In November 2009, the Shanghai Higher
People's Court affirmed a lower-court decision that exempted an OEM producing infringing goods
from trademark infringement liability, on the grounds that Chinese consumers
would not be harmed by goods that are destined for export. If followed by other
courts and administrative enforcement authorities in China-such as customs and
the Administrations for Industry and Commerce ("AICs")-it would create a gaping
loophole that would likely be exploited by counterfeiters. By the same token, the decision may create a
safe harbour for trademark owners abroad who have feared enforcement actions
against their Chinese OEM suppliers in the past. Overwhelmingly, the decision is generating
deep concern among the trademark community due to fears it will lead to
substantially greater levels of counterfeiting.
Fortunately, the decision does not appear to
enjoy widespread support among administrative authorities in China, and the
Supreme People's Court ("SPC") has been requested to review the holding to clarify
whether the decision should be followed, and if so, under what conditions. In the meantime, foreign industry
associations and governments are likely to weigh in with relevant authorities
in China to express their concern over the decision and its potential
Jolida Inc., a US-based electronic sound equipment manufacturer, owns the
"JOLIDA" trademark in the United States.
In 1996, it established a subsidiary in China called Shanghai Shenda ("Shanghai
Shenda"), which later registered the "JOLIDA" trademark in China under its own
name. In 1997, Shanghai Shenda was sold
to a third party. Meanwhile, Jolida Inc. established another Chinese subsidiary named Jiulide, which
it authorized to produce and export "JOLIDA"-branded products to the United
States. In 2008, Shanghai customs seized the "JOLIDA"-branded products produced
by Jiulide, on the basis that these goods infringed the trademark rights of
The Shanghai Intermediate People's Court held that Jiulide did not
infringe Shanghai Shenda's trademark rights; since Jiulide's goods were
produced under an OEM relationship and intended for export only, Chinese
consumers would not be confused by Jiulide's goods in relation to Shenda's
In November 2009, the Shanghai Higher People's Court sustained the lower
The Higher People's court decision is published on the SPC website. However, the SPC has not taken a position on
whether the decision represents a proper interpretation of PRC Trademark Law.
The factual determination of whether an OEM relationship existed between
Jolida and Jiulide weighed heavily in the Higher People's Court's decision. Specifically, the court asked:
1) whether the Chinese OEM supplier
manufactured only in accordance with the foreign buyer's specifications; and
2) whether all of the goods produced under the
OEM arrangement were for export only, or whether some of the products would
also be sold by the OEM itself in the domestic market.
The Shanghai Higher People's Court's decision noted in the recounting of
the facts that the PRC trademark registration at issue was previously owned by
the defendant through its previous ownership of the plaintiff's business. The court's decision does not address the
prior relationship between the parties in the holding itself; only in the
recitation of the facts. Consequently,
it remains unclear whether the court would have reached the same conclusion had
the parties been unrelated.
Shanghai Shenda has the right to request a retrial to the SPC, but there
are no indications it has done so for the time being.
The Shenda decision is ground-breaking, in that there are no prior
reported cases absolving OEM suppliers of liability for otherwise infringing
goods that are intended for export. Still,
the decision is not surprising, since prominent Chinese judges from major cities
have consistently expressed similar views on the topic at conferences and in
non-binding judicial opinions.
The only other notable court decision addressing OEM liability over the
last several years was a lower-court decision issued in 2002 by the Shenzhen
Intermediate People's Court. The decision confirmed Nike's right to halt
production and export of "NIKE" branded footwear to a Spanish party who owned
the trademark for "NIKE" in Spain.
Recently, the SPC addressed OEM liability tangentially in a
judicial interpretation1 issued in
April 2009. Article 18 of the Opinion
encourages OEMs to "completely fulfil their obligation of necessary examination
and care" in the handling of trademark matters. However, it does not absolve
them of infringement liability, even if they have fulfilled their duty of care
in checking trademark ownership and authorization.
The same SPC opinion also provides a partial safe
harbour for trademark owners whose marks have been registered by pirates in
China. This is achieved in Article 7,
which grants courts the power to deny compensation to plaintiffs that have not
used their marks prior to filing suit.2
The question of OEM liability has been a subject of ongoing discussion
among local and national judges, the State Administration for Industry and
Commerce ("SAIC"), the General Administration of Customs ("GAC"), and other
authorities. Published accounts of these
debates from the past few years suggest that the SAIC and GAC have taken the
firm view that strict liability should be imposed on OEM suppliers, while on
the other hand certain judges in Beijing, Shanghai and Guangzhou favor granting
OEMs safe harbors to promote export trade.
No other major countries appear to carve out an exception to
infringement liability for OEM exporters.
The status quo internationally-as well as in China to date-has been to
hold OEM producers and export traders to a high duty of care in verifying whether
their handling of trademarks might infringe the rights of trademark owners in the country where
production occurs. OEM producers are
generally held strictly liable for infringement, as the law in China does not
require a finding that the producer had actual or deemed knowledge of the
While the creation of an exception to liability for OEM suppliers would
arguably generate fairer results in some cases, brand owners overwhelmingly
fear that counterfeiters would aggressively exploit the exception through the
forging of authorization documents and trademark certificates.
Any exception for OEM suppliers would appear to contradict provisions in
the PRC Trademark Law. Currently, the Law defines trademark infringement to
include the production of trademark representations and the unauthorized use of
trademarks on products and packaging; nowhere in the Law does it permit OEM
exporters to engage legally in these activities. Consequently, it is arguable that only
China's legislature (the National People's Congress or "NPC") has the legal
authority to create such a safe harbor.
Since China continues to be the biggest supplier of counterfeit goods to
any change in the status quo with respect to OEM liability would likely
exacerbate relations between China and its many trading partners. Consequently, it is likely that foreign
industry associations and governments will express their opposition to the
Shenda decision, and request the SPC to intervene to clarify that the holding
does not represent binding law in China.
Good News for Victims
of Trademark Piracy?
While most trademark owners are reacting with alarm to the Shenda
decision, the decision clearly offers a new and valuable tool for trademark
owners whose marks have been registered by pirates in the PRC that are seeking
to leverage their rights to obtain high compensation through purchased
assignments. Trademark owners would
therefore be well-advised to use copies of the Shenda decision in the course of
negotiations with trademark pirates. Nevertheless, this silver lining offered
by the Shenda holding may not be sufficient for persuading the trademark
community to support Shenda's codification in the future revision of the PRC
Trademark Law (expected some time in 2011), or in a new SPC judicial
Should you have any queries relating to the above, please contact Joseph
Simone at firstname.lastname@example.org.
 The Opinions on Several Issues Concerning the Overall IP Trial Service
Situation under the Current Economic Circumstances were issued on April 21,
 Article 7 states:
the purposes of] activating trademark resources and preventing the use of
registered trademarks to engage in trickery: If a registered trademark for
which protection is claimed has not been put to actual commercial use, an order
to cease infringement may be used as the chief method of protection when
determining civil liability and, when determining damages, consideration may be
given to the fact that the trademark was not actually used and, other than the
reasonable expenses incurred in safeguarding the rights, in general, damages
should not be determined on the basis of the profits made by the accused
infringer if there were no actual losses or other damage. If the registrant or transferee did not have
the intent to actually use a registered trademark, simply using it as a tool to
claim damages, the People's Court may opt not to award damages. If a registered trademark has not been used
for three years in succession as specified in the Trademark Law, the People's Court
may opt not to uphold the claim for damages."
 For an overview of the scope of counterfeiting in China, see the
latest "Special 301" submission of the International Anti-Counterfeiting
Coalition at www.iacc.org.