Rising Above the Fake to Keep It Real

Secondary Liability of E-commerce Platform Providers

Current PRC regulations address the liability of e-commerce platform providers in tort, consumer protection and intellectual property protection laws.

Article 36 of The Tort Liability Law provides that the main legal basis for determining a platform's liability is if a platform provider knows or becomes aware of a seller infringing on a third party's intellectual property rights, or has been informed by the person who owns the rights, but fails to take necessary action in a timely manner, then the platform provider shall be jointly and severally liable with the seller.

The Consumer Protection Law also confirms platform liability when a platform provider knows or should have known of the infringing behavior or actions of the seller(s). The law further stipulates that if a platform cannot provide the real name, address and valid contact information of the seller, consumers may have the right to claim compensation from the platform. An operator can also be held liable for any misrepresentations.

The Trademark Law and its implementing regulations only affect those who intentionally provide internet trading platform services to facilitate infringement. These actors are held to have committed direct infringement. A standard of “know or should have known” has been adopted in copyright related regulations such as the Regulations on the Protection of the Right of Communication Through Information Network and the Interpretation by the Supreme People's Court of Several Issues Relating to Adjudication of and Application of Law to Cases of Copyright Disputes on Computer Network.

Generally, e-commerce platform providers assume secondary liability for the infringing products sold by a third party on their platforms. However, platform providers would not assume liability as long as it has 1) taken necessary measures upon receiving notice from the rights owner; and 2) provided the seller's information to applicable consumers. Platform providers are under no obligation to review all listed products or to check whether any third-party rights have been infringed, unless required under the “notice-to-take down procedure” provision.

In most cases, platforms such as Taobao and Jingdong have not been held liable as these platforms have taken necessary measures to review a seller's identity, obtain ID/business certificates, contact information and any other documents that a consumer may request. They usually provide clear instructions that sellers do not supply fake products through the rules and entry terms listed on their platform, and have taken immediate measures to delete the link to fake products upon request (see Wang Jihua v. Zhejiang Taobao Internet Limited Company re Disputes over Online Shopping Contract; and Meng Qingzhi v. Beijing Jingdong 360 E-commerce Limited Company and Guangxi Bamayisheng Tea Limited Company re Disputes over Online Shopping Contract).

The Principle of “Know, or Should Have Known”

As a general rule, the principle of “know, or should have known” seems reasonable as there are usually millions of products listed on an e-commerce platform, with new products uploaded each day. From a rights owners' standpoint, however, the function and liability of e-commerce platforms should not be limited only to the “notice and take-down procedure.” For example, there are generally top sellers listed on each platform, and if such sellers are involved in infringing activities, the case of whether the e-commerce platform provider did not know or chose to simply ignore such activity, might prove difficult to establish.

The principle of “know, or should have known” have been widely acknowledged. This principle is not at all an innovation. It is an established principle that is provided for by the legislation, as well as in the practical application of internet-related intellectual property disputes such as protection of personal privacy, online information service, copyright, etc. After the Consumer Protection Law introduced this principle into e-commerce sectors, the Amendment of PRC Patent Law (draft submitted for approval in the year of 2015) (Patent Law) and the PRC E-commerce Law (the third reviewing draft in the year of 2018) (E-commerce Law Draft) also adopted the principle. The draft E-commerce Law reads 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 necessary measures are taken, then the platform shall assume joint liabilities together with the infringers. According to the latest update, the fourth draft of E-commerce Law is expected to come out soon and the legislation is expected to be come in force by the end of this year, where a strict standard on platform liability would be adopted.

The standard of proof to satisfy the “know, or should have known” principle may be difficult to determine or define. According to 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:”

• The infringing information was listed on the homepage or other main pages of the website or other clearly visible areas;
• The platform was involved in the editing, screening and recommending of the alleged infringing information;
• 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; or
• 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.

Cases-on-Point where the Chinese Courts Held Joint Liability

For e-commerce platforms, the key to defining this principle is to determine the type of sales and service it provides to third party sellers. For example, in Descente Co. Ltd v. Shenzhen Zouxiu Network Technology Co. Ltd and Beijing Jinridushi Information Technology Co. Ltd re Trademark Infringement, the court held the third-party seller and the platform to be jointly liable. In this case, although the infringing products were provided by a third-party seller, the group-buying platform “Dida Tuan” had participated in the sales of the infringing product by upgrading its ranking in the goods list, sending promotion information to users, displaying the goods on the first page of the platform, editing and optimizing the product page, and being reimbursed at certain percentage from the profit earned for each product successfully sold. In addition, the platform was directly responsible for return of goods. This constituted the platform to be a co-seller, rather than simply a platform provider.

