On October 28, 2002, Shanghai Municipal People's Congress amended the "Shanghai Municipal Rules on the Protection of Consumer Interest" (the "Rules"). The Rules will enter into effect on January 1, 2003. The implementation of the Rules will have a significant impact on the current marketing and sale practices in Shanghai. Foreign companies and foreign invested enterprises ("FIE") selling products and services in Shanghai should pay particular attention to the Rules and any future supplemental regulations. The following is a summary of the new features in the Rules.
A. Definition of Consumer
Ever since Wang Hai, a Beijing resident who became a well known consumer protection advocate, started to go around the country to buy fake and defective products, and then demand refunds and punitive damages, there have been debates as to what constitutes "consumers". Many retailers and manufacturers do not agree that individuals or consumer rights groups, such as Wang Hai and his associates, are qualified as "consumers" if they do not intend to consume products or services they purchase.
The Rules seem to have yielded to the criticism from business owners. The Rules provide that a "consumer" under the protection of the Rules is one who, for the need of personal consumption, purchases or uses goods, or receives services within the Shanghai Municipality. It appears that:
(1) products consumed or services received by businesses or entities are excluded; and
(2) buying for the purpose other than real consumption is also excluded.
It is unclear whether office or household products or services that are purchased by businesses or entities, but are ultimately used by individuals (such as their employees) at work place is considered "consumer" products or services. It would be well advised, however, for the sellers and service providers to take a conservative approach and treat them as consumer products or services.
B. Consumer Privacy
(1) The Rules prohibit sellers and service providers (collectively, the "operators') from requesting information from consumers that is unrelated to the consumption of the products or the services.
(i) There is no definition of consumption here. One may argue that while some information collected from consumers is not relevant to the immediate consumption, it will help the operator improve its products and services in the future. It is doubtful, however, that the enforcement authority will take such a liberal view.
(ii) The Rules do not seem to allow information collection even if a consumer agrees to provide such information.
(iii) It is unclear whether the Rules allow information collection programs often seen in China and many other countries in which an individual may receive a small gift from the information collector if he/she completes a survey/questionnaire or provides certain personal information.
(2) Under the Rules, "Personal Information" includes "name, sex, occupation, education level, contact information, marital status, income and asset information, finger prints, blood type, health history and other information closely related to the individual consumer and his/her family."
(3) Under the Rules, one may not, without the consumer's consent, disclose personal information collected from a consumer, unless such disclosure is otherwise authorized by law. That means that no businesses (including telecom providers) may buy or sell a consumer's personal information without his/her consent. It is unclear whether publication of telephone directories, such as White Pages, can be exempted. Disclosure of individual telephone numbers has been a controversy in China. However, mobile phone service providers have been providing individual mobile phone numbers to many businesses for them to send short promotional messages. Lately there have been lawsuits against those providers in several other cities in China.
(4) Under the Rules, a business has no right to search consumers' body or personal belongings or detain consumers. It is unclear whether search with a consumer's consent can be justified. In some lawsuits, consents have been used by retailers as defenses. It would be interesting to see if Shanghai allows such a defense.
C. Consumers' Right to Know
The Rules impose high standard obligations on operators to inform consumers of the facts of the products and services, and to truthfully answer consumers' questions. Specifically:
(1) In accordance with applicable laws, industry rules and practices, operators should voluntarily disclose the following to consumers:
(i) price, place of manufacture, name of the manufacturer, use, specification, main ingredients, net content, manufacture and expiration dates, instruction for the use, after sale services, etc.;
(ii) for real estate projects, documents evidencing the ownership and land use rights, design of the structure, calculation and measurement of the space, etc.
(iii) nature of services, specifications, fees, standards, test results and services and repair records.
(2) If the seller stops sale of certain products or if the service provider terminates certain services, it should provide a prior notice to consumers, take proper measures to minimize negative impact and should compensate consumers for any damages caused by the termination. Providers of public utility services need to provide prior notices to consumers who have failed to pay and allow them a reasonable period of time to cure before terminating the services.
D. Direct Sales
(1) For direct sales through Internet, TV and telephonic sales:
(i) Goods and services actually delivered should be identical to the ones on the advertisements in terms of appearance, quality, functions, and should be delivered within the time periods as promised.
