Liuming International China Business Lawyers

Introduction – China OEM and trademark use

A China OEM trademark case heard in the Jiangsu High Court (“Jiangsu HC”) imposed higher duties on a China OEM manufacturers. Goods manufactured in China, solely for export to Indonesia had the “Dong Feng”(“东风”) trademark affixed. Jiangsu HC went beyond the reasoning of the China SC in the Focker case, and also beyond what has become convention trademark jurisprudence in that part of China.

China’s Supreme Court, on November 26 2015, handed down its decision in the Focker case, holding that China OEM manufacture solely for export did not constitute use of a China trademark in China.  As the highest court, its decisions are usually expected to be followed by lower courts, but China is a Civil Law country and precedents from higher courts are not binding.

The ink was barely dry on the Focker China SC judgment when the Jiangsu High Court (Jiangsu HC) handed down its decision in Shanghai Diesel Engine Co Ltd (“Shanghai Diesel”) v Jiangsu Changjia Jinfeng Power Machine Co Ltd (“Changjia”). The court acknowledged the reasoning in Focker but effectively distinguished it, holding on the facts of the case before it that a China OEM manufacturer had duties beyond confirming that their client has legal rights to an applied trademark in the destination jurisdiction.

Jiangsu HC’s jugment has been referred to in a number of articles as if it is equal in weight to Focker. In reasoning, or the standing of the court, it is not. We expect the China SC’s position to generally prevail in future China OEM cases.

China’s SC has power to review the decision, but it is not presently known whether an application for review has been filed.

 Background

Some “legal” background also needs to be taken into account when considering this case:

• Indonesia, like China is a “first to file” jurisdiction. Although there are some  exceptions, prior use or first use is practically irrelevant in both jurisdictions;
• Indonesia, unlike China is not a signatory to the Madrid protocol.  Trademarks can only be registered there directly through an Indonesian trademark agent.

Shanghai Diesel v Changjia was about the application of the China trademark “Dong Feng” (“东风”) (a well known trademark in China) to diesel engines and parts contracted for by an Indonesian company, Pt Adi Berkasa Buana (“Indonesian Company”).

The contract between the Indonesian Company and Changjia was a processing trade contract, whereby the manufacturer is paid a fee for carrying out the work and is not selling products with a marked up profit. The details of processing trade contracts are not really that important to the discussion of this case, although it is mentioned as such in the judgment: in trademark terms it is a variety of China OEM contract.

The terms of the contract were that Changjia would make certain goods and as part of the process the “Dong Feng” (“东风”) mark would be applied to them.  At the relevant time the Indonesian Company held the trademark rights to “Dong Feng” (“东风”) in Indonesia.

The goods manufactured by Changjia were seized by China Customs at the request of Shanghai Diesel, despite Changjia’s export declaration that the goods were manufactured solely for export to Indonesia.  Shanghai Diesel then filed a case at the Changzhou Intermediate Court.  The court ruled in favour of Changjia.

Shanghai Diesel then appealed to the Jiangsu HC.

Appeal to Jiangsu HC

Key facts found

(The facts, although summarized here, are lengthy but together with the findings in the judgment itself, are important in considering the potential impact of the Jiangsu HC judgment on China trademark jurisprudence).

