The China IP Blog Series: Chinese OEM Trademark Infringement Liability in Light of the Global Covid-19 Crisis
The China IP Blog Series: Chinese OEM Trademark Infringement Liability in Light of the Global Covid-19 Crisis Heading link
Author: Dr. Paolo Beconcini
Chinese OEM Trademark Infringement Liability in Light of the Global Covid-19 Crisis
For decades, Western companies have relied on Chinese factories to manufacture their products at a low cost and export them back to other markets to be sold with a high margin of profit. This is normally referred to as OEM manufacturing, where OEM stands for Original Equipment Manufacturer. This was the main business model for China’s industrial and economic development, and it earned China the nickname of the “World’s Factory.” In recent years, things have changed. China is now a market with hundreds of millions of consumers buying foreign products online or traveling and shopping abroad, while cheap manufacturing is moving elsewhere to be replaced by High-Tech businesses.
In this evolving socio-economic landscape, OEM manufacturing has lost its prior standing in government policies. China is now projecting towards a further integration of its economy into the global capital system. Aside from the already renown “Belt and Road Initiative”, China has recently launched “Made in China 2025”, a new grand plan to showcase China’s own brands and industries to the world. This new grand plan signals China’s evolution into an economy producing higher value products and services and its intent to shed the long-held label as the “world’s factory.” The policy changes embodied in the “Made in China 2025” program are also reflected in recent legal developments concerning the relation between OEM manufacturing and trademark infringement. These same legal developments appear to favor Chinese trademark holders, as they seem to reduce the amount of freedom OEMs have to operate when manufacturing products for foreign companies.
More recently, however, the trade war and the Covid-19 pandemic seem to have pushed Western businesses and governments to consider relocating OEM manufacturing from China to other countries that present lower legal and tax risks. How would such a trend affect the way China views protection of intellectual property, especially in terms of OEM manufacturing? Will China cave to the United States’ pressure and return to the older polices and technological dependency, thus ushering a change, again, in the OEM trademark exemption?
Already in May 2020, President Xi Jinping began openly speaking of a Dual Circulation strategy as being key for the further development of the internal demand in view of achieving a moderately developed country in the next couple of decades. The strategy centers on reducing China’s dependency on the U.S. for key high-tech products by boosting homegrown technology. More recently, the 14th Five-Year Plan covering the years 2020-2025, announced at the end of October 2020 by the Central Committee of the Communist Party, seems to take stock of the changes spurred by the U.S. trade policies and the Covid-19 pandemic. It also stresses the need for China to reduce reliance on foreign technologies and cooperation, while focusing more on homegrown technologies and innovation.
How will these opposed trends affect OEM manufacturers in China facing claims of trademark infringement? Will China favor right holders, thus increasing risks and costs for both OEMs and their foreign partners with the risk of accelerating the demise of the China’s “world factory” system? Or will China try balancing interests in boosting homegrown technologies while further incentivizing foreign investment and its manufacturing capacity?
In this post, we will first explore the issue of OEM manufacturing and trademark infringement, highlighting the changes in China’s jurisprudence in the wake of new emerging economic and innovation polices. This post will also urge that we keep an eye on what the future may have in store given the great changes that are still ongoing in China’s innovation and development policies in light of current international relations and the Covid-19 pandemic.
I. OEM Manufacturing and Trademark Infringement
To start, China is a first-to-file country, where IP rights are owned by those who register them first. It is therefore not uncommon that a Chinese OEM may be manufacturing products upon commission of foreign clients which bear a trademark that has already been registered in China by another person or entity. In the most typical case, the commissioning party owns that very same trademark in the OEM product’s country of destination. The question is whether affixing such trademarks of others by the OEM on such products meant for export constitutes an act of infringement of the third party’s registered rights in China.
Neither the Trademark Law of China, nor its implementing regulations provide an answer to this question. Therefore, the task of addressing this issue has been left to the People’s Courts. For a long time, several courts adopted a more conservative stand on the issue. Most of the more conservative case law denied an exemption to trademark infringement for OEM manufacturing when affecting local businesses. Courts in Guangdong and Zhejiang held such a conservative stance in order to give protection to local rights holders that would benefited from this kind of protection against foreign competitors. Also, a lack of legal sophistication in determining the concept of “trademark use” may have been at the base of such a conservative stance. Other courts like the Beijing Higher Court and the Shanghai Intermediate Court hold a different opinion.
