Japan: Initiatives To Boost AI And Metaverse Business In Japan

1. Introduction

In an effort to increase artificial intelligence ("AI") and Metaverse business in Japan, the government has enacted new legislation and established various supporting guidelines in recent years. In particular, the government issued, and continues to update, guidelines focusing on private businesses utilising big data and developing AI to clarify and analyse legal and ethical issues. In addition, the government has issued specialised reports for Metaverse business. Furthermore, the government is considering ways to strengthen regulations regarding competition policy.

2. The Legal Situation Surrounding AI

1 The law and regulation governing AI in Japan

The main principles and guidelines relating to AI published so far by public authorities in Japan are as follows:

• Draft AI R&D Guidelines for International Discussions (Draft of Kokusaitekinagironnnotameno AI Kaihatsu Guidelines) published by the Conference toward AI Network Society (a conference held by the Institute for Information and Communications Policy, the Ministry of Internal Affairs and Communications ("MIC") with advisers and experts to study social, economic, ethical and legal issues towards promoting AI networking in society) in July 2017;
• Social Principles of Human-centric AI (Ningen-chuisin-no AI Shakai Gensoku), published by the Cabinet Office in March 2019;
• AI Utilization Guidelines (AI Rikatsuyo Gidelines): Practical Reference for AI Utilization, published by the Conference toward AI Network Society in August 2019;
• Contractual Guidelines for the Use of AI and Data 1.1 (AI Data no Riyo-keiyaku Guidelines): Practical Reference for AI Utilization, published by the Ministry of Economy, Trade and Industry in January 2021;
• Governance Guidelines for the Implementation of AI Principles (AI Gensoku Jissenn notameno Governance Guidelines) version 1.1, published by the Study Group on the Implementation of AI Principles in July 2022; and
• Review of AI R&D Guidelines and AI Utilization Guidelines, published by the Conference toward AI Network Society in 2022.

These principles and guidelines were formulated as non-binding soft law, and the government strongly encourages users of AI to take certain voluntary measures when using AI.

2 New national strategy on AI including generative AI in Japan

The government has avoided regulating AI with hard law in the past, but in light of the April 2023 summit agreement, i.e., Hiroshima AI Process, it decided to re-examine whether AI should be regulated with hard law as well as soft law, and established the AI Strategy Council in May 2023.

The AI Strategy Council has discussed the following points so far:

1. Response to risks derived from AI:As basic policy on risk responses, AI developers, providers, users and others should assess the risks by themselves and fulfil the governance functions.
2. Transparency and reliability: AI developers and providers are required to proactively disclose information in accordance with current laws and guidelines. Government should also consider directly encouraging transparency and reliability with key AI developers and providers.

In light of the spread of generative AI, it is necessary to consider necessary revisions, etc., regarding existing guidelines. On occasion, third-party certification and auditing systems should also be used as references, in coordination with studies conducted in other countries.

The government is considering the following risks especially:

• Specific examples of concerned risks and responses.
• Risk of leakage of confidential information and improper use of personal information, and privacy rights.
• Risk of sophistication and facilitation of crimes.
• Risk of social instability and confusion due to disinformation, etc.
• Risk of more sophisticated cyber attacks.
• Handling of generative AI for education.
• Risk of copyright infringement.
• Risk of increased unemployment due to AI.

3. Metaverse

In order to promote metaverse business, the government is considering what risks are expected in many government sectors beginning in 2022, and how governments and private businesses should respond to these risks. In particular, the "Study Group on Utilization of Metaverse, etc. for the Web3 Era" established by the Ministry of Internal Affairs and Communications, and the "Public-Private Partnership Conference on Dealing with New Legal Issues Concerning Content on Metaverse, etc." established by the Cabinet Office, examined a number of legal risks.

1 Interim summary of the study group on utilisation of the metaverse, etc. for the Web3 era

In the interim summary, in view of the fact that there are many new fields for which there are no established definitions of terms at the present time, the first step is to sort out the terms so that a common understanding can be obtained, and then to identify (1) issues for improving user convenience, such as how the avatar of the metaverse should be, (2) issues for business development for each use case (e.g. (2) organisation of issues to be addressed for the commercialisation of each use case, ((i) regional revitalisation, tourism, urban planning, etc., (ii) telework (virtual offices), (iii) education and training, etc.), and (3) the impact of the increased use of the metaverse, etc. (i) impact on digital infrastructure, (ii) transformation of socio-economic activities, and (iii) impact on users (including negative impacts)) as follows.

