Whether manufacturers shall be responsible for distributors’ liabilities for selling fakes?

“X Sports Franchise Store” is an online store which has the authorization of a well-known brand H Racket. The store purchased some counterfeit rackets at low prices, and mixed those fakes with the real ones. H Racket found the store had sold fakes, so it terminated the authorization. However, some consumers believes that H Racket’s authorization is the reason for them to buy those fakes, so H Racket shall undertake partial of the liabilities for selling fakes.

If consumers take manufacturers as one of the defendants, whether the manufacturers would be ordered to undertake partial of the liabilities?

From the perspective of laws, according to the “Civil Code”, the “Product Quality Law”, and the “Law on the Protection of Rights and Interests of Consumers”, the precondition for Manufacturer to undertake liabilities is that the products produced by this Manufacturer have quality defects. Because the fakes sold by the authorized distributor are not produced by Manufacturer, there is no legal basis for Manufacturer to undertake any liabilities. In addition, the relevant contracts are signed by Distributor and Consumer, and Manufacturer is not a party to the contract, in view of the principle of relativity of a contract, there is no agreed basis for Manufacturer to undertake any liabilities. In judicial practice, normally the courts would not support the plaintiff’s claim on requiring Manufacturer to undertake liabilities. However, if a distributor’s store sells a large amount of counterfeit products, and such sale has lasted for a long time, then some courts may hold that Manufacturer is negligent in supervision and indulge such counterfeiting behaviors, and order Manufacturer to undertake partial of the liabilities.

There is another circumstance, which says a distributor had transformed the authorized products and sold to a consumer, if the consumer files a lawsuit against Distributor and the Manufacturer for the quality defects, whether Manufacturer shall be liable?

In the case (2016) Min 08 Min Zhong No. 867, Hui X Company is the distributor and after-sales service provider authorized by Dongfeng X Company. Hui X Company purchased vehicles from Dongfeng X Company. It installed non-original parts, and changed the relevant labels without the authorization of Dongfeng X Company. Then it authorized its secondary distributor Hong X Company to sell those vehicles. Zhang brought a vehicle from Hong X Company, and the vehicle had many quality defect problems. Zhang filed a lawsuit against Hong X Company, Hui X Company and Dongfeng X Company, and demanding compensation for losses. Dongfeng X Company argued that it was the manufacturer who should not be a qualified defendant. The court pointed out that although Dongfeng X Company was not a party to the relevant contract, it was the manufacturer, and it should be a qualified defendant until the court clarified the liabilities had no relationship with the original vehicle. After hearing the case, finally the court held that Dongfeng X Company just sold the vehicle to Hui X Company, and the vehicle conformed to the national standards, so Dongfeng X Company should not be liable for the liabilities. Therefore, if a product is not a counterfeit one, but it has been transformed by a party other than the manufacturer, then the liability of the manufacturer shall be determined based on whether the product conforms to the relevant standards before providing to the distributor.

Let’s go further. If a distributor has published an advertisement which has violated the relevant laws or infringed other party’s right, whether the manufacturer shall be liable?

In an administrative case, (2020) Er 05 Xing Zhong No. 106, a distributor was imposed with an administrative penalty for illegal advertisements, then it filed a lawsuit against the administrative authority, and claimed that the manufacturer should be imposed with such administrative penalty. However, the court held that the manufacturer could not manage the promotion activity in an exhibition, and would not enjoy the sales profit, so the court rejected the distributor’s claim.

In the case (2019) Yue 06 Min Zhong No. 5818, the authorized distributor of Gree used the picture of “Midea Bear” in the promotion materials on Tmall. Midea required Gree to undertake a joint liability with the distributor, with the reason that Gree would enjoy the benefits of promotion, and Gree should supervise the distributor’s activities by using trademark and corporate title. In the end, the Foshan Intermediate People’s Court held that the relevant evidence had proved that the distributor had sold Gree’s products, but could not prove Gree had the supervision obligation, or Gree had received profits related to such infringement. Since the distributor and Gree were independent market entities, the court rejected Midea’s claims.

To sum up, from the perspective of risk prevention, manufacturers could take the following measures: (1) in order to prevent consumers from taking a distributor as an affiliate of the manufacturer, and reduce the negative impact on the manufacturer’s brand by distributor’s sale of counterfeit products, it is recommended to prohibit distributors from registering manufacturers’ trademark or corporate title as their title; (2) in order to curb distributors’ improper behaviors, it is recommended to insert articles on the liabilities or punishment measures on the sale of counterfeit products, illegal promotion, and etc., in the distribution contract; and (3) to update the distributor management system, such as, assigning specialized department/personnel to monitor, collect information and evidence related to the counterfeit activities, implementing random inspections or visits, dissolving the relevant authorization when counterfeit activities or distributors’ other illegal behaviors were found, and cooperating with the relevant authorities to identify counterfeit products, collect evidence and do investigations.