International April 2016

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China:Unfair Competition Law

The National People’s Congress authorized in 2014 the State Administration for Industry and Commerce (SAIC) to issue a draft revision of the Anti-Unfair Competition Law (AUCL) of the PRC, which was first enacted in 1993. This new draft brings major changes to the AUCL and may change the approach foreign companies take towards China.

The State Council Legislative Affairs Office published on February 25th, 2016 the draft for public comments due on March 25th, 2016. It has been described as proof of China’s consistent effort in working towards the establishment of a comprehensive legal system to protect competition and intellectual property in its economy (China Issues a Draft of its New Law Against Unfair Competition and Passing Off by MMLC Group).

This clarity also happens to bring its load of complication.

Three major subjects are being targeted by the draft:

  1. The increase of the types of conduct that constitute unfair competition

  2. The increase of administrative enforcement penalties

  3. The clarification of the administrative enforcement authority

These subjects are important regarding competition and intellectual property in China and as such should be looked into more thoroughly. Indeed, the complexity of the clarification will weight on investors to be more attentive regarding the AUCL.

A commercial mark refers to the distinction between producer or operator logo…

  1. Increase of the types of conduct constituting unfair competition

Article 5 of the AUCL has been revised to become more extensive. It seeks to further define commercial mark to avoid market confusion. A commercial mark refers to the distinction between producer or operator logo, including but not limited to a unique name, packaging shape, decoration, product name, trademark, name or its abbreviation of an enterprise and enterprise group, the main part of a domain name, website name, pseudonym, stage name and so on.

Article 5 uses the definition of a commercial mark to extend the list of market confusion acts. This article demonstrates the modernity of the draft by including anticompetitive online conduct to the list. This addition has been made considering the fact that online conducts are different from conducts found in traditional physical markets. Article 13 of the revised draft provides for the use of network technology or application service to engage in acts that may affect user choices, emphasizing the modern aspect of the draft.

After the public comments are taken into account and the draft finalized, it will be important to take notice of the definition of a commercial mark and to stand within the law. As the definition as become more precise, any misstep can be sanctioned.

Furthermore, Article 6 of the revised draft has also been extended and includes a definition of relative dominance, clarifying the term and its cases of application. Its latest case of application (attaching other unreasonable trading conditions) enables the draft to cover additional conduct without limitation.

This last case of application should not be taken lightly: the general phrasing allows the People’s Courts to consider any situation as one of relative dominance. A previously unbalanced partnership on a specific market could very well be considered as abuse of dominance under the new law.

Comparing to its current form, these articles supply precisions to the legal terms and it must be paid attention to as the penalties have too been targeted by the draft.

  1. Increase of administrative enforcement penalties

The increase of administrative enforcement penalties is considerable and acts as deterrence effect against those who wish to go above the law. The following example will illustrate the escalation of the penalties compared to the current AUCL.

The current Article 21 grants a penalty of merely a fine not less than one time but not more than three times the illegal earnings.

The increase of administrative enforcement penalties is considerable…

However, Article 18 of the draft reads that if a business operation violates the provisions of Article 5, the supervision and inspection department shall order cessation of the illegal acts and confiscate illegal merchandise, and impose a fine of less than five times the amount of illegal revenue if the illegal revenue is more than RMB 50,000, and in serious cases, may revoked the business’ license; impose a fine of less than RMB 250,000 if there is no illegal revenue or if the illegal revenue is less than RMB 50,000; impose a fine of more than RMB 100,000 and less than RMB 1,000,000 according to circumstances, if the illegal revenue cannot be calculated.

The penalties have been raised and the range widen, allowing a choice for the competent authorities. Considering this, investors must be vigilant when taking action in China.

With a choice offered to the judge against foreign companies, the smallest penalty might not often be chosen. Because of this, the increase of administrative enforcement penalties might be the most threatening measure of the draft.

  1. Clarification of the administrative enforcement authority

Article 3 of the draft reads that the administrative departments of industry and commerce of the People’s governments at or above the county level, shall exercise supervision over, and inspects of, acts of unfair competition; where laws or administrative rules and regulations provide otherwise, relevant departments may also exercise supervision and inspection in accordance with those provisions.

The draft clarifies the administrative enforcement authority of the AUCL to be the SAIC. This clarification will address conflicts arising under the existing law as other agencies such as the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and the Ministry of Culture and Pricing Bureaus had authority if separately specified under applicable law or regulations (Article 3, AUCL). This will allow a simplification in the litigation process.

This clarification has few consequences for foreign companies: it only provides the competent authority regarding these matters. However, it is good to know the supposed competent administrative enforcement authority.

The draft as such appears to be complete and moves the discussion forward on competition and protecting intellectual property.

However, some concerns have been raised again the lack of provisions providing for evidence (discovery of evidence, evidence preservation and preliminary injunctions). By targeting online markets, the draft must not forget to also cover the evidence part of the investigation process.

Moreover, it has always been difficult to force an enterprise name to change in the local SAIC offices often due to local protectionism. Many local officials also do take actions to force a name change when the entity involved is engaged in counterfeiting or the selling of knockoff products involving the trademark owner’s registered or unregistered trademark. Article 5 of the draft seems to be a good first step but further responsibility needs to be given to SAIC officials. This will allow for a more satisfactory result in what is one of the most unsatisfactory areas of trademark law in China.

The draft clarifies the administrative enforcement authority of the AUCL to be the SAIC.

It is likely that some of these concerns will be addressed in the public comments but if not, foreign companies will have to be mindful with their competition actions and intellectual property rights in China.

Even if the new legislation brings novelty through precision, this should not cause worry at the moment. It will take time for the new AUCL to come into effect and as mentioned previously, local officials are in no rush.

*With the collaboration of GWA-ASIA.