New Regulatory Measures for Internet Transactions in China

by Davis Wright Tremaine LLP
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Background
On Jan. 26, 2014, the Chinese State Administration for Industry and Commerce (“SAIC”) promulgated the Regulatory Measures for Internet Transactions (the “New Measures”). The New Measures, which took effect on March 15, 2014, supersede the Interim Regulatory Measures for Goods, Transactions and Relevant Services over the Internet (the “Interim Measures”) enacted by the SAIC on July 1, 2010.

The New Measures respond to the new challenges created by the evolving e-commerce models. They focus on streamlining scope of applicability, information collection and disclosure, consumer rights protection, fair competition, and services relevant to Internet transactions.

Applicability
The New Measures apply to the offering of goods and services over the Internet (accessed from PC and mobile devices), as well as certain types of services relevant to conducting business over the Internet within the People’s Republic of China. The services covered by the New Measures include commercial services of third-party platforms, advertising and promotions, credit rating, payment and settlement, logistics, courier delivery, Internet access, server hosting, virtual space leasing, website/webpage design, etc. The sellers and service providers covered by the New Measures are referred to in this advisory as the “covered sellers.”

The New Measures require that covered sellers register with the SAIC and its local counterparts. Business license information of the covered sellers must be available through their websites either by displaying their information on a webpage or by providing a link to their electronic business license.

The only exception to this requirement is for individual sellers and service providers that engage in these offerings by using third-party platform services. The individual sellers and providers are referred to in this advisory as “individual sellers.” However, individual sellers are not entirely exempt from the regulation. The New Measures require that third-party platform service providers register not only their own information with the SAIC but also information on the individual sellers that sell on the service providers’ platforms. The platform service providers must also keep records of personal identification certifications of the individual sellers, including their ID cards.

The SAIC’s apparent plan is to have the capability to track the ID information of all Internet sellers and service providers through an official regulatory mechanism. The question remains, however, whether the SAIC has the competence and sufficient manpower to enforce this mechanism.

Information collection and disclosure
Due to the public’s concern about the privacy of personal information, the New Measures also impose stricter obligations on covered sellers regarding customer information collection and disclosure.

The New Measures establish legality, legitimacy, and necessity as the baseline principles for customer information collection and disclosure. Under these baseline principles, covered sellers must publish their own policies on the purposes for which information is collected and the methods and scope of information collection and disclosure. Customers’ consents must be obtained before any collection and disclosure.

Covered sellers and their employees are further required  to maintain the confidentiality of customer information collected and must not disclose, sell, or unlawfully provide that information to any third party. If they are aware of the actual or potential loss or unauthorized disclosure of customer information, they must take immediate remedial measures. In addition, without the consent and/or request of the customers,  covered sellers are not allowed to send any commercial advertisement to their customers, and, upon receipt of express objection from the customer, the covered seller must stop sending commercial advertisements to that customer.

Consumer rights protection

Cooling-off period
The New Measures give consumers a cooling-off period of seven days starting from the date the purchased goods are received. Unless otherwise agreed, the consumer will bear the cost of the return. Returned goods must be in good condition in order for the consumer to receive a full refund. The Internet seller must provide the refund within seven days after it receives the returned goods. It is important to note that the seven-day cooling-off period does not apply to tailor-made goods, fresh or perishable goods, downloadable audio and visual products, computer software or other digital products (if downloaded or unpacked), delivered newspapers or magazines, or other goods that have been confirmed with the consumer as not being subject to this cooling-off period.

Boilerplate contract
If boilerplate (standard form) contracts are used by covered sellers, the content of such boilerplate contracts must comply with the law and be fair in rights and obligations of the parties. Clauses that are material to the interests of the customers must be highlighted, and covered sellers must provide an explanation of the boilerplate contract at the request of the customer. In particular, a boilerplate contract cannot eliminate or restrict a consumer’s rights, reduce or exempt a covered seller’s liabilities, increase a consumer’s liabilities, or compel consumer compliance by technical measures.

