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.

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

Owen TsePARTNER

Ken HungASSOCIATE

Vivien ChanSBS BBS JP

SENIOR PARTNER

LITIGATION UPDATE

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2

A Cloudy System:Information Privacy ConcernsIn The Era Of Cloud Computing

Against the backdrop of an emerging global awareness of

information privacy, the Hong Kong Office of the Privacy

Commissioner for Personal Data published a guideline in respect

of use of cloud computing (“the Guideline”) in July 2015.

In the context of the use of cloud computing to store or process

personal data, it is pertinent to pay attention to the

requirements under the Personal Data (Privacy) Ordinance (Cap.

486 of the laws of Hong Kong) (the “PDPO”). The Guideline

suggests that the data user shall bear in mind the following data

protection principles in the PDPO:-

a. When a data processor is engaged, contractual or other

means must be adopted to prevent the data from being kept

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.

Under the aforesaid data protection principles, the data user

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

user should ensure that such data is treated with a similar level

of protection as if such data is stored in Hong Kong in order to

meet the expectation of data subjects. Data user should check

the transborder arrangement so as to ensure the personal data is

properly protected.

2. Data user should take note of further sub-contracting

possibilities. As data user will be liable for breach by any such

sub-contractor, formal contractual assurance should be in place

to ensure that obligations of the data processor are equally

applicable to sub-contractor.

3. Usage of standard contract may be convenient, but

customization will still be required to ensure the services and

the contract terms meet all security and personal data privacy

protection standards the users requires. Otherwise, the data

users will have to bear the risks of data breach and misuse, which

expose them to potential liabilty.

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

obligations owed to the data subject.

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

the data users are convicted for unauthorized direct marketing

reasons. As data user will also be liable if such unauthorized use

for direct marketing is committed by the data processor or other

sub-contractor, data user should be aware of their obligations

and to ensure compliance by the contractors.

by Owen Tse CONSULTANT

& Sharon Li ASSOCIATE

LITIGATION UPDATE

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.

3

Next Step for Variable Interest Entity (“VIE”)The Impact of Foreign Investment Law (“FIL”)on Existing VIE Structure

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.

by Patty Chan PARTNER

COMMERCIAL UPDATE

4

Latest Trends on Intellectual Property Protectionin China - Quarterly Updates

CTMO PRACTICE SEEMS TO ALLOW MORE CASES

AGAINST TRADEMARK SQUATTING

Based on recent decisions, we have found that the China Trade

Mark Office seems to have relaxed Article 11(7) of the

Trademark Law in order to combat trademark squatting

behavior. Article 11(7) provides that a sign which is deceptive

and easily misleads the public on the quality or origin of

goods or services, cannot be used as a trademark.

Traditionally, Article 11(7) is a ground that is used to prevent

deceptive marks from being registered, e.g. where the mark

specifically denotes that the quality of goods are high, or

where the mark appears to be an enterprise name but is

substantially different from the name of the mark owner. The

CTMO has now shown that it will allow this ground to be used

against marks that are registered in bad faith. This is therefore

another means for working around the tight requirements for

well-known status and similarity of goods. We will continue to

monitor this trend and will update more.

INCREASED REGULATIONS ON E-COMMERCE EVENTS

As Singles Day (November 11th) becomes the world’s biggest

shopping event, China has stepped up regulating

e-commerce promotional events in the “Interim Provisions on

the Administration of Centralized Online Promotional

Activities for Goods and Services” (“Interim Provisions”), which

came into effect on October 1st, 2015.

Under the Interim Provisions, platforms providing

promotional events have a duty to monitor sellers taking part

in the promotional events, and have a duty to take necessary

steps in stopping sellers from engaging in unlawful conduct.

Practices that violate consumer rights are also prohibited.

Examples of prohibited practices include refusal to return

deposits and denial of consumer’s rights to return product

sold during the promotional events. Practices amounting to

unfair competition are also prohibited — online platforms

cannot prohibit their sellers from taking part in other

promotional events organized by other competing platforms.

The Interim Provisions also regulate sellers taking part in such

promotional events. They are prohibited from using improper

means in its promotional activities, for example, falsely

labeling its products, providing false information on discounts

and giveaways, etc. This is a welcome clarification by the

IP UPDATE

by Annamae Koo CONSULTANT

& Fandy Ip ASSOCIATE

5

government, and serves a reminder to retailers and

e-commerce platforms to review its practices to be compliant.

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

August 1st, 2015.

The Guidelines provide that a dominant business may not

refuse, without due justification, to license its intellectual

property rights under reasonable terms if these IP rights are an

essential facility in business operation. In evaluating whether

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;

• 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.

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

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)

preventing the licensee from using competing products after

the expiry of the license agreement, and other unreasonably

restrictive conditions.

Violations of the above may result in sanctions by the

Administration of Industry and Commerce, resulting in

confiscation of earnings and a fine amounting to 1 - 10% of the

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).

