Directors and Officers Liability Insurance, also known as D&O Insurance, (hereinafter referred to as “D&O Insurance”), constitutes a form of professional liability insurance which covers the civil liabilities incurred by directors, supervisors, and senior executives (hereinafter referred to as “Directors and Officers”) in defending against the claims brought by companies, shareholders or third parties. It serves as a crucial cornerstone of corporate governance for listed companies. Originating from the Common Law system, D&O Insurance provides coverage for directors and senior executives. Notably, within the civil law system and the Chinese corporate governance system, D&O Insurance coverage has expanded to encompass a company’s supervisors.

The enactment of the revised Securities Law (2019 revision) marked a significant milestone in China’s regulatory and restraint mechanism, continuously strengthening oversight and liability restraint mechanism on Directors and Officers. Consequently, there is a growing recognition among companies, both listed and non-listed, of the imperative nature of D&O Insurance as a safeguard against potential liabilities. Thus, the demand for D&O Insurance as a risk protection for Companies, including listed and non-listed ones, as well as Directors and Officers continues to intensify.

On December 29, 2023, the 7th Session of the Standing Committee of the 14th National People’s Congress voted to adopt the newly revised Company Law of the People’s Republic of China (hereinafter referred to as the “2023 PRC Company Law”), which came into effect on July 1, 2024. The 2023 PRC Company Law, for the first time, explicitly encourages companies to purchase D&O Insurance and requires the board of directors to report the relevant details regarding the D&O Policy purchased at the shareholders’ meeting.

The legislation pertaining to D&O Insurance represents a proactive response to market demands aimed at encouraging and promoting its adoption. It further underscores the importance of securing D&O Insurance for Chinese companies. In order to elevate the corporate governance standards, the 2023 PRC Company Law systematically clarifies the liabilities of Directors and Officers. From the application scope, coverage subjects and approval procedure, the 2023 PRC Company Law constantly expands and refines the liabilities of Directors and Officers while establishing the D&O Insurance system. Notable changes include the extension of the application scope to encompass non-listed companies, broadening coverage to include all directors rather than solely independent directors, and modifying the approval process from shareholder meeting approval to post-purchase reporting to shareholders. The evolving business environment has prompted the continuous enhancement of the D&O Insurance system.

I. The Legislation of D&O Insurance System

Article 193 A company may, during the term of office of a director, purchase the liability insurance for the compensation liability to be borne by the director in performing the duties.

After the company purchases liability insurance or renews the insurance for the director, the board of directors shall report the insured amount, coverage and premium rate etc. of the liability insurance at the shareholders’ meeting.

It was first provided in the Guiding Opinions on the Establishment of Independent Director System by Listed Companies (hereinafter referred to as the “Guiding Opinions”) in 2001 that “listed companies may establish necessary Independent Director liability insurance systems in order to mitigate the risks that may arise in the normal performance by Independent Directors of their duties and responsibilities”. Subsequently, the Guidelines on Governance of Listed Companies (2018 Revision) (hereinafter referred to as the “Governance Code”) and the Several Opinions of the State Council concerning the Reform and Development of the Insurance Industry encouraged the establishment of the D&O Insurance system, but the aforementioned provisions were only reflected in policy documents and regulatory documents. The 2023 PRC Company Law, represents the first legislative endorsement of D&O Insurance, encouraging companies to purchase D&O Insurance to transfer directors’ management risks.

In accordance with Article 193 of the 2023 PRC Company Law, the coverage subjects of D&O Insurance have extended from independent directors to all directors, and the application scope of D&O Insurance has also extended from listed companies to non-listed companies. The approval procedures have shifted from “approval by a shareholders’ meeting” prescribed in the Governance Code to “the board of directors shall report to the shareholders’ meeting”. The 2023 PRC Company Law further clarifies the insurer’s obligation to inform the shareholders’ meeting of the insured amount, coverage and premium rate of the insurance purchased.

In the past, listed companies were the major purchasers of D&O Insurance in China. With the enactment of the 2023 PRC Company Law and the Securities Law and growing recognition of the importance of D&O Insurance, broader uptake of D&O Insurance by non-listed companies is anticipated. This trend signals a positive outlook for insurance companies seeking to expand their presence in the D&O Insurance market.

II. The Clarification and Elaboration of the Duties of Loyalty and Diligence of Directors and Officers

Under the modern corporate governance system, the Directors and Officers shall assume the duty of loyalty and duty of diligence. In practice, breach of such duties by Directors and Officers may result from either intentional acts, such as fraud and intentional concealment, or unintentional acts, such as mistakes, negligence or omissions. It is noteworthy that the D&O Insurance only covers losses arising out of the unintentional breach of duties of loyalty and diligence by Directors and Officers, namely the negligent violations. Typically, intentional acts such as fraudulent behavior, intentional illegal acts or crimes committed with intent are excluded from the coverage of D&O Insurance through the exclusion clauses.

Due to the absence of detailed and explicit standards regarding the duty of loyalty and diligence in the 2018 Company Law, judicial practice often involves assessing whether the actions of Directors and Officers violate laws, regulations, or company bylaws at a formal level. Some courts may additionally delve into a substantive examination to determine whether Directors and Officers have “exercised the reasonable care that a prudent person should exercise.” The inconsistency in examination standards, coupled with the lack of legal standards for the duty of loyalty and diligence, rendered D&O Insurance vulnerable to opportunistic behavior by management personnel.

Article 180 Directors, supervisors and senior executives shall assume the obligation of loyalty to the company and take measures to avoid the conflict between their own interests and those of the company and may not seek any improper interests by taking advantage of their powers.

The directors, supervisors and senior executives shall assume the duty of diligence to the company. When performing their duties, they shall, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager.

The provisions of the preceding two paragraphs shall apply to the controlling shareholder or actual controller of a company who does not serve as a director but actually executes the affairs of the company.

Article 180 of the 2023 PRC Company Law has refined the core elements and defining criteria of the duties of loyalty and diligence over the 2018 Company Law, explicitly clarifying that the core of the duties of loyalty revolves around refraining from “seeking any improper interests by taking advantage of their powers”, and its essence is to avoid conflicts between personal interests and the those of the company. When conflicts arise between the interests of the company and those of Directors and Officers, the interests of the company shall prevail. Similarly, the core of the duties of diligence is defined as “when performing their duties, …, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager”. This duty primarily aims to define the standard of reasonable care in their performance of duties.

Article 181 to 184 of the 2023 PRC Company Law specifically sets forth restrictive or prohibitive provisions on normal behaviors by Directors and Officers that may harm the company’s interests, such as related-party transactions, corporate opportunities, and non-competition agreements. Theoretically, any acts by the Directors and Officers that breach the duties of loyalty and diligence as specified in Article 181 to 184 of the 2023 PRC Company Law may constitute the “intentional illegal acts” as exempted by the exclusion clauses in the D&O Insurance Policies. It is imperative for insurance companies to carefully tailor the Exclusion Clause according to market demand, avoiding the inclusion of intentional illegal acts within the coverage scope, while ensuring they do not indiscriminately exclude all risks associated with Directors’ and Officers’ breaches. Failure to do so may lead to a dysfunctional D&O Insurance market. In practice, a detailed analysis and differentiation should be applied to the provisions specified in the 2023 PRC Company Law. The specific provisions of the 2023 Company Law are referred to as follows:

Article 181 No director, supervisor or senior executive may have any of the following acts:

(I)embezzling the property or misappropriating the funds of the company;

(II) depositing the funds of the company into an account opened in his/her own name or in the name of any other individual;

(III) giving bribes or accepting any other illegal proceeds by taking advantage of his/her power;

(IV) taking commissions from the transactions between the company and any other person into his/her own pocket;

(V) unlawfully disclosing the confidential information of the company; or

(VI) other acts in violation of the obligation of loyalty to the company.

Article 182 Where any director, supervisor or senior executive directly or indirectly concludes a contract or conducts a transaction with his/her company, he/she shall report the matters relating to the conclusion of the contract or transaction to the board of directors or shareholders’ meeting, which shall be subject to the resolution of the board of directors or shareholders’ meeting according to the articles of association.

Where any of the near relatives of the directors, supervisors or senior executives, or any of the enterprises directly or indirectly controlled by the directors, supervisors or senior executives or any of their near relatives, or any of the related parties who has any other related-party relationship with the directors, supervisors or senior executives, concludes a contract or conducts a transaction with the company, the provisions of the preceding paragraph shall apply.

Article 183 No director, supervisor or senior executive may take advantage of his/her position to seek any business opportunity that belongs to the company for himself/herself or any other person except under any of the following circumstances:

 (I) where he/she has reported to the board of directors or the shareholders’ meeting and has been approved by a resolution of the board of directors or the shareholders’ meeting according to the articles of association; or

(II) where the company cannot make use of the business opportunity as stipulated by laws, administrative regulations or the articles of association.

Article 184 Where any director, supervisor or senior executive fails to report to the board of directors or the shareholders’ meeting and obtain an approval by resolution of the board of directors or the shareholders’ meeting according to the articles of association, he/she may not engage in any business that is similar to that of the company where he/she holds office for himself/herself or for any other person.

Following the amendment of the 2023 Company Law, considerable discrepancies exist among insurance companies with regard to the coverage remit of D&O Insurance. Further discussion is merited on whether the circumstances set forth in Articles 181 to 184 should be incorporated into the Exclusion Clause.

In light of this, we propose the following advice:

  1. Intentional breaches of the duties of loyalty and diligence, especially those involving serious illegal acts and intentional crimes, shall undoubtedly be deemed as an exclusion term, such as embezzlement and misappropriation of company funds by Directors and Officers.
  2. It is not advisable to directly include the miscellaneous provision such as “other acts in violation of the obligation of loyalty to the company” stipulated in Article 181 (VI), as an Exclusion Clause when concluding a D&O policy. Exclusion clauses shall be explicit and specific so as to avoid disputes; otherwise, the People’s Court and arbitral tribunals may apply the “contra proferentem” principle when interpreting such clauses, which is unfavorable to the insurer.
  3. As stipulated in Article 183of the 2023 PRC Company Law, Directors and Officers shall not take advantage of their position through seeking business opportunities, that belongs to the company, for themselves or any other person. In practice, related disputes often arise due to the lack of sophisticated corporate governance in China, especially when the directors, recommended by shareholders, seek business opportunities that belong to the company. If such circumstances are included in Exclusion Clauses, it may deviate from the expectation of the policyholders. This issue merits further discussion among insurance companies.
  4. The “principle of insurable interest” shall be taken into account when designing the Coverage and Exclusion Clauses in accordance with the 2023 PRC Company Law. Unlawful interests shall not be covered to avoid regulatory concerns.

III. Controlling Shareholders and Actual Controllers as the “Shadow Directors” in D&O Insurance Policy

Article 180 Directors, supervisors and senior executives shall assume the obligation of loyalty to the company and take measures to avoid the conflict between their own interests and those of the company and may not seek any improper interests by taking advantage of their powers.

The directors, supervisors and senior executives shall assume the duty of diligence to the company. When performing their duties, they shall, for the best interests of the company, exercise the reasonable care that shall be generally possessed by a manager.

The provisions of the preceding two paragraphs shall apply to the controlling shareholder or actual controller of a company who does not serve as a director but actually executes the affairs of the company.

Article 180 Clause 3 of the 2023 PRC Company Law specifies that controlling shareholders and actual controllers who do not hold the position of director but execute the company’s affairs shall also assume the duty of loyalty and diligence to the company.

Currently, the D&O Insurance Policy typically defines the actual controllers and controlling shareholders as the “shadow directors”, included as the insured individuals. Under the 2023 PRC Company Law, losses incurred by the controlling shareholders or actual controllers due to a failure to perform their duties of loyalty and diligence may also fall within the coverage of a D&O Insurance Policy, thereby increasing the risk of triggering policy liabilities.

Notably, unlike their counterparts in Common Law jurisdictions, the PRC’s laws and regulations have not specified the definition and scope of “shadow directors”. It is usually necessary to determine whether controlling shareholders or actual controllers of an insured company constitute the shadow directors in the D&O Insurance Policy according to the specific policy definition.For example, the definition of shadow directors in the D&O Liability Insurance policy of an insurance company defines shadow directors as “individuals who, although not holding the position of directors, are accustomed to acting under their instructions or directions”. According to this policy, such controlling shareholders and actual controllers may fall within the scope of the aforesaid “shadow directors” due to their significant influence on the company’s resolutions or significant control of the company’s operations.

We recommend that insurance companies, when designing a D&O Insurance Policy, take into full consideration the definition of “shadow directors” and draft the policy terms in a more specific way so as to prevent potential disputes.

IV. Impact of Controlling Shareholders and Actual Controllers’ Joint and Several Liability on Insurers’ Subrogation Recourse

Article 192 Where any controlling shareholder or actual controller of a company instructs any director or senior executive to carry out any act damaging the interests of the company or the shareholders, it shall bear joint and several liability with the director or senior executive.

Article 192 of the 2023 PRC Company Law adopts the logic of joint and several tortious liability in civil law jurisdictions,requiring the controlling shareholders and the actual controllers to be jointly and severally liable with the Directors and Officers for acts that damage the interests of the company or the shareholders through their manipulation or instructions. Such regulatory measures could prevent the interests of the company and minority shareholders from being infringed upon by the Directors and Officers in pursuit of their own interests.

There existed a few feasible ways and routes for insurers’ subrogation against a third party after making payouts pursuant to the D&O Insurance Policy in the past. The above-mentioned provision on the joint liability provides a legitimate premise for the insurer to seek subrogation after making compensation, against the company’s controlling shareholders and the actual controllers who are truly liable or bear a higher proportion of liability.

As part of an insurance company’s wider sales strategy, it chooses to accommodate a client’s specific requirements in the terms of the insurance policy. Thus, flexibility of an insurer is a highly valued attribute for clients.

V.  Scope of the Insurance Applicant’s Duty of Truthful Disclosure

1. Illustration of Related Party Transactions

Article 182 Where any director, supervisor or senior executive directly or indirectly concludes a contract or conducts a transaction with his/her company, he/she shall report the matters relating to the conclusion of the contract or transaction to the board of directors or shareholders’ meeting, which shall be subject to the resolution of the board of directors or shareholders’ meeting according to the articles of association.

Where any of the near relatives of the directors, supervisors or senior executives, or any of the enterprises directly or indirectly controlled by the directors, supervisors or senior executives or any of their near relatives, or any of the related parties who has any other related-party relationshipwith the directors, supervisors or senior executives, concludes a contract or conducts a transaction with the company, the provisions of the preceding paragraph shall apply.

Article 182 of the 2023 PRC Company Law introduces the following modifications to the related-party transaction restriction system of the 2018 Law:

  1. Including Supervisors to be subjected to the related-party transaction system;
  2. Stipulating the duty of truthful disclosure for Directors and Officers;
  3. Allowing the company’s stipulation of approval process for related-party transactions through bylaws, and to be resolved by the board of directors or shareholders’ meeting;
  4. Providing illustrative provisions on related parties, including the near relatives of the Directors and Officers, or any of the enterprises directly or indirectly controlled by the Directors and Officers or any of their near relatives, or any of the related parties who has any other related-party relationship with them stipulated by the miscellaneous provision.

Insurance companies commonly include related-party transactions as a key inquiry when applicants seek to purchase D&O Insurance. Insurance applicants shall perform the duty of truthful disclosure pursuant to Article 16 of the Insurance Law. The expansion and detailing of related-party transactions in the 2023 PRC Company Law provides a clearer legal basis for insurance applicants and insurers to assess the performance of truthful disclosure obligations and the elements for exercising the right to rescind an insurance contract.

Based on our experience, the questionnaires designed for D&O Insurance by insurance companies are relatively deficient; in that, they lack coverage of key issues. It is advisable to further optimize the questionnaires in alignment with the 2023 PRC Company Law.

2. Obligation of Listed Companies to Disclose Information of Shareholders and Actual Controllers

Article 140 A listed company shall disclose the information about its shareholders and actual controllers according to law, and the relevant information shall be authentic, accurate and complete.

It is prohibited to hold the stocks of any listed company on an agency basis in violation of laws and administrative regulations.

Article 140 Clause 1 of the 2023 PRC Company Law introduces a new provision on duty of disclosure which requires listed companies to truthfully disclose the information of its shareholders and actual controllers. This aims to prevent the actual controllers from harming the interests of the company, minority shareholders and creditors through improper related-party transactions, thereby undermining the transaction order. The establishment of this provision legislates and specifies the duty of truthful disclosure prescribed in the Administrative Measures for the Registration of Initial Public Offerings of Stocks, the Administrative Measures for the Information Disclosure by Listed Companies, and the Securities Law, providing insurers with a clearer legal basis to determine whether the insured has performed the duty of truthful disclosure.

VI. Refinement and Expansion of the Compensation Liability of Directors and Officers under the 2023 PRC Company Law

The amendments of the 2023 PRC Company Law have gradually refined and expanded the obligations and liabilities of Directors and Officers. Compensation liability under the D&O Insurance Policy may be triggered where (1) the Directors’ or Officers’ failure to perform their obligations in accordance with the law incurs losses to the company, or (2) the gross negligence by the Directors or Officers results in damage to a third party. Consequently, the scope of claims made by the insured company has been broadened, increasing the underwriting risks of the insurers. The improvements of legislation and the changes in market demand impose higher standards on the insurers’ policy design and underwriting assessment.

1. Compensation Liability for Losses Caused by Directors and Officers to the Company

Article 51 After a limited liability company is established, the board of directors shall verify the capital contributions of shareholders. If it finds that any shareholder has not made capital contributions on schedule and in full amount as provided for in the articles of association, the company shall send a written notice of call to the shareholder to call up capital contributions.

Where any loss is caused to the company due to failure to fulfill the obligations as prescribed in the preceding paragraph in a timely manner, the responsible director shall make compensation.

Article 53 After a company has been established, none of the shareholders may illicitly withdraw the capital contributions.

In the case of violation of the provisions of the preceding paragraph, the shareholder shall return the capital contributions withdrawn. If it causes any loss to the company, the responsible directors, supervisors and senior executives shall bear the joint and several liability with the shareholder.

Article 163 No company may provide gifts, loans, guarantees or other financial aids for others to obtain the shares of the company or the parent company thereof unless it carries out an employee stock ownership plan.

For the benefits of the company, the company may, upon a resolution by the shareholders’ meeting or by the board of directors under the articles of association or the authorization of the shareholders’  meeting, provide financial aids for others to obtain the shares of the company or the parent company thereof, provided that the total accumulative amount of the financial aids shall not exceed 10% of the total issued share capital. A resolution by the board of directors shall be adopted by two thirds of all the directors.

Any director, supervisor or senior executive who is liable for any loss to the company due to violation of the provisions of the preceding two paragraphs shall make compensations.

Article 211 Where a company distributes profits to shareholders in violation of the provisions of this Law, the shareholders shall refund the profits distributed to the company, and the shareholders and the liable directors, supervisors and senior executives shall be held liable for compensation if any loss is caused to the company.

