2014.08.22 MIAO, Qinghui (Catherine)、PAN, Yiming
July was a lucky month for some foreign-invested enterprises, but not for all. Lenovo’s proposed deal to buy IBM’s X86 server business was approved. Apple lost a patent case. Shanghai Husi was shut down due to the alleged sale of expired meat. Microsoft China was targeted by the State Administration for Industry and Commerce (“SAIC”) for an anti-monopoly investigation. This bulletin provides a snapshot of the above events and the legal implications for the foreign-invested enterprises.
1. Lenovo: Ministry of Commerce’s Anti-Monopoly Bureau Approved the Proposed Deal to Buy IBM’s X86 Server Business
On July 4, 2014, according to Reuters, the Chinese Ministry of Commerce’s Anti-Monopoly Bureau approved Lenovo Group’s (“Lenovo”) proposed $2.3 billion deal to buy IBM Corporation’s (“IBM”) X86 server business.1 The announcement has not yet been published on the website of the Ministry of Commerce.
1.1 Background
On January 23, 2014, Lenovo announced that it had entered into a definitive agreement with IBM to acquire IBM’s X86 server hardware and maintenance business. The deal includes System x, BladeCenter, Blade, FlexSystem, Pure Flex, Blade Network Technology, related networking products, other tangible assets, related intellectual property, related contracts and inventory. Consideration for the acquisition is approximately $2.3 billion, including $2.07 billion in cash and $182 million in Lenovo shares to be issued to IBM.2
1.2 Legal Review
The Chinese Anti-Monopoly Law (“AML”) applies to activities outside mainland China that eliminate or restrict competition in the domestic market. If one operator obtains controlling rights in another operator by means of an asset acquisition and reaches the reporting threshold, such operator must report this information to the Ministry of Commerce. Without such report, the proposed acquisition cannot proceed.
1.3 Next Steps
In addition to approval from the Ministry of Commerce’s Anti-Monopoly Bureau, the proposed deal requires the approval of the Committee on Foreign Investment in the United States (“CFIUS”), the Council of Europe, and the Competition Bureau of Canada. We will continue to monitor the progress of these approvals.
2. Apple: Patent Case Defeat
In the morning of July 8, 2014, the Beijing First Intermediate Court announced its judgment in the case brought by Apple Computer Trading (Shanghai) Co., Ltd. (“Apple”) against the Patent Reexamination Board of SIPO and Shanghai Zhizhen Internet Technology Co., Ltd. (“Zhizhen”). The court upheld Zhizhen’s patent and decision number 21307 rendered by the Patent Reexamination Board of SIPO. Zhizhen’s voice system patent (number ZL200410053749.9) is still valid. Apple said it would appeal the judgment to the Beijing Higher People’s Court.3
2.1 Background
In June 2012, Zhizhen sued Apple in the Shanghai First Intermediate People’s Court, alleging that Apple’s Siri devices infringe Zhizhen’s voice system patent. This case has not been concluded.
In November 2012, Apple asked the Patent Reexamination Board of SIPO to invalidate the patent in question on the ground that Zhizhen’s patent did not fulfill the requirements of the Patent Law and the Implementing Rules of the Patent Law. Apple’s main allegations were that the invention did not satisfy the requirements of novelty and creativity, the relevant functions had not been fully disclosed, the scope of patent protection was not clear, and the patent claim could not be supported by the disclosure.
After review, the Patent Reexamination Board of SIPO upheld the validity of Zhizhen’s patent on September 3, 2013.4 Apple challenged the decision and sued the Patent Reexamination Board of SIPO and Zhizhen (as a third party) in the Beijing First Intermediate Court.
2.2 Legal Review
In order to reduce the risk that a new product will infringe a patentee’s rights, companies should conduct patent searches in the relevant jurisdictions, before commencing research and development. If a company must utilize a patented invention in a new product, it may attempt to secure a transfer of or a license to use the patent. In the event that the patent meets the requirements for invalidation, the company may ask the Patent Reexamination Board of SIPO to invalidate the patent.
2.3 Next Steps
The validity of Zhizhen’s voice system patent will directly impact the ongoing patent infringement case between Zhizhen and Apple in the Shanghai First Intermediate People’s Court. We will continue to follow the progress of Apple’s administrative proceedings and Zhizhen’s patent infringement case.
3. Shanghai Husi: Accused of Producing Food with Expired and Poor Quality Materials
3.1 Background
In the evening of July 20, 2014, Shanghai Dragon Television reported that Shanghai Husi Food Co., Ltd. (“Shanghai Husi”) supplied food produced, in whole or in part, with expired chicken and beef. The Shanghai Municipal Food and Drug Administration and the Shanghai Public Security Bureau immediately and took measures to remove the food from the distribution chain.5
On July 23, 2014, the Shanghai Public Security Bureau detained five executives of Shanghai Husi, including the person in charge and the quality control manager. Food containing products produced by Shanghai Husi has been removed, sealed, or otherwise controlled.6
OSI Group, LLC ("OSI Group"), the parent company of Shanghai Husi, announced a recall of all food produced by Shanghai Husi. In addition, OSI Group will appoint a new team in China. OSI Group also started an internal investigation into the misconduct of current and former executives and stated that it would cooperate in the investigations of the Shanghai Municipal Food and Drug Administration, the Shanghai Public Security Bureau, and other authorities.7
Although the joint investigation of the Shanghai Municipal Food and Drug Administration and Shanghai Public Security Bureau is ongoing, Shanghai Husi is suspected of producing food with expired materials, labeling old meat as new meat, changing production and expiration dates, changing the packaging of frozen meat, and other misbehavior.8
3.2 Legal Review
Operators that engage in food production, food distribution, and catering must establish a food safety management system and follow a number of laws including the Food Safety Law, Product Quality Law, and Protection of Consumers’ Rights and Interests Law. During procurement, in addition to inspecting the Certificate of Compliance and inspecting the product in accordance with food safety standards, the food operator should conduct on-site investigations of suppliers from time to time.
