In 2011, China's manufacturing output surged by 23% from the previous year, and it became the world's largest manufacturing nation, taking over from the US's 110- year run as the number one country in factory production. As a result, the case law in relation to the use of registered trade marks in the manufacturing process has been developing over time in China. This year saw an important decision for Chinese trade mark owners in this area of law.

What is OEM?

OEMs are outsourced manufacturers for brand owners' products and components, whereby the purchasing company goes on to sell the goods manufactured under its own brand. Using an OEM allows the purchasing company to obtain products and components without owning and operating its own factory, making the production line more cost effective. As products manufactured using OEMs are usually intended for export, brand owners have not historically needed to register their own trade marks in the country where manufacturing has taken place.

Historical case law

There has been a string of cases in recent years in China regarding OEM and how it fits into Chinese trade mark infringement legislation.

Pujiang Yahuan Lock Co Ltd v Focker Security Products International Limited ((2014) MinTiZi No 38) (Pretul) was the leading authority in relation to whether OEM manufactured products infringed a trade mark owner's rights. The Supreme People's Court (SPC) held that OEM was not "trade mark use", as simple affixation of a mark onto a product, in China, did not perform a trade mark's basic function of identifying the product source. The products were to be exported and used by brand owners abroad, not in the country of manufacture. This was soon reinforced by the SPC's decision in Dongfeng.

These decisions were problematic for brand owners, as they allowed third parties to manufacture in China and export counterfeit / infringing goods, without any recourse in the Chinese courts.

2020 Honda case

A marked departure from the previous case law, the SPC's 2020 judgment in Honda Motor Co Ltd v Chongqing Hengsheng Xintai Trading Co Ltd (2019) (HONDAKIT), has changed the position in favour of brand owners. This decision appears to mark the dawning of a new era in which the SPC may no longer permit OEM goods for export to be exempt from trade mark infringement.

Honda has the following Chinese registrations protected in relation to motorcycles and parts:

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The Defendant, Heng Sheng, produced motorcycle parts bearing "HONDAKIT" for Meihua, a company in Myanmar. Meihua provided Heng Sheng with copies of its Burmese "HONDAKIT" trade mark registrations.

In June 2016, Kunming customs seized the "HONDAKIT" products on the basis that they infringed Honda's trade marks. However, after realizing that the seized motorcycle parts were OEM products, Kunming customs could not make a decision as to whether the products were infringing, due to the SPC's attitude in relation to OEM products.

To obtain clarity, Honda sued Heng Sheng for trade mark infringement. At first instance the court ruled that the products were infringing, but that decision was overruled at second instance. Honda persisted, and the case was re-tried by the SPC.

The HONDAKIT mark was found to be confusingly similar to Honda's Chinese trade marks. Although the Burmese trade mark registration was for "hondakit", on the parts being manufactured in China HONDA was capitalised, and coloured red, and the products featured a wing device.

In the PRETUL case, the Court focused on the destination and end market of the goods in dispute. Since the products in that case would not be sold on the Chinese market, the trade mark would not create confusion among relevant Chinese consumers regarding the source of the goods.

The HONDAKIT case focussed on the likelihood of confusion caused by the OEM. Helpfully, the SPC gave the definition of "relevant public" as including any person that may have access to the OEM goods. The SPC highlighted that although the HONDAKIT OEM products were not sold in China, Chinese consumers may still be confused. With the expansion of e-commerce and the internet, it was possible that end consumers in Mainland China could have access to the OEM products or they might return to the Chinese market later. This broader definition of "relevant public" influenced the SPC's decision and, consequently, trade mark infringement was found.

Conclusion

This landmark decision will be welcomed by brand owners as they may now be able to initiate trade mark infringement proceedings against counterfeit goods intended only for export. On the other hand, companies who themselves use a Chinese OEM may face their goods being prevented from leaving China if they have failed to secure a trade mark registration and a third party does so instead. The case underlines the critical need for brand owners to ensure they have secured Chinese trade mark protection, whether or not they use a Chinese OEM or are commercialising their products in China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.