Article 226 When a company reduces its registered capitalin violation of the provisions of this Law, its shareholders shall refund the funds they have received, and if the capital contributions of the shareholders are reduced or exempted, such capital contributions shall be restored to the original status; if any loss is caused to the company, the shareholders and the liable directors, supervisors and senior executives shall bear the liability for compensation.

Article 232 Where a company is dissolved according to the provisions of Item (I) (II) (IV) or (V) of Paragraph 1 of Article 229 hereof, it shall be liquidated. The directors, who are the liquidation obligors of the company, shall form a liquidation group to carry out liquidation within 15 days from the date of occurrence of the cause of dissolution.

The liquidation group shall be composed of the directors, unless it is otherwise provided for in the company’s articles of association or it is otherwise elected by the shareholders’ meeting.

The liquidation obligors shall be liable for compensation if they fail to fulfill their obligations of liquidation in a timely manner, and thus any loss is caused to the company or the creditors.

The 2023 PRC Company Law further clarifies the scope of compensation liability of the Directors and Officers through Article 51, Article 53, Article 163, Article 211, Article 226 and Article 232.

Article 51 stipulates the capital adequacy responsibility of the board of directors revealing the directors’ fiduciary duty to creditors and granting the board of directors the right to call up capital contributions. The board of directors are required to verify the details of and call up shareholders’ capital contributions. Failing to perform such obligation would results in liability for compensation.

Article 53 underlines the system of illicitly withdrawing capital contributions, extending a single shareholder’s liability for compensation to Directors and Officers. It also provides that the liability shall be jointly and severally borne by the Directors and Officers and the shareholders.

Directors’ and Officers’ liability could also be seen in Article 163, Article 211, Article 226, and Article 232 which respectively refer to the circumstance in which the Directors and Officers are responsible for (1) providing financial aid for any person obtaining the company shares, (2) illicitly distributing profits, (3) illicit capital reduction and (4) failure to fulfill the obligations of liquidation in a timely manner. The 2023 PRC Company Law, through reinforcing the obligations and liabilities of Directors and Officers, promotes the alignment between their management rights and duties.

2. Compensation Liability for Damages Caused by Directors and Officers to A Third Party

Article 191 Where any director or senior executive causes any damage to any other person in the performance of duties, the company shall be liable for compensation. If any director or senior executive is intentional or grossly negligent, he/she shall also be liable for compensation.

Whilst the 2018 Company Law only stipulates compensation liability to the company for damages caused by Directors and Officers in their performance of duties, it lacks remedy provisions for third parties whose interests were infringed upon by the Directors and/or Officers. According to Article 191 of the 2023 PRC Company Law, Directors and Officers shall be liable for damages caused to third parties by intentional or gross negligence when performing their duties, which provides a remedy for harms caused to third parties.

D&O Insurance Policy usually excludes intentional acts of the insured individual through the “confirmed illegal acts” clause. However, acts with gross negligence are not included in the Exclusion Clause, i.e., where the insured acts with gross negligence, that commonly triggers compensation liability under the policy.

The promulgation of the 2023 PRC Company Law has significantly increased the duty of diligence of Directors and Officers and, consequently, the probability of D&O Insurance claims. It is advisable for insurance companies to conduct further investigations on related issues arising accordingly.

Additionally, insurance companies require more considerations when designing D&O Insurance Policies in light of the obligations borne by the Directors and Officers. For instance, the board of directors’ capital adequacy responsibility stipulated in Article 51 of the 2023 PRC Company Law reflects directors’ fiduciary duty to creditors and grants the board of directors the right to call up capital contributions. Failure to perform this duty, to verify and call up the capital contributions, will result in compensation liability. Whether the insured is obliged to promptly inform the insurer of any significant increases in underwriting risks is to be considered when the Insurance companies are designing D&O Insurance Clauses in accordance with the 2023 PRC Company Law; a case in point would be a shareholder delaying payment after the board of directors calls up capital contributions.

3. Establishment of A Dual Derivative Action System

Article 189 Where any director or senior executive is under the circumstance as mentioned in the preceding Article, the shareholders of a limited liability company or the shareholders of a joint stock limited company separately or aggregately holding 1% or more of the total shares of the company for 180 consecutive days or more may request the board of supervisors in writing to initiate a lawsuit in the People’s court. If any supervisor is under the circumstance in the preceding Article, the aforesaid shareholders may request the board of directors in writing to file a lawsuit with the People’s court.

Where the board of supervisors or the board of directors refuses to initiate a lawsuit after it receives a written request of the shareholders as mentioned in the preceding paragraph, or fails to file a lawsuit within 30 days upon receipt of the request, or in an emergency, the failure to initiate a lawsuit immediately will cause irreparable damage to the interests of the company, the shareholders in the preceding paragraph shall have the right to directly initiate a lawsuit in the people’s court in their own name for the interests of the company.

If others infringe upon the legitimate rights and interests of a company and cause losses to the company, the shareholders stipulated in the first paragraph of this Article may initiate a lawsuit in the people’s court in accordance with the provisions of the preceding two paragraphs.

If a director, supervisor or senior executive of a wholly-owned subsidiary of the company is under the circumstance specified in the preceding Article, or if the legitimate rights and interests of a wholly-owned subsidiary of the company are impaired by any other person, thus causing any losses, the shareholders of a limited liability company or shareholders of a joint stock limited company separately or aggregately holding 1% or more of the total shares of the company for 180 consecutive days or more may request the board of supervisors or the board of directors of the wholly-owned subsidiary in written form to initiate a lawsuit in the people’s court or directly files a lawsuit with the people’s court in their own name.

Article 189 Clause 4 of the 2023 PRC Company Law establishes the dual Derivative Action system, expanding the scope of the defendants in the derivative action to the directors and senior executives of the company’s wholly-owned subsidiaries.

In view of the common practices of D&O Insurance policies, the parties included within a subsidiary relationship are usually companies wholly controlled by the insured company. In the prevailing D&O Insurance policies, the definition of “Insured Company” comprises any subsidiaries of the insurance applicant, and accordingly, the “Insured Individual” also comprises the Directors and Officers of any subsidiary of the insurance applicant. In accordance with the dual Derivative Action system, Directors and Officers of a wholly-owned subsidiary may also serve as the defendants in a claim, which may trigger insurance liability under the policy and expose the insurer to higher underwriting risks.

VII. Cross-claims between Insureds

As mentioned above, in accordance with Article 51, Article 53, Article 163, Article 211, Article 226 and Article 232 of the2023 PRC Company Law, the insured Directors and Officers will be liable for the losses caused to the company due to their breach of duties. Disputes concerning compensation between a company and its Directors and Officers constitute “a cross-claim between the insured”, typically considered an “exclusion” under the D&O Insurance in the common law system. It usually refers to the lawsuit brought by a company against its Directors and Officers, or that between directors and senior executives, who are the insured individuals. The foregoing claims can be excluded from the policy coverage so as to prevent malicious collusion between the insured parties to harm the interests of the insurer.

However, there is usually no explicit term excluding cross-claims between the insureds in domestic D&O Insurance policies.

In view of the potential risks posed by “cross-claims between the insureds” to the insurer, it is advisable to draw on the experience of the Common Law system when drafting the policies, and to negotiate with the insurance applicant to include such exclusions in the insurance contract. It is noteworthy that, with respect to the potential risk of malicious collusion and conspiracy between the insured parties, Article 154 of the Civil Code prescribes that where a person colludes with his counterparty to perform an act impairing another’s legitimate rights and interests, such act shall be null and void. Therefore, even without explicitly excluding such risk, the insurer may contend that there is malicious collusion between the insurance applicant and the insureds to impair the insurer’s interests and thereby such act shall be deemed invalid.

VIII. Development and Solutions of D&O Insurance Terms under 2023 PRC Company Law

With the adoption and implementation of the 2023 PRC Company Law, Directors and Officers are held to a higher standard of liability. As the first law of its kind, the D&O Insurance system has actively responded to market demands through providing a protective mechanism for companies and their Directors and Officers, facilitating modern corporate as well as governance standards. The domestic market is increasingly cognizant of the significance of D&O Insurance.

1. Clarification of Duties and Obligations

The 2023 PRC Company Law clearly defines the duty of loyalty and diligence of Directors and Officers and enumerates the related parties’ transactions, affording insurance companies up-to-date knowledge on the duties and obligations of their Directors and Officers. Consequently, it tenders more prudent coverage advice and reasonable assessments during the process of underwriting, policy issuance, and claims handling.

  • Increasing Underwriting Risk

The expanding insurance coverage and increasing underwriting risks arise coupled with the amendments on Directors’ and Officers’ duties and obligations, such as (1) the underlining duty of performance, (2) the refinement and expansion of Directors’ and Officers’ liabilities, (3) the establishment of the dual Derivative Action System, and (4) the breakthrough legislation of the D&O Insurance System. Therefore, insurers shall be equipped with higher professional capabilities and risk awareness in the process of negotiation, assessment, verification, underwriting, claim settling, and pursuing subrogation. Faced with an evolving D&O Insurance market, insurers are encouraged to make flexible adjustment on underwriting conditions, develop insights in accordance with commercial changes, reasonably balance risks and interests, and be better positioned to recognize and seize business opportunities.

3. Insurance Policy Design

In terms of policy design, insurance companies can employ several approaches to enhance their risk assessment capacity:

  1. Multi-dimension assessment, as well as quantification of policy terms.
  2. Explicit definitions and detailed expressions.
  3. Related experience leveraging from international insurers.

Meanwhile, exclusion clauses shall be utilized to balance the interests and risks between the insurers and the insureds. Namely, an insurance company may consider the drafting of clauses from the following perspectives:

  1. The coverage of the insureds.
  2. The definition of shadow directors or de facto director.
  3. The standards for related-parties transactions.
  4. The standards for identifying intentional acts.
  5. Adjustment regarding exclusion clauses and limitation of liability clauses.
  6. Inclusion of acts with gross negligence in the exclusion clauses.
  7. Inclusion of cross-claims between the insureds in the exclusion clauses.
  8. Distinctive protection methods for D&O.

4. Consideration of the Differences Between Listed Companies and Non-listed Companies

The promulgation of the 2023 PRC Company Law creates a great opportunity for D&O Liability Insurance, by virtue of the extension of the coverage to include non-listed companies. Currently, the domestic insurance market predominantly offers D&O Liability Insurance tailored for listed companies, with a limited range of specialized products available for non-listed companies. The revision of the 2023 PRC Company Law, particularly its enhancement and clarification of directors’ liability for both listed and non-listed companies, fosters a conducive environment for the growth and success of insurance companies offering D&O Liability Insurance in China.

In response to the evolving business landscape and market demand, the legislation governing D&O Liability Insurance, as a special risk mechanism, provides comprehensive risk protection for companies, their directors, supervisors and senior executives. Furthermore, it incentivises transfer of management risks and consolidates sound corporate governance standards, and stabilises the market.

Given the existing legal framework and socioeconomic conditions, the adaptations and innovations of the D&O Liability Insurance system are expected to amplify its relevance and impact in the Chinese market. We eagerly anticipate the timely introduction of market-adapted D&O Liability Insurance products that align with domestic conditions and laws.

1. Introduction: when PRC court encounters AIGC[1]

    On November 27, 2023, the Beijing Internet Court made a judicial ruling on a case regarding the AI-generated images (the “First AI-image Case”).[2]  This case is noted to be the first of its kind in China, involving a plaintiff surnamed Li and a defendant surnamed Liu.  Li claimed that Liu used an image of a woman in her personal webpage without his permission in February 2023.  Li mentioned that he had generated the image using Stable Diffusion, an open-source software and posted it on his own social media account at Xiaohongshu, a social media platform widely regarded as the Chinese version of Instagram.

    Liu argued that she found the image by using a search engine and did not see any watermark or information about its copyright owner.  She also said she was not using the image for commercial purposes.  However, the Beijing Internet Court eventually ruled in favor of Li, pointing out that the image showed “intellectual achievements” by Li.  The court said that Li had input keywords on the expectations of the image, such as the appearance and posture of the young woman, filter of the image, and even the lighting. Li had also invested in adjusting the draft images to get the ultimate image that he had chosen.

    *Note: The above figure as a whole shows the operating interface of Stable Diffusion, and the image embedded displays the output generated.

    2. Key analysis: AI-generated image regarded as work

    According to the ruling and like other copyright infringement disputes, the main issues typically addressed include: (i) whether the picture in question constitutes a work under the Copyright Law of the People’s Republic of China and what type of work it constitutes; (ii) whether the plaintiff owns the copyright on the disputed picture; and (iii) whether the defendant’s behavior shall constitute an infringement.  Compared to traditional copyright cases, particularly the ones occurring prior to the advent of artificial intelligence (the “AI”) and Large Language Model (the “LLM”), two terms “intellectual achievements” and “originality” are intensively discussed in the ruling of the current case. 

    According to the ruling, the court defined the term “intellectual achievements” as the results of intellectual activities, which reflects the intellectual input of a natural person.  Compared to the operating model and logic of the LLM at issue, the court emphasized the “intellectual investment” the plaintiff made in the disputed picture, demonstrating that designing the presentation of the character, selecting prompt words, arranging the order of prompt words, setting parameters, and selecting the intended picture shall all be regarded as the “intellectual investment”. 

    With respect to the term “originality”, the court stated that “to meet the ‘originality’ requirement, the work shall be completed independently by the creator, reflecting such creator’s personalized expression.”[3]  Historically speaking and even in the global legal landscape, the standard of “originality” is relatively low.  In copyright cases, when pondering such subtle issue, it is commonly understood that the first of the two requirements encompassed by the term “originality” is independent creation and creativity.  In the present case, the court claimed that “if (i) a work is completed based on a certain order, formula, or structure and (ii) different people would yield same results, the work does not have originality since the expression at issue is the only effective way of conveying a particular idea”.[4]  Similarly, such principle already underlies the merger doctrine in the context of the western copyright system.  According to the ruling of the present case, however, “when people use the Stable Diffusion model to generate images, diverse needs and expectations will be reflected in the picture once they specify and describe details of elements, layout, and compositions of the image”.[5]  In this case, as the court finally determined that “there are identifiable distinctions between the picture in question and prior works”.[6]  As a result, the court concluded that the work in question satisfied the requirement of originality. 

    It is also worth noting that the court forthrightly tied its ruling to a general policy argument, highlighting that the primary purpose of the copyright system is to encourage creation.  Only if the copyright regime and legal methods could be properly applied, simulating more people to use the most up-to-date tools for creation process, more work will be cultivated, and the development of the AI technology will be enhanced.  In addition, such policy analysis was heavily examined in the Research on Legal Feature and Copyright Attribution of AI-generated Images, where the presiding judge of the First AI-image Case continued to stress the competing considerations like the creator’s rights and interests as well as the industrial development shall be balanced when making the judgement.[7]

    3. Different angles: when “Originality” interpreted in another jurisdiction   

    By coincidence, the United States Copyright Office (the “USCO”) tackled a seemingly identical case on December 11, 2023.[8]  Below are two figures respectively showing an original photograph taken by Mr. Sahni (i.e. the base image) and the Work titled “SURYAST” generated by an AI app (i.e. “RAGHAV Artificial Intelligence Painting App”) (i.e. the output of AI) involved in this case.  The Work, not hard to perceive, was derived from the style image (Vincent van Gogh’s The Starry Night). 

    In this case, the USCO refused to register the Work because it “lack[ed] the human authorship necessary to support a copyright claim.”[9]  The USCO examined the application by demonstrating the following guidance: “[Whether the ‘work’ is basically one of human authorship, with the computer [or other device] merely being an assisting instrument, or whether the traditional elements of authorship in the work (literary, artistic, or musical expression or elements of selection, arrangement, etc.) were actually conceived and executed not by man but by a machine.”[10]

    The USCO further argued that all of the Work’s “traditional elements of authorship” are generated by AI.  As a result, the work lacks human authorship.  If, however, a work containing AI-generated material also contains sufficient human authorship to support a claim to copyright.

    4.  Concluding observations

    (a) Creative efforts vs. “Sweat of the Brow”

    When in an age the AIGC indeed promises to facilitate the content production process, the regimes structures designed hereto may serve as a catalyze rather than an obstacle to realization of that technological hope.  In the digital era and for the time being, the court has been profoundly playing an essential role in reinterpreting laws and regulations as well as tackling and addressing such daunting challenges posed in those unprecedented cases. 

    When analyzing and elaborating IP issues, it is inevitable that in the past we used to check verdicts about similar or even equivalent cases in other jurisdictions, mainly the U.S. and the EU, even taking their decisions as a reference when evaluating how it is dealt with worldwide.  Followed by the development of globalization as well as technology itself, issues relating to evolvement and advancement in terms of the science and art usually emerge simultaneously in various countries.  According to the foregoing case analysis in both China and the U.S., the USCO finally refused to extend copyright protection to such works when denying the so-called “sweat of the brow” theory.  In practice, it’s not so clear that an individual’s labor does him no good when seeking copyright protection.  Despite the formal repudiation of the sweat of the brow theory in the global legal landscape, in borderline cases, the effort that authors have invested in their works may still merit attention.  Nevertheless, if one day the current AI technology becomes a generic tool or our perception, labor, and effort might be deemed as the traditional knowledge, would the ruling in similar cases reverse?  At least, the outcome would be unknown or to some extend unpredictable. 

    Based on our observation and analysis of AI-generated contents, it is likely an increasingly considerable amount of work could be done by AI in the future.  Nevertheless, it is of greater significance that we, human being, are actively engaged in identifying searching word, designing the outline, selecting, assembling, and structuring the entire work.  Though it is understandable that we tend to express our concern about the AI’s replacement in certain work particularly in the short term, mankind’s involvement in such process should not be ignored.  More importantly, those involvements are not only reflected in starkly visible and superficial parts but closely tied with people’s prior experience in a specific task, perception of the industrial circle, and aesthetic sensibilities of the cultural vibe. 

    (b) Copyright owners’ private benefits vs. public interests

    It has been historically witnessed that the emergence of IP law and the technological evolution intensively collide worldwide.  The prior industrial revolutions have shaped the legal landscape, sparking the concept of intellectual property.  The IP law, in turn, shall function as a powerful driver to the new economy. 

    How the legal regime responds to such constantly evolving society?  For one thing, apart from worrying about the replacement of humankind work by AI, there, as a matter of fact, are more issues triggered in terms of interest allocation mechanism under the current IP law.  For another, it goes without saying that human and AI will continue to collaborate for completing more and more tasks, especially cumbersome, routine and repetitive ones.  By embracing such trend, we could focus more on what mankind is able to contribute to the society and further stimulate and cherish such contribution. 

    On this front, even if we rarely see the policy analysis in verdicts of the PRC courts, it is worth noting that the presiding judge in the First AI-image Case has published some articles, actively participated in a number of academic discussions and accepted interviews to articulate how the judgement was exercised and more specifically to convey the backed concept of this case.  According to the Research on Legal Feature and Copyright Attribution of AI-generated Images, the presiding judge highlighted that by exercising the judgement of the First AI-image Case, the court has fully considered a variety of factors such as interests from different stakeholders, attempting to seek legislators’ value orientation as well as social and public benefits.[11]  Again, the economic philosophy of the copyright law is to advance public welfare by encouraging individual effort through personal gain. 