1. Relationship between the real world and users: As the metaverse is established on top of the real world and its survival depends on the physical layer, it has been pointed out in the discussion that it is necessary to keep in mind the so-called "landing problem", where events in the virtual space can affect the real world. It then states that methods of acquiring real-world data should be considered, taking into account the reality that a considerable number of users wish to separate their real-world and metaverse identities.
2. The state of avatars (actions and identity in the virtual space): On the grounds that some actions against avatars are unacceptable as problematic behaviour towards the operator of the avatar (the so-called "person in the middle"), the importance of a system that enables users to determine whether there is a "person in the middle" or not is pointed out. They also point out that for each type of action against avatars, it should be considered whether it is acceptable or not, and whether the privacy nature of the metaverse space affects it or not. With regard to the protection of identity and privacy, it is pointed out that the recognition of the identity between the person and the avatar, the degree to which the person is projected onto the avatar (self-projection rate) and other factors differ from use case to use case, but that the degree is difficult to determine from a third party, and the difficulty of handling cases where the same avatar has multiple "inside persons" is also pointed out.With regard to the prevention of fraud such as avatar "spoofing", the report mentions both the approach based on identity rights and the approach based on soft law, and points out the need to share value judgments through dialogue among the parties concerned on whether to leave it to free competition or whether norms are necessary. The report points out the following.
3. Relationship between users and operators, etc. : From the perspective of personal data protection and privacy, the report points out that, depending on the business model, platform providers and world providers acquire a considerable amount of data such as users' behaviour history, which may cause concerns among users, and also points out the need for a dialogue on the extent to which information can be grasped by service providers to users. The report points out that the way in which disclosure and other measures should be taken is an issue. It also points out the legal responsibilities of platforms and world providers in the event of problems between users.

2 Report: "Discussion points on new legal issues concerning content in the Metaverse, etc."

The report covers legal issues indicated in the table below.

