Chinese IP Law Updates
August 31, 2018

How liabilities on sellers of products constituting Unfair Competition have been implemented in the new amendment of the law

Co-authors: Edmond Au, Shirley Lin

“Products constituting unfair competition” defined in this article largely correspond with the circumstances provided in Article 6 of the new Anti-unfair Competition Law, where unfair competition is typically characterized as “unauthorized use” of other’s rights. Such use is, in our opinion, consistent with trademark use prescribed in Article 57.1 and 57.2 of the Trademark Law in terms of their nature. This is because even though the context is different in the two laws, the meaning of “use” should remain unchanged, as the provisions concerned are closely correlated and aim to address the same issue – identification of the source of products.

Similar to trademarks, a product’s “name, packaging or decoration”, a business’s “corporate name” and “the name of an individual” set forth in article 6 also function to identify where the product in question comes from. The two laws go hand in hand to serve as a bulwark against IP infringement inChina. So what does “unauthorized use” cover? Does it include pure distribution activities? We believe the answer is no, given its counterpart’s coverage in the Trademark Law. In the Trademark Law, the echoing trademark use is an act parallel with “sale”, and separate provisions have been designated for them.

In light of the correspondence between “unauthorized use” and trademark use, the same rule applies to the former. Therefore, the scope of the term “use” is supposed to be linked with direct use, i.e. by manufacturers who may also sell as well as produce. As for sellers who do not manufacture, their behavior is not regulated by this provision.

With pure distributors’ liabilities up in the air in the Anti-unfair competition law, reference could be drawn from ministerial regulations or administrative opinions. In the 1995 Certain Regulations on Prohibiting Unfair Competition Activity Concerning Imitating Specific Names, Packaging or Decoration of Well-known commodities, the State Administration for Industry and Commerce of PRC (SAIC) laid down in Article 9 that “Selling commodities containing specific name,packaging or decoration of a well-known commodity which is known well or ought to be known well by the sellers shall be punished according to the provisions of Articles 7 and 8 of these regulations.”

The Administration also rendered an official reply to its subordinating bureau in Tianjin on such an issue. Upon the latter’s query about how to deal with the sale of free-riding commodities, the SAIC affirmed that distributors’ selling goods exploiting other’s brand and reputation constitute a violation of Article 5.3 of the Anti-unfair Competition (before 2017 amendment) and should be punished pursuant to Article 21. The aforementioned regulations and reply are still in effect as of today and continue to be an established major standard that has been in place for years to guide law enforcement with regard to whether sellers are infringers by unfair competition.

In judicial practice, the regulations and reply shortly of legislation would not be cited for rendering judgment. Instead, courts factor in how well the product being infringed upon and the related right holder (name of corporate or individual) are known, and how much of bad faith the seller has displayed in a case. If the seller is obviously ill-intentioned and fails to justify the selling with proof of a legal source of the product in question, courts would generally make the seller stop the infringement and compensate the right owner, pursuant to Article 58 of the Trademark Law and Article 2 of the Anti-unfair Competition Law. The practice has been witnessed in two cases where the distributors were found with obvious bad faith to have sold products infringing upon their well-known competitors’ rights. Although unfair competition perpetrated by mere selling is not elaborated in the legislation, courts are within their rights to affirm infringement by resorting to Article 2, a fundamental provision of the law. In view of such court discretion within an acceptable range, it is no wonder that law-makers were comfortable enough to have left out a provision for pure selling as a form of unfair competition in the law.

We reckon that the omission has its bright side because some sellers might otherwise suffer loss. Unlike trademark or patent or copyright, rights concerned in unfair competition disputes are not publicized for the public to check on. If unfair competition by mere selling was written down in the law, small and micro sellers with good faith but lacking resources could have been found infringing to their surprise when they were not able to foresee what would constitute unfair competition, a term encompassing so many forms of infringement. Reasonable or not, the legislation is the way it is, but it should not be a reason to let go of infringing sellers at stake.

Lenient enforcement would aggravate the already severe landscape of unfair competition in China. Perpetrators would step up their violations knowing that they could easily get away, pushing originally good-faith operators towards the pursuit of illegal easy money. But if we stem unfair competition on the demand side by punishing sellers, it would in turn curb violations by manufacturers. It is, therefore, necessary to put administrative and civil liabilities on pure distributors considering the current workings of China’s market and economy.

But the question is, when and how to do it? Articles 60 and 64 of the trademark law could be a way. If a seller unknowingly provides products constituting unfair competition and is able to prove legal acquisition and identify a source of the products, it is only required that the seller stop the distribution without being subjected to any administrative penalties or civil liabilities. With the above-mentioned regulations and reply in place, infringing sellers can be effectively punished on reasonable grounds by the administrative authorities. As for court proceedings, Article 2 of the Anti-unfair competition law is available to be cited depending on the circumstances of selling activities to pass down judgments at courts’ discretion.

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