Legislation & Policy

Reducing Infringement Risks in China following the HONDAKIT OEM Exception Decision

SIPS Knowledge, Legislation and Policy

Due to widespread trademark piracy in the PRC, manufacturing in China without a locally-registered trademark can often incur serious risk of infringement – even where the OEM products are solely intended for export from and sale outside China. In the past several years, the “OEM exception”, a judicial construct, has provided a useful shield for companies that engage Chinese factories to manufacture their products in China solely for export purposes in spite of their lack of trademark rights in the PRC. Now, with the issuance of the SPC’s HONDAKIT decision, the situation appears to have shifted again.  As a result, pirated foreign brand owners would be wise to consider adjusting their approaches to OEM manufacture in China.

Key Points/ How does it affect you?
  • For brand owners who (1) have had their trademark pirated in China and thus do not own a registration in China for their own mark; but (2) nevertheless wish to have OEM factories in China produce goods for them bearing the pirated mark, there has been and remains a clear risk that the pirates whom have stolen their mark may take action against the victimised brand owners, claiming they are infringing the pirates’ exclusive right of use of the mark in China, using Customs, the courts and potentially even the police to seize the OEM goods.  Such actions can seriously disrupt brand owners’ supply chains, lead to fines or damages awards against their suppliers, and incur substantial legal costs.
  • Clearly, the best first step is applying for your own mark, and if there are pirated marks blocking that application’s way, attacking those marks and/or confronting the pirate to try to negotiate a withdrawal or assignment of the stolen trademark and bring the situation to a speedy (if not cheap) resolution.  Still, this is usually a long-term fight, so while the battle against the pirate’s trademark registration rages, companies seeking OEM manufacture of their goods will need to take steps to minimise the risk of infringement actions if they wish to do so in China.  This includes by working carefully and precisely within the boundaries of the OEM exception.  Consideration can also be given, of course, to directly avoiding these risks, including by having their goods manufactured in other countries, having labels and tags bearing the pirated trademark applied outside of China, etc., but if that is not a cheap option, proactivity in China is required.
  • In that case, and if the pirated brand owner decides to risk manufacturing branded OEM goods in China, then taking precautionary measures in anticipation of seizures of goods is a “must do”.  As well, if and when the OEM goods are seized and pirates initiate actions against the goods and/or their manufacturer, early intervention, relying on the OEM exception and underlining the bad faith of the pirate in victimising the true owner of the stolen trademark, are also necessities.
What is the OEM Exception?

Over the last twenty years, China has cemented its role as the “world’s factory.”  Any business, large or small, can find factories in China capable of manufacturing high-quality OEM products to their precise specifications.  In most cases, and particularly for smaller companies with limited markets, those goods are primarily intended for export from China to the companies’ home markets.  Larger companies may also intend to sell those goods in China to Chinese consumers.

In either case, owning your trademark in China is not legally required to manufacture and sell your products there.  That being said, any brand owner would be wise to ensure they have at least filed an application for their trademark in China before diving into the market.  Even before filing that trademark, clearance searches are necessary to ensure that the sought-after mark has not already been pirated by a third-party in bad faith (which will be discussed in this article), as well as to identify other similar marks that may pose obstacles to registration but were not filed in bad faith (which will NOT be discussed in this article).

Trademark Piracy in China – a Perennial, Pernicious Problem

Trademark piracy has been a troubling feature of PRC Trademark practice for many years, fuelled to a large degree by China’s reliance on a “first-to-file” system.  That system rewards the vigilant and proactive, and punishes the dilatory.  As a result, trademark pirates view the PRC trademark system as a bit of a lottery, filing hundreds, and in some cases, thousands of pirated trademarks in the hope that the rightful brand owner will eventually approach them and pay a fat price to purchase the trademark back.  Often, however, impatient pirates may take a more aggressive approach, including by recording their trademarks with PRC Customs, and using those recordals to seize shipments of products bearing the trademark as they leave Chinese territory.  Often, the pirates may conspire with OEM factories (or may even be the OEM factories, or at least ex-OEM factories) who have inside knowledge in the brand owners’ shipments and lack of a PRC registered trademark to try to bring the foreign brand owner to its knees.

