GC Agenda China: December 2015

Practical Law UK Articles 0-621-4325 (Approx. 10 pages)

GC Agenda China: December 2015

by Brad Herrold, Consultant and Practical Law China

Hong Kong and Macau sign trade services agreement with Mainland

China's Ministry of Commerce (MOFCOM) and the Hong Kong Special Administrative Region (SAR) (Hong Kong) signed a new agreement on trade in services on 27 November 2015 supplementing the Closer Economic Partnership Arrangement and achieving further liberalisation between Hong Kong and China across a broad range of service sectors. MOFCOM and the Macau SAR (Macau) signed a similar agreement on 28 November 2015. The new agreements will take effect on 1 June 2016.

Under the new agreements, trade in services are divided into four categories:

Commercial presence: services by a service provider of one side through a commercial presence in the area of the other side.
Cross-border supply: services from the area of one side to the area of the other side.
Consumption abroad: services in the area of one side to a service consumer of the other side.
Movement of natural persons: services provided through the presence of a natural person on one side in the area of the other side.

Both agreements follow the structure and substance of similar agreements signed in 2014 giving Hong Kong and Macau service providers greater access to the services market in Guangdong, including:

A negative list to identify China's ongoing restrictions on commercial presence in various sectors other than telecommunications and cultural services. The agreements provide for national treatment as a general principle and, following the approach already used in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ), list out ongoing restrictive measures as exceptions to national treatment. Except for the 120 restrictive measures contained in the negative list, China will allow market access to a Hong Kong or Macau service provider under terms no more restrictive than it imposes on a Mainland service provider.
Three positive lists to delineate permitted cross-border services activities (that is, those activities captured in the cross-border supply, consumption abroad and movement of natural persons categories), as well as specific liberalisations in the telecommunications and cultural services sectors. These positive lists cover 28 newly liberalised measures for Hong Kong and 20 for Macau, respectively.

As in the past, Hong Kong and Macau do not impose restrictions on Mainland services and service providers under the new agreements.

To determine how to qualify as a Hong Kong or Macau service provider, see Practice note, Telecommunications and internet content regulation in China: overview: Preferential policies under CEPAs.

For further information on the negative list and the specific reforms in the Shanghai FTZ, see Practice note, China (Shanghai) Free Trade Zone: overview: Shanghai FTZ key reforms.

Market reaction

Paul McKenzie, Managing Partner, Morrison & Foerster, Beijing and Shanghai

"These latest market openings under the CEPA framework are important in and of themselves. They present new opportunities for Hong Kong businesses to participate in China's growing service sector. They are also an important gauge of the likely direction of foreign investment liberalisation more generally."

Action items

GC for companies involved in providing telecommunications or cultural services should examine the changes brought by the new agreements to determine if they offer meaningful opportunities for their China operations. GC for other companies also may wish to review China's specific commitments to determine if new investment opportunities are now available through their Hong Kong and Macau affiliates.

Shanghai FTZ to further lead finance sector reforms

On 30 October 2015, the People's Bank of China (PBOC), MOFCOM, the State Administration of Foreign Exchange (SAFE), three other finance industry regulators, and the Shanghai Municipal People’s Government jointly issued the Plan for Further Promoting the Pilot Financial Liberalisation and Innovation of the China (Shanghai) Pilot Free Trade Zone and Accelerating the Development of Shanghai into an International Financial Centre 2015. Under the plan, Shanghai FTZ will again be used as a testing ground for reforms in the financial sector. The plan comprises 40 clauses that taken together provide a framework for experimenting with a broad array of policy initiatives, including:

Permitting the convertibility of the yuan for capital accounts.
Expanding the functionality of free trade accounts, or FTAs.
Creating a new foreign exchange control system and reducing restrictions on cross border currency flows.
Permitting qualified domestic individual investors to trade foreign securities.
Establishing a macro-prudential regulatory framework.
Expanding the use of RMB internationally.
Supporting the development of certain foreign invested finance businesses, including private equity funds, minority foreign owned securities trading firms, securities advisory firms, and health insurers.
Building an international finance market in Shanghai.

The plan does not contain a timetable. Instead, the reforms will be implemented gradually. Once implemented, the government will expand the reforms that it considers successful to the other free trade zones or will decided to roll them out nationwide.

For further information on the financial reforms in the Shanghai FTZ, see Practice note, China (Shanghai) Pilot Free Trade Zone: overview: Cross border funds flow.

Action items

GC for finance companies, particularly private equity funds, securities investment and advisory firms and health insurers, should continue to monitor developments and maintain regular contact with government officials to determine if and when to establish or expand a presence in Shanghai FTZ. Other companies also may wish to follow developments in Shanghai FTZ related to the gradual liberalisation of long-standing restrictions on cross border capital flows.

