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China to Introduce Punitive Damages to Consumption Sectors

Counterfeit and shoddy goods and food safety hazards have always bothered and concerned consumers most. The State Council disclosed at a recent executive meeting that China will establish a system of "punitive damages" to stop these problems from aggravating further.

The meeting decided to introduce across the board an oversight model featuring random inspection by randomly selected law enforcement officers or inspectors and requiring the prompt release of results. The government will establish a blacklisting system for enterprises, improve upon the measures for IPR protection, and strictly crack down on counterfeit and shoddy goods. Enterprises exhibiting perpetration of fraud, infringement and other acts of consumer rights infringement shall be fined and asked to pay damages equal to several dozen times the price of the products or more.

The policy will mainly concern enterprises dealing in consumer goods. Enterprises that used to rely on small workshops, connections, unwritten rules and counterfeit and shoddy goods for survival will find harder times ahead. They will suffer heavy losses or will be forced out of business if they do not exercise strict oversight on product quality in accordance with state laws and regulations.

This kind of policies has been in practice abroad for many years and has proved effective in deterring enterprises from committing such fraudulent acts. In 2011, Google was fined US$500 million for aiding rogue pharmacy advertisers. The case became the watershed in US efforts to crack down on deceptive online medical ads.  The Federal Trade Commission of the US government and the Food and Drug Administration of the Department of Health and Human Services are medical advertising watchdogs of the United States. In such an environment of close scrutiny and heavy penalty, not even big search engines like Google and pharmacies and medical institutions could escape legal sanctions if they are found to have anything to do with false medical advertising. By comparison, false medical advertising on Chinese search engine Baidu which allegedly led to the death of a Chinese student hardly suffered any "heavy penalty" except the demand by a joint investigation team on 9 May to make rectification, fluctuations in its share prices, and public outcry.

On the system of punitive damages, the Food Safety Law stipulates that in addition to claiming damages, a consumer may require the producer or the seller to pay damages in the amount of 10 times the money paid if food not up to safety standards is produced or knowingly sold.

The Law on the Protection of Consumer Rights and Interests also stipulates that a business operator that commits a fraudulent act when providing products or services shall, on the demand of consumers, increase the compensations for consumers' losses, and the increase in compensation shall be three times the payment made by the consumers for the product purchased or service received. However, it is obvious that compensations of three or 10 times mean nothing to the big companies.

Content provided by Picture: HKTDC Research
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