China Law Insight

Microsoft's Windows Genuine Advantage Initiative and the Protection of Intellectual Property Rights in China

mark.schroeder@kingandwood.com (King & Wood) — Thu, 13 Nov 2008 16:33:59 +0800

There has been a great deal of media coverage in China in the past weeks regarding the impact of Microsoft’s making available its Windows Genuine Advantage (hereafter, “WGA”) to users with Chinese language versions of Windows operating systems. For users going to Microsoft for many of its software updates (excluding some security updates), a validation is required where WGA would notify the user if unlicensed Microsoft Windows software was found on the user’s computer. Microsoft contends that WGA has been made available to warn users of the presence of unlicensed software and to give them the opportunity to purchase licensed software which would then allow them to have the benefits associated with said software, such as product support and ongoing software updates.

Please read on for our full analysis.

Shi Yusheng, Partner, IP Litigation

Mr. Shi Yusheng has also discussed this issue recently on CCTV - 9's Dialogue

The warnings used by Microsoft in its WGA initiative, however, have caused concerns among Internet users in China. Users with unlicensed software will, after running the WGA validation procedure, have notifications on their desktop which inform them that their copy of Windows did not pass the validation check. A notification icon reminding the user of the validation failure will provide persistent notification on the user’s desktop. Additionally – and perhaps most concerning amongst users – the desktop is set to a plain black background once every 60 minutes or until the user’s Windows software passes validation. Though the black background can be disabled and the program only runs for 45 days, a WGA user who has unlicensed Windows software will have to put up with some small amount of inconvenience.

Microsoft initiated the WGA program for other Windows software versions previously in 2005 after a 10-month trial. There has been controversy over the WGA program in the United States, where a lawsuit was brought against Microsoft claiming that it had violated “anti-spyware” laws. Microsoft denied the allegations in this lawsuit. As a result of the release of WGA for Chinese language versions, a lawsuit has been brought against Microsoft by a user (surnamed Liu), in the Haidian District People’s Court in Beijing. Mr. Liu is not seeking damages, but rather hopes to have a fine imposed upon Microsoft for, as he terms it, “penaliz[ing] users by intruding on their computers”. The China Computer Federation has also condemned Microsoft’s WGA initiative, suggesting that it pursue action against infringers via the Chinese courts. Additionally, the Federation “suggested that the government order Microsoft to stop the screen black-outs and investigate foreign monopolies in China’s software market. It warned that national security was threatened if the country lacked its own computer operating system and office applications.”

Given this background, the question which must be answered is whether Microsoft is within its rights under Chinese law to conduct an initiative such as the Windows Genuine Advantage program, as the operation of said program has a clear impact on users of Microsoft software – licensed or unlicensed – within China. While this is a question for the Chinese courts to decide, it is valuable to look at factors pertinent to this issue, as follows:

- Microsoft has the right to protect its intellectual property rights in China, under the relevant laws. China has a well-developed intellectual property legal regime, which is designed to be in compliance with its obligations under TRIPS, pursuant to China’s joining the WTO in 2001. Should Microsoft choose to take action against infringers of its IP rights in China, there exists a robust infrastructure to pursue civil, administrative or criminal action.

- Infringement of software is rampant in China. The Business Software Alliance reported in 2007 that over 80% of business software in China is pirated. Such levels of piracy negatively impact the profitability of all software companies and make it especially difficult for domestic software companies to develop sustainable business models.

- Microsoft is the dominant provider of operating systems for computers in China, with over 90% of computers utilizing licensed or unlicensed Microsoft products.

- Users who go to the Microsoft website for updates and who are, subsequently, required to submit to the WGA validation procedure are required to agree to the terms under which Microsoft provides said downloads. Specifically, they are entering into a contractual agreement with Microsoft where they will receive the benefit of the updates/downloads, but must adhere to the terms of the agreement (i.e. the end-user license for the WGA program).

- Though a small percentage of WGA users have reported “false positives”, where they were notified that their Windows software was not a properly licensed version, the vast majority of users who fail validation were likely employing pirated software on their computers. The impact of failure of validation is clearly spelled out on the Microsoft website.

The Vice Director of the National Copyright Authority, Yan Xiaohong, in response to the concerns raised by Chinese computer users regarding the WGA initiative noted that the “NCA understands and supports parties involved in intellectual [property] rights, including Microsoft, as well as other institutions and organizations to safeguard their legal rights, but the means of the safeguarding should be carefully considered”. Additionally, Yan Xiaohong offered his advice to Microsoft regarding its pricing policy for its operating systems in China, saying that “national conditions should be taken into consideration when they make decisions on product pricing”. It must be noted, however, that in a recent online survey of Chinese computer users, while 79% believed that Microsoft should reduce its pricing, only 12% of respondents questioned the legality of Microsoft’s actions under the Windows Genuine Advantage Program.

Putting aside any potential anti-monopoly/anti-trust claims against Microsoft, the core issue is whether the means which Microsoft has chosen to protect its intellectual property rights is proper under Chinese law. It is clear that Articles 23 and 24 of the Regulations on Computer Software Protection of the Copyright Law of the People’s Republic of China (the “Software Copyright Regulations”) protects rights owners (such as Microsoft) against infringers of computer software. In regards to users who unknowingly have purchased pirated software, Article 30 of the Software Copyright Regulations clearly states that the user is not liable for damages, but must destroy the infringing software upon obtaining “reasonable grounds” to establish that said software is pirated or, alternatively pay an “appropriate” fee to the rights owner, in this case, Microsoft. A notification to the user under the WGA of the invalidity of his or her Windows software would likely qualify as the “reasonable grounds” necessary to require the user to either destroy the software or obtain an “appropriate” license for software from Microsoft. Those users which purchased computers with Windows software believing it to be properly-licensed, have the opportunity to report violating computer resellers to Microsoft. In the past, Microsoft has used voluntary user feedback regarding infringing computer resellers as evidence in lawsuits brought in various U.S. states.

Additionally, Article 8 of the Contract Law of the People’s Republic of China notes that the terms of a valid contract, such as those included in the Microsoft Genuine Advantage end-user license agreement are legally binding upon the contracting parties. Users who take advantage of the free software “downloads” available via the WGA program must, as contracting parties, adhere to the terms of the licensing agreement.

In regards to any claims of WGA acting as “spyware” and infringing upon the privacy of Chinese computer users, Article 40 of the Constitution of the People’s Republic of China protects the privacy of individuals in regards to their correspondences. Additionally, Section 7 of the Regulations of the Administrative and Protection of Computer Information and Network Security, (US Embassy Translation), protects those communications made over the Internet. There are, however, no clear laws in China which correspond to the anti-spyware laws enacted in some U.S. states, such as California, so a court would have to apply the existing laws in a narrower context.

As the claims to date against Microsoft in this controversy have not revolved around the validity of its infringement claims, but rather the means which it is choosing to enforce the associated intellectual property rights, a court will likely focus its analysis on the validity of the contractual agreement between Microsoft and WGA users and, furthermore, whether programs such as WGA illegally intrude upon the privacy of computer users. In essence, did the users agree to the terms of WGA in order to get updates to their computers and, if so, should they be held to this contractual agreement, including notifications that their computers have unlicensed software or periodic screen blackouts? Though the media has chosen to highlight what some users have perceived to be a negative impact resulting from the WGA initiative in China, it still remains that the vast majority of those users who failed the WGA validation were likely using unlicensed Microsoft software. Lawrence Lessig, noted copyright law scholar and Stanford Law School Professor, notes that Microsoft may, however, benefit

“[w]hen the Chinese “steal” Windows, that makes the Chinese dependent on Microsoft. Microsoft loses the value of the software that was taken. But it gains users who are used to life in the Microsoft world. Over time, the nation grows more wealthy, more and more people will buy software rather than steal it. And hence over time, because that buying will benefit Microsoft, Microsoft benefits from the piracy. If instead of pirating Microsoft Windows, the Chinese used the free GNU/Linux operating system, then these Chinese users would not eventually be buying Microsoft. Without piracy, then Microsoft would lose.”

