China: The Impact Of The Revision Of Anti-Unfair Competition Law On Commercial Bribery

After three rounds of review, the Anti-unfair Competition Law of the People's Republic of China was adopted after revision at the 30th Session of the Standing Committee of the 12th National People's Congress on November 4, 2017, and the revised Anti-unfair Competition Law of the People's Republic of shall come into effect on January 1, 2018.

During 24 years of implementation of Anti-unfair Competition Law since December 1, 1993 when it was enforced, studies have been going on around its revision. The new law made comprehensive revisions on the original, focusing on the following 4 aspects.

1. Change in the definition of bribe takers

2. Making it clear that sate-owned and non-state-owned companies are equal participants

3. Making it clear that companies that "take advantage of their influence force to impact transactions" shall be punished for commercial bribery

4. Retaining the requirements of keeping books in an express manner

1. Change in the definition of bribe takers

The 1993 version of Anti-unfair Competition Law provides: "A business operator shall not resort to bribery, by offering money or goods or by any other means, in selling or purchasing commodities. A business operator who offers off-the-book rebate in secret to the other party, a unit or an individual, shall be deemed and punished as offering bribes; and any unit or individual that accepts off-the-book rebate in secret shall be deemed and punished as taking bribes.

A business operator may, in selling or purchasing commodities expressly, allow a discount to the other party and pay a commission to the middleman.

The business operator who gives discount to the other party and pays commission to the middleman must truthfully enter them in the account. The business operator who accepts the discount or the commission must also truthfully enter it in the account."

The 2017 version of Anti-unfair Competition Law provides: "A business operator shall not use assets or other means to bribe any of the following entities or individuals to seek for transaction opportunities or competitive advantages:

(1) Staff members of transaction counterparties;

(2) Entities or individuals entrusted by transaction counterparties with the handling of relevant affairs; or

(3) Any other entities or individuals who take advantage of their functional authority or influence force to impact transactions.

During transaction activities, a business operator may pay discounts for the relevant transaction counterparty in an open and fair manner, or pay commissions to the intermediary concerned. A business operator shall truthfully credit relevant amounts into account books if it pays discounts for transaction counterparties or pays commissions to intermediaries. The business operators who accept discounts or commissions shall also truthfully credit such amounts into account books.

The acts of bribery committed by a staff member of a business operator shall be deemed as the conducts of the business operator, unless the business operator has evidence to prove that such acts of the staff member are irrelevant to seeking for transaction opportunities or competitive advantages for the business operator."

Article 8 of the 1993 version of Anti-unfair Competition Law and the Article 2 of the 1996 version of Interim Provisions on Prohibition of Commercial Bribery define the bribe takers as transaction counterparties and their Staff members. The State Administration for Industry and Commerce expanded this definition in its public reply to cover "other individuals that are closely related with the transaction". The inclusion of the interests exchange between "transaction counterparties" in the above provision has been provoking disputes all along and has been widely viewed as a major sign that the law was "too broad".

Article 7 of the 2017 version of Anti-unfair Competition Law classified the commercial bribe takers as the following three categories.

(1) Staff members of transaction counterparties;

(2) Entities or individuals entrusted by transaction counterparties with the handling of relevant affairs; or

(3) Any other entities or individuals who take advantage of their functional authority or influence force to impact transactions.

Transaction counterparties per se has thus been excluded from the coverage of bribe takers. The "other individuals that are closely related with the transaction" in the 1993 version is now further specified as "entities or individuals who take advantage of their functional authority or influence force to impact transactions".

This revision answered the long term calling of the theoretical circle and practitioners, and brought the administrative enforcement tool back to its original purpose of punishing commercial bribery. The nature of commercial bribery is a "power-for-money deal", tempting others to go against their duty and loyalty by buying them over.

From this perspective, commercial bribery normally involves three parties: briber, recipient and betrayed party (or the party with damaged interests). Among them, recipient normally bears the responsibility of being loyal and dutiful to the betrayed party. Such loyalty and duties could be in the forms of labor relationship based on employment, civil contractual relationship based on agreements, or authority relationship based on laws and regulations, etc.

