The principle of trademark rights exhaustion

    0
    3252

    With the rapid development and popularization of electronic products, new types of trademark infringements have emerged. Instead of counterfeiting registered trademarks, some merchants recycle the products of a right owner and market the refurbished products bearing the right owner’s trademark. When a lawsuit is filed, the doctrine of exhaustion of rights is usually cited as the main grounds of defense.

    Linda Zhao Partner, GoldenGate Lawyers
    Linda Zhao
    Partner, GoldenGate Lawyers

    The exhaustion of trademark rights means that after a branded product is sold or transferred by the trademark owner or by others with the consent of the owner, the trademark right is exhausted. The trademark owner or others with the consent of the owner have no right to ban others from reselling or using the product. The doctrine aims to properly balance the interests of trademark owners and product owners.

    The exhaustion of trademark rights in effect is an owner’s loss of control over products bearing its trademark. However, the owner does not lose all extensions of the trademark right. The bond between the trademark and the product cannot be severed. If a legally obtained product damages a trademark’s intrinsic values, including distinctiveness and goodwill, during reprocessing and reselling, it may still infringe the owner’s exclusive right to use the trademark.

    TYPES OF REFURBISHMENT

    There are mainly two types of refurbishment of electronic products. One is to recycle main parts of used devices, such as mainboards and CPUs, and use them to assemble new devices together with non-original components for sale. In a case handled by a court in Shenzhen in 2011, the defendant bought used iPhones at a low price as well as counterfeit components bearing the trademark “iPhone” and its Chinese counterpart, including phone cases. The defendant utilized the used iPhones’ CPUs and the counterfeit components to assemble iPhones for sale.

    The court held that Apple puts the trademark “iPhone” on its cellphones to distinguish them from other producers’ cellphones. The defendant’s refurbished iPhones differed greatly from those produced by Apple in terms of quality. The defendant’s refurbishment would mislead consumers to mix iPhones made by Apple with refurbished iPhones, so it constituted trademark infringement or even trademark counterfeiting.

    The other one is that some merchants bought the previous one or two generations of products and partly refitted them for sale. In the case of one of our clients, the defendant bought the previous one or two generations of ink-jet printers made by a renowned British producer and sold the products bearing the original trademark after replacing their one-piece ink tanks. The defendant aimed to sell consumable items for profit.

    In the case, the defendant’s replacement of the ink supply system was bound to affect the quality of the right owner’s products and thus tarnish its brand reputation. In the meantime, as the system, which contained consumable items that were necessary for the device’s operation, was the main part for profit making, the defendant’s behaviour apparently infringed the right owner’s economic interests. The doctrine of exhaustion of rights therefore was not applicable to such a malicious refit.

    According to the practices of Chinese courts, to determine whether such behaviours as repair, refit, recycle and refurbishment constitute trademark infringement or comply with the exhaustion of rights, it is necessary to see if these behaviours affect the original trademark’s functions of distinctiveness and quality assurance, that is, whether they damage the interests of the trademark owner or mislead consumers. Specifically, the issue should be explored from the following two aspects:

    ASPECTS TO CONSIDER

    Trademark distinctiveness

    It is the core function of a trademark. The right owner has the right to ban others from misleading uses of its registered trademark without consent. Selling refurbished products bearing original trademarks without informing consumers that they are buying refurbished products, which directly or indirectly mislead consumers into thinking that the products are made by, or have a certain relationship to, the trademark owner, affects trademark distinctiveness and impairs the interests of the trademark owner. The conduct should be identified as trade infringement.

    Trademark’s function of quality assurance

    The function means that the same products bearing the same trademark are supposed to have the same quality. When the product quality represented by a trademark meets consumers’ expectations, the trademark serves as a form of quality assurance to consumers. Higher quality of a branded product can enhance the trademark’s goodwill and thus help enlarge the base of consumers or potential consumers, leading to larger potential incomes.

    Refurbished products bearing the original trademark have changed substantially in terms of components, forms and qualities. Such refurbishment causes the trademark owner to lose its control over product quality and impairs the trademark’s function of quality assurance, so it constitutes trademark infringement.

    NO PRETEXT

    In general, the recycling and refurbishment of electronic products hinder a right owner from gaining legitimate interests. In fact, infringers make profit at the price of the right owner. Therefore, the doctrine of exhaustion of rights should not be a pretext for infringers to make illicit profits.

    Linda Zhao is a partner in the Beijing office of GoldenGate Lawyers. She can be contacted on +86 10 5870 2028 or by email at lzhao@goldengatelawyers.com

    Law.asia subscripton ad blue 2022