SPC's position on OEM - the HONDAKIT case in focus

SPC’s position on OEM: the HONDAKIT case in focus

China has been the world’s largest manufacturer for nearly a decade now, with much of its manufacturing consisting of original equipment manufacturing (OEM) under contract for export. Thousands of Chinese factories work as OEMs to make, process and deliver goods that are then sold on overseas markets by foreign purchasing parties. Typically, these are overseas manufacturers, resellers, or retailers for foreign brands owned or legitimately used by the foreign purchasing parties. Previously, Chinese courts typically treated OEM solely for export as a non-infringing act under the Trademark Law of the People’s Republic of China. On 23 September 2019 however, the Supreme People's Court of China (SPC) issued a retrial judgment on a trademark dispute between Honda Motor Company Ltd and Chongqing Hengsheng Xintai Trading Co Ltd. The SPC ordered that the defendants immediately cease infringement of Honda trademarks and indemnify Honda 300,000 yuan in damages. This decision appears to mark the dawning of a new era in which the SPC may no longer permit special exemptions against trademark infringement for OEM for export activities under China’s Trademark Law.

Contextualizing the SPC’s previous position on OEM

The SPC judgment in Honda Motor Co Ltd v Chongqing Hengsheng Xintai Trading Co Ltd ((2019) Zui Gao Fa Min Zai No 138) (the HONDAKIT case) suggests that OEMs’ affixing of trademarks without authorization from the trademark’s owner in China would constitute trademark infringement. This represents a marked departure from the SPC’s previous position, which saw the SPC reject claims by trademark owners that sued Chinese OEMs for trademark infringement on the basis that the goods they manufactured or processed were an unauthorized use of the trademark owners’ logos or symbols. In Pujiang Yahuan Lock Co Ltd v Focker Security Products International Limited ((2014) MinTiZi No 38) (the PRETUL case), the SPC determined that the OEM activities were simply “physical attachment” of the trademark. Further, since this affixing itself had no function of identifying the source of goods, it was not deemed to be a “use of trademark”. Rather, in this case, the Court only focused on the “physical attachment” to OEM products for export, which the Court considered did not function to identify the source of goods and thus did not constitute a “use of trademark” under the Trademark Law. More recently, in December 2017, the SPC re-affirmed the PRETUL precedent, but with a key difference. In that case, Jiangsu Chang Jia Jin Feng Power Machinery Co., Ltd v. Shanghai Diesel Engine Co. Ltd ((2016) Zui Gao Fa Xing Shen No 339) (the DONG FENG case), the plaintiff’s trademark “DONG FENG and Chinese Characters” was recognized as a well-known mark in China. Here, contrary to PRETUL, the SPC affirmed that the act of affixing trademarks in the course of OEM may constitute “use” of a trademark. However, the SPC required that an evaluation of the likelihood of confusion caused by the OEM-manufactured goods must be performed in order to determine if OEM activities infringe a registered trademark.

Case background: the HONDAKIT case

Honda registered trademarks No. 314940 HONDA, No.1198975 H and its figure, and No.503699 HONDA and its figure, with the Chinese Trademark Office of the former State Administration for Industry and Commerce. Then, in June 2016, Chinese Customs in Ruili seized outbound motorcycles affixed with the trademark “HONDAKIT”. These were manufactured by the Hensim Group as authorized by the Meihua Company, and were applied for export by Hensheng Xintai Company, a subsidiary of the Hensim Group. Honda subsequently asserted that the two companies had infringed its trademark right and filed a case before the Intermediate People's Court in Yunnan Province seeking an injunction against the defendants and 3,000,000 yuan in damages. The defendants argued that they were authorized by Meihua to manufacture the products in question and to use the HONDAKIT trademark. The Court held that the two defendants used HONDAKIT and its figure on motorcycle hoods, engine covers and nameplates while protracting the size of the HONDA part, which led to infringement of the plaintiff's trademarks. Accordingly, the Court issued its first-instance decision, ordering an injunction against the two defendants and 300,000 yuan in damages. The Hensim Group and the Hengsheng Xintai Company then appealed to the Yunnan Higher People's Court in 2017 and requested the Court to revoke the first-instance judgment and deny Honda's claims. The two defendants argued that all of the products involved in the case were planned to be exported to Myanmar and did not enter the Chinese market. No infringement was established.

