2006 june ebulletin - prac · 2006-06-13 · university. he is admitted to practice law in the...

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June 2006 e-BULLETIN

Page MEMBER NEWS • Hogan & Hartson Adds Accomplished Aviation Lawyer 2 • NautaDutilh Strengthens Arbitration Practice With New Partner Hire in Rotterdam 2 • Simpson Grierson Appoints New Partner to Commercial Litigation Practice in Wellington 3

MAKING NEWS • Clayton Utz - Toll Takeover Bid of Patrick Corporation– Behind the Headlines 4 • Gide Loyrette Nouel Advises Coloplast A/S on Acquisition Urology Division of Mentor Corporation 4 • Hogan & Hartson Advises GAZ Group in Deal With DaimlerChrysler. 5 • Lovells Wins Patent Case for Statoil 5 • WilmerHale Client, MEDTRONIC, Closes Sale of $4.4Billion Convertible Senior Notes 6 MEMBER EVENTS • Hogan & Hartson – Washington DC - June 22 - Breakfast Reception Featuring Matthew S. Borman's Discussion of the Proposed China "Catch-all" Rule • Morgan Lewis & Bockius – June 20 – Interactive Webcast – Avian Flu – Planning for Pandemic COUNTRY ROUNDUPS • AUSTRALIA – Clayton Utz – NSW Supreme Court Endorsement of Creditor’s Trust Encouraging 8 • CHINA – King & Wood – Offering Stock Option to Employees Who Work in China - What You Need to Know 9 • NEW ZEALAND – Simpson Grierson – Fighting For Your Rights in Cyberspace 14 • UNITED STATES • Hogan & Hartson – Intellectual Property Update – A New Weapon in the Fight Against Counterfeiting: Using the United States International Trade Commission as a Forum to Combat Counterfeiting and Other Intellectual Property Violations 16 • Luce Forward Hamilton & Scripps – Arbitrator’s Failure to Disclose Results in Vacating Substantial Award 21 • Morgan Lewis & Bockius – Renewable Energy Portfolio Standards Update 23 • TAIWAN – Lee and Li – Regulatory Response to Card Debt Issue` 25

PRAC EVENTS (Members Only) • San Diego 2006 Conference – October 14 -18, 2006 (Early Registration NOW OPEN at www.prac.org) • Los Angeles 2006 Follow on Program – October 18 -19, 2006 (Early Registration NOW OPEN at www.prac.org) Tools to Use • PRAC Contacts Matrix & Email Listing –Update (members’ version only) • Directory 2006 Member Firms now available at PRAC web site • Expert System available at PRAC web site Private Libraries (members only) • Intellectual Property & Licensing Capabilities Survey – (members only) PRAC e-Bulletin is published monthly Visit us on line at www.prac.org

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HOGAN & HARTSON ADDS ACCOMPLISHED AVIATION LAWYER

WASHINGTON, D.C., June 1, 2006 – Hogan & Hartson L.L.P. has strengthened its aviation practice capabilities with the addition of Patrick “Pat” Rizzi as counsel in the firm’s Washington, D.C. office. Rizzi will be a member of the firm’s aviation and transportation group. Rizzi has extensive experience in the areas of aviation regulatory law and complex commercial litigation, with particular emphasis on operational and compliance issues under U.S. laws and regulations; safety, competition, licensing, advertising, customer service; and airline alliances. His practice encompasses international and domestic regulatory matters on behalf of scheduled, charter, commuter, and air taxi carriers. In addition, Rizzi has advised clients on merger transactions, the development and implementation of alliances and marketing arrangements, proposed aviation-related rulemakings by U.S. government agencies, international route and other comparative selection proceedings before the U.S. Department of Transportation, international bilateral agreements, and on aviation-related legislation and financings. He also has extensive class action litigation experience in the transportation area defending clients in courts throughout the United States. “Pat is a very talented lawyer who will add even greater depth to our aviation practice,” said George Carneal, director of the firm’s aviation and transportation practice. “He has an impressive record of aviation-related regulatory and litigation experience, particularly in proceedings before the U.S. Department of Transportation and the Federal Aviation Administration.” “I am very excited to be joining Hogan & Hartson’s preeminent global aviation practice,” said Rizzi. Rizzi received his law degree from New York University School of Law and his bachelor’s degree from Georgetown University. He is admitted to practice law in the District of Columbia and Pennsylvania. For more information about the firm, visit www.hhlaw.com. NAUTADUTILH STRENGTHENS ARBITRATION PRACTICE WITH NEW PARTNER HIRE IN ROTTERDAM

On June 6, 2006, Leading Benelux law firm NautaDutilh has announced the appointment of Gerard Meijer, who will join the firm’s Rotterdam office as a partner on September 1st 2006. A leading Dutch arbitration specialist, Gerard Meijer joins NautaDutilh from De Brauw Blackstone Westbroek in the Hague. Before entering private practice in 2000, he taught civil litigation and arbitration at the Erasmus University, Rotterdam. He is a key member of the Dutch Revision Commission on Dutch Arbitration Law. Commenting on his appointment, Marc Blom, chairman of NautaDutilh said: “We are delighted that such a distinguished academic lawyer as Gerard has chosen to join our litigation and arbitration team. NautaDutilh has a leading reputation for involvement in many of Europe’s largest commercial disputes before national Courts, reputable Arbitral Tribunals and the European Court of Justice, and Gerard’s appointment will strengthen our expertise in private law disputes. Our litigation teams are currently involved in a leading arbitration case for Eureko against the Polish State in connection with the acquisition of the Polish insurance company PZU and, are assisting oil company Yukos in a number of claims including against the Russian state oil company Rosneft.”

For additional information visit www.nautadutilh.com

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SIMPSON GRIERSON APPOINTS NEW PARTNER TO COMMERCIAL LITIGATION PRACTICE IN WELLINGTON

Simpson Grierson is proud to announce the appointment of Tim Stephens as the newest partner at the firm. Tim adds further strength to the growing commercial litigation unit in Wellington currently led by John Shackleton. "Tim is a passionate advocate for our clients and for our litigation practice," said John Shackleton. "We're proud to welcome him to the partnership." "Litigation is far more than appearing in court for clients," added John. "It's about anticipating outcomes and managing risks, and many times success is judged by avoiding the courtroom. But when it does come to it, Tim is a skilled litigator with an impressive track record of success." "Tim also brings a real commercial acumen to the practice that enables him to give advice to clients which is both technically excellent and highly practical." Tim has been in practice since 1995, rejoining Simpson Grierson in 2001 after three years in England where he undertook postgraduate study at the University of Oxford and worked in a leading London litigation firm.

He has had extensive experience in the District Court, High Court and Court of Appeal and various tribunals and commissions. He is a Fellow of the Center for International Legal Studies, a member of the Australian Institute of Insurance and Finance and INSOL New Zealand and is the author of a number of academic texts and articles. About Simpson Grierson Simpson Grierson is one of New Zealand's leading commercial and technology-focused law firms, delivering comprehensive advice in every commercial practice area. A national practice with more than 420 staff, including 214 lawyers and partners, Simpson Grierson combines leadership, innovation, technical expertise and good business sense to ensure our clients receive the best legal service available. For additional information visit www.simpsongrierson.com

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MAKING NEWS – CLAYTON UTZ - TOLL TAKEOVER BID FOR PATRICK CORPORATION – BEHIND THE TOLL HEADLINES

The just-completed Toll bid for Patrick Corporation was a journalists' dream.

When they weren't thinking up new headlines that punned on the word "Toll", journalists were flat-out documenting the many twists and turns of what will go down in Australian corporate history as one of the most complicated and protracted takeover battles ever.

Behind those headlines and out of the public gaze was a dedicated team of Clayton Utz lawyers.

