July 2012: Japan Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP
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The IP High Court Addresses Trademark Infringement Liability of Internet Shopping Websites: In Perfetti Van Melle S. p.A v. Rakuten Co., Ltd., the Intellectual Property (IP) High Court in Tokyo addressed the issue of whether Rakuten, who organizes a website in which numerous independent stores and dealers can sell goods on the Rakuten website (called an “internet mall” in Japanese), could be liable for trademark infringement committed by those stores. Although the court dismissed the suit and found the defendant Rakuten not liable, the court recognized that an internet mall can be liable in certain circumstances.

The plaintiff Perfetti Van Melle is an Italian entity that holds trademarks to “Chupa Chups,” a famous candy. The defendant, Rakuten, operates the biggest internet mall in Japan, called “Rakuten Ichiba.” The plaintiff claimed that several shops using the Rakuten website were committing trademark infringement by selling items such as mugs, caps and baby bibs that incorporated the “Chupa Chups” trademark. The plaintiff sued Rakuten seeking an injunction and damages under the Japanese trademark law and unfair competition law. Rakuten argued that it was not liable because it was merely the administrator of the website, and not the shop that directly sold the products accused of trademark infringement.

The IP High Court held that the threshold test for finding the administrator of an internet mall liable depends on whether the administrator receives commissions from the shops, has power or control over the shops, and knows or should have known of the existence of trademark infringement by the shops. If the test is satisfied, then the administrator can be held liable for damages and be subject to an injunction for the infringement unless the administrator removes the infringing products from the website within a reasonable time period. Applying this test to the case, the court concluded that Rakuten was not liable because Rakuten had removed the infringing products within a reasonable time after learning of the infringement.

The decision of the IP High Court leaves unclear when an administrator “should have known” of the infringement or what it means to remove the infringing goods “within a reasonable time.” Nevertheless, website administrators may now have to investigate if goods sold on the internet mall are infringing trademarks and remove them if they are costs.

Japanese SESC Accelerates Its Enforcement Activities: The SESC, the Japanese version of the SEC, has stepped up its investigations of insider trading allegations related to public stock offerings of Japanese companies. Recently, there have been instances where stock prices have fallen immediately before offerings were publicly announced. Critics have argued that this pattern suggests that some traders are getting information about offerings from securities companies before the public announcement of the offerings. Using this information, the traders sell the issuing company’s stock at a higher price in anticipation of a stock price drop due to the increase in capital, which leads to the stock price drop prior to the public announcement of the offering. Seeking to address potential insider trading, the SESC has opened a number of investigations.

On March 21 and May 29, 2012, the SESC recommended the Japanese Financial Services Agency issue an administrative monetary penalty order against Sumitomo Mitsui Trust Bank, Ltd. for insider trading in relation to the 2010 public share offerings held by Mizuho Financial Group Co., Ltd. and Inpex Co., Ltd., respectively. In addition, on June 8, the SESC recommended an administrative monetary penalty order against First New York Securities L.L.C., a New York based broker-dealer, for insider trading in relation to the 2010 public offering by Tokyo Electric Power Co., Ltd. The charges alleged the use of confidential information of the public offering to sell the issuing companies’ stock immediately before the public announcement of the offering. In each case, the employees providing the alleged information tips were from Nomura Securities Co., Ltd., a leading Japanese securities company and the underwriter in each instance. After the press release of the First New York case, Nomura officially admitted that they had tipped off traders to the confidential information.

In furtherance of its efforts to combat insider trading, the SESC also established in August 2011 an international trading investigation section that mainly handles overseas transactions, sometimes cooperating with the SEC.

Development on Introduction of a New Japanese Class Action System: Current Japanese laws provide no system comparable to the class action system in the United States. If a group of people suffers harm arising from a single cause of action and seeks to recover damages, all of the members of the group are required to either file individual suits or to jointly file a lawsuit. To improve consumer protection, the Japanese government is now in the process of drafting and passing legislation to introduce a new class action-like system. The Japanese government issued a summary of the proposal and is currently preparing the draft bill.

Although the details of the system might be changed when the bill is ultimately implemented, as it stands now, the new system would only allow a qualified organization (called a Specified Qualified Consumer Organization) to file an action on behalf of a class.

The proposed class action-like system consists of two stages. In the first stage, the qualified organization brings the lawsuit. A court conducts fact finding and makes a decision on issues which are common to all consumers who suffered harm. If a court finds that the defendant is liable for damages, the plaintiff organization gives notice to each individual consumer to join. At this point, the second stage commences with the involvement of the individual consumers to determine damages. Even if the plaintiff organization does not succeed in the first stage, consumers can still bring their own action.

Because plaintiffs are limited to the qualified organizations and consumers who actively participate in the procedure, the impact of this new system may be quite limited in comparison to the U.S. class action system. Nevertheless, the number of consumer damage cases in Japan will likely increase considerably.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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