With two decisions issued, one in 2015 and again at the end of 2017, respectively, the Supreme People’s Court stepped into the debate siding with the less conservative position and recognizing an OEM exemption to trademark infringement. Economic and industrial development at the national level seemed to prioritize the need to protect China’s function as the “world’s factory” by also exempting Chinese OEMs from fulfilling foreign orders from the risk of trademark enforcement.
II. Key Supreme People’s Court Decisions
In 2015, the Supreme People’s Court issued a landmark ruling on this issue, known as the PRETUL case. The case concerned a customs seizure action regarding the export of a number of products manufactured by the OEM of a foreign company. In this case, the holder of the Chinese mark affixed on the products meant for export claimed that this was an act of unauthorized sale of its registered mark and was therefore infringing its exclusive right. The Court eventually disagreed with this opinion and carved out the conditions and limitations for an OEM to raise a successful defense against an infringement claim. In particular, the Court concluded that an OEM’s act of manufacturing does not constitute a trademark use in the sense of the Chinese Trademark Law and cannot therefore constitute infringement if the following conditions are present:
- the OEM was authorized to make the products by a foreign company;
- the authorization was clearly limited to the manufacturing for the sole purpose of exporting the products abroad; and
- the foreign party owns a valid right on the marks affixed on the commissioned products in the country of destination.
In DONG FENG, a more recent judgement of the Supreme People’s Court in December 2017, the Court further confirmed the PRETUL exception but added an additional probatory burden to the OEM. In the DONG FENG case, the plaintiff’s trademark “DONG FENG and Chinese Characters” had been recognized as well-known in China. At the same time, the products under the DONG FENG mark were manufactured upon commission of an Indonesian company who had registered an identical mark in Indonesia in 1987. In this case, the lower court held there was infringement stating that the OEM duty of care stretched to examine and find out the well-known status of the mark DONG FENG and to determine whether the Indonesian mark had been filed in bad faith. The Supreme People’s Court rejected this view and concluded that the reasonable duty of care should be deemed discharged when the OEM manufacturer has verified the trademark rights of the foreign purchaser, unless there is evidence proving the contrary. In practice, this duty is discharged once the OEM receives from the consignee a copy of the relevant trademark certificates in the countries of destination. Overall, DONG FENG restated the teaching of PRETUL by confirming that once it is proved that the products are only meant for export, this will not infringe the relevant trademark because there is no use of this trademark in China among Chinese consumers. Therefore, consumers will not be confused by the act of manufacturing that is confined to a factory where the resulting products are sealed and immediately shipped outside China.
III. A Change of Direction in 2019
On October 14, 2019, the Supreme People’s Court published a judgment issued on September 23, 2019 in the case Honda Motor Co., Ltd. v. Chongqing Hengsheng Xintai Trading Co., Ltd. et Chongqing Hengsheng Group Co., Ltd. (“HONDA”). In this judgment, the Supreme People’s Court reconsidered the OEM manufacturing exception, giving the whole matter a second thought and arriving at a conclusion that contrasts PRETUL and DONG FENG.
In this case, Honda Motors, the owner of the HONDA trademarks in class 12 in China, sued defendants Hengsheng Xintai and Hengsheng Group for accepting an OEM order from a Myanmar company, Meihua Company Limited (“Meihua”), to manufacture 220 sets of Motorcycle parts and export them to Myanmar bearing a mark similar to the HONDA marks in China. In particular, Meihua is the licensee of a registered Myanmar trademark HONDAKIT in class 12. However, the parts manufactured in China bore a HONDAKIT trademark where the word HONDA was highlighted and in a capitalized, red-colored font, unlike the simple, un-stylized HONDAKIT wordmark in Myanmar.
The Supreme People’s Court arrived at a number of important conclusions. First, that the relation between the Myanmar Meihua and the defendant Hengsheng Group was that of an OEM arrangement. Second, that a mark used and attached to a product in a factory in China through an OEM arrangement can constitute trademark use in the eyes of China Trademark Law. Third, the use of a mark in the OEM process can be scrutinized as to whether it is infringing. To determine whether such OEM use is infringing, the involved enforcer will have to determine whether it can cause confusion among the relevant public in China. Fourth, the relevant public standard to determine confusion in the trademark use analysis also includes operators of businesses related to the products. Products involved in an OEM arrangement can still be accessed by the relevant public of the PRC either online or when traveling abroad. Finally, that the proper test is the likelihood of confusion test, asserting that proof of actual confusion or actual access to products is not required.
