Authors: Harry Liu, Shanghai Office, King & Wood Mallesons
In Review of Shanghai’s Anti-Commercial Bribery Administrative Law Enforcement in 2019, an article published on 22 January 2020, we conducted a comprehensive review and summary of the anti-commercial bribery enforcement in Shanghai in 2019, and compared the data of 2019 with those of previous two years for analytical purposes.
According to the written decisions of administrative penalty (the “decisions” or a “decision”) of 48 cases published on the official website of the Shanghai Municipal Administration for Market Regulation (the “Shanghai AMR”) in 2019 and relevant policy documents, the medical-related industries were still the focus of anti-commercial bribery enforcement, with 24 cases accounting for nearly half of the total of 2019. In addition to sales of medical devices to non-hospitals and the medical cosmetology industry, there were 16 cases directly related to hospitals. Based on these 16 law enforcement cases, this article discusses the application of anti-commercial bribery laws in the medical field by administrative authorities, in a bid to enhance the accurate application of laws, and to help pharmaceutical companies and medical device manufacturers, distributors and promotion agencies improve their compliance with the law and relevant regulations.
I. Summary and analysis of 16 cases
After categorizing the statutory penalty basis of each case, the results are showed in the following chart:
Further summary and classification of these 16 cases are as follows:
In the relevant decisions, it was not difficult to notice that the law enforcement authorities’ application of each item under Paragraph 1 of Article 7 of the new Anti-Unfair Competition Law (“Paragraph 1 of the new AUCL”) had the following features:
a) As for medical devices bundling, the Pudong New District AMR and the Yangpu District AMR categorized the involved hospitals as “entities authorized by the counterparty to a transaction to handle relevant affairs” under Paragraph 1 Item (2) of Article 7 of the new Anti-Unfair Competition Law (“Item (2) of the new AUCL”) and imposed penalties by applying such provision, while the Shanghai AMR categorized the involved hospitals as “entities that have influence on a transaction” under Paragraph 1 Item (3) of Article 7 of the new Anti-Unfair Competition Law (“Item (3) of the new AUCL”) and imposed penalty by applying this different provision.
b) In a case involving bribery of a hospital doctor, the Xuhui District AMR categorized the involved doctor as an “employee of the counterparty to a transaction” under Paragraph 1 Item (1) of Article 7 of the new Anti-Unfair Competition Law (“Item (1) of the new AUCL”) and imposed penalty by applying the said provision. In other similar cases where the bribe-recipients were also hospital doctors, the Putuo District AMR imposed the penalty by applying Item (3) of the new AUCL. Here, the categorization of the involved doctor has changed from “an employee of the counterparty to a transaction” to “an individual that has influence on a transaction”.
According to the above summary, we noticed that in the enforcement against commercial bribery in the medical field, all three provisions under Paragraph 1 of the new AUCL were applied in different cases, though there was not much difference in the factual basis of such cases where the recipients of the relevant benefit were either the hospital (as the counterparty to the transaction) or the doctors (as employees of the counterparty to the transaction). Therefore, whether such a big difference in the application of law is an issue resulted from the legislation or from the different or even biased understanding of law by the law enforcement authorities when enforcing the law is a very important topic worthy for further discussion.
II. Understanding of Paragraph 1 of Article 7 of the new AUCL
Paragraph 1 of the new AUCL stipulates three scenarios that constitute commercial bribery. The provision is as follows: A business operator shall not seek transaction opportunities or competitive advantages by bribing the following entities or individuals with property or by any other means:
(1) An employee of the counterparty to a transaction.
(2) The entity or individual authorized by the counterparty to a transaction to handle relevant affairs.
(3) An entity or an individual that uses authority or influence to affect a transaction.
Some scholars believe that this is a flawed definition on the ground that it “uses the term ‘bribery’ to interpret ‘commercial bribery’. It is to use a defined term to interpret the definition entry, which is a typical synonymous repetition phenomenon in semantic hermeneutics.” The law does not prescribe what constitutes commercial bribery, which will inevitably cause controversy in practice. Paragraph 1 of the new AUCL is generally considered as a definition in the mode of connotation + enumeration or generalization + enumeration. Although the enumerated is not of commercial bribery but an extended enumeration of the bribe-recipients, it has remedied the deficiency of this definition to a large extent. To review the legislative background and purposes may be helpful for us to understand the application of Paragraph 1 of the new AUCL in practice.
