Business Law in Japan - Cases and Comments. Intellectual Property, Civil, Commercial and International Private Law 9041138919, 9789041138910

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Preface

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Anja Petersen-Padberg; Christopher Heath; Moritz Bälz; Marc Dernauer

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Business Law in Japan – Cases and Comments

‘Hanrei Hyakusen’, the compilation of (normally 100 – hyakusen means a selection of 100) cases and comments has long been popular amongst Japanese practitioners, academics and law school students wishing to obtain a quick and reliable understanding of a specific field of law. Leading cases much more than statutory provisions are essential for understanding the reality of Japanese business law. The editors have compiled 72 of the most important decisions in this field, and have asked leading Japanese experts or foreign specialists of Japanese law working in academia or private practice to provide comments on these. The cases and comments can serve as practical guidance, as a basis for academic research or as classroom teaching material. The compilation should, therefore, be useful for all those who need to understand the various fields of Japanese business law – practicing lawyers, academics and last but not least students of Japanese and international law.

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Bibliographic reference

Anja Petersen-Padberg, Christopher Heath, et al., 'Preface', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. v vi

Nothing could, therefore, be more appropriate than dedicating this book to Harald Baum, head of the Japan Unit of the Max Planck Institute for Comparative and International Private Law in Hamburg and long-term editor of the Zeitschrift für Japanisches Recht / Journal of Japanese Law on the occasion of his 60th birthday. With his monumental work ‘Handbuch Japanisches Handels- und Wirtschaftsrecht [Handbook on Japanese Commercial and Economic Law]’ (Carl Heymanns 2011), Harald Baum has co-edited a landmark book on Japanese business law which the editors would like to complement by a collection of annotated cases from the following fields: Civil Law, Labour Law, Corporate Law, Financial Regulation, Insurance, Intellectual Property, Antitrust, Conflict of Laws, and Arbitration. With this work, we hope to come up to Harald Baum's demanding standards of academic clarity, readability, and practical usefulness. P vi

For a number of cases, the editors have turned to translations prepared on behalf of the Japanese Supreme Court, the project ‘Transparency of Japanese Law’ of Kyushu University, and the journal International Intellectual Property and Competition Law (IIC). The editors would like to thank the Japanese Supreme Court, Prof. Kono who is in charge of the Transparency project, the journal IIC and the individual translators mentioned by name for kindly agreeing to the use of case translations in this book. The editors are also indebted to Claire McGrath for checking the manuscripts for linguistic errors as well as Jana Zajacová for formatting. Moritz Bälz (1) Marc Dernauer (2) Christopher Heath (3) Anja Petersen-Padberg (4) P vi

References ★ )

Anja Petersen-Padberg: Hoffmann, University of Cologne Christopher Heath: Boards of Appeal, European Patent Office, Asian Department, Max Planck Institute, Munich Moritz Bälz: Goethe University Frankfurt am Main, University of Hamburg, Harvard University Marc Dernauer: University of Freiburg, Tohoku University

1) 2) 3)

Goethe University Frankfurt am Main, University of Hamburg, Harvard University University of Freiburg, Tohoku University Boards of Appeal, European Patent Office, Asian Department, Max Planck Institute, Munich

4)

Hoffmann, University of Cologne

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Dedication

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Harald Baum, in whose honour the following contributions were written, for more than 20 years has played an eminent role in the comparative study of Japanese law. As a result of his first research stay in Kyoto in 1988, he became intrigued by Japan, its culture and its law, and has frequently returned to that country ever since. It was also towards the end of the 1980s that he established the Japan Unit at the Max Planck Institute for Comparative and International Private Law in Hamburg, which he has since developed into one of the leading centres for research on Japanese law outside Japan. As professor at the University of Hamburg, he regularly shares his precious expertise with students.

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Business Law in Japan – Cases and Comments

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In his academic work, Harald Baum has extensively dealt with the nature of comparative research on Japanese law, and convincingly demonstrated the importance of reaching beyond disciplinary boundaries in order to analyse Japanese law in context. At the same time, he has co-pioneered research on the law of comparative capital markets and takeovers in Germany and Europe, not least by introducing the Japanese experience into the discussion. A prolific writer, Harald Baum's broad research interests also include corporate governance, private international law and dispute resolution. His first endeavour to give a comprehensive overview of Japanese Commercial Law in the German language dates back to 1994 (Baum/Drobnig, Japanisches Handels- und Wirtschaftsrecht, Berlin 1994), and he continued this in 2011 by co-editing a uniquely comprehensive German-language reference book on Japanese law (Baum/Bälz, Handbuch Japanisches Handels- und Wirtschaftsrecht, Cologne 2011).

Bibliographic reference

'Dedication', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. vii viii

In 1996, Harald Baum founded the Zeitschrift für Japanisches Recht / Journal of Japanese Law, which he has edited ever since, and which after more than 30 volumes enjoys an outstanding international reputation as the most prominent legal periodical dedicated to the documentation and analysis of Japanese law in Western languages. P viii

As head of the Max Planck Institute's Japan Unit, co-founder and vice-president of the German-Japanese Lawyers' Association (DJJV), Harald Baum has promoted academic exchange between Germany, Japan and beyond and has organised an impressive number of international symposia. For his contribution to relations between Germany and Japan, he was awarded the JaDe award in 2010. The international significance of his research is further underlined by his membership of the Advisory Board of the Australian Network of Japanese Law (ANJeL), and his position as a Research Associate of the European Corporate Governance Institute in Brussels. Last but not least, Harald Baum has always been a warm and welcoming host at the Max Planck Institute to researchers from Japan and other countries, and has extended his unfailing support and encouragement to generations of young German researchers interested in Japanese law. Harald Baum's long-term companions, disciples and friends find his 60th birthday the appropriate occasion to present a book in his honour. The Editors P viii

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List of Authors and Editors

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Heike Alps is a German attorney at law and works for Hoffmann · Eitle, Munich. She holds an LL.M. (Chuo University).

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Business Law in Japan – Cases and Comments

Prof. Dr. Makoto Arai is a professor of civil law at Chuo University, Faculty of Law. He holds a Dr. iur. (LMU Munich), an LL.M., and an LL.B (Keio University).

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Prof. Dr. Moritz Bälz is Professor of Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main. He holds a Dr. iur. (University of Hamburg) and an LL.M. (Harvard University).

Japan

Prof. Frank Bennett is an associate professor of law at Nagoya University, Faculty of Law. He holds a J.D. (UCLA Law School) and a B.A. (University of California, Berkeley). Dr. Felix Burkei is a judge, currently at the District Court Cologne. He holds a Dr. iur. (Passau University).

Bibliographic reference

Dr. Marc Dernauer is a German attorney at law and works for Hoffmann · Eitle, Munich. He is also a lecturer in law at the University of Freiburg and holds a Dr. iur. (University of Freiburg) and an LL.M. (Tohoku University).

'List of Authors and Editors', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. xxi xxiv

Dr. Ursula Eisele is a senior legal counsel at Robert Bosch GmbH in Germany. She holds a Dr. iur. (University of Hamburg). Prof. Kiyoshi Endo is a professor of law at Toyo University in Tokyo. Prof. Tomotaka Fujita is a professor of law at the University of Tokyo. Prof. Dr. Masanori Fujiwara is a professor of civil law at Hokkaido University, Law School. He holds an LL.D., an LL.M., and an LL.B. (Hokkaido University). Dr. Peter Ganea is a lecturer and coordinator of the M.A. program Modern East Asian Studies (MEAS) at the Goethe University in Frankfurt am Main. He holds a Dr. phil. (LMU Munich). Prof. Gen Gotō is an associate professor of law at the University of Tokyo. P xxii

Prof. John O. Haley is currently the William R. Orthwein Distinguished Professor of Law Emeritus, Washington University in St. Louis, and professor of law at Vanderbilt University Law School. He is also lecturer in law at California Polytechnic State University. He holds degrees from Princeton (A.B. 1964), Yale (LL.B. 1969), and the University of Washington (LL.M. 1971). Prof. Masaru Hayakawa is a professor of law at Doshisha University Law School. He holds an LL.M. (Doshisha University). Dr. Christopher Heath is a judge at the Boards of Appeal, European Patent Office and for more than twelve years (1992–2005) was Head of the Asian Department, Max Planck Institute, Munich. Dr. Klaus Hinkelmann is a German and European Patent Attorney at Patentanwaltskanzlei Hinkelmann in Munich. He holds a Ph.D. in Chemistry from Freiburg University. Takuya Iizuka is a Japanese attorney at law and head of the IP department of Mori Hamada & Matsumoto in Tokyo. He holds an LL.M. (LMU Munich). Prof. Colin P.A. Jones is a professor of law at Doshisha University Law School and a Life Member at Clare Hall at the University of Cambridge. He is also an attorney at law (New York, Guam and the Republic of Palan) and holds a J.D. and LL.M. from Duke University Law School and an LL.M. from Tohoku University. Prof. Hideki Kanda is a professor of law at the University of Tokyo. Prof. Hiroyuki Kansaku is a professor of law at the University of Tokyo. Dr. Olaf Kliesow is a German attorney at law and has been working as board member for different insurance companies since 2001, currently seconded to Japan. He holds a Dr. iur. (University of Münster). Prof. Toshiyuki Kono is a professor of law at Kyushu University, specialized in private international law and heritage law. He holds an LL.M. and an LL.B. (Kyoto). Dr. Gabriele Koziol is a research assistant at Goethe University Frankfurt, Faculty of Law. She holds a Dr. iur. (University of Regensburg), a Mag. iur., and a Mag. phil. (University of Vienna). Prof. Souichirou Kozuka is a professor of law at Gakushuin University in Tokyo and member of the editorial board of the Journal of Japanese Law. He holds a Ph.D. in law from Tokyo University. Prof. Dr. Hans-Peter Marutschke is a professor of law at Doshisha University Law School and Director of the Japanese Law Institute at FernUniversität in Hagen. He holds a Dr. iur.

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habil. (Hagen University). Prof. Gerald Paul McAlinn is a professor of law at Keio University, Law School. He is also an attorney at law (Pennsylvania, California) and he holds a J.D. (University of Pennsylvania), an LL.M. (Cambridge University), and a B.A. (Temple University). P xxiii

Prof. Curtis J. Milhaupt is the Fuyo Professor of Japanese Law and the Parker Professor of Comparative Corporate Law at Columbia Law School. Prof. Dr. Masafumi Nakahigashi is a professor at Nagoya University, School of Law. Prof. Kunihiro Nakata is a professor of civil law at Ryukoku University, Law School. He holds an LL.M. and an LL.B. (Ritsumeikan University). Prof. Dr. Towa Niimura is a professor of public law at Seikei University, Graduate School of Law. She holds an LL.D., an LL.M., and an LL.B. (Tohoku University). Prof. Dr. Yuko Nishitani is a professor of private international law at Kyushu University, Faculty of Law. She holds a Dr. iur. (University of Heidelberg), an LL.M., and an LL.B. (Kyoto University). Prof. Luke Nottage is a professor of law and associate dean at University of Sydney Law School. He holds degrees from Victoria University of Wellington (Ph.D., BCA, LL.B.) and Kyoto University (LL.M.). Prof. Hiroshi Oda is a professor at the University of London (UCL). He is also solicitor (England and Wales) and an attorney at law with Nagashima, Ohno & Tsunematsu. He holds an LL.D. (Tokyo University). Atsushi Okada is an attorney at law, admitted both in Japan and New York, and currently works for Mori Hamada & Matsumoto in Tokyo. He holds an LL.M. (Harvard Law School). Prof. Dr. Yasuhiro Okuda is a professor at Chuo University, Law School (Tokyo) and holds an LL.D. (Chuo University) and an LL.M. (Kobe University). Dr. Anja Petersen-Padberg is a German attorney at law and works for Hoffmann · Eitle, Munich. She holds a Dr. iur. (University of Cologne). Prof. Dr. Dan W. Puchniak is an assistant professor at National University of Singapore, Faculty of Law. Dr. Guntram Rahn is a German attorney at law and worked for Hoffmann · Eitle, Munich. He holds a Dr. iur. (LMU Munich) and between 1975 and 1992 was the Head of the Japan and East Asian Department, Max-Planck Institute, Munich. Prof. Maki Saito is an associate professor of law at Kyoto University and was a visiting scholar at the Max Planck Institute for Comparative and International Private Law in Hamburg. Prof. Dr. Tatsuya Sakamoto is an associate professor of law at Shizuoka University, Law School. He holds a Ph.D. (Osaka City University) and an LL.M. (University of Sydney). Dr. Dirk Schüssler-Langeheine is a German attorney at law and works for and is Co-Head of the Patent Litigation and Licensing Department of Hoffmann · Eitle, Munich. He holds a Dr. iur. (Osnabrück University). Prof. Dr. Matthias K. Scheer was a professor at the Hochschule Bremen (until 2010). He was also a German attorney at law (until 2011). He holds a Dr. iur. (University of Hamburg) and an LL.M. (Harvard University). P xxiv

Eva Schwittek is a doctoral student at the Max Planck Institute for Comparative and International Private Law, Hamburg. She completed her First and Second State Examination in Trier and Hamburg. Prof. Dr. Mihoko Sumida is an associate professor of civil law at Hitotsubashi University, Graduate School of Law. She holds an LL.D., an LL.M., and an LL.B. (Hitotsubashi University). Prof. Dr. Eiji Takahashi is a professor of law at Osaka City University and a member of the international advisory board of IJEB. He holds a Dr. iur., a Mag. iur. (University of Göttingen), an LL.D., and an LL.M. (Tohoku University). Prof. Dr. Mayu Terada is an associate professor of administrative law at International Christian University in Tokyo. She holds an LL.D. (Hitotsubashi University), a J.D. (Keio University), and an LL.B. (Hitotsubashi University). Markus Thier is a research assistant and doctoral student at Goethe University Frankfurt, Faculty of Law. He is qualified as a lawyer in Germany and holds a M.A. in Japanese Studies (Goethe University Frankfurt). Prof. Tatsuhiro Ueno is a professor of law at Rikkyo University in Tokyo and adjunct professor of Waseda Law School. He was also a visiting scholar at the Max Planck Institute in Munich.

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Prof. Hiroyuki Watanabe is a professor of law at Waseda University, Faculty of Law. He holds an LL.M. (University of Tokyo). Julius Weitzdörfer is a research assistant at the Max Planck Institute for Comparative and International Private Law. He holds an LL.B. (Bucerius Law School). Dr. Jörn Westhoff is a German attorney at law and works for the law firm of Dr Wehberg und Partner in Hagen, Germany. He holds a Dr. phil. and an M.A. in East Asian Studies (Bochum University). Prof. Dr. Keizō Yamamoto is a professor of civil law at Kyoto University, Graduate School of Law. He holds a Dr. iur. and an LL.B. (Kyoto University). Prof. Dai Yokomizo is a professor of conflict of laws at Nagoya University, Graduate School of Law. He holds an LL.M. (Tokyo University). Prof. Dr. Motoko Yoshida is now a guest professor in law at Sophia University. She holds a Ph.D. (Sophia University), a Dr. iur. (University of Regensburg), an LL.M., and an LL.B. (Sophia University). P xxiv

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Part I: Civil Law

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Marc Dernauer

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Business Law in Japan – Cases and Comments

Civil law is the fundamental basis for all cases relating to business law, which is the overall topic of this compilation of cases and case notes. The most important legal basis for Japanese civil law is still the Civil Code (1) (Minpō), which was and still is very much influenced by continental European law, in particular German and French law. The Civil Code has not much changed ever since its enactment at the end of the nineteenth century, on 16 July 1898, aside from a linguistic overhaul in 2004, the reform of the adult guardianship system a few years ago, an outsourcing of various forms of non-profit associations and foundations as well as other special non-profit or half-profit/half-nonprofit legal entities by way of establishing special laws, and aside from the radical reform of those parts regarding family law and inheritance law after World War II, as part of the democratization of the country, that brought about amendments, in particular, to the main parts 4 and 5 of the Civil Code.

Jurisdiction Japan

Bibliographic reference

Marc Dernauer, 'Part I: Civil Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 1 - 3

In particular in the field of contract law, all basic provisions on the formation of a contract, the validity of a contract, breach of contract, and also the basic provisions regarding a few specific basic types of contracts are still in force and have not undergone any substantial changes. The same is true for the law of unjust enrichment and tort law. However, the Civil Code will in a few years undergo a fundamental revision of those parts of the law regarding obligations. In October 2006, the ‘Japanese Civil Code (Law of P 2 Obligations) Reform Commission’ (Minpō (Saiken-hō) Kaisei Kentō I'inkai, hereinafter: the ‘Reform Commission’) was established for the purpose of discussing a fundamental reform of the law of obligations and for preparing a corresponding draft proposal for consideration by legislators and the general public. The Reform Commission is composed of twenty-six civil law professors, five commercial law professors and two professors for civil procedure law, all renowned scholars in their field and from famous universities. It is also composed, however, of two officials from the Ministry of Justice. Young scholars and other staff members have been appointed to the Reform Commission to support its members in carrying out its work. In 2009, the Reform Commission published its draft Basic Guidelines for a Reform of the Law of Obligations (Saiken-hō kaisei no kihon hōshin). (2) These draft Basic Guidelines were also submitted to the Legislative Council of the Ministry of Justice, which started its deliberations in October 2009. At the present, it cannot be foreseen when and to what extent the draft Basic Guidelines will be implemented. Apart from these recent plans for reform, the case law and academic legal theory have over the years clarified the meaning of certain legal provisions and the scope of application of the various legal instruments provided in the Civil Code and other special laws, and thus a great contribution to the development of civil law has been made. This is particularly true for the scope of application of general provisions, such as the principle of good faith as stipulated in section 1(2) Civil Code, and the principle that no juristic act may contravene public order or policy as stipulated in section 90 Civil Code. The Civil Code in its sections 90 and 91 basically acknowledges the freedom of contract as a fundamental principle as long as the contract does not infringe public order or policy. The meaning of this exception is, however, not fully clear and has to be interpreted. It does not, for instance, say whether a contract shall be deemed invalid if the object of the contract or if the conduct of the parties violates public law provisions, in particular provisions for the protection of one of the parties or for generally maintaining public order and morality and if this is the case, to what extent. This issue has long been debated in academia, but despite this the issue has still not been completely resolved. The first case selected for the Civil Law part in this collection of cases and case notes deals with this problem. Case 2 deals with the problem of whether one party may disengage itself from a contract or demand an amendment of the contract conditions if the circumstances on whose basis the contract was concluded have changed after conclusion of the contract (‘doctrine of frustration’). Case 3 deals with the question of whether the obligation to negotiate in good faith and the obligation of secrecy in a precontract agreement have legally binding effect and can be grounds for an injunctive relief. P3

With regard to a liability for a breach of contract (section 415 Civil Code), the Civil Code does not clearly provide whether the obligor is liable for the acts of his assistant when performing his obligations if such acts would have led to a breach of contract if the obligor had himself carried these out. Case 4 of the Civil Law part deals with this problem. Case 5 concerns the legal provisions on statutory warranties for defects of the object of a purchase contract (sections 570, 566 Civil Code) and deals with the difference between the warranty period and the time when warranty claims become statute-barred. Case 6 is a case which deals with the requirements for claims based on actio de in rem verso (sections 703 et seq. Civil Code), in particular in situations that involve the transfer of assets or benefits without valid legal cause in a situation involving not only the two

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parties to a related contract, but also a third party, which is not a party to the contract. Cases 7 and 8 concern the requirements for claims based on tort law. Case 7 shows that tort law is also a very important legal instrument in business transactions, in particular because a party to a contract may claim damages based on tort law if the said party had not been properly informed by the other party or a professional expert who is engaged in the conclusion and performance of the contract and is closely connected to the other party, that is, in cases of a breach of information duties. Case 8 deals with the liability of joint tortfeasors and is not only important with respect to tortious acts traditionally regarded as such, but also in case of business transactions and breaches of information duties by people connected to a party of the contract, such as, for instance, managers and employees of a company. During the last ten to fifteen years, many special laws have been enacted which now supplement the Civil Code. One of these special laws that supplements the tort law as provided in the Civil Code is the Product Liability Act. (3) Case 9 demonstrates the application of this special law in legal practice. A special field of law is also consumer law where many special laws have come into force and where courts and legal scholars are committed to apply the existing laws to the benefit of consumers. Case 10 shows how tort law is applied in order to protect elderly consumers in cases of fraudulent solicitation for a purchase contract for worthless real property. Case 11 deals with the conditions for the application of the Consumer Contract Act (4) and in particular with the provisions on the voidability of the declaration of intent of the consumer in cases of financial investment transactions. Case 12 deals with the problem of and with the conditions for reclaiming overpaid money, in particular excessive interest, from money lenders. Cases 13 and 14, as the final cases in the Civil Law part, deal with the requirements for the liability of the State under the State Compensation Law. (5) Marc Dernauer (1) P3

References ★ )

1) 2)

3) 4) 5) 1)

Marc Dernauer: University of Freiburg, Tohoku University Law No. 89/1896 and Law No. 91/1898, after the revision of 2004 continued only under Law No. 89/1896. More information can be found at . The draft Guidelines were also published in the form of a book: Saikenhō kaisei no kihon hōshin [Basic Guidelines for a Reform of the Law of Obligations], Japanese Civil Code (Law of Obligations) Reform Commission, Bessatsu NBL No. 126 (Shōji Hōmu 2009). Seizōbutsu sekinin-hō, Law No. 85/1994. Shōhisha keiyaku-hō, Law No. 61/2000. Kokka baishō-hō, Law No. 125/1947. University of Freiburg, Tohoku University

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Case No. 1: Civil Law – Contract Law – Nullity of Contracts (Juristic Acts) due to a Violation of Mandatory Public Law Provisions

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Business Law in Japan – Cases and Comments

Kazuhiko Yamamoto

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Case No. 1: Civil Law – Contract Law – Nullity of Contracts (Juristic Acts) due to a Violation of Mandatory Public Law Provisions (*)

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Japan

Supreme Court, 4 September 1997, Case No. 1993 o 2142, Yutaka Matsuo v. Yamaichi Securities Co. Ltd.

Court

Supreme Court of Japan

I Headnote(s)

Case date

An indemnification contract concluded in August 1990 under the Securities and Exchange Act prior to amendment by Law No. 96 of 1991 is against public policy pursuant to the Civil Code and, therefore, void.

4 September 1997

P6

II Relevant Provisions

Case number

Sections 90, 709 Civil Code

1993 o 2142

Section 50(1) No. 3 Securities and Exchange Act (1) (the ‘SEA’, prior to the revision by Act No. 96 of 1991)

Parties

Sections 50(1), 50-3 Securities and Exchange Act (after the revision by Law No. 96 of 1991: the ‘Revised SEA’)

Claimant, Yutaka Matsuo Defendant, Yamaichi Securities Co. Ltd.

III Facts The appellant (the Appellant and Plaintiff, hereinafter only referred to as the ‘Plaintiff’) was a representative of Company X engaged in real estate leasing etc. (‘Company X’). The Plaintiff had conducted securities transactions with the P Branch of the appellee (Appellee and Defendant, hereinafter only referred to as the ‘Defendant’), in the name of the Plaintiff since August 1987 and in the name of Company X since March 1988. Having incurred losses from stock transactions, the Plaintiff had refrained from conducting new stock transactions either in his own name or in the name of Company X since May 1990.

Bibliographic reference

Kazuhiko Yamamoto, 'Case No. 1: Civil Law – Contract Law – Nullity of Contracts (Juristic Acts) due to a Violation of Mandatory Public Law Provisions', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 5 16

Around 13 August 1990, a Branch Manager of the Defendant solicited the Plaintiff to resume stock transactions, and on 15 August 1990, the Plaintiff resumed stock transactions in the name of Company X. On 30 August and 6 September 1990, the Plaintiff placed orders to purchase stocks of Company A and Company B in the name of the Plaintiff (the ‘Stock Purchase’). Upon soliciting the Plaintiff to conduct the Stock Purchase, this Manager of the Defendant provided a conclusive evaluation (or determinative opinion) that the stock price of Company A was expected to rise to JPY 8,000 based on reliable information from stock speculators, and that the stock price of Company B would also rise to the JPY 2,000 level. However, since the Plaintiff had previously incurred losses from purchasing stocks recommended by the Manager of the Defendant and was unable to completely rely on the conclusive evaluation provided by the Manager, the Plaintiff demanded indemnification of losses, saying ‘If I incur any loss, make it up’. Therefore, the Manager of the Defendant, upon implementing the Stock Purchase, made an indemnification agreement with the Plaintiff by which any losses incurred by the relevant stock transactions would be compensated. Plaintiff filed a principal claim seeking performance of Defendant's contractual obligation for the indemnification of losses incurred by the Plaintiff from declining stock prices. Plaintiff also filed an alternative claim seeking damages from the Defendant based on its liability as an employer for compensation of losses sustained from the conclusive evaluation provided by the Manager of the Defendant. P7

Ruling on the principal claim, the court of second instance (Osaka High Court, 26 August 1993) determined that, although the indemnification contract had been concluded prior to the 1991 revision of the Securities and Exchange Act (‘SEA’), the contract was void as contravening public policy. Furthermore, the court of second instance dismissed the alternative claim brought by Plaintiff, holding that Plaintiff conducted the Stock Purchase not because the Plaintiff had relied on the conclusive evaluation provided by the Manager of the Defendant, but because the Manager had promised indemnification of losses. Thus, there was no causal relation between the provision of the conclusive evaluation by the Manager of the Defendant and the Stock Purchase. Plaintiff appealed.

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IV Findings (1) Indemnification of losses should be deemed to be a seriously anti-social act because it distorts the pricing function of securities markets, and undermines fairness in securities transactions and confidence in securities markets. We must find that this view had been valid even before the Revised SEA came into force. Considering that under the Old SEA, indemnification of losses was regarded as an illegal act but was only subject to administrative dispositions, and the majority of academic opinions construed an indemnification contract to be valid under private law, we find that indemnification of losses was not clearly recognized as a seriously antisocial act in the past. However, compensation for losses by securities companies was revealed in November 1989 and became a serious social issue. Because of this incident, the Director of the Securities Bureau of the Ministry of Finance (MoF) issued the relevant direction (tsūtatsu) in December 1989. Upon receiving the directive, the Japan Securities Dealers Association (JSDA) revised its regulations, thereby requesting its members to refrain from providing post factum compensation for any losses incurred, while raising awareness that indemnification of losses was prohibited under laws and regulations. In light of this background, we must say that through this process, the recognition that indemnification of losses was prejudicial to the fairness of securities transactions and strongly reprehensible in society was gradually established. It is appropriate to construe that by 15 August 1990, when the Plaintiff allegedly concluded the indemnification contract with the Defendant, at the latest, it had already been recognized in society that indemnification of losses was impermissible for the order of securities transactions and seriously anti-social. Consequently, we conclude that the indemnification contract that the Plaintiff alleges to be valid is against public policy and, therefore, void, and that the determination of the court of second instance that follows this reasoning can be affirmed as justifiable. The judgment of prior instance does not contain such illegality as alleged by the Plaintiff's counsels, and their argument cannot be accepted. (2) The provision by a securities company of a conclusive evaluation that the price of

P 8 particular stocks would rise, and the making of an indemnification agreement

between the securities company and its customer to the effect that any losses from a fall in the stock price shall be compensated, do not conflict with each other in the process of motivating the customer to purchase stocks. Rather, as indicated in the facts determined by the court of second instance, where a securities company has, in the course of carrying out a series of acts for soliciting a customer to purchase stocks, solicited the customer by providing a conclusive evaluation, and the customer who has received such solicitation has, with the intention of demanding security or guarantee, requested the securities company to compensate any losses that might be incurred, and accordingly an indemnification agreement is made between the parties, it is appropriate to presume that both the provision of the conclusive evaluation and the indemnification of losses have affected the customer's decision-making process for stock purchase, unless there are special circumstances. In such a case, we must say that there exists a causal relation not only between the indemnification agreement and the stock purchase but also between the provision of the conclusive evaluation and the stock purchase. The court of second instance, only by reason of a relevant part of the Plaintiff's statement, simply denied the existence of a causal relation between the Manager of Defendant's provision of the conclusive evaluation and the Stock Purchase, without finding or suggesting any other convincing special circumstances. Such fact-finding and determination of the court of second instance is contrary to rules of thumb (keikensoku) and evidentiary rules and are, therefore, illegal, and such illegality clearly affects the conclusion of the judgment of prior instance. The Plaintiff's counsels' argument is wellgrounded in alleging such illegality. (3) For the reasons stated above, the judgment of prior instance must be quashed with respect to the part concerning the alternative claim made by the Plaintiff. Also, for further examination regarding this part in terms of the establishment of a tort, i.e. whether or not the Manager of Defendant's provision of the conclusive evaluation went beyond the socially acceptable level, this case is remanded to the court of second instance. In the final appeal, the part concerning the Plaintiff's principal claim is groundless and, therefore, dismissed with prejudice on the merits. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comment 1 Summary and Issues a) Demand of Performance of Indemnification Contract Under the Old Shōken torihiki-hō [Securities and Exchange Act; ‘SEA’], indemnification of administrative dispositions and not to any criminal penalty (section 50(1) SEA). Despite this, when

P 9 losses was prohibited. However, violations were only subject to

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numerous instances of compensating losses to some large customers were revealed towards the end of 1989, this matter became a serious social issue triggering the revision of the SEA on 5 October 1991, and the Revised SEA came into effect on 1 January 1992. (2) The Revised SEA provides for criminal penalties aimed at prohibiting the provision of indemnification of and compensation for losses (sections 50-3 and 200-3 (3) ). The gravamen of the case at hand is whether a customer who has entered into an indemnification contract with a securities company in violation of the SEA may demand the performance of indemnification by the securities company. This raises two key points. The first is whether an indemnification contract concluded in violation of the SEA is valid. This, in turn, entails two separate questions. First, is the indemnification contract valid if it was concluded after the Revised SEA came into effect? Second, is the indemnification contract valid if it was concluded before the Revised SEA came into effect? The second point raises the question of whether the performance of an indemnification contract that has been deemed to be valid can be demanded under the Revised SEA. b) Compensation Claimed on the Basis of Reliance on the Conclusive Evaluation The Plaintiff in this case also demanded compensation under tort law, contending that the Plaintiff detrimentally relied on Defendant's conclusive evaluation in undertaking the Stock Purchase. Given that the present case involved both the provision of a conclusive evaluation and the promise of indemnification, the dispute revolved around a question of fact: whether a causal relation existed between the provision of conclusive evaluation and the Stock Purchase. The court of second instance rejected the existence of causality; but the Supreme Court found causality. In any case, the courts reasoned that the providing of the conclusive evaluation that led to the Stock Purchase might constitute a tort. (4) However, this is no longer a serious issue P 10 because explicit provisions covering precisely this point were included in section 4 of the Act on Sales, etc. of Financial Products, (5) enacted in 2000. Thus, this section does not comment further on this matter.

2 Validity of the Indemnification Contract The first issue that arises in considering the demand for performance of the indemnification contract is whether or not an indemnification contract that was concluded in violation of the SEA can be deemed to be valid. a) General Rules and Theory Concerning Agreed Terms A preliminary step considers the Civil Code of Japan (the ‘Civil Code’) concerning the terms of agreements, and the validity of agreements that have been concluded in violation of laws and regulations. i) Civil Code Provisions Like the German Civil Code, the Civil Code adopts the Pandekten system and includes provisions concerning juristic acts under its general part (Book I). Section 90 of the Civil Code stipulates that, ‘A juristic act with any purpose which is against public policy is void’. Furthermore, section 91 of the Civil Code states: ‘If parties to a juristic act have declared an intention which differs from any provisions of laws or regulations that are not concerned with public policy, such intention shall prevail’. The Civil Code does not contain direct and explicit provisions concerning the validity of juristic acts that are in violation of provisions of law. However, provisions that are ‘related to public policy’ are referred to as mandatory provisions (kyōkō hōki), and it is generally held that any juristic act that violates mandatory provisions is void. (6) ii) Validity of Act in Violating Prohibitions under Public Law In this particular area, there has been considerable discussion of the validity of contracts that violate prohibitions contained in ‘regulatory provisions under public law’ (torishimari hōki). In this regard, special attention has been paid to the dichotomy between public law and private law, and the position taken on whether public law and private law are distinct and different in nature. The commonly accepted view (7) and judicial precedents (8) both start with the

P 11 presumption of a dichotomy between public law and private law. They posit that

while prohibitions under public law are directly intended to prevent certain acts, mandatory provisions under private law are directly intended to leave effectualization of contractual intent to the parties to their agreements rather than to the State. Thus, a contract is not immediately rendered null and void under private law even if it violates public law. But such contracts deemed valid under private law could open up the possibility of persons acting in violation of public law regardless of stipulated public law sanctions. Therefore, effectuating the purpose of prohibitions under public law may necessitate invalidation of parties' agreements under private law. Further, validity under private law cannot be permitted when the violation is deemed to be socially reprehensible and censurable. (9) On the other hand, if contracts in violation of public law were deemed to be null and void, this would invite the possibility of contravening the

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basic principle of private law and thereby undermining the security of transactions and good faith undertakings between the parties. Therefore, the following factors must be considered when determining the validity of an act in violation of prohibitions under public law, and judgment must be reached based on a comprehensive evaluation of these factors: (1) the purpose of the prohibition, (2) the level of the society's ethical censure of the violation, (3) security or stability of transactions, and (4) good faith between the parties. Contrary to this approach, recent academic opinions reject the notion of dichotomy between public law and private law, and instead have advocated that the two are mutually interdependent. (10) This approach views public law and private law as two types of law that serve a common purpose. In particular, the twin purposes of maintaining order in transactions and protecting a party that is unfairly disadvantaged are deemed to be common to both public law and private law. In this sense, public law and private law are seen as supporting and reinforcing each other. According to this theory, in certain instances acts that violate public law provisions must be invalidated under private law as well, to better ensure the realization of the purposes behind public law. b) Validity of Indemnity Agreements Violating the SEA Under the SEA, indemnification contracts were generally deemed to be valid, in accordance with the commonly accepted view outlined first above. (11) According to this view, indemnification contracts were prohibited under the SEA for the following reasons. P 12 First, indemnification contracts are detrimental to the best interests of investors because they encourage poorly considered investment decisions and erode the principle of individual responsibility. Second, indemnification contracts are detrimental to the sound management of securities companies because they invite excessive competition wherein securities companies are encouraged to assume unreasonable risks. In order to realize the purpose of this prohibition, it is, therefore, unnecessary to invalidate individual indemnification contracts. The purpose of the prohibition could have been realized if the administrative regulations established under the Old Securities and Exchange Act had instead been adequately enforced. On the other hand, invalidating indemnification contracts would free securities companies from their assumed responsibility, which would undermine the interests of the investors and violate good faith between parties. Accordingly, under this approach, it was held that indemnification contracts were valid. However, following the enactment of the Revised SEA, there is no longer any doubt that indemnification contracts are null and void. (12) The Revised SEA contains the following specific prohibitions. Section 50-3(1) prohibits a prior offer or promise of indemnification of losses or guarantee of profit (no. 1), post factum offer or promise of indemnification of losses or guarantee of profit (no. 2), and post factum compensation of losses or provision of additional profit (no. 3). Section 50-3(2) prohibits a promise of indemnification in response to customer demands. Penalties for violation are stipulated under section 199-6 no. 1 and section 200-3 no. 3. Finally, section 200-2 provides for the confiscation and collection of the equivalent value of any financial benefits obtained by the customer. Thus, under the Revised SEA, indemnification contracts are prohibited and subject to criminal penalty. Moreover, by providing for confiscation and collection of equivalent value, the law negates the very purpose of entering into an indemnification contract. Consequently, in order to realize the purpose of the Revised SEA, it is necessary for indemnification contracts to be rendered null and void. This understanding is supported not only by recent academic opinions that recognize the mutual interdependence between public law and private law, (13) but also by advocates of the previously commonly accepted view rooted in the dichotomy between public law and private law. (14) P 13

c) Changes in Public Policy and Timing of the Judgment on Contractual Validity The problem is whether indemnification contracts concluded before the Revised SEA came into effect should uniformly be deemed to be valid. The Supreme Court determined this to be a question pertaining to ‘public policy’ as provided under section 90 of the Civil Code and ruled that, as a result of changes in ‘public policy’, indemnification contracts concluded after such changes are null and void. (15) Three points are at issue here. First, the Supreme Court ruled that indemnification contracts are null and void, not because they are in violation of the SEA, but because they contravene ‘public policy’. Hence, if they are found to contravene ‘public policy’, indemnification contracts prior to the revised SEA can be deemed invalid. Second, the Supreme Court predicated the determination of whether an act contravenes ‘public policy’ on the following: the act not only had to be a seriously anti-social act, but also had to be recognized as such by society. According to the Supreme Court, the indemnification of losses ‘distorts the pricing function of securities markets’ and ‘undermines fairness in securities transactions and confidence in securities markets,’ and is therefore a seriously anti-social act, and that this conclusion was valid and applicable

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even before the Revised SEA came into effect. (16) However, indemnification of losses cannot be deemed to contravene ‘public policy’ and therefore void merely because it is seriously anti-social; rather, it is against ‘public policy’ and becomes null and void only when society recognizes this as a seriously anti-social act. Third, the Supreme Court determined that by the time the indemnification contract in the case at hand was concluded (15 August 1990), indemnification of losses had already P 14 been recognized by society to constitute a seriously anti-social act. According to the Supreme Court, compensation of losses by securities companies became a serious social issue in November 1989. Because of these securities scandals, the Director-General of the MoF's Securities Bureau issued a directive in December 1989. Upon receiving the directive, the JSDA revised its regulations and requested its members to refrain from providing post factum compensation for any losses incurred, while raising awareness that indemnification of losses was prohibited under laws and regulations. The Supreme Court determined that through this process, the recognition that indemnification of losses was prejudicial to fairness in securities transactions and strongly reprehensible in society was gradually established. (17)

3 Demand for Performance of the Indemnification Contract Assuming that an indemnification contract is valid, the second major problem involves admissibility under the Revised SEA of the demand for performance. Based on the judicial precedent discussed above, this question assumes particular significance in the case of an indemnification contract that was concluded prior to the recognition that such a contract constitutes a seriously anti-social act but in which performance was not demanded until after the Revised SEA came into effect. This very issue was raised in the Supreme Court judgment of 18 April 2003, involving an indemnification contract concluded in June 1985, for which performance was demanded subsequent to conclusion of transactions in 1995. (18) P 15

a) Timing of Judgment in Contravention of Public Policy First, the Supreme Court determined that judgment on whether or not a juristic act contravened public policy and therefore was void must be made on the basis of what constituted public policy at the time when the juristic act was performed. Therefore, even if a change has occurred in public policy after the performance of a juristic act, the validity of the juristic act is judged as of the time of its performance. That is to say, it is not possible for a juristic act that was valid at the time of its performance to be later deemed ex post facto void due to a change in public policy. This would give rise to grave social uncertainty and would seriously undermine confidence between parties. Based on this reasoning, indemnification contracts entered into no later than December 1989 are valid because they did not contravene the ‘public policy’ that prevailed at the time of contract. b) Prohibition of Demand of Performance Notwithstanding, the Supreme Court held that even when an indemnification contract is deemed to be valid, a demand for performance of the contract cannot be made under the Revised SEA. Specifically, section 42-2(2) no. 3 of the Revised SEA prohibits post factum compensation of losses and the provision of property benefits to customers, and provides for criminal penalties for violations of the law. Demanding the performance of an indemnification contract is equivalent to demanding the provision of property benefits, which is prohibited under the Revised SEA. Thus, the Supreme Court reasoned that demand of performance is not legally admissible. Some academic theories posit that impossibility of performance is an appropriate doctrine to apply in this sort of situation. That is, if the law, subsequent to the conclusion of the contract, prohibits performance of this type of contract, it would then become impossible to demand performance. (19) Yet it should be noted that the doctrine of impossibility of performance is primary based on the following concept. If, due to changes in conditions, the cost of performance comes to exceed the limit anticipated under the contract, the said contract cannot be used to demand the obligor's performance beyond such anticipated limit. (20) However, the issue in the case under discussion does not relate to changes in the anticipated cost of performance, but to the prohibition of an act based on legal norms and standards. Thus, the Supreme Court was correct in questioning whether performance could be demanded under the Revised SEA, because the impediment to performance arises from subsequent interference by governmental action, which is arguably a different type of situation than changes in cost of performance. However, it would not be appropriate to simplify the position of the Supreme Court to be prohibited and subject to criminal penalty under laws and regulations’. Rather, it should be understood that the decisive factors are whether or not there is a need to deny the demand for performance in order to realize the intent of laws and regulations, and the justifiableness of this as a basis for limiting the rights of contracting parties. In addition,

P 16 declaring that ‘it is inadmissible to demand performance of an act if it is

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when making this assessment, a helpful but not necessarily conclusive factor is the wording of the provisions contained in the relevant laws and regulations, especially whether they include specific sanctions. (21) Keizō Yamamoto (1) P 16

References ★ )

*) 1)

2) 3) 4)

5) 6) 7) 8) 9) 10)

11)

12)

13) 14)

Kazuhiko Yamamoto: Kyoto University,Graduate School of Law The author is grateful to Prof. Luke R. Nottage, Sydney, for editorial assistance. Shōken torihiki-hō, Law No. 25/1948 (after the revision by Law No. 90/1965). Following the revision of 1991, the SEA underwent another major revision in 2006 and its title was changed to Kin'yū shōhin torihiki-hō [Financial Instruments and Exchange Act] (Law No. 65/2006). Law No. 96/1991. These correspond to sections 39 and 198-3, respectively, of the current Financial Instruments and Exchange Act (cf. supra note 1). An additional question is whether if a securities company has encouraged a customer to purchase stock by promising indemnification, the customer can claim compensation of losses under tort law. In this case, it may be argued that the customer has no legal recourse for recovery of losses because the customer was also party to an indemnification contract that is deemed an anti-social act. This corresponds to the provision restricting performance for illegal causes as stipulated in section 708 of the Civil Code. Judicial precedent infers from section 708 of the Civil Code that when the degree of illegality of the securities company far exceeds the degree of illegality of the customer, the wrongdoer cannot be exempted from tort liability for compensation. Kin'yū shōhin no hanbai-tō ni kansuru hōritsu, Law No. 101/2000. See S. Wagatsuma, Shintei Minpō sōsoku [General Provisions of civil Law] (new ed., Tokyo 1965) 262. See S. Wagatsuma (supra note 6) 263 et seq. See for example Supreme Court, 15 September 1953, Minshū 7-9, 942; Supreme Court, 18 March 1960, Minshū 14-4, 483; Supreme Court, 29 October 1964, Minshū 18-8, 1823. See Supreme Court, 23 January 1964, Minshū 18-1, 37. See A. Ōmura, Keiyaku-hō kara shōhisha-hō he [From Contract Law to Consumer Law] (Tokyo 1999) 177 et seq., 187 et seq., 201 et seq.; K. Yamamoto, Kōjo ryōzoku-ron no saikōsei [Reconstructing Theories of Public Policy in Civil Law] (Tokyo 2000) 246 et seq. and 292 et seq. See T. Suzuki / I. Kawamoto, Shōken torihiki-hō [Securities and Exchange Act] (2nd ed., Tokyo 1984) 319; K. Kanzaki, Shōken torihiki-hō [Securities and Exchange Act] (2nd ed., Tokyo 1987), 365; W. Horiguchi, Saishin Shōken torihiki-hō [The Recent Securities and Exchange Act] (Tokyo 1991) 252. See M. Kawamora (ed.), Kin'yū shōhin torihiki-hō [Financial Instruments and Exchange Act] (3rd ed., Tokyo 2010) 417; T. Yamashita / H. Kanda (eds.), Kin'yū shōhin torihiki-hō gaisetsu [Outline of the Financial Instruments and Exchange Act] (Tokyo 2010) 350 et seq. See K. Yamamoto, Minpō kōgi I, sōsoku [Lectures on Civil Law, Volume I: General Provisions] (3rd ed., Tokyo 2011) 270 et seq. See K. Kanzaki / M. Shitani / Y. Kawaguchi, Shōken torihiki-hō [Securities and Exchange Act] (Tokyo 2006) 480; T. Uemora, Sonshitsu hoshō, sonshitsu hoten no hōritsu mondai [Legal Problem Regarding Loss Indemnification or Compensation], in: Shōji Hōmu 1257 (1991) 16 et seq. and T. Isomora, Sonshitsu hoshō naishi rieki hoshō yakusoku wo meguru saiban-rei no hihanteki kentō [Critique of Court Cases Involving Indemnification of Losses or Guarantee of Profits], in: Minshōhō Zasshi 113-4/5 (1996) 556 et seq. These authors take the position that indemnification contracts were also null and void even under the Old SEA.

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15) On this point, compare E. Kuronuma, Comment on the Supreme Court's Judgment, 4

September 1998, in: Kin'yū Hōmu Jijō 1506 (1998) 9. This commentator has argued against the Supreme Court's position on the grounds that indemnification of losses does not constitute a seriously anti-social act for the following two reasons. First, in actual fact, indemnification of losses is undertaken when investment decisions have been effectively delegated to the securities company. In such cases, by bearing the risk of indemnification of losses, a securities company is encouraged to make careful investment decisions. Therefore, indemnification of losses does not distort the pricing function of securities markets. Second, because indemnifying the losses of some investors does not directly harm other investors, indemnification of losses does not undermine fairness of securities transactions and confidence in securities markets. A further critique of the Supreme Court's ruling is made by M. Hayakawa, Comment on the Supreme Court's Judgment, 4 September 1998, in: Hōgaku Kyōshitsu 211 (1998) 141. He argues that the Supreme Court was correct in pointing out that society's evaluation of indemnification contracts had changed before the revision of the SEA. However, while this provides grounds for justifying the criminal penalties included in the revised law, it does not provide sufficient grounds for denying the validity of an agreement based on private autonomy. 16) On this point, see Kuronuma (supra note 15) 9 and M. Takizawa, Comment of Supreme Court's Judgment, 4 September 1998, in: Shihō Hanrei Rimākusu 18 (1999) 13. They have argued against the Supreme Court's position on the grounds that prior to the revision of the law, the general public could not have foreseen that indemnification of losses contravened public policy. 17) On this point, the following argument against the Supreme Court's position is made by T. Kawachi, Comment on the Supreme Court's Judgment, 4 September 1998, in: Hanrei Hyōron 472 (1998) 35. If it were accepted, as the Supreme Court has stated, that awareness of the anti-social nature of indemnification of losses was gradually established, it then becomes unclear at what point on the ‘developing awareness’ continuum the indemnification of losses came to contravene public policy. This, in turn, would undermine the stability and predictability of law. Kawachi argues that all indemnification contracts entered into prior to the revision of the law should be deemed valid and that, as discussed in the main text below, it would be more appropriate to reject the demand for performance under the revised law. The same argument is made in Hayakawa (supra note 15) 141 and Takizawa (supra note 16) 13. 18) Minshū 57-4, 366. See, for example, K. Yamamoto, Comment on the Supreme Court's

Judgment, 18 April 2003, in: Minpō hanrei hyakusen sōsoku / bukken [100 Precedents on Civil Law General Provisions / Property Rights] (6th ed., Tokyo 2009) 30 et seq. Compare moreover A. Qjima, Comment on the Supreme Court's Judgment, 18 April 2003, in: Saikō saibansho hanrei kaisetsu minji-hen heisei 15 nendo jō [Commentaries on Precedents of the Supreme Court, Civil Law Cases, 2003, Vol.1], 259 et seq; M. Kawamora, Comment on the Supreme Court's Judgment, 18 April 2003, in: Hanrei Hyōron 540 (2004) 24; Y. Smomi, Comment on the Supreme Court's Judgment, 18 April 2003, in: Heisei 15 nendo jūyō hanrei kaisetsu [Commentaries on Important Precedents 2003], Jurisuto 1269 (2004) 65; K. Yoshida, Comment on the Supreme Court's Judgment, 18 April 2003, in: Shihō Hanrei Rimākusu 29 (2004) 6; A. Yamazaki Comment on the Supreme Court's Judgment, 18 April 2003, in: Hōgaku 69-1 (2005) 136. 19) See Shiomi (supra note 18) 66; Isomora (supra note 14) 559 et seq. 20) See Y. Shiomi, Saiken sōron I [Obligations General Part I] (2nd ed., Tokyo 2003) 166. 21) See Yamamoto (supra note 18) 31; Yamazaki (supra note 18) 141; Kawamora (supra note 18) 28. 1) Kyoto University, Graduate School of Law

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Case No. 2: Civil Law – Contract Law – Doctrine of Frustration – Change of Circumstances

Document information

Publication

Frank Bennett

Business Law in Japan – Cases and Comments

(★ )

I Headnote(s) In order to apply the doctrine of changed circumstances, the change in circumstances following the formation of the contract must be unforeseeable, and it must arise from circumstances beyond the control of the parties; furthermore, the questions of unforeseeability and lack of contribution to the changed circumstances are to be determined – even where contractual rights and obligations on one side of the contract have been the subject of transfer – from the standpoint of the original parties to the contract

Jurisdiction Japan

Court

Supreme Court of Japan

II Relevant Provisions

Case date

Section 1 Civil Code

1 July 1997

P 18

III Facts

Case number

This case arose in connection with a golf course originally constructed by Dai Nippon Golf Kankō KK (‘Dai Nippon’). While Dai Nippon's actions and imputed knowledge would figure prominently in a final disposition of the case in the Supreme Court, at the time of the original filing Dai Nippon had been reduced to a shell and the company was not a party to the action.

1996 o 255

Bibliographic reference

Frank Bennett, 'Case No. 2: Civil Law – Contract Law – Doctrine of Frustration – Change of Circumstances', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 17 24

The golf course itself came into existence as the grounds of the Hanshin Country Club (later to be renamed ‘Pine Hills Golf’, presumably in an effort to restore its depleted goodwill). The grounds, comprised of three courses (East, Central and West, with a total of 27 holes) were sculpted by Dai Nippon through heavy use of cut and fill, to produce a landscape suitable for the game of golf. The course opened for business in July of 1973. The 20 original Plaintiffs in the action were early members of the Hanshin Club who either entered into contracts of membership directly with Dai Nippon between 1971 and 1972 (prior to the actual opening), or accepted the transfer of membership rights from other members with Dai Nippon's consent. Under each of these membership agreements, Dai Nippon held a deposit of between JPY 500,000 and 600,000 on behalf of the member concerned. Under the membership agreements, Club members enjoyed certain benefits. The particular benefits at issue in this dispute are: (1) priority access to the Club and its facilities at rates lower than those charged to non-members; (2) a right to demand return of deposit monies after the lapse of ten years from the date of membership; and (3) the right to transfer the membership to third parties. The Club and members continued in their relationship for 14 years. During this time, due to weaknesses in the subsoil structure on which the course was built, and due to flaws in the works carried out by Dai Nippon, the course suffered from gradual erosion and subsidence, due, in particular, to artesian seepage through fill dirt originally applied in the course of landscaping. The detrimental effects of water moving through the vulnerable subsoil gradually became increasingly apparent with the passage of time. The Plaintiffs continued as members of the Club until 1987, when Dai Nippon transferred the grounds, together with related rights and obligations, to Mori International, who would later be named as a Defendant in the original trial court action. In September of 1988, Mori International found it necessary to close the Central course to play. Matters came to a head in May of the following year, when exceptionally heavy rainfall put additional pressure on the sagging soil structures of the grounds. Although protective measures were taken in an attempt to avert disaster, both the Central and the East courses were afflicted by such severe erosion and landslides that, combined with the earlier deformations to the landscape, the site became unsuitable for the conduct of the game of golf on a commercial basis. Government inspectors from the Hyōgo Prefecture took an interest in the condition of the grounds, and issued a demand for disaster prevention measures at the course on 22 May. Accordingly, Mori International announced that access to the entire grounds would be P 19 suspended at the end of that month, and a sweeping reconstruction project commenced from 1 June. This was evidently completed at some time in the following year, as the last inspection and demand for further preventive measures was issued by Hyōgo Prefecture on 3 June 1990. In rough outline, the works consisted of: the introduction of surface and underground drainage channels to divert artesian flows away from vulnerable fill zones; the

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application of gravel with better slide resistance in heavily filled areas; the disposal of the residue of slide damage and of unsuitably light soil; and the restoration of the grounds, in the wake of the drainage and construction work, to a condition and appearance suitable for the game of golf. In addition, Mori International undertook the construction of a new clubhouse. The total cost of these various projects amounted to JPY 13 billion, and the distribution of this burden was the immediate trigger of the dispute in this case. After the completion of the above recovery projects, the Club grounds, facilities and related rights and obligations were transferred from Mori International to Pine Hills Golf KK (‘Pine Hills’) by a contract concluded on 2 March 1991. Pine Hills became the new proprietor, and (apparently) the immediate contractual counterpart to the plaintiffs in this action. In light of the restoration works, Mori International (followed by its successor in interest Pine Hills) proposed to apply the deposit monies held on behalf of the Plaintiffs toward the costs of restoration. For members refusing to release their deposit funds, Mori International (and after it Pine Hills) demanded a top-up deposit of JPY 10 million per member. This was refused by the Plaintiffs, who filed this action for confirmation of their status as Club members on the original terms of their respective contracts. Mori International and Pine Hills asserted that the original contracts were subject to modification pursuant to the ‘change of circumstances’ doctrine implicit in the good faith clause of section 1 of the Civil Code.

IV Findings The source of the ‘change of circumstances’ doctrine in Japanese law is the good faith clause of section 1 of the Civil Code. While the doctrine is not specifically enumerated in the Civil Code, (1) interpretation of the good faith clause to cover such cases finds strong support both in academic commentary and in some court decisions. The reasoning in this case at all levels of judgment proceeds on this basis. The commonly understood formulation of the doctrine turns on four factors: (1) a change objective foundations; (2) that the change in circumstances was unforseeable to the parties; (3) that the change in circumstances was beyond the control of the parties (such as war, natural disaster, extreme rates of currency inflation, or changes in the law); (4) that holding the parties to the original terms of the contract would be inappropriate under the principle of good faith. (2)

P 20 in circumstances after the conclusion of a contract which cuts to its

The contribution of the Supreme Court judgment in this case to jurisprudence on this point can best be understood in light of proceedings in the courts that led to the final appeal. In the trial judgment handed down by the Osaka District Court on 25 November 1993, claims against Mori International were dismissed on the grounds that it had severed its legal relations with the golf club following the sale to Pine Hills. This marked the end of Mori International's direct involvement in the case. On claims against the other Defendant, Pine Hills, the District Court held for the Plaintiffs, reasoning as follows: (1) the court found the evidence inadequate to show that the JPY 13 billion cost of the works was the minimum necessary for disaster prevention; (2) even if the works were deemed the minimum needed for recovery at the time they were carried out, the court found that the evidence was insufficient to support the assertion that, during the tenure of Mori International, the need for disaster prevention measures was not known to it, nor indeed (3) that a need for such measures was unforeseeable. Accordingly, the court declined to apply the principle of changed circumstances, concluding that to deny or modify the rights enjoyed by the Plaintiffs under the original contract would be contrary to the principle of good faith. Upon appeal by Pine Hills to the Osaka High Court, the District Court judgment was reversed, and judgment handed down in favor of the golf club on 21 September 1994 striking down the Plaintiffs' claim. Founding its own reasoning also on the doctrine of changed circumstances, the High Court reached a different evaluation of the facts, finding that (1) the construction works undertaken were in fact the minimum required from the standpoint of disaster prevention; (2) that while Mori International could reasonably have been expected to anticipate some restoration works to the grounds, the extent of the ensuing damage and the need for large-scale construction works were not foreseen, and indeed (3) could not have been. The Court further observed that as in November 1988, Dai Nippon had become a shell corporation, cutting off any possibility of recovery from that quarter. Taking the totality of these circumstances into account, the High Court found that it would be inappropriate under the principle of good faith to hold the Defendant (= Appellant) Pine Hills to the terms of the original contract. Invoking the doctrine of changed circumstances, the Court overturned the lower court's judgment and denied all claims of the original Plaintiffs. P 21

The judgments in both the District Courts and in the High Court thus applied the knowledge and foreseeability tests of the commonly accepted rule to Mori International,

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the contractual counterpart to the Plaintiffs at the time the change in circumstances arose, and at the time the initial proposal to alter the contractual arrangements was put forward. The original Plaintiffs then appealed to the Supreme Court on three grounds. First the Plaintiffs objected that the High Court judgment was silent on whether the underlying cause of the change in circumstances was within the control of one of the parties, as required by the relevant standard. Second, the Plaintiffs posited that the relevant party to consider with respect to any contribution to the underlying circumstances was the Plaintiffs original contracting partner Dai Nippon, and not Mori International. Finally, the Plaintiffs objected that foreseeability, as well, should be evaluated from the standpoint of Dai Nippon, who were originally responsible for the unfortunate landscaping of the grounds. The Supreme Court panel accepted the arguments of the plaintiff appellants, and overturned the High Court judgment. In the words of the Court: In order to apply the doctrine of changed circumstances, the change in circumstances following the formation of the contract must be unforeseeable, and it must arise from circumstances beyond the control of the parties; furthermore, the questions of unforeseeability and lack of contribution to the changed circumstances are to be determined – even where contractual rights and obligations on one side of the contract have been the subject of transfer – from the standpoint of the original parties to the contract. After indicating that this point alone required the reversal of the High Court judgment, the Court went on to observe: In the absence of exceptional circumstances, the operator of a golf course that has been fashioned by changing the natural lay of the land will ordinarily be understood, for the purposes of applying the doctrine of changed circumstances, to be capable of expecting deterioration of the grounds, and it cannot be denied that the operator in such a case has contributed to such a change in circumstances. The Court thus declined to apply the doctrine of changed circumstances, reversed the High Court's judgment, and reinstated Plaintiffs' rights under their original contracts. Translations from the Japanese original by Frank Bennett

V Comment The doctrine of changed circumstances has had a more lively existence in commentary than it has enjoyed in the courts. To date, in the court of final appeal, it has been applied P 22 only in a single wartime judgment of the Imperial Court (Daishin-in), concerning payment under a contract rendered illegal by a change in statutory law. (3) In all cases that have reached the Supreme Court on this issue since 1945, the Court has declined to approve relief. (4) While the ultimate result in this case serves to underscore the stiff barrier that claimants must overcome to invoke the doctrine, it nonetheless contributes to clarity by extending somewhat our view of the contours of the doctrine as applied in the Supreme Court. Despite the repeated failure of claims based on the doctrine in the highest court, reasoning in the earlier cases had established that, whatever details of the standard might be, the doctrine had been accepted as a legitimate foundation for challenging a contract or asserting a need to change its terms. This particular case extends that limited line of authority, revealing the structure of reasoning adopted by the Court in applying the doctrine, if not of the combination of factors or their level that might satisfy the requirements of the standard. While previous cases in which the doctrine was raised had concerned purely external events such as price fluctuations, natural disaster, and the mandatory force of statute, the disaster in this case involved the interaction of natural forces (a prolonged period of rain) and the landscape crafted by one of the original contracting parties (Dai Nippon). Given that the rains concerned were not such as to cause widespread disaster in other contexts, the acceptance of these conditions as constituting a ‘change of circumstances’ at the threshold of the test under the doctrine is a point of interest that attracted some commentary. (5) While the factual circumstances are broadly accepted by the Court as qualifying for application of the test, the qualifying language following the main holding concerning the need for ‘exceptional circumstances’ makes it clear that the unforeseeability hurdle in such cases will be particularly high. The Supreme Court holding in this case confirms the relevance of the second and third requirements of the commonly accepted formulation, that is: (a) that the relevant change in circumstances must have been unforeseeable; and (b) that the event must be one beyond the control of the parties. With respect to the requirement of unforeseeability, two views are possible: that the change in circumstances must be entirely unforeseeable; or that the nature of the change

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P 23 may be foreseeable, but its degree is not. While lower court cases had been reported in

which the degree of change in a variable factor was found to constitute an unforeseeable change in circumstances, (6) the Supreme Court, in considering on the facts the foreseeability of the scale of landscape restoration works found to be necessary appears to accept the position that a change which is unexpected only in degree may potentially qualify on this element of the test. The primary novelty of this case, and the aspect that prompted consideration of the two factors mentioned above, is in the fact that the party seeking relief under the doctrine was a transferee of the relevant contractual obligations. The golf club enterprise in this case passed through three parties: Dai Nippon, Mori International, Pine Hills. Neither the transfer of these rights, nor the assertion of the change of circumstances doctrine by Pine Hills as the ultimate transferee were challenged by the Plaintiffs. This posture opened the door on the issue that proved dispositive in the Supreme Court: If the test turns on knowledge and reasonable foreseeability, this refers to the knowledge and foreseeability of whom? This was a question of first impression at the time this case arose, both in the courts and in scholarship. The clear outcome of the Supreme Court decision is that the transferee stands in the shoes of the transferor for purposes of the test. In the approach taken by the courts below, access to the doctrine in this case would turn on foreseeability in light of the transferee's actual knowledge at the time of the transfer. As the conflicting judgments below serve to illustrate, that factual evaluation is a difficult task, which the Supreme Court formulation avoids by applying a bright line rule. Foreseeability is read to mean foreseeability at the time of the original contract, to the original contracting parties, regardless of the party asserting the claim. This opens the possibility of burdening a party that is unaware of the full potential for disaster – as Pine Hills claimed to be, with some success in the High Court. The approach of the Supreme Court may be read as seeking a balance between equitable fairness and judicial efficiency. If the original contract is assumed to incorporate the relative risk evaluations of the golf course and members, it must be that permitting the transferee to modify or escape contractual provisions on the basis of mere ignorance would upset the balance of the exchange to the advantage of the transferee. Such a test would give rise to an adverse incentive to willful blindness, which might be controlled for by the courts, but only by further complicating the task of judicial evaluation. As the transferee is well positioned to investigate the potential risk factors of the golf course transaction, placing that party in the position of the transferor would seem to reinforce the incentives to carry out due diligence, and minimize the procedural costs of the courts themselves.

In the evaluation of the Supreme Court, this case involved transfer from a party with sufficient information to gauge the risk that the value of the golf course on which the contracts depended would be undermined by subsequent. The obverse situation, in which the risks are not foreseeable at the time of contracting, but later come to light P 24 and are known to a transferee, remains and open question. (7) In such a situation, the knowledge of the parties and the information available on which to base risk assessment at the time of the transfer would naturally be an unavoidable issue. Finally, with respect to the final element of the accepted test under the standard formulation, the terms asserted by Defendant Pine Hills in this case were tantamount to avoidance of the contract, which is of potential significance. The posture of cases in which the doctrine is raised requires the invoking party to declare its position; the court does not assume authority to determine a reasonable variance of contract terms and impose a solution. Accordingly, the determination of whether holding the parties to the original terms of the contract would be ‘inappropriate’ under the good faith clause of section 1 Civil Code may be colored by the position chosen by the party invoking the doctrine and the process of negotiations leading up to trial. Given the absence of cases in which the doctrine has succeeded at the Supreme Court level, the contours of such a relation remain unclear. As of this writing, no cases involving the change of circumstances doctrine have yet been reported following the tragic earthquake and tsunami of 11 May 2011. However, given the sweeping impact of that event, it may yet provide occasion for the courts to further explore and elaborate this doctrine in Japanese law. Frank Bennett (1) P 24

References ★ )

Frank Bennett: Nagoya University, (UCLA Law School), (University of California, Berkeley).

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1)

2) 3) 4)

5) 6) 7) 1)

Section 1 of the Civil Code provides: 1. Private rights must conform to the public welfare. 2. The exercise of rights and performance of duties must be done in good faith. 3. No abuse of rights is permitted. See S. Wagatsuma, Saiken kakuron (jōkan) [Principles of the Law of Contract (volume 1)] (Tokyo 1954) 178; T. Taniguchi / K. Igarashi, Shinpan chūshaku minpō, vol. 13 (Tokyo 1996) 69 et seq. Imperial Court, 6 December 1944, Minshū 23, 613. The relevant judgments are: Supreme Court, 6 February 1951, Minshū 5, 36; Supreme Court, 28 January 1954, Minshū 5, 36; Supreme Court, 28 January 1954, in: Hanrei Taimuzu 38, 51; Supreme Court, 12 February 1954, Minshū 8, 448; Supreme Court, 20 December 1955, Minshū 9, 2027; Supreme Court, 6 April 1956, Minshū 10, 342; Supreme Court, 25 May 1956, Minshū 10, 566; Supreme Court, 22 April 1958, in: Jurisuto 156, Hanrei Card 147; Supreme Court, 1 September 1960, in: Jurisuto 212, Hanrei Card 530; Supreme Court, 20 June 1961, Minshū 15, 1602; Supreme Court, 15 October 1963, Saibanshū (Minji) 68, 379; Supreme Court, 16 June 1981, in: Hanrei Jihō 1010, 43; and Supreme Court, 15 October 1982, in: Hanrei Jihō 1060, 77. Tokyo Daigaku Hanrei Kenkyū-kai [University of Tokyo Precedents Research Group], Saikō saibansho minji hanrei kenkyū [Studies of Supreme Court Precedent], in: Hōritsu Kyōkai Zasshi 117 (1997) 127 (H. Ishikawa reporting). See, e.g., Tokyo District Court, 19 August 1959, in: Hanrei Jihō 200, 22 (inflation); Kobe District Court, Itami Branch, 26 December 1988, in: Hanrei Jihō 1319, 139 (land price inflation far exceeding the cost of living index). See S. Katayama, in: Hanrei Serekuto No. 97, Hōgaku Kyōshitsu 210, 14. Nagoya University, (UCLA Law School), (University of California, Berkeley)

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Case No. 3: Civil Law – M&A – Binding Nature of Letter of Intent – Obligation to Negotiate in Good Faith – Confidentiality Clause – Injunctive Relief

Document information

Publication

Business Law in Japan – Cases and Comments

Jörn Westhoff

Jurisdiction

Supreme Court, 30 August 2004, Case No. 2004 kyo 19, Sumitomo Trust and Banking KK v. UFJ Holdings, ‘Sumitomo Trust’

(★ )

Japan

Source: Minshū 58-6, 1763 = LEX/DB280923

Court

I Headnote(s)

Case date

II Relevant Provisions

On the question whether the obligation to negotiate in good faith and the obligation of secrecy in a pre-contract agreement have legally binding effect and can be grounds for an injunctive relief.

Supreme Court of Japan

30 August 2004

Sections 41(4), 43(3) Civil Provisional Remedies Act (1) P 26

Case number

III Facts

2004 kyo 19

Reasons for the appeal as given by the representative of Appellant, Takeshi Fukazawa. (1) According to the files, the course of events was as follows:

Parties

Claimant, Sumitomo Trust and Banking KK Defendant, UFJ Holdings

(a)

Bibliographic reference

Jörn Westhoff, 'Case No. 3: Civil Law – M&A – Binding Nature of Letter of Intent – Obligation to Negotiate in Good Faith – Confidentiality Clause – Injunctive Relief', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 25 35

Appellant [= the Obligor, Sumitomo Trust and Banking KK], on 21 May 2004 agreed to a restructuring and cooperation (hereinafter: the ‘Implementation of Cooperation’) between the groups, namely the Group of Opponents [= the Obligors, UFJ Holdings and two other parties] (short for: the Opponents as well as daughter companies and affiliated enterprises of Opponent Y1) and the Group of Appellants (short for: Appellant as well as its daughter companies and affiliated enterprises). The intended restructuring consisted of the transfer of all business units (with the exception of business related to the share capital of Opponent Y2), the assets and liabilities forming those business units, and related assets and liabilities (hereinafter: ‘Business Units of Opponent Y2’) from Opponents to Appellant. A document was compiled which specified the content of this agreement (hereinafter: ‘Basic Agreement’). Section 12 of the Basic Agreement bears the title ‘Fair Discussion’, and the first paragraph reads as follows: In case of matters which are not regulated by this agreement or are doubtful, the parties shall discuss these in a fair manner. The next paragraph reads: The parties are not allowed to disclose to or discuss – neither directly nor indirectly – with third parties or together with third parties, information with regard to business related to the object of the present agreement.

(b)

P 27

(The content of this second paragraph will hereinafter be referred to as the ‘Clause in Question’.) The Basic Agreement does not contain a regulation to the effect that Appellant and Opponents are obliged to enter into a final agreement with respect to the Implementation of Cooperation, and the parties guarantee each other by the above cited clause that in future negotiations aiming on the conclusion of such final agreement they will not disclose or discuss towards or with third parties information referring to business related to the object of the present agreement. The Basic Agreement does not contain any regulations on sanctions or contractual penalties in case of a violation of this clause. Appellant and Opponents, on the basis of the Basic Agreement, negotiated with each other, aiming at conclusion by July of the same year of a basic contract including details of the Implementation of Cooperation. Subsequently however, Opponents concluded that the sole measure to overcome the current problems of their group was the revocation of the Basic Agreement and a merger with Group A [Mitsubishi Tokyo Financial Group] (joint notation for A and its daughter companies and affiliated enterprises), including opponent Y2. Therefore, on 14 July they declared towards Appellant the termination of the Basic Agreement and asked A for a merger including the transfer of the relevant Business Units of Opponent Y2. This was also publicly announced.

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(c)

On 16 July, Appellant claimed before the Tokyo District Court that the initiation of discussions on a merger between Opponents and Group A had violated the negotiation monopoly of Appellant as laid down in the Basic Agreement. Appellant, on grounds of the Basic Agreement, filed for injunctive relief regarding: (i) (ii)

(d) (e)

(f) (g) (l)

the disclosure of information and negotiations; actions between Opponents and a third party with the objective of transfer and acquisition of the relevant Business Unit of Opponent Y2 to or by the third party; and (iii) actions with respect to a merger of opponent Y2 with the third party and splitup as well as actions with respect to future cooperation in this respect. The Tokyo District Court, on 27 July 2004, issued a preliminary injunction as applied for. Opponents remonstrated, but the Court confirmed the preliminary injunction on 4 August. Opponents filed a complaint against the Court's decision and filed a protective complaint with the Tokyo High Court. The Tokyo High Court, on 11 August, overruled the above-mentioned decisions and issued an injunction for preservation, according to which injunctive relief was to be denied. According to the facts as laid down in the files, at that time the mutual trust between Appellant and Opponents was disturbed, and it is apparent that a serious continuation of the discussion in order to achieve the agreement which was originally intended by the parties could no longer be expected. Hence, latest on 10 August, the date of close of hearings, the Clause in Question, with regard to its nature, could not be regarded as valid for the future. Therefore, a grant of injunctive relief at that time was not justifiable. On 12 August, Opponents entered into an agreement on a merger between the Group of Opponents and Group A and guaranteed that they would perform the merger by October 2005. Appellant intended to complain against the general decision and filed for admission of complaint, which was granted by the Tokyo High District Court on 17 August 2004. The complaint argued that the general decision had been based on the assumption that, at the time, the mutual trust between Appellant and Opponent was already disturbed and thus a serious continuation of the discussion in order to achieve the agreement which was originally intended by the parties, could no longer be expected. The complaint argues against the decision that the injunctive relief could not be derived from the Clause in Question any more.

With respect to the question of whether the obligation according to the Clause in stated regarding future negotiations between the parties with the intention to achieve a final agreement on the Implementation of Cooperation, that the order not to disclose information or conduct discussions with respect to business related to the object of the agreement is inseparably linked to such negotiations. It is obviously a measure to ensure that negotiations lead to a final agreement without the influence of third parties, and in an unobstructed and efficient manner. If despite repeated negotiations, common sense leads to the conclusion that there is no possibility of achieving such final agreement, this can be interpreted in such a way that obligations according to the Clause in Question are forfeited.

P 28 Question, i.e. the obligation of forbearance, was indeed forfeited, it has to be

As already explained, Opponents in the present case had declared termination of the Basic Agreement towards Appellant on 14 July 2004. Furthermore, they had asked A for a merger including the transfer of the relevant Business Unit of Opponent Y2 and publicly announced this fact, in the aftermath of which injunctive relief was applied for. The application was granted, but Opponents succeeded in having this decision overruled and immediately entered into a basic agreement on a merger between the Group of Opponents and Group A, thereby further pursuing a final agreement on such a merger. Taking this into account, it must be regarded as extremely unlikely that an agreement on Implementation of Cooperation with Appellant could still have been achieved. However, taking into account the full course of events in the present case, it cannot be denied that there were still certain factors yet in the course of development, and common sense does not lead to the conclusion that such an option did not exist at all. Therefore, the obligation according to the Clause in Question cannot be regarded as forfeited. The preliminary injunction in the present case, however, is a preliminary injunction which defines a preliminary status and is issued under the condition that it is ‘necessary in a conflict under a legal relationship to safeguard the obligor against severe losses or danger’ (section 23(2) Civil Provisional Remedies Act), and it loses its importance if such a condition does not exist anymore. Whether such a condition indeed existed is a decisive point of contention in this case. Since the application for injunctive relief, both parties have comprehensively brought forward their respective warrants and justifications. Considering this point, we realize that, according to the facts, the Basic Agreement does not include a regulation with the effect that Appellant and Opponents are obliged to enter into a final agreement with regard to the Implementation of Cooperation and that the achievement of such a final agreement depends on future negotiations. The Basic Agreement does not guarantee the conclusion of a final agreement, and it is obvious that

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Appellant had merely expected such a conclusion. Therefore, the damage caused to Appellant by Opponent's violation of the Clause in Question is not only the damage in the amount of the expected profit, but also the damage caused by frustration of Appellant's expectation to be in a position where Appellant, through negotiation with Opponents and free from interference by third parties, would be able to achieve a final agreement on the Implementation of Cooperation. With respect to the nature and content of such damage it would be disproportionate to regard such damage as not recompensable. The probability of a final agreement between Appellant and Opponents regarding the P 29 Implementation of Cooperation being relatively small, the application for injunctive relief stretched over a long period of time until the end of March 2006 and demanded that Opponents refrain from disclosure of information to and discussions with third parties. The situation at that time was as follows: If the application were to be granted, the damage caused to Opponents would be enormous. Should Opponents, on the other hand, be prohibited by a preliminary injunction from sharing information or pursuing discussions with anyone else but Appellant, Appellant would neither suffer a severe loss nor be in any grave danger, which is why the application for injunctive relief does not meet the conditions mentioned above. Thus, the general decision not to grant injunctive relief is to be approved. The arguments only refer to the illegitimacy of elements which do not affect the conclusion of the general decision and can, therefore, not be taken into account. The Court, therefore, unanimously rendered the present judgment.

IV Findings Under condition of a deposit of JPY 3 billion by Appellant UFJ Holdings, a deposit of JPY 3 billion by UFJ Trust and Banking Corporation and a deposit of JPY 1.5 billion by Appellant UFJ Bank: (1) (2) (3)

the general decision is overruled; the preliminary injunction No. 2004 yo 2658 of the Tokyo District Court dated 27 July 2004 in the case of injunctive relief on the proscription of disclosure of information and pursuance of discussions is abolished; each of the applications of Opponents for preliminary injunction is dismissed.

Reasons (1) Section 12(2) (the Clause in Question) of the Basic Agreement concluded between Opponent and Appellants on 21 May 2004 (present Basic Agreement), which is cited as grounds for the present case, is legally binding and can be grounds for an injunctive relief. (2) The legal validity of the declaration of termination of the Basic Agreement, which Appellants submitted to Opponent on 14 July 2004, is not recognized. (3) The main condition of the Basic Agreement consists of the parties' fair efforts to realize cooperation while maintaining mutual trust. In order to overcome their emergency situation, Appellants decided to revoke the Basic Agreement and made this publicly known, pursuant to which Opponent filed for injunctive relief. Even after a general decision and the present examinations, the parties were at odds with each other and their mutual trust had gradually diminished. Therefore, it appears unlikely that the gap between the parties can now be bridged. Considering the matter from an objective perspective today, it is to be stated that the mutual trust between Appellants and Opponent is already disturbed and it can no longer be expected that in the future a P 30 final agreement can be achieved in a fair manner. As of the conclusion of examinations on 10 August 2004, it can be assumed that at least the Clause in Question has, because of its nature, lost legal validity for the future. Therefore, injunctive relief cannot be granted. The injunctive relief intends to protect the claim which derives from the Clause in Question. The application for preliminary injunction, which aims at the injunctive relief, is presently not justifiable anymore. (4) Therefore, sections 41(4) and 43(3) Civil Provisional Remedies Act are applied and, subject to the above cited deposits by Appellants, the present judgment is rendered. Translated from the Japanese original by Jörn Westhoff

V Comment The case underlying this decision is well-known in Japan and has received quite a lot of attention worldwide. It might have made international headlines mainly because of the prominence, the financial strength and the economic power of its protagonists, but it is also important because of the legal implications deriving from it for companies as a whole, as well as for their managers and shareholders. Furthermore, it sheds light on the way Japan's much-described, analysed and widely-discussed system of formal and informal rules and sanctions might – or might not – have changed in a society that, in the views of some, no longer seems to follow traditional Japanese manners and methods, but has instead fallen prey to an unregulated globalized capitalism.

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1 Facts To fully understand the implications of this case, it seems necessary to draw a bigger picture of the situation than is presented in the citation above: (2) a) The Situation of Financial Institutions in Japan at the End of the Last Millenium It is well known that the Japanese financial crisis of 1997 and 1998, with the failure of, inter alia, Hokkaido Takushoku Bank and the collapse of Long-Term Credit Bank of Japan and Nippon Credit Bank, led to major restructuring among Japanese banks. This was supported – or to some extent initiated – by the government when in 1998 the competence for the P 31 supervision of banks was shifted from the Ministry of Finance to an independent body, the Financial Services Agency (‘FSA’). (3) Whereas the Ministry had formerly followed a ‘Too-Big-to-Fail’-Policy, encouraging mergers of healthy as well as weak banks, the FSA refrained from following this worn-out path. (4) The new policy, however, resulted in an even more Darwinian approach to the ‘Too-Big-to-Fail’-pattern, with the major banks seeking relief in mergers among each other, leaving behind small banks: Seven mergers among major banks were implemented in the years 2000 to 2002. (5) b) Sumitomo and UFJ – Part I: Love and Loss Rather late, in 2004, Sumitomo and UFJ started planning for mergers, although from different directions. While Sumitomo had survived the crisis so far, UFJ found itself in a position where a speedy solution had to be found to its severe undercapitalization. (6) Parts of UFJ's business, though, were still profitable, i.e. its trust banking unit, and on 21 May 2004, Sumitomo's intention to purchase the latter at the price of JPY 300 billion was made public. (7) Sumitomo and UFJ, as reported in the Supreme Court's judgment, entered into a ‘Basic Agreement’, basically a letter of intent (‘LoI’), in which they included clause 12 cited by the Supreme Court in the judgment. The agreement did not contain any penalty clauses, although reportedly lawyers involved in the matter on Sumitomo's side had suggested such clauses. Yet they were rejected with the notion that the negotiations had to be pursued in a trustful manner. (8) This expectation, however, was frustrated when on 13 July 2004, UFJ informed Sumitomo of its decision to break off the negotiations and to commence merger proceedings with the Mitsubishi Tokyo Financial Group (‘Mitsubishi’, named ‘A’ in the Supreme Court's judgment). c) Sumitomo and UFJ – Part II: Restoration of Hope? Sumitomo, apparently taken aback by the decision, immediately – i.e. on 16 July 2004 – filed for injunctive relief, asking the Tokyo District Court to forbid that UFJ provide information to or negotiate with, third parties with respect to the business negotiation so far conducted between Sumitomo and UFJ, or to undertake further steps towards a P 32 merger with Mitsubishi. The interim injunction was granted in the first instance, but ultimately objected by UFJ, as reported in the Supreme Court's judgment. Alongside the legal steps, Sumitomo, with a very direct approach to UFJ's shareholders, tried to win over at least on third of UFJ's shareholders in order to make a decision on the merger with Mitsubishi impossible, as, according to the Companies Act, (9) resolution on a merger required a two-third majority in the shareholders' meeting. Furthermore, Sumitomo issued a counter-offer, exceeding Mitsubishi's reported offer of JPY 300 billion by an additional JPY 200 billion, causing Mitsubishi to acquire – for the amount of JPY 700 billion – shares of UFJ, newly issued as class shares with preferential rights that brought Mitsubishi to the position of being able to effectively block major business decisions. (10) d) Sumitomo and UFJ – Part III: What the Courts thought of it In the meantime, the legal measures taken by Sumitomo evolved further. The Tokyo District Court, on 4 August 2004, issued an injunction for preservation, and UFJ, bringing the case to the Tokyo High Court, succeeded in having the injunction set aside on 11 August 2004. The reasons of the Tokyo High Court pointed in two different directions, as on the one hand the Court confirmed the legal validity of Article 12 of the LoI and that UFJ's termination of the LoI had no legal basis. On the other hand the Tokyo High Court found that at the time of the last hearing the trustful relationship of the parties had substantially broken down and could not be expected to be restored, not to speak of the perspective of coming to a final merger agreement. Hence, the Court concluded, the Clause in Question had lost its binding effect for the future and could not support a decision as sought by Sumitomo. Further appeal by Sumitomo brought about the Supreme Court's decision cited above, in which the Supreme Court confirmed the Tokyo High Court's decision and supported the High Court's reasoning on the validity of the LoI and, thus, UFJ's general obligation not to breach the agreement. As for the Clause in Question, the Court held that with the vanishing of reasonable expectations for a final agreement, the obligation deriving from the Clause in Question would no longer exist. However, the Supreme Court could not bring itself to clearly state whether there was absolutely no hope for a final agreement, and thus, upheld UFJ's obligation to negotiate with Sumitomo. Nevertheless, in light of the fact that the LoI did not state any obligation to conclude a final merger contract and,

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thus, Sumitomo could only hope for, but not trust in a certain result of the negotiations, such misled trust could not be protected by injunctive relief. P 33

Following the decision of the Supreme Court, Mitsubishi and UFJ entered into a merger agreement on 18 February 2005. (11) e) UFJ and Sumitomo – What happened later? Sumitomo finally had to realize that there was indeed no hope of achieving a merger agreement with UFJ. As the Court decisions rendered so far had only dealt with injunctive relief, the material question as to whether UFJ had broken the LoI and could be held liable for damage caused to Sumitomo was not yet definitely answered. In order to achieve a positive answer to that question, Sumitomo turned to the courts again and filed a suit for tort damages in the amount of JPY 100 billion for breach of the duty of good faith created by the LoI, and for the failure to conclude a final agreement. (12) The Court held that neither did the LoI oblige the parties to conclude a final agreement, nor could such obligation be concluded from section 130 Civil Code, (13) be it in direct, or analogous, application. UFJ was in principle obliged to negotiate in good faith and exclusively with Sumitomo and such obligation was not extinguished at the time UFJ broke off the negotiations (the Court admitted though that extinction was possible once a final agreement could not be expected any more). UFJ, therefore, broke the contract in principle, but the Court did not acknowledge a foreseeable relationship between the breach of contract by UFJ and the loss of prospective profit by Sumitomo. Since Sumitomo had not claimed compensation of, for example the expenses they incurred because they trusted UFJ to negotiate faithfully, the Tokyo District Court dismissed Sumitomo's claim on 13 February 2006. Sumitomo appealed to the Tokyo High Court, this time reducing its claim to JPY 10 billion. Finally, on November 21, Sumitomo and the new, merged company as legal successor of UFJ, settled for payment to Sumitomo of JPY 2.5 billion. (14)

2 Analysis When Sumitomo and UFJ concluded an agreement containing a clause with the obligation down in the statutes anyway, namely in section 1(2) Civil Code which states that the ‘exercise of rights and performance of duties shall be done in faith and in accordance with the principles of trust’. This rule has been confirmed repeatedly as applicable to all legal acts, whether or not it is directly referenced or its content stated explicitly by the parties. Courts and scholars also acknowledge that the rule is applicable to pre-contract negotiation as well. (15) Thus, the judgment discussed here is not at all interesting from a dogmatic point of view and probably not even for anyone interested particularly in the law of M&A. There are some interesting dogmatic aspects, as the Supreme Court had its first chance to reflect in a judgment on the legal nature and the binding effect of pre-contract agreements such as a letter of intent, a memorandum of understanding, or, as it was called by Sumitomo and UFJ, a basic agreement. What we learn from the decision in this respect is that precontract agreements do indeed have a binding effect for the parties, and it seems that if the contract had contained an obligation to conclude a final agreement, UFJ could have been held accountable for much more than they had to face. And maybe if the matter had been decided by the Tokyo High Court they could have found that the contract was to be interpreted in this direction, which – hypothetically might have been part of the reasons for UFJ to settle for a payment to Sumitomo. Furthermore, contract lawyers learn that an LoI in Japan cannot be regarded as some kind of declaratory, non-binding notice of some vague plans for the future, but has to be drafted carefully and with due attention to avoiding unwanted binding effects. The situation is similar if one includes exclusive negotiation regulations (which are a good thing to do if the negotiation is already causing the party to undertake substantial efforts such as those necessary for due diligence examination or costly business planning). On the other hand, as for the managers of companies involved in a merger or in pre-merger contracting on part of the seller, knowing now that a buyer would try to include a strong exclusive negotiation regulation in order to better safeguard his interests than Sumitomo did, those managers on the seller's side must think about their obligation towards their shareholders, who might better profit from a merger if their company is free to negotiate with several potential purchasers.

P 34 to negotiate in good faith, such was merely a declaration of what is laid

It was not necessary for managers to think about such consequences when it could be expected that in negotiations which were conducted ‘in good faith’ there was some flexibility for both sides, but neither would stretch it too much or – on the other hand – react ‘overly’ aggressively to a little sidestep negotiation with other interested parties. Those times might have passed now, which brings us to other aspects which make the decision worth discussing, namely the prominent position of its protagonists, the parties' P 35 decision to choose open conflict and the way the courts invoked social values and Japanese virtues in a case that involved two globalized companies and their monetary interests. Although it is often stated that, in Japan, contractual relationships tend to be informal,

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based on ‘goodwill’ and personal trust, it is no longer unusual in Japan (if it ever was) to litigate among parties of big commercial transactions. And one would assume (16) that those conflicts arise on the interpretation of statutes or poorly-worded contracts, i.e. on ‘hard’ legal material questions. The more so, if two globalized, powerful and experienced banking field players are involved. However, what the courts had to deal with in this case was the breach of a simple promise by one side and the very harsh reaction by the other side. Unmannerly behaviour on one side, inability or unwillingness to talk by both parties and public whining on the other side were part of the case, and it is not surprising that the courts – which, at least in Japan, follow a somewhat paternalistic approach – resorted to exemplifying what shakai tsūnen (‘the conventional wisdom of society’) would think about the case and that they found a way on the one hand to make it clear to UFJ that it had done no good and, on the other hand, to point out to Sumitomo that its harsh and public reaction did not help to make things better. The fact that the parties to this case fought heavily, while the courts retreated to very generally debating the pros and cons of a fight for a relationship (instead of merely discussing the legal merits) is not surprising to a western observer knowing that the Japanese can and are willing to fight for their interests, and that courts in Japan always consider matters and reasons not closely related to the legal statutes that rule the case. But it is surprising that two powerful companies like Sumitomo and UFJ which in their banking business depend on the trust and respect of the market, of politics and of the society, were indeed unable to settle the matter amicably but had to fight in public, accepting the risk that in Japan their demeanour would be frowned upon (to say the least). On UFJ's side, it might have been an act of desperation, because their situation was quite difficult, negotiations with Sumitomo evolved slowly and Mitsubishi had a better offer to make. The reaction of Sumitomo, on the other hand, could be explained as an attempt to demonstrate strength to both the public and its shareholders. But it might also indicate a shift towards the juridification of conflicts in Japan, as a result, maybe, of judicial reforms meant to emphasize the importance of statutes and due process in conflict resolution. Jörn Westhoff (1) P 35

References ★ )

1) 2) 3)

4) 5) 6)

7) 8) 9) 10) 11)

12) 13) 14)

Jörn Westhoff: Dr Wehberg und Partner in Hagen, Germany., (Bochum University) Minji hozen-hō, Law No. 91/1989. The following summary of events follows the report given by V.L. Taylor, Japanese Commercial Transactions and Sanctions Revisited: Sumitomo v. UFJ, in: Washington University Global Studies Law Review Vol. 8 (2009) 399–125 (403–112). K. Hosono / K. Sakai / K. Tsuru, Consolidation of Banks in Japan: Cause and Consequences p. 11–12 (National Bureau of Economic Research, Working Paper No. 13399, 2007), available at (last visited 29 November 2011). Hosono et al. (supra note 3) 272. Hosono et al. (supra note 3) 272. T. Hoshi / A.K. Kashyap, Solutions to Japan's Banking Problems: What Might Work and What Definitely Will Fail 25 (27 Aug. 2004) (draft prepared for the US-Japan Conference on the Solutions for the Japanese Economy), available at (last visited 29 November 2011). ‘UFS to Sell Trust Bank Unit’, Daily Yomiuri, 21 May 2004, 1. M. Fackler / H. Sender, Court Limits Japan Bank Merger Talks, in: WALL ST. J., 28 July 2004, C5. Kaisha-hō, Law No. 86/2005. A. Morse / M. Fackler, Japan Bank Fight Grows More Public, in: WALL ST. J., 9 August 2004, A3. Press Release, Mitsubishi Tokyo Financial Group et al., MTFG and UFJ Group Enter into an Integration Agreement, hich Sets Forth the Merger Ratios and Official Corporate Names of the New Group (18 Feb. 2005), available at ; Press Release, Mitsubishi UFJ Financial Group, Establishment of Mitsubishi UFJ Financial Group (3 Oct. 2005), available at (last visited 29 November 2011). Tokyo District Court 3 February 2006, Sumitomo Trust & Banking KK v. UFS Holdings KK, in: Hanrei Jihō 1928 (2006) 3. Minpō, Law No. 89/1896 and No. 9/1898. Mitsubishi UFJ Financial Group, Inc., Settlement Agreed with The Sumitomo Trust & Banking co., Ltd., (last visited 29 November 2011).

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15) K. Yamamoto, Vertragsrecht [Contract Law], in: Baum / Bälz (eds.), Handbuch

japanisches Handels- und Wirtschaftsrecht [Handbook Japanese Commercial and Economic Law] (Cologne et al., 2011) 461–520 (472); Z. Kitagawa, Keiyaku sekinin no kenkyū [Examination of Contractual Liability] 194 et seq., 330 et seq.; Y. Shiomi, Saiken sōron [Law of Obligations General Part I] (2nd ed., Tokyo 2003) 529 et seq. 16) Unfortunately, there is neither space nor time to examine and discuss in this article the material questions in those conflicts to have a better basis for such assumption. Hence, it is a mere speculation. 1) Dr Wehberg und Partner in Hagen, Germany., (Bochum University)

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Case No. 4: Civil Law – Contract Law – Breach of Contract – Damages – Liability for Acts of the Assistant

Document information

Publication

Gabriele Koziol

Business Law in Japan – Cases and Comments

(★ ) Imperial Court, 30 March 1929, Case No. 1929 o 77, Liability for Harmful Acts of the Assistant in Performing an Obligation

Jurisdiction

Source: Minshū 8, 363 = Minpō Hanrei Hyakusen (Saiken) 6th ed., Bessatsu Jurisuto 196 (2009) 110

Japan

I Headnote(s)

Court

If the tenant's employees do not exercise due care in using the leased property and it thus becomes impossible to return it, the tenant, as the employer, is to be held liable.

Imperial Court of Japan

II Relevant Provision

Case date

Section 415 Civil Code

30 March 1929

P 38

III Facts

Case number 1929 o 77

Bibliographic reference

Gabriele Koziol, 'Case No. 4: Civil Law – Contract Law – Breach of Contract – Damages – Liability for Acts of the Assistant', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 37 48

The gist of the cause of action in this case is as follows. On 12 October 1924 the appellees of final appeal (the Appellees and Plaintiffs, hereinafter only referred to as the ‘Plaintiffs’) leased the motor sailboat Kōei-maru owned by them to the appellant of final appeal (Appellant, Defendant, hereinafter only referred to as the ‘Defendant’) Gisaburō for a period of six months beginning from the following day. On the same day the latter sub-leased the boat to the appellant of final appeal (Appellant, Defendant, hereinafter only referred to as the ‘Defendant’) Heiichi for a period of two months having obtained the consent of the Plaintiffs. While sailing under a crew employed by Defendant Heiichi, the above mentioned Kōei-maru got into a storm, ran aground and was wrecked off the Korean coast at Kyongsang-bukdo on 13 November of the same year. As a result, the Defendants could not return the ship to the Plaintiffs. On leaving Shimonoseki, a crack in the rudder had occurred. The crew did not replace the rudder with an undamaged one but only repaired it insufficiently. For this reason, it could not withstand wind and waves; it broke at the repaired crack and became useless. Because the captain had not simply thrown the anchor rope, which had been cut off, into the sea, but rather had fixed a barrel at one end, it became entangled in the propeller and thus hindered the progress of the ship. The Plaintiffs therefore claimed compensation of the damage incurred since the abovementioned accident occurred solely due to the negligence of the crew employed by Heiichi. In response to this, the Defendants maintained that the rudder had been completely repaired, that the rope which became entangled in the propeller without any negligence on the side of the crew was cut off without delay and did not hinder the navigation of the ship, and that there was no causal link to the accident in question. Rather, the Kōei-maru was wrecked due to force majeure, i.e. the strong storm and waves at that time, and there was no fault whatsoever on the part of the Defendants. The Court of Appeal (while dismissing a certain part of the assertions by the Plaintiffs regarding the amount of damages) stated the facts of the case entirely as asserted above by the Plaintiffs and upheld their claim.

IV Findings 1 Grounds of Appeal Even if there were any negligence on the part of the crew, it is doubtful whether the Defendant Heiichi Tokuda, as the employer, would be directly liable for the negligence of the above-mentioned employees. While section 278 German Civil Code and section 101 Swiss Code of Obligations provide that the employer is liable for the negligence of the employees as regards performance of an obligation, our Civil Code does not contain such a provision. If, however, someone is indeed to be held liable for the acts of another, this P 39 is specifically provided for by statute (sections 322, 327, 350 Commercial Code). Thus, it seems correct to assume that an employer does not incur such liability, but – in line with section 715 Civil Code – is only liable to pay damages in case of non-performance if he lacks care in selecting or supervising his employees (cf. Ishizaka, Nihon minpō dai-ichi-kan [Japanese Civil Law Vol. 1], 455-460). However, the Court of Appeal did not at all address whether there was any negligence on the part of the Defendants regarding the selection and supervision of the crew under Captain Kosaburō Tamura, but only held indiscriminately that the Defendants are directly liable for the negligence of the crew. This is a completely mistaken application of the laws and highly unjustified.

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2 Reasons A person who assumes an obligation has the duty to act with a certain level of care in performing this obligation as stipulated by contract or law; whether or not the obligor fulfils this duty of care when performing the obligation, has to be determined entirely with regard to the person who actually performs the obligation. Thus, if the obligor uses another person to perform the obligation, he clearly must not be negligent in selecting and supervising the employee; however, where he delegates the performance of the obligation to another, he is not exempt from liability for making the employee observe the necessary care in performing the obligation. Regarding the performance of the obligation, the obligor, as the employer, cannot escape any liability for the consequences of the employee's lack of care with regard to the performance. In the end, if the obligor seeks to perform the obligation by using an employee, the acts of the employee are nothing but acts of the obligor himself. Thus, assuming that the crew of the Kōei-maru acted negligently in performing the obligation in question, the Court of Appeal rightly held the Defendant Heiichi as the employer and obligor liable for negligence; the arguments of the final appeal are not accepted. (Further arguments brought forward by the Defendants, as well as further reasons, omitted.) According to section 439 paragraph 1 Code of Civil Procedure, the decision, therefore, is as stated in the main text. Translated from the Japanese original by Gabriele Koziol

V Comment 1 Starting Point: Provisions of the Civil Code According to section 415 Civil Code, the obligee is entitled to claim damages if the obligor fails to perform in a manner ‘consistent with the purpose of its obligation’. Under P 40 the second sentence of this section, ‘the same shall apply in cases it has become impossible to perform due to reasons attributable to the obligor’. This raises the question whether negligence on the part of the obligor's assistant is to be regarded as a ‘reason attributable to the obligor’, thus giving rise to liability on the part of the obligor. There is no explicit provision on the liability for assistants in the Civil Code. When the Civil Code was drafted, the Swiss Code of Obligations and the first draft of the German Civil Code already existed and both contain explicit provisions on the liability for assistants (section 115 Swiss Code of Obligations, section 224(2) First Draft of the German Civil Code). There is evidence that the Drafting Committee for the Civil Code consulted both laws when formulating what is today section 415 Civil Code. However, the relevant provisions on liability for assistants are not cited and other materials on the drafting of the Civil Code seem to remain silent on this issue. (1) It is, therefore, not clear why the drafters of the Civil Code decided not to adopt a provision on the liability for assistants. In tort law, however, there is a provision on employer's liability which is modeled on the German provision of section 831 German Civil Code. (2) According to section 715 Civil Code, an employer is liable for damage caused by his employee unless he can prove that he exercised reasonable care in selecting and supervising the employee or that the damage would have occurred even if he had exercised reasonable care. This means that an employer is, in the first place, liable for his own fault in selecting and supervising the employee. (3) However, the liability is stricter than under the general principles of tortious liability because the employer is liable based only on presumed fault if he fails to provide evidence that he exercised reasonable care. A similar provision can be found in section 105 Civil Code according to which an agent is only liable for the acts of a sub-agent if he was negligent in selecting or supervising the sub-agent. This also applies mutatis mutandis to the liability of the depositary (section 658(2) Civil Code) and the executor of a will (section 1016(2) Civil Code). The Commercial Code, on the other hand, provides that a freight forwarder is liable for any damage to the freight or any delay unless he can prove that neither he nor his employees failed to observe the necessary care (section 560 Commercial Code). There are corresponding provisions for the liability of carriers (sections 577, 590, 592 Commercial Code), warehouse keepers (section 617 Commercial Code) and ship owners Civil Code, the employer is P 41 (section 766 Commercial Code). Unlike under section 715 thus liable for his employees despite not having acted negligently himself. The underlying notion of these provisions is that the obligor benefits from using the employee and it would be thus unfair to let the obligee bear all loss if the obligor were not liable for the acts of his employee. Carriers and freight forwarders, for example, typically employ many people in their trade so that the obligee would be particularly disadvantaged if the employer were not liable. (4) Right after the entering into force of the Civil Code, opinions were divided on whether the obligor was to be held liable for acts of an assistant on the basis of the Civil Code. (5) Some argued that the basic principle of liability under the Civil Code was that a person is only liable for his own acts and only if he acts with fault. Unless there is an explicit provision, as for instance in the Commercial Code, the obligor is, therefore, not liable for

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the acts of another. (6) Others advocated a general and broad liability for acts of an assistant, pointing to the needs of modern commercial life. (7) Still others favored an analogy to section 715, thus holding the obligor liable only if he does not exercise due care in selecting and supervising the assistant.

2 Turning Point: The 1929 Decisions of the Imperial Court The turning point as regards the acceptance of a liability for acts of assistants was in 1929 when the Imperial Court had to decide two cases concerning nonperformance of the duty to return leased property due to negligence on the part of the sub-tenant or his employees. a Decision of 30 March 1929 The first instance in which liability for assistants was broadly acknowledged was the decision of the Imperial Court from 30 March 1929 under discussion here. In this case, the head landlords (Plaintiffs) had brought an action before the Yamaguchi District Court against both tenant and sub-tenant (Defendants) and claimed damages for nonperformance of the duty to return the leased property, which had become impossible due to reasons attributable to the sub-tenant. The Defendants alleged that the subtenant had had no knowledge of the lease contract between the Plaintiffs and the tenant (intermediate landlord), and that there was no negligence on the part of the Defendants in the wrecking of the ship, which had been caused solely by the strong wind and waves. The District Court granted the claim, against which the Defendants appealed to the Hiroshima Court of Appeal. As regards the facts, in particular the question whether there was negligence on the part of the ship's crew, the Court of Appeal's decision is P 42 summarized above in the decision of the Imperial Court. On the question as to whether the sub-tenant is directly liable for any damages caused to the head landlord or not, the Court of Appeal held that the sub-lease was lawful and that under the provision of section 613 Civil Code, the sub-tenant was indeed directly liable. b Decision of 19 June 1929 The second case (8) concerned a house which was leased to the appellee of final appeal who subsequently sub-leased it having obtained consent of the head landlord. During the term of the sub-lease the house burned down completely due to sub-tenant's negligence. The plaintiff claimed the return of a loan granted to the defendant, to which the defendant objected by alleging that he had offset the claim of the plaintiff against his own claim for damages arising from the destruction of the leased property. The claim was granted. Against this the defendant (head landlord) appealed to the Tokyo Court of Appeal. The Court dismissed the appeal holding that the subtenant had had a duty of his own to maintain the leased property independent of that of the tenant, which also continued to exist. Thus, if the house burned down due to the negligence of the subtenant, this cannot be regarded as a violation of the tenant's duty to maintain the property. The Imperial Court, however, held that the consent of the head landlord regarding the sub-lease does not affect the contractual relationship between head landlord and tenant in any way. Thus, the tenant's duty to observe the care of a good manager remains unaltered. The tenant is, therefore, liable if the leased property is damaged or destroyed through intent or negligence of the sub-tenant even if the head landlord consented to the sub-lease and even if the tenant himself did not act with fault. It would be against good faith if the obligor were able to escape liability by alleging that the assistant was a mere third party. Since it was at the will of the tenant that the subtenant was granted use of the property, and since the tenant continued to owe a duty of care, the position of the sub-tenant was similar to that of an assistant for the performance of an obligation. c Significance of the Decisions In both decisions the Imperial Court reasoned that the obligor owes a duty of care and that the assistant fulfils this duty of the obligor, not his own. The assistant thus fills the shoes of the obligor and, therefore, the obligor is held liable if the assistant does not act with such care as required of the obligor. Further, the Court also stressed that the obligor cannot escape liability merely by using another person to perform his obligations. In both decisions, the obligor was held to be liable for the negligence of the assistant, and not for his own negligence in selecting and supervising the assistant. While there is only a brief hint regarding the relationship between tenant and sub-tenant is to be regarded as an assistant. The Court based its decision on the assumption that the duty of care which the sub-tenant is required to observe is not one that he himself owes towards the head landlord, but that of the tenant. Most decisions on the liability for assistants which the Imperial Court and the Supreme Court have since rendered have concerned cases involving sub-tenants or persons living in the same household as the tenant. The Court has always held the tenant liable for intent or negligence on the part of the subtenant and has taken the same approach with regard to persons living in the same household as the tenant. (9) This has been met with criticism by many scholars who have felt it necessary to differentiate between the two. (10)

P 43 in the first decision, the second decision makes it clear that a sub-tenant

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Since the 1929 Imperial Court decisions, it has remained, however, undisputed by academics as well as in case law that the obligor is liable for acts of his assistants. Japanese law has thus acknowledged the necessity of modern trade. Often it is not individuals but companies that are under an obligation to perform, thus having necessarily to rely on another person to actually perform the obligation. (11) The concept of the obligor being liable for intent and negligence of the assistant corresponds to the provisions in the Commercial Code and might be said to be modeled on section 278 German Civil Code. (12) Within the framework of the Civil Code, the liability for acts of the assistant is said to be founded on section 415 Civil Code in holding – under the principle of good faith -intent or negligence of the assistant equal to circumstances attributable to the obligor. (13) The scope of liability, however, is still subject to discussion as set out below.

3 Post-1929 Development and Outlook a The Prevailing Opinion and its Critics An assistant is generally understood to mean any person who the obligor uses to perform his obligation, including not only persons who act solely on instruction by the obligor, e.g. employees, but also independent contractors. (14) However, businesses which offer services to the world at large, for instance post or railway services, are not regarded as P 44 assistants. (15) Also, liability for acts of the legal representative is discussed in the context of liability for assistants. There is a consensus that under the principle of good faith it is just to hold the obligor liable for acts of his legal representative in a manner as though he had performed the obligation himself. It is argued that the obligor benefits from the acts of the legal representative who helps to maintain and even increase the private autonomy of the obligor. (16) According to prevailing opinion, liability for acts of an assistant only extends to acts with regard to the performance of the obligation, and not to acts done solely on the occasion of performance. This corresponds to the interpretation of section 715 Civil Code. (17) Whether the assistant acted negligently is assessed against the same standard of care as that required of the obligor himself. Thus, if the standard of care which the obligor has to observe is lowered, this also applies to the assistant. (18) While case law does not make a distinction as to whether the obligor is permitted to use an assistant or to what extent the assistant is involved in the performance of the obligation, the academic discussion is largely based on a categorization introduced by Wagatsuma, (19) whose opinion is still prevalent today. The main distinction made is between assistants who only help the obligor in performing the obligation and assistants who perform the obligation in place of the obligor. The first category includes, for instance, employees of the obligor. The obligor may use such assistants even if he is in principle obliged to perform the obligation in person. (20) As far as such an assistant is concerned, there is general agreement that the obligor is liable for negligence of the assistant independent of whether the obligor himself was negligent in selecting or supervising the assistant. This corresponds to the approach taken by case law. If, on the other hand, the assistant performs the obligation in whole or in part in place of the obligor, the prevailing opinion differentiates further according to whether the use of an assistant is explicitly permitted or prohibited. If the use of another person for performance is explicitly prohibited by law (e.g. sections 104, 625(1) and (2), 658(1) Civil Code) or contract, using an assistant in itself amounts to breach of contract. Thus, according to Wagatsuma, (21) the obligor is liable for negligence of the assistant except where he can prove that the damage would have occurred even if he had not used an P 45 assistant. In fact, however, this is not an instance of liability for the acts of another, but rather of normal liability for breach of contract as the obligor is held liable for its own acts. (22) If, however, the use of another to perform in the obligor's stead is expressly permitted, i.e. if the obligor obtained consent of the obligee (e.g. sections 104, 625(2), 658(1) Civil Code), the prevailing opinion holds the obligor liable only if he was negligent in selecting and supervising the assistant. This is explicitly provided for in sections 105 and 658 Civil Code but is also applied to cases where there is no express statutory provision. It is argued that it is to be regarded as a mitigation of the obligor's liability for acts of the assistant if the law expressly permits the obligor to delegate the performance of the obligation to another person. (23) Just as under the provision of section 715 Civil Code the obligor is not liable for the negligence of another but for his own fault. (24) Some authors have voiced doubts as to whether it is just to mitigate the liability of the obligor, who is also the one that benefits most from using the assistant. (25) There are good reasons to subject the obligor to a stricter liability in contract law than in tort law. First, the scope of the term ‘assistant’ is broader in contract law than it is in tort law where only employees acting under the instructions of the obligor are included. (26) Secondly, the obligor is able to anticipate what kind of obligation he is entering into while this is typically not the case in tort law. Some scholars, therefore, argue that the obligor should be liable for negligence of the assistant independent of whether he was negligent in selecting or supervising the assistant. (27) If the use of another person in performing an obligation is neither explicitly permitted

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nor explicitly prohibited by statute or contract, the prevailing opinion holds the obligor liable for the assistant's intent and negligence unless the nature of the obligation did not allow for the use of an assistant. In the latter case using an assistant by itself constitutes a breach of contract for which the obligor is liable. (28) The distinction between different types of assistants as set out above, which was introduced by Wagatsuma and widely adopted in academic discussion, has, however, also been criticized as being insufficiently clear. It is further argued that, given the widespread use of assistants in commercial transaction, it is not feasible to base liability on such sophisticated distinctions. (29) In recent years a new approach has been suggested which would replace the traditional categorization. According to this view, the question as to whether and to what extent the obligor is liable for another person has to P 46 be determined with regard to the individual provisions of the contract, taking into consideration in what manner the assistant is actually involved in the process of performance. (30) b Specific Problems with Regard to Lease Contracts The liability of a tenant for the acts of a sub-tenant is mostly discussed in the context of liability for assistants and not as a particular problem of landlord and tenant law. (31) Sometimes a distinction is made between assistants in performing an obligation (rikō hojo-sha) and assistants in using (leased) property (riyō hojo-sha). (32) However, the difference seems to be mostly of terminological nature. The Imperial Court (33) reasoned that the position of a sub-tenant was very similar to that of an assistant and held the tenant liable for the sub-tenant's negligence. This is based on the assumption that the sub-tenant does not perform an obligation of his own towards the head landlord, but rather that of the tenant. The prevailing opinion among scholars, however, applies the same categorization as regards other assistants, distinguishing between a sub-lease with consent of the head landlord and without. Provided he has obtained the consent of the head landlord, the tenant is thus only liable if he acts negligently in selecting or supervising the sub-tenant. (34) The tenant is, therefore, only liable if he himself acts with fault, while the sub-tenant incurs liability for his own negligence. The underlying idea is that the sub-tenant owes a duty of care to the head landlord which is independent of that of tenant. (35) This is based on section 613 Civil Code, which provides that the sub-tenant is directly obliged to the head landlord provided the sub-lease is lawful. According to the prevailing opinion, the obligation of the subtenant under section 613 Civil Code does not only include the duty to pay rent, but also to compensate for damage to or loss of the leased property. (36) If, on the other hand, the head landlord has not consented to the sub-lease, the tenant is held liable for breach of contract. Some scholars have tried to find a solution within the framework of the provisions on lease. It is argued that the tenant incurs liability based on the idea of guarantee liability. Additionally, the sub-tenant owes a duty of care to the head landlord. Under section 613, the head landlord has a direct claim against the subtenant. (37) The liability of both P 47 tenant and sub-tenant to the head landlord is regarded by some as a quasi joint liability. (38) The tenant's guarantee liability applies also if the property is sub-leased without the consent of the head landlord. (39) The result reached is thus similar to that of the Imperial Court. (40) Another problem in the context of lease contracts is whether and to what extent the tenant is liable for persons living with him in one household, for instance his wife and children. Case law does not distinguish between sub-tenants and persons living in the same household and holds the obligor liable in both cases independent of whether he himself acts negligently. The prevailing opinion in academia, however, regards the subtenant as a kind of assistant who acts (or uses the leased property) in place of the obligor, while persons living in the same household with the obligor merely help the obligor in that action (or use of the leased property). Thus, the obligor (tenant) is held liable for the negligence of any person living in the same household with him. It is argued that the right of use and the duty of care with regard to the leased property are inextricably linked to one another. Those who share in the right to use, therefore, also have to assist with regard to the duty of care. (41) c Outlook Despite the criticism they have met with in academic discussion of the matter, the significance of the 1929 decisions of the Imperial Court is that they not only determined the approach taken by courts up until today, but also that they might as well be the basis for a future statutory provision on the liability for the acts of assistants: The Draft Proposal for a reform of the Civil Code's law of obligations presented by the Japanese Civil Code (Law of Obligations) Reform Commission in 2009 (42) contains a provision on the liability for assistants. (43) Draft section 3.1.1.60 explicitly allows for the use of a third party to perform the obligation (paragraph 1). P 48

In its second paragraph it states that any act performed by the third party shall be regarded as an act of the obligor himself. On the one hand, this makes clear that

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performance by a third party is to be regarded as performance by the obligor himself. On the other hand, it indicates that it is to be determined according to the general rules on non-performance whether and to what extent the obligor is liable in case of nonperformance due to acts of the assistant. (44) The Commission thereby intends to adopt the approach taken by case law. (45) Gabriele Koziol (1) P 48

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4) 5) 6) 7) 8) 9) 10) 11) 12) 13)

14) 15) 16) 17)

18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34)

Gabriele Koziol: (University of Regensburg), University Frankfurt, Faculty of Law., (University of Vienna) Cf. S. Toriyabe, Rikō hojo-sha [Assistant], in: Hoshino (ed.), Minpō kōza 4 – Saiken sōron [Lectures on Private Law 4 – Law of Obligations: General Part] (Tokyo 1985) 18. Cf. R. Yoshimora, Fuhō kōi-hō [Tort Law] (4th ed., Tokyo 2010) 202. There is an ongoing discussion on whether fault on the part of the assistant is also required. According to the prevailing opinion the liability of the employer is something halfway between fault-based and strict liability. Cf. H. Hirano, in: Endō (ed.), Saiken kakuron II, kihon-hō konmentāru [Law of Obligations: Particular Part II, Basic Law Commentary] (Bessatsu Hōgaku Seminā No. 187, 4th ed. 2005) section 715. However, as Y. Hirai, Saiken Sōron [Law of Obligations: General Part] (Tokyo 1985) 42, points out, courts hardly ever accept evidence for exculpation so that in fact section 715 Civil Code gives rise to a quasi strict liability for employees. M. Okuda, Saiken sōron (jō) [Law of Obligations: General Part I] (Tokyo 1982) 127. An overview of the various arguments prior to the 1929 Imperial Court decisions can be found with Toriyabe (supra note 1), 19 et seq. For further reference see Toriyabe, (supra note 1) 15; Okuda (supra note 4) 127. For further reference see Okuda (supra note 4) 127. Imperial Court, 19 June 1929, Minshū 8, 675. See, e.g., Supreme Court, 19 April 1955, Minshū 9, 558. See below 3.b). Cf. Hirai (supra note 3) 60 et seq.; Okuda (supra note 4) 126 et seq. Hirai (supra note 3) 42, 61. R. Hayashi / K. Ishida / T. Takagi, Saiken sōron [Law of Obligations: General Part] (revised ed., Tokyo 1982) 80. S. Wagatsuma, Shintō saiken sōron [Newly Edited Law of Obligations: General Part] (Tokyo 1964) no. 146; Okuda (supra note 4) 126. For a critical view see E. Hoshino, Minpō gairon III (Saiken sōron) [Outline of Private Law (Law of Obligations: General Part)] (revised ed., Tokyo 1986) 62. Okuda (supra note 4) 127. Wagatsuma (supra note 13) no. 147. Wagatsuma (supra note 13) no. 153, Okuda (supra note 4) 129. Wagatsuma (supra note 13), no. 154. Hoshmo (supra note 13) 65. See however Hirai, (supra note 3) 62, who argues that the obligor should also be liable for acts of the assistant on the occasion of performance if the assistant is an employee, whereas if the assistant is an independent contractor the liability should be confined to acts with regard to the performance of the obligation. According to T. Maeda, Kōjutsu saiken sōron [Law of Obligations: General Part] (Tokyo 1987) 139, the distinction in itself is not sufficiently clear and needs to be reconsidered. Wagatsuma (supra note 13) no. 155; Okuda (supra note 4) 129. Wagatsuma (supra note 13) no. 146. Wagatsuma (supra note 13) no. 148: Even a famous artist may use someone to help with the mechanical part of the work. Wagatsuma (supra note 13) no. 149. Cf. Hirai (supra note 3) 61. See also E. Hoshino et al. (eds.), Minpō kōza 4, saiken sōron [Private Law 4, Law of Obligations: General Part] (Tokyo 1985) 45. Maeda (supra note 17) 140. Wagatsuma (supra note 13) no. 150. See above 1. for the implications of liability according to section 715 Civil Code. Hirai (supra note 3) 61. On this issue see also Wagatsuma (supra note 13) no. 150. Hirai (supra note 3) 62. Hayashi / Ishida / Takagi (supra note 13) 81. Wagatsuma (supra note 13) no. 151. Hoshino (supra note 13) 63. See also Hirai (supra note 3) 61. See for instance Y. Shiomi, Saiken sōron [Law of Obligations: General Part] (3rd ed., Tokyo 2007) 120; cf. also idem, Rikō hojo-sha sekinin no kiseki kōzō (2) [The structural basis of the liability for assistants 2], in: Minshōhō Zasshi 96 (1987) 347. Cf. also Hirai (supra note 3) 63. For a critical assessment see Hirai (supra note 3) 63. See above 2. c). S. Wagatsuma, Saiken kakuron chūkan 1 [Law of Obligations: Particular Part I] (Tokyo 1957) no. 674.

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35) Wagatsuma (supra note 13) no. 152. 36) Wagatsuma (supra note 34) no. 673. 37) Cf. S. Kagayama, Minpō 613-jō no chokusetsu soken (action directe) ni tsuite (2) [On 38) 39) 40) 41) 42)

43)

direct action (action directe) under section 613 Civil Code], in: Handai Hōgaku 103 (1977) 114. See also S. Shinozuka, in: Ikuyo / Hironaka (eds.), Chūshaku Minpō (15) Shinkan, Saiken (6) (Tokyo 1989) 290. Hirai (supra note 3) 63. Hirai (supra note 3) 63. Wagatsuma (supra note 34) no. 674; Wagatsuma (supra note 13) no. 152; Okoda (supra note 4) 128. Minpō (Saiken-hō) Kaisei Kentō I'in-kai (ed.), Saiken-hō kaisei no kihon hōshin [Draft Proposal for the Reform of the Law of Obligations], in: Bessatsu NBL 126 (2009). An English translation of the Draft Proposal is available online at . 3.1.1.60 (Performance of an obligation and third parties) (1) (2)

The obligor may use a third party to perform the obligation unless otherwise provided in the contract or in laws. In cases where the obligor may use a third party, any act performed by the third party for the sake of performance of the obligation shall be viewed in the same way as the act of the obligor itself with regard to performance of the obligation or non-performance of the obligation.

See Minpō (Saiken-hō) Kaisei Kentō I'in-kai (supra note 42) 135. See Minpō (Saiken-hō) Kaisei Kentō I'in-kai (supra note 42) 135. 44) See Minpō Saiken-hō) Kaisei Kentō I'in-kai (supra note 42) 135. 45) See Minpō (Saiken-hō) Kaisei Kentō I'in-kai (supra note 42) 135. 1) (University of Regensburg), University Frankfurt, Faculty of Law., (University of

Vienna)

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Case No. 5: Civil Law – Contract Law – Purchase Contract – Extinctive Prescription for Damage Claims Under the Warranty against Defects

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Publication

Business Law in Japan – Cases and Comments

Nakata Kunihiro (★ ) Supreme Court, 27 November 2001, Case No. 1998 o 773

Jurisdiction

Source: Minshū 55-6, 1311 = Hanrei Jihō 1769, 53

Japan

I Headnote(s)

Court

The provisions on extinctive prescription may be applicable to claims for damages under the warranty against defects.

Supreme Court of Japan

II Relevant Provisions

Case date

Sections 167(1), 566(3), 570 Civil Code

27 November 2001

III Facts

Case number

In February 1973, the Plaintiff purchased the residential property in question from the price at that time. In May of that year, the transfer of title to the land from Defendant to Plaintiff was registered, and Plaintiff took possession of the land from Defendant. Part of the land, however, had been designated as the site of a road, pursuant to Kashiwa City Ordinance No. 157 of 27 October 1972. This caused problems for Plaintiff, including the fact that in the course of reconstructing the building on the land its floor area had to be greatly reduced. Plaintiff first learned of the existence of this road designation around February or March of 1994, and in around July that year, Plaintiff sent a notice to Defendant, demanding that Defendant act to have the road designation removed, and stating that if that could not be achieved, Plaintiff would seek damages from Defendant.

P 50 Defendant, as well as the building on the property. Plaintiff paid the purchase

1998 o 773

Bibliographic reference

Nakata Kunihiro, 'Case No. 5: Civil Law – Contract Law – Purchase Contract – Extinctive Prescription for Damage Claims Under the Warranty against Defects', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 49 53

When Plaintiff sued Defendant for damages on the basis of warranty for defects, Defendant employed a prescription defence, arguing that Plaintiff's right to seek damages had been extinguished through prescription. The court of first instance dismissed Plaintiff's claim, stating that in the case of liability to warrant against defects, ‘in light of the fact that the rights and obligations under the contract of sale are extinguished after ten years through prescription, reckoning either from the time of execution of the contract, the registration of the transfer of title or from Plaintiff's taking of possession of the property, the parties’ rights and obligations have expired owing to the passage of ten years'. By contrast, the Tokyo High Court upheld Plaintiff's claim, stating that a vendor's liability to warrant against defects is a statutory liability especially imposed on a vendor by the law for the purpose of the protection and confidence of purchasers, and that it is, therefore, different from an obligation under a contract of sale, it does not fall within the operation of section 167(1) of the Civil Code. The court stated that the fact that sections 570 and 566(3) stipulate the starting point of the prescription period only as ‘the time when [the purchaser] becomes aware of the facts’ indicates that the purpose of those provisions is not just the early resolution of parties' legal rights and obligations, and if this interpretation were not adopted, it would be tantamount to imposing an obligation on purchasers to themselves inspect properties to detect defects, which could not necessarily be described as equitable. Y appealed to the court of last resort. The Supreme Court held that the original judgment should inevitably be quashed without the need for ruling over the other points of the argument. The Supreme Court thereby concluded that the case should be remanded to the second-instance court so that Defendant's re-affirmative defence arguing that the citation of extinctive prescription by Plaintiff was a misuse of a right and so forth could be thoroughly deliberated. Slightly edited from a translation of the Database Kyushu University ‘Transparency of Japanese LawProject’ and the translation provided by the Judicial Research Council on the Supreme Court's homepage. P 51

IV Findings The buyer's right to claim compensation for damages under the warranty against defects from the seller is a right to claim payment of money arising from a purchase-and-sale contract under law, which obviously falls under ‘a claim’ mentioned in section 167(1) Civil Code. For the right to claim compensation for damages, a time limit for exercising a claim

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is stipulated to the effect that it runs out after a lapse of one year from the date when the buyer becomes aware of the fact (sections 570, 566(3) Civil Code), which is interpreted as a time limit within which the buyer should exercise his rights specifically for the purpose of stabilizing relations involving rights at an early enough stage. According to this interpretation, there are no grounds for construing that the stipulation of a time limit for exercising a claim precludes the applicability of section 167(1) Civil Code to the right to claim compensation for damages under the warranty against defects. Furthermore, once the buyer has the object of a purchase-and-sale contract transferred, it can be construed as not unreasonable to expect the buyer to detect defect(s) and exercise the right to claim compensation for damage from the seller within a period of time at least before being barred by the usually applicable extinctive prescription; granted if the provisions on extinctive prescription do not apply to the right to claim compensation for damages under the warranty against defects, unless the buyer becomes aware of the defect(s), it follows that the right of the buyer would remain exercisable for ever, which we consider imposes an excessive burden on the seller, and thus cannot be accepted as appropriate. Therefore, […] it is appropriate to construe that the provisions on extinctive prescription are applicable to the right to claim compensation for damages under the warranty against defects and that such extinctive prescription shall proceed from the time at which the buyer has the object of a purchase-and-sale contract transferred. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comment 1 Limitation Period for Liability for Damages Based on the Defect Liability In the Japanese Civil Code (CivC), the right to a claim for damages under the warranty against defects has a limitation period of one year from the moment the buyer recognizes P 52 the defects' existence (sections 570, 566(3) CivC). This period might seem like a period of exclusion; (1) however, it seems to be an open-ended look at the regulation from the opposite perspective. In other words, it seems like the exercise of the right could be possible forever, as long as the buyer does not know about the defect. Section 167(1) CivC mentions extinctive prescription for ‘Obligatory Rights’ after 10 years. The problem, therefore, is whether the extinctive prescription of section 167(1) CivC is applicable to claims for damages which are based on defect warranties. This decision's purpose is (1) to clearly state the applicability of section 167(1) CivC on defect-warranty-based damages claims and further more; (2) to clarify that, in this case the commencement of the limitation period is the time of the delivery of the subject matter. From the decision's point of view the following consequence may be derived. As a result of applying section 167(1) CivC, the right to a claim for damages determines 10 years after the delivery, even when the buyer did not become aware in that time of the defect's existence.

2 Court Decisions until Now Until this decision was released no court decision had directly dealt with this problem. And concerning warranty liability, there had only been court decisions which dealt with defective rights. One decision affirmed the application of the rule of extinctive prescription on the determination of an abatement claim related to a quantitative designation sale of land. (2) Another decision denied determination of an abatement claim in the case of selling parts of somebody else's land. (3)

3 Theory In the literature, a great majority affirms the application of the rules regarding extinctive prescription, (4) whereas almost no opinion denies the applicability. However, the opinions are split into one which sees the ‘contract time’ as the applicable point in time, and one which favours the ‘delivery time’. P 53

4 Conclusion As already described, this decision only directly deals with the right to claim for damages due to a warranty against defects, but the idea seems to be applicable to other rights to claim for damages under other warranty liabilities. However, the logic of this decision does not apply directly, because the rights of rescission and/or abatement are not ‘Obligatory Rights’ but rather rights to influence a legal relationship by unilateral declarations. Relating to the commencement point of the extinctive prescription, a development in the theoretical discussion can be seen. (1) One opinion postpones the point of commencement in cases in which it is not possible to realize that there is a defect at the

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time of delivery. (5) (2) Another opinion states that the time of delivery is appropriate in cases of defective objects, while in cases of a defect of rights it should be the time of contract. (6) In either case there many sorts of liability for defects and, depending on the aspect of the defect, the expectations of being able to exercise rights will differ between buyers. (7) Even if the idea of this decision becomes a standard, some problems will still remain. Kunihiro Nakata (1) P 53

References ★ )

1)

2) 3) 4) 5) 6)

7)

1)

Nakata Kunihiro: Ryukoku University, Law School., (Ritsumeikan University). Moreover, the decision states, that the buyer, in order to secure his right to claim compensation for damages, might announce within this period of exclusion his or her will to inquire about the warranty liability of the seller outside court and there is no necessity to exercise rights in front of court, Supreme Court, 20 October 1992, in: Minshū 46, 1129. Osaka High Court, 11 November 1980, in: Hanrei Jihō 1000, 96. Here the effect of the early stabilization of section 564 CivC was considered. Tokyo District Court, 26 August 1997, in: Hanyu 981, 130. In this case it was considered to have been extremely difficult for the buyer to confirm whether a part of land was owned by a different person. H. Matsuoka, in: Yunoki / Takagi (eds.), Shinpan Chūshaku Minpō [New Edition of Private Law Comment] (14) (1993) 233. H. Sono, Kashi tanpo ni motozuku songai baishō sekinin to shōmetsu jikō (Supreme Court, 27 November 2001) [Damage Claims under the Warranty against Defects and Extinctive Prescription], in: Hōgaku Kyōshitsu 262, 144. S. Kawakam, Kashi tanpo ni motozuku songai baishō sekinin to shōmetsu jikō kitei no tekiyō (Supreme Court, 27 November 2001) [Damages Claims under the Warranty against Defects and Application of the Provisions on Extinctive Prescription], in: Hanrei Hyōron [Hanrei Jihō 1809] 10. K. Matsui, Kashi tanpo ni yoru songai baishō seikyū-ken no shōmetsu jikō (Supreme Court, 27 November 2001) [Extinctive Prescription about Damage Claims under the Warranty against Defects], in: Bessatsu Jurisuto No. 196, Minpō Hanrei Hyakusen II – Saiken [Selection of Private Law Decisions II Obligatory Rights] (6th edition) 11. See for further comments on decisions and further articles. Ryukoku University, Law School., (Ritsumeikan University)

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Case No. 6: Civil Law – Case to Seek Return of Money Equivalent to Unjust Enrichment – Actio de in rem verso

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Publication

Masanori Fujiwara

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 19 September 1995, Case No. 1992 o 524, Contractor v. Owner of a Building (Lessor)

Jurisdiction

Source: Minshū 49-8, 2805 = Hanrei Jihō 1551, 69 = Hanrei Taimuzu 896, 89

Japan

I Headnote(s) Where a person carried out repair work for a building under a contract for work concluded with the lessee of the building, and then the lessee became insolvent and the whole or part of the person's claim against the lessee for the contract price became valueless, it is appropriate to construe that the owner of the building can be deemed to have received a benefit equivalent to the property and labour required for the repair work without legal cause, only when the owner received the benefit without paying any price under the lease contract between the owner and the lessee taken as a whole.

Court

Supreme Court of Japan

Case date

19 September 1995

II Relevant Provisions

Case number

Section 703 Civil Code

1992 o 524

P 56

III Facts

Parties

The appellant of final appeal (the Appellant and Plaintiff, hereinafter only referred to as the ‘Plaintiff’), on 4 November 1982, concluded a contract for work with the lessee of the building in question, for carrying out repair and refit work of the building at a total price of JPY 51.8 million. The Plaintiff carried out most of the contracted work by using a subcontractor and, in early December 1982, completed the work and delivered the building to the lessee.

Claimant, Contractor Defendant, Owner of a Building (Lessor)

Bibliographic reference

The appellee of final appeal (the Appellee and Defendant, hereinafter only referred to as the ‘Defendant’) is the owner of the building in question. On 1 February 1982, the Defendant leased the building to the lessee with rent of JPY 500,000 per month and for a period of three years. Since the lessee planned to repair and refit the building and use it as a commercial facility accommodating restaurants, boutiques, etc., the Defendant and the lessee, under the lease contract, made a special agreement to the effect that the lessee, as compensation for paying no premium, should pay costs for all works for repair and installation and alteration of furnishings to be carried out for the building, and should not claim any money upon returning the building to the Defendant.

Masanori Fujiwara, 'Case No. 6: Civil Law – Case to Seek Return of Money Equivalent to Unjust Enrichment – Actio de in rem verso', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 55 63

On the grounds that the lessee subleased a store space within the building in question without obtaining approval of the Defendant, on 24 December 1982 the Defendant made clear to the lessee his/her intention to cancel the lease contract, and filed a suit to seek surrender of the building and payment of damages equivalent to the amount of rent of JPY 500,000 per month for the period from 25 December until the completion of the surrender of the building. On 28 May 1983, the court rendered a judgment in favour of the Defendant and it became final and binding around that time. The lessee paid the Plaintiff part of the price for the work, JPY 24.3 million, but did not pay the remaining price JPY 27.5 million. Around March 1983, the lessee went missing, his/her property remained unidentified, and the remaining price was uncollectible. The Plaintiff effectively went bankrupt around the end of December 1982. The Plaintiff, alleging that the situation caused the Plaintiff to incur a loss equivalent to the property and labour required for the work, while it caused the Defendant to receive a benefit equivalent to said property and labour, filed this suit against the Defendant in March 1984 to seek payment of the amount equivalent to the remaining price and delay damages thereon based on the right to claim return of unjust enrichment. The Kyoto District Court affirmed the claim and held that on the one hand the Plaintiff incurred a loss because he could not collect the price for the contract for work from the lessee, and on the other hand the Defendant received a benefit, because as a lessor and owner he recovered the repaired building in question from his lessee without paying for this benefit to the lessee. In such a case it must be deemed that there is a direct connection between the loss to the Plaintiff and the benefit to the Defendant, and the Defendant received benefit from the Plaintiff without legal cause from the standpoint of equity. P 57

The Defendant appealed to the Osaka High Court and the High Court approved the appeal. The High Court held that the Plaintiff must have incurred a loss, but only when he

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paid the price of the contract for work to his subcontractor. In this case, however, the plaintiff did not pay the price to his subcontractor. For this reason it cannot be deemed that the Plaintiff incurred a loss equivalent to the property and labour for the work. The Plaintiff then appealed to the Supreme Court of Japan. The Supreme Court dismissed the appeal. The following is the reasoning of the Supreme Court.

IV Findings Where the Plaintiff carried out repair work on a building under contract for work concluded with the lessee of the building, and then the lessee became insolvent and the whole or part of Plaintiff's claim against the lessee for the contract price became valueless, it is appropriate to construe that the owner of the building, the Defendant, can be deemed to have received a benefit equivalent to the property and labour required for the repair work without legal cause, only when the Defendant received the benefit without paying any price under the lease contract between the Defendant and the lessee taken as a whole. If the Defendant incurred or bore any cost equivalent to the benefit in some form under the contract between the Defendant and the lessee, the benefit received by the Defendant should be deemed to be based on a legal cause, and in such case, if the Plaintiff were allowed to claim return of the benefit from the Defendant as unjust enrichment, it would result in forcing duplicate burden on the Defendant. According to the facts legally determined by the court of prior instance, the benefit received by the Defendant, the owner of the building in question, from the work carried out by the Plaintiff, is equivalent to the burden that the Defendant had borne by exempting the lessee of the building, from paying a premium that the Defendant could have generally received from the lessee upon leasing the building for commercial use, and in this context the Defendant cannot be deemed to have received the benefit without legal cause. The same applies even where the lease contract was cancelled on the grounds of lessee's default, as stated above. Consequently, the determination of the court of prior instance is inappropriate in that it did not find the Plaintiff to have incurred any loss, but the court's conclusion can be affirmed in that it dismissed the Plaintiff's claim for return of unjust enrichment. The argument brought by Plaintiff's legal counsel cannot be accepted. Therefore, according to section 401, section 95, and section 89 of Code of Civil Procedure, the judgment has been rendered in the form of the main text by the unanimous consent of the Justice. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed. P 58

V Comment 1 Third-Party Relations in Unjust Enrichment in Japanese Law in General It is well known that the Japanese Civil Code was mainly influenced by French law and German law. In the area of unjust enrichment Japanese Civil Code followed the first draft and especially the second draft of the German Civil Code (BGB) in important points and content. (1) As the consequence of this reception of the German Civil Code, the Japanese Civil Code has a comprehensive general clause on unjust enrichment like the German Civil Code. Section 703 Japanese Civil Code lays down that a person who has benefited from the property or labour of others without legal cause and has thereby caused loss to others shall assume an obligation to return that benefit, to the extent the benefit exists. Before the Second World War, German law, especially legal doctrine in Germany, had the strongest influence on legal doctrine in Japan. As a result, according to traditional legal doctrine in Japan on the claim for return of unjust enrichment, four requirements must be fulfilled: benefit to the defendant (enrichment); loss to the plaintiff (disadvantage); that the benefit is without legal cause; and, connection between the benefit and loss (‘thereby caused loss’). The connection between the benefit and loss must be direct (directness of transfer) or the loss to the plaintiff and the benefit to the defendant must result from one and the same transaction. (2) Under German law, claim for the restitution of benefits conferred by the plaintiff's own act lies only against the party to whom the plaintiff conferred the benefit and not against third parties who indirectly benefited from the transfer. The Japanese Civil Code draws a distinction between disposition (Verfügung) and obligation (Verpflichtung). (3) It did not, however, import the principle of abstraction (Abstrak-tionsprinzip) from German law. That means, if a seller transferred the goods in performance of a contract of sale but if the contract was void or avoided, then the seller can claim back what he transferred, even from third parties on the ground of the seller's property right. In this sense the directness of transfer does not play the same role (or plays no role at all) in Japanese law as it does in German law, as we will see below.

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P 59

2 Claim for Return of Money Transferred by Fraud In the first stage, Japanese courts dealt mainly with cases in which money was transferred by fraud from the plaintiff (X) to his immediate contracting partner (Y), and then from Y to a third party (Z). Those cases involved the plaintiff's (X's) claim against the third party (Z) for restitution of money. The opinions of courts varied and changed from case to case. Some judgments rejected such claims for restitution of money either because the third party had received the money as the acquirer in good faith for value or the third party had received the money as payment of a loan and there was, therefore, legal cause for the transfer. Other judgments held that there was no direct connection between the benefit and loss, when the third party (Z) had been indirectly enriched by the performance of the plaintiff (X) or when the money transferred by fraud had commingled with the money of the plaintiff's immediate contracting party (Y) and in consequence the property right of plaintiff (X) in that money ceased to exist. But most of the judgments paid attention to whether there was legal cause for the third party (Z) to receive the money, i.e., whether the third party (Z) had received the money from Y as performance of a contract between Y and Z. In this sense the connection between the benefit and loss did not have a decisive meaning and the judgments considered money to be similar to personal property (chattel). (4) The leading opinion in legal doctrine made the following argument: for the claim for restitution against a third party (Z) for money transferred by fraud, direct connection between the benefit and loss is not required. When the connection between the benefit and loss is fulfilled from the standpoint of common perception of society, namely when Y was able to transfer the money to Z only because Y received the money from X by fraud, then X can claim back the money from the third party Z, even when the transferred money has commingled with Y's money. If Z were free from bad faith or gross negligence concerning Y's fraud, there would be a legal cause for Z to receive the money. (5) That means, if the transferred object (money) can somehow be identified, the disadvantaged party (X) can trace that object (money) and claim for the return of that object (money) even from a third party (Z) who was enriched indirectly.

3 The Situation before This Judgment on Actio De in Rem Verso Twenty-five years before the 1995 judgment, the subject of this case note, the Supreme under a contract for work concluded with the lessee of the machine (Y), and then Y became insolvent and the whole or part of X' s claim against Y for the contract price became valueless, then it must be deemed that the owner of the machine (Z) has received a benefit equivalent to the property and labour required for the repair work without legal cause. In such a case the connection between the benefit and loss is direct, because on the one hand the repair work of X caused loss to X equivalent to his property and labour, and on the other hand it brought benefit to Z. Even when Y agreed with Z to assume a duty to repair the rented machine in exchange for setting the rent below market price, such agreement does not disturb X's claim for unjust enrichment against Z. (6) That was the first time the Supreme Court of Japan decided that a claim for restitution against a third party for benefit transferred indirectly according to a valid contract, i.e. actio de in rem verso, could be admitted. The traditional opinion, or the leading opinion, of legal doctrine in Japan at that time supported this judgment. (7) In other words, actio de in rem verso could be allowed in a very wide variety of cases.

P 60 Court of Japan held as follows. If X carried out repair work on a machine

Shortly after the Second World War, typology of unjust enrichment in German legal academy was introduced to Japan. (8) However, because the court had to deal with the claim for return of money transferred by fraud against third parties, and because in these cases the existence of legal cause for the transfer of benefit to the third party had decisive meaning, the categories of typology of unjust enrichment (enrichment by the performance of the disadvantaged party and enrichment based on interference of the enriched party) had little meaning. For this reason the typology did not have great influence on Japanese legal doctrines at that time. But the 1970 judgment gave a chance to spread the typology or to make it the prevailing view in Japanese legal academia. Most academic opinions criticized this 1970 judgment, not only in its result but also in its reasoning. Originally the directness of connection between benefit and loss came from German legal doctrine. In it, the loss to the plaintiff and the benefit to the defendant must result from one and the same transaction. That means that the transferor could sue only the transferee with whom he had concluded a contract and could not sue any other party, except for when the claim was based on property rights. But the directness of transfer has the opposite meaning in the 1970 judgment. (9) P 61

One of the most important contributions of typology in unjust enrichment is the distinction between enrichment by performance of the disadvantaged party (i.e., Leistungskondiktion) and enrichment based on interference of the enriched party (i.e., Eingriffskondiktion). A Leistung is any deliberate and purposive increase in another's patrimony. Leistung determines who the parties to the claim for return of unjust enrichment are; namely the party obliged to return and the party with the right to receive the return. In the case of the 1970 judgment of the Supreme Court, X had carried out the

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repair work on the machine because he concluded a contract with Y to do so. It is fair that X's claim, whether in contract or in restitution, should lay on his immediate contracting party, Y. X made the contract in reliance on Y's capacity to pay and should consequently bear the loss which resulted from the insolvency of Y. (10) Prof. Katō has analysed the situation of the above-mentioned judgment in detail. According to his analysis; (1) If Z were obliged to pay Y the price for the increased value of the machine, and if Z were also accountable to X for return of unjust enrichment, then it would result in forcing duplicate burden on Z. Such a conclusion would lead to the destruction of the security of transactions. (2) If Y could claim against Z for the repair work made by X, not only X, but also Y's other creditors could seize Y's claim against Z. If in such a case the direct claim of X against Z were allowed, X would be put in a preferred position among all creditors of Y. But such a priority right of X can in no case be justified (equality of creditors). (3) Had Z received the value increased in his machine without paying any price under the contract between Y and Z, or in other words, had Z received the value increased by the performance of X gratuitously from Y, only then would it be the case that Z's enrichment could not be justified and Z would have to be deemed to have received the benefit without legal cause. (11) Prof. Katō's opinion has spread among legal academy and has become the prevailing one. (12) The Supreme Court of Japan followed his opinion and changed the judgment rendered 25 years ago, allowing actio de in rem verso in a restricted form. (13) According to the Supreme Court of Japan and Prof. Katō, the existence of a legal cause for the transfer to a third party (Z) is the criterion to decide whether actio de in rem verso is allowed in a particular case. It means that, in contrast to Germany, where the existence of the principle of abstraction, namely the restriction of the claim for restitution of unjust enrichment to the immediate contracting partner (Y) has the decisive role in denying the claim of the disadvantaged party (X) against the third party (Z), in Japan the existence of legal cause for transfer to the third party (Z) has the greatest importance. P 62

4 The Discussion after the 1990 Judgment and Unsettled Problems Most academic opinion agrees with the 1995 judgment and therefore what has become most important is whether the third party (Z) received the benefit for value under the contract between him (Z) and his contracting partner (Y) in the given concrete situation. But some academic opinions criticize the judgment. Prof. Shinomiya argues that the disadvantaged party (X) concluded the contract with his immediate contracting partner (Y) and as a result he must bear the contractual risk of non-performance by his contracting partner (Y). According to Prof. Shinomiya, it would only be when the contract between X and Y were invalid or avoided and Y were released from the obligation to return because of change of position, that the disadvantaged party (X) could make a claim for return of unjust enrichment against the third party (Z), who received the benefit without paying for it. Actio de in rem verso can be allowed only when Y is not legally obliged to return unjust enrichment to X, and not when he is merely insolvent. (14) According to Prof. Uchida, because it is extremely difficult or impossible to decide whether the third party (Z) received the benefit from his contracting partner (Y) for no value under the contract between himself and his contracting partner taken as a whole, and because the judgment will cause uncertainty, it is appropriate to deny actio de in rem verso even in the restricted form. (15) In the concrete situation under the 1995 judgment, the contract to lease the building between the third party (Z) and his contracting partner (Y) was cancelled after a short period of time, after the repair work of the building had been carried out by the disadvantaged party (X). In this sense it is doubtful whether the third party (Z) as lessor received the repair work from the lessee (Y) for value, because the proportion between discharge of premium and burden of repairing the building must be based on the assumption that the lease contract for the building will last for a certain period of time. (16) If Z and Y had conspiratorially concluded the lease and cancelled the lease contract, Z could receive the repair work of X at X's expense. According to the judgment, the focus has moved to the evaluation of whether the third party received the benefit from his contracting partner for value in each given case. (17) The real problem dealt with in the judgments above is the issue of security of the collection of price of contract for work. In the first 1970 case of the Supreme Court concerning actio de in rem verso, it was questioned whether the repairman (X) should be protected when he had improved or repaired an object which did not belong to his contracting partner (Y), who later became insolvent. (18) Under Japanese law the P 63 repairman is given statutory lien to the object which he improved or repaired (section 320 Civil Code). (19) But this lien requires that the object belongs to the repairman's contracting partner. In the second 1995 case of the Supreme Court the security of contractor, who constructed or repaired a house, was at issue. The claim of a builder of a house is secured by mechanic's liens (sections 326, 327 Civil Code). (20) But these liens also require that the house belongs to the contracting partner (Y). These defects in the law were the substantial and real problems dealt with in the judgments which have been described in this article. (21)

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Masanori Fujiwara (1) P 63

References ★ )

1)

2) 3) 4) 5) 6) 7)

8)

9)

10) 11) 12) 13) 14) 15) 16) 17) 18) 19)

20)

Masanori Fujiwara: Hokkaido University M. Katō, Zaisan-hō no taikei to futō ritoku-hō no kōzō [The System of the Law of Assets and the Structure of the Law of Unjust Enrichment] (Tokyo 1986) 104. See about the reception of foreign legal systems in Japan in general, Z. Kitagawa, Rezeption und Fortbildung des europäischen Zivilrechts in Japan [Reception and Further Development of European Civil Law in Japan] (Frankfurt 1970). I. Suehiro, Saiken kakuron [Receivables, Specific Part] (Tokyo 1918) 932, H. Hatoyama, Nihon saiken-hō kakuron [Law of Receivables, Specific Part] (revised ed., Tokyo 1924) 791. See section 560 Civil Code. The sale of goods, which do not belong to seller, is not invalid and the seller is obliged to acquire the property right of such goods from the owner of the goods and remove the property right to the buyer. T. Isomora, Henshu kinsen ni yoru bensai to futō ritoku [Unjust Enrichment and Performance through Fraudulently Obtained Money], in: Kin'yū-hō no kadai to tenbō [The Function of Financial Law and Prospects] (Tokyo 1990) 257. S. Wagatsuma, Minpō kōgi 4 [Lectures on Civil Law 4] (Tokyo 1973) 977. The Judgment of the Supreme Court followed Wagatsuma. See Supreme Court, 26 September 1974, Minshū 28-6, 1234. Supreme Court, 16 July 1970, Minshū 24-7, 909. Wagatsuma (supra note 5) 1040–1041, S. Matsuzaka, Jimu kanri futō ritoku [Negotiorum Gestio and Unjust Enrichment] (revised ed., Tokyo 1973) 94–95. See also T. Taniguchi, Futō ritoku no kenkyu [Studies on Unjust Enrichment] (revised ed., Tokyo 1969) 233. See for example; T. Isomura, Futō ritoku ni tsuite no ichi kōsatsu – ritoku no futōsei wo chūshin toshite 1–3 [Considerations about Unjust Enrichment – in Particular about the Unjustness of the Enrichment], in: Hōgaku Ronsō 45-6-106, 46-1-80, 47-1-119. A. Sekiguchi, Futō ritoku ni okeru inga kankei [Causality with regard to Unjust Enrichment], in: Jimu kanri futō ritoku no kenkyū 3 [Studies on Negotiorum Gestio and Unjust Enrichment 3] (Tokyo 1972) 83-85, S. Yoshimi, Futō ritoku-hō no atarashii dōkō ni tsuite 2 [About New Developments in the Law of Unjust Enrichment], in: Hanrei Taimuzu 387, 28–29. T. Hironaka, Saiken kakuron kōgi [Law of Receivables] (5th ed., Tokyo 1979) 381-386. Katō (supra note 1), at 703–838, especially 713–720. Y. Sawai, Tekisutobukku jimu kanri, futō ritoku, fuhō kōi [Textbook Negotiorum Gestio, Unjust Enrichment, and Tort] (3rd ed., Tokyo 2001) 77–80, R. Suzuki, Saiken-hō kōgi [Lecture Law of Receivables] (1st ed., Tokyo 1980) 462-465. See Y. Tanaka, Note to the judgment, in: Saikō Saibansho Hanrei Kaisetu (Minji-hen) 1998, 2, 900–921, T. Uchida, Minpō 3 [Civil Law 3] (3rd ed., Tokyo 2011) 592. K. Shinomiya, Jimu kanri, futō ritoku, fuhō kōi 1 [Negotiorum Gestio, Unjust Enrichment, and Tort 1] (Tokyo 1981) 242–243. Uchida (supra note 13) 589–593. S. Yoshimi, Note to the judgment, in: Shihō Hanrei Rimākusu 1997, 59. M. Fujiwara, Futō ritoku-hō [Law of Unjust Enrichment] (Tokyo 2002) 389. See also K. Zweigert / H. Kotz, Einführung in die Rechtsvergleichung [Introduction to Comparative Law] (3rd ed., Tübingen 1996) 544–545. Section 320 Civil Code: Statutory liens for the preservation of movables shall exist with respect to movables, in connection with expenses required for the preservation of those movables, or expenses required for the preservation, approval or execution of rights regarding those movables. Section 326 Civil Code: Statutory liens for the preservation of immovable property, in connection with expenses required for the preservation of that immovable property or the expenses required for the preservation, approval or execution of rights regarding that immovable property. Section 327(1) Civil Code: Statutory lien for construction work for immovable property, shall exist, in connection with expenses of construction work performed by a person who designs, carries out or services construction work regarding the immovable property of the obligor. Section 327(2) Civil Code: The statutory liens under the preceding paragraph shall exist, in cases where there is a current increase in the value of the immovable property resulting from the construction work, with respect to the increased value.

21) Fujiwara (supra note 17) 384–390. See also M. Fujiwara, Dreipersonenverhältnisse im

1)

japanischen Bereicherungsrecht aus rechtsvergleichender Sicht [Relationsships among Three Persons under the Japanese Law of Unjust Enrichment from a Comparative Point of View], in: Recht in Japan 12, 7–20. Hokkaido University

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Case No. 7: Civil Law – Tort Law/Contract Law – Liability for a Breach of Pre-contractual, Contractual and Noncontractual Information Duties – Liability of Experts – Claim for Damages

Document information

Publication

Business Law in Japan – Cases and Comments

Marc Dernauer (★ )

Jurisdiction

Supreme Court, 17 September 2005, Case No. 1847 ju 2004, Liability for Breach of Precontractual Information Duties

Japan

Source: Hanrei Jihō 1912, 8 = Hanrei Taimuzu 1192, 256

Court

I Headnote(s)

Supreme Court of Japan

A real estate agency that has been entrusted by the owner of a condominium to sell the condominium on his behalf and that is a fully owned subsidiary company of the owner of the condominium has to inform, to comply with good faith, a potential purchaser during contract negotiations for the sale of the condominium of the location of the main switch for an automatic fire door in the condominium and how to operate this if the main switch is not, at first glance, easy to find and is switched off at the time of transfer of ownership.

Case date

17 September 2005

Case number

Such a real estate agency that does not inform the potential purchaser of this and thus compensate the purchaser for the damages incurred as a result of this breach of duty.

P 66 breaches its information duty has the obligation, based on the tort law, to

1847 ju 2004

II Relevant Provisions

Bibliographic reference

Sections 709, 1(2) Civil Code

Marc Dernauer, 'Case No. 7: Civil Law – Tort Law/Contract Law – Liability for a Breach of Pre-contractual, Contractual and Noncontractual Information Duties – Liability of Experts – Claim for Damages', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 65 76

III Facts The Plaintiff (Appellant and Plaintiff, hereinafter referred to only as the ‘Plaintiff’) was the widow of a man who on 30 April 1999 entered into a purchase contract for a condominium (‘no. 802’ in the respective building) with Defendant 1 (Appellee and Defendant 1, hereinafter referred to only as the ‘Defendant 1’), the company that owned the condominium. Defendant 2 (Appellee and Defendant 2, hereinafter referred to only as the ‘Defendant 2’) was a fully owned subsidiary company of Defendant 1 and a professional real estate agency. Defendant 2 was entrusted by Defendant 1 with the sale of the condominium on behalf of Defendant 1, including conducting negotiations, the handover of the condominium, and the realization of the transfer of the title. A fire door had been installed in the condominium for the purpose of preventing any fire starting in the condominium from spreading to other parts of the building. The fire door was designed to automatically shut in case of a fire. The fire door, however, was operated by an electric mechanism which could be switched off manually. The main switch for the fire door was located in a box attached to a wall inside a storage room, at a place where it was not easy to find for someone who did not know where the main switch was and who was looking for it for the first time. Moreover, the main switch was switched off at the time of the handover (and transfer) of the condominium to Plaintiff's husband and Plaintiff who both intended to live in the condominium. Neither during the contract negotiations nor at the time of the signing of the contract, nor when the condominium was handed over and transferred did Defendant 1 or Defendant 2 inform Plaintiff's husband or Plaintiff about the mechanism for the fire door, about how to operate the fire door or about the location of the main switch. In the document with explanations about the condominium handed over by Defendant 2 to Plaintiff and Plaintiff's husband before they moved in, the fire door was not mentioned at all. Only in the drawings for the condominium which were also handed over by Defendant 2 together with the explanatory document was the fire door visible. A while after Plaintiff and Plaintiff's husband had moved into the condominium, a fire broke out in the condominium as a result of a cigarette not properly extinguished by Plaintiff's husband. Due to the non-operation of the fire door, the fire did not remain within the Plaintiff's and the Plaintiff's husband's condominium, but spread to other parts of the building and caused extensive damage to the whole building. Moreover, Plaintiff's husband died as a result of this fire. P 67

Plaintiff, as one of the legal heirs of her husband, filed a civil action and brought claims to damages against Defendant 1 and Defendant 2. With respect to Defendant 1 this was based on non-performance (section 415 Civil Code) and legal warranty rights (sections 570, 566 Civil Code) and with respect to Defendant 2 this was based on the law of torts (sections 709, 715 Civil Code). The first instance court rejected the claims and dismissed the action. Plaintiff filed a first appeal at the Tokyo High Court.

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The Tokyo High Court decided that it constituted a hidden defect of the condominium as the object to be purchased that the main switch was switched off, and that, therefore, Defendant 1 was liable for the damages incurred by the non-operation of the fire door. Since, however, it was self-evident that Defendant 1 had to ensure that the condominium was handed over with the fire door mechanism switched on and since Defendant 2 was entrusted only with the sales transaction by Defendant 1, one could not say that Defendant 2 had a duty to inform Plaintiff's husband or Plaintiff about the whereabouts of the main switch and how to operate the main switch of the fire door. The Court also found that Defendant 2 moreover did not have a duty to make enquiries about or to confirm the status of the fire door mechanism, nor did Defendant 2 have a duty to hand over the condominium with the fire door mechanism switched on. The Supreme Court confirmed the judgment of the Tokyo High Court with respect to the liability of Defendant 1 based on a legal warranty for defects. In addition, the Supreme Court held that Defendant 1 and Defendant 2 had committed a breach of their legal duty to inform Plaintiff s husband of the location of the main switch for the automatic fire door and how it was to be operated. With regard to Defendant 2, the Supreme Court, therefore, set aside the judgment of the Tokyo High Court and held that Defendant 2 was also liable for damages resulting from the non-operation of the fire door.

IV Findings With regard to the liability of Defendant 1 and Defendant 2 for their breach of their obligation to provide information, the Supreme Court held as follows: According to the above-mentioned facts under 1 [in the judgment], in spite of the fact that it is obvious that the fire door in the present case could have fulfilled an extremely important role as an installation to prevent the fire spreading, Defendant 2, who had been entrusted by Defendant 1 with the conclusion of the sales contract in the present case, did not inform Plaintiff's husband or Plaintiff about where the main switch for the fire door in the present case was located, even though it was located at a place where it was difficult to find at first glance. Therefore, Plaintiff's husband received the condominium no. 802 in a state in which the above-mentioned main switch was switched off, and he and Plaintiff began to live there in this state, and finally the fire door in this case did not operate when the fire broke out in this case. Moreover, according to the record, one learns that: (1) Defendant 2 was established as a carrying out all kinds of real property sales transactions on behalf of Defendant 1. Defendant 2 was, therefore, not only carrying out the business of an agency and as a real estate agent when he was entrusted by Defendant 1 to sell the real property, he also solicited, instead of Defendant 1 or together with Defendant 1, prospective purchasers of the real property and carried out the entire sales transaction, beginning with the explanations and ending with the handover of the real property. (2) With respect to condominium no. 802 in the present case, Defendant 2 had also been entrusted by Defendant 1 with this transaction and this was not limited to concluding the sales contract, but included also the entire sales transaction, including the handing over of the condominium to Plaintiff's husband. (3) Plaintiff's husband trusted the expertise and achievements of Defendant 2 and bought the condominium no. 802 on the basis of the information provided by Defendant 2.

P 68 fully owned subsidiary company of Defendant 1 for the purpose of

In view of the above facts, it has to be concluded that Defendant 1 had a duty to inform Plaintiff's husband about where the main switch was located and how it was to be operated, at least as a secondary obligation derived from the present sales contract. If one accepts the above-mentioned facts as a basis, Defendant 2 as a real estate agent carried out the entire sales transaction for condominium no. 802 starting with the conclusion of the sales contract until condominium no. 802 was handed over to Plaintiff's husband. This was in such a manner that Defendant 2 had a very close relation to the transaction he had been entrusted with by Defendant 1; therefore, Defendant 2 and Defendant 1 became ‘one unit’. Plaintiff's husband also trusted Defendant 2, who was the person dealing with all of the matters relating to the sales transaction which resulted in the conclusion of the sales contract and the transfer of the condominium no. 802 in the present case. In view of such a factual situation one has to say that Defendant 2 had under the principles of good faith a duty similar to the duty of Defendant 1 mentioned above, and since Plaintiff's husband incurred the damages as a result of a breach of this duty, Defendant 2 hence has an obligation to compensate Plaintiff's husband for the damages incurred based on the law of torts. Translated from the Japanese original by Marc Dernauer

V Comment 1 Impact of the Supreme Court Decision In the present case, the Supreme Court most notably ascertained that the breach of a specific obligation to provide information leads to a liability for damages based on the law of torts (section 709 Civil Code), in particular if this is omitted during the negotiations for a contract. In the legal literature and case law up to this date, this was not fully clear, and the case was, therefore, very important to clarify whether there is a legal

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responsibility when there is a breach of an obligation to provide information and, if so, its legal construction under the present Civil Code. Moreover, the case clarified that an P 69 expert (in the real estate business) who has a close connection to one of the parties to a contract and acts on behalf of this party during the negotiations for the contract, when concluding the contract, and in the stage of the performance of the contract (Defendant 2), has similar information duties towards the other party as the party for whom he acted. Therefore, this decision is also a leading case that clarifies the requirements for a liability of an expert under the law of torts when an expert acts as an agent for one party to a contract where there is a breach of information duties towards the other party to the contract. Furthermore, the Supreme Court in the present case did not restrict the potential tort liability for a breach of information duties only to a situation before concluding the contract. In particular with respect to Defendant 2, the Court stated that the duty to inform the purchaser of the condominium existed during the whole contractual process, beginning with the phase of soliciting the purchaser and the conclusion of the sales contract and ending at the handover of the condominium to the purchaser. With respect to Defendant 1, it is not clear what kind of liability the Supreme Court actually considered when stating that Defendant 1, as the seller of the condominium, had a ‘secondary obligation derived from the sales contract’. It is possible to assume that this is a liability for a breach of contract based on section 415 Civil Code (liability for ‘nonperformance’). It is also possible to assume that this is a liability based on the law of torts (sections 709, 715 Civil Code). In this respect one has to point out that the Supreme Court and the lower courts often do not precisely distinguish between contractual information duties and information duties based on the law of torts if the information duty in question relates to a situation after the contract has been concluded (i.e. after the parties have entered into the contract). The basis for both kinds of information duties is - if there is no explicit statutory or contractual obligation - section 1(2) Civil Code, where the principle of good faith is laid down. The recognition of such a duty to inform the other party is always a case-by-case decision in view of the actual factual situation and the relationship between the parties involved, including those cases where there is a particular information imbalance between the contracting parties, such as in the present case. Other cases that usually involve even a structural information imbalance between the parties are, for instance, financial transactions and financial investment transactions where one party is a financial service provider, but the other party is not, or more generally consumer transactions. Moreover, one has to point out that in the present case the Supreme Court dealt with two different scenarios. The first scenario was the legal construction of a liability for a breach of an information duty of a party that is not a party to the sales contract, but is closely connected to the transaction such as the subsidiary company of one of the parties to the contract (Defendant 2). In this respect, it was clarified that a breach of an information duty during the whole process of the business transaction, i.e. from the stage of soliciting the contract to the stage of performance of the contract (in the present case, the handover of the condominium to the purchaser) gave rise to liability under the law of torts. The second scenario was a similar kind of scenario, but involved a party to the contract that committed the breach of an information duty (Defendant 1). A fortiori, one would expect that a breach of an information duty committed by a party to a contract P 70 during the whole process of the business transaction can also lead to a liability based on the law of torts, in particular as the Supreme Court itself speaks of Defendant 1 and Defendant 2 being a ‘unit’, and that Defendant 2 had an information duty ‘similar to the duty of Defendant 1’. In the second scenario, however, in theory, the legal construction of a liability based on the law of torts is here, if at all, necessary only with regard to precontractual information duties. After entering into a contract, section 415 Civil Code can be used as a legal basis for a liability for damages. The present case also once more demonstrates the enormous flexibility and the wide scope of application of Japanese tort law. This, however, is also often criticized in legal literature. While the situation that a third-party is so closely connected to one party of a contract that this third-party shall have similar legal duties as the respective party to the contract itself, in particular information duties (Defendant 2), this is a very special situation and not that common. The present case, however, is very important for confirming the legal construction of a tort law liability for a breach of pre-contractual information duties committed during the stage when the contract was drawn up by the party to a contract (soliciting and negotiating a contract). It remains to be seen whether the Supreme Court will in the future confirm this construction of a tort law liability for a breach of a specific information duty and whether the lower courts will follow this opinion.

2 Previous Legal Concepts Regarding Liability for Breach of Pre-contractual Information Duties The term ‘pre-contractual information duties’ relates to information duties that parties have in the stage of soliciting or negotiating a contract. When a contract is concluded under circumstances where one party lacks sufficient information about the object and content of the contract and/or has received wrong information from the other party, in

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such a case the contract later often becomes undesirable for the insufficiently and/or wrongly informed party. The reason for this is that after having entered into the contract under such circumstances, the insufficiently and/or wrongly informed party often sooner or later realises that the contract is in fact less beneficial than it had expected. In such cases, there is always the question whether the other party had failed to comply with a pre-contractual information duty during the stage of negotiating the contract. Basically, one can distinguish between negative and positive information duties regarding the object and the content of the envisaged contract, i.e. a duty to provide important information (juyō jikō) (positive information duty) and a prohibition to provide wrong or misleading information (negative information duty). In Japanese law, there are further sub-categories of positive and negative information duties (often provided in the form of statutory prohibitions), such as, for instance, a duty to provide documents with specific required information (sho-men kōfu gimu), a prohibition to provide a determinative opinion (dantei-teki handan no kinshi), a prohibition to guarantee a benefit P 71 (rieki hoshō no kinshi) or a prohibition to conceal important information (jijitsu fukokuchi no kinshi). A fraud, i.e. an intentional false representation by means of a statement or concealment of a fact in order to gain a material advantage, is of course also prohibited under criminal law (section 246 Criminal Code). In Japan, positive and negative information duties can be found in many laws, often combined with a special legal consequence for a breach of this information duty, but often applicable only in regard to a specific type of business transaction or contract. Such legal consequences include civil law provisions that form the basis for a special civil law liability or remedy, administrative sanctions, and/or criminal sanctions. The number of special legal bases for administrative and criminal sanctions is surprisingly high in Japanese law, in particular in the fields of financial services law and consumer law. (1) It is also correct to conclude that information duties have led meanwhile to an information overload in Japan. (2) Even before the Supreme Court decision in this case, several legal constructions under the present Civil Code were already under discussion, i.e. regarding a civil law liability for a breach of a pre-contractual information duty explicitly stipulated either by legal provisions or based on the principle of good faith. (3) a Invalidity of a Contract Due to a Lack of Intent or Due to a Defective Agreement In cases where one party to the contract was given a wrong impression about the object and content of the contract due to a false or misleading representation or in the case where the other party provides insufficient information, it has been discussed that a lack of intent or a defective agreement (gōi no kashi) as a result thereof should be acknowledged when there is an imbalance of information between the parties, for example, as is typical in consumer contracts. (4) In this context, the breach of explicit statutory information duties as well as of those based on good faith should be taken into account. The courts, however, rarely accept such claims. (5) P 72

b Invalidity of a Contract in Case of an Induced Mistake in Motive In cases where one party to the contract was given a wrong impression about the object and content of the contract and thus was mistaken (mistake in motive, in Japanese: ‘dōki sakugo’) due to a false or misleading representation or in the case where the other party provides insufficient information, there has been a longstanding debate in legal literature as to whether to allow the party that was mistaken to claim the invalidity of the contract based on section 95 Civil Code, in particular if there was an information imbalance between the parties to the contract, and more particular, if it was a consumer contract. (6) The courts, however, only rarely accept such a claim, usually only in cases where the motive has become part of the agreement and where the mistake in motive was at least recognizable by the other party, i.e. that this was the basis for the agreement. (7) c Voidability of a Contract in Case of Fraudulent Misrepresentation Section 96 Civil Code allows a party to a contract to avoid its declaration of intent (and hence the contract) in case of a fraudulent misrepresentation (sagi). The courts, however, seldom accept the voidability of a contract based on section 96 Civil Code because this requires the wilful intent of the party claimed to have committed the fraudulent misrepresentation. d The Theory of ‘culpa in contrahendo’ (Negligent or Wilful Breach of Pre-contractual Duties) At the beginning of the twentieth century, German courts accepted the legal theory of culpa in contrahendo in analogy to certain provisions of the German Civil Code as a general basis for a liability in case of a breach of all kinds of pre-contractual obligations committed during the process of the formation of the contract. Shortly thereafter, such a P 73 liability based on culpa in contrahendo became also generally accepted by the German Imperial Court (Reichsgericht). In the period after World War II, it was also confirmed as customary law in countless decisions rendered by the German Federal Court

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of Justice (Bundesgerichtshof), i.e. the German Supreme Court in civil cases. On the occasion of the reform of the law of obligations in Germany, which came into effect on 1 January 2002, this legal concept was codified in sections 280(1), 311(2), 241(2) of the German Civil Code. In Germany culpa in contrahendo is applied most notably in cases where pre-contractual information duties have been breached, and the number of precedents is countless. The result is a liability in the form of a claim for compensation of damages. Depending on the case, this can include a claim for money or a claim for the rescission of a contract (when it is concluded that the contract itself is a ‘damage’). Influenced by German legal theory, the theory of culpa in contrahendo (keiyaku teiketsu-jō no kashitsu (-ron)) was introduced in Japan as early as during the 1920s, but it is still being discussed for the most part only by the legal academia. (8) Japanese court decisions that refer to the theory of culpa in contrahendo are very rare, and so far there is not one court decision in which a claim of liability for a breach of pre-contractual information duty based on culpa in contrahendo was accepted. It seems that breaking off negotiations without specific reasons while having caused the other party to incur expenses due to having relied on the conclusion of the contract is the only case of a breach of a pre-contractual obligation that so far has been acknowledged by Japanese courts where culpa in contrahendo can be applied. (9) As a consequence of the liability based on culpa in contrahendo, the Japanese courts have so far only acknowledged a claim to compensation of damages in the form of a claim to receive money. Only in one case did a court hold that a contract could be rescinded by the disadvantaged party. (10) P 74

Therefore, in Japan, in contrast to Germany, culpa in contrahendo is generally not applicable as a legal basis for construing a liability for the breach of pre-contractual information duties. (11) e Liability under Tort Law Even before the Supreme Court handed down its judgment in the present case, it was widely acknowledged that the breach of a pre-contractual information duty can lead to a liability for the compensation of damages based on the law of torts, (12) in particular based on section 709 Civil Code as the general tort law provision. Section 709 Civil Code stipulates that under the law of torts a person who has intentionally or negligently infringed any right of another, or a legally protected interest of another is liable for the compensation of any damages resulting as a consequence thereof. The specific requirements for such a tort law liability, however, were not clear. Moreover, it is very difficult to find a court decision in which the liability for the compensation of damages based on section 709 Civil Code has been acknowledged on the grounds of a breach of only one specific pre-contractual information duty. In most decisions, the courts list a plurality of breaches of pre-contractual and contractual duties and decide on the basis of an overall view whether the tort law liability can be confirmed, and if this is affirmed, to what extent. This is the typical way of dealing with contractual and pre-contractual problems in business transactions, in particular in cases relating to consumer contracts or contracts relating to the sale of financial products (e.g., stocks or futures contracts). Duties that are being taken into account in this respect are e.g., negative and positive pre-contractual and contractual information duties and other pre-contractual or contractual duties (e.g., a duty to perform the obligations derived from the contract, a duty not to unduly press the envisaged contract party to conclude the contract, a duty to refrain from exaggeratory and misleading advertising, a duty not to violate legal provisions, in particular statutory provisions, a duty not to involve someone in unfair and fraudulent transactions). The qualification of tortious acts in business transactions is different from the qualifications in other typical situations, usually thought to involve liability under the law of torts. ‘Tortious acts in business transactions’ (torihiki-teki fuhō kōi) hence constitute a separate category of tortious acts. Their assessment follows different rules than the assessment of other classical tortious acts. (13) P 75

f Other Legal Mechanisms for Sanctioning a Breach of Pre-contractual Information Duties Provided in Special Laws As already mentioned above, many positive and negative pre-contractual information duties are explicitly stipulated in various specific laws outside of the Civil Code. These information duties are mostly accompanied with special provisions that provide for civillaw, administrative-law, and/or criminal-law mechanisms for sanctioning the breach of duty or for providing relief for the party disadvantaged by the breach of duty. In this regard the following types of legal mechanisms can be mentioned: (1) cooling-off periods, (2) rights to avoid the contract, (3) duties to compensate the aggrieved party for damages, (4) administrative sanctions such as the revocation of a business license, and (5) criminal sanctions such as a fine or imprisonment. Special statutory pre-contractual information duties and legal mechanisms such as the above-mentioned are provided in numerous different laws. (14)

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In the present case, the breach of a (single) positive information duty based on good faith led to a liability to pay damages based on the law of torts. This shows how flexible the Japanese tort law is. It can be applied in addition to other more specific legal instruments that regulate the formation and validity of a contract (e.g., invalidity in cases of a mistake (section 95 Civil Code) or voidability of a contract in case of fraudulent misrepresentation (section 96 Civil Code)), even though this is often criticized by legal scholars as a ‘conflict of values’ (hyōka mujun). (15) The tort law, however, is not applicable along with the theory of culpa in contrahendo, but rather instead of it. In fact, since the scope of application of the Japanese tort law extends to cases of a breach of information duties (and also a breach of other precontractual duties, if need be), the German import of ‘culpa in contrahendo’ is not and never was needed by Japanese civil law. This shows that studies of foreign law and comparative law, although they are generally very important, can sometimes bring about results that are not desirable. Whether it is possible to construe an additional tort law liability if other special legal mechanisms for sanctioning a breach of pre-contractual information duties provided in P 76 special laws are applicable has to be assessed separately in each individual case. In view of the scope of application of the Japanese tort law, however, one cannot help but wonder why the Japanese legislators have created so many special legal instruments which have the effect that Japanese law, in particular in the field of consumer law, is greatly overregulated. It should be reassessed which of these instruments are really needed. If we take the Supreme Court judgment in the present case seriously, it should be much easier to assess tortious acts in business transactions than courts have done so far. In view of the present decision, it seems to be not always necessary to sum up the breaches of numerous kinds of duties in order to finally acknowledge liability under the law of torts. The courts should be more focused on the main problems of the cases. This would lead to much clearer precedents. Marc Dernauer (1) P 76

References ★ )

1) 2) 3)

4)

5) 6)

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Marc Dernauer: University of Freiburg, Tohoku University For details see M. Dernauer, Verbraucherschutz [Consumer Protection], in: Baum / Bälz, Handbuch Japanisches Handels- und Wirtschaftsrecht [Handbook Japanese Commercial and Economic Law] (Cologne 2011) 567, at 575-588. C. Förster, From Information Overflow to Incapacitation: Comparing German and Japanese Consumer Protection, in: ZJapanR / J.Japan.L No. 14 (2009) 169–181, at 177. Regarding the criteria relevant for the emergence of a pre-contractual information duty in good faith, see M. Yokoyama, Keiyaku teiketsu katei ni okeru jōhō teikyō gimu [Information Duties During the Process of Concluding a Contract], in: Jurisuto 1094 (1996) 128–138. K. Yamamoto, Minpō ni okeru ‘gōi no kashi’-ron no tenkai to sono kentō [A Study on the Development of the Theory of a ‘Defective Agreement’ in Civil Law], in: Tanase (ed.), Keiyaku hōri to keiyaku kankō [Legal Basis for a Contract and Contract Customs] (Tokyo 1999) 149–184; Y. Imanishi, Shōhisha torihiki higai ni okeru shōhisha no keiyaku teiketsu ishi ni tsuite [On the Intent of the Consumer to Enter into a Contract in Cases of Damages Incurred by the Consumer in Consumer Transactions], in: Kōbe Shōdai Ronshu, Vol. 40, no. 4–5 (1989) 169–185, in particular at 171; M. Dernauer, Verbraucherschutz und Vertragsfreiheit imjapanischen Recht [Consumer Protection and Liberty of Contract in Japanese Law] (Tübingen 2006) 109 et seq. Examples: Monji Summary Court, 18 October 1985, in: Hanrei Taimuzu 576, 93; Honjō Summary Court, 25 March 1985, in: Seikatsu Gyōsei Jōhō 318, 109; Sapporo District Court, 28 August 1986 (unpublished). Cf. e.g. for details: H. Morita, Minpō 95-jō – dōki no sakugo wo chushin toshite [Section 95 Civil Code: Primarily about a Mistake in Motive], in: Hironaka / Hoshino (eds.) Minpō-ten no hyaku-nen II [Hundred Years Civil Code II] (Tokyo 1998) 141–197; Yamamoto (supra note 4) 154–155 and 166–171; A. Ōmora, Shōhisha-hō [Consumer Law] (Tokyo 1998) 84; Dernauer, (supra note 4) 118 et seq.; S. Hotz, Kapanische, deutsche und schweizerische Irrtumsregelungen [Japanese, German and Swiss Legal Rules on Mistake] (Tubingen 2006) 52 et seq. Supreme Court, 26 March 1963, in: Hanrei Jihō 331, 21; Supreme Court, 14 September 1989, in: Hanrei Jihō 1336, 93; slightly more inclined to accept such a claim for the protection of the weaker party (i.e. the consumer) were Nagoya High Court, 26 September 1985, in: Hanrei Jihō 1180, 64; Tokyo District Court, 30 April 1994, in: Hanrei Jihō 1493, 49; Tokyo District Court, 29 June 1983; Osaka District Court, 21 September 1981, in: Hanrei Taimuzu 465, 153.

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8)

9)

10) 11) 12)

13)

14) 15)

1)

Cf. for instance M. Takahashi, Keiyaku teiketsu-jō no kashitsu-ron no gen-dankai [The Present State of the Theory of culpa in contrahendo], in: Jurisuto 1094 (1996) 121–128; T. Tsuburaya, Die Entwicklung der ‘culpa in contrahendo’ in Japan [The Development of the ‘culpa in contrahendo’ in Japan], in: Müller-Freienfels et al. (eds.), Recht in Japan No. 10 (1996) 39–52; N. Tanaka, Zur Befreiung des Verbrauchers aus dem aufgrund unlauterer Verhandlungen abgeschlossenen Vertrag im japanischen Zivilrecht [On the Release of the Consumer from a Contract Concluded on the Basis of Unfair Negotiations], in: Müller-Freienfels et al. (eds.), Recht in Japan No. 11 (1998) 43–62; J. Honda, ‘Keiyaku teiketsu-jō no kashitsu’ riron ni tsuite [On the Theory of the culpa in contrahendo], in: Endō (ed.), Gendai keiyaku-hō taikei [The Modern System of Contract Law], Vol. 1 (Tokyo 1983) 193–215; K. Yamamoto, Vertragsrecht [Contract Law], in: Baum / Bälz (eds.), Handbuch Japanisches Handels- und Wirtschaftsrecht [Handbook Japanese Commercial and Economic Law] (Cologne 2011) 461–520, at 472. Cf. for instance Tokyo District Court, 29 May 1978, in: Hanrei Jihō 925, 81 ;Fukuoka High Court, 17 January 1972, in; Hanrei Jihō 671, 49. The decision of the Supreme Court of 18 September 1984 (Hanrei Jihō 1137, 51) is often cited as a leading case; in this case, however, the Supreme Court did not mention the theory of culpa in contrahendo at all. Nonetheless, Japanese legal scholars mostly agree that the Supreme Court referred to it when acknowledging the liability for damages resulting from the breaking-off of contract negotiations. Summary Court Kushiro, 23 January 1992, in: NBL No. 494, 48. For details see Dernauer (supra note 4) 132-139. Cf. for example N. Segawa, Minpō 709-jō (fuhō kōi no ippan-teki seiritsu yōken) [Section 709 Civil Code (General Requirements for the Emergence of a Tort], in: Hironaka / Hoshino (eds.), Minpō-ten no hyaku-nen III [Hundred Years Civil Code III] (Tokyo 1998) 559–629, at 585–588, 590; A. Kubota, Shōhisha keiyaku-hō to fuhō kōi [The Consumer Contract Act and Tortious Acts], in: Jurisuto 1200 (2001) 77–83, at 78. For details see: M. Saitō, Shōhisha torihiki to fuhō kōi [Consumer Transactions and Tortious Acts], in: Nihon Bengoshi Rengō-kai (ed.), Shōhisha-hō kōgi [Lecture on Consumer Law] (Tokyo 2009) 125–150; Dernauer (supra note 4) 181–244. See also the various papers published in M. Okuda (ed.), Torihiki kankei ni okeru ihō kōi to sono hōteki shori [Legal Handling of Illegal Acts in Business Transactions], Jurisuto Special Edition (1996). For details see Dernauer (supra note 1) 575-588. See for example Yamamoto (supra note 4); H. Dōgauchi, Torihiki-teki fuhō kōi – hyōka mujun to hihan no aru hitotsu no kyokumen ni gentei shite [Tortious Acts in Business Transactions: About the Conflicts of Values and the Criticism, Restricted to One Specific Aspect], in: Jurisuto 1090 (1996) 137-140. University of Freiburg, Tohoku University

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Case No. 8: Civil Law – Tort Law – Joint Tort Liability

Document information

Colin Jones

Publication

(★ )

Business Law in Japan – Cases and Comments

Supreme Court, 23 April 1968, Case No. 1964 o 902, ‘Sannō River’ Source: Minshū 22-4, 964 et seq.

Jurisdiction

I Headnote(s)

Japan

When joint actors whose individual conduct is objectively interrelated jointly pollute a stream thereby unlawfully causing harm, if the acts of each individual actor independently satisfy the criteria for tortious conduct, each actor should be liable for compensating damages having a considerable causal relationship to such unlawful harmful conduct.

Court

Supreme Court of Japan

II Relevant Provisions

Case date

Sections 709, 719 Civil Code

23 April 1968

Section 2(1) State Redress Act P 78

Case number

III Facts

1964 o 902

Bibliographic reference

Colin Jones, 'Case No. 8: Civil Law – Tort Law – Joint Tort Liability', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 77 84

This case arose from an appeal by the national government (the Appellant and Defendant, hereinafter only referred to as the ‘Defendant’) challenging the award of damages to 121 plaintiff farmers (the Appellees and Plaintiffs, hereinafter only referred to as the ‘Plaintiffs’) for injuries resulting from the discharge of effluent into the Sannō River by an ethyl-alcohol factory established by the government (MITI) near Ishioka City in Ibaraki Prefecture. The Plaintiffs had brought suit seeking compensation for (i) reduced crop yields resulting from the use of water contaminated with high levels of nitrogen from Defendant's factory effluent to irrigate their rice paddies during a period of severe drought in 1958; and (ii) the cost of boring four wells during the period from 1959-1961 in order to find alternate sources of water to use during droughts because of the inability to use the river water alone for such purpose due to contamination. At the trial court level Defendant asserted, inter alia, that: (1) by the time it had been diluted by waste water at the factory, the waters of the Sannō River and rainfall, nitrogen levels were actually at levels where they would be beneficial to crops as fertilizer (!); (2) there had been no complaints about factory effluent during the prior 20 years since the factory's establishment and that the crop yields in the area in question were actually higher than those of areas upstream from the factory; (3) had Plaintiffs actually been seriously concerned about the suitability of water from the river water as a source of irrigation in droughts because of effluent, they would have taken advantage of the subsidies then available to bore irrigation wells earlier; and (4) even if the effluent did have some effect on agriculture, there were no other places where the factory could discharge it and, having been one of the first in the country to install a methane fermentation system which significantly reduced the methane content of its effluent, the factory could not be said to be doing anything other than using its best efforts or to have defective equipment. The trial court (the Mito District Court) found that the factory effluent contained levels of nitrogen harmful to crops and awarded damages to the Plaintiffs. On appeal, the Tokyo High Court upheld the award of damages though made some adjustments to the amounts and the apportionment of costs. In upholding the award of damages the High Court noted that the Sannō River had been used by farmers as a source of irrigation water in times of drought from the Tokugawa Period and that because of this well-established custom the Defendant was not entitled to use the upstream portion in a way which interfered with this custom. Defendant appealed to the Supreme Court on the grounds that the lower courts had failed to adequately consider the facts and applied defective reasoning. Defendant reiterated evidence introduced at the trial court level which suggested that because of the drought it was only because of the waste water released from the factory that the farmers had been able to plant seedlings at all, going so far as to characterize as a ‘miraculous phenomenon’ the implications of the trial court's findings that the plaintiffs had been able to use the waters of the Sannō River for irrigation at a time when other water sources in the area had dried up completely. Defendant also noted that that P 79 insofar as the factory had existed for 20 years without causing any problems and had contributed to the local community during this period, its activities could not now be found unlawful. Finally, it was on appeal that Defendant apparently first argued that the Sannō River was also being polluted by municipal sewage which resulted in high nitrogen levels rendering it unsuitable for agricultural use even without taking into account factory effluent. This factor, Defendant argued, meant it was not possible to say that the factory effluent was the cause of the Plaintiffs' harm.

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The Supreme Court rejected the appeal and ordered Defendant to pay costs.

IV Findings and Rationale With respect to the first point of argument raised by the Defendant: When joint actors whose individual conduct is objectively interrelated jointly pollute a stream thereby unlawfully causing harm, if the acts of each individual actor independently satisfy the criteria for tortious conduct each actor should be liable for compensating damages having a considerable causal relationship to such unlawful harmful conduct. This rationale should be understood to also apply to compensation for damages resulting from water pollution such as in the case at issue. Applying this rationale to the case at issue, the Defendant should be liable for compensating all damages which have a considerable causal relationship to the damages caused by the discharge of effluent by the Defendant's factory as indicated in the judgment of the court below. As found by the trial court, with the inflow of natural spring water the flow of the Sannō River was never interrupted and while a number of wells were bored in 1958 as drought countermeasures, the number bored in the watershed of the Sannō River was found to be quite small. Accordingly, even without the waste water discharged by the Defendant's factory it would not have been impracticable to use the Sannō River for irrigation. In addition, although it can be surmised that the Sannō River was polluted not just by the effluent from the Defendant's factory but also by other sources such as the alleged municipal sewage, as found by the lower court during the period up to 1958 when there was no aeration tank [at the factory], immediately prior to being diluted by the waters of the Sannō River the factory effluent contained nitrogen in concentrations calculated as being 15 times greater than the water of the river, and that because of such effluent the water of the river contained concentrations of nitrogen far greater than is acceptable for use in wet-rice agriculture. The trial court also found that, based on the above facts and the other facts found at trial, but for the discharge of effluent by the factory into the Sannō River the reduced crop yield (damages) indicated in its judgment would probably not have occurred, that the effluent discharge was a direct cause of such reduced yield, and that as a result there was a considerable causal relationship between the effluent release and the harm suffered. Based on the evidence cited by the trial court, its findings indicated above and its judgment are upheld. Defendant's argument cannot be accepted because it contests the findings of the trial court but essentially P 80 resorts to nothing more than criticism of its judgment based on assumptions of fact which do not accord with these findings. With respect to Defendant's second point of argument: As confirmed by the trial court, the factory effluent contained high volumes of nitrogen and when discharged into the Sannō River when its water levels were low resulted in the river water containing nitrogen in levels of concentrations so high as to exceed the maximum amount suitable for cultivating rice paddies, rendering such waters both harmful and unsuitable for irrigation of rice paddies. Based on the above facts and its other findings, the trial court also judged that at least in years when there was little rainfall (such as 1958, the year at issue), the discharge of effluent was unlawful. Based on the evidence cited, these findings of the trial court and its judgments are upheld. Defendant's argument cannot be accepted because it misunderstands the trial court judgment and essentially resorts to nothing more than criticism of that judgment based on assumptions of fact which do not accord with the findings described above. With respect to the first part of Appellant's third point of argument: [this portion has not been translated because it deals with details of evidence relating to well-boring subsidies presented at trial] With respect to the second part of Defendant's third point of argument: As confirmed by the trial court, the waters of the Sannō River just upstream from where effluent was discharged by the factory only contained nitrogen at levels that were close to normal and even subsequent to the installation of an aeration tank in 1959 for active sludge processing, after the discharge of effluent the river water contained nitrogen in concentration far in excess of the amount acceptable for rice paddy cultivation. Furthermore, even though Defendant and Plaintiffs reached an accord regarding the manner in which effluent should be discharged, there was no decrease in the nitrogen concentration of the waters of the Sannō River which remained unsuitable for irrigation purposes, as a result of which Plaintiffs bored four deep water wells from the period of July 1959 to July 1961. Based on the evidence cited by the trial court, the above findings should be upheld. In addition, the trial court is understood to have held that the cost of boring these four deep water wells has a considerable causal relationship to the discharge of effluent by the factory, having found based on the above facts that in order for the Plaintiffs to use the waters of the Sannō River for their rice paddies it was necessary for them to purify the water polluted by factory effluent by diluting it so that its nitrogen levels were low enough that it was suitable for rice paddy cultivation and that adding water from these four deep water wells was one way of cleaning the polluted waters. Based on the findings described above, the judgment of the trial court in this respect is also confirmed as correct. Defendant's argument cannot be accepted because it merely contests the trial court judgment and essentially resorts to nothing more than

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criticism of that judgment based on assumptions of fact which do not accord with the findings described above. Translated from the Japanese original by Colin P. A. Jones P 81

V Comment 1 Liability of Joint Tortfeasors The Sannō River Case is a widely-cited tort case and is often described with a capsule summary that quotes the first sentence of the paragraph dealing with the first point of argument in the above translation. (1) As just this language would suggest, it seems to stand for the proposition that under section 719 joint tortfeasors can be held individually liable for the full amount of all damages suffered by a plaintiff due to joint torts. Except of course, that it actually does not: the trial only ever involved a single tortfeasor (the national government), who was raising other sources of pollution as a type of defense on the question of causation. Commentators generally agree that the case has little or no value as a precedent on the issue of joint tort liability (the Supreme Court's pronouncement on this point being dictum in any case). (2) For this reason, the Sannō River Case may be more interesting as an illustration of the problem of how to interpret section 719 of the Civil Code in a way which does not render it either completely or partially meaningless. After all, having found that the government's wrongful conduct had a considerable causal relationship to the Plaintiff's damages, the court in the Sannō River Case no longer needed to rely on section 719 since the elements of liability under the general tort provisions of section 709 were satisfied. (3) Indeed, although the most frequently cited language (underlined) of the case begins (in Japanese) with the term ‘joint actors’, it is essentially a statement about liability for individual tortuous acts by individual tortfeasors. This conundrum reflects an underlying problem in the structure of section 719, the full text of which is as follows: (1)

If more than one person has inflicted damages on others by their joint tortious acts, each of them shall be jointly and severally liable to compensate for those damages. The same shall apply if it cannot be ascertained which of the joint tortfeasors inflicted the damages.

(2)

The provisions of the preceding paragraph shall apply to any person who incited or was an accessory to the perpetrator, by deeming him/her to be one of the joint tortfeasors. (4)

P 82

Say a group of three gangsters beats a man repeatedly. That they would each be jointly and severally liable for all of his damages under the first sentence of paragraph (1) is hopefully obvious. This would be true even if it cannot be ascertained which gangster threw the punch which broke the man's jaw, landed the kick which broke his rib and so forth. Perhaps the third gangster was a weakling or a reluctant participant and only slapped the man a few times causing no serious harm. But this should again make no difference in his liability as a joint actor under the first sentence of paragraph (1) since he is participating in a course of unlawful conduct. Yet if this is the case, it is not clear what other different situations the second sentence of the paragraph is intended to address. Perhaps it anticipates a Summers v. Tice (5) type of problem where two or more people commit a potentially harm-causing act, but it is clear that only one of them has actually caused the plaintiff's harm. Yet to apply section 719 to this type of situation requires us to presuppose that the actors are ‘joint tortfeasors’ because of the existence of a victim that only one of them has harmed. But if they are joint tortfeasors, then the first sentence should be adequate for imposing liability on any or all of them. (6) It seems that the drafters of section 719 were never able to resolve these contradictions, one result of which is the deep thicket of academic commentary on the article and how it should be interpreted in a variety of situations. (7) From the standpoint of tort law, the real significance of the Sannō River Case may be as an example of the court dealing with what constitutes ‘jointness’ for tort liability purposes. To a much greater degree than the English word ‘joint,’ the Japanese term (kyōdō) carries a connotation of a common purpose, a connotation which if applied strictly would require there be some degree of intent on the part of joint tortfeasors to P 83 act in concert in order for the imposition of joint and several liability under section 719. Interpreting paragraph (1) of section 719 so as to require some form of subjective intent as an element of joint tort liability would certainly be consistent with paragraph (2) which is drafted to capture those who solicit or facilitate tortuous acts without directly participating in them, both of which involve an evaluation of subjective intent. By stating that joint tort liability accrued to harm-causing conduct which was ‘objectively related’ to other wrongful conduct without requiring any intent to act in concert, the Supreme Court in the Sannō River Case can be said to have avoided the limitations that an intent-based subjective jointness requirement would otherwise have imposed on the

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Japanese judiciary in granting redress in complex tort cases. Subsequent case law and academic commentary have continued to struggle with both issues of causation and the nature of jointness in deciding complex tort cases. Though case law and academic commentary vary on the details of what it means, the notion of ‘related jointness’ (kanren kyōdō-sei) appears to have become an accepted part of the section 719 interpretive scheme, facility the judicial imposition of liability on a greater range of separate actors whose conduct jointly causes harm. However, many scholars and subsequent cases still hold to the view that a certain degree of subjectively ‘related jointness’ should be required before one of several tortfeasors can be held liable for the full amount of damages caused by all of them collectively. Solutions have been sought by drawing distinctions between ‘strong related jointness’ and ‘weak related jointness’. For example, one view holds that joint tortfeasors among whom there is found to be ‘strong related jointness’ (e.g., in the case of a group of companies acting in concert through contractual or capital relationships) should be jointly and severally liable for all damages caused by the others and not be given the opportunity to prove a limited role in causing the harm. By contrast, when there is weak related jointness (e.g., when a number of unrelated factories being operated in the same region collectively cause harmful air pollution), individual defendants can seek to limit their damages by introducing evidence of their limited (or lack of) involvement in causing the harm, a form of evidentiary burden shifting which helps resolve some of the issues of causation underlying section 719. This type of approach was evidenced in the famous Yokkaichi Air Pollution case. (8) Subsequent air pollution cases have also held that the first sentence of section 719(1) should apply to cases of strong related jointness, while the second sentence should apply when the related jointness is weak, an approach which not only addresses evidentiary problems, but allows both sentences of section 719(1) to be P 84 interpreted in a way which renders them both meaningful (maybe). (9) A similar rationale has been applied to joint liability for medical malpractice cases also. (10)

2 The Greater Context Stepping back from the paradoxes presented by section 719, it might be best to simply look at the Sannō River Case as one aspect of the judicial response to the growing problem of environmental pollution, a response which is usually discussed primarily in the context of the so-called ‘big four’ environmental cases of the 1960s and 1970s. (11) From that standpoint, the Sannō River Case stands as an early example of Japanese courts dealing with society's demand for compensation of pollution-related harm despite the conceptual and evidentiary strictures imposed by black-letter tort law. That all levels of the judiciary were willing to look past numerous other possible proximate causes of the plaintiffs' injuries, including municipal sewage, drought and even a typhoon (12) in order to point the finger of blame squarely at no less a defendant than the Japanese government is perhaps more significant than anything else. Colin P.A. Jones (1) P 84

References ★ )

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Colin Jones: University Law School, University of Cambridge., (New York, Guam and the Republic of Palan), Tohoku University See, e.g., T. Watanabe, Kyōdō fuhō kōi no seiritsu yōken [Elements of Tort Liability], in: Hanrei purakutisu minpō II saiken [Case Practice – Civil Code II – Claims] (Tokyo 2010) 373; K. Yoshinaga, Fuhō kōi-hō kihon hanrei kaisetsu [Tort: Description of Key Precedents] (Tokyo 2010) 77-80. E.g., Yoshinaga (supra note 1) at 79; T. Kawai, Minpō gairon 4 (saiken kakuron) [Outline of the Civil Code, Volume 4 (Types of Claim)] at 465–466; T. Shiozaki (ed.), Hanrei ni miru kyōdō fuhō kōi sekinin [Cases on Joint Tort Liability] (Tokyo 2007) at 439; H. Hirano, Fuhō kōi-hō [Tort] (Tokyo 2007) 256; T. Uchida, Minpō II dai-san-ban saiken kakuron [Civil Code II (3rd. ed.) – Types of Claim] (Tokyo 2011) 541–542. Section 709: ‘A person who has intentionally or negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence’. This translation is from the Japanese government's law translation website at: . Note that this translation is assumed to be based on a recent version of the Civil Code, whereas that referenced in the case would have been the Civil Code prior to its conversion from classical Japanese into modern Japanese. That said, the substance of section 719 is the same whether one looks at the current (modern Japanese) version or the one that was in force at the time of the dispute (the classical Japanese version). Summers v. Tice, 33 Cal.2d 80, 199 P.2d 1(1948).

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For examples of the discussions of the section 719 conundrum, see, e.g., M. Katō, Shin minpō taikei V-jimu kanri, futō ritoku, fuhō kōi-hō (dai-ni-han) teisei [New Treatise on the Civil Code Volume V: Administration, Unjust Enrichment, Tort (2nd ed.) – Revised Edition] (Tokyo 2005) 366–377. 7) For an overview of some of the different views, see Y. Nōmi / S. Katō (eds.), Ronten taikei hanrei minpō 8 fuhō kōi-hō II (Tort Cases by Points of Debate V. 8, Tort II) (Tokyo 2009) 337–347; T. Uchida, Minpō II dai-san-ban saiken kakuron [Civil Code II (3rd. ed.) – Types of Claim] (Tokyo 2011) 541-542; and Uchida (supra note 2) at 535-541. Uchida notes that with respect to the internal inconsistencies evident in section 719, ‘[on] these points, the thinking of the drafters was never clear (or more properly, never consistent) and subsequent academic theories reflect a variety of conflicting views’. Ibid. at 529. 8) M.C. Chino / N. Kashiwagi / A. Okada, Contract and Tort in: McAlinn (ed.), Japanese Business Law (2007) 173, 220. Rather than ‘strong related jointness’ and ‘weak related jointness’, the authors of this chapter used the terms ‘strong cooperation’ and ‘weak cooperation,’ terms I would prefer to avoid because, even though ‘cooperation’ is arguably closer to the meaning of the Japanese term, kyōdō, ‘cooperation’ connotes a degree of intent which could be misleading, given the discussion involving subjective intent versus objective relatedness. 9) Ibid. 10) Ibid. 11) See, e.g., F. Upham, Law and Social Change in Postwar Japan (Harvard 1987) 28-77. 12) Part of the plaintiff farmers' argument was that their crops were disproportionately harmed by a typhoon because they had been weakened by contaminated water. 1) University Law School, University of Cambridge., (New York, Guam and the Republic of Palan), Tohoku University 6)

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Case No. 9: Civil Law – Tort Law – Product Liability Law – Claim for Damages

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Publication

Luke Nottage

Business Law in Japan – Cases and Comments

(★ )

Civil Law – Tort Law – Product Liability Law – Claim for Damages (*) Nagoya District Court, 30 June 1998, Case No. 1998 wa 2443, Katsurakawa v. Nihon McDonald KK, ‘McDonald's Orange Juice’

Jurisdiction Japan

Source: Hanrei Jihō 1682, 106

I Headnote(s)

Court

District Court of Nagoya

Unknown extraneous matter in orange juice manufactured by a supplier constitutes a defect for which the supplier is liable if it causes harm.

Case date

II Relevant Provisions

30 June 1998

Section 3 Product Liability Act (1) P 86

Case number

III Facts

Parties

The Defendant claimed from the Plaintiff JPY 400,000, plus 5% interest on that sum from 13 February 1998 until date of payment. This case involved: (i) a claim against the Defendant in product liability, defective performance (breach of a duty of safety in a contract of sale), and tort, (ii) by the Plaintiff alleging that she suffered injury to her throat from extraneous matter contained in orange juice she drank, which was manufactured and sold by the Defendant, (iii) for JPY 300,000 in damages as solatium (isharyō) and JPY 100,000 in lawyers' fees.

1998 wa 2443

Claimant, Katsurakawa Defendant, Nihon McDonald KK

Bibliographic reference

Luke Nottage, 'Case No. 9: Civil Law – Tort Law – Product Liability Law – Claim for Damages', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 85 95

On 13 February 1998, the Plaintiff was an employee of Aigin DC Card KK. The Defendant was a stock corporation engaged in the business of supplying food and beverages. At around 12.35 pm on 13 February 1998, the Plaintiff purchased for JPY 525 a double cheeseburger set, a combination of a double cheese burger, fried potatoes and orange juice manufactured by the Defendant, at the latter's drive-through outlet in Ise-machi. After drinking the juice, the Plaintiff vomited blood and, therefore, was examined at the surgery within Aichi Ginko KK, and also at Nagoya National Hospital (‘National Hospital’) after being transferred there by ambulance. On 13 February 1998, when the Plaintiff purchased the double cheese burger set, the Defendant's salesperson put the double cheese burger and fried potatoes in one paper bag. The orange juice with its plastic cap on top, and a straw which had been placed in an exposed manner on the counter, were then put in second paper bag; at that time, the straw was not inserted in the paper cup. Both bags were then closed by folding down their openings, and placed in one vinyl bag which was handed to the Plaintiff. She took this back in that form to the Aigin DC Card staff room. During that period, the Plaintiff did not stop off anywhere, nor did she leave the bag anywhere. The Plaintiff began to have lunch with her colleague, Hiromi Kawachi. She first ate the up the double cheese burger and the fried potatoes. Then she began drinking the orange juice through the straw. Immediately after this, she felt as if something like a fragment of glass (albeit a slight one) had penetrated the upper part of her throat. She then began to feel more and more pain, and to have difficulty in breathing, and was moved by nausea. Therefore, she went to the toilet where she vomited up what she had eaten. Blood was spread throughout the vomit. After vomiting, although the Plaintiff no longer felt like her throat was being penetrated by something, she continued to feel pain. Urged by Kawachi, the Plaintiff went to the surgery within the Aigchi Ginko next to Aigin DC Card, and was examined by Dr Nagasaka. When she explained that she had vomited blood after drinking the orange juice, he instructed her to call an ambulance and be examined at the National Hospital. In the toilet of this surgery also, the Plaintiff vomited something like hardened saliva (sputum) slightly mixed with blood. When she went to the National Hospital, her superior and Kawachi took along the orange juice that the Plaintiff had been drinking. At the National Hospital, Dr Shinichi Yasui examined the Plaintiff. He read the letter of introduction from Dr Nagasaka and heard what the Plaintiff had to say. Upon P 87 examining her pharynx, he could not find any actual bleeding or coagulated blood, but found that there was bleeding under the mucous membrane (nenmaku no shita ni shukketsu). He also examined her stomach using a duodenum fiberscope, but did not find any extraneous matter. The orange juice that the Plaintiff had been drinking was thrown away before its contents could be examined. Dr Yasui decided that there was no need for any direct treatment of the bleeding, but because the Plaintiff had vomited, he gave her a drip-feed of medicine against vomiting, and medicine to reduce the uneasiness in her

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pharynx and to prevent its blistering (dropsical swelling). He also instructed her to rest. Dr Yasui's record dated 4 March 1998 records the name of the symptoms as ‘pharynx bleeding’, and additional comments as: ‘13 February 1998, saying vomiting blood, brought to Hospital emergency services by ambulance, examined; based on throat fiber[scope], bleeding under mucous membrane (nenmaku ka shukketsu) in the swollen part of the right pharynx, established an impression of blistering (dropsical swelling)’. According to the testimony of Dr Yasui, ‘bleeding under mucous membrane’ did not mean ‘bleeding in the tissue under the mucous membrane’, as alleged by the Defendant, but instead ‘bleeding occurring under the mucous membrane’. After receiving Dr Yasui's examination, the Plaintiff returned briefly to her office and then went home. She stayed there two days, lying down almost all the time, and only eating soft foods. Moreover, at the time, the Plaintiff was not having any dental treatment. On 17 February 1998, the Plaintiff received the National Hospital's record of her examination, to show to the Defendant. After consulting her superior, she contacted the Defendant the next morning, on 18 February. In discussions on 19 February, however, the Defendant denied a causal link between the orange juice and her injury. Accordingly, through her counsel, by registered mail on 27 March 1998, the Plaintiff claimed damages and brought suit on 15 May 1998.

IV Findings The Defendant alleged that there was insufficient evidence to establish (1) that the Plaintiff suffered injury involving major bleeding, or (2) that injury was caused by the orange juice sold by the Defendant's outlet. The Court rejected both contentions. Accordingly, the Court (3) found the orange juice to have a ‘defect’ under section 3 of the Product Liability Act, and (4) awarded JPY 100,000 in damages. (1) Dr Nagasaka examined the Plaintiff immediately after she claimed to have vomited blood, and called an ambulance recommending her to be examined at the National Hospital. Dr Yasui, using a pharynx fiberscope, also found bleeding under her mucous membrane and wrote this in his record. The Court held that she suffered the injury as contained in that record. The Plaintiff did not receive treatment for an external injury to the throat. However this does not determine whether or not the Plaintiff suffered the P 88 injury, because there is ample grounds for considering such treatment was unnecessary due to any cut having closed up by the time of the examination at the National Hospital, given the peculiarities of the throat's pharynx area. There are also some aspects in the Plaintiff's testimony that can be seen as involving some over-exaggerations in describing the state of the injury, and mistakes as to whether the left or right part of her throat was injured. However, considering that this was testimony from the Plaintiff one year after the injury, and she was confused by the shock at the time of the injury, these cannot be said to be circumstances sufficient to reverse the holding that the Plaintiff suffered the injury itself. (2) The Court decided that (a) the Plaintiff suffered the injury to her throat immediately after drinking the orange juice, (b) there was no opportunity for any extraneous matter, able to cause this injury to her throat, to get into the orange juice from the time of its sale until she drank it, (c) the Plaintiff was not undergoing any dental treatment at the time, and (d) she drank the juice after having eaten the double cheese burger and fried potatoes. The Court therefore held that it was inconceivable that she could already have had extraneous matter in her mouth; instead, the cause of the injury was the extraneous matter in the orange juice. The Defendant contended that it was impossible, given the manufacturing process for the orange juice, for extraneous matter (able to pass through a straw with a seven millimetre diameter) to have got into it. However, based on the Court's findings as to the juice manufacturing process, when putting juice concentrate into the containers within the Defendant's orange juice machine or when scooping up ice from the preservation unit to mix with the juice, it could not be denied that there is a possibility of extraneous matter being mixed into the juice. (3) The Court then held that the orange juice was ‘defective’ under the Product Liability Law. Mixing into the orange juice such extraneous matter that is able to cause such injury to the throat of people drinking it, can be said to constitute a lack of the safety that juice generally has. The Court noted that the extraneous matter was never discovered, and ultimately it remained unclear exactly what it was. Considering that the Plaintiff probably threw up the extraneous matter when she vomited the contents of her stomach, and that the orange juice was thrown away without having been examined, it was thought too onerous to require the Plaintiff to determine the extraneous matter with any further specificity. Whatever it was, if any extraneous matter is mixed into juice to be able to cause injury to people drinking the juice, it is clear that the latter lacks the safety that juice usually has. Because of the clarity of the fact itself that there was extraneous matter in the orange juice sufficient to cause injury to the throat of the drinker (i.e., that it had a ‘defect’), the point that the form of the extraneous matter is unclear, did not affect the Court's holding

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on this point. (4) After suffering the injury, the Plaintiff vomited blood and a doctor determined that her condition made it reasonable for her to be taken to hospital by ambulance. At the P 89 National Hospital, she received drip-feed medicine to prevent vomiting, and the Court found she suffered considerable shock from the injury. The cause could not be ascertained because the orange juice taken to the Hospital was thrown away, and the duodenum fiberscope could not find any extraneous matter either. Thus, even after she returned home from the National Hospital, it is understandable that she remained uneasy and fearful, and that she rested at home for two days. Accordingly, we hold that the Plaintiff suffered considerable emotional and physical distress, and for that we find JPY 50,000 in damages to be a reasonable solatium. Given the circumstances of this case and the Defendant's behaviour, the Court also held that it was necessary to engage counsel. In light of the course of these proceedings, it found JPY 50,000 to be a reasonable amount in damages for lawyers' fees, in adequate causal relationship to this case. The Court, therefore, accepted that the Plaintiff had grounds to claim payment, under section 3 of the Product Liability Act, of JPY 100,000 plus interest at the rate of 5% on that sum from 13 February 1998 until date of payment (as set by the Civil Code as interest damages); but all other claims were dismissed. The Court ordered the Defendant to bear one-fourth of litigation costs and the Plaintiff the remainder, applying sections 61 and 64 of the Code of Civil Procedure, and held that it was not appropriate to declare this judgment open to provisional execution. The translation of the McDonald's case is edited from the Appendix from L. Nottage / T. Kitagawa, Japan's First Judgment under Its PL Law of 1994: Echoes of Donaghue v. Stevenson, in Australian Product Liability Reporter 10 (2000) 121-132.

V Comment 1 Product Liability Legislation and Case Law Developments This was the first reported judgment under the Product Liability Act, which applies to manufactured or processed movable goods supplied since 1 July 1995. The fact that it took almost four years for the first judgment to appear after the Product Liability Act came into effect illustrates that there is little litigation over defective products pursued through the courts in Japan. However, some judgments were rendered prior to this McDonald's case based on the Civil Code for goods supplied before 1 July 1995 or otherwise not subject to the Product Liability Act, as the latter (section 6) provides for any matters not covered to be governed by the Civil Code. (2) Product liability litigation is also generally infrequent in other parts of the world, except for the United States mainly because of its unique civil justice system. For example, the first judgment under P 90 Part VA of Australia's Trade Practices Act, added in 1992 and largely modelled – like Japan's Product Liability Act – on the EC Product Liability Directive of 1995, came only in 1998 – and, indeed, based on a representative suit brought on behalf of an injured consumer by the federal regulator. (3) The McDonald's Orange Juice case attracted extra attention in Japan as it was a small claim (seeking JPY 300,000 as a solatium or ‘consolation money’ for emotional distress, plus JPY 100,000 as lawyers' fees), and because it was processed very quickly (within five months) under the revised Code of Civil Procedure that came into effect in 1998. (4) Many pro-consumer groups that had lobbied for enactment of a strict-liability Product Liability Act, particularly from the late 1980s, had been concerned that cases like these would not eventuate unless far-reaching reforms were simultaneously made to Japan's civil justice system. Some had called for a class-action system, not included in the civil procedure reforms and still under discussion in Japan, (5) or additional ‘Alternative Dispute Resolution’ mechanisms to facilitate out-of-court settlements. The latter proposal was less threatening to business interests, which worked through various industry associations primarily with relevant central government bodies to establish ‘PL [Product Liability] ADR Centres’ from 1995. Local- government based Consumer Lifestyle Centres also began playing more of a role. (6) But court filings and related settlements increased significantly from the mid-1990s as well. There were at least 47 product liability judgments rendered over 1995–1999 and 35 over 2000-2003, including 26 first-instance judgments under the Product Liability Act over 2000–2003, and at least 65 known Product Liability Act filings over 1995–2004. (7) This has generated a critical mass of persuasive Court judgments. (8) The P 91 case law precedent, albeit without yet any Supreme McDonald's case was the first to signal clearly that pursuing even small claims through the regular court process, pursuant to the PL Act, represented a credible dispute resolution option. This judgment was also important as an example of the judiciary being quite open to finding that the plaintiff had proven both a ‘defect’ in the goods and a causal relationship to the harm suffered. The burden of proof lies on the plaintiff under section 3, the central provision of the Product Liability Act: The manufacturer etc shall be liable to compensate for damage arising from a

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defect in a product which it has delivered and manufactured, processed, imported or presented with its name etc in terms of section 2(3)(2) or 2(3)(3), and which interferes with another's life, health or property. Provided, however, that the manufacturer shall not be so liable for damage occurring only to the product itself. In the lead-up to enactment, pro-consumer groups had expressed concern – and some industry groups and even a few government bodies had expressed their hope – that courts would not find a ‘defect’ to have been established unless the plaintiff could identify the problem with considerable specificity. But this would have drastically reduced the capacity for consumers to bring claims, given their informational imbalance compared to manufacturers. It would also have risked pushing the Product Liability Act's strict-liability regime back towards the Civil Code's general tort law regime, which requires the plaintiff to prove negligence by the supplier (section 709 Civil Code). The latter is more likely to require the plaintiff to identify the particular problem, in order to proceed essentially with a risk-benefit analysis of decisions taken or otherwise by suppliers. (Nonetheless, in some litigation involving mass-torts and even some one-off accidents - notably, the Matsushita TV case decided just before the Product Liability Act was passed – some courts had alleviated pressure on plaintiffs by inferring negligence from the product failure unless the supplier proved otherwise. (9) ) Courts applying the Product Liability Act seem to have been sensitive to such potential problems and, after all, section 2(1) itself only sets out some general considerations for determining what constitutes an actionable ‘defect’: the lack of safety a product ought to have, taking into account the nature of the product, its normally foreseeable manner of use, the time it was delivered, and all other circumstances relating to the product. Furthermore, judges in the McDonald's case are scarcely alone in not requiring the

P 92 plaintiff to identify the root problem with specificity, (10) even though the justice

involved in this stance is particularly acute where the allegedly defective goods have themselves been inadvertently disposed of or destroyed. (11) This case law development undercuts occasional calls by pro-consumer interests to add to the Product Liability Act a rebuttable presumption that a product that causes harm contains a defect. (12) Some have even recommended adding a presumption of a causal link between the impugned product and harm suffered. But the McDonald's case demonstrates that Japanese judges anyway can set the bar quite low for plaintiffs trying to prove adequate causation. Indeed, one wonders if the judges in that case might have reached a different conclusion if they had been faced with a scenario like that in Odom v. Jebroa Enterprises (t/a McDonald's Restaurant). In almost contemporaneous and quite similar case, the US District Court for the District of Columbia instead ruled in favour of McDonald's. (13) Overall, the Nagoya District Court's decision has not proved an aberration, even though it was also unusual in having a presiding judge who had previously been a bengoshi lawyer. (14) Rather, it fits within a trend characterized by a significant volume of product liability case filings and settlements both under the Product Liability Act and the Civil Code, albeit off a very low base, and a majority of pro-plaintiff decisions. (15) Another early and P 93 important example is the Snapper Fish case. (16) The Tokyo District Court adopted an expansive definition of what constituted a ‘processed’ good under section 1 (extending it to sashimi), but a restrictive definition of the ‘development risks’ defence under section 4(1): that the state of scientific or technical knowledge at the time when the manufacturer, etc. delivered the product was not such as to enable the existence of the defect in the product to be discovered. This pro-plaintiff approach runs counter to some expectations from commentators, particularly from abroad, about the likely impact of the Product Liability Act. For example, one author quoted Professor John Haley for the view that in Japan ‘courts plow the field, and the legislature freezes it’. (17) Yet many judges seem to have taken the enactment as a signal to keep developing the case law, at least in this area. Perhaps a better analogy here would be that the legislature adds fertilizer, for courts to continue working the field in future years. A similar symbiosis between legislative enactment and case-law development can be observed in other (perhaps more high-profile) fields of consumer law over the last decade, notably in regard to unfair contract terms and consumer credit. (18) The McDonald's Orange Juice case and its aftermath, therefore, demand reassessments of conventional understandings about Japanese law, society and dispute resolution. (19) Nonetheless, this is far from a simple story of modernism and legalization of socioeconomic relations, despite the ambitions and some notable achievements of the Justice System Reform Council (‘JSRC’) program since 2001. (20) Communitarian norms still abound in Japan, but sometimes in new forms or combinations. (21) Product liability suits brought by individual consumers still often seem to be triggered by a sense of moral indignation or affront to community values, sometimes aimed at prompting changes in supplier behaviour or government policy – although this approach is far from peculiar to P 94

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P 94

Japan, and the willingness to persist in pursuing formal legal remedies responds partly to changes in various ‘institutional barriers’ to bringing suit. (22) Parallels can be found in ‘taxpayers' suits’ lodged against local government officials and in shareholder derivative actions, which have increased even more dramatically since the early 1990s. (23) These developments also suggest, as with product liability litigation under the Product Liability Act, that lawsuits have depended heavily on the goodwill of activist lawyers. After all, in the McDonald's case the lawyer agreed to pursue the Plaintiff's claim for JPY 100,000 in fees, probably anticipating that only some would awarded by the Court even if the case succeeded on the merits. But can such noblesse oblige survive in the long term? Competitive pressures have grown and incomes will have dropped – particularly among the smaller law firms, more likely to represent consumers in small claims – as the number of bengoshi has almost doubled over the last decade, following the National Legal Examination and ‘Law School’ reforms. (24)

Already from 2000, dubbed Japan's ‘summer of eating dangerously’ due to the spate of food safety failures epitomized by the Snow Brand milk poisoning fiasco, doubts had resurfaced about the capacity even of the new strict-liability private law regime to adequately incentivize product safety activities of manufacturers. Mitsubishi Motors and its senior executives also got into trouble, after a whistleblower tipped off regulators about clandestine recalls. A few years later, public trust was further undermined by an outbreak of ‘mad cow disease’, although ultimately its spread and impact on human health was quite contained compared to Europe. (25) From 2005, further major safety issues attracted widespread public attention: asbestos products, then buildings designed in breach of earthquake resistance standards, then used consumer electronic goods, dumplings imported from China, and elevators supplied by Schindler. (26) By P 95 2006, the Japanese public had had enough. Along with ‘vertical’ (product-specific) product safety re-regulation across these various sectors, the government improved ‘horizontal’ or generic regulation by adding to the Consumer Product Safety Act (Shōhi seikatsu-yō seihin anzen-hō, Law No. 31 of 1973) a duty on suppliers to notify the regulator (and thereby the public) about serious product safety accidents and specified risks. And since 2009, regulatory authority has shifted from the Ministry of Economy, Trade and Industry (METI) to the new Consumer Affairs Agency. (27) Some might see this as evidence of a return to relying on the bureaucracy to manage socio-economic problems, rather than on the courts and the justice system as a more indirect ordering mechanism triggered primarily by individual initiative, as envisaged by the JSRC. But Japan is far from unique in bolstering product safety regulation alongside or after private law reforms. The European Union is the most well-known example, but accident disclosure obligations also now apply in the US (in addition to the publicity provided anyway by its very active product liability litigation system), China (albeit with problems of enforcement), Canada and Australia. (28) Many countries, especially after the Global Financial Crisis of 2008, have become generally more sceptical about relying on market forces or even ex post private litigation. Furthermore, just as product liability law reform some two decades ago seems to have both reflected and reinforced consumer activism in Japan, Europe and Australia, underpinning more recent re-regulation, the latter is likely to feed back into an ongoing role for the product liability system in promoting appropriate consumer safety measures. In other words, both private and public law systems can and probably should develop in tandem to address effectively a variety of product safety risks. (29) Luke Nottage (1) P 95

References ★ )

*)

1) 2)

Luke Nottage: University of Sydney Law School, University of Wellington, Kyoto University The present contribution draws together two decades of comparative research into Japan's product safety law, begun when Dr Harald Baum and I got to know each well when based at Kyoto University Law Faculty over the early 1990s, amidst extensive public debate about enacting the Product Liability Act. Seizōbutsu sekinin-hō, Law No. 85/1994. On tort law claims under the Civil Code, see generally L. Nottage, Deliktsrecht und Produkthaftung [Tort Law and Product Liability] (I. Paulavets & J. Weitzdörfer trans.), in: Baum / Bälz (eds.), Handbuch Japanisches Handels- und Wirtschaftsrecht [Handbook of Japanese Commercial and Economic Law] (Cologne 2011) 1523–1606.

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3)

4) 5)

6) 7)

8) 9)

10)

11)

12) 13)

14)

15) 16) 17)

Australian Competition and Consumer Commission v. Glendale Chemical Products Ltd 40 IPR 619 (1999). Part VA has been transposed into Part 3–5 of the ‘Australian Consumer Law’, enacted as Schedule 2 of the renamed Competition and Consumer Act at . The EC Directive (85/379/EEC, amended in 1999 to always encompass primary agricultural products) can be found at ; and a semiofficial translation of Japan's Product Liability Act is at . For a detailed comparison of Japanese, European, Australian and American product liability case law and legislation, see L. Nottage, Product Safety and Liability Law in Japan: From Minamata to Mad Cows (London 2004) chapters 2 and 3. L. Nottage, Civil Procedure Reforms in Japan: The Latest Round, in: ZJapanR / J.Japan.L 18 (2004) 204–209 (also at ). Compare Y. Taniguchi, The 1996 Code of Civil Procedure of Japan – A Procedure for the Coming Century?, in: American Journal of Comparative Law 45 (1997) 767-91 with I. Sugawara, Japan, in: The Annals of the American Academy of Political and Social Science 622 (2009) 280–285 (manuscript at ), and recent comparative studies by Japan's Cabinet Office at . L. Nottage / Y. Wada, Japan's New Product Liability ADR Centers: Bureaucratic Industry or Consumer Informalism?, in: ZJapanR/J. Japan.L 6 (1998) 40-81; Nottage (supra note 3) chapter 2. L. Nottage, Comparing Product Liability and Safety in Japan: Path-Dependent Globalization, in: Scheiber / Mayali (eds.), Emerging Concepts of Rights in Japanese Law (Berkeley 2007) 159, 164-9 and 174-83; L. Nottage, Product Liability and Safety Regulation, in: McAlinn (ed.), Japanese Business Law (The Hague 2007) 221, 244 (Table 1). L. Nottage / M. Kato, Product Liability and Safety Regulation, in: Nottage (consultant ed.), Business Law in Japan, Vol.1 (Tokyo 2008), especially at 211-2. See Nottage (supra note 7, McAlinn (ed.)), 234-6. Taishi Kensetsu Kogyo KK v. Matsushita Denki Sangyo KK (29 March 1994, in: Hanrei Jihō 1439, 29) is translated in: K.L. Port / G.P. Mcalinn, Comparative Law: Law and the Legal Process in Japan (Durham, NC 2003) 952-7. See the cases notes in Nottage and Kato (supra note 8) 266-95, especially also the cases involving fuel additives (Product Liability Act case filing No. 32), a magnetic water current machine (No. 33) and brain catheter (No. 39). These case notes and a summary of all Product Liability Act filings from 1995–2004 can also be found at: . This may also explain why the Osaka District Court in the Matsushita case, decided under section 709 of the Civil Code, was willing even to infer negligence – the television set was seen catching fire, before it was completely destroyed. Even the US Restatement Third–Product Liability, which often reinstates negligence-type reasoning, leaves a pro-plaintiff provision for such situations. Cf. e.g. Y. Ota, Seizōbutsu sekinin-hō – Shōhisha no kitai to kadai [The Product Liability Act: Consumer Expectations and Issues], in: Kokumin Seikatsu July (2005) 14– 17. 47 F Supd 42 (1999) at 42. To be sure, there were some potentially important differences between the two scenarios. In Odom, McDonald's lemonade bought by the plaintiff had been carried back to his workplace with only a lid on ‘and a straw was inside’ (meaning, presumably, inserted through the lid – so extraneous matter might have entered afterwards). The juice was then left some distance from where the plaintiff resumed working, with his foreman also working nearby, so that it was not within his exclusive control for almost two hours. He resumed installing insulation on a roof over that period, presumably involving more risk of falling debris than walking down a street, as in the case before the Nagoya District Court. Lastly, it is unclear whether there was eyewitness testimony like that of the colleague of Ms Katsurakawa, confirming she felt an injury to her throat immediately upon drinking the orange juice, or testimony of two independent physicians who then performed very prompt examinations. More generally, see K. M. Clermont, Standards of Proof in Japan and the United States, in: Cornell International Law Journal 37 (2004) 263-84. L. Nottage, New Concerns and Challenges for Product Safety in Japan, in: Australian Product Liability Reporter 11 (2000) 100–110, citing M. Hirazuka, Nihon McDonald jūsu ibutsu kon ‘yū jiken [The McDonald's Co Japan Case Involving Extraneous Matter in Orange Juice], in: PLHō/Jōhō Kōkai Nyūsu 32 (1999) 2. The vast majority of judges in District Courts and above are instead career judges – that is, after qualifying as legal practitioners they begin work as court officers, and continue until mandatory retirement age. Nottage (supra note 7). Tokyo District Court, 13 December 2002, in: Hanrei Jihō 1033, 54. A. Marcuse, Why Japan's New Products Liability Law Isn't, in: Pacific Rim Law & Policy Journal 5 (1996) 365-98, 366 n. 8.

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18) S. Kozuka, Judicial Activism of the Japanese Supreme Court in Consumer Law:

19)

20)

21)

22)

Juridification of Society through Case Law?, in: ZJapanR / J.Japan.L 27 (2009) 81–90; S. Kozuka / L. Nottage, Re-Regulating Unsecured Consumer Credit in Japan: OverIndebted Borrowers, the Supreme Court, and New Legislation, in: Yearbook of Consumer Law 2009 (2009) 197-230. More generally, see eg S. Kozuka / L. Nottage, The Myth of the Cautious Consumer: Law, Culture, Economics and Politics in the Rise and Partial Fall of Unsecured Lending in Japan, in: Niemi-Kiesilainen, et al. (eds.), Consumer Credit, overIndebtedness and Bankruptcy: National and International Dimensions (Oxford et al. 2010) 199-224. See generally D. Foote, Introduction and Overview: Japanese Law at a Turning Point, in: Foote (ed.), Law in Japan: A Turning Point (Seattle 2007) xix-xxxix (book reviewed by L. Nottage, in: ZJapanR / J.Japan.L 25 (2008) 261-5, also at ). T. A. Tanase, Community and the Law: A Critical Reassessment of American Liberalism and Japanese Modernity (L. Nottage & L. Wolff trans., Edward Elgar 2009) (reviewed by T. Ryan, in: ZJapanR / J.Japan.L 31 (2011), also at ). Nottage (supra note 3), chapter 2 (referring, e.g., to M. Reich, Toxic Politics: Responding to Chemical Disasters (Ithaca 1991); and generally A. Etzioni, Social Norms, Internalization, Persuasion, and History, in: Law & Society Review 34 (2000) 157).

23) M. Abe, Mobilizing Law against Local Governments, in: Scheiber / Mayali (eds.),

24)

25)

26)

27)

28) 29) 1)

Emerging Concepts of Rights in Japanese Law (Berkeley 2007) 119-34; D. Puchniak / M. Nakahigashi, Japan's Love for Derivative Actions: Revisiting Irrationality as a Rational Explanation for Shareholder Litigation, in: Vanderbilt Journal of Transnational Law 45 (2012) forthcoming. See generally S. Steele / K. Taylor, Legal Education in Asia: Globalisation, Change and Contexts (Routledge 2009), reviewed by L. Nottage, in: ZJapanR / J.Japan.L 30 (2010) 255-64, also at ; M. Nakazato, et al., The Industrial Organization of the Japanese Bar: Levels and Determinants of Attorney Income, in: Journal of Empirical Legal Studies 7 (2010) 460-89 (also at ). Already there is some evidence that average claim amounts are increasing in Product Liability Act litigation, which often would make a case more worthwhile for a lawyer to take on, although of course this new pattern could instead simply reflect a decline in accidents causing minor harm. See Nottage (supra note 7, Scheiber / Mayali (eds.)) 168. Nottage (supra note 14); L. Nottage / M. Trezize, Mad Cows and Japanese Consumers, in: Australian Product Liability Reporter 14 (2003) 125-36; M. Ferrari, Risk Perception, Culture, and Legal Change: A Comparative Study on Food Safety in the Wake of the Mad Cow Crisis (Farnham, Burlington 2009); Nottage (supra note 7, Scheiber / Mayali (eds.)). L. Nottage, Re-Regulating Japan: Asbestos, Defectively Designed Buildings, and Secondhand Electrical Products, in: ZJapanR / J.Japan.L 22 (2006) 89–114 (with a revised version as: The ABCs of Product Safety Re-Regulation in Japan: Asbestos, Buildings, Consumer Electrical Goods, and Schindler's Lifts, in: Griffith Law Review 15 (2006) 242-86, also at ); L. Nottage / J. Rheuben, Chinese Dumplings and Dodgy Foods in Japan: Implications for the Australia-Japan Free Trade Agreement, in: Australian Product Liability Reporter 19 (2008) 50–55. L. Nottage / H. Kano, Japan, in: Kellam (ed.), Product Liability in the Asia-Pacific (Sydney 2009) 218-40, 229-33; M. Tan, ‘Lessons from Australia: How (Japan and) Other Countries are Dealing with Current Consumer Issues’, at . L. Nottage, Suppliers' Duties to Report Product-Related Accidents under the New Australian Consumer Law: A Comparative Critique, in: Commercial Law Quarterly (2011) 3–14, also at . L. Nottage, Product Safety, in: Howells, et al. (eds.), Handbook of International Consumer Law and Policy (Cheltenham 2010) 256-94 (with a transcript version at ). University of Sydney Law School, University of Wellington, Kyoto University

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Case No. 10: Civil Law – Contract Law – Improper Solicitation Transaction – Improperness of Solicitation of Transactions with Elderly People

Document information

Publication

Business Law in Japan – Cases and Comments

Makoto Arai

Jurisdiction

Tokyo District Court, 25 August 1987, Case No. 1985 wa 1997, Claim for Compensation of Damages

(★ )

Japan

Source: Hanrei Jihō 1276, 55

Court

I Headnotes(s)

Case date

II Relevant Provisions

Selling land at 200 times the market price, by cajoling a person with impaired judgment due to age and inexperience in real estate trading, and making statements contrary to fact, is illegal and constitutes a tortuous act.

