China Releases Draft Amendments to The Anti-Unfair Competition Law

On 22 November 2022, China's State Administration for Market Regulation ("SAMR") released the Draft Amendments to the Anti-Unfair Competition Law ("Draft AUCL Amendments"). Enacted in 1993 (and subsequently amended in 2017 and 2019), China's Anti-Unfair Competition Law ("AUCL") regulates business operators' unfair competition activities that disrupt market competition and harm the lawful rights and interests of other business operators or consumers. 1

The Draft AUCL Amendments introduce measures targeting a broad swathe of unfair competition activities that have caught the authorities' attention. These measures include improving fair competition in the digital economy, prohibiting malicious trading, expanding liability to persons who aid acts of confusion, refining the prohibition against false advertising, promoting the establishment of an integrated trade secret protection system, prohibiting companies with a "relatively advantageous position" from abusing their market position, updating the scope of commercial bribery, and adjusting (and in some cases, increasing) violators' legal liabilities.

This alert discusses the key changes proposed by the Draft AUCL Amendments in the following areas:

• Amendments to the commercial bribery provision, which now prohibits business operators from providing commercial bribes to transaction counterparties (and not just their employees) and persons and entities from receiving bribes in commercial transactions;
• New or updated measures targeting malicious transactions and unfair competition in the digital economy;
• Expansion of the prohibition on committing confusing acts, which now makes those who aid or facilitate confusing acts liable for such acts; and
• Enhanced or updated penalties for certain anti-competitive behavior.

Proposed Amendments to the AUCL's Commercial Bribery Provision

Article 8 of the Draft AUCL Amendments proposes the following changes to the AUCL’s prohibition against commercial bribery:

• Prohibits business operators from providing commercial bribes to counterparties to transactions. The current AUCL only prohibits business operators from providing bribes to an employee of the counterparty to a transaction. Specifying that business operators are forbidden from providing bribes to commercial counterparties may result in regulators increasing their scrutiny of discounts, rebates, and other benefits provided by business operators to counterparties.
• Prohibits business operators from instructing a third party to give bribes. The Draft AUCL Amendments explicitly extends the prohibition against giving commercial bribes to bribes given by business operators through intermediaries, including agents, distributors, business partners, and other third parties.
• Prohibits entities and individuals from accepting bribes in transaction activities. While receiving bribe may constitute a criminal offence, China currently does not have a state-level regulation setting out administrative penalties for the recipients of commercial bribes. The amendments to the commercial bribery provision fill this legislative gap and impose administrative fines on recipients of commercial bribes when the illegal behavior does not rise to the level of a criminal offence.
• Increases penalties for giving bribes (Article 29 of the Draft AUCL Amendments). 2 This amendment increases the maximum fines for giving bribes from RMB 3 million (~US$ 442,000) to RMB 5 million (~US$ 737,000). As to the administrative penalties for accepting bribes, the Draft AUCL Amendments provide that the applicable laws and administrative regulations shall apply. If there are no such laws or administrative regulations, the administrative penalties for giving bribes shall apply.

If adopted, these proposed changes may spur companies to update certain business practices by:

• Reviewing the legitimacy of any discounts, rebates, and other benefits provided to transaction counterparties;
• Enhancing the monitoring of agents, third partners, and partners to ensure that commercial bribes are not being passed through these intermediaries; and
• Updating internal controls preventing employees or agents of the company from receiving kickbacks, bribes, or other benefits in commercial transactions.

Proposed Updates Addressing Malicious Trading and Unfair Competition in the Digital Economy

With the digital economy in full swing, new business models have given rise to new forms of unfair competition that leverage data, algorithms, technologies, and platform rules. Against this backdrop, the Draft AUCL Amendments propose regulating a raft of unfair competition activities, including the following:

• Malicious trading (Article 14 of the Draft AUCL Amendments). The Draft AUCL Amendments add a provision prohibiting malicious trading. Malicious trading occurs when business operators disturb or sabotage other business operators' normal operations. The newly proposed malicious trading provision prohibits business operators from engaging in three kinds of malicious trading:
  • intentionally conducting large-scale and high frequency transactions with one business operator in a short period of time and giving favorable reviews, causing another business operator to suffer negative consequences such as a lowering of its search ranking or credit rating;
  • maliciously placing purchase orders for a large quantity of commodities in a short period of time without payment; 3 and
  • returning or refusing to accept goods after making purchases in bulk in bad faith.

  Malicious trading not caught by the above categories is also prohibited.

