2. Business Model Legality/ Regulatory Approval Investigation

If you are starting a new business in Japan, it is advisable to confirm beforehand that your company’s business is legally permitted under Japanese law. For example, your Internet company that uses content could inadvertently infringe the copyright of a third party. Or your introduction of a redeemable point system could subject you to the Payment Services Act. Or your financial services company may need to be registered under the Financial Instruments and Exchange Act. You may have a great business idea, but it could become very difficult to develop your business if you are found to violate Japanese law. Accordingly, you should check on the legality of your business scheme before it becomes too late to change your scheme.

AZX advises many companies on new business ideas, and has significant experience in investigating the legality of various business models. And, in addition to a legal check, we can investigate from other perspectives, such as tax and accounting, intellectual property and labor regulations.

Q1 (Telecom Regulations and Internet Businesses)

We understand that the Telecommunications Business Law applies to telecom carriers and providers, but does it also apply to community sites and other Internet service businesses?

Of course, the strictest regulations such as notification and registration apply to the so-called telecom-related businesses such as telecom carriers and providers. However, Internet services involving the exchange of information can also be subject to certain regulations under the Telecommunications Business Law, such as confidentiality of communications and prohibition of censorship.

A “telecommunications service” under the Telecommunications Business Law means “intermediating communications of others through the use of telecommunications facilities, or any other acts of providing telecommunications facilities for the use of communications of others”. And a business that offers telecommunications service in response to a request from a third party is a “telecommunications business”. So if you use a server to operate a community site, you are offering the use of telecommunications equipment for communications between third parties, and thus qualify as a telecommunications business.

On the other hand, if you do not intermediate communications of others, and you do not have installed telecommunications circuit facilities, even if you qualify as a telecommunications business, you are not subject to the stricter regulations of a “telecommunications carrier”, such as the notification and registration requirements. For example, a so-called bulletin board service offers a place where an unspecified number of people can exchange information, but is not “intermediating communications of others”, and thus would not be subject to the notification and registration requirements. Accordingly, a community site operator would not be subject to the stricter requirements of a “telecommunications carrier”, but would be subject to the regulations that apply to a “telecommunications business”, such as confidentiality of communications and prohibition of censorship.

This is a bit complicated, so for further details, please see the Ministry of Internal Affairs and Communications’ “Manual for Telecommunications Business Entrants (Supplement)”.

(Posted: January 27, 2012)

Q2 (Product Liability for Resellers)

We are conducting an e-commerce business. Is it correct that the liability for manufactured goods is only with the manufacturer, and we have no liability?

Under the Product Liability Act, not only the manufacturer and the processer, but also the following parties have liability for manufactured goods: (i) a person that imports the products in the course of trade (Article 2, Section 3(1)); (ii) a person that provides its name, trade name, trademark or other indication on the product as the manufacturer of such product (Article 2, Section 3(2)); (iii) a person that provides a representation of its name or another indication on the product which misleads others into believing that it is the manufacturer (Article 2, Section 3(2)); and (iv) a person that provides a representation of its name or another indication on the product which, [in light of the manner of manufacturing, processing, importation or sales of the product and other circumstances, could be deemed as holding itself out as the manufacturer] (Article 2, Section 3(3)). Accordingly, if you are importing the products as part of your business, you could have liability under item (i) above. And even if you are not importing the products, you need to be careful to not display your name or another mark so that one of items (ii) to (iv) above may apply to you.

(Posted: January 27, 2012)

Q3 (Copyright Law and Video Distribution Sites)

Do video distribution sites like YouTube raise any issues under the Copyright Act?

Videos that are distributed without the consent of the right holder raise copyright infringement issues. First, users who submit videos without the consent of the copyright holder may infringe on the holder’s reproduction right and right of public transmission. As to whether or not the company operating the video distribution site itself is an infringer, in the end it depends on the substance of the service. However, based on the trend in the court cases, a company that offers such a service for profit may also be judged as an infringer.

