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In-depth treatment of selected topics in Taiwan law for legal professionals

Legal issues to consider when choosing a SaaS business model

For companies offering software solutions to clients, one of the earliest and most important decisions will be whether to adopt a business model based on software licensing, or to instead opt for a “Software as a Service” (SaaS) approach. Under a licensing-based approach, the company provides a copy of its software to the customer, who may then use the software independently, subject to the terms of the licensing agreement. Under a SaaS approach, the customer is not provided with an actual copy of the software, but is instead allowed to access it remotely and use it according to the terms of a service agreement with the provider.

While the license-based approach was the dominant model for many years, recent trends in the industry indicate a shift towards SaaS as the preferred model. Following on the first major SaaS success story of Salesforce, a number of major software providers that traditionally relied on software licensing started pivoting towards SaaS, with a major example being Microsoft’s decision to offer its signature line of Office products as an online service known as Office 365. Along with Salesforce and Microsoft, other major tech companies in the field of SaaS include Amazon, Google, Fujitsu, Symantec, and IBM, just to name a few. The SaaS sector overall is booming, growing by more than 20% annually, with the global SaaS industry expected to be worth more than US$130 billion by the end of 2020.

Given the industry-wide trend towards SaaS, prospective founders of new companies will want to know the pros and cons of using a SaaS approach for their business. It is certainly not without its downsides – for example, many SaaS businesses take significant losses in the early stages of their development, as the investment made to acquire an initial customer base is only recovered slowly through regular subscription payments. That said, SaaS is appealing for other reasons, perhaps the most important being that many consumers would rather pay a regular fee for remote access instead of a single lump sum for installation of an expensive piece of licensed software, especially now that near-constant availability of internet access has become the norm in most developed economies. The age of licensing agreements and expensive, single-purchase software may be coming to an end.

Business considerations aside, what are some of the legal issues to consider before adopting a SaaS approach? Perhaps unsurprisingly, they are many and varied, and may differ from the typical issues that arise under a license-based approach. As a straightforward example, service outages are unavoidable with SaaS, including outages for scheduled maintenance. If the service contract is not worded properly, these outages could constitute a breach of contract by the provider. Service outages of this kind are generally not an issue for licensed software. It is therefore important to tailor the service contract specifically for SaaS, rather than simply adapting a pre-existing licensing agreement template. Ultimately, a well-crafted SaaS agreement – often presented to the customer as a so-called “clickwrap” contract which can be entered into with a single mouse click – may look quite different from a traditional software licensing arrangement.

Another legal issue which is increasingly important for SaaS providers is that of data security and digital privacy. SaaS users generally disclose at least some personal information to the provider when using the service, the extent and sensitivity of which can vary greatly depending on the nature of the services being provided. There is also the possibility that users may disclose information of a non-personal nature that is nonetheless highly confidential, such as when companies outsource their email, payroll, or document management systems to a SaaS provider. Whatever the nature of the confidential information being disclosed, this creates a potentially major source of liability for the SaaS provider that is unlikely to be an issue with licensed software. Moreover, the storage and transfer of such information through online networks often has an inter-jurisdictional aspect that may increase the provider’s exposure to liability for non-compliance with unfamiliar regulatory regimes in other countries. This creates a need to adapt and update data protection practices to comply with regulatory changes across all jurisdictions where the SaaS is available, which may create unforeseen expenses for the company – a lesson which many SaaS providers recently learned when the European Union’s General Data Protection Regulation (GDPR) entered into force. Even SaaS providers with no physical presence in Europe and no familiarity with European law should consider whether they are GDPR-compliant when offering their services to European clients.

There are also legal issues which can be avoided or mitigated by using SaaS instead of a licensing agreement. One much-touted advantage of SaaS is the supposed avoidance of taxes that would otherwise apply to licensing royalties, but this advantage requires closer scrutiny. While it is true that licensing royalties are generally taxable, the notion that revenue from SaaS will never be subject to tax is incorrect, and will depend on the jurisdiction where the services are offered. SaaS may be taxed differently in the various jurisdictions where it is available, even when those jurisdictions are within the same country. For example, according to currently available information, there are many jurisdictions in the United States which impose sales tax on SaaS (such as California, Illinois, and New Jersey), as well as others which do not impose such tax (such as Texas, Washington State, and New York). The situation is similar when offering SaaS across national borders. An American SaaS provider unaccustomed to dealing with a national value-added tax (VAT) will have to take VAT into consideration when expanding into Europe, where all EU member states are required to meet minimum VAT standards. VAT in the EU used to depend on the location of the seller, which notably led Apple to domicile the European wing of iTunes in Luxembourg for its relatively low VAT. However, when the EU later changed its VAT requirements to make the rate dependent on the location of the purchaser rather than the seller, VAT increased for most iTunes transactions in Europe. As changes like this continue to happen, the global landscape of SaaS taxation will continue to evolve.