    While reviewing the First AI-image Case, it is also noted that several weeks ago, in the U.S. the Sora has succeeded in directly generating video outputs followed with human descriptive instructions.  By examining present cases, it is not hard to imagine more copyright-related arguments will rise in the upcoming future.  How the legal disputes may gradually come out will remain to be seen.  But we can hardly deny that the legal outcome is more likely to depend on a case-by-case basis, instead of a bright-line rule for dealing with this ever-changing digital age.  In this scenario, if lawmakers and policy implementors wish to prevent any unfortunate outcome, they have to act in some way, to provide a special stimulus for the creation of public goods, continuously maintaining the delicate balance between the authors’ private rights and the public interests.


    [1] AIGC is the abbreviation of Artificial Intelligence Generated Content.

    [2] See the Civil Judgement of the Beijing Internet Court, file no.: (2023) Jing 0491 Min Chu No. 11279 (2023),  https://english.bjinternetcourt.gov.cn/pdf/BeijingInternetCourtCivilJudgment112792023.pdf

    [3] See supra note 2.

    [4] See supra note 2.

    [5] See supra note 2.

    [6] See supra note 2.

    [7] ZHU Ge, The Research on Legal Feature and Copyright Attribution of AI-generated Images, Intellectual Property, 1 (2024)

    [8] See Re: Second Request for Reconsideration for Refusal to Register SURYAST (SR # 1-11016599571; Correspondence ID: 1-5PR2XKJ), https://www.copyright.gov/rulings-filings/review-board/docs/SURYAST.pdf.

    [9] See supra note 5.

    [10] See supra note 5.

    [11] See supra note 4.

      I. AnJie Broad’s News on Int’Commercial Dispute Resolution

        • AnJie Broad Partners An Shouzhi, Wan Jia, and Wu Shanshan Listed on the First Legal 500 Arbitration Powerlist China 2023
          Recently, the Legal 500, an internationally renowned and authoritative legal rating agency, announced the first Arbitration Powerlist China 2023. With extensive practical experience in the field of arbitration and high-quality client feedback, AnJie Broad Partners Dr. An Shouzhi , Wan Jia and Wu Shanshan were listed in it.
        • AnJie Broad Partner Wang Xiaojun Appointed as Arbitrator of Several Arbitration Commissions 1
          In 2023, AnJie Broad Partner Wang Xiaojun was appointed as arbitrator of several arbitration commissions, including Nanjing Arbitration Commission, Langfang Arbitration Commission, Xuchang Arbitration Commission, Quzhou Arbitration Commission, Rizhao Arbitration Commission, Jingmen Arbitration Commission, Xiangyang Arbitration Commission and Fuzhou Arbitration Commission.
        • AnJie Broad Partner Chen Gui Appointed as Arbitrator of Shanghai International Economic and Trade Arbitration Commission 2
          In 2023, Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center) published a new version of Penal of Arbitrators, on which, AnJie Broad Partner Chen Gui, is listed as one of the new arbitrators. The appointment commences on January 1, 2024, and will expire on April 30, 2026.
        • AnJie Broad Partner Yan Bing Appointed as Arbitrator of Tianjin Arbitration Commission 3
          On 29 December 2023, Tianjin Arbitration Commission announced its new list of the Panel of Arbitrators, and AnJie Broad Partner Yan Bing was listed as one of the arbitrators, whose appointment will last three years, from December 29, 2023 to December 28, 2026.
        • AnJie Broad Assisted in the Forum of New Technology, New Cooperation and New Development – Improving the Service Level of Maritime Arbitration during Shanghai Arbitration Week
          On 21 November 2023, the forum of New Technology, New Cooperation, New Development – Improving the Service Level of Maritime Arbitration, co-organized by AnJie Broad Law Firm Shanghai Office, was successfully held in Shanghai. AnJie Broad Partner Chen Lei, attended the forum and presented a speech, pointing out that with the rapid development of the e-commerce industry, some new forms of cooperation in the shipping industry and the new risks brought by them, and the continuous improvement of the digitization of shipping has put forward new requirements for relevant conventions such as electronic bills of lading. It is believed that there will be new development trends in the “blue economy” such as offshore wind power and marine fishery in the future.
        • AnJie Broad Partner Dr. An Shouzhi Attended the 2023 International Congress of Maritime Arbitrators (ICMA XXII) and Present Keynote Speech
          From 5 to 10 November 2023, the XXII International Congress of Maritime Arbitration (ICMA 2023) was held in Dubai, United Arab Emirates. AnJie Broad Partner Dr. An Shouzhi was invited to attend and give a special report as a representative of arbitrators of the Singapore Court of Maritime Arbitration. With the theme of Issues on the Identification of B/L Carrier-Judicial Practice, Theories and the Proposed Revision on China’s Maritime Law, Dr. An Shouzhi focused on the identification of B/L carriers under China’s Maritime Law, conducted an empirical analysis of the judicial practice of China’s B/L carrier identification, discussed the theoretical issues, advantages and disadvantages of carrier identification methods in China’s judicial practice, as well as proposed advice on amendments to Article 89(2) of China’s Draft Revision of the Maritime Law.
        • AnJie Broad Partner Dr. An Shouzhi Appointed as Singapore International Arbitration Center (SIAC) Panel of Arbitrator and Arbitrator of Court of Arbitration for Sport
          In October, 2023, AnJie Broad Partner Dr. An Shouzhi was appointed as Singapore International Arbitration Center (SIAC) panel of arbitrator. In May, Dr. An was re-appointed as an arbitrator of the Court of Arbitration for Sport for the years 2023-2026.
        • AnJie Broad Partner Dr. An Shouzhi Appointed as Domestic and International Arbitrator of Several Arbitration Institutions
          In 2023, AnJie Broad Partner Dr. An Shouzhi was appointed as arbitrators of several international arbitration institutions, including Singapore International Arbitration Center (SIAC) panel, Arbitration Institute of the Stockholm Chamber of Commerce and Singapore Chamber of Maritime Arbitration, and will continue to serve as an arbitrator of Russian Arbitration Center. In May, Dr. An was re-appointed as an arbitrator of the Court of Arbitration for Sport for the years 2023-2026.
          Besides, Dr. An was also appointed as arbitrator of several domestic arbitration institutions, including the Arbitration Center Across the Straits, China Commission of Arbitration for Sport, and Chongqing Arbitration Commission.
        • AnJie Broad Partner Chen Lei Selected as Expert of Shanghai International Maritime Arbitration Expert Tank
          Justice Bureau of Shanghai Municipality released the list of experts in the Shanghai International Maritime Arbitration Expert Tank (the second batch). AnJie Broad Partner Chen Lei was selected as an expert in the tank. The establishment of the Shanghai International Maritime Arbitration Expert Tank is aimed at strengthening the construction of Shanghai’s international maritime arbitration talent team, promoting the enhancement of maritime arbitration service capacity, and assisting Shanghai accelerate the building of a globally oriented Asia-Pacific Arbitration Centre to provide better services to guarantee the construction of Shanghai international shipping centre.
        • AnJie Broad Partner Chen Lei Appointed as the Deputy Director of Maritime and Logistics Professional Research Institute, Shanghai Arbitration Association
          The first meeting of the second session of the General Assembly of Shanghai Arbitration Association was successfully held, and AnJie Broad Partner Chen Lei was appointed as the deputy director of Maritime and Logistics Professional Research Institute, Shanghai Arbitration Association. The Institute shall follow the footsteps of Shanghai Arbitration Association to help Shanghai accelerate the building of a globally oriented Asia-Pacific Arbitration Centre.
        • AnJie Broad Partner Chen Lei Appointed as an Arbitrator of Shanghai International Economic and Trade Arbitration Commission
          Following a rigorous selection by Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center, “SHIAC”), AnJie Broad Partner Chen Lei has been appointed as an arbitrator of SHIAC for a period beginning on 1 January, 2024 and ending on 30 April, 2026.
        • AnJie Broad Partner Chen Lei Hosted Seminar on Hot Issues of Maritime Arbitration in Singapore
          On 25 October 2023, a delegation from Singapore Chamber of Maritime Arbitration visited Shanghai to exchange views on the hot issues of maritime arbitration in Singapore. AnJie Broad Partner Chen Lei hosted the seminar. At the meeting, the industry insiders had an in-depth discussion on the relevant hot issues to further promote the friendly cooperation and communication between the two sides.
        • AnJie Broad Partners An Shouzhi, Wan Jia, and Liu Hongchuan Invited to Participate in FDI Moot Shenzhen 2023
          In August 2023, FDI Moot Shenzhen 2023 hosted by Shenzhen Court of International Arbitration (SCIA) came to a successful end. Anjie Broad, as the supporting law firm, has actively engaged in the tournament, exerting its legal expertise and sharing legal practice experience. AnJie Broad Partners An Shouzhi and Wan Jia acted as referees in the online tournament, providing precise guidance and comments for the competitors and injecting professional strength into the competition. AnJie Broad Partner Liu Hongchuan acted as the chief referee of the offline contests, to ensure the fairness and professionalism of the competition.
        • Seminar on International Arbitration Practice of Jiangsu Lawyers Association Arbitration Committee Successfully Held
          On 12 August 2023, the seminar on international arbitration practice of Jiangsu Lawyers Association Arbitration Committee, organized by Anjie Broad Law Firm, was successfully held in Nanjing. AnJie Broad Partners Wang Xiaojun and Wei Xueping presented the keynote speeches on the Application of International Arbitration in Cross-border Intellectual Property Dispute Resolution, and the Recognition and Enforcement of Foreign Arbitral Awards in Chinese Courts respectively.
        • AnJie Broad’s Dispute Resolution Team Invited to Co-write the Latest Work of The International Arbitration Review
          AnJie Broad Partners Wan Jia, Cui Wei, Wu Shanshan, and Associate Zhu Bingjing, were invited as Chinese experts and responsible for drafting the Chinese chapter of the latest work of The International Arbitration Review. This chapter provides an overview of China’s laws and regulations on international arbitration, analyzes the dynamic development of international arbitration in China, and forecasts the future development.
        • AnJie Broad Partner Sun Xumin Appointed as Arbitrator of Dongguan Arbitration Commission 4
          In August, 2023, Dongguan Arbitration Commission published the new list of the Panel of arbitrators. AnJie Broad Partner Sun Xumin has been appointed as arbitrator of the Commission.
        • AnJie Broad Partners Ding Zhenyu and Jiang Yading Invited to Participate in Frankfurt Investment Arbitration Moot Court [Chinese Circuit] Competition
          From 8 May to 10 May, 2023, Frankfurt Investment Arbitration Moot Court CIETAC Chinese (Mainland) National Rounds were held in Jiangwan Campus of Fudan University in Shanghai. AnJie Broad Partners Ding Zhenyu and Jiang Yading participated in the competition as the referees in 7 matches. They graded the participants in terms of their understanding of the facts and laws, logic of debate, ability of expression, preparation, and answering skills, and also actively communicated with the participants.
        • Several AnJie Broad Partners Appointed as the 6th Session of Nanjing Arbitration Commission
          In April 2023, the Nanjing Arbitration Commission announced the new Panel of Arbitrators of Nanjing Arbitration Commission. AnJie Broad Partners Liu Hongchuan, Wang Xiaojun, Wang Xiujuan, Wang Yong, Zhan Hao and Zhang Haixiao were appointed as arbitrators of the 6th session of Nanjing Arbitration Commission. Among them, Zhan Hao and Wang Yong are reappointed. The new arbitrators of Nanjing Arbitration Commission commence their duties on 4th March 2023, and the term of appointment is five years.

        II. AnJie Broad’s Observations on Int’Commercial Arbitration

        • Arbitration Case Review

        1. AnJie Broad Represents a Private Fund to Recover All the Performance Commitment Compensation for the Actual Controller of the Portfolio Company and the Interest and Fee Thereon

        AnJie Broad Partners Liu Hongchuan, associate Yan Fang and Wang Shijia filed for arbitration before Shenzhen International Court of Arbitration and assisted a private fund to successfully recover all the performance commitment compensation to the actual controller of a portfolio company in a total amount of more than RMB42 million in cash compensation, interest and fee thereon.

        【Case Background】

        The fund, as an investor, made equity investment in a high-tech company, of which the respondent is the actual controllers, and has set forth performance commitment, valuation adjustment and compensation arrangement in the Capital Increase Agreement. Subsequently, the portfolio company failed to fulfill its performance commitment, and the fund requested the actual controller to make equity compensation and entered into the Equity Compensation Agreement with the actual controller, which has not been actually performed. Thereafter, the fund and the respondent entered into the Cash Compensation Agreement regarding cash compensation in lieu of equity compensation, providing that the respondent shall pay a certain amount of cash compensation to the fund in lieu of equity compensation. The fund has exited the portfolio company by way of equity transfer, but the respondent has not paid most of the cash compensation and interest accrued thereon.

        Arbitration Process and Significance of the Case

        After being engaged by the fund, AnJie Broad Partner Liu Hongchuan, associate Yan Fang and Wang Shijia submitted an arbitration application to Shenzhen International Court of Arbitration to request the actual controller of the portfolio company to pay the remaining cash compensation and interest thereon. The respondent filed its reply in respect of the validity of the Cash Compensation Agreement, breach of the fund, and the cash compensation agreement terminated due to the fund’s exit from the target company, etc.

        By collecting and combing various agreements, letters, bank payment vouchers, e-mails, WeChat records and other evidence between the parties, the AnJie Broad team forcefully proved to the tribunal that it is a reasonable business arrangement agreed by the parties to replace the original equity compensation, and the parties have never reached any consensus with respect to the rescission or termination of the Cash Compensation Agreement. The Claimant has performed the obligation in accordance with the Cash Compensation Agreement, which is legitimate and valid. Moreover, the Cash Compensation Agreement is a termination and replacement of the original legal relationship between the parties with respect to the earn-out and compensation, which is independent of other transaction documents and is irrelevant to the shareholder status of the Claimant. Therefore, the Respondent shall continue to perform the obligation and pay the Claimant the remaining compensation and interest thereon.

        Finally, the tribunal supported the Claimant’s claims, ruling that the Respondent shall pay the remaining compensation and interest thereon in a total amount of more than RMB42 million in accordance with the Cash Compensation Agreement and pay all attorney fees and arbitration fees to the Claimant.

        2.AnJie Broad Successfully Provided Domestic Enterprises with Arbitration Service in Hong Kong Enriching the Practice of the Maritime Silk Road International Commercial and Maritime Dispute Preferred Seat

        AnJie Broad received the Consent Award by a tribunal consisting of Mr. Philip Yang, Mr. Patrick O’Donovan and Mr. Danny Mok, international arbitrators from the United Kingdom and Hong Kong, successfully saving domestic enterprises from losses of nearly RMB10 million and enriching the legal practice of the Maritime Silk Road International Commercial and Maritime Dispute Preferred Seat.

        In this case, the domestic enterprise, as agent, entered into a shipbuilding contract on behalf of a domestic shipyard and an Indonesian buyer. In the case, the shipbuilding contract was one given up by the previous Indonesian buyer, and was to be performed again with a new buyer. Accordingly, the domestic shipyard signed a shipbuilding contract with the new buyer according to the introduction of the previous buyer, and agreed on the advance payment made by the previous buyer as the advance payment of the shipbuilding contract. After the signing of the shipbuilding contract, due to market changes and the downturn of the international marine engineering market, the new buyer failed to pay for the subsequent shipbuilding, and the domestic shipyard fell into bankruptcy for the market reasons. The new buyer retained a Singapore Law Firm and initiated an ad hoc arbitration in Hong Kong, the arbitration place stipulated in the arbitration clause. The new buyer claimed termination of the shipbuilding contract and restitution of the advance payment of the contract and the liquidated damages. The arbitration place of the case was the Hong Kong SAR, with the Arbitration Ordinance of Hong Kong as the procedural law, and English law as the substantive law.

        Upon entrustment by the client, AnJie Broad formed a legal service team, led by Partner An Shouzhi, Wang Yong, Yang Manzhen, Xu Kun, Han Ziwei and Liu Xueqi as members, to provide the client with whole-process arbitration legal services. With full understanding of the facts of the case, the attorney team reviewed in detail the performance of the contract by the former buyer as well as the details of the takeover by the new buyer, pointed out to the tribunal that the new buyer had not actually paid any advance payment, and was not entitled to claim for the advance payment paid by the former buyer, and that the new buyer failed to make payment in the currency agreed upon in the contract, which constituted a breach of contract. In addition, AnJie Broad team took full advantage of the rules of evidence discovery in international arbitration proceedings. By requesting the new buyer to disclose the relationship between it and the former buyer as well as the transaction documents, they brought the new buyer back to the negotiation table and finally reached a settlement agreement of US $330,000, upon which the tribunal rendered a Consent Award, successfully saving losses of nearly RMB10 million for the domestic company.

