Restrictions Lifted on foreign ownership of Many Businesses

Many laws are currently being amended to meet China's WTO obligations so that foreign companies may now own sizable minorities of various enterprises previously foreclosed to them, such as logistics, warehousing, retailing, wholesale distribution, insurance and banking. In addition to industry specific liberalizations, there are also significant liberalizations that will affect many different industries.

China Enters the WTO

China acceded to the WTO on December 11, 2001, effective January 11, 2002. To comply with the WTO agreements, China promulgated new Import and Export Tariff Rules reducing import tariff rates on many items. The general tariff rate is reduced to 12%. The new tariff rates took effect on January 11, 2002. China also lifted certain restrictions on foreign investment in industries such as insurance, telecommunication, retail, construction, tourism, accounting, asset management and so on. China has amended and promulgated a series of laws and regulations, including Patent Law, Trademark Law, Copyright Law, Computer Software Protection Act, Sino-Foreign Equity Joint Venture Law, Sino-Foreign Cooperative Joint Venture Law and Wholly Foreign-Owned Enterprise Law, Anti-Dumping Act and Anti-Subsidy Act.

PRC Trademark Law Amended

The National People's Congress passed the Amended Trademark Law, which took effect on December 1, 2001. The amendment covered only items required to comply with WTO's and TRIPs. Nevertheless the total number of articles increased from forty-three to sixty-four. The revisions address protectable subject matter, joint application and ownership, protection of famous marks, prior use principles, priority rights, and judicial review of administrative actions by the Trademark Office. Revised Implementation Regulations are pending.

Under the Amended Law, individuals are now allowed to own trademarks as private property. Two or more individuals, juristic persons or organizations may jointly apply for registration of a mark, and jointly own and exercise trademark rights.

Protectable subject matter is extended to include three-dimensional signs and combinations of colors as well as any visually perceptible combination of signs capable of distinguishing the goods of the owner. As this last description is quite vague, we expect it to be the source of many disputes over distinctiveness. Non-distinctive and descriptive marks may become registrable if they acquire distinctiveness through use. The standard of "use" in China is expected to be quite high.

A trademark applicant may not register a mark adversely affecting others' pre-existing rights. It is expected that those rights will include corporate names, domain names, copyrights, patents, unregistered trademarks, and perhaps other rights as well. This will be a two-edged sword, protecting foreign companies with famous domain names, and company names or cartoon characters, but also preventing foreign companies from registering their trademarks in China when a local party can show a pre-existing right.

The Amended Law explicitly provides protection for foreign famous marks. A mark copying, imitating or translating an unregistered foreign famous mark on identical or similar goods or services with likelihood to cause confusion will not be granted registration or will be prohibited from being used. In addition, a registered famous foreign mark will receive cross-class protection. A mark copying, imitating or translating a registered foreign famous mark on goods or services not identical or similar to those covered by the registered famous mark, causing confusion to the public and possibly causing damage to the trademark holder, will not be granted registration or will be prohibited from being used. The Amended Law also provides the elements for determining whether a mark is famous or not:

1) Knowledge of the mark in the relevant sector of the public; 2) length of continuous use; 3) length, extent and geographic area for marketing the trademark; 4) recording of protection as a famous mark with local AICs; and other factors.

Priority rights in the event of first use of a trademark in an international exhibition sponsored or recognized by the Chinese Government were added to the Amended Law. The trademark applicant will enjoy priority rights within six months of such first use.

The new law also provides for judicial review of application, opposition, cancellation decisions of the Trademark Office's Trademark Review and Appeals Board. An applicant desiring court review must file legal action within 30 days of issue of the rejection decision. This relatively short time period will make it difficult for foreign parties to have adequate time for consideration.

Among the most significant new provisions is a statutory damages provision with real deterrent possibilities. The new law provides that in the event that the damages from infringement are difficult to calculate, the statutory maximum compensation will be RMB 500,000 (about US $61,000), which may be a real deterrent in some cases. In addition, preliminary injunctions are now a specifically listed remedy for trademark infringement.

