Anti-Trust & Unfair

Abstract

The Supreme People's Court of China has announced the first judicial interpretation of the PRC Anti-Unfair Competition Law (‘the Law’), to clarify the ambiguities in the application of the Law. Issues covered include passing off by the use of trade names, packaging or trade dress of well-known products, or the use of the business name or personal name of another enterprise or individual, false or exaggerated advertising, and unauthorized use of trade secrets.

Legal context

On 17 January 2007, the Supreme People's Court of China issued an interpretation on several issues regarding the application of the Law (‘the Interpretation’).

This is the first judicial interpretation of the Law since its enactment in December 1993. The People's Courts at different levels have since the enactment handled a vast number of cases involving different circumstances of unfair competition. The Interpretation is based on these decisions with a view to strengthening the protection of IP rights in China and fulfilling China's obligations under international treaties.

There are 19 articles in the Interpretation covering various areas which are briefly summarized as follows.

Passing off the well-known products of another by using trade names, packaging or trade dress peculiar to the well-known products

Article 5(2) of the Law prohibits the use without authorization of trade names, packaging or trade dress peculiar to that of well-known products or similar thereto, thereby causing confusion.

What are ‘well-known products’?

According to the Interpretation, ‘well-known products’ means products having a certain reputation in the PRC market and which are known to the relevant public. In deciding whether the products are to be recognized as well known, the court should take into account factors such as the duration, geographical location, revenue, and targets of sales as well as duration, extent, and geographical areas of promotion for the goods on a global assessment. The burden of proof lies on the claimant.

Shop décor, articles used in the business and staff uniform which form a unique style reflecting the corporate image on the whole may be considered as ‘trade dress’ as falling under Article 5(2) of the Law.

The use of an identical or similar trade name, packaging or trade dress of well-known products in different geographical locations does not, however, constitute an act of unfair competition if the later use is proved to be in good faith. Nonetheless, where business activities then extend to the same geographical location, thereby causing confusion as to the origin of the goods, the prior user may seek a court order directing the subsequent user to add to the name such other sign or mark capable of distinguishing the trade origin.

What constitutes ‘confusion’?

The use of trade names, packaging or trade dress substantially similar to that of well-known products with no apparent differences in respect of identical goods will be deemed capable of causing confusion. Reference may be made to the guiding principles on trademarks in determining similarity.

Further, if the relevant public is misled into believing that the user is operating under a licence from the proprietor of the well-known products or that the two entities are in some way associated when in fact it is not, ‘confusion’ is established.

Passing off the well-known products of another by the use of a business name or personal name of another enterprise or individual

Article 5(3) of the Law prohibits the use without authorization of the business name or personal name of another enterprise or individual thereby causing confusion.

The Interpretation defines ‘business name’ to include all business names registered with the business registration authority and business names of foreign entities that have been put to commercial use in China. Trade names with a certain reputation in the market and which are known to the relevant public are also included.

The word ‘use’ in Articles 5(2) and 5(3) of the Law is also defined to cover the relevant use on the products, their packaging, and the transaction instruments as well as use in advertising, exhibitions, and other business activities.

False or exaggerated advertising

Article 9(1) of the Law prohibits the use of advertisements or other means to give false and misleading publicity as to the quality, composition, performance, usage, manufacturer, usable duration, origin etc. of the goods.

The following acts creating confusion to the public are prohibited:

  • incomplete advertising or comparison of goods;

  • use of inconclusive scientific viewpoints or phenomenon as conclusive facts in advertising;

  • use of ambiguous language or other misleading means in advertising.

Advertising through exaggerated means will not be regarded as false advertising so long as no confusion is caused to the relevant public. The courts should determine cases of false advertising in accordance with the subject matter of the advertisement, the target audience of the advertisement, and the daily life experience and attention level of the relevant public.

Trade secrets

The Interpretation also clarifies what amounts to ‘trade secrets’ and what are the reasonable measures one should take to protect his confidential information in order to qualify as trade secrets. Further, obtaining trade secrets through independent analysis or ‘reverse engineering’ does not constitute an unauthorized use of trade secrets, provided that no unfair or unlawful means are involved in the process.

The Interpretation took effect on 1 February 2007 and will serve as helpful guidelines to the Chinese courts in unfair competition cases while removing the ambiguities and closing some of the loopholes in the Law. It is believed that there will be increasing number of cases based on the Law and the Interpretation to curb unfair or improper business dealings.

On 30 December 2006, over a decade after the Anti-Unfair Competition Law ("UCL") was promulgated, The Supreme People’s Court issued its judicial interpretation on the application of the law in civil unfair competition cases (the "Interpretation"). The Interpretation became effective on 1 February 2007 and provides the first detailed explanation of the UCL since it came into effect in 1993. The main thrust of the Interpretation is to clarify the scope of Article 5(2) of the UCL, which prohibits the unauthorized use of the trade name, packaging or trade dress of a well-known product and Article 10, regarding the protection of trade secrets.

Well-known Product

According to the UCL, the unauthorized use of the name, packaging or trade dress of a well-known product so as to mislead or confuse consumers, constitutes an act of unfair competition. However, the UCL provides no definition as to what is a "well-known product".

