China moves to make e-commerce sites liable for fakes

China has proposed a law that would see e-commerce firms such as Alibaba becoming directly accountable for the sale of counterfeit goods on their online platforms.

The move increases pressure on retail websites to crackdown on fakes, which have been described as prevalent across online marketplaces, in a bid to stamp out the illicit trade online and hopefully close loop holes that have allowed dodgy merchants who have been blocked to set up new accounts under new names.

The e-commerce law, which is currently in draft form, follows widespread condemnation over the persistence of fakes sold over the internet in China, with JD.com and Alibaba singled out as particularly problematic in the illicit trade.

The continual criticism that fakes from China are flooding the internet – both in China and in other countries – has given the country the dubious reputation as the capital of counterfeits. It’s an image the Chinese government is desperately wanting to shed.

“The draft law aims to further support and promote the development of e-commerce, regulate market order, and protect the legitimate rights and interests of all parties in e-commerce,” Cong Bin, from the National People’s Congress Constitution and Law Committee told lawmakers during the legislation’s third reading last week.

Under the draft legislation, e-commerce firms will be required to meet tough new requirements, for example, ensuring sellers of healthcare products have the requisite qualifications, and taking immediate action after receiving a complaint of a fake good.  

Some commentators and lawmakers have described the obligations on retail website operators as tough to enforce, while others called for more rules on regulating cross-border e-commerce transactions as well.

China’s e-commerce market is the world’s largest, worth more than $1trn and accounting for more than 40 per cent of the value of worldwide transactions.

The move by the Chinese government follows efforts already put in place by e-commerce giants Alibaba and JD.com to tackle the counterfeit problem that has plagued their platforms following accusations they weren’t doing enough to protect intellectual property.

Last year, JD.com set up its JD Tracing and Anti Counterfeit Alliance to highlight the transparency and tracking of its supply chain, while vendors are fined if caught selling fake goods. JD.com shareholder Tencent Holdings has also established a brand protection platform on Chinese messaging app WeChat as well as an Infringement Complaint E-Platform. 

More than 72,000 accounts selling dodgy goods have so far been penalised or blocked, according to a March WeChat report.

Alibaba has also upped the ante on ridding its platforms of counterfeits. It established the Alibaba Anti-Counterfeiting Alliance last year, which now has 105 member companies, including Nestle, Pfizer, Apple, Sony and Volkswagen, which works in partnership to address counterfeits. The company is also using a variety of technologies and data analytics to catch dodgy vendors.

In May, the firm claimed it was making significant progress in its fight against counterfeits with the number of brand-owner takedown requests dropping 42 per cent on the prior year. Alibaba also said that 95% of requests were handled within 24 hours. Meanwhile, the number of listings removed before going live was 27 times the number taken down as a result of rights-holder requests.

In total, 240,000 stores on Alibaba’s Taobao platform were closed down in 2017.  

Furthermore, through data analytics the company was able to produce 1,910 leads for law enforcement agencies, which resulted in the arrest of 1,606 suspects, the closure of 1,328 facilities, and the seizure of RMB 4.3 billion ($675m) worth of non-genuine goods.

Despite Alibaba’s efforts, the US Trade Representative still relisted Alibaba’s Taobao platform as a notorious market for a second year in a row in January.

The new e-commerce legislation is expected to up the measures e-commerce firms will be required to put in place.

“There will be an impact on what the platforms can do and more monitoring of merchants,” James Gong, a senior associate with law firm Herbert Smith Freehills, told the FT. “They will need more people to deal with complaints and fake goods and more careful dealing with personal information.”

However, the draft legislation has drawn concern over the impact it might have on smaller e-commerce operators, which may not have the resources to tackle the illicit trade on the same par as their behemoth counterparts.

Paul Haswell, a partner at law firm Pinsent Masons, told the South China Morning Post that the new onus on marketplace operators would increase the risk of sanctions against the company if they weren’t compliant.

Alibaba and JD.com “should be able to cope with the risks” because “much of what will be required by the new law has already been put in place by these major platforms”, he said, but for smaller companies without the necessary capabilities, the future was much more uncertain.