1. Imitation of real space designs in virtual space: Cases of unauthorised use of designs of products in real space have occurred, such as the sale of NFTs of virtual items in metaverse space that imitate the design of mass-produced products with a distinctive appearance, on the assumption that they will be used in the metaverse. Regarding the possible protection under the current legal system for such imitations of designs in real space in virtual space, the draft arrangement outlines the applicability of the Copyright Act, Unfair Competition Prevention Act and Design Act and their problems. In order to deal with cases where the design of a product in real space is imitated in virtual space and to protect the design of practical products used in both real and virtual space, it is appropriate to firstly enable the Unfair Competition Prevention Law to regulate the provision of product form imitations on the network (as has already been done in March 2023) and, secondly, to provide protection for the design of products that are used in virtual space. An amendment bill including such amendment was submitted in March 2023, and with regard to the response under the Design Law, it would allow design owners to monopolise the implementation of similar designs, regardless of whether or not there is reliance, and if the scope of such protection is extended to content, the copyright, which has reliance as an infringement requirement, would be. If the scope of such protection is extended to content, it would force a major change in the culture of the content field, which has moved in the world of copyright with its infringement requirement of dependability, and there are concerns that this could have an atrophying effect on the creative activities of creators, etc. Therefore, it is appropriate to carefully consider this as a medium- to long-term issue. Furthermore, it is also requested that, with regard to the use of designs that intersect real and virtual space, the scope and limits of protection under the Copyright Law, the Design Law and the Unfair Competition Prevention Law should be clarified, and that the necessary information should be communicated to right holders and users of metaverse through guidelines and other means. The guidelines should be disseminated to right holders and users of the metaverse.On the other hand, the opinions of the members were largely divided on the extent to which copyright protection should be extended to designs of "practical products" used by avatars in virtual space. The background to the divergence of opinion is that (i) designs for practical goods in real space tend to be less likely to be recognised as copyrightable in court practice because the range of choice is narrower, while "practical goods" in virtual space may be more likely to be recognised as copyrightable, given that the range of choice is not necessarily narrower. On the other hand, (ii) there is a concern that if this is affirmed, there will be an imbalance between the protection of "utility products" in real and virtual space in situations where imitations of utility products in virtual space are made in the real world or where they are designed in real and virtual space at the same time, or (iii) there is a concern that in virtual space the protection of utility products will be unbalanced. Lastly, (iii) there is the question of the extent to which a "practical product" is so, in virtual space. For this reason, the Draft Arrangement refrains from setting out a direction, and merely states that the thinking should first be organised based on the general trend of court decisions and the accumulation of practice regarding the copyrightability of applied art, etc.
2. Unauthorised use of signs in real space in virtual space: Cases of unauthorised use of signs of products in virtual space have arisen, such as a case where a person who sold "Meta Birkins", a digital imitation of the Hermes bag "Birkin", in a digital space, was sued on the grounds of trademark infringement, etc. As possible protection under the current legal system for such unauthorised use, the draft arrangement outlines the applicability of the Trademark Law and the Unfair Competition Prevention Law and their problems. With regard to the Trademark Law, at present, there are only a limited number of cases where a business owner who manufactures and sells goods in real space (e.g. clothing) also provides virtual versions of such goods (e.g. virtual space goods reproduced by computer programs, such as clothing for avatars), and it is not possible for registered trademarks for goods in real space to be used on virtual space goods. It is pointed out that even if a registered trademark relating to goods in real space is used for goods in virtual space, the similarity of the goods is not recognised and trademark infringement is not established in many cases, and it is recommended that the right holder should take measures, for example, to apply for trademark registration after designating goods in virtual space as well as goods in real space.
3. Reproduction of the appearance of the real environment in virtual space: In use cases such as digital twinning or 3D scanning of real space to create a virtual space, buildings, signs, posters, artworks, etc. in real space are often reproduced in virtual space. Here, as possible protection under the current legal system, the draft arrangement summarises the applicability of copyright law and trademark law and their problems. Regarding copyright law, a detailed examination of the permissible scope of reproduction of works of art and architectural works in the public domain (Article 46 of the Copyright Act) will be conducted to determine whether the requirements apply. In addition, with regard to the applicability of Article 30-2 of the Copyright Act, which is a provision limiting rights relating to so-called "reproductions", it is pointed out that further organisation and examination is necessary, taking into account (i) the possibility of the shadow image of the object being reproduced in large scale when an avatar approaches, and (ii) scenes reproduced with deformation, which are peculiar to the metaverse.
4. Licensed use of works in events, etc. in the metaverse: When organising events, or when metaverse users, service providers, etc. develop various activities in the metaverse space, it is necessary, in principle, to obtain the permission (licence) of the rights holders when using the copyrighted works of others. As a situation specific to the metaverse, for example, public performances not for profit in real space are subject to copyright rights restrictions and can be performed without authorisation, whereas if one attempts to perform an equivalent act in the metaverse, it will constitute a public transmission, which is not subject to rights restrictions and requires authorisation for its use. The problem of the need to obtain permission for use is pointed out. For this reason, it is recommended that platform operators (i) conclude comprehensive licence agreements with copyright management companies for the use of copyrighted works by users, and (ii) stipulate in their terms of use the prohibition of bringing in content that infringes on the rights of third parties and the measures to be taken against offenders. Regarding rights handling in the use of copyrighted works, including use in the metaverse, a bill to amend the Copyright Act aiming for simple and centralised rights handling measures has been submitted to the Diet in 2023, and the construction of a cross-sectoral rights information search system for copyright is also being considered.
5. Users' creative activities in the virtual space: In the metaverse, users also become creators and various creative activities are developed, and various works, including secondary creations, are created. To this end, we recommend that platform operators take measures such as setting rules in their terms of use regarding the creation and use of user-generated content ("UGC") on their platforms, including, for example, whether secondary use is allowed or not. At the same time, we call for the development of a mechanism, similar to the Creative Commons Licence, etc., to indicate the user's intention to permit secondary use of UGC within the metaverse, together with the conditions of use of the UGC in question, in a simple and easy-to-understand manner.
6. Transactions of virtual objects using NFTs, etc.: With the arrival of an era in which transactions take place between multiple metaverses in mind, we recommend the development of rules for the "possession" and "trading" of virtual objects, and for secondary distribution, including royalties to primary creators.
7. Portrayal of portraits of real persons: When a real space is converted into a virtual space by 3D scanning, etc., for example, when a photograph of a person is used in a signboard or poster that appears in the virtual space, whether problems will arise in relation to portrait rights and publicity rights in relation to the portrait of the real person captured, and to what extent rights handling will be required in such cases. The issue is whether the portrait of a real person incorporated into the case will cause problems in relation to portrait and publicity rights, and to what extent the case requires rights handling. The Draft Arrangement points out that the key point is whether or not the person is identifiable, based on previous court decisions, and states that, as a situation specific to metaverse, it can be assumed that in the case of a metaverse where a large image is displayed when approaching the subject, the decision will depend on whether the person can be identified when displayed in a large image. It recommends that platform operators take measures such as processing the image so that it is no longer possible to identify the person.
8. Unauthorised creation and use of avatars, etc. that imitate the likeness of real people: It is possible to create avatars and non-player characters ("NPCs") that realistically reproduce the appearance of real people using 3D scanners and cameras. The draft arrangement is based on the premise that (i) new avatars and NPCs that reproduce the appearance of real persons are created without permission, and (ii) portrait data of avatars that reproduce the appearance of real persons are copied without permission and used as the portrait of another avatar or NPC, and that the person's right of portrait, right of publicity and right to privacy are violated. The report points out that this may constitute an infringement of the portrait rights, publicity rights and privacy of the person concerned, as well as a violation of the Unfair Competition Prevention Act. It is noted that cases where the portrait of a celebrity is used, or used as a parody, should be considered on an ongoing basis.
9. Unauthorised use of the portrait or design of another person's avatar: The draft arrangement points out the new issue of "portrait rights of avatars". It also refers to measures to be taken by platform operators and users respectively to deal with unauthorised use, and measures to be taken in terms and conditions of use, such as avatar licence models.
10. Unauthorised taking and publication of avatar portraits: The draft arrangement examines the possibility of legal protection based on the classification of avatars into three categories: avatars that reproduce the appearance of real people; avatars with created designs; and avatars inbetween photorealistic portraits and created designs.

