“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.
Latest Laws and Regulations
§Latest Laws and Regulations
The Ministry of Land and Resources promulgated the “Land Registration Measures” (hereinafter, the “Measures”) on December 30, 2007, which came into force on February 1, 2008.
The Measures were formulated according to relevant laws including the “Land Management Law” to support the implementation of the “Real Right Law” and were based on the Law on Administration of Land. The Measures made great changes to the “Land Registration Rules” promulgated by the Ministry of Land and Resources in 1989, which deleted provisions concerning certificate examination, low price declaration and handling lands without registration as illegal occupation.
Land registration refers to recording state-owned land use rights, collective land ownership, collective land use rights, land mortgage rights, easement and other land rights on land registration books for public announcement as required by laws and regulations.
According to the Measures, five types of lands are not allowed to be registered where: (1) any land whose ownership is under dispute; (2) any land-related violations have not been handled or are under handling; (3) any land use fees and other taxes have not been fully paid; (4) any land-related right to be registered has expired; (5) there are other circumstances under which a registration is not allowed according to laws.
Land registration includes general registration, primary registration, modification registration, cancellation registration and other registrations, which include rectification registration, objection registration, advance notice registration and attachment registration.
Regarding cadastral investigation, it used to be a significant obligation of the registration authorities; while the Measures provide that “the applicant may engage qualified technical units to conduct the cadastral investigation to get his/her cadastral investigation form, block map and demarcation.” This means that the task of cadastral investigation and drawing will no longer be the duties of the administrative authorities. Applicants shall provide all by themselves necessary materials related to land registrations.
The Standing Committee of the Tenth National People’s Congress promulgated the “Law on Labor Dispute Mediation and Arbitration of the People’s Republic of China” (hereinafter, the “Law”) on December 29, 2007, which will come into force on May 1, 2008.
The Law shall apply to the following labor disputes arising between an employer and an employee within the territories of the People’s Republic of China: (1) a dispute arising from the confirmation of a labor relationship; (2) a dispute arising from the conclusion, performance, modification, rescission or termination of a labor contract; (3) a dispute arising from the removal or dismissal of an employee or the resignation or quit of an employee; (4) a dispute arising from working hours, breaks, vacations, social insurance, benefits, training, or labor safety; (5) a dispute arising from labor remunerations, medical expenses for a work-related injury, economic indemnity, compensation, etc.; (6) any other labor dispute provided by laws or administrative regulations.
When a labor dispute arises, the employee has the following three choices: (1) he/she may consult with his or her employer friendly, or request the trade union or a third party to jointly consult with the employer friendly, so as to reach a settlement agreement; (2) if one party does not desire a friendly consultation, and the parties fails to settle the dispute through friendly consultation, or one party does not fulfill a reached settlement agreement, either party may apply for mediation with a mediation organization; (3) if one party does not desire a mediation, and the parties fail to settle the dispute through mediation, or one party does not fulfill a reached mediation agreement, any party may apply for arbitration with a labor dispute arbitration commission. Either party disagreeing to an arbitral award may lodge a suit with the people’s court.
The Law provides diversified labor dispute mediation models: the party involved may apply for mediation with the labor dispute mediation commission of his/her/its enterprise, with a grassroots people’s mediation organization legally established; or with an organization that has the labor dispute mediation function established in a township or neighborhood community. A mediation agreement shall be binding upon both parties. Besides, where a mediation agreement is reached on matters of delayed payment of labor remunerations, medical expenses for a work-related injury, economic indemnity or compensation, and the employer fails to perform it within the time period prescribed in the agreement, the employee may apply to the people’s court for a payment order based on the mediation agreement.
The Law also makes great changes to labor dispute arbitration. Except otherwise provided by laws, an arbitral award on the following two kinds of disputes shall be final and shall take effect upon the issuance of the award: (1) a dispute over the recovery of labor remunerations, medical expenses for a work-related injury, economic indemnity or compensation, in an amount not exceeding the 12-month local monthly minimum salary level; (2) a dispute over working hours, breaks and vacations, social insurance, etc., arising from the performance of state labor standards.