As for "transaction counterparties" who take part in business exchanges as a person in legal sense, they do not possess the functional authority, endowed by law or administrative means, to be bought over. And it gives no cause for much criticism if a transaction party performs interest exchange on voluntary and fair basis. The inclusion of transaction parties into the coverage of commercial bribery for lacking betrayed parties and loyalty and duty is not appropriate. The 2017 version of Anti-unfair Competition Law means that offering favors to a transaction party in any forms, such as discount, rebate, promotion, sponsorship, gifts, or in any amount will not be viewed as bribery.

However, market players shall never let down their guards, considering the complexity and uncertainty of whether a party would be deemed as transaction counterparty during administrative procedures. The following are two cases referred to by Hongcan Yang, chief of Anti-monopoly and Anti-unfair Competition Law Enforcement Bureau, in an interview.

Case 1: Purchase contract made by Schools for students' needs

In the interview, Yang mentioned "... For example, where a school is commissioned by all the students to sign the school uniform purchase contract with the school uniform supplier, the two sides of the transaction should be suppliers and students, and the legal consequences of the transaction are actually borne by the students. If the supplier offers the school with gifts or other forms of economic interests, the conduct is suspected to constitute a commercial bribe... ".

According to the regulations issued by China's education sectors, most of the fees that the school collet from students, such as school bus fare, school fees, books fees, lunch fees and so on are in effect "fees collected and paid on behalf of others", which shall all be used to purchase relevant products or service and shall not be kept as reserve by the school. Whereas the students' rights of choosing supplier shall be exercised through Parents Committee or other forms of democratic decision-making mechanisms.

It is based on this regulation that most administrative law enforcement agencies believe that the role of schools is to carry out transactions on behalf of students, who are the real "transaction counterparty" to potential product suppliers. But in practice, this kind of determination is too rigid and rash. The determination of a school's role shall take consideration of its extent of engagement and investment. A school's direct participation in choosing a supplier will ensure a greater say in the deal, not to mention a school is the major party that contributes manpower and material resources to ensure the execution of contract. And such transactions also have direct impact on its own interests. Accordingly, it will be unreasonable to simply exclude school from the coverage of "transaction counterparties". The exact determination standards for such circumstances may still have to wait for further guidance from SAIC.

Case 2 The act of offering equipment to hospitals and forcing tie-in sales

It is a common marketing tactic in the medical market to donate or lease medical equipment at knockdown price so as to motivate or even to force the hospital to purchase more consumables and reagents, or to bar other suppliers from having a finger in the pie. But under the 1993 version of Anti-unfair Competition Law, such tactics are fairly vulnerable to be reined in by relevant provisions, as they were widely seen by law enforcement authorities as conducts of commercial bribery and were frequently being cracked down. In the Notice to Further Crack Down Unfair Competition in the Medical Market published on August 21, 2017, SAIC stressed again that "Unfair competition acts in commercial bribery such as leasing, donating, distributing equipment, tie-in sale of consumables and selling of corollary equipment will be severely punished."

But in the 2017 version of Anti-unfair Competition Law, the determination of whether the offering of free equipment to hospitals constitutes commercial bribery hinges on whether a hospital is the transaction counterparty of the supplier.

Some hold that hospital is the transaction counterparty of medical equipment supplier. Hospital could make independent business choice; decide whether to take free medical equipment, and to purchase more consumables and reagents. Such transactions made between equal entities of free will. No interests of other parties are damaged, thereby having no party with damaged interests in such transactions.

Others believe that: state-owned hospitals have public functions and their purchasing of medical equipment, reagents and consumables has been included in the Chinese government budget and purchase management. Considering that hospitals' purchases are thus not the reflection of their own wills and intentions, they shall not be regarded as "transaction counterparties".

