what we think

By Maarten Roos

Foreign companies may be surprised to know that China is extremely protective of its consumers, with laws that set a very high bar and therefore regularly cause problems to even the most compliant retailers selling their consumer goods in China. One of the areas that many companies, both foreign and Chinese, often fall foul of, is advertisement. In this article, we briefly review:

• The legal framework that is challenging good-faith operators;
• The consequences of incompliance;
• Steps that operators can take to protect themselves.

Legal Framework

The legal framework that establishes what can(not) be used in advertisement comprises mainly of the PRC Advertisement Law and the PRC Unfair Competition Law, though it involves a myriad of specific rules and guidelines as well. For an operator that in good faith tries to sell its products in the Chinese market, the key principles are:

1. An operator must not resort to any falsehood that results in deception or misleads consumers (Article 4, PRC Advertisement Law [2018]).
2. An operator is prohibited from commercial publicity in respect of the performance, functions, quality, sales, users' comments and honors received regarding its products, in order to defraud or mislead consumers (Article 8, PRC Unfair Competition Law).

The above principles are easy to understand, but the challenge is in their implementation, and in particular how strict terms such as “falsehood” and “misleading” are interpreted. In practice, this interpretation by both administrative authorities and China’s courts is often much stricter than what multinationals are used to from their experience in other markets. Some examples of risky practices:

• Use of certain terms are deemed misleading by default, including “world leading” and “first”, but also more general terms such as “top”, “most”, “permanent”, “best” and “effective”.
• Use, even in disguised form, of China’s national flag, emblems, or songs is prohibited, as are terms that suggest recognition by the State or other official organization (e.g. State level).
• Inclusion of politically-sensitive statements can cause problems, especially those that challenge the territorial integrity of China (e.g. the status of Hong Kong, Macau and Taiwan).
• Any encouragement of vices such as the drinking of alcohol is prohibited; this includes anyone actually drinking alcohol, or suggestions that drinking alcohol relieves tension and anxiety, increases physical strength, or has any other positive effects (such as related to success of an individual, her business or sex life).
• Statements on health functions, or expressing effects of some ingredient(s) intended to expressly or implicitly indicate the health functions, are not permitted.
• References to minimum market prices, ex-factory prices, wholesale prices, special prices, or super prices are prohibited when they are baseless or cannot be compared.
• Terms should never suggest that an operator has less liability than is mandated under the law (e.g. statement that the operator has no liability as the price is on sale).

Serious Consequences of Incompliance

A government investigation is usually the result of a third-party complaint, whether made in good faith or by a professional buyer that is looking for mistakes. Either way, the consequences can be very serious.

A consumer who has been disadvantaged by false advertisement can file a civil claim for compensation based on fraud – for three times the price of the goods (minimum CNY 500), or ten times (minimum CNY 1,000) if it relates to food safety standards. However, this is minor compared to the effects of a government investigation. The local Administration for Market Regulation (AMR) that handles complaints on false advertisement, can decide to penalize a violation under either the PRC Advertisement Law or under the PRC Unfair Competition law. We summarize below:

The PRC Unfair Competition Law also establishes the tools that the AMR has at its disposal, to investigate an alleged incompliance. This includes interviews, the right to inspect or make copies of agreements, accounting books, invoices and receipts, documents, records, business correspondence and other materials related to the alleged unfair competition; seizure or confiscation of monies and assets related to the alleged unfair competition; and inquiries into the bank account(s) of a business operator allegedly engaging in unfair competition. In other words, the investigation can be extremely invasive.

These risks are not just theoretical. Many companies have already been penalized. Below are some well-known examples; though it must be emphasized that not only large and famous companies get in trouble.

• Crest was fined CNY 6.03 million for advertising a celebrity statement that “Using Crest Dual Action White toothpaste made my teeth white in only one day”.
• Walmart was fined CNY 90,000 by the Pudong AMR for falsely claiming that its Alligga and HJY oils were low-fat.
• Dali Foods Group was fined CNY 36.7 million for misleading advertisement on the packaging of its Capico potato chips. Almost 92 million cans were sold with misleading packaging; and so the authority calculated CNY 0.10 per can and multiplied this by four.

Best-practices for Consumer Companies Selling in China

The first step to minimize the risk of investigations and penalties, is for employees to be aware of all the restrictions that apply on advertisement in its business. A process should be established to verify compliance. It is not uncommon to use a third party such as a law firm to support this process, but creating internal awareness on the key rules and regulations is just as important. Trainings can be organized internally (with employees) and externally (e.g. with designers), and regular updates can be provided with examples and case-studies.

A second step that companies can take, is to establish a protocol in case the AMR or another authority approaches the company for an investigation. Usually an investigation starts with a notice, and so businesses should make sure that processes are in place so that the notice comes to the attention of the right people. In more serious circumstances, the authority could also show up at the company with a whole team, demanding immediate access to computers, files and people. Dawn raid protocols are a way to make sure that employees know how to respond.

If a company is investigated, then the key issue becomes how to respond to such an investigation. Authorities continue to have a lot of discretion when it comes to determining a violation and administering a fine, and it is worth spending time and effort to maintain a good relationship with the investigating officers. Most important, a careful balance must be maintained between full cooperation with the investigation, and protecting the interests of the company.

Conclusion

Sales to Chinese consumers has become the main objective of many international companies operating in China, in food but also in a broad range of non-food categories. China’s standards for products is often more rigorous than in Western countries, and penalties for non-compliance more severe. In advertisement for example, huge penalties have already been levied on companies that have made mistakes. The best way to avoid future issues is to be proactive on internal trainings and processes, to ensure maximum compliance as well as minimizing the consequences in case an incompliance is investigated.

R&P China Lawyers is a full-service law firm with a strong compliance practice. The firm assists clients to screen advertisements and advise on compliance risks; and it supports companies that are the target of a complaint or government investigation. For more about our practice, please email Maarten Roos at roos@rplawyers.com), or your usual contact at R&P China Lawyers. The firm can also assist with general compliance matters.