Ultimately the benefits and drawbacks of SaaS will be case-specific, and will depend on factors such as the nature of the software, the nature of the customer base, the domicile of the provider, and the jurisdictions where the service will be offered, among other considerations. If you are trying to decide whether SaaS would be the right fit for your company, seek the advice of legal counsel before making a decision. And if you are already operating in the SaaS market, it is crucial that you retain legal counsel to protect you from liabilities of which you may not be aware.

For further information, please contact Greg Buxton at gbuxton@winklerpartners.com and Peter Lavelle at plavelle@winklerpartners.com.

Labor Incident Act: three takeaways for employers

Taiwan’s Labor Incident Act (“LIA”) was announced on 5 December 2018 and will come into force on 1 January 2020.[1]

The core principles of the LIA are speed, appropriateness, professionalism, effectiveness and fairness, with the given aims of readjusting the structure of the employee-employer relationship, reducing the barrier to litigation for employees and strengthening their employment rights.

It’s important to note that labor disputes that arise before the implementation of the LIA can still be dealt with under the new law, as long as they have not been completed (i.e. by settlement or final and binding judgment) by that date. Businesses employing people in Taiwan should therefore take advantage of this period and prepare ahead of time for the implementation of the LIA. Below, we outline three main points worth considering.

Scope

Please keep in mind that the scope of the Labor Standards Act and Labor Incident Act are not the same. Labor Standards Act  is a substantial law which provides the basis for employment relationships between employers and employees. The Labor Incident Act is procedural law which outlines how employment disputes should be handled.

Employers should be aware that the scope given for disputes to be settled under the LIA is quite broad. The law defines disputes as civil in nature, covering the rights and obligations between employers and employers, or those disputes where employment rights have been infringed upon.

However, due to the law’s basis for expanding the rights and obligations of both parties, the definition of “employee” and “employer” is relaxed, and the fact that related civil matters can be combined with or added to labor disputes, as well as allowing for counterclaims to be made during the litigation process mean that with this new scope comes increased risk. Two things that deserve special attention include:

  1. In addition to regular employers, recruitment agencies, dispatch employee companies, those that recruit people in trainee positions or similar roles are, under the LIA, considered employers. As an example, if there is a discrimination , sexual harassment or occupational safety dispute brought by a job applicant or dispatched employee, then this falls within the scope of the LIA.
  2. Secondly, the court will consider the work rules, labor-management conference decisions, labor norms and so on as the basis for trials, alongside the rights and obligations provided for by law.

Review all relevant documents

Businesses should use this time to review labor contracts and work rules and ensure that all employee records are up to date and maintained according to the law. As businesses bear the responsibility for proof, they should determine that employee records are complete (employee lists, attendance records, salary information etc.) and make sure that all contracts, work rules and other internal guidelines clearly define the obligations and rights under the employee-employer relationship. Clear definitions of what constitutes “wages” and “work hours” should be given.

1. Wages

Disputes over wages occur when it is difficult to judge the amount of money that a company should provide to an employee. It is a recurring payment, for a service performed, or given as a favor (ex gratia payment), for example retention bonuses. The determination of wages will affect how salary, pensions and/or severance pay are calculated.

Under the LIA, employees are only required to prove that payments occurred as part of an employer-employee relationship. It is the responsibility of the employer to prove that bonus payments are not wages. Businesses should therefore set rules that cover bonus payments, including eligibility, payment conditions, calculations and payment terms to serve as evidence should any disputes arise in the future.

2. Work hours

Disputes over work hours usually involve the calculation of overtime. Whether or not the employee was granted permission to work outside of their normal work hours has in the past been difficult to determine. The LIA similarly provides that employees are considered to have obtained approval for any work conducted outside of their normal working hours. Employers are obligated to prove that approval was not obtained by the employee before overtime commenced.

Businesses should therefore include overtime application procedures in their employment contracts, in the work rules or other overtime guidelines. Attendance record control should also be strengthened to serve as evidence in the event a dispute arises.

Focus on prevention

Now that the cost of recourse through the courts has been lowered for employees, it is essential that employers are aware of the increased burden of proof they have to meet. To avoid costs associated with the lengthy mediation and litigation process, businesses should try to prevent cases reaching the courts. As an example, businesses should determine whether a cause for termination is lawful, and whether they have enough evidence to support their claims should a dispute be brought, and whether they have followed the law regarding terminations, before they terminate the employee. If a business is unsure, they should consult with legal counsel before they take any steps.

Once the LIA is implemented a judge will be appointed to take part in both the court-led mediation and litigation stages, and because the judge will disclose their impression in certain circumstances during mediation, it will be clear whether an employer will be successful or not during subsequent litigation. Mediation therefore will become the critical stage once the LIA is implemented. It goes without saying that it is advisable that businesses retain legal counsel before a dispute occurs or at least before the dispute enters the mediation phase.

Employees are ever more aware of their rights, and there are more avenues for recourse than before, once the LIA becomes law businesses should spend time considering how management of their employees can be adjusted to minimize disputes. By preventing disputes from occurring in the first place, the employee-employer relationship can be a harmonious one, which in turn is good for business.

