China's WTO Accession: A New Opportunity for Competition Law Reform

It was not until the early 1990s saw the introduction of the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法) ¹ (UCL) that a broad attempt was made to regulate anti-competitive business practices. While other industry specific regulations and provincial regulations have added to the law in this area, the UCL still provides the cornerstone of China's regulatory approach to unfair competition issues.2 The UCL, however, is far from a comprehensive competition law regime. Chapter Two of the UCL, which is the only substantive chapter that deals with acts of unfair competition, contains a mere 10 provisions. These principally deal with intellectual property infringement issues. But the UCL fails to deal adequately with anti-trust concerns and other unfair market practices. Additionally, since its promulgation, there has been insufficient legislative follow-up to clarify and consolidate the rights and available remedies contained in the UCL. China still has a long way to go in articulating a rational theoretical basis to underpin its competition law regime and in providing a comprehensive regulatory framework.

One of the few authoritative guides to the scope and application of the UCL is the Interpretation of the Unfair Competition Law (UCL Interpretation) issued in April 1994 by the Civil Law Division of the Legal Commission, under the Standing Committee of the National People's Congress. The UCL Interpretation is a guide to the thinking behind the implementation of the UCL. However, it has not developed to take into account the rapidly changing nature of China's economy and the increasing sophistication of companies that seek to exploit unfair commercial advantage on the basis of uncertainties in the law.

In more developed jurisdictions, competition law is generally structured to deal with market failure on both the supply and demand side of the economy. Regulations governing restrictive trade practices and abuse of market position on the supply side are designed to ensure that businesses and consumers have adequate choices available to them and that there is adequate competition between producers. Regulations governing what is broadly characterised as misleading and deceptive conduct on the demand side work to ensure that customers have adequate information to make informed buying decisions and to ensure that producers do not obtain unfair advantage at the expense of their competitors. While views differ about the appropriate scope and application of such laws, some form of regulation of both these areas is generally considered essential in any legal system that seeks to guard against anti-competitive business practices.3

In the absence of a unified competition law regime that deals comprehensively with both the supply and demand side of the economy, the provisions of the UCL and similar provincial statutes operate on a seemingly ad hoc basis. The provisions of the UCL suffer from a lack of clear direction about how existing rights fit within a broader Chinese competition policy framework for an increasingly complex market economy.

Recently the attention of commentators and policy makers in China has tended to focus on development of effective anti-trust laws.4 This is a legitimate concern given the lack of any unified and comprehensive regulations on the issue, especially with regard to the monopolistic control state-owned enterprises have over so many Chinese industries.5 However, of equal importance is the regulation of the demand side of the economy. China's entry into the WTO is an opportune time to strengthen such regulation and, in particular, to update and enhance the operation of laws and regulations providing redress against unfair attacks on commercial reputation.

Where Does Protection of Commercial Reputation Fit in a Competition Law Framework?

One of the essential elements of a market economy is the freedom for business operators to robustly promote and differentiate their products in the marketplace. Such behaviour generally works to provide customers with information about the range and respective merits of products available in the market.

At the same time, there is also a strong policy interest in ensuring that businesses do not disseminate misleading and deceptive information about the reputation and products of their competitors. Such behaviour improperly affects customers' ability to make informed choices about the products and services they want to buy. More importantly, entities that engage in such behaviour not only obtain an unfair advantage over those who do not, but the targets of such behaviour suffer direct harm that is often quantifiable in terms of lost sales. The aim of the law in this area is to balance these dual policy objectives and ensure fair and honest competitive behaviour.

How Is Commercial Reputation Protected under Chinese Law?

Chinese law provides for a number of rights of action available to businesses whose commercial reputation is harmed through deliberate or reckless misinformation spread by competitors. They are principally found in the following provisions:

UCL Article 14 - "Fabricating/Spreading False Facts"

Article 14 of the UCL provides that:

"Business Operators shall not fabricate or spread false facts that harm the commercial reputation of competitors or their merchandise."

This provision contains two elements, namely "fabricating and spreading false facts" and "harming the commercial reputation of competitors or their merchandise". The UCL Interpretation of Article 14 gives important guidance to its scope. First, it is not required that a statement is wholly false; Article 14 is
breached if even part of the statement is untrue. Second, the name of the competitor's merchandise need not be used but rather the consumer need only reasonably suspect the target in order to establish a breach. Third, the "spreading of false facts" may be established irrespective of whether the statements are directed at the public as a whole or directed at a smaller specific group, such as another business operator.

Despite such apparently comprehensive interpretations, a host of questions arise. It is unclear what evidence needs to be established or will suffice to prove the second element of the offence, namely that harm has been suffered to commercial goodwill or reputation. For example, is it sufficient that a false statement is merely intended by the maker to cause harm or loss to a competitor, or must a harmful effect be demonstrated? What evidence needs to be shown to prove that a loss of sales is directly attributable to a false statement made by a competitor? What test is applied to determine whether a statement is factually incorrect? What level of proof is required? These fundamental questions remain unanswered.

