On March 11 - 12, 2009, attorneys with Hogan & Hartson’s Beijing office participated in the EU-China workshop on Countering Unfair Competition and Passing Off (the workshop). We were the sole international law firm in attendance. The workshop was organized by the EU-China Project on the Protection of Intellectual Property Rights (IP Rights Project) in an effort to assist the Chinese government with its goal of better enforcing, or if necessary amending, the provisions of China’s Anti-Unfair Competition Law (AUCL) related to passing off. Other attendees included European competition and Intellectual Property (IP) Rights experts and officials from the State Administration of Industry and Commerce of the People’s Republic of China (SAIC) and its provincial-level branches. The primary focus of the discussion over the two-day workshop was the passing off as an act of unfair competition and the ability, or inability of the AUCL to deal with such a cause of action. In this edition of the China Update, we will brief you on the highlights of the workshop and the developments of the amendments to the AUCL.  

Background of the Amendment to AUCL and the IP Rights Project  

The AUCL took effect on December 1, 1993 when China’s market-oriented economic system was at the early stages of development. Since that date the Chinese economy has advanced at a rapid pace, as has market competition, but the AUCL has not kept pace. In fact, it has fallen short of effectively regulating unfair competition. The inadequacies of the AUCL are reflected in its lack of specificity, particularly in procedural and penalty provisions, as well as the lack of relevant regulations governing newly emerging acts of unfair competition. SAIC initiated the AUCL’s amendment process in 1997 and Chinese legislature has been pushing for its amendment for some time. Progress has been slow. China stepped up its efforts to amend the AUCL after its accession to WTO in 2001 in order to meet its WTO commitments and safeguard competition on the Chinese market, and in 2003, the legislative agendas of China’s legislature and the State Council, respectively, finally incorporated the long anticipated draft for amendments of the AUCL. The amendment process of the AUCL accelerated after China adopted the Anti-Monopoly Law of the PRC (AML) on August 30, 2007.

As currently drafted, the AUCL recognizes passing off as one of the major acts of unfair competition, however, the lack of procedures and penalties for bringing a claim have made enforcement for this type of conduct challenging. Amending the statute to address the gap may be equally challenging, passing off affects a wide range of products in China, therefore, the amendment to the provisions on preventing passing off in the AUCL is expected to have broad effect and to be closely scrutinized. In drafting the amendments, the Chinese authorities have been commendably receptive to the input of both foreign and domestic experts.  

The European Union (EU) has been a strong partner in this effort, offering expertise and technical assistance to the Chinese government and various Chinese institutions to help improve the effectiveness of IP rights enforcement in China, particularly through the IP Rights Project. The IP Rights Project was created as a result of commitments made by China and the EU at the EU-China Summit in Helsinki in September 2006. It is intended to assist China in updating the Chinese IP rights legal framework so as to render it more predictable, transparent, coherent and consistent with the WTO agreements. An updated IP rights framework will benefit both Chinese and European rights holders in their business development, as well as help the Chinese government enforce the law. Amending the AUCL is one of the specific tasks that the IP Rights Project has taken on in pursuit of this larger goal.  

Highlights of the Workshop

At the workshop, representatives from provincial-level branches of SAIC briefed the audience on AUCL enforcement related to passing off, drawing attendee’s attention to certain issues, including determining the existence of passing off, overlapping of the provisions under the AUCL and other laws, and supervising and sanctioning acts of unfair competition. The EU experts outlined the legal framework of protecting IP rights and preventing passing off under the EU competition law as well as the laws and regulations of several EU Member States. They also analyzed a number of high-profile EU cases in this area. Given the complexity of the topic and the limited time frame of the workshop, Chinese officials and EU experts focused on several key issues in the field of passing off and AUCL enforcement which are set out in detail below. As SAIC is drafting amendments to the AUCL, the Chinese officials and EU experts’ comments on the following key issues may significantly impact the amendments.  

