One-and-a-half years into the Mahathir administration, Malaysian law firms are highlighting major legislative developments, pitfalls and trends that need immediate attention to electrify the nation’s business environment
Mahathir Mohamad’s second stint as prime minister of Malaysia (he previously held the office from 1981 to 2003) is 18 months in, and while his government wrestles with issues of corruption and transparency, there are key areas of business that are in need of some fast tracking.
Having won on a platform against a legacy of systemic corruption, erosion of the rule of law, economic malaise and anti-race-based politics, his administration has spent much of its time cleaning up the former government’s finances.
“They have started addressing corruption, such as with the National Anti-Corruption Plan, which was well received by both public and private sectors, and you see cases going to court, but also hear of continued corruption … but it’s a very good start. After all, Rome wasn’t built in a day,” says Wong Jin Nee, a partner at Wong Jin Nee & Teo in Kuala Lumpur.
The nation has shown improvement in its performance indicators in several important international studies and indexes, including the Edelman Trust Barometer Global (public confidence in the government), Corporate Governance Watch Report, The Economist’s Democracy Index, and the World Bank’s (on the ease of doing business).
Among the key initiatives of the new government were the adoption of the ISO 37001: Anti-Bribery Management System international standard, a new code of conduct for members of parliament, an asset declaration policy, a bill on political donations and an Independent Police Complaints and Misconduct bill.
But while these legislative measures are aimed at improving transparency in government, there are several other regulatory reviews proposed that will have a more direct and immediate impact on the country’s economy and business environment. Some are well placed, while others are awaiting positive regulation, and the real question is whether the government can move these along fast enough.
Amendments to patent, design, franchise, data protection and merger control laws are all moving through various stages of the policy making process. Developing trends and supporting government incentives to boost growth in Green IP and fintech are also under consideration. Other moves like an alliance with the European Patent Office (EPO) are being questioned by legal experts.
Madrid Protocol and Trademarks Act 2019
The Madrid System is the primary international mechanism for facilitating the registration of trademarks in multiple jurisdictions. Malaysia’s new Trademarks Act, 2019, which incorporates the changes brought by the Madrid Protocol, as well as other revisions to the country’s trademark regime, came into force on 27 December 2019.
Seen as long overdue, (Malaysia originally committed to the protocol in 2016 but missed the deadline, and has not revisited it until this year, when the Trademarks Act was ready) the act’s introduction was a slight annoyance to law firms, coming into force as it did at the end of this year. Many lawyers would have been away for the holidays, and provisions had to be made to ensure offices were staffed to deal with emergency filings and other issues.
“This is a much-awaited development for brand owners, IP practitioners and the IP industry as a whole,” says Ong Boo Seng, a partner with Zaid Ibrahim & Co (a member of ZICO Law).
“The new Trademarks Act brings the trademark regime in Malaysia into the 21st century. It is a boon for brand owners as the act now allows for registration of non-traditional marks such as shape marks, sound marks and position marks.”
Ong explains that as a result of the implementation of the Madrid Protocol, local brand owners can now obtain international registration, and foreign brand owners can designate Malaysia in their international registration. “The new act expands the scope of trademark infringement and allows for registration of security interests against registered trademarks, facilitating the use of IP for financing,” he says, adding that trademarks can therefore be a form of security interest as a movable property, and once that lifts off it will impact a lot of companies in Malaysia.
“The new act provides a platform or impetus for more trade and foreign direct investment into the country,” Ong concludes. “It also encourages brand innovation among local businesses, in particular, businesses that are thinking about competing in the international market.”
Wong agrees, saying it is an exciting development, especially for small to medium-sized enterprises (SMEs) that are planning to export overseas and cover their marks in different countries.
However, she says some clients have misconceptions about the protocols that need correcting. “Before [the act] they may think that the Madrid Protocol is really international, that by filing to WIPO [the World Intellectual Property Organization] you can actually cover all the countries, without realizing you have to designate and pay extra fees, and that it takes time, and you have to go through national litigations and be examined as though they are filed nationally,” she says. “It’s just that it’s a simplified procedure.”