UCL Article 9 - "False Statements"

Article 9 of the UCL provides that:

"Business Operators shall not make misleadingly false publicity through advertising or other means concerning the quality, composition, functions, uses, producer, period of validity and place of origin etc., of merchandise."

"Advertisers shall not knowingly, or in cases which they should have been aware of, design, produce, publicise or act as agent for any false advertisements."

There is some overlap between Article 14 and Article 9 of the UCL. However, the UCL Interpretation stresses that with respect to Article 9, the key in determining whether a statement is "false" is to determine whether it will "lead the consumer into error" (daozhi xiaofeizhe wujie). Using the UCL Interpretation as a guide, Article 9 appears to use a less stringent test than that used in Article 14, which requires the statement in whole or in part to be false and harm the commercial reputation of a competitor. Article 9 appears only to require that a statement be misleading in its effect, rather than demonstrably "false". There is no apparent requirement to show damage to the other party.

Arguably therefore, Article 9 catches all statements made about commodities of a certain type rather than being restricted to those that harm the commercial reputation or credit of a particular company's merchandise, as per Article 14. Thus, unlike Article 14, Article 9 may have application to all statements about a certain type or class of products which "lead consumers into error". In such circumstances the aggrieved party may not have an exclusive right of action against the issuer of the statement, but would nonetheless have theoretical standing to sue under paragraph two of Article 20 of the UCL.6 This also raises the issue as to whether the courts would, from a practical perspective, restrict an applicant from suing unless the applicant could demonstrate a prima facie case that it had actually suffered loss as a result of a statement made by another party. A restrictive approach seems likely at least in the foreseeable future. In China there are few civil groups and consumer associations that scrutinise the behaviour of corporations and business operators and sue to ensure such entities comply with the law. Such civil groups are tightly controlled by the State. Moreover, public policy is not directed at supporting or encouraging private litigation as a means of supervising or regulating inappropriate corporate or market behaviour.

UCL Article 2 - "Maintain Honesty and Trustworthiness"

Article 2 of the UCL states:

"Business Operators shall observe the principles of voluntariness, equality and fairness, maintain honesty and trustworthiness and abide by generally accepted commercial ethics in the course of market trading."

Article 2 seems almost too broad to be capable of specific application. But in one of the few published cases concerning an action successfully brought under the UCL, the court relied more on the general principles contained in Article 2 of the UCL in rendering its judgement than on any particular legislative power discussed above.7 While it is perhaps difficult to extrapolate from such limited judicial precedent, it is clear that if an anti-competitive effect can be demonstrated as a result of failure to act honestly, fairly or ethically, it may still be possible for an aggrieved party to prevail against a competitor even if it cannot prove a more specific breach of the UCL has occurred.

Notwithstanding this apparent judicial endorsement of Article 2, it is unclear to what extent Article 2 would be more generally applied. While PRC courts are often disposed to a result-oriented rather than "black letter" approach, it is difficult to draw wider lessons from a one off application of Article 2. It is not difficult to conceive of Article 2 being used as much as a defence as a basis for a claim. It is simply too ill defined to provide certainty of outcome when used as the basis of substantial litigation.

Application of the UCL to Providers of Services

The provisions of the UCL and related legislation do not clearly apply to services and the providers of services with regard to commercial reputation issues. This is a problem, as the services sector will play an increasingly important role in the PRC economy following China's accession to the WTO. In fact, as the service economy grows, service providers will increasingly rely on their commercial reputation in order to distinguish themselves. Against this background, the lack of clear statutory application of the UCL to such service providers is a glaring omission.

Advertising Law Article 47 - "Denigration of Goods of Other Producers"

Article 47 of the PRC Advertising Law (Advertising Law) makes it clear that advertisers who breach certain provisions thereof including amongst others "the denigration of goods....of other producers or operators" and "other acts which infringe the civil rights of others" shall bear liability. In such cases, where an aggrieved party's civil interests have been infringed, the aggrieved party could potentially initiate an action for damages on the basis of a breach by a competitor of the Advertising Law.

Like the above provisions of the UCL, a lack of definition of terms used is problematic. Moreover, the scope of the offence is also unclear. For example, is fact-based criticism a breach of Article 47? Is the answer the same across different jurisdictions? Will it change over time? Clearly, the law needs to develop further. However, there is no additional legislative or other guidance to assist in an interpretation of Article 47 at present.

Remedies and Enforcement

An injured party may institute proceedings directly at the People's Court, pursuant to Article 20 of the UCL. Article 20 provides that where a business operator violates any provisions of the UCL, it shall be liable for damages as well as the reasonable expenses incurred by any business operator that has suffered injury as a result of a violation of the UCL and who has the violation investigated. It appears, though, that there have been relatively few independent private actions by injured parties pursuant to Article 20.

