Legal Eye in Beijing

Anti-Monopoly Law：No need to panic

Wed, 12 Sep 2007 06:01:00 +0200

With the passing of China's Anti-Monopoly Law ("AML") on August 30 this year, effective as of August 1 next year, discussions about the impact of this statute on foreign companies that do business either with or in China are getting heated, especially among the business circles of expatriates in China. Few statutes enacted by China's top legislature over the past few years have received so such attention, so many comments and, at times, criticisms, with the possible exception of the revised Enterprise Income Tax Law that came into force as of January 1 this year.

In this article, I will first give a brief introduction to the legislative background and sum up the main features of this statute. Then I'll discuss certain key issues that may be of particular concern to foreign businesses with China connections, which will then be followed by some general advice. At some point, I may point out some popular misinterpretations of this law.

Legislative background
The AML is a work product of 13 years' legislative effort. Since the Ministry of Commerce ("Mofcom"), the then Ministry of Foreign Trade and Economic Cooperation, began the drafting of the AML in 1994, controversies have arisen and continued until after its enactment. While public concern at home is focused on the restraint of the monopolistic conduct of large state owned enterprises ("SOEs") and the so-called administrative monopoly, i.e. the abuse of governmental powers to exclude or restrict competition, the foreign businesses appear to be more concerned about provisions on such issues as concentration review and restriction of the abuse of intellectual property rights. The draft law had been released to the public for review and two official comments have been submitted by three sections of the American Bar Association in 2003 and 2005 respectively to the relevant Chinese authorities, which is rare.

Main features of the AML
The promulgated version of the AML is organized into 8 chapters, of which the most pertinent to foreign businesses may be the second, third and fourth chapters that respectively deal with three types of monopolistic conduct, i.e. monopoly agreements, abuses of a dominant market position and the control of concentrations. Chapter 1 provides for the general principles while Chapter 5 deals with the administrative monopoly. Chapter 6 addresses the investigation of suspected monopolistic conduct, which is followed by provisions regarding legal liabilities under Chapter 7 and miscellaneous clauses under Chapter 8.

Chapter 2 defines the monopoly agreements as agreements, decisions or other concerted behavior that eliminates or restricts competition (Article 13), which effectively extends the prohibited zone to any monopolistic conduct without any formal agreements. The monopoly agreements are divided into two categories as those between competing undertakings (Article 13) and those between the parties to a transaction, usually sellers and buyers (Article 14). While Article 14 bans the agreements that fix the resale prices or provide for a minimum resale price, Article 13 prohibits monopoly agreements that (i) Fix or change prices of products; (ii) Restrict the output volume or sales volume of the products; (iii) Allocate the sales market or the raw material procurement market; (iv) Restrict the purchase of new technology or new facilities, or the development of new technology or new products; or (v) Jointly boycott transactions. These monopoly agreements, however, may be exempted if the undertakings involved can prove the agreements are entered into to improve product quality or technology, increase efficiency, protect the environment, or reduce the impacts of economic depression, so long as they will not materially restrict the competition in the relevant market and will enable the consumers to share the relevant benefits. If the agreement is to protect the lawful interests in international trade, the test of material restriction of competition will not apply (Article 15).

Both articles have a catch-all clause that grants the AML enforcement authorities ("Enforcement Authorities") under the State Council the power to determine "other agreements" as monopoly agreements. Some critics have argued that this leaves room for abusing the granted powers by the Enforcement Authorities. While this argument may appear plausible in a sense, it is more of a reflection of lack of reasonably good knowledge of Chinese law and legislation. This kind of catch-all clause is not uncommon in the statutes of many countries in the world, including China, where dramatic economic and social changes force the law to leave greater room for future changes. Based on the tradition and practice of China's legislation which is characterized by statutory law, such clauses are invariably limited by the provisions of the general principles of the same statute and judges will usually look to such principles in the interpretation of a specific clause. From a PRC lawyer's perspective, I would treat this clause as preventive in nature and expect the Enforcement Authorities, which are relatively inexperienced in such areas, to be very prudential in exercising such powers of determination by referring to the general principles under Chapter 1.

