DC INSIGHT

Focus on China

Unfair Trade Practices in the PRC

by Daniel Arthur Laprès and Qin Yang

Trading activity within the People’s Republic of China (PRC) is subject to the local regime governing unfair trade practices. Foreign businesses should be aware that even trading activity contracted with PRC parties by entities established outside the PRC could be subjected to that regime if the contracts have effects within the PRC. The regulation of activities of enterprises in the public sector, which retains a preponderant role in all economic activity, is important in suppressing these practices.

The PRC Law on Combating Unfair Competition, adopted in 1993, applies to all business operators engaging in the sale of goods or services. In addition, the State Administration for Industry and Commerce (SAIC) has issued regulations expressly prohibiting a wide variety of anti-competitive practices, in particular:

• commercial bribery,

• violations of commercial secrets,

• bid-rigging,

• abuses of commercial names and identities,

• trading abuses by public enterprises and

• abuses or promotions.

Several recent cases serve to remind foreign business people that their nationality does not immunize them against pursuits in the PRC, including under the criminal laws, for their violations of local regulations.

Other competition laws

Freedom of competition is also imposed by stipulations in numerous other laws and regulations.

On August 30, 2007, the National People’s Congress adopted the Anti-Monopoly Law, which came into force on 1 August 2008. The law is modeled along the lines of European and American monopoly regulations and will be discussed in a subsequent article.

Businesses should also be aware of the Price Law, which is intended to promote fair and open markets while combating price collusion. Prices must be based on production or operating costs and market supply and demand.

In addition, PRC has adopted a Consumer Protection Law that guarantees consumers, inter alia, the right to safety of their persons and property when using products, the right to fair trade terms of trade such as quality warranties, reasonable prices, accurate measures and the availability of recourses in cases of violations of their rights. Advertisers, advertising agents and advertisement publishers are prohibited from engaging in unfair competition.

The Unfair Competition Law

The Unfair Competition Law, mentioned above, prohibits the following acts, among others:

· abuses of legal monopolies and abuses of administrative powers,

· use of monopolies by public utility companies to control purchases and sales or to impose upon consumers unreasonable terms with respect to prices or quantities and use of administrative powers to control purchases and sales impairing free circulation of goods in the market,

· infringements of intellectual property and business secrets,

· false or misleading publicity of a product in respect of its quality, its manufacturing components, its use or functions, and

· sales below cost (except for perishable products).

Commercial bribery

Commercial bribery involves giving gifts of property or other means in order to obtain contracts. Property includes cash and material objects paid as fees for promoting sales, publicity, support, scientific research, services, consultation, commissions or reimbursement of expenses to obtain contracts, specifically including the reimbursement of domestic or international travel.

In addition, secret returns of a certain proportion of payments with off-the-books cash, material objects or other means are considered to be bribery. Acts of bribery committed by employees in the course of their employment are imputed to the employer.

The prosecution currently conducted before the Shanghai courts of an Australian national in connection with the state-owned travel company, GZL, serves as a stark reminder that in these matters prudence is the better part of valour.

Violations of trade secrets

The Trade Secrets Regulations define trade secrets as non-public technical and operational information that the owner has taken steps to keep confidential, that is practical and that possesses economic value. Obtaining trade secrets by theft, promises of gain, coercion or other illegal means, as well as the disclosure or use of, or permission to use trade secrets acquired by these means are prohibited.

A major danger encountered by some foreign enterprises has arisen from the blurred distinction drawn in PRC law between trade secrets and state secrets. A trade secret may be treated as a state secret when it belongs to a state-owned enterprise. The violations of state secrets attract the most severe sanctions, including criminal prosecution.

