OEM Liability Decision Protects against Bad-faith Trademarks, but Leaves Border Protection Questions Unanswered

 Authored by Mr. He Jing (hejing@anjielaw.com), Mr. Zhao Kefeng (zhaokefeng@anjielaw.com) and Ms. Anita Chen at Anjie Law Firm

China's Supreme People's Court (SPC) recently held that an original equipment manufacturer (OEM) may not be held liable for trademark infringement for exporting products bearing a trademark that is registered outside China.  The SPC ruled that the trademarks used on exported OEM products are not intended to serve as an indication of origin to Chinese consumers; therefore, there is no likelihood of confusion and such use does not constitute trademark use under the Trademark Law.

The decision is the latest in a series of court rulings on OEM-related trademark issues.  Back in 2004, Nike prevailed in a case in which the Shenzhen court confirmed that the export of goods bearing unauthorized marks constitutes infringement. But in recent years, courts in various locations have decided in favour of OEMs, especially  in the context of border protection seizures.  Chinese courts and Customs have discussed these issues regularly with industry players,  but no consensus has been reached.

This case was being closely watched by the trademark community because of the potential implications. The issues were whether the defendant's manufacturing infringed the plaintiff’s exclusive trademark rights and constituted trademark use under the Trademark Law.

The suit was filed by Chinese company Focker Security Products International Limited, owner of the China- registered trademark PRETUL and device mark.   Defendant Zhejiang Pujiang Yahuan Locks Co, Ltd. was an OEM which exported goods to Mexican company TRUPER SA, which owned a registration for the PRETUL trademark and device mark in Mexico. 

Focker was said to have been a distributor for the Mexican company for some time previously.

Focker sued Yahuan for trademark infringement in the Zhejiang Ningbo Intermediate People's Court, which ruled in favour of the plaintiff, awarding damages of Rmb50, 000. Both parties appealed to the Zhejiang High People's Court, which affirmed the decision and increased the damages to Rmb80, 000. Yahuan applied for a retrial to the SPC as the last resort.

The SPC stated that under the Trademark Law, 'trademark use' refers to the use of a trademark on goods, packaging or containers and similar, or in advertisements, exhibitions  and other commercial activities, in order to indicate the origin of the products.  The SPC further explained that as in this case the products were all exported to Mexico and would not be sold on the Chinese market, the mark did not serve to distinguish their origin in China, as a trademark normally does. The relevant public in China thus would not confuse these products with those of the plaintiff.

The SPC further observed that as the mark did not serve as an indication of origin,   it was not necessary to compare the similarity of the marks at issue and the respective goods they covered. The SPC overturned the entire decision.

Brand owners may have ambivalent feelings about this result. To some extent, the exemption for OEMs - at least in certain circumstances - helps companies which have fallen victim to bad-faith registrations in China, allowing their OEM partners to export their products without hindrance.  This may be particularly helpful for medium-sized brand owners that primarily source their goods from China, but have somehow failed to register their marks in China.  The SPC decision allows these companies to continue their activities.

But many brand owners are also concerned that a broad reading of the SPC ruling could open up a big loophole for counterfeiters. What if counterfeiters or infringers managed to register a well-known trademark somewhere in the world and then came to China to order OEM'  goods? At a deeper level, the decision even undermines the legal foundations of the IP border protection regime.  Chinese Customs has been stopping significant numbers of exports of counterfeit goods. If the court really means that export-only goods are not infringing, exporters will be able to challenge every customs seizure order in the courts.  Predictably the Supreme Court may have to either figure out a way to deal with these problems or clarify the scope of the decision in some form in the near future.

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Trade Association Comes Under the Spotlight Again - First Boycott Case Published by the SAIC

 Authored by Michael Gu (michaelgu@anjielaw.com) and Bai Chen (baichen@anjielaw.com) at AnJie Law Firm

Introduction

China’s Guangdong Provincial Administration for Industry and Commerce (“Guangdong AIC”) fined local trade association Guangzhou Panyu Animation and Game Association (“GAGA”) RMB 100,000 for alleged monopolistic conduct, according to a penalty decision posted on the website of the State Administration for Industry and Commerce (“SAIC”) on 8 December 2015. This is the first ever boycott case penalized by the PRC competition enforcement agencies. 