(Posted: January 27, 2012)

Q4 (Antimonopoly Law and Discount Sales)

In selling goods at a discount, how should we judge whether or not this is dumping under the Antimonopoly Act?

Under the Antimonopoly Act, dumping is “without justifiable grounds, supplying goods or services continuously for consideration which is excessively below the cost required for the supply, thereby being likely to cause difficulties to the business activities of other companies”. Fundamentally, it is limited to cases where a company continuously sells at a price significantly below cost to affect a competitor’s business. Cases where there are special circumstances that justify the discount, such as price reductions based on market conditions or for raw foods or damaged goods, are outside the scope of the regulation.

For further details, please see the Japan Fair Trade Commission’s “Guidelines Concerning Unjust Low Price Sales under the Antimonopoly Act”.

(Posted: January 27, 2012)

Q5 (Scope of Antimonopoly Law)

What does the Antimonopoly Act regulate?

The objective of the Antimonopoly Act is to promote fair and free competition and to preserve unrestricted activities based on the independent judgment of businesses. Based on this objective, the Antimonopoly Act prohibits (1) private monopoly, (2) unreasonable restraint of trade, and (3) unfair trade practices.

A private monopoly means acts to monopolize a market, by using an unreasonably low sales price to eliminate competitors from the market and to prevent new entrants into the market (exclusionary private monopoly) or acts to control a market, by acquiring stock and taking other actions to restrict another company’s business activities (control private monopoly).

Unreasonable restraint of trade includes so-called cartels and collusion.

Unfair trade practices means patterns of behavior that threaten fair competition, such as refusal to deal, transactions with exclusivity conditions, transactions with restrictive conditions, resale price maintenance, abuse of dominant bargaining position, fraud in the inducement and dumping.

(Posted: January 27, 2012)

Q6 (Required Disclosures in Specified Commercial Transactions)

We have seen a website with the “Disclosures under the Act on Specified Commercial Transactions”. What kind of law is the “Act on Specified Commercial Transactions”? Also, are these disclosures always required?

The Act on Specified Commercial Transactions regulates prescribed transactions, such as door-to-door sales and mail order (including online) sales, for the protection of consumers. At present, 6 kinds of transactions are subject to the regulations ? (i) door-to-door sales, (ii) mail order (including online) sales, (iii) telemarketing sales, (iv) multilevel marketing transactions, (v) specified continuous services, and (vi) business opportunity sales transactions.

The regulations cover a broad spectrum, but, for example, if a product is advertised for mail order (including online) sales, certain information specified by the regulations (such as the sales price and delivery cost) must be included in the advertisement (Article 11). Whether you are obligated to include such a disclosure depends on whether your business conducts a business covered by the Act on Specified Commercial Transactions.

(Posted: January 27, 2012)

Q7 (Required Disclosures in Online Sales)

In selling products on the Internet, is it necessary to include in advertisements the disclosures under the Act on Specified Commercial Transactions?

Except for cases where the target buyer is a merchant, selling products on the Internet would fall within the regulation of mail order (including online) sales under the Act on Specified Commercial Transactions. So it is necessary to clearly disclose certain matters prescribed under the regulations in the advertisement on your site.

(Posted: January 27, 2012)

Q8 (Product Sales vs. Services under Act on Specified Commercial Transactions)

If we offer a service targeting individuals, but are not selling products, is it correct that we don’t need to worry about the regulations on mail order (including online) sales under the Act on Specified Commercial Transactions?

The regulations on mail order (including online) sales under the Act on Specified Commercial Transactions apply to the offer of services as well as to products. Accordingly, if you offer services for a fee, you must observe the regulations applicable to mail order (including online) sales. Fee-based mail magazines and online games are also thought to be covered.

(Posted: January 27, 2012)

Q9 (Cooling-Off Period in Online Sales)

We have heard that we should be careful about a cooling-off period in advertising mail order (including online) sales, but what does this mean?