4. Protection Under the Act on the Protection of Personal Information

The Japanese government intends to strengthen legal protection for personal data by amending the Act on the Protection of Personal Information (the "APPI"). The APPI was amended in 2020 and 2021 (the "Amendments"). The Amendments, except for certain provisions, took effect on April 1, 2022. The Amendments are a follow-up on the Japanese government's policy to review the legal system every three years, as stipulated by the 2015 amendment to the Act, which came into full force on May 30, 2017. The Amendments made reforms to the Act to strengthen the protection of the rights of principals who may be identified by personal information, as well as the supervisory and enforcement powers of the Personal Information Protection Commission of Japan (the "PPC"). The Amendments also aim to promote the utilisation of data in society. The contents of the amendment are the following items:

1 Strengthening data protection

1. The Amendments introduced a new concept of personal information (kojin-kanren-joho). Under the APPI, personal information is defined as information about a living individual that can identify the specific individual by name, date of birth, or other description contained in that information. Under the Amendments, certain non-personal information, such as cookies and IP addresses, would also be subject to third-party provision regulations, if the receiving third party is likely to receive the data as personal data. In that case, the providing party must confirm that the recipient has obtained the consent of data subjects to the provision of their data as personal data. This regulation would affect the online advertising industry.
2. Prior to the Amendment, data subjects have the right to demand the termination of use of, deletion of, and cessation of third-party transfer of their retained personal data, only if that data was used for purposes other than those about which the data subjects were notified, was collected by deceit or other improper means, or was provided to a third party in violation of the APPI. The Amendment would allow data subjects to demand cessation of the utilisation of their personal data when their personal rights and interests are at risk of harm, such as when data is stored even after the business operator ceased using it for its stated purposes.
3. The Amendment clarified that a business operator must not utilise personal data in ways that encourage or cause unlawful or undue use. Details of these obligations are not available currently; however, the amendment might possibly restrict data business in Japan, depending on what types of utilisation would be considered undue by the PPC, the regulator of data protection in Japan, or other regulators.