If Chinese Customs seizes the goods and the brand owner/the OEM supplier do not defend against the seizure, the outcome can be severe, including forfeiture of the goods and fines (up to 30% of value of the shipment)[i] if the goods are held to be infringing.  In cases where the OEM factory is selling the products out the backdoor into the Chinese market (presumably without the brand owner’s knowledge), the pirate may also be able to file administrative complaints against the factory with the local Market Supervision Bureaux or criminal complaints with the local Public Security Bureaux.  In those cases, successful administrative or criminal raid actions can result in detention and destruction of the “infringing” goods, imposition of fines, and in the worst-case scenario, imprisonment, where seized/sold quantities exceed relevant criminal thresholds.  Civil proceedings could also be filed by the pirate, with courts ordering permanent injunctions against further manufacture and/or sale and payment of compensation.

Aggressive pirates bringing such actions can have a serious impact on foreign brand owners, resulting in the following amongst other things:

  • Delay in delivery of the ordered goods to customers, and accompanying loss of sales revenues;
  • Unwillingness of Chinese suppliers or distributors to continue working with impacted brand owners; and
  • Considerable costs to defend against infringement actions initiated by pirates.

The OEM Exception

As a defense to Customs seizures engineered by trademark pirates and other trademark disputes in an OEM context, foreign brand owners have for some time now been able to rely on OEM exception to defend themselves and their shipments.  The OEM Exception is not codified in the law, regulations or judicial interpretations, but instead, has developed organically in legal decisions issued by courts in major cities over the past decade or so.  In OEM Exception decisions, the courts have recognized (amongst other things) that use of a trademark by Chinese suppliers on goods intended solely for export purposes, where those goods are NOT entering the PRC stream of commerce, will not cause confusion amongst PRC consumers.  As a result, and given the Trademark Law’s overarching goal of protecting consumers (and pragmatically, in recognition of the value of OEM manufacture to the Chinese economy), Chinese courts have created an “exception” to trademark infringement in these contexts.  As well, and over the years, courts have modified the contours of the OEM Exception as new fact patterns emerged.

The Evolution of the OEM Exception

In initial cases involving exports of branded goods seized by Customs due to prior Chinese trademark registrations, courts made fairly simplistic decisions finding that such manufacture constituted trademark infringement.  Those courts held that due to the PRC trademark registrant’s “exclusive” right of use of the mark in China, any unauthorized use of the mark by a third party constituted a trademark infringement against the prior Chinese trademark.

The Nike Decision (2001)[ii]

Strangely enough, this seminal case involved not a Chinese pirate, but a Spanish trademark owner, who for historical reasons was the owner of the word mark “NIKE” in Spain.  This infringement claim was brought by Nike International Ltd (“Nike”) against a shipment of OEM manufactured NIKE-branded products headed for Spain. In its decision, the Shenzhen Intermediate People’s Court held that, because trademark rights are territorial, the fact that Nike held the exclusive trademark right for “NIKE” on goods related to clothing in China, where the goods were manufactured, was dispositive.  This made the Spanish entity’s rights in the trademark in Spain, and its corresponding entrustment of the Chinese supplier to manufacture goods bearing “NIKE” in China, even if solely for export, an infringement of Nike’s exclusive PRC trademark rights.

The Crocodile Case (2012)[iii]

Following this decision, courts around China struggled to come to a definitive answer on this issue, reaching a variety of disparate decisions.  By 2012, however, the weight of decisions had begun to more clearly favour a position permitting OEM manufacture of goods bearing the mark of foreign brand owner, so long as that mark was registered in the country to which the goods were being exported.  This was in spite of any third party’s registered mark in China.  This reasoning behind the OEM Exception was most clearly initially defined in the Shandong Higher People’s Court’s decision in the Crocodile Case.

