Haworth & Lexon Law Newsletter

"Haworth & Lexon Law Newsletter" is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, Intellectual property rights, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.

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¡ìLatest Laws and Regulations

The Regulations provide that in trying marine insurance cases, the court shall apply the laws in accordance with the following priority sequence: the relevant provisions of Marine Law, the relevant regulations of Insurance Law, Contract Law and other regulations.

According to the Regulations, if the insurant does not pay the premium according to the insurance contract, then the insurer may terminate the insurance contract before the commencement of insurance liabilities. And after the insurance liabilities start, the court shall not support the insurer¡¯s claim to terminate the insurance contract. However, if the insurer has issued the insurance policies, it can not terminate the insurance contract, whether the insurance liabilities have started or not.

The Regulations provide that where the insurant violates the warranty provisions in the insurance contract, if he/she fails to notify immediately the insurer in writing, the insurer has the right to request that the contract be terminated from the date of violation; however, if the insurer still pays the insurance compensation after receiving the notice of violation from the insurant, the insurer¡¯s request to terminate the contract for this reason shall not be supported by the court; If the parties can not agree on such issues as conditions for change or increase of premium, the insurance contract shall be deemed terminated from the date when the warranty provisions are violated.

The Regulations state that if a vessel is assigned during the voyage without the consent by the insurer, the insurance contract shall be terminated when the voyage ends. The rights and obligations of the insurance contract may be enjoyed and undertaken by the assignor or the assignee.

The Regulations also request the insurer to submit evidence that he/she has paid compensations to the insurant when exercising its subrogation right; otherwise the case may not be accepted or the claim may be rejected by the court.

The Decisions deleted Article 3 of ¡°Interpretations of the Supreme People¡¯s Court concerning the relevant Issues on Application of Laws in Trial of Cases Involving Copyright Disputes over Computer Network¡±. Article 3 has the following provision: ?¡°Those who reprint or extract and edit through network the works that have been published in the newspapers or periodicals or disseminated through networks, and who have paid remunerations according to the relevant provisions and indicated the name of newspaper or magazine that first published the works, do not constitute infringement, unless otherwise the owners of the copyrights declare or the newspaper offices, the periodical offices or the Internet Service Providers entrusted by the owners of the copyrights declare that no reprinting or extracting and editing is allowed. But if the works reprinted or extracted and edited exceed the scope of the works as permitted to be reprinted, they shall be deemed as infringement.¡± ¡°The Regulation on Protection of the Right to Internet Information Dissemination ¡± promulgated on July 1, 2006 has clearly defined the scope of ¡°free permission¡± and ¡°statutory permission¡±, so the Decision is actually made in response to this change of laws.

According to Article 6 of ¡°Regulations on Protection of the Right to Internet Information Dissemination¡±, there are only eight (8) circumstances where neither permission nor remuneration is needed, for example, (1) Where an appropriate portion of any published works is quoted in the works provided to the general public for the purpose of introducing or commenting on any work or elaborating any issue; (2) Where it is inevitable to reproduce or quote any published works in the works provided to the general public for the purpose of making any news release; (3) Where any article on such current affairs as political and economic issues that have been published is provided through the information network; and so on.

According to ¡°Regulations on Protection of the Right to Internet Information Dissemination¡±, in some specific circumstances, the permission is not needed but the remuneration shall be paid, for example, where the nine-year compulsory education or state education planning is implemented through the information internet, and use fragments of works, short written works or musical works, a single work of fine art, or photographic works to produce courseware, as long as the said works are provided for the registered students through information internets by long-distance education institutions that have produced the courseware or acquired courseware according to the laws.

The Supplementary Provisions provide if (1) the number of shops opened by a service provider from Hong Kong and Macau in the mainland are more than thirty (30); and (2) the commodities sold by the service provider are books, newspapers, magazines or medicines etc. that are from different brands and different suppliers, then the service provider shall be allowed to be the controlling shareholder of the company, but its shareholding shall not be more than 65%.