In addition, there are now provisions punishing government officials who are derelict in their duties and abuse their authority in the course of enforcing the Trademark Law.

China Amended Copyright Law

The National People's Congress approved the Amendment to China's Copyright Law (the "Amendment") at the end of 2001. The Amendment contains revisions and additional provisions to bring the Law in closer conformity with TRIPS and the Berne Convention. The principle revisions are:

The Amendment provides for protection of some new types of works, such as acrobatic performances, mask works, and models. It also provides for the first-time publication ten-year protection for the original design of the published book or periodical. This will give some magazine publishers a new tool in fighting imitators.

Under the Amendment, public performance rights include mechanical performances. Rental rights are enumerated as separate rights. The first sale doctrine no longer applies to movies and computer programs, so that a copyright owner of such works has the right to prevent others from renting copies of the work. The Amendment specifically provides that delivering works over an information system, including the Internet, is an exclusive right of the copyright owner. This type of publication is described as "providing a work to the public by wire or wireless means so that the work is received at a time and location designated by the recipient."

The Amendment extends protection upon creation to foreign works even absent a mutual copyright treaty, as long as a work is first published in a Berne member or other treaty member nation.

The Amendment placed more restrictions on the definition of Fair Use. For example, to constitute fair use in performance, not only must the audience not pay to view the performance, but the performers should not receive compensation. Fair use in journalism should be limited to quotations of a published work necessary for news reporting. Re-broadcasting of other media news is permissible only for stories on politics, economics, and religion, but not for cultural news or other contents. Fair Use for education is permitted, but the amendment allows that the copyright owner has the right to request compensation for such use. Similarly, radio and television stations can broadcast the works of others without prior consent, but the copyright owner has the right to request compensation. The law does not define reasonable compensation, and the copyright owner is expected to negotiate with the user. If no agreement is reached, the compensation shall be set according to the payment standard set by the copyright administrative agency. There are as yet no set parameters. In addition, the compulsory license on translation of Chinese language works into one of many minority languages is now limited to works created by Chinese nationals.

Performers also enjoy a limited type of copyright. For a fifty-year term, a performer owns the right to be identified for his performance, to prevent others from distorting his performance, to permit reproduction or broadcasting, and to compensation for any use of the performance. But such right cannot infringe the copyright of the performed work. The performer's license alone is not sufficient to reproduce a work absent the permission of the work's creator. The Amendment supposes the creation of a non-governmental copyright collective management organization. Copyright owners can commit a non-governmental management organization to protect their rights in the name of the management organization. The organization can act on its own initiative to file lawsuits or bring arbitration actions against infringers.

The Law also provides for a court to issue a preliminary injunction where irreparable harm will occur without immediate action. The Amendment also establishes statutory damages where actual profits of the infringer or losses by the rights owner cannot be established. The maximum amount of such damages is RMB 500,000 (approximately US $60,000), low for actions against illicit manufacturing lines, but adequate for retailers and some distributors. "Serious cases" of infringement may still be referred to criminal authorities.

China Amended Patent Law

China's New Patent Law took effect on July 1, 2001. The new Patent Law is the first revision since 1992 (initially enacted and promulgated in 1984), and will combine the cancellation and invalidation procedures into one, thus eliminating the opportunity for a second challenge to a patent by the same party. The new Law will also provide for judicial review of patent grant and invalidation decisions. This revision has been awaited for some time, as it was needed to bring China into line with TRIPs. The new Law also provides guidelines for damages from patent infringement. In addition to stating that damages should be calculated upon the illegal profits of the infringer, actual losses to the rights owner or a few times the patent royalties, fines for infringement are set at three times the illegal profits, or RMB 50,000 (US $6,000) or less where no profits were earned from the infringement.

Provisions on Compulsory Patent Licensing are not substantially changed in the revised Law. Since, China, like many other nations, provides for compulsory licensing of patented pharmaceuticals in the event of "national need" and "need for use of a subsequent patent," many are watching to see if the current South African situation will eventually affect the pharmaceuticals market in China. China watchers, however, expect China to officially respect the rights of patent owners.