In sum, PRETUL and DONG FENG were overruled. While in the prior jurisprudence of the Supreme People’s Court, OEM manufacturing was always presumed not to be a “use” of a trademark in the sense of trademark law. In HONDA, this presumption was flipped around. After HONDA, an OEM could face infringement liability even if it was licensed by the foreign client to manufacture for export purposes only, and the foreign client can prove s/he validly owns the same mark in the country of destination. As long as the Chinese rights holder can prove that the affixing of the marks in that specific case has the ability to create confusion among the relevant public in China, the OEM will have infringed Chinese Trademark Law.
For the holder of a Chinese trademark, this can be good news. Unlike PRETUL, the holder of a Chinese trademark will now have a chance to stop the OEM from exporting those products and pay compensation in spite of the latter fulfilling all the PRETUL criteria. However, in order to succeed, the right holder must still prove that the OEM’s act of affixing its trademark on the commissioned products can cause confusion among the relevant Chinese public for that type of product. But even though HONDA did not require proof of actual confusion, this is still a difficult task. In OEM cases, there are no direct end users of those products in China because the OEM products are meant to be directly shipped abroad. How could this use then cause confusion? In order to lighten the burden of proof for the Chinese rights holder, the Court stretched the scope of “relevant public.” In particular, the Court stated that Chinese consumers of the kind of products in question can theoretically see and buy them online or when they travel abroad. In both cases, it is abstractedly possible that the exported OEM production may find its way back to China. The Court stressed the fact that nowadays Chinese people have access to the internet, shop online, and travel abroad more than ever before. Furthermore, the Court in HONDA added that when determining the relevant public, we should not only look at the end-user of the product, but, in case of spare parts like in HONDA, to the intermediate users, i.e., those involved in the export logistics or any other individual involved in the business of these spare parts. This will therefore help the rights holder in China build a case of likelihood of confusion against an OEM.
At the heart of this inversion of jurisprudence is a reinterpretation of the role of OEM manufacturing in the current Chinese economy and development planning. In the past, when OEM manufacturing was the main driver for economic development, China needed to secure it from any risk of disruption. With PRETUL the Court had insulated OEM manufacturing from being challengeable under the Trademark Law. After HONDA, OEM manufacturing is now open to trademark infringement claims under the relevant provisions of the Trademark Law of the PRC. The Court has expressly recognized that in the new economic context, and in light of new government policies (i.e., “Made in China 2025”), it is no longer justifiable to put OEM manufacturing above trademark law or other interests, such as those of the consumers or other rights holders (including Chinese rights-holders) being factored into the infringement equation. The decision shows China’s pledge to protect registered IP rights, especially those of its own domestic companies. It is evident that the balance now is tipping more towards rewarding innovative, IP‑oriented businesses than the old traditional OEMs working for foreigners only.
The HONDA decision was therefore prompted by a change of economic and innovation policies. Additionally, and more importantly, the new centrality of IP protection in China’s plans to further develop domestic businesses, ignite homegrown innovation, and manufacture products in China that penetrate foreign markets was initially formulated by Xi Jinping and the Central Committee of the CPC in the Thought on Socialism with Chinese Characteristics in a New Era.
IV. Covid-19 and the Relocation of Supply Chains Away from China
Meanwhile, the trade and political tensions with the U.S., coupled with the shock and realignments caused by the Covid-19 pandemic, have triggered new economic and political dynamics within and outside of China. Will these affect the Supreme People’s Court’s jurisprudence on OEM manufacturing and IP protection? Will the balance tip further to the side of domestic IP rights holders against domestic OEM manufacturers for foreign clients? Or will China succumb to the pressure and revert to older policies favoring manufacturing for overseas markets?
It must be remarked that foreign companies have already been shifting manufacturing and R&D activities away from China at a moderate pace for several years. Some of the various reasons why foreign companies are looking for cheaper and simpler legal and administrative environments to do business include rising labor and real estate costs, persistent IP theft and infringement, administrative interference in key industrial sectors, and increasing competition by Chinese entities. The initial phase of the shift has mostly involved companies requiring a less skilled and cheaper workforce. A typical example are the apparel and shoe productions moving part or all of their supply chains from China to Vietnam and Bangladesh a decade ago. At the same time, China’s reaction to the 2008 economic crisis in the Western hemisphere triggered the first policies for strengthening the Chinese domestic market and reducing China’s dependency on OEM manufacturing for foreign investors.