Before its revision in 2017, the AUCL had been in force for more than 20 years since it was promulgated in 1993. These 20-plus years witnessed dramatic changes in China’s economy. Not only has China leapt to the second place in the world in terms of economic scale, but also its economic structure has undergone revolutionary changes, and the market economy has achieved unprecedented development. In 1992, China’s GDP was RMB 2,734.1 billion, ranking 9th in the world, equivalent to 1/13 of the United States. By 2017, China’s economic scale had reached RMB 82,712.2 billion, increased by more than 30 times over 25 years ago. The economic scale of the United States was only 1.47 times that of China. “The private sector plays an important role in the entire economic system, contributing more than 50% of tax revenue, more than 60% of GDP, more than 70% of technological innovation, more than 80% of urban employment, and more than 90% of new jobs.”
The AUCL has played an active role in the development of market participants’ awareness of legitimate competition, the regulation of the market participants’ competitive conducts, and the establishment of the objective of the market-oriented economy in the past 20 years. However, during the process, there were many cases where the marketized methods adopted by business entities to stimulate transactions were generalized as commercial bribery. It was also not uncommon for market regulators in certain regions that lack the awareness of serving enterprises to set targets for fines, treat companies as funding sources, and abuse their enforcement power against enterprises for commercial bribery. The 14th National Congress of the Communist Party of China in October 1992 announced that the goal of China’s economic system reform was to establish a socialist market-oriented economic system. The AUCL was promulgated only one year later. The dramatic changes in the past 20 more years have sufficiently indicated that the AUCL promulgated at that time could only be transitional, of which many provisions have been unable to adapt to China’s current economic and market circumstances. It is inevitable to make amendments.
During the process, the legislature and the law enforcement authorities had been pushing for amending the old AUCL. On 25 February 2016, the then Legislative Affairs Office of the State Council published the “Anti-Unfair Competition Law of the People’s Republic of China (Deliberation Draft)”, and solicited comments from the public. Article 14 of the draft stipulates that business operators must not carry out other acts of unfair competition harming the lawful rights and interests of others or disrupting market order. “Other acts of unfair competition” as provided for in the preceding paragraph are to be determined by the administrative department for industry and commerce under the State Council. On 26 February 2017, the Standing Committee of the National People’s Congress issued a new “Anti-Unfair Competition Law of the People’s Republic of China (Draft Revision)” to solicit comments from the public. Article 15 of this draft explicitly stipulates that “the administrative department of industry and commerce under the State Council, either alone or together with other relevant departments of the State Council, will research and submit opinions to the State Council for final decision on whether an act constitutes unfair competition which seriously disrupts the market order and should be investigated and punished in accordance with Article 2 of this law but not yet clearly covered by Articles 6-14 of Chapter II of this law and other administrative laws and regulations.” The two provisions in the above drafts sufficiently indicated that the legislature’s intent to impose certain restrictions on the law enforcement authorities’ discretion to prevent possible abuse. And such abuse of discretion includes the generalization of many normal or innovative market conducts as commercial bribery. Although this provision was not included in the effective version of the new AUCL, it still showed the legislature’s concern about law enforcement authorities’ abuse of discretion and its intent to regulate it.
The report of the Legal Committee of the National People’s Congress on the review results of the “Anti-Unfair Competition Law of the People’s Republic of China (Draft Revision)” explicitly stated that Paragraph 1 of Article 7 of the Second Reading Draft of the Anti-Unfair Competition Law of the People’s Republic of China was in line with the relevant provisions of the Criminal Law and defined the objects of commercial bribery, of which the third category is “state organs, state-owned companies or enterprises, public institutions, people’s organizations, or state functionaries”; and the fourth category is “other units or individuals that might take advantage of the authority of state functionaries to influence transactions”. Some members of the Standing Committee proposed that market participants should be in an equal position in market competition, and therefore it was inappropriate to only emphasize that state-owned units were the objects of commercial bribery. Some have suggested that these two types of subjects both use their power and influence to affect transactions and therefore should be categorized as one group. After discussion, the Legal Committee suggested that these two categories be combined and modified into one, which stated as follows: An entity or an individual that uses power or influence to affect a transaction.
