China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

Some questioned the Court's decision as the tires sold by the Defendants were in fact manufactured by the Michelin's own factory and were not counterfeits. The case concerns the parallel importation of trademarked products, a common occurrence in international trade. Parallel importation of trademarked products refers to branded goods, manufactured and sold in the country or area where the trademark owner is located or where the trademark products are authorized to be manufactured and sold. The trademarked products are then imported into the countries or areas, where the trademark owner or the exclusive licensee enjoys the trademark and related rights without the authorization of the trademark owner and/or the exclusive licensee.

Parallel importation is often motivated by extra benefits. Since manufacturing costs and consumer capability vary in different countries and areas, the trademark owner always sets different prices for their products in different markets. Parallel importers purchase products in one country at a price (P1) which is lower than the price at which they are sold in a second country (P2), and import the products into the second country. Consumers are inclined to buy the imported product in the second country at a price which is lower than P2.

Whether parallel importing of trademarked products constitutes trademark infringement is not specifically addressed in the PRC laws and regulations. There are two prevailing opinions regarding parallel importing in the academic field. Most scholars disagree that parallel imports constitute trademark infringement based on the "Exhaustion of Rights Doctrine," while some believe that trademark infringement shall be established in parallel import based on the locality nature of intellectual property rights ("IPR").

In this case, the Court focused on whether the Defendants' sale of imported MICHELIN tires shall constitute trademark infringement upon the Plaintiff's exclusive right to use the registered trademark "MICHELIN & Device." As the manufacture and sale of tire products shall be in compliance with the relevant speed requirements, geographical and climatic features, the Court held that the Defendants' failure to obtain the 3C Certification for MICHELIN tires which were originally targeting the Brazilian market may raise quality and safety issues. It was foreseeable that consumers would attribute traffic accidents or any other civil disputes to the Michelin Group as the manufacturer. Consequently, the standard of quality denoted by the Michelin trademark and plaintiff's reputation as a leading tire manufacturer would be damaged. Therefore, the Court concluded the Defendants' acts had caused substantial damages to the Plaintiff's exclusive rights to use the trademark "MICHELIN & Device".

The Court's judgment shows that the Exhaustion of Rights Doctrine or the Territoriality Principle alone is insufficient to justify the act of parallel imports. When affirming the trademark infringement, the Court should also consider whether the interests and rights of the trademark owner have been damaged. In this case, the grounds on which the Court established trademark infringement were that the tires had not obtained 3C Certification, and the tires were not manufactured for the Chinese market. According to the Court, tire products should be certified under the 3C system before they are sold in China. Otherwise the quality and safety of the products could not be ensured. Therefore, the Plaintiff's reputation as a leading tire manufacturer trademarked as "MICHELIN & Device" would be damaged. In short, the key issue of this case is the "3C Certification," which represents or proves the quality and safety of the tire products sold in China.

One subsequent issue is whether importation and selling of trademarked products not subject to 3C Certification may cause trademark infringement. According to the Court's ruling, when affirming trademark infringement in parallel importation, the key issue is whether the import and sales activities have damaged the interests and rights of trademark owners. If an imported product is without 3C Certification, it merely indicates that the parallel imported products might have potential quality and safety problems. However, the absence of 3C Certification does not necessarily establish the problems. Therefore, a trademark infringement should be established if the imports and sales of the products that are not targeting the Chinese market would damage the reputation of the trademark owner, even if the parallel imported products are not subject to the 3C Certification. In other words, although the imported products are not subject to 3C Certification, the imports and sales of the products may also constitute trademark infringement conditioned that potential quality problems and safety risks exist within the imported products to be used in China. For example, the said products may not require a 3C Certification, but they are incompliance with other national standards or have potential safety risks in use.