The trade war between the US and China, and the Covid-19 pandemic, have only accelerated the global restructuring of supply chains to reduce dependency on China’s “world factory.” The need for Western enterprises to diversify their supply chain to better respond to sudden crises and the reduction of the dependency on China to obtain necessary supplies during times of turmoil in international relations are exigent and compelling reasons for U.S. and EU businesses to rethink their dependency on China as the “world’s factory.” Furthermore, Western governments have backed the idea of shifting supply chains from China. New policies, especially in the U.S., are pushing for a manufacturing exodus from China to more U.S.-friendly countries. That said, the magnitude and speed of these changes have now drastically increased.
How will this play out on China’s OEM trademark infringement exemption and the current HONDA-led case law? Will the more recent policies of Dual Circulation and the 14th Five-Year Plan have a direct effect on how courts treat OEM factories in China dealing with foreign manufacturers that violate Chinese trademark rights?
To start, we must examine court decisions issued after HONDA and determine whether the decisions upheld the latter or not. Remarkably, only one decision has been recorded in the last twelve months. This is less than the number of annual cases in the recent years before and after HONDA. How was this one case decided? Has the involved court upheld the guiding principles of HONDA?
In this case, a company called Beitechun made and exported wines bearing the mark “一品窖高丽村” (Yi Pin Jiao Gao Li Cun) to Korea based on an OEM contract signed with a Korean customer, who had registered the exact same mark “一品窖高丽村” in Korea . A certain Liu Zhidong was the owner of the registered mark “高丽村” (Gao Li Cun) in China, which is well-known in China. Based on the HONDA precedent, both the Court of first and second instance found Beitechun infringing the mark of Mr. Liu Zhidong. In particular, the appeals court found that Beitechun and Yanbian Biancheng Wine Co., Ltd. (licensee of Liu Zhidong) were all in the same province, and considering the well-known status of Liu Zhidong’s mark, Beituchun violated its duty of care and avoidance, noting that its duty of care was obviously higher than that of an ordinary liquor seller. Therefore, Beitecun’s manufacturing and exporting the involved products would cause confusion and constitute trademark infringement.
This decision seems to confirm, for now, that China’s focus on domestic-grown IP and businesses is still more important than protecting its traditional OEM industry.
V. Conclusions and A Look Forward
At present, I believe that the Supreme People’s Court has struck a fair balance of interests by offering more trademark protection than in the past, but only under certain clear conditions. However, we do not know if and for how long such jurisprudence will stay. It will be necessary to keep monitoring the situation and the case law in the near future to see whether the Supreme People’s Court will keep upholding HONDA or move away from it and, if so, in what direction: backward to the PRETUL system or forward by further enhancing the rights holders’ claims and ability to stop OEM manufacturing in a larger number of cases. Looking at the recent developments in China, including the formulation of the Dual Circulation economic strategy and the 14th Five-Year Plan, we may actually expect stability for the HONDA teachings in the short term with a possible lead towards a further increase in protection of IP rights holders claims against OEM manufacturers. Certainly, U.S. policies will also have an influence on that trend. If the U.S. further restricts market access to Chinese enterprises in key sectors, as it did with Huawei and TikTok, we can expect China to seek reprisals. In that case, Chinese OEMs could indeed be “sacrificed” for the furtherance of domestic consumption and homegrown innovation policies, and also as a way to hurt foreign businesses that rely on them. All we can do is keep a watchful eye and more will be reported as things develop.
 “Made in China 2025” Industrial Policies: Issues for Congress, fas, https://fas.org/sgp/crs/row/IF10964.pdf (last updated Aug. 11, 2020).
 Kevin Yao, What we know about China’s “Dual Circulation” economic strategy, Reuters (Sept. 15, 2020, 4:05 PM), https://www.reuters.com/article/china-economy-transformation-explainer/what-we-know-about-chinas-dual-circulation-economic-strategy-idUSKBN2600B5.
 China proposes development targets for 14th Five-Year Plan period, xinhuanet (Oct. 29, 2020), (http://www.xinhuanet.com/english/2020-10/29/c_139476451.htm) (reporting that The Plan has been adopted by the fifth plenary session of the 19th Central Committee of the Chinese Communist Party on October 29, 2020).
