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

By: Liu Yanling, Partner and head of King & Wood's Bankruptcy, Restructuring & Insolvency Practice

Stellar Megaunion Corporation ("SMC") was in serious debt, as it could barely repay its liabilities. New World China Land ("NWCL"), which was seeking an opportunity to go public, proposed to acquire SMC as a shell company which has no assets, but is publicly listed. To achieve this goal, NWCL conducted several rounds of negotiations with SMC's creditors to settle SMC's debts and clear the roadblocks for the acquisition. However, the parties were unable to make much progress in the negotiations due to the large number of SMC's creditors involved. As SMC needed to solve its debt crisis as soon as possible and its negotiations with NWCL were deadlocked, the company decided to reorganize to completely release itself from the heavy debt burdens in a short period time.

A. Reorganization initiated by SMC's creditors
As SMC failed to repay it debts due, a third party creditor petitioned the proper Intermediate People's Court (the "Court") to reorganize SMC. The Court accepted the petition on March 11, 2008 ([2008] Yusanzhongbozi No.1).

SMC's Reorganization

B. Confirmation of Creditors' Rights
According to the proposed reorganization plan the administrator of SMC (the "Administrator") submitted to the Court and the first SMC creditors' meeting, 70 creditors filed claims and the total value of confirmed claims was nearly RMB 2.5 billion. [continue reading to find out the outcome]
 

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At first glance, the goals of intellectual property law and competition law might appear to conflict. IPR owners are granted statutory rights to control access and charge monopoly rents to others for use of their rights. IPR owners may also use terms of IPR licences to regulate downstream activities of their distributors, such as imposing exclusivity, territorial restraints and price restraints. Competition law, on the other hand, is directed at curtailing such market power which may prove harmful to economic welfare.

 However, IP laws and competition laws can also be seen as complementary rather than antagonistic. Both laws share the same fundamental goals of enhancing consumer welfare and promoting innovation. According to the United States (US) Department of Justice (DoJ) and the Federal Trade Commission (FTC) :

 “…[competition] laws protect robust competition in the marketplace, while intellectual property laws protect the ability to earn a return on the investments necessary to innovate. Both spur competition among rivals to be the first to enter the marketplace with a desirable technology, product, or service.”

 While an IPR may confer a “legal monopoly” over a product, process or work, it does not necessarily confer an “economic monopoly”. Further, while an IP license may well confer restraints on licensees (such as territorial restraints) with respect to a specific product, process or work, there may be sufficient actual or potential close substitutes that constrain the exercise of market power by the IPR owner.

 Despite the view that the goals of IP and competition laws are complementary, difficult questions can arise when competition law is applied to specific activities involving IPRs.

A. China's AML:  Article 55

 The IPR provision in the AML is set out in Article 55:

“This law shall not apply to the conduct of operators to exercise their intellectual property rights in accordance with the laws and relevant administrative regulations on intellectual property rights; however, this law shall apply to the conduct of operators to eliminate or restrict market competition by abusing their intellectual property rights.”

 Article 55 exempts conduct which amounts to an exercise of IPRs so long as:  those IPRs are exercised in accordance with the provisions of laws and administrative regulations relating to IPRs; and the conduct does not amount to an abuse of IPRs by eliminating or restricting competition.

 The Article 55 approach is very similar to the approaches in Australia and Canada. In both these countries, there has been debate about when the IPR owner is only fairly exercising their inherent rights in the IPR or is trying to achieve something more which has an anti-competitive outcome. Experiences in both countries show that this dividing line can be difficult to draw.

* Angie Ng is a graduate in the Competition and Regulatory Group at Gilbert + Tobin in Sydney, Australia.

** Ding Liang is of counsel for King & Wood's International Trade Practice in Beijing.

*** Peter Waters is a partner in the Competition and Regulatory Group at Gilbert + Tobin in Sydney, Australia.

King & Wood established a strategic alliance with Gilbert + Tobin in November 2007.
 

