On 4 November 2017, at the 30th session of the Standing Committee of the 12th National People’s Congress (“NPC”) of China, the NPC approved a bill to amend the Law Against Unfair Competition, effective on 1 January 2018 (“2018 LAUC”). This is the first time the LAUC has been amended since it came into effect on 1 December 1993 (“1993 LAUC”). This article highlights specific amendments in the bill that are likely to cause major repercussions for foreign companies doing business in China.
1. Commercial Bribery
1.1 Definition of the recipient of a bribe
The 1993 LAUC defines the recipient of a bribe as “the other party [of a transaction], a unit or an individual,” leaving third parties that may affect the transaction out of its reach. Off-the-book rebates to third parties thus are considered as an exception to Article 8 of the 1993 LAUC. Compared to the Proposed Amendment that was first circulated in February 2017, the 2018 LAUC takes a step further and clarifies the definition of the recipient of a bribe to include third parties that may affect the transaction, such as an organization or individual commissioned by the other party to handle certain matters.
“A business operator shall not resort to bribery, by offering money or goods or by any other means to the following units or individuals, in exchange for transaction opportunities or competition advantages:
(1) employees of the other party [of a transaction];
(2) an organization or individual commissioned by the other party to handle certain matters [of a transaction]; or
(3) an organization or individual that can affect a transaction by means of its or his power of office or influences.”
The 2018 Revised LAUC defines the recipient of a bribe to cover the abovementioned organizations or individuals that may provide “transaction opportunities or competition advantages.”
1.2 Vicarious Liability
The 1993 LAUC does not provide for vicarious liability on the part of the employer where an employee pays a commercial bribe. This makes it possible for some companies to feign ignorance and scapegoat employees when caught bribing in a commercial transaction. It seems that a policy objective of the government is to curb this perceived problem.
The 2018 LAUC expressly imposes on the employer a vicarious liability for acts of commercial bribery by its employees, and it also places the burden squarely on the employer to prove otherwise. In other words, it creates a rebuttable presumption that the employer is liable for its employee’s acts of commercial bribery. Specifically, the 2018 Revised LAUC provides:
“Where the employee of a business operator acquires transactional opportunities or competitive advantages for the business operator by way of bribery, such act should be found to be an act by the business operator, unless the business operator produces evidence to establish that such act is a personal act by the employee.”
This article, upon coming into effect on 1 January 2018, is expected to have a major impact on the way business is done in China. Because of the presumption of vicarious liability, companies are no longer able to use their ignorance as a defence and divert all the blame to an individual employee. Instead, the aim of the amendment is to place greater pressure on companies to check and make sure that their employees clean up their act and steer clear of commercial bribery. In short, feigning ignorance should no longer be a strategy as of 1 January 2018, or so the authorities hope. It remains to be seen whether the new law will be effective in curbing commercial bribery.
Criminal liability aside, the 1993 LAUC imposes a fine for commercial bribery that is capped at RMB 200,000. After 24 years of inflation, this RMB 200,000 figure that was once probably viewed as a severe deterrent is looking more like a slap on the wrist in 2017. The 2018 LAUC raises the cap to RMB 3 million. The lower limit of the fine is also raised, from RMB 10,000 to RMB 100,000. Additionally, the authorities will be authorized to revoke the offender’s business license at its discretion. The confiscation of illegal income, which is a penalty under the 1993 LAUC (and was removed in the 2017 Draft Amendment), will still be enforced under the 2018 Revised LAUC.
2. Trade Secret
The 1993 LAUC defines trade secret as information that is, among other things, (a) capable of generating economic interests for the person with right to such information, and (b) of utility. These two elements have never been clearly teased apart in PRC courts. Subsequent judicial interpretations by the Supreme People’s Court do not maintain an exact distinction between the two elements, but only seem to muddy the water. However, this will soon become a moot point. The 2018 LAUC lumps these two elements into one requirement that the information is “of commercial value”.
Clearly, this amendment simplifies and broadens the definition of “trade secret.” Some types of information worthy of trade secret protection that are left out of the old definition are captured under the new definition. One example is results from failed experimentation that reveal the infeasibility or the lack of utility of certain engineering approaches. This type of “teaching away” information may not be able to actively generate economic interests and may even have no utility. However, it could definitely be of commercial value in that it could reduce experimentation and cut down on R&D costs.
This broadening of the definition of “trade secret” will likely translate into a broadening of scope of protection under the LAUC – a welcome change to industry sectors that rely heavily on trade secrets.
2.2 Employee Liability
Article 9 of the 2018 LAUC eliminates the express language concerning trade secret misappropriation by employees and former employees. It now provides “a third party that knows or should have known that actions of the employees or former-employees of the trade secret owner … falls under the unlawful acts listed in the preceding paragraph … shall be deemed as infringement upon trade secrets”.
As a result, to claim civil liabilities against former employees, employers will probably still have to rely on confidentiality or non-compete clauses in the employment contract. If such clauses are found unenforceable (for any of a wide variety of reasons), or if none exists, the employers may be left with no direct remedies against employees and former employees under many circumstances.
As with the penalties for bribery, the penalties for trade secret misappropriation under the LAUC will also increase in monetary value. While a business operator or third party is currently subject to a fine of RMB 10,000 to RMB 200,000, they will be fined RMB 100,000 to RMB 500,000, and potentially even up to RMB 3,000,000 under the 2018 Revised LAUC.
3. Other Provisions
The 2018 LAUC newly incorporates a provision regulating business activities that utilize the Internet. The 2018 LAUC is also further amended to avoid redundancy or conflicts with other legislations, such as the Trademark Law and the Antitrust Law, by staying away from areas that are expressly governed by these statues.
- Hendrik Jan Biemond, Jason Gray, David Shen and Aaron Guo, Allen & Overy