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An OEM non-infringement precedent: legitimate Chinese OEM business model sustained

A declaration of OEM non-infringement was recently concluded in Shanghai Intellectual Property Court (Shanghai IP Court) by mediation, marking the close of the over-three-year IP dispute between the foreign buyer, Casper Bilgisayar Sistemleri A.S. (Casper) and a Chinese trademark owner. After winning the first instance, King & Wood Mallesons (KWM) secured the significant final victory for Casper by mediation in the second instance, obtaining the declaration that the OEM of Casper brand laptops and computer devices through an original equipment manufacturer (OEM) in China and exportation to its destination outside China does not infringe the Chinese trademark owner's exclusive right to use the registered trademark.

In this case, the KWM team acted successfully for the well-known foreign company engaged in OEM activities without registering its trademark in China in the prolonged determination of non-infringement action. The final mediation provides strong protection for the client's IP rights and serves as a deterrent to disturbance from Chinese trademark owners.

Background

Casper, a renowned manufacturer of computers and related devices established in Turkey in 1993, has registered the trademark "Casper" in Turkey for a number of computer product categories. Since 2015, Casper has appointed an OEM in China to produce "Casper" brand laptops and computer devices. Under the appointment, Casper licenses the OEM to use the "Casper" trademark with the requirement of no change to the trademark design. Casper also specifies in writing that the products and devices must be exported to Turkey and not sold in China.

In March 2018, Casper had the OEM declare the export of the laptops produced for it in accordance with previous business practice. Unfortunately, Casper was informed that a Chinese company named Shenzhen Zhong Shi Tai Electronic Technology Co., Ltd. (ZST) had requested Shanghai Customs to take measures to protect its IP rights on the grounds that the use of the "Casper" logo on these products allegedly infringed on its trademark rights. Based on the request of ZST, Shanghai Customs issued a Seizure (Sealing) Decision and seized 675 Casper laptops.

On 30 September 2018, following the strategy provided by KWM team, Casper filed a lawsuit with the People's Court of Shanghai Pudong New Area (the "Court of First Instance"), requesting a declaration that the licensed use of the "Casper" trademark on the seized Casper brand laptops and computer devices produced by OEM in China and exported to Turkey did not infringe on ZST's exclusive right to its registered trademark "Casper".

In order to support its request, Casper submitted a set of exhibits including the notarized and certified Turkish trademark certificate, the reply from the Turkish Patent and Trademark Office, the letter to the Chinese customs (containing Casper's trademark license, the specifications for the licensed trademark use, and the requirements for exportation to Turkey only). In addition, in order to prove that the seized laptops and even all 5000 products under the same order were all for export, with the assistance of the KWM team, Casper collected and produced all detailed customs declaration forms, outbound cargo filing lists, invoices, packaging lists, transport documents, and internal email communication records to prove that all the products had been exported.

Court of First Instance: non-infringement of trademark

The Court of First Instance held after examination that Casper was eligible to file the declaration of non-infringement action. After reviewing Casper's submissions and finding that the use of the trademark on the seized products was within the approved scope, the Court of First Instance was of the view as follows:

OEM is an important mode of foreign trade in China. In determining whether OEM constitutes trademark infringement, the court should take the domestic and international economic landscape into consideration and apply laws accurately in order to strengthen the creation, protection and utilisation of IP and create a favourable environment for the IP rule of law, market and culture. If the foreign buyer has legitimate trademark rights in the destination country to which all products are exported, and has provided the complete licensing documents and trademark ownership evidence to the local OEM, the OEM and exportation in principle may be declared trademark non-infringement.

In this case, the plaintiff (i.e. Casper) as the foreign buyer owns the registered trademark "Casper" in Turkey. The approved scope of the trademark use covers computers. The laptops produced by the OEM have been and will be exported to Turkey. In the Letter to the Relevant Departments, the plaintiff mentioned that it requires the OEM "not to change the design of the trademark except for the colour". The change of colour does not affect the distinctiveness of the plaintiff's trademark. In summary, it may be found that the OEM and exportation of "Casper" brand laptops does not constitute an infringement upon the defendant's exclusive right to its registered trademark.

Mediation in the second instance: Casper's legitimate OEM protected

After ZST appealed the judgment of first instance before Shanghai IP Court, the parties reached a mediation agreement, acknowledging as below:
The OEM and exportation to Turkey of "Casper" brand laptops and computer devices does not infringe on the exclusive right of ZST to use its registered trademark. ZST agrees not to restrict such OEM and exportation in any way.

Thus, the case was finally closed with Casper's substantial success.

Conclusion

Notably, while this case was pending, the Supreme People's Court (SPC) made its judgment in Honda Motor Co., Ltd. v. Chongqing Hengsheng Xintai Trading Co., Ltd., changing its position on whether the OEM of foreign brand products in China and the intended exportation for sale in other countries constitute trademark infringement.

In fact, the Casper case has significantly differences from the HONDAKIT case. For example, in the HONDAKIT case, the trademark used by the domestic OEM irregularly highlighted the text "HONDA", such tort of malicious undoubtedly resulted in the declaration of infringement. Additionally, in the Casper case, the domestic trademark owner ZST and its trademark were registered at least 20 years later than Casper's registration. Taking that Casper is a popular awards-winning laptop manufacturer in Turkey in to account, it is clearly impossible for Casper to misappropriate the goodwill of ZST and avoid legal liability by means of OEM. These facts have important implications on the declaration of non-infringement.

In the HONDAKIT case, the SPC made its decision taking into account the changing market environment and the fact findings comprehensively. In its recent precedents, the SPC emphasises and clarifies that it is necessary to maintain the uniformity of the legal system and inappropriate to simply conclude a certain foreign trade mode, such as OEM, as an exclusion of trademark non-infringement. Therefore, whether OEM constitutes trademark infringement should not be generalised. The court should examine the OEM in accordance with Article 57(1) and (2) of the PRC Trademark Law and should not treat it as an exception for trademark infringement without substantiation. In the Casper case, the Court of First Instance made its decision based on the ascertained facts, rather than simply following the decision in the HONDAKIT case.

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