1 February, 2018
On 4 November 2017, the Standing Committee of National People’s Congress (the “NPC”) adopted the amended Anti-Unfair Competition Law of the People’s Republic of China (the “Amended AUCL”). The Amended AUCL will become effective on 1 January 2018. It is comprised of five chapters regarding general principles, unfair competition behaviours, investigations, legal liabilities and supplementary matters.
To put things into perspective, there have been calls over the past years for a revamp of the current AUCL which has been in force since 1993. In response to the calls, the State Administration for Industry and Commerce (“SAIC”), which led the amendment initiative, set out three goals for the amendments: adaption to the evolving economic and social landscape, harmonisation with the Anti-Monopoly Law (the “AML”) and other legislations, and provision of further rules regarding, among others, investigation procedures and damages calculation1.The Amended AUCL reflects multiple rounds of comments from stakeholders. Draft amendments were published for comment in February 2016, February 2017 and September 2017, respectively2.
This note discusses the key changes as introduced by the Amended AUCL and the expected enforcement trends. A convenience translation of the Amended AUCL, including a comparison with the current AUCL as prepared by Linklaters, is also attached to this article for ease of reference.
Overview of unfair competition conducts
The Amended AUCL specifically prohibits the following seven categories of unfair competition conducts:
- Acts of confusion which make people mistake one company’s product for another company’s product (Article 6);
- Commercial bribery (Article 7);
- False or misleading statements in promptions ( Article 8)
- Trade secret infringements (Article 9)
- Unfair sales involving prizes (Article 10);
- Commercial deformation (Article 11); and
- Internet-related unfair competition conducts (Article 12).
As compared with the current AUCL, the rules under the Amended AUCL in relation to commercial bribery have been revamped most significantly and the Internet-related unfair competition clause is newly added. In addition, the Amended AUCL no longer provides for four types of unfair competition conducts now regulated under the AML or bid-rigging dealt with under the Bidding Law. We discuss each of the above specified unfair competition conducts in detail below.
Commercial bribery
The current AUCL provides that business operators should not commit bribery through the use of money or other means to purchase or sell goods. The Amended AUCL has re-shaped commercial bribery in the following aspects:
- the context is expanded from the “purchase and sale of goods” to a broader scope, “transaction” in general;
- an element of purpose is added, i.e. the commercial bribery is “to obtain transaction opportunity or competitive advantage”; and
- most importantly, the scope of recipients of bribes is re-defined. According to the current rules3 and enforcement practice, giving bribes to the direct transaction counterparty or a third party who has certain influence over the transactions could be considered to amount to commercial bribery4. By contrast, the Amended AUCL essentially requires recipients of bribes to be entities/individuals owing a legal duty to the transaction counterparty (employees or entrusted entities/individuals), or third-party entities/individuals who “have influence over the transaction”.
The redefined concept appears to suggest that giving benefits to the direct transaction counterparty would no longer constitute commercial bribery. This is widely considered to capture the essence of commercial bribery, i.e. offering undue benefits to a person acting for/on behalf of the direct transaction counterparty, with a view that such person would not properly perform his fiduciary duty owing to the direct transaction counterparty5.
Meanwhile, SAIC officials emphasized that the identification of a “transaction counterparty” shall not take a formalistic approach (for instance, by looking at who are contractual parties). The transacting counterparties should be determined based on who provides the products and who receives the products in substance. Taking the procurement of school uniforms as an example, although the school enters into the purchase agreement with the supplier, the parties to the transaction should be the students and the suppliers if the school is entrusted by students (or empowered by relevant regulations) to purchase uniforms form such supplier; if the supplier gives benefits to the school with a view to boost sales of the uniforms, it would entail risks of commercial bribery.
However, it should be noted that Article 7 still seems to keep some space to catch the act of giving bribery to a transaction counterparty if the benefits/discounts are not properly booked or recorded6. For example, a medical instrument supplier may lease medical instruments to a hospital free of charge to promote its sales of reagents.
