Catherine Zheng, Partner; Dora Si, Partner; and Winne Yue, Professional Support lawyer; Deacons, look at the implications of Mainland China’s new e-commerce law, which comes into effect this month, relating to the liability of e-commerce platform operators in respect of consumer protection and intellectual property infringement.
In less than a decade, Mainland China has become the largest e-commerce market in the world, accounting for over 40% of global e-commerce, according to a recent report by McKinsey. The breathtaking speed of development has left lawmakers scrambling to regulate the booming e-commerce industry. After nearly two years of discussion, the Standing Committee of the National People’s Congress passed Mainland China’s new e-commerce law on 31 August 2018, only two weeks after the fourth draft of the law was released for consultation. The law is Mainland China’s first comprehensive legislation governing the field of e-commerce and took effect on 1 January 2019.
E-commerce operators in Mainland China have been under intense scrutiny following media reports of counterfeits sold on the online discount platform operated by Pinduoduo Inc, the Shanghai-based e-commerce platform recently listed on Nasdaq. The accountability of e-commerce operators in Mainland China has been a particularly hot topic recently following the reported deaths of users of the Didi mobile ride-sharing app and it is not surprising that there has been pressure to increase the liability of e-commerce platforms.
The law is wide-ranging and covers the requirement for registration and licensing of e-commerce operators, taxation, electronic payment and e-commerce dispute resolution. It also addresses other important aspects of e-commerce including false advertising, consumer protection, data protection and cybersecurity, as well as the protection of intellectual property (IP). Many of the provisions are a codification of the existing laws. This article will briefly examine the impact of some of the measures relating to the liability of e-commerce platform operators in respect of consumer protection and IP infringement.
It is significant that the law applies to all e-commerce operators, meaning all natural and legal persons that engage in the business of selling merchandise and/or providing services on the internet or other information networks. This covers e-commerce platform operators, the vendors of goods and services on the e-commerce platforms of others, and those who operate their self-built websites or through other network services. The expanded wording is important as it covers non-traditional shopping channels including social media and messaging services such as WeChat and streaming sites such as Douyin.
This has been a particularly contentious area. The new law provides that where e-commerce platform operators know, or should know, that goods or services provided on the platform do not comply with requirements for personal or property security, or otherwise violate the lawful rights and interests of consumers, and they do not take necessary measures, they will be jointly and severally liable with the online vendor. This makes clear that a consumer who suffers damage will be able to sue both the vendor and the e-commerce platform. Under the new law, it seems that a platform, such as Didi, is likely to be jointly liable, if it knew, or should have known, of the possible risk to its customers and did not take the necessary measures to protect them.
Notice and take-down
The new law provides a framework for ‘notice and take-down’ procedures that are already enshrined in existing regulations and are already provided for by most e-commerce platforms in Mainland China. There has been much discussion as to the nature of the ‘preliminary evidence’ needed to be included in any notice and whether this increases the burden on IP owners. However, since this is not a new concept, we do not expect this to be very different from the notice requirements currently used in practice in Mainland China or under other international notice and take-down systems.
The law refers to acting ‘promptly’ to take the necessary measures after receipt of a take-down notice. We believe that is likely to be interpreted in line with existing guidelines governing the infringement of copyright works on information networks, which already set out factors for determining whether measures have been taken in a ‘timely’ manner. These include the degree of difficulty in implementing the measures, the nature of the services provided by the online service provider, and the type and quantity of works involved.
Erroneous and malicious notifications
The new law provides for penalties in the case of incorrect or malicious notifications but does not actually specify who will bear the liability. Since it is not uncommon for rivals to make false accusations against their competitors, the suggestion that the platform operator may be liable for damages caused by an erroneous notice, or even ‘multiple’ damages in the case of a malicious notice, has caused legitimate concern. Our reading is that general civil liability in respect of erroneous notices is imposed on anyone; the provision may be deliberately ambiguous to give the courts discretion to apportion liability in appropriate circumstances, including platform operators, if they should have known that a notice may be incorrect.
However, we believe that the heavier penalty for filing a malicious notice is directed towards the persons filing the malicious notice, rather than the platform operator. This would be in line with the Beijing Higher People’s Court Guidelines for the Adjudication of Network-Related IP Cases (Beijing Guidelines), which allow vendors to seek damages against the complainant for filing a false complaint. It is hoped that this will be clarified in due course.
Counter-notices and reinstatement
There is also provision for counter-notices and reinstatement, which is normal with a notice and take-down regime. Legitimate concern has been expressed by IP owners regarding the burden on them to take court or administrative action once a counter-notice has been filed within 15 days. Whilst domestic companies should be able to take action quickly, formality requirements mean that it can take foreign IP owners more than a month to get the requisite documentation in place. Short deadlines are not uncommon in Mainland China but, given the particularly short timeframe and the difficulty of anticipating counter-notices, this provision may prove to be troublesome. This is especially as infringers may file false counter-notices and there is no discussion of verification of the counter-notice.
