SPC: The PRETUL case- OEM export, does not constitute trademark infringement

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(Author: Paul RANJARD; Source: WAN HUI DA)

On November 26, 2015, the China’s Supreme People’s Court (“SPC”) rendered a civil judgment (2014) Civil Retrial No. 38, which puts an end to the four-year legal battle of the much spotlighted PRETUL case (an OEM manufacturer exporting products sued for trademark infringement).

The SPC affirms in its judgment that the OEM manufacturer’s act of using the trademark in issue did not constitute trademark infringement because it did not qualify as trade mark use in the sense of article 48 of the “Trademark Law” (2013 version). The SPC overruled the trademark infringement findings of the first instance (Intermediate Court of Ningbo) and second instance (High court of Zhejiang).

 

Facts

On January 17, 2002 a natural person, XU Haorong, applied to register a combination trademark (PRETUL & device) No. 3071808 in class 6 (Cited Mark), covering the goods “fittings of metal for furniture, padlocks, locks of metal, other than electric”. The Cited Mark was registered on May 21, 2003 and was assigned on March 27, 2010, to Focker Security Products International Limited (hereinafter “FOCKER”), a company incorporated in Hong Kong.

Cited Trademark

 

TRUPER HERRAMIENTAS, S.A.DE C.V. (hereinafter “TRUPER”), is a Mexican manufacturer and dealer of hardware tools. TRUPER is the holder of the registered trademarks “PRETUL” and “PRETUL & oval device” in Mexico and in many other countries in class 6 and 8.

 

TRUPER’s Trademarks[1]

 

PUJIANG YAHUAN Locks Co., Ltd. (hereinafter “YAHUAN”) is a manufacturer of copper and iron padlocks in Zhejiang Province, China.

In 2010, TRUPER signed OEM contracts with YAHUAN to manufacture padlocks bearing the “PRETUL” marks. The products (padlocks, keys and the product specifications) bore the “PRETUL” trademark, while the packaging bore the “PRETUL & oval” device trademark.

In December 2010 and January 2011, FOCKER applied to the Ningbo Customs for the interception of two batches of padlocks exported by YAHUAN, destined for Mexico. The shipment was detained on January 13, 2011.

On January 30, 2011, FOCKER brought a lawsuit against YAHUAN before the Ningbo Intermediate Court on the ground of trademark infringement.

On March 24, 2011, TRUPER issued a statement declaring that as the legitimate holder of the registered trademark PRETUL in Mexico, it had authorised YAHUAN to manufacture, on the OEM basis, the padlocks bearing the PRETUL trademark, all of which were to be exported to Mexico.

Before the Court, YAHUAN claimed that since the accused goods were solely for exportation to Mexico without domestic distribution in China, the trademark was not used in the sense of the Trademark Law, and no confusion or misunderstanding could be caused among Chinese consumers, and therefore no harm done to the trademark right of FOCKER.

On July 23, 2012, the Court of Ningbo rendered a judgement in favour of the plaintiff. The Court dismissed the argument of YAHUAN concerning the export, citing Article 3 of the 2002 version “Implementing Regulations of the Trademark Law” [2] and affirming that YAHUAN’s using of the PRETUL trademark and “PRETUL & oval” device trademark clearly constituted trademark use in the sense of the Trademark Law. However, a distinction was made between the word mark “PRETUL & oval device” used on the packagings and the word mark PRETUL, used on the goods. Only the first was considered infringing.

The Court ordered YAHUAN to immediately stop using the infringing PRETUL & oval device trademark on the packagings and pay FOCKER a sum of CNY 50,000.

Both FOCKER and YAHUAN appealed to the Zhejiang High Court.

The Court of Appeal rendered its judgment on February 19, 2013.

The Court upheld the decision of the first instance Court but found that both acts (use of PRETUL and use of PRETUL & oval device trademark) constitute trademark infringement.

The Court ordered YAHUAN to immediately stop the trademark infringement acts and pay FOCKER CNY 80,000.

YAHUAN applied for retrial to the Supreme People’s Court.

The SPC started with the interpretation of what is “trade mark use” according to Article 48 of the 2013 version of the Trademark Law. (Note : Article 48 is the same as Article 3 of the 2002 version of the Implementing Regulations mentioned above, which was “upgraded”, however it includes the addition in fine of the words “to distinguish the origin of the commodities”). The Court explained that the added words aimed to further clarify the concept of use of trademarks rather than fundamentally change the interpretation of the said concept.  According to the SPC, any use of a trademark that does not fulfil the function of “distinguishing the origin of commodities” is not a trademark use in the sense of Article 48 of the Law. The SPC then affirms that Article 52 of the Trademark Law (which provides for the conditions of trademark infringement) does not apply to such cases where the use does not fulfil the function of distinction.

