On July 1, Dali Foods Group, a well-known Chinese foods conglomerate listed on the Hong Kong Stock Exchange, was fined CNY 36,730,400 (USD 5,340,817) by the Jiangsu Province market supervision administration for false advertising relating to a charity promotion connected to Dali Group’s Capico potato chips brand. For approximately 8 months, Capico potato chip packages stated that Dali Group would donate certain money to the “China Foundation for Culture Conservation” and the “China Non-Profit Foundation for Intangible Cultural Heritage” whenever a customer scanned a QR code printed on the package before the promotion ended on May 31, 2018.

Unfortunately, neither of these charities existed. The advertising authorities also noted that the promotional packaging was still being used well after the charity promotion had expired. As a result, Dali Group was accused of engaging in false advertising, essentially promoting the sale of its chips through a fictitious charity event.

Dali Group’s Defense

In its defense, Dali Group argued that its intent was genuine, and that it did in fact donate CNY 100,000 to the “China Foundation for Cultural Heritage Conservation”, a slightly different name than those listed on the packaging. Essentially, a mistake. The advertising authorities were not moved, and confirmed that a mistake that has a substantially misleading effect can still be considered false advertising even if there is no malicious intent.

The Dali Group may also have relied on the charitable nature of the promotion to try to avoid or minimize its penalty. However, under the PRC Advertising Law, “advertisement” has a very broad definition, i.e. “all commercial advertising activities for direct or indirect introduction of products or services promoted by product business operators or service providers via a certain medium and in a certain form within the PRC.” Under this definition, even a charity tie-in like this would be considered an advertisement, as it is clearly meant to promote sales or at the very least increase the product’s visibility.

In the end, Dali Group was given a record-breaking fine as a result of a typo.

Legal Basis of the Fine

The fine in the Dali case is the largest to date issued under the PRC Advertising Law, and represents a significant expansion of the scope of potential fines under that legal framework.

Under the PRC advertising law, fines are calculated based on the “advertising fees” which is the total amount the advertiser paid to place the add, including design fees, agency fees, production fees, publication fees, etc. In ordinary cases, the fine would be not less than three times and not more than five times the advertising fees, or, where the advertising fees are not known or are “unreasonably” low, not less than CNY200,000 and not more than CNY1 million. In serious circumstances, such as where a violation has occurred more than three times within two years or there are other serious issues, the fine would be not less than five times and not more than ten times the advertising fee, or where the advertising fees are not known or are unreasonably low, not less than CNY1 million and not more than CNY2 million.

As a result of this standard, many in the industry had long believed that the largest fine possible under the Advertising Law was CNY2 million. But the Capico case has conclusively demonstrated that this is not true. In this instance, the advertising authorities calculated as follows: 91.826 million cans of Capico chips sold with the misleading packaging, with an advertising fee of CNY 0.1 per can, for an aggregate advertising fee of CNY 9.1826 million. Multiplied by four, that equals CNY 36,730,400 – well in excess of any prior fine under the Advertising Law, but entirely predictable based on the law’s plain language.

A Trend of Enhanced Enforcement

The large fine in the Capico case indicates a significant escalation of potential risk under the Advertising Law in the PRC, but it is in line with a long trend of the market supervision administration attempting to assert more authority in this area.

In 2015, the former State Administration for Industry and Commerce (“SAIC”, now the State Administration for Market Regulation) implemented a system of random checks of more than 4,000 traditional media advertisers (television stations, newspapers, etc.). Then, in 2017, the SAIC launched the National Internet Advertising Monitoring Center, which monitors advertising across the Chinese internet on thousands of sites. And in 2018, the SAIC issued a notice on Launching a Special Program to Rectify Internet Advertisements, which reiterated that 100% of administrative penalties for illegal Internet advertising will be made public, as a way of bringing further discipline to the advertising market.

As a result of these efforts, there has been a gradual increase in penalties for false advertising, and a greater atmosphere of compliance, all of which should encourage advertisers to take due care with their campaigns in China – even if it’s just proofreading!