GC Agenda China: December 2016 | Practical Law

GC Agenda China: December 2016 | Practical Law

A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

GC Agenda China: December 2016

Practical Law UK Articles w-005-1122 (Approx. 9 pages)

GC Agenda China: December 2016

by Brad Herrold, Consultant and Practical Law China
Law stated as at 21 Dec 2016China
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

SPC issues split ruling on trade mark disputes involving Michael Jordan

On 8 December 2016, the Supreme People’s Court (SPC) publicly announced its decisions on 10 administrative cases involving disputes between US basketball star Michael Jordan and the Trade Mark Review and Adjudication Board (TRAB) over trade marks registered in China by QIAODAN Sports Co., Ltd (QIAODAN Sports).
QIAODAN Sports began using the common transliteration of the surname Jordan (乔丹) to build its brand in 2000. Michael Jordan sued in 2012, arguing that QIAODAN Sports had infringed his name rights.
The TRAB and lower appeals courts did not recognise a corresponding relationship between the common family name and Michael Jordan, and Jordan appealed.
Three of the ten cases involved trade marks with the Chinese characters "乔丹", four cases involved marks with "QIAODAN" (that is, the Pinyin, or Chinese phonetic Romanisation of the characters "乔丹"), and three cases involved marks with "QIAODAN" together with a silhouette graphic image of a basketball player.
The SPC held that there was an established link in the Chinese public between Michael Jordan and the characters "乔丹" and that the marks with these characters infringed on Jordan’s pre-existing right of name in violation of the then effective Trademark Law of the People’s Republic of China.
The SPC ruled against Jordan on the other seven cases because:
  • Jordan does not have a pre-existing right of name over "QIAODAN" in Pinyin and therefore the marks using "QIAODAN" do not violate the Trademark Law.
  • The marks do not violate other provisions of the Trademark Law by "endangering socialist morals or causing other negative influences" or "obtaining registration by deceptive or other improper means".
The SPC overruled the lower court decisions on the marks with the Chinese characters and ordered the TRAB to de-register those marks and to carry out a re-determination. The SPC also upheld the lower court verdicts and dismissed applications for retrial in the cases involving the marks with "QIAODAN".

Market reaction

Eugene Low, Partner, Hogan Lovells, Hong Kong

"While this partial victory may offer protection for some names and marks associated with well-known personalities, the difficulties faced by Michael Jordan in this litigation marathon also highlight the importance of pro-active registration and enforcement. One wonders whether Michael Jordan would have had an easier match-up if he took action before QIAODAN Sports gained its own reputation."

Action items

GC for similarly situated clients should carefully examine the SPC’s reasoning as it may prove useful in their clients’ actions against so-called trade mark squatters. The main significance of the decisions, however, is for counsel to redouble their efforts to ensure that clients pro-actively protect their brands under China’s first-to-file system.

SAIC fines Tetra Pak for abuse of dominant market position

On 16 November 2016, the State Administration for Industry and Commerce (SAIC) announced it had levied a RMB667,724,176.88 (approximately USD97 million) administrative fine against Swedish packaging company Tetra Pak International S.A. (Tetra Pak) and five of its Hong Kong and China-registered subsidiaries for abuse of its dominant market position in the liquid food paper-based aseptic packaging materials, packaging equipment and technical services markets.
The SAIC is China’s enforcement authority for non-price-related anti-competitive behaviour under the Anti-monopoly Law of the People’s Republic of China 2007 (2007 Anti-monopoly Law).
According to Article 17 of the 2007 Anti-monopoly Law, the term "dominant market position" refers to a market position held by undertakings capable of controlling commodities’ prices or quantities or other transaction terms in a relevant market, or preventing or exerting an influence on the access of other undertakings to the market.
Article 17 enumerates six specific types of conduct which constitute an abuse of a dominant market position, as well as a "catch-all" clause for conduct identified by an enforcement authority as an abuse of a dominant market position.
According to the announcement, the SAIC held that Tetra Pak had violated Article 17 by:
  • Restricting its raw materials suppliers from providing paper to its competitors.
  • Tying sales of packaging materials to the provision of packaging equipment and technical services.
  • Providing cumulative sales volume discounts, personalised purchase volume discounts and other loyalty discount schemes.
According to commentators, this marks the first penalty imposed by the SAIC for abuse of a dominant market position, as well as the first case involving loyalty discounts under the 2007 Anti-monopoly Law.
For more information on anti-trust investigations in China, see Article, Anti-trust investigations in China: a practical guide.

