New Judicial Interpretation in Fair Competition Law

A new Supreme Court interpretation of the unfair competition law clarifies what constitutes well-known commodities and infringement of business secrets. Yan Xun reviews the key issues affecting intellectual property rights owners in China.




By Yan Xun of Freshfields Bruckhaus Deringer

On January 12 2007, the People's Supreme Court promulgated the long-awaited Interpretations to Several Issues in Hearing Unfair Competition Civil Dispute Cases (the Competition Interpretations). Effective from February 1 2007, the final version of the interpretations is significantly shorter than the last draft published for public consultation (the Consultation Draft) and many highly-debated provisions have been deleted.

According to the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法) (Competition Law), unfair competition activity includes counterfeiting activity, i.e., the use on commodities of names, packages, or decorations (collectively, trade dress) identical or similar to those of unique well-known commodities or of other enterprise names or individual's names, causing confusion between the counterfeit commodities and the well-known commodities. The Competition Interpretations provide rules for determining counterfeit activity.

Determination of Well-known Commodities

Generally speaking, the Competition Law protects the trade dress of well-known commodities and the plaintiff has the obligation to prove the well-known element. According to the Competition Interpretations, a well-known commodity must have a certain degree of fame and be well-known to the public in the domestic market.

As such, well-known commodities include commodities manufactured in China and imported into China. Commodities which have never been used in China do not fall within the scope of well-known commodities protected by the Competition Law, even if they are famous in a foreign market.

Similar to the rule for the determination of well-known trademarks, the Competition Interpretations sets out the following factors which must be considered in determining whether commodities are well known:

i. the length of time in which the commodity has been in the market;

ii. the geographic scope in which the commodity has been distributed;

iii. the planned revenues and target market of the commodity;

iv. the duration, strength, and geographic scope of promotions of the commodity, and

v. the record that the commodity have been recognized as a well-known commodity by relevant authorities.

The element of confusion is satisfied if the plaintiff can prove confusion between a well-known commodity and counterfeit commodity, or confusion over the relationship (such as affiliate or licensing relationship) between the manufacturers of the well-known commodity and the counterfeit commodity. Further, if the same or a substantially similar trade dress is used on the same type of commodity, the element of confusion is deemed established without the need of proof.

The Competition Interpretations have deleted two factors from the Consultation Draft: the market share of a commodity and the funds invested in promoting a commodity. This deletion partly favours inexpensive and novel products manufactured by small companies being recognized as well-known commodities.

Exceptions to Counterfeiting Violations

The Competition Interpretations provide two exceptions to counterfeiting violations in which the use of the same or similar trade dress will not be deemed a counterfeiting activity.

Firstly, if the trade dress is substantially indistinctive, is a generic name or design, is descriptive of the commodity, is a design necessary to the function of the commodity, or is a design in violation of Article 10 Section 1 of the PRC Trademark Law  (中华人民共和国商标法)(e.g., a design similar to a national symbol), the well-known commodities bearing such trade dress are not protected under the Competition Law.

Secondly, it is not counterfeiting to use trade dress which is the same as or similar to other commodities in an area which is different from the area in which such other commodities are well-known, provided that the user can prove that the use of the same or similar trade dress is in good faith. Nevertheless, the court may require that a note be placed on the commodities to avoid confusion when they enter an area in which other such commodities are well-known.

Business Secret Infringement

In China, business secrets are protected by the Competition Law. Under the Competition Law, three conditions must be met in order for something to be considered a business secret. It must be:

i. unknown to the public,

ii. valuable to the owner, and

iii. protected by appropriate methods.

The Competition Interpretations broadly define the term "unknown to the public" to include, with respect to certain information, it being unknown to relevant personnel in the same area of the information and it being difficult to be acquired by relevant personnel in the same area of the information. As such, a database containing information gathered from public sources with much effort can be considered "unknown to the public".

The element of value to the owner requires either actual or potential commercial value which can bring advantages to the information owner in business competition. The utility requirement for business secrets appears much lower than that for patents.