The bid succeeded in the face of many legal obstacles and issues. These were not confined to takeovers law (which itself gave rise to four applications to the Takeovers Panel). Other legal aspects of the bid included competition law, commercial contracts, joint ventures and, occasionally, litigation.

The fact that Toll employed only one firm throughout the bid is a tribute to the depth and breadth of experience in Clayton Utz. At all points, Clayton Utz was able to provide the expertise and the resources to analyse the myriad of issues and to devise strategies to deal with them.

Heading up the Clayton Utz team were Rod Lyle, Andrew Walker and Ron Smooker from the Melbourne M&A team. The team drew from Clayton Utz offices around Australia, and included:

• Michael Corrigan, Linda Evans and Joanne Daniels(Competition) • Charles Rosedale and Penny Grau (Corporate) • Quentin Solomon (Banking and Financial Services)

Kym Fraser, Fred Prickett, Paul James, Richard Mereine and Vince Annetta (Commercial Litigation).

For additional information visit www.claytonutz.com.

MAKING NEWS - GIDE LOYRETTE NOUEL ADVISES COLOPLAST A/S ON ACQUISITION UROLOGY DIVISION OF MENTOR CORPORATION

Gide Loyrette Nouel advised the Danish company Coloplast A/S, In tandem with the US law firm Welch Spell, on its acquisition of the urology division of Mentor Corporation (world leader in its specialist sectors). Coloplast A/S, a company listed on the Copenhagen Stock Exchange, is a leading supplier of stoma and continence care products, wound care and skin protection products and breast prosthetics. Coloplast A/S purchased Mentor Corporation at a price of US$ 463 million. Legal counsel to Coloplast A/S France: Gide Loyrette Nouel - The team was led by Philippe Xavier-Bender, Christophe Eck and Philippe Desprès, assisted by Thomas Fleinert-Jensen, Edgard Nguyen (corporate aspects) and Isabelle Mignard-Gancz (employment law aspects). For additional information visit www.gide.com

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MAKING NEWS – HOGAN & HARTSON ADVISES GAZ GROUP IN DEAL WITH DAIMLERCHRYSLER

MOSCOW and NEW YORK, May 25, 2006 — Lawyers with the Moscow and New York offices of Hogan & Hartson L.L.P. have advised the GAZ Group, the largest Russian producer of commercial transport, in its negotiation of the contractual framework and closing of a long-term, multi-million dollar deal with DaimlerChrysler Corporation. The transaction, which closed on May 18, 2006 in Detroit, Michigan, provides for the GAZ Group to buy the production assets and a technology license to manufacture two DaimlerChrysler car models (Chrysler Sebring and Dodge Stratus) in Russia. The GAZ Group will sell the cars under its own brand. This matter was handled by Hogan & Hartson counsel Alla Naglis in Moscow and partner Claud "Lex" v.S. Eley and associate Cheryl M. David, both in the firm’s New York office. For additional information visit www.hhlaw.com MAKING NEWS – LOVELLS WINS PATENT CASE FOR STATOIL

News: The University of Southampton has withdrawn its appeal from last year's decision of the UK Patent Office which awarded ownership of a UK patent and a number of foreign applications on Sea Bed Logging (SBL) to Statoil ASA (Statoil). Lovells advised Statoil on the case. The decision had been appealed by the University but now the appeal has been withdrawn, the patent and applications will be transferred to Statoil, and then onwards to emgs (The Sea BedLogging Company). Detail: The dispute arose from a Statoil research project in which personnel from the University of Southampton, now at Offshore Hydrocarbon Mapping plc (OHM) took part.The project, SBL, exploits differences in resistivity beneath the seabed to identify hydrocarbon-bearing reservoirs with greater accuracy. This means that promising structures revealed by seismic surveys can be further investigated to identify whether oil or other hydro-carbons are present or not. Statoil brought the action as it maintained the University had wrongly patented the concept of SBL, and had devised the concept prior to the involvement of the University. The Patent Office held that the true inventors of the patent were Statoil employees at the relevant time, meaning that the University's personnel should not be named as inventors. It therefore ordered that the patent should belong to Statoil and not to the University. Statoil's case was upheld in its entirety. OHM will now lose the benefit of its licence from the University of Southampton under these patents which are fundamental to how the technology works. Two of emgs' key personnel will now be recorded as the inventors of the patent, which further adds to emgs' substantial portfolio in this area. Comment: Statoil, a client of the firm since 1981, has been absolutely clear all along that its employees were the inventors of the invention. This is therefore a tremendous vindication for the stance it has taken throughout the case. For additional information visit www.lovells.com.

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MAKING NEWS – WILMER HALE CLIENT, MEDTRONIC, CLOSES SALE OF $4.4 BIOLLION CONVERTIBLE SENIOR NOTES

WilmerHale client, Medtronic (NYSE: MDT), announced the closing of its sale of $2.2 billion principal amount of Convertible Senior Notes due 2011 and $2.2 billion principal amount of Convertible Senior Notes due 2013 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The aggregate principal amount of Convertible Senior Notes sold reflects the full exercise by the initial purchasers of their option to purchase additional Convertible Senior Notes to cover over-allotments. The net proceeds from this offering were approximately $4.33 billion, after deducting estimated discounts, commissions and expenses. The WilmerHale legal team was led by Jeff Stein and also included, William Caporizzo, Roger Ritt, John Sigel, Doug Chini, Jonathan Golden and Julie Hogan. For additional information visit www.wilmerhale.com.

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MEMBER EVENTS

PRAC Member: Hogan & Hartson LLP Date: June 22, 2006 Place: The Fulbright Center, Washington, D.C Event: Breakfast Reception featuring Matthew S. Borman's discussion of the proposed China "Catch-all" Rule Join us as Matthew S. Borman, acting assistant secretary of commerce for export administration, discusses the proposed China "catch-all" rule and related export control regulations. The event is sponsored by Hogan & Hartson L.L.P., The Coalition for Employment Through Exports (CEE), and the National Foreign Trade Council (NFTC). For more information on this event, please contact Brooke Riter, government regulations marketing manager, at +1.202.637.6680 or [email protected] PRAC Member: Morgan Lewis & Bockius Date: June 20, 2006 (11:00 am ET or 3pm ET) Place: Webcast Event: Interactive Webcast Presentation on the business issues employers will fact in the case of a global pandemic.

Governments, public health organizations, customers and employees are requiring employers to prepare for a pandemic. If employers are to effectively manage this potential crisis, there are numerous issues they need to address and they should be developing preparedness plans now. How will they handle employee absences that could be as high as 50%? What employment policy changes may be needed? Are there gaps in employee medical and other insurance coverages? What provisions can be added to vendor contracts to ensure the continued flow of critical supplies and services? How do employers handle business travel and ex-pat evacuations? What are current business continuity best practices?

This webcast will discuss the steps employers must take to ready themselves for this potential pandemic, including:

• Pandemic HR policies development • Global workforce issues • Privacy issues • Insurance review • Outsourcing and contracting issues • Business continuity best practices

The webcast presentation will be 90 minutes long, including time for online Q&A with our featured partners.

Our panel includes: Nina G. Stillman Labor and Employment Law Practice Group | Chicago Barbara M. Melby Outsourcing Practice Group | Philadelphia Thomas A. Marrinson Insurance Recovery Practice Group | Chicago Walter Ahrens Labor and Employment Law Practice Group | Frankfurt

Space is limited; register early at:https://morganlewisevents.webex.com.

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COUNTRY ROUNDUP - AUSTRALIA – CLAYTON UTZ – NSW Supreme Court Endorsement of Creditor’s Trust Encouraging

Creditors' trusts provide fast-track to financial health

Sydney, 1 June 2006: Creditors of failed companies have been thrown a lifeline by the NSW Supreme Court.