        III. News on Int’Commercial Dispute Resolution

        • Arrangements for Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Cases Between Courts of the Mainland and Hong Kong SAR Officially Implemented in Hong Kong SAR 5
          On 29 January 2024, the Secretary for Justice of the Hong Kong SAR has appointed the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (the “Ordinance”) officially comes into operation, and the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Rules (the “Rules”) concluded in accordance with Article 35 of the Ordinance shall come into effect on the same day. The Ordinance establishes a comprehensive mechanism for reciprocal enforcement of judgments in civil and commercial matters between Hong Kong and the Mainland, clarifying the mechanism for the registration of civil and commercial judgments in Hong Kong, and for the issuance of certified texts and certificates in respect of civil and commercial judgments made in Hong Kong. The Rules further set forth provisions regarding the application for the registration, enforcement, issuance of certificates and payment of relevant fees with respect to civil and commercial judgments of the Mainland. Through the specific mechanism of the Ordinance and the Rules, the Arrangements for Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Cases between Courts of the Mainland and Hong Kong SAR will officially come into effect in Hong Kong SAR.
        • The 2024 China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules Comes Into Force on 1 January 2024 6
          On 2 September 2023, the China Council for the Promotion of International Trade and the China Chamber of International Commerce approved the revision of the Arbitration Rules of the China International Economic and Trade Arbitration Commission, which only reflects the direction of the Commission’s integration with international arbitration practices and continuous internationalization, and also reflects the Commission’s practical commitment to implement the concept of facilitating arbitration users and “user friendly” at the rule level. Further improvement and innovation of arbitration rules will certainly play a positive role in enhancing the competitiveness of China’s arbitration in the global arena. The revised Arbitration Rules have come into effect on 1 January 2024.
        • The Supreme People’s Court Promulgated the Guidelines for “One-Stop” Diversified International Commercial Dispute Resolution Platform (for Trial Implementation) 7
          On 29 December 2023, the Supreme People’s Court promulgated the Guidelines for “One-stop” Diversified International Commercial Dispute Resolution Platform (for Trial Implementation) (the “Guidelines”). The Guidelines provide specific operational guidelines for optimizing the diversified dispute resolution mechanism for international commercial disputes which organically connects litigation with mediation and arbitration, better giving play to the function of the “one-stop” diversified dispute resolution platform for international commercial disputes, and solving the bottlenecks and difficulties in the development of the diversified dispute resolution mechanism for international commercial disputes. The Guidelines officially comes into force on 30 January 2024.
        • The 2023 Annual Conference of the China Academy of Arbitration Law and the Sixteenth Forum of China Arbitration and Justice Held Successfully 8
          From 23 to 24 December 2023, the Annual Conference of the China Academy of Arbitration Law and the Sixteenth Forum of China Arbitration and Justice with the theme of “High-quality Development of Arbitration in the New Era” was held in Kunming. The forum was hosted by China Arbitration Law Research Society, hosted by Kunming Arbitration Commission, and co-organized by CIEC and China Maritime Arbitration Commission. The participating experts spoke freely on hot and focal issues of international and domestic arbitration, expressed their insights and suggestions for promoting the high-quality development of arbitration in China.
        • The Symposium on Recent Trends in International Commercial Arbitration and Attorneys’ Representing Skills Held Successfully 9
          On 21 December 2023, the symposium on “The Recent Development Trend of International Commercial Arbitration and Lawyer Agency Skills” co-sponsored by CIETAC Hubei Branch and Wuhan Lawyers Association was successfully held in Wuhan. More than 100 people from central part of China, including arbitrators, judges, lawyers, corporate lawyers and university teachers and students, attended the symposium. This event invited a number of international commercial arbitration theory and practice experts to discuss, analyze and judge the development trend of international commercial arbitration and the development direction of China’s arbitration, and aimed to help lawyers improve the skills and practical expertise in representation in commercial arbitration.
        • The Central Asia Trial Center of CIETAC Held Its First Trial 10
          On 14 December 2023, the Central Asia Trial Center of the CIETAC held its first hearing of two foreign-related arbitration cases. The two cases are disputes over contracts for the international sale of goods, involving Chinese companies importing agricultural products from Kazakhstan and Russia respectively. The Central Asia Trial Center held its first trial in less than 45 days after its establishment, reflecting the urgent needs of parties involved in Xinjiang and neighboring countries and regions for dispute resolution, and further demonstrating the necessity of establishing a Central Asia trial Center in Xinjiang. At the same time, the active choice of the parties to conduct the trial in the Central Asia Trial Center also demonstrates the recognition and trust of the parties to the credibility and reputation of the center in the field of dispute resolution.
        • The 2023 Belt and Road High-level Dialogue on International Commercial Arbitration Held Successfully 11
          On 7 December 2023, the 2023 Belt and Road High-level Dialogue on International Commercial Arbitration was successfully held. The Dialogue was co-hosted by ICC China, CIETAC, China Maritime Arbitration Commission (CMAC), and ICC International Court of Arbitration (ICC Court). With the subject of “International Commercial Arbitration Advances New Development in BRI”, focusing on three topics, namely, “Path to Openness: Hot-button Issues of Arbitration under the Belt and Road Initiative”, “Path to Innovation: Intellectual Property and Diversified Dispute Resolution” and “Path to Sustainable: Energy Transition and International Arbitration”, speakers and presenters shared and exchanged their views. More than 300 people, including experts, scholars, representatives of business associations and entrepreneurs from the legal, economic and arbitration sectors, attended the conference.
        • Beijing Arbitration Commission and Asian-African Legal Consultative Organization Work Hand in Hand to Promote the Development of International Arbitration Cooperation 12
          On 5 December 2023, Beijing Arbitration Commission (or Beijing International Arbitration Center) and Hong Kong Regional Arbitration Centre of Asian-African Legal Consultative Organization (AALCO-HKRAC) jointly signed a Cooperation Memorandum during the “AALCO Annual Arbitration Forum 2023”, with the expectation to advance the cooperation and development in the field of international arbitration together. AALCO-HKRAC was jointly established by AALCO and the Chinese government. It is the sixth regional arbitration center established under AALCO, which was established in November 2021. AALCO-HKRAC aims to promote the development of arbitration and other alternative dispute resolution services, to facilitate ad hoc arbitration in and outside China, and to promote diversified alternative dispute resolution.
        • Shanghai Arbitration Commission Obtained First Investigation Order in Assisting Arbitration Institution 13
          On 1 December 2023, on the first day of the implementation of the Decision of the Standing Committee of the Shanghai Municipal People’s Congress on Revising the Regulations of Shanghai Municipality on Optimizing the Business Environment, the Primary People’s Court of of Minhang District of Shanghai Municipality, upon the application of the Shanghai Arbitration Commission, handled the first case involving the issuance of an investigation order by a court upon the application of an arbitration institution, giving judicial support to arbitration, which is an active practice optimizing the active the business environment.
        • Memorandum Signed among Hainan International Arbitration Court, Asian International Arbitration Centre and Asian Institute of Alternative Dispute Resolution 14
          On 27 November 2023, the China-Hainan Free Trade Port-Malaysia Two-Way Cooperation Promotion Conference on the theme of “Sharing New Opportunities for the Free Trade Port and Creating a New Future for RCEP” was held in Kuala Lumpur, Malaysia. Hainan International Arbitration Court entered into a Cooperation Memorandum with Asian International Arbitration Centre and Asian Institute of Alternative Dispute Resolution respectively. In accordance with the Memorandum, the Parties will cooperate in sharing hearing venues and facilities, recommending arbitrators and mediators to each other, jointly promoting international arbitration systems, and holding international arbitration forums and seminars.
        • SIAC and SCIA Jointly Hosted a Keynote Symposium in Qianhai International Arbitration Tower 15
          On 15 November 2023, the keynote symposium on “Innovations in International Arbitration Rules and Resolution of Cross-border Bankruptcy Disputes” co-hosted by Singapore International Arbitration Centre (“SIAC”) and Shenzhen Court of International Arbitration (“SCIA”) was held at the SCIA Tower. This symposium, focusing on two themes, namely “Latest Developments in International Arbitration: Reform, Innovation and Trends of Systems and Rules” and “The Role of Arbitration in Resolution of Cross-border Bankruptcy Disputes”, invited many guests from enterprises, law firms, arbitration institutions and other places from Singapore, Beijing, Shanghai, Hong Kong and Shenzhen to discuss the latest developments in arbitration rules in China, especially in the Greater Bay Area, and in Singapore, as well as the role and function of arbitration in resolution of cross-border bankruptcy disputes.
        • A Cooperation Memorandum Signed among Beijing Arbitration Commission, Asian International Arbitration Centre and Asian Institute of Alternative Dispute Resolution 16
          On 14 November 2023, the Beijing Arbitration Commission/Beijing International Arbitration Center, the Asian International Arbitration Center (“AIAC”) and the Asian Institute of Alternative Dispute Resolution (“AIADR”) jointly signed a Cooperation Memorandum during the Asia-Pacific Regional Arbitration Group (APRAG) Conference. In accordance with the Memorandum, the Parties will jointly promote international arbitration cooperation and advance the international development of diversified dispute resolution services by establishing a mechanism of expert recommendation and academic sharing and strengthening information exchange and cooperation, to realize resource sharing.
        • International Arbitration in Changing Times: Meeting Challenge, Bridging Divide —Successful Convening of the APRAG Conference 2023 17
          From 13 to 15 November 2023, the 8th Asia Pacific Regional Arbitration Group (APRAG) Conference, hosted by the Beijing Arbitration Commission/Beijing International Arbitration Center (“BIAC”), themed “International Arbitration in Changing Times: Meeting Challenge, Bridging Divide,” took place successfully held in Beijing. The conference focused on issues of arbitration reform, user expectations in arbitration, and the construction of international arbitration hubs confronted with the Asia-Pacific region, and looked ahead to the future development of investment arbitration, artificial intelligence, and big data in the Asia-Pacific region. Anjie Broad Law Firm participated in the conference as a Gold Sponsor, and Partners Liu Hongchuan, Cheng Mingzhu, Wan Jia and Cui Wei attended several seminars.
        • Report on AI in IA: The Rise of Machine Learning Released 18
          On 9 November 2023, Bryan Cave Leighton Paisner LLP issued a report titled AI in IA: The Rise of Machine Learning. According to a survey conducted among 221 lawyers, arbitrators and in-house counsels from various jurisdictions. The report analyzes certain issues, including the expected benefits and risks of utilizing artificial intelligence (AI) tools, the necessity to disclose information on the use of AI tools, the impact of AI tools on the integrity of evidence, and the necessity to apply AI tools in arbitration.
        • The Fujian Province Cross-Strait Maritime Dispute Resolution Center Established
          On 9 November, 2023, the Fujian Province Center for Resolution of Maritime Disputes Involving Taiwan (the “Center”) was officially established in Xiamen. As the first center for resolution of maritime disputes involving Taiwan in China, the Center aims to provide a “one-stop” legal service offering maritime legal consultations, public legal education, dispute resolution, and other services for Taiwanese residents and businesses. Furthermore, the Center will explore innovative legal services for cross-strait maritime affairs, promote the establishment of diverse dispute resolution mechanisms, enrich experiences in public legal services concerning cross-strait affairs, provide legal support for economic and trade exchanges and close personnel interactions across the strait, and aid Fujian’s exploration of new paths for integrated development across the strait and the construction of a demonstration zone for cross-strait integrated development.
        • The 5th Shanghai International Arbitration Forum Held Successfully 19
          On 8 November 2023, the 5th Shanghai International Arbitration Forum & Shanghai Arbitration Week 2023 Opening Ceremony was held successfully. Themed “New Technologies, New Tracks and New Momentum, New Advantages”, the Forum invited more than 400 domestic and foreign well-known international organizations, arbitration institutions, arbitrators, lawyers, experts and scholars, relevant chambers of commerce (associations) and industrial organizations, and representatives of the trade group of the Sixth China International Import Expo from more than ten countries and regions to participate in the activities online and offline. The opening ceremony of Shanghai Arbitration Week 2023 was also successfully held at the Forum. With exchanges and discussions centering on commercial dispute resolution, digital arbitration and talent development, presenters jointly introduced the legal system of arbitration to enhance the international community’s understanding and recognition of arbitration in Shanghai and promote the international credibility, attractiveness and impact of Shanghai arbitration.
        • HKIAC + SHIAC | Renewing the Cooperation Between the Two Places and Jointly Promoting the Development of Arbitration 20
          On November 4, 2023, the signing ceremony for the 20th anniversary of the Shanghai-Hong Kong cooperation conference mechanism was held in Shanghai. Yang Ling, Deputy Secretary-General of HKIAC, and Zhou Minhao, Chairman of SHIAC signed the Cooperation Agreement on behalf of the two institutions. Since the signing of the Cooperation Agreement for the first time in 2018, the two institutions have carried out multi-dimensional cooperation in promoting the development of international arbitration and diversified dispute resolution in the two places, which yielded good results. The two parties have agreed that the renewed Cooperation Agreement would deepen the communication and connection between the two institutions, and establish closer cooperative partnership in further promoting the cooperation in organizing professional forums and activities, mutually sharing arbitration information and research results, recommending arbitrators and legal experts. Additionally, it will help reciprocally provide court trial facilities, boost high-quality development of the economic and trade cooperation between Shanghai and Hong Kong.
        • HIAC Promulgated Rules for Assisting Ad Hoc Arbitration 21
          On November 1, 2023, Hainan International Arbitration Court Rules for Assisting Ad Hoc Arbitration (Provisional) (the “Rules”) was promulgated and came into effect simultaneously. The promulgation of the Rules provides convenient and efficient assistance and services for ad hoc arbitration, and facilitates the complementary functions between institutional arbitration and ad hoc arbitration. With detailed and practical content, the Rules is an important achievement of the HIAC in improving the arbitration system and optimizing the arbitration mechanism, which will consequently further enhance the international influence and international image of the HIAC.
        • SIAC-HIAC Seminar: Ten-Year Review on BRI Disputes Successfully Held 22
          On 24 October 2023, the Singapore International Arbitration Centre (SIAC) and the Hainan International Arbitration Court (HIAC) co-organized a seminar on “Ten-Year Review on BRl Disputes: Trends and Opportunities Ahead” at Maxwell Chambers. This seminar delved into critical topics shaping the world of international arbitration and dispute resolution, with a particular focus on the Belt and Road initiative (BRl). Distinguished experts and practitioners from China and Singapore came together to explore key issues through a compelling keynote address and insightful discussions. The seminar compared the arbitration and mediation systems of the two countries, which enabled the online and offline participants to further understand the differences in the “arbitration + mediation” models of the two countries, the reasons for the formation of the two countries, and the emphasis of their respective issues, so as to jointly concrete a new chapter of international cooperation in arbitration.
        • The United Nations Commission on International Trade Law Issues the UNCITRAL Code of Conduct for Arbitrators in International Investment Dispute Resolution, the UNCITRAL Guidelines on Mediation for International Investment Disputes and the UNCITRAL Model Provisions on Mediation for International Investment Disputes 23
          On 15 September 2023, the United Nations Commission On International Trade Law (the“UNCITRAL”) issued the the UNCITRAL Code of Conduct for Arbitrators in International Investment Dispute Resolution (the “Code for Arbitrators”). As an important part of the reform of the investor-state dispute settlement system, the adoption of the Code for Arbitrators helps regulate the conduct of arbitrators, clarify the relationship between arbitrators and parties to arbitration proceedings, and emphasize the values that arbitrators should share and express.
          On the same day, the UNCITRAL issued the UNCITRAL Guidelines on Mediation for International Investment Disputes (the “Guidelines”) and the UNCITRAL Model Provisions on Mediation for International Investment Disputes, to encourage the parties to resolve international investment disputes by means of mediation. In particular, by listing and briefly explaining the issues to be considered in investment mediation, the Guidelines provide practical guidance for parties to use mediation.
        • The Law Commission Published the Review of the Arbitration Act 1996: Final Report and Bill and Draft Law Revision 24
          It has been more than 25 years since the Arbitration Act 1996 of England came into force. To further consolidate London’s position as the first choice for international arbitration, the UK government requested a review to see if there was a need for amendment. On 6 September 2023, the Law Commission of the UK published the Review of the Arbitration Act 1996: Final Report and Bill. The Review discusses and proposes changes to ten major issues including confidentiality of arbitration, independence of arbitrators and the disclosure regime, discriminatory issues in arbitration, immunity of arbitrators, Ad Hoc Rulings in apparent lack of merit, courts’ powers in support of the arbitral procedures, emergency arbitrators, challenges to awards on the ground that the tribunal lacks substantive jurisdiction, appeals on matters of law, and the applicable law to the arbitration agreement.
        • A United States District Court Case: “Submitting to CIETAC Beijing or to Any Other Courts of the United States Capable of Settling International Arbitrations” Is Valid25
          On 31 July 2023, the United States District Court for the Eastern District of Pennsylvania rendered a judgment, holding that the arbitration clause which provides that “disputes shall be submitted to CIETAC in Beijing or to any other courts of the United States capable of resolving international arbitrations and shall apply CIETAC’s rules” is valid. Since the parties cannot unanimously agree on the selection of an arbitration institution and application of CIETAC’s rules in the United States, the court will, according to the terms of the agreement, mandate an arbitration in CIETAC and stay the case until it is resolved.
        • Hong Kong Courts: Arbitrators Are Entitled to Immunity 26
          On 31 July 2023, the Court of First Instance of Hong Kong made its judgment in the case of Song Lihua v Lee Chee Hon [2023] HKCFI 1954 (31 July 2023). Judge Mimmie Chan held that, in the absence of fraud or bad faith, arbitrators are generally entitled to immunity, which means that arbitrators should enjoy immunity from suit for any act performed by them and should not be compelled to testify as to their exercise of the arbitral function. This case is of great significance to arbitrators in Hong Kong and other jurisdictions, since it confirmed that arbitrators generally enjoy immunity from liability and will not be sued or compelled to testify as a result of exercising the arbitral function.
        • Hong Kong Court: Whether Pre-conditions of Arbitration Clause Have Been Met Generally Does Not Concern the Tribunal’s Jurisdiction 27
          On 30 June 2023, the Court of Final Appeal in Hong Kong made a leading judgment on whether the “prerequisites” for arbitration set out in the multilevel dispute resolution clause involved the jurisdiction of the tribunal or merely the admissibility issue in the case of C v D [2023] HKCFA 16.
          A majority of judges noted that, whether the parties have performed the pre-obligations set out in the arbitration clause (such as negotiating in good faith) is an issue relating to the admissibility of the claims in the arbitration, and generally does not involve the issue of jurisdiction of the tribunal in the case. As a result, generally, the dispute will be finally referred to the tribunal for decision and the court will not interfere, nor will it re-examine the merits of the tribunal’s award. Besides, as the dispute does not generally involve the issue of jurisdiction of the tribunal, the Hong Kong court will not set aside the award on that ground.
        • Australian Courts: Insolvency Disputes Can Be Arbitrated 28
          In May 2023, two Australian courts handed down judgments as to whether insolvency disputes can be submitted to arbitration under a pre-exist arbitration agreement in different circumstances. The judgments focused on the following two issues:
          (1) the types of insolvency matters that should be resolved by arbitration; and
          (2) under what circumstances, a third party may participate in an arbitral proceeding and present a claim or defence “through or under” the parties to the arbitration agreement.
          The judgments confirmed the sophisticated and nuanced approach taken by Australian courts in balancing the arbitration regime and the insolvency proceedings.