For more information on employment matters in Taiwan, please contact Christine Chen at cchen@winklerpartners.com.


[1] During the legislative process, the name of the Act was translated as either the Labor Dispute Act or the Labor Incident Act in news reports. We have updated the name used in our articles based on the official English translation given on the Ministry of Justice’s website.

Closed companies: still a useful option?

We published an article last year highlighting the amendments to Taiwan’s Company Act (the “Act”) which came into effect on November 1, 2018.  The changes to the Act were extensive and, among other things, greatly enhanced flexibility in structuring Taiwan company fundraising and shareholder control arrangements. During the preparation of the amendments to the Act, a number of commentators questioned whether “closed companies”, created by legislation enacted in 2015, continued to be necessary as the amendments worked to bestow upon typical private companies many of the benefits previously only available to closed companies.

While we agree that these amendments to the Act do close the gap between the more commonly used private company and a closed company, there remain some significant advantages to using a closed company. Set forth below are some of these differences:

1. Shareholders may exercise voting rights by written resolution. Being able to execute written resolutions instead of holding an actual shareholders meeting makes it easier and more efficient to manage a closed company.

2. Restrictions on transfer of shares can be stated in the Articles of Incorporation.  As opposed to a standard private company which can only place restrictions in its Articles of Incorporation on the transfer of preferred shares, a closed company can, in its Articles of Incorporation, restrict the transfer of any type or class of shares. We note that shareholders of a standard private corporation can restrict the transfer of non-preferred shares by agreement; however such an agreement would not be publicly available and thus would not be binding on bona fide third party transferees. In addition, transfers made in violation of such an agreement would give rise to monetary damages but would not be void ab initio as they would be if such transfers were disallowed in the company’s constitutive document.

3. There are no preemptive rights for employees and existing shareholders. Under the Act, when a standard private company issues new shares, (i) a certain number of shares must be reserved for subscription by employees of the company and (ii) existing shareholders would have preemptive rights with respect to any shares not reserved for employees. There is no similar requirement with respect to closed companies.

4. Directors and supervisor voting arrangements can be tailored. The Act requires the shareholders of a standard private corporation to use cumulative voting when electing its directors and supervisors. However, a closed company may use straight voting or any other voting method that the company deems best suited to its particular needs so long as such a voting method is clearly set forth in the company’s Articles of Incorporation.

5. Equity capital may be contributed by service. Shareholders of a closed company can contribute equity capital in the form of services rendered to the company.  Such service contributions are not available to standard private companies. This attribute of closed companies makes them particularly attractive to startups whose founders may lack significant capital resources. It is important to note, however, that there are some limitations on the amount of equity capital which can be contributed as services to a closed company. Total service equity cannot exceed one half of the total shares issued with respect to a closed company whose paid-in capital is under NT$30 million. For a closed company whose paid-in capital is equal to or exceeds NT$30 million, service equity is limited to one half of the first NT$30 million worth of shares issued plus one quarter of any additional shares issued.

We continue to recommend considering closed companies when clients are evaluating which type of entity is appropriate for their businesses in Taiwan. Even after the recent amendments to the Company Act, closed companies retain a number of attributes that make them well-suited in certain circumstances.

For more information, please contact Greg Buxton at gbuxton@winklerpartners.com.

Regulations governing ratings for cybersecurity responsibility levels

Article 7(1) of the Cybersecurity Management Act authorizes the Executive Yuan to define standards for rating cyber security responsibility levels. These standards are set out in the Regulations Governing Ratings for Cybersecurity Responsibility Levels (the “Rating Regulations”). The Rating Regulations took force on January 1 2019.

While the Rating Regulations consist of just 12 articles, there are ten tables appended to the Rating Regulations that contain detailed requirements for cyber security management.

The Regulations define five ratings from A to E. A is the strictest rating with the highest requirements while E is the lowest. Rating Regulations §2.

Critical Infrastructure operators (“CI Operators”) are rated A or B depending on an evaluation by the CI Operator’s regulator. Factors considered in the evaluation include the number of users, market share, region, replicability, and the impact of a failure of the CI operator’s information system. Rating Regulations §4(6) and §5(5).  For example, critical infrastructure includes industries such as energy, transport, telecoms, the banking system and certain medical facilities.

The specific requirements for each rating level are set out in tables attached to the Rating Regulations. Each table covers three aspects of cyber security: management, technology, and awareness/training.

Management

All CI Operators are required to rate their information systems within one year of designation. Systems must be evaluated for secrecy, integrity, usability, and legal compliance.  The standards for high, medium, and low ratings are defined in the attached Table 9.  CI Operators are also required to implement the security measures set out in the attached Table 10 within one year. These security measures are grouped in the following categories: access control, auditing/accountability, operational continuity plan, identity, system and service obtainability, system and communication protection, and system/information integrity.  Rating Regulations, Table 10.