Here, the plaintiff, Crocodile Garments Limited, had registered the “CROCODILE” trademark in China in 1986.  The defendant, Qingdao Ruitian Clothing Co., Ltd. (“Ruitian”) received an order from a Korean company, Espoir Co. Ltd. (“Espoir”) to manufacture clothes bearing “CROCODILE” mark for export to Japan.  The CROCODILE-branded goods were seized by Qingdao Customs.  To secure release of the goods, Ruitian argued that the “OEM exception” should be applied here because: (1) Yamato International  (“Yamato”)[iv], the Japanese importer, owned a series of “CROCODILE”  trademarks in Japan dating from the early 1960s, and (2) Espoir was authorized by Yamato itself to in turn entrust Ruitian to manufacture and export the CROCODILE-branded goods for delivery to Yamato (via Espoir) for sale solely in Japan.  The concerned goods were not intended for circulation in China.

The court held that there was no trademark infringement as the physical attachment of labels or tags bearing the mark to the concerned goods for OEM manufacture and export is not a class of trademark “use” connected with the circulation of the goods in the relevant “market” for PRC Trademark Law purposes, i.e., China. The court explained that the primary function of a trademark is its function of demonstrating the “origin” of the goods and services.  Given that, the court reasoned, the “origin” function can only be realized when goods bearing that trademark enter into commerce within that market.  If the concerned goods do not enter the PRC market, and are intended only for export, then the OEM manufacturing activities do not touch upon the “origin” function of the registered domestic mark, and do not infringe the Chinese trademark registration.  In addition, the court noted that the Chinese supplier had been lawfully authorized by the trademark registrant in the country of export, thus fulfilling its duty of care to avoid infringement.

This case was viewed as seminal on the issue and was eventually selected to be one of the 50 model intellectual property cases for Year 2012 by the SPC. [v]

The PRETUL Case (2015)[vi]

This is a more typical “OEM exception” case involving a trademark pirate attempting to extort a foreign brand owner through misuse and abuse of its pirated trademark to halt the foreign brand owner’s shipment of goods from China.

The pirate here, Xu Haorong, was a former shareholder of the original OEM manufacturer used by the owner of the PRETUL mark in Mexico, Truper Herramientas, S.A. de C.V. (“Truper”).  After registering the PRETUL mark in China – without Truper’s authorisation – Xu assigned the pirated mark to an HK-based affiliate of the now-ex-OEM manufacturer, Focker Security Products International Limited (“Focker”).  Focker brought suit against Pujiang Yahuan Locks Co., Ltd. (“Yahuan”), which had been entrusted by Truper to manufacture PRETUL-branded padlocks for export to Truper in Mexico after it broke off relations with Xu’s company.  The object of the suit was a container of PRETUL-branded padlocks seized by Ningbo Customs.

In this decision, the SPC itself validated the reasoning in the Crocodile.  Here, the SPC noted the “PRETUL” padlocks at issue were manufactured under the entrustment of trademark owner in Mexico, the country to which they were to be exported. As in the Crocodile case, the SPC noted that the concerned padlocks were not to be sold in the Chinese market, meaning the sign on the padlocks would play no role in distinguishing the source of the goods in China.  This meant that the relevant public in China could not be led to be confused as to whether the padlocks might have been connected with or provided by the owner of the Chinese trademark registration.  On this basis, the SPC held that the OEM manufacture’s physical attachment of the “PRETUL” sign on the padlocks at the entrustment of the Mexican brand owner did not constitute “trademark use” under the PRC Trademark Law, and did not therefore infringe the trademark rights of the owner of the pirated Chinese trademark registration.

The Dongfeng Case (2017)[vii]

This case involved not a pirated PRC trademark, but a pirated Indonesian trademark registration, namely, the “Dongfeng” trademark:

