Original equipment manufacturers: implications of latest Supreme People’s Court decision

The Supreme People's Court (SPC)’s landmark Pretul ruling in 2015 established the general principle that the use of trademarks on original equipment manufacturer (OEM) products exclusively for export does not constitute trademark infringement. The SPC considered that the use of the mark must constitute use in China, and since OEM products are only for export, the manufacturing of OEM products will generally not constitute trademark infringement in China. This decision was well received by foreign brand owners who were being held ransom by trademark squatters.

This position was recently reaffirmed by the Supreme Court in Dongfeng.

Dongfeng case
In January 2014 the claimant, Shanghai Diesel Engine Co, sued the OEM manufacturer Changjia for infringing its trademark  registered in China for diesel engines (Registrations 100579 and 624089) by accepting an OEM order from Indonesian company PT Adi to manufacture diesel engines bearing the identical mark  registered in Indonesia. The appellate court took into consideration that the claimant’s DONGFENG mark was a well-known mark in China and that there was reason to believe that PT Adi’s Indonesian registration was illegitimate. It held that the OEM should have been aware of the fame of the registered Chinese mark and the ongoing dispute between the two trademark owners. Given the previous dispute regarding the order from PT Adi, the court found that the OEM had failed in its duty of care to avoid using the same well-known mark and was therefore liable for trademark infringement.

However, on appeal the SPC overturned this broad duty of care imposed on OEMs by the Jiangsu High Court, reaffirming its position from Pretul that the manufacturing of OEM products does not constitute trademark infringement, as long as the mark has a valid registration in the country to which the goods will be exported. However, the SPC added that this position may not be applicable if there is evidence that the OEM did not fulfil its reasonable duty of care and that the goods have caused actual damage to the registered mark owner’s interests.

The SPC relied on the fact that the OEM had checked the registration certificates of the mark in Indonesia before accepting the order from PT Adi. This was considered adequate to discharge the duty of care in confirming the registration status of the mark. Further, there was insufficient evidence to show that the goods had caused actual damage to the Chinese trademark owner. Accordingly, the OEM manufacturer was not liable for trademark infringement.

Trademark infringement implications
This case is important as it not only reaffirms the SPC’s landmark Pretul ruling, but also confirms that a valid registration certificate in other jurisdictions is a sufficient prerequisite to accept an OEM order, thus removing the obligation on an OEM to determine whether a foreign mark is illegitimate. 

Given this ruling, brand owners should register trademarks and cancel registrations owned by third parties in jurisdictions other than the brand’s country of origin and operation. Brand owners are also encouraged to review their global portfolios in order to identify any gaps in filing, especially in countries where the brand is not yet established. This is to avoid a third party acquiring legitimacy through a rogue registration.

Non-use cancellation implications
While the SPC decision clarifies trademark infringement issues by an OEM’s use of a trademark, it reopens the debate over whether OEM use is sufficient to defend against non-use cancellation.

As the SPC held that OEM use does not constitute ‘use’ under the Trademark Law, it seems logical that it also cannot be used as evidence against non-use cancellation actions. In the 2017 MANGO case, the Beijing High Court held that the interpretation of ‘trademark use’ should be consistent in the context of trademark infringement and non-use cancellation. In MANGO, a trademark squatter’s registration in China was successfully invalidated by the brand owner on the basis that the squatter’s OEM use was not sufficient to defend against non-use cancellation in China.

However, in the absence of an SPC decision, the position is still unsettled; this is especially due to two contrary decisions by the Beijing IP Court and the Beijing High Court in the landmark DCLSA case (2015) and SODA (2016 and 2017). In these two cases, the court accepted OEM use as a defence against non-use cancellation and recognised that the trademark owner’s use of extensive resources in preparing the exported OEM products constituted an honest intention to use the registered trademark for business purposes. It was stated that OEM trademark use fulfils the legislative intent of the non-use cancellation procedure, which encourages the use of trademark resources and reduces the number of idle registered trademarks.

Although the issue remains unsettled in China, brand owners should note that in cases where trademark owners have successfully defended against non-use cancellation by OEM use, their success lies in the ample evidence of use. Examples of OEM evidence of use that have been accepted by courts include:

• licence agreements between the brand owner and Chinese OEMs;
• purchase orders and delivery notes for the OEM products;
• customs declaration forms; and
• dated photos of the products.

Brand owners should maintain and periodically review stringent records of evidence of use.