The Anti-Unfair Competition Law of 1993 (the current law) has been in effect since 1993. It seeks to regulate an array of conduct that the government considers to be ‘unfair’ competition, ranging from a statutory form of passing off and misappropriation of trade secrets to competition law provisions governing predatory pricing and tie-ins, to administrative law provisions governing abuse of administrative powers, provisions against bribery and unlawful discounts, and consumer protection provisions on misleading advertising and the organisation of lotteries.
The current law did not have to be revised as a precondition to China’s entry into the World Trade Organization.
Reflecting the rapidly evolving Chinese legal landscape, including in particular numerous revisions to intellectual property laws and the promulgation of the PRC Anti-Monopoly Law, on 25 December 2008, the State Administration for Industry and Commerce (SAIC) delivered to the State Council for approval a draft amendment to the PRC Anti-Unfair Competition Law. As and when the State Council approves the draft amendment, it would then be submitted to the Standing Committee of the National People’s Congress for consideration and potentially further revision before it can be adopted and take effect.
The proposed revision set out in the draft amendment is extensive, covering changes to 26 of the 33 articles under the current law as well as a proposal to introduce 11 new articles. Its key aims are:
- to strengthen the protection of goodwill to safeguard
- investment and efforts in providing quality commodities;
- to detail the provisions governing bribery to protect fair and healthy competition;
- to regulate the activities that amount to an abuse of ‘advantageous positions’ that are not apparently covered by the Anti-Monopoly Law;
- to introduce a ‘catch-all’ provision that permits the SAIC to define conduct that constitutes ‘unfair competition’; and
- to grant the administrative authority broad enforcement powers and increase penalty levels.
This briefing will discuss a selection of the measures that are proposed and that reflect these five key initiatives.
Protection of goodwill
As mentioned above, one of the key policy drivers behind the draft amendment is the Chinese government’s commitment to the protection of goodwill and its desire to encourage investment in brand promotion. The government seeks to implement this in a number of ways, outlined below.
Protection of unregistered marks
Article 5(4) of the draft amendment provides that no undertaking is allowed to use, without authorisation and in a way that may cause confusion to the public, a trade mark identical to or similar to a third party’s trade mark, which trade mark has been used by that third party and is known to the public in China.
This is a significant development because it means that a mark may potentially be protected from the risk of passing off even if it has not been registered in China or is not well known in China. The scope of protection is broader than that provided under the current law, which requires unregistered marks to be well known in China before protection is available. It is also broader than protection currently provided under the Trademark Law, which protects only registered marks and well-known marks (within the meaning of the Paris Convention). This proposed extension may benefit foreign companies that have not yet registered their marks in China and may have difficulty in proving that their marks are well known in China, but may be able to establish use and that the mark is ‘known to the public’.
‘Reverse infringement’ of brands prohibited
Article 5(5) prohibits ‘reverse’ brand infringement. This conduct involves removing or obscuring the original mark placed on a product by a trader with a different mark without the trader’s authorisation and placing the product onto the market. This newly added article extends the scope of brand protection currently available under the Trademark Law, which only prohibits an undertaking from attaching another’s mark to its own product without authorisation.
Other unfair competition activities in connection with the protection of goodwill
The draft amendment also seeks to strengthen the protection of goodwill in marketing and sales activities by introducing a number of prohibitions, including:
- using a third party’s trade name or an abbreviation of its enterprise name (unauthorised use of full enterprise names is already provided for in the current law), thereby causing confusion to the public between the third party’s product and its own product (article 5(3));
- false or misleading descriptions on products or their packaging concerning, among others things, price, place of origin or after-sales services (article 7); and
- fabricating or spreading false or misleading information (including through comparative advertising) so as to damage the goodwill of competitors or the reputation of their products (article 8).
The draft amendment prohibits undertakings from giving an individual or an entity property, or any other form of benefit, to obtain business opportunities or favourable business conditions in return. Such property or benefit amounts to a bribe, which is broadly defined to include payments such as reimbursement of expenses that are not properly recorded in financial accounts.
Prohibition on abusing an ‘advantageous position’
Prohibition on improper business conduct by abusing advantageous position
Article 15 of the draft amendment proposes introducing a series of provisions that prohibit undertakings from using their ‘advantageous position’ (as opposed to the significantly higher threshold requirement of dominance under the Anti-Monopoly Law) to engage in various types of anti-competitive conduct, including:
- unreasonably requesting economic benefits from a transaction counterparty;
- unreasonably requiring a transaction counterparty to purchase goods or services designated by the undertaking;
- unreasonably limiting the business activity of a transaction counterparty; and
- unreasonably requiring the counterparty to accept other unreasonable transaction terms.
The draft amendment does not specify the relevant standard for identifying an advantageous position and it is also unclear what is required to establish the ‘unreasonableness’ of the conduct in question. These provisions could potentially be problematic to the conduct of legitimate competitive behaviour. Further policy guidance is expected on this point.
Article 17 of the draft amendment introduces a broadly worded ‘catch-all’ provision providing that unfair competition arises if conduct violates a wide range of principles, including those of fairness, equality, honesty and good faith, public order and commonly accepted business ethics, and such other unfair competition activities as shall be stipulated by the SAIC.
Investigations and penalties
Powers of investigation
The draft amendment expands the scope of the SAIC’s enforcement powers and those of its local bureaux at the county levels or higher (the AICs), which are responsible for the day-to-day enforcement of this law. The powers proposed to be granted to the SAIC and the AICs are in line with those granted to the Anti-Monopoly Law enforcement authority and would allow the authorities to carry out ‘dawn raid’-style investigations.
Despite the breadth of enforcement powers and the intrusiveness of their exercise on day-to-day business operations, the draft amendment does not provide for procedural safeguards, such as the grounds on which AICs may initiate an investigation and the time period in which they should complete an investigation or the maximum time period in which the authority is able to take certain measures (such as seizing products or freezing bank accounts).
The draft amendment imposes higher penalties on most of the violations. A brief comparison of the penalty levels under the current law and the draft amendment is set out in the table above.
We continue to monitor developments in this area.