This article intends to provide reference for enterprises to establish a mechanism regarding the recovery of creditor’s rights based on practical experience.

The fundamental logic of such mechanism is that enterprises shall manage the creditor’s rights during the whole procedure, including the risk evaluation before a transaction, risk identification during the transaction, and corresponding measures after the risk comes true. The reason for such logic is that before the transaction, if an enterprise misunderstood the counterparty’s finance ability, or pursued a transaction without the concern of risks, then the creditor’s rights related to such transaction may have potential risks; during the transaction, if an enterprise ignored the agreed clauses, or failed to keep relevant evidence, then the risk related to the recovery would become higher; and when an enterprise encountered difficulties in the process of claim for the creditor’s rights, and it failed to take effective actions, such creditor’s rights may eventually become bad debts.

Then how to take effective measures during the three stages?

Before the transaction, enterprises should pay attention to the counterparty’s business status (including its business scope, performance over the years, etc.), and credit records. In addition, it is also recommended to investigate litigations related to the counterparty, and check whether the counterparty is under an enforcement, or its legal representatives, shareholders, and key persons have been enforced with high consumption restrictions, or been listed as dishonest persons, etc. Those measures could help enterprises to get to know the counterparty’s economic strength, performance capacity and business reputation, based on which, enterprises could set the bottom line of the relevant transactions (e.g., payment terms, liability for breach of contract, etc.).

During the negotiation, enterprises could take advantages of their own position and negotiate for more favorable conditions, which shall be stated in the contracts. Regarding the review of contracts, because this is a complex topic, which will not be gone further in this article.

During the performance of relevant contracts, enterprises shall collect and keep evidence, such as a contract, a statement signed and sealed by the debtor, the logistics vouchers or delivery vouchers, the receipt of goods, the supplementary agreement or memo regarding significant changes of the agreed items, various settlement bills, etc… The form of evidence includes written records, emails, WeChat chat history, letters, etc. In practice, it is recommended for enterprises’ legal department to draft a practical guidance for the business department regarding the evidence list based on different types of contracts.

During the performance of the contract, before the creditor’s rights are recovered, enterprises shall pay attention to the changes in the business conditions of the counterparty. If there is any negative changes, enterprises shall take appropriate measures in a timely manner, such as requiring the counterparty to provide additional guarantees, etc. It is recommended to design a countermeasures and authorization system, in which different departments would get to know when and how to take corresponding measures. Such system would design the countermeasures based on the characteristics of the enterprise’s industry and transaction mode, etc., in addition with the situation of the creditor’s rights. Due to the differences among economic conditions, industries, and transaction modes, the details of such system would not go further in this article.

Finally, it should be noted that the common means for the recovery of the creditor’s rights include sending urging letters, lawyers’ letters, taking preservation measures, applying for arbitration, filing lawsuits, applying for enforcement, applying for ordering the debtor to enter bankruptcy proceedings, etc. As the creditor, enterprises could flexibly choose one or more means. For example, when it is found that the debtor lacks property to be preserved or enforced, the creditor could check whether the debtor has any due claims against a third party, and if so, the creditor could apply for preservation of such claims; or, if the debtor has a large amount of debt, but still has market value, the creditor could urge the debtor to apply for debt restructuring and bankruptcy reorganization.

Therefore, the subrogation is a legal right, to implement such right does not require the consent of the debtor or the secondary debtor. However, such implementation shall meet the requirements stipulated in Article 535 of the “Civil Code”, that is, the creditor shall prove that “the creditor’s rights have expired” and “the debtor is remiss in exercising its creditor’s rights to the secondary debtor”.

Then, how can a creditor prove that the debtor has a due claim against the secondary debtor?