Wong says that there have been indications of fee changes, and unlike the previous system, there is both a filing fee and an acceptance fee (when your mark is accepted for registration) at the filing stage. “That is notwithstanding the fact that your mark might not be accepted, or if you change your mind and want to pull out after filing,” she says. “Also, the fee at the acceptance stage is quite substantial. The time between filing and acceptance is 12 to 18 months, which under the previous system gave SMEs time to get funding, but not anymore, which is the only down side.”
So, how do the country’s law firms see the Trademarks Act and the Madrid Protocol impacting their business? The consensus is that since the Madrid Protocol facilitates filing from a home country and designating Malaysia, law firms anticipate a drop in filing instructions coming from outside Malaysia.
However, with far more interest in filing trademarks in Malaysia from abroad, there will be an increase in activity, explains Indran Shanmuganathan, a partner at Shearn Delamore & Co. “Therefore, even if you lose out on initial filings, there will be more IP issues that arise, which then must mean there will be a need for lawyers to deal with those things,” he says. “Drawing from the experiences of neighbouring countries, [law firms] may see a significant increase on the prosecution side of their trademark portfolios.”
“We can’t compare ourselves really to Singapore, as they have a lot of inbound business, whereas Malaysia has a lot of outbound business, and a lot of business that is generated locally,” says Karen Abraham, also a partner at Shearn Delamore & Co, and head of the firm’s IP practice.
“I don’t know whether that will keep us intact, but that is what we are hoping to rely on, and we are confident other types of IP collateral work will come in. Maybe there will be more litigation because the act is now trying to expand those rights and facilitate the process of enforcement.”
The new Trademarks Act 2019 also carries more severe punishments for offenders. Those found committing fraud or trademark infringements can be fined up to MYR1 million (US$243,000), jailed for a maximum of five years, or both.
With the Madrid System’s structured designation process, foreign companies and trademark owners can now easily seek protection for their trademarks when introducing their products and services in Malaysia. A significant increase in trademark and IP applications is therefore expected.
“This is the first of the many initiatives to harmonize IP laws in Malaysia with that of other major jurisdictions and to bring it up to date and its treaty obligations,” says Ong, of Zaid Ibrahim. “It is anticipated that there will be amendments to the Patents Act and Industrial Designs Act in the near future, which is great news for the IP ecosystem in Malaysia.”
Among the proposed amendments to the Patents Act being discussed are provisions relating to implementation of amendments to the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement on compulsory licensing, amending the patentability criteria of novelty, inventive step and industrial applicability to bring them in line with the TRIPS Agreement and current international practice, expanded scope for public inspection, and availability of post-grant opposition.
“As Malaysia may accede to the Budapest Treaty on the International Recognition of the Deposit of Micro-organisms for the Purposes of Patent Procedure in the near future, which would be a welcomed development, there should be provisions in the Patents Act to give effect to this,” says Ong.
As for the law relating to industrial designs, it is anticipated that Malaysia may accede to the Geneva Act of the Hague Agreement concerning the International Registration of Industrial Designs. “This would mean amendments to our existing Industrial Designs Act,” says Ong. “ There needs to be enabling provisions in the new act, post-ratification, to cater for international registration of designs.
“In line with that, it is expected that there will be amendments to the definition of registrable design and registrability criteria to be consistent with current international practices in the area of designs law.”
Charmayne Ong Poh Yin, a partner at Skrine and head of both the IP and Technology, Media and Telecommunications (TMT) practice at the firm, agrees that the landscape of patent law may change soon, but as yet no draft bill has surfaced for consideration.
“The introduction of multi-class filings [via the Madrid Protocol], as opposed to one mark-one class, will have a significant impact on businesses such as franchises; when they want to expand their franchise businesses overseas, they will have to file their marks overseas, and this makes it easier,” adds Wong. “Another good thing about the Madrid Protocol is that you don’t need to designate all the countries at the same time. You can add on at a later stage so you don’t incur all the costs at the same time.”
Amendments to Franchise Act
In the past 10 years, businesses have been held back because of a complicated registration process and stringent requirements of the Malaysian Franchise Act, which will supposedly be cleaned up with new amendments to the act.