The requirement of a protection method, as explained by the Competition Interpretations, must be considered in the context of the value of the business secrets. In addition, the desire of the information owner and the function of protection methods must be considered in determining whether a protection method is appropriate.

The Competition Interpretations further list some examples for appropriate protection methods:

i. to limit access to business secrets to necessary persons;

ii. to lock the carrier of business secrets;

iii. to place the label "confidential" on the carrier of business secrets;

iv. to encode business secrets;

v. to cause the execution of a confidentiality agreement; and

vi. to restrict visits to work facilities containing business secrets.

Non-violation Activities

The Competition Interpretations provide for the following two circumstances in which the use of information protected as a business secret is not a business secret infringement.

Firstly, reverse engineering is a legal method to acquire business secrets. Reverse engineering means disassembling, measuring and analysing products purchased in the open markets for the purpose of obtaining the technical information of those products. However, the obtaining of technical information through illegal methods and subsequently confirming such information through reverse engineering is still considered a business secret infringement.

Secondly, with respect to customer relationships, although customer contact lists can be protected as business secrets, if a customer in that list enters into business with a former employee because of a personal reliance on that employee, the employee does not infringe on the business secrets of the employer. However, if the employee has a contractual obligation not to compete with the employer's business, the entry into business with the employer's customer may be considered a business secret infringement.

Burden of Proof

According to the Competition Interpretations, in order to establish a business secret infringement, a business secret owner has an obligation to prove:

i. the existence of such business secrets;

ii. an exact copy of the business secret or a substantial similarity between the business secret and the defendant's information, and

iii. the illegal method adopted by the defendant to acquire the information.

In the Consultation Draft, there is an assumption which is omitted in the Competition Interpretations. This assumption is that if a business owner can prove that the defendant has access to the business secret and that the defendant's information is identical or substantially similar to the business secret, the defendant may be inferred to have adopted legal methods to acquire the business secret based on common sense. It is not clear whether such an assumption still exists in practice.

Remedies

The remedies for business secret infringement include injunctions and damages.

The remedy of injunction is an order to stop the unauthorized use or disclosure of business secrets. Generally speaking, the duration for the injunction is the period until the business secret enters the public domain. If said duration is not reasonable, the court may determine another period of time, provided the competitive advantages of the business secret owner are protected.

In the circumstance of unauthorized use of business secrets, the damages are calculated by referring to the damages caused by patent infringement. In other words, the damages are the decrease in the profits of the business secrets owner or the illegal gains of the infringer as a result of the unauthorized use of the business secrets.

In a circumstance in which a business secret enters the public domain without authorization, the damages are measured as the commercial value of the business secret, which in turn is determined by taking into account the following factors:

i. the costs for researching and developing the business secret;

ii. the revenue and profits generated from implementing the business secret, and

iii. the possible duration in which the business secret owner may maintain its competitive advantages.

False Advertising Activity

False advertising is a violation of the Competition Law. Such activity is found when a misleading activity is sufficient to cause the general public to misunderstand the quality, function, ingredients, usage, manufacturer, period of validity, origin of manufacture, or other features of a commodity. As such, there are two elements of false advertising activity: misleading activity and ability to create a misunderstanding.

The Competition Interpretations list three misleading activities:

i. one-sided promotion or comparison;

ii. advertisements falsely citing teachings as scientific conclusions, and

iii. advertisements using prejudicial words.

Obviously, merchandisers will not describe the disadvantages of their commodities in advertisements and therefore a mere description of the advantages of a commodity is not considered one-sided or prejudicial.

It is still not clear what kind of description will be considered one-sided or prejudicial, since the Competition Interpretations require the courts to consider the following factors when determining whether an activity can cause a misunderstanding over a commodity:

i. day-to-day life experience;

ii. the attention which normal customers pay to the commodity;

iii. the existence of an actual misunderstanding over the commodity, and

iv. the relevant features of the commodity.

The Competition Interpretations also provide for non-violating advertising activities. Hyperbole used in advertisement is not considered misleading, provided that it does not cause a misunderstanding by the general public over the commodity.