The Court has endorsed a business process that can significantly boost the amount of money available to creditors in a liquidation.

Clayton Utz insolvency partners Cameron Belyea and Rob McKenzie were among the practitioners who pioneered the use of creditors' trusts. They have welcomed the NSW judicial support as a sign the process is gaining wider recognition for its role in helping to secure a better return for creditors.

The pair say the NSW Supreme Court's recent endorsement of creditors' trusts in the winding-up of copper and gold miner Chameleon Mining is encouraging and will hopefully lead to such trusts being more widely used.

Creditors' trusts are a relatively new business process that can significantly boost the amount of money liquidators are able to pay creditors. While they have been in use in Western Australia for some time, insolvency practitioners in the eastern states have not been as quick to embrace them.

"They have tended to be regarded as a bit 'newfangled' by many insolvency practitioners," Mr McKenzie says.

"This is despite the fact that, where they have been used, they have tended to produce better outcomes for both insolvent companies and their creditors."

In the case of Chameleon Mining, Chameleon's debts were hived off to a creditors' trust. The creditors' trust was funded by a cash injection from investor Centrebright. That allowed Centrebright to acquire a majority shareholding in what was now a debt-free Chameleon.

"This is a win-win situation for creditors and investors," says Mr Belyea.

"Moving the debts to a separate trust means that the company can quickly come back onto the market. This avoids the long, drawn-out process of insolvency which can destroy any goodwill in the company, as well as its stock market listing.

"That, of course, makes the company a more attractive proposition for would-be investors. The money they invest in the company can then be used to pay its creditors."

Mr McKenzie and Mr Belyea add that although creditors' trusts are not a cure-all for creditors' woes, the NSW Supreme Court's endorsement will hopefully encourage more insolvency practitioners to consider using them.

For additional information visit www.claytonutz.com.

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© 2006 King & Wood www.kingandwood.com

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Offering Stock Option to Employees Who Work in China – What You Need to Know for Foreign Exchange, Tax and Employment Laws

By Guojia* and Feng Jie**

When an overseas holding company (hereinafter referred to as “Overseas Company”) implements stock option plans (hereinafter referred to as “SOP”) for the employees in its domestic subsidiary company (hereinafter referred to as “Subsidiary Company”), some special legal issues may be concerned. This article intends to introduce the postures under PRC laws to provide a brief guideline on relevant issues. Under the current laws and regulations in China, when an Overseas Company implements SOP for the Subsidiary Company’s employees, the major issues come from foreign exchange control, labor law and taxation. Please note that the Measures for the Administration of Equity Incentive Plans of Listed Companies (For Trial Implementation) is not applicable to SOPs provided by Overseas Companies for its Subsidiary Company’s employees. Foreign Exchange Control As the grant of the option or the re-purchase of the shares under SOP involve the transfer of shares of an Overseas Company, foreign exchange control policy may applies to such postures. Under the current PRC laws, foreign exchange control may apply to capital accounts while there is no foreign exchange control on current accounts.1 Although the employees’ income from exercising the option has some features of revenues from securities investment and the officers in the State Administration of Foreign Exchanges (hereinafter referred to as “SAFE”) has suggested that SOP shall be regarded as operations of capital accounts2, the exercising of option are not same as general securities investment because the employees accept such income passively, which makes such income a kind of labor remunerations, such as salaries or bonus. In the light of the laws in other countries, SOP is not treated as securities investment under company laws, securities laws, taxation laws and accounting principles. For example, under the taxation laws and accounting principles of

1 See Regulations of the People's Republic of China on the Management of Foreign Exchanges (Promulgated by the State Council of China on

January 29, 1996 and as amended on January 14, 1997) Article 5: The State shall implement the system of compiling statistics and reports of international payments. All units and individuals involved in international payment activities shall compile statistics and reports of their international payments. Article 14: Individuals who go abroad for personal businesses can purchase foreign exchanges in prescribed amounts. If they want to purchase more than the prescribed amounts, they can apply to the foreign exchange management administration. Article 21: In case a domestic enterprise makes investment in a foreign country, its source of foreign exchange funds shall be examined by the foreign exchange management administration before it applies to its responsible department for examination and approval. After approval, relevant remitting procedures shall be gone through in line with stipulations of the State Council on the management of foreign exchanges used for investment in foreign countries. 2 See the Relevant Foreign Exchange Control Issues Regarding Stock Option Plan by Li Zhaoxi, Dong Shukui and Ye Liner at http://www.drcnet.com.cn.

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the United States, SOPs are treated as the employees’ labor remunerations.3 Under the current laws and regulation of PRC, this issue is still kept open. According to our communications with SAFE, the procedure of legislation regarding Overseas Company’s SOP still needs further communication between departments of the government. In case that an optionee is an individual4 who is a resident in PRC and has his/her own legitimate foreign exchanges, the SAFE’s approval is not required5, which means the optionee may exercise option by passing the bank’s formality examination. In other cases that an optionee is an individual6 who is a resident in PRC and has no legitimate foreign exchanges, it will be difficult for such optionee to exercise the granted option because the law does not permit the exchange of money for exercising options. In practice, to shield legal risks, the Overseas Company always entrusts overseas intermediary institutions to pay the foreign exchanges in advance and the optionees may sell the stocks to the intermediary institutions on the same day of exercising options, which means the optionees may obtain the income from the exercising options without acquiring foreign exchanges. However, such arrangements may reduce the optionee’s revenue and increase the cost of Overseas Company’s incentive plans. Issues under Labor Law Under the Labor Law of the People’s Republic of China, wages shall be paid to the workers in cash and on a monthly basis.7 Accordingly, although it could be argued that the SOP is a form of compensation for the employees, a SOP cannot take the place of the salaries in cash.

3 Under the Internal Revenue Code, FASB Standards and APB Standards, SOP is identified as non-fixed remuneration based on stocks and the cost of implementing SOP is defined as “Compensation Cost”. In addition, the FASB Standard No.123, which intends to interpret the accounting principles concerning SOPs, is named as “Accounting for Stock-Based Compensation”. Moreover, the APB Standard No.25 also defines SOP as a certain kind of labor remunerations for employees. 4 Refers to foreign natural persons (including stateless persons), Hong Kong, Macao, and Taiwan compatriots, and the Chinese natural persons who hold Chinese passports but who have already obtained the right of permanent residence overseas. 5 See the Notice of the State Administration of Foreign Exchange on the Relevant Issues concerning the Regulation of Foreign Exchange Control over Non-resident Individuals (Promulgated by the State Administration of Foreign Exchange on Feb 16th, 2004 and effective on March 1st, 2004) Article 5: Non-resident individual refers to the natural person who is not Chinese nationality (including stateless person)、who is not compatriot of Hong Kong、Taiwan or Macao, or who has a Chinese passport but has obtained a Permanent Resident certificate from other county(ies). 6 Refers to the Chinese residing in the territory of the People's Republic of China, foreign nationals (including stateless persons) having settled in the People's Republic of China and the foreign nationals and compatriots from Hong Kong, Macao and Taiwan staying in China for more than one year (calculated according to the latest entry date registered on the applicant's passport). 7 See the Labor Law of the People’s Republic of China (Promulgated on July 1st, 1995 and effective on January 1st, 1995) Article 50: Wages shall be paid to the workers themselves in cash and on a monthly basis. In no circumstance is it allowed to deduct or delay the payment.

