Cracking down on e-commerce

The increasing number of internet users in China has led to the e-commerce boom in recent years. On March 15 2014, the State Administration for Industry and Commerce (SAIC) implemented the new Measures for the Administration of Online Trading (网络交易管理办法) (New Measures), which modify and supersede the old Tentative Measures for the Administration of Online Commodity Transactions and Related Services (国家工商行政管理总局网络商品交易及有关服务行为管理暂行办法) (Old Measures) effective since July 1 2010. The New Measures were brought in to catch up with the latest e-commerce and social media technologies and trends, protect consumers' and online business operators' legitimate rights and interests to a fuller extent, as well as to promote the sustainable and healthy development of e-commerce in China.

Wider application scope

The Old Measures mainly governed activities of online traders, online service providers and online trading platform providers, while the New Measures further extend the coverage to  misleading information regarding promotions (whether online or through social media), credit evaluation, online payments, logistics and courier services, network access, server hosting, virtual space rental, website hosting and webpage design services.

Enhanced consumer protection

Article 16 of the New Measures adds the right for consumers to return goods to sellers within seven days from the date of receipt of the goods without giving a reason, provided that the goods returned are in good condition. The freight charges incurred must be borne by the consumer. Exceptions to the rule include customised commodities, fresh and perishable commodities, audiovisual products or computer software products downloaded from the internet or unpacked by the consumer, newspapers or journals that have been delivered and goods of other nature which are not acknowledged by the consumer as unsuitable for return. This right is generally considered a significant improvement in consumer rights in China – in line with the new PRC Law on the Protection of the Rights and Interests of Consumers (中华人民共和国消费者权益保护法) (Consumer Protection Law) – but there are still concerns that the new provision does not specify objective criteria for classifying goods as unsuitable for return and is silent on whether the seller is still obliged to accept the returned goods if they have been damaged during shipping. Further, it is often a challenge to determine who has altered the condition of the goods, which may give rise to disputes.

The new Measures prohibit fictitious transactions and malicious comments concerning competitors. It is not uncommon for online sellers to make up false transactions, remove negative comments, pay for positive reviews or even post adverse comments on competitors' sites. All activities which unjustifiably improve one's credibility or unfairly prejudice a competitor's reputation are now banned under Article 19 of the New Measures.

Article 37 imposes an obligation on a person who receives compensation for promoting services or evaluating goods or services through social media, such as blogs and microblogs, to disclose the nature of this engagement so as to avoid misleading the consumer. This new provision applies to anyone, whether he or she is a celebrity or not. Traders or service providers should clearly identify any material serving as advertisements, endorsements or promotions on social media.

There is also an attempt to deal with unsolicited commercial messages. Email and SMS spam have become a serious problem in China. This is one of the drivers for improved protection of personal data through the new Consumer Protection Law. In line with this new law, Article 18 of the New Measures provides that:

• online traders and service providers can only collect personal data about their customers with their express consent and shall specify clearly the purpose, manner and scope of data collection and use;
• online traders and service providers as well as their staff shall keep all their customers' personal data and their own trade secrets strictly confidential and refrain from unauthorised disclosure or sale of such confidential information;
• online traders and service providers are obliged to take all necessary technical or other precautions to protect data security and to take immediate remedial actions in case of actual or suspected data leakage; and
• no electronic commercial messages (including email and SMS) can be sent to consumers without their express consent or request.

Advance notice 

Intense competition in the e-commerce market in recent years in China has led to a number of e-commerce operators shutting down their operations or going into insolvency. This has had an impact on small or individual online traders and consumers who have suffered losses due to the sudden closure of third-party trading platforms and group buying sites. To better protect the public interest, Article 24 of the New Measures now requires third-party online trading platforms to give seven days' advance public notice to online traders operating on their platforms if the terms and conditions or the transaction rules of the trading platforms need to be modified; and if the modifications are not agreeable, the traders are allowed to terminate the contractual relationship with the online platform. Further, Article 31 of the New Measures specify that if the third-party trading platform intends to cease its operations or services, it must notify all customers and traders operating on its platform by placing a public notice prominently on its website and also take all necessary measures to safeguard the legitimate interests of the relevant traders and consumers.

Certain safeguards provided in the Old Measures are retained in the New Measures. These include: the adoption of a real name policy by the online traders and service providers; consumers' rights to complain by relying on electronic receipts (instead of on official receipts bearing a company's official chop, as customary in China); and prohibitions against use of standard contract terms (usually click-wrap agreements) which impose unreasonable terms on consumers, exclude consumers' rights or unfairly increase consumers' obligations or otherwise impose onerous terms on consumers.

