OEM in China –Stahlwerk and the Good Faith principle

Before we get into the case specifics of Stahlwerk (January 2022), which is a Higher People’s Court of Zhejiang Province case, we just need to cover what OEM is and the clear importance to retailers given that not all retailers actually sell goods into the Chinese market , but most probably manufacture there for export into their home markets. OEM refers to “Original Equipment Manufacturer” which is an important part of the Chinese economy – a retailer can commission a manufacturer in China to make product and attach the retailers branding and these products do not enter the Chinese marketplace and are essentially just exported. So, its attractive for retailers as the product can often be made cheaper in China and then simply exported complete with branding and ready for sale to the consumer.

Now most retailers will have registered their trade marks in China (at least for core brands) and indeed it is important that they have done so, given that sometimes product can find its way onto the market, so a further prudent step is a watching service to see what third parties are filing on the Chinese register also. Retailers also need to have clear manufacturing agreements in place and be clear on IP ownership. Such agreements need also be executed in accordance with local Chinese practice e.g. using the stamp of the company and the like.

The Chinese courts attitude to OEM trade mark usage has fluctuated over time. In the beginning there seemed to be a large of inconsistency in the courts decision (see Pretul (2015)and DongFeng (2017)). Then the courts followed a course that as OEM products did not enter the Chinese market, there was no trade mark usage in China, and thus no infringement. The well-known Honda case (2019) turned this slightly on its head, as Honda argued the previous practice as a licence for counterfeiters and the courts followed a more nuanced practice looking at each case, but possibly introduced no hard and fast rules. The Stahlwerk case has built on that practice and is the most recent case law.

So the context for this case discussion is the clear importance of China as a manufacturing territory but also the need to police trade mark usage in China and any infringement. In the present case, the plaintiff was Weike who had registered the STAHLWERK trade mark in China, and notably had prior dealings with brand owner, and when the defendant, Laoshidun, started manufacturing STAHLWERK branded goods for export to Germany, Weike launched trade mark infringement proceedings.

In a decision of January 2022, the court ruled that Weike had exercised its trade mark rights illegitimately and had violated the principle of good faith – the key point being that the OEM goods did not infringe the trade mark right which Weike owned. The court knew that Weike was well aware of the German company and the brand name, even previously having been involved with designing and processing product in China. This context was crucial in the decision.

Good faith

The court therefore brough the principle of good faith more clearly into OEM infringement proceedings and used that as the sole basis for the judgement and finding. So, this shows that the court will look at the history of the parties and all facts and evidence surrounding a prior commercial relationship and indeed why any trade mark was filed and obtained.

The trial court highlighted the following points for consideration:

• Key to have a proper weighted balance between trade mark right holder and OEM;
• That it isn’t clear cut – one cannot hold that all OEM goods are exempted from trade mark infringement nor that all manufacturing does constitute infringement – so an holistic approach and taking all facts and evidence into account.

It is clear that the intent of trade mark law in China now is not to allow illegitimate enforcement of trade mark rights and that the principle of good faith is to be followed. Thus, the fact that Weike knew of the German company and then pre-emptively registered the identical trade mark for the identical goods and then used this as the basis for infringement, totally went against the good faith principle. This is clear and good news for retailers because it means that if you can show prior knowledge or history of the brand and communications, there cannot be good faith in many cases.

Higher People’s Court Decision

The Court pointed out that not all uses of trade marks in OEM would be deemed infringement. The Court went onto analyse the below in more detail:

1. Are rights being exercised in a legitimate way? Is there an abuse of rights? Has the trade mark registration been lawfully obtained?
2. Has the principle of good faith being followed? The decision in the Soyoda case (which found violation of this principle) highlighted this principle and how trade mark rights are exercised:

*Has any party committed illegitimate acts;

*Principle of fair competition has been diminished;

*Rights and interests of others have been damaged

It is clear that the court is not to regard all uses of trade marks in OEM as infringement and the good faith addition which should now be a mainstay of OEM cases, is to balance the interests out of both parties. An OEM infringement case will very much turn on the specific facts of that case, including prior relationships and knowledge, which was prevalent in Stahlwerk.

The meaning of good faith will allow parties to understand the OEM relationship more and when an action for trade mark infringement might succeed and so Stahlwerk does move matters on from the well-known Honda case. It is highly advisable for companies to register their brands in China, even if they do only manufacture for export purposes because it can avoid the issues of a third party launching proceedings and have to spend time and money on court proceedings through the Chinese courts. It is also better to register your own brand first, as opposed to trying to claim it back which can substantially cost companies.  The Chinese courts seem to be ‘getting there’ with a nuanced and increasingly well developed practice towards OEM trade mark usage.

 

---

This article was prepared by HGF Partner and Trade Mark Attorney Rebecca Field