There has also been talk of updating the franchising law of 1998. The government had a consultative session with the stakeholders, which included law firms representing clients in the franchise process. Because this was a closed-door meeting, law firms were not permitted to share what these potential changes are, but they are said to be substantial, and are expected to be made public sometime this year, given there is enough time for the laws to be drafted and go through parliament.
“Especially foreign parties don’t understand why it is so difficult to do a franchise business in Malaysia, why it must take up to six months or even a year before the business can take off,” says Lee Lin-li, a partner and head of the IP & Technology practice group at Tay & Partners. “Whereas in Singapore, where there are no franchise laws, it’s just contract law, so there you sign the agreement and within four weeks you rent your premises and move in, start your renovation.
“But in Malaysia, even after identifying the franchise and location, and getting the tenancy agreement all signed, you still can’t start your business; therefore, you start incurring the overheads and it’s purely because you have this stumbling block, which is to register your franchise.”
Having eco-friendly or “green” products gives companies a competitive advantage in the marketplace since more and more consumers are becoming concerned with social responsibility. There has been an increase in applications filed with “sustainable” or “eco-friendly” in the product description in Malaysia.
“Intellectual property can play a role and create awareness apart from the technology, where they can be patented for the know-how and even for trademarks, as there are more companies applying for green marks. These marks can be deceptive though,” Wong cautions. “They may not be doing green topics but … as they want to be associated or project the image, they claim to use green technology or that some process of sustainability is included, but that may not be true.”
In addition, “there has been significant growth for green investment tax incentives, which have been around since 2014,” according to Cassandra Nicole Thomazios, a senior associate with MahWengKwai & Associates. “As of the end of 2019, there have been 175 renewable energy projects approved by the government, and this again attracts a lot of foreign direct investment, somewhere in the region of MYR3 billion. This encouraged a lot of construction companies to go green.”
EPO agreement milestone
Touted as another recent IP milestone for Malaysia was the signing of a memorandum of understanding (MoU) establishing an enhanced partnership between the Intellectual Property Corporation of Malaysia (MyIPO) and the European Patent Office (EPO), in October last year. Under this arrangement, for the next five years, the two will work together to make their patent systems as efficient, user-friendly and predictable as possible for European and Malaysian businesses, as well as promoting and improving services relating to patents in the ASEAN region and worldwide.
However, lawyers say its necessity to Malaysia is lukewarm. The story goes that two years ago there was some news from the patent office that they were considering entering a validation system with the EPO. When there was a consultation with practitioners and stakeholders, they were not sure about having the system, as it was seen that the MyIPO was perfectly capable of examining patent applications with its comprehensive facilities and experienced staff.
“It just doesn’t make sense for a country as developed as us in our patent system,” explains Lee of Tay & Partners. Malaysia has had its own examination system in place for more than 20 years, and in the past 10 years the number of skilled examiners and experienced staff in the registry has increased, so she says the argument is these people would be made redundant if the validation system with the EPO were to be employed.
“So as far as the reinforced partnership is concerned, I think we wanted to give the EPO a sense of assurance that we will continue to work together with them to enhance the quality of the patents which are being granted in Malaysia,” says Lee. “A large number of patentees are European, so we wanted to give them the assurance.”
Fintech: A developing trend
Fintech, particularly e-wallets (now increasingly being favoured over credit cards), is among the hottest industry sectors around the world and it is no different in Malaysia, which has 48 or more e-wallets, (Grab, Touch n’ Go and Boost being among the most active), up from 28 in 2016.
The MR30 digital stimulus by the government under the e-Tunai Rakyat initiative is set to drive more users to move towards digital payments, in line with the government’s aspirations of making Malaysia a cashless society. Malaysians aged 18 and above with an income of less than MYR100,000 (US$ 24,512) per annum, will receive a one-time e-wallet credit of MYR30 under this initiative, rolling out in early 2020. The government has set aside MYR450 million for this initiative, which will benefit 15 million Malaysians. Khazanah Nasional has been appointed to facilitate and co-ordinate the initiative, and they will be working closely with the National Registration Department and the Inland Revenue Board.