Market reaction

Bai Yong, Counsel, Clifford Chance, Beijing

"Several aspects of the decision are worth noting. First, as loyalty rebates is not listed as a specific type of abusive conduct under the 2007 Anti-monopoly Law, this is the first time the SAIC referred to the "catch-all" clause under Article 17 of the 2007 Anti-monopoly Law. The analysis generally mirrors international practice, though the SAIC’s approach is different in that it focused on the specific characteristics and conditions of the relevant market when analysing Tetra Pak’s rebate schemes. Second, the decision provides guidance on the methods for calculating fines. The fine imposed amounted to 7% of Tetra Pak’s sales revenue in mainland China (the "relevant market"), which is consistent with the approach adopted by the NDRC. Third, the SAIC clarified the meaning of "preceding year". The fine was calculated based on the revenue in 2011, which was the year preceding the initiation of the investigation."

Action items

GC for companies that could be deemed to hold a dominant market position in China should review client sales and licensing agreements and other arrangements in view of their actual or potential impact on competition through provisions such as loyalty discounts or restrictions on suppliers dealing with the client's competitors. In certain cases, counsel may wish to seek specialist advice or recommend discussing concerns directly with the SAIC and the other competition regulators to gain an increased level of certainty into the regulators’ interpretations of these arrangements and of the company’s justifications for their potentially anti-competitive conduct.

NPC Standing Committee circulates second draft of revised Civil Law Principles

On 18 November 2016, the National People’s Congress (NPC) Standing Committee circulated for public comment the General Principles of the Civil Law of the People’s Republic of China (Draft) (Draft for Second Review) (中华人民共和国民法总则(草案)(二次审议稿)).
This draft mainly updates the civil code to conform to laws enacted or revised since the original code was enacted in 1986. It also preserves and expands on a number of changes contained in the first draft (see Legal update, NPC to amend Civil Law Principles).
Specifically, the second draft contains the following changes:
  • Expanding civil rights, for example by:
    • permitting agents ad litem to ratify the acts of minors six years or older and adults with limited civil capacity;
    • obligating adult children to care for, support and protect their parents, even where the parents have full civil capacity;
    • adding provisions on the protection of personal data; and
    • protecting data and network virtual property.
  • Conforming to the provisions of laws enacted or revised after the 1986 civil code, for example by:

Market reaction

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

"The proposed amendments to the civil code are less important for their substance. In many cases, they reflect legal requirements already adopted in other laws or regulations. But the amendments do reflect an on-going project to codify these requirements as fundamental requirements of Chinese civil law. For that reason, the amendments are notable for data privacy and other practitioners."

Action items

No specific action is required as a result of the draft. It is, however, important for counsel advising clients with operations or assets in China to understand and follow the general development of Chinese civil law, particularly insofar as this development impacts the rights of customers, employees and other interested parties.

Draft revised foreign investment catalogue open for comment until 6 January 2017

On 7 December 2016, the National Reform and Development Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly circulated a draft of the seventh revision of the Catalogue of Industries for Guiding Foreign Investment for public comment.
The current version of the foreign investment catalogue (2015 Catalogue) took effect 10 April 2015. At the time, most commentators speculated that following the shift to a negative list approach to market access, the negative list for foreign investment would entirely replace the foreign investment catalogue. (For more information on the 2015 Catalogue, see Legal update, China releases new foreign investment catalogue. For more information on the new negative list approach, see Legal update, State Council initiates negative list approach to market access.)
However, the revised draft catalogue:
  • Preserves the previous categories of "encouraged", "restricted" and "prohibited" investments that determine the current approval or record-filing requirements for foreign investment projects in China (see Practice note, Establishing a business in China).
  • Groups all restrictive measures together with the "prohibited" category and names them collectively as the negative list for foreign investment (外商投资准入负面清单). The "restricted" category now is a unified list composing:
    • share ratio and senior management requirements in certain encouraged industries; and
    • restricted industries.
  • Removes 11 restrictive measures that apply to both domestic and foreign-invested businesses, as these common restrictive measures will be reflected in the negative list for market access, which will apply equally to domestic and foreign investment projects (for a draft of this list, see Legal update, Draft negative list for market access: implications).
The draft also liberalises certain market access restrictions found in the 2015 Catalogue.
Comments on the draft may be submitted until 6 January 2017.

Market reaction

Xu Liang, Partner, Hogan Lovells, Beijing

"This draft continues China’s trend toward gradually liberalising its foreign investment regime by removing or relaxing market entry barriers in 31 industries, including manufacturing, rail transportation and mining. Most notably, however, the draft appears to be a hybrid of the traditional catalogue and the new negative list for foreign investment. For example, although it retains the "positive list" format found in the traditional catalogue, it also contains a "negative list" comprised of restrictive measures and prohibited industries."

Action items

GC for companies operating (or wishing to operate) in any of the industries where market entry barriers are liberalised under the draft will want to determine if the proposed changes offer any new and significant opportunities and be aware of any related restrictive measures in the negative list. Counsel for all foreign invested businesses should take note of each stage in the evolution toward the new negative list approach to the regulation of foreign investment in China to assess its impact on their current operations or future plans.

