China's E-commerce Law Promotes High Quality Over Fast Growth

In 2014, the government issued the Administrative Measures on Online Business, which regulated e-commerce transactions on a provisional basis, at a ministerial level. The E-commerce Law took five years, and three public consultations before it was recently passed.

The government received a large number of comments and suggestions from e-commerce companies, consumer protection organizations, as well as legal practitioners during the public consultation stages, reflecting the interest of different stakeholders in e-commerce business. The newly released legislation encourages further development of e-commerce businesses in general, but sets out strict compliance rules to create a fair competition environment and protects consumer interest.

Scope of application.

The E-commerce Law has a wide scope of application regulating all e-commerce activities from a geographical aspect, business aspect and technological aspect.

All e-commerce operators residing in China or incorporated in China will be subject to the E-commerce Law, regardless of whether the relevant e-commerce platforms are hosted in China. The law regulates online supply of goods and provisions of services as well as the operations of e-commerce platforms. However, the operations of online financial business and publication of news, audio and video products, and other cultural products online are not subject to the E-commerce Law. The law also regulates businesses across the various networks, be it internet, mobile networks, and all other possible public networks.

E-commerce operators are divided into two categories according to the law, platform operators and online merchants. Online merchants refer to those who conduct business on their own e-commerce platforms or by using a third-party platform provider. The E-commerce Law recognizes the strong market position of platform operators and requires them to take responsibility to maintain a fair competition trade on their platforms and safeguard consumer interest.

KEY DEVELOPMENTS OF THE E-COMMERCE LAW

The E-commerce Law significantly changes the current legal landscape for operating online businesses in China. It imposes new legal requirements and strengthens existing rules in other legislations. The most important developments from the current e-commerce legal regime include (i) protection of intellectual property rights, (ii) protection of consumer interest, and (iii) protection of cyber security and personal data.

Protection of intellectual property rights

Recognizing that protection of intellectual property rights is critical to maintain a fair competition environment, the Chinese government has been making consistent efforts to strengthen the protection of intellectual property rights. Despite these efforts, infringements are still rampant on cyber space. This is partially because most third-party counterfeit goods vendors on the internet are small business owners or individuals hiding behind the computer. They are able to easily open and close businesses in disguise through platform operators.

Both the Regulations on Protection of Information Network Transmission Right effective in 2006 and the Tort Liability Law effective in 2010 have provisions dealing with the responsibilities of platform operators' to protect intellectual property. These regulations however only provide for a “notice-and-take-down” procedure to fight against infringement. This provision appears to be insufficient as platform operators tend to turn a blind eye against infringements on their platforms, and only take appropriate action when they receive a notice from the rights owner.

In August this year, the State Intellectual Property Office issued the Notices of Further Intellectual Property Protection Works in E-commerce Business, in which the office urged platform operators to formulate, adopt and implement a procedure to proactively prevent counterfeiting activities and to proactively crackdown infringement, including to blacklist repeated infringers and to look into alerting obviously suspicious offerings.

In line with this trend, the E-commerce Law imposes detailed obligations on platform operators to protect intellectual property rights, including:

• To formulate and implement an intellectual property protection policy and, following such policy, to adopt necessary technical measures and managerial measures to protect intellectual property rights, such as deletion of infringing information, blocking access to infringing web pages, and termination of services to frequent infringers.
• To establish a practical “notice and take-down” system, where both intellectual property rights owners and alleged infringers must have reasonable opportunities to put forward their argument, and to take active measures to deal with established infringement.

Consumer protection

Technology neutrality allows for the rapid development of e-commerce businesses in China. Platform operators tend to take the stance of being a technical solutions provider, thus, avoiding all burden to protect consumer interest. Some platforms continue to ignore blatantly suspicious crimes and do not proactively prevent repeated criminal offences. A typical example would be the Didi Chuxing case where two young girls were raped and murdered consecutively when they hired private cars on the platform, but the platform operators did very little to prevent further similar crimes from occurring.

Recognizing that platform operators do have a strong standing in managing online merchants using their platform, the E-commerce Law imposes strict requirements and liabilities on platform operators to protect consumer interest. These requirements include:

• E-commerce operators must prepare a complete and timely disclosure of all information relating to its goods or services, and grant customers meaningful freedom and sufficient information to select goods or services.
• Platform operators must formulate comprehensive consumer protection policies, which must be conveniently available for viewing and download, with any amendment of such policies to be published at least seven days before its effectiveness.
• Platform operators must adopt technical measures to distinguish goods and services provided by itself and those provided by third-party online merchants.
• Platform operators must adopt protective measures in the event that they have actual or constructive knowledge about defective goods or services provided on their platforms that may infringe legitimate rights and interest of consumers.
• Platform operators must verify the qualifications of online merchants providing goods or services that would affect a consumers' personal health or life.
• Operators are required to establish a credit assessment system, or a credit rating system where consumers are able to comment, remark or review the quality of goods or services they had received, which should not be removed by the platform.