2 Promoting data business

Most Japanese companies have not utilised the anonymisation system for personal data due to certain obligations and unclear standards on anonymising. However, many companies process personal data by replacing names with ID for data security. The Amendments introduced the definition of "pseudonymously processed information" and created new provisions relating to this new concept.

Pseudonymously processed information is defined as information obtained by processing personal information so that a specific individual cannot be identified unless the information is collated with other information, where:

1. for personal information that contains individual identification codes, these codes shall be deleted entirely or be replaced with other descriptions using a method with no regularity that can enable the individual identification codes to be decoded; and
2. for other personal information, part of such information (such as the name of the principal, etc.) shall be deleted or replaced with other descriptions using a method with no regularity that can enable such information to be decoded.

3 Data breach notification requirements

The Amendments introduced new data breach reporting to the Personal Information Protection Commission ("PPC") and notifying obligations to the suffered data subjects in the event of a breach.

This is a new regulation for Japan, and the PPC established newl parts specialised for data breach reporting and notifying obligations into the existing the general guidelines for the APPI ("General Guidelines"). The General Guidelines clarified the conditions that trigger reporting obligations. For example, the applicable cases of leakage and loss or damage of data such as leakage of sensitive data and the exemptions such as the case that personal data is secured by a sophisticated encryption system are explained.

4 The PPC's stronger authority relating to foreign entities and international data transfer

1. Under the Amendments, the PPC has authority to compel an entity located in a foreign country to submit reports, or to issue orders to that entity.
2. The APPI requires a transferor to obtain the prior consent of the principals to transfer their personal data to a third party located in a foreign country. The principals' consent to overseas data transfers is not necessary if any of the following conditions is met:
   1. the foreign country is specified in the enforcement rules as a country having a data protection regime with a level of protection equivalent to that of Japan; or
   2. the third-party recipient has a system of data protection which meets the standards prescribed by the enforcement rules; or certain other exceptional circumstances.

For item (a), as of today, the enforcement rules have listed only EEA countries and the UK as such foreign countries.

For item (b), under the enforcement rules, the standards of the data protection system that a third-party recipient outside Japan must meet are either of the following:

1. there is assurance, by appropriate and reasonable methodologies, that the recipient will treat the disclosed personal data in accordance with the principles of the requirements for handling personal data under the APPI; or
2. the recipient has been certified under an international arrangement, recognised by the PPC, regarding its system of handling personal data. To date, the only PPC-recognised international arrangement is the APEC Cross Border Privacy Rules System.

Under the cross-border transfer guidelines for the APPI, "appropriate and reasonable methodologies" in item (i) above include agreements between the disclosing party and the recipient, or inter-group privacy policies, which ensure that the recipient will treat the disclosed personal information in accordance with the principles of the APPI.

In addition to the above requirements, the Amendments will require:

1. business operators that purport to provide personal data to a foreign third party upon the principal's consent to provide information on the system for protection of personal information in such foreign country, as well as information on protective measures to be taken by such third party to the principal in advance; and
2. business operators that have provided personal data to a foreign third party without the principal's consent (as permitted in the APPI) to take necessary measures to ensure that such third party will continuously implement protective measures for the provided personal data and to provide the principal with the relevant information upon request.

5. Guidelines Focusing on Big Data

The government's guidelines focus on matters that should be included in data contracts, meaning contracts relating to the utilisation, processing, transfer and other handling of data. The guidelines have a view towards promoting reasonable negotiations and execution of contracts, reducing transaction costs and diffusing data contracts, etc. in light of the fact that data contracts tend to be incomplete contracts that fail to cover any events that may occur after the execution thereof. The basic ideas are as follows:

1 Purpose

Because data contracts have not been broadly executed in general and contractual practices have not become standardised, data contracts are likely to cause various problems when they are executed in the future. The guidelines are aimed, with respect to data contracts that have the characteristics described above and for which no standard form is established, at reducing transaction costs and diffusing data contracts in order to promote the effective use of data. The guidelines accomplish these goals by presenting major issues and questions for each type of contract, and by providing examples of contractual terms that are easily accessible to the public and factors to be considered when preparing those terms.