SPC issues judicial interpretation on disputes involving independent guarantees

On 18 November 2016, the SPC issued the Provisions on Certain Issues involving Trials of Independent Guarantee Disputes (最高人民法院关于审理独立保函纠纷案件若干问题的规定), which took effect 1 December 2016, to acknowledge the increasing use of these guarantees by Chinese banks and in cross-border commercial transactions.
According to the provisions, an independent guarantee (also known as a demand guarantee) (独立保函) refers to a written commitment by a bank or non-bank financial institution acting as guarantor to pay a specified or capped amount to a beneficiary on the strength of a demand for payment and documentation that satisfies the requirements specified in the guarantee.
The provisions apply to domestic and cross-border independent guarantees and distinguish independent guarantees from general guarantees and joint liability guarantees, which are governed by the Security Law of the People's Republic of China 1995 (1995 Security Law). (For more information on general guarantees and joint liability guarantees, see Practice note, Guarantees (China): overview).
Unlike general guarantees and joint liability guarantees, an independent guarantee is not ancillary to an underlying contract and the guarantor’s obligation is not secondary to the obligation of the primary obligor. As a result, an independent guarantee is not subject to the claims and defences of the underlying transaction.
Instead, the obligor of an independent guarantee generally is required to honour the beneficiary’s demand for payment where the documents presented conform to the documents specified in the guarantee, except where an enumerated instance of fraud occurs.
The provisions also permit an obligor to apply for interim relief against a payment demand upon the occurrence of any enumerated instance of fraud, but require the applicant to file a lawsuit or arbitration action to prove the fraud within 30 days of issuance of the preliminary injunction.

Market reaction

Jianwei (Jerry) Fang, Partner, Zhong Lun Law Firm, Shanghai

"The provisions are widely applauded by practitioners and are expected to have a huge and positive impact on cases involving independent guarantees, which have been controversial due to certain provisions in the 1995 Security Law. The provisions acknowledge and respect common business practices, as independent guarantees have been widely used in domestic and cross-border transactions in recent years. They will also increase the credibility and acceptance of independent guarantees issued by Chinese financial institutions in cross border transactions, facilitating the efforts of Chinese enterprises to expand abroad."

Action items

GC for financial institutions should closely study the rights and obligations of guarantors under independent guarantees. This also holds true for counsel for beneficiaries of independent guarantees, as well as any potential party to a dispute involving independent guarantees. Counsel interested in exploring the financing options and related protections available under Chinese law will also want to consider the impact of the provisions.

SAFEA initiates new work permit scheme for foreigners

On 27 September 2016, the State Administration of Foreign Experts Affairs issued the Notice on the Implementation of the Pilot Programme for the Issuance of a Work Permit System for Foreigners in China (国家外国专家局关于印发外国人来华工作许可制度试点实施方案的通知).
The pilot programme will be in effect from 1 October 2016 to 31 March 2017 in Beijing, Tianjin, Hebei, Shanghai, Anhui, Shandong, Guangdong, Sichuan, Yunnan and Ningxia. The new system will be implemented nationwide from 1 April 2017.
The pilot programme introduces a new, combined system for evaluating and issuing work permits for foreigners in China. Under the new system, all foreigners who work in mainland China will be required to obtain an Approval to Work in China for Foreigners (外国人工作许可通知) and a Work Permit for Foreigners (外国人工作许可证) and will be identified by a single code number through which the government will maintain files on foreigners’ work history.
The new system divides all foreign employees into three groups: high-end, general and low-end. Each candidate will be classified based on a talent assessment system that includes a criteria assessment measure and a scoring measure. Candidates are only required to satisfy either measure. The new system encourages the issuance of work permits for high-end foreign personnel by:
  • Not limiting the number of work permits.
  • Standardising and simplifying the application materials.
  • Accepting an online copy of application materials.
  • Shortening the process for issuing work permits.
In turn, the new system aims to strengthen the supervision of permit holders by sharing information through a database open to various administrative departments, including the departments in charge of human resources, public security and foreign affairs.

Market reaction

Jonathan Isaacs, Partner, Baker & McKenzie, Hong Kong

"During the pilot programme, the policy and implementation method may change from time to time and from city to city. For an initial assessment of a foreigner’s work permit eligibility, the current basic criteria of at least a bachelor’s degree and two years of relevant post-graduate work experience still apply. However, if a foreigner does not meet the basic criteria or is over the statutory retirement age, the foreigner may try to rely on other factors (such as annual salary amount, professional qualification, years of related work experience and working hours) to see whether they are qualified through another work permit category or under the score-based system."

Action items

GC for companies with foreign employees currently or potentially based in China should become familiar with, and periodically reconfirm, the actual rules and policies in effect in each relevant locality. Counsel also may wish to reserve additional lead time to obtain the relevant approvals and permits for their employees (or assist their employees in doing so), particularly during the transition to the new system.