The Law makes detailed provisions for arbitration procedures of a labor dispute: the time limit for the application for arbitration procedures of a labor dispute shall be one year; the arbitration proceedings of a labor dispute shall be concluded within 45 days as of the date when an application for arbitration is filed, which shortens the time for handling arbitration procedures of a labor dispute; new provisions for burden of proof assumed by the employer; and labor dispute arbitrations shall be free of charge, etc.
To adapt to the changes in the processing trade, the General Administration of Customs promulgated the “Decision on Amending the Measures of the Customs of the People’s Republic of China on Supervision of Processing Trade Goods” (hereinafter, the “Decision”) on January 14, 2008, which makes amendments to the “Measures of the Customs of the People’s Republic of China on Supervision of Processing Trade Goods”.
The Decision amends the meaning of “outward processing” to “the act of a trading enterprise, as a result of the restrictions from its own production characteristics and conditions, upon the approval by the customs and after completing relevant formalities, of engaging a contracting enterprise to process processing trade goods, and transporting the processed goods back to the trading enterprise within a prescribed time limit for final re-export.”
Besides, the Decision deletes the definition of “inspection” and cancelled the provision that “outward processing shall be carried out within the valid term of the manual of processing trade.” Besides, the Decision provides that “Upon the approval by the competent customs of the place where the trading enterprise is located, it may not transport back the finished products and the remaining materials of outward processing as well as the leftover materials, shoddy and defective products, byproducts and other processing trade goods produced in that course”, while in the Measures before amendment, such products and materials are required to be transported back.
The State Council promulgated the Decision on Amending the “Provisions on the Administrative Penalty of Price-related Violations” (hereinafter, the “Decision”) on January 13, 2008.
The biggest change made by the Decision to the “Provisions on the Administrative Penalty of Price-related Violations” (hereinafter, the “Provisions”) is to strengthen punishment. The Provisions imposed relatively small amount of fines concerning all kinds of price-related violations while the Decision strengthens punishment for such violations. In case of any price-related violations and in case the circumstances are serious, the Provisions only provided that a public notice should be made at the corresponding business locations while the amended Provisions extend the scope of such public notice beyond the corresponding business locations.
Besides, the Decision adds provisions on penalty to industry associations. For example, if an industry association violates the relevant provisions of the “Price Law”, fabricating and spreading price rise information, pushing up prices to an excessively high level by malicious hoard or other means, or resorting to deceitful or misleading price means so as to entice consumers or other business operators into trading, the industry association shall be fined up to 500,000 Yuan; if the circumstances are serious, the administrative organ in charge of social association registration may deregister it according to laws.
The Ministry of Health promulgated the Notice on Implementing Medical Service Issues in the Supplementary Agreement IV to “Mainland and Hong Kong/Macao Closer Economic Partnership Arrangement” (hereinafter, the “Notice”) on December 26, 2007, which came into force on January 1, 2008.
According to the Notice, a Hong Kong/Macao service provider with the Medical Practitioner Certificate of the mainland (in clinic, traditional Chinese medicine or oral cavity) may open a private clinic in the mainland if he/she satisfies one of the following conditions: (1) having the legal right to practice medicine in Hong Kong/ Macao and having been practicing medicine in Hong Kong/Macao for 5 years or more, or having been practicing medicine in both Hong Kong and Macao for accumulatively 5 consecutive years or more; (2) having been doing the clinical work of the same specialty in the mainland for 5 consecutive years or more. However, one Hong Kong/Macao service provider may only open one private clinic in the mainland, which shall be fully funded by the service provider and he/she shall also be the person in charge of the clinic; besides, the clinical subjects he/she apply for shall conform to his/her scope of work in the mainland and Hong Kong/Macao.
The Notice also makes provisions for application materials and procedures: the application shall pass the initial examination at the level of municipality (divided into districts) where the clinic is to be located and then shall be submitted to the health administration at the provincial level for examination and approval. The provincial health administration shall issue a Letter on Approving the Establishment of Medical Institutions and report it to the Ministry of Health for filing. To open a private Traditional Chinese medicine clinic, the application shall pass the initial examination at the level of municipality (divided into districts) and then be submitted to the administration of traditional Chinese medicine at the provincial level for examination and approval, the provincial administration of traditional Chinese medicine shall issue a Letter on Approving the Establishment of Medical Institute and report it to the State Administration of Traditional Chinese Medicine and the Ministry of Health for filing. The registration of practice as well as daily supervision and administration of private clinics shall be governed by the provisions of the health administration and the administration of traditional Chinese medicine at or above the provincial level.