Given that it would be very difficult for the supplier to record the value of the instrument in its financial books, such practice runs the risk of being regarded as commercial bribery. We note that in a recent notice promulgated by the SAIC7, it is also emphasised that authorities would pay close attention to medical instrument leasing behaviours in the future.
The Amended AUCL explicitly provides for the employer’s vicarious liability, as well as an exception. Specifically, commercial bribery carried out by an employee would be imputed to the employer, but the employer will not be held liable if it can prove that the employee’s bribery is not relevant to seeking transaction opportunities or competitive advantages for the employer.
Linklaters has separately prepared a client alert (available here) which discusses commercial bribery under the Amended AUCL in more detail.
Internet-related unfair competition
Another notable feature of the Amended AUCL is the introduction of a clause which specifically regulates unfair competition conducts in the context of the Internet. The current AUCL, which came into being at the time of conventional brick-and-mortar markets, does not provide specific rules for unfair competition conducts emerging amid rapidly-evolving innovation and technology. As a result, the courts had to apply the general provision under the current AUCL to pursue unspecified but unfair competition conducts in the Internet area.
Filling the gap, the newly added Internet-related clause provides detailed rules for Internet-related unfair competition conducts. Firstly, it sets out clearly that companies should not engage in the specified unfair competition behaviours during the operation of their Internet-related business. In addition, companies should not impede or disrupt the provision of Internet-related products/services by other companies by taking advantage of technical means to influence users’ choice. More specifically, the following Internet-related conducts are prohibited:
- “traffic hijacking”, i.e. one company inserts a link into another company’s online products/services, forcibly directing users to its own products/services without such company’s consent8;
- misleading, deceiving or compelling users such that they modify, close or uninstall another company’s online products/services;
- making, in bad faith, one’s own products/services incompatible with another company’s online products/services9; and
- other conducts which impede or disrupt the provision of Internet-related products/services by other companies.
It is worth watching how the enforcement authorities and courts would interpret these provisions and to what extent they would find other unspecified behaviours to constitute Internet-related unfair competition conducts in contravention with the Amended AUCL. In this regard, the SAIC officials, during a Q&A session, called for a prudent approach and striking a balance between protecting competition and promoting innovation when applying the Amended AUCL to the Internet sphere. It is yet to be seen whether an “effect-based” approach would be adopted.
Other unfair competition conducts
Acts of confusion
Article 6 of the Amended AUCL prohibits a business operator from making consumers perceive its products as others’ products or making them believe that its products are related to others’ products. The notable features of this clause include:
- “products with a certain level influence” are entitled to protection against bad-faith confusion caused by other products, which is broader in scope than the “well-known products” under the current AUCL; and
- a wide range of symbols/features are protected, including name, translation name, abbreviation, packaging, appearance, domain name, website, web page, etc.
False or misleading statements in commercial promotions
Article 8 of the Amended AUCL provides that a company should not make false or misleading statements in commercial promotions regarding its products’ performance, function, quality, sales volume, user rating, honours received etc., thereby defrauding or misleading consumers. The following aspects are noteworthy:
- the prohibited false or misleading statements can be in any commercial promotion context, noting that false advertisements are more specifically regulated under the Law on Advertisements;
- not only false statements, but also misleading statements are prohibited; and
- aiding or abetting the false or misleading statements by others, by way of, among others, organising false transactions (e.g. click farm), would also amount to a contravention.
Trade secret infringements
Article 9 of the Amended AUCL prohibits infringing others’ trade secrets. This clause remains largely unchanged except in the following aspects:
- the Amended AUCL no longer requires trade secrets to have “practical value” in order to be protected; and
- the Amended AUCL makes it clear that a third party would be held liable if it knows or should have known that the trade secrets it has received from a current or former employee of another company results from an infringement, but nonetheless accepts or uses such trade secrets.
Unfair sales involving prizes
Compared to the current AUCL, the Amended AUCL introduces a new type of prohibited conduct: the organiser providing unclear information on types of prize, terms of redemption or prize amount, thereby resulting in difficulty in prize redemption. In addition, the ceiling monetary amount for permissible lucky draws has been increased from RMB 3,000 to RMB 50,000 to allow for greater flexibility.