On the contrary, would the import and sales activities constitute trademark infringement if the Defendants had applied for 3C Certification before selling the MICHELIN tires? The answer is no according to the Court's ruling. The MICHELIN tires with 3C Certification means that they are free of quality and safety problems and, therefore, the reputation of the Plaintiff would not be damaged. The trademark owner may inevitably make less profit because of the competition of the parallel imported products in the local market. For example, the price of the trademarked products is RMB 100 in country A and RMB 80 in country B, and the profit is RMB 30 in both country A and B. Parallel importer imports the products that are sold in country B to country A and offer the price at RMB 90. As such, the trademark owner may suffer a profit loss of RMB 10 in country A. In practice, the parallel importing of the trademarked products does not necessarily constitute trademark infringement simply because the trademark owner suffers profit loss.

In Michelin, the Court demonstrated the progress of trademark infringement trials of parallel imported products into China. The ruling of the case set guidance over the issue of whether the imports and sales of parallel trademarked products constitute trademark infringement. The key focus of the issue is whether the alleged acts are detrimental to the interests and rights of the trademark owner. To trademark owners that are harassed by parallel imports, it is possible to take measures to stop others from parallel importing of their trademarked products, if they can prove the products have quality and safety problems in use. For parallel importers, they should ensure that consumers' interests would not be damaged while deriving profits.

In a 15 year products liability dispute (Hubei Gezhouba Sanlian Industrial Co. Ltd.  vs. Robinson Helicopter Company Inc.), the Central District of California found that the plaintiffs were entitled to the issuance of a domestic (U.S.) judgment in the amount of the PRC judgment with interest. This judgment was originally made in the PRC and recognized in the U.S. marking a landmark in recognition of judgments from China abroad. The case stemmed from a helicopter accident (March of 1994) which was the result of production defects of that particular type of helicopter (R-44).

With respect to foreign money judgments, the general principles of comity and recognition of foreign awards have been codified in the U.S. as the Uniform Foreign Money Judgments Recognition Act (“UFM-JRA”), which has been adopted by the majority of U.S. states. "Foreign money judgments" under the UFM-JRA refers to any judgment granting or denying recovery of a sum of money rendered in a jurisdiction outside the U.S. and its territories.  In states adopting the UFM-JRA, such as in California and codified in the California Code of Civil Procedure, a foreign judgment is subject to a limited scope inquiry prior to a determination as to whether it is entitled to be recognized. A defendant challenging recognition of a foreign judgment may not retry issues of liability or damages, but rather is limited to due process-type defenses enumerated in the statute.
 

Legal Requirements Under UFM-JRA
 

A. Mandatory Conditions

Other than a final, conclusive foreign judgment, the three mandatory requirements for recognition of a foreign judgment are all due process-type considerations:
(1) the foreign court must have rendered its judgment under a system that provides impartial tribunals or procedures compatible with the requirements of due process; (
(2) the foreign court must have had personal jurisdiction over the defendant; and
(3) the foreign court must have had subject matter jurisdiction over the controversy.
 

B. Discretionary Conditions
The discretionary factors a court may consider include:
(1) The Defendant Received Sufficient Notice of the Proceedings
(2) The Judgment Was Not Obtained by Fraud
(3) The Judgment Is Not Repugnant to the Enforcing Court’s Public Policy
(4) The Judgment Is Not in Conflict with Another Final and Conclusive Judgment
(5) The Judgment Is Not Inconsistent with an ADR Agreement Between the Parties
(6) Where Jurisdiction Is Based on Personal Service Alone, the Foreign Tribunal Was Not a Seriously Inconvenient Forum
(7) Does the Foreign Court Reciprocally Recognize Judgments From the U.S.?
 

In the Sanlian case, the district court found that service was proper, the PRC judgment was final, conclusive, and enforceable under the laws of the PRC and involved the recovery of a sum of money. As California's UFM-JRA applied and no exceptions to recognition were presented, the plaintiffs were entitled to a domestic judgment.

Because the principles governing recognition of foreign judgments in the U.S. are relatively uniform without regard to the nation where the judgment originated, however, one can look to authority under the UFM-JRA pertaining to recognition of judgments entered in any country for guidance of equal weight in assessing whether a judgment from China will be granted recognition and enforcement under any given set of facts.

