Administrative punishment under China’s Advertising Law

“The crystal pillow can alleviate brain fatigue, insomnia and dreamful sleep, and improve sleep quality”, claimed a T-mall flagship store.

The claim above resulted in a local market supervision authority imposing the first administrative punishment for violation of the Advertising Law in 2017.

According to the Xinhua News Agency, Industry and Commerce and Market Supervision authorities have dealt with some 24,000 cases nationwide since the implementation of the Advertising Law on 1 September 2015, and imposed fines of over 400 million RMB (approx. US$58.4 million). The cases included 3200 concerning Internet advertisements that attracted fines of about 67 million RMB (approx. US$9.782 million).  Since September 2015, advertising violations have been reduced by 84.29% and the volume of illegal advertisements maintained at a relatively low level.   

These statistics, acclaimed by both consumers and competent authorities, reflect the increased responsibility and awareness of advertising market bodies in China. As time goes by, and forms of advertising media, such as e-commerce, continue to develop, it will be interesting to see to whether the focus of administrative authorities, in relation to illegal advertisements, shifts; the legal grounds that are relied on in relation to punishment; and the methods of imposing punishment adopted.  This paper will look at China’s advertising laws, the administrative penalties that exist, and some of the issues that business entities will need to take into account in future

Types of Illegal Advertisement.

‘Advertising Law’ is a general concept that includes various types of illegal activity in relation to the promotion of goods and services. The market bodies involved include a range of participants in commercial advertising, such as advertisers, advertising operators, advertising publishers and even product endorsers.

The following are common types of illegal advertising: false advertisements that use superlatives or absolutes or quote inaccurate data; advertisements that make use of endorsers who are under 10 years of age; non-medical advertisements that make use of medical terms; advertisements that denigrate the goods or services of other business operators; medical advertisements that include endorsements; advertisements published in the names of national organs or in the form of news reports; and certain illegal advertisements for foods, healthy foods, medicines, cigarettes, alcohol, real estate, cosmetics, education, expected investment returns; illegal promotions such as  premium offers, illegal pricing, illegal contracts, such as standard term contracts that exclude the consumer’s right to interpret the terms; illegal online transactions e.g. where the seller has failed to show an online business licence or provide a clear ‘close’ sign.

The misuse of superlatives attracted much attention when the new Advertising Law was introduced, but there are other, less obvious, violations that also require the vigilance of relevant market bodies.

The basis of administrative punishment in the crystal pillow advertisement case mentioned at the beginning of this article was Article 17 of the Advertising Law, which provides that only advertisements for medical services, drugs or devices are entitled to refer to efficacy in curing diseases, or use medical jargon or words that are likely to cause consumers to believe the product being promoted is a medical product, drug or device. ‘Crystal’ is defined mineralogically as a transparent quartz and valuable stone, but not one with therapeutic qualities, even though articles can be found on the internet relating to the influence of crystals on health and the human body, and even on fortune and luck. A famous E-Commerce company, for example, used the slogan ‘drive out evil spirits and avoid disease’ in relation to agate products.  In the absence of satisfactory supporting evidence, however, the local market supervision authorities considered that this was a false promotion that would mislead consumers in relation to the goods’ performance: it, therefore, contravened the provisions of the Anti Unjust Competition Law.

Non-compliant product descriptions and price tags can often be easily identified. For example, an online store that failed to attach a ‘to be used with caution for babies’ warning on an aloe food product being sold online, contrary to a food security national standard, has been fined and the products in question confiscated by the local market supervision authority. Similarly, a supermarket misstating the origin of goods on a price tag was fined by a local market supervision authority for false and misleading marketing.