Regulations on Protection of Integrated Circuit Layout Design

On March 28, 2001, the State Council promulgated Regulations on "Protecting Integrated Circuit Layout Design", (the Regulations) which took effect on October 1, 2001. It is the first regulation specifically granting protection of intellectual property rights to an integrated circuit layout design.

The layout design must possess originality to be eligible for protection. If a layout design seeks protection under the Regulation, it shall be created independently by the designer and may not be a common design for practitioners in the industry. For a layout composed of well-known common designs, it shall be created independently as an original combination.

A layout design is not protected under the Regulations unless it is registered with the Administrative Agency within 2 years from the first date of commercial use in the world. If a right is granted, a layout design rights owner has the exclusive right to exploit his protectable layout design in whole or in part, and commercially implement the layout design, integrated circuit embodying the layout design or materials incorporating such an integrated circuit. The term of exclusive rights is 10 years from the prior date of the registration date in China or the first date of commercial use in the world, but no matter whether it is registered or commercially used, it will not be protected after 15 years from completion of the design. The assignment of a right shall be recorded with the authorities. The Regulation also stipulates that an enforceable license can be granted by the Agency for the purpose of national security, public interest or remedy of abuse by a rights owner. A protected layout design can be copied under the fair use for private use doctrine, evaluation, study and education or further creating new independent designs.

Explanations of the Supreme Court on Preliminary Injunction and Evidence Preservation for Trademark Infringement

To implement Articles 57 and 58 of New Trademark Law, China's Supreme Court issued a legal explanation on preliminary injunction and evidence preservation for trademark infringement, effective on January 22, 2002. The explanations clarify the interested parties who can file an application, courts having jurisdiction over the application, specific evidence to be submitted and so on. Besides a trademark registrant, interested parties including successor(s) to trademark rights and trademark licensees may apply for an injunction or evidence preservation. Evidence showing trademark rights and on-going infringement activities must be submitted. If it is possible to cause damage to the opposite party, the applicant must post a bond or provide other types of security. Once an injunction order is granted by the People's court, it remains effective until a final judgment is rendered.

New Computer Software Protection Act

The China State Council promulgated a new Computer Software Protection Act (The"Act"), effective on January 1, 2002. Changes reflected in the new Act are to comply with the new Copyright Law promulgated on October 27, 2001. According to the new Copyright Law, the Rules specify several new rights of computer software, which include, leasing, transmitting, disseminating over information networks, and translation rights that first existed in copyright law. The Rules extend the protection period from the 25 years to the whole life of an individual copyright owner plus 50 years, and fifty years for a corporate copyright owner. Fair use is limited to the purpose of study and research of the design idea and theory embodied in the program. Another note worthy change is that software registration is no longer a prerequisite for initiating a litigation proceeding.

Regulations on Administration of Technology Import and Export

The State Council promulgated the Regulations on Administration of Technology Import and Export, effective January 1, 2002. The Regulations classify technologies into three categories both for import and export purposes: prohibited technology, restricted technology and freely traded technology. Prohibited technologies may not be imported or exported. Import or export license-restricted technology. Freely traded technology requires that its import or export must be registered with the Ministry of Foreign Trade and Economic Cooperation or its local authorities. The authority will issue the importer or exporter a registration certificate, which is the basis for proceeding with foreign exchange, banking, tax, customs and other procedures. Any major changes to the contract or termination of the contract must be recorded with the authorities. Violating the Regulations will be subject to cash penalty, suspension of foreign trade permit or criminal punishment.

