On 28 May 2020, the Thirteenth National People’s Congress of China adopted the long-awaited “Civil Code” – the most extensive and significant legislation in China’s history, one that will replace several existing laws when it comes into effect on 1 January 2021.
Comprised of seven Parts, 84 Chapters and 1260 Articles, the new Civil Code is the only legislation in People’s Republic of China (“PRC”) history that is specifically labelled a “code”. The Civil Code amalgamates the existing civil and tort-related laws and Regulations, codifies a number of relevant judicial interpretations of the Supreme People’s Court, and introduces key new provisions.
This update begins with a brief history of China’s journey through development and enactment of the new Civil Code, provides an overview of the Code’s structure, and finally examines the Code’s intellectual property (“IP”)-related provisions and their impact on IP rights holders.
A brief history
China’s quest to establish a comprehensive and unified civil code began almost six decades ago. Due to the political and economic climate at the time, however, the first two attempts, undertaken in the 1950s and 1960s, both failed. Since the launching of its “opening-up” policy in 1978, the Chinese Government has consistently worked on its efforts to create a comprehensive civil code, one designed to meet the demands of a market-oriented economy. Unfortunately, China’s rapid economic and societal transformations throughout that same period made the creation of a complete civil code untenable.
As a result, the Standing Committee of the National People’s Congress (“NPCSC”) opted to proceed with the promulgation of a series of standalone civil law statutes instead, intending to integrate them into an overarching code when circumstances were finally ripe.
The fourth attempt at this amalgamation commenced in 2001 came the closest, when a draft civil code was completed and submitted to the NPCSC for review in 2002. The Chinese legislature eventually shelved this version, however, due to its complexity and controversy, choosing to maintain separate civil laws and substantively revise existing statutes.
The final attempt that led to the Civil Code began in 2014, as a two-pronged approach – first by adopting the General Provisions of the Civil Law in 2017 (which became the General Part of the Civil Code) and second, by separately crafting the remaining sections (the “Separate Parts”). The combined General Part and the Separate Parts were then submitted to the NPCSC in August of 2018, eventually forming the comprehensive and modern new Civil Code.
Overview of the new Civil Code
The new Civil Code consists of seven Separate Parts:
- General Part;
- Property;
- Contracts;
- Personality Rights;
- Marriage and Family;
- Inheritance; and
- Tort Liability.
Once effective, the new Civil Code will simultaneously abolish the still-extant General Principles of Civil Law, General Provisions of Civil Law (“GPCL”), Contract Law, Property Law, Tort Liability Law, Marriage Law, Inheritance Law, Adoption Law and Guarantee Law.
As the new Civil Code is an amalgamation of existing laws and regulations, it does not fundamentally change the existing legislation in those laws, and does not therefore alter the legal environment currently faced by foreign companies and rights holders doing business in China. However, specific changes may still affect the business models or compliance practices of foreign companies, so careful examination of relevant provisions to recognise and analyse the potential impact of any changes will be key.
Although this update briefly summarises the outline of the Civil Code, its overall focus is on those provisions dedicated to IP issues.
General Part
With the exception of a few language changes, the General Part is identical to the GPCL enacted in 2017. The General Part sets out the general principles and provisions of the Civil Code. Among others, these include rules on the types of civil entities, civil rights, and civil legal acts.
Property
The Part of Property is based on the current Property Law and Security Law. It addresses the ownership, usufructs and security interest over both real and personal property.
Contracts
The longest of all the Civil Code’s Parts, the Part of Contracts is based on the PRC Contracts Law, though it includes a significant number of new provisions. It prescribes the general contract law rules, introduces special provisions applicable to nineteen different types of typical contracts, and also states the position of the law on two types of quasi-contracts – negotiorum gestio and unjust enrichment.
Of note, the Part of Contracts have added four types of typical contracts to the original fifteen – guaranty contracts, property management services contracts, factoring contracts and partnership contracts.
The changes and additions in the Part of Contracts were promulgated with the dual aims of emphasising principles of good faith and fairness and improving existing transaction rules.
Personality Rights
This is the only Part of the Civil Code that did not have a pre-existing corresponding standalone statute. Instead, it is based on the General Principles of the Civil Law and codifies relevant judicial interpretations and administrative regulations on relevant issues.
Personality rights are defined to include: (1) the rights to life, body and health; (2) the rights of name and title; (3) the right of portraiture; (4) the rights of reputation and honour; and (5) the right to privacy. This Part sets out the general rules governing personality rights first, followed by specific rules on each of the five sets of rights.
Marriage and Family
This Part combines the current Marriage Law and Adoption Law, prescribing rules on marriage, relationships between couples and family members, divorce and adoption.