While the means which Microsoft has chosen to enforce its intellectual property rights under WGA will likely come under the scrutiny of the Chinese courts in the near future, what should not be lost in this controversy is that the health and well-being of the nascent Chinese software industry is largely dependent upon the protection of intellectual property rights. If there is to be a domestic Chinese company which will challenge Microsoft for dominance of the software market in China, it will only be through requiring that users pay for properly-licensed software and that users move away from piracy of software as an accepted practice. As Lessig notes, “[a] property right means giving the property owner the right to say who gets access to what – at least ordinarily. And if the law properly balances the right of the copyright owner with the rights of access, then violating the law is still wrong.”The laws of China clearly provide protection for intellectual property rights, but only time will tell if piracy of software in China will become the exception to accepted practice. Until that time, companies, such as Microsoft, will look to alternative ways to monetize and protect their intellectual property and the courts will have to decide if the means employed are legitimate.

Clean Development Mechanism: Untapped Potential

mark.schroeder@kingandwood.com (King & Wood) — Mon, 10 Nov 2008 17:55:30 +0800

Under the United Nation's Framework Convention on Climate Change (UNFCCC), “developed country Parties should provide new and additional financial resources to support the transfer of technology and take all practical steps to promote, facilitate and finance the transfer of, or access to, environmentally sound technologies and know how to developing country Parties.” However, a UNFCCC report revealed that a large portion of developing nations do not take advantage of CDM projects to import technology.

As long as technology transfer from developed countries is a convenient low-cost means for China to reduce GHG emissions, why doesn't China have more CDM projects that involve technology transfer? [continue reading to see our analysis]

Wang Rui, Partner, International Trade

Lack of Policy Incentives

Currently, the 《清洁发展机制项目运行管理办法》[Measures for Operation and Management of Clean Development Mechanism Projects] (the “CDM Project Measures”) are the only specific “CDM project” related legislation in China. The CDM Project Measures have set out related procedures and requirements but with respect to technology transfer, however, these Measures only specified a general principle that “CDM project activities should promote the transfer of environmentally sound technology to China.” Notably, these provisions did not impose any mandatory obligations or incentives to the foreign party and Chinese project owner to include technology transfer factors in proposed CDM projects.

Economic Barriers

Many Chinese enterprises are not interested in introducing technology transfer into CDM projects. For most Chinese enterprises, equipment and technology provided by foreign parties indicate longer cooperation terms and are associated with bigger risks. In addition, project owners normally will consider the payment of operation fees and maintenance fees once the clean technologies and equipment are put into use. If the technology transfer is free of charge but the operation and maintenance fees are expensive (the assumption of Chinese companies is that technical teams from western countries charge very high fees for remedial services), this may not be a good deal for the Chinese party. For Chinese companies, it is important to make sure that technology transfer does not impose large up-front costs.

Intellectual Property Concerns

Companies from developed countries are also concerned whether their intellectual property rights can be effectively protected should the technology transfer be implemented. As such, “some of the technologies imported under the CDM projects are second or third class in exporting countries. It is not possible [for Chinese enterprises] to touch the newest emission reduction technologies.”

Solutions

The UNFCCC and Kyoto Protocol are subject to adjustments or even drastic change after 2012. Before the CDM system is rescinded in multinational negotiations on climate change, China should fully use these valuable opportunities to gain access to more advanced emissions reduction technologies from developed nations to achieve sustainable development through the following means.

(1) Legislation.
Amend the CDM Project Measures to mandate a certain degree of technology transfer involved in each of the CDM projects, unless the particular types are unsuitable for technology transfer. Technical standards and criteria should be set out to screen the out-dated technologies. More legislative efforts should also be made to promote the activities of technology transfer under the CDM projects, such as providing taxation incentives and favorable treatment to both Chinese and foreign participants.

(2) Provide incentives to the private sector both domestically and abroad.
From the standpoint of Chinese enterprises, the current mechanism for allocation of revenues from CERs under the CDM Project Measures can be adjusted by reducing the portion of the cake taken by the government. In addition, the Chinese government may require that, as a contractual condition, “the foreign companies executing CDM projects should be responsible for costs incurred until the anticipated improvement in emissions is achieved.” As such, the economic concern of Chinese enterprises may be largely eliminated.

In order to encourage more foreign companies to do technology transfer, in addition to the legislative efforts, the government may popularize a “bundled CDM project package”. In this way,“[a] consortium of advanced technology equipment manufacturers and the GHG emission reduction credits buyers may obtain the purchase order and GHG emission reduction credits respectively by providing advanced equipment and advanced technology transfer and carbon funds accordingly.” This is a new “kind of CDM cooperation mode with complementary advantages” - several examples in China proved its feasibility and popularity.

Hong Kong's Proposed Competition Ordinance: Unsettled Issues of Design

mark.schroeder@kingandwood.com (King & Wood) — Tue, 04 Nov 2008 17:50:56 +0800

The Hong Kong Government has decided to introduce a cross-sector competition law during the 2008-09 legislative session. The Government has published a draft framework for the competition law and is currently seeking public comments on this draft.

The introduction of a competition law is a significant step for an economy to take. Not all competition laws are the same and the most important thing is that the law is designed well to suit the Hong Kong economy.

I. Key features of the draft framework paper

A. Competition rules
There are three core prohibitions commonly found in competition laws around the world. These are a prohibition against horizontal coordinated conduct such as price fixing between competitors; a prohibition on an abuse of unilateral market power (sometimes called an abuse of dominance or otherwise called an abuse of a substantial degree of market power); and a prohibition against anticompetitive mergers.

The competition law would contain two broad prohibitions:

• prohibition against undertakings (individuals, companies or other entities engaged in economic activities) entering into agreements, decisions or concerted practices with the purpose or effect of substantially lessening competition (the "First Conduct Rule"); and

• prohibition against undertakings that possess a substantial degree of market power from abusing that power with the purpose or effect of substantially lessening competition (the "Second Conduct Rule").

The Public Consultation Paper also raises the possibility of a prohibition against mergers or acquisitions that are likely to substantially lessen competition (the "Merger Rule") and a clearance process for mergers and acquisitions. If this possibility was not adopted, it would put the Hong Kong competition law out of step with most other competition law regimes around the world.

Also prohibited in some jurisdictions and not in others is certain vertical conduct like resale price maintenance. For example, the competition law on the Mainland contains such a provision. However, in step with recent US case law, Singapore does not prohibit such vertical conduct. The proposed Hong Kong law would follow the latter course. [continue reading for an in depth analysis]

*Nick Taylor is a partner of Gilbert+Tobin, a strategic partner of King & Wood since November 2007.
**Kenneth Choy is a partner of Arculli, Fong & Ng, King & Wood's associate firm in Hong Kong.

