Doing Business in Japan: 2010 Update

June 2010

The Revised Antimonopoly Act
Dramatic changes to antitrust rules governing mergers, share acquisitions and other business combinations. These new rules will also have a significant impact on mergers involving non-Japanese entities. Also, the statute of limitations for cartel investigations has been extended from three to five years.
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Copyright Act Modernized for the Internet Age
Changes to the Copyright Act address the needs of search engines, telecommunications carriers and electronic retailers to use copyrighted materials on the internet while protecting the rights of copyright holders.
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New Patent Examination Standards for Pharmaceutical Patents
New rules which loosen the standards for dosage and administration patents arrive as Pharmaceutical companies explore ways to extend patent lifecycles.
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Coming Changes to Civil Code's Obligation Law
Major changes are being considered in the Civil Code to extend greater protection to consumers under Japan law contracts. Such changes could have a dramatic impact on consumer and business contracts governed by Japanese law.
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The Revised Antimonopoly Act

Yusuke Kashiwagi served for four years as a chief investigator at the Japan Fair Trade Commission (JFTC) in the Investigation Division and in the Mergers and Acquisitions Division. During his time in the Mergers and Acquisitions Division, Mr. Kashiwagi was largely responsible for drafting the business combinations portion of the Revised Antimonopoly Act. Mr. Kashiwagi is now an associate at Morgan Lewis-TMI.

The Revised Antimonopoly Act was enacted by the Japanese Diet in 2009 and became fully effective in January 2010. The new amendments focus primarily on cartels and business combinations, and move both toward international standards.

Business Combinations

The Revised Antimonopoly Act dramatically changed the notification rules for business combinations. The most significant change is that share acquisitions meeting the following thresholds now require prenotification and not simply postnotification as under the previous law:

  1. The ultimate parent company of the acquirer and the subsidiaries of such parent company (the corporate group) have gross sales in Japan in excess of ¥20 billion
  2. The target company and its subsidiaries have gross sales in Japan in excess of ¥5 billion
  3. As a result of the acquisition, the acquirer's voting rights in the target will equal or exceed 20% or 50%

In addition, the standards under which a share transfer, merger, or certain other transactions will require prenotification have been significantly enhanced, covering any such transaction that involves a company in a corporate group having gross sales in excess of ¥20 billion and a company in a corporate group having gross sales in excess of ¥5 billion.

Another major change is that the calculation of gross sales in Japan is no longer limited to sales through Japanese entities. Gross sales will now be calculated as the total sales of products and services supplied in Japan, whether sold through a domestic office or directly from overseas.

As a result of such changes, a much larger number of mergers and share acquisitions between non-Japanese parties will trigger prenotification and review by the Japanese Fair Trade Commission (the JFTC).

International Cartels

One of the more significant revisions to the Antimonopoly Act is the extension of the statute of limitations for cartel investigations from three to five years after the illicit conduct has ended. This puts the JFTC on more even footing with competition authorities in the United States and the European Union, and should allow the JFTC to better collaborate with its peers on international cartel investigations in the future. (Previously, the JFTC was often unable to assist other competition authorities or pursue its own cases because the statute of limitations in Japan had already run out.)

Moreover, while the United States and the European Union allow joint leniency applications by group companies, the prerevision Antimonopoly Act only allowed individual business entities to apply. This often led to issues among group companies, such as in what order the group companies should file applications, whether they were allowed to discuss the filing among themselves, and whether they were allowed to jointly appoint counsel. The Revised Antimonopoly Act now allows joint applications by multiple entities that are group companies and expands the scope of the leniency program from three companies (or groups) to five companies (or groups). However, the number of applications for leniency after the JFTC commences an investigation is limited to three companies (or groups).

Japan has also strengthened the potential criminal penalties in cartel cases. The maximum jail term for cartels and bid-rigging has been extended from three years to five, and the statute of limitations for criminal prosecution has also been extended from three years to five. In addition, while it has previously been the practice of courts in Japan to suspend the sentences of officers and employees, we believe that they will start issuing sentences in the near future.

Copyright Act Modernized for the Internet Age

In an effort to update and modernize Japan's copyright system in the age of the Internet, the National Diet recently adopted major amendments to the Copyright Act that came into effect on January 1, 2010 (the Revised Act).

Facilitating Use of Copyrighted Works on the Internet

Reproduction of copyrighted artworks. The Revised Act now allows owners, agents, or auctioneers to reproduce and post images of artwork and products on auction or other shopping sites so long as the exhibitor takes "measures to prevent unreasonable prejudice to the interests of copyright holders."

Reproduction to provide reliable transmission. The Revised Act clarifies that telecommunication carriers do not infringe upon copyrights even if they make reproductions for the purpose of establishing mirror servers, back-up servers, or other similar copies for the purpose of providing reliable content transmission.