Chapter 3 deals with the abuses of the market dominant position and prohibits such acts as sale or purchase of goods for unfairly high or low prices and, without good cause, sale below the cost, refusal to transact, tying, discriminative pricing or restriction of the opposite party's right to trade with others(Article 18). An undertaking is presumed to be in a dominant market position if its market share accounts for 1/2 of the relevant market, or 2/3 together with another undertaking, or 3/4 with two other undertakings. However, an undertaking with a market share of less than 1/10 will be exempted and the presumed market dominator(s) is granted the right of rebuttal against such characterization (Article 19). This article, together with Article 17 that defines the market dominant position, raises the long-standing concern about the recognition of so called "shared monopoly" which as a theory has been controversial and much criticized ever since its introduction in the US in 1960s. Questions may be raised about the status of an undertaking which holds a market share of more than 1/10 but less than 1/2 of the total, which may not necessarily act in concert with other undertakings in the form of "shared monopoly". As with many other Chinese laws, the AML only lays a framework and needs to be fleshed out with the implementing rules to be made pursuant to this law. We expect this issue to be addressed by the implementing rules of the AML.

Chapter 4 provided for the review process, standards and certain exemptions to the notification obligations with respect to concentrations of undertakings by way of consolidation, equity or assets purchase, or change of control by contractual arrangements. Exemptions are made to concentrations that occur among the subsidiaries of a single undertaking or among an undertaking and its subsidiaries. The threshold of the notification obligation, however, is absent. The absence is due to debates among the lawmakers over whether the threshold in the earlier draft is too high or too low. In the earlier draft, the notification obligation is limited to concentrations whereby the participating undertakings have a combined annual turnover over RMB 12 billion (USD 1.57 billion) worldwide and one of the participants has an annual turnover over RMB 800 million (USD 104 million) in China. The passed AML leaves this issue aside and authorizes the State Council to make detailed requirements as to such threshold. Currently, the guideline for such anti-monopoly review for foreign investors is the Measures on the Merger and Acquisition of Domestic Enterprises by Foreign Investors ("M&A Rules"), which went effective in September last year and a filing guide promulgated by Mofcom early this year. The M&A Rules, which is a continuation of its earlier provisional version released in 2003, provided for notification threshold based on factors like the annual turnover, market share and the number of enterprises acquired. We expect this guideline will continue to apply until a unified review procedure and criteria are made in the implementing rules of the AML.

Shared system of enforcement
As against the calls for a unified enforcement authority, The AML authorizes the State Council to set up an Anti-Monopoly Committee to guide and supervise the AML enforcement while leaving the enforcement to the Enforcement Authorities under the State Council. This kind of enforcement system means more than one government agency will be participating in the enforcement of the AML, a concession to the current administrative regime. During the legislative process of the AML, at least three government agencies are said to have scrambled for the authorization of enforcement powers under the AML, i.e. Mofcom, the State Administration of Industry and Commerce ("SAIC") and the National Committee of Development and Reforms ("NCDR"). All of them are expected to enjoy the powers to enforce the AML while their borders are yet to be clearly marked out in the implementing rules. The upside of such a shared enforcement is that it will not undermine the present, ministry-based law enforcement system and create either power vacuum or major shuffle of the government regime as a result of the creation of a new, super-ministerial authority. This system may also ensure the coherence and predictability of law enforcement. The downside is that the AML, together with the Anti-Monopoly Committee, will likely face the risk of falling short of the public expectation for the AML, especially of the restraint of the administrative monopoly and the large SOEs like the petroleum giant Sinopec. This again highlights the importance and imperativeness of the creation of the implementing rules of the AML.