  • The plaintiff, Shanghai Diesel Engine Co., Ltd. (“SDEC”), registered its “Dongfeng” mark in China back in the 1960s. SDEC had been using this mark continuously, and it had even been recognised as a “well-known” mark in China.  Throughout this same period, SDEC had exported its Dongfeng-branded products to Indonesia.
  • In 1987, an Indonesian company, PT Adi Perkasa Buana (“PTADI”) successfully pirated the “Dongfeng” mark in Indonesia.
  • SDEC and PTADI had engaged in a drawn out legal battle in Indonesia regarding ownership of the Indonesian “Dongfeng” mark. As a result, in 2008, PTADI’s ten “Dongfeng” registrations were initially cancelled and SDEC’s own Dongfeng marks were registered in Indonesia.  PTADI appealed those decisions, however, and its marks were restored in 2009, resulting in the cancellation of SDEC’s “Dongfeng” marks in 2011.
  • During the brief period when SDEC’s “Dongfeng” marks were registered in Indonesia, Jiangsu Changjia Jinfeng Motor & Mechanics Co., Ltd. (“Changjia”) settled an ongoing trademark infringement dispute with SDEC in China relating to Changjia’s supply of Dongfeng-branded products to PTADI. In the settlement, Changjia acknowledged its export of “Dongfeng” diesel engines to Indonesia infringed upon SDEC’s “Dongfeng” trademark rights in China, agreeing to halt its infringement and to compensate SDEC and its Chinese licensee.
  • After SDEC’s marks were cancelled and PTADI’s were reinstated, PTADI again authorized Changjia to manufacture “Dongfeng”-branded diesel engines and components for export to Indonesia. Changzhou Customs in China seized a shipment of those goods in 2013.

Specifics of Courts’ Decisions

  • In the first-instance decision in the case, the Changzhou Intermediate People’s Court held that Changjia was authorized by PTADI to manufacture the concerned goods, intended solely for export to Indonesia. As they were OEM manufactured goods that would not enter the PRC market, the attachment of the “Dongfeng” mark to them by Changjia could not be regarded as an identifier of the source of the goods, and thus, not a type of trademark use.  As a result, the court held that Changjia’s OEM manufacturing activities did not constitute trademark infringement.
  • SDEC appealed that decision to the Jiangsu Higher People’s Court, which overruled the initial judgment. In doing so, it did not reject the OEM Exception’s basic tenets.  Instead, it held that the exception was not applicable here because Changjia had not fulfilled its reasonable duty of care to avoid infringing SDEC’s marks.   Here, SDEC’s “Dongfeng” mark was recognized in China as a well-known trademark, and PTADI was strongly suspected of committing trademark piracy in Indonesia.  Despite this, Changjia nevertheless chose to proceed with PTADI’s order.  In doing so, it had materially damaged SDEC’s interests, and this harm, caused by a failure to meet a reasonable duty of care, led to its conduct being held to constitute trademark infringement in China.
  • Changjia sought retrial with the SPC. As a result, the SPC held that during the OEM manufacture and export processes, Changjia’s attachment of “Dongfeng” labels at the behest of PTADI did not affect the “origin” function of SDEC’s registered mark in China.  As well, and importantly, for the goods here, when Changjia accepted the order from PTADI, the Supreme Court in Indonesia had already confirmed PTADI’s ownership of the “Dongfeng” mark there, meaning SDEC’s own “Dongfeng”-branded goods could not even be lawfully exported to Indonesia.  As a result, Changjia’s OEM manufacturing activities for PTADI caused no material damage or lost sales in Indonesia to SDEC.

The Dongfeng case represents the clearest statement by the SPC of the full contours of the OEM Exception, tying together the threads of the CROCODILE and PRETUL case, and delineating key factors relevant to a determination of whether (a) the OEM manufacturer had fulfilled its reasonable duty of care to avoid infringement; and (b) the OEM manufacturing activities caused “material damage” to the owner of the Chinese trademark registration.

The HONDAKIT Case (2019)

In this recent decision, the SPC modified the bases and reasoning inherent in preceding OEM Exception decisions.

Facts in the HONDAKIT Case

In the HONDAKIT case, the following facts were deemed relevant by the SPC in its determination of whether the OEM manufactured goods infringed Honda’s PRC trademark rights in its “HONDA” trademark:

  • Honda registered its mark in China as early as 1988, and it is now well-known in China;
  • While the Burmese pirate Thet Mon Aung registered “HONDAKIT” in Myanmar in 2014, it is similar to “HONDA”, and that mark was clearly filed in bad faith;
  • The goods made by the PRC OEM supplier bore the mark “HONDA” in much larger font than the “KIT” portion of the mark, with red color being applied to the “H” and wing-shaped devices, thus rendering the mark on those goods as a whole similar to Honda’s registered Chinese marks and further demonstrating the bad faith of both the foreign brand owner and the PRC OEM supplier;
  • Given the prior reputation of HONDA’s mark, even though the OEM manufactured goods bearing the sign “HONDAKIT” were exported to other countries, when Chinese consumers saw those goods in countries outside China, they could still clearly confuse them with goods provided by Honda.