Reproduction for use by search engines. Reproduction without copyright clearance to the extent necessary to provide search engine services is also permitted under the Revised Act. However, a recent government report states that if a copyright holder indicates his or her intent not to be subject to searches by search engines, deference must be given to such intent.

Reproduction for the purpose of information analysis. The Revised Act allows for reproduction and adaptation of copyrighted works in the course of information analyses. Note, however, that this is not applicable to databases that are accessible on a paid membership basis.

Reproduction required for the use of electronics. Internal accumulation of information in digital electronics (such as personal computers and mobile phones) to view websites using a browser is now expressly permitted (out-of-purpose use, however, is still prohibited).

Facilitation of use of works created by unknown copyright holders. The Revised Act now allows the use of compulsory licenses in certain limited cases "where, despite reasonable efforts, it is not possible to contact the copyright holder."

Preventing Illegal Circulation of Copyrighted Works

Review of the scope of reproduction for private use. The recording of music or videos illegally distributed with the knowledge of such illegality is specifically excluded from the scope of reproduction for private use.

Infringement implied from offers to distribute infringing items. The Revised Copyright Act expands the scope of infringement to include offers to distribute infringing items.

New Patent Examination Standards for Pharmaceutical Patents

The Japan Patent Office recently revised its examination standards in order to broaden the scope of registrable medical patents. These new standards became effective for applications examined on or after October 1, 2009.

Under the previous standards, inventions that specified dosage and administration were regarded as having novelty only when (i) the targeted patient groups were distinctly different, or (ii) the treated areas were different. As might be expected, this high bar for novelty had an extremely negative effect on patent registrations. According to the Japan Patent Office, during the period between April 2005 and June 2008, none of the applications specifying medical treatment such as dosage time and dosage amount were granted registration.

The Japan Patent Office examination standards have now been broadened as follows: even if the compound or group of compounds of the claimed medicinal invention does not differ from a cited invention, and the disease that the medicinal invention is applied to is not different, the medicinal invention has novelty when the dosage and administration for treating a specific disease is different from the cited invention.

While this greatly reduces the novelty bar, the "inventive step" test (i.e., the invention must exceed the ordinary creativity of experts in the field) remains difficult to overcome. Therefore, it is too early to conclude whether the revision to novelty will lead to a significant change in patent registrations.

These revisions are important because pharmaceutical companies conducting life cycle management of their products and patents are increasingly looking for various methods to extend their exclusivity periods, and dosage and administration patents may now become a key part of that strategy. Pressure on pharmaceutical companies to do so has been intensified by several recent decisions of the Intellectual Property High Court which have further limited the extended duration period of patents in Japan (the so-called 2010 problem).

Coming Changes to Civil Code's Obligation Law

Since its enactment in 1896, Japan's Civil Code has seen to remarkably little revision. However, the Deliberation Committee for the Revision of the Civil Code (Obligations Law), a private discussion group of legal scholars, has recently drafted and published a set of guidelines for revising the Obligations Law portion of the Civil Code (i.e., the law governing general contacts). The committee members consist mainly of well-known and established scholars of the Civil Code and include experts on the Commercial Code and procedural laws. The guidelines are expected to serve as an important reference in the course of drafting a revised Obligations Law in the near future.

While the general goal of the guidelines is to turn current practice and court precedent into statutory law, the guidelines also include a number of new proposals, such as the following:

The concepts of "consumers" and "merchants." The current Civil Code applies basic rules generically to "persons." Given the increased importance of consumer contracts, and in order to integrate better with the Consumer Contract Act, the guidelines propose adding the concepts of "consumers" and "merchants" with differing rights and obligations.

New regulations for standard terms and conditions. The guidelines also propose new rules under which standard terms and conditions may be incorporated into contracts. They also establish a list of certain "unconscionable provisions" that are prohibited. The guidelines propose to apply these regulations to contracts between merchants and consumers as well as to those strictly between merchants.

If these changes are implemented, they could have a significant impact on consumer contracts and business agreements governed by Japanese law. The Ministry of Justice currently plans to submit a bill to revise the Obligations Law to the National Diet by 2012.

About Morgan Lewis - TMI
Morgan Lewis-TMI is uniquely able to guide our Japanese and non-Japanese clients through this new corporate and legal landscape. Morgan Lewis-TMI brings together one of the largest U.S. law firms with the resources to advise our Japanese clients on nearly any issue of U.S. or international law, and one of the largest and most diversified Japanese law firms. Morgan Lewis-TMI's lawyers can advise our clients on a broad range of legal issues, including corporate, securities, employment, pension, intellectual property and environmental issues. Morgan Lewis-TMI is a joint venture (registered association) between Morgan Lewis & Bockius LLP and TMI Associates.