China Gradually Opening its Banking Market

In December 2001, China's central bank announced permission would be granted to foreign invested financial institutions to conducted limited operations in China, with increasing liberalizations in coming years. Beginning in December 2001, foreign invested financial institutions are allowed to serve Chinese nationals in the foreign exchange market. To do so, these financial institutions should increase their operating capital, and update their financial service licenses. Foreign invested financial institutions established in Shanghai and Shenzhen are permitted to formally conduct RMB businesses, while foreign invested financial institutions established in Tianjin and Dalian are now allowed to apply for permission to conduct RMB business. Foreign invested non-banking financial institutions also can apply to establish wholly foreign-owned automobile financing companies or Sino-foreign automobile financing joint ventures to engage in automobile financing services. Foreign investors can apply to set up wholly foreign-owned financial leasing companies or financial leasing joint ventures to engage in financial leasing businesses in accordance with the Measures for the Administration of Financial Leasing Companies promulgated by the People's Bank of China.

Foreign Ownership of Telecom Enterprises Loosened

The Minister of the Information Industry announced in January 2002, that foreign ownership of "value-added telecommunications business" is now permitted up to 30%, and will increase to 49% of such a business by the end of 2002. Under China's WTO obligations, foreign ownership will increase up to 50% by 2003 is required. Value-added telecommunications businesses include websites providing Internet content, ISPs, ASPs, providing email, database, fax and teleconferencing services. In the direct Telecom market, foreign investors are allowed to own up to 25% of the shares of joint ventures engaged in mobile voice and data services in Shanghai, Guangzhou, Beijing, and among these cities in 2002. The proportion will increase to 35 % by the end of 2002, and eventually reach 49% by 2003.

Insurance Market Opening to Foreign Competition

China's State Council promulgated "Administrative Regulations for Foreign Insurance Companies" as a means to achieve China's WTO obligations. From December 11, foreign non-life insurance companies can establish branch companies or hold up to 51% of the shares of joint ventures. Shares owned by the foreign investor to a life insurance joint venture shall not exceed 50%. In insurance brokerage joint ventures, the proportion of foreign ownership can reach 50%. At present, foreign investment is limited to the major markets of Shanghai, Guangzhou, Dalian, Shenzhen, and Foshan. Within three years after China's WTO accession, there will be no geographic restrictions.

Medicine Law (Law on Pharmaceutical Administration)

China has promulgated a completely revised Medicine Law, effective December 1, 2001. The first revision since 1984, the law has doubled the number of articles, and substantially strengthened quality and safety criteria for medicines distributed in China. The Law provides license requirements for pharmaceutical producers, distributors and medical organizations. Approval from local pharmaceutical authorities and inspection by the National Medicine Inspection Bureau is required for import of any medicine. The medicine may not be imported if it fails to pass the inspection. The new Law sets stricter requirements on labeling, including directions, expiration dates, etc. It also specifies penalties for transport, storage and distribution of fake medicines, including: sequestration of illegal gains, imposition of a penalty equal to twice to five times the price of the medicine and suspension of medicine license. Serious violations of the Law shall be subject to criminal liabilities.

Internet Pharmaceutical Information Services

China's National Medicine Bureau has promulgated Provisional Regulations on Administration of Internet Pharmaceutical Information Services, effective as of February 1, 2001. The new Regulations govern pharmaceutical information services, including medical equipment, pharmaceutical packaging, and materials, provided over the Internet. Pharmaceutical information services are classified into two categories: free service and fee for services. Those providing services for fees must obtain an Internet Information Service License from local information industry authorities. In addition, approval from local medicine authorities is also required. As to pharmaceutical information services for free, the provider must record their activity with the local information industry authorities but a license is not required. The provider must also obtain approval from local medicine authorities. If the pharmaceutical information service provider violates the new Regulations or other relevant laws, the pharmaceutical authorities shall give the violator a warning. If the violation is deemed serious, the provider's service shall be suspended.