(ii) Except for those goods and services of which quality warranty periods are shorter than 7 days, consumers may, without any reason, return any goods and services purchased through Internet, TV and telephonic sales within 7 days of the purchase.
(2) For door-to-door sales:
(i) The sales person needs to obtain consents from a potential buyer to visit the potential buyer. The sales person also needs to present the authorization documents and his/her ID. He/she should also provide written documentation regarding the price, specification, functions of the goods or services, the address of the seller, and the after sale service information.
(ii) Except for those goods and services of which quality warranty periods are shorter than 7 days, consumers may, without any reason, return any goods and services purchased through door-to-door sales within 7 days of the purchase.
E. "Bonus", "Gift" and Discounted Products and Services
The Rules provide that those bonus, gift and discounted and other promotional products and services are not exempted from the requirements of the Rules.
F. Product Recalls
(1) Product recalls have been a hotly debated topic in China for the past several months. The debate is primarily focused on automobiles. Some product makers, such as Legend, have voluntarily recalled computers, setting precedents for the industry. However, as far as we know, so far neither national nor local laws and regulations have mandated product recalls.
(2) The Rules have become a pioneer in this area. They require makers to voluntarily recall products or services that:
(i) have substantial defects; and
(ii) will likely cause damages to the personal safety or property even if the consumer properly follows the instruction.
(3) The Rules mandate the following corrective measures:
(i) stop selling or using such products and services;
(ii) recall products and services;
(iii) immediately notify authorities or chamber of the industry overseeing the industry; and
(iv) if the manufacturer or service provider fails to do so voluntarily, government authorities or industry chamber may take initiative of mandatory recall.
G. Consumers' Right of Safety
Several weeks ago, a well known CCTV anchor woman died from a fall through a dark, unrailed and unmarked balcony on a third floor when she dined at a restaurant in Beijing. Since then there has been a national debate on the safety obligation of a business owner.
The Rules require businesses to provide safe products, services, facilities and locations to consumers, and to provide clear and truthful warnings and explanations regarding any potential hazards, and provide instructions as to the proper use and the means to avoid hazards. Operators of hazardous facilities (such as some entertainment and recreation facilities) should be equipped with technical conditions and rescue equipment and should have plans in response to any emergencies.
H. Return and Refund
Consumers may request re-make, or return and refund under any of the following circumstances:
(1) defective products certified as such by quality certification authorities;
(2) fraud on the part of the seller/service provider;
(3) quality problems within the warranty period and the operator has failed to repair;
(4) the sale or service contract so requires;
(5) failure to operate properly after two repairs within the warranty period;
(6) within 7 days after the purchase in a direct sale; or
(7) any other situations that are mandated by the law.
I. Punitive Damages
In case of consumer fraud, in addition to return and refund, consumers are entitled to punitive damages equal to 100% of the sales price of the goods or services.
J. Administrative Penalties
Under the following circumstances, Shanghai municipal or a district Administrative Bureau of Industry and Commerce ("AIC") may impose administrative penalties on the operator:
(1) failure to show the operator's service mark, or true name, or business logo;
(2) consumer fraud;
(3) selling goods or services through coercion;
(4) short in quantity or including the weight of the package in calculating the price of the good;
(5) failure to obtain consumer's consent or failure to provide required documents when engaging in door to door sales;
(6) without consumers' consents, increasing charges to consumers for the costs of the business advertisements sent to the consumers; or
(7) failure to provide documentation to prove the sources of the goods.
The penalties can range from warning, confiscation of the goods, to monetary penalties up to 5 times as much as the gross revenue, and suspension of the business license.
K. Notes
The Rules present major breakthroughs in some areas of law (for example, product recalls) and set precedents in China. In some areas, the protection exceeds what developed countries' laws typically offer to consumers (for example, the prohibition against disclosure of consumer's personal information) and may create difficulties for businesses and commerce. Some other clauses, such as the clause regarding "increasing charges to consumers for the advertising costs", and the requirement for an operator who stops a product or service line to compensate consumers, can be confusing and overbroad. How some of the controversial clauses will be interpreted and enforced has yet to be seen (such as recall of automobiles and real estate development projects).
Meanwhile, it would be well advised for foreign companies and FIEs selling goods and services in Shanghai to well verse themselves with the Rules and any future implementation regulations, and make necessary adjustments to prepare for the Rules implementation on January 1, 2003.