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China – Beware Of False Advertising When Selling Into State.

23 June, 2015

 

Legal News & Analysis – Asia Pacific – China  Regulatory & Compliance

 

We are increasingly encountering foreign multinational corporations (“MNCs”) selling into China, attracted by the growing consumer market. However, China has in place fairly strict advertising law and regulations, that MNCs need to be mindful of. In this newsletter, we look at how Procter & Gamble (“P&G”) was sanctioned by the Chinese regulator for false advertising, and also highlight some of the new amendments to the PRC Advertising Law.

 

P&G Fined USD 1m

 

In early March this year, the regulatory body in charge, Shanghai Administration for Industry and Commerce (“Shanghai AIC”) publicized1 a legal violation of China’s advertising law involving P&G’s Crest toothpaste. Shanghai AIC found that a Crest television advertisement exaggerated the effects of its toothpaste, claiming that after merely one day of using Crest toothpaste, the teeth would become whiter, when in fact digital software was used to “touch up” images of the teeth in the advertisement to give the false impression. On this basis, the Shanghai AIC ruled that P&G had engaged in false advertising, and fined approximately USD 1m.

 

In another instance of false advertising, Shanghai AIC publicized2 a case involving a major China online electronics e-commerce platform, Yixun.com. The infringement arises from false and misleading advertisements on its website, in which Yixun.com had misled the public on the price discounts for mobile phones and other electrical appliances sold on its website.

 

In cases involving false advertising, the possible sanctions include cease-and-desist order and monetary fines, for which the quantum is determined, under the Advertising Law prevailing at that time, by multiplying one to five times of the advertising fee spent by the company on the non-compliant advertisement.

 

Amendments To PRC Advertising Law

 

The government recently amended3 the PRC Advertising Law, which had been in place for more than 20 years. Among the amendments, the sanctions and penalties for false advertising have been tightened, creating more severe punishments for infringers.

 

In the amendments (“Amendments”) to the PRC Advertising Law, the monetary fines have been increased to three to five times of the advertising fee, with a stiffer penalty of five to ten times of advertising fee for serious violations, including cases where the infringer had committed three or more violations within the preceding two years. In addition, the administrative powers have been widened, to enable the regulator to issue a ban on the infringing company from putting up advertisements for up to one year, or in more extreme cases, to revoke the business license of the company, thus disabling it from carrying on business altogether.

 

The Amendments also continue to treat as illegal various forms of superiority claim and derogatory statement about competitors. Interestingly though, the Amendments approached the sanctions for such other violations differently, by capping the fines for superiority claim to RMB 1m (approximately USD 160k), and for derogatory statements to RMB 100k (approximately USD 16k), in contrast to applying a multiple to the advertising fee in the case of false advertising.

 

Conclusion

 

As the recent enforcement actions against P&G and Yixun demonstrate, the Chinese regulatory body is taking a vigorous approach towards enforcing the PRC Advertising Law. With the increased sanctions against false advertising and other violations under the Amendments, multinational corporations selling to the China market should be vigilant and scrutinise every single advertisement to be used for China to avoid legal infringement, and be wary of potential complaints not only from competitors, but also the consumer public.

 

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For further information, please contact:

 

Chunfai Lui, Partner, Stephenson Harwood

cf.lui@shlegal.com

 

Homegrown Regulatory & Compliance Law Firms in China

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