Microsoft’s Form License Contract: Compliance with PRC Law?

Microsoft’s software license contracts with its Chinese end users provide that all disputes arising therefrom are subject to U.S. law and should be resolved in U.S. federal courts. Based on this clause, Mr. Dong, a lawyer in Beijing, requested the State Administration for Industry and Commerce (“SAIC”) to start antitrust investigation on Microsoft China.

According to Microsoft China’s in-house counsel, the software license contract used in China is based on the global form of Microsoft, which applies to all countries where Microsoft has business, and does not seem to violate PRC law.

International private law experts in China commented that China did allow application of foreign law in contracts involving foreign factors; however, it is arguable whether Microsoft’s software license contracts with Chinese end users have foreign factors. The key issue is who is the other party to such contracts. In fact, Microsoft is selling its software in China through its Chinese subsidiary (i.e., Microsoft China), which is obviously a company incorporated in China. With Chinese parties on both sides (Microsoft China and Chinese end users), plus the fact that the software sales and license transactions occurred within the territory of China, no foreign factors are seen in such contracts, according to the interviewed Chinese law expert. Application of U.S. law in such contracts is thereby baseless under PRC law.

In addition, from the consumer protection perspective, PRC law provides that product providers, when using form contracts, should not increase obligations on consumers. Given the choice of U.S. law as applicable law and U.S. federal courts as forum for dispute resolution will foreseeably increase the litigation cost and burden on consumers, this clause is also deemed as impairing consumers’ rights in China.

It is reported that the SAIC will pay more attention to such practice of Microsoft and engage investigation when necessary.

China Granted Conditioned Approval to Inbev’s Takeover of Anheuser Busch

Since the PRC Anti-monopoly Law came into effect on August 1, 2008, the Anti-Monopoly Bureau (“AMB”) under the Ministry of Commerce (“MOFCOM”) has received over 10 applications for antitrust review of concentration of business operators. According to MOFCOM, 13 of such applications have been formally accepted, eight of which have been granted decisions. One of the most widely reported examples is the Belgian brewer Inbev’s $52 billion takeover of Anheuser Busch Inc. (“AB”).

This takeover is reported to be subject to antitrust reviews in three jurisdictions, i.e., Belgium, U.S. and China where both parties have their respective strong market positions.

The AMB of China approved the proposed takeover, but imposed the following four conditions on the new company’s post-takeover investment in China:

- it shall not increase AB’s current 27% shareholding in Tsingtao Brewery;
- it shall not increase Inbev’s current 28.56% shareholding in Zhujiang Brewery;
- it shall not seek to hold any stake in China Resources Snow Brewery or Beijing Yanjing Brewery; and
- it shall notify MOFCOM if there are any changes to its controlling shareholders or the shareholders of such controlling shareholders.

Inbev must report to MOFCOM and obtain its approval before implementing any change to the above conditions.

China’s Energy Sector: Pipelines and Nuclear Power to Increase Domestic Demand

To increase the domestic demand in China, the energy sector plays an indispensible part. It is reported that certain energy infrastructure projects have been internally determined by the government, and will be formally initiated soon.

The Standing Committee of the State Council recently approved three energy related construction projects, which are two nuclear power projects (one as new construction, and the other as expansion) and one natural gas pipeline project (between Northern-Western part of China to Guangzhou and Hong Kong). The three projects amounted to a government investment of RMB188.5 billion in total.

Chinese energy experts anticipated, based on the above approvals, that pipelines and nuclear power projects would constitute the primary focus of China’s energy sector in the near future.
It is also reported that the Chinese government plans to invest RMB4 billion as fiscal support for rural and urban grid construction and/or transformation.

Beijing: Judicial Interpretations to Clarify Commercial Bribery

Recently, the Supreme People’s Court and Supreme People’s Procuratorate jointly promulgated the Opinions on Certain Issues Concerning Application of Laws in Handling Criminal Cases of Commercial Bribery (the “Opinions”).

The Opinions clarified certain aspects of application of law in criminal cases of commercial bribery, i.e., (i) scope of commercial bribery; (ii) scope of subject of this crime; (iii) criminal liability for commercial bribery in specific sectors, such as pharmaceutical procurement and sales, construction, government procurement; (iv) delineation of illegitimate interest in commercial bribery; (v) legal basis for determining accomplice in commercial bribery.

