The HONDAKIT case is one of few trademark cases to reach the Supreme People's Court (SPC) of China. As such, it has shone a spotlight on the question of what constitutes trademark infringement when foreign trademark owners and their Chinese local manufacturers export goods from China under the original equipment manufacturer (OEM) business model. In this article, we set out some of the potential issues to be aware of when operating under the OEM model, the implications of the ruling in this particular case and possible ways to mitigate potential risks in this environment.
Possible issues with the China Customs under the OEM business model
The OEM mode of production refers to a business model in which an overseas buyer (i.e. the "principal") provides the brand name and the authorisation, while a domestic manufacturer is responsible for the production and export of the goods to the overseas market under that brand name.
Under the OEM manufacturing mode, the principal outside China generally enjoys trademark rights in the target market country. However, due to the territorial nature of trademarks, the trademark rights in the target market country do not naturally extend to the exporting country.
On the other hand, if a domestic trademark owner has recorded its trademark with the China Customs, the labelled goods may be considered infringing by Customs even if they are not intended for sale in China. This circumstance can be easily overlooked by foreign principals and domestic manufacturers, but can lead to goods being detained by Customs, create delays in shipping schedules, and give rise to liability for breach of the contract.
Implications of the HONDAKIT case
In the HONDAKIT case heard by the SPC in 2019, the SPC adjusted its previous position on whether the OEM product intended only for export constituted trademark infringement. It is noteworthy that in this case, the Chinese manufacturer improperly highlighted the word "HONDA" in the trademark HONDAKIT, and this non-normative use of the foreign-registered mark and the defendant's intention to imitate the plaintiff's trademark had a significant impact on the Court's finding of trademark infringement.
The SPC reached its decision in the HONDAKIT case by weighing various factors in the context of the changing market environment. The increasing convenience of cross-border movement of goods and people in the internet age and the trend towards a globally integrated international environment, for example, means goods and people can easily travel across borders. As a result, it can be difficult to distinguish between goods originating from domestic and foreign sources, as the goods move with people.
With all that said, even in the previous Pretul case (also heard by the SPC in 2014), which found that OEM exports did not constitute trademark infringement, the SPC did not intend to simply crystallise a certain mode of trade (e.g. OEM/ODM etc.) into an exception to non-infringement. It was only in the Pretul case that the defendant did not appear to have had a subjective intent to infringe upon the trademark registered in China and was using its foreign-registered mark normatively. So, at that time, the SPC held there was no trademark infringement in respect of that type of goods; all of which were exported.
Therefore, it is not a blanket statement as to whether an OEM/ODM exported product constitutes trademark infringement, but it still needs to be analysed on a case-by-case basis.
How can OEMs mitigate the risks of trademark infringement?
While every situation is different, there are a number of measures foreign trademark owners should take in order to help mitigate the risk of trademark infringement:
- the foreign right holder should legally hold a valid trademark registered overseas;
- the foreign-registered trademark should be consistent with the trademark licensed to the Chinese manufacturer without alternations;
- the goods should all be exported without directly selling in mainland China; and
- the foreign right holder should NOT have other non-normative use of the trademark in the Chinese market. For example, changing the font or overall design of the trademark for aesthetic or marketing purposes, splitting the text and logo of the registered trademark for separate use, using items of goods/services that are not approved for use, etc.
In addition, it is advised that exporters should pay due attention and communicate with Customs promptly if they should seize the OEM goods.
Where the exporter believes the goods do not infringe the domestic trademark, a written explanation can be submitted to Customs with relevant supporting evidence. Alternatively, the exporter might consider filing a civil action for non-infringement or initiating administrative proceedings for invalidation or cancellation against the domestic trademark.
To understand more about trademark infringement issues for OEMs/ODMs, or to discuss any of the points raised here, please get in touch with Ivy Liang.