If the food operator produces food that is rotten, rancid, moldy, decayed, unclean, mixed with other objects, adulterated, doped, offensive to the senses, or expired, the food operator is at risk of incurring penalties (e.g., cessation of production, confiscation of products illegally produced or sold, confiscation of illegal gains, fines from five to ten times of the value of the products). In the case of a serious offense, the food operator’s license will be revoked. In the case of a crime, the food operator will incur criminal liability.
3.3 Next Steps
Even though the authorities have not finished their investigations into Shanghai Husi, fast food chains such as Yum!, McDonald’s, and Burger King have announced that they will cease purchasing from Shanghai Husi.9
We will continue to watch for any investigation results and any penalty imposed on Shanghai Husi. We will also monitor the impact of this food scandal on domestic food operators, consumers, legislation, and the enforcement of food safety laws.
4. Microsoft China: Anti-monopoly Probe
On July 28, 2014, nearly 100 officials from local offices of the SIAC in nine provinces and cities, including Shanghai, Guangdong, Sichuan, Fujian, Hubei, Jiangsu, Chongqing, and Hebei, raided Microsoft (China) Co., Ltd. and its Shanghai, Guangzhou, and Chengdu subsidiaries (collectively, “Microsoft China”) in connection with the SAIC’s anti-monopoly probe.10
4.1 Background
In June 2013, the SAIC commenced its review of Microsoft China based on reports that Microsoft China was suspected of violating the AML due to issues arising from the partially-disclosed Windows operating system and Office software (e.g., compatibility, tie in sales, file verification).
During the review, the SAIC met with Microsoft China and other related companies. Microsoft China submitted a report to the SAIC on its concerns. Other related companies also submitted reports to the SAIC.
In the course of the preliminary review, the SIAC concluded that it could not eliminate the possibility that Microsoft China’s behavior could be regarded as monopolistic. The SAIC accordingly commenced the anti-monopoly probe of Microsoft China.11
4.2 Legal Review
Despite the fact that the SAIC did not disclose the nature of Microsoft China’s behavior, it can be inferred that Microsoft China is suspected of abuse of dominant market position because the SAIC enforces rules on monopoly agreements (excluding price monopoly agreements), abuse of dominant market position, and abuse of administrative power to eliminate or restrict competition (excluding price monopoly agreements).
A “dominant market position” refers to a market position where an operator can manipulate the prices or volume of products or other transaction conditions and/or can hinder or affect the entry of other operators into the relevant market. Without a justifiable reason, an operator with a dominant market position cannot, inter alia, refuse to trade with counterparties, restrict trading, require tie in sales, attach unfair conditions to transactions, or apply different terms to counterparties.
In determining whether the operator holds a dominant market position, the SAIC will take the following factors into consideration: the operator’s market share in the relevant market, competition in the relevant market, the operator’s ability to control the market for the sale or purchase of the product, the operator’s financial and technological abilities, the level of reliance of other operators on the operator in terms of trading, and the degree of difficulty for other operators to enter the market. If the operator reaches certain thresholds of control in the relevant market, it may be deemed to hold a dominant market position.
If the operator abuses its dominant market position, the SAIC may require that the operator cease its offending conduct, may confiscate any illegal gains, and may impose a fine equivalent to 1% to 10% of the operator’s sales revenue in the previous year. The fine will be determined based on the nature, extent, duration, and other facts of the misbehavior. If the operator, on its own initiative, stops abusing its dominant market position, the SAIC may exercise its discretion to reduce or rescind the fine.
4.3 Next Steps
This is the first time that Microsoft China has been targeted in an anti-monopoly probe. Since 1990, Microsoft has been involved in anti-monopoly investigations in the United States, the European Union, Korea, and Japan and has incurred numerous fines. We will continue to monitor the progress of the anti-monopoly probe of Microsoft China.
A subsequent Foreign Investment Bulletin will cover key commercial events in China in August 2014.
1. http://www.reuters.com/article/2014/07/04/lenovo-ibm-idUSB9N0P601G20140704
2. Discloseable Transaction-Acquisition of the X86 Server Hardware and Related Maintenance Services Business of International Business Machines Corporation and Resumption of Trading
3.http://www.sipo-reexam.gov.cn/xwgg/dxalbd/10512.htm
4. http://app.sipo-reexam.gov.cn/reexam_out/searchdoc/decidedetail.jsp?jdh=21307&lx=
5. http://www.shfda.gov.cn/gb/node2/node3/node253/node270/node2765/userobject1ai41125.html
6. http://www.shfda.gov.cn/gb/node2/node3/node253/node270/node2765/userobject1ai41165.html
7. http://news.xinhuanet.com/2014-07/28/c_1111827933.htm
8. http://www.shfda.gov.cn/gb/node2/node3/node253/node270/node2765/userobject1ai41201.html
9. http://finance.sina.com.cn/chanjing/gsnews/20140724/163419809071.shtml
10. http://www.saic.gov.cn/ywdt/gsyw/zjyw/xxb/201407/t20140729_147122.html
11. http://www.saic.gov.cn/ywdt/gsyw/zjyw/xxb/201407/t20140729_147122.html