The above legislative statement is closely related to the problems in the application of law in current practice. “‘Accuracy and clarity’ are foremost requirements for expressing legal rules …. One should avoid the misalignment between legislative intent and linguistic symbols, and avoid ambiguity caused by improper use of linguistic elements…” After the promulgation of the new AUCL, many law enforcement officials and scholars tried to interpret the Article 7. Prof. Xiao Jiangping, director of the Peking University Competition Law Research Center, said in a lecture during the training course for law enforcement officials in Tianjin held by the State Administration for Industry and Commerce that “the new AUCL adjusts the scope of ‘bribe-recipient’ from ‘an entity or an individual of the counterparty’ to ‘an entity or an individual that uses power or influence to affect a transaction, i.e., to define ‘bribe-recipient’ from the perspective of the nature of the conduct: the person who can influence the transaction. This returns to the nature of bribery, emphasizes the purpose of the conduct or competitiveness of the effect, rectifies the unreasonable regulations in the past that caused difficulties in law enforcement, and corrects a series of unreasonable categorizations brought about by logical contradiction. In this way, it can also distinguish commercial bribery from monopoly and other bribery of non-commercial nature.”
Prof. Xiao Jiangping’s interpretation of Article 7 is consistent with that of law enforcement officials. On 4 November 2017, Yang Hongcan, then director of the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau of the State Administration for Industry and Commerce, said in an interview that “the new AUCL limits the scope of bribe-recipients and effectively prohibits the generalization of commercial bribery. It reflects the attitude of prudence for market regulation, and protects emerging trading models and market innovations. There are three types of bribe-recipients numerated in this article: one is an employee of the counterparty to a transaction. Another is an entity or an individual entrusted by the counterparty to handle related affairs. It should be clarified that to identify “the counterparty to a transaction” under this paragraph, one should first analyze the actual transaction and identify both parties to such transaction. For example, when a school is entrusted by all students to sign a uniform purchase contract with a uniform supplier, the parties to the transaction should be the supplier and the students since the legal consequences are actually borne by the students. If a supplier gives the school property or other economic benefits, then this conduct may constitute a suspected commercial bribe. The third is an entity or an individual that uses power or influence to affect a transaction. For example, when someone bribes the investors of the counterparty to a transaction in order to secure trading opportunities or competitive advantages, such investors may be categorized as bribe-recipients under the new AUCL.”
Therefore, according to the interpretation of Paragraph 1 of the new AUCL by government officials, scholars, and the practitioners, a “bribe-recipient” should not include the counterparty to the transaction. Therefore, Item (3) of the new AUCL after the combination should only refer to third-party entities or individuals who use their power or influence to affect transactions. Such an interpretation is in line with the textual meaning of “using influence”. This is also why Paragraph 1 of the new AUCL separately categorized “employees of the counterparty to a transaction” as one group of bribe-recipients. An employee of the counterparty to a transaction should not be in the same category with individuals defined in Item (3) of the new AUCL who use power or influence to affect a transaction. If so, there might be problems with the legislative logic. And in the meantime, if there is any possible overlap between two out of three items in the same article, it would also run afoul of the basic requirements of “accuracy and clarity” of legislation. Therefore, in the case of relevant benefits given to the counterparty to the transaction, and if such giving of benefits has any indication of unfair competition, my opinion would be that it should not be simply categorized as commercial bribery. Instead, one should take into consideration the specific circumstances and may refer to the Anti-Monopoly Law or other laws or regulations such as the accurate bookkeeping requirements under Paragraph 2 of Article 7 of the new AUCL
III. The extended application of Paragraph 1 of Article 7 of the new AUCL in practice
The State AMR issued the Opinions on Further Strengthening Anti-Unfair Competition Enforcement on 11 May 2018. In this document, the State AMR categorized hospitals and schools as entities with public management and service functions, requiring that the investigation of the illegal acts of giving property or other benefits to such entities should be focused on. For example, it may constitute an illegal act if a business operator, under the disguise of a lease, a donation or a placement of equipment, bribes the medical institution that uses power or influence to affect the transaction to secure a supply contract of the relevant consumables and ancillary equipment and in this way disrupts the market order, or if a business operator uses property or other methods to bribe schools that are entrusted by the parents (or the Parent Committee) to handle the purchase of school uniforms, arrangement of meals, and other affairs related to the students.