Cybersecurity and personal data protection

In line with the PRC Cybersecurity Law promulgated in 2017, the E-commerce Law provides for a strict adherence of cybersecurity and personal data protection regime. E-commerce operators are obliged to take the following measures to enhance cybersecurity and protect personal data:

• Seek informed consent of data subjects when collecting their personal data and to protect these personal data during the operation of their e-commerce business.
• Formulate personal data inquiry policies, by which data subjects will have access to amend or delete their personal data without unreasonable restrictions.
• Report any illegal information found or any cybercrime incidents that occurs during the operation of their e-commerce business to competent government agencies, and adopt necessary technical measures to prevent the spread of the illegal information and to mitigate losses from cyber incidents.
• Maintain the security of the network systems and to take proper technical and managerial measures to prevent malicious code or cyberattacks.
• Formulate contingency plans to back up data during the normal operation of business and to mitigate adverse impact from cyber incidents.

THE IMPACT OF THE E-COMMERCE LAW ON BUSINESSES

The promulgation of the E-commerce Law will have significant impact on various business sectors, both online and traditional businesses.

Impact on e-commerce businesses

The promulgation of the E-commerce Law sends out a clear signal that the government is taking initiative to mitigate negative effects of online businesses, especially in promoting the safety of person and property.

Firstly, e-commerce operators are required to formulate quite a number of operational policies such as intellectual property protection policies, personal data policies, and contingency plans. They are also required to implement certain procedures required by law such as the “notice and take-down” procedure and real name verification procedures. This means that e-commerce operators must revisit their business strategies and formulate appropriate policies and procedures before the E-commerce Law comes into effect.

Secondly, penalties and liabilities under the E-commerce Law are increased. The penalties for violation under the Online Business Measures range from a mere Rmb1 to Rmb30,000, while, once implemented, the penalties for violation under the E-commerce Law can reach Rmb2,000,000, almost 70 times compared to that under the current regime. Further, serious violation of the E-commerce Law will be recorded as a “credit defect,” which may affect the goodwill and creditworthiness of the offender.

Thirdly, the increased burden to protect intellectual property rights, consumer interest and cybersecurity will see a rise in compliance cost. This does not only mean that e-commerce operators will have to invest more on compliance initiatives, but also means that operators who have rapidly developed operating in a noncompliant or less-compliant manner will not be able to survive.

Lastly, e-commerce businesses in China will be directed from a fast growth market to a high-quality market in the near future. The past two decades have seen e-commerce operators in China focusing on fast-growth. Considering that a significant proportion of Chinese businesses and consumers are now online, operators must take responsibility for the provision of better quality services, where economic interest and social responsibility work hand in hand.

Brand and designer businesses

The E-commerce Law is definitely good news for brand companies or designers. Internet giants in China have long been criticized for their weak protection of intellectual property rights. With the promulgation of the E-commerce Law, these e-commerce operators are required to respect and protect the intellectual property of rights owners much more seriously than ever before.

“Notice and take-down” systems will be more robust allowing intellectual property rights owners to be well protected under the new regime. Although most platform operators have already established “notice and take-down” systems, some operators make it difficult to report an infringement. The E-commerce Law requires platform operators to create a more “friendly” and convenient procedure to ensure the system works as an important channel for intellectual property rights owners to take action.

The requirement on platform operators to establish and implement intellectual property policies to proactively protect intellectual property rights, including suspending services of frequent infringers will help create a business environment that respects intellectual property rights, thus protecting brands and designers.

International trade

The implementation of the new E-commerce Law will definitely create a friendlier environment for the import of foreign goods into China. The E-commerce Law allows for e-commerce operators to engage in import and export activities.

The government will soon implement rules affecting customs clearance, tax, inspection and quarantine, and foreign exchange settlements, so as to regulate and facilitate online import and export businesses. This would allow end-users in China to have access to foreign goods imported through legitimate channels. The government is working toward cooperation with different countries in establishing a friendly cross-border e-commerce environment in terms of electronic signatures and identity authentications. Such initiatives, when established, will likely negate the online sales of counterfeit products copying foreign brands, resulting in genuine goods manufactured outside of China having a better market position.