China TM Risk Shifting For Original Equipment Manufacturers

What do “Squid Game,” ChatGPT and original equipment manufacturers have in common when it comes to China’s trademark system? They are all plagued by China’s bad faith squatters. The difference is that in the OEM context, we may feel the main impact during the Christmas holiday gift-giving season.

China’s trademark system has encountered a concerning rise in bad faith squatters, creating obstacles for creators of popular shows like “Squid Game,” innovative technologies like ChatGPT and OEMs.

How fast can a brand get copied in China? Practitioners used to say six months but that was five or 10 years ago. Take a look at the “Squid Game” example. The release of “Squid Game” on Netflix witnessed a rapid influx of trademark applications in China.

In less than a month, over 60 trademark applications were filed, including 23 for “Squid Game” in English and 39 for the Chinese term. These applications, submitted by China- based companies and individuals, covered a wide range of goods and services, such as clothing, entertainment services, and even restaurant and hotel services.

Shockingly, the first imitation mark was filed a mere 10 days after the series’ release, highlighting the accelerated pace at which bad faith actors are exploiting the first-to-file system — which is common not just in China, but essentially in most countries outside the U.S.

Despite the global disruptions caused by COVID-19, trademark infringement remains unaffected, with imitation marks emerging more swiftly than ever. These bad faith actors resemble the participants in “Squid Game,” driven by the desire for quick profits and willing to risk everything.

ChatGPT, this year’s tech sensation, has also fallen victim to bad faith filers in China. Although ChatGPT has not yet been formally introduced in China, numerous third parties have already filed for the “ChatGPT” marks, attempting to claim rights over the brand for various goods and services ranging from exercise machines to perfume.

This exemplifies the widespread nature of bad faith squatters’ activities, affecting not only the technology sector but also posing challenges for businesses across multiple industries.

Why Bad Faith Trademark Filings Are a Concern

China’s first-to-file system, common among Asian countries, poses significant concerns regarding bad faith trademark filings. While this system provides clear-cut rules for

This situation creates opportunities for opportunistic bad-faith players in China to exploit the system and hold legitimate brand owners hostage. Once a brand falls into the hands of a bad faith squatter, it can have severe consequences, ranging from inconvenience and inability to register the brand in China to potential business disruptions and legal complications.

The consequences of bad faith trademark filings are varied and can greatly affect businesses. They may include the following:

Inability to Conduct Business

Trademark protection and restrictions on licensing can hinder a brand owner’s ability to operate in China. This can result in lost market opportunities and revenue.

Risk of Infringement Accusations

The Chinese courts may recognize the legitimate brand owner as an infringer to their own brand, leading to civil damages, the cost of rebranding, and even public apologies. This can significantly damage a brand’s reputation and public trust.

Supply Chain Disruption

One of the most far-reaching consequences is the disruption of the supply chain.

If products are seized and detained at the Chinese border because the third party not only registers one’s brand but also records the brand with the Chinese customs, it can not only affect business executives’ bonuses but also affect the ability to fulfill customer demands during critical shopping periods like Black Friday and Christmas.

This disruption can result in financial losses, reputational damage, and dissatisfaction among consumers.

The Focus on Bad Faith Trademark Squatters in OEM Situations

Let’s consider a hypothetical example: A U.S. company — Cooper Inc. — is the owner of a successful pet toy brand called Chester; it has long engaged a Chinese company — Wang — in Shenzhen to manufacture and export the pet toys back to the U.S.

However, Cooper Inc. does not own any trademarks in China. In fact, a third party owns the trademark “Chester” covering the pet toy category.

To make things worse, let’s assume a third party, Piper, used to work for Wang and know exactly how profitable the Chester-branded toys are; or Piper was the company that first received and processed Cooper Inc.’s order to make sample pet toys; or Piper simply watches “Shark Tank” one day and loves the Cooper CEO’s pitch and decides to register the brand in China.

Five questions emerge:

1. Can Piper successfully bring a trademark infringement claim against Cooper Inc. given

Piper is the owner of the “Chester” trademark in China and Cooper Inc. is essentially manufacturing the products in China without trademark protection?

2. Can Cooper Inc. defend the infringement claim by pointing out that it owns the “Chester” trademark in the destination country (the U.S.) and as such, convince the Chinese customs to release the shipment so it can arrive in the U.S. in time for Christmas?

