Our victory upheld in the Court of Final Appeal

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1 HONG KONG B E I J I N G WISHES YOU FOR 2016 happiness health fame fortune where you will find them everywhere body, mind & soul at play at work when you will find them every waking moment every minuteasleep, awake or in between especially when you are awake! even whilst you sleep Yours truly, gets help from fine firm of lawyers LITIGATION UPDATE Vivien Chan SBS BBS JP Owen Tse PARTNER Ken Hung ASSOCIATE SENIOR PARTNER Our victory upheld in the Court of Final Appeal Distributor s liability in libel: Defence of innocent dissemination lost once knowledge of defamation is acquired We recently extended our victory before the Court of Final Appeal, after securing the favourable judgments before the Court of First Instance and the Court of Appeal in a high profile defamation action. We acted for the Plaintiff who is a prominent individual. The Defendant is the Hong Kong distributor of a magazine primarily published and circulated in mainland China. Before the Court of Final Appeal, the Defendant tried to reformulate the common law defence of innocent dissemination. The Defendant sought an order for retrial by arguing that the defence of innocent dissemination should only fail if the distributor knew or ought to have known that the article in question contains an action libel (i.e. without any defence). The Court of Final Appeal dismissed the Defendant s appeal with costs, with a reasoned decision to be handed down in due course. This will be a landmark case on distributor s liability in defamation suits. Further updates will be provided in our subsequent newsletter.

2 2 LITIGATION UPDATE by Owen Tse CONSULTANT & Sharon Li ASSOCIATE A Cloudy System: Information Privacy Concerns In The Era Of Cloud Computing Against the backdrop of an emerging global awareness of 2. information privacy, the Hong Kong Office of the Privacy possibilities. As data user will be liable for breach by any such Commissioner for Personal Data published a guideline in respect sub-contractor, formal contractual assurance should be in place of use of cloud computing ( the Guideline ) in July to ensure that obligations of the data processor are equally In the context of the use of cloud computing to store or process Data user should take note of further sub-contracting applicable to sub-contractor. personal data, it is pertinent to pay attention to the requirements under the Personal Data (Privacy) Ordinance (Cap of the laws of Hong Kong) (the PDPO ). The Guideline customization will still be required to ensure the services and suggests that the data user shall bear in mind the following data the contract terms meet all security and personal data privacy protection principles in the PDPO:- protection standards the users requires. Otherwise, the data a. When a data processor is engaged, contractual or other users will have to bear the risks of data breach and misuse, which means must be adopted to prevent the data from being kept Usage of standard contract may be convenient, but expose them to potential liabilty. longer than necessary; b. Data so collected should not be used for new purpose unless with consent; c. Reasonable practicable steps should be taken to protect against unauthorized or accidental access, processing, erasure, loss or use; d. Data user will be liable for any data breach or misuse of data by data processor. The key remains that the data user will be liable for compliance of all legal requirements even if the storage of data is entrusted to a third party data processor such as a cloud provider. The outsourcing of processing or storage of personal data to third parties does not relieve the data users legal liability. The data users should ensure that the service provided by their outsourced data processors would enable them to meet their Under the aforesaid data protection principles, the data user obligations owed to the data subject. shall take note of the following aspects when engaging a cloud provider:1. It is not uncommon that cloud computing may involve transfer of personal data outside Hong Kong and sometimes even transborder data flow in a rapid manner. In that case, data It can be noted that the Commissioner in Hong Kong is taking a more active role in ensuring compliance of the privacy laws in Hong Kong. Recently, there are two cases in Hong Kong where user should ensure that such data is treated with a similar level the data users are convicted for unauthorized direct marketing of protection as if such data is stored in Hong Kong in order to reasons. As data user will also be liable if such unauthorized use meet the expectation of data subjects. Data user should check for direct marketing is committed by the data processor or other the transborder arrangement so as to ensure the personal data is sub-contractor, data user should be aware of their obligations properly protected. and to ensure compliance by the contractors.

