Guest Article by Rainer Burkardt (Burkardt & Partner)

Introduction to the topic:

The legislative affairs office of the state council released a draft revision of the law against unfair competition. The Law of the People’s Republic of China against Unfair Competition currently effective has come into force 23 years ago. As the face of China is changing rapidly and the China from two decades ago is a different China than today, China´s market is in dire need for a new law against Unfair Competition.

This article shall introduce some interesting key points of the draft law against unfair competition and the effect on companies in China, if the law is enacted.

I. Introduction

On February 25, 2016 the legislative affairs office of the state council released for the first time after 23 years a draft revision of the law against unfair competition (“Draft Anti-Unfair Competition Law”) for public review.

The current Law of the People’s Republic of China against Unfair Competition (“Current Anti-Unfair Competition Law”) is effective since December 1, 1993 and has not been amended since its effective date.

In the past there have already been plans to change the Current Anti-Unfair Competition Law. However, until recently, the PRC legislator prioritized other projects, as the new anti-monopoly law from August 1, 2008 or in the revised trademark law from May 1, 2014 for promoting fair trade within the PRC.

As the Current Anti-Unfair Competition Law dates from a time when the People’s Republic of China (“China”) mainly produced for an export market, whereas nowadays the local market becomes or is already more important and there is a fierce competition between Chinese companies and foreign invested companies in China for the Chinese customer, there is no doubt that China is in need of a new anti-unfair competition law.

The Draft Anti-Unfair Competition Law, which is open for comments until March 25, 2016, changes 30 of the 33 articles of the Current Anti-Unfair Competition Law, if enacted in its current draft version.

This article highlights some of the most interesting changes of the Draft Anti-Unfair Competition Law and also suggest additional  changes which to our opinion are missing in the Draft Anti-Unfair Competition Law.

II. Logos and trade names

The Draft Anti-Unfair Competition Law introduces a protection for non-registered trademarks, whereas the term “non-registered” most likely refers to “not registered in China”.

In the past it was difficult for foreign but also domestic trademark owners, who did not register their trademarks in China to take actions against trademark infringements. This problem has already been addressed and at least partly solved in the existing PRC trademark law.

However, unfortunately the Draft Anti-Unfair Competition Law also introduces a threshold that a trademark, which has a not been registered in f China is required to be a “well-known” trademark to effectively act against infringements. Respective disputes in the past have shown that proving to be a well-known trademark is difficult and often – especially for the so called “hidden champions” – not possible.

As the administration of industry and commerce (“AIC”) is responsible for  anti-unfair competition cases as well as for trademark related disputes, it is likely, that the AIC will apply the same thresholds for recognizing a trademark as a “well-known trademark” also in anti-unfair competition cases.

III. Anti-Monopoly

The Draft Anti-Unfair Competition Law restructures anti-unfair competition based on a “dominant market position”.

These changes were necessary to complement the Antimonopoly Law from 2008.

In comparison to the Antimonopoly Law the Draft Anti-Unfair Competition Law sets a lower threshold for a “dominant market position”.

Whereas the antimonopoly law defines a “dominant market position” as a “position held by undertakings that are capable of controlling the prices or quantities of commodities or other transaction terms in the relevant market, or preventing or exerting an influence on the excess of those undertakings to the market” – in short a dominant position in the field of industry over all -, the Draft Anti-Unfair Competition Law defines a relative dominant position as sufficient conditions for restrictions, meaning by legal definition that the company requires to have a “position in terms of funds, technologies, market entry, sales channels, purchase of raw materials and other aspects in the course of a specific transaction and the transaction counterparty is dependent on such business operator and test difficulties in turning to other business operators” or in short in the specific relationship is dominant and without alternatives. This “relative dominant position” may protect weaker counterparties of transactions, of which the dominant party is not strong enough to dominate the market, but still strong enough to make the weaker party dependent, e.g. due to a special technology or a wide sales network.

Whether such protection will actually be effective for “small businesses” or whether in practice will be a paper tiger will depend on the practical application of the regulation.

IV. Commercial bribery

In the light of the recent anti-bribery campaign, especially the part in the Draft Anti-Unfair Competition Law regarding bribery has received special attention. Other than the Current Anti-Unfair Competition Law the Draft Anti-Unfair Competition Law offers a legal definition of commercial bribery.

Remarkable are the changes from the Current Anti-Unfair Competition Law, which only considers “off-the-book rebates” as bribery, whereas at the Draft Anti-Unfair Competition Law considers “any payment of economic benefits without making a truthful record thereof in the contract or other accounting documents” as an indication for bribery.

Also the Draft Anti-Unfair Competition Law clearly states that a company is responsible for bribes of an employee which is made for the benefit of the company and it furthermore includes bribery to third parties which have influence on a transaction.

If the Draft Anti-Unfair Competition Law is enacted, especially the documentation requirements will be an issue. Companies will have to keep a close eye on such new requirements, as to avoid being considered having provided bribes.

