in China, thus it would not bring substantial damages to the trademark right of the owner.
 
In addition to the abovementioned three objective reasons, the subjective reason was that the domestic processors have already carried out necessary check on the lawful origin of the trademarks provided by the entrusting enterprises and they had no subjective malice in infringing the trademark rights of others, which was also an important ground for the non-infringement determination. The consideration of the subjective state of domestic processors in judicial adjudications was from the provision of the Opinions on Several Issues concerning Intellectual Property Trials Serving the Overall Situation under the Current Economic Situation (No. 23 [2009] of the Supreme People's Court) released in April 2009 by the SPC, wherein Article 18 provides “to properly handle trademark infringement disputes that frequently happen in OEM at present; as for situations where trademark infringement is constituted, the bearing of infringement liability shall be reasonably determined in consideration of whether or not the processor fulfills its necessary duty of check and care.”

It is noteworthy that all of the abovementioned typical judgments were made before the 2013 revised Trademark Law. Under the legal framework at that time, as stipulated by Article 52(1) of the 2001 Trademark Law, using a trademark identical with or similar to a registered trademark on the identical or similar goods without authorization from the trademark registrant is infringement to the exclusive right to use a registered trademark. This provision explicitly stated that as long as the abovementioned act was implemented, infringement to trademark right would be constituted, while whether or not confusion was caused was not a legal element in determining whether or not infringement was constituted. Moreover, the 2001 Trademark Law did not explicitly define the act of “use of trademark”; although the Trademark Law Implementing Regulations (2002 revision), a lower-level regulation, had a relevant provision, yet it did not clearly define “whether or not the use of trademark is restricted to the field of circulation”, which was a main argument of the side claiming that OEM constituted infringement.
 
Besides, under such background, the viewpoint of non-infringement was deemed as also relevant to economic policy consideration in addition to the theory of law regarding the basic function of trademark. Mr. Xiangjun KONG, former Chief Judge of IP Division of the SPC, once expressed “in terms of economic policy, China is a big manufacturing and processing trade country. OEM is an important part of China’s manufacturing industry and processing trade. If the use of a trademark identical with or similar to a domestic registered trademark in OEM is determined as trademark infringement, it would be harmful for Chinese companies to undertake processing trade business. And the determination of such act as infringement in OEM was also one of the reasons that part of the processing and manufacturing industry was transferred to other countries. Therefore, the determination of the use of an identical or similar trademark as non-infringement in OEM is helpful for the creation of a free environment for Chinese processing and manufacturing industry, in order to satisfy the diversified needs of the development of the industry.”⁸
 
Seen from the time, the judgments of the first and the second instance of PRETUL case was made in 2012 and February 2013 respectively, both before the release of the final draft of the 2013 Trademark Law in August 2013. The SPC decided in January 2014⁹ to retry the case, which was after the release of the final draft of the 2013 Trademark Law and before the 2013 Trademark Law took effect. The retrial judgment of the SPC was made in November 2015, about one and a half year after the 2013 Trademark Law took effect.
 
Under the context of the revision of the Trademark law in 2013 and its implementation, the writer believes the SPC’s judgment of non-infringement was a reflection of the new law.
 
In determining whether or not the act of use of trademark in OEM constitutes trademark infringement, “use of trademark” shall be determined firstly. The SPC has significant divergence on the determination of use of trademark with the courts of the first and the second instance, which directly leads to the opposite final judgment of SPC on whether or not infringement is constituted.
 
The readers may know that the definition of use of trademark in the 2013 Trademark Law changes significantly from that in the old law, as follows:
 

 

 
The expression in the law before revision is easily to be understood as trademark use would be constituted as long as the trademark is used on the goods or services, no matter whether it is functioned to identify the origin of the goods from the sense of Trademark Law. In addition, the way of use of the trademark on the goods or services is not limited to the circulation field. ¹⁰
 
However, as seen from the nature of trademark right, trademark is a commercial sign used to indicate the origin of the goods and distinguish different producers and operators. Protection of trademark right, in the essence, is to protect the function of identification of trademarks. Would trademark use be constituted when a trademark is used on the goods or services, but no function of identifying the origin of the goods is fulfilled? Regarding this issue, the Trademark Law before revision has rather vague stipulation, which sowed the seed for years of continuous dispute over the determination of trademark use.
 