Particularly, the Opinions addressed the issue of how to distinguish gifts between friends (which are common in a “relationship” society of China) and commercial bribery. Four factors should be taken into account: (i) historical relationship between the parties; (ii) amount of gifts; (iii) cause, timing and means of offering the gifts, especially whether to request the recipient to do something by taking advantage of his/her position; and (iv) whether the recipient takes advantage of his/her position to do that favor.
Given the complexity of commercial bribery in business practice, the Opinions also expanded the crime into offering not only property but also other proprietary interests or benefits.

China’s Outbound Investment: Time to Prosper?

China’s direct outbound investment in 2007 amounted to USD26.51 billion, representing a 25.3% increase than that of 2006. By the end of 2007, over 7000 Chinese companies have established their overseas presence covering 173 countries or regions across the globe.

The statistics jointly published by the Ministry of Commerce, National Statistics Administration, and State Administration for Foreign Exchange indicated that more privately-owned enterprises in China are investing overseas, and major invested countries and regions include Hong Kong, the United States, Russia, Vietnam, Japan, the United Arab Emirates, German, Australia and Singapore.

In spite of the perceived boom, it is reported that among the acquisitions Chinese companies have had in German during the past five years, only about 20% of the acquired companies were operated relatively well and stably.

As commented by an official from the Development and Research Center of the State Council, the major issues of Chinese companies’ outbound investment are (i) lack of strategic long-term vision, (ii) insufficiency of feasibility studies, (iii) incapability in cross-border integration, (iv) more as high-risk investment by the government, and (v) insufficient participation by mega privately-owned enterprises.

As some of those international business consultants have pointed out, the primary issue for Chinese companies’ outbound investment is their lack of capabilities in cross-cultural integration, which is a vital after-acquisition process to allow Chinese companies to achieve real success of overseas acquisitions.

Beijing: Draft Judicial Interpretations on Well-Known Trademarks in China

Owners of Chinese well-known trademarks are entitled to broader protection than ordinary trademarks registered in China. Above said, whether a trademark constitutes a well-known one in China becomes a significant issue to its owner.

The Supreme People’s Court of China promulgated draft Interpretations Concerning Certain Issues on Application of Laws in Recognizing and Protecting Well-Known Trademarks in Trails of Civil Disputes Related to Trademark Infringement (“Draft Interpretations”) on November 11, 2008.

The Draft Interpretations aim at addressing those common issues that have been revealed in judicial practice of recognizing Chinese well-known trademarks, and further strengthening protection over such trademarks in China.

Under the Draft Interpretations, only if the issue whether a disputed trademark constitutes Chinese well-known trademark is legally or factually significant in determining trademark infringement or unfair competition, such issue will be analyzed and determined by relevant people’s court.

It is noted that in order to be recognized as Chinese well-known trademark, the relevant trademark must be widely known within the territory of China. In other words, mere evidence of being well-known outside China (such as an international brand) is not sufficient to establish existence of a Chinese well-known trademark, even though overseas reputation or recognition may be taken into account in certain circumstances.

With respect to jurisdiction over cases involving judicial recognition of Chinese well-known trademarks, the views are split, and the Draft Interpretations provide for two possible options. One holds that intermediate people’s courts or above shall have such jurisdiction, while the other deem it necessary to further narrow it down to intermediate people’s court or above in major cities or others at the same level as approved by the Supreme People’s Court.

Beijing: Supreme People’s Court to Try A Copyright Case Live

On November 14, 2008, the Supreme People’s of China will try a copyright infringement case, which is to be live broadcasted online via China Court Net (www.chinacourt.org).

The trial was brought up by a famous singer in China, Sun Nan. In 2006, agent of Sun Nan purchased a CD of songs performed by Sun Nan. Based on this, Sun Nan filed a lawsuit against the CD publishers on the cause of unauthorized copying and publishing of such songs, which infringed his right to perform. He claimed the damage of RMB300,000 and requested the court to order the defendants to cease sales of, and destroy such infringing products.

The trial court supported all of Sun Nan’s claims, which was appealed by the defendants. The appellant court reversed the trial court’s judgment, and held in favor of the defendants.
Unsatisfied with the judgment of appellant court, Sun Nan applied for re-trial of this case by the Supreme People’s Court of China. It will be the first time for the Supreme People’s Court to try a case with live broadcasting online.

Shanghai: Clean Energy Vehicles for Expo?

As the host city of Expo 2010, Shanghai is pressured to reduce vehicle emission. An obvious solution is to convert from traditional vehicles into those clean energy ones; however, with a variety of different choices, what will be the right ones for Shanghai Expo?

In fact, Shanghai has been working on alternatives to diesel and gasoline for a while. For instance, Shanghai has already put some hybrid electric vehicles into operation. Furthermore, Shanghai is also looking into hydrogen fuel cell vehicles and built up the first hydrogen station for filling up such vehicles with hydrogen. Apart from that, LNG (liquefied natural gas) and DME (di-methyl ether) vehicles are in the market too.