1. Shanghai Diesel registered in China “Dongfeng” (“东风”) as a word mark in 1981 and a combined mark including a device in 1992. These trademarks have been recognized by the China Trademark Office as well-known trademarks in China from 2000.
2. The Indonesian Company registered the “Dongfeng” (“东风”) marks in Indonesia on January 19, 1987.
3. Shanghai Diesel had a series of disputes with the Indonesian Company regarding the trademark  “Dongfeng” (“东风”) in Indonesia. Details as follows:
   1. In 2006, Shanghai Diesel filed a case at Jakarta court claiming that the Indonesian company registered its world-wide well-known trademark in bad faith but the  Jakarta court ruled against Shanghai Diesel and confirmed the trademark rights of the Indonesian Company.
   2. Shanghai Diesel appealed to the  Indonesian Supreme Court, which overturned the decision of the Jakarta court and supported all claims of Shanghai Diesel on February 19, 2008.
   3. Accordingly, the Indonesian IP Office cancelled the Indonesian Company’s registration of the “Dongfeng” (“东风”) mark and other related trademarks on April 17, 2008. Shanghai Diesel then registered the  “Dongfeng” (“东风”) mark in Indonesia on July 31, 2008.
   4. On November 17, 2008, Shanghai Diesel, having won in the Indonesian Supreme Court and being the owner of the “Dongfeng” (“东风”) mark in Indonesia, came to an agreement about compensation with Changjia, key provisions included: Changjia had used the “Dongfeng” (“东风”) mark without the authorization of Shanghai Diesel in manufacturing and exporting diesel engines to Indonesia; and Changjia promised it would not do this again and agreed to compensate Shanghai Diesel with RMB 100,000.
   5. On April 29, 2009, The Indonesian Supreme Court, after a request from the Indonesian Company to review its prior decision in favour of Shanghai Diesel, held that Shanghai Diesel had failed to prove its mark was well-known world wide and overturned its own prior decision.
   6. Accordingly, The Indonesian IP Office reinstated the trademark registrations of the Indonesian Company.
   7. In December 2009, the Indonesian Company filed a case in the Jakarta court requesting cancellation of the registration of the “Dongfeng” (“东风”) mark by Shanghai Diesel. The Jakarta court decided to cancel the registrations on June 16, 2010.
   8. Accordingly, the Indonesian IP Office cancelled Shanghai Diesel’s registration of the “Dongfeng” (“东风”) mark on February 11, 2011.

Jiangsu HC judgment – additional obligations for China OEM manufacturers

(Translated from the judgment with some adjustments, eg the parties named, but believed to generally provide the flavor of the original).

1. In deciding whether a China OEM manufacturer has infringed China trademark rights, we should consider the law, as well as the need to promote the development of international trade. For this purpose, we need to balance the rights and interests of owner of Chinese trademark, the Chinese OEM manufacturer, and the owner of a foreign trademark.
2. Generally speaking, if the China OEM manufacturer will not sell any products in China and will export all OEM goods, we should regard that the China OEM manufacturer did not conduct any trademark infringement in China. However, before reaching that conclusion, we need to consider whether the China OEM manufacturer has duly checked the legitimacy of the foreign trademark.
3. The China OEM manufacturer is required to check whether the foreign customer has legitimate rights to the foreign trademark involved in the OEM arrangement. If it did not duly check this, it will be held as liable for trademark infringement in China.
4. Where the registration of foreign trademark by the foreign customer is not justified, we think the China OEM manufacturer should be more alert. It means that if the foreign customer breached the good faith principle in registering the relevant trademark offshore, and therefore impacted the trademark rights of Chinese famous or well-known trademark and its owner, the China OEM manufacturer has the obligation to be more careful and has an obligation to avoid causing any trouble to the owner of Chinese famous or well-known trademark. If the China OEM manufacturer knows such facts yet still accepts the OEM order, it should be held as liable for trademark infringement.
5. We think the above rules will work better with the economic development needs in China, protect normal OEM business, and prevent trademark squatting.
6. In this case, Changjia knew that Shanghai Diesel’s “Dongfeng” (“东风”) mark is a well-known mark in China, and it did not do what it could to avoid causing trouble to Shanghai Diesel and damaged their interests. Because of this, Changjia should be held liable for trademark infringement.