Commercial deformation
Under the Amended AUCL, one is prohibited from damaging the reputation of a competitor or its products by fabricating false or misleading information. As with the false or misleading promotions (see above), the addition of “misleading information” means that the prohibition also covers information which technically may not be “false” but would still harm competitors’ reputation in the same way as outright untrue information.
General provision on unfair competition conducts
In addition to the above specified unfair competition conducts, the Amended AUCL in Article 2 provides a definition of unfair competition conducts, which refers to conducts “disrupting the competition order in the market” and “infringing the legitimate interests of other business operators or consumers” 10.
The current AUCL also contains a similar general provision, based on which the courts in previous litigation cases determined that an unspecified behaviour would amount to an unfair competition conduct. Notably, the courts generally have been cautious in applying the general provision to capture unspecified unfair competition conducts, and their findings were highly case-specific and based on an examination of multiple factors, such as impacts on end-users and more broadly competition, commercial and technology innovation, as well as alleged conducts’ deviation from well-recognised business ethics and conventions, etc. It remains to be seen how the courts would apply the general provision under the Amended AUCL to behaviours which are not specified unfair competition conducts but are allegedly detrimental to competition.
It should be noted that the SAIC and its local offices are not empowered to apply the general provision to investigate to or penalise the unspecified conducts.
Reconciliation with the AML
The prohibitions against the following conducts, along with the legal liability clauses, are contained in the current AUCL but have been removed from the Amended AUCL:
- exclusive dealing requirements by a public utility company or a business operator holding a monopoly position according to law (Article 6);
- abuse of administrative power to impose exclusive dealing requirements or favour locally manufactured products (Article 7);
- below-cost sales (Article 11); and
- tie-in sales and imposition of unreasonable trading conditions (Article 12).
The above conducts are regulated under both the current AUCL and the AML (as abuse of market dominance or administrative power), but the legal benchmarks under the two laws differs, thereby resulting in confusions in compliance. With these four provisions removed from the Amended AUCL, the relevant conducts would be only subject to the scrutiny of the AML in the future11.
Enforcement power and penalties
The Amended AUCL expands the investigation power of the AICs, giving the authorities additional power to seal and seize the funding and property involved in the alleged conducts and access the relevant companies’ bank accounts12
These measures are usually considered effective and critical for uncovering wrongdoings.
As a check on the enforcement power, the Amended AUCL provides that a local AIC needs to submit a written report and obtain an approval from the chief official before taking investigation and evidence collection measures.
Sealing/seizing a company’s property or accessing a company’s bank accounts would even require the approval from the person-in-charge of the AIC at a higher level13. However, in practice, it may be difficult for companies under investigation to check whether the AIC on their doorstep has obtained the necessary approvals as the AIC does not have an obligation to present such approval along with the investigation notice.
The Amended AUCL also significantly increases the penalties for infringements. The penalty for acts of confusion increases up to five times the illegal gains14. The maximum fines for commercial bribery, defamations, trade secret infringements and Internet-related unfair competition conducts were raised from RMB 200,000 to RMB 3 million15. Where the circumstances are serious, the authorities are even entitled to revoke the infringing company’s business licence in case of acts of confusion, commercial briberies and false/misleading promotions16.
Another important change is that the Amended AUCL adds a clause to emphasise that the enforcement authorities have a confidentiality obligation to the business operators as to the information that they received during the investigation17.
Private enforcement
The Amended AUCL places importance on private actions, expressly stipulating that civil damages should take priority in the sequence of getting paid and enjoy preference over administrative and criminal fines18. The new law also clarifies the scope of damages – in addition to the actual harm caused by the alleged unfair competition conduct, the reasonable expenses incurred by the aggrieved party to stop the infringement (e.g. attorney’s fees) should also be borne by the infringing party19. With the introduction of these plaintiff-favourable measures, the Amended AUCL is expected to herald a wave of private actions against unfair competition conducts.