The Ministry of Economy, Trade and Industry and other authorities have already published two sets of guidelines related to data contracts. First, the "Contract Guidelines for Promotion of Data Transaction", published in October 2015, presented the conditions, points and other matters relating to the provision of data by rights holders of the data, on the assumption that the rights holders can be clearly identified from among the interested parties. Second, the "Contract Guidelines on Data Utilization Rights ver. 1.0", published in May 2017, presented the consultation process for determining the holders of utilisation rights and the process for determining the contractual utilisation rights.

However, the two sets of guidelines above were not intended to comprehensively present the types and terms of all data contracts. Further, it is apparent from the rapid progress of AI and Internet of Things ("IoT") technologies in recent years that the environment surrounding data contracts has evolved dramatically on a daily basis, against a background of technological innovation that enables the collection, processing and analysis of enormous amounts of data. Therefore, the practice of drafting data contracts, and the guidelines for the discipline of that practice, must also respond to those drastic changes. Typical examples of the difficulties in this area are: (1) issues related to so-called data ownership; (2) issues of how to handle derived data when a contracting party creates, processes, or integrates new data; and (3) issues of how to cope with the increase in new types of contract in which data is shared and used by platforms that go beyond the existing boundaries of companies and affiliates. In addition, users of the previous guidelines have not only raised questions about the present situation where data distribution is taken as a given, but also made requests for more clear explanation on how the guidelines should apply to specific cases (use cases, etc.) and on points of concern in the handling of personal information and cross-border transactions.

Accordingly, these guidelines, which cover contracts regarding data, the value of which is often uncertain at the stage of execution, examine the positions of each party to those contracts based on the discussions of professionals on concrete cases, list matters that should be generally included in contracts after organising them by contract types, and provide examples of contractual terms and factors to be considered when preparing those terms.

Also, the Ministry of Economy, Trade and Industry is focusing on the relationship between AI and ethics and intends to issue the guidelines on AI governance related to ethical issues and legal issues within 2021.

2 Importance and issues of data distribution and utilisation

Recently, the amount of data related to transactions has explosively increased in connection with the promotion of, among other things, IT adoption in those transactions. In some cases, data creates added value when combined with other data, and the combination of multiple data across industries especially is expected to lead to open innovation. To enhance the added value of data and to strengthen competitiveness, it is important to expand the subjects and types of data to be used and to utilise that data in various combinations.

1. Promotion of data utilisation: In many cases, data itself is not valuable, and value is created only after processing and analysing data and developing methods for utilising the data for business activities. Therefore, it would be desirable, when conducting contractual negotiations, to empower the parties that have the method or ability to utilise the data, encourage those parties to utilise the data, and distribute profits gained from the data utilisation among the parties. Certain types of data create sufficient value only when collected in a certain amount. For example, real-time driving data of vehicles can be used for congestion analysis when the data of a large number of vehicles is collected, and that data creates value that cannot be realised simply by analysing the data of each vehicle. Similarly, in the case of data regarding the operational status of machine tools, etc., it becomes possible to perform statistically meaningful analysis on the operation of those tools only by accumulating data from a large number of tools. In these types of cases, the party that can collect and utilise the largest volume of data should be authorised to use the data. In connection with allocation of the utilisation rights, it is also important that the resulting interests are distributed among the parties in an appropriate manner. In order to collect, process, and analyse data and develop utilisation methods, etc., parties must make hardware investments, such as sensors and servers, as well as human investments, such as data analysts. It is desirable to provide incentives for these investments and to grant the parties making those investments appropriate profits (returns).
   