Inheritance
Based on the Inheritance Law, this is the shortest Part of the new Civil Code. It includes general rules as well as specific provisions on intestate succession, testamentary succession, and wills.
Tort Liability
This Part is generally based on the Tort Liability Law but contains certain structural changes and removes duplicative provisions that are already included in the General Part. This Part sets out provisions on the general principles of tort and rules of tort liability, and special rules applicable to certain specific types of torts, including environmental pollution, traffic accidents, product liability, medical accidents, high risk activities, damages caused by animals, and damages caused by buildings and objects.
The IP provisions
While the new Civil Code does not include a separate Part on IP, there are a total of fifty-two Articles that touch on issues concerning IP rights. Those Articles are interspersed throughout the General Part and the Parts of Property, Contracts, Marriage and Family, and Tort Liability.
This section of the update provides an analysis of these amendments and highlights their impact on IP rights holders.
General Part
Article 123 of the new Civil Code retains the current provision in GPCL that defines IP rights verbatim. Specifically, IP rights are defined as the exclusive rights enjoyed by rights holders in accordance with law, in relation to:
(1) works; (2) inventions, utility models and designs; (3) trademarks; (4) geographical indications; (5) trade secrets; (6) layout designs of integrated circuits; (7) new plant varieties; and (8) other objects as prescribed by law.
While the language remains the same, it is worth noting that this provision has been placed in the new Civil Code under Chapter 5 of the General Part titled, “Civil Rights”, along with other important personal and property rights. Thus, the new Civil Code makes clear that IP rights are exclusive and private rights enjoyed by civil entities.
Part of Tort Liability – punitive damages provision
Arguably, the most remarkable of all IP provisions in the Civil Code is Article 1185, set out in Chapter 2 of the Part of Tort Liability. Article 1185 states:
where the intellectual property rights of another are intentionally infringed upon, and the circumstances are serious, the infringed party shall have the right to claim corresponding punitive damages.
The significance of the above provision is two-fold. First, it fundamentally establishes a punitive compensation system for infringement of all IP rights. Second, it clarifies the conditions under which a right to claim punitive damages may arise.
Unlike common law jurisdictions, China’s legal system has generally followed the principle of “making one whole”, including in respect of IP infringements. This has meant that China’s IP laws have emphasised a compensatory system, aimed at either repaying the injured party for its actual losses, requiring the infringer to disgorge any “illegal profits”, or attempting to provide an approximate amount for either or both of those through specified statutory damages. With actual losses and the pirate’s illegal gains nearly always difficult (if not impossible) to prove, and the specified levels of statutory quite low (though admittedly increasing over the years), rights owners have barely been compensated for their losses. As well, infringers have come to view damages awards in such cases – almost invariably quite low due to the conservativism of Chinese courts – as merely the cost of doing business.
Beginning with the 1993 Consumer Protection Law, however, China has been gradually introducing clauses allowing punitive damages in specific laws to punish those that violate the law and infringe the rights of others. Similar efforts began in the field of IP with the 2013 amendments to the PRC Trademark Law, in which the then-introduced Article 63 provided that in cases of bad-faith infringement of another’s trade mark rights, where the circumstances are serious, the amount of compensation awarded may be between one and three times the amount calculated in accordance with the methods prescribed in this provision (i.e., the loss of the infringed party, the gain of the infringing party, or by reference to licensing fees of the trade mark) – clearly intended to punish the bad-faith infringer for its illegal conduct. The 2019 amendments to the PRC Trademark Law subsequently increased the multiplier for punitive damages to between one and five times the underlying damages award (see SIPS article: The Impact of China’s Trademark Law Amendments).
The 2015 Seed Law of the PRC (effective 1 January 2016) followed suit, wherein Article 73(3) provides that if infringement of the right to new plant varieties is serious, the amount of compensation may be determined as between one and three times of the amount calculated in accordance with the aforementioned method. The very-recently-amended 2019 PRC Anti-Unfair Competition Law also includes an analogous provision in Article 17, which stipulates:
if a business infringes upon another’s trade secret in bad faith with serious circumstances, the amount of compensation may be determined to be more than one time but not more than five times the amount determined by the aforesaid method.
Similarly, the current draft versions of the Copyright Law and Patent Law both contain corresponding provisions, setting a range of punitive damages between one and five times the amount calculated in accordance with the appropriate method where the infringement of the respective rights is intentional and the circumstances are serious.
Applicability of the punitive damages provision
While provision for punitive damages has only been made in specific IP laws up till now, the new Civil Code makes clear that under Article 1185 (when read in conjunction with Article 123), infringement of any of the Code’s delineated IP rights may trigger exposure to punitive damages, so long as the circumstances are serious and the infringement is intentional.