3. Assuming Piper is still the trademark owner of the Chester brand in China for dog toys but she does not have the prior (bad faith) connection discussed above. A small factory in Shenzhen receives a purchase order to manufacture 1,000 Chester-branded pet toys which will be exported to Indonesia; the buyer is the dominant Indonesia pet company and it owns a “Chester” trademark in Indonesia, not China. Under such circumstances, can Piper still convince the Chinese customs to seize the Indonesia-bound shipment because she is the owner of the trademark in China? Can she succeed in bringing a trademark infringement lawsuit to stop the manufacturing even though the Indonesia company owns the trademark in the destination country?

4. Continuing on the fact scenario from question 3, can the Shenzhen factory defend the infringement lawsuit and successfully get its shipment released and sent to Cooper Inc. in Jakarta by producing the trademark registration certificate issued by the Indonesia trademark office?

5. What legal risks should OEM manufacturers be mindful of when manufacturing products in China for overseas purposes without possessing a China-issued trademark registration certificate?

“Squid Game,” ChatGPT, and OEM manufacturers all face China’s bad faith squatters, but OEMs experience broader consequences beyond executive bonuses — it affects the delivery of Christmas presents to consumers in the U.S. and Europe.

The good news is that positive changes are underway, with the China National Intellectual Property Administration, or CNIPA, initiating the fifth amendment to the Trademark Law in January to combat bad faith squatters.

Chinese courts have already shown a shift in attitude, addressing bad faith practices in the OEM sector since 2015. One key question is whether OEM in China is considered trademark infringement, specifically regarding Chinese manufacturers affixing trademarks to exported products without owning the trademark.

Key OEM Cases in China

1. The Good Old Days: Pretul and Dongfeng Cases

To protect the OEM industry, the Supreme People’s Court established two landmark cases: the Pretul case in 2015 and the Dongfeng case in 2017.

These cases set a precedent that affixing a mark to goods intended solely for export does not constitute trademark use, as it does not identify the source of goods or cause consumer confusion within the Chinese market. Therefore, under the Pretul and Dongfeng principles, OEM manufacturing factories could safely affix their clients’ trademarks to goods for export without infringing on Chinese trademark rights.

2. The Dark Time: The Honda Case, 2019-2022

However, in 2019, the SPC’s decision in the Honda Motor Co. case brought a significant shift. In this case, the court deviated from the previous precedents and ruled that OEM activities could potentially constitute trademark infringement, even if they occur solely in the export context. Here are some basic facts about the Honda case:

• Honda, the famous Japanese car company, owns various “Honda” trademark registrations in China (covering Class 12 products including vehicles and car parts).

• Two manufacturing companies in China were commissioned by a third company (called Burmese Meihua Company Limited) to manufacture and export 220 motorcycle parts in China and to ship them to Myanmar. These products will bear the trademark: “HondaKit & Design.” Meihua owns a Burmese trademark registration for “HondaKit” in Class 12.

• In 2016, the production was completed but it was stopped at the customs in China, suspecting infringement to Honda’s trademark rights. The shipment was released because the customs, upon showing of the Burmese trademark, was not able to determine if this case was indeed a trademark infringement case. Honda was notified and given an option to bring a court case if they were not happy with the customs’ decision.

• In 2016, Honda filed a trademark infringement lawsuit against the two companies in China who were in charge of manufacturing and exporting. The first court supported Honda’s position, finding infringement, and asked the defendants to pay Honda roughly $43,000.

• In 2017, the second court dismissed an infringement claim, pointing out this was an OEM case and following the principles discussed in the Pretul and the Dong Feng Case, a trademark infringement could not be found in this type of case. Dissatisfied, Honda filed a retrial application with the SPC.

• In 2019, SPC issued a — shocking — retrial judgment confirming that although the facts in the case fit squarely in the OEM context, an infringement could still be possible. Indeed, SPC recognized infringement in the Honda case.

There are several factors in the Honda case that support an infringement finding.

First, Honda is an extremely popular and well-known trademark in China; as such, although average consumers will not be exposed to this type of trademark activity, the operators who affix the mark to the motorcycle parts should’ve known the “Honda” trademark belongs to the Japanese car company.

Second, there are several bad faith factors present in this case. For example, although the defendant does indeed own the trademark in the destination country, the trademark registered in the destination country does not match exactly the mark in use — for example, the mark used by the defendant has “Honda” printed in larger size than “Kit” — while the mark registered has “HondaKit” printed in the same text — along with a wing design in red color over which Honda also owns a registration in China.

Based on the above, although SPC did agree the relation between Meihua and the defendants was indeed an OEM arrangement, SPC went on to find an infringement.

