Japan Legal Update Vol. 53 | Autumn 2020


Japan Ministries Support Expansion of E-Signature Use

On September 4, 2020, the Japanese Ministry of Internal Affairs and Communications, the Ministry of Justice, and the Ministry of Economy, Trade and Industry jointly published a Q&A interpreting Article 3 of the Electronic Signatures and Certification Business Act. This Act creates certain presumptions regarding how e-signed digital contracts can be treated as genuine in Japan. The Ministries' joint publication clarifies that electronic contracts signed on behalf of contractors/principals by third-party vendors (sometimes called "e-signature by vendors") can be presumed to be genuine as long as vendors encrypt the information using two-factor authentication and ensure that the relevant contractors/principals have instructed the use of their signatures under their own will.

How E-Signatures Work in Japan. There are two major mechanisms for e-signatures in electronic contracts in Japan. The first is called "e-signature by principal," where parties to an electronic contract use their own certification and encryption methods to perform a digital signature on a contract. The second is called "e-signature by vendors," which is frequently used in Japan. This is where third-party service providers (or "vendors") use their own encryption to perform e-signatures on behalf of contractors/principals to an electronic contract. In order for signatures performed by vendors to be presumed genuine in Japan, they need to adhere to strict user authentication systems and internal management protocols as described below.

Two-Factor Authentication. Article 3 presumes that digital documents are genuine if the e-signature is performed by the contractor/principal in accordance with two basic requirements. First, the e-signature must be consistent with the Act and be performed using enhanced encryption and security functions as required in Article 3. Second, the e-signature must be performed under the contractor's/principal's own will.

Previously, it was not clear whether e-signatures by vendors were covered by the Act and whether such e-signatures could benefit from the Act's presumptions. The Q&A published by the Ministries has clarified that e-signatures by vendors are indeed covered by Article 3 of the Act, as long as the vendor uses enhanced encryption and authenticity processes both in its interaction with contractors/principals and in its internal processes.

An example of enhanced encryption and authenticity processes is two-factor authentication, where the principal/contractor enters an email address and login password registered in advance and a one-time password obtained through a different method (such as an SMS or authentication token). The vendor must also ensure that its internal processes utilize enhanced authentication and encryption methods to ensure, for example, that it differentiates between different users of its service.

Going forward, parties using e-signature services in Japan or e-signatures by vendors should make sure that the vendor is using enhanced encryption and authentication, such as two-factor authentication, if they desire for the e-signature by vendor to be presumed genuine.

Financial Markets/Private Equity

Japan Welcomes Foreign Fund Managers by Temporary Registration Exemption

On July 22, 2020, Japan's Financial Services Agency ("FSA") implemented an amendment to a Cabinet Order regarding the Financial Instruments and Exchange Act ("FIEA"). The amendment introduces a temporary exemption from the registration requirements under the FIEA for foreign fund managers and securities brokers in certain emergency situations. This amendment allows foreign fund managers and brokers facing serious and unexpected difficulties attempting to continue operations overseas to operate in Japan after expedited approval from the FSA.

The FSA has indicated that it is likely to approve exemption applications within three business days of receipt of these emergency applications, which is a significant reduction from the standard foreign fund manager registration period of six months or more. In order to further shorten the three‑day review period, the FSA will also offer pre-consultation to foreign managers and brokers who have not yet filed a formal application but have or anticipate an emergency situation.

The FSA's temporary exemption will last for a period of three months, but if the emergency situation is persisting at the end of the three‑month period, applicants will be permitted to apply for an expedited renewal of the exemption. However, the FSA will not grant (and will revoke) exemptions if it finds that the applicant does not intend for a temporary transfer of operations to Japan in response to an emergency, but rather is seeking to exploit the amendment to circumvent the standard registration process required under the FIEA. For more details, please see the recent Jones Day Alert.

Investigations & White Collar Defense

Parent Company Compliance and Whistleblower Protection Act Amendment

In August 2020, the Japan Consumer Affairs Agency published a guideline regarding the amendment to the Whistleblower Protection Act enacted in June of this year. This amendment was introduced in response to a series of corporate scandals and was intended to strengthen internal whistleblowing procedures. The amended Act, among other things, requires businesses to develop internal systems for responding to whistleblowing claims, protects employees from being fired for whistleblowing, and provides whistleblowers with immunity from liability for damages associated with their whistleblowing.

Notably, for small- and medium-sized enterprises with 300 or fewer "regular employees," the amended Act imposes merely an "effort obligation" to establish internal whistleblowing systems. For example, such enterprises are required only to make an effort to develop internal systems for responding to whistleblowing claims, whereas larger enterprises are strictly required to do so. For purposes of the Act, "regular employees" are workers employed on a regular basis and part-time employees (excluding seasonally employed workers). 

In addition, with respect to the obligation of businesses to develop internal systems for responding to whistleblowing claims, the Japan Consumer Affairs Agency has clarified that in group companies, it is satisfactory if a single hotline is established by the parent company for all companies/subsidiaries within the corporate group. 

For an outline of the amendment to the Act, please see the Summer 2020 issue of this newsletter.

Antitrust & Competition Law

Japan Fair Trade Commission Publishes Government Order and Other Rules Relating to Enforcement of the Amended Antimonopoly Act

In August 2020, the Japan Fair Trade Commission ("JFTC") published a government order and other rules relating to the enforcement of the amended Act on Prohibition of Private Monopolization and Maintenance of Fair Trade ("Antimonopoly Act"). As explained in our April 2019 issue, the Japanese Cabinet approved and submitted a bill to the Diet in March 2019 calling for certain amendments to the Antimonopoly Act, including a revised "leniency" system in which the JFTC may grant immunity or reduce administrative fines in cartel cases in exchange for cooperation with the JFTC's investigation in addition to the immunity or administrative fine reductions that may be granted to businesses based on the order in which their leniency applications are submitted. The amendments also abolish the cap on the number of leniency applications that the JFTC may grant, which the law had set at five. The amendments will take effect on December 15, 2020.

The JFTC's order and other rules are intended to supplement the 2019 amendments and include: (i) amended rules on reporting and submission of information relating to the revised leniency system; (ii) a new, more severe method for calculating the amount of administrative fines, which may result in larger fines; and (iii) an operational policy for reducing administrative fines in exchange for cooperation with antitrust investigations. These rules and the government order will become effective on the same date that the 2019 amendments take effect (December 15, 2020).

Intellectual Property

Enforcement Dates of Remaining Patent Act and Design Act Amendments Announced

In response to the growing importance of intellectual property rights in today's digital world, the Japanese Cabinet approved and submitted to the Diet a bill last year calling for certain amendments to the Japanese Patent Act, Design Act, and other intellectual property-related acts intended to improve the facilitation of intellectual property litigation and to enhance the protection of design rights ("Amendment"). As mentioned in the April 2019 issue of this newsletter, the main revisions proposed under the Amendment were: (i) a new system for investigating alleged patent infringement, whereby an impartial technical expert inspects the facilities of an accused infringer; (ii) a revised method for calculating damages in industrial property infringement cases; (iii) expanding the Design Act to protect digital designs and interior and exterior designs for buildings; (iv) increasing the duration of design rights (from 20 years to 25 years); and (v) amending the Design Act to facilitate the registration of rights to designs.

Although most of these provisions came into effect on April 1, 2020, the Japanese Cabinet recently issued an order specifying the date upon which the remaining provisions noted above would come into force. Pursuant to this order, the provisions to create a system of on-site investigations by an impartial technical expert in intellectual property litigation came into force on October 1, 2020, and the provisions to facilitate registration of design rights will come into force on April 1, 2021.

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