   
2. Concerns over damage caused by leaks and unauthorised use of data: There are certain risks in the distribution and utilisation of data. In general terms, data can be easily duplicated and, if there is no appropriate management system, may be leaked to the outside through unauthorised access. Therefore, when data contains a company's confidential information, the company may be anxious that trade secrets and know-how might be leaked out of the company through the provision of the data. Moreover, if any personal information is included in the data, not only may the industrial competitiveness of the parties be diminished, but privacy rights may also be infringed. In considering data distribution and utilisation in individual cases, it is essential to pay careful attention to the concerns about these risks. The risks may be minimised through appropriate contractual and technical measures, so the parties should understand those various measures to correctly evaluate the risks and benefits and to execute reasonable data contracts. The methods for preventing any leaks or unauthorised utilisation of trade secrets and know-how, etc. are described in section II above.
   
   
3. Increased complexity and sophistication of contracts and significance of these guidelines: If the parties to data contracts, which are a new type of contract for which the matters to be decided are becoming increasingly complex and sophisticated, can build reasonable business relationships for data distribution and utilisation at a low cost, the competitiveness of the parties as well as national competitiveness would increase, in combination with the application of laws, including the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (the "Antimonopoly Act") and the Unfair Competition Prevention Act. However, in light of the principle of freedom of contract, matters such as the selection of counterparty, determination of contents, and method of contracting are left to the choice of the contracting parties. Therefore, these guidelines only indicate the matters to be set forth in contracts and do not, as a matter of course, restrict any freedom of contract. Specifically, for the purpose of generally diffusing data contracts among various transactions, these guidelines introduce matters to be included in contracts executed between business operators for the distribution, utilisation, sharing, etc. of data. In order to increase the sophistication of contracts, it is necessary to remember that utilisation rights can be freely stipulated by contract. Since data is intangible by nature and is not subject to ownership, the utilisation rights can be freely determined between the parties by contract. Therefore, to increase the sophistication of data contracts, the parties should flexibly determine the conditions of use and should set forth specific details of the utilisation rights and other matters, with reference to these guidelines and taking into consideration the degree of contribution to the creation and utilisation of data and other factors.
   
   
4. Promotion of innovation: These guidelines aim to support parties who wish to distribute and utilise data, and to enable the utilisation of new, undiscovered value by not only promoting traditional innovations in which data is utilised through the efforts of individual companies without opening the data, but also by further expanding the possibilities of open innovation. Another purpose of these guidelines is to encourage the utilisation of data and promote open innovation by providing the concept of data contracts and contract terms, etc. and by giving consideration to various positions.

6. Competition Policy Focusing on Big Data and Platform Business

Potential problems under the Antimonopoly Act can emerge in cases where unilateral contract provisions, etc. are imposed against a backdrop of what amounts to a position of dominance in the negotiation of contracts between large corporations on the one hand, and medium-sized, small, and venture corporations on the other hand, or in cases where the parties conduct exclusive dealing and restrictive trading, etc.

1 Abuse of a dominant bargaining position

Abuse of a dominant bargaining position under the Antimonopoly Act (Article 2(9)(v)) can become a problem if there is a relationship of relative dominance between contracting parties. In this regard, the "Guidelines Concerning Abuse of a Dominant Bargaining Position in Service Transactions under the Antimonopoly Act", published by the Japan Fair Trade Commission ("JFTC"), state the following views:

1. In a service transaction, a service provider can suffer undue disadvantage if a service delegator with a dominant bargaining position abuses its superior bargaining position by unilaterally causing a service provider to assign (including through licensing) the service provider's rights in deliverables to the service delegator, or by restricting the use of deliverables, technologies, etc. for other purposes (i.e., secondary use) to an extent not contrary to the purpose of the service transaction, on the basis that the deliverables, etc. have been obtained in the course of the service transaction with the service delegator or have been created at the expense of the service delegator.
2. Even under those circumstances, however, abuse of a dominant bargaining position does not arise if consideration for assignment of the rights pertaining to, or for restriction on secondary use of, Derivative Products is paid separately, or if negotiations for consideration are conducted in a manner that includes consideration for the assignment or restriction.
3. By contrast, abuse of a dominant bargaining position does arise in service transactions that are unreasonably disadvantageous to the service provider, such as cases where consideration for the assignment, etc. of the rights pertaining to Derivative Products is unreasonably low or where the assignment, etc. of the rights pertaining to Derivative Products is essentially forced.

