Miriam Yang, Senior Associate at Lusheng Law Firm (Rouse's strategic partner) is co-author of this article.
Due to the regional nature of trade mark rights, the rights of trade marks registered by original equipment manufacturer ('OEM') entrusting parties abroad can neither automatically be enjoyed nor exclude that vested in owners with identical or similar trade marks in China. If relevant trade marks have been registered by Chinese owners in the Intellectual Property Protection System of the General Administration of Customs of the PRC ('the GACC'), the OEM-related products may hurt these domestic owners during export declaration. Moreover, the OEM-related product might be detained by customs due to suspected trade mark right infringement. The latter event would be very costly to OEM entrusting parties abroad, trustees in China, and other participants, such as customs clearance agents (i.e., OEM operators).
Here, the application and adjudication rules of the Chinese judicial circle for the determination of OEM-related trade mark right infringement will be discussed. As part of this, the reasoning of Chinese courts in typical cases of OEM-related trade mark rights infringement will be analyzed. The aim is to help OEM operators in the PRC take effective measures to prevent in advance and deal with potential infringement.
Reflection on judicial decisions of OEM-related trade mark infringement cases in China
Judicial precedent in China has witnessed a long evolutionary transition regarding applying laws for addressing OEM-related trade mark infringement. For example, judicial decisions made by the Supreme People's Court of the PRC ('the SPC') on three (3) retrial cases, namely, the PRETUL case in 2015, the Dong Feng case in 2017, and the Honda case in 2019 have together provided guiding significance to the judicial adjudication in such matters.
The figure following illustrates the transition of judicial decisions of OEM-related trade mark infringement cases in the PRC:
The shift in judicial decisions in China is illustrated below:
Limitation of judgment on OEM-related trade mark infringement based on the specific elements constituting trade mark infringement
To some extent, the transition of Chinese judicial decisions reflects the balance maintained between trade mark owners and OEM trustees for protecting the interests in different historical stages. By summarizing key judgments of Chinese courts in different periods, major debates on determining OEM-related trade mark infringement in Chinese judicial circles reflect different understandings and applications of specific elements constituting trade mark infringement. For the reasoning of noninfringement, trade marks affixed to OEM-related products do not fulfill the function of distinguishing the origin of commodities. The said products are distributed in foreign countries, which cannot cause confusion and misunderstanding among domestic consumers. The OEM-related products are not sold in China and do not substantially harm owners of trade marks registered in the country. These reasonings are somewhat farfetched against the regional nature of trade mark rights. For the reasoning supporting infringement, it emphasizes that the infringement determination is mainly based on the similarity of trade marks and commodities because foreign trade mark rights cannot be protected in China. Yet, the particularity of OEM processing and the interests of Chinese and foreign merchants engaged in OEM activities out of good faith has not been taken into consideration if the infringement is determined in an oversimplified and crude way, which may lead to the imbalance of interests between trade mark owners and market participants.
For example, in OEM-related trade mark infringement cases, many Chinese registered trade mark owners who claim to be infringed by OEM activities obtain the trade mark right under the first-to-file principle and the regional nature of trade mark rights. However, it is more typical that the trade mark owner acquires a trade mark that has not been registered in China but was previously used by a foreign enterprise through rush registration or improper means. Companies or individuals who acquire trade mark rights in this way are often called trade mark squatters. Aiming at selling the registered trade mark to the OEM operator at a high price or producing, selling, or exporting the products bearing the OEM operator's trade mark or brand in China, the trade mark squatters may apply for customs seizure of OEM-related products through the Intellectual Property Protection System of GACC, or sue the operator for infringement through the judicial system, which may cause an extremely passive situation or high price to good faith OEM operators.
Thus, it is difficult to maintain the balance of interests between market participants under specific circumstances due to judgments limited to the specific elements constituting trade mark infringement. The principles of good faith and prohibition of abuse of rights may be the key to solving the problem.
Application of principles of good faith and prohibition of abuse of rights in OEM-related trade mark infringement cases
The principles of good faith and prohibition of abuse of rights have long been established in the Chinese legislative system and applied in judicial practice. Article 7 of the 'Civil Code of the ‘PRC': ‘When conducting a civil activity, a person of the civil law shall, in compliance with the principle of good faith, uphold honesty and honor commitments'; Article 132: ‘No person of the civil law shall abuse his civil-law rights and harm the interests of the State, the public interests, or the lawful rights and interests of others'. Article 7 of the ‘Trade mark Law of the [PRC]’：’The principle of good faith shall be complied with in applying for the registration of and using trade marks.'