Analysis of the SPC’s Judgment

(i) Trademark Use

In earlier cases, PRC courts generally held that in OEM Exception cases, the origin function of the trademark was not engaged by the mere physical attachment of a sign or label during the OEM manufacturing process where that product would not be presented to Chinese consumers.  Absent that presentation, there was no possibility of confusion being created amongst the relevant public, i.e., the Chinese public, under the Trademark Law, regarding the source of the goods.

In the HONDAKIT case, however, the SPC held that trademark use is an objective activity, one which includes many processes, such as physical attachment of labels/signs, as well as market circulation.  Thus, when determining the issue of “trademark use”, the activity should be interpreted consistently and holistically, instead of reviewing only a particular, isolated step in the OEM process.  By using the mark through labelling or in another manner on the manufactured or processed goods, and so long as mark possesses the ability to distinguish the source of the goods, such use can be regarded as “trademark use” under the PRC Trademark Law.

(ii) Confusion to Relevant Public

In earlier cases, PRC courts generally viewed that because the OEM manufactured goods were not on sale in China, the sign on the OEM manufactured goods could not play the role of identifying the source of the goods.  Thus, the relevant public, namely Chinese consumers, will not confuse the OEM manufactured goods with goods provided by the PRC trademark registrant.

In the HONDAKIT decision, however, and in addition to considering only Chinese consumers when considering the “relevant public”, the SPC also considered exposure to other parties that closely deal with or might also be exposed to the alleged infringing products, such as the parties transporting the alleged infringing products.  Further, and with the development of e-commerce and internet, even if the alleged infringing products were exported from China, it is always possible that they might flow back into the market.  In addition, as many Chinese consumers also travel overseas, they could also come into contact with those OEM manufactured goods in overseas countries, meaning it is still possible that confusion could be caused to those consumers.

(iii) Subjective Intent

In the Dongfeng case, the SPC held that by confirming the goods were intended for export to a country where the manufacturer held registered trademark rights, the OEM manufacturer had fulfilled its duty of reasonable care, and that the OEM manufacturing activities did not result in material damage to the exclusive rights enjoyed by the PRC trademark registrant.  Therefore, the OEM manufacturing activity in that case did not constitute trademark infringement.

In the HONDAKIT case, however, the SPC held that the alleged infringer’s subjective intent or any material damage done to the owner of the PRC registered trademark was irrelevant to the determination of trademark infringement.  The term “easily cause confusion” simply queries whether the relevant public has the possibility of encountering the alleged infringing products.  If so, then there is likelihood of confusion to the public and hence, the OEM manufacture of such goods constitutes trademark infringement.

(iv) Other Relevant Comments in the SPC’s Judgment

In the HONDAKIT case, the SPC again noted that trademark rights are territorial. For trademarks not registered in China, and even if they are registered in foreign countries, they do not provide the owner of those foreign rights any privileges in China.  Correspondingly, any so-called “trademark authorization” from foreign brand owners to a given Chinese OEM manufacturer grants no protection under PRC Trademark Law and cannot be used as a defense against an assertion of trademark infringement by the registrant of the Chinese trademark registration.

Further, the SPC also stated in the judgment that when considering OEM Exception cases, uniformity in the application of the law and the legal system should be maintained.  It noted, too, that courts should not simply transform, on a blanket basis, a trading practice (such as the authorisation of the OEM manufacturing activity concerned in this case) into an exception to trademark infringement.  If they did, the basic, underlying rules for the determination of trademark infringement under the PRC Trademark Law would be undermined.

In spite of this fairly clear language, the SPC also somewhat cryptically (and optimistically, for victims of trademark piracy) commented that cases involving issues of OEM manufacture should still be examined on a case-by-case basis.

Possible Impact of the HONDAKIT Decision on Future OEM Exception Cases?