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Individual Income Tax Under the PRC laws8, there three categories of individual income taxpayers: (1) an individual who has nationality of PRC (hereinafter referred to as “Taxpayers in Category 1”); (2) an individual who has a domicile in the territory of China or who has no domicile but has stayed in the territory of China for one year or more (hereinafter referred to as “Taxpayers in Category 2”); and (3) an individual who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than one year (hereinafter referred to as “Taxpayers in Category 3”). The taxpayers in Category 1 or in Category 2 shall pay individual income tax for the incomes obtained in and/or outside the territory of China, and the taxpayers in Category 3 shall pay individual income tax for the incomes obtained in the territory of China.9 In the case that the Overseas Company is a non-listed company, the governing laws (or regulations) shall be the Law of the People's Republic of China on Individual Income Tax (hereinafter referred to as “Individual Income Tax Law”), the Detailed Rules for the Implementation of the Individual Income Tax Law of the People's Republic of China (hereinafter referred to as “Detailed Rules”) the Notice of the State Administration of Taxation on the Issue of Levying Individual Income Taxes on Incomes Generated from the Deductions or Subsidized Incomes Given by Employers to Individuals for Their Subscription of Stocks and Other Securities (hereinafter referred to as “Notice No.9”) and Notice of the State Administration of Taxation on the Issue of Confirming the Duty of Tax Payment on Incomes from Wages and Salaries in the Form of Securities Obtained by Individuals Who Have No Domiciles in the Territory of China (hereinafter referred to as “Notice No. 190”). The Exhibit 1 introduces the detailed tax payments in such cases. In addition, if the Overseas Company is a listed company, the governing laws (or regulations) shall be the Individual Income Tax Law, the Detailed Rules and the Notice of the Ministry of Finance and the State Administration of Taxation on the Issue of Levying Individual Income Taxes on Incomes from Individual Stock Options (hereinafter referred to as “Notice No.35”). The Exhibit 2 introduces the detailed tax payments in such cases. According to the Detailed Rules, for the individual’s10 income derived from on job, employed or contracted labor service performed within the territory of China, regardless whether or not payments be made within China, shall be considered income derived from sources within the territory of China. 11 Moreover, under the Notice No.9, for

8 Generally, the People's Republic of China on Individual Income Tax Law (Promulgated on January 28th, 1994 and amended on December 19th, 2005) and the Detailed Rules for the Implementation of the Individual Income Tax Law of the People's Republic of China (Promulgated and effective on January 28th, 1994) provide a basis of the mechanism of income tax of the People’s Republic of China.

9 See Article 1 of the Law of the People's Republic of China on Individual Income Tax: Individuals who reside in the territory of China for a full year or more no matter having or having not a residence therein shall pay individual income tax according to this law on the income gained within or outside the territory of China. 10 Such individuals shall include the taxpayers in category 1, category 2 and category 3. 11 See Article 5 of the Detailed Rules for the Implementation of the Individual Income Tax Law of the People's Republic of China: The following categories of income, regardless whether or not payments be made within China, shall be considered income derived from sources

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those incomes from wages and salaries in the form of subscription of stocks or other securities at a deducted price obtained, the sources of such incomes and the duty of tax payment shall be judged according to the principle of the place where labor services are provided. In our opinion, after the promulgation of the Notice of the China Securities Regulatory Commission on Promulgating the Measures for the Administration of Equity Incentive Plans of Listed Companies (For Trial Implementation), the relevant authorities are paying attention to the issues concerning Overseas Company’s SOP for its Subsidiary Company’s employees. We believe that relevant laws or regulations will be enacted soon to provide a solution to the issues concerning Overseas Company’s SOP for its domestic subsidiary company’s employees.

Exhibit 1: Individual Tax Table (Non-listed Companies Granting Options to PRC Residents )

Time Tax Basis Tax Item Tax Rate

Grant Date None None No Tax12

Exercise Date

Market price deduct purchase price; or the issuing price deduct the purchase price

Salaries Tax Article 2 of the Notice No.913

When the Dividends and bonuses are received

Dividends and bonuses Dividends and Bonuses Tax 20％14

20 ％ , for the individuals in the category (1) or (2)15

Sale Date Income from selling the shares Property Transfer TaxNo tax, for the individuals in the category (3)16

within the territory of China: (1) Income derived from on job, employed or contracted labor service performed within the territory of China; (2) Income derived from leasing of property to others for use within the territory of China; (3) Income derived from transfer of buildings, land use rights or other property within the territory of China; (4) Income derived from granting of various franchises to be used within the territory of China; and (5) Income derived from interests, dividends and extra dividends from companies, enterprises and other economic organizations or individuals within the territory of China.

12 See Article 2 of the State Administration of Taxation, Questions Concerning the Levy of Individual Income Tax on Discounts or Subsidies Granted by Employers to Individuals Who Subscribe for Negotiable Securities such as Shares Circular (Promulgated and effective on January 20th, 1998): When calculating the individual income taxes on deductions or subsidies given by employers to the aforesaid individuals for their subscription of stocks and other securities, if it is difficult to wholly calculate such incomes into the incomes from wages and salaries of that month for paying the individual income taxes since such one-off incomes are fairly high, the aforesaid incomes may be averagely calculated into the incomes from wages and salaries for paying the individual income taxes on a monthly basis for not more than six months as of the month when the stock or other securities are actually subscribed after it is reported to the local competent taxation authority for approval. 13 ibid. 14 See Article 3(5) of the People's Republic of China Individual Income Tax Law provides: for incomes from royalties, incomes from interest, stocks dividend and bonuses, incomes from lease of property, incomes from transfer of property, occasional incomes and other incomes, the flat tax rate is applicable and the tax rate is 20 per cent. 15 ibid. 16 See Article 1 of the People's Republic of China Individual Income Tax Law.

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Exhibit 2: Individual Tax Table (Listed Companies Granting Options to PRC Residents)

Time Tax Basis Tax Item Tax Rate

Grant Date None None No Tax17

Exercise Date Market price deduct the

purchase price

Salaries Tax Article 4 (1) of the Notice

No.3518

When the Dividends and

bonuses are received

Dividends and bonuses Dividends and

Bonuses Tax

20％19

20％, for the individuals in the

category (1) or (2)20

Sale Date Income from selling the

shares

Property Transfer

Tax

No tax, for the individuals in

the category (3)21

(The article was written in Chinese, the English version is the translation.)

*Guo Jia is an associate at Corporate Group, King & Wood’s Beijing office. **Feng Jie is an associate assistant at Corporate Group, King & Wood Beijing office.

.

17 According to the Article 2(1) of the Notice of the Ministry of Finance and the State Administration of Taxation on the Issue of Levying Individual Income Taxes on Incomes from Individual Stock Options (Promulgated on March 8th, 2005 and effective on July 1st, 2005, hereafter the “Notice No. 35”), as a general rule, the stock options that are received by an employee in an enterprise implementing the stock option plan may not be taken as taxable incomes, unless it is otherwise prescribed by relevant taxation provisions. 18 Article 4(1) of the Notice No.35 provides: The calculation of taxes from incomes from stock subscription (incomes from exercising the right). Where an employee obtains incomes from the stock option plan within the territory of China, if this Notice prescribes that the said incomes shall be taxed in a same way as the incomes from wages and salaries, the incomes from wages and salaries in the form of stock options can be distinguished from those from other wages and salaries in the corresponding months, and the payable taxes thereon shall be separately calculated pursuant to the following formula: payable taxes = (taxable incomes from wages and salaries in the form of stock options / the prescribed number of months × applicable tax rate - sum of quick calculation deduction) × the prescribed number of months. The “prescribed number of months” as mentioned in the aforesaid formula refers to the number of months while an employee gets incomes from wages and salaries in the form of stock option from the territory of China, if the said number is larger than twelve, it will be calculated as twelve months. The “applicable tax rate”, the “sum of quick calculation deduction” and the quotient of taxable incomes from wages and salaries in the form of stock option divided by the prescribed number of months as mentioned in the aforesaid formula shall be fixed by referring to the table of tax rates attached to the Notice of the State Administration of Taxation on Printing and Distributing Some Issues Concerning the Levying of Individual Income Taxes (No. 089 [1994] of the State Administration of Taxation).