Different clean energy vehicles employ various technologies, which are currently at different stages in terms of maturity of technologies and extent of commercialization. For example, LPG (liquefied petroleum gas) and CNG (compressed natural gas) vehicles, though more mature in terms of technological development, are not perfect given their emission. Hydrogen fuel cell and electric vehicles are much cleaner, but still not ready for large-scale commercialization. Thus, what Shanghai needs is a blueprint to achieve zero-emission step by step.

When choosing the type of clean energy vehicles, there is a 4E principle to follow, which is Environment, Energy, Easy, and Economy. From that perspective, Shanghai will start from reducing emission, and gradually move toward the target of zero emission.

Based on the current blueprint, for buses, as a first step, Shanghai will restrict those “polluting” buses in outskirts of Shanghai city, and within in the city, the government plans to expand the use of CNG buses.

When the technologies for LNG or DME buses are more developed, LNG buses will take over, supplemented by some DME and electric buses. To meet that end, most of the CNG stations will be transformed into LNG stations then.

In the meantime, Shanghai will keep with demonstration projects of hydrogen fuel cell buses, and expect to reach the stage where electric buses constitute the majority, supplemented by hydrogen fuel cell buses. At that time, those LNG stations will be transformed into hydrogen stations.

For taxis, Shanghai plans to use more LPG cars at first, which will be gradually taken over by LNG ones in the mid term, and eventually reach the stage where hydrogen fuel cell cars constitute the majority, supplemented by LNG ones.

Beijing: China and Kazakhstan to Expand Cooperation in Natural Gas

China National Petroleum Corporation (“CNPC”) recently entered into a framework agreement with KazMunaiGaz, Kazakhstan’s national oil and gas company to expand cooperation in natural gas.

KazMunaiGaz has agreed to annually supply five billion cubic meters of natural gas to phase II of the Kazakhstan-China Gas Pipeline, and ensure the transport of natural gas produced by CNPC from the Aktobe field via such pipelines.

Meanwhile, the two sides will jointly develop the Urikhtau gas condensate field and export 5-10 billion cubic meters of natural gas to China on a yearly-basis, subject to the demand in southern Kazakhstan.

Based on the above, the two companies will jointly construct and operate the Beineu-Bozoy-Kyzylorda-Shymkent section of the Kazakhstan-China Gas Pipeline, the natural gas transport capacity of which is designed to be 10 billion cubic meters per year.

The parties also agreed to expand phase I of the Kazakhstan-China Gas Pipeline based on further assessment of incremental natural gas resources.

According to the joint statement of China and Kazakhstan, the Kazakhstan-China Gas Pipeline is a milestone project for cooperation between the two countries, which is expected to be completed by the end of 2009.

Beijing: First Lawsuit on Supermarket’s Use of Background Music

Music Copyright Society of China (“MCSC”) sued a supermarket in Beijing based on alleged infringing use of background music, and claimed damage of RMB16,500.

On November 4, 2008, Beijing Haidian People’s Court began to try this first copyright infringement lawsuit arising from supermarket’s use of background music since the promulgation of PRC Copyright Law.

MCSC is a collective management organization of music copyright in China, which aims at protecting music copyright holders, and representing them in infringement cases.

According to MCSC, the defendant, absent the right holder’s authorization, used a song as background music of the supermarket, which constituted copyright infringement.

MCSC indicated that around 8,000 companies in China have voluntarily paid royalties to MCSC for their use of background music in their respective stores; however, this only represents a minority of supermarkets or stores in China. Therefore, MCSC, via this lawsuit, intends to alert those companies to the potential infringing use of background music and its resulting violation of Chinese law, and in the meantime, encourage right holders to claim their rights in such cases through MCSC.

The defendant argued that use of background music in the supermarket is not for profit-making purpose, which is different from use of music in KTVs or other similar places. Thus, different rates of royalties should be applied to different types of use of music.

Though this case is still under trial, it is clear that all sorts of brand new intellectual property disputes are getting more common in China.

Beijing: Supreme People’s Court Commented on Implementation Issues of Anti-Monopoly Law

The long-awaited PRC Anti-monopoly Law (“AML”) has left quite a number of implementation questions unanswered; and recently, the head of Administrative Tribunal of the Supreme People’s Court of China responded to some of those questions with respect to administrative lawsuits that may be brought under AML.