Because of the protection of trade secrets and the relativity of contracts principle, it is difficult for the creditor to get to know the debtor’s claims. In practice, there are mainly two methods to solve this problem: (1) the debtor is willing to cooperate with the creditor, e.g., the debtor would send a notice of assignment of the creditor’s rights to the secondary debtor (essentially this is an act of assignment of creditor’s rights), or the debtor provides evidence related to those creditor’s rights. For example, in the case of (2022) Jing 02 Min Zhong No. 7638, the debtor sent a notice of assignment of the creditor’s rights to the secondary debtor, and the secondary debtor confirmed the amount of the secondary debt; and (2) relevant parties have a chain contract relationship, a common circumstance is the relationship between the owner, the general contractor and the subcontractor in the construction contract. For example, in the case of (2022) Hu 02 Min Zhong No. 6293, the sub-subcontractor skipped the subcontractor and sued the general contractor claiming for the secondary creditor’s rights, the court upheld the sub-subcontract’s claim. Overall, the probability of success through the former method is much higher than the later one. However, when adopting the former method, we suggest the creditor to seize two timings: (1) when the debtor cooperates in issuing the notice of assignment of the creditor’s rights, it would be better to require the debtor to provide evidence related to such creditor’s rights, such as contracts, other documents which have confirmed the amount of the creditor’s rights, etc., so as to avoid relying solely on the notice, which is easy to be successfully defended by the secondary debtor; and (2) it would be better to include the debtor as a third party in the lawsuit against the secondary debtor.

Regarding the requirement of “the debtor is remiss in exercising its creditor’s rights to the secondary debtor”, in the current judicial practice, the main opinion is that the debtor has not claimed its due debts from the secondary debtor by means of litigation or arbitration.

In addition, the creditor is puzzled by the arrangement of relevant lawsuits, that is, whether the creditor could sue the secondary debtor directly; or it shall sue the debtor firstly and then sue the secondary debtor?

It depends. If the due debt is clear without any disputes, the creditor could sue the secondary debtor directly. From the perspective of judicial practice, if the amount of the due debt is fixed, such as borrowing, or the debtor confirms the amount of the due debt in a certain way, normally the court would uphold the creditor’s claim for subrogation. In many cases, if the debtor raises an objection to the creditor’s due claim, or there is a dispute over the liquidated damages, etc., by which the court may hold that the amount of the due claim is uncertain, then the court may reject the creditor’s claim after hearing. For example, in the case of (2021) Hu 0116 Min Chu No. 12697, the debtor defended that there was liquidated damages, so the amount of the due claim was uncertain. Under such circumstance, the creditor has to sue the debtor first, and then prove that the claim against the debtor is due and clear by execution documents, such as judgment, mediation or arbitration award, and then sue the secondary debtor to exercise the subrogation. Typical cases are (2020) Supreme Court Min Zai No. 231, (2022) Hu 02 Min Zhong No. 6293, (2022) Beijing 02 Min Zhong No. 6005, etc.

Article 12 of the “Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Security Law” stipulates that, the security term agreed upon by the parties or required for registration by the registration authority is not legally binding on the existence of the right over the secured property, in which it clarifies that the mortgage registration term has no effect on the validity of the mortgage right. After the implementation of the “Civil Code”, the above judicial interpretation has become invalid. The “Civil Code” and the new judicial interpretation have not mentioned this issue. However, Article 393 of the “Civil Code” stipulates that the security interest may be extinguished under 4 circumstances: (I)the principal creditor’s rights are extinguished; (II) the security interest has been realized; (III) the creditor waives the security interest; or (IV) any other circumstance occurs under which the security interest will be extinguished as provided for by any law. In view of this, the expiration of the mortgage registration term will not affect the validity of the mortgage right.

Regarding this issue, in view of the recent practice of relevant administrative authorities, they hold the same opinion as stipulated in the previous judicial interpretation. According to the consultation with the administrative authorities in Shanghai and Dalian, when a mortgage right is extinguished, the mortgagor shall handle the mortgage right cancellation procedure, otherwise the mortgage right would still be registered in the system, and the mortgaged property could not be able to be used and transacted normally. In addition, this opinion is also applied in judicial practice. For example, in the case (2021) Jing 04 Min Chu No. 236, the Beijing No. 4 Intermediate People’s Court pointed out that, although the mortgage registration term has expired, it has no effect on the validity of the mortgage right. Therefore, when the mortgage registration term expires, as long as the claim is valid, the mortgage is valid.

Back to the case at the beginning, another question just jumps out of mind, that is, if other courts have seized the properties during the time lag between the expiration of the mortgage registration term and the seizure applied by A, whether A still has the priority right?

According to Article 414 of the “Civil Code”, where the same property is mortgaged to two or more creditors, the proceeds from the auction or sale of the mortgaged property shall be applied to paying debts in accordance with the following provisions: (I)where the mortgage has been registered, the repayment order shall be determined according to the time of registration; (II) The registered mortgage shall have priority over the unregistered ones for compensation; and (III) Where no mortgage is registered, the repayment shall be made on the basis of the proportion of creditor’s rights.