Determining the existence of passing off  

As an initial matter, the officials and experts observed that as currently drafted, the AUCL does not adequately cover many commonplace unfair competition activities. Examples of such activities include:  

  1. Unauthorized use of trademarks that are identical or similar to other parties’ trademarks;  
  2. Unauthorized use of names, packaging or designs that are identical or similar to the brand names, packaging, design of well-known products;  
  3. Unauthorized use of an enterprise name, store name, or the abbreviation of an enterprise name;
  4. Unauthorized alteration of registered trademarks, enterprise names, packaging or design of products, and resale of these products in the market (the “reverse passing off”);  
  5. Inappropriate use of its own registered trademarks, design patents, or enterprise name;  
  6. Use of enterprise names that contain trade marks, product names, store names, or domain names that are identical or similar to those that other persons have used;  
  7. Use of domain names that contain trade marks, product names, store names, or domain names that are identical or similar to those that other persons have used;  
  8. Use of trade marks that contain product names, store names, or domain names that are identical or similar to those that other persons have used, or  
  9. Use of enterprise names that contain trade marks or trade names of other persons that are registered in other countries or regions and are well known to the public in China. These types of activities are misleading and cause customer confusion in the market, but the current version of the AUCL does not provide a sufficient remedy for this harm.  

The amended AUCL is expected to remedy this gap by defining all the above-mentioned activities as acts of unfair competition. Broadening the scope of the AUCL in this way would be a significant change to the Chinese legal framework surrounding IP rights. Coverage of reverse passing off, which is expected, would be a particularly notable expansion of the law as it would be the first time the AUCL addressed this issue, constituting a legislative break-through.  

The primary substantive focus of discussions between Chinese officials and EU experts at the workshop revolved around how to deal with unfair competition and passing off in the area of trademark, brand name, product packaging and designs. Chinese officials noted that when dealing with the existence of unfair competition and passing off, it is crucial to determine:  

  1. whether any similarity exists between the protected and infringing trademarks, trade names, product packaging or designs; and  
  2. whether the similarity of the trademarks, trade names, product packaging or designs has caused or will cause customer confusion in the market.  

The experts delved into these two issues in some detail.

  1. How to determine the existence of similarities between two products

The first step for determining the existence of passing off is to identify whether the trademarks, trade names, packaging or designs of the counterfeiting products are identical or confusingly similar to a registered or unregistered trademark, brand name, packaging or design of a wellknown product. In practice, Chinese officials generally use the following principles to decide whether there is any similarity:

  1. Whether an ordinary customer can distinguish a counterfeiting product from the infringed product if he or she only uses ordinary discretion to differentiate the two products. An ordinary customer is a customer that has ordinary intelligence, technology, and capability. It is not necessary for all customers to be misled by the counterfeiting product to reach a determination of similarity since different customers may have different judgment. As long as any ordinary customers may be misled by a counterfeiting product, the AIC officials will consider the counterfeiting product to be similar to the original products. If the products are for special use by professionals in a certain industry, then an ordinary customer will constitute an ordinary professional in that area.  
  1. The distinctive parts and the overall composition of the relevant trademarks, brand names, product packaging or designs will be compared. If the distinctive parts of the two trademarks, brand names, product packaging or designs are identical, they will be considered similar, even if the other parts of the trademarks, brand names, product packaging or designs are not similar to each other.  
  1. The distinctiveness and the reputation of the infringed trademarks, brand names, product packaging or designs will also be considered. The AIC officials at the workshop pointed out that it is much more likely for a well-known product’s trademark, brand name, product packaging or designs to be maliciously copied than other less known products. Therefore, in practice, the officials direct more attention to the protection of well-known products or trademarks. To determine whether a product is well-known, the officials will conduct a comprehensive examination on the product’s sales volume, distribution area, distribution period, market share, advertisement, and the customers’ degree of awareness.  
  1. How to determine the existence of customer confusion  

After they have determined that a similarity exists between a counterfeiting product and the infringed product, officials will consider whether the similarity has led or will lead to any customer confusion in the market.

If a plaintiff can prove that the similarity has caused customers to confuse a counterfeiting product with the infringed products, Chinese officials will deem that customer confusion exists in the market and will determine that a passing off act has taken place under the AUCL. If a plaintiff is unable to prove the actual existence of customer confusion, but can show that the similarity between the counterfeiting product and the infringed product is sufficient to cause customer confusion in the market, AIC officials will determine that passing off exists. The AUCL in its present form does not expressly cover this situation of proving the possibility of customer confusion as opposed to actual confusion, illustrating the need to amend the law. At the moment, the only applicable regulation consists of the Provisions Regarding Prohibiting Unfair Competition of Counterfeiting Well-Known Products’ Brand Name, Packaging and Design, which was issued by SAIC in 2003 explicitly covering this passing-off issue. An amendment to the AUCL is expected to cover this situation. Chinese officials will also find customer confusion in the market if the similarity between a counterfeiting product and infringed product mislead general customers to believe the two products are made by the same manufacturer, or to believe that the manufacturers of the two products are associated.

