“Haworth & Lexon Law Newsletter” is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, Intellectual property rights, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.
News of Haworth & Lexon
Latest Laws and Regulations
§ News of Haworth & Lexon
Mr. Hu Jingyan, director-general of Department of Service & Trade of Ministry of Commerce, Mr. Wang Donghong, director-general of Department of International Cooperation of China Customs, Mr. Su Xiaolu, deputy commissioner of International Tax Department of the State Administration of Taxation, Guo Xiangping, deputy director of Import and Export Division of Import and Export Department of State Administration of Taxation, and other officers respectively made wonderful speeches about the latest regulation environment, the development of custom policies, the latest development of management for transfer pricing tax and reform of refund of export tax system in China. Mr. Wang Zhile, director of Research Center on Transnational Corporations of Ministry of Commerce, Professor Liu Huan, vice president of Institute of Finance and Public Management of Central University of Finance and Economics, Mr. Liu Zuo, president of Tax Research Institute of State Administration of Taxation respectively introduced and analyzed the opportunities met by transnational corporations in China, the influences on corporations brought by new tax reforms such as the reform on VAT and some related subjects. Moreover, the representatives from related professional institutes and corporations also introduced the latest development in the relavant fields.
CEOs and other senior managers coming from dozens of transnational corporations attended this conference.
§ Latest Laws and Regulations
The Interpretations have specific provisions on three factors for constituting “commercial secret” (namely “the commercial secret shall not be known to the public”, “the commercial secret can bring economic interest to the right holders and is practical” and “measures have been taken to keep confidential the commercial secret”). For example, six circumstances shall not be deemed as constituting the requirement of “not being known to the public”, including “that the information is common sense or industrial practice for people in the relevant technical or economic fields”, “the information has been publicly disclosed on any publication or any other mass medium” or “the information has been publicized through reports or exhibits”, etc. The Interpretations have also provisions on the determination of “client list”, a special kind of commercial secret.
The Interpretations allow acquiring commercial secrets by independent development or reverse engineering, which is not deemed by the Interpretations as “infringement of commercial secrets” defined in “Anti-Unfair Competition Law”.
The Interpretations have also provisions on the burden of proof in cases of infringement of commercial secrets. For example, the plaintiff should bear the burden of proof that its commercial secrets comply with legal requirements, that the information of the other party is the same or substantially the same as its commercial secrets, and that the other party adopt illegal measures.
Concerning compensations in the infringement of commercial secret cases, the Interpretations provide that the way to determine the compensation in infringement of patent right could be referred to. Firstly, the amount of compensation may be determined according to the losses of the patentee due to the infringement or the proceeds obtained by the infringer from the infringement. Where the losses of the infringed or the proceeds of the infringer are difficult to determine, and there is royalty that may be used for reference, the people’s court may reasonably determine the amount of compensation as one to three times of the royalty; where there is no royalty that may be used for reference or the royalty is obviously unreasonable, the people’s court may determine the amount of compensation somewhere between RMB 5,000 and RMB 300,000, and the amount of compensation shall not exceed RMB 500,000.
The Interpretations also have specific guidance on issues of infringement on names, packages and decorations, infringement of names of other people, misleading false publicity and jurisdiction of anti-unfair competition cases.
The parties regulated by the Measures not only include listed companies, issuers, and directors, supervisors and management of companies, but also include security service institutes, recommenders and their staff who issue special documents on information disclosure, and the market participants relevant to the disclosure of information, including institutes and individuals that use or may use internal information of listed companies to make deals, or institutes and individuals that disseminate false information.
The Measures make a series of provisions on the prospectus, listing announcements drafted by issuers and the periodical reports disclosed by listed companies. It also requests listed companies to disclose major events which may affect the process of the securities or derivatives, such as the major changes in the business guidelines and business scopes, great losses or deficits of the companies, or major changes to the external conditions for business operation.
According to the Measures, listed companies shall fulfill their disclosure obligations at the following milestone dates, whichever is earlier: (1) resolutions on major events are made by the Board of Directors or Board of Supervisors; (2) the relevant parties have signed letters of intent or agreements on major events; (3) any director, supervisor or management personnel get to know the major events and report. However, even if there are no such milestone dates, the obligation of disclosure shall be fulfilled if the major events can not be kept secret, or they have been disclosed or there is hearsay in the market, or there are unusual fluctuations in the securities and derivatives transactions.
The Measures request listed companies to set up a system of management of information disclosure, and have specific requirements on how to perform the duties of information disclosure by the relevant parties such as the controlling shareholders, actual controllers, purchasers, recommenders, securities service institutions and the media.?
