Introduction Unfair competition acts Investigation of suspected unfair competition acts Legal liability Comment
After four drafts (2004, 2016 and two in 2017), the revised Anti-unfair Competition Law 1993 was finally promulgated on November 4 2017. The new law entered into force on January 1 2018.
The general structure of the law remains the same. It comprises four chapters which cover:
- general principles;
- unfair competition acts;
- the powers of the Administration for Industry and Commerce (AIC) to investigate and punish such acts; and
- the legal liability and penalties for each type of unfair competition act.
The concepts and principles of the original 1993 text were essentially maintained in the four drafts and the final law. However, a number of changes have been introduced, some of which are significant. Further, some articles have been deleted as they are no longer relevant or have been addressed in other laws enacted since 1993.
This update highlights some of the key changes with regard to intellectual property.
As regards intellectual property, unfair competition acts can be classified as those that affect the interests of an identified competitor and are described in Articles 6 (copying and imitating) and 9 (trade secrets) of the new Anti-unfair Competition Law. A new type of unfair competition act – internet-related acts (Article 12) – was added in 2016.
Unfair acts against a competitor Copying and imitating During the revision process, Article 6 was one of the most commented on sections of the law. It concerns:
- copying a product's name, packaging or decoration;
- using another entity's name; and
- using another entity's website name.
Before examining Article 6 in detail, it is worth examining the different approaches adopted in the previous drafts of the law.
Article 5 (later renumbered 6) of the original 1993 text stated that "operators shall not adopt any of the following improper means to carry out market transactions".
In the 2016 draft, the wording became "operators shall not cause confusion in the market by committing the following acts with business identifiers".
The first 2017 draft stated that "no business operator shall use any of the following unfair means in market transactions".
The second 2017 draft reverted to "business operators shall not engage in any of the following confusion acts that may mislead the consumers to mistake its products for those of others or to misconstrue that such products have a certain association with others".
The final text states that "business operators shall not commit any of the following confusion acts that may mislead the consumers to mistake its products for those of another person or induce a special relationship with another person".
The discussion and comments concerning the first sub-paragraph of Article 6 (as renumbered in 2017) are good illustrations of the differences between the two approaches adopted.
In the original 1993 text, 'copying' was defined as "using, without authorization, the names, packaging or decoration unique (or specific) to a well-known product, or names, packaging or decoration similar to well-known goods, so that their goods are confused with the well-known goods of others, causing buyers to mistake".
The term 'well-known' prompted discussions during the revision process. It was argued that such a strict requirement (it was as difficult to prove the well-known status of a commodity as it was to obtain well-known status for a trademark) implied that, unless a commodity's well-known status was established, the act of copying was not unfair.
In the second 2017 draft, the term 'well-known' was deleted, but the words 'unique' and 'specific' were maintained. 'Unique' meant that the shape of packaging should not constitute a common sign or it would lose its function as a business identifier (a function that had been particularly highlighted in the 2016 draft).
In the final version of the text, the concept of reputation has been reintroduced, but in the reduced form of a 'certain influence' (the same term that is used in Articles 32 and 59.3 of the Trademark Law). Meanwhile, the word 'unique' has been deleted.
Another topic of discussion concerned the list of objects that cannot be copied (ie, a name, packaging or a decoration). A product's shape was not included in this list. However, many unfair competition cases have involved the slavish copy of a product's shape. Previously, the courts often refused cases based on such facts, as a product's shape was not listed in the law with regard to unfair practice. In M&G pen (March 3 2010), the Supreme People's Court clarified that a product's shape may be considered its decoration and, during the final reading of the law, it was proposed that the word 'shape' be added to the list. This was refused; instead, it was agreed to simply add 'etc', which indicates that the list is inexhaustive and may therefore include a product's shape, as well as a single colour or a sound.
Articles 6.2 and 6.3 list other types of unfair use, including with regard to:
- enterprise and trade names (Article 6.2); and
- website names, webpages and the stem of a domain name (Article 6.3).
These items were introduced in the first 2017 draft, which specified that such use would constitute an act of unfair competition if it misled the public. Under this draft, the use of another person's trademark (whether registered or not) in an enterprise name would be unfair if it misled the public. The second 2017 draft deleted this condition altogether, which was arguably a step too far. The final text keeps the reference to enterprise names and websites, but replaces the misled requirement with having "a certain influence".