As one can imagine, this law is on face value counter-intuitive

to the essence of IP rights, which are meant to provide a

certain degree of monopoly over IP rights. It has therefore

been controversial. The key is the interpretation of the clause,

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

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

had charged excessive royalties, bundled wireless

communications standard essential patents with

non-standard essential patents without justification, and

imposed unreasonable sales terms. Given these cases and the

further enactment of the Guidelines, right owners should keep

a close eye on how these guidelines are further applied in

practice. Existing license agreements should also be reviewed

to ensure that it is not in violation of the Guidelines.

IP UPDATE

6

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

Mark go way beyond the obvious trademark protection

granted to the House Mark itself. In Hong Kong, a prior

registered House Mark may even save any subsequent

trademark applications of the same entity from being refused

by the Trade Marks Registry.

Under Hong Kong law, if a trademark application is objected by

the Trade Marks Registry (no matter the objection(s) is/are

based on absolute and/or relative grounds), the applicant may

add a representation of a prior registered trademark to the

representation of the applied-for mark so that the revised

representation of the mark is no longer identical or similar to

the cited mark(s) or is distinctive enough to be registered as a

trademark. Of course, this method of overcoming objection

would only be advisable if the prior registered trademark is

likely to be used in conjunction with the applied-for mark in the

course of the trade. In such scenarios, adding a registered

House Mark may sometimes be the most logical choice and the

best way out for the applicant.

For instance, if a brand owner owns a prior trademark

registration “ABC” in Class 30, and would like to register a mark

“COFFEE” in Class 30 in respect of the goods ‘coffee’, which is

exclusively descriptive and is objected, the brand owner may

add the prior registered mark “ABC” to the mark “COFFEE” to

enable registration of the mark “ABC COFFEE”.

Given the potential role of House Mark as a ‘savior’ of

subsequent applications, one should be strategic and think

ahead when applying for the registration of House Mark and

there are a few important points to note:

First, one should make sure the goods and/or services covered

by the House Mark registration are broad enough, both in

terms of the classes and the specifications of goods and/or

services. It is the law that adding the representation of a

registered trademark (e.g. the registered House Mark) to that of

a subsequently applied-for mark is only possible if the goods

and/or services for which the registered House Mark is

registered are identical or similar to the goods and/or services

by Frederick Kwok ASSOCIATE

& Joyce Lee ASSOCIATE

IP UPDATE

applied for. For instance, in the hypothetical example above, if

the registered mark “ABC” does not cover Class 30 or covers only

‘rice’ in Class 30, it cannot be added to the pending mark

“COFFEE” in respect of ‘coffee’ to overcome Registry’s

objections even though both marks are owned/applied by the

same entity. That said, although the law adopts the wording

“identical or similar”, in practice, so long as the specification of

the pending application is narrower than that of the prior

House Mark, adding the House Mark to the pending mark is

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’.

What if the pending mark “COFFEE” covers not only ‘coffee’ but

also ‘confectionery’? In that case, if the applicant wants to add

House Mark, it will have to restrict the specification of the

pending mark to ‘coffee’. From our experience, it is not

uncommon to see brand owners without a complete IP

strategy having to reluctantly limit the specifications of their

subsequent applications and give up trademark protection for

parts of their goods and/or services when adding the

registered House Mark to overcome the Registry’s objection.

As such, it is advisable to keep the specifications of goods

and/or services and the classes in which the (potential) House

Mark is registered broad. In Hong Kong, proof of actual use of

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.

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

that it will become a prior registered mark to any other

subsequently-filed marks by the same applicant and ‘create’ a

safety net for them. For instance, if a brand owner filed the

application of the marks “ABC” and “COFFEE” on the same day,

and even though the application of “ABC” has first matured

into registration (which will have the date of registration dated

back to the filing date under Hong Kong law), the registered

mark “ABC” cannot serve as a prior registered mark to the

pending application “COFFEE” and cannot be used to save the

objected application.

Registering trademarks is always important to (new) business

or brand owners and special attention should be paid when

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

owners should rush to file all applications blindly without any

aforethought. Instead, there should be a strategy in place

before filing trademark applications, including when and in

what class(es) the applications should be made in order to

minimize costs and risks in protecting the brand.

A brand owner should always consider the possibility of using

a mark as House Mark and file a trademark application for that

mark first, before other applications for other marks. This way,

if there are objections or oppositions raised by the Registry or

any third parties against a subsequent application, the

applicant will at least have an option to save it by adding the

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).

There is never a straight-forward or standardized approach in

obtaining IP protection. With a coordinated strategy, one may

end up have a much broader protection than it would have

been at no extra costs. All is needed is a bit of extra thought

and a good IP counsel who has your best interests at heart.

IP UPDATE

7

8

State Council released Draft Revisionof 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 2015. 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:

by Flora Ho PRC PATENT ATTORNEY

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.

IP UPDATE

9

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.

© Vivien Chan & Co., Newsletter issue 4, December 2015

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.

(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)

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: 68 - 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.

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.

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.

The Draft clarifies the scope of disclosure of standards-essential patents. 85 (new) 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.

(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)

82and

83 (new)

IP UPDATE