Accordingly, in contracts regarding the development of AI-based software between Vendors and Users where the terms and conditions are basically entrusted to the independent judgment of each party, abuse of a dominant bargaining position can occur if either party exploits a dominant bargaining position over the other party unjustly in light of ordinary business practices in order to delay the payment of the price, to reduce the price, to conduct a transaction or do-over for significantly lower consideration, or to unilaterally handle rights, etc. pertaining to raw data, a training dataset, a training programme, or a trained model for the use of AI technology (e.g., assignment of such rights and restriction on secondary use). However, abuse of a dominant bargaining position does not emerge in cases where appropriate consideration is paid separately for the assignment of rights or restriction on secondary use, or where negotiations for consideration are conducted in an appropriate manner that includes the consideration for the assignment or restriction, including conditions for income-sharing in secondary use.

2 Exclusive dealing and restrictive trading, etc.

Unfair trade practices under Article 19 of the Antimonopoly Act, such as exclusive dealing and restrictive trading, can occur when parties establish terms of use for AI-based software and stipulate contractual provisions for restriction on the use of such software.

In a licensing contract, the following act is, in principle, deemed to constitute an unfair trade practice: imposing an obligation to vest in the licensor or a business operator designated by the licensor the rights in improved technology developed by the licensee, or the obligation to grant an exclusive licence to the licensor with respect to that improved technology. Even if the rights or licensing were shared, that act would be considered an unfair trade practice if the act constituted an impediment to fair competition ((12) of the Designation of Unfair Trade Practices (Fair Trade Commission Public Notice No. 15 of 1982)).

By contrast, imposing an obligation to license the licensee's improved technology in a non-exclusive manner to the licensor does not, in principle, constitute an unfair trade practice if the licensee has the discretion to use the improved technology developed by the licensee. In addition, if the improved technology developed by the licensee cannot be used without the technology licensed by the licensor, it is generally understood that the act of imposing an obligation to assign the rights pertaining to the improved technology to the licensor for reasonable consideration does not constitute an impediment to fair competition. Furthermore, the act of imposing an obligation to report to the licensor any knowledge or experience obtained in the course of using the licensed technology does not, in principle, constitute an unfair trade practice unless, in effect, that obligation requires the licensee to license the know-how acquired by it to the licensor.

3 Platform business regulation

The Japanese government intends to introduce new regulations regarding the platform business industry, which includes global IT giants. In December 2019, the JFTC introduced its Guidelines concerning Abuse of a Superior Bargaining Position in Transactions between Digital Platform Operators and Consumers that provide personal information, etc. (the "Guidelines"). The Guidelines clarify the JFTC's view that a digital platform operator has a superior bargaining position over consumers who provide personal information because the consumers, who may be subject to detrimental treatment by the digital platform operator, are compelled to accept that treatment in order to use the services provided by the digital platform operator. The Guidelines also explain various examples of abuse of a superior bargaining position in this context, including a digital platform operator that: (i) causes consumers to provide personal information without stating the purposes of the use of that information, such as on a webpage or by other means; (ii) obtains or utilises personal information contrary to consumers' intentions and beyond the scope necessary to achieve the purpose of use, such as by providing consumers' personal information to third parties without consent; (iii) obtains and utilises consumers' personal information without taking precautions necessary and appropriate for ensuring the safe management of that personal information; and (iv) causes consumers who continuously utilise its services to provide economic interests, such as unnecessary personal information, in addition to compensation in exchange for the utilisation of services.

Furthermore, the Japanese government submitted a bill to the Diet aimed at improving transparency and fairness of transactions by digital platform operators. The bill is expected to apply to IT giants such as Apple, Amazon, Rakuten, and Yahoo!, and requires digital platform operators to disclose trading conditions and make prior notifications of amendments to those trading conditions. The bill passed the Diet in May 2020, and came into effect in 2021.

Outsourcing the creation of programmes is considered to be an "information-based product creation contract" under the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors (the "Subcontractors Act"). Under the Subcontractors Act, a business operator that places an order (the main subcontracting entrepreneur) is prohibited from delaying payment, reducing subcontract proceeds, and engaging in transactions, etc. for significantly low subcontract proceeds.

Originally published by ICLG: Data Protection 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.