Essentially, SPC went out of its way, including breaking away from the precedents set in the Pretul and the Dongfeng case, to deny protection to bad faith actors.

However, the Honda case did cast a shadow over the entire OEM industry. Put simply, the golden shield was taken away by the SPC in the Honda case. Previously, under both Pretul and Dongfeng, even though China follows the first-to-file principle, a trademark owner cannot successfully sue for infringement or cause a shipment to be detained simply because he/she owns the trademark in China. The Honda case rips apart that presumption.

A party is able to successfully bring a lawsuit and cause shipment to be detained at the Chinese border as long as one owns the trademark, in China, for the underlying goods along with a whole strings of factors that tip the scale to its favor; the manufacturing party — or the party commissioning the products to be made — is no longer able to get the shipment released just because it owns the trademark in the destination country.

3. The Good News — 2022/2023

The Honda case drew significant criticism as it signaled a departure from China’s previous stance of shielding OEM from trademark infringement considerations.

The country places OEM activities under scrutiny, aligning with national policies. This change introduces a precarious dynamic, particularly amidst the ongoing tensions between China and the U.S. since 2019. The intersection of politics and law adds uncertainties, which is unwelcome news for businesses.

Fortunately, we welcomed two good decisions from Zhejiang High People’s Court in 2022/2023: the Stahlwerk case and the Juratek case. A quick summary of both cases is below:

The Stahlwerk Case (2022):

• Stahlwerk is a German company which is the owner of the German trademark “Stahlwerk.”

• Shidaiweike (时代威科) is a Chinese company that has an affiliated company Bailian in China.

• In 2010, Bailian was a Chinese partner of Stahlwerk. Shidaiweike learned the German trademark “Stahlwerk” through Bailian.

• In 2011, Shidaiweike applied for the trademark “Stahlwerk” in China and then obtained the registration.

• Laoshidun (劳士顿公司) is a Chinese OEM operator, manufacturing “Stahlwerk”- branded products for Stahlwerk.

• In 2019, Shidaiweike filed a trademark infringement lawsuit against Laoshidun, relying on its trademark registration “Stahlwerk.”

Rather than supporting the bad guy, the Zhejiang High People’s Court departed from the established registration-is-king principle and found a way to protect the good guy.

Essentially, the court refused to enforce the bad guy’s alleged trademark right — even though it was approved and registered through China’s Trademark Office — because, in the court’s words and relying on Article 7 of China’s Trademark Law, the registration violated the “principle of good faith” and is therefore a “misuse” of trademark.

The court refused to protect misuse of the trademark and dismissed the infringement claim, even though the defendant was in fact manufacturing products for a brand that belongs to a third party.

The Juratek Case (2022):

• Juratek is a British company and a provider of automotive brake products. Juratek owns the EU trademark: “Juratek.”

• Runjun is a Chinese OEM operator for Juratek.

• Baoyi is a Chinese company and is engaged in the same industry as Juratek.

• In 2014, Baoyi set up a company in Britain. In 2017, Baoyi applied for the Chinese trademark “Juratek”; registration was granted in 2018.

• In 2021, Baoyi sued Runjun for trademark infringement.

Although Baoyi is clearly the trademark owner of the disputed mark under the Chinese system, Baoyi had prior knowledge of the brand before its trademark application in China in 2017.

The court also considered Baoyi’s trademark filing patter and noticed many of its marks resemble third parties’ marks. In light of the above, the court dismissed the infringement claim.

These cases applied the misuse doctrine to ensure that if OEM participants are acting in good faith, they should be protected. The court emphasized that not all trademark use in the OEM context constitutes infringement and that improper exercise of trademark rights against OEM operators who have been acting in good faith could constitute misuse of trademark rights.

Consequently, the court dismissed the infringement claims made by the “trademark owners” against the OEM operators, as the latter did not breach the principle of good faith.

Conclusion

The landscape of OEM activities in China has been filled with twists and turns. Initially, the Honda case disrupted OEM protection, but subsequent judgments have provided relief by acknowledging the importance of good faith and discouraging trademark misuse. While we cannot revert to the old era defined by cases like Pretul and Dongfeng, the emphasis on the principle of good faith is a welcome and necessary change.

The proposed amendments to the Chinese Trademark Law in 2023, coupled with the support from courts, give brand owners the confidence to reenter or reconsider the PRC market.

Although it will take time for the new law to take effect, it showcases the government’s dedication to combating bad faith filers. With China’s shift toward the world’s retail market, these developments signify a positive step forward, protecting the rights of OEM operators and brand owners.