In addition to the above, the New Measures also require that the covered sellers:

  • When requested by the consumers, provide invoices and receipts to the customers in official, customarily acceptable, or electronic form, and must accept such invoices or receipts in dealing with customer complaints;
  • Must not infringe the trademark or trade name of any third parties;
  • Must ensure completeness of the goods and services and provide an accurate and truthful description of the goods and services;
  • Must not have any minimum volume/amount requirement or otherwise charge unreasonable fees; and
  • Must provide proper contact information to the customers and take proper measures to safeguard Internet transactions.

The New Measures also reiterate that covered sellers should comply with the statutory obligations provided in the Consumer Right Protection Law of the People’s Republic of China.1

Unfair competition prohibition
The New Measures remind covered sellers of their statutory obligation under the Anti-unfair Competition Law of the People’s Republic of China. In addition, the New Measures expressly prohibit covered sellers from engaging in the following activities through technical measures or mediums:

  • Unauthorized use of unique domain name, name, and mark of well-known websites, or use of domain name, name, and mark similar to the above that is sufficient enough to cause confusion with well-known websites, resulting in misunderstanding by consumers;
  • Unauthorized use or forging of electronic identification of government agencies or social organizations, and making misleading or false statements;
  • Lottery-attached sales with virtual prizes whose values exceed the maximum amount allowed by law (RMB 5,000);
  • Boosting business reputations by fabricating transactions or deleting unfavorable review comments;
  • Disparaging competitors’ business reputations with false and malicious review comments; and
  • Unlawful technical attacks against competitors’ websites in order to disable their normal operations.

Obligations of third-party platform service providers
The New Measures impose on third-party platform service providers (“platform providers”) the responsibilities of managing the merchants operating on the platform. Platform providers must examine the identity of each entity or individual applicant in its on-boarding process and should enter into agreements with these applicants to cover such matters as entering and exiting the platform, quality control, consumer rights protection, etc. Such agreements may be amended only after seven days’ prior notice and public announcement. The platform provider must allow covered sellers who disagree with the amendment to exit the platform without any liability. Lastly, before ceasing the platform service, the platform provider must provide notice to consumers and relevant covered sellers in eye-catching places on its website for no less than three months.

The New Measures also require that the platform providers establish measures and rules for business surveillance. Platform providers should publicly announce platform rules and policies to manage the trading processes and implement technical support for the operation of such rules and policies. Platform providers should supervise business-related information released by participating merchants, report to law enforcement agencies if any illegal conduct is observed, and aid law enforcement by taking necessary measures, including shutting down the platform service to any such seller and stopping all other illegal conduct. Data identifying sellers, transaction records, and other data must be preserved in secured, complete, and authentic condition by the platform providers for no less than two years from either the de-registration of the participating merchants or completion of the transactions.

Platform providers are encouraged to provide fair and equitable credit rating services for Internet transaction parties. When a platform provider sells its own goods or services on the same platform with other covered sellers, the platform provider’s business must be distinguished from those of other covered sellers.

Jurisdiction allocation of the SAIC
The New Measures delegate to the SAIC counterpart at or above the county level the power to regulate and punish Internet transactions. The county level AIC with jurisdiction over the registered address of the covered sellers has the power to regulate such covered sellers. If covered sellers who are individuals are engaged in an Internet transaction through platforms, the county AIC at the platform provider’s registered address has such regulatory power. The county-level AIC may transfer its regulatory power to the county AIC at the residence of the individual sellers for enforcement purpose.

Conclusion
With the dramatic growth of e-commerce in recent years, the regulation of e-commerce has fallen far behind, in both regulatory theory and practice. Compared with the Interim Measures, the New Measures present the SAIC’s updated understanding of Internet transactions, making some modest but material improvements in regulation. E-commerce is a business that is subject to regulation by multiple governmental agencies (the MIIT, the MOFCOM, and the SAIC). It remains to be seen whether the New Measures, which are promoted only by the SAIC, can produce efficiency and consistency in regulation of a multi-agency regulated business. Nevertheless, participants in Internet transactions will need to adjust their current business practices and technical measures to comply with the express terms of the New Measures and their coming enforcement practices.

FOOTNOTE

1 For the general bligations of the business under the Consumer Rights Protection Law, please see our advisory on the Amendments to the Law on the Protections of the Rights and Interests of Consumers of People’s Republic of China

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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