Management requirements for a CI Operator with an A rating include implementing the CNS 27001 information security standard within two years and having at least four dedicated information security specialists. CI Operators with a B rating must also implement CNS27001 within two years but are required to have just two information security specialists. Rating Regulations, Tables 2 and 4.

Technology

Technology requirements include security testing, security checkups, threat detection management mechanisms, and security protections. For example, an A rated CI Operator is required to do system penetration testing once each year. In contrast, a B rated CI Operator is required to do system penetration testing once every other year. Rating Regulations, Tables 2 and 4.

Awareness and Training

Awareness/training requirements include required training for security personnel and ordinary users as well as certification requirements for security specialists. For example, CI Operators with  A or B Ratings are required to train ordinary users for three hours per year. Rating Regulations, Tables 2 and 4.

Hearings for patent invalidation cases

In Taiwan, patent invalidation proceedings usually involve the submission of written pleadings and defenses, as well as the submission of evidence. In March 2018, the Taiwan Intellectual Property Office (TIPO) implemented new guidelines for patent invalidation cases and introduced a hearing system into the process. The new system provides the opportunity for both parties to debate their position orally and also help TIPO to clarify legal issues.

Hearings for patent invalidation cases can be requested by either party. Alternatively, the TIPO has the discretion to request a hearing for a patent invalidation case. In general, the hearing will be open to the public; however, if either party believes it is inappropriate for the hearing to be open to the public, it may file a request to hold the hearing in private, providing its reasons to the TIPO. The hearing panel will consist of three examiners. During the hearing, both parties will have the opportunity to present oral arguments, and to question witnesses or appraisers. In past cases the invalidation decisions were rendered within one to two months after the hearing. If the party disagrees with the TIPO’s decision, they may file an appeal with the IP Court.

Prior to the implementation of the hearing system for patent invalidation cases, a proceeding would typically take about 15 months before a decision was rendered by the TIPO. The TIPO has held twelve patent invalidation hearings since the implementation of the hearing system. Notably, for all of these cases, a decision was rendered by the TIPO within one year. Therefore, requesting a hearing for a patent invalidation case may significantly reduce the duration of patent invalidation proceedings.

For more information regarding patents in Taiwan please contact Peter Dernbach at pdernbach@winklerpartners.com and Betty Chen at betty@winklerpartners.com.

When claiming trademark priority in Taiwan, choice of country can make a difference

When filing a trademark application in Taiwan, an applicant may use the first application filed in a foreign jurisdiction to serve as a basis for a priority claim under certain conditions. While the Taiwan Trademark Act allows an applicant to claim priority within 6 months of the first filing date of the foreign application, it is important to note that the Taiwan Intellectual Property Office (TIPO) will only grant a right of priority if the foreign application was filed in a member state of the World Trade Organization (WTO) or in a country that reciprocates recognition of priority rights with Taiwan, in accordance with Article 20 of the Taiwan Trademark Act:

“An applicant who has duly filed an application for trademark registration in a country which has reciprocal recognition of priority rights with the ROC, or filed such application with a member of the World Trade Organization (WTO), may claim a right of priority, for the purposes of registering the same trademark in the ROC for some or all the same goods or services, within six months from the day following the date of filing of the first such application.”

Taiwan does not have any such reciprocity agreements in place at this time with any states that are not also WTO members. As such, only foreign applications filed in WTO member states can serve as the basis for trademark priority claims in Taiwan. This restriction poses significant challenges to applicants seeking to claim priority in Taiwan using an application filed in a country that is party to the Paris Convention for the Protection of Industrial Property (Paris Convention) if that country is not also a WTO member state.[1]

Article 4 (A)(1) of the Paris Convention sets out when the right of priority can be invoked:

“Any person who has duly filed an application for a patent, or for the registration of a utility model, or of an industrial design, or of a trademark, in one of the countries of the Union, or his successor in title, shall enjoy, for the purpose of filing in the other countries, a right of priority during the periods hereinafter fixed.”

For trademarks, the priority period is 6 months from the first filing date in any country of the Union.

Taiwan’s current political status prevents it from becoming a contracting party to the Paris Convention. As it is not a party to the convention, the Taiwan trademark authorities are not bound by obligations under it. As a result, if the first application is filed in a country of the Union that is not also a member state of the WTO, the application cannot be used to claim priority for a further trademark application in Taiwan.

Countries of the Union which are not member states of the WTO include Algeria, Andorra, Azerbaijan, Bahamas, Belarus, Bhutan, Bosnia and Herzegovina, Comoros, Democratic People’s Republic of Korea, Equatorial Guinea, Haiti, Holy See, Iran, Iraq, Lebanon, Libya, Monaco, San Marino, Sao Tome and Principe, Serbia, Sudan, Syrian Arab Republic, Turkmenistan, and Uzbekistan.

Priority claims based on applications filed in any of the above states will not be recognized by the TIPO. This does not mean that an applicant who makes an initial filing in a non-WTO member state is barred from making a claim of priority in Taiwan altogether. In practice, if an applicant makes an initial filing in one of the above states, and then later files a trademark application in a WTO member state, the first filing in the WTO member state will be deemed to be the first filing date when the applicant makes a priority claim during a trademark application in Taiwan.