After the hearing, the appellate court held that the two defendants did not infringe the exclusive trademark right of Honda and revoked the first-instance decision, whereupon Honda appealed to the SPC.

Judgment

In their decision, the SPC held that the products in question belonged to the OEM and were likely to circulate back to the Chinese market despite being bound for overseas markets. With the growth of the Chinese economy, an increasing number of Chinese consumers tend to travel abroad and may have access to these OEM products and be confused by their origin. In this connection, the first-instance ruling Court ascertained the facts clearly. The SPC then revoked the second-instance decision and upheld the first-instance one in its final judgment, ordering the two defendants to cease infringement and indemnify Honda 300,000 yuan in damages. 

In the HONDAKIT case, contrary to the PRETUL decision, the Court took the OEM model as a combination of all of the activities involved in the chain of production (i.e. physical attachment, transportation, market circulation, etc.). The Court further reasoned that the OEM activities must be taken as a whole and that each link must not be viewed in isolation. Rather, the Court now places significant emphasis on identifying if there is any “possibility of identifying the source of goods” arising from activities under the OEM model. As far as such possibility arises in the production chain, there should be “use of trademark”.   

Expanded definition of “relevant public”

In the PRETUL case, the Court mostly focused on the goods’ destination and end market. The Court reasoned that, since the products would not be sold on the Chinese market, the trademark would not create confusion among relevant Chinese consumers about the source of the goods.

The focus of the SPC’s enquiry in the HONDAKIT case concerned the likelihood of confusion caused by the OEM for export activities. Notably, this marked the first time the SPC gave a definition of the “relevant public” as including any person that may access the OEM goods for export. This included end consumers in Mainland China able to buy the goods on e-commerce platforms and where the purchased goods would be returned to Mainland China. It also included business operators with a close connection to the relevant products’/services’ marketing, including business operators with access to the infringing goods. This marked a broadening of the SPC’s interpretation of the scope of “relevant public” to include not only consumers but also business operators that were closely related to and might merely have contact with the infringing products (i.e., the operator of transportation). The Court even considered the resale of products back to the domestic market and the possibility of confusion created by such a circumstance. On this, the SPC emphasized that actual confusion is not required, and that the possibility alone would suffice. Moreover, the SPC’s expansive definition of the “relevant public” extended to all operators and consumers who may have access to such goods. This broadly defined “relevant public” heavily influenced the SPC’s consideration of how Chinese consumers might access the products branded with HONDAKIT.  With this lower threshold established, Honda’s trademarks were found to have indeed been infringed by the use of the “HONDAKIT” mark on 220 sets of OEM-manufactured motorcycle parts bound for export to Myanmar. 

The SPC is thus taking a stricter approach when determining whether there is “use of trademark” under the OEM scenario. And as long as there is even a mere possibility to identify the source of the goods and a possibility for confusion of this newly-defined “relevant public”, there may very well be a use of trademark under the Trademark Law. 

Conclusion

Following the SPC’s decision in HONDAKIT, it appears that trademark owners may now be able to initiate trademark infringement litigation to extend the scope of their trademark protection and prevent authorized OEM goods from being manufactured in China for export to other countries. Under the definition of “relevant public” for OEM for export only as defined by the SPC in this case, in its strictest interpretation, all future OEM cases for export that involve the affixing of another party’s registered trademark on goods that are identical or similar to those designated by the trademark may provide grounds for a finding of trademark infringement. This precedent is still in its infancy however, and the SPC did qualify that its judgment was strictly applicable to the facts of the case before it. While this decision marks a defining moment in the determining of how the likelihood of confusion is assessed for the purposes of trademark infringement cases in China, future guidance is needed from the SPC and Chinese courts on the lasting effects of this precedent in judicial application. 

This article was first published on IPLink-Asia