The new Article 6 includes a new final paragraph (Article 6.4), which addresses "other confusion acts that may mislead the consumers to mistake the products for those of others or to misconstrue that such products have a special relation with others". This article appears to refer to Article 58 of the Trademark Law, which concerns the use of another entity's trademarks as a trade name and refers to the Anti-unfair Competition Law.
Trade secrets The theft of trade secrets (including commercial and technology information) is a key concern among market players and many comments and suggestions were made during the revision process.
The original 1993 text referred to "obtaining trade secrets by theft, promise of gains, coercion or other improper means". The 2016 draft added 'cheating' to these improper means, which the first 2017 draft changed to 'bribery'. The final text has added 'fraud' to this list.
The discussions revealed that the main concern was the behaviour of the employees and ex-employees of victims of trade secret theft. The issue was first addressed, indirectly, in the 2016 draft, which stated that the "third party who has or ought to have a clear knowledge" of an unfair act "shall be deemed to have infringed upon the trade secrets". However, no express reference was made to employees. The first 2017 draft law added a new Article 10 concerning employees "where an employee or former employee of the right holder of trade secrets conducts any act provided in Paragraph 1 of Article 9 hereof". This condition was kept in the second draft and in the final text, which reads:
"Where a third party clearly knows or ought to know that the employee or former employee of the trade secret owner, or any other organization or individual has committed the acts listed in the preceding paragraph, yet, still acquires, discloses, explores or permit others to explore the trade secret, such act shall be deemed as infringement upon trade secrets."
The express reference to the role played by employees and former employees is an improvement on the previous drafts of the law.
However, the real difficulty is proving that a trade secret has been stolen by improper means. In trade secret litigation, it is sometimes necessary to reverse the burden of proof. It remains to be seen if the expression 'clearly knows or ought to know' will mean that, at a certain point, the courts will request defendants to justify that they have acquired the information under review through legal means.
Investigation of suspected unfair competition acts
The Control and Inspection chapter (as it was named in the 1993 law and up until the first 2017 draft) has been renamed Inspection of suspected acts in the final text.
This chapter concerns the AIC, which – as has been the case in the revision of other laws – has sought to increase its powers.
In the 1993 law, the AIC could only question suspected infringers and require them to produce evidence material. It had no right to enter business premises, so its rights to access documents, account books and vouchers, among other things, and inspect property were limited in practice.
The right to enter premises was added to the law in the 2016 draft. This power has been adopted in the final text and gives the AIC more power to:
- conduct investigations;
- seize and detain merchandise;
- duplicate documents; and
- examine bank accounts.
Some commentators warned against possible abuses of power that could be triggered by a malicious complaint. The second 2017 draft took this concern into account somewhat, as it stipulated that the "execution of the measures as provided in the preceding paragraph requires a written report filed to and an approval from the head of supervision and inspection departments".
A new Article 15 was added to the final text and provides some protection for defendants, stating that "the supervision and inspection departments and their functionaries are obliged to keep the confidentiality of the trade secrets that come to their knowledge during the process of investigation".
The 2017 drafts introduced the notion of whistleblowing, providing that any person can report any 'suspicious' (this notion was added to the second draft of 2017) unfair competition act to the AIC, which will keep the identity of such a whistleblower confidential. This measure has been adopted in Article 16 of the final text.
As in other IP laws (ie, the Trademark Law and the Patent Law), the Anti-unfair Competition Law provides for two types of penalty in the case of unfair competition acts:
- damages to be paid to the victim of the act that filed the case with the people's courts; and
- a penalty imposed by the AIC.
The revised law has updated the original text to reflect the existing practice in these matters.
Damages As regards damages, Article 17 of the Anti-unfair Competition Law reproduces the solutions already established in the Trademark Law. Damages are to be calculated by reference to the actual prejudice or, if this is difficult to establish, by reference to the profits earned through the infringement. If neither of these calculation criteria can be easily established, the court may decide up to the statutory maximum amount of Rmb3 million. The rule concerning statutory damages applies only to cases under Articles 6 and 9 (copying and trade secrets) of the law.
Fines Similarly, the revised law has updated the practice for calculating and awarding fines for each unfair competition act.
The amounts and calculation methods vary depending on the type of unfair competition act.
