16 Jan
2020

China’s new E-commerce Law: tools in the fight against IP rights infringement

FERRANTE Intellectual Property

China’s new E-Commerce Law, which entered into force on 1 January 2019, is a remarkable piece of legislation establishing a comprehensive framework for the regulation of the largest online retail market in the world.

The law has been nearly six years in the making and went through four rounds of public consultation and numerous high-level meetings between lawmakers and the representatives of major stakeholders. The final text reflects the hard-earned compromise between the interests at stake.

Alongside provisions directed at promoting e-commerce and protecting consumers, the new law offers a series of new tools to tackle IP rights infringement. One prominent contribution of the law is to require key e-commerce players to scale up their involvement in the fight against the widespread offer of counterfeiting goods within China’s online marketplace.

The law builds on pre-existing best practices. Nonetheless, it represents a major achievement for China and a valuable instrument on which rights holders may now rely.

The scope of the new E-commerce Law is large and, according to Article 9, includes the following:

  • e-commerce platforms (known as ‘platform operators’), such as Taobao, Alibaba and JD;
  • any vendor (ie, business or individual) on any of these platforms (known as an ‘operator on platforms’); and
  • any other natural or legal person, or unincorporated organisation that engages in the operation activities of selling goods or providing services through the Internet or other information network (known as ‘e-commerce operators’).

The first two categories represent traditional e-commerce players, while the last category is wide enough to cover a more recent trend where individuals use messaging apps (eg, WeChat) to offer products within closed groups of users. According to XinHua, there were more than 20 million WeChat-based vendors in 2017 and the offer of infringing products is vast within this network. In an attempt to keep up with the evolution of the market, such vendors have been included in the scope of the new law.

Core analysis of IP-related provisions

The E-commerce Law contains IP-specific provisions as well as new, more general rules, which will support owners and authorities tackling IP rights infringement.

These new tools are aimed at:

  • increasing the transparency and accountability of vendors;
  • empowering platforms and fostering cooperation with rights holders; and
  • punishing violations effectively.

Increasing transparency and accountability of vendors

All vendors operating online, whether they use a platform, social media app or have their own website, now face more stringent transparency and accountability requirements. These provisions are part of the lawmaker’s effort to apply the same level of regulation to e-commerce that applies to offline retail (a general principle underlying the law (Article 4)). The provisions will help to streamline the plethora of vendors operating on China’s online marketplace, discouraging those that are not prepared to abide by the more stringent regulation and will also likely discourage illegal practices, such as offering counterfeit products or using infringing images.

Article 10 of the E-commerce Law lays down the principle that all vendors should “go through market entity registration according to law”. This general requirement suffers only marginal exceptions. In addition, under Articles 11 and 12, vendors are obliged to pay taxes and obtain relevant administrative licences wherever required to do so by law. Article 13 explicitly states that goods sold by vendors should comply with laws and administrative regulations.

Transparency towards consumers is another principle underpinning the E-commerce Law. Consequently, Article 15 adds that vendors should make public their business and administrative licences, as well as other relevant information related to their business operation. Such information must be continually visible on their homepage.

Platforms are required by the law to actively work to achieve mapping of all vendors using their infrastructure and support them with the implementation of the new duties. Article 27 provides that platforms should collect, verify and keep an updated registry of information regarding identity and administrative licences of all vendors. Under Article 28, platforms are also obliged to make such information available to authorities and cooperate with them. Under the same provision, platforms are also entrusted to remind vendors that did not go through market registration to proceed and provide them with support. The same obligations apply for tax purposes.

Empowering platforms and fostering cooperation with rights holders

A series of provisions are directly addressed to platforms and aim to put in place a framework of obligations and duties of care that will, directly or indirectly, help rights holders to protect their rights.

The first set of provisions are not specific to intellectual property but will likely support the policing of platforms from infringing products and other IP rights violations. Under Article 31, platforms are required to act as a depository of data released on their infrastructure, ensuring “the completeness, confidentiality and availability of such information”, hence supporting any further enquiry into past transactions. Such information should be preserved for at least three years from the date of completion of the transaction.