Who has the jurisdiction?
Pursuant to the AML and the PRC Administrative Litigation Law, people’s courts that have jurisdiction over AML-related administrative lawsuits are relevant intermediate or higher people’s courts located where defendants reside.

Who can be defendants?
AML set up two-level institution. One is a Anti-monopoly Commission under the State Council, which is to coordinate anti-monopoly related work at a national level, and research for, make, and publish anti-monopoly related policies and regulations. The other is institutions which are responsible for enforcement of AML, i.e., the Ministry of Commerce (“MOFCOM”), the National Development and Reform Commission (“NDRC”), and the State Administration for Industry and Commerce (“SAIC”), and their respective counterparts at provincial level.

Given that the second-level institutions are those who will enforce AML in daily practice, and take specific administrative acts, they are potential defendants in AML-related administrative lawsuits.

What acts can be sued?
Under the PRC Administrative Litigation Law, only specific administrative acts (as opposed to administrative rules for general application). Therefore, specific administrative acts related to AML (including, without limitation, administrative licensing, penalties, decisions, approvals, and enforcement) can be cause of actions for AML-related administrative lawsuits.

Who bears the burden of proof?
As a general rule under the PRC Administrative Litigation Law, defendants bear the burden to prove that their specific administrative acts are in compliance with applicable laws, and facts that are not recorded at the time of conducting administrative acts should be excluded as inadmissible. If defendants do not produce evidence or delay in producing evidence without justification, it is deemed that disputed administrative acts lack corresponding evidences.

OEMs and CMs: Risks and Precautions

OEMs (original equipment manufacturers) are prevalent in today’s cost competitive environment. Despite the popularity, intellectual property risks lie on both sides --OEMs and CMs (contract manufacturers).

For OEMs, one major risk is that CMs may over-manufacture the designated products without OEMs’ authorization, and re-sell such products to third parties or directly to end users, which may dilute OEMs’ market. Another risk is that CMs may use, disclose or disseminate OEMs’ confidential information, without due authorization. Such act may be intentionally taken by CMs for profit-making, or due to negligence in restricting their employees in complying with their confidentiality obligations. Whatever the reason, such undue disclosure of confidential information exposes OEMs to business risks and harm.

For CMs, the primary risk is their inadvertent infringement of third party intellectual property rights due to OEMs’ lack of relevant rights. In this scenario, third party right holders may directly sue CMs for infringement, and if CMs are not properly protected under OEM contracts, CMs’ losses can hardly be indemnified by OEMs.

Awareness of risks leads to design of precautions. Suggested steps for OEMs and CMs include:

1. CMs should conduct intellectual property due diligence of OEMs, making sure that OEMs are legitimate holders of relevant intellectual property rights;
2. OEMs and CMs should specify detailed rights, obligations and remedies under their contracts, especially with respect to potential intellectual property disputes;
3. OEMs may require CMs to keep detailed records of how the designated products are manufactured, and entitle themselves to review and inspect; and
4. CMs should take precautions to protect confidential information of OEMs (including, without limitation, entering into confidentiality and non-compete agreements with employees).

Beijing: Digital Copyright of Thesis Infringed?

482 master and Ph.D. degree holders (collectively, the “Plaintiffs”) sued Beijing Wanfang Data Co., Ltd. (“Wanfang Data” or the “Defendant”) with respect to the Defendant’s infringing use of the Plaintiffs’ thesis. The trial judgment held the Defendant lost to 364 of the Plaintiffs, and should cease collecting thesis, make public apologies on its website, and compensate those winning Plaintiffs for the damages and reasonable litigation expenses.

According to the Plaintiffs’ claim, Wanfang Data, without due authorization, collected the Plaintiffs’ thesis, scanned them into digital files, and included the same into a “China Thesis Database”, which was available for search by various libraries across the nation after their paying certain subscription fees to use Wanfang Data’s system.

The Plaintiffs claimed that Wanfang Data’s conduct was illegally publishing, copying, disseminating, and selling the Plaintiffs’ thesis for profit, which constituted copyright infringement.

During the trial, Wanfang Data counter-argued that China Science and Technologies Information Research Institute (“CSTIRI”) is the designated institute to collect thesis under Chinese law, and the Defendant was authorized by CSTIRI to develop a database of such thesis. The Defendant further argued, given that the database was only available to users of college and other nation-wide libraries (as opposed to the general public), the purpose of this database was to promote exchange of research results, instead of for-profit-sale. In addition, the Defendant also pointed out that 324 of the Plaintiffs have signed certain agreements with their respective graduating universities, authorizing those universities to dispose their thesis, and those universities have all entered into agreements with CSTIRI, authorizing CSTIRI to include those thesis into the database.