District Court of Tokyo

25 August 1987

Sections 709, 719 Civil Code Section 266(3) Commercial Code

Case number

P 98

1985 wa 1997

III Facts

Bibliographic reference

Makoto Arai, 'Case No. 10: Civil Law – Contract Law – Improper Solicitation Transaction – Improperness of Solicitation of Transactions with Elderly People', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 97 101

After retiring as associate professor from a certain private university, the Plaintiff (born in 1915) was living alone. At the time of this case, close to age 70, his judgment was considerably impaired and he did not have any experience in land transactions. Nonetheless, an employee of A Co., a non-party to the litigation of which the Defendant 1 was representative director, visited the Plaintiff on the pretext of conducting a questionnaire survey. Thereafter, being told that he had been selected from the questionnaire, the Plaintiff was invited to a hot spring in Shizuoka Prefecture, and he set off for the hot spring with about twenty guests. On this occasion, A Co. explained to the Plaintiff that while land prices rise, they never fall, thus it is a completely safe investment. He was urged to buy land in Hokkaidō and it was explained to him that the company would buy it from him two or three years later when it would have increased in value by about 30%. On the way home from the hot spring, he was taken to A Co., where he signed a land contract and paid JPY 4.29 million. Thereafter, on the recommendation of Defendant 2, an employee of A Co. claiming to be the senior managing director, Plaintiff contracted to buy from the company the 155 tsubo parcel of land, also in Hokkaidō, pertaining to this case, instead of the land above, for JPY 6 million. He paid the difference of JPY 1.71 million between the two parcels of land. Therefore, Plaintiff paid A Co. JPY 6 million as the price for the land pertaining to this case. However, the market price of the relevant land was about JPY 200 per tsubo, and Plaintiff bought the land at about 200 times the market price. In this suit, Plaintiff contended that after buying the land pertaining to this case, the sales contract was rescinded on the recommendation of Defendant 1 and 2, and Plaintiff bought more, different land in Hokkaidō for JPY 8 million, corresponding to about 200 times the market price. Plaintiff contends that he had already paid the JPY 2 million difference in the price of the land pertaining to this case, and that Defendant 1 and 2 fraudulently induced Plaintiff to pay the total of JPY 8 million above, which represents an illegal price, in full knowledge of the market price of the several parcels of land above, and of Plaintiff's impaired judgment and ignorance concerning land. Plaintiff demanded the repayment of an amount equivalent to JPY 8 million as damages for the tort of Defendant 1 and 2 (in the case of Defendant, conjunctive with section 266(3) Commercial Code).

IV Findings The judgment recognized the facts up to the purchase of the land pertaining to this case and the payment above; however, it did not recognize the final replacement by purchase. Furthermore, the court held that by inviting people to a hot spring at no charge and cajoling them to buy very cheap land in Hokkaidō for a high price, A Co. was engaging in unfair business practices overall. In addition, the court held that it must be acknowledged that the act of selling the land a person with impaired judgment due to age and inexperience in real estate trading, and making statements contrary to fact, is of course illegal, causing Plaintiff to suffer damages equivalent to JPY 6 million. Therefore, Plaintiff's claim was partially granted to the amount of JPY 6 million, corresponding to the payment for the land pertaining to this case. Furthermore, concerning Defendant 1 the court held that he did not control A Co. in

P 99 pertaining to this case to Plaintiff at 200 times the market price, by cajoling

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fact, but even as a nominal representative director, he played a certain role commensurate with the position of representative director, being aware of the business methods and content of A Co. Since he took a direct part in sales activity, he bore responsibility through negligence at the least for the illegal conduct of business of A Co., and as a joint tortfeasor could not evade responsibility for the damages to Plaintiff. Concerning Defendant 2, the court held that since he held the position of executive responsible for business as senior managing director of A Co., he could not evade responsibility for the conduct of business by A Co. for that period. Moreover, since he participated directly in the sale to Plaintiff, he was a joint tortfeasor and had responsibility for compensating the damages suffered by Plaintiff. Translated from the Japanese original by Makoto Arai

V Comment (1) This case concerns the so-called genya shōhō, wherein general consumers are pressured by unscrupulous real estate developers into buying at a high price subdivided lots of approximately 100 square meters of wasteland or woodland of little value. The distinguishing feature of this case is the point that the victim was an elderly person whose sense of judgment was impaired. (2) One relief measure which could be considered for victims in cases such as this is exercising the cooling off right pursuant to section 37(2) of the Building Lots and Building Transaction Business Act. (1) However, there is no need to review the requirements in detail because the period of eight days to exercise this right had already lapsed in this case and therefore, this relief measure could not be adopted. Generally, meeting the requirements designated in that article of the Building Lots and Buildings Transaction Business Act is difficult and relief by cooling off is not effective. Thereupon, by focusing attention on the victims being elderly, a decline or lacking of their mental capacity as a reason for asserting nullity of the sales contract could be considered. This line of thinking has the relativity of the concept of mental capacity as its premise. (2) That is to say, putting aside whether or not the mental capacity of Plaintiff in P 100 this case was lacking on the whole, it is inconceivable that Plaintiff at least understood the content of the said sales contract and the effect and so on, brought about by the contract. Defendant and his party would have been fully aware that Plaintiff was an elderly person whose mental capacity was extremely impaired. In cases in which the victim is an elderly person whose mental capacity is extremely impaired, the relief measures of cancellation of the sales contract, claiming a refund of the part of the purchase price which has already been paid, and avoiding claims for the unpaid amount of the purchase price by asserting nullity due to mental incapacity, should be considered first and foremost. Also, in addition to asserting nullity due to mental incapacity, the cancellation of the sales contract could be done by asserting nullity due to violation of public order (section 90 Civil Code) and recision due to a fraudulent act (section 96(1) Civil Code). Whichever is adopted, in a case such as this, the cancellation of the sales contract could be said to be an orthodox relief measure. However, as on the whole, dishonest dealers who carry out the selling of worthless property have from the onset neither the intention nor the financial resources to refund the sales money they have already received, the above relief measures such as the cancellation of the sales contracts are insufficient. (3) Therefore, redress by pursuit of tort liability may be possible. Moreover, rather than pursuing responsibility with regard to A Co. which can barely be considered an entity, it should be pursued with regard to the individuals who actually solicited the injured party. The illegality of genya shōhō should be sought in the usuriousness of the agreement (lack of value of the land for sale) and the fraudulence of the solicitation. The usurious content of the contract will be considered first. Genya shōhō is the sale of wasteland or woodland with no utility value whatsoever. Legal precedents recognized as usurious include a difference of about 10 times between the market price and selling price (3) and about 14 to 36 times. (4) Since the difference between the marketprice and selling price is about 200 times in this case, it is easy to accept its usuriousness. Next to be considered is the fraudulence of the solicitation to make a contract. Solicitation is fraudulent if any of the following apply: (1) the market value of the land is represented falsely (e.g., ‘The market price is several times higher, but I'll give you a special low price’); (2) false promises of future price increase (‘There are development plans’); (3) false guarantee of resale profit (‘We will handle resale’); (4) unfair customer selection or persuasion (inducement to divulge financial resources under the pretext of a survey, offering free excursions to selected customers and applying unreasonable persuasion). (5) Since this case includes these four elements to some degree, it can easily be seen to involve fraudulence. Therefore, since this case involves the tortious aspects of P 101 both usuriousness and fraudulence, it satisfies the criteria for illegality. Therefore, it is natural that A Co. should assume responsibility, and Defendant 1, the representative director who permitted these practices, and Defendant 2, the senior managing director who directly solicited the injured party should be held individually responsible for joint tort. The scope of the damages requiring compensation could include damages for mental suffering besides the JPY 6 million paid as property damages, but in this case

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damages were not allowed. (4) The above examination was concerned with relief after the fact regarding genya shōhō. For the future, however, the prevention of property damage to elderly people such as in the present case appears likely to require steps taken in advance to protect assets. For this, too, there appear to be three conceivable possibilities. First, it is crucial that the assets of elderly people be safeguarded, that assets be protected in advance from deceptive solicitation. The system for declaration of incompetency corresponds to this under the current framework, but, as is well known, it has been pointed out that various harmful effects accompany the system for declaration of incompetency as it is at present. Moreover, this system can hardly be said to be functioning adequately to help safeguard elderly people's assets. It is necessary, therefore, to create a new system of legal representation that will truly help safeguard the assets of the aided person. This is, in other words, the question of issues in adult guardianship law. Adult guardianship law also makes the distinction between voluntary adult guardianship and statutory legal guardianship. In future, it will be necessary to place emphasis on the former, but this point will not be discussed in detail here. (6) Next, taking civil law as a reference, consideration might be given to always placing an intervening system of notarization in real estate transactions. If this is done, then a professional who is a neutral third party, other than the parties to the sale agreement, will examine the mental capacity of the party directly concerned and the appropriateness of the agreement content, so that if there are any doubts, then the agreement can be checked before it is concluded. This is likely to be useful in forestalling the kind of trouble in the present case. Finally, if it proves difficult to realize an intervening system of notarization, then reference could be made to British and American law and consideration be given to adopting an escrow system (depositing funds provisionally with a third party) in place of the notarization system. The escrow system, taking into account the fact that a purchase price already paid cannot be readily recovered even if the sales contract is dissolved, provides for the provisional deposit of the purchase money with a neutral third party until title has been transferred, which occurs after the conditions for complete payment of the price have been met following the establishment of a contract with proper content. This would no doubt constitute a certain restraint on improper contracts for sale of real property. Makoto Aral (1) P 101

References ★ )

1) 2) 3) 4)

5) 6) 1)

Makoto Arai: Chuo University, Faculty of Law, (Keio University) Takuchi tatemono torihiki gyōhō, Law No. 176/1952. M. Arai, Kōrei shakai no seinen kōken-hō [The Aging Society and the Adult Guardianship Law] (Yuhikaku 1994) 144. Osaka District Court, 24 February 1988, in: Hanrei Jihō 1292, 117; Bessatsu Jurisuto, Fudōsan torihiki hanrei hyakusen [Cases on Transaction of Real Property] (2008) Case 32. Osaka District Court, 26 February 1988, in: Hanrei Jihō 1292, 113; Y. Ishikawa, Genya shōhō [Sale of Worthless Land], in: Yoshida (ed.), Fudōsan funsō kanri no hōritsu sōdan [Real Estate Disputes, Consultation concerning Management Law] (Seirin Shoin 1994) 95. Ishikawa (supra note 4) 69. For details, see Arai (supra note 1). Chuo University, Faculty of Law, (Keio University)

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Case No. 11: Civil Law – Consumer Contract Act – Case That Decided whether Gold Futures Prices Are ‘Important Matters’ under the Consumer Contract Act

Document information

Publication

Business Law in Japan – Cases and Comments

Mihoko Sumida (★ ) Supreme Court, 30 March 2010, Case No. 909 ju 2008, Claims for Damages and Advance Money

Jurisdiction Japan

Source: Hanrei Jihō 2075, 32 = Hanrei Taimuzu 1321, 88

I Headnote(s)

Court

As sections 4(2) and 4(4) Consumer Contract Act (CCA) do not contain any language that applies to direct uncertain future fluctuations, future gold prices are not ‘important matters’, and thus failure to provide information indicating a possible plunge of gold prices cannot be a basis for avoiding the declaration of intent to enter into a contract under section 4(2) CCA.

Supreme Court of Japan

Case date 30 March 2010

II Relevant Provisions Sections 4(2), (4) Consumer Contract Act (CCA) (1)

Case number

P 104

909 ju 2008

III Facts

Bibliographic reference

Mihoko Sumida, 'Case No. 11: Civil Law – Consumer Contract Act – Case That Decided whether Gold Futures Prices Are ‘Important Matters’ under the Consumer Contract Act', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 103 - 109

Plaintiff was 64 years old and the representative director of a cosmetics manufacturer and distributor when he entered into a basic agreement with the Defendant, a commission house, on 24 November 2005, after having been solicited by one of the sales representatives of Defendant to commission Defendant to trade commodity futures. Based on the bullish market outlook presented by the sales representative of Defendant, i.e. that gold prices in Tokyo would continue to rise at least until the end of the year and that buying gold would bring profits, which the sales representative described as ‘if you buy, you will be in the winning team; if you sell, you will be in the losers' team’ and ‘buyers will be winners’. Plaintiff commissioned Defendant on 12 December 2005 to buy two-hundred gold positions providing a margin deposit of JPY 15 million (hereinafter: the ‘Contract’). The next day on 13 December, gold prices plunged causing a loss of JPY 31,390,000 to Plaintiff, who eventually sold all the positions on 14 December. The sudden fall was the result of several related events: (1) the gold price in Tokyo had been extraordinarily higher than the Loco London price, the basis for international trading and settlement in gold; (2) worried about the overheated market, Tokyo Commodity Exchange (TOCOM) held a special meeting on 9 December and decided on 12 December, after the Contract had been entered into, to require special additional margins; (3) October 2006 contracts, including the Contract, had mainly been bought by individual investors such as Plaintiff, which inherently had the risk of causing a significant loss to such investors if an increased margin requirement were introduced, because that action could lead to a market freefall as such investors would scramble to sell off their positions, but can't do so as the price quickly reaches the statutory limit before their close orders are executed through their commission house. (hereinafter: ‘Background’) Plaintiff requested that Defendant pays damages caused by Defendant's tort (JPY 15 million for margin deposit and JPY 2 million for delayed payment), alleging that Plaintiff's decision to engage in gold futures trading had been based on Defendant's illegal solicitation, including the provision of a determinative opinion. On the contrary, Defendant requested that Plaintiff pays JPY 16,390,000 for Plaintiff's loss from the transactions Defendant had carried out for Plaintiff, minus the margin deposit. The Sapporo District Court as court of first instance on 22 May 2007 dismissed Plaintiff s request. (2) Before the court of appeal, the Sapporo High Court, Plaintiff added principal claims that the Contract should be avoided as it had been entered into based on Plaintiff's misunderstanding caused by Defendant's provision of a determinative opinion (section 4(1) no. 2 CCA) or Defendant's failure to disclose detrimental information (section 4(2) CCA), and thus the margin deposit of JPY 15 million yen should be refunded as Defendant on 25 January 2008 granted Plaintiff's P 105 had obtained it illegally. The Sapporo High Court requests (3) stating that ‘[S]ince one can assume that a non-professional investor who decides to engage in the commodity futures market, which normally involves transactions valued significantly greater than a person's own means, looks to margins from market fluctuations, future gold prices are deemed as ‘quality … of … subject matter’ as set forth in section 4(4) no. 1 CCA which ‘normally affects the decision [of the Plaintiff as a consumer] as to whether or not to enter into [a Contract]’ and thus are deemed important

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matters under section 4(2) CCA’. Defendant's sales representative intentionally failed to mention the possible sharp fall of gold prices which would be detrimental to Plaintiff (Background) while asserting his personal view that the gold prices would rise and that it would be profitable to Plaintiff. (4) Consequently, Plaintiff wrongly believed that the Background did not exist and thus declared his intent to enter into the Contract. Based on the forgoing, the Sapporo High Court decided that Plaintiff could avoid its declaration of intent. The Supreme Court, on the other hand, decided that future gold prices are no ‘important matters’ that could be relevant for the application of section 4(2) CCA. Hence the Supreme Court held that part of the decision of the Sapporo High Court against Defendant should be reversed and Plaintiff's principal claims should be dismissed. The case was remanded to the appellate court for further discussion on Plaintiff's alternate claim (violation of a duty to explain risks) and Defendant's possible violation of the goodfaith principle by requesting Plaintiff to pay the loss.

IV Findings The ‘important matters’ provided for by section 4(2) CCA are defined in section 4(4) CCA as ‘[Q]uality, purpose of use and other content’ or ‘[Consideration and other terms’ of the subject matter of a consumer contract. In contrast to the clear provision of section 4(1) no. 2 CCA that a determinative opinion relates to ‘the monetary amount the consumer receives in the future and other matters of which fluctuations in the future are not certain,’ sections 4(2) and 4(4) CCA … do not contain any language that implies to direct uncertain future fluctuations. In the present case, therefore, the court finds that future gold prices are not ‘important matters’ and that … the failure to provide information indicating possible plunge of gold prices … cannot be the basis for avoiding the declaration of intent to enter into the contract under section 4(2). Translated from the Japanese original by Mihoko Sumida P 106

V Comment 1 Significance of the Decision This was the first Supreme Court decision dealing with the process for entering into a contract under the CCA. In light of an institutionalized disparity between consumers and businesses in their information and negotiation power, the CCA allows a consumer to avoid his/her intent to enter into a contract which he/she would not otherwise have wanted but did so because of the consumer's misunderstanding formed during the solicitation process when the business operator failed to provide necessary information. The CCA, however, requires for the avoidance of the contract an act of the business operator's that can be qualified as either (1) an untrue representation (section 4(1) no. 1 CCA), (2) a provision of determinative opinion (section 4(1) no. 2 CCA) or (3) an intentional non-disclosure of detrimental information (section 4(2) CCA). Cases (1) and (3) also need to relate to ‘important matters’. ‘Important matters’ are defined by section 4(4) CCA as (i) quality, purpose of use and other content (section 4(1) no. 1) or (ii) consideration and other terms (section 4(1) no. 2) of (iii) the subject matter of a consumer contract (iv) which normally affects the consumer's decision as to whether to enter into the consumer contract. While requirement (iv) is a substantive requirement which is equivalent to the ‘element’ requirement for avoidance of a declaration of intent based on the error theory, (i), (ii) and (iii) define the scope of application. Without considering requirements (i) through (iv) in detail, the Supreme Court denied a right of avoidance simply because future gold prices were not ‘important matters’.

2 Theories and Case Law Relating to ‘Important Matters’ The element of ‘important matters’ was included in the legal provisions based on the idea that if, in addition to other rights under the Civil Code, a new significant right of avoidance were to be given to consumers under private law, its application should be limited to an appropriate scope and its requirements should be clearly stipulated in law as the avoidance right may extensively affect business activities. (5) Therefore, according to the idea of those who drafted the CCA, a consumer who has replaced his/her oldfashioned black telephone and entered into a new telephone subscription contract after a salesperson persuaded him/her saying that ‘[Y]ou need a new telephone as the black telephone will soon be out of service,’ cannot avoid his/her subscription because the the subject matter of the consumer contract and thus does not P 107 black telephone is not meet requirement (iii) of ‘important matters’. (6) Among scholars, on the other hand, it has been argued that the requirements, especially those relating to the scope of application, should be flexibly interpreted so that the purpose of the provisions is not undermined. With regard to the foregoing example, they have tried to regard circumstances seemingly constituting the motivation of a consumer's declaration of intent as ‘important matters’ by considering that ‘a new telephone has the

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“nature (or quality)” which allows the consumer to avoid a life without a telephone and “purposes of use” to enable the consumer to continuously use telephone services.’ (7) Such interpretations also aim to slightly broaden the policymakers' idea that ‘quality’ means ‘quality and nature’ such as performance/function/efficacy, component/raw materials and safety, and that ‘purpose of use’ means ‘how a product/service is used according to its nature’ such as for office use or for private use. (8) More drastic opinions regarding section 4(4) nos. 1 and 2 CCA as merely a non-exhaustive list, argue that the development of error theory relating to the motivation based on misunderstanding teaches us that limiting the scope of application cannot be justified, and that such interpretation of the law does not conform to the legislative purpose. (9) Decisions of lower courts show a similar trend. In a case relating to injection of collagen to the glans penis as part of circumcision surgery, the Tokyo District Court granted the request for avoidance under section 4(2) CCA stating that, although the court could not easily say that such an injection was not effective, the court could find that the defendant had not provided detrimental information relating to important matters because such a treatment had ‘not been medically approved in general’. (10) As to untrue representation, the Tokyo District Court found an untrue representation with respect to ‘important matters relating to necessity and appropriateness of installing a product’ in a case where a consumer had been solicited to buy an under-floor ventilation system and moisture removal agents by such sales talks as ‘your house is in danger of collapsing because of dampness under the floor’. (11) Osaka High Court found in a case where a consumer had P 108 bought a finger ring based on the solicitation that the list price (JPY 414,000) would be significantly discounted to JPY 290,000 which, in fact, was more than double the generally applied retail price (JPY 120,000 yen), that the ‘generally-applied retail price’ was an important matter and that there had been an untrue representation. (12)

3 Analysis of the Supreme Court Decision Some argue that the significance of this Supreme Court decision is limited as it led its conclusion based on the structure of relevant law provisions. (13) I, however, appreciate the decision, in that it clarified the scope of ‘important matters’ from the rather new viewpoint that ‘matters of uncertain future fluctuations’ are not ‘important matters’. (14) In other words, the decision can be regarded as clarifying its viewpoint towards the risk of financial transactions and investments under the Consumer Contract Act. In those terms, the decision did not necessarily follow the trend of broadly interpreting the element ‘important matters’ which have been reinforced by academic theories and lower court decisions. (15) Come to think of it, the relationship between the risk of financial transactions and the element ‘important matters’ has been a major issue of concern since the legislation of the Consumer Contract Act. Some have expressed their concern in such a way as ‘important matters may fail to cover ‘how much risk the transaction may pose to a consumer’ (but policymakers in those days seemed to regard such element as ‘quality’ of goods/services)’. (16) In those terms, it is understandable that the Sapporo High Court held that the element may be regarded as ‘quality’. However, the issue in the present case is the consumer's declaration of intent which was made when, after entering into the basic agreement, the timing of placing an order had been negotiated, which in fact is extremely relevant to the erroneous evaluation of the specific market risk at that time. In those terms, one could also say that the real issue of the present case is not about the obscure, high risk of a commodity futures investment, but about whether a consumer can in fact enforce a material private right of avoidance when he/she is not provided with information relating to the specific market risk. P 109

With respect to case law relating to the violation of a duty to explain risks, it is noteworthy that the appellate court in the Mycal Bond case found that a business operator has the duty to explain specific credit risks depending on the attributes of customers even if such operator does not have the duty to explain obscure, general credit risk, unless there are special circumstances. (17) It should not be overlooked, however, that the High Court also applied contributory negligence based on the attributes of customers. It may be that the Supreme Court in the present case decided that the scope of application should be reasonably limited in return for granting the effect of ‘avoidance’ which is equivalent to virtually zeroing contributory negligence. (18) In other words, the Supreme Court may have suggested that while abstract, general risks are regarded as ‘important matters,’ specific risks are not. (19) On remand, the very issue will be one of whether or not damages should be awarded for tort resulting from violation of the duty to explain risks. (20) On 18 March 2010, shortly before the decision in the present case, the first petty bench of the Supreme Court judged that an error under the Civil Code requires ‘a false recognition as to specific, material facts’ which affects the person's belief, and ‘existence of such false recognition at the time of the declaration of intent’. (21) According to that criteria, the Supreme Court decision in the present case can be regarded as having narrowed the scope of applying the requirements of untrue representation and non-disclosure of detrimental information under the Consumer Contract Act to further requiring, as in the

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case of an error under the Civil Code, false recognition as to specific, material facts at the time of the declaration of intent, but not a false recognition as to matters such as future uncertain fluctuations. Mihoko Sumida (1) P 109

References ★ )

1) 2) 3) 4) 5)

6) 7)

8) 9)

10) 11)

12) 13) 14) 15) 16)

17) 18) 19) 20)

21) 1)

Mihoko Sumida: Hitotsubashi University, Graduate School of Law, (Hitotsubashi University) Shōhisha keiyaku-hō, Law No. 61/2000. See Shōji Hanrei 1285, 53. See Shōji Hanrei 1285 (2008) 44. While at the same time denying the violation of a duty to explain risks and the provision of determinative opinion which could be the basis for avoiding the contract based on section 4(1) no. 1 or 2. Shohisha-chō Kikaku-ka [Policy Planning & International Affairs Division, Consumer Affairs Agency], Chikujō kaisetsu Shōhisha keiyaku-hō dai-ni-han [Article-by-article Exposition of the Consumer Contract Act, 2nd Edition], in: Shōji Hōmu (2010) 142; S. Ochiai, Shōhisha keiyaku-hō [Consumer Contract Act] (Tokyo 2000) 91; Y. Yamamoto, Shōhisha keiyaku-hō [Consumer Contract Act], in: Hōgaku Kyōshitsu 242 (2000) 89. Yamamoto argues that the limitation of scope which is not applied in the concept of fraud under the Civil Code was included to offset it with the non-requirement of willfulness or negligence for untrue representation. Shōhisha-chō Kikaku-ka (supra note 5) 146. H. Dōgauchi, Shōhisha keiyaku-hō to jōhō teikyō gimu [Consumer Contract Act and Duty to Provide Information], in: Jurisuto 1200 (2001) 52; Nihon Bengoshi Rengō-kai Shōhisha Mondai Taisaku I'in-kai [Consumer Affairs Committee of Japan Federation of Bar Associations], Komentaru Shōhisha keiyaku-hō dai-ni-han [Commentary of the Consumer Contract Act, 2nd edition] in: Shōji Hōmu (2010) 92. Shōhisha-chō Kikaku-ka (supra note 5) 144. K. Yamamoto, Shōhisha keiyaku-hō no igi to minpō no kadai [The Significance of the Consumer Contract Act and Issues of the Civil Code], in: Minshōhō Zasshi (2001) 513; S. Ikemoto, Fujitsu no kokuchi to dantei-teki handan no teikyō [Untrue Representation and Provision of Determinative Opinion], in: Hōgaku Seminā 549 (2000) 20. Tokyo District Court, 19 June 2009, in: Hanrei Jihō 2058, 69. Tokyo District Court, 10 March 2005, LLI06030993. Right of avoidance under Tokutei shō-torihiki-hō [Act on Specified Commercial Transactions], Law No. 57/1976, also provides ‘circumstances requiring execution of a contract’ in the form of nonexhaustive list (section 6 of the Act). That interpretation seems to have been applied to the Consumer Contract Act. Osaka High Court, 22 April 2004, in: Shōhisha Nyūsu 60 (2004) 156. S. Miyashita, Shōhisha keiyaku-hō 4-jo no ‘jūyō jikō’ no imi [The Meaning of ‘Important Matters’ in Section 4 CCA], in: Kokumin Seikatsu Kenkyū Vol. 50 No.1 (2010) 80. However, there is an argument against the appellate court decision. E. Kuronuma, Hihan [Criticism], in Kinyu Shōji Hanrei 1324, 7. The last point is seconded by M. Gotō, Hihan [Criticism], in TKC Sokuhō Hanrei Kaisetsu Minpō (Zaisan-ho) No. 41. Y. Shiomi, Shōhisha keiyaku-hō, kin'yū shōhin torihiki to kin'yū torihiki [Consumer Contract Act – Financial Product Transactions and Financial Transactions], in: Keizai Hōrei Kenkyū-kai (2001) 37. At the sixth meeting of the Consumer Contract Legislation Committee of the 17th Quality of Life Council (6 September 1999), a question from a committee member that if those provisions were to be construed as an exhaustive list, none of them would cover the risk of financial transactions, the Secretariat replied that ‘quality’ would cover. Osaka High Court, 20 November 2008, in: Hanrei Jihō 2041, 50. Seconded by Kuronuma (supra note 14) 144 etseq. Disapproved by Miyashita (supra note 13)87. Anonymous commentary in Hanrei Jihō 2075. It may require reconsideration in relation to ‘important matters’ that become subject to a duty of explanation under the Kin'yū shōhin hanbai-hō [Financial Instruments Sales Law], Law No. 101/2000. It is worth noting that the Tokyo High Court awarded a 30% contributory negligence, finding a sales representative's negligent of his duty to give advice and consultation in a case relating to gold futures trading during a similar time period to the present case, although the trading methods and attributes of customers are different from the present case. See Tokyo High Court, 24 March 2010, in: Hanrei Jihō 2081, 15. Saibansho Jihō 1504, 109. The decision may trigger a reconsideration of the theory of error in motivation in conventional theories. I. Matsumoto, Saiban jitsumu ni okeru sakugo-ron [Error Theory in Court Practice], in: Hanrei Taimuzu 1247, 61. Hitotsubashi University, Graduate School of Law, (Hitotsubashi University)

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Case No. 12: Civil Law – Contract Law – Consumer Credit – Documentation Requirements – Return of Unjust Enrichment

Document information

Publication

Business Law in Japan – Cases and Comments

Julius Weitzdörfer

Jurisdiction

Supreme Court, 13 July 2007, Case No. 2005 ju 1970, Hitomi Yamamoto v. Eiwa Co., Ltd.

(★ )

Source: Minshū 61-5, 1980 = Hanrei Jihō 1984, 26 = Hanrei Taimuzu 1252, 110

Japan

I Headnote(s)

Court

The documentation requirements of section 43(1) of the Lending Act are not satisfied if payment amounts stated in the contract or corresponding payment tables issued for the purpose of recording items prescribed in section 17(1) of the same act are inconsistent, and therefore unclear.

Case date

If a lender has received interest exceeding the amount allowable under section 1(1) of the Interest Rate Restriction Act and section 43(1) of the Lending Act is inapplicable, the lender shall be presumed a ‘beneficiary with knowledge’ as prescribed in section 704 of the Civil Code with regard to the receipt of such payments.

Supreme Court of Japan

13 July 2007

Case number

P 112

2005 ju 1970

II Relevant Provisions Sections 17(1), 18(1), 43(1) Lending Act (1)

Parties

Section 704 Civil Code

Claimant, Hitomi Yamamoto Defendant, Eiwa Co., Ltd.

Bibliographic reference

Section 1(1) Interest Rate Restriction Act (2)

III Facts Eiwa Co., Ltd. (the ‘Defendant’) was a mid-tier Japanese consumer finance company registered as a lender under section 3 Lending Act.

Julius Weitzdörfer, 'Case No. 12: Civil Law – Contract Law – Consumer Credit – Documentation Requirements – Return of Unjust Enrichment', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 111 121

Inter alia, Defendant loaned money to Mrs Hitomi Yamamoto (the ‘Plaintiff’) on 14 occasions under agreements for the repayment of both interest and principal in equal instalments at annual interest rates of 40.004% for the 1st through 5th loans, 39.785% for the 6th through 9th loans, and 28.981% for the 10th through 14th loans. These rates were all in excess of the maximum allowable interest rate under section 1(1) of the Interest Rate Restriction Act. At the time of each loan, Defendant issued a loan document entitled ‘Copy of Document Pursuant to section 16(3) of the Ordinance for Enforcement’ (3) which was a copy of the written acknowledgement of the debt. Each contract document contained an entry noting the fixed amount of principal and interest, as well as a statement that read, ‘In accordance with the list in the attached table of payments’ under a column named ‘Payment Amounts for each Instalment’. There were also provisions that stated that any excess or deficiency in payments would be settled at the time of the final payment. The amount of the final payment listed in the payment table, which Defendant asserted it had issued, and which it submitted as evidence, was different from the fixed amount listed as the amount for the payments of principal and interest. Defendant issued the Plaintiff payment tables at the times when the contracts for the 12th through 14th loans were entered into. Plaintiff paid the monies listed in the column headed ‘Payment Amount’ to Defendant on the each of the dates listed in the column P 113 named ‘Date’, as listed on a separate statement prepared by the lower court, as payments on each of the loan debts. Among the respective payments made, there were cases where the details stated in the documents entitled ‘Receipt and Confirmation of Balance’, that Defendant had issued to Plaintiff, were allegedly not satisfying the requirements prescribed in section 18(1) of the Lending Act. Defendant however, considered that those documents did satisfy the above requirements, and that section 43(1) of the Lending Act (4) was applicable. Furthermore, Plaintiff asserted that if the portions of the loan payments that were paid as interest in excess of the maximum allowable interest prescribed in section 1(1) of the Interest Rate Restriction Act were appropriated toward the principal, then excess payments (shown on Attachment 1 to the decision of the court at first instance) had arisen, and that Defendant had known that the receipt of the above excess payments lacked any legal foundation. Accordingly, Plaintiff filed suit against Defendant pursuant to a claim for the return of unjust enrichment, claiming not only the excess payments from Defendant, but also interest for the period from the time the excess payments arose until repayment in full, as prescribed in the first sentence of section 704 of the Civil Code. The lower court (Tokyo High Court, 27 July 2005, in: Kinyū Shōji Hanrei 1272, 24) ruled that yet the breakdown of the principal and interest were unknown for the loans where there were no payment tables, the amounts involved were clear; that the documentation for all

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the loans satisfied the requirements for ‘section 17 documents’, that the documentation for the 1st through 11th loans satisfied the requirements for ‘section 18 documents’ as well, and that it was established that the loans were deemed to be legal as the debtor, the Plaintiff, made voluntary payments at high interest. With respect to the criteria for knowledge under section 704 of the Civil Code, the lower court concurred with the decision of the court of first instance, interpreting the criteria as there being an awareness of an obligation to repay (Tokyo District Court, 5 August 2004, in: Kinyū Shōji Hanrei 1272, 27). The Supreme Court partially dismissed the Plaintiff's final appeal, partially reversed and remanded the case to the lower court for further proceedings.

IV Findings The Supreme Court ruled that the lower court's decision involved misinterpretations of laws that clearly affected the conclusion of the decision. Specifically, the Supreme Court found that the lower court erred both in finding that the requirements for documentation under section 17 of the Lending Act were satisfied (i), and in misunderstanding the meaning of ‘knowledge’ under section 704 of the Civil Code (ii): (i) P 114

(ii)

P 115

The purport of section 17(1) of the Lending Act, in prescribing an obligation for lenders to issue ‘section 17 documents’ at the time loan contracts are entered into, is by requiring the documentation of the details of the agreements pertaining to the loans, to ensure proper management of the lender's business and to prevent disputes arising between the parties to a loan later in connection with the details of the agreement pertaining to the loan. Therefore, when details of statements in the documents issued for the purpose of recording the items prescribed in section 17(1) of the Lending Act are inaccurate or unclear, we ought to conclude that the requirements for section 43(1) of the Lending Act to apply are not satisfied (cf. Supreme Court, 24 January 2006, Minshū 60-1, 319). (5) In applying the above to the case at hand, although ‘section 17 documents’ must state the ‘payment amounts’ for each instalment (section 17(1)(ix) of the Lending Act; section 13(1)(i)(h) of the Ordinance for Enforcement (6) ), according to the above facts, the contract documents stated ‘In accordance with the list in the attached table of payments’ in the column headed ‘Payment Amounts’ and the payment table was intended to form one document together with the contract documents in order to clarify the payment amount. Even if the amount of principal and interest to be paid in each instalment was listed in the column named ‘Payment Amounts for each Instalment’, the final payment amount often did not match that amount (…), so it cannot be said that the payment amount for each instalment was stated accurately in the list. In cash consumer loans with contracts for interest in excess of the maximum allowable interest prescribed in section 1(1) of the Interest Rate Restriction Act (hereinafter: ‘Allowable Interest’), the excess portion is invalid, and this principle also applies to lenders. However, lenders are allowed to receive the excess portion as valid payment for interest obligations in limited circumstances where section 43(1) of the Lending Act is applicable. Given this legislative purport, lenders should be well aware that, where section 43(1) does not apply, the excess portion must be appropriated toward the balance of the principal of the loan, if any, and the excess payments made after the balance has been paid off must be returned to the borrower as unjust enrichment. Consequently, if a lender has received excess interest as payment for interest obligations, and section 43(1) of the Lending Act is not applicable to that receipt, the lender shall be presumed to be a person who acquired excess payments knowing there were no legal grounds for doing so, that is, a ‘beneficiary with knowledge’ prescribed in section 704 of the Civil Code, in the absence of unavoidable special circumstances in relation to the lender's state of knowledge regarding the application of the same paragraph. Turning to the case before us, according to the above facts, Defendant, the lender, granted the loans to Plaintiff at agreed interest rates, which were in excess of the allowable interest, and received the payment monies for each of the instalments, including portions that constituted excess interest. Since we do not find that section 43(1) of the Lending Act applies, at least with respect to some of the loans, in the absence of the special circumstances described above, the correct conclusion is that Defendant is presumed to have been a beneficiary with knowledge with respect to the receipt of the excess payments.

Summarized translation by Toshiyuki Kono (7) (Transparency of Japanese Law Project)

V Comment 1 Usurious Lending in Japan and the Supreme Court Regulation on consumer credit (8) has been widely acknowledged as an issue of utmost social, economic and legal significance in present-day Japan: For decades, laxly supervised consumer credit companies and individual moneylenders – some members of criminal organizations – had been using a legal grey-zone as a loophole to charge

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usurious interest rates of up to 109.5% per year. Although lower interest caps were set out in the Interest Rate Restriction Act, these did not have a sufficient deterring effect, as imprisonment or fines were only provided for in cases where the interest rate exceeded P 116 40.004 or 109.5% p.a., respectively. (9) The financial success of such companies, (10) some of which grew bigger than ordinary banks, was accompanied by a sharp rise in overindebtedness among the Japanese population, as well as a soaring rate of debt-related suicides, (11) unparalleled in any other industrialized nation. In order to address the roots of these problems, Japanese courts and, subsequently, legislators have taken significant steps towards stricter rules intended to eradicate the grey-zone with new interest caps and to protect consumers by tightening regulation on non-bank moneylenders. (12) At heart of this was the judiciary's pursuit to indirectly and gradually narrow down the scope of application for grey-zone interest by means of a stricter construction of the documentation requirements for lenders. (13) Before the last revisions of the Lending Act, the Interest Rate Restriction Act and the Capital Subscription Act (14) finally came into force in 2010, the Supreme Court had been initiating this judicial change by a series of decisions since the mid-1980s and particularly since 2003. (15) Among these was the case at hand, which, even though dealing with rather minor legal details, helped to pave the way for a flood of litigation that allowed borrowers to reclaim hundreds of billions of yen in overpaid interest, eventually pushing many moneylenders to the brink of insolvency or completely out of business. (16) Accordingly, the judgment was one of the rather rare cases on civil law handed down by the Supreme Court to make it into the international press (17) and to be cited in dozens of other holdings nationwide alone within the subsequent three years. Before continuing to further assess the implications of the ruling from an economic perspective, it is necessary to clarify its legal background. P 117

2 Statutory Conditions for Reclaiming Excessive Interest in Light of the Judgment The statutory basis for this decision is slightly complex and needs to be expounded briefly. On the one hand, this is due to the fact that the relevant laws have undergone amendment recently and some provisions have been deleted or relocated. On the other hand, the ruling touches upon interwoven legal consequences stemming from a combined application of laws. Simply put, in order to reclaim overpaid monies (kabarai-kin) in a case like the one at hand, a borrower needs to prove the following: (18) (a)

(b)

It is obviously necessary, yet insufficient, that the maximum allowable interest rates were exceeded: Under section 1(1) of the Interest Rate Restriction Act, these are 15, 18 or 20% p.a., depending on the amount of the principal, which were undisputedly exceeded in the case at hand. Even if the exceeding portions of the interests (seigen chōka bubun) are consequently void by law, this did by far not mean that the lender had to reimburse the borrower: According to the former sections 43(1)(i) and (ii) of the Lending Act, lenders were, by way of exception, allowed to keep overpaid interest if it was paid ‘voluntarily’ (nin'i ni) by the borrower; it was thus deemed to be legal (this was generally referred to as ‘minashi bensai’). (19) However, due to the judiciary's understandable strong scepticism toward such a clause, inserted by a liberal legislator, courts construed it very narrowly: (20) Requirements could only be presumed to be met if the lender was correctly registered, the borrower paid the money ‘as interest’, ‘with active intent’ and had been issued proper documents (shomen no kōfu) about these payments. (21) This is where documentation requirements come into play in our case and the reason why compliance with them was so crucial to lenders. (22)

P 118

(c)

Besides special information to be disclosed in advertisements and at the place of business, set out in sections 14–16 of the Lending Act, documents to be delivered are set forth, inter alia, in section 17 (1) of the same law, which states: A Money Lender shall, when he/she has concluded a loan contract (…), pursuant to the provisions of a Cabinet Office Ordinance, deliver a document that discloses the details of the contract and that states the following matters to the counterparty thereto without delay. (…) (iv) The loan interest rate; (v) The method of repayment; (vi)The repayment period and number of repayment instalments; (…) (23) These provisions on documents to be supplied initially upon conclusion of the contract are substantiated by section 16 of the corresponding Ordinance and complemented by section 18(1) of the Lending Law, (24) which sets forth what is to be handed out when the borrower makes payments: A Money Lender shall, upon receiving performance of all or part of his/her claim under a Contract for a Loan, deliver to the person who has

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made performance a document containing the following matters immediately after each instance in which he/she has received performance, (…) (iv) The amount received and amounts appropriated for repayment of the interest, the agreed liquidated damages, or the principal (…). In the case at hand, where the construction of these provisions was the first issue, the court continued to follow the strict course of previous rulings. Although pursuant to the wording of the statute, clarity or accuracy is not explicitly required, in countless precedents, where just a single item listed in sections 17 and 18 was missing (25) in the documents, or where they ‘contained mistakes (26) or omissions, however slight, the courts refused to apply section 43’. (27) This went as far as departing from the statute's literal wording by requesting receipts to be issued even when the borrower uses an ATM to pay an instalment, (28) while pursuant to section 18(2) this is obligatory only upon request of the borrower; or denying compliance with section 17(1) Item (iv) in a case where interest was correctly calculated, yet given per diem instead of per annum. (29) Accordingly, clarity of the documents became a key feature. (30) P 119

(d)

In the present case, in which documentation consisted of the lending contract (shakuyō shoshō) and a separate payment table (besshi shōkan-hyō), the Supreme Court further extended its restrictive construction of the statute to situations where details on the sum (hensai kingaku) of the principal and interest payable (genri-kin) were inconsistent. The only rationale given, explained by the court in a single sentence, was the provision's purport to ensure legal certainty about the borrowing arrangements between the parties and thereby avoiding disputes. However, when looking at similar precedents on issues of clarity, it becomes evident that deeper concerns not unlikely lay behind the judiciary's stance: Particularly, although the Supreme Court was not always as restrictive as lower courts, (31) high courts had stressed that they see section 43 of the former Lending Act as a ‘special privilege’ (32) for the lenders ‘to charge otherwise invalid interest rates’. (33) Also, there had been a notion that the lender had a ‘superior position’ with regards to the phrasing of the documentation. (34) Thus, by bearing in mind broader considerations of justice, courts had often taken a purposive approach rather than following textualism on questions of clarity. (35) Without ambiguity, the Nagoya High Court had ruled as early as 1996 that ‘the contract documents must be sufficiently comprehensive, clear and concrete to allow the borrower to correctly understand the nature of the debt and be able to reference the documentation in formulating a payment plan’. (36) Some courts even ruled that documentation has to be on single sheet. (37) Therefore, in retrospect, the outcome of the case at hand cannot be called a surprise. Finally, it is to be decided upon what exactly the lender is obliged to return. Under Japanese law, as in Germany and other jurisdictions, the beneficiary's (jueki-sha) duty to repay unjust enrichment with or without interest for the time of enrichment depends on the question whether he acted in good faith (zen'i). (38) In this respect, the first sentence of section 704 of the Civil Code sets forth: A beneficiary in bad faith must return the benefit received together with interest thereon.

P 120

As it is insufficient to describe ‘bad faith’ (aku'i) simply with the term ‘knowledge’, the scope of this term was to be assessed in the particular circumstances of this case, which was the second issue: By linking the failure to comply with the documentation requirements to the voidance of an agreement on excess interest, the court implied that even when the lender thinks the requirements of documentation were fulfilled, he can be in bad faith regarding the enrichment. (39) Though the court did not mention it explicitly, behind this reasoning probably lies the notion of the majority opinion in Japan that ‘negligently being unaware of a reason for unjust enrichment’, unless there are special circumstances (tokudan no jijō), is sufficient for presuming ‘bad faith’ under section 704. (40) As a consequence, in cases of insufficient documentation, lenders are obliged to pay 5% of annual interest (hōtei riritsu, section 404 Civil Code) in addition to repaying the borrower's overpaid interest. (41)

3 Brief Outlook on Economic Implications of the Judgment Certainly, one might contest the court's ruling on different grounds; e.g. the lack of a detailed reasoning. (42) However, as a key provision to both of the case's issues, section 43(1) of the former Lending Act, has not only lost significance due to the Supreme Court's decisions but is not in force anymore since June 2010, such endeavours would have only limited relevance for the future. (43) Instead, let us turn to the economic impact of the ruling, which also became a subject of debate. In particular, it was disputed whether the lenders' obligation to pay 5% of annual interest pursuant to section 704 of the Civil Code, on top of reimbursing the actual

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overpaid sums, would significantly increase the financial burden on the already struggling consumer credit companies. Faced with thousands of claims ahead, they had had to set aside tens or even hundreds of billions of yen (44) and assessing the possible costs became vital for the industry and intriguing for the markets, even more so because a number of major Japanese and foreign banks were shareholders of the once so profitable Japanese consumer credit companies. (45) While some commentators projected a substantial increase of losses, (46) other analysts maintained that the bulk of P 121 reimbursements would rather be attributable to previous rulings that had already effectively eradicated the grey zone interest margin. (47) However, bearing in mind the JPY 380,000 which were to be repaid in this case, a simple calculation demonstrates that after a fictional time of 10 years, (48) 5% of annual interest can increase the amounts by half. This weighs even heavier when bearing in mind that the fixed interest rate of 5% is significantly higher than the traditionally low interest rates offered by banks in Japan. (49) The actual impact of the judgment will be difficult to determine, since most of the claims are being settled out of court and it is impossible to tell whether borrowers will actually insist on the extra 5%, as one analyst at Merrill Lynch has pointed out. (50) Doubtlessly, however, it was the combination of the consequences of the Supreme Court's rulings that proved to be devastating to the consumer credit industry even before the amendments came into force. Takefuji Co., Ltd., once Japan's market-leading consumer finance institution, filed for bankruptcy last year. All this has led to ongoing discussions on the threat of an increase in black-market lending or possibly worse, a regulation-induced consumer credit crunch further worsening Japan's stalling economy. Already, in an effort to provide means of financial relief to victims of the 2011 East-Japan earthquake and tsunami, some lending restrictions were eased by the Financial Services Agency in the last amendment to the Ordinance. (51) It is very likely that the legislative bodies will further amend details of the statutes on consumer credit in the near future. (52) And the judiciary will follow – if not lead – this process closely. Julius Weitzdörfer (1) P 121

References ★ )

1)

2) 3)

4) 5) 6)

7)

Julius Weitzdärfer: Max Planck Institute, (Bucerius Law School) Kashikin-gyō no kisei-tō ni kansuru hōritsu, [Act on Controls on Money-Lending], hereinafter: Lending Act, Law No. 32/1983; this is the former name of the revised law now called Kashikin gyōhō (Money Lending Business Act) as amended by Law No. 74/2008; an English translation is available at (all online resources last retrieved on 15 October, 2011); a partial German translation can be found in C. Rapp, Überschuldungs-problematik und Verbraucherkreditrechtssystem in Japan [The Problem of Excessive Indebtedness and the Consumer Credit System in Japan] (Bonn 1996) 138–145 (as of 1994). Despite the revision and the renaming, which has taken effect in December 2007, the provisions governing registration can still be found in section 3. Risoku seigen-hō, Law No. 100/1954; an English translation is available at (as of 1999); a German translation can be found in Rapp (supra note 1) 136 (as of 1994). Kashikin-gyō no kisei-tō ni kansuru hōritsu shikkō kisoku, Cabinet Ordinance No. 40/1983; now renamed Kashikin gyōhō shikkō kisoku as amended by Cabinet Ordinance No. 35/2011. Section 16(3) refers to documents listed in section 17 of the Lending Act. Since the former section 43 of the Lending Act has been abolished, the provision will be explained below. A translated version by the Transparency of Japanese Law Project is available at . Items (i) and (h) of section 13(1) of this former ordinance are still listed in the same place in the present ordinance, although they – as most of the items listed in this section – have been substantiated by additional explanations in the meantime. Item (ix) of section 17(1) of the Lending Act is now Item (viii). The Author and the Editors wish to thank Prof. Kono (Kyūshū University) for his kind permission to reproduce this version of his translation for the Transparency of Japanese Law Project, available at: ; slight alterations, headnotes, footnotes, introductory information, ordinal numbers and italics were added by the author and the editor. For a summarized German translation of this case, see D. Tidten, Überblick über wichtige zivilrechtliche Entscheidungen des japanischen Obersten Gerichtshofs aus dem Jahr 2007 [Overview on important civil law judgments of the Japanese Supreme Court in 2007], in: Journal of Japanese Law 29 (2010) 259 et seq.

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8)

9) 10)

11) 12) 13) 14)

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16) 17) 18)

19)

20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34)

For a comprehensive overview of the three special laws regulating consumer credit, cf. e.g. Nihon bengo-shi rengō-kai [Japan Federation of Bar Associations] (ed.), Q&A kaisei kashikin gyōhō, shusshi-hō, risoku seigen-hō kaisetsu [Q&A Commentary on the amended Money Lending Act, Capital Subscription Act, Interest Rate Restriction Act] (Tokyo 2008); A. Mori'izumi (ed.), Shin-kashikin kisei-hō [The new laws regulating lending] (Tokyo 2006); probably the most comprehensive descriptions among the English language publications are A. Pardieck, Japan and the moneylenders – Activist courts and substantive Justice, in: Pacific Rim Law & Policy Journal 17 (2008) 529–594; and S. Kozuka / L. Nottage, Re-regulating unsecured Consumer Credit in Japan: Over-indebted Borrowers, the Supreme Court and New Legislation, in: Parry / Nordhausen / Howells / Twigg-Flesner (eds.), The yearbook of consumer law 2009 (Farnham 2009) 197-229; for German scholarship on the laws, though on the situation prior to the amendments, cf. M. Dernauer, Verbraucherschutz und Vertragsfreiheit im japanischen Recht [Freedom of contract and consumer protection in Japanese law] (Tübingen 2006) 288–301. Sections 5(1), (2) of the Capital Subscription Act. For a general overview of the market, cf. e.g. K. Hiraki, Saikin kurejitto/rōn gyōkai no dōkōto karakuri ga yoku wakaru hon [Understanding recent trends and mechanisms of the credit industry] (Tokyo 2008) 148–176; and Kozuka / Nottage (supra note 8) 205–213. For details, see M. West, Law in everyday Japan: sex, sumo, suicide and statutes (Chicago 2005) 191–214. The first in-depth English analysis of these shifts was published in 2007 by Kozuka / Nottage (supra note 8). Some of these rulings are commented on in Pardieck (supra note 8) 553–560, 565– 568. Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates (Capital Subscription Act), Shusshi no ukeire, azukarikin oyobi kinri-tōno torishimari ni kansuru hōritsu, Shusshi-hō) Law No. 195/1954; an English translation is available at ; a partial German translation can be found in Rapp (supra note 1) 137 (as of 1994). For a summary of the earlier decisions, see e.g. S. Ono, Kashikin-gyōni matsuwaru saikin no saikō-sai hanrei no hōri [Legal theory of the Supreme Court's recent decisions concerning the money-lending business], in: Jūrisuto 1319 (2006) 26; or generally S. Kozuka, Judicial Activism of the Japanese Supreme Court in consumer law: Juridification of society through Case Law?, in: Journal of Japanese Law 27 (2009) 87; and particularly Kozuka / Nottage (supra note 8) 200, 222 et seq. For further reading on the impact on the industry, see ibid., 201. See, e.g., M. Nakamoto, Blow for Japan's consumer finance sector, in: The Financial Times, 15 July 2007, available at . Details of material and procedural issues of such claims are described in countless guidebooks on the matter; cf. e.g. Nagoya Shōhi-sha Shinyō Mondai Kenkyū-kai (ed.), Kabarai-kin henkan seikyū no tebiki – sarakin kara no kan'i, jinsoku na kaishū wo mezashite [The Handbook on reclaiming overpaid money – Pursuing quick and easy reimbursement from loan sharks] (Tokyo 2010). More specifically, this provision was regarded as one of the few examples of a socalled shizen saimu, a natural obligation that binds the debtor, yet cannot be enforced by the creditor. For details, see T. Ueyanagi / Y. Ōmori (eds.), Chikujō kaisetsu Kashikin gyōhō [Commentary on the Lending Act] (Tokyo 2008) 20, 36, 91, 98. Pardieck (supra note 8) 554. Cf. e.g. Kōmatsu Summary Court, 27 September 1985, in: Minsai Shiryō 168, 51; Kyoto District Court, 19 August 1988, in: Hanrei Jihō 1318 (1989) 106; Tokyo District Court, 11 October 1991, in: Kin'yū Hōmu Jijō 1327 (1991) 33. Moreover, violation of duties of disclosure could lead to a temporary suspension or even withdrawal of the lender's registration pursuant to sections 36, 37 of the former Lending Act. Translations of laws are taken from the sources given in their respective footnotes. See generally Ueyanagi / Ōmori (supra note 19) 88–103. Cf. Sapporo Summary Court, 29 November 1985, in: Minsai Shiryō 168, 58; Kyoto District Court, 19 August 1988, in: Hanrei Jihō 1318 (1989) 106–109; Tokyo District Court, 1 January 1998, in: Kin'yū Shōji Hanrei 1052 (1998) 52. Cf. e.g. Akita District Court, 14 March 1988, in: Hanrei Jihō 1250 (1988) 73. Pardieck (supra note 8) 555. See Pardieck (supra note 8) 556 for several case citations. Kyoto District Court, 19 August 1988, in: Hanrei Jihō 1318 (1989) 106–109. For one of the first cases, see Tokyo District Court, 3 October 1986, in: Hanrei Jihō 1250 (1986) 70. Cf. Pardieck (supra note 8) 557 et seq. Cf. e.g. Osaka High Court, 14 March 1989, in: Hanrei Taimuzu 705 (1989) 176. Pardieck (supra note 8) 556. Osaka High Court, 14 March 1989, in: Hanrei Taimuzu 705 (1989) 176.

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35) However, as regards other questions, such as the ‘immediate’ delivery of receipts, or

36) 37) 38) 39)

40) 41) 42) 43) 44) 45)

46) 47) 48) 49)

50) 51) 52)

1)

documentation requirements for ‘revolving credit’, textualism seems to have been appropriate for the Supreme Court's restrictive interpretation of the requirements; for several case examples, see Kozuka / Nottage (supra note 8) 222. Nagoya High Court, 23 October 1996, in: Hanrei Jihō 1600 (1997) 106; translation by Pardieck (supra note 8) 558. See ibid., 559 for a concurring and a dissenting example. Cf. sections 703 and 704 of the Civil Code and sections 812, 818 BGB. For a detailed description of the question of lenders' bad faith concerning unjust enrichment, see recently M. Chihara / Y. Chihara, Risoku seigen-hō sendatsu kokufuku no jitsumu [The practice of fighting the evasion of the Interest Limitation Act] 576–596. Cf. e.g. H. Marutschke, Einführung in das japanische Recht [Introduction to Japanese Law] (Munich 2010) 164. For details, see S. Ono, Risoku seigen no riron [The theory of interest limitation] (Tokyo 2010) 487–489. For detailed case notes, cf. e.g. K. Hirata, Jurisuto1354 (2008) 87 et seq.; K. Ishiguro, Bessatsu Hanrei Taimuzu 22 (2007), 80 et seq. For a detailed analysis of the case-law after the amendments, see Ono (supra note 41) 299–338. Nakamoto (supra note 17). Sumitomo Mitsui Financial Group, one of Japan's three largest banking groups, for example, had mainly attributed its severe drop in profit to losses of 88 billion yen from its consumer lending affiliate, Promise, already in 2006, K. Takahara, SMFG reports 35.7% drop in net profit, in: The Japan Times, 22 May 2007, available at . Cf. ‘Consumer lenders ordered to pay interest on refunds’, The Japan Times, 14 July 2007, available at . Cf. Nakamoto (supra note 17). Naturally, limitation of actions has to be kept in mind; see Ono (supra note 41) 304 et seq. for Supreme Court rulings. Accordingly, there has been debate on lowering the 5% fixed interest rate by a revision of the Civil Code, cf. ‘Legal 5% interest rate may be cut’, The Japan Times, 16 July 2007; and Kozuka / Nottage, (supra note 8) 223; so far, however, this has not been done. ‘Consumer lenders ordered to pay interest on refunds’, The Japan Times, 14 July 2007, available at . Supra note 3; a summary of these amendments is available from the Financial Services Agency (Kin'yū-chō) at . A special provision for a revision of the statutes (minaoshi kitei) within 30 months of entry into force has been included in section 67 of the Lending Act; for recent discussions on this cf. e.g. M. Sumida, Kaisei kashikin gyōhō no kanzen shikō o meguru ronten [Issues involving the complete entry into force of the revised Moneylening Act], in: Jurisuto 1404 (2010) 2–6; or L. Nottage / S. Kozuka, Lessons from product safety regulation for reforming consumer credit markets in Japan and beyond: Empirically-informed normativism, Sydney Law School Legal Studies Research Paper 11/39 (2011), available at . Max Planck Institute, (Bucerius Law School).

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Case No. 13: Civil Law – State Compensation Law – State Liability – Extinctive Prescription

Document information

Publication

John O. Haley

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 27 April 2004, Case No. 2001 ju 1760, Japan v. Yamamoto Source: Minshū 58-4, 1032 = Saibansho Jihō 1362, 9 = Hanrei Jihō 1860, 34 = Hanrei Taimuzu 1152, 120

Jurisdiction Japan

I Headnote(s)

Court

The State is liable for damages as a result of the failure of the Minister of International Trade and Industry to exercise the authority to implement safety regulations including the authority to amend ministerial ordinances under the Mine Safety Law immediately after the enactment of the Pneumoconiosis Law (Jinhai-hō), Law No. 30, 1960.

Case date

The period of extinctive prescription set forth in the second part of section 724 of the Civil Code shall commence from the time when all or a part of damage has arisen from a delict (fuhō kōi), if the damage, due to its nature, arises after a considerable period of time has passed since the termination of the act of causing the damage.

Supreme Court of Japan

27 April 2004

P 124

Case number

II Relevant Provisions

2001 ju 1760

Section 1(1) of the State Compensation Law (Kokka baishō-hō), Law No. 125, 1947) provides:

Parties

When a governmental official who is in a position to exercise the public authority of the State or of a public body has, in the course of performing his duties, illegally (ihō ni) caused damage to another person either intentionally or negligently, the State or the public body concerned shall be liable to compensate such damage.

Claimant, Japan Defendant, Yamamoto

Bibliographic reference

Section 724 of the Civil Code (Minpō) provides: The right to demand compensation for the damage which has arisen from a delict (fuhō kōi) shall lapse by prescription if not exercised within three years from the time when the injured party or his legal representative became aware of such damage and of the identity of the person who caused it, and the same shall apply if twenty years have elapsed from the time when the unlawful act was committed.

John O. Haley, 'Case No. 13: Civil Law – State Compensation Law – State Liability – Extinctive Prescription', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 123 133

Sections 1 and 4 of the Mine Safety Law; Section 30 of the Mine Safety Law prior to amendment by Law No. 105 of 1962; Section 2, paragraph 1 sub-paragraph 1 of the Pneumoconiosis Law prior to amendment by Law No. 76 of 1977; Section 284-2 of the Safety Regulations on Coal Mines prior to amendment by Ministry of International Trade and Industry Ordinance No. 74 of 1986.

III Facts (1) … Pneumoconiosis is caused by dust that is inhaled into the lung cells and that develops fibrotic changes in lymph glands and alveoli over a long period of time, thereby causing pneumoconiosis nodules or blocked small blood vessels, and the clinical picture of pneumoconiosis is characterized by the progression of the disease such as a fusion of enlarged pneumoconiosis nodules even after the end of exposure to dust (progressiveness) and the unavailability of methods to cure fibrotic changes or emphysematous changes completely (irreversibility). Pneumoconiosis is often with a delayed onset, taking time to cause symptoms, at the shortest two or three years, generally five to ten years or more, or at the longest 30 years or more, after the start of the exposure to dust, and it is often the case that symptoms appear after a considerable period of time has passed since the end of the exposure to dust. Diseased persons notice symptoms such as coughing, sputum, shortage of breath, and dyspnea, and if these symptoms become worsen exceedingly, diseased persons would suffer prostration due to respiratory failure or cardiopulmonary function disorder, and might suffer complications such as pulmonary tuberculosis complicated by pneumoconiosis and finally result in death…. P 125

(2) (a)

The Pneumoconiosis Law promulgated on 31 March 1960, aims at contributing to the maintenance of workers' health, etc. by proper preventive means, supervision of

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(b)

health, and any other necessary measures against pneumoconiosis (section 1), obliges the employer to take proper measures for preventing pneumoconiosis (section 5), prescribes the classifications for supervision of health (No. I to IV) to be required for workers engaged in dusty work based on the result of a medical examination on pneumoconiosis, and requires the employer to decide what work should be assigned to each worker by giving consideration to the classifications to which each worker belongs (section 4 and sections 21 to 23). The Pneumoconiosis Law was under the jurisdiction of the Ministry of Labor, as the ‘Special Law for Protection of Persons who Suffer Silicosis or Damage on the Spinal Cord by External Injury’ (Law No. 91 of 1955, abolished by Law No. 29 of 1960; hereinafter referred to as ‘Special Law on Silicosis’), which was abolished along with the enactment of the Pneumoconiosis Law. The Mine Safety Law promulgated on 16 May 1949, aims at preventing harm to coal workers, etc. (section 1) and requires the mining right owner to take necessary measures to prevent harm or mine pollution, which arise from the treatment of dust, etc. (section 4, sub-paragraph 2). According to the delegation under section 30 of the said law, regulations such as the Safety Regulations on Metal Mines, Etc. (Ministry of International Trade and Industry (MITI) Ordinance No. 33 of 1949) and the Safety Regulations on Coal Mines (MITI Ordinance No. 34 of 1949) provide for specific safety measures to be taken by the mining right owner pursuant to section 4 of the said law. The Safety Regulations on Metal Mines, Etc. provide for safety measures for mining for the purpose of mining mineral resources other than coal, lignite, and petroleum, or in other words, mining in metal mines, etc., and the Safety Regulations on Coal Mines provide for safety measures for coal mining and lignite mining. The Mine Safety Law and these Safety Regulations are legal grounds for the regulation of dust prevention measures to be taken by the mining right owner to prevent mine workers from contracting pneumoconiosis.

(3) Outline of the Japanese government's coal policy in the postwar period before 1965 or thereabouts: During the war, many coal mines in Japan were devastated by forced production of coal due to shortages of resources. Based on the recognition that the increase in coal production was the most important task for Japan's postwar economic recovery, the government, under the cabinet decision to adopt the emergency coal production policy in October 1945, vigorously promoted a policy for increasing coal production by what is known as the prioritized production system. According to the Mine Safety Law enacted in May 1949, mine safety administration was placed under the jurisdiction of the Ministry of International Trade and Industry (former Ministry of Commerce and Industry) as mentioned in (2)(b) above, which was out of consideration of the need to increase coal production. Subsequently, due to the increase in import of fuel oil and other energy resources, a great depression occurred in coal industry in 1953 and 1954. To respond to this, the P 126 government decided to rationalize coal production by concentrating production in high-efficiency mines while supporting the closure of low-efficiency mines. The Coal Mining Industry Rationalization Temporary Measures Law was enacted in July 1955, and in light of the necessity for thorough rationalization of coal production to compete with fuel oil, the government gave specific instructions on rationalization to companies under the law. In 1963, implementation of the first coal policy was started with the aim of rationalizing the coalmining industry by ‘taking a wide range of measures while recognizing that coal would not countervail against fuel oil and giving consideration to avoiding social conflicts that would be caused by the collapse of the coal mining industry’. The government formulated several coal policies afterward. Thus, the government vigorously promoted increasing coal production as one of the postwar national policies, and also had a strong influence on matters concerning the management of coal industry after the policy changeover to rationalization. (4) Advances in medical knowledge on pneumoconiosis in the postwar period until 1964: (a)

Until the beginning of the Showa era (1926), among occupational diseases affecting mine workers that were caused by inhalation of dust, only silicosis in metal mines was seen as a problem. Silicosis is a chronic disease consisting of fibrotic changes in the lungs due to the inhalation over a long period of time of dust that contains a large amount of free silicic acid in metal mines, and it was already well known at that time that diseased persons would suffer symptoms such as dyspnea and pulmonary emphysema and might suffer cardiopulmonary function disorder or pulmonary tuberculosis complicated with this disease and finally result in death. On the other hand, pneumoconiosis, which coal miners contracted in coal mines, was often called ‘coal miner's lung disease,’ and it was regarded as causing not so many symptoms, most of which were regarded as not very serious. Therefore, pneumoconiosis was not seriously recognized among the public as a severe occupational disease, and some people even claimed that coal dust was effective in preventing silicosis and pulmonary tuberculosis. Subsequently, by around 1935, the existence of silicosis sufferers in coal mines was pointed out and workshops were held to underline the necessity of dust prevention measures. However, as Japan was soon put on a war footing, no major progress was made in medical

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(b)

P 127

(c)

(d)

(e)

knowledge on pneumoconiosis. After the war, a movement was launched, mainly in metal mines, for the establishment of a special law on silicosis, with the aim of eradicating silicosis. The Metal Mines Reconstruction Conference consisting of mine operators submitted a proposal to the Speakers of the House of Representatives and the House of Councilors on measures to prevent silicosis, thus advancing the movement. The Ministry of Labor presented a silicosis bill to the Silicosis Council in 1950 and Diet members submitted another silicosis bill to the Diet in 1953, but neither bill was enacted. The first special law on silicosis was finally established as the Special Law on Silicosis, which was promulgated on 29 July 1955. Section 2, paragraph 1, subparagraph 1 of the Special Law on Silicosis defined silicosis as ‘a disease consisting of fibrotic changes in the lungs due to inhalation of free silicic acid or dust that contains free silicic dust, and pulmonary tuberculosis complicated with it’. As obviously shown by this definition, this law was applicable to silicosis caused by inhalation of dust that contained free silicic acid, and was intended to prevent the progression of this disease (section 1). In October 1948, the Ministry of Labor conducted, as a national administrative organization, the first nationwide medical examination on silicosis, which revealed the fact that there were also a number of silicosis sufferers in coal mines. The Ministry of Labor also conducted, from September 1955 to March 1957, the medical examination on silicosis that was of the largest scale at home and abroad, targeting 12,981 business facilities and their 339,450 workers, of which 144,247 were coal workers. As a result of this medical examination, by around 1959, it became obvious that 38,738 workers were diagnosed as having silicosis, and among them, 11,747 were coal workers (about 30% of all workers so diagnosed). As for medical knowledge on the pneumoconiosis suffered by coal workers, it was pointed out in a number of theses published in medical journals since about 1955, that the condition of pneumoconiosis in coal mines could not be disregarded based on the results of surveys on coal workers suffering pneumoconiosis, and that there was no difference in dusts in terms of harmful effect and all kinds of dust had harmful effects if they were inhaled over a long period of time. Furthermore, an experiment conducted on animals revealed that serious nodules due to fibrotic changes were found in the lungs of rats that inhaled coal dust over a long period of time. Thus, it became increasingly obvious medical knowledge that inhalation of coal dust over a long period of time would lead to contraction of pneumoconiosis. The Minister of Labor, in June 1958, consulted with the Silicosis Council about the necessity of amendment of the Special Law on Silicosis, and the Council established a medical working group in charge of discussing this issue from a medical professional perspective. In September 1959, the medical working group announced the ‘Opinion on the Medical Problems Concerning Pneumoconiosis,’ stating the following: ‘as a result of the recent autopsies, various kinds of pneumoconiosis have been identified such as pneumoconiosis due asbestos, pyrophyllite, aluminum, and diatomite, and any of these kinds of pneumoconiosis would cause cardiopulmonary function disorder if it became serious; therefore, it is necessary to prevent harm due to all kinds of dust and monitor those workers' health’. This opinion affirmed, in light of the medical knowledge on pneumoconiosis at that time, the possibility and risk of suffering pneumoconiosis due to inhalation of any kinds of dust including coal dust, and pointed out the seriousness of health hazards in the case where pneumoconiosis became worse. It also stated the necessity of preventing not only damage due to dust that contained free silicic acid, the cause of silicosis, but also damage due to all kinds of dust, and monitoring those workers' health.

P 128

(f)

As the actual situations regarding coal workers suffering pneumoconiosis became obvious and the medical working group announced the above opinion, as discussed above, the need to fundamentally review the conventional measures concerning pneumoconiosis, which were only applicable to silicosis, was recognized. According to the report compiled by the Silicosis Council based on the above opinion of the medical working group, the government submitted a pneumoconiosis bill to the Diet in December 1959. Through deliberations at the Diet, the bill was passed and promulgated on 31 March and was enforced on 1 April 1960.

The initial Pneumoconiosis Law defined pneumoconiosis as ‘pneumoconiosis caused by inhalation of mineral dust and pulmonary tuberculosis complicated by pneumoconiosis’ (section 2, paragraph 1, sub-paragraph 1). This law thus broadly defined pneumoconiosis, including not only silicosis due to inhalation of dust that contained free silicic acid but also other kinds of pneumoconiosis due to inhalation of mineral dust such as coal dust, so that the law would also be applicable to such a broad scope of pneumoconiosis. Upon the adoption of the Pneumoconiosis Law, the Committee on Social and Labor Affairs of the House of Councilors adopted an additional resolution that stated that, ‘for the enforcement of the Pneumoconiosis Law, the government should place primary emphasis on preventive measures and give appropriate guidance on labor and health affairs in general’. (5) When the pneumoconiosis bill was submitted to the Diet in 1959, the regulations for

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dust prevention provided by the Safety Regulations on Coal Mines under the delegation under section 30 of the Mine Safety Law were as below: With regard to dust prevention in coal mining and lignite mining, the Regulations only provided general safety regulations as follows: ‘At worksites in mining pits where rocks are mined, conveyed, and broken, if a large amount of dust would be scattered due to such mining, conveying, and breaking of rocks, appropriate measures shall be taken to prevent the scattering of dust, by, for example, installing dust prevention apparatus and spraying water on rooks, unless anti-dust masks that satisfy the standards separately notified are used’ (section 284 of the Safety Regulations on Coal Mines before amendment by MITI Ordinance No. 115 of 1979). On the other hand, tightened regulations were applicable to ‘silicic acid areas,’ areas designated by the Minister of International Trade and Industry as areas that have a large quantity of free silicic acid contained in bedrock at the mining site, and it was provided that in such areas, water must be sprayed on and around such bedrock before drilling and percussive rock drills to be used in a silicic acid area must be wet-type drills (section 284-2 of the Safety Regulations on Coal Mines before amendment by MITI Ordinance No. 74 of 1986). These tightened safety regulations only applicable to silicic acid areas where a large quantity of free silicic acid was contained in bedrock at the mining site had been introduced upon the amendment of the Safety Regulations on Coal Mines in August 1950. Similar regulations were also introduced to the Safety Regulations on Metal Mines, Etc. at Metal Mines, Etc. in September 1952, the tightened regulations requiring spraying of water before drilling and the use of wet-type rock percussive rock drills were regarded as general safety regulations that should be applicable to all worksites in metal mining pits, and thus the designation of silicic acid areas was abolished under the amended Safety Regulations on Metal Mines, Etc. On the other hand, the designation of silicic acid areas was maintained in coal mines even after the amendment of the Safety Regulations on Metal Mines, Etc., and subsequently, even after the results of the medical examination targeting coal workers and the opinion of the medical working group were published and then the Pneumoconiosis Law was established based on the report by the Silicosis Council in March 1960, the designation of silicic acid areas continued to exist and tightened regulations were not applicable to areas other than the designated areas. The regulations requiring spraying of water before drilling and the use of wet-type rock percussive rock drills were not adopted as general safety regulations until November 1986.

P 129 the same time. However, upon the amendment of the Safety Regulations on

(6) Dust prevention measures to be taken to prevent pneumoconiosis include preventing the generation, scattering, and inhalation of dust, and in particular, preventing the generation of dust was regarded as key measure. By 1955, it became obvious engineering knowledge that it would be possible to prevent the generation of dust, the cause of pneumoconiosis, very successfully by using wet-type rock drills. Also by that time, light handheld wet-type rock drills were put into practical use, and by 1960 at the latest, there were no special obstacles to the use of wet-type rock drills in all coal mines. In metal mines, after the amendment of the Safety Regulations on Metal Mines, Etc. in September 1952, rapid progress was made in the laying of water distribution pipes and the use of wet-type rock drills: the rate of use of wet-type rock drills came to 99.7% by 1954, and water distribution pipes were laid in all metal mines by 1958. On the other hand, according to the survey on coral mines conducted in 1961, in the Kyushu area, the rate of use of wet-type rock drills was only 18.7% in large coal mines and 5.9% in medium and small coal mines, falling significantly behind the rate in metal mines. Among others, in mining pits other than those designated as silicic acid areas (the former referred to as ‘non-designated pits’ and the latter referred to as ‘designated pits’), wet-type percussive rock drills were not widely used, and the number of non-designated pits where water was sprayed on rocks only accounted for about one-third of the number of such sites in designated pits. Thus, the rate of use of wet-type rock drills and the rate of implementation of water spraying were exceedingly low in non-designated pits. In the Kyushu area, mining pits that had been designated by 1960 only accounted for 3.6% of all mining pits, and the designation criteria (the content of free silicic acid at 40% in 1956 and the content of free silicic acid at 30% in 1959, etc.) were not based on any medical knowledge on the tolerance of dust and therefore they were unreasonable as criteria for ensuring that the exposure of coal workers to dust in non-designated pits would be below a tolerable level in terms of health effects. When viewing the measures actually implemented as a whole at the stages of generation, scattering, and inhalation of dust, it P 130 was impossible to say that they were appropriate measures to prevent pneumoconiosis in coal mines, because dust collectors, which had been regarded as achieving almost the same effect as wet-type rock drills in 1960, were not diffused widely, the rate of use of anti-dust masks was low, and pneumoconiosis education for developing understanding among coal workers of the need to wear such masks was insufficient. …

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The court of the second instance pointed out that the jokoku appellant [the Ministry of International Trade and Industry, hereinafter MITI] should have reviewed the Safety Regulations on Coal Mines upon the enactment of the Pneumoconiosis Law in March 1960, and should have either abolished the designation of silicic acid areas or at least amend the designation criteria, or should have required that measures be taken to prevent the generation and scattering of dust, regardless whether the pit was a designated pit or a non-designated pit, for example by using wet-type percussive rock drills, and therefore the failure of [MITI] to take any of these measures at that time should be deemed to be extremely unreasonable. The court also stated that the instruction and supervision provided by [MITI] for taking the dust prevention measures applicable for both designated pits and non-designated pits was insufficient to eliminate such unreasonableness. On these grounds, the court of the second instance judged [MITI]'s failure to exercise the authority to enforce safety regulations to be regarded as illegal for the purpose of the application of section 1, paragraph 1 of the State Compensation Law, and also held [the State] liable to pay compensation for up to one-third of the damage suffered by each Former Employee who had engaged in dusty work in April 1960 and afterwards and had contracted pneumoconiosis.…

IV Findings 1 Liability of the National Government (1) The Mine Safety Law aims to prevent harm to mine workers (section 1), and it provides that measures to prevent accidents at mining work shall only be subject to this law and the Industrial Safety and Health Law shall not be applied to these measures (section 115, paragraph 1). Thus, the Mining Safety Law can be regarded as a special law under the Industrial Safety and Health Law that is aimed to secure the safety and health of workers in workplaces. The Mining Safety Law requires the mining right owner to take necessary measures to prevent harm or mine pollution, which arise from the treatment of dust, etc. (section 4, sub-paragraph 2), and provides that specific safety measures to be taken by the mining right owner under section 4 shall be prescribed by ministerial ordinances (section 30). The Mining Safety Law provides for such comprehensive delegation to ministerial ordinances by the provision of section 30 because what should be regulated as safety measures to be taken by the mining right owner may include a wide range of specialized technical matters, and it seems appropriate to delegate this task to the competent minister in order to amend the contents of such measures as quickly as that they would be in line with technological advances and the latest P 131 possible so medical knowledge. In light of the purpose of the Mining Safety Law and the purport of these provisions, the authority of the Minister of International Trade and Industry, the competent minister under the said law, to enforce safety regulations under the said law, and in particular, the authority to enact ministerial ordinances under section 30 of the said law, should have been exercised at the right time and in an appropriate manner in order to amend safety regulations and ministerial ordinances as quickly as possible so that they would be in line with technological advances and the latest medical knowledge with the primary aim of improving the working environment of mine workers, preventing harm to their lives and bodies, and guaranteeing their health. (2) Given the facts mentioned above, the following is obvious: (1) The large-scale medical examination on silicosis conducted by the Ministry of Labor from September 1955 to March 1957 revealed the serious condition of coal workers suffering pneumoconiosis as it became obvious, by 1959, that more than 10,000 coal workers were diagnosed as having silicosis (about 30% of all workers so diagnosed); (2) In September 1959, the medical working group established under the Silicosis Council announced the opinion that affirmed, in light of the medical knowledge on pneumoconiosis at that time, the possibility and risk of suffering pneumoconiosis due to inhalation of any kinds of dust including coal dust, and pointed out the seriousness of health hazards in cases where pneumoconiosis became worse. The opinion also pointed out the necessity of preventing not only damage due to dust that contained free silicic acid, the cause of silicosis, but also damage due to all kinds of dust, and supervising those workers' health; (3) As the serious condition of coal workers suffering pneumoconiosis became obvious and the medical working group announced the above opinion, the need to fundamentally review the conventional measures concerning pneumoconiosis, which were only applicable to silicosis, was recognized. According to the report compiled by the Silicosis Council based on the above opinion of the medical working group, the government submitted a pneumoconiosis bill to the Diet in December 1959. This bill broadly defined pneumoconiosis, including not only silicosis due to inhalation of dust that contains free silicic acid but also other kinds of pneumoconiosis due to inhalation of mineral dust such as coal dust, so that the law would also be applicable to such a broad scope of pneumoconiosis; (4) Preventing the generation of dust is regarded as a key measure to take to prevent pneumoconiosis. By 1955, it became obvious engineering knowledge that it would be possible to prevent the generation of dust, the cause of pneumoconiosis, very successfully by using wet-type rock drills. Also by that time, light handheld wet-type rock drills had been put into practical use, and by 1960 at the latest, there were no special obstacles to requiring the use of wet-type rock drills in all coal mines. In fact, in metal

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mines, after the amendment of the Safety Regulations on Metal Mines, Etc. in September 1952, rapid progress was made in the laying of water distribution pipes and the use of P 132 wet-type rock drills, the rate of use of wet-type rock drills coming to 99.7% by 1954; (5) On the other hand, regarding coal mines, although the government had vigorously promoted increasing coal production as one of the postwar national policies, the designation of silicic acid areas was maintained even after the amendment of the Safety Regulations on Metal Mines, Etc. Subsequently, even after the Pneumoconiosis Law was established based on the report by the Silicosis Council in March 1960, the designation of silicic acid areas continued to exist without any substantial review being made of safety regulations including the designation criteria. The regulations requiring spraying of water before drilling and the use of wet-type rock percussive rock drills were not adopted as general safety regulations until November 1986. Due to these reasons, in coal mines, the rate of use of wet-type rock drills and the rate of implementation of water spraying were extremely low in non-designated pits, which constituted the greater part of coal mines, and the implementation of measures to prevent pneumoconiosis including general dust prevention measures was far from sufficient. In light of these facts, the Minister of International Trade and Industry should have reviewed, by the time of enactment of the Pneumoconiosis Law on March 31, 1960, at the latest, the contents of the Safety Regulations on Coal Mines in line with the medical knowledge on pneumoconiosis mentioned above and the purport of the Pneumoconiosis Law enacted based on this knowledge, and also should have enforced new safety regulations for generally requiring effective measures to prevent the generation of dust such as the use of wet-type percussive rock drills and the implementation of spraying of water before drilling. Thus, the Minister should have exercised its supervisory authority under the Mining Safety Law as appropriate with the aim of quickly diffusing and promoting such measures to prevent the generation of dust. If such authority to enforce safety regulations (including the authority to amend ministerial ordinances) had been exercised as appropriate by that time, it would have been possible to prevent, to a significant extent, subsequent health hazards due to pneumoconiosis from spreading among coal workers. Comprehensively taking these facts into account, the failure of [MITI] the jokoku appellant to immediately exercise the authority to enforce safety regulations under the Mining Safety Law in April 1960 and afterwards should be deemed to be extremely unreasonable in light of the purport and purpose of the law and, therefore, illegal for the purpose of the application of section 1, paragraph 1 of the State Compensation Law. Consequently, the judgment of the second instance that held [MITI] the jokoku appellant liable for damages under the said paragraph can be accepted as justifiable.…

2 Extinctive Prescription The period of extinctive prescription set forth in the second part of section 724 of the Civil Code shall start from the time ‘when the [delict] was committed’. In the case of [a P 133 delict] from which damage arose when the act was committed, the period of extinctive prescription shall start from the time when the act was committed. However, in the case of [a delict] from which damage, due to its nature, would arise after a considerable period of time has passed since the termination of the act of causing the damage, such as damage due to substances that are harmful to human health if they are accumulated in the body and damage that would come to appear after a certain incubation period, the period of extinctive prescription should be deemed to start from the time when all or part of damage has arisen from the act. This is because it would be significantly cruel to any affected party to allow the period of extinctive prescription to start before damage arises from [a delict] whereas the affecting party should expect, in light of the nature of damage that could be caused by its own act, that any affected party would appear and claim damages after a considerable period of time has passed. Pneumoconiosis is caused by dust that is inhaled into lung cells and develops fibrotic changes over a long period of time, and may cause pneumoconiosis nodules, etc. These symptoms often appear after a considerable period of time has passed since the end of the exposure to dust. For this reason, in this jokoku appeal case, the period of extinctive prescription for the right to demand compensation for pneumoconiosis damage should start from the time when such damage arose. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed. For the case comment see the case 14. John O. Haley (1) P 133

References

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★ )

1)

John O. Haley: Washington University, California Polytechnic State University, University of Washington Washington University, California Polytechnic State University, University of Washington

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Case No. 14: Civil Law – State Compensation Law – State Liability – Extinctive Prescription

Document information

Publication

John O. Haley

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 2nd Petty Bench, 15 October 2004, Case 2001 o Nos. 1194 and 1196, and 2001 ju Nos. 1172 and 1174], Japan v. X

Jurisdiction

Source: Minshū 58-7, 1802 = Saibansho Jihō 1373, 4 = Hanrei Jihō 1876. 3 = Hanrei Taimuzu 1167, 89

Japan

I Headnotes

Court

Supreme Court of Japan

The State is liable for damages to claimants for failure to exercise the authority to enforce regulations under the Water Quality Laws in order to prevent the spread of health hazards caused by the so-called Minamata disease.

Case date

Kumamoto Prefecture is also liable because of the failure of the prefectural governor to take action under the Prefectural Regulations on Fishery Coordination.

Case number

In the case of a delict (fuhō kōi) from which damage, due to its nature, would arise after a considerable period of time has passed since the termination of the act of causing the damage, such as damage due to substances that are harmful to human health if they are accumulated in the body and damage that would come to appear after a certain incubation period, the period of extinctive prescription should be deemed to start from the time when all or part of damage has arisen from the act.

15 October 2004

2001 o 1194 and 1196 P 136

Parties

II Relevant Provisions

Claimant, Japan Defendant, X

Section 1(1) of the State Compensation Law (Kokka baishō-hō), Law No. 125, 1947, provides: When a governmental official who is in a position to exercise the public authority of the State or of a public body has, in the course of performing his duties, illegally (ihō ni) caused damage to another person either intentionally or negligently, the State or the public body concerned shall be liable to compensate such damage.

Bibliographic reference

John O. Haley, 'Case No. 14: Civil Law – State Compensation Law – State Liability – Extinctive Prescription', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 135 147

Section 724 of the Civil Code (Minpō), provides: The right to demand compensation for the damage which has arisen from a delict (fuhōkōi) shall lapse by prescription if not exercised within three years from the time when the injured party or his legal representative became aware of such damage and of the identity of the person who caused it, and the same shall apply if twenty years have elapsed from the time when the unlawful act was committed. – – –

Section 1 of the Law Concerning Conservation of Water Quality in Public Waters (prior to amendment of Law No. 108 of 1970); Section 5 of the Law Concerning Conservation of Water Quality in Public Water and sections 1, 2(2), 7, and 12 of the Plant Effluent Control Law; Sections 1 and 32 of the former Regulations on Fishery Coordination of Kumamoto Prefecture (Kumamoto Prefecture Regulation No. 31 of 1951; before repeal by Kumamoto Prefecture Regulation No. 18-2 of 1965).

III Facts (1) The so-called Minamata disease is a toxic disease of the central nervous system contracted by eating a quantity of fish and shellfish caught in Minamata Bay in Kumamoto Prefecture or its surrounding sea areas. The major symptoms of this disease include sensory disturbance, ataxia, afferent narrowing of visual field, auditory disorder, and language disorder. Patients with the Minamata disease show a variety of symptoms, from grave ones to mild ones, and might finally result in death in serious cases. The causative substance of Minamata disease is methyl mercury, a kind of organic mercury compound. This substance was produced at the acetaldehyde-manufacturing facility of the Minamata Plant of Chisso Corporation, called Shin-Nippon Chisso Hiryō K.K before the change of its corporate name in 1965 (hereinafter referred to as ‘Chisso’), and contained in effluent discharged from the Plant. The Minamata disease was caused by methyl mercury accumulated in fish and shellfish and then absorbed in the body and accumulated in organs such as the cerebrum and cerebella of people who ate a quantity of such contaminated fish and/or shellfish, thereby causing disorder to the nerve cells. P 137

(2) The Patients once lived in the areas around Minamata Bay and ate fish and shellfish

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caught in Minamata Bay or its surrounding sea areas. Among the Patients, A (Patient No. 16), X23 (Patient No. 17), X36 (Patient No. 24), X51 (Patient No. 32), X52 (Patient No. 33), B (Patient No. 34), C (Patient No. 45), and X68 (Patient No. 49) had moved by the end of December 1959, and the rest of the Patients moved in January 1960 or thereafter, to the Kansai District. (3) On 1 May 1956, a doctor at the hospital affiliated to the Chisso Minamata Plant notified the Minamata Heath Center of the fact that some people in Minamata City had contracted an unidentified disease with symptoms of brain disorder. This is the first recognition by an official body of the existence of Minamata disease, and it is called the ‘official discovery’ of Minamata disease. Upon receiving the notification, the Minamata Health Center and other bodies conducted investigations and found that the same symptoms had been seen in some people since 1953, and by January 1957, 54 people had contracted and 17 of them died of this disease. (4) Since the official discovery mentioned above, research and study was conducted by the Minamata Health Center, the Minamata Disease Study Group of the Medical School of Kumamoto University (hereinafter referred to as the ‘Kumamoto University Study Group’), the Health Science Study Group of the Ministry of Health and Welfare (hereinafter referred to as ‘MHW’) (the government ministries and agencies and the government posts shall hereinafter be referred to with the names at that time), and other institutes. Encountering extreme difficulties in identifying the cause of the disease, a tentative suspicion of the relevance between the disease and fish and shellfish was reported at the debriefing session of the Kumamoto University Study Group held in November 1956, and a tentative conclusion to identify eating of fish and shellfish as the cause of the disease was drawn at the joint briefing session held at the National Institute of Public Health in January 1957 where the persons in charge at jōkoku Appellant the National Government and jōkoku Appellant the Prefectural Government participated. Jōkoku Appellant Prefecture Government called on the inhabitants in Minamata City not to eat fish and shellfish caught in Minamata Bay and asked local fisheries cooperatives voluntarily to refrain from fishing within Minamata Bay. As a result of these administrative directives, no more patients with this disease were newly found for a short period from December 1956. At the briefing session of the MHW Health Science Study Group held in July 1957, the conclusion was offered that Minamata disease was not an infectious disease but a toxic disease, and it was contracted by eating a quantity of fish and shellfish contaminated by certain chemical substances. However, at that time, the causative substance of Minamata disease had yet to be identified, and substances such as manganese, thallium, and selenium were suspected as possible causes of the disease. At the Committee on Social and Labour Affairs of the House of Councillors held in June 1958, the Director of the Environment and Health Department of MHW stated that the causative substance of Minamata disease was inferred to have discharged from a P 138 fertilizer plant located in Minamata City. And in July 1958, the Director of the Public Health Bureau of MHW, in a document issued to the ministries and agencies concerned and jōkoku Appellant the Prefectural Government, drew an inference that Minamata disease was contracted by eating a quantity of fish and shellfish poisoned by certain chemicals contained in waste discharged by a fertilizer plant, and requested that more efficient measures should be taken to cope with Minamata disease. On the other hand, the Director of the Light Industry Bureau of the Ministry of International Trade and Economy (hereinafter referred to as ‘MITI’), in September 1958, requested MHW not to present an assertive view at the stage when the true cause of Minamata disease had yet to be identified. (5) In August 1958, a new patient with Minamata disease was found. The patient caught a quantity of fish and shellfish in Minamata Bay and ate it. In order to thoroughly extend awareness of the instruction not to eat fish and shellfish caught in Minamata Bay, jōkoku Appellant Prefecture Government again implemented public relations activities directed at local inhabitants and asked local fisheries cooperatives to voluntarily refrain from fishing within Minamata Bay. (6) In September 1958, Chisso moved the point of discharge of effluent from its acetaldehyde-manufacturing facility from Hyakken Port within Minamata Bay to the estuary of Minamata River outside Minamata Bay. In consequence, in March 1959 and thereafter, people who had eaten a quantity of fish and shellfish caught in sea areas outside Minamata Bay were found to show symptoms of Minamata disease, and therefore fish and shellfish caught outside Minamata Bay also started to be considered dangerous. (7) The report published by the Kumamoto University Study Group in March 1959 included a paper that suggested the conformity in symptoms between Minamata disease and organic mercury poisoning called Hunter-Russel syndrome. Through further research and study, the Kumamoto University Study Group presented its view, at its briefing session held on 22 July 1959, that Minamata disease was a nervous system disorder caused by eating fish and shellfish caught in the Minamata region and mercury came to attract extreme attention as a poisonous substance that possibly contaminated fish and shellfish. The Minamata Food Poisoning Task Force was established in January 1959 as a special task

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force of the Food Sanitation Investigation Council, an advisory body for the Minister of Health and Welfare. On 6 October 1959, the task force presented an interim report that Minamata disease was closely similar to organic mercury pinioning and its most likely cause was mercury. On 12 November 1959, the Food Sanitation Investigation Council concluded, based on this interim report, that the major causative substance of Minamata disease was a kind of organic mercury compound, and reported this conclusion to the Minister of Health and Welfare. The Minamata Food Poisoning Task Force was dissolved at that point in time as it accomplished its objective by making this report. Subsequently, the comprehensive research and study on Minamata disease was undertaken by MHW, MITI, and the Fisheries Agency under the initiative of the Economic Planning Agency. P 139

In October 1959, the experiment performed by a doctor at the hospital affiliated to the Chisso Minamata Plant revealed that cats that had been orally given effluent discharged from the acetaldehyde-manufacturing facility of the plant showed the same symptoms as those of Minamata disease. However, Chisso discontinued the experiment and did not publicize its results. (8) By August 1959, 71 people had contracted Minamata disease and 28 of them had died from it, to the knowledge of the jōkoku appellants. Around that time, in light of the fact that Minamata disease had become an extremely serious problem in the Minamata region, MITI gave an oral administrative directive to the Chisso Minamata Plant to close the drainage ditch that led to the estuary of Minamata River, speed up efforts to complete effluent treatment equipment, and provide sufficient cooperation for research to identify the cause of the disease. Upon receiving requests from the Director of the Public Health Bureau of the MHW, the Director-General of the Fisheries Agency, etc., during the period from the end of October to November 1959, to immediately take appropriate measures to cope with effluent discharged from the Chisso Minamata Plant, MITI also urged the president of Chisso, in writing, to compete the installation of effluent treatment equipment as soon as possible. In December 1959, effluent purification devices including Cyclator and Sedi-floater were installed in the Chisso Minamata Plant. Chisso stressed that these devices were capable of purifying plant effluent, but in fact, these devices were not intended to remove mercury from effluent, which could have been easily understood by persons with some knowledge on chemistry from the design drawings of the devices. (9) In December 1959, an agreement on compensation for damage to fisheries between Chisso and the Federation of Fisheries Cooperatives of Kumamoto Prefecture and an agreement on payment of a solatium between Chisso and the Mutual Aid Society of Families of Patients with Minamata Disease were arranged by mediation of the government of Kumamoto Prefecture, etc. (10) It was understood, as of 1959, that the minimum level of quantity of total mercury (including not only organic mercury compounds but also metal mercury and inorganic mercury compounds) that could be analyzed by means of a general quantitative analysis method was 0.01 ppm. However, the Tokyo Industrial Laboratory of the Agency of Industrial Science and Technology succeeded, by late November 1959, in developing a unique method to quantitatively analyze total mercury to the level of 0.001 ppm. From that time until August 1960, the laboratory conducted, at the request of MITI, quantitative analysis of total mercury contained in effluent discharged from the Chisso Minamata Plant, and reported test results indicating that total mercury of 0.002 to 0.084 ppm was detected from plant effluent. (11) As of the end of November 1959 at the latest, the jōkoku appellants were able to recognize, with high probability, that the causative substance of Minamata disease was a P 140 kind of organic mercury compound discharged from the acetaldehyde-manufacturing facility of the Chisso Minamata Plant. Furthermore, at that time at the latest, the jōkoku appellants were capable of quantitatively analyzing a small amount of mercury contained in effluent discharged from the Chisso Minamata Plant and could have easily known that the effluent purification equipment installed by Chisso had not been intended to remove mercury. (12) In May 1968, Chisso stopped manufacturing acetaldehyde at the Minamata Plant, and in consequence, a methyl mercury compound was no longer discharged from the plant. In September 1968, jōkoku Appellant the National Government presented a government view that Minamata disease was caused by a methyl mercury compound produced at the acetaldehyde-manufacturing facility of the Chisso Minamata Plant. In 1969, Minamata Bay and its surrounding sea areas were designated as a designated water area under the Water Quality Laws mentioned later.

IV Findings 1 Liability of the National Government (a) Under the regulations of the Water Quality Laws, the National Government is required to exercise its regulatory authorities by: (1) designating a particular public water area in which water pollution has caused or would cause considerable damage to relevant

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industries or has had or would have a significant impact on public health as a designated water area and, then, establishing water quality standards (acceptable pollution limits for water discharged to the designated water area from plants where specified facilities are installed) and designating facilities from which sewage, etc. is discharged as specified facilities; and, after taking these measures, (2) if the water quality of plant effluent, etc. is failing to meet the standards for the designated water area, having the competent minister order the person who discharges such effluent to improve the method of treating sewage, etc., temporarily stop using the specified facilities or take other necessary measures under sections 7 and 12 of the Plant Effluent Control Law, for the purpose of conserving water quality, This authority should be exercised in a timely and appropriate manner, aiming at protecting the life and health of people living in areas that might suffer water quality deterioration in the designated water area. (b) According to the facts mentioned above, as of the end of November 1959, (1) at least about three years had passed since the official discovery of the Minamata disease on 1 May 1956, and during this period, there was the continued possibility that serious and grave damage might be caused to the lives and health of people who ate fish and shellfish caught in Minamata Bay and its surrounding sea areas, and the National Government recognized that a large number of people had contracted Minamata disease and a considerable number of them had died of the disease, (2) the National Government was able to recognize, with high probability, that the causative substance of Minamata P 141 disease was a kind of organic mercury compound discharged from the acetaldehydemanufacturing facility of the Chisso Minamata Plant, and (3) the National Government was capable of quantitatively analyzing a small amount of mercury contained in effluent discharged from the Chisso Minamata Plant. As also mentioned above, the National Government could have easily known that the effluent purification equipment installed by Chisso in December 1959 had not been intended to remove mercury. Considering these facts, as of the end of November 1959, the National Government could have and should have immediately taken the measures that was required to exercise its regulatory authorities vested by the Water Quality Laws, by designating Minamata Bay and its surrounding sea areas as a designated water area, establishing water quality standards so as to prevent plant effluent discharged to the designated water area from containing a detectable amount of mercury or its compounds, and designating the acetaldehydemanufacturing facility as a specified facility. It is reasonable to conclude that, even if the time necessary for taking these measures were taken into consideration, the Minister of International Trade and Economy who was the competent minister for this issue, at the end of December 1959 at the latest, could have exercised the regulatory authorities and ordered Chisso to improve the method of treating sewage, etc., temporarily stop using the specified facilities or take other necessary measures, and in light of the seriousness of health hazards caused by Minamata disease, the minister should have immediately exercised the authority. It is also obvious that if the authority had been exercised at that time, the subsequent spread of the Minamata disease could have been prevented. (c) Comprehensively considering these circumstances, the failure to exercise the regulatory authorities under the Water Quality Laws in January 1960 and thereafter is extremely unreasonable in light of the purport and purpose of the Water Quality Laws that are the basis of the authorities and the nature of the authorities, and therefore illegal for the purpose of the application of section 1(1) of the State Compensation Law. Therefore, the judgment of the second instance that held the National Government liable for damages under the said paragraph can be accepted as justifiable….

2 Liability of the Prefectural Government According to the facts mentioned above, we conclude that the governor of Kumamoto Prefecture recognized or could have recognized the circumstances concerning the Minamata disease as the National Government recognized or could have recognized. We also conclude that, although the direct purpose of the Prefectural Regulations on Fishery Coordination is to ensure protection for reproduction of aquatic animals and plants, these Regulations also ultimately aim to protect the health of people who eat such animals and plants. Therefore, we can accept the reasoning of the court of the second instance that the governor should have exercised regulatory authority under section 32 of P 142 the Prefectural Regulations on Fishery Coordination by the end of December 1959 and the governor's failure to exercise the authority was extremely unreasonable, and can uphold the second instance's conclusion that the Prefectural Government is liable for damages under section 1(1) of the State Compensation Law.

3 Extinctive Prescription The second sentence of section 724 of the Civil Code provides for the period of extinctive prescription as ‘twenty years from the time when the [delict] was committed’. In the case of [a delict] from which damage arose when the act was committed, the period of extinctive prescription shall start from the time when the act was committed. However, in the case of [a delict] from which damage, due to its nature, would arise after a considerable period of time has passed since the termination of the act of causing the damage, such as damage due to substances that are harmful to human health if they are accumulated in the body and damage that would come to appear after a certain

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incubation period, the period of extinctive prescription should be deemed to start from the time when all or part of damage has arisen from the act. This is because it would be significantly cruel to any affected party to allow the period of extinctive prescription to start before damage arises from [a delict], and the affecting party should expect, in light of the nature of damage that could be caused by its own act, that any affected party would appear and claim damages after a considerable period of time has passed….. (2) According to this reasoning, the time when each of the Patients moved out of the areas around Minamata Bay should be regarded as the time when the act of causing damage was terminated for the Patient. However, some patients with Minamata disease developed the disease after an incubation period, and such patients with delayed-onset Minamata disease started to show symptoms within four years after they had stopped eating fish and shellfish caught in Minamata Bay or its surrounding sea areas. Having found these facts, the court of the second instance concluded that the period of extinctive prescription for these Patients should start from the time when at least four years have passed since they had moved out of the areas around Minamata Bay. [We affirm this conclusion.] The translation on the Supreme Court's homepage was closely followed.

V Comment (Both for Cases 13 and 14) In 2004 the Second and Third Petty Benches of the Japanese Supreme Court each separately held the State liable in compensatory damages for regulatory failures that occurred nearly a half century earlier. The first – Case XX – involved a claim for damages against the State by miners who had contracted pneumoconiosis from long exposure to coal dust that could, the lower courts found, have been reduced by the use of wet-type P 143 drills. ‘[T]he the failure of the Minister of International Trade and Industry,’ in the words of the Supreme Court, ‘to exercise the authority to implement safety regulations including the authority to amend ministerial ordinances under the Mine Safety Law immediately after the enactment of the [1960] Pneumoconiosis Law’ was illegal (ihō) and thus gave rise to a valid claim for compensation under section 1(1) of the State Compensation Law. The second decision – Case XX – involved similar claims of State liability for compensation as a result the failure of both the national and the prefectural governments to take corrective action after November 1959 when officials recognized a ‘high probability’ that the ‘Minamata disease’ was being caused by release by the Chisso Corporation of methyl mercury into Minamata Bay in Kumamoto Prefecture. In both decisions, the Court cited two prior cases as precedent – Ota v. Kyoto Prefecture, Minshū 43 (No. 10), 1169 (Sup. Ct. 2nd P.B., 24 November 1989) [Case 1986 o No. 1152] in which the 2nd Petty Bench affirmed the liability of the Kyoto Prefectural Government for having failed to issue a building permit in accordance with the standards set out in the relevant statute, and Yokozawa v. Japan, Minshū 49 (No. 6), 1600 (Sup. Ct., 2nd P.B., June 23, 1995) [Case 1989 o No. 1260] in which the State was held liable to 259 persons suffering from the side effects of chloroquine (kurorokin) for having failed to revoke its approval once the side effects, including blindness, were known. The two 2004 decisions are thus less significant as precedents for government liability for regulatory failure than as affirmation and extension of these earlier petty bench decisions. In both decisions the Court first construed the term ‘legality’ (ihō ni) of section 1(1) of the State Compensation Law to include the failure to take regulatory action in order to prevent or at least to reduce life-threatening and other potential injuries to human health. The first of the two cases extends the notion of ‘illegality’ and thus State liability to situations in which regulators have not exercised their authority to require use of new or improved technology that would minimize or at least reduce a known occupational hazard or environmental risk. The second case was the first Supreme Court decision Japan's best known postwar pollution disaster – the Minamata mercury poisoning case. It appears finally to bring closure to the litigation and allocation of costs. In terms of the circumstances under which the State may be held liable for regulatory failure, the decision appears to add little to the Court's judgment in the 1995 Chloroquine case. Also in both cases the Court held that the twenty-year period for extinctive prescription (statute of limitations) provided in Civil Code section 724 did not begin to run until the onset of injury, which was deemed to have occurred for the plaintiffs in both cases several years after the inhalation of coal dust or the ingestion of fish polluted with methyl mercury. P 144

1 Background a) The State Compensation Law The State Compensation Law was adopted in 1947 under the Allied Occupation pursuant to section 17 of the 1947 Constitution, which provides: Any person who has been injured [damaged] by a delict [tortious act] of a public official is able to claim compensatory damages from the state or a public entity as provided by statute. [Author's translation.]

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The provision was inserted in the constitution during deliberation in the Diet. A similar proposal in an early draft prepared by Lt. Col. Pieter K. Roest for the steering committee chaired by Charles Kades had been rejected. (1) Deeply common law notions of sovereign immunity were presumably at play. Because records of the meeting were not kept, we do not know whether a similar proposal was made by the Japanese members of the Matsumoto Committee who met subsequently with the steering committee members. If so, it too was rejected by Kades and the steering committee. The inclusion of section 17 in the Constitution was thus fully at the initiative of the Japanese. Its purpose was to expand State liability beyond the restrictive parameters of the pre-war system under which the State was liable only for ‘private law’ actions arising under the Civil Code subject to the adjudicatory jurisdiction of the regular courts. (2) The public law functions of the State and public entities did not give rise to private law claims. Moreover, unlike other civil law jurisdictions, particularly Germany and France, (3) however egregious the harm or improper the official action, no claim for compensatory damages was otherwise recognized. The principal proponent was then Tokyo Imperial University Law Professor Jirō Tanaka, who had argued in a series of sections published in 1937 that Japan needed to expand the private law liability of the State. (4) The State Compensation Law thus provided not only a significant basis for ensuring compensation for official misconduct, but also a means for judicial review of administrative actions that were also barred by the continued adherence to an extremely restrictive notion of justiciable administrative actions. (5) P 145

The constitutional provision and the State Compensation Law as the implementing statute reflect the influence of section 131 of the Weimar Constitution, which was incorporated verbatim in section in section 34 of the 1949 Basic Law, and 839 of the German Civil Code, which provide for State liability for damages as a civil action where an official has ‘violated a duty to a third party’. As construed, this language limits State liability to cases where the legal duty at issue was owed to the claimant in particular in contrast to regulatory responsibility to be carried out for the public good. (6) German law, as a result, does not extend State liability as broadly as in Japan to cases of regulatory failure. In turn, however, Japan's State Compensation Law has been the model for similar legislation in South Korea, Taiwan, and the People's Republic of China. To the extent that Japanese judicial construction and application of the statute are similarly influential, the civil liability of the State for regulatory failure may be broader in East Asia than anywhere else on the globe. i) The Cases The action in Case No. 13 was initially filed in 1985 by over 480 former mine workers suffering from black lung disease (pneumoconiosis) and successors of those who had died in the Iizuka Branch of the Fukuoka District Court against six mining companies and the government. In a judgment entered on 20 July 1995, the Iizuka Branch Court ordered the six defendant mining companies to pay nearly JPY 2 billion, but dismissed the claims for regulatory failure against the government under the State Compensation Law. (7) The plaintiffs filed a first (kōso) appeal to the Fukuoka High Court. Thereafter, three of the defendant companies settled. In 2001, the High Court handed down its judgment, holding the three remaining mining companies as well as the government liable. Two more mining companies then settled. The high court had ordered damage payments of 1.91 billion yen. On second, jōkoku appeal, the Supreme Court upheld the high court decision and ordered the government to pay JPY 329 million of the total JPY 560 million (the remainder to be paid by the sole remaining mining company) to the plaintiffs. Case No. 14 was similarly an appeal in a damage action that had been filed initially at the Osaka District Court in 1982 by a group of Minamata disease victims who had relocated to the Osaka area from Kumamoto and the neighboring Kagoshima prefectures. The case was one of several brought against the government, commencing with a suit filed in the Kumamoto District filed in 1980. Similar suits were filed subsequently between 1882 and 1988 in district courts in Fukuoka, Osaka, and Tokyo. In 1996, with the exception of the Osaka case, the plaintiffs withdrew their lawsuits in all of the cases, including pending actions in four district courts and three high courts, following a comprehensive settlement with the Chisso Corporation and the national and prefectural P 146 governments. Six years after filed, on 11 July 1996, the Osaka District Court handed down its judgment. (8) Although the decision held Chisso liable, it dismissed the claims against the national and prefectural governments under the State Compensation Law. On first (kōso) appeal by 75 of the original plaintiffs, (9) however, the Osaka High Court overturned the district court judgment, holding both the national and prefectural governments liable. The two governments filed a second, jōkoku appeal, providing the opportunity for the first Supreme Court decision with respect to liability for the Minamata mercury poisoning. b) Significance The two cases are perhaps most significant in affirming the Supreme Court's extension of State liability for regulatory failure in wide variety of contexts. As noted, no State apparently is subject to civil liability under similar circumstances, although Japan may become the model for East Asia. In hindsight the two cases also seemed to have presaged

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the court's extension of State liability for violations of constitutional rights. (10) With respect to regulatory failure, the cases have more immediate significance. On 11 March 2011, the northeast coast of Japan was struck by one of the most powerful earthquakes in recorded history. Although the damage caused directly by the quake itself appears to have been relatively slight, the quake produced one of the three largest tsunami in Japanese history that devastated scores of villages along the coast with a death toll of nearly 25,0000 persons. The tsunami is estimated to have reached heights of up to 40.5 meters (133 ft.), (11) making it too the largest and most destructive tidal wave in known Japanese history. Its only rivals were the tsunami that also struck the north eastern coast in 1896 following the Meiji-Sanriku Earthquake and in 869 as a result of the socalled Sanriku Earthquake. At an estimated height of 15 meters, the tsunami also easily breached the 5.7 meters (19 ft.) seawall protecting the six light water nuclear reactors operated by the Tokyo Electric Power Company (TEPCO) on the Pacific coast south of Sendai in Fukushima Prefecture. The consequence was by all accounts one of the most potentially serious nuclear power plant meltdowns in history. TEPCO will, without question, be held liable for any damages that result for the Fukushima nuclear disaster to the extent of any provable failure on its part to ensure the safe operation of the facility in light of all reasonably anticipated risks. Aside from special statutory limitations of liability, Japanese law in this respect does not significantly differ from that of any industrial State in either the civil or common law P 147 tradition. As these two recent Supreme Court decisions illustrate, however, Japan is exceptional in the extent to which the State can be held liable for regulatory failure. Two consequences already seem apparent. One is the establishment of State-funded relief programs for any potential victims of a nuclear disaster. The second is an arguably more rigorous scrutiny of both other nuclear facilities to ensure compliance with existing regulations as well as the regulations themselves to make certain that they provide the necessary protections. Whether any or all of these efforts would have been taken were only TEPCO and not the State liable is difficult if not impossible to determine. In any event, however, State liability for such regulatory failure at least fosters such measures. The imposition of liability on the State for such regulatory failure can have less beneficial consequences. It may lead in some instances to over-caution and over-regulation. Finally, the two cases are perhaps most significant in terms of what they tell us about the role of the judiciary. These cases and both preceding and prospective decisions, illustrate the independence and positive law-making role of the Japanese judiciary. They cannot be reconciled with the criticisms of the courts' conservative tendencies or deference to political preferences. (12) To the contrary, they reflect an active judiciary that is conservative only to the extent that on most issues its decisions are neither ahead nor behind what the judges perceive to be an existing social and political consensus – in other words, that the courts' views reflect as accurately as possible ‘the sense of society’. John O. Haley (1) P 147

References ★ )

1) 2) 3)

4)

5) 6) 7) 8) 9)

John O. Haley: Washington University, California Polytechnic State University, University of Washington See J.O. Haley, Toward a Reappraisal of Occupation Legal Reforms: Administrative Accountability, in K. Fujikura, ed., Eibeihō ronshū (Essays on Anglo-American Law) (Hideo Tanaka Festschrift) (Tokyo: University of Tokyo Press, 1987), at pp. 550–551. See J.O. Haley, Japanese Administrative Law: Introduction, Law in Japan: An Annual, vol. 19 (1986), pp. 1–14. The principal provisions in German law were sec. 131 of the 1919 Weimar Constitution coupled with sec. 839 of the Civil Code. State liability for official violations of duty under French law was based on the 1873 L'arrêt Blanco decision by the Tribunal des Conflicts of the Conseil d'Ėtat, translated into English in D. Fairgrieve, State Liability in Tort: A Comparative Law Study (Oxford, UK: Oxford University Press, 2002), at p. 287. T. Jirō, Hanrei yori mitaru gyōsei-jō no fuhō kōi sekinin (‘Administrative liability for delicts from the perspective of judicial decisions,’ Part 1, 51 Kokka Gakkai Zasshi (No. 1) 109 (1937); Part 2, 51 Kokka Gakkai Zasshi (No. 2) 258 (1937); Part 3, 51 Kokka Gakkai Zasshi (No. 3) 420 (1937). John O. Haley, Japanese Administrative Law, supra note 2. See, e.g., Bundesgerichtshof (Third Civil Division), Judgment of 27 May 1963, BGHZ 39, 358. Hanrei Jihō 1543, 3 (Fukuoka Dist. Ct. Iizuka Branch, 20 July 1995). Hanrei Jihō 1506, 5 (Osaka Dist. Ct., 11 July 1994). Hanrei Jihō 1761, 3 (Osaka High Ct., 27 April 2001).

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10) See Takase v. Japan, Minshū 59, 2087 (Sup. Ct., G.B., 14 September 2005), Grand Bench

decision affirming that denial of voting rights to Japanese nationals residing abroad violated the constitution and that the State had thereby acted ‘illegally’ (ihō ni) under sec. 1(1) of the State Compensation Law, thus subjecting the sate to valid claims for civil damages. 11) Y. Shinbun evening edition 2-11-04-15 page 15. 12) See, e.g., J.M. Ramseyer and E.B. Rasmusen, Measuring Judicial Independence: The Political Economy of Judging in Japan (Chicago: University of Chicago Press, 2003). 1) Washington University, California Polytechnic State University, University of Washington

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Part II: Labour Law

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Marc Dernauer

Publication

(★ )

Business Law in Japan – Cases and Comments

Labour law is a special area of civil law. In the Civil Code, (1) however, the labour contract is only very basically regulated by the rules on employment (koyō) and in not more than nine provisions (sections 623 to 631 Civil Code), which are of almost no importance anymore. Japanese labour law is, however, now regulated by numerous special laws which mostly aim at protecting the employee as the weaker party to a labour contract, but these laws are also to ensure a sufficient degree of flexibility on the side of the employer to pursue a labour policy adjusted to the economic situation of the company. Among the most fundamental laws is the Labour Standard Law. (2) The intention of this is to safeguard a minimum standard of working conditions, The Employment Contract Law (3) is also one of the fundamental laws and which provides basic rules for employment contracts.

Jurisdiction Japan

Bibliographic reference

Marc Dernauer, 'Part II: Labour Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 149 - 150

Since the beginning of the 1990s the traditional features of the Japanese employment system, namely the principle of long-term employment (shūshin koyō seido), (4) seniority (nenkō joretsu seido) (5) and enterprise unionism (kigyō-betsu kumiai seido) have been P 150 subject to significant changes which trace back to the years of recession subsequent to the burst of the so-called bubble economy. In those years, the number of regular employees (sei-shain) drastically decreased due to the changes in the corporate labour policies, and the rate of part-time employment and dispatched work (haken rōdō) has steadily increased ever since. The change of the Japanese employment structure was accompanied and reflected by a series of legal reforms, e.g. the reform of the Part-Time Law (6) that came into effect in 2008 and aims at an improvement of equal opportunities for part-time workers vis-à-vis regular employees. To address the increasing number of individual labour disputes that came along with the change of the traditional employment system, the Labour Tribunal Law (7) came into effect in 2006 which for the first time in the Japanese history of law established judicial proceedings especially for the resolution of individual labour disputes. Prior to this, only the general civil procedure (minji soshō) was available to resolve labour disputes in court. One of the main features of the new system is that the tribunal is composed of one career judge and two lay judges from both the labour and the management sides who have the same vote regarding the final decision which the tribunal is entitled to render if the parties to the dispute do not reach an amicable settlement. Case 1 in the part on labour law (= Case 15) deals inter alia with the question of whether the basic individual rights provided in the Japanese Constitution, such as, for instance freedom of thought, are directly applicable to the employment relationship. Moreover, the case deals with the question of whether the employer can dismiss an employee because of his political ideas, in particular during the probation period. Japanese companies are notorious for forcing their employees to work long hours. Case 2 of this part on labour law (= Case 16) concerns the question of whether employees in Japan in general have a corresponding contractual duty to work overtime, and if so, to what extent and under what conditions. A further phenomenon in the working environment in Japan is that employers quite regularly send their employees to branch offices all over the country. As this always causes problems for the employee as well as for his or her family, in such a case it is always the question of whether and under what conditions such a transfer order issued by the employer is lawful. This question is dealt with in Case 3 (= Case 17). Finally, Case 4 (= Case 18) deals with the fate of labour contracts in cases of a company restructuring, and in particular with the question of whether it is possible to challenge the effectiveness of the succession to labour contracts when a company splits. Marc Dernauer (1) P 150

References ★ )

1) 2) 3) 4)

Marc Dernauer: University of Freiburg, Tohoku University Minpō, Law No. 89/1896 and Law No. 91/1898, after the linguistic revision of 2004 continued only under Law No. 89/1896. Rōdō kijun-hō, Law No. 49/1947. Rōdō keiyaku-hō, Law No. 128/2007. According to the principle of long-term employment also referred to as lifelong employment, an employee will stay employed in one and the same company until he or she reaches retirement age.

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5) 6) 7) 1)

The principle of seniority regulates remuneration subject to employment tenure as opposed to the principle of performance. Pāto rōdō-hō, Law No. 76/1993. Rōdō shinpan-hō, Law No. 45/2004. University of Freiburg, Tohoku University

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Case No. 15: Labour Law – Freedom Related to Hiring – Length of Probation Period

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Publication

Hans-Peter Marutschke

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 12 December 1973, Case No. 1968 o 932, ‘Mitsubishi Jūshi’ Source: Minshū 27-11, 1536 = Hanrei Jihō 724, 18 = Bessatsu Jurisuto No. 197, Rōdō Hanrei Hyakusen (8th ed. 2009) 28

Jurisdiction Japan

I Headnote(s) Neither Article 14 nor Article 19 Japanese Constitution are applicable directly to the relationship between private persons.

Court

Supreme Court of Japan

If a company refuses to employ a person having a certain conviction or certain creed with a reason based on this conviction or creed, this refusal cannot be seen in and of itself as unlawful.

Case date

Section 3 Labour Standards Law does not submit the employment of workers as such to any restrictions.

12 December 1973

It is not unlawful if an employer examines in the process of recruitment the personal convictions, creed, etc. of the candidates and requests details for this purpose.

Case number 1968 o 932

Bibliographic reference

Hans-Peter Marutschke, 'Case No. 15: Labour Law – Freedom Related to Hiring – Length of Probation Period', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 151 158

If an employer fixes at the beginning of the employment of university graduates a probation period in order to reserve a final decision to be made on the basis of P 152 subsequent inquiries and monitoring (because it had not been possible at the time of the original decision of the employment to collect sufficient material enabling to judge on the ability of the respective person as prospective employee), and if the employer reserves the right of cancellation on the basis of which he will be able to dismiss the person if he comes to the conclusion during the probation period that he or she would not be qualified for a future management position, the employer may permissibly make use of this right to cancellation only if this would be objectively reasonable with regard to the above-mentioned whole purpose and could be sanctioned as acceptable with regard to the common sense of society.

II Relevant Provisions Articles 14 and 19 Japanese Constitution Section 3 Labour Standards Law (1)

III Facts and Findings In 1973 the Japanese Supreme Court decided this labour law case, which became a kind of corner stone with regard to the understanding of the legal relationship between Japanese workers and employers, and especially with respect to some of the most important problems in labour law, which include the so-called third-party effect of basic or fundamental rights, the freedom of the employer to hire and his right to question job candidates, as well as the question of protection against (unfair) dismissal. The case has to be seen in the context of the Japanese students' movement of the 1960s, which in its peak heavily criticized the revision of the Japanese American Safety under Prime Minster Kishi. At that time Mitsubishi Jūshi KK, one of the leading producers of artificial resin, asked employment candidates as part of the recruitment procedure, which traditionally takes place in autumn every year for employment on 1 April in the next year, the candidates to fill in a questionnaire. This questionnaire required the candidates to declare any ‘membership of social, cultural, political or other organisations outside the university’, as well as ‘ideologies or thoughts to which the candidates are committed’. In the oral exam, which followed the written one, the candidates were also questioned on these issues. The Plaintiff passed the exam and was recruited by the Defendant, Mitsubishi Jūshi KK, at the end of March 1963, with a probation period of three months. However, at the end of June 1963 the Defendant informed the Plaintiff that he would no longer be employed following completion of the probation time. Later in the hearing before the court the Defendant explained the reason for this: that the Plaintiff concealed or did not make known the truth when answering the above-mentioned questions. P 153

1 Court Trial in First and Second Instance The first instance at the Tokyo District Court (2) confirmed the Plaintiff's rights deriving from his labour contract with the Defendant, who was ordered to pay JPY 1.032.339 to the Plaintiff as ordinary remuneration. The court argued that the labour contract was not limited to a specific term by the agreed probation period. The contract could, therefore,

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only be terminated if the Defendant held the Plaintiff to be underqualified as a future management employee through evaluation of his performance during the probation period. Despite the fact that Plaintiff had been socially and politically active during his time at university, and although his answers to the questions during the recruitment procedure may thus be looked at as a kind of deviation from truth, the court saw no evidence of a specific maliciousness as alleged by the Defendant. The court further made clear that although the Defendant was in principle free to cancel the labour contract for any kind of adequate reason, the right to dismissal would have to follow general principles of law, which would require at least a more sophisticated examination of the qualifications of Plaintiff. As this was not the case and Plaintiff had been in an inferior position as a simple worker, the court qualified the dismissal as abuse and, therefore, invalid. The second instance, the Tokyo High Court, (3) accentuated the problem of constitutionality in this case. Besides ordering Defendant to pay an additional amount of money, it made clear, that all Plaintiff had hidden from Defendant had been his political opinions, etc., and this fact could neither constitute a fraud nor a reason for cancellation, because freedom of thought is guaranteed by Article 19 of the Japanese Constitution (JC), and this freedom must be protected, especially in a situation where superiority and inferiority play a role, which is the case in labour relations. In addition, Article 14 JC and section 3 of the Labour Standards Law (LSL) guarantee the freedom of thought. Restrictions might be discussed under special circumstances (news/media publisher, schools, etc.) but not in ‘normal’ enterprises, where a negative effect would rarely occur. It is for this reason that the High Court recognized an infringement of the principle of public order and morality if candidates are questioned in the recruitment process about their political thoughts or ideology, etc. The Defendant appealed to the Supreme Court with the following arguments: 1. 2. 3. 4. 5.

Fundamental rights of the Japanese Constitution do not have any effect between citizens, but only in the relationship citizen versus State. The refusal of further employment did not take place because of the political thoughts of Plaintiff, but because of his fraudulent behaviour. The alleged dominant position of the Defendant is of no relevance in this case. The freedom to conclude a contract also contains the right to ask questions concerning political thoughts. Section 3 LSL is not applicable to the refusal of final employment, because it is related only to ‘labour conditions’.

P 154

2 Supreme Court Decision The Supreme Court repealed the Tokyo High Court judgment and referred it back with the following verdict: 1. 2. 3. 4. 5.

Neither Article 14 nor Article 19 JC are applicable directly to the relationship between private persons. If a company refuses to employ a person having a certain conviction or certain creed with a reason based on this conviction or creed, this refusal cannot be seen in and of itself as unlawful. Section 3 LSL does not submit the employment of workers as such to any restrictions. It is not unlawful if an employer examines in the process of recruitment the personal convictions, creeds etc. of the candidates and requests details for this purpose. If an employer fixes at the beginning of the employment of university graduates a probation period in order to reserve a final decision to be made on the basis of subsequent inquiries and monitoring (because it had not been possible at the time of the original decision of the employment to collect sufficient material enabling to judge on the ability of the respective person as prospective employee), and if the employer reserves the right of cancellation on the basis of which he will be able to dismiss the person if he comes to the conclusion during the probation period that he or she would not be qualified for a future management position, the employer may permissibly make use of this right to cancellation only if this would be objectively reasonable with regard to the above-mentioned whole purpose and could be sanctioned as acceptable with regard to the common sense of society.

In its reasoning the Supreme Court repeats at first the facts already introduced above and cites first in more detail the arguments of appeal of Defendant, who stated above others, that the behaviour of Plaintiff had been a fraud in the sense of section 96 Japanese Civil Code, disqualifying him for future management tasks. It refers the abovementioned reasoning of the lower court judgments, which had held the dismissal to be unlawful and then summarizes the reasons for the appeal to the Supreme Court: Articles

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19 and 14 JC guarantee the right of equality and freedom of the individual in its relation to the State and do not regulate directly the relationships of private persons to each other. The mentioned articles of the Constitution also do not have the same meaning of public order and morality which is meant in section 90 Civil Code, as argued by the Tokyo High Court. In addition the High Court judgment is founded on the incorrect supposition that the data which Defendant requested of Plaintiff were related to his creed or thoughts, which was not the case, because the questions actually aimed at establishing whether there had been a particular type of behaviour in the past. Because of this misunderstanding, the lower court decision is based on an incorrect interpretation of the law. The same applies to the interpretation of section 3 LSA, because a formal labour contract between Plaintiff and Defendant did not exist. P 155

In its own statement the Supreme Court first examined the question whether the data, based on which Defendant had refused the final employment, were related to the thought or creeds of Plaintiff. It confirmed that companies at that time informed themselves about the participation of candidates in the students' movement with the purpose of checking whether candidates might fit into the enterprise. In its conclusion the Supreme Court made clear that the argument of Defendant, that this check was not at all related to an examination of political thoughts or creeds, is not acceptable, because it is quite normal that predictions with regard to personal activities cannot always be separated from a person's political standpoint. Nevertheless, the Supreme Court also made clear that this question has to be differentiated from the question whether it should be allowed that a company ask for this kind of personal information. In the following analysis the Supreme Court deals with the question whether the fundamental rights, guaranteed in part 3 of the Japanese Constitution, are per se applicable in a relationship between private persons. This point is dealt with rather intensively, leading to the conclusion that fundamental rights related to freedom or equality may in some cases be incompatible in a private relationship, simply because of contradictory interests. For that reason, the settlement of conflicts deriving from this kind of situation is left in a modern and free society to the parties' autonomy, and exceptions may only take place in cases when certain limits of generally accepted borderlines are exceeded. As it, therefore, cannot be said that human rights guaranteed in the Constitution are per se applicable in private relationships, it also cannot be argued without further ado, that in a private relationship, in which one party dominates the other because of existing unequal social or economic power, constitutional rights should be applicable. The Supreme Court argues that it is the task of the legislator to find a solution for adequately balancing contradicting interests, either by special legislation or by preparing general clauses in the Civil Code which would have restrictive effect to the autonomy of private parties. Within this generally accepted conflict of individual rights in the area of private autonomy, the Supreme Court then emphasizes that, besides the freedom of thought and creed and the principle of equality before the law, there is also a guarantee of fundamental rights such as the holding and owning of property, and the making use of it for economic purposes, or economic freedom in general. This means that the employer enjoys in principle the freedom to decide whom he wants to employ under which condition. It is, therefore, not unlawful per se and does also not contradict Article 14 JC, if the employer refuses to employ a person with certain convictions or political thoughts. With regard to section 3 LSA, the court clarified that the acts of discrimination mentioned there are only related to those acts which occur after employment. The regulation itself, however, does not restrict the freedom of employment. Accordingly, the Supreme Court continues, if it is not unlawful to refuse the employment of a person because of his or her thoughts, etc., it can neither be unlawful to ask candidates for their thoughts and political activities. It is, on the contrary, not irrational P 156 that an employer shows interest in former activities whatsoever of a candidate, especially under social circumstances such as those in Japan, where lifetime employment is still common. The Supreme Court finally summarized that the lower court's judgment had been based on an erroneous interpretation and application of the law, as it had evaluated the questioning of the candidates and collecting data as unlawful. In its further reasoning, the Supreme Court deals in more detail with the question of how to legally qualify the labour contract with regard to the probation period. Whereas Defendant argued that a clear difference has to be made between the ‘probation contract’ and the subsequent ‘employment contract’, the Supreme Court supported the interpretation of the lower court, which qualified the contract between Defendant and Plaintiff as a normal employment contract including a reservation-clause to dismiss, based on the interpretation of the company's work rules and the fact that there had been no single case yet in which a contract had not been continued after the end of the probation period. This means that in practice no new contract was concluded after the end of the probation, but candidates rather received a short notice (jirei), which indicated their new area of employment.

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By accepting on the one hand the lower court's interpretation of the contract as an employment contract with a dismissal-clause, the Supreme Court did not follow its subsequent conclusions. The Supreme Court made a distinction instead between a ‘regular’ dismissal and a dismissal on behalf of a dismissal clause in the contract, which can be activated if the employer comes, after thorough consideration, to the conclusion that a candidate might not be qualified enough for a management position. It conceded to the employer in the latter case the right to dismiss, because if viewed in the light of the aims and objectives in reserving a cancellation right, there are objective reasons to exercise this right and the exercise itself can be looked at as permissible with regard to the common sense of society. If the adequateness cannot be proved, the exercise of the reserved right is not permitted. In order to be able to decide on the reasonableness and appropriateness of a cancellation, the Supreme Court focused on the following facts, which had to be clarified by the Tokyo High Court: proof of the alleged concealment; and character, form and extent of Plaintiff's membership and participation in the students movement, especially with respect to unlawful acts, as well as the reason for the concealment. Furthermore it had to be clarified what kind of effect the concealment might have had on the prediction of Plaintiff's capabilities after real employment and how this prediction might have influenced the final decision of the company to employ the candidate. Translated from the Japanese original by Hans-Peter Marutschke

IV Comment As usual in other countries, probationary periods are also frequently used in Japanese companies. There is no statutory provision for this, exception made for the requirement P 157 put on the employer to give the employee a 30 days' notice after the first 14 days of the probationary period (section 21(4) LSA). The Supreme Court judgment shows, that under Japanese case law, the employer's freedom to dismiss an employee during the probationary period is broader than an ordinary dismissal, with the restrictions mentioned in the case. In the academic literature, the Supreme Court decision has been criticized to quite an extent because of its reluctant attitude towards a more active protection of workers' rights and one-sided support of the principle of freedom of contract in favour of the employer. This principle is in fact limited in the Constitution by considerations of ‘public welfare’ and there are a lot of legislative provisions that restrict it in order to promote a fair economic order and protect the weak, which is made obvious for instance through the constitutional guarantee of the citizen's right to work (Article 14 JC) and the provisions regarding labour standards (Article 27(2) JC). (4) The key content of the Mitsubishi Jūshi Case is that ‘the Constitution's Articles 22 and 29 guarantee, as basic civil rights, the right of a business to exercise its property rights, business freedom and other freedoms with respect to its broad economic activities. That is why the argument that the owner of a business, having the freedom to conclude a contract linked to his or her economic activities, can as a rule hire any worker and employ them ‘under any condition for its own business by the law or otherwise…’ is finally understood to be a decision against the above-mentioned constitutional principles aimed at protecting the weak. (5) Nevertheless, there is also support and understanding for the judgment with regard to the Japanese practice of lifetime employment and integrated structure of labour relationships: ‘Investigations of job applicants need to be carried out by commonly accepted proper methods, and care is taken not to infringe on the dignity of their personality and their privacy (depending on the circumstances, that infringement can constitute a tortious act). Even with regard to the matters investigated, it should be understood that the employer is limited to inquiring about and investigating matters related to the job applicant's qualifications, such as his or her occupational abilities, technical skills, and competence as an employee. Above all, even with that understanding, where an offer of long-term employment is contemplated, the matters that may be investigated can be wide ranging. The rationale of the Mitsubishi Jūshi Case should be understood as meaning that, in managing the enterprise, and to maximize their ability to make judgments, company officials have a right to inquire into a job applicant's world view and beliefs that are related to the contemplated job’. (6) Unfortunately the most important question, as to what is related to the contemplated job, is not at all further discussed and is finally left to the whole discretion of the employer. The question of how far the employer's right of freedom with respect to hiring should go is also disputed a lot in Germany, and a general line is still difficult to define: The majority P 158 view is that the employer may refuse to employ a candidate because of his political conviction and activities, but he is not allowed to ask for this conviction. (7) The Supreme Court of Japan has in the meantime maintained its attitude shown in the Mitsubishi Jūshi Case and adopted a similar stance in a later judgment, holding that the Trade Union Act, in connection with the prohibition of employers' unfair labour practices, did not clearly bar employers from refusing to hire workers because of their being union members. (8) This is because Japan has still not yet ratified the Discrimination (Employment and Occupation) Convention (ILO no. 111), which has led to an international

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impact of the problem, including the question of freedom related to hiring. In a recent statement of the International Trade Union Confederation (ITUC) (9) it is reported that Japan has now ratified six of the eight core ILO Labor Conventions, but is still to take measures to overcome a number of problems related amongst other things to discrimination in employment. Thirteen recommendations were made in the report, of which the following may be of interest in the present context: – –

– –

– –

The government of Japan must ratify ILO Convention no. 111 on Discrimination and ILO Convention no. 105 on the Abolition of Forced Labor, and implement measures to ensure an effective transposition into national law. The government should allow the rights to organize, collectively bargain and strike to all civil servants and employees of State-run companies, in line with ILO Conventions no. 87 and no. 98 and the recommendations of the ILO Committee on Freedom of Association and the Committee of Experts on the Application of Conventions and Recommendations. The government should formulate a new law that protects employment and working conditions of fixed-term contract workers so that they are able to benefit from the right to organize. The government needs to take measures to abolish societal norms and legal regulations which permit the ‘dual career ladder’ system to be the dominant system for advancing careers. In addition, the government should take specific measures to close the gender pay gap. The system of identification of companies that fail to protect their employees from sexual harassment should be reformed in order to include enforcement provisions. The government should make further efforts in changing societal norms towards the descendants of the former lower caste and the Ainu and take measures to provide them with improved employment opportunities.

Hans-Peter Marutschke (1) P 158

References ★ )

1) 2) 3) 4) 5) 6) 7) 8) 9) 1)

Hans-Peter Marutschke: Doshisha University Law School, Japanese Law Institute Rōdo kijun-hō, Law No. 49/1947. Tokyo District Court, 17 June 1967. Tokyo High Court, 12 June 1968. K. Sugeno, Japanese Labor Law (transl. by L. Kanowitz) (2nd ed. 2002) 129. K. Sugeno (supra note 4) 130. K. Sugeno (supra note 4) 134. Hanau / Adomeit, Arbeitsrecht [Labour Law] (11th ed. 1994) 168 et seq. Supreme Court, 22 December 2003, Minshū 57-11, 2335. ITCU Report for the WTO General Council Review of the Trade policies of Japan. Geneva, 15 and 17 February, 2011. . Doshisha University Law School, Japanese Law Institute

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Case No. 16: Labor and Employment Law – Duty to Work Overtime – Termination for Cause – Abuse of Right – Section 36 Agreements – Collective Bargaining Agreements – Work Rules

Document information

Publication

Business Law in Japan – Cases and Comments

Gerald Paul McAlinn (★ )

Jurisdiction

Supreme Court, 28 November 1991, Case No. 1986 o 840, Tanaka v. Hitachi Seisakusho, ‘Hitachi Factory Overtime’ Case

Japan

Source: Minshū 45-8, 1270 = Hanrei Jihō 1404, 35 = Rōdō Hanrei 594, 7

Court

I Headnote(s)

Supreme Court of Japan

When an employer concludes an agreement regarding overtime work with a union under section 36 of the Labor Standards Act (a ‘saburoku kyōtei’) and submits the agreement to the Labor Standards Bureau, and when there is a provision in the work rules of the company that the employer can request overtime work within the limits set forth in the above-mentioned agreement, employees have a duty to comply with a reasonable request based on such a provision.

Case date

28 November 1919

Case number

A provision of the work rules is integrated into employee labor contracts provided that the content of the provision to be integrated is reasonable.

1986 o 840

P 160

Termination of employment for refusing to work overtime is not wrongful, and therefore is not an abuse of right, if supported by a section 36 Agreement and the work rules of the company, and the order is reasonable under the circumstances.

Parties

Claimant, Tanaka Defendant, Hitachi Seisakusho

II Relevant Provisions Section 93 Labor Standards Act (1)

Bibliographic reference

Sections 32, 36, 89 Labor Standards Act (prior to the amendments in 1987, Law No. 99/1987)

Gerald Paul McAlinn, 'Case No. 16: Labor and Employment Law – Duty to Work Overtime – Termination for Cause – Abuse of Right – Section 36 Agreements – Collective Bargaining Agreements – Work Rules', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 159 171

III Facts and Findings The facts of the initial decision by the Tokyo High Court of 27 March 1986 are affirmed. The relevant facts are as follows. Hideyuki Tanaka (the Appellant on appeal and Plaintiff, hereinafter only referred to as ‘Plaintiff’) began working on 1 April 1960 for Hitachi Seisakusho (Hitachi, Ltd.; the Appellee and Defendant, hereinafter only referred to as ‘Defendant’). He worked at the Hitachi Musashi factory (‘Factory D’) in the Low Frequency Product Manufacturing Group, Quality Management Section of the Manufacturing Division. This section was responsible for controlling the manufacturing quality of germanium transistors. The main role of this section was to improve product quality and the yield rate of transistors. The work rules of Factory D provided that Defendant could extend the daily working time beyond the regular working hours in accordance with an agreement entered into between the Defendant and the labor union at Factory D. The written agreement between the company and the union stipulated that ‘the company may extend the working hours beyond the daily schedule when (1) the extension is required and needed to attain production goals or to meet delivery deadlines, (2) a payment is due or close to being due, or for inventory control, payment calculation or work dealing with closing the financial books and records, (3) it is difficult to finish the work during normal working hours due to plumbing, wiring issues and the like, (4) moving, setting up or repairing equipment or facilities is carried out and work must be done on a rush basis as a result, (5) it is necessary to attain production goals, (6) the extension is unavoidable as a result of the nature of the work, and (7) there is a reason similar to the above (1) through (6)’. The agreement also stated that the extended hours must not exceed 40 hours per month, but this limit could be exceeded in an emergency within a further limit agreed upon by the parties during the month. The agreement was submitted to the competent Labor Standards Bureau pursuant to section 36 of the Labor Standards Act. At around 4:30 pm on 6 September 1967, the Plaintiff's supervisor (‘Supervisor F’) ordered in the transistor yield rate and to re-calculate the estimated yield value. The Appellant refused and did not follow the overtime work order.

P 161 him to work overtime in order to investigate the cause of a decline

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1 Majority Opinion Regarding overtime work in section 32 of the Labor Standards Act (prior to amendment in 1987), when the union at the relevant work place (in which a majority of the workers are union members) agrees to a written agreement (a so-called 36 Agreement) (2) and it is submitted to the head of the competent Labor Standards Bureau, and when the employer sets out in the work rules the possibility of ordering overtime work when necessary to the production process within the limits of the 36 Agreement, and when the contents of the work rules are reasonable, then the 36 Agreement is incorporated into the work rules and becomes an actual part of the employment contract. The rules are applicable to workers in that they are obliged to work overtime – according to the agreement – exceeding the normal working hours set out in the employment contract (Supreme Court, Case No. 1965 o 145, decision of 25 December 1968, Minshū 22-13, 3469; Supreme Court, Case No. 1983 o 1408, decision of 13 March 1986, Saibanshū Minji No. 147, 237). In this case, as stated above, the concrete requirements for overtime work for the Plaintiff at Factory D are set out in the 36 Agreement. The 36 Agreement limits the working hours and, at the same time, requires the existence of one of the reasons from (1) to (7) above. Therefore, this working regulation is reasonable. We cannot deny that the above (5) to (7) reasons are somewhat general and all-inclusive for overtime work, however, section 36 of Labor Standards Act anticipates that it is necessary to accommodate the production plan in response to fluctuations in demand. From that viewpoint, the facts found by the court in the initial decision are affirmed and, considering the business activities of Factory D, and the workers' (including the Plaintiff's) assignments and actual working processes, the above (5) to (7) reasons cannot be said to be unreasonable. As such, the Defendant could have ordered the Plaintiff to work overtime when reasons exist under the 36 Agreement. The order to work overtime satisfied reasons 5 to 7 of this 36 Agreement, and therefore, we must say that the Plaintiff was obliged to do the overtime work. Considering the facts (determined by the initial decision) that Supervisor F ordered the overtime work because the Plaintiff did not perform his work satisfactorily during regular hours and the overtime was required to re-do or correct the negligent work, the punitive dismissal of the Plaintiff by the Defendant cannot be said to be an abuse of right. Therefore, the punitive dismissal based on the above reasons is effective, and the initial decision that dismissed the request by the Plaintiff for confirmation of his continued employment, and the Plaintiff's request for payment of unpaid salary after November 1967, with interest, is without legal error and is upheld. P 162

There is no legal error in the initial decision and the argument of the Plaintiff cannot be accepted. Therefore, we conclude the case according to sections 401, 95 and 89 Civil Procedure Law as an unanimous accord except for the separate opinion by Justice Osamu Mimura.

2 Separate Opinion by Justice Osamu Mimura I agree with the majority opinion regarding work rules and overtime work. However, the first ground for the appeal contends that the labor agreement and work rules cannot provide a basis for requiring overtime work. I think this is an important problem regarding work rules and overtime work so I would like to state my own opinion. In my view, section 32 of the Labor Standards Act (prior to the amendment) sets the maximum working hours with criminal sanctions for violations, and contracts or agreements extending working hours are, in principle, not valid. However, the effect of section 32 in protecting the rights of workers is eliminated by section 36 as long as there is a prerequisite conclusion of a 36 Agreement and it is submitted to the administrative agency. Employers thereby avoid criminal charges and the labor contract will still be effective. Section 16 of the Labor Union Act empowers a collective bargaining agreement to have so-called normative effect, in cases where the collective bargaining agreement sets out working conditions and other criteria that illustrates the standard of treatment for workers. A labor contract having clauses that violate standards in the collective bargaining agreement will be subordinate to the collective bargaining agreement. This is due to the nature of the collective bargaining agreement, which has been concluded after collective bargaining between the union (which is an organization of workers for the purpose of improving the economic situation of workers) and the employer. Since working hours are a critical part of the working conditions, the collective bargaining agreement should have normative effect. Even though extension of the maximum working hours over the statutory length is detrimental to the employees, a collective bargaining agreement is the result of collective bargaining as stated above. It could contain clauses both advantageous and disadvantageous to individual employees. The mixture of both creates the standard for working conditions. Therefore, the existence of a clause that is disadvantageous to an employee should not, by itself, make a clause of the collective bargaining agreement invalid.

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As such, with the signing of the so-called 36 Agreement and its being submitted to the administrative office, if the collective bargaining agreement makes it possible to extend the working hours, the labor contract between a worker who is in the Union that concluded the labor agreement and the employer follows the conditions set by the collective bargaining agreement within the limit of that 36 Agreement. It is appropriate to understand that the worker bears an obligation to work overtime. According to the facts determined by the initial decision, in the collective bargaining Defendant and the Factory D Labor Union (hereafter ‘Union’) and the umbrella general labor union, in which Plaintiff is a member there is a provision saying that the Defendant may, when unavoidable for business reasons, extend the normal daily eight working hours with the agreement of Union. Based upon this, Factory D and the Union concluded the 36 Agreement, which was already described in the majority opinion, on 21 January 1967 (expiring in the same year on 30 September) and it was reported to the administrative agency. Therefore, in this case, the labor contract between the Plaintiff and the Defendant has to be subordinate to the above collective bargaining agreement. It must be understood that the Plaintiff was obliged to work overtime because of this collective bargaining agreement.

P 163 agreement which was concluded on 31 October 1966 between the

Translated from the Japanese original by Gerald Paul McAlinn & Mayu Terada

IV Comment Few institutions are more central to the well being of individuals and society than work. For the individual, work provides a sense of identity and self-worth, and it allows for the sustainability of the family as the primary unit of society. (3) The social benefits of work are manifest to society at large as witnessed by the world-wide debate on globalization, unemployment and the shift from the solid and reliable jobs of the past, towards temporary or ‘contingent’ employment with no guarantees and few, if any, benefits. (4) This debate is equally prominent in Japan, where lifetime employment has rapidly given way to a dramatic rise in the number of ‘furita (freeter),’ ‘hi-seiki koyō-sha,’ and ‘haken shain’. (5) P 164

The issue in Japan traditionally has not been too little work but, rather, too much of it. The Japanese ‘salary man’ is iconic for his work habits, working long hours (often without overtime pay) followed by quasi-compulsory bouts of eating and drinking after work with colleagues, and foregoing annual leave on a regular basis. This has led to myriad social problems, such as karōshi (death from overworking), which have caught the attention of social commentators and regulators. (6) The government has responded by adding a number of national holidays and combining them into long weekends (in addition to the so-called Golden Week and Silver Week holidays in the Spring and Fall, respectively) as a method of involuntarily reducing the number of working hours. (7) The problem of working hours serves as a good example of the disconnection between formal law and actual behavior. The Labor Standards Act (Law No. 49/1947, the ‘LSA’), and the Labor Union Act (Law No. 174/1949, the ‘LUA’) were both promulgated following the end of World War II in order to create minimum standards for employment and to ensure the rights of workers to organize and to engage in collective bargaining, respectively. (8) Labor and employment law in Japan is largely based on contract. The LSA sets minimum working conditions that are non-waivable and preemptive. Employers are free to provide better conditions than prescribed by the LSA, but employment relationships that derogate from the minimum standards are both illegal and unenforceable. Limits on the number of hours an employee can work per week, the treatment of vacation, and other matters are all set forth in the LSA. (9) In this context, the Hitachi Factory Overtime Case is significant for two main points. First, the case addresses the complex intersection of the collective bargaining agreement under the LUA, company work rules, and individual employee rights under the LSA. Second, by sustaining the dismissal of the employee for refusing to work overtime, the case is important for marking an outside boundary to the strong protection afforded P 165 employees from wrongful termination under the abuse of right doctrine. This commentary will discuss both of these points, taking up the second point first because it provides the backdrop for so much of employer-employee relations in Japan.

1 Wrongful Termination and the Doctrine of Abuse of Right Japanese judges have long recognized the significance of stable employment to society. Since the passage of the LSA, the courts have developed a consistent and relatively voluminous body of jurisprudence highly favorable to the employee. The cases have emphasized the need to preserve the employment relationship at virtually any cost to the employer. The theoretical framework for the protection of employees is found in the doctrine of abuse of right. Section 1 of the Civil Code sets forth three fundamental principles that govern all legal relationships in Japan. These are as follows: (1) rights must conform to the public welfare, (2) the exercise of rights and performance of duties must be done in good

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faith, and (3) no abuse of rights is permitted. The doctrine prohibiting abuse of right has had wide application in Japanese law, including in the field of labor and employment. As will be seen later, the doctrine has been expressly incorporated into the LSA. The leading Supreme Court case of Shioda v. Kōchi Broadcasting Company, (Supreme Court, decision of 31 January 1977, Rōdō Hanrei 268) is illustrative. (10) Shioda was a radio announcer employed by Kōchi Broadcasting. His duties included, among other things, monitoring the overnight news feeds and working with a reporter to prepare, and then read on air, the morning news broadcast at 6:00 A.M. He went on duty at 10:00 P.M. on the evening of 22 February 1967 and was scheduled to broadcast the morning news the following morning. Unfortunately, Shioda fell asleep and did not wake up until 6:20 A.M. and there was no morning news broadcast on 23 February. The same thing happened less than one month later when Shioda was again assigned to overnight duty. At first Shioda did not report this second incident. When his boss found out about it, he ordered Shioda to make a written report. Shioda compounded the situation by turning in a false report in an effort to cover-up his neglect of duty. The work rules of Kōchi Broadcasting allowed the company to dismiss an employee for disciplinary reasons. Section 15 of the company work rules also provided, in relevant part, for ordinary dismissal ‘1. When a mental or physical disability makes the individual unable to perform the job, …, or 3. Any other cause of a similar nature’. The company believed it had justifiable disciplinary grounds for dismissing Shioda but decided instead to dismiss him under paragraph 3 of section 15 so that his chances of finding a new job would be better. After Shioda was fired, he brought a lawsuit for wrongful termination against the request for confirmation of his continuing status as an employee. The company appealed to the Supreme Court, which rejected the arguments of the company and affirmed the lower court decisions, writing as follows:

P 166 company. Both the District Court and the High Court sustained Shioda's

However, even in a situation with grounds for an ordinary dismissal, the employer does not necessarily have the unilateral right to dismiss, especially in a case where the dismissal will be considered an abuse of right and will therefore be deemed invalid. In this case, the incidents caused by [Shioda], caused [Kōchi Broadcasting Company], a company which regards punctuality as an imperative, to lose public credibility. The fact that [Shioda] overslept twice and caused the same incident to occur within a two week period shows a lack of responsibility as an announcer. Moreover, when taking into consideration the failure to confess one's fault, immediately after the Second Incident, [Shioda] cannot be absolved of responsibility. On the other hand, according to the facts presented at the trial, the incidents in question were brought about when [Shioda] overslept, which is an act of negligence, not intentional or malicious conduct. Furthermore, the fax operator who was supposed to get up first and to wake-up [Shioda] at a specified time, failed to do so on both occasions because he also overslept. Therefore, blaming the incidents on [Shioda] alone would be too severe. (11) Comparing the facts of the Hitachi Factory Overtime Case with those in the Kōchi Broadcasting Company case, it is not so easy to distinguish the two situations on first blush. In Hitachi Factory, Tanaka was negligent in the performance of his duties as was the case for Shioda in Kōchi Broadcasting. However, when we look at Tanaka's situation from the perspective of the actual reason he was dismissed, i.e., refusal to stay after work to correct his errors so that the company could meet its production obligations, we can see that the two cases are, in fact, different. The existence of the 36 Agreement was also a clearly critical factor in justifying the employer's decision to fire Tanaka. Without such an agreement in place, it is extremely doubtful that the company's decision to fire the employee would have been sustained. (12) The Hitachi Factory Overtime Case is a relatively rare, but not a singular, instance where the courts have recognized that employers do have valid, albeit narrowly construed, business interests justifying termination if an employee fails to follow reasonable instructions. As another example, the Supreme Court sustained a decision to terminate an employee for refusing to accept a transfer to a distant location even though the move P 167 would have required the employee to leave his family behind since his wife had a job. (13) The bottom line seems to be that employers will be given some latitude (always within the bounds of reasonableness, and any applicable agreements and work rules) in directing their work force in order to meet the exigent needs of the business. The judge made rule prohibiting wrongful termination under the general doctrine of abuse of rights was codified by the Act to Revise the Labor Standards Act (Law No. 104/2003). This new law added section 18-2 to the LSA providing that ‘A dismissal shall, where the dismissal lacks objectively reasonable grounds and is not considered to be appropriate in general social terms, be treated as a misuse of that right and invalid’. Subsequently, the Labor Contract Act (Law No. 128/2007, the ‘LCA’) was enacted in response to changing employment practices in the wake of the decline of traditional employment practices. The LCA resulted in section 18-2 of the LSA being moved from the LSA and placed into the LCA as section 16 without change.

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Section 16 of the LCA represents the current legal standard for terminating an employee. To reiterate, the decision must be objectively reasonable and it must not offend community standards. The result is that courts routinely find dismissals for incompetence, minor or non-chronic dereliction of duty, and other like behavior to be invalid. (14) An employer is expected to provide sufficient support and training for each employee so that he or she can ultimately remain within the company in some capacity. If an employee is not competent to perform a specific job, efforts must be made to find a position within the company where the employee will be able to contribute.

2 Relationship of Collective Bargaining Agreements, Work Rules, and the Rights of the Individual Employee Employers with 10 or more employees are required to have rules of employment (shūgyō kisoku). (15) The work rules must cover matters pertaining to, among other things, the starting and ending time of work, rest periods, days off, leave, and shift work if it is used at the workplace. (16) The employer is required to seek the opinion of the labor union P 168 organized by a majority of the workers or, if there is no union, ‘a person representing a majority of the workers’. (17) The work rules and a document setting forth the opinion of the labor union or representative of the workers must be submitted to the competent government agency. Work rules are allowed to extend benefits or to otherwise improve the working conditions of the employees, but they are not permitted to provide for conditions below the minimum standard set forth in the LSA. (18) In a very general, but imperfect, sense, company work rules represent a form of labor contract between workers and the company to the extent that they vest employees with certain rights and obligations. (19) When an employer is unionized, the collective bargaining agreement will determine the working conditions. Section 16 of the LUA provides, in relevant part, that ‘Any part of an individual labor contract contravening the standards concerning working conditions and other matters relating to the treatment of workers provided in the collective agreement shall be void’. A collective bargaining agreement that covers 75% of the workers in a particular factory or workplace will also govern ‘remaining workers of the same kind employed in the factory concerned or workplace’. As stated at the outset, the employer-employee relationship is in its final essence a matter of contract. Individual written employment contracts for regular, non-executive employees are, however, still relatively rare in Japan. This is arguably, in part, because of the effective coverage of the LSA and the LUA, respectively. In non-union workplaces, the basic standards of employment are set forth by the LSA. For union shops, the LUA and the collective bargaining agreement provide the content of the terms and conditions of employment. Finally, section 36 of the LSA provides, in relevant part, as follows:

P 169

In the event that the employer has entered into a written agreement either with a labor union organized by a majority of the workers at the workplace (in the case that such labor union is organized) or with a person representing a majority of the workers (in the case that such labor union is not organized) and has notified the relevant government agency of such agreement, the employer may, notwithstanding the provisions with respect to working hours stipulated in sections 32 through 32-5 or section 40 (hereinafter in this section referred to as ‘working hours’) or the provisions with respect to days off stipulated in the preceding section (hereinafter in this paragraph referred to as ‘days off’), extend the working hours or have workers work on days off in accordance with the provisions of the said agreement; provided, however, that the extension of working hours for belowground labor and other work especially harmful to health as stipulated in the Ordinance of the Ministry of Health, Labour and Welfare shall not exceed 2 hours per day. Section 36 is an express recognition of the need by employers to extend working hours beyond the 40 hour week contemplated by section 32 of the LSA provided that (1) the representative of the workers has agreed in a written agreement as to how, when and by how much, and (2) the written agreement is filed with the relevant government agency. (20) Entering into a saburoku kyōtei or 36 Agreement with the employees in writing exempts employers from liability, but only after satisfying the check and balance of having it filed and accepted by the government. (21) With this legal framework in mind, we can now turn to the situation of Tanaka at Factory D. Tanaka was apparently an active Hitachi Factory D union member and no stranger to trouble. The lower court noted that he had been suspended three times and reprimanded once in the past for disciplinary reasons. He had challenged a company decision to lay off workers at the factory in the past, and had advocated for three dismissed employees, including serving as a witness against the company in one court case. He also attempted to take collective action against the company by working with other factory unions. The company asserted in court that it had no alternative but to dismiss Tanaka since

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there was no chance he would correct his errant job performance. In other words, the order to work overtime was the result of his poor attitude and incompetent work during normal working hours. Tanaka countered that the company would not suffer serious damage if the work were left until the next day. He had an appointment to meet friends after work and the amount of work Supervisor F ordered him to do could not be completed within the day even if he worked overtime. Moreover, he asserted that the work was finished the next day during P 170 normal working hours. Thus, in Tanaka's eyes, the action by the company was little more than a subterfuge intended to disguise an illegal punitive dismissal for engaging in union activities. (22) The union at Factory D and Hitachi had entered into a 36 Agreement, which is quite common in manufacturing facilities. Regarding the import of the 36 Agreement, Tanaka contended the LSA provided him with basic rights as a worker that the company and the union could not alter by agreement. The 36 Agreement, in his view, only served to give the company the right to ask an employee to work overtime. It did not eliminate his right to refuse such work. The District Court accepted Tanaka's theory of the case finding that the individual work contract (as manifested by the LSA and work rules) should take precedence over the 36 Agreement. The 36 Agreement allowed Hitachi to request workers to stay overtime, but it did not mandate that they had to accept such a request. The Tokyo High Court and the Supreme Court rejected this view of the case in favor of a more comprehensive view of the labor contract as set forth in the collective bargaining agreement and the 36 Agreement. To paraphrase Justice Mimura, the individual contract must be subordinate to the collective bargaining agreement in order to recognize fully the negotiated balance of advantages and disadvantages to workers. If an individual worker were able to ‘cherry pick’ the parts that were in his or her favor, companies would not engage in collective bargaining and unions (or representatives of the workers) would lose their ability to strike a deal in the best interests of the majority of the workers. The result of the Hitachi Factory Overtime Case seems reasonable, fair and balanced. However, some critics have criticized the decision for allowing Hitachi to assert overly broad reasons for requiring overtime in the 36 Agreement. (23) The concern is that the case could lead to an erosion of the 40 hour week for little more than the convenience of the employer. Others have criticized the decision for ignoring the seeming reality that Tanaka was fired at least in part because of his pro-union attitude and his refusal to show remorse and to apologize for refusing to work overtime. (24)

3 Conclusion The majority decision and the separate opinion in the Hitachi Factory Overtime Case make sense in the context of the complex legal and contractual framework governing the employer-employee relationship. Without doubt, all workers are entitled to a guaranteed P 171 basic minimum standard of working conditions as provided in the LSA. The LSA is a floor and not a ceiling. Workers and employers are encouraged by the LSA to aspire to working conditions ‘that meet the needs of workers who live lives worthy of human beings’. (25) The minimum standards of the LSA, including the 40-hour work week required by section 32, cannot be derogated from except under the very specific circumstances provided in section 36. The requirement that 36 Agreements be in writing and filed with the government protects the interests of employees against being compelled to work overtime merely for the convenience of the employer. Moreover, the primacy of the collective bargaining agreement in a union shop protects the interests of the workers as a whole even though it may not be at all times and in all respects in the best interest of an individual worker. Without such a rule, the collective bargaining process would lose its meaning and workers would almost certainly find themselves in worst straits. Without the possibility of 36 Agreements, companies would likewise find themselves unable to meet the exigencies of business. This could result in companies failing and unemployment rising. The Supreme Court has recognized all of these strains in the Hitachi Factory Overtime Case and should be applauded for providing a reasoned, balanced and just result. Gerald Paul McAlinn & Mayu Terada (1) P 171

References ★ )

1) 2)

Gerald Paul McAlinn : Keio University, Law School, (University of Pennsylvania), (Temple University) Rōdo kijun-hō, Law No. 49/1947. Translator note: This is commonly known as a ‘saburoku kyōtei’ in Japanese.

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3)

4)

5)

6) 7) 8) 9)

10) 11) 12)

13)

14)

15) 16) 17) 18)

For an excellent and thought-provoking analysis of the constitutional dimensions of work and the workplace, see, K. Karst, The Coming Crisis of Work in Constitutional Perspective, in: Cornell Law Review 82 (1997) 523-71, 529) (‘…work has been one of the major arenas in which America's basic constitutional values of liberty, equality, and national union have been either validated or frustrated’). Ibid., at 525–28. See, also, G. Lester, Careers and Contingency, in: Stanford L. Rev. 51 (1998) 73–145, 73 (‘Perhaps the most celebrated “crisis of work” of the past decade is the perceived replacement of career employment with “contingent” jobs of limited duration, hours, or security’), and V. Schultz, Life's Work, in: Colum. L. Rev. 100 (2000) 1881, 1883 (‘As individuals, our work provides us with a forum to realize at least some of our aspirations, to form bonds with others, to serve society, and to project ourselves into the larger world beyond our families and friends. It also provides us with the wherewithal to sustain ourselves, economically and socially, so that we may enter into intimate relationships with the security that permits us to love (and leave), freely, without the need for recompense.’). These terms are all used to describe people in the workforce who have jobs that cannot otherwise be characterized as regular, full-time employment. Furita (Freeter) are defined by the Ministry of Health, Labour and Welfare as men and unmarried women (married woman are counted in the category of housewives) aged 15 to 34 who are not students and are working part-time, the unemployed who are seeking part-time work, and people who cannot, or do not have the desire to, work full-time. MHLW White Paper, Life of Citizens, 30 May 2003, available at . The other terms can be translated roughly as non-regular employees and dispatched employees. Recently, the percentage of the workforce that is comprised of ‘hi-seiki koyō-sha’ stands at about one-third. Statistics from Japan Institute for Labour Policy and Training, Sōmushō rōdōryoku chōsa, available at . Recent statistics show that only around 33% of Japanese workers use all of their paid vacation. This is believed to be the lowest percentage of all other industrialized countries. For an excellent review of the issues relating to working hours, see, M. West, Law in everyday Japan: Sex, Sumo, Suicide and Statutes, Ch. 7 ‘Working Hours’ (University of Chicago Press, 2005). For a comprehensive history of Japanese labor and employment law, see, K. Sugeno, Japanese Labor Law (Tokyo University Press, 1992; translated by L. Kanowitz). The total hours actually worked per year by the average Japanese worker is thought to have peaked at 2,426 in 1960 and then stayed between 2,100 and 2,200 from the mid-1970s through the 1980s. An amendment of the LSA in 1987 (Law No. 99/1987) set the goal at 40 hours per week with statutory working hours being reduced gradually from 48 to 40 by 1997, when the amended law was fully implemented. This led to a sharp decline in annual hours actually worked to 1,850 in 2007. The LSA also promoted a number of other major changes to working conditions, such as introducing flex time and increasing paid holidays. A partial translation of this case by R. Fukuzawa can be found in: Port / McAlinn, Comparative Law, Law and the Legal Process in Japan, 2d (Carolina Academic Press, 2003) at pp. 566–68. Ibid., at pp. 567–68. The District Court in the Hitachi Factory Overtime Case admitted Tanaka's claim. It found that the disciplinary dismissal was done to punish the plaintiff's attitude for refusing to work overtime work and then not submitting a written apology. The District Court also concluded that the 36 Agreement was too abstract. Workers could not expect the agreement to require overtime work in the same manner as they were required to work normal working hours. Tokyo District Court, Hachiōji Branch, Minji Dai-ichi-ibu, 22 May 1978, Case No. 1971 wa 200. Toa Paint Case, in: Hanrei Jihō 1198, 149 (Supreme Court, decision of 14 July 1986) discussed in R. Yamakawa, The Silence of Stockholders: Japanese Labor Law form the Viewpoint of Corporate Governance, in: Japan Labor Bulletin 38, No. 11 (1991) available online at (‘…it must be noted that Japanese employers exercise a wide discretion or flexibility in human resources management’). Companies typically provide in their work rules a specific list of reasons that can result in dismissal. Examples usually include behaviors such as (i) violating the law (theft, sexual assault, fighting, etc.); (ii) providing false or misleading information on pre-employment documents such as resumes, licenses, etc.; (iii) damaging the reputation of the employer; or (iv) lacking utterly the ability to perform the work for which the individual was hired. LSA, section 89. Additional matters provided for in the work rules include wages, retirement, disciplinary procedures and sanctions, safety and health, etc. LSA, section 90. LSA, section 1(2) provides as follows: ‘The standards for working conditions fixed by this Act are minimum standards. Accordingly, parties to labor relationships shall not reduce working conditions with these standards as an excuse and, instead, should endeavor to raise the working conditions’.

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19) There are two theories regarding the preparation of work rules on behalf of a

company. One asserts the work rules should closely track the provisions of the LSA without more in order to avoid losing flexibility in dealing with employees. The other takes the view that the work rules present an opportunity for an employer to demonstrate its commitment to a higher standard than the minimum set by the LSA. 20) An interesting case in counterpoint is the McDonald's Overtime Case. In that case, a McDonald's Japan store manager brought a claim against the company claiming that he was wrongfully denied overtime compensation. The company asserted that he was in the management class and, therefore, not entitled to overtime pay as a regular employee. The District Court found that the manager did not have the kind of authority consistent with his manager job title. The Nihon Keizai Shinbun reported on 28 January 2008 that the worker was awarded over seven million yen unpaid overtime. The decision of the Tokyo District Court was not published. The case was appealed, but was reportedly settled on 18 March 2009 at the Tokyo High Court. The McDonald's Overtime Case was closely followed in the media. The case has been very influential in the area of overtime. After the District Court decision, the Ministry of Health, Labour and Welfare notified all Labor Standards Bureaus in April of 2008 to check the working conditions of workers in cases similar to the McDonald's Overtime Case (MHLW Notification, No. 0401001 on 1 April 2008). 21) In practice, 36 Agreements are submitted to the local Labor Standards Bureau and

22)

23) 24) 25) 1)

will not be accepted unless they are found to be reasonable by the government. This protects employees from being coerced into enter into a 36 Agreement, as well as against their own desire to increase earnings to the detriment of health. Section 7 (i) of the LUA makes it an unfair labor practice for an employer to discharge or treat disadvantageously an employee for engaging in lawful union activities. It is interesting to note that the LUA does not contain any unfair labor practices that are applicable to unions or union members. See, Rōdō Hanrei No. 594-7, 8 / Jurisuto No. 165 [Rōdō Hanrei Hyakusen No. 54 (8th edition)] 113. See, M. Morozumi, Jurisuto No. 165 [Rōdō Hanrei Hyakusen No. 54 (8th edition)] 113, and S. Mori, Jurisuto No. 134 [Rōdō Hanrei Hyakusen (6th edition)] 99. LSA, section 1. Keio University, Law School, (University of Pennsylvania), (Temple University)

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Case No. 17: Labor Law – Abuse of Employer's Right to Transfer Employees

Document information

Publication

Matthias Scherer

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 14 July 1986, Case No. 1984 o 1318, Yoshida v. Toa Paint, ‘Toa Paint’ Source: Hanrei Jihō 1198, 149 = Rōdō Hanrei 477, 6

Jurisdiction Japan

I Headnote(s) The employer's right to issue transfer orders is abused if and when:

Court

(a) (b)

Supreme Court of Japan

(c)

Case date 14 July 1986

there is no business necessity for such transfer order; or there is a business necessity for such transfer order, but it is issued from improper motives or for improper purposes; or such transfer order causes the employee to bear disadvantages which clearly exceed the extent which is usually acceptable.

II Relevant Provisions Section 1(3) Civil Code

Case number

P 174

1984 o 1318

III Facts (1) According to the findings of the previous instance (2) the facts which are related to the disciplinary dismissal in issue of the appellee and plaintiff (3) are as follows:

Parties

Claimant, Yoshida Defendant, Toa Paint

1.

Bibliographic reference

Matthias Scherer, 'Case No. 17: Labor Law – Abuse of Employer's Right to Transfer Employees', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 173 185

2.

P 175

3.

Toa Paint (4) (the Appellant and Defendant, hereinafter referred to only as the ‘Defendant’) has its head office and other offices in Osaka, a branch office in Tokyo, plants in Osaka and two other cities and 13 business shops across the nation. It employs a workforce of about 800 employees and manufactures paints and other chemical products. Section 29 of the collective labor agreement which had been concluded between the Defendant and its company union stipulates: ‘The company may order union members to transfer or undergo reassignment for business reasons’. Moreover, section 13 of the Defendant's rule of employment stipulates: ‘Employees may be ordered to move for business reasons. In such cases refusals may not be made without good reason’. Within the Defendant company shukkō transfers (5) and other moves of employees, especially of sales people, were carried out frequently. It happened many times that moves of employees took place in such a way that employees were transferred from Osaka or Tokyo to regional business shops and returned to Osaka or Tokyo after two to three years. In March 1965 Yoshida Tōru (the Appellee and Plaintiff, hereinafter referred to only as the ‘Plaintiff’) graduated from the department of economy of Kwansei Gakuin University. (6) In April 1965 he was employed by the Defendant and assigned to the first sales department of the Defendant's Osaka office. When the employment contract between the Defendant and the Plaintiff was concluded, no agreement was reached to the effect that the Plaintiff's area of work would be limited to Osaka. As a matter of course, it was expected from the Plaintiff, who had entered the Defendant's company as a university graduate and was working in the sales area after his entry, that he would be moved in the future whenever the business necessity for such moves would arise. In April 1969 the Plaintiff was moved by way of shukkō transfer to Yamaichi Shōten K.K.'s Osaka business shop and in July 1971 this shukkō transfer was terminated and he started working at the Defendant's Kobe business shop. As of April 1983 he was promoted to the rank of shūnin taigū (7) and was engaged in selling paints. Since the Defendant had appointed the acting shūnin of its Hiroshima business shop as a specialist for household paints in the Chūgoku region (8) and the coastal region of the Seto Naikai, (9) it could enlarge its sales force within its Hiroshima business shop by another employee as his successor. Thus, it became necessary to transfer an employee of the kakari-chō, shūnin or shūnin dairi class, who would be able to work as an assistant to the chief of its Hiroshima business shop. On 28 September 1973, the Plaintiff, who was working as a shūnin taigū in the Kobe business shop at the time, was asked to transfer to the Hiroshima business shop by way of naiji. (10) The Plaintiff said, however, that because of his domestic situation he could not comply with the transfer order which would also result in a change of residence, and refused to transfer. As the Plaintiff stubbornly kept refusing to transfer to Hiroshima, the Defendant elected shūnin Kanenaga of its Nagoya business shop as successor of the acting shūnin of its Hiroshima business shop, and ordered the Plaintiff to transfer to its Nagoya business shop as successor of shūnin Kanenaga. As the Defendant had tried anew to persuade the Plaintiff to move to Hiroshima on 1 October 1973 and the Plaintiff again had not complied, the Defendant immediately

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P 176

4.

5.

transferred the Plaintiff by way of naiji, but the Plaintiff refused this time again because of his domestic situation. On 8 October the Defendant ordered the regular reshuffle of 50 employees, but postponed the issue of a transfer order to the Plaintiff trying to persuade him to transfer to Nagoya again and again. However, as the Plaintiff still did not comply, the Defendant, on 30 October 1973, issued the order in dispute to the Plaintiff to transfer to its Nagoya business shop without having his consent. The Plaintiff did not comply with this order and did not leave for Nagoya. Thereupon the Defendant, on 18 December 1973, was compelled to transfer Miyamoto Masatoshi, who was working in its Osaka business shop and had entered the Defendant's company in 1970, to its Nagoya business shop as successor of shūnin Kanenaga, substituting for the Plaintiff. Thereafter, on 22 January 1974, the Defendant issued the disciplinary dismissal in dispute to the Plaintiff, as his refusal to comply with the transfer order in dispute fell under the disciplinary provision of section 68 item 6 of the rule of employment which stipulates ‘when he has unjustifiably resisted official directives or orders or disturbed or tried to disturb the order of the workplace’. The Defendant faced the necessity to transfer a suitable employee to its Nagoya business shop as successor of shūnin Kanenaga who had been working there, but the situation was not such that the Plaintiff was required at any rate, and there was no serious disturbance caused by the fact that Miyamoto Masatoshi was transferred to its Nagoya business shop substituting for the Plaintiff. When the order to transfer in dispute was issued, the Plaintiff was living together with his mother, aged 71, his wife, aged 28, and his two-year-old daughter in a house in Sakai city (11) which was registered in his mother's name, and was supporting his mother. His mother was healthy, and could prepare meals and go shopping, but had never left Osaka prefecture since her birth. She had been a hobby haiku poetess for many years and used to organize haiku readings with other senior citizens two to three times a month. His wife had finished working for Toyobo on 30 August 1973 and had started working as a day nursery teacher at an unlicensed day nursery on 1 September 1973 and was also active as a member of the day nursery administrative committee. At that time, that day nursery had just opened with a team of three fulltime teachers and two part-time teachers. Among these, nobody was officially qualified as a day nursery teacher, and his wife was studying in order to obtain the qualification as a day nursery teacher.

IV Findings 1. The previous instance (12) had issued the following findings on the basis of the above facts: It must be affirmed that the Defendant's transfer order in dispute was based on business necessity, but such necessity was not especially strong, as it had also been possible to transfer another employee to its Nagoya business shop. If the Plaintiff, however, had moved to its Nagoya business shop, he would have been forced to live separate from his mother, his wife and his daughter. That would have meant that he would have been forced to make a considerable sacrifice. What is more, the Plaintiff, who had been working for the Defendant since April 1965, had already been moved to Yamaichi Shoten Ltd. by way of shukkō transfer and had thereafter been transferred to the Defendant's Kobe business shop and had been working at that shop for just two years and four months when the transfer order in dispute was issued. Considering this, it is quite appropriate to P 177 acknowledge that the Plaintiff refused the order to transfer to its Nagoya business shop with good and sufficient reason. Therefore, the transfer order in dispute which had been issued in spite of the Plaintiff's refusal to comply constitutes an abuse of right and is null and void, and the disciplinary dismissal that the Defendant had issued because the Plaintiff had not obeyed the transfer order in controversy is also null and void. 2. On the other hand, there are provisions in the Defendant's collective labor agreement and rule of employment that the Defendant may order employees to transfer for business reasons. Actually the Defendant has more than ten business shops nationwide and frequently moves its employees, especially its sales people, between these business shops. The Plaintiff had entered the Defendant's company as sales employee immediately after his graduation from university. When a labor contract was concluded between both parties, no agreement was reached to the effect that his area of work would be limited to Osaka. In view of this situation it must be said that, as there was no individual agreement to the contrary, the Defendant had the power to decide upon the Plaintiff's place of work and to expect that he continue to perform his duties after it had ordered him to transfer. Further, it must be said that an employer may decide upon an employee's work place for business reasons in his discretion, but transfers, especially those transfers that result in a change of residence, will have a great impact on the circumstances of life of the employees. Therefore, an employer may not exercise his right to order transfers without limitation and, as a matter of course, he is not allowed to abuse such right. Only if there is no business necessity for the transfer order in question or even if there may be such business necessity but the transfer order is issued from improper motives or for improper purposes, or if such transfer order causes the employee to bear disadvantages which

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clearly exceed the extent which is usually acceptable, or if other such special circumstances should exist, then one must say that the transfer order in dispute constitutes an abuse of right. Limiting such action to cases of urgent business necessity when it is difficult to transfer another person to the intended place in dispute is not appropriate either. But the existence of such business necessity must be affirmed, if and when it can be acknowledged that it will bring about the equitable distribution of the work force, the promotion of business efficiency, the development of the employee's occupational qualification, the uplifting of the joy of work, the creation of a pleasant working climate and other factors contributing to the rational management of an enterprise. Looking at these principles in this case, one can say that there was sufficient business necessity for the transfer order in dispute in which the Plaintiff, who was working as shūnin taigū, was chosen and ordered to work at the Defendant's Nagoya business shop, because a business necessity had arisen to transfer a suitable person as successor for shūnin Kanenaga of its Nagoya business shop. And then one must say that in view of above-mentioned domestic situation of the Plaintiff, the disadvantages for his domestic life which would be inflicted upon him by his transfer to the Defendant's Nagoya business shop would not have exceeded the ordinary extent which one must bear in connection with a transfer. Therefore, it is appropriate to interpret the above-mentioned facts, which P 178 were acknowledged by the previous instance, in such a way that the transfer order in dispute does not constitute an abuse of right. Such being the case, on must say that the judgment of the previous instance which, only on the basis of the facts acknowledged by it, had declared the transfer order in question to be null and void, contravenes the law as it contains errors regarding the interpretation and application of the legal norms. This contravention of the law has clearly influenced the conclusion within the judgment of the previous instance that the Defendant had lost this case. This argument is justified by the above-mentioned point. Thus it is unnecessary to pass judgment on the other points. The part within the judgment of the previous instance shall be quashed. Furthermore, as it is necessary to examine at length the other reasons for nullity of the transfer order in dispute submitted by the Plaintiff, it is hereby decreed according to section 407(1) of the Code of Civil Procedure, based on the unanimous opinion of all the judged, and as written in the formal adjudication, that this case will be returned back to the previous instance with regard to the above-mentioned part.

On The Statement of Grounds Of Appeal Made by the Defendant's Process-Attorneys Monma Susumu and Kadohara Mitsu 1 On The Election of a Successor for the Defendant's Nagoya Business Shop (13) As shown above, the Plaintiff's refusal created considerable problems for the area of business within the Defendant's Nagoya business shop for which shūnin Kanenaga had been responsible. These problems could not even be alleviated by the effort of all the other employees of this business shop. For this reason it was the only logical conclusion that the employees at the Defendant's Nagoya business shop wished that one employee – no matter who – would join them as a reinforcement, and Miyamoto Masatoshi was definitely not suited to become shūnin Kanenaga's successor. A business problem caused by a shortage of staff is fatal for an industry that is absolutely dependent on daily sales activities. Also the Plaintiff who himself had had experience in sales for more than eight years, must have been fully aware of the fact that a gap of more than three months could not be bridged easily, and that one would need quite some time to resuscitate sales. 2 On Transfer Terms During the first instance the Defendant had written in pages 5 and 6 of its brief dated 9 August 1982: ‘In conformity with an individual's qualifications and performance a transfer term can be long, but on the other hand according to various circumstances there are also short transfer terms. At any rate, it is a question of balancing by comparing and weighing merits and demerits’. This means that moving personnel in an enterprise must be carried out by paying heed to the business necessity, the rational nature of selecting personnel, the situation of the individual and other criteria in a rational and flexible P 179 manner. This means that: (1) (2)

(3) (4)

In case of a business necessity in a narrower sense, it is a matter of placing the person concerned into a position where he is urgently needed. In cases where there is also personnel management by job rotation where one wants the target person to expand his abilities and lets him experience various jobs which are different from his previous one and various regions and where one is looking for abilities which the individual possesses, and where one acts according to the maxim ‘the right man (14) in the right place’. In cases where there is a personnel reshuffle every three years in order to fight mannerism in business and to eradicate excessive attachment to other business people. In cases where people are being moved to suitable positions in line with shrinking

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or enlarging of the organization and with people's promotions to another status or position. One can also imagine other cases, but it would be theoretically wrong to think that people will only be moved situation that are based on business necessity in a broader sense. Whenever an enterprise transfers an employee, it will by moving one person by necessity produce a vacuum, insofar as the organization remains unchanged. This requires another person to fill this vacuum, i.e. a personnel management (15) by job rotation. If one, in this case, will view the enterprise as a whole, and if it is absolutely necessary for the sake of business expansion, it is appropriate to think that the complete personnel management by a chain of job rotations is based on business necessity. For sales people it will make no difference in what region they are selling something, as long as they are engaged in sales at all, but as far as sales methods are concerned, different regions, customs and human characters are essential factors, but there is great probability that someone who has no sales experience on the basis of these factors will stay a sales person who has hardly any chance of rising into middle or top managerial positions. After all, educating business people who can respond to any business situation requires a mind different from the proverbial ‘frog in the well’. (16) Thus, it is absolutely necessary to acquaint them with the ‘wide ocean’. 3 On the Plaintiff's Domestic Situation The judgment of the previous instance upheld the judgment of the first instance as administrative committee of the day nursery ‘Pikkolo’, it would have been practically difficult (17) for her to leave that day nursery which had just opened, and even if she had moved together with the Plaintiff, it would not necessarily have followed that she would have been able to leave her two-year-old child in the care of someone else and find a job’. Here again, one must say that these findings are based on errors about principles derived from experience and rules of evidence.

P 180 follows: ‘As at that time the Plaintiff's wife was a member of the

The Defendant had made the following statement: ‘The administrative committee did not consist of the Plaintiff's wife alone but consisted of seven or eight persons and the Plaintiff's wife was just one member of that committee. The Plaintiff contends that his wife is the only member of the committee who is charge of admissions of small children, but this day nursery is run by three full-time teachers (including the Plaintiff's wife) and two part-timers. Depending on the circumstances it is also possible to rely on the help of temporary staff. As a solution for the job situation of the Plaintiff's wife could have been found in the above-mentioned situation after an agreement between the spouses, and as normally in the case of a transfer of a married man this is quite appropriate, it would be out of the question that a man could not be transferred because of his wife's job’. Accordingly there would have been the possibility of tanshin funin, (18) if the Plaintiff had shown understanding for his wife and would have negotiated with her. (In this case the trip by Shinkansen from Osaka to Tokyo lasts only one hour, and as the Plaintiff would have received a monthly allowance (19) of JPY 15,000 and as the price of a round trip ticket is JPY 3,000, he could have returned home five times on this amount alone.) In our society such a situation happens all the time. Thus, the Plaintiff is stubbornly insisting on his egoistical and personal reasons and maintains that the Defendant had forced him to make a sacrifice, and assumes a position in which he is twisting the argument and is trying to avoid the problem. As the Defendant had also promised the Plaintiff that it would assist his wife in finding a job for her and a day nursery for his child, it is not at all true that the Plaintiff was going to be forced to make a sacrifice; rather the appellant company had proposed to assist the Plaintiff as much as possible. The Defendant had experienced an unprecedented crisis due to an explosion which had taken place in its plastic plant in Osaka in January 1973. Due to this the Defendant fell P 181 into a situation where it even had to transfer a great number of employees whose transfers normally would not have been expected to be to places as far as Ibaraki prefecture. According to the Defendant's submission, there were no other sales employees like the Plaintiff whose transfer could have been expected as a matter of course and who had refused to be transferred because of their personal situation. Therefore, one may assume that there had been other real reasons for the refusal of the transfer order than those which the Plaintiff had submitted. 4 Formal Adjudication The part within the judgment of the previous instance that the Defendant had lost this case shall be quashed. This case will be returned back to the previous instance with regard to the above-mentioned part. Translated from the Japanese original by Matthias K. Scheer

V Comment 1 Employment Contract, Collective Labor Agreement and Rule of Employment 12 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

Whereas the collective labor agreement which was concluded between the company's management and the company union will cover the wage structure and the working times in general, the details of the terms of employment are regulated by the rule of employment. (20) All employers who employ at least ten workers must submit a rule of employment to the authorities according to section 89(1) Labour Standards Law. (21) Employment contracts are by contrast relatively sketchy and contain the absolute minimum of the working conditions. The situation that ‘no agreement was reached to the effect that the Plaintiff's area of work would be limited to Osaka’ was very typical at that time. As late as the reform of the Labour Standards Law of 1998, the area of work had to be stated in the employment contract. (22) It was not only part of an unwritten rule that ‘as a matter of course, it was expected from the Plaintiff, who had entered the Defendant's company as a university graduate, that he would be moved in the future whenever the business necessity for such moves would arise’ , this expectation was clearly expressed by section 29 of the collective labor agreement (‘The company may order union members to transfer or undergo reassignment for business reasons.’) and section 13 of the Defendant's rule of P 182 employment (‘Employees may be ordered to move for business reasons. In such cases refusals may not be made without good reason.’). If the employment contract may have been vague, the collective labor agreement left no doubts and the rule of employment was even more explicit.

2 Naiji This is an internal, informal and unofficial means of communicating the wishes of the company, or to be more specific, its personnel department or the employee's superiors to the employee. It is face-saving in that it helps to avoid direct confrontation. The employee is informed in a more or less vague way about what is expected from him. He may say no, but in reality he is only allowed to plead for small changes of what is planned. The best result the management can hope for is an employee who will volunteer to do what is expected from him. This way of communication avoids friction which may arise if the hard way is applied. This indirect and suggestive leadership is especially well suited for individualistic persons who do not like to be ordered around (23) such as Yoshida. If it works out as well as intended there will be no legal problems as long as the employee does not feel that he has been pressured into volunteering. (24) Mostly, however, the addressee will understand the naiji exactly as it is meant, i.e. as a thinly coated poison pill. So the court was correct when it called the naiji of this case an ‘order’.

3 Regular Reshuffle The beauty of a regular reshuffle is that no one concerned can complain about being singled out for whatever prior behavior. If everyone is called upon to change positions in regular intervals, and this is what is meant by reshuffle, the blame is automatically placed on those employees who do not go along with it and claim personal or domestic reasons. Yoshida's position thus became awkward. Why would he so stubbornly cling to his family life? Even the Supreme Court went along with the Defendant's characterization of him as an egotistical and (overly) individualistic person and did not question the assumption that ‘there must be other (ulterior) reasons’. This kind of group pressure is very common in Japan (and many other countries as well) and serves to suppress undesirable and too individualistic behavior. This is why a Japanese doctor who had returned home after a long stay in the US said that the Japanese live in a ‘straightjacket society’. (25) P 183

4 Business Necessity According to the rule of employment there must be good reason for a transfer. What constitutes good reason is solely defined by the employer. As could be seen in the above judgment, personnel management by rotation as such is so typical of Japanese HR management that transfers are taken for granted. (26) Employees who hop from one station to another on their way up the corporation are often referred to as ‘transfer gipsies’. (27) Japanese organizations are not the only ones. In Germany, aspiring university lecturers are expected to have travelled the country for a few years before they may settle down as university professors. (28) Then the next period of moving around will start again. In the US the company name of IBM is often read as ‘I've been moved’. In case of dispute, however, a Japanese employer has to show that there was business necessity for the transfer in question. In this case, the company's attorneys tried very hard to show in great detail how much the unwilling Yoshida was needed in its Hiroshima business shop and then in its Nagoya business shop. The bottom line of all these lengthy arguments was, however, that the he was stubbornly refusing to obey to follow the career pattern that the personnel department had devised for him. In spite of being a salaryman he was egoistically placing his personal happiness above the company's common good. In retrospect, the court of first instance seems to have guessed right: Yoshida was a mere exchangeable chess figure to be moved around. Even the company's attorney explained that after some time the shortage of staff was so painful in Nagoya

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that about any employee was welcome, even Miyamoto, who had comparatively little experience.

5 The Transfer Order is Issued from Improper Motives or for Improper Purposes This vague allusion refers to cases when a transfer is used as a sanction against unwanted labor union activities. (29) Employers and courts tend to ignore all symptoms of vengeance that are very often extremely visible to all parties concerned. (30) P 184

6 Exceedingly Hard-to-Bear Disadvantages for the Domestic Life Caused by the Transfer Everyone will agree that a transfer will usually disrupt the routine of domestic life. But as regular transfers go along with some jobs, everyone will expect a transfer after some time. So the question is not whether to transfer but rather when, at what intervals, and to what kind of place. The two transfer orders came after the usual interval and at a time when Yoshida had just managed to balance the different needs of his extended family which consisted of three generation living under one roof. Like a pioneer, he had achieved a work-life balance at a time when this idea was not yet en vogue. (31) But pioneers will die young. His wife had just started her work at the day nursery to which she could also bring their own daughter. His wife had also just finished her former career and had embarked upon a new career that she could pursue even though she had a small child. Taking her to Hiroshima or Nagoya was of course possible, but would have destroyed this very special combination of hers. When the company asserted that it would have found another job for and another day nursery for their child, it sounded like an American relocation manager. Her job at the day nursery was not like any other job and that day nursery was very special. The company had completely missed the point. Yoshida's mother could have moved with the rest of the family to the new location. There she could have continued writing haiku poems but might have missed her regular poetry readings and her friends. It is interesting to see that her situation is not even mentioned in the discussion. Were Yoshida and his wife tacitly supposed to leave her alone in her house in Sakai? The alternative of moving the family was leaving the family in Sakai and becoming temporarily separated in Hiroshima or Nagoya. Tanshin funin was and still is a common phenomenon. It means cooking and eating your solitary meals on your own (jisui), (32) longingly phoning home, which at that time was still very expensive, missing one's daughter, wife or mother, etc, and feeling terribly lonely. Japanese employees are expected to grin and bear this situation and to look forward to those rare daytrips home on one to two week-ends per month. Sure, the separation allowance would have covered five return trips per month, but in reality two trips per month would have been the utmost possible. Is this too much to bear? It depends on the zeitgeist. During the seventies when Japan was still on its way to becoming a top economic power such a sacrifice was taken for granted. (33) The company was even shocked that Yoshida had had the guts to call this a sacrifice. A fate which is generally accepted as usual by society and one's peers is not regarded as P 185 unbearable. Japanese judges, who are themselves regularly transferred to far-away places all over Japan, could be expected to think: ‘Don't make such a fuss!’ And this was the way they decided: There had definitely been a need for a transfer, this need was not created out of spite, there was no improper imposition, and Yoshida's domestic and over-all situation was not exceptional but rather usual. So there was no abuse. (34) If people like Yoshida would have gotten away with this rebellious (35) self-indulgence which had clearly ‘disturbed the order of the workplace’ (36) then the whole social fabric of the Japanese economy would have been in jeopardy. He wanted to stay in his little paradise forever? OK, he asked for it. He had challenged the company and the company had dismissed him by way of disciplinary action. ‘Kubi da yo!’ (37) So this pioneer died at a young age. Matthias K. Scheer (1) P 185

References ★ )

Matthias Scherer: Hochschule Bremen, (University of Hamburg), (Harvard University).

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1)

2) 3)

4) 5)

6) 7) 8) 9) 10) 11) 12)

13) 14) 15)

16) 17) 18)

19) 20) 21) 22) 23) 24) 25) 26) 27) 28)

This judgment is based on, and consists of lengthy quotes from ‘the statement of grounds for the appeal by the process-attorneys Monma Susumu and Kadohara Mitsu’. It even ends with their petition ‘to be informed by the court about its opinion’. Statements of the appellee's 12 process-attorneys during this instance are only quoted indirectly at best. The opinions of the judges of the Supreme Court can be inferred by the way they quote from the statement of grounds for the appeal by the appellant company's process-attorneys. This means that this is an exercise of reading between the lines while trying to keep up with the flash-backs. Osaka High Court being the court of second instance had rendered its judgment on 21 August 1984. The Supreme Court decision is based on a ‘jōkoku’. According to J. Ito, A JapaneseEnglish Dictionary of Legal Terms with Supplement (Tokyo 1953) 255, the Japanese term ‘jōkoku’ should be translated into English as ‘jokoku appeal’ or ‘re-appeal’ in order to distinguish it from the ordinary appeal. It corresponds to German ‘Revision’. For better readability ‘hijōkokusha’ will simply be translated as ‘appellee’, but mainly referred to as ‘Plaintiff’, and ‘jōkoku kaisha’ as the ‘appellant company’ will be referred to as the ‘Defendant’. The official Japanese name is Tōa Peinto Kabushiki Kaisha, the present official English name is TOHPE Corporation. The term ‘shukkō’ is usually simply translated as ‘transfer’, but differing from an ordinary transfer within a company, it means a temporary transfer to another company which entertains friendly relations to the original company. See H. Yasueda, Die Versetzung – Rechte und Pflichten im Vollzug des Arbeitsverhältnisses, in: Tomandl (ed.), Arbeitsrecht und Arbeitsbeziehungen in Japan (Wien 1991) 164. This is the official English name. The Japanese name is Kansei Gakuin Daigaku. This is the first step up the corporate ladder, the next steps being shūnin dairi, shūnin and kakarichō in that order. Central Japan, the Hiroshima area. Inland Sea. Internal, informal and unofficial communication from the management to the employee(s), which nevertheless will and must be understood as direct order that must be obeyed. A city in Osaka prefecture. Osaka District Court being the court of first instance had rendered its judgment on 25 October 1982. This again is quoted from the brief of the Defendant's (Appellant's) process-attorneys who in turn quoted from the judgment of second instance which in turn quoted from the judgment of first instance. This section constitutes about 40% of the judgment and discusses in great detail whether the transfer in dispute was really caused by business necessity. Nowadays this maxim should normally be translated as ‘the right person in the right place’ for reasons of political correctness. But this judgment dates from 1986, some time before the advent of feminism in Japan. Nowadays, personnel management is usually translated as HR management, HR being human resource. But luckily this judgment dates from 1986. Human resource is translated as ‘jinzai’ which in turn could be translated into the infamous German expression ‘Menschenmaterial’ (human material). I no naka no kawazu daikai wo shirazu. See H. Reinirkens, Sprichwörter und Redensarten Deutsch-Japanisch (Tokyo 1955) 18. From painful experience it is generally known among Western Japan specialists that this expression is a euphemism for ‘impossible’ or at least ‘next to impossible’. Tanshin means alone, i.e. without one's family. Funin means transfer. Tanshin funin thus denotes a transfer to a place which is so far away that it is practically impossible to commute. As a change of school or even kindergarten would always jeopardize the future of the children, it is often done that the husband, and nowadays very rarely the wife, will move to the new job and visit the family on weekends. See also I. Mizushima, Kein Schadensersatz bei versetzungsbedingter Trennung von der Familie (tanshin funin), in: ZJapanR / J.Japan.L. 10 (2000) 196. This allowance is paid in case of tanshin funin to cover a part of the extra cost resulting therefrom. K. Kubo / H.-P. Marutschke, in: Marutschke (ed.), Arbeitsordnungen und Tarifverträge japanischer Unternehmen (Köln et al. 1999) 12. S. Nishitani, Vergleichende Einführung in das japanische Arbeitsrecht (Köln u.a. 2003) 100. Nishitani (supra note 21) 102. T. Gotō, Ningen kankei [Human Relations] (Tokyo 1969) 194. There are several cases where employees had rescinded a voluntary declaration of intention to leave the company on the grounds that they had been pressured and bullied into it; see Nishitani (supra note 21) 322. M. Miyamoto, Straightjacket Society (Tokyo 1995) 54. R. Clark, The Japanese Company (New Haven, London 1979) 197. See Obayashi, ‘Tenkin-jipushii’ wo kyohi suru jidai [The time when people refuse to be transfer gipsies], in: Nikkei Business, 15 October 1973, 95 [no first name given]. H.H. Munster, Der deutsche Reiseprofessor ist nirgendwo so ganz zu Hause, in: Frankfurter Allgemeine Zeitung 1 September 2011.

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29) S. Nishitani / H.-P. Marutschke, Arbeitsrecht, Sozialversicherung, Geschäftstätigkeit 30) 31) 32) 33) 34)

von Ausländern in Japan, in: Baum / Bälz (eds.), Handbuch Japanisches Handels- und Wirtschaftsrecht (Köln 2011) 430. M. Scheer, Grundzüge des Rechts des öffentlichen Dienstes in Japan (Hamburg 1977) 108. But now it is, see J. Takahata, Maßnahmen zur Verwirklichung der ‘Work-Life-Balance’ im japanischen Recht, in: ZJapanR / J.Japan.L. 25 (2008) 175. See K. Watanabe / T. Shmomura, Kyōshoku katsudō wo meguru mondai jirei [Problematic Cases of Teachers in their Work Life] (2nd ed., Tokyo 1971) 224, 225. M.H. Bobke / W. Lecher, Arbeitsstaat Japan (Frankfurt a.M. 1990) 97. This is the way the courts will usually decide, see Nishitani / Marutschke (supra note 29) 431. The general absence of statutory ‘comprehensive rules on labor contracts which incorporate principles of case law on such matters as … internal transfers including job rotation’ is deplored by R. Yamakawa, The Enactment of the Labor Contract Act: Its Significance and Future Issue, in: Japan Labor Review 6 (2009) 90.

35) The general understanding is that resistance is analogous to the rebellious

behaviour of children toward their families. See T.P. Rohlen, For Harmony and Strength. Japanese White-Collar Organization in Anthropological Perspective (Berkeley, Los Angeles 1974) 112. 36) See section 68 item 6 of the Defendant's rule of employment. 37) ‘[You are/he is to be beheaded!’ This allegedly was the command to behead a samurai who had misbehaved. It is still a common colloquial expression for disciplinary dismissals and other summary terminations of contracts of employment, meaning ‘you are fired!’ 1) Hochschule Bremen, (University of Hamburg), (Harvard University)

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Case No. 18: Labor Law – Succession to Labor Contracts upon Company Split – Section 5 Consultations

Document information

Publication

Moritz Bälz

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 12 July 2010 – Cases No. 2008 ju 1704, IBM Japan Source: Minshū 64, 1333 = Hanrei Jihō 2096 (2011) 145

Jurisdiction Japan

I Headnote(s) It is possible to challenge the effectiveness of the succession to labor contracts under section 3 of the Act on the Succession to Labor Contracts upon Company Split if consultations according to section 5 Supplementary Provision to the Law Amending the Commercial Code etc. have not been conducted at all, or, even in case such consultations have been conducted, if the explanations given by the splitting company and the substance of the consultations were extremely insufficient and thus clearly contravened the purpose of section 5.

Court

Supreme Court of Japan

Case date 12 July 2010

P 188

II Relevant Provision

Case number

Section 2(1), section 3 Labor Contracts Succession Act (1)

2008 ju 1704

Bibliographic reference

Section 5 Supplementary Provisions (fusoku) to the Law Amending the Commercial Code etc. (2)

III Facts

Moritz Bälz, 'Case No. 18: Labor Law – Succession to Labor Contracts upon Company Split – Section 5 Consultations', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 187 195

Defendant (and Respondent) [IBM Japan] split off its hard disk (HDD) business by way of an incorporation-type company split in order to subsequently set up a joint venture with another company [Hitachi]. According to the split plan adopted, the labor contracts of the employees so far primarily engaged in the HDD department were to be transferred to the company newly incorporated by way of the company split (the ‘New Company’). In order to seek the understanding and cooperation of the employees under section 7 Labor Contracts Succession Act (‘LCSA’) Defendant made information regarding the company split available on the intranet and gave detailed explanations to employees' representatives in the different workplaces regarding the New Company, the treatment of transferred employees at the New Company and the standards used to determine whether employees were considered as primarily engaged in the transferred business. All materials were collected in a database accessible to the employees' representatives. Furthermore, in order to conduct consultations according to section 5 Supplementary Provisions to the Law Amending the Commercial Code etc. (hereinafter the ‘Supplementary Provisions’), Defendant made all materials given to the employees' representatives available to the line employees in the HDD department, sought opinions as to the succession to labor contracts, and held consultations with employees not consenting to the succession at least three times. Most employees agreed to be transferred. Plaintiffs were employees primarily engaged in Defendant's HDD business and they nominated the branch of the labor union to which they belonged as their representative in the consultations according to section 5 Supplementary Provisions. Defendant held consultations with the labor union branch seven times and three times corresponded in written form. In the course of the consultations Defendant explained to the labor union branch the relevant facts with regard to the business carried out by the New Company and their assessment that Plaintiffs were primarily engaged in the business to be transferred. Regarding some items, however, Defendant did not respond in the form requested by the labor union branch. With regard to the business prospects of the New Company, Defendant stated that relevant figures were confidential business information it could not disclose, but explained that, while also other companies engaged in HDD P 189 business experienced a slowing of sales, the envisaged joint venture would be advantageous. As to working conditions at the New Company, they were to be set by the New Company conforming to the principle of employees' protection. Furthermore, Defendant declared that it was not able to conform to Plaintiffs' request to be either only seconded to the New Company while maintaining a labor contract with Defendant or to entirely remain with Defendant. Plaintiffs filed an objection against the transfer of their labor contracts to Defendant stating that explanations given by Defendant were insufficient and that consultations had been conducted improperly. Subsequently, Defendant kept the company split plan at its head office to which a statement was attached that, among others, Plaintiffs' labor contracts were transferred. The company split was then registered. Plaintiffs brought a suit in the Yokohama District Court alleging that the company split with regard to the transfer of their contracts was invalid and sought the declaration by

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the court that they still were employees of Defendant. Both the Yokohama District Court (3) and on appeal the Tokyo High Court (4) denied the claim. Plaintiffs further appealed to the Supreme Court.

IV Findings […] [An incorporation-type split] is a universal succession to rights and duties by the newly-incorporated company. The succession to labor contracts of individual employees is in principle determined by whether they are specified in the company split plan set up by the splitting company (section 374 [Old] Commercial Code (5) ). If employees primarily engaged in the business subject to succession are specified in the above-mentioned plan [as employees to be transferred to the New Company], succession to the labor contracts takes effect as a matter of course (section 3 LCSA); if such employees [i.e., employees primarily engaged in the business subject to succession] are not specified, succession to their labor contract is effected where they file an objection (section 4 LCSA). If employees not primarily engaged in the abovementioned business are specified in the split plan, they can avoid the succession to their labor contracts by filing an objection (section 5 LCSA).

P 190

While providing for the succession to labor contracts as set out above, the law also requires the splitting company to conduct consultations (hereinafter ‘section 5 Consultations’) with employees regarding the succession to labor contracts upon company split until the day from which the company split plan, among others, has to be kept at its head office (section 5 Supplementary Provisions). Since succession to labor contracts can have a considerable influence on the position of employees, the purpose of this provision is to achieve protection of employees by ensuring that, prior to the preparation of the company split plan and the decision on the succession to the labor contracts of the individual employees, the splitting company consults with the individual employees engaged in the business to be succeeded to and considers also the employees' wishes in its judgment. In cases provided for in section 3 LCSA employees are not able to file an objection against the decision of the splitting company regarding the succession to their labor contracts. However, considering the purpose of section 5 Consultations as set out above, section 3 LCSA presupposes that section 5 Consultations have been duly conducted and protection of the employees concerned has been ensured. Taking this into account, the abovementioned employees have to be given the possibility of challenging the effectiveness of the succession to their labor contracts under section 3 LCSA if section 5 Consultations with them have not been conducted at all. Further, even if section 5 Consultations have been conducted, there still may be a violation of the splitting company's duty to conduct such consultations provided the explanations given by the splitting company and the substance of the consultations were extremely insufficient and thus clearly contravened the purpose of section 5. The employees concerned should, therefore, be given the possibility to challenge the effectiveness of the succession to the labor contracts under section 3 LCSA. […] As to the present case the Supreme Court held that Defendant had conducted consultations at least three times with those employees not consenting to the succession and that the employees had been given the materials used in explanations to the employees' representatives. Furthermore, the Court found that Defendant had held consultations with the labor union representing the Plaintiffs seven times and also had corresponded with the union in written form. Also, the Court explained that Plaintiffs fell within the scope of employees primarily engaged in the business subject to succession and an outline of the New Company was given for which they would work after the company split and that no other circumstances were brought forward according to which Plaintiffs were not able to properly state their views due to insufficient explanations given by Defendant. If Defendant did not respond in the requested form as to the business prospects of the New Company, this was because these were subject to future business judgments by the New Company; and if Defendant could not conform to the request for a mere secondment to the New Company, this was because the aim was to carry out an incorporation-type company split and the split plan explicitly stated that for the purpose of realizing a joint venture labor contracts were to be succeeded to by the New Company. Both reasons are justified. Thus, it is not possible to say that Defendant's section 5 Consultations were insufficient and that succession to Plaintiffs' labor contracts by the New Company is ineffective. Furthermore, no tortious act was committed on the grounds that section 5 Consultations were insufficient.

P 191

The judgment of the prior instance rendering the same decision as above is upheld […].

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Translated from the Japanese original by Moritz Bälz

IV Comment 1 Significance of the Case This decision on the incorporation-type company split by IBM Japan has drawn considerable attention, as it is the first time the Supreme Court had to decide a case where employees of a splitting company challenged the validity of the transfer of their labor contracts alleging a violation of employee protection rules. (6) While under the facts of the case the Court held that the splitting company did in fact comply with its procedural obligations with respect to the transfer of labor contracts, it acknowledged that failure to conduct adequate section 5 Consultations, in principle, could constitute a ground for challenging the validity of the transfer of labor contracts. This comment will undertake an analysis in three steps: First, it will briefly summarize how a company split can affect employees' interests (2.). Second, it will analyze the approach adopted by Japanese law to protect employees' interests in case of a company split and to balance these interests with the aim of promoting corporate restructuring (3.). Third, we shall have a closer look into the so-called section 5 Consultations, which were a key issue in the case at hand (4.).

2 Company Split and Employees' Interests An incorporation-type company split (shinsetsu kaisha bunkatsu) enables the splitting company to transfer all or part of its assets or liabilities to a newly-incorporated P 192 company. (7) First introduced into the (Old) Commercial Code in 2001 (8) based on continental European models, the instrument of company splits has quickly become a frequently used tool for the restructuring and reorganization of Japanese companies. (9) When the Companies Act entered into force, the rules on company splits were liberalized and rearranged in Part V of the new Act (Entity Conversion, Merger, Company Split, Share Exchange, and Share Transfer, sections 743 et seq.). (10) Besides the shareholders and the creditors (11) of the companies participating in the company split, the splitting company's employees are the third major group whose interests may substantially be affected by such a transaction. This is obvious for those whose employment contracts, according to the split plan, are to be transferred to the new company as in the case of Plaintiffs. As the transfer of their contracts is effected automatically by way of partial universal succession, such employees' consent is not required in order to bring about a change of their employer. While in case of an assignment of business (jigyō jōto) section 625 Civil Code requires an employer to get the consent of the employee whose contract is to be assigned as part of such asset deal, section 625 Civil Code does not apply to the ipso iure succession in case of a company split. But even employees remaining with the splitting company may be affected by a company split, last but not least if, prior to the company split, they were engaged in a business unit transferred to a new company or a receiving company, or where the splitting company is facing dissolution after the company split. If one takes into account that cost-cutting or the even the discarding of unprofitable parts of the splitting company will be a frequent motive for exercising a company split, it is not surprising that when the introduction of the company split system was deliberated in the Japanese Lower House, to what extent and by which means employees should be protected against an abusive streamlining of the work force and negative consequences for working conditions turned out to be the most controversial issue. (12) P 193

3 Protection of Employees' Interests and the Labor Contract Succession Act Under corporate law rules, the companies carrying out a company split are in principle free to determine in the split plan which labor contract should be transferred to the new company or the receiving company (section 374(2) item (v), section 374-17(2) item (v) Old Commercial Code, now section 763 item (v) Companies Act). (13) The same applies to collective bargaining agreements. Once the company split becomes effective, such employment contracts by operation of law are transferred to the new company. As opposed to the EU directive on transfer of undertakings, (14) Japanese law does also not provide for an automatic and mandatory transfer of labor contracts in case of the transfer of a business. This, however, does not mean that Japanese law does not afford employees any protection at all in the event of a company split. First, the Labor Contract Succession Act was enacted simultaneously with the introduction of the company split system. The Act as its key feature grants certain employees a right to file an objection against the transfer or non-transfer of their contract stipulated in the split plan. This is supplemented by a duty of the splitting company to give advance notice to certain employees on whether their contracts are specified to be transferred or not. Second, two types of consultation requirements have been introduced. Under section 5 Supplementary Provisions the

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splitting company has a duty to engage in individual consultations with all employees engaged in the business to be transferred or a representative of their choice. In addition, section 7 LCSA provides for an obligation of the splitting company to endeavor to obtain the understanding and cooperation (rikai to kyōryoku) of its employees. The right of an employee to file an objection against the transfer or non-transfer of his or her employment contract under the LCSA is limited to those employees who, according to the split plan, are to be separated from the business they so far have primarily been engaged in. That is, where the labor contract of an employee so far primarily engaged in the transferred business is specified in the split plan as being transferred as part of this business, the labor contract is succeeded by the new company as soon as the company split becomes effective (section 3 LCSA). As opposed to a transfer by assignment (section 625 Civil Code), in case of a transfer by company split the consent of the employee is not required. Where a business is transferred and employees so far primarily engaged in this business are to be left behind, these employees can file an objection and thus have their employment contract transferred (section 4 LCSA). Conversely, where the employment P 194 contract of an employee so far not primarily engaged in the transferred business is specified to be transferred, he or she is entitled to file an objection and can thus prevent a transfer of his or her contract (section 5 LCSA). In the case at hand, Plaintiffs, prior to the company split, had been primarily engaged in the HDD division transferred to the New Company and according to the stipulations of the split plan their contracts were to be transferred as part of that business. Under the LCSA they, therefore, did not have a right to file an objection to the transfer of their contracts and could not prevent that their contracts would be transferred to the New Company (section 3 LCSA).

4 Consequences of a Violation to Hold Section 5 Consultations The outcome of the case, therefore, depended on whether the splitting company had complied with the obligation under section 5 Supplement Provisions to individually consult with its employees and its duty to endeavor to obtain the understanding and cooperation of the employees under section 7 LCSA. The wording of section 5 Supplement Provisions clearly does not require a certain result of the individual consultations; whether a violation of the duty to engage in section 5 Consultations can give ground for invalidating the company split is controversial. While some have taken the view that where the splitting company has altogether or practically failed to conduct section 5 Consultations this could be reason to invalidate the company split altogether, (15) a strong view among scholars has been that where only consultations with individual employees have accidentally been forgotten, this should result only in a relative invalidity of the company split vis-à-vis these employees. (16) The Supreme Court, while denying a violation of section 5 Supplement Provisions in the case at hand, now in principle adopted the latter approach. Considering that in the interest of legal certainty the (Old) Commercial Code as well as now the Companies Act, an invalidation of a company split is provided for only under the narrow conditions of the action for invalidation (17) and that it is doubtful whether employees have at all standing to bring such action, this view seems plausible. (18) As invalidation of the entire company split may have quite disastrous consequences for the companies involved, it is not surprising that the Supreme Court took a cautious stance in this regard. By interpreting meaningful section 5 Consultations as a precondition to the automatic transfer of those employees primarily engaged in the business transferred whose contracts are to be succeeded to under the split plan (section 3 LCSA) and by allowing individual employees with whom P 195 no such consultation has taken place to challenge the transfer of their labor contracts, the Court does give some teeth to section 5 Supplement Provisions. Considering that under section 3 LCSA employees do not have a right to refuse to be transferred if they are primarily engaged in the transferred business, the Court's approach also seems in line with the basic structure of the LSCA. Finally, Plaintiffs had argued that Defendant had not sufficiently endeavored to obtain their understanding and cooperation under section 7 LCSA. The Supreme Court did not agree with this factual allegation. Anyway, according to the prevailing view a violation of this duty to endeavor as such would not make the transfer of the employees' labor contracts invalid, let alone the entire company split. (19) Still the Court managed to give some meaning to this duty as well by declaring the endeavor to obtain employees' understanding and cooperation, one of the various factors to determine whether adequate section 5 Consultations have been conducted.

5 Conclusion This case sheds light on and thus brings valuable legal certainty, with regard to the procedural steps to be taken to protect employees in case of a company split and the consequences of a failure to comply with these obligations. It is quite obvious that the Labor Contracts Succession Law strikes a different balance between employees' interests and corporate law's aim to promote corporate restructurings than, e.g., the European Business Transferes Directive. This has to be seen against the backdrop of a strong need for restructuring Japanese companies in order to increase their global competitiveness. Not giving employees primarily engaged in the transferred business a right to refuse to

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be transferred (section 3 LCSA) obviously promotes this aim. On the other hand, certain procedural safeguards do exist and the Court, by acknowledging that not conducting meaningful section 5 Consultations can be a ground to challenge the transfer of the individual labor contract, guarantees them some practical effect. Overall the decision at hand, thus seems well in line with the fundamental policy decisions of the legislator. Moritz Bälz (1) P 195

References ★ )

1) 2) 3) 4) 5) 6)

7)

8) 9)

10) 11) 12) 13) 14)

15) 16)

Moritz Bälz: Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main. Kaisha bunkatsu ni tomonau rōdō keiyaku shōkei-tō ni kansuru hōritsu, Act on the Succession to Labor Contracts upon Company Split, Law No. 103/2000, as prior to the amendment by Law No. 87/2005. Shōhō-tō no ichibu o kaisei suru hōritsu, Law No. 90/2000, as prior to the amendment by Law No. 87/2005. Yokohama District Court 29 May 2007, Hanrei Taimuzu 1272 (2007) 224. Tokyo High Court 26 June 2008, Hanrei Jihō 2026 (2008) 150. Shōhō, Law No. 48/1899, prior to the amendment by Law No. 87/2005. An equivalent rule is now contained in sec. 763 Companies Act, Kaisha-hō, Law No. 86/2005. See for detailed comments of this decision M. Iwade, Kaisha bunkatsu ni tomonau rōdō keiyaku shōkei tetsuzuki to dō-tetsuzuki ihan no kōka – Nihon IBM jōkoku jiken [The Procedure on the transfer of labor contracts in case of company split and the consequences of violations of this procedure – the IBM Japan appeal case], Shōji Hōmu 1915 (2010) 4; F. Narita, Kaisha bunkatsu ni tomonau rōdō keiyaku shōkei tetsuzuki to tetsuzuki ihan no kōryoku – Nihon IBM (kaisha bunkatsu) jiken [The procedure for the succession of labor contracts in case of company splits and the effect of violations of such procedure – The IBM Japan company split case], Jurisuto 1432 (2011) 112; M. Saitō, Kaisha bunkatsu to rōdo keiyaku [Company split and labor contracts], Kaisha-hō hanrei hyakusen dai-ni-han [100 selected cases on corporate law, 2nd ed.] Jurisuto Bessatsu 205 (2011) 190. For a brief comment in English see E. Takahashi, Japanese Corporate Law: Important Cases in 2010, ZJapanR / J.Japan.L 31 (2011) 248, 251. See now the definition in sec. 2 item (xxx) Companies Act. At the time of the case, sec. 373 (Old) Commercial Code still described the object of a company split as ‘all or part of the splitting company's businesses’, which was understood to limit the possible object of a company split to a going concern, as opposed to individual assets and liabilities. While this restriction last but not least aimed at protecting employees from being arbitrarily separated from their business unit, this was not controversial in the case at hand. Arguably, as in such case there is no transferred business, all employees transferred are not ‘primarily engaged in the transferred business’ and thus can refuse to be transferred under sec. 5 LCSA. Saitō, supra note 6, 191. Shōhō-tō no ichibu o kaisei suru hōritsu, Law partially amending the Commercial Code and other laws, Law No. 90/2000. On the introduction of company splits see K. Harada, Kaisha bunkatsu hōsei no sōsetsu ni tsuite [On the introduction of rules on company splits], Shōji Hōmu 1563 (2000), 4, 1565 (2000) 4, and 1566 (2000) 4; in German also M. Bälz, Die Spaltung im japanischen Gesellschaftsrecht (Tübingen 2005) 40 et seq. See in English M. Bälz, Liberalized Rules for the Restructuring of Japanese Companies – Mergers, Demergers and Share Exchanges under the New Company Law, ZJapanR / J.Japan.L. 21 (2006) 19, 20. For the creditor protection in case of a company split see case no. 25 in this volume with a comment by Kansaku / Bälz. For details see K. Harada, supra note 9, Shōji Hōmu 1563 (2000) 7; Kōsei Rōdō-shō [Ministry of Justice], Rōdō keiyaku shōkei-hō no riron to jitsumu [Theory and practice of the Labor Contracts Succession Act] (Tokyo 2001) 48. Under the Companies Act, there is even no longer a requirement to transfer a business (eigyō), see supra note 7. Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, Official Journal L 82, 22.3.2001, p. 16–20. K. Harada, supra note 9, Shōji Hōmu 1566 (2000) 9; R. Yamakawa, Corporate Restructuring and the Role of Labour Law: Japan, 47 Bulletin of Comparative Labour Relations (2003) 113. K. Egashira, Kabushiki kaisha-hō [Stock Corporations Law] (3rd ed., Tokyo 2003) 823 (note 4); M. Iwade, Rōdō shōkei-hō no jitsumuteki kentō [A practical analysis of the Labor Contracts Succession Act], Shōji Hōmu 1570 (2000) 7. As a result, such employees would have a choice whether they wish to be transferred.

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17) 18) 19) 1)

Section 374-12 (Old) Commercial Code, now sec. 828(1) item (x) Companies Act. Narita, supra note 6, 114; Saitō, supra note 6, 191. Yamakawa, supra note 15, 114. Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main

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Part III: Corporate Law, Financial Regulation, Insurance Law

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Publication

Moritz Bälz

Business Law in Japan – Cases and Comments

(★ )

Jurisdiction

For obvious reasons corporate law has been the focus of many Japanese and foreign scholars and practitioners dealing with Japanese law. Particularly the law on takeovers has always been close to the heart of Harald Baum, to whom this volume is dedicated. The following section offers a combination of famous leading cases (mostly by the Supreme Court), as well as some interesting recent decisions. In addition, the section covers selected cases on financial regulation and insurance law.

Bibliographic reference

The first case of the section, the 2010 ‘Media Exchange’ decision of the Supreme Court, concerns the innovative book-entry transfer system for shares, whereby Japan in 2009 has fully dematerialized securities.

Japan

Moritz Bälz, 'Part III: Corporate Law, Financial Regulation, Insurance Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 197 198

The above section is followed by issues of the duty of care in different contexts: The wellknown ‘Janome Sewing Machine’ decision addressed a case where a board tried to fend off a greenmailer. In the following and much-discussed decision concerning the ‘Apamanshop’ derivative litigation, the Supreme Court for the first time expressly applied the business judgment rule. Finally, ‘Royal Hotel’ deals with the duty of care in the context of granting financial assistance to affiliated companies, a scenario of particular relevance for Japan. Like the preceding cases, ‘Kōno Tarō v. KK Momiji Bank’ may also have important implications for corporate governance, though from a very different angle: the decision concerns a director's post-retirement remuneration. The following cases all concern mergers & acquisitions. In ‘Hiromitsu Nojima v. Mitsui the question whether an unfair merger ratio can give grounds for invalidating the transaction. In ‘Yuni PR KK’ and ‘Ryōsen Golf Club’, the Tokyo High Court and the Supreme Court, respectively, resorted to different approaches in order to protect creditors in case of company splits.

P 198 Bussan KK’, the Tokyo High Court back in 1990 addressed

‘Rakuten v. TBS’ and ‘In Re Rex Holdings Co., Ltd.’ both are prominent minority shareholders appraisal cases where the determination of ‘fair value’ was at the core of the controversy. The latter case then leads to two landmark takeover decisions by the Supreme Court, namely ‘Nippon Broadcasting System’ and ‘Bulldog Sauce’, both corner stones in the rapidly developing field of Japanese takeover law. The corporate law cases conclude with the famous ‘Yahata Seitetsu (III)’ case. While this case dates back to the year 1970, its topic ‘corporate donations to political parties’ has lost none of its relevance. Two quite different Supreme Court cases concern financial regulation. In ‘KK Seoul Trading and Lee v. State’, the Supreme Court had to define what constitutes ‘banking business’ in the sense of the Banking Act. The ‘Murakami Fund’ Case, on the other hand, is considered as the most important case on insider trading for years. The section concludes with the cases ‘Masaharu Furukawa v. Aioi Insurance Co., Ltd.’ and ‘Daiichi Mutual Life Insurance’, both selected from the field of insurance law. The former case discusses the delicate question of the burden of proof in non-life insurance, while in the latter, the Supreme Court interpreted an exemption clause in a life insurance contract in an uncannily real scenario. Moritz Bälz (1) P 198

References ★ )

1)

Moritz Bälz: Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main.

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Case No. 19: Corporate Law – Book-Entry Transfer System for Shares – Minority Shareholders' Appraisal Right – Requirement to Make Individual Shareholder Notice

Document information

Publication

Business Law in Japan – Cases and Comments

Hideki Kanda (★ )

Jurisdiction

Supreme Court 7 December 2010 – Case No. 2010 kyo 9, Media Exchange Case

Japan

Source: Minshū 64-8, 2003

Court

I Headnote(s)

Case date

When a joint-stock company disputes over the shareholder status of a person who has filed a motion with the court asking for the determination of the price pursuant to section 172(1) Companies Act with respect to the book-entry shares provided in section 128(1) of the Act on Book Entry Transfers of Bonds and Shares (‘BETA’), the person who filed the motion must make an individual shareholder notice pursuant to section 154(3) BETA by the end of the court proceeding.

Supreme Court of Japan

7 December 2010 P 200

Case number

II Relevant Provisions

2010 kyo 9

Sections 128(1) and 154(3) Act on Book Entry Transfers of Bonds and Shares (BETA). (1)

Bibliographic reference

III Facts

Hideki Kanda, 'Case No. 19: Corporate Law – Book-Entry Transfer System for Shares – Minority Shareholders' Appraisal Right – Requirement to Make Individual Shareholder Notice', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 199 204

The Respondent Company (‘Respondent’) was a listed company on the Tokyo Stock Exchange and its common shares became book-entry shares under the BETA from 5 January 2009. In February 2009, Respondent's management decided to have Respondent go private and entered into an agreement with another listed company, A, by which Respondent would become a 100% subsidiary of A. Under this agreement, A made a public tender offer for all shares of Respondent and, as a result, obtained 83.24% of Respondent's shares in March. To squeeze out the remaining shareholders, Respondent had its shareholders meeting, held on 29 June 2009, and undertook squeeze-out by means of converting all of its common shares into redeemable shares in such a way that the remaining shareholders would receive less than one redeemable share, which would force them to ultimately receive cash. This transaction took effect on 5 August 2009. Pursuant to the BETA, the JASDEC (see below) made to Respondent a notice of all shareholders (‘all shareholders notice’) as of 31 March 2009, which showed Plaintiff as a shareholder owning 383 shares, and did the same as of 4 August 2009, which showed Plaintiff as a shareholder owning 420 shares. Plaintiff was not satisfied with this squeeze-out (i.e., the amount of cash Plaintiff received from Respondent), and filed a motion on 10 July 2009 with the Tokyo District Court for the determination of a (fair) price with respect to Plaintiff's 400 shares which Respondent acquired pursuant to section 172(1) item (i) Companies Act. Plaintiff did not make an individual notice of being a shareholder (‘individual shareholder notice’) under BETA section 154. The Tokyo District Court held that, when asking the court for the price determination under section 172(1) Companies Act, an individual shareholder notice is required before a person exercises the right to have the price of his/her shares determined by the court (‘the right to appraisal’), and dismissed Plaintiff's motion. (2) The Tokyo High Court reversed the case. (3) The Tokyo High Court held that exercising ‘the right to appraisal’ under section 172(1) Companies Act does not require an individual P 201 shareholder notice, and even if it did, Respondent could not assert the lack of the notice because such assertion would be an abuse of right as a violation of good faith. The Supreme Court reversed the High Court decision and affirmed the conclusion of the Tokyo District Court.

IV Findings The right to appraisal under section 172(1) Companies Act assumes the individual exercise of a shareholder's right within the period for filing a motion with the court, and is different from the rights specified under section 124(1) BETA which assumes that shareholders whose names are recorded on the company's shareholder registry are the persons who are entitled to exercise the rights and thus assumes the exercise of rights by

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all such persons. Therefore, the right to appraisal is one of the ‘minority shareholders' rights’ specified in sections 154(1) and 147(4) BETA. The reason why section 154 BETA requires the exercise of minority shareholders' rights to accompany the ‘individual shareholder notice’ is to enable shareholders to exercise minority shareholders' rights by individual shareholder notice irrespective of who are recorded as shareholders on the company's shareholder registry, because change of records on shareholder registry is made when notice of all shareholders (‘all shareholders notice’) is made to the company by the JASDEC. However, such notice is made, in principle, twice a year (sections 151 and 152 BETA). Under individual shareholder notice the reason why the information to be notified includes the dates on which credit or debit book-entries are made (section 154(3) item (i) and 129(3) item (vi) BETA) is that the company to which the minority shareholder's right is exercised can decide, on the basis of the information on book-entries, whether the shareholder who asserts the right satisfies the requirement for the exercise of the minority shareholder's right, and therefore the company needs to receive individual shareholder notice, aside from all shareholders notice. The BETA does not assume that individual shareholder notice can be substituted for by all shareholders notice when a minority shareholder's right is exercised between the time at which two all shareholders notices are made, since it is not presumed that if a certain person is recorded as a shareholder as of the ‘record date’ in more than one all shareholders notice, he/she continues to own the relevant shares between these recorded dates, in light of the fact that book-entry shares may often be sold and bought in a short period of time based on the changes of share price in the market. There is no room for interpretation to the effect that the right to appraisal is a right under section 124(1) Companies Act or a right to which the provisions with respect to the right under section 124(1) Companies Act apply by analogy. The fact that the period within which minority shareholders' rights must be exercised is made under section 40 of the BETA Enforcement Ordinance (4) does not make individual shareholder notice unnecessary.

P 202 shorter than that within which individual shareholder notice must be

Individual shareholder notice is a substitute for the shareholder registry in the context of the exercise of minority shareholders' rights (section 154(1) BETA), and it is thus the condition for shareholders to assert their status as shareholders against the company. Consequently, when the company disputes the status of a person who has filed a motion with the court as shareholder, individual shareholder notice must be made by the end of the court proceedings and that alone is sufficient. Thus, requiring individual shareholder notice for a shareholder to exercise the right to appraisal does not impose a heavy burden on that shareholder. With all of the above, where in the court proceedings in the case of the right to appraisal the company disputes the status of a person who filed the motion with the court as shareholder, individual shareholder notice is required by the end of the court proceedings. In the case before us, Respondent disputed the status of Plaintiff as shareholder and Plaintiff did not make individual shareholder notice by the end of the court proceedings, and so Plaintiff does not satisfy the condition for asserting shareholder status against Respondent. Translated by Hideki Kanda

V Comment (5) It is common practice today in Japan, as well as elsewhere in the world, for investment securities (such as shares and bonds) to be held through one or more intermediaries. Under such ‘intermediated’ holding structures, intermediaries, typically banks and securities firms, stand between the issuer of the securities and the investors, and those investors' interests are credited to the securities accounts maintained by such intermediaries. It is also common for a centralized securities depository (‘CSD’) to stand at the top of the holding chain. This holding pattern of investment securities has created new legal issues around the world that did not exist when securities were held under the ‘non-intermediated’ system, where investors hold certificates or investors' names are recorded on the issuer's registry with no book-entries at the intermediary's level. Traditionally, corporate and commercial law did not recognize explicitly the intermediated holding pattern mentioned above, and thus the operations of intermediated holding systems were governed by proper interpretations of such traditional corporate and commercial law. In recent years, many P 203 (albeit not all) countries have enacted special statutes in order to better deal with the intermediated holding pattern, but the exact legal system varies markedly from jurisdiction to jurisdiction. Moreover, even where there is such a special statute, there are a variety of legal issues concerning its proper interpretation. Beginning in 2001, Japan has changed its legal system from a custody scheme (certificates

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deposited to CSD) to a dematerialization scheme (securities without certificates). (6) A custody scheme (the ‘old scheme’) was established by special legislation in 1984 under which the custody of share certificates was made with the CSD. (7) The scheme did not apply to bonds. Bonds were held and traded under a unique system, which is not explained here. A dematerialization scheme (the ‘new scheme’) was established by special legislation in 2001 for commercial papers only, (8) but amendments were made to this statute in 2002 and it came into effect on 6 January 2003 for bonds and other debt securities, including government bonds. (9) Amendments to the same statute in 2004 incorporated shares and other equity securities into the new scheme and came into effect on 5 January 2009. (10) On that day, shares of all listed companies in Japan became dematerialized and were brought into the new scheme by operation of law. Consequently, also, on that day, all share certificates of listed companies in Japan became void by operation of law. Under the new scheme, the Japan Securities Depository Corporation (‘JAS-DEC’) serves as the CSD for corporate shares and corporate debt securities, while the central bank, the Bank of Japan, serves as the CSD for government bonds. On the issue brought to the Supreme Court in this case, the Tokyo District Court and the Tokyo High Court rendered different views. For different plaintiffs, the Tokyo High Court rendered three different views, and thus a decision by the Supreme Court was awaited. The decision by the Supreme Court in this case is quite natural in light of what is intended by the BETA, which is to distinguish between individual shareholder notice and all shareholders notice. Note, however, that where the company goes private, once it is delisted, its book-entries at the intermediaries are removed (as the book-entry system currently applies to listed companies only), and thus shareholders cannot make individual shareholder notice after P 204 the company is delisted, even if the period for making such notice as promulgated in the BETA Ordinance (currently, four weeks from the date of the shareholders meeting) is not yet expired. There is a remaining question as to what rights of minority shareholders, other than the right to appraisal under section 172(1) Companies Act, would require individual shareholder notice in order to be exercised. Indeed, there are many such rights of minority shareholders and single shareholders, for instance, the right to proposal at the shareholders meeting, the right to elect inspectors, and the right to challenge the validity of resolutions at shareholders meetings. The decision of the Supreme Court in this case does not necessarily mean that individual shareholder notice is required for the exercise of all such minority shareholders' and individual shareholder's rights. More fundamentally, one could question whether shareholder registry maintained by the issuer company is at all necessary for book-entry shares. For intermediated securities, what is relevant is the information in the books maintained by intermediaries. Indeed, in Japan, the names of shareholders on the shareholders registry maintained by the issuer company are changed only when all shareholder notice is made to the company by the JASDEC, and it is made twice a year in principle and on the basis of the information in the books maintained by intermediaries. Shareholders registry maintained by the issuer company thus, generally, seems unnecessary for book-entry shares. Hideki Kanda (1) P 204

References ★ )

1) 2) 3) 4) 5)

6)

7) 8)

Hideki Kanda: University of Tokyo Shasai, kabushiki-tō no furikae ni kansuru hōritsu, Law No. 75/2001. Tokyo District Court 27 October 2009, Kin'yū Shōji Hanrei 1360, 27. Tokyo High Court 18 February 2010, Kin‘yū Shōji Hanrei 1360, 23. Shasai, kabushiki-tō no furikae ni kansuru hōritsu sekō-rei, Cabinet Ordinance no. 362/2002. For a detailed analysis of this Supreme Court Decision, see H. Nishina, Media ekusuchenji kabushiki kakaku kettei moshitate jiken Saikō-sai kettei no kentō [Examination of the Supreme Court's Decision concerning the Right to Appraisal for shares in Media Exchange], Shōji Hōmu 1929 (2011) 4. For a brief overview of the Japanese system of book-entry securities, see H. Kanda, Intermediated Holding of Investment Securities in Japan, in: Grundmann et al. (eds.), Festschrift fur Klaus J. Hopt zum 70. Geburtstag am 24. August 2010: Unternehmen, Markt und Verantwortung, Band 2 (de Gruyter 2010) 3105 et seq. Act for Custody and Transfers of Shares, Kabuken-tō no hokan oyobi furikae ni kansuru hōritsu, Law No. 30/1984. Act for Book-Entry Transfers of Short-Term Bonds, Tanki shasai-tō no furikae ni kansuru hōritsu, Law No. 75/2001.