While Taiwan is not a contracting party to the Paris Convention, like all WTO members it is a party to the Agreement on Trade-related Aspects of Intellectual Property Rights (the TRIPS Agreement). Article 2.1 of the TRIPS Agreement stipulates that WTO member states shall comply with Articles 1 through 12, and Article 19, of the Paris Convention. Furthermore, at the International Patent Cooperation Union Assembly in 1999, the World Intellectual Property Organization (WIPO) released a Memorandum of the Secretariat specifically referring to Article 2.1 of the TRIPS Agreement and Article 4(A) of the Paris Convention, interpreting these to mean that WTO members are obliged to recognize priority claims based on applications filed in a country of the Union, even if that country is not a WTO member.

WIPO is an agency of the United Nations (UN), and Taiwan is not a member state of the UN due to its current political status. Accordingly, the WIPO Memorandum and WIPO’s interpretation of Article 2.1 of the TRIPS Agreement and Article 4 of the Paris Convention are not binding on Taiwan’s trademark authorities. However, Article 2.1 requires all WTO members to comply with Articles 1 through 12 and Article 19 of the Paris Convention. Does this mean the TIPO has obligations under the TRIPS Agreement to recognize priority claims based on trademark applications filed in any Paris Convention state, in accordance with Article 4 of the Convention? TIPO’s position is that since the WTO has not expressly interpreted Article 2.1 of the TRIPS Agreement and Article 4 of the Paris Convention to mean that all WTO members must recognize priority claims from all Paris Convention countries, Taiwan is therefore not required to recognize priority claims based on applications filed in Paris Convention countries which are not also WTO member states. Furthermore, as Taiwan is not a Paris Convention country to begin with, it is not in violation of the letter of Article 4 of the Paris Convention, which only provides that all Union countries shall grant priority rights to trademark applications filed in other Union countries.

Although WIPO interprets Article 2.1 of the TRIPS agreement and Article 4 of the Paris Convention as requiring all WTO member states to recognize priority claims from any Paris Convention countries, the TIPO currently only accepts the WTO’s interpretation of the TRIPS Agreement. While it is true that the WIPO’s interpretation has no legal effect in Taiwan, there is nothing to prevent the TIPO from choosing to adopt and affirm it. The TIPO should reconsider its stance on the WIPO interpretation, and should willingly implement it in order to bring Taiwan in line with international standards on this issue. A willingness to do so could also reflect well on Taiwan if it seeks to become a UN member state in the future. Taiwan should also amend Article 20 of the Taiwan Trademark Act to better conform with the obligations and practices set out by the WIPO. Pending such future changes, the situation remains quite complicated, and the most straightforward path to claiming priority in Taiwan at present is to base the claim on an application in a WTO member state.

For more information on trademark matters, please contact Jason Yan at jasonyan@winklerpartners.com.

Legal intern Amber Chou contributed to this article.


[1] The Paris Convention is an international agreement established in 1883 for the protection of industrial intellectual property. As of August 2019, there are 177 Contracting Parties to the Paris Convention. These Contracting Parties are referred to as the “countries of the Union” under the treaty.

Does abolishment of the recognition system allow foreign companies to freely obtain property in Taiwan?

Since the amended Company Act came into force, foreign companies that were organized and incorporated in accordance with the laws of a foreign country have legal capacity in Taiwan. Without having to be recognized or establish a branch, a foreign company now enjoys the same rights and obligations as a domestic company, including the right to file a complaint. As such, foreign companies that are the victim of fraud will be able to file criminal litigation seeking relief in Taiwan. However, foreign companies that wish to sign contracts, make price quotations, or engage in price negotiations, bids, and procurement projects, should still establish a Taiwan representative office, while those that wish to conduct business in Taiwan should establish a branch office.

However, of the various rights an unrecognized foreign company can now enjoy, do these include the right to acquire or set up rights in real property? Prior to the 2018 amendments, an unrecognized foreign company without a Taiwan branch could not acquire real estate, or mortgage or pledge personal property. Now, foreign companies, within the extent permitted by law, have the same legal capacity as domestic companies. Although the same scope of activities representative offices and branches can undertake still apply, there remain some questions as to whether an unrecognized foreign company can directly exercise the above-mentioned property rights. We inquired with the competent authorities about this issue and received replies addressing the following topics:

Registration of Property Rights (including registration as title holder and registration of mortgages)

Prior to 2018’s amendments, foreign legal persons who wished to acquire or register real property rights needed to be recognized in accordance with the laws of Taiwan and were required to attach their recognition certificate to the application. The Ministry of the Interior has indicated, however, that foreign companies no longer need to undergo the recognition process to obtain such rights.

