Handling Professional Consumers: 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? If you are a company doing business in China and you don't know what a professional consumer is, keep reading, as these individuals have become one of the biggest challenges multinational companies are being faced with in China when it comes to allegations of product non-compliance.

The term 'professional consumer' is not legally defined in any existing laws or regulations. The birth of the professional consumer, ironically, can be said to arise from Chinese legislation that is actually intended to protect consumers. This is because, unfortunately, 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, now often 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 purchase items that he or she believes will result in compensation worth several times more than the commodity's purchase price. Many professional consumers base their claims on facts that oftentimes do not relate to food safety or product quality; nevertheless, the authority must address the complaint. Many complaints are frivolous and result in a waste of administrative and judicial resources, not to mention costs for food manufacturers and distributors to defend such claims. Sadly, the outcome typically does not have any effect on improving food safety. 

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 unintentionally 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-times compensation provision and went after food companies by alleging 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 have 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.

In 2014, Interpretation No. 28 [2013] was issued by the China Supreme People's Court (Interpretation), and it gave the professional consumer another weapon in its arsenal.The Interpretation 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 to simply make a profit. As a result, professional consumers are more motivated to take their cases to administrative agencies and assert their claims before the courts. 

Some common complaints filed include: 1) unlawful use of novel food ingredients or non-cleared food additives; 2) false labelling; and 3) misleading product names or exaggerated function claims. While some complaints have a positive impact on policing unlawful acts, these cases are far and few between. A majority of the cases we have seen filed are based on problems such as printing errors and small font sizes used on the food label, which, typically, are not food safety related and unlikely to mislead consumers. However, food manufacturers and distributors have suffered greatly from having to defend many frivolous claims, enduring significant economic losses, government sanctions, bad press and brand dilution. 

Recently, legislators finally realized that the law needed to be revised 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 regulations to implement the Consumer Protection Law (CPL) amend 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, in 2016, Zhejiang Province's Draft Implementing Regulations of CPL clarified 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. We set forth some strategies below for consideration.

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' is still not standardized among the different administrative agencies and courts. It is therefore difficult to predict the outcome of a case involving a professional consumer complaint. However, based upon our experience, we provide the following 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 product advertisements must be reviewed against applicable national and local regulations and standards before commencing any sales and marketing distribution plan.

Turn to professionals for an effective coping strategy

It takes experience and patience to deal with professional consumers who are specialized in spotting issues, filing complaints and pressing for favorable 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.

We will, of course, provide further updates as the regulations develop. In the meantime, should you have any questions regarding professional consumer issues in China, please do not hesitate to contact David Ettinger (ettinger@khlaw.com), Jenny Li (Li@khlaw.com), or Yin Dai (dai@khlaw.com) at Keller and Heckman's Shanghai Representative Office, or your ordinary contact at Keller and Heckman LLP.