Brand-Labeled OEM Ruled as
Constituting Use of a Trademark in Chinese Landmark Decision

　　　Original equipment manufacture (“OEM”) continues to be one of the greatest contributors to China’s GDP growth since the advent of China’s economic reforms “reform and opening-up” in the late 1970s. Under the traditional OEM business model, a Chinese domestic manufacturer contracts with a foreign client to customize a line of ordered products for the purpose of selling those outside of China. In addition to receiving orders from foreign enterprises for the manufacture of specific components, OEMs often also engage in what is generally known as “overseas related brand labeling OEM”, in which an OEM labels specific brand names on products manufactured according to a given foreign enterprise’s (“consignor’s”) instructions, whereupon the products are exported. Although it is understood that all products made under an OEM contract are intended to be shipped overseas as opposed to being sold domestically, issues can arise when a brand name labeled by the OEM consignee is identical or similar to a registered Chinese trademark, entailing that the products manufactured are also identical or similar to the goods designated by the Chinese trademark registration.

　　　Chinese courts had previously been divided as to whether the “overseas related brand labeling OEM” model constituted trademark infringement in instances in which a brand being labeled by this kind of OEM was similar to or the same as a registered trademark in China. According to a number of empirical, but as of yet uncorroborated studies, in more than two-thirds of similar cases, the courts deciding cases involving this kind of OEM ruled against the trademark holders, whereas in roughly one-third of cases, the courts ruled in favor of the trademark holders. The balance of rulings unfavorable to trademark holders in China was particularly stark in the main industrial provinces such as Guangdong. In Pretul (2015)¹ and Dongfeng (2017)² the Supreme People’s Court held that “brand labeling and selling overseas” does not fall within the definition of trademark use under the Trademark Law because the OEM products in question are intended for export only.

　　　The Supreme People’s Court departed from opinions rendered by lower courts in the Hondakit (2019) decision³, instead ruling on September 23, 2019, that “overseas related brand labeling OEM” constituted one type of trademark use, entailing that the defendant’s use of a brand name infringed upon a registered Chinese trademark. The origin of the case is that Honda Motor Co. Ltd. (“Honda”) owns a series of Chinese registered marks “HONDAKIT” (Reg. Nos. 314940, 1198975, and 503699) and that Hengsheng Xintai Trade Co. Ltd. (“Hengsheng”) was contracted with a Burmese third party to manufacture motorbike components bearing the texts “HONDA” and “KIT.” Notably, the text “HONDA” was conspicuously larger than the text “KIT” part. The letter H in “Honda” and its associated feathered-wing logo was colored red. Under the traditional OEM model, Hengsheng’s products were kept covertly packaged during either manufacture or land shipment until they had been delivered across the border into Myanmar. In response, Honda sued Hengsheng for trademark infringement. The court of first instance ruled in favor of the plaintiff, Honda, while the appellate court ruled in favor of the defendant. As a last resort, Honda petitioned for its case to be reheard by the Supreme People’s Court.

　　　The Supreme People’s Court centered its reasoning on the fundamental purpose of a trademark, which is to identify the origin of a specific product. The Supreme People’s Court held that any “chance” of an indication of a product’s origin at the time of manufacture could be construed as trademark use under the meaning of the Trademark Law.

　　　Secondly, the span of the “relevant public” under the Trademark Law includes not only consumers of the accused products, but should also include business owners who are closely associated with the distribution and sales of the accused products.

　　　The Supreme People’s Court further elaborated that, due to the development of e-commerce and the Internet, the alleged infringing products exported abroad may possibly be imported back into China, thereby becoming exposed to domestic consumers. Meanwhile, as the number of Chinese citizens traveling overseas continues to increase, so does the opportunity for them to access to brand labeling OEM products. Therefore, the likelihood of confusion remains among the domestic relevant public. 
　　　

　　　Trademark infringement was a strict liability tort by requiring no actual damage as a constituent element. By rendering the text “HONDA” much larger than the text “KIT,” the defendant presented the mark in a way which was obviously malicious and constituted by passing off on Honda’s goodwill. The accused “HONDAKIT” mark was therefore deemed similar to Honda’s three registered marks. Since bearing “HONDAKIT” on motorcycle-related parts was a use of a similar mark on the same or similar products, the purpose of Honda’s three registered trademarks to identify the origin of its genuine products was hence compromised. The defendant Hengsheng infringed Honda’s trademark rights. The Supreme People’s Court dismissed the appellate judgment and instead affirmed the trial judgement.

　　　A clear signal of this case was that OEM was no longer a default exception from trademark infringement in China. As of this ruling, whether an act of brand labeling OEM violates a trademark right shall depend on whether the use of a mark on OEM products causes likelihood of confusion against a registered trademark.

　　　The Honda case is undeniably a landmark case which unified the previously divergent opinions of courts of different levels. This recent ruling by the Supreme People’s Court could be a positive development for holders of Chinese registered trademarks. Their enforcement of rights against brand labeling OEMs shall not be a negative.