3 3 COMMERCIAL UPDATE by Patty Chan PARTNER Next Step for Variable Interest Entity ( VIE ) The Impact of Foreign Investment Law ( FIL ) on Existing VIE Structure The draft Foreign Investment Law ( FIL ) is expected to have a sweeping impact on all levels of foreign investment in China. Under the FIL, in determining whether or not it is a foreign investment or foreign investor, the authority will take into account of the ultimate de facto controller. The law, if enacted in its current form, is going to have a significant impact on existing Variable Interest Entities ( VIEs ), which until this moment in time is still a grey area under the Chinese legal system. By definition, VIE is an entity nominally controlled by nominal shareholders but ultimately controlled by other parties through certain controlling and benefits transfer contracts with the entity and the nominal shareholders of the entity. 1ST QUESTION: ARE YOUR BUSINESS ON THE NEGATIVE LIST? VIE itself is nothing objectionable. If, however, you are operating a business which is on the negative list through a VIE structure, you may face dire potential legal consequences, including (a) an order to cease investment, (b) an order to dispose shares or assets within the business within a designated period, (c) confiscation of earnings, and (d) a fine up to RMB 1 million or 10% of the total investment. By negative list, it refers to a new system under which the authorities will only maintain a list of specific industries where foreign investments are prohibited or subject to certain restrictions. At present, the negative list is yet to be released and there is no indication which industry sectors will be covered by the negative list. Following the example of the Shanghai Free Trade Zone, it is generally expected that the industries covered by the negative list would be less than the restricted and prohibited sectors covered by the current Catalogue of Industries for Guiding Foreign Investment maintained by MOFCOM. This is however yet to be confirmed. 2ND QUESTION: ARE YOU A FOREIGN INVESTOR? Contrary to the existing practice, the authority will take into account of the ultimate de facto controller in deciding whether it is a foreign investment or foreign investor. If an entity is ultimately controlled by a Chinese entity, any domestic entity set up by an intermediary foreign entity will still be regarded as the investment of a Chinese investor, and not subject to the foreign investment restriction or prohibition. Conversely, if a Chinese entity is ultimately controlled by a foreign entity, the Chinese entity will also be treated as a foreign investment. Any investment in China by this foreign controlled Chinese entity will also be treated as a foreign investment. In determining the meaning of control, the FIL expressly provides for VIE control. Regardless of the actual shareholding structure, an entity may be controlled by a foreign entity through contractual or trust instruments. WHAT TO DO IF YOU ARE A DE FACTO FOREIGN INVESTOR ENGAGING IN BUSINESS LISTED IN NEGATIVE LIST? In case your business is a foreign investment engaging in industries covered by the negative list, there might still be ways out. According to the explanatory notes, it is proposed that there will be a three-year transition period from the date of commencement of the FIL. Three proposals are specifically put forward to deal with existing VIEs, but the first two are irrelevant to de facto foreign investors as those two options require a confirmation from the foreign invested enterprise to confirm that it is in fact controlled by a Chinese entity. The remaining proposal requires an application to the Ministry of Commerce ( MOFCOM ) to determine on a case by case basis whether grandfathering of the existing VIE is permitted. At this stage, given that a lot of issues require clarification in respect of the FIL, there could be no quick and easy answer to deal with VIE on the negative list controlled by foreign investor. It remains to be seen if there are any further updates or clarification on the side of MOFCOM. Having said that, it might be time for you to consider if the existing VIE structure should be unwinded.

4 4 by Annamae Koo CONSULTANT & Fandy Ip ASSOCIATE Latest Trends on Intellectual Property Protection in China - Quarterly Updates CTMO PRACTICE SEEMS TO ALLOW MORE CASES e-commerce promotional events in the Interim Provisions on AGAINST TRADEMARK SQUATTING the Administration of Centralized Online Promotional Based on recent decisions, we have found that the China Trade Activities for Goods and Services ( Interim Provisions ), which Mark Office seems to have relaxed Article 11(7) of the came into effect on October 1st, Trademark Law in order to combat trademark squatting behavior. Article 11(7) provides that a sign which is deceptive Under the Interim Provisions, platforms providing and easily misleads the public on the quality or origin of promotional events have a duty to monitor sellers taking part goods or services, cannot be used as a trademark. in the promotional events, and have a duty to take necessary Traditionally, Article 11(7) is a ground that is used to prevent steps in stopping sellers from engaging in unlawful conduct. deceptive marks from being registered, e.g. where the mark Practices that violate consumer rights are also prohibited. specifically denotes that the quality of goods are high, or Examples of prohibited practices include refusal to return where the mark appears to be an enterprise name but is deposits and denial of consumer s rights to return product substantially different from the name of the mark owner. The sold during the promotional events. Practices amounting to CTMO has now shown that it will allow this ground to be used unfair competition are also prohibited online platforms against marks that are registered in bad faith. This is therefore cannot prohibit their sellers from taking part in other another means for working around the tight requirements for promotional events organized by other competing platforms. well-known status and similarity of goods. We will continue to monitor this trend and will update more. The Interim Provisions also regulate sellers taking part in such promotional events. They are prohibited from using improper INCREASED REGULATIONS ON E-COMMERCE EVENTS means in its promotional activities, for example, falsely As Singles Day (November 11th) becomes the world s biggest labeling its products, providing false information on discounts shopping event, China has stepped up regulating and giveaways, etc. This is a welcome clarification by the

