China: The PRC E-Commerce Law: Platform Liability For Intellectual Property & False Advertising

Following nearly five years of discussion, revision and solicitation of public opinion; the E-Commerce Law of the People's Republic of China ("E-Commerce Law") was approved by the Congress on 31 August 2018. The law becomes effective 1 January 2019 and is the first e-commerce specific law in the PRC. It includes strict requirements and liabilities impacting e-commerce platforms, aiming to remedy the widespread proliferation of counterfeit products and false advertisements online.

Intellectual Property Infringement

Under the new law, e-commerce platforms will be held to higher standards and face increased risk of liability for the sale of counterfeit goods and products via their online marketplaces. As such, operators should adhere to several requirements and best practices.

Firstly, e-commerce platforms should observe the accepted "notice to take down" procedure established by the PRC Tort Liability Law and judicial practice, which requires that e-commerce platforms will be held jointly and severally liable if failing to take timely remedial action after being informed of the infringement of a rights owner's interests. Specifically, platforms are to forward notices of infringement to sellers and forward any seller responses including preliminary evidence to the rights owner to allow the latter to make potential administration complaints or take civil action. If the rights owner fails to take any further action within 15 days of such notice, the platform should promptly lift any measures it has taken against a seller.  Secondly, e-commerce platforms should establish rules on the protection of intellectual property rights. Specifically, platform standards should be clearly stated and prominently available to sellers and customers. Thirdly, platform operators should actively strengthen cooperation with intellectual property rights owners. These steps are important as platform operators can be held jointly liable for a right owner's losses and face fines of up to CNY 2,000,000 (approximately USD 300,000).

The above measures offer a useful starting point. However, under the new law, e-commerce platforms should further adopt the principle of "know, or should have known", which provides better protection to rights owners. Article 45 of the E-Commerce Law provides that, where an e-commerce platform knows or should have known that platform operators are infringing intellectual property rights, the platform operator must take necessary measures, such as deleting, blocking, disconnecting and terminating the transaction and service. If no such measures are taken as necessary, the platform assumes joint liability together with the infringer(s). 

The standard of proof to satisfy the "know, or should have known" principle can be difficult to determine or even define. As illustrated by several cases, and helpfully summarized in the Interpretations of the Beijing High People's Court on Issues in the Trial of Intellectual Property Dispute Cases in E-commerce, several situations can be presumed to fall within the scope of "know, or should have known" and used as guidelines:

  1. the infringing information was listed on the homepage or other main pages of the website or other clearly visible areas on the website;
  2. the platform was involved in the editing, screening and recommending of the alleged infringing information;
  3. the notice from the rights owner was sufficient for the platform to have been made aware of the fact that the alleged infringing information was transmitted through the platform; and
  4. other situations that are sufficient to prove a high likelihood of third party infringement, such as where the seller has directly expressed that no consent or authorization has been obtained, or where the price is unreasonably lower than the market price for a well-known product. 

These examples indicate that an operator should clearly avoid having any direct (or even indirect) action in the proliferation or marketing of counterfeit goods, which would give reasonable cause to believe it knew or should have known of the infringement. This is in addition to the obvious examples of when the platform operator has actually been notified, driving home the need for platforms to have strong monitoring, data analytics and customer service. Importantly, the last example provides the most risk to platforms as it is both open-ended and includes examples further requiring active monitoring and vigilance by e-commerce platforms. 

False Advertising

The E-Commerce Law maintains consistency with the Advertising Law of the PRC and the Interim Measures for the Administration of Internet Advertising, providing that commodities or services ranked under competitive bidding (e.g. paid search listings) are to be distinctively marked with the word "advertisement". The measures also make reference to the Advertising Law in respect of obligations when sending advertisements to consumers: namely, advertisements sent through electronic means should expressly indicate the true identities and contact information of the e-commerce operator, while recipients should be provided the option to opt out of future advertisements.  

The E-Commerce Law further provides that platform operators should not engage in false or misleading commercial promotion by fabrication and dissemination of transactions and consumer reviews, which would constitute unfair competition behavior under the new PRC Anti-Unfair Competition Law revised in late 2017. For example, Article 8 of the Unfair Competition, false or misleading commercial promotions related to product function, quality, sales, consumer reviews, and honors received are deemed anticompetitive.

Potential liability to e-commerce platforms under the E-Commerce Law with respect to online advertisements includes fines of up to CNY 2,000,000 and business license revocation.

Conclusion

The E-Commerce Law imposes stricter requirements on e-commerce platform operators regarding intellectual property protection and false advertising. The law not only necessitates the adoption by platform operators of the more stringent standard of "know, or should have known", but also the effective adoption of analytical and customer service solutions to actively monitor its marketplace and advertisements on the platform, including paid-search listings. Indeed, on the one hand, platform operators should be prepared for developments with respect to both commercial and legal requirements in order to best protect themselves against potential infringement disputes and administrative penalties, while actively monitoring their promotional and advertising activities.  On the other hand, intellectual property owners can proactively protect their rights by observing the requirements of the E-Commerce Law and adopting best practices. For example, when sending infringement notices to platform operators, necessary supporting documents should be included to avoid being considered disingenuous or malicious which could leave rights owners potentially liable for platform losses (however, unlikely). Once feedback is received from the infringer, rights owners should actively consider making administration complaints or taking civil action in a timely manner.

The adoption of the E-Commerce Law illustrates important progress by Chinese lawmakers to regulate an increasingly digital marketplace to the benefit of both customers and sellers. As these sectors continue to develop and innovate, so too will the standards and risks facing e-commerce platforms and their users. Quick adoption of the requirements and principles of the E-Commerce Law along with responsive commercial practices should place both platform operators and users in positions to mitigate liability risk while enhancing their own commercial capabilities.

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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