Therefore, after the mortgage registration expires, if the mortgagor does not apply for cancellation, the mortgage registration record will always exist in the system. Since A’s mortgage registration time is earlier than those enforcement actions, A could still have priority even if other courts have seized the properties before A applies for seizure.

In practice, there is another issue deserves attention. A creditor applies for both the exercise of the creditor’s right and the mortgage rights, the two applications are separate. Paragraph 1 of Article 44 of the “Interpretation of the Supreme People’s Court on the Application of the Guarantee System of the Civil Code” (Fa Shi [2020] No. 28) stipulates that, where the creditor brings a lawsuit only against the debtor before the period of limitation of action for the principal creditor’ right expires, but it, after judgment or mediation by the people’s court, fails to apply for compulsory execution against the debtor within the period of limitation for application for execution as prescribed in the Civil Procedure Law, if the creditor claims the exercise of his mortgage right against the mortgagor, the people’s court shall not support such claim. The interpretation holds such opinion because the mortgage right is a real right, which would not be applied with the statute of limitations, but as a subordinate right of the principal creditor’s right, it exists with the existence of the main creditor’s right (see (2020) Hu 01 Min Zai No. 86), so the purpose of this article is to urge the mortgagee to exercise the mortgage right before the expiration of the statute of limitations for the principal claim.

The above case occurred in 2018, and finally the Suzhou court rejected Y’s petition (see (2018) Su 0402 Min Chu No. 5721). Then, after the implementation of the “Personal Information Protection Law”, will employers still be possible to check on work attendance by GPS?

To check on work attendance by GPS would obtain employees’ whereabouts, which belongs to sensitive personal information. According to Article 13, paragraph 2 of the “Personal Information Protection Law”, where it is necessary for the implementation of human resources management in accordance with the labor rules and regulations formulated in accordance with the law and the collective contract concluded in accordance with the law, the consent of the individual concerned is not required. However, Article 29 stipulates that the processing of sensitive personal information of an individual shall be subject to the individual’s separate consent. Regarding the application of these two provisions, whether an employer should obtain a separate consent of its employee to process sensitive personal information, it is still unclear from the perspective of legislation and in the judicial practice. In order to minimize risks, the safest way for an employer would be to obtain a separate consent regarding employees’ sensitive personal information. However, let’s assume that the subsequent rules are issued to clarify that employers do not have to obtain employees’ separate consent while handling employees’ personal sensitive information within the scope stipulated in Article 13, paragraph 2, then whether employers could use GPS to check on work attendance without any risks? The answer is negative.

No matter whether there is legal basis or not, the very first thing for employers to check on work attendance by GPS is that they shall explain the purpose and necessity of such management methods, and obtain the understanding of employees as much as possible. Otherwise, even if employees have signed the separate consent paper, they may have a negative mentality such as resistance, or the unease of personal privacy being monitored, which will bring a negative impact on the enthusiasm and stability of employment, which deviate from the original intention of attendance management. This very first thing is a test of HR’s wisdom. It is necessary to provide a well-founded explanation regarding the purpose, objects, specific GPS tools, and the scope of personal information, then employers could gain employee’s understanding and support, by which employees’ doubts and resistance may be eliminated.

In practice, while using GPS to check out work attendance, the following aspects deserve special attention. First, the selection of GPS tools. Using equipment/tools provided by employers is less risky than using personally-owned equipment/tools. There are various tools, employers could choose appropriate ones based on own needs, such as WeChat, DingTalk, etc. In order to avoid confusion with personal information and materials, and to better protect employers’ business secrets, it is recommended to use corporate WeChat accounts, DingTalk work accounts, etc. Second, the scope of objects. It is not necessary to check out work attendance of all employees by GPS, normally employers would choose those positions which do not have a stable workplace, such as drivers, sales, and after-sales service staffs.

Third, the rationality and boundaries of using GPS. Take “time” for example, it should generally be limited to working hours; for positions with an irregular working hour system or a comprehensive calculation working hour system, it can be limited to scenarios. If the time or scene setting is unreasonable, it may cause legal risks or huge cost risks, e.g., if the company stipulates that an employee can be located 24 hours a day, then the employee may propose that the company has violated personal privacy, or propose that any time and interval to be located are working hours, based on which they would ask for overtime pay.