For mail order (including online) sales (excluding services) under the Act on Specified Commercial Transactions, in principle, there is an 8-day period during which the purchaser can return the product for any reason. However, you can avoid this cooling-off period by including a special stipulation (special stipulation on the return of goods) in the mail order (including online) sales advertisement. Accordingly, if you do not wish to be subject to a discretionary return of goods, it is important to clearly state this special stipulation in the advertisement. Further, it is necessary to include this special stipulation on the return of goods not only in the advertisement, but also on the so-called final confirmation screen (Regulations for Enforcement of the Act on Specified Commercial Transactions Article 16(2)).

The details of the actual method of display are specified in guidelines published by the Ministry of Economy, Trade and Industry, so please refer to them as appropriate.

(Posted: January 27, 2012)

Q10 (Necessity of Privacy Policies)

Why is a privacy policy necessary?

By setting forth its stance on the protection of personal information, a company can provide peace of mind to customers, thus contributing to the expansion of its business. Also, since the enactment of the Act on the Protection of Personal Information, companies have adopted privacy policies to comply with the law.

Under the Act on the Protection of Personal Information, whenever a business handling personal information obtains personal information, it must promptly notify the person of its purpose of use or post it, unless it has already posted its purpose of use beforehand. In addition, for any personal data in its possession, the company must also take measures so that the person will know certain matters, such as the name of the entity possessing the information, the purpose of use and procedures for disclosure to third parties. As a way to comply with these obligations, it has become customary for companies to establish privacy policies and post them on their websites or otherwise deliver them to their customers.

(Posted: January 27, 2012)

Q11 (Consent to Privacy Policies)

In a service targeting individuals, when we have them consent to the terms of use, should we also have them consent to the privacy policy?

For the matters covered in a typical privacy policy, posting is sufficient, and it is not usually necessary to obtain the consent of the user. Although strictly speaking it’s not necessary to obtain consent, it may be a good idea in order to avoid any dispute. Further, in some cases, such as offering the personal information to a third party, the user’s consent is required under the [Personal Information Protection Act]. In those cases, rather than just a consent to the privacy policy, you should obtain an express consent from the user to the disclosure of the information to the third party.

(Posted: January 27, 2012)

Q12 (Use of Personal Information and Privacy Policies)

When we have users register in an Internet-based service targeting individuals, we heard that we must notify the users of the purpose of our use of personal information. Is the posting of our privacy policy on our site sufficient?

Under the Act on the Protection of Personal Information, when you obtain personal information from a person through entering into a contract with that person, either in the contract itself or through electronic means, you must specify the purpose of use to the person beforehand. For Internet-based services, this should be done in a noticeable way. For example, you could display the purpose of use on the screen before the person can click on the submit button to send personal information. Or you can include a link to the page that includes the purpose of use. Accordingly, if your purpose of use is included in your privacy policy, one idea is to noticeably display a link to the privacy policy on the page where the user inputs personal information.

(Posted: January 27, 2012)

Q13 (Protection of Personal Information)

We are providing a service to distribute online magazines by e-mail. If we provide personal information of our subscribers to mail distribution companies without the subscribers’ consent, would this be a violation of the Act on the Protection of Personal Information?

In principle, offering a person’s personal information to a third party requires the person’s consent. But there are certain exceptions. One exception is when a company subcontracts the handling of the personal information to a third party to the extent necessary to achieve the purpose of use. Subcontracting the distribution of a mail magazine to a mail distribution company, and disclosing personal information to the extent necessary for that purpose, would fall within the exception above, so individual user consent should not be required.

(Posted: January 27, 2012)

Q14 (Personal Information to Third Parties)

We are planning to provide personal information we received from our users to a third party. We plan to obtain the consent of the users when we receive the personal information, but are we required to disclose the third party’s purpose of use of the personal information?

There is no obligation for you to disclose the third party’s purpose of use of personal information. It may be necessary for you to communicate with the user from a business standpoint, but there is no obligation under the [Personal Information Protection Act]. However, the third party who receives the personal information must post its purpose of use or otherwise notify the user. And since the third party’s failure to do so could result in trouble for you, as a matter between you and the third party, you should probably make sure that the third party will post its purpose of use.

(Posted: January 27, 2012)