SPC overturns the “Dong Feng” case and revisits the factors which constitute infringement in OEM arrangement

On 8 April 2018, the Supreme People’s Court (SPC) handed down the re-trial judgement of the DONG FENG case (Shanghai Diesel Engine Co. Ltd v Jiangsu Changjia Jinfeng Dynamic Machinery Co., Ltd), overturning the Jiangsu High Court’s decision to find that the OEM manufacturer did not commit trademark infringement.

Prior to the DONG FENG case, the SPC has in  the landmark decision on OEM infringement   “Focker Security Products international Limited v Pujiang Ya Huan Locks Co. Ltd – 2015” (commonly known as the “PRETUL” case) ruled that OEM use of a trademark on goods made solely for export is not an act of infringement.

According to PRETUL, there should be no infringement in situations where:

• the OEM was authorised to make the products by a foreign trademark owner with valid, prior trademark rights in the country of destination;
• the OEM had exercised a reasonable duty of care in verifying the IP rights of the foreign purchaser;
• the products made in China are intended solely for export and are not sold in China.

In the DONG FENG case, the plaintiff’s trademark “DONG FENG and Chinese Characters” was recognized well-known in China. The goods exported by the defendant, an OEM manufacturer, to Indonesia bore the “DONG FENG” mark, which were manufactured under the instructions of the Indonesian consignor who registered an identical mark in Indonesia in 1987.

In the second instance decision, decided merely 3 weeks after the PRETUL case, the Jiangsu High Court found for trademark infringement, ruling that the defendant failed to exercise reasonable care in verifying the consignor’s trademark rights, as it should be aware of the well-known status of the “DONG FENG” mark in China and the bad faith of the Indonesian trademark owner.  This ruling has effectively stretched the duty of care of OEM manufacturers: they have to familiarize themselves with the well-known trademarks in China and to enquire into whether the consignor’s trademark was registered in bad faith, in addition to verifying lawful trademark rights of the consignor.

The defendant therefore applied for re-trial by the SPC, which overturned the lower court’s judgment and held that:-

• The use of trademark in a way not serving as a badge of origin would not cause confusion and would not result in trademark infringement.  In the present case, all products were exported to Indonesia and such would not cause confusion to consumers in the PRC market;
• 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;
• The OEM arrangement in the present case does not cause any actual damage to the trademark owner in the PRC.

The SPC’s decision is in line with its ruling in the PRETUL case, affirming that OEM generally does not constitute infringement. It has further clarified that verifying the registration certificates of the mark in the exporting country is sufficient to discharge an OEM manufacturer’s duty of care.

While history shows that Chinese courts may simply be taking a pragmatic, fact-specific approach to try to achieve substantial justice in each case, brand owners are encouraged to secure trademark registrations in both the exporting country and in the PRC to achieve the most ideal scenario.