The legitimate source defense is the rule established by Article 64(2) of the Trademark Law: a seller who did not know that the goods sold infringed the exclusive right to a registered trademark, can prove the goods were legitimately obtained, and identifies the supplier, bears no liability for damages. It balances trademark protection with transaction security and channels recovery toward the source of infringement.
Normative Position
Selling infringing goods is itself infringement under Article 57(3), and the seller is in principle liable. The legitimate source defense is an exemption from damages for faultless sellers on the premise that infringement is established—it is an exemption from liability, not a finding of non-infringement; the duty to stop selling cannot be exempted.
Elements
- Neither knew nor should have known: subjective good faith. Purchase prices markedly below market, irregular channels, obviously shoddy workmanship, or prior penalties or complaints for similar goods all support a finding that the seller should have known;
- Legitimate acquisition: the goods were obtained through genuine, normal commercial transactions. Purchase documentation (invoices, contracts, payment and logistics records) must correspond to the accused goods in name, specification, quantity, and timing; backdated or uncorresponding documents carry weak probative force;
- Identification of the supplier: the upstream supplier's name, address, contact details, and other traceable information can be clearly provided; in practice this must generally enable the rights holder to locate the upstream party. All three elements are subject to the seller's burden of proof—none may be missing.
Legal Effect
If the defense succeeds: damages liability is exempted, but the seller must still stop selling, and the court will usually require it to provide upstream information to help the rights holder trace the source; if the defense fails: damages apply under the normal rules, and the degree of subjective fault also affects the amount, even becoming a factor in punitive damages.
Common Disputed Issues
In adjudication, the most disputed issues are the presumption of "should have known" and the correspondence of documentation: the former turns on the deviation of purchase price, regularity of channels, differences in product appearance, and the operator's experience; the latter requires documentation to correspond one-to-one with the accused goods—generic receipts and backdated invoices carry weak probative force. In e-commerce, dropshipping and no-inventory sellers must likewise prove their upstream sources, and low prices and complaint histories in platform records heighten their duty of care.
Practical Significance for Both Sides
For sellers (especially small merchants, terminal retailers, and online consignment stores): obtaining invoices on purchase and keeping complete transaction records is the most important compliance act—a proper invoice is the amulet for future exemption from damages. For brand owners: suing small retail endpoints offers poor value; the strategy should be to use the retailers' purchase information to trace and strike the manufacturing and wholesale sources, while monitoring abnormally low prices in the channel—both an anti-diversion and an anti-counterfeit early warning.
Judgment on the practice behind these concepts must be case-specific; before proceeding, you may book a filed trademark agent on MyTMBee for targeted analysis.