Chinese IP Law Updates
June 22, 2018

Reflection on “trademark use” prescribed by Art. 48 of the Trademark Law in OEM industry

Co-authors: Edmond Au, Shirley Lin

Source Materials:

No.(2016) ZGFMZ339 Civil Judgment by the Supreme Court

No.(2015) SZMZZ00036 Civil Judgment by the Jiangsu Higher People’s Court

Parties Concerned:

Retrial Applicant (defendant at first instance, appellee at second instance): Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd. (“Changjia Co.”)

Retrial Respondent (plaintiff at first instance, appellant at second instance): Shanghai Diesel Engine Co., Ltd. (“SDEC”)

Case Overview:

SDEC has rights to the trademarks No. 100579 and No. 624089 “东风 DONG FENG and device” on “diesel engines” etc. under Class 7 in China. TM No. 100579 was registered in 1981 and later extended to retain its validity through to Feb. 28, 2023. TM No. 624089, valid from Dec. 30, 1992, to Dec. 29, 2002, upon registration, also had experienced extension and will now continue to be in place until Dec. 29, 2022.

On the other hand, a company incorporated in Indonesia named PTAD IPERKASABUANA (“PTAD Co.”) is the registrant of the Indonesian trademark #IDM000089328 “DONG FENG”. Also registered under Class 7, the trademark covers a range of goods related to diesel machinery. It enjoys 10 years’ protection in the country starting from Jan. 19, 2007.

On Oct. 1, 2013, Changjia Co. and PTADI Co. entered into an agreement where the trademark registrant of TM #IDM000089328 asked the former to manufacture diesel engines and components with the trademark at issue and export the goods to import and export dealers who should limit the distribution within Indonesia. The agreement was set to expire on Jan. 19, 2017, exactly when the trademark “DONG FENG” concerned was also expected to expire.

Subsequently on Oct. 8, 2013, Changjia Co. declared the diesel engine parts (including bodies, oil tanks, and water tanks) destined for Indonesia with the Changzhou Customs. The batch of goods weighed 228,000 kg with a total value of USD 659,700. Informed of the declaration, SDEC requested Customs to seize the export on grounds of suspected trademark infringement. The Customs acted accordingly and withheld Changjia Co.’s products on Oct. 23.

SDEC continued to pursue Changjia Co. by taking it to the Changzhou People’s Court, which found the defendant not liable in its concerned OEM business. Unsatisfied, SDEC appealed to the higher court and won the lawsuit.

Changjia Co. was thus ordered to bear liabilities but in turn challenged the second-instance judgment, requesting the Supreme People’s Court (SPC) to have a retrial. In the trial proceedings, the SPC ruled in Changjia Co.’s favor and overturned the questioned judgment, thus affirming what the lower Changzhou People’s Court had delivered.

Court Opinions:

Trademark use specifically refers to attaching trademarks to goods, packages or containers as well as transaction documents, or applying them in commercial contexts including advertising and exhibition, with the aim to identify the origin of the goods concerned. In its essence, a trademark is meant to help with identification of or reference to where the goods or services related come from, functioning to distinguish between different sources.

Generally, when someone deals with a trademark that is not used to identify or distinguish between sources of goods from which misconception or confusion does not arise, the behavior does not interfere with trademarks’ function and thus does not constitute infringement prescribed in the Trademark Law.

Back to the case, the defendant Changjia Co. as an OEM service provider entrusted by PTADI Co. had sufficiently performed due diligence by reviewing the Indonesian company’s trademark rights concerned when it entered the contractual relationship. Furthermore, when proceedings unfolded in Indonesia where SDEC successfully secured rights to its trademark “东风 DONG FENG and device”, Changjia Co. voluntarily negotiated with SDEC over its manufacturing of the products in question, and paid reasonable compensation to SDEC, pursuant to a reached agreement between the two parties.

Obviously, Changjia Co. had reasonably fulfilled the duty of care required of a prudent actor when it came to examining its client’s trademark rights before it agreed to provide its services. Therefore, the second-instance erred in having opposite opinions on the fact.