Detailed reasons

1. Shanghai Diesel’s  “Dongfeng” (“东风”) trademark is a well-known mark in China, registered in 1962. Shanghai Diesel has been exporting diesels bearing this mark to Indonesia since the 1960s, and this mark is well recognized in that area. The Indonesian company registered the “Dongfeng” (“东风”) trademark in Indonesia after Shanghai Diesel’s China registration and Shanghai Diesel’s first use in Indonesia.
2. The Indonesian Company was in bad faith in registering their trademark. The official language in Indonesia is Indonesian, but the Indonesian Company registered its trademark with Chinese characters and the Pinyin of Dong Feng being the major part of the mark. Although the Indonesian company won the series of disputes regarding registering the “Dongfeng” (“东风”) trademark in Indonesia, we believe that the trademark registration by this Indonesian company is not justified. In addition, it engaged a Chinese company to do OEM manufacture with a trademark identical to that of Shanghai Diesel, and such activities will cause substantial damage to them.
3. Changjia promised Shanghai Diesel in their agreement that it would not use its trademark in the future. However, it still accepted the order after making such promise. We think that Changjia breached its obligation of checking the legitimacy of a foreign trademark in taking the OEM order and the obligation of avoiding causing trouble to the owner of a Chinese well-known trademark. Because of this, we decided to hold Changjia liable for trademark infringement.
4. With respect to the compensation shall be rewarded, we decide that Changjia should compensate Shanghai Diesel RMB 100,000 for the losses suffered by it, and RMB 116,750 for the costs incurred by it in filing this case.
5. The following factors have been considered in determining the compensation amount:
   1. Changjia only charged processing service fee in this OEM business.
   2. No OEM goods have been distributed in the  China market.
   3. Changjia had reached compensation agreement with Shanghai Diesel in 2008 and in that agreement, they compensated RMB 100,000 to the them.

Commentary

This case warrants close attention because in many reports it has been cited as an example of the lack of impact of the China SC’s Focker decision.  It did not follow Focker, and equally did not follow what had been previous jurisprudence in that part of China, namely OEM manufacture solely for export is not use of a trademark.

The reasoning (as reported) in this case is sometimes difficult to understand:

1. At one extreme it appears to require a China OEM manufacturer to go beyond the official registration of a trademark in the customer’s home jurisdiction.  In practice it is difficult to imagine what process or documentation could satisfy this requirement if a decision of the highest court in the relevant jurisdiction does not. It was not enough in this case.
2. It also appears to impose an extra-legal duty on China OEM manufacturers in China: “… an obligation to avoid causing any trouble to the owner of Chinese famous or well-know trademark”.
   Again, something difficult to apply in the form of a practical rule to guide business, Chinese or foreign. “Causing trouble: is a fairly loose definition to apply in this trademark context.

This case is diverges from what has become conventional China OEM jurisprudence in this part of China, and been endorsed by the China SC in Focker.  Previous cases on essentially the same facts and the same protagonists, Shanghai Diesel and the Indonesian Company, have been decided according to what has become the consensus view, as expressed on Focker – namely that China OEM manufacture, solely for export, is not use of a China trademark in China.

The most recent of these cases, prior to this case was decided in the Shanghai Free Trade Zone Court at first instance which held that China OEM manufacture in China, solely for export, is not use of a China trademark. The decision was appealed by Shanghai Diesel to the Shanghai No.1 Intermediate People’s Court, which in December 2014 upheld the first instance judgment.

As interesting asides: Shanghai Diesel only had rights to the “Dongfeng” (“东风” marks in Indonesia from (at best) February 19, 2008 when the Indonesian Supreme Court upheld its claim until February 11, 2011,  when the Indonesian IP office cancelled their registration. A period of about 3 years.

The Indonesian Company has held registration of the “Dongfeng” (“东风”  marks in Indonesia for about 27 years overall. This was not enough to satisfy the Jiangsu HC.

Take away points

• China is a Civil Law country. Case reports can provide insights into how legal issues are viewed by the courts, but precedents are not binding.
• A reminder that policy is an important consideration in China, including China courts, not just the letter of the law.
• The court system in China, as elsewhere, occasionally has cases where the outcome is puzzling, sometimes due to issues in court evidence that may not be fully brought out in the case report.
• Overall, it seems most likely that the China SC ruling in Focker will be the norm: China OEM manufacture solely for export is not trademark use in China. However, future decisions in particular cases that diverge from accepted jurisprudence cannot be ruled out.
• Companies using China for OEM manufacturing solely for export should reconsider their China trademark strategy to ensure that it is consistent with this norm.
• Owners of China trademarks who have in the past relied solely on China OEM manufacture as use of their trademark in China need to quickly reassess their China trademark strategy to ensure that they could meet a lack of use challenge.

© 2016 Graham Brown. All rights reserved.  The assistance of Peng Wei with this article is gratefully acknowledged,