According to the penalty decision, the Guangdong AIC’s investigation was not triggered by third party complaints, as is often the case; instead the agency initiated the investigation based on a report published by Guangzhou Daily on 13 March 2013. The local newspaper reported that GAGA had signed an “exhibition alliance agreement” (“Alliance Agreement”) with its 52 members. Under the Alliance Agreement, GAGA’s members were prohibited from attending exhibitions that were either not related to the animation and game industry or not approved by GAGA. 

After an initial investigation, the Guangdong AIC regarded that GAGA’s behavior might violate China’s Anti-monopoly Law (“AML”). On 21 July 2014, the Guangdong AIC officially started its probe into the suspected conduct after obtaining authorization from the SAIC.

After further investigation, the Guangdong AIC concluded that the Alliance Agreement constituted a monopolistic agreement under Article 13 of the AML since the participants were competing undertakings and the Alliance Agreement was designed to carry out a boycott which effectively restricts or eliminates competition. Therefore, citing Article 46(3) of the AML, the agency imposed a penalty of RMB 100,000 on the association, and ordered it to cease the illegal conduct. 

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Commentary on MOFCOM's Conditional Approval of NXP's Acquisition of Freescale

 Authored by Michael Gu (michaelgu@anjielaw.com) at AnJie Law Firm

Introduction

On 27 November 2015, the Ministry of Commerce (“MOFCOM”) granted clearance to the proposed acquisition of Freescale Semiconductor Inc. (“Freescale”) by NXP Semiconductors N.V. (“NXP”). This is the second conditional clearance case in the 2015 merger review.

NXP is a global semiconductor firm mainly engaged in the design, manufacture and sale of integrated circuits (ICs) and discrete components. Its products are used in various sectors, including the automotive, wireless network infrastructure, lighting, mobile, consumer and computer industries. The target company, Freescale, is mainly engaged in the manufacture and R&D of microcontrollers and digital networking processors (embedded processors). Freescale also provides customized semiconductor products to clients to complement its embedded processing solutions.

After conducting detailed analysis of the impact the concentration of undertakings may have on the relevant product markets, MOFCOM established that the proposed deal could eliminate or restrict competition in the radio frequency (RF) power transistor product market. MOFCOM comprehensively evaluated the remedies submitted by NXP, which includes the divestment of NXP’s RF power transistor business, and eventually granted conditional clearance to the proposed acquisition of Freescale based on NXP’s commitments. This is the only conditional clearance case granted by MOFCOM in the last three years, with the condition that the parties adopt the structural remedy of divesting business that may have negative effects on competition in the relevant market. As this deal involves a global notification, it obtained conditional approvals from the European Commission (EU) on 17 September 2015, as well as from the Korean Fair Trade Commission (KFTC) on 23 November 2015. The remedy submitted to MOFCOM by NXP is quite similar to that submitted to the EU and KFTC. This is, to a large extent, due to the fact that the geographical markets of the relevant products, which drew the attention of anti-monopoly authorities in different jurisdictions, are defined as the global market. This also indicates that MOFCOM’s anti-monopoly review and law enforcement practices are becoming more in line with international practice.

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Commentary on MOFCOM's Conditional Approval of NXP's Acquisition of Freescale

 Authored by Michael Gu (michaelgu@anjielaw.com) at AnJie Law Firm

Introduction

On 27 November 2015, the Ministry of Commerce (“MOFCOM”) granted clearance to the proposed acquisition of Freescale Semiconductor Inc. (“Freescale”) by NXP Semiconductors N.V. (“NXP”). This is the second conditional clearance case in the 2015 merger review.

NXP is a global semiconductor firm mainly engaged in the design, manufacture and sale of integrated circuits (ICs) and discrete components. Its products are used in various sectors, including the automotive, wireless network infrastructure, lighting, mobile, consumer and computer industries. The target company, Freescale, is mainly engaged in the manufacture and R&D of microcontrollers and digital networking processors (embedded processors). Freescale also provides customized semiconductor products to clients to complement its embedded processing solutions.

After conducting detailed analysis of the impact the concentration of undertakings may have on the relevant product markets, MOFCOM established that the proposed deal could eliminate or restrict competition in the radio frequency (RF) power transistor product market. MOFCOM comprehensively evaluated the remedies submitted by NXP, which includes the divestment of NXP’s RF power transistor business, and eventually granted conditional clearance to the proposed acquisition of Freescale based on NXP’s commitments. This is the only conditional clearance case granted by MOFCOM in the last three years, with the condition that the parties adopt the structural remedy of divesting business that may have negative effects on competition in the relevant market. As this deal involves a global notification, it obtained conditional approvals from the European Commission (EU) on 17 September 2015, as well as from the Korean Fair Trade Commission (KFTC) on 23 November 2015. The remedy submitted to MOFCOM by NXP is quite similar to that submitted to the EU and KFTC. This is, to a large extent, due to the fact that the geographical markets of the relevant products, which drew the attention of anti-monopoly authorities in different jurisdictions, are defined as the global market. This also indicates that MOFCOM’s anti-monopoly review and law enforcement practices are becoming more in line with international practice.

