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China Announces Crackdown Campaign Against Unfair Competition Activities

June 27, 2018

China’s State Administration for Market Regulation recently announced an enforcement sweep to promote the implementation of its amended Anti-Unfair Competition Law. The crackdown campaign, which began in May and will continue through October 2018, focuses on market confusion acts, trade secret infringement, commercial bribery, and internet-related misconduct. Key areas in the spotlight include online transactions and the pharmaceutical and education industries.

This LawFlash provides details about the ongoing crackdown campaign.

Background

On November 4, 2017, the Standing Committee of the National People’s Congress of the People’s Republic of China adopted the amended Anti-Unfair Competition Law of the People’s Republic of China (Amended AUCL), the first significant revision to the Anti-Unfair Competition Law (Old AUCL) passed in 1993. The new law took effect on January 1, 2018.

The current crackdown campaign seeks to enforce implementation of the Amended AUCL, including in the following areas:

Infringement of Intellectual Property Rights

Legal Basis

The State Administration for Market Regulation (SAMR) cites Articles 6, 9, 18, and 21 of the Amended AUCL as the legal bases for its intellectual property enforcement actions, which will cover market confusion acts and trade secret infringement, among other areas.

According to Article 6, market confusion acts refer to actions taken by a company to cause consumers to mistake its product for the product of another company, or to believe that there is a certain relationship between the company’s product and that of another company. The legislature has added two new types of market confusion acts in Article 6 of the Amended AUCL: (1) unauthorized use of names of well-known social organizations, and (2) unauthorized use of the well-known domain names, website names, or webpages of others. Simultaneously, the Chinese legislature has removed two types of market confusion acts that appeared in the Old AUCL: (1) counterfeiting the registered trademarks of others, and (2) falsely using symbols of quality on products, falsifying the origin of products, or making false and misleading representations as to product quality. However, these remain prohibited under the PRC Trademark Law and the PRC Product Quality Law.

Article 9 of the Amended AUCL concerns trade secret infringement. This article remains largely unchanged, except that (1) the Amended AUCL no longer requires that trade secrets have “practical value,” and (2) a third party will now be held liable if the third party knew, or should have known, that trade secrets it accepted and used from a current or former employee of another company were obtained illegally.

Article 18 stipulates the potential legal consequences that could follow from a violation of Article 6, including an order to cease the infringing acts, a confiscation order in respect to the infringing commodities, and/or administrative fines. Article 18 also increases the maximum amount of administrative fines that can be imposed. Under the Old AUCL, administrative fines could be imposed of up to three times the illegal turnover. Under the Amended AUCL, fines can be imposed of up to five times the amount (if illegal turnover is greater than 50,000 renminbi ($7,608)), or up to 250,000 renminbi ($38,030) (if illegal turnover is less than 50,000 renminbi ($7,608), or if no illegal turnover is generated). In addition, the second prong of Article 18 offers a penalty of mandatorily changing the registered name of an entity whose name is found in violation of Article 6.

Article 21 provides the penalties for violating Article 9, including an order to cease the infringing acts and an administrative fine of up to 3 million renminbi ($456,330).

Focused Enforcement Area

According to SAMR’s announcement, the enforcement actions focus on protecting the trade secrets of industry-leading companies, well-known trademarks, influential names, and science- and technology-oriented enterprises; market confusion acts and false promotion in rural markets and rural-urban fringe zones; and articles of daily use, general merchandise, alcohol, and similar products.

Typical Case

In March 2018, Yiwu Xing Bang Internet Technology Co. Ltd. was found liable for unauthorized domain name use and for employing a website design similar to that of Qihoo 360 Technology Co. Ltd. The latter is a well-known Chinese technology company, and its 360-series products and their associated websites have substantial influence on the market. The Jinhua Administration for Market Regulation concluded that the unauthorized use of Qihoo 360’s domain name, website name and website design by Xing Bang had created confusion among consumers and, therefore, these acts constituted unfair competition. Xing Bang was ordered to cease the operation of its website, delete the source code, and pay a fine of 50,000 renminbi ($7,608).