The revised Trademark Law introduced the regulation in the former Trademark Law Implementation Regulations, a lower-level law, to the Trademark Law, and improves the regulation by adding the expression “to identify the origin of the goods”.
 
Mainly there are two ways to interpret the above revision in practice:
 
(1) The use of trademark refers to an act of using the trademark in business activities, aiming at identifying the origin of the goods, which represent in the manners as use the trademarks on the goods, packages or containers thereof and commodity trading instruments, or use the trademarks in advertisements, exhibitions and other business activities.¹¹
 
(2) The use of trademark refers to the act of using the trademarks on the goods, packages or containers thereof and commodity trading instruments, or using the trademarks in advertisements, exhibitions and other business activities, with the aim of identifying the origin of the goods.
 
As for the aforementioned interpretation (1), one viewpoint is that the products processed and manufactured in OEM, if they are not circulated in the Chinese domestic market by ways of sales and advertisement, the trademark cannot play the role of identifying the origin of the goods, therefore the use of the trademark does not belong to trademark use from Trademark Law sense. In the cases involving OEM, as the products bearing the trademarks are all exported without being circulated in the Chinese domestic market, and relevant the public as consumers are impossible to have access  to the products, let alone to know the trademarks borne by the products; therefore, the trademarks on the relevant products cannot realize their basic function inside China, hence the use of a trademark in OEM does not constitute the use of trademark.
 
As for the aforementioned interpretation (2), one viewpoint is that seen from the logic structure and expression of the above Article 48 of the revised Trademark Law, the former half and the latter half of this article were divided by the coordinating conjunction “or”, which are obviously two coordinative statements. The expression of the former half “use of trademarks on goods, packages or containers thereof and commodity trading instruments” cannot directly be led to a conclusion that the trademark must be used in business activities. Therefore, it is hard to make a conclusion that the act of use of trademark in the sense of Trademark Law is restricted to the circulation field from semantic interpretation of the 2013 Trademark Law¹². Another viewpoint is that the use of trademark is an objective act, which shall not be commented differently due to different users or the situation as in manufacturing or circulation¹³.
 
In PRETUL retrial, the SPC decided that Yahuan’s act of labeling the trademark with the authorization from Truper on the products as “attaching mark”. It was determined in the judgment as “with authorization from Truper, Yahuan’s act of using the relevant ‘PRETUL’ mark is only an act of physical attachment in China; it provides necessary technical conditions to Truper for using its trademark in Mexico, and the mark does not play the role of identifying the origin of the goods in China. Therefore, the mark attached to the products processed by Yahuan under entrustment does not mean to indicate the origin of the processed goods, nor does it play the role of identifying the origin of the goods. As a result, the mark attached by Yahuan does not have the nature of trademark, and the act of attaching the mark on the products cannot be determined as the act of trademark use from Trademark Law sense.” This is the most direct interpretation of the act of use of trademark by processor among all the judgments in the cases involving trademark infringement in OEM in recent years. And this interpretation is closer to the viewpoint of the aforementioned interpretation (1).
 
Is the revision “…to identify the origin of the goods” in the 2013 Trademark Law applicable for the accused infringing acts happened before the revision? The PRETUL retrial judgment gave an explicit answer “Although ‘…to identify the origin of the goods’ is introduced to the Trademark Law in the 2013 revision, yet it does not mean that the Trademark Law has made essential changes concerning the use of trademark; instead, it is a clarification of the use of trademark. Although the 2001 Trademark Law shall be applied in this case, yet the aforementioned provision of use of trademark provided in Article 48 of the 2013 Trademark Law has significant reference for the understanding of Article 3 of the Implementation Regulations of the Trademark Law (2002 Revision)”. That is to say, although the 2001 Trademark Law does not explicitly stipulate the aim of the trademark “…to identify the origin of the goods”, yet it embodies the same spirit, while the 2013 Trademark Law makes it explicitly in the law, which is more convenient in practice.
 