5 5 government, and serves a reminder to retailers and Violations of the above may result in sanctions by the e-commerce platforms to review its practices to be compliant. Administration of Industry and Commerce, resulting in confiscation of earnings and a fine amounting to 1-10% of the IP RIGHTS: A VIOLATION OF ANTI-MONOPOLY LAW? The much debated Guidelines concerning Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competitive Behaviour has become effective as from sales of the last financial year. Further, where a monopolistic agreement has been reached but has not been performed, the dominant business may still be fined for a maximum amount of RMB500,000 (US$83,333). August 1st, The Guidelines provide that a dominant business may not As one can imagine, this law is on face value counter-intuitive refuse, without due justification, to license its intellectual to the essence of IP rights, which are meant to provide a property rights under reasonable terms if these IP rights are an essential facility in business operation. In evaluating whether certain degree of monopoly over IP rights. It has therefore been controversial. The key is the interpretation of the clause, such refusal are anti-competitive, the following factors have to be taken into account: the intellectual property rights cannot be reasonably substituted and are necessary for other undertakings to compete in the relevant market; especially how "valid justification" is to be read. To a certain extent, the Chinese court has already considered the interaction between intellectual property rights and anti-monopoly principles in high profile cases before the refusal to license will cause negative impact on competition or innovation, harming consumers' or the public interests; and licensing the rights will not cause unreasonable harm to the licensor. Guidelines came into effect. In the Huawei / Interdigital case, the Guangdong Higher People s Court applied the FRAND principle in assessing the royalties of standard essential patents at 0.019% and in the Qualcomm case, Qualcomm was fine US$975m for its anti-competitive licensing practices as it The Guidelines also list a series of contractual clauses that a dominant business cannot impose on its licensee, in the absence of a valid justification, including:-a) requiring an had charged communications excessive standard royalties, essential bundled patents wireless with non-standard essential patents without justification, and exclusive grant-back of improvements to the technology by the licensee, b) preventing the licensee from challenging the validity of the licensor s intellectual property rights, c) imposed unreasonable sales terms. Given these cases and the further enactment of the Guidelines, right owners should keep preventing the licensee from using competing products after a close eye on how these guidelines are further applied in the expiry of the license agreement, and other unreasonably practice. Existing license agreements should also be reviewed restrictive conditions. to ensure that it is not in violation of the Guidelines.

6 6 by Frederick Kwok ASSOCIATE & Joyce Lee ASSOCIATE House Mark is King House Mark, a guide for and the center of attention of consumers in the sea of hundreds and thousands of similar products or services in the market, at the same time an invaluable intangible asset that materializes the business s goodwill and reputation accumulated throughout the years. In light of the utmost importance of a House Mark to a business, it is quintessential to obtain trademark registration for your House Mark. In Hong Kong, application and registration of a House Mark is of no difference from other kinds of trademarks, all are subject to the same examination procedures and protection. As a matter of fact, the benefits of having a registered House For instance, if a brand owner owns a prior trademark Mark go way beyond the obvious trademark protection registration ABC in Class 30, and would like to register a mark granted to the House Mark itself. In Hong Kong, a prior COFFEE in Class 30 in respect of the goods coffee, which is registered House Mark may even save any subsequent exclusively descriptive and is objected, the brand owner may trademark applications of the same entity from being refused add the prior registered mark ABC to the mark COFFEE to by the Trade Marks Registry. enable registration of the mark ABC COFFEE. Under Hong Kong law, if a trademark application is objected by Given the potential role of House Mark as a savior of the Trade Marks Registry (no matter the objection(s) is/are subsequent applications, one should be strategic and think based on absolute and/or relative grounds), the applicant may ahead when applying for the registration of House Mark and add a representation of a prior registered trademark to the there are a few important points to note: representation of the applied-for mark so that the revised representation of the mark is no longer identical or similar to First, one should make sure the goods and/or services covered the cited mark(s) or is distinctive enough to be registered as a by the House Mark registration are broad enough, both in trademark. Of course, this method of overcoming objection terms of the classes and the specifications of goods and/or would only be advisable if the prior registered trademark is services. It is the law that adding the representation of a likely to be used in conjunction with the applied-for mark in the registered trademark (e.g. the registered House Mark) to that of course of the trade. In such scenarios, adding a registered a subsequently applied-for mark is only possible if the goods House Mark may sometimes be the most logical choice and the and/or services for which the registered House Mark is best way out for the applicant. registered are identical or similar to the goods and/or services

