China: Risky Business - Liability For False Or Misleading Advertising Under PRC Law

Last Updated: 26 October 2016
Article by Richard Bell and Victor Yang

Introduction

The past few years have witnessed the rapid growth of cross border e-commerce in China. This growth has resulted from a number of factors including, improved technology, a rising middle class in China and the Chinese government's encouragement of bonded zones for the efficient importation of goods. Recent estimates put the value of e-commerce business at more than US$3 trillion in 2015.

Manufacturers advertising and selling their products in China, whether via an e-commerce platform or by more traditional means, need to be aware that there are quite strict laws in China prohibiting false or misleading advertising.

This article offers an overview of the position under Chinese law in respect of misleading representations and the attendant risks for traders.

The law on misleading representations

The relevant legislation in China in relation to misleading advertising is as follows:

  1. The Anti-Unfair Competition Law
  2. The Advertising Law
  3. The Interpretation of the Supreme People's Court on Some Issues Concerning the Application of Law in the Trial of Civil Cases Involving Unfair Competition (the "Judicial Interpretation").

What is a misleading representation?

Article 9 of the Anti-Unfair Competition Law provides that:

"[t]raders shall not use advertisement or the other methods to make misleading representations on the quality, composition, function, usage, production, expiry date and place of production of products".

Article 4 of the Advertising Law further provides that:

"advertisements shall not have any false or misleading content or defraud or mislead consumers."

An initial point to note is that, aside from advertisements, other forms of representation may also be regulated by Article 9 of the Anti-Unfair Competition Law. It is therefore important to be aware of the broad application of the legislation to any form of representation, other than advertisements, that might fall within the scope of "other methods". The inclusion of this wording appears to have been designed as a catch-all, to make sure that no form of representation might fall outside of the legislation.

Essentially, the legislation applies to any form of representation in respect of a product's quality, composition, function, usage, production, expiry date or place of production.

Article 8 of the Judicial Interpretation sets out detailed rules for determining, from a practical perspective, what actions will constitute a misleading representation:

"In case a trader commits any of the following acts, which is sufficient to cause the misunderstanding of the public, it may be determined as a false or misleading representation prescribed in Paragraph 1 of Article 9 of the Anti-unfair Competition Law:

  1. conducting one-sided or contrastive representation of goods;
  2. conducting the representation of goods by taking undecided scientific viewpoints or phenomena as the facts for final conclusions; or
  3. conducting the representation of goods by using ambiguous language or other misleading means."

In a classic case reported by the Supreme Court in China, Fujian Fuqing Damin Biotechnology Co Ltd v Fuzhou Nanan Biotechnology Co Ltd, it was determined that misleading representations by traders or service providers are prohibited.

In practice, it is common for traders to make one-sided comparisons between their products and those of their competitors, by representing the advantages of their products against the disadvantages of their comparators. However, even if the representations are accurate and true, if they harm the interests of other traders, then the representations in question may be covered by Article 8.   Such representations might also breach article 14 of the Anti-Unfair Competition Law, and the provisions relating to "Business Discrediting".

Representations about products need to be simple and concise. Traders should therefore be very careful when designing the language they use in their advertisements. In the event that there are two or more interpretations of a particular phrase, one or both of which may mislead the consumers, then there might be a breach of Article 8.  Traders should therefore take time to consider whether a certain representation might have more than one potential meaning.

It is also common, and understandable, that traders will use exaggerated terms for the purpose of advertising their products. It is therefore important to know whether exaggerated terms may be treated as a means of unfair competition under Chinese law. In this respect, Article 8 of the Judicial Interpretation provides as follows:

"[t]he representation of goods by obviously exaggerating means, if it is insufficient to cause the misunderstanding of the relevant public, shall not be determined as the false or misleading representation".

If a representation is based on false facts, it can easily be identified as misleading. However, if the representation is made on the basis of true facts, but the representation is somehow inaccurate or incomplete, then it will be regarded as a misleading representation if:

  • the representation is sufficient to cause a consumer to misunderstand the product in question or its characteristics;
  • the traders have benefited from the representation – i.e. by making a profits from it.

Generally speaking, if there is any uncertainty regarding the nature of a representation, then the Court will make a judgement based on the intention of the traders and the actual damage or loss that has been caused. The factors that the Court may take into account are daily life experiences, the general attentions of the general public, the misunderstanding potentially caused, as well as the actual condition and facts of the product in question.

Liability

The legal consequences of making a misleading representation are set out in Article 24 of the Anti-Unfair Competition Law, which states that in addition to the compensation payable to third parties (i.e. competing traders or consumers):

"[t]he supervisor shall order to stop the illegal activities, clear up the bad influence, may fine amount from more than RMB10,000 to less than RMB200,000 in accordance with the fact, if the trader uses advertisement or the other method to make a fake or misunderstanding representation of its products".

In China, there is something of a cottage industry of private consumers lodge complaints against traders for false or misleading advertising so as to obtain a portion of the fine.  While these fines are modest, repeated infractions can add up over time.  These types of complaints are also a nuisance to defend and often take up valuable management time.

Most importantly, a finding of misrepresentation can have an impact on a company's reputation which may in turn affect sales. That is something every trader wants to avoid.

Conclusion

In order to successfully promote their products and avoid any liability or damage to reputation, traders should be aware of China's laws in relation to misrepresentation and false advertising and take care to review their advertisements accordingly.  When in doubt, traders should err on the side of caution.  The cleverest advert on television or the internet might well do more harm than good for a trader's business if it does not comply with Chinese law.

Risky Business - Liability For False Or Misleading Advertising Under PRC Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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