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Law No. 65/2002 (renaming the 2001 Act as Shasai-tō no furikae ni kansuru hōritsu, Act for Book-Entry Transfers of Bonds). 10) Law No. 88/2004 (renaming the 2002 Act as ‘Act on Book-Entry Transfers of Bonds and Shares’ abbreviated as the ‘BETA’ in this comment). 1) University of Tokyo 9)

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Case No. 20: Corporate Law – Duty of Care – Greenmailing – Benefits Granted to Shareholders

Document information

Publication

Curtis J. Milhaupt

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 10 April 2006, Case No. 2003 (ju) 1154, Janome Sewing Machine Case Source: Minshū 60, 1273 = Hanrei Jihō no. 1936 (2006) 27

Jurisdiction Japan

I Headnote(s)

Court

The court finds the directors' negligence cannot be denied with respect to alleged breach of the duty of care of a prudent manager and duty of loyalty, where directors paid vast sum of money to known stock speculator, as a loan, in order to stop him from selling shares to organized crime group.

Supreme Court of Japan

The court finds that if a company, for the purpose of preventing shareholders who are undesirable from its point of view, from exercising their votes or other shareholders rights, offers benefit to any person as consideration for the assignment of shares from such undesirable shareholders, the company's acts should be regarded as offering of benefit ‘in respect of the exercise of shareholder rights’ as prescribed in section 294-2(1) of the Commercial Code (prior to the revision by Law 90/2000).

Case date 10 April 2006

Case number

P 206

2003 ju 1154

Bibliographic reference

II Relevant Provisions Section 254, section 254-3, section 266(1) Commercial Code; section 644 Civil Code

III Facts

Curtis J. Milhaupt, 'Case No. 20: Corporate Law – Duty of Care – Greenmailing – Benefits Granted to Shareholders', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 205 - 214

1 Parties to the Case A is a person known as a stock speculator. Company B is a company engaged in the manufacture and sale of sewing machines and sewing instruments. Its shares are listed on the first section of the Tokyo Stock Exchange. Bank C is Company B's main bank. The Appellant is a shareholder of Company B and the Appellees Y1, Y2, Y3, Y4, and Y5 are directors and managers of Company B during periods relevant to the case.

2 Negotiation Process between A and Company B A and companies controlled by A acquired roughly 35 million shares of Company B. In order to finance this, and other share purchases, a firm controlled by A borrowed JPY 145.6 billion [about USD 1.5 billion], 96.6 billion of which was from Finance Company Q, a member of Group P. Of the JPY 96.6 billion borrowed, JPY 50 billion was secured by 17.4 million shares of Company B. Through this acquisition, A and companies controlled by A became the largest shareholder of Company B. A demanded a seat on the board, and as a result of his major shareholdings, was able to secure a position as director of the company. This acquisition alarmed the management of Company B because association with A, a known stock speculator, would impair the company's reputation. Taking advantage of this situation, A demanded that Company B purchase the shares in his possession at a high price. Specifically, A suggested that Company B, Bank C, and others form a new company that would take the shares of Company B while simultaneously assuming the JPY 96.6 billion loan. Bank C rejected this plan as a veiled attempt to sell the shares to Company B at a high price. Instead, Bank C secretly formulated a plan for Group P to purchase the 17.4 million shares used as security for the loan. When A discovered this plan he asked the president of Company B to speak with Group P's leader, and inform him of A's plan to create a new company. However, the president failed to do so. A blamed the president for humiliating him and pressured him into signing a pledge addressed to A, which stated, ‘Company B will take responsibility for P 207 financing or purchasing the 17.4 million shares of Company B in your possession’. A was able to convince Group P's leader to call off the purchase by showing him the signed pledge.

3 A's Extortion of JPY 30 Billion On 27 July 1989, A implied to Company B's management his intention to sell Company B's shares, in conjunction with the pledge, to a person related to an organized crime group. Although the management pleaded with A to abandon this plan, A informed them later that he had assigned all of his Company B shares to a company affiliated with Organized Crime Group U. A said, ‘The new shareholder will come to Company B and also come to Bank C. You will be in trouble, anyway.’ A requested JPY 30 billion to ‘cancel’ the sale. On 4 August A reproached Company B's management for not providing the money and

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threatened them by saying, ‘Two hit men have come from Osaka.’ Over the next week, Appellees moved quickly to accommodate A's request. Company B's affiliate borrowed JPY 30 billion from an affiliate of Bank C in a series of secured loan transactions, which was subsequently lent to an affiliate of A.

4 Assumption of Loans and Furnishing of Security Even after obtaining JPY 30 billion by extortion, A continued to harass Company B and Bank C, pressuring them to assume the JPY 96.6 billion loan payable to Finance Company Q. Because of the pledge, Company B agreed to assume part of the loan by assessing the share price from 3,400 to JPY 3,500 per share with respect to the 17.4 million shares. This was achieved through a complex set of secured loan transactions that ultimately resulted in Company B's affiliates borrowing JPY 60 billion, which was then lent to an affiliate of A. A used the money to pay back part of the JPY 96.6 billion owed to Finance Company Q. A continued to pressure Company B to purchase his shares and threatened to sell his holdings to another shareholder unfavorable to the management of Company B. In response, Appellee Y1 formulated a policy (hereinafter ‘Policy’) whereby Company B and an affiliate of Y1, Company S, would purchase 37.5 million shares of Company B in A's possession at JPY 5,000 per share one year in the future, and A would be provided with a loan of JPY 187.5 billion to repay loans of companies controlled by A. Appellee Y3 obtained approval of the Policy from Company B's directors. Pursuant to the Policy, Company S entered into a contract of promise for sale whereby Company S would purchase 34.5 million shares in Company B's possession at JPY 172.5 billion. Through a series of secured loan transactions that took place on 24 May 1990 and 14 June 1990, P 208 Company B's affiliates and subsidiaries borrowed JPY 100.6 billion, which they subsequently lent to A, thereby assuming a significant portion of A's outstanding loans.

5 Subsequent Developments On 19 July 1990, A was arrested for manipulating the price of another company's shares and subsequently resigned as Company B's director. Due to his arrest, the companies under his control went bankrupt, and their payments to Company B's affiliates stopped. Company S lost its reputation because of the news reports of its association with a stock speculator and began the composition procedure, making it impossible for Company S to purchase Company B's shares. Finally, certain of Company B's subsidiaries and affiliates went bankrupt. As a result of the ensuing transactions between Company B and A and their respective affiliates, Company B incurred a loss of JPY 93.9 billion. Appellant brought [a derivative] suit against Y1, Y2, Y3, Y4, and Y5, alleging two principal causes of action. First, that the management had breached the duty of loyalty and the duty of due care of a prudent manager pursuant to section 266(1) item (v) Commercial Code. Second, that they had offered a benefit to a shareholder in violation of section 266 item (ii) Commercial Code.

IV Findings The Tokyo High Court acknowledged that Appellees had erred in signing the pledge and providing a JPY 30 billion loan that was unlikely to be repaid. The court found that this was a breach of the duties of care and loyalty. However, the court ruled that the Appellees could not be deemed to have been negligent in breaching the duties since they were entrapped by A and determined they had no option but to prevent damage to the company: ‘In light of A's cunning and violent threat, it was unavoidable that the Appellees, as ordinary managers of a company at that time, made such determination.’ On a similar line of analysis, the High Court ruled that the assumption of loans and furnishing of security to fund repurchases of shares held by A did not constitute negligence: ‘Considering that it was necessary to regain Company B's shares from A and assign the shares to loyal shareholders as soon as possible, and also regain the JPY 30 billion taken by extortion as soon as possible, they discussed a possible method to achieve these purposes’. The High Court found no violation of the prohibition of offering of benefit in respect of the exercise of the shareholder rights, finding that ‘in reality Company B was deprived of JPY 30 billion by extortion’ and did nothing more than furnish loans and offer security to its affiliates. The Supreme Court ruled that the determination of the High Court could not be affirmed with respect to any of the above points, on the following grounds: P 209

1 Concerning the Payment of Money Because of A's Extortion a Concerning the Responsibility for the Breach of the Duty of Loyalty and the Duty of Due Care of a Prudent Manager Since A had no intention, from the beginning, to repay approximately JPY 30 billion that he had obtained as a loan, and there was no likelihood that the Appellees could recover the loan, it seemed difficult to collect the full amount of the loan. Furthermore, it is

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obvious that there was no reason to justify the payment of money because there was no need for Company B to pay it. The Appellees argue that when A implied that he would assign Company B's shares in his possession to a company affiliated with an organized crime group, they feared that people related to the organized crime group would interfere with Company B's management and such interference would impair the company's reputation and ruin the company. However, considering that the company's shares are listed on the stock exchange and traded freely in the securities market, the company is unable to prevent persons who are undesirable from its viewpoint, such as those related to organized crime groups, from acquiring the shares and becoming its shareholders. Therefore, only where such undesirable shareholders make unreasonable demands by abusing their status of shareholder, the company's management must take appropriate measures in accordance with laws and regulations.… [I]t cannot be said that it was impossible to expect the Appellees to notify the police of A's actions or take other appropriate measures. Therefore, the Appellees' negligence cannot be denied on the grounds that the Appellees had no option but to accept A's unreasonable demand and offer to pay a huge amount of money, … or agree to the payment of money. b Concerning the Responsibility for The Violation of Prohibition against Providing a Benefit in Respect of the Exercise of the Shareholder Rights (Section 266(1) Item (ii) Commercial Code) [I]f the company, for the purpose of preventing shareholders who are undesirable, from its viewpoint, from exercising their votes and other shareholder rights, provides a benefit to any person as consideration for the assignment of shares from such undesirable shareholders, the company's act should be regarded as providing a benefit ‘in respect of the exercise of the shareholder rights’ as prescribed in the said paragraph. According to the facts mentioned above, Company B believed A's statement that he had sold a large amount of Company B's shares in his possession to the organized crime group's affiliated company, and feared that people related to the organized crime group would interfere with Company B's management as a large shareholder of the company. For the purpose of avoiding such interference, Company B offered an unjustifiably huge amount of money, P 210 about JPY 30 billion, to A through a bypass loan in order to repurchase the shares from the organized crime group's affiliated company. Consequently, Company B should be deemed to have provided a benefit ‘in respect of the exercise of shareholder rights …’.

2 Concerning the Assumption of Loans and Furnishing of Security (the Policy) a Concerning the Responsibility for the Breach of the Duty of Loyalty and the Duty of Due Care of a Prudent Manager There was no need for Company B to cooperate in making arrangements for the assumption of loan debts. In addition, the assessed share price with respect to 37.5 million shares of Company B, JPY 5,000 per share, was extremely high, and such price was set through stock price manipulation or other maneuvers. It is obvious that the assumption of loans, which was conducted by providing the loans that were equivalent to the purchase price on the premise that the shares would be purchased at such a high price, satisfied A's intention to sell Company B's shares in his possession at a high price and never benefited Company B. Also according to the facts mentioned above, it was obvious that if Company S, or companies controlled by A went bankrupt, it would be extremely difficult to repay their loans, and if Company B's affiliated companies became insolvent, Company B would have no choice but to assume their debts. Considering all these circumstances, the Policy was highly likely to cause Company B to incur a vast loss. Therefore, the Appellees should not have accepted A's unreasonable demand, but rather, should have at least avoided taking measures as included in the Policy. It cannot be said that it was impossible to expect the Appellees to notify the police of A's actions or take other appropriate measures. Consequently, the Appellees' negligence cannot be denied by determining that it is understandable that the Appellees formulated or agreed with the Policy, and assumed loans and furnished security. b Concerning the Responsibility for the Violation of Prohibition against Offering of Benefit in Respect of the Exercise of the Shareholder Rights Company B's affiliated companies were formally designated in the Policy as the parties to provide the loans. However, considering that Company B and [Company B's subsidiaries] … furnished their real estate as security, and that if Company B's affiliated companies became insolvent, Company B would have no choice but to assume their loan debts, it cannot be denied that the assumption of loan debts and furnishing of security according to the Policy are, in effect, Company B's providing a vast benefit via its affiliated companies. Furthermore, the Policy was employed, under circumstances where A implied [his] intention to sell Company B's shares to Bank K, etc., in an attempt to prevent, in advance, potential shareholders who would acquire shares from A from P 211 exercising the shareholder rights and also prevent A from exercising his influence as a large shareholder. Consequently, the assumption of loans and furnishing of security according to the Policy should be deemed to have been conducted ‘in respect of the exercise of the shareholder rights …’. The judgment of the Tokyo High Court is therefore quashed and the case is remanded for

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further examination of the amount of loss that should be indemnified by the Appellees. Translation provided by the Judicial Research Council on the Supreme Court's homepage. Condensed with significant stylistic edits by Curtis J. Milhaupt.

V Comment This high profile case involves greenmailer Mitsuhiro Kotani (A) and his extortionate dealings with the directors of Janome Sewing Machine Company Ltd. (Company B) and Saitama Bank (Bank C) at the end of Japan's bubble period. Reporting on the derivative suit in 1993, the New York Times said the litigation ‘provides an ominous look at corporate mores’ in Japan, referring to widespread ‘improper payments to shady investors or underworld characters’. (1) In 2008, the Tokyo High Court found the five defendant directors of Janome liable for JPY 58.3 billion (about USD 600 million) in damages. (2) The amount of damages is certainly eye popping, particularly by Japanese standards, and considering that it is personal liability on the part of the directors. Not surprisingly, some Japanese commentators viewed the judgment as harsh. (3) Mr Kotani underwent one of the largest personal bankruptcies in Japanese history and received a seven year jail sentence for his activities. The case presents two rather straightforward legal issues. The first is whether providing loans with little or no prospect of repayment in response to the extortionate demands of a greenmailer with links to organized crime constitutes a breach of the director's duty of care of a good manager (by reference to the Civil Code) and duty of loyalty under the Commercial Code. The Tokyo District Court and Tokyo High Court determined that the directors of Janome had ‘no choice’ but to make the payments, and thus it could not be said that they had acted intentionally or negligently in violation of their duties. The Supreme Court, by contrast, held that the directors did have a choice: they could have notified the police or taken ‘other appropriate action’. (Precisely what other actions would have been ‘appropriate’ are anyone's guess, but the Supreme Court's message is clear: whatever the directors might have done, they should not have done this.) In this P 212 respect, the Supreme Court's holding has parallels in the Daiwa Bank derivative litigation, (4) in which the Osaka District Court found the directors liable for failing to notify US bank regulatory authorities of massive unauthorized trading losses that had occurred in their New York branch. Like the Daiwa Bank case, the Janome holding is a strong statement that corporate directors in Japan are obliged to obey the law, regardless of extenuating circumstances that may render compliance damaging to the firm's reputation or jeopardize its market position. The second legal issue is whether the series of loans to Kotani and his web of companies by Janome and its affiliates constitutes a violation of the Commercial Code's prohibition against payment of benefits ‘in relation to the exercise of shareholder rights’. This was the Supreme Court's first ruling on this provision. The Tokyo High Court had adopted the rather formalistic position that in these loan transactions Janome was deprived of money by extortion and was simply extending credit to its affiliates. As with its ruling on the breach of duty issue, the High Court's ruling is based on the view that the Janome directors are the victim, not the perpetrator. The Supreme Court's finding of a violation on these facts seems rather unremarkable, particularly given that the Commercial Code's prohibition against payments of benefits to a shareholder were enacted precisely to combat the widespread practice of corporate officials paying off organized-crime-linked (or to use the common Japanese euphemism ‘anti-social’) shareholders. (5) To conclude that such payments fell outside the Commercial Code's scope because they were made as a result of extortionate demands, were made by affiliates, were thinly disguised as loans, or were made with the intention of preventing the exercise of shareholder rights by inducing a transfer of the shares into other hands, would eviscerate the statutory provision. So much for the law. Well, not so fast. Let's return to the question of whether the Janome directors breached their duty of care and duty of loyalty to the corporation in the way they tried to fend off Mr Kotani's threats. Their method of dealing with Kotani as a sōkaiya racketeer was widespread practice in Japan at the time. Sōkai-ya were having a field day in bubble era Japan, and many a corporate executive was lying awake at night in a cold sweat fearing precisely the scenario that played out in this case. The amounts of money involved in the Janome case are certainly shocking: A USD 300 million payoff to a greenmailer? A billion dollar ‘loan’ to a web of shady companies? Only in Japan, and only in the Japan of gold-flaked sushi, multi-trillion yen white elephant real estate developments, and country club memberships trading like stocks. In other words, only in a Japan that no longer exists. But I digress. The point is, at the time, this was business as usual. And while the directors were clearly acting in their own self-interest (self-defense may be the more appropriate P 213 term, thinking of those ‘two hit men who have come from Osaka’), they were also doing what they thought was best for the corporation – preserving its reputation and preventing the company from falling under the control of characters with god-only-knows what kind of business model. (6) No doubt this is the line of thinking that motivated the District Court and High Court to find only a facial violation of the duties of care and loyalty, with

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no finding of liability on the part of the directors. In this same vein, what does the Janome directors' calculus say about the Japanese legal system and its enforcement mechanisms? This case, whose facts, again, are not particularly unusual for 1980s Japan, involves presumably rational business people making a determination that the benefits to the firm of complying with the greenmailer's demands (avoiding the reputational hit, conserving managerial time and energy, and so on) exceeded the cost to the firm of complying. Let's repeat the out-of-pocket cost for emphasis – in the ball park of USD 1 billion. By implication, the directors' cost/benefit analysis played out quite differently when they considered the alternative course of action – the one the Supreme Court found them liable for not pursuing – stiffing Mr Kotani and notifying the police (or some other ‘appropriate’ action). (7) The implicit calculus of the Janome directors does not inspire great confidence in the Japanese police and prosecutorial establishment, at least when it comes to organized crime. Sometimes, foreign observers of Japan get carried away with how distinctive the Japanese are and how unique are the features of their society and culture. But let's face it: this is truly bizarre stuff… Or is it? The best explanation for this behavior is the one Mark West provided – it's the information, stupid. (8) Sōkai-ya thrive in opaque institutional environments. If all relevant information about a firm is already impacted in stock price, a sōkai-ya knows nothing that could harm the corporation. The market for secrets dries up. And by extension, where the stock market is informationally efficient, the purchase of a large block of Janome shares by a known criminal organization – Mr Kotani's trump card throughout this sordid mess – would result in a massive decline in the price of the stock, hardly something that would benefit the new purchaser. The sōkai-ya problem seems to have largely abated in Japan, and thus hopefully, the Janome case is the Supreme Court's first and last word on corporate payments to a professional greenmailer. (More on this point in item 9 below.) Why has it abated? Part of the answer may be suggested by the comments immediately above: Japan's institutional environment has improved in the two decades since the conduct in this case took place. Corporate disclosure is better, regulatory oversight is tighter, and yes, thanks to this and other shareholder derivative suits, Japanese managers recognize that they have legal obligations to all their shareholders and cannot run the corporation as a personal fiefdom. More informational efficiency means less room for sōkai-ya shenanigans. In addition and not insignificantly, organized crime in Japan has probably suffered from P 214 many of the same ailments afflicting legitimate Japanese firms – an ageing and declining population, falling asset prices, and aversion to risk. (9) So greenmailing in this rather blatant form has declined, but what of other forms? Some may argue that greenmail still takes place in Japan, except that characters like Mr Kotani have been replaced by Wall Street types like Warren Lichtenstein of the hedge fund Steel Partners. Foreign and domestic investment funds made quite a target of Japanese management in the first decade of the 2000s. Consider another Supreme Court case decided a little more than one year after the Janome case – Bull-Dog Sauce. (10) In that case, Steel Partners, an aggressive US fund seeking to shake up the business model of a quaint maker of sauces for Japanese comfort food, was paid about JPY 2.3 billion at the behest of management to, in essence, make it go away. (11) The Supreme Court said this was fine, since the company's shareholders approved the defensive plan from which the payment resulted. In response to the case, many Japanese firms announced their intention to adopt similar defensive measures. As one Japanese corporate law scholar noted, this reaction to the Bull-Dog case could make Japan ‘a heaven for “green-mailers.”’ (12) It appears that in Japan, as on Wall Street, the line between greenmail and a legitimate takeover defensive measure is quite fuzzy at times. (13) How do you say, ‘Plus ça change, c'est la même chose’ in Japanese? Curtis J. Milhaupt (1) P 214

References ★ )

1) 2) 3) 4) 5) 6) 7)

Curtis J. Milhaupt: Japanese Law, Columbia Law School J. Sterngold, In Japan, a Plundered Company, New York Times, 9 Nov. 1993. Tokyo High Court 23 April 2008, Kin‘yū Shōji Hanrei no. 1292 (2008) 14. See, e.g., S. Ushijima, Janome Mishin daihyō soshō no imi [The Meaning of the Janome Machine Derivative Suit], Tōyō Keizai, 14 June 2008. Osaka District Court 20 September 2000, Nishimura v. Abekawa (The Daiwa Bank case), Shōji Homu no. 1573 (2000) 4. See M. West, The Puzzling Divergence of Corporate Law: Evidence and Explanations from Japan and the United States, 150 U. Pa. L. Rev. 527 (2001). A Yakuza-run sewing machine company is a rather amusing thought experiment. For other arguments along this line, see M. Matsunaka, Shōji Hōmu no. 1885 (2009) 49, 53–54.

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8) 9) 10) 11)

12) 13)

1)

M.D. West, Information, Institutions, and Extortion in Japan and the United States: Making Sense of the Sokaiya Racketeers, 93 Nw. U. L. Rev. 767 (1999). For more on the yakuza as entrepreneurs, see C. J. Milhaupt / M. West, The Dark Side of Private Ordering: An Institutional and Empirical Analysis of Organized Crime, 67 U. Chi. L. Rev. 41 (2000). Supreme Court 7 August 2007, Steel Partners Japan Strategic Fund (Offshore L.P.) v. Bull-Dog Sauce Co., Shōji Hōmu no. 1809 (2007) 16. See case no. 30 with comment by H. Oda. Technically, the payment resulted from the firm's shareholder rights plan, approved by over 80% of the shareholders (this is, virtually every shareholder except Steel Partners). Under the plan, each share except those held by Steel Partners was entitled to receive three additional shares. Steel was provided with the cash equivalent of those additional shares. For commentary on the case, see, Curtis J. Milhaupt, Bull-Dog Sauce for the Japanese Soul?, 8 Wash U. Global Stud. L. Rev. 345 (2009). K. Osugi, Recent Reform of Japan's Corporate Law in an International Context: Who has Participated in the Reforms, and How?, 53 The Japanese Yearbook of International Law 335 (2010). Consider the famous Delaware corporate law case Chef v. Matthes, 199 A.2d 548 (Del S Ct 1964) in which management was not found liable for breach of fiduciary duty in approving payment of a premium over market price to purchase a block of shares from an undesirable shareholder. Japanese Law, Columbia Law School

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Case No. 21: Corporate Law – Business Judgment Rule – Derivative Action

Document information

Publication

Dan W. Puchniak

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 15 July 2010 – Case No. 2009 ju 183, Apamanshop Case Source: Kin'yu- Shōji Hanrei 1347 (2010) 12 = Hanrei Taimuzu 1332 (2010) 50 (1)

Jurisdiction Japan

I Headnote(s)

Court

The first application of the business judgment rule by the Supreme Court, which occurred in a case involving a derivative action brought in connection with the restructuring of a corporate group

Supreme Court of Japan

II Relevant Provisions Section 423, 847 Companies Act (2)

Case date

Moritz Bälz, Marc Dernauer, Christopher Heath & Anja Petersen-Padberg (eds), Business Law in Japan – Cases and Comments: Intellectual Property, Civil, Commercial and International Private Law, pp. 215–226.

15 July 2010

© 2012 Kluwer Law International BV, The Netherlands.

Case number

P 216

2009 ju 183

III Facts

Bibliographic reference

Dan W. Puchniak, 'Case No. 21: Corporate Law – Business Judgment Rule – Derivative Action', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 215 226

Apamanshop Holdings Co. Ltd (‘Apamanshop’) (3) built a franchise business in real-estate rental services by developing a ‘Corporate Group’ that was made up of a number of companies (the ‘Affiliated Companies’) which included ‘the Partially Owned Subsidiary’. As of September 2006, the Corporate Group had, on a consolidated basis, approximately JPY 103.8 billion of combined assets, JPY 49.7 billion in sales, and JPY 4.3 billion in profit. In 2001, the Partially Owned Subsidiary was established with the primary purpose of engaging in the business of renting furnished apartments on a monthly basis. At the time that the Partially Owned Subsidiary was established, its shares were issued for JPY 50,000 per share. In the initial offering, Apamanshop retained 6,630 shares in the Partially Owned Subsidiary which corresponded to approximately 66.7% of the total 9,940 shares issued. However, Apamanshop also acquired and retained affiliated shops as its franchisees (the ‘Affiliated Shops’), which it believed were essential for the purpose of carrying out the aforementioned real-estate rental business of the Corporate Group. Apamanshop drew-up a business restructuring plan which was designed to create a more dynamic Corporate Group and to strengthen the Corporate Group's competitiveness. To achieve this, the business restructuring plan proposed to transfer the main operations of the real-estate rental business to a wholly owned subsidiary of Apamanshop (the ‘Wholly Owned Subsidiary’) and to transform Apamanshop into a holding company. In May 2006, in accordance with the restructuring plan, the Affiliated Companies were integrated into the holding company structure. It was planned that the Partially Owned Subsidiary would be amalgamated with one of Apamanshop's existing wholly owned subsidiaries and that the Partially Owned Subsidiary's operations, including its real-estate rental management operations, would thus be transferred to the Wholly Owned Subsidiary. Subsequently, a management meeting was set up within Apamanshop to discuss the overall management policy for Apamanshop and for each of the Affiliated Companies in the Corporate Group. The management meeting included all of Apamanshop's board members who were acting in an advisory capacity to assist the CEO of Apamanshop in carrying out its operations. On 11 May 2006, a management meeting was held, with ‘Director 1’ attending as Apamanshop's representative director, and ‘Director 2’ and P 217 ‘Director 3’ attending as other Apamanshop directors. At the management meeting, topics relating to the merger of the Partially Owned Subsidiary and the Wholly Owned Subsidiary were discussed. At the management meeting, it was proposed that: (1) as the Wholly Owned Subsidiary was an important subsidiary of Apamanshop and should remain a wholly owned subsidiary of Apamanshop, it was, therefore, necessary to also transform the Partially Owned Subsidiary into a wholly owned subsidiary before the Wholly Owned Subsidiary and Partially Owned Subsidiary merged; (2) the process for making the Partially Owned Subsidiary into a wholly owned subsidiary, which would best facilitate Apamanshop's operations, would be for Apamanshop to purchase as large a stake as possible in the Partially Owned Subsidiary through a voluntary agreement rather than through a sharefor-share exchange (kabushiki kōkan); (4) and (3) the amount per share to be paid by Apamanshop for the Partially Owned Subsidiary's shares would be the same as the initial issuance price of JPY 50,000 per share (the ‘Proposal’). Apamanshop retained a lawyer to provide an opinion on the aforementioned Proposal.

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The legal opinion was that the Proposal involved a management decision and that on that basis there was no legal issue preventing the Proposal from going forward. It further stated that the management decision involved a balance between the necessity of purchasing the shares and the offer price to be paid for the voluntary purchase of the shares. Moreover, considering that the total amount of the share purchase was not very large, the purchase price of JPY 50,000 would be considered to be within the acceptable range if such a price was deemed necessary to maintain good relations with the important Affiliated Shops (which also were shareholders in the Partially Owned Subsidiary). Arising out of the discussions at the management meeting, there was a decision (the ‘Decision’) to make an offer to purchase the Partially Owned Subsidiary’s shares at the price of JPY 50,000 per share (the ‘Purchase Price’) – which was in line with the aforementioned Proposal. Furthermore, a decision was made that those shareholders who were opposed to Apamanshop's proposal, and who thus refused to accept its offer to purchase the Partially Owned Subsidiary's shares, would be subject to a share-for-share exchange. Apamanshop prepared for the share-for-share exchange which was designed to transform the Partially Owned Subsidiary into a wholly owned subsidiary of Apamanshop. As part of the preparations, a request was made to two audit companies to calculate the share-forshare exchange ratio. One of the share-for-share exchange calculations set the price for the Partially Owned Subsidiary's shares at JPY 9,709 per share. The other share-for-share P 218 exchange calculation, based on comparisons with similar companies in the market, set the price for the Partially Owned Subsidiary in the range of JPY 6,561 to JPY 19,090 per share. Pursuant to the Decision, between 9 June and 29 June 2006, Apamanshop purchased 3,160 shares from the Partially Owned Subsidiary's shareholders who were willing to voluntarily sell their shares at the Purchase Price of JPY 50,000 per share. In total, Apamanshop paid JPY 158 million for the shares acquired in the voluntary purchase (hereafter, referred to as the ‘Deal’). Subsequently, a share-for-share exchange agreement was concluded between the Partially Owned Subsidiary and Apamanshop at a rate of 0.192 Apamanshop shares for every one Partially Owned Subsidiary share. Some of Apamanshop's shareholders brought a derivative action under section 847 Companies Act (the ‘plaintiff-shareholders’). (5) The plaintiff-shareholders claimed that Apanmanshop's directors (the ‘defendant-directors’) had breached their duty of care by causing Apamanshop to purchase shares from the Partially Owned Subsidiary for JPY 50,000 per share when the alleged actual value of the Partially Owned Subsidiary's shares was JPY 10,000 per share. As such, the plaintiff-shareholders claimed that the defendantdirectors should be held liable under section 423(1) Companies Act in the amount of JPY 130,040,320 – which was the difference between what Apamanshop had paid for the shares and the alleged actual value of the shares plus ‘delinquency charges’. (6) The Tokyo District Court held that the defendant-directors were not liable as their actions were protected by the business judgment rule. (7) However, on appeal, the Tokyo High Court reversed the District Court's decision. The High Court accepted the shareholderplaintiffs' claim that Apamanshop's defendant-directors should be held jointly and severally liable as a result of violating their duty of care by ordering the ‘over-payment’ of JPY 126.4 million (which resulted from Apamanshop paying JPY 50,000 per share when the actual market value of the shares was JPY 10,000 per share) to the Partially Owned Subsidiary's shareholders. (8) P 219

The High Court found that, although the original issuance price of shares in the Partially Owned Subsidiary was JPY 50,000, there was no proper investigation or consideration by Apamanshop's defendant-directors of the feasibility of a lower purchase price. Moreover, Apamanshop – which already held two-thirds of the total shares issued in the Partially Owned Subsidiary – did not properly consider how beneficial it would be from a business perspective to make the Partially Owned Subsidiary a wholly owned subsidiary as compared to maintaining the status quo. The High Court further held that there were no reasonable grounds or cause that could be identified for the Purchase Price (i.e., JPY 50,000 per share) selected for making the offer for the Partially Owned Subsidiary’s shares, given the fact that it was seen as appropriate to have set the value of the shares at JPY 10,000 for the share-for-share exchange. As such, the High Court held that Apamanshop's defendant-directors had violated their duty of care as directors and were negligent in carrying out their duties. The Tokyo High Court's decision was appealed to the Supreme Court. The Supreme Court reversed the Tokyo High Court's decision and found that the District Court's decision, which dismissed the plaintiff-shareholders' derivative action, should be upheld. (9) Applying the same reasoning as the District Court, the Supreme Court held that the defendant-directors' decisions were protected by the business judgment rule. In arriving at this decision, the Supreme Court summarized the High Court's decision and set out its decision as follows.

IV Findings (10) 35 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

The Supreme Court overruled the decision of the High Court for the following reasons. According to the above-mentioned facts, the Deal was carried out for the purpose of making the Partially Owned Subsidiary a wholly owned subsidiary of Apamanshop as a part of the Corporate Group's restructuring plan to merge the Partially Owned Subsidiary into the Wholly Owned Subsidiary and to transfer its real-estate and rental management operations to the latter. The formulation of such business restructuring plans can be seen as something to be appropriately entrusted to the ‘specialized managerial judgment’ of the directors which involves considering future business prospects, including evaluating the merits of forming a wholly owned subsidiary. Therefore, in regard to the methods and pricing for acquiring shares in such cases, directors can consider the overall situation and make decisions about not only share price, but also the necessity of obtaining shares, Apamanshop's financial burden, the necessity of smoothly acquiring shares, and so on. So long as there are no significantly unreasonable aspects involved in the process and content of such decisions, it should be understood that the directors will not violate their duty of care as directors. P 220

When seen in these terms, the purchase offered by Apamanshop for the Partially Owned Subsidiary's shares, on the basis of a voluntary agreement, must be considered a reasonable method for ensuring the smooth process of the share acquisition, and in regard to the Purchase Price, given that there had been less than five years since the Partially Owned Subsidiary's establishment, setting the issuance price at JPY 50,000 cannot generally be seen as unreasonable. Furthermore, the Supreme Court reasoned that – even in light of the above valuation and actual ratio of the share-for-share exchange of the Partially Owned Subsidiary's shares – it would be difficult to suggest that the decision to set the Purchase Price at JPY 50,000 per share was significantly unreasonable given that: the Partially Owned Subsidiary's shareholders, including Apamanshop's Affiliated Shops, were considered to be an essential part of Apanmanshop's operations; the smooth purchase and the maintenance of cordial relations between the Affiliated Shops would be beneficial for Apamanshop and its Corporate Group's future business; there was an acceptable range for the value of the Partially Owned Subsidiary's unlisted shares; and, the value of the Partially Owned Subsidiary may increase as a result of business restructuring. In the process for arriving at the decision, there was consideration given to: the deliberations at the managerial meeting considering the overall management policy of Apamanshop and each company in the Corporate Group; the procedure for listening to the opinion of a lawyer which was put into practice; and, that there were no unreasonable aspects found in the decision-making process. Based on the above, the judgment made by Apamanshop's defendant-directors concerning the Decision was not significantly unreasonable. As such, Apanmanshop's defendant-directors cannot be said to have violated their duty of care as defendant-directors. With the Supreme Court's view differing from the High Court's earlier decision summarized above, the finding against the defendant-directors is quashed. The Supreme Court's judgment was rendered as summarized above by the unanimous consent of the Judges. (11) Translated by Dan W. Puchniak & Masafumi Nakahigashi

V Comment I The Domestic Importance of the Decision From a domestic perspective, there are at least three reasons why the Supreme Court's decision is important. First, the decision marks the first time that the business judgment P 221 rule has been explicitly applied by the Supreme Court in Japan. (12) The Supreme Court's application of the business judgment rule is particularly significant in light of its decision not to apply the business judgment rule in a number of recent cases involving directors of banks who were found liable for deciding to extend loans to corporations on the brink of insolvency. (13) This shift in the Supreme Court's position is a watershed development because now, for the first time, it is explicitly clear that the business judgment rule is part of Japanese company law. Previously, this was unclear as the business judgment rule had only been applied in lower courts and does not exist in the statutory language of the Companies Act or any other statute. The Supreme Court's explicit recognition of the business judgment rule makes it a powerful defence for directors in Japan who have increasingly found themselves as defendants in derivative actions. (14) Second, the decision is important because it affirms the general framework for applying the business judgment rule which has previously been used in several lower court decisions. (15) According to this framework, directors’ managerial decisions should be protected from liability by the business judgment rule when: (1) the decision was based on reasonable research and analysis of the relevant facts; and (2) the decision was not irrational or inappropriate in comparison to what a reasonable manager in the specific business environment would have decided. (16) In the Supreme Court's decision, it articulated a standard which generally mirrors the framework used by the lower courts.

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Specifically, the Supreme Court held that ‘so long as there are no significantly unreasonable aspects involved in the process and content of such decisions, it should be understood that the directors will not violate their duty of care as directors’. (17) Similar to the lower courts, the Supreme Court prima facie appears to carve out a fairly wide ambit of managerial discretion for the directors by stating that they will not be held liable unless their conduct is found to be ‘significantly unreasonable’. Also, similar to the approach taken by the lower courts, the Supreme Court draws a clear distinction between the ‘decision-making process’ and the ‘content of the decision’. P 222

Third, the Supreme Court's decision is important because it sheds light on what factors courts will consider when determining whether the decision-making process and content of a decision are significantly unreasonable. In terms of the decisionmaking process, in arriving at its decision that the process was not significantly unreasonable, the Supreme Court placed considerable weight not only on the directors' reasonable deliberations of the relevant facts but also on the directors' decision to seek and follow a lawyer's opinion. (18) In terms of the content of the decision, the Supreme Court cited several specific facts (e.g., the short time since the Partially Owned Subsidiary's public offering, the range in the value of the Partially Owned Subsidiary's unlisted shares, the essential nature of the Affiliated Shops, the maintenance of cordial relations, and the Corporate Group's future business) to support its finding that the content of the decision was not significantly unreasonable. It may be argued that the Supreme Court's detailed examination of the specific facts concerning the content of the decision caused it to venture beyond a formal evaluation of whether the directors' decision was ‘substantially unreasonable’ and into the territory of evaluating whether the content of the decision was indeed ‘reasonable’. In practice, if ‘reasonableness’ (as opposed to ‘substantial unreasonableness’ or ‘irrationality’) becomes the standard which must be met for a director to gain the protection of the business judgment rule then the scope of protection provided by the business judgment rule will be significantly diminished. Indeed, if a director can prove that his actions are reasonable then there would seem to be little need for the protection provided by the business judgment rule because ‘reasonable decisions’ normally do not attract liability in the first place. Other commentators have noted that the Supreme Court's consideration of such detailed facts concerning the reasonableness of the content of the directors' decision was not entirely unexpected. (19) Indeed, such an approach has generally been taken by the lower courts. (20) In addition, as discussed in detail below, commentators have also noted that the willingness of courts in Japan to engage in a detailed examination of the reasonableness of the content of directors' decisions distinguishes the Japanese business judgment rule from the business judgment rule in the United States. (21)

2 The Potential of the Decision to Shape the future of Japanese Corporate Governance Each of the aforementioned important findings has the potential to significantly shape the future of Japanese corporate governance. First, the Supreme Court's recognition of the P 223 business judgment rule should provide a wider and more predictable ambit of protected managerial discretion for directors in Japan. This development is timely as directors in Japan, particularly those in large listed companies, are now subject to a substantially higher rate of derivative litigation than in almost any other jurisdictions (with the notable exception of the United States). (22) In addition, the Supreme Court's recognition of the business judgment rule is in line with the trend in most other developed countries which have increasingly come to recognize the business judgment rule as an essential company law doctrine for properly incentivizing entrepreneurial risk taking, attracting talented directors and ensuring that directors (and not the courts) are the primary decision-makers in companies. (23) Second, the Supreme Court's recognition of the importance of engaging an outside lawyer for establishing the reasonableness of the decision-making process will likely further increase the role of lawyers in Japanese boardrooms. (24) Sceptics may suggest that the heightened importance of lawyers may simply amount to a tax on corporate profits that merely provides ‘full employment for lawyers’ with marginal corporate governance benefits for shareholders. (25) Although such an argument may be true in other countries, it is less persuasive in the context of Japan. Compared to other developed countries, the boardrooms of Japan's largest listed companies are strikingly dominated by corporate insiders (i.e., there are comparatively very few outside and/or independent directors). P 224 (26) In this context, the emphasis on involving an outside lawyer as an ‘external check’ on the decision-making process of Japanese boards may improve corporate governance efficiency more than in most other countries. It may also provide an avenue for a valuable ‘outsider's perspective’ without dismantling the insider-dominated ‘company community’ which some pundits see as a key component in the success of many of Japan's most important companies. (27) Third, the Supreme Court's detailed examination of the content of the directors' decisions suggests that the manner in which the business judgment rule is applied in Japan is markedly different from how it is applied in the United States. (28) In the United

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States, the business judgment rule has been applied in a way that essentially ‘direct[s] courts not to examine the substantive merits of business decisions that are not accompanied by a conflict of interest’. (29) As explained above, in the Apamanshop case, the Supreme Court appeared to evaluate the ‘reasonableness’ of the content of the directors' decisions. Such a detailed consideration of the content of directors' decisions arguably makes the protection provided by the business judgment rule in Japan much narrower than in the United States. The narrower protection provided by Japan's business judgment rule may be criticized on the basis that it will unduly deter risk taking and dissuade skilful executives from becoming directors in Japan. Alternatively, however, the Supreme Court's decision may be justified based on the idiosyncratic nature of Japan's wider corporate governance framework. Specifically, Japan's corporate governance framework lacks many features that exist in American corporate governance (e.g., Japan lacks a market for corporate control, independent directors, class action lawsuits and has limited discovery rights) which effectively place restrictions on managerial discretion. As such, when viewed through this wider lens – even with the narrower scope of managerial discretion provided by Japan's business judgment rule – in practice, Japanese directors may enjoy a similar (or even greater) level of discretion than directors in the United States in the context of Japan's wider corporate governance environment. Moreover, it is important to note that the scope of managerial discretion afforded to directors in the United States by its business judgment rule is considerably wider than in most other jurisdictions such as Germany (which recently codified its business judgment rule but allows directors to be held liable for excessive risk-taking) (30) and the UK (which does not have a formal business judgment rule but which in practice avoids second P 225 guessing the business decisions of directors as long as they meet the ‘reasonably diligent person’ standard). (31) In this sense, it may be the United States (and not Japan) that is the outlier in terms of the extremely strict constraints that it places on the ability of US-courts to review directors' business decisions. Thus, considering Japan's wider corporate governance environment and the international norms for judicial review of business decisions, the Supreme Court's decision appears reasonable. It may even be seen as forward-looking, as the global financial crisis has increasingly caused scholars to question the extremely broad scope of protection that the business judgment rule (as well as other statutory measures) in the United States provides for directors' discretion. (32)

3 The Importance of the Decision to Comparative Corporate Law There are two important, albeit brief, lessons that can be drawn from the Supreme Court's decision which shed light on some influential theories in comparative corporate law. First, it has been suggested that with respect to legal transplants – which some scholars posit are bringing about a global convergence in shareholder law – the ‘reception of foreign law generally starts from codified law’. (33) The business judgment rule in Japan is an example which clearly does not follow this broad theory. Indeed, although Japan's business judgment rule is rooted in United States' corporate law, the rule has been ‘transplanted’ to Japan entirely through case law – not statute. This example of a company law provision being ‘transplanted’ through case law is even more interesting considering that Japan is generally classified as a civil law country which ostensibly should be inclined to incorporate changes in its company law via statutory amendment. Second, now that the Supreme Court in Japan has acknowledged and applied the business judgment rule, those who like to approach the study of comparative corporate law through the lens of leximetrics (i.e., by coding company law provisions in a number of countries for the purpose of comparing them with other variables using statistical analysis) can now ‘code’ Japanese company law as having the business judgment rule. (34) P 226 However, this brief analysis illustrates why such coding explains little and confuses a lot. (35) The important issue is not whether Japan formally has (or has not) adopted a business judgment rule. Instead, in practice, the real issue surrounds the precise standard that has been used by the Supreme Court in Japan when applying the rule. This is illustrated by the fact that now Japan and the United States both technically have adopted the business judgment rule but, as we have seen, the rule has a distinctly different effect in both countries – a fact that ‘coding’ would not only miss but confuse. Indeed, in practice, Japan's business judgment rule likely involves a standard of review and a permissible level of directors' managerial discretion that is more in line with the UK (which technically has no business judgment rule) than the US (which has a business judgment rule). Again, an important point that ‘coding’ would obscure.

4 The Conclusion Of course, like most things in life, there is a silver lining in the complexities of both the important domestic and comparative lessons that can be drawn from the Supreme Court's decision. First, the unique evolution of the Japanese business judgment rule suggests ‘full employment’ not just for lawyers but also for law professors, as it illustrates how company law continually evolves in complex ways. Second, it demonstrates that to properly understand Japan's (and every other country's) corporate law it is necessary to

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develop a detailed understanding of how the black letter corporate law actually works in practice (as opposed to merely on the books). Developing such an understanding of the law in practice, especially for comparative corporate law scholars who analyse several jurisdictions, can be daunting – but also has the potential to be extremely rewarding – as it often requires a broader knowledge of the country's legal culture and informal norms. Professor Harald Baum, whose scholarship inspired us to write this piece, is an eminent example of one of those extremely rare scholars who for decades has found this silver lining: continually embracing the complex evolution of corporate law while at the same time developing a detailed knowledge of local Japanese practice and culture. By doing this, Professor Baum has inspired a generation of Japanese and comparative corporate law scholars. He has also forever raised the bar of scholarship in this field. Dan W. Puchniak & Masafumi Nakahigashi (1) P 226

References ★ )

1) 2)

Dan W. Puchniak: National University of Singapore, Faculty of Law The case (the ‘Supreme Court Decision’) is also available at the Supreme Court's website . Kaisha Hō, Law No. 86/2005; Engl. Transl.: Ministry of Justice of Japan, Japan Law Translation (as of 2011).

In the version of the Supreme Court Decision available on the Supreme Court's website, single roman letter names (i.e., Z, A, B and Y) are used to refer to the parties in this case. In the version of the Supreme Court Decision that appears in a prominent case reporter (Kin'yū Shōji Hanrei), different single roman letter names are used to refer to the parties in this case. We have chosen to substitute descriptive names for the single roman letter names used in both reported versions of the Supreme Court Decision as it makes the decision easier to follow and does not meaningfully alter the substance or content of the decision. As such, throughout this case summary and comment we have substituted the following descriptive names for the original single roman letter names used in the version of the decision available on the Supreme Court's website: Z = Apamanshop; A = Partially Owned Subsidiary; B = Wholly Owned Subsidiary; and Y = Directors. 4) Generally, a ‘share-for-share exchange’ involves one company exchanging or swapping its shares with another company for the purpose of transforming the former into a wholly owned subsidiary of the latter. Section 2(31) of the Companies Act defines ‘kabushiki kōkan’ as any exchange of shares whereby a Stock Company causes all of its issued shares to be acquired by another Stock Company or Limited Liability Company. In the United States, the general procedures and guidelines for ‘share exchanges’ are provided for in s. 11.03 of the Model Business Corporation Act. 5) For a more complete understanding of the background of this case, the information contained in this paragraph has been supplemented by information not contained in the Supreme Court decision as it appears on its homepage. Although the case was originally commenced by three shareholders only one of the three shareholders ultimately pursued the appeal to the Supreme Court. However, as the facts found by the court in the first instance (i.e., the Tokyo District Court) involved three shareholders and the original case was commenced by three shareholders we refer to the plaintiffs herein as the ‘plaintiff-shareholders’. 6) ‘Delinquency charges’ are interest charges that are required by law (art. 412(3) and art. 404 Civil Code, Minpō, Law No. 89/1896) and which are calculated based on a 5% interest rate on the damages awarded that begin to accrue from the day on which the claimant requests the defendant's performance. In a derivative action case, the date when a ‘request’ is considered to be made is the day after the complaint letter is delivered through the court. 7) Tokyo District Court 4 December 2007, Kin'yu Shōji Hanrei 1304 (2008) 33. 8) The Tokyo High Court found that the directors had violated their duty of care by causing Apamanshop to ‘overpay’ for the Partially Owned Subsidiary's shares based on the Court's finding that Apamanshop paid JPY 50,000 per share when the actual market value of the shares was JPY 10,000 per share. As such, the decision of Apamanshop's directors to cause Apamanshop to purchase 3,160 shares at a price which was JPY 40,000 per share above the actual market price caused JPY 126.4 million in damages to Apamanshop. 9) Supreme Court Decision, note 1. 10) This section is based on a translation of Parts 4 and 5 of the Supreme Court Decision. 11) In this Part of the Supreme Court Decision, the Supreme Court dealt with a minor issue which was not related to the business judgment rule. We therefore decided not to include this minor issue in the summary/translation as it is irrelevant in the context of this case summary and comment. 3)

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12) See M. Kitamura, Hi-jōjō kaisha no kabushiki no kaitori to keiei handan no gensoku

13) 14)

15)

16) 17) 18)

19) 20) 21) 22) 23)

24)

25) 26)

27) 28) 29)

30) 31) 32) 33)

[Purchase of Shares in Unlisted Corporations and the Business Judgment Rule], Juristo 1420 (2011) 139; R. Kobayashi, Hi-jōjō kaisha no kaitori kakaku no kettei to torishimari-yaku no zenkan chui gimu ihan no umu [Decision of Purchase Price of Unlisted Companies and the Existence of Directors' Breach of the Duty of Care], Hanrei Select 2010 [II] (2010) 18. Supreme Court 28 January 2008, Hanrei Jihō 1997 (2008) 148; Supreme Court 28 January 2008, Hanrei Jihō 1997 (2008) 143; Supreme Court 27 November 2009, Hanrei Jihō 2063 (2010) 138. M. Nakahigashi / D. Puchniak, Land of the Rising Derivative Action: Revisiting Irrationality to Understand Japan's Unreluctant Shareholder Litigant, in: Puchniak / Baum et al. (eds.), The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge, Forthcoming 2012). S. Ochiai, Apamanshop kabunushi daihyō soshō Saikō-sai hanketsu no igi [Significance of the Supreme Court's decision in the Apamanshop Shareholder Derivative Action], Shōji Hōmu 1913 (2010) 7. See M. Yanaga, Torihiki sōba no nai kabushiki no shutoku to keiei handan gensoku [The Purchase of Stocks without a Market Price and the Business Judgment Rule], Juristo 1406 (2010) 110. Ochiai, note 15, 7. See K. Egashira, Kabushiki kaisha-hō [Laws of Joint Stock Corporations] (Tokyo 3rd ed. 2009) 433–435. Supreme Court Decision, note 1, Part 4 para. 2. Supreme Court Decision, note 1, Part 4 para. 3. Some scholars have expressed support for the Supreme Court's deference to the lawyer's opinion in this case – particularly because the court chose not to question the precise content of the lawyer's opinion. See H. Matsui, Jigyō saihen keikaku no sakutei ni okeru torishimariyaku no zenkan chui gimu [Directors' Duty of Care in Drawing up a Plan for Business Restructuring], Minshō-hō Zasshi 143 (2011) 711. Matsui, note 18, 714. Matsui, note 18, 714. Matsui, note 18, 714. Nakahigashi / Puchniak note 14. See generally, K. Hopt, Comparative Corporate Governance: The State of the Art and International Regulation, American Journal of Comparative Law 59 (2011) 39; W. Kaal / R. Painter, Initial Reflections on an Evolving Standard: Constraints on Risk Taking by Directors and Officers in Germany and The United States, Seton Hall Law Review 40 (2010) 1459; T. Aman, Cost-Benefit Analysis of the Business Judgment Rule: A Critique in Light of the Financial Meltdown, Albany Law Review 74 (2010–2011) 3. For an interesting analysis of how the Daiwa Bank case may have started the increasing trend of outside lawyers being involved in Japanese boardrooms. See B. Aronson, Reconsidering the Importance of Law in Japanese Corporate Governance: Evidence From the Daiwa Bank Shareholder Derivative Case, Cornell International Law Journal 36 (2003) 37–38, 44. See generally, Aronson note 24, 38. The insider-dominated nature of Japanese boards has continued in the face of a 2003 amendment to the Commercial Code (that was substantially integrated into the Companies Act) which provides the option for companies to adopt a ‘US-style board’ with committees (See D. Puch-niak, The 2002 Reform of the Management of Large Japanese Corporations: A Race to Somewhere?, The Australian Journal of Asian Law 5 (2003) 59; D. Puchniak, Delusions of Hostility: The Marginal Role of Hostile Takeovers in Japanese Corporate Governance Remains Unchanged, Journal of Japanese Law 14 (2009) 117-18). It further appears that even in the face of the 2010 amendment to the Tokyo Stock Exchange Listing Rules (See generally, the Tokyo Stock Exchange, Securities Listing Regulations Rule 436-2; Tokyo Stock Exchange, Enforcement Rules for Securities Listing Regulations Rule 436-2. English translation, for reference purposes only, is available at ), which requires all listed companies to have at least one independent director or statutory auditor (i.e., kansa-yaku), that the vast majority of corporate boards in large listed Japanese companies remain insider dominated. Currently, the Japan Corporate Auditors Association uses the term ‘corporate auditor’ to refer to kansayaku (See ). They claim that kansayaku can be understood as having powers which are equivalent to directors who serve as audit committee members. However, it should be noted that kansayaku do not have any voting power to remove the CEO or other senior executives. See, e.g., Z. Shishido, Japanese Corporate Governance: The Hidden Problems of Corporate Law and Their Solutions, Delaware Journal of Corporate Law 25 (2000) 189. Matsui, note 18, 714. W. Klein / J. Coffee et al., Business Organization and Finance: Legal and Economic Principles (New York 2010) 157. This has led commentators to suggest that when plaintiffs in the United States solely allege that directors have breached their duty of care ‘the presumption established by the business judgment rule is all but impossible to overcome’. Aman, note 23, 8. Kaal / Painter, note 23, 1461. D. Kershaw, Company Law in Context: Text and Materials (New York 2009) 428-30. Aman, note 23, 1–6; Kaal / Painter note 23, 1473-74, 1485. M. Siems, Convergence in Shareholder Law (Cambridge 2008) 245.

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34) La Porta et al.'s article (which is arguably the most influential article in comparative

corporate law over the last decade) is based on the leximetrics method of coding specific provisions in the company laws of a large sample of countries with either a ‘0’ or ‘1’ to indicate whether or not they exist (R. La Porta et al., Law and Finance, Journal of Political Economy 106 (1998) 1113). Then, the 1s and 0s are tabulated and regression analysis is used to see if there is a correlation between the existence of certain legal rules and other variables such as a country's legal origin or level of economic development. This type of research has become extremely popular in the area of comparative corporate law (e.g., H. Spamann, The ‘Antidirector Rights Index’ Revisited, in The Review of Financial Studies 23 (2008) 468; A. Licht et al., Culture, Law, and Corporate Governance, International Review of Law and Economics 25 (2005) 229). 35) For a more detailed analysis of this issue See D. Puchniak, The Complexity of Derivative Actions in Asia: An Inconvenient Truth, in: Puchniak / Baum et al. (eds.), The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge, Forthcoming 2012); D. Puchniak, The Derivative Action in Asia: A Complex Reality, Berkeley Business Law Journal 9.2 (Forthcoming 2012). 1) National University of Singapore, Faculty of Law.

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Case No. 22: Corporate Law – Financial Assistance by Stock Corporation to Associated Corporation – Directors' Duty of Care and Duty of Loyalty

Document information

Publication

Business Law in Japan – Cases and Comments

Eiji Takahashi (★ ) Osaka District Court 30 January 2002 – Case No. 2000 wa 6704, Royal Hotel Case

Jurisdiction

Source: Hanrei Taimuzu 1108 (2003) 248; Kin'yu Shōji Hanrei 1144 (2002) 21.

Japan

I Headnote(s)

Court

In order to pursue a case of director's liability on the grounds that management measures in the past were contrary to the duty of care and the duty of loyalty, it is necessary to show that, at the time that the management measures were taken, there were gross and careless mistakes in the recognition of certain facts which formed the basis for the judgment of same directors, or that the process of the decision-making as well as the substance of that decision-making, was especially irrational or inappropriate for an entrepreneur.

District Court of Osaka

Case date

30 January 2002 P 228

Case number

II Relevant Provisions

2000 wa 6704

Bibliographic reference

Section 254(3) (Old) Commercial Code, (1) section 644 Civil Code, (2) section 254-3 (Old) Commercial Code

III Facts

Eiji Takahashi, 'Case No. 22: Corporate Law – Financial Assistance by Stock Corporation to Associated Corporation – Directors' Duty of Care and Duty of Loyalty', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 227 236

Royal Hotel KK (‘Royal Hotel’) was a stock corporation whose purpose was to offer customers accommodation, restaurants, parties and banquets, amongst others. The total number of the outstanding shares of Royal Hotel was 61,616,515, and the share capital amount was JPY 3,080,825,750. Defendants were representative directors or directors of Royal Hotel. Defendant 1, who was a representative director of Royal Hotel, was also a representative director of K Hotel. E Corporation was a stock corporation whose purpose was investment in domestic hotel business. Royal Hotel had 50 % of the outstanding shares of E Corporation. Royal Hotel, as a group strategy, made five hotels including K Hotel (hereinafter, the five hotels are referred to as the ‘5 Associated Hotels’) open their hotel business. K Hotel was a stock corporation, and its purpose was inter alia hotel management. The total number of the outstanding shares of K Hotel was 60,000, and the share capital amount was JPY 3,000,000,000. Royal Hotel had 36.6 % of the outstanding shares of K Hotel. Royal Hotel had an R hotel group (the ‘R Hotel Group’). Members of the group were corporations, into which Royal Hotel, or Royal Hotel and the 5 Associated Hotels made substantial investments, and which Royal Hotel or the 5 Associated Hotels virtually controlled. The 5 Associated Hotels had consistently poor performance in their business from the time of the opening, included deficits in their budgets every year, and had substantial amounts of accumulated losses. Royal Hotel carried out financial assistance to the 5 Associated Hotels. Royal Hotel supplied K Hotel with loans (hereinafter, these loans are referred to as ‘Loans before the 3-Year Plan’) six times without collateral. The total amount of the Loans before the 3-Year Plan was JPY 690,000,000 and the Loans before the 3-Year Plan were granted by way of Royal Hotel lending E Corporation money and, on the same day, E Corporation then lending K Hotel the same amount of money. Financial institutions with which the R Hotel Group had business relations grew suspicious and cautioned the group, which continued to include enormous deficits in its budget and had massive debts in excess of its assets. The financial institutions took a hard line with the R Hotel Group and made it aware that the continuance of financial assistance to the R Hotel Group would be difficult if Royal Hotel did not take radical revival measures for the R Hotel Group, including a debt relief for the group by which Royal Hotel would forfeit its claims against the group companies. In the circumstances, Royal Hotel concluded a three-year management reform plan (this plan is referred to as P 229 the ‘3-Year Plan’ in this paper) which worked out revival plans for the R Hotel Group as a whole. The 3-Year Plan was approved by the board of directors of Royal Hotel. Royal Hotel subsequently supplied K Hotel with additional loans (hereinafter, these loans are referred to as the ‘Loans after the 3-Year Plan’) a further five times without collateral. The Loans after the 3-Year Plan totalled JPY 493,000,000, and were made by way of Royal Hotel lending E Corporation money and, on the same day, E Corporation lending K Hotel a part of, or all of that sum. Defendant 1, representing both Royal Hotel and the K Hotel, reached an agreement with E Corporation and drew up a contract based on the 3-Year Plan. The contract stipulated that Royal Hotel would offer E Corporation debt relief of JPY 2,418,400,000, which would go to K Hotel via E Corporation, including the Loans before the 3-Year Plan as well as the

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Loans after the 3-Year Plan (hereinafter, these loans collectively are referred to as ‘the Loans’) and on the same day E Corporation also would offer the same amount of debt relief. Royal Hotel would give K Hotel relief of rights to indemnity of JPY 405,000,000 and of credits of JPY 1,176,600,000, which Royal Hotel had (hereinafter, this debt relief is referred to as ‘Debt Relief etc.’). Plaintiff, one of Royal Hotel's shareholders holding 293,000 shares, filed a derivative action against the Defendants. Plaintiff argued that with view to the Loans and the Debt Forgiveness etc. (hereinafter, collectively referred to as the ‘Financial Assistance’) Defendant 1, as a representative director of Royal Hotel, should have refrained from lending to K Hotel, and if Defendant 1, nevertheless, did grant loans, Defendant 1 had a duty of care and a duty of loyalty to take sufficient measures to secure these loans, such as taking collateral. Defendant 1, however, had failed in such duties, had extended the Loans and had granted K Hotel the Debt Relief etc. Plaintiff also argued that the Defendants, other than Defendant 1, as directors of Royal Hotel approved the Loans at meetings of the board of directors, so that they were deemed to have extended the Loans, and, although they had the duty of care and the duty of loyalty to monitor and supervise Defendant 1’s executive affairs so that affairs of Royal Hotel would be in good order, they failed in these duties and did not prevent the Financial Assistance, as they should have. Plaintiff demanded damages from the Defendants under section 266(1) item (v) (Old) Commercial Code. As to whether breaches of the duties of care and loyalty were found in relation to the Financial Assistance, the Court held as below, and dismissed Plaintiff's action.

IV Findings ‘Directors, as professionals entrusted with the management of corporations having profitmaking purposes, have a duty of care and a duty of loyalty to perform their duties in the best interests of all shareholders from a long-term viewpoint (section 254(3) (Old) Commercial Code, section 644 Civil Code, section 254-3 (Old) Commercial Code). P 230 However, since in order to run business and make profits professional directors have to appropriately understand various factors changing every moment and collectively consider these factors, make short-term as well as long-term future forecasts, and then accumulate business judgment without losing opportunities, they are given broad discretion in performing their duties. Therefore, in order to pursue a case of director's liability on the grounds that management measures in the past were contrary to the duty of care and the duty of loyalty, it is necessary to show that, at the time that the management measures were taken, there were gross and careless mistakes in the recognition of certain facts which formed the basis for the judgment of same directors, or that the process of the decision-making as well as the substance of that decision-making, was especially irrational, or inappropriate for an entrepreneur.’ […] […] ‘As to the Loans before the 3-Year Plan, the Defendants did not go beyond the ambit of discretion given as directors, and therefore, no negligence of their duties which would become breaches of the duty of care and the duty of loyalty is found because, at the time the business judgment to carry out such lending, no gross and careless mistakes in recognition of the facts which formed the basis of the judgment are found, and the process of the decision-making as well as the substance of the decision-making were not especially irrational or inappropriate for an entrepreneur.’ […] […] ‘As to the Loans after the 3-Year Plan and the Debt Forgiveness etc., at the time of judging it appropriate to carry them out, no gross and careless mistakes in recognition of facts which formed the basis of the judgment are found. In addition, insofar as it was necessary to prevent the bankruptcy of K Hotel (which had a close relationship with Royal Hotel), and to evade such losses of Royal Hotel in terms of money invested becoming of no value, to aim at fulfilling surety obligations, and to avoid withdrawal of loans by the financial institutions as well as a decrease of sales due to a deterioration of the corporation's image, the Loans after the 3 Year Plan and the Debt Forgiveness etc. were decided and carried out with the effect that no excessive burden was placed on Royal Hotel, and after prudent procedures had been taken where consultation of outside opinions was carried out amongst other things. In fact, the management reform of K Hotel and Royal Hotel had a certain effect. Taking these above-mentioned matters into consideration, the process of the decision-making and its substance could not be considered especially irrational, or inappropriate for an entrepreneur. Therefore, the Defendants did not go beyond the ambit of discretion given to them as directors, and therefore, no negligence with regard to their duties, which would constitute breaches of the duty of care and the duty of loyalty, is found.’ […] Translated by Eiji Takahashi & Tatsuya Sakamoto

V Comment The issues raised in this case are, first, whether the Defendants breached their duty of whether some of the Loans, which the board of director did not approve, would fall within ‘disposition of important assets' under section 260(2) item (i) (Old) Commercial Code, and third, whether the Financial Assistance could be considered self-dealing. (3) This paper

P 231 care and their duty of loyalty in terms of the Financial Assistance, second,

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discusses the first issue. As to the first issue, the Court employed the business judgment rule, and held that Y did not breach the duty of care and the duty of loyalty. In relation to the business judgment rule, the Nagoya District Court decision of 22 September 1995 (4) adopted the notion of that rule in determining whether directors breached the duty of care and the duty of loyalty concerning relief to associated corporations or subsidiary corporations. In that case, a bank offered debt relief to an affiliated non-bank holding bad debts, and an action was filed against the directors for liability for breach of the duty of care and the duty of loyalty. The Court held that at the time that the bank chose such debt relief, there were no careless mistakes in the recognition of facts which were the basis of the business judgment of the directors, nor was the process of the decision-making based on such facts seriously irrational, and therefore, that the directors did not go beyond the discretion allowed to directors in their business judgments. The Court also stated that the possibility of breach of the duties of care and loyalty of the directors was remarkably low. Thus, the Nagoya District Court demonstrated the business judgment rule attaching importance to the decision-making process. In contrast to this, in the case dealt with in the Tokyo District Court decision of 8 February 1996, (5) in order to relieve a group corporation confronting a business slump, a corporation turned the group corporation into a wholly owned subsidiary by acquiring all shares of the group corporation, and an action was brought against the directors for breach of the duty of care and the duty of loyalty as to such share acquisition. The Court held that unless there were no gross and careless mistakes in recognition of facts which formed the basis of the business judgment, and the process or substance of the decision-making were not especially irrational or inappropriate for an entrepreneur, the acts of the directors did not breach the duties of care and loyalty. Thus, the Court showed in the decision a scrutiny of the process and P 232 substance of the decision-making. Moreover, the Osaka District Court decision of 20 February 2002 (6) concerned a case in which a stock brokerage corporation gave financial assistance to an associated corporation when the latter corporation was being wound up, and an action for breach of the duties of care and loyalty was brought against the directors of the former corporation. The Court held that in determining whether there was breach of the duty of care or the duty of loyalty it was necessary to consider that, at the time that management measures were taken, there were in fact gross and careless mistakes concerning the recognition of facts which formed the basis of the directors' judgment, and that the decision-making process, and the substance of the decision were especially irrational, or inappropriate for an entrepreneur. Thus, the Court in this case, as in the above mentioned Tokyo District Court decision of 8 February 2002, scrutinized the process and the substance of the decision-making as part of the business judgment rule. The above-mentioned Osaka District Court decision of 20 February 2002 expressly referred to the business judgment rule. There is another case which is different from those above cases, namely the Tokyo High Court decision of 11 December 1996. (7) In this case, a corporation supplied financial assistance in the form of loans to an associated corporation facing management difficulties, and afterwards the associated corporation became bankrupt. The Court held that it was specifically foreseeable that the associated corporation would become bankrupt, that management rehabilitation as a result of the financial assistance provided could not be expected, and therefore, that the danger that the loan money could not be collected, or that the corporation giving the financial assistance would be forced to subrogate as guarantor and the paid money could not be collected, was especially foreseeable. Further, the Court held that offering the financial assistance without collateral in the above circumstances would go beyond the ambit of discretion of a director, and therefore, the directors breached the duty of care and the duty of loyalty. In this case, the Court did not mention the business judgment rule, (8) and is considered not to have applied it. (9) As seen above, cases concerning the business judgment rule and determination of whether the duty of care and the duty of loyalty were breached in terms of financial assistance to associated corporations or subsidiary corporations can be classified into P 233 three groups, namely: (1) cases in which the business judgment rule is not referred to; (2) cases in which the business judgment rule, attaching importance to the process of decision-making of directors, is adopted; and (3) cases in which the business judgment rule is employed in scrutinizing both the process and the substance of decision-making of directors. (10) The lower court cases take the position of (3). (11) The present case of the Osaka District Court 30 January 2002 decision, also following the position of (3), held, with regard to the business judgment rule, that in order to pursue a claim against directors for liability on the grounds that management measures in the past violated the duty of care and the duty of loyalty, it would be necessary that at the time of taking the management measures there were gross and careless mistakes in the recognition of facts which formed the basis of the judgments of the directors, or that the process and the substance of the decision-making were especially irrational and inappropriate for an entrepreneur. The present case, like the above-mentioned case of the Osaka District Court decision of 20 February 2002, expressly employed the business judgment rule. The latter case is classified as the type of case where financial assistance is offered to subsidiary corporations or associated corporations while these corporations are going into liquidation or settlement (the liquidation type). (12) In contrast to this, the present case falls into a type of case where financial assistance is offered to preserve or

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rehabilitate subsidiary corporations or associated corporations (the rehabilitation type). The Fukuoka High Court decision of 8 October 1980 (13) and the Tokyo District Court decision of 12 July 2000 (14) are classified as the rehabilitation type. (15) In the former case, a parent corporation continued financial assistance to a subsidiary corporation facing management failure, the subsidiary virtually became insolvent, and then an action was filed against the directors of the parent corporation for breach of the duty of loyalty. In this case the Court stated the following: Where, in spite of a risk, directors of parent corporations considered that improvement of business could be expected and, therefore, continued giving new loans to subsidiary corporations facing management difficulties which would inevitably become bankrupt if the directors did not provide such loans and P 234 the subsidiary corporations remained untouched, the duty of loyalty would not directly be breached by such financial assistance even if the rehabilitation of the subsidiaries failed and, as a result, a substantial amount of credit on such loans was not collected, as long as such acts of the directors were taken to pursue interests of the parent corporations and did not go beyond the ambit of rational decision as a business person when they were making a decision as to whether loans should be continued or terminated. In the latter case where financial assistance such as lending was supplied to an associated corporation and afterwards it went into liquidation, an action was brought for breach of the duties of care and loyalty on part of the directors regarding such financial assistance. The Court held that unless there could be found special circumstances, for example that there was a specifically foreseeable danger that a corporation offered financial assistance would be wound up and credits would not be able to be collected, offering financial assistance to a close business customer corporation to maintain business customers and commercial rights would come within the extent of discretion as a director, and, therefore, such offering would not break the duty of care or the duty of loyalty. The former case allows directors broad discretion in relation to management decisions. (16) The latter case also takes a position of allowing for directors' discretion. In these two cases, the Court did not clearly distinguish between the process of decision-making and the substance of decision-making, and mainly scrutinized the substance. In contrast to this, in the present case, the Court expressly mentioned the business judgment rule, and scrutinized both the process and the substance of decision-making. (17) As to the giving of relief to associated corporations or subsidiary corporations and breach of the duty of care and the duty of loyalty of directors of supporting corporations, academic views take a position that, if advantages and disadvantages to parent corporations by offering relief are compared and considered and the advantages exceed the disadvantages, then such relief should be allowed. (18) As to the rehabilitation-type cases, academic views allow directors of parent corporations, to a certain extent, discretion in terms of financial assistance the parent corporations carry out for the rehabilitation of the subsidiary or of associated corporations. (19) As to the application of the business judgment rule in the liquidation type cases, although there is a view P 235 expressing doubt about applying the business judgment rule, (20) influential views take an affirmative position on such application. (21) In the rehabilitation-type cases, academic views affirm the business judgment rule. (22) As seen above, the present case has significance in terms of the Court demonstrating that, in the rehabilitation-type cases, it would adopt the business judgment rule, scrutinizing both the process and the substance of decision-making of the directors. In Japan, thus, the business judgment rule is adopted by the courts (23) and scrutinizes both the process and the substance of the decision-making of directors. As to that rule under US corporate law, (1) the court seeks only to establish that there are no conflicts of interests between the directors and the corporations and that there is no irrationality in the decision-making of the directors, but (2) the court does not intervene in determination as to whether rationality is found in the substance of the directors' judgment. (24) In this respect, the Japanese business judgment rule is different from that of the US. (25) Looking at German law, there have been clear provisions concerning the business judgment rule since 2005 in the Stock Corporate Act, which provide that ‘a breach of duty does not exist when making a business decision if the member of the board can rationally assume that he or she acted in the interests of the company based on appropriate information’ (section 93(1) 2nd sentence German Stock Corporation Act). (26) P 236

Japan will now attempt to develop the business judgment rule through case law, following US practice. (27) Law concerning the business judgment rule is a field where the content of Japanese law approaches that of German law and is under the influence of American legal standards, and can be thought of as a new type of ‘legal interaction’ between Germany and Japan. (28) Eiji Takahashi & Tatsuya Sakamoto (1) P 236

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References Eiji Takahashi: Osaka City University, (Tohoku University) Shōhō, Law No. 48/1899. Minpō, Law No. 89/1896 and No. 9/1898. On the third issue, see E. Kuronuma, Gurūpu kigyō e no kin'yū shien to Shōhō 266-jō 1kō 4-gō ni motozuku torishimari-yaku no sekinin [Financial Assistance to a Group Corporation and Liability of the Directors under sec. 266(1) item (iv) Commercial Code], Shihō Hanrei Rimâkusu 29 (2003) 84; C. Nunoi, Gurūpu kigyō ni taisuru kin'yū shien ni tsuki torishimari-yaku no sekinin ga hitei sareta jirei [A Case in Which the Liability of the Directors Concerning Financial Assistance to a Group Corporation Was Denied], Kin'yū Shōji Hanrei 1151 (2002) 64; K. Matsuo, Kanren gaisha e no kin'yū shien ni tsuki torishimari-yaku ni zenkan chūi gimu ihan/rieki sōhan torihiki ni motozuku sekinin ga mitomerarenai to sareta jirei [A Case in Which Liability of Directors on the Grounds of Breach of the Duty of Care/Dealings in Conflicts of Interests as to Financial Assistance to an Associated Corporation Was Denied], Shōji Hōmu 1739 (2005) 115; K. Toriyama, Daihyō torishimari-yaku ga kennin kankei ni aru ko-gaisha e no kin'yū shien to torishimari-yaku no sekinin [Financial Assistance to a Subsidiary Corporation Having Directors Who Were also Directors of an Assisting Corporation and Liability of the Directors], Jurisuto 1246 (2003) 98. 4) Nagoya District Court 22 September 1995, Kin'yu Hōmu Jijō 1437 (1995) 47. 5) Tokyo District Court 8 February 1996, Shiryō-ban Shōji Hōmu 144 (1996) 115. 6) Osaka District Court 20 February 2002, Hanrei Taimuzu 1109 (2003) 226. 7) Tokyo High Court 11 December 1996, Kin'yū Shōji Hanrei 1105 (2000) 23. The Supreme Court affirmed the decision of the Tokyo High Court of 11 December 1996, Supreme Court Kin'yu Shōji Hanrei 1105 (2000) 16. 8) E. Takahashi, Kanren gaisha ni taisuru kin'yū shien kyōyo to keiei handan gensoku [Financial Assistance Offer to an Associated Corporation and the Business Judgment Rule], Shōji Hōmu 1747 (2005) 56. 9) M. Kitamura, Saikin no hanrei ni miru kabunushi daihyō soshō [Derivative Actions Found in Recent Cases], Kobayashi / Kondo (eds.), Atarashii kabunushi daihyō soshō [New Derivative Actions] (Tokyo 2003) 85. 10) Takahashi, supra note 8, 56. ★ )

1) 2) 3)

11) Takahashi, supra note 8, 56. 12) For cases like the above-mentioned Osaka District Court case of 20 February 2002

13) 14) 15)

16) 17) 18)

19)

20) 21)

which are classified into the liquidation type and adopted the business judgment rule, see Sapporo District Court 16 September 2003, Hanrei Jihō 1842 (2004) 130, and Tokyo District Court 3 March 2005, Hanrei Jihō 1934 (2006) 121. For a discussion of the Tokyo District Court decision of 3 March 2005, see, E. Takahashi, Kanren gaisha ni taisuru seiri shien-kin no shishutsu to torishimari-yaku no zenkan chūi gimu [Expenditure of Settlement Assistance Money to Associated Corporations and the Duty of Care of the Directors], Shōji Hōmu 1843 (2008) 63. Fukuoka High Court 8 October 1980, Kōtō Saibansho Minji Hanrei Shu 33(4), 341. Tokyo District Court 27 July 2000, Hanrei Taimuzu 1056 (2001) 246. Y. Ito, Kanren gaisha no seisan ni atatte no shien-kin no kyōyo to torishimari-yaku no chūjitsu gimu ihan [Assistance Money Offer For Winding-up of an Associated Corporation and Breach of the Duty of Loyalty], Shihō Hanrei Rimâkusu 30 (2004) 99; Matsuo, supra note 3, 113. Kitamura, supra note 9, 82. See, It o, supra note 15, 99. See, Ito, supra note 15, 101; Matsuo, supra note 3, 144. M. Shitani, Oya-gaisha to torishimari-yaku no sekinin [Parent Corporations and Liability of the Directors], in: Kobayashi/Kondō, Kabunushi daihyō soshō taikei (Shinban) [Outline of Derivative Actions (New Edition)] (Tokyo 2002) 151; M. Kondo, Hanrei ni miruta-kigyō shien to torishimari-yaku no gimu [Assistance to Other Enterprises and the Duty of the Directors as Seen in Case Law], Kinyū Hōmu Jijō 1491 (1997) 45; Y. Kawaguchi, Keiretsu gaisha no kyusai to torishimari-yaku no sekinin [Relief of Group Corporations and Liability of the Directors], Kobe Gakuin Hōgaku 25(1) (1995) 175 et seq. Shitani, supra note 18, 148; N. Nakamura, Daihyō soshō to gurupu kogai-sha kyusai [Derivative Actions and Relief to Group Subsidiaries], JICPA Janaru 448 (1992) 47; Y. Niiyama, Shōken gaisha ga kanren gaisha no seisan ni atari shien-kin o kyōyo shita koto ni tsuite, shōken gaisha no torishimari-yaku ni zenkan chūi gimu ihan oyobi chūjitsu gimu ihan wa mitomerarenai toshite, genkoku no seikyū o kikyaku shita jirei [A Case in Which There Was Held to Be No Breach of the Duty of Care and the Duty of Loyalty of the Directors of a Stock Brokerage Corporation When That Corporation Supplied Assistance Money to an Associated Corporation Winding-up, and Therefore an Action of the Plaintiff Shareholder Was Dismissed], Hanrei Taimuzu 1153 (2004) 92. Nakamura, supra note 19, 48. Itō, supra note 15, 100; Takahashi, supra note 8, 57.

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22) Itō, supra note 15, 100; Shitani, supra note 18, 141, 147; Nunoi, supra note 3, 64;

23) 24) 25) 26)

27) 28) 1)

Matsuo, supra note 3, 114; Y. Tezuka, Ko-gaisha/gurūpu gaisha kyūsai to torishimariyaku no sekinin [Relief to Subsidiary Corporations/Group Corporations and Liability of the Directors], in: Egashira et al. (eds.), Ko-gaisha kyūsai to torishimari-yaku no sekinin [Relief to Subsidiary Corporations and Liability of the Directors] (Bessatsu Shōji Hōmu 172) (Tokyo 1995) 24. K. Egashira, Kabushiki kaisha-hō [Stock Corporations Law] (3rd ed., Tokyo 2009) 434 note 3; H. Kanda, Kaisha-hō [Corporations Law] (13th ed., Tokyo 2011) 207 note 1. Egashira, supra note 23, 434 note 3. Egashira, supra note 23, 434 note 3. Aktiengesetz. For further content of the German Business Judgment Rule, see, K. Hopt / M. Roth, in: Hopt / Wiedemann (eds.), AktG: Großkommentar (4th ed., Berlin 2006) § 93 Abs. 1 Satz 2, 4 nF para. 1 et seq.; H. Fleischer, in: Spindler / Stilz (eds.), AktG (2nd ed., München 2010) §93 para. 67 et seq.; S. Kalss / G. Spindler, in: Goette / Habersack (eds.), Münchner Kommentar zum Aktiengesetz (3rd ed., München 2008) § 93 para. 35 et seq.; U. Hüffer, AktG (9th ed., München 2010) § 4a et seq.; G Krieger / V. SailerCoceani, in: Schmidt / Lutter (eds.), AktG (2nd ed., Köln 2010) § 93 para. 10 et seq. H. Merkt / S. Gothel, US-amerikanisches Gesellschaftsrecht (2nd ed., Frankfurt a.M. 2006) 429 et seq. E. Takahashi, Doitsu to nihon ni okeru kabushiki kaisha-hō no kaikaku [The Reform of Stock Corporation Law in Germany and Japan] (Tokyo 2007) 231. Osaka City University, (Tohoku University).

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Case No. 23: Corporate Law – Director's Remuneration – Pension-Type Remuneration after Retirement – Unilateral Cancellation by the Company

Document information

Publication

Business Law in Japan – Cases and Comments

Souichirou Kozuka

Jurisdiction

Supreme Court 16 March 2010 – Case No. 2009 ju 1154, Kōno Tarō v. KKMomiji Bank

(★ )

Source: Hanrei Jihō 2078, 155 = Hanrei Taimuzu 1323, 114

Japan

I Headnote(s)

Court

Once the director acquires the claim for remuneration pursuant to the resolution of the shareholders meeting, the claim cannot be revoked solely by the amendments to the relevant bylaw, even if the remuneration is a pension-type retirement payment to be made over a long period of time.

Supreme Court of Japan

Case date

P 238

16 March 2010

II Relevant Provisions Section 361 Companies Act (1)

Case number

III Facts

2009 ju 1154

The Plaintiff had been a director of KK Hiroshima Sōgō Bank (Defendant, currently KK Momiji Bank, hereinafter ‘the Bank’) from June 1990 till June 1999. Upon his retirement, the shareholders meeting of the Bank resolved that retirement pay be made to the Plaintiff in an amount to be decided according to the existent criteria, and that the details of the payment be determined by the board of directors. The criteria were in the bylaw of the Bank, which provided that the retirement pay consisted of the lump-sum payment and pension-type payment and that the pension-type part would be monthly payments of JPY 60,000 plus an additional amount according to the rank that the retiring director had held (such as Senmu, Jōmu etc.), not exceeding JPY 200,000 in total, to be paid over a 20year period after the retirement. The board authorized the CEO to determine the exact amount, and the CEO, applying the criteria, determined that the Plaintiff should receive JPY 56,830,000 in lump sum and JPY 133,000 every month for 20 years. The payment had been made accordingly until April 2004.

Parties

Claimant, K?no Tar? Defendant, KK Momiji Bank

Bibliographic reference

Souichirou Kozuka, 'Case No. 23: Corporate Law – Director's Remuneration – Pension-Type Remuneration after Retirement – Unilateral Cancellation by the Company', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 237 244

The Bank had suffered from bad loans since the late 1990s and incurred losses every year. The business did not turn around in the 2000s and the Financial Services Agency ordered the holding company of the Bank to improve its business in August 2003. In the wake of this order as well as in preparation for a merger with another bank, the Bank attempted to discontinue paying the pension-type retirement pay to the retired directors. Most of the recipients gave consent to it, but the Plaintiff did not give consent. The board of directors of the Bank abolished the bylaw in April 2004 and decided that only the lump sum retirement pay would be made from then on. The Plaintiff brought this suit and requested the continued payment of the pension-type retirement pay as originally promised. The Tokyo High Court held that the Bank was justified in abolishing the bylaw, considering the poor performance of the Bank and rejected the claim. The Tokyo High Court affirmed the binding effect of the abolishment upon those who had retired in the past, based on the need for the collective and uniform treatment of all the retired directors. The Plaintiff appealed to the Supreme Court. The Supreme Court reversed the decision of the Tokyo High Court and held that the Plaintiff was entitled to the promised pension-type retirement pay, as the contractual right to payment that he had acquired could not be revoked unilaterally by the Bank. P 239

IV Findings The retirement pay that the Bank promises its director is the remuneration under section 361(1) Companies Act, because it is paid in consideration of the service of the director. When the retirement pay is made according to the bylaw, the director does not automatically acquire the right to the retirement pay based on the bylaw after his retirement; he acquires an enforceable claim for the retirement pay only after he has entered into a contract with the Bank regarding the payment of the retirement pay, based on the resolution of the shareholders meeting adopted for the specific case. Even if the Bank has the bylaw that provided for the criteria for determining the retirement pay to be made to the retired directors, this does not mean that the decision as to whether or not the retirement pay shall be made, and in what amount, must be made in a uniform manner among the directors that retire on different occasions. It cannot be argued that the contract already in force must be revoked to ensure collective and uniform treatment to achieve the equality among the retired directors.

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Once the retired director has acquired the enforceable claim for the pension-type retirement pay based on the resolution by the shareholders meeting in each case, the abolishment of the bylaw is not binding upon the already retired director, and his right to the pension-type retirement pay cannot be cancelled without his consent only for the reason that the collective and uniform treatment is required, even considering that the payment will be made over a long period of time during which the social and economic situation can change and that the abolishment of the bylaw could result in an unequal treatment in relation to the directors retiring in the future. Translated by Souichirou Kozuka

V Comment 1 Background Section 361(1) Companies Act provides that the shareholders meeting shall determine the amount of the remuneration of the corporate directors unless it is stipulated in the corporate charter (which is rarely the case). If the remuneration is not fixed in the amount (such as contingent on the performance) or non-monetary (such as stock options), the shareholders meeting must determine the calculation formula or the specifics of what is granted, respectively. The rule had been the same in essence under the Commercial Code (2) (then section 269 of the Code) before the enactment of the Companies Act of 2005. (3) P 240 It has traditionally been understood in Japan that the aim of the rule is to authorize the transfer of the assets from the shareholders to the director. (4) The rule does not apply to the committee-type companies, which must have a remuneration committee within the board of directors to determine the remuneration for each director and officer (section 409 Companies Act). The committee-type company apparently adopts the ‘monitoring model’ for corporate governance and is modelled after the publicly held companies in the United States. In this type of company, therefore, the control over the remuneration is one of the mechanisms for good corporate governance. Thus, the relevant rules in the traditional-type companies and committeetype companies differ not only in the body to determine the amount, but also in the aim of regulating the remuneration. The view emphasizing the role of the remuneration control in corporate governance has, however, gradually affected the traditional type companies as well. As mentioned below, the practice is changing in recent years under the pressures from institutional investors.

2 Practice in the Past In Japan most of the directors, except for the owner-managers that hold the majority of the shares and manage the company at the same time, are senior employees nominated as executive directors. (5) The practice has developed to adapt the rule of the corporate law to such reality. First, disclosing the amount of the remuneration has been avoided to the extent possible. The customary way that the shareholders meeting resolves about the director's remuneration is to determine the maximum amount for the total board members and authorize the board to decide the individual member's pay within the given amount. It is also customary that the board authorizes the CEO (daihyō torishimari-yaku) to determine it. Apparently the idea is closer to the determination of the employee's salary by the management (CEO) and reflects the respect for the privacy of the employees as regards the amount of their salary. Second, the company has often granted ‘retirement pay’ to the director when he finishes his term and is not re-elected. Sometimes, as in this case, the payment is made monthly, just like the pension of the retired employee. Upon the understanding that such retirement pay is a part of the remuneration package, it is also granted upon the resolution of the shareholders meeting. The resolution usually makes no reference to the amount, but merely states that the payment shall be made ‘according to the existent criteria.’ The determination of the specific amount is entrusted to the board of directors, which again authorizes the CEO to determine it. The Bank in the case at hand followed this common practice exactly. P 241

3 Case Law Justifying the Practice The courts have basically supported these practices. As a result, the disclosure of directors' remuneration, including the payment made after their retirement, has remained extremely limited in Japan. Referring to the understanding that the aim of the corporate law rule is to authorize the transfer of assets, the Supreme Court justified the resolution stating merely the ‘maximum amount for all board members in sum.’ According to the Supreme Court, the shareholders can at least know from such a resolution the extent to which the corporate asset can be transferred to the directors. (6) Further, the Supreme Court has held that the ‘retirement pay’ is included in the

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remuneration under section 361 Companies Act and, therefore, needs the resolution by the shareholders meeting. (7) The resolution may be made without explicit reference to the amount but merely stating ‘according to the existent criteria’ as long as the criteria do exist and is presented to the shareholders explicitly or implicitly. (8) The criteria do not have to be found in a book accessible by the shareholder (record of the board meetings, for example) if the company was ready to disclose them when requested. (9) If, therefore, the company refuses to disclose the criteria even though the shareholder asked about them in the shareholders meeting, the resolution is subject to cancellation due to the failure to sufficiently inform the body. (10)

4 Protecting the Director's Contractual Right While the courts ensured only minimal disclosure about the amount of the directors' remuneration, they have been positive in protecting the right to remuneration of the director from being deprived by the arbitrary decision of the management. In order to do so, the courts have focused on the service contract between the director and the company, which is a contract of mandate in nature (section 330 Companies Act), and treated the right to remuneration as contractually binding on the company. According to the Supreme Court, once the amount of the remuneration is determined by the shareholders meeting, it becomes a part of the contract between the director and the company and, therefore, cannot be changed unilaterally after that point. Even if the shareholders meeting makes a second resolution annulling the previous decision, the P 242 contractual right of the director is not affected unless he gives consent to the change of the contract. (11) The exception could be the case if the company has a rule according to which the amount of the remuneration corresponds to the rank of the director and the rank of the director at issue was lawfully changed. (12) In such a case, the contractual right of the director is considered as contingent on his rank. The Supreme Court in the case at hand confirmed the ‘contractual right’ doctrine and frustrated the attempt of the Bank to discontinue payment of the pension-type retirement pay. As it is based on the binding effect of a contract, the ‘contractual right’ doctrine does not allow consideration of the reasonableness of the company's behaviour. The Bank in this case advanced an argument that it had to improve its performance, pressured by the regulator (FSA), and had tried to cut down the remuneration of the incumbent directors, salary of the personnel, and finally the promised retirement pay to the retired directors, to which most of the recipients gave consent. Furthermore, the Plaintiff had not been a senior employee of the Bank but a former employee of the Bank of Japan (BoJ) that had been nominated by the Bank as a director after leaving the BoJ (so-called amakudari). All these circumstances, though found to be true by the lower court, were not considered relevant by the Supreme Court.

5 The Corporate Governance View Introduced Beginning in the 2000s, new developments took place with regards to the remuneration of corporate directors. They were in line with the global call for enhanced corporate governance and the view to regard the director's remuneration as one of the mechanisms for this purpose. First, the committee-type companies were introduced by the amendments to the Act on Special Rules to the Commercial Code Regarding the Audit of Stock Companies (13) in 2002 and then codified in the Companies Act of 2005 with slight modifications. As already mentioned (above 1.), the remuneration in this type of companies is determined by the remuneration committee where outside directors occupy the majority (section 400(3) Companies Act). The committee must determine the remuneration for each director and officer individually, not ‘for the board members in sum’ (section 409(1) Companies Act). Further, the committee is required to decide the basic policy on remunerations first and apply this policy in determining the amount for individual directors and officers (section 409(2) Companies Act). These rules impose the burden on the committee members, especially outside directors, to account for the governance mechanisms that the company adopts and to consider the remuneration in that context. P 243

Second, the Ministerial Order implementing the Companies Act, published in 2006, requires publicly held companies to disclose the policy to determine the amount of remuneration, if any (section 121 item (v) Ministerial Order to implement the Companies Act (14) ). The term ‘policy’ (hōshin) differs from the ‘criteria’ (kijun) that the case law focused when affirming the traditional practice. While the criteria meant a formula with which one could work out the amount for each director by inputting some variables, the policy perhaps refers to the view of the company as regards how the remuneration contributes to improve corporate governance. Thus, the corporate governance perspective has spread to the traditional (not committee-type) companies. As a compromise with the prevailing practice, though, this disclosure item may be omitted in the case of traditional company. Finally, in March 2010, the disclosure rules under the Financial Instruments and Exchange Act (15) were amended to introduce disclosure of the amount that each director and officer received as remuneration. The disclosure is mandatory only when the amount is

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JPY 100 million or more. (16) The new disclosure rule shocked the industry that had relied on the practice of resolution ‘for the board members in sum’ to avoid disclosing the individual amount. In reality, the threshold of JPY 100 million shielded most of the directors from exposing the amount of their remuneration to the public. Still, 259 cases of 140 companies were reported disclosing the amount of remuneration for each director and officer in 2010. (17) It may be argued that the ‘contractual right’ doctrine under the case law is not fully consistent with the recent view emphasizing the corporate governance perspective. While the former protects the claim for remuneration once established, the latter requires the power on the side of the company to adequately control it. The inconsistency is all the greater in the case at issue, where the remuneration continued to be paid to a person that had retired several years before and was not responsible for the management any longer. Although no case has appeared in Japan, the ‘contractual right’ doctrine enables the company to adopt a defensive measure against hostile takeovers that promises a large amount of remuneration binding even after the successful takeover. The significance of the case at hand, which confirmed that the Supreme Court has not changed its attitude notwithstanding the developments in the 2000s, cannot be underestimated. P 244

6 Recent Changes in Practice While the case law has remained unchanged, the practice is making gradual changes. The changes have been brought by the pressure from institutional investors, both domestic and foreign. The Pension Fund Association (Kigyō Nenkin Rengō-kai), for example, requested in its ‘Principles of Corporate Governance’ (most recently revised in February 2010) (18) that the director's remuneration shall be appropriate against the performance of the company as well as the distribution of dividends to shareholders. Furthermore, some institutional investors, in particular foreign ones, have started to doubt whether the retirement pay is appropriate as effective incentive to the management and often cast their votes against it. As a result, many listed companies have recently abolished the retirement pay to directors. According to the inquiry research by Shōji Hōmu, in 2004, 1,691 companies among 1,924 respondents (87.9%) had the system of the retirement pay and only 114 answered that it will be abolished in the future. (19) In 2010, however, only 601 among 1,868 (32.2%) indicated their intent to maintain the retirement pay, whereas 1,080 (57.8%) had already abolished it, 46 (2.5%) had just abolished in the shareholders meeting of that year, and 57 (3.1%) responded positively about its abolishment in the future. (20) The market and law have interacted with each other in bringing shifts in the corporate governance in Japan, gradually but steadily. Souichirou Kozuka (1) P 244

References ★ )

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16)

Kozuka Souichirou: Gakushuin University in Tokyo Kaisha-hō, Law No. 86/2005. Shōhō, Law No. 48/1899. For this reason, this article does not distinguish the cases under the Commercial Code before 2005 from those under the current Companies Act. Supreme Court 26 March 1985, Hanrei Jihō 1159, 150 = Hanrei Taimuzu 557, 124. C. Milhaupt / M.D. West, Economic Organizations and Corporate Governance in Japan: The Impact of Formal and Informal Rules, pp.17–18 (Oxford University Press, 2004). Supreme Court 26 March 1985, Hanrei Jihō 1159, 150 = Hanrei Taimuzu 557, 124. Supreme Court 11 December 1964, Minshū 18-10, 2143 = Hanrei Jihō 401, 61 = Hanrei Taimuzu 173, 131. Supreme Court 26 November 1973, Hanrei Jihō 722, 94. Supreme Court 22 February 1983, Hanrei Jihō 1076, 140 = Hanrei Taimuzu 495, 84. Tokyo District Court 28 January 1988, Hanrei Jihō 1263, 3 = Hanrei Taimuzu 658,52 (appealed and reversed on other grounds); Nara District Court 29 March 2000, Hanrei Taimuzu 1029,299. Supreme Court 18 December 1992, Minshu 46-9, 3006 = Hanrei Jihō 1459, 153 = Hanrei Taimuzu 818, 94. Tokyo District Court 20 April 1990, Hanrei Jihō 1350, 138 = Hanrei Taimuzu 765, 223. Kabushiki kaisha no kansa-tō ni kansuru Shōhō no tokurei ni kansuru hōritsu, Law No. 22/1974. The Act was abolished in 2005, when the new Companies Act was enacted. Kaisha-hō sekō kisoku, Order of the Ministry of Justice, no. 12/2006. Kin'yu shōhin torihiki-hō, Law No. 25/1948. Form 2 under the Ministerial Order on Corporate Disclosure, Kigyō naiyō-tō no kaiji ni kansuru naikaku-fu rei, Order of the Ministry of Finance, no. 5/1973), Note (57) a (d).

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17) Sumitomo Shintaku Ginko, Yuka shōken hōkaku-sho ni okeruyakuin hōshu kaiji nojirei

bunseki [The Analysis of Disclosure of Directors' and Officers' Remuneration in Annual Filings], Bessatsu Shōji Hōmu no. 349 2010), 4. 18) Reproduced in: H. Kansaku / K. Takei (eds.), Kōporeto gabanansu handobukku [Corporate Governance Handbook] 488 et seq (Minji-hō kenkyū-kai, 2010). 19) Kabunushi Sōkai Hakusho 2004-ban [White Paper on Shareholders Meetings 2004], Shōji Hōmu no. 1715 (2004). 20) Kabunushi Sōkai Hakusho 2010-ban [White Paper on Shareholders Meetings 2010], Shōji Homu no. 1916 (2010) 132. 1) Gakushuin University in Tokyo

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Case No. 24: Corporate Law – Absorption-type Merger – Fairness of Merger Ratio – Action Seeking the Invalidation of a Merger

Document information

Publication

Business Law in Japan – Cases and Comments

Hayakawa Masaru

Jurisdiction

Tokyo High Court 31 January 1990 – Case No. 2921 ne 1989, Hiromitsu Nojima v. Mitsui Bussan KK

(★ )

Japan

Source: Shiryō-ban Shōji Hōmu 77 (1991) 193

I Headnote(s)

Court

On the requirements with regard to the balance sheet to be made available for inspection prior to a merger.

High Court of Tokyo

On whether an extremely unfair merger ratio can constitute cause to seek the invalidation of the merger.

Case date

31 January 1990

II Relevant Provisions Section 408-2, 408-3 [Old] Commercial Code (1)

Case number

P 246

2921 ne 1989

III Facts On 30 April 1987 Defendant, Mitsui Bussan KK, a listed corporation, and its unlisted subsidiary, A Corp., in which Defendant held approximately 85% of shares, agreed to carry out an absorption-type merger. According to the merger agreement, Defendant, as the surviving company, was to absorb A Corp. on 1 October 1987. The merger ratio was set at one share in A Corp. for one share in Defendant Company. The merger agreement stipulated that all assets and liabilities of A Corp., the value of which was calculated based on a balance sheet and a list of assets as of 31 March of the same year, would be acquired by Defendant, and that Defendant would be informed of any variations in the value of these assets and obligations from 1 April of the same year until the merger date by way of a separate calculation sheet. After March 31 of the same year, A Corp. increased its capital twice, each time doubling the amount of its capital, and conducted a revaluation of its assets. Defendant's general meeting of shareholders on 26 June of the same year saw the approval of the merger agreement.

Parties

Claimant, Hiromitsu Nojima Defendant, Mitsui Bussan KK

Bibliographic reference

Hayakawa Masaru, 'Case No. 24: Corporate Law – Absorption-type Merger – Fairness of Merger Ratio – Action Seeking the Invalidation of a Merger', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 245 - 260

Plaintiff, who is a shareholder of Y Corp., subsequently filed an action seeking the invalidation of the merger, asserting that (i)

the rules on ex-ante disclosure set forth in section 408-2 of the [Old] Commercial Code had been violated, because the fact that A would increase its capital twice had not been stipulated in the merger agreement, nor had this capital increase and the revaluation of A's assets appeared on the balance sheet kept for inspection at Defendant's head office; (ii) there was cause for revoking the approval of the merger because the approval resolution method had been extremely unfair due to the fact that the resolution had been adopted without informing Defendant's shareholders of A's capital increase and revaluation of assets; (iii) the merger was invalid because the merger ratio between Defendant and A had been extremely unfair; (iv) there was cause for revoking the approval of the merger because a person having a vested interest had exercised his voting rights at the resolution with the result that an extremely unfair merger ratio had been approved. The District Court dismissed the claim. (2) Plaintiff appealed to the High Court. The judgment of the High Court quoted the judgment of the District Court many times, and the quotations in the reasons for the decision below directly show the relevant parts of the judgment of the District Court.

IV Findings The court rejected Plaintiff's assertions and dismissed the appeal. The following two points of the decision are without precedent and attract attention: P 247

1 Requirements with Regard to the Balance Sheet to Be Provided for Inspection in Case of a Merger The balance sheet to be provided for inspection according to section 408-2(1)

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Commercial Code has to be the last balance sheet, but it is not necessary to especially prepare a new balance sheet as usually the previous closing balance sheet is understood to be sufficient. However, if a significant change of assets with influence on merger conditions has occurred in the time between the end of the accounting period and before the merger contract is prepared, this has to be specified by an appendix or notice to the calculation sheet. In the present case, a significant change of assets did not occur through the revaluation of assets so that a corresponding specification was not necessary, nevertheless an important change of assets had occurred by the increase of capital. It can be acknowledged that in this case Defendant annotated the closing balance sheet kept at its head office. Furthermore, it can be acknowledged that at the time of the resolution approving the merger in this case, shareholders did not pose any questions and approved the merger agreement unanimously. And, although the fact that a revaluation of company's assets had occurred was not explained to the shareholders once again, one cannot say that the approval resolution in this case has been adopted in an extremely unfair way.

2 Concerning the Question as to Whether an Inequitable and Unfair Merger Ratio Constitutes a Cause for the Invalidity of the Merger Plaintiff asserted that the unfairness and inequity of the merger ratio should be considered as a cause for invalidity of the merger; however, the unfairness and inequity of the merger itself should not be considered as constituting such cause because shareholders who opposed the resolution approving the merger agreement could have exercised their appraisal remedy [and thereby forced the company to acquire their shares].… Even if one follows Plaintiff's assertion that the merger ratio's unfairness and inequity can be a cause for invalidating a merger, the share value of each of the parties and the corresponding merger ratio may be calculated in many ways considering many factors; therefore, exclusive figures which are precisely and objectively correct cannot be determined. Thus, the merger ratio cannot be recognized as significantly unfair unless it goes beyond the bounds which are acceptable as a measurement of a complex corporate value. The value of Corp. A's shares was calculated as JPY 2,666 per share based on the net asset value method.… The value of shares in Y Corp. was calculated as JPY 625 per share, which was the average of the closing quotation of the market price of the shares in Y Corp. In addition, the calculation of the share value was conducted by an external expert. According to this calculation, the merger ratio should have been one share in A Corp. for four shares in Y Corp.; however, the fact that the increase of capital in A Corp. occurred P 248 and the merger ratio was set at 1:1 indicates that the share value of each of the parties to the merger was calculated in an appropriate way and determined to be 1:1, therefore, the merger ratio cannot be recognized as extremely unfair. The translation of the facts and the findings of court is based on the translation provided by the Transparency of Japanese Law Project of Kyushu University. Substantial additions and stylistic amendments have been made.

V Comment (3) 1 On the Requirements with Regard to the Balance Sheet to Be Kept for Inspection The High Court's decision cited the decision of the District Court (4) many times. On further appeal, the Supreme Court (5) supported the High Court's decision as well and dismissed the appeal without mentioning the reasons. Therefore, the present High Court's decision sets a precedent on the question as to whether in case of a merger it is necessary to prepare a special merger balance sheet in order to be able to provide it for inspection. The aim of the obligation in section 408-2 Commercial Code to keep and publicize the balance sheets of the companies of a merger is to provide the necessary information for the shareholders' decision on whether to approve the merger agreement in situations in which they have no knowledge of the financial conditions of both companies, and to provide the necessary information for the creditor's decision as to whether to raise an objection against the merger. Functioning as the material for a decision on the adequateness of the terms of the merger, according to the prevailing opinion the balance sheet should accurately indicate the status of each company's assets as the basis for setting the terms for the merger, but as a general rule, the last closing balance sheet is sufficient and it is not necessary to especially prepare a balance sheet for the resolution merger. This also corresponds with practice. (6) In contrast to this, there P 249 approving the exists the opinion that, since the balance sheet provides the material for the decision whether the merger ratio is a fair and appropriate one that maintains the value of each shareholder's investment, a merger balance sheet should be provided that indicates the enterprise value of each company and includes a revaluation of the assets and information on the enterprise's profitability. (7) There are doubts, however, about whether such merger balance sheet is worth the expense and effort that arise as a result of its preparation, (8) and if one considers that there is no obligation to calculate the merger ratio based on a merger balance sheet, (9) the above-mentioned opinion goes too far. It was pointed out in the present case that in relation to the fact that A's share value

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had been calculated by applying the net asset value method, an adjusted merger balance sheet should have been disclosed. (10) However, if one considers that in situations in which the merger ratio is calculated based on materials other than the balance sheet such materials need not be disclosed, the opinion that requests the disclosure of an adjusted merger balance sheet rather reflects the law de lege ferenda. It is especially significant that the court in the present decision makes clear that it agrees with the prevailing opinion on the meaning of the balance sheet required in section 4082 Commercial Code, and this conclusion can also be supported by the aim of the Commercial Code's provisions. (11) Through the amendment of the Commercial Code in 1997, it was stipulated that documents to be kept for inspection by the company must be prepared during a period of six months before a general shareholders' meeting to approve the merger, and that if it is not the last balance sheet, the last balance sheet has also to be kept at the head office for a period of two weeks leading up to the general shareholders' meeting (section 4082(1) items (iii) and (iv) Commercial Code). Furthermore, the Companies Act (12) expanded and strengthened prior disclosure and, as a measure to ensure the fairness of the merger ratio, introduced a duty to disclose information regarding the appropriateness of the merger consideration. Within the period between the day on which preparations start as stipulated by the law (sections 782(2), 794(2), 803(2) Companies Act) and six months from the day on which the merger becomes effective, each company participating in the merger has to keep at its head office the facts concerning the appropriateness, etc., of P 250 the merger terms, (13) accounting documents of the other company (14) and other details, (15) as well as important post-balance sheet events and other details related to the said companies, (16) and make them available for inspection by shareholders as well as creditors. (17) This is intended to enable the shareholders to decide on the adequateness of the merger and its terms and to supply materials to the company's creditors for their decision on whether they should raise an objection against the merger. The accounting documents to be disclosed are those accounting documents which have passed a formal auditory process pertaining to the last year. (18) Accordingly, if a company with an accounting auditor and an accounting period ending at the end of March has a merger agreement approved during the ordinary shareholders' meeting, the accounting documents become definite two weeks prior to the opening of the annual shareholders' meeting, and these definite accounting documents are kept for inspection by the company. Other companies keep the accounting documents of the preceding business year because they become definite by approval of the annual shareholders' meeting and will be subject to a process of change after the annual shareholders' meeting (section 182(1) item (vi), section 191 item (vii), section 204 item (vii) Enforcement Ordinance). This process takes into account the fact that the accounting documents to be disclosed are only a part of the materials determining the fairness of merger terms. A merger balance sheet with adjusted asset valuations is not included in the aforementioned accounting documents. (19)

2 On the Question as to Whether an Unfair Merger Ratio Can Give Cause for the Invalidation of a Merger a) Unfairness of the Merger Ratio As the merger ratio is closely connected with the return for the merger companies' shareholders and therefore a fact of great importance, it is a mandatory subject to be mentioned in the merger agreement (section 409 item (ii), section 409-2 Commercial Code; section 749 (1) item (iii) Companies Act). Factors which are considered when P 251 calculating the ratio are the status of the assets, profitability, share price and dividend rate, type and scale of the business, future business expectations and various other circumstances related to the companies of a merger, and it is said that the balance of power between these factors or the decisions made under diverse political considerations become, in practice, an issue of the companies' bargaining powers. (20) Nevertheless, it is understood that in theory the merger ratio must be fair in the light of the enterprise value (share price) of the companies of the merger. (21) This is because the principle of equal treatment of shareholders is applied to all shareholders of the companies participating in a merger, (22) and because it follows from the so-called continuity of shareholding as an essential element of a merger. (23) Concerning the question as to whether an inequitable and unfair merger ratio can give cause for invalidating the merger, the court in the present decision, for the first time ever in a court decision, held that this factor by itself does not constitute grounds for invalidating a merger. However, opinions are divided on the court's position that there is no cause for invalidating a merger even when the merger ratio is extremely unfair. There are some who agree with this view. (24) The judge in charge at the court of first instance refrained in his judgment from assertions on this matter. (25) In the decision of the Tokyo P 252 High Court, the part referring to the issue of an ‘extremely unfair’ merger ratio constitutes an obiter dictum, but shall nevertheless be discussed here as a matter of particular importance. (26) The minority opinion (27) that acknowledges grounds for invalidating a merger is criticized by the prevailing opinion (28) with the argument that even when the merger ratio is unfair, dissenting shareholders are sufficiently protected by their appraisal rights.

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(29) The court in the present decision clarifies for the first time that it basically takes the same view. (30) According to this opinion, since the merger ratio is theoretically set according to the share price, it is not appropriate to consider calculation errors as grounds for the invalidity of the merger, as long as the share price has been ascertained and the ratio has been calculated in good faith, and there is the perception that it is also necessary to consider the legal stability of a merger. (31) As the Supreme Court dismissed the appeal without stating any specific reasons, it is conceivable that the court construed these premises as appropriate. Nevertheless, it is rightly criticized that shareholders who seek to correct an unfair merger ratio, but at the same time wish to stay invested in the company, are not protected. (32) Against this criticism the counterargument has been voiced that due to the revision of shareholders' right to demand appraisal (section 785(1), section 797(1) Companies Act, purchase of shares at fair value) and the fact that cash, etc. has been acknowledged as merger consideration (section 749(1) item (ii) Companies Act, flexibilization of merger consideration) under the Companies Act, the necessity to consider those shareholders who wish to remain shareholders in the company has faded. P 253 (33) In the following, the state of the various opinions discussed under the Companies Act will first be examined, and then we shall consider how the shareholders' appraisal right is used in practice by looking at trends in recent case law. b) Academic Opinions Relating to an Unfair Merger Ratio under the Companies Act Under the old Commercial Code, it was understood that the merger consideration was generally limited to shares of the surviving company, and granting cash was acknowledged only to adjust the merger ratio. In contrast to this, under the Companies Act, shares, cash, and other assets can be stipulated freely as consideration in the merger agreement (flexibilization of merger consideration). As there have not been any court decisions so far on the merger ratio since the enactment of the Companies Act, one could assume that courts will take the same view on the unfairness of a merger ratio as the court in the present decision. In relation to this, there are some scholars (34) who doubt whether the shareholders' appraisal right is sufficient protection and conclude that an unfair merger ratio has to be construed as grounds for invalidating a merger. Similar to the court in the present decision, the prevailing opinion takes the view that an unfair merger ratio does not constitute grounds for invalidating a merger as shareholders are able to regain their investments by exercising their appraisal rights. (35) There are opposing opinions being voiced, but the number of opinions that favour an approach under the Companies Act similar to the present court decision is increasing. c) Shareholders' Right to Appraisal Many academic opinions are based on the fact that shareholders who disapprove of a merger are sufficiently protected since by exercising their appraisal rights they can sell their shares back to the company. In such cases, the Companies Act seems to require that, when calculating the price to be paid to shareholders, the even synergies expected from the merger are taken into account. While the old Commercial Code stipulated that the company had to buy back the shares ‘at the price which would be adequate if the resolution approving the merger had not been adopted’ (section 408-3(1) Commercial Code), the Companies Act requires that the shares simply be acquired at a ‘fair price’. By this the effectiveness of the appraisal remedy, and thus also the reasoning of courts and of prevailing opinion, have been strengthened. However, some scholars have pointed out that the function of the right to demand appraisal has also changed under the Companies Act. For example, regarding the question as to the point in time at which the fair price P 254 should be calculated, the prevailing opinion looks at the time at which the demand for the purchase was made, (36) but there are opinions which hold that the approving shareholders' resolution should be decisive instead, (37) or perhaps the last day on which the appraisal right can be exercised (sections 785(5), 797(5), 806 Companies Act), (38) or even the day on which the merger comes into effect. There has been no consensus among court decisions on this point either, but since the Supreme Court has shown in two recent decisions (39) that if there is no increase in the enterprise's value it applies to the point of time when the demand for the purchase was made, it can be said that the Supreme Court established this as the reference point. However, if one adheres to this approach, if various shareholders demand that the company repurchase their shares at different times, the courts will set fair prices that differ from each other, and therefore it cannot be avoided – for example in case of a absorption-type merger accompanied by a delisting where a drastic fluctuation in the share price occurs – that a problem of fairness between the shareholders arises. Furthermore, if one considers that the strict procedural requirements for exercising the appraisal right (notice of dissent, section 785(2) item (i) (a), section 797(2) item (i) (a) Companies Act), the expenses of the proceedings to be borne by the shareholder (section 26 Non-Contentious Cases Procedures Act (40) ), the significant information gap between the company and the shareholders, (41) the high burden of appraisal fees, (42) the time it takes until the price has been set, and the fact that shareholders who only hold a small interest normally do not exercise their right, one can no longer expect that this right has the effect of preventing an unfair merger. (43) Accordingly, it cannot be expected that the amendment of the rule that refers to the purchase price of the shares means a turn towards a system of sufficient economical remedies. (44) P 255

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3 Significantly Unfair Merger Ratio a) Action Revoking the Shareholders' Resolution Approving the Merger It has already been mentioned that the present court decision did not depend on the question as to whether an extremely inequitable merger ratio constitutes a cause for the invalidity of a merger. Still, the court gives some guidance on how to value the shares in the companies participating in the merger and thus when a merger ratio is extremely inequitable, (45) and having calculated the share price by itself, the court held that the materials disclosed had been insufficient. There is the opinion that in case that the determination of a merger consideration is extremely unfair considering the assets and the profitability of the companies involved, and that this fact by itself constitutes a cause for invalidating the merger, but this is the minority opinion. (46) By contrast, the prevailing opinion does not rigidly separate the merger ratio from the valuation of the enterprises of the companies; moreover it takes the view that when a general meeting of shareholders decides autonomously and lawfully upon adequate disclosure of information, it is not appropriate to consider this as grounds for invalidity. The reasoning behind this is that the merger ratio is in practice not set from a rational point of view and that the merger approval is a special resolution of the shareholders' meeting where the right of dissenting shareholders to seek appraisal is acknowledged. (47) However, if a merger agreement stipulating an unfair merger ratio has been approved at a general meeting of shareholders at which a person having a special interest has exercised his/her voting right, this fact constitutes – as acknowledged under the Commercial Code (48) – a cause for revoking these kind of resolutions (section 831(1) item (iii) Companies Act), and therefore becomes a cause for invalidating the merger. One can support this prevailing view, but since shareholders receive only monetary compensation and no sufficient remedy upon exercising of their appraisal rights, it is necessary to acknowledge in addition the possibility to seek an injunction in order to stop the merger, to invoke the liability of the directors, and to resort to other means under the Companies Act. (49) If the concept of a person having a special interest is interpreted narrowly, minority shareholders are not sufficiently protected in an unfair merger. However as the law acknowledges the voting right of a person having a special interest in principle and stipulates a right to seek revocation only when an extremely improper resolution has been adopted as a result of a person having a special interest in the resolution exercising the Companies Act), it is not necessary to P 256 a voting right (section 831(1) item (i) of interpret it narrowly. (50) With view to the approval of a merger, the group of persons having a special interest comprises a corporate shareholder who is party to the merger, a controlling shareholder or representative directors of such company, and those persons who have been appointed as director in the surviving company of the merger. (51) Even under the Companies Act there is nobody who would deny that when a person having a special interest has participated in the adoption of an extremely improper resolution, this constitutes a cause for revoking the resolution. (52) In this context, if one adheres to the prevailing opinion, the answer to the question concerning which kind of action should be filed – an action seeking the revocation of a resolution or an action seeking the invalidation of a merger – differs depending on whether the action is filed before or after the merger comes into effect. First, if an action seeking the revocation of the resolution is filed in the time before the merger comes into effect, it can be changed by amendment of claim (section 143 Civil Procedure Act (53) ) into an action seeking invalidation of the merger once the merger comes into effect (this is called the ‘absorption’ theory because the action seeking the revocation of the resolution is absorbed by the action seeking the invalidation of the merger). An action filed after the merger has been realized will become an action seeking invalidation of the merger, (54) while it is no longer possible to file an action for revocation of the resolution of the general meeting. Since the period for filing an action seeking the revocation of the resolution of the general meeting of shareholders is set to three months after the shareholders resolution has been adopted (section 831(1) Companies Act) and differs from the period for filing an action seeking the invalidation of the merger, which is six months after the merger comes into effect (section 828(1) item (vii) Companies Act), it is necessary that the action seeking the revocation of the resolution approved by the general meeting of shareholders is amended into an action P 257 seeking the invalidation of the merger. (55) In contrast to this, an influential opinion states that it should be possible under the Companies Act to file either of the actions (coexistence theory). (56) These scholars argue that a company can set the merger into effect at any time (section 783(1) Companies Act), and, therefore, in a situation in which a company sets the merger to come into effect on the day immediately after the merger agreement has been approved, shareholders can no longer file for an provisional disposition – with a claim for revocation of the resolution on the merits – seeking that the execution of the merger resolution be suspended (section 23(2) Civil Provisional Remedies Act (57) ) and the consummation of the merger prohibited by the court (section 24 Civil Provisional Remedies Act). They argue that this would mean that countermeasures could no longer be taken. b) Directors' Liability When shares or share options are granted as merger consideration and an unfair merger

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ratio has been set, it causes unfairness between the shareholders of the companies concerned but no damage to the companies. Therefore, since this does not make the directors liable for negligence of the company (section 423 Companies Act), it is held by the courts (58) and some scholars (59) that in such cases it is not possible to bring a derivative suit against the directors. In contrast to the above, a minority opinion sees room for directors' liability, arguing that the damage to shareholders is indirect and will not cease to exist by the merger. (60) However, those who adhere to this opinion admit that since the inequity of the calculation of an unfair merger ratio is hard to prove, if liabilities are concealed or shifted off-balance or alike, the remedy is of limited effectiveness. By contrast, in the case that obligations and cash are granted as merger consideration and the merger consideration has been unfavourably set by the surviving company, the surviving company will be damaged by an excessive out-flow of assets. Consequently, shareholders of the surviving company are able to pursue the liability of its directors through a derivative suit. (61) P 258

c) Unfairness of the Merger Ratio and Directors' Liability to Third Parties If the merger ratio has been set unfavourably to the shareholders of an expiring company, the question arises as to whether these shareholders can claim damages from the directors who made the decision according section 429 of the Companies Act (liability for damages of officers, etc. to third parties). According to the prevailing opinion, shareholders are included in such third parties so that directors are liable if the shareholders have been damaged directly. In case of a merger with a significantly unfair merger ratio, it can be understood that this is the case. (62) In this event, shareholders have to prove malicious intent or gross negligence on the part of the directors with regard to the performance of their duties as well as causality between their behaviour and the damage caused. Directors' liability for malicious intent or gross negligence is not acknowledged if the merger ratio has been set on the basis of an expert's appraisal. (63) d) Injunctions Once a merger has been consummated, its reversal causes considerable confusion to legal relationships. To avoid this, it is acknowledged that shareholders may enjoin the merger in advance. With respect to this point, explicit provisions that acknowledge in certain cases a right to seek an injunction have been newly enacted in the Companies Act: One example are so-called short-form mergers (section 784 (1) Companies Act). Here the surviving company owns more than 10% of the voting rights of the expiring company and is, therefore, a special controlling company (section 468(1), section 136 Enforcement Ordinance). An approval for the merger agreement by the general meeting of shareholders of the expiring company in such case is not necessary; in this event, if there exists the risk that shareholders of the expiring company suffer a disadvantage because of an extremely unfair merger consideration, the shareholders of the expiring company can seek an injunction in order to stop the merger (section 784 (2) Companies Act). In this context, the requirement ‘extremely unfair’ is determined in light of the status of the assets and other conditions of the companies concerned. (64) The same applies to cases in which the expiring company is the special controlling company of the surviving company (section 796 Companies Act). This aims at protecting shareholders where a shareholders resolution is, by exception, not required. (65) P 259

Some argue that in cases other than these exceptional ones, shareholders cannot seek an injunction. (66) However, the person responsible for drafting the provision points out that such interpretation was not intended. (67) If one follows the approach of the prevailing opinion that a cause for revoking the resolution exists when an extremely unfair merger ratio is the result of a person having a special interest participating in the voting (section 831(1) item (i) Companies Act), there exists the opinion that by filing an provisional disposition - with the claim for revocation of the shareholders' resolution on the merits (section 23 (2) Civil Provisional Remedies Act) – seeking the execution of the merger resolution to be suspended, shareholders can achieve the same result as if they were filing an enjoinment. (68) Since according to this view an extremely unfair merger ratio as such does not give a right to seek an invalidation of a merger, the scope of cases in which an injunction can be sought is narrow. There has recently appeared a notable and very persuasive opinion holding that, in cases in which the merger consideration is extremely unfair, shareholders may file for an injunction by using a general injunction available to enjoin illegal acts (section 360, section 422 Companies Act). However, the general provision of the said rule requires a ‘substantial detriment’ to the company (section 360(1) Companies Act) or ‘irreparable detriment’ (in case of a company with a board of auditors or a company with a committee, section 360(3) of the Companies Act). Cases in which this is recognized include a resolution adopted by the general meeting of shareholders, which is feared to

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cause considerable confusion to the company's legal relationships. In such cases, in order to prevent irreparable detriment, the opening of the shareholders general meeting or the exercise of voting rights can be enjoined. In cases in which extremely unfair merger terms are set with regard to part of the shareholders of the companies concerned, this influences the exercising of voting rights and causes the risk of irreparable detriment to the company. Here, the right to seek an injunction is acknowledged. (69) Since the necessary expenses to restore the original state as well as the decline of the company's value are also conceivable as a detriment to the company in any subsequent proceedings, proving such detriment in practice does not seem to difficult. Thus this approach is helpful for shareholders' protection and for the stability of legal relationships under the current system of the Companies Act. (70) Moreover, there is the opinion that in case of an unfair merger ratio, a shareholder should be entitled to file for an injunction according to section 210 Companies Act applied mutatis mutandis, (71) and yet another opinion gives shareholders the right so seek an injunction according to P 260 section 784(2) or section 796(2) Companies Act applied mutatis mutandis. (72) Finally, some scholars argue that shareholders should be entitled to suspend the merger by seeking a provisional disposition (section 23 Civil Provisional Remedies Act). (73) The development of even more opinions shows that shareholders should be endowed with an effective and easily exercisable right to seek an injunction, which is the future task of our country; a country which lacks a prior examination system regarding the issue of the merger ratio. (74) Masaru Hayakawa (1) P 260

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Hayakawa Masaru: Doshisha University Law School Shōhō, Law No. 48/1899 prior to the revision by Law No. 87/2005. Tokyo District Court 24 August 1989, Hanrei Jihō 1331 (1990) 136. See also the comment on this decision by: Y. Endō, in: K. Egashira et al. (eds.), Kaisha-hō hanrei hyakusen. Bessatsu Jurisuto 180 [Hundred Leading Court Decisions of Companies Law. Extra Issue of Jurisuto No. 180] (Tokyo 2006) 192. For a comment on the decision of the court of first instance see K. Nakamura, Kin'yū Shōji Hanrei 838 (1990) 41; K. Egashira, Jurisuto 1034 (1993) 140; J. Mori, Hōgaku Seminā 425 (1990) 125; T. Kakiuchi, Hanrei Taimuzu 762 (1991) 232; K. Kondō, Hanrei Hyōron 380 (1990) 222; Y. Endo, in: T. Ōtori/A. Takeuchi/K. Egashira, Kaisha hanrei hyakusen. Bessatsu Jurisuto 116 [Hundred Leading Court Decisions of Companies Law. Extra Issue of Jurisuto No. 116] 5th ed. (Tokyo 1992) 191. Supreme Court 5 October 1993, in: Shiryō-ban Shōji Hōmu 116 (1993) 196. For a comment see M. Hayakawa, Hanrei Taimuzu 948 (1997) 204; Y. Setani, in: Kaisha-hō juyō hanrei kaisetsu [Commentary on Hundred Important Court Decisions of Companies Law], 3rd ed. (Tokyo 2008) 348. H. Imai, in: K. Ueyanagi/T. Ōtori/A. Takeuchi (ed.) Shinban Chūshaku Kaisha-hō 13 [New Commentary on Companies Law, No.13] (Tokyo 1990) §408-2 note 8. K. Kubo, Kabushiki-gaisha no gappei to noren no keijō [Merger of Stock Companies and the Accounting for Goodwill], in: Aoyama Hōgaku Ronshū Vol. 5 No. 2 (1963) 17. Egashira, supra note 4, 141. Mori, supra note 4, 125. Nakamura, supra note 4, 41. Taking the same view: Egashira, supra note 4, 141; Mori, supra note 4, 125; Kondō, supra note 4,224; However, according to Nakamura (supra note 4) No.838,41, a merger balance sheet that indicates the asset value is necessary as material to set the merger ratio if the assets have been revaluated. Kaisha-hō, Law No. 86/2005. Section 182(1) items (i)-(iii), (3)-(5), section 191 items (i), (ii), section 204 items (i), (ii), section 213 of the Ordinance for Enforcement of the Companies Act, Kaisha-hō shikō kisoku, Ministry of Justice Ordinance No. 12/2006 (hereinafter ‘Enforcement Ordinance’). According to section 435(2) Companies Act, balance sheet, profit and loss statement, and others stipulated by ministerial ordinance. Section 182(1) item (iv), (6) item (i), section 191 items (iii), (iv), section 204 items (iii), (iv), section 213 Enforcement Ordinance. Section 182(1) item (iv), (6) item (ii), section 191 item (v), 204 item (v), section 213 Enforcement Ordinance. Section 782(1), section 794(1), section 803(1) Companies Act, section 192, 191, 294 Enforcement Ordinance. T. Aizawa/M. Hosokawa, Soshiki saihenkōi [Restructuring Transactions], in: Shōji Hōmu 1769 (2006) 15. K. Egashira, Kabushiki kaisha-hō [Laws of the Stock Corporations], 3rd ed. (Tokyo 2009) 794 (note 3).

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Yamada, Gappei hiritsu no fu-kōsei to gappei mukō gen'in [Unfairness of Merger Ratio and Ground for the Invalidity of a Merger], in: M. Iechika (ed.), Gendai saiban-hō taikei 17 (Kaisha-hō) [Outline of the Laws of Contemporary Courts No. 17 (Companies Law)] (Tokyo 1999) 408; K. Kondō, supra note 4, 225. K. Ueyanagi, Gappei [Merger], in: Kaisha-hō, tegata-hō ronshū [Collective Essays on Companies Law and Negotiable Instruments Law] (Tokyo 1980) 189; M. Tatsuta, Gappei no kōsei iji [Maintaining the Fairness of a Merger], in: Hōgaku Ronsō, Vol. 81, No. 2, 3, 4 (1968) 262; H. Imai, supra note 6,117; Suzuki/Takeuchi, supra note 20,507; J. Tamura, Gappei tetsuzuki no kōzō to ronri [Structure and Legal Principle of Merger Procedure] (Tokyo 1995) 32; K. Shibata, in: S. Morimoto (ed.), Kaisha-hō konmentāru 17 [Commentary on Companies Act No. 17] (Tokyo 2010) § 749, 130 et seq. S. Morimoto, Gappei no kōsei kakuho to Nishi-Doitsu kabushiki-hō kaisei 1 [Ensuring the Fairness in a Merger and Amendment of Western Germany's Stock Corporation Act] in: Hōgaku Ronsō, Vol. 113, No. 1 (1983) 4; H. Imai, Oyako-gaisha no gappei to shōsū kabunushi hogo [Parent-Subsidiary Type Merger and the Protection of Minority Shareholders], in: K. Ueyanagi/R. Kawamata/ M. Tatsuta (eds.) Kigyō-hō no kenkyū. Ōsumi Ken'ichirō sensei koki kinen [Research on Business Law. In Commemoration of the 70th Birthday of Prof. Ōsumi Ken'ichirō] (Tokyo 1977) 216 (Fn 34). K. Nakamura, Gappei hiritsu no kōsei kakuho [Ensuring the Fairness of a Merger Ratio], in: A. Takeuchi (ed.), Tokubetsu kōgi Shōhō [Special Lecture on Commercial Law 1] (Tokyo 1995) 293, 302. For a comment on the decision of the court of first instance see Kin'yū Shōji Hanrei 832 (1990) 21, 22; H. Kanda, Kaisha-hō [Companies Act], 13th ed. (Tokyo 2011) 343; M. Yanaga, Rigaru maindo Kaisha-hō [Legal Mind Companies Act] (Tokyo 2007) 428. See also Endō, supra note 4, 193. Kakiuchi, supra note 4, Hanrei Taimuzu 948 (1997) 233. Hayakawa, supra note 5, Hanrei Taimuzu 948 (1997) 204, 207; id., Kaisha gappei o meguru soshō ruikei [Types of Litigation Concerning the Merger of Companies], Hanrei Taimuzu 917 (1996) 177; S. Masai, Ichijirushiku fu-kōsei na gappei tō ni okeru kabunushi no kyūsai hōhō [Remedies for Shareholders in case of an Extremely Unfair Merger etc.], in: M. Hamada/ S. Iwahara, Kaisha-hō sōten [Issues of the Companies Act] (Tokyo 2009) 202. Tatsuta, supra note 21, Hōgaku Ronsō, Vol. 82, No. 2, 3, 4 (1968) 283; K. Nakamura, Gappei no kōsei to kabunushi hogo [Fairness of a Merger and Shareholders' Protection] (Tokyo 1987) 75. For a detailed overview on the academic discussion at the time when the present judgment has been rendered compare Nakamura, supra note 4, Kin'yū Shōji Hanrei 838 (1990) 42 et seq.; Kondō, supra note 4, Hanrei Hyōron, 225; Endō, supra note 4, 190. Ueyanagi, supra note 21, 194; Yamada, supra note 20, 412. Most of the commentaries referring to the decision of Tokyo High Court support the decision's conclusion and reasoning, see Egashira, supra note 4, 142; Kon dō, supra note 4, 225; Endō, supra note 4, 191. However, in opposition to this opinion, Nakamura, supra note 4, argues that as shareholders' share value remains unchanged before and after the merger, the fairness of the merger ratio is a fundamental demand that results from the continuity of shareholding, see Kin'yū Shōji Hanrei 838 (1990) 43. Further, by decision of 24 November 1994, Tokyo District Court dismissed in a merger case in which an unfair ratio had been adopted the claim for directors' and auditors' liability in a derivative suit, clearly stating that an unfair merger ratio presents grounds for invalidating the merger, see Shiryō-ban Shōji Hōmu 130 (1995) 89. Endō, supra note 4, 193. Mori, supra note 4, 125; M. Tatsuta, Kaisha-hō taiyō [Outline of the Companies Act] (Tokyo 2007) 472; S. Aotake, Shin-Kaisha-hō [New Companies Act], 3rd ed. (Tokyo 2010) 546. Endō, supra note 4, 193. Kanda, supra note 24, 343; K. Shibata, Kaisha-hō shōkai [Full Commentary on the Companies Act] (Tokyo 2009) 380. Egashira, supra note 19, 784 (note 2); Masai, supra note 26, 202; Y. ITō, Gappei hiritsu e no fuman to kabunushi [Dissatisfaction with the Merger Ratio and the Shareholder] Hōgaku Kyōshitsu 348 (2009) 28. Kanda, supra note 24, 335 (note 7). T. Fujita, Shin-Kaisha-hō ni okeru kabushiki kaitori seikyū-ken seido [The System of Shareholders' Right to Demand for Share Purchase under the New Companies Act], in: E. Kuronuma/ T. Fujita, Kigyō-hō no riron. Egashira Kenjirō kanreki kinen (jōkan) [Theory of the Business Law. In Commemoration of the 60th Birthday of Prof. Egashira (Vol. 1)] (Tokyo 2007) 297. Egashira, supra note 19, 799 (note 3); W. Tanaka, ‘Kōsei na kakaku’ to wa nani ka [What is a ‘fair price’?], in: Hōgaku Kyōshitsu 350 (2009) 64-65, 68. Supreme Court 23 April 2011, Kin'yu Shōji Hanrei 1366 (2011) 9; Supreme Court 26 April 2011, Kin'yu Shōji Hanrei 1367 (2011) 16. Hishō jiken tetsuzuki-hō, Law No. 14/1898. Masai, supra note 26, 202.

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42) M. Yanaga, Ichijirushiku futō na gappei jōken to sashitome – songai baishō seikyū

43) 44) 45) 46)

47) 48) 49) 50) 51) 52)

53) 54) 55) 56) 57) 58) 59) 60)

61) 62) 63) 64) 65) 66) 67) 68) 69) 70)

[Significantly Unfair Merger Terms and the Claim for Enjoinment / Damage], in: E. Kuronuma/ T. Fujita, Kigyō-hō no riron. Egashira Kenjirō kanreki kinen (jōkan) [Theory of the Business Law. In Commemoration of the 60th Birthday of Prof. Egashira (Vol. 1)] (Tokyo 2007) 628-629. W. Tanaka, Soshiki saihen to taika jū'nan-ka [Restructuring and the Flexibilisation of Compensations], in: Hōgaku Kyōshitsu 304 (2006) 80. Compare K. Osumi/H. Imai/R. Kobayashi, Shin-Kaisha-hō gaisetsu [Outline of the New Companies Act] (Tokyo 2009) 468-469 (note 322). Kakiuchi, supra note 4, Hanrei Taimuzu 762 (1991) 233. Kanda, supra note 24, 343; Shibata, supra note 34, 380; T. Suenaga, Kaisha-hō [Companies Law], 2nd ed. (Tokyo 2001) 238; I. Hattori, Gappei mukō tō no uttae [Action for Invalidating a Merger etc.], in: Hōgaku Kenkyū (Aichi gakuin daigaku ronso) Vol. 47, No. 3 (2006) 17,41, 52. Osumi/ Imai/ Kobayashi, supra note 44, 468 (note 322). H. Imai/S. Kikuchi, Kaisha no gappei [Company Merger] (Tokyo 2005) 127. Compare Yanaga, supra note 42, 629 (note 6); Shibata, supra note 21, 134. Egashira, supra note 19, 344 (note 1). Yamada, supra note 20, 414. T. Aizawa et al., Ronten kaisetsu Shin-Kaisha-hō [Commentary on Point at Issue of the New Companies Act], (Tokyo 2006) 679; Egashira, supra note 19,773; Tatsuta, supra note 32,472; K. Yoshimoto, Kaisha-hō [Companies Act] (Tokyo 2010) 383; compare Ito, supra note 35, 28; Masai, supra note 26, 202; Osum/Imai/ Kobayashi, supra note 44,468, 315; Aotake, supra note 32, 546; K. Yoshimoto, Kaisha-hō [Companies Act] (Tokyo 2010), 383; T. Seki, Kaisha-hō gairon [Outline of the Companies Law], 2nd rev. ed. (Tokyo 2009) 512; H. Maeda, Kaisha-hō nyūmon [Introduction to Companies Law], 12th ed. (Tokyo 2009) 716; M. Sasaki, Gappei – kaisha bunkatsu mukō no uttae [Actions for Invalidating a Merger or a Company Split], in: K. Egashira/M. Monguchi, Kaisha-hō taikei [Outline of the Companies Law], (Tokyo 2008) 386; M. Yanaga, supra note 24, 428, takes the opinion that if the resolution approving the merger agreement is revoked, there will be no resolution anymore which poses a ground for invalidating the merger. Minji soshō-hō, Law No. 109/1996. Tokyo District Court 2 August 1989, Hanrei Jihō 1331 (1990) 136. Yamada, supra note 20, 415; Hattori, supra note 46, 150. Egashira, supra note 19, 348 (note 7); Masai, supra note 26, 203. Minji hozen-hō, Law No. 91/1989. Supreme Court 23 January 1996, Shiryō-ban Shōji Hōmu 143 (1996) 158; Osaka District Court 31 May 2000, Hanrei Jihō 1742 (2001). Egashira, supra note 19, 784 (note 2); Yanaga, supra note 24,428 (note 34); ITō, supra note 35, No. 348, 30. R. Tsuchida, Gappei hiritsu no kōsei kakuho to kabunushi daihyō soshō [Ensuring the Fairness of the Merger Ratio and Derivative Action], in: Y. Endo/T. Shimizu (eds.), Kigyō ketsugō-hō no gendaiteki kadai to tenkai. Tamura Junnosuke sensei koki kinen [Contemporary Issues and Developments of Corporate Merger Law. In Commemoration of the 70th Birthday of Prof. Junnosuke Tamura] (Tokyo 2002) 140, 152, 159. Endō, supra note4, 193; Egashira, supra note 19, 784 (note 2); Masai, supra note 26, 203; Itō, supra note 35, No. 348, 30; Hattori, supra note 46, 52; Shibata, supra note 42, 140. Yanaga, supra note 42, 653; Itō, supra note 35, No. 348, 31; compare Hattori, supra note 46, 139, 129. Masai, supra note 26, 203. T. Aizawa/M. Hosokawa, Soshiki saihen kōi [Restructuring Transactions], in: Aizawa (ed.) Rippō tantō-sha ni yoru Shin-Kaisha-hō no kaisetsu [The New Companies Act Explained by the Responsible Legislator], (Tokyo 2006) 199. T. Aizawa, Ichimon ittō shin-Kaisha-hō [Q&A on the New Companies Act] (Tokyo 2005) 229. Fujita, supra note 37, 261, 268 (note 44). Shibata, supra note 21, 141. ITō, supra note 35, 33. Yanaga, supra note 42, 623, 632; H. Ogawa, Kigyō soshiki saihen to shōsu kabunushi hogo [Corporate Restructuring and the Protection of Minority Shareholders] Ajia Hōgaku, Vol. 43, No. 2 (2009) 1, 17-18; Masai, supra note 26, 203. Yanaga, supra note 24, 427 (note 32); cf. Tanaka, supra note 43, 75, 82.

71) Kanda, supra note 46, 144. 72) T. Murata, Kabushiki-gaisha no gappei hiritsu no ichijirushii fu-kōsei ni tsuite [The

Consideration of ‘Extremely Unfair’ in the Merger Ratio], in: Ritsumeikan Hōgaku 321, 322 (2008) 542. 73) Yanaga, supra note 42, 632. 74) SeeM. Hayakawa, EU ni okeru kokkyō okoeta gappei [On Cross-border Merger in the EU], in: Dōshisha Hōgaku 58 (2006) 42; T. Sasagawa, Soshiki saihen ni okeru Yōroppa kaisha hōsei no tokushoku [Characteristics of European Companies Law System in the Case of Restructuring], Kokusai Shoji Homu 35 (2007) 323 et seq.

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1)

Doshisha University Law School

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Case No. 25: Corporate Law – Fraudulent Incorporationtype Company Split – Right of Creditors to Seek Avoidance and Request Compensation from the New Company

Document information

Publication

Business Law in Japan – Cases and Comments

Moritz Bälz; Kansaku Hiroyuki (★ )

Jurisdiction

Tokyo High Court 27 October 2010 – Case No. 2010 ne 4126, Yuni PR KK Case

Japan

Source: Kin'yū Hōmu Jijō 1910 (2010) 77

Court

I Headnote(s)

High Court of Tokyo

Where an incorporation-type company split constitutes a fraudulent act, creditors may, with regard to their claims, avoid the transaction and claim compensation from the newly incorporated company.

Case date

II Relevant Provisions

27 October 2010

Sections 763 et seq. Companies Act, (1) section 424 Civil Code (2)

Case number

P 262

2010 ne 4126

III Facts Defendant 1 (the Appellant 1) [Yuni PR KK] was a stock company engaged inter alia in restaurant services for groups, as well as in the advertisement industry. As its advertisement business faced a severe crisis, the company decided to separate the two businesses by way of an incorporation-type company split (shinsetsu kaisha bunkatsu). On 14 January 2008, a split plan was set up according to which Defendant 2 (the Appellant 2), as the company newly incorporated by the company split, was to take over virtually all of Defendant 1's remaining assets (totalling approximately JPY 155.9 million in bills of exchange, etc.) and part of Defendant 1's liabilities (totalling approximately JPY 69.8 million in long term debt, etc.). At the same time, Defendant 1 was to cumulatively assume all liabilities transferred to Defendant 2. All 400 shares issued by Defendant 2 in the course of the company split were issued to Defendant 1. The incorporation-type company split took effect on 19 June 2008. Prior to that, on 31 January 2008, Defendant 1 had become a wholly owned subsidiary of a third company, which was an affiliate of a fourth company serving as sponsor of the aforementioned split. On 15 January 2009, Defendant 2 had issued an additional 1000 shares to said sponsor.

Bibliographic reference

Moritz Bälz and Kansaku Hiroyuki, 'Case No. 25: Corporate Law – Fraudulent Incorporation-type Company Split – Right of Creditors to Seek Avoidance and Request Compensation from the New Company', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 261 - 273

Plaintiff (and Appellee) [Showa Leasing KK], who was active in the leasing business and as broker for instalment sales, had outstanding claims against Defendant 1 based inter alia on lease contracts in the amount of approximately JPY 19.1 million (‘the Claims’), which were not transferred by the aforementioned company split. At the time of the company split, Defendant 1 was in the state of over-indebtedness. Since the day the company split had taken effect, Defendant 1 had already lost any substance as a company. Plaintiff sought payment of the Claims from Defendant 1, and, based on an avoidance of the company split as a fraudulent act, compensation in an amount equivalent to the Claims [plus interest] from Defendant 2. On first instance, Plaintiff had prevailed. (3) Subsequently, the Defendants appealed the decision.

IV Findings Even if an incorporation-type company split can be used as an instrument for business restructuring, this does not mean that it cannot constitute a fraudulent act. An incorporation-type company split can be effected without active participation of the company's creditors. It is not carried out according to a procedure based on a rehabilitation plan approved by a majority of the company's creditors and by the court, nor is it based on the Civil Rehabilitation Act, which necessarily balances the interests of the company and its creditors. Therefore, it cannot be considered along the same lines as a rehabilitation procedure. P 263

Defendant 1 was virtually without assets and thus lacking the resources to satisfy its creditors for their claims. It carried out the transaction, which reduced the assets available for its creditors, being aware that such step would harm the creditors. Therefore, it is only natural that this transaction constitutes a fraudulent act and that the creditors can seek avoidance of such transaction. Section 161 Bankruptcy Act, (4) which limits the right of avoidance if the obligor in exchange for transferring property has received reasonable value, does not warrant another result.

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Translated by Moritz Bälz

V Comment 1 Context of the Decision Since its introduction into the (Old) Commercial Code in 2000, (5) the instrument of a company split (kaisha bunkatsu) has been applied as an effective tool to purchase, restructure, or revive businesses. On the other hand, however, there are quite a few cases in which it has been abused or used fraudulently to the disadvantage of creditors. (6) These days, we observe an increase of cases in which company splits give rise to disputes between the companies carrying out the company split and their creditors, even resulting in litigation. Courts have tried to protect creditors, applying various legal doctrines and statutory provisions including the right to request avoidance of a fraudulent act (section 424 Civil Code), the right of avoidance (section 161 Bankruptcy Act), the doctrine of piercing the corporate veil, and section 26(1) (Old) Commercial Code (=section 22(1) Companies Act), applied mutatis mutandis, which stipulates the liability of an assignee company using the trade name of an assignor company. (7) Like in some of the aforementioned cases, the case at issue deviates from the prevailing view and existing case law of the time by granting a right to request avoidance. Looking P 264 at abusive company splits, this case is highly relevant among the cases of incorporation-type company splits carried out by a single company, (8) as following the court of first instance it recognizes a right to request avoidance of the company split as a fraudulent act. Furthermore, the fact that a right to compensation was granted as legal effect of the right to request avoidance, a view so far little developed in legal doctrine or court precedents, constitutes a valuable example. The following comment will first summarize the background of abusive company splits (2.) then look into whether a right to request avoidance should be granted in case of a company split (3.) and, if so, under which conditions (4.) and with which legal effects (5.). Finally, the ongoing deliberations to adopt amendments to the law in order to restrict the abusive use of company splits shall briefly be touched upon (6.).

2 Background for Abusive Company Splits – Shortcomings in the Creditor Protection System under the Companies Act A company split enables a splitting company, without the consent of its creditors, to transfer assets and liabilities to a new company (in case of an incorporation-type company split) or a receiving company (in case of an absorption-type company split). As opposed to the universal succession in case of a merger, in case of a company split it is possible to transfer only a part of the company's rights and obligations (partial universal succession, bubunteki na hōkatsu shōkei). Therefore, there is a risk that a splitting company, e.g. by spinning off the unprofitable parts of its operations or, conversely, by transferring the profitable parts to a new company (in case of an absorption-type company split: a receiving company) keeping only the unprofitable parts, arbitrarily distributes its assets and liabilities between itself and the new company (or the receiving company). In the case of a merger, the fact that assets and liabilities of the merging companies are combined works as a safeguard against abuses, as all shareholders of the merging companies share the same fate if the merger does not meet with success. By contrast, in case of a company split the risks for creditors are typically larger, as it is possible to let one of the companies go bankrupt while having the other company continue. The Companies Act, in addition to protection through ex ante disclosure requirements, grants certain creditors the right to object to an envisaged company split and to bring an action seeking the invalidation of a company split. Furthermore, the Act stipulates joint and several liability of the companies carrying out the company split vis-à-vis certain creditors of the splitting company who the splitting company failed to notify individually of the company split (sections 759(2) and (3), 764(2) and (3) Companies Act). (9) P 265

The procedure for objections by creditors is as follows: The Companies Act, as opposed to the Old Commercial Code, only allows for company splits in a way that the new company (in case of an absorption-type company split: the receiving company), in exchange for the assets transferred, issues shares to the splitting company (so-called butteki bunkatsu, as opposed to jinteki bunkatsu, where shares are issued to the splitting company's shareholders). (10) Those creditors of the splitting company who even after the company split can request fulfilment of their claims from the splitting company, in principle do not enjoy a right to object to the company split (section 789(1) item (ii) parenthesis, section 810(1) item (ii) parenthesis Companies Act). In addition, creditors of obligations which have been transferred to the new company (or the receiving company), but for which the splitting company has assumed joint and several liability, are excluded from the objection procedure (section 789(1) item (ii) parenthesis, section 810(1) item (ii) parenthesis Companies Act). By contrast, all existing creditors of the receiving company in an absorption-type company split do enjoy a right to state an objection, as such a split can have the effect of a ‘partial merger’ and thus may considerably affect the asset

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structure of the receiving company (section 799(1) item (ii) Companies Act). For a new company in an incorporation-type company split, an objection procedure does not become an issue, as there are no existing creditors. In order to give those creditors entitled to state an objection the opportunity to exercise such right, the company split must be disclosed in the official gazette and, in addition, those of the creditors entitled to state an objection who are known to the company must be notified individually (sections 789(2), 799(2), 810(2) Companies Act). A company which, in addition to publication in the official gazette, in accordance with the provisions of its articles of incorporation gives public notice through a daily newspaper or electronically, only has to notify tort creditors individually (sections 789(3) 799(3), 810(3) Companies Act). If a creditor states an objection within the applicable time period, the splitting company must either make payment or provide reasonable security to such creditor, or entrust equivalent property to a trust company to ensure payment, provided that such obligation P 266 does not exist if the company can show that there is no risk that the relevant creditor might be harmed by the company split (sections 789(1) item (ii) and (5), 799(1) item (ii) and (5), 810(1) item (ii) and (5) Companies Act). A creditor who does not state an objection within the applicable time period is deemed to have approved the company split (sections 789(4), 799(4), 810(4) Companies Act). In addition, the Companies Act stipulates an action to seek invalidation of the company split (section 828(1) item (ix) and (x) Companies Act). Creditors who have not approved the company split are entitled to bring such action (section 828(2) items (ix) and (x) Companies Act). Those creditors who are not entitled to state an objection are also considered excluded from ‘the creditors who have not approved the company split’. Therefore, it is generally held that they are not qualified to bring an action seeking invalidation. In the cases in which a company split is carried out abusively, each of these mechanisms designed to protect the creditors of the splitting company proves problematic. The main reason is that the creditors of the splitting company are, in principle, excluded from the objection procedure and thus also may not bring an action seeking invalidation. The rationale for this is as follows: (1) Under the Companies Act the new company (in case of an absorption-type company split: the receiving company) grants the consideration for the value received by the company split to the splitting company (butteki bunkatsu) and the latter thus should be adequately compensated for the transfer of assets. (2) Functionally, a company split and a partial assignment (jōto) of a business or of company assets are equivalent and for these no special creditor protection procedure is stipulated either. (3) Stipulating strict creditor protection procedures for company splits might bear the risk of making this instrument impractical as a tool for reviving companies.

3 Right to Request Avoidance in Case of a Company Split Whether in case of a company split creditors can exercise a right to request avoidance of a fraudulent act (sagai kōi torikeshi-ken, section 424 Civil Code) is controversial. Existing case law and the prevailing view have so far denied such possibility. It is argued that the invalidity of a company split can exclusively be sought by way of an action seeking invalidation, or that a company split as an organizational act cannot be subject to a right to seek avoidance. (11) P 267

More recently, however, a strong view has been arguing in favour of granting a right to seek avoidance. (12) Even the people responsible for the preparation of the Companies Act at the Ministry of Justice see room for granting those creditors who are not entitled to state an objection against a company split the right to request avoidance if it cannot be expected that their claims will be fulfilled. (13) The legal concept of ‘organizational act’ (soshiki-hōjō no kōi) is used to explain procedures and effects under the Companies Act; it is not a concept to categorically deny the application of provisions and systems under the Civil Code. As examples of an organizational act (as opposed to a business transaction, torihiki kōi), the establishment of and contributions to a company are given, as well as restructuring measures such as mergers, company splits, share exchanges and share transfers. Courts have recognized a right to seek avoidance of the establishment of a company and of a contribution in kind. (14) There are also no precedents denying a right to seek avoidance of a fraudulent act under the Civil Code merely on the grounds that the act in question was an organizational act. Therefore, whether creditors in case of a company split should be able to exercise a right to request avoidance under the Civil Code should probably be best decided based on an assessment of the need for additional protection beyond the creditor protection system under the Companies Act, as well as with a view to legal certainty, which the Companies Act fosters by the instrument of the action for invalidation. Furthermore, opinions are divided on what should be considered the object of the right to seek avoidance in case of a company split, which is characterized by the special legal effect of (partial) universal succession. Is it the company split itself, or rather the individual acts of transfer based thereupon? (15) If the individual acts of transfer are considered the object there is substantially no difference to the avoidance of the transfer

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of individual assets in case of an assignment of a business. It seems questionable whether in case of a company split only individual transfer actions can be the object of a right to seek avoidance, as the universal succession into rights and obligations in such case is affected by operation of law. Problems might occur where not only assets, but also liabilities are transferred through the company split. P 268

4 Prerequisites for a Right to Request Avoidance as Fraudulent Act Existing case law judges whether or not the object of a right to seek avoidance is a legal act ‘which an obligor commits knowing it will prejudice the obligee’ by considering the fraudulent character of the act as well as the malicious intent of the obligor in a correlative or comprehensive way. (16) In the case at hand, the court considered the act fraudulent, as through the company split at issue (1) Defendant 1 was virtually stripped off all its assets and lost its substance as a company; (2) the liquidity of the shares Defendant 1 received from Defendant 2 in exchange was low and their value was difficult to maintain for Defendant 1's creditors; and (3) compulsory execution into the shares in Defendant 2 might also be difficult. As this company split involved only one splitting company (so-called tandoku bunkatsu) and all shares issued by Defendant 2 would be attributed to Defendant 1, one might think that Defendant 1 should have received value equalling the value of the assets and liabilities transferred to Defendant 2. (17) However, in the case at hand, even if Defendant 1 did in fact receive reasonable value, this does not necessarily mean that there was no fraudulent act. Rather, case law and the prevailing view assume that selling off assets even for equal value may in principle be fraudulent, as cash is easily consumed or concealed. (18) Where, in order to grant preferential payment to certain creditors of the splitting company, an incorporation-type company split is used and the liabilities belonging to certain creditors together with unencumbered assets are transferred to the new company, this practically has a similar effect as if such assets are provided as security to certain creditors. If in such case the splitting company jointly assumes these liabilities the effect gets even closer to granting security to some of the creditors. However, granting security to certain creditors prejudices the other creditors and, therefore, is considered fraudulent by case law and the prevailing view. (19) If this is correct, it is plausible to see the fraudulent element in cases such as the one at hand as lying in the discrimatory act. Under section 161 Bankruptcy Act an act of disposing property for reasonable value may be avoided only if three requirements are fulfilled: (1) The act poses the actual risk that the bankrupt might conceal or otherwise dispose of the asset in a prejudicial way; (2) the bankrupt has the intention to conduct concealment etc., and (3) the other party had knowledge thereof. If in the case of a fraudulent company split a right to request P 269 avoidance under section 424 Civil Code is acknowledged based on the discriminatory act even though the splitting company has received reasonable consideration for the business transferred by the company split, this arguably cannot mean that the scope of application of the right to request avoidance according to section 424 Civil Code is broader than the scope of the right of avoidance according to section 161 Bankruptcy Code. (20) The rule of section 161 Bankruptcy Act, in order to prevent the assets to be effectively diminished, recognizes the possibility of avoiding a transaction for reasonable value. On the other hand, section 161 Bankruptcy Code takes into account that third parties, fearing that their transaction might later be avoided, may refrain from dealing with a debtor in a time of crisis, and this may further complicate the debtor's financing and may drive a debtor into bankruptcy even though there had been the chance for a successful rehabilitation. (21) Even if one follows the strong view among academics that, when interpreting the requirements for a right to request avoidance, the right of avoidance in the Bankruptcy Act should be used as a model, in the company split at hand the prerequisites (1) through (3) above can be considered fulfilled: As far as the fraudulent intention of Defendant 1 is concerned, based on the factual assumption that Defendant 1 through the company split lost its substance as a company, it can be said that this company split did not aim at restructuring a business by transforming Defendant 1 into a (pure) holding company. Rather, it is difficult to consider the aim of this company split reasonable. The subjective malicious intent of the debtor appears to have been strong. Even though in case of the incorporation-type split the value received in exchange was reasonable, the nature of the relevant assets – shares in a non-listed company – effectively reduced the value as joint collateral for the creditors, and receiving payment on their claims became difficult. There was a close connection to the malicious intent. Thus the split can be considered a fraudulent transaction. Viewed from the perspective of case law, which decides whether or not a legal act was one ‘which an obligor commit[ted] knowing it [would] prejudice the obligee’ by judging the correlation of the fraudulent nature and the malicious intention of the debtor, the reasoning and the result of the decision can be considered as conforming to existing case law. The factors taken into account for assuming the fraudulent character of this incorporation-type split were the following: First, the case at hand was an incorporationtype company split of a single company, which may have increased the value of the business by abolishing a conglomerate discount by spinning off a comparatively

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flourishing business, but it was not a case in which synergies were to be expected by combining it with another business. Second, Defendant 1 lost its substance through the company split; with regard to Defendant 1's existence it is difficult to detect any justification or reasonableness and thus an abusive company split could be suspected. Third, viewed ex post the shares in Defendant 2 held by Defendant 1 were diluted by the large-scale share issuance to a third party in which Defendant 2 engaged thereafter, as may have been planned from the outset. P 270

According to the reasons for the decision, no evidence was presented on whether Defendant 2 as the beneficiary was unaware that the company split would prejudice the creditors of the splitting company, and the decision is silent on which natural person's knowledge should determine whether Defendant 2 had such knowledge. There are some specific problems with determining knowledge of the beneficiary in case of an incorporation-type split as opposed to an absorption-type split: According to the decision of the Imperial Supreme Court (Daishin'in) which allowed the establishment of a limited partnership to be avoided as fraudulent act, (22) whether the beneficiary of the establishment of the company had knowledge should be decided by looking at the founders. However, there are no founders in case of an incorporation-type company split. But in case of an incorporation-type company split of a single company, the splitting company can be seen as fulfilling the function of the founder. (23) Furthermore, as a company split is an organizational act which must be carried out by the representative directors, whether the beneficiary had knowledge must be decided by looking at the splitting company's representative directors. On this basis the requirement that Defendant 2 as the beneficiary was not unaware that the company split would prejudice Plaintiff can formally be considered fulfilled.

5 Legal Effects of Avoidance as Fraudulent Act Section 425 Civil Code stipulates that the avoidance ‘shall have an effect for the benefit of all obligees’. However, while case law, with regard to the legal effects of an avoidance as fraudulent act, takes the view that the status of the debtor's assets is reversed to the original status before the fraudulent act and that in principle the status quo ante is reestablished, these effects occur only inter partes between the avoiding creditor and the beneficiary or his successor and do not extend to the debtor. (24) Furthermore, even if the effect of an avoidance as fraudulent is only relative, in case of transferred immovable property the registered ownership is retransferred from the beneficiary or his successor to the debtor, (25) and, as thereafter there will be a compulsory enforcement against the immovable property, the creditor requesting avoidance is considered obliged to render possession to the debtor. By contrast, if the transferred property consists of movables or money, the creditor seeking avoidance may demand that such property is directly handed over to him. (26) In particular where the property transferred consists of money, this allows the creditor to set off his obligation to return the money received to the debtor against his own claim and thus, without first acquiring a title, to easier achieve payment on his claim than through an attachment of the debtor's claim. Practically, P 271 this enables the creditor to receive preferential payment. (27) As a result, as in the decision at hand, Plaintiff can through the compensation awarded effectively receive preferential payment. As a consequence, there arises not only the general problem that Plaintiff enjoys preferential treatment vis-à-vis the splitting company's other creditors. In case of a company split the relationship to creditors of those obligations transferred to the newly established company also becomes an issue, as to which in the case at hand the splitting company had assumed joint liability and which, therefore, were excluded from stating an objection to the split. This is because for these creditors the newly incorporated company's assets, transferred together with the obligations owed to these creditors, are reduced if, as a result of the avoidance, assets transferred from the splitting company are retransferred to the latter. Based on the relative effect of the avoidance which does not extend beyond the avoiding creditor and the beneficiary, in cases like the case at hand in which the splitting company has lost its substance, it remains unclear how the creditors of those obligations transferred to the newly incorporated company can be protected. There is no statutory rule on whether the newly incorporated company has a claim against the splitting company, and it is far from obvious how this issue can be resolved by interpretation. According to case law, concerning the right to seek avoidance of a fraudulent act, if the value of the claim held is lower than the value of assets as to which the avoidance is requested and if these assets are separable, the creditor can seek avoidance only in the amount of his claim. (28) By contrast, if the object is inseparable, the entire fraudulent act can be avoided. (29) The present decision, with a view to the scope of avoidance of a company split, considered the object of the avoidance separable. It seems possible to solve the problem as to which diverted assets should be returned, up to the amount of the avoiding creditor's claim, by letting the avoiding creditor choose the scope of avoidance. Even though the present decision considered the assets transferred by the company split to be separable, it did not specify individual assets to be returned, but took the view that

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retransferring individual assets would be extremely difficult. Therefore, the court ordered that compensation in the equivalent amount be paid instead. Yet, the object of a transfer by company split must be specified, at least in a generalizing manner, in the spit plan. To say that the assets ‘are not specified’, therefore, seems exaggerated and even to argue that the newly incorporated company has combined the assets into a business and therefore to specify them has become difficult, is hardly convincing. If, following the reasoning of the decision at hand, one considers it difficult to order a retransfer of specified assets and instead considers monetary compensation appropriate, this probably makes it easier for Defendant 2 as the newly incorporated company to comply with the judgment compared to a retransfer of assets used in its business. This is also in P 272 line with the principle of not breaking up a going concern. If one takes the view that, as an incorporation-type company split is carried out in one juridical act, the object of an avoidance always is inseparable, under the doctrine that in such case the entire transfer may be avoided even if its amount exceeds the avoiding creditor's claim, this is likely to greatly affect the newly incorporated company and its stakeholders. One may say that the decision at hand, which considers the object of the avoidance separable but the specification of individual assets extremely difficult and therefore orders monetary compensation, as a result, amounts to a reasonable solution. In a case in which a company split is avoided as a fraudulent act because it diverts assets to the disadvantage of creditors, with regard to determining the scope of the avoidance, one can think of a retransfer of specified assets in the amount of the avoiding creditor's claim or of equivalent monetary compensation. By contrast, when a company split is avoided as a prejudicial act in itself, it seems reasonable to assume that, even if the avoidance has a relative effect only, the liabilities transferred to Defendant 2 are revived as liabilities of Defendant 1. Also under existing case law, when a transaction is avoided by which the beneficiary has received payment or substitute performance from an obligor, the beneficiary's claim against the obligor is reinstated. (30) In case of avoidance as a prejudicial act, the creditors of the liabilities transferred to Defendant 2 should arguably be considered beneficiaries as well.

6 Legislative Deliberations From a corporate law perspective, with regard to the legal effect of an avoidance as a fraudulent act, if compensation is ordered to be paid, the avoiding creditor is practically granted a right to preferential payment. This entails problems with regard to the equal treatment of the other creditors of the splitting company and bears the risk that, with regard to liabilities or employment contracts transferred to the newly incorporated company, the interests of such creditors and employees may be harmed. Quite a few questions remain with regard to the legal effect of an avoidance as a fraudulent act, e.g. as far as the legal relationship between the debtor and the beneficiaries is concerned. It has to be considered whether the issue of abusive company splits should be addressed by legislative reform of the Companies Act, and in fact the Legislative Advisory Council's Company Law Sub-Committee (Hōsei shingi-kai kaisha hōsei bukai) is currently deliberating such measures. Generally speaking, two courses of action are considered: (1) Introducing an action to seek avoidance of company splits similar to the action which can be brought to avoid the establishment of a membership company (mochibun kaisha) and thus introducing special rules on the avoidance of the establishment of newly incorporated company as a fraudulent action; (2) strengthening creditor protection in case of a company split by introducing special provisions into the Companies Act. As with (1) there is strong criticism P 273 with regard to the action seeking avoidance of the establishment of a membership company, discussed as a model, (31) as a practical measure such action is costly and hardly a reasonable approach. Therefore, we probably must consider the second approach (2), i.e. strengthening the protection of certain creditors of the company under the Companies Act. For this there are basically two options; either to expand the procedure under which creditors can state an objection, or to expand the joint liability of the companies involved in the company split. Expanding protection through joint liability could even be stipulated together with the rules for transfers of business (jigyō jōto). Basically, under the rules for company splits the procedures for stating objections and joint liability are stipulated as mutually exclusive creditor-protection mechanisms, but it might be more appropriate to combine both instruments. (32) Simultaneously with amending the procedure for creditor objections, it would be effective to abolish the link existing under the current law and to recognize joint liability of the companies involved in a company split under certain conditions and with reasonable limits with regard to assets and time. The tentative report on the framework for corporate law reform published on 7 December 2011 by the Legislative Advisory Council's Company Law SubCommittee proposes that the newly incorporated company (in case of an absorption-type company split the receiving company) shall be liable for the obligations of the splitting company up to the value of the property transferred from the splitting company by way of the company split, provided that this shall not apply where a receiving company had no knowledge of the fact that the creditor of the splitting company would be harmed. (33) Presently, the Legislative Advisory Council is progressing in its deliberations on the reform of the law of obligations. Also envisaged as part of the reform is a comprehensive amendment of the right to seek avoidance. Obviously, it is important to include these

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developments into the discussion as well. (34) Hiroyuki Kansaku (1) & Moritz Bälz (2) P 273

References ★ )

Moritz Bälz: Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main Kansaku Hiroyuki: law at the University of Tokyo

1) 2) 3)

Kaisha-hō, Law No. 48/2005. Minpō, Law No. 89/1896. Tokyo District Court 27 May 2010, Kin'yū Hōmu Jijō 1902 (2010) 144 = Hanrei Jihō 2083 (2010), 148.

4) 5)

Hasan-hō, Law No. 75 of 2004. Sections 373 et seq. Commercial Code, Shōhō, Law No. 48/1899, as amended by Law No. 90/2000. See for details regarding company splits under the Old Commercial Code in German M. Bälz, Die Spaltung im japanischen Gesellschaftsrecht (Tübingen 2005). Osaka High Court 21 December 2009, Kin'yū Hōmu Jijō 1916 (2010), 108 [right to seek avoidance]; Fukuoka District Court 30 September 2010, Kin'yū Hōmu Jijō 1911 (2010), 71 [right of avoidance]; Osaka District Court 4 October 2010, Kin'yū Hōmu Jijō 1920 (2011), 118 [piercing the corporate veil]; Tokyo District Court 29 November 2010, Kin'yū Hōmu Jijō 1918 (2011), 145 and Supreme Court 10 June 2008, Hanrei Jijō 2014 (2008), 150 [application of sec. 26(1) Old Commercial Code = sec. 22(1) Companies Act mutatis mutandis]. Cf. for the aforementioned decision by the Supreme Court case no. 26 with comment by K. Endo in this volume. Company splits by a single company (tandoku bunkatsu) tend to pose higher risks for creditors than company splits carried out jointly by multiple splitting companies (kyōdō bunkatsu), where the need to reach mutual consent on the split agreement serves as a certain safeguard. Under the Old Commercial Code prior to 2005, a splitting company could only transfer ‘all or part of its businesses’ and the notion of ‘business’ (eigyō) served as a restriction, but under the Companies Act this has been changed into ‘all or part of the rights and obligations held… in connection with its businesses (jigyō)’. This, according to the prevailing view, allows the transfer of even individual assets or liabilities by way of a company split. Furthermore, the Old Commercial Code required as part of the ex ante disclosure a document stating that ‘it can be expected that each company will be able to fulfill the obligation attributed to it’. But in the Ordinance for the Enforcement of the Companies Act (Kaisha-hō shikō kisoku, Ordinance no. 12/2006 of the Ministry of Justice) this has been changed into a statement ‘concerning the likelihood that obligations will be fulfilled’ thus no longer making it a requirement for the validity of the company split that such fulfillment can be expected and facilitating abusive company splits. See H. Kansaku, in: Morimoto (ed.), Kaisha-hō kommentāru 17 – soshiki henkō, gappei, kaisha bunkatsu, kabushiki kōkan-tō (1) [Commentary on the Companies Act vol. 17 – Entity Conversion, Merger, Company Split, Share Exchange etc. (1)] § 757 pp. 256-265 and 267-274. See in English M. Bälz, Liberalized Rules for the Restructuring of Japanese Companies: Mergers, Demergers, and Share Exchanges under the New Company Law, ZJapanR / J.Japan.L. 21 (2006) 18, 22. Tokyo District Court, 20 December 2005, with view to the rules under the Old Commercial Code denied the bankruptcy trustee of a splitting company the right to request avoidance, stating that invalidity of a company split could only be sought through an action seeking invalidation (unpublished). The head of the division in the Ministry of Justice in charge for the introduction of the company split system has taken the same view, K. Harada, Kaisha bunkatsu seido no sōsetsu ni tsuite (ge) – [On the Introduction of the Corporate Split System (part 2)], Shōji Hōmu 1566 (2000) 8. T. Fujita, Soshiki saihen [Restructuring], Shōji Hōmu 1775 (2006) 60; M. Yanaga, Saikensha hogo, in: Asagi/Kobayashi/Nakahigashi/Imai, Kenshō kaisha-hō – Hamada Michiyo sensei kanreki ki'nen [Examining Corporate Law – Celebrating Prof. Michiyo Hamada's 60th Birthday] (Shinzansha 2007) 505; Y. Itō/K. Ōsugi/W. Tanaka, Kaisha-hō [Corporate Law] (Yūhikaku 2009) 393. T. Aizawa/M. Hadama/D. Kōriya, Ronten kaisetsu Shin-Kaisha hō [The New Companies Act -Explaining Points under Discussion] (Shōji Hōmu 2006) 690, 723. Imperial Supreme Court (Daishin'in) 28 October 1918, Minroku 24, 2195 (establishment of a partnership), Tokyo District Court 10 October 2003, Kin'yū Shōji Hanrei 1178 (2003), 2 (contribution in kind; the avoidance was, however, limited to the extent the capital was not impaired).

6) 7)

8)

9)

10) 11)

12)

13) 14)

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15) In case of the establishment of a company, there are three steps, namely the act of

16) 17)

18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32)

33) 34)

1) 2)

establishment, the contribution contracts between the individual shareholders and the company, and the acts fulfilling the obligations under these contracts; scholars disagree which step should be considered the object of the right to request avoidance. I. Sakai, in: Omori/Yazawa, Chūshaku kaisha-hō (1) [Company Law Commentary (1)] (Yūhikaku 1971) sec. 141, 1 (p. 522). M. Okuda, Saiken sōron [Law of Obligations – General Part] (enlarged edition, Yūyūsha 1992) 285-287; A. Ōmura, Kihon minpō III [Basis Civil Law III] (Yūhikaku 2005) 180-182. This is the reason why under the Companies Act, which only provides for company splits by which the new company (or the receiving company), in exchange for the assets and liabilities received, issues shares to the splitting company (butteki bunkatsu), there is in principle no creditor protection system for the creditors of the splitting company. Imperial Supreme Court 5 February 1906, Minroku 12, 136. H. Nakata, Saiken sōron [Law of Obligations - General Part] (Iwanami Shoten 2008) 229-230, 233. Supreme Court 1 November 1932, Minshū 11, 1832. S. Inoue, Ran'yō kaisha bunkatsu ni okeru mondai no honshitsu [The Nature of the Problems concerning Abusive Corporate Splits], Kin'yū Hōmu Jijō 1903 (2010) 6. M. It o et al., Jōkai Hasan-hō [Commentary on the Bankruptcy Act] (Kōbundō 2010) 1027. Supra note 14. Kansaku (supra note 9) 358. Imperial Supreme Court, 24 March 1911, Minroku 17, 117. Imperial Supreme Court, 31 March 1917, Minroku 23, 596. For movables as object of an avoidance see Supreme Court 23 January 1964, Minshū 18, 76; for money see Imperial Supreme Court 18 June 1921, Minroku 27, 1168. Supreme Supreme Court 9 October 1962, Minshū 16, 2070. Imperial Supreme Court 7 December 1903, Minroku 9, 1339. Supreme Court 11 October 1955, Minshū 9, 1626. Imperial Supreme Court 10 February 1941, Minshū 20, 79. M. Hamada, in: Ueyanagi et al. (eds.), Shinpan chūshaku kaisha-hō dai 1 maki (New Company Law Commentary vol. 1), sec. 141 note 3. See Legislative Advisory Council's Company Law Sub-Committee, Materials of the Sub-Committee 7-7-1 (note 1) and supplementary comment. There is a draft proposal providing that, when the splitting company is over-indebted or becomes overindebted through the company split, those creditors who may only request payment on their claims from the splitting company and who are known to the splitting company must be notified individually, and that if the duty to give such notice is not complied with, the newly incorporated company (in case of an absorption-type company split, the receiving company) shall be jointly liable vis-à-vis such creditors. Zenkoku tōsan shori bengoshi nettowāku [National Network of Bankruptcy Lawyers], Ran'yōteki kaisha bunkatsu nit suite no rippō iken teishutsu [Proposal for Legislation regarding Abusive Company Splits], Kin'yū Hōmu Jijō 1914 (2011) 10-14. See Legislative Advisory Council's Company Law Sub-Committee, Tentative Report on the Framework for Company Law Reform, 2-6-11 (note 1) (7 December 2011), available at . For the state of these discussions see Legislative Advisory Council's Civil Code (Law of Obligations) Sub-Committee, Materials 7-1 part II, 7-2 part II, 21 part 8 and 5 (9 March 2010); minutes of the 21st meeting (11 January 2011), available at . law at the University of Tokyo. Japanese Law and its Cultural Foundations at Goethe University Frankfurt am Main

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Case No. 26: Corporate Law – Company Split – Continued Use of Trade Name – Liability of Succeeding Company for Obligations of Splitting Company

Document information

Publication

Business Law in Japan – Cases and Comments

Endo Kiyoshi

Jurisdiction

Supreme Court 10 June 2008 – Case No. 2006 ju 890, Ryōsen Golf Club Case

Japan

Source: Shūmin 228, 195 = Hanrei Jihō 2014 (2008) 150 = Kin'yū Shōji Hanrei 1302 (2008) 46 = Kin'yū Hōmu Jijō 1848 (2008) 57 = Hanrei Taimuzu 1275 (2008) 83

Court

I Headnote(s)

(★ )

If the name of a golf club, whose members place a deposit, is used to indicate the operator of the business and, in case of assignment of the golf course business, the assignee company continues to use the trade name of the golf course as used by the assignor company, it is appropriate to understand that, absent special circumstances, the assignee company owes an obligation to return deposits paid by members pursuant to section 22(1) Companies Act applied mutatis mutandis.

Supreme Court of Japan

Case date 10 June 2008

II Relevant Provisions

Case number

Section 26(1) Old Commercial Code, section 22(1) Companies Act.

2006 ju 890

Bibliographic reference

P 276

III Facts

Endo Kiyoshi, 'Case No. 26: Corporate Law – Company Split – Continued Use of Trade Name – Liability of Succeeding Company for Obligations of Splitting Company', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 274 - 290

On 7 October 1995, the Plaintiff (and Appellant) entered into a membership agreement with A Corp. in order to become – as a legal person – a regular member of a Golf Club (the ‘Golf Club’) and deposited JPY 35,000,000 (the ‘Deposit’) with A Corp. in order to guarantee its membership. A Corp., a joint-stock company (kabushiki kaisha), was engaged in running a golf course (the ‘Golf Course’). The period for which the Deposit was placed was, initially, five years from the day of the official opening of the Golf Course pursuant to the rules of the Golf Club. However, due to an amendment to the rules this was extended to five years from 18 May 1999 (until 18 May 2004). On 8 January 2003, the Defendant (and Respondent), a joint-stock company, was incorporated following a company split (kaisha bunkatsu) by A Corp. (the ‘Company Split’) pursuant to Article 373 of the [Old] Commercial Code (1) [now Article 763 of the Companies Act (2) ]. Defendant succeeded to A Corp.'s Golf Course business, but did not succeed to A Corp.'s obligations to return deposits to members of the Golf Club. Following the Company Split, Defendant continued to run the Golf Course using the name ‘Ryōsen gorufu kurabu’; the name used by A Corp. to indicate the operator of the Golf Course business. On or around 15 April 2003, A Corp. and Defendant jointly delivered a document entitled ‘A Request’ (the ‘Document’) to each member of the Golf Club, including Plaintiff. The Document described the fact that Defendant had been incorporated for the purpose of managing the Golf Course following the Company Split and that the Golf Club would be transformed into a golf club for the sole use of the Defendant's shareholders through the conversion of memberships of the Golf Club into Defendant company shares and requested the members to convert their memberships of the Golf Club into Defendant company shares. On 25 May 2004, Plaintiff notified Defendant of its intention to withdraw from the Golf Club and requested that Defendant return the Deposit. Defendant, however, did not return same. Accordingly, Plaintiff filed suit against Defendant, claiming return of the Deposit JPY 35,000,000 plus delinquency charges calculated based on the commercial statutory rate and accrued from 26 May 2004, the date following the date of the notification of its withdrawal, until the date of payment. Plaintiff alleged that Defendant owed an obligation to return the Deposit due to its succession to the Golf Course business and continuous use of the name of the Golf Club pursuant to section 26(1) Commercial Code applied mutatis mutandis. Section 26(1) Commercial Code provides that, in the case of an assignment of business, if the assignee company continues to use the trade name of the assignor company, the assignee company shall also be liable for the performance of P 277 any obligations having arisen from the business of the assignor company. Defendant disputed Plaintiff's claim, asserting that there was no room for application of section 26(1) Commercial Code, mutatis mutandis, to a company split and that, even if there had been, the delivery of the Document to each member of the Golf Club constituted a special circumstance that denied the application of such provision, mutatis mutandis, in this case.

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The court of first instance and the court of second instance ruled that there was room to apply section 26(1) Commercial Code, mutatis mutandis, to a company split. However, the courts concluded that delivery of the Document to each member of the Golf Club constituted a special circumstance that denied the application of such provision, and dismissed the Plaintiff's claim. The court of first instance (3) acknowledged Plaintiff's claim against A Corp. for return of the Deposit but rejected all reasons asserted by Plaintiff regarding such claim against Defendant, i.e. cumulative taking over of obligations (succession to obligations by way of the company split), liability of the transferee of the business due to continued use of the trade name (application of section 26(1) Commercial Code mutatis mutandis), liability of the transferee of the business due to notification of the taking over of obligations (application and application mutatis mutandis of section 28 Commercial Code), and the doctrine of denial of legal personality. The court, therefore, did not hold Defendant liable for the obligation to return the Deposit. The court of second instance (4) upheld the decision of the court of first instance and dismissed the Plaintiff's appeal. Plaintiff made a final appeal.

IV Findings The Supreme Court quashed the judgment of prior instance and upheld the Plaintiff's claim. Note that the Companies Act was enforced following the judgment of prior instance and now section 22(1) Companies Act provides the same as section 26(1) of the former Commercial Code. Pursuant to section 2 of the Supplementary Provisions of the Companies Act, section 22(1) Companies Act shall apply even to matters that occurred prior to the enactment of the Companies Act. Therefore, the court of final appeal judgment was concerned with whether or not section 22(1) of the Commercial Code should apply, mutatis mutandis, to this case. The Supreme Court held: P 278

If the name of a members-only golf club, whose members place a deposit, is used to indicate the operator of the golf course business and in case of assignment of the golf course business the assignee company continues to use the name of the golf course previously used by the assignor company, it is appropriate to understand that the assignee company owes an obligation to return deposits paid by members of the golf club to the assignor company pursuant to section 22(1) Companies Act applied mutatis mutandis, unless there exist special circumstances such as the assignee company rejecting the privileged use of the golf course facility by such members of the golf club immediately following the assignment (see Supreme Court, Case No. 2002 ju 399, 20 February 2004, Minshū 58-2, 367). This should apply not only to a case in which the golf course business is assigned but also to a case in which the golf course business is succeeded to by another company or a newly-incorporated company following a company split. Succession to the golf course business by another company or a newly-incorporated company following a company split is not different from an assignment of the business in the sense that in both cases all or a part of the business is succeeded to by another legal entity pursuant to juridical acts. Accordingly, in a case in which a company succeeding to the business continued to use the name of a golf club that had been used to indicate its prior business operator, then unless there exist special circumstances as mentioned above, members of the golf club could not help but believe that the business was still being run by the same business operator or that obligations incurred by such business had been succeeded to by the succeeding company pursuant to the succession of business. Defendant succeeded to the Golf Course business from A Corp. by way of the Company Split and continued to use the name of the Golf Club that had been used by A Corp. to indicate its business operator. Accordingly, unless there exist special circumstances, such as Defendant having rejected the privileged use by members of the Golf Club immediately following the Company Split, Defendant owes an obligation to return to Plaintiff, a member of the Golf Club, the Deposit paid to A Corp. pursuant to section 22(1) Companies Act applied mutatis mutandis. The Document delivered by A Corp. and Defendant to each member of the Golf Club following the Company Split, including Plaintiff, merely outlined that Defendant was newly incorporated to manage the Golf Club pursuant to the Company Split and that the Golf Club would be transformed into a golf club for Defendant's shareholders by the conversion of memberships of the Golf Club into Defendant company shares. The Document also requested conversion of memberships in the Golf Club into Defendant company shares, however it did not describe such matters as Defendant not permitting the privileged use of the Golf Course facility by members who failed to respond to the above request of conversion of the membership to shares in the Defendant company.

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P 279

Based on such content of the Document, it was not clear that Defendant would not succeed to the obligations that A Corp. had owed to former members. Accordingly, the delivery of the Document did not constitute a special circumstance as mentioned above and we do not recognise any other matters that could be regarded as such a special circumstance. Therefore, Defendant owes Plaintiff an obligation to return the Deposit. The translation of the facts and the findings of court is based on the translation provided by the Transparency of Japanese Law Project of Kyushu University. Substantial additions and stylistic amendments have been made.

V Comment 1 Introduction The present decision is one of many claims for the return of deposits brought by golf club members against companies running golf clubs after the collapse of the bubble economy in the 1990s in Japan. It is the first case in which the Supreme Court held that the reasoning of the Supreme Court decision of 20 February 2004, (5) referred to in the present decision, also applies if a company succeeds to a business by way of company split. According to the 2004 decision, the provision on the liability of a company continuing to use the trade name (previously section 26(1) Commercial Code, now section 22(1) Companies Act), applies mutatis mutandis in cases where the assignee company continues to use the name of golf club of the assignor company upon assignment of business, the assignee company being thus also liable for the performance of obligations towards creditors of the assignor company. Since the new Companies Act entered into force on 1 May 2006 while the present case was still pending, the Court of First Instance (Nagoya District Court 22 June 2005) and the Court of Appeal (Nagoya High Court 2 February 2006) applied the provisions of the pre-reform Commercial Code both to the liability of the company continuing to use the trade name, and to company splits, whereas in the decision of the Supreme Court the law as it stands after the entry into force of the Companies Act was applied. According to section 2 Supplementary Provisions to the Companies Act, the Companies Act also applies to cases which occurred prior to the entry into force of said law unless specific provisions in other laws provide otherwise. Thus, sections 22 et seq. Companies Act were applicable as regards the assignment of business and the liability due to continued use of the trade name. As far as the company split is concerned, however, the provisions of the Commercial Code prior to the reform (sections 373, 374-16, etc.) remained applicable according to section 105 Law on the adjustment of other laws accompanying the entry into force of the Company Law. (6) P 280

2 Background of the Problem After the collapse of the economic bubble from the 1990s onwards, the number of cases concerning the reconstruction of businesses and the protection of existing creditors increased. In particular companies which run golf clubs on the basis of a deposit system and could not meet the numerous claims for returns of deposits by their members tried a variety of legal arrangements in order to dispose of these obligations and yet be able to continue to run the golf business. Such arrangements often included, for instance, spinning off the golf business by assignment of business (eigyō jōto), lease of business or a management agreement, by setting up a second company by way of contribution in kind or – as in the present case – by making use of a company split (kaisha bunkatsu). One might see this as the intention of those running the company seeking to restructure the business in order to ensure profits and maintain the enterprise by continuing business. On the other hand, one cannot deny that this gives rise to a large number of creditors whose claims are difficult to collect. Creditors have taken countermeasures based on the right to rescind fraudulent acts and the doctrine of denial of legal personality. Further, it is held to be relatively easy to allege and prove the legal requirements for applying (mutatis mutandis) the provision on the liability of the assignee company due to continued use of the trade name (previously section 26 Commercial Code, now section 22 Companies Act). This provision was originally modelled on the German Commercial Code (7) and was introduced into Japanese law in the course of the 1938 reform of the Commercial Code. In Japan, just as in Germany, the various views regarding the purpose of this provision are rather complex.

3 Purpose of Section 22 Paragraph 1Companies Act Section 22(1) Companies Act is understood as a provision to protect creditors of the assignor company; its theoretical foundation, however, has invariably been subject to discussion. According to the prevailing opinion and case law, its basis is in reliance on outward appearance, whereas others stress the fact that business assets serve as security and still others argue that its justification can be found in the intentions of the assignee company. (8) Some representative views on the theoretical foundation of the provision

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are outlined below. P 281

a Protection of Reliance on Outward Appearance (9) If the trade name continues to be used, the creditors of the business cannot know that there has been a change in the person running the business and might believe that the assignee company, i.e. the company presently running the business, is its creditor, and even if they happen to know about the assignment of the business, they would normally assume that by continuing to use the trade name the assignee company has taken over all liabilities; in any case they would most likely believe that they could claim against the assignee company. Thus, the purpose of the provision is to protect those who rely on the outward appearance of the business. b Company Assets Serving as Security (10) The assets of the company serve as security for obligations arising from the business. Thus, the assignee is, in principle, held to have also taken over the obligations unless it uses a new trade name or expressly indicates that it does not take over any obligations. The provision, therefore, holds the assignee liable as the new owner of the company assets. c Intention of the Assignee (11) An assignee continuing to use the original trade name usually intends to succeed to the obligations arising from the business, whereas an assignee not continuing to use the trade name does not have such an intention. d Principle of Cumulative Assumption of Obligations – Construction as Provision for Cases of Parties Agreeing Not to Transfer Obligations (12) It is held to be the rule that obligations are transferred based on the fact that company the attribution of obligations, the assignee thus takes over the obligations. But even if the parties have specifically agreed that there be no succession to liabilities, the present provision permits that the assignee continuing to use the trade name takes over the obligations.

P 282 assets serve as security. Unless the parties provide otherwise regarding

e Participation in the Business Activities of the Assignor and Construction in Comparison with (Previous) Section 82 Commercial Code (13) If adapted to the new law, by participating in the business activities of the assignor company the liability adopted is construed to be the same as that of admitted partners of a membership company (mochibun kaisha) (section 605 Companies Act). f Construction as a Sanction to Prevent Fraudulent Business Assignments by Assignor and Assignee and to Urge a Reconciliation of Interests between the Parties (14) Unless an assignee continuing to use the trade name takes the measures of registration and notification as previously provided for in section 26(2) Commercial Code, it is assumed that it has taken over the obligations of the assignor company arising from the business. The provision is thus to be seen as a sanction inducing the assignee to register and notify, i.e. to take measures which safeguard the protection of claims. Because it is difficult for creditors to know that the person running the business has changed if the trade name remains in use, and they might well believe that the same business is being continued or that the assignee has taken over the obligations, the Supreme Court has construed section 26(1) Commercial Code (now section 22(1) Companies Act) as a provision to protect those who depend upon on such outward appearance in their dealings with said business. (15)

4 Provision on the Liability of the Assignee Company Based on Continued Use of the Trade Name In order for a liability of the assignee company under section 22 Companies Act to arise, the following requirements have to be met: (1) assignment of business; (2) continued use of the trade name of the assignor company by the assignee company; and (3) failure to either register, without delay after the business assignment at the place of the assignee's head office, the fact that the assignee shall not be liable for the obligations of the P 283 assignor company, or, alternatively, to notify without delay after the assignment of business the third party of such fact (section 22(2) Companies Act). a Assignment of Business ‘Assignment of business’ as used in section 22 Companies Act is understood to refer to the assignment of all or a significant part of assets which are structured for a certain business purpose and function as an organic unit, and has the same meaning as an assignment of business requiring consent of the general shareholder, as provided for in section 467 Companies Act. (16) The main issue of the present decision is whether the provision on liability based on

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continued use of the trade name is applicable by way of analogy to cases in which another person succeeds to the business or business activity by way of a legal transaction other than the assignment of business. The courts have dealt with this issue several times prior to the reform of the Commercial Code, i.e. when section 26 Commercial Code was still applicable. Contribution in kind to a business differs from an assignment of business in its legal nature, but is similar in that it also refers to a business fulfilling a certain purpose; both involve a transfer of business by way of a legal transaction. Thus, since there is also a strong necessity to protect creditors in cases of an incorporation of a new company by way of contribution in kind, aimed at an exemption from debts, application mutatis mutandis is acknowledged. (17) As regards the lease of a business with the lessee using and exploiting the object in its own name and at its own expense, application by way of analogy was affirmed in many cases since there is no difference to the assignment of the business in that the lessee is at the core of the business and all rights and duties arising out of the business are attributed to it. (18) This reasoning of the case law regarding the application by way of analogy also applies to contribution in kind (section 28 item (i) Companies Act) and lease (section 467(1) item (iv) Companies Act). b Company Split While in case law the applicability to legal transactions other than assignment of business had already been widely acknowledged, one decision also affirmed application of the provision on liability through continued use of the trade name mutatis mutandis to P 284 companies incorporated by way of company split as regards the creditors of the transferring company. (19) Since then several decisions up until the present decision have granted the claims of creditors of the transferring company. (20)

5 Analogous Application of Section 22 Companies Act to Cases of Company Split As regards the question whether a company which succeeds to a business through a company split is liable for the performance of obligations of the transferring company, the disclosure system in case of a company split makes clear to what extent liabilities are taken over (section 758 item (ii), 763 item (v) Companies Act). Thus, it is possible to check with the company split plan (in case of an incorporation-type company split) or the company split agreement (in case of a absorption-type company split) kept at the head office whether obligations have been taken over (section 782(3), 803(3) Companies Act). Further, creditors of obligations which have been taken over are given the possibility to state objections (section 789(1) item (ii), 810(1) item (ii) Companies Act). However, creditors which are able to claim against the transferring company even after a company split are not subject to the creditor protection proceedings from the time of establishment of the company split system (section 374-4(1) proviso, section 374-20(2) pre-reform Commercial Code). The reason for this is that the transferring company has received remuneration equivalent to the value of the business transferred in the company split so that there is no change in the state of assets (recoverable assets). (21) The fact that legal protection of creditors is provided for in the disclosure system and creditor protection proceedings in cases of company split as set out above is cited as a reason to reject analogous application of the provision on the protection of creditors upon assignment of business pursuant to section 22(1) Companies Act to the legal relationships occurring in case of company split. (22) Further, the fact that there is no registration system for exemption in cases of company split is also given as a reason. (23) Also, it is argued that analogous application of the provision protecting those who rely on the outward appearance is inadequate since a company split – in contrast to an P 285 assignment of business – is a form of universal succession which does not require the consent of the creditors as regards the transfer of obligations. (24) Those in favour of an analogous application, however, stress that ‘there is no difference in that through a legal transaction either the whole or a part of the business is taken over by a different subject of rights and obligations’ (Supreme Court in the case at issue) and that given the similarities between a company split and assignment of business in legal respects, it is necessary to introduce protection of creditors by analogous application of section 22 Companies Act. (25) Creditor protection, as provided for in the company split system, concerns creditors of obligations taken over by the company split; creditors whose claims are still performed by the transferring company are not given a possibility to raise objections. Further, in cases of a company split in which the receiving company issues shares to the transferring company (butteki bunkatsu), there generally does not exist a procedure for objections by creditors. The reason for this is the fact that as a result of the shares received in exchange for the company split, there is no change in the transferring company's state of assets as shown on the balance sheet. (26) Thus, the protection of creditors within the company split system is not sufficiently provided for; the legal position of the creditors is undermined if the obligations remain with the transferring company. The reasoning of those arguing in favour of analogous application seems to be based on the assessment

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that the company's intention to be exempt of liabilities and to continue the business remains the same whether assignment of business or a company split are the method of choice, and that it is thus necessary to take countermeasures in both instances alike once the legally accepted scope and level are exceeded. In the present case, the Commercial Code prior to its 2005 reform was applied to the company split. According to the wording of the law, the purpose of a company split is ‘succeeding to the company's business in whole or in part’ (sections 373, 374-16 [Old] Commercial Code), which makes it clear that one of the factors involved is that the business is being transferred. This serves as the basis for accepting analogous application in case of an assignment of business. The provision of the current Companies Act, however, uses the wording ‘succeeds […] to any rights and obligations, in whole or in part, in connection with the business’ (section 2 items (xxix) and (xxx) Companies Act) and there is controversy regarding whether the rights and duties which are subject to a company split have to actually amount to a business (an organic unit). Some argue, therefore, that if the company split in the present case were dealt with under the Companies Act it would be difficult to apply the provision on assignment of business P 286 mutatis mutandis. (27) However, company splits have indeed been provided for as a legal means to restructure a company pursuing a certain economic purpose within a system which balances the legal interests involved. Thus, it is generally used with respect to objects which are businesses. In this matter it is hard to agree with those who decided on the possibility of analogous applicability based only on a difference in the wording of the law. 6 Decision Regarding Special Circumstances In the 2004 Supreme Court decision, which acknowledged the legal responsibility of the assignee company by analogous application of (pre-reform) section 26 Commercial Code in the case of continued use of the name of the golf club upon assignment of business, it was held that under analogous application of section 22(1) Companies Act (section 26 Commercial Code), the assignee is liable for the return of the deposit which the members issued to the assignor unless there are special circumstances, for instance that the hitherto priority use of the golf premises by the golf club members is rejected without delay after the assignment of the business takes place. (28) Thus, if there are special circumstances such as priority use of the golf course being denied to the members of the club, the assignee cannot be held liable. A key point in deciding whether the assignee is liable based on analogous application of said provision is, therefore, the kinds of situation which would constitute such special circumstances. In this regard the following opinions have been voiced: (a) P 287

(b)

(c)

(d)

In being denied priority use of the golf premises, the members get to know of the assignment of the business and no longer assume that the receiving company has taken over the duty to return the deposit since it is reasonable in such a case to have doubts about whether upon denial of the priority use of the premises the claim for return of the deposit has not also been rejected. (29) Circumstances which contravene the name of the golf club indicating the subject of the business are considered such special circumstances; if there are such circumstances, the continued use of the name of the golf club does not amount to continued use of the indication of the business subject. (30) If the right to play is not taken over, this amounts to an unusual situation in which the essential right obtained by the golf club membership is not succeeded to, thus it is very likely that the obligation to return the deposit has also not been taken over. Thus, one might well take it as a notification of non-succession to the membership relationship if there is no succession to the right to play golf. (31) If the business is assigned as a life-prolonging measure for the golf club and the name of the golf club continues to be used, it is difficult to assume that the priority right of use of the members is rejected; it is unclear what the real intention of the Supreme Court was when stating that the denial of the priority right of use constitutes a special circumstance. (32)

From the point of view of the creditors, cases in which there are such ‘special circumstances’ seem few and the 2004 Supreme Court decision is seen as one heavily burdening the assignee with liabilities. Those operating the business, however, rate the decision as being in principle approving of life-prolonging transactions and restructuring. (33) The significance of the present decision from 2008 is, among others, that it again indicates the reasoning of the Supreme Court with regard to ‘special circumstances’. In the present case, the companies involved in the company split issued a ‘request’ addressed to the golf club members. It stated that through the company split a new company had been set up and that from now on the new company would operate the golf business; the members were requested to exchange their membership right in the relevant golf club for shares in the new company. The previous instance held that through the ‘request’, Plaintiff was informed that Defendant had been incorporated by the company split of company A, and that the golf club was now being operated on the basis of shareholder membership. It thus acknowledged the existence of special circumstances P 288 since it was not reasonable that Plaintiff could have believed that the business was

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being continued by the same business operator, or that, even if the business operator had changed, that Defendant had taken over the liabilities of company A. (34) The Supreme Court, however, held that from the contents of the ‘request’ it was not possible to know that members not conforming to the exchange of shares were not allowed priority use of the golf premises and that company Y had not taken over the liabilities of company A towards the previous members, and the court, therefore, did not acknowledge that the issuance of the letter amounted to special circumstances. On this matter, Justice Tahara gave a concurring opinion and Justice Nasu an additional opinion. Justice Nasu understood the information in said letter regarding the restructuring into a shareholdermember golf club as implicitly indicating that it was not envisaged that Defendant should take over the duty to return deposits to those members declining to exchange shares. He stated that it had been clear – or at least easily comprehensible to the members – that Defendant was not liable for the return of the Deposit and argued that there was a possibility that the issuance of the said letter could amount to a notification of non-assumption of liabilities under section 22(2) proviso Companies Act or, if not, at least amount to a special circumstance obstructing analogous application of section 22(1) Companies Act. However, since in the present case more than three months had passed from the time of company split to the issuance of said letter, the issuance was not ‘without delay’ and could thus not be seen as a notification under section 22(2) Companies Act or as a special circumstance; thus in the end the result is the same as that of the main opinion. (35) Justice Tahara argued that based on a detailed analysis of the text of the request, its content was not sufficient to be regarded as a notification of Defendant's non-assumption of the duty to return deposits to club members; the letter was also insufficiently clear on the treatment of those members who would not conform to the share exchange and as such could not be regarded as a letter sufficient to give rise to special circumstances. (36) Some scholars have voiced the view that through the issuance of the request Plaintiff might be mala fide both as regards the fact that the business had been assigned and that its claim had not been taken over. Thus, there was leeway to understand the request letter as a notification of liabilities not being taken over. (37) The general prevailing opinion, however, does not regard the issuance of the ‘request’ as a notification of exemption or as a special circumstance. (38) P 289

If one adheres to the prevailing opinion and case law – which justify liability according to section 22(1) Companies Act, with the reliance on outward appearance, stating that due to continued use of the trade name of the assignor company the creditors did not know of the assignment of business or, even if they knew, believed that in case of continued use of the trade name the assignee company took over the liabilities –, the action of the assignee company to deny priority right of use to the club members, which was exemplified in the 2004 decision as a special circumstance, is a clear rejection of their legal position as holders of membership rights and objectively makes it clear to the hitherto members that fundamental membership rights, i.e. the right to use the facilities (right to play golf) and the right to claim for return of the deposit, as provided for in the golf membership contract, are not succeeded to. Thus, one must come to the conclusion that there is no reliance on outward appearance, which would form the basis of a claim against the assignee company. In deciding whether there were indeed special circumstances, it is decisive whether the issuance of the request letter in the present case was sufficient to make club members aware. As Justice Tahara stated, one must probably assert that the content of the letter was insufficient in this respect.

7 Other Problems A number of other problems which need to be solved have been pointed out. First, it is held that the golf club members' priority right of use of the golf premises and the claim for return of the deposit form a unit as a comprehensive contractual relationship. Can they be separated? Is it possible to separate these rights in case of company split by stating it in the company split plan? Second, is it possible to apply section 22(3) Companies Act by way of analogy to liabilities in cases in which more than two years have passed since the company split? And finally, is it section 22 Companies Act or section 17 Commercial Code that is applicable in the present case? It is necessary to further examine the above-mentioned issues. (39)

8 Final Remarks Applying the provision on the legal responsibility of the assignee mutatis mutandis, provided that the trade name continues to be used, and thereby protecting creditors has until now played a certain role in the protection of creditors by expanding the scope of application to legal transactions other than the assignment of business and by also including cases in which names other than trade names continue to be used, for instance P 290 shop names or names of golf clubs, the purpose of which is to indicate the subject of business. Recently, however, cases in which the name of the golf club does not continue to be used, and in which the company split system is employed to dispose of debts, are

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steadily increasing. Thus, there is currently a tendency to urge for a reconsideration of the right to rescind fraudulent transactions as well as the company split system itself. (40) Kiyoshi Endō (1) P 290

References ★ )

1) 2) 3) 4) 5) 6) 7)

8) 9) 10) 11)

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Endo Kiyoshi: Toyo University in Tokyo Shōhō, Law No. 48/1899. Kaisha-hō, Law No. 86/2005. See Nagoya District Court, 22 June 2005, Kin'yū Shōji Hanrei No. 1302 (2008) 54. See Nagoya High Court, 2 February 2006, Kin'yū Shōji Hanrei No. 1302 (2008) 53. Minshū 58-2, 367. Kaisha-hō no shikō ni tomonau kankei hōritsu no seibi-tō ni kan suru hōritsu, Law No. 87/2005, as amended by Law No. 74/2011. Section 25 German Commercial Code (Handelsgesetzbuch). I. Kobayashi, Shōgō o zokuyō suru eigyō yuzuriuke-nin no sekinin [Liability of the assignee of a business continuing to use the trade name], in: Ueyanagi sensei kanreki kinen: Shōji-hō no kaishaku to tenbō [In Commemoration of the 60th Birthday of Prof. Ueyanagi: An Outlook on Commercial Law and its Interpretation] (Tokyo 1984) 1; T. Ōyama, Kigyō keisei no hōteki kenkyū [Legal Study on the Formation of Enterprises] (Tokyo 2000) 89. S. Ochiai, Shōgō zokuyō eigyō yuzuriuke-nin no sekinin [Liability of the Assignee of a Business Continuing Use of the Trade Name], in: Hōgaku Kyōshitsu 285 (2004) 28. K. Ōsumi, Shōhō sōsoku [Commercial Law: General Part] (Tokyo 1978) 328, T. Ōtori, Shōhō sōsoku [Commercial Law: General Part] (5th revised ed., Tokyo 1999) 149. E. Hattori, Shōhō sōsoku [Commercial Law: General Part] (3rd ed., Tokyo 1983) 418; M. Kondō, Shōhō sōsoku shō-kōi-hō [Commercial Law: General Part, Commercial Transactions] (5th revised ed., Tokyo 2008) 112. M. Tanabe, Shōhō sōsoku shō-kōi-hō [Commercial Law: General Part, Commercial Transactions] (2nd ed., Tokyo 1999) 154; M. Yamashita, Eigyō jōto yuzuriuke no riron to jissai [Practice and theory of assignment of business] (new ed., Tokyo 2001) 162; idem, Shōgō zokuyō no aru eigyō yuzuriuke-nin no sekinin [Liability of the assignee of a business continuing to use the trade name] in: Ritsumei-kan Hōgaku 256 (1997) 242. M. Sanekata, Saikō-sai shōwa 38-nen 3-gatsu tsuitachi hanketsu hihyō [Critical assessment of the decision of the Supreme Court of March 1, 1963] in: Hōritsu Jihō 3513 (1963) 105, H. Shimura, Eigyō yuzuriuke-nin ga yagō o zokuyō suru baai to shōhō 26jō 1-kō [Continued use of the shop name by the assignee and Art. 26(1) Commercial Code], in: Shōji Hōmu 1157 (1985) 41. Kobayashi, supra note 8, 17. Ochiai, supra note 9, 31. Supreme Court 7 October 1954, Minshū 8, 1795; Supreme Court 2 March 1972, Minshū 26, 183. Supreme Court 22 September 1965, Minshū 19, 1600. On the academic discussion on the meaning of assignment of business see K. Egashira (ed.), Kaisha-hō konmentaru 1 [Commentary on the Companies Act 1] (Tokyo 2008) 198 et seq. (M. Kitamura). Supreme Court, 2 March 1972, Minshū 26, 183. Tokyo High Court 1 October 2001, in: Hanrei Jihō 1772 (2002) 139; Tokyo High Court 2 September 2002, in: Hanrei Jihō 1807 (2003) 149; Tokyo District Court 31 August 2004, in: Kin'yū Hōmu Jijō 1754 (2004) 91. Nagoya High Court 6 October 2005, in: Hūgaku Semina 616 (2006) 121, annotated by Y. Sasamoto. Nagoya High Court 26 July 2006, in: Hōgaku Kenkyū 81-1 (2008) 101, annotated by C. Okamoto; Tokyo District Court 12 September 2007, in: Hanrei Jihō 1996 (2008) 132, annotated by M. Yanaga in: Jurisuto 1371 (2009) 107 and M. Yamashita in: Shihō Hanrei Rimakusu 38 (2009) 86). K. Harada, Kaisha bunkatsu hōsei no sōsetsu ni tsuite (chū) – Heisei 12-nen kaisei Shōhō no kaisetsu [On the Introduction of a Legal Regulation of Company Splits (2) – on the Commerical Code as Amended in 2000], in: Shōji Hōmu 1565 (2004) 14. With regard to creditor protection in case of company split see also case 22 with comment by H. Kansaku. See Egashira, supra note 17, 218 et seq. M. Yanaga, Kaisha bunkatsu to bunkatsu kaisha no saimu ni tai suru shōkei kaisha no sekinin [Company Split and the Liability of the Receiving Company for Obligations of the Transferring Company], in: Jurisuto 1360 (2008) 85. C. Okamoto, Kaisha bunkatsu-go no shinsetsu kaisha ni yoru shōgō no zokuyō to saiken-sha hogo [The Continued Use of the Trade Name by the Newly Incorporated Company after Company Split and Creditor Protection], in: Hōgaku Kenkyū (Keiō Gijuku Daigaku) 81 (2008) 116.

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25) Cf. H. Kikuta, Kaisha bunkatsu e no kaisha-hō 22-jō 1-kō no ruisui tekiyō no kahi [The 26) 27) 28)

29) 30) 31)

32) 33) 34) 35) 36) 37) 38)

39)

40)

1)

Possibility of Analogous Application of Art. 22(1) Companies Act to Company Split], in: Kin'yū Shōji Hanrei 1331 (2010) 17. Harada, supra note 22, 14 et seq. Yanaga, supra note 24, 85. On the interpretation of this decision see for example K. Uda, Gorufu-jōno eigyō yuzuriuke-nin ga gorufu kurabu no meishō o keizoku shiyō shita baai no yotaku-kin henkan gimu [Duty to Return the Deposit in Case of Continued Use of the Name of the Golf Club by the Assignee of a Golf Business], in: Jurisuto 1291 (2005) 100; K. Endō, Gorufu kurabu-mei no zokuyō to yotakukin henkan gimu no umu [Continued Use of the Name of a Golf Club and the Existence of a Duty to Return the Deposits] in: Kin'yū Shōji Hanrei 1195 (2004) 63; T. Hayakawa, Gorufu-jō no eigyō no yuzuriuke-nin ga yotaku-kin kai'in-sei no gorufu kurabu no meishō o zokuyō shite iru baai ni okeru yuzuriuke-nin no yotaku-kin henkan gimu no umu [The Duty of a Transferee of a Golf Business to Return Deposits if the Assignee Continues to Use the Name of a Members-only Golf Club Operated on the Basis of Deposits] in: Shihō Hanrei Rimakusu 30 (2005) 74; R. Kobayashi, Gorufu kurabu no meishō no zokuyō to shōhō26jō1-kōno ruisui tekiyō [Continued Use of the Name of a Golf Club and Application by way of Analogy of Art. 26(1) Commercial Code], in: Minshō-hō Zasshi 131 (2005) 142; A. Tokutsu, Yotaku-kin kai'in-sei gorufu kurabu no eigyō yuzuriuke ni oite gorufu kurabu no meishō o shiyō suru yuzuriuke-nin wa gensoku toshite shōhō26-jō1-kōni yori yotaku-kin saimu o hikitsugu [An Assignee who Continues to Use the Name of the Golf Club upon Assignment of a Members-only Golf Club Business Operated Based on Deposits as a Rule Takes over Liabilities according to Art. 26(1) Commercial Code] in: Hōgaku Kyōkai Zasshi 124 (2007) 1225. Comment on Supreme Court 20 February 2004, in: Kin'yū Shōji Hanrei 1195 (2004) 32. H. Mori, Eigyō jōto ni okeru shōgō zokuyō-sha sekinin no yōken [Requirements of Liability of a Person Continuing to Use the Trade Name in case of an Assignment of Business], in: Ginkō Hōmu 21 638 (2004) 27. M. Takahashi, Eigyō yuzuriuke-nin ni yoru gorufu kurabu no meishō no zokuyō to yotaku-kin henkan ginmu no keishō [Continued Use of the Name of the Golf Club by the Assignee and Assumption of the Duty to Return Deposits], in: Hōgaku Kyōshitsu 289 (2004) 151; K. Uda, Gorufu-jō jigyō jōto ni tomonau kurabu-mei zokuyō kaisha no sekinin kanken [A Personal View on the Liability of a Company Continuing to Use the Club Name upon Transfer of a Golf Business], in: Sapporo Gakuin Hōgaku 22 (2006) 147. T. Hayakawa, supra note 29, 137. See Uda, supra note 32, 137. Nagoya High Court 2 February 2006, in: Kin'yū Shōji Hanrei 1302 (2008) 54 et seq. See Supreme Court 10 June 2008, in: Kin'yū Shōji Hanrei 1302 (2008) 51. See Supreme Court 10 June 2008, in: Kin'yū Shōji Hanrei 1302 (2008) 50 et seq. Yanaga, supra note 24, 85; F. Kawahara, Kaisha-hō 22-jō 1-kō no ruisui tekiyō jirei [Cases of Application mutatis mutandis of Art. 22(1) Companies Act], in: Hakuō Daigaku Hōka Daigakuin Kiyō 3 (2009) 401. S. Kosuge, Kaisha no soshiki saihen to Kaisha-hō22-jō no ruisui tekiyō [Corporate reorganization and the application mutatis mutandis of sec. 22 Companies Act], in: Minji-hō Jōhō 275 (2009) 85; A. Tokutsu, Kaisha-hō 22-jô 1-kô ruisui tekiyō wa sagai jōtō hōri ka? – kaisha bunkatsu no bawai [Is the application mutatis mutandis of sec. 22(1) Companies Act following the doctrine of fraudulent transfer? The case of company splits], in: NBL 888 (2008) 6; Kikuta, supra note 26, 18 et seq. Tokutsu, supra note 39, 6; Ch. Ikeno, Kaisha bunkatsu ni yoru jigyō o shōkei shita kaisha no meishō zokuyō sekinin [Liability of a Company Succeeding to a Business by way of Company Split for continued use of the Trade Name], in: Jurisuto 1376 (2009) 126. S. Morimoto, Kaisha bunkatsu seido to saiken-sha hogo [Company Company Split and Creditor Protection], in: Kin'yū Hōmu Jijō 1923 (2011) 28; Zadan-kai: Kaisha bunkatsu o meguru shomondai [Round-table Discussion: Various Problems of Company Split] in: Kin'yū Hōmu Jijō 1923 (2011) 40; H. Kansaku, Shōhō gakusha ga kangaeru ran'yōteki kaisha bunkatsu mondai [Problems of an Abuse of Company Split – Some Thoughts by a Commercial Law Scholar], in: Kin'yū Hōmu Jijō 1924 (2011) 36; T. Takizawa, Kaisha bunkatsu o meguru saiban-rei to mondai-ten [Case Law on and Issues involved in Company Split], in: Kin'yū Hōmu Jijō 1924 (2011) 62. Toyo University in Tokyo

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Case No. 27: Corporate Law – Absorption-type Merger, etc. – Appraisal Remedy – Determination of Fair Value

Document information

Publication

Watanabe Hiroyuki

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 19 April 2011 – Case No. 2010 kyo 30, Rakuten v. TBS Source: Kin'yū Shōji Hanrei 1366 (2011) 9

Jurisdiction Japan

I Headnote(s) Where an absorption-type merger or other reorganization prescribed in section 782(1) Companies Act does not create synergies or otherwise increase the corporate value, the ‘fair price’ to be determined in response to a request for appraisal made by a dissenting shareholder of the absorbed stock company, etc. prescribed in said section, in principle, corresponds to the price at which the shares would have been valued but for a resolution of the shareholders' meeting to approve the absorption-type merger agreement, etc., as of the day on which a request for appraisal is made.

Court

Supreme Court of Japan

Case date 19 April 2011

If the absorption-type merger, etc. neither increased nor decreased the corporate value and accordingly caused no change in the value of the shares of the absorbed stock company, etc., it is within the scope of the reasonable discretion of the court taking into account the circumstances of the case, to use the market share price of the shares as of the day on which a request for appraisal is made or the average market share price P 292 during a certain period of time close to said day, as the market share price to be referred to when calculating the price at which the shares would have been valued but for a resolution of the shareholders' meeting to approve the absorption-type merger agreement, etc., as of said day.

Case number 2010 kyo 30

Parties

Claimant, Rakuten Defendant, TBS

Bibliographic reference

(There is a concurring opinion by Justice Tahara, and an additional opinion by Justice Nasu, respectively.)

II Relevant Provisions Section 785(1) and section 786(2) Companies Act.

Watanabe Hiroyuki, 'Case No. 27: Corporate Law – Absorption-type Merger, etc. – Appraisal Remedy – Determination of Fair Value', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 291 298

III Facts and Findings The appellee (Tokyo Broadcasting System Television, ‘TBS’) is a stock company, the shares of which are listed on the first section of the Tokyo Stock Exchange. At the shareholders' meeting held on 16 December 2008, a resolution was adopted to approve an absorption-type company split agreement according to which, through an absorptiontype company split, the appellee would have its wholly owned subsidiary company succeed to the rights and obligations held by the appellee in relation to the television broadcasting business and the visual contents and culture business, with no consideration for such succession to be granted by the subsidiary company to the appellee. The absorption-type company split was effected for the purpose of transforming the appellee into a certified broadcast holding company in accordance with the Act for Partial Revision of the Broadcast Act etc., (1) introducing the certified broadcast holding company system, which came into effect as of 1 April 2007. The appellant (‘Rakuten’) is a shareholder of the appellee, and holds a total of 37,770,700 shares. Since around 2005, Rakuten has acquired the appellee's (TBS') shares through its subsidiary company and obtained the relevant stocks by transfer from the subsidiary. Rakuten suggested to TBS the possibility of forming a business combination and an affiliation but negotiations did not make progress. After that, TBS introduced a defensive measure against takeovers and Rakuten's shareholdings remained under 20%. Moreover, by the new Broadcast Act, (2) a restriction was introduced on the capital in certified broadcast holding companies; a shareholder of such a company, in principle, cannot exercise its voting rights for more than 33%. Therefore, a business combination of TBS and Rakuten was rendered substantially impossible. Prior to the shareholders' meeting mentioned above, Rakuten gave notice to TBS of its dissent to the absorption-type company split, and also dissented to the resolution when it was adopted at said shareholders' meeting. Subsequently, on 31 March 2009, the P 293 expiration date of the period prescribed in section 785(5) Companies Act (period for requesting appraisal), Rakuten demanded that TBS purchase its shares in TBS at a fair price, and then filed a petition for determination of the share price according to section 786(2) Companies Act. The Tokyo District Court held that the closing price of TBS's shares on the Tokyo Stock Exchange as of the date of the appraisal request (JPY 1,294 per share) was the ‘fair price’ of the shares. (3) Rakuten appealed to the Tokyo High Court, and the High Court dismissed the appeal. (4) Rakuten then appealed to the Supreme Court of Japan. The Supreme Court affirmed the ruling of the High Court in terms of its conclusion and dismissed the appeal.

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Translated by Hiroyuki Watanabe. For the headnotes, the translation by the Judicial Research Council on the Supreme Court's homepage was closely followed.

IV Comment 1 Provisions of the Commercial Code and the Companies Act on Appraisal Where an absorption-type merger, an absorption-type company split, or a share exchange (defined as ‘absorption-type merger, etc.’ by the Companies Act) is effected, a shareholder as set forth in section 785(2) Companies Act may demand that the stock company absorbed in the absorption-type merger, the splitting stock company in the absorption-type company split, or the wholly owned subsidiary company in the share exchange respectively, purchase the shares held by such dissenting shareholder at a ‘fair price’ (section 785(1) Companies Act). Formerly, the Commercial Code (prior to the 2005 revision; the same shall apply hereinafter) (5) provided that, where a stock company carries out a reorganization based on a shareholders' resolution, a dissenting shareholder may demand that the company purchase the shares held by such shareholder at a ‘fair price at which the shares would have been valued but for such resolution’ (section 374-3(1), section 374-31(3), and section 408-3, etc., Commercial Code). Among academics, (6) it has been pointed out that if reorganization of a stock company appraisal right should also be entitled to receive distribution of the benefit from such synergies for the purpose of striking a balance with the other shareholders, and therefore a ‘fair price’ should be determined taking into consideration such synergies.

P 294 creates synergies, a dissenting shareholder who has exercised its

As generally understood, the Companies Act does not follow the relevant provisions of the former Commercial Code, but simply stipulates that a ‘fair price’ shall apply, with the intention of making it clear, in view of the circumstances described above, that synergies may be taken into consideration when calculating a ‘fair price’ applicable in relation to appraisal upon reorganization. (7) Most scholars consider that this does not preclude the application of the basis expressly set forth in the Commercial Code – the hypothetical price ‘on condition of no resolution’ – in cases where reorganization creates no synergy or reduces the corporate value. (8) In the decision of this case, the Supreme Court held that the ‘fair price’ to be determined in response to a demand for appraisal made by a dissenting shareholder of the splitting stock company, corresponded, in principle, to the price at which the shares would have been valued but for a resolution of the shareholders' meeting to approve the absorptiontype merger agreement etc. (here the company split agreement), where the absorptiontype merger, etc. would not create any synergies or otherwise increase the corporate value.

2 Effect of the Absorption-Type Company Split on TBS's Share Value However, even when we consider the absorption-type company split, if it is linked with other reorganizational or organizational action, there is a possibility that the value of the shares in TBS changed as the result thereof. If so, the effect of such actions related to the relevant reorganization should be taken into consideration in deciding on the ‘fair price’ for appraisal. On this point, considering that the absorption-type company split was linked to TBS's transformation into a certified broadcast holding company, which could be regarded as an organizational action, the courts of prior instances made a cross reference to the changes in the share price of TBS and that of TOPIX (Tokyo Stock Price Index) between ‘the effective date of the new Broadcast Act’ and ‘the day of public announcement of TBS's transformation into a certified broadcast holding company’ and found that the market price of TBS's shares had not been affected by the relevant absorption-type merger, etc. P 295

Then the Supreme Court held that if the absorption-type merger, etc., neither increased nor decreased the corporate value, and accordingly caused no change in the value of the shares of the absorbed stock company, etc., it was within the scope of the reasonable discretion of the court, taking into account the circumstances of the case, to use the market share price as of the day on which an appraisal request was made or the average market share price during a certain period of time close to said day, as the market share price to be referred to when calculating the price at which the shares would have been valued but for a resolution of the shareholders' meeting to approve the absorption-type merger agreement, etc., as of said day. Taking various elements into consideration, it is very hard to examine precisely whether the absorption-type company split actually created synergies or reduced the corporate value of TBS. So, it is reasonable that, in determining the fair price of the shares subject to appraisal, the courts of prior instances in this case made a cross reference to the market share prices of TBS and a general market index.

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Also, when there is a battle over the control of a company, and the losing side demands appraisal of its shares in the target, the amount of the shares subject to appraisal may affect the controlling interest of the target company to a greater or lesser extent. As a result, in calculating the price for appraisal concerning the shares held by Rakuten in this case, the courts did not take the control premium, i.e., Rakuten holding about 20% shares of TBS, into consideration. This will be important for future cases where a large shareholder exercises the right of appraisal as an opportunity for exiting from the company.

3 ‘Reference Date’ for Calculating a fair Price Under the Companies Act, various theories are advanced with regard to the reference date for calculating a fair price. In cases where the shares are compulsorily expropriated as a result of the reorganization (so-called squeeze-out), the reference date for calculating a ‘fair price’ to be applied has been set as ‘the effective time of the reorganization’. (9) On the other hand, in the cases where the statuses of shareholders are maintained, various opinions are presented on this point. While some courts' decisions set the reference date as ‘the time of the exercise of the right of appraisal’, (10) many P 296 other courts' decisions have set the reference date as ‘the time of the resolution to approve the reorganization’, (11) and there has also been a decision that leaves it to the discretion of the court in each case. (12) Concerning the case at hand, in first instance the Tokyo District Court had set as the reference date ‘the effective time of the reorganization’ while in second instance the Tokyo High Court held it was ‘the time of the expiration of the period for appraisal’. However, the majority opinion of the Supreme Court held that it was reasonable to determine a ‘fair price’ by setting the reference date as being ‘the time of the exercise of the appraisal right, that is, the point in time when the same legal relationship arose as would exist if a sales contract were formed and the point in time when the dissenting shareholder clearly manifested its intention to leave the company’. Unlike the case where shareholders are squeezed-out for cash, when the shareholders of the absorbed (or the splitting) stock company exercise their appraisal right, the shares are supposed to be purchased. So, also in this light, ‘the theory applying the time of the exercise of the appraisal right’ can be justified. (13) According to the theory which applies the time of the exercise of the appraisal right, adopted by the majority opinion, in the case where a number of shareholders have exercised the appraisal right, this would require some calculation and thus be quite burdensome. However, if an agreement on the purchase price is reached between the company and the dissenting shareholder (section 786(1) Companies Act), the price will be decided respectively. So, the practical problems involved should be discussed rather as an issue of the whole system of appraisal. Also, in such a case as this, where the court found neither an increase nor a decrease in the corporate value after the reorganization of a listed company, the price for the appraisal remedy should correspond to the market price at the date of exercising the appraisal right. So, one may think that there is no advantage for a dissenting shareholder in exercising the appraisal right in such a case. However, if a dissenting shareholder starts to sell many shares in the market, the share price could be expected to decrease within a short period of time and it would be difficult for the shareholder to sell all the shares at the equivalent level of the market price as of the relevant date. Therefore, it can be understood that said right gives dissenting shareholders the advantage of having its shares purchased for the market price at the date of exercising the right. P 297

4 Right of Appraisal as a free ‘Put Option’ and Its Abusive Use It has sometimes been pointed out that the appraisal right under the Companies Act could function as a free ‘put option’ and may be used abusively. A shareholder of listed shares could, first of all, dissent to the resolution, and then, if the share price were rising, the shareholder could sell out the shares on the market before the price dropped, without exercising the appraisal right, whereas if the share price were falling, the shareholder could choose to exercise the appraisal right. (14) This possible consequence is criticized as resulting in a disadvantage to shareholders who have not cast dissenting votes, and as also involving the risk of inducing shareholders' speculative action. Moreover, there is a possibility that the shareholders would have excessive incentives to dissent to the resolution on the reorganization, in order to get a ‘free option’. (15) Out of such consideration, some scholars say that the reference date should be set as late as possible during the period for appraisal. However, even if we set the reference date as late as possible, supposing the reference date is uniformly set on a specific day, the shareholders who hold the appraisal right options could still carry out a speculative action, aimed at making the market price of the target company on the day of the reference date as high as possible by proceeding with buying shares in the market in the period of time running up to the reference date. (16) Therefore, also from the point of avoiding dissenting shareholders' speculative action concerning the price for appraisal, the theory which applies the time of the exercise of the appraisal right, adopted by the

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majority opinion in this case, would be better than any other theory as to the reference date for calculating a fair price.

5 Discretion of the Court in Setting the Reference Date To conclude, I would like to mention the issue of the discretion of the court in setting the reference date. Concerning the issue of setting the reference date, Justice Tahara insisted in his concurring opinion that the basis for calculation must be predictable to the parties, as well as reasonable and transparent. He also argued that for this reason, it was essential to basically choose a certain date as the reference date for price calculation, P 298 thereby establishing a uniform legal standard, and this date, which is to serve as the reference date, should be the same irrespective of the presence or absence of synergies, although he insisted that the specific ‘fair price’, together with the reference share price and corrections, was to be determined by the court by exercising its discretion reasonably. (17) On the other hand, there might be a problem with the majority opinion in that, by adopting this theory, the majority opinion implies that it is not possible to determine the ‘fair price’ according to other theories, such as the theory applying the time of the expiration of the period for appraisal or the theory applying the effective time of the reorganization. (18) Justice Nasu insisted in his opinion that, unlike the ordinary type of litigation in which the existence or absence of rights or obligations is disputed, the determination of a ‘fair price’ (under section 785(1) Companies Act) should basically be left to the discretion of the district court and the high court, provided that it is sufficient to reverse the determination by the court of prior instance only when the court is found to have violated the law by abusing its discretion in adopting the reference date. (19) Also, just after this decision, in another Supreme Court decision on the determination of the share price for appraisal, (20) the majority opinion adopted ‘the theory applying the time of the exercise of the appraisal right’, unlike the decisions of prior instances in that case. (21) In response to this majority opinion, Justice Nasu submitted his dissenting opinion which was similar to his opinion in the case Rakuten v. TBS and there were remarkable differences in opinion on this issue between the two Justices of the Supreme Court. Consequently, there still remains a theoretical antagonism concerning the discretion of the court in setting the reference date. However, even when we adopt the former view (Justice Tahara), if the judges have free discretion to make reference share prices and corrections, the importance of setting the reference date is diminished. So, the issue on setting the reference date for calculating a fair price should be argued together with the extent of the discretion by the judges on making reference share prices and corrections. (22) Hiroyuki Watanabe (1) P 298

References ★ )

1) 2) 3)

4)

5) 6) 7) 8)

Watanabe Hiroyuki: University of Tokyo Hōsō-hō tō no ichibu o kaisei suru hōritsu, Law No. 136/2007. Hōsō-hō, Law No. 132/1950 as amended by Law No. 136/2007. Tokyo District Court 5 March 2010, Kin'yū Shōji Hanrei 1339, 44. As for an comment on this decision, see, H. Matsui, Rakuten tai TBS kabushiki kaitori kakaku kettei jiken no kentō [Analysis of the case about determining the price for appraisal in Rakuten v. TBS] Shōji Hōmu 1902, 4. Tokyo High Court 7 July 2010, Kin'yū Shōji Hanrei 1346, 14. As for a comments on this decision, see, K. Toriyama, Kabushiki kaitori seikyū ni okeru ‘kōseina kakaku’ no kijunbi [Reference date for calculating ‘fair price’in case of share appraisal], Kin'yū Shōji Hanrei 1358, 14. Shōhō, Law No. 48/1899 prior to the amendment by Law No. 87/2005. E.g., Z. Shishidō in, Ueyanagi/Takeuchi/Ōtori (eds.), Shinpan chūshaku kaisha-hō [Newly edited commentary on the Companies Act] vol. 5, § 245-2, 12. T. Aizawa / M. Hamada /D. Kōriya (eds.), Ronten kaisetsu shin-kaisha-hō [Commentary on the new Companies Act] (Tokyo 2006) 682; K. Egashira, Kabushiki kaisha-hō [Law of Stock Corporations] (4th ed., Tokyo 2011) 810 note 3, et seq. T. Fujita, Shin-Kaisha-hō ni okeru kabushiki kaitori seikyū-ken seido [The appraisal right in the new Companies Act], in: Kuronuma / Fujita (eds.), Egashira Kenjirō sensei kanreki ki'nen: Kigyō-hō no riron (jō) [In commemoration of the 60th Birthday of Professor Kenjirō Egashira: Theory of the Law of Enterprises (Book One)] (Tokyo 2007) 281 et seq.

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9)

10) 11)

12) 13) 14)

15) 16) 17) 18)

19) 20) 21) 22) 1)

Tokyo District Court 19 December 2007, Kin'yū Shōji Hanrei 1283, 22; Tokyo High Court 12 September 2008, Kin'yū Shūji Hanrei 1301, 28 – Rex Holdings, see case no. 28 in this volume with comment by M. Saitō; Osaka District Court 11 September 2008, Kin'yū Shōji Hanrei 1326, 27; Osaka High Court 1 September 2009, Kin'yū Shōji Hanrei 1326, 20 – Sunstar; Tokyo District Court 18 September 2009, Kin'yū Shōji Hanrei 1329, 45 – Cybird; Sapporo District Court 28 April 2010, Kin'yū Shōji Hanrei 1355, 58; Sapporo High Court 16 September 2010, Kin'yū Shōji Hanrei 1355, 64 – Openloop; Tokyo District Court 15 November 2010, Kin'yū Shōji Hanrei 1357, 32 – Hoan Kōgyō. Kobe District Court 16 March 2009, Kin'yū Shōji Hanrei 1320, 59 – Sankyō Kōsei; Yokohama District Court (Sagamihara Branch) 27 March 2009, Kin'yū Shōji Hanrei 1341, 35; Tokyo High Court 17 July 2009, Kin'yū Shōji Hanrei 1341, 31 – Nojima. Tokyo District Court 17 April 2009, Kin'yū Shōji Hanrei 1320, 31; Tokyo District Court 13 March 2009, Kin'yū Shōji Hanrei 1320, 41 – Kyōwa Hakkō Kirin; Tokyo District Court 19 October 2009, Kin'yū Shōji Hanrei 1329, 30 – Kanebō; Tokyo District Court 31 March 2010, Kin'yū Shōji Hanrei 1344, 36 – Tecmo; Tokyo District Court 29 March 2010, Kin'yū Shōji Hanrei 1354, 28; Tokyo High Court 19 October 2010, Kin'yū Shōji Hanrei 1354, 14 – Intelligence. As for the Intelligence case there is a decision by the Supreme Court, rendered shortly after the case at hand (see, infra at 5. and note 20). Osaka District Court 13 November 2008, Kin'yū Shōji Hanrei 1339, 56 – Kokudo Sōgō Kensetsu. Toriyama, supra note 4, 17. It is pointed out that one of the reasons for making such shareholders' speculative action possible is that the Companies Act set the period for the exercise of said right as from 20 days prior to the effective day to the day preceding the effective day (sec. 785(5), etc. Companies Act) on the grounds that the dissenting shareholder should be given some time to carefully deliberate before deciding whether or not to exercise said right. W. Tanaka, Kōseina kakaku to wa nanika? [What is a ‘fair price’?], Hōgaku Kyōshitsu 350, 65; T. Fujita, supra note 8, 294 et seq. In the practice of stock market index options, it is common that the right-holders of the option make speculative actions toward the reference date for calculating a settlement price of the option. Concurring opinion by Justice Tahara. As far as this case is concerned, the issue of the reference date amounts to nothing more than the difference in referring to the same day as the ‘expiration date of the period for appraisal’ or the ‘date of the appraisal request’, and regardless of the name chosen, there would be no difference in the conclusion. Opinion by Justice Nasu. Supreme Court 26 April 2011, Kinyū Shōji Hanrei 1367, 16 – Intelligence. See, supra at 3 and note 11. Concerning the case at hand, as stated above, I think the discretion exercised by the judges of prior instances on making reference share prices and corrections in calculating a fair price was reasonable. University of Tokyo

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Case No. 28: Corporate Law – MBO – Squeeze-out – Minority Shareholders' Appraisal Right

Document information

Publication

Maki Saito

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 29 May 2009 – Cases No. 2008 ku 1037 and No. 2008 kyo 48, In Re Rex Holdings Co., Ltd.