Article 19 of the “Regulations of the Supreme People’s Court on Several Issues Concerning Changing and Adding Parties during Enforcement of Civil Cases” stipulates that, “when a company, as a party subject to enforcement, cannot pay off with its property the debts specified in effective legal documents, and one of its shareholder transfers his shares without performing contribution obligations according to law, if the petitioner applies to change the party subject to enforcement, or add such original shareholder or the promoter which is jointly and severally liable for such contribution according to the company law as a party subject to enforcement to be liable within the scope of failed payment, the court shall uphold the application.” Therefore, literally speaking, the shareholder Chen transferred the equity without fulfilling the obligation of capital contribution, then T could apply for adding Chen as the person subject to execution.

However the practical rules are not as clear as the above provision. Take two typical cases for example. In the case (2021) Jing 02 Min Zhong No. 10256, the Beijing No. 2 Intermediate People’s Court held that, “the shareholders could make an agreement on the subscription period for capital contribution, and such period is the expectation interests of shareholders which shall be protected by law, so if the original shareholder transferred the equity before the expiration of such period, it shall not be deemed as the original shareholder failed to fulfill the obligation of capital contribution, which means the original shareholder should not be added as the person subject to execution.” In the case (2022) Su 02 Zhi Yi No. 1, the Wuxi Intermediate People’s Court pointed out that, “adding a third person as the person to be executed during the execution of the case is an expansion of the res judicata of the effective legal document, and is related to the substantive rights of the person to be added, which shall meet the corresponding statutory conditions as prescribed in relevant laws and judicial interpretations strictly. The original shareholder transferred the equity before the expiration of the subscription period for capital contribution, and the debt involved has not yet occurred, so adding him as the person subject to execution is inconsistent with the law.” In view of the two cases, directly adding the original shareholder as the person subject to execution would be difficult to obtain the approval of the court under two circumstances, which are the subscription period for capital contribution has not yet been due, and the debt involved has not yet occurred. Because for those circumstances, the court would held that the debt has nothing to do with the original shareholder.

However, in the case in the beginning, the court supported T for applying to add the original shareholder as the person subject to execution. (See (2021) Yue 01 Min Zhong No. 27553) The reason is that the involved debt had occurred and T had sued Y before Chen transferred his equity, which means Chen knew or should have known that Y might have debts that had not been paid off and had been applied for execution in a case, but Chen still transferred his equity without paid off his capital contribution, and the transferee H was unable to pay off those capital contribution, which made Y could not pay off the debt, so the court determined that Chen’s obligation to make his capital contribution should be accelerated, and Chen shall be liable for the debts of Y within the scope of his capital contribution. It can be seen that when an executor can prove that the original shareholder has maliciously colluded with the transfer, deliberately concealed important facts, abused the shareholder’s capital contribution period, made untrue capital contributions, and so on, the obligation of capital contribution can be accelerated, and the original shareholder shall bear the corresponding liabilities

In practice, it is very common that in order to avoid being listed as a restricted high consumption person, in some cases, if the defendant predicted that it would lose the lawsuit and could not pay off the debt or compensation, it may change its legal reprehensive during the litigation.

Regarding this, there is a relatively unified practical opinion in judicial practice. In the case (2017) Zui Gao Fa Zhi Fu No.73, the Supreme People’s Court pointed out that, “if the defendant changes its legal representative after the enforcement basis is made and before the case is filed for enforcement, in order to ensure the enforcement and protect the legitimate rights and interests of creditors, the original legal representative can be determined as the main responsible person who shall be undertake relevant responsibilities, such as being listed as a restricted high consumption person.” Several local courts have released rules regarding such circumstance. Such as, the “Notice on Strengthening Property Investigations in Cases where the Company is the Person Subject to Execution” issued by the Jiangsu High People’s Court in 2018 clearly stated that, “the legal representative when the debt occurred must be present in the court and accept property investigation”. Therefore, normally the court would strictly review the situation of the legal representative at the time of the occurrence of the debt involved, and identify whether such change is justified. In other words, from the perspective of the defendant, to change its legal representative during litigation may not eliminate the liabilities of the original legal representative. From the perspective of the plaintiff, it could take another preventive measure based on the facts of individual cases, according to paragraph 1 of Article 103 of the “Civil Procedure Law” stipulates that, “for cases in which the action of a party to the lawsuit or any other reason causes difficulty in enforcement of a judgment or causes other harm to the litigants, a People’s Court may, pursuant to an application by a counterparty litigant, rule on preservation of its property or order the counterparty to undertake certain acts or prohibit the counterparty to undertake certain acts; ……”Therefore, when it is necessary, the plaintiff can apply for conduct preservation during the litigation, and apply for prohibiting the defendant from changing its legal representative. However, the plaintiff should provide necessary and sufficient evidence in this regard.

