Amend People’s Republic of China’s Unfair Competition Law

by Shu on January 2, 2009

in Regulatory Compliance

 

The People’s Republic of China is considering amending the current law related to Unfair Competition. Originally enacted in 1993, a draft amending the law written in 2006 is currently in circulation and is open for comments to invited parties. One such invited party is the American Chamber of Commerce (Amcham) in Shanghai. As a member of its Legal Committee, Diaz Reus’ Chief Representative in China was appointed a member of the Taskforce organized to draft comments on Amcham’s behalf.

The draft law, in some respects, is an attempt to make it more sophisticated and in-line with developed countries. Clearly, it is designed to help protect companies in China, many of which are foreign, that have invested in and fostered its company’s brand name. The draft law lists fifteen (15) separate offenses considered to be unfair competition. There are the standard offenses found in developed countries such as unauthorized use of TMs, domain names, trade names as well as passing-off and trade dress. It is not uncommon for Chinese domestic companies (or domestic companies from any other country) to use another company’s IP, trade name, famous mark, or other indicia of notoriety as its own for profit. This, of course, can result in lost sales and possibly loss of goodwill if the offending company produces an inferior product and a customer associates it with the company whose IP or likeness is taken without authorization.

The enforcement mechanism is not done through private parties but one that involves the government. If a foreign company in China suspects an enterprise located in China from using its IP or likeness, it can file a complaint with the State Administration of Industry and Commerce (SAIC). If the complaint and supporting documentation are sufficient and the SAIC has the required “suspicion”, it then has the power to investigate. These powers to investigate are broad and invasive. They include:

1. ENTRY onto the premises;

2. REQUEST materials related to unfair competition activities;

3. COPY agreements, accounting books, vouchers, documents, records, business fax or letters, electronic evidence, and other materials

4. ORDER an explanation of the source and quantity of the commodities

5. ORDER a stop sale, to wait for further investigation, not to move, hide or eliminate the relevant illegal properties.

6. SEIZE and DETAIN relevant properties, vouchers, accounting books, and other materials, the business establishment

7. REQUEST bank account information

8. NOTIFY the banks to temporarily stop payment

Investigative powers four through eight require approval from the government department’s head. Notwithstanding, the lead investigators have significant ability to inconvenience the suspected company by demanding documents related to the suspected activity.

After the SAIC concludes its investigation it will then make its Determination (findings of fact and recommendations). It then has 10 days to file a report and submit it to the SAIC-Beijing office. SAIC-Beijing has the final authority to approve or change the Determination at its discretion.

If the infringing company is found to have committed unfair competition, then it is liable to the innocent company. Typically, the maximum amount of the fine is about US$150,000 plus any investigative costs the innocent company incurs.

 Though there are common offenses which most foreign lawyers are familiar with in an unfair competition sense, there is one off-beat offense – “commercial bribery”. There are four separately defined acts that are considered to be “commercial bribery” and one of them actually might hinder competition and hurt consumers. If a company gives a 3% “discount” in a business transaction, then it is considered to have committed unfair competition. The probable intent of this language was to penalize those who do not properly record this discount. China is battling against a wide-spread problem of those who don’t properly record such discounts which are commonly referred to as kickbacks. They are perfectly legal, but must be recorded in accordance with standard accounting practices. Notwithstanding, as the draft reads now, this is considered unfair competition and will subject the offender to a maximum fine of 2,000,000 RMB (about US$300,000). If it is considered “serious” (which is undefined) the case can be sent to a Prosecutorial agency for criminal proceedings. This is one such provision that Amcham is seeking clarification and possible change.
 

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