B. Exemptions and exclusions
One of the issues that is gaining the most interest in the consultation phase is the issue of whether and when should there be exclusions or exemptions from the core competition law rules identified above. Under the Hong Kong proposed Competition Ordinance, conduct would be excluded or exempt from the competition law if it passes one of the following three tests:

• the Economic Benefit Test: essentially an efficiency gains test weighing economic benefits against potential anti-competitive harm;

• the Services of General Economic Interest Test: undertakings would first have to show that (a) they have been "entrusted" by the Government to provide the service in question and (b) the conduct must be a service of general economic interest (i.e. the service must be an essential public service); or

• the Public Policy Test: a test which takes into consideration benefits and broader than economic benefits.

Undertakings would be encouraged to make self-assessments to determine if their conduct fulfills any of the three tests set out above. However, if undertakings wish for clarification as to whether their agreements or conduct are exempt or excluded from the competition law, they may seek the Commission's guidance or decision.

The Commission will also possess the power to issue Block Exemptions. Block exemptions would exempt categories of agreements from the First Conduct Rule on the basis of the Economic Benefit Test. The Commission must undertake a public inquiry process before issuing a Block Exemption.

C. Two new Government instrumentalities
A Competition Commission (the "Commission") would be established and would consist of a minimum of seven members appointed by the Executive Council.

Generally speaking, the small and medium enterprise sector around the world is a strong advocate for robust competition laws but this is not so in Hong Kong. In Hong Kong there is apprehension amongst some small businesses that the law may be used by large companies against smaller rivals. If that were the case, it would be quite counterproductive against the achievement of the objective of the law. Nevertheless, one feature of the package has been designed to address that concern.

Although the person selected would not formally represent small business, at least one member of the Commission would be chosen who has experience with small and medium enterprise to ensure that these perspectives are available to the Commission when making decisions.
The functions of the Commission would be to:

• investigate suspected breaches of the law, for which the Commission will have powers to require documents to be produced and parties to answer questions. However, searches of premises will require a magistrate's order;

• issue orders appropriate to bring breaches of the law to an end or take enforcement litigation; and

• consider applications for guidance or decisions on the applicability of the exemptions to the Conduct Rules where the criteria for granting the exemption requires an economic assessment.

Where serious penalties are to be imposed by the State, or where there is litigation between private parties, matters would be brought before another new instrumentality, the Competition Tribunal. The Tribunal conduct trials, consider evidence and make judgment decisions. The Tribunal would have at least one judicial member would preside over matters but, reflecting that competition law is a complex economic regulatory regime, the Tribunal would also have members sitting on the bench selected for their economic credentials or business credentials who would not necessarily have any formal legal training. Appeals from the Tribunal would be to the Court of Appeal.

D. Private actions by individual plaintiffs and class actions

Persons or entities which have suffered loss or damage arising from breaches of the competition law may litigate to seek an award of damages or a range of other orders. Such actions could be brought after the Commission has taken action and the private plaintiff would not then be required to again prove matters already determined in the Commission. In such "follow-on actions" the private plaintiff would generally only need to prove what damages had flowed from conduct that the Commission or Tribunal had already decided amounted to a breach. However, it would also be possible for the private plaintiff to bring litigation even where the Commission has not taken any action ("stand-alone actions") but, of course, the private litigant would have to prove all the elements of a contravention and damage.

A credible organization acting in the interests of a defined group affected by anti-competitive conduct is authorised to bring an action on behalf of the group. To guard against potential abuse, a body wishing to bring such an action must have permission of the Competition Tribunal (as described below) and such permission is only granted if the Competition Tribunal considers that the body can fairly and adequately represent the interests of the relevant group.

II. Key issues that the draft paper does not currently address
A. Vertical arrangements
Traditionally, competition law regimes have included a general prohibition against vertical agreements (i.e. supply agreements) that have the purpose or effect of substantially lessening competition. However, the proposed legislation for Hong Kong does not prohibit vertical arrangements between suppliers and distributors of goods and services other than in the context of abuse of substantial market power. The recently adopted Singapore Competition Act takes a similar approach to the Hong Kong proposal.

Common vertical arrangements involve suppliers fixing re-seller price or setting minimum re-sale price for goods and services. Exclusive dealing and tying arrangements are other examples of vertical arrangements. The proposal takes the view that unless a supplier has substantial market power, a vertical agreement is simply a way of influencing the way in which its product is distributed and marketed and that a supplier has no incentive to use a distribution or marketing strategy to make its products less attractive to consumers than its competitors' goods and services.

That approach is similar to the approach emerging in the US through case law and in the EU through the block exemption and case law. The idea is that where a manufacturer and its distributor(s) lack a substantial degree of market power or lack dominance, there is vigorous competition between that brand of goods and other brands of goods. This "inter-brand" competition is invariably a more vigorous form of competition than "intra-brand" competition would be because the whole supply chain is competing, not just the final distributor. The theory also goes that any "intra-brand" restrictions (i.e. restrictions by the manufacturer upon the distributors of its brand of goods) would only be applied by a manufacturer or its distributor(s) where the restrictions enhance the sales of that brand of product against others – that is, the superior "inter-brand" form of competition.

Turning to how this might apply in Hong Kong, as set out above, while a supplier's possession of substantial market power is not prohibited, abuse of such power through vertical arrangements is.
Hong Kong has a small economy where more sectors than most economies have only a few sellers. These sectors are neither perfectly competitive nor are the players strong enough to be described as possessing a substantial market power. It remains to be seen whether applying principles developed in very large economies (i.e. a law that relies either on companies being vigorously competitive or have substantial degree of market power) will be sufficient in small economies such as Hong Kong and Singapore (i.e. in which market participants may fall between these extremes).

B. Geographic markets
Hong Kong is a small, open economy. It is also rapidly integrating into the larger Mainland economy, particularly the Pearl River Delta ("PRD").

The Hong Kong economy's openness can make it susceptible to trans-border anti-competitive conduct, such as regional or global cartels. But it also can complicate the task of market definition. There maybe many sectors of the Hong Kong economy where the relevant market definition may be larger than Hong Kong, such as the PRD as a whole.

Traditional approaches to market definition can accommodate trans-border markets. Hong Kong's competition authority may need to work closely with competition authorities in other jurisdictions to address anti-competitive conduct affecting Hong Kong consumers.

C. Intellectual property
At one level competition law and intellectual property law seek the same thing – to enhance economic efficiency. However, the way in which the two bodies of law seek to do so are, to a significant extent, at odds. In particular, intellectual property laws award a short run limited monopoly to encourage innovation and creativity while competition laws seek to prevent monopolies. This has spawned extensive and expensive litigation in established competition law regimes (e.g. the Microsoft cases in which both the US and Europe found Microsoft to have abused its IP rights).

In the US and Europe there are no exceptions or special provisions to the core competition laws provisions for the use of IP rights (although there is extensive informal comfort from the US regulators in non-binding guidelines and the European Commission has issued limited protection through the block exemption process).

Other countries have specific exemptions for IP rights – take for instance Article 55 of China's Anti-monopoly law. It states:

"This law [that is the Anti-monopoly law] shall not apply to the conduct of operators in exercising 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."

There are also special provisions for IP rights in the competition laws of Australia, Canada and Singapore.

The Hong Kong proposal can accommodate both the US approach (that it is possible to argue that a mere use of intellectual property rights would not offend the prohibitions) and also accommodate the European approach which is to provide additional comfort through the Block Exemption process.

D. High level prohibitions or specific guidance
The law would not define key concepts such as what is a ‘market' or ‘abusive behavior'. There are no "bright line" or "per se rules" (such as an absolute prohibition on price fixing). There are only high level definitions of ‘economic efficiency' defense or ‘essential public service'.