The Circular requests that the percentage of on-market transactions should be steadily increased and off-market transactions by agreement shall be strictly controlled. The Circular strictly restricts the scope that allows transfer by agreement, and requests the scope to comply with the industry policies of the state, the general scheme of the layout and the structural adjustment of the state-owned economy. If the target enterprises fall into key industries and fields of the national economy, the state portion shall still have absolute controlling rights after the transfer by agreement. Concerning the approval authority of the transfer by agreement, if the transferor is an enterprise directly under the Central Government, the transfer shall be approved by the State-owned Assets Supervision and Administration Commission of the State Council and for an enterprise directly under the local government, the transfer shall be approved by the provincial State-owned Assets Supervision and Administration Commission.
If the transferee is a foreign enterprise or other economic entities, or an individual, in principle, the transaction shall be publicly conducted in the property right exchange market, and the transferor shall point out the restrictive or prohibitive provisions on the transfer of property right to foreign parties when it provides on the requirements for acceptance in the announcement of transfer of property rights.
According to the Circular, the property right exchange institutions shall examine and determine the intended transferee based on the publicized acceptance conditions. If the transferor can not agree with the property right exchange institutions, the property right exchange institutions may consult the relevant government for their opinions in writing or coordinate through dispute resolution systems for property right transactions.
The transferring price of state-owned property right shall be formed by public quotation in the property right exchange market, on the basis of the asset assessing result. The initial offering price shall not be lower than the assessed price. If the price is lower than 90% of the assessed result because there are no transferees, it shall be approved by the relevant authority in writing.
The Opinions provides that after a deduction of all the technology development expenses that have occurred in the improvement by information technology of an enterprise according to the relevant stipulations, 50% of the expenses are allowed to be deducted before calculating the enterprise income tax.
The Opinions also encourage the cooperation between enterprises in the traditional industries and software enterprises, between manufacturing enterprises and integrated circuit design enterprises.
The Supplementary Provisions provide that Hong Kong or Macau aviation sales agents that comply with the definition of Hong Kong or Macau Service Providers are permitted to establish equity joint ventures, contractual joint ventures or wholly owned aviation sales agencies in the Mainland of China.
The Supplementary Provisions provide that the registered capital of the established aviation sales agency shall be the same as that of the domestic enterprises: the registered capital of an enterprise that operates the first class aviation sales business shall not be less than RMB 1, 500, 000 and the registered capital of an enterprise which operates the second class aviation sales business shall not be less than RMB 500, 000. The registered capital shall correspondingly be increased by RMB 500, 000 for each division or branch additionally set up by a sales agency.
The State Development & Reform Commission and the State Administration of Foreign Exchange promulgated the “Circular on Regulating the Filing of Transferring Bad Claims to Foreign Parties by Domestic Financial Institutions” (hereinafter referred to as “Circular”) on February 1, 2007, which will come into force on April 1, 2007.
The Circular provide that when a domestic financial institution bears foreign debts by transferring its bad claims to foreign investors, it shall report to the State Development & Reform Commission and the State Administration of Foreign Exchange, and the foreign debts shall be subject to administration of foreign debts. The Circular also provide that in principle, all transfers shall be conducted by public means of public bidding, auction and public quotation, and foreign investors shall make the payment for the transfer in one installment.???
The Circular also makes restrictions on bad claims. Those debts shall be excluded that are owned or guaranteed by the Chinese government of any level or the competent administrative departments, and that fall within the prohibited category of the Catalogue of Industries for Guiding Foreign Investment or involves any industry of national security, or that are prohibited by laws and regulations from being transferred to foreign parties.
The Circular provides that in the key fields of major technical equipment decided by the State Council, import duties and VAT imposed on import of key parts and raw materials that can not be produced domestically for developing or manufacturing the equipment shall be collected before refunding. The refunded taxes shall be transferred to the capital contributed by the state according to such different situations as follows: (1) for wholly state-owned enterprises, the refunded taxes shall become direct increase of registered capital; (2) for listed companies, the refunded taxes shall be handled pursuant to the regulations on directional issuance of shares provided by the China Securities Regulatory Commission; (3) for other enterprises, if it is a company which has state-owned shareholders, the shares from newly increased registered capital of the state will be held by them (if there are many state shareholders, the proportion of the shares shall be negotiated by them); if there are no state-owned shareholders, such shares will be held by the state-owned asset operating companies authorized by the governments of any level.