The definition of ¡°service provider¡± can be seen in the ¡°Mainland/Hong Kong Closer Economic Partnership Arrangement¡± and the ¡°Mainland/Macao Closer Economic Partnership Arrangement¡±.

The State Administration for Industry and Commerce promulgated ¡°Measures for Administration of Medical Treatment Advertising¡± (hereinafter referred to as ¡°the Measures¡±) on November 10, 2006, which began to implemented as of January 1, 2007.

The Measures provide that the contents of medical treatment advertisements shall be in the following eight aspects: (1) the name of the medical institution; (2) address; (3) ownership category(state or private); (4) types of medical institutions; (5) diagnosis and treatment subjects; (6) numbers of sickbeds; (7) time of receiving the sick; (8) contact telephone number.

The Measures request medical institutions to apply to the departments of health at the provincial level where it is located if it intends to release medical treatment advertisements. If the medical treatment institutions of traditional Chinese medicine, those of traditional Chinese medicine in combination with western medicine treatment, and those of national medicine intend to release medical treatment advertisements, they shall apply to the department in charge of traditional Chinese medical treatment at the provincial level where they are seated. The certificates for medical treatment advertisements will be issued if they are qualified, and shall be valid for one (1) year.

The Measures provide for stricter penalty on release of medical treatment advertisement in violation of the laws. The relevant authority may order the violating entities to stop business operation, and revoke the relevant diagnosis and treatment subjects, or even revoke its Medical Institution Practicing Permit.

The State Council promulgated ¡°Regulations on Administration of Foreign-funded Banks¡± (hereinafter referred to as ¡°the Regulations¡±) on November 8, 2006, and the China Banking Regulatory Commission promulgated the ¡°Detailed Rules on Implementation of Regulations on Administration of Foreign-funded Banks¡± (hereinafter referred to as ¡°the Detailed Rules¡±) on November 24, 2006. Both the Regulations and the Detailed Rules came into force on December 11, 2006.

According to the Regulations, ¡°foreign-funded banks¡± refer to institutions approved to be set up in China according to the laws of China, and they may be: (1) a wholly foreign-funded bank established by one foreign bank or a foreign bank together with other foreign financial institutions; (2) a Sino-foreign joint venture bank established by foreign financial institutions and Chinese companies or enterprises; (3) branches of foreign banks; (4) representative offices of foreign banks. The minimum registered capital of a wholly foreign-funded bank or a Sino-foreign joint venture banks shall be RMB one billion or of equivalent amount in other freely convertible currencies. And the foreign banks shall allocate at least RMB200,000,000 or of equivalent amount in other freely convertible currencies to its branches for its operation. Concerning the business scope, only wholly foreign-funded banks or Sino-foreign joint venture banks may engage in banking card business and branches of foreign banks do not have the right to operate such business. Branches of foreign banks may accept periodical deposits from the residents in China, each of which shall be no less than RMB one million.

The Detailed Rules provide that where branches of the foreign banks operate foreign exchange business, the operating funds shall not be less than RMB 200,000,000 or of equivalent amount in foreign currencies. If the branches of foreign banks operate foreign exchange business and RMB business, their operating funds shall not be less than RMB 300,000,000 or of equivalent amount in foreign currencies, and the operating funds in RMB shall not be less than RMB 100,000,000.

The Detailed Rules provide for the basic qualifications for the directors, senior managers and chief representatives. The Detailed Rules reflect ¡°the orientation of the governmental policy to banks with legal person status¡±. Banches of wholly foreign-funded banks and joint venture banks may engage in the business within the authorization of its parent banks, without any additional approval. If the branches of a foreign bank are reformed to wholly foreign-funded banks, the foreign bank may reserve one branch bank to do the whole sale of foreign exchange business. And the operating funds of the branches in China may be transferred, after approval, to the registered capital of the wholly foreign-funded banks, and the remaining may be remitted back to its parent bank. Wholly foreign-funded banks, after reformation, may continue to do all the business licensed to the original branches of the foreign banks.