In addition, in principle, a private clinic may not hire other medical practitioners. For medical needs, it is allowed to hire one or two medical practitioners (residents of the mainland) who shall have the same scope of work. An individual clinic may, in light of medial needs, hire a proper number of nurses registered in the mainland.
The State Council promulgated the Notice on the Implementation of the “Transitional Preferential Policies for Enterprise Income Tax” (hereinafter, the “Notice”) on December 26, 2007, which provides for issues concerning preferential policies for enterprise income tax in the “Enterprise Income Tax Law” and the “Regulations on Implementation of Enterprise Income Tax Law”.
1. For enterprises established before the promulgation of the “Enterprise Income Tax Law”:
As foreign-invested enterprise previously enjoy a preferential policy of “2-year exemption and 3-year half reduction”, the transition of tax preferential policies for foreign-invested enterprises is now attracting much attention after the “Enterprise Income Tax Law” has given unified provisions concerning income tax of both domestic and foreign-invested enterprises.
According to the Notice, as of January 1, 2008, enterprises that previously enjoy preferential policies of low tax rates shall gradually be transited to enjoy the statutory tax rate within 5 years after the implementation of the “Enterprise Income Tax Law”. Of them, enterprises that previously enjoy an enterprise income tax rate of 15% shall be subject to a tax rate of 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012; enterprises that previously enjoy an enterprise income tax rate of 24% shall be subject to a tax rate of 25% as of 2008.
Besides, from January 1, 2008 on, enterprises that previously enjoy preferential treatments in the form of periodic tax deductions and exemptions such as “2-year exemption and 3-year half reduction” and “5-year exemption and 5-year half reduction” of enterprise income tax may, after the implementation of the “Enterprise Income Tax law”, continue to enjoy relevant preferential treatments under the preferential measures and the time period prescribed in the unrevised tax law, administrative regulations and relevant documents until the expiration of the said time period. However, if such enterprises have not enjoyed the preferential treatments yet because of its failure to make profits, its preferential time period shall be calculated from 2008.
2. The Notice makes it clear that the preferential income tax policies for enterprise engaging in the Western Development Program as provided in the “Notice of the Ministry of Finance, the State Administration of Taxation and General Administration of Customs on the Preferential Policies for Western Development Program in respect of Enterprise Income Tax” shall continue to be implemented.
3. In case there is any overlap between the transitional preferential policies and those provided in the “Enterprise Income Tax Law” and “Regulations on Implementation of the Enterprise Income Law” in respect of enterprise income tax, the enterprise may choose the most preferential policies rather than enjoy such preferential policies repeatedly, and once it has made the choice, it shall not change it.
The State Council promulgated the “Notice on Providing Transitional Preferential Tax Treatments to High-tech Enterprises Newly Established in Special Economic Zones and in Pudong New Area of Shanghai” (hereinafter, the “Notice”) on December 26, 2007, which came into force on January 1, 2008.
The Notice clarifies Article 57 of the “Enterprise Income Tax Law”, which provides that the State Council decides to provide transitional preferential tax treatments to high-tech enterprises under key support of the state that are newly established in the said special zones as provided by law for developing foreign economic cooperation and technological exchange as well as in the areas where the State Council has provided the implementation of the abovementioned special policy.
The Notice points out that “special zones established by laws for developing foreign economic cooperation and technological exchange” refer to Shenzhen, Zhuhai, Shantou, Xiamen and Hainan Special Economic Zones; “the areas where the State Council has provided the implementation of the abovementioned special policy” refer to Pudong New Area of Shanghai.
For a high-tech enterprise under key support of the state in a special economic zone or in Pudong New District that had completed its registration on or after January 1, 2008 (hereinafter, the “new high-tech enterprise”), the income obtained by it in the special economic zone or in Pudong New Area shall be exempted from the enterprise income tax for the first 2 years from the tax year in which its first revenue arising from production or operation, and shall be taxed at half of the statutory tax rate of 25% for the third to the fifth years.