Nonetheless, the “Operation Directions for Foreigners to Acquire Land Rights in the Republic of China” amended on 21 March 2019 and letters of interpretation issued by the competent authority still require foreign companies attach their registration documents and that they do so in the name of the head company. A foreign company still needs to establish at least a branch in Taiwan before it can apply for real property registration, and would need its responsible person in Taiwan to file the application on its behalf. This means, that in principle a foreign company can purchase property without a Taiwan branch, but in reality they are still required to form a branch to register their real property rights. We urge the government to revise the Operation Directions for Foreigners to Acquire Land Rights in the Republic of China to remove this restriction.

Registration of Mortgages in Personal Property

Before the Company Act amendments took force, unrecognized foreign legal persons were not permitted to register mortgages in personal property, except in cases where Taiwan had signed a treaty with the home jurisdiction of the foreign legal person containing special provisions that allow for such registration. Now, the Financial Supervisory Commission has explained, a foreign company can register mortgages in personal property in its own name without needing to be recognized by the government. The “evidentiary documentation for contract parties” required for registration will instead be determined by the registration authority on a case-by-case basis. Other than foreign companies, there are no special regulations for other forms of foreign legal person. Registration of mortgages in personal property by non-company foreign legal persons is governed by other legislation, which requires that they first obtain legal personhood.

Pledges of Personal Property

Previously, unrecognized foreign companies had no legal capacity and thus had no rights to pledge personal property. The Ministry of Economic Affairs has stated that now, foreign companies have legal capacity without being recognized by the Taiwan government. Therefore, recognition is no longer required to make pledges.

Although foreign companies have legal capacity without being recognized under the new amendments, a foreign company that has not established a branch cannot acquire or set up rights in real property. The regulations need to be revised to remove this minor administrative obstacle. We believe that such revisions will go some way to making Taiwan an even more attractive place to purchase property.

For more information on this topic, please email Christine Chen at cchen@winklerpartners.com.

TIPO announces directions on third-party observations regarding trademark applications

The Taiwan Intellectual Property Office (TIPO) has released “Operational Directions on Trademark Applications Submitted by Third Parties”, which allow third parties to provide written observations to the TIPO regarding pending trademark applications. The TIPO hopes that this will lead to more objective decisions. The Directions are effective as of 20 June 2019.

According to the Directions, a third party must submit its observation to the TIPO in hard copy form, and they may do so anonymously. If evidence or observations provided are not submitted as hard copies, or are submitted on compact disc or in the form of computer records, such material may not be referred to by the TIPO during their examinations.

The third party’s observations should also indicate the grounds on why the trademark shouldn’t be registered and should include related evidence. For example:

1. Where the mark lacks distinctiveness: the third party should provide an explanation of how the industry uses words, pictures, or symbols, which are similar to the mark in question, and submit evidence related to their opinions.

2. Where the mark is identical or similar to another person’s already filed trademark: the third party must submit objective, publicly credible evidence, and:

(a) Evidence of use must demonstrate that the earlier mark is in use for marketing purposes ;

(b) Evidence of use of the earlier mark must indicate the date and the user of the mark, and must conform to standard commercial practices;

(c) Newspaper and magazine materials are acceptable, but they must contain complete information, including the source, volume/issue, date of publication, and page number(s).

(d) Online material is acceptable, but accuracy and objectivity of such information should be cautiously employed.

3. Where the applicant has the intent to counterfeit or imitate the other person’s marks: the third party must provide evidence that the applicant has an existing contractual, regional, transactional, or other material relationship with the owner of the earlier mark that is allegedly being imitated. Such evidence could include the following:

(a) Correspondence, transaction documents, or purchase information showing a relationship between the applicant and the owner of the earlier mark;

(b) Documentary evidence showing a dependent or contractual relationship between the applicant and the owner of the earlier mark;

(c) Evidence showing that the place of business of the applicant is in close proximity to the place of business of the earlier mark’s owner;

(d) Evidence showing that the applicant was once a shareholder, representative, manager, or employee of the earlier mark’s owner, or vice versa; or

(e) Other evidence proving that the applicant was aware of the existence of the earlier mark. If they were aware, this could be covered by the blanket provision regarding “other relationships”. Where the applicant is a competitor of the earlier mark’s owner, evidence may be submitted to the examiner showing the time period, region, and scope of actual use of the trademark, as well as the accumulated goodwill of the earlier mark’s owner.

4. Where the mark is identical or similar to a well-known mark: a third party may refer to the “Examination Guidelines for the Protection of Well-known Trademarks” to determine what kind of evidence should be submitted.

5. The mark in issue involves infringement of another party’s copyrights, patent rights, or other rights: When arguing infringement of this kind, a third party should submit documentary evidence of a final civil judgment, or documents showing that a complaint citing the applicant’s infringement has been lodged with a court of relevant jurisdiction. If no final judgment has been handed down, the trademark application may be suspended pending the issuance of such judgment.

6. Other objective, concrete evidence showing that the disputed application should be denied registration according to the Trademark Act.

After the TIPO receives a third-party observation, they may request that the applicant provide a response. However, if the examiner does not notify the applicant of a third-party observation, that observation cannot be used as basis for rejection.