This case has similarities, but differences, to the case in the previous Legal Notebook, which mentioned an accounting executive was fired due to other colleague’s false reimbursement. In the previous issue, the accounting executive is fired on the grounds that he failed to fulfill his duty of auditing vouchers. However, in the case in the beginning, H may also take the same opinion that the company shall blame the accounting executive instead of C’s supervisor, or as the supervisor, H may has a certain liability, which shall not be a severe one.

Therefore, in addition to the identification on the “significant damage” stipulated in Article 39, paragraph 3 of the “Labor Contract Law” as mentioned in the previous issue, the case in the beginning reminds enterprises to pay attention to the identification on the “serious dereliction of duty” under the circumstance that a subordinate has constituted a severe violation behavior, whether the supervisor shall be liable from the perspective of supervision and management. According to Article 39, only when both the “significant damage” and the “serious dereliction of duty” have been achieved, the employer could consider to dismiss the supervisor. In practice, enterprises need to pay attention to the following issues.

First, in view of massive judgments, the courts focus on two elements, which are the supervisor’s corresponding management responsibilities and the legality of relevant internal regulations. Regarding the former, the corresponding management responsibilities shall be clearly stipulated in internal regulations, which may include a job description, approval authority, management process, operating guidelines for specific businesses, employee handbooks and so on. Regarding the latter, enterprises should pay attention to the procedures of those regulations. It is well known that those regulations which applied to all employees shall go through democratic consultation and publicity procedures. Enterprises may ignore the procedures of those regulations which may applied to a certain department or position, such as a job description, approval authority, management process, operating guidelines for specific businesses and etc., although there is room for negotiation on whether such regulations require democratic consultation, the publicity procedures are obviously essential. Therefore, many enterprises failed in relevant labor disputes cases due to the lack of publicity procedures. Many employees would defend with the excuse that they did not know the existence of those regulations, and if the employer failed to prove the publicity procedures, then it would fail in the case.

Second, “The party who asserts shall present evidence” is the basic principle of the burden of proof in civil litigation, so enterprises shall present evidence to prove the supervisor’s “serious dereliction of duty”. For example, in the case (2016) Su 01 Min Zhong Zi No. 1278, the court held that, “although the company found that Jin’s email involved a subordinate’s report that the subordinate planned to require doctors to use products and increase sales through meeting requests, visiting doctors, paying lecture fees and etc., however, if the aforementioned alleged violation of the “Standards of Conduct and Ethics” has not been verified, it is illegal for the company to directly terminate the labor contract.” It can be seen that when the supervisor is to be punished, the enterprise shall present a complete evidence chain, which includes the subordinate’s actual fault.

Third, when there are multiple supervisors, it is also very important to choose the object who shall be punished and the corresponding punishments. When employees make serious mistakes, the big boss is often pissed off, and such angry emotion would drive the boss to be angry with a certain supervisor. In the case (2019) Min 0203 Min Chu No. 12581, the court held that, “it is not reasonable for the enterprise to dismiss the middle-level manager L’s labor contract only, and applied a less lightly punishment or none punishment to the subordinate’s direct supervisor, the supervisor with corresponding management responsibilities, and the supervisor with greater management responsibilities. Therefore, enterprises should arrange the punishments reasonably and rationally upon a comprehensive analysis regarding various elements of individual cases.

In practice, some companies would mark “Symbols” similar to competing products on their own products. Partial of those companies intend to copy, and the rest of them just chose such “Symbols” by coincidence. Then whether it is risky to use “Symbols” similar to competing products? Regarding this question, different situations shall be decided case by case.

If a competing product’s “Symbol” is a generic name in the industry and has not been registered as a trademark, normally the usage of such “Symbol” would not be deemed as infringement. For example, in the case (2020) Zhe 06 Min Chu No. 193, the Shaoxing Intermediate People’s Court of Zhejiang Province pointed out that, “ZR-1000 is a ‘Symbol’ consisting of alphabets and digits, which is one of the numerous ‘Symbols’ of Company X, and its distinctiveness is not high; and the mask bacterial filtration efficiency (BFE) detector is the generic name of the product. Therefore, the ZR-1000 mask bacterial filtration efficiency (BFE) detector is a combination of the ‘Symbol’ and the generic name, and its distinctiveness is not strong.”

