Risks and precautionary measures related to sponsorship

In order to contribute to the community and enhance awareness for brands, many companies would sponsor public service activities, themed conference, competitions, and etc., no matter voluntarily or not. Such sponsorship is supposed to be a win-win event, but if the sponsorship is implemented in a wrong way, it may bring risks to those companies.

Generally, the risks related to sponsorship include the following:

Firstly, it may constitute commercial bribery. Companies provide sponsorship for gain competitive advantages may be recognized as commercial bribery by administrative authorities and judicial authorities, because such sponsorships may be deemed as violations of the “Anti-unfair Competition Law” and the “Interim Provisions on Prohibiting Commercial Bribery”. For example, in the case Sui Gong Shang Chu Zi [2018] No.179, the administrative authority held that, the company had provided CNY10,000 to the seminar held by the research institute, and such behavior has constituted commercial bribery, finally imposed a fine. In the case (2015) Quan Xing Chu Zi No. 00090, the court held that the company sponsored a total of CNY120,000 in twice for “Jiangsu Ultrasound Medicine New Technology and New Progress Learning Classes” organized by the hospital, combined with other bribery behaviors, the company constituted the crime of unit bribery.

Secondly, there is a risk of violating the “Advertising Law”. The “Advertising Law” sets special provisions for advertising for certain specific industries. Even in sponsored advertising, if it does not comply with relevant regulations, it will be considered as an illegal advertising. For example, in the case Ning Shi Jian Dong Chu [2020] No. 17, a real estate company sponsored a public service activity for the promotion of the National Traffic Safety Day, the organizer embedded 8 seconds introduction of the company in the promotion video of this activity. The 8 seconds video showed, “Comfortable homes with 90 to 130 square meters”. The administrative authority held that the advertising did not indicate the area was the floor area or the usable floor area, which should be deemed as an illegal advertising.

Thirdly, there is a risk of being held accountable for breach of contract. Some sponsored parties, especially those with strong brand protection awareness (such as the Olympics), may set specific requirements regarding promotion in the contracts, such as, the approval process for the use of trademarks, restrictions regarding the type and content of promotion, and etc.. If the sponsor failed to implement accordingly, it may be held accountable for breach of contract.

Fourthly, there is a risk of infringement. Although such cases are rare, the risks actually exist. For example, in the case (2021) Yue Min Shen No.2644, a company sponsored a team to participate in a roller-skating match, and also lent its seal to assist the team in registration. During the competition, a team member was injured, and the court determined that the company had a supervisory and management obligation regarding whether the members had qualifications and their physical health status, whether the team had purchased personal accident insurance for the members; since the company failed to fulfill its supervisory and management obligations, it should bear corresponding liabilities.

Fifth, there is a risk of product liability. Some sponsors provide materials for free, so they believe that they would not have any liabilities for product quality. This is an incorrect perception. A business operator shall bear legal liabilities for free gifts sent to clients. This logic could also be applied in the sponsorship. Because sponsors could add benefits to the awareness and image of their brands by the sponsorship, they should also bear relevant liabilities. Therefore, where materials provided by sponsors do not meet relevant regulations such as the “Product Quality Law”, those sponsors may have to bear relevant liabilities.

Therefore, in practice, when a company intends to provide sponsorship, it is recommended to pay attention to the following aspects:

Firstly, to review the sponsorship in advance. (1) The situation of the sponsored party. In addition to review routine items, such as the registration and qualification of the sponsored party, the relationship between the sponsor and the sponsored party is also important. Because if the parties are upstream and downstream business operators, such sponsorship is riskier from the perspective of commercial bribery. (2) The information of the sponsorship activities, including the purpose of such activities, the usage of sponsored materials, the authenticity of such activities, and etc.. (3) The rationality of the consideration. The scale and result of the activity shall be equal to the sponsored materials, which means, if it is a small activity, it is not appropriate to sponsor a large amount of fund or too many materials.

Secondly, to review the sponsorship contracts in advance. (1) The contract should prescribe the purpose of the sponsorship, the use of sponsored funds/materials, and etc. For example, the purpose of the sponsorship shall be adding benefits to the awareness and image of brands instead of gaining a competitive advantage, such as the sponsored party shall purchase products from the sponsor. (2) The sponsored funds shall be remitted to the organizer instead of an individual’s personal account. (3) The rights and obligations of the parties shall be specific, such as the sponsored party shall ensure the safety during the event. In addition, the obligations shall not be unreasonable transaction conditions, such as the sponsored party shall purchase products up to a minimum quantity.

Thirdly, to follow up with the performance of the sponsorship contract and retain relevant evidence. In terms of accounting, the sponsor should truthfully record expenditure in its accounts. It should also require the sponsored party to provide feedback on the progress of the event timely, and submit documents reflecting the performance, such as photos and videos of the event, attendance forms, achievement materials, cost list and etc.. If it is necessary, the sponsor shall check the aforementioned items on site. In addition, the sponsor shall retain the contact records, payment vouchers, etc. during the performance of the agreement.