Although China is not a common law jurisdiction, and lower courts are not bound to follow even a SPC judgment in cases with similar facts, lower courts in the PRC are increasingly inclined to follow judgments of higher courts, particularly the SPC.  Given that, it can fairly safely be assumed that the HONDAKIT case will have some impact on future cases involving OEM manufacture, particularly given the notoriety the case has garnered (where it was selected by the SPC as one of its “Top 10 IP cases” in 2019[viii]).

Given the SPC’s modification to some of the earlier reasonings relied upon by it and other courts to support the application of the OEM exception, some of the earlier conclusions commonly used to reject allegations of trademark infringement in cases involving OEM manufacture appear less likely to find favour with PRC courts, however, including the following:

  • Physical attachment of a trademark in China that has been registered overseas, where the foreign brand owner authorizes said attachment, and those goods are intended solely for export purpose, i.e., will NOT enter the Chinese market, does not constitute trademark use;
  • As the OEM manufactured goods are not sold or circulated in China, there is no risk of confusion to Chinese consumers as to the source of the goods; and
  • The OEM manufacturer has fulfilled its reasonable duty of care by verifying the registration of the trademark in the country of export by its OEM customer, and that the OEM manufacturing activities will not result in material damage to the exclusive trademark rights enjoyed by the PRC trademark registrant.

That being said, as the SPC indicated in the HONDAKIT decision that, cases involving OEM manufacture will still need to be examined on a case-by-case basis.  Where the facts of the case are more innocuous, i.e., they don’t involve a pirate in the foreign country, and/or the owner of the PRC trademark is not a reputable business like Honda, it seems less likely the SPC and lower courts will do away entirely with over a decade’s worth of precedent.  This is particularly the case where the impact of the precedent is to protect foreign brand owners victimized by pirates and OEM manufacturers acting entirely in good faith.

Nevertheless, to navigate these new and uncertain waters, proactive efforts to stay ahead of the curve on possible OEM Exception cases is recommended.

Precautionary Measures for Post-HONDAKIT OEM Exception Cases

Trademark Clearance Searches and Applications

In any instance involving the PRC manufacture of a product bearing a trademark which is not yet registered in China, brand owners need to take immediate steps to understand the risks they may be facing.  First and foremost, this involves proper clearance searches to confirm if there are any prior trademarks on file in China that may raise infringement risks.

For any such marks that are registered, searches on PRC Customs’ database also needs to be conducted to determine if enterprising pirates have recorded those rights, making any goods bearing the mark subject to Customs seizures.

Consideration should also be given to means of eliminating the infringement risk, including by approaching the pirate and/or attacking the registration.  Such actions can include invalidations, non-use cancellations, in some cases, preceded by an investigative approach to the pirate (ideally via a strawman to hide the brand owner’s involvement) to obtain evidence of bad faith that may be useful in an invalidation (or infringement defense) or evidence of use (or lack thereof).  It may also be possible to explore a purchased assignment of the mark at a reasonable price during such investigations.

In the case of trademarks that are still in the application phase, consideration can similarly be given to exploring issues surrounding bad faith and a possible assignment via an investigative approach to the pirate.  Evidence obtained in the investigation can be used in an informal interference letter to the TMO examiner reviewing the application.  These letters can be quite effective in cases where the pirate has victimized a large number of brands and could be classified as a “serial pirate” (where the TMO will often reject such applications outright).  If the interference letter does not succeed, an opposition against the mark can be considered upon its preliminary approval.

In any event, it would also be prudent to consider immediately halting any sales or promotion of goods bearing the pirated mark in China pending a resolution of the situation.

At the same time, and given the likelihood that the pirate may not agree to assign or withdraw the mark cheaply or easily, it is also always advisable for the brand owner to file its own trademark application in China as soon as possible if it has not already done so.  This is also true, of course, in situations where the mark has not yet been pirated and the foreign brand owner only has plans to manufacture in China.  again, China’s first-to-file regime – to say nothing of the relative uncertainty of the HONDAKIT decision – make it fertile ground for trademark piracy backed up by Customs-based extortion, so filing early and often should be the norm.  Any company’s supply chain could be at real risk of disruption in the absence of registered rights.  Thus, having a trademark application on file or a registration in hand is vital to anticipate and avoid the risks of infringement claims.