“High-tech enterprises under key support of the state” refer to high-tech enterprises that have their own kernel independent intellectual property rights, and simultaneously meet the conditions required under Article 93 of the “Regulations on the Implementation of Enterprise Income Tax Law” and have been recognized in pursuance of the “Measures for the Determination of High-tech Enterprises”. If such a high-tech enterprise no longer has the high-tech enterprise qualification due to failure to pass review or a spot check, it shall stop enjoying the transitional preferential tax treatments from the tax year when it loses the high-tech enterprise qualification. If it is recognized as a high-tech enterprise again later, it shall not continue to or re-enjoy the transitional preferential tax treatments.
Where a high-tech enterprise newly established in a special economic zone or in Pudong New Area simultaneously engages in production and operation in other areas besides the special economic zone or Pudong New Area of Shanghai, it shall separately compute the income it obtains in the special economic zone or Pudong New Area of Shanghai and reasonably apportion the expenses incurred during the corresponding period. If it fails to make separate computations, it shall not enjoy the preferential treatments for enterprise income tax.
The Ministry of Civil Affairs, the Ministry of Foreign Affairs, the Ministry of Public Security and the Ministry of Labor and Social Security promulgated on November 24, 2007 the “Notice on Issues concerning Employment and Residence of Foreigners in Foundations or Representative Offices of Overseas Foundations” (hereinafter, the “Notice”).
The Notice makes clear issues about applying for employment and residence of foreigners in foundations and representative offices of overseas foundations, which provides the following procedures: (1). Submitting the application to the competent authority, filling in forms and an “Application Form for Foreigner’s Employment in China” formulated by registration administrations and submitting relevant valid documents provided in Article 11 under the “Regulations on the Management of Employment of Foreigners in China”; (2). After identification rectification and approval by the said competent authority, the relevant materials shall be transferred to the registration administration; (3). The registration administration shall chop its official seal on the “Application Form for Foreigner’s Employment in China” after examination and approval; (4). A foundation or the representative office of an overseas foundation shall apply for relevant foreigners’ work permits with the labor and social security administration of the people’s government at provincial level or the labor and social security administration of the municipal people’s government authorized by the provincial people’s government. Such labor and social security administration will verify the registration certificate provided by the foundation or the representative office of the overseas foundation according to the relevant certifying materials provided in the “Regulations on the Management of Employment of Foreigners in China” and then will issue work permits to qualified foreigners; (5). A foreigner who has obtained his/her work permit shall, within 30 days after entering China, apply for residence permit and legally handle formalities for accommodation registration with the competent public security bureau with his/her work visa, work permit, official letter of the foundation or the representative office of the overseas foundation and other relevant certification materials.
Besides, the director (chief representative) of the representative office of an overseas foundation is exempted from applying for a work permit. He/she may directly apply for work visa at Chinese embassies or consulates abroad with the approval documents issued by the Ministry of Civil Affairs and the visa notice issued by an authorized authority. Then after entering China, he/she can directly obtain a work permit at a labor and social security administration with his/her work visa, approval documents issued by the Ministry of Civil Affairs and other relevant certification materials.
As the number of public holidays has been increased from 10 to 11 in the “Measures of Public Holidays for National Annual Festivals and Memorial Days” (Order of the State Council No. 513), the Ministry of Labor and Social Security promulgated the “Notice on Issues about the Average Monthly Working Days and Salary Calculation of Employees” on January 3, 2008, which makes adjustment to the average monthly working days and salary calculation methods.
1. Calculation of working days
Yearly working days: 365 days -104 days (rest days) -11 days (legal holidays) = 250 days
Quarterly working days: 250 days / 4 quarters = 62.5 days/quarter
Monthly working days: 250 days / 12 months =20.83 days/month
Working hours: monthly working days, quarterly working days or yearly working days times 8 hours per day.