        Footnotes:

        [1] https://lfac.org.cn/zxdt/808.jhtml

        http://zcb.rizhao.gov.cn/art/2023/8/24/art_30732_10281679.html

        http://fzzcw.org.cn/#/detail/60?categoryName=%E5%85%B3%E4%BA%8E%E6%88%91%E4%BB%AC&subCategoryName=%E9%80%9A%E7%9F%A5%E5%85%AC%E5%91%8A

        [2] https://www.shiac.org/pc/SHIAC?moduleCode=experts

        [3] http://tjac.org.cn/wap/article/index.html?id=927

        [4] http://www.arbdg.com/user/list_1_4_349.html

        [5] https://mp.weixin.qq.com/s/5um1NBv5y3aZSfaM2vH2iw

        [6] https://www.junhe.com/legal-updates/2263

        [7] https://mp.weixin.qq.com/s/d6pVGJ_smjqswnYrO31I6g

        [8] https://mp.weixin.qq.com/s/3yxCRoJjECD855QNnyiL_w

        [9] https://mp.weixin.qq.com/s/sM-x_BXy8S1LQ_LVPUKHaA

        [10] https://mp.weixin.qq.com/s/KubQLfY_2bq6AQqe6v8iYw

        [11] https://mp.weixin.qq.com/s/wuDa9dVXR6VwKfr-EI5Lvg

        [12] https://mp.weixin.qq.com/s/XyaScslfh9ewZNhyIca-QA

        [13] https://mp.weixin.qq.com/s/15kBt-2SdZE8zD9VrdzMnA

        [14] https://mp.weixin.qq.com/s/OBq6dEmVtx_kBRJ0TZLm7A

        [15] https://mp.weixin.qq.com/s/m0yghJ9O7Q59GZNBzbG8wg

        [16] https://mp.weixin.qq.com/s/G9amoGBgPK9XSFjpQf9BzA

        [17] https://mp.weixin.qq.com/s/A-tCU9OHGJel0g-3RIpYLA

        [18] https://mp.weixin.qq.com/s/xhxob4sIHxlwWKSw8Sj9vw

        [19] https://mp.weixin.qq.com/s/TbkBfINW-TeslOSG9bv_jQ

        [20] https://mp.weixin.qq.com/s/mC0BGxdAaqwRrHdNKta3kg

        [21] https://mp.weixin.qq.com/s/Yb_N-6PrM9M4Ct02t0yXaQ

        [22] https://mp.weixin.qq.com/s/fiv9B9-k2iYK7O4_DzUMlw

        [23] https://mp.weixin.qq.com/s/_mRJZMFYbYnp_Er_sNSe9w

        [24] https://mp.weixin.qq.com/s/HbOleMrIj1sufsd1RcKkig

        [25] https://mp.weixin.qq.com/s/heUcdesG-jDziQzvpXDL1A

        [26] https://mp.weixin.qq.com/s/Bu4GbgiAA23OnlLMM8udIg

        [27] https://mp.weixin.qq.com/s/vAX98EPtXe4BW2RcqeccXA

        [28] https://mp.weixin.qq.com/s/vxfU_zm2RkesKXibHAtbtw

        In an era dominated by digital connectivity, safeguarding the integrity of networks and information systems has become a global imperative. China, recognizing the critical importance of cybersecurity, has introduced the draft Management Measures for Cybersecurity Incident Reporting (the Measures). The Measures outline a comprehensive approach to reporting cybersecurity incidents, aiming to minimize losses, incentivize legal compliance, protect national cybersecurity, and align with existing legal frameworks. Samuel Yang, Chris Fung, and Bill Zhou, from AnJie Broad Law Firm, explore key provisions in the Measures, shedding light on the intricacies of China’s evolving cybersecurity landscape.

        Purpose

        Article 1 of the Measures describes the rationale behind the Measures. It emphasizes the Measures’ alignment with foundational privacy, data, and cybersecurity laws in China, such as the Cybersecurity Law, the Data Security Law, the Personal Information Protection Law (PIPL), and the Regulations on the Protection of the Security of Critical Information Infrastructure.

        Scope

        Article 2 of the Measures sets out the Measures’ scope of application to entities involved in constructing, operating, or providing services through networks within the PRC (Operators).

        Regulators

        Article 3 of the Measures provides, the central cyberspace administration coordinates and supervises national cybersecurity incident reporting. In contrast, local cyberspace administrations coordinate and supervise cybersecurity incident reporting within their administrative regions.

        Timely reporting and incident classification

        Article 4 of the Measures contains requirements for the expeditious activation of emergency response plans by Operators and mandates reporting significant, serious, and particularly serious incidents within an hour.

        Annexe 1 to the Measures provides meticulously granular guidelines for incident classification. Focusing on severity and impact, Annex 1 categorizes incidents into the strata of particularly serious, serious, significant, or general, as described below, in descending order of severity.

        Particularly serious cybersecurity incidents can be identified by important networks and systems facing widespread failure, precipitating a consequential shutdown and loss of functionality, national security facing a particularly serious threat, and the occurrence of other particularly serious threats such as:

        • disruption to key Government websites or major news platforms exceeding a day;
        • critical infrastructure interruptions persist for over six hours or significant function disruption for over 24 hours;
        • impact felt by over 30% of a province’s populace;
        • impact on transport and utilities affecting over 10 million individuals;
        • leakage of important data posing a particularly serious threat to national security;
        • disclosure of personal information affecting over 100 million individuals;
        • impact on information systems resulting in the widespread dissemination of harmful information;
        • direct economic losses exceeding CNY 100 million (approx. $13.9 million); and
        • other particularly serious threats.

        Serious cybersecurity incidents can be identified by important networks and systems facing partial failure, impacting operational functionality, national security facing a serious threat, and the occurrence of other serious threats, such as:

        • disruption to key Government websites or major news platforms exceeding six hours;
        • critical infrastructure interruptions persist for over two hours or significant function disruption for over six hours;
        • impact felt by over 30% of a city’s populace;
        • impact on transport and utilities affecting over one million individuals;
        • leakage of important data posing a serious threat to national security;
        • disclosure of personal information affecting over 10 million individuals;
        • impact on information systems resulting in the dissemination of harmful information;
        • direct economic losses exceeding CNY 20 million (approx. $2.8 million); and
        • other particularly serious threats.

        Significant cybersecurity incidents can be identified by important networks and systems facing significant system losses, impacting operational capabilities, national security facing a significant threat, and the occurrence of other significant threats, such as:

        • disruption to key Government websites or major news platforms exceeding two hours;
        • critical infrastructure interruptions persist for over 30 minutes or significant function disruption for over two hours;
        • impact felt by over 10% of a city’s populace;
        • impact on transport and utilities affecting over 100,000 individuals;
        • leakage of important data posing a significant threat to national security;
        • Ddsclosure of personal information affecting over one million individuals;
        • impact on information systems resulting in some dissemination of harmful information;
        • direct economic losses exceeding CNY 5 million (approx. $695,500); and
        • Other particularly serious threats.

        General cybersecurity incidents can be understood as not meeting the criteria of any of the above categories. This is, in essence, a residual category.

        The grade of severity experienced during a cybersecurity incident may also serve as a benchmark that allows Operators to comprehend the regulatory significance of cybersecurity incidents.

        Detailed reporting requirements

        Article 5 of the Measures outlines what Operators must include in their reports, ranging from incident details, impact, and harm to preliminary analyses of causes and proposed countermeasures. Specifics related to ransomware attacks, such as ransom amounts and payment details, are also mandated.

        A translation of the form is provided below for reference:

        Cybersecurity Incident Information Report Form

        Report Time: [year/month/day/hour/minute]

        Report Number: [report number]

        Issued by: [signatory]

        Organizations with operations in China may wish to include the above fields in any internal forms they use for incident reporting to facilitate reporting to regulators afterward.

        Rigid reporting timeframes

        Article 6 of the Measures acknowledges that certain incidents may require more time for a comprehensive assessment, including particularly serious or significant incidents. In such circumstances, Operators must provide initial reports within one hour, focusing on certain essential details, such as the basic information about the unit where the incident occurred, including the facilities, systems, and platforms involved, and the time, location, type, impact, and harm caused by the incident, the remedial measures taken and their effectiveness, and ransom amounts and payment details for ransomware incidents. After providing essential information within the mandated one-hour timeframe, Operators should submit supplementary information within 24 hours.

        The Measures are silent on the timescales for reporting general cybersecurity incidents. However, Operators may wish to consider adopting the 24-hour standard because it is featured in other legal sources of general application and may apply to general cybersecurity incidents.

        Post-incident analysis

        Article 7 of the Measures mandates Operators to conduct a thorough analysis and summary within five working days of the incident’s resolution. This comprehensive report should cover incident causes, emergency response measures, damages, liability management, rectification status, lessons learned, and other relevant matters.

        Community involvement

        Article 8 of the Measures encourages organizations and individuals providing services to Operators to remind them of reporting obligations. In cases of intentional concealment or refusal to report, organizations and individuals are empowered to escalate the matter to local or national authorities.

        Public reporting and recognition

        Article 9 of the Measures actively encourages social organizations and individuals to report significant cybersecurity incidents, fostering a collective approach to cybersecurity.

        Enforcement and consequences

        Article 10 of the Measures outlines the basis for penalties for Operators failing to comply with reporting requirements, ensuring accountability. Severe violations resulting in significant harm may, in principle, lead to more stringent penalties.

        We note that one basis for penalties is the PIPL, which states the following:

        ‘If the illegal activity[…] is of a grave nature, the violator will be ordered to make a correction, confiscated of any illegal gain, and fined up to [the higher of] CNY 50 million (approx. $6.95 million), or 5% of last year’s annual revenue[…] and may also be ordered to suspend any related activity or to suspend business for rectification, and/or be reported to the relevant authority for the revocation of the related business permit or the business license; and any person in charge or any other individual directly liable for the violation will be fined [and banned from certain roles for a time].’

        Exemptions for responsible Operators

        Article 11 of the Measures provides leniency to Operators who have implemented reasonable and necessary protective measures, actively reported incidents, and mitigated the situation’s impact. Such Operators may be exempted or face reduced penalties based on the circumstances. Article 11 can be viewed as an incentive for developing a robust internal compliance framework.

        Defining cybersecurity incidents

        Article 12 of the Measures clarifies that cybersecurity incidents include events caused by human factors, software or hardware defects, failures, and natural disasters, resulting in harm to networks, information systems, or data, with negative societal consequences.

        Handling state secrets

        Article 13 of the Measures acknowledges that incidents involving State secrets need to follow specific reporting procedures defined by relevant departments. For the avoidance of doubt, State secrets are not limited to information held by State organs or emanations. State secrets can, in principle, include (without limitation) other types of information, such as health and genetic information and mapping data, etc.

        Conclusion

        China’s proactive stance in formulating a comprehensive cybersecurity incident reporting framework reflects its commitment to securing digital infrastructure. As the global community grapples with escalating cyber threats, understanding and adapting such measures becomes imperative for fostering a secure and resilient digital environment.

        The ongoing public feedback and potential refinements to the Measures will hopefully contribute to their effectiveness in addressing the dynamic challenges of the digital age.

        –At the Juncture of the Supreme Court Judgment

        At the onset of 2024, AnJie Broad’s antitrust team secured a pivotal second instance judgment from the Supreme People’s Court of China (“the Supreme Court”) in the rare earth antitrust litigation. The ruling completely overturned the first instance judgement rendered by the first instance court Ningbo Intermediate People’s Court (“the Ningbo Court”), holding that the conducts of AnJie Broad’s client Hitachi Metals did not constitute abuse of market dominance. The Supreme Court dismissed all claims brought by the four plaintiffs, four Ningbo rare earth magnets producers.

        Reflecting on this case, it undoubtably encompasses several legal issues worthy of in-depth study and contemplation. The key controversies aroused in this case highlight some of the most cutting-edge issues prevalent in current antitrust litigation practice. The proceedings largely showcase the distinctive features of antitrust civil litigation in China. Notably, this case also garnered widespread attention both domestically and internationally.

        On 27 April 2022, the Office of the United States Trade Representative (“USTR”) released its annual Special 301 Report (2022). The Report includes an expression relevant to this case:

        “In 2021, a local intermediate court issued the first instance ruling declaring certain IP developed by foreign company to be an ‘essential facility’ and finding the company’s failure to license its IP to a Chinese plaintiff – notwithstanding existing licenses to other Chinese parties – to be an abuse of dominance. This decision raises concerns that China’s competition authorities may apply this approach to foreign patent holders for AML enforcement. The case is currently awaiting decision on appeal to the Supreme People’s Court. It is critical that China’s AML enforcement be fair, transparent, and non-discriminatory; afford due process to parties; focus only on the legitimate goals of competition law; and not be used to achieve industrial policy or other goals.”

        As a matter of fact, the second instance judgment can clearly respond to the above “concerns” of the USTR’s Office, by displaying that China’s judicial ruling is strictly based on the proper application of the Anti-Monopoly Law (“AML”). Some case particularities are noteworthy and helpful to savour the significance of this millstone case.

        I. A Case Lasted Nearly a Decade.

        On December 11, 2014, four companies engaged in the production and sale of sintered neodymium-iron-boron (“NdFeB”) permanent magnet materials in Ningbo, namely Ningbo Ketian Magnet Co., Ltd., Ningbo Permanent Magnetic Industry Co., Ltd., Ningbo Tongchuang Strong Magnet Material Co., Ltd. and Ningbo Huahui Magnetic Industry Co., Ltd (collectively “the four plaintiffs”), initiated antitrust actions against Hitachi Metals with the Ningbo Court.

        The cross-examination commenced for the first time at the Ningbo Court on September 21, 2015, followed by two subsequent hearings on December 18, 2015, and March 10, 2017, respectively, leading to the handing-down of the first instance judgment by the Ningbo Court on April 23, 2021. Then Hitachi Metals appealed to the Supreme Court.

        The second instance was amid the hard pandemic period, and the Supreme Court organized the trial through an online hearing on November 23, 2021, with tens of thousands of people tuning to the live broadcast.

        Near the ending of 2023, the Supreme Court rendered the final judgement by completely overturning the first instance judgment, and dismissing all claims made by the plaintiff. To this point, the rare earth antitrust litigation of China was finally brought to the conclusion, with the first and second instances in total spanning nearly a decade.

        II. Both Parties Retained Expert Witnesses to Participate in the Trial.

        In the first instance, Hitachi Metals engaged Professor Jiong GONG from the University of International Business & Economics as an economics expert, and Professor Jiemin SHENG from Peking University as an antitrust law expert, to participate in the trial. Furthermore, Hitachi Metals also presented an Expert Report issued by the above experts to the Ningbo Court.

        For the other side, the four plaintiffs engaged an expert in the field of magnetic materials, Mr. Da MA, along with Mr. Yongwei CHEN and Professor Ming YANG from Peking University, to provide witness opinions from the perspectives of technology, economics and law, respectively.

        In the second instance trial, Professor Jiong GONG, Dr. Vanessa Yanhua ZHANG and Professor Zhongwu LIU, engaged by Hitachi Metals, respectively issued the economic analysis and technical expert report for the appeal procedure.

        Also, Dr. Vanessa Yanhua ZHANG and Professor Zhongwu LIU engaged by Hitachi Metals, and Mr. Da MA, engaged by the four plaintiffs, appeared in court to provide testimony on specialized issues, including the essentiality of the relevant technology, definition of the relevant market, determination of market dominance, development of upstream technology and competition of downstream products, conditions for the application of essential facilities doctrine, and the relationship between protection of intellectual property and antitrust, etc.

        The opinions of those expert witnesses are partly reflected in both the first and second instance judgments.

        The first instance judgment states, “Mr. Da MA, an expert in the field of magnetic materials technology, conducted a comprehensive analysis of Hitachi Metals’ patent claims from a patent perspective. He systematically compared them with existing production processes and concluded that the defendant’s patent list includes a series (Class I and Class II patents) of essential patents for the production of sintered NdFeB.” “The economic analysis report provided by Prof. Jiong GONG, expert designated by the defendant, asserts that there is a certain degree of overlap in the applications of sintered NdFeB and bonded NdFeB. For instance, both are utilized in motor products, indicating the substitutability. In terms of product sales scale, the market for sintered NdFeB is significantly larger than that of bonded NdFeB, with the former being roughly six times or more than the latter. Additionally, in certain downstream applications such as speakers and wind power, there is substitutability to some degree between ferrite permanent magnetic materials and sintered NdFeB.”

        The second instance judgment underlines that, Prof. Zhongwu LIU, expert designated by Hitachi Metals, provided a technical expert report and stated that the 15 disputed patents are not uncircumventable for sintered NdFeB. According to the data in the Economic Report provided by Hitachi Metals, among Hitachi Metals and the eight Chinese companies licensed to implement its patents, the combined market share of Hitachi Metals and seven Chinese licensees is 13.91%. Although the data for Beijing Thinova Magnet Co., Ltd., one of the eight licensees, was not provided in the Economic Report, its market share cannot exceed that of Beijing Zhong Ke San Huan High-Tech Co., Ltd.’s market share 6.07%. Therefore, the combined market share of sintered NdFeB produced by Hitachi Metals and the eight Chinese licensees in the Chinese market is not more than 20%, and their relevant market share in foreign markets was even lower. Therefore, it cannot be found that Hitachi Metals had a dominant market position in this case. (Certainly, apart from the disputed patents, Hitachi Metals also possesses numerous highly valuable patents.)

        In sum, it can be observed from this case that expert witnesses play a significant role in current antitrust civil litigations of China, with the frequent presence of some overseas economists.

        III. The First Time to Apply “Essential Facilities” Doctrine in China’s Antitrust Litigation.

        The first instance judgment holds that the essential facilities doctrine could be applied as an analytical tool in this case. Its reasons include: such facilities are indispensable for sintered NdFeB enterprises to participate in competition; Hitachi Metals, as the intellectual property owner, has exclusive control of such facilities; competitors could not duplicate the same facilities using reasonable efforts; where the plaintiff raised clear requests for license and was willing to pay reasonable consideration, Hitachi Metals rejected the use of essential facilities; it would be feasible for Hitachi Metals to grant license; the refusal has no reasonable grounds, and the plaintiff, as a large-scale industry operator, is qualified to exploit the patent and has actively expressed its willingness to request a license.

        In fact, the above arguments have aroused strong concerns and criticism in China and abroad. It must be pointed out, the essential facilities doctrine has a long history of controversies under antitrust law, lacking a clear and consistent application standard. Consequently, various jurisdictions have always maintained a very cautious and restraint approach to this doctrine. Specifically, this doctrine is usually deemed applicable only under very exceptional circumstances, leading to its limited application in practice. It is true that, before this case, there is not any precedent in China where an enforcement agency or a judicial organ applied the essential facilities doctrine to the behavior of refusing to license, which further underscores the cautious stance towards this doctrine. Although the Supreme Court in the second instance judgement did not explicitly comment on the application of the essential facilities doctrine, it has in essence negated the application of this doctrine by finding Hitachi Metals’ absence of dominant position in the relevant market. It should be recognized that this cautious approach employed by the Supreme Court is commendable.

        IV. This Case Involves the Intersection of Anti-Monopoly Law and Intellectual Property Laws.

        This case exemplifies the cross-application of antitrust law and intellectual property laws, carrying demonstrative significance in several senses.

        The public and private enforcement of antitrust law in the intellectual property field is crucial and complex. It demands striking a proper balance and ensuring coordination between the dual objectives of safeguarding and promoting competition for one thing, and protecting intellectual property rights to stimulate innovation for another. Hence, the AML provides a principle that the AML does not apply to the lawful exercise of intellectual property rights by undertakings pursuant to relevant laws and regulations governing intellectual property rights; however, undertakings’ abuse of intellectual property rights to eliminate or restrict competition shall be still governed by the AML.

        The above provision outlines the fundamental principles and stance of the AML regarding the relationship between intellectual property and antitrust, which could be interpreted from three aspects. First, the AML does not interfere with the lawful exercise of intellectual property rights by holders in accordance with intellectual property laws and regulations. Secondly, if the exercise of intellectual property rights amounts to abuse and results in elimination or restriction of competition, the AML shall apply. Thirdly, if the exercise of intellectual property rights constitutes abuse, but without causing elimination or restriction of competition, the AML will not apply; instead, such exercise of intellectual property rights will be regulated within the framework of intellectual property laws.

        Jurisprudentially, intellectual property rights are fundamentally a type of private right, constituting a legal monopoly granted by law. The creator and investor of an intellectual property right have exclusive privileges within a specific scope and timeframe. The application of AML should come into play, only under exceptional circumstances when the “abuse of intellectual property rights” results in substantial harms to market competition. Thus, if the abuse of intellectual property rights by the holder does not cause significant harms to market competition, the regulation falls under intellectual property law, civil law, and other relevant statutes, rather than the AML.