China considering creation of unified regulator for finance industry

China's senior leadership was reported to be considering a major structural reform of China's financial regulatory system. A report published by Reuters, citing unnamed sources, claimed that China may merge its securities, banking and insurance regulators into a single agency due in part to what has been perceived as an uncoordinated policy response to China's stock market crash in the summer of 2015. Currently, the China Securities Regulatory Commission (CSRC) regulates China's securities markets, the China Banking Regulatory Commission (CBRC) regulates the banking sector, and the China Insurance Regulatory Commission (CIRC) regulates the insurance industry. The CSRC, CBRC and CIRC each independently report to the State Council, China's top administrative organ.

For many years, China's leadership has discussed the creation of a unified agency to provide more direct linkage between leadership and the financial markets. Recent public comments by senior Chinese finance policy makers have revealed a renewed push for reform. One model that has been discussed is the regulatory model adopted by the UK in response to the global financial crisis. The UK Financial Services Act 2012 created a new banking and financial services regulatory framework and gave the Bank of England greater power over the British financial system. The recent comments have revealed that China may be considering a similar role for China's central bank, PBOC. The reform is not expected to occur for some time.

Beijing High Court affirms IP court's jurisdiction over antitrust civil cases

On 18 June 2015, the Beijing High Court confirmed that a civil action filed with the Beijing Intellectual Property Court (Beijing IP Court) was an antitrust civil case and upheld the judgment of the Beijing IP Court that it had jurisdiction in the first instance over certain civil antitrust cases. The judgment of the Beijing High Court was published on 3 November 2015. The plaintiff filed suit in December 2014 following a decision by the National Development and Reform Commission of China (NDRC) to fine several infant formula producers a total of RMB668 million (about USD106 million) for conduct related to resale price maintenance in 2013 (see Legal update, NDRC decision following investigation of nine infant formula producers).

The plaintiff claimed that Carrefour and Abbot had engaged in anti-competitive conduct, resulting in higher prices for Abbot's infant formula products, and sought damages of RMB10.44 (approximately USD1.60) and litigation costs of RMB3,000 (approximately USD488). Carrefour and Abbot challenged the Beijing IP Court’s jurisdiction, arguing that according to relevant jurisdiction rules, the competent court should be the Beijing No. 3 Intermediate Court or a competent People's Court in Shanghai. The Beijing IP Court dismissed the objections and the two defendants appealed to the Beijing High Court.

Market reaction

Adrian Emch, Partner, Hogan Lovells, Beijing

"The suit against Carrefour and Abbott may be characterised as 'follow-on' antitrust litigation, where a court decides on the damages caused by a defendant's conduct after a government agency decides the conduct was anti-competitive. It will be interesting to see how the Beijing IP Court decides on the merits of the damages claim. Until recently, there was some uncertainty as to whether the Intermediate People's Courts would retain their jurisdiction over antitrust cases, or the IP courts would take over."

State Council circulates draft of revised Patent Law

On 2 December 2015, the Legislative Affairs Office of the State Council circulated a revised draft of the fourth amendment to the Patent Law of the People’s Republic of China 2008 (Patent Law). An earlier draft was circulated by the State Intellectual Property Office (SIPO) on 1 April 2015. The new draft contains some new changes and some of the revisions proposed under the previous draft. Overall, the proposed amendments are intended to strengthen the rights of patent holders and the enforcement powers of SIPO and its local counterparts. These changes include:

The definition of "design" for a design patent is expanded to include partial designs, that is, the design of a portion of a product (Article 2).
Where an invention is created using the materials or technical conditions of an entity and the entity and employee inventor or designer have not concluded a contract, the patent rights to belong to the employee inventor or designer; where the entity obtains the patent rights by contract, the entity is required to reward the individual and pay compensation (Articles 6 and 16).
The term of validity of a design patent is extended from ten years to 15 years (Article 42).
A repeated infringement of a patent right is regarded as a "wilful infringement" subject to penalties including a confiscation of the infringing products and an administrative fine of up to five times the illegal gain, or up to RMB250,000 where the illegal gain is less than RMB50,000 (Article 60).
Any person knowingly facilitating patent infringement or inducing a third party to infringe a patent is liable for joint infringement (Article 62).
Internet service providers that know (or should have known) that a vendor is engaged in patent infringement but fail to prevent the infringement are liable for joint infringement (Article 63).
The administrative fine for counterfeiting is increased to an amount up to five times (as opposed to four times under the existing law) the illegal gain, or up to RMB250,000 where the illegal gain is less than RMB50,000 (Article 66).
The damages for wilful infringement may be trebled by a People's Court, and if the amount of damages cannot be determined, the range of statutory damages the court can impose is increased to between RMB100,000 and RMB5 million(as opposed to between RMB10,000 and RMB1 million under the existing law) (Article 68).
A patent holder may provide SIPO with a written expression of its willingness to license its patent rights to anyone on terms that it specifies, and a licensee may exploit the patent upon informing the patent holder in writing and complying with those terms (Articles 82 to 84).
A patent holder involved in the development of a national standard that fails to disclose that it holds a patent essential to the use of the standard (that is, a standard essential patent, or SEP), is deemed to have licensed the SEP to those who implement the national standard (Article 85).