2. Calculation of Daily Salaries and Hourly Salaries
According to Article 51 of the “Labor Law”, the employer shall pay salaries to employees when they are on legal holidays, which means that the calculation of daily and hourly salaries shall not exclude the 11 days of legal holidays stipulated by the state, which shall be as follows:
Daily salaries: monthly salary / paid days in a month
Hourly salaries: monthly salary / (paid days in a month x 8 hours)
§ IP Cases
Shandong Weifang Intermediary People’s Court made a judgment of first instance on December 27, 2007, in the case of the plaintiff Nanjing Pengwanda Lighting Co., Ltd. (hereinafter, Pengwanda) vs. the defendant Shandong Hengda Landscape Engineering Co., Ltd. (hereinafter Hengda), regarding infringement upon patent rights, which affirmed that the defendant’s behavior constituted infringement upon patent rights but it did not need to be liable for any compensation.
The plaintiff alleged that, it had applied for and obtained the design patent of its self-developed street lamps “Peng V8” from the State Intellectual Property Office. With the plaintiff’s consent, Weifang Highlight Tapered Steel Tube Co., Ltd. (hereinafter, Highlight), by combining the street lamps of the disputed design patent with its own lamp posts, won the bidding for Weifang West Ring road lamp model in the name of Highlight. Later, the plaintiff found that the defendant conducted the installation for Highlight’s bid-winning project by producing and using the disputed patent products without the plaintiff’s consent. The plaintiff filed an action with the court, claiming that the defendant’s behavior had constituted infringement upon patent rights.
The defendant defended that it just participated in the bid for street lamps installation, won the bid and then conducted the installation according to relevant documents of governmental authorities, rather than produced or used the plaintiff’s patent products, which shall not be deemed as infringement.
The court held that, Pengwanda enjoyed the patent rights of the disputed patent. The defendant installed the plaintiff’s patent lamp model, which had already constituted infringement and should be stopped. However, the lamp model installed by the defendant was the bid-winning product for the bidding held by government authorities. As a normal business operator, the defendant had no obligation to check whether the bid-winning lamp model provided by governmental authorities had infringed upon any right. After winning the bid, the defendant used and installed the same kind of lamp model produced by another company to meet the requirements of the bid-inviting company and to reduce costs. The defendant had proved the source of its products. Therefore, though the defendant’s behavior constituted infringement, it did not need to be liable for any compensation.
Fujian Higher People’s Court made a final judgment on December 20, 2007, in the case of the appellant (the defendant in the first instance) Xiamen City Kidly Arts & Crafts Co., Ltd. (hereinafter, Kidly) vs. the appellee Quanzhou Nanmao Arts & Crafts Co., Ltd. (hereinafter, Nanmao), with Zhu Anman, Chen Weiping and Huang Puzhen as defendants of the first instance, regarding dispute over exhibition rights of works, which affirmed that the appellant’s behavior constituted infringement.
The court of first instance held that, the disputed art works were created by Nanmao. Nanmao engaged Zhu Anman to make proofs to produce the disputed products. Zhu Anman breached the contract, disclosing such products to Chen Weiping and Huang Puzhen, which had constituted infringement upon Nanmao’s authorship. Kidly used the said works for exhibition without Nanmao’s consent, which also infringed upon Nanmao’s authorship and thus Kidly should also assume corresponding civil liabilities.
Kidly did not accept the judgment of first instance and filed an appeal mainly for the following reasons: During the exhibition, the actual exhibitor was Zhu Anman rather than the appellant and the exhibiting products were provided by Zhu Anman. The appellant only let the exhibition stall to Zhu Anman for exhibition of products. The contract executed by the appellant and Zhu Anman provided that Zhu Anman guaranteed that his exhibiting products should not infringe upon others’ intellectual property rights. The appellant could not know whether the disputed works infringed upon others’ authorship and did not conduct any intentional infringement upon the appellee’s authorship. Besides, Naomao registered the authorship of the disputed works only after the exhibition, which meant that during the exhibition, the appellee had not obtained the authorship. Therefore, the appellant alleged that its behavior was not infringement.
The court of second instance held that, firstly, according to the doctrine of automatic protection, the authorship should exist upon completion of works, rather than registration. Kidly lacked legal grounds while alleging that the authorship of the disputed works was registered after the exhibition and that Nanmao had not obtained the authorship during the exhibition, and therefore, Kidly’s allegation should not be supported. Secondly, while letting the exhibition stall to Zhu Anman, Kidly only required Zhu Anman to guarantee that the exhibiting products did not infringe upon others’ rights, but failed to ask the product sources, which should be deemed as a failure in performing reasonable inspection obligation. Therefore, it can be affirmed that Kidly was wrong to exhibit the disputed works without the consent of Nanmao. Nanmao had infringed upon Nanmao’s exhibition rights of the disputed works and should assume corresponding civil liabilities. Based on this ground, the court of second instance sustained the judgment of first instance by ruling that the appellant’s behavior constituted infringement.