A couple of recent cases have highlighted this risk. In July of 2010, an American geologist of Chinese origin working for an American consulting company on assignment in China was sentenced by a Chinese court to eight years’ imprisonment for attempting to acquire a data base about the petroleum industry which they claim was of a commercial nature but which the authorities considered to be a state secret. And in the highly publicized case involving Rio Tinto, the Australian minerals giant, one of its operatives admitted to stealing commercial secrets belonging to CISA, the Chinese Iron and Steel Association, concerning alleged production cuts by a leading Chinese steel maker, state-owned Shougang. While the case was not prosecuted as theft of state-secrets, the authorities did invoke state-interests to close the debates to the public.

Bid-rigging

The SAIC’s measures against bid-rigging deal with tenders in construction projects, purchases of complete sets of equipment, sub-contracts, leases, transfers of land-use rights and leasing of operating locations. Tenders are operations in which bids are invited publicly or through written invitations in accordance with special standards and conditions that are openly disclosed and that culminate in the designation of a winning bidder.

Bid-rigging refers to the use of unfair means by a caller for tenders and a bidder, or among bidders, acting in collusion to exclude competitors or harm the interests of the competitors. Nor can bidders decide on a bid winner through competition before participating in bidding.

Callers for tenders may not predetermine the winner of a call for tenders, reveal bids of a bidder to others, disclose the floor price to a bidder, assist a bidder in withdrawing or changing its bid or alter its offered price.

Abuses of commercial names and identities

The SAIC deems illegal the use without authorization of an identical or similar name, packaging or decoration specific to a well-known product that misleads purchasers into mistaking the imitation for the well-known product, i.e., products that enjoy a certain reputation in the market. Only names, packaging and decorations not commonly used by similar products are protected. If they are distinctive, the SAIC will protect trade names even when they have not been registered as trademarks.

Trading abuses by public enterprises

Public enterprises are defined as operators of public utilities, including the provision of postal services, telecommunications, transportation, water, electricity, heat and gas and the like.

Public enterprises may not use their market power to impede fair competition, nor may they infringe upon the legal rights and interests of consumers. In particular, public enterprises must refrain from several practices:

· compelling users to buy certain products exclusively from themselves or parties designated by them or limiting their customer’s capacity to buy alternative products meeting the required standards,

· compelling users to buy unnecessary products from themselves or persons designated by them,

· preventing users from purchasing products that meet the required standards, and refusing to sell products or charging excessive prices if users refuse to accept unreasonable conditions.

Abuses of promotions

The SAIC regulations cover sales including incidental articles, money or other economic interests for purchasers, such as lottery attributed awards for some of the purchasers, to the express exclusion of charitable lotteries approved by the authorities.

Promotions must include clear representations with respect to the prize, the probability of winning, the number of prizes and, where relevant, their categories, the time and manner of their collection, the time, location and conditions of identification and disclosure of winners, as well as the time and method of informing winners.

Conclusion

For foreign business people, it is important to know that the SAIC plays the dominant role in the investigation and sanctioning of unfair trade practices, subject to the NDRC’s jurisdiction over pricing abuses and the Ministry of Commerce’s jurisdiction to review enterprise concentrations that might run afoul of the Anti-Monopoly Law. Administrative remedies are often the most effective recourses to combat unfair trade practices.

Civil remedies are also frequently available before the people’s courts.

Infractions of the rules against unfair trade practices may also entail criminal pursuits before the people’s courts under a general principle of Chinese criminal law that once an infraction of almost any rule has “serious consequences”, it may attract criminal sanctions. In the present context and for practical purposes, this is of specially grave significance in relation with bribery and commercial secrets with serious consequences for the interests of state-owned enterprises because such conduct can attract criminal penalties of dreadful severity when judged by foreign standards.

Trading with, or otherwise doing business in China, requires that businessmen have a good working knowledge of these laws and regulations.

Daniel Laprès is Avocat à la Cour d’Appel de Paris, Barrister and Solicitor Nova Scotia, Canada and Special Counsel to Kunlun Law Firm, Beijing. His e-mail is Daniel@lapres.net

Qin Yang is a member of the Kunlun Law Firm in Beijing.