Elements of the punitive damages provision
As clarification, Article 1185 of the new Civil Code states that claiming punitive damages require both “serious” circumstances and the “intentional infringement” of another’s IP rights. This language is consistent with the relevant provisions in the draft Copyright and Patent Laws but differs from the earlier requirement of “bad faith” currently stipulated in the PRC Trademark Law and Anti-Unfair Competition Law.
The change from “bad faith” to “intentional” is generally viewed as lowering the threshold for punitive damages, as acting in bad faith is generally understood to require something beyond the intentional infringement of another’s IP rights. For instance, some courts in practice have found “bad faith” where the infringer not only initially intentionally infringed upon another’s rights but then continued to do so after being informed that their activities constituted infringement (or suspected infringement).
The second prong of this provision, however, remains the same and requires that the circumstances of infringement be serious before punitive damages may apply. Thus, the second prong acts to limit the scope of this provision, thereby preventing its abuse by rights holders.
In practice, courts have interpreted the second prong to require knowing and repetitive infringement of another’s IP rights. For instance, serious circumstances have been found to exist where a party continued to infringe on another’s rights after receiving a warning letter and being issued punishment decisions and injunctions by administrative and court authorities. Courts have also deemed the circumstances to be serious where the infringing party engaged in comprehensive imitation of the rights owner’s brand or the illegal trading thereof.
Since the first introduction of the punitive damages scheme, court cases where punitive damages have been awarded have been few and far between, due most likely to the lack of clear guidance in the law and, again, the general conservatism of Chinese courts. Regardless, it is hoped that the introduction of Article 1185 and the lowering of the bar for awards of punitive damages will encourage rights owners to seek such awards and courts to grant them moving forward.
Other provisions concerning IP
The remaining provisions pertaining to IP are set out in the Parts of Property, Contracts, and Marriage and Family, with the vast majority being included in the Part of Contracts.
Of these, the provisions in the Part of Marriage and Family (Article 1162) and in the Part of Property (Articles 440 and 444) retain entirely the language of the original provisions in the corresponding individual statutes, with the exception of Article 444, which no longer requires a written contract when pledges of IP rights are made. This change to eliminate written contracts, however, is made to all pledges and not just to pledges of IP rights.
IP provisions in Part of Contracts
Within the Part of Contracts, IP specific provisions are respectively set out in Subpart I, Chapter 2 Conclusion of the Contract; Subpart II, Chapter 9 Sales Contract; and Subpart II, Chapter 20 Technology Contracts. These changes and additions are generally in favour of IP rights holders.
For instance, Article 501 of Subpart I, Chapter 2 is a general provision that has expanded the contracting parties’ confidentiality obligations to include not only trade secrets learned during the conclusion of a contract, but also any other information that should have been kept confidential.
Similarly, Article 600 of Subpart II, Chapter 9 clarifies that wherever a subject matter with IP rights attached is sold, the IP rights do not automatically transfer to the buyer, only doing so if otherwise prescribed by law or agreed upon by the contracting parties.
Articles 843 to 887 in Subpart II, Chapter 20 largely track Articles 322 to 341 of the current Contracts Law relating to rules on technology contracts, with the following notable amendments and additions:
- Technology licensing contracts have been separated out from technology transfer contracts, and now constitute an individual form of technology contracts.
- The obligations of the parties in a commissioned development contract are clarified.
- A new provision has been added to address the transfer and licensing of other IP rights. This provision will act as the legal basis for the commercialisation of technology contracts involving other IP rights, such as new plant varieties, layout designs of integrated circuits, etc.
The above amendments are clearly in line with the Government’s policy to exert greater efforts on protecting IP rights and to promote the development of IP. Therefore, they serve to rights holders’ advantage in general (at least, in theory).
It however remains to be seen just how the PRC Civil Code will be implemented and enforced in practice. Meanwhile, further guidance is expected from the PRC Supreme People’s Court in the forms of judicial interpretations this year.
The promulgation of a comprehensive Civil Code, the first “code” ever enacted in the PRC, is a significant milestone in the advancement of China’s legal system. It embodies a number of new provisions clearly designed to streamline business transactions and makes clear the Government’s commitment to principles of good faith and fairness in these contexts. From an IP perspective, the new Code also strengthens the protection of IP rights, promotes scientific innovation and, importantly for victimized rights owners, should act to increase the cost of infringement for recalcitrant pirates via the imposition of punitive damages in all IP infringement contexts. It remains to be seen whether the courts will follow the Civil Code’s lead on that point, however.
By Dan Plane and Avie Zhou