A law in the context
A closer look into the AML may find that it is not independent of, but rather, intertwined with a variety of other laws like the Pricing law, the Contract law and the laws about intellectual properties. For instance, certain provisions regarding the price-fixing under Chapter 2 and the abuse of dominant market position under Chapter 3 can be found equivalent or similar provisions in the Pricing Law or the Anti-Unfair Competition Law, respectively. It is therefore necessary to bear in mind that the introduction of the AML will not necessarily supersede other laws in respect of the corresponding portions. Rather, reference must be made to such other laws to understand the AML. For instance, Article 16 of the AML prohibits the sale of goods below cost without good cause as an abuse of the dominant market position. Similarly, such an act is also found illegal under Article 11 of the Anti-unfair Competition Law, without the requirement of a market dominant position. The law enforcers under the Anti-unfair Competition Law, the SAIC and its local branches, may well be able to refer to this provision to punish such an act which may not fall under the AML even after the law goes into force. Another example is the concept of national security under Article 31, which requires an additional, separate national security review of a proposed concentration involving foreign investors that concerns national security. There is concern among some foreign investors and even lawyers that the absence of a clear definition of this concept may be abused by the reviewing authority to discourage undesired concentrations by foreign investors. National security review of concentration proposals is nothing new. As said, while such a concept in itself may be as difficult to define as the concept of public policy, it is not entirely without of source of reference in the anti-monopoly laws of many countries, including that of the US. China’s National Security Law, passed in 1993, together with its implementing rules, has defined 10 types of activities, such as the stealing of national secrets, as detrimental to national security, most of which are of political in nature. In economic terms, the Guideline of Foreign Investment in China relating to Industry Sectors, promulgated by Mofcom and NCDR, has already provided for certain industry sectors relating to national economic security as restricted or prohibited areas for foreign investment. When concentrations occur in or in connection with certain such sectors, it won't be surprising that national security review will be triggered. Unless and until the AML implementing rules or other pertinent laws make further categorization or clarification in the future, there is no need to panic and adhering to the current laws and regulations mentioned above will be a sound choice.

Conclusion
In conclusion, the AML will have impacts on both foreign and domestic enterprises, despite the fact that they may have different concerns. Although the law still needs to be fleshed out with the implementing rules to clarify certain key issues, it is not created out of nothing and therefore should be read in the context of the relevant Chinese laws and regulations. Otherwise, misinterpretation or unnecessary panic may arise.

We strongly urge foreign businesses with China connections to do a thorough compliance audit of their corporate policies, contracts and business activities during the period between now and its going into force in August next year so as to avoid any of the same, or any portion thereof, being found illegal. Reading an English translation of the AML and this short article here alone is far from enough.

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Protection of Intellectual Properties at Exhibitions in China: New Alternative

Wed, 12 Sep 2007 05:49:43 +0200

Trade fairs and commercial exhibitions are good venues for doing business, and they provide companies with an opportunity to market their products, look for potential partners or simply share information. This is particularly true in China, where trade fairs and exhibitions have long been one of the only major places from which to market new products and technologies. These venues are also susceptible to intellectual property rights (IPR) infringement, however, and it's not uncommon that a company finds that some articles on display at exhibitions have infringed upon their valid patents, trademarks or copyrights. In response to these problems, four ministerial authorities in charge of IPR protection and exhibition administration under the central government jointly issued IPR regulations on January 10, 2006 specifically aimed at exhibitions and trade fairs. The Measures Regarding Intellectual Property Rights Protection at Exhibitions and Trade Fairs went into effect on March 1, and will cover exhibitions, trade fairs, and conventions operating within the realm of trade and technology (see Article 2). These measures also cover patents, trademarks and copyrights, and are generally seen as an effective means of bringing different administrative bodies together to fight IPR infringements.