In cases of violations of Article 6 (ie, confusion with a name, packaging, an enterprise name or a website), the calculation is similar to that provided for in the Trademark Law (ie, up to five times the illegal turnover where it exceeds Rmb50,000 and up to Rmb250,000 if the turnover is less than Rmb50,000).
If an operator is ordered to change its name because it is using another party's trademark illegally, the law adopts a solution to facilitate the enforcement of such order: if the operator does not change said name within a prescribed time, "the enterprise registration authority (AIC) shall replace such name with a Uniform Social Credit Code".
The penalties for the theft of trade secrets (Article 9) and denigration (Article 11) are the same (ie, a fine of between Rmb100,000 and Rmb500,000 or up to Rmb3 million if the case is serious). As for trade secrets, the final law specifies that functionaries will be punished if they:
- abuse their powers; or
- divulge "trade secrets that come to their knowledge during the process of investigation".
These administrative punishments may be waived or reduced depending on the infringer's actions. Article 25 of the revised law provides that if the "circumstances are minor and the operator rectifies his behavior in time so that no consequential damage is caused", no penalty will be applied. Alternatively, the penalty may be lighter "if the operator proactively removes or relieves the harmful consequences of its act, or there are other circumstances explicitly provided by laws that enable the application of a lighter or mitigate administrative punishment".
The most significant change to the Anti-unfair Competition Law with regard to intellectual property is arguably the introduction of the expression 'a certain influence' into Article 6, which applies to signs and replaces the terms 'known' or 'well-known', which applied to products.
The expression 'a certain influence' is vague, which – paradoxically – is a good thing.
'Influence' refers to a sign's reputation and is the direct consequence of the duration and scope of the use of such sign.
In all cases where a party accuses a competitor of copying or imitating its IP rights, it will be necessary to demonstrate a certain level of reputation. This is similar to the 2017 Supreme People's Court's provisions on administrative trademark litigation concerning Article 13.2 of the Trademark Law (protection of an unregistered well-known trademark). When applying this article, the courts should consider, among other things:
- the level of similarity;
- the level of reputation of the plaintiff's unregistered mark; and
- the defendant's intentions.
These criteria are interwoven and flexible.
In unfair competition cases under Article 6, the courts will also examine the above criteria.
The generality of the term 'influence' allows a comparison between the various situations provided by the Trademark Law and the Anti-unfair Competition Law.
In the basic case of a registered trademark, it is unnecessary to prove influence. Rather, a mark is protected as a result of its registration.
Problems arise where a mark is unregistered. In such cases, reputation must be established.
A mark's reputation may be well-known (Article.13.2 of the Trademark Law) or of lesser repute but – when combined with improper means – sufficient to oppose a pre-emptively filed trademark (Article 32 of the Trademark Law).
A trademark's influence must also be demonstrated:
- to counter a revocation action based on non-use (Article 49 of the Trademark Law; if a registered trademark has not achieved a certain level of influence after three years it is not worth being protected); and
- to justify the exception provided for in Article 59.3 of the Trademark Law (the first user of the trademark is allowed to continue doing so within the same use range).
The level of required influence varies in accordance with the circumstances addressed by each of the law's articles. The level of influence required also varies in relation to other criteria, such as the level of similarity and the defendant's level of good or bad faith.
The new wording of Article 6 of the Anti-unfair Competition Law, which also refers to the term 'influence' (of the sign concerned), should unify the reasoning of the courts, which are expected to be flexible and open and consider all of the circumstances of a case.
However, one paradox and one regret are notable:
- the paradox – an unregistered sign (eg, a name, a decoration or packaging) has greater protection under the Anti-unfair Competition Law than an unregistered well-known trademark has under the Trademark Law (eg, an unregistered well-known trademark can only prevent registration and use and cannot result in damages); and
- the regret – the focus on confusion and influence means that an act's unfairness is secondary. This can be problematic where a competitor is systematically copying new models that are yet to have a certain influence because they have just been launched. Such behaviour is clearly unfair, but may be possible based on the general principle set out in Article 2.
The other noticeable change with regard to trade secrets is the clear acknowledgment of the key role played by employees and former employees. The courts will hopefully:
- construe the expression 'clearly knows or ought to know' in an open and flexible way; and
- consider requesting that a defendant must prove that it has not benefited from illegally obtained trade secrets, once satisfied that the plaintiff has produced all available evidence.
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