Recent Chinese trade mark decision creates greater certainty for manufacturers, but there are related issues to consider

In 2014 a number of amendments were made to Chinese trade mark laws designed to improve the efficiency and effectiveness of the Chinese trade mark system (see our update here). To recap, despite these changes, there has been ongoing uncertainty over whether brand owners who manufacture branded goods in China, but do not sell those products in China, could infringe a Chinese trade mark registration held by a third party in that country. This issue arose because of some inconsistency in judicial rulings as to whether simply manufacturing branded goods (but not selling those goods) in China constitutes trade mark ‘use’.

This issue was not specifically addressed in the 2014 amendments, to the disappointment of many manufacturers. However, a recent Supreme People’s Court (SPC) decision clarifies that applying a trade mark to goods in China for the purpose of export only, does not constitute trade mark ‘use’ in China because the trade mark does not function as a badge of origin to Chinese consumers. This is good news for foreign brand owners using China as a manufacturing base, as they no longer need to be concerned that this manufacturing use can infringe a local trade mark registration.

The decision may conversely open up a loop-hole for counterfeiters to exploit, and impact the maintenance of Chinese trade mark registrations held by brand owners who have registered their trade marks solely to protect China as a manufacturing base for their branded goods.

The case involved a Chinese company, Focker Security Products International Limited (Focker) which held a Chinese trade mark registration for PRETUL & device. A separate Mexican company, Truper SA (Truper) owned a registration for the PRETUL & device trade mark in Mexico. The defendant, Pujiang Yahuan Locks Co., Ltd (Pujiang) was an original equipment manufacturer (OEM) which exported goods out of China to Truper in Mexico. Importantly, the OEM goods were not otherwise distributed or sold in China.

Focker originally sued Pujiang for trade mark infringement, which was decided in favour of Focker in the Intermediate People’s Court and affirmed in the High People’s Court. Pujiang then appealed to the SPC, which is the highest court in the mainland area of the People's Republic of China.

The two trade marks in question in the infringement case clearly met the similarity requirements, and there was no great discussion over whether or not the goods in use were similar. The central issue remaining in the case was whether applying the PRETFUL trade mark to the exported OEM goods constituted trade mark ‘use’ in China. Without this ‘use’, there could be no infringement. The question was: does this manufacturing use constitute use of the PRETFUL trade mark as a badge of origin in the Chinese market?

In this case, it was decided that as Pujiang only made use of the trade mark on products which were OEM goods, which were exported from China without entering the Chinese market for retail or trade, the application of the PRETFUL trade mark could not serve as a badge of origin. This was because there was no risk of trade mark confusion, as Chinese consumers would never see the products. Consequently, there was no trade mark ‘use’ and no infringement.

The decision is one which provides some comfort to companies manufacturing in China. This is because where OEM goods are being exported only, and the trade marks and brands in use are registered in the export market, a trade mark infringement action by a Chinese trade mark owner is unlikely to succeed. This is irrespective of whether or not the Chinese trade mark registration is held by the true trade mark owner. This is good news for foreign brand owners using China as a manufacturing base.

However the decision creates a potential loop-hole for counterfeiters. This is because it is possible for counterfeit branded goods to be manufactured in, and exported from, China without any ramification. For example, if those goods are being exported to a jurisdiction where the counterfeiters have obtained a trade mark registration, it seems the counterfeit goods will now not be susceptible to being permanently seized by Chinese customs.

In addition, foreign brand owners could still have their goods seized by Chinese customs if the Chinese trade mark owner has a customs watch in place. The foreign brand owner would then need to establish that their use in China was for OEM purposes only, and that they have registered rights overseas. This has the potential to create substantial costs and delays which can severely impact any business. Since the SPC decision was issued, it has been the centre of much commentary within the Chinese trade mark space and many Chinese commentators consider that the ultimate effect of the decision will take some time to filter through to practical operations within Chinese customs.

Finally, the decision raises questions for foreign brand owners who have registered their trade marks in China to secure their manufacturing base. Registered trade mark owners must meet certain ‘use’ requirements within China in order to maintain a valid registration. For Chinese trade mark owners who only manufacture OEM goods for export out of China, where those goods do not enter the Chinese market for retail or trade, there is some concern that this will no longer be considered ‘use’ sufficient to maintain the registered trade mark rights in China. Previous judicial decisions in China on this specific question have held that when considering trade mark use for registration maintenance purposes, it is not necessary to only consider end consumers, but market operators (such as those involved in marketing and distribution of products) are also relevant.

Previous commentary suggested that where a trade mark was only used on OEM goods by a registered Chinese trade mark owner, to revoke it for non-use would be unfair and in contradiction of the country’s foreign trade policies. As a result, manufacturing use was sufficient for registration maintenance purposes. The latest SPC ruling may affect this position, although this is as yet an unknown factor.

Therefore, the decision has positive flow on effects for foreign brand owners manufacturing in China in that the manufacture alone will no longer be seen as creating a trade mark infringement risk. However, businesses exporting from China are urged to ensure that they hold valid registrations in export jurisdictions, to ensure that third-party counterfeiters are unable to exploit the recent SPC ruling to their advantage.

Some practical customs seizure risks still exist, and brand owners are still advised to register their trade mark rights in China to avoid these risks. They should however be alive to the need to maintain those rights by selling goods to an adequate extent in the local market, and watch for any confirmation of the previous position that registered trade mark rights in China can be maintained through manufacturing use.