Complaint centre
One of the guidelines calls for the establishment of complaint centres at exhibitions to handle any disputes regarding alleged IPR infringements. Article 6 states that events running three days or longer may set up a complaint centre in the exhibition venue, provided that the relevant administrative authority — generally the Ministry of Commerce or one of its local offices — deems it necessary. Complaint centres are to be staffed by government officials in charge of IPR protection, the exhibition administrative authority and the exhibition organizer. Organizers of exhibitions that do not fall under this category are still required to post contact information within the venue for the IPR protection authorities of the government (see Article 6). Complaint centres will generally act as a liaison between the petitioners and the IPR protection authorities. All complaints and relevant evidence shall be forwarded to the authorities within 24 hours. If an investigation reveals that IPR had been violated, the authorities can order the offending enterprise to stop. They can also confiscate or destroy the infringing articles and impose fines on violators.

Precautions
Complaint centres can provide easier and faster access to administrative solutions to IPR violations, but every party concerned should still take precautions. The complaint centres are authorized to prevent questionable articles from being displayed, for example. This might be an effective way to minimize the negative impact of violations at an ongoing exhibition, but the event organizer could end up exposing itself to lawsuits by the alleged violator if they are eventually found to be innocent. The complaint centre, by its nature, is a temporary entity set up by the organizer according to the said measures. It is not an official government office with the power to enforce IPR laws. Rather, it can be viewed as an internal body of the organizer, and as such it is expected to close when an exhibition ends. Innocent exhibitors might be justified in suing organizers for losses if their products are wrongly removed from an exhibition. It would therefore be wise for exhibition organizers to include a clause in their agreements with exhibitors allowing them to exercise the powers outlined in the said measures.

The onus of proof placed upon the petitioner for an alleged infringement, however, is by no means less stringent. With alleged patent infringements, for example, petitioners are required to submit:
1. Evidence of the petitioner’s status as a lawful holder of the patent in question, in the form of a patent certificate, patent publication document, petitioner’s identity certificate, or documents showing the legal status of the patent (normally, a receipt of the annual fees paid would suffice) ；
2. Basic information on the alleged infringer ；
3. Reasons of claim against an infringement and evidence.
This essentially means a company has to bring all documents showing its status as lawful rights holder. Foreign exhibitors must also provide an official Chinese-language version of these documents. Whether such requirements will affect how quickly and efficiently infringements are handled remains to be seen. Apart from the administrative solutions the IPR protection authorities provide, exhibition administrative authorities can also publish rogue exhibitors’ names and ban them from future exhibitions if they are found guilty of a violation twice in run (see Article 31). This provision will hopefully intimidate would-be violators.

Double-track Procedure
Companies that find their IPRs have been infringed upon at an exhibition may also choose to turn directly to the courts if they wish to, as IPR protection authorities’ decisions are not final, and they are subject to judicial review. But concerns may arise that the judicial relief is not always readily available before an exhibition, which may last only several days, comes to an end. Several judicial interpretations issued by the Supreme People’s Court of China on IPR case adjudication in 2001 and 2002, however, address this issue to a certain extent. A court can grant pre-litigation injunctive orders to stop imminent or ongoing IPR infringements. It is required to make the order within 48 hours of acceptance of an application. Injunctions are enforced immediately. A bond is requested for these applications, but this is not required under the administrative procedures conducted the IPR protection authorities of the government. Time limits are another important factor to consider. Applicants for a court order are required to file a suit within 15 days after an injunction is carried out. For punitive decisions by the IPR authorities, the time limit for seeking judicial review varies from 15 days (for patents and trademarks) to three months (for copyrights). So it is essential to take into consideration all the above factors to take right legal measures against the infringer.