7 7 applied for. For instance, in the hypothetical example above, if and even though the application of ABC has first matured the registered mark ABC does not cover Class 30 or covers only into registration (which will have the date of registration dated rice in Class 30, it cannot be added to the pending mark back to the filing date under Hong Kong law), the registered COFFEE in respect of coffee to overcome Registry s mark ABC cannot serve as a prior registered mark to the objections even though both marks are owned/applied by the pending application COFFEE and cannot be used to save the same entity. That said, although the law adopts the wording objected application. identical or similar, in practice, so long as the specification of the pending application is narrower than that of the prior Registering trademarks is always important to (new) business House Mark, adding the House Mark to the pending mark is or brand owners and special attention should be paid when also possible. For instance, if the registered mark ABC covers both rice and coffee, the applicant can overcome the objection by changing the pending mark to ABC COFFEE covering coffee only. Such adding of House Mark ABC will not restrict the its specification, which still covers both rice and coffee. they intend to file a number of applications at a time. Under most circumstances, once a brand owner starts using a mark (or in fact even before use), application for trademark registration in Hong Kong should be filed to ensure trademark protection as early as possible. However, this is not always a simple mechanical exercise and does not mean that brand What if the pending mark COFFEE covers not only coffee but owners should rush to file all applications blindly without any also confectionery? In that case, if the applicant wants to add aforethought. Instead, there should be a strategy in place House Mark, it will have to restrict the specification of the before filing trademark applications, including when and in pending mark to coffee. what class(es) the applications should be made in order to From our experience, it is not uncommon to see brand owners without a complete IP minimize costs and risks in protecting the brand. strategy having to reluctantly limit the specifications of their subsequent applications and give up trademark protection for A brand owner should always consider the possibility of using parts of their goods and/or services when adding the a mark as House Mark and file a trademark application for that registered House Mark to overcome the Registry s objection. mark first, before other applications for other marks. This way, As such, it is advisable to keep the specifications of goods if there are objections or oppositions raised by the Registry or and/or services and the classes in which the (potential) House any third parties against a subsequent application, the Mark is registered broad. In Hong Kong, proof of actual use of applicant will at least have an option to save it by adding the the mark is generally not necessary when filing a trademark application. That said, a registered trademark may be vulnerable to cancellation on grounds of non-use in Hong Kong for a continuous period of at least three years after registration. It is therefore a balancing exercise as to how broad the specification of the House Mark should be. prior registered mark as a last resort. If all applications are filed on the same day, brand owner s hands will be tied and cannot rely on the House Mark (even if it has been successful registered as the registration date of the House Mark will be the same as the filing date of those other applications and it will not be regarded as a prior registered mark). Second, if there is a mark that can be potentially used as a House Mark, such a mark should be filed as soon as possible so There is never a straight-forward or standardized approach in that it will become a prior registered mark to any other obtaining IP protection. With a coordinated strategy, one may subsequently-filed marks by the same applicant and create a end up have a much broader protection than it would have safety net for them. For instance, if a brand owner filed the been at no extra costs. All is needed is a bit of extra thought application of the marks ABC and COFFEE on the same day, and a good IP counsel who has your best interests at heart.