Conclusion
The Amended AUCL is expected to have far-reaching impacts on how companies conduct businesses in China. Companies operating in China are strongly advised to closely follow how certain key issues/rules (e.g. benefits given to the direct transaction counterparty) will be interpreted/implemented following the entry into force of the Amended AUCL. In the meantime, in light of the refined categories of specified unfair competition conducts and the more severe penalties, companies must re-evaluate their commercial practice and compliance policies and as appropriate to ensure full compliance
Please click here for the Appendix.
1 See Mr. Zhang Mao’s explanation about the proposed amendment on behalf of the State Council to the NPC Standing Committee’s session. Available at http://www.npc.gov.cn/npc/xinwen/2017-11/07/content_2031329.htm.
2 In February 2016, the SAIC prepared a draft revised law (the “February 2016 Draft”), which was submitted to the State Council. In February 2017, the Legislative Affairs Office of the State Council issued the first round of draft revisions for public comment (the “February 2017 Draft”), and in September 2017, the NPC released a second round of draft revisions (the “September 2017 Draft”).
3 For instance, see SAIC’s reply to the Issue of Travel Agency’s Acceptance of Personal Expense and Parking Fees by Shopping Mall (《国家工商行政管理局关于旅行社或导游人员接受商场支付的 “人头费”、“停车费”等费用定性处理问题的答复》).
4 The February 2017 Draft also used the term “third party that has influence over a transaction”. Under this draft, paying a third party who does not have any prior relationship with the business counterparty could be considered as bribery.
5 See Changes of the Amended AUCL and Its Impacts to Enforcements, by He Maobin; and Hot Issues Interpretation of the Amended AUCL by Zhang Shihai.
6 Article 7 of the Amended AUCL also provides that a company’s offering of discounts to the transaction counterparty would not amount to bribery provided that the payment and receipt of such discounts are properly recorded in the financial books of both the payor and payee.
7 See Notice to further Intensify Punishments to Anti-Unfair Competition in Medical Fields (《关于进一步加强医药领域不正当竞争案件查处工作的通知》) promulgated by SAIC on 21 August 2017.
8 As an example, in Baidu v. Qihoo, Qihoo’s antivirus software arbitrarily changed the search outcomes generated in Baidu’s search box and directed users to Qihoo’s affiliated websites. The Courts found Qihoo’s behaviours unlawfully hitchhiked users’ trust to Baidu search and unfairly obtained competitive advantage by directing Internet traffic to its own websites. See details in Beijing Intellectual Property Court (2015).
9 The second and third types of conducts were in dispute in Qihoo v Tencent. In this case, Qihoo misleadingly announced that Tencent’s instant messaging software QQ was “likely infringing users’ privacy” and suggested users uninstall it. As a counter-measure, Tencent suspended services to computers where Qihoo’s 360 antivirus software is installed.
10 The definition under the Amended AUCL is broadly in line with that under the Interpretation of the Supreme People's Court on Certain Issues Concerning the Application of Law in the Trial
of Civil Cases Involving Unfair Competition.《最高人民法院关于审理不正当竞争民事案件应用法律若干问题的解释》
11 Notably, the controversial “relative advantageous position” clause proposed in the February 2016 Draft is removed from the Amended AUCL. Under the proposed rule, companies are prohibited from abusing their relatively advantageous position (a term distinct from the term “dominant market position”) without justification, by, for instance, restricting their trading counterparty’s choice of business partners, requiring their trading counterparty to buy designated products, or unreasonably requiring their trading partners to provide economic benefits. This far-reaching prohibition drew much controversy during public consultation and was not included in the final Amended AUCL.
12 See Article 13 of the Amended AUCL.
13 Ibid.
14 See Article 18 of the Amended AUCL.
15 See Article 20, 21, 23 and 24 of the Amended AUCL.
16 See Article 18, 19 and 20 of the Amended AUCL.
17 See Article 15 of the Amended AUCL.
18 See Article 27 of the Amended AUCL.
19 See Article 17 of the Amended AUCL.
For further information, please contact:
Clara Ingen-Housz, Partner, Linklaters
cih@linklaters.com