Based on PwC Malaysia’s estimates, the e-wallet market is projected to grow to US$20 billion by 2024, underpinned by favourable industry growth dynamics and market potential. It could also support more sophisticated functions such as remittances, e-payments and shared QR codes.
Natalie Lim Yen Kuan, a partner at Skrine’s TMT practice, says that in an effort to promote and regulate fintech, regulators have been working on developing a framework for its various forms, including cryptocurrency and digital/virtual banks. “Admittedly, our framework is still in its infancy compared to other countries such as Singapore, but there are new regulations in place and proposals in the works,” says Lim.
“In respect to cryptocurrency, regulators have clarified that certain digital currencies and tokens are deemed as securities under our laws, and there are minimum anti-money laundering and anti-terrorism financing requirements in place, as well as a framework for establishing and operating a digital asset exchange,” she says.
“However, while it appears that initial coin offerings (ICOs) will be regulated, we still await the confirmation of the regulatory framework for ICOs. In respect of virtual banks, the Central Bank of Malaysia has just issued the Exposure Draft on Licensing Framework for Digital Banks, which provides a framework for licensing digital banks requiring them inter alia to maintain minimum capital funds unimpaired by losses of MYR100 million during the foundational phase, and MYR300 million thereafter.”
Labuan: A mid-shore jurisdiction
Labuan International Business and Financial Centre (IBFC) is a special economic zone of the Malaysian government on the island of Labuan, off the coast of Borneo, and is a mid-shore jurisdiction, which is neither fully offshore or onshore. Singapore and Hong Kong are leading this new trend as substantial financial centres but neither with zero-tax regimes.
“As a mid-shore jurisdiction, Labuan offers the ease of conducting wholesale financial transactions married with internationally accepted standards of regulation, supervision and monitoring, typically found in such onshore centres,” says Farah Jaafar-Crossby, CEO of Labuan IBFC.
“By providing a mid-shore approach, financial intermediaries have the benefit of operating in a well-regulated jurisdiction, complying with international standards and practices, overseen by a one-stop business friendly Regulator (Labuan Financial Services Authority) offering a wide range of licences, as well as fiscal and currency neutrality.” The Malaysian government plans to develop Labuan as an Asian business hub.
“Labuan is a place that the government is always trying to push because of the tax advantages,” says Su Tiang Joo, a senior partner with Cheah Teh & Su in Kuala Lumpur. “It is a continuing effort that Malaysia is trying to promote as an attractive hub for investment … [Labuan] seems to be growing, with new business up 12.5% since last year as 1,059 new companies, mostly fintech players from Japan, China and South Korea, have set up there.”
Future game changers
Some potentially significant changes in the works are a review of the data protection framework and the potential introduction of a merger control regime.
The Minister of Communications and Multimedia has proposed to review the Personal Data Protection Act 2010 (PDPA) to streamline it with international laws including the EU’s General Data Protection Regulation (GDPR), particularly its provisions on cross-border transfer of personal data, a proposed white list of countries and notifications for data breaches.
“Our understanding is that there is no bill yet, but the review process has commenced, with discussions with the stakeholders,” says Ong. “Till then, we will have to wait and see what the law will look like, but we would like to see further guidance on handling data breaches.”
The introduction of merger controls is scheduled to be implemented in the first half of this year. “There is no indication as to the principles and systems, such as voluntary or mandatory, which the Malaysia Competition Commission will adopt,” says Tan Shi Wen, a partner in Skrine’s competition practice.
“Currently, we have merger control provisions for aviation and telecommunications (albeit both voluntary in nature), but we do not have one covering other industries,” says Tan. “If introduced, it will of course heavily affect investment strategies in Malaysia, as transactions may be delayed or suspended due to the need to comply with the merger control process, such as to notify or to obtain approval from the competition authority for any transaction to be implemented. So it is something critical for businesses to look out for in 2020.”
Whether Malaysia can get a move on with meaningful business-friendly regulation may well be a factor deciding the make-up of the next government, regardless of the worthy deep-rooted changes on transparency and corruption.