At the time of the lawsuit between Changjia Co.’s OEM activities, the Indonesian Supreme Court had already affirmed PTADI Co.’s ownership of TM “DONG FENG”. This, in fact, had come to make it illegal for SDEC to export any further relevant or similar products bearing the identical trademark to the country. It was also revealed in the retrial that, between 2004 and 2007, SDEC’s export of its trademarked products to Indonesia was also entrusted. Given the circumstances, Changjia Co.’s OEM services in question did not substantially harm SDEC’s chances of striving for opportunities and interests in a competition based on its trademark rights in the Indonesian market.

After all, despite a trademark’s basic function of identification, it works not merely by itself, but in synergy with the goods and services as well as their quality it represents. Looking at the realities of international trade, there was no practical reason that could justify SDEC’s claim of substantial damages caused by Changjia Co.’s behavior and therefore, determination of trademark infringement was not applicable.

HFL Comments:

Although the Jiangsu Higher People’s Court rendered a judgment which was overturned by the Supreme Court, we still find some reason in the logic running through its determination of OEM infringement that is worth studying. Fundamentally, However, it was wrong in finding PTADI Co.’s registration of “DONG FENG” in Indonesia illegitimate, as the judicial and administrative bodies in the country had decided in favor of affirming the trademark rights of PTADI Co. Meanwhile, in 2008, when SDEC still had rights to “东风 DONG FENG and device” in Indonesia, Changjia Co paid contractual damages to SDEC. This fact was combined with its legitimate OEM business where it was reasonably prudent and careful enough to vet PTADI Co., to sell products only in Indonesia and not to be involved in any circulation and distribution in relation in China. Thus, the SPC found Changjia Co. not liable for trademark infringement.

In judicial practice concerning OEM infringement disputes, there have been significant Changes, over the years, in the Chinese judicial bodies’ attitude to what was thought of as infringement, as it has gradually shifted to the other side of the spectrum. There are many explanations for this development. Besides abiding by laws and regulations including the Trademark Law, the social impact should also be factored in, i.e.development of international trade, the balance of interest between domestic trademark owners and manufacturers, and foreign trademark owners or users. Back in 2001, a court found a Defendant’s OEM business infringing and liable (No.(2001) SZFZCCZ55 Civil Judgment). The dispute surrounded the use of TM “NIKE”; however, the court did not elaborate on whether such use functioned to identify a source. In the civil judgment No. (2007) SMSZZ0034, another court, while delivering the same result as to whether the infringement was established, had a change in opinion on granting compensation. On this issue, it said no harm could be done to the trademark owner’s interest in the market because there was no confusion or mistake concerning the origin of goods that could be caused to domestic consumers by OEM services. After the watershed “JOLIDA” case in 2009, it has become a common sense for courts in China to conclude that “OEM business constitutes no infringement as it involves no trademark use prescribed in the Trademark Law because it cannot confuse the relevant public in the domestic market regarding the source of goods”.

This time, the SPC goes in its judgment like this: any use of a trademark that works not to identify or distinguish between sources, and triggers no misconception or confusion thereof to such an extent that a trademark’s function is influenced, does not constitute an infringement for the purpose of the Trademark Law. It could be inferred from this conclusion that: there is trademark use in OEM business, but it does not count as what makes trademark stick. In similar precedents such as some three-year non-use administrative disputes, the Beijing Intellectual Property Court also affirmed trademark use in OEM industry that is set forth in Article 48 of the Trademark Law (No.(2015) JZXCZ5119 and No. (2015) JZXCZ408 judgments). With echoing court opinions, we can see a general theory that has been formed in the recent years’ judicial practice: a trademark used in OEM is not an identifier as it is supposed to be for a trademark to function.

There might be something confusing about why “trademark use” as in Article 48 is stated as “behavior for identifying the source of goods” in the first place given the above conclusion. In our opinion, the provision is somewhat unreasonable. In fact, “trademark use” differs from “trademark use in the Trademark Law”. The former can be interpreted as concrete ways of how a trademark can be applied, e.g. on commodities or their packages, but should not imply its legal consequences. This should be the notion to adopt when we decide whether a trademark has been used in three-year non-use cancellation disputes that focus on the substantial existence of and access to a trademark.

As for the latter, it is trademark use plus a process of identification, so it is concerned with what will follow after a trademark is exploited, which forms a big part in determining trademark infringement. In summary, we advocate that the kind of “trademark use” elaborated in Article 48 of the Trademark Law should not be restricted to identification involved behavior.

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