Nantong Intermediary People’s Court made a judgment of first instance on December 20, 2007, in the case of the plaintiff Nantong Jianghai Filter Cloth Facotry (hereinafter, Jianghai) vs. the defendant Yang Yan, regarding confirmation on non-infringement upon patent rights, which affirmed that the plaintiff’s products did not constitute infringement upon the defendant’s patent rights.
Jianghai alleged that it obtained the authorization of a patent owner not involved in this case and produced filter cloths made by filter presses, the products of which were quite popular with clients both at home and abroad. Recently, Jianghai and its clients received lawyer’s letters from Nantong Law Firm engaged by the defendant Yang Yan, claiming that Jianghai applied Yang Yan’s patent techniques to its filter cloths without authorization, requesting Jianghai to stop producing and selling such filter cloths and relevant clients to stop use of products produced by the plaintiff. Jianghai alleged that its filter cloths lacked a key technical feature held by Yang Yan’s patent and thus did not fall into the protective range of Yang Yan’s patent rights, which should not constitute infringement. On the other hand, Yang Yan’s warning of stopping infringement sent to Jianghai’s clients had put Jianghai’s business into danger and had caused great losses to Jianghai’s business interests. Therefore, Jianghai lodged a suit and requested a judgment confirming that Jianghai’s products did not infringe upon Yang Yan’s patent rights.
Yang Yan defended that the filter cloths provided by Jianghai to Nantong Acetate Fiber Co., Ltd. (hereinafter, “Nantong Acetate Fiber”) had the technical feature of “using twill cotton cloths for the third layer”. Ordinary technical personnel could relate such technical feature to the technique of “twill cotton cloth raising” recorded in Yang Yan’s patent documents without any creative work. According to the principle of equivalence, Jianghai’s products fell into the protective range of Yang Yan’s patent rights, which should constitute infringement.
The court held, compared with Yang Yan’s patent rights, Jianghai’s filter cloths lacked a key technical feature. Concerning Yang Yan’s point that the equivalence principle might be applied to this case, the court held that, the judgment of patent infringement should be based on the patent claims instead of applying the principle of equivalence to neglect meaningful structural or functional defining features recorded in the patent claims. Each defining feature in the claim should be considered if the principle of equivalence was to be used and the patent owner should prove that the infringed product adopted each and every defining feature or its equivalence in the claim. In this case, Jianghai applied “twill cotton cloths without raising process” to its products, which lacked the technical feature of “raising process” instead of replacing Yang Yan’s “twill cotton cloths with raising process” with basically identical methods. Therefore, the principle of equivalence should not apply to this case and Jianghai’s products did not fall into the protective range of Yang Yan’s patent rights. Thus the court finally affirmed that the plaintiff’s products did not constitute infringement and ruled in favor of the plaintiff’s non-infringement confirmation petition.
Nantong Intermediary People’s Court made a judgment of first instance on December 20, 2007, in the case of the plaintiff Nantong OhE Chemical Co., Ltd. (hereinafter, “OhE”) vs. the defendant Zhu Huizhong, regarding dispute over a non-compete contract, which affirmed that the defendant did not have a non-competition obligation and ordered the defendant to refund compensations already paid by the plaintiff plus bank interests over the same period.
OhE alleged that Zhu Huizhong executed an “Enterprise Staff Confidentiality Contract” (hereinafter the “Contract”) with OhE, Article 5 of which provided that Zhu Huizhong should not work for any industry engaging in the same kind of business as that of OhE for 3 years after he left the company and the Contract also provided non-competition compensations. Upon Zhu Huizhong’s dismissal on November 16, 2005, OhE paid 12 months’ non-competition compensations to the defendant. Zhu Huizhong obtained such compensations and clearly promised to observe all provisions in the Contract. However, according to investigations, Zhu Huizhong had been working for a company competitive with OhE before he completed formalities for leaving, which seriously violated non-compete provisions.