Jurisdiction

Source: Kin'yū Shōji Hanrei No. 1326 (2009) 35 = Shiryō-ban Shōji Hōmu No. 307 (2009) 168

Japan

I Headnote(s) On the appraisal of minority shares in case of a squeeze-out.

Court

Supreme Court of Japan

II Relevant Provision Section 172(1) Companies Act.

Case date

III Facts

29 May 2009

Y Company (Kabushiki kaisha Rekkusu Hōrudingusu, Rex Holdings Co., Ltd.) is the core of a supermarkets. Shares of Y had been listed on the JASDAQ Stock Exchange, and were delisted on 29 April 2007. On 27 April 2007, its stated capital amounted to JPY 9,669,756,658, the total number of shares authorized to the board was 600,000, and the number of issued shares was 264,360.

P 300 group that runs franchise restaurants, convenience stores and

Case number

2008 ku 1037 and 2008 kyo 48

1 Takeover Bid A Company (Kabushiki kaisha AP8), following an announcement on 10 November 2006, initiated a takeover bid on the shares of Y Company from 11 November to 12 December, offering JPY 230,000 per share. According to A Company, this tender offer bid was part of a management buyout (MBO) that was accepted by the board of Y Company. After the successful bid, P, a representative director (daihyō torishimari-yaku) of Y Company, planned to obtain 33.4% shares of A Company, which would make it possible for him to run the Y group as its director for at least the next five years. The offered price was the sum of the simple average of the market closing prices during the month up to 9 November 2006, that is JPY 202,000 with a premium of 13.9%.

Bibliographic reference

Maki Saito, 'Case No. 28: Corporate Law – MBO – Squeeze-out – Minority Shareholders' Appraisal Right', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 299 - 311

At the same time, Y Company announced that, after the bid, the remaining shareholders would be squeezed out for a consideration of cash, the amount of which would be calculated using the tender offer price. With this bid, A Company successfully acquired 91.51% of the outstanding shares of Y Company.

2 Downward Modification of Y's Performance At about the time that A tendered this bid, Y Company announced downward modifications of its performance as follows. (1) Table 1Announced Modifications and Actual Figures for the Fiscal Year 2006 (JPY 100 million, rounded off to a whole number) 06/2/17 06/8/21 06/11/10 07/2/26 07/3/1 Actual figures turnover

1,900

1,700

1,680

1,620

1,618

ordinary profit

105

64

44

-24

-24

net profit

45

0

-8

-91

-162

-89

-(89+157)

Nonoperating income

-55

-91

P 301

Table 2Announced Expectations and Actual Figures for the Fiscal Year 2007 (JPY 100 million, rounded off to a whole number) Midterm Performance Annual Performance (Consolidated (Consolidated Basis) Basis)

turnover

Expectation (07/3/2)

Actual figures Expectation (07/2/26)

Actual figures

769

753

1,493

1,650

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Midterm Performance (Consolidated Basis) Expectation (07/3/2) net operating profit

Annual Performance (Consolidated Basis)

Actual figures Expectation (07/2/26)

Actual figures

-37

-45

ordinary profit

-4

-42

60

-86

net profit

-39

-157

3

-124

Table 3Transition of the Market Price of Y Shares (JPY '000) 06/8/18 06/8/21 06/8/22 06/9/26 closing price

314

304

254

144

06/11/10

Later

219

ca. 220

3 The Squeeze-Out On 28 March 2007, at the annual shareholders' meeting and a class shareholders' meeting of common shares, the articles of incorporation were amended to permit Y Company to issue a new class of shares as class shares subject to a class-wide call (zenbu shutoku jōkō-tsuki shurui kabushiki), to convert all of the common shares into that new class, and to allow Y Company to acquire all shares of this new class in exchange for common shares with an exchange rate of 1 to 0.00004547 (which means 1 zenbu shutoku jōkō-tsuki shurui kabushiki is valued at only 0.00004547 per common share), so that all remaining shareholders, except for A Company, which held a great number of the new class of shares, were entitled to only cash and not common shares for this adjustment. These changes took effect on 9 May 2007.

4 Petition filed by X and Others X and others owned common shares of Y Company until the squeeze-out was implemented. They filed a petition in the Tokyo District Court for appraisal of their shares under section 172(1) of the Companies Act. By the time of the petition, Y Company had merged into A Company, which in turn changed its name to ‘Y’. The petition was brought against ‘Y,’ which had originally been called ‘A’. P 302

5 Decisions of the first and Second Instances The Tokyo District Court and Tokyo High Court found that the purpose of the remedy prescribed in section 172(1), i.e., appraisal of the shares to be acquired, is to protect shareholder interests when deprived of their status as members of the company; that petitioning shareholders shall be paid by the acquiring company in cash at the sum of 1) the fair price of their shares at the time of the squeeze-out and 2) the value attributable to the potentially expected rise in the share price as a result of the MBO; that, in cases like this, where a squeeze-out is carried out shortly after the shares are delisted, the market price during a certain period close to the date of the squeeze-out shall be used to calculate the fair value unless there are situations that suggest that the market price does not reflect the objective value of the company; and that, in calculating the amount to which the petitioners are entitled, the court enjoys wide discretion. The courts, however, came to different conclusions. The Tokyo District Court held that the petitioners were entitled to JPY 230,000 per share, according to the price offered in the bid, accepting the tender offer bid as appropriate. The Tokyo High Court held that the petitioners were entitled to JPY 336,966 per share, rejecting the appropriateness of the tender offer bid price. The court used the period from 10 May to 9 November 2006 as its reference in determining the objective value, and added 20% to obtain a fair price.

IV Findings Taking the certified facts of the second instance, the court's decision was affirmed as within its discretion. Complementary Opinion of Justice Mutsuo Tahara As the judicial appraisal shall compensate shareholders for their financial loss when deprived of their shares against their will in management buyouts, the appropriate price shall be the sum of the value that they should enjoy but for the buyouts and the value that will be realized by carrying out the buyouts, but which should actually belong to the squeezed-out shareholders. As there may well be certain conflicts of interest in the case of management buyouts, where the bidders are at the same time members of the management of the target company, and as shareholders who are unwilling to accept the management buyout may

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be exposed to coercive pressure during the procedures, it is recommended that transparency be assured during the process of the buyouts (see the Report of the Corporate Value Study Group (Kigyō Kachi Kenkyū-kai) consulting the Ministry of Economy, Trade and Industry on Management Buyout of 2 August 2007). The amendments to the Securities Regulation came into effect one day after the bidding with these new rules. In addition, he refused to release voluntarily any ‘reports or opinions that he had referenced in deciding the offered price,’ which he should have done under the new rules. The Report of the Corporate Value Study Group recommended that bidders in MBOs disclose future business plans or evaluations by third parties in order to assure shareholders the opportunity to examine the appropriateness of the offered price.

P 303 period of this MBO, so the bidder was not required to comply

In carrying out MBOs, it is important to assure shareholders an opportunity for careful deliberation and to avoid coerciveness. In this MBO, however, several phrases are found in the bidder's press releases and in letters from Y Company that suggest that, if the shareholders fail to submit their shares during the bid and are given a fragment of a full share to be issued in the following squeeze-out, it is not clear that a court would afford the shareholders an appraisal remedy and that, therefore, unwilling shareholders should be cautious when pursuing necessary procedures and in deciding to seek judicial remedies. These phrases are of just the tone that the Report of Corporate Value Study Group warned was coercive. The second instance, in evaluating the shares on the day of the squeeze-out, denied A's assertion to adopt together the ‘market-price-method’, the ‘modified-book-value method’, and the ‘comparing-similar-companies method,’ saying that the last two methods lead to a result that diverges much from the price offered in the bid and that these do not adequately reflect the profitability of various businesses on which the corporate value of Y Company heavily depends. The instance also held that it cannot be denied that, already, on 21 August 2006, when Y Company announced a downward modification of the expected performance for 2006, they intended to write down their account book by recognizing an extraordinary loss in order to induce downward performance, keeping in mind that an MBO plan was coming to maturity. Therefore, the second instance court selected out the average closing market prices for the period from 10 May to 9 November 2006, which begins six months before the announcement of the bid and ends one day before it. In addition, the second instance court held that 20% should be added to the value the shareholders are entitled to get in surplus to the objective value of the abovementioned share, which was calculated by reference to other MBO cases carried out in the proximate period, taking into account the fact that A refused to submit future business plans and evaluation reports based on the due diligence process it had conducted. All these factors show that the decision of the second instance is based on the course of this buyout and the examination by the first and second instances, which can be followed by the evidence here, and does not deviate from its discretion. Translated by Maki Saito P 304

Comment I Introduction In the case In Re Rex Holdings, the Supreme Court for the first time stated their position on the question of how much compensation shareholders are entitled to when a squeezeout is carried out for an MBO.

II How to Carry Out a Squeeze-Out and Whether Shareholders are Entitled to Judicial Remedies A bidder planning to acquire all of the shares of a listed company usually initiates a takeover bid over all outstanding (common) shares in order to assure him/herself voting rights that will enable him/her to pass a special resolution at the general meeting and at the class meeting of the common shareholders. After a successful bid, he/she takes advantage of a special class of shares – ‘class shares subject to a class-wide call’ (zenbu shutoku jōkō-tsuki shurui kabushiki) – to squeeze out the remaining shareholders. (2) This special class of shares is subject to compulsory acquisition (i.e., without the consent of each holder) as a group by issuance of a supermajority resolution at the shareholders' meeting (section 108(2) item (vii) and section 171 Companies Act), either with or without compensation, as decided at the shareholders' meeting. If a company issues this special class of shares, the shareholders' meeting (not their class meeting) can resolve whether the company acquires all of the shares of this class. If a shareholder of the shares to be acquired is dissatisfied with the compensation amount, then the shareholder may file a petition to the court for determination of a fair and reasonable price (section 172 Companies Act). The petitioners in the case In Re Rex Holdings resorted to this remedy. The most characteristic aspect of this special class of shares is that shares that have

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already been issued can be converted to this special class by a super-majority resolution at the shareholders' meeting, provided that this resolution is approved by a supermajority at the class meeting of the shareholders whose shares are to be converted (sections 111(2) and 324(2) item (i) Companies Act). Dissenting shareholders are entitled to an appraisal (section 116(1) item (ii) Companies Act). P 305

III The Appropriateness of Compensation Offered in a Management Buyout 1 Conflicts of Interest In an MBO, where a bidder is at the same time a member of the target company's management, there is a certain conflict of interest. (3) As a bidder, he/she wants to beat the price down to save money, whereas, as a member of management, he/she is expected to protect the interests of shareholders, who might wish to sell their shares at as high a price as possible if they can no longer continue to be members of the company. The bidder, who as management has control over target information, could also determine the time of the takeover bid at his/her will. The bidder can choose, for example, a point where the market price seems, in his/her view, discounted. This would enable him/her to conduct a bid under the most favourable conditions, whereas other shareholders are deprived of the potential opportunity to sell their shares at a higher price. Moreover, the management bidder is exposed to the temptation to disclose bad news of the target before the bid to induce a decrease in the market price. 2 Securities Regulations and Judicial Remedies upon the Companies Act Securities Regulations in Japan contain many rules regarding takeover bids, mainly concerning disclosure requirements. (4) There is no material control over the price offered in a takeover bid in Japan, either for general or for special cases such as management buyouts. Since the amendments to the Securities Regulation in 2006 additional disclosure requirements have been imposed on bidders in cases where they are at the same time members of the management/supervisory board at the target company or raise a bid at the request of these. (5) In such a case, they must disclose the measures that they have taken to guarantee the appropriateness of the tender offer price, how they came to decide on the management buyout, and what kind of measures were taken to avoid conflicts of interest. If they have any third-party evaluations of the shares, copies of these shall be attached to the form kōkai kaitsuke todokede-sho to be filed and exhibited for public reference. P 306

Shareholders are entitled, however, to request appraisal by the court under the Companies Act if they continue to hold their shares until they are squeezed-out after a successful bid (see II). The Supreme Court has held in In Re Rex Holdings that the court has great discretion in calculating how much the shareholders may receive as compensation. 3 Efforts to Establish Best Practices 1) Report of a Study Group in the METI The Corporate Value Study Group (Kigyō Kachi Kenkyū-kai, chaired by Professor Hideki Kanda, University of Tokyo), a study group established informally in Keizai Sangyō-shō, the Ministry of Economy, Trade and Industry (METI), has published several reports on issues of mergers and acquisitions that have drawn much attention from both practitioners and academics. (6) The 2 August 2007 report deals with best practices in management buyouts (7) (shortly after, the Ministry also published a guideline for management buyouts, the contents of which, however, are identical to the study group's report, except that the latter deals with problems resulting from current tax practices). (8) The report emphasizes that the MBOs should be carried out to raise corporate value of the target companies, and that its shareholders should be ensured their stakes through a fair procedure. Amongst other recommendations, it advises that bidders and target companies in MBOs disclose the situation of conflicts in interest and the information on which the tender offer price are based, that they ensure remaining shareholders judicial remedies, that they invite independent outsider professionals in order to avoid arbitrary decision-making in the target company, and that they not exclude competing bidders from making contact with the target company. The report is acknowledged in the complementary opinion of Justice Tahara cited above, and in decisions of lower instances such as those of the second instance of In Re Rex Holdings and In Re Sunstar. P 307

2) Case Law Several cases on management buyouts have followed In Re Rex Holdings, two of which are presented here (for a further reported case, see In Re Open Loop Inc. [Ōpun rūpu], a

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decision of the Sapporo High Court of 2010. (9) a) In Re Sunstar, Inc. (10) Shares of Y Company (Kabushiki kaisha Sansutâ, Sunstar Inc.) had been listed on the Osaka Stock Exchange (First Section), and were delisted on 26 July 2007. On 14 February 2007, a subsidiary of a Swiss company Sunstar SA (hereafter cited as A Company) announced a takeover bid over the shares of Y Company from 15 February to 15 March 2007, with a tender offer price of JPY 650 per share. According to the announcement, the representative director of A Company was one of the representative directors and the chairman of the board of Y Company. The takeover bid was to be carried out as part of a management buyout, and, if successful in persuading the employees of Y Company, this would become a management and employee buyout. The board of Y Company supported the takeover bid and at the same time modified the amount of an expected dividend to be proposed at the next general meeting from JPY 5 per share to JPY 0. Y Company also announced downward modifications in expected performance on 10 November 2006. After the bid, the general meeting of the shareholders and the class meeting of the common shareholders were held and agreed to the following: First, to amend the articles of incorporation to permit the company to issue shutoku jōkō-tsuki kabushiki (shares subject to call); second, to convert the common shares (Shares A) into zenbu shutoku jōkōtsuki shurui kabushiki (Shares B); third, to call the zenbu shutoku jōkō-tsuki shuruikabushiki (Shares B) and distribute shutoku jōkō-tsuki kabushiki (Shares C) to its shareholders as consideration, which, once again, the company can call at will (without approval at a general meeting) in exchange for cash at JPY 650 per share; and fourth, on the very day that the conversion of Shares A into Shares B takes place, to let the company call these Shares B in exchange for Shares C. The acquisition of Shares B by Y Company, that is to say conversion of Shares B into Shares C, took place on 1 August 2007. Shutoku jōkō-tsuki kabushiki sounds very similar to zenbu shutoku jōkō-tsuki shurui kabushiki, but is a class share of a different character. Zenbu shutoku jōkō-tsuki shurui kabushiki is a class of shares that the general meeting of shareholders allows the company to call altogether at anytime with a resolution of a special majority in exchange for any compensation decided on by the resolution. Shutoku jōkō-tsuki kabushiki (shares subject to call), in contrast, can be acquired by the company against the will of the P 308 holders, in part or altogether at one time, but how the compensation to the losing shareholders will be calculated and how the timing of the acquisition will be decided should be articulated in advance in the articles of incorporation. In the case In Re Sunstar, the amended articles of incorporation specified that the company could acquire Shares C at the board's discretion. In fact, the C shares which were held by shareholders other than the subsidiary of A Company, a major shareholder SLJ and the association of employees, were acquired shortly after the common Shares A were turned into Shares C ‘over Shares B’. X1 and X2, who held common shares of Y before these arrangements took place, filed a petition for judicial review under section 172(1) the Companies Act. The Tokyo High Court held the objective value of Share B to be JPY 700, an approximation of its market value one year before the announcement of the bid, thereby excepting from reference the period after the time preparations for the buyout had begun and the downward modifications were announced. The court also noted that the shareholders should additionally be paid a control premium (which the bidder has to pay in excess in order to get control of the target company), or compensation for the loss of the possibility to continue the investment or liquidity, and that the court in this case had not been provided with sufficient reliable data. The court therefore exercised its discretion and determined the premium would be 20% of the objective value. It concluded that the shareholders would be paid JPY 840 per share. The court also found that the foregoing bid was still of a coercive nature and that there was a potential for competing bidders. b) In Re Cybird Holdings Co., Ltd. (11) Shares of Y Company (Kabushiki kaisha Saibâdo Hōrudingusu, Cybird Holdings Co., Ltd.) had been listed on the JASDAQ Stock Exchange and were delisted on 16 March 2008. P, a representative director of Y Company, with several other directors, entered into an MBO contract with A Group (an investment fund, Longreach Group). A subsidiary of A Group announced a tender offer on 31 October 2007, and bid for the shares of Y Company from 1 November to 12 December, offering JPY 60,000 per share. At the same time, the board of Y Company announced their support of the bid. It was also announced that, after a successful bid, the remaining shareholders would be squeezed out, that P, Q and R would run the company, that P and Q were going to submit their shares in Y Company in the bid and subscribe 7.88% and 0.18% of the shares of the bidder, respectively, and that several major shareholders had already given informal consent to submit their shares in this bid. After a successful bid, an extraordinary meeting of the shareholders and a class meeting

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P 309 of the common shareholders were held to approve the squeezing out of the

remaining small shareholders using the device zenbu shutoku jōkō-tsuki shurui kabushiki. X, who was a former shareholder, filed a petition for judicial review under section 172 paragraph 1 of the Companies Act. The background of this case is as follows: (1)

(2)

(3)

P and Q had substantial shares in Y to submit in the bid. They wanted to invest in Y indirectly through investment in the bidder company, but at a lower rate. Therefore, P strongly insisted that the bidder raise the price from the originally offered JPY 56,000, and succeeded in persuading him to raise the bidding price by JPY 4,000. The Y board invited advisors on legal and financial matters independent of A Group to consult on the buyout. They also established a special committee that consisted of members independent of both Y and A (including two outside directors of Y). This committee was to analyse the advantages and disadvantages of the buyout, and negotiate with A over the conditions of the buyout. As a result of the bid, the bidder succeeded in acquiring 89.77% of Y's outstanding shares.

Taking these factors into consideration, the District Court concluded that the alleged conflict of interest was dissolved and that the JPY 60,000 offered in the bid could be considered appropriate. Nevertheless, the court calculated that the objective value of the share was JPY 51,113 based on the volume weighted average closing market price during a month before the announcement of the bid and that the tender offer price JPY 60,000 should include a premium of JPY 8,867 (17%), rejecting Y Company's assertion that the price of JPY 60,000 should include a premium ranging from 22.38% to 31.68%. In contrast, the High Court held that, while it agreed with the District Court in the assessment of the objective value, a review of the amount of an appropriate premium was needed. The Court of Appeals emphasized that the conflict of interest had not been fully dissolved as regarding P, who planned to run the business after the buyout, that the advisors on financial and legal matters were selected by Y Company's board, and that the takeover bid was coercive in nature with an imminent squeeze-out. According to a report in Nihon Keizei Shimbun, the average premium offered in bids in 2007 was 20%, which rose in 2008, especially for management buyouts. Y Company insisted that the JPY 60,000 price should contain a reasonable premium. Taking all of these facts into account, the High Court of held that the premium was 20% of the objective value or more, and the appropriate price was JPY 61,360.

IV Present Situation Japanese courts and academia still seek a method for dealing with the conflicts of interest in MBO cases. P 310

1 Measures to Dissolve Conflicts of Interest It appears that the price offered in a takeover bid preceding a squeeze-out immediately after the bid, and accepted by the majority of outstanding shareholders, is an appropriate one if the takeover bid is free of coercion and adequate measures have already been taken to resolve conflicts of interest. Such measures could include sufficient disclosure of information, an assessment of the share value by an independent investment bank, or close examination and serious negotiation by an internal committee that is independent of bidder management. In contrast, the price may be found inappropriate if there are facts that suggest financial disadvantages for the remaining shareholders, such as announcements of downward modification in expected performance after planning for the management buyout has begun. The Revlon auctioning rule (12) in the US requires that, in certain situations, the board of the target company seek a bidder who offers conditions that are more favourable to its shareholders. This rule seems difficult to adopt in Japan, where the management of the target company is under pressure to protect its employees after the bid, especially considering the interests of the employees themselves. (13) A rule that requires the board of the target company to take adequate measures to solve conflicts of interest should be substituted in part for the Revlon rule to assure shareholders favourable exit conditions. A committee of independent outsiders established within the target company can be used for quasi-arm's-length negotiation with bidder management.

2 Appropriateness of the Price For the time being, the Japanese court is of the opinion that, in squeeze-out situations, shareholders of the target companies should be paid the sum of the objective value of the share at the point of the squeeze-out and the value equal to any other opportunities they would otherwise enjoy (the ‘premium’ in case law). The market price of a certain period preceding the bid may be used for guidance as long

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as there is no manipulation of disclosed information or any other situations that suggest that the market price does not reflect the long-term expectation of investors. The second factor, the ‘premium’, should compensate squeezed-out shareholders for the unintended loss of participation in future profit of the target companies and opportunities to sell their shares at a higher price. The High Court in In Re Cybird Holdings considers 20% of the market price as a benchmark for an appropriate premium. This idea will not apply in general, however. The court might P 311 have presented a much higher price than the one offered in the bid in its decisions in the second instance in In Re Rex Holdings and In Re Sunstar because the bidders and the target companies in these cases were not forthcoming and cooperative with the court in disclosure, in such aspects as providing a future business plan or evaluation of the share by investment banks. The court, taking information imbalances into account, might have rendered decisions unfavourable to these parties in order to encourage potential bidders and target companies to be co-operative with the court in providing future disclosure, and in this way develop an effective judicial appraisal remedy. Some commentators mention, however, that this approach could impose undue burdens on the bidders, as materials such as business plans are usually created for private use only. (14) Maki Saito (1) P 311

References ★ )

1) 2)

3) 4) 5)

6) 7)

8)

9) 10) 11) 12) 13) 14)

1)

Maki Saito: Kyoto University Charts 1 and 2 are based on T. Kato, Rekkusu Hōrudingusu jiken saikō-sai kettei no Kentō [Remarks on the Supreme Court Decision in Re Rex Holdings], in Shōji Hōmu 1875 (2009) 5. For legal rules on squeeze-outs in Japan, see M. Saito, Squeeze-out and Appraisal Rights in Japanese Company Law, in: Grundmann et al. (eds.), Festschrift für Klaus J. Hopt zum 70. Geburtstag am 24. August 2010: Unternehmen, Markt und Verantwortung (Berlin/New York 2010) Band 2, 3305 et seq. For general analysis, see R. Kraakman et al. The Anatomy of Corporate Law (2nd ed. New York 2009), 248-250. See H. Baum/M. Saito, Übernahmerecht, in: Baum/Bälz (eds.), Handbuch Japanisches Handels-und Wirtschaftsrecht (Köln 2011) 317-371. Section 12, 13(8) item (viii), Remarks on Form 2(6)f and (25) Hakkō-sha igai no mono ni yoru kabuken-tō no kōkai kaitsuke no kaiji ni kansuru naikaku furei [Ordinance of the Cabinet Office no. 38/1990 on takeover bids raised over shares and other securities by bidders other than the issuing companies]. These rules are also applied if the bidder is a parent company of the target company. See also Baum/Saito, supra note 4, 347-348. For details, see Baum/Saito, supra note 4, 329-330. Kigyō Kachi Kenkyū-kai, Kigyō kachi no kōjō oyobi kōsei na tetsuzuki kakuho no tame no keieisha ni yoru kigyō baishū (MBO) ni kansuru hōkoku-sho [The Report of the Corporate Value Study Group on management buyouts for the improvement of corporate value and assurance of fair procedures] of 2 August 2007, available at . Keizai Sangyō-shō, Kigyō kachi no kōjō oyobi kōseina tetsuzuki kakuho no tameno keiei-sha ni yoru Kigyō baishū (MBO) ni kansuru shishin [Guidelines on Management Buyouts for the Improvement of Corporate Value and Assurance of Fair Procedures] of 4 September 2007, available at . Sapporo High Court 16 November 2010, Kin'yū Shōji Hanrei No. 1353 (2010) 64. Osaka High Court 1 November 2009, Hanrei Taimuzu No. 1316 (2010) 219. Tokyo High Court 27 October 2008, Shiryō-ban Shōji Hōmu No. 322 (2011) 74. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986); Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d. 34 (Del. 1994). K. Egashira, Sōron [General Remarks on the Symposium], in: Shōji Hōmu 1940 (2011) 6. For an overview of discussion and further reference, see M. Yanagi, Kōsei na kagaku [Fair Value], in: Kaisha-hō shikō gonen, riron to jitsumu no genjō to kadai [5 Years after the Implementation of the New Companies Act, The Present Situation and Problems in Theories and Practice] (Jurisuto Supplement 2011), 121-129; M. Tokumoto, MBO ni okeru kabushiki no shutoku kakaku [On the appraisal in case of a squeezeout] in: Kaisha-hō hanrei hyakusen (2nd ed.) Bessatsu Jurisuto 205 (2011) 182-183. Kyoto University

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Case No. 29: Corporate Law – Takeovers – Issuance of Share Options as Defence Measure – Principal Purpose Rule

Document information

Publication

Business Law in Japan – Cases and Comments

Fujita Tomotaka

Jurisdiction

Tokyo High Court 23 March 2005 – Case No. 2005 ra 429, Livedoor Co., Ltd. v. Nippon Broadcasting System, ‘Nippon Broadcasting System’ Case

(★ )

Japan

Source: Tokyo Kōsai Minji Geppō 56(1-12) = Hanrei Jihō 1899 (2005) 56 = Hanrei Taimuzu 1173 (2005) 125

Court

I Headnote(s)

High Court of Tokyo

On the legality of the issuance of shares or share options as defence measure against a hostile takeover bid.

Case date

II Relevant Provisions

23 March 2005

Sections 280–10, 280-39(4) (Old) Commercial Code, (1) sections 210 item (i) and 247 item (i) Companies Act. (2)

Case number

P 314

2005 ra 429

III Facts

Parties

Claimant, Livedoor Co., Ltd. Defendant, Nippon Broadcasting System

Bibliographic reference

Fujita Tomotaka, 'Case No. 29: Corporate Law – Takeovers – Issuance of Share Options as Defence Measure – Principal Purpose Rule', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 313 322

Nippon Broadcasting System, Inc. (the Obligor and Final Appellant) was a member of the Fuji Television Group. Fuji Television Network, Inc. (Fuji) launched a takeover bid for the Obligor's shares in order to gain control over the Obligor. Livedoor Co., Ltd. (the Obligee and Adverse Party) was a shareholder of the Obligor who held approximately 5.4% of the Obligor's issued shares. During the takeover bid period, the Obligee, through off-floor trading, purchased approximately 29.6% of the Obligor's shares and came to own approximately 35.0%, and told some of the Obligee's shareholders that it would continue to acquire more shares. The Obligor's board of directors decided to issue share options to Fuji. The number of shares issued when all share options were exercised would come to 1.44 times the number of the Obligor's total outstanding shares. Then, the number of shares that the Obligee held would be reduced from around 42% to approximately 17%; while Fuji's shareholding would rise to approximately 59%. The Obligee filed for an injunction to block the share option issue, arguing that the share options were issued by a ‘method that is extremely unfair’ as stipulated under section 280-10 of the Commercial Code (prior to the revision by Act No. 87/2005) applied mutatis mutandis under section 280-39(4). The Tokyo District Court granted the injunction. (3) While the Obligor filed an objection against this ruling, the Tokyo District Court rejected the objection and confirmed the order to allow the injunction. (4) The Obligor filed an appeal to the Tokyo High Court to challenge this ruling.

IV Findings Appeal to court dismissed (the decision is final and binding). Under a situation where a dispute has actually arisen over the control of a company's management, if share options are issued principally for the purpose of reducing the shareholding ratio of a particular shareholder who, through hostile acquisitions of the company's shares, is vying for control of the company and for the purpose of maintaining or securing such control by the current management or by another particular shareholder who supports and has de facto influence over that management, as a general rule it is appropriate to construe that such an issue as constituting an issue of share options made by ‘an extremely unfair method’ as stipulated in section 280-10 of the Commercial Code applied mutatis mutandis under section 280-39(4). The reason for prohibition of issuing share options principally for the purpose of maintaining or securing control of the management of the relevant company is because the directors stand in a fiduciary relationship with the company's shareholders who own special circumstances that would justify a P 315 the company. It follows that if there exist share option issue from the viewpoint of protecting the interests of the company's shareholders as a whole, as an exception to the general rule stated above, such a share option issue, even if made principally for the purpose of maintaining or securing control of the company by a particular shareholder, should be considered as not constituting an unfair issue.

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If a hostile buyer of a company's shares intends to prey on the company, the buyer acquiring shares for such exploitative purposes will not deserve protection as a shareholder, and since it will be clear that if nothing is done about such hostile buyer, the interests of the other shareholders will be harmed, the board of directors carrying out a share option issue principally for the purpose of maintaining or securing control of the company by a particular shareholder should be permitted as just and proper – to the extent judged to be necessary and reasonable as a means of defence against such buyer. Examples of such exploitation would be: (i) where the buyer has no true intention of playing a constructive role in managing the company, and is acquiring the shares for the sole purpose of boosting the share price so as to force the company and its supporters to buy back the shares at an inflated price (known as a ‘greenmail’ case); (ii) where the buyer acquires the shares with the aim of gaining temporary control of the company so that it can conduct a ‘scorched earth’ policy of management towards the company, whereby it has the intellectual property, know-how, trade secrets, principal trading partners and customers that the company needs to conduct its business transferred to itself or to its group companies; (iii) where the buyer acquires the shares with the expectation upon gaining control of the company, of diverting the company's assets as security for or as sources, of funds to repay debts of the buyer or its group companies; (iv) where the buyer acquires the shares with the aim of gaining temporary control of the company in order to sell off its high-value assets such as real estate and/or securities that are, for the time being, not pertinent to the company's business. In that event, the buyer's aim will be to use the profits from such divestment to pay out temporarily high dividends or, to set its sights on taking advantage of the spike in the company's share price that would result from the payment of temporarily high dividends and sell off the shares when they peak. Therefore, if share options are issued for the purpose of maintaining or securing control of the company by a particular shareholder under a situation where a dispute over the control of management of a company has actually arisen, as a general rule, a petition for an injunction to stop the issue should be granted on the grounds that it constitutes an unfair issue, while in the event that the company shows prima facie evidence or proves that special circumstances exist that would justify such share option issue from the viewpoint of protecting the interests of shareholders as a whole, more specifically, it shows prima facie evidence or proves that the hostile buyer's true aim is not the sound and proper management of the company and that the acquisition of control by the P 316 hostile buyer will result in irreparable harm to the company, the injunction should not be allowed against a share option issue that would affect who has control of the company. Translated by Tomotaka Fujita

V Comment 1 Introduction The Commercial Code prior to the 2005 revision allowed the board of directors to decide on issuing shares or share options, unless the conditions of the issuance were ‘particularly favourable’ to subscribers (section 280-2(1), (2), 280-20(2) and 280-21(1) Commercial Code). (5) The existing shareholders of the issuing company could apply for an injunction against the issuance of shares (including disposition of treasury stock) or share options which: (i) violated the applicable laws and regulations or articles of incorporation; or (ii) was effected by using a method which is extremely unfair (section 280-10 Commercial Code for shares and section 280-39(4) Commercial Code for share options). When the board of the target company decides to issue shares or share options in order to prevent a takeover, the acquirer relies on these provisions by asking the court for an injunction against such issuance. The validity of the takeover defence has been discussed to determine whether a particular issuance of shares or share options constitutes ‘a method which is extremely unfair’ under these provisions. The situation is essentially the same under the new Companies Act. (6) The Nippon Broadcasting System decision, which provides for a ruling on what constitutes the issuance of shares or share options by ‘a method which is extremely unfair’, is understood as marking the starting point for the developments in case law with respect to takeover defence in Japan. (7)

2 Analysis of the Decision a ‘Principal Purpose Rule’ as Framework Deciding whether Nippon Broadcasting System issued share options ‘by an extremely known as the ‘principal purpose rule’, which had been adopted by many previous courts. Under the ‘principal purpose rule’, courts had determined whether the issuer's principal purpose is finance for a business plan, or maintaining or obtaining corporate control. If the court found that the latter was the case, the issuance was considered to be ‘effected by an extremely unfair method’ and the courts ordered the injunction to block the issuance.

P 317 unfair method’, the Tokyo High Court followed the framework

Although the framework resembles the frameworks used in the previous decisions, the Tokyo High Court's decision on the Nippon Broadcasting System case had a couple of new

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elements. First, unlike previous decisions, the court explicitly explained the theory on which the ‘primary purpose rule’ is based. The court stated (in the part of the decision which is not cited in the above summary of the findings) as follows: ‘Under the Commercial Code, the election and the removal of directors is decided exclusively by the shareholders' meeting (sections 254(1) and 257(1)) and hence a director is an executive organ who is appointed by majority voting by the shareholders. Therefore, it obviously contradicts the purpose that the Commercial Code provides the division of power between corporate organs if the directors who are subject to the shareholders' vote are generally allowed to issue shares with the principal purpose of changing the composition of the shareholders who vote.’ The concept of the ‘division of power between the corporate organs’ has been known in academic literature since the late 1970s. (8) Second, in the previous cases, courts had focused on whether the principal purpose of the issuance is ‘finance’ or ‘control’. In the Nippon Broadcasting System case, the court (in the part of the decision which is not cited in the above summary of the findings) refers to other possible legitimate purposes such as: (a) to form or strengthen a business alliance or cross-shareholding; (b) to provide for ‘stock options’ as an incentive scheme for the employees or for the management; or (c) to use the newly issued shares as the payment for employee invention. Although it is too narrow to limit the legitimate purpose only to finance, reference to (a) might be controversial. Enhancing the business alliance with friendly firms through equity finance is sometimes nothing more than a typical takeover defence known as ‘white knight’. Finally, the Tokyo High Court recognized, although in very limited instances, that the possibility of the issuance of shares or share options is justified even when the principal purpose is maintaining or securing the corporate control (see, (3) below). b How the Courts Find the ‘Principal Purpose’ Under the framework of the ‘principal purpose rule’, the target company would most likely lose the battle if the purpose is recognized as ‘control’, while it would easily prevail if the court rules the purpose is ‘finance’ or another legitimate purpose. How the court P 318 recognizes the principal purpose of the issuance of shares or share options in question is pivotal to the outcome of each case. Even though the purpose of the issuance in the Nippon Broadcasting System case was so apparent, (9) in most cases, the principal purpose is vigorously disputed by the parties. It has been observed that the courts have recognized ‘finance’ as being the principal purpose very easily in the past. (10) Some courts, when finding the principal purpose to be ‘finance’ rather than ‘control’, relied on the simple fact that there was a need for external funds. (11) Others referred to the reason why equity finance was desirable compared with other methods of finance (12) or why public offering does not achieve the purpose in the case. (13) Few explained the reason why the company should have issued shares to a specific person or the firm in question. Recent courts, however, seem to examine the purpose of the issuance more closely and require a more convincing reason as to why the principal purpose is finance when the shares or share options are issued after a dispute on control occurs. (14) The courts have a difficult decision to make, especially when the target company issues shares or share options to form or strengthen a business alliance or cross-shareholding with another company. A company may, of course, pursue a reasonable business plan even after a control contest has broken out. The problem is that the motivation to form or strengthen the business alliance or cross-shareholding under such circumstances is often compatible with that of maintaining or securing control. (15) This author believes that, under these circumstances, it makes more sense for the courts to examine whether the board would still issue shares or share options without the motivation to maintain or secure the control over the company, than to ask which one supersedes, a desire ‘to form or strengthen a business alliance or cross-shareholding’ or the aim ‘to maintain or secure control’. However, there has been no case which has adopted this formula. P 319

c ‘Special Circumstances’ that Justify the Defence The court in the Nippon Broadcasting System case allowed the target's board to issue shares or share options in order to maintain or secure the corporate control if ‘[the target company] shows prima facie evidence or proves that the hostile buyer's true aim is not the sound and proper management of the company and that the acquisition of control by the hostile buyer will result in irreparable harm to the company’. There had been no previous decision that explicitly recognized such an exception. Naturally, this drew a great deal of attention from lawyers who were involved in Merger and Acquisitions (M&A) activities. One should note, however, that although the decision recognized the possibility, it is not easy for the target company to actually establish such ‘special circumstances’. Neither in the Nippon Broadcasting System case, nor in any subsequent case have courts recognized such ‘special circumstances’. The court in the Nippon Broadcasting System case refers to four examples which, it believes, are evident cases of ‘a hostile buyer of a company's shares [which] intends to simply or largely prey on the company’. These are the cases of: (a) acquiring the target's

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shares with the intent of requiring the corporation to buy them back at a higher price (‘greenmail’); (b) temporarily taking control of the corporation and running the corporation in the interests of the acquirer at the expense of the corporation, such as acquiring the corporation's important assets at low prices; (c) pledging assets of the company as collateral for debts of the acquirer or its group companies or using the company's funds to repay such debts; or (d) temporarily taking control of the management of the company and selling valuable assets that are currently not related to the company's businesses and temporarily declaring high dividends with profits from the disposition, or selling the shares at a higher price after the share price rose, due to temporarily high dividends. The above examples mentioned by the Tokyo High Court need careful examination. Cases (c) and (d) in particular might cause problems. Case (c) could be understood as always allowing the target's management to take defensive measures against the acquirer which engages in leveraged buy-out (LBO) and (d) might inadvertently prevent a takeover which might enhance the inefficient allocation of the target's assets. These exceptions should be interpreted in a reasonably rigid manner (16) so as not to interfere with an acquisition which might enhance economic efficiency. P 320

3 Developments of Case Law after the Nippon Broadcasting System Case In the Nippon Broadcasting System case, the Tokyo High Court applied a strict standard for the target company to issue shares or share options as a defensive measure. It is important to examine the scope to which the standard in Nippon Broadcasting System case applies. First, the board decided to issue share options to the Nippon Broadcasting System. The standard for the Nippon Broadcasting System case does not apply when defensive measures are exercised upon approval of a shareholders' meeting. The Supreme Court in the Bulldog Sauce case (17) shows a much more relaxed standard to justify the issuance of share options with a discriminatory exercise condition (18) that was approved by the shareholders. (19) Second, in the Nippon Broadcasting System case the share options were issued after the control contest had begun. What happens if the board issues ‘poison pills’ (share option with a discriminatory exercise condition (20) ) as a defensive measure before a specific acquirer appears? In the Nireco case, which occurred only two months after the Nippon Broadcasting System case, a shareholder of the company who was not an acquirer tried to prevent the issuance of poison pills which would be triggered after a specific acquirer appears. The Tokyo District Court granted an injunction order applying essentially the same rigid standard as in the Nippon Broadcasting System case. (21) Although the Tokyo High Court maintained the same conclusion, the decision is based on quite a different ground. It emphasized that the design of the poison pill in the Nireco case was unreasonable since, when exercised later, it could harm shareholders other than the acquirer, and such ‘pills’ are issued ‘by extremely unfair methods’. (22) This decision implies that the standard in the Nippon Broadcasting System case does not apply when defensive measures are being taken before the dispute over control arises. According to the Tokyo High Court's ruling, if the pills were more carefully designed so that they were harmless to the shareholders other than the acquirer, the conclusion in the Nireco case might have turned out differently. P 321

Does the standard in the Nippon Broadcasting System case apply to all types of defensive measures exercised by the board after the control contest broke out? The Nippon Gijutsu Kaihatsu (23) case, which occurred four months after the Nippon Broadcasting System case, involves a weaker form of the defensive measure. The stock split adopted by the board in the Nippon Gijutsu Kaihatsu case could not, by itself, prevent the takeover. The only effect is that it was able to delay the timing of the acquisition of the shares. The defensive measure could simply guarantee that the shareholders of the target company could decide at the shareholders' meeting whether a change of control would be desirable before the acquirer finally obtained the control. The Tokyo District Court ruled in favour of the defendant (the target company) based on a more relaxed standard than the one used in the Nippon Broadcasting System case. One can infer that the strict standard implemented in the Nippon Broadcasting System case applies only to a defensive measure that is taken by the board and can definitively prevent the takeover and deprive the shareholders of deciding whether a change of control is desirable or not. Finally, there remains an important case in which the answer is not clear under the current case law: when the board exercises the defence based on the defence plan which was adopted before a specific takeover begins. The most popular defensive measure adopted by many companies is known as the ‘pre-warning type of defense plan’. They warn the potential acquirer that the board will take defensive measures, such as an issuance of share options with discriminatory exercise conditions if, and only if, the acquirer does not provide the information that the board requests or does not follow the procedure described in the plan. What happens if the board triggers the defensive measure (such as the issuance of share options) considering that the acquirer does not

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observe the condition set forth in the plan? Is the validity judged based on the strict standard of the Nippon Broadcasting System case? Courts will probably take account of the fact that the defence plan was already authorized by the shareholders and the shareholders authorized the board to trigger the defence if the specific conditions in the plan were met and will give the target's management more discretion than in such cases as the Nippon Broadcasting System case, where the board issued the shares or share options without any pre-authorized plan. There has been, however, no case so far on this issue.

4 Influence in a Broader Context The Nippon Broadcasting System case has also influenced many other areas of the law. The dispute between Livedoor and Nippon Broadcasting System broke out in February P 322 2005, just after the Legislative Council of the Ministry of Justice had adopted the final report on the new Companies Act, (24) which includes a number of changes to the former law in order to facilitate M&A activities. Industries suddenly realized the potential threat of a hostile takeover, and expressed concerns that the new Companies Act could encourage hostile takeovers which, according to their opinion, would seriously affect the Japanese economy. In order to mitigate the concerns, the Ministry of Economy, Trade and Industry (METI), and the Ministry of Justice (MOJ) jointly published the ‘Guidelines Regarding Takeover Defense for the Purposes of Protection and Enhancement of Corporate Value and Shareholders' Common Interests’, on 27 May 2005. The ‘Guidelines’ show the proper procedure to introduce ‘legitimate’ takeover defences. (25) While the Companies Act passed the Diet in July 2005 and entered into force in May 2006, the implementation of the provisions related to ‘cash-out mergers’ was postponed until May 2007. The purpose of this was to give Japanese companies sufficient time to introduce a proper defence mechanism against hostile takeover and many companies have actually adopted defence measures. The Nippon Broadcasting System case also resulted in an amendment to the Securities and Exchange Act. (26) Livedoor purchased a substantial volume of Nippon Broadcasting's shares through off-floor trading known as ToSTNeT (Tokyo Stock Exchange Trading Network System). Nippon Broadcasting argued that such purchases violated the requirement of the mandatory offer under section 27-2 (1) of the Act which requires takeover bids in order to acquire more than one third of a company's voting shares. Although the Tokyo High Court in the Nippon Broadcasting System case decided that purchases constitute market transactions and do not trigger the mandatory offer required for the acquirer, (27) many believed that Livedoor took advantage of a loophole in the Act. The 2005 Amendment of the Act explicitly excluded the purchase of shares through off-floor trading from the scope of market transaction. Tomotaka Fujita (1) P 322

References Fujita Tomotaka: University of Tokyo Shōhō, Law No. 48/1899 prior to the revision by Law No. 87/2005. Kaisha-hō, Law No. 86/2005. Tokyo District Court 11 March 2005, Hanrei Taimuzu 1173 (2006) 143. Tokyo District Court 16 March 2005, Hanrei Taimuzu 1173 (2006) 140. A company whose shares had restricted transferability, however, was required to get shareholders' approval by supermajority when it issued shares or share options to a third party (sec. 280-5-2(1) and 280-27(2) Commercial Code). 6) The board of a ‘Public Company’ (sec. 2 item (v) Companies Act) can decide to issue shares or share options (sec. 199, 201, 238, 240 Companies Act). Sec. 210 item (ii) and sec. 247 item (ii) of the Act provide for the existing shareholders' right to stop a share issue or a share option issue ‘effected by using a method which is extremely unfair.’ 7) For the development of case law in Japan, see, Ishiwata et.al., Panel Discussion: Japanese Legal Structure for Corporate Acquisition: Analyses and Prospects, UT Soft Law Review 2 (2010) 40. 8) S. Morimoto, Shinkabu hakkō to kabunushi no chi'i [The Issuance of New Stocks and the Status of Shareholders], in: Hōgaku Ronsō 104(2) (1978) 12. 9) Even Nippon Broadcasting System did not hide its intention. Just after the board decided to issue share options, Nippon Broadcasting System issued a press release that the purpose of issuance is to protect its firm value and its public nature as mass medium. The release, at the same time, condemned the fact that Livedoor's acquisition was not compatible with Nippon Broadcasting System's public nature as mass medium. 10) See, K. Egashira, Kabushikigaisha-hō [Stock Company Law], 4th ed., (Tokyo 2011) 708 note 4. 11) See, for example, Osaka District Court 18 November 1987, Hanrei Jihō 1290 (1988) 144; Tokyo District Court 2 December 1988, Hanrei Jihō 1302 (1989) 146. ★ )

1) 2) 3) 4) 5)

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12) Tokyo District Court 5 September 1989, Hanrei Jihō 1323 (1989) 48. 13) Osaka District Court 18 November 1987, Hanrei Jihō 1290 (1988) 144; Osaka District

Court 12 July 1990, Hanrei Jihō 1364 (1991) 104.

14) See, for example, Saitama District Court 22 June 2007, Hanrei Taimuzu 1253 (2008) 107

15)

16)

17) 18) 19)

20) 21) 22) 23) 24) 25)

26) 27)

1)

[The principal purpose was considered to be maintaining control of the current management.]; Tokyo District Court 23 June 2008,Kin‘yū Shōji Hanrei 1296 (2008) 10 [The principal purpose was considered to be maintaining control of the current management.]; Tokyo High Court 1 December 2009, Kin‘yū Shōji Hanrei 1338 (2010) 40 [The court refused the injunction based on the close examination of the business plan and how the shares were allotted to the specific party.] See, Tokyo District Court 30 July 2004, Hanrei Jihō 1874 (2005)143; Tokyo High Court 4 August 2004, Kin‘yū Shōji Hanrei 1201 (2004) 4 [The court, recognizing the management's motive to maintain control, concluded that it was neither the sole nor principal purpose.] See, T.Fujita, Nippon Hōsō shinkabu yoyaku-ken hakkō sashitome jiken no kentō (2) [Analysis of the Case of the Injunction against the Share Option Issue by Nippon Broadcasting System], Shōji Hōmu 1746 (2005) 5–6. W. Tanaka, Baishū bōei-saku no genkai o megutte – Nippon Hōsō jiken no hōteki kentō [On the Limit of Takeover Defence Measures – A Legal Analysis of the Nippon Broadcasting Case], Kin‘yū Kenkyū 26 (2007) 16–20. Supreme Court 7 August 2007, Minshū 61, 2215. See case no. 30 in this volume with comment by H. Oda. The share option in the Bulldog Sauce case could be exercised by all option holders other than the hostile buyer (Steel Partners and their related funds) which are named in the condition. Unfortunately, the Tokyo High Court applied the standard of the Bulldog Sauce case to a wrong case (Tokyo High Court 12 May 2008, Hanrei Taimuzu 1282 (2008) 273). Although the poison pill (share options with discriminatory exercise condition) in question was designed in a similar manner as the one used in the Bulldog Sauce case, the board rather than the shareholders' meeting had decided on the issuance in this case. The Tokyo High Court should have rested on the standard in Nippon Broadcasting rather than that of the Bulldog Sauce case. A typical condition is that only shareholders whose voting rights are less than 20% of the total voting rights can exercise the share option to obtain the target's shares. Tokyo District Court 9 June 17 2005, Kin‘yū Shōji Hanrei 1219 (2005) 26. Tokyo High Court 15 June 2005, Kin‘yū Shōji Hanrei 1219 (2005) 8. Tokyo District Court 29 July 2005, Hanrei Jihō 1909 (2006) 87. Hōsei Shingikai [Legislative Council of the Ministry of Justice], Kaisha hōsei no gendaika ni kansuru yōkō [Report on the Modernization of the Corporate Law Regime ] (9 February 2005). The Guidelines focus on how to adopt defence measures and not on whether and how the adopted defence measure can be exercised. Three years later, the Corporate Value Study Group established under the Director-General of the Economic and Industrial Policy Bureau of the Ministry of Economy, Trade, and Industry (METI) published a new report which focuses on the latter question (Corporate Study Group ‘Takeover Defense Measures in Light of Recent Environmental Changes’ (30 June 2008)). Shōken torihiki-hō, Law No. 25/1948, now amended and renamed into Financial Instruments and Exchange Act, Kin'yū shōhin torihiki-hō, Law No. 65/2006. Unlike under the European regulation, the mandatory tender offer is not triggered if the acquirer obtains control through market purchase. See, T. Fujita, The Takeover Regulation in Japan: Peculiar Developments in the Mandatory Offer Rule, UT Soft Law Review 3 (2011) 24. University of Tokyo

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Case No. 30: Corporate Law – Takeovers – Defensive Measures – Equality of Shareholders

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Publication

Hiroshi Oda

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 7 August 2007 – Case No. 2007 kyo 30, Bulldog Sauce Co., Ltd. v. Steel Partners

Jurisdiction

Source: Minshū 61-5, 2215 = Hanrei Jihō no. 1983 (2007), 56 (1)

Japan

I Headnote(s) Decision upon whether the underlying idea of the principle of the equality of shareholders extends to cases where shareholders are allocated share options in a gratuitous manner.

Court

Supreme Court of Japan P 324

Case date

II Relevant Provisions

7 August 2007

Section 109 (1), section 247 items (i) and (ii) Companies Act

III Facts

Case number 2007 kyo 30

Bulldog Sauce Co., Ltd. (hereafter ‘the Company’) is a company listed in the second section of the Tokyo Stock Exchange. Steel Partners Japan Strategic Fund (hereafter ‘the Fund’), a US investment fund, in conjunction with its affiliates, held 10.25% of the issued shares of the Company. On 18 May 2007 the Fund, via a special purpose vehicle set up in Japan, initiated a takeover bid (TOB) vis-à-vis the Company. In accordance with the Financial Instruments and Exchange Act, (2) the Company submitted its views regarding the bid, which included various questions. In response to the questions raised by the Company, the Fund responded that it had no experience of managing a company in Japan, had no intention to manage the Company by itself and had no proposal to increase the corporate value of the Company, or a business plan or management plan after the acquisition of the Company. The way the Fund intended to recover the investment was not disclosed either.

Parties

Claimant, Bulldog Sauce Co., Ltd. Defendant, Steel Partners

Bibliographic reference

Hiroshi Oda, 'Case No. 30: Corporate Law – Takeovers – Defensive Measures – Equality of Shareholders', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 323 - 330

On 7 June, the board of the Company determined that the proposed acquisition of the Company by the Fund would harm the corporate value of the Company and was against the interest of the Company as well as the common interest of its shareholders (hereafter, ‘corporate value and other interests’) and decided to resist the bid. At the annual shareholders' meeting, it was decided that share options would be distributed gratuitously to all those who were shareholders as of 10 July. Three share options were to be allocated for each share. Share options could be exercised from 1 September to 30 September, and the exercising price was JPY 1. As this was a Delaware type poison pill, share options were not assignable without the consent of the board of the Company, and moreover, the Fund and its affiliates were not allowed to exercise the option. Share options were accompanied by the right of the Company to acquire those rights from shareholders in exchange for ordinary shares. In relation to the Fund and its affiliates, instead of shares, share options were to be purchased by cash – JPY 396 – which is a quarter of the price per share offered by the Fund in the bid. This scheme was endorsed at the general shareholders' meeting with 88.7% of the vote. The Fund sought an interim injunction against the issue of share options on 13 June on the basis that the issuing of share options was against the equality of shareholders as provided by section 109 Companies Act, (3) and also that the issuing was in a grossly unfair manner in the light of section 247 item (ii) Companies Act. The first instance court, the Tokyo District Court, dismissed the application. The second of share options was a reasonable and necessary measure to prevent damage to the corporate value of the Company. Taking into consideration that the Fund and its affiliates are ‘abusive bidders’, this was not against the principle of equality of shareholders, nor was it an issuing by grossly unfair means. The court accordingly dismissed the appeal. The plaintiff appealed to the Supreme Court.

P 325 instance court, the Tokyo High Court, ruled that the gratuitous issuing

IV Findings The Supreme Court ruled that the ‘underlying idea’ of the principle of the equality of shareholders as provided by section 109(1) of the Companies Act was applicable to cases where shareholders were granted share options in a gratuitous manner. If holders of share options were treated in a discriminatory manner in relation to the content of the share option, since it is not directly related to the content of the shares, it is not directly against the principle of the equality of shareholders. However, section 278(2) of the Companies Act provides that the rules regarding the content and the number of share

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options allocated to shareholders, the means of its calculation, require that the allocation of share options be proportionate to the number of shares the shareholder holds. This means that the content of the share options allocated to shareholders should be the same with all shareholders in its content. Therefore, the ‘underlying idea’ of the principle of the equality of shareholders shall be equally applicable to the gratuitous allocation of share options. If this was the case, would the gratuitous allocation of share option in the present case not be against the equality of shareholders? The Court took the position that in cases where, by the taking control of a company by a specific shareholder, the corporate value and other interests of this company would be harmed, treating this shareholder in a differential manner in order to prevent this from happening was not immediately against the ‘underlying idea’ of the principle of the equality of shareholders, provided that it was not against the idea of fairness and was not inadequate. Whether the corporate value and other interests would be harmed or not in the view of the Court should be determined by the shareholders. Unless there is a material flaw which deprives the decision of the shareholders of legitimacy their decision should be respected. The Court put weight on the fact that at the general shareholders' meeting the proposal of the Company was approved by around 88.7% majority of the votes present and 83.4% of all the votes. This means that most existing shareholders other than the Fund and its affiliates took the view that the takeover of the Company by the Fund would harm the corporate value and other interests. The procedure of the general shareholders' meeting was not flawed. As for the ground on which the attempted takeover by the Fund was found to be against corporate value and other interests, the Court merely pointed out as follows:

P 326

The decision of shareholders seems to be caused by the fact that the Fund, despite their intention to acquire all the issued shares, failed to disclose the business plan after the taking control for the reason that they had no plan to manage the counter party, nor did they disclose the plan for the recovery of investment. On the basis of the decision of the shareholders, the Court proceeded to determine whether or not the measure – in this case the gratuitous allocation of share options with selective treatment of shareholders – was against the idea of fairness and inadequate. The measure was approved by almost all shareholders except the Fund and its affiliates. Representatives of the Fund took part in the general shareholders' meeting and had an opportunity to express their views. Furthermore, the Fund was entitled to when share options were acquired by the Company. Even if this does not happen, the Fund can be paid by offering share options to the Company. The price payable was calculated on the basis of the bidding price determined by the Fund and corresponds to the value of the share options. In the light of these facts, the Court concluded that it cannot be said that the gratuitous allocation of share options in this case was against the idea of fairness and was inadequate. The second instance court had characterized the Fund to be an ‘abusive bidder’. The Supreme Court took a different approach as above and without characterizing the Fund as an abusive acquirer, the gratuitous allocation of share options was not against the ‘underlying idea’ of the principle of the equality of shareholders and nor was it against the law. The second contested issue was whether the gratuitous issue of share options in the present case was in an extremely unfair manner as provided by section 247 item (ii) of the Companies Act. The Court primarily refers to the reasons which it gave on the compatibility of the gratuitous issue with the ‘underlying idea’ of the principle of the equality of shareholders. In addition, the Court, while expressing its preference of prebid defensive measures, pointed out as follows: The absence of such advance rules [regarding defensive measures] does not in itself mean that adoption of defensive measures is impermissible at the time the attempt of taking over control has begun. The Court took into consideration that the gratuitous allocation of share options was implemented as a result of the resolution of the general shareholders' meeting in response to a urgent situation in order to prevent damage to the corporate value and other interests, and that an amount which corresponds to the value of the share options allocated to the Fund had been paid, and concluded that the gratuitous allocation of share options could not be found to be by extremely unfair means. The Court added that if the gratuitous allocation of share options to shareholders with different contents was primarily intended for the maintenance of control by directors, such gratuitous allocation of share options was, as a rule, regarded as extremely unfair. Translated by Hiroshi Oda

P 327

B Comment 8 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

Despite the fact that various parts and components of US type defensive measures were made available in Japan via successive amendments to the Commercial Code (4) and eventually the 2006 Companies Act, there was no statutory rule on their actual use in Japan. There was no case law either. The present case represents one of the very few cases in takeover law decided by the court since 2005. (5) To be sure, there were some hostile takeover cases which reached the court in the 1980s and 1990s, but they were more of a greenmailing, rather than a real takeover. Companies in such cases issued new shares and allocated them to friendly parties as a defensive measure. The bidder usually sought an interim injunction against such measures. The court applied the ‘primary purpose rule’ in order to determine the lawfulness of such measures. According to this rule, if the primary purpose of the measures was to dilute the shares of the acquirer, the issue of new shares would be unfair and unlawful. If there was a genuine financial need for the new share issue, it would be lawful. When the court had a reasonable ground to believe that the bidder was a greenmailer, insofar as the company referred to some need for finance, the court denied the argument that the dilution of shares was the primary purpose of the new share issue and ruled in favour of the company. However, this rule had its limits. The question is whether it is always unlawful to issue new shares primarily for the purpose of diluting the shares held by the bidder. For example, in cases where the attempted takeover is likely to harm corporate value, is the company still not allowed to take such a measure? To put it in a more general way, is the company ever allowed to take defensive measures against a raider? Following a successful takeover of a non-listed media company by Cable & Wireless in 1999, there have been some abortive attempts by foreign investment funds to take over a Japanese company in the first half of the 2000s. Even a major listed company in Japan attempted to take over another sizable listed company in the same industry. Then in 2005, the celebrated case of Live Door v. Nippon Broadcasting System took place. (6) It is important to note that in this case the defendant company, Nippon Broadcasting System, never denied that the new share issue was intended to dilute the shares of Live Door. Therefore, the primary purpose rule could not be applied. (7) The question was P 328 whether it was lawful or not for the company to take defensive measures against the bidder, and if the answer is in the affirmative, under what circumstances and through what procedure it could be deployed? In this case, the courts took a rather narrow view and limited the permissibility of defensive measures. In general, the court's view was that it was the shareholders and not the board, which could make decisions whether or not to take defensive measures. However, the Tokyo High Court ruled that defensive measures could be taken by the board if there are special circumstances, insofar as these measures were necessary and adequate. The court listed four such circumstances, such as greenmailing and asset stripping, but these seem to be rather limited. It should be noted that in this case, the means by which Live Door accumulated close to 30% of the issued shares of Nippon Broadcasting System was dubious at best. In such cases, where the integrity of the bidder is at question, this may ultimately affect the corporate value of the target company, once the takeover is successful. In such cases, arguably, the board should be allowed to take defensive measures. (8) In the Live Door v. Nippon Broadcasting System case, the Tokyo High Court specifically pointed out that it was possible to put pre-bid measures in place. Since then, some companies introduced pre-bid defensive measures. According to the TSE White Paper on Corporate Governance, (9) companies which have pre-bid defensive measures account for 20.3% of listed companies at the TSE. The increase in the number of such companies since 2006 has slowed down, while 23 companies reported abolishing such measures. The Report concludes that ‘the introduction of takeover defence measures in Japan has come to a full circle, and the trend of adopting such measures has peaked.’ (10) The Live Door v. Nippon Broadcasting System case is important in that it marked a shift of the court from the primary purpose rule. However, since then, no case has followed until the present case. In fact, in the aftermath of the Live Door v. Nippon Broadcasting System case, hostile takeover seldom took place. The focus has shifted from hostile takeover to issues such as management buy-outs (MBOs). This left many questions regarding takeover law unanswered. The first problem was who is entitled to make the decision to take defensive measures. There was a strong mistrust of the board on the part of the court. The acknowledged principle was that the shareholders should decide, and only in some limited circumstances were the board allowed to make such a decision. The second problem was the content of defensive measures. As is the case with rights plans in the United States, it is inevitable that defensive measures involve a selective treatment of shareholders – the bidder/raider has to be treated differently from other shareholders. Is this selective or P 329 differential treatment lawful in the light of the principle of the equality of shareholders? The Takeover Guideline prepared by the Ministry of Economy, Trade and Industry and the Ministry of Justice in 2005 took the view that such selective treatment was not against equality of shareholders. (11)

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The Report of the Corporate Value Study Group, which had served as the basis of the 2005 Guidelines, was revised in 2008 after the Supreme Court decision in the present case. It took a negative view on any form of payment by the company to the bidder. (12) However, the 2005 Guidelines were never revised and do not seem to bear much significance any more. The third problem concerned the circumstances where defensive measures can be deployed. Under what circumstances are defensive measures justified? The present case is the first case where the lawfulness of a defensive measure against a takeover bid was contested at the Supreme Court. This decision is important in that the Supreme Court has acknowledged pre-bid as well as post-bid measures to be justifiable in some circumstances. However, the significance of this decision is limited for the following reasons: First, there is the problem of who makes the decision whether or not to resort to defensive measures. The present case is unique in this respect. TOB was initiated shortly before the scheduled annual general shareholders' meeting. The Company had time to put the proposed defensive measure on the agenda. The proposal, including the payment of compensation to the Fund, was put to a qualified majority vote and was supported by 88.7% of shareholders who were present at the shareholders' meeting. Therefore, the problem of whether the board would be able to take such a decision without consulting shareholders was not at issue. Second, the Court found selective treatment of shareholders in a defensive measure to be justifiable, provided that the measure was fair and adequate. This is fine. But in this case, in determining the fairness and adequacy of the measure, the court stressed the fact that the bidder had been compensated for not being allowed to exercise the option. The question, then, is whether compensation is an essential component in deciding the fairness and adequacy of defensive measures. In fact, the defensive measure in this case was overcautious. The Company feared that in the light of the decisions in the Live Door v. Nippon Broadcasting System case, the court might take a restrictive approach towards defensive measures. The third problem was the necessity of the defensive measure. In this case, the fact that the attempted takeover would harm the corporate value and other interests was readily acknowledged by the Court. It seems almost that the Court has put too much emphasis on the almost unanimous support of shareholders (except the bidder), and did not look P 330 closely at the content of the decision of shareholders regarding the potential harm on corporate value and other interests. Presumably, the Court was hesitant to replace the shareholders' view by its own view. Thus, the decision of the Supreme Court is based upon these unique aspects of the case, and therefore, its value as a precedent is limited. Hiroshi Oda (1) P 330

References Hiroshi Oda: University of London (UCL) An English translation by the author can be found on the Supreme Court website at: . A number of comments have been published on this case. One available in English is: N. Hansen, Japan's First Poison Pill Case: Bulldog Sauce v. Steel Partners: A Comparative and Institutional Analysis, ZJapanR/J.Japan.L no. 26 (2008) 139 et seq. In Japanese, see, e.g., M. Hamada, Minshō-hō Zasshi no. 139 (2008) 127 et seq. and 302 et seq., H. Matsui, Heisei 19 nendo jūyō hanrei kaisetsu [Important Decisions of the Year 2007] Jurisuto no. 1354 (2008), 109–110. 2) Kin'yū shōhin torihiki-hō, Law No. 25/1948 as amended by Law No. 109/2006. 3) Kaisha-hō, Law No. 86/2005. 4) Shōhō, Law No. 48/1899. 5) A useful reference material for judgments and decisions on takeover law is: S. Nomura / M. Nakahigashi (eds.), M&A hanrei no bunseki to tenkai [Cases on Mergers and Acquisitions: Analysis and Future Developments], Bessatsu Kin'yū Shōji Hanrei 2007. 6) See case no. 29 with comment by T. Fujita in this volume. 7) H. Oda, The Current State of Takeover Law in Japan, The Journal of Business Law 8/2009, 749. 8) Ibid. 9) Tokyo Stock Exchange, Inc., TSE-Listed Companies – White Paper on Corporate Governance 2011, 78. 10) Ibid. ★ )

1)

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11) METI / MoJ, Guidelines Regarding Takeover Defense for the Purpose of Protection and

Enhancement of Corporate Value and Shareholders' Common Interests (27 May 2005), 7. 12) Corporate Value Study Group, Takeover Defense Measures in Light of Recent Environmental Changes (30 June 2008) 3 et seq. 1) University of London (UCL)

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Case No. 31: Corporate Law – Constitutional Law – Political Donations by Companies – Legal Capacity of Companies – Purpose of Companies

Document information

Publication

Business Law in Japan – Cases and Comments

Niimura Towa

Jurisdiction

Supreme Court 24 June 1970 – Case No. 1966 o 444, ‘Yahata Seitetsu III’ Case

(★ )

Source: Minshū 24-6, 625 = Hanrei Jihō 596, 3 = Hanrei Taimuzu 249, 116

Japan

I Headnote(s)

Court

Supreme Court of Japan

Political donations by companies are within the limits of the purpose of a company, as long as the company, having considered the reasons therefor objectively and abstractly, makes such donations as part of their social responsibility.

Case date

Companies shall, to the extent that it does not interfere with public welfare, have the freedom to donate to political parties as part of their political freedom, since the provisions of Chapter III of the Japanese Constitution, ‘Rights and Duties of the People’, are, insofar as possible by their very nature, applicable to domestic companies.

24 June 1970

P 332

Case number

II Relevant Provisions

1966 o 444

Bibliographic reference

Section 43 Civil Code (now section 34), section 90 Civil Code, section 166 Commercial Code (now section 27 Company Law), Chapter III Japanese Constitution, section 254-2 Commercial Code (now section 355 Company Law)

Niimura Towa, 'Case No. 31: Corporate Law – Constitutional Law – Political Donations by Companies – Legal Capacity of Companies – Purpose of Companies', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 331 338

III Facts Defendants, two representative directors of Yahata Steel Corporation (now Nippon Steel Corporation), gave, in the name of Yahata Steel Corporation, JPY 3.5 million in the form of a political donation to the Liberal Democratic Party (LDP, Jiyū Minshū-tō) on 14 March 1960. Plaintiff, a shareholder of the company, insisted that the political donation far exceeded the company's purpose as well as the financial limits normally associated with political donations made by such companies. Section 2 of the Articles of Incorporation of Yahata Steel Corporation stipulated as purpose of the company ‘producing and selling iron and steel and engaging in incidental business’. Plaintiff also asserted that making the political donation had caused damage to the company. He brought a shareholder derivative suit before the court. The Tokyo District Court held that Defendant's act of making a political donation had been outside the purpose laid down in the Articles of Incorporation and had therefore infringed the duty of loyalty prescribed in section 254-2 Commercial Code, and that, accordingly, Defendant should pay damages. (1) Citing the contrary reason, the Tokyo High Court dismissed the claim. (2) In the final appeal, Plaintiff made the following allegations: (1) (2) (3)

Since the political donation in question is outside the purposes of the company as laid down in the Articles of Incorporation, the company has no legal capacity to make such a political donation. That companies make political donations is contrary to the Constitution, under which only natural persons have suffrage. The act of making a political donation is hence against public policy (section 90 Civil Code). The political donation at issue violates the duty of loyalty which is prescribed in section 254-2 Commercial Code.

The Supreme Court unanimously dismissed the Final Appeal.

IV Findings 1. Since it is the original purpose of companies to engage in profit-making activities, it for carrying out purposes relating to the Articles of Incorporation. However, companies, like natural persons, exist as social entities and are components of the state, the local government, the local community, and so on. They should therefore play some role in society. Although some activities have apparently nothing to do with the purpose of the Articles of Incorporation, companies should and can undertake such activities insofar as those are socially expected or requested of them. In addition, it is not useless at all but rather quite effective and worthwhile for companies to play a role in society, in order to develop smoothly as corporate entities. In this sense, such activities are considered, although indirectly, a necessary part of a company's purpose. Examples of this include donations to disaster relief funds, fiscal contributions to the local community and

P 333 goes without saying that they place emphasis on activities directly required

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financial help for various types of welfare work. It is now socially accepted that it is natural for companies to pay considerable amounts of money in the fulfilling of their social responsibilities, so that such activities are not contrary to the expectations of company shareholders at all, and it is accordingly the case that, if such activities are interpreted to be covered by the legal capacity of the company, they are not likely to cause harm to the interests of shareholders and others. The principle stated above can be applied to cases in which companies donate money to political parties. Although the Japanese Constitution contains no provisions regarding political parties and gives no special status to them, it should be considered that, because the representative democracy provided for in the Constitution cannot work well without the existence of political parties, the Constitution considers political parties, which support representative democracy, to be an essential element of the Constitution itself. At the same time, because political parties are the most powerful medium to make the political opinions of the people known, how and why political parties may act should be a matter of great concern for the people. Consequently, companies, as social entities, are expected to cooperate with political parties for their sound development, and this includes making political donations to them. In short, a political donation by a company made upon objective and abstract examination of the reasons for such donation, is within the scope of the purpose of the company as part of its social responsibility. 2. As Plaintiff properly states, the Constitution acknowledges only natural persons to have suffrage. However, as long as companies pay taxes like natural persons, there is no reason to prohibit companies, which are in a position as taxpayers, giving their opinion or doing anything concerning the measures of the state or of the local government. Furthermore, companies shall have the freedom to support, promote or oppose some specific policies of the state or of political parties, since the provisions in Chapter III of the Japanese Constitution, ‘Rights and Duties of the People’, are, as much as possible by their very nature, to be interpreted as being applicable to domestic companies, as well. Making political donations belongs exactly to those freedoms. Even though such donations, if made by companies, might have an influence on political trends, the Constitution does not require that they be distinguished from donations by natural persons. P 334

Political donations do not, by their nature, have a direct influence on the voting rights of individual people. If political parties do use a part of their funds in order to buy votes, it occurs as an exception to the rule as a pathological phenomenon. What is more, there are obviously institutions that control such illegal conduct. In any event, donating to political parties is not directly related to the infringement of the people's freedom to vote. Plaintiff alleges that excessive political donations on the part of big companies bring about the adverse effects of ‘money politics’ and that in cases in which the dominant shareholder is a foreigner, such donation could be construed as political intervention by a foreign country. Moreover, too much money has the effect of spoiling politics. However, it is clear that for the time being future legislation or political measures ought to be awaited as the means to cope with such abuses as pointed out here. The fact remains that from the viewpoint of constitutional law, even companies shall, to the extent that it does not interfere with public welfare, have the freedom to donate to political parties. The interpretation that political donations are a violation of the suffrage rights of natural persons is not acceptable. 3. Section 254-2 Commercial Code just clearly defines the provisions of section 254(3) Commercial Code and section 644 Civil Code. In cases in which directors make a political donation on behalf of the company, the reasonable amount of money should be decided upon in consideration of the scale, the management performance, and the social and financial position of the company, etc., as well as the particulars of the political party in receipt of the donation. If donations are improper and extend beyond the reasonable range, the directors' behaviour is held to be contrary to their duty of loyalty. According to the facts established, taking into account the sum of the stated capital, the net profit and the dividends of the Yahata Steel Corporation, the donation in question is not beyond the reasonable range. Translated by Towa Niimura

V Comment 1. Political Donation as a Social Problem For political activity, especially at elections, politicians and political parties generally require a huge amount of money. In Japan this is no different. Without donations by companies and other organizations such as labour unions, political parties would no longer be able to function. In Japan, the Political Funds Control Law (3) was enacted under the guidance of the General Head Quarter of the Allied Powers in 1948 in order to deal with political P 335

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P 335

corruption and with the overabundance of small political parties that occurred after World War II. The chief aim of this Law was the disclosure of the income and expenditure details of political funds, but restriction of the total amount of donations was not provided for at the time of the Law's enactment. (4) In spite of the enactment of the Political Funds Control Law (or perhaps due to the lack of efficiency of this law), bribery cases by means of political donation have been a constant occurrence ever since. The Yahata case was brought before the court by one shareholder of the company so as to raise the problem of political donations by companies under such circumstances. That particular shareholder had had experience as a director of a local bank and was also a lawyer, and great attention was therefore drawn to the decision of the Supreme Court, which had to address these legal problems.

2. Legal Capacity of Companies within the Limits of Its Purpose According to section 43 Civil Code (now section 34 Civil Code after the amendment 2006), the legal capacity of a juridical person is limited to the purpose laid down in the Articles of Incorporation. Applying this provision even on companies, their legal capacity shall be restricted to their purpose. In other words, companies can carry out only the activities which are laid down as part of the ‘purpose’ of the Articles of Incorporation. Indeed, before the Yahata decision, since the time of the Imperial Supreme Court (Daishin'in), the courts had held that any activity outside the bounds of the ‘purpose’ of the Articles of Incorporation was null and void irrespective of whether a trading partner had knowledge thereof. (5) However, decisions of the Imperial Supreme Court had interpreted the meaning of the purpose of the Articles of Incorporation flexibly and held that ‘matters which are derived from the matters stated in the Articles of Incorporation’ and ‘matters which are required for achieving the purpose of the company’ belong to the purpose as laid down in the Articles of Incorporation, (6) and moreover held that it should be judged objectively from the external form of the activity, whether such activity is required for achieving the company's purpose. (7) The Supreme Court in Yahata seems to have followed the previous decisions. While the former cases above had dealt with, so to P 336 speak, ‘genuine’ matters of trading, the matter in question in Yahata was political donation which is not considered to relate directly to trading. Recognizing the importance of the social responsibility of companies, the court acknowledged that companies have a wide legal capacity to make political donations, although only to a reasonable extent. The court assumed that financial help for various welfare activities and political donations were the same with regard to social responsibility. However, is this appropriate? It is true that nowadays there is an increasing onus upon big companies to contribute to social welfare causes. There are different theories on the issue; some insist that for financial welfare contributions irrespective of the company's purpose, a company should have legal capacity, (8) or that such legal capacity should be acknowledged considering the social profit which companies hope to obtain through such contributions. (9) However, the decision of the court that companies, as social entities, are expected to make political donations is also harshly criticized. (10)

3. Enjoyment of Human Rights by Juridical Persons – Freedom to Carry Out Political Activities One of the most important and distinctive points of the Yahata decision is that, when the Supreme Court acknowledged political donations by companies to be legal, the court in essence held that companies, which are not natural persons but juridical persons, enjoy constitutional ‘human rights’, in other words, ‘the freedom to carry out political activities’ which is recognized in the Constitution. In the Japanese Constitution, there is no provision which defines the rights of juridical persons like section 19(3) of the Basic Law for the Federal Republic of Germany. (11) From this point of view, it is said that the Yahata decision tried to read the same idea into the Japanese Constitution. (12) This idea that juridical persons can enjoy constitutional human rights seems to have become widely accepted, (13) but for what kind of juridical persons, concerning which human rights and to what extent, are questions that need to be examined further. (14) P 337

In theory, the Supreme Court could just say that even though political donations might affect political trends, it is not against the Constitution, for the activity itself does not infringe the people's freedom to vote. There was no necessity to boldly adopt such a rough theory, i.e. that companies have the exactly same freedom to carry out political activities like natural persons. (15) Now that, companies have the human right of political activity, the question could arise as to whose political right should be given priority in cases of conflict between companies and individuals. Companies are social entities with huge economic power and influence on society, but big money ought not to distort politics, (16) constitutional guarantees for the freedom of companies' political activity should be restricted for the sake of the freedom of the individual. (17)

4. Relevant Cases after Yahata 14 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

Five years after the Yahata decision, the Supreme Court was confronted with a similar political donation case, this time concerning a labour union, in which the labour union had made the decision to collect extra dues from its members in order to support a particular candidate. The Supreme Court held that labour unions themselves have the right to make an election campaign; however, they cannot compel their members to cooperate with such campaign or to pay extra union dues for an election campaign in order to support a particular candidate. Emphasizing the freedom to vote of each union member, the court held such collection of union dues to be an infringement of the political freedom of each member. (18) In this case, the Court stressed the characteristics of labour unions, from which the members de facto cannot easily escape if they desire the continuance of comfortable working conditions. The aspect of ‘compulsory membership’ shown above is related to a relevant case discussed next, namely a case concerning political donation by a certified tax accountant association. In this decision of 1996, the Supreme Court, quoting the Yahata case, found that a political donation made with money collected by way of extra membership dues was beyond the purpose of the certified tax accountant association. This was deemed to be the case because certified tax accountant associations have, unlike companies which pursue a profit, a public nature, and moreover they are ‘compulsory membership’ associations whose members have no option of escape, and consequently due regard must be paid to the influence of the political donation on the freedom of thought and conscience of each member; thoughts naturally vary from member to member and those of the individual members perhaps different from those of the association. (19) P 338

It is true that the results of these two other cases related to political donations were contrary to those of the Yahata case, however both ‘compulsory membership’ and ‘extra dues’ have, as the conclusive factors, played important roles in the last two cases, and are in this sense consistent with Yahata. However, it could be argued that the argumentation involving the weighing of conflicting rights between associations and their members is far better developed in these two cases than in Yahata.

5. Respect for the Legislature or Confirmation of Problematic Status'? It goes without saying, that democracy in Japan is distorted through political donations by companies which have enormous wealth. Repeated amendments of the Political Funds Control Law seem to be no help for that. In the Yahata decision the Supreme Court showed its respect for the legislation and was therefore compelled to accept political donations by companies, for there is indeed a law, namely the Political Funds Control Law, which prescribes the right of companies to make such donations, even though arguably its logic did not go far enough at least in relation to the issue of the political freedom of juridical persons. While the Court approved political donations by companies, hoping for the sound development of political parties, corruption in terms of political donations has increased significantly since the 1960s, when this suit was brought before the court. To make matters worse, the fact that even the Supreme Court approves the legality of political donations is often cited as a justification when reforms against ‘money politics’ are carried out. (20) Corruption, defined as a ‘pathological phenomenon’ by the Supreme Court, can now be seen everywhere. It may be high time, 50 years after the Yahata case, to re-examine the validity and appropriateness of this decision once again. Towa Niimura (1) P 338

References ★ )

1) 2) 3) 4)

Niimura Towa: Seikei University, Graduate School of Law Tokyo District Court 5 April 1963, Minshū 14-4, 657. Tokyo High Court 31 January 1966, Kōminshū 19-1, 7. Seiji shikin kisei-hō, Act No.194/1948. After revelations of corrupt activities forced the resignation of Prime Minister Kakuei Tanaka, one of post-war Japan's most skilful practitioners of ‘money politics’, the 1948 Political Funds Control Law was amended to establish ceilings for donations from companies, other organizations, and individuals, in 1975. However, at the time of the Yahata decision there was not yet any restrictive regulation in this law. Under the current Political Funds Control Law of sec. 21(1), political donations by companies are allowed only to political parties and political funds bodies (seiji shikin dantai). And what is more, sec. 21-3(1) item (ii) sets an upper limit for donations by companies; JPY 30 million per year for companies with over JPY 5 billion capital, for example.

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5) 6) 7) 8) 9) 10) 11)

12) 13) 14) 15) 16) 17) 18) 19) 20) 1)

Imperial Supreme Court 29 January 1903, Minroku 9, 102. Imperial Supreme Court 25 December 1912, Minroku 18, 1078. Imperial Supreme Court 7 February 1938, Minshū 17, 50; Supreme Court 15 February 1952, Minshū 6-2, 77. S. Tanaka, Kaisha no kenri nōryoku no han'i ni tsuite [On the Limits of Legal Capacity of Companies], in: Kaisha-hō kenkyū (Tokyo 1959) 145. Y. Tomiyama, Kabushiki kaisha no nasu kenkin [Donation Made by Joint Stock Companies] in: Minshō-hō Zasshi 47-3 (1962) 35. E.g. T. Suzuki, in: Kaisha-hō hanrei hyakusen [Hundred Selected Cases from Company Law], 5th. ed. Bessatsu Jurisuto No.116 (1992) 9. For instance, sec. 19(3) of the Basic Law for the Federal Republic of Germany [Grundgesetzfür die Bundesrepublik Deutschland] prescribes that ‘the basic rights shall also apply to domestic juridical persons to the extent that the nature of such rights permits. (Art. 19 Abs. 3 GG: Die Grundrechte gelten auch für inländische juristische Personen, soweit sie ihrem Wesen nach auf diese anwendbar sind.) See, A. Ubara, in: Kenpō hanrei hyakusen [Hundred Selected Cases from Company Law], 5th. ed. Bessatsu Jurisuto No.186 (2007), 25. However negative accepted by: T. Kakudo, Kenpō [Constitutional Law] (Tokyo 1977) 202; Y. Higuchi, Kenpō [Constitutional Law] (Tokyo 2007) 182. M. Nakamura, Kenpō I [Constitutional Law I], 4th. ed. (Tokyo 2006) 230. See, T. Suzuki, supra note 10, 9. J. Annen, Kaisha no kihon-hō [Fundamental Law of Companies], in: Jurisuto No.1155 (1999) 99. N. Ashibe, Kenpō-gaku II [Study of Constitutional Law II] (Tokyo 1994) 174. Supreme Court 28 November 1975, Minshū 29-10, 1698 - Kokurō Hiroshima. Supreme Court 19 March 1996, Minshū 50-3, 615 - Minamikyūshū. Y. Higuchi, Kenpōhanrei o yominaosu [Rereading Constitutional Precedents] (Tokyo 2011) 34. Seikei University, Graduate School of Law

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Case No. 32: Banking Law – Definition of Banking – Meaning of ‘Funds Transfer’ – Legality of Money Transmittance Service on Behalf of Customer

Document information

Publication

Business Law in Japan – Cases and Comments

Souichirou Kozuka (★ ) Supreme Court 12 March 2001 – Case No. 2000 a 873, KK Seoul Trading and Lee v. State

Jurisdiction

Source: Keishū 55-2, 487 = Hanrei Jihō 1745, 148 = Hanrei Taimuzu 1059, 66.

Japan

I Headnote(s)

Court

The ‘funds transfer’ that defines the banking business under the Banking Act means an undertaking, at the request of the customer, to transfer the money using a mechanism to transfer money between distant parties without the actual carriage of cash or to perform such undertaking.

Supreme Court of Japan

Case date

One that received the funds to be transferred to a foreign country and, instead of actually that country to deposit the money of the amount equivalent to the entrusted funds into the bank account of the recipient, falls under the ‘funds transfer’ subject to licensing under the Baking Act.

P 340 carrying the cash to that country, instructed an accomplice resident in

12 March 2001

Case number 2000 a 873

II Relevant Provisions Section 2(2) Item (Ii) Banking Act

Bibliographic reference

III Facts Lee Seung-Lo (the accused), as the manager of KK Seoul Trading (the accused company) in Tokyo, was asked by the customers to transfer money to the bank and postal accounts in Korea they designated and undertook to do so. He made the customers deposit their money into his account with a Japanese bank by Japanese yen and instructed his brother in Seoul to deposit the sums of money entrusted by each customer to transfer into the recipients’ bank and post accounts in Korea. Such transactions were committed 954 times between 11 September and 30 December of 1998. Lee and his company were indicted as having engaged in the banking business, in particular the funds transfer, without a licence.

Souichirou Kozuka, 'Case No. 32: Banking Law – Definition of Banking – Meaning of ‘Funds Transfer’ – Legality of Money Transmittance Service on Behalf of Customer', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 339 - 346

Lee argued that his acts did not constitute the funds transfer under the Banking Act. He further argued that the meaning of the term ‘funds transfer’ was so vague that the penal sanction on engaging in the funds transfer was unconstitutional. The Tokyo District Court and the Tokyo High Court held that Lee was guilty of having engaged in the banking business without a licence. Lee appealed to the Supreme Court.

IV Findings Whereas section 2(2) item (ii) of the Banking Act mentions the ‘funds transfer’ (kawase torihiki) as an act that constitutes banking business, this court interprets the ‘funds transfer’ under this provision to mean an act to undertake, at the request of the customer, the transfer of money using a mechanism to transfer money between distant parties without the actual carriage of cash or to perform such undertaking. In light of this interpretation, the High Court was right in finding that the acts of Lee constituted a ‘funds transfer’ under the Banking Act and that Lee and his company were guilty of engaging in the banking business without a licence. Translated by Souichirou Kozuka P 341

V Comment 1 The Definition of Banking under the Banking Act Article 2(2) of the Banking Act (1) provides that the banking business includes ‘taking deposit and lending, including discounting the bills’ and ‘funds transfer’. If someone is engaged in either of them, he is doing ‘banking business’. Such definition of ‘banking business’ has a long history in Japan, dating back to the Baking Regulation of 1890. (2) Banking business requires a licence of the government (section 4 Banking Act). (3) Engaging in the banking business without a licence is penalized, either with imprisonment for three years or less, or with the penalty of JPY 3 million or less, or both (section 61 Banking Act). As a result, the businesses of ‘taking deposit and lending’ (not including lending only, which can be undertaken by non-bank moneylenders) and ‘funds transfer’ are monopolized by licensed banks.

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The consumers sometimes complain that the banking service in Japan is not sufficiently convenient. The fees have been claimed to be too expensive and the opening hours too short. (Major banks are open only from 9:00 to 15:00). In particular, foreign residents, like the customers of Lee, have difficulties in sending money to their home countries. For these and other reasons, the business of ‘money sending’ arose: the operator sent the money collected from many people by a single transaction with the bank and then paid the individual amount to the bank accounts in the destination country. As the bank's fee for funds transfer is not proportionate to the amount sent, such business made sense. It was labelled as ‘underground banking’, apparently connoting that the system is prone to the use by illegal migrants or money laundering. (4) Lee's business was one of those underground banks, although, in his case, the court found no connections with illegal activities.

2 The Supreme Court s Decision and Its Implications The problem with the regulation described above was that the term used for ‘funds P 342 transfer’ was a traditional Japanese phrase (kawase torihiki), (5) rather than a modern

banking term (such as sōkin), probably due to its historical origin. As a result, the meaning of the term is not entirely clear. The Supreme Court, in holding Lee's ‘underground bank’ to be illegal, interpreted the term as meaning the distant transfer of money on behalf of others without the actual carriage of cash. The interpretation adopted by the Court was not new. Commentators had understood the term in more or less the same meaning. (6) No particular reason was stated by the Supreme Court as to why the term should be interpreted in such a manner. The High Court, in justifying the almost same interpretation, mentioned the need to protect the users. According to the High Court, the intermediation of distant money transfer is based on the creditworthiness of the mediating institution, just as taking of deposits and lending. Lee alleged that he merely acted as an agent of his customers for the procedures at the bank. However, the High Court held that the money of the customers would be at risk should Lee become insolvent. As Lee had no trouble with his customers and the funds had been duly transferred to Korea without any problem, the concern about the creditworthiness of the intermediary institution by the High Court, presumably shared by the Supreme Court, was more a theoretical than a real one. It could be argued that the insolvency of the intermediary is the risk to be accepted by the user that has chosen the intermediary and that the only risk that the regulator should be concerned about is the impact on the settlement systems that could cause the systemic risk affecting the whole financial system. However, the Court was apparently concerned about the risk of individual users, not about the systemic risk.

3 The Identification of a Problem and Legislative Discourses The broad definition of the ‘funds transfer’ by the Supreme Court did not attract much attention for some years. It came to be recognized as a problem, however, when the Financial Services Agency (FSA) launched discussions on the new types of payment services in 2007. The intention of the FSA appeared to lie in reconsidering the regulatory framework for the payment and settlement systems. With the growth of the information technology and the spread of e-commerce, new types of payment services have burgeoned. Such new services include the smart card, web payment for content downloads and the pay-ondelivery (daikin hikikae) services by the courier operators frequently used for Internet auctions. The payment-receipt (shū'nō daikō) service over the counter of convenience stores, in which the store receives the payment by the consumer on behalf of the payee, P 343 has come to be used for various kinds of payment, including the payment for the purchase on e-commerce as well as the health care contributions and even tax payment. The providers of these services are not banks, though the services appear to entail distance transfer of money without the actual carriage of cash. It would be disruptive if all these services that have spread so widely should be declared illegal and punishable by criminal sanctions. The intended new regulatory framework was supposed to provide a legal basis for these new services. Somewhat surprisingly, however, the providers of the new payment services, especially the convenience store networks and courier service operators, argued that their services were out of the definition of ‘funds transfer’ under the Supreme Court decision and, therefore, should be outside the scope of the new framework. Their argument relied on the reasoning of the High Court that the underground bank exposed the customers to the risk of Lee's insolvency. As the operators of the pay-on-delivery and the payment-receipt services acted on behalf of the payee, rather than as the agent of the payer, it was alleged that they involved no risk to their consumers, who are usually the payers. Because it was not the Supreme Court but the High Court that pointed to the possible insolvency of the intermediary as the justification for prohibiting funds transfer without a banking licence, the argument risked being denied by a later decision by the Supreme Court that would declare their services illegal. Still, the providers of the new services were more afraid of the introduction of a new regulation, which they anticipated to entail

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stricter regulation and supervision by the FSA. In other words, they preferred living with the legal uncertainty to facing a strengthened regulation. After the deliberations for almost a year, the working group of the Financial System Council (7) recommended the FSA to enact a new law to address the new types of payment services, but was unable to reach a consensus over the question whether or not the payment-receipt service and pay-on-delivery service are covered by the concept of ‘funds transfer’. (8) In the meantime, the Ministry of Economy, Trade and Industry (METI) launched the discussions on the same subject on their own at the Industrial Structure Council and had a report published that clearly stated that the two types of services fall outside of the regulation of ‘funds transfer’. (9) Based on these discourses, the new P 344 regulation on money transmittance was introduced, but on the understanding that the FSA does not apply it to the payment-receipt services and pay-on-delivery services. (10) The success of the lobbying by the providers of new services was partly the product of the political process. The banking industry, having monopoly status on the funds transfer services, was not interested in the retail payment services and did not object to the limitative interpretation of the ‘funds transfer.’ The consumers did not have many cases of complaints about these services and, as a result, made no strong arguments for their regulation. METI, on the other hand, was eager to facilitate the e-commerce and supported the payment services used in relation to e-commerce. The outcome may also be attributable to the framework of discussions introduced by the Lee's underground bank case. Under the influence of the High Court, the arguments mostly concentrated on the user's interest in case of the insolvency of the intermediary, not so much caring about the stability of the settlement system. If the user's interest is the primary issue, the construction of private law scheme to eliminate the risk, such as making the intermediary the agent of the payee, rather than the payer, can easily be found as a possible substitute to the regulation.

4 The Regulation of Money Transmittance Services under the Law on Settlement Based on the recommendations of the Financial System Council, the government introduced the Law on Settlement in 2009. (11) The law has a chapter on the money transmittance service (shikin idō-gyō), besides the chapters on prepaid payment methods and clearance of payments. Nonetheless, the newly introduced term ‘money transmittance’ does not have a definition of itself. It rather refers to the traditional concept of ‘funds transfer’ (kawase torihiki) and defines the money transmittance service as the funds transfer carried out by an entity other than a bank. (12) The amount to be transmitted by this service shall not exceed the maximum provided in the Cabinet Order, which was later determined to be JPY 1 million. (13) P 345

The aim of the new law was to allow new entrants into a part of the market that had been monopolized by banks and subject them to a less stringent regulation than that on banking. (14) The money transmittance service only requires registration with the FSA, not a licence as in the case of banking. If duly registered, the service is exempted from the prohibition of the Banking Act and can be conducted as a legal business. (15) As a measure for consumer protection, the operator of the money transmittance service must deposit or acquire guarantee in some other manners, the amount that the operator has yet to deliver to the payee. (16) The operator also has the duty to arrange for information security, (17) furnish appropriate protections to the users (18) and, finally, is subject to the general supervision of the FSA, such as the inspection of its books and request for annual reporting. (19) It is easy to see that the primary regulation on the money transmittance service is the requirement for the full coverage of the entrusted fund that has not been delivered, in the form of deposit or guarantee. This means that the law requires the service to be completely bankruptcy-remote. Obviously, it derived from the concern of the High Court in the Lee's underground bank case, which dominated the deliberations in the legislative process. It is, however, not a negligible burden. Therefore, the convenience stores and courier service operators must have welcomed the decision of the FSA not to apply the new framework to their services.

5 The New Businesses under the Law on Settlement Service As of July 2011, 17 companies are registered as the providers of money transmittance service. (20) Some of them have already launched the service. Thus, the new law of 2010 may be said to have opened the market for new entrants successfully. Still, the services of pay-on-delivery and payment-receipt with a far larger volume in trade remain outside of the scope of the law and, at least theoretically, are subject to the risk of falling under the illegal banking without a licence. The whole process appears to be typically Japanese. Although it is obvious that the use of a classical term kawase torihiki without a statutory definition has been the cause of difficulties, no definition has been introduced. The Supreme Court decision that P 346 interpreted the term in Lee's underground bank case remained intact. The reform of the law was limited to a minimum, just as much as is necessary to allow new entrants,

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which was the immediate political aim. (21) Still, the economy develops without elaborating on the concepts constituting the legal framework. Law matters, to some extent, but in some senses it does not matter. Souichirou Kozuka (1) P 346

References ★ )

1)

2) 3) 4) 5) 6)

7)

8)

9)

10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21) 1)

Kozuka Souichirou: Gakushuin University in Tokyo Ginkō-hō, Law No. 59/1981. For an overview of the Banking Act, see H. Kanda / H. Baum, Finanzmarktrecht, in: Baum / Bälz (Hrsg.), Handbuch Japanisches Handelsund Wirtschaftsrecht, 279 ff., Rdn. 82-103 (Carl Heymanns, 2011). The definition of banking is discussed in Rdn.89. Ginkō Jōrei, Law No. 72/1890. Presently the Prime Minister on behalf of the Financial Services Agency (FSA) is in charge, but at the time of this indictment in 1998 the government agency in charge was the Financial Reconstruction Commission. See M. Kimura, Case comment, Hanrei Jihō 1803,192 = Hanrei Hyōron 528 (2003), 30. S. Iwahara, kin'yū hōsei no kakushin [The innovation of financial regulation], Jurisuto 1391, (2009) 6, 9. The term is not a translation of the Western concept in the Meiji period. Rather, it is a classical term in use since Kamakura period (pronounced as ‘kawasi’ at that time). See A. Matsumura (ed.), Daijirin (Sanseido 3rd ed. 2006) 543. S. Morimoto, Ginkō gyōmu to kawase torihiki [The banking business and the funds transfer], in: R. Suzuki / A. Takeuchi (eds.), Kin'yū torihiki-hō taikei [Treatise on the law on banking], vol. 3, 1, 3–4 (Yūhikaku, 1983). See also the decision of Yokohama District Court 13 August 1997, Hanrei Taimuzu 967, 277, that pronounced a similar definition. The Financial System Council (Kin'yū Shingi-kai) is one of the deliberate councils that the Japanese government consults with regarding important policy issues, inclusive of introducing new laws or law amendments. These councils serve as the forum for the private sector to provide its inputs. Each government agency has at least one council for matters within its responsibility, and in the case of FSA, it is the Financial System Council. See sec. 7 of the Law to Establish the Financial Services Agency, Kin'yū-chō setchi-hō, Law No. 130/1998. Kin'yu Shingi-kai, Kin'yū Bunka-kai, Daini Bukai, Kessai ni kansuru Wākingu Gurūpu Hōkoku [Report of the Working Group on Settlement under the Second Division of the Financial System Committee, Financial System Council], 11–15. . Sangyō Kōzo Shingi-kai, Sangyō Kin'yū Bukai / Ryūtsū Bukai, Shō-torihiki no Shiharai ni kansuru Shōiin-kai [Subcommittee on the Payment for Commerce, under the double auspices of the Committees on Industrial Finance and Distribution, Industrial Structure Council], Shōtorihiki no shiharai sābisu ni kansuru rūru no arikata ni tsuite [On the rules on the payment services for commerce]. The Sangyō Kōzō Shingi-kai [Industrial Structure Council] is another deliberate council (see footnote 7, supra), which discusses policy issues of METI. Sec. 7 of the Law to Establish the Ministry of Economy, Trade and Industry, Keizai Sangyō-shō setchi-hō, Law No. 99/1999. Y. Takahashi, Shikin kessai ni kansuru hōritsu no seitei to sono igi [The enactment of the Law on Settlement and its meaning)] Jurisuto no.1391 (2009), 15, 19. Shikin kessai ni kansuru hōritsu, Law No. 59/2009. Section 2(2) Law on Settlement. Section 2 Cabinet Order to Implement the Law on Settlement, Shikin kessai ni kansuru hōritsu sekō-rei, Cabinet Order no.19/2010. Takahashi, supra note 10, pp. 20–21. Section 37 Law on Settlement. Section 43–45 Law on Settlement. Section 49 Law on Settlement. Section 51 Law on Settlement. Sections 52–58 Law on Settlement. The list of registered companies is available on the website of FSA. . The minimalism seems to be the approach followed by the Japanese legislators, at least recently. See Souichirou Kozuka / Jiyeon Lee, The New Japanese Insurance Act: Comparisons with Europe and Korea,' ZJapanR 28 (2009) 73, 87. Gakushuin University in Tokyo

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Case No. 33: Insider Trading – Decision Regarding Carrying Out a Tender Offer – Decision-Making Organ

Document information

Publication

Thier Markus

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 6 June 2011 – Case No. 2009 a 375, Murakami Fund Case Source: Hanrei Jihō 2121 (2011) 34

Jurisdiction Japan

I Headnote(s) The term ‘decision to launch a tender offer, etc’ in section 167(2) Securities and Exchange Act has to be construed in a way that if ‘the organ which is responsible for making management decisions’ prescribed in the same paragraph intends to realize a tender offer, etc. and decides to make the tender offer, etc., or initial tasks leading up to the tender offer, etc., as a matter of the company's business, such a decision will be sufficient to be deemed a ‘decision regarding the carrying out of a tender offer, etc.’. It is not required that the feasibility of an implementation of a tender offer, etc., is concretely acknowledged.

Court

Supreme Court of Japan

Case date 6 June 2011

P 348

II Relevant Provisions

Case number 2009 a 375

Bibliographic reference

Section 167(1) SEA (1) (prior to the revision by Act No.97/2004), section 167(2) SEA (prior to the revision by Act No. 65/2006), section 167(3) SEA (prior to the revision by Act No. 65/2006), section 31 Order for Enforcement of the SEA (2) (prior to the revision by Cabinet Order No.19/2005).

Thier Markus, 'Case No. 33: Insider Trading – Decision Regarding Carrying Out a Tender Offer – DecisionMaking Organ', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 347 - 358

III Facts Appellant Yoshiaki Murakami (the ‘Appellant’) was director and executive manager of MAC Asset Management KK (the ‘Appellant Company’), which was the management company of a widely known active investment fund called the Murakami Fund. The case took place in the context of Livedoor KK's (‘Livedoor’) attempt to take over control of Nippon Broadcasting System KK (‘NBS’). NBS was a subsidiary of Fuji Television KK (‘Fuji Television’), and both belonged to the Fuji Sankei Communications Group, a large media conglomerate (keiretsu). At this time, the Appellant Company had gradually accumulated shares of NBS. (3) Beginning on 15 September 2004, several meetings were held between Appellant and Livedoor executives, namely Takafumi Horie, representative director and CEO, and Ryōji Miyauchi, director and CFO. On their first meeting on 15 September 2004, Appellant persuaded Horie and Miyauchi to purchase a large stake in NBS' shares, explaining that Livedoor could take control of NBS if it acquired one-third of the shares and that it could even possess a majority in NBS' shares in the end, together with Appellant Company's portion of shares. The idea of acquiring a block of NBS' shares strongly attracted Horie's and Miyauchi's interest, particularly because they hoped to gain in the long run influence on Fuji Television as well, as at the time NBS held about 23% of Fuji Television's shares. They instructed employees to investigate possible financing and concrete measures for realizing the acquisition of a large stake in NBS. Based on the results of these investigations, Horie and Miyauchi decided during the period until 8 November 2004 to P 349 work on steps for the purchase of one-third of NBS' shares. In another meeting held on 8 November 2004, Horie explained to Appellant the prospects of the fundraising attempts and debated specific steps for the acquisition of NBS' shares. Following this conference during the period from 9 November 2004 until 26 January 2005, Appellant continuously purchased large numbers of NBS' shares. At the time of the present case, Appellant was fully aware of the scale of Livedoor's operations. After Livedoor had secured financing by issuing convertible bonds, it launched the purchase of a large stake in NBS' shares from 8 February 2005. On the same day, Livedoor also publicly announced that it had acquired 5% of NBS' shares. Eventually, Livedoor acquired more than half of NBS' shares with voting rights by 25 March 2005. On 8 February 2005, Appellant on behalf of the Appellant Company sold approximately half of the shares held by the Appellant Company (corresponding to about 10% in NBS) to Livedoor. Furthermore, on 10 February 2005, Appellant on behalf of the Appellant Company sold the rest of NBS' shares in the market, and since the market price of NBS' shares had rapidly increased due to the public announcement made by Livedoor, the Appellant Company made a substantial profit. (4) On 19 July 2007, the Tokyo District Court sentenced Appellant to a two-year term of imprisonment and a JPY 300 million fine for illegal insider trading, besides confiscating approximately JPY 1,149 million in profits. (5) In addition, the Tokyo District Court imposed a fine of JPY 300 million on Appellant Company. (6) Appellant and Appellant Company filed an appeal to the Tokyo High Court. With the decision of 3 February 2009,

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the Tokyo High Court suspended the two-year term of imprisonment against Appellant, but confirmed the amounts of the fine and the confiscation. The fine against Appellant Company was reduced to the amount of JPY 200 million. (7) Finally, the case was appealed to the Supreme Court. The Supreme Court dismissed the appeals in the present decision. P 350

IV Findings 1 Excerpt from the Supreme Court's Decision Concerning the Element of a ‘DecisionMaking Organ’ in Section 167(2) SEA At the time of the present case, Horie as representative director and CEO of Livedoor supervised the business in general, and Miyauchi as director and CFO of Livedoor was the responsible person for financial matters. […] The Appellant asserted that at that time they had not been granted the authority by Livedoor's two other directors to make the substantial decision on the purchase of more than 5% of NBS' shares, and therefore they could not be deemed an ‘organ of the tender offeror responsible for making decisions on the execution of tender offeror's operations’ as stipulated in section 167(2) SEA. […] However, in addition to Horie's and Miyauchi's positions within the Live-door company as mentioned above, the two other directors besides Horie and Miyauchi were both parttime employees who relied on the business judgments of Horie and Miyauchi and were entrusted with ensuring the financing for the acquisition. Considering this, both Horie and Miyauchi together can effectively be deemed Livedoor's organ responsible for the making of decisions on the execution of company's operations with regard to the decision on the purchase of more than 5% of the shares of NBS. Therefore, it can be said that they meet the requirement of being an ‘organ of the tender offeror responsible for making decisions on the execution of tender offeror's operations’ in section 167(2) SEA. On this point, the judgment of the prior instance is appropriate.

2 Excerpt from the Supreme Court's Decision Concerning the Element of a ‘Decision Regarding the Carrying Out of a Tender Offer, Etc.’ in Section 167(2) SEA The Supreme Court summarizes the gist of Tokyo High Court's decision as follows: The court of the prior instance deemed Horie and Miyauchi to be an ‘organ of the tender offeror responsible for making decisions on the execution of tender offeror's operations’. Regarding the use of the term ‘decision’ as part of the requirement ‘decision regarding the carrying out of a tender offer, etc’ in the same paragraph, the court of the prior instance presents the interpretation that if the ‘decision’ is reasonably feasible both objectively and subjectively based on reasonable grounds, it can be deemed a ‘decision regarding the carrying out of a tender offer, etc’. The court of the prior instance acknowledged in the present case the existence of such kind of feasibility referring to a ‘decision regarding the carrying out of a tender offer, etc’, namely the decision to implement a purchase of more than 5% of NBS' shares with voting rights […]. P 351

The Supreme Court proceeds with its reasoning as follows: In the following, it will be examined whether the decision in this case fulfils the requirement of a ‘decision regarding the carrying out of a tender offer, etc’ of section 167(2) SEA. Paragraph (1) of the said article […] stipulates the meaning of a ‘tender offer, etc.’, while paragraph (2) stipulates that when the decision-making organ of a juridical person makes a decision to carry out a tender offer, etc., this will correspond with the term ‘facts concerning the implementation of a tender offer, etc’ in paragraph (1). According to the proviso [in paragraph (2)], those cases will be excluded that only have insignificant influence on investors' investment decisions under the criterion stipulated in a Cabinet Office Order. (8) The said article objectively and specifically determines the scope of prohibited acts, while the requirement that a decision must have an influence on investors' investment decisions is not stipulated. From the point of view of clarifying the scope of the regulation in order to enhance predictability, it needs to be construed in such a way that the subject of the rule is limited to acts in which an actual ‘decision’ according to paragraph (2) has occurred, because this decision alone usually could influence investors' investment decisions, regardless of whether an individual and concrete influence on investors' investment decision has occurred or to what degree the investment decision may have been influenced. There may be cases in which the implementation of a tender offer lacks sufficient substance

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to be called a ‘decision regarding carrying out a tender offer, etc’ [as stipulated in] section 167(2), because the tender offer, etc., is completely or practically unfeasible, and is therefore not considered to be of influence on ordinary investors' investment decisions. Leaving such cases aside, it is appropriate to construe that if the organ as mentioned above […] intends to realise a tender offer, etc., and decides to make the tender offer, etc., or initial steps leading up to the tender offer, etc., as a matter of the company's business, such a decision will be sufficient to be deemed a ‘decision regarding the carrying out of a tender offer, etc’. It is not required that the feasibility of an implementation of a tender offer etc. is concretely acknowledged (compare Supreme Court 1998 a No. 1146, No. 1229; Decision First Petty Bench 10 June 1999; Keishū 53 No.5, 415). In light of the facts in this case […], it is evident that the collective purchase of the shares was not completely or practically unfeasible, and therefore it is sufficient to be deemed a ‘decision regarding the carrying out of a tender offer, etc’ If it is concluded in this way, the prior instance's approach to require for a ‘decision’ that it has to be reasonably feasible both objectively and subjectively based on reasonable grounds is not appropriate […]. Translated by Markus Thier P 352

V Comment 1 Outline on Insider Trading Regulations in Case of a Tender Offer or Equivalent Actions Under the SEA, (9) the provisions of sections 166 and 167 SEA regulate insider trading in a very technical and detailed language. The provisions differ in the scope of their application and broadly classify insider trading into two categories. (10) Section 166 refers to the typical insider trading case providing that a ‘corporate insider’ (kaisha kankei-sha) who has come to know a ‘material fact pertaining to business or other matters of a listed company’ shall not make transactions involving securities pertaining to the listed company before those material facts have been ‘publicized’. In this context, section 166(1) items (i-vi) SEA provides an enumerative definition of the scope of ‘corporate insiders’. It basically refers to a person who is affiliated with, or has certain connections to, the listed company. In other words, section 166 SEA involves cases in which directors or employees (or other persons such as an advising attorney) of a listed company trade shares of the said listed company while having knowledge of undisclosed information related to the company. In contrast, section 167 SEA considers the specific situation of a tender offer. It provides that ‘a person concerned with a tender offeror, etc.,’ (kōkai kaitsuke-sha tō kankei-sha) who comes to know of ‘a fact concerning the launch of a tender offer, etc.,’ by a person who intends to launch a tender offer or ‘a fact concerning the suspension of a tender offer etc.,’ by such tender offeror, shall not make ‘transactions involving securities pertaining to the tender offer’ before the facts concerning the launch or suspension of the tender offer have been ‘publicized’. In short, if a person concerned with a company that intends to launch a tender offer has knowledge of the upcoming tender offer for a listed company (target) and uses such information to purchase shares of the said target company before that information is announced to the public, he or she become subject to insider trading regulations. In this context, the scope of a ‘person concerned with a tender offeror’ is defined in section 167(1) items (i-v) SEA (for example an officer, etc., of the tender offeror according item (i)). Further, section 167(3) covers the case of a so-called primary information receiver (jōhō juryō-sha). In the present case, Appellant was found by the court to be such a primary information receiver because Horie and Miyauchi had informed him about the large-scale share purchase during their meetings. Section 167 has been stipulated as an additional provision to consider the specific a ‘person concerned with a tender offeror’ normally are not persons affiliated or having certain connections with the target company, so that section 166 SEA, which essentially requires a corporate insider, is not applicable. (11) Therefore, one can say that cases under section 166 SEA have the characteristic of insider trading based on internal information (naibujōhō motozuku torihiki), while cases under section 167 SEA refer to insider trading based on an external information (gaibu jōhō ni motozuku torihiki). (12)

P 353 circumstances in case of a tender offer, since a tender offeror as well as

However, section 167 SEA applies not only to cases in which information relating to a tender offer has been used, but also in comparable situations as defined by the Order for Enforcement of the SEA, such as the purchase of shares of 5% or more of the total voting rights of a listed company's shares (kaiatsume kōi) stipulated in section 31 SEA. This is the case in the present decision, where Livedoor's executives set plans to acquire a large stake in NBS' shares exceeding one-third of the voting rights of all shares. Furthermore, according to a definition in section 167(2) SEA, the requirement ‘facts concerning launch of a tender offer’ means a fact that if the tender offeror is a juridical

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person, the ‘organ of the tender offeror, etc., which is responsible for making decisions on the execution of the operations of the offeror’ (gyōmu shikkōo kettei suru kikan, hereinafter referred to as ‘decision-making organ’), makes a ‘decision regarding the carrying out of a tender offer, etc’ (kōkai kaitsuke-tōo okonau koto ni tsuite no kettei). In the present decision, one aspect on which the courts focused was the question when exactly Livedoor had decided to pursue the collective share purchase of NBS' shares. This discussion refers to the two points mentioned above: Firstly, the interpretation of the term ‘decision-making organ’, namely whether the decision by the directors Horie and Miyauchi constitute a decision of the ‘decision-making organ’ of Livedoor, and secondly the exact meaning of the term ‘decision regarding carrying out a tender offer, etc’

2 Courts Interpretation of the Term Decision-Making Organ One of the key elements in context of the present case is the concept of a ‘decisionmaking organ’. In the Nippon Orimono Kakō case of 1999, (13) an important precedent regarding insider trading, the Supreme Court held that the definition of a ‘decision-making organ’ is not limited only to a corporate organ formally empowered by corporate laws, such as the board of directors which is granted with formal decisionmaking authority, but in a broader sense may include other entities which are able to make decisions seen as effectively equivalent to corporate decisions. P 354

Further, since the entity inside the company which makes decisions on a company's operations may differ depending on the type of company and the sort of decision, it needs to be interpreted individually in the light of the actual circumstances regarding the decision-making process inside said company. Therefore, not only the board of directors (torishimari yakkai), but also an executive committee (keiei i'inkai), an operating committee (jomu-kai), a representative director (daihyo torishimari-yaku), or even an individual director alone (torishimari-yaku kojin), may constitute a ‘decision-making organ’. (14) One reason for this flexible approach is the fact that decisions which are not taken internally by an authorized corporate organ but are deemed externally to be decisions made by the company itself also may be considered to have influence on investors' investment decisions. (15) Although the Nippon Orimono Kakō case referred to an insider trading case in which company-related information (decision on the offering of new shares for subscription, section 166(2) item (i) (a) SEA) had been used by an ‘corporate insider’ (advising attorney, section 166(1) item (iv) SEA), it is commonly understood in academic opinions that this principle is also applicable in cases which are based on information relating to a tender offer or equivalent actions. (16) The decision of the Tokyo District Court was the first court decision clarifying the applicability of the theoretical approach in regard to a tenderoffer case. (17) In the present case, the Tokyo District Court (18) and the Tokyo High Court (19) have rejected the reasoning asserted by Appellant that both Horie and Miyauchi had not been authorized by the board of directors to take an acquisition-related decision. Rather, due to their positions – Horie as representative director and CEO, and Miyauchi as director and CFO of the company – and due to their status as full-time employees besides the two other directors who were both part-time employees, the courts found that both together could be deemed to be Livedoor's decision-making organ with regard to the decision to acquire a large stake in NBS' shares. Considering the doctrine mentioned above, the Supreme Court consequently upheld the prior instances' judgments on this point. P 355

3 Courts' Interpretation of the Term ‘Decision Regarding Carrying Out a Tender Offer, Etc.’ Another controversial issue in the present case is the interpretation of the term ‘decision regarding the carrying out of a tender offer, etc’ in section 167(2) SEA. The discussion regarding this concentrated especially on the point of time at which the decision-making process regarding the insider event (here the collective purchase of shares) had occurred. The court decisions of Tokyo District Court and Tokyo High Court, as well as the present decision of the Supreme Court, agree to the extent that the term ‘decision’ pursuant to insider trading regulations also includes a decision to initiate preparatory works towards the realization of the insider event. Accordingly, the Supreme Court clarifies in the present decision that ‘decision’ means a decision to actually carry out a tender offer, etc., as well a decision that ‘initial steps leading up to the tender offer, etc., would be carried out as a matter of the company's business’. The courts follow in this point the common theoretical approach (20) which has been confirmed for the first time in the precedent of the Nippon Orimono Kakō case. (21) The reasoning for this approach is that the implementation of an insider event usually passes an initial period and requires various steps (i.e. investigations on financing, negotiations, and other preparations) preceding the actual insider event, and that a decision on these preparatory steps itself possibly affects investors’ investment decisions. This interpretation is also supported by the wording of insider trading provisions, as for example section 167(2) SEA deliberately

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specifies a ‘decision regarding carrying out a tender offer, etc’ (kōkai kaitsuke-tō o okonau koto ni tsuite no kettei) rather than a ‘decision to carry out a tender offer, etc.’. Furthermore, the text of the law reflects a clear distinction from the wording in case of a withdrawal of a tender offer which reads ‘decision not to carry out a tender offer, etc’ (kōkai kaitsuke-tō o okonawanai koto o kettei shita koto). (22) However, the courts’ decisions diverge on the point regarding whether the said ‘decision’ in insider regulations necessarily presumes the feasibility of the insider event concerned. The Tokyo District Court (23) ruled that, in order to construe a ‘decision’, it is necessary but also sufficient that the decision-making organ had the intention to actually conduct the insider event (namely the collective purchase of shares). Moreover, the court held that except in cases in which the realization of the insider event is deemed to have been completely unfeasible, any possibility for realization regardless of the degree of feasibility would be sufficient to determine that a ‘decision’ had been made. P 356

The Tokyo District Court basically referred in the decision to the criteria that had been established by the Supreme Court in the precedent Nippon Orimono Kakō case. (24) However, in contrast to the Supreme Court, which merely held that the decision-making organ need not have an expectation that the insider event would certainly occur, the District Court modified this concept as mentioned above by stating that a ‘decision’ could be construed as having actually been made if there had been any possibility for the realization of the insider event. This approach of the Tokyo District Court was criticized for inappropriately expanding the scope of insider regulations and lowering the hurdle even further for listed companies and institutional investors to become a subject of insider regulations when exchanging information (e.g., in a due diligence process of an M&A transaction). (25) The Tokyo High Court (26) agreed on the point that an intended insider event with marginal prospects of being realized does not constitute a ‘decision’ pursuant to insider trading regulations. However, in contrast to the District Court's decision, the High Court advocated a more flexible approach, emphasizing that courts should thoroughly analyze all facts and particularly judge case by case whether the decision could have a significant influence on investors' investment decisions. (27) Regarding the feasibility of the insider event, the court further ruled that the ‘decision’ has to be reasonably detailed and of specific substance and that the decision-making organ must have the serious intention to perform the envisaged insider event. Therefore, a ‘decision’ must be deemed reasonably feasible both objectively and subjectively based on adequate grounds. (28) By requiring an appropriate level of likelihood of realization with adequate subjective and objective grounds, or in other words, a certain degree of feasibility in order to exclude cases with undisclosed information lacking significant influence on investors' decisions, the Tokyo High Court advocates a flexible interpretation of the insider provisions, which has been considered as being more reasonable. (29) In the present decision, the Supreme Court also acknowledges that in some cases the decision on an intended insider event possibly may not constitute a ‘decision’ in the P 357 context of insider provisions because there is absolutely or practically no likelihood that the insider matter will be executed, so that the decision is presumed not to influence ordinary investors' decisions. However, in contrast to the High Court, the Supreme Court held that such concept of a reasonable likelihood both subjectively and objectively based on adequate grounds is inappropriate in consideration of the provisions' wording. Rather, the court argues that the rule determines objectively and specifically the scope of prohibited acts, while the requirement of an influence on investors' investment decisions is not stipulated. By this, the Supreme Court adheres to a strictly formalistic approach similar to the approach of the Tokyo District Court's decision, ruling that the question as to whether a concrete matter constitute a ‘decision’ pursuant to insider regulations is not dependent on whether or not the specific matter in fact influences investors' investment decisions (‘the subject of the rule is limited to acts where actually a ‘decision’ according to paragraph (2) has occurred, because this decision alone usually could influence investors' investment decisions, regardless of whether an individual and specific influence on investors' investment decision has occurred or to what degree the investment decision may have been influenced’). As mentioned above, the Supreme Court justifies this position with the purpose of ‘clarifying the scope of the regulation in order to enhance predictability’. Applied to the present case, the Supreme Court consequently reasoned that obviously Livedoor's plan to acquire shares in NBS had not been absolutely or practically unfeasible and was therefore sufficient to be deemed a ‘decision’.

4 Significance of the Murakami fund Case for Investors Decisions The incidents surrounding Yoshiaki Murakami and Takafumi Horie aroused widespread public attention and the decisions relating to the Murakami Fund case are called the most important recent court decisions regarding Japanese insider trading regulations. (30) Although opinions on the present decision seem to be divided, (31) the fact that the Supreme Court rejected the more flexible approach of the Tokyo High Court and fell back on a strict and formal interpretation will certainly stir up once more the criticism that

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had been raised with regard to the decision of the Tokyo High Court. In a first reaction one voice stated that the scope of insider trading regulations is interpreted too widely in consequence of the court's decision, which results in the risk that markets become stifled by overregulation and fosters the possibility that M&A and investors' activities become withered. (32) Although the court's intention to increase the predictability of illegal P 358 insider trading by clearly defining the regulations' scope is comprehensible, the proposed formalistic approach obviously bears the risk of massive restrictions to trading and investors' activities. Particularly problematic is the possible outcome that the degree of influence on the decision of a specific investor becomes irrelevant, as trading whilst in possession even of undisclosed information that would not significantly influence investors' investment decisions may also be treated as illegal insider trading. (33) Therefore, in practice companies and investors will have to carefully consider the risk that information may be deemed insider information when used in communications among each other. Furthermore, the developments will certainly have an effect on corporate compliance practice as practitioners may tend to act in a more self-protecting way in the future. Especially in regard to the fact that the Supreme Court confirms in the present case that preparatory tasks may also constitute a ‘decision’, the point in time at which a ‘decision’ occurs highly depends on the individual characteristics of every case. This is due to the fact that in business reality, the intention for the implementation of a company's matter (e.g. an M&A transaction) does not switch digitally from ‘white to black’ but gradually increases up to the required degree of a serious intention, which brings about the difficulty to define when exactly the ‘decision’ occurs. (34) Consequently, practitioners may be urged to carefully consider that all steps (investigations, analysis, negotiations, etc.) might fall under ‘preparatory tasks’ that are deemed a ‘decision’. The present decision involves further legal issues and disputable problems which are intertwined in a complex way. (35) These issues, as well as their effect on business practice, will be the subject of comprehensive examinations in the future. Markus Thier (1) P 358

References ★ )

1)

2)

3) 4)

5)

6) 7)

8)

Thier Markus: Goethe University Frankfurt, Faculty of Law Securities and Exchange Act, Shōken torihiki-hō, Act No.25/1948 (hereafter ‘SEA’). After amendment renamed Kin'yū shōhin torihiki-hō (Financial Instruments and Exchange Act, hereafter ‘FIEA’), Act No.65/2006. For details see H. Oda, The New Financial Instruments Exchange Act, in: Zeitschrift für Japanisches Recht/Journal of Japanese Law Vol. 12 No. 24 (2007) 5. Shōken torihiki-hō shikō-rei (Order for Enforcement of the Securities and Exchange Act), Cabinet Order No.321/1965 (hereafter ‘SEA Order‘’). After amendment renamed Kin'yūshōhin torihiki-hō shikō-rei (Order for Enforcement of the Financial Instruments and Exchange Act), Cabinet Order No.233/2007. Regarding the courts' decisions in the case Livedoor v. Nippon Broadcasting System compare the comment by T. Fujita in Case No. 29 (‘Nippon Broadcasting System’; on the legality of a share issuance as defense measure against a hostile takeover bid). For further details of this case, see: S. Osaki, The Murakami Fund Incident and the Regulation of Collective Investment Schemes, in: Zeitschrift für Japanisches Recht/Journal of Japanese Law Vol. 13 No. 25 (2008) 89; M. Ozaki/R. Nakayama, Recent Trends Regarding the Regulations on Insider Trading in Japan, in: Asia Pacific Regional Forum News Vol. 16, No. 1 (2009) 34. Tokyo District Court 19 July 2007, Case No. 2006 toku wa 2832 (unreported). An excerpt of the decision can be found in: Nihon Shōken Keizai Kenkyū-sho [Japan Securities Research Institute], Kin'yū shōhin torihiki-hō kenkyū-kai kenkyū kiroku dai-21-gō, Fukōseitorihiki ni tsuite – Murakami fando jiken o chūshin ni – [FIEL Research Group Study Report No.21: About Unfair Trading – With a Focus on the Murakami Fund Case] (Tokyo 2008) 91; also accessible online: (last visited 25 November 2011). Section 207(1) item (ii), sec. 197-2 item (xiii) SEA (now FIEA) provides for parallel punishment of a juridical person where a representative has violated insider trading regulations (so-called ryōbatsu kitei). Tokyo High Court 3 February 2009, Case No.2007 u 2251, in: Hanrei Taimuzu 1299 (2009) 99. See also an abstract of the decision with a comment by K.MATSUO, Insaidā torihiki kiseini okeru ‘kōkai kaitsuke-tō o okonau koto ni tsuite no kettei’ no igi [The Meaning of ‘Decision Regarding Carrying out a Tender Offer, etc.’ in Insider Trading Regulations], in: Jurisuto 1398 (2010) 131–132. Note: de minimis criteria (keibi kijun): if the number of share certificates, etc., accumulated each year is less than 2.5%of the number of voting rights of all shareholders, compare section 62 Yūka shōken no torihiki-tō no kisei ni kansuru naikaku-fu-rei, Cabinet Order regarding the regulation of securities transaction, etc. No. 119/2007 (as amended by Cabinet Order No. 37/2011).

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9) 10) 11) 12) 13) 14)

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16) 17) 18) 19) 20) 21) 22) 23) 24) 25)

26) 27) 28) 29)

30) 31) 32) 33)

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35)

1)

The following explanations refer to the SEA which was the law at the time of the Murakami case, but is applicable to the scope of the present insider trading regulations in the FIEA as they do not differ substantially. E. Kuronuma, Insaidā torihiki kisei to hōrei kaishaku [Insider Trading Regulation and Interpretation of the Statutes], in: Kin'yū Hōmu Jijō 1866 (2009) 43. M. Kishida, Chūshaku Kin'yū shōhin torihiki-hō, daisan-kan: kōi kisei [Commentary on the Financial Instruments and Exchange Act, No.3: Regulations on Acts] (Tokyo 2010) 170. E. Kuronuma, Kin'yū shōhin torihiki-hō nyūmon [Introduction to the Financial Securities and Exchange Act] Nikkei Bunko 1189, 3rd ed. (Tokyo 2009) 134. Supreme Court, 10 June 1999, Case No. 1999 a 1229, Keishū 53–55, 415. Y. Yokobatake, Insaidā torihiki kisei to bassoku [Insider Trading Regulations and Penal Provisions] (Tokyo 1989) 52; T. Seki, Shōken torihiki-hō 166-jō 2-kō 1-gō ni iu ‘gyōmushikkō o kettei suru kikan’ oyobi kabushiki o hakkō suru koto no ‘kettei’ no igi [Meaning of ‘Corporate Organ which is Responsible for Making Decisions on the Execution of the Operations’ and ‘Decision’ on the Issue of Shares in section 166(2) item (i) SEA], in: Jurisuto 1179 (2000) 114. H. Kimeda, Insaidā torihiki kisei no jitsumu [Insider Trading Regulations in Practice] (Tokyo 2010) 73; S.Matsumoto, Insaidā torihiki kisei [Insider Trading Regulations] (Tokyo 2008) 68–69; E. Kuronuma, Insaidā torihiki ni okeru ‘kettei ni kakaru jūyō jijitsu’ no igi [Meaning of ‘Decision on a Material Fact’ in Case of Insider Trading], in: Hōgaku Kyōshitsu 234 (2000) 108 et seq. Y. Yokobatake, supra note 14, 183. Y. Ōta, Murakami fando jikenTōkyō chisai hanketsu no igi to jitsumu e no eikyō [Significance and Influence on Practice of the Tokyo District Court's Decision in the Murakami Fund Case], in: Shōji Hōmu 1830 (2008) 22. Supra note 5. Supra note 7. Y. Yokobatake, supra note 14, 54; Y. Ōta, supra note 17, 22; T. Seki, supra note 14, 114; H. Kimeda, supra note 15, 75. Supra note 13. Cf. Y. Ōta, supra note 17, 22. Supra note 5. Supra note 13. For an overview on the criticism brought forward compare also Y. Ōta, supra note 17, 23 et seq; see also E. Kuronuma, supra note 10, 44; ‘Tōshi kōdō ni genkakusa semaru’ [Forcing Strictness on Investment Activities], Nihon Keizai Shinbun, 20 July 2007, 3; Y. Ōmori, Kasumigaseki kara nagameru shōken shijō no fūkei dai 7-kai – Shokugyō moraru mono [The View on the Securities Market from Kasumigaseki No.7 – Business Morality], in: Kin'yū Hōmu Jijō 1889 (2010) 5; M. Ozaki/R. Nakayama, supra note 4, 37; K. Matsuo, supra note 7; Y. Ōta, supra note 17, 26 et seq., favouring a more differentiated approach. Supra note 7. K. Matsuo, supra note 7, 131. Compare H. Kimeda, supra note 15, 91–95. H. Kimeda/M. Yamada, Murakami fando jiken kōso – shin hanketsu no kentō – ‘kettei’ nokaishaku o chūshin ni [Analysis of the Appeal Court Judgment on Murakami Fund Case – With Focus on the Construction of ‘Decision’], in: Shōji Hōmu 1864 (2009) 9 et seq.; H. Kimeda, supra note 15, 91 (‘[ . . . ] breaks the spell of the Nippon Orimono Kakō decision’); E. Kuronuma, supra note 10, 44 et seq.; K. Matsuo, supra note 7. M. Ozaki/R. Nakayama, supra note 4, 34; Y. Ōta, supra note 17, 20. ‘Murakami moto daihyō, yūzai kakutei e’ [Guilty Verdict against ex-CEO Murakami Becomes Definite], Nihon Keizai Shinbun, 8 June 2011, 35. Comment by E. Kuronuma in: ‘Murakami moto daihyō, yūzai kakutei e’ [Guilty Verdict against ex-CEO Murakami Becomes Definite], Nihon Keizai Shinbun, 8 June 2011, 35. S.Osaki, Problematic Supreme Court Decision in Murakami Fund Case, lakyara vol. 113 (2011) 3, published online: (last visited 25 November 2011). J. Yokoyama, Insaidā torihiki kisei ni okeru ‘kettei’ to jitsugen kanō-sei. Iwayuru Murakami fando jiken saikō-sai kettei [Feasibility of ‘Decision’ in Insider Trading Regulations. Supreme Court Decision in the so-called Murakami Fund Case], in: Daiwa Institute of Research, Legal and Tax Report (16 June 2011) 9, published online: (last visited 25 November 2011). See J. Yokoyama, supra note 34, 4 et seq., especially for the author's discussion on differences in detail between the decision in the Nippon Orimono Kakō case and the present decision as well as the question whether the feasibility refers to the successful accomplishment of a tender offer, etc. or the mere possibility of the realization of a tender offer, etc., an issue that in Yokoyama's view is still to be solved by case law. Goethe University Frankfurt, Faculty of Law

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Case No. 34 Insurance Law – Non-Life Insurance – Accidental Nature of the Insured Event – Burden of Proof

Document information

Publication

Gen Gotö

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 1 June 2006 - Case No. 2005 ju 1206, Masaharu Furukawa v. Aioi Insurance Co., Ltd.

Jurisdiction

Source: Minshū 60, 1887 = Hanrei Jihō 1943 (2006) 11 = Hanrei Taimuzu 1218 (2006) 187 = Kin'yu Shoji Hanrei 1244 (2006) 43

Japan

I Headnote(s)

Court

The person claiming for the payment of insurance benefit for an insured automobile which sank into water according with the automobile's insurance policy which prescribes ‘collision, contact,… and other accidental events' as the insured events does not bear the burden of asserting and proving that the sinking of the automobile did not occur by the insured's intention.

Supreme Court of Japan

Case date 1 June 2006

II Relevant Provisions Sections 629 and 641 Commercial Code (before the revision by the Law No. 57/ 2008) (now out of force)

Case number 2005 ju 1206

P 360

III Facts

Parties

Claimant, Masaharu Furukawa Defendant, Aioi Insurance Co., Ltd.

Bibliographic reference

Gen Gotö, 'Case No. 34 Insurance Law – Non-Life Insurance – Accidental Nature of the Insured Event – Burden of Proof', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 359 - 367

Plaintiff Furukawa (Intermediate Appellant, Final Appellant) owned a normal passenger automobile (hereinafter referred to as ‘the Automobile’). On 1 November 2000, Plaintiff entered into a private-use automobile insurance contract (hereinafter referred to as ‘the Insurance Contract’) with Chiyoda Fire and Marine Insurance Co., Ltd. (hereinafter referred to as ‘Chiyoda’), having the Automobile as the insured automobile. The insurance benefit for the Automobile was JPY 2,450,000 and the contract period was from 1 November 2000 to 1 November 2001. Article 1 of Chapter 5 (Automobile Provisions) of the contract provisions of the Insurance Contract prescribed that the insurer would pay the insurance benefit to the insured for losses to the insured automobile as a result of ‘collision, contact, fall, overturn, flying object, falling object, fire, explosion, theft, typhoon, flood, high tide and other accidental events’ (hereinafter referred to as ‘the Provision’). On 2 April 2001, Chiyoda merged with and was absorbed by Aioi Insurance Co., Ltd. (Defendant, Intermediate Appellee, Final Appellee) (hereinafter referred to as ‘Aioi’). At around 11:50 AM of 29 October 2001, the Automobile sank into the sea at a marina (hereinafter referred to as ‘the Accident’). The Automobile was scrapped after the Accident. The Plaintiff filed a suit against Aioi claiming, as a primary claim, damages for torts asserting that Aioi's delay in responding regarding the payment of insurance benefit rendered early repair of the Automobile impossible, and as an alternative claim, payment of the insurance benefit for the Automobile according to the Insurance Contract. Both the court at first instance, Fukui District Court Tsuruga Branch, (1) and the appellate court, Nagoya High Court Kanazawa Branch, (2) dismissed the plaintiff's primary and alternative claims. The Plaintiff appealed to the Supreme Court. The Supreme Court dismissed the final appeal regarding the primary claim. The decision of the appellate court on the alternative claim, however, was reversed and remanded to the appellate court.

IV Findings The meaning of section 629 Commercial Code, which prescribes the insured event of a non-life insurance contract as ‘certain accidental event’, should be regarded as to make it clear that the provider of a non-life insurance contract promises to compensate losses resulting from an event, uncertain as to whether it would occur or not at the time when insurance contract would not enter P 361 the insurance contract was concluded, and that into force were it certain as to whether the insured event would occur at the time of the contract's being concluded. The meaning of section 641 Commercial Code, which denies the liability of the insurer to compensate losses resulting from intention or gross negligence of the policyholder or the insured, is not to prescribe the accidental nature of the insured event, but to prescribe the intention or gross negligence of the policy holder

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or the insured regarding the occurrence of the insured event as an exemption clause which denies claim for the payment of insurance benefit. The intention of the Provision, which states ‘collision, contact, fall, overturn, flying object, falling object, fire, explosion, theft, typhoon, flood, high tide and other accidental events' as the insurance events, is to make it clear by plain examples that the insured event includes any event, uncertain as to whether it would occur or not at the time when the insurance contract was concluded, and to describe ‘certain accidental event’ under section 629 Commercial Code in conformity with the Insurance Contract. ‘Accidental events’ under the Provision cannot be construed differently from ‘certain accidental event’ under section 629 Commercial Code to mean that the occurrence of the insured event did not result from the intention of the insured at the time of the occurrence. Also, it cannot be said that there is a great difference between fire insurance and automobile insurance regarding the difficulty in proving the cause of an accident as the appellate court states. Accordingly, we conclude that the person claiming for the payment of insurance benefit for the insured automobile, which sank into water, in accordance with the Provision, does not bear the burden to assert and prove that the sinking of the automobile did not occur by the insured's intention. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comment 1 The Burden of Proof of the Accidental Nature of the Insured Event It can be said that the burden of proof of the accidental nature of the insured event was one of the hottest topics of Japanese insurance law in the last ten years. According to the commonly accepted theory regarding the allocation of burden of proof in Japanese civil procedural law, the person who claims for the payment of insurance benefit bears the burden of proof regarding the occurrence of the insured event and the insurer bears the burden of proof regarding the applicability of exemption clauses. (3) P 362

The (former) Commercial Code (4) referred to the intention of insured, policyholder or beneficiary regarding the occurrence of the insured event as exemption clauses, (5) and provisions of insurance contracts generally follow the same way. According to the rule mentioned above, an insurer seeking exemption has to prove that the occurrence of the insured event has been caused by the intention of the insured, etc. However, section 629 Commercial Code defined the non-life insurance contract as a contract by which the insurer promises to compensate for losses caused by ‘certain accidental events [gūzen naru ittei no jiko]’ and provisions of personal accident insurance contracts and some non-life insurance contract used the phrase ‘accidental event [gūzen najiko]’ in their definition of insured events. If we read the word ‘accidental [gūzen na]’ to mean ‘not intentional’, the person claiming for the payment of insurance benefits has to prove that the loss resulted from an event, the occurrence of which was not caused by the intention of insured etc., since events which are intentionally caused will not fit the definition of insured events under these provisions. This result seems to contradict the notion of allocation of burden of proof for the exemption clause. This problem has been mentioned as the burden of proof of the accidental nature of the insured event [hoken jiko no gūzen-sei no risshō sekinin], and the Supreme Court has tackled this problem several times since 2001. In the following, I would like to give an overview of the case law's development and then comment on a few remaining problems.

2 The Development of the Supreme Court s Case Law a) Personal Accident Insurance ‘Certain accidental event’ under section 629 Commercial Code has been construed traditionally to mean uncertainty of the occurrence of the insured event at the time of the conclusion of insurance contract and not the absence of the insured's intention regarding the occurrence of the insured event at the time of the occurrence. (6) ‘Accidental event’ under the provision which gives definition of the insured event in mean the absence of the insured's intention regarding the occurrence of the insured event at the time of said occurrence, and the allocation of burden of proof of this point was disputed in lower courts. (8)

P 363 personal accident insurance contracts, (7) however, has been construed to

A case decided by the Supreme Court on 20 April 2001, (9) (hereinafter referred to as ‘Case No.1’) was the first in which the Supreme Court had to deal with this problem. (10) In this case, additional provisions of a life insurance contract prescribed to increase the insurance benefit when the death of the insured resulted directly from ‘unexpected event [furyo no jiko]’, which was further defined as ‘accidental external event [gūhatsuteki na gaihatsu no jiko]’. However, there was a provision which denied the insurer's liability to

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pay the additional insurance benefit when the insured event resulted from the insured's intention. The Supreme Court held that the person claiming for the insurance benefit has to assert and prove that the insured event occurred accidentally and that the insurer does not have to assert and prove that the insured event resulted from the intention of the insured. The court mentioned two points as part of its reasoning. The first point was the definition of the insured event by the contract provision. The second point was that it might make fraudulent claims easier if the burden of proof was allocated on the insurer. The problem of the burden of proof of the accidental nature of the insured event was first discussed only for personal accident insurance contracts. By the time of Case No.1, however, insurers seeking to combat fraudulent claims had started to assert that the person claiming for the insurance benefit should bear the burden of proof even in nonlife insurance contracts, such as fire insurance and automobile insurance, relying on the words ‘accidental event’ in section 629 Commercial Code and provisions of those insurance contracts. (11) Some lower instance courts agreed with this argument, (12) but there were strong criticisms against this. First, this argument of the insurers misunderstands the meaning of the term ‘accidental event’ in section 629 Commercial Code. (13) Second, the possibility P 364 of fraudulent claims differs between personal accident insurance, which is an insurance of fixed sums and non-life insurance, which is not an insurance of fixed sums. (14) Third, the insurer is able to prove indirectly that the occurrence of the insured event resulted from the intention of the insured by showing abnormal conditions regarding the situation of the accident, the financial situation of the insured, etc., but it is difficult for the person claiming for the payment of insurance benefit to prove that the occurrence of the insured event did not result from the intention of the insured by showing that all the conditions were normal. (15) b) Fire Insurance Three years later, another Supreme Court case (16) (hereinafter referred to as ‘Case No.2’) dealt with a case involving a fire insurance contract. The provision of this contract defined the insured event as ‘loss resulting from fire’ and did not use the phrase ‘accidental event’. The court held that the person claiming for the payment of insurance benefit does not bear the burden of asserting and proving that the occurrence of the insured event did not result from the intention of the insured. Case No. 2 might be regarded as a reply of the Supreme Court to the criticism of Case No.1. Since it dealt with an insurance contract which did not use the phrase ‘accidental event’ as a definition of the insured event, however, it was expected that the Supreme Court deal with a case of an all-risks insurance contract, which defines the insured event as ‘other accidental events’ after giving some examples of accidents or as ‘any accidental events’. c) All-Risks Insurance The Supreme Court in a 2006 decision, (17) (hereinafter referred to as ‘Case No.3’, the subject of this comment), held that the meaning of the phrase ‘other accidental events’ in the provision defining the insured event of all-risks insurance is the same as the traditional understanding of the phrase ‘accidental event’ in section 629 Commercial Code, and the person claiming for the payment of insurance benefit does not bear the burden of asserting and proving that the occurrence of the insured event did not result from the intention of the insured. After Case No. 3, the Supreme Court rendered similar decisions twice in the same year. now established case law to allocate the burden of proof of the accidental nature of the insured event on the insurer as regards non-life insurance contracts, even if contract provisions have used the phrase ‘accidental event’ to define the insured events.

P 365 (18) Examining Case No. 2 and Case No. 3 together, it can be said that it is

d) Theft Cases As regards theft cases, however, it has been pointed out that the allocation of the burden of proof can still be a problem, since ‘theft’ means the loss of possession of the object, which was not intended by the insured. (19) In a 2007 case, (20) the Supreme Court dealt with a claim by the insured of an automobile insurance contract for the theft of the insured automobile. Provisions of the contract defined the insured event in a similar way as in Case No.3. The court held that the person claiming for the payment of insurance benefit has to assert and prove the external appearance of theft, i.e. the fact that somebody other than the insured has taken away the insured automobile which had been under the possession of the insured, but does not have to assert and prove that the taking away of the automobile was not intended by the insured. In this case, it was not difficult to prove the external appearance of theft, since there was surveillance camera footage of the parking lot, which recorded the situation of the automobile being stolen. In other cases without such direct evidence, it would be a problem how to establish the external appearance of theft. (21)

3 Evaluation of the Existing Case Law and Remaining Problems 3 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

a) Evaluation of the Case Law As mentioned before, many commentators were critical of Case No.1 and the development of the case law after Case No.2 seems to have been welcomed generally. (22) Some commentators criticize this development, arguing that it makes fraudulent P 366 insurance claims easier. (23) However, this problem should be dealt with by assuming intention or gross negligence of the insured, etc., from various indirect evidence such as the situation of the accident or the financial situation of the insured, and not by the allocation of the burden of proof. (24) b) Validity of Case No. 1 The first problem which still needs to be addressed is that of whether the Supreme Court's judgment in Case No.1 regarding personal accident insurance can be maintained when one takes the case law after Case No.2 in consideration. The case comment by the research official of the Supreme Court for Case No.3 distinguishes Case No.2 and No.3 from Case No.1, pointing out that personal accident insurance is a type of insurance with a high probability of fraudulent claims since it is an insurance of fixed sums. (25) This suggests that the Supreme Court itself did not regard Case No.1 to be overruled or modified by Case No.2 and No.3. Some commentators, however, argue that Case No.1 should be considered overruled since the difficulty for the insurer to prove the intention of the insured does not differ in case of personal accident insurance and in case of nonlife insurance. (26) Another problem regarding Case No.1 is that of whether it is valid when one takes the law reform of 2008 into consideration. (27) In the Insurance Act, the provisions regarding personal injury and illness insurance of fixed sums [shōgai shippei teigaku hoken] were newly introduced. The provision regarding the exemption clause denied the liability of the insurer to pay insurance benefit when the occurrence of the insured event results from the intention of the insured (section 80 item (i)). However, there was no provision defining the insured event using the phrase ‘accidental event’. Some commentators argue that Case No.1 should be regarded as invalid since the legislators of the Insurance Act knowingly chose the allocation of the burden of proof which differed from that of Case No.1, even though no formal procedure was taken to confirm this point at the Insurance Law Division of the Legislative Council in its discussion for the preparation of the Insurance Act. (28) P 367

c) Validity of Contract Provisions Altering the Allocation of the Burden of Proof The Supreme Court's decision in Case No.3 denies the ability of the insurer to alter the allocation of burden of proof by inserting the phrase ‘accidental event’ in the definition of the insured event. The problem is that of whether the insurer can alter the allocation of burden of proof by inserting a more direct provision, for example a provision which would require proof of the fact that the occurrence of the insured event did not result from the intention of the insured as a condition to claim the payment of insurance benefit. Section 10 of the Consumer Contract Act (29) invalidates provisions of contracts between consumers and business operators which restrict the right of consumers or expand the duties of consumers beyond the default rules of statutes and which impair the interests of consumers unilaterally against good faith. Since it is clear that a provision of an insurance contract allocating the burden of proof of the accidental nature of the insured event on the person claiming for the payment of insurance benefit expands the duty of the claimant compared to Insurance Act, its validity depends on whether such a provision impairs the interests of consumers unilaterally against good faith. (30) Some commentators argue that such a provision fulfils this condition and is thus void, (31) but there are also commentators who support the contrary view. (32) There is no decision of the Supreme Court and lower instance courts on this topic as of 15 August 2011. (33) Gen Gotō (1) P 367

References ★ )

1) 2) 3)

Gen Gotö: law at the University of Tokyo Fukui District Court Tsuruga Branch, 2 September 2004, Minshū 60, 1891 = Kin'yū Shōji Hanrei 1244 (2006) 50. Nagoya High Court Kanazawa Branch, 28 February 2005, Minshū 60, 1903 = Kin'yū Shōji Hanrei 1244 (2006) 48). T. Yamashita, Hoken-hō [Insurance Law] (Tokyo 2005) 358-359.

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4)

5) 6) 7) 8) 9) 10)

11)

12) 13) 14) 15) 16) 17) 18)

19) 20) 21)

22) 23) 24)

25) 26)

27) 28)

29)

Shōhō, Law No. 48/1899 as amended by Law No. 109/2006. Before 2008, provisions regarding private insurance contract law used to exist in the Commercial Code. Following the insurance law reform in 2008, those provisions in the Commercial Code (except those regarding marine insurance) were deleted by Law No. 57/2008. Private insurance contract law is now regulated by the new Insurance Act, Hoken-hō, Law No. 56/2008 (in force since 1 April 2010). Sections 641 and 680(1) Commercial Code (before the revision by the Law No. 57/2008). For the new provisions, see sec. 17(1), sec. 51 items (i)-(iii) and sec. 80 items (i)-(iii) Insurance Act. T. Omori, Hoken-hō [Insurance Law], supplement edition (Tokyo 1985) 61-62, Yamashita, supra note 3 at 355-356. There were no provisions regarding personal accident insurance contract in the Commercial Code (before the revision by the Law No. 57/2008). See S. Shidahara, Hanrei Kaisetsu [Case Comment], in Hoso-kai (eds.), Saikō saibansho hanrei kaisetsu minji-hen, Heisei 13-nendo, Jō [Comments on Supreme Court Civil Cases of 2001, vol. 1] (Tokyo 2004) 442, 453-462. Supreme Court, 20 April 2001, Minshū 55, 682. There is another case on the same day (Supreme Court, 20 April 2001, in: Hanrei Jihō 1751 (2001) 171), which dealt with personal accident insurance contract. The insured event of this contract was ‘sudden and accidental external event’, and the Supreme Court's decision was the same as that of Case No. 1. T. Yamashita, Ōru risuku songai hoken to hoken-kin seikyū soshō ni okeru risshō sekinin no bunpai [All-risks non-life insurance and the allocation of the burden of proof in action for insurance benefit], in Kawai/Tao (eds.), Tenkan-ki no torihiki-hō [Business Transaction Law at a Turning Point] (Tokyo 2004) 515, 518. For example, Tokyo High Court, 30 January 2003, Hanrei Jihō 1817 (2003) 153. Yamashita, supra note 11 at 531. Shidahara, supra note 8 at 466, 470, T. Ota, Hanrei Kaisetsu [Case Comment], in Hōsōkai (eds.), Saikōsaiban-sho hanrei kaisetsu minji-hen, Heisei-18-nendo, Ge [Comments on Supreme Court Civil Cases of 2006, vol. 2] (Tokyo 2009) 663, 675. M. Sakaki, Hanrei Hihyō [Case Comment], Shōji Hōmu 1708 (2004) 41, 43. Supreme Court, 13 December 2004, Minshū 58, 2419. Supreme Court, 1 June 2006, Minshū 60, 1887. Supreme Court, 6 June 2006, Hanrei Jihō 1943 (2007) 14 (automobile insurance contract with similar provisions as Case No. 3; the insured automobile had been scratched); Supreme Court 14 September 2006, Hanrei Jihō 1948 (2007) 164 (comprehensive insurance for stores with provision defining the insured event as ‘any accidental event’; a fire broke out at the insured store). Yamashita, supra note 11 at 545. Supreme Court 17 April 2007, Minshū 61, 1026. N. Toyoura, Hoken-kin seikyū jiken ni okeru koi-tō no risshō sekinin ni kansuru Saikōsai hanrei no keifu [Genealogy of the Supreme Court's judgments regarding the burden of proof of intention etc. in actions for the insurance benefit], Hanrei Taimuzu 1248 (2007), 62, 77, 79-80, J. Takahashi, Hanrei Kaisetsu [Case Comment] in Hōsō-kai (eds.), Saikō saiban-sho hanrei kaisetsu minji-hen, Heisei 19-nendo, Jō [Comments on Supreme Court Civil Cases of 2007, vol. 1](Tokyo 2010), 320, 336-337. See for example, Supreme Court 23 April 2007, Hanrei Jihō 1970 (2007), 106. For example, T. Yamamoto, Hokenjiko no gūzen-sei ni tsuite [On the accidental nature of the insured event], Seimei Hoken Ronshū, 160 (2007), 1. For example, U. Nishijima, Kasai hoken-kin seikyū soshō to risshō sekinin [Action for fire insurance benefits and the burden of proof], Songai Hoken Kenkyū 67-3 (2005), 1; T. Takizawa, Hanrei Hihyō [Case Comment], Ki'nyū Shōji Hanrei 1275 (2007), 2, 8-9. Yamashita, supra note 11 at 550 note 30, S. Matsunam, Hanrei Kaisetsu [Case Comment] in Hōsō-kai (eds.), Saikō saiban-sho hanrei kaisetsu minji-hen, Heisei 16nendo, Ge [Comments on Supreme Court Civil Cases of 2004, vol.2](Tokyo 2007), 771, 783, Ōta, supra note 14 at 676-677. For a practical study by judges and attorneys, see I. Nakayama / M. Ueda / S. Moriwaki, Hoken-kin seikyūsoshō ni okeru jujitsu nintei oyobi soshō un'ei-Jō no sho-mondai [Some problems on fact finding and administration of procedure in action for insurance benefit], Hanrei Taimuzu 1229 (2007), 49. Ōta, supra note 14 at 675. T. Yamashita, Hoken-hō to hanrei hōri e no eikyō [Insurance Act and its effect on case law], Jiyu to Seigi 60-1 (2009) 25, 35. For an opposing view, see K. Egashira, Hanrei Hihyō [Case Comment], in: Yamashita/Suzaki (eds.), Hoken-hō hanrei hyakusen [Hundred Cases on Insurance Law], Jurisuto Bessatsu 202 (2010) 196, 197. Since there are provisions in the Insurance Act (sec. 2 item (vi) and sec. 17(1)) which take over sec. 629 and sec. 641 Commercial Code, the Supreme Court's decision after Case No. 2 can be regarded as valid under the Insurance Act. T. Kamiya, Hoken jiko no gūhatsu-sei no risshō sekinin (2) [The burden of proof of the accidental nature of the insured event (2)], Minshō-hō Zasshi 140-2 (2009) 162, 173185. Tomonobu Yamashita, who was the chairman of the Insurance Law Division, personally shares Kamiya's view (Yamashita, supra note 26 at 34). Shōhi-sha keiyaku-hō, Law No.61/2000, as amended by Law No. 49/2009.

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30) As regards personal accident insurance, there is a possibility that the Supreme

Court's decision in Case No. 1 cannot be maintained according to sec. 10 Consumer Contract Act, even if we admit that the legislator did not have a clear intent to deny the Supreme Court's decision in Case No. 1 by the Insurance Act itself. 31) M. Sakaki, Hanrei Hihyō [Case Comment], Minshō-hō Zasshi 132-6 (2005) 913, 930-933, T. Doki, Shōgai hoken keiyaku ni okeru gūzen-sei no risshōsekinin bunpai ni kansuru shōrai tenbō [Future prospects of the allocation of the burden of proof of the accidental nature of the insured event in personal accident insurance contracts], Songai Hoken Kenkyū 69-4 (2008) 21, 42-44, Kamiya, supra note 28 at 192. See also Yamamoto, supra note 22 at 28. Government officials who drafted the Insurance Act of 2008 also recognizes the possibility that such a provision might be void according to sec. 10 Consumer Contract Act: O. Hagimoto / S. Sakamoto / K. Tomita / M. Shimadera / H. Nishina, Hoken-hōno kaisetsu (5) [Commentary on the Insurance Act (5)], NBL 888 (2008), 39 note 47. 32) For personal accident insurance, see Egashira, supra note 26 at 197. 33) As regards a personal accident insurance contract to which the Insurance Act is not applied since it was entered into before Insurance Act came into force, one lower instance court has admitted the validity of the contract provision allocating the burden of proof of the accidental nature of the insured event on the person claiming for the payment of insurance benefit: Osaka High Court 17 September 2009, Kin'yū Shōji Hanrei 1334 (2010), 34. 1) law at the University of Tokyo

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Case No. 35: Insurance Law – Life Insurance – Claim for Payment – Exemption due to Intentional Cause of Death

Document information

Publication

Olaf Kliesow

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 3 October 2002 – Case No. 2002 ju 310, Daiichi Mutual Life Insurance Case Source: Minshū 56-8, 1706 = Hanrei Jihō 1804 (2003) 122 = Hanrei Taimuzu no. 1109 (2003) 139.

Jurisdiction Japan

I Headnote(s) (1) An exemption clause in a life insurance contract stipulating that a payout shall not be made in the case the insured dies as a consequence of an intentional act of the policyholder or beneficiary, covers instances in which in the light of public interest and the doctrine of good faith and fair dealing, the act of a third party who intentionally killed the insured person can be regarded as constituting the act of the policyholder or beneficiary.

Court

Supreme Court of Japan

Case date

3 October 2002

According to the facts established by the court, if an insured person who is the representative director of a limited liability company (which is the policyholder and P 370 beneficiary of a life insurance contract) and basically controls the business of such company is killed, out of personal motive, by an intentional act of a non-representative director who is only in charge of business with supporting character, the act of said director cannot be regarded as constituting an act by said company and therefore the insurer is not exempted by the exemption clause in the insurance contract which stipulates that if the insured dies as a result of an intentional act of the policyholder or beneficiary, the insurance money shall not be paid.

Case number 2002 ju 310

Parties

Claimant, Daiichi Mutual Life Insurance

(Regarding item 2 there is a dissenting opinion).

II Relevant Provisions

Bibliographic reference

Section 680(1) (Old) Commercial Code (= section 58 Insurance Law). (2)

Olaf Kliesow, 'Case No. 35: Insurance Law – Life Insurance – Claim for Payment – Exemption due to Intentional Cause of Death', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 369 - 375

III Facts Plaintiff is requesting payment of an insurance claim from Defendant. Plaintiff, a construction company organized as a limited liability company, had closed a group term life insurance contract for its directors with Defendant, an insurance company. The insurance contract included an exemption clause, which would release Defendant from its duty to pay the insurance benefit (Exemption Clause). Under such a clause, in case of the insured's death following an intentional act of the policyholder or the beneficiary, the insurance money shall not be paid. Plaintiff was the policyholder and beneficiary of said group term life insurance contract; A was the representative director of the Plaintiff and the insured person. Being angered by A's extra-marital affairs, his wife, B, murdered A. B committed suicide directly after killing A. B had also been a director (without representative power) of Plaintiff along with C (their eldest son) and D, A's younger brother. A had basically run Plaintiff's business as a one-man show. B had been in charge of payroll and social security, had accompanied A to the tax consultant, had been engaged in negotiating the renewals of loans and – along with A – had held the key to the safe which contained the promissory note book, signet and deeds. B had gone to the office every day, but her role had been of a supportive nature. C had been little involved in the business, while D had been in charge of the Plaintiff's on-site work. The annual turnover of the company was around JPY 330 million and the number of employees varied between 20 and 30. The annual remuneration was JPY 11.4 million for A, P 371 JPY 6.6 million for B, JPY 5.6 million for C and JPY 2.7 million for D. From Plaintiff's total capital of JPY 15 million, A had contributed JPY 8.2 million, B and D 1.6 million each and C JPY 1.0 million. On first instance, the Kumamoto Court ordered that Defendant pay the insurance claim. (3) The Fukuoka High Court dismissed the appeal. (4) Defendant then further appealed to the Supreme Court. The Supreme Court also held that Defendant was obliged to pay the insurance claim. One out of the five judges gave a dissenting opinion to the effect that Defendant should not be obliged to pay the insurance money since the Exemption Clause should be applicable in this case.

IV Findings The Exemption Clause not only covers instances in which the policyholder or the beneficiary has intentionally caused the insurance incident, but also includes cases in which the act of a third party who intentionally caused the insurance incident can be

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regarded as constituting an act of the policyholder or the beneficiary in light of public interest and the doctrine of good faith and fair dealing. If the policyholder or the beneficiary is a company and the insured person dies as a consequence of an intentional act of a director, the Exemption Clause is applicable if the act of the director can be regarded as constituting an act of the company because the director was in a position to be able to substantially control the company or was in a position to benefit directly from the payment of the insurance money, taking into account the following factors: the size and structure of the company, the position of the director within the company at the moment of the insurance incident and the extent of his influence, the extent of common economic interest between the company and the director, the existence or absence of the power of the director to manage or dispose of the insurance money, the motive of the act, etc. In the present case, B cannot be considered to have been in a position to control the Plaintiff, taking into account the fact that A was the one in control of most of the business and B was a director without representative powers and her role was only of a supportive nature for A to run the business, nor could B be regarded to have been in a position to benefit directly for the payment of the insurance money. Therefore, in the light of public interest and the doctrine of good faith and fair dealing which are the underlying ideas of the Exemption Clause, the act of B that caused the death of A and was personally motivated cannot be regarded as constituting an act of Plaintiff. Even when taking into account the fact that B's remuneration was the second highest in the company and that B was in possession of the key for the safe and was engaged in financial matters, this is not a case in which B's act can be regarded as constituting an act of Plaintiff. P 372

The dissenting opinion is as follows: I concur with the view of the court that in cases in which a director has intentionally caused the insurance incident, the Exemption Clause is applicable if the act of the director can be regarded as constituting an act of the company. However, I cannot agree with the opinion of the court that in light of public interest and the doctrine of good faith and fair dealing being the underlying ideas of the Exemption Clause, and taking into account the requirement of coincidence of insurance incidents, the intentional act of B which caused the death of A cannot be regarded as constituting an act of the company. Therefore, the Exemption Clause should be applicable. According to the facts established by the court of first instance, B's position and her role were not limited to supportive work of Plaintiff. B should be regarded as having had a common economic interest with Plaintiff, as having had the power to manage the insurance payment and also as having been in a position to benefit directly from the payment of the insurance money. Considering the fact that upon the death of A, B's share in the capital of the Plaintiff would have been JPY 5.7 million, i.e. 38% and the highest among the contributors if she were to inherit the assets in accordance with the statutory division of the estate, B was in a position immediately after the accident to be able to control the company in a substantial manner. Even taking into account that this act was based upon a personal motive, B's act can be regarded as constituting an act of Plaintiff. Therefore, the judgment of the court of first instance which acknowledged this should be quashed and Plaintiff s claim should be dismissed. For the findings of the court, the translation provided by the Sir Ernest Satow Chair of Japanese Law, University College, University of London on the Supreme Court's homepage was closely followed.

V Comment The Exemption Clause is identical to section 680(1) item (ii) and (iii) Commercial Code, (5) which reads as follows: In the following instances the insurer is not responsible for paying insurance money: 1. 2. 3.

If the insured dies as a result of suicide, a duel or another crime or execution; If the beneficiary of the insurance money has intentionally caused the death of the insured. However, if this person was to receive only part of the insurance money, the insurer is not exempted from the obligation to pay out the remaining amount. If the policyholder has intentionally caused the death of the insured.

P 373

The Supreme Court had ruled in a previous case that it would contravene public interest and the doctrine of good faith and fair dealing if a policyholder or beneficiary that intentionally killed the insured person were to receive the insurance money. (6) In that case the intentional act had been, however, committed by a natural person and not the director of a legal entity. In the past, several courts had applied the Exemption Clause to cases in which the director of a company (who was the policyholder or beneficiary) had intentionally killed the insured person. (7) With the ruling at issue here, the Supreme Court was addressing the question under what conditions the intentional act of a director

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of a legal entity could be regarded as constituting the act of such legal entity (being the policyholder and beneficiary). In its ruling the Supreme Court stipulated two cases in which the intentional act of a director could be regarded as constituting an act of the company: (1) (2)

If the director had been in a position to be able to substantially control the company or If the director had been in the position to benefit directly from the payment of the insurance money.

The Supreme Court, furthermore, took the following criteria into account in determining whether any of the two stipulations had been fulfilled: the size and structure of the company, the position of the director within the company at the moment of the insurance incident and the extent of his influence, the extent of common economic interest between the company and the director, the existence or absence of the power of the director to manage or dispose of the insurance money, the motive of the act, etc. The ruling of the Supreme Court has drawn considerable attention among scholars and most of the principles established by the court are disputed. (8) Some scholars have criticized that the Supreme Court did not take the requirement of the ‘unpredictability of the insurance accident’ into account. It would contravene public interest and violate the doctrine of good faith and fair dealing, as well as the basic idea P 374 of insurance, if the act triggering insurance cover had not been caused accidentally. (9) This idea reflects the underlying general insurance principle that in the case of life insurance, unpredictable incidents at the time of policy issue, such as death or sickness, should be covered. Causing the insurance incident intentionally, as in the current case, would be beyond the scope of the basic idea of insurance. In the light of such requirement, the intentional act of B could be regarded as an act constituting that of Plaintiff; the insurance money should not be paid. (10) It is also criticized that the Supreme Court failed to specify how the two types of cases created related to each other, and that the personal motive of B was not properly taken into account. (11) Another point of criticism refers to the question of whether B had actually had the intention of obtaining the insurance money. In particular in the light of the previous ruling of the Supreme Court, (12) the Exemption Clause should have been applied. (13) In such ruling the Supreme Court had decided that if the beneficiary kills the insured and immediately afterwards commits suicide and has no intention of obtaining the insurance money, the Exemption Clause should still be applied. (14) From the German perspective, two points are surprising. Firstly, while in Japan several similar cases have been subject of court decisions and section 680 Commercial Code is drawing substantial attention among scholars, it appears that a similar case has neither been brought before the courts in Germany, nor has such case been discussed among scholars. One explanation might be the high number of legal entities in Japan, in particular stock companies. (15) Family-run businesses that bring about similar incidents with such personal backgrounds are – unlike in Japan – often not organized in the form of a limited liability or even stock company in Germany. Secondly, presumably the approach to dealing with such case would be different under German law. Under section 31 German Civil Code, (16) a legal entity could be held responsible for unlawful acts committed by its representatives only if there were a factual connection between the tasks assigned to the representative and the unlawful act. (17) In other words, if the unlawful act were not merely committed accidentally on the occasion of performing the tasks assigned. In cases of intentional unlawful acts such approach it seems unlikely that P 375 connection is usually denied. (18) Based on this Plaintiff would not be considered entitled to the insurance premium due to the unlawful act of B: Killing A because of his extramarital affairs does not seem to have any factual connection with the tasks assigned to B. Even though the legal approach to dealing with the case might be different, the result under German Law would most likely be the same as decided by the Supreme Court: Defendant would have to pay. Olaf Kliesow (1) P 375

References ★ )

1)

Olaf Kliesow: University of Münster) While the Headnotes are completely translated form the Japanese ruling, the Facts and the Findings are a summarized translation.

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2)

3) 4) 5) 6) 7)

8)

9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 1)

Shōhō, Law No. 48/1899, as amended by Law No. 74/1981. Chapter 10 (Insurance) of the Commercial Code has been extracted into the Hoken-hō, [Insurance Law], Law No. 56/2008, effective as of April 1, 2010. sec. 680 Commercial Code has been transferred without any change into sec. 58 Insurance Law. Regarding the new Japanese Insurance Law see S. Kozuka / J. Lee, The New Japanese Insurance Act: Comparisons with Europe and Korea, J.Japan.L 28 (2009) 74; in German: S. Kozuka / M. Takahashi, Versicherungsrecht, in: Baum/Bälz (ed.), Handbuch Japanisches Handelsund Wirtschaftsrecht (Koln 2011) 373 et seq. Kumamoto District Court 7 December 2000 – case no. 249 wa 1999, LEX/DB 28081122. Fukuoka High Court 29 November 2001 – case no. 1249 ne 2000, LEX/DB 28081123. O. Kanazawa, in: Hattori/Hoshikawa (ed.), Shōhō sōsoku, shō-kōi-hō Kihon-hō konmentāru [Commercial Code General Part, Commercial Transactions. Commentaries of Basic Laws] (Tokyo 1991) 281. Supreme Court 31 January 1967, Minshū 21-1, 77. Nagoya District Court 8 August 1984, Hanrei Jihō no. 1168 (1985) 148; Sapporo District Court 5 October 1999, Kin'yū Shōji Hanrei no. 1079 (1999) 32; Tokyo District Court 7 October 1999, Kin'yū Shōji Hanrei no. 1079 (1999) 40; Tokyo High Court 13 March 2001, Hanrei Jihō no. 1744 (2001) 125; Kobe District Court 6 August 2001, Hanrei Taimuzu no. 1109 (2003) 145. N. Yamashita, Seimei hoken keiyaku ni okeru hōjin ni yoru hoken jikō shōchi menseki no kahi [Liability Exemption for Insurance Accident Caused by Legal Entity in the Case of Life Insurance Contract], Hanrei Taimuzu no. 1115 (2003) 77; M. Sakaki, Hōjin no torishimari-yaku ni yoru hi-hoken-sha kosatsu to hoken-sha menseki no kahi [Killing of Insured Person Caused by Director of Legal Entity and Exemption of Insurer], Shōji Homu no. 1802 (2007) 45; T. Fujita, Hoken keiyaku-sha ken hoken-kin uketori-nin taru kaisha no torishimari-yaku ni yoru hi-hokensha kosatsu [Killing of Insured Person by a Director of a Company being the Policyholder and Beneficiary], Bessatsu Jurist no. 202 (December 2010) 170. Yamashita, supra note 8, 79. Fujita, supra note 8, 170; Sakaki, supra note 8, 47. Fujita, supra note 8, 170. See supra note 6. See dissenting opinion by Fukazawa, Hanrei Taimuzu no. 1109 (2003) 143. See also Yamashita, supra note 8, 81. See H. Kansaku / M. Bälz, Gesellschaftsrecht, in: Baum/Bälz, supra note 2, 63, 70 (note 8 et seq.). Bürgerliches Gesetzbuch (BGB). D. Reuter, in: Münchener Kommentar zum BGB Band 1, 1. Halbband Allgemeiner Teil (5th ed., München 2006), § 31, para. 33, 34. D.-U. Otto, in: jurisPK-BGB (2010), §31, no. 26. University of Münster

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Part IV: Intellectual Property and Competition Law

Document information

Christopher Heath

Publication

(★ )

Business Law in Japan – Cases and Comments

Within the field of business law, intellectual property holds a special position in, Japan: Thanks to the domestic ingenuity combined with the voracious copying of foreign technology, Japan in a very short time rose to become an industrial power. Japan was able to maintain this position by combining the right mixture of stimulating innovation with a disregard for enforcement of intellectual property rights where these were deemed a hindrance to industrial development.

Jurisdiction Japan

1.

Bibliographic reference

Christopher Heath, 'Part IV: Intellectual Property and Competition Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 377 379

P 378

2.

3.

4.

5.

It is against this background that within the field of intellectual property rights, patents feature most prominently. The cases chosen for this volume are all relatively recent and reflect two major trends. First, primarily in the 1990s, the attempt by the courts to balance monopolistic rights with the interests of society at large, and, second, mostly in the last decade, the attempt to bring a certain conformity to the system of patent enforcement, namely by harmonizing nullity and infringement procedures. The first trend started with the Supreme Court's ‘BBS’ decision, and is also reflected in the decisions ‘Canon Ink Tank' and ‘Clinical Trials’ all of which tried to define what should be a competitor's freedom to operate. The cases ‘Ball Spline Bearing’ and ‘Pacif Capsule’ address the same issue, but in regard of interpreting patent claims. ‘Olympus’ and ‘Nakamura’, however, relate to the balance between employee inventors and employer companies. The name most closely associated with these cases is Ryoichi Mimura, who as an assistant judge to the Supreme Court prepared the decisions ‘BBS’ and ‘Ball Spline Bearing’, and as a judge of the Tokyo District Court decided the ‘Nakamura’ case in first instance. The second trend emanated from the ‘Kilby’ decision and concerned the court's power to refuse patent enforcement where the patent should obviously be revoked. The decision had significant consequences for the balance of power between the Patent Office and the courts, and for judicial enforcement of patent rights. Currently Judge Toshiaki Iimura through the decisions of the IP High Court (set up in 2004) is putting pressure primarily on the Patent Office to come up with a better framework for conducting nullity and limitation proceedings, and a more coherent and rational approach for determining patentability. Also, the copyright cases chosen for this volume strive to find a balance between the interests of the public and those of the copyright owner. Issues of exhaustion and fair use feature prominently in the decisions ‘Rokuraku’, ‘Maneki TV, ‘Mad Amano’ and ‘Second-hand Video Games’ and have contributed to the current discussion on a more general fair use exemption. The ‘Wall Street Journal’ case, in turn, may not look so significant from hindsight, yet marked a watershed in the effective enforcement of IP rights: for this reason the comment is focussed on current enforcement issues. Five cases deal with trade mark (and, where the principles are related, unfair competition) law. ‘Coca Cola’ concerns the registrability of three-dimensional marks and the question and concept of secondary meaning. ‘Hyōzan’ is considered the leading case on the interrelated issues of similarity and confusion, while ‘Type Chanel No. 5’ highlights the defences of descriptive or comparative use, and the broader issue of dilution. ‘L'Air du Temps’ was the case where the Supreme court finally put an end to the century-old practice of an abusive registration of foreign, well-known marks by unrelated Japanese applicants and ‘Fred Perry’ deals with the function of trade marks and the parallel importation of trade marked goods. The main principles of unfair competition prevention law, namely the protection of unregistered marks against confusion or dilution, have already been dealt with by the case comments on ‘Hyōzan’ and ‘Type Chanel No. 5’. In addition, ‘Daigaku-Yu’ highlights the protection of commercial achievements beyond intellectual property rights. This is further elaborated in the cases ‘Decorative Veneer’ for protection against slavish imitation, and ‘Oniyanko Club’ for publicity rights. The ‘FlexX’ case makes a brief visit to the field of licensing law, and the remaining three cases highlight different aspects of antitrust law. ‘Oil Cartel’ deals with hardcore cartels and the difficult relationship of the Fair Trade Commission within the Japanese bureaucracy: The balance notably shifted in favour of the FTC when its energetic chairman Toshihide Takahashi in 1974 had all Japanese oil importers indicted for criminal price manipulations. ‘Pachinko Patent Pool’ touches upon the relationship between antitrust and IP law and finally ‘Shiseido’ deals with the relationship between antitrust law and civil law.

While one could easily compile a case law book on Japanese intellectual property cases book has been written, has always been a bit less enthusiastic about intellectual property than about the shady world of hostile takeovers, sōkaya and arcane financial transactions. Still, back in 1991, he was kind enough to recommend me to the director's of the Munich Max Planck Institute for Patent Law as the future Head of the Asian department.

P 379 alone, I am well aware that Harald Baum, in whose honour this

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In translating, selecting and compiling the above cases on IP and anti-trust, I have been much assisted by the monthly Max Planck Hanrei kenkyukai and its erstwhile and current members, in particular Mineko Mōri, Tatsuhiro Ueno, Atsushi Furuta, Hisao Yokoyama, Ryoko Oshikamo and Masahito Imai. Christopher Heath (1) P 379

References ★ )

1)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich Head of the Asian Department, Max Planck Institute, Munich

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Case No. 36: Patent Law – Limits of Patent Rights – National and International Exhaustion

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 1 July 1997 - Case No. 1995 ne 1988 - BBS Car Wheels III [BBS Parallel Import]

Jurisdiction

Source: Minshū Vol. 51 No. 6, 2299, Hanrei Jihō No.1612, 3, Hanrei Times No. 951: 105 (1)

Japan

I Headnote(s) The importation of products covered by a domestic patent and marketed abroad by the patentee is only infringing if the patentee has clearly excluded such importation.

Court

Supreme Court of Japan

II Relevant Provisions Sections 1, 100, 68 and 2(3) no. 1 Patent Act

Case date 1 July 1997

P 382

III Facts

Case number

The plaintiff, the German manufacturer BBS, holds parallel patents for certain car wheels, both in Japan and Germany. The defendant had obtained BBS patented car wheels in Germany and subsequently imported them to Japan. No notice was displayed on the car wheels about import restrictions. BBS wants to enjoin the defendant from importing the patented product and claims damages. The Tokyo District Court regarded the import of patented products without proper consent of the patentee to be an infringement and upheld the claim (decision of 22 July 1994). The Tokyo High Court allowed the appeal and dismissed the claim, arguing that the patentee was sufficiently rewarded by the act of first sale of the patented product, whether domestically or abroad (decision of 23 March 1995). The plaintiff now appeals to the Supreme Court against this ruling.

1995 ne 1988

Bibliographic reference

Christopher Heath, 'Case No. 36: Patent Law – Limits of Patent Rights – National and International Exhaustion', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 380 - 397

IV Findings '1. The plaintiff is the owner of a Japanese patent for car wheels that was … registered on 20 December 1991. The patent is subsequently referred to as ‘the present patent’ or ‘the present invention’. The plaintiff is the owner of a corresponding German patent based on an identical invention and … registered on 22 April 1987, subsequently referred to as ‘the parallel patent’. At least until August 1992, the defendant had imported BBS, RS and RSK aluminium wheels. The second defendant had subsequently sold them. Since the defendants had sold said products until that time, there is a certain likelihood that they will also engage in these activities in the future. The products sold by the defendants are subsequently referred to as ‘the products’. The products fall within the scope of the present patent. The products were produced and sold by the plaintiff under his parallel patent in Germany. 2. The defendant has argued that the products protected under the present patent have been marketed by the plaintiff in Germany with the consequence that his right no longer covers these products. Importation and sale of these products by the defendant would not qualify as a patent infringement due to the theory of international patent exhaustion. According to the Tokyo High Court, producing and marketing the products under the parallel German patent in Germany would give the plaintiff sufficient reward for having made his invention available to the public. Since it was established that compensation could be obtained, the Tokyo High Court did not find any kind of restriction whereby compensation by distribution would have been legally prevented. By having legally marketed products in Germany, the patent right was exhausted with respect to the distributed products, and consequently the plaintiff could no longer invoke his patent right against the defendant for claiming injunctive relief and damages. P 383

3. This Court agrees with the lower court's findings insofar as, under the present patent right, the plaintiff is not entitled to a claim for damages and injunctive relief. The reasons for this are as follows: a.

According to Article 4bis Stockholm version of the Paris Convention: (1) (2)

Patents applied for in the various countries of the Union by nationals of countries of the Union shall be independent of patents obtained for the same invention in other countries, whether members of the Union or not. The foregoing provision is to be understood in an unrestricted sense, in particular, in the sense that patents applied for during the period of priority are independent, both as regards the grounds for nullity and forfeiture, and as

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b.

P 384

c.

regards their normal duration. The provision denies the interdependency of patents and affirms that patent rights as regards their formation, amendments and forfeiture are independent of each other in each country. The existence of a patent right does not depend on patent rights being declared void or invalid in another country or on the duration of the patent right in such country. It is understood that all this does not reciprocally affect patent rights. Having established this, the above provision does not concern the exercise of patent rights by the patentee. Next, the principle of territoriality with regard to patents means that patent rights in each country are subject to domestic legal provisions insofar as establishment, transfer and validity are concerned. It means that the patent rights only have effect within the geographical limits of such country. It is only to be determined under domestic patent law as to what constitutes a use of the patent right, and in how far exercise of a patent right can also relate to goods the patentee has circulated outside Japan. This question bears no relation to the principle of territoriality under the Paris Convention, for which reason a violation of the provision of Article 4(2) Paris Convention cannot be successfully claimed in the present case. According to section 68, Japanese Patent Act, a patentee shall have the exclusive right to work the patented invention commercially. In the case of a product invention, ‘working’ means the acts of manufacturing, using, assigning, leasing, importing or offering for assignment or lease of the product (section 2(3)(i) Patent Act). Any person who has purchased products covered by a patented invention, either from the patentee or from a licensee with consent of the patentee, commits an act of use by re-selling these goods to a third party. Equally, such a third party who has obtained the patented products in such a way is, at least formally, working the patented invention when further leasing it, and would thus be liable for patent infringement. However, if patented products are sold domestically, either by the patentee or with his consent, the patent is deemed exhausted because it has fulfilled its purpose. The patent does not give rights to subsequent use of the patented product by acts of transfer or lease. First, patent law has to be understood as balancing the interests of invention protection and the public benefit of society at large. Next, if a tangible object is transferred, the rights are obtained by the transferee, and the transferee obtains those rights that were originally vested in the transferor. Also insofar as patented products are distributed on the market, the transferee obtains an object from the patentee whose exercising of the right suggests that the right in further acts of resale has been transferred as well. If with respect to any acts of marketing patented products, the patentee's consent were necessary each time a transfer occurs, the free movement of goods would be seriously impeded, the smooth distribution of patented products would be hampered and as a result, the interests of the patentee himself would suffer. This would run counter to the purpose of the Patent Act ‘to encourage inventions by promoting their protection and utilisation so as to contribute to the development of industry’ (section 1 Patent Act). Finally, by making the invention available to the public, the patentee will have the opportunity to obtain the reward from selling the product or granting a licence for the use of the patent and thereby obtain a licensing fee. In order to protect the financial interests of the patentee who has made his invention public, it would not seem necessary to give the patentee or the licensee rights beyond the first act of marketing, as the patentee would then obtain an unnecessary double reward in the course of further distribution. However, the above considerations are not applicable if the owner of a Japanese patent markets the patented products abroad. For one thing, in the country where the products have been marketed, the patentee may not even hold a parallel patent that corresponds to the one in Japan. However even so, the domestic patent right and the parallel patent right in the country of marketing have to be regarded as separate rights. It cannot be argued that although selling the products under a parallel patent would give a double reward, it may qualify as an act of use of the domestic patent right.

4. Yet some thought should be given to the relationship between the free movement of goods in international trade and the interests of the patentee. In our present day society, international trade and economy affect us very broadly and permit conditions of rapid development. Even in the case that goods are purchased abroad, imported into Japan and put into circulation in the domestic market, there is the need to create conditions for the free distribution of goods, including their importation. Even if economic transactions have been made abroad, as a general principle, the transferee obtains not only the object as such, but also the rights vested therein. In other words, the transferor transfers his rights. To enable such transactions and to set the conditions for international trade in modern day society, it is assumed that the patentee who has transferred the ownership of patented goods abroad has also endowed the transferee or any subsequent purchaser with the right to undertake further transactions with third parties, including the importation to Japan, use in Japan, and transfer of ownership on our domestic market. P 385

Opposed to the above concept, a domestic patentee who markets patented products

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abroad and wishes to exclude their sale and use in our country by subsequent purchasers, has to make clear his intention of such a restriction when dealing with the transferee, and has to clarify such restriction on the patented goods for the benefit of subsequent purchasers. In the absence thereof, such acts cannot be understood as a use of the patent in Japan. That is to say: (a)

(b)

(c)

(d)

According to the above, if the patented products were marketed abroad, then it can be naturally expected that such goods may be imported into Japan if the patentee puts such goods into circulation abroad without any reservations at the time of transfer. The transferee or any other subsequent purchaser is understood to have purchased the product without any restrictions that might apply to such products in Japan. However, if the patentee reserves his rights at the date of transfer with respect to the use in Japan when selling the patented products abroad, at the time of transfer the patentee has agreed with the transferee that sale or use of the patented product should not be allowed in Japan. If clearly indicated on the products, such a restriction is also valid against subsequent purchasers of the patented product along the distribution chain even with a number of intermediaries. Here it is understood that the above products have been sold under certain restrictive conditions, and any purchaser is free if he wants to obtain products bearing such a limitation or not. In the case where the marketing activities abroad have been undertaken by an affiliated company, a subsidiary or a person with the same standing as the patentee, the case should be treated as if the patentee himself had marketed the patented products. In view of the fact that the transferee's right of further distribution of the patented products should be maintained, it appears correct to attach no importance to the existence of a parallel patent in the country of marketing.

5. The products were sold by the plaintiff and patentee in the Federal Republic of Germany. When the plaintiff sold the products, no limitation was imposed on the purchaser about any restrictions of sale or use, or even if so, the plaintiff has offered no proof of this fact. For this reason, with regard to the products, the patentee is not entitled to claim an injunction or damages under his patent right. The decision was unanimous'. Translated by Christopher Heath P 386

V Comment (2) 1 Introduction For a long time and in many fields Japanese law has been strongly influenced by German concepts. In the field of patent law the Japanese Patent Act of 1899 was modelled on the German Patent Act of 1877. Subsequent amendments of the Japanese Patent Act should also be seen against the background of German developments. For instance, the reform of the Japanese Patent Act in 1921 was geared to German patent law concepts, e.g. the firstto-file principle, publication of the patent applications, opposition proceedings as well as the bifurcated system separating infringement proceedings from nullity actions. (3) This transfer of legal know-how is no longer a one-way road, and in particular also in the field of patent law much can be learned from Japanese law and practice. It is still rare, however, that German courts expressly refer to Japanese court decisions. While the German Federal Court of Justice in 2010 still had to remind the domestic courts to take parallel decisions of their European neighbours and the European Patent Office into consideration when deciding a patent case in Germany, (4) the remarkable decision of the Supreme Court, i.e. BBS Car Wheels III, is one of the few Japanese decisions on patent law which found its way into a judgment of a European court, namely the German Federal Court of Justice, back in the twentieth century. In the so-called Karate case one issue was whether patent rights were exhausted. (5) In this context the German Federal Court of Justice referred to the Japanese Supreme Court's BBS Car Wheels III decision and noted that in this case the Japanese Supreme Court had applied the principle of international exhaustion. (6) As will be elucidated below, that statement is not precisely correct, and the German Federal Court of Justice was also not inclined to follow the reasoning of the Japanese Supreme Court. However, from a comparative-law point of view, it can be taken as a positive signal that the Japanese decision had been noted and even expressly referred to by the German court. As far as questions beyond the peculiarities of national systems are P 387 concerned, it would be desirable to see further court decisions in Germany and other countries which duly take the arguments discussed and solutions found in Japan into consideration.

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According to the principle of exhaustion the rights conferred by a patent shall not extend to acts concerning a product covered by that patent which are done after that product has been put on the market by the proprietor of the patent or with his consent. (7) The principle's purpose is that a patentee should not control the entire distribution chain. This restriction of the patentee's exclusive right in the invention is justified, on the one hand, by the fact that the patentee has the chance to get a reward for his invention for being the one to first put the invention on the market or with his consent. However, it is assumed that trade in products will be unduly hampered if the exclusive patent right allows the patentee to control the entire distribution chain. (8) In its decision of 1 July 1997 the Japanese Supreme Court referred to the first point when stating: ‘Finally, by making the invention available to the public, the patentee will have the opportunity to obtain the reward from selling the product or granting a licence for the use of the patent and thereby obtain a licensing fee. In order to protect the financial interests of the patentee who has made his invention public, it would not seem necessary to give the patentee or the licensee rights beyond the first act of marketing, as the patentee would then obtain an unnecessary double reward in the course of further distribution’. (9) With regard to the second point, i.e. the unhampered trade in products, the Japanese Supreme Court differentiated between a microeconomic and a macroeconomic level. On P 388 the microeconomic level, the marketability of individual products is to be guaranteed by the principle of exhaustion. Therefore the Japanese Supreme Court stated: ‘Next, if a tangible object is transferred, the rights are obtained by the transferee, and the transferee obtains those rights that were originally vested in the transferor. Also insofar as patented products are distributed on the market, the transferee obtains an object from the patentee whose exercising of the right suggests that the right in further acts of re-sale has been transferred as well’. (10) On the macroeconomic level the principle of exhaustion ensures the free movement of goods, as explained by the Japanese Supreme Court: ‘If with respect to any acts of marketing patented products, the patentee's consent were necessary each time a transfer occurs, the free movement of goods would be seriously impeded, the smooth distribution of patented products would be hampered and as a result, the interests of the patentee himself would suffer. This would run counter to the purpose of the Patent Act ‘to encourage inventions by promoting their protection and utilisation so as to contribute to the development of industry’ (section 1 Patent Act)’. (11) Depending on which point the emphasis is put, i.e. either the ‘reward’ aspect or the ‘unhampered trade’ aspect, different jurisdictions apply either the principle of national exhaustion or international exhaustion. The principle of regional exhaustion is a mixture of both concepts. (12) Under the principle of national exhaustion the exclusive patent right in a particular country is only exhausted with regard to a particular product covered by the patent if the product has been put on the domestic market by the patentee or with his consent. (13) In contrast, the principle of international exhaustion says that a patent is also exhausted with regard to a particular product covered by the patent if the product has been put on the market of any third country by the patentee or with his consent. Therefore, in a country which follows the principle of international exhaustion, the patentee cannot invoke his patent right if such product is imported without his consent. (14) The principle of regional exhaustion – as developed by the European Court of Justice with regard to the EU and the European Economic Area due to the principle of free movement of goods as now enshrined in Articles 34 et seq. of the Treaty on the Functioning of the EU (TFEU) – in principle says that a patent is exhausted with regard to a particular product covered by the patent if the product has been put on the market of any country being a P 389 member of the EU or the European Economic Area by the proprietor of the patent or with his consent. In consequence within the EU or the European Economic Area the patentee cannot invoke its patent right against the import of patented goods which have been put on the market in other Member States by himself or a third party with the patentee's consent. (15) Whereas the principle of national exhaustion is patentee-friendly and attempts to safeguard the patentee's reward as far as possible because it limits his patent right only with regard to the particular country, the principle of international exhaustion puts the emphasis on the unhampered trade of products and severely restricts the patentee's possibilities to obtain a remuneration for his invention. (16)

3 The Japanese Supreme Court's BBS Car Wheels III Decision The Japanese Supreme Court's decision of 1997 is characterized by the attempt to

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balance the three above-mentioned issues, i.e. the ‘reward’ issue as well as the microeconomic and the macroeconomic aspects of the ‘unhampered’ trade issue. Accordingly, the Japanese Supreme Court states that ‘patent law has to be understood as balancing the interests of invention protection and the public benefit of society at large’. (17) a) The ‘Reward’ Issue First, with regard to the ‘reward’ issue the Supreme Court emphasizes that the parallel putting on the market of a patented product in Japan and abroad cannot be regarded as an inadmissible double reward. Even if selling the patented product abroad under a parallel patent may qualify as an act of use in Japan, it cannot be argued that in such a case the patentee receives a double reward. (18) Insofar the Japanese Supreme Court is in accordance with, for instance, the German Federal Supreme Court which explained in the Tylosin case:

P 390

‘The appellants’ contention that, by marketing his products in a country where he can make use of his patent monopoly, the patentee is already adequately compensated for the advancement of the art brought about by his invention and that a renewed assertion of identical patent rights in another country is not justified, finds no support in German patent law. It also ignores the fact that in every country in which he successfully applies for a patent, the patentee is granted for his invention an independent exclusive right which ends at the borders of such country and that each issuing state grants him an independent claim for compensation for disclosing his invention, which is wholly unrelated to advantages derived from other patents in other countries, even though identical’. (19) b) The Macroeconomic Aspect of ‘Unhampered Trade’ Subsequent to its preliminary remarks, the Japanese Supreme Court notes, however, that ‘some thought should be given to the relationship between the free movement of goods in international trade and the interests of the patentee.’ The Supreme Court sees the need to create conditions for the free distribution of goods, including their importation, even if these goods are purchased abroad, imported into Japan and put into the circulation in the domestic market. (20) At this point the Japanese court's reasoning starts to deviate from considerations made by the German Federal Court of Justice. In the Karate case, the German court saw no need to apply the principle of international exhaustion because Germany was not a party to any international treaty which – in the opinion of the Federal Court of Justice – obligated Germany to apply the principle of international exhaustion in patent law. (21) The German court's decision is further elucidated by the European Court of Justice's (‘ECJ’) judgment in the Polydor case of 1982 in which the ECJ denied extension of the principle of regional exhaustion to the then non-EEC Member State Portugal based on the association agreement between the EEC and Portugal establishing a free trade area, even though the association agreement contained provisions with a wording that was identical to what is now Articles 34 et seq. TFEU. (22) In the opinion of the ECJ, the similarity between the terms used in Articles 30 and 36 EEC Treaty, on the one hand, and Articles 14 (2) and 23 of the Agreement between the EEC and Portugal was not a sufficient reason for transposing to the provisions of the Agreement the ECJ's case law on regional exhaustion. The reason was that the Agreement between the EEC and Portugal had not the same purpose as the EEC Treaty. In the Court's opinion the latter seeks to unite national markets into a single market reproducing as closely as possible the conditions of a domestic market. Therefore, in the context of the Agreement restrictions on trade in goods – according to the ECJ – may be considered to be justified on the grounds of protection of industrial and commercial property in a situation in which justification of this would not be possible within the Community. (23) Hence, unlike the Japanese Supreme Court neither the German Federal Court of Justice nor the European Court of Justice makes indiscriminate use of the consideration that free trade should not be hampered by intellectual property rights.

P 391

The economic reason for this is given by Straus, who exemplifies the shortcomings of the principle of international exhaustion with the help of the following example: ‘Where a manufacturer supplies a market having low purchasing power with goods produced in a foreign country, or if he himself or a licensee produces such goods in the country at issue, although the country may not impose price controls, as a rule he is not as free to set the price for his goods as the Japanese judges in the BBS Wheel II case assumed. Rather, such a manufacturer must adjust his retail policy to the prevailing market conditions. If one affirmed, e.g., the exhaustion of a Japanese patent, e.g. by products patented in India and Japan being put on the market in India by the patent holder or his licensee, with the result that anyone could import these products into Japan without the consent of the patent holder, it becomes clear that in

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an extreme case the Japanese patent would become practically worthless [ … ]’ (24) Hence, the European and German courts only apply the principle of exhaustion to sufficiently integrated economies. However, even with regard to the EU it is not undisputed that this criterion applies due to the economic differences between North and South Europe. (25) c) The Microeconomic Aspect of ‘Unhampered Trade’ Further to the macroeconomic argument of free movement of goods, the Japanese Supreme Court introduced a microeconomic consideration in order to allow the reimport of patented products into Japan: ‘Even if economic transactions have been made abroad, as a general principle, the transferee obtains not only the object as such, but also the rights vested therein. In other words, the transferor transfers his rights. To enable such transactions and to set the conditions for international trade in modern day society, it is assumed that the patentee who has transferred the ownership of patented goods abroad has also endowed the transferee or any subsequent purchaser with the right to undertake further transactions with third parties, including the importation to Japan, use in Japan, and transfer of ownership on our domestic market’. (26) The Japanese Supreme Court referred to the contractual relationship between the patentee and his licensee, on the one hand, and the purchase of the product covered by product P 392 the patent. The Japanese Court assumed that e.g. the cross-border sale of the in question implied that there was permission regarding any further transaction, including the subsequent re-importation into Japan. On the microeconomic level, such an implied permission would foster the macroeconomic goal of ‘international trade in modern day society’. In principle, this argument is not alien – for instance – to German patent law under which a patent right is not only exhausted with regard to a specific product if this product is put on the market by the patentee himself, but also in cases where the product in question is put on the market by a third party with the patentee's consent. However, under German law the principle of exhaustion requires the patentee's explicit consent to a third party putting products on the market covered by the patent. (27) Furthermore, the German principle of exhaustion requires an actual and not only a potential putting on the market. (28) In view of the difficulties to fit the Japanese court's arguments into the concept of exhaustion, it seems from a dogmatic point of view more appropriate to assume that the Japanese Supreme Court with this argument finally left the field of patent exhaustion and actually applied an ‘implied license’ argument. (29) German law also recognizes the concept of implied license but has always applied this narrowly. In a decision from 2007, the German Federal Court of Justice assumed, for instance, in the absence of indications to the contrary an implied license to use a patented method because the patentee had sold to the user of the method the device necessary to use the method. (30) It is unlikely that German courts would also assume an implied licence with regard to goods exported to third countries if the receiver were allowed to re-import them into Germany. In such a case, the burden of proof would be on the person pleading such an implied licence and the court would not be able to just assume it. (31) The reason why the Japanese Supreme Court assumed there was such a far-reaching, implied licence is the emphasis it put on ‘the free movement of goods in international trade’. In how far this emphasis is justified is arguable (see above). The consequence of the emphasis on international trade and the resulting ‘implied licence’ is that the patentee has to make explicit statements to exclude such an implied licence. Accordingly the Supreme Court explains: ‘Opposed to the above concept, a domestic patentee who markets patented products abroad and wishes to exclude their sale and use in our country by subsequent purchasers, has to make clear his intention of such a restriction when dealing with the transferee, and has to clarify such restriction on the patented goods for the benefit of subsequent purchasers. In the absence thereof, such acts cannot be understood as a use of the patent in Japan’. (32) P 393

If clearly indicated on the products, such a restriction is also valid against subsequent purchasers of the patented product along the distribution chain, even if there are a number of intermediaries. (33) According to Ohara, the application of competition law is exempted in the EU and Japan when a licensor directly prohibits a licensee from exporting licensed goods to the territory of the licensor. It is doubtful, though, whether it is in compliance with EU or Japanese competition law if the licensee requests a wholesaler of the licensed goods not to export to the territory of the licensor for the

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purpose of preventing parallel imports. (34)

VI Conclusions In the BBS Car Wheels III decision, the Supreme Court held that there is not automatic exhaustion of Japanese patent rights if a product is sold by the patentee in a foreign country. However, the Supreme Court accepted the doctrine of implied licence, i.e. if patented goods are sold by the patentee abroad without any reservations, it was deemed that the patent owner had implicitly assigned to the purchaser a right to control the patented products in Japan. Consequently, Japanese patent rights may not be invoked against any purchaser with regard to the patented goods. A patentee can retain his rights with regard to the marketing of the products in Japan visa`-vis the purchaser and, with regard to subsequent transactions, if he clearly indicates such a restriction on the product. Dirk Schüssler-Langeheine

Postscript In the 1990s, Japan became an ever more affluent country, but consumers had the feeling that traditional and opaque distribution structures made it difficult for them to benefit from a strong Yen and actually get hold of cheap (or cheaper) foreign products (see also the comment on the Shiseido case no. 60). In 1991, the Fair Trade Commission had issued new Guidelines on the Distribution System (35) and included a chapter on attempts to prevent the parallel importation of goods. The FTC considered such attempts anticompetitive to the extent that they could not be justified by the exercise of an intellectual property right. After the Parker decision handed down in 1971, it was clear at least that the parallel importation of trade marked goods could not be prevented, (36) P 394 while the case for patents had not been seriously tested. (37) The German Tylosin case mentioned in the above comment based its prohibition of parallel imports on the principle of territoriality enshrined in the Paris Convention, a not particularly convincing line of thought. (38) Also other arguments such as differences in national patent protection or the costs of patenting abroad (39) failed to convince. (40) Still, the Tokyo High Court decision basing its arguments on international exhaustion on the remuneration doctrine and the fact that the patentee by putting the goods into circulation abroad had received his monopolistic reward and should not be able to have another bite of the apple by invoking his right against the importation, came a bit out of the blue: ‘The possibility of the patentee to obtain a reward for disclosing his invention is limited to one time. To the extent that one regards this principle as a fundamental aspect of domestic exhaustion in the context of economic development, is does not make much of a difference whether the first marketing takes place in Japan or abroad. Only by the fact that national borders are crossed, no reasonable grounds can be found why the patentee should have yet another opportunity for economically benefiting from his disclosure’. (41) The decision divided Japanese IP experts. Those in favour of the decision were Kidana, Nakayama, Shibuya, Tamura and Kuwata, those against Koizumi, Monya and Dr S. Ono. The Ministry of International Trade (MITI) thought that the diplomatic repercussions of accepting international exhaustion outweighed the benefits for Japanese consumers. F.K. Beier wrote an opinion on behalf of the plaintiff BBS, as did H. Wegner. The Supreme Court entrusted Ryoichi Mimura, then an assistant judge on secondment to the Supreme Court, with preparing and drafting the appeal decision. It was no doubt Judge Mimura's finest hour. Judge Mimura had come to the IP field in the 1990s and was determined to interpret patent law conducive to the needs of society. Monopolies should be respected, should not be interpreted beyond their actual contribution to society, and should be balanced with the interests of the general public. However, in view of the fact that no national court outside of Japan had yet adopted such a clear stance on the international exhaustion of patent rights, and most foreign experts had criticized the High Court decision, Judge Mimura found himself in a difficult position in trying to persuade the Supreme Court judges to endorse the decision under appeal. Rather inconveniently for the plaintiffs in this action, the English Patents Court by the end of 1995 handed down a decision (42) that affirmed the long-standing case law on the P 395 doctrine of implied license in cases of parallel importation. As this doctrine was subsequently adopted by the Japanese Supreme Court, a closer look on this concept may be justified. Under English common law, ‘it is open to the patentee, by virtue of his statutory monopoly, to make a sale sub modo, or accompanied by restrictive conditions which would not apply in the case of ordinary chattels; … the imposition of these conditions in the case of sale is not presumed, but, on the contrary, a sale having occurred, the presumption is that the full right of ownership was meant to be vested in the

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purchaser while … the owner's rights in a patented chattel would be limited, if there is brought home to him the knowledge of conditions imposed, by the patentee or those representing the patentee, upon him at the time of sale’. (43) This rule was applied in the 1995 case Roussel Uclaf v. Hockley, the facts of which were the following: The plaintiff is the patentee of the process for making insecticide called deltamethrin. The defendant imported deltamethrin manufactured by the plaintiff in France but ultimately exported to China, from where the defendant had obtained the product. The deltamethrin was supplied to the Chinese Company, subject to the restriction that it was not to be exported. The restriction ‘for use in PRC only – re-export forbidden’ was applied to the drums, yet it could not be proven that the labels had not been removed prior to the defendant purchasing them. The court then held as follows:

P 396

‘[443] In this case, therefore, it is critical to Roussel's position that they establish that in the course of their original supply, in the words of Lord Shaw of Dunfermline in National Phonograph Company of Australia Ltd. v. Menck, (1911) 28 R.P.C. 229 at 248, they ‘brought home’ to the relevant Party, whether the Chinese or the defendants, the alleged limited licence. First then, the Chinese, the original supplyee. In his evidence in chief M. De Seze said in relation to China that a joint venture company was set up, that Roussel supplied technical grade deltamethrin to the company in China for formulation. He said nothing about the terms of supply to the Chinese and in particular does not say that the Chinese had it brought home to them that the [444] technical grade deltamethrin supplied to them should not be resold. He does say that the product as supplied from France was in drums bearing the label ‘for use in PRC only, re-export forbidden’. The defendants answered that by an express challenge concerning the labelling of the drums. They had bought a drum which did not bear that legend. The express challenge was in the following language: ‘I note M. De Seze does not say when Roussel first began marking the kegs in this way nor has he sworn every single drum exported to China had those words stamped on it.’ The reply from M. De Seze does not take up the challenge, and I must take it that some drums were so marked but others were not so marked. I could well understand how somebody receiving two kinds of drum might think that they were entirely free positively to export those which are not so labelled, even in a joint venture company. So it is not established that it was brought home to the Chinese joint venture company by the labels on the drums that there should be no export whatever of deltamethrin technical grade. It is of course not necessary that the label be on the product provided the message is brought home somehow. However closely one looks at the evidence one cannot see any such bringing home. The high water mark seems to be M. De Seze in reply in a sentence which says: ‘Roussel do not sell such products for purchasers either to use for their own purposes or to sell on to a third party as they sec fit’. That does not say that it is brought home to purchasers that they may not do those activities. It says no more than what Roussel's purpose is in making the sale. It is a remarkable fact that although this case has been proceeding for a remarkably long time of a year and a half (so far as I can see that is entirely due to Roussel's own lack of activity), that nothing more has emerged. In a letter which they sent to the defendants at the end of 1993 Roussel's solicitors said: ‘Material sold outside the EC is “subject to strict conditions of sale”.’ None have been produced before me. Next I turn to the position of the defendants as subsequent supplyees. Had it been brought home to them that there are such conditions? In a sense it is virtually impossible to do this once it has not been established that it was not brought home to the original purchasers. What is relied upon is indeed the letter which I have just quoted. That says in the previous sentence: ‘It is not correct that our client's technical grade material is freely available on the world market without conditions as to its use.’ That is a pretty opaque way, if it be intended, to say that there is a positive imposition of a limited permission to use. It was said in the context of an argument between the parties' solicitors about the availability of technical grade deltamethrin in a number of different countries. The evidence certainly establishes that people in Florida, Singapore, Holland, England, India, Taiwan and Jordan at least have been advertising the material freely for sale. Mr Fysh for Roussel says that is a ‘grey market’. I do not really understand the relevance of that observation. The question is not whether the market is grey or any other colour or shade, but whether or not conditions of a limited licence were imposed when the product was first supplied by Roussel. This letter of 24 December 1993 does not convey to the defendants that the product was originally supplied subject to a limited licence. [445] There may be yet another difficulty in Roussel's way: whether the intermediate companies who have had dealings with the product and from whom the defendants have bought – they did not buy from the Chinese company but from three different sources – themselves had notice of the limited licence. Limited licences require that notice be brought to the attention of every person down the chain. That is normally done by putting notice of the licence on the goods, but it can of course, as Mr Fysh rightly pointed out, be

P 397

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P 397

done in other ways. Once the goods are sold without a limited licence then the purchaser buys them free of any patent restriction. In my judgment this case is far removed from a case strong enough for judgment under Order 14, and the application falls’. And although the concept of implied license never had any place in Japanese law before, the Supreme Court might have found the solution appealing for three reasons. First, it could point to international support for this position, second, it provided a compromise between the interests of the patentee and the general public (it would be up to the patentee to prevent parallel importation by an appropriate notice, after all), and, third, in practical terms, the result was an international exhaustion in all but name. The decision was subsequently affirmed in the ‘Canon Ink Jet’ decision (case no. 37 in this book). BBS is perhaps the Japanese patent decision best known abroad. It has been cited (with disapproval) by the German ‘Karate’ decision mentioned above. And it has led to an intense discussion on parallel imports and international trade, and subsequently some countries have adopted the principle of international exhaustion, namely China. Christopher Heath (1)

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References ★ )

1)

2) 3)

4) 5) 6) 7)

8)

9) 10) 11) 12) 13) 14) 15) 16) 17) 18)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich An English translation can be found under by Japanese Supreme Court/Sir Ernst Satow Chair of Japanese Law, University College, University of London; IIC 29 (1998) 331; Journal of the Japanese Group of AIPPI 1997, 164 with an annotation by Fujino; a German translation is published in GRUR Int. 1998, 116. The author wishes to thank Dr Simon Klopschinski and Dr Anja Petersen Padberg for their invaluable support in the preparation of these comments. Rahn et al., Patent- und Gebrauchsmusterrecht in Japan, in: Baum/Bälz, Handbuch Japanisches Handels- und Wirtschafstrecht, 1st ed., 2011, § 20 para. 1; Rahn, in: Klopschinski, Der Patent-verletzungsprozess in Japan und Deutschland (Report), GRUR Int. 2010, 309; Rahn, The Role of Industrial Property in Economic Development: The Japanese Experience, IIC 1983, 449. See with regard to the critical reception of German law in Japan in general: Baum/Bälz, Rechtsentwicklung, Rechtsmentalität, Rechtsumsetzung, in: Baum/Bälz, supra, § 1 para. 1; Rahn, Rechtsdenken und Rechtsauffassung in Japan, 1990, p. 111. Federal Court of Justice, IIC 2011, 363 – Roller Forming Machinery. The Federal Court of Justice demonstrates how to do this, for instance, in Federal Court of Justice, IIC 2011, 851 – Occlusion Device. Federal Court of Justice, GRUR Int. 2000, 635 – Karate. Federal Court of Justice, GRUR Int. 2000, 635 (637) – Karate. See Art.32 ofthe Convention for the European Patent for the Common Market of 1975 (IIC 1976, 48); Enchelmaier, The Inexhaustible Question – Free Movement of Goods and Intellectual Property in the European Court of Justice’s Case Law, 2002-2006, IIC 2007, 453; Heath, Parallel Imports of Patented Pharmaceuticals from the New EU Accession States, IIC 2004, 776; Conde Gallego, The Principle of Exhaustion of Rights and Its Implications for Competition Law, IIC 2003, 473; Stamatoudi/Torremans, International Exhaustion in the European Union in the Light of ‘Zino Davidoff’: Contract Versus Trade Mark Law?, IIC 2000, 123; Beier, Industrial Property and the Free Movement of Goods in the Internal European Market, IIC 1990, 131. Cottier/Véron/Cottier/Germann, Concise International and European IP Law, 2nd ed., 2011, Art. 6 TRIPs para. 1; Mes, PatG/GebrMG, 3rd ed., 2011, § 9 PatG para. 72; Kühnen, Handbuch der Patentverletzung, 5th ed., 2011, para. 1349; KRAßER, Patentrecht, 6th ed., 2009, p. 793; Schulte/Kühnen, PatG, 8th ed., 2008, § 9 para. 15; Busche/Stoll/Höhne, TRIPs, 1st ed., 2007, Artikel 6 para. 1; Benkard/Scharen, PatG, 10th ed., 2006, § 9 PatG para. 16; Busse/Keukens-chrijver, PatG, 6th ed., 2003, § 9 para. 142. Japanese Supreme Court, IIC 1998, 331 (333 et seq.) – BBS Car Wheels III. Japanese Supreme Court, IIC 1998, 331 (333) – BBS Car Wheels III. Japanese Supreme Court, IIC 1998, 331 (333) – BBS Car Wheels III. Cottier/VÉron/Cottier/Germann, supra Art. 6 TRIPs para. 1; Busche/Stoll/Höhne, supra, Artikel 6 para. 2. Mimura, Patent Exhaustion in Japan, in: Hansen/Schüßler-Langeheine, Patent Practice in Japan and Europe, 2011, 521; Cottier/VÉron/Cottier/Germann, supra Art. 6 TRIPs para. 1. EFTA Court, GRUR Int. 1998, 309 – Maglite. European Court of Justice, IIC 1970, 580 – Centrafarm; Cottier/VÉron/Cottier/Germann, supra Art. 6 TRIPs para. 1. Cottier/VÉron/Cottier/Germann, supra Art. 6 TRIPs para. 1. Japanese Supreme Court, IIC 1998, 331 (333) – BBS Car Wheels III. Japanese Supreme Court, 29 IIC 331, 334 (1998) – BBS Car Wheels III.

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19) 20) 21) 22) 23) 24)

25) 26) 27) 28) 29) 30) 31) 32) 33) 34)

35) 36) 37) 38) 39) 40) 41) 42) 43) 1)

German Federal Court of Justice, 8 IIC 64, 66 (1977) – Tylosin. Japanese Supreme Court, 29 IIC 331, 334 (1998) – BBS Car Wheels III. German Federal Court of Justice, 2000 GRUR Int. 635, 637 – Karate. ECJ, ECR[1982] 329 – Polydor. ECJ, ECR[1982] 329 (para. 14 et seq.) – Polydor. J. Straus, Implications of the TRIPs Agreement in the Field of Patent Law, in: Beier/Schricker (eds.), From GATT to TRIPs – The Agreement on Trade-Related Aspects of Intellectual Property Rigfhts, IIC Studies Vol. 18, Weinheim 1996, p. 160, 194. Laudien, Erschöpfung der gewerblichen Schutzrechte aus rechtsvergleichender Sicht: Die Position der forschenden pharmazeutischen Industrie, 2000 GRUR Int. 617. Japanese Supreme Court, 29 IIC 331, 334 – BBS Car Wheels III. KRAßER, supra, p. 796. Schulte/Kühnen, supra, § 9 para. 18. Mimura, in: Hansen/Schüßler-Langeheine, supra, 521. German Federal Court of Justice, 39 IIC 106 (2008) – Pipe Welding Process (Rohrschweißverfahren). Benkard/Ullmann, supra, § 15 PatG para. 80. Japanese Supreme Court, 29 IIC 331, 334 (1998) – BBS Car Wheels III. Japanese Supreme Court, 29 IIC 331, 334 (1998) – BBS Car Wheels III. Y. Ohara, 29 IIC 334 (1998). See with regard to EU competition law: Loewenheim/Meessen/ Riesenkampff/WÄgenbaur, Kartellrecht – Europäisches und Deutsches Recht, 2nd ed., 2009, ART. 81 Abs. 1 EG para. 298; see with regard to Japanese competition law: Heath, Lizenzen und Technologietransfer, Baum/Bälz, supra, §23 para. 89. FTC, Guidelines on the Distribution System and its Trade Practices, 11 July 1991. Osaka District Court, 27 February 1970, 2 IIC 325 (1971) – Parker. There was one previously reported decision that had denied the possibility of parallel importing patented goods: Osaka District Court, 9 June 1969, 1 Mutaishū 160. As was convincingly pointed out by F.K. Beier, Territoriality and International Trade, 1 IIC 48. Argued by D. Reimer, Der Erschöpfungsgrundsatz im Urheberrecht und gewerblichen Rechtsschutz, GRUR Int. 1972, 221. H.G. Koppensteiner, Zum Erschöpfungsgrundsatz im Patent- und Urheberrecht, AWD 1971, 357. Tokyo High Court, 23 March 1995, German version in 1995 GRUR Int. 417 – BBS Carwhels II. English Patents Court, Roussel Uclaf v. Hockley, 9 October 1995, [1996] RPC 441. Privy Council, National Phonograph Company of Australia Ltd. v. Menck, 3 February 1911, [28] R.P.C. 229, 248. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 37: Intellectual Property – Patent Law – Patent Infringement – Defence of Patent Exhaustion and Exceptions

Document information

Publication

Business Law in Japan – Cases and Comments

Marc Dernauer (★ ) Supreme Court, 8 November 2007, Case No. 2006 ju 826, Canon Inc. v. Recycle Assist Co. Ltd., ‘Canon Ink Cartridge’

Jurisdiction Japan

Source: Minshū 61-8, 2989 = Hanrei Jihō 1990, 3 = Hanrei Taimuzu 1258, 62 = IIC 39 (2008) 982 (English translation) (1)

Court

I Headnote(s)

Supreme Court of Japan

Patent rights are not deemed to be exhausted in regard of products that were modified or where parts were replaced so that, as a result, it has to be said that a patented product, not identical to the assigned one, has been newly manufactured.

Case date

P 327

8 November 2007

In order to determine whether a patented product was newly manufactured, the entire circumstances, including the attributes of the patented product, the content of the patented invention, the manner in which the product was modified or its parts were replaced, and the actual conditions of the sales transaction, have to be considered. The attributes of the patented product include the product's functions, the structure and material[s], the intended use[s], the lifespan, and the manner in which it is used. The manner in which the patented product was modified or its parts were replaced includes the state of the patented product after it was modified, the content and the degree of the modification, the lifespan of the replaced parts, and the technical function and economic value of the replaced parts in the patented product.

Case number 2006 ju 826

Parties

Claimant, Canon Inc. Defendant, Recycle Assist Co. Ltd., ‘Canon Ink Cartridge’

Bibliographic reference

Reviving essential features of the patented invention may constitute an act of new manufacture.

II Relevant Provisions Sections 100, 68, and 2(3) no. 1 Patent Act.

Marc Dernauer, 'Case No. 37: Intellectual Property – Patent Law – Patent Infringement – Defence of Patent Exhaustion and Exceptions', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 399 - 411

III Facts Canon Inc. (Plaintiff and Appellee, hereinafter referred to only as the ‘Plaintiff’) is one of the leading manufacturers of inkjet printers and suitable ink cartridges for use with its inkjet printers, selling them worldwide (through affiliated companies). Recycle Assist Co. Ltd. (Defendant and Appellant, hereinafter only referred to as the ‘Defendant’) is a company which has imported to and sold refurbished Canon ink cartridges in Japan and was sued by Plaintiff for patent infringement. Plaintiff raised claims for a perpetual prohibitory injunction to stop Defendant from importing and selling those ink cartridges and for the disposal of Plaintiff's ink cartridges. P 400 Plaintiff sued Defendant on the basis of its Japanese patent J

841 0 entitled ‘Liquid Containing Vessel, Manufacture thereof, Package thereof, Ink Jet Head Cartridge Integrated with Vessel and Recording Head, and Liquid Jet Recorder’ (hereinafter ‘the patent’), which relates to a specific type of ink cartridge (2) being sold by Plaintiff as a genuine Canon ink cartridge for certain types of inkjet printers. Claim 1 of the patent pertains to the basic construction of the ink cartridge. The invention seeks to prevent leakage of ink during storage, upon opening of the package, and during installation of the ink cartridge (=‘technical effect’ and ‘object of the invention’). The main features of claim 1 regarding the construction of the patented ink cartridge can be summarized as follows: A liquid containing vessel (i.e. the ink cartridge) with (1) a negative pressure generating member (housing chamber) housing two negative pressure generating members (i.e. P 401 absorptive members of a porous, ink absorbing material) pressing against each other and forming thereby a boundary layer in between, a vent and a liquid supply section (i.e. the ink supply nozzle), and (2) a liquid (in particular ink) containing chamber with a partition wall separating the liquid containing chamber from the negative pressure generating member housing chamber and a passageway that connects both chambers with each other, while the first of the two negative pressure generating members is located closer to the passageway connecting to the liquid containing chamber, and the second closer to the vent, in particular characterized in that: – –

the pressure between the two negative pressure generating members generates a stronger absorption of the boundary layer than the absorption of each of the negative pressure generating members (Limiting Feature H), the negative pressure generating member housing chamber is filled with a sufficient amount of liquid so that the entirety of the boundary layer can hold liquid regardless of what position the liquid containing vessel may be in (Limiting Feature

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K). This construction has the effect that as long as there is enough ink in contact with the negative pressure generating members, the ink will be absorbed by these members and distributed to the boundary layer with a stronger absorption, thereby creating an airproof barrier which entirely blocks the flow of air from the vent into the liquid containing chamber, and thereby holding the ink within the ink cartridge, except for the time when the inkjet printer is in motion and ink is flowing through the ink supply nozzle into the inkjet printer. Thereby, ink leakage is being prevented. Defendant imported to and sold in Japan refurbished Canon ink cartridges falling within the scope of protection of Plaintiff's patent. Defendant had bought them from a company in Macao. Before that, affiliated companies of this company in Macao had collected used genuine Canon ink cartridges in Japan and other countries and then refurbished them by a process involving the following process steps: (1) opening a hole for cleaning and filling in new ink on the upper surface of the cartridge's liquid containing chamber, (2) cleaning the inside of the cartridge, (3) taking measures to prevent the ink from leaking out of the cartridge's ink supply nozzle, (4) filling ink into the negative pressure generating member housing chamber through the hole on the upper surface of the cartridge's liquid containing chamber until the ink rises above the boundary layer between the two negative pressure generating members in the negative pressure generating member housing chamber and into the entire liquid containing chamber, (5) sealing the hole and the ink supply nozzle, and (6) affixing labels and the like. The refilled ink cartridges could also have been used again with the suitable Canon inkjet printers without cleaning the interior of the used cartridge. However, the boundary layer would not have been able to hold the ink anymore, and therefore the characteristic technical effect to prevent the leakage of ink would no longer have been present. The reason for this is as follows: when the Canon ink cartridges run out of ink after having been fully used and have therefore been removed from the inkjet printer, there always remains P 402 a small amount of ink in all parts of the ink cartridge. Within a week to ten days, the remaining ink usually dries and hardens. This creates air bubbles and air layers within the spaces of the cartridge, in particular in the small spaces of the porous material of the negative pressure generating members and in the area of the boundary layer, which results in a state where the negative pressure generating members and the boundary layer can no longer hold the new ink, and where especially the function of the boundary layer is extinct. After cleaning and washing away the hardened ink, however, the ability of the boundary layer to create an air-proof barrier is restored and finally its function to prevent leakage is revived after filling in the ink to a point above the boundary layer between the negative pressure generating members. The Plaintiff warns on its web site, in its user's manual for the genuine ink cartridges and on the packaging that the cartridges should not be refilled with ink and then reused because of technical problems such as reduced printing quality and malfunction of the inkjet printer as a result of dried and hardened old ink in the ink cartridge, but should be rather replaced with new ink cartridges. In addition, Plaintiff indicates that its ink cartridges are intended for single use only and has established a program to recover used ink cartridges. The Tokyo District Court held that the importing and selling of the refurbished Canon ink cartridges did not constitute an infringement of Plaintiff's patent because it found that the patent was exhausted in regard of the refurbished ink cartridges. (3) The judgment, however, was overturned by the IP High Court on appeal by the Plaintiff. (4) Defendant further appealed to the Supreme Court of Japan (hereinafter: the ‘Supreme Court’). The Supreme Court dismissed the appeal. Thereby however, the Supreme Court did not adopt the reasoning of the IP High Court, in particular it did not confirm the two exceptions to patent exhaustion which the IP High Court had established. The Supreme Court rather rendered its judgment generally based on the standard that was applied by the Tokyo District Court, with a few modifications, but also took into account some thoughts of the IP High Court (5) about how to decide the case on the merits. (6) P 403

IV Findings In a case where the patentee or its licensee (hereinafter both are referred to as ‘patentee etc.’) has assigned (7) a patented product within Japan, the respective patent has achieved its purpose and is therefore exhausted with respect to this product so that the effect of this patent no longer extends to the use, assignment etc. (here and hereinafter, this means the use, assignment etc., export or import or offering for assignment etc. as stated in section 2(3) no. 1 Patent Act.) of this product. When the patentee etc. has assigned a patented product, it is appropriate to conclude that the patentee shall not be permitted [anymore] to enforce its patent right with respect to this specific product. However, the limitation of the right to enforce a patent because of the exhaustion of the patent applies only to the product itself actually assigned by the patentee etc. in Japan. Therefore, if the product that was assigned in Japan by the patentee etc. was modified or if part[s] were replaced so that, as a result, one has to acknowledge that a patented

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product, not identical to the assigned one, has been newly manufactured, then the patentee should [still] be permitted to enforce its patent right with regard to this product. Moreover, in order to determine whether a patented product was newly manufactured, it is appropriate to decide this issue by taking into account the entire circumstances, including the attributes of the patented product, the content of the patented invention, the manner in which the product was modified or its parts were replaced, and the actual conditions of the sales transaction etc. In regard of the items that have to be considered, it has to be said that the attributes of the patented product include the product's functions, the structure and material[s], the intended use[s], the lifespan, and the manner in which it is used, and that in regard of the manner in which the patented product was modified or its parts were replaced, the consideration shall include the state of the patented product after it was modified etc., the content and the degree of the modification, the lifespan of the replaced parts, and the technical function and economic value of the replaced parts in the patented product. In cases where the patentee or one regarded as such in regard of a Japanese patent (hereinafter both are referred to as the ‘patentee etc.’ in regard of a Japanese patent) has assigned a patented product outside of Japan, it has to be concluded that the patentee shall not be permitted [anymore] to enforce its patent right in Japan with respect to this specific product against the assignee (unless the patentee etc. agreed with the assignee to exclude Japan from the territory of sale or use in regard of the respective patented P 404 product) or against a third party to whom the specific patented product has been [further] assigned or any person who has received the specific product thereafter (unless the patentee etc. reached the aforementioned agreement with the assignee and this is also clearly indicated on the specific patented product). Still, the resulting limitation to enforce the patent only applies to the specific patented product itself that the patentee etc. had assigned. This is no different to the case where the patentee etc. has assigned the patented product in Japan. Therefore, if a patented product that had been assigned by the patentee etc. outside of Japan was modified or if its part[s] were replaced, so that, as a result, one has to acknowledge that a patented product, not identical to the assigned one, has been newly manufactured, then the patentee should [still] be permitted to enforce its patent right with regard to this patented product in Japan. Moreover, for deciding whether a patented product was newly manufactured in the way stated above, it is appropriate to apply the same standard as in the case where a patented product assigned in Japan was modified or where its part[s] were replaced. If one looks at the present case in view of this, the Plaintiff, according to the facts stated above, warns that its products are for single use only and should be replaced with new products because if the ink cartridges are refilled with ink and reused, it has to be feared that problems such as reduced printing quality or malfunction of the printer itself will arise. For this reason, Plaintiff's products do not have a hole for adding ink, and this structure makes it necessary to open a hole in the ink cartridge for refilling the ink. The process for the production of Defendant's products also includes the opening of a hole on the upper surface of the liquid containing chamber and the plugging of the hole after filling with ink. Such a state after the modifications etc. have been carried out in the process for the production of Defendant's products is not one limited to the simple refilling of consumed ink; it is nothing less than an alteration of the ink cartridge in order to allow the refilling of ink. Moreover, according to the facts stated above, the ink itself has the function of creating a barrier at the boundary layer of the contact part [where the two negative pressure generating members meet] that prevents the flow of air. Once the ink has been consumed to a certain degree, a part of or the entire boundary layer of the contact part loses its ability to hold the ink. Furthermore, within one week to ten days after the fully used products of Plaintiff have been removed from the printer, the remaining ink inside them hardens. If the ink tanks were refilled in this state, even if the liquid containing chamber and the negative pressure generating member housing chamber were filled with ink to a point above the boundary layer of the contact part, the ink could not perform the function of creating a barrier at the boundary layer of the contact part to prevent the flow of air. In Defendant's products, however, the interior of the ink cartridges at issue was cleaned and the hardened ink was thereby washed away to restore the ability to create the barrier that prevents the flow of air at the boundary layer of the contact part, and the ink was filled in to the same level as Plaintiff's products before they were used. Thereby, the ink cartridge was put back to the state where the boundary layer of the contact part could hold the ink no matter what position the ink cartridge may be in. P 405

Therefore, the state after the modifications etc. have been carried out in the process of the production of Defendant's products is not one limited to the simple refilling of consumed ink. It is a state where the ink cartridges at issue can be reused after they were [once] fully consumed and where essential features of the invention (Limiting Features H and K) which were once lost are again fulfilled. This has to be evaluated to the effect that the actual value of the invention in this case has been recreated and the technical effect of the invention, namely the prevention of ink leakage before opening, has been achieved anew. In addition, when considering the overall circumstances revealed in the facts stated

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above, including the circumstances of the sales transactions with respect to the ink cartridges, it is appropriate to confirm that Defendant's products are newly manufactured ones, not identical to the products of Plaintiff before the modifications etc. Therefore, it has to be said that no limitation to enforce the patent applies here with regard to Defendant's products at issue, which, for their production, made use of fully used ink cartridges that had been previously assigned by the patentee etc. in Japan or by the patentee in regard of a Japanese patent outside of Japan, and the Plaintiff as the patentee here can claim, based on the patent, the rendering of a perpetual prohibitory injunction to stop the import and selling etc. of the products as well as their disposal. Translation from the Japanese original by Marc Dernauer (8)

V Comment According to sections 100, 68, and 2(3) no. 1 Patent Act, the owner of a Japanese patent or an exclusive licensee can demand from the infringer of the patent that he stops infringing the patent and that he destroys the infringing products. These were also the claims brought by the plaintiff in the present case and which are common claims in many jurisdictions. The alleged infringer in turn raised the defence of exhaustion and of lawful parallel imports. The Canon Ink Cartridge case is an important case in which the Japanese Supreme Court defined and clarified the limits of and exceptions to the exhaustion of a Japanese patent and lawful parallel imports into Japan. The Supreme Court first of all confirmed its case law with regard to domestic exhaustion and lawful parallel imports (‘implied licence doctrine’) - which is also being considered by some to mean a rule of ‘international exhaustion’ - set out in its famous BBS Car Wheels case. (9) That is, the patent right shall no longer be enforceable (= deemed exhausted) with regard to a specific product that P 406 was once assigned by the patentee or its licensee to another person in Japan such that, as a result, the title to the product was once transferred within Japan. Moreover, the same shall apply if the specific product was assigned to another person outside Japan, unless the patentee or licensee who assigned the product had agreed with the assignee to exclude Japan from the territory of use (including resale), and with regard to third persons, if this reservation is also clearly visible on the product itself. In the BBS Car Wheels case, however, the Supreme Court primarily ruled on the lawfulness of a parallel import of patented goods into Japan. The rule of domestic exhaustion was therefore only raised as an obiter dictum. The present case, however, also pertains to the limits of and exceptions to domestic exhaustion, and thus the Supreme Court first of all had to explicitly confirm the rule before elaborating on the exceptions. As a result of the judgment, it is now clear that, as in most other countries, the rule of domestic exhaustion is also applicable in Japan as a defence in patent infringement cases. Since its introduction (based on German law theory) in the 1920s, (10) the rule of domestic exhaustion has been widely accepted in Japan as being applicable also under Japanese law, but neither the Supreme Court or its predecessor before the war, the Imperial Court, had had to decide on it before. In the Canon Ink Cartridge case, however, the Supreme Court eventually found that the conditions for an exception to the rule of domestic exhaustion were fulfilled. Moreover, the same conditions were also held to constitute an exception to a lawful parallel import. The Supreme Court in the Canon Ink Cartridge case thus identified further exceptional conditions under which a parallel import shall not be lawful, in addition to those named in the BBS Car Wheels Case. Therefore, the patentee in the Canon Ink Cartridge case was eventually allowed to prohibit the defendant from further selling its refurbished ink cartridges and to claim destruction of the infringing products. According to the Supreme Court, the rule of domestic exhaustion shall not be applicable and the patentee hence shall still be entitled to enforce its patent right against another person if the product at issue was modified or if parts were replaced in such a way that the product, as a result, can no longer be considered as being identical to the product before the modification and/or replacement of parts, but rather to be a newly manufactured product. The Supreme Court further stated that this shall also apply if the product was first sold abroad, regardless of whether or not the requirements for the exception of a lawful parallel import as set out in the BBS Car Wheels case were fulfilled (i.e. where a general implied licence can be denied). Therefore, in cases of modifications to and replacement of parts of a patented product, one also has to generally distinguish in Japan, as in many other countries, between ‘permissible repair’ (= product is deemed to be identical) and ‘impermissible new manufacture (or reconstruction)’ in order to decide whether the patent has to be P 407 regarded as exhausted. Moreover, in Japan, this distinction also has to be made in order to decide whether a parallel import is lawful or not. In all countries, however, the specific criteria for making this distinction are slightly different. Furthermore, in most countries, the criteria are not precise, but rather ambiguous. This causes a big strategic problem for international companies that sell their products worldwide: Courts in the same and in different jurisdictions reach different conclusions even if they have to decide on very similar cases. Japan is no exception in this regard. In the Canon Ink Cartridge case, the Supreme Court

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introduced a multifactor test as the standard for distinguishing between permissible repair and impermissible new manufacture, as mentioned in the headnotes above. In addition, the multiple criteria presented by the Supreme Court have to be considered in an overall view. Therefore, all the involved interests and criteria identified by the Supreme Court have to be weighed against each other. On top of that, in the Canon Ink Cartridge case the Supreme Court left open which of the factors were actually the decisive ones. For instance, the Supreme Court held that it was important that the essential technical function of the boundary layer of the contact part between the negative pressure generating members, i.e. to hold the ink inside the cartridge except for the time when the ink cartridge is attached to the inkjet printer and in operation (e.g. during storage), represented by the claim features H and K, had been revived by the defendant through refurbishing of plaintiff's ink cartridges (by washing and refilling with ink). One could infer from the judgment that such an act of reviving essential elements and functions of the invention shall be generally deemed to be a new manufacture of the patented product. At the same time, however, what the Supreme Court also cited as important was that the products were intended by the plaintiff (the patentee) for single use only, and that the plaintiff had made sufficient efforts to indicate this to its customers. Moreover, it was also named as relevant that the products were physically altered (opening of a hole on the upper surface of the ink cartridge and plugging of the hole after refilling the ink). The mere refilling of ink, on the other hand, was not considered to constitute a new manufacture. Due to the fact that the Supreme Court had mentioned the ‘refilling of the ink’ as a separate factor which was not sufficient as such to cause the ink cartridges to have to be considered as newly manufactured ones, it can be inferred that the multifactor test introduced in the Canon Ink Cartridge case shall, in principle, also be applicable to cases where consumables have been refilled. However, such a mere refilling shall, in principle, be considered to be a lawful act of the owner of the patented product if no essential elements of the patented invention are involved, in particular if these have not been revived. Since the Supreme Court in its judgment only speaks of cases where patented products were modified or where parts were replaced, the exchange and refilling of consumables was apparently regarded as a form of modification of the product. Moreover, although not explicitly referred to, the multifactor test as standard shall probably also be applicable in cases of repair and maintenance of a patented product where there is neither a replacement of (spare) parts nor significant ‘modifications’, because the revitalization of the essential functions of the invention was also considered P 408 to be an important criterion for deciding the present case. Of course, in the Canon Ink Cartridge case, reviving of the essential features of the patented product was interconnected with the modifying of the ink cartridge, but the Supreme Court nevertheless raised this reviving as a separate important factor for deciding the case. Therefore, it is not quite clear whether the ‘reviving of an essential feature’ of the patented product shall be considered to be a third category of cases next to those where the ‘patented product was modified’ or ‘parts replaced’. It is possible that the standard set by the Supreme Court in the Canon Ink Cartridge case now should probably be applicable in all cases of maintenance of a patented product by the owner, including the refilling of consumables and the repair and reuse of the product, regardless of whether modifications were made or whether parts were replaced. Notwithstanding, the standard itself remains ambiguous, and its application will not lead to clearly predictable results. If the standard had been objectively applied in some past famous cases decided by the Japanese courts, this would have not made the outcome any more predictable. (11) On the other hand, it is important to realize that the Supreme Court in the Canon Ink Cartridge case did not only establish an objective test standard for deciding cases where patented products were modified or where parts were replaced, it also showed a tendency as to how the Supreme Court would weigh the criteria in future cases. The Canon Ink Cartridge case is not only important for purchasers of patented products in order to decide what they are allowed to do with them from the viewpoint of patent law. The case also sets the legal limits for companies engaged in the aftermarket, i.e. for companies that manufacture and sell consumables and replacement parts for patented P 409 (combination) products (e.g. ink cartridges, coffee pads, reagents) or which recycle patented products (e.g. ink cartridges, single-use cameras). The multifactor test introduced by the Supreme Court in the Canon Ink Cartridge case will not only be the basis for the decision as to whether there is direct infringement (sections 68, 2(3) Patent Act), (12) but also as to whether indirect infringement can be affirmed (section 101 Patent Act). (13) Considering that the Supreme Court in the Canon Ink Cartridge case did not take into account at all the general importance of the recycling of goods and of the preservation of natural resources for the Japanese society, both for the sake of economic development and for the protection of the environment, and considering that the Supreme Court furthermore confirmed that the patentee defines or can define whether a product shall be used only once or several times, implicitly also defining the lifespan of a product, rather than making this decision from an objective point of view or from the viewpoint of consumers, (14) it is not difficult to predict that future cases regarding patented products where certain unpatented parts regularly have to be replaced (e.g. coffee pads for use in ‘coffee machines’) or where the patented products themselves are intended for use with other products and for regular replacement (e.g. ‘ink cartridges’ for printers) will probably also be mostly decided in favour of the manufacturer of the

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patented combination products rather than to the advantage of the companies engaged in aftermarket sales or to the advantage of consumers. (15) Japan has in particular not yet adopted a principle that the replacement of unpatented parts of a patented combination product (or the sale of such parts for replacement) is always lawful. The courts decide on a case-by-case basis whether such acts constitute direct or indirect patent infringement. However, as already mentioned, the standard and the criteria for deciding between permissible repair and impermissible new manufacture (or reconstruction) in cases P 410 where measures were applied to maintain the patented product, including the refilling of consumables and the repair and reuse of the product, in particular by replacing parts, is in many countries at least as ambiguous as in Japan. In Germany, acts carried out in order to maintain the operation of a patented product (including the refilling and replacement of consumables) or in order to maintain the patented product itself (e.g. by repairing the product), also by replacing worn-out parts or parts that are intended to be replaced several times during the lifespan of the patented product with new, non-patented parts, are usually considered to be within the usual and intended use of the product, and thus permitted (no direct patent infringement). Correspondingly, the manufacture and sale of non-patented parts for replacing worn-out parts or parts that are designed to be replaced several times during the lifespan of the patented product are also usually not considered to constitute indirect patent infringement. In such cases, German courts usually consider that the product is still identical to the original product, (16) a criterion which is also used by the Japanese Supreme Court for the distinction. However, in contrast to the judgment of the Supreme Court, the intended use, including the lifespan of the respective product, is decided in Germany from an objective point of view (‘general perception of the involved trade circles’) and is not to be determined by the patentee alone. However, the German courts also carry out a weighing of the involved interests and take into account multiple criteria when deciding a specific case, with some of the criteria being similar or identical to the criteria considered by the Japanese Supreme Court. Moreover, as in Japan, the protection of the environment is not a relevant criterion in this regard. Therefore, despite the principle set out above, the actual legal situation is more complicated, and the outcome of a case always difficult to predict. In an old case, the Supreme Court of the German Reich, the predecessor of the Federal Court of Justice (= the German Federal Supreme Court), stated that the refilling of a consumable cannot always be considered to be within the intended use, namely if the replacement of the operating material such as fuel and lubricants requires a ‘job of a craftsman’. (17) Moreover, the repairing of the patented product to a significant extent after it has lost its proper functioning can sometimes also constitute a new manufacture. (18) The replacement of a part may also constitute a patent infringement, even if it concerns a worn-out part or a part that is intended to be replaced several times during the lifespan of the patented product, and even if the replaced part is a common consumable. (19) This is in particular considered if the parts replaced actually reflect the technical effects of the invention, (20) i.e. if P 411 they make the patented product inventive. This is a criterion similar to the one the Japanese Supreme Court considered with regard to the reviving of essential features and functions of the invention. However, the German courts have never had to decide on a case like the Canon Ink Cartridge case where the reviving of the essential function without the replacement of certain essential parts of the invention was assumed. It is therefore difficult to predict how the German Federal Court of Justice would decide the Canon Ink Cartridge case. I suppose however, it also would rule in favour of patent infringement. P 411 Marc Dernauer (1)

References ★ )

1)

2) 3) 4)

Marc Dernauer: University of Freiburg English translation of a part of the judgment. Full English translation under by Japanese Supreme Court / Sir Ernest Satow Chair of Japanese Law, University College, University of London. Further English translation by C.A. Rakow, in: CASRIP Newsletter (University of Washington, School of Law), Vol. 15, Issue 1 (Winter/Spring 2008), available under (with introduction); similar translation with introduction by the same author under ), both last visited on 25 October 2011. Referred to as ‘ink tank’ in the judgment. Tokyo District Court, 8 December 2004, in: Hanrei Jihō 1889, 110 et seq. IP High Court, 31 January 2006, in: Hanrei Jihō 1922, 30 —IIC 37 (2006) 867 (English translation).