Legal basis, mechanism and degree of punishment

Illegal advertisements are dealt with in many laws and regulations. The Advertising Law, the Anti Unjust Competition Law and the Law on the Protection of Consumer Rights and Interests all include a definition of false advertising and provisions for punishment. Other amended or unrevised laws and regulations such as Interim Measures for the Administration of Internet Advertising; Advertisement Administration Regulations; Measures for the Administration of Medical Advertisement;, Interim Provisions on the Publication of Food Advertisement; Measures for the Administration of Cosmetic Advertisements; and Provisions on the Release of Real Estate Advertisements also provide punishment for false advertising, or refer to the punishment provisions in higher level laws such as the Advertising Law.

Further, although Measures for the Supervision of and Punishment for Illegal Contract Activities Product Quality Law and Administrative Measures for Online Trading does not directly relate to advertising, it does regulate some forms of advertising activity such as website promotions, statements about products, including origin, and certification marks.   It is, therefore, relevant to illegal advertisements to some degree.

Based on the particular law being applied and the particular punishment target, the forms of punishment for illegal advertising include a warning; an order to cease the illegal activity and correct, or erase the influence of illegal deeds; an order to publish a correction; the imposition of a fine; the confiscation of illegal profits and property; and even revocation of a business licence or advertisement publication certificate.  The various punishments can be found in the various laws referred to above and the Law on Administrative Penalty.

It should also be noted that the Interim Regulation on Enterprise Information Disclosure provides that the Industry and Commerce Administration Authority, as well as certain other government authorities, shall disclose enterprise information, such as details of administrative punishment, that they obtain in the course of the performance of their duties in connection with the enterprise credit information publicity system. Under this system, too, companies are required to disclose to the public, within 20 working days, details of any administrative punishment imposed on them. Such disclosure may have an additional negative impact on the party concerned. 

The following factors will be taken into account when determining the severity of punishment for illegal advertising: whether the party involved committed the breach knowingly or intentionally, whether it cooperated in rectification after detection of the breach; the nature of the breach the seriousness of the influence on consumers or society, the basis of calculation of the fine, the penalty clauses that apply, and the financial situation and location of the party involved.

In relation to fines, for example, the punishment for false promotion (advertisement) includes a fine of 10,000 to 200,000 RMB (approx. US$ 1,460 to 29,200), under the Anti-Unfair Competition Law, three times to five times the advertisement fee, from 200,000 to 1,000,000 RMB (approx. US$ 29,200 to 146,000), or five to ten times the advertisement fee, if there are over three illegal actions within two years or other serious circumstance, or from 1,000,000 to 2,000,000 RMB (approx. US$146,000 to 292,000) if the advertisement fee cannot be calculated or is too low as provided in Advertising Law, and a fine from one time to ten times the illegal gain, or a fine below 500,000 RMB  (approx. US$73,00) if the illegal gain has been confiscated as provided in the Law on the Protection of Consumer Rights and Interests

One of the largest fines for illegal advertising imposed to date, more than 6,000,000 RMB (approx. US$ 876,000), related to a commercial that exaggerated the teeth whitening effect of a toothpaste. Although the fine was imposed before implementation of the amended Advertising Law, the previous law also provided for a fine of one to five times the commercial fee. Another case, in 2016, 315 Gala of CCTV, concerned a second-hand car dealer who had used slogans such as “no price differences”, “transparent process and fast deal” etc, which contradicted the reality.  He faced a fine of 2,000,000 RMB (approx. US$ 292,000). Because the slogans had been both created and released by the e-commerce dealer itself, it was not possible to calculate an advertisement fee; therefore, the administrative authority issued a punishment based on a specific monetary amount provided for in the Law on the Protection of Consumer Rights and Interests and Advertising Law.

