China’s New e-Commerce Law: Businesses Should Ready for Stronger Compliance Norms

China will implement a new e-commerce law from January 1, 2019. The new law will extend legal protection for consumers and brand owners and will arm the fight against the country’s reputation as a source of fake goods.

The timing is important as e-commerce sales accounted for 23.8 percent of all retail sales in China in 2017, and is projected to reach 33.6 percent by 2019. As the country’s e-commerce market grows at a staggering rate, so does the need for stricter oversight and market regulation.

Responding to this, the Standing Committee of the National People’s Congress (NPC) passed a new law on August 31, to improve the regulation of China’s booming e-commerce market. It was first reviewed in December 2016 and deliberated upon by the NPC in October 2017 and June 2018.

In this article, we highlight key changes introduced in the new e-commerce law.

Types of e-commerce operators recognized by new law

A major provision under the new law is the clarification of the types of businesses that will fall under its jurisdiction. The e-commerce law mainly applies to the following three types of operators:

• Platform operators: Any legal persons or unincorporated organizations that provide a space for digital business, transaction matching, information release, and other services to facilitate parties in an e-commerce transaction. An example is the shopping site Taobao owned by Alibaba.
• Operators on platforms: Third party merchants that sell goods or provides services on e-commerce platforms. An example is a vendor operating an online store on Taobao.
• Online sellers: Other e-commerce players doing business through their own websites or through other online channels, such as social media applications.

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Business Intelligence

A key element is the inclusion of non-traditional shopping channels (such as social media) as places of e-commerce, bringing popular apps like WeChat and Duoyin under the new legislation.

This inclusion is significant; in recent years, the number of micro-businesses online on these channels have increased manifold. A micro-business is a small store with no physical storefront, no business license or credit guarantee, and little assurances in terms of customer service.

By simply changing the account information or deleting a contact, these businesses can evade legal responsibility and disappear. Although the term ‘micro-business’ is not a legal term, these types of businesses do exist and are one of the newer forms of e-commerce in today’s mobile age.

IP protections strengthened for e-commerce

E-commerce platforms must establish rules to protect IP rights, and when notified of a violation, respond in a timely manner. Those who fail to do so will face penalties of up to US$293,130.

To further strengthen IP protection, retailers on e-commerce sites must also register with the State Administration for Industry and Commerce to obtain a business license.

By requiring registration, the law aims to make it more difficult for those who infringe on IP to avoid detection and punishment.

Regulating unfair competition

Article 22 of the new legislation highlights fair competition obligations for all e-commerce operators, with special emphasis on those with dominant market positions.

Operators with advantages in the market through methods such as number of users and technological advantages, are prohibited from abusing their position to exclude or restrict competition.

Article 35 further underlines fair competition by prohibiting platform operators from imposing unreasonable restrictions, conditions, or fees on merchants.

Shared liability for platforms

E-commerce platforms will now be jointly responsible for the sale of fake goods on their site.

Previously, only individual merchants were responsible when caught selling counterfeits.

Under the new law, platform operators must respond in a timely manner to reports of violations or face penalties of up to US$30 million.

Consumer rights reinforced in e-commerce domain

Consumers will now have stronger legal protections under the new e-commerce law. Merchants must clearly disclose any clauses or bundles they have placed on sales and cannot assume consent from the consumer.

The new legislation will also protect consumers against fake reviews. The ban of fake reviews includes not only those reviews written by hired agents, but also positive reviews written by customers in exchange for monetary rewards.

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Corporate Establishment and Structuring

Over the past few years, e-commerce in China has developed at a rapid pace, but with little oversight. The new e-commerce law comes at the right time as more consumers turn to online platforms to make their purchases as a first option.

Bolstering this e-commerce oversight will result in the effective regulation of online activities and should improve protections for consumers and brand owners. In addition, the law will tackle the sale of counterfeits, helping to clean up China’s reputation as a source of fake goods.

While it is certainly a step in the right direction, there is scope for more improvements. Some aspects of the law still need clarification. Provisions, such as the standard of evidence required to initiate take-down procedures or the relevant legal responsibility of platform operators, are still unclear, leaving them open to abuse or misinterpretation.

Platform operators, merchants, and brand owners should be aware of the regulatory changes that will come into effect next year and prepare for compliance.

For platform operators, due diligence is necessary to ensure that goods sold by third party merchants on their platforms are in compliance with the updated legal norms. On their part, merchants and brand owners should have a good understanding of compliance norms and consumer and brand protections provided under the new law.

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