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5)

6)

7)

8) 9) 10) 11)

12)

13)

14)

15)

For details about the IP High Court Judgement see e.g. R. Mimura, Patent Exhaustion in Japan, in: Hansen / Schüssler-Langeheine (eds.), Patent Practice in Japan and Europe, 521-526, at 523 et seq.; C. Heath / M. Mōri, Three Recent Decisions on Repair, Refill, and Recycle, in: ZJapanR / J.Japan.L No. 23(2007) 246 et seq., at 251 et seq. (summary of the case). For a summary of the court decisions in all three instances in the Canon Ink Cartridge case, see T. Yamada, Kokunai shōjin [Domestic Exhaustion], in: Iimura / Shitara (eds.), Chiteki zaisan kankei soshō [Lawsuits Relating to Intellectual Property], Vol. 3 (Seirin Shoin 2008) 176 et seq, at 185 et seq. For a comprehensive analysis of the case in Japanese see e.g. T. Nakayoshi, in: Saikō Saibansho Hanrei Kaisetsu 62 (2008) 973 et seq.; T. Nakayoshi, in: Law & Technology 39 (2008) 60-70; Y. Tamura, in: NBL 877 (2008) 12-23, 878 (2008) 22-34; H. Yokoyama, in: Tokkyo Kenkyū 45 (2008), 52-71. Here the term ‘jōto’ is used, which literally means ‘assigned’ or ‘assignment’, in particular as a result of the selling of the product. Although ‘assignment’ in the context of patent law is usually considered to mean not only the permanent transfer of a product (of the title to a product), but also the temporary surrender of a product for use (e.g. the letting and lending of an object (cf. section 2(3) no. 1 Patent Act and N. Nakayama, Chūkai tokkyo-hō [Commentary to the Patent Act] (2000) at sections 2 and 35), here, it can be assumed that it shall not extend to such acts. The translations and comments by C.A. Rakow (supra note 1) were used as valuable reference materials for the translation. Supreme Court, 1 July 1997, Hanrei Jihō 1612, 3 = IIC 29 (1998) 331 (English translation) = GRUR Int. 1998, 168. (German translation); also referred to as the BBS Car Wheels III or BBS Parallel Import case. See also Case No. 36 in this book. M. Mohri, Maintenance, Replacement, and Recycling from a Comparative Perspective, in: Hansen / Schüssler-Langeheine (eds.), Patent Practice in Japan and Europe (Kluwer Law International 2011) 527, 532. Cf. e.g. the following cases: Osaka District Court, 20 July 2006, Hanrei Jihō 1968, 164 Fixing Device for Parking Facility (Repair and replacement of worn out parts did not constitute patent infringement); Osaka District Court, 24 April 1989, Hanrei Jihō 1315, 120 - Hammer for a Sand-Making Machine (partial translation and case review in English: Y. Yamasaki, Japanese Case Law Report, in: AIPPI Journal of the Japanese Group (August 1989), 151 (Sale of an unpatented product for replacing a part of the patented product with a shorter lifespan than the patented product itself, where the part is designed to be easily replaceable, was held to constitute an indirect patent infringement); Osaka District Court, 26 November 2002 - Step Tool (Sale of an unpatented product for replacing a part of the patented product with a shorter lifespan than the patented product itself was held to constitute no indirect patent infringement); Tokyo District Court, 31 August 2000, Case No. 1996 wa 16782, Jurisuto 170, 128 - Fuji Camera (also referred to as Film Unit with Lense [Rensu-tsuki firumu yūnitto] or Fuji Camera for Disposal after Use [Fuji tsukai-sute kamera] case); see also the case note by T. Takii, in: Tokkyo Hanrei Hyakusen, Bessatsu Jurisuto 170 (3rd ed., 2004) 128-129 (Refurbishing and recycling of Fuji paper-boxed cameras was held to constitute direct patent infringement.). Similar in facts and result to the Fuji Camera case was also the Konika Camera case (also referred to as Camera Unit with Film [Firumu ittai-gata kamera yūnitto] or Konika Camera for Disposal after Use [Fuji tsukai-sute kamera] case) where the Tokyo District Court also had to deal with refurbishment of disposable (‘single-use’) cameras; see Tokyo District Court, 6 June 2000, Case No. 1999 yo 22179 (provisional injunction), Hanrei Jihō 1712, 175. For a short summary of the latter two cases see Yamada (supra note 6) 184-185 and C. Heath / M. Mōri, Ending is Better than Mending - Recent Japanese Case Law on Repair, Refill and Recycle, in: ZJapanR / J.Japan.L No. 23 (2007) 65 et seq., at 70 et seq. = IIC 37 (2006) 856-864, at 860 et seq. For a discussion of the relevance of the Canon Ink Cartridge Case from the viewpoint of direct patent infringement see M. Mohri, Repair and Recycle as Direct Patent Infringement?, in: Heath / Sanders (eds.), Spares, Repairs and Intellectual Property Rights (Kluwer Law International 2009) 59 et seq., at 68-71. The Canon Ink Cartridge Case though was not discussed from the viewpoint of indirect infringement, probably because the Defendant had not replaced anything other than the ink, and the ink that was replaced was a staple product purchased by the defendant on the market without any specific supplier being identifiable, cf. C. Heath, Repair and Refill as Indirect Patent Infringement, in: Heath / Sanders (eds.), Spares, Repairs and Intellectual Property Rights (Kluwer Law International 2009) 85 et seq., at 96. In contrast to the first instance ruling of the Tokyo District Court in the Canon Ink Cartridge case which at least considered the objective to protect the environment as one relevant criterion and which held that the view of the general public was decisive for deciding whether a product shall be deemed to be reusable. The same tendency is also visible in the Fuji Camera and Konica Camera cases decided by the Tokyo District Court in favour of the manufacturer of the disposable cameras (cf. supra note 10). In the Tissue Paper case, on the other hand, the refilling of tissue papers in patented dispensers by a company that had no licence from the patentee was held not to infringe the patent because the paper as such was not patented, cf. Osaka High Court, 1 December 2000, Case No. 1998 wa 11089 - Tissue Paper (unreported), cited based on Heath / Mōri (supra note 5) 69-70.

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16) BGH [Federal Court of Justice], 27 February 2007, X ZR 38/06, in: GRUR 2007, 769, 772 –

17) 18) 19) 20) 1)

Pipette System; BGH, 3 May 2006 X ZR 45/05, in: GRUR 2006, 837, 838 – Wheel Tread; BGH, 4 May 2004, X ZR 48/03, in: GRUR 2004, 758, 762 = IIC 36 (2005), 964, 969, 970 – Impeller Flow Meter; BGH,8 March 1973, X ZR6/70, in: GRUR 1973, 518, 520– Gambling Machine II; BGH, BGH, 21 November 1958, I ZR 129/57, in: GRUR 1959, 232, 234–235 – Conveying Trough. RG, 4 October 1938, in: GRUR 1939, 184, 187 – Tannic Acid. BGH, 21 November 1958 – Conveying Trough (cf. supra note 16) 234. Higher Regional Court Karlsruhe, 10 December 2003, in: GRUR-RR 2004, 97, 98 – Friction Brake Pad. BGH, 4 May 2004 – Impeller Flow Meter (cf. supra note 16); BGH, 27 February 2007 – Pipette System (cf. supra note 16). University of Freiburg

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Case No. 38: Intellectual Property – Patent Law – Clinical Trials – Research Exception

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Publication

Klaus Hinkelmann

Business Law in Japan – Cases and Comments

(★ ) Supreme Court of Japan, Decision of 16 April 1999, Clinical Trials III Source: 30 International Review of Intellectual Property and Competition Law (IIC) 448 (1999)

Jurisdiction Japan

I Headnote(s)

Court

Clinical trials for generic products undertaken for the purpose of obtaining government approval under section 14 Pharmaceuticals Act do not constitute patent infringement under section 69 Patent Act.

Supreme Court of Japan

II Relevant Provisions Section 69(1) Patent Act, section 14 Pharmaceuticals Act

Case date

III Facts and Findings

16 April 1999

‘The appellant in the present proceedings owns a patent for a chemical product, or rather the effective ingredient therein. He claims that the appellee produces and uses a drug P 414 identical to the one protected by the patent in substance, dosage, method of use and effect, and requests damages and injunctive relief. The appellee's use relates to clinical trials being carried out under section 14 Pharmaceuticals Act necessary to obtain government approval for the drug's manufacture and sale. According to the appellee, his trials are exempt under section 69(1) Patent Act as ‘experiment or research’.

Case number 1998 ju 153

Bibliographic reference

A case does not qualify as an infringement where a third party, having the intention of manufacturing and selling a product with the same active ingredient, purpose and use as a patented substance after the life span of the patent, undertakes clinical trials for the purpose of obtaining government approval under section 14 Pharmaceuticals Act. Even though the substances so used fall within the technical scope of the patent right, they are exempt by virtue of the purposes of ‘experiment or research’ for the following reasons:

Klaus Hinkelmann, 'Case No. 38: Intellectual Property – Patent Law – Clinical Trials – Research Exception', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 413 - 420

(1)

(2)

(3)

By granting exclusive use of a certain invention for a limited period of time in exchange for a disclosure of the invention, the patent system promotes inventive activity. Yet at the same time, the patent system provides the general public with the opportunity of using these publicly disclosed technologies, thereby contributing to the overall development of industry. It is one of the basic principles of the patent system to allow anyone to exploit freely a new technology after the expiry of the patent term, thereby generating a benefit to society. For reasons of safety in the production of pharmaceuticals, the Pharmaceuticals Act requires their prior approval by the Ministry of Health and Welfare. The corresponding application must be accompanied by various data obtained from clinical trials, which have to be conducted over a certain period of time, even if the approval relates to a generic product. It is necessary to manufacture and use pharmaceuticals within the scope of the patent right in order to conduct such clinical trials. It stands to reason that if such clinical trials did not qualify as ‘experiments’ under section 69(1) Patent Act, they could not be conducted as long as the patent remained in force. As a result, third parties would not be in a position to exploit freely the patented invention for a certain period of time even after the patent had expired. This, in turn, would contradict the basic principles of the patent system as explained above. However, patent law would not allow third parties to manufacture and use components of a patented pharmaceutical during the life span of a patent beyond what would be required under the Pharmaceuticals Act in order to obtain government approval. Limiting the exemption in this way, the patent owner would still be able to reap the commercial benefit of exclusively exploiting his invention for the life span of the patent right. Extending such protection to also cover clinical trials conducted by generic drug makers and carried out for the purpose of obtaining government approval would effectively prolong the life span of a patent, a benefit that cannot be said to be intended by the Patent Act.

For the reasons explained above, and the facts set out by the lower court, the appellee's acts qualify as ‘working of the patent right for the purposes of experiment or research’ under section 69(1) Patent Act. They are not infringing. P 415

The lower court's decision can therefore be upheld, and the appellant's particular views on the lower court's findings must be dismissed. The decision was unanimous'. Translated by Christopher Heath

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IV Comment 1 The Decision in the Context of Japanese Law The Supreme Court clearly ruled that clinical trials being carried out under section 14 Pharmaceuticals Act which are necessary to obtain approval for the drug's manufacture and sale during the pendency of a patent protecting the drug do not infringe upon the patent and put thus an end to several years of intense discussions and numerous P 416 infringement suits. (1) The corresponding acts of a third party are exempt from patent infringement under section 69(1) Patent Act as ‘experiment or research’. The reasoning of the Supreme Court illustrates, however, that the Supreme Court did not establish criteria for the applicability of the ‘experiment or research exemption’ and did not investigate whether specific criteria were fulfilled. In the absence of judicial precedents, only academic doctrines up until this point had interpreted the meaning of ‘experiment or research’ pursuant to section 69(1) Patent Act. In the prevailing doctrine, it is considered that whether or not an experiment or research is such ‘experiment or research’ as is exempted under section 69(1) should be decided depending on its subject and purpose. (2) Namely, an experiment or research should qualify only when its subject is limited to the patented invention itself and when its purpose is limited to ‘technological progress’. This includes research regarding patentability to find whether another's patented invention is novel and involves an inventive step in order to allow an assessment of the chances of opposition or nullity proceedings, functionality research to see whether another party's invention can be worked or has the effects asserted in the patent application (including experiments conducted for ascertaining the economic outcome the invention has or deciding what costs will be required to put the invention into practice), or experiments aiming at improving another party's invention or creating a better invention. (3) In a notable exception, the Nagoya District Court on 6 March 1996 decided that clinical trials during the pendency of a patent constitute patent infringement since clinical trials carried out for the purpose of obtaining government approval for a pharmaceutical are not intended to advance technology and therefore do not fall within the scope of the ‘experimental or research exemption’ to an otherwise infringing use. (4) In sharp contrast, the Supreme Court did not examine whether clinical trials contribute to the advancement of technology and therefore. The rationale behind the Supreme Court's decision appears to be that a further prolongation of patent protection beyond the general 20-year term from filing, and perhaps an additional period of up to five years P 417 as patent term extension because the patented invention could not be worked for up to five years due to the absence of government approval under section 14 Pharmaceuticals Act, should not be granted. The decision is based on the assessment that it is essentially sufficient that the patentee is provided with the right of exclusive use of the patented invention as long as the patent is in force (pending). Clinical trials required for third parties for working the invention after the patent has expired should not extend the term of protection for a patentee. The Supreme Court considers this situation as the basis of the patent system which promotes on the one side inventive activity, and allows on the other side anyone to freely exploit a new technology after the expiry of the patent, thus contributing to the overall development of industry and generating a benefit to society. This balance would be disturbed if a third party were hindered in using the new technology after the expiry of the patent. This would be the case if the third party could not carry out clinical tests to obtain various data which would be necessary for obtaining prior approval by the Ministry of Health and Welfare even if the approval relates to a generic product. It was decisive for the Supreme Court that such clinical trials could not be conducted as long as the patent is in force if they did not qualify as ‘experiments’ under section 69(1) Patent Act. The free exploitation of the patent after the patent's expiry would be impossible, which would contradict the basic principles of the patent system. Extending such protection to also cover clinical trials conducted by generic drug makers carried out for the purpose of obtaining government approval would effectively prolong the life span of a patent, a benefit that cannot be said to be intended by the Patent Act. Accordingly, the exemption for ‘experiment or research’ had to be applied to clinical trials. The establishment of criteria for this exemption and a test as to whether such criteria were fulfilled, were not necessary. The experimental use exemption was thus applied in order to enforce the opinion of the Supreme Court of Japan on the balance between the interests of the patentee and those of third parties. The Supreme Court's reasoning is thus not very convincing. However, as the decision as such is very clear, there seem to be no attempts to change the current status in Japan. It should be noted that the Supreme Court decision is also applicable to tests necessary for obtaining government approval for agrochemicals.

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In Europe and the US, clinical trials with the aim of obtaining marketing approval are not considered infringing, be it based on specific legal provisions or court decisions. The US courts have clearly ruled that ‘limited unauthorised testing of a drug during the term of a patent thereon, with a view to obtaining FDA approval to market the generic P 418 version upon expiration of the patent, is infringement. It is excused by neither the experimental purpose doctrine nor the policies of the Food, Drug, and Cosmetic Act’. (5) However, this position was reversed with the Patent Term Restoration Act. The newly introduced section 271(e)(1) of Title 35 U.S.C. now clearly states that ‘it shall not be an act of infringement to make, use, or sell a patented invention solely for uses reasonably related to the development and submission of information under federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products’. According to a subsequent decision, ‘the clear intent of Congress was to create an FDA experimental use exemption for use which Roche had held would constitute infringement under section 271(a)’. (6) In other words, US Congress saw a clear connection between extending the patent term for pharmaceuticals with lengthy approval procedures and putting generic drug makers on the same footing by allowing them to carry out their clinical trials already during the term of the patent right. Pharmaceutical makers should not, in other words, have their cake and eat it too. The English courts have viewed such clinical trials as a clear infringement of patent rights: ‘Trials carried out in order to discover something unknown or to test a hypothesis or even in order to find out whether something which is known to work in specific conditions, e.g., of soil or weather, will work in different conditions can fairly, in my judgement, be regarded as experiments. But trials carried out in order to demonstrate to a third party that a product works or, in order to amass information to satisfy a third party, whether a customer or a body such as the PSPS or ACAS, that the product works as its maker claims are not, in my judgement, to be regarded as acts done ‘for experimental purposes’. (7) Exactly the opposite position has been taken by the Italian courts: ‘The owner of a patent for a commercial invention cannot oppose the experimental use undertaken by a third party in order to obtain the necessary documents for obtaining the registration of a pharmaceutical with the competent health authorities. The reason for this is if third parties were not allowed to request authorization from the health authorities in time for putting the products on the market immediately after the expiration of the patent, the term of the exclusive right granted to the patentee would in fact be extended for the time it took to obtain such government approval. . . [As the additional protection certificate] is meant to compensate the patentee for the delay incurred due to government approval, it would not seem reasonable to also give the patentee the advantage of the delay incurred by third parties if they were not allowed to request government approval in due time for putting their products on the market immediately upon expiration of the patent term’. (8) P 419

A less clear-cut stance has been taken by the German courts. In the first Supreme Court Decision on this matter, it was held that ‘clinical trials on humans with the aim of finding further use of the patented substance fall within the exemption under section 11(2) Patent Act 1981’. (9) In its second decision, the Supreme Court further clarified that ‘the primary purpose of [exempted] clinical trials on humans is the healing or improvement of illnesses, even if such trials are initiated and conducted with certain economic purposes in mind, and if the data obtained therefrom are used to obtain the necessary marketing approval . .. This does not mean, however, that experiments of all sorts can be freely conducted. If an experiment does not relate to the [patented] technical solution or if experiments are conducted on such a large scale that cannot be justified, the scope of permissible experimental use has been overstepped. The same holds true for cases in which experiments are conducted with the purpose of interfering with the marketing efforts of the inventor's products. In these cases, experiments do not serve the purpose of technical progress, but are used as a means to pursue competitive interests’. (10) It appears from these decisions that clinical trials undertaken also but not only for the purpose of obtaining government approval are permissible. This was also the position of the French courts. (11) In order to harmonize the clinical trial exemption within Europe, the Commission amended Directive 2004/27/EC relating to medicinal products for human use, and Directive 2004/28/EC relating to veterinary medicinal products. Both Directives had to be implemented by national laws by 30 October 2005. Article 10(6) of the Directive 2004/27/EC exempts from patent infringement ‘the necessary studies and trials and the consequential practical requirements’ carried out in order to obtain regulatory approval for human medicinal products. The scope covers Experiments and trials – both preclinical and clinical – studies for generic (Article 10(2)b)), quasi generic (Article 10(3)) or bio-similar (Article 10(4)) products. Most industrialized countries have now acknowledged the patentee's quandary and have (sometimes in exchange for allowing clinical trials) introduced the possibility of patent

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term extensions for marketing delays due the necessity of obtaining drug approval: The US, on 24 September 1984, introduced the Patent Term Restoration Act that under section 156 of Title 35 U.S.C. permits an extension of the patent term for up to five years. The EC introduced a Supplementary Protection Certificate by Council Regulation 1768/92 that ‘shall take effect at the end of lawful term of the basic patent for a period equal to the period which elapsed between the date on which the application for a basic patent was lodged and the date of the first authorization to place the product on the market in the P 420 community reduced by a period of five years.’ Japan has already allowed for an extension of the patent term since 1 January 1988 by adding sections 67(3), 67bis-67quater and 68bis Patent Act. An extension may be sought for periods between two and five years on the condition that it was not possible to work the patented invention for two years or more due to the necessity obtaining marketing approval. Also Korea introduced a patent extension system under sections 89–93 Korean Patent Act. Klaus Hinkelmann (1) P 420

References ★ )

1)

2) 3)

4)

Klaus Hinkelmann : University of Freiburg In 1987, the Tokyo District Court had already decided in a very similar case and found the exemption for experimental research not applicable to cases where experiments were only conducted with the aim of obtaining government approval (Tokyo District Court, 10 July 1987 -Monsanto, 20IIC 91 (1989)). Nevertheless, the decision apparently had no serious repercussions, as a large number of Japanese drug manufacturers carried out clinical trials with the aim of obtaining government approval during the patent term of the original pharmaceutical. However, because of the pricing mechanisms of the Japanese Health Ministry, marketing generic drugs in Japan at least in the 1990s when the decision was rendered was not the big business it may have been in other countries. In Japan, generic medicines account for about 7 - 8 % of the total pharmaceutical sales, while in Europe and the U.S. the comparable figures amount to 30 - 40 % (reported in The Nikkei Weekly, 24 June 1996, at 9). This led to a new wave of court actions that at first seemed to go in favour of originator companies: Nagoya District Court (6 March 1996) and Nagoya High Court (16 March 1996), both reported in 28 IIC 398 (1997) - Synthelabo. The reported success of Synthelabo in these actions then encouraged other pharmaceutical companies to take on their imitators. Hence it was reported (Patents & Licensing, August 1996, at 2, 3) that the U.K. firm Glaxo-Wellcome PLC had taken on the Japanese companies Kobayashi Kako, Fuji Yakuhin, and Towa Yakuhin for an alleged infringement of Glaxo's patents by conducting clinical trials in order to obtain official approval before Glaxo's patents expired. Glaxo-Wellcome also sued Sawai Seiyaku, Taiyo Yakuhin K‘gy’ and Kayaku on the same grounds. While these cases were filed in the Tokyo District Court, Sandoz Ltd. of Switzerland filed suits both in Tokyo and in Nagoya against nine Japanese companies, Sagami Kasei Kogyo, Shiono Chemical, Permachem Asia, YIC, Taiyo Yakuhin K‘gy’, MF, Medisa Shinyaku, Taiko Seiyaku and Toyo Pharmacy, on the same grounds of conducting clinical trials with the purpose of obtaining official approval. Short of filing a suit in court, the German-owned Bayer Yakuhin Ltd. warned nine Japanese generic drug makers of alleged infringements of its substances by conducting clinical trials in order to obtain official approval prior to the patent expiration date. The nine companies were said to be Toyama Seiyaku Kōgyō, Ikeda Mohando, Ryukakusan, Taiyo Yakuhin Kōgyō, MF, Maeda Yakuhin Kōgyō, Kyowa Yakuhin Kōgyō, Yoshindo, and Fukui Seiyaku. All these suits, however, went in favour of generic manufacturers: Tokyo District Court, 18 July 1997, summarily reported in 267 Hanketsu Sokuhô 12 [1997]; Tokyo District Court, 29 August 1997, summarily reported in 269 Hanketsu Sokuhô 7-9 [1997]; Nagoya High Court, 14 January 1998, [1998] AIPPI Journal (Int'l Ed.) 57; Tokyo District Court, 9 February 1998, reported in 275 Hanketsu Sokuhô 10 [1998]; Yamagata District Court, 17 March 1998, reported 276 Hanketsu Sokuhô 20 [1998]; Osaka District Court, 30 April 1998, reported in 277 Hanketsu Sokuhô 14 [1998]; Osaka District Court, 7 May 1998, reported in 277 Hanketsu Sokuhô 15 [1998]; Tokyo High Court, 31 March 1998, 39 IIC 454 (1999) - Procaterole. S. Maeda and H. Akimoto, The Impact of Public Health Issues on Exclusive Patent Rights, Journal of the Japanese Group of AIPPI (English Version), Vol. 33, No. 4, July 2008, page 192-195. K. Someno, Shiken Kenkyū ni okeru tokkyō hatsumei no jisshi (Working of a Patented Invention for Experiments or Research ); Journal of the Japanese Group of AIPPI (Japanese Version), Vol. 33, No. 3, 5 (1998). A comparative analysis is provided by: W.R. Cornish, ‘Experimental Use of Patented Inventions in European Community States', 29 IIC 735 1998); C Heath, ‘The Patent Exemption for ‘Experimental Use’ in Clinical Trials', [1997] AIPPI Japanese Group (Int'l Ed.) 267; J. Straus, ‘On the Admissibility of ‘Biological Equivalence Test’ During the Patent Term for Obtaining a Regulatory Approval for Patented Drugs by Third Parties', [1998] AIPPI (Int'l Ed.) 211. Nagoya District Court, 6 March 1996, 28 IIC 398 (1997) - Synthelabo.

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Roche v. Bollar, 221 USPQ 1937 (cir. 1984). Eli Lilly and Co. v. Medronic Inc., 873 D 2d 402, 10 USPQ 2d 1304 (Fed. Ser. 1989), affirmed 496 US 661, 110 S.Ct. 2683 (1990). 7) Monsanto Co. v. Stauffer Chemical Co., Court of Appeal, 11 June 1985, 17 IIC 410 [1986]. 8) Decision of the Tribunale di Milano, 12 June 1995 in Jurisprudenza Annuale del Diritto Industriale, 1995, 1081. 9) German Supreme Court, 11 July 1995, GRUR 1996, 109. 10) Decision of German Supreme Court, 17 April 1997, not reported. 11) TGI Paris, 20 February 2001, PIBD 2001 No 729, III, 530. 1) University of Freiburg 5) 6)

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Case No. 39: Intellectual Property Law – Patent Law – Requirements for a Patent Term Extension of Pharmaceutical Patents

Document information

Publication

Business Law in Japan – Cases and Comments

Marc Dernauer

Jurisdiction

Supreme Court, 28 April 2011, Case No. 2009 gyō-hi 326, Takeda Pharmaceutical Company Limited v. Japanese Patent Office, ‘Pacif Capsule II’ or ‘Morphine Hydrochloride II’ Source: Hanrei Taimuzu 1348, 102 = IIC 42 (2011) 972 (English translation)

(★ )

Japan

I Headnote(s)

Court

A prior marketing approval for a medicinal product with the same active ingredient, efficacy and effect cannot be held against a patent extension for a subsequent product where the former product is not within the technical scope of the claims of the patent for which extension is sought.

Supreme Court of Japan

Case date

II Relevant Provisions

28 April 2011

Sections 67(2), 67-3(1) No.1, 68-2 Patent Act P 422

Case number 2009 gy o-hi 326

III Facts This is an appeal filed by the Japanese Patent Office (hereinafter: the ‘Appellant’) against the decision of the IP High Court of 29 May 2009 overturning a decision to deny the extension of a patent. (1) The Supreme Court rejected the appeal, but for somewhat different reasons than the IP High Court.

Parties

Claimant, Takeda Pharmaceutical Company Limited Defendant, Japanese Patent Office

IV Reasons: Regarding the arguments of the Appellant, represented by Sudō Noriaki and others: 1.

Bibliographic reference

Marc Dernauer, 'Case No. 39: Intellectual Property Law – Patent Law – Requirements for a Patent Term Extension of Pharmaceutical Patents', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 421 - 431

2.

The case concerns an appeal filed by the Appellee to this suit, who is a patent holder of the Japanese patent no 3134187 (hereinafter ‘the patent in suit’, and the right based on this patent, ‘the patent right in suit’), challenging the decision of the Patent Office which rejected the application for patent term extension based on the patent right in suit. The facts correctly confirmed by the original ruling are as follows: (1)

(2)

(3)

The patent in suit (with 22 claims) is for an invention entitled ‘composition for controlled release’. The patent application was filed on 6 March 1997, and the patent grant was registered on 1 December 2000. The invention claimed in the patent in suit is related to a controlled release composition comprising a core containing a drug coated with a water insoluble substance, a coating agent with a certain hydrophilic substance or a cross-linked acrylic acid polymer. The Appellee has received an approval for manufacturing and sales (hereinafter ‘disposition in suit’) according to section 14(1) of the Pharmaceutical Affairs Act (PAA) (2) on 30 September 2005, for a medicinal product marketed as ‘Pacif Capsule 30mg’ (hereinafter ‘medicinal product in suit’). The medicinal product in suit has hydrochloride morphine as the active ingredient and its effect and efficacy relate to an analgesic for medium to high-grade cancerous pain. There was a prior manufacturing and sales approval according to section 14(1) PAA, (hereinafter ‘prior disposition in suit’) issued for a medicinal product marketed as ‘Opso Oral Solution Internal 5mg, 10mg’ with the same active ingredient, efficacy and effects, (hereinafter ‘prior medicinal product in suit’), predating the disposition in suit. The prior medicinal product is not within the technical scope of the patented invention as claimed in the patent in suit.

P 423

(4)

(5)

The Appellee has filed a patent term extension application on 16 December 2005, as there was a period during which time the patented invention based on the patent in suit could have not been worked, as it was necessary to obtain the disposition in suit. This application was rejected and the Appellee requested a trial to set aside the decision rejecting the patent term extension based on the patent in suit. The Japanese Patent Office has denied the above request (hereinafter, ‘Decision in suit’) on 21 October 2008, because there was the prior disposition in suit for the prior medicinal product in suit with the same active ingredient, efficacy and effect as the medicinal product in suit, and because the

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3.

4.

disposition in suit was not deemed necessary. Even when there is a prior marketing approval based on section 14(1) PAA (hereinafter ‘prior disposition’) for a medicinal product with the same active ingredient, efficacy and effect (hereinafter ‘prior medicinal product’) as the subsequent medicinal product (hereinafter ‘subsequent medicinal product’), predating a subsequent marketing approval according to section 14(1) PAA (hereinafter ‘subsequent disposition’) for which the application for patent term extension is based on, it is not possible to hold that the prior disposition makes the subsequent disposition unnecessary in case the prior medicinal product is not within the technical scope of the claims of the patent which patent term extension application is based on. This is because the patent term extension system aims to restore the period during which time the working of patented invention is not possible, due to the disposition according to the regulation provided in section 67(2) Patent Act. Even when there is a prior disposition for a prior medicinal product with the same active ingredient, efficacy and effect, as long as the prior medicinal product does not fall within the technical scope of the claims of the patented invention which the patent term extension of the right is sought for, the patented invention as claimed, nevertheless could not be worked for the subsequent medicinal product. Moreover, when the prior medicinal product is not within the technical scope of the patented invention, the conclusion above cannot be decided by considering the effect of the prior disposition on the scope of protection for the patent whose term is extended (section 68-2 Patent Act). The prior medicinal product in suit is not within the technical scope of the claimed invention of the patent in suit and thus, based on the prior disposition in suit, it is not possible to deny that the disposition in the suit was necessary to practice the patented invention. As reviewed in the above, the original ruling which held the decision in suit unlawful and which held that the presence of the prior disposition could not form the ground to deny the necessity of the marketing approval according to section 14(1) PAA is correct subject to the above reasons.

The decision has been rendered unanimously. Translated from the Japanese original by Nari Lee, MIPLC, Munich Translation first published in: IIC 42 (2011) 972 P 424

V Comment This Supreme Court decision in the Pacif Capsule IIcase clarified certain requirements for the extension of pharmaceutical patents based on sections 67(2), 68-2 Patent Act and had an enormous impact on the hitherto practice of the Japanese Patent Office (JPO) in deciding on applications for (the registration of) a patent term extension (hereinafter: ‘PTE’). Moreover, the decision is of tremendous importance for the pharmaceutical industry as a whole, with economic implications that cannot be overestimated.

1 Content of the Decision The regular term for a Japanese patent is twenty years, calculated from the filing date of the patent application (section 67(1) Patent Act). Sections 67(2), 67-3(1) no.1 Patent Act allow an application for a PTE of up to five years in cases where a specific approval or other disposition was necessary to work (i.e. to commercially use and exploit) the invention and where the proceedings to obtain such an approval or disposition caused a delay (a loss of time) in working the invention (‘the invention could not be worked [hatsumei no jisshi wo surukoto ga dekinai]’), which eventually resulted in a reduced period of patent protection. The PTE has to be filed at the JPO and shall compensate the patentee (and possible licensees) for the time lost due to the proceedings for obtaining the approval or disposition. However, not all kinds of approvals or dispositions necessary for working the invention are eligible for a PTE. Section 67(2) Patent Act stipulates that only approvals or dispositions which (1) are explicitly prescribed by legal provisions, (2) have the purpose of ensuring the safety of the product that embodies the invention (and similar purposes), and (3) are designated as such by cabinet ordinance can constitute a basis for the application of a PTE. The relevant designations by cabinet ordinance in this respect can be found in section 3 of the Implementing Ordinance Referring to the Patent Act (3) (hereinafter: ‘Implementing Ordinance’). Section 3 of the Implementing Ordinance designates the following approvals or designations as relevant in this regard: approvals for the manufacture, sale, and/or import of medicinal products (iyaku-hin) according to sections 14(1), 14(9) or 19-2(1) PPA, approvals for the manufacture, sale, and/or import of medicinal products for diagnostics to be applied outside of the body (taigai shindan-yō iyaku-hin) according to section 23-2(1) PPA, and registrations required for the manufacture, processing, and/or import of plant protection products and fertilizers (nōyaku) according to sections 2(1), 6-2(1) or 15-2(1) of the Act on the Regulation of Chemicals Used in Agriculture (4) , (5) .

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P 425

Moreover, in view of sections 67(2) and 67-3 Patent Act, the following further requirements have to be met in order to obtain a PTE: (1) the patentee or registered exclusive or nonexclusive licensee must have actually obtained the respective designated marketing approval or registration, (2) the requested term of the PTE may not exceed a period corresponding to the loss of time actually suffered by the proceedings for obtaining the marketing approval or registration, (3) the patentee must file the application for the PTE, (4) in case of a jointly owned patent, all joint owners together must file the application, (5) the application for a PTE must be filed no later than three months after having obtained the respective marketing approval or registration, and (6) if the marketing approval or registration is unlikely to be obtained until a date six months prior to the expiry of the patent, the patentee must notify the JPO at least six months prior to the expiry of the patent that an application for marketing approval or registration is still pending and that a PTE application will be filed after the grant of the marketing approval or registration. (6) In Japan, the system of PTE was introduced in 1987 by a revision of the Patent Act, which is shortly before the EU established a similar system of additional protection by supplementary protection certificates (SPC's) in 1992 for medicinal products (7) and in 1996 for plant protection products. (8) The present Pacif Capsule II case concerned an application by Takeda Pharmaceutical Company Limited (Takeda Yakuhin Kōgyō Kabushiki Kaisha) for a PTE of a patent relating to a controlled-release-type microcapsule capable of carrying inter alia morphine hydrochloride as an active ingredient. The application was based on a marketing approval according to section 14(1) PPA for the medicament ‘Pacif Capsule 30mg (Pashiifu Kapuseru 30mg)’, which pertained to a controlled-release-type microcapsule with the active ingredient morphine hydrochloride in a concentration of 30mg for pain treatment in cancer patients. However, a prior marketing approval had already been obtained and was held by a competitor of Takeda, Dainippon Sumitomo Pharma Co., Ltd. (Dainippon Sumitomo Seiyaku Kabushiki Kaisha), for the medicament ‘Opso Liquid for Oral Administration 5mg/10mg’ (or ‘Opso Oral Solution Internal 5mg, 10mg’) that related to a medicament with the same active ingredient (‘morphine hydrochloride’) and for the same medicinal application (‘pain treatment of cancer patients’) as the medicament ‘Pacif Capsule 30mg’. However, in contrast to the medicament ‘Pacif Capsule 30mg’, this medicament was a solution and thus different in its dosage form and, moreover, comprised the active ingredient in a lower concentration. The existence of the prior marketing approval for the medicament ‘Opso Liquid for Oral Administration 5mg/10mg’ was the only reason why the JPO rejected the PTE application of Takeda. Takeda P 426 appealed to the IP High Court and the appeal was successful. (9) The JPO decision was set aside. The JPO then filed an appeal at the Supreme Court, which upheld the decision of the IP High Court to quash the JPO decision. The Supreme Court held in the Pacif Capsule II case that the prior marketing approval for the medicament ‘Opso Liquid for Oral Administration 5mg/10mg’ was not a justified reason to reject the application for a PTE regarding a patent with a technical scope as applied for by Takeda, i.e. with technical features corresponding to the features of the medicament ‘Pacif Capsule 30mg’, because the previously approved medicament ‘Opso Liquid for Oral Administration 5mg/ 10mg’ was not covered by the technical scope of the claims of the patent in the form for which extension was sought, and, therefore, the subsequent marketing approval obtained by Takeda was also not unnecessary for working the patented invention in the form of the PTE applied for by Takeda. In other more general words, the Supreme Court held that if a (subsequent) marketing approval for a medicament features the same active ingredient and medicinal application (referred to by the Supreme Court by the attributes ‘efficacy [kōnō]’ and ‘effect [kōka]’ of the medicament) as a prior marketing approval for a different medicament, but differs in further features from the prior marketing approval (such as the dosage form and the concentration of the active ingredient), the subsequent marketing approval is deemed to be necessary for working the patented invention identified by the patent for which the PTE was applied, and, at the same time, the prior medicament identified by the prior marketing approval is not covered by the technical scope of the patent for which the PTE was applied. Hence, the PTE for the patent has to be granted in such cases. (10) What is the relation between the medicament as the object of a marketing approval and the technical scope of the patent for which a PTE is applied? Pursuant to section 68-2 Patent Act, they have to be identical. According to section 68-2 Patent Act, the extended patent shall only cover the patented invention to the extent identified by the marketing approval that forms the basis for the PTE application, i.e. in regard of the ‘object’ of the marketing approval. As a result of the Supreme Court decision in the present case, a prior marketing approval for a medicament is no longer an obstacle to obtaining a PTE for a patent with a technical scope equal to the attributes of a subsequent marketing approval, if the prior marketing approval and the subsequent marketing approval both refer to the same active ingredient and the same medicinal application, but if they differ from each other in regard of further attributes, such as the dosage form or the concentration of the active ingredient. Of course, the technical scope of the original P 427 patent always has to include the technical scope of the patent in the form for which a

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PTE is sought, i.e. in the form of the medicament identified by the marketing approval that forms the basis for the respective PTE application. The technical scope of the patent for which the PTE is applied is always a limited part of the technical scope of the originally granted patent, i.e. it is limited to the object of the respective marketing approval. It is not possible to apply for a PTE for a medicament which does not fall within the claims of the originally granted patent. The decision of the Supreme Court (and of the IP High Court) in the Pacif Capsule II case is convincing. Section 67(2) Patent Act refers to necessary marketing approvals for commercially using the invention. There is no doubt that the marketing approval was necessary for Takeda to put the medicament ‘Pacif Capsule 30mg’ on the market. The prior marketing approval was not sufficient in this regard. Even if the prior marketing approval had been granted to Takeda, it would not have been sufficient because the medicament ‘Opso Liquid for Oral Administration 5mg/10mg’ was different from the medicament ‘Pacif Capsule 30mg’ in terms of its dosage form and in its concentration of the active ingredient. As was correctly stated by the IP High Court, as the trial court, in its judgment, a marketing approval under the PAA is not only characterized by the active ingredient and the intended application, but also by several other specifications such as e.g. the dosage form and the concentration of the active ingredient as set out in section 14 PAA. The IP High Court further stated that each marketing approval was actually quite narrow and did not extend to similar medicaments with the same active ingredient and for the treatment of the same disease if they differed in any other relevant feature as set out by section 14 PAA. For the manufacture and sale of such similar medicaments, a new marketing approval was necessary. The IP High Court also took into consideration the fact that Drug Delivery Systems (DDS) and similar technologies are growing in relevance in medicine. (11) The decision of the IP High Court in the present Pacif Capsule II case, and thus also the decision of the Supreme Court which upheld the decision, has been widely welcomed by legal practitioners and scholars alike. (12)

2 The Hitherto Practice of the JPO and the Former Case Law According to the former practice of the JPO and the hitherto established case law of the courts, in particular the case law of the IP High Court, before the IP High Court decision in this case, the object of the marketing approval as stated in section 68-2 Patent Act was P 428 only deemed to be characterised by the contained ‘active ingredient’ and the ‘medicinal application’. The medicinal application, i.e. the disease which the medicament is designed to treat, is also referred to as the ‘effect’ and ‘efficacy’ of the medicament. Whenever there was a prior marketing approval for a medicament which was identical to another subsequent marketing approval in regard of the contained active ingredient and the intended application, the subsequently granted marketing approval was generally not accepted as a basis for a PTE. It was of no relevance whether the prior marketing authorization was held by the patentee and holder of the second marketing authorization or by another party. The other features in which the two marketing approvals differed, such as e.g. the dosage form (capsule, tablet, solution for oral, nasal, or ophthalmic administration, solution for injection, etc.), the concentration or amount of the active ingredient, the existence of a further active ingredient (i.e. a combination of active ingredients) or whether the intended treatment concerned adults or children, were also not deemed to be relevant at all. Moreover, it did not matter whether the patent for which the PTE was filed referred to a specific active ingredient and application or rather to the form of the medicament itself. Furthermore, it was also not relevant whether the application for the PTE was a first application in regard of a patent or whether it was a second application for a PTE of the same patent, for which one PTE had been already granted based on a prior marketing approval. (13) In all such cases, it was always decided that a PTE could not be granted. The JPO and the courts in such cases stated that the patented invention could already be worked after the first marketing approval, at least partly.

3 Open Issues In the Pacif Capsule II case, the patent in suit related to a specific form of a medicament (dosage form) which was able to carry, for instance, the active ingredient identified by the marketing approval at issue, i.e. morphine hydrochloride. Therefore, the patent was not a patent relating to the active ingredient itself. Hence, the Supreme Court decision P 429 left it open whether the same reasoning can be applied in a case relating to a patent for an active ingredient. This is, however, likely. In two further decisions of the IP High Court, following the IP High Court decision in the Pacif Capsule II case (but issued before the Supreme Court decision), the IP High Court confirmed its new case law by allowing a PTE for a patent relating to a combination medicament (tablet) for the treatment of an HIV infection containing abacavir sulfate and lamivudine as active ingredients (i.e. two active ingredients) on the basis of a marketing approval for a corresponding medicament, and this even though there was a prior marketing approval for a medicament containing one of these active ingredients and another one for a combination treatment with two medicaments, each containing one of these active ingredients for the treatment of the same disease. (14) A further open issue is whether it could be sufficient to argue (where possible) that the former marketing approval was granted to a different party. In theory, this should be

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possible because if the prior marketing approval was granted to a different party, no matter what the object of it was, another party never can claim that it would be entitled to market that medicament. However, in the Pacif Capsule II case, this was not discussed at all, neither by the Supreme Court nor by the trial court, i.e. the IP High Court. It remains to be seen whether the Supreme Court will also clarify this issue. Another open issue is the question as to whether it is possible, based on the new precedents established by the Supreme Court and the IP High Court in the Pacif Capsule II case, to obtain a second PTE for the same patent on the basis of a second marketing approval. It is imaginable, for instance, that a patent for a specific active ingredient was first extended based on a marketing approval for a medicament (e.g. a film coated tablet) with an amount of 5mg of the active ingredient, and that afterwards the patentee obtained a second marketing approval for a medicament with the same active ingredient, but with an amount of 10mg, and maybe also in another dosage form (e.g. a solution for oral administration). In such a case, the patentee would probably like to obtain a further PTE for the same patent, limited of course to the object of the second marketing approval. In the Pacif Capsule II case, this issue was also not decided by the Supreme Court. It should, however, be assumed that a second PTE of the same patent is possible because it seems to be possible to apply the reasoning of the Supreme Court and the IP High Court in the Pacif Capsule II case also with respect to such a case. Another issue is how the technical scope (i.e. the scope of protection) of the extended patent has to be interpreted in infringement proceedings. The present case is not an infringement case, and it seems that Japanese courts have so far, at least up until January 2010, (15) never had to decide on an infringement case relating to a patent whose term P 430 had been extended. The IP High Court in the Pacif Capsule II case, however, at least indicated that the object of the marketing approval is limited to its specific object including all characteristics relevant for the approval according to section 14 PAA. Since the object of the extended patent must be identical to the object of the marketing approval on which the PTE is based (cf. section 68-2 Patent Act), it can be concluded that the technical scope of an extended patent must also be interpreted very narrowly, i.e. with hardly any leeway e.g. for arguing equivalent infringement. This would mean the technical scope of the extended patent has to be interpreted more narrowly than hitherto commonly assumed in legal literature. (16) Before the court decisions in the Pacif Capsule II case, it was believed that the technical scope of an extended pharmaceutical patent would also extend to similar medicaments, for example to a medicament for the treatment of a disease substantially the same, to a medicament with a different concentration/ amount of the same active ingredient or to a medicament with a different dosage form, if only the active ingredient was the same.

4 Decisions in Similar PTE Cases and Outlook Takeda filed an appeal against the JPO decision not only in the Pacif Capsule II case, but also in several other similar PTE cases. Five of these cases have also already been decided by the IP High Court in favour of Takeda, (17) and in two of these cases (the socalled Pacif Capsule I and Leuplin cases), the IP High Court judgment was also upheld by a Supreme Court judgment of the same day as in the Pacif Capsule IIcase, i.e. on 28 April 2011, with almost the same reasoning. (18) In the three remaining cases (the so-called Takepron cases), the JPO also filed an appeal at the Supreme Court against the decisions of the IP High Court. It is, however, not clear what has happened with the appeal proceedings in these Takepron cases after the Supreme Court rendered its judgment in P 431 the Pacif Capsule II case and in the other two cases (Pacif Capsule I and Leuplin) on 28 April 2011. Meanwhile, the appeals to the Supreme Court in these three Takepron cases might have been withdrawn. Otherwise, it is likely that the Supreme Court will render further judgments in the near future, wherein the interpretation of sections 67(2), 68-2 and 67-3(1) no. 1 Patent Act applied by the Supreme Court in the Pacif Capsule II case, in the Pacif Capsule I case, and in the Leuplin case will be confirmed. However, while the judgments rendered by the Supreme Court in the Pacif Capsule II case, in the Pacif Capsule I case, and in the Leuplin case related to almost the same main legal issue, in the Takepron cases, the IP High Court referred to the interpretation of the legal term ‘object’ of the marketing approval in section 68-2 Patent Act and to the problem of an existing prior marketing approval for a medicament with the same active ingredient and for the same medicinal application only as obiter dicta. In the Takepron cases, the IP High Court ruled against the JPO on a rather procedural aspect of patent disclosure, namely that the JPO failed to use the disclosed patent claim as granted (instead of the patent claim as applied for). (19) The JPO quickly reacted to the new precedents set by the Supreme Court in the present Pacif Capsule II case and in the cases Pacif Capsule I and Leuplin. Only around one month after the Supreme Court judgments were rendered in these cases, the JPO announced on 26 May 2011 that Part VI: Patent Term Extension (PTE) of the current Examination Guidelines for patents would be revised and that the examination of applications for the registration of a PTE would be suspended until the establishment of the new guideline. Meanwhile, on 2 November 2011, the JPO published the new Draft Examination Guidelines for ‘Patent Term Extension’ on its website and invited the public to file written comments regarding this draft by no later than 1 December 2011. (20)

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Marc Dernauer (1) P 431

References ★ )

1) 2) 3) 4) 5) 6) 7)

8)

Marc Dernauer: University of Freiburg, (Tohoku University) Case No. 2008 gyō-ke 10460. Yakuji-hō, Law No. 145/1960, last amended by Law No. 85/2006. Tokkyo-hō sekōrei, Cabinet Ordinance No. 16/1960, last amended by Cabinet Ordinance No. 404/2008. Nōyaku torishimari-hō, Law No. 82/1948, last amended by Law No. 8/2007. For details cf. M. Dernauer, Patent Term Extension in Japan, in: Hansen/SchüsslerLangeheine (eds.), Patent Practice in Japan and Europe, Liber Amicorum for Guntram Rahn (Kluwer Law International 2011) 589, 593-596. For details cf. Dernauer (supra note 5) 592-600. Council Regulation (EEC) No. 1768/92 of 18 June 1992 concerning the creation of a supplementary protection certificate for medicinal products; now replaced by Regulation (EC) No. 469/ 2009 of the European Parliament and of the Council of 6 May 2009 concerning the supplementary protection certificate for medicinal products. Regulation (EC) No. 1610/96 of the European Parliament and of the Council of 23 July 1996 concerning the creation of a supplementary protection certificate for plant protection products.

9) See supra note 1. 10) For further comments on this case see R. Iseki, Iyaku-hin no fukusū shōnin to tokkyo-

11) 12)

13)

14) 15)

16)

ken no sonzoku kikan enchō tōroku –pashiifu kapuseru 30mg jiken Saikō-sai hanketsu [Multitude of Approvals for the Manufacturing of Medicinal Products and the Registration of the Extension of Patent Rights], in: AIPPI Journal of the Japanese Group (September 2011) 596; M. Dernauer, Japan – Oberster Gerichtshof entscheidet über Voraussetzungen der Verlängerung von Phar-mapatenten [Japan - Supreme Court Decides on the Requirements for the Extension of Pharmaceutical Patents], in: GRUR Int 2011, 657-659. T. Iimura, ‘Patent Term Extension in Japan’, manuscript of a presentation at the Munich Intellectual Property Law Center (MIPLC) in May 2010, slide 5 (on file with the author). Cf. for example Y. Sonoda, Controversy over Patent Term Extensions, in: Asia-Pacific & Middle East IP Focus 2009, 51–53; R. Iseki, Case Revoking the JPO Decision which Refused Application for Patent Term Extension Based on the Previous Marketing Approval for the Same Active Ingredient and Indication of Another Drug, in: AIPPI Journal of the Japanese Group, English edition (January 2010) 3–20, at 17. R. Iseki, Registration of Patent Term Extension and Marketing Approval under the Pharmaceutical Affairs Law, in: AIPPI Journal of the Japanese Group, English edition (May 2009) 107; S. Matsui, Yakuji-hō no kōsaku suru tokkyo-ken sonzoku kikan enchō seido no mondai-ten [The Problematic Issues Regarding Complicated Cases in Pharmaceutical Law with Respect to the Patent Term Extension System]; Dernauer (supra note 5) 602. Cf. for example: Tokyo High Court, 5 March 1998, in: Hanrei Jihō 1650 - Ketitofen Fumarate, 32; Tokyo High Court, 10 February 2000, in: Hanrei Jihō 1719, 133 - Ondansetrone Hydrochloride; IP High Court, 30 May 2005 - Lamivudine and Zidovudine (see also a partial translation of the judgment by M. Mori, in: IIC 2009, 872); IP High Court, 18 January 2007, Case No. 2005 gyō-ke 10724 - Microencapsulation of Water Soluble Polypeptides; IP High Court, 11 October 2005, Case No. 2005 gyō-ke 10345 - Microcapsule with Hormonally Active Water-Soluble Polypeptide; IP High Court, 16 November 2005, in: Hanrei Taimuzu 1208, 292 -Eye Perfusion and Cleansing Solution Packaged Container; IP High Court, 19 July 2007, in: Hanrei Jihō 1980, 133 Long-Term Sustained Release Type of a Microcapsule; IP High Court, 27 September 2007, Case No. 2007 gyō-ke 10016 - Beclomethasone Aerosol Medicament. IP High Court, 28 March 2011, Case No. 2010 gyō-ke 10178 - Lamivudine and Abacavir; and Case No. 2010 gyō-ke 10177 of the same day, available on the Supreme Court website at . R. Iseki, Case Revoking the JPO Decision which Refused Application for Patent Term Extension Based on the Previous Marketing Approval for the Same Active Ingredient and Indication of Another Drug, in: AIPPI Journal of the Japanese Group, English edition (January 2010) 3, at 17. H. Aoyama, Tokkyo-hō [Patent Law] (10th ed., Hōgaku Sho-in 2008) 205; Dernauer (supra note 5) 600.

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17) IP High Court, 29 May 2009, Case No. 2008 gyō-ke 10458 - Pacif Capsule I (or Morphin

Hydrochloride I), in: Hanrei Jihō 2047, 11 (English translation of N. Lee, in: IIC 42 (2011) 478); IP High Court, 29 May 2009, Case No. 2008 gyō-ke 10459 - Leuplin (or Leuprorelin Acetate), unpublished, but available on the Supreme Court website under ; IP High Court, 27 May 2009, Case No. 2008 gyō-ke 10476 Takepron I (or Lansoprazole I), unpublished, but also on the Supreme Court website, ibid.; on IP High Court, 27 May 2009, Case No. 2008 gyō-ke 10477 - Takepron II (or Lansoprazole II), unpublished, but available at the Supreme Court website; IP High Court, 27 May 2009, Case No. 2008 gyō-ke 10478 - Takepron III (or Lansoprazole III), also available on the Supreme Court website. For a discussion of the IP High Court decisions in these cases, see N. Lee, Patent Term Extension in Japan in Light of the Pacif Capsule Decision, in: IIC 42 (2011) 442. 18) Iseki (supra note 10) 607, in footnote 1. Supreme Court, 28 April 2011, Case No. 2009 gyō-hi 324 (corresponding to IP High Court, 29 May 2009, Case No. 2008 gyō-ke 10458); Supreme Court, 28 April 2011, Case No. 2009 gyō-hi 325 (corresponding to IP High Court, 29 May 2009, Case No. 2008 gyō-ke 10459). 19) Cf. Lee (supra note 17) 452. 20) Cf. , last visited on 1 December 2011. The Draft Examination Guidelines are also available there. 1) University of Freiburg, (Tohoku University)

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Case No. 40: Intellectual Property – Patent Law – Interpretation of Patent Claims – Doctrine of Equivalents

Document information

Publication

Okada Atsushi

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 24.02.1998 – Tsubakimoto Seiki K.K. v. THK K.K – Ball Spline Bearing III Source: 1999 International Review of Intellectual Property and Competition Law (IIC), 443

Jurisdiction Japan

I Headnote(s)

Court

A contested device is technically equivalent and infringing if not belonging to prior art at the time of the patent application, embodying the essential parts of the invention with the same purpose or result and if the equivalent was easily conceivable at the time of production without having been disclaimed by the patentee.

Supreme Court of Japan

II Relevant Provisions

Case date

Section 70 Patent Act

24 February 1998 P 434

Parties

III Facts

Bibliographic reference

The defendant (plaintiff in the original action) is the owner of a Japanese patent for ‘ball spline bearings for infinite sliding’ that was filed on 26 April 1971 and granted on 30 May 1980. The plaintiff (and the defendant to the original action) made and sold ball spline bearings similar to those claimed by the patented invention. The Tokyo High Court [decision of 3 February 1994, 26 IIC 683 (1995) with comment by Takenaka] found the plaintiff's device infringing under the doctrine of equivalents. The Tokyo High Court found that the plaintiff's embodiment attained the same technical object and result, and that the plaintiff's modifications were insignificant. The plaintiff appealed.

Claimant, Tsubakimoto Seiki K.K. Defendant, THK K.K

Okada Atsushi, 'Case No. 40: Intellectual Property – Patent Law – Interpretation of Patent Claims – Doctrine of Equivalents', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 433 - 448

IV Findings ‘ … II. The Tokyo High Court accepted the patentee's arguments that the contested product complied with all the claim components or their equivalent, and the court granted injunctive relief and damages, holding the following: 1. 2. 3.

4.

The accused product undisputedly complies with the claim components C, D and E. The ‘U-letter section’ and ‘circumferentially profiled ditch’ (component A in the patent claim) differ from the ‘semicircular’ and ‘cylindrical inner face (7)’ of the contested product. The patented ball retainer consists of one single piece and is able to hold without dropping the balls when the spline shaft (9) is removed from the bearing and is designed to recede (at 12) in order to link up with the projection (10) on the spline shaft (9) of the accused product, yet, the three parts including the inward projections (25, 27, 29), plate members (11) and return caps (31) are designed for cooperation to perform the functions by the patented retainer (2). Thus, there is a difference in the composition. However, with the contested product, no difference from the patent is found from the aspect of the inventive problem to be solved, the basic technical idea, or the effects brought about by each component. These are the same in the patented invention and the accused product. The ball retainer of component B could have been easily interchanged by a person skilled in the art with the respective solution of the allegedly infringing device at the time the application was filed. Finally, the difference between the ‘semicircular’ and ‘cylindrical inner face’ (7) of the contested product and the patented ‘U-letter section’ and ‘circumferentially profiled ditch’ of component A is technically insignificant. The accused product therefore falls within the technical scope of the patented invention.

P 435

III. This Court cannot agree with the lower court's findings for the following reasons. 1.

Whether the contested device infringes a patented invention or not must be determined according to the interpretation of a patent claim under section 70 Patent Act. However, even if the allegedly infringing device partially differs from the wording of the claims, an equivalence can be affirmed if: (i) (ii)

the above differences concern an essential part of the claimed invention, the allegedly infringing device despite the replacement still attains the same purpose and result, (iii) a person skilled in the art could have easily anticipated the replacement at the time of production,

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(iv) at the time of the patent application the allegedly infringing device did not belong to the state of the art or could have been easily anticipated therefrom, and (v) in the course of patent application proceedings, the scope of the patent claims was not meant to exclude the allegedly infringing device. If the allegedly infringing device according to the above can be understood as an equivalent to the scope claimed in the patented invention, it should be regarded as falling within such scope. The reasons for the foregoing are as follows: (i)

2.

At the time of filing an application and drafting a claim, it is very difficult to anticipate all possible infringements that may occur. Thus, if a third party could evade the proper enforcement of a patent right by changing the structure of the patented invention after patent application, this would lead to a general decline in inventive activities and thereby contravene the purpose of the Patent Act to encourage inventions by promoting their protection. Not only that, it would also be contrary to social justice and contrary to the idea of equitable results. (ii) In view of the above, the patented invention should cover such embodiments a third party could readily conceive from the patented claim composition as substantially equal. Thus, it is proper to assume that anyone should anticipate such interpretation. (iii) However, embodiments known or easily conceivable at the time of filing are unpatentable. No patent could claim such an embodiment that consists of prior art and is thus in the public domain. (iv) In addition, no embodiment may be claimed that was deliberately eliminated from a claim during the patent prosecution or the like. This may be raised as an estoppel. Applying such rationale to this case, the lower court found a difference between the patented claim components A and B and the allegedly infringing device, but found for an infringement on the basis of easy interchangeability.

P 436

Further: (i)

4.

5.

Infinite sliding ball spline bearings composed of an outer cylinder, spline shaft and retainer were generally known before the application of the claimant patent and the patent claim component C concerning the spline shaft was state of the art. (ii) Component B concerning the retainer with its one-piece structure and its functional feature was compared by the court with the allegedly infringing retainer composed of three separate plates (11) to interact with two return caps (31) and the projections (25, 27, 29) from the outer cylinder (1) to the same effect as the patented device. However, the combination of the allegedly infringing retainer structured of three plate members and two return caps was published prior to the patent application by US Patent 3360308. (iii) Application thereof would require an additional projection from the outer cylinder that is also found in prior art in the US Patent 3398999. These facts lead to the assumption that the allegedly infringing device may well belong to prior art. ... Thus it may well be that the ball spline bearing consisting of the circumferential circulation of nontorque balls and angular contacts was known prior to the patent application… . One may therefore conclude that the allegedly infringing technology is a combination of a known device with a known retainer having a structure of separate plates. Should this combination have been readily conceivable without relying on the disclosure of the patented invention, the allegedly infringing device should be considered in the public domain at the time of the patent application, and could therefore not qualify as an infringing equivalent of the patented invention. The lower court only analysed the difference between the patent components and the allegedly infringing device as to the possible and easy interchange. It did not take into account the state of the art with respect to the defendant's device known at the time of the patent application. Since the lower court affirmed an equivalence without such considerations, it has not properly interpreted the Patent Act’.

Translated by Christopher Heath

V Comment The Ball Spline case is a patent infringement suit concerning an invention named the ‘infinite sliding ball spline bearing’ (the ‘Invention’). The accused product was a ball spline performing functions similar to the Invention, but there were several differences between it and the wording of the invention's claims, such as in the form of its ball guide P 437 grooves and in the structure of its holder. The patentee therefore claimed damages

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from the alleged infringer, alleging equivalent infringement under the doctrine of equivalents in addition to literal infringement.

1 The Basic Principle of the Doctrine of Equivalents The technical scope of a patented invention is determined based on the statements in the scope of claims (Patent Act, section 70 (1)). Therefore, the general principle is that patent infringement is recognized only if an allegedly infringing product meets all of the structural elements stated in the claims. This is known as literal infringement. However, if the wording of the claims is rigidly interpreted, then the appropriate protection of patent rights would be impossible as alleged infringers could avoid patent infringement by making insignificant changes to the claims. Consequently, an approach is necessary in which infringement is recognized and the protective scope of patent rights is expanded in exceptional cases if certain requirements are fulfilled, even if an accused product does not fulfil a part of the structural elements stated in the claims according to the interpretation of the wording. This approach is known as the doctrine of equivalents.

2 The Significance of the Decision in the Ball Spline Case a) The Situations Prior to the Decision Prior to the Ball Spline decision, parties to patent infringement suits had made arguments based on the doctrine of equivalents, and there had been several lower court precedents using the doctrine of equivalents to recognize patent infringement. (1) There P 438 were also lower court precedents that drew a similar conclusion by expanding its interpretation of the claims, although the phrase doctrine of equivalents was not used. (2) However, in addition to lower court precedents rejecting the doctrine of equivalents, (3) there were a number of lower court precedents that, even while acknowledging the doctrine of equivalents as a general principal of law, took a negative attitude toward applying it to specific cases. (4) Prior to the Ball Spline decision, the courts were thus reluctant to affirm infringement when one element of the claim had been replaced by another one or when one element of the claim was missing. (5) Unlike in the past, legal theories accepting the doctrine of equivalents had also become influential, but there were various different views on the requirements for applying the doctrine of equivalents. Therefore, prior to the Ball Spline decision, patentees were in a state of having to hesitate before asserting the doctrine of equivalents in a patent infringement suit, and there was a growing need for the acceptability of the doctrine of equivalents and the requirements for its application to be clarified either through legislation or through a Supreme Court decision. P 439

Furthermore, shifting the focus to countries other than Japan, the doctrine of equivalents was accepted in the United States (6) and Germany, (7) among others, and was also adopted in the draft of the World Intellectual Property Organization's Treaty Supplementing the Paris Convention for the Protection of Industrial Property as far as Patents Are Concerned (known as the ‘Patent Harmonization Treaty’), it can be said that the adoption of the doctrine of equivalents had been anticipated from the perspective of the international harmonization of patent systems. (8) Against the background described above, codification of the doctrine of equivalents had been examined at the legislative level, but it was not implemented on the grounds that the courts should consider the doctrine on a case-by-case basis. The question of how to handle the doctrine of equivalents was therefore taken up at the judicial instead of the legislative level, and was eventually entrusted to the judgment of the Supreme Court in particular. Just as in the BBS case on the parallel importation of patented products, the assistant judge at the Supreme Court was Ryoichi Mimura, who also published a comment on how to interpret the five requirements set forth in the decision. (9) b) The Significance of the Ball Spline Decision The Ball Spline decision is extremely important since it is the Supreme Court of Japan's first declared acceptance of the doctrine of equivalents as a general legal principle, and in that the Supreme Court clearly articulated the requirements for establishing equivalence: The first (nonessential part), the second (replaceability) and the third (ease of replacement) requirements are positioned as positive requirements for equivalence, which is to say requirements to establish the basis for being virtually identical with the patented invention, while the fourth (not publicly known technology) and the fifth (special circumstances such as conscious exclusion, generally referred to as ‘file-wrapper estoppel’) requirements are formulated as negative requirements for equivalence, which is to say requirements to reject an equivalent infringement if argued by the defendant by way of estoppel. c) The General Trend in Lower Court Precedents after the Ball Spline Decision Cases of the doctrine of equivalents being invoked in patent infringement suits have P 440

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P 440

notably increased since the Ball Spline decision. However, there are a limited number of lower court precedents that have affirmed equivalence as the result or conclusion of applying the doctrine of equivalents. Among lower court precedents that rejected equivalent infringement, cases in which equivalent infringement was rejected on the grounds that the first requirement had not been met were overwhelmingly common, the next most common being cases rejected on the grounds that the fifth requirement had not been met. For example, the following general trends of lower court precedents have been demonstrated according to a thesis (10) published in 2007. The percentage of judicial precedents affirming equivalent infringement among those deciding the application of the doctrine of equivalents: less than 10% Among judicial precedents rejecting equivalent infringement, the percentage of cases rejected for not meeting the first requirement: more than 70% for not meeting the second requirement: less than 20% for not meeting the third requirement: about 15% for not meeting the fourth requirement: about 3% for not meeting the fifth requirement: more than 30%

3 The Requirements for Applying the Doctrine of Equivalents Set forth in the Ball Spline Decision The details of each requirement for applying the doctrine of equivalents set forth in the Ball Spline decision are explained in order below. There are numerous parts of the Ball Spline decision where the detailed interpretation of each requirement is unclear, but in the more than 10 years that have passed since the decision, a number of lower court precedents have appeared that ruled on the application of the doctrine of equivalents based on the framework of the Ball Spline decision. a) The First Requirement - Nonessential Part The first requirement is that the difference is not an essential part of the patented invention. According to Mimura, (11) an essential part of the patented invention is, ‘among the structures of the patented invention stated in the claims, a characteristic part particular to the patented invention that is a basis for its means of solving the problem of the invention’. In other words, it is understood as referring to ‘a part that would create a different overall technical idea from the patented invention if it were replaced by another structure’, and a similar phrase has also been commonly used in lower court P 441 precedents after the Ball Spline decision. In this manner, the Ball Spline decision has limited the scope for establishing equivalence by demanding sameness in the means of problem solving particular to the patented invention (technical idea) through the first requirement in addition to the sameness of effect (the second requirement). (12) As a rule, an essential part is defined based on the problem of the prior art stated in the specification and its means of solving the problem. However, the level of publicly known technology stated in the specification differs according to the applicant, and therefore the issue exists of whether to allow the consideration of publicly known technology not stated in the specification as material for defining an essential part. The trend in the majority of lower court precedents after the Ball Spline decision has been not to limit the publicly known technology used in defining essential parts to the prior art stated in the specification. Furthermore, most lower court precedents have considered material such as the application process, especially the arguments in the applicant's written opinions, as important for understanding essential parts. For example, if there are circumstances wherein a patent was granted after an applicant made an argument in a written opinion highlighting a prominent effect of a specific structure in the claims, replacing that structure with something else would be judged to be changing an essential part, and this is weighed against the establishment of equivalence. However, it must be noted that the flexible introduction of these multiple circumstances into the first requirement might conversely damage legal predictability because both the publicly known technology and the application process are stressed in the fourth and fifth requirement, respectively. As seen above, there are several different avenues for finding material to define an essential part, and in specific cases it has not been simple to define what constitutes an essential part of a patented invention, with examples of different conclusions being reached in identical cases. One such example is the ‘Hollow Golf Club Head’ case. (13) In this case, literal infringement was rejected on the grounds that the ‘short strip’ of the accused product did not fall under the ‘stitching member’ in the claims of the patented invention. However, with regard to the doctrine of equivalents, in contrast to the court of first instance (Tokyo District Court, 9 December 2008) rejecting equivalent infringement by determining that a stitching member is an essential part of the patented invention as P 442 it is a characteristic structure that solves the problem of binding materials together, the court of second instance affirmed equivalent infringement by determining that using

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a stitching member to bind materials together is not itself a central part of the technical idea of the patented invention. In this respect, the IP High Court held: ‘(1) In this case, the problem is whether the short strip of the defendant's product (8) is equivalent to the ‘stitching member’ of the patented invention. The difference between the short strip and the ‘stitching member’ is that (1) the short strip is passed through a through hole made in the metallic shell member only once and (2) it is bonded at one point to both the upper and lower FRP shell members respectively (on the upper side and the lower side of the metallic shell member). (2) According to the specification of the patent, the purpose and advantageous effect of using the ‘stitching member’ is to increase the bonding strength between the metallic shell member and the FRP shell member. By passing the short strip through one through hole and bonding it at one point to both the upper FRP and lower FRP shell members respectively, the short strip also increases the bonding strength between the metallic shell member and the FRP shell member. As the ‘stitching member’ and the short strip have the same purpose and advantageous effect, they are interchangeable’. In fact, when starting from the patented invention, one could arrive to the infringing embodiment by the following steps (a graph used by the plaintiff used to illustrate his

case): P 443

b) The Second Requirement – Replaceability The second requirement is that the object of the patented invention can be achieved and the same effect obtained even if the different part is replaced. According to Mimura's commentary on the Ball Spline decision, the effect of the patented invention that is to be compared in the second requirement is determined by a comparison of the patented invention and the prior art at the time of its application, and should be determined based on the statements concerning its effects in the ‘Detailed Explanation of the Invention’ section of the specification. Mimura further states that the second requirement should be generally decided based on the statements of the specification and that additional effects beyond the resolution of the object of the patented invention or the particular effects of embodiments of the patented invention should not be treated as a subject of the second requirement. The reason Mimura gives for this are that requiring identity to such an extent would greatly constrict the space for establishing equivalence and that even if the second requirement is generally recognized, the scope for establishing equivalence can be limited by the first requirement. Most lower court precedents after the Ball Spline decision are based on a similar reasoning, however, there are also cases in which, rather than simply relying on the statements in the specification, the effect of the patented invention has been compared to the effect of the accused product after the patented invention's particular effects have been defined in detail through a comparison with publicly known technology. With regard to the identity of effects, one issue that has arisen is how to handle cases in which the accused product has separate effects in addition to those of the patented invention. Lower court precedents after the Ball Spline case have, in general, held that accused products meet the second requirement even in cases in which they have additional effects beyond effects identical to those of the patented invention. c) The Third Requirement – Ease of Replacement The third requirement is that a person skilled in the art could have easily conceived of a

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replacement part at the time of infringement. First of all, the Ball Spline decision is important for settling an issue that had been known from prior debate, namely at what point in time the ease of replacement should be decided, i.e. at the time of patent application (as in German doctrine) or at the time of infringement (as in US doctrine). Before the Supreme Court decided on this matter, there had been multiple theories taking the view that the time of application should be the standard for judgment on the grounds that the scope of the patent should be defined at the time of application or that inventions created by another person at a later date should not be incorporated into the scope of the patentee's exclusive right. However, a different view had become gradually influential, i.e. that the time of infringement should be the standard for judgment, on the grounds that since it is difficult for an applicant to predict every future form of infringement and include them in the specification of the unfair for an adverse party to be able to easily avoid infringement P 444 claims, it would be by replacing a part of the structure stated in the claims with a technology that would be revealed after the patent application had been filed. The Supreme Court of Japan in the Ball Spline decision made a definite statement in favour of the view taking the time of infringement as the standard for judgment. Although the reason the Supreme Court adopted this view in the Ball Spline decision is that equivalent infringement should be affirmed when a part has been replaced with technology revealed after the time of application, the Supreme Court did not reject equivalent infringement even if that part is replaced with technology already in existence at the time of application. However, if it is technology that would have been obvious to a person skilled in the art at the time of application then the applicant should have been able to include it in the claims, and a possible approach exists that finds it unnecessary to extend the protection of equivalent infringement to applicants who fail to take that type of precaution. In that case, the issue would arise with regard to the sufficiency of the fourth and fifth requirements in response to the level of publicly known technology at the time of application or the specific circumstances of the applicant. Therefore, in cases in which a part has been replaced with technology publicly known at the time of application, the patentee will be in a disadvantageous position to the extent that he/she can argue and prove that the third requirement has been fulfilled, and will be conversely disadvantaged with regard to the fourth and fifth conditions, as will be explained below. Consequently, from the patentee's perspective, a desirable strategy in a patent suit is to provide materials indicating that the replacement structure became publicly known in the period between the time of application and the time of infringement. Another issue is what degree of ease is meant by the phrase ease of replacement. Ease is also a standard for the inventive step that is required for a patent grant (Patent Act section 29 (2)), but as their contexts are different it is not necessary to interpret both as being the same degree of ease. In actuality, the trend in lower court precedents after the Ball Spline decision has been to avoid an improper expansion of the doctrine of equivalents by not requiring as high a degree of ease as the inventive step. (14) d) The Fourth Requirement - Not Identical to Publicly known Technology or Easily Derivable from Publicly known Technology The fourth requirement is that the accused product is not to have been identical to a publicly known technology or easily derivable from a publicly known technology at the time of application, and it is considered to be a negative requirement for equivalence, which is to say a reason for excluding the application of equivalence. Internationally, this P 445 estoppel is known as the ‘Formstein Einwand’, as it was developed by the German Federal Supreme Court in the above-mentioned Formstein decision. The estoppel is more important in countries that do not allow the defendant to raise an invalidity defence against an infringement claim, as was the case in Japan when the Ball Spline decision was rendered, and as is still the case in China, Germany and a number of other countries. If the doctrine of equivalents is only applied based on the first three requirements the effect will be to expand the scope of the claims, with the possibility of expanding the protective scope of patent rights to include publicly known technology. However, it is improper to expand the scope of patent rights to include unpatentable technology in the name of the doctrine of equivalents because, in the first place, it should have been impossible to obtain a patent for technology that was publicly known at the time of application or that a person skilled in the art could have easily derived from publicly known technology at the time of application. Consequently, the Supreme Court in the Ball Spline decision provided the fourth requirement as a negative requirement for applying the doctrine of equivalents. Furthermore, in the Ball Spline decision the Supreme Court went no further than providing the fourth requirement as a requirement for equivalent infringement alone, and, at least at the time, the court did not approve the so-called public domain defence in cases of literal infringement. However, if the patented invention itself is deemed a publicly known technology or a technology that a person skilled in the art could have derived from that, then alleged infringers may raise the ‘invalidity defence’ since the Supreme Court's 2000 decision in the Kilby case (15) and in the subsequent 2004 amendment of the Patent Act (Patent Act section 104-3). For details, see Case No. 43.

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Generally, in cases in which the fourth requirement should be rejected, the patented invention is often a publicly known technology or a technology that a person skilled in the art could have easily derived from that technology. Therefore, in these cases, the ‘invalidity defence’ is usually acknowledged and patent infringement is rejected without the court ruling on the doctrine of equivalents. That is one reason why the percentage of cases rejecting equivalent infringement on the grounds of the fourth requirement is extremely small. f) The Fifth Requirement – Special Circumstances such as Conscious Exclusion The fifth requirement is that there are no special circumstances such as the accused product being consciously excluded from the claims during the application process of the patented invention. This requirement is analogous to the legal principle of filewrapper estoppel occurring in literal infringement. In the Ball Spline decision the Supreme Court held that not only in cases in which the patentee had admitted during the application process that the accused product did not fall under the technical scope of P 446 the patented invention, but also in cases in which the patentee ‘[had taken] actions that could be outwardly construed in that fashion’, would the patentee's subsequent contradictory arguments not be permitted in light of the legal principal of estoppel. Mimura suggests that this estoppel may be more important in cases of equivalent infringement than in literal infringement, due to the differing contexts of the application of file-wrapper estoppel in cases of literal infringement, in which it is limited to the wording of the claims, and estoppel in cases of equivalent infringement, in which it goes beyond the wording of the claims. That is not to say, however, that the Ball Spline decision specifically spells out the extent to which this estoppel functions. Lower court precedents after the Ball Spline decision are divided on this point. In cases in which an applicant has corrected or revised the claims, the Osaka District Court (16) has given a limited interpretation of this estoppel and only excluded embodiments removed in order to avoid grounds for rejection, whereas the Tokyo District Court (17) has tended to recognize corrections and revisions as conscious exclusions without considering their objective. Another issue is to what extent conscious exclusions can be established when corrections or revisions do not exist. For example, as stated above, the applicant should state a technology in the claims if it would have been obvious to a person skilled in the art at the time of the application, and if, regardless of this, that publicly known technology was still not stated in the claims, then the issue concerns whether the fifth requirement is fulfilled. On this point, the Intellectual Property High Court in a decision of 25 September 2006 (18) held that ‘regardless of the fact that a structure relating to the allegedly infringing product could easily have been conceived of in light of publicly known technology or the like at the time of application, the simple fact that a structure of that type was not included in the claims does not constitute the conscious exclusion of that structure relating to the Subject Product from the claims’. However, there are precedents that recognize conscious exclusion in a case in which a replacement structure had been publicly known technology and the applicant had not included it in the claims while aware of the fact that the replacement part could obtain the same effect, (19) and also a precedent recognizing conscious exclusion in a case in which a replacement structure stated in an embodiment drawing in the specification had not been stated in the claims. (20) This issue as to what extent the application of the doctrine of equivalents will be recognized in cases in which corrections or revisions are not followed but claims are clumsily written will continue to require clarification through the accumulation of future judicial precedents. P 447

g) The Burden of Proof for the Application of the Requirements In the Ball Spline decision, the Supreme Court did not issue a clear finding as to which party bears the responsibility for arguing and proving each of the five requirements for applying the doctrine of equivalents. There are various views in legal theory on this point, but in practice a simple interpretation has taken hold wherein the patentee, who is arguing for equivalence, bears the responsibility for arguing and proving the positive requirements for equivalence (the first through the third requirements), and the alleged infringer, who is denying equivalence, bears responsibility for arguing and proving the negative requirements for equivalence (the fourth and fifth requirements).

4 Outlook In a rather unusual statement to come from a judge, Tomokatsu Tsukahara, the former chief justice of the IP High Court, has criticized his fellow judges' attitude towards applying the doctrine of equivalents. He writes: ‘Judges in Japan feel that, basically, they do not want to admit infringement under the doctrine of equivalents. Judges in Japan emphasise consistency with the statement of the claims without showing any substantive, rational grounds. They should not, however, depend solely on grammatical considerations when interpreting the [Ball Spline Bearing] judgment of the Supreme Court with

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regard to the first requirement [essential element] … Judges in Japan should start understanding the doctrine of equivalents from the original point; they should not start from the wording of the Supreme Court precedent. If judges examine and determine infringement under the doctrine of equivalents based on that idea, they will notice easily that it was wrong that they were relieved in their hearts by denying infringement under the doctrine of equivalents based on the first requirement. With regard to the first requirement, judges in Japan should cease to examine initially and determine the first requirement through comparison with the distinctive matters of the claimed invention as they did in the past. Instead, they should examine and determine infringement under the doctrine of equivalents mainly based on the second and third requirement in almost the same manner as in the United States and Germany.… In order to increase the number of patent lawsuits in Japan, … the content of the first requirement of the doctrine of equivalents, which has been a source of confusion since the Supreme Court's decision, must be reviewed’. (21) The above-mentioned ‘Hollow Golf Club Head’ decision may well be evidence that the has made to the state of the art and determine the scope of protection more in line with what judge Tsukahara has suggested. Further evidence of this trend is a recent decision of the IP High Court of 7 September 2011 (22) that affirmed literal infringement even in a case in which the infringing embodiment had used all elements of the claim, plus one additional element that had been explicitly disclaimed – in this case, a cross-wise cut on top of prefabricated rice cakes that had to be baked for a couple of minutes prior to consumption. This may indicate that courts are also becoming more willing to affirm literal infringement when it is arguable whether or not all elements of the claim have been used, and therefore contribute to a claim interpretation that reflects the inventor's contribution to society.

P 448 courts are becoming more willing to look at the contribution the invention

Atsushi Okada (1) P 448

References ★ )

1)

Okada Atsushi: (Harvard Law School) One of the few cases in this respect is the first instance Lucidril decision of the Osaka District Court, 30 July 1974, 6 IIC 81 (1975) The presiding judge in this case, judge Oe, was a vociferous proponent of both the doctrine of equivalents and the defence of patent invalidity in an infringement suit, both developments that would become mainstream only 30 years later. The relevant part of the decision reads: ‘Therefore, when in the Patent Gazette the chemical structure, boiling point and so forth of the compound having a novel pharmacologic effect, as well as the detail of the manufacturing process, are disclosed to the public, including those skilled in the art, the patent should be interpreted so that the equivalent techniques satisfying the (inventive) requirements mentioned above are disclosed implicitly by the publication of the invention, because it can be said that those who are skilled in the art should easily conceive of the equivalent techniques, even though the description does not mention them. Then, unless the applicant has expressed his intention that he would disclaim such equivalent process or there are any particular circumstances that the process employing such an equivalent technique is to be interpreted as being excluded from the scope of protection of the patent, it constitutes no more than piracy of the technique of the patented invention to use the process in which such an equivalent technique is employed and it constitutes infringement of the patentee's right.’ The decision was overturned on appeal, however.

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2)

For example, the well-known decision of Tokyo District Court, 10 July 1987, 20IIC 91 (1989) -Monsanto affirmed infringement outside the literal scope of the claims, but did not use any specific theory for this conclusion: ‘1. It is found that the above aqueous solution contains glyphosate ion and trimethylsulfonium ion. Hence the defendants’ herbicide is the same in constitution as the aqueous solution of the invention. The mole ratio between glyphosate ion and trimethylsulfonium ion in the defendants’ herbicide is about 1: 1.13. The mole ratio between glyphosate ion and trimethylsulfonium ion in the above aqueous solution, which is an embodiment of the invention, can be made almost the same as that in the defendants' herbicide by adjusting the amount of trimethylsulfonium hydroxide to be added to glyphosate. 2. The defendants' herbicide has the same composition as that of the abovementioned aqueous solution, which contains glyphosate as an effective herbicidal ingredient and trimethylsulfonium hydroxide as an adjuvant - an embodiment of the invention. Thus, all the elements of the invention, as defined by the phrase ‘a herbicide comprising glyphosate as an effective’ ingredient, are present. The defendants' herbicide falls within the technical scope of the claimed invention.’

3)

4)

5) 6) 7) 8) 9) 10)

11) 12)

13) 14) 15) 16)

There were a number of reasons why the courts were reluctant to adopt the doctrine of equivalents in Japan. One reason was that according to sec. 36(5) Patent Act, the patent claim should only contain those elements that were necessary to describe the patented invention. If an element in an allegedly infringing embodiment differed from an element in the claim, equivalence could not be argued because in such case, the element that was replaced could not be called ‘necessary’ (Niihara, Jurist 888, 101). Another reason was the prevailing method of comparing the individual elements of the claim with the allegedly infringing embodiment in disregard of the inventive concept, e.g. Tokyo High Court, 27 March 1969, and Osaka High Court, 28 May 1985, Hanrei Kōgyō Shoyūken hō (HanKō) 2213-278. A third reason was that one of the most influential IP judges in the 1980s and 1990s, Toshiaki Makino, was an outspoken critic of the equivalents' doctrine. Osaka District Court, 31 October 1980, 12-2 Mutaishū 632: A doctrine of equivalents could only be affirmed if the patented technology was replaced by another one with the same effect, and when such replacement was ‘obvious’ at the time of filing. Also Nagoya District Court, 22 February 1988, HanKō 2305-139-412. So-called incomplete infringement. The theory was explicitly rejected by Osaka District Court, 25 July 1980. Notably by Graver Tank & Mfg. Co., Inc. v. Linde Air Products Co., 3 39 U.S. 605; 85USPQ328 (1950). Notably by Federal Supreme Court, 29 April 1986, 18 IIC 795 (1987) Formstein/Moulded Curbstone. For a comparative overview, the reader is guided to T. Takenaka, A Comparative Study of Claim Interpretation in the United States, Germany and Japan, 17 IIC Studies, Weinheim 1995. R. Mmura, Saikō saibanshō hanrei kaisetsu minji hen [Comments on Supreme Court Precedents in Civil Cases] 1998, 112. K. Iida, Kintōron ni kansuru saikin no saibanrei no keikō ni tsuite (Trends in Judicial Precedents on the Doctrine of Equivalents.) The Theory and Practice of Intellectual Property Law. Shinnippon-Hoki Publishing Company, 2007. On page 177, the author provides research performed on more than 150 lower court precedents between 1997 and June 2006. R. Mimura (as supra note 9), 112. The problem with the definition of the ‘essential part’ is, of course, that this term is nowhere to be found in the Patent Act. It may therefore serve either for rejecting or affirming an infringing equivalent. Accordingly, the requirement has given different definitions by the courts. According to Osaka District Court, decision of 17 September 1998, 1664 Hanrei Jihō 122, the essential part refers to the characterizing part that constitutes the nucleus of the technical idea and which brings about the specific technical effect of the invention. According to Tokyo District Court, 28 January 1999, 1664 Hanrei Jihō 109, it refers to the characterizing part that constitutes the basis for the specific technical solution for the problem the invention is meant to solve. This is also the definition that has been given by Tokyo High Court, decision of 26 October 2000, 1738 Hanrei Jiho 97. For a criticism on the notion of ‘essential element’, see below 4. Intellectual Property High Court, decision of 29 June 2009, English translation in 42IIC (2011) (forthcoming). Tokyo District Court, 7 October 1998, 1657 Hanrei Jihō 122; Osaka District Court, 17 September 1998, 30 Chitekizaishu 570. Decision of the Supreme Court of Japan, 11 April 2000. Minshū Vol. 54, No. 4, 1368. Case No. 43 in this book. Osaka District Court, 27 May 27 1999, 1685 Hanrei Jihō 103 and Osaka District Court, 23 May 2000, court website.

17) Tokyo District Court, 28 January 1999, 1664 Hanrei Jihō 109 and Tokyo District Court,

30 June 30 1999, 1696 Hanrei Jihō 149.

18) AIPPI Vol. 52, No. 7, 454.

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19) Tokyo District Court, 28 April 2004, court website, and Intellectual Property High

Court, 16 June 2005, court website.

20) Tokyo District Court, 29 June 1999, 1686 Hanrei Jihō 111. 21) T. Tsukahara, Current Situation and Activation of Patent Infringement in Japan, 36

AIPPI Journal of the Japanese Group (English Edition), 3 (2011).

22) IP High Court, 7 September 2011 - Rice Cakes, 43 IIC (2012), forthcoming. 1) (Harvard Law School)

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Case No. 41: Intellectual Property – Patent Law – Employees' Inventions – Company Rules – Reasonable Remuneration

Document information

Publication

Business Law in Japan – Cases and Comments

Anja Petersen-Padberg

Jurisdiction

Supreme Court 22 April 2003, Case No. 2001 ju 1256, Olympus Source: Minshu, 57-4, 477 = Hanrei Jihō 1822, 39 = IIC 2004, 1039

(★ )

Japan

I Headnote(s)

Court

Supreme Court of Japan

Employees who transfer the right to obtain a patent for an invention to their employer can claim additional payment where the amount of remuneration provided under employment regulations or other internal company rules is not reasonable pursuant to section 35(3) and (4) Patent Act.

Case date

The prescription period for a claim to reasonable remuneration under section 35(3) Patent Act runs from the date of remuneration payment provided in employment regulations, etc., where these rules set a certain date.

22 April 2003

II Relevant Provisions

Case number

Patent Act, section 35 (3) and (4); Civil Code, section 166(1), 167(1)

2001 ju 1256

Bibliographic reference

P 450

III Facts

Anja Petersen-Padberg, 'Case No. 41: Intellectual Property – Patent Law – Employees' Inventions – Company Rules – Reasonable Remuneration', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 449 - 459

The Plaintiff (appellee) was an employee of Defendant from May 1969 to November 1994. The Defendant (appellant), Olympus, is a company which manufactures and sells optical instruments. During his work in the R&D division of Defendant, the Plaintiff was engaged in the research and development of videodisc devices and in 1977 created an invention called a ‘pickup device’ (Invention). Defendant has a set of company rules that apply to employees' inventions. When an employee transfers his right to obtain a patent for an employee's invention to the company, the company under the rules must pay a remuneration to the employee in three instalments: the first when a patent is filed, the second when the patent is granted, and the third when the invention is actually used and the company makes a profit from it. The third instalment is a lump sum payment of up to JPY 1,000,000 (approx. EUR 7,635 (1) ). The Plaintiff, as well as other employees, took an oath to accept the internal rules and regulations, including the one mentioned above. Defendant succeeded in the right to obtain a patent for the Invention by the Plaintiff, and obtained patent protection. After October 1990, Defendant obtained licence fees for pickup device patents, including the Invention, from some manufacturing companies. According to the above rule, Defendant paid the following remuneration to the Plaintiff: JPY 3,000 (approx. EUR 23) for the patent application (on 5 January 1978), JPY 8,000 (approx. EUR 61) for the patent grant (on 14 March 1989), and JPY 200,000 (approx. EUR 1,527) in connection with the use of the Invention owing to the grant of licences to third parties (on 1 October 1992). The Plaintiff was of the opinion that the amount of remuneration he received was not reasonable and claimed the sum of JPY 200,000,000 (approx. EUR 1,526,950) as a partial payment of the reasonable amount of remuneration due under section 35 (3) and (4) Patent Act. The courts of first and second instance sustained the claim. (2) Defendant appealed to the Supreme Court requesting a ruling inter alia as to whether the right to claim additional remuneration payment existed when the company had a rule for reward and remuneration of employees' inventions, and whether the Plaintiff's claim was time-barred.

IV Findings An employer can include a provision in its company rules that it will succeed in the right not prohibited to specify the amount of remuneration to be paid for such a transfer or the date of payment, regardless of whether the employee intends to transfer the right to obtain a patent for an employee's invention to the employer. However, it is clear that the amount of remuneration cannot be rigidly set before the employee's invention has been made, or before the content and value of the right to be transferred have become specific. To set a certain amount of remuneration is impermissible according to the

P 451 to obtain a patent or other rules set in advance (company rules). It is moreover

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intent and wording of section 35 Patent Act. In other words, the remuneration set by the company rules cannot be deemed to constitute the entire amount of the remuneration under section 35(3) and (4), but only a part of it. The amount of remuneration set in advance can be interpreted to constitute the entire amount of reasonable remuneration under section 35(3) and (4) only if such an amount of remuneration matches the intent and wording of section 35(4). Therefore, it is reasonable to conclude that an employee who transfers the right to obtain a patent for an employee's invention to the employer according to the company rules can claim additional payment under section 35(3) if the amount of remuneration provided by the employer under the company rules is less than the reasonable remuneration determined according to section 35(4). There is no provision in the Patent Act regarding the due date of the remuneration. Therefore, if the company rules specify a payment date, it was held that the law prohibits the employee from exercising his right to receive reasonable remuneration, and that the employee cannot claim payment thereof until the payment becomes due under the company rules. If the company rules include a provision relating to the payment date of the remuneration, it is reasonable to conclude that the date of payment shall trigger the prescription period for such reasonable remuneration. Translation is based on IIC 2004, 1039 [Mineko Mouri].

V Comment The ‘Olympus’ decision of the Supreme Court established and confirmed important principles under the law of employees' inventions in view of transfer of ownership rights, the effect of remuneration schemes in company rules and the prescription period of remuneration claims. It is one of two Supreme Court decisions on employees' invention law in Japan. (3) The ‘Olympus’ decision and its lower instance decisions have caused a sudden increase of employee-invention-remuneration cases in Japan since (former) employees thus became aware that they have a right to claim a higher remuneration that P 452 was awarded pursuant to the company rules. (4) The ‘Olympus’ decision and court proceedings in which high amounts of remunerations were awarded caused the industry to voice strong criticism and resulted in an immediate revision of section 35 Patent Act. As will be seen below, even after the reform of section 35 Patent Act, the ‘Olympus’ decision has remained of relevance.

1 Transfer of Ownership Rights The Supreme Court has confirmed in ‘Olympus’ that the employer may establish unilaterally in company guidelines its right to succeed to employee's rights to the invention. (5) This rule may be established even prior to the report of an invention and regardless of the intent and will of the employee. The employer therefore obtains the rights to the patent including the right to obtain patents in foreign countries, without a separate assignment agreement. However, it is common practice in Japanese companies to let the employee sign an assignment agreement. Under German law, it is basically inadmissible to assign the right to the patent to the employer before the invention is reported. (6)

2 Maximum Amount of Remuneration The employer may fix a remuneration scheme for employees' inventions. However, the Supreme Court decided that it is inadmissible to determine a fixed maximum remuneration sum. There will be no binding effect of company rules with regard to ‘unreasonable’ remunerations.

3 Concerns of Industry In view of the ‘Olympus’ decision and various court proceedings in which former P 453 employees obtained high remunerations, industry became uncertain about its

company rules. It was demanded that the binding effect of company rules must be strengthened. The amount of remuneration should be decided according to the decision of each company's management policy. If there will be no binding effect of company rules and if the remuneration is to be calculated pursuant to section 35 Patent Act, employers will suffer an unforeseeable financial risk even years after the employee has retired. (7) As mentioned, the lawmakers reacted and amended section 35 Patent Act in 2004, which came into force 1 April 2005. (8) Under the new law, company rules basically enjoy legal precedence with regard to the calculation method for the remuneration of exploited employees' inventions, provided that certain formal conditions are fulfilled: (1) The employer and the employee have negotiated to set standards for the determination of the remuneration, (2) the standards have been disclosed and (3) the employee could give his opinion on the calculation of the remuneration. The JPO has issued ‘case studies’ to explain and interpret the new rules (9) and, it has also published new sample corporate guidelines on employees' inventions (see below). (10) The amendment of Section 35 Patent Act and the ‘Olympus’ decision caused many Japanese firms to revise their remuneration policies for employee inventions (see below).

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4 Remuneration to be Calculated under the Law (Section 35 (5) Patent Act) Employees may, however, still claim a remuneration calculated pursuant to section 35 (5) Patent Act (new version), (1) if procedural rules under section 35 (4) Patent Act were not observed and the remuneration must be considered ‘unreasonable’, (2) if the result of the calculation method as laid down in the company rules must be considered as not reasonable or (3) if the company has not established any company rules. The question arises which amount of remuneration must be considered as ‘unreasonable’. So far, courts have not had an opportunity to interpret the new law. According to the JPO, even a small amount of remuneration is to be considered as ‘appropriate’. (11) However, an extremely small remuneration might be considered ‘inappropriate’. (12) The ‘Olympus’ P 454 decision states that a remuneration must be calculated considering the intent of section 35, i.e. considering the employer's profit and its contribution and any benefits which the employee has received for the invention (section 35(5) amended version). However, which proportion of the profit must be considered ‘reasonable’ is basically left to the ‘negotiations’ between employer and employee (section 35 (4) Patent Act). It is highly recommendable for companies with an R&D facility in Japan to enact company rules under consideration of the prescribed procedural rules (section 35 (4) Patent Act), especially if there is not a fixed upper limit with regard to the remuneration for the use of the invention. Company rules help to prevent court actions on remuneration claims with unforeseeable financial risks. As there are no fixed standards on the calculation of remuneration for employees' inventions under Japanese law, companies should establish their own standard.

5 Statute of Limitations As there is no specific prescription period indicated in section 35 Patent Act, the general rules of section 166(1) and section 167(1) Civil Code apply. Pursuant to these rules, the right to obtain reasonable remuneration extinguishes ten years after the date when it became possible to exercise the right. According to the ‘Olympus’ decision of the Supreme Court, the prescription period commences at the payment time as laid down in the company guidelines. (13) Should there be no company guidelines, according to one lower court decision, the point of time of the assignment of the right to obtain a patent is relevant. (14) According to another lower court decision, the prescription period shall begin at that point of time when the employee can reasonably exercise his right, i.e. when the employer commences the use of the invention. (15)

6 Practice of Company Rules in Japan The main question of the ‘Olympus’ decision was whether company rules on the remuneration of employees' inventions have a binding effect, i.e. cannot be ‘overruled’ by section 35 Patent Act. The first and second instances in this case have denied a binding effect, the Supreme Court confirmed these rulings. (16) In an older decision of the P 455 Osaka District Court, the company rules prevailed, however the remuneration provided by the company rules were quite generous and also had not provided for an upper limit of payments. (17) Company guidelines regarding employees' inventions have been known in Japan since the 1960's. (18) According to a survey in 2005, (19) the establishment of company guidelines for employees' inventions is common practice, in particular in Japan's larger companies. (20) 96% of companies with more than 50 employees in R&D departments have enacted company guidelines on employees' inventions, 93% of the companies surveyed stated that they have provisions stipulating that all rights to inventions are to be assigned to the employer. (21) With regard to companies filing IP rights, no matter which size their R&D division has, 85% of those companies have established some provisions on patent and patent application rights and on remuneration. (22) After the reform of section 35 Patent Act, Japanese companies began vividly to amend existing rules or to establish new company rules. 63.7% of the companies have stated that they are aware of the amendment of section 35 Patent Act. (23) In the meanwhile, the rate might be much higher. Company rules on employees' inventions play a significant role in Japan, since section 35 Patent provides only a few rudimentary rules. Quite different to German law there are in particular no standards on the calculation of the remuneration. P 456 (24) Standards must therefore be established by the companies. In 2004, the JPO published new sample guidelines. (25) The sample guidelines provide for rules on the entire handling of employees' inventions: Rules on the obligation of reporting of inventions, assignment of rights, determination of remuneration, point of time of payment, employee's right to objection, obligation to keep the invention secret, handling of reports on inventions which are not considered as inventions, joint inventions, inventions of retired employees and employees working at other locations, inventions of employees working at other locations, disclosure of guidelines, etc. In the past, remuneration sums set out in company guidelines were often not very high, (26) but companies believed to comply with section 35 Patent Act, since there were no particular calculation standards. (27) Further, it was common practice to establish an upper limit for the payment of remuneration in case of the use of the invention.

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To comply with the Supreme Court's ‘Olympus’ decision, companies have abolished upper limits with regard to the remuneration for the use of the invention. As a survey from 2006 has shown, with regard to remunerations based on the value of the invention, 50% of companies do not fix an upper limit on remuneration. (28) The most significant change, however, was the firms' decision to greatly increase the disclosure of their policies to employees. (29) A director of the intellectual property rights office of a Japanese electronic machinery manufacturer stated:

P 457

In 2005 when the law was revised, we held a series of meetings to explain our remuneration policy for employees' inventions to all employees. We were given a roster of all employees and checked their attendance and, if necessary, arranged one-to-one meetings to make sure that everyone received an explanation. Since the law requires ‘consultation’ with the employees, we created a special e-mail address to receive their inquiries and comments. Since 2005, we have held an information session for new employees every year including a thirty-page Power Point presentation that explains the Patent Law, describes the legal treatment of employees' inventions, and provides a detailed explanation of the formulae used to determine remuneration levels. Furthermore, all the information including the formal provisions and a twopage summary is available for viewing on our intranet, therefore anyone can see it whenever they want. (30) Before the amendment, firms often did not reveal the details of their remuneration policies to employees. Many inventor-employees did not precisely know whether or how much remuneration they would receive prior to developing their inventions. (31) It remains to be seen whether the disclosure of company rules on employees' inventions would strengthen the incentive effect of remuneration to employees' inventions in Japan. (32) Most of the companies with 50–99 researchers have introduced ‘objection proceedings'. (33) Employees will now be informed on their right to objection, for instance, in the letter with the notice of the remuneration. If an employee objects to the remuneration, a company committee (hatsumei iinkai or tokkyo iinkai) will, for instance, re-examine the remuneration under consideration of the employee's arguments. In practice, so far, only a few employees have made use of objection proceedings. In company guidelines, payments are basically made at four different points in time: (34) (1) at the time of application (87.5%), including applications in foreign countries, (35) (2) at the time of patent registration (81.8%), (3) when exploiting the invention (73.3%) and (4) in the case of another's use of the patent (licensing) (57.5%). According to the survey, more than half of the companies have company guidelines regarding payments at all four points in time. (36) The law requires a payment of a reasonable remuneration when making use of the invention. Payments for the application or grant of the patent must therefore be considered as a reward or incentive payment. At the time of patent application and patent registration, it is common practice to pay lump sums (82%). (37) Payments under consideration of the value of the invention are generally made when exploiting the invention or if another company is exploiting the invention (e.g. based on a license agreement) (91%). The amount of remuneration varies significantly as the following table will show. (38)

P 458

Minimum, Maximum and Average Amounts of Payment, Paid at Different Points of Time (39) Payment Times Application of Patent

Average Amount Maximum Amount

Minimum Amount

Fixed Amount JPY 9,941 (EUR 86.50)

JPY 100,000 (EUR JPY 1,000 (EUR 870) 8.70)

Fixed Amount JPY 23,782 (EUR 207)

JPY 300,000 (EUR JPY 1,200 (EUR 2,610) 10)

Exploitation of Patent

Upper Limit

JPY 12,079,577 (EUR 105,110)

JPY 30,000,000 (EUR 261,044)

(Value-based remuneration)

Lower Limit

JPY 53,517 (EUR 466)

JPY 500,000 (EUR JPY 0 (EUR 0) 4,350)

Use of Patent by Another Company

Upper Limit

JPY 22,924,444 (EUR 199,477)

JPY 30,000,000 (EUR 261,044)

(Lump sum payment) Registration of Patent (Lump sum payment)

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JPY 50,000 (EUR 435)

JPY 90,000 (EUR 783)

Payment Times (value-based remuneration)

Average Amount Maximum Amount Lower Limit

JPY 78,278 (EUR 681)

Minimum Amount

JPY 500,000 (EUR JPY 2,500 (EUR 4,350) 22)

As can be seen, the average amount paid at the time of application amounts to EUR 86.50 and at the time of registration to EUR 207. If it is based on the value of the invention, the remuneration paid for exploitation of the patent can be quite low considering the lower limits (EUR 0 – EUR 4,350, average payment: EUR 466), but can be quite high in its upper limits, i.e. EUR 435 to EUR 261,044 (average: EUR 105,110). In case of use of the patent by another company (licensing), employees can receive quite high payments considering the upper limits, i.e. between EUR 783 and EUR 261,044 (average: EUR 199,477). Considering the lower limits, in case of use of the patent by another company, payments range between EUR 22 and EUR 4,350, the average payment amounts to EUR 681. P 459

The calculation methods of Japanese companies usually differ from the calculation methods as applied by the courts. In practice, for instance, employer's turnover will be taken as a calculation basis, instead of the ‘profits of exclusivity’ (i.e. the ‘profits of a fictitious licensee’ or half of employer's profits). Some companies split the ‘sources’ of the turnover of a patented product into several categories, for instance, equity investment, market potential, technology, etc. As a consequence, only a share of the turnover will be taken as a basis to determine the ‘relevant’ turnover, i.e. the inventionrelated turnover. Further, the employer's share in the invention is usually very high (around 99%). Finally, there are various methods to deduct further costs. In sum, company guidelines are of importance in Japan to complement the rudimentary rules under section 35 Patent Act and to avoid payment of large remuneration sums under the law. The amendment of section 35 Patent Act together with the ‘Olympus’ and other court decisions are the reasons why more and more Japanese companies plan to establish or amend their internal rules on employees' inventions. It is already foreseeable that court actions on employees' remuneration will decrease significantly. (40) Foreign companies can in principle apply their remuneration schemes in Japan. However, they need to observe the procedural rules under section 35(4) Patent Act and must comply with the ‘Olympus’ decision, i.e. the determination of a general maximum amount of remuneration could be considered as ‘unreasonable’ and could possibly cause a court action depending on the circumstances of the case. Foreign companies can take the JPO sample guidelines into consideration and can also consider adjusting their guidelines to common practice in Japanese companies, i.e. payment of an award at the point of time of the application and of the registration of a patent, etc. Remuneration for the exploitation of the invention can be calculated according to the companies' individual remuneration scheme. Anja Petersen-Padberg (1) P 459

References ★ )

1) 2)

3) 4)

Anja Petersen-Padberg: (University of Cologne) Conversions Yen - Euro were made for 22 April 2003. Tokyo District Court, 16 April 1999, English translation reprinted in: AIPPI Japan, English edition, 1999, 255, with comment by K. Hinkelmann - Pick-up Apparatus (subsequently referred to as the Olympus case); Tokyo High Court, 22 May 2001, Hanrei Jihō 1753, 12. Another Supreme Court decision is the Hitachi-case of 17 October 2006, Case No. 2004 ju 781, Minshū Vol. 60, No. 8, 2853, English translation available on the website . Actions to obtain a reasonable remuneration pursuant to sec. 35 Patent Act were very rare for many decades. For instance, between 1991 and 2000 only one or two actions, if any at all, were filed each year. The number of cases has increased: In 2001 it was four, in 2002 and 2003 five cases were filed. A peak was reached in 2004 when (former) employees went to court in ten cases. Subsequently, the number of cases has decreased. In 2005 there were seven, in 2006 five and in 2007 two cases were filed (K. Onishi/H.Owan, Incentive Pay or Windfalls: Remuneration for employee inventions in Japan, RIETI (The Research Institute of Economy, Trade and Industry), Discussion Paper Series 10-E-049, published on the website: , 32). In comparison, in Germany, for instance in 2010, six employees' invention cases were filed at the Regional Court Duesseldorf, four at the Regional Court Mannheim and five at the Regional Court Munich. About 60 cases are annually filed at the Arbitration Board for Employees' Inventions at the German Patent and Trademark Office.

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5) 6) 7)

8)

9) 10) 11) 12) 13) 14) 15) 16) 17)

18) 19)

20)

21) 22) 23) 24)

25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37)

Supreme Court, 22, April 2003, Hanrei Jihō 1822, 39 - ‘Olympus’. An agreement on a transfer of rights to an invention prior to its report is considered as disadvantageous pursuant to sec. 22 Act on Employees' Inventions. Japan Intellectual Property Association (JIPA), sec. 35 Patent Act, Proposal to the regulation on the employees' inventions', quoted by C.Heath/M. Mouri, Employees' inventions in Japan, IIC 2005, 679. Amendment of sec. 35 (4) and (5) by the Law on the Partial Reform of the Patent Act to Accelerate Patent Prosecution Proceedings (tokkyo shinsa no jinsoku tō no tame no tokkyohō no ichibu wo keiseisuru hōritsu) No. 79 of June 2004. The law came into force on 1 April 2005. JPO, ‘The Case Studies of the Procedures under the New Employee Inventions System’, November 2004, published on the website: . . JPO, Case Studies, supra note 9, 15. Ibid. Supreme Court, April, 22, 2003, Minshū 57, 4, 477, English translation published in IIC 2004, 1039 and on the website: . See for instance, Tokyo District Court, 23 December 1983, Hanrei Jihō 1104, 120. Tokyo District Court, 16 April 1999, supra note 2. This approach is shared by C. Heath and M. Mouri, ibid., IIC, 2005, 663, 676. See supra note 2. Osaka District Court, 26 April 1984, Mutaishū, 16 -1, 283. According to the facts, Defendant's company rules provided for a remuneration of JPY 2,000 for the application, JPY 5,000 – 50,000 for the registration and 0.3% to 1 % of the income from the actual use of the invention (reported by C. Heath/M. Mōri, ibid., IIC 36, 663, 669). In 1964, the Japanese Patent Office published model company guidelines. Since that time, particularly large companies have adopted in-house regulations (T. Doi, Patents & Licensing, Vol. 36, No. 5, 2006, 17). In view of the amendment of sec. 35 Patent Act in 2004, the Japan Institute for Labor Policy and Training conducted a survey regarding the handling by Japanese companies of employees' inventions, at the end of 2005 (Jūgyō-in no hatsumei ni taisuru shogū ni tsuite no chōsa) in: JILPT Chōsa Series No. 27, October 2006, published at (hereinafter: ‘JILPT, Survey 2006’). The survey is based on the responses of 613 companies made between November 25 and December 15, 2006. The survey distinguishes between companies without research staff, research staff of less than 50 persons, research staff between 50-99 persons, and with 100-299 or 300-999 and more than 1000 persons. We will focus on companies with researchers here. A few questions relate to ‘companies filing IP rights’. This will be indicated. With regard to a survey of 1994, see C. Heath/M. Mouri, ibid., IIC 2005, 680. The survey showed that remuneration provisions are usually set out in the company guidelines (79.9%) or are employment instructions (shūgyō kisoku) (18.5%). However, almost never are there agreements with a company's labor union (0.8%) or in employment contracts (0.5%) (JILPT, Survey 2006, supra note 19, 31). JILPT, Survey 2006, supra note 19, 30. JILPT, Survey 2006, supra note 19, 28, 31. JILPT, Survey 2006, supra note 18, 19. German law provides detailed rules, i.e. in the Gesetz über Arbeitnehmererfindungen (ArbEG) (Act on Employees' Inventions) of 25 July 1957 as last amended by Article 7 of law of 31 July 2009 (Federal Gazette 2009 I, 2521); In particular, the calculation of reasonable remuneration (own use, licensing, sale, no use, etc.) is established in the Richtlinien für die Vergütung von Arbeitnehmererfindungen im privaten Dienst (Guidelines for the remuneration of employees' inventions) of 20 July 1959 (BAnz No. 156, 1) as last amended on 1 September 1983 (BAnz No. 169, 9994). The provisions have been interpreted by many court decisions, including a high number of Federal Court of Justice decisions and by a high number of decisions by the Arbitration Board for Employees' Inventions of the German Patent and Trademark Office. . For instance, the inventor of the ‘Blue Diode’ received JPY 20,000, about EUR 150 remuneration for his invention. Onishi K./Owan H., ibid., 3. JILPT, Survey 2006, 33. K.Onishi / H. Owan, ibid., 2. K. Onishi / H. Owan, ibid., 2. K. Onishi / H. Owan, ibid., 2. This question is discussed in the paper of K. Onishi / H. Owan, ibid. JILPT, Survey 2006, supra note 19, 24. JILPT, Survey 2006, supra note 19, 32. JILPT, Survey 2006, supra note 19, 32. JILPT, Survey 2006, supra note 19, 32. The JPO sample guidelines propose in a sample calculation example a lump sum payment at the date of application and the date of registration of the patent under consideration of possible future profits. However, possible future profits are difficult to estimate.

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38) The conversion into Euros was made on 6 December 2010. Euro sums were rounded

up.

39) 33.3% of companies with 50-99 researches have implemented objection proceedings,

30.2% are considering implementation; 15.8% of companies with less than 50 researchers provide for objection proceedings, 32.2% have responded that they are consider implementation, JILPT, Survey 2006, supra note 19, 34. 40) See supra note 4. 1) (University of Cologne)

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Case No. 42: Intellectual Property – Patent Law – Employees' Inventions – Reasonable Remuneration

Document information

Publication

Anja Petersen-Padberg

Business Law in Japan – Cases and Comments

(★ ) Tokyo District Court, 30 January 2004, Case No. 2001 wa 17772, Shūji Nakmura v. Nichia Kagaku Kōgyō K.K., ‘Blue LED’

Jurisdiction

Source: Hanrei Jihō 1852, 36 = Hanrei Taimuzu 1150, 130

Japan

I Headnote(s)

Court

What is reasonable remuneration pursuant to section 35 (3) and (4), Patent Act for the assignment of the right to obtain a patent must be calculated on the basis of the employer's ‘profits of exclusivity’ multiplied by the degree of contribution by the inventor.

District Court of Tokyo

Case date

II Relevant Provisions

30 January 2004

Section 35 Patent Act P 462

Case number

III Facts

2001 wa 17772

Parties

Claimant, Sh?ji Nakmura Defendant, Nichia Kagaku K ogy o K.K.

Bibliographic reference

Anja Petersen-Padberg, 'Case No. 42: Intellectual Property – Patent Law – Employees' Inventions – Reasonable Remuneration', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 461 - 473

The Plaintiff is a researcher who invented the blue light-emitting diode (Blue LED) when he was an employee of the Defendant between 1979 and 1999. Defendant is a chemical company that originally focused on the manufacturing of inorganic luminescent materials (phosphors), but which now mainly manufactures and sells LEDs and LDs. Plaintiff claimed (1) transfer of ownership of Japanese patent no. JP 2,628,404 (hereinafter the ‘404 Patent’) concerning a ‘Method for Growing a Nitride Compound Semiconductor Crystal Film’, as filed on 25 October 1990 and registered on 18 April 1997. As an auxiliary request he claimed payment of a reasonable remuneration of JPY 20 trillion (approx. EUR 148 million (1) ) for his invention. At the end of the 1980s, Plaintiff decided on its own initiative to concentrate on research with regard to blue light-emitting diodes. Blue light-emitting diodes have broad industrial applications, in particular they are of importance to generate white light. At that time, a large number of company research teams had tried in vain to develop a blue light-emitting diode with a crystal layer based on ZeSe. Plaintiff began improving a semiconductor crystal layer based on GaN applying the MOCVD (metal organic chemical vapour deposition) method. Defendant financed Plaintiff's study year in the U.S., provided equipment and two assistants, although it was basically against the research project. Defendant had even issued a formal work order to stop research on the blue LED. Plaintiff, however, still reported a series of inventions relating to the blue light-emitting diode during his tenure, on which Defendant obtained patent protection. (2) In 1994, Defendant brought blue LEDs and LDs onto the market, became a market leader in Japan and made high profits. Plaintiff argued that he never assigned the right to the invention relating to the ‘404 Patent. His signature on the report was made by pencil and without affixing his personal seal. Furthermore, the invention is not a ‘service invention’ pursuant to section 35 Patent Act since it was made against the will of the employer and was therefore ‘not related to the employer's business’. Plaintiff further argued that he could not agree with Defendant on the assignment of the right since both parties had mistakenly thought that the invention belonged to the employer. With his auxiliary claim, Plaintiff asserted that he is entitled to seek JPY 20 billion from the Defendant as reasonable remuneration for the assignment of the right. The remuneration payment of JPY 20,000 (approx. EUR 148) which he had received pursuant to Defendant's company rules was not ‘reasonable’ within the meaning of section 35 (4) Patent Act. In its interlocutory decision of 19 September 2002, the Tokyo District Court held that the section 35 Patent Act even if it was made against the will of the Defendant since it was made during working hours and using Defendant's facilities. (3) The Court further decided that the rights to the invention were assigned explicitly and implicitly to the employer after consideration of the circumstances of the case. (4) With regard to the implied agreement, the Court decided that even if there is no explicit contract or work regulation on the assignment, but that over a certain period of time the right to obtain a patent for the employee's invention was routinely assumed to belong to the employer and if patent applications were filed by the employer as the applicant, and the employee did not complain about this, then this should be construed to mean that a kind of contract in form of an implied agreement between employer and employee had been concluded. Therefore, even

P 463 ‘404 invention must be considered as a service invention pursuant to

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before the report was made regarding the invention underlying the ’404 Patent, an implicit agreement between Plaintiff and Defendant existed, i.e. that the right belongs to the Defendant. (5) With regard to the right to reasonable remuneration, the Court decided that even if a clause regarding the amount of money to be received by the employee is provided in a contract or in the company regulations, the employee can claim in addition a ‘reasonable remuneration’ in accordance with the aim of the provisions of section 35 Patent Act. (6) After the interlocutory decision, the Court had to decide on the amount of ‘reasonable remuneration’ pursuant to section 35 (4) Patent Act. The Court had to consider ‘the profits which the employer will obtain from the invention and the degree of contribution of the employer in making the invention’.

IV Findings ‘The amount of profits that the employer will obtain from the invention’ pursuant to section 35(4) Patent Act means the profits which the employer will obtain by monopolizing the right to use the invention (hereinafter referred to as ‘profits of exclusivity’). (7) P 464

The profits of exclusivity were to be determined as follows: (1) (2)

Where the employer licenses the right to use the invention to third parties, the ‘profits of exclusivity’ mean royalties that the employer will obtain from these licenses. Where the employer makes use of the invention but does not license the right to third parties, ‘profits of exclusivity’ must be calculated on the basis of a ‘fictitiously excess turnover’ i.e. the fictitious turnover of hypothetical licensees under consideration of employer's turnover. The ‘excess turnover’ of the entire lifespan of the patent must be considered.

Defendant's profits are entirely caused by the patented invention. The patented invention is crucial for the making of a GaN semiconductor crystal film, which is the material in high-quality blue LEDs and laser diodes. The reason why the Defendant is now dominating the market of high-quality blue LEDs is simply because he was able to manufacture the semiconductor crystal film in a better quality using the patented invention than its competitors. Defendant will be able to keep its monopolistic position until the end of the lifespan of the patent, i.e. competitors will be unable to develop an exchangeable technology within that period of time. Sales were made since 1994 and therefore Defendant's inventionrelated turnover since 1994 must be considered. If no special circumstances are given, it is appropriate to assume that payment of the remuneration is due at the date of payment which is laid down in Defendant's company guidelines, i.e. the date of the grant of the patent which was 18 April 1997. Should the company guidelines not provide a payment date, the point of time of the transfer of the right was to be applied. For the calculation of the ‘profits of exclusivity’, Defendant's turnover from the sales of GaN blue LEDs and GaN laser diodes (LDs) must be taken as a basis. The total sales were calculated a) from 1994 to 2002, based on actual sales, b) from 2003 to 2010, based on the prediction of (i) the growth rate of the GaN LED market according to an expert opinion, (ii) the Defendant's market share which would continuously decrease, and (iii) the Defendant's assumed rate of growth (total sum of a) and b)). With regard to Defendant's turnover between 2003 to 2010, the report ‘Gallium Nitride – 2003’ prepared by the company Strategies Unlimited had to be taken into consideration. It was assumed that Defendant's market share would continuously decrease. As a result, the entire turnover made concerning the GAN LED amounts to JPY 1.1 trillion (approx. EUR 8.1 billion). The entire turnover with GaN LDs amounted to JPY 103 trillion (approx. EUR 764 million). Both products in sum amounted to a turnover of JPY 1.2 trillion (approx. EUR 9 billion) after deduction of accrued interest since payments had to be made on 18 April 1997. As a next step, ‘excess sales’ arising from prohibiting competitors' use of the patented invention had to be calculated. ‘Excess sales’ represent how much turnover the Defendant could make compared to if the Defendant had licensed the patent to its competitors. There were two competitors which could have taken a license from P 465 Defendant. If the Defendant had licensed the patent to those two competitors, at least half of the total sales would have been made by them, and therefore the ‘excess sales’ arising from prohibition of the other competitors' use of the patent invention is one-half of Defendant's total sales. Finally, if the Defendant had licensed the patent to its competitors, a royalty rate of 20% must be assumed. The hypothetical license income must then be calculated as follows: half of the turnover from LEDs and LDs for the time-span between 1994 – 2010 amounting to JPY 1.2 trillion turnover (approx. EUR 9 billion) multiplied by 0.2. This amounts to JPY 120.8 billion. As a

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result, Defendant's ‘profit of exclusivity’ amounts to JPY 120.8 billion (approx. EUR 896 million) to be paid on 18 April 1997. Plaintiff's contribution to the invention must be assumed to amount to 50%. This share is justified since, compared to its competitors which are large companies having relevant prior art, information, abundant researchers and staff, the Defendant is a small company having no such research environment, and the Plaintiff made the invention all alone based on his own idea. This case is absolutely out of the ordinary in the sense that the Plaintiff made this world-class invention, long awaited by industry, as an employee's invention prior to all research institutes in the world, including competitors, in the crude research environment of such a small company. The limitation period for the remuneration claim pursuant to section 35 (4) Patent Act commenced at the date when payment was due, i.e. 18 April 1997. The limitation period for claims according to section 35 is 10 years. As a result, the claim filed with the court action on 23 August 2001 had not become time-barred. In sum, the ‘reasonable remuneration’ pursuant to section 35(4) Patent Act amounts to JPY 120.8 billion × 0.5 = JPY 60.4 billion (approx. EUR 444.8 million). As the Plaintiff sought payment of JPY 20 billion only, the Defendant was ordered to pay the JPY 20 billion and interest of 5% as of 23 August 2001. Translation is based on IIC 2004, 941 made by T.S., Heath/Mori, IIC 2005, 663, and PetersenPadberg, GRUR Int. 2005, 439.

V Comments In the ‘Blue Diode’ case, the Tokyo District Court granted the enormous sum of JPY 20 trillion (approx. EUR 148 million) as ‘reasonable remuneration’ for an employee's invention. When the case was settled for JPY 844 million (JPY 600 million plus interest), i.e. approx. EUR 6.2 million in the second instance, (8) it was still the highest remuneration ever granted to an inventor in Japan. (9) This decision P 466

(and the ‘Olympus’ decision of the Supreme Court, see case no. 41 in this book) was one of the main causes for the immediate revision of section 35 Patent Act to strengthen the binding effect of company rules. (10) The ‘Blue Diode’ case received tremendous public attention since the charismatic inventor vividly communicated his mission to gain a better acknowledgment of employee inventors in Japan. He criticized that companies treated inventors as ‘slaves’ (he was then nicknamed ‘slave’). As a result, this case has made the Japanese more aware of employees' inventors' rights.

1 Transfer of Ownership of the Rights to the Invention The interim judgment of 19 September 2002 of the Tokyo District Court is of interest with regard to the question of ownership in an employee's invention. (11) According to section 35 Patent Act, rights to an employee invention belong to the employee, the employer receives a charge-free, non-exclusive license. If an explicit assignment agreement is concluded with the employee, the employer obtains the right to obtain a patent (section 33 Patent Act). (12) The Court assumed explicit assignment owing to the document signed in pencil, but also assumed implicit agreement on the assignment of rights even prior to the report of the invention according to the common practice in Defendant's company. However, if no such special circumstances are given, courts will not accept implied assignments. (13) In practice, the right to obtain a patent will usually be transferred by a written assignment agreement (jōtō shōsho) from the employee to the employer.

2 Reasonable Remuneration a) Principles According to Section 35 Patent Act The employee has a right to obtain a reasonable remuneration (sōtō no taika) when he transfers the right to obtain a patent to the employer (section 35 (3) Patent Act). P 467

The employer shall pay a ‘reasonable remuneration’ based on the profits made by the invention and under consideration of employer's contribution (section 35 (5), formerly section 35 (4) Patent Act). Should profits be made prior to the grant of the patent, according to court decisions, the ‘profits of exclusivity’ will be assumed to have arisen at an earlier point of time, for instance after publication of the patent application. (14) The date of payment is not determined by the law. If employer's company rules provide for a payment date for the remuneration, the courts will consider this to be the due date for payments to be made under section 35 Patent Act. (15) If there is no date of payment laid down in the company rules, the date of the assignment of rights is to be applied (section 35 (3) Patent Act). However, since it is usually very difficult to assess the profits at that point of time, according to court decisions, the employer may calculate the remuneration when he will be able to assess the profits, i.e. after he had commenced sales or received license income. (16)

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b) Calculation Method ‘Profits of Exclusivity’ In its ‘Blue Diode’ decision, the Tokyo District Court applied the calculation method ‘profits of exclusivity’ which is based on section 35 paragraph (4) (now section 35 (5) Patent Act). This rule provides an employee's right to receive a share of employer's profits generated by the monopolistic market position the employer has received owing to the rights to the invention, by a patent application, (17) a registered patent or by secret know-how. (18) According to section 35(4) Patent Act ‘old version’, ‘the amount of the remuneration shall be determined by taking into consideration the amount of profit to be received by the employer from the invention under consideration of employer's contribution. The new section 35 (5) took over the wording of section 35 (4) but added that ‘the employer's burden, contribution and treatment of the employee and any other circumstances relating to the invention shall be considered’. Therefore also non-financial advantages granted o the employee may be considered. P 468

The calculation method of ‘profits of exclusivity’ was established under the previous case law (19) and is still the prevailing calculation method. (20) The following formula must be applied: Licence income [or turnover of a (fictitious) licensee or 50 % of employer's turnover] of the product multiplied by the royalty rate multiplied by employer's rate of share [= employer's burden, contribution] multiplied by the co-ownership part multiplied by the income years [lifespan of the patent]; if necessary, deduction of accrued interest i) Profit of Exclusivity According to established case law, the ‘profits of exclusivity’ generated by the invention are first of all the employer's license income. (21) Income will also be assumed in crosslicensing cases. (22) If the patent right is not licensed, the employer's fictitious license income must be considered. (23) According to the calculation method in the ‘Blue Diode’ decision, the court must first determine the patentee's turnover from the patented product. In the ‘Blue Diode’ case, the court has assumed that the invention has caused 100% of the P 469 product income. (24) As a next step, it will be assessed how much turnover the fictitious licensee(s) would have made with the patented part of the product (relevant turnover). The court must then consider the entire lifespan of the patent from the beginning of the exploitation of the invention. In the ‘Blue Diode’ case, the court decided that 50% of patentee's turnover shall be considered as fictitious licensee's turnover (excess turnover). Other court decisions applied a different approach to determine the ‘excess turnover’, i.e. according to those decisions, came to an identical result, however with a different reason. The ‘profit of exclusivity’ shall be 50% of employer's turnover. The reason for this is that the employer has a non-exclusive license to the rights to the invention pursuant to section 35 (1) Patent Act. (25) This approach however comes to the same result as the approach to estimate the income of ‘fictitious licenses’. ii) Royalty Rate The ‘excess turnover’ must be multiplied by a royalty rate. It must be assessed which amount of a royalty rate could have been claimed from a competitor. So far, courts have considered a royalty rate to the entire product. (26) Usually courts use as a basis, for instance, the royalty rates that are compiled in the publications of the Japan Institute for Inventions and Innovation (Hatsumei Kyōkai) (27) In the ‘Blue Diode’ case, the Court assumed a very high license fee, i.e. 20% which the Defendant could have claimed from its two competitors. In its settlement proposal, the Tokyo High Court reduced this to a royalty rate of 10% respectively 7% (see below). iii) Employer's Burden (Rate of Share) The ‘profit of exclusivity’ (i.e. the ‘excess turnover multiplied by a reasonable royalty rate’) must then be multiplied by the rate of share of the employer in the invention. In the ‘Blue Diode’ case, the court assumed an unusual high rate of employee's share of 50% since the Plaintiff had chosen the research topic and the method and had received only minor support from the Defendant. This was later corrected by the settlement proposal of the Tokyo High Court, which assumed a 5 % share of the employee under consideration of Defendant's extraordinary high turnover. Courts generally assume that the average share of an employer is 90% -95%. (28) However, companies tend to assume in internal P 470 remuneration calculations that the share of the employer is even higher, for instance, 97.5% in the pharmaceutical sector (29) or even 99% in the telecommunication industry. The amended wording of former section 35 (4), now section 35 (5) emphasizes that the employer's burden, contribution, treatment of the employee and other circumstances must be taken into consideration. This is a reaction to industries' complaint that the courts do not consider the other benefits an inventor may receive, such as an improved research environment, a salary rise or the like. iv) Co-ownership Share

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Finally, an employee's co-ownership share must be considered. There were no coinventors in the ‘Blue Diode’ case. c) Summary As it became obvious, in the ‘Blue Diode’ case the court made a couple of assumptions which are very special to this unique case and which usually would not be made in an ‘ordinary’ employees' invention case. First, the Court assumed that the Defendant's profits were entirely based on the invention, i.e. the invention's share in the profits made by blue LEDs and LDs was assumed to be 100%, which is a rare (but in this case appropriate) assessment. However, also in other decisions, courts have taken the entire income of the product as basis for their calculation. (30) Further, the Court calculated the ‘excess turnover’ for the entire lifetime of the patent, i.e. it took Defendant's turnover from the sales of blue LEDs and LDs in the past, but also the possible turnover in the future into consideration. (31) It assumed that no alternative technology would have been invented in those ten years. In practice, e.g. under company rules, remunerations will often be paid annually based on the real turnover. This is admissible according to court decisions. (32) The Court fixed the very high license fee of 20% assuming that until the end of the lifespan of the patent, there would only be two possible licensees. The Court finally decided that the share of the employee in the invention amounted to 50%, which is an extraordinary high share. Due to these assumptions and due to the fact that Defendant had generated a very high turnover based on the invention, the extraordinary high amount of the remuneration was calculated. P 471

It must be criticized that the Court's assumptions were very much to the favour of the inventor since he did not have to bear any financial risks for instance with regard to the marketing of the products, etc. Further, the result of the calculation seems unpredictable since the assumptions must be made on basically unforeseeable factors. (33) The Tokyo High Court made significant corrections with regard to the first instance's assumed parameters of the case (see the following paragraph). d) Corrections Made by the Tokyo High Court It came as a great surprise when the Plaintiff accepted on 11 January 2005 in the second instance proceedings a settlement sum of JPY 883 million (approx. EUR 6.2 million). (34) The Plaintiff stated that he accepted the settlement upon advice of his lawyers, but was ‘very disappointed’. The Tokyo High Court had proposed a settlement with regard to all 195 patent and utility model rights based on Plaintiff's inventions. The Tokyo High Court stated that it took into consideration the intent of section 35 of the Patent Act and the precedent Hitachi case which assumed a contribution ratio of the employer of 80% and the Ajinomoto case in which the employer's contribution rate was 95%. The Tokyo High Court was of the opinion that the license fee should be 10%, and from 1997 on due to technological advances 7%. The employer's contribution was to be assessed to be 95% under consideration of the extremely high amount of remuneration in this case. For the period following 2002, when Defendant had lost its monopoly market position, the Tokyo High Court calculated an average amount for the period from 1997 to 2002 which was multiplied by 9 years (the average residual period for important patents amongst the Plaintiff's employee inventions). Further the Tokyo High Court also calculated an adjustment rate of 70%, since the development and implementation of alternative technologies was highly likely due to significant technological progress in this field. Due to these considerations, the Tokyo High Court came to a much lower amount of remuneration. e) Other Cases The courts have granted high amounts of remuneration also in a other cases. For instance, in the ‘Hitachi Optical Pickup’ case the court awarded to the employee inventor about JPY 168 million (about EUR 1.2 million). (35) In the Ajinomoto case, the Tokyo District Court granted about JPY 200 million (about EUR 1.4 million). (36) The IP High Court granted in P 472 2009 a remuneration amounting to about JPY 70 million in total (approx. EUR 556,000) (37) and a remuneration of JPY 55 million in total (approx. EUR 419,000). (38) Both decisions applied the ‘old’ version of section 35 Patent Act. In other cases smaller amounts of remuneration were awarded. (39) f) Criticism and Reform The industry has strongly criticized the court decisions on employees' invention remunerations as a non-calculable financial risk that can remain even years after an employee has left the company. (40) It was further criticized that the courts ignored the fact that employers bear the risk of failure of an invention, including the costs for facilities and personnel. In 2003, an additional problem for industry turned up when the Supreme Court decided in the ‘Olympus’ case that the calculation schemes as laid down in company guidelines do not prevent employees from claiming a reasonable remuneration according to the calculation method as laid down in section 35 (4) Patent Act (old version). (41) This decision caused a further increase of remuneration cases and

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this further concerned the industry. The government reacted to industry's harsh criticism and amended section 35 Patent Act by the law of June 2004 that came into force on 1 April 2005. The new law has significantly strengthened the binding effect of employer's company guidelines (see Case No. 41 in this book). g) Relevance of the Calculation Method ‘Profits of Exclusivity’ after the Amendment of Section 35 Patent Act The calculation method as applied in the ‘Blue Diode’ case by the Tokyo District Court is still of relevance under the new law. It must be applied (1) if a company has not established company rules on employees' inventions or (2) if company rules were established but without observing the procedural rules as laid down in section 35(4) Patent Act, i.e. proper consultations, disclosure and hearing of the employee, and, the P 473 amount of remuneration is not ‘reasonable’ (3) if a remuneration calculated pursuant to company's guidelines had not generated a ‘reasonable’ remuneration. Court decisions may not be significantly different from the cases under earlier law, results of which were quite unpredictable. However, in the last years, cases have decreased significantly. Companies should establish company guidelines on the handling and remuneration of employees' inventions under consideration of the procedural requirements as laid down in section 35 (4) Patent Act. (42) h) Different Calculation Methods in Company Guidelines Japanese Companies, when establishing internal rules on remunerations, often establish their own calculation methods that differ from the calculation method ‘profits of exclusivity'. Companies sometimes take the license analogy method as it is commonly used under German law as a starting point. According to this, the company's actual turnover relating to the invention (i.e. usually a part of the product's turnover) should be multiplied by an appropriate license fee. Companies make further deductions under various aspects. Companies consider, for instance, that profits by successful products are not generated by the invention alone but also, for instance, by the design or marketing strategies. Anja Petersen-Padberg (1) P 473

References Anja Petersen-Padberg: (University of Cologne) Conversions Yen-Euro in this text were made on 28 July 2004, 11 January 2005. Defendant filed 195 patents and utility models in Japan and abroad related to the ‘Blue Diode’ invention. 3) Tokyo District Court, 19 September 2002, Hanrei Jihō 1802, 30; see also S. Mochizuki, The Blue LED Patent Case, AIPPI Journal, Vol. 28 (2003) No 3, 179. 4) The Court had considered the following circumstances: (1) the filled out form sheet, (2) no contesting of succession of rights even if no form sheet was used regarding inventions in the past (before 1990), (3) no definite form requirements for signatures (i.e. with or without a personal seal), (4) Defendant applied for a large number of patents based on employees' inventions, (5) for each invention, Plaintiff received a compensation, (6) no contest of ownership regarding the rights to this invention within the past ten years. 5) The entire findings of the Court are translated by S. Mochizuki, AIPPI Journal, May 2003, 179, 184. 6) Translated by S. Mochizuki, AIPPI Journal, May 2003, 179, 184. 7) This is not to be understood a remuneration for the mere use of the invention, since the employer has received a non-exclusive license for its use according to the law (sec. 35 (1) Patent Act). 8) Conversion as of 11 January 2005. 9) Commented on by T. Doi, AIPPI Journal 2004, 111 et seq., A. Petersen-Padberg/P. Klusmann, Neue Entwicklungen bei der Vergütung von Arbeitnehmererfindungen in Japan – Zur Entschei-dung ‘Blaue Diode’ des BezG Tokyo und der Neufassung von § 35 Abs. 4 und 5 PatG [New Developments regarding the remuneration for employees' inventions in Japan – ‘Blue Diode’ decision of the Tokyo District Court and revision of sec. 35(4)(5) Patent Act], GRUR Int. 2005, 370; IIC 2004, 941. 10) Amendment of sec. 35 para. 4 and 5 by the Law on the Partly Reform of the Patent Act to Accelerate Patent Prosecution Proceedings (tokkyo shinsa no jinsoku tō no tame no tokkyohō no ichibu wo keiseisuru hōritsu) No. 79 of June 2004. The law came into force on 1 April 2005. Regarding details on the reform, please also see case no. 41 ‘Olympus’ in this book. 11) Tokyo District Court, 19 September 2002, Hanrei Jihō 1802, 30; see also S. Mochizuki, The Blue LED Patent Case, AIPPI Journal, Vol. 28 (2003) No. 3, 179. ★ )

1) 2)

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12) According to court decisions, a provision on the assignment of inventions in

13) 14) 15) 16)

17) 18) 19) 20)

21)

22)

23)

24)

25) 26) 27)

28) 29) 30) 31)

32) 33) 34) 35) 36)

company guidelines is sufficient for employers to obtain the right to obtain a patent (i.e. an individual assignment agreement is not necessary) (see e.g. Tokyo District Court, 19 September 2002, Hanrei Jiho 1802, 30 - ‘Blue Diode’ interim decision). Tokyo High Court, 20 July 1994, Chizaishū 26 (2), 717. Tokyo District Court, 26 January 2006, Hanrei Jihō 1943, 85 - ‘Konika Minolta’; Tokyo District Court, 30 January 2007, Hanrei Jihō 1971, 3 - ‘Canon’. Supreme Court, Olympus, Tokyo District Court, 30 January 2004, Hanrei Jihō 1852, 36 ‘Blue Diode’. IP High Court, 26 February 2009, Case No. 2007 ne 10021, published on the website: . Osaka District Court 4 March 1992, Chizaishū Vol. 26, No. 2, 405 ‘Gosen’; Osaka High Court, 27 May 1993, Hanrei Jihō 1532, 118 - ‘Gōsen’; Tokyo District Court 26 January 2006, Hanrei Jihō 1943, 85 - ‘Konika Minolta’, Iimura/Shitara, Chiteki zaisan kankei soshō [Proceedings Related to Intellectual Property] 2009, 329 et seq. These considerations are also of importance for the beginning of the prescription period, see case no. 41 ‘ Olympus’ in this book. Tokyo District Court, 26 January 2006, Hanrei Jihō 1943, 85 - ‘Konika Minolta’. Tokyo District Court, 23 December 1983, Hanrei Jihō 1104, 120 - ‘Nihon Kinzoku Kako’. Tokyo District Court, 23 December 1983, Hanrei Jihō 1104, 120 - ‘Nihon Kinzoku Kako’; Tokyo District Court, 30 September 1992, Hanrei Taimuzu 795, 278; Osaka High Court, 27 May 1994, Hanrei Jihō 1532, 118. T. Imura/R. Shitara, Chiteki zaisan kankei soshō [Proceedings Related to Intellectual Property], 2009, 331, referring to numerous court decisions.; Court decisions which have applied this method: Osaka District Court, 4 March 1993, Chizaishū Vol. 26, No 2, 405 - ‘Gōsen’; Osaka High Court, 27 May 1994 Hanrei Jihō 1532, 118 - ‘Gōsen’; Tokyo District Court, 26 January 2006, Hanrei Jihō 1943, 85 - ‘Konika Minolta’; Tokyo District Court, 8 June 2006, Hanrei Jihō 1966,102 - ‘Mitsubishi denki’; Tokyo District Court, 12 September 2006, Hanrei Taimuzu 1234, 182, - JSR; Tokyo District Court, 30 January 2007, Hanrei Jihō 1971, 3 - ‘Canon’. The remuneration in the ‘Ajinomoto’-case (Tokyo District Court, 24 February 2004, ) was based on Defendant's license income, in the ‘Hitachi Optical Pickup’ - case, the calculation was based on a cross-licensing agreement (Tokyo High Court, 29 January 2004, Hanrei Jihō 1848, 25). IP High Court, 26 February 2009, Case No. 2007 ne 10021, published on the website: ; Tokyo High Court, 29 January 2004, Hanrei Jihō 1848, 25; Tokyo District Court, 8 June 2006, Hanrei Jihō 1966,102 - ‘Mitsubishi denki’; Tokyo District Court, 30 January 2007, Hanrei Jihō 1971, 3 - ‘Canon’. The ‘fictitious license income’ must be calculated, and not solely employer's income will be considered as under Germany's Employees Invention Act, since the employer receives a charge-free non-exclusive license to the rights of the invention pursuant to sec. 35 (1). Courts usually apply the entire product income, not only the income of the patented part of the product. See also IP High Court 26 February 2009, Case No. 2007 ne 10021, published on the website: . Under German employees' invention law, for the calculation of the remuneration, the turnover of the patented part of the product will be taken as a basis. Only in rare cases, if the invention causes the sale of the product, turnover of the entire product will be considered. IP High Court, 26 November 2009, Case No. 2009 ne 10020; IP High Court, 26 February 2009, Case No. 2007 ne 10021) both published on the website: . Tokyo District Court, 30 January 2004, Hanrei Jihō 1852, 36 - ‘Blue Diode’, see also IP High Court 26 February 2009, Case No. 2007 ne 10021, published on the website: . The latest version of Hatsumei Kyōkai's publication on royalty rates is: Hatsumei Kyōkai Kenkyū Centā [Japan Institute of Invention and Innovation, Science Center], Jisshi Ryōritsu [Royalty Rates], 2003. Further compilations of royalty rates can be found at: (p. 13) and here: . T. Iimura/ R. Shitara, ibid., 342. T. Imura/R. Shitara, ibid., 342. See, for instance, IP High Court 26 February 2009, Case No. 2007 ne 10021, published on the website: . Under German law, if the remuneration claim is concerned with future income, courts establish parameters for remunerations to be paid annually by the employer. In lump sum settlements, it is common practice to calculate on the basis of an ‘average lifetime’ of the patent, dependant on its technical field. This practice is accepted by decisions of the Board of Arbitration for Employees' Inventions. Tokyo High Court, 27 April 2004, Hanrei Jihō 1872, 95 - ‘Hitachi Metals’. A. Petersen-Padberg/P. Klusmann, ibid., GRUR Int. 2005, 370, 373. JPY 608.5 million plus JPY 235 million interest. Settlement Agreement in the Second Instance, 11 January 2005 (Case ne 962/2177), AIPPI Journal 2005, 311 et seq., commented on by R. Shimanami, AIPPI Journal, Vol. 30, No. 6, 2005, 306. Tokyo High Court, 29 January 2004, Hanrei Jihō 1848, 25 - ‘Hitachi Optical Pickup’. Tokyo District Court, 24 February 2004, - ‘Ajinomoto’.

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37) IP High Court 26 February 2009, Case No. 2007 ne 10021, published on the website:

.

38) IP High Court 26 November 2009, Case No. 2009 ne 10020, published on the website:

.

39) Tokyo District Court, 30 September 1992, Hanrei Taimuzu 795, 279 - ‘Kaneshin’: about

EUR 96,000; Osaka District Court, 28 April 1994, Patento 1994, 12, 103 - ‘Zojirushi’: about EUR 47,500; Supreme Court, 22 April, 2003, Hanrei Jihō 1822, 39 - ‘Olympus’: about EUR 18,540, commented on by J. Fujino, AIPPI Journal, Vol. 28, 477; Tokyo High Court, 29 January 2004, Hanrei Jihō 1848, 25 - Hitachi Optical Pickup: about EUR 1.2 million; Tokyo District Court, 24 February 2004, - ‘Ajinomoto’: about EUR 1.4 million. 40) See C. Heath/M. Mōri, ‘Employees' Inventions in Japan’, IIC 2005, 663, 678. 41) Supreme Court, 22 April 2003, Hanrei Jihō 1822, 39 - ‘Olympus’. The Supreme Court has confirmed prior case law of lower courts: for instance, Tokyo District Court, 19 September 2002, Hanrei Jihō 1802, 30 et seq.; see also S. Mochizuki, The Blue LED Patent Case, AIPPI Journal, Vol. 28 (2003) No 3, 179 et seq. 42) Please see in detail, Case No. 41 ‘Olympus’ in this book. 1) (University of Cologne)

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Case No. 43: Intellectual Property – Patent Law – Patent Infringement – Counterclaim of Invalidity

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 11 April 2000 – Case No. 1998 o 364, Texas Instruments v. Fujitsu, ‘Kilby (III)’ Source: Minshū 54-4, 1368 = Hanrei Jihō 1710, 68 = Hanrei Taimuzu 1032, 120

Jurisdiction Japan

I Headnote(s)

Court

The court that examines a case of patent infringement may judge whether or not the patent is invalid, even before a patent annulment decision of the Japanese Patent Office becomes final.

Supreme Court of Japan

If it is found that there are obvious reasons for holding the patent invalid as a result of the court hearing, a claim for injunction, damages, etc., based on the patent is deemed an abuse of rights.

Case date 11 April 2000

II Relevant Provisions Section 125 Patent Act, section 1(3) Civil Code

Case number

P 476

1998 o 364

III Facts

Parties

Fujitsu Ltd. (the Plaintiff), one of the leading Japanese manufacturers of semiconductors, had a cross-licence agreement with Texas Instruments Inc. (the Defendant).

Bibliographic reference

The Defendant, a leading US manufacturer of semiconductors, holds a Japanese patent called the Kilby Patent after its inventor Dr Kilby (Kilby Patent, Registration No. 320275) concerning a semiconductor integrated circuit. The application of the Kilby Patent, filed on 21 December 1971, was divided from the patent application (parent application) that was divided from another patent application (grandparent application). The grandparent application was filed on 6 February 1960 and expired on 26 June 1980. There were nine parent applications divided from the grandparent application and two applications divided from parent applications including the Kilby Patent. All of them, except the Kilby Patent, were finally rejected by the Japanese Patent Office. The Kilby Patent application was published on 27 November 1986, and the Kilby Patent was registered on 20 October 1989. Its expiration date was 27 November 2001, 15 years from the date of publication, under the old 1921 Patent Act that governed the grandparent patent application.

Claimant, Texas Instruments Defendant, Fujitsu

Christopher Heath, 'Case No. 43: Intellectual Property – Patent Law – Patent Infringement – Counterclaim of Invalidity', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 475 - 483

The Defendant had cross-licence agreements with many leading Japanese semiconductor manufacturers and those agreements were going to expire at the end of 1990. After Defendant was granted the Kilby Patent in 1989, it strongly demanded that Japanese manufacturers renew the agreements at a higher royalty rate, insisting that the Kilby Patent was the basic patent for manufacturing semiconductors, and most of the semiconductors manufactured in Japan infringed the Kilby Patent. Most Japanese manufacturers accepted Defendant's proposal and renewed their licensing agreements. However, Plaintiff rejected Defendant's demand and brought a lawsuit to the Tokyo District Court requesting a declaratory judgment that: (1) Defendant was abusing its right as the Kilby Patent was unlawfully filed and should be revoked, and (2) Plaintiff's products did not infringe the Kilby Patent. The Tokyo District Court held that Plaintiff's products did not infringe the Kilby Patent. Defendant appealed to the Tokyo High Court, and the High Court dismissed the appeal. Defendant then appealed to the Supreme Court of Japan. The Supreme Court also held that Defendant abused its right, yet gave a different reasoning than the High Court. The Supreme Court thereby overturned precedents of the Imperial Supreme Court of 15 September 1904 and 23 April 1917 that did not allow the patent to be challenged in infringement proceedings.

IV Findings ‘Certainly, the Patent Act provides that if a patent contains a reason for annulment, the patent shall be examined and judged by the Patent Office's Appeal Board which has the special knowledge and experience necessary to invalidate a patent (section 123(1), 178(6) Patent Act). Such patent shall be deemed nonexistent from the beginning once an P 477 annulment decision becomes final (section 125 Patent Act). Therefore, the patent remains lawful and valid, and is not deemed invalid by any third party until an annulment decision becomes final. However, in case of a patent such as the one in this case, where there are obviously grounds for annulment and where it may be that the patent will be annulled once a patent annulment trial before the Japan Patent Office has been initiated and such

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decision becomes final, it is appropriate to disallow a claim for injunction, damages, etc., based on such patent for the following reasons: (i)

if a claim for injunction and damages arising out of any act of using the invention based on such patent was accepted, this would give unreasonable advantages to the patent owner and unreasonable disadvantages to any person using the invention. This is contrary to the spirit of equity; (ii) it is desirable to settle a dispute as quickly as possible in one proceeding. In the case of an infringement claim based on the above patent, the defendant should be allowed to argue the existence of the reason for annulment as a measure for defending itself against the existence of the patent right, even before a patent annulment trial is initiated before the Patent Office and an annulment decision has become final. Otherwise, even a defendant who does not intend to seek patent annulment also on behalf of any third party would be forced to initiate proceedings for an annulment trial. This is against the economy of legal procedures; and (iii) section 168(2) Patent Act may not be interpreted to provide that legal procedures shall be suspended even in cases where the patent obviously contains a reason for annulment and it can be predicted that the patent will be annulled with certainty as stated above. Therefore, it must be understood that the court that examines a case of patent infringement may judge whether the patent has an obvious reason for annulment or not, even before a patent invalidation decision becomes final. If it is found that the patent is obviously invalid as a result of the court hearing, it is reasonable that a claim for injunction, damages, etc., based on the patent is considered an abuse of rights unless there are special circumstances to the contrary. It cannot be held that this interpretation is against the spirit of the patent system. Precedents given by this Court including the judgment dated 15 September 1904 on Case No. 1903 re 2662 (Keiroku, No. 10, at 1679), the judgment dated 23 April 1917 on Case No. 1916 o 1033 (Minroku, No. 23, at 654), etc., which are contrary to the above opinion, shall not be upheld to the extent that they are in conflict with the above opinion. The judgment of the Tokyo High Court held that the patent was obviously invalid and that there were no recognizable special circumstances, including, for instance, an application for corrective trial. A claim for damages based on such patent should be considered an abuse of right, and therefore, the appeal should be dismissed. This Court holds such judgment as appropriate and lawful. The judgment of the Tokyo High Court is not in conflict with the precedents quoted by the appellant, and is lawful'. Translated by Mineko Mōri P 478

V Comment 1 Validity and Infringement The relationship between patent infringement procedures and the estoppel of invalidity has been of considerable practical importance and comparative interest. After all, the main defences against patent infringement are, first, that the act performed by the defendant does not infringe in the first place, and, second, that the patent is invalid or unenforceable. There is a certain divide in this matter. Anglo-American systems tend to give the courts the power to invalidate patents if so requested as a counterclaim to an infringement action, or even in isolation, while the Patent Office does not enter the fray. France and Italy have given the courts the same powers, but for a different reason: the Patent Office does not examine patents as to the requirements of patentability, and therefore there is no perceived conflict between the administrative decision of grant, and a possibly contradictory one of invalidating such grant. This is (or was) different for countries such as Germany (1) and China, (2) and until recently Korea, (3) where the courts in an infringement action do not allow the defendant to raise the issue of validity. The underlying rationale for such bifurcation is that an administrative decision such as the grant of a patent should be reviewed by an administrative body. In China, this is the Patent Office (SIPO), in Germany, the Federal Patent Court (Bundespatentgericht). In Germany, the division between the infringement courts and the Bundespatentgericht seems rather settled, and it is currently too early to say whether and in what form the German division will find its place in a future European patent litigation system. Also, against this background of possible future development of the European systems, experiences from Japan in switching from one system to the other are of considerable interest and deserve a closer look.

2 The Situation Prior to Kilby In Japan, it had always been clear that only the Japanese Patent Office has jurisdiction over invalidating a registered IP right, either by request of an interested party (patent law) or the public at large (trade marks). In the case of trademarks, the courts have long P 479 refused enforcement in cases where the trademark should not have been registered in

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the first place (4) or was prone to cancellation. (5) Things were far more complicated for patents. Here, decisions of the Imperial Supreme Court of 1904 and 1917 had held that the estoppel of patent invalidity would give the court discretion to stay procedures, yet not to regard the patent as invalid. (6) Invalidation procedures before the Patent Office were not only slow, but both parties could even supply the Tokyo High Court with completely new facts on appeal. (7) In circumstances where the patent was presumably invalid, the courts sometimes tried to narrow the patent's scope, (8) or grant the defendant a prior user right. (9) Before Kilby and based on the precedents cited by the Supreme Court, it had been assumed that the court could not judge the validity of a patent, as this was a matter for the Japanese Patent Office to decide. However, according to Kilby, a patent right, registered with JPO, is a civil right, and the scope of a patent can be judged by a court in an infringement case. Thus, the decision held that if there are obvious reasons for holding the patent invalid as a result of the court hearing, a claim based on the patent is deemed an abuse of right. (10) Regarded this way, the court only holds the exercise of the patent as an abuse of right, but does not declare the patent invalid. In its Kilby decision, the court held the precedents of the Imperial Supreme Court were contrary to the spirit of equity and against the economy of legal procedure. A similar reasoning was already adopted previously where the court found the patent lacked novelty and was thus invalid. (11) Unlike previous decisions, however, the Kilby decision no longer required the P 480 courts to demonstrate specific circumstances of the case for holding a patent invalid, but lets obviousness be a sufficient reason.

3 The Situation after Kilby Subsequent decisions affirmed that the grounds for holding a patent invalid could relate to a lack of novelty (12) or inventive step, (13) insufficient disclosure (14) or misappropriation. (15) The new approach towards invalidity may have speeded up procedures, but it is not necessarily beneficial to the patentee. According to statistics from 2002, the patentee's success rate in infringement procedures was a mere 24% of the 70 cases where the estoppel of invalidity was raised after the Supreme Court's decision. (16) According to information supplied to the authors by the former presiding Judge Mimura, alleged invalidity was affirmed by the courts in about half of the infringement cases. This also had repercussions on the Patent Office's handling of nullity procedures. While between 1997 and 1999 nullity actions had a success rate of 10%-15%, this escalated in 2001 to almost 50%. (17) Only recently has the IP High Court been more inclined to uphold decisions of the Patent Office that affirmed the validity of the patent, and the success rate of patentees in court has increased (18) : This trend has also become manifest in a number of recent decisions where Judge Iimura has applied a more rational approach in determining inventive step. (19) Current practice before the courts has shown that the estoppel of invalidity is successful even in cases that are not ‘obvious’. This in effect has given the courts a parallel jurisdiction over patent invalidation matters, albeit limited to an inter partes effect. It is thus conceivable that the courts find a patent invalid, yet that the Patent Office in subsequent invalidation procedures upholds the patent. What should happen in these P 481 cases is unclear, and as the law stands at the moment, there is no remedy for the patentee should the court decision already have become final. Only the reverse case has now been dealt with by the patent reform 2011: should the courts have found a patent valid and infringed, and this decision has become final, a subsequent invalidation of the patent before the Patent Office will no longer give the defendant the right for a retrial and a claim for damages due to unlawful patent enforcement, see below. The legislature has partly responded to the above changes. A Patent Amendment Act was promulgated on 23 May 2003 and provides for a merger of opposition and invalidation procedures, yet does not fundamentally change the procedures before the Patent Office. The new system came into force on 1 January 2004 and applies to all patents granted after that date. In a further legislative change of 2005, the power of the courts to hold patents unenforceable has been clearly stated in section 104-3 Patent Act that now reads: (1) (2)

In a litigation that concerns a patent or an exclusive license thereof, the patentee or the exclusive licensee is barred from exercising the patent right if the latter is likely to be invalidated in a nullity action. If an estoppel or an attack under the preceding subsection has been raised in order to cause unreasonable delay, the court is entitled to disregard it.

4 The Law of Unintended Consequences So far, so good. While allowing the estoppel of invalidity may have solved some problems, it turned out that it created a myriad of others, mostly due to the fact that procedures before the courts and the patent office were unrelated to each other. Under the current law, the courts (according to section 6 Code of Civil Procedure those of Tokyo and Osaka) can hold the patent invalid inter partes, and the Patent Office can invalidate the patent erga omnes. Technical expertise of the courts is ensured by the so-

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called technical assistants from the patent office (six in Tokyo, five in Osaka) that are meant to assist the judges in technical matters. The technical assistants, chōsakan, are normally dispatched from the Patent Office for a period of three years. Invalidation and infringement proceedings may be conducted concurrently, subsequent to each other or in isolation, creating all sorts of legal problems. As if this was not enough, the patentee can request ex parte limitation proceedings before the Patent Office, often in response to the court holding the patent invalid inter partes. Different from most common law countries, the courts in Japan still cannot declare the patent invalid, and they cannot limit the scope of the patent by request of the patentee. In limitation proceedings, the patentee has the advantage of dealing with the Patent Office in the absence of any third party, but is significantly inconvenienced by the fact that the Patent Office in such proceedings does not accept auxiliary requests. In one of the subsequent cases that went up to the Supreme Court, the patentee in patent in order to distinguish the patent from the prior art the infringement court found prejudicial to the maintenance of the patent. Yet it took the patentee five attempts to successfully limit the patent, and the infringement case had meanwhile arrived at the Supreme Court (20) that held:

P 482 response to a finding of invalidity by the infringement court, tried to limit his

A patentee whose patent has been regarded as invalid by the courts can only be heard with the argument that such patent was successfully upheld in amended form in a correction trial before the Patent Office where such trial was conducted without unreasonable delay. In the case at issue, the Supreme Court found that it was too late to consider the limitation. Patentees have therefore tried to request amendments to the patent in a timely manner, but the courts are not entirely clear what this should encompass. In a recent case, in order to overcome the estoppel of invalidity, the patentee suggested an amendment of the patent to the court that would overcome the prior art objections while still making the defendant's device fall into the scope of the patent claims. The first instance court (21) dismissed the action, but stated three requirements for a suggested patent amendment to be considered by the court: 1. 2. 3.

the plaintiff has already requested a correction trial before the Patent Office and submitted a new wording of his claims; the limitation is able to overcome the prior art against which the patent is deemed not novel or non-inventive; even after the limitation, the defendant's device will fall within the scope of the amended patent.

The IP High Court dismissed the appeal, but held that only the first of the above three requirements is necessary for a patentee to counter the invalidity defence. (22) Things can get even more complicated where the patent is revoked in proceedings before the Patent Office, the patentee appeals this decision and at the same requests correction of the patent before the Patent Office. In the case such correction is allowed, the object of the dispute (Streitgegenstand) before the court becomes mute. (23) The 2011 patent reform addresses the issue to a certain extent in that it limits the patentee's possibility of amending the patent once that patent has been revoked by the Patent Office and the patentee has appealed against this decision: Once the appeal has been filed with the Tokyo High Court, the patent can no longer be amended. In turn, the Patent Office is studying the possibility of admitting auxiliary requests in the nullity or correction proceedings. P 483

A case of the Tokyo High Court dealt with the reverse situation that the court had found the patent valid and infringed, yet the Patent Office had ultimately revoked the patent. In such situation, the court allowed for a re-opening of proceedings to take account of the fact that the patent had been invalidated: (24) ‘The fact that the courts dealing with patent infringement may hold the patent valid or invalid inter partes does not preclude a re-opening of a final and conclusive decision establishing validity and infringement of the patent where the latter has subsequently been declared invalid erga omnes by the Patent Office.’ While certainly correct, such possibility creates legal uncertainty. The 2011 Patent Amendment Act now excludes such a re-opening of proceedings and thereby gives more weight to the findings of the courts. However, of course, as long as the infringement action is pending while the patent is invalidated, such fact must be considered by the courts within the limits of the above Supreme Court decision ‘Knife-Processing Device’. A final issue that deserves mention is the different treatment of res iudicata between procedures for limitation and procedures for nullity, both before the Patent Office. According to the Supreme Court: (25)

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‘Subject matter of limitation procedures according to section 126 Patent Act is the patent as a whole, while in cases of inter partes revocation procedures under section 123 Patent Act, the decision may only relate to certain claims and the patent can be partially upheld if only certain claims are deemed invalid.’ This complicates things quite a lot where, for example, invalidity of claim 1 has been acknowledged by the Patent Office, but not invalidity of subclaims. If this decision is appealed, the subject matter of the appeal is only claim 1, while the remainder of the patent is not subject to the proceedings. If on appeal the patentee proposes amendments, this may have unforeseen consequences for the dependent subclaims – a somewhat odd situation. The strict split between infringement and revocation proceedings practiced in many Asian jurisdictions – China, Taiwan, Japan, Korea – has been overturned by court practice in Japan and Korea. Other jurisdictions may well follow. This will lead to a speeding up of proceedings in general, but, as the Japanese example demonstrates, may lead to unforeseen difficulties. Christopher Heath (1) P 483

References ★ )

1) 2) 3) 4)

5)

6) 7)

8) 9) 10) 11) 12) 13) 14) 15) 16) 17)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich The German Federal Patent Court has exclusive jurisdiction in regard of the invalidation of German patents and extended European patents that are no longer subject to opposition/appeal procedures. P. Ganea / T. Pattloch, Intellectual Property Law in China (2005) 305. Until the decision of the Korean Supreme Court, 28 December 2004, German translation in: GRUR Int. 2006, 617. E.g., Kobe District Court, 21 December 1982, Mutaishū 14-3, 813 – Dorothee Bis. Here, a former distributor of the French fashion designer ‘Dorothee Bis’ had registered the mark while still distributing Dorothee Bis goods. The court held that the goodwill rested only in the French fashion undertaking, not the registered trademark owner, and thus refused enforcement of the mark. Supreme Court, 20 June 1990, in: IIC 25 (1994) 118 – Popeye Scarves III. Here, the Supreme Court held that the registered mark even at the time of registration conflicted with an existing copyright and should thus be cancelled. Cancellation procedures at the Patent Office seemed to take forever as the Patent Office apparently was unable to make up its mind about the cancellation request already filed years earlier. Imperial Supreme Court, 23 April 1917, Minroku 23, 654: ‘If a new commercial model has been registered as a utility model…, it is not permissible to deny the validity unless the right has been declared null and void in nullity procedure’. Supreme Court, 4 April 1968, Minshū 22–4, 816. The invalidation procedure has two further disadvantages. First, the Patent Office and the courts would only examine the reason of invalidation as argued by the petitioner, rather than make a general assessment of patentability (Supreme Court, 10 March 1976, Minshū 30–2, 79 – Knitting Machine). Second, the patentee can almost endlessly prolong invalidation procedure by requesting an amendment of the patent before the end of the invalidation trial, as this trial would then have to be repeated in light of the amended patent (Supreme Court, 9 March 1999, Minshū 53-3, 303 – Rectangular Steel Pipe, and Supreme Court, 22 April 1999, in: Hanrei Jihō 1675, 115 – Calendar). Should the amendment not be accepted, the patentee can of course appeal against this decision, too. E.g., Osaka District Court, 25 March 1993, in: Patent 11/1994, 121. E.g., Nagoya District Court, 31 July 1991, in: Tokkyo Kenkyū 15, 3. It is at this point, where the decision is at its least convincing. Nagoya District Court, 26 November 1976, in: Hanrei Jihō 652, 95. Tokyo District Court, 14 July 2000 (unreported); Osaka District Court, 5 September 2000 (unreported). Tokyo District Court, 27 September 2000 (unreported). Tokyo District Court, 25 April 2001 (unreported). Tokyo District Court, 30 January 2001 (unreported). Japan Patents and Trademarks 111 (February 2002) 12. 1997: 184 invalidation requests, upheld in 22 cases; 1998: 252 invalidation requests, upheld in 46 cases; 1999: 293 requests for invalidation, upheld in 27 cases; 2000: 296 requests for invalidation, upheld in 77 cases; 2001: 283 requests for invalidation, upheld in 138 cases. Source: Tokkyo-chō, Tokkyo gyōsei nenji hōkokusho [Annual Report on Patent Administration] ( Tokyo 2002) 183.

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18) This figure was provided by S. Okuyama, Recent IP High Court decisions in Japan on 19)

20) 21) 22) 23)

24)

25) 1)

inventive step, in: Hansen et al. (eds.), Patent Practice in Japan and Europe – Liber amicorum Guntram Rahn, Kluwer 2011, 157, 166. E.g. in that the Patent Office must properly reason its decisions (IP High Court, 27 April 2009), apply the problem-solution approach when determining inventive step (IP High Court, 27 May 2010), accept late-filed experimental evidence as proof of the patented teaching (IP High Court, 28 January 2010), and properly determine sufficiency of disclosure (IP High Court, 12 April 2011 – ‘Pipeline Architecture’). Japanese Supreme Court, 24 April 2008, in: IIC 40 (2009) 721 – Knife-Processing Device. Tokyo District Court, 27 February 2009, in: Hanrei Jihō 2082, 128 Intellectual Property High Court, 27 April 2010, K.K. Kotobuki v. Japan Post. In Tokyo High Court, 8 September 2011, Matsushita Seisaku v. Amada, the patentee requested two subsequent amendments to his patent after the Patent Office had invalidated the patent in nullity proceedings, and each time the patentee appealed to the courts, meaning that there were three appeals pending, and each time a new appeal was filed, the subject of the previous appeal became moot. Tokyo High Court, 14 July 2008, 43 IIC (2012 – forthcoming) – ‘Seaweed Purifying Apparatus’. This is in line with previous decisions: Tokyo High Court, 31 January 2005, 39 IIC 359 (2008) – ‘Platform Planks’; Osaka High Court, 29 March 2005, 39 IIC 228 (2008) – ‘Fire Door’; Japanese Supreme Court, 10 July 2008, German translation in: GRUR Int. 2009, 623. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 44: Copyright Law – Time- and Space-Shifting Broadcast – Right of Reproduction

Document information

Publication

Ueno Tatsuhiro

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 20 January 2011, Case No. 788 (Ju) of 2009, NHK (Japan Broadcasting Corporation), et al. v. Nihon Digital Kaden Co. Ltd.–‘Rokuraku III’

Jurisdiction

Source: 65-1 Minshū 399 = 43 IIC [2012], (forthcoming)

Japan

I Headnote(s)

Court

Supreme Court of Japan

Providing, without permission of the respective broadcasting organizations, a time-and space-shifting service of TV programmes that enables a user living abroad to enjoy at any time TV programmes broadcast in Japan via the Internet infringes the right of reproduction.

Case date

II Relevant Provisions

20 January 2011

Copyright Act, Section 112(1) P 486

Case number

III Facts

788 ju 2009

The appellee is a provider of a time- and space-shifting service for TV programmes called ‘Rokuraku II’, which works by using a hard disc recorder with the function of Internet communication.

Parties

Claimant, NHK (Japan Broadcasting Corporation), et al. Defendant, Nihon Digital Kaden Co. Ltd.

Rokuraku II, which is manufactured and sold or leased out by the appellee, consists of two devices; the ‘Parent Rokuraku’ and the ‘Subsidiary Rokuraku’. The Parent Rokuraku incorporates a TV tuner and has the function of digitizing and recording broadcasted TV programmes, and of transmitting the recorded TV programmes via the Internet. The Subsidiary Rokuraku has the function of instructing the Parent Rokuraku, via the Internet, to record broadcast TV Programmes and to receive the recorded TV programmes from the Parent Rokuraku for replay.

Bibliographic reference

The appellee rents out both the Parent Rokuraku and the Subsidiary Rokuraku, or sells the Subsidiary Rokuraku and rents out only the Parent Rokuraku. A user of the service can enjoy TV programmes broadcasted in the area where the Parent Rokuraku is installed by accessing the Parent Rokuraku via the Internet at any given location. Accordingly, the service enables a user living abroad to enjoy TV programmes broadcasted in Japan via the Internet. The service costs JPY 3,150 for the initial registration and between JPY 6,825 and JPY 8,925 in monthly rent.

Ueno Tatsuhiro, 'Case No. 44: Copyright Law – Timeand Space-Shifting Broadcast – Right of Reproduction', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 485 - 490

The appellants, broadcasting organizations, assert that the service provided by the appellee infringes the right of reproduction (sections 21 and 98 Copyright Act) and seek an injunction against and damages from the appellee. The appellee maintains that the person who reproduces the TV programmes is not the appellee but the user of the service, who lawfully reproduces them for private use. The Tokyo District Court by decision of 28 May 2008 (1) upheld the appellants' (plaintiffs') claim, holding that, taking into account the appellee's management and control as well as business profits, the person actually reproducing the TV programmes had been the appellee (defendant), a reasoning based on the ‘Karaoke doctrine’ developed by the Supreme Court in a decision dated 15 March 1988 – ‘Club Cat's Eye’. However, the IP High Court on 27 January 2009 upheld the appeal and dismissed the appellants' claim, holding that the act of reproduction of TV programmes should be attributed to the user on the grounds that the appellee merely provides the means therefore, even if the Parent Rokuraku is installed at a site managed and controlled by the appellee. (2) P 487

The appellants appealed to the Supreme Court. The Supreme Court quashed the decision of the IP High Court and remanded the case to the IP High Court, holding as follows:

IV Findings It is reasonable to conclude that the person providing the service that enables a user to obtain a reproduction of broadcast TV programmes is regarded as the person having made the reproduction, where the service provider feeds broadcasts captured by a TV antenna into a reproduction device, and where the broadcast TV programmes are automatically reproduced by such device upon the user's request, and where such scheme is provided as a service under the provider's management and control, even if the user operates the recording.

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The reasons are the following: it is reasonable to determine the person responsible for a reproduction by taking into account various factors such as the object and the method of the reproduction, as well as the details and the extent of the involvement in the reproduction. In the case at issue, the service provider not only provides circumstances that facilitate the reproduction, but also conduct, under its management and control, the acts of receiving broadcasts and feeding broadcasted TV programmes into the reproduction device, both of which are decisive for realizing the reproduction of the broadcasted TV programmes by using the reproduction device. It is completely impossible for the user of the service to reproduce the broadcasted TV programmes unless the service provider conducts the above-mentioned acts. Therefore, it is sufficient to regard the service provider as the person responsible for the reproduction. Accordingly, the decision under the appeal must be reversed, as it did not examine the management circumstances of the service with respect to the Parent Rokuraku, and dismissed the appellants' claims on the grounds that the appellee could not be regarded as the person responsible for the reproduction of the broadcasted TV programmes, even if the Parent Rokuraku was installed at a site managed and controlled by the appellee. This case shall be remanded to the original court for further examination with respect to the management circumstances of the device. Translated by T. Ueno

V Comment Under the Japanese Copyright Act, (3) a claim for injunction is permitted against an P 488 infringer. However, there is no explicit provision under which a right holder may

demand an injunction against a person who contributes or supports another's infringement. Because of this, judicial precedents have been expanding the scope of an ‘infringer’ based on the so-called Karaoke doctrine, according to which a certain intermediary can be regarded as an infringer in a normative sense by considering certain factors, namely the intermediary's management and control as well as its business profits. (4) Based on the Karaoke doctrine, case law includes a number of intermediaries that have been held liable for copyright infringement: a provider of a P2P file sharing service, (5) a provider of a space-shifting service of TV programmes by using a PC, (6) a provider of an online storage service enabling users to listen to music recorded on their own CDs by way of their cellular phones, (7) and a provider of a hard disk video recorder system designed for a condominium apartment. (8) In this case too, the Tokyo District Court upheld the plaintiffs' claim, holding that the actor of the reproduction of TV programmes was the defendant based on the Karaoke doctrine, taking into account the defendant's management and control as well as the business profits. (9) However, the Karaoke doctrine and the court decisions based thereupon have been criticized on the grounds that the doctrine excessively expands the scope of infringers without a satisfactory justification. (10) In response to such concerns, the IP High Court has recently denied the liability of providers of the space-shifting services of TV programmes in two cases between 2008 and 2009 (Maneki TV Case and Rokuraku II Case). In this case, the IP High Court dismissed the plaintiffs' claim, holding that the defendant had merely provided the means by which users of the service could lawfully reproduce TV programmes for the purpose of private use (section 30(1) Copyright Act). (11)

In contrast, the Supreme Court quashed the decision of the IP High Court and remanded the case back for further hearing. Actually, it is not clear whether the Supreme Court decision was indeed based on the Karaoke doctrine in this case, because the Court did not explicitly take into account the business profits of the defendant in the judgment. Instead, the Supreme Court held that the agent of reproduction should be determined by P 489 taking into account various factors such as the object and the method of the reproduction, as well as the details and the extent of involvement in the reproduction. And the Supreme Court held that the defendant was regarded as the agent of the reproduction, since the defendant had not only provided circumstances that facilitated the reproduction but also conducted, under the defendant's management and control, the acts of receiving broadcasts and feeding broadcast TV programmes into the reproduction device. Some commentators criticize the decision of the Supreme Court on the grounds that the defendant cannot be regarded as the agent of the reproduction, because it is not the defendant but rather a user of the service who actually and physically operates the recording of TV programmes. Further, the decision of the Supreme Court is sometimes criticized because the scope of an infringer (an agent of exploitation) could be excessively expanded according to the decisions of the Supreme Court and because the decision has the great chilling effect that development of possible internet services using cloud-computing technology could be widely restricted in the future. However, the decision of the Supreme Court could be understandable from the following standpoint, irrespective of whether one admits the Karaoke doctrine itself. It is true that the person who decides which TV programmes are recorded is in this case the user of the service. However, the defendant provides the reproduction device with which the broadcasted TV programmes are automatically reproduced upon the user's request as

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well as the object of the reproduction (namely TV programmes and broadcasts) by the feeding of broadcasts captured by a TV antenna into the reproduction device to the user. In such a case, the defendant can be regarded as the agent of reproduction in the same manner as in the case of a jukebox installed by a restaurant manager and that contains musical works and automatically plays the same upon the user's request. (12) At any rate, since the Supreme Court quashed the decision of the IP High Court and remanded the case back for further hearing, there is a strong possibility that the IP High Court will uphold the broadcasting companies' claim for injunction. (13) Against this background, discussions have severely intensified in Japan. A properly limited liability of an intermediary, which has been the main subject of discussions in Japanese Copyright Law in recent years, will play a significant role in achieving an P 490 appropriate balance between protection and exploitation of works in the digital network era. With this in mind, a discussion on the legislation for a clarification of a liability of an intermediary has been held at the Council for Cultural Affairs of the Japanese government for many years. I am also a member of the subcommittee and of a working team. The debate in response to the recent decisions of the Supreme Court and the pending discussion still continues. Tatsuhiro Ueno (1) P 490

References Ueno Tatsuhiro: Rikkyo University in Tokyo Tokyo District Court, 28 May 2008, 2029 Hanrei Jihō 125. IP High Court, 27 January 2009, 41 IIC 860 (2010) (with the comment by Hiroaki Kikuchi). 3) Translations of the Japanese Copyright Act are available at and . For a commentary of the JCA in English, see T. Ueno, Chapter 22 (Japan) in: Silke von Lewinski (ed.) Copyright throughout the World, (Thomson / West, loose-leaf from 2008). 4) See Supreme Court, 15 March 1988, 42–3 Minshū 199 – Club Cat's-Eye Case. A translation is available at . 5) Tokyo High Court, 31 March 2005 – File Rogue Case. See also 35 IIC 35 (2004) for the judgment of the first instance. 6) IP High Court, 15 November 2005 – Rokuga-Net Case. See also K. Ohtake, Two IPHC decisions on the infringement of neighbouring rights, 2–4 Asia Law Japan Review 18 (2007). 7) Tokyo District Court, 25 May 2007, 1979 Hanrei Jihō 100 – Myuta Case. 8) Osaka High Court, 14 June 2007, 1991 Hanrei Jihō 122 – Yoridori Midori Case. 9) See supra note 1. 10) See e.g., T. Ueno, Iwayuru ‘karaoke hō ri’ no saikō sei [Reconstruction of the so-called ‘karaoke doctrine’] in: Chitekizaisankenhō to kyōsohō no gendaitekikadai [Modern issues on intellectual property law and competition law]: Writings in Honour of Nobuo Monya, (Hatsumei Kyōkai, 2006) pp.781 (in Japanese); T. Ueno, Chosakukenhō niokeru ‘kansetsushingai’ [Indirect infringement under the Copyright Law], 1326 Jurist 75 et seq. (2007) (in Japanese). ★ )

1) 2)

11) See supra note 2. 12) See T. Ueno, a commentary on the decision of the Supreme Court in Rokuraku II Case,

Minshō hō zasshi (in preparation) (in Japanese).

13) Also in Germany, it is discussed whether a service of an online TV Recorder is

1)

considered to fall under an infringement of the right of reproduction and whether the act of reproduction of TV programs is attributed to the service provider. According to the recent court decisions, there seems to be enough room that a service provider of a certain online TV Recorder is not considered to the actor of the reproduction and does not constitute an infringement of the right of reproduction. See BGH, Urteil vom 22.04.2009, GRUR 2009,845 – Internet-Videorecorder (Shift.TV); OLG Dresden, Urteil vom 12.07.2011, MMR 2011,610 – Internet-Videorecorder (save.tv). Rikkyo University in Tokyo

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Case No. 45: Copyright Law – Re-Broadcasting of TV Programmes – Public Transmission

Document information

Publication

Ueno Tatsuhiro

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 18 January 2011, Case No. 653 (Ju) of 2009, NHK (Japan Broadcasting Corporation), et al. v. Nagano Shōten Co. Ltd. – ‘Maneki TV’

Jurisdiction

Source: 65-1 Minshū 121 = 43 IIC [2012] (forthcoming)

Japan

I Headnote(s)

Court

Supreme Court of Japan

Providing, without permission of the respective broadcasting organizations, a spaceshifting service of TV programmes that enables a user living abroad to enjoy TV programmes' broadcast in Japan via the Internet, infringes the right of public transmission.

Case date

II Relevant Provisions

18 January 2011

Copyright Act, section 2(1)(ix-5) P 492

Case number

III Facts

653 ju 2009

The appellee (and defendant of the first-instance infringement action) provides a spaceshifting service for TV programmes called ‘Maneki TV’. The product used to this end is called ‘LocationFree’.

Parties

Claimant, NHK (Japan Broadcasting Corporation), et al. Defendant, Nagano Sh oten Co. Ltd.

Bibliographic reference

Ueno Tatsuhiro, 'Case No. 45: Copyright Law – ReBroadcasting of TV Programmes – Public Transmission', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 491 - 496

LocationFree, which is sold by Sony, mainly consists of a device called the ‘Base Station’, which incorporates a TV tuner and digitizes broadcast TV programmes upon a user's request, and automatically transmits the TV programmes via the Internet. A user of LocationFree can enjoy TV programmes broadcast in the area where the Base Station is installed by accessing the Base Station via a PC connected to the Internet, independent of the location of the user. Therefore, if a user sets up the Base Station at home in Japan beforehand, he/she can enjoy TV programmes broadcast in Japan. Accordingly, LocationFree enables Japanese nationals living abroad to enjoy TV programmes broadcast in Japan via the Internet. The appellee provides a service of housing the Base Station owned by users. A user sends his/her Base Station to the appellee and the appellee installs the Base Station at its office, and connects the Base Station with a TV antenna and the Internet. The service costs JPY 31,500 for admission and JPY 5,040 per month. The appellants, broadcasting organizations, asserted that the service provided by the appellee had infringed the Right to Make Transmittable (section 99-2 of the Japanese Copyright Act (JCA)) and the Right of Public Transmission (section 23(1) JCA), and sought an injunction and damages against the appellee. The Tokyo District Court, on 20 June 2008, and the IP High Court, on 15 December 2008, both dismissed the appellants' claim, holding that the appellee had not infringed the Right to Make Transmittable on the grounds that the Base Station had had the function of transmitting information only to a sole corresponding device that had already been set up and could not be regarded as an ‘automatic public transmission server’ (section 2(1) (ix-5)(a) JCA). (1) The appellants appealed to the Supreme Court. The Supreme Court quashed the decision of the IP High Court and remanded the case to the IP High Court, holding as follows.

IV Findings ‘The purpose of introducing the Right to Make Transmittable into the Japanese Copyright Act is to cover an act in the preliminary stage prior to an actual automatic public transmission. From this point of view, it must be considered that any device which has the function of automatically transmitting information fed in upon a user's request when P 493 the device is connected to the internet, is regarded as an automatic public transmission server (section 2(1)(ix-5)(a) JCA) in cases where the transmission using the device is considered to be an automatic public transmission, even though the device has the function of transmitting information only to a sole corresponding device that has already been set up. And it is reasonable to consider that the one responsible for an automatic public transmission is the person who creates a situation in which information can be automatically transmitted from the device upon a receiver's request. In cases where a device is connected to the internet and information is continuously fed in, it is reasonable to consider that the one responsible for a transmission is regarded as the person feeding information into the device.

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In this case, the Base Station, which is connected to the Internet, has the function of automatically digitizing and transmitting information fed in upon a receiver's request. The service at issue connects the Base Station to the Internet, and information is continuously fed into the Base Station. The appellee connects the Base Station with a TV antenna managed by the appellee, sets it up so that the TV programmes captured by the TV antenna are continuously fed into the Base Station, and installs and manages the Base Station at its office. Therefore, it is reasonable to consider that the appellee is the person feeding the broadcast TV programmes into the Base Station, and the entity responsible for carrying out the transmission by using the Base Station, even though the user owns the Base Station. This transmission using the Base Station must be regarded as an automatic public transmission and the Base Station as an automatic public transmission server, since any person can become a user of the service by entering into a service contract with the appellee, and the user of the service is regarded as an unspecified person from the appellee's perspective, and therefore must be regarded as the public (section 2(5) JCA). Accordingly, the decision under appeal must be reversed and this case shall be remanded to the original court for further examination’. Translated by T. Ueno

V Comment No wonder it was surprising for many people in Japan that the Supreme Court quashed the decision of the IP High Court in this case. It is because the Courts had denied the liability of the defendant with all court decisions concerning this case, until the Supreme Court gave its decision in 2011. (2) P 494

It is true that some providers of a space-shifting service of TV programmes by using a PC or another reproduction devices have been held liable of an infringement of copyright or neighbouring rights based on the so-called Karaoke doctrine (Rokuga Net Case (3) and the first instance of the Rokuraku II Case (4) ) and the defendant in this case is a provider of a space-shifting service of TV programmes as well. However, what the defendant in this case uses is not a device with the function of recording broadcast TV programmes and transmitting them but a product called the ‘LocationFree’ with the function of merely transmitting the TV programmes via the Internet upon a user's request. It means that a user of this service can enjoy the TV programmes only on a real-time basis. Accordingly, the problem in this case is only the right of public transmission and not the right of reproduction. Under the Japanese Copyright Act, (5) an author shall enjoy the right of public transmission (section 23(1) JCA). The author's right of public transmission is the right to effect a public transmission of a work (section 23(1) JCA) and a public transmission is defined as the concept which covers wired and wireless broadcasting as well as interactive public transmission (section 2(1)(vii-2) JCA). The right of public transmission includes the right to make the work transmittable in case of an interactive public transmission (the part in parentheses in section 3(1) JCA). (6) Otherwise, a broadcasting organization shall enjoy the right of making transmittable (section 99-2 JCA). The act of making a work or a broadcast transmittable corresponds to the act of ‘making available to the public’ provided in the international treaties (WCT Article 8; WPPT Articles 10 and 14). For this reason, the unauthorized uploading of another's work or broadcast will constitute an infringement of the author's right of public transmission or the broadcasting organization's right of making transmittable, irrespective of whether the transmission has actually been carried out. In this case, a user of this service can enjoy only the live TV programmes on a real-time basis, because the defendant uses the device with the function of only capturing and transmitting TV programmes via the Internet upon a user's request. Under the Japanese Copyright Law, such transmission shall be considered as an automatic public transmission. An automatic public transmission is defined as a public transmission that occurs automatically in response to a request from the public (section (1)(ix-4) JCA). In information is transmitted only at the P 495 other words, a public transmission where request of a user and this is carried out automatically is an automatic public transmission. Therefore, internet broadcasting (simulcasting), where TV or radio programmes are transmitted on a real-time basis over the Internet, and webcasting on the Internet are both regarded as acts of automatic public transmission under the Japanese Copyright Act. (7) , (8) Accordingly, a broadcasting organization's right to make transmittable (section 99-2 JCA) shall cover the transmission of the broadcast on a real-time basis in this case, even though a broadcasting organization actually has the rights of re-broadcasting and wire rebroadcasting under the Japanese Copyright Act (section 99 JCA). The problems in this case are whether the transmission in this service is considered to be ‘public’ and the defendant the agent of public transmission.

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The Tokyo District Court and the IP High Court dismissed the plaintiffs' claim, holding that the defendant had not infringed the right of public transmission and the right of making transmittable on the grounds that the Base Station of the device (LocationFree) had had the function of transmitting information only to a sole corresponding device that had already been set up and could not be regarded as an ‘automatic public transmission server’ (section 2(1)(ix-5)(a) JCA). On the other hand, even though the device had had the function of transmitting information only to a sole corresponding device that had already been set up, the Supreme Court held that the transmission using the device (LocationFree) could be considered to be an automatic public transmission on the grounds that any person could become a user of the service by entering into a service contract with the defendant, and that the user of the service had been regarded as an unspecified person from the defendant's perspective and could therefore be regarded as the public. Under the Japanese Copyright Act, the ‘public’ is considered to be an unspecified or large number of persons, while a small number of specific persons does not qualify as ‘public’ (section 2(5) JCA). (9) Therefore, even one person shall constitute the public, if he/she is unspecified. The judgment of the Supreme Court in this case would be understandable, when one considers the language of the provisions of the Japanese Copyright Act. Under the Japanese Copyright Act, an act of making transmittable includes inputting information to an interactive transmission server without a reproduction (section 2(1)(ix-5)(a) JCA). P 496

At any rate, since the Supreme Court quashed the decision of the IP High Court and remanded the case back for further hearing, there is a strong possibility that the IP High Court will uphold the broadcasting companies' claim for injunction. Against this background, discussions are intensifying in Japan. Tatsuhiro Ueno (1) P 496

References ★ )

1) 2)

3) 4) 5)

6) 7) 8)

9) 1)

Ueno Tatsuhiro: Rikkyo University in Tokyo An English summary of the decision of the IP High Court is available at 40 IIC 860 (2010), the Japanese original can be accessed at . Tokyo District Court, 4 August, 2006, 1234 Hanrei Times 278 – Maneki TV Case: the first instance for civil provisional remedy; Tokyo District Court, 4 August, 2006, 1945 Hanrei Jihō 95 – Maneki TV Case: the first instance for civil provisional remedy; IP High Court, 12 December 2006, 2038 Hanrei Jihō 110 – Maneki TV Case: the second instance for civil provisional remedy; Tokyo District Court, 20 June, 2008 – Maneki TV Case: the first instance; IP High Court, 15 December 2008, 2038 Hanrei Jihō 110 – Maneki TV Case: the second instance, etc. IP High Court, 15 November 2005 – Rokuga-Net Case. See also Kazuo Ohtake, Two IPHC decisions on the infringement of neighbouring rights, 2–4 Asia Law Japan Review 18 (2007). Tokyo District Court, 28 May 2008, 2029 Hanrei Jihō 125 – Rokuraku II Case: the first instance. Translations of the Japanese Copyright Act are available at and . For a commentary of the JCA in English of the JCA, see T. Ueno, Chapter 22 (Japan) in: Silke von Lewinski (ed.) Copyright throughout the World, (Thomson / West, loose-leaf from 2008). See P. Ganea, in: Ganea/Heath/Saitō (eds.), Japanese Copyright Law: Writings in Honour of Gerhard Schricker, (Kluwer, 2005) p.57. T. Ueno, supra note 5 at 22–26 et seq. See also M. Kato, Chosakuken hō chikujō kōgi [Commentary on the Copyright Act], 5th revised ed. (CRIC, 2006) p. 42 (in Japanese). On the other hand, under the German Copyright Act, a simulcasting and a webcasting over the Internet are considered to be broadcasting in terms of the right to broadcast (Senderecht) (sec. 20 of the German Copyright Act), although authors shall have the right of making their work available to the public (sec. 19a of the German Copyright Act). See e.g. Schricker/Loewenheim/v. Ungern-Sternberg, Urheberrecht Kommentar, 4. Aufl. (Beck, 2010) Vor secs 20ff. Rn.7 und § 20 Rn.45ff; H. Schack, Urheber- und Urhebervertragsrecht, 5. Aufl. (Mohr Siebeck, 2010) Rn.464. See also OLG Hamburg, Urteil vom 08.02.2006, NJW-RR 2006,1054,1055 – Cybersky. T. Ueno, supra note 5 at 22–24 et seq. See also M. Kato, supra note 7 at 70 (in Japanese). Rikkyo University in Tokyo

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Case No. 46: Copyright Law – Parodistical use – Right of Quotation – Fair Use

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Publication

Peter Ganea

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 28 March 1980, Shirakawa Yoshikazu v. Amano Masayuki – Mad Amano Source: Hanrei Times 415 (1980) 100–114

Jurisdiction Japan

I Headnote(s)

Court

A quotation must be made in a manner that the work using the quotation and the work that is quoted can be clearly separated from each other. With regard to the relationship between the two works, the work using the quotation must play the main role, the work that is quoted the minor role.

Supreme Court of Japan

II Relevant Provisions

Case date

Old Copyright Act (1899), sections 18 (3) and 30 (1) No.2

28 March 1980

III Facts

Parties

The plaintiff is the owner of the copyright in a photography which shows a winter P 498 mountain scene in which six skiers slalom down a snow-covered slope, leaving

Claimant, Shirakawa Yoshikazu Defendant, Amano Masayuki

parallel zigzag tracks in the snow. The photography has been published, inter alia, in a calendar titled ‘Ski'67’. The defendant, famous parodist Mad Amano, used the plaintiff's photography for a photomontage which shows an oversized car tire appearing behind the top of the slope where the ski tracks start, thereby creating the impression that the ski tracks in the snow match the profile of the tire. The photomontage has been published in the plaintiff's own photo book and in a weekly journal. Based on the old Copyright Act of 1899, the plaintiff claims compensation for pecuniary and non-pecuniary damage, due to infringement of both the reproduction right and moral right to preserve the integrity of the work. Whereas the first instance court decided in favour of the plaintiff, the Tokyo High Court in its appeal decision rejected the plaintiff's claim, opining that the defendant's photomontage would be reasonable in scope and the amendments necessary to enable the defendant to create a new work. It would therefore fall under the limitation rule in section 30 (1) No.2 of the old Copyright Act which permits quotations of published works within a reasonable scope in one's own work. Dissatisfied with the second-instance decision, the plaintiff appealed to the Supreme Court.

Bibliographic reference

Peter Ganea, 'Case No. 46: Copyright Law – Parodistical use – Right of Quotation – Fair Use', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 497 - 504

P 499

IV Findings […] ‘Section 30 (1) No. 2 of the old Copyright Act permits the quotation of a published work in one's own work to the extent that such quotation does not exceed a reasonable scope. However, ‘quotation’ within this meaning must be understood as adopting a part of another person's work within one's own work for certain purposes such as presentation, reference or commenting. Therefore, with regard to the expression of a work that contains quotations, a permissible quotation must be made in a manner that the quoting work and quoted work can be clearly separated from each other. With regard to the

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relationship between the two works, the quoting work must play the main role, the quoted work the minor role. Moreover, it is clear that section 18 (3) Copyright Act prohibits the quotation of a work in a manner that infringes the right to preserve the integrity of such work. A comparison between the plaintiff's photography and the photomontage in the light of the above-mentioned facts which have been established by the previous instance reveals that the photography at issue is a colour photography which shows a snow-covered mountain range from the distance, and in front of it, the scenery of a snow-covered slope running down a mountain, shot from a position which provides a bird's view on six skiers slaloming down the slope and leaving behind tracks which resemble the tracks of a snow tire. In the photomontage which has been reproduced in black and white, however, that part of the scenery which does not show the skiers, has been partly trimmed away, and in the upper part of the right half of the photo, at the mountain ridge where the ski tracks start, the photography of a giant snow tire has been inserted in a manner that the upper part of the tire which partly covers the mountain range behind the slope extends beyond the frame of the photography. Therefore, a part of the plaintiff's photography is not shown in the photomontage. Moreover, also due to the fact that the photomontage contains a snow tire which has not been part of the original photography and that it has been reproduced in black and white, it is clear that the photomontage has been created by way of adding changes to the plaintiff's photography. Due to the use of the plaintiff's photography in the above-described manner, and as a result of the mentioned alterations, the part of the plaintiff's photography which has actually been used for the photomontage (hereinafter ‘part of the photography’) is, with respect to its external form of expression, no longer consistent with the plaintiff's photography. Nevertheless, those parts which form the essential character of the plaintiff's photography, namely the part showing the six skiers who left their tracks in the snow-covered slope in the above-described manner, as well as the part which shows the mountain scenery, can still be perceived, the former in its entirety, the latter in a manner that at least the essential character of the photography is perceivable. With regard to the defendant's photomontage, it is obvious that it has been created by adding the picture of a snow tire to said part of the plaintiff's photography. The mentioned ski tracks appear as a track of a tire, and by positioning an oversized snow tire at the place where the ski tracks start, the photomontage creates an unreal world which is different from the P 500 thoughts and sentiments raised by the plaintiff's photography of the real world. Nevertheless, the essential character of the plaintiff's photography in its entirety can still be directly perceived from the photomontage. As the defendant's use extends to the entire photography of the plaintiff, it forms an alteration which infringes upon the integrity right enjoyed by the plaintiff. As mentioned, those parts of the photography which are used by the photomontage are not quoted in a manner which renders them subordinate to an expression mode of the photomontage. That is, the photomontage does not form a quotation in the meaning of section 30 (1) No.2 Copyright Act. This finding cannot be altered by the aforementioned findings of the previous instance, namely that the photomontage aimed at subjecting the social conditions to irony, by making critical reference to the plaintiff's photography, and that for the creation of such work, the quotation of a part of the photography would have been necessary, whereby the defendant would have resorted to photomontage as an artistic form of expression which has become socially accepted. Therefore, the distribution of the disputed photomontage by the defendant without the plaintiff's consent infringes upon the moral right of the appellant as the holder of the copyright in the photography at issue. It must be noted that it is not absolutely prohibited to use another person's works as base for the creation of one's own work. However, use in a manner that the author's consent is not required is permitted only insofar as the pre-existing work is not put in a state that enables the perception of the essential character of pre-existing work. Consequently, transformative use of the plaintiff's photography in the aforementioned manner in the course of creating the disputed photomontage cannot be regarded as legal, unless the plaintiff has permitted such use. Furthermore, even if the disputed photomontage possesses originality with regard to the unique expression that arises from the merger of the plaintiff's photography with the photography of a snow tire, so that the photomontage per se can be regarded as a copyrighted work, it still infringes upon the integrity right in the photography, due to the aforementioned fact that the essential character of the expression of the photography is still directly perceivable from the photomontage, whereby the photography is used in a manner that changes its form of expression'. […] Translated by Peter Ganea

V Comment 1. Due to the absence of newer court decisions in this matter, the Supreme Court's ‘Mad Amano’ decision still forms the landmark case on the permissibility of parodies of copyrighted works. It has been criticized as unduly restricting the freedom of expression.

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Indeed, the very nature of a parody necessitates putting the parodied work in the centre of criticism, which is impossible if the ‘essential character’ of the parodied work must be P 501 curtailed to an extent that it can no longer be perceived, as required by the Supreme Court. Consequently, German and US decisions put much less emphasis on the aspect of integrity right infringement in similar cases, but focused on the work character of the parody, including the question whether it forms a new work which targets a different market and which does not simply take a free ride on the reputation of the pre-existing work. The German Supreme Court, for instance, requires a parody to be ‘sufficiently distant from the original work and use certain characteristic features only as a starting point for the creation of an independent work in antithetical form’. (1) The Japanese decision is quite old but the question it dealt with, namely the conflict between exclusive copyright and freedom to use pre-existing works for the creation of new works, has not lost its relevance. Quite to the contrary, in recent years it has become a hotly debated topic, not only in Japan but also throughout the world. An increasing number of European scholars, for instance, call for the application of constitutional rights (e.g. the right to freedom of expression) to achieve a ‘balance of interest’ whenever statutory copyright limitations turn out to be too weak to curtail allegedly too strong copyright exclusivity. (2) US courts, in particular the Supreme Court, are increasingly permissive towards derivative works which infringe upon pre-existing works, by allowing the infringer to continue the exploitation of the infringing work, whereas the author is awarded a mere monetary relief. (3) It seems that the worldwide debate has also electrified Japanese copyright circles. According to the Copyright Subdivision of the Council of Cultural Affairs under the Agency for Cultural Affairs of January 2011, (4) a coming amendment to the Copyright Act will introduce a new Japanese-style fair use clause which would enable a more flexible reaction to new forms of internet exploitation than the present legislation mode of amending the rules whenever a new technology emerges. It should be noted that Japan's Copyright Act actually combines elements from both the Continental European author's right tradition and the US Copyright tradition. So far, however, the limitation provisions were modelled after the Continental European tradition, by regulating an exhaustive catalogue of single limitations for specific purposes. The amendment will further align Japanese Copyright with US principles. Similar trends towards a more generous interpretation of copyright limitations can be 13 October 2010, (5) the IP High Court also had to deal with the question of permission-free quotations. The disputed subject matter consisted of expert certificates issued and distributed by the Tokyo Art Club which confirmed the genuineness of several paintings created by a deceased artist. The certificates were not confined to mere written statements but each certificate contained a downsized colour copy of the painting it referred to on its rear side, reason enough for the artist's heirs to sue the Tokyo Art Club for infringement of the reproduction right:

P 502 observed within the judiciary. In the ‘Tokyo Art Club’ decision of

The IP High Court, however, found that attaching the copies would be permissible under section 32 (1) of the Copyright Act of 1970 on quotations which reads as follows: ‘It shall be permissible to make quotations from a work already made public, provided that their making is compatible with fair practice and their extent does not exceed that justified by purposes such as news reporting, criticism or research’. The court based its decision, inter alia, on the preamble in section 1 Copyright Act which provides that the purpose of the copyright is to protect authors and neighbouring right owners with respect to their works etc., while having regard to a just and fair exploitation of cultural products and to contribute to the development of culture. It referred to this provision as follows:

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‘Due to this objective, the Copyright Act, with respect to the content of the rights of authors, is not confined to regulating the moral rights […] and copyright […], but its provisions extend to the regulation of limitations […]. Pursuant to section 32 (1) Copyright Act, one of these limitations is the permissibility to make quotations from a work already made public, provided that their making is compatible with fair practice and their extent does not exceed that justified by purposes such as news reporting, criticism or research. A permissible quotation of another person's work requires that method and form of quotation pertains to fair practice, i.e., it shall remain within a reasonable scope in the light of purpose of the quotation, meaning that the quotation shall have a reasonable scope in accordance with the general public understanding. Reconsidering, however, the above-mentioned aim of the Copyright Act, the judgment whether a use pertains to a quotation requires a holistic consideration not only of the quoting parties' objectives but also of manner and form of quotation, the kind and nature of the quoted work, the existence and significance of any effects on the author and the like’.

P 503

That is, the IP High Court refrained from an express judge-made Japanese fair use doctrine on the one hand, but on the other hand it paved the way for a very flexible interpretation of the freedom to quote in the light of what would be considered appropriate according to the general public understanding. With such reasoning, the court largely abandoned the Civil Law tradition to interpret single limitations narrowly. Such narrow interpretation could have required, for instance, that a permissible quotation can only be made within a ‘work’ in the copyright meaning. The certificates at issue could hardly be regarded as works which, according to the definition in section 2 (1) (i) Copyright Act (1970), must be ‘productions in which thoughts or sentiments are expressed in a creative way and which fall within the literary, scientific, artistic or musical domain’. They consisted of mere standard forms which contained the name of the artist, date, stamp and signature of the certifying expert but no further ‘quoting’ reference, e.g. to artistic features, technique, etc. of the respective painting. Previous court decisions actually required the quoting material to be a work (6) but the IP High Court also overthrew such previous case law, with reference to the wording of section 32 (1) of the Copyright of 1970, which, in contrast to the old provision in section 30 (1) No.2 of the Copyright Act of 1899, no longer expressly stipulates that the quoting material must be a work: ‘With regard to this aspect, the defendant opines that a permissible quotation according to section 32 (1) Copyright requires that the quoting subject matter must be a work. However, not only does section 32 (1) of the present Copyright Act […], in contrast to section 30 (1) No.2 of the Old Copyright Act […] refrain from imposing the condition that the quoting party can only quote another parties' work within his or her own work, but the new Copyright Act regards safeguarding the permissibility to quote for purposes such as news reporting, criticism or research, provided that such use remains within a reasonable scope, as a subject matter of great importance for the society. A permissible quotation according to section 32 (1) Copyright Act shall not be understood as being restricted to the use of another person's work within one's own work, so that the fact that the respective certificates do not form works has no impact on the finding that the attachment of the copies at issue form permissible quotations […]’

P 504

The IP High Court decision represents a new trend towards a more generous interpretation of copyright limitations and the legislature seems to be eager to go even a step further, by adding an explicit fair use clause to the Civil Law style catalogue of single, clearly defined copyright limitations. Should the Supreme Court today, in light of the changed perception of copyright within and beyond Japan's copyright circles, be confronted with another parody case, it can be assumed that it will seize the opportunity and lessen the strict requirements for a permissible parody established more than 30 years ago. Peter Ganea (1) P 504

References ★ )

1)

Peter Ganea: Goethe University in Frankfurt am Main German Supreme Court, 11 March 1993, 25 IIC 610 [1994]– Asterix Parodies; more about the Supreme Court decision in comparison with case law from Germany and the US, in C. Heath; Parodies Lost, in: Ganea/Heath/Schricker (eds.), Urheberrecht Gestern – Heute – Morgen, writings in honour of Adolf Dietz, C.H. Beck 2001, 401 et seq.; C. Heath, in: Ganea/Heath/Saitō (eds.), Japanese Copyright Law, Kluwer International 2005, 69 et seq.

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2) 3) 4) 5) 6) 1)

See, e.g., C. Geiger, Constitutionalising' Intellectual Property Law? The Influence of Fundamental Rights on Intellectual Property in the European Union, 37 IIC 371 [2006] Paul Goldstein, The Quiet Revolution in American Copyright Law, in: Prinz zu Waldeck und Pyrmont et al., Patents and Technological Progress in a Globalized World – liber amicorum Joseph Straus, Springer 2009, 703. . . Tokyo District Court decision of 20 February 1998 (‘Barnes Collection’), 1643 Hanrei Jihō 176; online available at . Goethe University in Frankfurt am Main

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Case No. 47: Copyright Law – Cinematographic Works – Distribution Right – Exhaustion

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Publication

Peter Ganea

Business Law in Japan – Cases and Comments

(★ ) Supreme Court decision of 25 April 2002 – Second-Hand Computer Games Source: 1785 Hanrei Jihō 3 = 35 IIC 467 (2004)

Jurisdiction Japan

I Headnote(s)

Court

The right to distribute copies of computer games intended for use on private game stations is exhausted upon first sale. Subsequent distribution is not intended for public display, as cinematographic works may not be prohibited.

Supreme Court of Japan

II Relevant Provisions Copyright Act, sections 2 (1) (xix), 2(3), 26, 26-2

Case date 25 April 2002

Bibliographic reference

III Facts The plaintiffs are producers of computer games. The defendants are engaged in the sale with the consent of the plaintiffs. Based on section 26 of the Japanese Copyright Act, pursuant to which ‘the author of a cinematographic work shall have the exclusive right to distribute copies of his work’, the plaintiffs have requested that the defendants refrain from such second-hand sale. In their opinion, computer games form a category of cinematographic works within the meaning of section 26. The distribution right mentioned in that provision would not be exhausted upon first sale but would entitle the copyright owner to control subsequent acts of circulation. The defendants deny both the cinematographic work quality of computer games and the non-exhaustible character of the distribution right. Thus, there are, in their estimation, no legal grounds for prohibiting the subsequent sale of computer game copies put into circulation with the consent of the copyright owner.

P 506 of second-hand versions of computer games originally put into circulation

Peter Ganea, 'Case No. 47: Copyright Law – Cinematographic Works – Distribution Right – Exhaustion', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 505 - 513

Almost identical cases were litigated both in Tokyo and in Osaka. In the first instance, the Tokyo District Court and the Osaka District Court disagreed about the cinematographic work quality of computer games. Whereas the Osaka District Court (decision of 7 October 1999, Hanrei Jihō 1699, 48) adhered to the prevailing opinion that computer games qualified as cinematographic works, the Tokyo District Court (decision of 27 May 1999, Hanrei Jihō 1679, 3) held that the legislature could not possibly have had computer games in mind when providing producers of cinematographic works with a non-exhaustible distribution right. Moreover, the court stated that computer games were fundamentally different from cinematographic works in the traditional meaning, in that the latter consisted of an unalterable sequence of moving images, whereas the former provided for variable image sequences according to the player's operations. In second instance, both the Tokyo High Court and the Osaka High Court denied the plaintiffs a non-exhaustible distribution right, but on different grounds. The Tokyo High Court (decision of 27 March 2001, Hanrei Jihō 1747, 60) affirmed the non-exhaustible character of the distribution right in section 26, yet limited its application to film copies intended for cinema showing, while the Osaka High Court (decision of 29 March 2001, Hanrei Jihō 1749, 3) interpreted the distribution right as exhausted in the case of cinematographic works distributed other than by circulating a few copies among cinema theatres. The plaintiffs appealed before the Supreme Court against these decisions.

IV Findings ‘1. The facts established by the previous instance are summarized as follows: (1)

P 507

(2) (3)

… As a whole, each of the disputed computer games forms an expression of a sequence of moving images, whereby the data underlying the images extracted by the computer program stored on CD-ROM are subsequently displayed at predefined locations on the screen. Furthermore, each computer game is a creative expression in that it uses the technique of animation films, achieving a real sequence of the moving images by the use of computer graphics and the like, and in that it creates the feeling of being physically involved by linking sounds and background music to the images. Even though, in the course of playing the games, the moving images appearing on the screen and the sounds coming out of the loudspeakers differ in reaction to the player's operations on the controlling device, so that the actual content of each computer game depends on the player's reactions, all contents remain within the scope predefined by the computer program. The defendants are engaged in the sale of the disputed computer games as secondhand goods, purchased from consumers who bought them via small shops to whom they were legally sold by the plaintiffs as original vendors. When the Copyright Act was enacted in 1970, a certain distribution pattern with

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regard to movies intended for public display in film theatres was customary, namely the so-called distribution system. Here, the film producer and the film distributor made a certain number of print film copies based on the film negative and rented them to cinema operators. These either returned them or handed them over to other specified cinema operators after the expiration of the showing period, thereby passing the copies from one cinema house to the other. Since the return of the investment in a film production depended on public film presentation through this distribution system, each print film represented a high economic value and its presentation in the cinemas generated a huge profit. 2. … 3. Among the facts established by the previous instance, the opinion that the present computer games correspond to ‘works expressed by a process producing visual or audiovisual effects analogous to those of cinematography and fixed in some material form’ as defined by section 2(3) of the Copyright Act and are therefore consistent with the ‘cinematographic works’ mentioned in section 10(1)(vii) is correct. Also, the opinion of the previous instance that, since the disputed computer games correspond to cinematographic works, the owners of the copyright in them enjoy an exclusive distribution right stipulated in section 26(1) is correct. 4. The present court has already established the principle that, where a patent owner or the owner of the right to exploit the patent on the basis of a licence granted by the patent owner transfers the ownership in commodities incorporating that patent, the patent right will be regarded as having achieved the purpose of its grant and is therefore exhausted, so that it has no longer an effect on subsequent acts of ownership transfer (Supreme Court decision of 1 July 1997 [decision BBS Car Wheels, this book case no. 36). In general, this principle is also applicable to the case of ownership transfer of works or work reproductions. This means that: (a) the protection of the legal rights of copyright owners must correspond to the public interest; (b) in general, transfer of ownership in goods means that the transferor assigns to the transferee the rights comprised in the goods subject to that transfer and that the transferee obtains the rights owned by the transferor, so that the placement of works or work reproductions on the market by transfer also forms a transaction implying that the transferee obtains the right to redistribute the assigned goods freely; if the subsequent transfer of works or work P 508 reproductions required the copyright owner's authorization, the free movement of goods would be impeded, the smooth circulation of works and work reproductions would be hampered and, as a result, the interest of the copyright owner himself would suffer. This would run counter to the purpose of the Copyright Act set forth in section 1, namely ‘to secure the protection of the rights of authors, etc., and thereby to contribute to the development of culture’; and (c) however, since a copyright owner who transfers a work or a work reproduction or who licenses it for exploitation can obtain a corresponding royalty, he has the opportunity to be compensated accordingly, so that it is not necessary to allow copyright owners and licensees to obtain a double profit with regard to works or work reproductions already transferred. In the course of enacting the present Copyright Act, section 26(1) on the distribution right was introduced in order to meet the obligations imposed by the Berne Convention for the Protection of Literary and Artistic Works (revised in Brussels on 26 June 1948) which provides for such a distribution right with regard to cinematographic works. That such a distribution right was only provided for cinematographic works is due to the huge investment in a film production and the necessity of an effective capital return by controlling the film circulation. When the Copyright Act was enacted, the abovementioned distribution system was customary, which was mainly based on the rental of a number of copies; and because the act of showing the film without the consent of the copyright owner was hard to control, it was necessary to control the previous act of distribution, including ownership transfer and rental. Taking this situation as a starting point, section 26 of the Copyright Act is interpreted to mean that the right to transfer or to rent (sections 26 and 2(1)(xix) Copyright Act) a cinematographic work or its reproductions within the above-mentioned distribution system for the purpose of public display is not exhausted upon first sale. Section 26, however, provides no further rule that would give a definite answer to the question as to whether the distribution right is in fact exhausted, so that this question must be understood as being left open to interpretation. Consequently, with regard to the assignment of ownership in reproductions of cinematographic works intended for use on home TV game devices and not for public showing, and from the viewpoint of securing a smooth market circulation of goods as explained under a), b) and c), the right in the public transfer of these works is exhausted. Once legally assigned, it has achieved the purpose of its grant, so that the copyright has no more effect on the act of subsequent public distribution of computer game reproductions. Pursuant to section 26-2(1) of the 1999 amended Copyright Act (Amendment Law No. 77/1999), works other than cinematographic works enjoy a right of ownership transfer; section 26-2(2) of the amended law further provides that this right is exhausted once a lawful transfer has taken place. The reason for not applying (1) of the same provision to cinematographic works is that the distribution right granted in cinematographic works

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already comprises the right of ownership transfer. Section 26-2(2) affirms the above-

P 509 mentioned exhaustion principle, but it would be inappropriate to deduce from (1) and (2)

a contrario that these provisions would not allow the exhaustion of the transfer right in copies of the cinematographic work form ‘computer games’. Consequently, since each disputed computer game was lawfully sold by the plaintiffs as original vendors and purchased by the consumers via small shops, the ownership transfer right in them as a subcategory of the distribution right has achieved the purpose of its grant and is therefore exhausted. Thus, copyright no longer has an effect on the defendant's act of publicly redistributing second-hand versions of these computer games. The previous instance's judgment is correct; its opinion conforms to the law. The grounds, however, are not applicable. Finally, the plaintiffs request cessation of the distribution of such computer games. Since there is no sufficient evidence that the distribution act of the defendants consisted in the rental of the computer games, the request is ungrounded’. Translated by Peter Ganea

V Comment The Japanese Copyright Act regulates the distribution right and the circumstances of its exhaustion in a rather complicated manner. Altogether three rights deal with the distribution of tangible work copies. The first of them, the above-mentioned film distribution right pursuant to section 26 of the Copyright Act, was introduced in 1970, in response to Article 14 (1) of the Berne Convention. Considering the film industry's vulnerability to unauthorized circulation of traditional film copies among cinema houses, whereby each film copy represented a significant economic value, the Japanese distribution right was widely interpreted as a non-exhaustible right which enabled the film copyright owner to control subsequent distribution of copies even after their first legal sale. Such generous interpretation went far beyond the standards of the Berne Convention, which remains silent on the exhaustibility of the film distribution right. (1) The legislature in 1970 may not have anticipated the emergence of VHS cassettes, and later on of DVDs and other disk formats. However, even 25 years later, when secondary exploitation by sale of videos had become widely established, the Tokyo District Court in its Beauty and the Beast decision still referred to the original legislative intention to provide film copyright holders with a non-exhaustive right when it held that parallel imports of video cassettes from the US to Japan infringed the copyright in the cinematographic works recorded thereon. (2) In the area of music copyright, adaptation of the Copyright Act to technological progress and new exploitation modes proceeded rather quickly. Mainly because of heavy lobbying P 510 from the music industry, a second right related to distribution and exhaustion was added to the Copyright Act in 1984, the rental right. Such rental right was granted in all kinds of works except cinematographic works (which, pursuant to the definition in section 2 (1) (xix), already enjoyed a rental right as part of the distribution right), as well as in neighbouring rights protected performances and phonograms. Without such right to control the rental of copies, the music industry would have suffered significant losses due to widespread private recording of rented phonograms on music cassettes. (3) The rental right can be regarded as an exception to the exhaustion principle, as it enables right holders to control the distribution of work copies even after their first legal circulation. With special regard to the rental right in phonograms, however, the legislature also strived for a balance of interest between right holders and the already established rental shops. A rather unique provision regulated that the exclusive rental right of performers and phonogram producers was to be reduced to a mere remuneration right after a certain period from the first market release which had to be determined by Cabinet Order. The TRIPS Agreement and the WIPO treaties have considered this unique Japanese rental right, by allowing members which already had in force a system of equitable remuneration for the rental of phonograms instead of an exclusive rental right, to maintain such remuneration system. The WIPO treaties necessitated further amendments to the Copyright Act. Both treaties regulate that copyright owners as well as performers and phonograms producers shall enjoy a distribution right in addition to the rental right. In 1999, the Japanese legislature incorporated these new international requirements into the Copyright Act, by adding another distribution right to the Copyright Act. The new ‘ownership transfer right’ (section 26-2) is granted in all kinds of works except cinematographic works. It can best be described as a ‘distribution right light’ as compared to the distribution right in cinematographic works because the law clearly stipulates that it exhausts upon first circulation within the country and outside Japan, so that right owners cannot even proceed against parallel imports. One exception to this rule will be treated in a later paragraph. The present Supreme Court decision added a new variety to the circumstances which decide whether the distribution right in certain subject matter is exhaustible. It opined that the non-exhaustive character of the film distribution right is nowhere explicitly regulated in the Copyright Act. Considering the legislative history, the court found that copies for personal use would not fall under the privileged treatment of cinematographic

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works. On 28 November 2002, and therefore shortly after the Supreme Court decision, the Tokyo High Court extended the exhaustion doctrine established by the Supreme Court to video recordings of ‘classical’ cinematographic works and denied the plaintiffs, several film copyright holders, the right to control the second-hand sale of such videos. It P 511 rejected, inter alia, the argument of the plaintiffs that video recordings were different from computer games, and therefore had to be treated differently in such way that the distribution right in them did not exhaust. (4) The decision clarified that the distribution right in all kinds of audio-visual subject matter recorded on media for personal use shall exhaust upon first lawful circulation. In 2004, the legislature further enhanced the complexity of the legal framework, by adding a new section 113 (5) to the Copyright Act, which provides privileged treatment of copyright and neighbouring rights owners in phonograms. Pursuant to the new provision, importation of phonograms to Japan in cases in which the right owner has divided markets in such a manner that the distribution of phonograms intended for sale abroad shall remain confined to that foreign market, is regarded as infringing. However, such exemption from the worldwide exhaustion of the mentioned ‘ownership transfer right’ must be limited to a certain period which has to be specified by Cabinet Order and shall not exceed seven years. This amendment too, just like the introduction of the rental right in the mid-1980s, can be traced back to heavy lobbying from the phonogram producers. They successfully pointed to their status as export promoters of Japanese pop culture by way of selling Japanese music CDs at comparably low prices in neighbouring Asian countries, a useful activity which should be rewarded by special protection against parallel imports of cheap CDs. It seems that the present regulatory framework is capable of accommodating almost all cases which involve the distribution right and its exhaustion, at least if we restrict our observations to the circulation of tangible copies and do not go further into questions related to the internet, e.g., whether the internet transmission right exhausts upon first legal transmission to a client. With regard to one question, however, there remains a slight legal uncertainty, namely the treatment of imported DVDs or other audio-visual data carriers intended for mass use. Can the above-mentioned Beauty and the Beast decision still be upheld in the light of the Supreme Court's rather liberal view on domestic second-hand sale of audio-visual copies? In the Beauty and the Beast decision, the Tokyo District Court pointed to an important difference between mere national redistribution and parallel imports of audiovisual copies: the latter case involves the special danger that uncontrolled imports jeopardize the film industry's interest in undistorted cinema showing, i.e., the interest that the legislature originally had in mind when introducing the film distribution right in 1970. This is because the date of entry into the secondary video exploitation phase may vary from country to country, or a movie may enjoy exceptional popularity in one country, so that it is shown in cinema houses for a comparably long period before being exploited in form of DVD sale. All this entails the danger that copies which are legally made and sold in one country where film exploitation has already entered the secondary exploitation phase are imported to another country where the same cinematographic work is still shown in cinema houses. to introduce a new provision P 512 Such danger prompted, for instance, the Swiss legislature according to which the copyright in cinematographic works shall not exhaust unless domestic exploitation has entered the secondary phase. (5) The Japanese Copyright Act does not contain such a specific rule. It can be assumed, however, that in a corresponding case in which the cinematographic work at issue is still being shown in the cinemas, a Japanese court will also decide to prohibit the parallel importation, with reference to the intention of the Japanese legislature to protect the primary film exploitation against distortions. If this assumption is correct, the present legal framework with respect to the exhaustion of the distribution right can be summarized as follows: (1)

Owners of the copyright in cinematographic works enjoy a specific distribution right which can be flexibly interpreted as: (a)

(2)

a right to permit not only the first circulation of copies to the public, but also as a right to control subsequent distribution of legally sold copies, provided that the cinematographic work is still being exploited by way of traditional cinema showing; (b) a right to permit the first circulation of film copies to the public, which, however, exhausts domestically and internationally after such first circulation, if (1) the cinematographic work has already entered the phase of secondary exploitation in form of sale of copies for individual use in Japan, or if (2) the subject matter of copyright forms other audiovisual matter classified as ‘cinematographic works’ like computer games which are not intended for cinema showing but are distributed in form of sale of copies for individual use from the beginning. Owners of copyright in other kinds of works, as well as performers and phonograms producers enjoy a separate distribution right, the ‘ownership transfer right’. Such right exhausts upon first circulation within Japan or abroad. That is, owners of copyright in other kinds of works and the above-mentioned neighbouring right are treated in the same manner as the copyright owners in cinematographic works

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(3)

(4)

P 513

under b) above, but under different legal rules. An exception to the exhaustion of the ‘ownership transfer right’ applies to owners of copyright and neighbouring rights in works and sound recordings incorporated in phonograms: for a certain period, which must be specified by Cabinet Order, they can proceed against the parallel importation of their phonograms. As an exception to the exhaustion principle, copyright owners in cinematographic works whose distribution right is liable to exhaust (category b) above) and copyright owners in other kinds of works, as well as performers and phonogram producers, maintain a rental right which allows them to control subsequent acts of distribution in form of rental even after the first sale of copies of their works. Also with regard to the rental right, owners of the copyright in cinematographic works and owners of the copyright in other kinds of works are treated under different legal rules: whereas the rental right in cinematographic works is part of the specific film distribution right, the rental right of other copyright holders is regulated by separate provisions. Moreover, the exclusive rental right of performers and phonogram producers in a new release will be reduced to a mere remuneration right after a certain period which must be specified by Cabinet Order.

Peter Ganea (1) P 513

References ★ )

1) 2) 3) 4) 5) 1)

Peter Ganea: Goethe University in Frankfurt am Main. S. Ricketson, The Berne Convention for the Protection of Literary and Artistic Works: 1886– 1986, 406 et seq. (London 1987). Tokyo District Court, decision of 1 July 1995, 27 IIC 570 [1996] – Beauty and the Beast. Preceding efforts by phonogram producers to enforce a ban on rentals by contractual means were held unlawful under anti-trust law by the Fair Trade Commission: FTC, 15 December 1983, 389 Kōsei Torihiki, 34 – Nihon Record. . More details in a previous comment to this decision by P. Ganea in 35 IIC 467 [2004]. Goethe University in Frankfurt am Main

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Case No. 48: Copyright Law – Future Works – Injunctive Relief – Enforcement of Copyright

Document information

Publication

Christopher Heath; Takuya Iizuka

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, Decision of 8 June 1995, Heisei 7(1995)(TE)5, and Tokyo High Court, 27 October 1994, Heisei 5 (1993)(NE)3528, Dow Jones Company v. Know how Japan – The Wall Street Journal II/III

Jurisdiction Japan

Source: 1524 Hanrei Jihō 118 – 134 [1995] = 30 IIC 223 (1999)

I Headnote(s)

Court

Injunctive relief against the unlawful translation of newspaper articles protected by copyright can also be granted for articles that will be written in the future.

Supreme Court of Japan

II Relevant Provisions

Case date

Japanese Constitution, section 21(2); Copyright Act, sections 2(1)(i), 10(2), 112, Code of Civil Procedure section 226

8 June 1995

P 516

Parties

Claimant, Dow Jones Company Defendant, Know how Japan

Bibliographic reference

Christopher Heath and Takuya Iizuka, 'Case No. 48: Copyright Law – Future Works – Injunctive Relief – Enforcement of Copyright', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 515 530

III Facts and Findings of the Tokyo High Court The plaintiff of the action is the well-known publishing house Dow Jones Company, Inc., whose equally well known ‘The Wall Street Journal’ is distributed daily throughout the world, including in Japan. The defendant, Know-How Japan, had regularly translated articles from The Wall Street Journal without proper authorization. The plaintiff asked the courts for legal redress by requesting an interim injunction that after two years was finally granted by the Tokyo District Court on 24 September 1991 (1399 Hanrei Jihō 25 [1992]). According to the injunction, the defendant was barred from translating The Wall Street Journal articles in the future without proper authorization. In the main action, the Tokyo District Court upheld the injunction (reprinted in 25 – 2 Chizaishū 380). The defendant appealed. [Quotation from the Tokyo High Court decision:] ‘I. Factual Background 1.