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Commentary on MOFCOM's Conditional Approval of NXP's Acquisition of Freescale

 Authored by Michael Gu (michaelgu@anjielaw.com) at AnJie Law Firm

Introduction

On 27 November 2015, the Ministry of Commerce (“MOFCOM”) granted clearance to the proposed acquisition of Freescale Semiconductor Inc. (“Freescale”) by NXP Semiconductors N.V. (“NXP”). This is the second conditional clearance case in the 2015 merger review.

NXP is a global semiconductor firm mainly engaged in the design, manufacture and sale of integrated circuits (ICs) and discrete components. Its products are used in various sectors, including the automotive, wireless network infrastructure, lighting, mobile, consumer and computer industries. The target company, Freescale, is mainly engaged in the manufacture and R&D of microcontrollers and digital networking processors (embedded processors). Freescale also provides customized semiconductor products to clients to complement its embedded processing solutions.

After conducting detailed analysis of the impact the concentration of undertakings may have on the relevant product markets, MOFCOM established that the proposed deal could eliminate or restrict competition in the radio frequency (RF) power transistor product market. MOFCOM comprehensively evaluated the remedies submitted by NXP, which includes the divestment of NXP’s RF power transistor business, and eventually granted conditional clearance to the proposed acquisition of Freescale based on NXP’s commitments. This is the only conditional clearance case granted by MOFCOM in the last three years, with the condition that the parties adopt the structural remedy of divesting business that may have negative effects on competition in the relevant market. As this deal involves a global notification, it obtained conditional approvals from the European Commission (EU) on 17 September 2015, as well as from the Korean Fair Trade Commission (KFTC) on 23 November 2015. The remedy submitted to MOFCOM by NXP is quite similar to that submitted to the EU and KFTC. This is, to a large extent, due to the fact that the geographical markets of the relevant products, which drew the attention of anti-monopoly authorities in different jurisdictions, are defined as the global market. This also indicates that MOFCOM’s anti-monopoly review and law enforcement practices are becoming more in line with international practice.

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Slow Down! Follow Merger Filing Procedures Step by Step

 Authored by Michael Gu (michaelgu@anjielaw.com) and Bai Chen (baichen@anjielaw.com) at AnJie Law Firm

Background

On 29 September 2015, the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) issued four penalty decisions on parties involved in four merger cases that failed to fulfill their notification obligations under the Anti-Monopoly Law (“AML”). It is the second time that MOFCOM has announced penalties on non-filers following the penalty decision for Tsinghua Unigroup's failure to notify its acquisition of RDA Microelectronics in December 2014.

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Will China Welcome Amicus Briefs in Patent Cases?

 Authored by Mr. He Jing (hejing@anjielaw.com) at Anjie Law Firm

The Beijing IP Court  published a notice on its website in October 2015 entitled Collection and Publication of Opinions Regarding Law Application on Issues Related to Article 19.4 of the Trademark Law. This notice looks like irrelevant to the patent world, but actually the implication goes well beyond trade marks. Arguably, this court notice started something similar to the amicus brief sys- tem for Chinese IP cases. The issue in this case is related to whether or not Chinese trade mark agent firms are entitled to register trade marks under their own names except for their own trade names.
What is significant is that the panel adjudicating this case went out to associations and IP law centres in several law schools for opinions. The notice cited above published five law professors’ opinions in full text. We do not know how the Beijing IP Court informed the law professors about the background of the case. But it is very interesting that the Court conducted such an experiment. Imagine what becomes possible if the same court issues a similar request in an injunction case involving standard essential patents?
 
The notice itself includes several interesting details:
 
First, it is the court panel that was as- signed to this particular case that sought the opinion from the Universities, associations and research centers. The court said it sent out “survey forms” to such entities. The notice was signed by the three judges’ names.
 
Second, the reason the panel sought the opinion is that the relevant legal provision is new and the very issue is of importance to the trade mark filing practice and growth of the trade mark agency sector.
 
