A New Challenge to Doing Business in China

What is a professional consumer? What do they do and why should enterprises be aware of them? David Ettinger of Keller and Heckman LLP explains how the rise of this ‘profession’ is causing problems for food manufacturers, and provides tips on how to respond.

The term ‘professional consumer’ is not legally defined in any existing laws or regulations. This phenomenon has in fact arisen from Chinese legislation that is actually intended to protect consumers. The legislative intent, which is reflected in legal provisions that grant punitive damages, has been interpreted by certain individuals and groups as an opportunity to make a profit. These individuals, referred to as ‘professional consumers’, focus their attention on identifying products that, based on their limited understanding of the law, may or may not comply with applicable laws and regulations. The professional consumer will then purchase items that they believe will entitle them to compensation worth several times more than the commodity’s purchase price. Many professional consumers base their claims on facts that often do not relate to food safety or product quality, but their complaint must still be dealt with, which often results in a waste of administrative and judicial resources, not to mention costs for food manufacturers and operators to defend such claims. Sadly, the outcome typically does not have any effect on improving food safety in China.

This article reviews China’s legislative trend in dealing with professional consumers with a focus on reports and complaints in the food area, and offers possible strategies to effectively respond to situations when the professional consumer knocks on the door.

Regulatory background

In 2009, China promulgated the Food Safety Law (FSL) (replacing the 1995 Food Hygiene Law), which not only started a new era of food safety management in China, but also introduced the ‘professional consumer’ to the food industry. The 2009 FSL established grounds for compensating consumers up to 10 times the cost of a product for noncompliance of a food safety standard. Professional consumers saw an opportunity to profit from this 10-time compensation provision and went after food companies by claiming their products do not comply with food safety standards (e.g., the General Standard for the Labelling of Pre-packaged Foods (GB7718)). As noted above, the professional consumer will purchase food products in an amount beyond reasonable daily consumption and file complaints or reports with relevant government agencies or go to court to seek damages per their understanding of non-compliance. The total complaints/reports filed by professional consumers has dramatically increased since the adoption of the 2009 FSL. For instance, the Market Supervision Bureau in Hangzhou reported that, in 2016, more than half of their food-related complaints and reports were filed by professional consumers.

The Supreme Court Notice (Notice) regarding reviewing food cases and consumer requests in 2014 marked another milestone for consumers as well as the professional consumer. The Notice explicitly supports claims by consumers who purchase foods with the knowledge that they are problematic. In other words, it protects professional consumers’ right to compensation even if they are aware of the potential non-compliance of a food regardless of their intent. This has resulted in professional consumers becoming more motivated to take their cases to administrative agencies and assert their claims before the courts.

Some common complaints filed include: 1) use of novel food ingredients or non-cleared food additives; 2) false labelling; and 3) misleading product names or exaggerated function claims. While some cases like these may help improve food safety, these cases are typically in the minority. A majority of the cases we have seen are filed based on problems such as printing errors and small font sizes used on food labelling, which, by nature, are not food safety concerns and unlikely to mislead consumers. However, food manufacturers and distributors have suffered greatly from these frivolous claims, enduring significant economic losses, government sanctions, bad press and brand dilution.

Legislators finally realised that the time had come to revise the law, to balance the need to protect consumers, while maintaining normal function of the legal system to regulate the food industry. Specifically, in 2015, the amended FSL explicitly excludes food labelling defects and non-safety threatening or misleading cases from the scope of causes for punitive damages. In 2016, the Draft Implementing Regulations of the Consumer Protection Law (Draft Implementing Regulations) amends the definition of ‘consumers’ to exclude professional consumers who buy products not for the purpose of daily consumption. Similar actions also have been taken at the local level. For example, the Draft Implementing Regulations in Zhejiang (2016) clarify that “consumers are limited to persons who buy products for daily consumption.” The Draft Food Safety Rules (2016) in Shenzhen went further by imposing a restriction on claiming damages, stating that when “the complainant’s purchasing behaviour is beyond a reasonable scale, or the complainant’s main income relies on seeking damages and rewards,” his/her claim for damages will not be supported.

As a result, enforcement agencies and courts apply more deliberate consideration when they review food cases filed by professional consumers. As it now stands, it is not unusual for local courts to dismiss a claim for compensation of 10 times purchase price due to: 1) the amount purchased is beyond the scope of daily consumption; or 2) the purpose of the purchase disqualifies the plaintiff from the CPL’s protection. Legislation and administrative practice pertaining to professional consumers is still evolving and should be monitored closely. In the meantime, we recommend that food companies adjust their strategies to handle professional consumer claims as discussed below.

Tips for responding to professional consumer complaints

Despite an overall improvement in the climate for food producers and distributors to respond to professional consumers’ complaints, the threshold for determining whether a complaint falls under the scope of ‘food safety’ issues is still not standardised among the different administrative agencies and courts. It is therefore difficult to predict the outcome of a case involving a professional consumer complaint. Given this situation, we provide below some tips to better prepare food producers or operators when facing a professional consumer.

• Continuous internal checks on compliance status

Every stage of food production and distribution is worth attention and thorough recordkeeping. Do not let any flaws or defects slip under the radar. It cannot be stressed enough that continued monitoring of legal developments in China is critical to dealing with such complaints, both at the central and local levels. Ingredient use, food labelling and advertisements must be reviewed against applicable national and local regulations and standards before any distribution plan is settled.

• Turn to professionals for an effective coping strategy

It takes experience and patience to deal with professional consumers who are specialised in spotting issues, filing complaints and pressing for favourable rulings. It is never too early to have your company’s in-house team and external legal consultants step into the process and commence dialogue with the professional consumer. Meanwhile, in-time consultation and cooperation with the local administrative agency commonly moves the case forward efficiently and effectively.

• Close the case in court

Law suits are typically considered to be the last resort and usually resolve the case when settlement or release of liability agreements cannot be reached. When entering the court phase, it will be important to have accurate records and sound evidence to help secure a positive outcome. Always remember to seek professional legal advice along the way, both in negotiations and formal legal proceedings.

The above suggestions are intended to guard the legitimate rights and interests of food producers and operators. They should not be understood as methods to avoid fulfilling one’s primary responsibility of ensuring food safety and quality. As the Chinese Government’s management of consumer reports and complaints becomes more sophisticated, we continue to expect to see ordinary consumers being distinguished from those making purchases for profits that disrupt the orderly functioning of the market.

Keller and Heckman LLP is a global law firm founded in 1962. The Shanghai office opened in 2004, focusing on serving its global clients in the Asia Pacific Region regarding compliance matters from food and drugs, food packaging, cosmetics, consumer products, chemicals, medical devices to E-cigarettes and tobacco related products.

The firm’s global food and drug practice has gained recognition by Chambers and Partners Asia-Pacific Guide in the category of Life Sciences (International Firms) – China. David Ettinger, the Shanghai office’s chief representative, has attained noted practitioner status in the same category and guide.

For more information about the firm and the article, please contact David Ettinger at ettinger@khlaw.com, Jenny Xin Li at li@khlaw.com or Yin Dai at dai@khlaw.com.