The Promulgation of the Law of the People's Republic of China. against Unfair Competition (Revised Draft for Review) and the

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1 The Promulgation of the Law of the People's Republic of China against Unfair Competition (Revised Draft for Review) and the Substantial Modification of the Commercial Bribery Related Terms I. Background On February 25 th, 2016, the Legislative Affairs Office of the State Council promulgated Notice of the Legislative Affairs Office of the State Council on Promulgation of the "Law of the People's Republic of China Against Unfair Competition (Revised Draft for Review) for Solicitation of Public Comments and released the full text of Law of the People's Republic of China Against Unfair Competition (hereinafter referred to as the Draft for Review ) for public comments till March 25 th, Since the implementation of the Law of the People's Republic of China against Unfair Competition (hereinafter referred to as the "Law against Unfair Competition") in 1993, there has been no any amendment until now. In view of the implementation of Law against Unfair Competition, there has been great increase in the pace of market-oriented development of the economy in China as well as extensive and profound change in the extent of market competition situation. The current Law against Unfair Competition obviously cannot meet the needs of economic development. Therefore, the revision of the Law Against Unfair Competition was in place, listed as the preparatory project of the legislation plan of the Standing Committee of the 12 th National People's Congress, the research project of the legislative work plan of the State Council in 2014, the preparatory plan of the legislative work in 2015 and eventually was determined that the State Administration for Industry & Commerce shall be responsible for the revision of this law. The revision work has thereafter been officially kicked off. In 2014, the State Administration for Industry and Commerce has formed eight research groups, including some university experts, legal practitioners, and regional Industrial and Commercial Bureaus. They discussed in depth vital issues during the revision of the law and held several seminars and symposia concerning the revision work. By taking into comprehensive consideration the opinions from all sectors, they revised the current Law against Unfair Competition and ultimately formed this Draft for Review. The Draft for Review has changed tremendously compared to the current Law against Unfair Competition and its content change has to do with the 30 regulations of the current Law (33 1 Newsletter Shimin Law Offices

2 regulations in total). Our law firm participated partly in the research work concerning the revision of provision related to commercial bribery. Combing with our previous experience dealing with the commercial bribery cases, we make a brief analysis on the commercial bribery part of Draft for Review as follows. II. The main point of the contrast on the commercial bribery between current law and Draft for Review No. the current Law Against Unfair Competition(effective from 1993) 1 Article 2 A business operator shall, in his market transactions, follow the principles of voluntariness, equality, fairness, honesty and credibility and observe the generally recognized business ethics. "Unfair competition" mentioned in this Law refers to a business operator's acts violating the provisions of this Law, infringing upon the lawful rights and interests of another business operator and disturbing the socioeconomic order. "A business operator" mentioned in this Law refers to a legal person or any other economic organization or individual engaged in commodities marketing or profit-making services ("commodities" referred to hereinafter includes such services). 2 Article 8 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 Draft for Review Article 2 Business operators shall, in their economic activities, follow the principles of voluntariness, equality, fairness, honesty and credibility and observe the generally recognized business ethics. For the purpose of this Law, "unfair competition" refers to a business operator's acts violating the provisions of this Law, infringing upon the lawful rights and interests of any other business operators or consumers and disturbing the market order. For the purpose of this Law, "business operators" refer to the natural persons, legal persons and other organizations engaging or participating in production or operation of commodities or provision of services ("commodities" referred to hereinafter include services). Article 7 A business operator shall not commit any of the following acts of commercial bribery: (1) Seek the organizational, departmental or personal economic benefits in public services or by depending on public services; (2) Pay economic benefits to another business operator without making truthful record thereof in the contract and accounting documents; or (3) Pay or offer to pay economic benefits to a third party having influence on the transaction, causing harm to the 2 Newsletter Shimin Law Offices

3 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. lawful rights and interests of other business operators or consumers. Commercial bribery means that a business operator pays or offers to pay economic benefits to the transaction counterparty or a third party that may have influence on the transaction and thus induce the latter to seek for the business operator any transaction opportunities or competitive advantages. Paying or offer to pay economic benefits constitutes offering of commercial bribery; accepting or agreement to accept economic benefits constitutes taking of commercial bribery. Where any employee of a business operator makes use of commercial bribery to seek any transaction opportunity or competitive advantage for the business operator, such act shall be deemed as the act of the business operator. Where there is evidence showing that the employee takes bribery against the interests of the business operator, such act shall not be deemed as the act of the business operator. 3 Article 22 A business operator, who resorts to bribery by offering money or goods or by any other means in selling or purchasing commodities and if the case constitutes a crime, shall be investigated for criminal responsibility according to law; if the case does not constitute a crime, the supervision and inspection department may impose a fine of not less than 10,000 yuan but not more than 200,000 yuan in light of the circumstances and confiscate the illegal earnings, if any. Article 20 Where a business operator violates Article 7 hereof, the supervision and inspection department shall order the business operator to stop the illegal act and impose on it a fine of not less than ten percent but not more than thirty percent of the illegal business revenue in light of the circumstances; if the violation constitutes a crime, criminal liability shall be imposed in accordance with the law. 3 Newsletter Shimin Law Offices