Strengthened anti-unfair competition measures

The Old Measures also contain broad prohibitions against false advertising, false representations, trademark infringement, infringement of trade secrets and other acts harmful to a third party's commercial goodwill and trade name. Yet, it is far from certain whether some of the tricks commonly employed by online traders, e.g. the use of fictitious transactions and the making up and posting of positive reviews on trade platforms to attract customers, fall squarely within the definition of traditional unfair competition activities.

Articles 19 and 20 of the New Measures seek to elaborate by adding a list of examples which are recognised as falling squarely within the definition of unfair competition under Chinese laws, which include but are not limited to:

• Unauthorised use of a domain name, name or logo of a famous website or any domain name, name or similar logo which causes confusion between the two sites among consumers;
• Unauthorised use or falsification of the electronic logos of governmental departments or social organisations for the purpose of false advertising;
• Lottery sales with virtual items, the agreed amount of which exceeds the limits imposed by the relevant laws and regulations;
• Use of fictitious transactions or removal of negative reviews to improve one's reputation or that of a third party;
• Use of malicious and untrue comments to harm a competitor's business reputation; and
• Deployment of illegal technical attacks against a competitor's website that interfere with its normal operation (such as a denial of service attack).

Violation of any of the above provisions will attract an administrative fine ranging from Rmb10,000 to Rmb30,000 (approximately US$1,540 to US$4,620). But given the high volume of transactions on some platforms, these penalties are unlikely to have the desired deterrent effect against malicious technical attacks that impair or delay the processing of online transactions.

Clarified enforcement powers

The Administration for Industry and Commerce (AIC) at the county level or above has jurisdiction over the dealings and activities of online traders and service providers (including third-party online trading platforms) located within its own county.

Yet, online trading, by its very nature, transgresses such borders. It is not uncommon for illegal online trading activities to happen outside the local AICs' jurisdictions where the online operators are located. Article 41 of the New Measures provides that in case the local AIC has difficulty in taking action against illegal activities that occur beyond its jurisdiction, it can transfer the case to the AIC where the infringing trader resides. Moreover, in the event that there is a jurisdictional dispute between two AICs, the case should be reported to the AIC at the next highest level which will settle the jurisdiction issue. Article 41 further stipulates that where the illegal activities have great nationwide impact, severely prejudice consumers' interests, result in group complaints or are otherwise complex and difficult, the SAIC will have the power to initiate the investigation and impose penalties, or it shall appoint a provincial AIC to take charge of the case.

Article 43 of the New Measures also makes it clear that the parties under investigation must give full assistance and cooperate with the authorities, and explains clearly the scope of the AIC's investigative powers in tackling suspected illegal activities concerning online trading and services. Such investigative powers include but are not limited to: conducting inquiries into the concerned parties to investigate their engagement in the alleged illegal activities; accessing and making copies of the transaction details, contracts, invoices, account books and other relevant information; seizing and detaining goods, tools, equipment and other articles involved or used in the illegal activities; and raiding and closing down the premises where the illegal activities are carried out.

A promising future

The e-commerce industry in China is still evolving. In the past, the growth of this sector was beset by problems caused by online fraud as well as a general lack of confidence in the quality of goods and services, the credibility of online traders and service providers, and online payment security.

The New Measures address a number of these issues and fill the gaps in existing legislation such as the PRC Anti-unfair Competition Law (中华人民共和国反不正当竞争法), the Consumer Protection Law, the PRC Trademark Law (中华人民共和国商标法) and other internet-related regulations, such as the Several Provisions on Regulating the Market Order of Internet Information Services (规范互联网信息服务市场秩序若干规定), which came into effect on March 15 2012.

The New Measures are a very positive step forward. They attempt to increase the transparency of online transactions and the level of consumer protection and are instrumental in creating an environment where there is a level playing field for online vendors and third-party platform operators alike. A higher level of certainty over the rights and obligations of online vendors, third-party trading platforms and consumers will only increase the confidence of foreign investors in the e-commerce sector in China.


Gabriela Kennedy, Hong Kong, and Alan Chiu, Hong Kong/Beijing, Mayer Brown JSM


More from CLP:
Measures for the Administration of Online Trading
Courts get tough on ISPs