Comments may be submitted before 1 January 2016.

For more information on patent law in China generally, see Practice note, Patents (China): overview.

Market reaction

Dr. Isabella Liu, Partner, Baker & McKenzie, Hong Kong

"Key changes are being introduced under the draft Patent Law to enhance patent protection in China. Proposed provisions relating to wilful infringement, damage calculations and joint liabilities, in particular, pave the way for greater deterrence against patent infringement. At the same time, provisions based on competition law concepts are introduced to address grave inequities that may result from IP abuse."

Action items

GC for companies with significant market shares, large patent portfolios or research facilities in China should pay close attention to further legal developments in this area, particularly the interplay between IP and competition and the proposed statutory stipulations over ownership and remuneration of employee inventions.

SAPPRFT circulates draft news publication licensing measures

On 3 December 2015, the State Administration of Press, Publications, Radio, Film and Television (SAPPRFT) circulated for public comment the Interim Measures on the Administration of News Publication Licenses (draft for comment). The draft measures apply to the establishment, design, production, issue, amendment and cancellation of news publication licences for legal persons, natural persons and other organisations engaged in editing, publishing, printing or copying "imported" and domestic news, but do not apply to journalism licences.

The draft measures impose certain obligations on SAPPRFT, its counterparts at the provincial level, and its authorised counterparts at the local level, including the following:

The content of a news publication licence must be consistent with the content of the administrative licensing decision.
A news publication licence must be delivered to the licence holder within ten business days after issue, or within an additional four business days if a higher level SAPPRFT made the licensing approval decision.
The term of a news publication licence is determined by SAPPRFT in accordance with the actual situation in an industry and need of an applicant.
A licence holder is prohibited from forging, altering, misusing, or transferring a news publication licence and is permitted to use a news publication licence only within its scope and duration.
A licence holder must apply to renew a news publication licence within 30 days before the expiry of the licence.

The draft measures also address the future use of electronic licences, call for the design and construction of a national news publication licensing information management system, and set out various penalties for violating the draft measures, including a revocation of the issued licence and a fine up to RMB30,000 for serious violations.

Action items

GC for businesses engaged in editing, publishing, printing or copying news should study the draft measures to become familiar with the revised licensing rules. They also may wish to follow further developments, including the implementation of the national news publication licensing information management system.

First deferred prosecution agreement under BA 2010 approved

On 30 November 2015, an English court approved the first deferred prosecution agreement (DPA) under the Bribery Act 2010 (BA 2010) in relation to alleged bribery outside the UK. The DPA is between ICBC Standard Bank Plc and the Serious Fraud Office (SFO). Under the DPA, ICBC agreed to pay:

A financial penalty of USS16.8 million.

USD8.4 million disgorgement of profits.
USD6 million in compensation.
USD1 million in interest.
Prosecution costs of £330,000.

The court approved the DPA based on mitigating factors including the bank’s self-reporting and proactive engagement with the SFO and its co-operation with the SFO from the earliest possible date.

For more coverage of this development, see Legal update, First DPA approved (Crown Court).

For more information on anti-corruption enforcement in China (including the overlapping anti-corruption regimes with extraterritorial jurisdiction), see Practice note, Anti-corruption regimes in China, the UK and the US: a comparative guide.

Market reaction

Todd Liao, Partner, Dentons, Shanghai

"[T]he UK SFO's DPA with ICBC has interesting implications from a China-perspective and represents an on-going paradigm shift. The acquisition of multinationals by Chinese entities is increasingly pulling Chinese entities, such as ICBC, into the orbit and jurisdiction of global anti-bribery laws. Hence, rather than a multinational's dealings with ICBC being the focus of the UK SFO, ICBC and its compliance programme is itself the subject of an investigation for activities in Africa. ICBC has accepted independent monitoring of its compliance programme, and this is an indication that Chinese entities will increasingly need to become aware of the requirements of foreign anti-bribery laws when expanding globally."

Action items

GC for domestic and foreign companies should become familiar with the requirements of foreign anti-bribery laws when acquiring offshore affiliates or otherwise expanding globally. Counsel also should work with senior management to develop and implement policies and procedures for complying with these rules.

GC Agenda China: December 2015 | Practical Law