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China – Addressing The E-Commerce Market: Tentative Online Trading Procedures (Part 1).

5 December, 2013

 
 

2. Aims Of The Tentative Online Trading Procedures


As noted above, the primary aim of the Tentative Online Trading Procedures was regulation of online behaviour and to protect the parties to a business to consumer online transaction. Among other things, the Tentative Online Trading Procedures required vendors to register using a real-name system and to display their business license information on their websites, so as to give consumers of their products better transparency as to who they were dealing with, and the ability to trace the vendor in the event there was an issue with the product. Vendors and service providers were also required to display accurate and detailed information about their products or services as well as to comply with intellectual property and anti-unfair competition laws (presumably meaning, amongst other things, no selling of fakes and no unlawful bundling of products). Furthermore, online service providers were required to establish a monitoring system to review commodities and service information, report any violation of laws and regulations by online vendors to the local SAIC branch, the Administration of Industry and Commerce (“AIC“) department and take immediate action to stop such violations.


While the Tentative Online Trading Procedures represented a first attempt at bringing order to the online market place, things have since moved on, and they have become substantially outdated. Further measures and revisions are now needed to adequately protect consumer rights in the changed marketplace. As a result, the SAIC issued the Draft Online Trading Procedures for public consultation on 11 September 2013. The main proposed changes are outlined below.


2.1. Defined “Online Trading” And ” Third-Party Platform”


The Draft Online Trading Procedures specify that “Online Trading” will only refer to transactions involving commodities and services processed through the internet, and not telephone or television sales. Moreover, the Draft Online Trading Procedures define “Third-Party Platform” as a virtual space which publicizes information, and assists parties in conducting online transactional activities based on certain transactional rules. The narrower definitions, which were absent in the Tentative Online Trading Procedures, provide more certainty as to who may be caught under the law.


2.2 Addition Of Anti-Unfair Competition Provision


In line with the recent investigations and enforcement actions by the National Development and Reform Commission (“NDRC”) against market behaviour constituting anticompetitive conduct or unlawful unfair competition, a provision has been added to the Draft Online Trading Procedures focusing on anti-competitive acts, which would attract a penalty of RMB 10,000 to RMB 30,0001. The non-exhaustive list of anti-competitive acts is as follows:


a) unauthorized use of famous trade names, marks and domain names of famous websites, leading to consumer confusion as to the source of the goods or services;
b) unauthorized use of marks belonging to government departments or social groupings;
c) offering virtual items as prizes for raffles and lotteries with market values exceeding the permissible amount prescribed by relevant laws and regulations or falsely declaring to have prize;

d) employing others or colluding with others to perform fictitious transactions that enhance the business reputation of oneself or another;
e) employing others or colluding with others to provide negative commentary on a competitor’s product or service with intent to damage a competitors’ business reputation after a transaction;
f) performing cyber-attacks on a competitor’s website or web-pages which prevents a competitor from conducting normal business operation; and
g) other acts amounting to unfair competition.


Looked at in isolation, the provisions on anti-unfair competition simply contain a shopping list of prohibited activities with a “sweep up” provision at the end to make it open-ended to catch potential new activities or ones overlooked in the Draft Online Trading Procedures.

 

With such low value monetary fines, it is unlikely the Draft Online Trading Procedures alone will act as a significant financial deterrent for large online vendors. However, this draft legislation must be assessed against the wider legislative and regulatory background, such as the People’s Republic of China Anti-Unfair Competition Law2 (“AUCL“) and the People’s Republic of China Trade Mark Law3 (“Trade Mark Law“), which impose much more stringent penalties than those provided for in the Draft Online Trading Procedures for the same types of anti-competitive activities. For example, under the AUCL, a business operator who engages in anti-competitive lottery activities or intentionally damages a competitor’s reputation will be liable in damages for losses caused to the business operators whose rights have been infringed, and/or will be required to give up unlawful gains. Additionally, under the AUCL, business operators selling counterfeit products are liable to a fine of between one to three times the unlawful earnings, revocation of their business licence as well as facing criminal liability. Similarly, under the Trade Mark Law, trade mark infringers are liable to have a punishment of up to five times the unlawful profits imposed on them and criminal sanctions. If the illegal profits cannot be ascertained, a fine of up to RMB3 million may be imposed. There may also be a case to answer under the AML in circumstances where either the infringing company was in a dominant market position or where the relevant activity involved the parties entering into a “monopolistic agreement”, such as a cartel agreement.

 

The AUCL, Trade Mark Law and AML are laws promulgated by the Standing Committee of the National People’s Congress and thus will rank above the Draft Online Trading Procedures4. Therefore, the Draft Online Trading Procedure alone may not be able to deliver a big enough ‘punch’ to deter the big players from engaging in anti-competitive acts. However, it may still be possible to rely on the overlap with existing, higher-ranking legislation within the Chinese legislative hierarchy which has more severe penalties and real “teeth”.


2.3 Powers Of The SAIC


The Draft Online Trading Procedures also added a provision outlining the powers of the SAIC when conducting investigations on suspected illegal online transactions or services, namely to:


a) enter business premises and conduct onsite investigations;
b) conduct investigations and question suspects;
c) access data, documents, contracts and accounts;
d) seize products, tools, equipment and so forth relating to the unlawful online business and products or service transactions; and
e) shut down the business premises of places where unlawful online product or service business is being carried on.


These powers granted to the SAIC are not new. Under the AML, the AUCL, Trade Mark Law, the SAIC also has extensive powers to enter the “relevant premises” (which may be interpreted to include residences), conduct on-site investigations, remove documents and other evidence (including data from computers) and question suspects or witnesses. Given the low monetary punishments in the Draft Online Trading Procedures, these additional SAIC powers may not be a deterrent per se, but may act as an indirect deterrent, as the party engaging in the suspect activities may be concerned about what else SAIC will find while exercising these powers, such as breaches of the AML or AUCL (where ‘bigger guns’ are available).

 

1. Introduction

 

2. Aims of the Tentative Online Trading Procedures (Part 1)

 

3. Aims of the Tentative Online Trading Procedures (Part 2)

 

4. Online Retailing Conducted on Third-Party Platforms, Concluding Thoughts

 

End Notes:

 

1 On 1 August 2013, China celebrated the fifth anniversary of the People’s Republic of China Anti-Monopoly Law (中华人民共和国反垄断法) (“AML”) coming into effect. For the most part of the AML’s first five years of enforcement, the NDRC has maintained a low profile, mainly only investigating and penalizing blatant cartels and monopolies. However, in 2013, NDRC appeared to shift up several gears and the NDRC’s regulatory enforcement focus appears to have shifted to aspects of retail price maintenance and excessive pricing practices. 

 

2 People’s Republic of China Anti-Unfair Competition Law (中华人民共和国反不正当竞争法), effective 2 September 1993.


3 People’s Republic of China Trade Mark Law (中华人民共和国商标法), effective on 1 March 1983, and amended in 22 February 1993, 27 October 2001 and on 30 August 2013. The latest version of the Trade Mark Law shall come into effect on 1 May 2014.

 

4 Which are lower-ranking departmental rules (部门规章).

 

Hogan Lovells

 

For further information, please contact:

 

Roy Zou, Partner, Hogan Lovells
roy.zou@hoganlovells.com


Sherry Gong, Hogan Lovells
sherry.gong@hoganlovells.com


Stephanie Tsui, Hogan Lovells
stephanie.tsui@hoganlovells.com


Andrew McGinty, Partner, Hogan Lovells
andrew.mcginty@hoganlovells.com


Hogan Lovells TMT Practice Profile in China

 
 

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