V. Trade secrets

Though the core regulations regarding trade secrets in the Draft Anti-Unfair Competition Law are similar to the Current Anti-Unfair Competition Law, it is remarkable that the Draft Anti-Unfair Competition Law introduces a “shift of burden of proof”, with the consequence that  a holder of a trade secret who can proof that such secret is used by another person, such other person is obligated to proof that the trade secret was obtained legally.

This shift of burden of proof will, if the Draft Anti-Unfair Competition Law is enacted, on the one hand offer a better protection for the holder of trade secrets and on the other hand companies will have to carefully document, on how they obtain their business information.

VI. Anti-Dumping

It is also noteworthy that the prohibition of sales of products under their production cost from the Current Anti-Unfair Competition Law was removed completely in the Draft Anti-Unfair Competition Law.

The removal of the anti-dumping clause cannot be explained by making reference to the anti –dumping laws from 2001, as those anti-dumping laws only refer to the import of “dumping prized products”. At the time being it is unclear, whether an anti-dumping prohibition shall be abandoned for domestic products, which seems unlikely, or whether such prohibition shall be moved to another law or into the catch all clause as maybe introduced by the Draft Anti-Unfair Competition Law.

VII. Misinformation

It is especially noteworthy that the Draft Anti-Unfair Competition Law includes a prohibition for businesses  to spread malicious evaluation, incomplete information or information, to injure another person’s business credit or product reputation which cannot be proven. This addition is most likely contributable to the malicious, but not uncommon, business practice to spread rumors about competitors on social networks. Even without such prohibition, Chinese courts already started to counteract this behavior, as in the case of a well know fast food chain, which was slandered by a news portal, by spreading information that the chain processes mutated chicken for its products. The courts granted a damage compensation for the fast food chain against the publisher of the news.

If enacted, the Draft Law will further support such verdicts.

VIII. Network Services

Also unfair competition regulations in telecommunication service industry  were added in the Draft Anti-Unfair Competition Law. However, the definitions are wide and it remains to be seen how the scope will be applied in practice.

 IX. Catch all clause

The Draft Anti-Unfair Competition Law includes a “catch-all” clause, which provides the AIC with the power to define further elements of an unfair competition.

Such clause may be a blessing, as the AIC may react quicker on new unfair competition methods than the legislator, but it may also be a curse, as the state council in the past tended to overregulate and thereby may smother legitimate business practices.

X. Responsibilities and penalties

As to be expected, the Draft Anti-Unfair Competition Law tighten penalties, which are in place since 23 years – e.g. in case of misinformation the fine under the Current Anti-Unfair Competition Law is limited to RMB 200,000.-. The Draft Anti-Unfair Competition Law constitutes a maximum fine of up to RMB 1 million or five times of the illegal business revenue if provable. However, it is more interesting that the Draft Anti-Unfair Competition Law includes an “assistance clause”, based on which a party which is clearly aware or should be aware of acts of unfair competition facilitates acts of unfair competition, e.g. by warehousing, transporting or providing technical support. Based on such new clause- such party may be fined with a penalty of up to RMB 1 million. However, such fines may be mitigated if the accused supports the investigations into the acts.

XI. Conclusion

Even though some urgent requirements for a fair-market have already been addressed by other laws like the trade mark law or the anti-monopoly in the past, the Draft Anti-Unfair Competition Law introduces several changes, which are required to bring the Current Anti-Unfair Competition Law up to the requirement of the modern marked.

However several amendments, which the business community may has hoped for, like a simplification of protecting unregistered trademarks are still missing and even worse, some important regulations like the anti-dumping prohibition maybe abolished in the future.

Also several regulations of the Draft Anti-Unfair Competition Law like the anti-unfair competition clauses regarding networks require further clarification. It can therefore be concluded that the Draft Anti-Unfair Competition Law is a step in the right direction, but clearly requires further refinement in its details. 

Note: This article is for your information only and does not contain any specific statements to individual cases. We therefore assume no liability for the content of the article.
 

About the Author

Mr. Burkardt’s practice focuses on foreign direct investments, mergers and acquisitions, and labor law. He predominantly counsels for companies headquartered in Austria, Germany and Switzerland in the automotive, chemicals, food, machine building and engineering industries that are entering or operating in China. 

Living and working in China for 18 years, Mr. Burkardt belongs to the few German lawyers who own a longtime China experience.

He was a member of the Board of Directors of the German Chamber of Commerce in Shanghai from 2008 to 2010 and was appointed as the trusted lawyer of the Consulate General of Austria in Shanghai by the Austrian Government in 2009.

For two years, he served as Vice-chair of the European Union Chamber’s Legal Working Group, Shanghai before he was elected as Chairman in 2010. Since 2013 he is appointed arbitrator at the Shanghai International Economic and Trade Arbitration Commission (SHIAC).

He is the author of articles in several PRC-related magazines, co-author of the WKO Fachreport and a frequent speaker at PRC-related seminars.

Website of Burkardt & Partner Rechtsanwälte (in German)