§ IP Cases
Jingdiao Company claimed that it was the copyright holder of the software JDPaint V4.0 and JDPaint V5.0 (hereinafter collectively referred to as “JDPaint”), and Naikai Company was the right holder of “Naikai Numerical Control System V5.0” and “Weihong Numerical Control System V3.0” (hereinafter collectively referred to as “NCstudio”). According to the relevant documents preserved by notarization, the NC-1000 engraving and milling machine controlling system could support all versions of ENG files of engraving and milling. Therefore, Jingdiao Company claimed that it was an infringement upon its software copyright for the NCstudio software to read the ENG files output by JDPaint software.
The court of the first instance stated that the ENG files output by the JDPaint was statistic files, and did not fall into the protected scope of the computer software, so they could not be protected by the laws.
Jingdiao Company appealed and stated that JDPaint software was not sold in the market as a common commercial software, but was existing as part of the “engraving and milling CNC System” sold by Jingdiao Company. The output of JDPaint software was not in the standard NC format, but in a self-defined ENG format. The encryption of such format was increased continuously to prevent the application of JDPaint software in the normal numerical system. However, the appellee counter-compiled the ENG format of the JDPaint software, to avoid and destroy the technical measures on protecting the software right. Therefore, the counter-compiling act constituted infringement on the software copyright.
The court of the second instance held that firstly, the ENG format adopted by the appellant was technically not a technical measure for protecting JDPaint. The counter-compiling itself would not directly lead to illegal copy of the software. Secondly, for design purpose, the appellant used ENG format for restricting the use of the JDPaint software only in the “engraving and milling CNC System”, not in other numerical systems, which exceeded the scope of protection of computer software provided under the Copyright Law, and it was not a technical measure “for purpose of protection of software copyrights”. Therefore, support to the claims of the appellant would improperly extend the protection of the interest in software copyrights to products which had been tied to the software with “technical measures” by the appellant. This did not comply with the legal principle of the Copyright Law that the protection of the software copyright shall be limited to the economic interest based on software copyright. And thus the court of the second instance rejected all the claims of Jingdiao Company and the judgment of the first instance was sustained.
The plaintiff stated that the “AhnLab ASP Agent” software developed by the defendant falsely identified the “Network Real Name” product developed by the plaintiff as spy software, which seriously harmed the reputation and other lawful interest of the plaintiff. The defendant defined, on its webstie, spy software as “a malicious program infringing the personal life of users in harmful programs”, and also notified the users that spy software may lead to “disclosure of personal information, slowing down speed of system, and breakdown of system”. Such false appraisal made the users suspicious of the function of the products and lowered their creditability and loyalty to the products. Therefore, the plaintiff claimed to the court to judge that the defendant should stop infringement and pay compensations.
The defendant Anboshi Company defended that the defendant did not indicate that the Network Real Name was spy software, and there was no infringement as claimed by the plaintiff. The yasfsks.dll file disputed in this case was displayed as “cnsmin” by the software developed by many companies. This industry also recognized that there were hazards in the yasfsks.dll file and it was suggested being deleted. In summary, the defendant requested the court to reject the claims of the plaintiff to protect its lawful rights and interests.
The court held that the business reputation and commodity reputation were the basic guarantee to have edges in the market competition. An enterprise with legal personality should comply with the principles of honesty and good faith, and should not seek for market competitiveness by defaming the business reputation or commodity reputation of a third party. In this case, Anboshi Company provided “free examination of spy software” services on its website, but it did not show the “spy” activities of the Network Real Name software examined. Such services were harmful to the commercial reputation and commodity reputation among the competitors in the industry and should be affirmed as infringement. So the company should stop infringement immediately and bear the relevant liability. Therefore, the court determined that Anboshi Company should compensate Alibaba Company RMB 20,000 and bear RMB 6000 as reasonable expenses according to the extent of the infringement, and it should put up an announcement on its website to eliminate the effect.
The plaintiff Longle Company stated that, in 2006, it found Wangluoxiu Company provided online downloading services of five songs sung by Zhou Zhiyou and two songs sung by Yan Bo. When Wangluoxiu Company provided its services, it stored the uploaded songs in the space it administers, recommending songs by "hot" and "ranking list", and classifying the songs searched. So it was not solely a provider of storing space for network information. The copyrights, neighboring rights and the relevant rights to internet dissemination of information shall belong to the plaintiff, and the plaintiff had never licensed the defendant to disseminate them to the public by internet. Therefore, the plaintiff requested the court to judge that the defendant should stop infringing the right of the Plaintiff to internet dissemination of information.