Even if an injured party is successful in an action under the UCL, it may not be able to obtain an award for damages that reflect the actual loss suffered. In China, courts have traditionally exercised considerable discretion as to the compensation for damages they will award. China's courts sometimes award damages based on the actual or perceived ability of a party to pay, rather than on the full extent of the injured party's losses. This has often been true where a foreign party has been the successful plaintiff. PRC courts have exhibited reluctance to award significant damages against a local party if such an award would adversely impact the local party's ability to continue its business.

The Fair Trade Office of the State Administration of Industry and Commerce (SAIC) or its local counterpart has authority to investigate and prosecute acts of unfair competition under the UCL. However, in some areas no Fair Trade Office has been established, in which case responsibility for investigation of breaches of the UCL appears to fall under the general jurisdiction of the SAIC or its local counterpart.

The general lack of judicial precedent indicates that the relevant authorities have not actively pursued violators or otherwise committed significant resources to enforcement of the laws. Informally, such authorities have consistently indicated that enforcement of unfair competition laws has not been a priority.

Articles 21 to Article 27 of the UCL provide for fines of up to Rmb200,000 for violations of the provisions of the UCL and for confiscation of illegal income. These may be sufficient settlements in some cases, but are woefully inadequate in others. If the aggrieved party can convince the relevant Fair Trade Office of the SAIC or the SAIC itself to take action of its own accord, then it may be able to avoid protracted litigation, while still ensuring that a clear message is sent to its competitors. Experience in this area suggests that this is no easy task as such matters may become highly political or are otherwise influenced by extra-legal considerations.

Regulatory Weaknesses Emphasize Need for Reform

The provisions of the UCL that are designed to deter unfair attacks on commercial reputations are a deterrent against the most blatant forms of libel and slander. They are less able to cope with subtle mistruths and misleading publications. The biggest weakness of the existing regulatory regime is that there is little authoritative guide for how the sections of the UCL dealing with protection of commercial reputation operate in practice. As such, there is considerable uncertainty about how such provisions are applied in complex situations.

The lack of practical guidance in this area is only partly the result of reluctance on the part of businesses to seek remedies through the actions outlined above. Confidence in the law's ability to provide for effective outcomes with a measure of certainty must precede active use of any legal recourse.

The problems associated with the actions available for the protection of commercial reputation are representative of problems that affect other areas of competition law. While there are legal provisions in place, there is little experience of their use, either by those authorities charged with their interpretation and supervision, or by companies relying on the remedies such provisions purport to offer. However, increased competition after China's accession to the WTO will likely result in more actionable statements than ever before. At present, foreign pharmaceutical products
and imported foodstuffs appear to have been particularly subject to attack and there are indications that direct comparison advertising (where misleading statements often appear) is on the rise in more and more types of products. Still, even litigation conscious multinationals and foreign companies are unlikely to launch lawsuits on the basis of existing provisions of the UCL, given the lack of guidance as to how an action might be expected to play out in practice.

China's accession to the WTO may provide new impetus for reform, and the task of competition law reform cannot remain off the legislative agenda for long. It is of crucial importance, given the challenge of adapting the Chinese economy to a post-WTO environment, that the rules governing remedies for unfair attacks on commercial reputation form part of a unified approach to reform and that the bare bones of the UCL be fleshed out with more comprehensive legal reforms. Failure to reform may eventually lead to the same kind of international pressure that China has been facing on intellectual property protection and enforcement. As far as major foreign companies are concerned, the strengthening of legal remedies to defend commercial reputation may well be the next most important issue. After all, a company has few assets more valuable than its commercial reputation.

Endnotes:

1 Promulgated on September 2, 1993 and effective from December 1, 1993.

2 Other regulations which include provisions governing anti-competitive conduct include: PRC, Protection of the Rights and Interests of Consumers Law (1993), PRC, Advertising Law (1995), PRC, Anti-dumping and Anti-subsidy Regulations (1997), PRC, Product Quality Law (1993), and various provincial anti-unfair competition statutes.

3 For an overview of the complementary relationship between the two broad types of competition laws see Consumer Protection and Product Liability, SG Corones & PH Clarke, 1997.

4 The Anti-Monopoly Law of the PRC is in draft form and remains subject to internal government discussion. It has not yet been officially promulgated.

5 See GG Chang, "Competition and Policy in the PRC", China Law & Practice, September 1999 for an overview of competition issues impacting on various industries in China.

6 Article 20 of the UCL provides inter alia that: "a business operator whose legitimate rights and interests are harmed by an act of unfair competition may file a lawsuit directly with the People's Court".

7 Runtian Natural Beverages Food Ltd v Gannan Huakang Food Factory published in the People's Court Case Collection 1999.