        Indeed, overapplication of the AML can stifle innovation and competition in the realm of intellectual property rights, contradicting the fundamental principle of freedom of contract and the legislative purpose of the AML. Freedom of contract is essential for a market economy and a prerequisite for fostering free competition. This freedom allows business operators to choose transaction partners and determine transaction conditions at their discretion. It also empowers operators to decline transaction requests from other counterparts for normal business purposes. Consequently, a business operator is generally not obligated to engage in transactions with other market players. The Court of Justice of the European Union expressed a similar viewpoint in the 1988 Volvo case, holding that “… an obligation imposed upon the proprietor of a protected design to grant to third parties, even in return for a reasonable royalty, a licence for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right.” Therefore, the application of the AML should not undermine the freedom of trade, which serves as the cornerstone of a market economy.

        V. Definition of the Relevant Market is Fully Debated in This Case.

        There is no divergence between the Ningbo Court and the Supreme Court on the time and geographic element of the relevant market, while different views exist on the relevant product market.

        The first instance court holds that this case mainly involves disputes over the licensing of sintered NdFeB patent owned by the defendant. Therefore, the technology market most closely related is the market of patent licensing. Where the patent is a product or method patent for manufacturing a specific product, the market dynamics generated by consumers’ selection of products in the downstream product market will directly impact the supply and demand relationship in the upstream technology market. If the downstream product is easily substituted by other products, the competitive product should be taken into consideration not only in the downstream product market, but also in the upstream technology market. Consequently, when determining the substitutability of technologies, the substitutability of downstream sintered NdFeB products shall be first considered, to accurately define the substitutability of specific technology of sintered NdFeB and other magnetic materials technologies. Based on the evidence of the parties, the Ningbo Court concluded that whether from demand or supply substitution, sintered NdFeB and other magnetic materials are not substitutable, thus the downstream product market should be defined as sintered NdFeB product market.

        The first instance court then further examined the upstream technology market. By having relied on the opinions of the technical expert engaged by the four plaintiffs, Hitachi Metals’ public statement and relevant statements in third-party reports, the Ningbo Court considered that licensing for sintered NdFeB patents owned by Hitachi Metals is essential. With respect to the scope of essential patents involved in this case, the Ningbo Court accepted the plaintiff’s expert witness’s patent list and its technical opinions.

        In addition, the first instance judgment further emphasizes and clarifies that, since Hitachi Metals’ sintered NdFeB patents were not part of a standard, it did not qualify as a standard essential patent (SEP). To avoid ambiguities, the patents discussed in the instant case are referred to as sintered NdFeB “essential patents”, which refers to the Class I and Class II patents as classified by the plaintiff’s expert. In the end, the Ningbo court concluded that the relevant technology market in this case can be defined as the market for licensing the essential sintered NdFeB patents owned by Hitachi Metals.

        In sum, the Ningbo Court defined two relevant product markets in this case: one is the market for licensing the essential sintered NdFeB patents owned by Hitachi Metals (upstream), and the other is the market for producing sintered NdFeB (downstream).

        While, the Supreme Court dissented on Ningbo Court’s position in terms of the technology market definition, and its analysis of market definition in the second instance judgment is notably more well-knit, solid and appropriate.

        The second instance judgment holds that, the evidence at hand is insufficient to prove existence of an independent market for licensing of the essential sintered NdFeB patents, let alone a smaller market for licensing the essential sintered NdFeB patents only owned by Hitachi Metals. The main grounds of the Supreme Court are set out as follows.

        Firstly, there are two inconsistent or contradictory claims and facts in this case. On the one hand, the plaintiff held that the relevant patented technology of Hitachi Metals encompasses “essential patents” or important technology for manufacturing sintered NdFeB. On the other hand, some manufacturers such as the plaintiff, who hope to be granted the license by Hitachi Metals, meanwhile claimed that their production did not infringe Hitachi Metals’ patent.

        Secondly, the fact regarding sintered NdFeB and the development of its production technology objectively demonstrated that the argument that “Hitachi Metals’ sintered NdFeB patents are essential patents” lacks supporting evidence. Meanwhile, in recent years, China has made a rapid progress in sintered NdFeB patent applications, production, and exports. Sintered NdFeB and their production technology are non-standardized products and non-standardized technologies, with increasingly frequent updates and iterations of technology.

        Thirdly, Hitachi Metals used to hold more than 600 patents of sintered NdFeB worldwide. It had expanded its patent portfolio globally in an early time, applying for patents in the United States, Europe, China and other countries. In China, Hitachi Metals used to hold 90 Chinese patents, and only licensed eight companies to implement sintered NdFeB patents to produce and sell sintered NdFeB materials worldwide except in Japan. However, companies that did not obtain a license from Hitachi Metals still produced and sold sintered NdFeB materials in China and exported to Europe and other countries except the United States and Japan.

        The Plaintiff further argued in the second instance that the essentiality of the involved patents does not arise from technology but rather stems from Hitachi Metals’ abusive tie-in sales, litigation threats, and exclusive arrangements. This further indicated that the plaintiff’s allegations are lack of sufficient factual basis and were more likely a misjudgment or misconception about the facts.

        In summary, the Supreme Court maintained that the definition of the relevant market in this case shall be conducted in accordance with case-specific circumstances, using objective and authentic data and with the aid of economic analysis methods. The Plaintiff claimed that the sintered NdFeB patent of Hitachi Metals was irreplaceable and constituted an independent relevant market. However, it was inconsistent with the actual production, sales and relevant technical development of sintered NdFeB products. It also failed to provide sufficient evidence to prove its claims, especially did not provide evidence to prove why and how the sintered NdFeB patent of Hitachi Metals was technically irreplaceable. Therefore, the plaintiff should bear the adverse consequences for which it was unable to bear the burden of proof.

        Take the analysis above into consideration, the Supreme Court concluded that: since the evidence in this case is insufficient to prove that the sintered NdFeB patent of Hitachi Metals technically irreplaceable, and in accordance with the demand-side substitutability of the production technology of sintered NdFeB materials, the relevant product market in this case should be defined as the production technology market of sintered NdFeB materials, including both patented technology and non-patented technology with close substitutability. The first instance court’s market definition lacked factual and legal basis, hence the Supreme Court amended accordingly.

        In antitrust civil litigations, especially where abuse of market dominance involves, market definition is not always necessary (this view is also reflected in the latest Draft Judicial Interpretation issued by the Supreme Court). That said, in the specific cases, market definition in most times is still fundamental and a prerequisite step. This is because that definition of the relevant market decides the competitive analysis path and the debate starting point for both parties, further directly affects the judgment. In particularly, the definition of the relevant market is vitally important for antitrust cases involving intellectual property rights.

        This rare earth antitrust case was finally brought to its conclusion after nearly a decade. During this long but intriguing journey, as Hitachi Metals’ counsels, we are very privileged to have come across and handled those most cutting-edge issues. We are also very delighted to witness the meticulous and rigorous attitude of all the plaintiff’s counsels, expert witnesses, and the collegial benches of the first and second instances.

        The counsels and expert witnesses of both parties, as well as the first and second instance court demonstrated a high level of expertise and professionalism in the whole proceedings. This has led to very in-depth debates and discussions on those key disputed issues between the parties, fully mirroring the technical nature of antitrust litigations. In antitrust civil litigations, for both the parties’ counsels and the adjudicating judges, the complexity of cases and the application of relevant legal theories pose significant challenges. Perhaps, it is precisely the technicality and challenge that make antitrust litigations rather fascinating and charming.

        ——Analysis of the Supreme Court’s Trial Pattern in the First Antitrust Litigation of Rare Earth Sector

        Introduction

        Recently, the Supreme People’s Court of China (“the Supreme Court”) has rendered its second instance judgment on the first antitrust case in China’s rare earth industry. The ruling overturned the first instance judgement by having dismissed all claims made by the plaintiff. AnJie Broad team represented Hitachi Metals in both the first instance and appellate proceedings and dedicated a span of nearly ten years to bring this case to its final conclusion. Given that this case marked the first instance of a Chinese court having applied the essential facilities doctrine in an antitrust litigation, this case garnered widespread attention and commentary from both domestic and international industry stakeholders, academic circles, and legal practitioners, rendering it extremely high-profile.

        The complex issues involved in this case, such as the approach of defining the relevant technology market, whether the owner of non-SEP might be deemed to have a dominant position simply based on the patent ownership, the conditions for application of essential facilities doctrine and the approach of competitive analysis when it comes to exercising intellectual property rights. This case does not only bear academic significance within the antitrust domain but also wield a guiding influence on economic and innovative activities within the industry.

        In addition, it is noteworthy that the Supreme Court’s ultimate ruling in this case not only thoroughly embodies the judicial spirit that “antitrust law protects competition, not specific competitors,” establishing judicial practice on the value and objectives of anti-monopoly law, but also showcases its stringent approach and commitment to impartial justice, especially facing the dispute between the Chinese party and foreign party.

        I.       Case Overview

        On December 11, 2014, four companies engaged in the production and sale of sintered neodymium-iron-boron (“NdFeB”) permanent magnet materials in Ningbo, China, namely Ningbo Ketian Magnet Co., Ltd., Ningbo Permanent Magnetic Industry Co., Ltd., Ningbo Tongchuang Strong Magnet Material Co., Ltd., and Ningbo Huahui Magnetic Industry Co., Ltd (“the four plaintiffs”), initiated civil antitrust lawsuits against Hitachi Metals, Ltd. (“Hitachi Metals”) with the Intermediate People’s Court of Ningbo, Zhejiang Province (“the Ningbo court”). The four plaintiffs contended that Hitachi Metals owned numerous essential patents related to sintered NdFeB. Hitachi Metals had a dominant position in the essential patent licensing market for sintered NdFeB. Hitachi Metals’ refusal to license without justifiable reasons was considered a “refusal to deal” under the framework of AML. Additionally, the bundling of essential and non-essential patents by Hitachi Metals constituted tie-in sales. Therefore, the four plaintiffs believed that these activities constituted abuse of market dominance and requested the court to order Hitachi Metals to cease infringement and compensate for their economic losses.

        On April 23, 2021, the first instance judgment was rendered by the Ningbo court against Hitachi Metals. The Ningbo court defined two relevant markets in the dispute: one upstream market for licensing sintered NdFeB magnet patents held by Hitachi Metals, and one downstream market for producing sintered NdFeB magnets. The Ningbo court determined that Hitachi Metals held a dominant market position in the upstream market, thus its refusal to license was deemed an abuse of dominant market position, leading to the court ordering the cessation of infringement and compensation for economic losses.

        Subsequently, Hitachi Metals appealed to the Supreme Court. Following a public trial, the Supreme Court handed down its second instance judgment on December 14, 2023, overturning the first instance ruling and dismissing all claims made by the four plaintiffs. That marked a complete reversal took place in the appeal procedure.

        Indeed, a meticulous analysis is necessary to understand the substantial disparity between the judgments of the first instance and second instance courts. What accounts for the complete divergence in the opinions of the two courts on the pivotal issues?

        II.    Does Licensing of Sintered NdFeB Patents Owned by Hitachi Metals Constitute A Separate Relevant Market?

        1.      The Court’s Ruling

        The Ningbo Court, in the first instance, found that from the perspective of demand-side substitution, licensing for sintered NdFeB patents owned by Hitachi Metals is essential. The primary evidence that Ningbo Court relied on includes Hitachi Metals’ public statement, the opinions of technical expert witnesses engaged by the four plaintiffs, and relevant statements of third-party reports. The Ningbo Court further explicitly clarified that since Hitachi Metals’ sintered NdFeB patents were not part of standard-setting, it did not qualify as a standard essential patent (SEP). To avoid ambiguities, the patents discussed in the instant case are referred to as sintered NdFeB “essential patents”.

        The Supreme Court held in the second instance ruling that the evidence at hand is inadequate to establish the existence of an independent market for licensing of essential patents for sintered NdFeB, let alone the relevant market for licensing of essential patents for sintered NdFeB owned by Hitachi Metals. Specific reasons for this conclusion include:

        Firstly, there are two inconsistent or contradictory claims in this case. On the one hand, the four plaintiffs argued that Hitachi Metals’ patents were essential or crucial technology for manufacturing sintered NdFeB. On the other hand, the four plaintiffs sought a patent exploitation license from Hitachi Metals while simultaneously asserting that their production of sintered NdFeB did not infringe Hitachi Metals’ patent.

        Secondly, the fact regarding the development of sintered NdFeB’s production technology objectively demonstrated that the argument at the time of the allegation that “Hitachi Metals’ sintered NdFeB patents are essential patents” lacked evidence to support. The technologies of manufacturers included patents, technical secrets, and publicly known technologies. Meanwhile, in recent years, China has made rapid progress in patent applications, production, and exports of sintered NdFeB. Sintered NdFeB and its production technology are non-standardized products and non-standardized technologies, characterized by frequent updates and iterations of technology.

        Thirdly, Hitachi Metals used to hold more than 600 patents of sintered NdFeB worldwide. In China, Hitachi Metals held 90 Chinese patents and granted licenses to eight Chinese companies, such as Zhong Ke San Huan, for implementation. Nevertheless, companies that did not obtain licenses from Hitachi Metals continued to manufacture and sell sintered NdFeB materials in China, exporting to Europe and other countries, except the United States and Japan.

        Fourth, the four plaintiffs further contended that the essential nature of the patents concerned did not result from technology but rather stems from Hitachi Metals’ abusive tie-in sales, litigation threats, and exclusive arrangements. This further indicated that claims such as “Hitachi Metals’ patents concerned are essential patents that cannot be design around in the production of sintered NdFeB materials” and “Chinese rare earth permanent magnet companies without license from Hitachi Metals cannot export their products to designated countries such as the United States” lacked sufficient factual basis and were more likely a misjudgment or misconception about the facts.

        Based on the afore-mentioned reasons and through comprehensive analysis, the Supreme Court held that the four plaintiffs’ claim – the sintered NdFeB patent of Hitachi Metals was irreplaceable and constituted an independent relevant market – was inconsistent with the reality. The four plaintiffs also failed to provide sufficient evidence to prove its claims, especially did not provide evidence to prove why and how Hitachi Metals’ sintered NdFeB patents were technically irreplaceable. In the Supreme Court’s view, the relevant product market in this case should be defined as the market for the production technology of sintered NdFeB materials, encompassing both patented technology and non-patented technology with close substitutability.

        2.      Comments: “Patent Licensing Market” Is Different From “Technology Market”

        Guidelines of the Anti-Monopoly Commission under the State Council on the Definition of  Relevant Market (“Guidelines on Relevant Market”)and Provisions on Prohibition of Abuse of Intellectual Property to Exclude or Restrict Competition (“Antitrust Provisions on Abuse of Intellectual Property”) respectively stipulate that “In the antitrust enforcement for technology trade, licensing agreement, etc. that involves intellectual property, it might be necessary to define the relevant technology market in consideration of such factors as intellectual property and innovation.” and “In the antitrust enforcement involving intellectual property licensing, the relevant commodity market may be a technology market or a product market containing specific intellectual property.” Antitrust Provisions on Abuse of Intellectual Property also provides that “The relevant technology market refers to the market formed by the competition between technologies involved in the exercise of intellectual property and the same type of technologies that are mutually substitutable.”

        Based on the above rules, it can be inferred that, substitutable technologies of the same type are not limited to patents. In other words, non-patented technologies can also constitute substitutes to patented technologies and may belong to the same relevant technology market along with patented technologies. Therefore, when defining the relevant technology market, it is necessary to examine not only the existence of substitutable patented technologies, but also the existence of substitutable non-patented technologies to accurately define the scope of the relevant technology market under antitrust regime. We must avoid falling into the misconception that the “relevant technology market” is equivalent to the “patent licensing market”.

        It should be recognized that the judicial pattern of the Supreme Court’s judgment in this case aligns with the legislative spirit of the Antitrust Provisions on Abuse of Intellectual Property.

        III.  The Application of Essential Facilities Doctrine in the Field of Intellectual Property should Be Strictly Limited

        1.       The Court’s Ruling

        The Ningbo Court held in the first instance that, Hitachi Metals’ concerned patents enjoys a strong market dominance due to their technological irreplaceability, which was then further strengthened by the solidification of market awareness. The Ningbo Court believed that the “essential facilities” doctrine could be applied as an analytical tool in this case and determined that Hitachi Metals’ patents concerned had already constituted essential facilities. The rationale behind this decision is as follows: such a “facility” was indispensable for sintered NdFeB enterprises to participate in competition; Hitachi Metals, as the intellectual property rights holder, monopolistically controlled the essential facility; competitors cannot duplicate the facility exerting reasonable efforts; Hitachi Metals denied the use of the facility by competitors when the four plaintiffs having explicitly made licensing requests and being willing to pay reasonable consideration; the refusal to license is not justified.

        Although the Supreme Court did not explicitly evaluate the application of essential facilities doctrine in the second instance ruling, the decision to overturn the determination of Hitachi Metals’ market dominance in the relevant market essentially negated the first instance finding of essential facilities. In reality, Hitachi Metals owns some important patents in the relevant product market, and it does not mean that Hitachi Metals has a dominant position under the AML.

        2.      Comments: the Application of Essential Facilities Doctrine shall be strictly restricted

        Pursuant to Article 123 of the Civil Code, a civil person or entity enjoys an intellectual property right in accordance with the law. The intellectual property right is a “proprietary right” enjoyed by the right holder in respect of a specific object. Given that intellectual property rights belong to the category of private rights and its nature of civil rights, the application of essential facilities doctrine in the field of intellectual property requires especially careful precaution.

        Noteworthy, the Antitrust Provisions on Abuse of Intellectual Property released in 2023, compared to its old version in 2015, deleted the provision on essential facilities doctrine. Such a subtle legislative change further evidences the cautious attitude toward application of essential facilities doctrine in the Intellectual Property.

        As a matter of fact, the application of essential facilities doctrine is also rare and controversial in other jurisdictions, such as Europe and the United States.

        The essential facilities doctrine was first introduced in the case United States. v Terminal Railroad Association of St. Louis (1912). However, the Supreme Court of the United States remained conservative on the application of this doctrine in cases involving intellectual property. It has noted that compulsory licensing is in conflict with the legislative purpose of antitrust laws, as it would weaken the innovation incentives of competitors. In the case Verizon Communications Inc. v. Law Offices of Curtis v Trinko, LLP (2004), the Supreme Court of the United States elaborated on the potential conflict between compulsory licensing of intellectual property and the legislative purpose of antitrust laws as follows:

        Compelling firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing-a role for which they are ill suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion.

        Similarly, there have been very strict requirements for the application of essential facilities doctrine in Europe as well. Relevant EU rules explicitly stipulate the requirements for applying the essential facilities doctrine, including: first, the refusal of the relevant product or service is objectively essential for effective competition in the downstream market; second, the refusal is likely to eliminate effective competition in the downstream market; third, the refusal is likely to cause harms to consumers; fourth, licensing will not have a negative impact on the innovation.

