Unless you have been on another planet for the last few years, you will have heard about and possibly experienced China‘s hunger for technology. China‘s appetite for the latest software, e-commerce applications and telecommunications devices and functions seems insatiable. In addition to us seeing the well known foreign brands in the local Chinese market, a number of local brands are beginning to come through as leaders in IT and communications. This article explores some of the more important legal issues associated with IT and communications in China. Recent changes to foreign trade regulations, telecommunications’ services classifications and the way courts and government agencies are viewing unfair competitive practices signal that the legal framework for IT and communications, and the convergence of these industries, is coming together and laying the foundations for a well regulated market sector.
The Regulators and Convergence
As we have seen in many countries around the world, the convergence of technologies has forced the convergence of regulations and the regulators themselves. China has been well aware of this phenomenon, seeing the Ministry of Information Industry (MII) formed in 1998 by the merging of the Ministry of Post and Telecommunications, the Ministry of Electronics Industry and part of the Ministry of Radio, Film and Television. The MII now regulates the IT, the Internet and telecommunications industries, albeit by separate departments. The State Administration of Radio, Film and Television (SARFT) continues to retain control over the general media, however, given the rapid convergence of industries, it is likely that it will need to work much more closely with the MII over the next few years. The State Administration of Industry and Commerce (SAIC) continues to exercise jurisdiction over some aspects of e-commerce (for example business and Web site registration in Beijing), and it is expected that it will continue to do so in relation to non-technical issues, as China and the rest of the world has tended to prefer to put the “bricks” back into “clicks and mortar”, rather than establish and maintain two separate administrative regimes. Similarly, the Ministry of Commerce (MOFCOM) will remain in charge of regulating foreign investment in the IT and communications sectors, as it does in other sectors of the economy.
E-commerce
China was actually one of the first countries to be able to claim that it had legislated in the area of e-commerce. The 1996 Guangdong Province Ecommerce Regulations were revolutionary in some ways, in showing a legislature that had the courage to legislate in an area that suffered from a lack of country-specific legislative precedents. One of the main achievements of these regulations was to make it clear that electronic contracts involving a foreign element would be upheld as valid. In 1999, the long awaited PRC Contract Law was unveiled, bringing together the contract law regimes for domestic and foreign related transactions. The law stated that contracts could be in written form, with Article 11 confirming that “”Written form” refers to a form such as a written contractual agreement, letter, electronic data text (including a telegram, telex, fax, electronic data exchange and e-mail) that can tangibly express the contents contained therein.” Article 16 basically produced a postal acceptance rule for email-concluded contracts. Then in 2000, the Beijing AIC issued a regulation requiring any entity in Beijing engaging in various forms of e-commerce and Internet services to register with the AIC and other government agencies. In 2002, it issued a further set of regulations (Supervision and Administration of Electronic Commerce Tentative Procedures) which reaffirmed the licensing and registration regime it announced in 2000, and also set out various helpful consumer protection provisions such as mandating a cooling-off period.
One issue which has continued to frustrate local and foreign companies wishing to engage in e-commerce in China has been consumer and technical concerns with security issues such as hacking, viruses and privacy. To the surprise of many foreign companies, China has an intimidating legislative framework relating to computer network security. What remains a concern is how often the laws are enforced and the lack of deterrence in the penalties that are imposed when they are enforced.
The Regulations Regarding the Security of Computer Information Systems were enacted as early as 1994. Article 6(1) prohibits the intrusion into or use of a computer information network without authorisation. Article 285 of the PRC Criminal Law imposes criminal liability for unauthorised entry into computer systems in limited circumstances. It provides that whoever, in violation of state regulations, enters without authorisation computer information systems in the fields of state affairs, national defence construction or sophisticated science and technology shall be sentenced to a prison term of no more than three years or to criminal detention. The reference to “state regulations” is understood to mean the Computer Information Networks Security Measures.
As far as viruses are concerned, the PRC Criminal Law, the Regulations Regarding the Security of Computer Information Systems, the Administrative Measures for the Prevention and Control of Computer Viruses and various other regulations clearly make writing and spreading a virus, a risky proposition in China. For example Article 23 of the Regulations for the Security Protection of Computer Information Systems provides that whoever intentionally inputs computer viruses or other harmful data to endanger the safety of computer information systems..shall be given a warning or fined by the public security authorities.
There also appears to be potential for privacy and personal data to be protected under various laws in China. The PRC Constitution refers to a right of “personal dignity”. The PRC Civil Law refers to this right, as well as a right to “reputation”. Given the Supreme Court 2001 Interpretations regarding a person’s right to claim loss for mental anguish, the concerns regarding the need to prove damage in a “personal dignity” or “reputation” privacy invasion case, have become less of a concern. Further, the PRC Criminal Law prohibits the unauthorised opening of correspondence, and it is thought that a court would have little trouble in concluding that this includes electronic correspondence, given that 100 million people in China use e-mail as their preferred form of correspondence. Finally, Article 12 of the Internet Messaging Services Provisions 2000 requires that ICPs “shall keep users’ personal information confidential and shall not disclose such personal information to any third party without the consent of the users, unless the law otherwise requires such disclosure.” It is the last part of this sentence that continues to cause concern, since China‘s law enforcers have extremely wide search powers in the relevant cases.
The amendments to the PRC Foreign Trade Law and the issuing of the Foreign Investment in the Commercial Sector Procedures create the potential for far more effective e-commerce in China. Individual persons will now be able to engage in import and export, thus largely removing concerns by e-commerce operators that the contract that is formed on-line with a PRC citizen may not be enforceable due to lack of capacity. Further, foreign entities will be able to engage in domestic wholesale and retail services (a major breakthrough for “bricks and mortar” as well) without having to form a costly joint venture or engage in a fiction of adding value to their imported goods before selling them into the China market.