Detailed OEM Agreement

A detailed OEM agreement between the OEM supplier and the foreign brand owner is highly recommended generally.  In situations where the brand owner does not own their own registration in China – and particularly where a pirate does – such an agreement is vital.  The uncertainty surrounding the OEM Exception’s continuing viability after the HONDAKIT decision only enhances this need.  The earlier such agreements are inked, the better.   In the past, PRC courts were more lenient and applied the OEM Exception even where documents showing the OEM relationship were only inked with the Chinese suppliers after the seizure of the goods by the pirate.  With the Dongfeng case and HONDAKIT case, it is advisable to change this practice, in order to show the Chinese suppliers timely fulfilled their duty of care before manufacturing the goods in order to more effectively avoid infringement findings.

Generally speaking, it is not uncommon for many companies to rely wholly on short-form, boilerplate purchase orders with their Chinese suppliers.  Such “POs” may contain little to no language outlining the parties’ respective rights and liabilities in respect of intellectual property, dispute resolution and/or indemnification in respect of goods subject to seizure due to trademark infringement claims.  They should be avoided.

In their OEM agreement, brand owners should clarify the situation regarding the brand owner’s trademark rights in China and in overseas markets, with the OEM manufacturer being provided copies of valid registration certificates in the countries to which the goods are being exported to ensure the supplier can be said to have done its due diligence.  The agreement must also require, absolutely, that the OEM manufacturer not sell or circulate any of the OEM manufactured goods in China, and not even disclose the relationship with the brand owner to any visiting customers (who could be investigators sent by the pirate!).  This limits the risk that the pirate will get a “free kick” by being able to show the goods being sold on the PRC market, eliminating the argument that confusion to Chinese consumers due to exposure to the goods is impossible or at least unlikely.

Out of an abundance of caution, it is also suggested that all of these materials be made bilingual, and prepared in a form that is ready for presentation to local customs, MSBs and courts, should actions be taken against the PRC suppliers by the pirate that has stolen the brand owner’s trademark in China.  This means a package of notarized (and ideally legalized) copies of relevant overseas trademark registrations, the OEM manufacturing agreement, and purchase orders for the goods in question, and customs paperwork that confirms the goods are intended solely for export to countries where the brand owner has registered rights.  Typically, it takes at least three to four weeks to compile this documentation and likely at least another four weeks to complete the notarization and legalization of the paperwork.  This means planning well in advance, where if such documents can be produced quickly when trouble arises, there is a higher chance of persuading local authorities to deal with the matter in a favourable manner.

Responses/Countermeasures to Infringement Claims of Trademark Pirates

If the pirate is able to take action against the OEM manufactured goods, be it by convincing Customs to seize the goods, by filing an administrative or criminal complaint with the local authorities, or by lodging civil lawsuits with the local courts, brand owners will need to obtain qualified representation immediately.

For customs seizure and administrative/criminal complaints, rapid intervention with authorities to explain the full circumstances of the case, and in particular, the bad faith of the pirate, is key to persuading the authorities the goods are not infringing and should be released.  In this regard, the OEM Exception “package” discussed above will be invaluable in communicating the full story to authorities.

For court cases, both parties will need to attend the hearings to argue the cases.  Given that, it is worthwhile to invest serious time in getting well prepared for the hearings, including by preparing persuasive evidence to prove just why the goods should not be deemed infringing and should be released.

With regards to the arguments to defend against actions by the pirate, the OEM Exception packet and precautionary measures mentioned above should support the following arguments:

  • The OEM manufactured goods will not cause consumer confusion;
  • No protection should be granted to pirated marks registered in bad faith in China; and
  • Fines shall be imposed on pirates who register their mark in bad faith and have no intent to use pursuant to Article 68 of the PRC Trademark Law (Such an argument, if supported by courts, would also be beneficial in trademark invalidations against the pirated mark).

Moreover, victimised brand owners can also file their own lawsuits against pirates on the ground of unfair competition in relation to the pirates’ misuse and abuse of the Chinese registrations filed in bad faith.

If victimised brand owners can prove their prior use of the concerned marks and/or sales of their brand goods in China which have already accumulated certain influence before the filing dates of the pirated marks, consideration can also be given to relying on Article 59.3 of the PRC Trademark Law, which can permit victims of piracy to continue to use their own marks within the original scope of use.