        It’s critical to highlight that the EU has introduced an additional criterion for applying the essential facilities doctrine to intellectual property in practice, known as the “new product” standard. This means that it must be demonstrated that, after compulsory licensing, the result will be the creation of a new product that meets consumers’ new demand. For instance, in the Magill v Radio Telefis Eireann case, the plaintiff Magill intended to introduce a new business involving a comprehensive “television program guide” that met consumer demand. Similarly, in the IMS Health GmbH & Co. OHG v NDC Health GmbH & Co. KG case, IMS provided innovative regional sales data for pharmaceutical products in Germany, addressing consumer demand.

        The “new demand” standard of the EU is reasonably justified. This is because intellectual property essentially grants intellectual property holders the legitimate right to restrict competitors from producing, selling, and offering products identical to their own. If, after licensing, the result is merely that other licensees produce products identical to those of the intellectual property holder, it would have no effect in promoting innovation. On the contrary, it could significantly dampen the enthusiasm of operators to innovate.

        The first instance judgment of this case marks the first-time application of essential facilities doctrine in China, representing a bold attempt. However, this attempt is evidently flawed. The Supreme Court’s second instance judgment provides insights into the future application approach of essential facilities doctrine in China.

        IV.  Is the Key to Conduct Competitive Analysis on the Upstream Technology Market or Downstream Product Market?

        1.       The Court’s Ruling

        In the first instance judgment, the Ningbo Court directly concluded that Hitachi Metals’ activities excluded and restricted competition. Nevertheless, the Ningbo Court did not examine the fundamental facts needed for the “competitive effects analysis” nor elaborated on the “competition analysis process”.

        In the second instance judgment, the Supreme Court held that it was difficult to establish Hitachi Metals’ dominant market position, and consequently, the plaintiff’s claims of dominant market position and bearing civil liability were difficult to substantiate. As a result, the Supreme Court decided not to further examine the case. That said, it is noteworthy that when discussing whether Hitachi Metals had market dominance, the Supreme Court had, in fact, carried out examinations and analysis of the competition in the downstream product market. Specifically, the Supreme Court maintained that in a situation where multiple competitive technologies exist in the relevant technology market, the market share of downstream products implementing that technology could more accurately and conveniently reflect the conditions of the relevant technology market. It could also more accurately reflect the market position of the operator owning that technology. The combined market share of sintered NdFeB produced by Hitachi Metals and eight Chinese enterprises licensed under its patents did not exceed 20% of the Chinese sintered NdFeB product market. Furthermore, the market share of Hitachi Metals and the eight Chinese licensees, along with foreign licensees, in foreign markets was even lower. In addition, despite not licensing other Chinese enterprises after 2013, the production of NdFeB magnets in China had increased significantly since 2014. This further supported the finding that Hitachi Metals did not have a dominant market position, either in the upstream NdFeB technology market or the downstream materials market.

        2.      Comments: The Key to Antitrust Evaluations of the Exercise of Intellectual Property is the Competitive Analysis of Downstream Product Market

        Pursuant to Article 68 of the Anti-Monopoly Law (AML) 2022, the AML does not apply to the exercise of intellectual property rights by undertakings according to relevant laws and administrative regulations governing intellectual property rights; however, undertakings’ abuse of intellectual property rights to eliminate or restrict competition shall be governed by the AML. Consequently, justifiable exercise of a patent right is a legitimate and free activity of the party involved and does not constitute an abuse of intellectual property rights under the AML.

        As mentioned above, the application of essential facilities doctrine to regulate refusal to license activities is uncommon in global judicial practices. As emphasized by the Supreme Court of the United States in the case United States v. Colgate, every operator should have the right to freely choose its trading partners, and antitrust laws do not prevent operators from exercising their inherent autonomy in business. Compulsory transactions contradict the fundamental legal principle of freedom of contract. Therefore, the prerequisite for compulsory transactions must be that the refusal to deal would have a serious anticompetitive impact on the relevant market.

        Moreover, although the Antitrust Provisions on Abuse of Intellectual Property only mentions that “refusal to license the intellectual property will have adverse impact on the competition or innovation in the relevant market, thus harming the interests of consumers or the public” without specifying which market it is, according to the domestic and overseas judicial practices, the primary consideration for the impact on competition should be the downstream product market. For instance, section 3.2 of the U.S. Antitrust Guidelines for the Licensing of Intellectual Property explicitly states that if the patent licensing appears likely to have anticompetitive effects, the Agencies normally will identify one or more relevant market in which the effects are likely to occur. Usually, enforcement agencies evaluate the downstream product market, and in other circumstances, they may consider the impact on technology or research and development markets.

        Hence, when evaluating conduct that seems to be the lawful exercise of intellectual property rights, the primary emphasis in antitrust law assessment should be on examining whether it exerts substantial exclusionary or anticompetitive effects on the downstream product market, rather than the upstream technology market. This is crucial because obtaining a patent license is specifically for the production and sale of downstream products. If the upstream technology lacks application value, scrutinizing the market position in the upstream market becomes meaningless.

        Conclusion

        The refusal to license a patent presents distinctive features compared to a typical refusal to deal. When regulating the refusal to license, considerations should extend not only to protecting the licensor’s contractual rights, it is also essential to take into account the incentives for innovation and the strike on the proprietary nature of patent rights. In the case of refusal to license non-SEP, antitrust law should use intervention more cautiously to avoid inappropriate interference. Forcing patent owners into licensing may impede innovation and diminish incentives in alternative technologies, ultimately harming technological innovation in the market as a whole. From a technical standpoint, defining the relevant technology market should consider both patented and non-patented technologies. The application of essential facilities doctrine, given its controversial nature, should be cautious in the realm of intellectual property. When assessing antitrust implications of the normal exercise of intellectual property rights, careful attention should be directed towards analyzing the competitive effects on downstream product markets.

        The nearly-ten-year legal dispute in the Hitachi Metals case has ultimately come to an end. The judicial pattern of the Supreme People’s Court of China in the first antitrust litigation of rare earth sector deserves careful study.

        On December 14, 2023, China Supreme People’s Court (“the Supreme Court”) rendered a second-instance judgment on the case of four Ningbo rare earth enterprises suing Hitachi Metals for abusing its dominant market position, overturning the first-instance judgment by the Ningbo Intermediate People’s Court (“Ningbo Intermediate Court”) and dismissing all claims of the plaintiffs in the first instance. Scan the QR code below for an English translation of the second-instance judgment.

        On April 23, 2021, the Ningbo Intermediate Court, in its first-instance judgment, held that the relevant product market in this case should be defined as the market for “licensing sintered NdFeB essential patents owned by Hitachi Metals”. Therefore, Hitachi Metals, Ltd (“Hitachi Metals”), as the sole patent holder in this assumed market, was deemed to possess a 100% market share, and its refusal to grant patent licenses to potential licensees was considered an abuse of its dominant market position by refusing to deal. The Ningbo Intermediate Court’s aforementioned reasoning made this case the first antitrust case involving refusal to license non-standard essential patents “non-SEPs” in China.

        In the second-instance judgment, the Supreme Court pointed out that the relevant product market in this case should be defined as the market for the production technology of sintered NdFeB materials. The market definition in the first-instance judgment lacked factual and legal basis. Additionally, since the plaintiffs in the first instance failed to provide evidence demonstrating Hitachi Metals’ market dominance in the relevant market, their claims regarding Hitachi Metals’ abuse of its dominant market position and the corresponding civil liability were naturally untenable.

        AnJie Broad Antitrust Team has been representing Hitachi Metals since 2014 against the lawsuits filed by the four plaintiffs and finally achieved a total victory after nearly a decade of litigation. This case, as the first antitrust case involving refusal to license non-SEPs in China, has garnered significant attention worldwide. The Supreme Court’s approach to the adjudication of key issues in this case, including the definition of relevant markets, the boundaries of antitrust intervention in the exercise of intellectual property rights, and the prudent application of essential facilities doctrine in the field of intellectual property, holds significant milestone value in both the judicial and administrative enforcement practices of antitrust law in China.

        Legislative Practice of Trade Sanctions in China

        China’s trade sanctions system has counter and defensive characteristics and is established and continuously improved to address discriminatory and restrictive measures taken by foreign countries against Chinese citizens, enterprises, or other organizations, which deviate from international law and basic norms of international relations, as well as measures that harm the legitimate rights and interests of China, other organizations, or individuals.

        1. Provisions on Blocking the Improper Extraterritorial Application of Foreign Laws, Measures, and Judgments

        On January 9, 2021, the Ministry of Commerce of China issued the “Measures for Blocking the Inappropriate Extraterritorial Application of Foreign Laws and Measures” (hereinafter referred to as the “Blocking Measures”), in order to block the extraterritorial application of foreign laws and measures that violate international law and basic norms of international relations, and improperly prohibit or restrict Chinese citizens, legal persons, or other organizations from engaging in normal economic, trade, and related activities with third countries (regions) and their citizens, legal persons, or other organizations.

        The “Blocking Measures” requires Chinese citizens, legal persons, or other organizations to truthfully report the relevant situation to the competent commerce department of the State Council within 30 days when encountering situations where foreign laws and measures prohibit or restrict their normal economic and trade activities with third countries (regions) and their citizens, legal persons, or other organizations.[1] For foreign laws and measures which have been assessed and confirmed to have improper extraterritorial application, the competent commerce department of the State Council may decide to issue an injunction prohibiting recognition, enforcement, and compliance with relevant foreign laws and measures.[2] If a party complies with foreign laws and measures within the scope of the prohibition, which infringes on the legitimate rights and interests of Chinese citizens, legal persons, or other organizations and causes losses, Chinese citizens, legal persons, or other organizations may bring a lawsuit to the court in accordance with the law, requiring the party to compensate for the losses. If the aforementioned parties refuse to fulfill the effective judgment or ruling of the court, Chinese citizens, legal persons, or other organizations may apply to the court for compulsory execution in accordance with the law.[3]

        On June 10, 2021, the Anti Foreign Sanctions Law of the People’s Republic of China (hereinafter referred to as the “Anti Foreign Sanctions Law”) officially came into effect. Article 12, Paragraph 1 of the Anti Foreign Sanctions Law requires that no organization or individual shall enforce or assist in enforcing discriminatory restrictive measures taken by foreign countries against Chinese citizens and organizations.[4]

        In addition, for the recognition and enforcement of effective judgments made by foreign courts, Article 300 of the new Civil Procedure Law of the People’s Republic of China, which comes into effect on January 1, 2024, stipulates that if a court determines that an effective judgment made by a foreign court violates the basic principles of the laws of the People’s Republic of China or national sovereignty, security, or social public interests, it shall rule not to recognize and enforce it.[5]

        2. Principle Provisions on Sanctions and Countermeasures

        The Cybersecurity Law of the People’s Republic of China (hereinafter referred to as the “Cybersecurity Law”), which came into effect on June 1, 2017, is a law formulated by China to ensure cybersecurity, safeguard cyberspace sovereignty, and national security. Article 75 of the Cybersecurity Law provides for sanctions against overseas institutions, organizations, and individuals who attack critical information infrastructure. It stipulates that if overseas institutions, organizations, or individuals engage in activities that endanger the critical information infrastructure of the People’s Republic of China, such as attacks, intrusion, interference, or destruction, and cause serious consequences, China has the right to hold them legally responsible in accordance with the law. The public security department and relevant departments of the State Council may also decide to take measures to freeze property or other necessary sanctions against the institution, organization, or individual.[6] This is an earlier legal provision that explicitly regards the adoption of sanctions against overseas illegal entities as legal responsibility.

        On December 1, 2020, the Export Control Law of the People’s Republic of China (hereinafter referred to as the “Export Control Law”) was officially implemented. Article 48 of the Export Control Law stipulates that if any country or region abuses export control measures to endanger the national security and interests of the People’s Republic of China, China may take corresponding measures against that country or region based on the actual situation.[7]

        Article 12 of the “Blocking Measures” issued by the Chinese Ministry of Commerce in January 2021 clearly stipulates that the Chinese government can also take necessary countermeasures against the inappropriate extraterritorial application of foreign laws and measures based on actual circumstances and needs.[8]

        On July 1, 2023, the Foreign Relations Law of the People’s Republic of China (hereinafter referred to as the “Foreign Relations Law”) began to be implemented officially. The Foreign Relations Law clarifies the powers of state organs in foreign relations affairs, the goals of developing foreign relations, the system of foreign relations, and the guarantees for developing foreign relations. According to Article 33, China has the right to take corresponding countermeasures and restrictive measures against actions that violate international law and basic norms of international relations and endanger China’s sovereignty, security, and development interests. The Foreign Relations Law further stipulates that decisions made by relevant state organs in accordance with the aforementioned provisions shall be final.[9]

        In addition, the Foreign Relations Law also provides a legal basis for the implementation and compliance of United Nations Security Council sanctions and related measures within China. Article 35 clearly stipulates that the state shall take measures to implement binding sanctions resolutions and related measures made by the United Nations Security Council under Chapter VII of the United Nations Charter. The Ministry of Foreign Affairs is responsible for issuing notices and announcing the implementation of the aforementioned sanctions resolutions and measures. Relevant national departments and regional governments shall take measures to implement them within their respective powers. Organizations and individuals within China shall comply with the contents of the Ministry of Foreign Affairs announcement and relevant measures of various departments and regions, and shall not engage in any behaviour that violates the aforementioned sanctions resolutions and measures.[10]

        3. Provisions on Specific Measures for Sanctions and Countermeasures

        On September 19, 2020, the Ministry of Commerce of China issued the “Regulations on the List of Unreliable Entities”, establishing a working mechanism for the list of unreliable entities. It clearly states that foreign entities (foreign enterprises, other organizations or individuals) (1) which endanger China’s national sovereignty, security, and development interests, or (2) which violate normal market trading principles, interrupt normal transactions with Chinese enterprises, other organizations, or individuals, or take discriminatory measures against Chinese enterprises, other organizations, or individuals, seriously damaging legitimate rights and interests of Chinese enterprises, other organizations or individuals in international economic and trade activities, will be included in the list of unreliable entities.[11]

        The working mechanism of the list of unreliable entities can determine to take one or several of the following measures against the relevant foreign entities: 

        (1) restrict or prohibit engagement in import and export activities related to China; 

        (2) restrict or prohibit investment within China; 

        (3) restrict or prohibit the entry of its related personnel, transportation vehicles, etc.; 

        (4) restrict or cancel the work permit, stay or residence qualification of its related personnel within China; 

        (5) impose a corresponding amount of fine based on the severity of the situation;

        (6)  other necessary measures.[12]

        On the other hand. The working mechanism also has a certain degree of flexibility. 

        (1) a correction deadline can be set for foreign entities, and no measures will be taken within the deadline.[13]

        (2) if a foreign entity corrects its behavior and takes measures to eliminate the consequences of the behaviour within the correction period, the working mechanism shall remove it from the list of unreliable entities.[14]

        (3) if a foreign entity is restricted or prohibited from engaging in import and export activities related to China, and Chinese enterprises, other organizations or individuals need to engage in transactions with the foreign entity under special circumstances, they should apply to the Office of the Working Mechanism, and with consent, they can engage in corresponding transactions with the foreign entity.[15]

        In addition to the working mechanism for the list of unreliable entities, the Anti Foreign Sanctions Law, which officially came into effect on June 10, 2021, specifies the situations in which China has the right to take countermeasures, including: 

        (1) foreign countries violate international law and basic norms of international relations, use various excuses or based on their own laws to contain and suppress China, adopt discriminatory restrictive measures against Chinese citizens and organizations, and interfere in China’s internal affairs;[16] or 

        (2) foreign countries, organizations, or individuals commit, assist, or support actions that endanger China’s sovereignty, security, and development interests.[17]

        The objects of taking countermeasures include: 

        (1) individuals and organizations who directly or indirectly participate in the formulation, decision, and implementation of discriminatory restrictive measures;[18]

        (2) spouses and immediate family members of individuals included in the counter list; 

        (3) senior management personnel or actual controllers of organizations included in the counter list; 

        (4) organizations where individuals listed on the counter list serve as senior management personnel; 

        (5) organizations that are actually controlled or involved in the establishment and operation by individuals and organizations included in the counter list.[19]

        The relevant departments of the State Council may decide to take one or several of the following countermeasures based on the actual situation:

        (1) not issue visas, not allow entry, cancel visas, or expel; 

        (2) seizure and freezing of movable, immovable, and other types of property within the territory of China;

        (3) prohibit or restrict organizations or individuals within China from engaging in related transactions, cooperation, and other activities with them; 

        (4) other necessary measures.[20]

         In addition, if any organization or individual implements or assists in implementing discriminatory restrictive measures taken by foreign countries against Chinese citizens or organizations, which infringes on the legitimate rights and interests of Chinese citizens or organizations, Chinese citizens or organizations may bring a lawsuit to the court in accordance with the law.[21]

        Judicial Practice of Trade Sanctions in China

        1. Case of Sales Contract Dispute between Company A and Company B [22]

        In this case, the seller Company A signed a methanol procurement contract with the buyer Company B, and Company A promised in Annex 3 of the procurement contract “Declaration and Guarantee on Trade Sanctions” that the goods it provided did not come from Iran. Otherwise, Company B has the right to terminate the contract and refuse payment. Afterwards, Company B suspected that the methanol provided by Company A may originate from Iran and requested Company A to provide a certificate of origin, but Company A was unable to provide such proof. Company B refused to make payment, while Company A filed a lawsuit claiming that Annex 3 of the contract in question violated the Anti Foreign Sanctions Law and the Blocking Measures, violated mandatory provisions of laws and administrative regulations, and should be deemed invalid. At the same time, Company A requested the court to judge Company B for breach of contract and pay liquidated damages and compensation for losses.

        After trial, the court found that the statement was a unilateral commitment issued by Company A to Company B when signing the procurement contract with Company B. The document bears the seal of Company A and should be considered as a true expression of Company A’s intention. Secondly, the main content of this document is that Company A promises that the goods it provides do not come from countries such as Iran, not falling within the scope of the Foreign Sanctions Act and the Blocking Measures. Therefore, Company A’s claim that this commitment should be invalid lacks basis, and will not be adopted. Company A’s inability to provide relevant supporting documents to prove to Company B that the source of the goods involved in the case constitutes a breach of contract.

        2. Case of C Company and D Company Applying for Recognition and Enforcement of Foreign Arbitral Awards [23]

        In this case, Company C applied to the court for recognition and enforcement of an arbitration award made by the Singapore International Arbitration Centre Arbitration Tribunal. The respondent Company D requests the court not to recognize and enforce the arbitration award, for the following reasons: 

        (1) the law firm to which the chief arbitrator belongs has been sanctioned by the Chinese government, resulting in the arbitration award being unfair;

        (2) According to the “Blocking Measures”, Company D is a Chinese enterprise engaged in liquefied gas pipeline business that affects social and livelihood projects. It complies with this regulation and hopes that the court will consider the central “six stability and six guarantees” policy and the spirit of protecting the development of private enterprises in the trial.