8 8 by Flora Ho PRC PATENT ATTORNEY State Council released Draft Revision of Chinese Patent Laws for Public Comments The Legislative Affairs Office of the State Council P. R. China released the Draft of the 4th Revision of Chinese Patent Laws (the Draft ) for public comments on 2 December With the aim to enhance the protection of patent and innovators interests, the Draft focuses on a number of aspects, including but not limited to: (1) the reinforcement of patent protection and patentee s rights; (2) encouraging innovations; and (3) the realization of the value of patent. Below is a brief summary of the key amendments proposed. (1) REINFORCE PROTECTION OF PATENT AND PATENTEE S RIGHTS In order to establish an all-rounded long-term mechanism to combat patent infringement, the Draft incorporates the following amendments: ARTICLE(S) AMENDMENT(S) The Draft clarifies the power of the patent adminitrative departments. 60 The Draft clarifies that the patent administrative departments for patent affairs shall have the power to confiscate, destroy infringing products, parts, tools, molds, equipment dedicated to the manufacture of infringing products or to perform infringing methods. The Draft introduces liability against indirect infringer. 62 (new) Any entities, after being aware of infringement acts, provide raw materials, intermediate products, components or equipments which are specific for production of the infringing products, or induce others to implement a patented method without permission of the patentee, shall bear the joint liability for the infringement acts. The Draft introduces liability against network service providers. 63 (new) In cases where the infringers sell infringing products on the internet, if the network service provider knows or should know such infringement acts (e.g. upon the receipt of a notification from the right owner/patent Administrative Department) but fails in taking actions in time to delete, shield or disconnect the relevant links, it shall bear the joint liability for damages caused by the infringement. The Draft increases the penalty for acts of patent counterfeiting. The patent administrative departments may impose:- 66 a fine up to five times (as opposed to four times under the current law) of the amount of the illegal business turnover if the turnover is over RMB 50,000; or a fine less than RMB 250,000 (as opposed to RMB 200,000 under the current law) if there is no illegal business turnover or the turnover is less than RMB 50,000.

9 9 ARTICLE(S) AMENDMENT(S) 68 The Draft increases the statutory limit of damages for patent infringement. The Draft introduces that if willful infringement is established, the court may allow punitive damages of up to 3 times of the damages ascertained in the case. In the case where the loss of the patentee, the profit gained by the infringer and the patent royalty cannot be ascertained, the Draft increases the: - lower limit of statutory damages from RMB 10,000 to RMB 100,000 - upper limit of statutory damages from RMB 1 million to RMB 5 million. The Draft clarifies that in the event the patentee has tried its best to collect evidence but the relevant account books and financial information are under control of the infringer, the court may order the infringer to submit the account books and relevant material. If the infringer fails to comply, the court may determine damages based on the evidence submitted by the patentee. 29 Under the current law, the domestic priority system in China does not include the priority claim for design patent application. The Draft introduces domestic priority for a design patent application with a priority period of 6 months. 42 The draft increases the term of protection for a design patent from 10 years to 15 years. (2) ENCOURAGE INNOVATION With an aim to encourage innovation, the Draft clarifies the scope of (i) design patent and (ii) service invention: ARTICLE(S) AMENDMENT(S) 2 Under the current law, only the entire product design is patentable. The Draft introduces that a portion of a product may also be eligible for protection under a design patent. 6 The Draft limits the scope of service invention to invention made by an employee in execution of the task of the entity so that service invention no longer includes invention made with an employee s materials and technical means as under the current law. The Draft clarifies that in the absence of an agreement, invention made mainly by using the material and technical means of the entity, the right to apply for a patent shall belong to the inventor or the designer. (3) REALIZE THE VALUE OF PATENT With an aim to realize the value of patent, the following amendments are proposed in the Draft to enhance the application and use of patent: ARTICLE(S) AMENDMENT(S) 81 (new) The Draft introduces that inventors who are employees of state research institutes or universities may have agreements with their employers to implement or license the service invention to other parties. 82 and 83 (new) The Draft introduces the mechanism for granting non-exclusive license. Any patentees may make a statement with the Patent Administrative Department to express his willingness to grant a non-exclusive license to any potential licensees with a payment of a prescribed license fee. Any potential licensee may get the license by notifying the patentee in written form and paying the prescribed license fee. During the effective period of the statement of willingness, patentee should not grant a sole or an exclusive license, and should not request for a preliminary injunction. 85 (new) The Draft clarifies the scope of disclosure of standards-essential patents. In cases where a patentee does not disclose its/his ownership of any standards-essential patents in the course of establishing a national standard, it/he is deemed to license the standards-essential patents to any parties who implement the standard. Vivien Chan & Co., Newsletter issue 4, December 2015 All Rights Reserved. Please note that the information and opinions contained in this newsletter are intended to provide a general overview only, and should not be treated as a substitute for proper legal advice concerning an individual situation. We disclaim all liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the contents of this newsletter. Readers should make their own enquiries and seek appropriate legal advice on the particular facts and circumstances at issue.