19 According to Article 3 (5) of the People's Republic of China Individual Income Tax Law, for incomes from royalties, incomes from interest, stocks dividend and bonuses, incomes from lease of property, incomes from transfer of property, occasional incomes and other incomes, the flat tax rate is applicable and the tax rate is 20 per cent. 20 ibid. 21 See Article 1 of the People's Republic of China Individual Income Tax Law.

STOP THIEF! FIGHTING FOR YOUR RIGHTS IN CYBERSPACE

What can you do if a competitor is using a domain name similar to yours? In this article, we seek to answer this question by considering a hypothetical example involving two competing hair salon businesses, Cutz and Stylit. The example may seem far fetched to some, but has actually been fairly common and Simpson Grierson has dealt with many similar cases. In domain name disputes, the options available to domain name owners will depend on their existing brand protection and on the way their competitor is using the competing domain name. For example, if a domain name is registered by a rival trader but no use is made of that domain name, it is very difficult to remedy. However, where a competitor completely steals or mimics another's brand on its competing website more solutions are available. Cutz vs Stylit In our hypothetical example, Cutz is a popular national chain of hair salons. Cutz uses the domain name www.cutz.com as the platform for its website and engages a web designer to create a website promoting the business. A rival hair salon chain, Stylit, decides to register the domain names www.cutz.co.nz and www.cutz.biz.nz. Stylit does not make any use of the www.cutz.biz.nz website, but does use the www.cutz.co.nz website to promote its business using a similar style and layout to that used on the Cutz website. Understandably, the owner of Cutz is not impressed and is concerned about losing customers to Stylit. What options and legal rights does Cutz have? Can't Cutz just complain to the Registrar? It is often mistakenly assumed that disputes involving domain names are resolved simply by making a complaint to the relevant domain name registrar. In New Zealand and most other international jurisdictions, domain names are registered on a first come, first served basis. Domain name registrars will register domain names without any evidence of entitlement. It is therefore generally necessary to have recourse to legal solutions in domain name disputes, and an interim injunction may be available in urgent cases. However, as reported in the May 2006 edition of X-Tech, after 1 June 2006 an alternative dispute resolution system will also be available.

JUNE 2006

Continued overleaf ►

CUTZ ® Let's assume Cutz has registered the trade mark CUTZ in class 44 for hairdressing and salon services and in class 35 for advertising and promotional services. As the owner of these trade marks Cutz has clear legal rights that it can point to in its dispute with Stylit. Cutz could first write to Stylit, advising Stylit it is infringing CUTZ's trade mark registrations and requesting Stylit cancel its domain name registrations. This allegation is less viable for www.cutz.biz.nz since Stylit is not making any use of this website at present so arguably Stylit is not directly infringing the Cutz trade marks. It is though, possible, in these circumstances that the registration of www.cutz.biz.nz is an actionable threat to infringe. Such a letter may be sufficient to convince Stylit to stop using these domain names. If not, Cutz has the option to sue Stylit for trade mark infringement (and a threat to infringe for www.cutz.biz.nz). If proceedings for trade mark infringement are successful, various remedies are available to the trade mark owner including an injunction constraining the rival's use of infringing domain names or requiring the domain names to be cancelled and possibly the website to be shut down. Damages or an account of the profits the rival trader has obtained through its use of infringing trade marks may also be available. What if CUTZ is not a registered trade mark? Two other legal actions may also be available in domain name disputes - breach of the Fair Trading Act 1986 and the tort of passing off. These actions can be particularly useful where there is no trade mark registration to rely on as they provide recourse where there has been a misrepresentation or other deceptive conduct. Once again, these options will be more directly relevant for Stylit's active website than for the inactive domain name registration, but a threats action may be available for the inactive domain name. To rely on either of these actions, Cutz must establish it has built up goodwill in the CUTZ brand and a significant portion of those who visit the www.cutz.co.nz website will believe this website is related to the Cutz salons. To succeed in a passing off action against Stylit, Cutz must prove that: (i) it has goodwill in the Cutz brand in New Zealand; (ii) Stylit's use of www.cutz.co.nz to advertise similar services, on web pages with a similar format has misled the public

that there is an association between Stylit and Cutz; and (iii) as a result of this misrepresentation Cutz has lost business or has otherwise been damaged. Similar elements must be established to rely on misleading or deceptive conduct in breach of the Fair Trading Act but actual damage need not be established as long as there is a likelihood of damage. Tips for Protecting your Brand in Cyberspace Register the most intuitive domain name(s) to prevent the problem of competitor registration. • Before registering a domain name, check the local Trade Marks Register, and marketplace to see whether the

proposed domain name (or something confusingly similar) has been registered or used. • Obtain appropriate trade mark registrations for your key brands. • If you are considering competing with your business rivals over the internet, consult Simpson Grierson to find out what

you can and can't do. Contacts Earl Gray (partner) – [email protected] Angela Stafford (solicitor) – [email protected]

© Simpson Grierson

mailto:[email protected]


http://www.simpsongrierson.com/Earl_Gray.html

Copyright © 2006 Hogan & Hartson L.L.P. All rights reserved.

Intellectual Property June 2006

A New Weapon in the Fight Against Counterfeiting: Using the United States International Trade Commission as a Forum to Combat Counterfeiting and Other Intellectual Property Violations

Every intellectual property (IP) owner should be aware of the mechanisms available through the U.S. International Trade Commission (ITC) to exclude the importation of counterfeit and infringing products into the United States. Indeed, the ITC is becoming an increasingly favored venue for companies asserting patent, trademark, and unfair competition claims against importers and foreign manufacturers of products destined for the United States. Between 1994 and 2000, the ITC instituted an average of 11 investigations a year. By 2004, this number had swelled to 25. So what makes the ITC so popular, you ask? The answer is three-fold: Broad jurisdiction against foreign infringers, expansive injunctive relief against the importation of infringing articles, and a speedy outcome. Indeed, as the clear majority of counterfeit and infringing products intended to be sold in the United States originate from outside the United States in countries such as China and India, a successful ITC proceeding can potentially result in the seizure of a large number of unauthorized imports so that such products never reach the U.S. market. An ITC action may also have a “chilling” effect on the manufacture of counterfeit and infringement goods as counterfeiters and infringers seek to avoid manufacturing goods that may be seized and destroyed at the U.S. border. As a result, even the filing of an ITC proceeding can potentially be enough to persuade certain counterfeiters and infringers to stop stealing a brand.

Intellectual Property Update | 2

This article provides an overview of the potential strategic benefits available through an ITC proceeding and considerations affecting whether the ITC is the appropriate forum for your IP litigation.