        Regarding the issue of whether the sanctions imposed by the Chinese government on the law firm to which the arbitrator belongs will affect the hearing of this case, the court believes that the sanctions are aimed at the law firm to which the chief arbitrator belongs and not at its arbitrator’s identity. At the time of the sanctions being imposed, the arbitration award involved in this case had been completed. This sanction is not within the scope of non recognition as stipulated in Article 5 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and is not related to the trial of this case; During the process of selecting arbitrators, both the Singapore International Arbitration Center and the applicant fulfilled their obligation of disclosure to the respondent, and there was no improper procedure.

        Regarding the issue of whether the recognition and enforcement of arbitration awards comply with the “Blocking Measures”, the improper extraterritorial application of foreign laws stipulated in the “Blocking Measures” is not related to this case, and the choice of arbitration is the result of the autonomy of the parties in this case. The special protection of a certain type of private enterprise during special periods is a policy consideration and should not affect the recognition of the arbitration results in this case. The rule of law is the best business environment. If the results of legal implementation cannot be guaranteed, it may be beneficial to protect individual enterprises, but in the long run, it will harm more enterprises. Therefore, the court shall handle the disputes involved in this case fairly and impartially in accordance with the law.

        The court ultimately held that the award made by the Singapore International Arbitration Centre in question did not fall under the circumstances of non-recognition and enforcement under Article 5 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and shall be recognized and enforced.

        Summary

        At present, China’s regulations on trade sanctions are relatively general and principled, and relevant details still depend on further provisions of supporting regulations and rules. Thus, Article 33 of the Foreign Relations Law requires the State Council and its departments shall formulate necessary administrative regulations and departmental rules, establish corresponding work systems and mechanisms, strengthen departmental coordination, and determine and implement relevant countermeasures and restrictive measures. 

        Article 13 of the Anti Foreign Sanctions Law also stipulates that relevant laws, administrative regulations, and departmental rules can further regulate countermeasures against actions that endanger China’s sovereignty, security, and development interests. On the other hand, there are currently few precedents that cite laws and regulations related to sanctions. In the aforementioned precedents citing the Anti Foreign Sanctions Law or the Blocking Measures, the court held that the relevant cases did not fall within the scope of application of the Anti Foreign Sanctions Law or the Blocking Measures and did not further discuss them. Against the backdrop of foreign countries continuing to impose sanctions on China, it is expected that China will continue to take countermeasures. In the future, with the enactment of relevant supporting documents, the responsibilities and obligations of all parties involved will be further clarified, and the application of trade sanctions laws and regulations by courts will also be more frequent.

        Note: 

        [1] Article 5 of the Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures.

        [2] Article 7 of the Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures.

        [3] Article 9 of the Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures.

        [4] Article 12 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [5] Article 300 of the New Civil Procedure Law of the People’s Republic of China.

        [6] Article 75 of the Cybersecurity Law of the People’s Republic of China.

        [7] Article 48 of the Export Control Law of the People’s Republic of China.

        [8] Article 12 of the Measures for Blocking the Improper Extraterritorial Application of Foreign Laws and Measures.

        [9] Article 33 of the Foreign Relations Law of the People’s Republic of China.

        [10] Article 35 of the Foreign Relations Law of the People’s Republic of China.

        [11] Article 2 of the Regulations on the List of Unreliable Entities.

        [12] Article 10 of the Regulations on the List of Unreliable Entities.

        [13] Article 11 of the Regulations on the List of Unreliable Entities.

        [14] Article 13 of the Regulations on the List of Unreliable Entities.

        [15] Article 12 of the Regulations on the List of Unreliable Entities.

        [16] Article 3 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [17] Article 15 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [18] Article 4 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [19] Article 5 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [20] Article 6 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [21] Article 12 of the Anti Foreign Sanctions Law of the People’s Republic of China.

        [22] See Award (2021) Yue 01 Min Chu No. 1365.

        [23] See Rule (2021) Hu 74 Xiewairen 1.

        for Video Game Industry

        China has been in lack of a comprehensive regulation governing online game industry in general since July 2019, when the Ministry of Culture and Tourism (“MOCT”) formally abolished the Interim Administrative Measures on Online Games promulgated by it in 2010. Since the National Press and Publication Administration (“NPPA”) became China’s sole regulatory body of online game business in early 2019, it has released a number of policies to guide and regulate the market on different aspects, in particular, on minor protection. However, due to the absence of an overall regulatory framework, the NPPA’s specific requirements and their legal consequences are less systematic and sometimes blurry.

        On Dec 22, 2023, the NPPA released the long-awaited draft Online Game Administrative Measures (“Draft Measures”) to solicit public comments by Jan 22, 2024. Despite of the immediate concerns and controversies raised by gaming companies and other stakeholders, the introduction of a comprehensive regulation in game industry will undoubtfully fill the legislative gap and create more regulatory certainty.

        Two Major Participants: Publishing Entity and Operating Entity

        As game-specific approval (aka, ISBN) is a key administrative measure that the NPPA takes to regulate online game market, the NPPA divides its administrative dimension into two stages, namely prior-launch approval and after-launch supervision. It follows that the NPPA imposes regulatory duties on two entities: a game publishing entity (“Publishing Entity”) that must have an Internet Publishing Permit (“IPP”) in order to file an application for the ISBN to the NPPA and a game operating entity (“Operating Entity”) that must have an ICP License in order to distribute and operate an approved game. Such an approach follows the way the NPPA regulates traditional publishing business where a publishing house (comparable to a Publishing Entity) is in charge of the review and censorship of the content of a book, while bookstores (comparable to an Operating Entity) are in charge of the distribution of books. Though the split of the roles in game market does not make too much sense, such approach has been adopted by the NPPA for many years and is widely viewed as a “Chinese feature” in the regulatory landscape.

        However, under such model, the NPPA feels its hands are tied when administrating Operating Entities, because an ICP License is granted by the Ministry of Industry and Information Technology. In other words, the NPPA is unable to impose any administrative power through a license or permit that an Operating Entity must have and maintain for its game operation activities. To close this loophole, the Draft Measures require a Publishing Entity must have an IPP with the business scope of online game publishing (“IPP-Publishing”) issued by the NPPA and an Operating Entity must have an IPP with the business scope of online game operation (“IPP-Operating”) issued by the provincial branch of the NPPA. The conditions for obtaining an IPP-Publishing are same as the requirements under a higher-level regulation, including having 8 qualified editors, which remains a high bar that most game companies are unable to satisfy. The conditions for obtaining an IPP-Operating are no stricter than the requirements for an ICP License that most game companies can meet. Thus, if the Draft Measures are finalized in current form, most gaming companies will simply need to go through some formalities to have an IPP-Operating. Apparently the newly introduced IPP-Operating is not meant to make it more difficult for companies to enter the market, but to bring them into the NPPA’s license/permit system so that to closely influence, monitor and rule them in relation to their game operation activities. By the same token, the Draft Measures also require that the change of registered matters, shareholding structure or ultimate controller of an IPP-Publishing/IPP-Operating holder, as well as the merger or split of the company or the setup of a branch should be subject to the NPPA’s approval. Moreover, an IPP-Publishing/IPP-Operating holder should submit annual reports to the NPPA’s provincial branch according to the Draft Measures.

        The Draft Measures also emphasize that an IPP-Operating or IPP-Publishing holder must make sure its servers are located in China, which is required by other relevant laws and regulation.

        No Harmful Content in Games Published Outside China

        The Draft Measures list forbidden content in games, which has no substantial difference from the existing legal requirements and policies. However, the Draft Measures necessitate Chinese gaming companies to comply with those forbidden content in games targeting non-China users, which is quite controversial considering the NPPA should have no direct jurisdictions over those overseas game publishing activities.

        Game Launch within 1 Year After Grant of ISBN

        The Draft Measures require a game should go live within 1 year after the issuance of the ISBN, otherwise the Publishing Entity and/or the Operating Entity should explain the reasons in writing to the NPPA’s provincial branch, so that to prevent any company from stocking up ISBNs for any potential illegal use.

        No Forced PvP

        According to the Draft Measures, users can not be forced to play any PvP mode. In fact, such requirement was adopted by the MOCT before, thus most gaming companies are quite familiar with it and already have solutions to make players to “voluntarily” take part in duels. SLG games are most likely be affected by this requirement.

        No Circumvention for Beta Test and Ad-only Games

        The Draft Measures target to close loopholes for unlicensed games made available to the public in the name of a Beta test or ad-only games. If a company intends to do any technical test for an unlicensed games, then testers involved should be no more than 20,000, and the tester’s account and game record should be deleted, in addition, such test should be reported to the NPPA’s provincial branch in advance.

        No Excessive Spend

        The Draft Measures forbid rewards that may induce game addiction or excessive spend, such as for daily log-in, first time purchase or consecutive purchases. To hype or auction virtual items in order to offer them at a high price is also prohibited. In addition, game companies are required to put a cap on in-game spend, articulate the spend limitations in their terms of services and remind users not to spend excessively in pop-up windows.

        Apparently, these rules are intended to prevent gaming companies from using the most commonly seen incentive mechanisms to enhance users’ engagement and urge to spend, they immediately became the most controversial part in the Draft Measures. Some companies argue such harsh restrictions are unfair and unnecessary, as similar incentives are widely used by other online businesses, and to encourage users to spend more time or money is determined by the nature of all online business. It’s worth noting that these limitations on in-game spend and live operations will likely be applicable to adult users only, since minors are subject to much stricter in-game spend limits and game hour restrictions in China. Such new rules may greatly change most game companies’ monetization model and user engagement practice once they are formally promulgated.

        No Payment Services for Unlicensed Games

        To curb commercial operation of any unlicensed game and illegal game operations, the Draft Measures disallow online payment solution providers to integrate their payment services in any unlicensed games or offer any payment services for any illegal game operation activities.

        Trading of In-game Currency

        The Draft Measures prohibit a company that issues in-game currency from setting up or operating any platform to facilitate the trading of the in-game currencies by users. A in-game currency trading platform can only allow users to use real-name digital RMB when purchasing or selling in-game currency.

        Minor Protection

        Considering China has already put in place the strictest rules in the world to prevent minors from game addiction, the Draft Measures stipulate these measures in greater details. In addition to reiterating the existing requirements, the Draft Measures prohibit minors’ access to loot box mechanisms and minors’ tipping in live streaming of games, which are not mentioned in any regulatory policies before. It is unknown whether game companies will be required to launch minor only version if loot box is used in gameplay.

        Administrative Punishments

        Though there are quite lengthy provisions on the consequences for violating the Draft Measures, no new administrative punishment is created due to the relatively low level of this piece of legislation. However, the Draft Measures quote and consolidate the administrative punishments under other relevant laws, such as China’s Cybersecrutiy Law and Personal Information Protection Law, which contain quite high administrative fines and make the Draft Measures look much stricter on the legal consequences.

        Aftermath

        The release of the Draft Measures caused a great deal of concerns and worries about the business of gaming companies that mainly make money from China market, and reportedly led US$80bn in market value being wiped off from China’s two biggest companies, Tencent and NetEase. The NPPA did not seem well-prepared for such a huge wreck in stock markets and immediately made 3 moves to soften its stance: on Dec 22, it announced the approval of 40 foreign game titles during the trading hours, just a few hour after the release of the Draft Measures; on the next day (Saturday), it responded to the market reaction that the Draft Measures are meant to promote the prosperity and healthy development of the industry, and it will carefully study the feedback and try to improve the next draft; on Dec 25 (Monday), it unprecedentedly granted 105 domestic game approvals in early morning with a clear intention to boost confidence in the stock market.

        Outlook

        As a draft of new legislation seeking public opinions, the Draft Measures still seem relatively rough and premature considering quite some provisions are less logically sound or too vague/general to put into implementation. Given the drastic reaction in the market and the NPPA’s prompt attempt to change its position, it may take some time for the NPPA to address the concerns of various stakeholders and come up with the next or final version of the Draft Measures, which is expected to, on the one hand, demonstrate the regulator’s attitude to encourage more innovative and high quality games, on the other hand, avoid creating the impression that the regulator may try to crack down on game industry.

        — Based on Preliminary Analysis of Several Typical Judicial Cases Released by Pudong New Area People’s Court of Shanghai

        On November 10, 2023, Pudong New Area People’s Court of Shanghai (“Pudong Court”) released 50 typical cases regarding the judicial protection of intellectual property (“IP”) at a press conference (“Pudong IP Cases”). The typical cases encompass a variety of IP matters, ranging from traditional issues in the fields of copyright law, trademark law and anti-unfair competition to practical matters like IP-related contractual disputes. This preliminary analysis will briefly address issues relating to interim measures particularly injection relief taken by Pudong Court in Pudong IP Cases. 

        1. Injunction system under the current PRC law

        In general, injunctive relief serves as a remedy that prohibits a party from doing an act or restrains from doing a threatened act, or mandatorily requires a party to do an act. Injunctive relief has existed in China for many years, particularly in the realm of IP rights (“IPR”), although the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”) did not formally endorse it until 2012.[1]

        The Civil Procedure Law stipulates the interim measures which includes both the preservation of evidence and property and the injunctive relief. Such interim measures are available both before and after a litigation is initiated. Where an injunctive relief is sought before a litigation is initiated, the court shall make a decision within 48 hours and the decision should be executed immediately after the decision is made.[2] According to the Civil Procedure Law, the application of injunction relief shall be filed under the urgent situation.[3] 

        According to the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in Reviewing the Injunction Cases involving Intellectual Property Disputes, taking effect on January 1, 2019 (the “IP Injunction Provisions”), several cases are listed as urgent situations like the disputed IP is about to be at an illegal disposal or the IP of a relatively time-sensitive and hot show or program is or about to be infringed.[4] Furthermore, the IP Injunction Provisions provide that the People’s Court shall consider the following factors when reviewing an application for injunction such as (i) whether the failure to enforce an injunction will cause the applicant’s legitimate rights and interests to suffer irreparable injuries or will lead to the difficulty in executing a judicial ruling and (ii) whether the applicant’s injury due to the failure of issuing an injunction will exceed the respondent’s injury as a result of the enforcement of an injunction.[5]

        It is commonly known that the subject matters of IPR are intangible assets, which can be easily reproduced regardless of time and space. In terms of infringement, IPRs are even more vulnerable than tangible property rights, which are more likely to result in extremely severe situations and cause irreversible damages. Injunctive reliefs offer several  advantages  for protecting IPR in the judicial process. Specifically, IP litigation normally involves a rich variety of complex legal, commercial or even technical issues, inevitably requiring the engagement of expert determination and demonstration of evidence. As such, the judicial process would usually last longer, and in the meantime, existing and potential damages would easily get increased if no remedial measures like injunctive relief are taken before a trial.

        2. Injunctive Relief in Pudong IP Cases

        According to the Judicial Protection of Intellectual Property Rights in Chinese Courts (2022) published by the IP Court of the Supreme People’s Court, courts in Beijing, Tianjin, and Shanghai, issued injunctions against acts such as the piracy of the Beijing Winter Olympics and the Qatar World Cup, which in turn improves the market environment for digital culture. 

        Pudong Court further released three representative cases in which the injunctive relief was applied so as to timely protect the IPR before the trial. Below is the basic information of each case:

        It is noted from the foregoing typical cases that Pudong Court adhered to the IP Injunction Provisions, thoroughly considered various situations of each case, and eventually issued the injunction in a relatively prudent manner. 

        What’s more, considering that all of the foregoing cases are related to the emerging industrial sector such as livestream, online game and video aggregation, when determining whether irreparable damages may exist in a certain case, Pudong Court has given much attention to factors like comparative advantages and market shares may be affecting the industrial landscape as a whole. After all, to tackle IP issues in the digital era, a rich and complex understanding in terms of law and regulations, public policy, economy and commerce, technology and even culture is highly required.

        Last but not least, one of the hot topics in IP is about balancing the interests of rightsholders and the public, which is continuously discussed both in the academic circle and the legal practice. Based on the analysis of those typical cases, Pudong Court has also proactively taken into account such balance when deciding to issue an injunction.

        3. Looking ahead: increasing application of injunctive reliefs to boost the digital culture

        It has been widely recognized that IP is of significant importance. Countries need an effective IP system to bolster innovation and creativity, helping to ensure economic prosperity and a vibrant cultural life. Moreover, the rapid development of the digital economy in China has sparked greater efforts to protect IPR through judicial procedure.

        On September 22, 2021, China issued a long-term plan for the development of IPR power, stating that the country’s IPR competitiveness will rank among the top in the world by 2035, with a complete IPR system, prosperous growth in IPR-driven innovation and a better social environment for IPR culture. The injunctive relief, like the IP laws and regulations, is actually brought in from the Western legal regime. We have witnessed that Chinese courts focused more on solving IP disputes concerning new technologies and digital industries in recent years as they sought to adhere to the nation’s development strategy and promote innovation. The improved judicial efficiency is a boon for new businesses like the digital industry. The quick resolution of disputes allows market entities to invest in a fresh round of research and development as soon as possible, thus facilitating the creation of more new technologies.

        The injunctive relief is designed to offer IP rightsholders effective measures to beef up IPR protection in disputes, specifically under urgent situations. As more and more injunctive reliefs are issued upon parties’ application in the IP litigation, this may further invite more rightsholders to proceed with such measures prior to an IP trial. With injunctive relief functions as a better safeguard in real cases, IP rightsholders could be protected even under extreme and urgent situations. Similar to other IP protection measures, it is believed that the application of injunctive relief would ultimately stimulate the creation and the economy driven by innovation. 

        Currently, China is advancing the revision of laws in the fields of resolving disputes evidenced by the newly amended Civil Procedure Law to take effect on January 1, 2024 and the Arbitration Law in the amending and consultation process. As such, it can better solve disputes efficiently, optimize the arrangement of judicial resources, enhance the usage of technical methods in resolving disputes and effectively meet the public’s diverging expectations on resolving judicial cases in a variety of contexts such as fairness, high-efficiency and expediency. With the release of typical cases concerning the issuance of injunction, we may expect more injunctive reliefs would be taken in the future IP litigation. With respect to the arbitration process, however, injunctive reliefs are still in discussion and rarely filed in real cases, which has become an impediment for parties to choose arbitration for purposes of resolving IP disputes. For purposes of better allocating judicial resources, we would anticipate the usage of injunctions in the arbitration so as to resolve IP disputes more effectively and efficiently.

        [1] Wenyan Ding, Application and Review of Civil Preservation of Act, People’s Judicature (Application) Issue 34 (2017), available at: http://yyfx.court.gov.cn/news/xq-622.html, (Accessed 26 November 2023)

        [2] See article 103 of the Civil Procedure Law of the People’s Republic of China (Amended in 2023).

        [3] See article 103 of the Civil Procedure Law of the People’s Republic of China (Amended in 2023).

        [4] See article 6 of the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in Reviewing the Injunction Cases involving Intellectual Property Disputes.

        [5] See article 7 of the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in Reviewing the Injunction Cases involving Intellectual Property Disputes.