Horizon scanning for consumer companies in China – key issues to watch

The digital economy and digital assets have been hot topics in China in recent years, in particular, the prevalence of NFTs is increasingly significant. Currently, there are no statutory definitions or specific laws on NFTs in China. As NFTs share some similarities with cryptocurrencies such as Bitcoin, there are doubts in the market as to whether NFTs would be considered and regulated as cryptocurrencies in China. If so, this could heighten legal risks, as the usage and trading of cryptocurrencies is prohibited in China. In light of the regulatory landscape, NFTs in China operate quite differently when compared to international markets. Therefore, companies that are interested in launching NFTs or related products in China should be aware of the China-specific risks and restrictions.

Impacted by the latest wave of the pandemic in China, we have seen more food and beverages brands using innovative ways to thrive in cities facing lockdowns. For example, we note that various brands have created group buying deals, utilized private traffic to organize sales and employed other new ways of engagement with the consumers in restricted cities such as Shanghai. It will be interesting to see how these new channels will develop or whether they may sustain their operations and continue to thrive after the lockdown.

Customer ‘stickiness’ and loyalty will continue to be a focus going forward. Ways of enhancing customer stickiness include engaging with one’s customers via the creation of various touchpoints and products, and supporting their experiences by building a strong ecosystem. This can be achieved through building alliances, entering joint ventures, creating partnerships or buying out complementary assets with the goal of creating more loyalty and a greater share of customers’ wallets as well as to scale business. In addition, we are seeing consumer sector clients using more innovative deal structures to achieve their business goals, rather than traditional equity deals. For instance, we are seeing new opportunities in the form of collaboration, corporate venturing, and data sharing.

The year 2022 has turned a new leaf for competition law in the PRC. The amendments to the China Anti-Monopoly Law (Amended AML) have been approved, and will come into force on 1 August 2022. The Amended AML will bring significant changes to the current competition regime:

• The amendments restate the goals of the legislation, and clarifies in particular that antitrust regulation shall be carried out under the leadership of the Communist Party of China. This unprecedented level of focus on competition policy will directly affect the relationship between the state and the market, as well as the competitive landscape between businesses.

• For the consumer sector in China, one piece of good news from the amendments is that the resale price maintenance (RPM) is no longer illegal per se, as an “effect” test is explicitly introduced in relation to RPM. The introduction of the new test means that companies can implement RPM as long as it does not create an anti-competitive impact – the RPM is unlikely to be anti-competitive if the market shares in the relevant markets held by the distribution agreement parties do not exceed the “safe harbour” threshold. Whilst the exact market share threshold is still to be confirmed by the State Administration for Market Regulation, pursuant to the Draft Monopoly Agreement Provisions, the safe harbour market share threshold is 15% and the market shares of the distributors in the same market should be combined. If the supplier and distributors have market shares in excess of such threshold in any plausible market, the rule of reason still applies, but the burden of proof lies on the investigated company.

Under the Amended AML, a company’s legal representative, the main person-in-charge, and any other responsible person of a business that has personally been involved in reaching a cartel and a vertical agreement will be subject to a fine of up to RMB1 million. Moreover, the Amendment AML has laid out the groundwork for the criminalisation of monopolies in China. Although the criminalisation of monopolistic conduct would require amendments to the Criminal Law to be adopted, the possibility of criminal liability for senior management and employees of the infringer under the AML will significantly increase the level of deterrence. The passing of the Amended AML was closely followed by an announcement for a consultation of amendments to six of the substantive competition regulations. As there is an increased focus on competition law and policy in China, it is likely that enforcement activity by the Chinese competition authority will likely remain high throughout the remainder of this year.

Another noteworthy point is that in late 2021, the position of the Chinese competition authority has been promoted within the governmental hierarchy and it has also increased its staffing and capacity threefold.

On the enforcement front, the Chinese competition authority has slapped billions of fines on the internet giants. The consumer sector is still one of the top ranked sectors targeted by the antitrust agencies.

The two milestone pieces of legislations, the Personal Information Protection Law (PIPL) and the Data Security Law, took effect in 2021. Along with the Cybersecurity Law which took effect in 2017, a comprehensive legal framework in China for cybersecurity and data protection has been established. In addition, numerous accompanying new regulations and standards in relation to cybersecurity and data protection took effect in 2021 or early 2022 including but not limited to the Measures for Cybersecurity Review, which will present additional compliance challenges for many companies in China. The Cyberspace Administration of China is still working on various supporting regulations and rules including those relating to cross border data transfer e.g. the latest published consultation draft of Regulations on Standard Contract for Export of Personal Information.

The cyberspace authorities and industrial regulators have been actively enforcing against data processors which have breached relevant regulations. The new data protection regime in China would also likely trigger a large number of civil cases concerning the protection of personal information. In fact, in 2021, many local courts have already accepted a number of such cases. In addition, the consumer protection organisations or similar organisations are entitled to bring public interest litigations against data processors under the new law. Public interest litigation has profound impact on a company’s reputation and economic situation, so it is worthwhile for companies to pay close attention to such a trend.

The supervision of cross-border transfer of personal information is expected to become a regulatory focus by authorities. This will have a substantial impact on multi-national companies’ cross-border transfer practices between companies in China and their overseas headquarters or other group companies. In particular, companies in the consumer and retail sector usually process a large volume of personal information of their consumers, and should prepare themselves for the new laws and compliance challenges.

On the Intellectual Property Rights (IPR) protection aspect, China has been devoting major efforts to high-quality economic development by improving IPR protection so as to encourage innovation and the establishment of famous brands. Both the newly amended Patent Law and the Copyright Law, which took effect in 2021, have enhanced remedies to right holders, including increasing the statutory maximum amount of damages, establishing a punitive damages system, and clarifying the mechanism for transfer of burden of proof.

In order to support the amendme