As early as 2014, the SPC in the ‘Ellassay' case [(2014) Min Ti Zi No. 24] held that: ‘It is the basic principle that all market participants and civil litigation activities should comply with the principle of good faith. Thus, relevant claims cannot be protected and supported by law because any malicious acquisition and exercise of trade mark rights against the purpose and spirit of the law and aiming at harming the legitimate rights and interests of others is an abuse of rights'. By applying the principle of good faith, the court can review and affirm the legitimacy of acquiring the trade mark by the owner in individual cases and refuse to provide legal relief to the claims of malicious trade mark squatters.
All rights should be regulated. The principles of good faith and prohibition of abuse of rights are the key to solving disputes over the legitimacy of acquisition and exercise of rights regarding trade mark infringement cases. However, applying the principles of good faith and prohibition of abuse of rights in specific OEM-related trade mark infringement cases is not easy. In this respect, the Zhejiang Provincial Higher People's Court is at the forefront among Chinese courts.
In January 2022, the Zhejiang Provincial Higher People's Court invoked the principle of good faith in a retrial procedure on the ‘STAHLWERK' case. The court found that: An affiliate of Shenzhen Stahlwerk Welding Technology Co., Ltd. (i.e., the trade mark registrant in China) was entrusted by Stahlwerk (Germany) (i.e., the OEM entrusting party abroad) to design and process products of the brand in China. Though knowing the existence of Stahlwerk (Germany) and the ‘STAHLWERK' trade mark registered in Germany, the company registered the same trade mark on the same commodity in China in October 2011 and filed an infringement lawsuit against Zhejiang Laosdun Technology Co., Ltd. entrusted by Stahlwerk (Germany) for OEM processing of the accused infringing goods within the territory of China by virtue of rights based on the trade mark. The court ruled that the OEM operators did not infringe the trade mark rights for the reason that the trade mark rights exercised by Shenzhen Stahlwerk Welding Technology Co., Ltd. was improper and violated the principle of good faith, and based on Article 7 of the ‘Trade mark Law of the PRC' that ‘the principle of good faith shall be complied with in applying for the registration of and using trade marks’. In this case, the agency relationship between the Chinese trade mark registrant and the OEM entrusting party abroad is the key fact that the Chinese trade mark registrant knows the existence of the trade mark owned by the OEM entrusting party abroad and violates the principle of good faith.
In September 2022, the Zhejiang Provincial Higher People's Court, making still further progress, determined that how the trade mark rights involved were exercised violated the principle of good faith by Laizhou Baoyi Machinery Co., Ltd. according to a comprehensive investigation and review of various facts in the final judgment of ‘JURTEK' case [(2022) Zhe Min Zhong No. 352], under the circumstance that there was no direct evidence to prove that Laizhou Baoyi Machinery Co., Ltd., the Chinese trade mark registrant, had applied for the registration of the same trade mark in China though knowing the business marking of JURATEK (British), the OEM entrusting party abroad.
Being no longer entangled in whether the defendant's behavior accords with the elements constituting the infringement and directly applying the ‘principle of good faith' regarding the two cases mentioned above, Zhejiang Provincial Higher People's Court protected the OEM operators who use trade marks in good faith and maintain the interest balance between trade mark owners and market participants, which worth learning from and promoting.
The principles of good faith and prohibition of abuse of rights have been included in the draft amendment of the ‘Trade Mark Law of the ‘PRC'
The China National Intellectual Property Administration (CNIPA) has released the ‘Draft Amendment of the Trade mark Law of the ‘PRC' and solicited comments from all sectors of society. It is pleasing to notice that the provisions on the principle of good faith in Article 7 of the ‘Trade mark Law of the ‘PRC' revised as Article 9 are improved in the draft amendment: ‘The principle of good faith shall be complied with in applying for the registration of and using trade marks. The trade mark registrant shall not abuse trade mark rights and harm the interests of the State, the public interests, or the lawful rights and interests of others'. The revised provisions are expected to provide a more comprehensive solution to problems, such as trade mark squatting and abuse of rights in the trade mark field of China.
Advices for OEM operators
Though the ‘STAHLWERK' and ‘JURATEK' cases determined by Zhejiang Provincial Higher People’s Court are big shoes to fill, it is often costly and difficult to assert the principle of good faith in specific cases. OEM enterprises should apply for trade mark registration as soon as possible, with the registration of strategy combination of overseas trade marks and corresponding Chinese trade marks, phonetic transliteration, and free translation. Once confronted with customs seizure, OEM operators should respond actively and take various measures to protect rights. Companies should also familiarize themselves with various legal tools to protect their trade mark rights, including declaring nullity to a registered trade mark, filing noninfringement defenses, initiating affirmative noninfringement proceedings, negotiating for settlement, etc. Finally, do understand the strategic advice on participating in the Chinese market provided by local professionals specialized in the PRC market.
In a separate piece, our legal experts share their comments on the case.