¡ì IP Cases

The decision No. 7915 made by the Patent Re-examination Board was concerning the ¡°Electrical Frying Pan¡±, whose patent number was 200330107787.4, and was applied to be invalidated by Zhejiang Hengfeng Company. The decision held that the evidence submitted by Zhejiang Hengfeng Company was not enough to support the invalidation application. According to Article 23 of the Patent Law, the patent right was maintained to be valid.

The court held that, according to the provisions of the Patent Law, any entity or individual may apply to the Patent Re-examination Board for invalidation of a patent on the ground that the patent for design does not conform to Article 23 of the Patent Law. But the premise is that the applicant has evidence to prove that the patent for design is the same as or similar to the one that has been published in foreign or domestic publications or that has been used domestically before the application date. The evidence submitted by Zhejiang Hengfeng Company was enough to prove that Zhejiang Hengfeng Company had produced the product HPA-3030C and submitted it to the relevant authority for inspection, but it could not prove that the product was in the public domain as the inspection department was a specific entity. In addition, the Annex 1 of the Product was the drawings of the pizza pans produced by Zhejiang Hengfeng Company, which showed the appearance of the product HPA-3030C, but it could not be deemed as in public because the phrase ¡°preserved in strict confidence¡± was printed at the foot of the drawings. In this case where the probative force of the Annex 1 could not be decided, it is hard to say whether the former design which might cause this patent to be published had been used in a public manner before the application date. Therefore, there did not exist the issue that the defendant failed to examine some of the facts. So the decision No. 7915 made by the Patent Re-examination Board was maintained as the facts were ascertained clearly, and the laws were applied correctly and the procedures were followed.

The plaintiffs stated that they held the patent for the invention ¡°High-voltage and High-power Transducer without Pollution of Electricity Net¡±. But the defendant had used as of 2003 this patented technology to produce and sell high-power transducers, which had the same technical characteristics as those of the plaintiff¡¯s. So it infringed the patent right of the plaintiffs.

The defendant, Hekang Yisheng Company, defended that there were substantial mistakes in the measures and bases relied on by the plaintiffs to judge infringement, and thus the comparison of technical characteristics based on the measures and bases could not reach the conclusion of infringement by Hekang Yisheng Company. Meanwhile, there was improperness in the measures and bases in calculating the profit acquired from the infringement.

The court held that normally, in business transactions, especially in large or medium electrical equipment involved in this case, there were instructions accessory to the products. The product instructions shall include descriptions of the manufacturer, and the structure, function, working principles, technical index, using methods, notes and maintenance of the products. When a series of products used the same instructions, there would be descriptions of the characteristics of the different types of the products and the corresponding product types for the users¡¯ identification. Therefore, the relevant words and pictures in the product instructions, as engineering language, could show the main technical characteristics and the structural characteristics, and was one of the means to reflect the technical characteristics. If there was no evidence to the contrary, it could be used as evidence to reflect the technical characteristics of the products charged with infringement. Hekang Yisheng Company claimed that the products were renovated and improved frequently, but the product instructions were printed in a great amount, and therefore the product instructions might not objectively reflect the main technical characteristics and the structural characteristics. The court thought that such claim was not in conformity with the normal business practice, and it could not be established as Hekang Yisheng Company could not provide evidence to prove that such a case actually existed. In addition, it had no necessary relationship with the infringement while Hekang Yisheng Company claimed that the product instructions were only for guiding the users, and no product could be produced according to the product instructions. So the court would not take it into account. As it was affirmed that the product instructions could be used to reflect the technical characteristics of the products charged with infringement, the court held that the product charged with infringement fell into the protected scope of the patent involved in this case, and further ruled on the high compensations according to the result of the judicial audit.

Beijing No.1 Intermediate People¡¯s Court made, on November 17, 2006, a judgment of the first instance in the dispute of infringement upon the right to internet information dissemination between Go East Entertainment Co., Ltd. and Beijing Baidu Network Information and Technology Co., Ltd., which rejected the claim of the plaintiff.