The Interpretation defines a "well-known product" as "a product which is known and has a certain degree of reputation among the relevant public in the territory of the PRC". The Interpretation set out the factors that need to be taken into consideration when determining whether a product is well-known including the duration and geographical extent of sales of the product; the product's revenue and market share; the duration, extent and geographical area of any advertising of the product; and examples of where the product was previously recognized as well-known.

The extent to which the product must be well known in the PRC itself is not clear but if the product has been recognized as well-known elsewhere, this may enhance the chances of it being recognized in the PRC. However, if a product has no reputation in the PRC, recognition as well-known in other countries alone, is unlikely to help.

Confusion
"Confusion" includes not only confusion that the defendant's product is the well-known product, but also that it has been endorsed by the proprietor of the well-known product, or that it is in some way connected or associated with the proprietor of the well-known product. There is no need to prove actual confusion provided that the defendant’s conduct is sufficient to cause confusion. Confusion is deemed if the name, packaging or trade dress is identical, or almost identical, to the well-known product.

The Interpretation makes clear that the burden of proving the product's reputation rests with the Plaintiff. Also, the product must be well-known to the relevant public in the PRC.

Trade Dress
The Interpretation provides guidance as to what constitutes "trade dress" which is not defined in the UCL. This includes the decoration of a place of business, the tools and equipment used, and the uniforms of personnel. However, generic, descriptive or non-distinctive trade dress will not be protected. It may be possible to acquire distinctiveness through use but the shape of a product which is dictated solely by function or technical effect will not be recognized.

The Interpretation provides that when determining whether a product is identical or similar to the name, packaging or trade dress of a well-known product, references can be made to the principles and methods adopted for determining identical or similar trade marks.

Enterprise Names and Names of Individuals
The UCL prohibits the unauthorized use of another's enterprise name or personal name which causes confusion. The Interpretation provides that "enterprise name" shall include not only enterprise names legally registered in the PRC, but also foreign enterprise names which have been used commercially in the territory of the PRC, but not necessarily registered.

Protection will also be extended to the "name of a natural person" which has been used in merchandising operations, including a pseudonym or stage name. This should help celebrities to take action against unauthorized use of their names.

The Interpretation makes clear that the enterprise name or individual name must have acquired a certain degree of reputation in the market and be known to the relevant public.

Trade Secrets
The UCL already prohibits businesses from obtaining trade secrets by way of theft, inducement, duress or other illegal means. It also prohibits the disclosure of trade secrets obtained illegally or in breach of a confidentiality agreement. As the scope of manufacturing and production in the PRC increases in scale and sophistication, the pressure on companies to protect their trade secrets has increased.

The UCL defines "trade secret" as any technical or operational information, which is unknown to the public; is of practical use and is capable of bringing economic benefits to the owner of the information; and which is subject to confidentiality measures adopted by the owner of the information.

The Interpretation provides guidance on the scope of protection of trade secrets:

Ø Information "unknown to the public" means information "not generally known and easily obtainable by the relevant personnel belonging to the same realm of technology, business or industry." The Interpretation sets out in detail various circumstances for assessing whether information is "unknown to the public". These are similar to the test for the novelty of a patent.

Ø The information must have actual or potential commercial value and is capable of enabling the owner to gain a competitive advantage.

Ø Reasonable protective measures appropriate to the commercial value of the trade secret must have been adopted. Factors to be considered are set out and examples of appropriate measures are provided including:

Ÿ ensuring that only relevant personnel are informed of sensitive information;
Ÿ adopting encryption or other protective measures; marking information as confidential;
Ÿ adopting passwords or codes for access;
Ÿ confidentiality agreements;
Ÿ limiting physical access to areas containing confidential information.

The Interpretation makes clear that "reverse engineering" is not a trade secret infringement. However, if a trade secret was obtained by means of unfair or illegal measures, the infringer cannot rely on this defence.

In the past, it was not clear whether "customer lists" should be regarded as trade secrets. The Interpretation clarifies that they are. However, it also provides that an ex-employee will not be in breach of the UCL for entering into business dealings with customers of his ex-employer if it can be shown that the customer independently chose to enter into business dealings with the ex-employee. It is uncertain whether this is still the case if the employee actively solicits customers from the ex-employer.

The burden is on the plaintiff to establish that there has been a violation of trade secrets.

The Interpretation also gives a licensee of trade secrets the right to sue for infringement.

Conclusion
The Interpretation codifies many administrative regulations and provisions already promulgated by the SAIC or local government. However, these existing regulations do not have the same legal effect as the Interpretation, which is binding on all People’s Courts. It is hoped that the Interpretation will help to strengthen IP protection in the PRC.

However, the issue of whether a product must have been used or sold in the PRC in order to be regarded as well-known is a crucial one for many brand owners. Strictly speaking, the definition of "well-known product" does not exclude the possibility of a foreign product being recognized as well-known in the PRC to the relevant public, even though it has not actually been sold there. It is interesting to note that the Draft Interpretation which was published for consultation provided that "a product which has not been used in the PRC would generally not be recognized as well-known". This clause does not appear in the Interpretation. However, it remains to be seen whether, in practice, the Courts or administrative authorities will still require some actual use in the PRC.

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