Zhu Huizhong defended that his Contract executed with OhE was invalid due to unreasonable non-competition compensations and thus he should not undertake non-competition obligations.
The court held that non-competition referred to a system in which specific employees were forbidden to work for any industry competitive with the employer, which was also called restriction of competition. To decide whether the non-competition Contract in this case was valid and whether Zhu Huizhong had any non-competition obligation, the following factors should be considered, besides referring to general provisions about contract validity provided in the “Contract Law”: (1). Non-competition provisions were subordinate to and dependant on an employment relationship. (2). The employer as one party to a non-competition contract should have interests to be protected. In this case, the plaintiff selected the defendant from a group of employees and sent him to Japan for specific training paid by the plaintiff. The plaintiff hoped that such training costs might generate returns to itself, not to its competitors, which obviously constituted the factors of “having interests to be protected” of a non-competition contract. (3). The industries that the employee was forbidden to work for as well as the time period and scope in non-competition provisions shall be appropriate. (4). The employer shall pay reasonable compensations. Such compensations could not only make up for losses caused to the employee, but also protect the employer’s competitive advantages. Therefore, paying reasonable compensations should be the employer’s primary obligation while performing a non-competition contract. Without reasonable compensations, the employee would lose sources of income and thus should not have non-competition obligations.
The court held that the non-competition provisions in this case met the first 3 factors while the compensations were not reasonable. Though laws did not make clear how to define “reasonable”, to decide whether compensations were reasonable or not should not only refer to the “percentage”, but also consider other factors such as the employee’s life standard, the price level, the level of minimum life standard, the minimal salary level, educational, medical and housing costs, as well as the employee’s original salary. Generally, the employee’s former life standard should not remarkably and unreasonably be lowered. In this case, the employee’s former salary was about 2200 Yuan per month, which enabled him to maintain a fairly well-off life standard. However, there was only about 730 -Yuan non-competition compensation provided by OhE per month, which was basically an income of minimal level (the standard for the local minimal salary was 700 Yuan per month). Though the defendant did sign on such non-competition provisions, considering the unbalanced relationship between the employee and the employer upon execution of the Contract and the much lowered life standard of the employee, if he performed the non-competition obligations, the court held that such compensations were unreasonable to the defendant. The defendant did not undertake the obligation of non-competition but should refund compensations already paid by the plaintiff along with bank interests over the same period.
Jiangsu Higher People’s Court made a final instance on December 10, 2007, in the case of the appellant (the plaintiff in the first instance and the defendant in the counterclaim) Xuzhou Zhuoer Computer Research Institute (hereinafter, “Zhuoer”) vs. the appellee (the defendant in the first instance and the plaintiff in the counterclaim) Xuzhou Litian Technology Research Institute (hereinafter, “Litian”), regarding unfair competition, which affirmed that both the appellant’s behavior and the appellee’s behavior constituted unfair competition.
Zhuoer alleged in the first instance that it had been for years selling KHT5 products, which belonged to the same series of KHT200 produced and sold by Litian. Litian publicized in its product manuals and on name cards of its employees that Litian was “Siemens’ Automation and Drives Cooperative Partner”, which raised its products’ competitive edge by utilizing Siemens’ reputation and debasing Zhuoer’s products, and the publications were not true. Besides, Litian intentionally mixed the concept of “high-tech products” with “high-tech enterprises”. Though Litian’s products had obtained the authentication of high-tech products, Litian falsified by publicizing that it was “a high-tech enterprise in Jiangsu”. Therefore, Zhuoer alleged that the above behaviors of Litian had constituted unfair competition.
Litian defended in the first instance, though it acknowledged its promotional behavior of calling itself “Siemens’ Automation and Drives Cooperative Partner”, its promotional contents had factual grounds rather than falsification. As Litian’s products had obtained the certification of high-tech products, it was also true by publicizing that it was a high-tech enterprise.
Litian alleged in the counterclaim, its KHT200 products were launched into the market after receiving a safety certification mark. However, though M12-3B products sold by Zhuoer had obtained the safety certification mark, its M12-3B/201 products and M12-3B/203 products had not obtained such certification. Zhuoer launched the latter two products by using the safety certification mark of M12-3B products and thus Zhuoer’s behavior of falsely using certification marks had constituted unfair competition.