The plaintiff stated that it found that the defendant provided online playing and downloading services of forty seven (47) songs, sung by Chen Huilin and recorded by the plaintiff, on the website (www.baidu.com ) operated by the defendant. The plaintiff had never licensed the defendant to disseminate the songs above to the public through the internet. The action of the defendant seriously infringed the right to internet information dissemination of the plaintiff as the record producer, which caused great economic losses to the plaintiff.

The defendant defended that it was an expert searching engine service provider. The MP3 searching service was one of the services of the searching engine. The operational principles, techniques and software were completely the same as those of such other service items as the website, news and pictures. The searching engine service provided by the defendant did not make any treatment or disposal to the recorded website information itself, which was automatically completed by the program. The defendant only provided internet links, with no actual content. The defendant did not select or control, non-technically, the contents of the linked websites. Nor did it identify, select or sift the linked contents. So it had no intention of infringement, nor there was any infringement because of its negligence. On the contrary, to protect the lawful rights of the right holder, the defendant issued a ¡°statement of right¡± on its website, which provided a smooth, effective and convenient way to protect rights of the right holders. Therefore, the plaintiff sued the wrong defendant, and it should have listed as the defendants of the case the owner of the searched websites providing the songs involved in this case.

The court held that from the relationship between the searching engine service website and the websites uploading the works, whether the linking relationship could be established between the searching engine service and the websites uploading the works depended on two main factors: whether the website uploaded the format for audio data file and whether the website had been forbidden to be linked. The searching engine did not have any forecast, identification or control of the lawfulness of the searched contents. Therefore, the defendant had no false intention to infringe the right to internet information dissemination while providing MP3 searching engine services. Secondly, works for ¡°trial listening¡± and ¡°downloading¡± did not come from the website of the defendant, but from the internet server of the third party, which was not prohibited to be linked. The dissemination action happened between the users and the websites uploading the works. At present, as there were no express legal provisions or limitations on the business modes and functional setup of the searching engines, and the plaintiff could not prove that the defendant knew or should have known that the linked works might infringe the right of the third party, there was no legal bases to request the searching engine service provider, who had no ability to identify or judge, to undertake the legal liabilities for the uploading provided by the linked websites, which might infringe the right to internet information dissemination, and for the downloading and copying acts of the users. Therefore, the plaintiff¡¯s claim that the defendant infringed its right to internet information dissemination was in lack of legal bases, and the court did not support the claim.

The plaintiff stated that he was the actor of the song ¡°Back to Your Heart¡± and he held the actor¡¯s right of this song. The defendant released the song, without the consent of the Plaintiff, on the website www.12530.com through mobile telecommunication companies in many provinces and cities for downloading by the public. Such action infringed the actor¡¯s right of the plaintiff, so the defendant should compensate the plaintiff for the economic losses.

The defendant defended that the plaintiff could not prove that he was the singer of the song ¡°Back to Your Heart¡±, and it could not be decided whether the singer of the song ¡°Back to Your Heart¡± (including the DJ edition) recorded in the notarial deed was Yan Minglong. The song involved in this case and used in mobile phone ring business by the defendant had been licensed by Guangdong UFO Audio Recording Production Co., Ltd., so the use of the song by the defendant did not constitute infringement.

The court held that, unless there was evidence to the contrary, the natural person, legal person or other entity that was indicated on the works or products should be deemed as the right holder of the copyright or the copyright-related interest. The name signed on the cover and face of the tape ¡°June 7 Heilong¡±, published by Guangdong Audio & Video Publishing House, was Hei Long, so Hei Long should be deemed as the singer of ¡°Back to Your Heart¡±. Yan Minglong was the actual name of Hei Long, and this was clarified in the copyright transfer agreement between Guangdong UFO Culture Broadcasting Company and Tianlang Company, which was submitted by Quantiantong Company. Therefore, the court affirmed that Yan Minglong was the singer of ¡°Back to Your Heart¡±, which could be downloaded from the website involved in the case. According to the provisions of the Copyright Law, the actor of the song had the right to disseminate its performance to the public through the internet and get remuneration. A third party should acquire license and pay remunerations if it used the song performed by the actor in the internet to the public. In this case, the way that Quantiantong Company used the song was in Ring Back Tone of the mobile phones, which belonged to the scope of the internet dissemination under the Copyright Law. Therefore, Quantiantong Company should get permission from the right holders who enjoyed the right to internet information dissemination, including Yan Minglong. In this case, there were only licenses from the copyright holders of the lyrics and melody, and the record producer in the agreement signed by Quantiantong Company and UFO Company, and the license from the actor was not included. Therefore, the claim of Quantiantong Company that the song involved in this case was lawfully licensed should not be supported by the court. So the infringement was affirmed.

