[Guest post] Shanghai court: the doctrine of exhaustion does not protect all unauthorized repackaging from trade mark infringement claims

The IPKat has received the following comment from Rui Cao (LLM candidate at Shanghai Jiaotong University) on a recent trade mark infringement case in Shanghai regarding Klüber's specialty lubricants. 

Here's what Rui Cao writes:

Shanghai court: the doctrine of exhaustion does not protect all unauthorized repackaging from trade mark infringement claims

by Rui Cao

As a general rule of thumb, Chinese courts follow the doctrine of exhaustion. Namely, a trade mark owner has no right to prohibit others from reselling or using a product bearing the trade mark owner’s mark, after the branded product is sold or transferred by the trade mark owner or by others with the owner’s consent. In other words, once a trade mark owner has obtained an economic interest from the first sale or placing the branded product in the market, the purchaser or transferee may use or dispose of the branded product without further restriction, provided the trade mark affixed to the product is not altered. 

That said, in a recent case before the Shanghai Pudong New Area Court, the court held that the doctrine of exhaustion is subject to further restriction. Namely, a distributor was found to have infringed on the other’s trade mark right via repackaging the branded products without authorization. The court held that the repackaging had potentially impaired trade mark’s other functionality to ensure product quality, considering that the flawed repackaging process was susceptible to contamination. 

'Repackaging.'

Case facts 

[Case reference: the first instance: (2020) Hu 0115 Min Chu 26507; the second instance: (2021) Hu Min Zhong 596 for the second-instance] 

The case was brought by a trade mark owner, Klüber, a maker of specialty lubricants. Klüber had been operating in China for years through an official distributor. Unknown to Klüber, the distributor had begun purchasing genuine Klüber-branded lubricants through parallel channels and reselling them to customers in China. These parallel import lubricants were packaged in 25 kg containers. The distributor then repackaged the lubricants into 1 kg containers that are more convenient for customers’ use and could be sold for a higher unit price. 

To repackage the lubricants, the distributor purchased imitation 1 kg Klüber containers and repackaged the lubricants from the 25 kg containers into those smaller imitation containers. The distributor neither informed Klüber nor was authorized by Klüber as the trade mark owner to repackage the Klüber product. That said, the trade marks affixed to the imitation 1 kg Klüber containers were identical to the trade marks affixed to genuine Klüber-branded lubricants. The value of repackaged lubricants sold over the years was worth millions of renminbi. 

Court findings for further restriction to the doctrine of exhaustion 

Klüber filed a lawsuit. Predictably, the distributor submitted evidence of parallel imports and argued Klüber’s trade mark right had been exhausted when the 25 kg containers were sold on the market. Since the repackaged lubricants bore the same Klüber trade marks, customers would not be misled about the source of the lubricants. The distributor argued that it should be treated as an ordinary purchaser of branded products and that its resale activities did not infringe Klüber’s trade mark right. 

The court rejected the distributor’s exhaustion argument. It ruled that the doctrine of exhaustion should have a further restriction, as not every resale or use is non-infringing. The court set out two factors to determine whether there will be trade mark infringement in such circumstances of repackaging: (1) the quality of the product; and (2) the goodwill of the trade mark owner. If the resale or use will enhance the trade mark owner’s goodwill and thus help enlarge the base of consumers or potential consumers, leading to more significant potential profits, the activity should be permitted. Conversely, where the resale or use impairs or otherwise damages the quality of the branded product or the goodwill of the trade mark owner, in that case, the activity should be deemed as trade mark infringement and therefore be prohibited.

The court further acknowledged that a trade mark functions beyond just identifying the source of goods. It also has derivative functions of ensuring product quality and maintaining the trade mark’s reputation. Regarding whether product quality had been affected, the court evaluated the distributor’s repackaging process and examined the repackaged product. The court found that the quality of lubricants could have been impaired during the distributor’s repackaging because the unauthorized repackaging process was not conducted under Klüber’s product quality control to ensure moisture or dust could not enter the lubricants. 

Moreover, the distributor’s repackaging activities had altered the Klüber lubricant containers’ quality and design features that ensured product quality. Therefore, the distributor’s unauthorized repackaging had caused damage to the derivative functions of Klüber’s trade mark in ensuring product quality and maintaining the trade mark’s reputation as customers buying the repackaged products might not receive the same high-quality lubricants. 

The first instance court ruled that the distributor had infringed the Klüber’s trade mark and awarded monetary damages of approximately RMB 2 million. The Shanghai IP Court upheld the decision.

Take-away 

The China National Intellectual Property Administration (CNIPA) has also weighed in, in an official reply letter to the Shanghai Intellectual Property Administration, on whether the unauthorized repackaging and resale of another’s products while using the same trade mark constitutes trade mark infringement. The CNIPA letter submits that it does constitute trade mark infringement, indicating that a trade mark should have the derivative function of ensuring the quality of the product and maintaining the goodwill of trade mark owner, which should be protected independently of a trade mark’s essential function to identify the product source. 

The Klüber case and the CNIPA opinion letter show China’s authorities have accepted that the exhaustion of trade mark rights is not absolute. In effect, a trade mark owner may maintain trade mark rights even after the branded product is legally sold or transferred. Resellers who repackage products may still be protected by the doctrine of exhaustion only if they ensure that both the trade mark representation and the product are not altered during the repackaging process. 

While the tension between the trade mark owner and the product owner should be further tested, so as to properly balance the interests of both, it is advisable to bear in mind that the resale or use of a legally obtained product may still infringe the owner’s exclusive right to use the trade mark. The key, as the court explained, lies with whether the resale or use will prejudice a trade mark’s intrinsic value, including distinctiveness, to identify the product source, and goodwill, to protect the trade mark owner’s reputation. 

Photo: Shelly, Tian's kitten.