In addition, despite the distinctiveness of the product’s “Symbol” itself, the court would also analyze whether such “Symbol” has built up its distinctive feature after it has been used in commercial, and whether it has established a stable corresponding connection with a specific product. In the case (2021) Min Min Zhong No. 1161, the Fujian High People’s Court has mentioned the distinctiveness of the product’s “Symbol”, and especially emphasized: “During the trial, Company X confirmed that… the ‘Symbol’ is not unique in the industry, and Company X did not provide evidence to prove that ZR- 1000 has built up its distinctive feature after it has been used in commercial for a long term, and has established a stable corresponding connection with the mask bacterial filtration efficiency detector manufactured by Company X.”

Conversely, if a “Symbol” is relatively special, or has been clearly differentiated from other similar “Symbols” through use, and has a certain market reputation, it may be protected in accordance with Article 6 of the “Anti-Unfair Competition Law”. According to the relevant provisions of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Anti-Unfair Competition Law” (Fa Shi [2022] No. 9, implemented on March 20, 2022), “Where the mark is the generic name, graphic or model of the commodity has, upon being used, acquired distinctive feature and a certain market reputation, and the party concerned applies for protection in accordance with Article 6 of the  ‘Anti-Unfair Competition Law’, the people’s court shall uphold such application.”

Take a typical case of Jiangsu High People’s Court for reference, the court held that, “Although CM1 is the ‘Symbol’ of Company C, it also conforms to the characteristics of the unique name of a well-known commodity, and plays the role of the unique name of a well-known commodity in actual use. First, Company C has obtained the registration for CM1 as a specific ‘Symbol’ approved by the China Electrical Equipment Industry Association and its general low-voltage electrical branch, so this CM1 is unique and other companies are not allowed to use it. Therefore, CM1 is not a generic name for relevant products, and it has significant distinguishing characteristics. Second, CM1 is the national key protection Low-voltage electrical ‘Symbol’. The letter ‘C’ stands for Company C, the letter ‘M’ stands for plastic case circuit breaker, and the digit ‘1’ stands for the design serial number. Therefore, CM1 has a natural connection with Company C, and it could be used by consumers to distinguish Company C‘s products from other competing products. Third, after conducting a questionnaire survey of 105 design institutes and 50 industry companies of the branch, the results shows that Company C and its CM1 plastic case circuit breaker have a high influence in the industry, and also have a relatively high brand awareness among relevant users. CM1 as its proprietary ‘Symbol’ is well-known to relevant users, and has become a unique mark to distinguish it from similar products of other manufacturers” (see (2005) Su Min San Zhong Zi No. 0108).

Therefore, it is recommended that companies shall try to avoid using “Symbols”similar to competing products.

If due to various reasons, a company has to use “Symbols” similar to competing products, it is recommended to pay attention to the following two aspects. First, to avoid using “Symbols” similar to well-known ones in the industry. Second, to avoid infringing competitors’ IPR, such as copyright, trademark and etc., while using those similar “Symbols” on products, packages, or in promotion; in addition, in order to avoid confusion with competitors which might be identified as acts of unfair competition, it is further recommended to highlight its own trademark.

Paragraph 3 of Article 39 of the “Labor Contract Law” stipulates that an employer may dissolve a labor contract if a worker is guilty of serious dereliction of duties or corruption, and causes the employer to suffer significant damages. Regarding the “Significant damages” (hereinafter referred to as the “SD”), Article 87 of the “Opinions on Several Issues concerning the Implementation of the Labor Law” (Lao Bu Fa [1995] No. 309) stipulates: “the ‘SD’, as mentioned in Item 3 of Article 25 of the ‘Labor Law’ shall be stipulated by the enterprise in its internal rules, and it is not appropriate to make a unified interpretation nationwide for it. Where an employer dissolves a labor contract based on such reason and a labor dispute arises, and a party applies for arbitration, the labor dispute arbitration committee shall identify the ‘SD’ stipulated in the enterprise rules according to such circumstances as the type, scale and degree of damages of the enterprise.” Therefore, the “SD” can be stipulated by the employer itself, and its scope is not limited to economic losses of a specific amount, but can also be other damages, such as damage to a company’s credit, image, etc.

In judicial practice, even if the internal rules of an employer have not stipulated the scope of the “SD”, the judicial authorities would determine whether the consequence shall be deemed as the “SD” by considering the type and consequences of damage, the cost of handling, and the risk of negative impacts. We have selected 4 typical categories of the “SD” for reference.