The plaintiff stated that the plaintiff applied for the patent for utility model named ¡°valve for fire fighting¡±, and the patent was granted on December 12, 2001. The patent number was ZL01204954.9. The defendant Tongfa Factory produced the patented products in violation of laws, and sold the products in Jiangsu, Shandong and Sichuan, together with Tongfa Company. The acts of the two defendants caused great economic losses to the plaintiff.

Tongfa Company applied for invalidation of the patent to the Patent Re-examination Board within the lawful period and requested the court to suspend the trial of the case. Meanwhile, the defendant pointed out that the defendant¡¯s act of application for utility model patent and the launch of the infringement lawsuit was malicious, so it also filed to the court to request Mr. Yuan Lizhong to pay RMB 50,000 for the losses incurred from the malicious lawsuit.

The court held that there was close relationship between the lawsuit of compensation filed by the defendant and the lawsuit of infringement of patent filed by the plaintiff. So the two cases were consolidated. Concerning the infringement of patent case, according to the decision No. 6355 made by the Patent Re-examination Board and the judgment No. 955 on administrative case made by Beijing No.1 Intermediate People¡¯s Court (2004), it was affirmed that the patent No. ZL01204954.9 for the ¡°valve for fire fighting¡± was invalid. Therefore, the basis for suing Tongfa Factory and Tongfa Company had disappeared. So none of the claims were supported by the court. Concerning the case of compensation for damages, Yuan Lizhong had been the plant director and factory owner of a valve factory since 1977, and he should have known the relevant national standards of the valve. But Yuan Lizhong ignored the provisions of the ¡°Patent Law¡± and the public national standards, and applied, when its technological plan had no novelty or creativity and the way of application had not been changed, for the patent for utility model for the ¡°valve for fire fighting¡± with a technology in the public domain, taking advantage of the provision that no substantial examination shall be conducted in utility model patent application. The act of application for patent right should be considered as malicious application; what is more, after Yuan Lizhong acquired the patent, he sued others for infringement of patent right, which involved the innocent defendant in the patent infringement lawsuit and patent administrative lawsuit. Such act infringed the lawful rights and interests of others, and caused losses to Tongfa Company, so the malicious lawsuit was established, and he should take the relevant liabilities. As the defendant had paid a lawyer¡¯s fee in the amount of RMB 20,000 and an application fee for invalidation of the patent in the amount of RMB 1500, the court ruled that Yuan Lizhong should pay for the losses of RMB 21500.

¡ì Analysis of Cases

Appellee (defendant of the first instance):
Kangrui Cotton Processing Co., Ltd., Jinghe, Xinjiang (hereinafter referred to as ¡°Kangrui Company¡±)

Background of the case:
On January 2, 2004, Yakun Company and Kangrui Company entered into a ¡°Cotton Purchase Contract¡±, which provided that Kangrui Company should provide lint cotton of Level 229 (Level 2). The quality of the lint cotton should be meet national cotton quality standards. If there were serious problems in quality or quantity, the documents issued by the nortary public or the commodities inspection bureau should prevail. Yakun Company made a prepayment of RMB 6,500,000 to Kangrui Company on the day when the Contract was signed. On January 7, 2004, Kangrui Company delivered 1173.947 ton of lint cotton to Yakun Company according to the Contract, and submitted inspection reports to Yakun Company. Yakun Company paid the remaining contract price.