In long established competition law regimes, clarity is typically found in years of case law precedents. This has its advantages because the law can change over time as different types of anti-competitive conduct are discovered or conduct is identified that is actually pro-competitive but falls foul of prescriptive prohibitions.

In newer competition laws, it is more common for the legislation itself to articulate detailed prohibitions rather than relying on the interpretation of the law by the Court or Tribunal (see for example China's Anti-monopoly Law which identifies six specific types of abusive conduct and six categories of economic benefit for which exemptions apply).

The course currently mapped out for Hong Kong provides a range of tools to provide certainty to business.

E. Government exemption
The current proposal is to exempt the Government, its instrumentalities and statutory bodies from the application of the law. This is similar (although not identical) to the approach in Singapore.

Competition laws tend to exempt mainline or core Government activities, although they use different approaches. At one level, this can be regarded as necessary: if the police shut down smuggling rackets, it necessarily reduces competition for the supply of the goods that otherwise would be smuggled and if the health authorities require food suppliers to adhere to standards or shut those that fail to meet the standards, competition from sub-standard food suppliers is reduced or eliminated. These actions must continue unhindered.

Turning to governments' involvement in activities that are more akin to the operation of businesses competition law may be appropriate to apply. However, properly identifying and delineating the separation between the regulatory and commercial activities of government s a detailed time consuming task. In economies in which the Government has extensive business interests this task is a higher priority than in economies in which the Government's interests are less extensive. In this regard, it is notable that the Hong Kong Government is less involved in business than most other governments (e.g. the Singapore Government).

The approach in other competition laws is not to have a blanket exemption but to assess whether the Government entity is engaged in business or commercial activities, which can be a complex exercise. The Government's proposal is that the Government and statutory bodies will initially be covered by a broad exemption but that there will be a review to determine whether parts of the Government should, in fact, be subject to the law. This approach has the advantage of not swamping the Commission in the start up phase of the Hong Kong law with a long and detailed task that for the reasons set out above is a lower order priority.

F. Criminal Sanctions
There has been a trend to criminalize certain competition law offences, such as cartel behavior. However, the draft framework paper proposes that the laws:

• not impose criminal sanctions for Conduct Rules; but also

• impose substantial fines of up to 10% of the offending firm's revenue. The fines which can be imposed by the Commission are limited to HK$10m and if the Commission seeks higher fines it will need to bring proceedings before the Tribunal.

A key issue with respect to these two points together arises from a recent decision of the Court of Final Appeal in the Koon Wing Yee v Insider Dealing Tribunal and Another [2008] 3 HKLRD 372 (the Koon Case) concerning the insider trading provisions of Hong Kong's Securities Ordinance (as it applied prior to certain amendments). The court found that the Hong Kong's Basic Law required Hong Kong legislation not to infringe certain human rights found in the constitutionally entrenched Bill of Rights. When the law provides that a substantial penalty may be imposed, the party alleged to have breached the law is entitled to the types of safeguards which apply in criminal proceedings, such as the privilege against self incrimination. This does not make the offenses criminal – for example attracting a prison sentence and resulting in a person having a criminal record. The offences remain civil but the human rights protections are more stringent if the penalties are substantial.

In a related case, the Court of Appeal ruled that questioning of individuals during an investigation by the Securities and Futures Commission (Hong Kong's security regulator) does not infringe the individual's right to remain silent or his or her right to a fair trial. A separate question arises as to whether, once collected, the material can be used in a trial where significant penalties may result. If this ruling stands, it will strengthen the Commission's ability to conduct investigations.

III. Final Comments

Numerous stakeholders have commented on the Government's proposed legislation since the Competition Policy Review Committee issued its first public discussion document in November 2006. Taking into consideration the various public comments, the Government intends to introduce a Competition Bill in the 2008-2009 legislative session. The likely content of the proposed law as summarized in this article will give businesses an opportunity to comment on the proposals and also provide some lead time to review their business practices, correct potentially infringing conduct and develop best practice guidelines to ensure compliance once the law comes into effect.

Debt Restructuring -- Second Life for a Distressed Company

mark.schroeder@kingandwood.com (King & Wood) — Wed, 29 Oct 2008 16:50:20 +0800

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.

SMC's Reorganization
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).

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]

Liu Yanling, Partner and head of King & Wood's Restructuring & Insolvency group.

C. The Reorganization Plan
The Administrator proposed the following reorganization based on SMC's financial status and characteristics.

a. SMC would repay the secured creditors with the asset(s) over which the security was created. Where the asset(s) is converted into cash, the corresponding secured creditor enjoys priority of repayment and a cash payment equivalent of 30% of the principal of the secured claim would be paid to the secured creditor.

b. The employees' claims and tax claims should be paid in full.

c. The unsecured creditors should be repaid 30% of the principal of the unsecured claims.

d. The shareholders of non-tradable shares of SMC transferred 50% of their equity shares they held to an outside company in Shanghai as consideration for funding SMC's cash repayment to its creditors. Up to 40 million of the non-tradable shares were transferred to the Shanghai company could be converted into cash at RMB 5/share and used to repay the creditors. The secured and unsecured creditors may apply in writing for repayment from SMC on a voluntary basis.

e. SMC then transfers all its existing assets (excluding those over which secured claims were created) to a Corporate Management and Consultancy company ("CCCMC") as consideration for CCCMC to repay the remaining claims outstanding upon cash repayment by the Shanghai company and the stock repayment for non-tradable shares.

On April 18, 2008, SMC convened the first creditors meeting and the Administrator submitted the proposed reorganization plan to the Court and to a creditors meeting for to vote. The plan was passed during the meeting and approved by the Court.

The Reorganized SMC
Upon the completion of the reorganization, SMC repaid claims of RMB 560 million and the creditors discharged claims of RMB 1.9 billion in total. All the assets and the outstanding portion of the creditors' claims were transferred to CCCMC. SMC was released from the said portion of liabilities and became a shell company without any assets or liabilities.

Compared with the reorganization of other listed companies, the reorganization of SMC had its own features. First, SMC's reorganization timeframe was short — the proceeding was concluded within 41 days from the day the Court accepted the reorganization petition. Second, SMC utilized shares, a fictitious “currency”, to fund a portion of cash repayment under the reorganization plan. This approach not only lowers the cost to the Shanghai company that assumed shares, but also provides reasonable compensation for SMC's creditors with the reevaluation of the company shares upon further asset restructuring.

The Importance of Reorganization for Listed Companies
By April 30, 2008, more than 10 listed companies in China had completed their reorganizations. Reorganization offers those companies that face a debt crisis due to their poor operation an opportunity of survival. To distressed public companies, reorganization is not only a means to gain a second life but also a tool to better protect their creditors and shareholders, alleviate the unemployment pressures of their employees, and stabilize the local economy.

As the most efficient method to solve a debt crisis, reorganization has been increasingly used in the debt restructuring of listed companies. It is also the most popular approach for parties to release the debt burden of a target company in merger and acquisition transactions in China.
Compared with other conciliation proceedings, reorganization has some advantages.

First, reorganization is time efficient. The company under reorganization does not need to negotiate with each of its creditors. The reorganization can be adopted with the consent of the majority of the creditors. Even if the creditors in a certain voting group rejects a proposed plan, the court may rule approve it if certain requirements are met.

Second, reorganization has a better chance of success. So far, no company has entered bankruptcy proceedings following an unsuccessful reorganization.