The Digital Millennium Copyright Act (US) (DMCA) has been seen as a vital tool in ensuring the confidence of businesses to engage in on-line services. It makes ISPs liable in certain circumstances and sets up a regime for efficient dispute resolution regarding copyright material that is placed on an ISP’s Web site without the copyright owner’s consent. China’s Supreme People’s Court’s Several Issues Concerning the Laws Applicable to the Trial of Copyright Disputes Involving Computer Networks Interpretation (ISP Interpretation) was first issued in December 2000, and was amended in January 2004 – an article was added to the 2004 revision of the interpretation prohibiting an ISP from uploading, broadcasting or providing methods or equipment that it knows are used to avoid the technical protection measures used to safeguard other person’s copyright works. Article 5 sets up a “take-down” notice procedure similar to that found in the DMCA. Article 6 requires an ISP/ICP to provide the copyright owner with information regarding the person that has carried out the online copyright infringement.
Software
The PRC Contract Law sets out a number of provisions affecting “technology” contracts. Most of these are not controversial and would be dealt with in any lawyer’s standard software licensing or outsourcing contracts. The PRC Technology Import and Export Regulations 2002 (Technology Import Regulations) do however contain some provisions which have caught many foreign software sellers off-guard.
Article 2 of the Technology Import Regulations states that “technology import and export as referred to in these Regulations means acts of transferring technology from outside the territory of the People’s Republic of China into the territory of the People’s Republic of China or visa versa by way of trade, investment, or economic and technical cooperation. The acts mentioned in the preceding paragraph include assignment of the patent right, assignment of the patent application right, licensing for patent exploitation, assignment of technical secrets, technical services and transfer of technology by other means.” Upon a literal reading of these regulations, it would appear that they cover software licensing and outsourcing arrangements. Article 17 requires the relevant technology agreement to be registered with the local department of MOFCOM. It is understood, that many software sellers have been able to obtain exemptions from MOFCOM regarding registering their software license agreements under these regulations – some MOFCOM officials take the view that the software licenses should be registered with the MII under other regulations (discussed below) and therefore do not need to be registered under the Technology Import Regulations. Given that the Technology Import Regulations contain a number of clauses that concern technology owners, such as prohibitions on certain restrictive covenants, mandatory improvement-ownership provisions and others, some sellers are happy not to try to get within this regime. Failure to comply with these regulations could cause problems when it comes to enforcing the provisions of the agreement (a defendant could claim some type of equity-related claim) or attempting to convert RMB into foreign currency for royalty remittance.
The Computer Software Regulations that were issued in 2002, allow for the optional registration of software and licences with the Computer Software Protection Centre. There is no doubt that registering software with this body will allow for easier enforcement in copyright infringement actions, since a plaintiff will not have to prove that they own the copyright in the software in order to be able to take advantage of interlocutory injunctions and to proceed with a successful infringement action. Further, given that software enterprises are able to obtain favourable tax treatment in China, registration under these regulations may be required by the software enterprise approval authority as a condition of being offered the preferential treatment. The MII also requires registration – in 2000, it issued the Administration of Software Products Procedures. These procedures state that only those products that are registered with the MII can be sold in China.
We are beginning to hear a lot of talk about the long-awaited general competition law being unveiled in the near future. Many are concerned that this law is going to be aimed at large foreign multinationals that have been able to eat up more than 90% of the market in some sectors. No doubt freeing up the commercial sectors of wholesale and retail to small foreign companies will in itself have an impact on competition in many of these sectors. Some articles have appeared in the press stating that the government intends issuing a special government-software procurement law to make government departments and possibly state-owned entities use no more than 30% of foreign software. Given the size of the government in China, this could cause significant concerns for foreign software suppliers. Such a step would also be a concern for China‘s move towards improving efficiency in government.
Another interesting development is the increased willingness of the courts to apply the PRC Anti-Unfair Competition Law to technology-related cases. In one recent case, a software developer was found liable for unfair competition when it set up some software which, when downloaded, stopped the software of one its competitors from functioning adequately. If the courts continue to move in this direction, we will start to see local and foreign companies putting increased confidence in the judiciary to deal with more technical cases involving anti-competitive conduct.
As far as foreign investment in software enterprises and R&D centres in China is concerned, the incentives still seem to favour software enterprises. The Encouraging the Development of the Software and Integrated Circuit Industries Several Policies and the Questions Relating to Foreign Investors Investing in and Establishing Research and Development Centres Circular were issued in 2000. Whilst the minimum investment required to establish an R&D Centre has remained at US$2m, most of the tax incentives (two years tax free, and then three years of 50% income tax) seem to favour software enterprises. One difficulty in obtaining these very favourable incentives is that an enterprise must be registered as a software enterprise, allowing subjectivity to enter the equation. Nevertheless, it certainly appears that investment in software development remains a key area for China.
Conclusion
It is hoped that this article provides its readers with an insight into the substantial framework of regulations currently existing in China, as well as likely future developments particularly in the areas of e-commerce, competition law concerning technology and convergence issues affecting the regulators. There is great potential for China to become a leader in the IT and communications markets, given new technologies, passion and dedication and foreign cooperation in relation to to new technologies. It is hoped that China will also continue to ensure that its laws keep pace with the technological and industrial developments.
Mathew Murphy established the MMLC Group, which is based in Beijing. He is its Managing Director.