The first category is the “SD” to an employer’s commercial reputation. In the case (2021) Yue 01 Min Zhong No. 9092, the Guangzhou Intermediate People’s Court pointed out: “This material is the equipment installed in real estate, and it would be used for a long time, so it requires stricter requirements on product quality. In addition, such material involves personal safety. Therefore, even if there is no direct economic loss for the time being, it will cause ‘SD’ to the commercial reputation of Zhao X Real Estate Company.”

The second category is the “SD” to an employer’s daily operation. In the case in the beginning of this article, the Shandong High People’s Court pointed out: “Although the embezzled funds have been recovered, the above-mentioned embezzlement has occurred and it has brought a significant impact on the company’s operation and management.”

The third category is the cost of handling with damages could be deemed as the “SD”. In the case (2020) Hu 02 Min Zhong No. 5876, the Shanghai No. 2 Intermediate People’s Court pointed out: “Mr. S neglected to check the accounts at work, and after receiving the deduction notice, he knew that the relevant manufacturers had negative accounts, however, he still arranged the payment, which had violated his job responsibilities. Although the New X Store could collect the corresponding arrears through legal channels, the litigation costs incurred for it are unavoidable.”

The fourth category is the violation of confidentiality obligations could be deemed as the “SD”. In the case (2021) Zhe 02 Min Zhong No. 2836, the Ningbo Intermediate People’s Court pointed out: “The Employee Handbook has prescribed the specific scope of confidentiality matters,…J’s explanation of the email in the appeal essentially avoided the most fundamental question, which is why J, as the executive of Company T, use his personal mailbox to send emails involving agency agreements to suppliers, so J’s explanation of relevant details is not credible.”

1. The categories of behaviors would be considered as dishonest behaviors.

Article 6 of the “Provisions” clearly lists 6 categories of specific dishonest behaviors, including: (1) abnormal patent application not aimed at protecting innovation; (2) malicious trademark registration application; (3) violation of laws and administrative regulations to engage in patent and trademark agency who have been punished by CNIPA; (4) submitting false materials or concealing important facts in the application for administrative confirmation; (5) the credit commitment is found to be untrue or fails to make such commitment; and (6) refusing to perform or evading the execution of administrative penalties and administrative rulings that have the ability to perform.

However, with regard to the above-mentioned category (1), Article 7 of the “Provisions” specifically stipulates that if there are abnormal patent applications, but the consequences can be corrected in a timely manner or the consequences can be eliminated actively, such behaviors may not be regarded as dishonest.

2. What measures would be implemented to dishonest entities?

According to Article 9 of the “Provisions”, CNIPA could take the following measures:

(1) applications for administrative financial projects would be examined more strictly;

(2) applications for preferential policies and facilitation measures such as the fee reduction or priority examination on patent and trademark would be examined more strictly;

(3) the excellence appraisal qualification of CNIPA projects shall be canceled;

(4) the qualifications for the appraisal of national IP demonstration enterprises or advantageous enterprises shall be canceled;

(5) the frequency of inspections would be increased to those key supervision objects, and relevant supervision measures would be stricter;

(6) the credit commitment system is not applicable.

3. How to repair credit?

According to Article 13 of the “Provisions”, if the following conditions are met at the same time, a dishonest entity could apply for credit repair. The conditions include, (1) the subject has been identified as dishonest for 6 months; (2) the dishonest behavior has been corrected, the relevant obligations have been fulfilled, and the relevant consequences have been eliminated; and (3) the entity has not been subjected to any new dishonest behavior.

However, there are exceptions to Article 14 of the “Provisions”. If there are any of the following 4 situations, the credit would not be repaired: (1) it is less than 1 year since the last credit repair; (2) there are acts of falsification or intentional concealment of facts during the process of applying for credit repair; (3) during the process of applying for credit repair, it is determined to be dishonest again; and (4) laws, administrative regulations, and policy documents of the Party Central Committee and the State Council clearly stipulate that it cannot be repaired.

4. What are the incentive measures for honest entities?

Article 20 of the “Provisions” stipulates that for entities that have kept their honest records for three consecutive years, incentive measures may be adopted depending on the specific situations. Incentive measures mainly include:

(1) during the procedures of administrative approval, project approval and so on, entities would enjoy convenient services such as the processing would be simplified, speed up and etc.;

(2) in the allocation of government special funds, entities would be preferred objects under the same conditions;

(3) in the priority examination of patents, entities are the priority selection objects under the same conditions;

(4) in the approval of patent pre-examination and filing, the IPR Protection Center would give priority to entities; and the frequency of routine inspections and special inspections would be reduced.

