Laws and Regulations Impacting Business in China: 2008 – 2009 Legislative Update

The New Chinese Anti-Monopoly Law Adds Uncertainty to Chinese Business Transactions

On August 30, 2007, the Standing Committee of the National People’s Congress (NPC) of the PRC adopted the Anti-Monopoly Law (AML), which came into effect on August 1, 2008. Three agencies have the responsibility to review and enforce relevant acts under the AML: (1) the Ministry of Commerce (MOFCOM) is responsible for review of concentration by business operators — that is, the mergers and acquisitions — and other activities likely to cause market concentration; (2) the National Development and Reform Commission (NDRC) is responsible for review of price fixing; and (3) the State Administration for Industry and Commerce (SAIC) is responsible for review of abusing dominant market position and abusing administrative power to eliminate or restrict competition.

Much more attention has been given to the MOFCOM’s market concentration review over several high-profile transactions in or related to China, such as the AB-InBev deal and the Huiyuan-Coca Cola deal. More than two dozen review applications have been submitted since August 1, 2008, most of which are still pending. Parties to the transactions that may trigger the concentration review must carefully structure the deal documentation in order to factor in the uncertainties and risks associated with the AML reviews: (1) the closing date may have to be prolonged, as it could take as long as 180 days to obtain a decision from the MOFCOM; (2) the deal may not be able to close, as the MOFCOM may ultimately issue an unfavorable decision, in which case the affected parties do have a judicial remedy to appeal; and (3) the deal may have to be restructured, as the MOFCOM may issue a conditional approval in order to reduce the adverse impact on competition. The conditional approval may alter the original deal structure, prohibit a future increase of the market share by buyers, or both. In such a case, the parties may choose to renegotiate or break the deal.

On the judicial enforcement front, the Shanghai courts are taking a step further. On December 22, 2008, the Shanghai No. 2 Intermediate People’s Court formed a Special Collegiate Tribunal for AML cases comprising seven experienced judges from the IP and administrative tribunals of that court. The Special Collegiate Tribunal will handle both AML civil and administrative cases. This gesture may well position Shanghai as a better forum in resolving AML disputes.

The AML has singled out the IP commercialization and enforcement by rights holders or owners in compliance with relevant IP laws and regulations as a lawful act, but reserved its application to acts of IP misuse, or otherwise elimination or restriction of competition (Article 55). Echoing Article 55 of the AML, the newly amended Chinese Patent Law, to be made effective on October 1, 2009, will allow a compulsory license imposed against those patent holders or owners whose acts are found to be monopolistic. Although the interplay between the AML and IP laws is yet to be seen, the IP owners or holders now should carefully review their commercialization and enforcement activities in China to avoid triggering the AML reviews, scrutiny, and claims.  

Technology Import and Export Contracts Required to Register Within 60 or Fewer Days

On February 1, 2009, the MOFCOM issued new Measures for the Administration of Registration of Technology Import and Export Contracts (Measures), which became effective as of March 3, 2009.

The new Measures require timely submission for registration of technology import/export contracts. Specifically, the technology importer/exporter shall apply for registration within 60 days after such contracts have become effective, with the exception of royalty-bearing agreements, in which licensing fees are paid in the form of royalties. The royalty-bearing technology import/export agreements shall be registered within 60 days after the royalty basis for the first installment has accrued. Furthermore, if a royalty-bearing agreement involves running royalties, the technology importer/exporter shall record the changes with the authority for each royalty basis of subsequent installment(s).

Such a requirement on the technology importer/exporter to record the relevant contract in a timely manner would not impact the effectiveness of the underlying technology import/export contract. However, without appropriate registration of the technology import/export contract, it would be difficult to remit the licensing fees out of China due to foreign exchange control policies.

Mandatory Appointment of a Chinese Agent to Handle IP Customs Recordation Imposed on Foreign Rights Holders or Owners Without a China Presence

On March 9, 2009, the General Administration of Customs issued Order No. 183 and published the amended Measures for the Implementation of the Regulation on the Customs Protection of Intellectual Property Rights (the amended Customs Regulations). The current Customs Regulations promulgated by the General Administration of Customs on May 25, 2004 will be abolished on July 1, 2009, when the amended Customs Regulations come into effect.

Under the current Customs Regulations, foreign IP rights holders or owners may apply to record their IP rights or take actions at customs through their representative offices or agents in China. While the amended Customs Regulations have imposed a mandatory entrusting requirement, foreign rights holders or owners without a presence in China will have to retain a Chinese agent to handle customs-related recordation and actions, as pro se actions will not be accepted from July 1, 2009.

