Background

On Jan. 5, 2015, the Chinese State Administration for Industry and Commerce (“SAIC”) promulgated the Penalty Measures for Infringement on the Rights and Interests of Consumers (the “Measures”), which will take effect on March 15, 2015.

The purpose of the Measures is to crystalize certain requirements provided in the Law on the Protection of the Rights and Interests of Consumers (“Consumer Protection Law”), which was amended on March 15, 2014. The Measures interpret the existing prohibitions in the Consumer Protection Law by giving examples of merchant misconduct related to: (i) intentional delays or unreasonable refusals of a consumer’s return request; (ii) fraud on consumers; (iii) misleading and fraudulent publicity; (iv) prepayment arrangements; (v) consumer personal information protection; and (vi) unfair form contracts.

Fulfilment of return and repair obligation - no intentional delay or unreasonable refusal Return and repair obligation – 15 days

  • 15-day policy

For shopping via the Internet, television, telephone and by mail, the Consumer Protection Law entitles consumers to return the products with or without any reason within seven days upon consumer’s receipt of such products. The Consumer Protection Law further requires merchants to refund to consumer within seven days upon receipt of consumer’s return. In practice, merchants could delay or refuse to respond to the consumer’s request to return the products. The Measures set up a 15-day window, meaning the merchant must fulfil the consumer’s seven-day no-reason return request within 15 days after the request. Otherwise, the competent counterpart of SAIC could impose administrative penalties on the merchant for “intentional delay or unreasonable refusal.”

  • Opening of packaging is not a reason for refusal of return

Merchant may not refuse a return request based on its own announcement, without the consumer’s consent, that the seven-day no-reason policy does not apply to certain goods. The consumers are entitled to open the package to check the status of the goods, and the merchant may not refuse the return request based on the fact that the package was opened. After receiving the returned goods, the merchant must refund the purchase price to the consumer within seven days.

  • Interpretations of other related laws 

If, according to any other provision of the Consumer Protection Law, the consumer requests the merchant to return, repair, refund, exchange or compensate, the merchant must satisfy such request within 15 days or expiry of agreed term. Any delay beyond 15 days will be deemed intentional delay or unreasonable refusal.

Penalty

Merchants’ intentional delay or unreasonable refusal to fulfil its obligations will be punished by SAIC (including its counterparts on local level) by one or more of the following administrative penalties: (i) a warning; (ii) forfeiture of any illegal gain; (iii) administrative penalties equal to one to ten times of the illegal gains (or in the absence of any illegal gains, penalties of up to RMB 500,000); (iv) suspension of the merchant’s business; and/or (v) revocation of the merchant’s business license.

Fraud on consumers

The Measures divide fraud on consumers into two categories: (1) intentional fraud, and (2) fraud per se.

  • Intentional fraud

If the merchant engages in any of the following types of misconduct, it will bear the burden of proof to show that it had no intent to defraud the consumer. Intentional fraud will be found if the goods/services sold are unsafe, do not have the intended effect, or have deteriorated. Intentional fraud also applies to products that state a fake or false place of origin, name of producer, date of manufacture, or mark of certification or qualification. In addition to the Consumer Protection Law, the Measures stipulate that merchants are committing intentional fraud if they use, without authorization, the registered trademark of other merchants or the distinctive name, packaging, or decoration of other famous products.

  • Fraud per se

Fraud per se will be found if the goods/services (a) consist of fake or unqualified goods/services; (b) are prohibited from, or ordered to cease, sales by government; (c) are measured by unqualified measuring instrument; or (d) fail to conform to the agreement.

Any misleading and fraudulent publicity, as explained further below, also constitutes fraud per se.

Penalty

Both categories of frauds are subject to the same administrative penalties as elaborated in the above section.

In addition to the administrative penalties, merchants that commit fraud can be subject to civil liability for the consumers’ actual loss plus punitive damages amounting to the higher of (1) three times the cost paid for the goods/services, or (2) RMB 500.

Fraud per se in special service industries

In the case of service industries, fraud per se will be found if:

  • Merchants providing repair, processing, installation, decoration services: (i) claim false utilization of manpower or materials; (ii) intentionally sabotage or exchange parts or material; (iii) use unqualified or sub-standard parts or material; (iv) unnecessarily change parts; or (v) charge excessive fees; or
  • Merchants providing intermediary services (such as introduction of housekeepers or real estate brokerage services) give consumers false information or maliciously collude to cheat consumers.

Unlike the general penalty rule, the administrative penalty for the above types of service industry misconduct is one to three times the illegal gain, not exceeding RMB 30,000 (or in the absence of any illegal gains, penalties of up to  RMB 10,000).

Misleading and fraudulent publicity

Merchants must not publicize their goods/services in an untruthful or misleading manner. Specifically, merchants must not boost sales by falsifying transaction volume or comments, or by hiring others to do so. Prices shall not be falsely marked as “clearance price,” “lowest price,” “promotion price,” etc., if untrue. Merchants shall not organize fake “premium sales,” “try-before-you-buy sales,” or “refund-cost sales.” Substandard products shall not be sold as regular goods. Merchants shall not exaggerate about or conceal the information that is material to consumers (e.g., amount, quality, and functionality).

Prepayment arrangements

If the goods/services are purchased by means of prepayments, the merchant must agree with the consumer by stating clearly the number and quality of the goods/services, the price and fee, terms and means of performance, warnings and risks, after-sales services, and civil liabilities. If the goods/services provided do not conform to the agreement, the merchant must cure the deviation or refund the prepayment along with accrued interest and any reasonable expenses incurred by the consumer. If there is no specific agreement regarding refunds, the amount will be calculated in a way favorable to the consumer. Any refusal or delay over 15 days is subject to the same administrative penalties as mentioned in the above section.

Protection of personal information of consumers

The Chinese government has enacted various laws and regulations to protect personal information, including, among others, theRegulatory Measures for Internet TransactionsRegulations on Protection of Personal Information of Telecommunication and Internet Users, the Decision on Strengthening Online Information Protection, and the Consumer Protection Law. Under these laws and regulations, merchants can collect and use consumers’ personal information only with prior consent and following the principle of legality, necessity, and legitimacy. The Measures further define the concept of “personal information” to cover any information that may be used alone or in combination with other information to determine the identity of the consumer, including the consumer’s name, gender, profession, date of birth, ID number, address, contact information, income and property, health condition, consumption, and spending information. This expanded definition will raise the standard of obligations for merchants, especially online sellers, to collect and utilize the consumer’s personal information.

Form contracts

The Measures provide that merchants shall not, by form contracts, announcements, or notices: (i) exempt or limit the merchants’ obligations to repair, replace, exchange, return, refund, and compensate; or (ii) eliminate or restrict consumers’ corresponding legal rights. Merchants shall not, by form contracts, eliminate or restrict consumers’ rights to file complaints, blow-whistles or bring actions. Form contracts may not be used to require consumers to purchase or use any designated goods/services, and those consumers who refuse to do so may not be turned down for such goods/services or charged any additional cost. Merchants shall not have a unilateral right to change or terminate contracts or the sole power to interpret the contract.

Conclusion

The Measures create a higher standard for merchants to observe in complying with their duties under the Consumer Protection Law and show the pro-consumer attitude of the Chinese government. It would be advisable for online retailers to immediately review their online sale/use terms and policies and make any necessary adjustments.