The Notice of Implementing the Notice of Preventing and Prohibiting Improper Business Activities Under the Disguise of the Thematic Campaign Education on “Remain True to Our Original Aspiration and Keep Our Mission Firmly in Mind” issued by the General Office of the State AMR on 31 July 2019 further advanced this law enforcement practice. Our summary of the anti-commercial bribery cases in the medical field in Shanghai reflects this enforcement effort and trend.
Although the view that the school’s purchase of uniforms and arrangement of meals are considered as an entrustment by parents or the Parent Committee may require further discussion, it is to some extent reasonable from a contract law perspective. However, it would be difficult to legally justify the categorization of a hospital’s purchase of consumables and pharmaceuticals as an entrustment the same way. Is the procurement of state-funded hospitals entrusted by the state or by patients? If the former, then, the state, as an investor of public hospitals, is not directly involved in the day-to-day operation of the hospitals. If the latter, then, the “entrusting” patients are not even specified when the hospitals are purchasing consumables and medicines. Additionally, the purchased consumables and medicines can be used for both current and future patients. So, if the patients have not been specified, how can it be said that the hospital is entrusted by such unspecified patients to purchase consumables and medicines? That’s also not in line with the rules of entrustment and agency in the Contract Law.
State-owned medical institutions have the functions of public management and services. Their public management functions can only be exercised under certain circumstances. For example, during the COVID-19 pandemic, hospitals may perform certain public epidemic prevention functions while treating patients in the same time. The functions of public services lie in many other state-owned institutions such as water supply, electricity, gas, telecommunications companies and business entities in other public utility industries. Most of them are state-owned or state-controlled. They all have functions of public services. But that doesn’t deny their existence as market participants when they engage in civil and commercial activities, nor does it deny their rights and obligations under the Contract Law as market participants. If a market participant is categorized simultaneously as a counterparty to a transaction and a third-party entity that has influence on a transaction simply because of its public service functions, such a change in or misplacement of the role of the subject may not only go against the intent of Paragraph 1 of the new AUCL to restrict the scope of bribe-recipient and the consensus to exclude the counterparty to a transaction, but also cause enormous confusion in the application of the new AUCL.
The above-mentioned retrieved cases of commercial bribery in the medical field in 2019 from the official website of the Shanghai AMR sufficiently illustrate this problem. Some cases in other regions that we retrieved may have only applied Paragraph 1 of the new AUCL in general without further specifying the item. Some even list only the applied penalty clause, namely Article 19 of the Anti-Unfair Competition Law. This also reflects the confusion of the law enforcement authorities in the application of the law.
IV. Consequences of the extended application of Paragraph 1 of Article 7 of the new AUCL and suggestions
The confusion in the application of the law in the above 16 cases has illustrated to some extent the consequences of such extended application. Firstly, as for the administrative counter-parties, administrative law enforcement authorities’ unclear application of law makes it impossible to give clear guidance to the market participants (the administrative counter-parties). A penalized conduct in a case of administrative penalty should be a violation of the law. The administrative law enforcement authorities should therefore specify the legislative provisions that are violated. Otherwise, the market participants would lose guidance. For example, in the above cases, public hospitals were in some cases defined as the counterparties, in others as trustees, and yet in other similar cases as entities or individuals that use their power and influence to affect transactions. Paragraph 1 of the new AUCL has in such way become a one-fit-all provision. Under Article 70 of the Administrative Litigation Law of the People’s Republic of China, “if a specific administrative act has been undertaken in one of the following circumstances, … b. erroneous application of the law or regulations, the act shall be annulled or partially annulled by judgment, or the defendant may be required by judgment to undertake a specific administrative act anew.” The uncertainty of the application of law in anti-commercial bribery enforcement in the medical field has greatly increased the possibility of erroneous application of law, which may lead to the annulment of a decision.