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 Recently, the Chinese government issued a couple of new laws and regulations to curb overseas “hot” money and strengthen the administration of foreign exchange. On August 5, 2008, the State Council amended and promulgated the Regulations on Foreign Exchange Administration of the People's Republic of China which requires that foreign exchange and the fund for settlement in a capital account should be used as approved by relevant approval authorities. On August 29, 2008, the Circular of Relevant Implementation Questions Concerning the Improvement of Administration of Payment and Settlement of Foreign Exchange Capital of Foreign Invested Enterprises (the “Circular”) was then issued by the State Administration of Foreign Exchange (“SAFE”), according to which the RMB settled from the capital account of a foreign invested enterprise (“FIE”) should be used in accordance with the business scope approved by the governmental agencies and may not be used to make equity investments in China. This means foreign investors cannot directly make use of the foreign exchange in their capital account to invest in China, which is expected to have a major impact on domestic re-investment by FIEs.

  In the past, a number of foreign investors used to invest in China by first establishing a FIE and then using the FIE as an investment arm to re-invest in China. Please note such an FIE referred to here is not the so-called “foreign funded investment company” (“Investment Company”) which is a special entity set up by foreign investors to mainly engage in direct investment in China. Rather it refers to such a FIE whose business scope may include production, retail, wholesale of products, consulting or technology services or other businesses rather than “investment” as permitted under PRC law.

 Interestingly, the item of “investment” is normally not allowed to be included in the business scope of a FIE by approval authorities like the Ministry of Commerce (“MOFCOM”)  and corporate registration bodies like the State Administration for Industry and Commerce (“SAIC”) along with their local counterparts. However,  the Provisional Regulations on Investment within China by Foreign Invested Enterprises which was promulgated dated July 25, 2000 jointly by MOFCOM and SAIC does grant a FIE a qualification to re-invest in China. In practice, a FIE is permitted to conduct investment in China e.g. acquiring the equity interests of other FIE(s) or domestic company(s), but a FIE is required to use RMB to make such investment under the current PRC law. Thus a question arises: if a FIE has no or cannot obtain sufficient amount of RMB by whatever lawful means, could it be allowed to convert funds into RMB from its capital account for the purpose of investment?

Huang Caihua, Associate, Foreign Direct Investment

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The Implementation Regulations of the PRC Employment Contract Law, which has been anticipated for over a year, became effective on September 18, 2008. Overall, the Regulations are consistent with the spirit of the Employment Contract Law and resolves certain problems in its implementation. However, the Regulations have a relatively limited impact and failed to meet many expectations.

A few limitations include:

(1) The Regulations do no resolve the question of whether a company may unilaterally make a final decision in formulating and revising internal rules, regulations, and other material matters or if the company must jointly formulate such internal policies along with its employees. Basically, the Regulations do not clarify whether the employer can determine the matters by itself when trade unions or employee representatives disagree. It is unfortunate that the differing views and practices on this question are not addressed as this is a major point of contention.

(2) The Regulations do not define the terms “temporary”, “auxiliary” and “substitute” employees as described in the Employment Contract Law. The three terms are used to classify those job positions that qualify for labor dispatch. Although the Regulations intentionally omitted definitions to preserve flexibility, the omission still makes that corresponding article in the Employment Contract law difficult to implement in practice and does not provide clarity for how to handle labor dispatch.

Resolving the above issues will most likely now be addressed by local rules promulgated in the future. Therefore, it is very important for employers to keep an eye on the local legislation (of both the place of the company’s registration and the place of performance of the employment contract). As always, the employer also then needs to continually update its internal regulations and rules in accordance to latest national and local legislation.
 

Duan Haiyan, associate, Labor & Employment

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On May 26, 2008, the China Trademark Review and Adjudication Board (“TRAB”) of the State Administration for Industry and Commerce (SAIC) made a decision in favor of Changyu Winery Group, upholding its exclusive use of the mark “cabernet” in Chinese （“解百纳”） as a registered trademark. The decision further found that Changyu established “解百纳”  as one of its trademarks through its use and did not consider “解百纳” the generic name for these cabernet grape varieties.  This means other wineries such as China Great Wall Winery, Dynasty Fine Wines Group Limited and Yantai Weilong Grape Wine Co. are prohibited from using the mark “解百纳", which may certainly cause damage to these wine makers in marketing their products.

This dispute mainly focuses on the following two issues:

1. Whether “解百纳” directly indicates the main raw materials and the characteristics of the products and accordingly should be considered a generic term for certain wine products;

2. Whether Changyu obtained the characters “解百纳” through its long term use.

Ting Xu, Associate, Trademark Department

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