Third, as the number of companies qualified for becoming a shell company is small, more and more investors with substantial financial strength prefer to acquire shell companies via reorganization. Reorganization can lower the investment costs by alleviating the debt burden of the distressed company and repaying a portion of the creditors' claims with the stocks of the company and leave the investors with more funds for further asset restructuring.

Fourth, once the reorganization plan is approved by the court, the plan is binding on all creditors. This ensures that the distressed company is completely free from further claims by the creditors and becomes a shell company.

As an effective means of saving distressed companies and conducting debt restructuring in M&A transactions, reorganization creates a new mechanism that benefits all stakeholders of distressed companies.

Intersect Between Intellectual Property Law And Competition Law

mark.schroeder@kingandwood.com (King & Wood) — Fri, 24 Oct 2008 14:56:16 +0800

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.

[continue reading for further analysis]

* 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 Group 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.

B. IPRs and abuse of dominance

Article 55 also subjects the exercise of IPRs to the abuse of dominance conduct rule (Article 17 of the AML). This is similar to the approaches of the competition laws of the US, Singapore, EU and Australia.

The key phrase is “abusing… intellectual property rights”. However, this phrase has not been defined in the AML.

This phrase, is, however used in Article 40 of the World Trade Organisation’s (WTO) Agreement on Trade Related aspects of Intellectual Property Rights (TRIPS). Article 40(2) may shed some light in relation to the AML phrase “abuse of intellectual property rights”:
“…nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market …a Member may [however] adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.”

China acceded to the WTO in 2001 and as such has an obligation to comply with all WTO agreements including TRIPS. In paragraph 286 of the Report of the Working Party on the Accession of China, some members of the Working Party expressed some concern as to the compatibility of China's rules on control of anti-competitive licensing practices or conditions with the corresponding obligations under Article 40 of TRIPS. Notably, the representative of China stated in response that China's legislation would comply with these obligations. The representative of China stated that these rules would apply across the board to all intellectual property rights. The Working Party on the Accession of China took note of this commitment. Hence, there is some suggestion that Article 55 of the AML may not stray too far from Article 40(2) of TRIPS.

On October 11, 2007, the European Communities raised the following question with China during a WTO Council for TRIPS meeting: “…[t]he EC welcomes the recently adopted Chinese Anti-Monopoly Law. This new legislation refers to the concept of ‘abuse of intellectual property rights’ in particular in Article 55. Can China clarify what this concept means in practice? Can China confirm that this concept does not go beyond what the TRIPS Agreement considers as abusive practices under Article 31(k) (compulsory licensing) and Article 40 (competition)?” This question may be indicative of concerns from other WTO members as to whether China will ignore Article 40 of the TRIPS Agreement when defining the term “abuse of intellectual property rights”.

Dominant entities exercising IPRs may still have to be concerned about the following provisions: (a) the prohibition against refusal to deal (without justification) ; (b) the prohibition against exclusive dealing (without justification) ; (c) the prohibition against tying ; and (d) the prohibition against applying differential treatment to parties . In a typical IP licence, it is common to find tying and exclusive dealing provisions. It is also common for IPR owners to refuse to deal with certain entities for various reasons.

Given that no guidelines or regulations have been issued in relation to the AML, there is much uncertainty as to how the dominance provisions (or the rest of the other provisions) of the AML will operate.

In relation to Article 55, the following questions arise: Should dominant entities (exercising IPRs) be subject to the same competition scrutiny as dominant entities selling other goods or services? Or would Chinese competition regulators apply a different standard in relation to IP licences and assignments, in recognition of the fact that IP differs from all other forms of property? Does the Chinese government intend for there to be transitional provisions in relation to the AML? Will the AML apply to IP licences and assignments entered into after 1 August 2008 (the date in which the AML will come into effect) or will it apply retrospectively to IP licences and assignments entered into before 1 August 2008?

C. The Article 15 “improving technology, research and new products” exception

If entities are somehow not able to get their IP related agreements exempt from the AML pursuant to Article 55, then there is a possibility that these agreements may be exempt pursuant to Article 15. Specifically, Article 15 of the AML exempts certain categories of agreements from the “monopoly agreements” conduct rule (located in Article 13 and 14). However, it is important to note that Article 15 does not exempt an agreement from the abuse of dominant position conduct rule (located in Article 17).

The most relevant Article 15 exemption in relation to IP related agreements is the “improving technology, research and new products” exception located in Article 15(1). Specifically, Article 15(1) exempts agreements made “for the purpose of improving technology, researching and developing new products” from the monopoly agreements conduct rule.

The EU has a similar exemption in the form of a block exemption entitled “categories of research and development agreements”. However, in order for an agreement to fall under the EU block exemption, there are several conditions which need to be fulfilled, including the condition that, if the agreement only provides for joint research and development but excludes joint exploitation of the results, then each party conducting the research must be free to exploit the results and any necessary pre-existing know-how independently. In addition, agreements exempt under this block exemption are immune from competition law only for a limited period of time (usually 7 years) and the market share of the participant undertakings must not exceed a particular threshold (for non-competing undertakings, the threshold is 25%).

It is unclear whether the Article 15 exemption will apply in a similar way as the EU’s “categories of research and development agreements” block exemption.

There are still many grey areas to iron out in relation to Article 55 and Article 15 of the AML. Hopefully guidelines or regulations, which are able to shed light on some of the issues and questions above, will be issued before the AML comes into effect.

Foreign Exchange Capital: Restrictions on Domestic Investment

mark.schroeder@kingandwood.com (King & Wood) — Mon, 20 Oct 2008 15:27:41 +0800

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? [continue reading to find out the current policy]

Huang Caihua, Associate, FDI

Before the issuance of such a Circular, the above-mentioned question has for a very long time confused not only foreign investors, its lawyers, and other consultants, but also some local officials of SAFE partly due to the reason that SAFE did not clarify this question by issuing an official and universally-applicable rule. As a result the answer to this question has to depend, to large extent, on the local regulatory practice. Not surprisingly, in practice, some local offices of SAFE held a view that a FIE should not be allowed to exchange the foreign currency from its capital account into RMB for purposes of re-investing in China on the grounds that the foreign currency deposited in such account had been specially approved to satisfy the defined project as described in the business scope. In the meantime, some others officials held different views and allowed the FIE to settle the foreign exchange into RMB to satisfy the needs of re-investing in China. This is particularly the case where a local government is thirsty for foreign investment and it may be driven to take a more flexible policy.

Now, with the promulgation of the Circular, the door to direct re-investment by FIE(s) using the RMB settled from its foreign exchange capital account in China is closed. If a FIE happens to come upon a good investment opportunity, it will have to use its accumulated RMB profits or income or borrow RMB from domestic banks.

As is known in recent years, international “hot” money has unnerved the Chinese government which has thus taken a series of measures to cope with the issue. Without doubt the new rule is intended to strengthen the administration of foreign exchange flow and curb the inflow of hot money. However while it may contribute to the strengthening of its foreign exchange administration and the stability of its economic growth, it may also add the cost of making re-investment by foreign investors through their FIE(s) in some cases more difficult from a commercial perspective.

