Court confirms that OEM activities do not constitute trademark infringement

Upon receiving a complaint from Crocodile Garments Limited of Hong Kong based on its Chinese trademark registration for CROCODILE in Class 25 of the Nice Classification, the Shanghai Pudong Customs detained 3,500 pairs of denim trousers bearing the marks CROCODILE (and device) and CROCODILE (collectively the CROCODILE marks), which had been shipped by Everton Wuxi International Trading Company Limited through the Customs port for export to Korea.
Everton Wuxi was the original equipment manufacturer (OEM) of the denim trousers and alleged that the goods were not infringing. Shanghai Customs was unable to decide whether the detained goods infringed the trademark rights of Crocodile Garments. Everton Wuxi applied to the court for a non-infringement declaration. 
On March 28 2011 the Shanghai Pudong People's Court of First Instance ruled in favour of Everton Wuxi. The decision means that original OEM activities in China which conflict with a trademark registered in that country do not constitute infringement of that mark. The court reached its decision for the following reasons:
  • The order for the denim trousers was placed by a consignor in Korea whose authority could be traced to Crocodile International Private Limited of Singapore, which has registered the CROCODILE marks in Korea.
  • The use of the CROCODILE marks was within the scope of their registration in Korea.
  • The OEM activities in China simply complied with the request of the overseas consignor. 
  • The garment tags properly identified the consignor and other relevant parties.
  • All the OEM products were for export to Korea. Hence, there could be no market confusion in China and Crocodile Garments had not suffered any loss in that country.
Crocodile Garments appealed to the Shanghai Intermediate People's Court. According to the information on the Pudong IP Judiciary Protection website, the appeal court has now confirmed the ruling of the lower court.
Whether OEM activities may constitute trademark infringement in China has been an unsettled issue in recent years, and conflicting decisions have been issued by different courts. Notably, the courts in Beijing and Shanghai have been more robust in taking the view that OEM activities may not constitute trademark infringement in China. Article 18 of the "Opinion on Certain Questions concerning the Adjudication on Intellectual Property Issues in light of the Current Economic Situation", published by the Supreme People's Court in April 2009, suggests that, to determine who is responsible for any infringement, the courts should ascertain whether an OEM manufacturer has properly conducted due diligence. However, the scope of due diligence is still unclear: does the OEM manufacturer have to check the rights of the consignor in the place of destination of the OEM products or should it check the rights of the consignor in China?
It is not clear in the present case whether Everton Wuxi conducted due diligence at the time the order was received, even though it provided documentary evidence for the trial showing that its OEM activities were ultimately allowed by the owner of the CROCODILE marks in Korea. In this regard, although the ultimate confirmation of authorisation from the trademark owner was provided only for the purpose of the trial, the court considered that Everton Wuxi had the relevant authorisation at the time of the OEM activities.
In light of the cases in which it was decided that OEM activities do not constitute trademark infringement and where due diligence had been conducted by the OEM manufacturer, it seems that due diligence - to verify and confirm that the consignor, or the entity ultimately authorising the OEM order, has rights in the relevant marks in the place of destination of the OEM goods - will suffice.
Kenny Wong, Mayer Brown JSM, Hong Kong

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