Lastly, as third parties are not parties to the trademark application, the TIPO will not notify the third party about their observations, nor notify them of any decisions. If a third party disagrees with the TIPO’s decision on a given application, they may file a separate opposition or invalidation action against the trademark in issue.

The Directions can be found on the TIPO’s website (in Chinese) here.

For more information on trademark matters in Taiwan, please contact Peter Dernbach at pdernbach@winklerpartners.com and Jesimy Yu at jesimy@winklerpartners.com.

Further liberalization of Taiwan’s foreign investment rules

Taiwan’s Executive Yuan has approved draft bills to amend the Statute for Investment by Foreign Nationals and the Statute for Investment by Overseas Chinese in an effort to simplify Taiwan’s foreign investment approval process. If passed into law by the Legislative Yuan, it is expected that 85% of foreign investment in Taiwan would be subject to post-investment reporting rather than pre-investment approval. The draft bills simplify review procedures, shorten the review process, and strengthen regulation of foreign investment.

Review Procedure Simplification

Under the draft bills, investments would require pre-approval or post-investment reporting depending on the nature of the investment. Investments that would require pre-approval include:

  1. Investments above a certain amount or level of shareholding
  2. Industries in which investment is restricted by law
  3. The investor is a foreign government, government-related entity, or from a jurisdiction under sanctions.

It is expected that investments over US$1 million would require pre-approval. The level of shareholding that would require pre-approval is still under review.

Restricted industries include broadcasting, power transmission and distribution, and telecommunications. The complete list may be found in the Negative List for Investment by Overseas Chinese and Foreign Nationals last revised in February 2018.

Examples of sanctioned jurisdictions include Cuba, Iran, and North Korea.

All other types of investment would be subject to post-investment reporting.

Shortened Review Process

The draft bills would also tighten deadlines for regulatory approval. The Ministry of Economic Affairs would be required to notify investors within five days if application documents are incomplete. After accepting an application, the Ministry would have one month to rule on the application unless other agencies need to be consulted. If other agencies are involved, the deadline for a decision would be two months.

Strengthened Foreign Investment Regulation

The bills would also strengthen the regulator’s post-investment regulatory powers. If irregularities requiring review are discovered in an investment following reporting of the investment, the regulator could order the investor to apply for approval. The investor could also be ordered to withdraw the investment if it is discovered that the investment affects national security. Currently the regulator’s powers are limited to ordering withdrawal of the investment or cancellation of the right to settle foreign exchange.

Registered foreign investors in listed securities would be subject to new fines of NT$240,000 (c. US$7,660) to NT$4.8 million (c. US$153,000) for violations of the Taiwan Financial Supervisory Commission’s securities regulations. Failure to remedy such violations could lead to suspension of investments in securities by the foreign investor for up to one year or revocation of the investor’s registration.

Failure to apply for equity investment approval when required would be subject to fines of NT$120,000 (c. US$3,800) to NT$600,000 (c.US$19,000) while failure to report an investment would be subject to fines of NT$60,000 (c. US$1,900) to NT$300,000 (c. US$9,600). Orders to rectify, suspending shareholder rights, and to stop or withdraw the investment could also apply.

The draft bills also would expand the definition of an investor to include foreign funds and partnerships. Currently investors include only natural and legal persons. The definition of investment would also be expanded to include agreements giving control over domestic sole proprietorships, partnerships, and companies as well as acquisition of domestic sole proprietorships, partnerships, or companies.

The Legislature is expected to review these bills during its 2019 fall session at the latest.

For more information on investing in Taiwan, please contact Christine Chen at cchen@winklerpartners.com.

Do social media influencers need to disclose partnerships?

Social media influencers are the celebrities of the internet age, with their every movement watched closely by followers and media alike. This can have its advantages and disadvantages, as just recently a well-known influencer in Taiwan was fined by the Taipei City Department of Health for posting a review of an at-home cervical cancer test kit. The government determined that her behavior constituted advertising of a product with a medical purpose that had not received the necessary regulatory approvals. This incident gives one pause to reflect, if posting a written or video review of a product online can be construed as a form of advertising, how should consumers view articles or videos posted by influencers? Are they merely natural observations made by the influencer about certain products, or do they indicate some sort of partnership between the influencer and the companies behind those products? Also, if the influencer uses a less conspicuous approach to advertise a product in an online review, how can consumers’ rights and market order be safeguarded? This article will take a closer look at these questions from a legal point-of-view.

Disclosure of Material Connections in American Law

In order to address this new method of product promotion, the U.S. Federal Trade Commission in 2009 amended the Guides Concerning the Use of Endorsements and Testimonials in Advertising, adding posts and reviews made on social media to its regulatory scope. These amendments provide that if there is a material relationship between the poster and the producer or provider of the goods or services being reviewed, this could impact the credibility of the review and the poster must therefore provide a “Disclosure of Material Connections.” For example, when posting on social media, the poster can use hashtags, such as “#ad” or “#sponsored”, to indicate the nature of the post. On top of this, the producer or provider must also guarantee that such disclosure obligations are fulfilled. That being said, are there similar regulations and applications in Taiwan?