Despite the “blacklist” of CNIPA, in practice, some local municipal supervision departments have included IP offenders on the list of the dishonesty with serious violations of law in accordance with the “Measures for the Administration of the List of the Dishonesty with Serious Illegal Laws for Market Supervision and Administration” (implemented on September 1, 2021), and published the list via the national enterprise credit publicity system. For example, the Ningbo Municipal Supervision Department of Zhejiang Province issued the first batch of “blacklist” in January this year, and 4 parties were included in the list of dishonesty for the crime of counterfeiting registered trademarks and infringing trade secrets.

If you are the rights holder, how to protect your rights and interests?

In China, the current laws and regulations have not defined the concept of “commercialization rights”, in general, a rights holder could take the following two fundamental rights as the legal base for claim.

First, if the constituent elements of an anime work, such as the image of “Crayon Shin-chan”, meet the requirements of the “Copyright Law” for “originality”, then from the perspective of copyright protection, it is possible for the rights holder to require the infringer to stop infringement, and claim for damages, etc.

Second, the rest constituent elements, such as names, catchphrases, typical props, and etc., may not meet the requirement of “originality”, which may be difficult to be protected from the prospective of copyright. Then the rights holder could choose to register such elements as a trademark. If these constituent elements do not belong to prohibited registration circumstances as stipulated in the “Trademark Law”, and there are no identical or similar prior registered trademarks after searching, the rights holder may register such elements in the fields, goods, services which related to rights holder’s business. The fields that are usually considered include entertainment, stationery, toys, clothing, food, etc. After the rights holder has registered relevant trademarks, it could raise objection or apply for invalidation against the identical or similar trademarks, or claim for compensation against the use of the identical or similar trademarks by others.

However, when conducting trademark searches, it often happens that relevant trademarks have been registered by other parties. Regarding such circumstance, the rights holder of anime work could raise objections or apply for the declaration of validation against such registered trademarks. The legal basis is Article 22 of the “Rules of the Supreme People’s Court on Issues Relating to the Hearing of Administrative Cases Involving Granting or Affirming Trademark Rights”, which stipulates that for a work within the term of copyright protection, of which the name, roles etc. are of relatively high popularity, if the name or roles are used as trademark on relevant goods, which is likely to have relevant public misunderstand that such use is permitted by the right owner or has a specific connection with the right owner, the party concerned therefor claims prior right, the People’s Court shall uphold the claim.

It should be noted that, in view of the published judgements, despite the title of the work and the character, other constituent elements normally would not be defined as prior rights. In addition, in such cases, the court would focus on the “prominence” and “possibility of confusion”. For example, in the case of (2020) Jing Xing Zhong No. 1133 “机动战姬”, Company X registered “机动战姬” on several commodities such as computer game software in the 9th trademark international category, the rights holder of the anime image “机动战士高达” (Mobile Suit Gundam) applied for invalidation, but the Trademark Review and Adjudication Board rejected the application. In the administrative litigation, the court held that: “…the anime work and the characters’ names in “Mobile Suit Gundam” are different from the goods as approved for the registered trademark. …There are huge difference between the two on the perspective of the production sector, function, sales’ channels and target consumers, so the disputed trademark which is used on the above goods would not misleading the relevant public to confuse the source of goods.”

Finally, in individual cases, the rights holder could also take the following two measures into consideration case by case.

The rights holder could claim based on both the trademark infringement and unfair competition. The basis for claiming unfair competition is Article 6 and Article 2 of the “Anti-Unfair Competition Law”. Article 6 is about the acts which mislead others to misidentify their goods as others’ goods or to associate their goods with others. Article 2 is about the acts which breach good faith, and disrupts market competition order, or harms the legitimate rights and interests of other business operators or consumers.

If a party obtains a design patent for an anime image or related constituent elements, the rights holder could apply for invalidation regarding such patent. The two main reasons are, ①the design is not a new one, which could be requested to be invalidated in accordance with Article 2, paragraph 4, of the “Patent Law”; and ②the design patent conflicts with prior legal rights, which could be requested to be invalidated in accordance with Article 23(3) of the “Patent Law”.