  The AUCL provides that the SAMR shall order the cessation of malicious trading. Article 35 of the Draft AUCL Amendments increases the maximum fines for malicious trading from RMB 3 million (~US$ 442,000) to RMB 5 million (US$ 737,000), and provides that illegal gains made from the malicious trading shall be confiscated.

  • Using technical means to influence user choice (Article 16 of the Draft AUCL Amendments). The AUCL prohibits business operators from using technical means to influence user choices and obstruct or sabotage other business operators' internet products or services. The Draft AUCL Amendments add traffic hijacking and intercepting or blocking to the list of prohibited activities.
    • Traffic hijacking (Article 16(2) of the Draft AUCL Amendments). Traffic hijacking is defined as a business operator using related keywords, setting false operational options, and other means to deceive or mislead users into clicking a link directing them to the business operator's own products or services.
    • Intercepting or blocking (Article 16(5) of the Draft AUCL Amendments). Intercepting or blocking refers to intercepting or blocking, without legitimate reasons, the content, and pages of the products or services legally provided by other business operators. This newly added provision likely targets Chinese internet companies' practice of blocking each other's links on their sites.

    Article 36 of the Draft AUCL Amendments increases the maximum penalty for violating Articles 16 – 20 of the Draft AUCL Amendments from RMB 3 million (~US$ 442,000) to RMB 5 million (~US$ 737,000) and adds that the SAMR shall order cessation of the illegal activity and confiscate the illegal gains. 4 Article 38 of the Draft AUCL Amendments imposes enhanced penalties for particularly serious violations 5 of its Articles 13 and 16 – 20 in the form of higher fines of up to 5% of the business operator's annual turnover from the previous year, suspension of the business, and revocation of a business operator's business permits or business license. In addition, if found personally liable in such cases, the legal representative, primary person in charge and directly liable persons of the business operators, shall be subject to a fine between RMB 100,000 (~US$ 14,700) and RMB 1 million (~US$ 147,000).

    Article 21 of the Draft AUCL Amendments provides a non-exhaustive list of factors that may be considered to assess whether acts of unfair competition specified in its Articles 13 – 20 6 have been committed, including the following:

    • the impact on the lawful rights and interests of consumers, other business operators, and the public interest;
    • whether compulsion, coercion, fraud, or other means are adopted;
    • whether usages of trade, business ethics, and business morality are violated;
    • whether the principles of fairness, reasonableness, and non-discrimination are violated; and
    • the impact on technological innovation, industry development, and network ecology.

    These proposed updates suggest that Chinese regulators are serious about clamping down on new unfair competition behaviors that proliferated in the digital economy.

    New Restrictions on Aiding Acts of Confusion

    The AUCL prohibits business operators from engaging in specified acts of confusion causing the consumer to be misled about the origin of a commodity. Article 7 of the Draft AUCL Amendments expands the original obligation imposed on business operators to persons who aid acts of confusion. Persons who aid acts of confusion include those who sell confusing commodities or provide facilitative conditions such as the storage, transport, mail, printing, concealment, or business premises for the commission of confusing acts.

    Under the current AUCL, business operators who engage in specific acts of confusion are subject to administrative penalties, including cessation of the illegal act, confiscation of illegal income, fines of up to RMB 250,000 (~US $37,000), and if the circumstances are serious, revocation of business licenses. Article 28 of the Draft AUCL Amendments applies these administrative penalties to those who aid business operators commit acts of confusion.

    However, if the confusing commodities are sold without knowledge of the aider and the aider can prove that they obtained the commodities legally and identify the providers of the commodities, then SAMR will only order the sale to be ceased and the other administrative penalties will not be assessed. The extension of liability to those who aid acts of confusion will arguably increase the burden on resellers and distributors to ensure that they are not facilitating the sale of commodities that mislead consumers. Network platform operators will also likely need to strengthen their compliance programs to ensure that they are not aiding unscrupulous actors to commit acts of confusion.

    _{1 Article 2 of the AUCL.
    2 See also Article 163 of the Criminal Law of the People's Republic of China.
    3 Article 2 of the AUCL defines "commodities" as including services.
    4 Article 20 of the Draft AUCL Amendments is a new provision prohibiting business operators from committing "other online acts of unfair competition."
    5 The Draft AUCL Amendments use "under particularly serious circumstances," "of a particularly execrable nature," and "seriously damaging the order of fair competition or the public interest" to describe such serious violations but does not provide additional guidance.
    6 Article 13 of the AUCL Draft Amendments prohibits companies with a "relatively advantageous position" from abusing their market position. Articles 14 – 20 prohibit unfair competition in relation to the digital economy.}

    Xue Feng (White & Case, Associate, Beijing) contributed to the development of this publication

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    _{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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