Platforms are also obliged to take measures and report to the relevant authorities if they detect any breach by vendors of Articles 12 (obligation to pay taxes) and 13 (obligation not to sell illegal products).

Further, platforms are entrusted with a burdensome duty of care regarding the quality of the products that are sold by vendors using their website, in order to protect the interests and health of consumers. Under Article 38, a platform “that knows or should have known” that a vendor has been offering goods or services which infringe safety requirements or any other legitimate right or interest of consumers and fails to take necessary measures, incur joint and several liability with the vendor. In addition, under the same provision, platforms incur corresponding liability for damages caused to consumers if they fail to check the qualifications of a vendor or “to fulfil the obligation to safeguard safety of consumers”, regarding the sale of goods related to the life and health of consumers. Arguably, this provision could also be triggered in case of sale of products infringing IP rights, coupling other mechanisms directly related to IP rights violations.

A second batch of provisions directly regulates IP rights protection. Article 41 adopts fairly broad wording, stating that platforms “shall establish their intellectual property rights protection rules, strengthen cooperation with IPR holders and legally protect the IPRs”.

It is worth looking at the three obligations separately. First, platforms are obliged to establish their own IP protection procedures. While most major players already had such procedures in place, such as Alibaba and JD, Article 41 makes it a legal obligation for the platform to establish them.

Platforms must also strengthen cooperation with rights holders. Best practices along this line were already in place before the law entered into force, at least for the major platforms. However, under the new regime, it is now compulsory for platforms to show that they team-up with the rights holders to tackle IP rights violations.

Finally, Article 41 affirms that platforms must “legally protect” IP rights, which is a rather broad obligation. It remains to be seen how courts and administrative authorities will implement it. However, platforms are certainly required to proactively contribute, alongside authorities and rights holders, to tackle IP rights violations.

Articles 42 to 44 create a legal procedure to allow rights holder to point out IP rights infringements to platforms and have them removed, subject to a right of counter-notice by the vendor.

Under Article 42, rights holders with reasons to maintain that their IP rights are being infringed upon by a vendor may notify the platform and ask for appropriate measures to be taken (eg, deletion, blocking and disabling the link, or “termination of transaction and service”). The notice should be accompanied by “prima facie evidence on the constitution of infringement”. Such evidence would need to include proof of ownership of the right in question (eg, registration in China of a trademark or a copyright recordation certificate).

On receipt of the notice, platforms are obliged to inform the vendor of the notice, opening the right to counter-notice under Article 43. At the same time, they should take interim measures to block the allegedly infringing link or otherwise minimise possible damage. These obligations come with heavy penalties, as platforms assume joint and several liability with the vendor for the part of the damage directly caused by their failure to act in a timely manner.

Article 43 regulates the right of the vendor to respond to the notice with a statement of no infringement. The counter-notice should also include prima facie evidence of no infringement (eg, authorisation documents or purchasing receipts). Previous versions of the law did not mention the need for the vendor to provide evidence. Such a condition was inserted after stakeholders pointed out that requiring a mere one-sided document could foster unethical practices and weaken IP rights protection. This mechanism could be further enhanced, as suggested during the public consultation phase, by allowing the rights holder to verify the prima facie evidence submitted by the vendor, in order to discourage misleading statements which platforms may be unable to detect.

On receipt of a counter-notice, platforms are again under a demanding duty of forwarding it to the claiming rights holder, together with information regarding the right to file a complaint to the relevant competent authorities or bring a lawsuit in court. In case they receive the counter-notice, rights holders have 15 days to file a complaint with the relevant regulatory authorities or file a lawsuit and inform the platform accordingly. If the platform does not receive any notice within 15 days, the measures will be immediately lifted. Conversely, the law is silent regarding an instance in which a complaint is filed and the platform is informed. Arguably, in such a case, measures taken by the platform against the infringing link could be maintained pending the decision on the claim.