While cases under the UFM-JRA abound, cases specifically addressing recognition of foreign judgments entered in China are still relatively few. Based on developments in the legal system in China, and especially in the People’s Republic of China, over the past two decades, it is increasingly likely that a U.S. court evaluating whether to recognize a judgment entered in China would conclude that the system of justice in China comports with traditional western notions of due process, and thus that element would likely not to be a bar to recognition in a U.S. court. If the Chinese judgment otherwise meets the due-process type requirements of the UFM-JRA, there is nothing unique about judgments from China that should interfere with their recognition and enforcement in any U.S. court under the same analysis as a judgment entered in England or Canada, as demonstrated in the Sanlian case.

The public can submit their comments on the draft by logging onto the website of the Legislative Affairs Office of the State Council http://www.chinalaw.gov.cn. The deadline for comment is May 26, 2009.

The draft rules are part of China's efforts to improve the recall system. At present, there is a patchwork of recall regulations in respect of special products – often it seems to be a response to an emergency of some kind. The first recall regulations were issued in relation to automobiles in 2004 – against a backdrop of foreign manufacturers not affording Chinese consumers the same rights as enjoyed in other jurisdictions. Other recall regulations were passed in relation to food and toys in 2007 – again responding to specific crisis in these areas. The recent PRC Food Safety Law which was approved by the National People's Congress (NPC) on February 28, 2009 also has specific provisions in respect of food products.

The draft rules currently being considered cover all types of products, whether manufactured within China or imported from outside. The only exceptions are drugs and military products which are excluded from the draft rules ambit.

The current draft states that manufacturers (including entities with production within China as well as importers or import agents) are required to immediately stop production and sale of defective products and commence a recall. Thereafter the manufacturer/importer will need to submit a report to the local quality inspection department immediately after the product has been confirmed to be harmful to human health and safety. The draft states that manufacturers must not conceal the hazards of their defective products and should report to the quality department details as to risks posed to human health and safety, damage or accidents that may have been caused as well as defects that have been identified outside of China.

The draft also states that sellers shall establish stock account and sales account, record details of sales including product type, specification, production batch and quantity etc. These details need to be stored for at least 3 years.

The draft also states that if sellers or service providers become aware that products may be defective and this is harmful to human health and safety, they should immediately stop sales, use or lease of products, inform the customers, producers and suppliers and report to quality department. The seller or service providers are also under a duty to coordinate with the producers to carry out the recall.

Penalties

The draft states that violators of the rules will be warned or asked to rectify the issue within a fixed period. Producers failing to comply may be fined between RMB 200,000 and RMB 500,000 or subject to sanctions under PRC criminal law.

Similarly, sellers or service providers may face fines up to RMB 200,000 on PRC criminal law sanctions.

Summary

The draft rules will, if and when they are issued, address a major concern of PRC consumers – how to deal with defective products. The main criticism one could have on the draft is that its provisions are still too vague and the penalties too limited to adequately protect consumers. However, as an incremental first step it is useful. On the other hand of the equation manufacturers and retailers would prefer more clear statements as to what is considered a “defect”, “harmful to human health and safety” and how best to deal with situations which fall within gray areas.

The new Food Safety Law further establishes an enhanced monitoring and supervision system, a product-recall system and a set of national safety standards.

Improved Regulation - pursuant to the law, the State Council will set up a province-level food safety commission. The current system of splitting food safety responsibilities among many different agencies has long been blamed for the uneven enforcement and confusion in the market. A major problem in the past has been the patchwork of standards. In order to combat this, the new law stipulates a set of mandatory national food safety standards. This was a key concern voiced in the Asian Development Bank policy note. Food safety standards will be the only mandatory food standards and accordingly, all food producers and business operators shall follow such food safety standards when engaging in food production and related business activities.

Despite the establishment of a food safety commission, the law still foresees a role for a variety of departments including the departments of health, agriculture, quality supervision and industry & commerce. These departments will shoulder different responsibilities such as risk evaluation, making and implementing safety standards, monitoring of food production and distribution etc. All in all the new law will likely make it much easier to determine the correct authority to be addressed and also to deal with co-ordination issues in case a problem arises.