I. INTRODUCTION The ITC has jurisdiction over imported goods. Among other things, the ITC, upon successful petition by a U.S. company pursuant to Section 337 of the Tariff Act of 1930, as amended (19 U.S.C. § 1337), may exclude goods from importation that infringe a company’s trademarks, patents, or copyrights. In order to take advantage of the ITC’s power, an IP owner must satisfy certain prerequisites. The most important of these prerequisites include the existence of a valid trademark registration, patent, or copyright (or common law trademark rights in the absence of a federal registration), the importation of goods that infringe the trademark, patent, or copyright, a domestic industry on the part of the IP owner and an adverse effect on the domestic industry relating to the infringed trademark, patent, or copyright. Companies with patent, trademark, copyright, or unfair competition claims (referred to as “complainants” before the ITC) sometimes prefer the ITC as a forum over federal district court because of the ITC’s in rem jurisdiction (meaning that the case is really against the goods in question and personal jurisdiction need not be obtained over U.S. or foreign-based entities to exclude the importation of the infringing products), the ITC’s rapid adjudication of claims (often within 12-18 months from the commencement of the proceeding), and the ITC’s expertise with IP developed through the adjudication of numerous IP cases. Also, because proceedings are against the goods rather than particular parties, ITC proceedings can be an effective tool if there are multiple manufacturers or importers of the infringing goods, but not all manufacturers or importers are necessarily known. Some of the very reasons that make the ITC a favored forum of complainants may also place respondents (those against whom the ITC investigations are brought) in a disadvantageous position. Namely, the rapid pace under which ITC investigations operate often leaves respondents with little time to catch up, unlike complainants who are in a position to prepare for the proceeding in advance of its commencement. It is this unique combination of characteristics that has made the ITC a forum of choice for some IP plaintiffs. Nevertheless, there are several other aspects of ITC proceedings that should be considered when evaluating the ITC as a potential forum for IP litigation. Specifically, the ITC offers limited remedies. Complainants may obtain an exclusion order prohibiting the importation of infringing goods into the United States, but may not obtain money damages. In addition, a complainant has the burden of proving that it has established or is in the process of establishing a “domestic industry” involving the IP rights being asserted. Further, if the case is settled with all respondents, then the investigation will be terminated without the issuance of an exclusion order; thereby minimizing the usual favorable result of settlements. While these are some potential downsides to ITC proceedings, they can be minimized (or even eliminated) by making strategic litigation choices.

II. BENEFITS OF THE ITC

A. Broad Jurisdiction Unlike proceedings in federal district court, where IP claims are generally asserted against particular accused infringers personally, proceedings before the ITC may be in rem, meaning that the proceedings are directed against the infringing property being imported into the United States. Thus, there is no requirement to obtain personal jurisdiction over the respondents to obtain an exclusion order to prevent


the importation of infringing products. Thus, foreign defendants, whose infringing products are being imported into the United States, may be more easily targeted in ITC proceedings than proceedings in federal district court. Further, it is common in an ITC proceeding to name multiple “respondents.” Together, these two jurisdictional aspects of ITC proceedings can avoid the need to institute multiple cases to litigate the same or similar infringement issues and the attendant consequences of battling defendants on numerous fronts. Indeed, if successful, an ITC exclusion order can in certain instances extend to not only all named respondents, but all infringing articles regardless of whether the manufacturer or importer was a named respondent, as further discussed in Section IIC below.

B. Broad Injunctive Relief There are three primary types of orders that the ITC may issue when a violation 19 U.S.C. § 1337 is found. The most desired remedy is a general exclusion order preventing the importation of all infringing products regardless of whether the manufacturer or importer was a named respondent. Such a remedy, however, is considered a form of exceptional relief. To obtain such relief, a complainant must not only make the requisite showing that a violation of Section 337 exists, but it must also show (1) that business conditions, e.g., ease of market entry, product demand, etc., indicate that parties other than those named as respondents will import the infringing goods, and (2) that there is a widespread pattern of infringement. In other instances, the ITC may issue a limited exclusion order directed to only the respondents identified in the investigation. Additionally, the ITC, in lieu of or in addition to a general or limited exclusion order, may determine that a cease and desist order is an appropriate remedy. A cease and desist order is directed to specific parties and can be modified or revoked at any time. Typically, to obtain a cease and desist order, the complainant must show that there are “commercially significant” inventories of infringing imports in the United States. There is also the possibility of a temporary exclusion order (which is akin to a preliminary injunction). Obtaining a temporary exclusion order, however, is a difficult hurdle -- perhaps even a more difficult hurdle at the ITC than in federal court because there is less of a perceived “emergency” due to the relatively short timeframe within which the case will be decided, as discussed below. These forms of relief are enforced through U.S. Customs, which carries with it the practical aspects of Customs locating the infringing products in order to exclude them. However, as mentioned above, a successful ITC case can often serve to persuade not only the named respondents, but also other counterfeiters and infringers, to not manufacture products that may be detained at the U.S. border to avoid the attendant loss resulting from seizure and destruction of such articles. Further, with respect to trademark and unfair competition cases (unlike in patent cases before the ITC) a decision in the ITC is given res judicata effect in federal court, which can be helpful in pursuing a damages claim as discussed below in Section IIIA. Notably, for a general exclusion order to issue, there must be at least one respondent involved in the proceeding. While federal district court cases are often resolved through settlements wherein the defendant(s) stipulates to entry of a consent judgment and permanent injunction, a settlement among all respondents in an ITC proceeding would prevent the IP owner from obtaining a general exclusion order. Although a settlement may remain a favorable outcome, such as when all foreign manufacturers are known and the infringing articles are not likely to be made by others, in other situations the IP owner should consider settling with some, but not all, respondents to not foreclose the possibility of a general exclusion order.


C. Rapid Adjudication Companies that are interested in achieving a rapid resolution of their IP disputes may find the ITC to be a more favorable forum than federal district court. ITC proceedings are typically resolved within 12 to 18 months after their institution, in contrast to the two to four year proceedings that are experienced sometimes in federal district court. In addition, within the broader context of the ITC’s rapid adjudication of claims are procedures that may further expedite the resolution of claims. Specifically, a complainant may move for a summary determination of their claims, much in the same way that parties may move for summary judgment in federal district court. Again, complainants, unlike respondents, may be particularly well-suited for submitting such a motion to promptly resolve their claims, as complainants have the opportunity to prepare for the ITC proceeding before instituting any proceeding.

D. Tactical Advantages The rapid pace of the ITC provides complainants with additional tactical advantages over respondents. Indeed, there are virtually no extensions of time granted in ITC proceedings (such as those to respond to discovery -- discovery responses are due within 10 days under ITC rules), which provides little time for respondents to catch-up and to conduct thorough discovery, locate and evaluate expert witnesses, and prepare a comprehensive defense strategy. Thus, in contrast to the often protracted litigation in federal district court where defendants are given ample time to conduct thorough discovery and develop a comprehensive defense strategy, an ITC proceeding puts respondents on the defensive -- often at a great disadvantage.

E. Intellectual Property Expertise The ITC’s routine handling of numerous IP matters, particularly patent matters, has allowed it to develop an institutional expertise for claims of IP infringement. Notably, the administrative law judges assigned to hear claims of unfair competition (broadly interpreted to include patent, trademark, and copyright claims) are dedicated solely to the adjudication of such claims. This increased expertise is particularly pronounced in the area of patent claims. While various district courts may have more experience with trademark and copyright cases than the ITC, the ITC does hear and adjudicate trademark cases and to a lesser degree copyright cases. One reason for the number of patent cases is because patents, unlike trademarks and copyrights, cannot be recorded with U.S. Customs, and U.S. Customs can only seize products infringing a U.S. patent pursuant to an ITC order.

III. LIMITATIONS OF THE ITC

A. Limited Remedies One of the most notable distinctions between proceedings before the ITC and proceedings in federal district court is the unavailability of money damages as a remedy in ITC proceedings. The ITC is authorized to provide prospective relief, in the form of exclusion orders or cease and desist orders, that prohibit the importation of infringing products. Although complainants may not obtain money damages for any infringing activities, IP owners who desire the rapid relief afforded by the ITC may still obtain money damages through a proceeding in federal district court. Consequently, federal court cases are often filed along with ITC cases to preserve damages claims. The federal court cases are often stayed pending an


ITC action and then revived for a damages phase after the ITC ruling. This strategy is fairly common as it allows initiation of the district court case (where damages are available) and if the IP owner were to prevail at the ITC, the district court case would in many instances essentially become a damages case.