Commercial Bribery in Pharmaceutical and Education Industries

Legal Basis

SAMR cites Articles 7 and 19 of the Amended AUCL as the legal bases for its enforcement actions against commercial bribery in the pharmaceutical and education industries.

Article 7 of the Amended AUCL has been revamped as follows:

  • The scope of “commercial bribery” has been expanded to encompass all “transactions” instead of being limited to the “purchase and sales of goods.”
  • The definition of “bribe-taker” has been clarified. Under the Amended AUCL, a bribe-taker must be an employee of, or an entrusted entity or individual acting on behalf of, another party to the transaction, or a third-party entity or individual that “has influence over the transaction.”

Under Article 19 of the Amended AUCL, the maximum fine for commercial bribery has been increased from 200,000 renminbi ($30,425) to 3 million renminbi ($456,330) and, in severe cases, the authorities will revoke the business license of the offending business.

Focused Enforcement Area

The announced enforcement actions are focused on areas and industries such as medical devices, education, public utility institutions, and other industries that are closely related to public welfare.

Typical Case

In November 2017, NT Medical Information Consultant (Shanghai) Co. Ltd. was found liable for commercial bribery in the form of the payment of conference fees, promotion fees, and similar fees to relevant departments and persons in hospitals, for the purpose of promoting sales. The payments were made by pharmaceutical representatives to doctors and other individuals at the hospitals in the form of a rebate, which was directly based upon the volume of sales at those hospitals. Investigators from the Shanghai Administrative Bureau of Industry and Commerce concluded that these unreported rebates to hospital personnel were made in exchange for business opportunities and sales promotion, and that they constituted commercial bribery under the PRC Anti-Unfair Competition Law. The company’s illegal profits were confiscated, and the company was fined 180,000 renminbi ($27,381).

False Promotion in Online Transactions

Legal Basis

SAMR cites Articles 8 and 20 of the Amended AUCL as the legal bases for its enforcement actions against false promotion in online transactions.

Under Article 8 of the Amended AUCL, false or misleading commercial promotions regarding product function, sales, consumer reviews, and awards are prohibited. In addition, business operators may not assist other business operators with commercial promotion in a false or misleading manner by means of organizing false transactions, or by any other means. Under these new provisions, falsifying the number of purchase orders in the e-commerce context in order to mislead consumers (a common practice in today’s Chinese e-commerce environment) is now illegal.

Under Article 20 of the Amended AUCL, the maximum fine for false promotion is 2 million renminbi ($304,258) and, in severe cases, the authorities will revoke the business license of the offending business.

Focused Enforcement Area

According to SAMR’s announcement, the enforcement actions in this space focus on activities such as organizing false transactions, which includes “click-farming,” falsification of honors or ratings of products or operators, and false promotion in direct sales and in the healthcare product industry.

Typical Case

In April 2018, Jinhua JS Internet Technology Co. Ltd. was found liable for organizing false online transactions. The company employed click-farming using its “PO Workshop Click Farming Platform” on behalf of retailers on several major e-commerce platforms in China. The company also generated false orders based upon retailers’ requests using false accounts on e-commerce platforms, and the retailers then forged logistics information to create false transaction records. The violating company was capable of generating 7,000 transactions in one day. Considering the large volume of illegal transactions, the Jinhua Administration for Market Regulation ordered JS Internet Technology Co. to cease operation and fined the company 2 million renminbi ($304,258) pursuant to Article 8(2) of the AUCL.

Status of the Crackdown Campaign

As of today, SAMR has not published official data regarding the progress and status of individual enforcement cases within the crackdown campaign. However, in light of the wide scope of activities and industries targeted, companies operating in China are strongly advised to timely review their commercial practices as appropriate to ensure full compliance with the Amended AUCL.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Shanghai
Todd Liao
Judy Wang