Zhuoer defended in the counterclaim that it was a distributor of mine products. No state laws or regulations requested that a distributor needs to obtain safety certification marks. The safety certification mark obtained by Zhuoer recording the product model as M12-3B. As M12-3B/201 and M12-3B/203 belonged to the same series as M12-3B products, Zhuoer did not need to obtain another two certification marks.
The court of first instance held that, firstly, Litian publicized that it was “Siemens’ Technical Cooperative Partner” and “Siemens’ Automation and Drives Cooperative Partner”, which constituted false publicity. The reasons were as follows: Nanjing Langchi Group Ltd. (hereinafter, Langchi) was appointed by Siemens Automation and Drives Group as its product distributor and Litian was a second grade cooperative partner appointed by Langchi, but according to the relativity of the contract, neither Litian’s behavior of purchasing relative Siemens’ technology from Langchi or the cooperative relationship between Litian and Langchi should be a basis to judge that Litian had a technical cooperative relationship with Siemens. Therefore, without the consent of Siemens, Litian’s promotional remarks of “Siemens’ Automaton and Drives Cooperative Partner” and “Siemens’ Technical Cooperative Partner” was untrue, which would easily misled consumers that Litian’s KHT200 products had certain links with technical cooperation with Siemens. Litian raised its market competitive edge by using Siemens’ reputation, which was false publicity and should be regarded as unfair competition. On the other hand, the remark “a high-tech enterprise” called by Litian should not constitute false advertising as Litian’s KHT200 products were affirmed by Jiangsu Science & Technology Bureau as “high-tech products” and thus Litian’s exaggeration “a high-tech enterprise” would not cause misunderstanding in the products’ quality, function and the producer, etc.
Concerning the counterclaim, the court held that Zhuoer had falsely used the authentication mark, which constituted unfair competition. According to the “Anti-Unfair Competition Law of PRC”, a business operator should not falsely use the authentication mark of others that would make people misunderstand the qualification of the commodities, which could damage other competitors. According to the “Provisional Measures for Mine Products Safety Marks Management”, safety certification marks should be adopted concerning mine products that might endanger lives and health of staff. Any employer or employee shall not sell, purchase or use mine products that have been included into the scope of safety mark management but have not obtained safety marks. The same kind of mine products sold by Zhuoer and Litian were all included into the scope of state safety mark management. Though Zhuoer had obtained the safety certification mark for M12-3B products, it failed to provide evidences to prove that M12-3B/201 products and M12-3B/203 products produced by Xuzhou Guanghui Industrial Control Research Institute (hereinafter, “Guanghui”) had also obtained safety certification marks. As Zhuoer had been selling the said products of Guanghui for years, it should have known the above facts. However, Zhuoer still engaged in selling M12-3B/201 products and M12-3B/203 products by using the “Product Manual” with the safety certification mark of KHT5 on it to publicize, which belonged to the behavior of falsely using certification marks.
After the first instance, Zhuoer did not accept the judgment and lodged an appeal claiming that it was a distributor and no laws provided whether a distributor should obtain safety certification for products.
Litian responded that the judgment of first instance was correct and should be sustained.
The court of second instance held that, safety certification was a measure enforced by the sate to manage products that might endanger human safety and health. Without safety certification, the said products should not be produced or sold. In this case, M12-3B products had obtained a safety mark numbered 20021533 and Zhuoer applied such mark to M12-3B/201 and M12-3B/203 products distributed by it. The court held that any enterprise or individual who engaged in selling products included into the scope of state safety mark management catalogue should have known relevant laws and regulations of safety mark management and should have fully performed due care to know whether the products sold by it had passed safety certification. As Zhuoer had been selling the mine products produced by Guanghui for years, it should have known that M12-3B/201 and M12-3B/203 products had not passed safety certification. However, Zhuoer still sold such products and publicized by using the “Product Manual” recorded with the certification mark of M12-3B, which belonged to falsely using certification mark and would easily mislead the relevant public into thinking that M12-3B/201 and M12-3B/203 products had met the state certification requirements and could be purchased and used. Therefore, the said behavior of Zhuoer constituted false publicity and Zhuoer should assume corresponding legal liabilities.