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What recent clarifications are there to the Unfair Competitions Law in china? (05/04/2007)

05/04/2007

The first interpretation of the Unfair Competition Law came into effect in China On 1 February 2007. The detailed interpretation clarified passing off, trade secrets and misleading advertising. The clarification of concepts in the interpretation will assist litigators and the courts in dealing with such issues.

What is the Background of the Unfair Competition Law and its interpretation?

Judicial interpretations issued by the Supreme People's Court (SPC) clarify the law and bind all courts. An SPC Interpretation may be provided in response to a specific question asked by a lower court, or it may be provided as a general explanation of the law. Once issued, an SPC interpretation becomes part of China's law.

In 2006, there were around 1188 unfair competition cases in the Chinese court system, according to the SPC's statistics; areas of passing off (under section 5) and infringement of trade secrets (under section 10) were high. Client list disputes had also risen with increased movement in the workplace. However, until now no detailed rule had existed to guide the court in handling unfair competition disputes.

How is “Copying well-known products” now defined?

Section 5 of the Unfair Competition Law states that 'the operators shall not adopt any of the following unfair means to carry on transactions in the market and cause damage to competitors:

1) Passing off the registered trade marks of others
2) Unauthorized use of the special name, packaging or decoration (ornamentation) peculiar to or similar to a well-known product in order to confuse and mislead the public
3) Unauthorized use of the name of the enterprise or natural person of others, which misleads the public to believe the product is from others
4) Forging or falsely using, on their goods, symbols of quality such as symbols of authentication and symbols of famous and high-quality goods, falsifying the origin of their goods, and making false, misleading representations about the quality of the goods.

What clarification have been made on the term “Well-known product”?

There is no definition of 'well-known product' under the Unfair Competition Law, although it is protected under section 5.

The Interpretation defines 'well-known product' as a 'product that is known to the relevant public with certain market reputation (cognition) within the territory of the People's Republic of China'. According to the Interpretation, the factors taken into consideration when determining whether a product is 'well-known' include:

1) How long the product has been sold
2) The region in which the product has been sold
3) The product's revenue
4) The object of the said goods (targeted consumer)
5) The duration, extent and geographic area of any promotion campaign.

The three judges of the SPC who drafted this Interpretation commented that the determination of whether a product is a well-known product is based on the degree of recognition of its special name, packaging and decoration in China, which is often from the manufacture, sale or other business activity (such as advertisements). It is not protected if the product has a good reputation overseas but not in China. However the product does not have to be known to everyone; being known in certain fields is enough.

What classifies a Special name, packaging and decoration of a well-known product?

The meaning of a 'special name, packaging and decoration of the well-known product' is not defined under the Unfair Competition Law.

However, the Interpretation makes it clear that the name, packaging and decoration of the goods which distinguish the goods shall be deemed to be the 'special name, packaging and decoration' under section 5(2) of the Unfair Competition Law. The Interpretation of the draft states that, when determining unfair competition, the general name, pictures and models of goods, names of goods, which are only directly indicating the quality, main materials, functions, purpose, weight, quantity and other characteristics of the goods are not considered, except for those that become distinguishing characteristics through usage.

The Interpretation further defines the meaning of 'decoration'. The unique integrated image consisting of the decoration of the business place, the style of the instruments used and the clothing worn may be identified as 'decoration' under section 5(2) of the Unfair Competition Law.

However, usage of the same or similar special name, packaging or decoration of the well-known product in a different area – where the subsequent trader can prove good faith – is not unfair competition according to the Interpretation. The court encourages the earlier trader to ask the later trader to put a mark to differentiate its product – if the later trader enters the same field as the earlier trader – to avoid confusion.

One SPC judge commented that this is not considered as an infringement because China's large geographic area makes it difficult to avoid the usage of the same or similar product name, packaging and decoration across different geographic areas.

What is seen as Misleading in unfair competition?

The meaning of 'misleading' is not defined under the Unfair Competition Law. However the Interpretation states that if the public mistakenly believes that the goods are licensed by the trader of the well-known goods or is a related company, the goods shall be identified as 'goods that are confused with the well-known products of others, and mislead the public to believe the goods are well-known goods' under the Unfair Competition Law. If the goods use the same or visually indistinctive name, packaging and decoration as the well-known goods, then it shall be deemed to cause the confusion with other well-known goods.

