30 June, 2015
China has sharpened its legal tools for protecting consumers in response to a series of scandals relating to food safety, misleading advertising and leakage of personal information over the past few years. The Consumer Protection Law was overhauled in 2014 (followed by a number of implementing rules), and the Advertising Law and the Food Safety Law were amended in early 2015.
While the new laws are a welcome trend for long-suffering Chinese consumers, the new rules will bring challenges to both domestic and international businesses that manufacture, promote and sell products in China.
The new Consumer Protection Law was effective from 15 March 2014. The new Advertising Law will be effective from 1 September 2015, and the new Food Safety Law will be effective from 1 October 2015.
We set out below some of the highlights of these legal developments.
Regulating Advertising Activities
False advertising is rampant in China, in part due to unclear legal rules and a lack of enforcement. The new Advertising Law, for the first time, provides a clear definition of “False Advertisement” which refers to an advertisement that uses false or misleading information to deceive or mislead consumers. The new rules also list a number of circumstances in which “False Advertisement” will be deemed, including among others: (i) the products advertised do not exist; (ii) the information contained in the advertisement turns out to be inconsistent with the facts and has a substantial impact on the purchasing decisions of consumers; or (iii) use of fabricated or falsified materials to indicate outcomes or performance of the products.
The new Food Safety Law and the new Advertising Law also provide compulsory requirements for sector-specific advertising. For example, advertisements for health food must be prominently marked with the wording “the product is not a substitute for pharmaceuticals”. Such advertisements are also prohibited from guaranteeing efficacy, or suggesting that the product is necessary, for safeguarding health. Additionally, health food related advertising must be examined and approved by the food and drug administration before being published. Advertising for certain other products, such as infant formula and beverages, is also regulated.
Restrictions On The Use Of Standard Terms
The new Consumer Protection Law and the Measures on the Sanctions for Misconduct Infringing Consumers' Interests regulate the use of standard clauses used by retailers when selling to end-customers. Under the new rules, retailers are obligated to draw the attention of consumers to clauses in their standard terms that potentially affect consumers' material interests (eg, the price, quality and quantity of products). Such clauses will have no binding effect if they have not been brought to the attention of a consumer. Retailers are also generally prohibited from limiting or eliminating their own liability or consumer rights through standard terms. Any such clauses will be null and void.
In addition, retailers may not reserve to themselves the exclusive right to interpret standard terms. Currently, it is not uncommon for retailers to provide in their standard terms that the unilateral power of interpretation remains with the retailers; in practice, this means that they will typically construe the standard terms to the best interest of their own interests. Under the Consumer Protection Law, this is no longer permitted.
Personal Data Privacy
Data privacy is emphasized in the new laws. In order to collect customer information, retailers must inform customers of the scope of information to be collected, how it is to be collected and for what purposes it may be used. Prior consent from customers must be obtained before the information can be collected and used.
Retailers must take necessary measures to keep customer information in strict confidence and may not disclose or sell it to third parties. Unless customers agree in advance, retailers are prohibited from sending messages or emails to customers for promotional or marketing purposes.
Stricter Penalties For Non-Compliance
Both the Advertising Law and the Food Safety Law impose heavier administrative penalties on violating businesses. Fines include:
- For violations of food safety regulations, up to thirty times (previously up to ten times only) the value of illegal income; and
- For false advertising, up to five times the advertising fees, or RMB 2 million if the advertising fees are difficult to calculate.
In addition, non-monetary measures may be taken by the authorities to shame violators. This includes recording the violations in the national credit system, which can be accessed by the general public.
On the civil liability front, the “First Approach and Advance Compensation” mechanism is introduced to avoid buck-passing. Under this mechanism, manufacturers or retailers which are first approached by customers for claims of defective products are responsible for the handling of such claims.
For substandard food in particular, the Food Safety Law provides that advance compensation must be made by the first party being approached, provided that the customer making the claim can prove his or her losses resulted from the substandard food. The amount of compensation can include not only the losses suffered by the customer but also punitive damages, which may amount to ten times the purchase price or three times the loss. The first party approached is entitled to seek indemnification from the responsible party in respect of the amount of compensation that has been paid to customers in advance.
The Food Safety Law does not, however, specify how the “First Approach and Advance Compensation” mechanism will be enforced in practice. In particular, it is unclear how punitive damages are to be determined. Whether implementing rules will be issued to clarify this issue remains to be seen.
Conclusion
The new laws give Chinese consumers and regulators more legal rights against wrongdoers.
We recommend that businesses in the customer goods industry should train their staff for a potential increase in consumer complaints and related investigations. The response of front-line staff will be crucial in managing consumer complaints and expectations. The response of businesses to consumer complaints should also be able to withstand greater regulatory scrutiny.
Business should also carefully and thoroughly:
- examine their existing manufacturing, marketing and contracting practices against the new requirements;
- review their standard terms and conditions and data protection policies, seeking professional assistance as needed;
- ensure advertising materials and campaigns are compliant with the new standards; and
- maintain ongoing training and support for sales staff to ensure both compliance and happier customers.
For further information, please contact:
Nanda Lau, Partner, Herbert Smith Freehills
nanda.lau@hsf.com
Karen Ip, Partner, Herbert Smith Freehills
karen.ip@hsf.com
Patrick Han, Herbert Smith Freehills
patrick.han@hsf.com
