A moment of clarity: China settles rules on trademarks and OEMs
On November 26, 2015 a decision by China’s Supreme People’s Court on a trademark infringement case settled the long-running debate over the nature and legitimacy of trademark use by original equipment manufacturers (OEMs) in China.
The case, Focker v Yahuan, was in relation to the trademark ‘Pretul’, which was used on OEM padlocks exported to Mexico from China; there were no sales in China. The Supreme Court reasoned that in the OEM business structure, ‘Pretul’ only functions to distinguish the origin of goods in the export market of Mexico. In China, attaching ‘Pretul’ on the padlocks for export is just providing the necessary technical and material preparations for the functioning of the trademark in Mexico. The court therefore ruled that attaching a symbol during the manufacturing by an OEM for export does not constitute “use” of a trademark, and therefore cannot be considered as infringement of a registered trademark in China.
For brand owner purchasers, the ruling will bring more freedom for exporting products they have ordered and manufactured in China. However, the brand protection battle will not end there and merely manufacturing in China is still far from enough. The new ruling means that companies now need to seek to better protect themselves in the long run. Whether or not a company’s products are intended for sale in China, securing an early trademark registration at home in China and in the export market is always suggested to prevent marks being hijacked by OEMs or third parties.
Frequently referred to as the factory of the world, China is often the major export manufacturing base of many foreign companies. Unfortunately, many purchasers in the past failed to register their trademarks. Sometimes their applications are blocked by a prior mark legitimately owned by a third party, but more frequently they find their marks have already been squatted by an OEM or third party. Even worse, some of the purchasers find themselves or their new OEM being sued for infringing their own brands in China.
Truper, a leading Mexican hardware provider and registrant of the ‘Pretul’ trademark in Mexico, found that its own application for ‘Pretul’ in China was blocked by a prior registration which, it claimed, was a hijacking filing made in 2001 by an individual shareholder of its former Chinese OEM. Over the past ten years, several actions were brought to remove the Chinese registration, but all failed. The shareholder later assigned the Chinese mark to a Hong Kong company, Focker, which turned out to be an affiliate of the shareholder.
In 2010, Truper contracted another Chinese OEM, Yahuan, to manufacture and export padlocks, but their products were seized (although finally released after about two months) by the local customs authority on suspicion of infringing Focker’s ‘Pretul’ trademark.
In January 2011, Focker sued Yahuan. Despite the Ningbo Intermediate People’s Court of First Instance confirming that Yahuan was an OEM of Truper, the court ruled that the use of ‘Pretul’ on locks was trademark use and Yahuan was found liable for trademark infringement. In 2013, the Zhejiang Higher People’s Court of Second Instance upheld the first instance decision in establishing Yahuan’s infringement.
Supreme Court decision
After Yahuan’s further application, the Supreme Court reconsidered the case in 2014 and overturned both lower decisions in November 2015. It ruled that attaching ‘Pretul’ on padlocks manufactured by Yahuan for Truper is not trademark use, and therefore the OEM products did not infringe the trademark. The court’s decision was based on the following factors:
