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Are there any restrictions on the establishment of a business entity by a foreign licensor or a joint venture involving a foreign licensor and are there any restrictions against a foreign licensor entering into a licence agreement without establishing a subsidiary or branch office? Whether or not any such restrictions exist, is there any filing or regulatory review process required before a foreign licensor can establish a business entity or joint venture in your jurisdiction?
To establish a business entity or joint venture in Japan, every foreign company has to follow the general requirements, including the filing or regulatory review process under the Companies Act and other related corporation laws.
On the other hand, to enter into a licence agreement, there are no special restrictions in general against a foreign licensor without a subsidiary or branch office.
Kinds of licences
Forms of licence arrangement
Identify the different forms of licence arrangements that exist in your jurisdiction.
The patent, utility model, design and trademark laws provide for two types of statutory licences: non-exclusive and exclusive. The Trademark Law also covers service mark protection. The statutory exclusive licensee can exclusively use the intellectual property rights (IPRs) and enjoy, specifically, an injunction and other effects as provided, while the licensor should relinquish use of the subject IPR for the licensor’s business. In addition to this statutory exclusive licence, a contract-based exclusive licence is also frequently used. Although this type of contract-based exclusive licence cannot be equivalent in strength to the statutory exclusive licence, the licensee can enjoy the exclusivity of territory, licensed intellectual property and licensed products and services under the contract. The statutory non-exclusive licensee cannot use the IPR exclusively and enjoy an injunction.
The Copyright Law also provides for licence of copyrights and covers software program protection as licensing. The type of licence, however, whether non-exclusive or exclusive, is left to the contract made between the parties. In addition to these types of licensing, court precedent and the majority of academic views have recognised the licensing of trade secrets and technical know-how, technology transfer, publicity of celebrities, merchandising of characters, etc, on a contractual basis. Franchise agreements are also recognised and usually include the licensing of trademarks, etc.
Law affecting international licensing
Creation of international licensing relationship
Does legislation directly govern the creation, or otherwise regulate the terms, of an international licensing relationship? Describe any such requirements.
A statutory non-exclusive licence of a patent, utility model, design or trademark right can be created without any registration requirement. On the other hand, statutory exclusive licences of the same industrial property rights must be registered at the Japanese Patent Office (JPO) in addition to the contract between the parties, and registration guarantees their exclusive licensee position, for example, the right to obtain an injunctive order and the right to exclude even the licensor’s use of the licensed intellectual property in the territory. The Copyright Law does not require any registration for creation of a licence.
The legislation does not directly regulate royalty rates or other fees that may be charged by a licensor, the duration of the contractual term or the purchasing of certain products, but the Antimonopoly Law possibly regulates the terms of such matters. For example, if the licensor maintains an international licensing relationship with the licensee by abusing its dominant bargaining position, which causes the licensee to provide the licensor with money, services or other economic benefits, it may be against the Antimonopoly Law.
What pre-contractual disclosure must a licensor make to prospective licensees? Are there any requirements to register a grant of international licensing rights with authorities in your jurisdiction?
No pre-contractual disclosure requirement is imposed on a licensor in favour of its licensees.
On the other hand, a statutory exclusive licence of the industrial property rights must be registered, but such registrations can only be made after the contract and not before. In such cases, registration is necessary only with the JPO, not with any other local authorities.
Are there any statutorily- or court-imposed implicit obligations in your jurisdiction that may affect an international licensing relationship, such as good faith or fair dealing obligations, the obligation to act reasonably in the exercise of rights or requiring good cause for termination or non-renewal?
Licence agreements (whether international or domestic) are subject to the general principles provided under the Civil Code: ensuring that obligations are made in good faith and that abuses of rights are prohibited. On these points, licence agreements are treated the same as any other agreements.
In general, agreements can be terminated when there is a breach of obligation provided thereunder. However, since they govern the continuous relationship between the parties, it is more difficult for licence agreements to be terminated than other agreements. According to a precedent of the Intellectual Property (IP) High Court, whether licence agreements can be terminated depends on some factors such as the degree of a breach of obligation and the reason causing the breach. On the other hand, there is no special requirement for licence agreements to be non-renewable. It is possible for both parties not to renew the agreement when it is terminated.
Intellectual property issues
Is your jurisdiction party to the Paris Convention for the Protection of Industrial Property? The Patent Cooperation Treaty (PCT)? The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)?
Japan is a signatory country of both international treaties and the agreement, and has ratified them.
Can the licensee be contractually prohibited from contesting the validity of a foreign licensor’s intellectual property rights or registrations in your jurisdiction?
In general, the licensee can be contractually prohibited from contesting the validity of a foreign licensor’s IPRs or registrations in Japan. Yet this contractual prohibition may constitute an unfair trade practice when it is found to tend to impede fair competition by continuing rights that should be invalidated and by restricting the use of the technology associated with said rights. On the other hand, when the licensee contests the validity of IPRs, the Antimonopoly Law in general allows the licensor to terminate the licence contract.
Invalidity or expiry
What is the effect of the invalidity or expiry of registration of an intellectual property right on a related licence agreement in your jurisdiction? If the licence remains in effect, can royalties continue to be levied? If the licence does not remain in effect, can the licensee freely compete?
The invalidity of an IPR registration makes a licence agreement void, and the licensor may be required to pay back to the licensee the royalty that has already been paid. To practically avoid this, in some cases, both a licensor and a licensee will conclude the agreement with a provision regarding the right of the licensor to retain the royalty that has already been paid.
On the other hand, the expiry of an IPR registration terminates a licence agreement. The licensor can retain any royalty that has already been paid, but loses the right to receive any future royalty. The agreement with a provision regarding the right of the licensor to continue receiving the royalty even after expiry can be illegal under the Antimonopoly Law, depending on the situation.
If the licence does not remain in effect, the licensee can freely compete when registration of an intellectual property right is invalid or has expired.
Requirements specific to foreigners
Is an original registration or evidence of use in the jurisdiction of origin, or any other requirements unique to foreigners, necessary prior to the registration of intellectual property in your jurisdiction?
No. However, it should be noted that being the first to file, even via the Paris Convention 1883, Patent Cooperation Treaty 1970 or Madrid Protocol 1989, is a common requirement, especially for patents, utility models, designs and trademarks in Japan.
Can unregistered trademarks, or other intellectual property rights that are not registered, be licensed in your jurisdiction?
Yes. However, non-registered trademarks can only be protected by contract, as full protection under the Trademark Law is not provided before the registration is completed at the JPO. Only trademarks that are famous or well known among consumers and traders may enjoy certain protection under the Unfair Competition Prevention Law.
A patent right that is not registered at the JPO is treated as ‘the right to obtain a patent’ under the Patent Act and as such can be licensed. The patent law provides for a provisional statutory exclusive licence and a provisional statutory non-exclusive licence. On the other hand, the Utility Model Law and Design Law only provide for a provisional statutory non-exclusive licence.
A copyright can be created without any registration, thus unregistered copyrights can be licensed as registered copyrights can.
Are there particular requirements in your jurisdiction to take a security interest in intellectual property?
Any type of licensed right can be subject to a pledge or contract-based mortgage as collateral. These must be registered at the JPO to be effective and opposable to third parties.
Proceedings against third parties
Can a foreign owner or licensor of intellectual property institute proceedings against a third party for infringement in your jurisdiction without joining the licensee from your jurisdiction as a party to the proceedings? Can an intellectual property licensee in your jurisdiction institute proceedings against an infringer of the licensed intellectual property without the consent of the owner or licensor? Can the licensee be contractually prohibited from doing so?
Licensors and the licensee of a statutory exclusive licence can institute proceedings against a third party for infringement if their rights are still effective and existent in Japan. On the other hand, a contract-based exclusive licensee cannot institute proceedings against a third party except claiming damages against an infringing third party according to higher court precedents.
There is no direct rule, regulation or precedent regarding contractual prohibition from licensees instituting those proceedings, but it may be construed that a licensee’s capacity to institute such proceedings is based on the contract, namely the intent of both parties hereof, and so licensees can be contractually prohibited from doing so.
Can a trademark or service mark licensee in your jurisdiction sub-license use of the mark to a third party? If so, does the right to sub-license exist statutorily or must it be granted contractually? If it exists statutorily, can the licensee validly waive its right to sub-license?
Yes. However, the licensee must be granted the right to do so by the consent of the licensor. No statutory grant of a sub-licence exists in Japan.
Jointly owned intellectual property
If intellectual property in your jurisdiction is jointly owned, is each co-owner free to deal with that intellectual property as it wishes without the consent of the other co-owners? Are co-owners of intellectual property rights able to change this position in a contract?
A co-owner of a patent, utility model, design, registered trademark or copyright may not assign its own share the intellectual property right to any third party or use it as security without the consent of all of the other co-owners. A co-owner of a patent, utility model, design, registered trademark or copyright may not license the IP to any third party without the consent of all of the other co-owners. In addition, a co-owner of a copyright may not utilise the copyrighted work without the consent of all of the other co-owners.
First to file
Is your jurisdiction a ‘first to file’ or ‘first to invent’ jurisdiction? Can a foreign licensor license the use of an invention subject to a patent application but in respect of which the patent has not been issued in your jurisdiction?
Japan is a ‘first to file’ jurisdiction. However, a patent application that is pending at the JPO can be licensable, because a right to obtain a patent for such a patent application is protected under the Patent Law. An invention contained in such a patent application that is pending can also be considered technical know-how and the subject of a licence.
Scope of patent protection
Can the following be protected by patents in your jurisdiction: software; business processes or methods; living organisms?
If they satisfy the general requirements for patentability (novelty, inventive step and capability of industrial application), all of these are patentable. However, software programs and business processes or methods need to show in their patent claims and specifications how they can be applied to a hardware resource. Living organisms such as microorganisms, animal organisms, etc, are patentable, but human organisms are not.
Trade secrets and know-how
Is there specific legislation in your jurisdiction that governs trade secrets or know-how? If so, is there a legal definition of trade secrets or know-how? In either case, how are trade secrets and know-how treated by the courts?
The Unfair Competition Prevention Law prohibits some types of conduct related to unfair transactions, including obtaining, disclosing or using certain trade secrets in bad faith or with gross negligence. The definition of ‘trade secrets’ to be protected covers any confidential methods of manufacturing and sales and other technical or trade information useful for business activities.
Any person may make a request to a court clerk for the inspection of a case record, but in order to ensure that any trade secrets or know-how stated or recorded in the case record are not disclosed to any person except for the parties to the case, the persons allowed to inspect the case records may be limited by the courts.
Does the law allow a licensor to restrict disclosure or use of trade secrets and know-how by the licensee or third parties in your jurisdiction, both during and after the term of the licence agreement? Is there any distinction to be made with respect to improvements to which the licensee may have contributed?
A licensor can restrict disclosure or use of trade secrets and know-how even after the term of the licence agreement with a survival clause hereof. However, if a confidentiality agreement with a long term appears excessive when applied against the ‘former’ licensee, it can be illegal under the Antimonopoly Law.
With respect to improvements, the same applies, and in addition to that, if there is no reasonable reason for the licensor to restrict disclosure or use of the improvements by the licensee, it can also be illegal under the Antimonopoly Law.
What constitutes copyright in your jurisdiction and how can it be protected?
A copyrightable work is any thought or sentiment that is expressed in a creative way and falls within the literary, scientific, artistic or musical domain. The Copyright Law provides a detailed definition of copyrightable ‘works’, including software programs.
Perpetual software licences
Does the law in your jurisdiction recognise the validity of ‘perpetual’ software licences? If not, or if it is not advisable for other reasons, are there other means of addressing concerns relating to ‘perpetual’ licences?
Japanese law does not have a special rule for restricting perpetual software licences. However, if a licensee forces a licensor to make a licence term perpetual despite an effective term limitation on IPRs, it can be illegal and invalid under the Antimonopoly Law.
Are there any legal requirements to be complied with prior to granting software licences, including import or export restrictions?
The Foreign Currency Exchange and Foreign Trade Law stipulates that export or international transactions involving certain kinds of goods to specified regions designated by Cabinet Order as being considered to obstruct the maintenance of international peace and security require the permission of the Minister of Economy, Trade and Industry. In addition, customs law prohibits export and import of goods that infringe patent rights or copyrights.
The above provisions are general restrictions that could also apply to computer software.
Restrictions on users
Are there any legal restrictions in your jurisdiction with respect to the restrictions a licensor can put on users of its software in a licence agreement?
There are no specific legal restrictions with respect to such software. Generally speaking, it is possible for a licensor to include a contractual restriction prohibiting its licensees from reverse engineering, decompiling or making copies. However, general legal principles such as breach of contract or tort or the Antimonopoly Law may be applied depending on the facts of a particular case.
Royalties and other payments, currency conversion and taxes
Is there any legislation that governs the nature, amount or manner or frequency of payments of royalties or other fees or costs (including interest on late payments) in an international licensing relationship, or require regulatory approval of the royalty rate or other fees or costs (including interest on late payments) payable by a licensee in your jurisdiction?
In general, no. However, some regulations under the Foreign Currency Exchange and Foreign Trade Law may apply regarding a large cash transfer in view of currency and money laundering control. For example, a cash transfer of over ¥30 million must be reported to the minister concerned.
Are there any restrictions on transfer and remittance of currency in your jurisdiction? Are there are any associated regulatory reporting requirements?
As far as payments in a licence agreement are concerned, as stated under question 23, cash transfers (from Japan to a foreign country and from a foreign country to Japan) of more than ¥30 million must be reported to the minister concerned.
Taxation of foreign licensor
In what circumstances may a foreign licensor be taxed on its income in your jurisdiction?
The Income Tax Law and the Corporate Tax Law can impose a withholding tax on royalty payments of 20 per cent. Basically, the Law applies to any income generated in the territory of Japan. However, if the unitary tax regulation applies, the income from Japan can be counted with other income from outside Japan.
Some tax treaties can give a licensor a chance to avoid double taxation and reduce the withholding tax if they make advance notice of the payment with withholding tax in Japan to their local tax authorities. However, if there are no tax treaties between Japan and the country of the licensor, double taxation cannot be avoided.
Competition law issues
Restrictions on trade
Are practices that potentially restrict trade prohibited or otherwise regulated in your jurisdiction?
The Antimonopoly Law generally prohibits unfair competitive trade for any contract, including a licence contract. Practices that potentially restrict trade are prohibited or regulated by this Law. To follow up this general prohibition, the General Specification of Unfair Trade and the Guidelines for the Use of Intellectual Property under the Antimonopoly Law should apply.
Are there any legal restrictions in respect of the following provisions in licence agreements: duration, exclusivity, internet sales prohibitions, non-competition restrictions and grant-back provisions?
There are no legal restrictions on duration provisions.
A statutory exclusive licence and a contract-based exclusive licence are legal, that is to say, an exclusive licence itself is legal.
On the other hand, if a licensor limits the type of customers to whom licensees may sell products (including copies of software programs) using the licensed technology, this may constitute formal restrictions on the licensee’s business activities. Limitations on the counterparties to trade in the products that may use a licensed technology constitute unfair trade practices prohibited by the Antimonopoly Law if they tend to impede fair competition. Examples of such conduct include limiting counterparties (distributors) to those nominated by the licensor, limiting counterparties to those assigned to the licensees and prohibiting trade with specific parties.
Internet sales prohibitions
If the restriction on internet sales tends to impede fair competition, this may also constitute an unfair trade practice prohibited by the Antimonopoly Law, as it does in the above-mentioned restriction on customers.
When a licensor imposes on licensees an obligation to refrain from exercising, in whole or in part, the rights owned or to be acquired by them against the licensor or any firms designated by the licensor, this obligation may be an unfair trade practice if it tends to impede fair competition.
A licensor imposing an obligation on its licensees not to contest the validity of rights to licensed technology may fall under the category of an unfair trade practice when it is found to impede fair competition by continuing rights that should be invalidated and restricting the use of technology associated with said rights. However, in principle, terminating an agreement with any licensee that challenges the validity of rights may not constitute an unfair trade practice.
If any licensor imposes a restriction on licensees in relation to manufacturing or selling any product that competes with the licensor’s products or to acquiring a licence for a competing technology from a competitor of the licensor, such a restriction constitutes an unfair trade practice prohibited by the Antimonopoly Law if it has a tendency to impede fair competition.
If a licensor imposes on licensees an obligation to hand over to the licensor or any designated entity the rights to improved or newly developed technology made by the licensees, or to grant the licensor an exclusive licence for it, this conduct, in principle, constitutes an unfair trade practice prohibited by the Antimonopoly Law.
However, if the improved technology created by a licensee cannot be used without the licensed technology, the obligation imposed on licensees to hand over to the licensor the rights or grant the licensor an exclusive licence for the improved technology in exchange for fair consideration could be recognised as essential to promote technology transactions. Moreover, it is not recognised as detrimental to the licensees’ motivation for research and development. So, it is generally confirmed to have no tendency to impede fair competition.
When a licensor imposes on licensees an obligation to grant the licensor non-exclusive licences for improved or developed technology made by licensees, in principle it may not constitute an unfair trade practice as long as the licensees may still freely use their own improved technology.
IP-related court rulings
Have courts in your jurisdiction held that certain uses (or abuses) of intellectual property rights have been anticompetitive?
Indemnification, disclaimers of liability, damages and limitation of damages
Are indemnification provisions commonly used in your jurisdiction and, if so, are they generally enforceable? Is insurance coverage for the protection of a foreign licensor available in support of an indemnification provision?
Indemnification provisions are generally enforceable and commonly used, but in cases where the parties to a licence agreement are both Japanese companies, it can be said that they are less commonly used than in those cases where at least one of the companies is a foreign company. Insurance would be available to support a foreign licensor.
Waivers and limitations
Can the parties contractually agree to waive or limit certain types of damages? Are disclaimers and limitations of liability generally enforceable? What are the exceptions, if any?
Parties can contractually agree to waive or limit certain types of damages under freedom of contract unless it is considered unreasonable and unfair under the Civil Code, Antimonopoly Law or other laws.
Disclaimers or limitations of liability are generally enforceable. However, if such a disclaimer seems unreasonable in view of fairness, consumer protection or other superseding legal interest, the disclaimer can be vacated and considered unenforceable under the Civil Code, Antimonopoly Law and other laws.
Right to terminate
Does the law impose conditions on, or otherwise limit, the right to terminate or not to renew an international licensing relationship; or require the payment of an indemnity or other form of compensation upon termination or non-renewal? More specifically, have courts in your jurisdiction extended to licensing relationships the application of commercial agency laws that contain such rights or remedies or provide such indemnities?
The Antimonopoly regulation demands fair trade practices if the licensor wishes to terminate the licensing contract. In addition, court precedents tend to sympathise with licensees by giving them compensatory damages under the Civil Code if they face a sudden termination without reasonable cause and without good faith. On the other hand, there is no special requirement for licence agreements to be non-renewable. Commercial agency laws and other relative laws can also be applied to licensing relationships.
Impact of termination
What is the impact of the termination or expiration of a licence agreement on any sub-licence granted by the licensee, in the absence of any contractual provision addressing this issue? Would a contractual provision addressing this issue be enforceable, in either case?
According to court precedents, any sub-licence granted by the licensee shall terminate automatically on the termination or expiration of a licence agreement. If a licensee and a sub-licensee contractually agree on a clause that, for example, licensee shall keep the original licence during the sub-licence period, such a clause is enforceable in the sense that the sub-licensee may request compensation for damages against the licensee based on a breach of contract when the original licence is terminated during the sub-licence period.
Impact of licensee bankruptcy
What is the impact of the bankruptcy of the licensee on the legal relationship with its licensor; and any sub-licence that the licensee may have granted? Can the licensor structure its international licence agreement to terminate it prior to the bankruptcy and remove the licensee’s rights?
The bankruptcy of the licensee often leads to the termination of the licence agreement. In the case of the licensee’s bankruptcy, terminating the licence agreement by using a provision within the licence agreement itself is often possible. In most cases, a licence or sub-licence agreement includes a provision to allow a party to terminate it if the other party goes bankrupt. It is also common for the licensor to reserve a right of termination in the licence agreement if there is a high possibility of insolvency or a filing of bankruptcy for the licensee, even before the bankruptcy actually occurs and is approved by the court. On the other hand, it is not so common for the licensee (sub-licensee) to reserve the same right.
Impact of licensor bankruptcy
What is the impact of the bankruptcy of the licensor on the legal relationship with its licensee; and any sub-licence the licensee has granted? Are there any steps a licensee can take to protect its interest if the licensor becomes bankrupt?
With regard to trademark licences and copyright licences, under the Bankruptcy Law, the bankruptcy trustee of the licensor may terminate the license agreement, depending on the contents of the licence agreement. In such an event, a sub-licence agreement, if any, should automatically become impossible to perform because of the termination of the licence agreement. To avoid such termination, a trademark licensee has no choice but to register the trademark licence with the Japan Patent Office beforehand. A copyright licensee has no way to protect the licence since there is no registration system for copyright licences. Terminating the licence or sub-licence agreement in this way before the court orders the commencement of bankruptcy proceedings is impossible.
However, patent, utility model or design licence agreements cannot be terminated in this way under the Bankruptcy Law.
Governing law and dispute resolution
Restrictions on governing law
Are there any restrictions on an international licensing arrangement being governed by the laws of another jurisdiction chosen by the parties?
Contractual agreement to arbitration
Can the parties contractually agree to arbitration of their disputes instead of resorting to the courts of your jurisdiction? If so, must the arbitration proceedings be conducted in your jurisdiction or can they be held in another?
The parties can agree to use arbitration rather than a court proceeding. The arbitration venue can be Japan or another country as specified in the contract.
For domestic disputes, the Japan Intellectual Property Arbitration Centre may be used for licensing agreements. For international disputes, other arbitral bodies such as the Japan Commercial Arbitration Association, the Singapore International Arbitration Centre, International Chamber of Commerce, American Arbitration Association, etc, are possible choices depending on the location of the parties.
Would a court judgment or arbitral award from another jurisdiction be enforceable in your jurisdiction? Is your jurisdiction party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
Yes. However, according to the Arbitration Law, a court judgment or order in Japan is required to enforce a foreign judgment or arbitration award. Japan is a member of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.
Is injunctive relief available in your jurisdiction? May it be waived contractually? If so, what conditions must be met for a contractual waiver to be enforceable? May the parties waive their entitlement to claim specific categories of damages in an arbitration clause?
Injunctive relief against IP infringement is available under the IP laws. Such injunctive relief for infringement can be waived contractually in theory, but its actual effect is still dubious because it rarely occurs between the infringer and the intellectual property owner unless they have a previous contractual relationship of licence or other special contract to waive a right to file an injunction. So then, such a contractual waiver may not be a good defence against an actual injunction by a lawsuit, but may cause compensation for damages under the breach of such contract on the waiver of the injunction.
On the other hand, an injunctive relief provided in a contract by the parties is also available and it can be waived by contract because it was originally given by the contract.
The parties can waive their entitlement to claim specific categories of damages in an arbitration clause.
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