Foreign Investor's Reinvestment Tax Preference Restricted to Retained Earnings

Recently, several local tax administrations reported that some foreign invested enterprises increase their after-tax profits for the purpose of tax audits of their affiliated companies. When the foreign investors of these enterprises reinvest the increased part of the profits in China, they wish to take advantage of the preferential treatment allowed by Article 10 of the "China Income Tax Law for Foreign Invested Enterprises and Foreign Wholly-owned Enterprises" (hereinafter Tax Law). The National Tax Administration responded that Article 10 is limited to direct reinvestment where retained profits are directly transferred to increase the registered capital of an enterprise, or reinvested in other foreign invested enterprises after the profits are allotted to foreign investors. Therefore, a foreign investor who has transferred profits out of the enterprise, which produced the profits, and then reinvested the profits, cannot benefit from such preference, whether he chooses to return the profit to increase the registered capital, or reinvest in another Chinese Enterprise. This Notice discourages an action that a foreign investor decrease the profits of the affiliate to avoid tax by raising the price or by other means increasing the profits of the foreign invested enterprise when dealing with the affiliate, then reinvesting the increased profits back to the affiliated after tax refund.

China to Annul Tax Preference For Foreign Invested Enterprises

The State Tax Administration of China stated that with China's entry into the WTO, China will apply the general tax law to foreign invested enterprises and annul tax preferences granted to foreign invested enterprises. The new tax law is expected to be promulgated by the end of 2003. With China's entry into WTO, foreign invested enterprises will be treated as local enterprises according to the principle of national treatment. Therefore, some previous restrictions on foreign companies will be cancelled, as well as certain preferential treatment. However, China will maintain tax preferences applicable for certain foreign invested enterprises for a relatively long period after WTO accession. There will be more tax benefits for foreign investment in western areas of China, capital construction or high technology industries.

Official Internet Survey

The China Internet Networks Information Center (CNNIC) reports that there are nearly 35 million Internet users as of the end of 2001. This population is nearly 50% higher than the number at the end of 2000, and all signs indicate that the number will continue to grow rapidly. CNNIC also reports that there were nearly 13 million separate computers linked to the Internet as of the end of 2001, an increase of roughly 40% from the year before. Figures show that most users collect information or view entertainment, but e-commerce is growing.

New Implementation Rules of the Copyright Law

In order to compliance with its commitments in WTO agreements, the State Council of China passed new Implementation Rules of the Copyright Law, which took effect in September 2002. Under the new rules, the local copyright authorities may handle foreign-related copyright cases directly. Co-authors may exercise copyright and related rights except for the right to assign the work even if co-authors cannot agree on the terms of use. Furthermore, the new rules clearly provide that infringers will be imposed penalties of up to three times their illegal gains from the infringement, and a penalty of less than RMB100,000 Yuan shall be imposed in the event that it is difficult to calculate the illegal gains.

New Implementation Rules of the Trademark Law

The State Council of China promulgated new Implementation Rules of the Copyright Law in August 2002. The new rules took effect in September 2002. According to the new Implementation Rules, the concerned party may apply for famous mark verification in the event of any disputes arising from trademark registration and review. The time period for submitting supplemental documents or make corrections has been extended from 15 days to 30 days upon receiving notice from the Trademark Office. Supplemental documents for trademark opposition may be submitted within three months after submission of the application for trademark opposition. The new rules also provide that famous mark owners may submit applications to the State Administration of Industry and Commerce or its local authorities to cancel the corporate names containing their famous marks.

Interpretations of the Supreme Court on Trial of Copyright Disputes

The Supreme Court of China issued the Interpretations in October 2002 addressing jurisdiction, evidence, burden of proof and other issues related to trial of copyright disputes and infringement cases. According to the Interpretations, only intermediate or higher level courts have jurisdiction over copyright disputes unless otherwise approved by local high courts. Publishers and producers have the burden of proof to show they are duly authorized to publish or produce copyrighted works. The Interpretations also provides specific methods for determining the actual losses of the copyright holder.

The State Counsel promulgated Amendment to the Implementation Rules of the Patent Law. The Amendment extends the time period for filing an application to enter into the national phase in the international application from twenty months after the priority date to thirty months after the priority date. The Amendment took effect on February 1, 2003.

