Application of “Seller’s Defense of Legitimate Source” in Trademark Infringement Cases Involving Special Goods

By Zhou Shijun, Zhejiang Zeda Law Firm,[Trademark]

The “seller’s defense of legitimate source” appears in the third paragraph of Article 56 of China Trademark Law.
It provides that “Selling goods without awareness of such goods’ infringement upon the exclusive right to use a trademark shall be exempted from liability for compensation insofar as the seller is able to prove that the goods were lawfully obtained and can indicate the supplier’s identity.” Pursuant to the provision, if the seller is unaware of the fact that the goods on sale are infringing the exclusive rights of others’ registered trademarks, and is able to prove the goods were properly and lawfully obtained and indicate the identity of the supplier, then the seller is not liable for any compensation claims arising from the sale. As a matter of fact, the provision has become a last-resort guarantee of exemption from compensation liabilities for sellers entangled in disputes involving infringement upon the exclusive rights of registered trademarks.
In trademark infringement disputes, sellers allegedly selling infringing goods often make every effort to furnish all the information of suppliers in order to obtain exemption from liability for compensation. Items which may exclude the seller include Value Added Tax(VAT) invoices, commercial invoices, purchase contracts, proof of payment; some provide payment receipts, delivery lists, storage lists and other materials, while others provide business licenses, sales qualifications and other documents. Some judges also tend to focus on the basis of materials furnished by sellers, on review of whether separate evidential materials support each other and form a complete evidence chain, and direct the focus to discussions of their authenticity, legitimacy and relevance. However, this manner of evidence review still remains an examination of facts of infringement for only certain types of goods. For some special goods, judges and lawyers need to pay further attention to the issue of the applicability of the “seller’s defense of legitimate source.”
The production and distribution of food, medicines, health food, fireworks, chemical products and other goods generally relate to the safety of users’ lives, therefore, China often sets out strict provisions in their production, hygiene, quality, transportation and sales, and imposes various qualification requirements for businesses engaged in the production, transportation and sales. Accordingly, laws and regulations also make provisions on the conduct of the relevant parties. If the special goods are involved in a trademark infringement dispute, the relevant laws and regulations should serve as key appraisal criteria in determining whether the seller has “legally obtained” the goods.
Take health food for example; in accordance with the Food Hygiene Law, China’s Ministry of Health promulgated Provisions on the Administration of Health Food in 1996 with specific provisions on the definition of health food, approval, production and operation, labeling, specifications and advertising, supervision and management, encompassing requirements in areas of production, marketing, monitoring and evaluation. In the last 10 years or so, the Ministry of Health has consecutively released a series of regulatory documents and technical standards, such as Provisions on the Declaration and Acceptance of Heath Food by the Ministry of Health, Notice of the Ministry of Health on Further Regulating Management of Raw Materials for Health Food, Provision on Labeling of Health Food, Good Manufacturing Practices of Health Food and Technical Standards of Inspection and Evaluation of Health Food. With the transfer of administrative authority from the Ministry of Health to the State Food and Drug Administration (SFDA) and promulgation of the Administrative Licensing Law, Trial Provisions on the Administration of Registration of Health Food formally entered into force on July 1st, 2005, detailing rules on the application, approval, raw materials and auxiliary materials, labeling and specifications, tests and inspections, re-registration, review and legal liabilities.
Moreover, laws and regulations not only set strict health food requirements for manufacturers, but also make provisions on obligations upon sellers over their obligations regarding the examination incoming goods. For example, Zhejiang Province released Provisions of Zhejiang Province on Production Quality Supervision and Management and Provisions of Zhejiang Province on Investigating Production and Distribution of Counterfeit and Shoddy Goods. Article 7 of Provisions of Zhejiang Province on Administration of Certificate Claims in Food Procurement expressly provides that in procurement of special nutritional food, health food and new resources food, the product approval certificate shall be claimed together with inspection certificates or laboratory test results.
Considering that the relevant laws, local regulations and department rules have imposed strict requirements for the production and sales of health food, stricter requirements should be set accordingly in the application of the “seller’s defense of legitimate source” as provided in the third paragraph of Article 56 of China Trademark Law. In other words, a seller should not only demand sales certificates from the supplier but also examine the supplier’s qualifications, which include business licenses and production permits, products’ authentication marks, marks for fine quality products and other quality marks, and manufacturer’s production permits, use licensing, inspection reports, certificates and trademark registration certificates. In many disputes involving well-known trademarks of a famous pharmaceutical enterprise represented by the author, the infringing products were all disguised as “health food” on sale mainly in supermarkets, chain drug stores and health care products firms. Manufacturers were varied, but the majority of them were “shell” companies. Because manufacturers have inherent deficiencies, sellers can provide neither the manufacturers’ production permits registered and recorded with SFDA, nor the trademark registration certificates consistent with those of the infringed registered trademarks. Pursuant to the aforesaid requirements on certificate claims by purchasers, the purchase of the seller, of course, does not fall into the “legitimate” category, because no certificate has been claimed during the procurement, thus violating the mandatory requirements imposed by laws and regulations. In this regard, the “seller’s defense of legitimate source” is not applicable to the seller as provided in the third paragraph of Article 56 of China Trademark Law, even though the seller is able to provide the relevant payment receipts and purchase vouchers, and indicate the supplier of the infringing goods.
For a better understanding, take a more familiar and relevant case for example: opium is a medical drug whose production and distribution is strictly controlled. If it is planted and produced in private, the subsequent procurement is certainly illegal and will in no way become legal just because the purchaser has made the payment.
Furthermore, in determining whether the seller has fulfilled the obligation of certificate claims, its business scope and scale should also be taken into account and treated differently. For example, drug enterprises specializing in pharmaceutical wholesales or chain sales should, of course, shoulder more obligations in certificate claims than private food stores and have a greater burden of proof. In trademark infringement cases, some people tend to believe that as long as the seller can prove the source of goods, the seller may be exempted from compensation liabilities. At this point, the wording “legal” has been intentionally or unintentionally ignored. However, this author holds that if judges and lawyers are able to accurately grasp the special requirements in the production, distribution and procurement of special goods, and make an accurate conclusion over the conduct of the seller in accordance with relevant laws, regulations or provisions, justice will be done in the protection of legitimate rights of trademark holders. In the meanwhile, the seller will not be bogged down in trademark infringement disputes if it strictly complies with the relevant provisions on certificate claims.
(Translated by Wang Hongjun)

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