Employment Contract Law Implementation Regulations: Initial Thoughts

mark.schroeder@kingandwood.com (King & Wood) — Wed, 08 Oct 2008 13:17:19 +0800

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

读《劳动合同法实施条例》有感
金杜劳动部段海燕
2008年9月18日，人们翘首以盼的《劳动合同法实施条例》（以下简称“条例”）正式出台。这部备受社会公众关注、体现了各方利益搏弈最终结果的行政法规，主要体现了如下三个方面的特点：
1、协调一致性。从整体上看，条例保持了与《劳动合同法》的一致性，体现了《劳动合同法》确立的“保护劳动者合法权益，构建和发展和谐稳定的劳动关系”的立法宗旨。尽管条例第十九条列举了14种情形下的用人单位对劳动合同的单方解除权，以此刻意地强调无固定期限劳动合同的“非终身性”，但是，其内容仅仅是《劳动合同法》相关条款的简单照搬与罗列，没有超出《劳动合同法》规定的范围。正如《劳动合同法》起草人之一、全国总工会民主管理部部长郭军对该条款的评价：“除了向用人单位解释了一下原有条文外，没有任何积极意义”。
2、可操作性。主要表现是：一是明确了未签订书面劳动合同的法律责任。条例规定了用人单位因未签订劳动合同而支付双倍工资的起始时间，以及导致“视为无固定期限劳动合同”的起始时间。同时，针对员工拒绝签订书面劳动合同这一现实问题，赋予了用人单位及时终止劳动合同的权利。二是规范了经济补偿的计算标准。针对《劳动合同法》第四十七条有关解除劳动合同经济补偿给付标准的规定，条例进一步明确了该标准中“月工资”的范围，即“包括计时工资或者计件工资以及奖金、津贴和补贴等货币性收入，且不得低于当地最低工资标准”。三是明确了劳动合同履行地规定优先适用。对于劳动合同履行地与用人单位注册地不一致的情形下员工的最低工资标准、劳动保护、劳动条件、职业危害防护和本地区上年度职工月平均工资标准等事项的确定，条例第十四条规定原则上适用劳动合同履行地规定。但是，双方约定适用用人单位注册地规定，且用人单位注册地规定的标准高于劳动合同履行地标准的，从其约定。这一规定为解决劳动合同涉及的地域性差别问题提供了明确的法律依据；四是明确规定了工作年限连续计算的原则。一方面，针对无固定期限劳动合同订立条件，条例第九条明确了“连续满10年” 的起始时间，还特别规定包括劳动合同法施行前的工作年限。这一规定明显针对部分企业赶在《劳动合同法》实施前采用“突击裁员，重新雇用，工龄归零”方式规避法律的行为而定，目的就是要使其计划落空。另一方面，条例第十条规定，员工非因本人原因从原用人单位被安排到新用人单位工作的，其在原用人单位的工作年限合并计算为新用人单位的工作年限。如果原用人单位已经向员工支付经济补偿的，新用人单位在依法解除、终止劳动合同计算支付经济补偿的工作年限时，不再计算员工在原用人单位的工作年限。

3、局限性。主要表现是：一是对于《劳动合同法》第四条第二款规定的“与工会或者职工代表平等协商确定”的含义，即用人单位内部规章制度的制定，实行用人单位“单决”制还是用人单位与工会或者职工代表“共决”制这一问题，条例没有解释，法律界在这一问题上存在的较大分歧至今未能得到统一；二是对于《劳动合同法》第六十六条规定的、可实施劳务派遣的岗位应当具有的“临时性、辅助性、可替代性”没有定义，以至该条款因缺乏可操作性而成为“纸上的法律”；三是对《劳动合同法》第二十二条规定的、可在相关协议中约定员工服务期及违约金的“专业技术培训”的定义未作解释。另外，条例第十六条虽然规定了培训费用的范围为“有凭证的培训费用、培训期间的差旅费用以及因培训产生的用于该劳动者的其他直接费用”，但是，由于条例未对其中的“直接费用”的范围未给予明确，以至 “培训费用”的范围仍然不清晰。四是条例第十八条规定的员工单方解除劳动合同的情形中包括了 “导致劳动合同无效或部分无效”的情形（即用人单位以欺诈、胁迫的手段或者乘人之危，使劳动者在违背真实意思的情况下订立或者变更劳动合同的；用人单位在劳动合同中免除自己的法定责任、排除劳动者权利的；用人单位违反法律、行政法规强制性规定的），从而混淆了用人单位及员工在劳动合同无效与解除等不同情形下的法律责任。五是条例第二十六条将员工应当支付违约金的情形仅限于其存在“严重过错”（即用人单位有权单方即时解除劳动合同的情形），忽视了员工为逃避违约责任实施“不胜任工作”这一恶意规避法律的行为（即消极怠工方式迫使用人单位“不胜任”工作为由单方解除劳动合同）。
总之，我认为，条例在“解决操作性问题”上的作用有限，我们不必有过多的期待与苛求。同时，我们还应当看到，条例存在的缺陷与不足，为地方立法提供了较大空间。因此，用人单位在今后劳动合同管理工作中，有必要密切关注相关的地方规定。在相关立法尚未出台之前，用人单位应当借助于劳动合同及内部规章制度的规范作用，对相关问题加以规定与明确，以最大限度地消除因立法缺失导致的不利风险。

Wine Confusion: Trademark Dispute over Cabernet

mark.schroeder@kingandwood.com (King & Wood) — Tue, 07 Oct 2008 16:39:43 +0800

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

1. According to the decision, “a generic term” that cannot be trademarked is defined as “a product name which is set out in the national standard and/or industry criteria, or accepted by common use”. The Examiner held that “解百纳” is not the name of a grape variety published in the national standard nor the generic term of a wine regulated by the applicable “wine” related industry criteria and standards.

In addition, “解百纳” was not deemed as the generic term accepted in common use. As a generic term, it must explicitly refer to one product and reflect the essential differences between one product from another. However, “Cabernet” has been translated into “解百纳”, “加本力”、“加本纳特”、“卡贝奈特”. The Chinese wording “解百纳” does not establish a substantial and clear relationship with “Cabernet” as it would in English since there are other equally valid translations. Secondly, three grape varieties contain the word “Cabernet”, i.e. Cabernet Sauvignon; Cabernet Franc; Cabernet Gernischt which are translated as “赤霞珠”; “品丽珠” and “蛇龙珠” respectively leading one to conclude that the wording “Cabernet” is merely a prefix to the name of grape varieties. The above three grape varieties are not translated into “解百纳” and thus are not the common use terms.

2. As for the second issue, the TRAB held that “解百纳” originated from Changyu’s first use beginning in 1936. “解百纳” was registered as a part of Changyu's trademark and was recognized as Changyu's trademark by wine magazines, the authorities, as well as the China national food industry association. Through its long term use, “解百纳” has become a trademark for Changyu's wine and identifies the origins of the wine products. Therefore “解百纳” has developed its distinctive use by Changyu's over its 70 year history.

However it is obvious that the 6-year dispute regarding the mark “解百纳” has not come to an end since as many as 12 competitors including China Great Wall Winery, Dynasty Fine Wines Group Limited and Yantai Weilong Grape Wine Co., have all claimed to have filed lawsuits against the TRAB with the First Intermediate People's Court of Beijing. It remains to be seen to what extent the court's decision will influence the wine industry in China by this case as well as how the court will set an interesting precedent for judging what constitutes a “generic name”.

Milk Mayhem - China Food Safety System in Flux

mark.schroeder@kingandwood.com (King & Wood) — Fri, 26 Sep 2008 12:31:40 +0800

The current concerns about the spiking of dairy products in China with melamine have expanded into concerns about the state of Chinese food safety generally.

The problem does not appear to be a lack of regulations as there are a myriad of relevant laws, regulations and rules (including PRC Food Hygiene Law, PRC Product Quality Law, PRC Agricultural Product Quality Safety Law, PRC Consumer Rights Protection Law, Special State Council Rules on Strengthening Supervision and Management of Food Safety, National Plan for Major Food Safety Emergencies to name a few).