However, the addition of the words “to distinguish etc.,…” was introduced in the 2013 of the law, while the Pretul case was subject to the 2001 version of the Law and its Implementing Regulations of 2002 (which did not contain those words). Nevertheless, the Court declared that the 2013 version of the Trademark Law should serve as an important reference for the interpretation of Article 3 of the 2002 Implementing Regulations”.

The SPC then analysed YAHUAN’s use act of the PRETUL marks. The Court held that “since the padlocks manufactured by YAHUAN are not for distribution in the Chinese market, the PRETUL marks do not fulfil the trademark function of ‘distinguishing the origin of the commodities’ in China. Therefore, such marks are unlikely to cause confusion and misidentification among the relevant public in China between the products to which they are affixed and the source of the goods manufactured by FOCKER ”.

The SPC finally dwelled its reasoning on the function of source indicator of a trademark. It held that “The primary function of a trademark which the Trademark Law intends to protect, is to be a source indicator. When determining whether the act of using an identical trademark on identical goods, or a similar trademark on identical goods or an identical or similar trademarks on similar goods, is likely to cause confusion, the Court shall base its finding on the fulfilment or possible fulfilment of the source indicator function of the trademark. The Court should base its finding on whether trademark infringement is constituted on whether the source identifying function of the trademark is fulfilled or undermined. There is no practical significance in judging that there is a likelihood of confusion where the trademark involved fails to fulfil its identifying function and does not constitute trademark use in the sense of the Trademark Law.”

Based on the aforementioned reasoning, the SPC ruled that the Courts of both instances erred in the application of the law because they based their assessment of infringement on the sole fact that an identical or similar trademark was used without authorisation, and ignored the prerequisite that the litigious act must constitute trademark use in the sense of the Trademark Law.

The SPC finally ruled in favour of YAHUAN and revoked the judgment made by the Court of both instances.

 

Comments

This case is a typical example of glass half full / half empty.

The half full gives satisfaction to any good faith purchaser of goods manufactured in China by an OEM factory. If such purchaser has been unable, for any reason, to register the trademark in China, it may be protected against any attack from the owner of the trademark in China.

On the other hand, one has to admit that the glass is also half empty, for the very same reason. If the simple fact that goods are exported eliminates the possibility of infringement, an entire set of legislation (the Customs capacity to act against trademark violations on exported goods) becomes pointless: no more control at the border. The result is that trademark owners will be unable to prevent containers of fake goods from being exported.

The reasoning of the Court affirming that the OEM factory did not use the trademark because of the destination of the products … is difficult to accept.  Questions come immediately to mind:  What if half of the production is sold in China and the other half is exported? Does that mean that the trademark is only used on half of the production and not on the other half? And, what if the production is exported but is eventually re-imported to China? Does that mean that the trademark was initially not used, but became used after the re-importation?

The consequences of the “half empty” side of this decision are so serious that it seems necessary to make an in-depth analysis of the reasoning and to examine if it is conform to the wording and the spirit of the law.

 

About the concept of trademark, and trademark use, in general.

All legal systems that protect trademarks follow the same principles, but they do not necessarily proceed in the same way. For example, the TRIPS Agreement first defines what is a trademark (a sign capable of distinguishing etc.,), and then, defines what are the rights conferred to the trademark owner (prevent all third parties not having his consent from using in the course of trade, etc.,). The same structure is found in the European system: definition of a trademark and definition of the rights conferred.

Both TRIPS and the European systems provide limits to the right conferred by the trademark, which can be referred to under the term “fair use”. Furthermore, in both systems, the unauthorised use of a trademark can only be deemed as an act of infringement is such use is made “in the course of trade” and “in order to distinguish the origin of the goods”. Therefore, if a trademark is used for another purpose than to distinguish the origin of the goods, the issue is to be treated according to another set of laws (see the 18th and 19thwhereas of the latest European Trademark Directive of December 16, 2015).

The Chinese law reaches the same objective, but with a different structure. First, a definition of what is a trademark, then a definition of what is the use of a trademark, and finally a definition of what constitutes an act of infringement (to “use”… to sell… etc.,).