Secondly, the practice that categorizes a hospital simultaneously as a counterparty to a transaction and a third-party entity that has influence on the transaction simply because of its public service functions may cause uncertainty to the application of the new AUCL. If this kind of dual-identity can be conferred merely because of the fact that an entity has public management and service functions, should other state-owned enterprises that also have public management and service functions, such as water supply, electricity, gas and telecommunications companies, be categorized as bribe-recipients when they accept commercial benefits other than rebates and discounts from the counterparty to a transactions due to such dual-identity? This issue has been raised by law enforcement officials. Officials from the market regulation authorities wrote in an article that “in addition to public hospitals and public schools, some enterprises and institutions entrusted to manage public affairs, such as state-owned enterprises and property management companies, should also be included into the category. Such entities also have the dual-identity of the counterparty to a transaction and the third parties that influence the transaction, and their conducts are of the nature of entrustment by duty.” If this logic continues, the efforts of the new AUCL to encourage transaction innovation and to avoid generalization of innovative market conducts into commercial bribery may probably be ruined.
Concerns that the current anti-commercial bribery enforcement may continue the expanded recognition of commercial bribery as the old AUCL did are not unfounded. The market regulation authorities should still take into account of the ultimate goal of realization of the socialist marketization, protect the initiatives of the parties concerned, and encourage them to make innovations to obtain legitimate competitiveness. As mentioned above, in the context of a market-oriented economy, state-owned enterprises and public institutions are all market participants and should operate in accordance with market rules. They should neither enjoy treatments that are superior to others, nor should they endure operating conditions and environment that are inferior to others. At the same time, considering the absence of penalty of the bribe-recipients in the new AUCL, and the proportion of the private enterprises in the current economy in China, if the current anti-commercial bribery law enforcement logic continues, it is more than imaginary the concern that the “Anti-Unfair Competition Law” may be evolved into the “anti-non-state-owned enterprises unfair competition law”.
In order to mitigate market participants’ concerns about such enforcement logic, the law enforcement authorities’ application of law should be more precise. If doctors of state-owned hospitals or employees of enterprises of any background receive bribes from the counterparty to a transaction before, during or after such transaction and have an influence on the said transaction, Item (1) of the new AUCL should apply and such conducts should be investigated and handled thereunder. For cases where one party gives benefits to the other party to the transaction but such benefit-giving has not been accurately recorded, one may consider applying Paragraph 2 of Article 7 of the new AUCL. If one party to the transaction receives benefits from the counterparty at the cost of the interests of patients or consumers and therefore constitutes unfair competition, then the general principles in Article 2 of the new AUCL or relevant provisions in the Law on Protection of Consumer Rights and Interests may apply and penalties may be imposed thereunder. However, quantitative economic analysis must be conducted before imposing such penalty in order to prove how the market order has been disrupted or how the lawful interests of other business operators or consumers have been damaged. In applying the general principles in Article 2 of the new AUCL, close attention should be paid to avoiding the abuse of discretion. If the seller possesses a certain market position or if its operation violates the prohibitive provisions of the Anti-Monopoly Law, penalties should be imposed under the Anti-Monopoly Law. Justice has long arms. Ever since the reform and opening-up, China’s has made great achievements in legislation, and it has established a basically complete legal system necessary to build a socialist market economy. These laws have undergone several rounds of modification over the past 20 years to keep them adaptive to the developing market. As the most important gatekeeper to safeguard the market-oriented economy, market regulation authorities should be loyal to and accurately applying the law, trying not to leave the market participants in the dark. From another perspective, pharmaceutical companies and medical device manufacturers should also operate more compliantly, cooperate with the state’s healthcare reform, work hard to reduce the production and sales costs, and promote the pricing reform of pharmaceuticals and medical products to benefit the public, especially the patients.
Acknowledgement: Thanks to my colleagues Wang Yue, Liu Hongyue, and Bao Yining for their help in collecting and organizing the materials, and Yang Haiyan, Xia Ying, and Luo Chenchen for their valuable comments.
Translated by: Jason Gan
 The Shanghai AMR is in the leading position in China in terms of decision disclosure. Its official website allows visitors to retrieve information they need through keyword search. The official websites of most other AMRs in China either don’t have such function or don’t support keyword search.
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