2.

4.

5.

The plaintiff in the main action has its main offices in New York and edits both economic and local newspapers. It is an enterprise that offers a multitude of media services and that in 1987, with 9,000 employees, made a turnover of US$1.3 billion. According to the magazine Fortune, it ranks as No. 264 among the top 500 companies. One of the newspapers edited by the plaintiff is The Wall Street Journal, which has been published since 1889 within the United States and has a circulation of two million copies per day. It is a quality newspaper not least thanks to the high number of collaborators. The newspaper is considered influential not only in the U.S., but also in a great number of other countries. The journalists employed by the Wall Street Journal put together information by telephone or in conferences and make decisions. Articles from AP or Reuters are also taken. The choices are then made by the regional or chief editor who checks and corrects information that is subsequently transferred to the New York bureau of The Wall Street Journal. Here, manuscripts handed in by individual journalists are selected, checked for correctness, form and style, and sometimes altered…. Since September 1986, the defendant has edited a daily journal entitled ‘Research Group for U.S. Information’, and regularly uses articles by the plaintiff and the New York Times that it translates in abbreviation as a so-called ‘Headline Service’. This is reprinted in the defendant's journal on the same day. Subscribers have to pay JPY 30,000 per month for delivery of said journal per post or fax. The defendant also advertises the Japanese summary of articles as the ‘service for perfectly condensed translations’. According to the defendant, these are ‘fully comprehensible, complete articles… articles from the same day in five minutes … and no cuts – we deliver full articles large and small’, all advertised in newspapers and journals. In that advertising, the defendant uses, for example, the title ‘The Wall Street Journal, Thursday, 28 September 1989’ (in Japanese). It is obvious that the title and respective contents of the plaintiff's

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newspaper have been used. P 517

6.

II.

III. P 518

With respect to the 28 September 1989 edition, the defendant has used articles starting from page 11. The plaintiff's newspaper from this day contains articles numbered A1-A78 (three numbers are missing) on pages 1-26. They carry the heading ‘Market Place’. The articles printed on pages 27-33 are numbered B1-B27 under the heading ‘Money and Investing’. Finally, those articles as printed on pages 35-62 are numbered C1-C42. The above-mentioned articles A1-A78, B1-B27 and C1-C42 are mirrored exactly in this order in the infringing articles. The articles printed in the defendant's journal under the heading ‘Important Economic News’ as articles A1-A13 have been taken and abbreviated from the plaintiff's column ‘Business and Finance’, the articles A14-A26 (A15 has been omitted), labelled as ‘Important International News’ have been taken from the plaintiff's newspaper heading ‘Worldwide’ and subsequently abbreviated. Of the 170 articles in the plaintiff's paper, about 10 do not correspond to articles by the defendant, while vice-versa the defendant's articles all correspond to those in the plaintiff's newspaper. Apart from the columns ‘What's News’, ‘Business and Finance’, ‘Worldwide’, ‘Market Place’, ‘Money and Investing’, the plaintiff's newspaper also carries the headings ‘Leisure and Arts’ and ‘Review and Outlook’ that have also been translated in the defendant's paper as ‘Leisure and Arts’ and ‘Outlook and Review’. Advertisements and job offers in the plaintiff's paper have been left out by the defendant. On a certain topic, the defendant's paper spends about one to three lines (1 line containing 34 characters), thus abbreviating the plaintiff's articles considerably. While these abbreviations are not always proportionate to the plaintiff's articles, their main content is always kept. In general, there is an abbreviated overview above the whole article, and the essential information contained in the plaintiff's paper corresponds to the articles in the defendant's paper. The content of the defendant's paper thereby corresponds by and large to the content of the plaintiff's articles. This is particularly so with respect to the news in the plaintiff's paper on a certain day, and the grading according to their importance. Copyrightability of Plaintiff's Newspaper According to the above facts, the reprinted articles containing information and prepared on a basis of manuscripts by employees amounts to the largest part of the plaintiff's newspaper. The rest concerns share values, indices on raw materials and advertisements. This collection is the result of the concerted efforts of the plaintiff's employees, thereby constituting the individuality of the plaintiff's newspaper. Selection and control of articles, photographs and advertisements is a creative effort that justifies copyright protection for a collective work that is owned by the plaintiff as the newspaper's editor. Injunctive Relief Based on Plaintiff's Copyright A newspaper is printed matter that quickly and thoroughly reports on daily events. It goes without saying that the plaintiff's newspaper falls under the above definition. A multitude of journalists gather a high number of news or reports on activities and write manuscripts based thereupon. These manuscripts are then checked by the responsible editor as to whether they will be taken or not, and are printed if chosen. Of course, apart from the case of a manuscript being chosen, sometimes a journalist does research on an event without the manuscript being used or the event reported, in other words, an instance in which the information gathered is subsequently not used. In other cases, information is used that has been researched by third sources. When considering the production process, it basically means assembling newspaper articles, choosing manuscripts written by journalists and thereby managing the results of such efforts. The subject matter of selection and control is the manuscripts written by journalists on the one hand, and the distribution of events contained in such manuscripts on the other. According to the above-mentioned facts, the plaintiff owns copyright in the newspaper as a collective work …. Insofar as the defendant now translates and abbreviates individual articles on certain events that correspond with those articles of the plaintiff's newspaper, this also touches upon the object of copyright in the collective work. Those events covered by the defendant minutely correspond to the topics covered by articles of the plaintiff, while those events not covered by the plaintiff's newspaper cannot be traced in the defendant's, either. Even the

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IV.

arrangement of articles is the same. Thus, the events covered by the defendant's newspaper correspond in their choice and order to those events selected and arranged by the plaintiff. It is thus obvious that production of the defendant's newspaper with regard to the topics covered in the headlines and the day of publication depend on those topics as covered by the plaintiff's newspaper. Production and distribution of the defendant's newspaper thereby infringe upon the exclusive right of translation of the plaintiff's newspaper. Injunctive Relief Against Future Infringements 1.

P 519

2.

According to section 112 Copyright Act the copyright owner may request cessation of future infringements. If the copyright is already in existence, a request for future injunctive relief can be requested if an infringement has not yet occurred, but is likely. The problem in this case is that injunctive relief is requested for a copyrighted work that at the end of the pleadings before this court has not yet come into existence. In other words, can a request for injunctive relief be granted even in cases of a copyright only to be created in the future? Section 226 Code of Civil Procedure allows a request for injunctive relief even in cases where it is necessary to protect an existing right that is actually or legally threatened. Yet a request for injunctive relief under this section cannot be based on a copyright only to be created in the future. However, one has to consider that a newspaper will appear in the future, and that in such case, selection and control will make this newspaper eligible as a collective work under copyright law, as there is a great possibility that the level of creativity necessary for copyright protection will be met. It is equally clear that infringement of the collective work has been going on day by day and most likely will continue in the future. Upon a proper construction of sections 112 Copyright Act and 226 Code of Civil Procedure, the interests of the right owner will not be done justice if the latter is in a position only to raise an action against infringement after the copyright has been created. The above provisions must therefore be interpreted differently if these provisions aim at protecting a collective work against future infringements. In a case where an infringement is likely, it is difficult to accept that redress shall only be possible once the copyright has come into existence. Against this background it seems justified to allow for a claim of future cessation on condition that the newspaper will actually appear in the future. The plaintiff has an annual turnover of US$300 million, ranks No. 264 in the list of the top 500 companies according to the magazine Fortune and is a strong enterprise in the media business. The plaintiff's newspaper has been edited since 1889 without interruption; it is one of the most important US newspapers. From the start, there has been a guideline on the composition of the paper. This guideline has always been adhered to as the basis of the creativity in selecting and arranging current events. It can be expected with certainty that the plaintiff's newspaper will also be published in the future. For this reason, it can also be expected that the future newspapers of the plaintiff will be protected by copyright in a collective work. The defendant has published his paper continuously since September 1986. Upon request by the plaintiff, the defendant has ceased its copy service on the original texts, but not publication and distribution of its newspaper. It can be assumed that the defendant will also supply its customers and members with summaries of articles in the future in dependence on articles by the plaintiff, and thereby infringe the plaintiff's copyright in the collective work.

According to the above, it is clear that the plaintiff's newspaper appears daily, and that the defendant produces and distributes its newspaper therefrom. It would be very difficult for the plaintiff to request an injunction every time the defendant publishes its newspaper in order to request cessation of publication and distribution. Denying the plaintiff injunctive relief based on the copyright on a collective work would effectively mean denying protection at all. According to the plaintiff, the copyright in the collective work to be produced in the future equals an already-existing right and thereby allows a request for injunctive relief. However, such a right is conditional on the future publication of the collective work. With this caveat, the right to request injunctive relief in the case of an already existing work can also be extended for a work soon to come into existence. According to the above, continuous production and publication of the defendant's

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newspaper is likely to affect the plaintiff's interests in various ways. Protection is thus necessary’. P 520

IV Findings of the Supreme Court ‘The defendant appealed against the above decision based on Art. 21 of the Japanese Constitution (freedom of press and prohibition of press control). This Court rejects the final appeal: An appeal against injunctive relief granted by the Tokyo High Court according to section 409 Code of Civil Procedure can be allowed insofar as the Constitution has been wrongly interpreted, facts have been incorrectly assessed or laws have been broken. This is not the case. Nor is this a case of an extraordinary appeal. Thus, the final appeal is rejected. The decision has been unanimous’. Translated by Christopher Heath

V Comment 1. From hindsight, this case does not look particularly spectacular and certainly not like a leading case in intellectual property law. However, this merely shows how much the enforcement mechanisms in the field of intellectual property law have changed in the last 20 years since this case first came before the courts. Back in 1991, a service (the defendant) had started to make literal translations of the news column of The Wall Street Journal and distribute these translations via fax (those were the days!) to a limited number of subscribers. The existence of such service pointed to a certain market failure on the side of The Wall Street Journal, but there was by no means a monopolistic situation in relation to the information as such (there was no dispute that the individual news headlines did not enjoy copyright protection, and that the information as such could be easily come by from other sources, too). What was taken by the defendant was the (copyrightable) selection and arrangement of the news made by The Wall Street Journal, and there was method in it in that it was repeated every day for the contents of each day's newspaper column of The Wall Street Journal. In terms of civil procedure, there was certainly a likelihood that the infringement would continue in the future, but, and that was the crux of the case as the Japanese courts saw it, injunctive relief would be requested for rights not yet in existence (although highly likely to be created for each day). Japanese judges back in the early 1990s had heard little about intellectual property, were regularly transferred every three years and preferred to be safe rather than sorry in their approach to enforcement. It was thanks to the efforts of the Japanese IP lawyer Wataru Sueyoshi that the judge after an inordinately long period of hesitation could finally be convinced to issue an interim injunction about one year after such request had been made. Sueyoshi's argument, upheld in all court instances, was that an exclusive right worthy of its name should give the right to injunctive relief, and if such relief was denied in a case of continued copyright infringement such as this one, the exclusive right was not worthy of its name. P 521

2. The case is a good opportunity to look more closely at the enforcement structures related to the infringement of copyrights. a)

P 522

The first step in a civil suit is the submission of a letter of complaint to the court of jurisdiction. A suit is rarely brought without first warning the potential defendant, however the plaintiff is not obliged to do so. In Japan, warning letters are often sent not only to the alleged infringer but also to the latter's customers or suppliers. Even notices in newspapers have appeared. (1) Such letters can be very damaging to the business reputation of the alleged infringer, and if proved wrong, the right owner is often liable for damages. (2) Undue warnings constitute an act of unfair competition. The Unfair Competition Prevention Act prohibits the act of announcing or spreading an untrue fact that injures a competitor's business (section 2 (1)-No. 14 Unfair Competition Prevention Act). (3) In many decisions, assertions of infringement are judged as ‘untrue facts’ according to this provision. (4) However, attention should be drawn to the decisions rendered by the Tokyo District Court (5) and the Tokyo High Court (6) in which a warning letter sent to a competitor's customer was deemed truthful and therefore permissible. The Tokyo High Court stated that: ‘When a patentee is so bold as to warn in spite of knowing that there are no factual grounds or no legal basis for the allegation, or when a patentee could have easily concluded that the warning was groundless, had examined the facts and done legal research necessary for commencing a patent infringement suit, the warning should be regarded as unlawful and the spreading of untrue facts injuring the competitor's business reputation. When the above precautions are

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taken, the warning should be regarded as a legitimate conduct, because it is a part of the legal exercise of the patentee's patent rights. When the notice to customers of a competitor at first sight looks like the lawful exercise of a patent right, but in contents or style goes beyond what can be considered normal, in other words, when the right is exercised substantially for the purpose of injuring a competitor's business reputation vis-à-vis its customers, thus threatening the competitor's relationship with customers or competition in the market as such, it is obvious that such notice cannot be regarded as a legitimate conduct and constitutes an act of unfair competition. The patentee in such case is liable for the competitor's damage. It must thus be determined whether the warning letter directed at customers of the competitor was part of the exercise of the patent right or rather beyond what was necessary according to common sense. Whether such letter was part of the exercise of the patent right or only formally complied with such exercise should also be determined by looking at the synthesis of the negotiation process with the competitor until the warning, the timing and the distribution of the warning letter, the number and range of customers the letter was distributed to, the size and type of business concerned, the relationship and the style of dealing with the competitor, the allegedly infringing products, the way a patent infringement can be dealt with at the level of customers supplied with the allegedly infringing goods, the reaction to the distribution of the warning letter, the conduct of the patentee and the customers after the distribution, and other circumstances’.

b) P 523

c)

The above considerations also apply to copyright owners considering the dispatch of a warning letter to either the alleged infringer or the latter's customers. Besides indicating both parties to the suit, a letter of complaint must also contain the ‘gist of the claim’ (seikyū no shushi) and a ‘statement of claim’ (seikyū no gen-in). The gist of the claim corresponds to a description of the formal remedy (shubun) that the plaintiff seeks, and the statement of claim is the assertion of facts supporting the plaintiff's right to be granted the remedy sought. To successfully obtain an injunction order in an infringement action, it is necessary to specify the act that the plaintiff seeks to prohibit and the infringing items that should be destroyed in the gist of the claim. After an examination by the chief judge, a letter of complaint is delivered to the defendant (section 138 Code of Civil Procedure). The court sets the first trial date, delivers the letter of complaint, sets a deadline for the defendant to respond, and requests the submission of a written answer. In the Tokyo District Court, copyright infringement suits are handled in four special divisions for intellectual property (the 29th, 40th, 46th and 47th divisions for civil cases). In these divisions, a team of three judges hears each copyright infringement case. Similarly, there are two special divisions for intellectual property cases at the Osaka District Court (the 21st and 26th civil divisions).While the IP High Court with four divisions and 18 specialized judges has exclusive jurisdiction in cases of patent appeals, this is not the case in the field of copyright, and because of this reason, copyright decisions may emanate from a number of different District Courts and High Courts. For each case, the court will sit about once a month. After the first or second hearing, the case usually shifts to a procedure called ‘benron junbi tetsuzuki’. Because this procedure does not need to be held in open court, the hearing dates can be fixed more flexibly, without being restricted to dates of the court's availability. At each hearing, the parties try to support their case through the submission of briefs and documentary or other evidence. In civil suits for copyright infringement, the parties are mostly represented by attorneys (attorney-at-law – ‘bengoshi’). In November 2011, there were 30,505 registered bengoshi. (7) Recently, about 1,500–2,100 candidates have passed the bar exam each year, which means a passing rate of about 25% of all students enrolled in the law schools. After an apprenticeship period of 18 months, the successful apprentices are called to the bar. Very few bengoshi specialize in intellectual property. (8) Law schools within Japanese universities started from April 2004, and the new bar examination system that only allows law school graduates to sit started in May 2006. The number of successful candidates that passed the bar examination remained at about 1,500 people up until 2006 and has since risen to 2,100. Since 2003, patent attorneys have been able to represent clients in intellectual property infringement cases upon passing an additional examination (fuki-benrishi section 6-2 benrishi hō). In March 2008, there were about 7,600 benrishi, and the number of such fuki-benrishi was about 2,400. Fuku-benrishi as a rule will have to represent their clients jointly with attorneys.

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d)

P 524

e)

In principle, the losing party must bear the court costs (section 61 Code of Civil Procedure). However, the costs of the legal representatives are currently not included in the court costs. (9) There are no fixed fees for legal representation, yet as a rough guideline, the costs of attorneys in Japan are as follows: Attorneys' fees are freely negotiable. In general, two methods of calculation are used. According to the traditional way, the payment is calculated as a combination of advanced payment and success fee. This method is mainly selected for civil lawsuits and the amount to be paid is estimated by the economic gains of winning the lawsuit. The other method of calculation is time-charge based. The legal fee is thus calculated by the amount of time spent on the case. The latter way is more common when dealing with foreign clients or large companies. The Japanese Attorney's Act, the ‘Bengoshi hō’, was amended in 2003. According to the amendment, the Japanese bar associations were to abolish the old tables of recommended attorneys fees by 1 April 2004. Thus, the bar associations no longer recommend certain fees members should charge to their clients. According to the new rules, every attorney is supposed to submit an estimate of fees to be charged for a certain case in advance, and enter into an agreement with the client for the attorney fees to be charged. Still, many attorneys will keep applying the old table of attorney fees for another couple of years. According to the abolished table, a client should expect to pay about 10% of the economic value of a case – more for small claims, less for large ones. For complicated or international cases, the time charge system is preferable because it is often necessary to involve a team of specialists in such cases, even for litigation cases. Although the going hourly rates depend on the specialty and experience of each attorney, IP specialists would charge between JPY 20,000 (EUR 190) and JPY 50,000 (EUR 480). For lawsuits, much time is required especially at the preparatory stages. While the losing party in a lawsuit has to bear the court costs (although the successful plaintiff would rarely claim these against the defendant), attorneys' fees would have to be borne by each side, and only in exceptional circumstances be (partly) awarded as damages in cases where particularly difficult legal questions are involved. (10) Due to a revision to the Code of Civil Procedure in April 2003, both the judges and the parties are obliged to strictly adhere to a trial schedule (section 147-2 Code of Civil Procedure). Therefore, it is now more common that evidence and statements will be rejected if not submitted in time. In addition, section 157 CPC allows the court to reject facts or arguments filed unduly late. While this provision was hardly applied prior to 1998, (11) the courts are now more assertive in exercising their discretion in this respect. (12)

P 525

f)

The length of trials for intellectual property right infringements has decreased, with those heard in 2010 at District Courts lasting on average approximately 14.8 months. Even in complicated cases, judges often express their opinion as to infringement within about one year of the commencement of the case. Particularly in the IP High Court, judges have become rather assertive in engaging in arguments with the parties, thereby changing the traditional pattern of judges being silent listeners to the parties' arguments.

3. When a copyright is infringed or there is a likelihood of infringement, and the need to stop the infringement is apparent, the owner of the copyright can seek a temporary injunction from a court having jurisdiction. The owner of the copyright must submit a brief with evidence demonstrating that the copyright is being infringed or that there is threatened infringement, and also the necessity for a temporary injunction. This procedure is provided under the Civil Preservation Act (minji hozen hō). A provisional injunction order for copyright infringement is considered a preservation order, and is available only in cases in which there is a risk of significant or serious damage to the copyright owner (section 23(2) Civil Preservation Act). In principle, the court is not permitted to declare an injunction against a defendant unless the defendant has had an opportunity to appear before the court (section 23(4) Preservation Procedure Act). The civil preservation procedure for a provisional injunction is usually handled by a single judge. When the existence of an infringement is obvious, the preservation order will be granted speedily, but when the issues are complicated, the judge may seek additional evidence through further hearings held about every three weeks. When the judge determines that a preservation order is appropriate as a condition for granting the provisional relief, the plaintiff will be required to post a security. This security will indemnify the defendant against any damages incurred in the event that the defendant ultimately prevails on the merits of the case. The amount of the security is at the discretion of the judge, but the standard amount seems to be the equivalent of one year's profits of the defendant, since it takes about one year until an ordinary suit is completed and the injunction ceases to be effective.

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If after several hearings a judge is unable to reach a conclusion about granting an injunction, it is common practice for the judge to suggest that the application for injunction be withdrawn or to proceed with the trial on the merits. If the plaintiff does not withdraw its request for a preservation order even though the judge has not reached a conclusion, the court may dismiss the action for cause or proceed with preservation order hearings simultaneously with the trial on the merits. A plaintiff will usually seek a preservation order simultaneously with bringing a case on the merits. The parties will often reach a reconciliation agreement settling their dispute during the course of the preservation order procedures. Because the length of time required to obtain final judgment on the merits has recently decreased, it is often not much quicker to obtain a preservation order than a final P 526 judgment. However, it is usually more difficult to suspend the execution of an order for provisional injunction than to suspend the execution of a temporary enforcement order under a judgment in an ordinary suit. Therefore, there continues to be merit in pursuing both procedures concurrently. 4. The persons who can institute a claim to stop an act of infringement in respect of copyright are the owner of the copyright in the relevant work and the owner of the right of publication of the work. In the case of the infringement of a moral right, the author of the relevant work may institute the claim. An owner of a neighbouring right may also commence an action to preclude an infringement of its right (section 112 (1) The Copyright Act). Also, a co-owner of a right can independently seek injunctive relief in respect of an infringement on the basis that it is an act of preservation. Copyright and moral rights in a work arise automatically through the author's act of creating the work and do not require any special form. However, the work in question must have some originality to be entitled to these rights. It is generally understood that a moral right cannot be transferred by its owner to a third party, whereas the owner of the copyright in a work is able to transfer that right to a third party (section 61). The transfer of a copyright is possible only by a declaration of intention by the owner of the right, and no special form is necessary. However, unless the assignment is registered with the Agency for Cultural Affairs, the assignee cannot assert its copyright against a third party, such as another assignee of the same right. In the case of patents, utility models, designs and trademarks, transfer and licensing require registration in order to be effective vis-à-vis third parties. A registered, exclusive licence like a real right is called ‘sen-yō jisshiken’ or ‘sen-yō riyōken’. The owner of such right can claim injunctive relief and damages, section 100 of Patent Act. The Copyright Act provides such a right only for publisher, section 79. These registered, exclusive rights of use, like a real right, must be distinguished from contractual licensees. This contractual licence includes an exclusive (dokusenteki tsū jō jisshiken) or non-exclusive licence (Tsū jō jisshiken). These contractual licensees in principle can only sue the licensor under contract law, but not third parties. Yet, such contractual licensees are also interested parties to an infringement on the licensed right and may wish to sue for damages or injunctive relief. As for injunctive relief, it is relatively clear that contractual licensees may not sue in their own right (unless the licence is registered, which for copyrights cannot be the case, and which for the other IP rights will no longer be possible once the 2011 amendment to the Patent Act has come into force in June 2012), even if there is a provision of exclusivity in P 527 the licence agreement (13) Yet where the licensor agrees, the licensee, who has a common interest in the right, may sue for injunctive relief on behalf of the licensor (nin-iteki soshō tantō). (14) In 1965, a decision (15) permitted a licensor to (implicitly) subrogate his right to sue for injunctive relief to the licensee based on section 423 Civil Code that allows a creditor to subrogate the debtor's rights to a third party. Subsequent decisions have not upheld such automatic subrogation, e.g. in cases where the licensor refuses to sue third parties. (16) For example, one decision denied the possibility of such subrogation but for a special provision in the licence agreement, because the licensor was not obliged to prohibit infringement for the benefit of the licensee, even though the licence was exclusive. (17) The courts are more forthcoming where the licensing agreement contains an exclusive provision for the licensor's right to sue for injunctive relief to be subrogated to the licensee. (18) Although such standing to sue was denied in the cases at issue, claims appear permissible where the licensee proves that the licence was exclusively given him regardless of the licensor's obligation to stop infringement by third parties. (19) Undoubtedly, a contractual licensee of an exclusive licence is entitled to sue for damages against the infringer in the same manner as the owner of the IP right, including copyrights. (20) A non-exclusive licensee does not have standing to sue for damages or to apply for injunctive relief. In the case of an application for injunctive relief, the owners of these relevant rights can

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demand that the items that constitute the infringement of these rights be disposed of, as well as any machine or apparatus that contributed to the infringement. In addition, they can request an order for any other measures necessary to stop the current infringement and prevent any further infringement (section 112 (2) The Copyright Act). (21) P 529

VI Statistics a) Number of Intellectual Property Lawsuits Between 1993 and 2010 (First Instance at the District Court Level) Year Total Patents Utility Designs Trademarks Copyrights22 Unfair Others models competition 1993 470

91

130

37

55

70

81

6

1994 497

106

98

26

53

72

134

8

1995 528

111

61

31

53

87

172

13

1996 590

157

77

28

80

85

132

31

1997 563

167

70

25

63

94

132

12

1998 559

156

58

22

78

112

130

3

1999 642

191

72

32

65

117

155

10

2000 610

176

59

38

89

97

143

8

2001 554

153

34

29

67

127

136

8

2002 607

165

38

27

99

113

141

24

2003 635

n/a

n/a

n/a

n/a

n/a

n/a

n/a

2004 654

217

35

25

80

100+7

178

12

2005 579

196

13

28

90

81+15

133

23

2006 589

139

16

18

93

138+18

146

21

2007 496

156

12

20

78

115+14

92

9

2008 497

147

3

29

88

105+14

92

19

2009 527

174

1

14

96

102+18

111

11

2010 631 (1)

n/a

n/a

n/a

n/a

n/a

n/a

n/a

b) Requests for Preliminary Measures Year Total Patents Utility Designs Trademarks Copyrights Unfair models competition

Others

1993 362

47

38

17

33

138

76

13

1994 299

64

21

11

36

76

90

1

1995 316

73

28

17

29

68

93

8

1996 386

75

36

17

53

106

89

10

1997 410

75

30

13

40

139

108

5

1998 391

62

19

16

47

142

104

1

1999 488

62

25

10

35

275

79

2

2000 552

75

22

14

54

283

102

2

2001 522

61

15

6

40

321

78

1

2002 398

75

3

11

33

200

68

8

2005 267

n/a

n/a

n/a

n/a

n/a

n/a

n/a

c) IP Cases on Appeal Year Total Patents Utility Designs Trademarks Copyrights Unfair Others models competition 1993 102

38

14

10

5

6

25

4

1994 91

28

12

7

10

11

21

2

1995 97

18

17

4

11

11

32

4

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1996 84

23

14

3

9

15

19

1

1997

120

40

16

11

7

10

31

5

1998 143

50

23

10

8

23

24

5

1999 194

62

22

7

25

41

36

1

2000 216

69

30

2

17

43

55

0

2001 180

58

23

9

18

32

38

2

2002 181

77

13

7

15

34

33

2

2003 183

n/a

n/a

n/a

n/a

n/a

n/a

n/a

2004 178

68

6

4

21

29+5

41

4

2005 141

51

3

6

15

31+3

31

1

2006 135

41

5

4

22

25+4

30

4

2007 138

58

4

8

19

29+1

14

5

2008 140

57

2

3

19

30+2

22

5

2009 134

55

2

2

9

30+6

27

3

2010 130

n/a

n/a

n/a

n/a

n/a

n/a

n/a

P 530

d) Average Duration of IP Infringement Cases in Months (1st Instance at District Courts) 1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

31.1

29.6

31.9

23.1

23.7

22.7

25.0

25.7

23.1

21.6

18.3

2002

2003

2004

2005

2006

2007

2008

2009

2010

16.8

15.6

13.8

13.5

12.5

14.4

13.7

13.4

14.8

Christopher Heath (2) & Takuya Iizuka (3) P 530

References ★ )

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich Iizuka Takuya: Hamada & Matsumoto in Tokyo., (LMU Munich)

1)

2) 3) 4) 5) 6)

7)

Nagoya District Court, 27 February 1984, 16-1 Mutaishū 91 [1984] – Walking Beam; Nagoya District Court, 31 August 1984, 16-2 Mutaishū 568 [1984] – Magnetic Recorder; Tokyo District Court, 19 December 1990, 266 Tokkyo To Kigyō 46 – University Entrance Exam; Nagoya District Court, 8 October 1992, 1993/10 Patents & Licensing 25 – Fungus Growing Device; Tokyo High Court, 26 May 1993, 46/10 Patent 142 [1993] – Cap Transport Device; Osaka High Court, 23 February 1993, 1993/10 Patents & Licensing 25, 1994/1 AIPPI Journal (Engl.ed.) 23 –Fish Processing Device; Osaka District Court, 22 July 1993, 47/1 Patent 95 [1994] – Rice Seedling Mat; Osaka District Court, 27 October 1994, 234 Hanketsu Sokuhō 11 [1994] – Swinging Doors; Tokyo District Court, 26 December 1994, 236 Hanketsu Sokuhō 8 [1995] – Design; Osaka District Court, 31 August 1995, 244 Hanketsu Sokuhō 4 [1995]. Osaka District Court, 29 June 1979, Tokkyo Kanri Bessatsu 554 [1979], and the other above-mentioned decisions impose a no fault liability in these cases. Tokyo District Court, 28 January 2004, 1847 Hanrei Jihō 60 – Keikai denwa; The court ordered JPY 5 million in damages and JPY 1 million as attorney's fees. As supra note 3. Tokyo District Court, 20 September 2001, 1801 Hanrei Jihō 113 – Metal powder. Tokyo High Court, 29 August 2002, 1807 Hanrei Jihō 128 – Metal powder II. The approach taken in this decision was affirmed by Tokyo District Court, 15 March 2004, 39IIC 246 (2008) – Water Pellets and Tokyo District Court, 6 July 2006, 39 IIC 374 (2008) Powdered Fish Food. A lawsuit for alleged infringement may be abusive under certain circumstances: Tokyo High Court, 19 October 2004, 39 IIC 121 (2008) – Kojima/Yamada’. Academic literature on this issue: M. Takabe, Chiteki zaisanken wo shingai suru shi no kōkoku to fusei kyōsō kōi no seihi, 1290 Jurist 88 [2005]; T. Hirose, Chiteki zaisanken shingai ni kan suru kōkoku,. Literature in English: C. Heath, Wrongful Patent Enforcement, 39 IIC 307 (2008). Website of Japan Federation of Bar Associations

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8) 9)

10) 11) 12)

13) 14) 15) 16) 17) 18) 19) 20) 21)

1)

2) 3)

The number of bengoshi who are registered at JPO as patent attorneys is about 300. However, the registration is not a requirement for bengoshi to deal with IP cases in Japan. The Japanese government submitted a bill to the Diet in 2004 that would have required a losing party to bear the opponent's cost of legal representation. However, because of the opposition of the Japan Federation of Bar Associations, the bill was rejected. For example, Supreme Court, 29 May 1984, 530 Hanrei Times 97 – American Football Symbol Mark. Amounts tend to be low, e.g. JPY 1 million. Yoshino, Die neue Diskussion um die Prozeßbeschleunigung in Japan, 8 Recht in Japan 65, 67 (1991). Tokyo High Court, 31 October 2002, 2003 AIPPI Japan English Edition 359 – AntiAllergic Agent. Here, in a patent infringement suit, the defendant was slow and reluctant in producing relevant documents which caused a tremendous delay in proceedings. In addition, the defendant frequently changed the basis of its argumentation. As this continued on appeal, the appeal court ruled in favour of the plaintiff, as the defendant had failed to overcome the statutory presumption of infringement (the case concerned a manufacturing process) as its arguments in this respect were filed too late. Ōsaka District Court, 20 December 1984, 16-3 Mutaishū 803 – Hair brush. Supreme Court 11 November 1970, 24-12 Minshū 1854. Tokyo District Court 31 August 1965, 185 Hanrei Times 209 – Cam equipment. K.Yamagami, Dokusenteki tsū jō jissikensha ni yoru sashitome seikyū ken no daiikōshi, 170 Jurist Bessatsu 210 (2004). Ōsaka District Court, 20 December 1984, 16-3 Mutaishū 803 – Hair brush. As for copyright; Tokyo District Court, 31 January 2002, 35 IIC 1110 – Tonttu. As for patent rights, Tokyo District Court, 3 October 2002 (unpublished) – Noodle maker. In case of subrogation of the licensor's right, all legal effects of the licensee's conducts directly affect the licensor. Tokyo District Court, 22 May 1991, 23-2 Chisaishū 294 -Audio tape. Tokyo District Court, 23 January 2001 1756 Hanrei Jihō 139 (Shinsengumi tamachihō shiseki guide book); The court ordered the defendant to recall the infringing books from the market, to destroy all half-finished books and negative films, and to delete all data in mediums like MO discs. After 2004, the statistics show two figures for copyright cases, e.g. 100+7. The first figure refers to the ordinary cases, the second for the number of cases involving computer programs that fall within the exclusive jurisdiction of the Tokyo/Osaka District Courts and the IP High Court. Head of the Asian Department, Max Planck Institute, Munich Hamada & Matsumoto in Tokyo., (LMU Munich)

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Case No. 49: Trade Marks – Registrability – Secondary Meaning – Three-Dimensional Marks

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Japanese Intellectual Property High Court, decision of 29 May 2008, Coca Cola Company v. Japanese Patent Office – Coca-Cola Source: 2009 Hanrei Jihō 36

Jurisdiction

I Headnote(s)

Japan

A three-dimensional mark that only consists of the shape of a bottle can be registered if its shape has become distinctive due to use.

Court

II Relevant Provisions

Intellectual Property High Court of Japan

Trade Mark Act section 3(1) no. 3, (2)

III Facts

Case date

The plaintiff, the Coca Cola Company, has requested registration of the following shape as a three-dimensional mark. The registration was refused by the Japanese Patent Office and the plaintiff has now appealed.

29 May 2008

Parties

P 532

Claimant, Coca Cola Company Defendant, Japanese Patent Office

Bibliographic reference

Christopher Heath, 'Case No. 49: Trade Marks – Registrability – Secondary Meaning – ThreeDimensional Marks', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 531 540

IV Findings … ‘1. On the Trade Mark Act Section 3(1) no. 3 a)

P 533

The Trade Mark Act provides that three-dimensional marks can be registered once they meet certain criteria (Trade Mark Act section 2(1), section 5 (2)). Trade Mark Act section 3 (1) excludes trade marks from registration ‘that merely consist of signs that in a common way may serve to be used in commerce to indicate the geographical origin, the place of sale, characteristics, material, effect, definition of amount, form of the goods or packing, the value, way or time of manufacture or use of goods, place or material of goods, effect, definition, amount, value, modality, manner or time of the service’. Trade Mark Act section 3 (2) provides that subsection (1) nos. 3, 4 and 5 do not apply if the mark has obtained recognition for the goods or services due to use. Trade Mark Act section 4(1) no. 18 in deviation from section 3 excludes marks from registration that ‘only consist of the shape of goods or wrappings that are necessary in order to fulfil their functions'. Trade Mark Act section 26 (1) no. 5 stipulates that a trade mark right cannot be obtained for those marks ‘that exclusively consist of the shape of goods or wrappings that are necessary in order to fulfil their function’. While in principle there are no different requirements for the registrability of twoor three-dimensional marks, section 4 (1) no. 18 excludes marks from registration that merely consist of the shape of the goods or their wrapping necessary to fulfil their function. For this reason, it is not allowed for anyone to obtain a monopoly over a certain shape of goods or wrappings that are necessary to fulfil their function.

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b)

P 534

This does not automatically exclude the possibility of registering three-dimensional marks whose shape is not necessary for fulfilling their function, even if such shape was chosen in order to develop function or beauty. A three-dimensional mark can be registered without difficulty if due to its use for goods or services it has obtained distinctiveness. In order to affirm distinctiveness, strict criteria should be applied. On the basis of the above criteria, we determine whether section 3(1) no. 3 should apply to the above shape. Frequently, trade mark shapes are chosen in order to develop function or beauty and are rarely suitable to indicate the origin of goods or services and to distinguish one's goods or services from the goods or services of others. From the perspective of a manufacturer or seller, the shapes of goods often cannot be used for the purposes of indication or distinction and thus will not be used as marks. Also, consumers often do not recognize the shapes of goods as an indication of origin, but rather as functional or aesthetic designs. The shapes of goods are often chosen due to functional or aesthetic considerations. For this reason, section 3 (1) no. 3 is doubtlessly applicable to the shape of goods chosen for these reasons, as the goods merely consist of shapes that in commerce can serve as the ordinary shape of goods. While certain shapes of goods are chosen for functional or aesthetic reasons, there is often some leeway for a selection in terms of purpose or characteristics of the goods. In this respect, Trade Mark Act section 3 (1) no. 3 applies to shapes that are chosen for functional or aesthetical reasons in respect of comparable goods, even if these show special characteristics. Developers of forms for comparable goods are interested in using certain shapes in order to develop function or beauty. In the public interest, it is therefore not appropriate to allow private persons to obtain a monopoly on these shapes only because they were the first to apply for a trade mark. To the extent that goods show certain shapes that are different from other comparable goods, patents, utility models as exclusive rights, can be granted for a technical function, while designs may be obtained due to aesthetic characteristics, to the extent that the requirements for these rights are met. Granting trade mark rights to such shapes effectively means granting a permanent exclusive right beyond the duration of patent, utility models or design rights, and this contravenes public interest in preventing restraints of competition. … (2) Applicability of Trade Mark Act section 3 (1) no. 3 to the case at issue … Feature A of the shape of the mark in this case is the basic form of a bottle in which cola beverage is filled and whose opening is meant to be covered by a removable cover. Features B and C are meant to assist in the grip of the bottle and add beauty to its contours. Feature D serves beauty and facilitates labelling. Features E and F give beauty to the bottle's shape. In this case, the shape of the bottle does not go beyond the above-mentioned shape for ordinary bottles. To this extent, the bottle at the time the Patent Office rendered its decision (6 February 2007) was used for functional and aesthetic purposes. Consumers regard the shape as the shape of the Coke bottle.

2 Trade Mark Act Section 3 (2) (1) Secondary meaning and distinctiveness through use for three-dimensional shapes As mentioned under above 1, section 3(2) Trade Mark Act provides that those marks mentioned in section 3 (1) (iii) that exclusively consist of signs that in commerce can serve as the shape of goods in an ordinary manner, may be registered once the mark has obtained distinctiveness through use. Excluded from the ambit of this provision are marks that exclusively consist of the shape of goods or wrappings that is owed to function, Trade Mark Act section 4(1) (xviii). Whether a three-dimensional mark has obtained secondary meaning through use must be determined based on a consideration of all aspects in regard of the shape of goods, commencement of use, duration and geographical scope of use, turnover, extent, territory and duration of advertising, and the existence of similar shapes for similar goods. In this respect, the shapes used for the goods shall correspond to those of the trade mark application and should have been used for the designated goods. Signs such as trade names or combinations of letters are normally used in the manufacture and sale of goods. A change in the shape of goods is normally owed to the maintenance of function or quality, a further development of technology or a change in the social environment or business practices. For this reason, it is incorrect to hold that the used marks cannot obtain secondary meaning because they have been used together with the trade name or in combination with letters or because there were small changes in the shape. Whether a shape has obtained secondary meaning due to use must be established by determining all circumstances regarding the impression the shape makes upon consumers, even if use has been made together with signs of there having been

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small changes in the shape. (2) Applicability of section 3(2) to the present case … . b. Evaluation When taking into account all circumstances, the following should be said. The goods of the plaintiff that have almost the same shape as the recyclable bottle have been sold in the US since 1916. From the beginning it was perceived that the shape of the bottle was unique and characteristic. In Japan, the applicant has not changed the shape of the recyclable bottle and has been using the same shape since the beginning of sales in 1957. P 535

The turnover for the sale of the recyclable bottles is striking and in 1971 registered a record of 2.38 billion bottles. Thereafter, turnover declined, as comparatively more beverages were sold in bins or in plastic bottles. Nevertheless, there are still 98 million bottles sold per year. Since 1997, the applicant has spent an annual of JPY 3 trillion on advertising, including advertisements for the recyclable bottle. In the advertisements on television, and in newspapers and journals, the plaintiff has emphasized the form of the recyclable bottle. Especially since the start of sales in cans or plastic bottles, the plaintiff has consistently emphasized in its advertisements the sale of its drink in recyclable bottles. About 60%– 80% of persons, when shown the plaintiff's bottle without any writing, answered that the bottle originated from Coca Cola. Quite a number of experts have emphasized that the form of the recyclable bottle is a typical example of a shape with secondary meaning. Many books have been published that outline the history, stories, episodes and particulars associated with the plaintiff's recyclable bottle. No other bottle that is currently sold shows all the characteristics of the Coke bottle. As soon as third parties have tried to imitate the bottle, the plaintiff has taken action against them. The shape of the bottle in itself is recognized as a brand symbol. From the above facts, it is notable that the plaintiff's bottle has achieved stunning sales figures, and that it was sold unchanged over a long period of time. Furthermore, that consumer at the time the decision of the Patent Office was rendered (6 February 2007) recognized the shape of the bottle as a distinctive element. Evaluation of other issues On the relationship between the bottle and the logo ‘Coca Cola’, it should be mentioned that the plaintiff's bottle is sold bearing the logo ‘Coca Cola’. Traders and consumers often determine the origin of goods according to the two-dimensional logo that consists of writing, pictures or symbols. And also manufacturers distinguish their goods from the goods of others by way of signs and symbols. This is useful, but not the only way to go about it. Also, the use of two signs may serve as indications of origin. And traders and consumers may also perceive the origin of different goods according to the shape of the goods as a distinguishing feature. In light of these circumstances, one cannot require that the additional elements of writing or symbols found on the bottles be devoid of distinctive character. (Unfair Competition Prevention Act section 2 (1) (i) or (iii)). Thus, the distinctive character of the shape of the recyclable bottle is rather strong, not least due to the above-mentioned fact of the long and uninterrupted use of the shape, the high volume of sales, the high-level advertising activities, and the results of surveys that the shape is capable of indicating an origin. Such distinctiveness is not called into question by the use of the ‘Coca Cola’ logo on the bottles. And the shape is not of a type that is exclusively functional with regard to the shape of goods or wrappings. P 536

On the tap of the bottle The registered mark and the shape of the bottle actually used are different in respect of the cap. The registered mark contains a cap that can be screwed, the bottle that is actually used has a crown cork cap. The cap is directly functional and of ordinary character. Consumers do not distinguish goods according to the cap. The cap is thus no characteristic of the registered mark. According to the undoubted distinctiveness of the bottle, the difference in the cap does not call the distinctiveness of the bottle as an indication of origin into question. Thus, the registered mark has become distinctive through use of the recyclable bottle. It can be registered according to section 3 (2) Trade Mark Act. The decision of the Patent Office that refused registration is erroneous and must be overturned’. Translated by Christopher Heath

V Comment 1. Three-dimensional marks have been registrable in Japan since 1 April 1997. Yet trade

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marks that consist solely of the shape of the goods in question are capable of registration only ‘when, as a result of the use of such mark, consumers are able to recognize the goods as those from a certain business’, section 3(1)(iii) and (2) Trade Mark Act. The Courts and the Patent Office have made it clear that in order to become registrable, a threedimensional mark must have obtained secondary meaning, (1) and even if this can be demonstrated, that the form is not purely functional. (2) The decision, ‘Fishing Scale’, explained this position as follows: ‘Basically, the shape of goods is chosen for the purpose that the goods can serve their functions more efficiently, of for the purposes of aesthetic effect on behalf of the consumer. Even if modifications are made or decorations are added, a trade mark that merely consists of the shape of such goods is but a description of the goods themselves. P 537 Such a mark should generally be regarded as an indication whose use is necessary and appropriate for the relevant circles in trade and in view of the public interest should not be open to monopolisation by one person. In addition, such a mark does not in most cases possess the necessary capacity to distinguish the goods of an enterprise from the goods of another enterprise. This is no different from other marks that are found to be devoid of distinctive character. In the absence of a unique shape that cannot be expected from the function or the intended use of the goods, or contains decorative elements that evoke a special impression on the user, we therefore hold that a mark that merely consists of the shape of the designated goods is a ‘mark that merely consists of signs that in a common way indicate the shape of goods', section 3(1) (iii), and that is therefore not registrable’. A rather complicated case of a three-dimensional mark was decided by the Tokyo High Court in 2006. (3) In the case at issue, the defendant on 24 July 2003 had obtained registration of a trade mark consisting of the shape of a sitting young bird for ‘manjū’, buns with a sweet bean curd filling. The defendant, previously trading under the name of Yoshinodō, has been selling bird buns in such a shape since 1911 and has about 270 sales outlets primarily in the Kantō and in Kyū shū areas. The little bird buns are also sold by other companies, inter alia the plaintiff and count as specialties of either Tokyo or Kyū shū, and make popular omiyage (presents). In as far back as 1970, the plaintiff had accused the defendant of engaging in unfair competition by selling little bird buns, yet the public prosecution had refused to take up the case under the old Unfair Competition Prevention Act of 1934. The plaintiff then requested invalidation of the mark, as the threedimensional shape was nothing more than the ordinary shape of the goods themselves. The Patent Office rejected the request, as it thought the lack of distinctiveness had been overcome by widespread use. The Tokyo High Court held that the use was insufficient to prove secondary meaning:

P 538

‘In the current case, it is in dispute whether the three-dimensional mark at issue meets the requirements of section 3(2) Trade Mark Act… According to this provision, when a trade mark falls under one of the provisions (iii)-(v) of the preceding subsection, registration can be obtained when due to the use of such mark the consumer recognises the goods or services as belonging to a certain business enterprise…. Section 3(2) thus allows for the exceptional registration of trade marks devoid of distinctive character when [in the case of three-dimensional marks] the specific shape of the goods through a long period of consecutive or monopolistic use and corresponding advertising is widely recognised as an indication of origin; in other words, it has obtained distinctiveness. This is what can be understood from the legislation that since 1 April 1997 has allowed the registration of three-dimensional marks. Yet one should be careful when establishing the requirements of section 3 (2) to take into account only the three-dimensional element alone without the word or character elements that go with it. Whether a threedimensional mark has become distinctive must further be established for the country as a whole… This court is convinced that the defendant's word mark ‘Hiyoko’ has become widely known amongst consumers in the Kantō and Kyū shū areas, yet the shape of the three-dimensional mark as such has not yet obtained widespread recognition in the

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whole country. Certainly, the defendant has sold ‘Hiyoko’ sweets since 1911, and particularly since 1957, annual sales and advertising in journals, newspapers and on television have been substantial… Yet, the Hiyoko sweets have been sold in wrapped condition and always accompanied by the word ‘Hiyoko’ on the boxes…, and the television advertisements have always been accompanied by the pronounced phrase ‘famous Hiyoko’ or ‘Hiyoko’ … In addition, there are… a total of 23 competitors all over Japan producing and selling bird-shaped sweets … that are difficult to distinguish from those of the defendant… The defendant has most of its shops in the areas of Kyūshū and Kantō, yet not everywhere in Japan. The sale and advertisement of the ‘Hiyoko’ sweets to the consumer is accompanied by the word ‘Hiyoko’, and a good number of bird-shaped sweets similar to the mark registered by the defendant have been sold all over Japan and are identified as Japanese-style sweets,… and therefore the three-dimensional mark at issue has not yet received nationwide distinctiveness. Thus, as a result of the use made of three-dimensional mark, the consumer at the time of registration was not able to identify the goods as those of a particular business enterprise, and the three-dimensional mark has not yet achieved a distinctive character… as required by section 3(2) Trade Mark Act…. Thus, the Patent Office's reasoning with respect to section 3(2) Trade Mark Act is faulty and the plaintiff's appeal must be allowed’. In the only other case in which a three-dimensional mark could successfully be registered, the plaintiff was able to demonstrate high turnover, high advertising expenses, a shape that had been used in unchanged form for a long time, design awards for the shape and a consequent enforcement of the shape against copycat designs with the consequence that no lookalikes could be found on the market. (4) P 539

2. The restrictive practice for allowing registration of three-dimensional marks seems to be owing to two concerns. The first is that the shape of goods is seldom regarded as an indication of origin and that the shape therefore lacks the necessary distinctiveness or is merely descriptive of the goods themselves. And the second is that public policy should speak out against the monopolization of the shape of goods. Similar considerations have led to a rather restrictive practice in the registration of geographical names, (5) description of the goods in a foreign language, (6) public order (7) or the portrait or name of other persons. (8) Christopher Heath (1) P 539

References ★ )

1)

2)

3) 4) 5)

6)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich. Tokyo High Court, 28 December 2001, 34 IIC 449 (2003) – Fishing Scale: No distinctiveness for the shape of a fishing scale; Tokyo high Court, 12 July 2001, 34 IIC 832 (2003) – Yakult: No distinctiveness for the shape of a yoghurt cup; Tokyo High Court, 30 January 2002, 35 IIC 103 (2004) – Kakubin: no distinctiveness for the shape of a square bottle for whiskey. In the decision of Tokyo High Court, 27 November 2001, 34 IIC 448 (2003) – Dowel, the plaintiff applied to register the shape of a dowel for plastic fastening devices in Class 20. The Patent Office rejected the application. On appeal, the plaintiff argued that distinctiveness had been obtained through use. The court did not deny this, yet rejected the appeal. To the extent that the shape of the object to be registered comprised a patentable invention, this would mean incorporating the patent monopoly into the trade mark, thereby infinitely prolonging the patent monopoly. Thus, even when the shape had become distinctive through use, registration would conflict with the principle that monopolies under patent law are only granted for a limited period of time, and trade mark registration of any such invention would contravene the intent of patent law. Thus, registration could only be obtained for those features that were unrelated to the patented invention even when the applicant could show distinctiveness. Tokyo High Court, 29 November 2006, 38 IIC 998 (2007) – Hiyoko. Tokyo High Court, 27 June 2007, 2007 AIPPI Journal of the Japanese Group, English Edition, 296 - Maglite. Registration was denied for ‘Georgia Coffee’ for beverages on account of the fact that consumers may mistake this as a geographical indication: Supreme Court, 23 January 1986, 593 Hanrei Times 71; registration was allowed, however, for ‘Sidamo’ (a region in Ethiopia well-known for its high class coffee) for beverages, presumably because the applicant was the Ethiopian Intellectual Property Office, and there was no likelihood of origin confusion: IP High Court, 29 March 2010 – ‘Sidamo’. Cancellation of the trade mark ‘Cupuaçu’ registered for oil and fruit juice of the Brazilian cupuaçu fruit: Decision of the Patent Office, 18 February 2004, 37 IIC 98 (2006) w. comment by Beas Rodrigues – ‘Cupuaçu’.

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7)

8)

IP High Court, 20 June 2006, Anne of Green Gables (registration of the title for pachinko slot machines): ‘We all understand that the work, “Anne of Green Gables”, is world-renowned and of high economic value. Besides, according to the principle of international good faith, if it is considered reasonable grounds to protect and to maintain recognition and reputation of the work at issue upon particular request, the act of registration for the trade mark, composed of the title of the said work, applied by the person who has no any relationship with the said work clearly falls within the category of “trade marks which are liable to contravene public order or morality” under Sec. 4(1)(7)’. Supreme Court, 8 June 2004, 36 IIC 367 (2005) – Leonard Kamhout. Here, on 22 October 1998, the appellant applied for registration of the trade mark ‘Leonard Kamhout’, which coincides with the name of Mr Leonard Kamhout, an American chaser and designer of silver accessories. On 1 December 1998 Mr Kamhout gave consent in writing, but withdrew his consent and submitted a notice of withdrawal in writing to the Japan Patent Office (JPO) on 25 May 2000. The registration was refused for the reason that the application fell under sec. 4(1)(viii) of the Trade Mark Act. The appellant lodged an appeal before the JPO but was unsuccessful. The Supreme Court ultimately ruled as follows: ‘Sec. 4 (1) (viii) provides that a trade mark containing either a portrait of another person or a name, denomination, the well-known abbreviation or such other items as are listed … of another person shall not be registered unless consent by that other person has been obtained, as provided in the bracketed text [of (viii)]. Its aim lies in protecting the personal interest of another person in the portrait or name. Therefore, anyone applying for the registration of a trade mark that falls under No. (viii) must obtain the consent of that other person in order not to harm the latter's personal interests. Subsection 3 [of Trade Mark Act, sec. 4] provides that the provision of No. 8 shall not apply to a trade mark that falls under No. (viii), but did not fall thereunder at the time of application for registration of the trade mark… . According to this provision, the critical date for whether or not a trade mark shall be registered … is the time of the examiner's decision to register the trade mark or to refuse registration (if the decision of refusal is appealed, the time when the appeal decision over the latter is made … ). The intent of this provision is to accept registration of a trade mark that did not fall under No. (viii) at the time of application, as it did not contain either a portrait of another person or a name, denomination or the well-known abbreviation of another person, but subsequently fell under No. 8 by the time of the examiner's decision due to a change in circumstances upon which the applicant had no influence, e.g. because another person with the same name as the applied trade mark came into being or the abbreviation of the name of another person became well known. It would thus be unreasonable if the application were refused in such cases. Considering the above-mentioned intent of No. (viii) and subsection 3 [of Trade Mark Act, sec. 4], … in order for a trade mark that falls under No. (viii) at the time of filing of the application to be registered, the consent required in the bracketed text shall exist at the time of the examiner's decision. The registration shall not be granted if there is no consent at the time of the examiner's decision, even though it existed at the time of application. The application at bar shall be refused on the grounds that the applied trade mark falls under No. (viii)… . ’

1)

Head of the Asian Department, Max Planck Institute, Munich.

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Case No. 50: Trade Mark Law – Similarity – Confusion

Document information

Christopher Heath

Publication

(★ )

Business Law in Japan – Cases and Comments

Supreme Court, decision of 27 February 1968 - Hyōzan Source: 22-2 Minshu 399

I Headnote(s)

Jurisdiction

The similarity of two trade marks should be judged according to their appearance, their meaning and their pronunciation. If one of these three parameters is similar, yet the others are not, there is a presumption of confusion that can be rebutted by the specific circumstances of the product market for which the trade mark is registered.

Japan

Court

II Relevant Provisions

Supreme Court of Japan

Trade Mark Act section 4(1)(xi)

III Facts and Findings

Case date

27 February 1968

The similarity of a trade mark should be decided by considering whether a trade mark mark is used for an identical or similar product in comparison with the trade mark of another person. In such a case, the trademark used on the goods should be decided by taking into account the totality of its impression, memory and imagination, etc. which a person in commerce gets by the appearance, concept, pronunciation, etc. of the trademark and by considering this on the basis of the specific commercial circumstance as long as the actual trading conditions of the product can be demonstrated.

P 542 causes confusion regarding the place of origin of a product when the trade

Bibliographic reference

Christopher Heath, 'Case No. 50: Trade Mark Law – Similarity – Confusion', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 541 - 550

The designated product of the filed trade mark in this case is only fibreglass and it is clear from the concept of the trade mark that the trade mark is only used for fibreglass. Therefore, the original judgment was not incorrect to consider the actual trading conditions of fibreglass when judging the similarity of the trade mark. In the circumstances of fibreglass trading, the two trade marks could be distinguished only phonetically, and the quality of the product was hardly of issue when determining the place of origin of the product. Thus, it was correctly decided that a trade mark of such a designated product is not likely to cause confusion in connection with the commercial origin of the product even if the comparative analysis of the pronunciation of the trade marks is interpreted without much detail. The appellant argues that the original judgment failed to apply the rules for an analysis of similarity as applied in general commerce. However, the original judgment did not ignore that the trade mark has the function to distinguish the place of origin in the fibreglass trading. Rather, it therefore decided that the rule in general commerce (that is, that a phonetic similarity of two trade marks causes confusion as to the place of origin of a product) cannot be directly applied, and that if a merchant distinguishes the place of origin of a product, the pronunciation of a trademark is less important than in general commerce. It seems that the appellant's argument does not correctly understand the original judgment. The appellant argued that as far as the actual trading conditions of fibreglass were concerned and upon which the original judgment based its reasoning, these neither reflected the considerations in general trade nor those in the trade of fibre glass, but rather these were temporary and irregular trading circumstances based on specific conditions at the beginning of the development of a new product. However, the original judgment identified all the evidence that was filed, and all the arguments on trading conditions of fibreglass on and after the filing date of the trade mark application in this case. Further, there is no evidence that conditions were limited and temporary phenomena, as is now argued. If the argument was correct, the registration of the present trade mark should be invalidated. Moreover, the argument from appellant claimed that the original judgment is incorrect because the actual trading conditions of fibreglass were identified on the basis of arguments and evidence contradicted by the appellee. However, though the record of this case has been scrutinized, there is no evidence for this. Accordingly, the appellant's above arguments cannot be endorsed. The similarity in appearance, concept and pronunciation of a trade mark are merely standards for presuming confusion as to the place of origin of a product bearing a trade mark. Therefore if one of the above three criteria is similar, but the other two are quite different or there is a specific condition in the market for the goods at issue, and the P 543 trademark is not considered to be likely to cause confusion as to the place of origin of the product, in such a case the two marks should not be considered as similar. Considering the present case, the filed trade mark includes the image of an iceberg and the wording ‘Garasu-senni (Kana and kanji characters),’ ‘hyōzanjirushi (Kanji characters),’ and ‘nittoh-bōeki (Kanji characters)’ while the prior trade mark consists merely of the wording ‘shōzan (Hiragana characters).’ Therefore, the filed trade mark is clearly different in appearance from the prior trade mark; the prior trade mark obviously does not have

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the concept of an iceberg. The appellant did not contest the dissimilarity regarding the above two points as held by the original court. Therefore, the original judgment considered that even if the filed trade mark is pronounced ‘hyōzan jirushi’ or ‘hyōzan’, and the prior trade mark is pronounced ‘shōzan jirushi’ or ‘shōzan’, and the pronunciation of both trade marks is relatively similar, when considering the differences of appearance and concept between the two trade marks, similarity of the two marks should not be determined by comparing only the pronunciation of both trade marks. Moreover, the original judgment can be understood in that even if the pronunciation of both trade marks is similar, the phonetic difference between both trade marks can easily be recognised. This is so even when taking into account that there are parts of Japan where people tend to hardly distinguish between the pronunciation of ‘hi’ and ‘shi;’ In the specific and actual trading conditions of the fibreglass market described above, it is difficult to imagine that the place of origin of the product can be confused by misunderstanding two trade marks which are different in appearance and concept and the pronunciation of which can be distinguished as described above. Therefore, both trade marks are considered to be dissimilar to each other. The appellant contests the findings of the original judgment that pronunciation of both trade marks are not similar to each other. However, considering the actual trading conditions in the fibreglass market, it could be said that the comparison of pronunciation of a trade mark can be relatively broadly analysed as described above. From this viewpoint, the original decision was not incorrect to conclude that the above difference of pronunciation made the two marks dissimilar. In summary, the appellant contests that the original judgment wrongly determined that the fibreglass market does not determine similarity by looking at the pronunciation of a trademark, and that a decision on the similarity between the present trademark filed and the prior registered trademark should not be made by merely comparing only parts of the wording of both trademarks, and that this would be an insufficient reason for supporting the decision that the pronunciation of both trademarks in total is not similar. Rather, the applicant argues, such findings would be contradictory. However, the original judgment appears not to contain any errors and should therefore be upheld. Accordingly, the appeal cannot be allowed. The decision was unanimous. Translated by Ryoko Oshikamo P 544

IV Comment 1. The concepts of similarity and confusion are fundamental parameters for determining the scope of trade mark rights. A trade mark that is identical or similar with another one registered for identical or similar goods is likely to cause confusion in trade, the prevention of which is the object of trade mark law. By indicating a commercial origin, consumers should be able to distinguish the goods of one undertaking from those of another. The function of indicating an origin is seriously compromised if consumers mistake goods from one undertaking with goods of another. In order to determine whether confusion is likely, the degree of similarity between two marks should be determined. The above decision of the Supreme Court makes two fundamental statements. First, that similarity of two marks should be determined according to the parameters of meaning, pronunciation and appearance. And, second, that similarity is not an isolated concept per se, but should merely assist in determining confusion, avoidance of which is the ultimate purpose of trade mark law. In other words, there may be cases of trade mark similarity without confusion. The case was decided in 1968, yet was recently identified by Judge Toshiaki Iimura as the fundamental case, where the Supreme Court for the first time applied a rational and transparent approach for determining similarity. (1) It is no coincidence that Judge Iimura now cites this case. As a presiding judge at the IP High Court, for quite some time now it has been his objective to make proceedings before the Patent Office more transparent, to require rational rules and properly reasoned decisions on the requirements for patent and trademark protection and to establish by his decisions rules to this end. (2) In Japan, the Patent Office is checking trade mark applications for prior marks, and tends to reject an application if it is identical or similar to a prior mark that has been registered for identical or similar goods. Apart from this ground of rejection, there is another one that refers to confusion with a prior well-known mark or indication, which is primarily concerned with unregistered indications according to Art. 6bis Paris Convention. 2. The case at issue applies a rational standard of how to determine confusion and speaks out against formalistic equations, a line that has been reiterated in two subsequent decisions. The first case concerns the question of similarity of goods and, in this connection, the potential customers. While registration of a trade mark with respect to goods or services P 545 now follows the Nice classification, the scope of similarity with respect to goods or services is determined according to the level of similarity and confusion of the public. The term ‘similarity’ does not necessarily follow the formal classification of goods or

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services. In one case, the trademark owner for the word mark ‘Robinson’ registered for helicopters had sued against a third party using ‘Robinson’ for bicycles, and argued that there was a similarity of goods already for the fact that the class of registration was the same. The court disagreed: Although belonging to the same class of goods, the use of the name ‘Robinson’ for helicopters was deemed not confusing with the ‘Robinson’ trade mark used on bicycles, because the potential customers were different. (3) The court thus denied that similarity of goods should be schematically decided along the lines of the trade mark classification system, but with a view to potential customers of the goods in question. Should there be no or little overlap, confusion was unlikely and similarity be denied. In the second case, the defendant wanted to register the trademark ‘Riscoat’ for pharmaceutical products meant to cure eye ailments, while the plaintiff was the owner of the previously registered mark ‘Viscoat’ registered for the same class of goods and actually for the same products. Despite similarity of goods and marks as such, the court (4) denied any risk of confusion in this specific case. After all, the products could not be purchased by the average customer off the shelf, but were available only by prescription through doctors or for use in hospitals. Since it was this specific group that made the actual purchasing choice, confusion had to be determined according to the understanding of this group. When applying such a standard, it would become clear that there was no risk of confusion. Thus, registration of the mark ‘Riscoat’ was granted. 3. It should be noted that at least in the eyes of the Western user of the Japanese system, there are a number of peculiarities about determining similarity under trade mark law. (5) The first is the imperfect transliteration of foreign words into Japanese kata-kana script. As there is no difference between ‘b’ and ‘v’, ‘l’ and ‘r’, and each consonant must be followed by a vowel, there may well be surprising similarities or dissimilarities owing to this fact. Just to give an example, the Japanese transliterate the phrase ‘I love you’ in the same way as ‘I rub you’. Where words are registered in Western writing, or where a mark in the Latin alphabet is compared to one in Japanese writing, the courts assume that the foreign mark is pronounced in American English. For further details on this point, see the ‘L’Air du Temps' decision, this book case no. 52. Second, similarity can even be affirmed in case one mark is a word mark, and the other a device mark that to the average consumers confers the very same meaning as the word mark. In the ‘Kōzō Sushi’ case, two marks were registered for various food items, one a P 546 (kanji) word mark 'kōzō (meaning apprentice), and the other the picture of an apprentice bowing before a customer. Both the Patent Office and the Tokyo High Court denied similarity, though, as both word and device mark could be interpreted different from the meaning ‘apprentice in a restaurant’. (6) Also a subsequent infringement suit failed. (7)

Third, the scope of similarity has been defined very narrowly and has only recently been slightly expanded. (8) A straightforward case of two owls being used as marks for competing publishing companies was found worthy of being included in the collection of important cases on unfair competition. (9) A noteworthy case of 1992 concerned the registered trade mark ‘Daishinrin’ for soaps and cosmetics. The defendant sold soaps and cosmetics in packages with a largely identical presentation under the trade mark ‘Kirinmori’. Both trade marks consisted of three Kanji characters, two of which were identical, while the third differed only by one stroke. To visualize this in Western terms, the plaintiff s trade mark could be 1-3-2, the defendant's 1A-2-3. Due to the peculiarities of the Japanese language and pronunciation, the defendant's trade mark could also be read as ‘Mokurinshin’. The meaning of the three characters of the plaintiff's mark is: big forest - grove, while the defendant's three characters mean: tree - grove - forest. However, the difference in pronunciation of the two combinations is immaterial as long as the consumers could easily mistake the appearance of one for that of the other. In Japan, this case went up to the Supreme Court, because the Tokyo District Court (10) and the Tokyo High Court (11) refused to find confusion by focussing exclusively on the two marks rather than the accompanying presentation, and by chopping the three characters up in a way that no reasonable consumer would ever do (‘the prefix “dai” indicates something very P 547 big, in this case the very large forest, while the first character ‘ki’ in the defendant's mark rather puts the stress on individual trees'). The Supreme Court in its decision reiterated the three criteria for judging the danger of confusion it had already

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established in the ‘Hyōzan’ case: first, the outward appearance of a mark, second, the pronunciation and third, the underlying concept or idea. According to the court, (12) it was sufficient to establish confusion if only one of the elements in both the plaintiff's and the defendant's mark were identical (bar special circumstances such as different consumer groups, etc.). On the basis of these criteria, the Supreme Court referred the case back. Since the system of associated trade marks was abolished in 1997, the scope of a registered trade mark can no longer be expanded by filing similar, associated marks for the same goods or services (formerly section 7 TMA). As a sort of compensation, the Patent Office has declared that the scope of identity or similarity has been broadened, particularly to trade marks the normal observer would recognize as identical. Of course, it remains to be seen to what extent the courts will also be inclined to adopt a broader concept of similarity. (13) An example that not much has changed may be two decisions involving the registered trademark ‘Puma’ plus device. Similarity was denied in the first decision (1994) for the following marks (14) :

About 15 years later, the courts arrived at the same conclusion (dissimilarity) with respect to these two marks (15) : Plaintiff's trade mark Puma AG Rudolf Dassler Sport's trade mark

P 548

4. Similarity of indications is essential, both to establish trademark infringement and to constitute an action of passing off under unfair competition law. In both cases, the plaintiff's aim is to establish a confusing similarity. However, there are some differences between trade mark law and unfair competition law which might also affect the interpretation of the terms ‘similarity’ and ‘confusion’. In order to prove confusion under unfair competition law, the plaintiff has to show that the defendant's indication is not only confusing or misleading as such, but that confusion occurs in particular with the goods or business establishment of the plaintiff. A misappropriation can only be established if this means misappropriation of the plaintiffs goodwill. It is thus a valid defence for the defendant to establish that while there might be similarity of indications, customers do not associate the plaintiff's indication with the goodwill of his enterprise. (16) With trade mark law, things are a bit different. The trade mark owner does not specifically have to show that the defendant's use is a misappropriation of the plaintiff's goodwill because such misappropriation is presumed by the fact of registration. Even though the defendant may prove that the general public does not associate the particular goods with the enterprise the registered trade mark belongs to, this does not help unless the defendant can prove that the general public specifically associates his own enterprise with the origin of the goods bearing the particular indication. In other words, to disprove confusion, the defendant must show a better right. (17) A number of academics have stressed that when determining similarity, a different approach should be taken in the case of trade marks and unregistered indications. (18) Some courts have P 549 stressed that interpretation of similarity/confusion should be different, (19) others have held that it should be the same. (20) The differences are not so big if one substitutes the right parameters: a competitive relationship in geographical terms does not need examination in trade mark law because registration is valid for the whole of Japan, and so is the assumption of use. A competitive relationship in terms of similarity of goods/services under trade mark law is replaced by examination of the classes for which the trade mark has been registered. If there is a similarity, it is up to the defendant to

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disprove danger of confusion. (21) While passing off is granted against an indication as it has established goodwill, protection under trade mark law is granted for the trade mark as it has been registered. In the case of trade marks, protection does not extend to use outside the registered scope - the legislation even makes the trade mark liable to cancellation. (22) It is certainly correct to say that under the Unfair Competition Act examination of confusion in the case of indications permits, even mandates, the scrutiny of target groups and sales methods, (23) whereas under the Trade Mark Act there is less scope for this. (24) A similar distinction can be drawn between the different scopes of protection under unfair competition and trade mark law: trade mark law does not permit a distinction by criteria which are beyond what can be registered so that the sale of trade marked goods in supermarkets and by door-to-door sales are both covered under the P 550 Trade Mark Act. It would not conform to the exclusive right of use granted under trade mark law to affirm confusion only according to the way of use rather than the similarity of marks. Thus, depending on the relevant market circles, the element of confusion may be judged according to the marketing method. (25) Christopher Heath (1) P 550

References ★ )

1) 2)

3) 4) 5) 6) 7) 8)

9) 10) 11) 12) 13) 14) 15) 16)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich. T. Iimura, Shōhyō no ruihi ni kan suru hanrei no kōsokuryoku (The precedent for determining trade mark similarity), 52 Law & Technology 51 (2011). Particularly in patent law, Judge Iimura has required the Patent Office to properly reason its decisions (IP High Court, 27 April 2009), to apply the problem-solution approach when determining inventive step (IP High Court, 27 May 2010), to accept late-filed experimental evidence as proof of the patented teaching (IP High Court, 28 January 2010), and to properly determine sufficiency of disclosure (IP High Court, 12 April 2011 - Pipeline Architecture). Decision of the Osaka District Court, 9 October 1990, 22-3 Mutaishū 651 [1990] Robinson Helicopters. Tokyo High Court, 13 September 2001, 35 IIC 338 (2004) - Riscoat. A very detailed analysis (in German) is provided by K. Hinkelmann, Gewerblicher Rechtsschutz in Japan, 2nd. ed. 2010, 417 - 438. Tokyo High Court, 10 September 1990, 1382 Hanrei Jihō 116 - Kozō. Supreme Court, 11 March 1997, 51-3 Minshū 1055 - Kōzō Sushi. The same development can be detected under patent law. The high level of application figures in Japan, both for patents and for trade marks, may not reflect a specially creative frenzy but rather mirror the fact that the scope of protection is very narrow. Osaka High Court, 17 May 1973, 5-1 Mutaishū 107 - Owl Mark. A long-winded comment by K. Kudo even tries to explain the obvious, that is, why there is similarity: Hanrei Fusei Ono-FS 401. Tokyo District Court, 22 June 1990, 1992 Tokkyo Kanri 55. Tokyo High Court, 30 July 1991, unreported. Supreme Court, 22 September 1992, 800 Hanrei Times 169 [1993] - Daishinrin. For details, see K. Port, Japanese Trade mark Jurisprudence, 105. Tokyo High Court, 25 October 1994, 234 Hanketsu Sokuhō 7 (1994) = German version in GRUR Int. 1995, 988 - Puma. IP High Court, 10 February 2009, 41 IIC 986 (2010) - Shi-sa. Tokyo District Court, 25 October 1991, 1993 Tokkyo Kanri 1185 - Belt Clasps: here, the plaintiff (manufacturer) had sold belt clasps that had become well-known as products of the parent company, not the manufacturer itself. The court therefore concluded that recognition had not been obtained particularly with respect to the plaintiffs enterprise. While correct in principle, this formalistic approach (distinction between parent and subsidiary company) looks rather artificial. In the case Tokyo High Court, 23 March 1994, 26-1 Chizaishū 254 [1994] - Rubber Mats, the court found that the plaintiff's insulating mats were distinctive, but did not indicate any specific origin traceable to an enterprise and therefore did not find in his favour. The court mentioned the fact that no indication of the plaintiff s enterprise was featured on the goods (presumably because they were used in the construction sector and quickly became covered with dirt and gravel).

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17) However, in cases where the general public associates a registered trade mark with

18) 19)

20) 21)

22) 23) 24)

25) 1)

a different origin, registration should properly be cancelled. That a trade mark is liable to cancellation is a defence in a trade mark infringement suit before the courts, although the action for cancellation has to be brought before the Patent Office first: Supreme Court, 20 June 1990, 25 IIC 118 [1994] - Popeye Scarves III The court stated that exercising a trade mark right that the general public would associate with an origin different from the trade mark owner's enterprise was an abuse of rights, since the Trade Mark Act's purpose was the maintenance of a fair competitive structure. Subsequently confirmed by Tokyo High Court, 31 March 1998, 1649 Hanrei Jihō 159 [1998] - Tamashin. T. Katsube, 1996/3 Patent 25. The first view is taken by Tokyo District Court, 3 August 1981, 1042 Hanrei Jihō 155 [1982] -Seikō: ‘Determining similarity under unfair competition law does not, as in the case of trade marks, require comparison between two marks on an aesthetic or formal basis, but rather an examination of the goods with respect to the competitive relationship, the degree of competition, the degree the goods are chosen because of the indication, and, in short, an evaluation of the relevant trading climate. It is on this basis that confusion as to the presentation of the goods should be determined.’ This was also held by Osaka District Court, 28 June 1984, 536 Hanrei Times 266 [1984] - Asahi Bemberg. Tokyo District Court, 27 October 1966, Fusei Kyōgyō Hō Hanreishū 945 - Waikiki Pearl. In fact, this decision concerned the question of similarity rather than that of confusion. Osaka District Court, 9 October 1990, 22-3 Mutaishū 651 [1990] - Robinson Helicopters: here, an identical mark was used by the plaintiff for bicycles and by the defendant for helicopters. Despite the similarity (and the same class of goods), the court was satisfied that customers for helicopters were well enough informed not to confuse the two marks. Supreme Court, 13 October 1981, 14 IIC 429 [1983] -McDonald's III: cancellation may be requested if the actual use differs from registration and thereby causes confusion with another person's business, goods or services, sec. 51(1) TMA. In the Tokyo District Court'sMcDonald's I decision, 9 IIC 175 [1978], the court had refused to recognize confusion, since the defendant was only selling through automatic vending machines and this apparently precluded confusion. However, importance may be attached to the characteristics of Japanese customers as a whole. In this respect, confusion with marks consisting of, or containing, words spelt in the Roman alphabet may be more readily assumed than in Western countries, Nagoya District Court, 16 June 1964, 15-6 Kakyū Minshū 1426 - Hatto Bus; Tokyo District Court, 24 March 1993, 26 IIC 566 [1995] -Type Chanel No. 5-this book, case no 51.: because of this, greater importance is attached to the artistic elements of the mark. Such was the view held in the decision Osaka District Court, 27 August 1992, 1993 Tokkyo Kanri 1175 – Naris Bio Queen: because of door-to-door sales, even confusion of similar indications (‘Pola Bio Queen’) could not be assumed. Head of the Asian Department, Max Planck Institute, Munich.

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Case No. 51: Trade Marks – Trade Mark Use – Confusion – Comparative Advertising – Well-Known Marks

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Tokyo District Court, Decision of 24 March 1993 – Type Chanel No. 5 Source: 812 Hanrei Times 262 (1993) = 114 Kōgyō Shoyūken Kenkyū 1 (1993), with comment by Nakajima = 44 Tokkyo Kanri 975 (1994), with comment by Matsuo = 26 International Review of Intellectual Property and Competition Law (IIC) 566 (1995).

Jurisdiction Japan

I Headnote(s)

Court

District Court of Tokyo

When an advertisement for a product refers to products of a competitor, an infringement of the latter's trade mark rights is assumed if the advertisement's presentation gives rise to confusion of origin of the advertised goods.

Case date

II Relevant Provisions

24 March 1993

Trade Mark Act, sections 36, 37, 38 P 552

Bibliographic reference

III Facts and Findings

Christopher Heath, 'Case No. 51: Trade Marks – Trade Mark Use – Confusion – Comparative Advertising – Well-Known Marks', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 551 566

The plaintiff owns the well-known trade mark ‘Chanel No. 5’ in Japan, registered for perfume and cosmetics. The defendant sells a so-called fragrance stick under the

product name, Cinq 5, with the following design: Inside the little circle at the top left-hand, ‘Chanel No. 5 type’ is written in Japanese katakana script. Based on its trade mark rights, the plaintiff claims injunctive relief plus damages to the amount of 30% of the retail price of the fragrance sticks sold by the defendant (JPY 7.8 million or USD 78,000). According to the plaintiff, its products have been sold in Japan since 1933 and enjoy a very high reputation; therefore, it is not unreasonable when licensing to charge about 30% of the retail price. In addition, the defendant had exploited and harmed the plaintiff's reputation by selling the goods cheaply, thus hurting the goodwill of the plaintiff's trade mark. The defendant should thus be liable for damages to the amount of JPY 20 million. As a Swiss-based company, the plaintiff had to Japanese courts and the defendant should also be P 553 be represented by a lawyer before liable for the plaintiff's attorney's fees of JPY 8 million.

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The defendant denies infringement. And even if there had been an infringement, damages should be calculated on the basis of 5% of the retail price as an appropriate licensing fee (JPY 48,750). From the Opinion: I. The plaintiff is the owner of all trade marks and intellectual property rights of the Chanel group in Japan and is responsible for the administration of such rights. III. Wrapping of the Defendant's Products a) It is not disputed that the entire surface of the products sold by the defendant is coloured orange-yellow. Further: (1) (2)

(3) (4) (5)

The top part features the handwritten word ‘Cinq’ in the centre and the number ‘5’ just below. Diagonally below at the left, the word ‘Cinq’ can be found and left of the ‘5,’ a grey circle. The upper part of the circle is set in bold-type with smallfont katakana script, meaning ‘Chanel,’ below that ‘No. 5,’ and at the bottom ‘Taipu’ (meaning ‘Type’). Left of the centre of the wrapping and parallel to the stick are the words ‘La Parfumerie’ in large handwriting and, in parallel below, the words ‘Designer Fragrance Stick’ in small type. At the very bottom are the words ‘Designer Fragrance Stick’, in a larger font. Below left on the wrapping, a little left of the words under (3) above, in somewhat smaller print are the words, ‘If you like the fragrance of CHANEL NO. 5(R), You'll love Cinq 5,’ divided into seven lines. Only the line containing the words ‘CHANEL NO. 5(R)’ catches the eye and is printed in a different font from the other lines.

b) Due to their size and position, the words ‘Cinq 5,’ ‘La Parfumerie’ and ‘Designer Fragrance Stick’ catch one's eye. The French word ‘cinq’ means the number 5, while the word ‘Parfumerie’ behind the article ‘La’ means perfume or fragrant water. In view of the poor knowledge of French in ordinary Japanese society, these words will not be understood in their original meaning. Even taking into account that the English language is well understood among the Japanese people, more often than not the words ‘Designer Fragrance Stick’ in the sense of ‘stick-type designer perfume,’ and the slogan in (5) ‘If you like the fragrance of Chanel No. 5, you will like Cinq 5’ will not be understood correctly. In contrast to this, in feature (2), the words ‘Shaneru’ and ‘No. 5 Taipu’ are the only ones written in Japanese; they are catchy because of the grey circle outside the orange-yellow wrapping. Although printed in a small font, these words attract the attention of both retailers and customers. This court attaches special importance to the fact that ‘Shaneru No. 5’ is well known as an indication of goods produced and sold by the Chanel Group. P 554 Among customers, the part ‘Shaneru No. 5’ of the words ‘Shaneru No. 5 taipu’ will thus be widely understood as an indication of origin for the defendant's goods. Certainly, there will be some consumers who will perceive that the indication ‘Shaneru No. 5 taipu’ is not for the perfume ‘Chanel No. 5,’ but for a similar fragrance. However, the defendant has not indicated in a readily understandable way that the goods it sells are not genuine ‘Chanel No. 5’ perfumes. It should thus be noted that on the above wrapping, the word ‘Taipu’ cannot be properly understood by many consumers, who will assume it to be an indication of origin of the defendant's goods. In addition, the ‘Chanel No. 5’ part attracts attention by its position and different font component. There will be many retailers and consumers who do not understand the meaning of the text as a whole, including the parts in English, and may also be misled because it is immediately followed by the sign (R) that indicates a registered trade mark. As already mentioned above, because of the ‘Shaneru No. 5’ part, many consumers will assume the indication to be an indication of origin of the defendant's goods. For this reason, attaching the above described wrapping to the defendant's goods has to be viewed as ‘use’ under the Trade Mark Act. IV. … The similarity of both the trade marks used by the plaintiff and by the defendant is established by the fact that they only differ in that one is written in one line and the other in two lines, and also the fact that as an abbreviation for numbers a ‘No’ or ‘No.’ is used. Even if the word ‘Paris’, which is a part of the plaintiff's trade mark, is included, there is a similarity between both trade marks. The marks used by the defendant are thus similar to the plaintiff's trade mark. The defendant has argued that its goods are sold by mail order only, while the plaintiff's goods are sold in specialized shops. The defendant has further stressed the differences in appearance and price that would rule out any risk of confusion between such dissimilar goods. First, it is untrue that the defendant's goods are only sold by mail order. Next, similarity would exist even if the defendant's goods were in fact sold cheaper than the goods of the plaintiff. Since it can therefore be assumed that a more than insubstantial number of consumers will come across the goods bearing the defendant's marks and will therefore be misled, the above allegations of the defendant cannot be endorsed.

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VIII Claim for Damages (1) The plaintiff has argued that damages should be calculated on the basis of section 38(1) Trade Mark Act (infringer's profits). However, for the application of this provision it is necessary for the trade mark owner to use that trade mark himself and show that he has suffered damages because of the infringement. The plaintiff is a legal entity that inter alia handles the management of trade marks and other intellectual property rights. As set out under I. above, it is the Chanel Kabush-iki Kaisha (in Kanji and Katakana: Chanel Inc.) that handles the sale and purchase of Chanel products in Japan. Since the plaintiff thus does P 555 not use the registered trade marks itself, calculation of damages cannot be made according to section 38(1) Trade Mark Act and, accordingly, the plaintiff's argument in this respect cannot be upheld. (2) Alternatively, the plaintiff wants its damages to be calculated on the basis of a licensing fee under section 38(2) Trade Mark Act. It is not in dispute that the defendant has sold 1,300 items of the goods which are the subject of this action. Their retail price is JPY 2,000 and their wholesale price JPY 750. Owing to the fact that the plaintiff's trade mark is very well known in Japan for luxury perfume, the amount of damages that the plaintiff should and usually would receive as a licensing fee would not be less than 10% of the retail price. There is little to indicate, however, that it should be more. The amount of damages the plaintiff can recover is thus 10% of JPY 2,600,000, the retail price of JPY 2,000 multiplied by 1,300 items sold, thus JPY 260,000. (3) Damages for loss of reputation The plaintiff's goods enjoy both a high reputation and a great degree of confidence and trust. The plaintiff's trade marks are recognized as familiar trade marks, very attractive to customers, representing good value in quality, reliability and reputation. The Chanel Group, of which the plaintiff is a part, spends large sums on advertizing in order to retain its customer's confidence in its familiar trade marks and image. According to the facts established above, the sale of the defendant's goods is detrimental to the reputation of the plaintiff's trade mark and public confidence in it. However, there is insufficient evidence to assume that there are not customers who, after careful examination, correctly understand that the indications and wrappings of the defendant's goods are not indications of origin. Apart from that, there is no evidence that the defendant's goods were sold for more than seven months. Considering the price and turnover of not more than JPY 2,600,000, the damage done to the plaintiff's business has not reached a sufficient degree to make monetary compensation necessary. (4) According to the minutes of the court hearings, the plaintiff has briefed counsel to represent it in court. Taking into consideration that the facts as stated by the plaintiff are correct and that the claims for injunctive relief and damages have been granted, it appears appropriate to allocate fees to the amount of JPY 300,000 as necessary legal costs due to the trade mark infringement. The reason the defendant is also ordered to pay legal fees is not the fact that this action has been needlessly provoked by the defendant, but that these costs in effect are damages ensuing from an unlawful act and, further, the fact that the plaintiff had little choice but to sue after the defendant had denied infringement. It stands to reason that the enforcement of the above-mentioned trade mark rights required briefing counsel. Translated by Christopher Heath P 556

IV Comment This case relates to a sort of comparative advertising whereby a no-name perfume (‘Cinq’) was likened to a well-known one (‘Chanel No. 5’). This then begged the question to what extent such use could be enjoined either by trade mark or unfair competition prevention law. After briefly elaborating on the issue of confusion (dealt with in more detail in the Hyōzan case, case no. 50). I will briefly analyse the case law on descriptive and comparative trade mark use (1), add some words on comparative advertising in Japan (2), and, as ‘Chanel’ is a well-known trade mark, also mention the concept of confusion in the broad sense (3) and the protection of well-known marks beyond confusion (4). And, by the by, and beyond all legal consideration, it should be mentioned that the ‘fragrance sticks’ sold by ‘Cinq’ simply smelt rather awful.

1 Trade mark Use The Trade Mark Act prohibits the use of the registered trade mark or a trade mark similar thereto for the registered goods/services or goods/services similar thereto by unauthorized parties (section 37(1) Trade Mark Act). In the case Type Chanel No. 5, the court could establish an infringement fairly easily. Since the indication ‘Type Chanel No. 5’ was regarded by many consumers as an indication of origin, the use of such indication amounted to an act of ‘use’ under the Trade Mark Act. Because of the similarity to the

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registered trade mark ‘Chanel No. 5 Paris’, such use was an infringement. In reaching its conclusion, the court emphasized the Japanese consumer's limited understanding of foreign languages and Western writing: ‘In view of the poor knowledge of French in ordinary Japanese society, these words will not be understood in their original meaning. Even taking into account that the English language is well understood among the Japanese people, more often than not the words ‘Designer Fragrance Stick’ in the sense of ‘stick-type designer perfume,’ and the slogan in (5) ‘If you like the fragrance of Chanel No. 5, you will like Cinq 5’ will not be understood correctly. In contrast to this, in feature (2), the words ‘Shaneru’ and ‘No. 5 Taipu’ are the only ones written in Japanese; they catch the eye because of the grey circle outside the orange-yellow wrapping. Although printed in a small font, these words attract the attention of both retailers and customers. This court attaches special importance to the fact that ‘Shaneru No. 5’ is well known as an indication of goods produced and sold by the Chanel Group. Among customers, the part ‘Shaneru No. 5’ of the words ‘Shaneru No. 5 taipu’ will thus be widely understood as an indication of origin for the defendant's goods.' In cases in which there is no risk of confusion, the court's reasoning does not apply, however. If the competitor clearly indicates that it is using a third party's trade mark, a P 557 risk of confusion cannot be assumed. In the past, Japanese courts have been fairly consistent in limiting claims under trade mark law to a risk of confusion. As it is the function of the trade mark to indicate an origin, there can be infringement only when such function is compromised. (1) In a previous case on the comparative advertisement of perfumes, the court denied any risk of confusion and rejected the claim: (2) ‘It is not in dispute between the parties that the plaintiffs are engaged in the production and sale of cosmetics, that all those cosmetics referred to by the defendant belong to the plaintiff and that the defendant sells perfumes with the comparative references in question [the defendant compared, e.g. its perfume ‘Sweet Lover No. 120’ with ‘Miss Dior’ and ‘Sweet Lover No. 127’ with ‘Joy’]. It is further not disputed that the defendant lists each of its perfumes with a price and contrasts them with certain perfumes of the plaintiff under the heading ‘Fragrance Types’. It further elaborates these comparisons in a brochure and mentions the perfumes of the plaintiff in the context of ‘This fragrance [Sweet Lover no … ] corresponds to the world famous fragrance … [of the plaintiff's]’. According to the above facts, the defendant in its advertisement only states that certain perfumes of the defendant in their fragrance or fragrance type correspond to certain perfumes of the plaintiff listed in direct comparison. The defendant does not go as far as to state that the fragrances are identical. Already for this reason and according to experience it is beyond thinking that those customers confronted with these perfumes fall prey to a confusion about the contents of the goods, in other words, get the impression that the defendant's perfumes are of an identical fragrance as the ones of the plaintiff. The plaintiff's arguments in this respect must be rejected and the claim dismissed.’ Thus, the plaintiff was unsuccessful in convincing the court that the comparisons used were misleading. The court did not, however, examine whether there had been a confusion as to origin, and/or whether consumers had understood the use of the trade marks as indications of origin. In a number of cases, the courts held that the use of trade marks as descriptive references, book titles and such like were not considered trade mark use and therefore not infringing: In the case ‘Asa Banana Diet’, use was made of the trade mark ‘Asa Banana’ registered for books, and the plaintiff had published four books entitled ‘Asa Banana Diet’. The defendant subsequently had published a book with the title ‘40 Tips for a successful Asa Banana Diet’. The court denied that there was a case either under trade mark or unfair competition law: (3) ‘The content of the defendant's book is to list 40 items which the author thinks are tips for success in a diet by exercising the diet method ‘Asa Banana Diet’. P 558

And the sign of the title is put in a place where the readers who assess the defendant's book can recognise the sign as a title of a book, and use of the sign does not convey an unnatural impression as the title of a book. Thus, the readers who assessed the defendant's book will have understood the display of the title of the defendant's book including (Asa Banana) as a sign indicating that the defendant's book describes tips for succeeding in a diet by using the dieting method called (Asa Banana Diet)….

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Consequently, the display of the defendant's mark on the jacket or cover, etc., of the defendant's book displays the defendant's mark as a part of the title by simply indicating the contents of the book, and this cannot be understood as use in a manner that would be conceived as an indicator for distinguishing goods from others or designating a source. Therefore, the act does not amount to an infringement of the trade mark…. Since the title of the defendant's books … can be understood to represent the defendant's book and thereby to distinguish it from other's goods (books), it qualifies as the defendant's indication of goods. And the title of the defendant's book (40 Tips for a successful Asa Banana Diet) includes (Asa Banana), which is identical or similar to the plaintiff's mark, and which is a part of the title of the plaintiff's books…. While another person's indication of goods or business is included in one's own indication of goods, it is used solely for describing or representing the contents, characteristics, etc. of the goods considering the manner of the indication, and cannot be recognised as the use of an indication which is identical to or similar with another person's indication of goods or business…. Thus, the readers who assessed the defendant's book will understand the display of the title of the defendant's book including (Asa Banana) as a sign indicating that the defendant's book describes tips for succeeding in a diet by using the dieting method called (Asa Banana Diet). And it should be understood that the title of the defendant's book including the defendant's mark is solely used for representing the contents of the defendant's book. Consequently, the defendant's behaviour of displaying the defendant's mark on the jacket and cover, etc. of the defendant's book does not amount to the use of a mark identical or similar to another person's indication of goods provided in sections 2(1)(i), (ii) of the Unfair Competition Prevention Act.' In similar fashion, the court decided for the use of the Brother trade mark for compatible printer ribbons. The defendant in that case had used the indication ‘For Brother’ (in English) and ‘buraza yō’ (in Japanese) in order to indicate the use of the goods. The plaintiff had argued that the use in the English language particularly gave rise to origin confusion. The court denied confusion as to the origin as follows: first, it was rather P 559 common these days that spare parts were manufactured not by the maker of the original appliance, but by third parties. Second, the usage and meaning of the English word ‘for’ was taught in Japanese middle schools and thus all Japanese consumers should be familiar with the English phrase ‘for use in brother’. Third, the indication ‘For brother TYPE 1’ and ‘buraza-yō’ was correct and necessary information to consumers wishing to purchase replacement ink ribbons for certain types of Brother fax machines. Finally, the fact that the name of the maker ‘Ohm’ was only indicated in English did not create confusion; after all, the name was written in large letters. (4)

2 Comparative Advertising Until the beginning of the 1980s, comparative advertising was rather uncommon in Japan, mostly because under a highly oligopolistic public relations industry, led by Dentsu, one agency would handle several competitors concurrently, thus discouraging comparisons. (5) Consequently, the first comparisons spearheaded by Pepsi and the airline ANA avoided direct references to their competitors. This pattern changed in 1991 when Pepsi, in a television advertisement, directly compared the products of Pepsi and Coke with both trade marks clearly visible. The advertisement showed the musician, A. Hammer, in a concert, playing some lively music. After a fan hands him a glass of Coke, the music abruptly changes to a schmaltzy tune. A fan of his, apparently taken aback, immediately hands him a glass of Pepsi, and the music changes back to the previously lively style. After protests by Coke, the commercial was soon withdrawn in May 1991 because of P 560 allegedly unresolved legal questions and its highly ‘un-Japanese’ style. (6) First, Pepsi had to change the advertisement in such a way that the Coke logo was no longer visible, but later had to withdraw it completely. The Free Gifts and Trade Misrepresentations Act as subsidiary legislation to the AntiMonopoly Act is enforced by the Fair Trade Commission. If there is a contravention, the Fair Trade Commission can require the entrepreneur in question to desist from the contravening acts. Section 4 Free Gifts and Trade Misrepresentations Act prohibits the use of ‘indications that may be misleading for consumers in regard to quality, price or other essential qualities of goods or services’. Comparative advertising per se is not prohibited under section 4, as the Fair Trade Commission has clarified in a legal opinion on comparative advertising published in 1987. (7) Only comparisons that are incomplete, distort the facts, or unreasonably disparage competitors or competing products are

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prohibited: Comparative advertising of goods or services (‘goods’) is deemed to be an objective comparison between one's own goods and the goods of a competitor with reference to quality or sales conditions. Other forms of comparative advertising will be judged according to the following principles in each individual case: Permissible Forms of Comparative Advertising As a basic condition, comparative advertising must not be misleading to consumers. For this reason, comparative advertising has to meet the three following conditions: – – –

The contents of comparative advertising must be based on facts that can be proven. Alternatively, a statement is not unlawful if it is plain to the consumer that subjective opinions rather than facts are presented. The facts presented must be exactly described and as comprehensive as the circumstances demand. The way the comparison is made must be fair…. In general, there is no problem about this requirement. But if one product is compared to other products in relation to aspects not intrinsic to the character of such product, thereby creating an impression of the superiority of the product concerned, this is not deemed to be fair.

In other words, the Free Gifts and Trade Misrepresentations Act permits a comparison based on facts. However, it also permits a comparison that is unequivocally based on subjective views or opinions provided it is clear that it is so based. Unlawfulness, however, does not depend on the risk of confusion. Accordingly, in August 1991 the FTC ruled (8) that there was no fault to be found in the above Pepsi advertisement. (9) P 561

In 1997, the FTC declined to take action against the car maker Ford after it had highlighted the comparatively higher prices of Volkswagen cars in Japan. The ad showed a golf course, a tee, and instead of a golf ball, a small Volkswagen Golf. The advertisement was captioned with the question ‘Isn't it odd that the sub-compact Golf is more expensive in Japan than in Europe?’ (10) – a question a good many consumers might be interested in. The advertisement may not be comparative in the strict sense, yet also makes direct reference to a competitor, the implied message being that there are no such price differences for Ford cars. While there is no legal problem in advertisements which claim goods to be better than ‘average’, (11) more precise references in this respect have to meet the above criteria of correctness and completeness. (12)

3 Confusion in the Broad Sense The rather narrow concept of confusion as mentioned in 1. above and as further elaborated in the ‘Hyōzan’ case also made it difficult for the owners of well-known marks to go after third parties using identical or similar marks for dissimilar goods, e.g. in cases like ‘Snack Chanel’ or ‘Pornoland Disney’. Here, the courts developed a notion of ‘confusion by association’ or 'confusion in the broad sense. Goods or services bearing the well-known indication of a competitor though dissimilar may after all lead the public to the conclusion that in one way or another, there is an association between the two enterprises. As a result of this assumption, consumers may credit the defendant's goods with qualities hitherto associated with the plaintiff s business. While the plaintiff's loss may not be measurable in terms of loss of turnover (because there is no competition with goods or services), nevertheless there could still be a loss of goodwill in the long run, if the plaintiff's name is no longer associated with specific or unique qualities, but becomes known or even notorious for low grade goods or services which bear no relationship with the goodwill the plaintiff has legitimately earned. So, though the plaintiff may not suffer a loss of business in the strict sense, he/she may still lose goodwill. P 562

The loss of goodwill is more apparent in cases in which the defendant's business is incompatible with the plaintiff's reputation: cases, for example, when a love hotel is called ‘Love Hotel Chanel’ (13) or an amusement parlour ‘Porno-land Disney’. (14) However, in many cases there was no such clearly incompatible use, e.g., when the indication ‘Yashica’, well-known for cameras, is used for cosmetics (15) or when the name ‘Ritz’ is used for a baby-wear shop. (16) Insofar as there is confusion as to the origin of goods, these cases could be easily decided either under the traditional concept of confusion of goods or else under trade mark law insofar as the plaintiff s indication is registered. In cases of incompatible use (no confusion as to the origin), some academics have argued that trade mark law should still apply since it was designed not only to guarantee an origin, but also to protect the trade mark owner's goodwill. (17) However, it is arguable that trade mark law seeks to protect the trade mark owner's goodwill by guaranteeing an

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origin in the first place and that thereby any other acts that do not cause confusion fall outside its scope. (18) After some hesitation, in cases of dissimilarity of goods/services, the courts have granted remedy on the basis that dilution of a mark can be regarded as confusion in the broad sense: ‘The use of the term Yashica Cosmetics dilutes the of the mark ‘Yashica’ developed by the Yashica Camera Co., weakens its association with their cameras and thus undermines the trade mark's function of reminding the public of value-for-money Yashica cameras, thereby reducing its attraction to customers and diminishing its value as an intangible asset.’ (19) The court went even further in holding that: ‘The use of the mark by the defendant is a misappropriation of the plaintiff's well-known mark, no matter whether the plaintiff had any intention of freeride on the plaintiff's recognition or not.’ P 563

Earlier, a similar decision had been given before by the Osaka High Court with regard to a possible association of the defendant's business to the Mitsubishi Keiretsu-Group of the same name. (20) The concept of confusion in the broad sense was finally confirmed by the Supreme Court in 1998, holding that confusion under the UCA ‘should be understood to embrace the concept of confusion in the broad sense’: (21) ‘The current case according to section 2 of the Transitory Provisions to the new Act Against Unfair Competition has to be decided under section 2(1)(i), 3 (1) and 4 of the new Act Against Unfair Competition which requires ‘an act causing confusion’ while previous precedents have been decided under the old Act Against Unfair Competition, section 1(1)(ii) which requires ‘acts causing confusion’ [in old Japanese writing]. Both should be understood to embrace the concept of confusion in the broad sense. Certainly, the defendant's business both in content and style is different from the business of the Chanel group. ‘Chanel’ is an extremely well-known indication, and the Chanel group's enterprises are much diversified. The defendant's use of his indication according to the facts of this case might indicate to the general consumer that the defendant and the Chanel group are in a close business relationship with each other, or even belong to the same group of enterprises. This may lead to the danger of confusion. Consequently, the defendant's act of using an indication similar to the plaintiff's business indication ‘Chanel’ is an ‘act which may give rise to confusion’ according to section 2(1)(i) new Act Against Unfair Competition, thereby causing damage to the plaintiff's business. Accordingly, the appeal court's decision dismissing the request for injunctive relief and damages against the defendant's use of his business indication misinterprets the current law and is not well founded. Since there is no doubt that the lower court's decision was based on such mistaken interpretation, those parts dismissing the plaintiff's requests must be reversed. To the extent that the lower court has to rule on the extent of damages, the action must be remitted for further hearing.’ Such a notion of confusion in the broad sense requires the plaintiff's indication of business or goods to be widely known nation-wide, rather than only locally. This is so for two reasons: first, under the principle of confusion in the broad sense, the plaintiff is able to prevent registration of a confusingly similar trade mark even for non-similar goods or services, as in the case of the ‘Yashica’ decision. It has been argued above that in the case of local recognition, such an objection cannot be made. For a widely-known indication to prevent a trade mark (valid throughout Japan) being registered, an equal geographical degree of recognition, that is nationwide, is required. The second reason is that confusion in the broad sense, that is, confusion as to sponsorship or association, P 564 removes the level of competition from the actual place where competition takes place to a more general level, comparable to the concept for trade marks. How could consumers associate a ‘Love Hotel Chanel’ with the Chanel S.A. Company if this company were known only in parts of Japan, and perhaps not even in Kobe, where the hotel in question had opened? One could also argue that misappropriation of goodwill in the case of dissimilar goods requires a higher level of recognition. The plaintiff would still have to prove confusion by association in every single case. In some cases, the courts denied confusion, (22) yet more often than not the courts were quite perceptive in affirming a broad concept of confusion. In the ‘Love Hotel Chanel’ case, (23) the court could argue that it was not completely out of line for fashion houses to diversify into hotels. In the ‘Snack Chanel’ decision, (24) the court argued that there was a risk of confusion, as recently some fashion houses had diversified into gourmet

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restaurants. For example, Pierre Cardin had bought Maxim's in Paris and even opened a branch of this restaurant in Tokyo. In the ‘Porno-land Disney’ case, (25) the court argued that there was a risk of confusion because the Disney Company had made its objective the fulfilment of children's dreams, while ‘Pornoland Disney’ aimed at the same for adults. In the ‘Michelin’ decision, the court pointed out the use of ‘Michelin’ not only for tyres (as registered), but also for grading restaurants and enjoined the defendant from using ‘Michelin’ for foods (26) In a 1996 decision, the court even found confusion selfevident. (27)

4 Dilution A registered trade mark confers a right to exclusive use (section 25 TMA), and the right to prevent others from any use deemed infringing (section 37 TMA). According to section 3(1), registration of a trade mark has to be effected with respect to certain goods or services. Accordingly, protection of a registered trade mark only excludes others from registering or using an identical or similar mark for identical or similar goods. While registration of a trade mark with respect to goods or services now follows the Nice classification, the scope of similarity with respect to goods or services is determined according to the level P 565 of similarity and confusion of the public. The term ‘similarity’ does not necessarily follow the formal classification of goods or services. (28) Until the amendment of the Trade Mark Act in 1997, the scope of a registered trade mark could be broadened in two ways. The owner could register similar trade marks for the same goods or services as associated marks, or else register the same trade mark for different goods or services as a defensive mark. Since the abolition of the system of associated trade marks in 1997, only the system of defensive marks is of interest to owners of well-known marks. According to section 64 TMA, defensive marks can be registered for different goods or services insofar as the registered mark is widely known amongst consumers. Registration, however, cannot be sought out of the blue, but only if an unrelated third party uses the mark for different goods or services. Thus, the defence may not be abstract, but has to be very precise with regard to the use of the mark by another person. According to the Tokyo High Court, registration may be effected on the basis that there might be some confusion in the broad sense; the defensive mark would not necessarily have to be identical to the registered mark. (29) Yet the main basis of protection for well-known marks has not been the Trade Mark Act, but the Unfair Competition Act. It has been explained above in 3. that already in the 1960s the courts had broadened the concept of confusion to include confusion in the broad sense in such cases as ‘Love Hotel Chanel’. (30) Adopting this concept was facilitated by the structure of Japanese industry that had many unrelated or not closely related enterprises use the same name due to keiretsu relationships. Members of these keiretsu-groups tried to nip attempts to use such names in the bud and found sympathetic judges. (31) The 1993 amendment of the Unfair Competition Act now prohibits the use of an indication that is identical or similar to another person's widely-known indication. As distinct from the concept of passing-off, confusion is no longer required. According to the legislators, there is a difference between indications ‘widely known’ amongst consumers (section 2(1) (i) UCA), which are protected against confusion and a ‘famous’ indication under section 2(1)(ii) UCA which appears to be protected without an additional element of confusion. P 566 For an indication to become widely known among consumers, local recognition seems to be sufficient, (32) while a famous indication requires recognition nation-wide. (33) Such seemingly absolute protection of famous indications gives rise to a number of problems, as Ono has adroitly pointed out: (34) (1)

(2) (3)

(4)

The first concerns the base of recognition in geographical terms. Is it necessary that recognition has been obtained in Japan, or is it sufficient that there is a sort of ‘world-wide’ recognition or recognition in certain countries? The courts have clarified that international fame is not enough when the addressees are a distinct and limited group. (35) The next concerns limits of protection with regard to prior users. In addition, other exceptions may be desirable, particularly with regard to comparative advertising or the use of the indication in a rather descriptive way, mainly when it comes to spare parts and other goods of supply. The courts have affirmed that descriptive use is not infringing even for well-known marks. (36) Finally, there might be some discussion about the extent to which the indication must be used as an indication of origin in order to obtain protection. This is not the case when an indication is used, e.g., on little toys in order to make them look more realistic, or in cases where the indication is not perceived as one of origin. (37)

Up to now, the courts have thus been relatively reluctant to apply a provision that is difficult to justify either under trade mark or unfair competition prevention law. (38) Christopher Heath (1) P 566

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References ★ )

1) 2) 3) 4) 5)

6)

7) 8) 9)

10) 11)

12)

13) 14)

15) 16) 17) 18)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich. E.g. Osaka District Court, 27 February 1970, 2 IIC 235 (1971) – Parker. Tokyo District Court, 28 January 1980, 12-1 Mutaishū1 (1980) – Sweet Lover. One should mention, though, that the case was argued under the claim against the misleading indication of goods rather than as a case of confusion. Tokyo District Court, 12 November 2009, 2012 IIC (forthcoming) – Asa Banana Diet. Tokyo High Court, 13 January 2005, 37 IIC 609 (2006) – For Brother. ‘Dentsu's control over Japanese media is breathtaking. It finances, produces, and supplies many television companies’ programs. As a result, it controls over a third of television's ‘Golden Time’ (between 7:00 p.m. and 11:00 p.m.). It also maintains unusually close relations with its clients -by, for instance, finding marketing directors for firms that need them… It manages, on an unofficial basis, companies' public relations and it arranges for the newspapers to minimise any unpleasantness … Another impending nightmare for Dentsu is ‘client conflict’. Japanese clients have cared far less than Western ones about conflicts of interest, because they have used ad agencies mainly as media-space securers rather than brand defenders. Dentsu's 3,000 odd clients include both Toyota and Honda as well as all the brewers. Nor, for much the same reasons, do the clients mind using umpteen different agencies; some hire different ones not just for different products, but often for the same product in different media.' (Promoting Brands – the Perils of Maturity, The Economist, 2 August 1997, 54 (55)). Even more significant is the fact that in the 1950s and 60s Dentsu reportedly tried to suppress justifiable protests against environmental shortcomings: I. Kenji (ed.), Dentsu kōgairon (Environmental Pollution through Dentsu), Tokyo 1971. ‘What Did Comparative Advertising Bring Out? – The Pepsi Challenge’, The Nikkei Weekly, 14 December 1991, 18-19. An investigation by the ASI Research Company had revealed in 1988 that Japanese consumers were not offended by this kind of advertising. It is significant that alleged cultural conflicts are often cited when convincing arguments are missing. Pepsi's increase in turnover after the campaign clearly indicated that advertising agencies rather than consumers were miffed. Hikaku kōkoku ni kan suru keihin hyōji hō no kangaekata, (Legal opinion of the Fair Trade Commission on Comparative Advertising) of 12 April 1987. Nihon Keizai Shimbun, 3 August 1991, no official statement by the FTC. So far, the Fair Trade Commission has issued only one formal decision based on its guidelines on comparative advertising. On 4 December 1993, the FTC asked four makers of cheap menswear to stop their advertisement ‘X% below the maker's price’, as the clothes were not made by the makers the comparison referred to, but by makers in North Korea. In this case, the basis of the comparison was likely to be misleading as regards the origin of the products (reported in Nihon Keizai Shinbun, 5 December 1993). Reported in The Nikkei Weekly, 27 January 1997, 8. The FTC did not issue any official statement. The Asahi Shinbun on 26 February 1989 reported that the brewer Asahi had started advertising its No. 318 beer as much better in quality, but at ‘the price of a normal beer’. This sort of advertising has become so common that consumers take it with a liberal pinch of salt. In February 1987, the chocolate maker Morinaga started a campaign claiming that ‘as a result of a survey, 83 per cent of those questioned stated that Morinaga chocolate tasted fine, that they liked it and would choose it.’ A chocolate maker whose product had not been included in the survey apparently complained to the FTC (reported by Y. Someno, 100 Kōgyō Shoyūken Hō Kenkyū 11 (15) [1989]. Kobe District Court, 23 March 1987, 19-1 Mutaishū 72 [1987] – Love Hotel Chanel. Tokyo District Court, 18 January 1984, 515 Hanrei Times 210 [1984] – Pornoland Disney. In this case, as well as the Love Hotel Chanel case, the defendants had not tried to register their indication, perhaps due to the fact that until 1992, registration of service marks was not available. Tokyo District Court, 30 August 1966, Doi Digest (1971), 92 – Yashica. Tokyo High Court, 31 March 1993, 819 Hanrei Times 179 [1993] – Ritz Baby Wear II. K. Dohi, Hikaku kōkoku ni okeru tanin no tōroku shōhyō no shiyo (Comparative advertising and registered trade marks), Someno FS 251. K. Dohi admits that in these cases unfair competition law might be the more appropriate statute to rely on: Tanin no shin'yō, meidō no riyō to fusei kyōsō boshi hō (Use of another's fame and name, and unfair competition law), 4 Tokkyo Kenkyū 12 [1987].

19) This was held in the Yashica case, Tokyo District Court, 30 August 1966, 17 Kakyū

Minshū 729 (745) [1966] = T. Doi, Digest of Japanese Court Decisions in Trade mark and Unfair Competition Cases, Tokyo 1971, 92. 20) Osaka High Court, 5 April 1966, 19 Kōsai Minshū 215 [1966] – Mitsubishi Group. 21) Supreme Court, 10 September 1998, 30 IIC 466 [1999] – Snack Chanel III. 22) Denied for the use of the Mercedes star on barber's chairs: Tokyo High Court, 21 December 1981, 158 Tokkyō 17 [1982] – Mercedes-Star; Tokyo District Court, 28 January 1980, 135 Tokkyo To Kigyō 68 [1980] – Sweet Lover (see above).

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23) Kobe District Court, 23 March 1987, 19-1 Mutaishū 72 [1987] – Love Hotel Chanel. 24) Tokyo District Court, 24 September 1994, partly amended on appeal: Tokyo High

25) 26) 27) 28)

29)

30) 31) 32)

33) 34) 35) 36) 37) 38)

1)

Court, 23 March 1995, 27-1 Chizaishū 171 [1995]: damages only for loss of reputation. Upheld in principle by Supreme Court, 10 September 1998, 30 IIC 466 [1999] – Snack Chanel III (see above). Tokyo District Court, 13 January 1984, 515 Hanrei Times 212 [1984]. Tokyo High Court, 30 March 1998, 277 Hanktsu Sokuhō 6 [1998] – Michelin. Chiba District Court, 17 April 1996, 268 Hanketsu Sokuhō 10 [1997] – Sony Walkman: use of the indication ‘walkman’ on shoes. Although belonging to the same class of goods, the use of the name ‘Robinson’ for helicopters was deemed not confusing with the ‘Robinson’ trade mark used on bicycles, because the potential customers were different: decision of the Osaka District Court, 9 October 1990, 22-3 Mutaishū651 [1990] – Robinson Helicopters. Tokyo High Court, 30 January 1996, 1563 Hanrei Jiho 134 [1996] – Scotch. Here, the plaintiff wanted to register ‘Scotch’ for household goods, relying on his registered and well-known trade mark ‘SCOTCH’ for audio-tapes. The court allowed the registration of the defensive mark (albeit not identical with the registered one), and held that confusion between video-tapes and household goods could be assumed insofar as video-tapes were sold in supermarkets alongside household goods. Kobe District Court, 23 March 1987, 19-1 Mutaishū 72 [1987] – Love Hotel Chanel. Osaka High Court, 30 January 1964,15 Kakyū Minshū 105 [1964] (interim injunction) Mitsubishi I. Osaka High Court, 5 April 1966, 19 Kōsai Minshū 215 [1966] (final) – Mitsubishi II. In a number of recent cases, there was a conflict between an indication well-known regionally, and one well-known all over Japan, both owned by different parties: Tokyo High Court, 4 July 1991, 23-2 Chizaishū 555 [1991] – Jet Slim Clinic. Kōchi District Court, 23 March 1992, 789 Hanrei Times 226 [1992] – Kōzō Sushi. Yamamoto, Shin fusei kyōsō boshi hō (The new Unfair Competition Prevention Act), Tokyo 1997), 94: there is no dispute about the distinction as to local and nation-wide recognition. S. Ono, Chomei shōhyō hogo ni okeru shomondai (Problems on famous marks), 18 Kōgyō Shoyūken Hogakukai Nempō 93 et seq. [1994]. Tokyo District Court, 2 July 2004, 1890 Hanrei Jiho 110 – Vogue for the foreign fashion magazine. Supreme Court, 15 July 2004, 1870 Hanrei Jihō 15 – Gohmanism. Tokyo High Court, 24 February 2000, 1719 Hanrei Jihō 122 – Les Paul Guitars. K. Port, Trade mark Dilution in Japan, 4 Nw. J. of Tech. & Int. Property 228 (2006) is thus correct in observing that Japanese courts have been reluctant to embrace the rather broad concept as stipulated in sec. 2 (1) (iii) UCA, not least because in many cases (e.g. honest concurrent use) results may not be appropriate. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 52: Trade Mark Law – Abusive Registration of Well-Known Marks – Foreign Marks

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, decision of 11 July 2000, Parfum Nina Ricci v. Madras K.K. – L'Air du Temps Source: 54 (6) Minshū 1848 = 1721 Hanrei Jihō 141 = 1040 Hanrei Times 125

Jurisdiction Japan

I Headnote(s) In determining the risk of confusion between two marks, the concept of ‘confusion in the broad sense’ should be applied.

Court

Supreme Court of Japan

The risk of confusion and the degree of recognition of a mark must be determined based on the consumer group likely to purchase the goods in question.

Case date

II Relevant Provisions Trade Mark Act section 4(1) (xi) and (xv)

11 July 2000

P 568

Parties

III Facts

Claimant, Parfum Nina Ricci Defendant, Madras K.K.

Bibliographic reference

(1) In connection with the trade mark consisting of the horizontally written katakana script, the defendant on 21 May 1986 applied for registration of a trademark in katakana

Christopher Heath, 'Case No. 52: Trade Mark Law – Abusive Registration of Well-Known Marks – Foreign Marks', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 567 - 578

script that may be transliterated in alphabetic script as ‘reerudyutan’ [L'Air du Temps in French pronunciation] for the designated goods ‘clothing, accessories and other products of this kind’ as specified in Class 21 of the Trade Mark Act's classification system (prior to revision in accordance with Cabinet Ordinance No. 299 of 1991), and the trade mark was registered on 19 December 1988 (registration No. 2099693; hereinafter referred to as ‘registered trade mark’). In addition, the defendant had also obtained registrations of the marks (all in katakana) Cabochard, Calandre, NarcisseNoir, Farouche, etc., all filed on the same day. The plaintiff is the holder of rights to the trade mark consisting of the horizontally written alphabetic script characters ‘L'AIR DU TEMPS’ in association with ‘perfumes and other related products belonging within this category’ as specified in Class 4, registered in 1964 (hereinafter referred to as ‘prior trade mark’.). On the grounds that registration was contrary to section 4 (1) (xi) (conflict with a previously registered mark) and (xv) (marks liable to cause confusion) Trade Mark Act, the plaintiff on 3 July 1992 filed a request for invalidation of the registered trade mark for the designated goods ‘cosmetic appliances, bodily accessories, head accessories, cases, and bags’. On 24 February 1997, the Patent Office rejected the request. First of all, the Patent Office denied similarity between the registered and the prior trade mark and held that the latter should be pronounced according to (US) pronunciation rules, as English was the most popular foreign language in Japan. However, when so pronounced,

was different from

(pronounced ‘reeadyutenpus’), for which reason similarity could not be affirmed. As to the risk of confusion, the Patent Office held that the prior trade mark was not well-known, as it had only been used in Japan in connection with perfume. In the absence of a wide recognition amongst consumers, there could be no confusion, however. The plaintiff appealed to the Tokyo High Court and argued that in the field of fashion and perfume, it was common even in Japan to pronounce foreign words as if they were French. Furthermore, the perfume had enjoyed a reputation since its first launch in 1948, and sold very well in Japan in the 1980s. In the advertisements used by the plaintiff, the trade mark ‘L'Air du Temps’ was often accompanied by its katakana equivalent, which, however, was identical to the mark now registered by the defendant. Consumers were thus familiar with the fact that ‘L'Air du Temps’ was pronounced the French way. The Tokyo High Court decision of 28 May 1998 remained unconvinced. As to similarity, it reasoned that, given the rather poor level of foreign-language education in Japan, an English pronunciation for all foreign words was the most likely. One had to consider the ordinary consumer rather than dealers well-versed in the fashion world. There was no evidence for the assertion that the names of fashion items would be pronounced the French way, and it was doubtful that the Japanese consumer would even know how to pronounce the mark P 569 in French. And although the court found it obvious that the defendant had registered its marks in full knowledge of the plaintiff's marks, it found nothing wrong with the practice. The plaintiff thus appealed to the Supreme Court.

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IV Findings The above judgment of the original court cannot be affirmed for the following reasons: (1)

It is legitimate to assume that the concept of ‘trade marks that entail the risk of confusion with products or services relating to the business of another party’ as referred to in section 4 (1) (xv) Trade Mark Act, when said trade marks are used with such designated goods or designated services (hereinafter referred to as ‘designated goods, etc.’), should include not only trade marks in the case of which the said goods, etc., entail the risk of being confused with the goods or services of other parties (hereinafter referred to as ‘the goods, etc.’), but also trade marks that entail the risk that the goods, etc., will be confused with the goods, etc., relating to the business of commercial organizations connected in terms of close business relations such as parent–subsidiary companies or family (keiretsu) companies with the other party or in a relationship of subordination to the group involved in commercial operations employing the same labelling (hereinafter referred to as ‘risk of confusion in the broad sense’). This is because the stipulation in this item is intended to preserve the business trust of the party using the trade mark and to protect the interests of consumers by preventing another party from taking a ‘free ride’ on a widely or well-known indication and by preventing the dilution of said indication. In this light, in order to protect the legitimate rights of the party using a widely- or well-known indication, etc., in accordance with changes in companies and the market such as diversification of corporate management and the formation of corporate groups held together by commercial operations involving use of the same indication, as well as the establishment of famous brands, the judgment should have been made that it is not possible to register trade marks that run the risk of confusion in the broad sense. The question of whether there is indeed any ‘risk of confusion’ needs to be considered in a comprehensive manner in light of the extent to which there is similarity between the trade mark in question and the indication used by another party, the extent to which the indication of the other party is generally known and the extent of its originality, the extent to which designated goods, etc., bearing the trade mark and the goods, etc., relating to the business of the other party are related in terms of character, use or purpose, and other conditions having a bearing on business such as similarity in terms of dealers in the goods and consumers, and on the basis of the extent to which dealers and consumers concerned with the goods, etc., bearing the trade mark in question generally pay attention to the trade mark.

(2)

Amongst the plaintiff's trade marks, the prior trade mark is identical, at least in pronunciation, as far as the word ‘reeru-dyu-tan’ [L'Air du Temps] is concerned. It bears an obvious superficial resemblance, and to judge from the representation of registered trade mark and the goods that it designates, the name ‘reerudyutan’ is clearly created from the French reading of the prior trade mark, meaning that the registered trade mark is identical in name to the prior trade mark. All of the prior marks are well-known as labels of a perfume created by the appellant to businesses handling perfumes and to consumers with an interest in high-class perfumes, and they are original trade marks. Of the designated goods bearing the registered trade mark, ‘cosmetic appliances, bodily accessories, head accessories, cases and bags’ and perfumes bear an extremely close connection in terms of use principally with women's wear, and the consumers who purchase both types of goods are to a considerable extent the same. In light of the above circumstances, when the registered trade mark is used to denote ‘cosmetic appliances, bodily accessories, hair accessories, cases and bags,’ it may be said that there is a risk that dealers and consumers of these goods fall victim to confusion in the broad sense between these goods and goods relating to commercial enterprises in a close relationship, as described previously for the plaintiff. It should be mentioned that the fact that the prior trade marks are being used as so-called pet marks is not sufficient to influence the above judgment, bearing in mind the recognition of the prior trade marks and the close connection between these marks and the goods related to the registered trade mark.

P 570

As indicated above, the High Court decision rejecting the demand for overturning the Patent Office's decision was based on a different interpretation and clearly contains a misconstruction of the law likely to influence the judgment. The argument of the plaintiff is upheld in expressing this opinion, and the original decision must be overturned. In accordance with the explanation presented above, the request of the plaintiff must be granted. The decision was rendered unanimously. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comment The abusive registration of foreign well-known marks in Japan has been a nuisance ever

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since. Almost as soon as foreign trade started with Japan's opening to the West in 1858, Japanese companies used Western indications of geographical and commercial origin in order to improve the sale of domestic goods. When this became more difficult with Japan's accession to the Paris Convention in 1900, Japanese traders forged alliances with traders in Mainland China so that goods with foreign indications could be produced P 571 abroad. The problems caused by such applications for trade marks were already acknowledged by Japanese officials at the Revision Conference in London in 1934, (1) but little was done about it. For this reason, foreign companies trying to invalidate such abusive registrations had always been left with rather ‘technical’ arguments on similarity, confusion and recognition, while the courts looked the other way when asked to decide cases on the apparently bad faith of the registrant. This attitude only changed about ten years ago when the well-known marks of Japanese companies fell victim to the same practices in other Asian countries. The following explanations will provide some details.

1 Infamous Cases The ‘L'Air du Temps’ case was preceded by a string of others in which foreign trade mark owners discovered that their marks had been registered in Japan by Japanese companies, either in order to become sole import distributors, or to sell the marks later on to the foreign trade mark owner. In the ‘Technos’ decision, (2) the Japanese trade mark owner successfully prevented the import of foreign, but original, ‘Technos’ watches. In the case of the ‘BBS’ decision, (3) the trade mark ‘BBS’ was registered by a party in Japan so that he could become the sole importer and distributor of German ‘BBS’ car parts (the registration achieved what it was meant to; though to his chagrin, parallel imports could not be barred). The ‘McDonald's III’ decision (4) dealt with the registration of the marks ‘Mac’ and ‘Burger’ by third parties sued for infringement. McDonald's was absolved, but only because the trade mark owners had used the mark ‘MacBurger’ with a special logo rather than the marks they had registered. Finally, in the ‘Dorothee Bis’ decision, (5) the court rejected an invocation of trade mark rights by the Japanese trade mark owners of ‘Dorothee Bis’ because the trade mark had first been registered on behalf of a joint venture company with the French trade mark owner, though the joint venture had later been dissolved. Nevertheless, ‘Dorothee Bis’ fashions continued to be imported, and the general public associated ‘Dorothee Bis’ with the French fashions rather than the products of the Japanese trade mark owner (see also below 4.). In addition, the reason for seven of the eight actions in ‘Popeye’ was the registration of the ‘Popeye’ trade mark by a certain Kenji Matsumoto in 1959. (6) Apart from the letters ‘Popeye’, the mark showed a simplified version of the ‘Popeye’ character with a sailor's pipe and an anchor tattoo on one of his arms. There was no connection between Mr Matsumoto and the copyright owners of the ‘Popeye’ character, and contrary to the P 572 opinion expressed by the appeal court (see below 3.) it is – with respect – not too difficult to assume that the application was indeed made parasitically to exploit the fame of the ‘Popeye’ character. Other cases concern the registration of the ‘Omega’ trade mark for cigarette lighters, only ruled out because the Swiss watchmaker's product had become well-known in Japan. (7) The application of the mark ‘New Yorker’ for bicycles, ruled out by the Tokyo High Court, (8) because the term ‘New Yorker’ had become wellknown for its association with the Chrysler Corporation; piracy application of the ‘Esso’ trade mark for textiles, struck down by the Patent Office; (9) piracy application for the trade name ‘Bayer’, rejected by Kobe District Court; (10) in the ‘Crocodile Lacoste’ case, (11) it was quite clear from the facts that a Singaporean trader had registered a crocodile mark in bad faith in Japan. However, the court found the crocodile mark dissimilar to the one used by Lacoste and therefore declined to decide on the issue of bad faith. Further, there is no shortage of recorded cases which concern the misappropriation of famous or well-reputed marks by means other than trade mark applications, particularly for perfumes (Chanel, Nina Ricci), fashion designs (Louis Vuit-ton in particular), and comic characters (Snoopy, Popeye). (12)

2 Basic Principles:Use and Confusion Under the Trade Mark Act, there are two grounds under which a prior trade mark can be invoked in order to request rejection of a subsequent application, or invalidation of a subsequently registered mark. One is similarity, and another is confusion with a prior mark. Both elements are interrelated, and the case at issue only dealt with confusion. Issues of similarity are further explained in the ‘Hyōzan’ case, this book case no. 50. Both use and registration can be prevented in cases in which confusion with the origin of the mark could arise. (13) Under unfair competition law, this corresponds to the classic passing-off action known under common law. Very often, however, foreign trade mark owners will not be able to prove sufficient goodwill in Japan to prevent use (under unfair competition law) or to effect cancellation based on confusion with a prior mark (under trade mark law). In fact, there has not been any case in which sufficient recognition could P 573 be proven without actual use in Japan. (14) In order to prevent confusion under unfair competition law, local recognition in a certain area is sufficient, (15) while obstacles to registration under section 4(1)(xv) Trade Mark Act require countrywide recognition. (16) While proving confusion has been facilitated by the broad concept of confusion, which no longer requires a direct competitive relationship (see the decision ‘Type Chanel No. 5’,

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case no. 51), but only some form of association between the two indications, proving recognition is an uphill battle in most cases. Basically, there are two options: (1)

(2) P 574

One would be that the plaintiff's mark has already been recognized by the Japanese Patent Office as well known. In an attempt to make its practice more predictable, the Patent Office has tried to compile a list of well-known marks. The first, basically a list of Japanese well-known marks, was published in 1970 by the Japanese Patent Office and AIPPI. (17) In the 1980s the Japanese Patent Office sent out thousands of questionnaires to foreign associations of industry to compile lists of ‘foreign wellknown trademarks unregistered in Japan’. A list of German marks was published in 1987. (18) Another updated list of Japanese well-known marks was published in December 1998. (19) The list was drawn up in an apparent attempt to prevent ‘other countries from newly registering trademarks which are identical to any of the Japanese well-known trademarks on the circulated list’. (20) In fact, the list does not feature one single foreign mark. Apart from that, we should be aware of the fact that recognition has in almost no case been in fact affirmed by the courts, but rather mostly been judged by the Japanese federations of industry, which makes ‘the immaturity of this methodology so striking it barely deserves comment’. (21) If a mark is on one of these lists, there is an assumption that it is indeed well known. In other cases, the owner of a mark has to prove recognition by the period and area of use, the amount of advertisements and promotion, and the size of business both at home and abroad. (22) Given the not always very encouraging precedents, (23) any trade mark owner would be well advised to spend some time and effort collecting evidence of use and recognition.

In view of the Japanese market's being highly saturated by advertising, it is quite easy for foreign companies to have somewhat inflated ideas about recognition of their mark in Japan. An example of successfully argued recognition (and thus, confusion), is the ‘Tanino Crisci’ decision. ‘Tanino Crisci’ is an Italian fashion brand for shoes. Its shops are found on the main streets of Italian fashion, such as the Via Monte Napoleone in Milan or the Via Tornabuoni in Florence. A Japanese party unrelated to the Italian company applied for registration of the trademark for clothing on 13 December 1973, with effect on 27 October 1982. The plaintiff Tanino Crisci had requested cancellation as early as 23 March 1984 on the grounds that Japanese customers would associate the trade mark with Italian rather than Japanese origin (section 4(1)(xv) Trademark Act). The plaintiff relied on turnover figures of 1,500 pairs of shoes sold in Japan as early as 1965, 5,000 in 1973, and as many as 10,000 in 1982. The shoes were sold for prices between JPY 40,000 and JPY 100,000 in 1973 by shoe shops in Japan. Despite this evidence, the Patent Office had dismissed the plaintiff's claim for cancellation on 22 December 1994. The court, however, saw things differently: (24) ‘In view of the turnover figures presented by the plaintiff, the plaintiff's shoes were sold by shoe shops as expensive, high-quality shoes to those customers who could afford them. This of course limited the number of pairs sold, but at the time of trade mark registration (12 March 1982) as well as the time of application (13 December 1973), ‘Tanino Crisci’ had become a well-known brand for high-class shoes both among retailers and the relevant sector of customers… . Because already at the time of trade mark application ‘Tanino Crisci’ had become a well-known brand, use of the same mark for clothing might lead to the assumption that there could be some economic links with the plaintiff, and thereby to the danger of confusion regarding the origin of goods… . The Patent Office Appeal Board's decision denying a contravention against section 4(1)(xv) Trademark Act was therefore mistaken and the appeal should be allowed.’

3 Other Options:Better Rights When the defence under section 4(1)(xv) failed or looked unpromising, the foreign trade namely copyrights, to defend use (but not necessarily request revocation of the abusively registered mark, section 29 Trade Mark Act). The copyright avenue was chosen in the ‘Popeye’ and ‘Peter Rabbit’ cases.

P 575 mark owner could sometimes invoke other intellectual property rights,

In ‘Popeye’, the Court of Appeal upheld the US company's (defendant's) better rights for those indications that were deemed copyrightable, but otherwise sided with the Japanese trade mark owner and denied any wrongdoing of the latter: (25) ‘Contrary to assertions by the defendant (King Features Syndicate), there is nothing that suggests that the plaintiff (Alps Kawamura) has acquired the trade mark merely to draw customers attracted by the ‘Popeye’ character without compensation. Even if this were so, the concept of free-ride as ‘the deft use of another's achievements without due compensation’ cannot normally be considered unlawful. The licensee of the ‘Popeye’ character, The Hearst Company, began to market the character in Japan in 1960. At the time of the application to register the trade mark as an associated trade mark

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consisting of the ‘Popeye’ character and lettering (No. 326206 of April 21, 1939), assuming that no third party had any legal interest in the trade mark, the use of the trade mark by the plaintiff cannot be said to have been an abuse. Moreover, there is no evidence of subsequent unlawful behaviour concerning the trade mark on the part of the plaintiff. The claim for damages based on the plaintiff's trade mark rights with respect to the use of badge ‘C’ by the defendant is to be dismissed in view of the wording of section 29 Trademark Act. Insofar as badge ‘B’ is concerned, the court of appeal was correct in awarding as damages the sum of JPY 1,085,000 in favour of the plaintiff of the original action, in view of the fact that the goods with the badge ‘B’ attached were sold from the summer of 1981 until December 1982. The claim for an injunction shall be dismissed, as there is no evidence that the defendant further intends to sell the goods.’ The Supreme Court overturned the appeal decision and found the exercise of trade mark rights an abuse: (26) ‘III. On the following grounds, this Court cannot concur with the view expressed by the appellate court that the invocation of trade mark rights against the use of badge ‘B’ is not an abuse of rights.

P 576

Badge ‘B’ was used as a trade mark and was similar to the trademark, especially as it is pronounced in the same way as the name of the comic hero, ‘Popeye’. Badge ‘B’ does not qualify as a work of art independent from the comic strip ‘Popeye,’ and, in addition, it is impossible to regard badge ‘B’ as a reproduction of a copyright work. Therefore, the plaintiff takes the view that the claim for damages for trade mark infringement is well founded. But, as already stated above, even at the time the application to register the trade mark was made, the comic hero, ‘Popeye,’ was liked by many and known by even more. It would not be too much to say that the character, ‘Popeye,’ had become a celebrity throughout the whole world, including Japan. The comic hero, ‘Popeye,’ is a fictional character. Taking into account that the word ‘POPEYE’ or ‘Popai’ (in katakana) in fact refers to no other hero but this one, it must be said that the word pronounced ‘Popeye’ is intrinsically linked with the character associated with the comic hero so well known to the public. It can easily be deducted that both today and at the time the application for registration of the trade mark was made, the word, ‘Popeye,’ was associated with the comic character ‘Popeye’. The trade mark does not confer any other meaning or association and is pronounced the same way as the comic hero, ‘Popeye’. The trade mark thus parasitically exploits the fame of the character, ‘Popeye,’ without providing adequate compensation. As it is the purpose of the Trade Mark Act to maintain fair competition, the appellee's claim of an infringement of trade mark rights through the sale of goods with the badges ‘B’ attached, in fact, amounts to an abuse of a legal position. The claim of the plaintiff itself was unfounded in the first place. The Court of Appeal thus erred in denying the defendant recourse to the defence of an abuse of rights by the plaintiff, and the decision was based on such error.' In the ‘Peter Rabbit’ decision, too, the court found that the mere word ‘Peter Rabbit’ was not copyrightable, but the fame of Beatrix Potter's books made it a ‘high likelihood’ that the trade mark had been applied in bad faith. (27) Another avenue was taken in the ‘Cupuacu’ decision where the trade mark owner Asahi Foods had tried to monopolize the name of a tropical fruit (from which juice and oil could be extracted) by way of trade mark registration, while this was considered a form of biopiracy by the plaintiffs, amazonlink.org. While this did not turn out the decisive argument, the mark was revoked as being descriptive and not capable of indicating a commercial origin (28) (see also the ‘Coca Cola’ decision, case no. 49):

P 577

‘According to the facts elaborated in [various documents], cupuacu is a tree that grows at a height of three to eight metres, and when grown in plantations, even between 15 and 20 metres, while trees of eight metres would be considered rather small. It is thus a small or medium-sized tree that originates in Latin America and grows frequently in the Amazon region. It can be found within Brazil in the states north of Rio de Janeiro. The flesh of the fruit is fragrant and can be used for making juice, while the seeds can produce oil (vegetable butter). Just as with cocoa beans, they can be used for producing chocolate, and can also be used as a raw material for making soap. It is acknowledged that the above-mentioned facts were known at the time the trade mark application was assessed on 6 January 1998. Thus, as far as the indication Cupuaçu is concerned, this word is used as basic material for the oil made from cupuaçu seeds and is thus necessary to indicate a product as such without there being any substitute name. Anyone should thus be able to use this indication, and it would not be fair to have it monopolised by one person only.

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The background information supplied by the respondent at the time of application does not alter the above considerations. In addition, it is clear that the trade mark ‘Cupuaçu’ both in Katakana and in the Roman alphabet, at least for the latter, has the meaning of cupuaçu, as is clearly demonstrated by the supplied material. Thus, the trade mark in question registered for ‘edible oils’ when produced from cupuaçu seeds as the basic material is clearly the generic description of the goods themselves or the description of the production method. If, on the other hand, the indication is used for edible oils not derived from the cupuaçu plant, there might be misconceptions leading to the assumption that the product was actually made from cupuaçu, and this would be clearly misleading as to the quality of the goods. Accordingly, registration has been made contrary to Trade Mark Act section 3(1)(ii) or section 4(1)(xvi), and the registration is cancelled under section 46(1) Trade Mark Act.'

4 Use Despite Third-Party Registration Some of the cases mentioned under above 1. allowed the foreign trade mark owner to import or sell goods bearing the indication either in case that use was considered nontrade mark use (t-shirts with Popeye characters were sold, and this was considered by the court not to have been meant or understood as an indication of origin and thereby not trade mark use (29) ), or where the Japanese trade mark owner had merely imported and sold off the foreign trade mark owner and therefore established no goodwill of its own. This then allowed the foreign trademark owner to import and sell the trade marked goods in Japan (a sort of reverse parallel import situation). (30) But of course, although the foreign trade mark owner may have prevailed in the court action, there is a high degree of legal uncertainty involved.

5 Bad Faith Until the year 2000, there was specific provision in the Japanese Trade Mark Act to provide for cancellation of a mark on grounds of bad faith, and the courts in the ‘L'Air du Temps’ case turned a blind eye to the series of piracy registrations by the defendant. P 578 However, the principle of bad faith should be one to permeate the legal system as a whole. There are many cases of piracy or quasi-piracy applications decided by Japanese courts which granted remedy only upon proof of confusion as to the source or origin, or geographical indication, etc., see above 2–4. In one case, the Tokyo District Court mentioned the possibility of bad faith registration serving as a means of ‘obtaining a trade mark right for the sole purpose of injuring others’, (31) but in this particular case the court reached a different decision because the plaintiff as a sole import distributor had registered the trade mark for himself, after having bought out two pirates who had been even quicker off the mark. The case that came closest to an acknowledgement of bad faith was the ‘Juventus’ case. Here, the Tokyo High Court found it an act contravening public order and morality to register the mark ‘Juventus’ for bags, clothing and cosmetics in view of the well-known Italian football team Juventus of Turin: (32) In our country someone who has no connection to a famous foreign enterprise and without proper consent tries to register a trade mark similar thereto, will not be able to do so under sections 4(1)(vii) and (xv) Trade Mark Act. Even if such an act does not fall under one of these provisions, and the applicant with the intention of unfair competition or in order to obtain an unfair benefit tries to obtain registration, such an act is against good morals, because it runs against the grain of international trust and damages public order. For that reason, such act should be understood to fall under the provision of section 4(1)(vii) Trade Mark Act. If, on the other hand, such foreign organisation is not well-known in Japan at the time of application and there is no bad intention when such mark is applied for, and the foreign group or organisation only becomes well-known in our country later and subsequently a renewal of such trade mark is requested, it is much more difficult to argue that renewing such mark would contravene public order. To determine the question of bad faith again once the mark comes up for renewal and to determine for this point of time whether a foreign group has become famous in Japan, would not be a proper interpretation of section 4(1)(vii) Trade Mark Act. This interpretation can also be supported by the provision of section 4(1)(xix), section 4(3) and section 46(1)(v) Trade Mark Act introduced by Law No. 68 in 1996. The court in this connection mentions the provision of section 4(1)(xix) Trade Mark Act, which prevents a trade mark registration of ‘trade marks that are well known among consumers in Japan and abroad as indicating the goods or services as being connected with another person's business … , and that are used by the applicant with unfair intention (the intention to gain an unfair profit, to cause damage, etc.)’. The abovementioned ‘Peter Rabbit’ decision may have found the right standard in holding it to be sufficient that there was a ‘high possibility of bad faith’. Christopher Heath (1)

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P 578

References ★ )

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14)

15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 1)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich. Actes de Londres 192, 466 [1935]. Tokyo High Court, 22 December 1981, 13-2 Mutaishû 696 [1981] – Technos. Nagoya District Court, 25 March 1988, 678 Hanrei Times 183 [1988] – BBS. Supreme Court, 13 October 1981, 14 IIC 429 [1983] – McDonald's III. Kobe District Court, 21 December 1982, 14-3 Mutaishû 813 [1982] – Dorothee Bis. See the Supreme Court Decision, 20 June 1990, 25 IIC 118 [1994] – Popeye Scarves III. Supreme Court, decision of 24 April 1973, Doi, Trademark and Unfair Competition Law of Japan, Digest of Court Decisions (‘Digest 1980’), Tokyo 1980) 71 – Omega. Tokyo High Court, decision of 26 January 1967, Doi, Digest of Japanese Court Decisions in Trademarks and Unfair Competition Cases ‘Digest 1971’), Tokyo 1971, 17 -New Yorker. Japanese Patent Office, decision of 12 February 1966, Doi Digest (1971), 23 – Esso. Kobe District Court, 8 August 1966, Doi Digest (1971), 84 – Bayer. Osaka District Court, 24 February 1971, Doi Digest (1980), 108 – Crocodile Lacoste. Many of the above cases are reviewed in C. Heath, Sell-out of foreign trademark rights in Japan?’, 26 IIC 509 [1995]. See Supreme Court, 20 June 1990, 25 IIC 118 (1994)- Popeye Scarves III (see below 2); Kobe District Court, 21 December 1982, 14-3 Mutaishu 813 (1982) – Dorothee Bis (see below 3). In Supreme Court, 16 December 1993, 835 Hanrei Times 248 (1994) – Amex, however, the plaintiff and owner of the well-known ‘Amex’ credit cards could obtain protection against the defendant's use of ‘amekkusu’ before credit cards had actually been issued in Japan. Here, recognition was affirmed through the use of the mark in dictionaries and newspapers. Prior to 1994, service marks were unregistrable, which put the owners of such indications in a difficult position. Tokyo High court, 4 July 1991, 23-2 Chizaishū 555 (1991) – Jet Slim Clinic. Here, the owner of a locally well-known indication had prevailed over the owner of an indication known all over Japan. Tokyo High Court, 16 June 1983, 15-2 Mutaishū 501 (1983) – Daewoo Coffee. Japanese Patent Office, Famous Trade Marks in Japan, AIPPI, Tokyo 1970. Japanese Patent Office, Foreign Well-Known Marks Unregistered in Japan – West German Edition, December 1987. Well-Known Marks in Japan, AIPPI 1998. Explanation by the JPO's Director-General Hashimoto on 3 December 1998, then published on the JPO's homepage. Kenneth Port, Japanese Trademark Jurisprudence, London 1998, 25. Japanese Patent Office, Shinsa kijun no gaisetsu (Examination Guidelines of the Japanese Patent Office), Tokyo 1996, 306. E.g. Osaka District Court, 13 November 1987, 229 Tokyo to Kigyo 83 (1988): here, the plaintiff had sold at least 11.000 Stefano Ricci neckties in one year, yet the court held that this was insufficient for proving recognition. Tokyo High Court, 12 December 1996, 30 IIC 461 (1999) – Tanino Crisci. Osaka High Court, mentioned in the Supreme Court decision of 20 June 1990, Popeye Scarves III. Supreme Court, 20 June 1990, 25 IIC 118 (1994) – Popeye Scarves III. Tokyo High Court, 15 March 2004 – Peter Rabbit. Japanese Patent Office, decision of 18 February 2004, 37 IIC 98 (2006) – Cupuaçu. Osaka District Court, 24 February 1976, 8-1 Mutaishū 102 – Popeye Shirts II. Kobe District Court, 21 December 1982, 14-3 Mutaishū 813 – Dorothee Bis. Tokyo District Court, Decision of 31 August 1973, Doi Digest (1980), 89 (98). Tokyo High Court, 24 March 1999, 1683 Hanrei Jihô 138 [1999] – Juventus. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 53: Trade Mark Law – Parallel Imports – Identity of Goods – Licensing Agreement – Counterfeit Goods

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court of 27 February 2003 – KK Three M v. Hit Union Co. Ltd. – ‘Fred Perry’ Source: 35 International Intellectual Property and Competition Law (IIC) 216 (2004)

Jurisdiction Japan

I Headnote(s) Trademarked goods produced abroad by a licensee in breach of a contractual stipulation of the place of manufacture are considered counterfeits and thus may not be imported.

Court

Supreme Court of Japan

II Relevant Provisions Trade Mark Act, sections 1, 2(3), 25

Case date

III Facts

27 February 2003

The defendant, Hit Union, is the owner of two ‘Fred Perry’ trade marks registered in Japan, Sportswear Ltd. The plaintiff, KK Three M, imported polo shirts bearing ‘Fred Perry’ marks. The shirts were manufactured in China at the instruction of a Singaporean company, Ocea International Pte. Ltd. Ocea had received a licence from Fred Perry Sportswear for the manufacture of ‘Fred Perry’ sportswear in Singapore, Malaysia, Brunei Darussalam and Indonesia. Manufacture of the goods in China qualified as a breach of the licence agreement with Fred Perry Sportswear. The defendant thus posted a notice in an industry journal that denounced the goods imported by the plaintiff as counterfeits. The plaintiff sued for defamation, the defendant countersued for infringement of the ‘Fred Perry’ trademarks.

P 580 and Fred Perry Holdings Ltd., a successor to the UK company, Fred Perry

Parties

Claimant, KK Three M Defendant, Hit Union Co. Ltd.

Bibliographic reference

Christopher Heath, 'Case No. 53: Trade Mark Law – Parallel Imports – Identity of Goods – Licensing Agreement – Counterfeit Goods', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 579 586

The lower courts were divided as to the issue of trade mark infringement. While the Tokyo District Court (25 October 2001 – Fred Perry Tokyo [34 IIC (2003)], 15 Law & Technology 90) found that a breach of the licensing agreement did not make the goods counterfeit (already held by Tokyo District Court, 28 January 1999 (1670 Hanrei Jihō 75) and Tokyo High Court, 19 April 2000), the Osaka District Court (21 December 2000, 1063 Hanrei Times 248) and Osaka High Court (29 March 2002 – Fred Perry Osaka [34 IIC (2003)], 16 Law & Technology 84) found that there was infringement. The question was relevant in the present context, as the parallel importation of (original) trade-marked goods has been held lawful in Japan for more than 30 years (Osaka District Court, 21 February 1970 [2 IIC 1971] – Parker). This decision has been rendered against the appeal from the Fred Perry Osaka decision.

IV Findings 3 ….The import of trade marked goods does not qualify as an infringement of a trade mark as a parallel import of authentic goods where: (1) (2) (3)

the mark had been lawfully attached by the holder or the licensee of the trade mark in another country, the trade mark in the said country indicates the same source as is indicated by the registered trade mark in Japan, because the holder of the former trade mark is the same as, or legally or economically connected with, the right holder in Japan; and the imported goods are not different in quality from the goods marketed under the registered trade mark in Japan due to the position of the right holder in Japan directly or indirectly to enforce a quality control of the goods…

4. In the case at bar, the source function of the trade mark is harmed by the importation of the disputed goods: Ocea, the licensee of the mark that is identical to the registered trade mark in Singapore and three other States, had the goods manufactured in a factory in China, which is not included in the licensed territory, and thus manufactured and marked the goods in breach of a provision of the agreement that relates to the scope of the licence. Restrictions in the licensing agreement that relate to the country of origin and issues of the goods and ensuring the quality function by the holder of the trade mark. The disputed goods, having been manufactured and marked in breach of such restrictions, may harm the quality function of the trade mark, since they could be out of the trade mark owner's quality control and thus be different in the quality as would be guaranteed by the latter for all goods to which the registered trade mark is attached and that are put onto the market by the defendant….

P 581 subcontracting are also of great importance for controlling the quality of

From the above, the import of the disputed goods does not qualify as a parallel import of authentic goods.

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Translated by Souichirou Kozuka

V Comment 1 Parallel Import of Trade Marked Goods from Parker to BBS The starting point for a re-evaluation of parallel imports of original trade-marked goods under Japanese law was the Max Planck Institute, when Saburo Kuwata spread Friedrich Karl Beier's ideas of parallel imports and international trade (1) in Japan, and Dr Shōen Ono sued against the seizure of original goods that had entered Japan by way of parallel importation. In what became known as the ‘Parker’ case, the defendant company, Shrilo, was the sole import distributor of Parker fountain pens in Japan. The plaintiff company, NMC, had obtained original Parker pens from Hong Kong and tried to import them to Japan, whereupon the defendant asked the customs office to confiscate the shipment. The plaintiff argued that the import could not be considered illegal; although the importation constituted a formal infringement under the Trade Mark Act, the latter was not meant to protect legal monopolies in favour of trade mark owners, but, as stated in its preface, ‘to ensure the maintenance of the business reputation of persons using trade marks by protecting trade marks, and thereby to contribute to the development of industry and to protect the interests of consumers’. Applying this standard, according to the argument of the plaintiff, the parallel importation looked lawful, as the business reputation of the trade mark owner did not suffer from the importation of genuine goods, and consumers were not misled. The Osaka District Court agreed and held that the Trade Mark Act was intended to guarantee the source of origin and the quality of goods as well as to protect the goodwill of the trade mark owner. As the Japanese trade mark licensee and its foreign licensor could be regarded as the same person, and the general consumer did not associate the trade mark ‘Parker’ with Shrilo, the latter had thus established no goodwill of its own.

P 582

‘It is the purpose of the law to protect the special functions of a mark: as a designation of the source of goods, as a guarantee of the quality of goods, and as a symbol of the goodwill of the trade mark owner as acquired by use of the mark for his goods. At the same time, a certain trading pattern is sought to be maintained so that customers can ascertain the identity of goods based on their source and so that they do not make wrong choices in purchasing but rather obtain the desired goods having proper quality; thus the interests of consumers are safeguarded. As stated above, these functions are the subject of protection, and this protection is not only for the benefit of the trade mark owner but also for the benefit of the public at large. It can be said, therefore, that trade mark law as compared with other areas of industrial property protection is characterised by its very strong and common interest aspects. The scope of protection is also limited by public policy considerations within the framework of the principle of registration, even though basically a trade mark can be characterised as a private property right’… (2)

The case became one of the leading cases of Japanese IP law not only due to its clarity of reason, but also partly by accident, as the defendant company that had appealed the decision went bankrupt while the appeal was still pending, thereby allowing the District Court decision to become a final precedent that has been good law for the last 40 years. After Parker, sole import distributors became much more cautious in petitioning for the exclusion or confiscation of parallel imports. Nevertheless, in the three cases that followed, the parallel importers could not meet the legal requirements set out by Parker; either the source of origin or the standard of quality was different, or the close legal and/or economic connection between the Japanese plaintiff and the foreign trade mark owner could not be established. (3) Only two cases following these decisions broadened the scope of legitimate parallel importation: in Lacoste, (4) the plaintiff, La Chemise Lacoste, owned the trade mark ‘Lacoste’ in various countries including Japan. The trademark was licensed to the co-plaintiff, a Japanese company that produced and sold Lacoste goods in Japan. The defendants had obtained Lacoste goods from an American firm (in which La Chemise Lacoste held a 47% interest) that produced and sold them in the US. Although the quality of the goods imported by the defendants differed to some degree from that of those manufactured by the co-plaintiff in Japan, the Tokyo District Court dismissed the claim for damages and held that even if the trade mark was owned by different entities in the US and Japan, the source of origin as well as the source of goodwill these goods enjoyed with the general consumer could be identified as ‘Lacoste’ sole import P 583 and were thus identical. In a subsequent case, BBS, (5) the plaintiff, a distributor of German car parts, sought relief against the defendant importing original BBS-parts whose serial numbers had been rasped off. The Nagoya District Court examined: (a) the relationship between the foreign and the domestic owner of the trade mark; and (b) the similarity of the parallel imports to those being domestically distributed. On the first issue, the court found that, though at the time of registration of the domestic trade mark there was no relationship between the parties, the registration had been made with such prospect in mind, and at the time of importation of the goods a relationship had been established. On the second issue, the court found that the goods were of the same origin and of similar quality despite the erasure of the serial numbers.

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Accordingly, the court dismissed the claim and allowed the parallel importation. After BBS, nothing much happened in the field of trade marks in regard to parallel import issues. The Fair Trade Commission kept punishing attempts to prevent lawful parallel imports, and the attention shifted to the parallel importation of patented goods after the Tokyo High Court had issued a decision – also involving the German company BBS – that allowed the parallel importation of patented products. The decision was attacked by a number of Japanese academics, Dr Shoen Ono no less, (6) and also Prof. Beier, both wrote opinions on behalf of the patentee BBS. (7) The Supreme Court might have overturned the decision for lack of international support had it not been for a UK decision rendered in 1995 (8) that allowed the parallel importation of patented goods under the doctrine of implied license, a solution the Japanese Supreme Court ultimately followed. (9) It thereby endorsed the rationale of the Parker decision that intellectual property rights must be interpreted in a manner beneficial to the interests of society at large.

2 Fred Perry: A case of Identity Only ‘Fred Perry’ gave an opportunity to revisit the Parker decision. ‘Fred Perry’ concerned the parallel importation of trade marked goods in the rather unusual constellation of a breach of a licensing agreement. The Tokyo District Court (10) and the Tokyo High Court (11) found that a breach of the licensing agreement did not make the goods counterfeit. (12) The Tokyo courts found that even though there was a breach of the licensing agreement, this did not render the goods infringing. After all, the goods were indistinguishable from those manufactured in P 584 Singapore and Malaysia, and the only thing that a third party could reasonably ascertain was the fact that there was a licensing agreement at all. To the extent that the goods could be attributed to the licensee, third parties should not be burdened with the risk that they had purchased pirated goods. In other words, the Tokyo courts stressed the importance of protecting third parties. The Osaka District Court (13) and Osaka High Court (14) on the other hand found that there was infringement, and the Supreme Court sided with the Osaka decisions. Rather unusual for a Supreme Court decision, ‘Fred Perry’ has been heavily criticised by some Tokyo judges, even if only in private conversations. For one, the issue of product identity should have been determined according to the law applicable to the license, that is, Singaporean law. To the extent that the trade mark is attached in Singapore, it is the law of this country that determines whether the breach in the licensing agreement is of such a nature as to regard the goods as counterfeit. And, furthermore, certainty in trade is seriously compromised where goods originating from a licensee are still regarded as counterfeit with the consequence that they can be seized and destroyed at any stage of the distribution chain until the final end consumer and even beyond, as was explained by the Tokyo courts. Finally, to add insult to injury, the plaintiff in the Fred Perry case was happy to pocket the licensing fees the Singaporean licensee had paid for the very goods the plaintiff then claimed were infringing.

3 ‘Converse’ – A Split in Ownership (a) The most recent decision in the difficult field of parallel importation of trade marked goods is ‘Converse’, (15) a case that touches upon the fundamentals of trade mark law, just as the previous cases Parker and Fred Perry. Although the facts were somewhat complicated, ‘Converse’ had to deal with an identical owner of the ‘Converse’ trade mark in the US and Japan that went bankrupt, leading to a split in ownership of the Japanese and US marks. Although there was still a joint production of goods (shoes), the Japanese trade mark owner had no ultimate control over the goods for the US market that were subsequently imported to Japan by a third party. Lack of control was the ultimate criterion for the Japanese High Court to prohibit such parallel importation. (b) Under European law, the ‘Converse’ case seems relatively clear. According to the ECJ's ‘Ideal Standard’ decision that concerned the parallel importation subsequent to an assignment of trade mark rights: ‘for the trade mark to be able to fulfil its role, it must offer a guarantee that all goods bearing it have been produced under the control of a single undertaking which is accountable for their quality’. (16) P 585

Thereby, the previous doctrine of allowing parallel imports in case the trade mark in the country of exportation and importation shared a common origin – Hag I (17) – was discarded. (18) Furthermore, the ECJ made clear that a possible misconception of consumers as to the origin or goodwill of the product must take second place over a lawful assignment of the mark. (19) (c) Both decisions, ‘Fred Perry’ and ‘Converse’, are consistent with the old ‘Parker’ decision that the Japanese courts irritatingly do not identify as the leading case of parallel importation, and references to the ‘BBS Car Wheels’ decision are somewhat misleading

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already due to the different functions of trade mark law on the one hand, and patent law on the other. The ‘Parker’ decision requires a common origin of goods sold by the trade mark owner, and the parallel importer (not the case in ‘Converse’), and a ‘proper quality’ of the goods, which the ‘Fred Perry’ decision has interpreted as ‘proper supervision so as to guarantee quality’. ‘Parker’, in a way, was the archetypical case of parallel importation v. territorial exclusivity of the licensee, while ‘Fred Perry’ and ‘Converse’ had some rather unusual characteristics. The Japanese Trade Mark Act in section 1 contains a specific reference to consumer protection, as has been correctly mentioned in the above decisions ‘Parker’ and ‘Converse’. The angle of consumer protection is not necessary to justify parallel imports as such – after all, the origin function of the trade mark cannot be compromised by goods that have been imported via a different distribution channel. The question to be asked is whether the angle of consumer protection calls for some sort of adjustment in cases where the general public associates the goodwill of the trade marked goods with a source that is different from the registered trade mark owner, a sort of ‘reverse confusion’. This must not be a bar to the transfer of the trade mark as such, as otherwise, one would reintroduce the requirement of transfer together with the goodwill or business. But could one argue that a trade mark owner who only obtains the trade mark as a shell without any goodwill cannot pursue use of this trade mark by third parties that is in accordance with consumer perception about the origin of the goods. Worded differently, is there an estoppel of ‘unclean hands’ in cases in which the trade mark owner himself causes consumer confusion. This was essentially the point made by the defendant in ‘Converse’, and it is the point strongly advocated by Yoshiyuki Tamura in a pro bono opinion on this case. (20) Based on reverse confusion, the defendant in ‘Converse’ raised the counterclaim that use 2 (1) Unfair Competition Prevention Act, a provision protecting unregistered indications from passing-off. Unsurprisingly, the courts took the view that the use and enforcement of a registered trade mark by the trade mark owner – bar evidence of fraudulent registration – could not make a cause for unfair competition. But this is not so self-evident: in a very old precedent, the ‘Dorothee Bis’ case, the defendant Dorothee Bis France had imported designer goods under this trade mark to Japan. In Japan, however, the previous sole import distributer of ‘Dorothee Bis’ goods unbeknown to Dorothee Bis France had registered the trade mark in its own name and, after termination of the distribution agreement, kept trading ‘Dorothee Bis’ goods from France, while trying to block parallel importation of ‘Dorothee Bis’ goods. Under these circumstances, the court held that the sole goodwill consumers associated with the ‘Dorothee Bis’ goods derived from their French origin, and the plaintiff could not exercise its trade mark right against goods identical to those it was trading in. (21) Different from the Converse case, there was a fraudulent registration of the mark (now actionable under section 4(1)(xix) Trade Mark Act), and there was no issue about quality/supervision. As to the latter point, however, one may ask whether the courts' analysis of the differences in quality and separation of quality control has not been an exercise in splitting hairs (or, in this case, shoelaces).

P 586 of the trade mark by the plaintiff was contrary to section

The result in Converse certainly means that the plaintiff has obtained a monopoly over the importation of shoes that consumers associate with an American origin and that are identical to those produced and sold in the US. Christopher Heath (1) P 586

References ★ )

1) 2) 3)

4) 5) 6) 7) 8)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich F.K. Beier, Territoriality of Trademark Law and International Trade, 1 IIC 48 [1970]. Osaka District Court, 27 February 1970, 2 IIC 325, 326 [1971] – Parker. Fukui District Court, injunction of 29 March 1974 (No. 40/1972)- Ramie; Tokyo District Court, decision of 31 August 1973, 1973 Tokkyo kanri hanketsushū 123 = 301 Hanrei Times 267; Tokyo District Court, decision of 31 May 1978, 10-1 Mutaishū 216 – Technos; appeal dismissed by the Tokyo High Court, decision of 22 December 1981, 13-2 Mutaishū 969. Tokyo District Court, 7 December 1984, 543 Hanrei Times 323 [1985] = 1141 Hanrei Jihō 143 [1985] – Lacoste; Nagoya District Court, 25 March 1988, 678 Hanrei Times 183 [1988] = 1277 Hanrei Jihō 146 [1988] – BBS Trade Mark Case. S. Ono, Heikō tokkyo to yunyū, in: Y. Someno (ed.), Chiteki zaisan to kyōsō no riron (Theorien zum Recht des geistigen Eigentums und Wettbewerbsrechts (Festschrift für F.K. Beier)), Tokyo 1997, 459. F.K.Beier, Zur Zulässigkeit von Parallelimporten patentierter Erzeugnisse, GRUR Int. 1996, 1. English Patents Court, Roussel Uclaf v. Hockley International, 9 October 1995, 1996 RPC 441.

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Japanese Supreme Court, 1 July 1997, 29 IIC 334 (1998) – BBS Wheels III. Tokyo District Court, 25 October 2001, 1670 Hanrei Jihō 75 – Fred Perry Tokyo. Tokyo High Court, 19 April 2000 – Fred Perry Tokyo II. Already held by Tokyo District Court, 28 January 1999, 1670 Hanrei Jihō 75. Osaka District Court, 21 December 2000, 1063 Hanrei Times 248. Osaka High Court, 29 March 2002, 16 Law & Technology 84 – Fred Perry Osaka II. Intellectual Property High Court, 27 April 2010, 42 IIC 235 [2011] – Converse. ECJ case C-9/93, Internationale Heiztechnik v. Ideal Standard (Ideal Standard). ECJ, case 192/73, Van Zuylen v. Hag (Hag I). ECJ, case C-10/89, Hag v. Van Zuylen (Hag II). ECJ, case C-259/04, Elisabeth Emanuel v. Contintental Shelf (Elisabeth Emanuel). Y. Tamura, Shō hyō ken no jō tō go no jū zen no gusei shō hin no heikō yunyū no kahi – Converse heikō yunyū jiken (Parallel imports of previously original goods after transfer of the trade mark – the Converse case of parallel importation), 30 Chiteki zaisan hō seisaku gaku kenkyū 279 (2010). 21) Kobe District Court, 21 December 1982, Mutaishū 14-3, 813 – Dorothee Bis. 1) Head of the Asian Department, Max Planck Institute, Munich 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20)

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Case No. 54: Protection of Legal Interests Not Explicitly Recognized by Statute – Tort and Intellectual Property Law

Document information

Publication

Business Law in Japan – Cases and Comments

Rahn Guntram (★ ) Daishin'in, decision of 28 November 1925, Daigaku-yu

Jurisdiction

Source: Minshū 4-670

Japan

I Headnote(s)

Court

Under the general tort clause of section 709 Civil Code, any interest (here: the prospective interest to be gained by selling the goodwill in the name ‘Daigaku-yu’) which according to our concept of law requires that relief based on an unlawful act is granted when it is infringed, can be protected, and its infringement be sanctioned by a claim for damages.

Imperial Court of Japan

Case date

II Facts

28 November 1925

Bibliographic reference

Rahn Guntram, 'Case No. 54: Protection of Legal Interests Not Explicitly Recognized by Statute – Tort and Intellectual Property Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 587 - 594

In 1915, the plaintiff's predecessor, A, had leased from Y1 a public bathhouse near Kyoto University operating under the name of Daigaku-yu (University Bath). Plaintiff X asserts that A had paid extra for the goodwill incorporated in the name Daigaku-yu, and A and Y1 P 588 had agreed that at the end of the lease, Y1 would either buy the name back or A would be entitled to sell it to a third party at his discretion. However, after the lease was terminated in 1921 by mutual agreement between X and Y1, Y1 leased the bathhouse and the name Daigaku-yu to Y2, whereby X lost the goodwill incorporated in the name that allegedly was his under the special agreement between A and Y1. X therefore sued Y1 for damages based on non-fulfilment of his contractual obligation and, alternatively, Y1 and Y2 for damages based on the unlawful act that they had committed jointly by depriving X of his right to sell the goodwill incorporated in the name at his discretion. The original instance, the Osaka Court of Appeals, dismissed the action, ruling that the alleged special agreement did not exist; furthermore, that X had no claim to compensation of damages based on an unlawful act since the pertinent provision of the Civil Code, section 709, required the infringement of a right, and goodwill was not a right. Section 709 Civil Code in the version of 1896, valid at the time of the present judgment, reads: A person who by intent or negligence has infringed the right of another person is liable for the resultant damages. X lodged an appeal on points of law at the Daishin'in (Great Court of Cassation), the Supreme Court under the Meiji Constitution.

III Findings The Daishin'in granted the appeal and referred the case back to the original instance. It held: When section 709 provides that a person, who by intent or negligence has infringed upon another person by an act of violation of a legal norm, is liable for compensation of the resultant damages, this can only be meant in a broad sense. The object of this infringement may be a so-called concrete right, such as the person's right of ownership, hereditary building right, obligatory right, immaterial property right, right to honour, etc., or, although it may not be regarded as a right in the strict sense as these, an interest that is however legally protected, or rather, to put it more precisely, an interest which according to our concept of law requires that relief based on an unlawful act is granted when it is infringed….

P 589

Considering the present case, the original judgment confirms that the predecessor of X, A, possessed the goodwill incorporated in Daigaku-yu. Since it goes without saying that goodwill can be the object of sale or gift, should Y etc. have ventured an act in violation of a legal norm by which it was rendered impossible for the predecessor of X, A, to sell it to someone else, A would in fact have lost his prospective interest, which is the same as if someone were to sell his property and lose his prospective interest due to the sale having been made impossible by fraud of a third party. In this case the object of the infringement is not the property or the goodwill which is the subject-matter of the sale, but the prospective interest. According to our concept of law, such interest requires protection by admitting a claim for compensation of damages based on an unlawful act. The original judgment erred in holding that

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goodwill can by its nature not be the object of an infringement by an unlawful act since it was not a right. furthermore it erred in holding that what was infringed by the unlawful act of the present case asserted by X was the goodwill itself. The appeal on points of law in the present case is wellfounded. Although X finally lost the case because the lower court to which it was returned now held that the goodwill possessed by X had ceased to exist when the lease was terminated by mutual agreement and X had returned the bathhouse to Y1, the judgment of the Daishin'in was widely acclaimed for broadening the scope of infringement of a ‘right’, or what is legally protected against unlawful acts pursuant to section 709 Civil Code. Translated by Guntram Rahn.

IV Comment 1 Statutory and Case Law Background In the so-called Old Civil Code (kyū minpō) that had been modelled on the Napoleonic Code Civil by the French legal scholar Boissonade and promulgated in 1890 but was never enacted, the only requirement of a claim based on tort was negligent infliction of damage on another person. However, according to the explanatory memorandum of the revised Civil Code for which the draft German Civil Code had served as a model, an unlawful act required the infringement of an existing right, since otherwise generally inflicting a loss on another person's business in free competition would also be covered by the provision. Section 709 of the Civil Code that entered into force on 16 July 1898 therefore explicitly stipulated the infringement of a right as prerequisite of a claim based on an unlawful act (fuhō kōi). This provision was put to a test in the widely reported Kumoemon case decided by the Daishin'in in 1914 (Daishin'in, 4 July 1914, Keiroku 20-1360). Kumoemon Tochuken (1873– 1916) was an extremely popular performer of rōkyoku (also known as naniwa bushi), a kind of narrative ballad of Bushidō heroes intoned to shamisen accompaniment. He was a master of the sandan nagashi style of singing, being able to modulate a tone for up to 30 seconds, which had his audience holding its breath, too. Richard Werdermann, a German merchant in Yokohama, paid him a fee of the then formidable amount of 15,000 yen and had 72,000 phonograph cylinders put on the market with Kumoemon's most popular narratives. Shortly thereafter pirate copies of the records appeared and a criminal action P 590 was brought, combined with a claim for compensation of damages incurred due to the unlawful act. The Daishin'in held that rōkyoku did not merit copyright protection since they were created out of the moment and lacked a definite melody pattern represented in musical notes as in Western music. Thus the sale of the pirate copies did not fulfil the requirement of infringement of a right in section 709 Civil Code, and the claim for compensation of damages based on an unlawful act was dismissed. In the Daigaku-yu case a decade later, the lower courts had still applied this strict interpretation of the term ‘right’, denying that an infringement of the goodwill incorporated in the name Daigaku-yu constituted an unlawful act. But then the Daishin'in judgment brought about an epochal change in the case law: it extended the scope of protection under section 709 Civil Code to any interest which according to our concept of law requires that relief based on an unlawful act is granted when it is infringed. This was the beginning of the so-called flexible interpretation (jūnan na kaishaku) of law, which has been a characteristic of Japanese legal methodology ever since.

2 The Development of Legal Theory Among legal scholars in the late Taishō era, the Daigaku-yu decision of the Daishin'in was welcomed as a turning point between the conceptual jurisprudence (gainen hōgaku) exemplified by the Kumoemon decision that had failed to flexibly react to legal expectations, and the now popular free jurisprudence (jiyū hōgaku) that aimed to achieve ‘concrete equity’ (gutaiteki datōsei) in each individual case when applying the law. The general provision of relief in case of an unlawful act in section 709 Civil Code is particularly suited as a legal basis for ‘concretely equitable’ decisions, and so the Daigaku-yu ruling initiated the development of appropriate legal theories, first by professors Hiroshi Suekawa and Sakae Wagatsuma. Hiroshi Suekawa (1892–1977) was a professor for civil law at Kyoto University from 1925 to 1933 and is regarded as one of the leading Japanese scholars of civil law of his time. His main publications were ‘Kenri shingai ron’ (Treatise on infringement of right), 1930, and ‘Kenri ranyō no kenkyū’ (Study on abuse of right), 1949. In his ‘Treatise on infringement of right’, Suekawa devised his ‘theory of illegality’ (ihō-sei setsu). Pointing out that in its Daigaku-yu decision the Daishin'in had held that an unlawful act was an ‘act of violation of a legal norm’, he argued that the true requirement of a claim pursuant to section 709 was not an infringement of a right, but the illegality of the act. Illegality was a more flexible

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concept than infringement of a right; it should therefore replace the latter in the construction of section 709. Sakae Wagatsuma (1897–1973) is considered to be the greatest scholar of Japanese civil 1927 to 1957, publishing numerous scholarly works, among them ‘Minpō kōgi’ (Lectures on civil law), 1932–1962, 7 volumes, and ‘Minpō kenkyū’ (Studies on civil law), 1966–1971, 11 volumes. In response to Suekawa, Wagatsuma presented his ‘correlation theory’ (sōkan kankei setsu). He argued that whether there was an illegal act should be determined by assessing the mutual relation between the nature of the infringed interest and the manner of the act of infringement. For example, if the illegal nature of the infringing act were grave, relief should be granted under section 709 even if the infringed interest was not clearly established as meriting legal protection. Thus, the applicability of section 709 requires a correlative balancing of the specific infringed interest and the specific infringing act.

P 591 law. He held the chair for civil law at Tokyo University from

Wagatsuma's correlation theory is widely ranked in Japanese jurisprudence as the generally accepted legal theory for the application of the provision of section 709 till today, in that it combines the assessment of what is said to be a subjective element – the significance of the infringed interest – in relation to the objective element of the nature of the act of infringement. New theories are also advocated that aim to simplify the approach of the correlation theory in the application of the provision regarding unlawful acts. Their starting point is the criticism that the above theories have not addressed the relation between intent/negligence and illegality. The ‘monistic illegality theory’ (ihō-sei ichigen ron) takes the position that the illegality of the act is the only requirement that needs to be assessed when applying section 709. The opposing ‘new negligence theory’ (shin kashitsu ron) counter-argues that the term ‘illegality’ is not even found in section 709 but included in the concept of negligence, which is therefore the only essential requirement of an unlawful act. While it is conceded that the monistic theories may have a rationalising effect on the construction of section 709, the majority opinion still insists that the dualistic approach of balancing the subjective aspect and the objective aspect of an act that has inflicted injury, in order to decide whether the injurious act qualifies as an unlawful act entitling to compensation of damage, is more in line with the wording of section 709. It is better suited to decide whether an interest is involved which – as the Daishin'in put it in the Daigaku-yu case – ‘according to our concept of law requires that relief based on an unlawful act is granted when it is infringed’.

3 Statutory Reform in 2004 In 2004, when the Civil Code was revised to adapt its language from the original written style to modern spoken Japanese, the provision of section 709 was amended to reflect the Daigaku-yu case law and the ensuing development in legal theory. Section 709 now reads: A person who by intent or negligence has infringed the right or legally protected interest of another person is liable for the resultant damages. P 592

4 Present-Day Methodology and Case Law In the light of the above, the present-day requirements of a claim to compensation of damages due to an unlawful act, pursuant to section 709 Civil Code are: 1. 2. 3. 4.

Intent or negligence in committing the act Infringement of a right or legally protected interest Responsibility capacity Causation of damages.

Intent and negligence are not differentiated for the reason that there is ‘little practical use’ in doing so. Also, no distinction is made between infringement of a right or of an interest, since a right is considered to be merely an explicitly protected interest. In practice, the unlawful act test is thus reduced to the following: 1. 2. 3.

an interest worthy of legal protection is infringed by an illegal act resulting in damages.

As the eminent professor of civil law at Tokyo University, Ichiro Kato (1922–2008), put it in his explanatory notes on section 709 in the 26 volume ‘Commentary on the Civil Code’ (Chūshaku Minpō, Vol. 19, 1971, p. 4 et seq.): A dispute in the area of contract law is a dispute relating to a contract which the parties have entered into in advance. Since importance must be attached to ex ante predictability by the contract parties in such a case, legal certainty is respected. In contrast, in the area of unlawful acts the problem is the ex post handling of an incident in the broad sense between persons that have no contractual relationship. Predictability not being directly much of an issue,

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what should be taken heed of is concrete equity (gutaiteki datōsei) from the standpoint of according ex post equitable relief to the injured party. But what is ‘concrete equity’ in the individual case where an injurious act has been committed? Legally this is decided by the courts today based on a weighing of the interests (rieki kōryō) of the injured party and the injurer. In this framework the courts operate rather freely with the concepts of ‘interests worthy of protection by law’ and ‘illegal acts’ to find a balanced synthesized judgment. Examples of rights/interests held to be infringed under section 709 are real rights (bukken), obligatory rights (saiken), the right to life and physical integrity (seimei, shintai ni kan suru kenri), the right to sunlight (nisshō-ken), environment (kankyoken) and the interest in landscape (keikan rieki), the right to personal status (mibun-ken), reputation (meiyo-ken), privacy (puraibashii), the right to one's name and likeness (shimei-ken, shōzōken), the right of business (eigyō-ken, – the principle lex specialis derogat lex generalis not applying in regard to competition law or trade mark law), and the interest not to be involved in an undue lawsuit (futō soshō). To illustrate, in conclusion, the Japanese courts' present-day construction of an unlawful act pursuant to section 709, the following is an abridged translation of a fairly recent P 593 judgment of the Intellectual Property High Court that has attracted attention. The Yomiuri Online case (IP High Court, decision of 6 October 2005, final, Heisei 17 nen (ne) dai 10049 go, ) relates to the issue of protectability of news headlines published on the internet: ‘Plaintiff Yomiuri Newspaper Tokyo Head Office operates a homepage ‘Yomiuri On Line’ (YOL) on which news articles are published with corresponding headlines. Under license with Yomiuri, Yahoo Japan also publishes these headlines in its ‘Yahoo News’, together with links to the YOL homepage, where the corresponding articles can be read. The defendant operates a website with links to ‘Yahoo News’ which also reproduce the headlines originating from the YOL homepage. When clicked, these links open the ‘Yahoo News’ in a separate window. The defendant furthermore offers a ‘Line Topics’ service, which sends information to registered users, also enabling them to access the headlines originating from YOL and the ‘Yahoo News’. The plaintiff claims infringement of its copyright in the headlines and, alternatively, damages based on the unlawful act of their unauthorised copying.’ The Tokyo District Court, in first instance, denied copyright protection since news headlines lacked the required creativity. With regard to the alternative claim of damages due to an unlawful act it held: ‘The YOL headlines are information that the plaintiff itself discloses free of charge on the internet, and since, as explained above, an exclusive right of the plaintiff based on copyright law etc. cannot be acknowledged, third parties are normally free to use them. As long as special circumstances do not exist, such as using them with the purpose of unfairly striving for one's one profit or with the purpose of inflicting damage on the plaintiff, the use of information disclosed on the internet is not illegal. And on the basis of all evidence in the present case it cannot be recognised that special circumstances exist that would allow to assess the acts of the defendant as having been done to unfairly strive for its own profit or with the purpose of inflicting damage. Consequently the acts of the defendant are not unlawful. The plaintiff's claim regarding this point is unfounded’. The plaintiff appealed to the Intellectual Property High Court, which, finding that it was ‘not necessarily easy’ to affirm a copyright in news headlines, did, in contrast, grant the claim based on an unlawful act pursuant to section 709 Civil Code. In this respect, the IP High Court held:

P 594

‘For an unlawful act (section 709 Civil Code), it is not necessary that a right in the strict sense provided in a statute such as a copyright etc. is infringed; if an interest worthy of legal protection is illegally infringed, this is an unlawful act…. The YOL headlines in the present case are the fruit of a sequence of activities of the appellant in which it invested great labour and costs as a news medium, and although it cannot be acknowledged that this has gone to the extent that they come under the protection of copyright law, they have been devised by appropriate effort and ingenuity so that through their concise expression they themselves can provide a first understanding of the outline of the news of the reported affair etc., and in the light of the actual situation that the YOL headlines alone have an independent value in that they are the object of a business transaction, it should be said that the YOL headlines can be an interest worthy of legal protection…. It cannot be denied that there is an aspect of competition between the Line Topics service and the appellant's business relating to the YOL headlines in that the appellee, unauthorised by the appellant, has put together its LT link headlines dependent on the YOL headlines, with the purpose of profiting commercially,

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in continuous repetition, moreover shortly after the YOL headlines had been devised, as it were at a time when the information was very fresh, without needing special effort as dead copies or practically dead copies, and not only displaying them on its own homepage but on the homepages of about 20,000 sites of registered users' homepages, which is in substance a distribution of the LT link headlines…. Thus it must be said that the appellee's series of acts of the Line Topics Service have gone beyond the socially permissible limit and, having illegally infringed an interest of the appellant that is worthy of protection, constitute an unlawful act’. Guntram Rahn (1) P 594

References ★ )

1)

Rahn Guntram: Japan and East Asian Department, Max-Planck Institute, Munich Japan and East Asian Department, Max-Planck Institute, Munich

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Case No. 55: Copyright – Works of Applied Art – Law of Torts – Slavish Imitation – Unfair Competition Prevention – Designs

Document information

Publication

Business Law in Japan – Cases and Comments

Christopher Heath (★ ) Tokyo High Court, decision of 17 December 1991, Case No. Hei 2 (Ne), 2733 – Decorative Veneer

Jurisdiction Japan

Source: Chiteki Zaisanshū 23-3 (1991), 808 – 822 = 25 IIC 805 (1995)

Court

I Headnote(s)

High Court of Tokyo

A decorative, artistically designed veneer that has been mass-produced industrially does not enjoy copyright protection.

Case date

The identical copying of another person's design can be considered an infringement of commercial interests, if the design represents a certain artistic value and if the copies are sold to third parties at rock-bottom prices.

17 November 1991

II Relevant Provisions

Case number

Copyright Act, section 2 (1); Civil Code, section 709, Design Act sections 1, 2.

1990 ne 2733

Bibliographic reference

P 596

III Facts

Christopher Heath, 'Case No. 55: Copyright – Works of Applied Art – Law of Torts – Slavish Imitation – Unfair Competition Prevention – Designs', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 595 - 606

The plaintiff developed a veneer with a decoratively grained wood, to be applied to furniture. The furniture with the decorative grain was sold in Ogawa in the prefecture of Fukuoka. The defendant applied an identical veneer to the furniture it produced and sold it in the same region as the plaintiff at a much lower price. Through its court action, the plaintiff claims damages and cessation of further sales of the defendant's furniture with the identical grain. According to the plaintiff, the decorative veneer, although not registered as a design, enjoys protection under the Copyright Act as a work of art. In any case, the defendant's act of blatant imitation should be viewed as a contravention of the general tort clause of section 709 Civil Code. The Tokyo District Court dismissed the action. On appeal, the Tokyo High Court reversed the District Court's decision.

IV From the Opinion …II. The plaintiff owns all the rights to the original drawing of the grain in question. According to the plaintiff, since November 1983, the defendant has simply copied the grain, attached it by way of matrix reproduction to its own furniture and sold it under the brand-name ‘kajuaru uddo’ (‘casual wood’ – perhaps in the sense of ‘random grain’). In doing so, the defendant has infringed the plaintiff's copyright in the original drawing. Even if such infringement is to be denied, the plaintiff alleges an infringement of its sole and exclusive rights to the original drawing. Primarily on the basis of an infringement of its copyright, otherwise as an infringement of its rights of possession in the original drawing, the plaintiff claims damages as well as cessation of production, sale and distribution of the defendant's furniture. It has already been established by the court of first instance that the original drawing served as a model for mere utilitarian goods made by industrial mass production. As such, these articles are unable to qualify for copyright protection under section 2 (1) Copyright Act (creations of literature, science, art or music). Further, the court found that the rights of possession in the original drawing only refer to rights in material goods and are thus not infringed by the defendant's acts. Accordingly, the claims of the plaintiff are unfounded, since the above acts on the part of the defendant do not infringe the plaintiff's rights of possession. According to section 2 (1) Copyright Act, a work of art is defined as the ‘creative expression of ideas or feelings within the scope of literature, science, art or music.’ In addition, section 2 (2) Copyright Act provides that ‘works of art under the Copyright Act include artisan works.’ Thus, the provision of section 2 (1) Copyright Act clearly establishes that so-called applied works of art, which only use techniques and impressions of real art (as the expression of beauty meant for edification) for mere utilitarian goods, can only be The Copyright Act only protects craft works made in very P 597 utilitarian goods themselves. small numbers. As for works of applied art that fall outside the scope of craft works, the Copyright Act does not clearly define how far they can be protected under copyright law. First of all, it is certainly possible to protect works of applied art that serve as models for mere utilitarian goods that are used as prototypes for goods, made by means of

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industrial production technically identical and in large numbers, under the Design Act, since it is the purpose of this Act to promote the creation of such models and thereby to contribute to industrial development (Design Act, section 1). Also qualifying for protection are the form, pattern and colouring of the above products, including their connections as a subject of design rights (Design Act, section 2). Apart from that, even if the product in question has only been produced as a prototype for mere utilitarian goods – if, for example, a famous artist has created a work of high artistic value (as the highly creative expression of ideas for feelings), and such work can be said to have the quality of art – it should be protected as a work of art under the Copyright Act. In this connection the plaintiff claims that the grain on the veneer does not serve any practical purpose, but was made with the sole intention of creating an aesthetic feeling of luxury. Therefore, the court of first instance erred in refusing the artistic drawings copyright protection and in holding that the characteristic of the drawings was that they were merely intended for utilitarian goods, as the original drawing was an expression of the designer's individuality even if used for identical, natural veneers. The production process of the original drawing consists of steps that do not actually differ from those used for producing industrial designs that are meant to be utilitarian prototypes. Evidently, the prototype of the original drawing can be used industrially and applied to goods. The design in question is apparently fit for industrial use and has been applied to goods. Even in considering all the relevant circumstances, it has to be assumed that very few people would characterize the combination of grains in natural wood as representing a high degree of art, much less put it on a par with real art significantly different from run-of-the-mill, industrially devised designs. The opinion general consensus would thus not regard the designs as real works of art. As the original drawing cannot be considered a work of art under copyright law, the allegations of the plaintiff to the contrary have to be dismissed. III. The plaintiff claims in addition that even if no copyright in the original drawing or no rights to indirect, exclusive possession of the original print have been infringed, the defendant's acts of reproduction of the plaintiff's goods combined with the production of products by way of simple matrix copies should be held unlawful. To be considered unlawful under section 709 of the Civil Code an action has to infringe rights, even if these are not the subject of specific legal protection. It is sufficient if the action represents an infringement of interests that deserve legal protection. If an enterprise deals with the production and sale of goods to which original designs have P 598 been applied that increase the value of such goods, it must be regarded as an infringement of business interests if a third party sells identical goods to which virtually the same designs have been applied in the same geographical area at a lower price. According to the principles of free and fair competition, such an action has to be regarded as unlawful, as the protected business interests of a third party are infringed by unlawful means. In the case now before the court, the veneer applied to the plaintiff's goods has been devised like an inlay so as to create a natural grain through pattern designing. The original drawing was devised as a composite from designs of original veneer and subsequently coloured and printed. Both parties agree that the defendant produces and sells goods identical to those of the plaintiff and designates them as ‘kajuaru uddo’ (casual wood). A comparison of the objects submitted as evidence clearly reveals that the design used for the defendant's goods is a direct imitation of the plaintiff's goods down to the millimetre (so-called dead copy), apart from some slight differences in the colouring. Statements of witnesses as well as other evidence have established that the plaintiff had reached an agreement with an enterprise in the city of Ogawa (Fuku-oka prefecture) that all furniture with the veneer in question should be sold only to this enterprise via the large-scale retailer, Dainippon Shōji. It has further been established that it became increasingly difficult for the plaintiff to uphold the initial sales prices after November, when the defendant sold its products (that were nothing but imitations down to the millimetre) to a third party more cheaply, as a consequence of which the plaintiff had to slash prices when selling to Dainippon Shōji. Properly put into context, it is quite clear that the defendant undertook his sales activities knowing that the sale of its direct imitations in the city of Ogawa would disrupt the commercial activities of the plaintiff. According to the facts established above, the plaintiff applied an originally designed grain to its products, thereby increasing their commercial value. The plaintiff further undertook the production and sales of such goods. The defendant produced goods that were 100% identical imitations of the plaintiff's goods and sold the goods for a cheaper price in the same geographical area as the plaintiff. The plaintiff thus had difficulties in maintaining the sales price for his goods. The actions of the defendant diverge significantly from the permitted area of fair and free competition and are torts infringing commercial interests of the plaintiff which require protection. It has been alleged that the plaintiff himself was guilty of imitation, and that imitations of certain grains were quite frequent in the veneering industry. But no proof of these allegations has been forthcoming. Accordingly, the defence that the plaintiff could himself be held liable for unlawful acts has to be dismissed and the court is unable to

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exempt the defendant from its liability for damages to the plaintiff. In addition to the payment of damages, the plaintiff has asked the court to require cessation of production, sale and distribution of identical goods by the defendant. However, the unlawful acts of a competitor provide no legal basis for a claim of this kind. Such a claim could only be justified if a real, absolute right had been infringed by the tort. The mere award of damages because of an unlawful act is not evidence of such an absolute right. No claim for the cessation of the production, sale and distribution of goods can lie in an unlawful P 599 act if only commercial interests that deserve protection are thereby infringed. Thus, the plaintiff's request for cessation is unsuccessful. Translated by Christopher Heath

V Comment This is a case on the interface between copyright law, civil law, design law and unfair competition prevention law. It gives rise to a number of interesting issues: 1. Copyright protection for works of applied art, 2. Design protection, 3. Protection of commercial achievements under tort law, and 4. the protection against slavish imitation that shall be dealt with in this order. 1.

According to a decision of the Osaka High Court rendered in 2004, (1) ‘copyright law defines ‘paintings, engravings, sculptures and other artistic works’ as copyright works and also provides that an artistic work includes ‘a work of artistic craftsmanship’ (section 2(2)). Therefore, it is obvious that an artistic work is not restricted to the fine arts. However, it is not clear whether works of applied art, when putting aside the utility, shall qualify as artistic works under copyright law. Applied art can be categorized as follows: (i) (ii)

where a work of fine art is applied to a product in use, where employing the technique of fine art, the author aims to pursue an aesthetic expression that goes beyond the utility of product, and (iii) the case where the author employs just a sense or technique of fine arts to the mass production of goods. In addition to this categorization, the design of products used in industrial mass-production is supposed to be protected by design law so as to contribute to industrial development (Design Act, section 1), while copyright law aims at contributing to the development of culture (Copyright Act, section 1). Thus, legislative history seems to indicate that applied art should be protected by design law rather than by copyright law, which is also indicated by the difference in the term of protection between design law and copyright law…. We thus conclude that applied art does not receive protection under copyright law. However, when the author's applied art is an intellectual, cultural and spiritual work beyond the normal threshold of creativity, when it can be independently appreciated as art apart from its functionality and utility, when it obtains aesthetic aspects qualified as figurative art, and thus when it can be equal in aesthetic creativeness to fine art, such applied art is protectable as an architectural work under copyright law. P 600

In fact, Japanese courts have normally applied a high threshold of creativity in order to protect works of applied art. According to section 2(1) Copyright Act, a work of art is defined as the ‘creative expression of ideas or feelings within the scope of literature, science, art or music’. In addition, section 2(2) Copyright Act provides that ‘works of art under the Copyright Act include works of craftsmanship’. Thus, the provision of section 2(1) Copyright Act clearly establishes that works of ‘applied art’, which only use fine art techniques and which are merely utilitarian, can only be utilitarian goods themselves. The Copyright Act only protects craft works made in very small numbers.’ As for works of applied art which fall outside the scope of craft works, the Copyright Act does not clearly define how far they can be protected under copyright law. It is certainly possible to protect works of applied art which serve as prototypes for mass-produced utilitarian goods, since it is the purpose of the Act to promote the creation of such prototypes and thereby the progress of industrial development (Design Act, section 1). Also qualifying for protection are the forms, patterns and colouring of such products, including their associations as a subject of design rights (Design Act, section 2). Apart from this, even if the product in question has only been produced as a prototype for mere utilitarian goods - if, for example, a famous artist has created a work of high artistic value (as a highly creative expression of ideas or feelings) and such work can be said to have the quality of art – it should be

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protected as a work of art under the Copyright Act. As a result, a number of decisions have excluded protection under the Copyright Act for industrially made goods, (2) while others have upheld it. (3) Japanese courts thus seem to determine copyrightability in terms of degree of originality rather than production method (4) and it is certainly true that in many cases industrially-made products lack the degree of originality necessary to qualify for copyright protection. In fact, as Teramoto has conclusively proven, courts tend to grant copyright protection for applied art by subtracting the ‘degree to which expression in a work is restricted by its utilitarian function’ from the work's creative value. This approach can also be detected in the above decision Good Design Award. The same approach that Teramoto has detected in judging works of applied art seems to be taken for judging logos and trademarks. Here, the courts also reject copyright protection unless a sufficient degree of originality can be established. (5) That this approach is shared not only by the lower courts, but also by the Supreme Court is evidenced by the Nii Chair case. In Nii chair, the plaintiff created the design of a chair that visually conjures up a sense of beauty and in 1974 was selected as one of the permanent collection items of the New York Modern Art Museum and is described in art textbooks of junior high school. The Nii-chair is quite simply composed of seven parts: four pipes which are folded in two different ways; both right and left armrests; and one sheet of a seat. It can easily be folded. A copyright claim was dismissed in all instances, however. According to the Osaka High Court: (6)

P 601

‘Among applied art which is a practicable and aesthetic creation, only a work of artistic craftsmanship, which is included in an artistic work specifically stipulated under section 2 (2) Copyright Act, is an object protected by copyright law. The work of artistic craftsmanship should be considered an object for art even if it is of practical use. Considered whether the design of the chair falls within the scope of art, the design of the chair is of practical use which is intended to be mass-produced. The chair is an object that can be protected under intellectual property laws such as design law as a practicable and aesthetic work; however, the chair itself is not an object for art solely as a completely artistic work without practical and functional use. Therefore, the chair does not fall within the scope of an ‘art work’ stipulated by section 2 (2), or ‘other works of art’ stipulated by section 10 (4), nor a ‘creative expression of thoughts or feelings which falls within the scope of …., art’ stipulated by section 2 (1) Copyright Act. The appellant's argument that the chair has been housed in the Museum of Modern Art, exhibited in the International Furniture Messe and published in textbooks of art and general books does not affect the above decision. Accordingly, the design of the chair is not an object protected as a work under copyright law.’

2.

P 602

3.

It is clear that this rather narrow interpretation of a copyrightable work leaves some gaps in the protection of applied art and artistic designs. Protection under the Design Act is possible for ‘shapes, patterns or colour, or a combination of these in an article which produces a visual aesthetic impression’, section 2(1) Design Act, and which must be capable of ‘industrial manufacture’, section 3(1) Design Act. Designs can only be registered on condition that they have not been made public elsewhere prior to the filing date. The same applies to utility models under the Utility Model Act (an advanced technical innovation embodying a scientific process or processes), and patents under the Patent Act (highly advanced realisations of technical ideas in which a scientific principle is utilised). Yet, even though protection under these laws is available, application procedures are cumbersome, especially for products with short life cycles. Since designs are still substantively examined before being registered, application procedures may well take two years or more. Before registration, however, injunctive relief against infringement cannot be sought. The same applies to patents. Only in the case of utility models is no examination necessary. Yet an infringement suit can only be lodged after the registered (but at that time unexamined) utility model has been examined by the Patent Office. Thus, while registration can be effected without examination, such examination has to be undertaken before an infringement suit can be brought. As all these procedures involve the participation of the Patent Office, a certain delay is inevitable. Such delay can be fatal if the life cycle of a product is shorter than the examination procedure. It is therefore fair to conclude that design protection has not featured prominently in litigation suits in Japan in order to protect works of applied art. In the absence of a design registration and the qualification as a copyrightable work, the plaintiff in the above Decorative Veneer case relied on general tort law as interpreted by the Supreme Court in the Daigaku Yu decision (this book, case. 54). Ever since Daigaku Yu, the courts have awarded damages in cases in which the interest at stake fell short of qualifying as a right, but where the court felt uneasy with the unauthorized use. (7) In contrast to other cases in which the courts had identified protectable interests, in this case the legislature decided that the Unfair Competition Prevention Act should be amended in order to provide protection against slavish imitation. The reasons given were these:

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‘Introducing a new product contributes to society in that it enhances progress. Prohibiting the imitation of newly-released products is problematic insofar as a general prohibition would distort free competition and obstruct progress. On the other hand, making an identical copy would deprive the first person to put such goods on the market of the incentive for development and would therefore be unfair. Thus, when considering to what extent imitation should be made illegal, a balance has to be struck between society's need for progress and the need of people marketing products for incentives. The requirements of economic development and social benefit should both be taken into account. The object of intellectual property laws is the protection of creative efforts by way of granting a specific right. Hitherto this has been thought of as the limit of the extent to which imitation should be prohibited. However, the object of the Unfair Competition Act is to prevent certain unfair acts, against which civil remedies (injunction, damages) can be granted in order to maintain the system of fair competition. Especially in view of recent developments in copying and reproductive technologies, the increasingly shorter life cycle of products and the way in which retail structures have developed; it has become increasingly easy to deprive persons of the benefits of their financial and manpower investment by developing imitative products. While the costs and risks of marketing copied products have decreased greatly, so has the benefit to the person who first puts goods on the market. So much so, that the competitive relationship between the person who copies and the person who has developed the products has become unfair, and the incentive to develop original products and put them on the market has been reduced. In this situation, the possibility that the system of fair competition will collapse cannot be ruled out. Therefore it is necessary to recognise that direct imitations of another's goods down to the millimetre represent an act of unfair competition. In this way it will be possible to protect another's financial and human investment in the development of goods if there is also a possibility of choice in order to make them differently, regardless of the fact that protection under industrial property laws may or may not be available (so-called ‘dead copy’).’ (8)

P 603

4.

Since its amendment in 1994, section 2(3) Japanese Unfair Competition Act prohibits the act of transferring or dealing in (including the display for such purpose), or exporting or importing products that imitate the configuration of another party's products (excluding such configurations as are commonly used for such or similar goods, or that fulfil an identical or similar function or effect), provided that no more than three years from the date of first commercial distribution have elapsed. According to section 19(1)(v) Unfair Competition Prevention Act, the three-year marketing period is calculated from the first selling date in Japan. According to the Tokyo District Court: (9)

P 604

‘The provision of section 2(1)(iii) on the marketing of goods that are an imitation of the shape of another's goods amounts to unfair competition as follows. Where a person has successfully invested time and labour in order to develop and market a product, the copying and marketing of such product by an imitator can save the latter significant costs and risks, while at the same time depriving the first person on the market of the benefits of such a headstart. Between the firstcomer and the imitator, this amounts to unfair competition that in principle destroys the trust in the development of markets and products. Thus, for the person who has invested time and money in the development and marketing of a product shape that, despite its arbitrary selection, is copied and subsequently brought to the market in the form of goods, this is an act of unfair competition. In such cases, the profits that the firstcomer can expect shall be protected against subsequent imitation. Injunctive relief and damages under section 2(1)(iii) UCA are limited to the person who himself has developed and marketed goods, the shape of which has been copied….’ This provision did not see many cases in which it was successfully invoked (10) in the first ten years of its existence, as in most cases the courts found the products dissimilar, (11) ordinary, (12) functional (13) or part of an ensemble that as a whole was deemed dissimilar. (14) In addition, the provision still gives rise to some interesting questions. (15) For one, the provision is meant to give a period of three years' market exclusivity in Japan, yet does not (or so it seems), reward the making available of products on the Japanese market, rather the development of such goods. The issue is somewhat

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P 605

5.

P 606

unclear in view of the above NuBra decision, which allowed the sole import distributor of NuBra strapless bras to sue for infringement even though the development of such goods had not been his – a point that might need further clarification. Next, the defences to an alleged infringement are not yet entirely clear. In the above case the defendant could successfully prove that the plaintiff's goods had been developed by a Chinese company that had probably copied them from the defendant's supplier, for which reason the configuration of the goods could not count as the plaintiff's achievement – a classic unclean-hands defence Japanese courts had been reluctant to apply in the past. (16) Future decisions need to clarify, though, what exactly the thrust of this defence should be: does the defendant need to prove that the plaintiff has copied, or would it be sufficient (or even necessary) for the defendant to show that his goods were not copies of the plaintiff's due to an own or a third party independent development? The wording of the provision seems to favour the ‘copyright approach’ whereby an independent development does not amount to ‘copying’ or ‘imitating’. The defence should thus be that either the plaintiff has not spent time and money on the goods' development, (17) or the defendant independently developed the marketed goods. Due to the limitations contained in IP laws, making the slavish imitation of configurations an act of infringement has given rise to heated debates ever since. On the one hand there are those who would not acknowledge any protection of achievements beyond established intellectual property rights including those mentioned in Article 10bis Paris Convention – a position often found in Common Law countries (18) (that, however, often allow copyright to cover this perceived gap). (19) On the other hand are those that regard protection against slavish imitation as a solution to the perceived wrong of ‘ploughing with another's calf’ (20) or to gaps to be subsequently filled by legislation, (21) a position that has found an increasing number of critics. (22) This ambiguity is reflected in diverse patterns of international recommendations on the subject (23) and domestic legislation. (24) The picture gets even more diverse taking into account decisions that protect certain types of achievements such as news (25) or fashion designs. (26) Viewed in an international context, the Japanese provision against slavish imitation is nothing out of the ordinary. In the context of Japanese IP protection, the provision finds justification in the absence of swift design protection, high hurdles to obtain protection under copyright law for works of applied art and proof of secondary meaning for the registration of three-dimensional trademarks (see the Coca Cola case in this book, case no. 49). Case law has applied the provision rather cautiously.

Christopher Heath (1) P 606

References ★ )

1) 2) 3)

4) 5)

6)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich. Osaka High Court, 29 September 2004, 37 IIC 235 (2006) – Good Design Award. Osaka High Court decision, 14 February, 1990, final appeal rejected by the Supreme Court decision, 28 March 1991 – Neetier (reported by Ushiki (1992)); Tokyo District Court decision, 24 January 1992 – Decorative Window Bars; Nikkei Design 61 [1992]. Nagasaki District Court decision, 7 February 1973 – Hakata Dolls, 5-1 Mutaishū 18 [1973]; Kobe District Court decision, 9 July 1979 – Altar Statues, 11-2 Mutaishū 371 [1979]; Osaka District Court Decision, 21 December 1970 – California T-shirts, 2 Mutaishū 654 [1979]. S. Teramoto, Copyrightability and scope of copyright protection for a work of utilitarian character under the copyright law of Japan, 28 IIC 51 [1997]. In one case, the plaintiff Asahi had tried to stop a third party using the trademark ‘Asax’ and based the claim on trademark law and unfair competition law. When this was rejected (Tokyo District Court decision, 28 March 1994, 1994/10 Patent 96), the plaintiff tried to enjoin the continued use of the ‘Asax’ logo by the defendant under copyright law. However, the Tokyo High Court (26 January 1996, 249 Hanketsu Sokuhō 3 [1996]), denied protection because of lack of originality. Osaka High Court, 14 February 1990, upheld by Supreme Court decision, 28 March 1991.

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7)

8) 9) 10)

11) 12) 13)

G. Rahn in his comment on the Daigaku Yu case has given some examples. One could add the Mitsurei 27 case (decision of the Intellectual Property High Court, 24 December 2008, German translation in GRUR Int. 2010, 166) where the court denied protection to works created by North Korean citizens (despite North Korea being a member to the Berne Convention), yet affirmed a protectable economic interest and therefore awarded damages where the use exceeded a ‘socially acceptable threshold’. This decision was overturned by the Supreme Court on 8 December 2011. The Supreme Court affirmed that works of north Korean citizens could not enjoy copyright protection in Japan, but denied a claim under section 709 Civil Code, as it could see no ‘deviation from the ambit of fair competition’ in that a work that was denied protection under copyright law should not receive alternative protection under tort law. Sangyo kōzō shingikai chiteki zaisan seisaku bukai hōkōku (Study Group on Industrial Development, Section Intellectual Property Rights), January 1993, 15. Tokyo District Court, 26 April 2006, 39 IIC 627 (2008) – Shoulder Hip Belt. Tokyo High Court, 26 February 1998, 1644 Hanrei Jihō 152 – Dragon Node (successful in first instance only, but overturned on appeal); Osaka District court, 17 September 1998, 282 Hanketsu Sokuhō 17 [1998] – Toaster; Osaka District Court, 26 November 1998, 284 Hanketsu Sokuhō 18 [1999] – Lune Louran Paris; Tokyo High Court, 5 December 2005 – Women's Shirt; Osaka District Court, 26 July 2004, 37 IIC 480 [2006] – NuBra. Tokyo High Court, 26 February 1998, 1644 Hanrei Jihō 152 – Dragon Node. Tokyo District Court, 27 June 1997, 1610 Hanrei Jihō 112 – Animal Tag. Osaka District Court, 26 November 1998, 284 Hanketsu Sokuhō 18 [1999] – Lune Louran Paris (obiter dictum).

14) Tokyo District Court, 24 May 2005, 1933 Hanrei Jihō 107 – Manhole Steps. Osaka District

Court, 29 September 2004, 37 IIC 235 [2006] – Design Award.

15) A stimulating discussion on the subject is provided by K. Port, Dead Copies under the 16)

17) 18)

19)

20)

21) 22)

23)

24)

Japanese Unfair Competition Prevention Act: The new moral right, 51 St. Louis University Law Journal 93 (2006). In the only case in which this was an issue under sec. 2(1) (iii) UCA, the court rejected the estoppel of unclean hands out of hand: Osaka District Court, 10 September 1998, 1659 Hanrei Jihō 105 – Bear's Collection. The estoppel was accepted, though, by Sendai High Court, 12 February 1992, 793 Hanrei Times 239 – Earthbelt in a case where the plaintiff had obtain recognition for its goods by mistakenly labelling them as patented. E.g. Swiss Supreme Court, 4 February 2005, 37 IIC 610 [2006] – Search Spider: ‘The effort required for the exploitation of the results of the work is unreasonably small in proportion to the objectively necessary effort for the initial creation of the data.’ E.g. English High Court, 4 October 2006, L'Oréal v. Bellure, headnotes in 37 IIC 747 (2008): ‘The law of passing off is not designed to protect a trader against others selling the same goods or copied goods. The passing off claim instead hinges on the names and packaging of the offending products. No assistance can in this respect be derived from decisions in other countries where the cause of action appears to have been based on a more general idea of unfair competition than represents the law in the United Kingdom.’ See, e.g. the cases of the British House of Lords in Leslie v. Young [1894] A.C. 329 (copyright protection for a railway time table); English High Court, BBC v. Wireless League Gazette Publishing, [1926] Ch 433 (protection of TV programme guides). Recently also Dutch Supreme Court, 16 June 2006, 37 IIC 997 – Trésor Perfume (copyright protection for perfume smells). In this sense I understand P. Frassi, Protection under Modular Products Under Italian Law, 32 IIC 267 [2001]. Very clear also Austrian Supreme Court, 15 September 2005, 38 IIC 749 [2007] – Friendfinder: ‘Anyone who without any achievement of his own, without any creative effort of any consequence, adopts wholesale the unprotected achievement of another to compete with the injured party using the latter's own painstaking and expensive achievement acts dishonestly within the meaning of sec. 1 of the Act Against Unfair Competition’. M. Leistner, The Legal Protection of Telephone Directories, 31 IIC 950 [2000], and the decision of the German Supreme Court, 6 May 1999, 31 IIC 1055 [2000] – Tele-Info-CD. E.g. against ‘eternalising’ the shape protection of Lego bricks Canadian Supreme Court, 25 November 2005, Kirkbi v. Ritvik, 37 IIC 605 (refusal to grant trade mark protection); in the same vein Commercial Court Zurich, 17 December 2002, GRUR Int. 2004, 258 – Lego Formmarke (overturned on appeal and remanded back). More critical towards admitting claims against slavish imitation: now also German Supreme Court, 8 December 1999, GRUR 2000, 521 – Modulgerüst. While the WIPO Model Provisions against Unfair Competition 1994 include no protection against slavish imitation, AIPPI in 1995 recommended a text that included protection against slavish imitation also in the absence of confusion: Resolution to Question 115, adopted at the 34 AIPPI Congress in Montreal 1995. Spain (sec. 11 UCA 1991) and Switzerland (sec. 5c UCA 1986) specifically protect slavish imitation without confusion, while the new German UCA 2004 in sec. 4 (9) only lists acts of slavish imitation that entail a confusion of origin.

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25) US Supreme Court, International News Service v. Associated Press, 248 US 215. It is

well-known that R. Callmann took this case as a starting point for his (failed) attempt to introduce the concept of unfair competition prevention to US law: R. Callmann, He who reaps where he has not sown: Unjust enrichment in the law of unfair competition, 55 Harvard Law Review 595 [1942]. 26) German Supreme Court, 19 January 1973, GRUR 1973, 480 – Modeneuheit (Protection of fashion clothing for one season). 1) Head of the Asian Department, Max Planck Institute, Munich

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Case No. 56: Publicity Rights – Personality Rights

Document information

Christopher Heath

Publication

(★ )

Business Law in Japan – Cases and Comments

Tokyo High Court 26 September 1991 – Oniyanko Club Source: 28 IIC 416 (1997) = 1400 Hanrei Jihō 3 = 772 Hanrei Times 246

Jurisdiction

I Headnote(s)

Japan

To claim an infringement of an artist's right, proof is required that the artist's popularity has suffered.

Court

Using artists' names and photographs without their consent for producing and subsequently selling calendars infringes the artists' exclusive right to exploit their popularity commercially and entitles them to compensation and injunctive relief.

High Court of Tokyo

II Relevant Provisions

Case date

Copyright Act, section 23; Civil Code, section 709

26 September 1991

III Facts And Findings

Bibliographic reference

Christopher Heath, 'Case No. 56: Publicity Rights – Personality Rights', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 607 - 619

I. The appellees (plaintiffs of the original action) were actors of a television programme called ‘Yuyake Niyaniyan’ ‘Glowing Sunset Grin’ broadcast by the Fuji Television Company P 608 from 1 April 1985. Some of the cast consisted of television talents that had formed a group called ‘Oniyanko Club’ ‘Pussycat Club’ or ‘Club of the Grinning Chicks’ and appeared on stage in the programme. It is undisputed by the parties that as a consequence, their names and faces became widely known across the whole country. As established by the court of first instance, the appellant (defendant of the original action) had used the plaintiffs' names and photographs for calendars that he produced and subsequently sold (the products). The lower court has determined that there was insufficient evidence to show that the appellants would continue producing such calendars in the future. II. Injunction to Prohibit Product Marketing The appellees are artists that have obtained their reputation by their appearances on stage and the publicity of their productions broadcast by the mass media. Their names and faces are well-known throughout the country, and they have achieved wide popularity. Understandably the appellees, whose names and faces have become widely known, wish to enhance the popularity and esteem they have obtained. In other words, they themselves wish to exploit their popularity commercially. For artists, the personal benefits based on the concept of privacy are certainly different from the ones of the man on the street. Use of the names and photographs of artists may cause the formers' public esteem to decline. Depending on the manner of use, however, the general public may be favourably impressed, thereby enhancing the fame of such artists. Therefore, it is in effect difficult to claim that acts of use per se will damage the benefits derived from the personal reputation of the actors. It stands to reason that use of the names and photographs of actors having gained fame and popularity for products has a sales-promoting effect. The attraction for consumers that goes along with the use of the artists' names and photographs is based on the fame, esteem and publicity these artists have achieved. Such attraction in itself has to be regarded as of potential economic benefit and value, and for this reason should belong to the artists as a characteristic of themselves. Thus, analogous to property rights, it should be the artists' exclusive right to be in control of the commercial exploitation of the benefits and value of their attraction to consumers. Based on such right, an action for damages, as well as the right to request an injunction and destruction of infringing goods, shall be granted accordingly. In the present case before the court, the appellant has used the appellees' names and photographs for calendars that were produced and subsequently sold without the appellees' consent. Also the possibility of future sales without the necessary consent cannot be ruled out. According to the evidence, the appellant's products, apart from listing the year, month and day, contain no other characteristic feature than the names and photographs of the appellees, on which the attraction to consumers therefore entirely depends. Based on the appellees' proprietary rights mentioned above, they can therefore rightly demand cessation of the appellant's sales activities of the products as well as the destruction of such products in order to implement the injunction. P 609

The appellants have alleged that an injunction to prohibit use of the appellees' names and photographs could only be based on regulations of the Copyright Act or the Antimonopoly Law. As regards copyright law, an injunction claim could be based on an infringement of neighbouring rights, but the act of use did not in any way relate to the stage performance of the actresses. Granting the motion would thus amount to

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acknowledging the existence of an intellectual property right similar to copyright. Of course, it goes without saying that legal reasoning has to pay tribute to the principles of the special field of law concerned. Nevertheless, acknowledging the proprietary right of actors to make use of their popularity in economic terms and thereby restrain others from doing so cannot be considered the same as an injunction based on copyright law or intellectual property rights; rather, it is a different cup of tea and cannot be equated to the creation of a new intellectual property right. The appellants' view obscures the recognition of the legal roots of both copyright and proprietary rights, and because the foundations of both are different, the appellants' point cannot succeed…. The court of first instance has granted an injunction on the basis of an infringement of the artist's right of privacy. Nevertheless, such claim could only succeed if the names and photographs of the artists had been used in a way as to be detrimental to their reputations, as only then would the benefits deriving from their personalities have suffered. Since the appellees' names and photographs apparently have not been displayed in a way that has damaged the benefits deriving from their personalities, the injunction accordingly cannot be based on such infringement, and the lower court's reasoning must be considered fallacious…. III. Action to Recover Damages

1 Damages Based on the Use of the Names and Photographs Fuji Television had produced and sold calendars with the consent of the appellees. Neither Fuji nor the appellees granted such consent to other entrepreneurs producing and selling calendars displaying the names and photographs of the appellees. Fuji Television was responsible for planning and broadcasting the show called ‘Yuyake Niyaniyan’, and the policy adopted in making the programme was to hire lay actors and subsequently train them. Against such background, any entrepreneur had to obtain the consent of Fuji Television when manufacturing and selling the calendars. Accordingly, an appropriate contract to obtain such consent would have been necessary with all the members of the ‘Oniyanko Club’ (the appellees). The appropriate user fee would be similar to the one paid by Fuji Television. In calculating the user fee, 10% of the price of one calendar has to be deducted as actual production expenses, and 60% of the remaining amount to be divided into six parts – one to be paid to the production, and five to the appellees. The latter amount then has to be divided equally between the members of the ‘Oniyanko Club’. In the case of Fuji Television producing and selling the P 610 calendars, the price of one calendar was JPY 1,200, and the guaranteed minimum to be sold 50,000 copies. Since the ‘Oniyanko Club’ at that time consisted of 18 members, each of its members was entitled to receive an amount of JPY 150,000 as compensation for the use of its names and photographs. Insofar as the appellees have demanded compensation in excess of this amount, the claim is unfounded. Although the calculation of the user fee for Fuji Television producing and selling the calendars was due to the special relationship between the actors and Fuji Television, such calculation should be made in the same way in the case of third entrepreneurs using the names and photographs of the appellees, thereby entitling the latter to claim compensation for damages in the amount of JPY 150,000 plus an annual interest rate of 5% from the date the claim was raised, i.e., 8 October, 1986 ….

2 Damages Based on an Infringement of the Right of Privacy As regards damages based on the use of the names and photographs of the appellees and thereby damaging their personal reputation, it has been established by the lower court that the products sold by the representative of the appellants contained photographs of the faces of the appellees, but that this does not necessarily represent an infringement of the appellees' right of privacy. Undisputedly, the appellees were a group of popular television talents called ‘Oniyanko Club’ at the time the products were sold, that is in 1986. It has not been established, though, that publishing photographs of the faces of the members of the ‘Oniyanko Club’ has resulted in their popularity suffering in any way. In other words, the appellees had entrusted Fuji Television with the management of consent to the use of their names and photographs, but it appears realistic to assume that this merely had the function of managing the appellees' commercial potential. For this reason the damage incurred by the appellees through the use of their names and photographs without consent was equally limited to the economic loss for which compensation should duly be paid. Therefore, damage of the privacy right has not been established and the lower court erred in granting damages based thereon. IV Infringement of the Antimonopoly Act The appellants have alleged that by granting the appellees an exclusive right to use their names and photographs, any potential producer of calendars other than Fuji Television was barred from making and selling such calendars, thereby effectively hampering competition in a specific field of business and thus contravening section 3 of the Antimonopoly Act. While the appellees can certainly be considered entrepreneurs within the meaning of section 2(1) of the Antimonopoly Act, for a contravention of section 3 of the Antimonopoly

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Act it is required that ‘the activities of other entrepreneurs in a specific field of business be excluded or controlled’, section 2(5). In this respect, Fuji Television has been entrusted by the appellees with the exclusive management of marketing their names and P 611 photographs; but in concluding a contract giving Fuji Television the sole right to consent to the use of the appellees' names and photographs, the appellees have made legitimate use of their proprietary rights, and such act cannot be said to exclude or control the activities of other entrepreneurs in a specific field of business…. Translated by Christopher Heath

IV Comment 1 Introduction ‘Oniyanko Club’ is the leading case in the field of publicity rights. Already in the 1970s, the right of privacy was recognised not only as a legal interest, but as an absolute right (for this distinction, see the Daigaku Yu case (Case No. 54 in this book). This meant that the victim of an infringement could not only claim compensation, but also injunctive relief. ‘Oniyanko Club’ broadens the scope of the right of privacy in the direction of acts that are not necessarily detrimental to the reputation of a person, yet use his or her personality for commercial purposes.

2 Right to Privacy a. aa) As in many countries, it all started with the acknowledgement of the right to privacy (1) in Japan literally in the aftermath of a party. ‘After the Party’ was a book by the famous writer and right-winger Yukio Mishima in which he described the life of a Mr Noguchi. According to the novel, Mr Noguchi was an ex-foreign minister and twice candidate for the governorship of Tokyo. He was also a member of the Japanese Communist Party, and Mr Mishima did not have much good to say about him, especially regarding his shady financial transactions and connections in the ‘willy flower’ world of amusement districts. That could have worked well and made for nice reading had it not been for the fact that Mr Noguchi was clearly recognisable as the real life Mr Arita, who was not particularly charmed by the novel that artistically, but indistinguishably, mixed facts and fiction. A suit filed by Mr Arita for an alleged infringement of privacy was successful, especially because of the literary technique of mixing facts and fiction. The Court ordered the defendants to pay JPY 800,000 in damages and to publish an apology. (2) At least for Mr Mishima, the party was over. P 612

bb) Other decisions (3) more clearly established the boundaries between the right to privacy and the right of free speech. The courts have basically held the following: (1) (2) (3) (4)

The right to privacy is not infringed if facts of public interest are reported. There is no public interest if the reported facts are not true. There is no public interest if the facts or photos are used for purposes of commercial advertising. In case photographs are published, they must be related to facts that meet conditions (1) to (3).

b. It took a bit longer to recognise that there were rights beyond the right of privacy. (4) Several cases, however, dealt with unsolicited use of photographs or film scenes, the first of which was the Mark Lester case. (5) P 613

Mark Lester was a famous English actor, whose films were fairly popular in Japan. A closeup of his face in the film ‘Little Witness’ was used for a TV advertisement by the chocolate maker ‘Lotte’. The close-up of Mark Lester was accompanied by the text ‘From Little Witness – Mark Lester’; and: ‘Mark Lester likes it, too’ – apparently referring to Lotte chocolate. It is not clear if Mr Lester really liked Lotte's chocolate; at any rate, at that time he had an exclusive advertising contract with a competitor of Lotte, that is, Morinaga. The close-up used for the Lotte advertisement was in fact part of the Morinaga advertisement, and the message ‘Mark Lester likes it, too’ would thus also refer to the Morinaga advertisement. The court ruled that Lotte in part had used the Morinaga commercial, knowing that the plaintiff had not agreed to his photograph and name being used for that purpose, and knowing that it was a Morinaga commercial. In broadcasting the commercial, the defendant had infringed the broadcasting rights of EMI (who had granted permission to Morinaga to broadcast the ad), and by thus infringing the broadcasting rights, the defendant had also failed to ask the plaintiff for permission, since request for such permission was standard practice throughout the movie world, as the court pointed out. Thus, the court awarded the plaintiff damages of JPY 500,000 as an economic loss (the standard rate for such permission), plus JPY 500,000 because the reputation of the

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plaintiff had suffered from the fact that it could be suspected that Mr Lester had worked for two competing companies. The decision, although limited in scope, offers a very apt synthesis of the double-edged character of unauthorized exploitation of another's personality: loss of earnings because the publicity is uncompensated; loss of reputation because the publicity is damaging. Later decisions such as ‘Steve McQueen’ (6) concerned the problem of the artist not being directly connected to the advertised product. CBS had secured the rights to certain film scenes with Steve McQueen to be used for advertisements. Yakult and Matsushita Denki used the scenes for their own ads. The court found the facts materially different from the ‘Mark Lester’ case, since a close-up of Steve McQueen was only used as an eye-catcher and not in such a way that one could assume that Steve McQueen had endorsed the advertised products. The court therefore dismissed the claim. While the decision is certainly correct from the viewpoint of privacy rights (no infringement because no identification between artist and product), in regard to publicity rights, the case has certainly been superseded by the later ‘Oniyanko Club’ decision. In fact, the case is rather a denial than an acknowledgement of publicity rights. The decision ‘Fujioka Hiroshi’ (7) dealt with facts very similar to those of ‘Mark Lester’. Here, the plaintiff had entered into a contract with a franchising chain, for which he agreed to star in some advertisements. The contract expired, but the defendant, part of the chain, kept on broadcasting the advertisement. The plaintiff accordingly was awarded damages amounting to JPY 1.5 million, although he had asked for JPY 30 million in damages. The case does not go beyond the reasoning of Mark Lester. P 614

Hikari Genji (8) concerned mainly procedural matters in regard to lifting an interim injunction. The Tokyo District Court had issued an injunction preventing the defendant from selling goods bearing the photograph of the famous singer Hikari Genji in what came close to an acknowledgement of the ‘right of publicity’. Upon immediate redress, the court noted that for the use of the name and photograph of the appellee, a famous artist, on a considerable number of goods – especially if these goods come in an infinite variety of design and quality -without the appellant having obtained the consent of the appellee for the use of such name and photograph, detailed attention is required for a decision based on the existence of a right of publicity and its development. The appellee expressed his objection towards granting consent to the sale of such goods and obtained an interim injunction; it cannot be acknowledged that the value of such publicity right would not be harmed by such sale. The court did not explicitly acknowledge the right of publicity here, but simply that there might be one. It only had to deny the presence of ‘special circumstances’ under section 759 Code of Civil Procedure that would be necessary to lift an injunction. The court held: ‘On the related arguments regarding a right of publicity, some elements of the personality such as the image and the name have a positive value as a property right. This is a right whereby the own name or image that have a value for third parties when using if for the purposes of information etc. need the consent to use such right.’

3 Right of Publicity a. The leading case that clearly distinguished the ‘right to privacy’ from the ‘right to publicity’, defined as ‘the exclusive right to exploit the commercial value of one's attraction to customers’, is the ‘Oniyanko Club’ decision reprinted above. (9) The court basically made three observations: (1) (2) (3)

The ‘right of publicity’ is a real right and not just an economic interest; accordingly, an injunction can be obtained. For an infringement of the right to privacy, proof is required that the reputation or popularity has suffered. Persons with a marketing value such as artists have the exclusive right to exploit their popularity and fame commercially. In case of infringements, they can claim economic losses.

The scope of the decision was limited insofar as the defendants had only used the photographs of the plaintiffs, not the names, voices or any other personal features. P 615

b. The decision Kase Taishū (10) concerned a different problem from the one raised in the Oniyanko Club case above. It was a dispute between a production company and one of its artists, an area that interestingly enough is still highly unclear and not regulated by standard contracts in Japan. The court could leave these problems open, as the contract was terminated without the artist being prevented from joining another production company or using his name, photograph or voice. The court held the following: 1.

Exclusive use and control of artists' names and images is a proprietary interest, the use of which requires consent of the artist.

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2.

In case a contract between artist and production company does not clearly state the duration of the contract, a period of one year can be said to meet the interest of both parties.

But the case made clear that all this might present a minefield of problems. c. In line with the above cases involving famous and popular personalities, the ‘Eikichi Yazawa’ case (11) also concerned a popular rock singer. Mr Yazawa was imitated by a third person, and the imitation was used for an advertisement of a Pachinko parlour. In the settlement, the defendant admitted to an infringement of Mr Yazawa's privacy and publicity rights and agreed to pay JPY 3 million in damages. Further, both parties agreed that when staging a look-alike, the consent of the original, famous person must be obtained and the public informed that a look-alike is at work. It remains to be seen if these terms will be adhered to in future court decisions.

4 Limits of the Publicity Right The limits of the right of publicity are yet to be defined. According to a later decision (Dōi Bansui (12) ), the right of publicity is exclusively reserved to famous artists. The case concerned a sign, in front of the former house of the deceased poet Dōi Bansui, that was erected by the Sendai Prefecture. The heirs of the poet objected to the sign and sued, while the court dismissed the claim reasoning that the right of publicity was only available to famous artists (apparently musicians, models, etc.). We think there are more convincing reasons. Not ‘because the person is a poet, there is no right of publicity’, but rather ‘because the poet is a public personality, his exposure is permissible for the sake of providing information’. The decision is even one more example for the fact that the link between the right to privacy and the right of publicity has not been clearly P 616 understood. However, it should be noted that the court did not refuse relief just because Mr Dōi Bansui was no longer alive. A very imminent problem also concerns the possibilities of registering a trademark containing the name or photograph of a famous person. In Japan, apparently ‘James Dean’, (13) ‘Marilyn Monroe’ (14) and ‘Takehisa Yumeiji’ (15) have been registered, while ‘John Wayne’ was rejected. In principle, there is nothing much to say against a person's trademark being registered upon consent. As for deceased persons, the acknowledgement of a right of publicity should lead to the conclusion that agreement of the heirs is necessary for registration: the similarity with copyright law would suggest a similar period of protection for post-mortem rights of publicity.

5 Subsequent Developments a. The above cases on the right of publicity were decided in a relatively short period of time at the beginning of the 1990s. On behalf of the plaintiffs, most of them were argued by the flamboyant Tokyo lawyer Hideaki Kubori who was thereby instrumental in establishing publicity rights as proprietary rights. The key statements in Oniyanko Club were: (1) (2) (3)

The right of ‘publicity’ is a proprietary right and not just an economic interest; accordingly, injunctive relief can be obtained. For an infringement of the right to privacy, proof is required that reputation or popularity has suffered, while for an infringement of the right of publicity, unauthorised commercial use is sufficient. Persons with a marketing value such as artists have the exclusive right to exploit their popularity and fame commercially. In case of infringement, they can claim economic loss calculated on the basis of a licensing fee.

It was only about a decade later that other cases on publicity rights were decided that confirmed the above principles, yet also established further parameters in order to better delineate the right of publicity. b. In the Ramen Gamon II decision, (16) the Tokyo District Court summarized the position as follows:

P 617

A person can oppose the use of his name or image against his intentions, as this would make use of a person's personality rights (Supreme Court, 16 February 1988 and Supreme Court, 24 December 1969). The free use of a person's name or image for commercial advertisements can be objected to based on the exclusive nature of personal interests. In this respect, concerning celebrities such as actors or sportsmen, use of their name or image for the advertisement or otherwise of goods is a case of commercialising their personal features. As a celebrity is a famous person in society whose image has a certain amount of marketing power, this can lead to an increase in the sale of goods that represents an economic and valuable interest. Such economic and valuable interest that has its roots in the right of personality is a right that celebrities can exclusively use and that, in other words, is called a publicity right. There are various theories about the legal nature of the right of publicity. While the

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courts hold that it must be likened to a personality right, (17) in academic literature some argue that it can be likened to a property right, (18) that is, a commercial achievement protected by unfair competition prevention law, (19) and still others that it should be regarded as a right sui generis personality and intellectual property rights. (20) c. It is still not entirely clear whether production companies, based on a contract that stipulates an exclusive transfer of publicity rights, can independently sue for damages or injunctive relief, (21) or whether the artist must also join as a plaintiff. (22) Ultimately, this refers to the question as to what extent publicity rights can be freely transferred. (23) d. The limits of publicity rights for plants and animals were clarified in two cases. In a 2004 Supreme Court decision, the court had to decide upon the unconsented use of the name of a famous racehorse for a character in a computer game developed by a third party. While the second instance affirmed at least an economic interest (and therefore a claim for damages), the Supreme Court found that there was no case: (24)

P 618

‘From the gist and purpose of the above laws [intellectual property, tort], it does not seem appropriate to grant the owner an exclusive right of use over the name of a race horse, and thereby to allocate an immaterial object [i.e. the name] to an object such as the race horse, whatever customer appeal such a name may have. There is no legal basis for this. Further, as to what extent the use of the name of a race horse without permission amounts to an act of tort, it must be said that the form and scope of such a tort is not at all clear and, at least for the time being, should thus not be acknowledged. Consequently, the requests for injunctive relief or for acknowledging an act of tort cannot be affirmed. Even if, as the lower courts have pointed out, there are cases in which, based on contract, royalties have been paid for the commercial use of names of horse races, these contracts have been concluded in order to avoid legal disputes and to smoothen business operations. And, if such was the reason for entering into these contracts, the latter cannot indicate any common law or practice that would be a suitable basis for giving the owner of a race horse the exclusive right over commercially exploiting the horse's name.’ In a case decided two years earlier, the Tokyo District Court had denied a right of exclusive use for a beautifully cultivated maple tree in a case in which a third party had taken photographs of the tree and subsequently published them. (25) e. Difficulties in defining the correct basis for an infringement claim (see above 3.) also leave room for doubt about what should actually be considered an infringing act. In the Pink Lady case, (26) the defendant had used a number of photographs of two well-known female artists (Ms Nemoto and Ms Kuwaki) that had formed the group ‘Pink Lady’, and reported on their need to go on a diet. The photos had been taken during several of their shows and were about 30 years old. These photos showing the ladies in their prime were meant to prove that, when compared with the how the ladies currently looked, a diet was necessary. The Tokyo High Court denied infringement and held as follows: ‘Accordingly, the case concerns the use of the photographs of the Pink Lady singers taken from various dance shows in order to report on their diet. In other words, use is made of this choreography in order to bring them before the reader's mind. Furthermore, these photos were taken by a cameraman on behalf of the plaintiff's [the two ladies in question] production company. While these photos were not literally in the custody of the cameraman when they were reused, and although such reuse had not been consented to by the plaintiffs, the latter are well-known in Japan, and making use of the photos merely in order to bring the plaintiff's back to the readers mind is not sufficient [for affirming infringement]. When taking into account all the circumstances,… it cannot be affirmed that the plaintiff's exclusive rights in their names and photographs were infringed.’