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"False Promise": A Legal Anatomy of Copyright Infringement of a Chinese Movie

Wed, 12 Sep 2007 04:14:35 +0200

China's filmmaking community has been shaken over the past several weeks by a parody of last year's most highly anticipated domestic movie.
Hu Ge, a Shanghai-based multimedia designer, made a comic short using footage from Wuji (The Promise), a 35-million-dollar blockbuster released late last year. Unlike the movie upon which it was based, Hu's short was about a murder bizarrely initiated by a steamed bun. Footage from the original film and several other TV programmes were woven into the dumpling storyline. Devoid of the philosophical musings that figured so prominently in The Promise, Hu's short is awash with funny, caustic riffs on some of the source material's main themes. Hu's parody soon went popular with millions of viewerss after released on the Internet early this January.
Hu says he made the clip for fun, but director Chen Kaige was not amused. Chen (Farewell, My Concubine) blasted Hu for being "unimaginably unscrupulous" in making the parody, and threatened legal action in mid-January. The incident quickly evolved into a war of words between Hu and Chen, as well as Chen's wife, his ex-wife, the movie company, film critics, lawyers and tens of millions of Internet users. The debate centres on whether Hu infringed upon Chen's copyrights (as some claim).
China's Copyright Law recognizes the producer, not the director, as the lawful holder of most of the copyrights in a movie (Article 15). As the director of The Promise, Chen only enjoys the right of attribution to the film under Copyright Law. Hu rightly gives credit to Chen by acknowledging him, among others, towards the end of his parody. It is unlikely that a court would determine that Chen's right of attribution had been infringed upon.
It has also been suggested that Chen might sue Hu for defamation. While Chen might feel his reputation as an artist has been damaged by Hu's parody, there probably is little legal support for such a claim. Hu did not make up anything about Chen, nor did he insult him in the parody. It is unlikely a solid defamation case can be established using Hu's film. Rather, it's the producers of The Promise who might have a case against Hu.

Main contentions
If the producers choose to sue, which seems increasingly likely, Hu might find himself in an unfavourable position. There is no dispute over the fact that Hu used portions of The Promise without permission. The dispute lies largely, if not completely, in the law itself. No specific provisions in the Copyright Law deal directly with parodies of copyrighted work, and no similar case has been reported in China The producers, however, might have at least two arguments to back their claims, by referring to certain sections of the Copyright Law. Hu's work might constitute a mutilation and distortion of the original film, which would be an infringement upon the producer's right of integrity to the work (Article 10.4, Article 46.4). The 20-minute short is also largely comprised of cut-and-paste scenes from The Promise, and has been released to countless Internet users, however. This could constitute unlicensed reproduction and distribution (Article 10.5, 10.6, 10.12).
Hu's main counter-argument is that his film constitutes a fair use of The Promise, and that the law does not require prior permission or payment. It has been suggested that Hu's work, though sarcastic, is a critical comment on the original, in which case quotation is allowed and comments, though derogatory as they may be, should be tolerated.
The Copyright Law allows for appropriate quotation from published work for the purpose of making a comment (Article 22.2), but Hu's work barely qualifies as commentary which supposedly distinguishes facts from opinions. Rather, it tells of a story in its own, giving the leading roles of The Promise new, rather comical identities. Hu may have impliedly made a comment on "a bore without originality", as he claimed, by so doing, but The Promise's producers may equally feel their work has been mutilated and distorted by Hu's flick. Further, given that Hu's work is largely comprised of a substantial portion of footage from the original film, it can hardly be treated as "appropriate quotation".
Hu's other defence is that his short was not intended for commercial purposes. Copyright Law treats use of a copyrighted work for private study, research or simple self-entertainment purposes as fair use (see Article 22.1), but Hu's film has been released and circulated over the Internet. It has become public entertainment.
At one point, media reports quoted Hu as saying he had simply sent his work to a couple of friends, but had no idea it had been released online. On another occasion, he was reported to have uploaded the movie to his blog. It was then downloaded and circulated by unknown users.
If the first case holds, Hu might be let off. Otherwise, he could be in trouble.

Likely outcome
While Hu's short might infringe on the original film, it appears unlikely that it has caused any material losses for the producer of The Promise, a film that had already done well at the domestic box office long before Hu's parody became popular online. Hu made no money out of his work, nor has such an intention ever been established.
The Promise's producer would be legally justified to demand an apology from Hu, but might have a tough time getting more than nominal damages out of the courts.

This article was written and first published on a newspaper in March 2006.

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