The Chinese law does not contain such “rights conferred” and “fair use” articles but an article 48 (definition of use), which has been completed in the latest revision of 2014 by the words “(use)… to distinguish the origin of the goods”.

What is the impact of these few added words?

Clearly, the intention was to refer to cases where a trademark is used for another purpose than to distinguish the origin of the goods.

Article 58 of the Trademark law of China is an example: a trademark of another person is used as a trade name or an enterprise name (therefore, the use is to identify a person, not to distinguish the origin of goods) the case is to be handled according to the Anti-Unfair Competition Law of China.

Another example of such other purpose can be found in the latest European Trademark Directive of December 16, 2015 (article 12) which refers to certain circumstances where using a trademark is necessary to indicate the destination of another product of service, in particular when such product is an accessory or a spare part.

Which leads to the conclusion: the real issue is not whether a trademark is used or not used (actually, if it was not used, there would be no case at all). The issue is to determine for what purpose the trademark is used: to distinguish the origin of the goods or for another purpose (trade name, fair use).

 

About the use of the trademark in the Pretul case

Based in the above, it is possible to look at the Pretul case in a completely different way than what the SPC did.

The question was: did the OEM factory use the trademark for another purpose than to distinguish the origin of the products ?

The answer is obviously negative. Even if the OEM factory simply followed the instruction given by the purchaser, the purpose of the use was to distinguish the origin of the products.

The trademark was used, and it was used in China.

The only reason why the SPC reached the opposite conclusion is based on the geographical location of the consumers to whom the products were to be sold. According to the Court’s reasoning, the determination of whether a trademark is used or not used depends on where the products are sold, and not how or why the trademark is used. In other words, the issue is decided on the basis of geographical criteria.

It seems impossible to find anywhere in the law any ground that supports such a reasoning based on the geographical location of the consumers.

 

About the trademark user and the related liability

It is established that, apart from the exceptions defined as “fair use”, the use of a trademark without the consent of its owner is an act of infringement. Yet, OEM export is a specific situation that needs to be addressed. As mentioned above, the OEM factory is simply executing instructions. The real “user” is, in fact, the purchaser.

If a registered trademark is infringed in the process, how should the case be handled?

It seems possible to draw a solution from article 60 of the law about the so called ‘innocent seller” (the seller who does not know that the goods infringe a trademark… shall be ordered to stop selling the goods”) and from article 64 of the law (the seller shall not bear the liability to make compensation if he does not know…”).

If these two provisions were applied to the OEM exporter, the solution would be simple: the goods are still considered infringing, they must be detained by the Custom and treated accordingly, but the liability of the OEM factory depends on its knowledge of the infringement.

 

About use of a trademark and revocation for non-use

What if a trademark registrant, in China, exports all its production to countries, and does not sell anything in China. Is there a risk of losing the trademark if someone claims, based on the SPC reasoning, that the mark has not been “used”.

In the past, OEM use has been considered as “use” in the sense of the Trademark law, (Beijing High Curt (2010) in Scalextric No. 731233). The Court stated that revoking a trademark for non-use where it is used through OEM would be unfair and in contradiction with China’s policy of developing foreign trade.

This solution is the same as what it provided in article 16 of the recent European Directive ” Are considered as use (in the sense of resisting a revocation for non-use) b) affixing the trademark on the goods or their packaging for the sole purpose of exportation”.

The Pretul case could lead to the opposite solution….

 

About the TRIPS Agreement

It remains to be seen if the SPC’s reasoning is compatible with TRIPS.

Indeed, Article 51 provides that member states shall adopt procedures that allow a right holder to require the customs authorities to detain goods suspected of violating a trademark right registered in the country of importation.  This article goes on providing that “Members may also provide for corresponding procedures concerning the suspension by the customs authorities of the release of infringing goods destined for exportation from their territories”.

The concept of “infringing goods destined for exportation” implies, necessarily, that the act of infringement is committed regardless of the geographical location of the consumers.

This raises the question of the compatibility of the SPC’s reasoning with TRIPS.

Indeed, China does provide for such corresponding procedures in detailed regulations governing the powers of the General Administration of Customs.

This Pretul case raises lots of questions, and it will be interesting to know what are the real intentions of the SPC. Is it a purely circumstantial decision destined to remain isolated? Or is it a strategic choice aiming to boost Chinese exports by all means, even at the cost of trademark protection?