Compliance issues for gifts that advertise

By Wu Jiang, AllBright Law Offices
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Advertising gifts mean items printed with brand name, logo or slogan that operators give to counterparties or the public in business dealings with the view to increasing awareness or market share. Legal matters involved in advertising gifts include, but are not limited to, anti-business bribery and other competition issues.

GIFTS OR BRIBERY

How do we distinguish legitimate advertising gifts from illegal business bribes? Article 8 of the Interim Provisions on Prohibiting Business Bribery, issued by the State Administration for Industry & Commerce (SAIC), states that, “Operators are not allowed to give cash or items to the counterparties or individuals of the counterparties, except for small-ticket advertising gifts given as a customary practice. Any violation of the foregoing is deemed business bribery.” The reality, however, is much more complicated than this simple rule. For example, the recipient of a business bribe may not be the counterparty itself but a third party that is sufficient to influence the transaction; the gift does not necessarily constitute a business bribe even if its value is significant.

Common distinguishing standards:

  1. Recipient of gift. Advertising gifts for unspecific recipients does not usually constitute a business bribe since they mainly target consumers or the public. The provision of advertising gifts from suppliers may constitute a business bribe. And advertising gifts used for facilitation are bribes in disguise.
  2. The gift. Low-value consumables, such as cups, will hardly be deemed bribes. However, according to the interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate, items of low value, but with considerable combined value, such as purchase cards and transportation cards, have the risk of accumulating as business bribes. Computers or mobile phones, with considerable value, obviously are out of reasonable scope, though they may be deemed as office supplies.
  3. Purpose of gift. While the purpose of advertising gifts is to promote products, the purpose of a business bribe is to seek an inappropriate transaction opportunity or competitive advantage. In an administrative sanction case, a tyre company gave agents material incentives such as iMacs or iPhones of value proportional to sales. Such items had nothing to do with tyre equipment produced by the company, and therefore could not convince people that they were for promotion of products even if they bore the logo of the company.
Wu Jiang Partner  AllBright Law Offices
Wu Jiang
Partner
AllBright Law Offices

In practice, one mistake is to regard gifts given for free as business bribes. In an administrative sanction case, the plaintiff offered, free of charge, its brand freezers to the retailer for sale of brand beers at market price, and signed an agreement with the retailer pursuant to which beers of other brands could not be put into the freezers. The court deemed that the plaintiff aimed to build product image and promote its brand. It didn’t aim to jeopardize its competitors or put them at a competitive disadvantage and therefore damage their legitimate interests.

Based on this, the plaintiff’s act did not constitute unfair competition. Therefore, whether a gift constitutes a business bribe lies primarily in whether the purpose is to jeopardize competitors and gain a competitive advantage or transaction opportunity. The two factors for determining a business bribe are: (1) whether the principle of equal value exchange is followed; and (2) whether it may lead to the loss of competitors’ market share.

In another administrative sanction case, the plaintiff sold brand fresh butter products to Party A, while Party B purchased such products from Party A as raw material. The plaintiff gave the brand fresh butter products to Party B in proportion to sales as gifts. The court deemed that since Party B had an advantageous position in the production and supply chain, the plaintiff’s giving of gifts without any transaction with Party B was aimed to gain or enhance transaction opportunity by offering benefits, and therefore
constituted business bribery.

Other competition law issues. An operator may be suspected of dumping if he offers a gift for the product sold or services rendered, and the value of such a gift is high, or has even exceeded the price of the product sold or services rendered. The operator may be suspected of committing tie-in sales if the offered gift goes against, or has no way to meet, the expectations of buyers, but has to be accepted by buyers for the purchase of the product or services. The operator may be suspected of conducting a monopoly if there are only a few major competitors in the areas of the product sold or services rendered by the operator, and the gift is offered mainly for the purpose of defeating those competitors.

COMPLIANCE ADVICE

First, we need to distinguish the persons to whom we offer gifts and draw a line between right and wrong. We must not offer gifts to a third party that may affect a transaction, and must pay attention not to affect fair competition in the market when we offer gifts to the dealer of an opposing party. Second, we need to hold down the value of a gift but give prominence to its function. We may hold down the value of a gift within the reasonable range accepted in business activities and choose those articles relating to the product, brand or image of the operator, and having the advertising function as the gifts.

It is better to offer gifts as complimentary, and reflect the principle of equality and compensation in transactions. People are more prone to construe a combination of a gift with the product sold or services rendered as commercial behaviour. If it is done on the basis of equality and compensation, such behaviour is less likely to be linked with the malicious elimination of competitors.

Finally, direct linkage should be avoided and accounting should be made truthfully. We must avoid establishing a direct linkage between gift offering and sales through calculation and, regarding accounting truthfully, it is an effective measure to strengthen internal control and reduce legal risks.

Wu Jiang is a partner of AllBright Law Offices

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