Third, the notice states that the panel published five opinions it received, for the purpose of “impartiality” and “transparency”. The panel did not say how many opinions it received in total.
 
The implications of this notice could be far-reaching in terms of improvement of the judiciary transparency and quality of adjudication. A system similar to amicus briefs will allow the courts to hear from those interested parties on some very complex legal issues that may have significant social impact. The involvement of key stakeholders and thought leaders, including those from the international legal community, will assist the courts to in- crease the depth of thinking. China now uses “guiding cases” or leading cases to improve the consistency of judgments and to guide local courts to deal with controversial issues. Amicus brief will certainly benefit the courts to decide what should be those “guiding cases”.
 
The court notice issued on October 13 is clearly another sign of commitment to a better IP system in China. The Beijing IP Court is the first IP court to be established in China. The judges appointed to this court have been considered among the best in China. Hopefully, the first experiment in trade mark cases will soon expand over to the patent world.
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Insurance Law Changes as Industry Heats Up

 Authored by Dr. Zhan Hao (zhanhao@anjielaw.com), Zhang Xin (zhangxin@anjielaw.com), and Hong Yanjun (hongyanjun@anjielaw.com) at AnJie Law Firm

The PRC Insurance Law is being amended again to offer the market more flexibility while tightening supervision. The key changes include greater coverage, consumer protection, funding opportunities and corporate governance.

While far less exploited than other financial sectors in China, the insurance business is growing rapidly – with a capital of Rmb11 trillion ($1.73 trillion) now – in an ever-changing regulatory environment.

To meet the increasing requirements of the industry, the China Insurance Regulatory Commission (CIRC) has decided to adopt the approach of opening up access but strengthening control. In early 2015, the  PRC  Insurance Law abolished the qualification requirements for insurance agency practitioners, as well as the administrative approval process entirely – a significant change. Further amendments, however, are still needed.

On October 14 2015, the Legislative Affairs Office of the State Council published the Decision on Amending the <PRC Insurance Law> (Draft for Comments) (Draft), which contained 24 new articles, deleted one article and revised 54 articles in total. This left nine chapters with 208 articles. The CIRC began working on this in 2014, six years after the last large-scale revision of the Insurance Law. The Draft focuses on regulating the business scope of insurance companies and the use of insurance assets and introduces a new regulatory system for insurance overall. It does not address insurance contracts; the Supreme People’s Court will publish judicial interpretation instead.

The aim is to deregulate, promote innovation and exercise the full potential of the insurance market, as well as to provide a comprehensive regulatory mechanism and enforce stricter penalties for wrongdoing.

Expanded coverage and consumer protection

The Draft has included pensions, internet insurance, catastrophe insurance and insurance trading platforms in its coverage of the industry.

It recognizes that this expanded applicability inevitably requires an emphasis on consumer protection. It adds rules for personal information protection and a cooling-off period for life insurance and stipulates administrative punishments for “misleading solicitation” and “unreasonable refusal to claim”, both of which are major pains for the Chinese insurance business.

Pursuant to the Draft, insurance companies are subject to a fine between Rmb200,000 and Rmb1 million for misleading solicitation and misrepresentation or refusal to pay indemnities or insurance benefits within the time limit as set out in the insurance policy. Business licenses can even be revoked for serious violations – the industry’s strictest provision yet.

Increased use of insurance funds

The Draft further relaxes the operation of insurance-registered capital and offers more financing channels. It specifies that insurance companies no longer need to set aside more capital if their guarantee funds reach Rmb200 million and enables them to offer equity, debt and other financing instruments approved by the CIRC. These changes address the insurance companies’ need for operating capital as well as their challenge of having insufficient funds.

The Draft allows for the investment of insurance funds in equity, asset management businesses and derivatives for risk assessment purposes. In fact, several regulations and documents published by the CIRC have already broadened the scope of investment, but this amendment sets in stone the activities tested in practice.

Finally, the Draft increases risk assessment requirements for utilizing these funds. It clarified the measures the CIRC can take if insurance companies or asset management institutions fail to either adhere to the decision-making process or to apply the necessary risk standards. The fine can be up to five times the illegal gains.

Enhanced corporate governance

Article 137 of the 2015 Insurance Law states the CIRC will develop “a sound system for regulation of the solvency of insurance companies” to be fully implemented next year.