Joint and several liability
IP owners should be happy to see that the law specifically provides that an e-commerce platform operator will have joint and several liability with the vendors, where a platform operator knows, or should know, that a vendor has violated another’s intellectual property rights and fails to take the necessary action such as deleting, blocking links or stopping transactions. This is in line with existing law where a platform operator may be liable for assisting in a web user’s infringement where it fails to take action.
The new law imposes liability where the e-commerce provider knew, or should have known, that relevant goods and services infringe the rights and interests of consumers or the IP of others. This notion is reminiscent of the ‘red flag’ test under the US Digital Millennium Copyright Act, where an online service provider cannot claim safe harbour protection if it is aware of facts and circumstances from which infringing activity is apparent. On the face of it, the wording places a greater burden on e-commerce operators than the law in many jurisdictions, including Hong Kong, which has a high threshold for establishing joint liability, requiring there to be a common design, deliberate collaboration with a third party to commit an infringing act, or otherwise procuring another person to commit the tort.
However, the concept has existed for some time under Mainland Chinese law, appearing in the Information Network Dissemination Provisions, the Beijing Guidelines and existing case law such as E-land v Tao Bao (2011) 沪一中民五(知)终字第40号and Wenqing Culture v Baidu (2016)京民终248号, which already provide guidelines for determining whether a platform service provider knew or ought to have known of infringement by an online vendor, and are likely to be relevant to interpreting the new law. This may also be covered in the implementing rules.
Where e-commerce platform operators fail to take necessary measures in respect of IP infringements, the relevant administrative authorities may order them to rectify the situation within a set time. For the first time, the law provides that failure to rectify by the deadline could expose the platform to a fine of between RMB 50,000 to RMB 500,000. In serious cases, a fine of between RMB 500,000 to RMB 2,000,000 may be levied. However, the law does not grant IP owners any specific right to file complaints or request compensation from platform operators.
Business licence registration
In practice, the most important change for IP owners may be the administrative requirements for all e-commerce operators to obtain business licences and to register with the tax authorities. The law also requires all e-commerce operators to ensure that their business licence and administrative licence information related to their business activities are prominently displayed online at all times.
Whilst unscrupulous vendors may still try to file fake registrations, this will not be easy, as they will be examined by the local market supervision bureau. Although these requirements may not catch all the parties in a supply chain, the new law should make it easier for IP owners to identify infringers, or at least key parties involved in counterfeiting activities. This should be welcomed by IP owners who may now be able to avoid the expense and trouble of filing civil actions to secure disclosure orders for vendor information.
Retention of transactional information
All e-commerce platforms are now required to keep records of product and service information, as well as transaction records, for not less than three years. Failure to keep such records can result in significant fines and suspension of operations pending rectification. Such records can be crucial to IP owners in building an infringement case. However, the law does not address the issue of whether the courts or administrative enforcement authorities have the power to order disclosure of such transactional information for the purpose of infringement proceedings. Given that the law does provide for e-commerce operators to hand over information to relevant authorities in the context of data protection, cybersecurity and tax, it remains to be seen whether there may be provision for information to be requested by the authorities in the context of administrative enforcement or court proceedings.
The law raises many questions that will be the subject of further debate and lobbying as the implementing rules are yet to be drafted. The broad wording in some areas is not unusual as it allows the authorities flexibility in applying the law. Some of the provisions are not actually a significant departure from the current law, but it is clear that the online platforms are expected to do more to protect the interests of IP owners and, especially, consumers.
IP owners and e-commerce operators should seek advice on the effect of the changes and prepare for compliance. Many of the major e-commerce companies already have mechanisms in place to identify and handle counterfeits and have been making use of big data technology in an attempt to cleanse their platforms in advance of the new law coming into force. They are also likely to revise their business terms with vendors to impose obligations on them to comply with the law, but operators may need to conduct more careful due diligence into the vendors and their products.
The swift enactment of the law and the recent high-profile campaigns by the Mainland Chinese authorities to crack down on internet-related infringement are a sign of the government’s resolve to increase the pressure on e-commerce platforms to help fight illegal activities on their platforms. However, whilst the larger companies may have the resources to do this, smaller platform operators – and especially vendors operating their own websites – may find it more difficult to comply with the law, which may hamper the sustainable growth of small and medium-sized businesses that the government is hoping to promote.
Catherine Zheng, Partner; Dora Si, Partner; and Winne Yue, Professional Support lawyer