Perhaps the myriad of laws and regulators are part of the problem and not part of a solution. The existing PRC laws can cover the main points but it seems that problems remain due to a failure to enforce the regulations and not due to a failure to have enough of them. In addition there are so many authorities involved (Administration for Industry and Commerce, the Food and Drug Administration, the Administration of Quality Supervision, Inspection and Quarantine, the Standardization Administration, the Ministry of Health, the Ministry of Agriculture, the Ministry of Commerce, etc.) it may be difficult to determine the correct authority to be addressed in case of a problem and there are also co-ordination issues. Also it seems that local authorities have not fully enforced the regulations. As is often the case only the central authorities appear to be willing to take effective action.

Another problem appears to be that a number of large dairy companies were given inspection-free status by the General Administration of Quality Supervision, Inspection and Quarantine (China's product quality watchdog). As we have seen in Wall Street self-regulation or de-regulation is not always the right answer.

What's Next from a Legal Perspective

The PRC central authorities are now moving quickly to take action and calm consumers concerns including:

Cancelling Exemptions from the Inspection System – as mentioned above a major problem was a system of “trusted” companies being largely unsupervised. This system was cancelled on September 18, 2008 by the State General Administration for Quality Supervision, Inspection and Quarantine. On the same day, the State Council declared that the System of Exemption from Inspection for food quality was cancelled.

Draft PRC Food Safety Law - The government currently has a draft PRC Food Safety Law being circulated since April 20, 2008. This law will replace the PRC Food Hygiene Law, which is no longer considered suitable for today's China. The Draft law is an umbrella law which aims to establish a comprehensive supervision system for food safety and resolve turf fights between supervision authorities. It is expected that the Draft or its implementing regulations will be strengthened further in light of the dairy industry problems. One area of controversy is whether the food safety administration should still be done by a number of authorities (current method) or be done by one authority is still full of controversy.

Administrative Responsibility System – Up to now, 7 senior officials have been dismissed or have resigned due to the milk incident, including the Head of the State General Administration for Quality Supervision, Inspection and Quarantine (Mr. Li Changjiang) and the Mayor of Shijiazhuang (Ji Chuntang) resigning, the CCP Secretary of Shijiazhuang (Wu Xianguo) being dismissed, etc. Accordingly the government is taking responsibility. This distressing incident may be a spur to better and more effective regulation. Hopefully other governments facing different types of regulatory problems will also take specific action.

Mark Schaub, Partner, FDI

Privacy: New Developments in the Protection of Personal Information

mark.schroeder@kingandwood.com (King & Wood) — Tue, 23 Sep 2008 12:20:13 +0800

Finally, it seems that the first light of dawn in a quieter world has been shown to people who have been continuously bombarded by anonymous messages or phone calls via mobile and other communication channels for private tutoring, apartment sales, and insurance.

On the 25th of August 2008, the 4th Conference of the Standing Committee of the 11th National People’s Congress (NPC) deliberated on The 7th Amendment to the PRC Criminal Law (draft). The Draft is the first time a proposal for providing protection of personal information by imposing criminal charges for violations on such information was put forward. This has raised broad public attention at all levels.

The current legal protections for personal information appear loosely in various laws including the Constitution and other Civil and Criminal Laws. The protections are presented in the forms of certain individual articles in the varying pieces of legislation. These provisions mainly protect a citizen's right to communications freedom, communications security and privacy in general and do not cover basic personal information such as personal address, phone numbers, etc.

Furthermore, the current applications of these articles are limited. Take for example the “crime of infringing upon a citizen's right to freedom of correspondence” provided for in the Criminal Law, Article 252, which provides not only the true intent of the law (the right to freedom of correspondence), the target of crime (the letters) but also requires “the circumstance is serious” as the standard of conviction. It is not easy for these provisions to be adapted to the developments of the information age as writing physical letters has declined.

In deliberating the Draft, a strong message that the constitutional principle of “respect for and insuring Human Rights” will also be embodied in the field of personal information protection, and such protection will mark an important step for respecting personal liberty and dignity.

Even more exciting is that the legislative process for the Personal Information Protection Law, started in 2005, is now entering a new phase. The Personal Information Protection Law (Draft) has been submitted to the State Council for discussion. We are now looking forward to success during the deliberation as well as the release of the Personal Information protection Law in the near future. This will help create a comprehensive system for the protection of personal information and provide effective legal safeguards to right of privacy.

Li Yongmei, associate, Domestic Dispute Resolution

个人信息法律保护的新发展

那些为一对一辅导、售楼信息、不厌其烦的保险代理骚扰的人们终于看见了喧嚣世界突然安静下来的曙光。

8月25日，十一届全国人民代表大会常务委员会第四次会议对《中华人民共和国刑法修正案（七）（草稿）》进行初审。该草案首次提出对公民个人信息进行刑法保护，引发了社会各界的广泛关注。

现行法律对个人信息的保护主要散落在宪法、刑法、民商事法律等领域，以单行法中个别条款的方式表现。这些条款以保护公民通信自由及通信秘密、隐私权为主，未涵盖基本的个人信息，例如住址及电话等，且保护条件较为严苛。以现行刑法中的“侵犯通信自由罪”为例，该罪不仅规定了特殊的犯罪客体和犯罪对象，还以“情节严重”为定罪起点。仅依靠这些条款的保护力度显然落后于信息时代的发展要求。

《刑法修正案（七）（草稿）》的审议无疑发出了一个强烈的信号，即随着社会进步，尊重和保障人权的宪法原则在个人信息保护领域得以具体化，体现了法律和社会对个人自由和尊严的尊重。

更为可喜的是，2005年启动的个人信息保护法立法程序现已进入新阶段。《个人信息保护法（草案）》已呈交国务院讨论。我们期待着《刑法修正案（七）》能够顺利通过审议，更进一步期待《个人信息保护法》尽早出台。从而形成较为完善的中国个人信息保护法律体系，使公民解脱“透明人”的担忧，公民个人隐私、尊严及安全得到切实有效的法律保障。

李咏梅, 国内诉讼仲裁组

Transitional Tax Incentive Policies relating to the Enterprise Income Tax

mark.schroeder@kingandwood.com (King & Wood) — Mon, 22 Sep 2008 10:42:52 +0800

The new PRC Enterprise Income Tax Law (“EIT law”) came into effect on January 1, 2008 and consolidated the enterprise income tax regimes for domestic enterprises and foreign-invested enterprises and ended the system of dual income tax regimes. The new EIT law unified the tax rates and tax incentive policies for both domestic enterprises and foreign-invested enterprises so that more equitable market conditions are created.

For those enterprises previously enjoying favorable tax incentives under the former tax regimes, the new EIT law provides a 5-year transitional period. For example, enterprises that enjoyed fixed term tax exemptions and reductions may continue to enjoy them until the end of the original term. Enterprises that used to enjoy a 15% tax rate will gradually shift from the lower rate to the 25% as required by the new EIT law. The transitional tax incentive policies are provided in many different tax regulations. The following is an introduction of some of the transitional tax policies:

Wu Libin & Stephen Nelson, Head of King & Wood's Tax Practice

1. Transitional tax incentives to enterprises previously enjoying lower tax rates.

As of January 1, 2008, enterprises which enjoyed lower tax rates will be gradually transition to the new tax rate within 5 years after the implementation of the EIT law. Among them, the enterprises which previously enjoyed enterprise income tax rates of 15% shall be transition to tax rate of 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012. Enterprises which enjoyed the tax rate of 24% previously shall be subject to the tax rate of 25% immediately in 2008.

