PRC Trademark Enforcement: Shanghai Appeal Court Ruling Sparks Controversy over OEM Infringement Liability - Issue 4, June 2010

PRC Trademark Enforcement: Shanghai Appeal Court Ruling Sparks Controversy over OEM Infringement Liability - Issue 4, June 2010

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 ramifications.

Case Background

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 Shanghai Shenda.

The Decision

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 goods.

In November 2009, the Shanghai Higher People's Court sustained the lower court's decision.

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.

Context

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

Continuing Debate

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 violation.

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 foreign countries,3 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 interpretation.

 

Should you have any queries relating to the above, please contact Joseph Simone at joseph.simone@bakermckenzie.com.

 


[1] The Opinions on Several Issues Concerning the Overall IP Trial Service Situation under the Current Economic Circumstances were issued on April 21, 2009.

[2] Article 7 states:

                "[For 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."

[3] 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.