In E-land (Shanghai) Fashion Clothes Trading Co. Ltd v. Zhejiang Taobao Internet Co. Ltd and Du Guofa re Trademark Infringement, Taobao.com was found jointly liable for the losses incurred by the rights' owner for failing to take necessary action as they 'should have known' of the alleged infringement. In this case, the rights owner filed more than 150,000 complaints with sufficient evidence to the platform Taobao.com within two months. Seven of these complaints targeted a single third-party seller. The platform deleted some infringing products, but refused to take any action against seven other complaints that it considered to have insufficient evidence. The court held that, considering the significant amount of complaints and evidence already filed by the rights owner, the platform should have known that the seller was infringing, and should have taken necessary action instead of rejecting the complaints.

Another instance where the courts held the platform provider and third-party seller jointly liable can be seen in the case of Perfect (China) Limited v. Youle Interactive Information Technology Limited re Trademark Infringement. Here, the product brand, “Perfect,” by the third-party seller on the platform was priced much lower than the market price of the authentic product. Further, the authorization provided by the seller to the platform was obviously fake as the name of the rights' owner was incorrect. The court held that the platform's failure to detect this activity made it jointly liable for the infringement of the rights' owner.

Mitigating the Risks of Infringement Disputes

As e-commerce platform providers upgrade their platforms to expand its services and offerings to third party sellers, the potential risks these platforms face might increase too. There are a number of protective measures e-commerce platform providers should consider to mitigate potential infringement disputes.

i) Terms of Service

Terms of service of user terms are among the most common and effective mitigation tool. Take Taobao for example, its user terms state that it only provides platform services, so users should be aware that the information on Taobao platform is released by other parties, and Taobao will establish relevant monitoring systems to ensure protection of consumer rights. However, the terms also state that due to the vast amount of information, the platform will not be able to ensure a review of each and every product on their platform, therefore, consumers should take caution while purchasing. In our opinion, the terms of service should be drafted using more concrete terms rather such a vague language.

ii) Rules for Entry of Third-Party Sellers

Additional agreements, contractual provisions and rules for entry of third party sellers can also offer a stronger safeguard to platform providers. Such mechanisms should clearly address the obligations of a third-party seller, including provisions of true and valid information and certification, a guarantee that products sold shall not infringe the legitimate rights of others, etc. Besides including provisions requiring the seller to compensate any losses incurred by the platform due to any action by the seller, the standard of calculation for compensation should also be detailed and made explicit. In one of the 'Ten Typical Cases from the Internet Sector,' released by the Supreme Court on Aug. 15, Zhejiang Taobao Internet Limited Company v. Xu Wenqiang re Disputes over Online Service, a seller named Xu Wenqiang sold fake products on Taobao's platform, and was held liable for Taobao's losses on the bases of breach of service agreement and defamation of the platform's reputation. The court took into account factors such as the platform's market presence, the duration and scale of Xu Wenqiang's operations, the category of goods, pricing and profits when considering the amount of compensation. The amount was fixed at Rmb20,000, and Taobao was awarded costs at Rmb23,000.

iii) Establishing a Complaint System

As reviewing each product would be rather impractical for most platforms, the establishment of a complaint system could be an important protective measure. Generally, when an infringement is noticed, consumers or rights holders will first negotiate with the seller, before approaching the platform's official complaint channel. Alibaba is a good example of this as it employs an internal communication system for buyers and sellers to communicate directly. Should there be a dispute, consumer would then have the option of an official service personnel to intervene. The Aliprotect Intellectual Property Protection System also allows for rights owners to easily file online complaints.

iv) Consumer Protection Funds

Establishing a consumer protection fund could also be a potential measure against mitigating infringement. Jingdong's platform for example introduces a Deposit Management Rule, where third-party sellers are required to prepay a guaranteed fee, ranging from Rmb10,000 to Rmb100,000 depending on the category of the products. These fees are set aside for any potential losses to the platform providers caused by consumer compensation claims or rights owner's claims. When 50 percent or more of the guaranteed fees have been used, the seller must make up the determined amount in order to maintain its ability to use the platform. While this significantly helps, platform providers should also be mindful of the inherent risks likely to surface in managing such deposited money.

v) Technological Innovations and Big Data

Technological innovations vastly improve the risk of e-commerce platforms being implicated by right's owners. Taobao's IP Protection System for example, which employs big data to actively locate counterfeit product listings by comparing the information provided by rights holders such as brand, model, characters of a product against all products listed on the platform to pinpoint suspected infringers. This information is then sent to the rights holders for their confirmation and one-click complaint. The service even allows for the tracking down of the product source by working with law enforcement departments to shut down factories producing fake goods—indeed a significant step in protecting IP rights.

Conclusion

E-commerce platforms play an increasingly important role in the everyday life of consumers. As such, these entities will gradually be expected to take on added responsibility and liability. E-commerce platform providers should be prepared for both commercial and legal advancements and requirements to protect themselves against potential infringement disputes. Innovative and effective safeguard measures should be employed to ensure the protection of both the consumer, and the platform provider.