2. Transitional tax incentives to enterprises previously enjoying fixed term tax exemptions and reductions.

As of January 1, 2008, enterprises which previously enjoyed fixed term enterprise income tax reductions or exemptions may continue to enjoy the same rate for the stated fixed pre-implementation term after the new EIT law takes affect. However, if an enterprise has not yet started to enjoy its period of exemption and reduction because of its failure to make profits to date, its period of exemption and reduction begins in 2008, whether or not it has a cumulative profit.
These transitional policies apply to foreign invested enterprises which were incorporated and registered before March 16, 2007.

If a foreign-invested enterprise enjoyed a fixed term tax exemption and reduction, but changes its business scope after 2008 and as a result, no longer satisfies the conditions as prescribed in previous tax laws and regulations to qualify for the tax holiday, it will then be required to repay the exempted and reduced taxes (including during the transitional period) based on the previous law.

3. Transitional tax incentives to enterprises previously enjoying low tax rates as well as fixed term tax exemptions and reductions

All enterprises that qualified for the enterprise income tax rate of 15% and simultaneously enjoy a 50% reduction for a fixed term may continue to enjoy this arrangement as follows: 50% reduction of 18% for the year 2008 (for a rate of 9%); 10% for the year 2009; 12% for the year 2011 and 12.5% in 2012 .

All enterprises that were previously under enterprise income tax rates of 24% or 33% but enjoying a 50% deduction for a fixed term may pay income tax based on a 50% deduction of the new tax rate of 25% tax rate in and after 2008.

4． Transitional tax incentives to High and New Technology Enterprises (“HNTEs”) established in special economic zones or in the Shanghai Pudong New Development Zone.

All HNTEs which are specially supported by the government, incorporated and registered on and after January 1, 2008 within the special economic zones or in Shanghai Pudong New Development Zone, will enjoy a two year tax exemption for the first two years, and a 50% deduction of the statutory tax rate of 25% for the third to fifth year, calculated from the financial year when the enterprise starts making its first business income within the special economic zone and Shanghai Pudong New Development Zone.

5. Tax incentives for Development in Western China

The special income tax policies for enterprises engaging in Western China development as provided in the “Notice on the Tax Favorable Policies for Western Development” will continue in force after the implementation of EIT.

企业所得税过渡期税收优惠概述

随着内外资企业所得税的统一，新的企业所得税法开始自2008年1月1日起正式生效，原来分别适用于内资企业和外商投资企业的所得税制同时废止。新的企业所得税法使原来的内外资企业在适用税率、优惠政策等方面实现了统一，为内外资企业创造了更加公平的市场环境。为使依原税制享受优惠的内外资企业在新企业所得税法实施后平稳过渡，如将未享受完的定期减免优惠享受完毕，使原适用15%低税率的企业逐步过渡到新企业所得税法规定的25%的税率等，税法对此设置了一个五年的过渡期。这些过渡期优惠政策散见于不同的法律规定之中，下面介绍的是一些已发布的过渡期税收优惠政策。

1、原适用低税率企业的过渡期税收优惠

自2008年1月1日起，原适用低税率优惠政策的企业，在新税法施行后5年内逐步过渡到法定税率。其中：适用企业所得15%税率的企业，2008年按18%税率执行，2009年按20%税率执行，2010年按22%税率执行，2011年按24%税率执行，2012年按25%税率执行；原执行24%税率的企业，2008年起按25%税率执行。

2、原享受定期减免优惠的过渡期税收政策

自2008年1月1日起，原享受企业所得税定期减免税优惠的企业，新税法施行后继续按原优惠办法及年限享受至期满为止，但因未获利而尚未享受税收优惠的，其定期减免期限从2008年度起计算。

享受上述优惠的外商投资企业，指在2007年3月16日之前完成登记注册的企业。

享受定期减免税的外商投资企业在2008年后其生产经营业务性质发生变化，导致其不符合原来法律规定的条件的，仍应按照旧法规定补缴其此前（包括在过渡期内）已经享受的定期减免税税款。

3、原适用低税率并享受定期减免的企业过渡期税收政策

对按照国发[2007]39号文件有关规定适用15％企业所得税率并享受企业所得税定期减半优惠过渡的企业， 2008年按18％税率计算的应纳税额实行减半征税，2009年按20％税率计算的应纳税额实行减半征税，2010年按22％税率计算的应纳税额实行减半征税，2011年按24％税率计算的应纳税额实行减半征税，2012年及以后年度按25％税率计算的应纳税额实行减半征税。

对原适用24％或33％企业所得税率并享受国发[2007]39号文件规定企业所得税定期减半优惠过渡的企业，2008年及以后年度一律按25％税率计算的应纳税额实行减半征税

4、经济特区和上海浦东新区新设立高新技术企业过渡期税收优惠

对经济特区和上海浦东新区内在2008年1月1日（含）之后完成登记注册的国家需要重点扶持的高新技术企业，在经济特区和上海浦东新区内取得的所得，自取得第一笔生产经营收入所属纳税年度起，第一年至第二年免征企业所得税，第三年至第五年按照25%的法定税率减半征收企业所得税

5、西部大开发税收优惠政策

《关于西部大开发税收优惠政策问题的通知》中规定的西部大开发企业所得税优惠政策在新税法实施后继续有效

Labor Arbitration Decision Vacated

mark.schroeder@kingandwood.com (King & Wood) — Wed, 17 Sep 2008 15:00:56 +0800

The First Intermediate Court of Beijing recently issued a landmark decision under the new Labor Mediation and Arbitration Law (effective May 1, 2008). Under the new law, only employees can appeal certain arbitration decisions, while the employer is only able to request the court to vacate arbitration decisions on certain narrow grounds.

In this recent case, the court vacated a previous labor arbitration decision on the grounds that the Labor Contract Law (effective Jan. 1, 2008) did not apply retroactively to the case at hand. The plaintiff in this case started to work for a Beijing medical technology company in Nov. 2007 with a probation period that lasted until Jan. 2008. In Feb. 2008, he was terminated for incompetence. He filed for a labor arbitration and was awarded RMB 3600 compensation under the Labor Contract Law. The company requested the court vacate the decision. Upon review, the court determined that the arbitrator retroactively applied the Labor Contract Law on severance calculation and vacated the arbitrator's decision on that ground.

This is the first reported case of a court vacating a previous labor arbitration award. Once vacated, the case could not be submitted to arbitration for a second time and the only recourse is now to seek judicial remedies before the courts.

In light of recent labor employment legislation, this decision will become persuasive authority for similar employment disputes. Unlike other countries in terms of costs and processing time, to arbitrate an employment dispute in China requires no filing fee and a final decision will be obtained within a couple of months. Labor arbitration filings have tripled since the promulgation of the new Labor Contract Law. Previously, either party could appeal the arbitration decision to the court to have a completely new trial of both factual disputes and legal issues. Under the new Labor Mediation and Arbitration Law, as illustrated by this case, arbitration decisions will now have certain limitations as to judicial appeal/review. In the short term, it will effectively reduce the court's case load. In the long term, it will teach the public to have a more rational view of employment litigation. For practitioners, the amount in controversy now becomes an important factor in evaluating the overall procedural strategy, since certain small claims of employment disputes will have limited grounds to appeal arbitration decisions.

Wu Jing, Attorney, Labor & Employment