The viewpoint of the aforementioned interpretation (2), in addition to its reflection in the judgment of the second instance of PRETUL case and the judgment of the second instance of the dispute over “SPEEDO” trademark (see Note No.13), is also reflected in the defense by using OEM trademark use evidence against the non-use cancellations, non-use cancellation reviews and the relevant administrative litigations. That is, the act of trademark use shall not be restricted only to circulation field as sales, instead, as long as it can be functioned as to identify the origin of the goods among the relevant public in the production, manufacturing and processing, it should be determined as trademark use. Different examiners and judges still have different understandings and decisions regarding whether the trademark evidence in OEM can be used in the non-use cancellations.
 
In addition, the definition of the act of trademark infringement has also been changed greatly in the 2013 Trademark Law.
 

 

 
The revised Trademark Law stipulated the infringing act differently according to different situations as identical trademark on identical goods (hereafter referred to as “double identical situation”), similar trademark on identical goods, and identical or similar trademark on similar goods (hereafter referred to as “similar situation”). It stipulated that under the “double identical situation” infringement is presumed to be constituted without the condition of possibility of confusion, while under the “similar situation”, it stipulated that infringement would be constituted only when “confusion and misunderstanding” is likely to be caused. Literally speaking, this provision happens to hold the same view with the judgment of the first instance of PRETUL case, which determined that Yahuan partially infringed the trademark right of Focker (i.e., the act of using “PRETUL & oval device” trademark, which is identical with the registered trademark of Focker, on the packing boxes of padlocks constituted infringement).
 
However, seen from the Trademark Law as a whole, “the use of trademark” prescribed in Article 57 and “the use of trademark” prescribed in Article 58 shall be interpreted in the same way. Therefore, the precondition of applying “double identical situation” is still that the act of trademark use is constituted in the first place, and if the use is not trademark use, then it would not fall into the scope of Article 57. As mentioned by the SPC in judgment of the PRETUL retrial, “where a trademark cannot play the role of identifying the origin of the goods and the use of the trademark is not in the sense of the Trademark Law, determining whether identical trademarks are used on identical goods, whether similar trademarks are used on similar goods, or whether confusion is likely to be caused when identical or similar trademarks being used on similar goods lacked significance in practice.”
 
In conclusion, we believe that it is the amendment to the definition of “use of trademark” in the 2013 Trademark Law that provides explicit legal grounds to the SPC’s judgment of PRETUL retrial case. Although China is not a nation that follows case law, but the judgment of PRETUL retrial case made by SPC, the highest adjudicative authority of China, surely has considerable significance to the judgments of the similar cases in the future.
 
III. Extension
 
1. Is it true that none of OEM acts would be determined as infringing trademark in the future?
 
Does the judgment of PRETUL Retrial mean that none of OEM acts would be determined as acts of trademark infringement? The answer to this question is no.
 
In December 2015, one month after the SPC’s judgment of PRETUL retrial case was made, Jiangsu Higher People’s Court concluded on another case involving OEM —- the dispute over “Dongfeng” trademark¹⁴, that infringement was constituted. The said case had both similarities and differences with PRETUL retrial case. The similarities lied in that in the said case, all OEM products are exported, and the foreign entrusting enterprise had exclusive right to use the trademark “Dongfeng” in its home country, Indonesia. However, the said case was different from PRETUL retrial case in the following aspects: “Dongfeng” trademark, through years of extensive use and publicity by the registrant Shanghai Diesel Engine Co., Ltd. (hereinafter referred to as “SDEC”), enjoyed high popularity in China and had been determined as “well-known trademark”. The products bearing the same trademark had been exported to Indonesia from 1960s, which prior to the registration of “Dongfeng” trademark in Indonesia by the entrusting enterprise. In Indonesia, the entrusting enterprise was suspected of preemptively registering the trademark of SDEC, and the two enterprises had fought over the ownership of “Dongfeng” trademark in a lawsuit lasted over six years. In addition, the domestic processor used to reach an indemnity agreement with SDEC for exporting diesel engines bearing “Dongfeng” trademarks to Indonesia, in which it agreed that such act would never happen again. As the result, Jiangsu Higher People’s Court adopted the principle of “duty of necessary investigation and duty of care”, decided that the domestic processor, being fully aware of the fact that the trademark of SDEC was well-known trademark and the entrusting enterprise was suspected of preemptive registration, still undertook the OEM; in this way, it failed to fulfill its duty of reasonable care and avoidance, which substantially damaged the interest of SDEC, thus the act of the processor constituted trademark infringement. As seen above, OEM cases shall be analyzed case by case according to the case situation.
 
