It has been over a year since the Supreme People's Court (SPC) laid down the judgment in the "PRETUL" case (Focker Security Products International Limited v. Pujiang Ya Huan Locks Co. Ltd -2015), ruling that original equipment manufacturing (OEM) use of a trademark on goods made solely for export is not an act of infringement. Details and implications of the PRETUL case were first discussed here. PRETUL re-opened the debate over whether OEM use is sufficient to defend a non-use cancellation case; if OEM use is not trademark use in the context of infringement, surely it cannot defend against cancellation for non-use?
Genuine trademark owners and OEM manufacturers will now be relieved to hear that in the "SODA" case (Distinct Seasons Sd. Bhd. v. Trademark Review and Adjudication Board - 2016 & 2017), both the Beijing Intellectual Property Court (Beijing IP Court) and the Beijing Higher People's Court (Beijing High Court), have indicated that OEM use constitutes use in the context of non-use cancellation.
Distinct Seasons Sd. Bhd. (Distinct Seasons) obtained a trademark registration for the mark "SODA" in class 25. Distinct Seasons licensed manufacturers to produce clothes bearing the mark "SODA" non-exclusively in China. The products were then exported to Southeast Asia for sale via an import-export agency. In October 2013, a Korean company, Soda Co., Ltd. filed an application to cancel Distinct Seasons' registration based on non-use. Both the Chinese Trademark Office (TMO) and the Trademark Review and Adjudication Board (TRAB) ruled against Distinct Seasons. The disputes lasted for more than 3 years and went on to a second appeal with the Beijing High Court.
An informal inquiry was held at the Beijing High Court which heard arguments on the evidence and considered the SPC decision as well as other earlier cases. China is a civil law system and, unlike the common law system, precedents are not strictly binding on other Chinese courts, but they will be of reference value to judges before they make a ruling. As part of the recent judicial reforms, China's IP Courts are implementing a Precedents Guiding System which will be different from the precedent case law system adopted by western countries, but should help to set judicial standards and improve consistency of decisions.
For a mark to function as a trademark, products bearing the trademark must be circulated in the market so that consumers recognise it as a badge of origin. However, in the context of non-use cancellation proceedings, the Beijing High Court sided with the Beijing IP Court in that it must look into the legislative purpose of non-use cancellation which is to encourage use of trademark resources and to reduce the number of idle trademarks. A trademark owner should exercise its duty to continuously use its registered marks. In SODA, although the goods had not yet been circulated in the China market and were only exported for sale, the Beijing High Court acknowledged that Distinct Seasons had been actively using the trademark and had not left its trademark registration idle. The Beijing High Court went on to support its decision from a policy perspective, holding that in the interests of protecting foreign trade and promoting the development of OEM activities, OEM use should be regarded as trademark use in the context of non-use cancellation.
If the parties do not file for re-trial, the decision may be an important influence on other similar non-use cancellation cases. We believe that the Beijing IP Court and the Beijing High Court is likely to recognise that OEM use constitutes trademark use in non-use cancellation cases as long as here is evidence documenting the OEM activities.
While the SODA case is good news, trademark owners and manufacturers should not be too relaxed. In China, the applicant in a cancellation action is only required to establish a prima facie case that there is no use by the registered proprietor, usually by way of preliminary internet searches. The burden of proof then rests on the registered proprietor to adduce evidence to prove valid use. It is advisable for trademark owners to periodically review their documentation with OEM manufacturers. Even though the level of awareness of OEM issues is higher now, it is still a recurring problem for trademark owners who do not have appropriate agreements, or even proper records of their business dealings, with the OEM manufacturers. Even where documents are available, the agreements and/or the commercial documents may fail to mention the trademarks and goods concerned.
Trademark owners should not only have internal policies to maintain comprehensive records documenting their trademark use, they are advised to require other parties dealing with their trademarks, such as licensees, export agencies etc., to maintain equally full records so that crucial evidence can be quickly located at critical times. Very often, trademark owners do not possess, or are not in control of, documents prepared by OEM manufacturers.
In SODA, the following evidence was adduced as proof of use: -
- License agreements between Distinct Seasons and two manufacturers in China;
- Purchase orders showing Distinct Seasons purchasing from the two manufacturers, their relevant delivery notes and photos of the products;
- VAT invoices issued by a manufacturer to the import-export agency concerning the products to be exported to Malaysia;
- Customs declaration forms showing export of the products to Malaysia.
The VAT invoices and customs declaration forms were provided by the manufacturers. The manufacturers were further required to assist by obtaining separate certifications from the respective authorities to verify the authenticity of the evidence. If there had not been such a clear document trail, it may not have been possible for the Chinese courts to find in favour of the trademark holder.
Whilst it is unsatisfactory for such a high administrative and evidentiary burden to be placed on trademark holders to prevent a registration from being cancelled, especially when it is disproportional to the effort required from the applicant for cancellation, we expect that it will continue to be the practice for the trademark authorities and courts to require a higher threshold of evidence. The courts tend to adopt a more pragmatic and realistic approach to evidence but the trademark authorities seem to be more rigid. Businesses, particularly small and medium sized businesses, may find it difficult to fulfil the evidentiary requirements due to limited resources. However, if trademark owners start maintaining evidence of use and documenting their agreements with OEM manufacturers and other counter-parties, there is a better chance of protecting their registrations.