When determining whether the product similarity will cause customer confusion, the AIC official will consider the character of the products, the price, reputation, and distinctiveness of the product’s trademark, brand name, packaging, or designs.  

At the workshop, Chinese officials and EU experts discussed the use in some foreign courts, including courts in EU Member States, of customer surveys, often conducted by an independent organization or industry association, to determine whether any customer confusion exists in the market. Chinese courts have not adopted this mechanism. The EU experts noted that some Member State courts are growing increasingly reluctant to use customer surveys in making this determination due to concerns that the designs of the survey questionnaires and the manner in which the surveys are conducted have a significant impact on the survey results. Consequently, the survey results may not be entitled to much, or even any, evidentiary weight. Additionally, the costs of conducting the surveys are significant, and courts often need to hire experts to analyze the survey results. Therefore, EU experts did not highly recommend that Chinese courts adopt the survey mechanism.  

According to our experience, if a plaintiff can sufficiently prove the trademark, brand name, packaging, or designs of a counterfeiting product is very similar to that of an infringed products, the Chinese officials generally will consider the similarity to be sufficient to cause customer confusion in the market and will conclude the existence of passing off.  

Overlapping of provisions under the AUCL and other laws

The workshop also addressed the issue of conflicting and/or overlapping laws in the passing off arena. Specifically, there are a number of administrative regulations surrounding the AUCL that address certain facets of acts of unfair competition and passing off, such as counterfeiting or using unauthorized quality certifications, counterfeiting place of origin, providing a false or misleading indication of product quality, or providing false or misleading information through advertisements. Unfortunately, the definitions and requirements of these regulations sometimes overlap with, or conflict with, the AUCL. Further, these regulations and the AUCL sometimes impose different legal liabilities on the same violation, causing uncertainty and difficulty in the enforcement of law.  

For example, the AUCL and the Product Quality Law of the PRC (PQL) overlap in their provisions on passing off. According to the PQL, manufacturers and sellers must not counterfeit place of origin, or counterfeit or use the names and addresses of other manufacturers or unauthorized quality marks, such as certification marks and fine quality marks. Similarly, the AUCL provides that business operators must not counterfeit or use unauthorized quality marks, such as certification marks and well-known marks, or counterfeit place of origin, which provide misleading indications of product quality. Although the AUCL provides that business operators conducting such acts of passing off will be penalized in accordance with the PQL, uncertainties still remain because the AUCL and the PQL are enforced by different authorities. While SAIC and its local branches enforce AUCL, the General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ), and its local branches enforce the PQL. In practice, business operators may be subject to the supervision or sanction by both authorities.  

Another example is the overlapping of provisions on providing false or misleading information through advertisements under the AUCL and the Advertisement Law of the PRC (AL). According to the AL, business operators must not provide false information on products through advertisements. The AUCL also prohibits business operators from providing false or misleading information through advertisements or other means on the products’ quality, components, properties, usage, manufacturer, expiration date, production location or other items. Unfortunately, although the statutes prohibit the same conduct, they impose different sanctions. Under the AUCL, the authorities may order a violator to cease the illegal acts and eliminate the effect of such acts, as well as impose a fine of between RMB10,000 and RMB200,000. Similarly, under the AL however, the authorities can order the violator to cease publishing the advertisement, they can also require public corrections to eliminate the effect of such advertisement. Further, the amount of the fine which authorities can impose under the AL - from twice to five times the amount used for advertisement – differs from that set out in the AUCL. The terms of the AL provide that it prevails over any laws and regulations concerning advertisement promulgated before the enforcement of the AL that are in conflict with it, and as the AUCL was enacted before the AL, arguably, the AL overrides the AUCL in the above situation. But in practice, the authorities may still quote the AUCL for imposing liabilities, which may lead to uncertainties. Moreover, even if the AUCL does not apply to false or misleading information in advertisements, it does apply to the provision of false information through other means, which means that businesses will still face different sanctions for the same underlying conduct, which is unreasonable and unequal.  

