The whole world has seen China growing into one of the largest consumer markets, as particularly boosted by its fast emerging e-commerce sector which is already now a pivotal part of the country’s economy. Besides many well-known online marketplaces like Alibaba, JD and the newest force Pinduoduo, quite a lot of other players operate under different business models including the very popular shopping from offshore model (“Haitao/海淘” in Chinese) where many foreign brands and players also have a stake. Since long ago, there have been constant issues and problems associated with the rapid growth of the e-commerce business which triggered a lot of concerns from various angles.
Governmental agencies have been taking various measures and actions to regulate these issues and problems, which gradually turned into a formalistic approach resulting in now the final enactment of the new PRC E-commerce Law on August 31, 2018 (“E-commerce Law”). The legislative process of this law has been quite spotlighted for a while. Its unprecedented four rounds of review by the congress attracted heated debate among experts and industrial stake holders in many fields. This law will take effect as of January 1, 2019. Below we would like to share with you some key highlights under the E-commerce Law which we deem are more relevant to international operations.
Who and what are covered?
Coverage of the E-commerce Law is very broad. According to its Article 2, e-commerce shall refer to the operational activities to sell goods or provide services via information networks like the internet. Its Article 9 further defines e-commerce operators to be individuals, legal persons (companies) and non-legal person organizations who carry out e-commerce as aforesaid defined, including e-commerce platform operators, merchants operating on the e-commerce platform and others selling goods or providing services via self-constructed websites or other “network services”. Such definition could mean to cover all online associated sales activities, be it sales of goods or services, by an individual or a company, via a traditional webpage, social media services or any other internet tool.
In this context, many trick questions could arise. E.g. will the popular overseas buy-on-others’-behalf (Dai Gou代购 in Chinese), Wechat Moment marketing, SMS promotion fall within the scope of this law? The answer will be yes since they are obviously online based or closely connected with online tools or use of social media. The same conclusion will also apply to the cross-border delivery model which has been adopted by some foreign brands targeting Chinese consumers while keeping their operation abroad to avoid onshore exposure. Although Article 2 of the law states that it applies to e-commerce activities within the territory of the PRC, the various connection factors (e.g. promotion and performance within China, ICP filing requirement) will pull a cross - border delivery model closer to the reach of the Chinese authorities. Hint in this regard may also be found under Article 26 of the law which was newly added in the published final draft and explicitly stresses that those conducting cross - border e-commerce operation shall abide by the laws and rules on import and export supervision. Considering tendency of the Chinese government to quite often launch enforcement campaign when a new law becomes effective, many existing business models will need to be legally revisited and adjusted where necessary so as to better accommodate the increased legal exposure brought by the new E-commerce Law.
Increased obligations and burden
One important aspect of the E-commerce Law is obviously to better regulate the market and protect consumers. To this effect, many new obligations were brought in. Below are some examples:
- business registration: except for very few types of rare and small personal business, Article 10 of this law requires all e-commerce operators to handle business registration (市场主体登记 in Chinese). Where a special license is required (e.g. food or drug related), such licenses shall be obtained according to law. The registration and license information shall be publicly disclosed all the time. This triggers a tricky question, i.e. shall an offshore brand targeting Chinese consumers also follow this onshore registration requirement (=incorporation)?
- taxation: according to Articles 10 and 14, e-commerce operators are required to pay tax and shall issue paper form tax invoice (fapiao) or electronic fapiao, all as required by law. A marketplace platform has the legal obligation to report merchant identity and tax related information to the tax authorities, and shall keep transaction related information for at least three years. This new mechanism will make all taxable revenue transparent to the tax authorities’ and some tax related grey area practice in the past will no longer be feasible in future.
- IP protection: both marketplace platforms and merchants are obliged to respect and protect intellectual property rights. Fake goods and rampant infringement of IP have been quite an iconic phenomenon associated with the rapid growth of China’s e-commerce business. Also many good designs and photos have been pirated and misused due to fierce competition of the market. Article 45 codifies the existing judicial practices by clarifying that marketplace platform operators shall assume joint and severable liabilities if they fail to “take necessary measures” to stop sales after it is determined that they knew or should have known any infringement of IP rights by the items sold on such platforms. The term “necessary measures” is defined modestly to cover deletion of online ads as well as termination of services by platforms.
- market order and competition: Article 17 of the law stipulates that an e-commerce operator shall fully, truly, correctly and timely disclose information about the goods or services to ensure consumers’ right of information and right of choice. Fake transactions or forged comments or misleading promotion is strictly prohibited. A marketplace platform shall establish a credit rating system for consumers’ and purchase comments made by consumers shall not be deleted (so as to dress up sales). Cheating/manipulating in marketing and promotion activities has been a big issue since long ago. Such illegal practice will now face penalties in future, which is a very positive step forward.
Privacy and data protection
Still until now, China does not have a systematic legal framework to regulate privacy and personal data protection issues. Even though now there is the new Cyber Security Law effective as of June 1, 2017 incorporating a special chapter addressing personal data protection, privacy and personal data protection regime still remains as patchwork of fragmented rules which you may also find under various other laws, measures and sector-specific regulations. The E-commerce Law continues on this path regarding this topic.
Article 18 of the law now addresses consumer profiling issue. When offering goods or services including search results according to consumption preference and habits profiling, an e-commerce operator shall also offer options independent from the concerned consumer’s personal profiling so as to respect and treat consumers equally. This clause could hit the very controversial “smart marketing activities” where some players intentionally abuse their data rich position, which results in discriminatory treatment to different consumers. To avoid circumvention, Article 19 further stipulates that for any tied-up sales or services (e.g. profiling based recommendation), a remarkable reminder shall be placed while default opt-in is not allowed. Any violation in this regard will face legal punishment including a fine up to RMB 500,000.
General impact and prospect
It may be a quite unique thing to see a specific law being enacted to regulate e-commerce activities, since the topics of concern under this E-commerce Law seemingly could have been regulated by other specific laws regarding e.g. consumer protection, competition, contract conclusion, data protection. Again China takes a very pragmatic approach to roof all these topics under the E-commerce Law, which however could trigger quite some practical implications which international operation shall pay special attention to. E.g. the very broad definition of e-commerce activities/operators and the explicit reference to cross-border operation could likely grant the administrative authorities more legal bases to examine and challenge some easy-to-start but risky business models like cross - border delivery from offshore. The statement under Article 4 of the law that the government shall treat both online and offline commercial activities equally sounds quite reasonable. However, considering the fact that there were fewer rules regulating online commercial activities, such a statement generally seems to indicate heavier regulatory burden of e-commerce operators in future (as we have outlined in above sections).
The focus of better protecting Chinese consumers as contemplated under this law including the introduction of the various punishment measures targeting violation may also signal an invitation to use China’s product quality and consumer protection claims, which may not necessarily be good news for all players in this fast growing market. As always, enforcement is the key in China and how the regime will develop remains to be closely watched upon. Our e-commerce experts are constantly monitoring this.