The court held that the basis for Longle Company to claim that the website M149 disseminated the songs involved in the case was the searching results of the specific songs on the M149 website, and the name of the relevant space was marked after each searching result, which proved that the songs involved in the case were from the registrant of "M149 Space". Based on that, the court held that the service of "M149 Space" provided by Wangluoxiu Company was a service to provide space for storing information, which complied with the requirements for network service provider who did not need to be liable for compensations provided in Article 22 of the Regulation on the Protection of the Right to Network Dissemination of Information. Firstly, based on the notarized documents provided by Longle Company and Wangluoxiu Company, Wangluoxiu Company had already shown that "M149 Space" was providing storing space for the registrants, and it had publicized the name of Wangluoxiu Company, the contacts and the address of the website. Secondly, Wangluoxiu Company did not make changes to the songs uploaded by registrants. It only provided convenience for the administration of stored space of the uploaded contents and learning the contents of the songs. Thirdly, there was no evidence to show that Wangluoxiu Company had known or should have known that the uploaded songs infringed the rights of the third party until Longle Company and the other right holders presented the relevant evidence to Wangluoxiu Company. Fourthly, Longle Company admitted that it had never found Wangluoxiu Company charged fees for the uploaded songs. Finally, Longle Company did not send any notice to Wangluoxiu Company to request it to delete all the songs involved in the case, and there was no evidence to prove that the other right holders had sent such notice. Moreover, Wangluoxiu Company had deleted all those songs after this case was initiated. Based on the analysis above, Wangluoxiu Company had already met the conditions for not being liable as a provider to provide storage space of information. So the court did not support the claim for compensations by Wangluoxiu Company.
The court of the first instance stated that the patent of utility model on "the Multi-functional channeled keel" held by Jinpeng Company was lawful and valid. In comparison with the keels used by Sanrong Company and Guojiao Company in the decoration project for "Guojiao Mingcheng" with the patent of Jinpeng Company, there were only simple changes in the structure, which fell into the protection scope of the patent. Though Sanrong Company insisted that the suspected infringing products "Shangren Keel" were purchased from Shapingba District Decoration Materials Sales Department of Chongqing, but the name of the products marked on the inspection report and the packages of the products was "Fast Jointed Light Steel Keel". The current evidence could not prove that the two products were actually the same. Secondly, "Guojiao Mingcheng" project had an area of more than 10,000 square meters, among which, the area for molded ceiling with light steel keel gypsum boards was 3449 square meter, which required at least 290 square meters of light steel keels. The two defendants could not prove that the products involved in the case had a lawful source. Therefore, the infringement by the defendants was established.
Sanrong Company was not satisfied with the judgment and appealed. The court of the second instance held that the point of the dispute was whether Sanrong Company had provided lawful sources of the infringing products and whether it shall be liable. The court held that the reasons were insufficient while the court of the first instance recognized that the current evidence could not prove that the "Shangren Keel" and "Fast Jointed Light Steel Keel" were similar products. Meanwhile, according to the evidence provided by the appellant in the second instance, as the appellant was the user of the infringing products, its obligation to examine the lawful sources of the products should not be too heavily imposed. It was acceptable to purchase the products at a lawful price in a lawful way. The court affirmed that Sanrong Company had provided lawful sources for 1160 square meters keels. But the molded ceiling with light steel keel gypsum boards confirmed in the "Building Decoration Project Contract" was 3449 square meters, and the amount of keels whose lawful source was proved by Sanrong Company in the first and second instance was 1450 square meters, and did not reach the amount agreed in the contract. Sanrong Company should be held liable as it had the liability to prove the lawful sources of the products but it failed to submit the relevant evidence. Therefore, the claim of Jinpeng Company should be supported that the defendant should stop infringement immediately and should make compensations.
§ Analysis of Cases
The court of the first instance was Harbin Intermediate People's Court, the court of the second instance was Heilongjiang Higher People's Court, the first retrial court was Heilongjiang Higher People's Court and the last retrial court was the Supreme People's Court. It was a case regarding a licensing contract for implementation of patent.
On November 1, 1990, Wang Xinghua, Wang Zhenzhong and Mei Mingyu (collectively referred to as "Party A") entered into a licensing contract for implementation of patent with Radio Factory, which licensed Radio Factory to implement the patent for utility model on "Single Portable Bathtub" held by Wang Xinghua. As the right holder of the patent No. 88202076.5, Wang Xinghua signed on the contract on behalf of Party A. The contract also stated that Party A had the right to acquire the entry fees and royalties. On March 20, 1991, Wang Xinghua and the Radio Factory entered into an agreement for terminating the contract, which terminated the licensing contract for implementation of patent on the ground that the structure of the "Single Portable Bathtub" involved in the contract could not be implemented in production.