B. Domestic Industry Requirement To qualify for any relief afforded by the ITC, a complainant must prove that it has established or is in the process of establishing a domestic industry with respect to the IP right being asserted. That is, each complainant is required to prove that it makes sufficient use of the IP asset being asserted in the proceeding in the United States. Sufficient use of the IP may take the form of research and development, operation of facilities, licensing programs relating to the subject IP, maintaining a work force, and/or purchase and maintenance of equipment. Sales and marketing of products in the United States alone is insufficient to establish a domestic industry. Further, if an IP owner pursues an unfair competition claim based on an unregistered trademark, it must satisfy another hurdle by establishing that the importation of the infringing products do or threaten to either (i) destroy or substantially injure an industry in the United States; (ii) prevent the establishment of such an industry; or (iii) restrain or monopolize trade and commerce in the United States. Notably, although the use of the asserted IP asset must be within the United States, there is no requirement that complainants be U.S. entities, as foreign corporations may equally establish a domestic industry. Indeed, a growing trend in the ITC is actions involving foreign complainants as the U.S. market is a large and valuable market for IP owners worldwide. In sum, the ITC can be a powerful part of a company’s strategic IP enforcement arsenal in the appropriate situation and can be used as an effective tool to combat the rampant global problem of counterfeiting. For more information about the matters discussed in this Update, please contact the Hogan & Hartson L.L.P. lawyer with whom you work or one of the attorneys listed below. If you are interested in viewing any of our other publications, please go to: http://www.hhlaw.com/newsstand/.

Update Authors: Shelly L. McGee Washington, D.C. 202-637-6433 [email protected]

Raymond A. Kurz Washington, D.C. 202-637-5683 [email protected]

John M. Klempir Former Hogan & Hartson attorney

Intellectual Property Update Editors: Kenneth J. Hautman Timothy Lyden 703-610-6145 703-610-6147 [email protected] [email protected]

www.hhlaw.com

This Update is for informational purposes only and is not intended as basis for decisions in specific situations. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. To have your e-mail address removed from the list for distribution of future issues of this newsletter, please contact Chad Cole via e-mail: [email protected].

http://www.hhlaw.com/newsstand/

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June 6, 2006 www.luce.com

Arbitrator's Failure to Disclose Results in Vacating Substantial Award

Roger C. Haerr Partner [email protected] Phone: 619.699.2564 Fax: 619.645.5329

Recently, the California Court of Appeal held that an arbitrator's failure to disclose his intent to entertain offers of employment and subsequent employment by one of the parties' attorneys justified setting aside an award of approximately $3.4 million. The decision highlights the consequences of a law firm hiring an arbitrator to serve in two different, but concurrent proceedings, and the severe remedy for failure to disclose.

In Ovitz v. Schulman (October 26, 2005) 133 Cal. App. 4th 830, Catherine Shulman ("Shulman") and her employers ("APG") agreed to contractual arbitration pursuant to American Arbitration Association ("AAA") rules. After an arbitration hearing spanning several months, the arbitrator awarded APG approximately 1.5 million in damages and another 1.9 million dollars in attorney's fees and costs. Shortly after making the attorneys' fees award, the arbitrator sent a letter to AAA disclosing his role as an arbitrator in a second arbitration in which the attorneys for APG represented a party. The disclosure revealed that the arbitrator was hired while the Schulman/APG arbitration was pending.

After the arbitrator's award was issued, APG moved to confirm the award in Superior Court. Schulman opposed the motion and moved to vacate the award on grounds the arbitrator's disclosure failed to comply with California law. The trial court vacated the award pursuant to Code of Civil Procedure section 1286.2, finding the arbitrator's late disclosure violated California's disclosure standards for neutral arbitrators.

The Second Appellate District affirmed, holding the arbitrator violated various ethics standards by failing to disclose his intent to entertain offers of employment from the law firm representing one of the parties, and failing to disclose his subsequent employment by that firm. The appellate court also held that the Federal Arbitration Act did not preempt California's ethics standards because they were consistent with the Federal Arbitration Act's goal of making arbitration contracts fair and enforceable.

In sum, the holding in Ovitz v. Schulman requires strict adherence to arbitrator disclosure standards. Failure to do so could result in vacation of a substantial award.

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Renewable Energy Portfolio Standards UpdateTwenty states and the District of Columbia have adopted mandatory renewable portfolio standards (RPSs)requiring retail electricity suppliers to increase the percentage of electricity supplied from wind power, solarenergy, biomass, and other renewable energy sources. Other states have adopted “goals” to expand the useof energy generated by renewable resources. These standards and goals are now being implemented andrevised through rule-making proceedings and rulings by state public utility commissions as well as newstate-level legislation. This Morgan Lewis Renewable Energy Update highlights several recent developments.

New Jersey Increases RPS Requirement to 22.5% by 2021New Jersey imposed renewable energy requirements for retail electricity suppliers as part of its 1999restructuring of the state electric utility industry and the introduction of retail electric competition. Retailelectric suppliers were first required, by 2012, to provide 4% of the electricity they sell from Class I sources(including wind, solar electric, and biomass) and 2.5% from Class I or Class II sources (including hydro up to30 MW and resource-recovery systems). In 2004, the New Jersey Board of Public Utilities (NJBPU) raisedClass I requirements to 4% by 2008, with an additional 2.5% by 2008 from Class I or Class II sources. The2004 Class I requirements included a set-aside in the Class I requirements of 0.16% for solar electric generation.

On April 12, 2006, the NJBPU proposed new amendments to its rules to require retail electric suppliers toprovide 22.5% of the electricity they sell each year from renewable energy sources by 2021. This newrequirement consists of a 20% Class I source requirement and an additional 2.5% from either Class I or ClassII sources. The amendments include minimum percentages for each reporting year, and became effective onMay 15, 2006.

Notably, the amended rules include an increase in the Class I solar set-aside to 2.12% by 2021, which theNJBPU stated was “the largest solar goal in the country on a per capita basis” (excluding California). TheNJBPU had previously determined that Class I and Class II renewable energy certificates (RECs) issued by thePJM Generation Attribute Tracking System may be used to satisfy New Jersey RPS requirements; the newrules maintain the requirement that all solar RECs must be from generation connected to a distribution systemthat supplies electricity within New Jersey (i.e., from solar electric projects located within New Jersey).

Pennsylvania Limits Geographic Location of Alternative Energy ProjectsPennsylvania’s Alternative Energy Portfolio Standard (AEPS) became effective on February 18, 2005. AEPSrequires all utilities and retail electric generation suppliers to gradually increase the percentage of electricitysupplied to retail customers from alternative energy sources to 18% by 2020, with 8% from Tier 1 sources(including wind, solar electric, low-impact hydro, and biomass) and 10% from Tier 2 sources (including large-scale hydro, waste coal, integrated coal gasification, and demand-side management). AEPS also includes asolar electric generation set-aside (0.5% of Tier 1 by 2020).

Pennsylvania’s AEPS provides that only energy from alternative energy projects within Pennsylvania or “theservice territory of any regional transmission organization [RTO] that manages the transmission system in anypart of [Pennsylvania]” is eligible to meet AEPS requirements. The RTO for most Pennsylvania utilities andnearly all (97%) of Pennsylvania’s electric customers is PJM Interconnection (PJM). One utility, Penn Power,is a member of Midwest Independent System Operator (MISO). On April 20, 2006, in a proceeding involvingPenn Power, the five-member Pennsylvania Public Utility Commission (PUC) ruled 3-2 that Penn Powercould only use alternative energy derived from energy projects within Pennsylvania and MISO, but notPJM, since PJM was not Penn Power’s RTO.