Second-Level Domain Name Registration Opened to the Public in China

According to a Notice from the China Internet Domain Name System issued by the Ministry of Information Industry on December 12, 2002, it is now permissible to apply for registration of second-level domain names under the top-level domain name .CN. Second-level domain names will be open to general registration starting March 17, 2003. However, during the period from Jan. 6, 2003 to Feb. 28, 2003, a registrant of a third-level domain name has a priority right to register a second-level domain name based on a pre-existing identical third-level domain name.

Notice of Strengthening the Administration on Establishment, Registration, Foreign Exchange and Taxation of Foreign Invested Enterprises

The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) issued the Notice on December 30, 2002, effective January 1, 2003, to update the approval procedures for certain joint ventures. According to the Notice, foreign invested enterprises with less than 25% foreign equity must follow the approval and registration procedures provided in the Equity Joint Venture Law and the Cooperative Joint Venture Law. "Foreign investment below 25%" will be noted on the Approval Certificate of the Foreign Invested Enterprise. The Notice also provides detailed tax, capital contribution, registration and other provisions regarding such enterprises. In addition, the Notice also provides relevant rules regarding purchase of the equity interests of domestic enterprises by foreign investors, capital contribution, approval and foreign exchange.

Investment in Domestic Securities by Qualified Foreign Institutional Investors

The China Securities Regulatory Commission (CSRC) and the People's Bank of China issued the Provisional Rules on Administration of Investment in Domestic Securities by Qualified Foreign Institutional Investors, which took effective on December 1, 2003.

As defined in the first Provisional Rules, "Qualified Foreign Institutional Investors" (QFII) refers to foreign fund management companies, insurance companies, securities companies and other assets management institutions. A QFII must authorize a domestic commercial bank as its trustee to manage assets and authorize a domestic securities company to engage in domestic securities transactions. The Provisional Rules also provide capital and asset requirements for the QFII, such as the requirement that a fund management institution must have more than five years experience abroad, and hold assets of US$100 billion or above in the latest financial year, and be able to provide certain documents to the CSRC and the State Administration of Foreign Exchange. There are also qualifications for the Trustee, the management of trust assets, etc.

Provisional Regulations on Restructuring State-Owned Enterprises by Infusion of Foreign Capital

The State Administration of Industry and Commerce and the State Administration of Foreign Exchange promulgated the Provisional Regulations on Restructuring State-Owned Enterprises by Infusion of Foreign Capital, which took effect January 1, 2003. The Regulations apply to foreign investment in state-owned enterprises and companies, and allows restructuring part of the equity by sale to the foreign investor. It provides that the restructure can be done by transferring or selling all or part of the assets, equity, or creditor's rights to foreign investors, or by increasing capital for issuance of ownership interests to foreign investors. The Regulations provide other detailed requirements for foreign investors to invest in state-owned enterprises or companies having state-owned shares.

MOFTEC Promulgated Rules for Administration of Foreign Invested Freight Carriers

To comply with China's commitments to the WTO promote the development of the international freight carrier industry in China, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) promulgated Rules for Administration of Foreign Invested Freight Carriers, which took effect on January 12, 2003. The Rules govern the establishment and business operations of foreign invested freight carriers. They provide that foreign investors may set up a foreign invested freight carrier by purchasing an existing domestic carrier. The foreign investor must have more than three-year experience in international freight carrier services. The minimum capital of the invested enterprise is US$ 1million. The Rules also set forth the business scope, term of operation, documents required for approval, and other related aspects of foreign invested carriers.

Opinions on Patent Administration in Foreign Trade

On January 24, 2003, the MOFTEC and SIPO issued the Opinions on Patent Administration in Foreign Trade for the purpose of protecting the patents of Chinese entities and to reduce the risk of patent infringement. The Opinions apply to patent rights related to international trade in goods, services and technologies. According to the Opinions, the parties must provide relevant proof of patent rights, and Chinese entities engaging in foreign trade must record relevant patent rights with Chinese Customs. The import contract may set forth that the foreign exporter or licensor shall be liable for any infringement claims by a third party. The Opinions will take effect on February 25, 2003.