Article 44 requires platforms, in a timely manner, to make it public when they receive a notice, counter-notice and results of any procedure under Articles 42 and 43.

Finally, Article 45 provides for an additional case of joint and several liability of the platforms, when they “know or should have known” of any IP rights infringement by vendors. In such cases, platforms should take such necessary measures, such as deletion, blocking, disabling the link, termination of transaction and service, or incur liability for damages. As it is common practice in Chinese law, the scope of the duty of care is not clearly defined by the E-commerce Law and it is up to the courts to define its limits.

Punishing infringement effectively

The E-commerce Law penalises the obligations placed on vendors and platforms with administrative fines. As an example, vendors that fail to make visible information regarding their business registration and licences on their homepage will be fined up to Rmb10,000. Article 80 provides that failure by platforms to report breaches of Articles 28 and 29 by vendors and to store information for three years under Article 31 will trigger an administrative fine of up to Rmb100,000 or Rmb500,000 for serious breaches.

Besides assuming joint and several liability with vendors for damages caused to rights holders (Article 45), platforms also incur fines when they fail to take necessary measures to address an alleged infringement on IP rights in violation of Article 42 or 45, and do not rectify such failure within the prescribed time limit imposed by the authority. Fines may reach Rmb500,000 or Rmb2 million for serious breaches.

Remaining challenges

The E-commerce Law is a significant milestone in China’s fight against IP rights infringement. Nonetheless, the size of China’s online market, its growing importance in daily life, as well as the rapidly changing layout of e-commerce make it difficult for market regulators to close all loopholes in one attempt.

For example, the counter-notice system raised some criticism among stakeholders during the public consultation preceding the enactment of the law. Under Article 43, a vendor may reply to a notice of IP rights infringement, prompting the need for the claiming rights holder to bring the matter before a market regulation authority or court. Some stakeholders have highlighted the risk of an increase in costs for rights holders and in workload for market authorities. Rights holders should be entitled to review the prima facie evidence of no infringement submitted by the vendors. However, as it presently stands, the mechanism is a compromise and could encourage parties and platforms to seek out-of-court solutions.

Another point that raised criticism among stakeholders is that social media operators are not covered by the law. Indeed, Article 9 explicitly includes platforms, vendors on platforms and social media-based vendors in its scope of application. Nevertheless, it falls short of including social media operators in the definition of ‘e-commerce operators’. Consequently, they are not as empowered as platforms when it comes to monitoring and punishing the behaviour of vendors using their network. In addition, the solution to this problem does not seem straightforward, as social media-based vendors are likely to hide behind the private nature of the groups within which they offer their products.

How to take full advantage of the new tools

Rights holders should act in order to maximise the positive changes brought about by the new E-commerce Law.

It is necessary for rights holders to devise a sound strategy of protection in China, which includes registering trademarks, patents and copyrights in China. Without proof of ownership of the rights allegedly infringed upon, many of the new tools cannot be used.

It is also advisable to strengthen cooperation with platforms and to adopt monitoring programmes aimed at uncovering infringement. Finally, rights holders should be ready to counteract and refer matters to the proper authority when breaches cannot be tackled effectively through cooperation with platforms.

FERRANTE Intellectual Property

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Michele Ferrante

Managing partner

[email protected]

Michele Ferrante is founder and managing partner at Ferrante Intellectual Property, advising corporations around the world on IP rights protection. He has experience in multi-jurisdictional practices in London, Paris and Milan.

He is an active speaker, lecturer, moderator and panellist for INTA and other associations and conferences. Since 2017 he has lectured on China’s IP landscape at the Il Sole 24 ORE Business School in Italy. He is a prolific author on a range of topics relating to China’s IP laws. In 2017 he contributed to the China chapter in A Practical Guide to Protection against Online Infringement.

Mr Ferrante is acknowledged by WTR 1000 and Legal 500 as an exceptional legal professional. He speaks fluent Italian, English, French and Spanish.