The obligation to disclose material relationships of endorsers and advertisers under Taiwanese law

Taiwan’s current laws and regulations do not contain anything specifically directed at the sharing of experiences by influencers or celebrities. However, if such sharing involves the influencer or celebrity’s opinions, trust, discovery, or personal experience with respect to a product or service, this could fall under the scope of an “endorsement/testimonial” provided in the Fair Trade Act (FTA).

The “Statement on the Fair Trade Commission’s Directions Regarding Advertising Endorsement and Testimonials” (hereinafter “Endorsements and Testimonials Statement”) clarifies these concepts, explaining that the terms “endorsements/testimonials” not only refer to those commercial endorsements made by celebrities, but also include experience sharing by average consumers. Moreover, “endorser” as regulated under the FTA, refers to an individual or organization who offers their reflection on a product or service, or their personal experience using that product or service. Therefore, anyone from a well-known personality, to a professional individual or organization, to an average consumer, can be considered an “endorser”. Given this, if an influencer or celebrity shares their experience with or opinions on a certain product or service with the public and such behavior is advertising in nature and is likely to affect market order and consumer interests, it will be governed by the provisions of the FTA.

Because fans and consumers are savvy to the interests and recommendations made by influencers and celebrities and purchase products and services based on these, this therefore represents their trust in the personal experience such influencers or celebrities have had with the recommended products or services. If it were to come to light that an influencer or celebrity was receiving free products or services from the producing company, or if there was another material relationship between the two, this could possibly affect consumers’ desire to purchase the product.

According to the “Truthful Representations Principle” described in the Endorsements and Testimonials Statement, if a “material relationship between the endorser and the advertiser that cannot be reasonably expected by the general public” exists, such a relationship should be fully disclosed in the testimonial. If it is not disclosed, depending on the particulars of each case, the testimonial could be considered a false or misleading representation relevant to goods or services sufficient to influence trading decisions, and thus be in violation of Article 21 of the FTA. It could otherwise be deemed a violation of the blanket provision regarding unfair practices in Article 25.

In addition, the “Obligation to Disclose Material Relationships” is specifically discussed in Point 5 of the Endorsements and Testimonials Statement. This item explicitly states that if an endorsement or testimonial is posted on social network websites (including online blog posts and posts in forums), any material relationship between the endorser and the advertiser that cannot be reasonably expected by the general public, which is not fully disclosed in the advertisement, and is sufficient to affect trading order, is in violation of Article 25 of the FTA.

We can better understand the term “material relationship that cannot be reasonably expected by the general public” by taking a look at the 2013 incident in which it came to light that the Taiwan subsidiary of South Korean electronics manufacturer Samsung was paying Taiwanese netizens to post negative online review and comments about HTC products on message boards and blogs, scrub the internet of negative news and reviews regarding Samsung’s products, and contrast Samsung’s products with those of their most prominent competitors by highlighting the deficiencies of the competitors’ products. Because consumers viewing these message boards and blogs would assume that the posts were the opinions or recommendations of average consumers like themselves, they would be unable to reasonably expect that there was a material relationship between the poster and the company. That these facts were concealed by Samsung significantly affected the credibility of the posts, and given Samsung’s long-term use of this particular approach, the FTC fined the company NT$10 million (approximately US$320,000) as a warning.

Influencers and celebrities should timely disclose their material relationships with companies

In order to maintain the impression of neutrality, and boost the credibility of their online posts, influencers and celebrities recommending certain products or services will frequently downplay the material relationship they have with the providers of those products or services. However, when there is such a relationship between the two sides, the articles, pictures, or videos posted are no longer purely experience sharing, and are rather closer to advertisements in nature. Given this, the FTA specifically includes experience sharing by celebrities or average consumers in the scope of “endorsements and testimonials,” and requires that any material relationship between the experience sharer and the company behind the product or service that cannot be reasonably expected by the general public be disclosed.

A great number of consumers are accustomed to buying products or perusing services based on the tastes and preferences of influencers or celebrities they follow online. Accordingly, if these tastemakers do not sufficiently disclose their material relationships with companies whose products or services they are reviewing, average consumers may go out and make purchases based on the mistaken belief that such reviews were made objectively in good faith. Based on previous cases, influencers or celebrities that conceal such relationships could be punished by the FTC if it is determined that the concealment is severe enough to affect market order. Moreover, if it is determined that they clearly knew or were capable of knowing that their endorsement or testimonial is misleading but still made it, the influencer and the company could also be held jointly and severally liable for civil damages.

Therefore, to reduce any possible legal risk and safeguard the trust fans and followers have in their idols, influencers and celebrities should disclose any material relationships they have.

For more information on social media and advertising in Taiwan, please contact Peter Dernbach at pdernbach@winklerpartners.com and Ling-ying Hsu at lhsu@winklerpartners.com.

 

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