Improved Monitoring - the new law establishes a food safety risk system to monitor food-borne diseases and food contamination as well as a food safety risk assessment system to assess risks as to biological, chemical and physical hazards in food and food additives. These safety systems will be regulated and implemented by the health administrative department of the State Council. In addition, the result of food safety risk assessments will also flow into revisions to food safety standards as well as to how food safety is supervised and administrated. The Food Safety Law focuses on prevention rather than resolving problems that arises.

Another important step the law takes is to cancel the exemptions from the inspection system. A major problem in recent years has been the system of “trusted” companies. These trusted companies were left largely unsupervised. As in the case of Sanlu, it turned out that some of the trusted companies were actually not to be trusted. The trusted system was cancelled by the Food Safety Law. Sanlu's shadow looms large over the legislation. As a result, the law pays special attention to the issue of food additives that lay at the heart of last year's infant formula scandal. Additives are prohibited unless proven to be both necessary and safe.

Food Recall Procedures- in the event that the preventative systems do not succeed, the law also establishes a regime for food recalls. Article 53 provides that a food producer which detects non-conformity with food safety standards shall promptly stop production, recall food already in the market place, issue a notification to related producers, business operators and consumers and record the recall.

Improved Enforcement- no matter how well designed a food safety system is, there will still be a need for coercion in implementation. Severe punishments are foreseen to warn off potential offenders. Enterprises found producing or selling sub-standard foodstuffs can be subject to claims of up to 10 times the price of the product in addition to compensation for the harm the product causes to the consumer. In severe cases criminal prosecution is also likely.

Summary

The PRC Food Safety Law will become effective June 1, 2009. For food manufacturers, abiding by the law may mean stricter tests on raw materials and tighter control of the manufacturing process. Compliance will likely increase the cost of production. The new law is an umbrella law which aims to establish a comprehensive supervision system for food safety and resolve turf fights between various supervision authorities and set national guidelines. The adoption of this law will not immediately change the food safety landscape. However, careful implementation will lead to improved food quality and safety for consumers of PRC products.
 

As the main supervising department for product quality, the General Administration of Quality Supervision, Inspection and Quarantine has promulgated several regulations on defective product recalls. These regulations include the “Regulation for Defective Automobile Product Recalls” (which came into force on Oct 1, 2004), the “Regulation for Child Toy Recalls” (which was promulgated on Aug, 2007), and a 3C certification for toys (that came into force in September of 2007). These new regulations aim to eliminate incidents like “Benz smash” and the “Mattel recall” etc. The “Regulation for Medicine Recall”, implemented in December of 2007, symbolized the law’s guarantee of public medicine safety. The “Law for Food security in The People’s Republic of China (draft)” and the “Regulations for the Supervision and Administration of Medical Devices” (draft amendment) are all now in the process of soliciting public opinion. These regulations represent a comprehensive system for recalling food and medical devices produced and sold in China. These new rules will also offer a further level of legal protection to consumers in terms of physical health and safety.


Furthermore, the procedure for dealing with defective product recalls has also been streamlined. According to the legislative affairs office of the General Administration of Quality Supervision, Inspection and Quarantine, the “Regulation for the Recall and Administration of Defective Products (draft)” has been submitted to the Legislative Affairs Office of the State Council, and is planned to be implemented next year. According to this regulation, the scope of defective product recalls extend to all products that pose a serious risk to health and safety except food, medicine, and medical devices. The implementation of this regulation will fill the shortage of rules for product recalls in China, and bring China in line with international standards. It will also avoid an unfair and discriminatory result for Chinese consumers whereby Chinese companies face unlimited liability abroad while defective foreign products only face very limited levels of liability in China.


The establishment of recall rules indicates that China has built a recall system that meets international standards. However, for protecting consumers, the regulation itself is not enough, implementation is more important. Compared to mature legal systems for product recalls in western countries, there is still a long way to go.