Interestingly, the objective of establishing this system was clarified in the Draft, which highlighted capital classification, testing and assessment standards and a capital replenishment mechanism. The Draft enhances insurance companies’ corporate governance responsibilities and provides stricter rules for shareholders and actual controllers. It specifies that CIRC approval is required to change an insurer’s actual controller that represents over 5% of the capital or equity, in order to prevent unqualified investors in insurance companies from purchasing shares. The CIRC’s stricter criteria for the identity of shareholders is in line with past practice and is especially important now, given the dynamic M&A and investment activity regarding insurance companies’ equity.

The Draft clarifies the measures to be taken by regulators in circumstances involving risks, insolvency and corporate governance violations. It states that the authorities can inspect shareholders and actual controllers of the insurer, as well as their bank accounts and account information. It also lays down the rules for rectification and takeover of insurers by authorities, and enhances the connection between administrative exit and judicial bankruptcy.

Industry boost

Regretfully, the amendments did not touch upon the association between the Chinese and international insurance markets. The Draft did not contain any provisions for overseas investment of insurance funds or for domestic cooperation by foreign insurers.

Market activity and industry products are growing and diversifying at an extremely fast pace. Hot investment areas in recent years include:

•  the establishment of mutual insurance and reinsurance companies;

•  the issuance of insurance catastrophe bonds, insurance firms;

•  subordinate bonds and capital supplementary bonds;

•  employees’ stock ownership plan permits; and

•  internet insurance.

Under these circumstances, the Draft substantially demonstrates the market-oriented, risk-prevention approach set forth by the State Council’s 2015 Opinions on the Reform and Development of the Insurance Industry. The effective implementation of these amendments would significantly boost the insurance industry as well as encourage innovation and investment under the guidance of the new Insurance Law.

MOFCOM Focuses On Competition Impacts of SEPs on The Chinese Market-Review of Nokia's Equity Acquisition of Alcatel-Lucent

 Authored by Michael Gu (michaelgu@anjielaw.com) at AnJie Law Firm

Background

On October 19, 2015, the Ministry of Commerce ("MOFCOM") announced the first conditionally approved merger review case in 2015, namely the case of Nokia's acquisition of Alcatel-Lucent's equities. It is the second time that Nokia has become the protagonist in a MOFCOM merger review case due to mobile communications standard essential patents ("SEPs") 18 months after MOFCOM conditionally approved the case of Microsoft's acquisition of Nokia's device and service divisions in April 2014.

In early April 2014, when reviewing the case of Microsoft's acquisition of Nokia's device and service divisions, MOFCOM thought this concentration might have adverse impact of excluding or restricting competition on China's smart phone market after considering that Microsoft owns a number of important patents in the field of smart phones and Nokia holds thousands of SEPs in the field of communication technologies. After several rounds of negotiations, MOFCOM finally accepted the commitments with remedy plans respectively proposed by Microsoft and Nokia, and thereby conditionally approved this concentration. Specifically, Nokia, as the seller, made relevant commitments to strict compliance with the FRAND (fair, reasonable and non-discriminatory) principle in respect of related SEPs. In the recent case of acquisition of Alcatel-Lucent's equities, Nokia, as the acquirer, has made more stringent commitments to a larger extent in respect of its telecommunications SEPs, including telecommunications SEPs owned by Alcatel-Lucent.

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MOFCOM Conditionally Clears Nokia's Acquisition of Alcatel-Lucent with Behavioral Remedies

Authored by Dr. Zhan Hao (zhanhao@anjielaw.com), Ms. Song Ying(songying@anjielaw.com), and Feng Siduo (fengsiduo@anjielaw.com) at AnJie Law Firm

On 19 October 2015, the Ministry of Commerce of the P.R.C (“MOFCOM”)   conditionally cleared Nokia Oyi’s (“Nokia”) acquisition of Alcatel Lucent (“Alcatel”) with four behavioral remedies focusing on maintaining fair licensing of standard-essential patents (SEPs).

Brief Introduction of the Case

On 15 April 2015, Nokia signed a Memorandum of Understanding on Acquisition with Alcatel, according to this memorandum, Nokia intends to acquire 100% shares of Alcatel through a tender off.

A notification about this deal was filed on 21 April 2015 and officially accepted by MOFCOM on 15 June 2015. On 14 July 2015, the notification went into the second phase for review of MOFCOM. After MOFCOM expressed its concerns that this deal would lead to anti-competitive effects, Nokia proposed relevant remedies to MOFCOM. Through thorough evaluation, MOFCOM considers the proposals could release its competition concerns and decides to clear this transaction with remedies.

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