According to the trial court, Wanfang Data infringed copyright to thesis of 158 of the Plaintiffs who have not entered into any agreements with their graduating universities with respect to the disposal of their thesis. Among the remaining 324 Plaintiffs, the agreements 206 of them have entered with their graduating universities were insufficient to justify Wanfang Data’s use of the disputed thesis, thereby rendering the Defendant’s conduct as copyright infringement too.

Thus, 364 of the Plaintiffs were entitled to damages in the range from RMB2,300 to RMB5,100 individually, which added up to over-RMB1 million-damage in total to be paid by Wanfang Data. With respect to the remaining 118 of the Plaintiffs, due to their agreements with graduating universities, plus the latter’s agreements with CSTIRI, the trial court determined that Wanfang Data’s conduct did not infringe their respective copyright.

Upon announcement of the trial judgment on October 16, 2008, the attorney representing the Plaintiffs indicated that the Plaintiffs would further continue this case with an appeal.

Shanghai: Intellectual Property Arbitration Tribunal Founded

On October 29, 2008, Shanghai Intellectual Property Arbitration Tribunal was officially founded, with the first batch of 61 arbitrators appointed.

This tribunal offers a new avenue to solve intellectual property disputes in China, apart from the traditional administrative or judicial channels. It aims at taking advantage of the features of arbitration, such as confidentiality, efficiency, and expertise of arbitrators, and thereby providing a more cost-effective way to resolve intellectual property disputes.

This tribunal is formed to meet the dispute resolution demand arising from the increasing number of cross-border intellectual property transactions (including transfer or licensing) involving China.

Beijing: First Antimonopoly Case in China

In stark contrast with the common perception that Chinese “hate” and “avoid” litigation, plaintiffs in China are much more fast-paced nowadays.

On the date when China’s first comprehensive competition statute, PRC Antimonopoly Law, took effect, a plaintiff, Mr. Fangping Li (who is a lawyer), brought China Netcom, a mega State-owned telecom company, into the courtroom.

Mr. Li claimed that China Netcom has “abused its dominant market position by applying differential treatments to counter-parties to transactions who have the same qualifications with respect to transaction price and other transaction terms, without any justification” (Article 17(6) of PRC Antimonopoly Law).

According to Mr. Li, he, as a non-Beijing permanent resident, had no choice but to opt for the pre-paid services of China Netcom when installing his land line telephone in Beijing. Unexpectedly, the difference following that choice is much more than when to pay the fees (pre-paid vs. monthly billing after actual use). In his claim, Mr. Li enlisted 8 items of preferential treatment or services that Netcom provided to monthly billing customers only. This seems unfair to Mr. Li, who decided to arm himself with the weapon provided under the new law (Article 50 of PRC Antimonopoly Law entitles those who suffer losses by one’s monopolistic conduct to file civil lawsuits) even though he only claimed nominal damage of RMB 1.

On September 18, 2008, the Beijing Chaoyang People’s Court accepted this case, and it had this latest development on October 29. After the judge clarified with the plaintiff that this was an antitrust claim, the case was transferred to Beijing No. 2 Intermediate People’s Court, which has the jurisdiction over antimonopoly cases pursuant to a recently-issued judicial interpretation.

This is the first antimonopoly case in China. Though formally accepted and transferred to proper jurisdiction, the case has much to be seen with respect to where it goes and how the long-awaited new law will be enforced.

East? West? Stereotyped?

Moving to New England in August 2007, I, as a Chinese native, have been experiencing my own version of "East meets West". After years of serving American clients at an international law firm, I find the West not unfamiliar, but still interesting to explore, from New Hampshire's "Live Free or Die" to Massachusetts’s "Spirit of America", from subprime crisis to presidential debate.

While writing on Business Negotiation between Westerners and Chinese State-Owned Enterprises, I have read through various Western literatures about negotiation with Chinese, which gave me an unparalleled opportunity to re-think about Chinese from the other side. Some comments on Chinese made me nod, while others totally confused me.

In such a globalized world, West and East meet all the time; however, are the two sides understanding each other? Isn't it true that each side is armed with all sorts of stereotypes of the other side before they actually meet? If so, how can both sides avoid misunderstanding?

To continue my efforts on helping both sides to understand each other, here comes this new blog - China Law and Business - it is a generic name, and the purpose is simple:

For both the East and West, let's stay away from those "years-old" stereotypes, and keep ourselves abreast with this dynamic world - everything is changing every day!

For those who are interested in doing business s in China, are you ready for China market? Look out for the dynamic legal, business, and cultural complications, which are what I hope to capture here.