P 619

The Tokyo High Court reached the opposite result in a case in which, for reporting purposes, photos from the private sphere of the artists (in other words, paparazzo photos) had been used. (27) On 2 February 2012, the Supreme Court has ruled on the final appeal in the Pink Lady case. The court denied infringement and confirmed the absolute nature of a publicity right based on personality rather than copyright or unfair competition. Christopher Heath (1) P 619

References 31 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

★ )

1)

2) 3)

4)

5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich A short introduction in German is provided by H. Saito, Persönlichkeitsschutz auf privatrechtlichem Gebiet in Japan, in Festschrift für Heinrich Hubmann zum 70. Geburtstag, 97-402 (1985); Japanese introductions by Saito, Jinkaku kachi no hōgō to mimpō (The protection of personality interests and civil law) (1986); Oie, Shōzōken (Rights in images) (1979); ibid., Shōzōken kankei hanrei shū (Decisions relating to the rights in images) (1989); Kai, Shashin to jinken (Photographs and Personality Rights) (1971). Tokyo District Court, 28 September 1964, 15-9 Ge-Minshū 2317–1370 – After the Party. Supreme Court, 23 June 1966,453 Hanrei Jihō 29 – Lower House Member; 16 April 1981, 1000 Hanrei Jihō 25 – Gekkan Pen. Tokyo District Court, 15 June 1987, 1243 Hanrei Jihō 54 – Wedding Ceremony; 23 June 1989, 1319 Hanrei Jihō 132 – Weekly Friday; 14 March 1990, 1357 Hanrei Jihō 85 – Naked Suspect; 22 May 1990, 1357 Hanrei Jihō 93 – President in Wheel-Chair; 25 July 1988, 1293 Hanrei Jihō 105 – Attorney I; 29 January 1985, 1160 Hanrei Jihō 97 – Pro Boxing School; 28 February 1987, 1242 Jihō 73 – Philippino Girls; Osaka District Court, 27 December 1989, 1341 Hanrei Jihō 53 – Aids Victim; Otsu District Court, 18 April 1988, 1290 Hanrei Jihō 122 – Upper House Member; Tokyo High Court, 17 October 1989, Hanrei 1327 Jihō 34 – Attorney II; Okayama District Court, 3 September 1991, 1408 Hanrei Jihō 34 – Expert Opinion. Literature: Oie, Shōzōken (Rights in photographs) (1979); Takeda, Meiyō, publicity shingai ni kan suru minji sekinin no kenkyū (Civil liability for infringement of publicity rights) (1982); Ushiki, Shōhinkaken (Marketing personality) (1980); Oie, Geinōjin hanrei hyakusen (Decisions on artists' rights) (1984); Y. Saito, Publicity ken no heikei to mondai (Problems relating to publicity rights) (ka, ge), 427 NBL 28 (1989); 428 NBL 52 (1989); Oie, Jinkakuken to publicity ken (Personality rights and publicity rights), 10 Tokkyo Kenkyū 10 (1990); M. Takeda, Privacy songai to minji sekinin (Infringement of privacy and civil liability), 1353 Hanrei Jihō (1990) 3; Honma Oniyanko club jiken (The Oniyanko Club case), 45-10 Patent 58 (1992); Shimizu, Geinōjin no publicity (Artists' and publicity rights), 6-1 Surugadai Hogakū Zasshi 78 (1992); Yasukura, Chomei geinōjin no shimei (Names of famous artists), 1992-4 Hōritsu no Hiroba 35; Oie, Kase Taishū shutsuen kinshi to seikyū jiken (On the injunction against using ‘Kase Taishū’), 90-12 Hatsumei 120 (1993); H. Saito, Shōzō publicity ken no hōgō (Protection of images under publicity rights), 1018 Jurist 7 (1993); ibid., Shimei, shōzō no shōgyōteki riyo ni kan surukenri (Rights in names and images in business), 15 Tokkyo kenkyū 18 (1993); Miura, Shōzōken kenkyū jōsetsu (Studies on the right in images), Mimpo to chōsakukenhō no shomondai 770 (1993); T. Takeda, The right of publicity in Japan (Master's Thesis, University of Washington, 1993); T. Takeda, Shimei, shōzō no zaisanteki kachi (Images and names as proprietory rights), 91-3 Hatsumei 97 (1994); Ushiki, Publicity no kenri to shōhyōhō to no kankei (Publicity rights and trademark law), 47-5 Patent 4 (1994); Hayashi, Chōsakuken to shoyūken, soshite publicity no kenri ni tsuite (On publicity rights, copyright and proprietory rights), Chiteki zaisanken no gendaiteki kamon 225 (1995); Tatsumura, Publicity no kenri no hogo no gendai to shomondai (Protection of publicity rights – actual and future problems), 35-7 Copyright 2 (1995); T. Takura, Publicity no ken (Publicity rights), Chiteki zaisan wo meguru shomondai 473 (1996); Ito, Mono no publicity ken (Publicity rights in objects), Chiteki zaisan wo meguru shomondai 507 (1996); Ushiki, Publicity no kenri to kyōdō fuhōkōi sekinin (Publicity rights and concurring liability under tort law), Chiteki zaisan wo meguru shomondai 523 (1996). Tokyo District Court, 29 June 1976, 817 Hanrei Jihō 23; 339 Hanrei Times 136 – Mark Lester. Tokyo District Court, 10 November 1980, 981 Hanrei Jihō 19 – Steve McQueen. Fukuyama District Court, 31 October 1986, 1218 Hanrei Jihō 128 – Fujioka Hiroshi. Right to lift interim injunction denied by decision of the Tokyo District Court, 27 September 1989, 1326 Hanrei Jihō 137 – Hikari Genji. Already in 1986, the plaintiffs had obtained an interim injunction in this matter: Tokyo District Court, 6 and 9 October 1986, 1212 Hanrei Jihō 142. Tokyo District Court (as court of first instance), 30 March 1992, 1440 Hanrei Jihō 99, and Tokyo High Court, 30 June 1993, 28 IIC 408 (1997) – Kase Taishū. Settlement before the Tokyo District Court, reported in Asahi Shinbun, 19 April 1994 = 28 IIC 412 (1997) – Eikichi Yazawa. Tokyo District Court, 4 June 1992, 788 Hanrei Times 207. Registered on 30 November 1988 – trademark no. 2098112. Registered on 28 April 1974. Apparently registered for sweets, as can be deduced from the decision Takehisa Yumeiji, Tokyo High Court, 22 January 1991, 764 Hanrei Times 249. Tokyo District Court, 28 April 2010, Ramen Gamon II. Tokyo District Court, 14 June 2005, 1917 Hanrei Jihō 135 – Yazawa Eikichi Pachinko; Tokyo High Court, 27 August 2009, 2060 Hanrei Jihō 137 – Pink Lady. Confirmed by the Supreme Court, decision of 2 February 2012. H. Saito (supra note 4), 15 Tokkyo Kenkyū 19. Y. Inoue, Publicity no kenri no ryōkōsei – sono rironteki no kijun toshite kondo boshikitei (The double-faced nature of publicity rights – its legal basis of protection as the provision for avoiding confusion), in: Gendai kigyo hōgaku no kenkyū, Tokyo 2001, 127; C. Heath, The System of Unfair Competition Prevention in Japan, London 2001, 161.

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20) Y. Tamura, Fusei kyōsohō gaisetsu (Outline of Unfair Competition Law), 2nd ed. Tokyo

2003, 508.

21) The above Kase Taishū decision, and also Tokyo High Court, 25 February 2008 – Pro

Yakkyu; Tokyo High Court, 28 April 2010, Ramen Gamon I and II. 22) Tokyo District Court, 31 August 2005 – Bubka. 23) In the affirmative Tokyo District Court, 31 March 2005, 1189 Hanrei Times 267 –

Nagashima Isshige; Tokyo High Court, 17 July 2002, 1809 Hanrei Jihō 39 - Rockband Kuroyume.

24) 25) 26) 27) 1)

Supreme Court, 13 February 2004, 37 IIC 352 (2006) – Keiba / Gallop Racer. Tokyo District Court, 3 July 2002, 35 IIC 255 (2005) – Maple Tree. Tokyo High Court, 27 August 2009, 2060 Hanrei Jihō 137 – Pink Lady. Tokyo High Court, 26 April 2008, 1954 Hanrei Jihō 47 – Bubka Special 7. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 57: Patent Law – Licensing Law – Exclusive Registered Licensee – Standing to Sue

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Jörn Westhoff

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 17 June 2005 – Case No. Hei 16 (Ju) 997, A & Kabushiki Kaisha Iyaku Bunshi Sekkei Kenkyusho v. Sumisho Electronics Kabushiki Kaisha – ‘FlexX’

Jurisdiction

Source: 37 International Review of Intellectual Property and Competition Law (IIC) 221 (2006)

Japan

I Headnote(s)

Court

A patentee shall not lose his right to seek injunctive relief even when he has granted an exclusive, registered licence to a third party.

Supreme Court of Japan

II Relevant Provisions

Case date

Section 101 Patent Act

17 June 2005

III Facts

Case number 2004 Ju 997

Parties

Claimant, A & Kabushiki Kaisha Iyaku Bunshi Sekkei Kenkyusho Defendant, Sumisho Electronics Kabushiki Kaisha

Bibliographic reference

The plaintiffs (appellant, appellee) are the owners of a process patent on the ‘search for the structure of the stability complex of ligand molecules and a biopolymer’ (Pat. No. P 622 2621842). The patentees granted an exclusive, registered licence (senyō jisshi ken) for the territory of Japan over the complete period of the patent term to a third party that is not part of these proceedings. The defendant (appellee, appellant) imports and distributes CD-ROMs containing a program called ‘FlexX’ that is in effect a molecule modelling system software. The plaintiffs assert that the program falls within the scope of their process patent. The plaintiffs regard the defendant's acts of importing and distributing the program and the CD-ROM as an infringement of their process patent under section 101(3) Patent Act (products which are used only for the employment of a process patent) and seek an injunction against the importation and distribution of the CD-ROM and the program. The Tokyo District Court (6 February 2003, Hei 13 (Wa) 21278) rejected this claim, as it found the program was not infringing and the patentee lacked standing to sue:

Jörn Westhoff, 'Case No. 57: Patent Law – Licensing Law – Exclusive Registered Licensee – Standing to Sue', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 621 - 628

‘Section 77(2) provides that the exclusive licensee shall have the exclusive right to commercially work the patented invention in accordance with the scope of the licence agreement, while section 68 provides that a patentee shall have an exclusive right to commercially work the patented invention. However, this right shall not be exercised to the extent that the exclusive licensee has a right to work the patented invention under an exclusive licence. Thus, when a patentee has granted an exclusive licence, only an exclusive licensee has a right to seek injunctive relief over the scope of the licensed patent, and the patentee no longer has a corresponding right to seek an injunction. The right to seek an injunction (section 100 Patent Act) is designed to secure the right to work the patented invention. A patentee therefore cannot claim such a right where the corresponding right to work the patented invention has been ceded to an exclusive licensee, and there are no specific needs to allow the patentee to exercise such right for claiming injunctive relief. This case is different from the preservation of a right, e.g. to become a defendant in an invalidation suit or the right to become a plaintiff in an appeal against an invalidation decision.’ On appeal, the Tokyo High Court (27 February 2004, Hei 15 (Ne) 1223) reversed the decision: ‘Section 100 Patent Act provides that a patentee or an exclusive licensee shall have the right to request a person who is infringing or likely to infringe the patent or exclusive licence to discontinue or refrain from such infringement…. Even when a patentee has granted an exclusive licence, a patentee needs to seek injunctive relief against infringement where he receives a licensing fee based on the exclusive licensee's sales turnover. The same holds true where the patentee under an exclusive licence agreement is obliged to request the discontinuance of infringing acts against third parties. Also here, such patentee is in need of exercising the right to claim injunctive relief. Even when the patentee is under no such duty, it is necessary for him to preserve his right by claiming injunctive relief in case the exclusive licence is terminated or is abandoned by the licensee.’ The defendant (appellee) appealed to the Supreme Court.

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P 623

IV Findings We determine that a patentee has standing to sue for seeking injunctive relief even where the patentee has granted an exclusive licence to a third party. A patentee has a right to seek injunctive relief in order to have others discontinue or refrain from infringement (section 100(1)). When a patentee grants an exclusive licence to a licensee, his exclusive right to commercially work the patented invention shall not be exercised to the extent that the exclusive licensee has a right to work the patented invention (section 68). Thus, the issue here is whether a patentee's right to seek injunctive relief is also restricted by this provision. Judging from the wording of section 100(1) Patent Act, there is no room for the interpretation that the right to seek injunctive relief is restricted. Also on substantive grounds, it is necessary to protect the patentee's right to seek discontinuance of an infringement so as to protect the patentee's licensing income in cases where the amount of the licensing fee is based on the turnover of an exclusive licensee's sales. In addition thereto, it is generally necessary to allow patentees to exercise their right to seek injunctive relief, because a patentee might suffer a loss when an exclusive licence is terminated for some reason and the patentee is in need of exercising his patent right. For the above reasons, we conclude that a patentee shall not lose his right to seek injunctive relief even when a patentee has granted an exclusive licence to a licensee. Translated by Mineko Mōri

V Comment 1 The ‘Licence Triangle’ The above decision highlights problems occurring along one line of the ‘licence triangle’, a metaphor that describes the three legal relationships that are usually constituted by a licence contract, namely between: – – –

licensor and licensee; licensee and third parties; licensor and third parties. (1)

Third parties are involved and the matter becomes a triangle because the licensee grants against everyone who infringes the right – provided, however, that the licensee only receives this right against third parties by virtue of registration of the licence contract according to section 98(1) of the Japanese Patent Act.

P 624 rights derived from an IP right, which, generally speaking, can be held

2 Three Decisions: One Wrong, One Right, One with Legal Reasons The question which the courts had to decide in our case was whether a licensor, by granting an exclusive licence, forfeits his right to hold the licensed IP right against a third-party infringer. The answers given by the involved courts differed from instance to instance. The Tokyo District Court denied the injunction against the infringer, reasoning that the right to seek an injunction against an infringer according to section 100 of the Japanese Patent Act ‘is designed to secure the right to work the patented invention’. Hence, only a person who has the right to work the patented invention, stands to seek injunction against an infringer, and by virtue of an exclusive licence the owner of a patent cedes to the licensee his right to work his invention, section 77 (2) of the Japanese Patent Act. On appeal, however, the Tokyo High Court gave the best answer to the legal question that any lawyer can give to any legal question: it depends. Namely, if a patentee, who has granted an exclusive licence, is interested for his very own commercial reasons in fighting against an infringement of his licensed patent, he is entitled to claim injunctive relief. He does have his own commercial reasons if, as in this case, he receives a licensing fee that depends on the licensee's sales turnover. The Supreme Court upheld the Tokyo High Court's decision and provided the doctrinal base: Judging from the wording of section 100 (1) of the Japanese Patent Act, the licensor's right to seek injunctive relief is not restricted. The provision reads: A patentee or exclusive licensee may demand a person who infringes or is likely to infringe the patent right or exclusive licence to stop or prevent such infringement. (2) Furthermore, when seeking the ratio legis, the court could not find reason to assume that section 77(2) of the Japanese Patent Act means to take from the patentee all rights to safeguard his patent even if he has granted an exclusive licence. The provision reads: An exclusive licensee shall have an exclusive right to work the patented

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invention as a business to the extent permitted by the contract granting the licence. (3) P 625

In a systematic and pragmatic approach, the Supreme Court held that, first, an exclusive licence does not mean that the patentee has forever lost his patent rights, since the licence contract might be terminated for some reason before the patent right itself lapses. Only because of this possible future, the court seems to say, he must be able to fight against infringements even as long as the licence contract is still in force, in order not to be left with a commercially worthless patent. Second, if the licensor has a continuing interest in the patent even while the licence is in force, for example, because of licensing fees, this fact alone justifies that he has standing to sue for seeking injunctive relief.

3 Open Questions 1 Licensor without immediate commercial interest The discussed judgment does not answer the question in which cases the licensor might have lost completely his right to seek injunctive relief against an infringer. Considering only the Supreme Court's reasoning on the wording of section 100(1) of the Japanese Patent Act, one might conclude that the law does not provide for an inclusion of the standing to sue in the rights transferred by an exclusive licence and, hence, the patentee never fully gives up his right to sue an infringer. On the one hand, taking into account the Supreme Court's discussion of the ratio legis, it seems that a licensor of an exclusive, registered licence is no longer entitled to seek relief against an infringer once he has lost commercial interest in the patent, for example, in case he has received a lump sum payment as a licence fee and thus the commercial success of the licensee does not affect the advantage he has already drawn from his patent. On the other hand, with the Supreme Court's reasoning that the licensor can be interested in infringement just because the licence contract might be terminated before lapse of the period for which the patent is protected, it seems that the licensor, even when fully compensated for the transfer of his rights to the patent, might be entitled to sue against an infringer because of the – more or less – remote chance that the rights given away with the licence might return to him one day. So far, the question has not been answered in published decisions. 2 Claim and Calculation of Damage a) The Licensor As the Supreme Court in the case discussed here only had to decide on injunctive relief, there was no need to answer the question as to whether and to what extent the licensor of an exclusive licence agreement may claim liquidated damages from an infringer of the licensed patent. At the very least, it would be consistent with the Supreme Court's reasoning to assume that the licensor, who is not entitled to work the patent, is P 626 consequently not entitled to seek disgorgement of the infringer's profits. This claim belongs solely to the exclusive licensee. (4) If, however, the licensor is still entitled to receive licence fees (not the case if he has received a lump sum as full compensation already), then he is eligible to compensation for lost profit. As for the calculation: lost profits, according to section 102 (1) Patent Act, may be presumed to be the amount of profit per unit of articles which would have been sold by the patentee or the exclusive licensee if there had been no such act of infringement, multiplied by the quantity (...) of articles assigned by the infringer, the maximum of which shall be the amount attainable by the patentee or the exclusive licensee in light of the capability of the patentee or the exclusive licensee to work such articles;… (5) Obviously, there is no ground for such a claim if neither the patentee nor the exclusive licensor ever worked the patent, (6) but, other than that, the licensor is entitled to calculate his damage by licence analogy. (7) In contrast, the licensor of a non-exclusive licence may calculate based on his individual damage or by way of licence analogy or he may claim disgorgement of the infringer's profits. b) The Licensee The situation of the holder of an exclusive, registered licence is quite unclear when it comes to calculation of damages. While it is obvious from section 102 (1) Patent Act that the licensee may claim damages based on his own injury or on the infringer's profit, there is no final decision on the question as to whether the licensee has to deduct from his damages the amount which the licensor would be entitled to claim, which would be fair from the infringer's perspective, as he might face being sued by both, or whether the licensee may claim the full amount of his damage, which seems fair from his position as

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he has to pay licence fees to the licensor regardless of any infringements by third parties. (8)

4 New Legislation In recent years, companies have become more and more aggressive in the marketing of their patent rights at an early stage, often while the patent is still pending. In particular, P 627 developers of new technologies at universities and other not so wellfunded institutions often depend on marketing their inventions as early as possible in order to raise funds for further research and development. In addition, the number of M&A or similar takeovers has increased as well, adding to the trend to trade licences and patents from one holder of the rights to the next. According to a survey conducted by the Japan Patent Office, the number of transfers of the right to receive a patent was 11,370 in 1999, 18,819 in 2001 and 21,336 in 2006. (9) Concerning our case above and its underlying principles: the increasing utilization of licences and the frequent transfer of patent rights, that is, the rights to receive a patent, have resulted in greater potential risks that the licence agreement be terminated, if either the licensed patent or the patent application is transferred, or in case of bankruptcy of either party. Hence, the interest of the licensor to protect his patent even when in possession of an exclusive licence has become even more vital. The Supreme Court's decision is thus to be welcomed for best safeguarding the interests of both the licensor and the licensee of an exclusive, registered licence from a procedural point of view. However, a licensee may find himself holding an exclusive, yet unregistered licence, because registration of a licence requires the consent of both the licensor and the licensee, and it is deemed by the Japanese courts that the licence contract alone does not imply the licensor's consent for registration (10) and cannot be claimed from the licensor without explicit provision in the licence contract. (11) In such cases, that is, when the licence is not registered, the licensee may not, according to Japanese courts, claim for discontinuation of infringement, (12) which could prove burdensome, if the licensor is not interested in suing the infringer himself. Furthermore, a licensee of an unregistered licence at least prior to the Patent Act amendment 2011 was unable to assert his rights against any third party to which the licensor had sold the patent in the course of his business. The reasons for a licensor, who did not willingly cooperate in the registration of a licence, were based on the concern that a registration would make public information such as the name of the licensor and the licensee, the scope of the licence and the licence fee, etc., which the parties or at least the licensor felt were important business secrets and should be kept confidential – at least at an early stage when not a patent, but only the rights resulting from a pending application were transferred. Until recently the registration of licences for pending application was not possible, be it an exclusive or non-exclusive licence, which put on risk venture capital invested in such pending patents and thus limiting the chances of entities that depended on venture capital for further development. P 628

In order to protect the licensee, who without registration had had no chance to act against infringers, an amendment of the Patent Act and the corresponding Patent Act Enforcement Order which became effective 1 April 2009, (13) provides that holders of a licence on a pending patent can file for registration of a provisional licence that protects their licence rights. (14) A provisional licence holder is protected even if the underlying patent application is transferred in connection with a business transfer, and a provisional licence cannot be terminated by a bankruptcy trustee. (15) To protect the licensor and lift the concerns that the registration of licences at an early stage might cause risks for his business secrets, the amendment limited the information that must be disclosed during the process. The only public information is the licensor's name and the patent number. Other information, such as the licence scope and licence fees, is not made available to the general public. However, the Patent Office will disclose the name of the licensee and the scope of the licence to parties who have an interest in the licence. Persons who have an interest include: a holder of the patent right, a party who has a right to be granted the patent, licensee, a pledgee and other secured party, an attaching creditor and a person who has a right to disposal of property. (16) In a further twist, with the 2011 amendment to the Patent Act, in force since 1 May 2012, the system for registering non-exclusive licences has been abolished, as all licensees will be protected against the acquisition of the right by third parties. Until 2014, further discussions will be held in order to reform the system of exclusive licences, in particular because the difference between an exclusive, registered licence, and an exclusive nonregistered licence are not well understood abroad, and because the system of registration as such is considered cumbersome and unwelcome due to the issues that have to be made public by the act of registration.

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Jörn Westhoff (1) P 628

References ★ )

1)

2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 1)

Jörn Westhoff: East Asian Studies (Bochum University) For a discussion on all three lines of the triangle, see C. Heath, Lizenzen und Technologietransfer, in: H. Baum, M. Bälz, Handbuch Japanisches Handels- und Wirtschaftsrecht, Köln 2011, p. 1041 – 1082 (1053 – 1060); C. Heath, Fred Perry, a Case of Identity – New Developments in Japanese Licensing Law, in: Beier/BrüningPetit/Heath, Festschrift für Jochen Pagenberg, Cologne etc. 2006, p. 135 – 150. Inofficial translation provided by the Japanese Ministry of Justice at . Ibid. C. Heath (2011) fn 1, p. 1057. Inofficial translation provided by the Japanese Ministry of Justice at . DC Osaka, 27 March, 1978, Mutaishū 10-2, 102; DC Tokyo, 29 May, 1998, Hanrei Jihō 1663,129. C. Heath (2011) fn 1, p. 1057. C. Heath (2011), fn 1, p 1058 with jurisdiction in both directions. A. Nomoto / Y. Ohba, Partial Amendment of the Japan Patent Law, available at: . Supreme Court, 20.04.1973, Hanrei Times 258; C. Heath (fn 1, p. 3); K. Hinkelmann, Gewerblicher Rechtsschutz in Japan, 2nd. ed., München 2008, Rn 790. Supreme Court, 20.04.1970, Case No. Showa 47 0 395; K. Hinkelmann (fn 10), rn 809. K. Hinkelmann (fn 10), Rn 1069. Law Partially Amending the Patent Law and other IP-related Acts, Law No. 16/2008. For details on the mutual obligations of licensor and licensee in case that a pending application is licensed, see C. Heath 82011), fn 1, p. 1062-1063. . Nomoto/Ohba (fn 4). East Asian Studies (Bochum University)

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Case No. 58: Antitrust Law – Price Fixing – Administrative Guidance – Fair Trade Commission

Document information

Publication

Ursula Eisele

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 24 February 1984, Case No. 1980 a 2153, in re Japan v. Idemitsu Kōsan K.K. et al. (1) – Oil Cartel

Jurisdiction

Source: Keishū 38-4, 1287 et seq., Hanrei Jihō 1108, 3 et seq., Hanrei Times 520, 78 et seq.

Japan

I Headnote(s) The criminal offence of section 89 (1) (i) AMA is accomplished if parties negotiate and determine prices and mutually agree to bind their business activities, and if such agreement contrary to the public interest substantially restricts competition in a particular field of business. The said criminal offence is accomplished even if the parties have not realized the substance of their agreement or the date agreed upon [for executing the agreement] has not yet come.

Court

Supreme Court of Japan

Case date

24 February 1984

In view of the aim and legislative intent of the AMA and its history of amendments, the be interpreted as follows: conduct is generally contrary to the public interest if it is against the freely competitive order, which is the direct interest protected by the AMA. However, even if an activity appears to violate the letter of the AMA, one might in exceptional cases reasonably decide, after comparing the interests protected by the statute with the interests protected by the activity, that where the activity does not substantially violate the ultima ratio of the AMA, which is ‘to protect the interests of the general consumers and to promote the healthy and democratic development of the national economy’, such activity is excluded from the scope of ‘unreasonable restraint of trade’.

P 630 ‘contrary to the public interest’ provision in section 2 (6) AMA should

Case number 1980 a 2153

Parties

Claimant, Japan Defendant, Idemitsu K osan K.K.

Bibliographic reference

Ursula Eisele, 'Case No. 58: Antitrust Law – Price Fixing – Administrative Guidance – Fair Trade Commission', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 629 - 648

The price of goods should be formed through free competition within the market. This is a major principle of the AMA. The government should not readily interrupt such price formation processes. This is clearly recognized in view of the intent and aim of the AMA. However, even where a price agreement between parties formally violates the letter of the AMA, its illegality has to be denied if it is reached according to and in cooperation with lawful administrative guidance. Even in cases in which administrative guidance has no direct grounds in the law, such guidance should, taking into consideration the need for smooth and flexible administrative regulation to deal with the changing environment, not be deemed unlawful, provided that the circumstances necessitate it, it is given by socially accepted means and it does not substantially violate the ultimate aim of the AMA. A scheme of administrative guidance cannot absolve an agreement to simultaneously raise the prices of their products on a fixed date which the parties subsequently expected to be approved by the ministerial bureaucracy.

II Relevant Provisions Anti-Monopoly Act (AMA) (2) sections 3, 89 (3)

III Facts Along with the OPEC offensive to increase the price of crude oil and the assumption that 1971 the Ministry of International Trade and Industry (Tsūshō Sangyō-shō, MITI (4) ) issued to the Japanese Petroleum Federation (Sekiyu Renmei) a basic strategy on how to pass on the increase of crude oil prices to the prices of petroleum products, and instructed the Federation to inform the Ministry prior to carrying out price increases. (5)

P 631 the industry would react by raising its prices for petroleum products, in early

In the spring of the same year the MITI issued the so-called 10 cent burden administrative guidance, (6) according to which the oil industry had to bear 10 cents per barrel of any price increase. In addition MITI indicated figures on the range of price increases by type of oil and demanded that the industry respect those figures. The industry abided by such guidance. (7) When in early 1972 the industry demanded that MITI abolish its ‘10 cent burden’ rule, the Ministry refused to do so but did approve the industry's proposal to increase prices of various types of oil. On this occasion, MITI demanded that the industry consult with the Ministry whenever it believed that an increase in crude oil prices necessitated an increase in the price of its petroleum products above the ceiling established by the guidelines. (8) From 1972 to 1973 executive officers of the 12 defendant companies – the latter being regular members of the Petroleum Federation's Business Committee (Eigyō I'inkai) – held so-called Price Meetings (kakaku no kaigō) chaired by the chairman of the Business Committee in order to discuss and agree upon the maximum level and timing of the five

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increases in petroleum product prices, which they then carried out in 1973. (9) As the defendant companies wanted MITI to reflect the changes in its guideline system, they constructed respective price-fixing schemes, which were then submitted to the Ministry for approval. At the request of the Ministry each scheme had to be explained to its officials based on industry data provided by the defendants. In some cases the Ministry demanded amendments to the effect that the schemes reflected the Ministry's policy, and in one case MITI requested postponement of the implementation of an P 632 already approved price increase. (10) In all cases MITI finally approved the schemes prior to their implementation by the defendant companies. (11) All 12 of the defendant companies were wholesalers of petroleum products with their combined sales accounting for more than 80% of the total sales at the wholesale level in Japan. (12) On the suspicion that the defendant companies had formed a secret cartel for raising oil prices, the Japanese Fair Trade Commission (Kōsei Torihiki I'inkai, FTC (13) ) conducted an on-sight inspection at their offices in December 1973, and on 5 February 1974 recommended to cease the agreement on prices. On 15 February this recommendation was accepted by each defendant company. (14) In doing so they admitted the allegation of concerted price increases. On 22 February, the FTC issued a recommendation decision (kankoku shinketsu) outlining the agreement between the FTC and the defendant companies. (15) Prior to that, however, on 19 February, the FTC had filed an accusation against the 12 defendant companies, 14 of their executive officers and one company attorney for violating the criminal provisions of the AMA. (16) The Tokyo High Court as the court of first instance (17) found all defendants criminally liable for violating section 3 AMA, and imposed fines varying from JPY 1.5 million to JPY 2.5 million for each defendant company and suspended prison terms of 4–10 months on the executive officers and the company attorney. (18) Eleven defendant companies and 14 executive officers appealed to the Supreme Court. P 633

The Supreme Court held that two defendant companies and one executive officer were not guilty and, in this respect, overturned the original decision. The appeal of the remaining defendants was dismissed.

IV Findings (19) 1 Relation between Administrative Guidance and Unreasonable Restraint of Trade The defendants did not dispute the allegation of their discussions concerning price increases at meetings of the Petroleum Federation, but asserted that they had done so in order to construct proposals for changes in MITI's guidelines. Only after the proposals had been approved by the Ministry did the defendant companies raise their prices within the range and on the date acknowledged by the Ministry. Thus, the defendants claimed that they had only cooperated with MITI's administrative guidance. (20) The Tokyo High Court took up the stance that it was the industry that had initiated the price increases and determined their scope, and that the defendants had obtained the acknowledgment only because they had considered it advantageous to raise prices based on MITI's acknowledgment, thereby avoiding any guidance restraining their price increase. There had been no established MITI approval system for price increases in effect, and it would not have been impossible for the defendant companies to raise the prices without the prior consent of the Ministry. It was rather the opposite way around in that MITI had only administratively intervened in the process established by the defendant companies to increase their prices. Therefore, the increases had not been the result of price guidance by MITI's guideline system. (21) The Supreme Court, in contrast, concluded that at the time of this case there had been a process of administrative guidance in place in order to obtain MITI's consent for price increases, and that, although the Ministry had taken the attitude to avoid direct and active intervention, ‘this did not mean that the administrative guidance of that time was necessarily weak.’ In fact, the court acknowledged that ‘under the premise of such kind of administrative guidance by MITI it had been in practice exceedingly difficult for a firm to P 634 ignore the Ministry's guidance and raise its prices based on its own individual judgement.’ In consideration thereof, the court held the following: it cannot be regarded as an act of unreasonable restraint of trade prohibited by sections 3, 2 (6) AMA, if companies, for the purpose of obtaining MITI's acknowledgement, discuss prices based on data provided by each other and finally reach a mutual agreement, as long as such agreement is confined to the industry's desired scheme of a maximum limit to which the prices shall be increased, and as long as it does not restrict the decision of each company in case the Ministry's acknowledgement is obtained. (22) However, the court went on to state that the defendant executive officers had not stopped at agreeing upon the industry's desired schemes for the envisaged price

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increases: ‘but assuming MITI's acknowledgement of the schemes had also agreed to simultaneously raise the prices of their petroleum products on a fixed date to the full limit expected to be approved,’ which ‘evidently constituted an unreasonable restraint of trade prohibited and punished according to sections 3, 89 (1) (i), 95 (1) AMA’. (23)

2 Criminal Liability of Member Entrepreneurs When Unreasonable Restraint of Trade is Committed by a Trade Association The defendants further claimed that they had not acted in their capacity as executive officers of the defendant companies but as members of the Business Committee of the Petroleum Federation when they had met and decided to raise prices together. Therefore, the activities at bar had been carried out by the Petroleum Federation and as such fall under section 8 (1) (i) AMA. (24) The Tokyo High Court vindicated the violation of section 3 AMA on the grounds that the concerted actions had not been activities of the Federation's Business Committee but of a private ‘Price Meeting’ formed by the defendant companies. (25) The Supreme Court, in contrast, adopted the position that since the ‘Price Meeting’ had been substantially modelled after the Business Committee the following was the case: P 635

‘[It] is difficult to negate that the agreements at bar regarding the price increase of petroleum products were made by a body of […] the Petroleum Federation and thus by the Petroleum Federation itself. However, even if an unreasonable restraint of trade which is subject to criminal punishment under the AMA is committed by a trade association, but if it must be conceived that this was at the same time carried out by the employees etc. of each member firm with regard to their businesses, it is permissible to question the criminal liability not only of the trade association but also of each of the member firms, and it is in the reasonable discretion of the FTC and the prosecutor, respectively, to decide the criminal liability of which they want to question’. (26)

3 Dual Liability of Employee and Juridical Person The defendants contended that since employees are not ‘entrepreneurs’ in the meaning of section 3 AMA they cannot be subject to dual liability pursuant to section 95 (1), section 89 (1) (i), section 3 AMA. The Supreme Court, however, held that ‘if a natural person who is an employee of a juridical person has, with regard to the business of such legal person, committed a violation of section 89 paragraph 1 no. 1 AMA, both the natural person as the offender and the said juridical person shall be punished according to section 95 (1), section 89 (1)(i) AMA.’ (27)

4 Interpretation of Mutually Restrict […] Business Activities in Section 2 (6) AMA The defendants in addition argued that the agreements to raise prices had not been binding upon the defendant companies, since they had not provided for penalties that would have prevented the defendant companies from not adhering to the agreements. Therefore, the agreements could not be considered an ‘unreasonable restraint of trade’ in the meaning of section 3 AMA. (28) The Supreme Court upheld the opinion of the High Court, (29) stating the following:

P 636

‘Since the defendant executive officers, with regard to the businesses of their companies, agreed to simultaneously raise the prices of products to a certain level, had the intention to realise the substance of the agreement and believed that the other parties would do so as well, […] such agreement, in the moment it was made, evidently resulted in a restriction of the business activities of each defendant company and therefore fulfils the requirements of a ‘mutual restriction of business activities’ pursuant section 2 (6) AMA and must be deemed an ‘unreasonable restraint of trade’ pursuant to the aforementioned provision as well as to section 3 AMA, irrespective of whether such agreement provides for sanctions in order to secure its effectiveness’. (30)

5 Interpretation of Contrary to the Public Interest in Section 2 (6) AMA Furthermore, the defendants asserted that the court of first instance had misinterpreted the term ‘public interest’ in section 2 (6) AMA, since the phrase was to be understood as ‘the general interest of the national economy, including the interests of both manufacturers and consumers’. (31) The Supreme Court, however, held the following:

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‘In view of the aim and legislative intent of the AMA and its history of amendments, the ‘contrary to the public interest’ provision in section 2 (6) AMA should be interpreted as follows: Conduct is generally contrary to the public interest if it is against the freely competitive order, which is the direct interest protected by the AMA. However, even if an activity appears to violate the letters of the Law, one might in exceptional cases reasonably decide, after comparing the interests protected by the statute with the interests protected by the activity, that where the activity does not substantially violate the ultima ratio of the AMA, which is ‘to protect the interests of the general consumers and to promote the healthy and democratic development of the national economy’, such activity is excluded from the scope of ‘unreasonable restraint of trade’. (32) The Supreme Court further noted that there had been no misinterpretation of facts by the Tokyo High Court. (33) The latter had stated ‘that furtherance of a healthy and democratic national economy clearly [did] not allow protection of mere business managerial interests which are at odds with the interests of general consumers’, (34) and that circumstances pointing to interests beyond such mere business managerial interests did not exist in the case at bar, since: ‘the evidence did not indicate that the defendants would have found it extremely difficult or impossible to remain in business or that the nation's maintenance of a stable supply of inexpensive petroleum products would have been jeopardized, had the defendants not engaged in the concerted activity’. (35) P 637

6 Completion Point of Section 89 (1)(I) AMA The defendants asserted that the criminal offence of section 89 (1) (i) AMA would only have been accomplished if the content of the agreement had been realised. (36) The Supreme Court confirmed the decision of the Tokyo High Court, (37) noting that: ‘the criminal offense of section 89 (1) (i) AMA is accomplished if parties negotiate and determine prices and mutually agree to bind their business activities, and if such agreement contrary to the public interest substantially restricts competition in a particular field of business. The said criminal offence is accomplished even if the parties have not realised the substance of their agreement or the date agreed upon [for executing the agreement] has not yet come’. (38)

7 Illegality of Acts Carried Out Pursuant to Administrative Guidance The defendants further brought the defence that since their actions had been carried out pursuant to MITI's lawful administrative guidance based on the Petroleum Industry Act (39) they were not against the legal order and therefore could not be deemed illegal. In contrast to the Tokyo High Court, which did not qualify the action of the MITI as administrative guidance (40) and thus did not reach the question whether administrative guidance would have immunized the defendants from prosecution, (41) the Supreme Court elaborated on this question in the form of a dictum. The court held:

P 639

‘the price of goods should be formed through free competition within the market. This is a major principle of the AMA. The government should not readily interrupt such price formation processes. This is clearly recognized in view of the intent and aim of the AMA. On the other hand, the Petroleum Industry Law, which aims at securing the sustainable and affordable provision of petroleum products and thereby promoting the development of the national economy and a better life for the citizenry (section 1), clearly authorises the government […] to interrupt the price formation process for petroleum products both directly by setting the standard price (section 15) as well as indirectly through its licensing system for entering the business of petroleum refining and construction of new facilities (sections 4 and 7) and the MITI's authority to compile a petroleum supply plan (section 3). And even in cases in which administrative guidance has no direct grounds in the Petroleum Industry Law such guidance should, taking into consideration the need for smooth and flexible administrative regulation to deal with the changing environment, not be deemed unlawful, provided that the circumstances necessitate it, it is given by socially accepted means and it does not substantially violate the ultimate aim of the AMA, which is ‘to protect the interests of the general consumers and to promote the healthy and democratic development of the national economy’. And even where a price agreement between parties formally violates the letter of the AMA its illegality has to be negated if it is reached according to and in cooperation with [such] lawful administrative guidance’. (42)

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Based on the aforesaid, the court reasoned that the administrative guidance employed by MITI had been meant to handle the emergency situation arising out of the rapid hike of oil prices caused by the OPEC offensives in the early 1970s. The guidelines had been issued in order to control prices and stabilize the private sector, which could not have been achieved with the means provided by the Petroleum Industry Law. Under these circumstances the method of guidance adopted by the Ministry (in particular, to set maximum limits by type of petroleum product, to demand the industry to consult with the Ministry prior to any price increase and to reflect the Ministry's basic policy in the industry's schemes) as well as the Ministry's basic attitude to avoid direct and active intervention to the extent possible could be viewed as socially acceptable and not in conflict with ‘the protection of the interests of the general consumers and the promotion of a healthy and democratic development of the national economy’. Therefore, the Ministry's administrative guidance could not be viewed as illegal. (43) However, the court concluded the following to be true: ‘Since the defendants did not stop at agreeing on the industry's desired schemes for the envisaged price increases, but assuming MITI's acknowledgement of the schemes, also agreed to simultaneously raise the prices on a fixed date to the full limit expected to be approved, such activities cannot be regarded as in compliance and in cooperation with administrative guidance, and hence the illegal nature of the defendants' activities cannot be denied’. (44)

8 Lack of Criminal Intent Lastly, the defendants contended that they had not been conscious of the illegality of their activities, since they had believed that they were acting pursuant to MITI's lawful administrative guidance. (45) 638 The Supreme Court upheld the decision of the Tokyo High Court, which had found the defendants conscious of the illegality of their actions, in particular since at the time of this case there was pending administrative litigation with the FTC concerning the defendants' price-fixing activity in 1971, (46) and the defendants therefore had to fear that the FTC might take action also against their present activities: (47) For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comments 1 Historical and Political Context The AMA was enacted after World War II under strong influence of the Allied Forces. (48) Aiming at constructing a democratic economic order, the AMA embodied ideals of the US antitrust laws. (49) In the early stages of the law, the FTC supported by the American occupation authorities, vigorously attacked anti-competitive practices. (50) The Commission also took the position that since the AMA provided for a per se illegality of cartels it could not accommodate a rule of reason. (51) Soon after the end of the occupation, however, efforts to weaken the initially restrictive which in post-war Japan pursued an industrial policy of controlled economy in order to catch-up with the competitiveness of western countries rather than to leave economic development to market mechanisms. (52) First priority was placed on strengthening industrial production and eliminating overly intense domestic competition. In order to further these ideas, MITI sponsored cartels in key industries (such as steel, coal mining, shipbuilding, electric power industries) and in industries with potential growth (e.g., synthetic fibres, plastic, petroleum reefing, petrochemical and electronics industries). (53) In this context, special exemptions laws for a variety of products and industries, (54) as well as exemptions in the AMA itself with regard to depression and rationalization cartels, were enacted in the early 1950s. (55) In addition, MITI resorted increasingly to administrative guidance in order to form cartels, justifying such guidance on the basis of inherent agency power. (56) The mid-1960s marked the peak of cartel activity in Japan, with 1079 formally exempted cartels recorded in 1966. (57) However, the FTC's modus operandi of that time was characterised by only limited enforcement of legal action against violations of the AMA (58) and compromises with MITI, (59) perhaps in acknowledgement of Japan's economic development priorities. (60)

P 640 antitrust policies commenced. The strongest proponent was MITI,

The recession caused by the oil shock in 1973 justified a permissive approach toward the companies' anti-competitive activities. Public mood had, however, significantly changed by the late 1960s as people had become aware of the risks associated with rapid economic growth, such as environmental hazards, creeping inflation and oligopolistic dominance of markets. (61) With the inflation stemming from the oil shock, public P 641 hostility towards cartelization grew as the latter was regarded as part of the problem. (62) The FTC took advantage of the heated political climate and reinforced its activities

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against cartels, including the first criminal action against cartelization in the history of the law (63) as well as the AMA amendments of 1977, which were the first amendments to strengthen antitrust enforcement. (64)

2 The Oil Cartel Criminal Cases The price-fixing case discussed in this article is the companion case of another decision handed down by the Tokyo High Court separately, but on the same day: (65) the so-called Petroleum Federation Production Restriction Cartel Criminal Case (sekiyu renmei seisan chō sei keijijiken), (66) in which all defendants were found not guilty and the prosecutor did not appeal the decision. Since both cases, which are often referred to as the ‘oil cartel criminal cases’, arose from the same context and the production restriction case involved additional interesting legal considerations, a brief summary of the latter shall be given in the following. Defendants in the production restriction case were the Petroleum Federation and two of its executive officers. In 1972 and 1973 the Federation had, with heavy involvement of MITI officials, limited the quantity of petroleum produced by establishing refining quotas for a number of refiners, which together controlled over 97% (67) of the domestic refining capacity outside Okinawa. (68) , (69) The court found that the Federation's restrictions had directly limited the amount of crude oil processed, which in turn had limited the amount of petroleum available on the Japanese market. In restricting the quantity of petroleum produced, the limitations had had the potential to restrain competition among petroleum wholesalers and therefore P 642 constituted a violation of section 89 (1), section 95 (2), section 8 (1) (i) AMA. (70) The defendants claimed preclusion of illegality of their activities based on section 35 Penal Code. (71) They argued that their actions were justified because they had acted pursuant to MITI's administrative guidance, and that such guidance was based on the Petroleum Industry Law, which authorized the MITI to issue a petroleum supply plan (72) and to use that plan as a basis on which it would, amongst others, review the production plans of the refineries and decide whether to advise firms to modify their plans. (73) , (74) In contrast to the price-fixing case, in which the Tokyo High Court found that administrative guidance did not exist, the court in the production-restriction case recognised administrative guidance of MITI officials in determining the quantity of petroleum processed. (75) However, it also held that neither the Petroleum Industry Law specifically exempted this type of control over the production of petroleum products from the strictures of the AMA, nor could the law be interpreted as authorizing the conduct at bar as a means of carrying out the Ministry's administrative goal to enforce the petroleum supply plan, since it is generally impermissible to address administrative guidance directly to an association of competitors as it almost inevitably causes concerted activity and is no less than an instruction to the trade association to violate section 8 (1) (i) AMA. (76) While the court noted that the alleged production restraints might ‘under certain circumstances’ still be legal if they had been carried out with MITI's approval or pursuant to its guidance, and if they had been necessary to fulfil the Ministry's administrative responsibilities, it found that the activities at bar had not been indispensable for the fulfilment of MITI's responsibility to implement petroleum supply plans. (77) In addition, it stated that the restrictions had in fact largely been initiated by the industry itself, their substance and method were autonomously determined by the defendants and only later approved by the Ministry and therefore not carried out pursuant to the Ministry's guidance. (78) Having found the alleged activities to be illegal, the court refused to hold the defendants been, conscious of the illegality of their conduct. (79) The court noted that although ignorance of illegality would not always be a defence, it would preclude a finding of criminal intent when the ignorance had been reasonable. (80) In the case at bar the court regarded the defendant's belief in the legality of their actions as reasonable, since they had consulted repeatedly with MITI officials in determining the production restrictions. Furthermore, the FTC had acquiesced to the MITI's anticompetitive role: while it had issued a recommendation to the Federation in 1971 accusing it of having decided to raise the price of petroleum products, it had taken no subsequent measures regarding the production regulations by the Federation. (81) Moreover, a public statement had even suggested that the FTC believed the production regulation MITI had instituted in the petroleum industry through its administrative guidance was based on the Petroleum Industry Law, and that it approved such guidance. (82)

P 643 responsible for their acts, since they had not been, and could not have

3 Gyosei Shido and the AMA One of the central issues the Supreme Court decision dealt with was the position of administrative guidance in relation to the AMA, in other words, whether a cartel initiated under administrative guidance should be immune from application of the AMA. The court stated that even if a conduct formally violates the AMA, its illegality is to be negated to the extent it was carried out in co-operation with lawful guidance. (83) With respect to legality of administrative guidance, the court reasoned that even where the guidance is neither specifically excluded from the scope of the AMA nor authorized under

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a non-exclusionary regulatory state, the guidance might still be lawful under the following three requirements: (1) It is under the given circumstances indispensable for the execution of the Ministry's duties, (2) it is considered necessary from the viewpoint of socially accepted ideas, and (3) it is not counter to the ultimate aim of the AMA. (84) It should be noted, however, that the Supreme Court interpreted the term ‘in cooperation was deemed lawful, the court concluded that the alleged conduct could not be justified by the guidance, since the firms had not only followed the Ministry's guidance in order to prepare an industry-wide scheme for price increases but had also agreed that they would implement the proposed measures in anticipation of the Ministry's consent. (85)

P 644 with [lawful guidance]’ strictly in this context. Although the guidance at bar

The Supreme Court's decision is sometimes interpreted in a way that companies acting pursuant to administrative guidance would not be criminally liable, even if their conduct constituted an unreasonable restraint of trade. (86) Taking into consideration that pursuant to the Supreme Court's interpretation a conduct serving the ultimate aim of the AMA is not ‘counter to the public interest’ (87) it is hard to imagine a situation in which a particular guidance is qualified as serving the ultimate aim of the AMA, whereas the conduct carried out pursuant to such guidance is deemed counter to the public interest and thus an unreasonable restraint of trade. It is therefore reasonable to conclude that, while the Tokyo High Court in the production restriction case found the alleged conduct to be in violation of section 2 (6) AMA and only then examined whether illegality might, with regard to MITI's administrative guidance, be precluded according to section 35 Penal Code, the Supreme Court's considerations in the case at hand pertain to the question as to whether conduct pursuant to lawful administrative guidance can satisfy the elements of section 2 (6) AMA. This view is supported by the fact that the court in its decision did not refer to the provision of section 35 Penal Code. (88) The Tokyo High Court decision had suggested that legality of administrative guidance which is not authorized by law must be considered in relation to the surrounding circumstances in which it occurred. By applying a kind of balance of interests test, the High Court virtually set no guideline on how far administrative guidance could go. However, the three criteria stipulated by the Supreme Court are still opaque and thus can only give an indication as to the limits of administrative guidance. (89) As such, only little improvement has been achieved.

4 Public Interest (kyōdō no rieki) The decision of the Supreme Court settled a long-running dispute over the interpretation of the ultimate ratio of the AMA. The dispute arose because the term ‘public interest’ in section 2 paragraph 6 AMA is commonly understood as a reference to the purpose of the law as provided in section 1 AMA. (90) P 645

Prior to the decision of the Supreme Court there were mainly two theories on the interpretation of section 1 AMA. (91) The first and prevailing theory was presented by the FTC, stating that the sole aim of the AMA is ‘to promote fair and free competition’. This theory takes the viewpoint that other social and economic values including economic growth, democratic economy and the consumer's interest are best served by fair and free competition. According to this doctrine of interpretation, consistency with the public interest is not a separate and independent requirement in the AMA. (92) The second theory holds that the aim of the AMA is ‘to promote the democratic and wholesome development of the national economy as well as to assure the interest of general consumers'. In order to achieve this aim, the policy to promote competition has to make way for other meaningful objectives, such as economic growth. Under this doctrine a cartel is not necessarily unlawful even if it restrains competition as long as it is useful in meeting those other objectives. In this context, the term ‘democratic and wholesome development of the national economy as well as […] the interest of general consumers' is by some – including the defendants in the price-fixing case - interpreted as ‘the general interest of the national economy, including the interests of both manufacturers and consumers' while others perceive it as ‘the interest of small and medium enterprises, general consumers and other economic subordinates’. (93) The position adopted by the Supreme Court in the price-fixing case is somewhere in between these two theories: while the term ‘public interest’ means ‘free and fair competition’ in principle, the court acknowledges that there may be situations in which an agreement that substantially restrains competition is necessary to meet the ultimate aim of the law, which is ‘to protect the interests of the general consumers and to promote the healthy and democratic development of the national economy’. In such situations, courts should weigh the benefit of maintaining competition and the benefit of permitting such agreement taking, however, the view that a violation of the ‘free and fair P 646 competition’ is presumptively ‘contrary to the public interest’, and only in exceptional cases does the benefit of allowing such an agreement outweigh that of maintaining competition. In the Oil Price-Fixing Criminal Case both the Tokyo High Court and the Supreme Court

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ultimately rejected the argument that the contested anticompetitive conducts were lawful in the light of the afore-described ultimate aim of the AMA. Although later cases occasionally referred to the theory established by the Supreme Court, none of them arrived at considering the conducts at bar as serving the ultimate ratio of the law. (94) One reason for this is that the aforementioned two aims of the AMA are commonly understood as being in a relationship of rule and exception in the sense that if a violation of the ‘free and fair competition’ is proved, the contested conduct is presumptively ‘contrary to the public interest’, and evidence of exceptional circumstances is required in order to justify the conduct as serving the ultimate ratio of the Law. (95) Moreover, along with the change in the international economic climate in the 1980s the Japanese government gradually arrived at making competition policy a first priority, repealing one antitrust law exemption statute after another until finally the AMA was acknowledged as the ‘basic law of economic activities’ (keizai katsudō no kihon-hō). (96) As such, even stricter standards were applied in order to justify an exception to the rule. It should be noted, however, that other decisions, although not explicitly referring to the ‘public interest’ and the ultimate ratio of the law, in fact applied similar considerations. (97) Even the FTC in its 1995 ‘Guidelines Concerning the Activities of Trade Associations P 647 under the Antimonopoly Act’ (98) stipulated that, when examining whether selfregulation imposed by a Trade Association constitutes an impediment to competition, it should be considered ‘whether the activity is within the scope reasonably determined necessary to achieve social or other rightful purposes’. (99) Nowadays, the discussion over the ultimate aim of the AMA is gaining in importance in a different context, namely, in relation to the so-called ‘social public aim’ (shakai Kōkyō mokuteki), such as protection of the environment, the local community, and consumer safety. (100)

5 Act of a Trade Association (Section 8 AMA) v. Concerted Activity of Its Member Entrepreneurs (Section 3 AMA) To find a violation of section 8 AMA there has to be an act of a trade association. Cases like the one at hand leave room for the question whether the alleged conduct is to be considered as an act of the trade association or as a concerted activity of its member companies (section 3 AMA). Before 1972 the FTC tended to treat substantial restraints of competition which involved trade associations as section 8 AMA violations. From 1973 onwards, however, an increase in cases in which the Commission found unreasonable restraints of trade pursuant to section 3 AMA could be observed, the FTC thereby taking an either-or approach: Depending on whether the association or its member companies played the central role in the alleged anti-competitive conduct, section 8 or section 3 AMA was applied. In particular, when decisions were taken by the trade association's executive organ and only later approved by its member companies – as it is often the case in large associations – section 8 AMA was applied, while direct participation of the member companies in the decision making led to application of section 3 AMA. This either-or practice met with criticism in the legal literature since it was often unclear who had played the central role in the alleged conduct. In addition, a need to take actions against both the associations and the companies was recognised in order to effectively eliminate restrictive behaviour. (101) Against this background, the Supreme Court's finding that ‘it is permissible to question the criminal liability not only of the trade association but also of each of the member firms’ is interpreted as allowing parallel imposition of both sections 3 and 8 AMA. (102) P 648

6 Conclusion The Supreme Court's decision in the price-fixing case was momentous, since it was the first case in Japan to impose criminal sanctions due to cartelization. (103) It made clear that companies must not blindly rely on advice of administrative authorities, since it would not necessarily protect them from subsequent criminal prosecution, but only if and to the extent the guidance had been lawful. Thus, firms facing anticompetitive guidance from government agencies need to make their independent assessment of the legality of their compliance with such guidance. In practice, however, further criminal prosecutions were not brought by the FTC until the 1990s, when the US in the Structural Impediment Initiative Talks requested that Japan more vigorously enforce antitrust violations. (104) The Supreme Court decision was also hailed as clarifying the illegality of administrative guidance in conflict with the AMA and thus limiting the authority of MITI to create antitrust exemptions by means of administrative guidance. (105) However, the limits of administrative guidance remained unclear since the court at the same time admitted that even where guidance was not authorized by law, it might still be lawful under certain circumstances. Moreover, the three criteria stipulated by the court in this context were opaque and therefore could not serve as a clear measure as to the limits of administrative guidance. In order to counteract moves of ministries to keep exempting

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cartels from the AMA by use of administrative guidance the FTC thus issued its new ‘Guidance Concerning Administrative Guidance under the Antimonopoly Act’ in 1994. (106) This guideline basically stipulates that activities initiated on the basis of administrative guidance are considered illegal as long as they meet the requirements for illegality under the AMA. It should also be noted that it was not the court decisions in the oil cartel criminal cases that caused the shift in the antimonopoly policy towards a more energetic prosecution of anticompetitive behaviour. Rather, the decisions spurred an already ongoing antitrust revival and change in industrial policy. These changes had begun in the latter half of the 1960s (107) and were based mainly on trade liberalization due to Japan's membership in the OECD as well as on a shift in public opinion from the single-minded pursuit of economies of scale having industrial policy as their first priority, to a demand for improvement in socio-economic performance. Ursula Eisele (1) P 648

References Ursula Eisele: (University of Hamburg)., Robert Bosch GmbH in Germany Defendants in this case were 12 wholesalers of petroleum products (Idemitsu Kōsan K.K., Nihon Sekiyu K.K., Taiyō Sekiyu K.K., Daikyō Sekiyu K.K., Maruzeni Sekiyu K.K., Kyōdo Sekiyu K.K., Kigunasu Sekiyu K.K. Kyūshū Sekiyu K.K., Misubishi Sekiyu K.K., Shōwa Sekiyu K.K., Shell Sekiyu K.K., General Sekiyu K.K.), 14 of their executive officers and one company attorney. 2) Shiteki dokusen no kinshi oyobi Kōsei torihiki no kakuho ni kansuru hōritsu [Act on the Prohibition of Private Monopolisation and the Maintenance of Fair Trade] Law No. 54/1947 as amended by Law No. 53/2011. English translation available on the Homepage of the Japanese Fair Trade Commission: . 3) Section 3 AMA provides: ‘No entrepreneur shall effect private monopolisation or unreasonable restraint of trade.’ The term ‘unreasonable restraint of trade’ referred to in sec. 3 AMA is defined in sec. 2 (6) AMA as ‘business activities, by which any entrepreneur, […] in concert with other entrepreneurs, mutually restrict or conduct their business activities in such a manner as to fix, maintain or increase prices, […] thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade.’ According to sec. 89 (1) (i) AMA the violation of sec. 3 AMA constitutes a criminal offence. 4) In 2001 the Ministry was renamed the Ministry of Economy Trade and Industry (METI). 5) Hanrei Jihō 1108, 10. 6) Section 2 no. 6 of the Administrative Procedure Act (Gyōsei tetsuzuki-hō, Law No. 88/1993 as amended by Law No. 66/2006, English translation available on the Homepage of the Ministry of Justice: ) defines administrative guidance (gyōsei shidō) as ‘guidance, recommendation, advice, or other acts by which an administrative organ may seek, within the scope of its duties or affairs under its jurisdiction, certain action or inaction on the part of specified persons in order to realize administrative aims, where such acts are not dispositions.’ For a description of administrative guidance see W. Pape, Gyōsei Shidō and the Antimonopoly Law, in: 15 Law in Japan (1982) 12 et seq; J. Haley, The Oil Cartel Cases: The End of An Era, in: 15 Law in Japan (1982) 1-6. 7) Hanrei Jihō 1108, 10; Hanrei Jihō 985, 12. 8) Hanrei Jihō 1108, 10. 9) Such price increases were carried out in January, February, August (postponed from initially July), October and November of that year, Y. Ibata, Case No. 29, in: Funada / Kanai / Sensui (eds.), Keizai-hō Hanrei / Shinketsu Hyaku-sen [Best 100 Precedents and Decisions in Economic Laws], 199 Bessatsu Jūristo 2010, 60. 10) Hanrei Jihō 1108, 11. 11) Hanrei Jihō 1108, 10. 12) Hanrei Jihō 985, 12. 13) For an overview of the history, powers, duties and procedures of the FTC see J. Haley, Antitrust in Germany and Japan: The First Fifty Years, 1947-1998 (Seattle and London 2001) 99 et seq., 115 et seq. ★ )

1)

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14) Six of the defendant companies later sued to rescind their consent claiming that

15)

16) 17) 18)

19)

20) 21) 22) 23) 24)

25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37) 38) 39) 40) 41) 42) 43) 44) 45)

they had only accepted the recommendation out of fear of further public criticism. They had also believed that if they accepted the recommendation there would be no prosecution. The Tokyo High Court and the Supreme Court rejected the claims. The Supreme Court noted that the recommendation decision of the FTC had not proved the existence of an AMA violation. Neither had the fact determination by the FTC been binding upon the court nor had it discharged the court from conducting its own determination of facts. As such, the recommendation decision had not affected the appellants' right to a fair trial. In re Idemitsu Kōsan et al v. FTC, Tokyo High Court, 29 September 1975, in: Hanrei Jihō 790, 24 et seq.; Supreme Court, 4 April 1978, in: Minshū 32, 515 et seq. See also R. Seeman, Oil Cartel Case – Supreme Court Vindicates Administrative Guidance, in: The Japan Lawletter (April 1984) 1 et seq., available online at: ; L. Repeta, The Limits of Administrative Authority in Japan: The Oil Cartel Criminal Cases and the Reaction of MITI and the FTC, in: Law in Japan 15 (1982) 25 fn. 5. FTC Recommendation Decision, 22 February 1974, Shinketsu-shū 20, 300 et seq. Available in the online data base of the FTC: . According to sec. 73 AMA the authority to seek criminal prosecution is reserved to the FTC. Section 85 no. 1 AMA. In re Japan v. Idemitsu Kōsan et al, Tokyo High Court, 26 September 1980, in: Kō Keishū 33-5, 511 et seq., Hanrei Jihō 985, 3 et seq. For a statement and analysis of the decision see M. Ramseyer, Japanese Antitrust Enforcement After the Oil Embargo, in: The American Journal of Comparative Law 31 (1983) 405 et seq.; Repeta, supra note 14, 40 et seq. For an English translation of the decision see M. Ramseyer, The Oil Cartel Criminal Cases: Translations and Postscript, in: 15 Law in Japan (1982) 57 et seq. For an English translation of the official court summary of the decision see Repeta, supra note 14, 50 et seq. Of the many findings only a choice can be presented here. An official summary of the findings is published on the Homepage of the Supreme Court (in Japanese only): . An English translation of an unattributed summary of the decision is provided by Seeman, supra note 14, 1. Hanrei Jihō 985, 32. Hanrei Jihō 985, 34-35. Hanrei Jihō 1108, 11. Hanrei Jihō 1108, 11. Hanrei Jihō 985, 35. sec. 8 para. 1 no. 1 AMA (after AMA revision in 2009: sec. 8 (i) AMA) provides that no trade association shall engage in any act which substantially restrains competition in any particular field of trade. Sec. 89 (1) (ii) AMA makes the violation of sec. 8(1) AMA a criminal offence. Hanrei Jihō 985, 35. Hanrei Jihō 1108, 12. Hanrei Jihō 1108, 13. Hanrei Jihō 985, 36. Hanrei Jihō 985, 36-37. Hanrei Jihō 1108, 12. Hanrei Jihō 985, 37; Hanrei Jihō 1108, 12. Hanrei Jihō 1108, 12-13. Hanrei Jihō 1108, 13. Hanrei Jihō 985, 37. Hanrei Jihō 985, 37-38. Hanrei Jihō 985, 38. Hanrei Jihō 985, 38. Hanrei Jihō 1108, 13. Sekiyu Gyōhō, Law No. 128/1962. For the structure of the Petroleum Industry Law see M. Matsushita, Problems and Analysis of the Oil Cartel Case Decisions, in: Law in Japan 15 (1982) 80-82; Repeta, supra note 14, 35-36. See no. 1 above. Hanrei Jihō 985, 4 (annotations). Hanrei Jihō 1108, 13-14. Hanrei Jihō 1108, 14. Hanrei Jihō 1108, 14. Hanrei Jihō 985, 44.

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46) The litigation arose when the FTC issued a cease-and-desist order (haijo sochi meirei)

47) 48)

49) 50)

51)

52) 53) 54)

55) 56) 57) 58) 59)

60) 61) 62) 63) 64)

65) 66)

67) 68) 69) 70)

urging the Petroleum Federation to terminate the alleged price-fixing cartel (FTC Decision, 28 March 1974, in: Hanrei Jihō 865, 19 et seq., also available in the online data base of the FTC: ). The decision was upheld in both the Tokyo High Court (in re Sekiyu Renmei v. FTC, Tokyo High Court, 15 August 1977, in: Hanrei Jihō 865, 3 et seq.) and the Supreme Court (in re Sekiyu Renmei v. FTC, Supreme Court, 9 March 1982, in: Hanrei Jihō 1037, 3 et seq.). For a summary of this case see Ramseyer, supra note 18, 75 et seq. Hanrei Jihō 985, 44; Hanrei Jihō 1108, 14. For the historical backgrounds of the enactment of the AMA see J. Haley, Error, Irony, and Convergence: A comparative study of the origins and development of competition in post-war Germany and Japan, in: Großfeld et al (eds.), Festschrift für Wolfgang Fikentscher (Tubingen 1998) 876 et seq. For an overview of the history of the AMA see A. Shōda, Keizai-hō Kōgi [Lecture on Economic Laws] (Tokyo 1999) 55 et seq. M. Ramseyer, Trustbusting in Japan: Cartels and Government-Business Cooperation, in: 94 Harvard Law Review 1066; A. Negishi / M. Funada, Dokusen Kinshi-hō Gaisetsu [Outline of Antimonopoly Laws] (4th ed. Tokyo 2010) 18 et seq. With decisions hitting a peak of 59 in 1950, A. Seita / J. Tamura, The Historical Background of Japan's Anti-monopoly Law, in: Kenneth L. Port / G. McAlinn (eds.), Comparative Law – Law on the Legal Process in Japan (2nd ed. Durham 2003) 761; S. Sugahisa, Wettbewerbspolitik in Japan [Competition Policies in Japan], in: Zeitschrift für Betriebswirtschaft [Journal for Business Economics] (1994) 157. The 1953 AMA amendments however substituted the per se prohibition of cartels with a balancing of interests test to the effect that cartels were only prohibited if they caused substantial restraint of competition in a particular field of trade. See Ramseyer, supra note 49, 1068. For a comprehensive investigation of Japan's post-war industrial policy see R. Komiya / M. Okuno / K. Suzumura (eds.), Industrial Policy of Japan (Tokyo et al 1988). Shoda, supra note 48, 73. E.g. Export and Import Transaction Law (Yushutsunyū torihiki-hō, Law No. 299/1952) and Law on Extraordinary Measures for Stabilisation of Specific Small and Medium Sized Companies (Tokutei chūshō kigyō no antei ni kansuru rinji sochi-hō, Law No. 294/1952). Haley, supra note 13, 53-54. Seita / Tamura, supra note 50, 762; Ramseyer, supra note 18, 397 fn. 8; Ramseyer, supra note 49, 1072; Haley, supra note 6, 9, R. Schwindt / D. McDaniels, Competition Policy, Capacity Building, and Selective Adaptation: Lessons from Japan's Experience, in: 7 Washington University Global Studies Law Review 35 (2008) 61; Haley, supra note 13, 83. Schwindt / McDaniels, supra note 57, 62; Negishi / Funada, supra note 49, 13. E.g. the FTC attempted to prevent the Yawata-Fuji steel company merger. When the effort failed, the FTC still managed to negotiate some concessions in exchange for the final consent decision that permitted formation of the New Japan Steel Corporation, Haley, supra note 48, 899, Haley, supra note 6, 10. See also Sugahisa, supra note 50,159 et seq. Yawata Seitetsu K.K. hoka 1-mei ni taisuru ken [Yawata-Fuji Steel Merger Case], FTC Consent Decree, 30 October 1969, in: Shinketsu-shū 16, 46 et seq. Seita / Tamura, supra note 50, 762 et seq.; J. Haley, Japanese Antitrust Enforcement: Implications for United States Trade, in: Kenneth L. Port / G. McAlinn (eds.), Comparative Law – Law on the Legal Process in Japan (2nd ed. Durham 2003) 770. Haley, supra note 60,770-771; M. Uekusa, The Oil Crisis and After, in: R. Komiya/M. Okuno / K. Suzumura (eds.), Industrial Policy of Japan (Tokyo et al 1988) 89, 113. Schwindt / McDaniels, supra note 57, 62; Ramseyer, supra note 49, 1074. Hanrei Jihō 1108, 4 (annotations). Repeta, supra note 14, 25. A surcharge system was introduced and restriction on the amount of stock that could be held by a non-financial company exceeding a certain prescribed size was implemented. In addition, the FTC was given the power to order measures to restore competition, including the divestiture of companies, and to issue cease-and-desist orders against unfair trade practices. Finally, a report system on parallel price increases was established and maximum penalties for Art. 3 and Art. 8 AMA violations were raised ten times the original amount, Ramseyer, supra note 49, 1082. The most comprehensive analysis of the two decisions is provided in Law in Japan 15 (1982), which is a symposium issue on the oil cartel criminal cases. Tokyo High Court, 26 September 1980, in: Kō-Keishū 33-5, 359 et seq.; Hanrei Jihō 983, 22 et seq.; Hanrei Times 434, 86 et seq. For a statement and analysis of the decision see Ramseyer, supra note 18, 399 et seq.; Repeta, supra note 14, 35 et seq; Matsushita, supra note 39, 79 et seq. For an English translation of the decision see Ramseyer, supra note 18, 66 et seq. For an English translation of the official court summary of the decision see Repeta, supra note 14, 47 et seq. Hanrei Jihō 983, 55. Okinawa was administered by the US until its return to Japanese control in 1972. Hanrei Jihō 983, 53-54. Hanrei Jihō 983, 55.

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71)

72) 73) 74) 75) 76) 77) 78)

79) 80) 81) 82)

83) 84) 85) 86) 87) 88) 89) 90)

91)

92) 93)

Keihō, Law No. 45/1907 as amended by Law No. 74/2011. English translation available on the Homepage of the Ministry of Justice: . Art. 35 Penal Code stipulates that ‘an act performed in accordance with laws and regulations or in the pursuit of lawful business is not punishable.’ Section 3(1) Petroleum Industry Act. Section 10 para. 2 Petroleum Industry Act. Hanrei Jihō 983, 57. Hanrei Jihō 983, 58; Repeta, supra note 14, 36. Hanrei Jihō 983, 58-59. Hanrei Jihō 983, 59. Hanrei Jihō 983, 59-60. See also I. Takahayashi, Case No. 49, in: Imamura / Atsuya (eds.), Dokkin-hō Shinketsu /Hanrei Hyaku-sen [Best 100 Decisions and Precedents in Antimonopoly Law] (141 Bessatsu Jūristo 1997) 100-101; T. Kanai / N. Kawahama / F. Sensui, Dokusen Kinshi-ho [Antimonopoly Law] (3rd ed. Tokyo 2010) 112. Section 38 (1) Penal Code provides that ‘an act performed without the intent to commit a crime is not punishable; provided, however, that the same shall not apply in cases where otherwise specifically provided for by law’. Hanrei Jihō 983, 60-61. Hanrei Jihō 983, 64. In 1966 FTC Commissioner Takeo Kitajima had stated in a hearing of the Lower House: ‘Because of the Petroleum Industry Law, pure administrative guidance such as is found in the raw steel industry does not exist in the petroleum industry. We have always maintained that the production restrictions should not be initiated by administrative guidance that is based solely on the Ministry's authority and responsibility and which does not have specific statutory basis [...]’, Hanrei Jihō 983, 62. Kanai / Kawahama / Sensui, supra note 78, 113. T. Shiraishi, Dokkin-hō Jirei no Kandokoro [Bottom line of AMA Case Studies] (2nd ed. Tokyo 2000) 34-35. See Essential Findings, no. 7 above. For example A. Negishi / I. Sugiura (eds.), Keizai-hō [Economic Laws] (5th ed. Tokyo 2010) 83. See no. 4 below. Hanrei Jihō 1108, 5 (annotations); T. Tanaka, Case No. 133, in: Imamura / Atsuya (eds.), Dokkin-hō Shinketsu / Hanrei Hyaku-sen [Best 100 Decisions and Precedents in Antimonopoly Law] (141 Bessatsu Jūristo 1997) 261; Shiraishi, supra note 84, 35-36. Negishi / Funada, supra note 49, 190. Negishi / Sugiura (eds.), supra note 86, 21. Sec. 1 AMA stipulates that ‘the purpose of this Act is, by prohibiting private monopolisation, unreasonable restraint of trade and unfair trade practices, by preventing excessive concentration of economic power and by eliminating unreasonable restraint of production, sale, price, technology, etc., and all other unjust restriction on business activities through combinations, agreements, etc., to promote fair and free competition, to stimulate the creative initiative of entrepreneurs, to encourage business activities, to heighten the level of employment and actual national income, and thereby to promote the democratic and wholesome development of the national economy as well as to assure the interest of general consumers’. SeeM. Wakui, Antimonopoly Law (Suffolk 2008) 41-42; Negishi / Funada, supra note 49, 27-29, 55 et seq., Negishi / Sugiura (eds.), supra note 86, 21-22; M. Funada, Case No. 7, in: Funada / Kanai / Sensui (eds.), Keizai-hō Hanrei / Shinketsu Hyaku-sen [Best 100 Precedents and Decisions in Economic Laws] (199 Bessatsu Jūristo 2010) 16; T. Yamabe, Case No. 9, in: Imamura / Atsuya (eds.), Dokkin-hō Shinketsu / Hanrei Hyaku-sen [Best 100 Decisions and Precedents in Antimonopoly Law] (141 Bessatsu Jūristo 1997) 20-21; Kanai / Kawahama / Sensui, supra note 78, 33-34; M. Matsushita, The Antimonopoly Law of Japan, in: D. Richardson / E. Graham, Global Competition Policy (1997) 171-173. Matsushita, supra note 91, 171. Negishi / Funada, supra note 49, 28.

94) For example Osaka Bus Kyōkai Jiken [Osaka Bus Association Case], FTC Shinpan

Shinketsu, 10 July 1995, in: Shinketsu-shu 42, 3 et seq.; Tokyo Suidō Mêtâ Dangō Jiken [Tokyo Water Meter Bid-Rigging Case], Supreme Court, 25 September 2000, in: Keishū 54-7, 689 et seq.; Nihon Yūgi-jū Kyōkai Kumiai Jiken [Japan Air Soft Gun Association Union Case], 9 April 1997, in: Hanrei Jihō 1629, 70 et seq., Hanrei Times 959, 115 et seq.; Bōi-chō Sekiyu Seihin Dangō Keiji Jiken [Defense Agency Petroleum Products BidRigging Criminal Case], Tokyo High Court, 24 March 2004, in: Hanrei Times 1180, 136 et seq. 95) Kanai / Kawahama / Sensui, supra note 78, 117. 96) Funada, supra note 91, 16.

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97) For example Toshiba Shōkō -ki Jiken [Toshiba Elevator Case], Osaka High Court, 30

98) 99) 100) 101) 102) 103) 104) 105) 106) 107) 1)

May 1993, in: Hanrei Jihō 1479,21, Hanrei Times 833,62. In this case a building owner and an independent elevator servicing company brought action against the Toshiba Elevator Company on the grounds that the refusal of Toshiba to supply parts and components to independent servicing companies constituted an illegal tie-in arrangement between elevator-servicing (tying product) and parts and components (tied product). The defendant argued that the tie-in arrangement was necessary to maintain the safety of elevator operations. The court however held that although product safety was an important issue to be taken into account when considering the illegality of a tie-in contract, there was no need to take this into consideration in this case because the plaintiffs were sufficiently equipped to handle Toshiba-made elevators, Matsushita, supra note 91, 167-168. Jigy -sha dantai no katsudō ni kansuru dokusen kinshihō-jō no shishin, 30 October 1995, as amended on 1 January 2010. English translation available on the Homepage of the FTC: . Part II no. 7(2)A item 3. Wakui, supra note 91, 42. See also Kanai / Kawahama / Sensui, supra note 78, 112; Funada, supra note 91, 17. Kanai / Kawahama / Sensui, supra note 78, 34, 115. I. Sugiura, Case No. 39, in: Imamura/ Atsuya (eds.), Dokkin-hō Shinketsu/Hanrei Hyaku-sen [Best 100 Decisions and Precedents in Antimonopoly Law] (141 Bessatsu Jūristo 1997) 81; Kanai/ Kawahama / Sensui, supra note 78, 124. Sugiura, supra note 101, 81; M. Kondō, Case No. 35, in: Funada / Kanai / Sensui (eds.), Keizai-hō Hanrei / Shinketsu Hyaku-sen [Best 100 Precedents and Decisions in Economic Laws] (199 Bessatsu Jūristo 2010) 73; Shiraishi, supra note 84, 39. Hanrei Jihō 1108, 4 (annotations). See Haley, supra note 13, 165-166. For example Haley, supra note 48, 900. Gyosei shidō ni kansuru dokusen kinshihō-jō no kangakata, 30 June 1994, as amended on 1 January 2010. English translation available on the Homepage of the FTC: . See Haley, supra note 13, 60. (University of Hamburg)., Robert Bosch GmbH in Germany

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Case No. 59: Antitrust Law – Concerted Behaviour – Cartels – Patent Pools

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Fair Trade Commission, 20 June 1997, in re Sanyo K.K. et al. – Pachinko Patent Pool Source: Kōsei Torihiki Shinketsu Shū

Jurisdiction Japan

I Headnote(s)

Organization

A refusal to license amounts to an unlawful attempt at monopolization in a situation where several patent holders have pooled their patents in the same technical field in which they hold a market share of 90% and license exclusively amongst themselves, and where market entry is possible only by obtaining a licence.

Fair Trade Commission of Japan

II Relevant Provisions Anti-Monopoly Act sections 3, 23

Case date 20 June 1997

Bibliographic reference

III Facts The 10 businesses in question employ a total of 3,584 employees and manufacture

P 650 pachinko machines. They hold a market share for these machines of 90% and in

Christopher Heath, 'Case No. 59: Antitrust Law – Concerted Behaviour – Cartels – Patent Pools', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 649 - 662

1995 had a complete turnover of JPY 550 billion by manufacturing and selling about 3.5 million pachinko machines. For some time, the 10 businesses have had a superior capacity in developing pachinko machines. They own a significant number of patents and utility models for the manufacture of pachinko machines. The businesses empowered the Society for Administering Japanese Pachinko Patents (Society) to decide about granting non-exclusive licences, about entering into licensing agreements with a duration of one year, the issuing of certificates and the collection of licensing fees, yet the businesses also took part in the decision of whether or not to grant licences. The 10 businesses directly or indirectly hold a majority stake in the Society and nominate a significant number of its directors. In 1961, the above Society was founded by the manufacturers of pachinko machines organized in the Pachinko Association of Japan (Association) with the purpose of carrying out all business related to the granting and obtaining of licences for intellectual property rights related to the manufacture of pachinko slot machines. Since its foundation, the Society has granted licences with one-year's duration to all of its members. Since 1979, the Society has been empowered to identify those patents and utility models owned by one of its 10 members that were open to be licensed, and to administrate these rights. Without the use of those patents and utility models that are administered by the association it is virtually impossible to manufacture pachinko slot machines in conformity with the safety regulations under the Restaurant Act. All 19 members of the Association, that is, essentially all manufacturers of pachinko slot machines in Japan, have obtained licences for the manufacture of pachinko slot machines. Competition in the field of selling pachinko slot machines to the about 18,000 pachinko parlours has always been rather limited. As early as 1987, the maximum number of machines to be certified by way of a security check introduced by the Society for each of the 19 businesses was set. Since about 1989, the pricing policies of each of the ca. 650 dealers that sell pachinko machines alongside the manufacturers have been limited.

With an eye on benefiting the members of the Association, the Society has never granted licences to non-members and even introduced a termination clause to licensing agreements with members in case of changes to the business, the name, the representatives and directors, and significant changes in the economic performance of the company. With the introduction of the ‘Fiibaa’ pachinko slot machine in spring 1983 [a sort of combination of pachinko and slot machines], the market for pachinko machines expanded. During this time, large manufacturers of other slot machines tried to obtain access to the production of pachinko machines by way of purchasing the stock of pachinko machine manufacturers. Of the 10 businesses, nine who were the owners of important patents in the field of pachinko machine production, as well as the Society, started in 1983 to include clauses in their licensing agreements to the effect that any intended change in ownership of the licensee had to be notified and, unless permission to such change was granted by the licensor, the licensing agreement would automatically be terminated. At that time, no licences were granted outside the group, and competition intensified. Due to this, fewer patents were administered by the Society. It thereby to manufacture pachinko machines without licences from the P 651 became possible Society. The system of limiting price competition set up by the Society was disbanded and led to concerns by the manufacturers of pachinko machines about their profits. Against this background, nine pachinko machine manufacturers and the Society agreed on a new scheme in order to exclude outsiders and to limit price competition. Until 1985, the termination clauses that related to termination in case of takeover in the licensing

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agreements for those patents and utility models administered by the Society were to be enforced in order to increase the entry barriers for outsiders. No licences were to be granted to outsiders. Subsequently, this led to the exclusion of outsiders. The tenth company joined the agreement in the fiscal year 1994. The 10 businesses succeeded in preventing the market entry of several outsiders by acting according to the agreement. Specifically two cases are at issue here: 1.

2.

In 1985, a large manufacturer of slot machines that was not a member of the Society wanted to gain access to the pachinko machine market by purchasing the majority of stock of one of the members to the Society. In response to this, nine members and the Society refused an extension to the licensing agreements beyond May 1985 with the reasoning that the market entry would have a significant impact on other manufacturers and would seriously affect their interests. For these reasons, the Society member could not continue with the production of machines. For the same reasons, in September 1995 the above 10 businesses and the Society refused a licensing request of a former member of the Association and another major manufacturer of slot machines that intended to jointly manufacture pachinko machines. Other companies that were interested in the manufacture and sale of pachinko machines also desisted from requesting a licence because they understood that they would not receive such licence.

IV Findings According to the above facts, the above-mentioned 10 businesses and the Society jointly and according to their principles that third parties should not gain access to the market, by refusing the licensing of patent and utility model rights owned or administered by the Society, excluded the business activities of businesses that wanted to manufacture pachinko machines and thereby, contrary to public interest, prevented competition in the field of manufacture of pachinko machines in Japan. This is no exercise of rights under the patent or utility model laws and contravenes the prohibition of private monopolization (section 3 (i), 2(5) Anti-Monopoly Act). Translated by Christopher Heath P 652

V Comment 1 Acts Prohibited by the Anti-Monopoly Act The AMA basically prohibits acts of private monopolization, acts of undue restraint of trade (that is, cartels), and unfair business practices. Private monopolization aims at obtaining even greater market power by excluding or controlling the business activity of other entrepreneurs. Unreasonable restraint of trade aims at joint activities of several entrepreneurs to mutually agree on their business activities. And finally, ‘unfair business practices’ refers to vertical restrictions, often in the framework of contracts, which may impede competition. Examples of such acts are the unjust discrimination against other entrepreneurs, dealing at unjust prices, unjustly inducing or coercing customers of a competitor to deal with oneself, dealing with another party on terms that will restrict the business activities of said party, abuse of one's bargaining position in dealing with another party, and unjustly interfering with another entrepreneur's business activities. In short, both horizontal and vertical restraints are prohibited by the AMA.

2 The Exemption of Exercising Intellectual Property Rights (1) a) Section 21 AMA (formerly section 23) in its present wording could already be found in the original AMA of 1947 and was not affected by any of the subsequent amendments made in 1953, 1977, or 1992. The provision reads as follows: Section 21 (intellectual property rights) The provisions of this act shall not apply to acts that qualify as the exercise of rights under the Copyright Act, the Patent Act, the Utility Model Act, the Design Act, or the Trade Mark Act. Section 21 was renumbered in 2000 in an amendment to the AMA, and literature prior to 2000 refers to the section as section 23. The wording, however, remained completely unchanged. In 1947, the legislature apparently wanted to exclude patent rights from the scope of the Antimonopoly Act regardless of whether such technical monopoly developed into an act of private monopolization against the public interest. Correctly, the patent monopoly was distinguished from the monopolies under the AMA. Based on this assumption, section 21 should then clarify that even if an entrepreneur on the basis of a patent right could broaden its enterprise and therefore exclude or dominate other enterprise, section 3 AMA P 653 (private monopolization) would not apply. (2) No mention was thus made of acts that

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would constitute undue restraint of trade or unfair business practices. b) It took the Fair Trade Commission a long time to explicitly state its opinion on the relationship between section 23 and the application of the AMA. One would have expected such a statement in the first guidelines on patent and know-how licensing agreements of 1968. However, these guidelines were based on section 6 AMA, the prohibition of unfair business practices in international agreements. The guidelines were thus less concerned with intellectual property rights as such than with restrictions imposed on the (presumably weaker) Japanese licensee. Only the subsequent 1999 guidelines make explicit mention of the relationship between intellectual property rights, the AMA and section 21 (then 23): ‘1.

2.

Section 23 of the Antimonopoly Act provides: ‘The provisions of this Act shall not apply to such acts recognisable as the exercise of rights under the Copyright Act, the Patent Act, the Utility Model Act, the Design Act, or the Trademark Act.’ With respect to restrictions in patent licensing agreements, there are some acts that are considered to be an exercise of rights under the Patent Act, etc., such as restrictions on territory, duration or field of use of the licence. However, those acts also can often restrict the business activities of the other parties or other firms. So, it is first necessary to evaluate such acts in light of the provisions of Section 23 of the Antimonopoly Act. It is also necessary to evaluate as well other acts that are considered to be an exercise of rights under the Patent Act, etc., such as decisions to license or not to license a patent, or the filing of a suit demanding a suspension of violation of the licensor's rights. Section 23 is viewed as having been enacted for the purpose of confirming that (1) ‘Acts recognisable as the exercise of rights’ under the Patent Act, etc., are not subject to the Antimonopoly Act and shall not constitute a violation of the Antimonopoly Act; but that (2), on the other hand, even if acts are considered to be the ‘exercise of rights’ under the Patent Act, etc., if the said acts are considered to deviate from or run counter to the purposes of the IPR system to, among other things, encourage innovation, the said acts will no longer be deemed ‘acts recognisable as the exercise of rights’ and the Anti-monopoly Act shall be applicable to them. For instance, even if an act is, on its face, considered to be an exercise of rights under the Patent Act, etc., if the said act is conducted under the pretext of exercising rights but in reality is considered to be employed as part of a series of acts that constitute an unreasonable restraint of trade or private monopolization, the said act is considered to deviate from or to run counter to the purposes of the IPR system to, among other things, encourage innovation and, for this reason, the said act is no longer deemed an ‘act recognisable as the exercise of rights’ under the Patent Act, etc., and is subject to the Antimonopoly Act.

P 654

3.

4.

Furthermore, in addition to the above-mentioned situation, even if an act on its face appears to be an exercise of rights under the Patent Act, etc., if the said act, after evaluating its purpose and particular circumstances and the extent of its impact on competition in a market, is considered to deviate from or to run counter to the purposes of the IPR system, it is possible that the Antimonopoly Act will also apply to such act, since it would no longer be deemed an ‘act recognisable as the exercise of rights’ under the Patent Act, etc. If, after evaluating the act in light of the provisions of Section 23 of the Antimonopoly Act, the Antimonopoly Act is deemed applicable, the act will then, in accordance with the views in Part 3 or Part 4, be evaluated to determine whether it falls under unreasonable restraints of trade, private monopolisation or unfair trade practices, etc. In addition, when making a determination regarding the exercise of rights under the Patent Act, etc., it is also necessary to take into account whether the rights have been exhausted. In other words, the patent holder, in its exploitation of the patented invention, not only has exclusive possession of the rights to manufacture and use the patented invention, but also to sell patented products. When parties who have not been granted a licence individually from the patent holder sell the patented products, the said act would also appear to be an act that infringes upon the patent rights in form. However, when the patented products are distributed lawfully according to the wishes of the patent holder, as far as the said patented products are concerned, in the domestic context, this is interpreted to mean that the patent rights have already achieved their objective and that the patent rights for the products have been exhausted. Consequently, restrictions on the sale of

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5.

patented products that were once lawfully distributed according to the wishes of the patent rights holder are handled in the same manner as restrictions on the sale of products in general under the Antimonopoly Act. In addition, like other property rights or goods with value as property, know-how is subject to the Antimonopoly Act. However, because knowhow is intellectual property with a confidential nature, it is necessary to take account of this nature when problems under the Antimonopoly Act concerning conduct regarding use, profit and sale of know-how itself or particular conduct based on know-how are considered. Moreover, compared with patents, know-how is characterised by an uncertainty of technological scope, weak exclusivity protection and uncertainty as to the duration of protection. Therefore, in determining the effect on competition in a market for know-how licensing agreements, it is necessary to take into account these specific characteristics of know-how’. (3)

Subsequently the FTC issued a decision that concerned restrictions on the sale and P 655 distribution of software. The copyright owner and defendant, Sony Computer

Entertainment, had requested retailers and wholesalers to strictly comply with the policy of no discount, no second-hand sales and no under-the-counter sales of PlayStation software. In its decision the FTC held that ‘Section 21 Antimonopoly Act is deemed to have been enacted for the purpose of confirming that even if acts are considered to be the ‘exercise of rights’ under the Copyright Act, if those acts are considered to deviate from or run counter to the purposes of the IP protection system considering their effect on orderly competition, those acts will no longer be regarded as acts considered the exercise of rights, and the Antimonopoly Act shall apply to them…In this case the act of prohibiting the sale of second-hand goods was carried out in connection with the act of fixing the retail price, and worked as an additional fortification thereof. However, the act of fixing retail prices including the act of prohibiting the sale of second-hand articles is detrimental to fair competition. Therefore, even if, as argued by the defendant, the PlayStation software is considered a cinematographic work which is given additional distribution rights, and if the act of prohibiting the sale of second-hand articles is within the scope of such distribution rights, such act would still deviate from or run counter to the purpose of the IP protection system’. (4) The current FTC stance thus goes beyond what was originally intended by the legislature. The FTC does not regard attempts of private monopolization as exempt from the application of the AMA, and regards the imposition of permissible clauses as a contravention if used for purposes that are prohibited by the AMA. The decision is in contrast to previous ones that required a higher level of proof regarding failed attempts of retail price maintenance, (5) and may have been caused by parallel court decisions that refused to afford distribution rights to computer software (see Case No. 47). c) A number of academics both specialized in intellectual property and in antitrust have published their opinions on the interpretation of section 23/21 AMA. One of the earliest views was taken by Toyosaki. (6) Toyosaki takes the view that section 23 is meant to ensure that the specific contents granted under an intellectual property law can indeed be realized; he specifically denies that there is any contradiction between patent law and anti-trust law. Toyosaki then mentions that only certain conditions in licensing agreements can be considered part of the patent right. This is not the case particularly when the licensor tries to impose clauses on retail price maintenance.

P 656

The next academic article on the problem was published 20 years later by another intellectual property specialist, Monya. (7) Monya sees it as an issue of friction that the AMA may prohibit monopolies, while the Patent Act may cause them. However, both laws aim at the development of domestic industry. In that respect, market monopolies cannot be justified by a patent right, as they often lead to an inhibition of competition in research. The purpose of the patent monopoly is not the protection of a strong position in commerce, but rather the possibility of obtaining a just reward. This should also determine the scope of section 23. Kawaguchi (8) takes the view that section 23 should rather be deleted. Rather, a comparative analysis on the respective scopes of protection of both patent law and antimonopoly law should decide on the scope for the application of sections 3 (undue restraints of trade) and 19 (unfair business practices) AMA. Also Shōda (9) takes the view that section 23 is a self-explanatory provision that stipulates, first, that exclusive rights related to real property are not contrary to the competitive order, and, second, that a contract whose object is the intellectual property right as such (e.g. licensing) is recognised as part of the exclusive right. Shōda then takes

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the view that the exercise of intellectual property rights in toto should be made subject to the provision of the AMA. Where a single patent right would become a market monopoly, the provisions on monopolistic positions (section 8(4) AMA) could apply. Acts of private monopolization could be the strategic purpose or non-use of rights in order to curb the competitive freedom of other entrepreneurs. The same could hold true for the termination of licensing agreements or the refusal to license. This could be likened to a refusal to deal in a manner as stipulated under the AMA. Negishi (10) regards intellectual property rights as ‘competition laws in the broader sense’. In his view, both the AMA and intellectual property laws complement each other. Intellectual property rights stimulate dynamic competition, while the AMA provides methods to curb restrictions resulting from the unfair use of intellectual property rights. Both the AMA and intellectual property rights should be interpreted as preventing acts of unfair copying, free-riding on the achievements of others, and the undue exploitation of achievements without due cause. Particularly the latter aspect could explain why the AMA prohibited the use of intellectual property rights in order to achieve restrictions that could not be justified by the scope of the right as such. The exercise of intellectual property rights for purposes other than prevention of copying and piggy-backing constitute an abuse of such rights and are made subject to the AMA. P 657

Nakayama (11) regards the stated purpose of the Patent Act as well as the Anti-monopoly Act as basically identical despite different wording. He sees both laws as supporting each other in order to achieve a wholesome development of industry. Nakayama thus regards section 23 as having only declaratory character. The most detailed analysis was undertaken by Hienuki. (12) Hienuki takes the view that intellectual property laws on the one side and the AMA on the other share no common purpose, yet complement each other in the development of the economy. In fact, the socalled monopoly granted under patent law is a right to prevent or eliminate patent infringements, which could be likened to a form of competition by way of undue copies. Section 23 AMA is a provision that confirms that the prevention of patent infringement by way of competition through undue copying would not amount to a contravention against free and fair competition and thus would not contravene the purpose of protection of the AMA. However, the AMA would apply once the exercise of the patent right had effects that limited competition, and where such limitation of competition was primarily done for the purpose or with the effect of suppressing normal competition. Hienuki's point of reference is section 100 Patent Act and the right to request injunctive relief and damages against acts considered infringing. Acts undertaken by the patentee with such purpose in mind are consistent with free and fair competition, as the Anti-monopoly Act only protects competition based on achievements rather than on imitation. Hienuki explains his view in relation to private monopolization, undue restraints of trade and unfair business practices, according to which acts of private monopolization may be the aggressive and active investment policy of the market leader, the strategic purchase of patents by a market leader, the aggressive exercise of patent rights by way of warning letters and unjustified threats. Particularly interesting are Hienuki's views on cases of patent pools, cross-licensing agreements and patents in co-ownership where several patentees practise a joint licensing policy. The discrimination of one member in a group should be considered an act of domination by the majority of members and thus a case of private monopolization. The exclusion of an outside entrepreneur from membership in a patent pool or cross-agreement without just cause should also be considered an act of private monopolization. To what extent an act would contravene section 23 AMA would not depend on the formal or literal meaning of the patent right, but rather would be judged according to the contents of the act and its effects on the real market. Finally, Shibuya (13) mentions three new aspects. First, that a refusal to license should not be considered a case of private monopolization, because the Patent Act already offers P 658 the possibility of granting compulsory licences, a provision tailor-made for prevention of the non-use of patents and thus taking precedence over remedies under the AMA. Furthermore, Shibuya considers the use and exercise of homemade inventions as exempt from section 23, yet not the use and exercise of patent rights purchased from third parties. The use of homemade inventions and patent rights could be likened to a natural monopoly; the use of purchased ones could be likened to attempts at private monopolization. Finally, Shibuya mentions section 6 of the old Unfair Competition Prevention Act of 1934, which exempted acts under intellectual property rights from the application of the law. Shibuya notes that this provision was basically identical to section 23 and might have served as a reference. The old provision in the Unfair Competition Prevention Act could only be invoked against charges of causing confusion in trade, yet not in connection with licensing agreements. (14) It is interesting to note that despite differences in the details, specialists in both intellectual property and antitrust are of the unanimous opinion that section 23 does not justify restrictive clauses in licensing agreements. The application of the AMA to restrictive clauses in licensing agreements has consequently been the primary focus in the FTC's practice.

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The underlying consideration of the Fair Trade Commission when issuing the Guidelines on Patent and Know How Agreements of 1968, 1989 and 1999, and the latest (and currently applicable) Guidelines for the Use of Intellectual Property Rights under the AntiMonopoly Act of 28 September 2007 were basically the following: (1) (2) (3)

Cases in which the licensor imposed sanctions on the licensee for clauses that, due to the above, were unenforceable; Restrictions on the licensee's research capacity; and Use of the leverage of the IP right in order to impose other restrictions that are deemed anti-competitive.

Apart from these three types, the Fair Trade Commission has also pursued anticompetitive behaviour on a horizontal level (see below), and attempts to stymie otherwise permissible parallel imports. Cases of (1) can best be exemplified by the FTC's ‘Nihon Record II’ decision. (15) Here, certain manufacturers of audio discs had tried to prevent shops from renting out these discs to customers. Since the Copyright Act at that time did not provide for any specific rights of rental and lending, the obligation was unenforceable, as the rights over these audio discs were exhausted by the first sale. It was anti-competitive to try to enforce the restriction by way of a boycott of these shops. P 659

Case (2) concerns limits imposed on the licensee in further developing the licensed technology, or unilateral grant-back clauses, without due remuneration. (16) Case (3) concerns other restrictions imposed on the licensee, for example, tie-in sales (17) or resale price maintenance schemes. (18) The issue of maximum output restrictions remains unclear. (19) Currently, the following vertical restraints are deemed unlawful: (1)

(2)

(3)

Abuse of a bargaining position by imposing an obligation to pay royalties after expiration of the patent right; licensing more than one patent as a package when unnecessary for the technology involved; requiring the licensee to assign rights over improvement inventions without compensation or granting exclusive licences for improvement inventions without corresponding obligations of the licensor. It is considered an unjust dealing on restrictive terms to prohibit the licensee from challenging the patented technology, (20) from manufacturing competing products or employing competing technology after the expiration of the licensing agreement, or other restrictions, to the extent that they have a measurable impact on the market, for example, to prevent the licensee from asserting his own IP rights against the licensor or to restrict the licensee in sales activities of the patented products. Retail price maintenance schemes are a violation per se.

4 Horizontal Restraints and Intellectual Property Rights While the FTC has been very active in pursuing vertical restraints in technology transfer AMA) (21) or attempts of private monopolization (also, section 3 AMA) (22) have rarely been subject to the FTC's scrutiny. ‘Private monopolisation’ concerns unlawful means to exclude others in order to maintain or increase market domination; ‘undue restraints of trade’ refers to a decrease in competition by mutual agreements.

P 660 agreements, horizontal restraints (‘undue restraint of trade’ under section 3

In its Guideline on Joint Research and Development of 20 April 1993, the FTC addressed the problem of undue restraints of trade in the course of technical cooperation agreements. It particularly identified restrictions regarding research activities, either outside the field of common research, or beyond the contractual period of time as unlawful. The same applies to restraints in research and development for the jointly developed technology, restraints in the grant-back for improvement inventions, and restraints in the sale of the developed products in terms of territory, suppliers or retail price maintenance. Restrictions in joint venture agreements may be objectionable when limiting competition between the partners setting up the joint venture. In one instructive case, a foreign company and a domestic company founded a joint venture meant to produce ‘power shovels’ with technology obtained from the foreign partner. The domestic enterprise agreed not to compete with the products developed by the joint venture and not to export certain products to a number of Asian markets. The FTC qualified this as an abuse of a superior bargaining position (unfair trade practice), (23) yet one might well argue that since the restrictions had not been imposed on the recipient of the licensed technology, it should have been classified as a case of undue restraint of trade between two potential competitors. (24) In the 1999 Guidelines for Patent and Know-how Licensing Agreements, the FTC, for the first time, offered a systematic approach on how to deal with efforts of private monopolization and undue restraints of trade in connection with intellectual property rights. This approach has essentially been repeated in the Guidelines for the Use of Intellectual Property Rights under the Anti-Monopoly Act of 28 September 2007.

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According to the Guidelines, acts of prohibited private monopolization are: (1)

forming patent pools or cross-licensing agreements and refusing to grant licences without justifiable reasons to new entrants or existing businesses, or taking other means that have the effect of impeding the market entry of other businesses;

(2) (3)

acquiring patents and behaving as described in above (1); and using licensing terms aimed at the exclusion of outsiders.

P 661

The above shall apply in cases in which withholding the licence makes it difficult for a business to conduct its activities in a particular field of trade. In other words, the patent as a commercial monopoly must have become a market monopoly. This is more difficult if it is only one patent, and easier if a cluster of patents is involved. Also it would constitute an abuse if a licence was withheld under conditions in which the patent is deemed an essential facility for market entry. Undue restraints of trade in connection with intellectual property rights can occur if several enterprises in a cross-licensing or patent pool agreement impose a mutual restriction on the sales price, manufacturing volume, sales volume, sales outlets, sales territories or other aspects of the patented products. It would be immaterial if these restrictions were directly agreed upon, agreed through a trade association (this would make section 8 AMA applicable), or if made in the course of founding a joint venture. Particular attention is given to the frequent Japanese practice of cross-licensing, of granting several non-exclusive licences, and of patent pools. In the case of cross-licences, any additional restrictions in the cross-licensing agreement on sales prices, quantities of production or sale, and territorial restrictions would be interpreted as undue restraints of trade if this had an effect on the market. The same would be assumed for limitations on research and development. In the case of licensing the patent to several licensees, the agreement on mutual restrictions on sales prices, quantity of production, etc., would be considered as an undue restraint of trade. Patent pools per se are not regarded as restricting competition, as they may have a pro-competitive effect. However, when the members of the patent pool agree on mutual restrictions of sales prices, quantities of production, research and development, this may amount to an undue restraint of trade. When cross-licensing agreements, open licensing schemes or patent pools are used in a manner contrary to the purposes of the system to stimulate innovation, they may also become prohibited acts of private monopolization. The FTC would regard it as an act of private monopolization when a cross-licensing scheme is set up for the purpose of accumulating all future improvement inventions made by members and when the scheme is meant to deny licensing of the jointly held patents to new market entrants without justifiable reason. (25) Also the strategic accumulation of patents in order to prevent others from entering the market could be regarded as an act of private monopolization. Restrictive clauses in licensing agreements concluded by a licensor holding a patent that has become a market standard would also be regarded as an act of private monopolization. The Pachinko Patent Pool decision was thus instrumental in defining the FTC's position (unreported) decision of the Tokyo High Court of 4 June 2003, and the FTC has taken the same approach in a subsequent decision of 27 February 2009 against the collecting society JASRAC, which calculated copyright levies on an across-the-board price rather than based on actual use, thereby effectively preventing other collecting societies from entering the market. (26)

P 662 towards horizontal restraints. The decision was upheld by an

Christopher Heath (1) P 662

References ★ )

1)

2) 3) 4)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich The relationship between intellectual property and antitrust law in Japan is further elaborated in English by C. Heath, The interface between competition law and intellectual property in Japan, in: S. Anderman (ed.), Intellectual Property Rights and Competition Policy, Cambridge 2007, 250 – 311. R. Ishii, Dokusen kinshihō (Anti-monopoly Law), 2nd ed Tokyo 1948, 278-280. Guidelines for Patent and Know-how Licensing Agreements, Fair Trade Commission, July 1999, accessible under the FTC's homepage at , both in Japanese and in English. FTC, decision of 1 August 2001, 612 Kōsei Torihiki 64 (2001) w. comment by Suwazono – Sony Computer Entertainment.

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5)

6) 7)

8) 9) 10) 11) 12) 13) 14) 15) 16) 17)

18) 19)

20) 21)

22) 23) 24) 25)

26) 1)

Namely in cases where Shiseido and Kao, producers of cosmetics, insisted on sales by personal consultation, which inevitably led to high prices in the retail and outlet stages of distribution. Although it was fairly obvious that the scheme was meant to keep prices artificially high, the courts denied this: Supreme Court, 18 December 1998, 1664 Hanrei Jihō 3 – Shiseido and 1664 Hanrei Jihō 14 – Kao. For this case, see also Case No. 60. K. Toyosaki, Kōgyō shoyū kenhō (Industrial Property Law), Tokyo 1956, 273 et seq. N. Monya, Tokkyo ken, know-how to dokusen kinshi seisaku (Patent Law, Know-how and Anti-trust Policy), in: Dokusen kinshihō course II (Course on the Anti-trust Law II), Tokyo 1976, 293 et seq. H. Kawaguchi, Tokkyo kan tō no kōshi to dokusen kinshihō no kankei (The Exercise of Patent Rights, etc., and Its Relation to the Antimopoly Act, 21 Keizaihō 23 et seq. [1978]. A. Shōda, Zentei dokusen kinshihō I (Commentary on the Antimonopoly Act, Vol. 1), Tokyo 1981, 223 et seq.; also idem, Patentlizenzverträge im japanischen Antimonopolgesetz, 1997 GRUR Int. 206 et seq. A. Negishi, Chiteki zaisan kenhō to dokusen kinshihō (Intellectual Property Rights and the Antimonopoly Act), 15 Nihon Kōgyō Shoyū kan Dakukai Nempō 65 [1991]. N. Nakayama, Kōgyō shoyū kinhō I (Industrial Property Rights, Vol. I), Tokyo 1994, 38 et seq. T. Hienuki, Chiteki zaisan to dokusen kinshihō (Intellectual Property and the Antimonopoly Act), Tokyo 1994. T. Shibuya, Tokkyo hō totio dokusen kinshihō (Patent Law and Anti-monopoly Law), N. Kokusaika, Jidai no dokusen kinshihō no kadai (The Task of the Antimonopoly Act in an Era of Internationalisation), Writings in Honour of Akira Shōda, Tokyo 1993, 578 et seq. K. Toyosaki, Unfair Competition in Japan, 2 IIC 372, 378 [1971]. FTC, 15 December 1983, 389 Kōsei Torihiki 34 – Nihon Record II. Between 1969 and 1996, the FTC found a contravention against this prohibition in no less than 1,986 contracts: Iyori/Uesugi, Chiteki shoyū ken to dokusen kinshihō (Intellectual Property and Antitrust), NBL Bessatsu No. 52, Tokyo 1998), 25/26. FTC, 14 December 1998, 30IIC 478 [1999] – Microsoft: ‘The licensing of a computer program to manufacturers of personal computers with the obligation to license also other programs of the same software maker with a significant market share constitutes an unfair trade practice and is unlawful’. The case concerned the bundling of the programs ‘Word’ and ‘Excel’. FTC, 13 September 1965, 13 KTIS 72 – Yakult: resale price maintenance scheme for imported patented products. See the rather inconclusive decision Tokyo High Court, 20 June 2006, 40 IIC 617 (2009) – Manhole Cover: ‘A scheme whereby a patent licensee is allowed to produce the patented products for free up to the amount of 75% of the estimated annual demand of each municipality divided by the number of licensed bidders, while the remainder must be purchased from the licensor, which sells such products to the licensee under the latter's brand at a price that includes a royalty (maximum output limitation), qualifies as a lawful exercise of the patent right and is not anticompetitive.’ Permissible, though, when agreed upon in a court settlement of an infringement action: FTC, 23 April 1982, 381 Kōsei Torihiki 21 – Fujisawa. FTC, 23 April 1982, 381 Kōsei Torihiki 21 – Fujisawa: the parties to a lawsuit used a settlement to agree on a licensing agreement that obliged the licensee not to sell below a certain price. The FTC viewed this as an unlawful restraint of trade, which it is not: it is rather a vertical restriction between licensor and licensee, and thus an unfair trade practice (resale price restriction): Iyori/ Uesugi, Chiteki shoyū ken to dokusen kinshihō (above), 40. FTC, 10 September 1993, 40 KTIS 3 – Fukuoka Sewage System concerned a joint activity of seven sewage companies, one the patentee, the others licensees, to agree on certain margins for bid-rigging schemes. FTC, 19 September 1951, 3 KTIS 166 – Toho Subaru: one market-dominating cinema tried to bully others out of the market by using its distribution rights for film works. FTC, 26 October 1981, 28 KTIS 79 – Komatsu/Bicycrus. Considered by Iyori/Uesugi, Chiteki shoyū ken to dokusen kinshihō (above), 39. The example given in the Guidelines shows that the FTC does not regard the grant of a compulsory licence in such cases as a factor that would eliminate an anti-trust violation or that should be given precedence over any measures taken under the AMA. English press release on the FTC's homepage. German summary in 2011 GRUR Int. 276. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 60: Antitrust Law – Unfair Trade Practices – Resale Price Maintenance – Private Enforcement

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, decision of 18 December 1998, case 1994 (O) No. 2415 Fujiki Honten v. Shiseido – Shiseido Cosmetics

Jurisdiction

Source: 52 Minshū 9, p. 1866 = 1663 Hanrei Jihō 3

Japan

I Headnote(s) Even if a wholesaler imposes a restriction on sales methods on retailers by requiring them to provide customers with a face-to-face consultation for products in the course of sale, such restriction on sales methods does not fall within the scope of dealing on restrictive terms prescribed in Paragraph 13 of Notification No. 15 of 1982 (General Notice on Unfair Trade Practices) of the Fair Trade Commission, as far as the restriction can be deemed to be based on certain reasonable grounds for the sale of the product and the same restriction is imposed also on other trading partners.

Court

Supreme Court of Japan

Case date

8 December 1998

Where a wholesaler dealing with a particular manufacturer's cosmetics requires the retailers to implement a face-to-face sales system under the franchise contract, such restriction on sales methods does not fall within the scope of dealing on restrictive terms prescribed in Paragraph 13 of Notification No. 15 of 1982 (General Notice on Unfair Trade P 664 Practices) of the Fair Trade Commission if the restriction is imposed with the aim of maintaining among customers the reputation (the brand image) of the cosmetics as distinguished from those of a competitor, which can be deemed reasonable to some extent, and the wholesaler concludes the same contract also with other trading partners.

Case number 1994 o 2415

Parties

Claimant, Fujiki Honten Defendant, Shiseido

II Relevant Provisions Sections 2 (9), 19 of the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Anti-Monopoly Act, AMA), Paragraph 13 of Notification No. 15 of 1982 (General Notice on Unfair Trade Practices) of the Fair Trade Commission.

Bibliographic reference

III Facts and Findings

Christopher Heath, 'Case No. 60: Antitrust Law – Unfair Trade Practices – Resale Price Maintenance – Private Enforcement', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 663 - 676

Concerning Reason I-2 for final appeal argued by the appeal counsel Jiro Yamane I. The outline of the facts determined by the court of second instance are as follows: 1.

2.

3.

4. P 665

5.

The defendant (appellee) is a company exclusively dealing with cosmetics manufactured by Shiseido Co., Ltd., a cosmetic manufacturer with the largest sales in Japan (hereinafter referred to as ‘Shiseido’). The plaintiff (plaintiff of final appeal) is a company engaged in the retail sale of cosmetics. The defendant conducts transactions with retailers selling Shiseido cosmetics by concluding franchise contracts for the supply of cosmetics with each of such retailers based on a ‘contract of Shiseido franchise stores’ all on the same conditions. The defendant was such a retailer and also concluded a franchise contract with the plaintiff in 1962, has continued transactions since then (this contract shall hereinafter be referred to as the ‘Franchise Contract’). The Franchise Contract includes a clause providing as follows: the contract shall be valid for a period of one year, and shall be automatically extended for another one year if both parties have no objection; even during such period, either party may terminate the contract by giving a 30-day notice in writing to the other party (this clause shall hereinafter be referred to as the ‘Termination Clause’). Under the Franchise Contract, franchise stores are obliged to establish a section exclusively for the sale of Shiseido cosmetics and participate in beauty seminars provided by the defendant. In the course of selling cosmetics, they are also obliged to provide customers with an explanation on how to use the cosmetics and give them advice on cosmetics. The defendant states that it adopts the sales system in which sales staff provide customers with an explanation on how to use cosmetics and give them advice (hereinafter referred to as the ‘face-to-face sales system’), because such explanation and advice are necessary to prevent skin problems that might arise from the use of cosmetics and to teach customers successful ways of using cosmetics, based on the key concept that the sale of cosmetics is not a mere sale of goods but rather a sale with the function of making users beautiful. Although many customers purchase Shiseido cosmetics without receiving an explanation, and franchise stores sell products without an explanation to such customers, a significant quantity of Shiseido cosmetics are still sold at franchise stores that have exclusive sections where sales staff speak to customers and provide them with explanation and advice.

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6.

7.

8.

Around February 1985, the plaintiff started to sell cosmetics at a 20% discount by distributing a catalogue or product list, which only indicated the product name, price, and product code, to business offices and workplaces, receiving orders in bulk by phone or facsimile, and delivering products to customers (the plaintiff calls this sales system an ‘office sales system’). The plaintiff also sold Shiseido cosmetics via this sales system, while providing customers with an explanation of the products only on the phone in response to customers' inquiries, without intending to provide them with explanations or advice face-to-face. Around the end of 1987, the defendant became aware of the plaintiff's sales system described above, and requested the plaintiff to remove Shiseido cosmetics from the catalogue. In response to this request, the plaintiff removed Shiseido cosmetics from the catalogue. However, it was found later that the plaintiff prepared a catalogue exclusively showing Shiseido cosmetics and used it as a separate volume. The defendant, in a document entitled ‘Letter of Recommendation of Correction’ dated 12 April 1989, recommended that the plaintiff should correct the abovementioned sales system that contravened the clause requiring the implementation of a face-to-face sales system under the Franchise Contract. As a result of negotiations between the attorneys of both parties, by written agreement dated 19 September 1989, both parties reached an agreement that the plaintiff would not sell Shiseido cosmetics by catalogue and would sell Shiseido cosmetics in conformity with the conditions of the Franchise Contract. Throughout the abovementioned negotiations, the defendant never complained about the plaintiff s discount sales. However, despite the written agreement mentioned above, the plaintiff did not appear to change its sales system. Therefore, having determined that the plaintiff had no intention of correcting its sales system, the defendant, in accordance with the Termination Clause, manifested its intention to terminate the Franchise Contract on 25 April 1990, and stopped the supply of products to the plaintiff (this termination shall hereinafter be referred to as the ‘Termination’).

II. In this case, the plaintiff, challenging the effect of the Termination, seeks declaratory the defendant to deliver ordered products under the Franchise Contract. The court of second instance (Tokyo High Court, decision of 14 September 1994), had based on the facts mentioned above, determined that the plaintiff breached the clause requiring the implementation of the face-to-face sales system under the Franchise Contract, and found the Termination effected by the defendant in accordance with the Termination Clause to be valid. For this reason, the court dismissed the plaintiff's claims.

P 666 judgment of its status of being eligible to receive products and requests

III. In short, the plaintiff argues that the clause requiring the implementation of the faceto-face sales system falls within the scope of ‘unfair trade practices’ prohibited by section 19 Anti-Monopoly Act (AMA) (prohibition of unfair trade practices), or more specifically, falls within the scope of Paragraph 12 (resale price maintenance) and Paragraph 13 (dealing on restrictive terms) of Notification No. 15 of 1982 of the Fair Trade Commission (hereinafter referred to as the ‘Paragraphs’) issued by the Fair Trade Commission for the purpose of designating ‘unfair trade practices’ under section 2 (9)(iv) of said Act. The court of second instance found the clause to be valid, and the firstinstance court decision (Tokyo District Court, 27 September 1993) that came to a different conclusion was based on an erroneous interpretation of section 19 AMA. IV. We examine the points now argued by the plaintiff in its appeal. 1.

Section 19 AMA provides that ‘no entrepreneur shall employ unfair trade practices’. Section 2(9)(iv) of the said Act lists, as one of such acts that constitute unfair trade practices, dealing with another party on such terms as will unjustly restrict the business activities of the said party, which tends to impede fair competition and which is designated by the Fair Trade Commission. Under this provision, ‘dealing with the other party on terms which unjustly restrict any transaction between the said party and his other transacting party or other business activities of the said party’ (dealing on restrictive terms) is designated as a category of such problematic acts in Paragraph 13. The reason for regulating ‘dealing on restrictive terms’ is that where an entrepreneur deals with the other party on terms which restrict the other party's business activities, and in particular restrict the other party's transactions with his other transacting party in a manner not directly related to the entrepreneur's transactions, thereby imposing a restriction that might have a direct impact on competition, it would artificially impede competition that should be achieved by the other party by providing quality goods or services at a low price. However, since dealing on restrictive terms may be conducted in various ways, the tendency to impede fair competition should be determined in light of the manner of dealing and the degree of restriction. Therefore, dealing on restrictive terms should not be regarded as falling within the scope of dealing with the other party on terms that ‘unjustly’ restrict the other party's business activities unless it is found to be likely to have an adverse impact on the order of fair competition. Considering that in principle, a wholesalers' freedom of choice of sales policy and sales methods should be respected, where a wholesaler imposes a restriction on the sales method on retailers by requiring them to provide customers with an

P 667

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P 667

2.

explanation on products in the course of sales, or giving them instructions on product quality control methods or product display methods, such an act of the wholesaler is not likely to have adverse impact on the order of fair competition as far as it can be deemed to be based on certain reasonable grounds for the sale of the product, and the same restriction is imposed on other contractors. In such cases, it is appropriate to hold that such an act does not fall within the scope of dealing with the other party on terms that ‘unjustly’ restrict the other party's business activities as prescribed in Paragraph 13. In this case, the face-to-face sales system that the franchise stores are required to implement under the Franchise Contract is a sales method to sell cosmetics with value-added services to provide customers with an explanation on cosmetics or give them advice on the choice or use of cosmetics (or at least sell cosmetics while always being ready to provide customers with such explanation or advice upon request). The defendant seems to adopt this sales system with the aim of satisfying the customers' needs to use its cosmetics under ideal conditions and realise the maximum cosmetic effect, or satisfy customers by giving consideration to the prevention of rough skin and other skin problems, thereby sustaining the reputation (or brand image) of Shiseido cosmetics as distinguished from other competitors' cosmetics. In light of the characteristics of cosmetics, it is a self-evident truth that the success in sustaining the reputation among customers affects competitive power in the market, and therefore it seems to be reasonable for the defendant to some extent to adopt the face-to-face sales system. Considering that the defendant also concludes the same contracts as the Franchise Contract with other trading partners and a considerable quantity of Shiseido cosmetics are actually sold via the face-to-face sales system, the defendant's requiring the plaintiff to implement this sales system cannot be deemed to fall within the scope of dealing with another party on terms that ‘unjustly’ restrict the other party's business activities prescribed as Paragraph 13. However, Paragraph 12(1) of the General Notice by the Fair Trade Commission issued under section 2(9)(iv) AMA prohibits ‘causing another party to maintain the sales price of the commodity that one has determined, or otherwise restricting the said party's freedom on determining the sales price of a commodity’ (resale price maintenance) unless there is a justifiable reason to do so. Where an entrepreneur seems to restrict resale prices by requiring the other party to implement a particular sales method, it is construed that such sales method can be a problem under the Anti-Monopoly Act from the above-mentioned perspective. If retailers are required to implement a particular sales method, such restriction on sale methods would increase sales costs, resulting in retail price stability to a greater or lesser degree, but it should not be immediately deemed to be restricting a retailers' free decision on the sales price only because of such result. The determination of the court of the second instance denying that the defendant restricted the resale prices by requiring the plaintiff to implement a face-to-face sales system, can be affirmed as justifiable based on the evidence mentioned in the decision under appeal.

P 668

3.

For the reasons stated above, requiring the implementation of the face-to-face sales system cannot be deemed to fall within the scope of Paragraph 13 (dealing on restrictive terms) or Paragraph 12 (resale price maintenance). The determination of the court of second instance that goes along with this reasoning can be affirmed as justifiable, and the judgment under appeal does not contain an error as is argued by the plaintiff. The plaintiff's argument is nothing more than a criticism of the choice of evidence or fact-finding, which comes under the exclusive jurisdiction of the court of second instance, or a criticism of the judgment of prior instance based on its own view, and therefore cannot be accepted. … Concerning the remaining part of the reasons for final appeal: The determination of the court of second instance rejecting the allegation that the defendant effected the Termination because of the plaintiff's discount sales, and the court's factfinding on other points can be affirmed based on the evidence mentioned in the decision under appeal. According to the facts mentioned above, the determination of the court of second instance denying that the Termination was contrary to the principle of good faith or constituted an abuse of rights can also be affirmed. The decision under appeal was not erroneous, as is argued by the plaintiff. The plaintiff's argument is nothing more than a criticism of the choice of evidence or fact-finding, which comes under the exclusive jurisdiction of the court of second instance, or a criticism of the decision under appeal based on its own dogmatic view, and therefore cannot be accepted. Therefore, the appeal has to be rejected. The decision was unanimous.

For the headnote and the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

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1 Background of the Kao and Shiseido Decisions By the end of the 1980s, Japan seemed unstoppable in becoming the world's new economic superpower. The Nikkei stock index went to new and unseen heights, and real estate prices in Tokyo and other major cities virtually exploded. The area of the imperial palace in the middle of Tokyo was valued at more than the whole of California. The Yen steadily appreciated in value against the dollar. But despite being rich on paper, Japanese consumers had the impression that little of this wealth benefitted them. Distribution structures were opaque and multi-layered, foreign competition was shut out by difficulties of market access, and entrenched and inefficient resale structures were difficult to challenge or circumvent. The Fair Trade Commission knew hard-core cartels when it saw them but found it much more difficult to identify and challenge unfair trade practices than to go against clear-cut price collusion schemes, as it had done with the oil cartel in the 1970s. More and more mail order shops and resellers saw a chance to cut P 669 through the red tape of restrictive distribution agreements, uniformed elevator girls and nicely smiling store personnel bowing low at the entrances of high class stores, and to offer cheap and no-frills products in a lean distribution structure. The ‘Shiseido’ case was the most visible, but by no means the only attempt to rely on antitrust law in order to refuse compliance with allegedly anti-competitive clauses in contracts, or to force competitors to comply with the rules of fair competition. The ‘Shiseido’ case is always mentioned in one breath with the ‘Kao’ case, (1) both were decided by Supreme Court on the same day, and essentially revolved around the same issue: whether the obligation to sell cosmetics only face-to-face to the customers was a veiled attempt at influencing the ultimate sales price, a means for keeping prices artificially high, thereby contravening the AMA that prohibited any form of resale price maintenance. This was the position of the plaintiffs in the ‘Shiseido’ and ‘Kao’ cases who stylized themselves as the champions of consumers. The defendants, Kao and Shiseido, had stopped supplying the unruly resellers by terminating the franchising agreements for cause. A good cause, they argued, because brand image and consumers' safety were good reasons for insisting on personalized sales, while price considerations never were an issue. As the plaintiffs had no means of discovery and therefore no direct proof of the defendants' allegedly sinister intentions on their hand, they turned to the courts and the Fair Trade Commission. The court actions were based on the allegation that Shiseido and Kao had unlawfully terminated the supply contracts, and that for this reason there should be a claim for continued supply on demand. In first instance, the claim was successful. The court reasoned as follows: (2) ‘According to Art. 15(2) of the Agreement between plaintiff and defendant, the distribution agreement can be terminated without any specific reason, as every party should be able to freely negotiate the terms of the contract. (1) The main reason why the defendant terminated the distribution agreement lay in the fact that the plaintiff gave its customers some rebates and allegedly sold some of the goods on to discounters. It seems less relevant that the sale took place without a face-to-face advice. According to the above, there is no doubt that the contract was terminated in order to enforce a resale price maintenance. For this reason, the termination contravenes the AMA and is unlawful and not permissible.

P 670

(2) The plaintiff has neither contravened the terms of the agreement, nor has the relationship of trust between the parties suffered. There are also no apparent facts why a continuation of the contractual relationship would cause difficulties to the defendant. The defendant mentioned as a reason that the plaintiff had sold some of the goods on to discounters, but this has not been sufficiently proven. According to the defendant, the plaintiff was meant to sell the products to customers only after a face-to-face advice, Arts. 6(2) and 8(1) of the Agreement, although this is not so clear from the wording of the contract. Even a supply without a face-to-face advice thus cannot be deemed to run counter to the Agreement. Even if the defendant was obliged to sell only after a face-to-face advice, such an obligation would be unjustified, as it cannot be deemed necessary in order to avoid allergic reactions of customers. Apart from this, the obligation is financially burdensome and thus likely to make it impossible for a distributor to sell goods at a discount. The defendant may find this desirable, yet such a sale based on a face-to-face advice makes it impossible to sell Kao goods in larger quantities. A clause that requires a face-to-face advice for the sale of goods therefore qualifies as an unfair trade practice even taking into account that the defendant's market share is only 6.5% and it is the sixth largest cosmetics producer in Japan. (3) Due to the termination of the Agreement, the plaintiff would run into financial difficulties, as it could find other suppliers of Kao products only with difficulty. Due to the above findings (1) – (3), the termination of the Agreement is abusive and has no effect, as its true purpose is the maintenance of the prices for Kao products. The plaintiff has not been in breach of the Agreement, the relationship of trust between the parties is intact and the plaintiff would run

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into financial difficulties due to the termination. Although the obligation to supply goods is not stipulated by the Agreement itself, but rather in the individual contracts of sale between the parties that are concluded when the defendant accepts the plaintiff's request for supply. But the Agreement must be interpreted in that the sales contract is concluded once the defendant has no cause for refusing the request for supply … whether there is such reason must be examined on a case-by-case basis, for which reason the plaintiff cannot request that the court ascertains a general right to be supplied …’. As is mentioned in the above Supreme Court decision, both the Tokyo High Court and the Supreme Court took a different stance on this matter. (3) The Fair Trade Commission that was also approached took a position that was all but clear-cut. It did not take up the complaints in respect of the termination of the agreements due to the alleged breach of the face-to-face sales clause, but held Shiseido accountable for enforcing a resale price maintenance in a different case where several chain stores that sold Shiseido cosmetics wanted to sell these products with a 10% discount against the resale price as recommended by Shiseido. The chain-stores had P 671 asked Shiseido for permission of such discounts, which Shiseido had declined. The FTC thereupon issued a consent decision that was accepted by Shiseido: (4) ‘Shiseido has supplied its contractual agents with goods for which a resale price maintenance is not allowed. The agents wanted to sell these goods at a discount. Shiseido has also supplied several consumer associations with goods for which a resale price maintenance is allowed [goods sold at no more than 1030 Yen], and concluded resale price maintenance agreements. In both cases, it has tried to enforce a prohibited resale price maintenance scheme. These acts contravene section 12 of the General Guidelines and thereby section 19 AMA. The FTC therefore recommends that Shiseido: – – – – –

discontinues the above acts in respect of goods for which a resale price maintenance is not allowed; no longer interferes with the freedom of agents in setting their prices; rescinds the contracts that concern a resale price maintenance; no longer, directly or via its distribution companies, enters into contracts with consumer associations that have a resale price maintenance as their objective; and reports to the FTC on the implementation of the above’.

A more detailed account of the Shiseido and Kao cases can be found in a PhD thesis on ‘Japanese Contract and Anti-Trust Law’ written by W. Visser ‘T Hooft and published in 2002 by Routledge Curzon. Also in other countries, tensions between selective distribution systems and antitrust law have surfaced where the courts were asked to order a continuing supply of cosmetics. (5)

2 Private Enforcement and Antitrust Law When the AMA was enacted in 1947, little thought was given to private enforcement. According to section 20 AMA, it is principally the Fair Trade Commission (FTC) that is entitled to issue cease and desist orders to offenders. (6) While the FTC cannot be forced to act against specific unlawful behaviour, (7) an aggrieved entrepreneur under section 25 AMA is entitled to bring a damage claim based upon a final and conclusive measure by the FTC. In the alternative, an entrepreneur may decide to bring a damages claim under P 672 the general tort provision of section 709 Civil Code. According to the report of an FTC study group published in 1990, (8) none of the 15 lawsuits raised under either of these provisions was successful despite the fact that under section 25 AMA, the facts of wrongdoing as ascertained by the FTC can no longer be questioned. In most of these cases, damages could not be sufficiently proven due to a lack of access to the defendants' internal documents. Allowing the so-called passing-on defence has given end consumers a right to sue, but only for minuscule amounts. (9) However, unfair trade practices only to a limited extent are actionable under the Unfair Competition Prevention Act which has a list of prohibited acts. Customer inducement and sales below cost are not listed there, and the courts have consistently refused a broad interpretation of what can be considered unfair. (10) As mentioned above, by the late 1980s entrepreneurs aggrieved by unfair trade practices, boycotts or cartels became more assertive in bringing their complaints before the courts. (11) Of particular importance were claims aimed at a further supply of goods under (unlawfully terminated) long-term contracts (12) or at ascertaining the nullity of acts contravening the AMA. (13) Yet it became clear that only a claim for injunctive relief could effectively remedy antitrust wrongs. (14) At the end of 1998, a study group convened by the Fair Trade Commission issued an interim report on providing injunctive relief against antitrust violations. (15) The report very cautiously endorses providing injunctive relief against antitrust violations, yet raises some additional points on matters of jurisdiction and

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appropriate legal construction:

P 673

It would be appropriate to introduce a system of private injunction against antitrust violations from the viewpoint of improving the system of remedies for victims, and for deterring unlawful conduct. Yet, in order to make the system of injunctive relief appropriate and effective, further studies should be made on the plaintiff's standing to sue and the jurisdiction of the court. (16) Suggestions were also made by some academics. (17) Basically, two proposals emerged: one was to implement the catalogue of unfair trade practices under the General Guidelines into the Unfair Competition Prevention Act and thereby allow private suits by competitors (but not consumers). (18) The second was adopted as the solution and introduced a right of injunctive relief into the AMA, now section 24: A person whose interests have been infringed or are likely to be infringed by a violation of section 8(1)(v) [acts of trade associations causing entrepreneurs engaged in unfair trade practices] or section 19 [unfair trade practices] and who thereby incurs or is likely to incur serious damage, is entitled to request cessation or prevention of such violation from the entrepreneur or trade association engaging in such acts. (19) Although the provision is limited to unfair business practices, also undue restraints of trade under section 2(5), 3 AMA often qualify as unfair business practices, for example, in the case of boycotts. The limitation is thus less serious than it looks at first sight. (20) Less clear is the limitation on acts that cause ‘serious damage’, a limitation that is not contained in comparable provisions of section 709 Civil Code or the Unfair Competition Prevention Act. One commentator has remarked that ‘It is impossible to give a logical explanation’regarding this limitation. (21) Neither is it clear what is exactly meant by ‘cessation or prevention of violation’. The term is certainly more narrow than the one employed in section 48 AMA. In other words, the courts are not meant to grant plaintiffs the same scope of remedies as the Fair Trade Commission would have had at its hands. Thus, it is clear that the plaintiff can demand cessation such as: ‘The defendant shall not engage in X’, or, also ‘The defendant shall not hinder the plaintiff in engaging in X’.

Yet, would a right of cessation also include the right to demand performance, for example, in cases where the supply of goods is concerned. One commentator has P 674 expressed doubts about this not only due to the wording of the provision but also the limitations of the Civil Enforcement Act. (22) He recommends that the courts be more assertive in this respect and on the basis of the current law suggests, for example in cases of boycott (because of breach of a non-competition clause), that the plaintiffs demand the following: ‘The defendant shall not refuse to deal with the plaintiff because the latter has engaged in business relationships with X’ or: ‘The defendant shall not enforce a clause whereby the plaintiff is prevented in engaging in business relations/ supply with X’, or: ‘The defendant shall not prevent the plaintiff from supplying/receiving supplies from X’. The above-mentioned author is of the opinion, however, that an order to supply can be issued by the courts on a preliminary basis. (23) The first reported case where section 24 AMA was actually invoked, was ultimately without success. But it is instructive in regard of both the arguments from the parties, and the findings of the court. The plaintiff in this case was a leading home-delivery company in Japan, which started its express parcel service called ‘Takkyūbin’ in January 1976. In this sector, it was the market leader with a market share of more than 30%. The defendant was a Japanese government corporation engaged in postal services, postal savings and postal life insurance business. In August 2004, the defendant reached an agreement with Lawson, a major convenience store chain company in Japan, whereby all nationwide chain stores of Lawson (about 7,900 outlets) would offer ‘Yu-Pack’, the defendant's new parcel service, as of 15 November 2004. Around the same time, the ‘Takkyūbin’ consignment contract between the plaintiff and Lawson of May 1988 was terminated by Lawson. The plaintiff asserted that the defendant had induced Lawson into signing the above contract by offering a number of benefits deemed unfair under Article 9 of the General Guidelines on Unfair Trade Practices, thereby damaging the plaintiff's business. The alleged benefits were: (a) placing post boxes in all chain stores of Lawson as of 1 January 2003 without charging a fee for collecting postal mail from the defendant; and (b) providing Lawson with extra space in three post offices at a low rent. Besides, the defendant introduced a new tariff structure of the ‘Yu-Pack’ service on 1 October 2004. Instead of charging by weight, the new tariff is mainly based on the size of ‘Yu-pack’ items. The average unit price of ‘Yupack’ items in 2003 (JPY 605) was cheaper than that of the plaintiff s ‘Takkyūbin’ service (JPY 683). The plaintiff asserted that the implementation of the new tariff structure of the ‘Yu-Pack’ service amounted to a ‘price far below the costs incurred’ or an ‘unduly low

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price’ under section 6 General Guidelines on Unfair Trade Practices. According to the above, the plaintiff claimed that the defendant's acts contravened sections 19, 2(9)(ii) and (iii) AMA and thus sought injunctive relief under the newly introduced section 24 AMA. The points at issue were: 1.

Whether or not the defendant offered ‘unjust benefits’ in order to induce Lawson; and

2.

Whether or not the implementation of the new tariff structure of the defendant's ‘Yu-Pack’ service qualified as an ‘unduly low price’.

P 675

The Tokyo District Court (24) dismissed the case: ‘On Issue 1 (a)

(b)

(c)

In accordance with the provision of section 2(9)(iii) AMA, the act of ‘inducing customers of a competitor to deal with oneself by offering unjust benefits in the light of normal business practices’ has been designated as an unfair trade practice under Article 9 General Guidelines on Unfair Trade Practices. The consideration of the legislature for the above Article 9 was that inducement of customers by offering economic benefits unrelated to the goods or services in question will inhibit free and fair competition, even if the inducement of customers is the essential element of competition. According to the above, the definition of ‘unjust benefits’ prescribed in the Guidelines Article 9 shall be considered as ‘economic benefits’. No substantial evidence has been presented to support the position that the defendant offered such economic benefits by renting out extra space at its post offices to Lawson at a very low price, or by offering some possibilities for Lawson of handling postal savings and postal life insurance in the future. Furthermore, it is difficult to ascertain that the act of placing post boxes inside the chain stores of Lawson without charging a collection fee qualifies as ‘unjust benefits’.

On Issue 2 (a)

(b)

(c) P 676

The definition of ‘costs incurred’ under Article 6 General Guidelines on Unfair Trade Practices [‘Without good reason constantly selling goods or services at a price far below the costs incurred …’] shall be interpreted as the ‘total sales costs’ which include ‘costs of revenue from operations’, ‘distribution costs’ and ‘general administrative expenses’. And the term ‘unduly low price’, the second alternative of said Article 6, shall be considered as a price lower than the ‘costs incurred in said supply’, rather than the market price. However, no substantiated claims or evidence regarding the total selling cost of defendant's ‘Yu-Pack’ service have been presented by the plaintiff. It is thus difficult to determine that the new rate structure of ‘Yu-Pack’ service is lower than the ‘costs incurred in the said supply’ as required by Article 6 General Guidelines on Unfair Trade Practices. Even if the unit price of ‘Takkyūbin’ parcels is higher than ‘Yu-Pack’, the scale of operation of the ‘Takkyūbin’ service is larger than ‘Yu-Pack’ and the plaintiff still enjoys the biggest market share (33.58% based on the number of parcels, 40.8% based on sales). It is thus difficult to conclude that the asserted acts of the defendant have caused any difficulties or may cause future difficulties to the business activities of the plaintiff under Article 6 General Guidelines on Unfair Trade Practices'.

Also in other reported cases, the plaintiffs failed in obtaining relief against allegedly anti-competitive behaviour of others. (25) Some academics regard this as a problem of missing precedents or the absence of a real right (such as an intellectual property right) that would merit protection by injunctive relief. (26) Yet, the most consistent pattern in all cases under section 709 Civil Code and sections 24, 25 AMA is the lack of sufficient evidence of wrongdoing. (27) Just as in IP cases, the evidence is usually with the alleged infringer. In the case at issue, how could Yamato prove sales below cost if not by an inspection of the defendant's cost structure? Already in a previous case where Japan Post was accused of price-dumping, the action failed due to a lack of evidence. (28) It would thus be expedient to provide means of discovery similar to section 105 Patent Act (Order of documents in the possession of the other side related to infringement and damages). Otherwise, it is unlikely that claims under section 24 AMA will ever become an effective way of anti-trust enforcement by private competitors. The discussion in Japan is interesting, not least in light of the Commission's Green Paper on Damages Actions for Breach of the EC Antitrust Rules of 19 December 2005, (29) and the comments on this submitted by the Max Planck Institute. (30) Experience from Japan shows that a rule whereby facts ascertained by the competition authorities can no longer

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be questioned in private antitrust actions is not enough and needs to be accompanied by proper rules on the production of evidence, and possibly by certain presumptions on the amount of damages. Furthermore, it should be clarified that remedies can also include an order for continuous supply. Christopher Heath (1) P 676

References ★ )

1) 2) 3) 4) 5)

6) 7) 8) 9) 10) 11)

12) 13)

14) 15)

16) 17)

18) 19) 20) 21) 22) 23) 24) 25) 26)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich Supreme Court, 18 December 1998, 1663 Hanrei Jihō 14 – Kao. Tokyo District Court, 18 July 1994, 855 Hanrei Times 111 = 1068 Jurist 22 w. comment by Suzuki = 1996 GRUR Int. 71 (German translation) – Kao Cosmetics. Tokyo High Court, 14 September 1994, 1507 Hanrei Jihō 43 = 1069 Jurist 141 with comment by Tamura = 1996 GRUR Int. 72 (German translation) – Shiseido Cosmetics II; Tokyo High Court, 31 July 1997, 1624 Hanrei Jihō 55 – Kao Cosmetics II. FTC, recommendation of 21 June 1995, German translation in 1996 GRUR Int. 73. Nürnberg Fürth District Court, 16 April 2010, BeckRS 2010, 29293 (right of supply denied), Munich Appeal Court, 6 December 2001, 2002 GRUR RR 207 – Depositär (attempt to limit internet sales of cosmetics to licensed distributors was held unlawful). In the past, the courts have consistently held that only the FTC should be entitled to impose cease-and-desist orders, not the courts upon request of competitors: Tokyo District Court, 16 September 1993, 4 wa 5783 – Nomura. Supreme Court, 16 November 1972, 26-2 Minshū 1573 – Ebisu shokuhin kigyo kumiai. Dokusen kinshihō ni kan suru songai baisho seidō kenkyūkai of 25 June 1990. Supreme Court, 8 December 1989, 36 KTIS 115 – Sekiyu Renmei. Most recently Tokyo High Court, 19 October 2004, 1904 Hanrei Jihō 128 – Kojima for misleading price indications. The most important cases are mentioned by M. Murakami, Fukōsei na torihiki hōhō no kaitai to haishi (Type and prevention of unfair business methods), 1316 Jurist 109 (2006); W. Visser ‘T Hooft, Japanese Contract and Anti-Trust Law, London 2002; C Heath, Bürgerliches Recht, Wettbewerbsrecht und Kartellrecht in Japan, 1995 WuW 93. Eg Supreme Court, 18 December 1998, 1664 Hanrei Jihō 3 and 14 – Shiseido and Kao; Osaka District Court, 21 June 1993, 829 Hanrei Times 232 – Jeans; Osaka District Court, 24 July 1992, 1046 Jurist 241 – Oppen. All these claims were unsuccessful, though. Tokyo District Court, 16 September 1993 (above fn. 1), – Nomura; Osaka District Court, 31 August 1992, 1458 Hanrei Jihō 111 – Nengajō; Tokyo District Court, 23 October 1992, 810 Hanrei Times 202 – JAL Tickets; Osaka District Court, 5 June 1989, 734 Hanrei Times 241 – Construction Steel. In the case Osaka High Court, 30 July 1993, 833 Hanrei Times 62 – Toshiba Elevator, the court affirmed an unlawful boycott, but awarded only nominal damages of about 600 Euro. A annotated Japanese version of the report can be found in K. Higashide, Dokusen kinshihō ihankōi ni kan suru shijin ni suru sashitome soshō seidō [Injunctive relief in a private action based on antitrust violations], 580 Kōsei torihiki 4 [1999] 4 et seq. An English summary is available at the Fair Trade Commission's homepage under . K. Higashide (supra note 9) 10. M. Matsushita (ed.), Fukōsei na kyōsō kōi to minjiteki kyūsai [Unfair Trading Acts and Civil Relief], NBL Bessatsu 43 (1997); Tsusansho (ed.), Fukōsei na kyōsō kōi ni tai sum minjiteki kyūsai seidō no arikata [Unfair Trading Acts and How the System of Civil Relief Should Be], NBL Bessatsu 49 (1998); K. Higashide (ed.), Dokusen kinshihō ihan kōi to minjiteki kyūsai seidō [Anti-competitive Acts and the System of Civil Relief], NBL No. 55 (2000); K. Higashide, Dokkinhō ihan to minji sosho [Civil Suit and Anticompetitive Acts] (Tokyo 2001). The 1994 Unfair Competition Prevention Act does not protect consumers (unlike the AMA) and grants remedies of injunctive relief and damages only to competitors. The provision was introduced by law No. 76 on 19 May 2000, and came into force on 1 April 2001. Correctly M. Murakami, Dokusen kinshihō to sashitome, songai baishō [The AMA and Claims for Injunctive Relief and Damages] (Tokyo 2001) 32. M. Murakami (supra note 14) 34. M. Murakami (supra note 14) 37/38. M. Murakami (supra note 15) 39. Tokyo District Court, 19 January 2006, 38 IIC 263 (2007) – Yu Pack. E.g. Tokyo District Court, 19 October 2004, 1904 Hanrei Jihō 128 – Kojima; Tokyo District Court, 15 April 2004, 1872 Hanrei Jihō 69 – Mitsuimaru; Osaka High Court, 5 July 2004, not yet reported – Kansai Airport. These two reasons are mentioned by A. Kaneko, Dokusen kinshihō jō no sashitome seikyu to wakai (Anti-trust settlements and requests for injunctive relief), 651 Kōsei Torihiki 27.

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27) Mentioned by Y. Ōucm, Sashitome seikyu sosho to kōsei torihiki iinkai (FTC and claims

for injunctive relief), 662 Kōsei Torihiki 34, 35. 28) In Osaka District Court, 31 August 1992, 1458 Hanrei Jihō 111 – Nengajō, Japan Post had

sold stamped New Year's cards for the price of a stamp, suggesting zero production costs for the cards as such. 29) COM (2005) 672 final. 30) Drexl et al., Comments on the Green Paper, 37 IIC 700 [2006]. 1) Head of the Asian Department, Max Planck Institute, Munich

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Part V: Conflict of Laws, Arbitration and Civil Procedure

Document information

Anja Petersen-Padberg

Publication

(★ )

Business Law in Japan – Cases and Comments

International Private Law, International Procedure law and Arbitration law are all of importance in international business. The laws in Japan were, and still are, influenced by German law. However, particularly in the field of conflict of laws and international civil procedure law, the traditional Japanese legal institute of ‘jōri’ is of importance.

Jurisdiction

Arbitration and procedural law, as well as international private law have been the subject of major law reforms in the last few years. The selected court decisions relate to the laws prior to the amendments, but are nevertheless of relevance. The authors have explained how the court decisions must be understood in the context of the revised laws.

Japan

Bibliographic reference

Anja Petersen-Padberg, 'Part V: Conflict of Laws, Arbitration and Civil Procedure', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 677 678

The Japanese Private International Law (Hōrei) was comprehensively revised in 2006 and came into force as of 1 January 2007, renamed as the ‘Act on General Rules on the Application of Laws’. The decisions chosen for this section start with the hotly discussed ‘Card Reader’ case on the question of whether US Patent law can be infringed by acts committed in Japan, and is followed by the well-known case on the applicable law with regard to the legal capacity of a company (Supreme Court decision of 15 July 1975). Two further interesting cases of the Supreme Court deal, first, with the applicable law to maritime liens, and with the applicable law to a claim of lost income of a foreigner having only a temporary visa and, therefore, only a temporary employment income in Japan. Where appropriate, the comments also make reference to the revised provisions, P 678 and present numerous links to further interesting literature on the new Act on General Rules on the Application of Laws. In the field of International Civil Procedure, new provisions on international jurisdiction have come into force in May 2012. The new rules provide for a broader jurisdiction compared to the European Regulation EC/44/2001 or German national law due to the new jurisdiction rule on ‘doing business’ and a new consumer venue. The comment on the ‘Malaysia Airlines’ case, the leading case on international jurisdiction, explains how that case became part of Section 3-9 of the revised Code of Civil Procedure. The Supreme Court decision ‘Tokyo Sanyo Boeki Co. v. The Islamic Republic of Pakistan’ of 21 July 2006 on state immunity, demonstrates how the Japanese courts apply the new and restrictive theory of state immunity. Two further Supreme Court decisions deal with the conditions of recognition and enforcement of foreign judgments. The decision ‘Punitive Damages’, explains why punitive damages granted by a US court cannot be recognized and enforced in Japan, while the Supreme Court decision of 28 April 1998 deals with the conditions for the recognition of foreign judgments, in particular with the principle of reciprocity. The revised Japanese Arbitration Act based on the UNCITRAL Model law came into force on 1 March 2004. Four cases in this section touch upon arbitration: first, the abovementioned Supreme Court decision of 15 July 1975 on international company law. Second, the ‘Ringling’ case of the Supreme Court of 1997 on the governing law for determining the validity of an arbitration clause. Third, the decision ‘Arbitration Clause in Patent License Agreements’ of the IP High Court of 28 February 2006 that deals with the validity of an arbitration clause once the main contract is terminated, and fourth, the decision ‘Descente v. Adidas’ of the Tokyo District Court of 26 January 2004 that clarifies the question of when an arbitration award can be set aside. Finally, the Supreme Court decision of 12 November 1999 on the disclosure of documents which were meant for internal use (ringi soshō) concerns the field of civil procedure. Anja Petersen-Padberg (1) P 678

References ★ )

1)

Anja Petersen-Padberg: (University of Cologne) (University of Cologne)

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Case No. 61: Infringement of a US Patent – Patent Law – Applicable Law

Document information

Publication

Yuko Nishitani

Business Law in Japan – Cases and Comments

(★ )

Case No. 61: Infringement of a US Patent – Patent Law – Applicable Law (*) Supreme Court 26 September 2002, Case No. 2000 juri 580, Fujimoto v. Neuron Co. Ltd. (‘Card Reader’ case) (1)

Jurisdiction Japan

Source: Minshū 56-7, 1551 = Hanrei Jihō 1802, 19 = Hanrei Taimuzu 1107, 80 = J.A.I.L. 46 (2003), 168

Court

Supreme Court of Japan

I Headnote(s)

Case date

The claim for injunction and destruction of products in Japan based on a US patent is characterized as a matter of the effects of patent and governed by US law. However, enjoining certain conducts in Japan according to US patent law cannot be allowed, as it would run counter to the principle of territoriality and Japan's public policy.

26 September 2002

The claim for damages concerning the infringement of a US patent is characterized as a dismissed, for Japanese law that is cumulatively applicable does not condemn an active inducement committed outside the country of registration.

P 680 matter of tort and governed by US law. However, the claim is to be

Case number 2000 juri 580

II Relevant Provisions Articles 11 (1)(2) and 33 Hōrei; section 709 and section 719 (2) Civil Code; section 271 (b) and section 284 of the US Patent Law.

Parties

Claimant, Fujimoto Defendant, Neuron Co. Ltd.

III Facts In 1985, a Japanese national residing in Japan (the Plaintiff) obtained a US patent for an invention named ‘FM Signal Demodulating Apparatus’. A Japanese company (the Defendant), with its principal place of business in Japan, owned the parallel Japanese patent. From approximately 1986 to 1991, the Defendant produced in Japan ‘Card Reader No. 1’ and later, from 1992 on, ‘Card Reader No. 2’. They were exported to the US and sold there by the Defendant's wholly-owned US subsidiary.

Bibliographic reference

Yuko Nishitani, 'Case No. 61: Infringement of a US Patent – Patent Law – Applicable Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 679 - 689

Card Reader No. 1 was within the technical scope of the Plaintiff's invention protected by his US patent. The Plaintiff argued that Card Reader No. 2 was also within this scope, and that the Defendant induced the infringement of his US patent pursuant to section 271 (b) of the US Patent Laws. He filed a claim against the Defendant seeking the following remedies: (a) the injunction against production of Card Reader No. 2 for the purpose of exporting to the United States, export of Card Reader No. 2 to the US, and inducement of the Defendant's US subsidiary to import and sell them in the US; (b) the destruction of the Defendant's products in her possession in Japan; (c) compensatory damages. Both the Tokyo District Court (1999) (2) and the Tokyo High Court (2000) (3) dismissed the Plaintiff s claim on the merits. The Plaintiff appealed to the Supreme Court.

IV Findings (1) The appellant's claim seeking (a) injunction against infringing acts and (b) destruction of products is based on the property right of a private person. It concerns a Japanese national domiciled in Japan and a Japanese company whose principal place of business is in Japan, and the latter party's activities in Japan are being questioned. However, because this claim draws upon property right that is granted by US patent law, it includes a foreign element and therefore requires the determination of applicable law. P 681

The ‘principle of territoriality’ of patent means that the formation, transfer and effects of each country's patents are determined by each country's law, and that the effects of patents do not extend beyond the border of the country concerned. (4) In other words, every country regulates, based on its own industrial policy, in which procedure what kind of effects shall be conferred on an invention. The effects of a Japanese patent are restricted to the territory of Japan. However, this does not exempt the judge from determining the applicable law pursuant to Hōrei (5) when a dispute arises concerning a foreign patent between private persons. The claims for (a) injunction and (b) destruction of products pursuant to a US patent draw upon its exclusive effects. These claims are different from a tort action that seeks, in light of justice or fairness, (c) compensation for damages caused to the victim in the past. They should, therefore, be characterized as a matter of the effects of patent. Since neither the Hōrei nor other statutes contain any legal provisions governing the effects of patent, the law concerned should, as a matter of Jōri (reasonableness), be the law of the country of

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registration, namely the law of the country that has the closest connection to the patent. Hence, the law governing the (a) injunction and (b) destruction of products based on the US patent is US law. Section 271 (b) of the US Patent Law stipulates that someone who actively induces infringement of a patent shall be liable as an infringer. This provision is interpreted as also covering an active inducement committed outside the US territory, so long as the directly infringing conduct takes place within the US borders. Furthermore, section 283 of the US Patent Laws provides that courts can order an injunction as a remedy. It is construed as allowing courts to order the destruction of the products infringing the patent as well. However, issuing a court order that enjoins certain conducts in Japan based on the US patent would mean extending the effects of US patent extraterritorially to Japan. This would run counter to the principle of territoriality. In addition, Japan and the US have not signed a treaty that provides for mutual recognition of patents. Thus, granting these remedies pursuant to US patent law would be incompatible with the fundamental principles of Japanese patent law and violate Japan's public policy under Article 33 Hōrei. The appellant's claim for injunction and destruction of products is to be dismissed. (2) The appellant's claim for (c) compensatory damages based on the infringement of the for the infringement of property right. This claim should therefore be characterized as tort. It is governed by the law designated by Article 11 (1) Hōrei. (6)

P 682 US patent is not a specific question of patent law, but concerns a civil remedy

With regard to the claim for damages, the place of tort in the sense of Article 11 (1) Hōrei should be interpreted as indicating the US, in which the directly infringing act was committed and its result was felt. This is because: (i) the result of the appellee's conduct in Japan to actively induce the infringement of the US patent occurred in the US, and (ii) the application of the US law does not run counter to the appellee's foreseeability, so long as the appellee had intended to have its products imported and sold in the US by its US subsidiary. Article 284 of the US Patent Law provides for compensatory damages as a civil remedy. Those who have actively induced infringement of a US patent in Japan could therefore be considered as liable pursuant to section 271 (b) and section 284 of the US Patent Law. However, Japanese law is cumulatively applicable, according to Article 11 (2) Hōrei. The question is whether the appellee's active inducement of patent infringement, effectuated outside the country of registration, constitutes a tort under Japanese patent and civil law. Unlike section 271 (b) of the US Patent Law, Japanese law lacks a provision that enables to extend the effects of Japanese patent to an extraterritorial active inducement of infringement. So long as there is no legislation or treaty in this sense, such an act cannot be regarded as illegal or constitute a tort. Since the appellee's conduct is ‘not unlawful according to Japanese law’ in the sense of Article 11 (2) Hōrei, the appellant's claim for damages is to be dismissed. (3) Hence, the majority of the Supreme Court Justices affirmed the judgment of the Tokyo High Court and dismissed the appellant's claims. Justice Ijima delivered a supplementary opinion and Justice Machida an opinion. On the other hand, Justice Fujii delivered a dissenting opinion concerning the claim for damages as follows: In applying Japanese law cumulatively pursuant to Article 11 (2) Hōrei, the existence of the US patent is taken for granted. We should examine whether the infringement of an equivalent right in Japan would be regarded as a tort. According to section 709 and section 719 (2) Civil Code, an active inducement of patent infringement is a solicitation or assistance of a wrongful act. The one who committed the act is regarded as a joint tortfeasor and is liable for damages together with the direct infringer. Thus, the appellee's conduct fulfilled the requirements P 683 of tort under Japanese law. This consideration does not contravene the principle of territoriality, as it does not extend the effects of the US patent to conducts effectuated outside the country of registration. It only recognizes the appellee's joint liability with the direct infringer for the direct infringement taking place in the country of registration. Even if we were to imagine an equivalent case in which active inducement of the infringement of a Japanese patent took place outside Japan, it would constitute a tort under Japanese law as an act of joint tortfeasor. The judgment of the Tokyo High Court contains obvious violations of law. It should therefore be reversed and remanded. Summarized and translated by Yuko Nishitani

V Comment 1 Jurisdictional Rules in Japan a General Principles The international adjudicatory jurisdiction of Japan was first developed by case law. The Supreme Court held in 1981 (7) that there were no general rules on international jurisdiction in national law, treaties or established international law. It should therefore be determined based on jōri (reason) in light of the balance of interests between the parties, as well as due and expeditious process. So far as a specific court in Japan had the territorial jurisdiction pursuant to national jurisdictional rules, the international

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jurisdiction was presupposed (doctrine of ‘reverse presumption’). Lower courts introduced an exception to this rule, allowing judges to decline jurisdiction under ‘special circumstances’ to avoid exorbitant jurisdiction, which was eventually confirmed by the Supreme Court in 1997. (8) This general framework has been upheld in the 2011 ‘Act for the Amendment of Civil Procedure Code and Civil Provisional Remedies Act’ (9) that adopted rules on international jurisdiction in civil and commercial matters. The general jurisdiction is based on the domicile or principal place of business of the Defendant (section 3bis (1) and (3) CCP). Special jurisdiction is conferred on the basis of, inter alia, the place of performance of the contractual obligation (section 3ter Item (i) CCP), the location of the object of the claim or, in the case of monetary claim, the location of the asset to be seized (Item (iii)), branch office for claims concerning its activities (Item (iv)), P 684 engagement in business in Japan (Item (v)), and the place of tort (Item (viii)). Furthermore, in addition to special rules on consumers and employees (section 3quater CCP), exclusive jurisdiction (section 3quinquies CPC), objective joinder of claims (section 3sexies CCP), choice of court agreement (section 3septies CPC) and general appearance (section 3octies CCP) are provided for. However, jurisdiction can exceptionally be declined in the absence of an exclusive choice of court agreement, when exercising jurisdiction would run counter to the balance of the parties' interests or hinder due and expeditious process (section 3novies CCP). b Adjudicatory Jurisdiction of Patent Infringement A patent is an intellectual property right that is conferred by the authority of a country and presupposes registration. The registration or validity of patents is subject to the exclusive jurisdiction of the country of registration pursuant to section 3quinquies (3) CCP, the same as Article 22 No. 4 of the Brussels I Regulation. (10) However, patent infringement is a dispute where the right holder seeks remedies from the infringer. Unlike the revocation or invalidation of patent that involves administrative acts and has erga omnes effects, it is litigation between private parties seeking remedies. It therefore falls within the category of tort. (11) From a practical viewpoint, granting jurisdiction at the Defendant's domicile enables an efficient implementation of remedies and consolidation of infringement disputes over parallel patents. (12) In this particular case, the judges in all instances implicitly granted the jurisdiction of Japan by deciding on the merits, presumably due to the Defendant's domicile in Japan. Subjecting infringement disputes to general jurisdictional rules was in line with the previous case law as well. (13) Also under the new statute, jurisdiction in infringement disputes is conferred on the Defendant's domicile (section 3bis CCP) and place of tort. The place of tort covers both P 685 locus damni and locus delicti commissi (section 3ter, Item (viii) CCP). (14) Locus damni is the country of registration in which patent is effective and damage is felt. Following this provision, the locus damni-jurisdiction is denied if it was unforeseeable under normal circumstances that the results of the wrongful act would come into effect at that place. Locus delicti commissi should be interpreted as the place where the tortfeasor acted or induced the infringement, including acts taken outside the country of registration. So far as the infringing result occurs in the country of registration, granting jurisdiction at the place of extraterritorial preparatory or contributory acts serves for effective remedies, especially injunctions. (15) An objective joinder of claims between the same parties is possible when the claims are closely related to each other (section 3sexies CCP). Furthermore, recent doctrine and case law permit the joinder of Plaintiffs or Defendants so far as the object and legal basis of the dispute are common among parties (see section 7, 2nd sentence and section 38 CCP). (16) In light of these rules, the consolidation of claims should be approved in parallel patent infringement, including those caused by a parent company and its subsidiaries in different countries (‘spider in the web’ doctrine). (17) An exorbitant jurisdiction can be avoided by exceptionally declining jurisdiction based on ‘special circumstances’ (section 3novies CCP). An important question is whether courts having jurisdiction over the infringement of a foreign patent can incidentally decide on the validity issue when raised as a defence. The European Court of Justice denied it in 2006, maintaining that it falls within the exclusive jurisdiction of the country of registration. (18) This means, however, that right holders, who typically hold parallel patents in different countries, have to seek remedies in each country of registration. This is not only cumbersome, but also could result in contradictory decisions for parallel patents. Making jurisdiction depend on a later plea of invalidity by the Defendant also contradicts the established procedural rules. (19) The P 686 infringer may even strategically raise an invalidity defence to hamper the infringement suit, without bringing an invalidation claim in the country of registration. (20) For the sake of effective remedies, Japanese courts should be allowed to incidentally decide on the validity of foreign patents with inter partes effects, irrespective of the applicable substantive rules. (21) This would be in line with Japanese national rule that permits an incidental validity decision in infringement suit (section 104ter Patent Act), (22) independently of the invalidation by the Patent Office (section 123 Patent Act).

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a Characterization In the present case, the appellant's claims for (a) injunction against production, export and inducement of infringement, as well as (b) destruction of the products were characterized as ‘effects of patent’, whereas the claim for (c) compensatory damages was characterized as ‘tort’. As a result, US law was applicable to (a) and (b) in the capacity of lex loci protectionis based on jōri (reasonableness), and to (c) as the law of the place of tort pursuant to Article 11 (1) Hōrei. Arguably, the rationale of this distinctive characterization lay in Japanese substantive law that subjects injunction and prevention of infringing acts as actio negatoria to patent law (section 100 (1)(2) Patent Act), and damages to compensate a loss sustained in the past to tort law (section 709 Civil Code). (23) Such an approach, however, contradicts the generally recognized principle that the criteria of characterization be found in conflict of laws itself, independently of any substantive laws. (24) While it is a matter of substantive law to design the remedies available, patent infringement as such constitutes one legal phenomenon. Besides, the distinctive characterization runs the risk that the claims be P 687 subject to different applicable laws that lead to a contradictory result. Also pursuant to Article 8 and 15 of the Rome II Regulation, (25) all the remedies for patent infringement, that is, injunction and prevention of infringement as well as damages, are governed by the single applicable law. The same as in matters concerning adjudicatory jurisdiction, patent infringement should have been uniformly characterized as a tort in relation to applicable law. (26) b Law Governing Tort Concerning the claim (c) for damages, the Supreme Court regarded the US as the place of tort in the sense of section 11 (1) Hōrei, on the grounds that the directly infringing act took place and the damage was felt there, and that the application of US law did not violate the appellee's foreseeability. However, the first and second instance held, just as Justice Machida' s opinion, that the place of tort was Japan, considering that the Defendant's allegedly wrongful acts were all performed in Japan. (27) These diverging results stemmed from the reasoning that the underlying patent infringement was a complex tort. Arguably, the lower courts followed the then prevailing interpretation of Article 11(1) Hōrei, according to which tort based on negligence was subject to the lex loci delicti commissi to control the conducts of the tortfeaser, while tort based on strict liabiliy was subject to the lex loci damni aiming at the compensation of the victim. (28) However, a patent right has specific characteristics as the entitlement to an exclusive exploitation of invention. Since the effects of a patent right do not go beyond the border of the country of registration, its infringement always takes place in that country, even if part of the infringing acts is committed outside of it. So long as the conducts of the alleged tortfeasor do not affect the country of registration, infringement must be denied. Thus, patent infringement should not be subject to the general conflicts rules applicable to complex tort, but always governed by the law of the country of registration. (29) The Supreme Court rightly decided to designate the US law as applicable concerning the claim (c) for damages, apart from its superfluous reference to the appellee's foreseeability. After the reform of the Hōrei in 2006, (30) detailed conflicts rules on tort were adopted on the infringement of intellectual property rights pointing to the country of protection for lack of unanimous understanding on this connecting factor. (31) Under the AGRAL, the general conflicts rule on tort (Article 17) (32) and the escape clause (Article 20) focus on a close connection with the parties, and party autonomy (section 21) aims at realizing their private interests. These rules are not adequate to determine the law governing the infringement of intellectual property rights, which always occurs in the country of protection as a violation of territorial exclusive rights geared to the economic and industrial policy of the country concerned. De lege lata, therefore, the law of the country of protection should be applied based on jōri (reason) to the exclusion of Articles 17, 20 and 21 AGRAL. (33)

P 688 (Articles 17 to 22 AGRAL). It left out, however, the envisaged special rule

c The Application of Governing Law and Double Actionability Article 11 (2) and (3) Hōrei stipulated the so-called double actionability principle, providing for the cumulative application of Japanese law in relation to the existence and remedies of tort. Despite criticism by academics, these rules have been maintained in Article 22 (1) and (2) AGRAL. (34) In the Manchurian patent case (1953), (35) the Plaintiff, a Japanese company owned a Japanese and Manchurian patent for vacuum tubes. The Defendant, also Japanese company, bought the products from the Plaintiff's licensee in Japan, made radio receivers by using them in Japan and sold its end products in Manchuria. The Tokyo District Court regarded Manchuria as the place of tort pursuant to Article 11 (1) Hōrei. It dismissed the Plaintiff's claim for damages, however, on the grounds that the Defendant's conducts did not constitute tort under Japanese law (Article 11 (2) Hōrei), because the effects of the Manchurian patent did not extend to Japan. This decision was rightly criticized by academics, because an ‘equivalent act’ committed in Japan would have constituted, by all means, infringement of a Japanese patent. (36)

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P 689

In the current case, the appellee's acts were completed in Japan and solely induced a patent infringement through its US subsidiary in the US. The Supreme Court did apply the ‘equivalent act’ test under Article 11 (2) Hōrei. It denied, though, the existence of tort, holding that the inducement of a Japanese patent infringement committed outside of Japan would be legal, as the effects of Japanese patent would not extend extraterritorially in default of a provision corresponding to section 271 (b) of the US patent law. It should, however, be pointed out that Article 11 (2) Hōrei solely concerns the illegality of conducts, not the territorial scope of application of patent law. In this respect, it would have sufficed to ascertain that an active inducement of patent infringement establishes joint liability as a solicitation or assistance under Japanese law (sections 709 and 719 (2) Civil Code). Even if one considers a parallel case in which an active inducement of patent infringement in Japan was committed outside of Japan, the result would be the same so long as the directly infringing act takes place in Japan. In this regard, Justice Fujii delivered a convincing dissenting opinion. (37) The Supreme Court was certainly hesitant to apply US law extraterritorially to the appellee's conducts in Japan. Indeed, the appellee's production of the products in Japan as such was legal because of its corresponding patent in Japan. It could not have been condemned by injunction against production or for destruction of the products pursuant to US patent law. However, considering that the appellee purposefully induced the infringement of the appellant's US patent through its US subsidiary, said appellee could have been held liable for its conducts that affected the US market. In this respect, the appellant's claim could have been granted to the extent of damages, as well as the injunction against the inducement of the patent infringement in the US. (38) Yuko Nishitani (1) P 689

References ★ )

*) 1) 2) 3) 4) 5)

6)

Nishitani Yuko: Kyushu University, Faculty of Law Abbreviations: AGRAL = Act on General Rules for Application of Laws; CCP = Code of Civil Procedure; J.A.I.L. = Japanese Annual of International Law; JYIL = Japanese Yearbook of International Law. On this decision, see also Y. Nishitani, Cross-Border Patent Infringement in Japan – Comment on the Supreme Court's Decision of September 26, 2002 [‘Card Reader’ case] –, in: ZJapanR/J.JapL. 16 (2004) 251 et seq. Tokyo District Court, 22 April 1999, Minshū 56-7, 1575, Hanrei Jihō 1691, 131. Tokyo High Court, 27 January 2000, Minshū 56-7, 1600, Hanrei Jihō 1711, 131. The judgment quotes Supreme Court 1 July 1997, Minshū 51-6, 2299 – ‘BBS’. Hōrei (Law No. 10 of 21 June 1898) was substituted by the AGRAL (Law No. 78 of 21 June 2006); for an English translation, see M. Dogauchi et al., Act on General Rules for Application of Laws, in: J.A.I.L. 50 (2007), 87; for the background of the reform, see Y. Nishitani, Internationales Privat- und Zivilverfahrensrecht, in: H. Baum/M. Bälz (Ed.), Handbuch Japanisches Handels- und Wirtschaftsrecht (Compedium on Japanese Business and Commercial Law) 201, para. 7. Article 11 Hōrei reads as follows (translation by EHS Law Bulletin Series – Japan, Eibun-Horei-Sha, 1986): ‘(1) The formation and effect of obligations due to negotiorum gestio, unjust enrichment or unlawful acts shall be governed by the law of the place where the facts forming the cause of such obligation have occurred. (2)

The provision of the preceding paragraph shall not apply to unlawful acts in case the facts occurring in a foreign country are not unlawful according to Japanese law. (3) ‘Even when facts occurring in a foreign country are unlawful according to Japanese law, the injured person may lodge no claim for compensation for damage or other measures (remedies) except such as are recognized by Japanese law.’ 7) Supreme Court, 16 October 1981, Minshū 35-7, 1224 – ‘Malaysian Airlines’, see case no. 66 in this book. 8) Supreme Court, 11 November 1997, Minshū 51-10, 4055 [Family case]. For an overview, Y. Nishitani, supra note 5, para. Ill et seq.; A. Petersen, Das internationale Zivilprozessrecht in Japan (International Civil Procedure in Japan) 2003, 41 et seq. 9) Law No. 36 of 2 May 2011 (entry into force early 2012 [to be fixed by a ministerial decree]). For further details, see the contributions in JYIL 54 (2011) (forthcoming). 10) Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, O.J. 2001, L 12/1.

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11) Section 2:202 of the Draft Principles for Conflict of Laws in Intellectual Property

12) 13)

14) 15)

16)

(hereinafter ‘CLIP’) as of March 2011, prepared by the European Max Planck Group on Conflict of Laws in Intellectual Property; sec. 204, paragraph 1 and 2 of the ALI Principles (American Law Institute, Intellectual Property: Principles Governing Jurisdiction, Choice of Law, and Judgments in Transnational Disputes (2008)); sec. 105 of the Transparency Proposal on Jurisdiction, Choice of Law, Recognition and Enforcement of Foreign Judgments in Intellectual Property (2009) (Basedow et al. (Ed.), Intellectual Property in the Global Arena, 2010, 395). See S. Chaen, Gaikoku Tokkyo Shingai Jiken no Kokusai Saiban Kankatsu, (International Jurisdiction with regard to patent infringement cases) in: Nihon Kōgyō Shoyūken-hō Gakkai Nenpō 21 (1998), 59 et seq., 73 et seq. Tokyo District Court, 12 June 1953, Kaminshū 4-6, 847 – ‘Manshurian Patent’, Tokyo District Court, 14 May 2001, HanreiJihō 1754, 148 – ‘Ueno Seiyaku’; Tokyo District Court, 16 October 2003, Hanrei Jihō 1874, 23 – ‘CoralSand’; see S. Chaen/T. Kono/D. Yokomizo, Jurisdiction in Intellectual Property Cases: The Transparency Proposal, in: Basedow et al. (ed.), supra note 11, 94 et seq.; Y. Nishitani, Intellectual Property in Japanese Private International Law, in: J.A.I.L. 48 (2005), 87 et seq. See Hōmosho Minjikyoku Sanjikan-shitsu, Kokusai Saiban Kankatsu Hōsei ni kansuru Chūkan Shian Hosoku Setsumei (2009), p. 21. Y. Nishitani, Comments on Jurisdiction, in: Basedow et al. (ed.), supra note 11, 148 et seq.; also Articles 204 (1) and (2) ALI Principles. However, Article 2: 202 CLIP Principles denies jurisdiction of the locus delicti commissi for conducts taken outside the country of registration, on the ground that they do not constitute an infringement as such due to the principle of territoriality. See C. Heinze, A Framework for International Enforcement of Territorial Rights, in: Basedow et al. (ed.), supra note 11, 62 et seq. Y. Sakorada, Shukan-teki heigō ni yoru kankatsu-ken, in: takakowa/Dogauchi (ed.), Kokusai Minji Soshōhō (Tokyo 2002), 127 et seq.; for further indication, see Y. Nishitani, supra note 5, para. 140.

17) The European Court of Justice decided differently on 13 July 2006 in Roche Nederland

et al. v. Primus and Goldenberg – Case C-539/03, [2006] ECR I-6535.

18) European Court of Justice 13 July 2006, GAT v. LuK – Case C-4/03 [2006] ECR I-6509;

19)

20) 21)

22) 23)

24) 25) 26) 27) 28)

also Roche Nederland case (supra note 17). This principle has been confirmed in Article 22 No. 4 of the revised Lugano Convention (2007) and is being contemplated in the reform of the Brussels I Regulation (Article 22 No. 4 of the Proposal of the European Commission for a Regulation of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, 14.12.2010, COM(2010) 748/3). C Heinze, (supra note 15), 56, 60 et seq.; European Max-Planck Group for Conflict of Laws in Intellectual Property, Exclusive Jurisdiction and Cross Border (Patent) Infringement (2006) (). In this respect, Handelsgericht Zürich 13 October 2006, GRUR 2007, 285, rightly set a time frame for the defendant to bring an invalidation suit. Cfr. M. Dogauchi, Jurisdiction over Foreign Patent Infringement from a Japanese Perspective in Consideration of the Hague Draft Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters as of June 2001, in: J.A.I.L. 44 (2001), 56; for the substantive law solution that was contemplated but eventually not adopted, see Y. Nishitani (supra note 15), 147. See Case No. 61 in this volume. See comments of the clerk, M. Takabe, in: Saikō Saibansho Hanrei Kaisetsu Minjihen (2002 II), 716 et seq.; also R. Kojima/R. Shimanami/M. Nagata, Applicable Law to Exploitation of Intellectual Property Rights in the Transparency Proposal, in: Basedow et al. (ed.), supra note 11, p. 183. The second instance held that claims (a) and (b) concerning the effects of patent be deemed as a matter of public law without giving rise to a conflict of laws question, and claim (c) as a tort (also M. Dogauchi, in: Juristo 1246 (2003), 279 et seq.). However, once granted and registered, patent can be licensed, assigned or laid in pledge as an intangible property right. Its infringement as a dispute between private persons is independent of the administrative procedure of conferring patent and should therefore be subject to conflicts rules. See, e.g., Y. Sakorada, Kokusai shihō, 5th ed. (Tokyo 2006), 69 et seq. Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), O.J. 2007, L 199/40. S. Kidana, in: Minshōhō Zasshi 129-1 (2003), p. 118; Kojima/Shimanami/Nagata, supra note 23, 186. Supported by K. Ishiguro, Shihō Hanrei Remarks 21 (2000), 153. Y. Orwo, Kokusai shihō Kakuron, 2nd ed. (Tokyo 1972)180; S. Ikehara, Kokusai shihō, Keiei Hōgaku Zenshū: Kokusai Torihiki-hō (Tokyo 1967) 377. Recent authors, however, have criticized this opinion for lack of clear-cut criteria and supported the principle of lex loci damni. Y. Tameike, Kokusaishihō Kōgi, 3rd ed. (Tokyo 2005), 396.

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29) A. Metzger, Applicable Law under the CLIP Principles: A Pragmatic Revaluation of

30) 31)

32) 33)

34) 35) 36) 37) 38) 1)

Territoriality, in: Basedow et al. (ed.), supra note 11, 171 et seq.; comparatively, M. Pertegás Sender, Cross-Border Enforcement of Patent Rights (London 2002) 209 et seq. Supra note 5. See Hōmosho Minjikyoku Sanjikan-shitsu, Kokusai shihō no Gendaika ni kansuru Yōkō Chūkan Shian Hosoku Setsumei, in: Bessatsu NBL Henshū-bu (ed.), Hō no Tekiyō ni kansuru Tsūsoku-hō Kankei Shiryō to Kaisetsu (Tokyo 2006) 201; Y. Nishitani, Die Reform des internationalen Privatrechts in Japan, (The Reform of the Private International Law in Japan) in: IPRax 2007, 556 (note 46). Article 17 AGRAL subjects a wrongful act to the lex loci damni in principle and, in the absence of foreseeability by the tortfeasor, to the lex loci delicti commissi. Also Article 8 (1) and (3) Rome II; cfr. Article 301 (1)(a) and sec. 302 (1) ALI Principles; Article 3: 601 (1) CLIP Principles; see Hōrei Kenkyū-kai (ed.), Hōrei no minaoshi ni kansuru shomondai, Vol. 2: Fuhōkōi, Bukken tō no junkyo-hō ni tsuite (Tokyo 2003), 8, 97; Y. Nishitani, Fuhōkōi no junkyo-hō, (Applicable Law with regard to Torts) in: Suami/Dogauchi (ed.), Kokusai Business to Ho: Business Hōmu Taikei, Vol. 4 (Tokyo 2009), 176 et seq. Y. Nishitani, supra note 31, 556. See Tokyo District Court, supra note 13. Y. Orimo, supra note 28, p. 187 (note 4); R. Yamada, Kokusaishihō no Kenkyū (Tokyo 1969)150 et seq. Also S. Kidana, supra note 26, 122 et seq.; as a result, also M. Dogauchi, supra note 23, 280. Y. Nishitani, supra note 33, 178. Kyushu University, Faculty of Law

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Case No. 62: Claim for the Interdiction of an Arbitration Procedure: Law Applicable to the Legal Capacity of a Company – Adoption of an Arbitration Agreement – Doctrine of Separability of the Arbitration Agreement from the Main Contract

Document information

Publication

Business Law in Japan – Cases and Comments

Eva Schwittek

Jurisdiction

(★ )

Japan

Supreme Court, Third Petty Bench (Appellate Court), 15 July 1975 – Case No. 1974 o 1125, Kokusan Kinzoku Kogyo KK v. Guardlife Corp.

Court

Source: Minshū 29-6, 1061 = Kin'yū Hōmu Jijō 767, 32 = Kin'yū Shōji Hanrei 527, 42 = Saikō Saiban-sho Saiban-shū Minji 115, 443

Supreme Court of Japan

I Headnote(s)

Case date

The question whether a company that was founded under the law of the State of New York, US, and has its head office in that state, can acquire the rights and duties originated from a contract that its promoter concluded before its foundation with a Japanese company in order to set up its business, and what the necessary conditions therefore are, is to be determined, in applying Article 3 paragraph 1 Hōrei analogically, according to the statute of this company, that is the law of the State of New York.

15 July 1975

Case number 1974 o 1125

P 692

Parties

Claimant, Kokusan Kinzoku Kogyo KK Defendant, Guardlife Corp.

Bibliographic reference

Eva Schwittek, 'Case No. 62: Claim for the Interdiction of an Arbitration Procedure: Law Applicable to the Legal Capacity of a Company – Adoption of an Arbitration Agreement – Doctrine of Separability of the Arbitration Agreement from the Main Contract', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 691 - 702

The arbitration agreement in a contract concluded before the foundation by the promoter of a company later founded under American (New York) law with a Japanese company in order to set up its business becomes valid as a contract concluded between those companies through the adoption by the company after the foundation. The effect (1) of an arbitration agreement incorporated into the main contract shall be judged independently of the main contract unless otherwise expressly agreed on between the parties, and any defect in the formation of the main contract would not affect the validity (2) of the arbitration agreement.

II Relevant Provisions Article 3 Hōrei; section 786 Code of Civil Procedure

III Facts Kokusan Kinzoku Kōgyō Kabushiki Kaisha (the Plaintiff), a Japanese producer of locks, sued Guard-Life Corporation (the Defendant), a company founded under the law of the State of New York, in order to stop an arbitration procedure initiated by the Defendant against the Plaintiff. The crucial point was the validity of an arbitration agreement contained in a business contract that was concluded with the Plaintiff in the name of the Defendant before the foundation of the Defendant's company. The case was based on the following facts. (3) The Plaintiff, in planning to export its products to the US and Canada, turned to a US-American company, which proposed that a new company, the subsequent Defendant, be founded with the American company's vice president as director. The exclusive selling right for the products of the Plaintiff in the target region were to be transferred to the new company. The Plaintiff agreed to the P 693 offer. On 23 January 1968, the designated director of the yet to be founded Defendant company concluded in Tokyo in the name of said Defendant a contract with the Plaintiff about the transfer of the exclusive selling right, which contained a choice of law clause for the law of the State of New York in section 11 paragraph 1. On 9 November 1968, the Defendant company was incorporated under the law of the State of New York. From July 1968 to May 1969, the Plaintiff and the Defendant maintained business transactions and exchanged letters, in which they referred to the contract concluded earlier. However, because the Plaintiff began doing business with other US-American companies meanwhile, the Defendant proceeded against the new trading partners by filing suit claiming the infringement of rights, and by sending warnings. On 1 September 1969, the Defendant, referring to an arbitration clause in section 11 paragraph 2 of the contract, filed an application for a commercial arbitration procedure at the Tokyo branch of the Japan Commercial Arbitration Association (Kokusai Shōji Chūsai Kyōkai). (4) It demanded the observance and enforcement of the contract clause stating the obligation to supply locks and of the clause containing the exclusive selling right. At first, the Plaintiff responded to the request for arbitration without retention by agreeing with the Defendant in written form on the appointment of an arbitrator, and by submitting a written defence. However, on 17 December 1971, in a letter addressed to the Defendant, it expressed the notion that the contract be invalid as it was concluded based on a fraudulous act on the part of the Defendant. On 4 February 1972, it requested the

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rejection of the arbitrator at the Tokyo branch of the Japan Commercial Arbitration Association. At the same time, it filed suit at the Tokyo District Court, which led to this decision. In the first and second instance, the Plaintiff claimed, inter alia, that the contract, including the arbitration agreement, had not come into existence as at the time of the conclusion, the Defendant company had not been founded and was therefore nonexistent as party to the contract. Moreover, as the arbitration agreement therefore lacked the necessary written form, the arbitration procedure was not to be admitted. In its opinion, even if the contract had been valid, it had been disputed by the Plaintiff, on grounds that the designated director of the Defendant company had pretended that said company already existed, and the Plaintiff had concluded the contract relying on the misconception caused thereby. The Plaintiff therefore demanded: 1. the confirmation that the contract documents had not been set up authentically (section 225 Code of Civil Procedure); 2. the confirmation that the arbitration agreement did not exist, and the interdiction of the arbitration procedure (section 805 Code of Civil Procedure); 3. the confirmation that no claims existed. Concerning the first demand, the Defendant claimed that there was no legal interest in a declaratory judgment. Against the second and third demand, it brought forward, amongst P 694 other arguments, that the law of the State of New York was applicable, and that thereafter, the Defendant had adopted or confirmed the contract. Even if it was not so, an implied contract with the same content would have been concluded afterwards. Also, at the latest through the application for arbitration, an arbitration agreement had come into existence in written form. The Plaintiff responded that notwithstanding a choice of law clause, the law of the place of the act, that is Japanese law, should be applied. The Defendant won in both instances. The Tokyo District Court (5) and the Tokyo High Court (6) held that, concerning the first demand, the action was improper. The second demand was rejected on the grounds that, as the problem of the validity of the contract versus the company was an issue related to the legal capacity of the promoter as a party of the contract, it should be subjected to the law of foundation of the company by applying Article 3 Hōrei analogously. According to the thus applicable law of the State of New York, the Defendant had by a number of acts, at the latest with the application for the arbitration procedure, adopted the contract and thus acquired the rights and duties from the contract. The court of second instance added that the facts that the Plaintiff had claimed were fraudulous, etc., concerned only the validity of the main contract, and did not affect the arbitration agreement. The third demand was rejected as its decision was accordingly in the authority of the arbitrator. Before the Supreme Court, the Plaintiff claimed: 1. 2.

3.

that the law of the place of the act, that is Japanese law, should be applied, and that according to Japanese law, an adoption of the contract would not have been possible; that the decision of lower instance violated the experiential base for the acknowledgment of facts insofar as the designated director of the Defendant company mislead the Plaintiff about the fact that the Defendant company had not been founded and did not possess an organized sales network; and that, even if under the law of the State of New York an adoption of the invalid contract were possible, it would lack the necessary written form; that the validity of the main contract formed the prerequisite of the arbitration agreement, and that treating the main contract and the arbitration agreement separately would be sophistry or formal logic.

The jōkoku appeal was dismissed.

IV Findings 1 About the First Reason for Appeal [Concerning the Law Applicable to the Legal Capacity of a Company] If the promoter of a stock company, in order to set up business of a company that is to be whether this company, after being founded, can acquire the rights and duties of this contract, and what the requirements therefore are, should, as it concerns the protection of interests of the stockholders and the creditors of the company etc., be comprehended as a problem of legal capacity of the company. It should accordingly, in applying Article 3 paragraph 1 Hōrei analogously, be determined based on the law applicable to this company. As was decided correctly by the court of lower instance, the jōkoku appellee [Defendant] was founded based on the law of the State of New York, and moreover has established its head office in this state, so the statute of the jōkoku appellee [Defendant] is the law of the State of New York. Again, in order for this contract to become effective between the. jōkoku appellant [Plaintiff] and the jōkoku appellee [Defendant], the aspects that do not require a confirmation as pleaded are to be decided according to the opinion of the lower instance. […]

P 695 founded in the future, concludes a contract with a third person, the question

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2 About the Second Reason [Concerning the Adoption of the Arbitration Agreement] The fact-finding of the decision of lower instance concerning the arraigned aspects can be approved as shown in the evidence relations cited in the decision of lower 3+instance, and there is none of the claimed mistakes in the taking of evidence. Again, for the jōkoku appellee [Defendant] to adopt the arbitration agreement in this case, a form is not required, and it is clear that through the adoption by the appellee [Defendant], an arbitration agreement came into existence between the jōkoku appellant [Plaintiff] and the jōkoku appellee [Defendant]. […]

3 About the Third Reason [Concerning the Relation of Arbitration Agreement and Main Contract] The arbitration agreement was concluded adherent to the main contract, but its effects and validity (7) are to be judged separately and independently from the main contract. So if there are flaws in the conclusion of the main contract, unless there is a special agreement between the parties, they do not directly affect the validity of the arbitration agreement'. Translation by Eva Schwittek P 696

V Comment 1 Admissibility of Action The action for a declaratory judgment in respect to the validity of the arbitration agreement was admissible at the time of the judgment. However today, since the coming into effect of the Arbitration Law (8) in 2004, which lays down in section 4 the principle that intervention by the state should be confined to a minimum, the suit would be dismissed as inadmissible. (9)

2 Justification of Action I Law Applicable to the Legal Capacity of the Defendant a Determining the Law Applicable to a Company: Foundation Theory v. Real Seat Theory This is the only judgment of the Supreme Court concerning the conflict of laws of companies. As neither the (now out of force) Hōrei (10) nor the Act on General Rules for Application of Laws (11) that was enacted in 2007 contain provisions on this subject, a P 697 determination of the law applicable to a company would have been a welcome reference. But the Supreme Court, in referring to ‘a company that was founded under the law of the State of New York, USA, and that has its head office in this state’, named both the law of foundation and the head office. It thus decided neither on the foundation theory, which applies the law of foundation, nor on the real seat theory, which chooses the actual place of business as connecting factor. The interpretation that the court favoured the real seat theory, (12) as it referred to both connecting factors, which allegedly (13) complied with the stricter seat theory, is a misconception. Rather, the Court did not have to make a decision as both theories came to the result that New York law was applicable. So, due to the constellation of the case, a determination was not appropriate. (14) However, the foundation theory has long been prevailing opinion in Japan. The route was set when the major bodies of law were drafted in the late nineteenth century. The drafters adhered to the foundation theory, though not as a method to determine the applicable law, but rather as one related to the recognition of the legal personality of foreign companies. Their understanding of companies was strictly territorialistic; for example, in their view, a company's legal personality existed only within the territory of its founding State. In order for the company to possess legal personality in other States, it had to be recognized. So the drafters refrained from creating a conflict of laws provision, but rather set up a provision on the recognition of foreign juridical persons in section 36 Civil Code (now section 35 Civil Code). (15) Over time, (16) the fundamental understanding of the foundation theory changed because it was generally, though with varying dogmatic substantiation, (17) perceived as a method to determine the applicable law, accompanied by alien law provisions. (18) P 698

b Characterizing the Disputed Issue as one of the Legal Capacity of a Company There were different approaches to characterize the issue at stake, that is ‘the question whether a company (…) can acquire the rights and duties originated from a contract that its promoter concluded before its foundation (…) in order to set up its business (…).’ The court of first instance saw it as a question of legal capacity of the promoter. This was unfounded as the contract was concluded in the name of the company. (19) The solution of the second instance, which was overtaken in the reasons for appeal, (20) was to treat it as a matter of the legal capacity of the company, that is, the question as to which organ

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can establish rights and duties for the company, and to what extent. (21) However, at the time the contract was concluded, the company itself was non-existent and had no organs, thus could not be represented by its organs. A third, preferable approach was to characterize the issue as a question of foundation. (22) The contract was concluded before the foundation of the company in order to set up the business of the company. The question whether and under which conditions the company acquires the rights and duties originated from such a contract is treated differently by the substantive law of different countries, depending on legal policy considerations on the foundation of companies. (23) Albeit, the Supreme Court follows the solution of the second instance: the problem ‘should, as it concerns the protection of interests of the stockholders and the creditors of the company etc., be comprehended as a problem of legal capacity of the company.’ (24) c Determining the Law Applicable to the Legal Capacity of a Company The Plaintiff is of the opinion that the law of the place of the act, for example Japanese law, should be applied: ‘The court of lower instance (…) applied the law of foundation of the juridical person, i.e. the law of the State of New York. However, it is currently prevailing opinion in Japan and abroad that the scope of the law of foundation (…) relates to the interior structure of the juridical person like the kinds of organs of the juridical person, the number of members, their duties and powers, the relation of the stockholders to the juridical person and the rights and duties of the stockholders, while a problem of duty or power of an organ in relation to a third party doing business with the juridical P 699 person, namely the relation of the juridical person to a third person, i.e. its external relation, is determined applying the law of the place of the act. As the problem in this case is exactly one of the relation towards a third person, one of the external relations, the law of the place of the act should be applied.’ The court, in applying Article 3 paragraph 1 Hōrei analogously (25) does not follow this minority opinion, (26) and deservedly so. For the law governing the company, which is applicable according to the majority opinion today, (27) is most closely connected to the legal capacity of the company, and deviating connections should be restricted to a minimum. (28) 2 Law Applicable to the Requirements for the Adoption of the Arbitration Agreement The adoption of the arbitration agreement was judged by the Supreme Court based on the law of the State of New York. This is not explicitly stated in the judgment, but derives from the fact that the judgment answers to the reasons for appeal brought forward by the Plaintiff, which, referring to the judgment of lower instance, (29) presuppose the application of the law of the State of New York. (30) But how was the law applicable to the adoption to be determined? P 700

The adoption had to comply with the requirements for the formation of an arbitration agreement. So the question was which law was applicable to the validity of the litigious arbitration agreement. The traditional view saw an arbitration agreement as a contract of mere procedural nature compulsively underlying the lex fori, thus Japanese law. (31) However, at the time of the judgment, the classification as a contract of substantive law with partly procedural effects, which could be subject to the parties' choice of law, was already prevailing opinion. (32) In the case at stake, the choice of law clause for the law of the State of New York in section 11 paragraph 1 of the contract only applied to the business contract. In cases like this, where an explicit choice of law was missing for the arbitration agreement, the then prevailing opinion excessively drew on the presumed will of the parties, (33) using the (designated) place of arbitration as an indication. (34) The place of arbitration being Tokyo in the case concerned, there actually was a presumption for the application of Japanese law. However, commentators pointed out that the application of New York law as implemented by the Supreme Court was not against the interests of the parties and was supposedly according to their original will. (35) This opinion, which connected the arbitration agreement in accordance with the main contract, neglects the importance of the place of arbitration. (36) So it is an improvement that today, the law at the place of arbitration is applied subsidiarily according to section 44 paragraph 1 No. 2, 45 paragraph 2 No. 2 Arbitration Law analogue if there is no parties' choice of law. (37) P 701

3 Doctrine of Separability of the Arbitration Agreement from the Main Contract a Determining the Applicable Law To the separability of the arbitration agreement from the main contract, the Supreme Court without explanation applied Japanese law. The question is whether and how that was justified. At first sight of the Japanese text, (38) it seems that the judgment of the Supreme Court only touched the relation of the arbitration agreement towards the main contract insofar as the effects were concerned. However, as the judgment of lower instance treated this aspect not only in respect to the effects, but also the validity, and accordingly, the reasons for appeal to which the Supreme Court responded referred to both, (39) the Supreme Court approved the separability for the validity as well. (40)

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The question whether the arbitration agreement is separable from the main contract in its validity is relevant for the scope of the jurisdictional authority to decide, thus for an aspect belonging to procedural, not to material law. (41) For the effect of a valid arbitration agreement is that it transfers the authority to decide to the arbitrating body. So the crucial question is whether the arbitration agreement is valid, and if that question can be answered independently from that of the validity of the main contract, then the court has no authority to decide about the validity of the main contract. (42) In this respect, the applicable law is found through the differentiation between procedural and material law. As the aspect of separability belongs to procedural law, which is always subject to the lex fori, Japanese law is applicable. (43) P 702

b Application of Japanese Law According to Japanese law, the validity of the arbitration agreement has long been judged separately from that of the main contract (doctrine of separability). (44) For oftentimes, the dispute brought before the arbitrative body comprises the evaluation of the validity of the main contract. And were it not for the doctrine of separability, the arbitrative body would not be able to decide about an invalid main contract. Eva Schwittek (1) P 702

References ★ )

1) 2) 3)

4)

Eva Schwittek: Max Planck Institute for Comparative and International Private Law, Hamburg The expression used in the Japanese original is kōryoku, which can be translated as ‘effect’ or as ‘validity’ (see ). For further explanations, see text at infra notes 38 et seq. See previous note. See T. Kanzaki, Hōjin no jūzoku-hō [The law applicable to juridical persons], in: Kokusai shihō hanrei hyakusen, Bessatsu Jurisuto 185 (2007) 42; H. Kobayashi, Hōgaku Kyōkai Zasshi 94-10 (1977) 1561 et seq.; Y. Kubota, Hokki-nin ga setsuritsu chū no kaisha no tame teiketsu shita keiyaku no junkyo-hō to gai-keiyaku no ichibu o nasu chūsai jōkō no kōryoku [On the law applicable to a contract that the promoter concluded for a company in the course of foundation, and on the validity of an arbitration clause forming part of this contract], Jurisuto 642 (1977) 259 et seq.; K. Kurata, Shutaru keiyaku no kashi to chusai keiyaku no kōryoku [Defect of the main contract and validity of the arbitration agreement], JCA Jonaru 23-3 (1976) 2 et seq.; Y. Sakorada, Minshō-hō Zasshi 78-6 (1978) 843 et seq.; A. Sekiguchi, Jurisuto 618 (1976) 163 et seq.; Y. Shibata, Hōsō Jihō 28-2 (1976) 278 et seq. (As Kobayashi at 1567 points out, Shibata was a researcher for the Supreme Court on this case). Japan Commercial Arbitration Association (Kokusai Shōji Chūsai Kyōkai) Tokyo, Case No. 4429. In the English contract documents, the arbitration body was called Japan Commercial Arbitration Association; in the Japanese documents Kokusai Shōji Chūsai Kyōkai. See H. Kobayashi (previous note) 1561.

Judgment of 25 December 1973, Hanrei Jihō 747, 80. Judgment of 18 July 1974, Minshū 29-6, 1079. The expression used in the Japanese original is kōryoku, which can be translated as ‘effect’ or as ‘validity’ (see ). The reasons for the translation as ‘effects and validity’ are explained in the text at infra note 39. 8) Law No. 138/2003, as amended by Law No. 147/2004; semi-official English translation On the new law, see A. Cole, Commercial Arbitration in Japan: Contributions to the Debate on ‘Japanese Non-Litigiousness’, in: New York University Journal of International Law and Politics 40-1 (2007), , 104 ff.; T. Nakamora, Salient Features of the New Japanese Arbitration Law Based Upon the UNCITRAL Model Law on International Commercial Arbitration, in: JCAA Newsletter 17 (2004), ; H. Oda, Arbitration Law Reform in Japan, in: J.Japan.L. 18 (2004) 5 et seq. 9) F. Burkei, Internationale Handelsschiedsgerichtsbarkeit in Japan (International Commercial Arbitration in Japan) (Tübingen 2008) 126 (with further reference in n. 312 on the former legal situation). 10) Law No. 10/1898, last amended by Law No. 151/1999. The reason why it contained no provision on the conflict of laws for companies is explained in the text at infra note 15. 5) 6) 7)

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11) Hō no teki'yo ni kansuru tsūsoku-hō, Law No. 78/2006 (a renamed and revised version

12) 13) 14) 15)

16)

of the Hōrei); English translation K. Anderson/Y. Okuda, J.Japan.L. 23 (2007) 227 et seq.; M. Dōgauchi et al., J.A.I.L. 50 (2007) 87 et seq.; German translation in: Y. Sakurada/ Y. Nishitani/E. Schwittek, J.Japan.L., 22 (2006) 269 et seq.; reprinted in: RabelsZ, January 2012 (forthcoming). The codification of the conflict of laws for companies was discussed, but then abandoned. See Y. Nishitani, Internationales Privat- und Zivilverfahrensrecht, (International Private and Civil Procedure Law) in: H. Baum/M. Bälz (ed.), Handbuch Japa-nisches Handels- und Wirtschaftsrecht, (Cologne 2011) marginal number 38; E. Schwittek, Internationales Gesellschaftsrecht in Japan (International Company Law in Japan) (forthcoming); D. Yokomizo, International Company Law in Japan, in: Basedow/Baum/Nishitani (eds.), Japanese and European Private International Law in Comparative Perspective (Tübingen 2008) 181 et seq. S. Kidana/H. Matsuoka, Kihon-hō kommentâru: Kokusai shihō [Commentary: Private International Law] (Tokyo 1994) 29; B. Großfeld/K. Yamauchi, Internationales Gesellschafts-recht in Japan, AG 30 (1985) 229, 231. If the real seat theory really used both connecting factors, which law would it apply for a company that does not have its real seat in the State it was founded in? It would then choose the real seat as sole connecting factor. Y. Shibata (supra note 3) 283 et seq.; A. Takakuwa, Kokusai torihiki ni okeru shihō no tō ‘itsu to kokusai shihō [Unification of Private Law and Private International Law for Cross-border Transactions] (Tokyo 2005) 271. N. Hozumi and S. Yamada, the drafters of the Hōrei, insofar adhered to the ideas of the jurist F. Laurent, who was influential in Belgium. See Y. Nishitani (supra note 11) marginal number 38 n. 82; E. Schwittek (supra note 11); D. Yokomizo (supra note 11) 177 et seq. T. Atobe, Hōjin no kokuseki ni kansuru saikin no gakusetsu ni tsuite [About the most recent doctrines on the nationality of juridical persons], Hōgaku Ronsō 20 (1928) 501 et seq. contributed decisively to this change.

17) Some proponents draw upon the fact that the company is created by and is thus

18)

19) 20) 21)

22) 23) 24) 25) 26)

27)

closely connected with the founding state; others base it on the party autonomy of the founders, partly naming jōri as its source. A –questionable – dissenting opinion is opposed to the choice of law view, but rather regards the issue as one concerning the recognition of the decision of a foreign state to originate a company. See T. Kanzaki (supra note 3) 42 f.; D. Yokomizo (supra note 11) 179 et seq.; E. Schwittek (supra note 11). Section 35 Civil Code is today classified as alien law. The provision on pseudo foreign companies in sec. 821 Company Code is of great importance. Moreover, secions 817 to 819 Company Code contain provisions stating duties to appoint a representative, to register, and to disclose the balance sheet for foreign companies (see the definition in sec. 2 para. 2 Company Code). Y. Okuda, The Legal Status of Foreign Companies in Japan's New Company Law, J.Japan.L. 22 (2006) 115 et seq.; E. Schwittek (supra note 11). Cf. Y. Shibata (supra note 3) 282 et seq. Item 1. (1) of the appeal reasons: ‘The court of lower instance treated this problem as one of the legal capacity of the juridical person…’ Y. Sakurada, Kokusai shihō [Private International Law] (Tokyo 2006) 164; A. Takakuwa (supra note 14) 272; Y. Tameike, Kokusai shihō kōgi [Lessons in Private International Law] (Tokyo 2005) 300; R. Yamada, Kokusai shihō [Private International Law] (Tokyo 2004) 235. Similarly Y. Nishitani (supra note 11) marginal number 42. Y. Sakurada, Jurisuto 595 (1975) 134 (concerning the decision of the court of first instance). Y. Sakurada, Jurisuto 595 (1975) 134. Opposite opinion Y. Sakurada (supra note 3) 852 et seq. Now sec. 4 para. 1 Act on General Rules for Application of Laws. Others name jōri as legal basis. See Y. Shibata (supra note 3) 283, who favours the application of Article 3 para. 1 Hōrei analogously. The Plaintiff names its proponents and their arguments: ‘Concerning this problem, Orimo, Hōritsu-gaku zenshū kokusai shihō kakuron, 39 and R. Yamada, Hbjin no zokujin-hō ni tsuite, Kokusai-hō Gaikō Zasshi 50-5, 58 state that if the extent of the power of representation is wider according to the law governing the juridical person than the extent of that of a representative of a domestic juridical person of the same kind at the place of the act, this causes an imbalance, and if it is narrower, then through the lack of power of representation, the act is declared to be invalid, and both cases are a threat to the safety of the business, so the law of the place of the act should be applied.’ Consenting: K. Kurata (supra note 3) 6. M. Dōgauchi, Pointo kokusai shihō – kakuron [Points in Conflict of Laws – Specific Matters] (Tokyo 2005) 202; Y. Sakorada (supra note 21) 164; Y. Tameike (supra note 21) 299 et seq.; R. Yamada (supra note 21) 235 et seq.

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28) The majority opinion applies Article 3 para. 2 Hōrei (today sec. 4 para. 2 General Act

29)

30)

31)

32)

33)

34) 35) 36)

37)

on the Application of Laws) analogically if the scope of the legal capacity was wider according to the law of the place of action than according to the law governing the company. In practice, this case mainly occurred if the company statute adhered to the ultra vires doctrine, which restricted the legal capacity to the powers granted by the corporation's articles of incorporation. However today, since the reform of the Civil Code in 2006, the ultra vires doctrine is prescribed by law in Japan (M. Bälz, Gesellschaftsrecht, in: Baum/Bälz (ed.), Handbuch Japanisches Handels- und Wirtschaftsrecht [Handbook on Japanese Business Law), (Cologne 2011) marginal number 5), thus the analogous application of sec. 4 para. 2 General Act on the Application of Laws is hardly relevant for acts performed in Japan. Sakurada points out the problem that the judgment of second instance, which should be the reference point for the judgment of the Supreme Court, actually expounded the problems of the validity of the main contract, not of that of the arbitration agreement (Y. Sakorada (supra note 3) 855 n. 6). Item 2. (2) of the appeal reasons: ‘As also under the law of the State of New York, this is no problem of agency, the question is whether as an invalid act it can be confirmed (through adoption or acknowledgement). […] Accordingly, even if it is permitted under the law of the State of New York to adopt (confirm the invalid act), the arbitration agreement requires as a formal act the written form.’ Cf. also Y. Sakurada (supra note 3) 854. F. Burkei (supra note 9) 80. Whether the lex fori was the law at the place of the court or at the place of arbitration – here both in Japan – was contentious. Y. Nishitani, Die Bestimmung des Schiedsvertragsstatuts und dessen sachliche und persönliche Reichweite, in: J.Japan.L. 6 (1998) 187 et seq. with further reference. H. Kobayashi (supra note 3) 1564; Y. Shibata (supra note 3) 285. Also see F. Burkei (supra note 9) 80; Y. Nishitani (previous note) 187 et seq. About the present situation, in which a choice of law is admitted, S. Nakano, International Commercial Arbitration under the new Arbitration Law of Japan, in: J.A.I.L. 47 (2004) 96, 105. On this development concerning arbitration law, see F. Burkei (supra note 9) 81. However, this was a general problem of international contract law, the elimination of which was one major concern in the drafting of the Act on General Rules for Application of Laws. See Y. Nishitani, Party Autonomy and Its Restrictions by Mandatory Rules in Japanese Private International Law: Contractual Conflicts Rules, in: Basedow/Baum/Nishitani (eds.), Japanese and European Private International Law in Comparative Perspective (Tübingen 2008) 84 et seq.; Y. Sakurada / E. Schwittek, Reform des internationalen Privatrechts in Japan (Reform of Private International Law in Japan), in: RabelsZ January 2012 (forthcoming). F. Burkei (supra note 9) 81. Such is the approach of Y. Shibata (supra note 3) 285 et seq. – but in regard to appeal reason 2. Y. Sakurada (supra note 3) 855 et seq. An arbitration agreement that is not valid according to the law at the place of arbitration does not serve the parties well. Also, the opinion that favours applying the same law to the arbitration agreement and the main contract is contrary to the fact that they serve different purposes. See F. Burkei (supra note 9) 81 et seq. F. Burkei (supra note 9) 81 et seq. with further reference. See also for the former legal situation Supreme Court, 4 September 1997, . Note that the supposition of an implied choice of law is constricted according to the will of the legislator since the coming into force of the General Act on the Application of Laws. See references in supra note 33.

38) The expression used in the Japanese original is kōryoku, which can be translated as

39)

40) 41) 42) 43)

‘effect’, but also as ‘validity’ (see supra note 1). However, in the context debated here, ‘validity’ would probably rather be referred to by the term seiritsu (used by Y. Sakurada (supra note 3) 849 as opposed to kōryoku = effect). Item 3. of the appeal reasons: ‘So if the main contract does not come into existence or is invalid, it shares that fate. Namely, the validity of the main contract forms its prerequisite. Again, assumed that one takes out separately from the main contract only the arbitration clause, if the main contract is invalid through a mistake, the arbitration agreement has at least a mistake of motive. If the main contract comprises a fraud act, then through this influence, the arbitration agreement also looses its foundation of existence. If the main contract lacks consideration, then the arbitration agreement will probably not have consideration.’ Y. Sakurada (supra note 3) 849. That is the reason why the word kōryoku was translated in a wide sense at supra note 1, 2, 7. See text at supra note 32: The arbitration agreement is perceived as a contract of substantive law with partly procedural effects. However, the decision about the legal capacity of the Defendant is within the authority of the court, as it is relevant for judging the validity of the arbitration agreement. Cf. Y. Shibata (supra note 3) 284. See Y. Kubota (supra note 3) 261; Y. Sakurada (supra note 3) 850 et seq.; cf. Y. Nishitani (supra note 31)191. Other approach (as described in the text at supra note 34) Y. Shibata (supra note 3) 285 et seq.

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44) See the other judgments listet by F. Burkei (supra note 9) 88 n. 85. Nowadays, the

1)

doctrine is contained in sec. 13 para. 6 Arbitration Law. See H. Baum/E. Schwittek/F. Burkei, Schlichtung, Mediation, Schiedsverfahren, in: Baum/Bälz (ed.), Handbuch Japanisches Handels- und Wirtschaftsrechts [Handbook on Japanese Business Law], (Cologne 2011) marginal number 124. Max Planck Institute for Comparative and International Private Law, Hamburg

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Case No. 63: Law Applicable to Maritime Lien

Document information

Okuda Yasuhiro

Publication

(★ )

Business Law in Japan – Cases and Comments

Takamatsu High Court, 30 April 1985, Pine Trio Corporation v. Marubeni International Petroleum Company Ltd. Source: Kinyū Shōji Hanrei, 730, 28; Hanrei Taimuzu, 561, 150 (citing as the decision on 2 May 1985); J.A.I.L 29, 250

Jurisdiction Japan

I Headnote(s) With regard to a maritime lien, both the governing laws of secured claim and property right must be cumulatively applied, because the maritime lien is ex lege formed to secure legally specified rights and claims.

Court

High Court of Takamatsu

II Relevant Provisions

Case date

Articles 7, 10 Hōrei, Sections 704, 842, 1102 and 1507 Commercial Code

30 April 1986

III Facts A contract for sale of oil was concluded in Tokyo between the company of Hong Kong and Hong Kong delivered the oil to the ship, when it anchored in Washington, US. Thereafter the charterer is gone into bankruptcy. Thus, the company of Hong Kong filed for public sale of the Panamanian ship to the Matsuyama District Court based on the maritime lien. The District Court dismissed the complaint for stay of public sale by the ship owner. The ship owner appealed to the Takamatsu High Court and argued above all the following reasons: (1) Since the time charter is not a ship lease, section 704(2) of the Japanese Commercial Code providing that the maritime lien caused by operation of the ship by the lessee is also effective to the ship owner is not applicable to the case; (2) The maritime lien of Panamanian law subordinate to the maritime mortgage is not identical to the maritime lien of Japanese law that justifies the public sale under the Civil Execution Law.

Parties

P 704 the Japanese charterer of a ship with flag of Panama. The company of

Claimant, Pine Trio Corporation Defendant, Marubeni International Petroleum Company Ltd.

Bibliographic reference

Okuda Yasuhiro, 'Case No. 63: Law Applicable to Maritime Lien', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 703 - 707

IV Findings The High Court dismissed the appeal. The reason was as follows: 1.

2.

3.

4.

‘Although it is strongly argued that the maritime lien is only governed by the law of flag, both the governing laws of secured claim and property right should be cumulatively applied, because the maritime lien is ex lege formed to secure legally specified rights and claims’. ‘As the concerned ship is evidentially registered in Panama, the property right to the ship is governed by Panamanian law under sec. 10 of the Hōrei. Although the parties of the contracts on time charter and sale of the oil did not intend any governing law, the law applicable to the secured claim is Japanese law under Article 7(2) of the Hōrei considering that the contracts were concluded in Tokyo … Accordingly, the maritime lien needs to be formed both under Panamanian law and Japanese law… The time charter is a mixture of the ship lease and the service contract under Japanese law (See Imperial Supreme Court, 28 June 1928, Minshū, 7, 519). ‘The maritime lien on the ship was formed both by the law applicable to the claim to the price for the oil, that is, Japanese law including sec. 704(2) and sec. 842(vi) of the Commercial Code and the law of flag, that is, Panamanian law including sec. 1102 and sec. 1507(viii) of the Commercial Code’. ‘The appellant argued that the maritime lien subordinate to the maritime mortgage under sec. 1102 of the Panamanian Commercial Code is different to the maritime lien under Japanese law. However, the effects of the maritime lien should be exclusively determined by the law applicable to the property right. According to sec. 1507 (viii) of the Panamanian Commercial Code, the person having the claim to the necessary expenses of the ship has the maritime lien that subordinate to the maritime mortgage but having priority over other claims can be executed by public sale’.

Translation by Yasuhiro Okuda P 705

V Comment According to section 181(l)(iv) and section 189 of the Civil Execution Law, the maritime lien can be executed when its formation is evidenced by a document. According to Article 13(2) of the Act on the General Rules of the Application of Laws that is same as Article 10(2) of the Hōrei of 1898 effective at the time of the case, the formation of a property

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right is governed by the law of the place where the property was situated (lex rei sitae) at the time when the events causing the formation were completed. However, the majority of the doctrine argues that the property right of a ship is governed by the law of flag, (1) because the ship moves always across the border of various countries. As for the ex lege formed right to secure legally specified claims such as the statutory lien and the right of retention, it is generally recognized that the governing laws of property right and secured claim should be cumulatively applied. (2) The decision of the Takamatsu High Court followed the majority of the doctrine but needs to be clarified in some points. First, the Court did not exactly distinguish the law of flag and the law of registration, (3) but both laws may be different. In such case the law of flag should be applied, (4) because it can be more easily known by third parties and better protect their interests in the sense of private international law. Secondly, the Court cited section 10 of the Hōrei to justify the application of Panamanian law. However, Panamanian law is applied as the law of flag that should be distinguished from the lex rei sitae and also in fact is different to the law of the place where the ship was situated at the time of formation of the secured claim. The application of the law of flag should be recognized as an unwritten rule of private international law. (5) As for the governing law of the secured claim, under the Act on the General Rules of the Application of Laws it would be differently determined than the Takamatsu High Court. According to the effective Act a contract is governed by the law of the place with which the contract is most closely connected (Article 8(1)). Where only one party is to do the characteristic performance, the contract is presumed to be most closely connected with the law of the principal place of business of the party (Article 8(2)). In case of sale of goods the performance of seller is characteristic for the contract. (6) As the seller of the oil has the principal place of business in Hong Kong, law of Hong Kong would be arguably applied to the secured claim. P 706

Strangely enough the Court confirmed that the parties of the contracts on time charter and sale of the oil did not intend any governing law. The contract on time charter was not relevant to the secured claim, because it was formed only by the contract of sale of the oil. The judges possibly considered that the governing law of the contract on time charter should regulate the question of whether the maritime lien caused by operation of the ship by the charterer is effective also to the ship owner. However, the question should be regarded as a matter of formation of the maritime lien and cumulatively governed by the laws applicable to the property right and the secured claim. Accordingly, the Court should have confirmed that the maritime lien is effective to the ship owner also under Panamanian law. (7) According to the majority of the doctrine, the effects of the statutory lien are only governed by the law of property right, (8) although the formation is cumulatively governed by two laws. Above all the law of property right regulates the preference between the statutory lien and the mortgage whose formation is only governed by the law of property right, (9) since the mortgage is not closely connected to the secured claim. (10) The Takamatsu High Court followed the majority in this point. Although the maritime lien is subordinate to the maritime mortgage under Panamanian law, it should be recognized as the ground for public sale of the ship under the Civil Execution Law. (11) As for the formation of the maritime lien, some decisions of lower courts like the Takamatsu High Court cumulatively applied the law of flag and the law of the secured claim. (12) Contrary to this, other older decisions applied only the law of flag. (13) However, they are not convincing, because the maritime lien is ex lege formed to secure only some specified claims and therefore considered to be effects of the claims. This is P 707 because the law of the secured right is also applied to the formation of the maritime lien. More strange are the decisions of the Tokyo District Court that applied the lex fori. (14) However, the formation of the maritime lien is not a procedural matter but a matter of substantive law. Even if the judge considered that the lex fori is identical to the law of the place where the ship is situated, (15) the idea is contrary to the legal text. According to section 13(2) of the Act on the General Rules of the Application of Laws, the law of the place where the ship was situated at the time of formation of the secured claim would be applicable. However, the lex fori means the law of the place where the ship is actually situated. The decisions of the Tokyo District Court are not convincing at all. Yasuhiro Okuda (1) P 707

References ★ )

1) 2)

Okuda Yasuhiro: Chuo University, Law School (Tokyo) R. I. Yamada, Kokusai Shihō [Private International Law], 3rd ed. 2004, 311; Y. Tameike, Kokusai Shihō Kōgi [Lecture on Private International Law], 3rd ed. 2005, 343. Yamada (note 1), p. 296; Tameike (note 1), 338.

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3) 4) 5) 6) 7)

8) 9) 10) 11)

12) 13) 14) 15) 1)

Similar as Tameike (supra note 1), 343. However, Yamada (supra note 1), 312 prefers the law of registration, although he does not clarify the reason. See also Yamada (supra note 1), 312. See R. I. Yamada / H. Sano, Kokusai torihiki hō (International Trade Law), 3rd ed. 2nd revised 2009, 90. See also Article 117(3)(a) of the Swiss Private International Law. The maritime lien may be effective to the ship owner also by piercing the corporate veil. As well known, a ship of flag of convenience is often operated by the contract on time charter concluded between the charterer, that is, a real ship owner and the nominative ship owner, that is, a paper company totally owned by the charterer. As study of Japanese authors on flag of convenience, see K. i. Kihata, Benri Chiseki Sen (Ship of Flag of Convenience), 2nd ed. 1975; K. Yamauchi, Kaiji Kokusai Shihō no Kenkyū (Study on International Maritime Law), 1988; S. Henmi, Benghi Chiseki Sen Ron (Study on Ship of Flag of Convenience), 2007. Yamada (supra note 1), 296. However, Tameike (supra note 1), 339 argues that only the preference between various rights to secure claims is exclusively by the law of property right. Yamada (note 1), 296; Tameike (note 1), 337. For example, the revolving mortgage is formed to secure undefined claims that may be not yet existent. Although the legal text of Sec. 189 mentioned only the maritime lien under Sec. 842 of the Commercial Code, the lien under sec. 19 of the International Carriage of Goods by Sea Law, Sec. 95 of the Law concerning the Limitation of Liability of the Ship Owner and others, sec. 40 of the Law concerning the Compensation of the Damage Caused by Oil Pollution and so on can be equally executed under the Civil Execution Law. T. Nakano, Minji Shikkō Hō [Civil Execution Law], 2nd ed. 1994, 476. Likewise, the maritime lien under a foreign law can be executed. Hiroshima High Court, 9 March 1987, Hanrei Jihō, 1233, 83; Hanrei Taimuzu, 633, 219; Akita District Court, 23 January 1971, Kaminshū, 22, 52. Hiroshima District Court, Kure Branch, 27 April 1970, Kaminshū, 21, 607; Yamaguchi District Court, Yanai Branch, 26 June 1967, Kaminshū, 18, 711. Tokyo District Court, 19 August 1991, Hanrei Jihō, 1402,91; Hanrei Taimuzu, 764,286; Tokyo District Court, 15 December 1992, Hanrei Taimuzu, 811, 229. Both were rendered by the same judge. The maritime lien is executed after the ship is arrested. This is because the lex fori is identical to the law of the place where the ship is situated. Chuo University, Law School (Tokyo)

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Case No. 64: Calculation of Lost Income of Foreign Victim because of Accident in Japan

Document information

Publication

Okuda Yasuhiro

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 28 January 1997, Case No. 1993 o 2132, 1996 o 2383, Bobby Maxdo v. Kaishinsha Limited Liability Company et al.

Jurisdiction

Source: Minshū, 51, 78; Hanrei Jihō, 1598, 78; Hanrei Taimuzu, 934, 216; Tōmeika, 1962

Japan

I Headnote(s) The lost income of a foreigner due to an accident must be based on the income in Japan for the period when the victim would work or stay in Japan, and based on the income in the probable destination (in most cases the native country) for the remaining period. The working period in Japan must be assessed by considering all factual and normative factors such as the purpose of entering Japan, the future plan of the victim just before the time of accident, whether the victim was eligible to stay in Japan, with which eligibility and how long he or she stayed, how many times he or she was and will be granted an extension of stay, whether the victim was eligible to work in Japan, the details of his or her work.

Court

Supreme Court of Japan

Case date

28 January 1997

Case number

II Relevant Provisions

1993 o 2132 and 1996 o 2383

Article 24(iv)(b) of the Immigration Control and Refugee Recognition Act P 710

Parties

III Facts

Claimant, Bobby Maxdo Defendant, Kaishinsha Limited Liability Company et al.

The plaintiff, of Pakistani nationality, entered Japan with a visa for ‘Temporary Visit’ on 28 November 1988. He was employed on the next day by the defendant company, even though it was aware that the Plaintiff was not eligible to work in Japan. On 30 March 1990, the index finger of the Plaintiff's right hand was caught in a bookbinding machine, and the distal part of the finger was cut off. The worker's accident insurance paid him the amount fixed by law for the compensation of lost income during medical treatment and future income because of disability, the degree of which was determined by the competent governmental office (Labor Standard Inspection Office, Rōdō Kijun Kantokusho). The Plaintiff filed a suit against the Defendant and its representative director for compensation of damages not covered by the insurance.

Bibliographic reference

Okuda Yasuhiro, 'Case No. 64: Calculation of Lost Income of Foreign Victim because of Accident in Japan', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 709 - 714

The Tokyo District Court (24 September 1992, Hanrei Jihō, 1439, 131; Hanrei Taimuzu, 806, 181) estimated the income lost during medical treatment at JPY 120,428 based on the actual income before the accident. However, it calculated the loss of future income because of disability at JPY 2,222,622 based on the actual income in Japan for only three years and based on the average income in Pakistan for the subsequent period until the plaintiff's attainment of 67 years of age. As the Court estimated the negligence of the plaintiff for the accident at 30%, the plaintiff was entitled to claim JPY 1,640,135 for compensation of his income, which had been already recovered by the insurance. As a result, the Court ordered the defendants to pay the solatium of JPY 1,750,000 which was calculated by considering all circumstances and reduced by 30% because of negligence on the part of the plaintiff. The Tokyo High Court (31 August 1993, Hanrei Taimuzu, 844, 208) rejected the appeal filed by all parties. The plaintiff appealed to the Supreme Court arguing above all that the calculation of the lost income based on the average income in Pakistan is contrary to Article 14 of the Japanese Constitution providing for the equal treatment under law.

IV Findings The Supreme Court partially substituted its own decision for the High Court's decision and dismissed otherwise the appeal filed by the plaintiff. The appeal filed by the defendants was totally dismissed. The reason was as follows: 1.

The lost income, which is a material damage, should be estimated as the income that would be gained in absence of the accident. It should be calculated by considering all circumstances such as the future income of the victim presumed with much probability from various evidences. For the purpose of the compensation to recover the actual damage, the calculation should be done by considering all circumstances of the victim and not different between Japanese and non-Japanese victims.

2.

Calculating the lost income of a non-Japanese victim who was temporally in Japan and would depart in near future, the tribunal should estimate the future income by evidentially finding with much probability how long the non-Japanese victim would stay and work in Japan, and in which country he or she would settle and work after

P 711

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3.

leaving Japan. Thus, the tribunal should calculate the lost income based on the income in Japan for the period when the victim would work or stay in Japan, and based on the income in the probable destination (in most cases the native country) for the remaining period. The tribunal should find out the working period in Japan by considering all factual and normative factors such as the purpose of entering Japan, the future plan of the victim just before the time of accident, whether the victim was eligible to stay in Japan, with which eligibility and how long he or she stayed, how many times he or she was and will be granted an extension of stay, whether the victim was eligible to work in Japan, the details of his or her work. Illegal overstayers are sooner or later to be deported according to Article 24(iv)(b) of the Immigration Control and Refugee Recognition Act, so that his or her stay and work in Japan are considered to be unstable. Thus, although in fact some illegal overstayers remain in Japan for a considerable period of time without being deported, all of them are not estimated to work in Japan long time, except of the case such as where they would with much probability be granted the special permission to stay in Japan.

However, as the High Court found, there is no circumstance in which the plaintiff would be granted the special permission and exempted from deportation. Accordingly, the High Court decided with justice that the plaintiff would work in Japan only three years. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comment This is a leading case on the calculation of lost income of a foreign victim because of an accident in Japan. There is no doubt that Japanese law is applicable to the case. The contractual liability of the defendant company is governed by Japanese law, because there was no parties' choice of law applicable to the employment contract and the victim P 712 worked only in Japan. (1) The tort of the representative director is also governed by Japanese law, as the accident occurred in Japan. (2) The applicable law of contract and tort covers all matters concerning the requirements and the effects of the claim including the calculation of damages. (3) Certainly, the victim is a Pakistani national and only worked in Japan temporarily, but the law applicable to the calculation of damages is Japanese law. Pakistani law is not considered in this case. As mentioned below, judges often consider the standard of the native country of the victim. The standard is clarified by the taking of evidence concerning the average income according to such factors as occupation, school background, sex and, eventually, by considering the actual income of the victim before the accident. Accordingly, this is not an application of foreign law but a logical conclusion from the calculation of damages under Japanese law. Further, procedural matters such as the taking of evidence are governed by lex fori, that is, Japanese law. (4) According to Article 416(1) of the Civil Code, the purpose of the damages in failure of a contractual obligation is to recover the damage which would usually arise from the failure. The provision is mutatis mutandis applicable to the tort liability according to case law. (5) The Supreme Court's decision means the same thing, although it did not cite Article 416(1) of the Civil Code. The provision is equally applicable to Japanese and nonJapanese victims, because the governing law of the claim is Japanese law. If the victim is non-Japanese and was working in Japan temporarily or only making a short stay, compensation for lost income may be less than that received by a Japanese victim. However, this is not any discrimination but a logical conclusion reached after consideration of all the circumstances for the compensation of the damage which would usually arise from the accident. Before and after the Supreme Court's decision there have been many decisions of lower courts concerning the lost income of non-Japanese victims whose statuses of residence differ. The cases often concern traffic accidents, sometimes industrial accidents like this case and other torts. The tribunals consider not only the visa status of the plaintiffs but also any other circumstances. For example, in the case of a Japanese-Brazilian, his lost income was calculated for the whole workable period based on the Japanese standard, (6) but another Japanese-Brazilian was estimated as being likely to have worked in Japan Brazil. (7) In the cases of some students, P 713 only for a further five years and thereafter in their lost income was calculated based on the standards of their native countries, to which they were considered likely to have returned after studying. (8) On the one hand, compensation for other students was estimated based on Japanese standards for three years or ten years, because they were presumed likely to have worked in Japan after studying. (9) On the other hand, in cases in which non-Japanese victims had in fact been working in Japan with a visa for permanent residency, or with a working visa and applying for naturalization at the time of accident, or with visa for engineering and living with their family members, it was always considered that they would have worked in Japan for the whole workable period. (10) Contrary to this, when non-Japanese victims entered Japan for the purpose of sightseeing or training for three months at a university, their lost income was calculated for the entire workable period based on the standards of their native countries. (11)

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As for illegal workers, judges similarly consider not only their visa statuses but also any other circumstances. Namely, their lost income is not always calculated based on the standard of their native countries but often on the Japanese standard for a certain period. In most cases judges found that the victims would have worked in Japan for three years in the absence of an accident, even though they were illegal workers. (12) There are P 714 also some cases in which the period of future work in Japan was estimated at two years. (13) In one case where a Philippine woman lived together with a Japanese man and gave birth to a child, the judge calculated her lost income for the whole workable period based on the Japanese standard in consideration of the fact that she would have been granted special permission of residence were it not for the accident that killed her. (14) Contrary to this, in cases of an illegal worker who was already deported to his native country at the time of the suit in Japan, and of another who was killed by the accident and had wanted to go back to his native country on the day after of the accident, their lost income was calculated for the whole period based on standards of their native countries. (15) In this case the Supreme Court clarified that the judge should consider all circumstances for calculating the lost income of a foreign victim because of the accident in Japan. This is a logical conclusion from Article 416(1) of the Civil Code, which applies equally to Japanese and non-Japanese victims, because the governing law of the claim is Japanese law. Which circumstances should be considered is a matter of fact finding that is not reviewed by the Supreme Court. The judgment of the Supreme Court is convincing in all aspects. Yasuhiro Okuda (1) P 714

References ★ )

1)

2)

3) 4)

Okuda Yasuhiro: Chuo University, Law School (Tokyo) According to Article 8 of the Act on the General Rules of the Application of Laws, a contract is governed by the law of the place with which the contract is most closely connected at the time of contract, where there is no parties' choice of law. Article 12(3) provides that an employment contract is presumed to be most closely connected with the law of the place of employment. In this case the Hōrei of 1898 was effective. The Tokyo District Court in the first instance drew the same conclusion from Article 7 of the Hōrei concerning the parties' choice of law, arguably because at the time Japanese judges found often easily an implied choice of law. See Y. Okuda, Reform of Japan's Private International Law: Act on the General Rules of the Application of Laws, in: Yearbook of Private International Law, Vol. 8 (2006), 2007, 149. According to Article 17 of the Act on the General Rules of the Application of Laws, a tort liability is governed by the law of the place where the resulting harm occurred. The Tokyo District Court in the first instance drew the same conclusion from Article 11(1) of the Hōrei that designated the law of the place where the events causing the tort liability occurred. R. Yamada, Kokusai Shihō [Private International Law], 3rd ed. 2004, 363. See Y. Okuda, Gaikokujin rōdōsha no saigai hoshō [Compensation of Damages to Immigrant Workers because of Industrial Accident], in: Takao Sawaki/Jun'ichi Akiba, Kokusai Shihō no Sōten [Points on Private International Law], 2nd ed. 2006, 144.

Supreme Court, 7 June 1973, Minshū, 27, 681. Utsunomiya District Court, 1 November 2001, Saibanrei Jōhō . 7) Gifu District Court, Mitake Branch, 17 March 1997, Hanrei Taimuzu, 953, 224. 8) Tokyo District Court, 20 September 2007, Hanrei Jihō, 2000, 54; Hanrei Taimuzu, 1286, 194 (as for a language student); Osaka District Court, 12 July 2007, Kōminshū, 40, 891 (as for an university student). 9) Tokyo District Court, 24 December 1997, Kōminshū, 30, 1832 (as for a language student, three years); Tokyo District Court, 25 March 1998, Kōminshū, 31, 441 (as for an university student, ten years); Kobe District Court, 24 November 2006, Kōminshū, 39, 1645 (as for an university student, ten years). See also Tokyo High Court, 27 December 1995, Hanrei Taimuzu, 929, 233. As for an university student, whose wife is also an university student, the judges calculated his lost income for the whole workable period based on the Japanese standard. 10) Tokyo District Court, 27 November 2008, Kōminshū, 41, 1502; Hanrei Jihō, 2030, 30 (as for a permanent resident); Tokyo District Court, 5 November 2007, Kōminshū, 40,1471 (person with working visa); Nagoya High Court, 25 May 1993, Kōminshū, 26, 589 (as for an engineer). 5) 6)

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11) Kofu District Court, 5 February 2008, Hanrei Jihō, 2023, 134 (as for a traveler); Tokyo

12)

13) 14)

15) 1)

District Court, 28 January 1993, Hanrei Jihō, 1457, 115 (as for a trainee in a university). See also Tokyo High Court, 19 January 1995, Hanrei Taimuzu, 886, 244 (as for a husband coming with his wife who is a university student); Takamatsu High Court, 25 June 1991, Hanrei Jihō, 1406, 28; Hanrei Taimuzu, 770, 224 (as for a person visiting relatives). However, in the last case, the judge calculated the lost income of the victim based on Japanese standard, because at the time all living costs in China were paid by the Chinese government. Osaka District Court, 6 July 1993, Kōminshū, 26, 882; Tokyo District Court, 31 August 1993, Hanrei Jihō, 1479, 149; Nagoya District Court, 18 March 1998, Kōminshū, 31, 339; Tokyo District Court, 28 April 2000, Kōminshū, 33, 749; Osaka District Court, 26 July 2002, Kōminshū, 35, 1028; Nagoya High Court, 24 September 2003, Saibanrei Jōhō ; Osaka District Court, 30 November 2005, Kōminshū, 38, 1623. However, in the last case the period of work in Japan was estimated at three and half years. The reason for why the estimated period was one half year longer is not known. Tokyo District Court, Hachioji Branch, 25 November 1992, Hanrei Jihō, 1479, 146; Urawa District Court, 2 July 1997, Kōminshū, 30, 957; Hanrei Taimuzu, 959, 213; Tokyo High Court, 10 June 1997, Kōminshū, 30, 663; Hanrei Taimuzu, 962, 213. Nagoya District Court, 24 August 2005, Kōminshū, 38, 1130. According to Article 50(1) of the Immigration Control and Refugee Recognition Act, the Minister of Justice may grant the special permission of residence to a person who falls under Article 24 concerning the grounds of deportation. Tokyo District Court, 19 August 1976, Kōminshū, 9, 1111 (as for a deported person); Osaka District Court, 22 March 1994, Kōminshū, 27, 402 (as for a killed person). Chuo University, Law School (Tokyo)

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Case No. 52: Trade Mark Law – Abusive Registration of Well-Known Marks – Foreign Marks

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, decision of 11 July 2000, Parfum Nina Ricci v. Madras K.K. – L'Air du Temps Source: 54 (6) Minshū 1848 = 1721 Hanrei Jihō 141 = 1040 Hanrei Times 125

Jurisdiction Japan

I Headnote(s) In determining the risk of confusion between two marks, the concept of ‘confusion in the broad sense’ should be applied.