Further, certain provisions in the AUCL, the Trademark Law, and the Company Law of the PRC also overlap, a fact which may cause difficulty in the authorities’ supervision and investigations, uncertainty in the enforcement, and/or inequality in legal sanctions for the same underlying conduct. Therefore, the Chinese officials and EU experts present speaking at the workshop advised that the amendments to the AUCL address these issues. For example, it is advisable for the final text of the amendments to the AUCL to adopt an article explicitly stating that if there is any conflict between the provisions under the AUCL and other laws in sanctioning the same act of unfair competition, those under the AUCL shall prevail.  

Supervision, Investigation and Legal Liabilities  

To allow officials to battle acts of unfair competition effectively, the AUCL must confer sufficient enforcement power to the authorities, and must provide the authorities with comprehensive guidance on the scope and means of acceptable enforcement. The enforcement power set forth in the current AUCL is weak and does not satisfy this criteria. For example, the current AUCL does not allow authorities to seize, detain, and freeze violators’ properties. Consequently, violators are not prevented from moving their properties or destroying evidence of their unlawful acts to evade sanctions. In addition, if a violator refuses to be investigated or to provide relevant information, the weak measures allowed for investigation and evidence collection under the current AUCL fail to provide the authorities with adequate power to move forward.  

At the workshop, Chinese officials called for strengthening authorities’ enforcement powers when amending the AUCL, acknowledging that the latest draft amendments to the AUCL does exactly this by adding provisions expanding government enforcement powers under the statute. For example, one amendment, if adopted, would allow the authorities to conduct onsite investigations of premises or properties suspected of being used for acts of unfair competition, and to check the bank accounts of businesses under investigation, as well as to ask the bank to freeze the accounts. In order to avoid the abuse of power, another amendment, if adopted, requires supervisory authorities to obtain prior approval of the principal person-in-charge of the enforcing authorities before exercising their power to suspend sales, seize and detain properties, or freeze bank accounts. Further, these restrictive measures must not exceed 15 business days. If the case is complicated, the period may be extended for another 15 business days. The authorities must make a decision during the period of the restrictive measures, and a failure to do so will be deemed as the lifting of the restrictive measures.  

Under the current version of the AUCL, violators’ liabilities include civil, administrative, and criminal liabilities. However, these provisions have proven to be problematic in practice. First, they fail to address the legal liabilities of a violator that refuses to be investigated or to provide materials truthfully. Violators have incentives to do so because the current sanctions lack deterrence. Second, for some violations, the AUCL only provides for the impositions of fines without providing for the confiscation of infringing properties. In addition, the maximum amount of the fine is relatively low, which in many cases leaves the violators with a profit margin, rendering the law without teeth. Finally, while the law requires that some of the fines be calculated based on the illegal income, in practice, the illegal income cannot be accurately ascertained. To remedy these gaps, the Chinese officials at the workshop suggested revising and supplementing the provisions on legal liabilities in the amendments to the AUCL on the following aspects:  

  1. Providing for heavier administrative liabilities so as to take full advantage of the expedience, efficiency, simplicity, and effectiveness of administrative enforcement;  
  2. Prescribing legal liabilities for violators who refuse to be investigated or to provide relevant materials truthfully;  
  3. Raising caps of fines to add deterrence; and  
  4. Changing the base for calculating fines from “illegal income” to turnover gained from the illegal acts.  

The Chinese officials acknowledged at the workshop that the latest draft amendments to the AUCL have added these provisions.

Conclusion  

In conclusion, discussions at the workshop reflected the major issues with which the Chinese government is concerned in its process of amending the AUCL. Also, the workshop indicated that the Chinese competition authority is willing to learn about the EU’s experience while preparing for the amendments to the AUCL and its implementing rules. Since the AUCL and the drafts of its future implementing rules contain quite a number of elements similar to the EU competition law, specific rules resembling EU competition law are reasonably expected.  

Currently, China’s anti-monopoly enforcement authorities, including SAIC, the National Development and Reform Commission and the Ministry of Commerce, also invite EU experts to attend workshops on various topics on the enforcement of the Anti-Monopoly Law of the PRC (AML). As the AML and the AUCL set up the basic legal framework of China’s competition law, EU’s experience may influence China’s competition legal framework as a whole.