In 1993，Wang Xinghua filed the case to the Intermediate People’s Court of Harbin, objecting to the termination of the contract, and requesting the Radio Factory to pay the fees for the license.
In addition, as confirmed in the judgment No. 229 issued by the Intermediate People’s Court of Harbin, the patent for utility model was a non-service invention, jointly owned by Wang Xinghua, Wang Zhenzhong and Lv Wenfu. The proceeds were distributed among Wang Xinghua, Wang Zhenzhong, Lv Wenfu and Mei Mingyu in the proportion of 45%, 35%, 15% and 5% respectively.
The Intermediate People’s Court of Harbin held that the licensing contract for implementing the patent and the termination agreement were signed by the parties voluntarily, which did not violate any laws and regulations. Therefore, the Intermediate People’s Court of Harbin rejected the claim of Wang Xinghua. Wang Xinghua and the third party in the first instance were not satisfied with the judgment and appealed to Heilongjiang Higher People’s Court.
Heilongjiang Higher People’s Court held that the licensing contract for implementing patent was lawful and effective, but it infringed the lawful interests of others when Wang Xinghua terminated the contract without the consent or authorization from Wang Zhenzhong or Mei Mingyu. And the agreement for terminating the contract had not been implemented after its conclusion. Meanwhile, it had been confirmed in another case that the patent was jointly owned by Wang Xinghua, Wang Zhenzhong and Lv Wenfu. Therefore, the agreement to terminate the contract should be affirmed as invalid. The Radio Factory should pay the fees for the use of the patent right from November 1, 1990 to March 19, 1996.
The Radio Factory was not satisfied with the final judgment, and applied to the Supreme people’s Court for retrial in October, 1998 after their application to Heilongjiang Higher People’s Court had been rejected.
Heilongjiang Higher People’s Court retried the case and held that Wang Xinghua was the only right holder indicated in the patent certificate when the agreement to terminate the contract was signed, and Wang Xinghua failed to prove that the Radio Factory had an intention to harm the lawful rights of the third party. So these two contracts should be affirmed as effective. So it supported the judgment of the first instance.
Wang Xinghua, Wang Zhenzhong, Lv Wenfu and Mei Mingyu did not submit themselves to the judgment, so they applied for retrial to the Supreme People’s Court.
The Supreme People’s Court held that the points discussed in this case were whether the agreement to terminate the contract was valid and whether the Radio Factory should pay the fees for the use of the patent.????
The patent right holder and the other non-patent right holders were one party to the licensing contract for implementing the patent. Particularly, in such a contract that provided the rights and obligations of the non-patent right holders, the patent right holders should be bound by the contract when implementing the patent rights. Without the consent from the non-patent right holders, the patent right holder had no right to terminate the signed contract in its sole discretion. Otherwise, it would damage the lawful rights and interests of the other parties to the contract. Based on that, the Supreme People’s Court held that the agreement to terminate the contract should be invalid. As the agreement was ineffective, the Radio Factory should pay the fees for using the patent to those persons including Wang Xinghua according to what had been agreed upon by the parties.
Analysis by Attorney:
In this case, Wang Xinghua was the sole right holder shown on the patent certificate when the contract and the agreement were signed. And Wang Zhenzhong and Mei Mingyu became the beneficiaries of the licensing contract due to the conclusion of the contract. Therefore, the nature of the point of this case is whether the patent right holder may terminate the contract without the consent when there were several licensors of the contract. The judgment of the Supreme People’s Court held that if one party to the licensing contract was consisting of more than one persons, among whom one was the right holder of the patent, then the patent right holder should not exercise the right of termination in its sole discretion.
Similarly, after a contract for the benefit of a third party comes into effect, may the two parties to the contract terminate the contract without the consent of the third party?
Article 64 of Contract Law of China provides that “Where the parties agree that the obligor performs the obligations to a third party, and the obligor fails to perform the obligations to the third party or the performance does not meet the terms of the contract, the obligor shall be liable to the obligee for the breach of contract.”
However, as the third party enjoys the rights and interests under the contract for the benefit of the third party, whether their rights to terminate or change the contract should be limited. According to Article 93 of the Contract Law of China, the contract may be terminated upon agreement by the parties. We think that the third party is not the party to the contract. So the parties of the contract may change or terminate the contract before the third party collects the interests.