Punishment Target

As noted above, there are many participants in the advertising market.  The Advertising Law alone makes provision for the following punishment targets:

  • Advertiser: means a natural person, legal person or other organization who, or which, for the purposes of the promotion of goods or services, designs, produces, or publishes advertisements, or engages third parties to do so (aka the operators of goods and services in an advertisement). An operator may be an advertiser, advertising operator or advertising publisher depending on changes in its market position.
  • Advertising operator and advertising publisher: means the natural person, legal person or other organization who is entrusted to provide services in relation to advertisement design, production, agency and release of advertisement for advertisers or the advertising operators entrusted by advertisers. The former include service providers such as advertising agencies and the latter entities such as TV channels, newspapers, publishing houses.
  • Product endorser: means a natural person, legal person or other organization, other than the advertiser, who recommends or approves goods or services in his/its own name in an advertisement. The Advertising Law provides for joint liability of the product endorser in relation to advertisements that concern the health of consumers or are detrimental to consumers. The product endorser will be the target of administrative punishment when making recommendations in relation to medicines and health foods etc. that he has never used. It is not clear whether a legal representative endorsing his company’s goods and services, and breaching the law, can be regarded as an endorser.
  • Other bodies: Managers of public spaces, telecommunication business operators, or internet service providers, such as Taobao, will become the target of administrative punishment if they clearly knew or should have known, of the illegitimacy of the advertisement being published and failed to take steps to prevent it.   Entities such as radio stations, television stations, newspapers and periodicals (audiovisual) are also considered to be advertising operators and publishers, subject to the relevant laws.  If these entities release medicine or health food advertisements in disguised forms, such as news reports or introductions to health information, they will be liable to be punished.  In accordance with the Advertising Law, a legal representative who has been held personally liable for a violation shall not act as a director, supervisor or senior manager in any company or enterprise within three years of revocation of the company’s Business Licence.

Advertising on the Internet has attracted much attention in recent times. Although the Advertising Law clearly provides that its provisions apply to advertisements on the Internet, it has not been able to deal with them comprehensively due to the innovative nature of such advertising and the diversity of forms it can take .e.g. pop-up and email advertisements as well as paid for search results. One year after implementation of the amended Advertising Law, the State Administration for Industry and Commerce (SAIC) therefore began implementing  Interim Measures for the Administration of Internet Advertising, These Measures, which took effect on 1 September 2016, aim to fully regulate online advertising and supervise Internet advertisement participants.

Among various Internet advertising activities, it is common for advertisers to publish their own advertisements.  In the event of illegal advertisements, however, in addition to the advertiser, publishers and operators providing link services to the advertisement will also be liable to be punished if they have failed to perform due diligence. For example, a cultural media company that failed to censor an illegal restaurant advertisement posted online faced punishment from the local trade and commerce quality supervision authority

The automated, or programmatic, buying of advertisements is a business model unique to Internet advertising.  It connects advertisers with many medium and small websites and applications and involves emerging advertising bodies, such as Demand Side Platform, Supply Side Platform, AD Exchange and members of a Supply Side Platform.  These bodies interact through Internet advertisement contracts. Internet advertising publicized by programmatic buying requires Demand Side Platform to clearly mark the origin of the advertisement.  It may be liable for failure to do so. If Supply Side Platform, AD Exchange or members of Supply Side Platform fail to check the identity of the other party to an internet advertisement contract, and to archive such information they could also be the target of administrative punishment. 

Conclusion

China’s advertising laws are being developed and strengthened.  This year, the State Administration for Industry & Commerce’s Department of Advertisement Regulation has released Working Points indicating the need for increasingly strong advertising laws and regulations under the Advertising Law.  Pursuant to the amended Advertising Law,  Measures for the Administration of Medical Advertisements will be amended in collaboration with relevant authorities, and regulations relating to the censorship of medicines, medical equipment and healthy food advertisement will be amended. Positive and negative lists for financial advertisements will be published in collaboration with financial regulation authorities. Interim Provision on the Management of Advertisement Language and Words, Regulations on the Management of Cosmetic Advertisement, Interim Provisions on the Publication of Food Advertisements, and Regulations on the Management of Alcohol Advertisement will be studied for further amendment or abolition.

All those engaged in advertising activity in China should be aware of the rapidly evolving legislative environment and the spirit of the changes that are occurring.  Close attention should be paid to changes in the law to ensure compliance and avoid administrative penalties.

If you have any questions, please contact the author Jacqueline Zhao

This article was first published in China Intellectual Property Magazine.