Renewable Energy

While the PUC proceeding involved only Penn Power, the PUC’s ruling effectively limits the otherPennsylvania utilities—which belong to PJM—to alternative energy derived from projects located withinPennsylvania and PJM but not MISO. The PUC’s decision was based in part upon a conclusion thatPennsylvania utility customers should not pay for alternative energy from projects outside Pennsylvania andthe service territory of a utility customer’s RTO because that would “dilute” environmental and financialbenefits Pennsylvania customers would receive from construction of more local alternative energy projects.

Other Recent DevelopmentsMichigan: On April 6, 2006, Governor Jennifer Granholm issued Executive Directive No. 2006-02, calling forthe development of a comprehensive state energy plan for Michigan. Among other provisions, the plan providesthat “a renewable portfolio standard shall be created that establishes targets for the share of this state’senergy consumption derived from renewable energy sources.” The Michigan Public Service Commission isresponsible for development of the plan, with a deadline of December 31, 2006.

Wisconsin: On March 17, 2006, Governor Jim Doyle of Wisconsin signed Senate Bill 459, which createsnew requirements and deadlines for Wisconsin utilities to include renewable energy in retail electric supply.The new Wisconsin RPS raises existing utility requirements and is designed to reach a statewide average of10% utility generation from renewable sources by 2015. The new rules are implemented through percentageincreases based upon the amount of renewable energy in each utility’s generation portfolio in 2004. ByDecember 31, 2010, each Wisconsin electric utility must have increased its percentage to at least twopercentage points above its 2004 percentage. By December 31, 2015, the increase must be at least sixpercentage points above the 2004 amount.

Morgan Lewis represents utilities, developers, power marketers, commercial and investmentbanks, private equity funds, construction companies, and suppliers across a broad range ofleading-edge domestic and international energy matters. We actively assist clients inrenewable energy project development and finance, mergers and acquisitions, powercontracts, and complex regulatory issues before the Federal Energy Regulatory Commissionand state public utility commissions. For more information, including additional informationon the issues discussed in this Renewable Energy Update, please contact:

Edward Zaelke213.612.7330 (Los Angeles)[email protected]

Adam Umanoff213.612.7374 (Los Angeles)

[email protected]

Michael Griffen202.739.5257 (Washington, DC)

[email protected]

Kenneth Kulak215.963.5384 (Philadelphia)[email protected]

About Morgan, Lewis & Bockius LLP

Morgan Lewis is a global law firm with more than 1,200 lawyers in 20 offices located in Beijing, Boston,Brussels, Chicago, Dallas, Frankfurt, Harrisburg, Irvine, London, Los Angeles, Miami, New York, Palo Alto,Paris, Philadelphia, Pittsburgh, Princeton, San Francisco, Tokyo, and Washington, DC. For more informationabout Morgan Lewis or its practices, please visit us online at www.morganlewis.com.

This Renewable Energy Update is provided as a general informational service to clients and friends ofMorgan, Lewis & Bockius LLP. It should not be construed as imparting legal advice on any specific matter.

©2006 Morgan, Lewis & Bockius LLP. All Rights Reserved.

REGULATORY RESPONSE TO CARD DEBT ISSUE

◎James C. C. Huang

Over the past several years, most of Taiwan''s financial institutions have entered the consumer credit market, and in particular have strongly promoted cash cards and credit cards. The result is large amounts of non-performing loans, not only causing huge losses for the financial insti-tutions themselves, but also creating general so-cial problems.

In order to address the financial and social issues, the Financial Supervisory Commission (FSC) and the Bankers Association of the ROC (Asso-ciation) recently announced a series of regulatory measures, as outlined below:

•Risk management

When marketing credit cards, financial insti-tutions must not use marketing techniques such as offering quick approvals or similar inducements, and they may not give gifts or prizes to solicit a card application or the acti-vation of an issued card. Financial institutions may not set up stands on the street to market credit cards and cash cards, nor extend credit that would allow the aggregate amount of a borrower''s total unsecured loans (including credit card debt, cash card debt, and personal loans) with all financial institutions to exceed 22 times of the borrower''s average monthly income; and the minimum amount to be repaid by a credit holder per month should not be less than 10% of his card debt incurred during such month.

In the future, banks must comply with regu-latory policy by adopting differential interest rates for credit-card or cash-card customers with different creditworthiness. Card issuers already having a credit scoring system should adopt differential interest rates for all their cardholders within three months. Institutions that have not established a credit scoring sys-tem should draw up a differential interest rate charging plan within three months after the Joint Credit Information Center (JCIC) estab-lishes a credit scoring system. By the end of March 2006, JCIC is required to establish a credit scoring system, based on the system used by Fair Isaac Corporation of the United States, for Taiwanese card-issuing institutions to use as a basis for judging creditworthiness.

•Mechanism for rescheduling repayment

If the aggregate amounts of unsecured con-sumer loan (including cash card debt, credit card debt, personal loans, and remaining amount of secured loan after the foreclosure of collaterals) of a borrower incurred before 15 December 2005 reaches NT$300,000 or above with multiple creditor banks, and the borrower meets the criteria for repayment ability set by the FSC, such borrower may apply to the largest creditor bank to negotiate a reschedule agreement for the repayment of loans. Upon receiving notice regarding the debtor''s request from the largest creditor bank, all creditor banks must temporarily suspend all debt col-lection activities against the debtor, except for provisional proceedings or ongoing litigation.

In addition, the Association has passed a resolution that for a certain period banks should suspend debt collection activities against borrowers who meet relevant condi-tions, and that for any debtor who by 10 April 2006 submits a written application to negoti-ate for the rescheduling of repayment which has been accepted by the banks, the banks should waive the interest incurred during the period of negotiation.

After the largest creditor bank has reviewed and accepted an application in accordance with the rules set by the FSC, the bank may determine the terms and conditions for re-payment of loans as agreed by the debtor, and then give notice to the debtor and the other creditor banks to proceed in accordance with such terms and conditions.

•Outsourcing of card debt collection and sale of card loans

Because of the unlawful debt collection prac-tices by numerous entities to which financial institutions have outsourced their debt collec-tion, the FSC announced a list of debt collec-tors to which financial institutions are for-

http://www.leeandli.com/web/bulletin/artical.asp?id=3017 (1 of 2)6/11/2006 8:56:29 AM

Lee and Li Bulletin_May 2006 Issue

bidden to outsource debt collection. In coor-dination with this move, the Department of Commerce (DOC) of the Ministry of Eco-nomic Affairs has suspended the registration of companies to conduct related areas of business. For as long as the DOC maintains this restriction, new companies can no longer be set up to conduct debt collection business, and existing companies can no longer register debt collection as a new line of business. However, this measure does not affect existing debt collection enterprises that are already registered as such.

The FSC has also ordered that financial insti-tutions should not sell non-performing loans derived from credit card, cash card or unse-cured consumer loan to asset management companies (AMC). In addition, if any AMC is involved in illegal debt collection activities, and such illegal activities is on file at the JCIC, in the future no financial institution may sell any non-performing loans to the AMC con-cerned.

•Other legislative action

To allow borrowers who cannot repay their debts to apply for bankruptcy as early as pos-sible, the relevant competent authorities plan to separate the provisions on personal bank-ruptcy that are currently included in the draft amendments to the Bankruptcy Act and sub-mit them to the legislature as a separate bill. Also, suggestions were made in the Legisla-tive Yuan to lower the cap on interest rate under the Civil Code. However, because of the international trend for interest rate de-regulation and consideration about financial institutions'' reasonable operating costs, this suggestion has not thus far gained support of the relevant competent authorities.

Lee and Li Bulletin_May 2006 Issue

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