Court

Supreme Court of Japan

The risk of confusion and the degree of recognition of a mark must be determined based on the consumer group likely to purchase the goods in question.

Case date

II Relevant Provisions Trade Mark Act section 4(1) (xi) and (xv)

11 July 2000

P 568

Parties

III Facts

Claimant, Parfum Nina Ricci Defendant, Madras K.K.

Bibliographic reference

(1) In connection with the trade mark consisting of the horizontally written katakana script, the defendant on 21 May 1986 applied for registration of a trademark in katakana

Christopher Heath, 'Case No. 52: Trade Mark Law – Abusive Registration of Well-Known Marks – Foreign Marks', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 567 - 578

script that may be transliterated in alphabetic script as ‘reerudyutan’ [L'Air du Temps in French pronunciation] for the designated goods ‘clothing, accessories and other products of this kind’ as specified in Class 21 of the Trade Mark Act's classification system (prior to revision in accordance with Cabinet Ordinance No. 299 of 1991), and the trade mark was registered on 19 December 1988 (registration No. 2099693; hereinafter referred to as ‘registered trade mark’). In addition, the defendant had also obtained registrations of the marks (all in katakana) Cabochard, Calandre, NarcisseNoir, Farouche, etc., all filed on the same day. The plaintiff is the holder of rights to the trade mark consisting of the horizontally written alphabetic script characters ‘L'AIR DU TEMPS’ in association with ‘perfumes and other related products belonging within this category’ as specified in Class 4, registered in 1964 (hereinafter referred to as ‘prior trade mark’.). On the grounds that registration was contrary to section 4 (1) (xi) (conflict with a previously registered mark) and (xv) (marks liable to cause confusion) Trade Mark Act, the plaintiff on 3 July 1992 filed a request for invalidation of the registered trade mark for the designated goods ‘cosmetic appliances, bodily accessories, head accessories, cases, and bags’. On 24 February 1997, the Patent Office rejected the request. First of all, the Patent Office denied similarity between the registered and the prior trade mark and held that the latter should be pronounced according to (US) pronunciation rules, as English was the most popular foreign language in Japan. However, when so pronounced,

was different from

(pronounced ‘reeadyutenpus’), for which reason similarity could not be affirmed. As to the risk of confusion, the Patent Office held that the prior trade mark was not well-known, as it had only been used in Japan in connection with perfume. In the absence of a wide recognition amongst consumers, there could be no confusion, however. The plaintiff appealed to the Tokyo High Court and argued that in the field of fashion and perfume, it was common even in Japan to pronounce foreign words as if they were French. Furthermore, the perfume had enjoyed a reputation since its first launch in 1948, and sold very well in Japan in the 1980s. In the advertisements used by the plaintiff, the trade mark ‘L'Air du Temps’ was often accompanied by its katakana equivalent, which, however, was identical to the mark now registered by the defendant. Consumers were thus familiar with the fact that ‘L'Air du Temps’ was pronounced the French way. The Tokyo High Court decision of 28 May 1998 remained unconvinced. As to similarity, it reasoned that, given the rather poor level of foreign-language education in Japan, an English pronunciation for all foreign words was the most likely. One had to consider the ordinary consumer rather than dealers well-versed in the fashion world. There was no evidence for the assertion that the names of fashion items would be pronounced the French way, and it was doubtful that the Japanese consumer would even know how to pronounce the mark P 569 in French. And although the court found it obvious that the defendant had registered its marks in full knowledge of the plaintiff's marks, it found nothing wrong with the practice. The plaintiff thus appealed to the Supreme Court.

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IV Findings The above judgment of the original court cannot be affirmed for the following reasons: (1)

It is legitimate to assume that the concept of ‘trade marks that entail the risk of confusion with products or services relating to the business of another party’ as referred to in section 4 (1) (xv) Trade Mark Act, when said trade marks are used with such designated goods or designated services (hereinafter referred to as ‘designated goods, etc.’), should include not only trade marks in the case of which the said goods, etc., entail the risk of being confused with the goods or services of other parties (hereinafter referred to as ‘the goods, etc.’), but also trade marks that entail the risk that the goods, etc., will be confused with the goods, etc., relating to the business of commercial organizations connected in terms of close business relations such as parent–subsidiary companies or family (keiretsu) companies with the other party or in a relationship of subordination to the group involved in commercial operations employing the same labelling (hereinafter referred to as ‘risk of confusion in the broad sense’). This is because the stipulation in this item is intended to preserve the business trust of the party using the trade mark and to protect the interests of consumers by preventing another party from taking a ‘free ride’ on a widely or well-known indication and by preventing the dilution of said indication. In this light, in order to protect the legitimate rights of the party using a widely- or well-known indication, etc., in accordance with changes in companies and the market such as diversification of corporate management and the formation of corporate groups held together by commercial operations involving use of the same indication, as well as the establishment of famous brands, the judgment should have been made that it is not possible to register trade marks that run the risk of confusion in the broad sense. The question of whether there is indeed any ‘risk of confusion’ needs to be considered in a comprehensive manner in light of the extent to which there is similarity between the trade mark in question and the indication used by another party, the extent to which the indication of the other party is generally known and the extent of its originality, the extent to which designated goods, etc., bearing the trade mark and the goods, etc., relating to the business of the other party are related in terms of character, use or purpose, and other conditions having a bearing on business such as similarity in terms of dealers in the goods and consumers, and on the basis of the extent to which dealers and consumers concerned with the goods, etc., bearing the trade mark in question generally pay attention to the trade mark.

(2)

Amongst the plaintiff's trade marks, the prior trade mark is identical, at least in pronunciation, as far as the word ‘reeru-dyu-tan’ [L'Air du Temps] is concerned. It bears an obvious superficial resemblance, and to judge from the representation of registered trade mark and the goods that it designates, the name ‘reerudyutan’ is clearly created from the French reading of the prior trade mark, meaning that the registered trade mark is identical in name to the prior trade mark. All of the prior marks are well-known as labels of a perfume created by the appellant to businesses handling perfumes and to consumers with an interest in high-class perfumes, and they are original trade marks. Of the designated goods bearing the registered trade mark, ‘cosmetic appliances, bodily accessories, head accessories, cases and bags’ and perfumes bear an extremely close connection in terms of use principally with women's wear, and the consumers who purchase both types of goods are to a considerable extent the same. In light of the above circumstances, when the registered trade mark is used to denote ‘cosmetic appliances, bodily accessories, hair accessories, cases and bags,’ it may be said that there is a risk that dealers and consumers of these goods fall victim to confusion in the broad sense between these goods and goods relating to commercial enterprises in a close relationship, as described previously for the plaintiff. It should be mentioned that the fact that the prior trade marks are being used as so-called pet marks is not sufficient to influence the above judgment, bearing in mind the recognition of the prior trade marks and the close connection between these marks and the goods related to the registered trade mark.

P 570

As indicated above, the High Court decision rejecting the demand for overturning the Patent Office's decision was based on a different interpretation and clearly contains a misconstruction of the law likely to influence the judgment. The argument of the plaintiff is upheld in expressing this opinion, and the original decision must be overturned. In accordance with the explanation presented above, the request of the plaintiff must be granted. The decision was rendered unanimously. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

V Comment The abusive registration of foreign well-known marks in Japan has been a nuisance ever

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since. Almost as soon as foreign trade started with Japan's opening to the West in 1858, Japanese companies used Western indications of geographical and commercial origin in order to improve the sale of domestic goods. When this became more difficult with Japan's accession to the Paris Convention in 1900, Japanese traders forged alliances with traders in Mainland China so that goods with foreign indications could be produced P 571 abroad. The problems caused by such applications for trade marks were already acknowledged by Japanese officials at the Revision Conference in London in 1934, (1) but little was done about it. For this reason, foreign companies trying to invalidate such abusive registrations had always been left with rather ‘technical’ arguments on similarity, confusion and recognition, while the courts looked the other way when asked to decide cases on the apparently bad faith of the registrant. This attitude only changed about ten years ago when the well-known marks of Japanese companies fell victim to the same practices in other Asian countries. The following explanations will provide some details.

1 Infamous Cases The ‘L'Air du Temps’ case was preceded by a string of others in which foreign trade mark owners discovered that their marks had been registered in Japan by Japanese companies, either in order to become sole import distributors, or to sell the marks later on to the foreign trade mark owner. In the ‘Technos’ decision, (2) the Japanese trade mark owner successfully prevented the import of foreign, but original, ‘Technos’ watches. In the case of the ‘BBS’ decision, (3) the trade mark ‘BBS’ was registered by a party in Japan so that he could become the sole importer and distributor of German ‘BBS’ car parts (the registration achieved what it was meant to; though to his chagrin, parallel imports could not be barred). The ‘McDonald's III’ decision (4) dealt with the registration of the marks ‘Mac’ and ‘Burger’ by third parties sued for infringement. McDonald's was absolved, but only because the trade mark owners had used the mark ‘MacBurger’ with a special logo rather than the marks they had registered. Finally, in the ‘Dorothee Bis’ decision, (5) the court rejected an invocation of trade mark rights by the Japanese trade mark owners of ‘Dorothee Bis’ because the trade mark had first been registered on behalf of a joint venture company with the French trade mark owner, though the joint venture had later been dissolved. Nevertheless, ‘Dorothee Bis’ fashions continued to be imported, and the general public associated ‘Dorothee Bis’ with the French fashions rather than the products of the Japanese trade mark owner (see also below 4.). In addition, the reason for seven of the eight actions in ‘Popeye’ was the registration of the ‘Popeye’ trade mark by a certain Kenji Matsumoto in 1959. (6) Apart from the letters ‘Popeye’, the mark showed a simplified version of the ‘Popeye’ character with a sailor's pipe and an anchor tattoo on one of his arms. There was no connection between Mr Matsumoto and the copyright owners of the ‘Popeye’ character, and contrary to the P 572 opinion expressed by the appeal court (see below 3.) it is – with respect – not too difficult to assume that the application was indeed made parasitically to exploit the fame of the ‘Popeye’ character. Other cases concern the registration of the ‘Omega’ trade mark for cigarette lighters, only ruled out because the Swiss watchmaker's product had become well-known in Japan. (7) The application of the mark ‘New Yorker’ for bicycles, ruled out by the Tokyo High Court, (8) because the term ‘New Yorker’ had become wellknown for its association with the Chrysler Corporation; piracy application of the ‘Esso’ trade mark for textiles, struck down by the Patent Office; (9) piracy application for the trade name ‘Bayer’, rejected by Kobe District Court; (10) in the ‘Crocodile Lacoste’ case, (11) it was quite clear from the facts that a Singaporean trader had registered a crocodile mark in bad faith in Japan. However, the court found the crocodile mark dissimilar to the one used by Lacoste and therefore declined to decide on the issue of bad faith. Further, there is no shortage of recorded cases which concern the misappropriation of famous or well-reputed marks by means other than trade mark applications, particularly for perfumes (Chanel, Nina Ricci), fashion designs (Louis Vuit-ton in particular), and comic characters (Snoopy, Popeye). (12)

2 Basic Principles:Use and Confusion Under the Trade Mark Act, there are two grounds under which a prior trade mark can be invoked in order to request rejection of a subsequent application, or invalidation of a subsequently registered mark. One is similarity, and another is confusion with a prior mark. Both elements are interrelated, and the case at issue only dealt with confusion. Issues of similarity are further explained in the ‘Hyōzan’ case, this book case no. 50. Both use and registration can be prevented in cases in which confusion with the origin of the mark could arise. (13) Under unfair competition law, this corresponds to the classic passing-off action known under common law. Very often, however, foreign trade mark owners will not be able to prove sufficient goodwill in Japan to prevent use (under unfair competition law) or to effect cancellation based on confusion with a prior mark (under trade mark law). In fact, there has not been any case in which sufficient recognition could P 573 be proven without actual use in Japan. (14) In order to prevent confusion under unfair competition law, local recognition in a certain area is sufficient, (15) while obstacles to registration under section 4(1)(xv) Trade Mark Act require countrywide recognition. (16) While proving confusion has been facilitated by the broad concept of confusion, which no longer requires a direct competitive relationship (see the decision ‘Type Chanel No. 5’,

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case no. 51), but only some form of association between the two indications, proving recognition is an uphill battle in most cases. Basically, there are two options: (1)

(2) P 574

One would be that the plaintiff's mark has already been recognized by the Japanese Patent Office as well known. In an attempt to make its practice more predictable, the Patent Office has tried to compile a list of well-known marks. The first, basically a list of Japanese well-known marks, was published in 1970 by the Japanese Patent Office and AIPPI. (17) In the 1980s the Japanese Patent Office sent out thousands of questionnaires to foreign associations of industry to compile lists of ‘foreign wellknown trademarks unregistered in Japan’. A list of German marks was published in 1987. (18) Another updated list of Japanese well-known marks was published in December 1998. (19) The list was drawn up in an apparent attempt to prevent ‘other countries from newly registering trademarks which are identical to any of the Japanese well-known trademarks on the circulated list’. (20) In fact, the list does not feature one single foreign mark. Apart from that, we should be aware of the fact that recognition has in almost no case been in fact affirmed by the courts, but rather mostly been judged by the Japanese federations of industry, which makes ‘the immaturity of this methodology so striking it barely deserves comment’. (21) If a mark is on one of these lists, there is an assumption that it is indeed well known. In other cases, the owner of a mark has to prove recognition by the period and area of use, the amount of advertisements and promotion, and the size of business both at home and abroad. (22) Given the not always very encouraging precedents, (23) any trade mark owner would be well advised to spend some time and effort collecting evidence of use and recognition.

In view of the Japanese market's being highly saturated by advertising, it is quite easy for foreign companies to have somewhat inflated ideas about recognition of their mark in Japan. An example of successfully argued recognition (and thus, confusion), is the ‘Tanino Crisci’ decision. ‘Tanino Crisci’ is an Italian fashion brand for shoes. Its shops are found on the main streets of Italian fashion, such as the Via Monte Napoleone in Milan or the Via Tornabuoni in Florence. A Japanese party unrelated to the Italian company applied for registration of the trademark for clothing on 13 December 1973, with effect on 27 October 1982. The plaintiff Tanino Crisci had requested cancellation as early as 23 March 1984 on the grounds that Japanese customers would associate the trade mark with Italian rather than Japanese origin (section 4(1)(xv) Trademark Act). The plaintiff relied on turnover figures of 1,500 pairs of shoes sold in Japan as early as 1965, 5,000 in 1973, and as many as 10,000 in 1982. The shoes were sold for prices between JPY 40,000 and JPY 100,000 in 1973 by shoe shops in Japan. Despite this evidence, the Patent Office had dismissed the plaintiff's claim for cancellation on 22 December 1994. The court, however, saw things differently: (24) ‘In view of the turnover figures presented by the plaintiff, the plaintiff's shoes were sold by shoe shops as expensive, high-quality shoes to those customers who could afford them. This of course limited the number of pairs sold, but at the time of trade mark registration (12 March 1982) as well as the time of application (13 December 1973), ‘Tanino Crisci’ had become a well-known brand for high-class shoes both among retailers and the relevant sector of customers… . Because already at the time of trade mark application ‘Tanino Crisci’ had become a well-known brand, use of the same mark for clothing might lead to the assumption that there could be some economic links with the plaintiff, and thereby to the danger of confusion regarding the origin of goods… . The Patent Office Appeal Board's decision denying a contravention against section 4(1)(xv) Trademark Act was therefore mistaken and the appeal should be allowed.’

3 Other Options:Better Rights When the defence under section 4(1)(xv) failed or looked unpromising, the foreign trade namely copyrights, to defend use (but not necessarily request revocation of the abusively registered mark, section 29 Trade Mark Act). The copyright avenue was chosen in the ‘Popeye’ and ‘Peter Rabbit’ cases.

P 575 mark owner could sometimes invoke other intellectual property rights,

In ‘Popeye’, the Court of Appeal upheld the US company's (defendant's) better rights for those indications that were deemed copyrightable, but otherwise sided with the Japanese trade mark owner and denied any wrongdoing of the latter: (25) ‘Contrary to assertions by the defendant (King Features Syndicate), there is nothing that suggests that the plaintiff (Alps Kawamura) has acquired the trade mark merely to draw customers attracted by the ‘Popeye’ character without compensation. Even if this were so, the concept of free-ride as ‘the deft use of another's achievements without due compensation’ cannot normally be considered unlawful. The licensee of the ‘Popeye’ character, The Hearst Company, began to market the character in Japan in 1960. At the time of the application to register the trade mark as an associated trade mark

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consisting of the ‘Popeye’ character and lettering (No. 326206 of April 21, 1939), assuming that no third party had any legal interest in the trade mark, the use of the trade mark by the plaintiff cannot be said to have been an abuse. Moreover, there is no evidence of subsequent unlawful behaviour concerning the trade mark on the part of the plaintiff. The claim for damages based on the plaintiff's trade mark rights with respect to the use of badge ‘C’ by the defendant is to be dismissed in view of the wording of section 29 Trademark Act. Insofar as badge ‘B’ is concerned, the court of appeal was correct in awarding as damages the sum of JPY 1,085,000 in favour of the plaintiff of the original action, in view of the fact that the goods with the badge ‘B’ attached were sold from the summer of 1981 until December 1982. The claim for an injunction shall be dismissed, as there is no evidence that the defendant further intends to sell the goods.’ The Supreme Court overturned the appeal decision and found the exercise of trade mark rights an abuse: (26) ‘III. On the following grounds, this Court cannot concur with the view expressed by the appellate court that the invocation of trade mark rights against the use of badge ‘B’ is not an abuse of rights.

P 576

Badge ‘B’ was used as a trade mark and was similar to the trademark, especially as it is pronounced in the same way as the name of the comic hero, ‘Popeye’. Badge ‘B’ does not qualify as a work of art independent from the comic strip ‘Popeye,’ and, in addition, it is impossible to regard badge ‘B’ as a reproduction of a copyright work. Therefore, the plaintiff takes the view that the claim for damages for trade mark infringement is well founded. But, as already stated above, even at the time the application to register the trade mark was made, the comic hero, ‘Popeye,’ was liked by many and known by even more. It would not be too much to say that the character, ‘Popeye,’ had become a celebrity throughout the whole world, including Japan. The comic hero, ‘Popeye,’ is a fictional character. Taking into account that the word ‘POPEYE’ or ‘Popai’ (in katakana) in fact refers to no other hero but this one, it must be said that the word pronounced ‘Popeye’ is intrinsically linked with the character associated with the comic hero so well known to the public. It can easily be deducted that both today and at the time the application for registration of the trade mark was made, the word, ‘Popeye,’ was associated with the comic character ‘Popeye’. The trade mark does not confer any other meaning or association and is pronounced the same way as the comic hero, ‘Popeye’. The trade mark thus parasitically exploits the fame of the character, ‘Popeye,’ without providing adequate compensation. As it is the purpose of the Trade Mark Act to maintain fair competition, the appellee's claim of an infringement of trade mark rights through the sale of goods with the badges ‘B’ attached, in fact, amounts to an abuse of a legal position. The claim of the plaintiff itself was unfounded in the first place. The Court of Appeal thus erred in denying the defendant recourse to the defence of an abuse of rights by the plaintiff, and the decision was based on such error.' In the ‘Peter Rabbit’ decision, too, the court found that the mere word ‘Peter Rabbit’ was not copyrightable, but the fame of Beatrix Potter's books made it a ‘high likelihood’ that the trade mark had been applied in bad faith. (27) Another avenue was taken in the ‘Cupuacu’ decision where the trade mark owner Asahi Foods had tried to monopolize the name of a tropical fruit (from which juice and oil could be extracted) by way of trade mark registration, while this was considered a form of biopiracy by the plaintiffs, amazonlink.org. While this did not turn out the decisive argument, the mark was revoked as being descriptive and not capable of indicating a commercial origin (28) (see also the ‘Coca Cola’ decision, case no. 49):

P 577

‘According to the facts elaborated in [various documents], cupuacu is a tree that grows at a height of three to eight metres, and when grown in plantations, even between 15 and 20 metres, while trees of eight metres would be considered rather small. It is thus a small or medium-sized tree that originates in Latin America and grows frequently in the Amazon region. It can be found within Brazil in the states north of Rio de Janeiro. The flesh of the fruit is fragrant and can be used for making juice, while the seeds can produce oil (vegetable butter). Just as with cocoa beans, they can be used for producing chocolate, and can also be used as a raw material for making soap. It is acknowledged that the above-mentioned facts were known at the time the trade mark application was assessed on 6 January 1998. Thus, as far as the indication Cupuaçu is concerned, this word is used as basic material for the oil made from cupuaçu seeds and is thus necessary to indicate a product as such without there being any substitute name. Anyone should thus be able to use this indication, and it would not be fair to have it monopolised by one person only.

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The background information supplied by the respondent at the time of application does not alter the above considerations. In addition, it is clear that the trade mark ‘Cupuaçu’ both in Katakana and in the Roman alphabet, at least for the latter, has the meaning of cupuaçu, as is clearly demonstrated by the supplied material. Thus, the trade mark in question registered for ‘edible oils’ when produced from cupuaçu seeds as the basic material is clearly the generic description of the goods themselves or the description of the production method. If, on the other hand, the indication is used for edible oils not derived from the cupuaçu plant, there might be misconceptions leading to the assumption that the product was actually made from cupuaçu, and this would be clearly misleading as to the quality of the goods. Accordingly, registration has been made contrary to Trade Mark Act section 3(1)(ii) or section 4(1)(xvi), and the registration is cancelled under section 46(1) Trade Mark Act.'

4 Use Despite Third-Party Registration Some of the cases mentioned under above 1. allowed the foreign trade mark owner to import or sell goods bearing the indication either in case that use was considered nontrade mark use (t-shirts with Popeye characters were sold, and this was considered by the court not to have been meant or understood as an indication of origin and thereby not trade mark use (29) ), or where the Japanese trade mark owner had merely imported and sold off the foreign trade mark owner and therefore established no goodwill of its own. This then allowed the foreign trademark owner to import and sell the trade marked goods in Japan (a sort of reverse parallel import situation). (30) But of course, although the foreign trade mark owner may have prevailed in the court action, there is a high degree of legal uncertainty involved.

5 Bad Faith Until the year 2000, there was specific provision in the Japanese Trade Mark Act to provide for cancellation of a mark on grounds of bad faith, and the courts in the ‘L'Air du Temps’ case turned a blind eye to the series of piracy registrations by the defendant. P 578 However, the principle of bad faith should be one to permeate the legal system as a whole. There are many cases of piracy or quasi-piracy applications decided by Japanese courts which granted remedy only upon proof of confusion as to the source or origin, or geographical indication, etc., see above 2–4. In one case, the Tokyo District Court mentioned the possibility of bad faith registration serving as a means of ‘obtaining a trade mark right for the sole purpose of injuring others’, (31) but in this particular case the court reached a different decision because the plaintiff as a sole import distributor had registered the trade mark for himself, after having bought out two pirates who had been even quicker off the mark. The case that came closest to an acknowledgement of bad faith was the ‘Juventus’ case. Here, the Tokyo High Court found it an act contravening public order and morality to register the mark ‘Juventus’ for bags, clothing and cosmetics in view of the well-known Italian football team Juventus of Turin: (32) In our country someone who has no connection to a famous foreign enterprise and without proper consent tries to register a trade mark similar thereto, will not be able to do so under sections 4(1)(vii) and (xv) Trade Mark Act. Even if such an act does not fall under one of these provisions, and the applicant with the intention of unfair competition or in order to obtain an unfair benefit tries to obtain registration, such an act is against good morals, because it runs against the grain of international trust and damages public order. For that reason, such act should be understood to fall under the provision of section 4(1)(vii) Trade Mark Act. If, on the other hand, such foreign organisation is not well-known in Japan at the time of application and there is no bad intention when such mark is applied for, and the foreign group or organisation only becomes well-known in our country later and subsequently a renewal of such trade mark is requested, it is much more difficult to argue that renewing such mark would contravene public order. To determine the question of bad faith again once the mark comes up for renewal and to determine for this point of time whether a foreign group has become famous in Japan, would not be a proper interpretation of section 4(1)(vii) Trade Mark Act. This interpretation can also be supported by the provision of section 4(1)(xix), section 4(3) and section 46(1)(v) Trade Mark Act introduced by Law No. 68 in 1996. The court in this connection mentions the provision of section 4(1)(xix) Trade Mark Act, which prevents a trade mark registration of ‘trade marks that are well known among consumers in Japan and abroad as indicating the goods or services as being connected with another person's business … , and that are used by the applicant with unfair intention (the intention to gain an unfair profit, to cause damage, etc.)’. The abovementioned ‘Peter Rabbit’ decision may have found the right standard in holding it to be sufficient that there was a ‘high possibility of bad faith’. Christopher Heath (1)

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P 578

References ★ )

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14)

15) 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 1)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich. Actes de Londres 192, 466 [1935]. Tokyo High Court, 22 December 1981, 13-2 Mutaishû 696 [1981] – Technos. Nagoya District Court, 25 March 1988, 678 Hanrei Times 183 [1988] – BBS. Supreme Court, 13 October 1981, 14 IIC 429 [1983] – McDonald's III. Kobe District Court, 21 December 1982, 14-3 Mutaishû 813 [1982] – Dorothee Bis. See the Supreme Court Decision, 20 June 1990, 25 IIC 118 [1994] – Popeye Scarves III. Supreme Court, decision of 24 April 1973, Doi, Trademark and Unfair Competition Law of Japan, Digest of Court Decisions (‘Digest 1980’), Tokyo 1980) 71 – Omega. Tokyo High Court, decision of 26 January 1967, Doi, Digest of Japanese Court Decisions in Trademarks and Unfair Competition Cases ‘Digest 1971’), Tokyo 1971, 17 -New Yorker. Japanese Patent Office, decision of 12 February 1966, Doi Digest (1971), 23 – Esso. Kobe District Court, 8 August 1966, Doi Digest (1971), 84 – Bayer. Osaka District Court, 24 February 1971, Doi Digest (1980), 108 – Crocodile Lacoste. Many of the above cases are reviewed in C. Heath, Sell-out of foreign trademark rights in Japan?’, 26 IIC 509 [1995]. See Supreme Court, 20 June 1990, 25 IIC 118 (1994)- Popeye Scarves III (see below 2); Kobe District Court, 21 December 1982, 14-3 Mutaishu 813 (1982) – Dorothee Bis (see below 3). In Supreme Court, 16 December 1993, 835 Hanrei Times 248 (1994) – Amex, however, the plaintiff and owner of the well-known ‘Amex’ credit cards could obtain protection against the defendant's use of ‘amekkusu’ before credit cards had actually been issued in Japan. Here, recognition was affirmed through the use of the mark in dictionaries and newspapers. Prior to 1994, service marks were unregistrable, which put the owners of such indications in a difficult position. Tokyo High court, 4 July 1991, 23-2 Chizaishū 555 (1991) – Jet Slim Clinic. Here, the owner of a locally well-known indication had prevailed over the owner of an indication known all over Japan. Tokyo High Court, 16 June 1983, 15-2 Mutaishū 501 (1983) – Daewoo Coffee. Japanese Patent Office, Famous Trade Marks in Japan, AIPPI, Tokyo 1970. Japanese Patent Office, Foreign Well-Known Marks Unregistered in Japan – West German Edition, December 1987. Well-Known Marks in Japan, AIPPI 1998. Explanation by the JPO's Director-General Hashimoto on 3 December 1998, then published on the JPO's homepage. Kenneth Port, Japanese Trademark Jurisprudence, London 1998, 25. Japanese Patent Office, Shinsa kijun no gaisetsu (Examination Guidelines of the Japanese Patent Office), Tokyo 1996, 306. E.g. Osaka District Court, 13 November 1987, 229 Tokyo to Kigyo 83 (1988): here, the plaintiff had sold at least 11.000 Stefano Ricci neckties in one year, yet the court held that this was insufficient for proving recognition. Tokyo High Court, 12 December 1996, 30 IIC 461 (1999) – Tanino Crisci. Osaka High Court, mentioned in the Supreme Court decision of 20 June 1990, Popeye Scarves III. Supreme Court, 20 June 1990, 25 IIC 118 (1994) – Popeye Scarves III. Tokyo High Court, 15 March 2004 – Peter Rabbit. Japanese Patent Office, decision of 18 February 2004, 37 IIC 98 (2006) – Cupuaçu. Osaka District Court, 24 February 1976, 8-1 Mutaishū 102 – Popeye Shirts II. Kobe District Court, 21 December 1982, 14-3 Mutaishū 813 – Dorothee Bis. Tokyo District Court, Decision of 31 August 1973, Doi Digest (1980), 89 (98). Tokyo High Court, 24 March 1999, 1683 Hanrei Jihô 138 [1999] – Juventus. Head of the Asian Department, Max Planck Institute, Munich

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Case No. 53: Trade Mark Law – Parallel Imports – Identity of Goods – Licensing Agreement – Counterfeit Goods

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Supreme Court of 27 February 2003 – KK Three M v. Hit Union Co. Ltd. – ‘Fred Perry’ Source: 35 International Intellectual Property and Competition Law (IIC) 216 (2004)

Jurisdiction Japan

I Headnote(s) Trademarked goods produced abroad by a licensee in breach of a contractual stipulation of the place of manufacture are considered counterfeits and thus may not be imported.

Court

Supreme Court of Japan

II Relevant Provisions Trade Mark Act, sections 1, 2(3), 25

Case date

III Facts

27 February 2003

The defendant, Hit Union, is the owner of two ‘Fred Perry’ trade marks registered in Japan, Sportswear Ltd. The plaintiff, KK Three M, imported polo shirts bearing ‘Fred Perry’ marks. The shirts were manufactured in China at the instruction of a Singaporean company, Ocea International Pte. Ltd. Ocea had received a licence from Fred Perry Sportswear for the manufacture of ‘Fred Perry’ sportswear in Singapore, Malaysia, Brunei Darussalam and Indonesia. Manufacture of the goods in China qualified as a breach of the licence agreement with Fred Perry Sportswear. The defendant thus posted a notice in an industry journal that denounced the goods imported by the plaintiff as counterfeits. The plaintiff sued for defamation, the defendant countersued for infringement of the ‘Fred Perry’ trademarks.

P 580 and Fred Perry Holdings Ltd., a successor to the UK company, Fred Perry

Parties

Claimant, KK Three M Defendant, Hit Union Co. Ltd.

Bibliographic reference

Christopher Heath, 'Case No. 53: Trade Mark Law – Parallel Imports – Identity of Goods – Licensing Agreement – Counterfeit Goods', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 579 586

The lower courts were divided as to the issue of trade mark infringement. While the Tokyo District Court (25 October 2001 – Fred Perry Tokyo [34 IIC (2003)], 15 Law & Technology 90) found that a breach of the licensing agreement did not make the goods counterfeit (already held by Tokyo District Court, 28 January 1999 (1670 Hanrei Jihō 75) and Tokyo High Court, 19 April 2000), the Osaka District Court (21 December 2000, 1063 Hanrei Times 248) and Osaka High Court (29 March 2002 – Fred Perry Osaka [34 IIC (2003)], 16 Law & Technology 84) found that there was infringement. The question was relevant in the present context, as the parallel importation of (original) trade-marked goods has been held lawful in Japan for more than 30 years (Osaka District Court, 21 February 1970 [2 IIC 1971] – Parker). This decision has been rendered against the appeal from the Fred Perry Osaka decision.

IV Findings 3 ….The import of trade marked goods does not qualify as an infringement of a trade mark as a parallel import of authentic goods where: (1) (2) (3)

the mark had been lawfully attached by the holder or the licensee of the trade mark in another country, the trade mark in the said country indicates the same source as is indicated by the registered trade mark in Japan, because the holder of the former trade mark is the same as, or legally or economically connected with, the right holder in Japan; and the imported goods are not different in quality from the goods marketed under the registered trade mark in Japan due to the position of the right holder in Japan directly or indirectly to enforce a quality control of the goods…

4. In the case at bar, the source function of the trade mark is harmed by the importation of the disputed goods: Ocea, the licensee of the mark that is identical to the registered trade mark in Singapore and three other States, had the goods manufactured in a factory in China, which is not included in the licensed territory, and thus manufactured and marked the goods in breach of a provision of the agreement that relates to the scope of the licence. Restrictions in the licensing agreement that relate to the country of origin and issues of the goods and ensuring the quality function by the holder of the trade mark. The disputed goods, having been manufactured and marked in breach of such restrictions, may harm the quality function of the trade mark, since they could be out of the trade mark owner's quality control and thus be different in the quality as would be guaranteed by the latter for all goods to which the registered trade mark is attached and that are put onto the market by the defendant….

P 581 subcontracting are also of great importance for controlling the quality of

From the above, the import of the disputed goods does not qualify as a parallel import of authentic goods.

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Translated by Souichirou Kozuka

V Comment 1 Parallel Import of Trade Marked Goods from Parker to BBS The starting point for a re-evaluation of parallel imports of original trade-marked goods under Japanese law was the Max Planck Institute, when Saburo Kuwata spread Friedrich Karl Beier's ideas of parallel imports and international trade (1) in Japan, and Dr Shōen Ono sued against the seizure of original goods that had entered Japan by way of parallel importation. In what became known as the ‘Parker’ case, the defendant company, Shrilo, was the sole import distributor of Parker fountain pens in Japan. The plaintiff company, NMC, had obtained original Parker pens from Hong Kong and tried to import them to Japan, whereupon the defendant asked the customs office to confiscate the shipment. The plaintiff argued that the import could not be considered illegal; although the importation constituted a formal infringement under the Trade Mark Act, the latter was not meant to protect legal monopolies in favour of trade mark owners, but, as stated in its preface, ‘to ensure the maintenance of the business reputation of persons using trade marks by protecting trade marks, and thereby to contribute to the development of industry and to protect the interests of consumers’. Applying this standard, according to the argument of the plaintiff, the parallel importation looked lawful, as the business reputation of the trade mark owner did not suffer from the importation of genuine goods, and consumers were not misled. The Osaka District Court agreed and held that the Trade Mark Act was intended to guarantee the source of origin and the quality of goods as well as to protect the goodwill of the trade mark owner. As the Japanese trade mark licensee and its foreign licensor could be regarded as the same person, and the general consumer did not associate the trade mark ‘Parker’ with Shrilo, the latter had thus established no goodwill of its own.

P 582

‘It is the purpose of the law to protect the special functions of a mark: as a designation of the source of goods, as a guarantee of the quality of goods, and as a symbol of the goodwill of the trade mark owner as acquired by use of the mark for his goods. At the same time, a certain trading pattern is sought to be maintained so that customers can ascertain the identity of goods based on their source and so that they do not make wrong choices in purchasing but rather obtain the desired goods having proper quality; thus the interests of consumers are safeguarded. As stated above, these functions are the subject of protection, and this protection is not only for the benefit of the trade mark owner but also for the benefit of the public at large. It can be said, therefore, that trade mark law as compared with other areas of industrial property protection is characterised by its very strong and common interest aspects. The scope of protection is also limited by public policy considerations within the framework of the principle of registration, even though basically a trade mark can be characterised as a private property right’… (2)

The case became one of the leading cases of Japanese IP law not only due to its clarity of reason, but also partly by accident, as the defendant company that had appealed the decision went bankrupt while the appeal was still pending, thereby allowing the District Court decision to become a final precedent that has been good law for the last 40 years. After Parker, sole import distributors became much more cautious in petitioning for the exclusion or confiscation of parallel imports. Nevertheless, in the three cases that followed, the parallel importers could not meet the legal requirements set out by Parker; either the source of origin or the standard of quality was different, or the close legal and/or economic connection between the Japanese plaintiff and the foreign trade mark owner could not be established. (3) Only two cases following these decisions broadened the scope of legitimate parallel importation: in Lacoste, (4) the plaintiff, La Chemise Lacoste, owned the trade mark ‘Lacoste’ in various countries including Japan. The trademark was licensed to the co-plaintiff, a Japanese company that produced and sold Lacoste goods in Japan. The defendants had obtained Lacoste goods from an American firm (in which La Chemise Lacoste held a 47% interest) that produced and sold them in the US. Although the quality of the goods imported by the defendants differed to some degree from that of those manufactured by the co-plaintiff in Japan, the Tokyo District Court dismissed the claim for damages and held that even if the trade mark was owned by different entities in the US and Japan, the source of origin as well as the source of goodwill these goods enjoyed with the general consumer could be identified as ‘Lacoste’ sole import P 583 and were thus identical. In a subsequent case, BBS, (5) the plaintiff, a distributor of German car parts, sought relief against the defendant importing original BBS-parts whose serial numbers had been rasped off. The Nagoya District Court examined: (a) the relationship between the foreign and the domestic owner of the trade mark; and (b) the similarity of the parallel imports to those being domestically distributed. On the first issue, the court found that, though at the time of registration of the domestic trade mark there was no relationship between the parties, the registration had been made with such prospect in mind, and at the time of importation of the goods a relationship had been established. On the second issue, the court found that the goods were of the same origin and of similar quality despite the erasure of the serial numbers.

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Accordingly, the court dismissed the claim and allowed the parallel importation. After BBS, nothing much happened in the field of trade marks in regard to parallel import issues. The Fair Trade Commission kept punishing attempts to prevent lawful parallel imports, and the attention shifted to the parallel importation of patented goods after the Tokyo High Court had issued a decision – also involving the German company BBS – that allowed the parallel importation of patented products. The decision was attacked by a number of Japanese academics, Dr Shoen Ono no less, (6) and also Prof. Beier, both wrote opinions on behalf of the patentee BBS. (7) The Supreme Court might have overturned the decision for lack of international support had it not been for a UK decision rendered in 1995 (8) that allowed the parallel importation of patented goods under the doctrine of implied license, a solution the Japanese Supreme Court ultimately followed. (9) It thereby endorsed the rationale of the Parker decision that intellectual property rights must be interpreted in a manner beneficial to the interests of society at large.

2 Fred Perry: A case of Identity Only ‘Fred Perry’ gave an opportunity to revisit the Parker decision. ‘Fred Perry’ concerned the parallel importation of trade marked goods in the rather unusual constellation of a breach of a licensing agreement. The Tokyo District Court (10) and the Tokyo High Court (11) found that a breach of the licensing agreement did not make the goods counterfeit. (12) The Tokyo courts found that even though there was a breach of the licensing agreement, this did not render the goods infringing. After all, the goods were indistinguishable from those manufactured in P 584 Singapore and Malaysia, and the only thing that a third party could reasonably ascertain was the fact that there was a licensing agreement at all. To the extent that the goods could be attributed to the licensee, third parties should not be burdened with the risk that they had purchased pirated goods. In other words, the Tokyo courts stressed the importance of protecting third parties. The Osaka District Court (13) and Osaka High Court (14) on the other hand found that there was infringement, and the Supreme Court sided with the Osaka decisions. Rather unusual for a Supreme Court decision, ‘Fred Perry’ has been heavily criticised by some Tokyo judges, even if only in private conversations. For one, the issue of product identity should have been determined according to the law applicable to the license, that is, Singaporean law. To the extent that the trade mark is attached in Singapore, it is the law of this country that determines whether the breach in the licensing agreement is of such a nature as to regard the goods as counterfeit. And, furthermore, certainty in trade is seriously compromised where goods originating from a licensee are still regarded as counterfeit with the consequence that they can be seized and destroyed at any stage of the distribution chain until the final end consumer and even beyond, as was explained by the Tokyo courts. Finally, to add insult to injury, the plaintiff in the Fred Perry case was happy to pocket the licensing fees the Singaporean licensee had paid for the very goods the plaintiff then claimed were infringing.

3 ‘Converse’ – A Split in Ownership (a) The most recent decision in the difficult field of parallel importation of trade marked goods is ‘Converse’, (15) a case that touches upon the fundamentals of trade mark law, just as the previous cases Parker and Fred Perry. Although the facts were somewhat complicated, ‘Converse’ had to deal with an identical owner of the ‘Converse’ trade mark in the US and Japan that went bankrupt, leading to a split in ownership of the Japanese and US marks. Although there was still a joint production of goods (shoes), the Japanese trade mark owner had no ultimate control over the goods for the US market that were subsequently imported to Japan by a third party. Lack of control was the ultimate criterion for the Japanese High Court to prohibit such parallel importation. (b) Under European law, the ‘Converse’ case seems relatively clear. According to the ECJ's ‘Ideal Standard’ decision that concerned the parallel importation subsequent to an assignment of trade mark rights: ‘for the trade mark to be able to fulfil its role, it must offer a guarantee that all goods bearing it have been produced under the control of a single undertaking which is accountable for their quality’. (16) P 585

Thereby, the previous doctrine of allowing parallel imports in case the trade mark in the country of exportation and importation shared a common origin – Hag I (17) – was discarded. (18) Furthermore, the ECJ made clear that a possible misconception of consumers as to the origin or goodwill of the product must take second place over a lawful assignment of the mark. (19) (c) Both decisions, ‘Fred Perry’ and ‘Converse’, are consistent with the old ‘Parker’ decision that the Japanese courts irritatingly do not identify as the leading case of parallel importation, and references to the ‘BBS Car Wheels’ decision are somewhat misleading

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already due to the different functions of trade mark law on the one hand, and patent law on the other. The ‘Parker’ decision requires a common origin of goods sold by the trade mark owner, and the parallel importer (not the case in ‘Converse’), and a ‘proper quality’ of the goods, which the ‘Fred Perry’ decision has interpreted as ‘proper supervision so as to guarantee quality’. ‘Parker’, in a way, was the archetypical case of parallel importation v. territorial exclusivity of the licensee, while ‘Fred Perry’ and ‘Converse’ had some rather unusual characteristics. The Japanese Trade Mark Act in section 1 contains a specific reference to consumer protection, as has been correctly mentioned in the above decisions ‘Parker’ and ‘Converse’. The angle of consumer protection is not necessary to justify parallel imports as such – after all, the origin function of the trade mark cannot be compromised by goods that have been imported via a different distribution channel. The question to be asked is whether the angle of consumer protection calls for some sort of adjustment in cases where the general public associates the goodwill of the trade marked goods with a source that is different from the registered trade mark owner, a sort of ‘reverse confusion’. This must not be a bar to the transfer of the trade mark as such, as otherwise, one would reintroduce the requirement of transfer together with the goodwill or business. But could one argue that a trade mark owner who only obtains the trade mark as a shell without any goodwill cannot pursue use of this trade mark by third parties that is in accordance with consumer perception about the origin of the goods. Worded differently, is there an estoppel of ‘unclean hands’ in cases in which the trade mark owner himself causes consumer confusion. This was essentially the point made by the defendant in ‘Converse’, and it is the point strongly advocated by Yoshiyuki Tamura in a pro bono opinion on this case. (20) Based on reverse confusion, the defendant in ‘Converse’ raised the counterclaim that use 2 (1) Unfair Competition Prevention Act, a provision protecting unregistered indications from passing-off. Unsurprisingly, the courts took the view that the use and enforcement of a registered trade mark by the trade mark owner – bar evidence of fraudulent registration – could not make a cause for unfair competition. But this is not so self-evident: in a very old precedent, the ‘Dorothee Bis’ case, the defendant Dorothee Bis France had imported designer goods under this trade mark to Japan. In Japan, however, the previous sole import distributer of ‘Dorothee Bis’ goods unbeknown to Dorothee Bis France had registered the trade mark in its own name and, after termination of the distribution agreement, kept trading ‘Dorothee Bis’ goods from France, while trying to block parallel importation of ‘Dorothee Bis’ goods. Under these circumstances, the court held that the sole goodwill consumers associated with the ‘Dorothee Bis’ goods derived from their French origin, and the plaintiff could not exercise its trade mark right against goods identical to those it was trading in. (21) Different from the Converse case, there was a fraudulent registration of the mark (now actionable under section 4(1)(xix) Trade Mark Act), and there was no issue about quality/supervision. As to the latter point, however, one may ask whether the courts' analysis of the differences in quality and separation of quality control has not been an exercise in splitting hairs (or, in this case, shoelaces).

P 586 of the trade mark by the plaintiff was contrary to section

The result in Converse certainly means that the plaintiff has obtained a monopoly over the importation of shoes that consumers associate with an American origin and that are identical to those produced and sold in the US. Christopher Heath (1) P 586

References ★ )

1) 2) 3)

4) 5) 6) 7) 8)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich F.K. Beier, Territoriality of Trademark Law and International Trade, 1 IIC 48 [1970]. Osaka District Court, 27 February 1970, 2 IIC 325, 326 [1971] – Parker. Fukui District Court, injunction of 29 March 1974 (No. 40/1972)- Ramie; Tokyo District Court, decision of 31 August 1973, 1973 Tokkyo kanri hanketsushū 123 = 301 Hanrei Times 267; Tokyo District Court, decision of 31 May 1978, 10-1 Mutaishū 216 – Technos; appeal dismissed by the Tokyo High Court, decision of 22 December 1981, 13-2 Mutaishū 969. Tokyo District Court, 7 December 1984, 543 Hanrei Times 323 [1985] = 1141 Hanrei Jihō 143 [1985] – Lacoste; Nagoya District Court, 25 March 1988, 678 Hanrei Times 183 [1988] = 1277 Hanrei Jihō 146 [1988] – BBS Trade Mark Case. S. Ono, Heikō tokkyo to yunyū, in: Y. Someno (ed.), Chiteki zaisan to kyōsō no riron (Theorien zum Recht des geistigen Eigentums und Wettbewerbsrechts (Festschrift für F.K. Beier)), Tokyo 1997, 459. F.K.Beier, Zur Zulässigkeit von Parallelimporten patentierter Erzeugnisse, GRUR Int. 1996, 1. English Patents Court, Roussel Uclaf v. Hockley International, 9 October 1995, 1996 RPC 441.

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Japanese Supreme Court, 1 July 1997, 29 IIC 334 (1998) – BBS Wheels III. Tokyo District Court, 25 October 2001, 1670 Hanrei Jihō 75 – Fred Perry Tokyo. Tokyo High Court, 19 April 2000 – Fred Perry Tokyo II. Already held by Tokyo District Court, 28 January 1999, 1670 Hanrei Jihō 75. Osaka District Court, 21 December 2000, 1063 Hanrei Times 248. Osaka High Court, 29 March 2002, 16 Law & Technology 84 – Fred Perry Osaka II. Intellectual Property High Court, 27 April 2010, 42 IIC 235 [2011] – Converse. ECJ case C-9/93, Internationale Heiztechnik v. Ideal Standard (Ideal Standard). ECJ, case 192/73, Van Zuylen v. Hag (Hag I). ECJ, case C-10/89, Hag v. Van Zuylen (Hag II). ECJ, case C-259/04, Elisabeth Emanuel v. Contintental Shelf (Elisabeth Emanuel). Y. Tamura, Shō hyō ken no jō tō go no jū zen no gusei shō hin no heikō yunyū no kahi – Converse heikō yunyū jiken (Parallel imports of previously original goods after transfer of the trade mark – the Converse case of parallel importation), 30 Chiteki zaisan hō seisaku gaku kenkyū 279 (2010). 21) Kobe District Court, 21 December 1982, Mutaishū 14-3, 813 – Dorothee Bis. 1) Head of the Asian Department, Max Planck Institute, Munich 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20)

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Case No. 65: International Civil Procedure Law – State Immunity from Civil Jurisdiction – Restrictive Immunity Theory – Waiver from Immunity

Document information

Publication

Business Law in Japan – Cases and Comments

Yokomizo Dai (★ ) Supreme Court 21 July 2006, Case No. 2003 ju 1231, Tokyo Sanyo Boeki Co., Ltd. v. The Islamic Republic of Pakistan

Jurisdiction Japan

Source: Minshū 60-6, 2542 = Hanrei Jihō 1954, 27 = Hanrei Taimuzu 1228, 119

I Headnote(s)

Court

A foreign State shall not be immune from the civil jurisdiction of Japanese courts for its acts other than acts by sovereignty, such as acts under private law or acts for business administration, unless there are special circumstances where the exercise of civil jurisdiction by Japanese courts is likely to infringe the State's sovereignty.

Supreme Court of Japan

Case date

Where a foreign State's acts are, in nature, commercial transactions that can be conducted by a private person, irrespective of the purpose of the acts, such acts fall within the category of acts under private law or acts for business administration for which the State shall not be immune from the civil jurisdiction of Japanese courts, except under special circumstances.

21 July 2006

Case number 2003 ju 1231

Where a foreign State has clearly manifested the intention to subject itself to the civil jurisdiction of Japanese courts by promising, under an explicit provision contained in a P 716 written contract entered into with a private person, that it would subject itself to the civil jurisdiction of Japanese courts for disputes that may arise from the contract, the State shall in principle not be immune from the civil jurisdiction of Japanese courts regarding such disputes.

Parties

Claimant, Tokyo Sanyo Boeki Co. Defendant, The Islamic Republic of Pakistan

II Relevant Provisions (Concerning 1 to 3) Part I, Chapter 2 of the Code of Civil Procedure (Courts)

Bibliographic reference

III Facts

Yokomizo Dai, 'Case No. 65: International Civil Procedure Law – State Immunity from Civil Jurisdiction – Restrictive Immunity Theory – Waiver from Immunity', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 715 725

Two Japanese companies asserted claims against the Islamic Republic of Pakistan (Pakistan), insisting that each sold computers to Pakistan under contracts of a quasi loan for consumption subsequently executed by a company affiliated with the Pakistani Ministry of Defense. These two companies demanded payment of the unpaid principal and agreed upon interest and delinquency charges, in an amount substantially in excess of JPY 2 billion. In its judgment of 27 August 2001, the Tokyo District Court accepted all claims advanced by the two Japanese companies, finding that Pakistan had, by default, admitted all the facts asserted by the plaintiffs. However, in its judgment of 5 February 2003, the Tokyo High Court granted immunity to Pakistan and dismissed the two companies' claims. The Supreme Court quashed the original judgment and remanded the case to the Tokyo High Court. The Supreme Court explicitly declared for the first time the adoption of the so-called restrictive immunity theory, and also changed the rule on the form of the waiver from immunity.

IV Findings With respect to immunity of foreign States from civil jurisdiction, it seems that, in the past, it was generally accepted that a State should be immune from the civil jurisdiction of another State of the forum unless there were special reasons, such as the suit being related to real estate situated in the forum State or its willingness to subject itself to the civil jurisdiction of the forum State (the absolute immunity doctrine), and there was an international customary law based on such a doctrine. However, along with the expansion of the range of States' activities, another idea has gradually gained ground; that a State's acts should be divided into acts by sovereignty and other acts (acts under private law or for business administration), and that it is inappropriate to hold the State immune from the civil jurisdiction of the forum State for not only its acts by sovereignty but also those under private law or for business administration. At present, in accordance with such restrictive immunity doctrine, many States restrict the immunity of foreign States from P 717 the civil jurisdiction of their courts. Besides, the United Nations Convention on Jurisdictional Immunities of States and Their Property adopted at the 59th General Assembly of the United Nations as of 2 December 2004, also adopted this doctrine. In light of these circumstances, today, although the existence of the international customary law whereby a foreign State shall be immune from the civil jurisdiction of the forum State for its acts by sovereignty remains affirmable, it should be regarded that the international customary law whereby a foreign State shall also be immune from the civil

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jurisdiction of the forum State for its acts under private law or acts for business administration does not exist any longer. Next, we examine whether it is appropriate for Japanese courts to exercise their civil jurisdiction over a foreign State's acts under private law or acts for business administration. Immunity of a State from the civil jurisdiction of the courts of another State is recognized based on the idea that individual States have their own sovereignty and they are on equal footing, and therefore they should mutually respect their sovereignty. However, it can be construed that even if Japanese courts exercise civil jurisdiction over a foreign State's acts under private law or acts for business administration, such exercise of jurisdiction is not likely to infringe the State's sovereignty, and therefore, it should be concluded that there is no reasonable ground to hold the foreign State immune from the civil jurisdiction of Japanese courts for such acts. If a foreign State were granted immunity from the civil jurisdiction of Japanese courts even in cases where the exercise of civil jurisdiction is not likely to infringe the State's sovereignty, it would bring about an unfair consequence in that the private person involved in the State's acts under private law or acts for business administration is unilaterally denied access to judicial remedy without reasonable grounds. Therefore, it is appropriate to construe that a foreign State shall not be immune from the civil jurisdiction of Japanese courts for its acts under private law or acts for business administration unless there are special circumstance where the exercise of civil jurisdiction by Japanese courts is likely to infringe the State's sovereignty. Needless to say, a foreign State shall not be immune from the civil jurisdiction of Japanese courts, irrespective of whether or not the act in question can be regarded as an act under private law or acts for business administration, in cases where it has agreed to subject itself to the civil jurisdiction of Japanese courts under a treaty with Japan or other international agreements or where it has filed a suit with a Japanese court, thereby manifesting the intention to willingly subject itself to the civil jurisdiction of Japanese courts in a particular litigation. In addition, it is appropriate to construe that, in cases where a foreign State has clearly manifested the intention to subject itself to the civil jurisdiction of Japanese courts by promising, under an explicit provision contained in a written contract entered into with a private person, that it would subject itself to the civil jurisdiction of Japanese courts for disputes that may arise from the contract, the State shall in principle not be immune from the civil jurisdiction of Japanese courts regarding such dispute. This is because, in such cases, the exercise of civil jurisdiction by Japanese courts over the foreign State is generally not likely to infringe the State's sovereignty, and furthermore, if the foreign State can claim immunity from the civil jurisdiction of P 718 Japanese courts, it would bring injustice between the parties to contracts and therefore contravene the doctrine of good faith. In this case, if, as argued by the appellants, the appellee concluded the Sales Contracts with the appellants to purchase high-performance computers, and after receiving delivery of the objects of sale, it concluded the Quasi-Loan Contracts with the appellants to obtain loans to cover the sale price, these acts conducted by the appellee are, in nature, commercial transactions that can be conducted by a private person, and therefore it should be deemed that these acts fall within the category of acts under private law or acts for business administration, irrespective of the purpose of the acts. Assuming so, the appellee should not be immune from the civil jurisdiction of Japanese courts in this suit unless there are special circumstances as explained above. According to the records, it is also obvious that the order forms prepared in the name of Corporation A representing the appellee contain a clause stating that the appellee agreed to conduct the judicial proceedings at Japanese courts in the event of any dispute over the Sales Contracts, and furthermore, it seems that under the written contracts for the Quasi-Loan Contracts prepared in the name of Corporation A representing the appellee and provided for the appellants, this clause is applied mutatis mutandis to the Quasi-Loan Contracts. Therefore, if Corporation A represented the appellee as argued by the appellants, this clause, which is an explicit provision contained in written contracts, can be regarded as the appellee's promise to subject itself to the civil jurisdiction of Japanese courts regarding a dispute arising from the contracts, and by reason of this clause, there is room to find the appellee to have clearly manifested the intention to subject itself to the civil jurisdiction of Japanese courts. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed. (1)

V Comment (2) 1 From Absolute Immunity Theory to Restrictive Immunity Theory a Matsuyama Case and Lower Courts' Judgments until Yokota Base Case In the Matsuyama case (1928), which concerned an alleged failure to honour promissory notes drawn by the Chinese Chargé d'Affaires in Tokyo, the Great Court of Judicature, the P 719 highest court in Japan at that time, held as follows: ‘[i]t is beyond doubt under international law that, in as much as no State acknowledges the authority of another except as an act of voluntary submission, a foreign State, in principle, is not amenable to

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our jurisdiction unless some peculiar ground, such as the fact of the proceedings being in rem, exists. There may be an exception only when such a State deliberately accepts our jurisdiction; and this may comprise occasions provided for by a treaty or those in which it has expressed its willingness to abide by the decision of our courts in the particular instance, or in contemplation of certain special cases.’ (3) Since then until recently, lower courts had consistently adopted the so-called absolute immunity theory held by the Great Court of Judicature. (4) However, in the 1990s, some lower courts began to imply that the so-called restrictive immunity theory should be adopted. (5) b Yokota Base Case Then, in the Yokota Base case (2002), in which residents near the Yokota Air Base in Tokyo brought an action against the United States for damages, and for an injunction to restrain the United States from allowing its military aircraft to take off and land at night, the Supreme Court held, in acknowledging ‘the accumulation of State practices by other States that attempt to restrict the scope of immunity,’ that ‘ [d]espite such recent trends, … it should be said that even today we can still recognize the survival of the foreign State's immunity from civil jurisdiction as a principle of customary international law, in cases in which a foreign State's act at issue could be considered a sovereign act’ and that the nighttime landing practice ‘carried out by the aircraft of the U.S. Armed Forces at the Yokota Base… is nothing but an official activity of the U.S. Armed Forces in Japan,’ and ‘ [b]ecause the nature and purpose of this activity clearly show its character as a sovereign act, there can be no doubt, under customary international law, of its immunity from civil P 720 jurisdiction’. (6) While this judgment did not rely upon the so-called absolute immunity theory anymore and doubted the existence of the customary international law rule that requires States to grant immunity from civil suit for acts jure gestionis, it was not clear whether the Supreme Court adopted the restrictive immunity theory since it stated nothing about the question how the case should be dealt with for acts jure gestionis. (7) This case concerned military aircrafts taking off and landing, which are usually considered as an act jure imperii for which immunity is granted under both theories. This may partly explain the indecision of the Supreme Court about the adoption of the restrictive immunity theory. (8) c Movements after Yokota Base Case After some subsequent judgments in which the courts implied the adoption of the socalled restrictive immunity theory, (9) the Tokyo District Court declared the adoption of that theory in the case that concerned bonds issued by the Nauru Finance Corp. under guarantee by the Republic of Nauru, in stating that, ‘under the actual situation where States’ acts are not limited to the inherent sovereign acts, and States perform commercial and industrial transactions …, the restrictive immunity theory should be adopted, in which the acts jure imperii are distinguished from the acts jure gestionis and immunity is granted only in relation to the former acts.’ (10) Likewise, in the case in which the plaintiff who had been dismissed by the Georgia Ports Authority claimed for reinstatement, the court adopted explicitly the so-called restrictive immunity theory. (11) Thus, after the Yokota Base case, the lower courts began to adopt explicitly the so-called restrictive immunity theory. (12) Furthermore, it should be noted that the General Secretariat of the Supreme Court abolished in 2000 the Circular Notice concerning procedures to be followed when a foreign State is sued. (13) This notice required a lower court to submit to the Foreign Ministry, through the Supreme Court, a request for an inquiry as to whether the State P 721 has an intention of responding to the suit. After this abolition, it would be sufficient that courts take the procedure of service in the ordinary course prescribed by the Code of Civil Procedure even in cases where foreign States are sued. (14) It was also an influential event that the United Nations Convention on Jurisdictional Immunities of States and Their Property was adopted in 2004. (15) d Ambiguity under the New Framework Against the background of those recent changes, the Supreme Court finally declared the adoption of the so-called restrictive immunity theory, in stating that ‘it should be regarded that the international customary law whereby a foreign state shall also be immune from the civil jurisdiction of the forum state for its acts under private law or acts for business administration does not exist any longer’. Having long been awaited, such a declaration has been welcomed almost unanimously. (16) However, the framework the Supreme Court established still has certain ambiguity. First, in relation to the acts jure privatorum or gestionis, the Supreme Court established the rule that ‘a foreign state shall not be immune from the civil jurisdiction of Japanese courts… unless there are special circumstances where the exercise of civil jurisdiction by Japanese courts is likely to infringe the state's sovereignty’. What would be the case in which the exercise of civil jurisdiction in relation to the acts jure privatorum or gestionis is likely to infringe the foreign State's sovereignty? If the exercise of civil jurisdiction is likely to cause such an infringement, then should not the acts in relation to which civil jurisdiction is exercised rather be the acts jure imperii? (17) Although ‘it seems contradictory to argue that such an exercise of jurisdiction as permitted under international law could infringe upon the sovereignty of the foreign State,’ (18) it appears

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that, in the Supreme Court's view, such an infringement would occur even by the exercise of civil jurisdiction in relation to the acts jure privatorum or gestionis (19) and that, in such a case, the Japanese courts should restrain from exercising civil jurisdiction from the viewpoint of comity. Such a concern might have to do with the criteria the Supreme Court adopted with which the acts jure privatorum or gestionis are distinguished from the acts P 722 jure imperii: whether the acts ‘can be conducted by a private person’ or not. Then, the case in which the exercise of civil jurisdiction in relation to the acts jure privatorum or gestionis is likely to infringe on the sovereignty of the foreign State would involve such acts of which the object is sovereign. (20) If it is the case, there would be a considerable risk that, even after the explicit adoption of the so-called restrictive immunity theory by the Supreme Court, the lower courts would continue to grant immunity in most cases by using this ‘special circumstances’ condition. (21) However, considering that this issue necessarily includes the complicated political factor, (22) the flexibility the Supreme Court introduced with this condition can be positively appreciated. (23) In fact, are the criteria by nature of the acts always so clear and useful for the distinction of the two kinds of acts that no defendant State would be offended by the decision? (24) How about labour contracts (25) or the agency service for obtaining the US green card provided by another State? (26) Thus, the appreciation of this condition introduced by the Supreme Court is divided. Second, it follows from the statement that ‘ [i]mmunity of a state from the civil jurisdiction of the courts of another state is recognized based on the idea that… they should mutually respect their sovereignty’ that the Supreme Court considered that immunity of a foreign State is based upon the public international law, not upon the private international law, which regulates international civil disputes not only between individuals but also between individuals and other actors such as foreign States. Thus, in the Supreme Court's view, even under the so-called restrictive immunity theory, which pays more attention to the acts than the subjects that do acts, (27) it is required that the P 723 defendant is a foreign State or its agent as the subject in the public international law. Then, what about the case where the defendant is a constituent unit of a federal State or a political subdivision of the State? Although lower courts recognized that the State of Georgia could enjoy jurisdictional immunity, (28) academic opinions were divided. (29) The Supreme Court recently affirmed the lower courts' view. (30)

2 Waiver from Immunity a Traditional View As for the waiver from jurisdictional immunity, the Great Court of Judicature expressed in the above-mentioned Ruling of 1928 a strict view in stating that an intention to waive immunity ‘must always and necessarily be made between the States concerned,’ and thus ‘although an agreement might be concluded between a foreign State and an individual Japanese subject in which the former, on its part, agreed to be subjected to the jurisdiction of Japan, the agreement would not operate per se to bring that State under our jurisdiction’. Since then, apart from one case where a foreign State was a plaintiff, and the Japanese court thus affirmed jurisdiction in stating that the plaintiff had waived immunity by appearing voluntarily before the court, (31) until recently there had been no case in which the form of the waiver was involved. In practice, based on the ruling held by the Great Court of Judicature, the lower courts followed the procedure required by the above-mentioned Circular Notice issued by the Supreme Court. (32) However, in academic opinions, some authors claimed that the waiver from immunity should be permitted even in the case of the explicit expression to an individual in an agreement. (33) b Recent Judgments Recently, in a case where the Nauru Finance Corp., as well as the Republic of Nauru were defendants, the Tokyo High Court referred to the form of the waiver from immunity, but P 724 only in the case of foreign public legal persons. (34) It held that, in such a case, ‘the form with which the foreign public legal person expresses the intention to the other State for the waiver from immunity should not be considered as always the same as the form required for the case in which a foreign State waives immunity to the other State,’ and that, ‘when there is an agreement for the waiver from such jurisdictional immunity between a foreign public legal person and an individual such as a national in the other State, such an agreement should not be considered as void for the reason that it has not been expressed directly to the other State’. Then, in a related case, the Tokyo District Court referred to the existence of a jurisdiction clause in an agreement between a foreign State and an individual as one of the reasons for not granting the Republic of Nauru jurisdictional immunity. (35) c Significance and Problems In this judgment, the Supreme Court also changed the rule established by the Great Court of Judicature with regard to the waiver from jurisdictional immunity, in stating that a foreign State shall not, in principle, be immune from Japan's civil jurisdiction by expressly consenting to such jurisdiction in a written contract concluded with private parties. The rule newly established by the Supreme Court is widely accepted. (36)

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The problem is that, in the present case, there was no jurisdiction clause in the contracts in question and merely a choice-of-law clause that designates Japanese law as the applicable law. (37) In the Supreme Court's view, is the choice-of-law clause a valid form for the waiver from jurisdictional immunity? Although one commentator affirmed it, (38) the answer would be negative since the Supreme Court mentioned that the jurisdiction clause included in the order forms ‘is applied mutatis mutandis to the Quasi-Loan Contracts’. (39) By the way, was it really necessary to refer to the form of the waiver from immunity in the present case, in which the acts of the defendant State were qualified as acts jure privatorum or gestionis? The only explanation in favour of the Supreme Court may be that the Supreme Court mentioned it in preparation for the case where the immunity should be granted because of the special circumstance condition in relation to the acts jure privatorum or gestionis. (40) 3 Conclusion The above-mentioned ambiguity was not entirely cleared by the new law enacted on 17 Jurisdiction over Foreign States). (41) Whereas it was made clear that the choice-of-law clause is not a valid form for the waiver from jurisdictional immunity, (42) the framework established by the Supreme Court can be perhaps accepted under the new Act, since no provision was introduced as regards the criteria for distinguishing ‘private law transactions’ from sovereign acts, which would leave considerable room for the interpretation and courts' discretion. It is possible that courts would determine what ‘private law transactions’ are, based on the nature of transactions, with the reservation that they adapt the tentative conclusion by the consideration of special circumstances. (43) We will have to wait for the development of case law and academic discussion in order that such ambiguity will be totally resolved.

P 725 April 2009 and entered into force on 1 April 2010 (the Act on Civil

Dai Yokomizo (1) P 725

References Yokomizo Dai: Nagoya University, Graduate School of Law The translation is available on . Another translation is available in: J.A.I.L., Vol. 49 (2006) 144. 2) The following comment is based on my previous case note in J.A.I.L., Vol. 51 (2008) 485. 3) Daishin'in [Imperial Supreme Court] 28 December 1928, 7 Daishin'in Minshū 12, 1128, Matsu-yama & Sano v. The Republic of China, translated in: Annual Digest and Reports of Public International Law Cases, Vol. 4,168. 4) Aomori District Court, 14 February 1956, Rōdō hō Minshū 7, 103, translated in: J.A.I.L., Vol. 2 (1958), 140, International Law Reports, Vol. 23, 265; Fukuoka High Court, 9 June 1954, Kakyu Minshū 7, 629; Tokyo District Court, 16 March 1957, Rōdō hō Minshū 8, 243, translated in J.A.I.L., Vol. 2 (1958) 144, International Law Reports, Vol. 24, 226; Tokyo District Court, 20 April 1957, Rōdō hō Minshū 8,255; Yokohama District Court, 19 May 1960, Rōdō hō Minshū 11, 527; Tokyo District Court, 19 September 1960, Kakyu Minshū 11, 1931. For these judgments, see K. Hirobe, Immunity of State Property: Japanese Practice, Netherlands Yearbook of International Law, Vol. 10 (1979)233; Y. Iwasawa, Japan's Interactions with International Law: The Case of State Immunity, in Nisuke Ando ed., Japan and International Law: Past, Present and Future (1999) 129-131. 5) Tokyo High Court, 25 December 1998, Hanrei Jihō 1665,64; Tokyo District Court, 30 November 2000, Hanrei Jihō 1740, 54, translated in: J.A.I.L., Vol. 44 (2001) 204, but affirmed in part, reversed in part, Tokyo High Court, 29 March 2002, unpublished, which again adopted the so-called absolute immunity theory. 6) Supreme Court, 12 April 2002, Minshū 56, 729, X v. United States, translated in: J.A.I.L., Vol. 46 (2003) 161. 7) A. Takakuwa, Case Note, Minshōhō Zassi, Vol. 127 (2003) 874; D. Yokomizo, Case Note, 120 Hōgaku Kyōkai Zassi (2003) 1067. 8) A. Takakuwa, ibid., 872, 874; A. Kotera, Kokusai Hō Hanrei no Ugoki [Recent Development of Case Law in International Law], Jurisuto 1246, 254; T. Mizushma, Case Note, American Journal of International Law, Vol.97 (2003) 410; T. Mizushma, Foreign State Immunity in Japanese Courts at the Beginning of the Twenty-First Century, J.A.I.L., Vol. 50 (2007) 101. 9) Yokohama District Court, 29 August 2002, Hanrei Jihō 1816, 86; Tokyo District Court (Hachioji Branch), 23 May 2003, unpublished. 10) Tokyo District Court, 31 July 2003, Hanrei Jihō 1850, 84. ★ )

1)

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11) Tokyo District Court, Interlocutory Judgment, 29 September 2005, Hanrei Jihō 1901, 77,

12) 13) 14)

15) 16) 17) 18) 19) 20)

reversed, Tokyo High Court, 4 October 2007, Hanrei Jihō 1997,155 [for another reason]. As other examples, Tokyo District Court, 14 October 2004, Hanrei Jihō 1901,77, in which the State airline of the Republic of Turkey was sued for involvement in the alleged mistreatment of Tunisians who were denied landing in Japan; Tokyo District Court, 27 December 2005, Hanrei Jihō 1928, 85, in which brokerage contracts concerning the acquisition of Saudi Arabia's Embassy premises were at issue. As the only exception, Tokyo High Court, 5 February 2003, reprinted in: Minshū 60, 2554. The Secretary General of the Supreme Court, Circular Notice Concerning Inquiries of an Intention to Respond in Civil Cases against Foreign States (Civil Second, No. 425), 14 December 1994, Saibansho Jihō 1137, 6. J. Hayashi, Gaikoku wo aitegata to suru minji jiken ni kansuru ōso ishi no umu to no shokai ni tsuite' to daisuru tsutatsu no haishi ni tsuite [On the abolition of Circular Notice ‘Concerning Inquiries of an Intention to Respond in Civil Cases against Foreign States’], Minji Hō Jōhō 167 (2000), 43. The Convention was approved by the Diet on 10 June 2009, and the Cabinet decided its acceptance on 11 May 2010. M. Miki, Case Note, Jurisuto 1342, 177, 180; K. Kawamura, Case Note, Meiji Gakuin Hōka Daigakuin Rō Rebyū, Vol. 6 (2007) 46; S. Furuya, Case Note, Law & Practice, Vol. 1 (2007) 273. M. Wachi, Case Note, Kin‘yū Shōji Hanrei, Vol. 1254 (2006) 3. T. Mizushima, supra note 8, 112. The same view can be found in M. Murakami, Shuken menjo ni tsuite [On Sovereign Immunity], Hōritsu Jihō, Vol. 72, No. 3 (2000) 16. Y. Nakanishi, Case Note, Lexis Hanrei Sokuho No. 14 (2006) 91-92; S. Taira, Case Note, Hōgaku Kyōshitsu 314 (2006) 3.

21) Contra, M. Miki, supra note 16, 180. However, in fact, in a judgment, the Tokyo High

22) 23) 24) 25)

26) 27)

28)

29) 30) 31) 32) 33) 34) 35) 36) 37) 38) 39) 40) 41)

Court granted immunity in using this condition. Tokyo High Court, 4 October 2007, supra note 11. The Supreme Court dispelled such a concern in a recent case, in adopting the strict interpretation of the special circumstances. Supreme Court, 16 October 2009, Minshū 63-8, 1799. M. Wachi, supra note 17, 3. A. Kotera, Case Note, Hanrei Jihō 1968 208, 209; T. Ōmine, Case Note, Hōritsu no Hiroba 73 (2007) 78 (with reservation). M. Hayashi, Case Note, Kin‘yū Shōji Hanrei 1259 (2007) 5. Lower courts' judgments are divided. Compare Tokyo District Court, Interlocutory Judgment, 29 September 2005, supra note 11 and Tokyo High Court, 4 October 2007, supra note 11. The Supreme Court held in a recent case (supra note 21) that the employment relationship between a Japanese and the State of Georgia should be characterized as acta jure privatorium or gestionis, in practically considering the object of the employment contract. See, D. Yokomizo, Case Note, Minshōhō Zassi, Vol. 144, No. 3 (2011) 350, 361; K. Yakushiji, Legislation of the Act on Civil Jurisdiction over Foreign States, Acceptance of the U. N. Convention on Jurisdictional Immunity of States and Their Property, and Their Possible Effects upon the Jurisprudence of Japanese Domestic Courts on State Immunity, J.A.I.L., Vol. 53 (2010) 202, 233. Cf. Tokyo High Court, 19 December 2000, Kin'yū Shōji Hanrei 1124 (2000) 36. Cf. M. Dogauchi, Case Note, Shihō Hanrei Rimakusu, No. 36 (2008) 149, which explains that, by the transition to the restrictive immunity theory, the nature of the immunity from civil jurisdiction has changed from the limitation based upon the attribute of the defendant to that based upon the content of the litigation. Tokyo District Court, Interlocutory Judgment, 29 September 2005, supra note 11; Tokyo High Court, 4 October 2007, supra note 11. In another judgment, the Tokyo High Court referred to the possibility of granting a foreign public legal person jurisdictional immunity, at least exceptionally. Tokyo High Court, 29 March 2002, supra note 9. As affirmative, N. Takasugi, Case Note, Juristo 1311 (2006) 217; as negative, Y. Sakurada, Case Note, Lexis Hanrei Sokuho, 10 (2006) 102. Supreme Court, 16 October 2009 (supra note 21). Tokyo District Court, 23 December 1955, Kakyu Minshū 5, 2679, translated in: J.A.I.L., Vol. 2 (1958) 138; International Law Reports, Vol. 23, 210; affirmed, Tokyo High Court, 18 July 1957, Kakyu Minshū 8, 1282. Ex. Tokyo District Court, 14 March 1997, Hanrei Jihō 1612, 101. Ex. Hideo Saito et al. eds., Chūshaku Minji Soshō Hō (5) [Commentary on Code of Civil Procedure (5)] (2nd ed., 1991) 436 [Kazuhiko Yamamoto]. Tokyo High Court, 29 March 2002, supra note 5. Tokyo District Court, 31 July 2003, Hanrei Jihō 1850, 84. See, ex. the U. N. State Immunity Convention, sec. 7, para. 1(b); A. Kotera, supra note 23, 210. A. Takakuwa, Case Note, Jurisuto 1326 (2007) 214. M. Kawano, Case Note, Bessatsu Jurisuto 185 (2007)165. Y. Nakanishi, supra note 20, 92. A. Kotera, supra note 23, 210. Act No. 24 of 24 April 2009. The English translation is available in: J A.I.L., Vol. 53 (2010) 830.

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42) Section 5, para. 2. 43) See, T. Tobisawa, Chikujō Kaisetsu Tai Gaikoku Minji Saibanken Hō [Commentary on

1)

the Act on Civil Jurisdiction over Foreign States] (Shōji Hōmu, 2009) 37; K. Koshiyama, Case note, Hanrei Sokuhō Kaisetsu, No. 6 (2010) 157, 160, which claim that the ‘special circumstances’ condition still works with regard to the sec. 8 relating to commercial transactions. Contra, M. Dogaichi, Gaikoku Tō ni taisuru Wagakuni no Minji Saiban Ken [Japan's Civil Jurisdiction against Foreign States], Juristo 1398, 65. Nagoya University, Graduate School of Law

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Case No. 66: International Civil Procedure Law – Jurisdiction – Place of Business of Corporations

Document information

Publication

Anja Petersen-Padberg

Business Law in Japan – Cases and Comments

(★ ) Supreme Court 16 October 1981, (1) Case No. 1980 o 130, ‘Malaysia Airlines’ Source: Minshū 35-7, 1224 = Hanrei Jihō 1020, 9 = Hanrei Taimuzu = 452, 77

Jurisdiction Japan

I Headnote(s)

Court

It complies with jōri to extent the jurisdiction of Japanese courts to a foreign corporation with a place of business in Japan with respect to a lawsuit for damages filed against such corporation.

Supreme Court of Japan

II Relevant Provisions Sections 4(4) and 4(5) of the Code of Civil Procedure (2)

Case date

16 October 1981

P 728

III Facts

Case number

Plaintiffs (and jokoku appellees) argue that the second instance court incorrectly interpreted and applied sections 4(4) and (5) of the Code of Civil Procedure and invalidly revoked, on insufficient grounds, the judgment of the first instance court dismissing the present case filed by the Plaintiffs on the basis that the case was not subject to the jurisdiction of the courts in Japan.

1980 o 130

Bibliographic reference

Anja Petersen-Padberg, 'Case No. 66: International Civil Procedure Law – Jurisdiction – Place of Business of Corporations', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 727 737

The present case has been raised by Japanese nationals against a foreign corporation for damages. Plaintiffs argue that A, an individual, was killed in the crash of an aircraft of the defendant (jokoku appellant), a corporation, in Tanju-kuban, Johor Bahru, Malaysia on 4 December 1977 during its flight from Penang to Kuala Lumpur which the decedent was on board under a passenger transport agreement concluded between the decedent and the defendant on the same day in Malaysia. The three Plaintiffs, that is, the decedent's wife and two children, require Defendant to pay damages of JPY 13,330,000 to each of them based on the decedent's claim for damages of JPY 40,454,442 arising from said crash which constitutes a default under said passenger transport agreement, the claim for which has been inherited equally by each of the three Plaintiffs.

IV Reasons A country's jurisdiction is exercised as an operation of its sovereignty and basically covers the same territory as the sovereignty, so that, in principle, the jurisdiction of Japan does not extend to foreign corporations with their principal places of business in foreign countries unless they elect to submit to the jurisdiction of Japan. However, with respect to cases in which the defendants are somehow legally related to our country, including those concerning land within our country's territory, it complies with jōri (i.e. it is reasonable) for the defendants to be subject to the jurisdiction of Japan regardless of their nationalities and locations. Given that there are no laws or regulations directly providing for international jurisdiction over such cases, and there are no established applicable conventions or generally accepted rules under international laws, its compliance with jōri determine the scope of such exceptions on the basis of fairness toward the parties and proper, prompt judgment. Further, it complies with jōri to subject the defendants to the jurisdiction of Japan with respect to cases in which, under the provisions of the Code of Civil Procedure of Japan concerning territorial jurisdiction, any of the forums, determined on the basis of the defendants' residences (Article 2 thereof), the defendants' offices or places of business in cases where the defendants are P 729 corporations or other associations (Article 4 thereof), the place of performance of the relevant obligations (Article 5 thereof), the defendants' assets (Article 8 thereof), the place where the relevant tortious act was committed (Article 15 thereof), or other factors specified in other provisions, is located in Japan. According to the lawful determination of the second instance court, the defendant was incorporated under the corporation law of Malaysia and has its principal place of business in that country, but appointed E as its representative in Japan and has a place of business in Tokyo, so it complies to jōri to subject the defendant to the jurisdiction of Japan despite the fact that it is a foreign corporation having its principal place of business in a foreign country. Therefore, the judgment of the second instance court affirming jurisdiction is reasonable and said judgment cannot be found invalid on the basis of insufficient grounds. For the findings of the court, the translation provided by the Judicial Research Council on the Supreme Court's homepage was closely followed.

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V Comment The ‘Malaysia Airlines’ decision is the leading case on international jurisdiction in Japanese civil procedure law. The Supreme Court decided that due to a lack of explicit law or regulations on international jurisdiction, courts must decide according to jōri (reason). (3) It complies with jōri to assume jurisdiction, if the court's jurisdiction does not violate the principles of fairness towards the parties and proper, prompt judgment. Further, it complies to jōri to subject the defendants to the jurisdiction if one of the provisions governing territorial jurisdiction of the Code of Civil Procedure is fulfilled, that is, sections 2, 4, 5, 8 and 15 CCP. The examination of ‘the principles of fairness towards the parties and proper, prompt judgment’ when deciding on the international jurisdiction became law in section 3-9, as part of the new rules on international jurisdiction, to be in force in May 2012 at the latest. (4) This will be further discussed below. The ‘Malaysia Airlines’ case is concerned with a claim for damages by the widow of a husband died when a plane of the defendant's crashed during a domestic flight in Malaysia. The ticket had been bought in Malaysia. Plaintiffs argued that it is reasonable to assume international jurisdiction of Japanese courts, since Defendant has a subsidiary in Japan.

P 730 Japanese citizen and her two children against Malaysian Airlines. Her

Section 4 (4) Code of Civil Procedure provides for a general jurisdiction where a company's office is located. Section 4(4) does not require that the transaction at issue, which is here the purchase of the flight ticket, must be made at the office (subsidiary or representative office) in Japan.

1 International Conventions The Supreme Court had first of all to examine whether any international treaties with rules governing international jurisdiction had to be observed. There is no international treaty on jurisdiction and recognition of foreign judgments to which Japan is a contracting State. The plan of the Hague Conference on Private International Law to establish a Convention on Jurisdiction and Recognition, in which Japan was very interested, failed in the end. The remains of that attempt, the Hague Convention on Choice of Court Agreements, were adopted by the Conference on 30 June 2005. However, the Convention is so far ratified by only one country. (5) Japan signed the Convention for the Unification of Certain Rules for International Carriage by Air (The Warsaw Convention) of 1929, which contains in Article 28(1), that is, a rule on international jurisdiction. However, the Warsaw Convention does not apply to domestic flights.

2 Background The question to be raised is why did the Supreme Court not base its decision on the CCP's jurisdiction rules alone? Are there really no rules on international jurisdiction in the CCP? Japan enacted its first Civil Procedure Act in 1890, and this was closely modeled after the German Code of Civil Procedure of 1877. (6) The first book provides for rules on territorial jurisdiction. It can be derived from the wording of the provisions and the historical P 731 background that the German lawmaker considered international cases, when establishing the jurisdiction rules'. (7) According to German case law and literature, the rules on territorial jurisdiction of the German CCP are ‘dually functional’, that is, rules on national jurisdiction indicate international jurisdiction of German courts. (8) In very exceptional cases, German courts may assume jurisdiction, even if no jurisdiction rule has been fulfilled, in order to avoid the plaintiff's loss of rights. Under German law, jurisdiction may not be denied if conditions are fulfilled under the rules of the CCP. (9) However, the Japanese lawmaker was also in favour of the rules on jurisdiction governing international cases as well. This becomes clear at the latest with the comprehensive revision of the Japanese Civil Procedure law in 1926. First, a number of the jurisdiction rules clearly refer in their wording to cases with an international context. (10) Further, the protocol of the reform in 1926 proves that lawmakers engaged in discussion of crossborder cases. It can be read in the protocol that ‘the venue of the place of performance can be of interest in international cases’ (11) and, ‘the venue of assets is to enable a court action against foreigners without a domicile in Japan’. (12) The first decisions on ‘international’ jurisdiction of the Japanese Supreme Court between 1905 and 1908 applied the rules on territorial jurisdiction of the CCP directly. (13) In 1959, the Tokyo District Court considered for the first time the ‘principle of fairness’ when deciding on its international jurisdiction over the venue of seizable property. The Court had to decide on the complaint of an US salesman against his former US employer for payment of relocation costs after his dismissal. The salesman had argued that Japanese courts could assume jurisdiction over the venue of the property, based on the existence of Defendant's product sample book in Japan. The court dismissed the action P 732 due to a lack of jurisdiction. (14) It decided that it would violate the principle of fairness between the parties to assume jurisdiction based on Defendant's assets of only small value. According to the court, the relation of such property to Japanese territory was weak. As a matter of fact, the venue of property had also been the cause of trouble under the (original) German law. (15)

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Subsequent court decisions applied the CCP rules governing the territorial jurisdiction again directly to assume international jurisdiction of Japanese courts. (16) In the 1970s the theory of Ikehara became popular, that is, that courts must basically decide on the international jurisdiction pursuant to jōri in consideration of the principles of fairness, and prompt and proper proceedings. (17) Rules on the territorial jurisdiction of the CCP also had to be ‘taken into consideration’. Ikehara was of the opinion that the lawmaker had had no international cases in mind when establishing the rules on territorial jurisdiction and therefore courts' decisions on international jurisdiction must be based on ‘jōri’. Ikehara's approach has remained the prevailing theory until today. (18) Only a minor voice in literature is of the opinion that the rules on territorial jurisdiction are double-functional, that is, they govern both national and international jurisdiction. (19) The Supreme Court's ‘Malaysia Airlines’ decision, which considers both the rules governing territorial jurisdiction of the CCP and the principle of fairness to the parties in determining the international jurisdiction of Japanese courts, is understandable in light of the above-described prevailing opinion in literature. However, a discussion of the lawmaker's intent regarding the rules on territorial jurisdiction is missing.

3 Special Circumstances Approach The ‘Malaysia Airlines’ decision has been criticized for leaving open the issue of how to with regard to the principles which must be considered under jōri. (20) To further clarify the legal basis for the decision on international jurisdiction, subsequent lower court decisions have established a two-step ‘rule and exception’ approach for the examination of international jurisdiction. (21) According to this, Japanese courts may in principle assume international jurisdiction if: (1) a forum of the Code of Civil Procedure applies and, (2) no special circumstances (tokudan jijō) are given (under consideration of the fairness between the parties, and prompt and proper proceedings), according to which jurisdiction must be denied. The Supreme Court confirmed the two-step ‘special circumstances approach’ in its decision of 11 November 1997. (22) As a result, courts will assume jurisdiction as a rule if jurisdiction is indicated by the provisions of the CCP and, as an exception would dismiss the action, should ‘special circumstances’ be given.

P 733 weigh the results of the rules of territorial jurisdiction pursuant to the CCP

Since both the ‘original’ German and later the Japanese lawmakers have enacted jurisdiction rules which are also eligible for international cases, and, since the jurisdiction rules of the Japanese CCP provide for connecting links with the Japanese territory, it comes as no surprise that in most cases when a rule on territorial jurisdiction was fulfilled, courts have also assumed jurisdiction. (23) In the following cases, courts have denied jurisdiction due to special circumstances, even when jurisdiction was given according to a rule on territorial jurisdiction of the CCP: – –

no access to evidence caused by the lack of diplomatic relations to Taiwan; (24) pending parallel proceedings in a foreign country; (25)

– –

a joint defendant had any relations to Japan; (26) unpredictability of the ‘place of performance’, in particular since parties have neither agreed on a place of performance nor on the law applicable to the contract; (27) a negative declaratory action at the forum of the property; (28) property of small value. (29)

P 734

– –

The restriction of the venue of the place of performance according to established case law can cause a refusal to recognize a foreign judgment based on that venue, see below.

4 Special Circumstances According to Section 3–9 Revised CCP According to the new rules on international jurisdiction of the Japanese CCP, the consideration of ‘special circumstances’ will be necessary. Section 3-9 CCP, which is based on the two Supreme Court decisions on international jurisdiction in civil matters unknown to European or national German law, reads: If a court has jurisdiction [according to the rules of the CCP] with the exception of courts having exclusive jurisdiction on the case, it may deny jurisdiction due to the nature of the case, the burden of response of the defendant, the location of evidence or due to other reasons according to which jurisdiction of Japanese courts would be inappropriate to the parties or prompt and proper proceedings are not to be expected. This general rule does not apply to cases with exclusive jurisdiction of Japanese courts. Under the new law, rules on exclusive jurisdiction were re-established. (30) According to sections 3–5 revised CCP, Japanese courts have exclusive jurisdiction in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies, or of the validity of the decisions of their organs, (31) in proceedings which have as their object the validity of entries in public registers, (32) if the register is located P 735

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P 735 in Japan, and, in proceedings concerned with

the registration or validity of intellectual property rights, if registration must be made in Japan. It can be assumed that courts will apply section 3–9 CCP in a restrictive manner. Under the current law, as shown above, courts have denied jurisdiction only in exceptional cases. The lawmaker should have taken the chance to consider the above decisions assuming ‘special circumstances’ and denying jurisdiction in order to amend existing rules, for example, with regard to negative declaratory actions at the venue of the property. Further, the lawmaker could have established a special rule with regard to lis pendens cases (parallel proceedings), that is, court actions between the same parties on identical or related matters. Finally, it seems questionable whether the ‘special circumstances rule’, that is, the new sections 3–9 should have been included at all. If a rule on territorial jurisdiction is fulfilled under the CCP, the case will have a connecting link with Japanese territory. In this case, a plaintiff must have the right to receive a court decision from a Japanese court. Courts will, in the end, assume jurisdiction in most of the cases, based on the jurisdiction rules. However, it will take time and effort to discuss ‘special circumstances’ as shown in the past cases and, the ‘special circumstances rule’ causes legal uncertainty.

5 Broad Jurisdiction Rules Generally, the provisions governing jurisdiction under the CCP as a rule provide for any kind of ‘connecting link’ to Japanese territory, however, they also provide for broad jurisdiction of Japanese Courts. If the new rules on international jurisdiction come into force in May 2012, they will provide for a broader jurisdiction compared to the European Regulation EC/44/2001 or German national law due to the new jurisdiction rule on ‘doing business’ and a new consumer venue, see below. Numerous venues allow Japanese courts to assume jurisdiction. Rules which allow the assumption of jurisdiction even in cases with a (possibly stronger) link to a foreign country are, for instance, the following: (1)

General jurisdiction at the principal place of business of a company (section 3-1 (3) CCP revised version) or at a subsidiary of a foreign company in Japan (section 3-1 (3) revised CCP). As the ‘Malaysian Airlines’ case shows, a case with quite a strong link to a foreign country may be filed at the venue of the subsidiary, even if the case is not directly related to the subsidiary. Also, for instance, claims based on the infringement of foreign IP rights may be filed at the general venue of a company. (33)

(2)

Further, the venue at the location of (any) seizable property (section 3-3 (3)) can provide jurisdiction to Japanese courts. However, money claims cannot be filed when the defendant's property is located in Japan if the value of the asset is extremely low. (34) Courts may also assume jurisdiction with regard to joint defendants (e.g. domiciled in a foreign country), if the claims against the joint defendant are based on the same legal and factual grounds (e.g. joint tortfeasors) (sections 3–6 revised CCP). According to a newly-established rule, jurisdiction can be assumed against a foreign company engaged in business in Japan which continuously carries out transactions in Japan, but does not have its office in Japan and in the circumstances in which the action relates to the business in Japan (section 3-3 (5) revised CCP). Jurisdiction over a foreign company can also be assumed if that company conducts business through third-party entities such as agencies and subsidiaries. It also allows an action to be filed in Japan if the defendant is engaged in business in Japan from a foreign country by means of the internet or other modes of communication. (35) A consumer may file a complaint before a Japanese court against a foreign company (section 3-4 (1) revised CCP). (36)

P 736

(3) (4)

(5)

So far, as a rule, courts have basically assumed jurisdiction if one of the rules governing territorial jurisdiction was fulfilled. Under the revised law, Japanese courts have an even broader jurisdiction. Important restrictions based on jōri have so far been made with regard to jurisdiction at the place of performance and with regard to jurisdiction against joint defendants. However, dismissal of cases depends on the individual circumstances of the case. It can be presumed that, also under the new rules, courts will dismiss an action due to ‘special circumstances’ only in exceptional cases.

6 Indirect Jurisdiction The judgment of a foreign country shall be recognized in Japan only when the jurisdiction of the foreign court is recognized (section 118 (1) CCP). Japanese courts decide on the jurisdiction of the foreign court under the assumption of a hypothetical case that the action was filed in Japan. It must be examined whether Japanese courts would have P 737 assumed jurisdiction under Japanese law (indirect jurisdiction). Since Japanese courts can establish jurisdiction on broad jurisdiction rules, the first of four conditions for the

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recognition of a foreign judgment will be usually fulfilled. However, indirect jurisdiction can be denied due to ‘special circumstances’, which have so far become relevant when jurisdiction has had to be established over the place of performance. (37) Anja Petersen-Padberg (1) P 737

References ★ )

1) 2)

Anja Petersen-Padberg: (University of Cologne) Court of Second Instance: Nagoya High Court, 12 November 1979, Hanrei Taimuzu 402, 102 = J.A.I.L. 25 (1982) 165. Section 4 (4), (5) of the Code of Civil Procedure reads: (4)

3)

4)

5)

6) 7)

8) 9) 10)

11) 12) 13) 14)

The general venue of a juridical person or any other association or foundation shall be determined by its principal office or business office, or by the domicile of its representative or any other principal person in charge of its business if it has no business office or other office. (5) The general venue of a foreign association or foundation, notwithstanding the provision of the preceding paragraph, shall be determined by its principal office or business office in Japan, or by the domicile of its representative or any other principal person in charge of its business assigned in Japan if it has no business office or other office in Japan. jōri can be translated with ‘reason’. It is a basis to decide a legal question without having an explicit legal rule. jōri has a more than 1400 year old history. It still plays a role in international civil procedure law and international private law to fill legal gaps. It is remarkable that courts and literature apply this legal institute without further defining it and without a discussion whether its application is justified (regarding the historical background and its role in Japanese international civil procedure, see A. Petersen, Das internationale Zivilprozessrecht in Japan (International Civil Procedure Law in Japan), 2003, 55. On 28 April 2011, the Japanese National Diet passed the ‘Act for Partial Amendment of the Code of Civil Procedure and the Civil Interim Relief Act’. The Act was promulgated on 2 May 2011. It will enter into force on the date to be fixed by a Cabinet Order within one year from promulgation. The Act contains provisions on international jurisdiction of in civil matters. An annotated English translation of the new rules was published by K. Takahashi, Japan's New Act on International Jurisdiction, May 2011 at . In 1994, the Hague Conference began to work on an agreement on international jurisdiction and recognition on foreign judgments. This agreement failed around 2002, however, the ‘Convention on Choice of Court Agreements’ was concluded on 30 June 2005. This Convention was signed by the European Union and the US in 2009 and was ratified by Mexico in 2007 (please see the ‘status’ of the Convention No. 37 as published on the website: ). The Convention also provides for rules on the recognition of foreign judgments. Regarding the historical background of jurisdiction rules of the Japanese CCP, see A. Petersen, ibid,. 43 et seq. For instance, the property venue should provide jurisdiction of German courts over foreign citizens. Further, according to the will of the lawmaker, the exclusive venue for immovable property should avoid that a foreign country decides on real estate in German territory, etc. Moreover, some venues are based on Roman law (actor sequitor forum rei, forum contractus) or law on former States of German territory and were applied for centuries to decide on the jurisdiction in cases in which foreigners were involved. This is proven in the excellent habilitation treatise of J. Schroder, Internationale Zuständigkeit (International Jurisdiction), 1971. German Federal Supreme Court, BGHZ 156, 157; BGHZ 115, 90, 91; WM 1997, 1310, 1311. H. Schack, Internationales Zivilverfahrensrecht (International Civil Procedure Law), 5th ed., 2010, marginal note 266. An exception is the decision of the German Federal Supreme Court of 2.7.1991 (XIZR 206/90), BGHZ 115, 90 on the venue of property (see below, note 15). For instance, venue for persons without a domicile in Japan (sec. 4, para. 2 CCP current version), the venue for foreign associations and foundations (sec. 4 (5) CCP current version), venue at the place of property for persons without domicile in Japan (sec. 5, No. 4 CCP current version), etc. Shihōshō (Ministry of Justice) ed., Minji soshō hō kaisei chōsa iinkai sokkiroku (Minutes of the commission for the revision of the civil procedure act), 1929, 17. Shihōshō (Ministry of Justice) ibid., 10. Daishin'in [Imperial Supreme Court], 15 February 1905, Minroku Vol. 11, 175; ibid., 18 October 1906, Minroku Vol. 22, 916; ibid., 26 June 1908, Minroku Vol. 14, 786. Tokyo District Court, 11 June 1959, Hanrei Jihō 191, 13.

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15) The venue of property is also in dispute among scholars in Germany. The Federal

16)

17) 18)

19) 20) 21)

22)

23) 24) 25)

26) 27) 28) 29) 30) 31)

32) 33) 34) 35) 36)

37)

Supreme Court had decided that property in Germany alone would be insufficient to justify jurisdiction; rather the case must have a sufficient relation to German territory (Federal Supreme Court of 2July 1991 (XIZR 206/90), BGHZ 115,90). It is interesting to note that the property in that case had a value of DM 150,000, approx. EUR 75,000. Tokyo District Court of 27 May 1965, Kaminshū Vol. 16, No. 5, 923 = J.A.I.L. 11 (1967) 197 (sec. 15 CCP, torts); ibid., of 26 April 1965 Juristo 349, 120 = J.A.I.L. 10 (1966) 189 (sec. 4 (3) CCP Subsidiary of Foreign company); ibid., 17 October 1967, Kaminshū Vol. 18 No. 9/10,1002 = J.A.I.L. 14 (1969) 136 (choice of forum agreement). S. Ikehara/M. Hiratsuka, Shōgai soshō ni okeru saiban kankatsu (Jurisdiction with regard to proceedings relating to foreign countries) in: C. Suzuki/A. Mikazuki, jitsumu minji soshō kōza (Practical Civil Procedure) Vol. 6 (1971) 3. H. Takahashi, Kokusai saiban kankatsuken (International Jurisdiction) in: T. Sawaki/Y. Aoyama, Kokusai minji soshō hō no riron) (Theory of International Private Law), 1987, 31; R. Yamada (in: T. Sawaki (ed.), Kokusai shihō kōgi (Seminar of International Private Law), 1970, 231; K. Shindo, Minji soshō hō (Civil Procedure Law), 1986, 58. Y. Fujita, ‘Kokusaiteki saiban kankatsu kitei' to sono hikakuhōteki kenkyū, (Comparative law studies on ‘rules regarding international jurisdiction’), Hanrei Taimuzu 856, 15. K. Ishiguro, Shōgai soshō ni okeru uttae teiki (Filing a court action in international cases) in K. Shindo, et al. (ed.), Kōza minji soshō hō (Civil Procedure Law Course), Vol. 2, 1984, 27; M. Takeshita, Kinyū Shōji Hanrei 637, 49. Tokyo District Court of 27 September 1982, Hanrei Taimuzu 487, 167 = J.A.I.L. 27(1984) 174; ibid., 15 February 1984, Hanrei Taimuzu 525, 132 = J.A.I.L. 28 (1985)243; ibid., 20 June 1986, Hanrei Taimuzu 604, 138 = J.A.I.L. 31 (1988) 216; ibid., 22 May 1991, Hanrei Taimuzu 755, 213, ibid., 19 June 1989, Hanrei Taimuzu 703, 240 = J.A.I.L. 33 (1990), 203; ibid.. 27 March 1989, Hanrei Taimuzu 703,264 = J.A.I.L. 33 (1990) 199; ibid., 28 July 1987, Hanrei Jihō 1275, 77 = J.A.I.L. 32 (1989) 160, ibid., 28 August 1989, Hanrei Taimuzu 710, 249; ibid. 29 January 1991, Hanrei Taimuzu 764, 256 = J.A.I.L. 33 (1990) 206. Supreme Court, 11 November 1997, Hanrei Jihō 1626, 74: ‘If one of the territorial jurisdictions as provided by the Code of Civil Procedure of Japan can be found in Japan, in principle, it is appropriate to subject the defendant to the jurisdiction of the Japanese court in an action brought to a Japanese court. However, if there are special circumstances in which handling of the proceedings in Japan is against the ideas of fairness of the parties, and assurance of just and speedy adjudication, the jurisdiction of the Japanese court should be denied.’ (Translation by the Supreme Court as provided on the website: ). However, in cases, in which the jurisdiction of Japanese courts was disputed by the defendant, it took the courts on an average two years to decide on the jurisdiction issue. Tokyo District Court, 20 June 1986, J.A.I.L. 31 (1988) 216. Tokyo District Court, 15 February 1984, J.A.I.L. 28 (1985) 243, Tokyo District Court, 29 January 1991, J.A.I.L. 35 (1992) 171. However, as a rule, jurisdiction will not be denied due to prior pending court proceedings in a foreign country between the same parties in an identical or related matter (Tokyo District Court, 9 October 1973, Hanrei Jihō 728, 79; Tokyo District Court, 19 June 1989, J.A.I.L. 33 (1990) 202). Tokyo District Court, 23 October 1990, Hanrei Jihō 1398, 87. Supreme Court, 11 November 1997, Hanrei Jihō 1626, 74, English translation is published on the website: . Tokyo District Court, 28 July 1987, Hanrei Jihō 1275, 77. Tokyo District Court, 11 June 1959, Hanrei Jihō 191, 13. The term ‘exclusive jurisdiction’ was abolished with the CCP Reform of 1926, A.Petersen, ibid., 45. Pursuant to Part VII, Chapter 2 Company Act (with the exception of part 4 and 6) and with regard to actions under Chapter 6, Part 2 of the Act on general foundations vested with legal capacity and general associations vested with legal capacity (ippan shadan hōjin oyobi ippan zaidan hōjin ni kansuru hōritsu), and with regard to similar actions concerning associations and foundations established under Japanese law and vested with legal capacity. This includes the registration of immovable property in Japan. Supreme Court, 26 September 2002, Hanrei Jihō 1802, 19 – ‘Card Reader’, see case no. 61 in this book. As mentioned, a book with product samples was considered to be property with too low a value, Tokyo District Court, 11 June 1959, Hanrei Jihō 191, 13. K. Takahashi, Japan's New Act on International Jurisdiction, May 2011, published on the website: . A forum selection clause in a contract with a Japanese consumer that designates a forum outside Japan will be unenforceable unless the Japanese consumer was domiciled in the designated forum when the contract was concluded (sec. 3-7 (5) (i) CCP new version). Courts have denied recognition of a foreign judgment due to a lack of jurisdiction at the place of performance since the venue was ‘not foreseeable’ for the defendant: Tokyo District Court, 31 January 1994, Hanrei Jihō 1509, 101 (dismissal of a default judgment of the High Court London).

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1)

(University of Cologne)

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Case No. 67: International Civil Procedure Law, Recognition of Foreign Judgments, Punitive Damages

Document information

Publication

Toshiyuki Kōno

Business Law in Japan – Cases and Comments

(★ ) P 739

Supreme Court, 11 July 1997, Case No. 1993 o 1762, Northcon I, Oregon Partnership v. Mansei Kyogyo Co. Ltd and Yoshitaka Katayama.

Jurisdiction Japan

Source: Minshū 51, 6, 2573, Saibansho Jihō 1199, p.3, Hanrei Jihō 1624, p.90; Hanrei Taimuzu 958, p.93; Kinyū Shōji Hanrei 1039, p.28, Shiryo ban Shōji Hōmu 163, p.278, IIC 1999, 480

Court

I Headnotes

Supreme Court of Japan

Recognition and enforcement of a foreign decision awarding punitive damages is contrary to public policy and must therefore be declined.

Case date

II Relevant Provisions

11 July 1997

Civil Execution Act, section 24 paragraph 2, Code of Civil Procedure, section 118 P 740

Case number 1993 o 1762

III Facts

Parties

The present case involves a claim by the appellee requesting the enforcement of a judgment of the Court of the State of California, USA. The original instance court has ascertained the following facts:

Claimant, Northcon I, Oregon Partnership Defendant, Mansei Kyogyo Co. Ltd and Yoshitaka Katayama

(1)

(2)

Bibliographic reference

Toshiyuki Kōno, 'Case No. 67: International Civil Procedure Law, Recognition of Foreign Judgments, Punitive Damages', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 738 - 743

(3)

The Civil Code of the State of California, USA, has a provision which allows the plaintiff to receive punitive damages for the purpose of deterrence and sanction on the defendant in addition to damages for the actual loss in litigation on the ground of breach of non-contractual duties, if there was a fraudulent act or similar acts on the part of the defendant (section 3294). The Superior Court of California ordered the appellees to pay compensatory damages of USD 425,251 and the cost of USD 40,104,71 cents, and in addition, ordered the appellee company to pay punitive damages of USD 1,125,000 by the judgment of 19 May 1982 (hereinafter, ‘the foreign judgment in the present case’) on the grounds that the appellees effected fraudulent acts against the appellants in relation to the conclusion of a lease agreement between the appellant and a subsidiary of the appellee, Marman Integrated Circuit Inc. Both the appellants and appellees appealed against this judgment to the Appellate Court of California, but the Court dismissed the appeal on 12 May 1987, and the foreign judgment in the present case came into effect.

IV Findings (1) In a claim for an enforcement judgment, whether the given foreign judgment fulfils the requirements of subparagraphs of section 200 of the Code of Civil Procedure (section 24, paragraph 3 of the Law on Civil Enforcement) is examined. Section 200 of the Code of Civil Procedure requires that the foreign judgment should not contradict public policy and good morals of Japan. One may not conclude that this requirement is not fulfilled solely by the fact that the foreign judgment contains an institution which does not exist in Japan, but if the given institution is against the basic principles or basic ideas of the legal order in Japan, the judgment should be regarded as being against public order in the above-cited provision. (2) It is evident that the system of punitive damages as provided by the Civil Code of the State of California (hereinafter, ‘punitive damages’) is designed to impose sanctions on the culprit and prevent similar acts in the future by ordering the culprit who had effected malicious acts to pay additional damages on top of the damages for the actual loss, and judging from the purposes, is similar to criminal sanctions such as fines in Japan. In contrast, the system of damages based upon tort in Japan assesses the actual loss in a pecuniary manner, forces the culprit to compensate this amount, and thus enables the recovery of the disadvantage suffered by the victim and restores the status quo ante (Judgment of the Supreme Court, Case No. 1988 o 1749, Judgment of the Grand Bench, 24 March 1993, Minshū 47-4-3039), and is not intended for sanctions on the culprit or P 741 prevention of similar acts in the future, that is, general prevention. Admittedly, there may be an effect of sanctions on the culprit or prevention of similar acts in the future by imposing a duty of compensation on the culprit, but this is a reflective and secondary effect of imposing the duty of compensation on the culprit, and the system is fundamentally different from the system of punitive damages whose goals are the sanctioning of the culprit and general deterrence. In Japan, sanctioning of the culprit and general deterrence is left to criminal or administrative sanctions. Thus, the system in

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which in tort cases, the victim is paid damages for the purpose of imposing sanction on the culprit and general deterrence in addition to damages for the actual loss should be regarded as against the basic principles or basic ideas of the system of compensation based upon tort in Japan. (3) Therefore, part of the foreign judgment in the present case which ordered the appellee company to pay punitive damages for the purpose of deterrence and sanction in addition to compensatory damages and the cost is against public policy of Japan and therefore, has no effect. Thus, the judgment of the original instance which dismissed the claim for enforcement judgment on the part of the foreign judgment in the present case ordering the appellee company to pay punitive damages should be upheld. The arguments of the appellant, including the assertion that the original judgment is against the preamble to the Constitution and section 6, paragraph 1 of the Friendship and Commerce Treaty between Japan and the United States, criticize the interpretation and application of laws and ordinances by the original instance based upon unique views and cannot be accepted. The claim in the present case by the appellant vis-a'-vis the appellee X requests an enforcement judgment on the part of the foreign judgment in the present case on the payment of compensatory damages and the cost as well as the accompanying interests. The original judgment dismissed the appeal against the judgment of the first instance court which had acknowledged such a claim in total. Therefore, the appellant has no interest for further jokoku appeal, and therefore, this jokoku appeal should be dismissed as unlawful. Based upon section 401, 399-3, 399 paragraph 1, subparagraph 1, 95, and 89, the justices unanimously judge as indicated in the main text. The translation provided by the Sir Ernest Satow Chair of Japanese Law, University College, University of London on the Supreme Court's homepage was closely followed.

V Comment 1 General If a party to legal action taking place before a foreign court succeeds against a party P 742 which has assets in Japan, there then exists for that successful party the possibility

to have, by way of enforcement, its title recognized in Japan as well. Prerequisites for this are recognition of the foreign decision as well as the issue of an exequatur through a Japanese court, because Section 24 Paragraph 2 Civil Execution Act demands that the foreign decision fulfils the preconditions for section 118 Code of Civil Procedure, formerly section 200. In line with section 118, paragraph 3 Code of Civil Procedure, in this respect in keeping with the previous section 200, paragraph 3 Code of Civil Procedure, foreign judgments must not contravene the Japanese public policy. Not only the Code of Civil Procedure, but also the Japanese Act on the Rules of Application of Laws (International Private Law), (1) and the Minpō – the Japanese Civil Code, use the term ‘public policy’ in order to protect fundamental legal values of Japanese law. The protection provided by the public policy in the Code of Civil Procedure and the Act on Applicable Law is, however, of a different form to that of the Civil Code. The Japanese Court must examine ex officio whether foreign judgments breach the Japanese public policy. In doing so the court must consider as the basis of its ratio decidendi not only the operative provisions of foreign decisions, but also the facts upon which they are based. A révision au fond is, however, prohibited. In practice, it is often difficult to make a clear distinction between the examination of the public policy and a révision au fond. Section 118 Code of Civil Procedure differs from the previous section 200, paragraph 3 Code of Civil Procedure in that it is henceforth stipulated that neither the content nor the proceedings of a foreign judgment may be allowed to breach the public policy of Japan. Thus future examinations must be undertaken with the inclusion of procedural aspects. However, this was already the prevailing opinion in literature at the time of the old Code of Civil Procedure, and in an obiter dictum the Supreme Court had expressed a similar view. (2)

2 Punitive Damages A much-discussed issue regarding the recognition of foreign decisions in Japan is the question of recognition of US-American court decisions, which award punitive damages. The question is a particularly explosive one, not least because of the tendency of these types of decisions to order the defendant to pay extensive damages - a punishment intended to act as a deterrent to future perpetration of incriminatory behaviour on the part of the liable party itself, as well as others. In respect of the problem of recognition it is important to differentiate between two questions. First, it must be clarified whether judgments with punitive damages may be classified as ‘civil judgments’ at all. If the answer to this question is in the negative, then recognition is automatically rendered impossible. However, if the answer is positive the P 743 second question arises; namely, whether recognition of this kind of foreign decision, that is, with punitive damages, breaches the Japanese public policy. In Japanese scholarly

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opinions there are two different views concerning this matter. According to the first, recognition should be categorically ruled out. The second opinion, however, holds that punitive-damages decisions should be capable of achieving recognition under particular conditions. An absolute repudiation is rejected in favour of analysis of the function of that part of the judgment which awards punitive damages in individual cases. What becomes problematic, however, is the fact that this approach can in essence lead, in a given case, to the necessity to undertake a prohibited révision au fond. The first-instance decision of the Tokyo District Court (3) in the present case makes clear this difficulty. The court has also been criticized for having gone above the admissible in its review. The Tokyo High Court seems to concur in the stance which negates the civil-law character of punitive-damages judgments and, in doing so, fundamentally rules out the possibility of recognition. (4) The Supreme Court has not disclosed its stance on the issue. However, it too emphasizes the penal character of punitive damages and how they are, as a legal principal, alien to Japanese law. (5) This being the case, it can probably be assumed that the discussed part-recognition of punitive-damages judgments, concerning at least similar case configurations, could not be supported by the jurisdiction. This rigid attitude of the Japanese courts can have grim consequences for the injured party in individual cases. One only has to think of the circumstances where the refusal of even part-recognition of punitive damages cases could lead to the injured party receiving only a very minimal amount of compensation. This can occur when, for example, compensation for immaterial damage is calculated not as part of the compensatory damages, but as part of the punitive damages instead. To my mind, the better solution is not an across-the-board refusal of recognition, but rather to impose upon the claimant the burden of producing evidence, as well as proof, that recognition of that part of the compensation allotted to it which exceeds the normal amounts in Japan would not, in a given case, breach the Japanese public policy. Toshiyuki Kono (1) P 743

References ★ )

1) 2) 3) 4) 5)

1)

Kono Toshiyuki: Kyushu University, private international law and heritage law Hō no tekiyō ni kansuru tsū sokuhō (Act on the general Rules of Application of Laws), Law No. 10 of 1898 as newly titled and amended on 21 June 2006. Supreme Court, 7 June 1983, Minshū 37-5, 611. Tokyo District Court, 18 February 1991, Hanrei Jihō 1376, 79; Hanrei Taimuzu 760, 250; Kinyū Shōji Hanrei 882, 31; Shiryoban Shōji Homu 85, 104. Tokyo High Court, 28 June 1993, Hanrei Jihō, 1471, 89; Hanrei Taimuzu, 823, 126; Kinyū Shōji Hanrei 927, 3; Shiryoban Shōji Homu, 112, 112. Worth mentioning is the judgment of 28 April 1998, where the Supreme Court recognized a judgment rendered in Hong Kong which applied the so-called Indemnity Basis standard to determine the litigation costs to be borne by defendant. The Court acknowledged the punitive character of the standard. In this judgment, what seems decisive is the fact that the costs to be borne by the defendant as the result of the Indemnity Basis standard did not exceed the amount of the actual expenses. Kyushu University, private international law and heritage law

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Case No. 68: Recognition – Enforcement – Foreign Judgment – Indirect Jurisdiction – Service – Public Policy – Mutual Guarantee

Document information

Publication

Business Law in Japan – Cases and Comments

Toshiyuki Kōno

Jurisdiction

Supreme Court, 28 April 1998, Case No. 1994 o 1838, Kishinchando Naraindas Sadhwani, Sadhwanis Japan v. Gobindram Naraindas Sadhwani, Gobindram Sadhwani

(★ )

Japan

Source: Minshū 52-3, 853; Saiban Jihō 1218, 4; Hanrei Jihō 1639, 19; Hanrei Taimuzu 973, 95; LEX/DB 28030790

Court

I Headnote(s)

Supreme Court of Japan

The order of the Hong Kong High Court for payment of litigation costs and the determination of the assessment of cost which is inseparable from this order are ‘foreign judgments’ as provided by Article 24 of the Law on Civil Enforcement.

Case date

Under the circumstances of this case where four actions were filed in Hong Kong and the Hong Kong court has jurisdiction over the first and second actions, concerning the third action, in the light of the purpose of section 7 of the Code of Civil Procedure, the jurisdiction of the Hong Kong Court on the consolidated claim with the second action should be acknowledged.

28 April 1998

Case number 1994 o 1838

If there is a treaty on judicial cooperation between Japan and the country where the for the commencement of the litigation must be effected in the manner as provided by this treaty, service of document which does not follow the procedure as provided by the treaty does not fulfil the requirements of section 118, item 2 of the Code of Civil Procedure.

P 746 original judgment was rendered and the service of documents needed

Parties

Claimant, Kishinchando Naraindas Sadhwani, Sadhwanis Japan Defendant, Gobindram Naraindas Sadhwani, Gobindram Sadhwani

Service of documents directly delivered in Japan by an individual who was personally requested to do so by a party who is a resident in Hong Kong does not fulfil the requirements of section 118, item 2 of the Code of Civil Procedure. A judgment ordering a party to pay the total cost of litigation including the lawyers' fee is not against ‘public policy’ as provided by section 118, item 3 of the Code of Civil Procedure.

Bibliographic reference

There is ‘reciprocity’ as provided by section 118, item 4 of the Code of Civil Procedure between Japan and Hong Kong before the reunification in relation to a judgment ordering payment of money.

Toshiyuki Kōno, 'Case No. 68: Recognition – Enforcement – Foreign Judgment – Indirect Jurisdiction – Service – Public Policy – Mutual Guarantee', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 745 - 755

II Relevant Provisions Section 22, item 6 and section 24 of the Law on Civil Enforcement, section 7 and section 118 of the Code of Civil Procedure, The Convention on the Service Abroad of Judicial and Extra-judicial Documents in Civil and Commercial matters (Treaty No. 7, 5 June 1970), Consul Treaty between Japan and the United Kingdom of Great Britain and Northern Ireland (Treaty No. 22, 29 September 1965).

III Facts This case concerns an action for the recognition and enforcement of an order issued by the Hong Kong High Court before Hong Kong was returned to China on 1 July 1997. Gobindram Naraindas Sadhwani (hereinafter referred to as Gobindram) and his wife, the appellees in this case, are Indian nationals resident in Hong Kong. Gobindram is a brother of Kishinchando Naraindas Sadhwani (hereinafter referred to as Kishinchando). Kishinchando and his wife, Radika, are Indian nationals resident in Japan. Kishinchando and Radika incorporated the appellant company in accordance with the laws and ordinances of Japan, and they since that time have carried on an international trade business. Kishinchando and this Company are the defendants and appellants in this case. On 5 June 1978, in order to obtain a loan from the Bank of India (hereinafter referred to as the Bank), the appellees, appellant Kishinchando and Radika, undertook a guaranty agreement for the Company within the limit of JPY 230 million. Then, as Gobindram became involved in a disagreement with Kishinchando, the appellees cancelled the guaranty agreement, and appellant Kishinchando and Radika made a new guaranty agreement for the appellant Company within the limit of JPY 330 million. P 747

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When the bill drawn by the appellant Company and discounted by the Bank was dishonoured, the Bank claimed USD 540,000 against the Company. However, on 12 May 1982, an agreement was concluded between the appellants and the Bank to the effect that the Bank promised to sue the appellees based on the above-mentioned surety in return for the appellant Company's bearing of the total amount of the legal expenses and its refraining from suing the appellees and Radika (hereinafter referred to as the Agreement). On 10 June 1982, the Bank brought an action against the appellees for the performance of the guaranty agreement (hereinafter referred to as the First Case) in the Hong Kong High Court. The appellees filed a counter-claim against the Bank, the appellant Kishinchando and Radika, in which the appellees called for a declaration that if the guaranty agreement is performed by the appellees, they be permitted to subrogate the Bank for the mortgage pledged by the appellant Kishinchando and Radika (hereinafter referred to as the Second Case). The Hong Kong Court ordered to notify the third-party proceeding to the appellant Company, the appellant Kishinchando and Radika. Hence is pending a suit against them for a declaration that if the appellees were ordered to perform the guaranty, the appellees have the right for compensation from the appellants and Radika (hereinafter referred to as the Third Case). The appellants and Radika counter-claimed that only appellee Gobindram was liable for the guaranty obligation to the Bank (hereinafter referred to as the Fourth Case). The Third Case has the quality of third-party proceedings, which are a legal form peculiar to the British–American legal system. On 27 April 1988, the High Court dismissed claims in the First, Second and Fourth Cases and the Third Case was deemed non-existent. On 11 May1988, the appellees pleaded with the Hong Kong High Court for an order that the appellants and Radika should bear the litigation costs. The High Court delivered notice of the motion to them. Then, on 31 August, the court ordered them to compensate the total amount of the litigation costs of HKD 1.2 million borne by the appellees (hereinafter referred to as the Orders). The Orders were based on the Indemnity Basis standard, which was applied by reason of the appellants' dishonest conduct regarding the abovementioned Agreement to sue. Then the appellees brought this action against the appellants in the Kobe District Court for recognition and enforcement of the Orders, including the delayed interest not mentioned in the Orders. The Kobe District Court granted the appellees' claim, and the appellant appealed to the Osaka High Court. That court, however, dismissed the appeal. The appellant then appealed to the Supreme Court.

IV Findings 1. The ‘foreign judgment’ mentioned in section 24 of the Civil Execution Act means the final judgment passed by a foreign court, regardless of the name, procedures, or form of P 748 the court, under the assurance of due process for both parties, with regard to legal relationships in private law. It is reasonable to understand that a ruling having the qualities listed above, whether it is called a decision or an order, is referred to as a ‘foreign judgment’ mentioned in the section. According to the above facts, it is reasonable to acknowledge the orders in this case as corresponding to the above-mentioned ‘foreign judgment’ and it is possible to approve the original judgment containing the same arguments as this as legal. 2. In the case where interest accrues on the money ordered by the judgment to be paid, it differs depending on the legal system of each country, whether it is written into the judgment or the power of execution is granted by the laws and ordinances without being mentioned in the judgment. The difference is largely due to technical aspects. So it is not impossible to recognize or execute the interest not mentioned in the foreign judgment in our country (Supreme Court Judgment, 11 July 1993, Minshū 51-6, 530). According to the above facts, we approve as reasonable the original judgment, in which recognition and execution are found to be permissible in our country, even with regard to the rate of overdue interest not mentioned in the foreign judgment (See the calculation of profit table appended below). 4 (1)

It is understood that the language ‘the foreign court's jurisdiction is granted under the laws and ordinances and treaties’ in section 118, item 1 of the Code of Civil Procedure means that, viewed from the principles of the international civil procedure of our country, the international jurisdiction to adjudicate (indirect general jurisdiction) for the relevant case be affirmatively found in the country to which the foreign court belongs (hereinafter referred to as ‘the judgment country’). Concerning under what circumstances the judgment country has the international jurisdiction to adjudicate, there are no statutes directly regulating the question, and neither treaties nor clear principles of international law have yet been established. So it is reasonable to determine this in accordance with principles of justice and reason, based upon the ideas of promoting fairness between the parties

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(2)

(3) P 749

(4)

and the equitable and prompt administration of justice. Concretely, whether the judgment country has the international jurisdiction to adjudicate should be determined in accordance with principles of justice and reason, basically referring to the provisions of territorial jurisdiction provided for in the Japanese Code of Civil Procedure, and taking into account the concrete circumstances of each case, from the viewpoint of whether it is appropriate for our country to recognize the foreign judgment. The orders of this case are the decisions as to the bearing of the legal expenses, which accompany the judgment on the merits. Hence, in principle, whether the international jurisdiction to adjudicate be affirmed in Hong Kong with regard to this case, should be determined in accordance with the judgment on its merits. Now we apply the above consideration to the case before us. The original court affirmed the international jurisdiction to adjudicate in Hong Kong, the judgment country. With regard to the First Case, the accused appellees' domicile, or the general forum, was in Hong Kong. With regard to the Second Case, the jurisdiction for joint claims with the First Case was found in Hong Kong. With regard to the Fourth Case, it had the nature of a counter-claim to the Third Case. So if the jurisdiction regarding the Third Case was affirmed in Hong Kong, the jurisdiction of the Fourth Case was granted as well. There is no illegality in the original judgment. However, the Third Case, in which the appellees call for the declaration of their right to claim compensation against the appellants and Radika, subject to the Hong Kong court's approval of the claim of the plaintiff in the First Case, has the quality of third-party proceedings, which are a legal form characteristic of the British and American legal systems. Among the accused persons in the Third Case, the appellant, Kishinchando, and Radika are also the defendants in the Second Case. Moreover, both the Second and the Third Cases seek a declaration of either their right to subrogation regarding the mortgage foreclosure or their claim for compensation, if the First Case brought against the appellees, based on the Agreement to sue executed among the appellants and the Bank, is acknowledged. These two cases are based on the same cause of substantive law, and have a close connection with each other. Therefore, there is a strong necessity for uniform and consistent considerations to be given to the two cases.

Considering these circumstances, with regard to the Third Case, including the claim against the newly joined appellant Company, the Hong Kong court should have jurisdiction to adjudicate this case as a joint claim with the Second Case in accordance with the spirit of the provision of section 7 of the Code of Civil Procedure, and recognition of the Hong Kong judgment in our country is in conformity with the principles of justice and reason, realizing the ideas of fairness between the parties and equitable and prompt administration of justice. 5. (3)

P 750

(4)

‘The serving of process necessary to commence an action’ against defendants in section 118, item 2 of the Code of Civil Procedure does not have to comply with the laws and rules of our civil procedure. But it is required that the process serving give the defendant actual knowledge of the commencement of action and not hinder the exercise of his/her right to defence. In addition, the viewpoint of realizing clear and stable procedures leads to the following interpretation of section 118, item 2. Where a treaty is concluded regarding judicial co-operation between our country and the judgment country for the serving of judicial documents and it is required that the serving of judicial documents necessary to commence an action be undertaken in accordance with the methods provided by that treaty, process serving that does not abide by the methods of that treaty does not satisfy the requisite mentioned in section 118, item 2. We consider the present case following the above considerations. Japan and the United Kingdom, which had sovereignty over Hong Kong at that time, are parties to the ‘Convention of 15 November 1965 on the Serving Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters'. Serving, as in this case, by means of direct delivery by a person who is asked personally to do so by the appellees is not permitted by this treaty. Moreover, we are unable to find a basis for such delivery in the bilateral treaty between our country and the United Kingdom the ‘Consular Treaty between Japan and the United Kingdom of Great Britain and Northern Ireland’ (the so-called Japan–England Consular Treaty). Therefore, the serving of the above-mentioned Notice of Motion to the appellants should be regarded as an illegal action that does not satisfy the requisite mentioned in section 118, item 2 of the Code of Civil Procedure. However, it is understood that ‘response to the action’ by the defendant mentioned in section 118 (ii) of the Code of Civil Procedure is different from the response to the merits, which effectuates the jurisdiction based on the defendant's response on the merits. It means that a defendant is given an opportunity to defend and actually takes measures of defence in court. It includes cases where a defence to contest jurisdiction is submitted. According to the above facts, with regard to the proceedings regarding the above Notice of Motion, it is clear that the appellants responded to the action specified in section 118, item 2.

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6. How to determine the bearing of legal expenses is a matter for the legal system of each country. If the share is determined within the confines of the actual expenses incurred, even if one of the parties is to bear the entire expenses, including lawyers' fees, it should not be considered as contrary to the ‘public policy’ mentioned in section 118, item 3 of the Code of Civil Procedure. According to the record of this case, the so-called Indemnity Basis standard was applied in consideration of the fact that there was dishonest conduct by the appellants, and almost the entire amount of the legal expenses, including lawyers' fees, was ordered to be borne by the appellants. It is recognized that the application of the Indemnity Basis standard is a special case in a court of Hong Kong and that it includes a punitive evaluation. However, the amount of the legal expenses ordered to be borne by the appellants does not exceed the amount of the actual expenses. Therefore, the contents of the orders in question may not be considered as contrary to the public policy of our country. 7. It is understood that the ‘existence of a reciprocity’ mentioned in section 118, item 4 of the Code of Civil Procedure means that the foreign country where its court passing a judgment is located gives the effect of the same kind of judgment rendered by our court, under the requisite of not differing on important points from the requisite stated in this Article (Supreme Court Judgment, 7 June 1983, Minshū 37-5, 611). It is possible to say that the requisite of the recognition of a foreign judgment under Common Law does not differ on important points from each requisite mentioned in section 118 of our Code of Civil Procedure. Therefore, it is reasonable to acknowledge that, concerning the recognition of a foreign judgment, there was the reciprocity mentioned in item 4 of the same Article between Hong Kong and our country. Translation is a permitted reprint from J.A.I.L. Vol.42 (1999) 155–161 with minor modification by this author. P 751

V Comment 1 The Situation Prior to This Judgment The Supreme Court had rendered three judgments in the field of the recognition of foreign judgments under the old section 200 of the Code of Civil Procedure (CCP). Since the current section 118 of the CCP which deals with the recognition of foreign judgments keeps the same substance as the old section 200, these three judgments are still significant. First, the judgment of 7 June 1983 (1) clarified its stance on the requirement of reciprocity in the old section 200, item 4 (the current section 118, item 4). According to this judgment, reciprocity would be granted between Japan and a foreign country, if the requirements to recognize judgments of other countries in the foreign country do not differ on important points from the requirements for the recognition of foreign judgments in the CCP. The judgment also stated that public policy in the old section 200, item 3 (the current section 118, item) covers public policy from the viewpoint of procedural fairness as well. Second, the Supreme Court stated in its judgment of 1997, (2) which denied the recognition of a US-punitive damage award, that public policy in old section 200, item 3 (the current section 118, item3) would be violated, if a foreign judgment were ‘contrary to fundamental principles or basic ideas of the legal order of our country’. Third, the Supreme Court pointed out in another judgment rendered in 1997 (3) that to recognize the effects of a foreign judgment means ‘recognizing the effects that the judgment has in the foreign country’, and the Court approved to recognize the payment of interest that was not stated in the foreign judgment. Under such circumstances, the Supreme Court rendered its first judgment on the current section 118 of the CCP. While the previous three judgments on the old section 200 of the CCP remain important even after the amendment of the CCP, the Court clarified the meaning of foreign ‘judgment’ and all four requirements in the current section 118. Especially important is its judgment on the meaning of ‘judgment’, jurisdiction of foreign court in item 1, and service in item 2.

2 Foreign Judgment The scope of the recognition must be clarified before the examination of the requirements to recognize foreign judgments. The Supreme Court stated in this judgment that the foreign judgment to be recognized should be, regardless of the name, procedures, or form of the court: (1) the final judgment passed by a foreign court, (2) under the assurance of due process for both parties, (3) with regard to legal relationships P 752 in private law. Due to the first element of this definition, foreign provisional measures, for example, cannot be recognized in Japan. No recognition takes place either, insofar as appeal procedure is still pending in the judgment country. The second element of this definition concerns the question whether the procedural rules in the judgment country could satisfy the procedural due process. The question whether in a specific case procedural due process was satisfied or not must be examined in the framework of

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section 118, item 3. The third element excludes the possibility to recognize foreign penal judgments, for instance. In this judgment, the Supreme Court affirmed that the Hong Kong judgment on payment of litigation costs in this case satisfies this definition.

3 Indirect Jurisdiction The first requirement of the recognition of a foreign judgment is so-called indirect jurisdiction, which concerns the jurisdiction of the foreign court that rendered the judgment through the lens of Japanese law. In this judgment, the Supreme Court stated its view on the criteria to examine indirect jurisdiction. Traditionally, the prevailing opinion has been the so-called mirror theory, according to which both direct and indirect jurisdictions should be examined by applying the same criteria. The criteria applied by the Supreme Court in this case, that is, the principles of justice and reason based upon the ideas of promoting fairness between the parties and the equitable and prompt administration of justice, are the same as those applied to examine the direct jurisdiction of the Japanese court in the Family Case. (4) However, the language in the judgment of our case here, ‘whether the judgment country has the international jurisdiction to adjudicate should be determined in accordance with principles of justice and reason, basically referring to the provisions of territorial jurisdiction provided for in Japanese Code of Civil Procedure, and taking into account the concrete circumstances of each case, from the viewpoint of whether it is appropriate for our country to recognize the foreign judgment’, [emphasis added] seems different from those applied to direct jurisdiction. Some other commentators share such view as well. (5) A possible justification of such differentiation would be to retain certain flexibility for the recognition. However, with regard to family cases, the Supreme Court had adopted the so-called special circumstances test as a part of the criteria to be applied to direct jurisdiction before this judgment. Since this test could have such function as a kind of general exception clause to deny the jurisdiction of the Japanese court, the criteria to be applied to direct jurisdiction has enough flexibility. In addition, on 28 April 2011, the Japanese Diet passed the amendment of the CCP to introduce black-letter rules of international jurisdiction into the CCP. As a result, the special circumstances test was incorporated in the CCP as its new Articles 3–9, by which a Japanese court may refuse to exercise jurisdiction, if it would P 753 hamper ‘fairness between the parties’ or ‘the equitable and prompt administration of justice’. Hence, there might practically be less necessity to differentiate the criteria for indirect jurisdiction from those for direct jurisdiction. One important issue of our case was whether judgment of third-party proceedings in Hong Kong could be recognized in Japan at all. Third-party proceedings are not known in Japanese law, so that a third party who is obliged to pay compensation to a defeated defendant cannot be directly involved in the main proceedings. Instead, third party notice (section 53 of the CCP) should be made, and then separate proceedings for compensation should be filed against the third party. In addition, there was no legislation concerning direct international jurisdiction in Japanese law. Taking these domestic rules into consideration, direct jurisdiction for such proceedings would have been denied. However, in this judgment the Supreme Court recognized such judgment in Hong Kong as a kind of joinder for the sake of the necessity to avoid discrepant judgments. Under these circumstances, to this extent it would have been possible to say that direct jurisdiction and indirect jurisdiction could be differentiated. Would the situation change after the introduction of black-letter rules on international jurisdiction into the CCP in 2011? The new section 3-6 of the CCP, which was promulgated in 2011, provides for joinder as international jurisdiction. Concerning requirements for filing a suit against multiple defendants (the so-called subjective joinder), section 3-6 refers to section 38 the first half-sentence of the CCP, according to which ‘common claim or obligation’ must exist between these defendants in order to exercise jurisdiction on the basis of joinder. Thus it has become clear that there is no legislative basis under the new CCP for those cases where third-party proceedings would take place. Hence taking the lack of black-letter rule on third-party proceedings and this judgment, it is still possible to say that the criteria of indirect jurisdiction could be differentiated from those of direct jurisdiction.

4 Service In this case, the service was manually delivered to the defendant by a Japanese attorney. It was questioned if such way of service is lawful or not. The Supreme Court pointed out that the service does not have to comply with Japanese law, but required that the service should give the defendant actual knowledge of the commencement of action and should not hinder the exercise of his/her right to defence. If a treaty is concluded between Japan and the judgment country for the serving of judicial documents, the service should be undertaken in accordance with that treaty. Service that does not abide by the methods of that treaty does not satisfy the requirement in Article 118, item 2. In this case, the Court affirmed that the requirement was satisfied despite the manual delivery. According to the Court, appearance by the defendant in section 118 (ii) of the CCP should be understood differently from the response to the merits. It means that a P 754 defendant should be given an opportunity to defend and actually takes measures of defence in the court, including cases where a defence to contest jurisdiction is

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submitted. This conclusion could be supported. Worth mentioning is the fact that the Court examined this requirement ex officio.

5 Public Policy and Reciprocity The preceding judgment of the Supreme Court in 1997 (6) clarified the criteria to examine the requirement of public policy and rejected to recognize a US-punitive damage award in Japan. Subsequently, in our case, the so-called Indemnity Basis standard was applied by the Hong Kong court to decide the share of the litigation costs. The Supreme Court confirmed that the application of the Indemnity Basis standard is a special case in a court of Hong Kong and that it includes a punitive evaluation. Such punitive nature of the Indemnity Standard could have led to rejection of the recognition. However, the Supreme Court did indeed recognize the judgment. The decisive factor for the recognition seems to have been that the amount of the legal expenses ordered to be borne by the appellants did not exceed the amount of the actual expenses. It is an established case law in Japan that the Japanese court burdens the attorney's fees of the plaintiff on defendant as the plaintiff's loss with appropriate causality to defendant's tort. (7) Hence the conclusion of the Supreme Court in this case is therefore in line with the basic stance of the Court. The Supreme Court followed its judgment in 1983 and affirmed the reciprocity between the recognition systems in Japanese law and English Common law. However, on the issue of whether reciprocity could be granted between Japanese law and Hong Kong law after the return of Hong Kong to China in 1977 a new judgment is required.

6 Payment of Interest That Are Not Mentioned in Judgment When a foreign judgment document does not expressly refer to the payment of interest, a question could be raised whether the recognition of this judgment leads to the enforcement of the interest payment as well. In this regard, the Supreme Court, following its judgment in 1997, (8) stated that the lack of reference to the interest payment in the judgment document does not hamper the recognition and enforcement, since it is a technical matter whether it is written into the judgment document or the power of execution is granted by the laws and ordinances without being mentioned in the judgment. P 755

When interest ratio is determined by foreign court officers' calculation after rendering the judgment, the defendant is not able to argue about the interest ratio to be applied in the foreign court. To recognize the judgment irrespective of the reference to the payment of interest would mean not to guarantee the opportunity for the defendant to defend his position concerning the interest ratio. (9) Toshiyuki Kono (1) P 755

References ★ )

1) 2) 3) 4) 5) 6) 7) 8) 9) 1)

Kono Toshiyuki: Kyushu University, private international law and heritage law Supreme Court, 7 June 1983, Minshū 37-5, 611. Supreme Court, 7 June 1983, Minshū 51-6, 2573. Supreme Court, 7 June 1983, Minshū 51-6, 2530. Supreme Court, 11 November 1997, Minshū 51-10, 4055. S. Watanabe, Hanrei Hyōron 484, 44; K. Yamamoto, Jurisuto 1157, 298-299. Supreme Court, 11 July 1997, Minshū 51-6, 2573. Supreme Court, 27 February 1969, Minshū 23-2, 441. Supreme Court, 11 July 1997, Minshū 51-6, 2530. S. Watanabe, supra, 48. Kyushu University, private international law and heritage law

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Case No. 69: Arbitration Law – Governing Law – Scope of Arbitration Agreement

Document information

Publication

Felix Burkei

Business Law in Japan – Cases and Comments

(★ ) Supreme Court, 4 September 1997, Case No. 1997 o 1848, Nihon Kyōiku-sha Co. Ltd. v. Kenneth J. Feld, ‘Ringling’

Jurisdiction

Source: Minshū 51-8, 3657 = Hanrei Jihō 1633, 83 = Hanrei Taimuzu 969, 138

Japan

I Headnote(s) The governing Law of the coming into existence and taking of effect of the arbitration agreement should be understood to be determined primarily by the intention of the parties.

Court

Supreme Court of Japan

II Relevant Provisions

Case date

Article 7 (1) Hōrei, section 786 Civil Code

4 September 1997

III Facts

Case number

Plaintiff-Appellant Nihon Kyōiku-sha Co., Ltd. (hereinafter referred to as the Plaintiff), is a (hereinafter referred to as the Defendant) is the representative of a corporation of the United States of America (hereinafter referred to as ‘Ringling Inc.’). On 2 October 1987, Plaintiff and Ringling Inc. entered into an Agreement for the performance of the Ringling circus in Japan during 1988 and 1989 (hereinafter referred to as the Show Agreement). At the time of making the Show Agreement, Appellant and Ringling Inc. made an arbitration agreement as follows (hereinafter referred to as the Arbitration Agreement): ‘If a dispute including the interpretation or application of the provisions of the Show Agreement is not settled, that dispute shall be submitted to arbitration, by the request of one of the parties, in accordance with the rules and procedures of the International Chamber of Commerce relating to the arbitration of commercial disputes. Arbitration initiated by Ringling Inc. shall be submitted to arbitration in Tokyo, and arbitration initiated by the Plaintiff shall be submitted to arbitration in New York City’.

P 758 Japanese corporation and Defendant-Appellee Kenneth J. Feld

1997 o 1848

Parties

Claimant, Nihon Ky oikusha Co. Ltd. Defendant, Kenneth J. Feld

Bibliographic reference

Felix Burkei, 'Case No. 69: Arbitration Law – Governing Law – Scope of Arbitration Agreement', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 757 762

The Plaintiff filed an action in the Tokyo District Court against the Defendant seeking for damages based on a tort on the part of the Defendant. In addition to the assertion that the performance by Ringling Inc. was not as contemplated in the Show Agreement, it is alleged that the Defendant deceived the Plaintiff regarding the share of profits from the sale of such products as featured by the circus and the duty to pay for tents used to house animals. The Defendant moved to dismiss the action, asserting that the Arbitration Agreement between the Plaintiff and Ringling Inc. has effect on the present action. The Tokyo District Court granted the Defendant's motion and dismissed the action. (1) On appeal by the Plaintiff, the Tokyo High Court affirmed the judgment of dismissal. (2) The Plaintiff then appealed to the Supreme Court. The appeal was dismissed.

IV Findings Arbitration is a means of dispute resolution without litigation, in which the parties to a dispute agree to submit the resolution of the dispute between them to arbitration by a third-party arbitrator, thereby binding themselves to the arbitration decision. Considering such nature of arbitration as a means of dispute resolution based on agreement between the parties, the law applicable to the validity and effect of the arbitration agreement in so-called international arbitration should be determined primarily by the parties' intentions under Article 7(1) Hōrei. Even if the arbitration agreement does not contain an express agreement as to the applicable law as mentioned above, the court should find and resort to the implied agreement on the applicable law, in light of the possible existence and content of the agreement as to the place of arbitration, the terms and conditions of the main contract, and all other relevant circumstances. P 759

In this case, according to the facts stated above, the Agreement does not contain an express agreement on the applicable law but it does contain the agreement on the place of arbitration that reads ‘any arbitration proceeding initiated by Ringling Inc. shall take place in New York City.’ Therefore, regarding the arbitration that Plaintiff requests, it is appropriate to find that there was the implied agreement to the effect that the applicable law to the arbitration agreement should be the law applicable in the place of arbitration, that is, New York City. The law applicable to the arbitration requested by Plaintiff on the basis of the Arbitration Agreement is construed to be the Federal Arbitration Act of the United States

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of America. In light of this Act, the interpretation shown by the case law of the federal courts of the United States regarding the objective and subjective scope of the effect of the arbitration agreement, as well as other factors, it is appropriate to construe that the arbitration clause does cover Plaintiff's claims for damages against Defendant. The scope of disputes to be submitted to arbitration by the request of the parties and the scope of disputes to permit a motion, on the basis of an arbitration agreement, to dismiss the action filed by one of the parties are two sides of the same coin. Defendant's motion before the merits on the basis of the Arbitration Agreement shall be granted and this action, lacking the interest for legal action, shall be dismissed as improper. Translated by Prof. Dr Shun'ichirō Nakano

V Comment Arbitral proceedings in Japan have been scarce ever since the introduction of arbitration to Japan. (3) In the course of reform of the justice system, the Japanese government has undertaken serious efforts in the past decade to strengthen arbitration as a means of alternative dispute resolution, most notably the enactment of the Arbitration Law in 2003. (4) However, these efforts have as yet not led to a significant increase in the use of arbitration. Consequently, there is and has been a relative dearth of Japanese case law, especially by the Supreme Court, on arbitration law. The Supreme Court's ‘Ringling’ decision as one of the best known Japanese international arbitration cases is important with regard to the applicable law and the scope of the arbitration agreement. P 760

1 Governing Law The Supreme Court held that pursuant to Article 7(1) Hōrei (5) the arbitration agreement is governed by the law intended by the parties. The Court thereby acknowledged choice of law with regard to the arbitration agreement, whereas the prevailing view so far had denied party autonomy and applied lex fori. (6) The arbitration agreement in question did not contain an explicit choice of law. Instead of applying the lex loci actus, that is, the law of the place of the arbitration agreement's conclusion in accordance with section 7 (2) Hōrei, the Court construed an implied agreement on the law of the place of arbitration. In general, avoiding the lex loci actus seems preferable as this may potentially lead to somewhat arbitrary results in cases where the contract was concluded in a place without any actual relation to the parties or the subject matter of the contract. The Act on the Rules of Application of Laws (7) which replaces the Hōrei since the beginning of 2007 now provides in Article 8 (1) that lacking an agreement the law of the place with the closest connection applies. (8) However, in conformity with the UNCITRAL Model Law, the Arbitration Law now contains provisions for the application of the law of the place of arbitration if an explicit agreement is lacking. Although section 44 (1) No. 2 and 45 (2) No. 2 Arbitration Law directly apply only to the setting aside and recognition of arbitral awards, it is advocated to extend their application to all other cases as well. (9) The difficulty with the arbitration agreement in question arises from the fact that it contains a so-called finger-pointing clause providing for arbitration in different places (and, more importantly, jurisdictions) depending on which side initiates proceedings. Consequently, with two potential places of arbitration, there is a risk of contradictory results in the assessment of the arbitration agreement under different jurisdictions. This risk is not merely hypothetical as is illustrated by the fact that the Tokyo District Court as the court of first instance had expressed in an obiter dictum that under Japanese law, the scope of the arbitration agreement would not extend to the Defendant. At least in the P 761 case of an express choice of law with regard to the main contract, it seems preferable to subject the arbitration agreement to this same law. (10)

2 Scope of the Arbitration Agreement Having established the governing law, the Supreme Court held that under the US Federal Arbitration Act and the relevant case law, the Plaintiff's claim against the Defendant as representative of Ringling Inc. fell within the personal scope of the arbitration agreement. The court did not take the opportunity to clarify or at least hint at whether the result would have been different if the arbitration agreement had been governed by Japanese law. This is somewhat unfortunate given the obiter dictum by the Tokyo District Court. However, most commentators argue that permitting an action in tort against the representative of a party to an arbitration agreement would undermine the agreement's aim of resolving through arbitration all disputes arising in connection with the contract. (11) In a judgment from 1995, the Nagoya District Court also dismissed an action against a party to an arbitration agreement and two of its representatives based on an alleged fraud. (12) Although the judgment does not state this explicitly, the dismissal of the action on the Defendant's motion is based on Japanese law as lex fori. At the time of the decision, Japanese law did not contain any provisions on the enforcement of the arbitration agreement in a lawsuit. Under the new law, however, section 14 (1) Arbitration Law now explicitly stipulates that an action brought in spite of an arbitration agreement will be

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dismissed upon the defendant's request.

3 ‘Finger-Pointing Clauses’ ‘Finger-pointing clauses’ such as the one in question are frequently used by Japanese companies. (13) The risk of contradictory assessments under different jurisdictions of the validity, scope, etc. of the arbitration agreement is mitigated if both potential places of arbitration are located in arbitration-friendly jurisdictions. P 762

Given the prevailing above-mentioned opinion, it also appears likely that the Supreme Court would have ruled in the same way based on Japanese Law. However, given the legal and practical risks involved, parties drafting an arbitration agreement should refrain from using finger-pointing clauses. (14) Instead, agreeing on a single (possibly neutral) forum seems preferable. (15) Felix Burkei (1) P 762

References Felix Burkei: District Court Cologne Tokyo District Court, 25 March 1993, Hanrei Taimuzu 816, 233. Tokyo High Court, 30 May 1994, Hanrei Taimuzu 878, 276. Sections 786–805 of the Civil Code of 1890 adopted the provisions of the German Zivilprozessordnung (ZPO) without any amendments. 4) Chūsaihō, Law Nr. 138 of 2003. For a brief outline, see H. Oda, Arbitration Law Reform in Japan, in: ZJapanR/J.Japan.L. 18 (2004) 5 et seq. For a brief outline of the simultaneously amended JCAA Rules, see G. McAlinn/L. Nottage, Changing the (JCAA) Rules: Improving International Commercial Arbitration in Japan, in: ZJapanR/J.Japan.L. 18 (2004) 23 et seq. 5) Law Nr. 10 of 1898. English translation by K. Anderson/Y. Okuda, Asian-Pacific Law & Policy Journal Vol. 3 Issue 1 (Winter 2002) 233 et seq. 6) There was further controversy as to whether ‘forum’ meant the court or the prospective place of arbitration, cf. Y. Nishitani, Die Bestimmung des Schiedsvertragsstatuts und dessen sachliche und persönliche Reichweite, in: ZJapanR/J.Japan.L. 6 (1998) 187. 7) Hō no tekiyō ni kansuru tsū soku-hō [Act on the General Rules of Application of Laws], Law Nr. 78 of 2006, English translation by K. Anderson/Y. Okuda, Asian-Pacific Law & Policy Journal Vol. 8 Issue 1 (Fall 2006) 138 et seq. 8) Section 8 (1): ‘Where there is no choice under the preceding Article, the formation and effect of a juristic act shall be governed by the law of the place with which the act is most closely connected at the time of the act.’ Translation by K. Anderson/Y. Okuda, supra note 7, 142 et seq. 9) S. Nakano, Chūsai keiyaku no junkyohō to chūsaihō [The Law Applicable to the Arbitration Agreement and Arbitration Law], in: JCA Journal 51 Nr. 11 (2004) 68, 69. 10) Cf. S. Nakano, International Commercial Arbitration under the new Arbitration Law of Japan, in: J.A.I.L. 47 (2004) 96, 104. 11) H. Tezuka, Who is a Party? – Case of the non-signatory, in: WaveLength JSE Bulletin 50 (2005) 1, 6; Y. Nishitani, supra note 6, 193. ★ )

1) 2) 3)

12) Nagoya District Court, 27 October 1995, Kaijihō Kenkyūkai Shi (Maritime Law Review)

150, 33.

13) Y. Taniguchi, The Pre-arbitral Phase: An Asian View, in: ICCA Congress Series 6 (1994)

57, 58; P. Godwin / D. Roughton, ‘Finger-pointing’ Arbitration Clauses – don't use them!, in: Dispute Avoidance Newsletter 43 (March 2006), , downloaded on 23 August 2011. 14) P. Godwin / D. Roughton, supra note 13, strongly advise against finger-pointing clauses. 15) The Standard Arbitration Clause recommended by the JCAA also provides for a single venue. 1) District Court Cologne.

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Case No. 70: Arbitral Award – Setting Aside – Appropriateness of Arbitral Tribunal's Reasons not Examinable by State Court – Impact of New Arbitration Law

Document information

Publication

Business Law in Japan – Cases and Comments

Heike Alps (★ )

Jurisdiction

Tokyo District Court, 26 January 2004, Case No. 2002 wa 20966, Descente, Co., Ltd. v. AdidasSalomon AG

Japan

Source: Hanrei Jihō No. 1847, 123 = Hanrei Taimuzu No. 1157, 267

Court

I Headnote(s)

District Court of Tokyo

Discontent with the reasoning by which an Arbitral Tribunal of the Japan Commercial Arbitration Association reached its award is not a reason to set aside such an award.

Case date

A claim for damages based on an unlawful refusal to renew a license agreement shall be rejected if it conflicts with the res judicata of an arbitral award.

26 January 2004 P 764

Case number

II Relevant Provisions

2002 wa 20966

Sections 800 and 801 Law concerning Procedure for Public Peremptory Notice and Arbitration Procedure (kōji saikoku tetsuzuki oyobi chūsai tetsuzuki ni kansuru hōritsu) (hereinafter ‘old Arbitration Law’). (1)

Parties

Claimant, Descente, Co., Ltd. Defendant, AdidasSalomon AG

Bibliographic reference

III Facts Descente, Co., Ltd. (hereinafter ‘Plaintiff’), a Japanese manufacturer and distributor of sports-related products, had an exclusive license for the manufacture and sale of sportsrelated products in Japan that was granted by the German corporation Adidas-Salomon AG (hereinafter ‘Defendant’). The license agreement provided that disputes between the parties should be settled by the Japan Commercial Arbitration Association (hereinafter ‘JCAA’).

Heike Alps, 'Case No. 70: Arbitral Award – Setting Aside – Appropriateness of Arbitral Tribunal's Reasons not Examinable by State Court – Impact of New Arbitration Law', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 763 - 771

When the time came to renew the license agreement, a dispute arose between the parties and their negotiations failed. The Plaintiff – in compliance with the arbitration clause – started arbitration proceedings claiming damages from the Defendant. The arbitral tribunal, on 29 March 2002, rendered an award dismissing the Plaintiff's claim. As a result, the Plaintiff filed an action before the Tokyo District Court, requesting the court to set aside the arbitral award and claiming damages from the Defendant. The Plaintiff argued that the substantive reasons in the respective award pertaining to the points in dispute were insufficient and were based on obvious mistakes in fact-finding and the application of law as the arbitral tribunal had only applied the law of Japan. Also, Plaintiff asserted that the parties had established an agreement that arbitration awards would not be accepted as final. The basis for this assertion was that the word ‘final’ was not expressly mentioned in the arbitration clause.

IV Findings The District Court Tokyo dismissed the claims based on the provisions of the old Arbitration Law.

1 Insufficient Reasons for the Arbitral Award According to the old Arbitration Law, the legal remedy which a party of arbitral proceedings may file against an arbitral award differs from the one foreseen against a P 765 judgment that was rendered by a Japanese (civil) court, that is, the remedy against an arbitral award is not an appeal but an application to set aside the award. Section 801, paragraph 1 old Arbitration Law reads: Application to set aside the award may be made in any of the following cases: (1) (2) (3) (4) (5) (6)

Where the arbitration procedure was not permissible; Where the arbitration award ordered a party to do an act prohibited by law; Where a party was not represented in the arbitration procedure in accordance with the provisions of law; Where a party was not heard in the arbitration procedure; Where the award is not accompanied by reasons; Where there is any of the grounds for an action for a new trial under Article 338, Paragraph 1, items (4) to (8) of the Code of Civil Procedure.

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The District Court Tokyo held that the reasons asserted by Plaintiff did not fall within the scope of insufficient reasons as laid down in section 801, paragraph 1, item (5) old Arbitration Law that would justify setting aside the award. It ruled that the requirements for the reasoning of an arbitral award were less strict than in the case of a court judgment, regarding both the fact-finding in full and the legal determinations in detail. As long as the reasons allow an understanding – in outline – of the decision process by which the tribunal reached its decision, the reasoning is considered to be sufficient, that is, the court may not examine and judge the appropriateness of those reasons, even if the reasons were unjust. The argument that the arbitral tribunal had only applied the law of Japan was not convincing. The court ruled that the basis on which an arbitration award is made is left to the discretion of the respective tribunal. The fact alone that a certain set of laws was not taken into consideration by a tribunal would not render its reasoning insufficient. Furthermore, as the arbitral tribunal made its decision based on specific fact-finding with regard to each issue, the court could not affirm obvious irrationality or uncertainty in the meaning of the reasons.

2 Agreement between the Parties That Arbitration Awards Would Not Be Accepted as Final With regard to section 800 old Arbitration Law which reads The award shall have between the parties the same effect as a final and conclusive judgment of the court, the court held that the claims were to be dismissed by the force of res judicata of the arbitration award which was rendered on the basis of the arbitration clause in the contract between the Parties. According to the court, the alleged agreement between the Parties that arbitration But even if such an agreement had been recognized by the court, it would have been held invalid. Otherwise, the arbitration award and a court judgment would coexist, which would be impermissible as it would give rise to an impediment to the permanent resolution of conflicts and mar the stability of the legal system. (2)

P 766 awards would not be accepted as final had not been evidenced by Plaintiff.

The court ruled that if parties to a contract agree to rely on arbitration proceedings for the resolution of certain conflicts arising between them, this should be interpreted as an agreement that the parties will abide by the arbitral award that is rendered. This interpretation should not be affected by the fact that the arbitration clause does not mention the word ‘final’. For the findings of the court, the translation provided by the tomeika project of the Kyūshū University was closely followed.

V Comment The District Court Tokyo rendered its decision on 26 January 2004 and based it on the regulations of the old Arbitration Law. Only a month later, on 1 March 2004, Japan's new Arbitration Law (chūsai hō) (3) came into force. Below, the recent development of arbitration law in Japan shall briefly be introduced, followed by a comment on the potential impact of the new rules with regard to the specific points of issue of the case which the Tokyo District Court had to decide on.

1 Background of the New Arbitration Law Originally, arbitration provisions were regulated in Chapter 8 of the Japanese Code of Civil Procedure (minji soshō hō) (4) that was enacted in 1890. More than 100 years later, in the course of the fundamental reform of the Code of Civil Procedure in the late 1990s, Chapter 8 was singled out as arbitration was excluded from the scope of the reform. (5) The unchanged arbitration rules became part of the Law concerning Procedure for Public Peremptory Notice and Arbitration Procedure (old Arbitration Law). Public peremptory apparently were more or less P 767 notice and arbitration are two legal fields that coincidently combined under one law. What eased the situation was that at least the numbering from Chapter 8 of the Code of Civil Procedure was kept in the old Arbitration Law. It was on the basis of this law that the Tokyo District Court rendered its decision. The old Arbitration Law was deemed to be one of the main factors as to why Japan was not well known as a place for conducting international arbitration. (6) The law did not even contain regulations about international arbitration. Considering Japan's trade volume, the amount of international commercial arbitration was quite low, the annual number of new applications filed at the JCAA was 10 to 20. (7) Between 1995 and 1999, only 56 requests for international arbitration were filed at the JCAA, a minute number as compared to the international cases filed at other institutions in the same time period, for example, 3,750 cases at the China International Economic and Trade Arbitration Commission, and 2,307 cases at the International Chamber of Commerce. (8) A reform of the old Arbitration Law was finally tackled within the framework of the Major Judicial

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Reform (daikibo no shihōseido kaikaku) – the ‘once in a hundred years major reform’ (9) – that was initiated in 1999 when the Judicial Reform Council (shihōseido kaikaku shingikai) was established. The statutory mission of the Judicial Reform Council was to consider fundamental measures necessary for judicial reform and judicial infrastructure arrangement by defining the role of judicature in Japan in the twenty-first century. (10) In December 2001, a consultation group on arbitration (ADR kentō-kai) was established, (11) whose task it was to consider a new law based on the UNCITRAL Model Law on International Commercial Arbitration (12) (hereinafter ‘UNCITRAL Model Law’). (13) After the consultation group had met for more than a year, they filed a draft, on the basis of P 768 which a bill was submitted to the Diet in March 2003. The Arbitration Law was enacted on 25 July 2003 and came into force on 1 March 2004. (14) The Arbitration Law of 2004 follows the UNCITRAL Model Law and incorporates most of its parts. (15) Its scope of application is a little broader though. Contrary to the UNCITRAL Model Law, the Arbitration Law does not only apply to international commercial arbitration, but also to domestic arbitration. (16) The adoption of a number of provisions concerning international commercial arbitration shall eliminate the uncertainty under the old Arbitration Law that lacked express provisions to quite some extent. (17) The Arbitration Law, for example, governs arbitration procedures that are held in Japan, recognizes the parties' autonomy to determine the applicable law in an arbitration clause between them, introduces new proceedings for a prompt enforcement of arbitral awards and recognizes foreign arbitral awards following the New York Convention.

2 The Situation under the New Arbitration Law with Regard to the Decision of the Tokyo District Court a) Setting Aside an Arbitral Award The only remedy against an arbitral award is still the application to set it aside. But the regulation regarding those cases in which such an application can be filed has been completely modified in the new law and has in most parts been adapted to the UNCITRAL Model Law. (18) Section 44, paragraph 1 Arbitration Law reads: A party may apply to a court to set aside the arbitral award when any of the following grounds are present: (1) (2) (3) P 769

(4) (5) (6)

(7) (8)

the arbitration agreement is not valid due to limits to a party's capacity; the arbitration agreement is not valid for a reason other than limits to a party's capacity under the law to which the parties have agreed to subject it (or failing any indication thereon, under the law of Japan); the party making the application was not given notice as required by the provisions of the laws of Japan (or where the parties have otherwise reached an agreement on matters concerning the provisions of the law that do not relate to the public policy, such agreement) in the proceedings to appoint arbitrators or in the arbitral proceedings; the party making the application was unable to present its case in the arbitral proceedings; the arbitral award contains decisions on matters beyond the scope of the arbitration agreement or the claims in the arbitral proceedings; the composition of the arbitral tribunal or the arbitral proceedings were not in accordance with the provisions of the laws of Japan (or where the parties have otherwise reached an agreement on matters concerning the provisions of the law that do not relate to the public policy, such agreement); the claims in the arbitral proceedings relate to a dispute that cannot constitute the subject of an arbitration agreement under the laws of Japan; or the content of the arbitral award is in conflict with the public policy or good morals of Japan. (19)

The option that an award can be set aside if it is not accompanied by sufficient reasons (section 801, paragraph 1, item (5) old Arbitration Law), which Plaintiff relied on, is no longer part of the items listed in section 44, paragraph 1 Arbitration Law. The only case in which the new Arbitration Law relates to the content of an arbitral award as a reason to set the award aside is if there is a conflict with the public policy or good morals of Japan (section 44, paragraph 1, item (8)). The requirements to affirm such a conflict are rather strict. Examples for an award being in conflict with public policy and the good morals of Japan are for example, false testimony of a witness (shōnin no kishō) or bribe of an arbitrator (chūsai'nin no wairo). (20) The approach of the UNCITRAL Model Law (Article 34, paragraph 2, b ii) is similarly strict: a violation of public policy is to be understood as serious departures from fundamental notions of procedural justice. (21) Circumstances such as in the case which the Tokyo District Court had to decide on will most certainly not be considered as conflicting with public policy. Rather, if an application for the setting-aside of an arbitral award is filed under the new the arbitral tribunal's reasons, its fact-finding and legal determinations. An examination as to whether the content of an award is right or wrong is not regarded as the court's task in

P 770 Arbitration Law, a court does not have to deal with the appropriateness of

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setting-aside proceedings, that is, a mistake in the fact-finding and/or in the application of law is not the object of the examination. (22) Therefore, although the provision regarding the remedy against an arbitral award has drastically changed, under the new Arbitration Law a court would most likely render the same decision as the Tokyo District Court. Plaintiffs' allegation that the award was based on obvious mistakes in fact-finding and the application of law could not be considered relevant as the court shall not examine these issues. The question that arises is whether the parties to an arbitration agreement may amicably include grounds on which an award may be set aside, for example, the award is based on an error in fact-finding or application of law. (23) In the case of the UNCITRAL Model Law the situation is clear. The grounds listed in Article 34, paragraph 2 are exhaustive. (24) No additional grounds may be agreed upon. For Japan, the situation is not that clear. When Kojima and Takakuwa published their commentary in 2007, there had not been any precedent cases in Japan. Thus, they considered US jurisdiction in that respect. The US Supreme Court had not rendered any decisions in this regard, but the majority of High Court decisions denied a right of the parties to effectively agree on extra grounds, (25) therewith confirming that the law exhaustively listed the grounds on which an award may be set aside. Against the background that the number of decisions concerning this issue increased in the US, Kojima and Takakuwa concluded that, in practice, parties to an arbitration agreement seemed to often include a section in their agreement stipulating that a court should be allowed to intervene with regard to the fact-finding and legal assessment of an arbitral tribunal. This trend is not surprising, given that an arbitration, contrary to court proceedings, only consists of one instance. There is no further level in which mistakes such as a poorly chosen arbitrator could be amended. This leads to insecurity to a certain extent in arbitration proceedings and is quite a strong motive for the above-mentioned agreement in arbitration clauses. (26) Hence, there are voices in Japanese literature which expect that the use of arbitration in Japan would be promoted and enhanced if such agreements on additional grounds were to be accepted as effective. (27) P 771

One difference to the old law which should be mentioned is that according to the new Arbitration Law, the court no longer renders a judgment (hanketsu) but an order (kettei) in setting-aside proceedings. (28) Also, the Arbitration Law clarifies in section 3, paragraph 1 that section 44 only applies to domestic arbitral awards, not to foreign awards, that is, awards that have been made at a place of arbitration in another State (only if the place of arbitration is in the territory of Japan). However, this provision would not have an effect on the case which the Tokyo District Court had to decide on as it was an award of the JCAA. b) Agreement between the Parties that Arbitration Awards would not be Accepted as Final The Tokyo District Court has generally denied the validity of agreements in which arbitral awards are not accepted as final. (29) There is no indication that this interpretation would not be in accordance with the new Arbitration Law, in particular as the provision the Tokyo District Court referred to (Section 800 old Arbitration Law) is also part of the new Arbitration Law. (30)

3 Conclusion There has been a strong attempt to make Japan more attractive for international arbitration by bringing Japanese arbitration law to a large extent into line with the international standards of the UNCITRAL Model Law. However, whether this will be enough to abolish the unpopularity of Japan as a place for arbitration cannot be conclusively confirmed at this point in time. The number of cases brought before the JCAA has increased over the last few years and reached 25 arbitrations in 2010 (31) – triple the number of cases in 1996. (32) However, compared to the number of new cases filed at other institutions such as the International Chamber of Commerce, the number is still minute, showing that, in spite of the revised law, Japan's arbitration does not yet measure up to international standards. Heike Alps (1) P 771

References ★ )

1)

Heike Alps: orks for Hoffmann Eitle, Munich.(Chuo University) An English translation of the law is available under (accessed on 24 October 2011).

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2)

3)

4) 5)

6)

7)

8) 9) 10) 11)

12) 13)

14) 15)

16) 17) 18) 19)

20)

21)

22) 23)

This part of the Tokyo District Court's decision has been discussed by Tezuka and Hironaka who conclude that the attitudes of the Japanese courts towards arbitration were very much raised by the here discussed judgment, in: H. Tezuka/A. Hironaka, Recent trends in international arbitration in Japan, in: The Asia-Pacific Arbitration Review 2007, 56,

(accessed on 24 October 2011). Law No. 318 of 1 August 2003; an English translation by the Arbitration Law Follow-up Research Group is available under (accessed on 24 October 2011). Law No. 29 of 21 April 1890, after the revision Law No. 109 of 26 June 1996. For a Justice System to Support Japan in the Twenty-first Century, Recommendations of the Justice System Reform Council, 12 June 2001, Chapter II Part 1 8 (3), (accessed on 24 October 2011). S. Nakano, International Commercial Arbitration under the New Arbitration Law of Japan, 2004, 3, (accessed on 24 October 2011); for a different view cf. T. Cole, Commercial Arbitration in Japan: Contributions to the Debate on ‘Japanese Non-Litigiousness’, in: JILP, Vol. 40, No. 1, 2007, 29-114, who challenges the critics that attribute arbitration's lack of success in Japan to the inadequacy of the old Arbitration Law and presents an explanation Cole calls the social-cultural explanation. Nakano does not reveal the source and exact time period in which the number of applications was 10 to 20, but very likely speaks of the years around 2000-2003. The homepage of the JCAA currently only offers information about the number of annual applications as of 2008 (cf. footnote 30). T. Cole, supra note 6, p. 48 at footnote 62. Nakano, supra note 6, 1. (accessed on 24 October 2011). The consultation group on arbitration was chaired by Professor Y. Aoyama, cf. – The members of the Consultation Group on Arbitration (ADR kentō-kai membā), (accessed on 24 October 2011). Adopted by the United Nations Commission on International Trade Law (UNCITRAL) on 21 June 1985. T. Nakamura, Salient features of the New Japanese Arbitration Law Based Upon the UNCITRAL Model Law on International Commerical Arbitration, in: JCAA Newsletter, No. 17, 2004, 2, (accessed on 24 October 2011). S. Nakano, supra note 6, 3; K. Iwasaki, Key Features of New Japanese Arbitration law, Asian International Arbitration Journal, Vol. 2, No. 1, 2006, 76; T. Nakamura, supra note 13. For an overview of the significant differences between the Arbitration Law and the UNCITRAL Model Law cf. Y. Furuta; N. Iguchi, Chapter 10: Japan, in: The International Comparative Legal Guide to: International Arbitration 2008, published by Global Legal Group, (accessed on 24 October 2011). K. Iwasaki, supra note 14, 76. S. Nakano, supra note 1; according to K. Iwasaki, supra note 14, 77, the new law ‘clarifies many vague issues under the old law’. Cf. comparison between Sec. 44 new Arbitration Law and Article 34 UNCITRAL Model Law in M. Kondō et al., Arbitration Law – Legal Commentary (chūsai-hō konmentāru), 2003, Shōji Hōmu, 242. The grounds listed in Sec. 44, para. 1 Arbitration Law are divided into two groups. The existence of items 1-6 is to be proven by the Plaintiff, items 7-8 are to be considered ex officio, Kondō et al., supra note 18, 246, 253; cf. Sec. 44, para. 6 Arbitration Law. M. Kondō et al., supra note 18, 253; with regard to the enforcability of foreign arbitral awards in Japan, the Nagoya District Court has held that ‘where a foreign arbitral award was properly rendered in accordance with the agreement between the parties, if the award has become final and enforcable under the law of the place of arbitration, the enforcement in Japan would not be contrary to public policy’, cf. T. Cole, supra note 6, 46, 47. UNCITRAL Model Law on International Commercial Arbitration, Part Two: Explanatory Note by the UNCITRAL secretariat on the 1985 Model Law on International Arbitration as amended in 2006, 35, (accessed on 24 October 2011). T. Kojima/A. Takakuwa, Comment and Points at Issue – Arbitration Law, 2007, Seirin Shō’in, 243. T. Kojima and A. Takakuwa, supra note 22, name precisely these two grounds which were disputed between the parties of the case decided on by the Tokyo District Court, 246.

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24) UNCITRAL Model Law on International Commercial Arbitration, Part Two: Explanatory

25) 26) 27) 28) 29) 30)

31)

32) 1)

Note by the UNCITRAL secretariat on the 1985 Model Law on International Arbitration as amended in 2006, 35, (accessed on 24 October 2011). Kojima/Takakuwa, supra note 22, 247. Ibid. Ibid. For the reasons, cf. Kondō et al., supra note 18, 246 and Kojima/Takakuwa, supra note 22, 249. Cf. comment in H. Tezuka/A. Hironaka, supra note 2, 56. Section 45, paragraph 1, 1 Arbitration Law reads: ‘An arbitral award (irrespective of whether or not the place of arbitration is in the territory of Japan; this shall apply throughout this chapter) shall have the same effect as a final and conclusive judgement.’ Business Report 2010 (heisei 22 nendo jigyō hōkokusho), (accessed 24 October 2011); the business reports for 2009 and 2008 are also available under and (both accessed on 24 October 2011). The number of new applications filed at the JCAA in 1996 was only 8, cf. T. Cole, supra note 6, 48 at footnote 62. orks for Hoffmann Eitle, Munich. (Chuo University).

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Case No. 71: Arbitration Law – Separability and Arbitrability – Terminated Contract

Document information

Publication

Christopher Heath

Business Law in Japan – Cases and Comments

(★ ) Intellectual Property High Court 28 February 2006 Case No. 2005 ne 10120, Tokyo District Court 21 October 2005 – Case No. 2005 wa 14441, Taiyō Ink Mfg. Co. Ltd. v. Tamura Kaken Corporation, ‘Arbitration Clause in Patent License Agreement’

Jurisdiction Japan

Source: Hanrei Jihō 1926, 127 = LEX/DB28110611

I Headnote(s)

Court

District Court of Tokyo

Where a licensing agreement contains an arbitration clause, the ordinary courts have no jurisdiction over any civil disputes arising from this agreement, even if it has been terminated.

Case date

Termination of the licensing agreement ordinarily does not affect the arbitration agreement.

28 February 2006

Patent invalidation procedures are not ‘civil disputes’ that can be made subject to arbitration.

Case number

P 774

2005 ne 10120

II Relevant Provisions Sections 2, 13 and 14, Arbitration Act (1)

Parties

III Facts

Claimant, Taiyo Ink Mfg. Co. Ltd. Defendant, Tamura Kaken Corporation

The Plaintiff (patentee of two patents on printing ink) and the Defendant in 2002 entered into a non-exclusive licensing agreement, under which Defendant or any of its sublicensees was to pay a running royalty of JPY 160 for every kilo of the patented printing ink. Two years later, Defendant got in arrears with its payments. In the case of any dispute between the parties, Clause 15 of the licensing agreement envisaged an amicable settlement between the parties. If no such settlement could be reached within a reasonable period of time, the dispute was to be brought before the International Chamber of Commerce (ICC) to be settled according to its Rules of Arbitration. The licensing agreement was terminated in 2005. Subsequently, Y brought two actions for revocation of the patents before the Patent Office. X requested the Tokyo District Court to order payment of the outstanding royalties. Invoking the arbitration clause, Defendant sought dismissal of the action for lack of jurisdiction of the ordinary courts. The Court dismissed Plaintiff's claim, as did the Intellectual Property High Court on appeal.

Bibliographic reference

Christopher Heath, 'Case No. 71: Arbitration Law – Separability and Arbitrability – Terminated Contract', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 773 784

IV Findings In dismissing the appeal, the Intellectual Property High Court gave the same reasons as those given in the ruling of the court at first instance, except for the following additional points. 1.

P 775

2.

Plaintiff asserted that, since Defendant did not apply for arbitration within 40 days of receipt of the relevant cancellation notice in accordance with Clause 12(2) of the contract, Plaintiff's claim in this suit was no longer subject to the arbitration clause prescribed in Clause 15 of the contract. Clause 12(2) of the contract prescribed, however, that cancellation of the contract would be invalidated if default in an obligation was rectified within 40 days of the written notice from one party to the other regarding the other party's default in that obligation. Also, the proviso to the same Clause merely provided that, if an application was made for arbitration during this time period, time did not run during the arbitration proceedings. It followed that even if Y did not apply for arbitration within 40 days of receipt of the cancellation notice, disputes such as whether or not there had been default in an obligation, or regarding the demand for performance of an obligation, were not excluded from the coverage of the arbitration clause. Plaintiff asserted that Defendant breached the relevant agreement by not itself applying for arbitration, and that it was against the ‘clean hands’ principle, and principles such as those of fairness and balance, for Defendant to demand the dismissal of Plaintiff's claim in this suit. However, the relevant agreement was only to ‘refer to arbitration in accordance with the rules of the ICC, where a dispute, argument or difference in opinion cannot be resolved within a reasonable period of time’, and could not be understood to impose an obligation to proactively apply for arbitration on either party. The District Court had ruled as follows: ‘…The applicable law for the contract was Japanese law, and the seat of arbitration was Tokyo. According to the Guidelines issued by the ICC on 1 January 2000, international as well as domestic disputes can

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P 776

be made subject to arbitration [under ICC Rules]. Only if the parties have reached an arbitration agreement can arbitral proceedings be instigated. In the case at issue, the parties agreed that current or future civil disputes that bore a legal relation to the contract for their interpretation should be brought before one or more arbitrators. In other words, an agreement in this matter can be interpreted as an agreement in accordance with section 2(1) of the Arbitration Act. Such an arbitration clause can be regarded as covering a civil dispute between the parties that can be settled by arbitration, and the clause is binding according to section 13(1) of the Arbitration Act. As it is clear that the clause related to civil disputes, and none of the grounds listed in section 14(1) Arbitration Act apply, there is no reason to deny validity of the clause under those exceptions. Plaintiff alleged that the licensing agreement was terminated due to arrears in the payment of the running royalty, and that this termination meant that the arbitration clause had lost its validity. However, Y does not dispute the validity of the arbitration clause, and, to begin with, it is not clear if the default in payments led to a termination of the agreement in the first place. Even if Plaintiff were correct and the agreement was terminated due to arrears in the payment of the running royalty, and Plaintiff had given proper notice of termination, section 13(6) of the Arbitration Act states that: ‘In the event that certain provisions of an agreement that contains an arbitration clause are void, have been terminated or are invalid for other reasons, the validity of the arbitration clause remains generally unaffected’. Thus, the termination of the licensing agreement does not affect the validity of the arbitration clause, which does not become void. Plaintiff therefore fails on this point. Plaintiff further argues that Defendant has lodged two cases of patent invalidity. In this respect, Clause 6(2) the licensing agreement bars Defendant from asserting patent invalidity for the duration of the contract, for which reason the current actions of Defendant cannot be interpreted as a breach of this agreement. In addition, where there is a ground for patent invalidity in an action for revocation of the patent, the patent will be declared void by an administrative order, and this does not constitute a ‘civil dispute between the parties that can be settled by arbitration’. By bringing a case of patent invalidity, Y has thus not breached Clause 15 of the licensing agreement. Even if Y's actions were regarded as a breach of Clause 15 of the licensing agreement, this would simply mean that the requests for patent invalidity were unlawful, but this would be insufficient to call into question the validity of the arbitration clause. For the dispute at issue, it would certainly not qualify as a ground under section 14(1) of the Arbitration Act, and thus Plaintiff must fail on this point as well. Translated by Christopher Heath

IV Comment 1 Arbitration Legislation, Case Law Development and Practice Traditionally, arbitration has been little used within Japan to resolve commercial disputes. Some commentators have viewed this phenomenon as simply reflecting ‘premodern’ Japanese culture, particularly an unwillingness to subject disputes to binding ‘black and white’ decisions. (2) But the reality was never that straightforward and certainly is not so nowadays. (3) Domestically, private or commercially supplied arbitration services have been unattractive partly because of the advantages of other more well-established, trusted and cost-effective dispute resolution processes. One category comprises governmentsupported processes, mostly involving mediation services, although a scheme established after World War II to resolve construction disputes involves some arbitration as well as mostly mediation cases. (4) A second category comprises court processes, which of course enjoy financial support from taxpayer funds as well. These processes also benefit from the flexibility that Japanese judges have to encourage settlement during proceedings (even through ‘caucusing’ or private meetings with each party), or to to court-annexed mediation panels P 777 encourage or order parties to refer their disputes under the Civil Conciliation Act (No. 222 of 1951). (5) Of course, both categories may reflect some underlying cultural preferences in Japan, but they also developed in particular political contexts. (6) In addition, in the (unlikely) event that these State-supported dispute resolution procedures were significantly wound back, cost and time savings potentially available in arbitration procedures would probably make the latter much more widely used. In the international dispute resolution arena, moreover, specific government-supported schemes or court processes become inapplicable or relatively unattractive. Unsurprisingly, therefore, we find that Japanese companies have long been prepared to agree to arbitration clauses in cross-border contracts, and to fight out disputes in arbitral proceedings – and even litigation related to such proceedings or arbitration agreements. (7) The distinctive feature here, though, is that this has predominantly involved arbitration with the seat outside Japan. Originally this involved ‘core’ Western venues such as London (especially for maritime disputes), New York, Geneva and Paris (main

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venues for arbitrations administered the ICC). Nowadays Japanese companies increasingly agree to having the arbitral seat in regional centres such as Beijing (or other parts of China), Seoul, Hong Kong and (to a lesser extent) Singapore. (8) These venues, and more recently Seoul, have seen rising caseloads especially over the last decade. This partly reflects the growth of regional economic activity, but it also undermines some P 778 earlier broader assertions that the ‘Asian way’ is fundamentally averse to resolving disputes through binding decisions based on legal considerations. (9) Nonetheless, while the willingness of Japanese corporations to agree to international arbitration is steadily increasing, they still seem to place relatively low priority on securing the ‘home court advantage’ by pressing hard for Japan to be the seat. Japanese corporations are more likely to believe that they will be the subject of claims, rather than having to initiate them, which is why we still often see ‘finger-pointing’ clauses whereby each party agrees to commence proceedings in the other party's jurisdiction. (10) That attitude may also be related to the lower profile of legal departments and outside lawyers in corporate activity in Japan, although this has gradually expanded over the last two decades. (11) Again, all this could be seen as a persistently ‘cultural’ trait (12) – indeed, one stronger than in several other Asian countries nowadays – but it could also represent a plausible cost-benefit assessment. After all, international arbitration has become increasingly expensive and time-consuming, in tandem with the rise of large law firms active in the field which increasingly adopt a ‘billable-hours’ or ‘time-charge’ approach. (13) Actually initiating arbitration to resolve a dispute could well involve ‘throwing good money after bad’. Using the arbitral clause as leverage for a negotiated settlement, better preserving the business relationship in the expectation of recouping losses over the longer term, can make good sense even in today's more competitive business environment both within and outside Japan. (14) The present case is therefore remarkable as it arose in a purely domestic setting, and outcomes from third parties: the Tokyo District Court, the Patent Office, and potentially the arbitral tribunal). Even more unusually, they specified the ICC to administer the arbitration, even though it mostly resolves international disputes (between companies having the place of business in different countries) and the most popular institution for (non-maritime) commercial arbitrations in Japan is the Japan Commercial Arbitration Association (JCAA). Perhaps the parties agreed to arbitration to resolve their civil disputes because of familiarity with ICC arbitration from other international dealings. This case also provides a rare instance where a Japanese court was faced with an application contesting the validity and effect of the arbitration agreement, which it upheld and so declined to itself resolve the dispute – opening the way for the plaintiff instead to commence arbitral proceedings. Such applications, and other cases where parties to the courts to uphold and support the arbitral process are much more infrequent than applications to enforce awards generated by proceedings with the seat abroad. (15) This is usually done pursuant to section V of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed by Japan as early as 1959 and which Japanese courts have applied very faithfully. (16)

P 779 also because the parties escalated the dispute (seeking binding

The judgment therefore should be welcomed by those who have been worried about the persistently low uptake of arbitration especially within Japan. Concerns were highlighted regarding domestic as well as international dispute resolution particularly in the deliberations led by the Justice System Reform Council (JSRC, 1999–2001). As part of the JSRC's suite of recommendations to reorient Japan away from a reliance on ex ante government regulation, towards more indirect socio-economic ordering through ex post relief provided primarily through the legal system at private initiative, the JSRC urged improvements in the regime for privately supplied Alternative Dispute Resolution (ADR) as well as in court proceedings. (17) A framework for certification and promotion of ADR services (but expressly excluding arbitration services) was duly enacted in 2004, and may now be achieving some modest P 780 success. (18) The Arbitration Act was also enacted (No. 138 of 2003), with effect from 1 March 2004, based on the 1985 UNCITRAL Model Law on International Commercial Arbitration (ML). It extended coverage to domestic as well as international arbitration agreements and proceedings, and thus was applicable to the present case; (19) but it also added some extra provisions aimed at balancing different public interests related solely to domestic settings. In particular, arbitration agreements purporting to govern individual labour-related disputes are null and void, and consumers are entitled to cancel arbitration agreements with businesses ‘for the time being, until otherwise enacted’ in order to protect the weaker party (Arts 3 and 4 of the Supplementary Provisions). By contrast, the Arbitration Act did not expressly specify whether or not disputes involving the validity of intellectual property rights, such as the patent rights at issue in this case, were ‘arbitrable’. There is also limited statutory or case law guidance on what other matters may not be capable of resolution through arbitration, but one commentary adds: other intellectual property rights issued by the government (utility models and trade marks), anti-trust law matters, shareholders' suits against resolutions of general shareholders' meetings, administrative decisions of government agencies, and insolvency and civil enforcement procedural decisions. (20) Japanese experts in international civil procedure and arbitration law had long urged

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enactment of a new statute, based primarily on the ML, to replace the quite serviceable but occasionally unusual and certainly venerable, provisions in the German-influenced Code of Civil Procedure (No. 29 of 1890). (21) The Arbitration Act did get rid of the previous possibility of ending up with two arbitrators, for example, and validated arbitral agreements concluded by exchanging ‘data messages’ (anticipating 2006 revisions to the ML, which also liberalized ‘writing’ requirements). More importantly, the Act provided for court decisions related to arbitral proceedings to be made by more informal and faster P 781 rulings (kettei) rather than judgments (hanketsu), allowing only one appeal from a ruling. (22) Another innovation was to clarify that arbitrators should not attempt settlement unless the parties provided consent in writing, unless they dispensed with that requirement. There had been persistent remarks, particularly on the part of jurists from common law jurisdictions since the late 1980s, that some Japanese arbitrators – rather like some Japanese judges – had tended to press for settlement relatively aggressively. (23) However, over-enthusiastic use of ‘Arb-Med’ had already diminished by the late 1990s. (24) In addition, in several important respects the ML-based Act is not too dissimilar to the old statute, or the Act is consistent with influential Japanese case law. For example, section 13(6) – quoted above and applied in this case – states that the arbitration agreement on dispute resolution and any other underlying substantive contract (like licensing) are in principle ‘separable’; but the Supreme Court had already established this point in 1975. (25) This help explain why the Arbitration Act could be enacted relatively quickly – some two years – after the JSRC recommendations were issued in 2001. Other contributing factors were that the enactment was part of a high-profile set of civil justice reforms; and the emergence of ‘competing’ regional arbitration venues, often supported by newly enacted ML-based legislation (such as Korea's Arbitration Act of 1999). Another possible impetus may have been the impending inauguration (from 2004) of the option for full profit-sharing partnerships for international law firms in Japan, which also triggered the consolidation and expansion of large Japanese law firms. (26) However, precisely because Japan's Arbitration Act does not represent a large departure from earlier legislation and mainly just brings the country up to the (ML-based) ‘global standard’, there have not yet been large quantitative changes in arbitral activity and related court proceedings. The surge in commentary on Japanese arbitration law P 782 published over 2003–2006 (27) has not been associated with any dramatic increase in cases filed with the JCAA, for example. This contrasts with the ongoing growth in caseloads reported by other regional venues, consolidating their ‘first mover’ advantages. (28) Nonetheless, perhaps as in other legal fields, the Japanese courts seem to have taken the enactment as a signal to do their bit in trying to make arbitration – even within Japan – a more attractive dispute resolution option. The decisions in the present case, insisting that the parties should abide by their decision to have civil disputes heard only through the agreed arbitral procedure, represent one recent example among several. (29) This is in conformity with international practice: one of the main issues of dispute between the parties may be precisely the validity of the licensing agreement. (30) For that reason, arbitration clause and licensing agreement are regarded as two separate agreements.

2 Arbitrability of Patent Validity Claims Admittedly, the Courts might have gone further, to hold that disputes over patent validity were instead arbitrable. They could have reasoned that: (a)

(b) P 783

the parties probably intended the arbitrators to resolve such disputes, closely linked with the fundamental question of whether the licensee should have to pay royalties related to the licensor's patents, rather than having a costly and public separate proceeding on validity disputes (through the Patent Office, and indeed possibly the Japanese courts (31) ); and there exist sufficient public interests to interpret ‘civil dispute’ expansively in Arts 2 and 13 of the Arbitration Act (namely, cost-efficiency in dispute resolution, funded more from private parties than through taxpayers' funds, and the potential to promote ADR more generally – in line with JSRC recommendations and subsequent government policy).

However, this would have pushed the boundaries of statutory interpretation, and the public interests involved are difficult to assess. (32) That is why different countries continue to adopt different approaches to the question of arbitrability of claims about the validity of intellectual property rights. (33) Leaving the issue to be revisited by the legislature is understandable, particularly given that the Japanese government has agendas not just to expand ADR, but also to improve the formal court system as well as to develop an integrated intellectual property policy program. (34) This case instead takes the view that while issues of infringement, damages and injunctive relief may be brought within the ambit of an arbitration clause, this is not so for patent invalidation actions, as these are considered administrative in nature. In Japan, these disputes have to be brought before the Patent Office that has exclusive jurisdiction over matters of invalidation. As a consequence of the Kilby decision, the courts may refuse the enforcement of a patent held revocable (section 104bis Patent Act), P 784 a provision that applies to civil litigation before the courts that in order to determine revocability are assisted by personnel from the Patent Office. Yet the Kilby ruling in

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expressing a general principle of equity (it is an abuse to enforce obviously voidable patents) should also be applicable in arbitration proceedings. Thus, while it is permissible to insert a clause that prevents the licensee from challenging the patent, (35) bringing an invalidation action before the Patent Office may be a breach of the nonchallenge clause, allowing for a court injunction preventing such action. But an action for invalidity does not breach the arbitration clause, as this is not considered a matter that may be subjected to arbitration. While arbitration clauses may be useful in a number of ways, not least because ready enforceability of arbitral arbitration awards under the New York Convention or (largely equivalent) provisions in section 45 of the Arbitration Act, they may also have drawbacks – quite apart from the inconvenience of the arbitrators not being able to determine any issues raised about the validity of Japanese patents. For one thing, court procedures in Japan have become so efficient that a first-instance decision in intellectual property matters is now handed down in about 14 months. (36) In addition, arbitration clauses can benefit a recalcitrant party unless drafted rather clearly. In one case, it was agreed that in case of a dispute, each party should nominate one arbitrator. As the Defendant failed to do so, the Plaintiff sued. The court – perhaps correctly – held that in such case, the Plaintiff was not entitled to nominate both arbitrators, and thus only ordered the Defendant to select an arbitrator as was stipulated in the arbitration agreement. (37) This, however, makes the whole process extremely cumbersome. Christopher Heath & Luke Nottage (*) P 784

References ★ )

1)

2)

3)

4) 5)

6) 7)

Christopher Heath: Head of the Asian Department, Max Planck Institute, Munich No. 138 of 2003. A semi-official translation can be found at: . For related legislation see also: . T. Kawashima, Dispute Resolution in Contemporary Japan, in: A. von Mehren (ed.), Law in Japan: The Legal Order in a Changing Society (Harvard 1963) 41. See generally E. Feldman, Law, Culture, and Conflict: Dispute Resolution in Postwar Japan, in: D. Foote (ed.), Law in Japan: A Turning Point (Seattle 2007) 50-79. L. Nottage, Japan's New Arbitration Law: Domestication Reinforcing Internationalisation?, International Arbitration Law Review 7 (2004) 54-60; C. Tseng, Factors Affecting the Choice of Dispute Resolution Methods in Japan (with an Emphasis on Arbitration), Journal of International Arbitration 24 (2007) 211-230 (based on a 2003 survey of companies belonging to the Japan Shipping Exchange). Compare also generally now T. Tanase, Community and the Law: A Critical Reassessment of American Liberalism and Japanese Modernity (Cheltenham 2010). T. Nakamura, Arbitration, in: L. Nottage (ed.), Business Law in Japan (Tokyo 2008) 441459, 444. Y. Sato, Commercial Dispute Processing and Japan (The Hague et al. 2001); R. Nishikawa, Judges and ADR in Japan, in: Journal of International Arbitration 18 (2001) 361-369; K. Ishida and Y. Tamura, Introduction to Code of Civil Procedure, in: L. Nottage (ed.), Business Law in Japan (Tokyo 2008) 323-347, 346-347. See generally J. O. Haley, The Myth of the Reluctant Litigant, in: Journal of Japanese Studies 4 (1978) 359-390; F. Upham, Law and Social Change in Post-War Japan (Cambridge, Mass. 1987). L. Nottage, Educating Transnational Commercial Lawyers for the Twenty-first Century: Towards the Vis Arbitration Moot in 2000: Part Two, in: Hōsei Kenkyū [Kyūshū University] 66 (1999) F1-F32; C. Tseng, supra note 3; T. Kitagawa & L. Nottage, Globalization of Japanese Corporations and the Development of Corporate Legal Departments: Problems and Prospects, in: W. Alford (Ed.), Raising the Bar (Cambridge, Mass. 2007) 201-285. However, some empirical research suggests that Japanese parties are somewhat more likely to be respondents than claimants, overall across major venues surveyed over 2005-2007, in international arbitration proceedings. See WHITE & CASE, ‘Evolving Japanese Attitudes to International Arbitration and Litigation for Dispute Resolution’, ABA International Legal Exchange Program seminar, Temple University, Tokyo, 9 July 2008 (topics listed at , Powerpoint presentation on file with the authors).

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8)

9)

10)

11) 12) 13) 14)

15)

16)

17) 18)

19)

20)

This can be inferred from the White & Case survey (ibid.), assuming that cases administered by regional arbitration centres have the seat in their respective States. Out of around 100 arbitration cases involving Japanese companies reported each year over 2005-2007, 15% were administered by CIETAC (which only administers arbitrations with the seat in China), 3 % by HKIAC and 5% by (Seoul-based) KCAB. Six cases involving Japanese firms were administered by (Singapore-based) SIAC over 2002-2004, but none over 2005-2007. Around 43% were administered by the (USbased) AAA-ICDR, 2% by the (London-based) LCIA, and 20% by the (Paris-based) ICC – some of which probably had the seat in Asia, rather than the US or Europe. See also, e.g., Toyo Engineering Corporation v. John Holland Pty Ltd. [2000] VSC 553 (20 December 2000) (involving arbitration with the seat in Singapore); Yokohama District Court, 25 August 1999 (Heisei 10 wa 3851), (one of several CIETAC awards from China enforced in Japan). L. Nottage & R. Garnett, Introduction, in: L. Nottage & R. Garnett (eds.), International Arbitration in Australia (Sydney 2010) 1, 6-11; S. Greenberg, et al., International Commercial Arbitration: An Asia-Pacific Perspective (Cambridge; New York 2011) 33– 53. See e.g. P. Godwin, ‘Finger-Pointing’ Arbitration Clauses – Don't Use Them!, in: H. Smith – Dispute Avoidance Newsletter 43 (March 2006) , noting a sample ‘fingerpointing’ clause at . T. Kitagawa & L. Nottage, supra note 7. Cf. generally T. Cole, Commercial Arbitration in Japan: Contributions to the Debate on ‘Japanese Non-Litigiousness’, in: New York University Journal of International Law and Politics 40 (2007) 29-114. L. Nottage, Addressing International Arbitration's Ambivalence: Hard Lessons from Australia, in: K. Bhatia, et al. (eds.), Arbitration Practice and Discourse: Issues, Challenges and Prospects (Dartmouth 2012) forthcoming. This is even more plausible for cross-border investment contracts, which may explain the paucity of direct and even indirect investor–State arbitration claims by Japanese firms despite the arbitration rights increasingly available through investment treaties. See S. Hamamoto, A Passive Player in International Investment Law: Typically Japanese?, in: V. Bath & L. Nottage (eds.), Investment Law and Dispute Resolution Law and Practice in Asia (London 2011) 53–67. Asian parties, especially Asian investor claimants, are generally under-represented in investor–State arbitration filings and awards; but this too may be changing as ‘institutional barriers’ to contesting claims begin to come down. See L. Nottage & J.R. Weeramantry, Investment Arbitration in Asia: Five Perspectives on Law and Practice, in: V. Bath & L. Nottage (eds.), Foreign Investment and Dispute Resolution Law and Practice in Asia (London 2011) 25–52. For example, 14 enforcement decisions were rendered by Japanese courts between March 2004 and July 2006; but there were only one case each for appointment of an arbitrator, service of an award and service of a document. See H. Tezuka/A. Hironaka, Recent Trends in International Arbitration in Japan, in: The Asia-Pacific Arbitration Review 2007 (2007) 45-7. T. Tateishi, Recent Japanese Case Law in Relation to International Arbitration, Journal of International Arbitration 17 (2000) 63-75; T. Nakamura, supra note 4; T. Nakamura/L. Nottage, Japan, in: T. Ginsburg/S. Ali (eds.), Arbitration in Asia (New York 3rd ed. 2012) forthcoming. D. Foote, Introduction and Overview: Japanese Law at a Turning Point, in: D. Foote (ed.), Law in Japan: A Turning Point (Seattle 2007) xix-xxxix; T. Kitagawa and L. Nottage, supra note 7. A. Yamada, A.D.R. In Japan: Does the New Law Liberalize A.D.R. From Historical Shackles or Legalize It?, in: Contemporary Asia Arbitration Journal 2 (2009) 1-23; L. Nottage, New Legislative Agendas, Legal Professionals and Dispute Resolution in Australia and Japan: 2009-2010, in: Ritsumeikan Law Review 28 (2011) 33-85, 66-9. But see H. Irie, An Overview on the Current Status of Japanese Private Dispute Resolution – Small Impact of the ADR Act and It's Still at the Early Stage, in: JCAA Newsletter 25 (2010) . By contrast, many of Australia's recent revisions to the International Arbitration Act (Cth) probably do not apply to agreements specifying Australia as the seat, which were concluded before 6 July 2010. See L. Nottage/R. Garnett, The 2010 Amendments to the International Arbitration Act: A New Dawn for Australia?, in: Asian International Arbitration Journal 7 (2011) 29-53 (also at ). Y. Furuta/N. Iguchi, Japan, in: Global Legal Group (ed.), The International Comparative Legal Guide to International Arbitration 2008 (London 2008) 55-61, 56. Other countries are also not very helpful in clarifying which matters are or are not arbitrable: see, e.g., L. Nottage/R. Garnett, The Top 20 Things to Change in or around Australia's International Arbitration Act, in: L. Nottage/R. Garnett (eds.), International Arbitration in Australia (Sydney 2010) 149-90, 152-6.

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21) See, e.g., H. Ogawa, Proposed Draft of Japan's New Arbitration Law, 7 Journal of

22) 23) 24)

25) 26) 27)

International Arbitration 7 (1990) 33-41. The Code's arbitration provisions were left unchanged when it was otherwise comprehensively reformed in 1996. They were retained in the original 1890 Code, which was then renamed the ‘Law concerning Procedure for General Pressing Notice and Arbitration Procedure’ (accessible via: ). H. Tezuka/A. Hironaka, supra note 15. C. Ragan, Arbitration in Japan: Caveat Foreign Drafter and Other Lessons, Arbitration International 7 (1991)93-113; R. Thirgood, A Critique of Foreign Arbitration in Japan, Journal of International Arbitration 18 (2001) 177-89. T. Nakamura, Continuing Misconceptions of International Commercial Arbitration in Japan, Journal of International Arbitration 18 (2001) 641-7. Anyway, Arb-Med is increasingly acknowledged world-wide as having a role to play in international arbitration, provided it is carried out carefully and with the participant's informed consent. See L. Nottage/R. Garnett, supra note 20, 179-84; and ‘Arb-Med and New International Commercial Mediation Rules in Japan’ (21 July 2010) at (also in: L. Nottage, supra note 18, 73-7). Supreme Court, 15 July 1975, Minshū 29-6, 1061 - Kokusan Kinzoku Kogyo KK v.Guardlife Corp., see case 62 in this book. See generally K.-W. Chan, The Emergence of Large Law Firms in Japan: Impact on Legal Professional Ethics, in: Legal Ethics 11 (2009) 154-180. Just in English, see L. Nottage, supra note 2; D.A. Livdahl, Cultural and Structural Aspects of International Commercial Arbitration in Japan, in: Journal of International Arbitration 20 (2003) 375-386; N.T. Braslow, Contractual Stipulation for Judicial Review and Discovery in United States–Japan Arbitration Contracts, in: Seattle University Law Review 27 (2004) 659-720; M. Kondō, et al., Arbitration Law of Japan (Tokyo 2004); G. Mcalinn/L. Nottage, Changing the (JCAA) Rules: Improving International Commercial Arbitration in Japan, ZJapanR/J.Japan. L 18 (2004) 23-36; S. Nakano, International Commercial Arbitration under the New Arbitration Law of Japan., J.A.I.L. 20 (2004) 96-118; R. Nishikawa, Arbitration Law Reform in Japan, in: Journal of International Arbitration 21 (2004) 303-308; H. Oda, Arbitration Law Reform in Japan, ZJapanR/J.Japan.L 18 (2004) 5-22; D. Roughton, A Brief Review of the Japanese Arbitration Law, Asian International Arbitration Journal 1 (2005) 127-140; Y. Sato, The New Arbitration Law in Japan: Will It Cause Changes in Japanese Conciliatory Arbitration Practices?, Journal of International Arbitration 22 (2005) 141148; A. Takakuwa, Arbitration, Y. Taniguchi, et al. (eds.), T. Hattori/D. F. Henderson, Civil Procedure in Japan (New York 2005) chapter 12; Y. Taniguchi/T. Nakamura, Japan, in: International Council on Commercial Arbitration. Arbitration (ed.), International Handbook on Commercial Arbitration (The Hague 2005) 1-38 (updated 2010);K. Iwasaki, Key Features of New Japanese Arbitration Law, Asian International Arbitration Journal 2 (2006) 76-88.

28) L. Nottage/R. Garnett, supra note 9, 10-11 and 32-33. Australia is also still struggling

29) 30) 31) 32)

to attract more than a handful of international commercial arbitration cases each year, despite adopting the ML in 1989 and revising its legislative framework further in 2010. T. Nakamura, supra note 4; Y. Taniguchi/T. Nakamura, Japan, in: M. Moser, et al. (eds.), Arbitration in Asia (New York 2008) JAP-1-30; and the case notes at . For Germany: K. H. Schwab/G. Walter, Schiedsgerichtsbarkeit, 7th ed. Munich 2005, Chapter 4 marginal note 17. See Japanese Supreme Court, 11 April 2000 –‘Kilby’, in this volume case no. 43. For various views expressed among Japanese commentators on this point, see also T. Nakamura/L. Nottage, supra note 16.

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33) See e.g. L. Boo, Arbitrability of Intellectual Property Disputes, in: Proceedings of 4th

AIPPI Forum in Singapore, 4 – 6 October 2007, via (with further references comparing especially the situation in Singapore, Switzerland and the United States); G. Born, International Commercial Arbitration, Vol. 1 (Alphen aan den Rijn 2009) 805-8. See also recently Larkden Pty Limited v. Lloyd Energy Systems Pty Limited [2011] NSWSC 268 (1 April 2011), at . The Supreme Court of New South Wales dismissed the licensor's claim and confirmed that the arbitrator in a domestic arbitral proceeding retained jurisdiction to make a declaratory decision regarding interpretation of a licensing agreement, Hammerschlag J. stated that: ‘[66] The powers to grant a patent, to make a declaration of eligibility and to decide the case where the grant of a standard patent is opposed, are powers conferred by the provisions of the Patents Act on, and only on, the Commissioner of Patents or the Federal Court on appeal from the Commissioner. These statutory powers cannot, by private arrangement, be conferred by parties on an arbitrator. [67] There is, however, no impediment to the parties investing in the arbitrator power to resolve a dispute as between themselves as to their rights in and entitlements to a patent application, or for that matter an invention.’ The outcome, reasoning and situation show remarkable similarities to the Japanese case law, although in Larkden the licensee had not (yet) applied to the authorities or Federal Court to determine the validity of the patents giving rise to dispute with the licensor. 34) See generally e.g. Secretariat of Intellectual Property Strategy Headquarters,

Overview of ‘Intellectual Property Strategic Program 2010’, 35 AIPPI Journal of the Japanese Group (English Edition), 255 (2010); R. Taplin, Intellectual Property and the New Global Japanese Economy. (London et al. 2009); S. Matsui, The Intellectual Property High Court of Japan, in: A. Harding & P. Nicholson (eds.), New Courts in Asia (London 2009) 83-100; P. Ganea/S. Nagaoka, Japan, in: P. Goldstein, et al. (eds.), Intellectual Property in Asia – Law, Economics, History and Politics (Berlin 2009) 129153. 35) However, no-challenge clauses may give rise to antitrust concerns. The Japan Fair Trade Commission's Guidelines for the Use of Intellectual Property under the Antimonopoly Act (Tokyo 2007, online at ) state the following in this respect: ‘Patent licensing agreements that prohibit the licensee from contesting the validity of the licensed patent rights will fall within the category of unfair trade practices and be in violation of the Antimonopoly Act (Item 13 of the General Designation (Dealing on Restrictive Terms)) if this prohibition may have an adverse effect on competition in a market by continuing the rights under a patent that the licensor would not originally have been able to obtain. However, providing in patent licensing agreements that the licensor can terminate the said licensing agreement if the licensee contests the validity of the patent rights will not, in principle, fall within the category of unfair trade practices when the licensee can contest the validity of the said patent rights.’ 36) R. Tokunaga, The Reform of Japanese Judicial System to make an IP-based Nation, in:

B. Hansen/D. Schuessler-Langeheine (Ed.), Patent Practice in Japan and Europe (Kluwer Law 2011) 61. 37) Tokyo District Court, 25 January 1958, in: Hanrei Jihō 142, 22. See also Godwin, supra note 10. *) This chapter includes research for the project, ‘Fostering a Common Culture in CrossBorder Dispute Resolution: Australia, Japan and the Asia-Pacific’, supported by the Australian Commonwealth through the Australia–Japan Foundation which is part of the Department of Foreign Affairs and Trade. The authors thank Professor Tatsuya Nakamura for helpful information, although all views expressed remain our own.

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Case No. 72: Disclosure of Documents for Internal Use

Document information

Supreme Court, 12 November 1999, Case No. 1999 kyo 2

Publication

Source: Minshū 53, 1787

Business Law in Japan – Cases and Comments

I Headnote(s) When a document, judging from the purpose of preparation, content, the process until it came into the possession of the present possessor and other circumstances, was prepared solely for internal use and did not presuppose disclosure to outsiders, and by disclosure, is likely to cause disadvantage which cannot be overlooked, such as the violation of privacy, or inhibition of free formulation of will by individuals or organizations, unless there are special circumstances, it is appropriate to regard the document as ‘a document which is solely for the use of the possessor’ as provided by section 220 (iv) (c).

Jurisdiction Japan

Court

Supreme Court of Japan

II Relevant Provisions

Case date

Section 220 (iii), (iv) Code of Civil Procedure

12 November 1999

P 786

III Facts (1)

Case number

Late Maeda received a loan of JPY 650 million from the appellant and effected transactions in securities including shares through Daiwa Securities, but incurred heavy loss. An heir of his asserts that the branch manager of the appellant company extended excessive loan to the decedent, late Maeda, despite being aware that in the light of his financial state, there was no way other than paying from the proceeds of securities transaction for him to repay the interest of the loan. Appellee argues that this was a breach of the duty to care for the safety of the opposite party and claimed damages.

1999 kyo 2

Bibliographic reference

'Case No. 72: Disclosure of Documents for Internal Use', in Moritz Bälz , Christopher Heath , et al. (eds), Business Law in Japan – Cases and Comments, (© Kluwer Law International; Kluwer Law International 2012) pp. 785 - 800

This case concerns a petition to the court for issuing an order to submit document for the internal approval of the loan and the actual approval by the head office in possession of the appellant as included in the list of documents attached to the original decision (hereafter ‘documents’). The opposite party contented that the document in question qualify as the document as provided by section 220 (iii), second half, and are ‘documents which are solely for the use of the possessor’ as provided by section 220 (iv) (c) (present (d) as amended by Act No. 96 of 2001) of Japanese Code of Civil Procedure (Act No. 109 of 1996, up to the revision of Act No. 95 of 2007). (2) The court of first instance, the Tokyo High Court, ruled that the documents for internal approval and the document for approval are not ‘documents which are solely for the use of the possessor’ as provided by section 220 (iv) (c) at that time and also found that there were no other grounds to deny the duty to submit documents as provided in the same subparagraph. Therefore, the court found that the petition was well grounded and ordered the appellant to submit the documents.

IV Findings The original decision is quashed. The petition of the opposite party is dismissed. P 787

1) When a document, judging from the purpose of preparation, content, the process until it came into the possession of the present possessor and other circumstances, was prepared solely for internal use and did not presuppose disclosure to outsiders, and by disclosure, is likely to cause disadvantage which cannot be overlooked, such as the violation of privacy, or inhibition of free formulation of will by individuals or organizations, unless there are special circumstances, it is appropriate to regard the document as ‘a document which is solely for the use of the possessor’ as provided by section 220 (iv) (c). 2) In the present case, according to the record, a document for internal approval of a loan is a document which is made in order to seek approval of the head office for a loan which exceeds the limits given to the branch manager in its amount and content. Usually, in addition to the content of the loan such as the name of the borrower, amount of loan, purpose of the money, security and guarantee, method of repayment, matters such as the prospect of profitability for the bank, creditworthiness of the borrower, assessment of the borrower, and the opinion of the person directly in charge on the proposed loan are included. The opinion of the person directly in charge in the head office, the opinion of those people who are empowered to approve the loan such as the deputy general manager or the general manager as to whether the loan should be extended or not, based upon the above information is expressed in the document. Documents in the present case are the document for internal approval of the loan and the document of approval by the head office which is an integral part of the former. It is evident that the documents were made in the process of the appellant formulating the intention to extend a loan to

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late Maeda in order to confirm, examine and review the above-mentioned issues. 3) Judging from the purpose of making the document and its contents, a bank document for internal approval of a loan is a document which is made internally by the bank in order to form an opinion on a proposed loan in a smooth and appropriate way, but is not made under the requirement of law, and due to the nature of the document which is made for examining the availability of a loan, presupposes that a frank assessment and views be contained therein. Therefore, the document for the internal approval of a loan is a document which is prepared solely for the internal use of the bank and is not intended to be disclosed externally. Such disclosure may affect the free exchange of views and inhibit free formulation of opinions within the bank, and unless special circumstances exist, the documents should be considered to be ‘documents solely for the use of the possessor’. Documents in the present case are the document for internal approval of the loan and the document of approval by the head office which is an integral part of the former, and special circumstances do not seem to exist. Therefore, both documents should be regarded as ‘documents solely for the use of the possessor’, and thus, it is not possible to acknowledge the duty of the appellant to submit documents on the basis of section 220 (iv). 4) Incidentally, since the documents in the present case are understood to be ‘documents solely for the use of the possessor’, it is evident that they are not documents as provided in section 220 (iii), second part. P 788

5) Thus, the decision of the original instance is unlawful for the error in interpretation and application of law, and it is obvious that this affects the conclusion of the court. Arguments of the appellant are well-grounded and the original decision cannot avoid being quashed. As mentioned above, the appeal by the opposite party has no grounds, and therefore shall be dismissed. Thus, the court unanimously decides as the main body of the decision. The translation provided by the Sir Ernest Satow Chair of Japanese Law, University College, University of London on the Supreme Court s homepage was closely followed.

V Comment 1 A Document Prepared Exclusively for Use by the Holder Thereof [jiko senriyō bunsho] Collection of evidence is one of the stages of civil procedures in which there is a great difference between common law and civil law. Therefore, the procedures for the collection of evidence, has always been an issue, when comparing both procedural law systems. Recently both seem to have come closer and the main result from the civil law side is an expansion of the obligation to submit a document. (3) Section 220 of the current Japanese Code of Civil Procedure is the central regulation on this, which imposes the obligation to submit a document on the first parties and third parties excluding exceptional documents. (4) P 789

One of the documents not required to be submitted is a ‘document prepared exclusively for use by the holder thereof (section 220 (iv) (d) of the current Japanese Code of Civil Procedure), so-called jiko senriyō bunsho. The document originates from the jiko shiyō bunsho which was developed under the former Code of Civil Procedure and was a contrary concept of the Common Document (the document with regard to the legal relationship between the party who offers evidence and the holder of the document, or prepared in the interest of the party who offers evidence). Under the former Code of Civil Procedure, it meant that the document that did not fall under the category of the Common Document, which was required to be submitted as an exception, or the category of the document prepared exclusively in the interest of the party who offers evidence. However, under the current Code of Civil Procedure, in the case that a document does not fall under the category of the Common Document, if the document is presupposed to be disclosed to a person other than the party who offers evidence, the document is subject to the obligation to submit because of the presupposed disclosure to outsiders. Therefore, according to a standard theory, the range of jiko senriyō bunsho presupposed by the current Code of Civil Procedure should be more limited than the range of jiko shiyō bunsho which is presupposed by the former Code of Civil Procedure. (5) P 790

With respect to the document for internal approval of a loan of financial institutions, the Kashidashi Ringisho, which was dealt with in the Decision in question, active discussions had been made from a previous period as to whether it had fallen under the category of a ‘document prepared exclusively for use by the holder thereof’. The legislators of the current Code of Civil Procedure had insisted that the document for internal approval of a loan had fallen under the category of a ‘document prepared exclusively for use by the holder thereof’, (6) but after enforcement of the current Code of Civil Procedure the judgments of courts was divided. (7) The Decision in question is the first judgment made

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by the Supreme Court with regard to the issue.

2 General Requirements of a ‘Document Prepared Exclusively for Use by the Holder Thereof’ The Decision in question judged that the document for internal approval of a loan of financial institutions generally and typically fell under the category of a ‘document prepared exclusively for use by the holder thereof’. In the decision the Supreme Court clearly indicated the general requirements of a ‘document prepared exclusively for use by the holder thereof’ for the first time. That is: (1) the document does not presuppose disclosure to outsiders (Non-disclosure to outsiders), (2) disclosure of the document is likely to cause disadvantages which cannot be overlooked to the holder (Disadvantageous nature) and (3) there are no special circumstances. The requirements indicated by the Decision in question are abstract, and what these mean concretely is not necessarily clear. Therefore, discussions are still continuing taking individual cases as a main subject. However, the discussions only aim to make the requirements concrete, and subsequent court precedents and theories are also built on the requirements indicated by the Decision in question. In this sense, there is no doubt that the Decision in question is a precedent on the general requirements of a ‘document prepared exclusively for use by the holder thereof’. a) Non-disclosure to Outsiders This requirement can be directly drawn from the provision of section 220 (iv) (d). (8) However, because the provision itself is abstract, court precedents have made it concrete. P 791

According to the Decision in question, when judging whether the document concerned is presupposed to be disclosed to other third parties than a party who offers evidence, the factors to be considered are ‘the purpose of preparation, content, the process until it came into the possession of the present possessor and other circumstances’, and they should be considered comprehensively (refer to the import of judgment 3). One example cited as a document required to be submitted, a document ‘which is made under the requirement of law’ because the preparation purpose of such a document is heteronomous and therefore in many cases such a document is immediately found to be presupposed to be disclosed to outsiders. The document for the internal approval of a loan is subject to inspection by the Prime Minister. (9) For a document which is not made under the requirement of law, the content of the document and the process until it came into the possession of the present possessor, or other factors are considered comprehensively, and a judgment is made on whether there is an obligation to submit it. b) Disadvantageous Nature This requirement cannot be directly drawn from the provision of section 220 (iv) (d). However, as the requirements of jiko shiyô bunsho under the former Code of Civil Procedure, a standard theory and court precedents had demanded the disadvantageous nature. (10) It is evaluated that on the premise of it the Decision in question restrictively interpreted the range of a ‘document prepared exclusively for use by the holder thereof’. (11) That is, under the current Code of Civil Procedure, providing that the obligation to P 792 submit a document should be imposed in principle, and a ‘document prepared exclusively for use by the holder thereof’, is an exception, if the range of the ‘document prepared exclusively for use by the holder thereof’ were recognized more widely than the range of jiko shiyô bunsho, it would run counter to the legislative intent of the current Code of Civil Procedure to expand the procedures for the collection of evidence on documents. (12) Theories largely support that the Decision in question recognized the disadvantageous nature as one of the requirements of a ‘document prepared exclusively for use by the holder thereof’. (13) According to the Decision in question, just as is the case with the nondisclosure to outsiders, the requirement of disadvantageous nature also should be judged by evaluating comprehensively ‘the purpose of preparation, content, the process until it came into the possession of the present possessor and other circumstances’ (refer to the import of judgment 3). As the case in which there is the disadvantageous nature, the following ones are cited: there is a risk that individual privacy will be violated, or that the free decision making of individuals or organizations will be impaired. It should be noted that all of the concrete examples indicated by the Decision in question relates to the content of a document, but not the form. Although a ‘document prepared exclusively for use by the holder thereof is naturally a concept to indicate the possession form of information, when making a judgment on the disadvantageous nature, the judgment is based on the different material that is the concealment nature of the content. In addition, in the case of a document with the name (or the form) of a ‘document prepared exclusively for use by the holder thereof’, if the content did not fall under the section 220 (iv) (a) or (c) (Right of Refusal to Testify), the obligation to submit would not be imposed to it, and the concealment would be permitted.

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c) No Special Circumstances This requirement is a negative requirement of a ‘document prepared exclusively for use by the holder thereof’. In the Decision in question, the Supreme Court judged that there were no special circumstances without mentioning the content concretely or considering it in relation to the case. The Decision in question set ‘no special circumstances’ as one of the requirements without concretely clarifying in what cases there were (or no) ‘special circumstances’, without even giving an example. Regarding the Decision in question, this requirement has the highest risk to be a black box when judging whether it falls under the category of a ‘document prepared exclusively for use by the holder thereof’, and its meaning was left with the challenge of this decision. (14) P 793

3 Development of Discussions through Subsequent Court Precedents The general requirements on whether a document falls under the category of a ‘document prepared exclusively for use by the holder thereof’, indicated by the Decision in question, have been applied to various types of documents through court precedents following the Decision in question, and the content has become gradually more concrete. As mentioned above, although the document discussed from an early period, is for internal approval of a loan of financial institutions, (15) the judgments of the Supreme Court have extended to other documents. a) Non-disclosure to Outsiders The Decisions in question have not been entirely supported in subsequent court precedents in that it recognized the relation of the obligation to make a document under the requirement of law to the obligation to submit it. On the one hand, a document which is made under the requirement of law may not be subject to the obligation to submit. (16) For example, the Decision of the Supreme Court, 10 November 2005, Minshū 59, 2503 acknowledged the nondisclosure to outsiders on ‘research study reports’ and exempted the obligation to submit it, which is a result of research studies with the research study expenses and describes the content and the breakdown of the expenses to be submitted to the political faction concerned. According to the decision, the research study reports are only required to be submitted to the representatives of the political faction, not to the mayor or assembly chairperson. As a background to it, it was noted that political factions have the nature of acting independently on an autonomous basis in the assembly, and therefore the utilization and proper use of the research study expenses should be left to the autonomy of the political faction, and that since the research study reports also include the content on the essence of activity of the political faction and the assembly members, interference by executive organs etc. in the research studies should be eliminated. (17) Decision of the Supreme Court, 12 April 2010, Shū min 234, 1 also follows this stance on reports and receipts. Decision of the Supreme Court, 30 November 2007, Minshū 61, 3186, judged that ‘selfclassify the debtors as a premise of the evaluation of assets, which was mandatory by law, were presupposed to be disclosed to outsiders as the materials to support the accuracy of the assessment results.

P 794 assessment materials’ prepared and preserved by a bank in order to

On the other hand, a document which is not made under the requirement of law may be subject to the obligation to submit. It is the case that the form and content of the document are the same as those submitted to third parties. For example, Decision of the Supreme Court, 23 August 2007, shū min 225, 345 denied the non-disclosure to outsiders on the ‘check list by type of service’ which a care service provider prepares, and ordered the submission. The decision stated that the content of the check list is a copy of information sent to examination organs for claiming for nursing care benefits etc., and therefore the check list is presupposed to be disclosed to third parties. (18) b) Disadvantageous Nature Next, no advantageous nature is demanded as the requirement of a ‘document prepared exclusively for use by the holder thereof in subsequent court precedents. For example, regarding ‘the plans for the circuit and the flow of the signals of the Equipment’ the original judgment was overturned on the ground that it had recognized the document concerned as a ‘document prepared exclusively for use by the holder thereof’ without examining the requirement of the disadvantageous nature (Decision of the Supreme Court, 10 March 2000, Minshū 54, 1073). A standard theory is sceptical about the Decision in question in terms of the content of disadvantage and insists that it should be limited to individual privacy. (19) However, some opinions support the example given by the Decision in question and state that the freedom of the decision-making process is also an interest to be protected by a P 795 ‘document prepared exclusively for use by the holder thereof’ on the grounds of the freedom of thought and conscience (section 19 of the Japanese Constitution). (20) However, after that, court precedents hold that an interest which is neither individual privacy nor a decision-making process also may be subject to protection. For example,

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according to Decision of the Supreme Court of 10 November 2005, the content of the disadvantageous nature includes a risk that the research studies by a political faction and a member thereof may be hampered by interference of executive organs or other political factions. Decision of the Supreme Court, 17 February 2006, Minshū 60, 496 made a judgment on the ‘in-house notifications’ and ‘reports on objective business results’ in accordance with similar standards. The Supreme Court judged that there was no disadvantage on the ground that the document stated the reports on objective business results in order to show the general business policy and was only used for notification within a corporation, and that the content of the document did not contain information on individual privacy or matters on trade secrets of the plaintiff. (21) If the holder of a document changes, the existence of an obligation to submit a document may change. That is, a document not required to be submitted, under the person who prepared it, may fall out of the categories of ‘non-disclosure to outsiders’ or ‘disadvantageous nature’ under the new holder of the document. Until recently, many court precedents have adopted the latter reason. For example, with respect to the investigation report which was prepared by the investigation committee (22) established by the insurance administrators as ordered by the Commissioner of the Financial Supervisory Agency (section 313 I and 242 III of the Insurance Business Law, before amendment by Law No. 160 of 1999. Now the Commissioner of the Financial Services Agency) and which was submitted to the insurance administrators, it was ordered that the report should be submitted to the insurance administrators of the current holder on the grounds of lack of the requirements of the disadvantageous nature (Decision of the Supreme Court, 26 November 2004, Minshū 58, 2393). P 796

In addition, some theories hold that when a brief is possessed by the party concerned, the brief should be regarded as a document equivalent to a ‘document prepared exclusively for use by the holder thereof’ and not required to submit. (23) When making a judgment on the disadvantageous nature, balancing a protected interest against other circumstances is viewed more or less affirmatively by many people. Other circumstances mean the content of a document, the purpose of a lawsuit, and importance as evidence, and in the light of these, a judgment will be made on whether the document concerned is necessary for clarifying the facts to be disputed. (24) c) No Special Circumstances Following the Decision in question, discussions arose as to the meaning of the requirement of ‘no special circumstances’. In theories the following opinions are presented on it: a kind of a conventional phrase provided for considering a future occurrence of an unexpected circumstance, (25) a clue to considering individual circumstances in each lawsuit as important as evidence, (26) a clue to consider a typical pattern of a lawsuit. (27) After that, the Supreme Court gave an interpretation on special circumstances in Decision, 14 December 2000, Minshū 54, 2709. The case was a derivative action by members of a credit association. According to the decision, special circumstances can be construed as a ‘case where the applicant seeking an order for submission of the document is in a position identifiable with that of a credit association or the holder of the document in relation to the use of the Kashidashi Ringisho’, that is, a case where the applicant has the right of a request for perusal or copying under the requirement of law, and members of a credit association are not in that position. To the extent that the standards apply, there will be little space that special circumstances are acknowledged on the document for internal approval of a loan, because if the applicant seeking an P 797 order for submission of the document is in a position identifiable with that of the holder of the document, it is likely that the applicant can request submission of the document in a more effective way than under section 220 (iv). (28) As of the end of February 2011, the only court precedent that the Supreme Court acknowledged as special circumstances, is the Decision of the Supreme Court, 7 December 2001, Minshū 55, 1411 (mentioned above). In this case the Supreme Court takes notice of the difference between a party who prepares the document and the current holder of it. Also, the Supreme Court explained the reason to acknowledge special circumstances as follows: on the one hand, the party who prepares the document is in the process of liquidation and is not going to make any further loans, on the other hand, the current holder is engaged in the collection of the loans only under the requirement of law, and therefore the submission of the document is not considered to imperil the current holder's freedom to express opinions and make decisions. In the sense the Supreme Court makes a judgment on special circumstances as a negative requirement, based on the disadvantageous nature as one of positive requirements. It can be regarded as the proof that the ‘absence of special circumstances’ as an independent requirement is understood as a requirement that is actually rarely met. (29)

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If we evaluate the Decision in question as a precedent on the document that falls under a ‘document prepared exclusively for use by the holder thereof’, taking subsequent court precedents into account, it is a reasonable conclusion for the Case in question, but the grounds leave room for discussion. First, the general requirements indicated by the Decision in question is reasonable only as a generalization. Certainly, although there are some doubts about uncertainty of concrete content of special circumstances, it has significance as a general requirement. Since it is not impossible to make individual provisions for each document, ensuring flexibility by interpretation is needed to deal with various documents differing in type and background circumstance (including a document that cannot be presupposed at the present time). However, the requirement of ‘special circumstances’ is aimed at avoidance of inflexible rules and ensuring elasticity, and is only a means to achieve the legislative purpose of the current Code of Civil Procedure to realize the collection of evidence needed for civil suit under the principle of the obligation to submit a document. Therefore, when making a judgment on this requirement, it is necessary to fully consider whether it is a case that P 798 clearly contributes to the substantial proper procedures for the collection of evidence, and it should be avoided to quickly assume special circumstances. On the contrary, if it is a case that clearly contributes to the substantial proper procedures for the collection of evidence, there is a doubt about judging that the document satisfies a general requirement and falls under the category of a ‘document prepared exclusively for use by the holder thereof’ only on the grounds of the type of document – the document for internal approval of a loan of financial institutions in the Decision in question – on the premise that special circumstances rarely exist, and without considering the case fully. Next, I discuss the rights and wrongs of the precedent on the obligation of submission for the document for internal approval of a loan of financial institutions, established by the Decision in question. In financial institutions, on a loan proposal exceeding the prescribed amount, preparing the document for internal approval of the loan is a common and ordinary practice. The prepared document for internal approval of a loan becomes the most important material to support the appropriateness and rationality of the loan. (30) From that, it is easy to presume that the bank people and the other parties can predict that the document for internal approval of a loan will be disclosed to outsiders on the occasion of examination and inspection by administrative authorities. Actually, it is said in the practical world that a possibility of such disclosure is a fact known publicly. (31) Based on this, it should not be asserted that the document for internal approval of a loan may never be disclosed to outsiders. In addition, financial institutions are classified into a private enterprise formally, but practically they are protected more strongly than general private enterprises in various points such as taxation and avoidance of liquidation, in the light of the size of impact on a capitalistic economy. It will not be insisted that such treatment itself being adopted on the grounds of its strong public nature, is inappropriate and should be eliminated. However, strong public nature sometimes leads to the financial institutions being given more preferential treatment on management than general private enterprises, and that P 799 the freedom permitted to general private enterprises is restricted partially for financial institutions and more information is required to be disclosed. Only for the purpose of protecting the public, that is, the interest of third parties, can it be justified that public nature should be the basis for an exceptional treatment. It means that regarding the document for internal approval of a loan dealt with in individual cases, sometimes it cannot be required to submit on the ground of impairing the public interest even if it does not bring decisive damage to financial institutions, or sometimes it can be required to submit on the ground of serving public interest, even if it is not desirable for financial institutions. Such circumstances would be reflected on a conclusion concerning an order for submission of a document as a result of a judgment of the requirements of disadvantageous nature and special circumstances. Some may criticize that on judging whether there is the obligation to submit a document, leaving room for considering the character of a case is not substantially very different from balancing, and legal stability and predictability would be lost. However, the discussions are about submission of the document for internal approval of a loan prepared by financial institutions, which are given a different legal treatment from other private enterprises because of its public nature, and therefore it should not be trivialized to the issues of freedom of general private enterprises. A judgment on the obligation to submit a document should be made considering fully the organization of financial institutions, and the relations of the document for internal approval of a loan to the interest of third parties. Utilization of in camera proceedings (section 223 VI) would be useful for a strict judgment on whether the obligation to submit a document is exempted or not, and the range to be exempted (section 223 I, the latter half on partial submission order). In camera proceedings have been introduced to an intellectual property lawsuit (section 105 of

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Patent Act), and there is also a call for the introduction for information disclosure lawsuit. (32) Regarding the judgment on whether there is an obligation to submit a document in a civil suit, the system for it exists in law and therefore in camera proceedings should be actively used to serve for the proper interpretation and application of a ‘document prepared exclusively for use by the holder thereof’. In camera proceedings were not used in the Case in question, but it can be evaluated positively that they are becoming used gradually in subsequent court precedents. P 800

A judge inspects the document in camera proceedings. It is irresponsible to assert there is no risk that the opinions or evaluations of the relevant parties described on all or part of the document not required to be submitted would be reflected on the actual formation of the impression of a judge. The avoidance only depends on the faithfulness to duties and good sense of the judge in charge. However, should there be a content reflected on the actual formation of the impression of a judge, unconsciously, it is likely to have a decisive effect on the outcome of judicial proceedings, and be necessary for the discovery of truth. We should remember that in fact the document which is ‘not required to be submitted, and should not be used to form an impression’ is often important as evidence. Furthermore, if the obligation to submit the documents for internal approval of a loan is broadly exempted, it is likely to encourage the management of financial institutions behind closed doors. From a long-term and international view, there is doubt whether it will truly be in the interest of the financial institutions of our country. (33) There are still many issues to be considered. Motoko Yoshida P 800

References The facts and the reasons of this case are translated in English and are available at