4 III. Our Analysis on Draft for Review 1. Redefine the act of commercial bribery The current Law against Unfair Competition does not elaborate the definition of commercial bribery. Based on the Law against Unfair Competition, the Interim Provisions on Prohibition of Commercial Bribery (hereinafter referred to as the Interim Provisions ), promulgated by the State Administration for Industry and Commerce, solely specifies the definition of commercial bribery from the perspective of offering a bribe and it is frivolous to use word bribe to explain commercial bribery. This Draft for Review in virtue of typical act enumeration and the specific definition and special provisions comprehensively redefines the act of commercial bribery. The details are as follows: (1) Renounce the use of secretly offers a rebate off the book, rebate.etc. words to define commercial bribery (2) The party who accepts bribery is no longer only limited by the other party to the transaction. And a third party that may have influence on the transaction could become the party who takes bribery. (3) Specify the purpose for commercial bribery--- to seek for any transaction opportunities or competitive dvantages Recent years, the practice of many commercial briberies indicates that the means of conducting commercial bribery varies a lot, no longer limited by such traditional tricks as secretly offers a rebate off the book or offer a discount to the other party in an explicit way. Only judging the commercial bribery by such above type is lack of exhaustiveness and tends to cause ambiguity. Such rigid terms in Law Against Unfair Competition do not affiliate the enforcement by the Administration of Industry and Commerce and also render the administrative counterpart hard to grasp the essence of commercial bribery. In the practice of commercial bribery, the subject offering bribery not only to the other party to the transaction but also to another third party that may have achieved his goal during the transaction. In usual, They closely relate to the transaction and have great power to affect the transaction capability, commonly including the intermediary organ, the broker, the government officer, etc. The substantive characteristic among those subjects who takes bribery is that they may influence the transaction. Therefore, the party to the transaction cannot form the restrictive condition for the affirmation of the subject who takes bribery. The adding of this ultimately extensive scope deserves more attention. The Draft for Review has amplified the definition of commercial bribery by means of elaborating the purpose from to sells or purchases any commodity to to seek for the business operator any transaction opportunities or competitive advantages. However, from the business operator s perspective, to seek for any transaction opportunities or competitive advantages is an inevitably 4 Newsletter Shimin Law Offices

5 (4) offer to pay, agreement to accept may also be identified as commercial bribery request under the instance of the furious competition. Therefore, to seek for any transaction opportunities or competitive advantages itself shall not consist of the substantive element for judging the commercial bribery. Only a business operator's acts violating the provisions of this Draft for Review, infringing upon the lawful rights and interests of any other business operators or consumers and disturbing the market order are the banned behavior. The constitution of bribery requires not only directly pay or accept, but also offer to pay, agreement to accept. This kind of legislation spirit embodies in the United Nations Convention against Corruption (hereinafter referred to as "the Convention") and many countries legislation. The Convention defines the act of bribery as three categories the promise, offering or giving. Draft for Review has enhanced the establishment scope of commercial bribery, clearly demonstrated the attempted standard, which is conducive to the management of commercial bribery. Moreover, as this standard is internationally adopted, in respect of Foreign Corrupt Practices Act in America, provided that there is any commitment or agreement to offer rather than achievement of their purpose for bribery, it will constitute contravention. 2. The act that employee takes bribery shall not be absolutely deemed as the act of the business operator The Interim Provisions in Article 3, regulates that where a business operator's employees sell or purchase commodities for the business operator by means of commercial bribery, the act shall be determined as the business operator's act. The Draft for Review on the one hand affirms the Interim Provisions, requiring that where any employee of a business operator makes use of commercial bribery to seek any transaction opportunity or competitive advantage for the business operator, such act shall be deemed as the act of the business operator. On the other hand, add a special circumstance that Where there is evidence showing that the employee takes bribery against the interests of the business operator, such act shall not be deemed as the act of the business operator. This exclusion provision limits the liability scope of commercial bribery for business operator. However, the definition of against the interests of the business operator still remain unknown to the public. For instance, the laws and regulations shall further specify whether the employee s failure to comply with a well-disciplined code of conduct (including the provision on combating bribery) is against the interests of the business operator. 5 Newsletter Shimin Law Offices

6 3. Three typical acts of commercial bribery It is certain that in Draft for Review, the provision on three typical acts of commercial bribery is not the definition of commercial bribery itself, not the non-exhaustive list in connection with commercial bribery, but only as a simple description on the three typical acts under the new market environment with the purpose for the public to easily understand. Three typical acts of commercial bribery is as follows. (1) Seek the organizational, departmental or personal economic benefits in public services or by depending on public services; (2) Pay economic benefits to another business operator without making truthful record thereof in the contract and accounting documents; or (3) Pay or offer to pay economic benefits to a third party having influence on the transaction, causing harm to the lawful rights and interests of other business operators or consumers. 4. Impose much heavier penalties on commercial bribery Compared with the Law against Unfair Competition, the Draft for Review has impose much heavier penalties on commercial bribery: The supervision and inspection department shall order the business operator to stop the illegal act and impose on it a fine of not less than ten percent but not more than thirty percent of the illegal business revenue in light of the circumstances; Not to mention the illegal gains (Its computing standard is controversial in practice), but base on the illegal business revenue without any Maximum amount of the penalty. Yet, the formal legislative bill of the Law against Unfair Competition shall further specify under the attempted circumstance, how to determine the penalty. IV. The Draft for Review will take time to become an official law The Law against Unfair Competition is formulated by the National People's Congress. Pursuant to Legislation Law of the People's Republic of China, the Draft for Review shall be submitted to the State Council, through the discussion held by the State Council, eventually forming as a legislative bill. Through the procedure of submission, deliberation, vote, promulgation, the legislative bill can become an official law. According to previous experience of other laws revision, it may still take 1 or 2 years before the Law against Unfair Competition being officially revised and promulgated. Any question about the material above, please contact: info@shiminlaw.com. Copyright in this material is owned by Shimin Law Offices. Do not quote, modify, transfer or copy this material. The composition of this material is only for comprehending Chinese laws and regulations, excluding any explanation, illustration or interpretation etc. in connection with Chinese laws and regulations. 6 Newsletter Shimin Law Offices