 美国耐克国际有限公司诉浙江省嘉兴市银兴制衣厂等商标权侵权纠纷案(2001) 深中法知产初字第55号 (NIKE INTERNATIONAL LTD v. Jiaxing City Yinxing Clothing Factory, etc., re trademark infringement, Guangzhou Intermediate People’s Court, Shen Zhong Fa Zhi Chan Chu Zi No. 55/2001). See also 慈溪市永胜轴承有限公司与宁波保税区瑞宝国际贸易有限公司商标侵权纠纷上诉案, (2005)浙民三终字第284号 (Appellant Cixi Yongsheng Bearing Co., Ltd. v. Appellee Ningbo Free trade Zone Ruibao International Trade Co. LTD., Zhejiang High Court, Zhe Min San Zhong Zi No. 284/2005). In all these older cases the courts made no distinction on whether the products were for export or for the local market. Unauthorized use was always an infringement even if trademarked products were not used in China.
 广东佛山市泓信贸易有限公司与广东省深圳市恩同实业有限公司、广州海关商标侵权纠纷上诉案（2006）粤高法行终字第22号 (Appellant Guangdong Fosahn Hongxin Trading Co., Ltd v. Appellees Guangdong Entong Industry Co., Ltd. and Guangzhou Customs, Guangdong High Court Yue Gao Fa Xing Zhong Zi No. 22/2006.).
 Art. 13 of the 北京市高级人民法院关于审理商标民事纠纷案件若干问题的解答  48号(Beijing Higher Court “Answers to Several Issues Concerning Trial on Trademark Civil Disputes, No. 48/2004 and上海申达音响电子有限公司与玖丽得电子(上海)有限公司侵犯商标专用权纠纷上诉案（2009）沪高民三（知）终字第65号(Appellant Shanghai Shenda Audio Electronics Co., Ltd. v. Appellee Jolida Electronics (Shanghai) Co., Ltd., Shanghai High Court, Hu Gao Min San (Zhi) Zhong Zi No. 65/2009). For both courts, an OEM affixing a mark on goods only meant for export does not equal “use” of the trademark as defined by the trademark law.
 浦江亚环锁业有限公司与莱斯防盗产品国际有限公司侵害商标权纠纷再审案,(2014)民提字第38号 (Retrial of trademark Infringement Dispute between Pujiang Ya-huan Lock Co., Ltd. and Rice Security Products International Co., LTD Supreme People’s Court (2014) Min Ti Zi No. 38/2014).
 江苏常佳金峰动力机械有限公司与上海柴油机股份有限公司侵犯商标权纠纷再审案, (2016)最高法民再339号 (Retrial of trademark infringement dispute between Jiangsu Changjia Jinfeng Power Machinery Co., Ltd. and Shanghai Diesel Engine Co., Ltd., Supreme People’s Court, Zui Gao Fa Min Zai No. 339/2006).
 本田技研工业株式会社诉重庆恒胜鑫泰贸易有限公司侵害商标权纠纷再审案, (2019) 最高法民再138号(Retrial of the trademark infringement dispute between Honda Motor Co., Ltd., Chongqing Hengsheng Xintai Trading Co., Ltd. and Chongqing Hengsheng Group Co., Ltd., Supreme People’s Court, Zui Gao Fa Min Zai No. 138/2019).
 Xi Jinging, The Governance of China 229-231 (Vol. III, 2020 Foreign Languages Press) (stresses that IP rights protection is requested bit only by foreign enterprises but even more by the Chinese ones. It also states China’s IP reform is to be based on a reciprocal treatment abroad for Chinese IP rights.).
 China still holds a substantial share of apparel and shoe manufacturing, especially for more technically complex knitting or the working of special fabrics. See also Companies Move Supply Chain Out of China, fashionatingworld(Mar. 24, 2020, 12:12), https://www.fashionatingworld.com/new1-2/companies-move-supply-chain-out-of-china
 Yao, supra note 3.
 Jacob M. Schlesinger, How the Coronavirus Will Reshape World Trade, wsj (June 19, 2020, 2:56 PM),
 沈阳市北特春酒厂、刘志东侵害商标权纠纷二审民事判决书(2020)辽02民终538/Appellant Shenyang Beitechun Wine Factory (the defendant in the 1st instance) v. Appellee Liu Zhidong (the plaintiff in the 1st instance) (202) Liao 02 Min Zhong No. 538.