Conclusion

Winning back a pirated PRC trademark registration can be a long, expensive battle in any case, but can have an even greater impact where the victimised brand owner’s supply chain is at risk.  This has never been more true than today, where the circumstances under which the OEM Exception can be applied has been clouded by the SPC’s decision in the HONDAKIT case.  As a result, brand owners that wish to start (or continue!) using China as a source of OEM manufactured goods will need to be prepared for possible challenges by enterprising pirates eager to take advantage of this uncertainty.

In that regard, the following measures can be considered:

  • Manufacturing the goods in China but having the labels or packaging with trademarks applied outside of China (trademark registration in that country is also recommended, of course);
  • Encouraging local suppliers to carefully choose methods of shipment and ports through which goods will pass. Some regions are laxer about inspecting for IP compliance.  As well, shipment by air is sometimes considered safer than shipping via container ships.
  • A full set of OEM Exception materials should be prepared to facilitate discussions with Customs and enforcement authorities, and the raising of defences in any court cases involving seizure of branded goods;
  • Investigating the pirate to identify vulnerabilities, for example, if they are engaged in counterfeiting activities, have pirated other trademarks, etc., can be used as leverage in actions against and negotiations with the pirate to force a resolution;
  • Negotiating with the pirate, whilst distasteful, should at least be considered, ideally before shipments of goods have been seized by the pirate, giving them serious and immediate leverage over the foreign brand owner;
  • Finally, brand owners should be prepared to vigorously defend against any actions brought by the pirate. There are solid legal bases to attack such actions, either as part of the pirate’s lawsuit against the goods/the OEM supplier, or in separate civil actions (such as for unfair competition).

Although the SPC’s HONDAKIT decision creates uncertainty surrounding the OEM Exception’s ongoing validity, the SPC itself has made clear that facts matter in these cases.  By understanding the risks of ongoing OEM manufacture in China where the mark to be applied to the goods has been pirated, and facing those risks head on, brand owners should be able to effectively navigate the uncertainty created by the SPC’s HONDAKIT decision.

By Grace Chen and Dan Plane

This article originally published in the Australian Intellectual Property Law Bulletin, Vol. 33, No.2.

Endnotes:

[i] Implementation Regulations of Administrative Penalties of the People’s Republic of China Customs
[ii] (2001) Shen Zhong Fa Zhi Chan Chu Zi Di 55 Hao ((2001) Shenzhen Intermediate Court IP First-Instance NO.55), Nike International Ltd vs Zhejiang Chuchan Import & Export Company, Zhejiang Jiaxing Yinxing Clothing Factory, and CIDESPROT
http://news.southcn.com/gdnews/nanyuedadi/200302180264.htm
http://www.cnipa.gov.cn/albd/albd2007n/1017153.htm
[iii] (2012) Lu Min San Zhong Zi Di 81 Hao ((2012) Shandong Civil Final No.81), Crocodile Garments Limited v Qingdao RuiTian Clothing Co., Ltd.
https://pkulaw.cn/case/payz_a25051f3312b07f3f8a7e0bf4a31f23d81a57cbd3b1642e7bdfb.html?match=Exact
[iv] http://www.yamatointr.co.jp/brand/crocodile
[v] https://www.chinacourt.org/article/detail/2013/04/id/950084.shtml
[vi] (2014) Min Ti Zi Di 38 Hao ((2014) Civil Re-trial No.38), Focker Security Products International Limited vs Pujiang Yahuan Locks Co., Ltd.
http://wenshu.court.gov.cn/website/wenshu/181107ANFZ0BXSK4/index.html?docId=5edfb03818cf41229c6b32ed11e4ed12
[vii] (2016) Zui Gao Fa Min Zai 339 Hao ((2016) SPC Civil Re-trial No.339), Shanghai Diesel Engine Co., Ltd. vs Jiangsu Changjia Jinfeng Motor & Mechanics Co., Ltd.
http://wenshu.court.gov.cn/website/wenshu/181107ANFZ0BXSK4/index.html?docId=5746533e1b0b4b918126a8b300bf1138
[viii] http://ip.people.com.cn/n1/2020/0421/c136655-31682454.html