In conclusion, if a company is deemed as "transaction counterparty", acts that were regarded as commercial bribery in the 1993 version of Anti-unfair Competition Law such as pharmaceutical companies' offering of sponsors or medical equipment to hospitals as a way of promoting the sales of consumables, tire companies' offering of sales incentives to their distributers etc., will not be treated and punished as commercial bribery in the 2017 version.

2 Making it clear that sate-owned and non-state-owned companies are equal participants

Solicitation of Public Opinions on the Anti-unfair Competition Law (Second Revised Draft for Deliberation) defined the receivers of commercial bribery into the following 4 classes.

(1) Staff members of transaction counterparties;

(2) Entities or individuals entrusted by transaction counterparties with the handling of relevant affairs;

(3) State organs, State-owned companies and enterprises, public institutions or people's groups, or State functionaries; or

(4) Any other entities or individuals that may take advantage of the positions of State functionaries to influence transactions.

It can be seen that private business operators were excluded from the list. But in reality, state-owned entities are equally competing with other forms of entities in the same market. It is thus not appropriate to just highlight state-owned companies in this list. That's why the 2017 version of Anti-unfair Competition Law does not single out "State-owned companies and enterprises, public institutions or people's groups, or State functionaries".

3. Making it clear that companies that "take advantage of their influence force to impact transactions" shall be punished for commercial bribery

Entities or individuals "who take advantage of their functional authority or influence force to impact transactions" are different with other commercial bribers in that they do not necessarily bear the responsibilities of being loyal and dutiful.

For example, if a producer bypass distributors and directly offer favors to its end clients, distributors may be pressured by end clients to purchase more commodities from the producer. In such case, end clients are third persons that having major influence on the transaction between producer and distributors. Nevertheless, end clients do not have to be loyal and dutiful to the distributors or any other entities.

Article 2 of 2017 version of Anti-unfair Competition Law provides:" For the purpose of this Law, activities of unfair competition shall refer to the activities whereby a business operator violates this Law in the production and operating activities, thus disrupting the order of market competition and undermining the legitimate rights and interests of other business operators or consumers."

This means that the determination of whether a party "takes advantage of its influence force to impact transactions" lies in whether it disrupts the order of market competition and undermining the legitimate rights and interests of other business operators or consumers.

How to determine whether an entity disrupts the order of market competition and undermines the legitimate rights and interests of other business operators or consumers?

In accordance with The SAIC's reply to the determination and handling of travel agencies' or guides' acceptance of "head fees", "parking fees" ect., where the lure by promise of gains is directed to win over transactions and disrupts fair competition of other competitors in terms of quality, price and service, such acts shall be deemed as commercial bribery.

And according to past results of law enforcement, if a business operator shifts the favors that it offers to others to impact transaction to consumers such as by increasing price, it will be deemed as undermines the legitimate rights and interest of consumers.

4. Retaining the requirements of keeping books in an express manner

The 2017 version of Anti-unfair Competition Law deleted the prohibiting provision of offering off-the-book rebate: "A business operator who offers off-the-book rebate in secret to the other party, a unit or an individual, shall be deemed and punished as offering bribes". The possibility of commercial bribery induced by improper bookkeeping is thus reduced.

But the 2017 version retained the requirements for keeping books in an express manner: "During transaction activities, a business operator may pay discounts for the relevant transaction counterparty in an express manner, or pay commissions to the intermediary concerned. A business operator shall truthfully credit relevant amounts into account books if it pays discounts for transaction counterparties or pays commissions to intermediaries. The business operators who accept discounts or commissions shall also truthfully credit such amounts into account books."

Legal experts predict that the focus of the 2017 version of Anti-unfair Competition Law will be on the business models of the third party entrusted by "transaction counterparty" or the third party that could impact the transaction. Companies in the Chinese market shall re-evaluate their business and sales models, to see if they fit into the requirements of the new law. And if not, such companies shall shift or change their market strategies in the right way.

Written and edited by Rongrong Luo -- Attorney-at-law/Patent Attorney of Beijing Sanyou IP Agency Ltd.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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