From June 12, 2004 on, Yakun Company began to resell the lint cotton provided by Yakun Company. According to the inspection certificates of the lint cotton and the cotton inspection certificates under those sales contracts, the total amount of lint cotton provided by Kangrui Company was as follows: 1.618 tons of Lint Cotton at Level 2, 523.416 tons of lint cotton at Level 3; 564.525 tons of lint cotton at Level 4; 21.643 tons of lint cotton at Level 5, and the total amount was 1111.202 tons, and the total payment was RMB12,733,990.29 Yuan. The loss of Yakun Company was RMB 6,659,358.11.

Therefore, Yakun Company filed a suit to the court of the first instance and applied to terminate the Cotton Purchase Contract signed by both parties, requesting that Kangrui Company return the payment of RMB19,393,348.4 and the earnest money of RMB 4,600,000, and bear the court fee.

The court of the first instance held that the Cotton Purchase Contract signed by Yakun Company and Kangrui Company on January 2, 2004 was valid and effective and therefore was protected by the laws. During the performance of the Contract, there were serious problems in the quality and quantity of the lint cotton supplied by Kangrui Company to Yakun Company, which constituted material breach of contract. So the application of Yakun Company to terminate the Contract complied with the laws and regulations and the agreement of the parties, and should be supported by the court. Due to the fluctuations of the cotton price, Yakun Company still suffered some losses, though it had taken some remedies. Kangrui Company should assume the main liabilities for such losses suffered by Yakun Company. The amount of RMB 6,500,000 paid by Yakun Company was not earnest money, as it was specified in the remittance details that the payment was a prepayment, not earnest money. So the application to pay RMB 4600000 according to the Penalty Rule on Earnest Money was in lack of factual and legal basis. So the court did not support this application.

Both Yakun Company and Kangrui Company refused to accept the judgment of the first instance, and appealed to the Supreme People¡¯s Court.

The Supreme People¡¯s Court ascertained the following facts additionally: The period from September to August 31 of the next year was the ¡°year¡± of cotton, and the quality of the cotton should be ensured not to deteriorate during the year. But from October of the next year on, even the cotton which had been inspected by the inspection bureau would degrade by one or two levels. In addition, because of the decrease of production of cotton in 2003, the price of the cotton once was as high as RMB 17,500 per ton. But for many reasons, the price of the cotton went down soon thereafter. And now, the price of the cotton was only RMB 11300 per ton, which was less than 35% of the price at the beginning of the year.

The Supreme People¡¯s Court held that:

It was right in the judgment of the first instance that there existed losses, but the court of the first instance was wrong in deciding the standard of compensations. The Contract was signed in January 2004, but the price in May and June had decreased by RMB 5000 to RMB 6000 per ton. So the cotton resold by Yakun Company after June 2004 would have loss in profit even the quality had been maintained, because of the change of the market. Such loss was caused by the market risk, which could not be foreseen by the parties, and which was not the fault of Kangrui Company. So the request of Yakun Company that Kangrui Company should compensate RMB 6152857.22 for its losses could not be established.

Analysis by Lawyer:

This case may be used for reference in trial of sales contract. According to the grounds of both parties in the appeal, the main focus of this case was whether the quantity and quality complied with the provisions of the contract, whether Yakun Company suffered losses and how to calculate the losses. The parties also had disputes in the earnest money and whether the contract should be terminated.

The key point of this case was whether the party who breached the contract should be liable for the losses caused by the market rather than by the fault of that party. The loss confirmed by the judgment of the first instance not only included the difference of the prices from the degradation of the cotton, but included the losses incurred in the decrease of the market. The Supreme Court affirmed the actual loss suffered in purchasing the cotton, but did not support, for lack of contractual basis or legal basis, the other parts, namely the loss of profit resulting from market risk, the transportation fees incurred in re-sale, and the loss of interests due to the loan from third parties. In this case, the value of the goods which was not delivered and which did not comply with the quality agreed in the contract accounted for 8%. It was not high; neither did it deprive the opportunity to resell for profit. The Supreme People¡¯s Court held that Kangrui Company¡¯s act only constituted a general breach of contract, and did not affect the realization of the purpose of the contract.