Where does the burden of proof lie with when proving unfair competition?

The burden of proof shall be with the plaintiff.

What is meant by a “Name” under the Unfair Competitions law?

The Interpretation stipulates that the enterprise name under section 5(3) includes the registered enterprise name and the foreign company name used in China for business purposes. The trading name (not the full company name), which has a certain market recognition (reputation and goodwill) and is known to the relevant public may be identified as the enterprise name under the Unfair Competition Law.

The name of a natural person used in the business may also be identified as the name under section 5(3). Pen names and stage names of a natural person with certain reputation and goodwill (market recognition) known to the public may be identified as the name under the Unfair Competition Law.

What defines “Use” in the Unfair Competitions law?

The Interpretation defines the 'use' under sections 5(2) and 5(3) of the Unfair Competition Law as commercial use including use of the name, packaging and decoration peculiar to the well-known goods or the name of the enterprise or natural person for:

1) Other products, packages or other trading documents or
2) Other advertising campaigns, exhibitions and other commercial activities.

What is a “Misleading promotion” under the Unfair Competition law?

Section 9 of the Unfair Competition Law states that the operator shall not engage in false, misleading promotion about the quality, composition, function, usage, manufacture, product life or origin of a product through advertising or other means. But it is not clear whether the meaning of the false, misleading promotion includes incomplete and comparison advertisements.

The Interpretation clarifies the position, prohibiting:
1) Selective advertising or selective comparison of the product
2) Presenting as fact scientifically arguable ideas and phenomena to promote the product
3) Promoting the product with ambiguous words or other forms that may cause misunderstandings.

However, it is not deemed to be false, misleading promotion and is only an explicit exaggeration insufficient to cause a misunderstanding.

How is Protection of trade secrets defined?

Section 10 of the Unfair Competition Law prohibits the disclosure of trade secrets. Trade secrets are defined as certain information which:

1) Is not known to the public
2) Is of economic value to the owner
3) Has a practical application, and
4) The owner has taken measures to maintain its confidentiality.

What is meant by “Not known to the public”?

The Interpretation does not list which category belongs to 'not known to the public' but excludes six categories of information such as information which is general knowledge in the field, can be obtained from other channels and is easy to obtain without significant cost. The client list is the most common trade secret dispute, but not all information in the client lists is considered a trade secret. Judgment varies in this area.

The Interpretation defines client lists, which contain customer names, addresses, contact information, trading habits, intentions and other information, including lists of a collection of many customers and specific customers with long-term stable trading relations, as trade secrets as distinct from public information.

However, where the customer's trading with the enterprise is based on their relationship with the individual employee, it is not deemed as unfair competition if it can be proved that the customer voluntarily chose to trade with the individual or their new employer, unless otherwise agreed between the employee and their former employer.

What is seen to be of “Economic value and practical application” to an owner?

The Interpretation explains 'economic value to the owner' under section 10 of the Unfair Competition Law' as having actual or potential commercial value and bringing economic benefit to the owner. An actual value is not required.

What required measures should there be to maintain confidentiality?

Section 10 of the Unfair Competition Law requires the trade secret owner to take measures to maintain its confidentiality. In practice, the level of adequacy taken in measures to maintain confidentiality are often arguable during litigation because of some uncertainties and differing requirements between judges.

The Interpretation makes it easier for the owner to prove the measures, which they have taken to keep the secret in case of dispute. It lists seven types of confidentiality measures and just one of them is sufficient to prove measures to maintain confidentiality.

They include:

1) Limiting information to a 'need to know' basis
2) Encryption
3) Label confidentiality
4) Passwords or codes
5) Confidentiality agreements
6) Limiting visitors
7) Requiring the secret to be kept, or any other reasonable measures.

Is Reverse engineering unfair competition?

Section 10 of the Unfair Competition Law prohibits illegal measures to obtain, disclose, use or permit to use the confidential information.

The Interpretation clarifies that independent R&D or reverse engineering is permitted. The Interpretation further defines 'reverse engineering' as information acquired by disassembly, survey and mapping, and analysis of the product obtained through public channels. Confidential information cannot be obtained through illegal measures in the guise of reverse engineering.

 

 

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