The 国家市场监督管理总局 – State Administration for Market Regulation (“SAMR”) in China has released a draft Amendments to the 反不正当竞争法 – Anti-Unfair Competition Law (hereinafter the “Draft”) on November 22, 2022. The Draft, amongst other things, proposed the addition of the “相对优势地位” or “relatively advantaged position” concept and the relevant factors for determining this position. This is the second time this concept has been proposed in recent years and if this concept is formally introduced it could affect franchising.
Article 47 of the Draft defines the “position of relative advantage” to be including business operators’ advantages in areas such as technology, capital, user numbers, or industry influence, as well as other business operators’ reliance on that business operator in transactions. This is a broader definition than in the previous draft amendments in that the reliance of other business operators is no longer a necessary factor to determine the “relative advantageous position.”
In a franchise relationship, the franchisor is the owner of the business model and the IP resources, and exercises control over the franchised business operated by the franchisee. When considering the franchisor’s mature business model and experience, as well as franchisee’s reliance on the license of the franchisor’s IP resources, it can be easily argued that the franchisor has the position of relative advantage.
If franchisors are deemed to have a “position of relative advantage” over the franchisees, Article 13 of the Draft should be carefully studied and complied with. Article 13 of the Draft provides the prohibited activities for business operators with a position of relative advantage as follows:
- Coercing the transaction counterpart to sign exclusive agreements;
- Unreasonably limiting the transaction counterparts’ trading partners or conditions;
- Forcing the bundling of other goods when providing goods;
- Unreasonably restricting the price, sales targets, sales regions, sales time, or participation in the promotion of goods;
- Setting up unreasonable restrictions such as margin deductions or reductions of subsidies, discounts, or volume resources;
- Using methods such as influencing user choices, limiting traffic, blocking, reducing search ranking, and removing goods from stores, disrupting normal trading;
- Other conduct that impacts fair trade through unreasonable restrictions or by adding unreasonable requirements.
It’s worth noting that the Draft indicated that above-mentioned conduct may be justifiable if there are legitimate reasons. However, If the conduct unreasonably restricts, or adds unreasonable conditions to the transaction or impacts fair trade or disrupts the order of fair market competition it cannot be justified. It is unclear whether this language intends to impose a condition for Article 13 to apply, and if so, whether the intention focuses on regulating the relationship between private parties in business transactions or the public market order. If it is the latter, China seems to be gearing towards the standards in countries like Germany and France.
Article 21 of the Draft provides further guidance on the factors to be considered when determining whether a conduct constitutes unfair competition under Article 13. The factors include:
- The impact on the lawful rights and interests of consumers and other business operators, as well as on the societal public interest;
- Whether tactics such as coercion, duress, or fraud were employed;
- Whether the conduct went against industry custom, commercial ethics, or commercial morality;
- Whether the conduct violated the principles of fairness, reasonableness, and non-discrimination;
- The impact on technological innovation, industry development, and online ecology.
These factors should be reviewed by franchisor and considered in a potential defence.
If the proposed “position of relative advantage” is eventually adopted, its implementation and application calls for the immediate attention for franchisors in China.
The comment period has ended and SAMR is now reviewing the comments. There could either be a further draft presented by SAMR, or SAMR could forward a draft to the State Council and National People’s Congress for further consideration and adoption.
Paul Jones, IDI Country Expert for franchising in China