As shown by the above two cases, an OEM act is more likely to be determined as non-infringement when it meets the following three requirements, which are the mainstream opinion at present. However, the situation cannot be fully excluded that infringement is established due to specific conditions of individual cases or different opinions of judges.
 
1) The foreign entrusting enterprise has exclusive right to use the relevant trademark in the exporting country, and its registration of the trademark is legitimate;
 
2) All the processed products are exported without sales in China;
 
3) The foreign entrusting enterprise has carried out its duty of investigation or reasonable duty of care.
 
2. Inspirations to future OEM acts
 
From PRETUL retrial case, the entrusting enterprises and the processing enterprises may get the following inspirations:
 
1) It is advisable for the processing enterprises to properly keep written materials relevant to OEM, including contracts, orders, Customs declaration for import and export and correspondence between the processing and the entrusting enterprises regarding the trademark, in case of need. In practice, many enterprises do not think it is important to preserve written materials, and cannot present valid written evidence when being accused of trademark infringement, which makes it vulnerable to exploitation by the accuser.
 
2) It is advisable for the foreign entrusting enterprises, before entrusting OEM, to search whether or not others have already registered identical or similar trademarks on relevant goods in China. If not, foreign enterprises should apply the trademark in China as soon as possible so as to avoid unnecessary conflicts.
 
Regarding the second point, someone may ask: what is the point of applying the trademark in China if it is only used in OEM which would not be determined as the act of use of trademark when meeting some requirements? Even if the application is granted, is it possible to successfully defend the trademark right in the non-use cancellation procedure? According to our practical experiences, in the non-use cancellation cases in recent years, it is not unusual for the trademark administrative authorities and judicial authorities determined that materials regarding trademark use in OEM constituted valid use evidence. In addition to the aforementioned interpretation (2), there are two other reasons for such decisions: firstly, the trademark registrant has obvious subjective intent of actively use his/her trademark through OEM, and secondly, it is relevant to the background that OEM is an important form of foreign trade in China, i.e., “policy consideration”.
 
In many disputes over trademark infringement in OEM, the registrants of the domestic trademarks are suspected of malicious preemptive registration when being fully aware of the trademarks of the foreign entrusting enterprises. For example, in PRETUL retrial case, the enterprise in which the original registrant hold the position of shareholder had business transactions with Truper prior to the filing date of the trademark “PRETUL & oval device”, accepted orders from Truper to process and export products bearing the trademark “PRETUL & oval device” for Truper; in the dispute over “JOLIDA” trademark, the registrant of the Chinese trademark is the enterprise established by the foreign entrusting enterprise, and the company of the registrant was later sold to a third party; in the dispute over “SOYODA” trademark, the registrant of the Chinese trademark had been working for a company which had business transaction with the foreign entrusting enterprise regarding paint brushes bearing “SOYODA” trademark. Given that the acts of preemptive registration still happen frequently in China, it is advisable for the foreign entrusting enterprises to protect their trademarks in China before entrusting OEM work with the Chinese companies so as to effectively protect their interests and  avoid unnecessary troubles in the future.
 
Notes:
1. (2014) Civil Retrial No. 38 Civil Judgment
2. (2011) Zhejiang Ningbo IP First Instance No.56 Civil Judgment
3. (2012) Zhejiang IP Final No. 285 Civil Judgment
4. (2007) Fujian Civil Final No. 459 Civil Judgment
5. (2009) Shanghai High Civil Third (IP) Final No.65 Civil Judgment
6. (2012) Shandong Civil Third Final No. 81 Civil Judgment
7. (2012) Jiangsu IP Civil Final No.0297 Civil Judgment
8. Page 103, Fundamental Issues on Application of the Trademark Law—Revised Edition, Xiangjun KONG
9. (2013) Civil Retrial No. 1644 Judgment
10. Analysis on Issue of Trademark Infringement in OEM, Hui HUANG, Chao FENG
11. Page 133, Interpretation and Guidance of Application of the Revised Trademark Law
12. Analysis on Issue of Trademark Infringement in OEM, Hui HUANG, Chao FENG
13. (2014) Zhejiang IP Final No. 24 Civil Judgment
14. (2015) Jiangsu IP Civil Final No. 00036 Civil Judgment
 

（2016）