Qualified Money Judgments Are Recognized and Enforced Between the Courts of Mainland China and Hong Kong

On August 1, 2008, Hong Kong became the first common law jurisdiction whose monetary judgment was recognized and enforced by courts in mainland China. The legal framework allowing such a historical beneficial breakthrough was established on July 14, 2006, when the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong SAR Pursuant to the Choice of Court Agreements Between the Parties Concerned (Arrangement) was signed between the Supreme People’s Court of mainland China and the Secretary of Justice of the Hong Kong Special Administrative Region. It took more than two years for the framework to develop into reality through the respective ordinance in Hong Kong and Judicial Interpretation in mainland China that gave effect to the Arrangement.

The PRC Supreme People’s Court (SPC) issued a Judicial Interpretation on the Arrangement on July 3, 2008. The application of the Arrangement is limited to: (1) final and enforceable monetary judgment involving commercial contracts other than employment contracts and contracts to which a natural person is a party acting for “personal consumption, family or other non-commercial purposes”; (2) such situations where the parties have designated in writing either the courts of Hong Kong or of the mainland China as the exclusive jurisdiction over their disputes provided the choice of court agreement must be independently valid; and (3) qualified commercial contracts that have been signed on or after August 1, 2008.

Due to the differences in the legal systems of mainland China and Hong Kong, the Arrangement reserved certain safeguard provisions, which were adopted by the Judicial Interpretation, as the grounds by which respective courts can refuse recognition and enforcement. Such grounds include:

• The choice of court agreement is invalid under the law of the place chosen by agreement of the parties where the original trial was conducted, unless the chosen court has determined that the choice of court agreement is valid
• The judgment has been fully enforced
• The court of the place where enforcement is sought has exclusive jurisdiction over the case according to its law
• The losing party has not been given sufficient time to defend his or her case
• The judgment has been obtained by fraud
• The court of the place where enforcement is sought has made a prior judgment on the same cause of action
• Enforcement would be contrary to the social morality and public interests of mainland China or the public policy of the Hong Kong SAR

Since 2000, mainland China and Hong Kong have been reciprocally recognizing and enforcing the arbitral awards of each other. The Arrangement has provided a promising future to Hong Kong as a regional or international dispute resolution center in dealing with China. However, there are more hurdles to overcome in enforcing a court judgment rendered by a Hong Kong court in mainland China, versus enforcing an arbitration award. For example, joint venture (JV) parties that now choose a Hong Kong court as the exclusive jurisdiction to resolve JV contract-related disputes, hoping to take advantage of Hong Kong’s mature common law litigation system and legal talent, may end up finding their carefully designed Hong Kong court judgment cannot be recognized and enforced in mainland China. As under the PRC law, the mainland China courts have exclusive jurisdiction over disputes relating to Sino-foreign JV contracts, which fall within the safeguard provisions of the Arrangement. Accordingly, in order to have the award recognized and enforced in mainland China, the parties may choose Hong Kong to arbitrate but not to litigate. For IP licensing agreements and royalty agreements, the foreign rights holders or owners now have the option to select Hong Kong as the exclusive jurisdiction to litigate or arbitrate in resolving payment disputes.  

China Trademark Law Is Being Revised: Is the Third Time Really a Charm?

China is in the process of revising its Trademark Law for the third time after the law was promulgated on August 23, 1982. Unlike the second amendment, adopted in preparation of China’s accession to the World Trade Organization in 2001, the current third revision was initiated by the China Trademark Office (CTMO) to streamline the trademark prosecution and enforcement process to meet the demand of rapid domestic economic growth. The CTMO published its latest draft in August 2007 (Draft) for public comments. It is anticipated that the newest Draft will be circulated for public comment later this year and the final third amendment will be implemented within the next two years.

The circulated Draft proposes to set a statutory one-year examination term for trademark application. This is a very ambitious proposal in view of the increased volume of applications and significantly backlogged pending cases. The Draft further addresses grounds for rejection based on senior applications or registations, which would reduce examination time substantially but would shift the burden of “gate keeping” before and after the applications to applicants and registrants. Consistent with the third amendment of the Patent Law, the Draft also proposes to increase the maximum statutory damages to RMB 1 million Yuan (about U.S. $147,000). In addition, the Draft proposes an increased administrative fine up to five times of the illegal gain, and where the illegal gain cannot be quantified the maximum statutory fine may reach RMB 1 million Yuan (about U.S. $147,000).