Temporary Unfair Competition Rules for the Internet: A Step Towards a Healthier Digital Economy | Sheppard Mullin Richter & Hampton LLP

(by Zhenye Wang and Minjie Lu*)

In order to prevent and curb unfair competition in the Internet sphere, maintain fair market competition, encourage innovation, and protect the legitimate rights and interests of enterprises and consumers, the State Administration of Market Regulation (SAMR) of China recently promulgated the “Temporary Regulations on Combating Unfair Competition in the Internet Sphere” (hereinafter referred to as the “Temporary Regulations on Combating Unfair Competition in the Internet Sphere”).Regulations”), which will enter into force on 1 September 2024.

The regulations consist of five chapters and 43 articles, covering general provisions, types of unfair online competition, supervision and inspection, legal liability and supplementary provisions. Key features of the regulations include:

1. Competition regulation

In response to the new characteristics, trends and requirements of China’s digital economy, the regulations clarify the standards and requirements for identifying and regulating various types of unfair online competition. Traditional unfair competition behaviors such as imitation and confusion and false advertising have been redefined in the context of the online environment. In addition, the regulations list new types of unfair competition such as fake reviews and illegal data acquisition, providing regulatory measures to address these problems.

2. Strengthening consumer protection

By addressing social issues, the regulations focus on key issues of online consumption that harm consumer rights, such as fake reviews, encouraging positive reviews, and practices that influence user choices. By providing political support to address these emerging issues in new consumption scenarios, the regulations aim to strengthen consumer protection.

Examples of violations:

1. Fake reviews and inflated ratings: The regulations specifically prohibit “刷单炒信” (deleting orders and inflating credit), which involves creating fake transactions or fake reviews to create a misleading impression of the popularity or quality of a product. The first clause of Article 9 prohibits the falsification of transaction volumes, number of meetings, number of collections, clicks, follows, likes, reads, subscriptions, shares and other data or information related to business activities in order to manipulate perceptions and inflate rankings.
2. Encouraging positive feedback: The regulations also prohibit “好评返现” (positive review cashback), which is when sellers offer cashbacks, red envelopes, coupons or other incentives to consumers in exchange for positive reviews, likes or votes. The first clause of Article 9 prohibits such incentives, ensuring that consumer reviews remain objective and trustworthy.

3. Increasing platform accountability

Platforms are being called upon to strengthen governance of competitive behavior in their ecosystems. The rules address issues such as the misuse of data algorithms to gain competitive advantage, ensuring that platforms do not unfairly exploit their dominant position.

For example, Article 6 of the Regulation emphasizes the responsibility of platform enterprises to regulate competitive behavior on their platforms. Platform enterprises, which process huge amounts of data and connect many entities, are both key targets for the supervision of unfair online competition and key nodes for the regulation of cooperation. When platform operators detect unfair competition, illegal sale of goods, services or infringement of the legitimate rights and interests of consumers, they must promptly take necessary measures, keep relevant records and report it to the market surveillance department at the county level or above where the platform operator is located. The record retention period is counted from the date of taking countermeasures and should not be less than three years.

4. Optimizing enforcement

Given the widespread, cross-platform and cross-regional nature of online unfair competition, the regulations include special provisions on supervision and inspection procedures. An expert observer system has been introduced to provide intellectual and technical support to address key issues, thereby increasing the efficiency and effectiveness of law enforcement.

5. Explanation of legal liability

The regulations emphasize the combined use of various legal measures in market regulation, effectively combining anti-unfair competition law, e-commerce law, antitrust law and administrative penalty law. By clearly defining legal liability, including the confiscation of illegal profits, the regulations strengthen the regulatory impact.

Implementation and future prospects

The SAMR, which is set to come into effect on September 1, 2024, will strengthen training and guidance for local market regulation departments to ensure effective enforcement of the regulations. The aim is to protect the legitimate rights and interests of both businesses and consumers, promote orderly competition and foster innovation.

Overall, the Temporary Provisions for Combating Unfair Competition in the Internet Sphere complement and strengthen China’s legal framework against unfair competition in the digital sphere. It addresses practical enforcement and judicial needs, clarifies key concepts, and details the application of key provisions. These regulations will provide clearer guidance and expectations for enterprises to operate in accordance with the law and regulations.

*Minjie Lu is an intern at the company’s Shanghai office.