The fine line between retailer incentives and commercial bribery

One anomalous result of this statutory framework is that payments made directly to an enterprise (as opposed to its individual employees), or benefits provided directly to individual employees with their employers' clear consent, may nevertheless be condemned as commercial bribery. Past enterprise bribery cases have focused on improperly documented payments, in-kind benefits, promotional incentives outside “normal” commercial practices, payments in support of fraud and other wrongful purposes, and anti-competitive incentives.

In 2016, Shanghai divisions of the Administration for Industry and Commerce (AIC) fined local subsidiaries of Michelin, Giti, Bridgestone, Yokohama, and Kumho for operating retailer incentive schemes deemed commercial bribery in violation of the AUCL. The tire manufacturers supplied distributors, which in turn supplied independent retailers. Though the retailers were not their direct customers, the tire manufacturers implemented sales incentives programs to encourage the retailers to promote their tires rather than competing brands. Under the incentive programs, retailers that achieved specific sales targets could receive prizes such as travels, gift cards and gas cards (presumably for use by their employees).

Significantly, the AICs did not condemn these sales incentives for depriving retailers of the loyal services of their employees—the core harm of bribery. Instead, the AICs focused on the perceived anti-competitive effects. For example, in the Bridgestone investigation, the AIC found that, “the purpose of Bridgestone to offer benefits in the name of 'sales rewards' to retailers other than normal transactions, from a subjective perspective, is to promote the sales of products and to increase its market share. From an objective perspective, Bridgestone offered additional benefits to influence the downstream market retailers' selection of trade items and goods, achieving the goal of restricting its competitors from obtaining transaction opportunities.” The AIC opined that, “enterprises should achieve this goal by promoting the quality of goods, improving supporting services, adopting more reasonable prices or other allowable competing methods.” In contrast, the AIC found that, “Bridgestone bribed the purchasers by offering additional benefits in addition to normal transaction payment.” The AIC further warned that the incentives were “relatively large and could materially influence market competition order” and harmed the competitors that “did not provide additional benefits.” The Giti and Kumho orders contain similar language. The Michelin and Yokohama sales incentives were likewise found to “restrict competitors.”

Anti-competitive effects of sales incentives in many jurisdictions are generally scrutinized under antitrust rules against vertical restraints of trade or abuse of dominance. Retailer incentives generally promote consumer welfare and efficiency, except when a manufacturer with market power uses loyalty discounts, first-dollar rebates, and similar measures to exclude competitors. Analysis of the retailer incentives as potential vertical monopoly agreements and/or abuse of dominance under the PRC Anti-monopoly Law (AML) would entail inquiry into the market power of the parties and a balancing of any exclusionary effects against procompetitive benefits to consumers. Condemning sales incentives as commercial bribery under the AUCL allowed the AICs to bypass consideration of consumer welfare, focusing instead on disadvantaged competitors.

Decisions of Shanghai authorities are influential, so the tire investigations may portend probes of retailer programs in other industries or regions. Proposed amendments to the AUCL would overhaul the commercial bribery rules, but would preserve the textual basis for challenging sales incentives to entities as bribes. Consequently, companies should exercise caution in structuring retailer incentive programs to avoid running afoul of the AUCL.

Nate Bush & Zhou Yang

[email protected] / [email protected]

In response to China's intensified antitrust and anti-bribery enforcement, many multinational companies (MNCs) have reinforced their China compliance programs by importing global policies and procedures. However, recent enforcement actions targeting retailer incentive programs demonstrate the risk that certain commercial practices viewed as antitrust risks in other jurisdictions may be condemned as commercial bribery in China.

In most jurisdictions, bribery offenses involve improper offers or payments to individuals to induce or reward them to act contrary to their lawful duties to third parties—such as an official's duty to a government agency, an employee's duty to the employer, or an agent's duty to a principal. In China, however, bribery is not confined to corrupt inducements for individuals to serve their own interests in contravention of duties to others. The 1993 PRC Anti-unfair Competition Law (AUCL) prohibits companies from “practicing bribery by using money, valuable items, or other means to sell or purchase products.” The 1996 Interim Provisions for the Prohibition of Acts of Commercial Bribery further identify “giving valuable items or resort to other means to bribe the counterparty, either an entity or individual, to sell or purchase products” as commercial bribery. Exceptions apply to certain rebates, discounts, and commissions that are properly documented in both parties' records, and for “small promotional gifts according to business practices.” Neither the AUCL nor any implementing rules explicitly define the Chinese term “bribery”, relying instead on the common usage in Chinese.

One anomalous result of this statutory framework is that payments made directly to an enterprise (as opposed to its individual employees), or benefits provided directly to individual employees with their employers' clear consent, may nevertheless be condemned as commercial bribery. Past enterprise bribery cases have focused on improperly documented payments, in-kind benefits, promotional incentives outside “normal” commercial practices, payments in support of fraud and other wrongful purposes, and anti-competitive incentives.

In 2016, Shanghai divisions of the Administration for Industry and Commerce (AIC) fined local subsidiaries of Michelin, Giti, Bridgestone, Yokohama, and Kumho for operating retailer incentive schemes deemed commercial bribery in violation of the AUCL. The tire manufacturers supplied distributors, which in turn supplied independent retailers. Though the retailers were not their direct customers, the tire manufacturers implemented sales incentives programs to encourage the retailers to promote their tires rather than competing brands. Under the incentive programs, retailers that achieved specific sales targets could receive prizes such as travels, gift cards and gas cards (presumably for use by their employees).

Significantly, the AICs did not condemn these sales incentives for depriving retailers of the loyal services of their employees—the core harm of bribery. Instead, the AICs focused on the perceived anti-competitive effects. For example, in the Bridgestone investigation, the AIC found that, “the purpose of Bridgestone to offer benefits in the name of 'sales rewards' to retailers other than normal transactions, from a subjective perspective, is to promote the sales of products and to increase its market share. From an objective perspective, Bridgestone offered additional benefits to influence the downstream market retailers' selection of trade items and goods, achieving the goal of restricting its competitors from obtaining transaction opportunities.” The AIC opined that, “enterprises should achieve this goal by promoting the quality of goods, improving supporting services, adopting more reasonable prices or other allowable competing methods.” In contrast, the AIC found that, “Bridgestone bribed the purchasers by offering additional benefits in addition to normal transaction payment.” The AIC further warned that the incentives were “relatively large and could materially influence market competition order” and harmed the competitors that “did not provide additional benefits.” The Giti and Kumho orders contain similar language. The Michelin and Yokohama sales incentives were likewise found to “restrict competitors.”

Anti-competitive effects of sales incentives in many jurisdictions are generally scrutinized under antitrust rules against vertical restraints of trade or abuse of dominance. Retailer incentives generally promote consumer welfare and efficiency, except when a manufacturer with market power uses loyalty discounts, first-dollar rebates, and similar measures to exclude competitors. Analysis of the retailer incentives as potential vertical monopoly agreements and/or abuse of dominance under the PRC Anti-monopoly Law (AML) would entail inquiry into the market power of the parties and a balancing of any exclusionary effects against procompetitive benefits to consumers. Condemning sales incentives as commercial bribery under the AUCL allowed the AICs to bypass consideration of consumer welfare, focusing instead on disadvantaged competitors.

Decisions of Shanghai authorities are influential, so the tire investigations may portend probes of retailer programs in other industries or regions. Proposed amendments to the AUCL would overhaul the commercial bribery rules, but would preserve the textual basis for challenging sales incentives to entities as bribes. Consequently, companies should exercise caution in structuring retailer incentive programs to avoid running afoul of the AUCL.