Briefing Changes to unfair trade practices law in Hong Kong Summary Amendments to the Hong Kong Trade Descriptions Ordinance will come into force on 19. The changes broaden the application of the law to services, widen the definition of trade descriptions and create new offences for specified unfair trade practices. Draft enforcement guidelines have been published for implementation of the new law which are examined here. For more information please contact Mark Parsons Partner T +852 2846 3341 E mark.parsons@freshfields.com Richard Bird Counsel T +852 2913 2660 / +86 21 6105 4139 E richard.bird@freshfields.com Freshfields Bruckhaus Deringer Changes to unfair trade practices law in Hong Kong 1
1. Overview The Hong Kong Trade Descriptions Ordinance (the Ordinance) presently only prohibits false trade descriptions of goods and not services. Amendments to the Ordinance were passed in July 2012 and will come into force on 19. The key changes include: (a) widening the definition of a trade description to cover any indication (of information) in any form by any means; (b) prohibiting false trade descriptions in respect of services made in consumer transactions; (c) creating new offences for specified unfair trade practices, such as misleading omissions, aggressive commercial practices, bait advertising, bait-and-switch and wrongly accepting payment; and (d) introducing a civil, compliance-based enforcement mechanism, in addition to criminal sanctions, to promote compliance with the Ordinance. The Customs and Excise Department is responsible for enforcing the Ordinance alongside the Communications Authority, that enforces the fair trading sections relating to commercial practices of licensees under the Telecommunications Ordinance and the Broadcasting Ordinance. The Commissioner of Customs and Excise and the Communications Authority have published a final draft of the enforcement guidelines for the amended Ordinance to promote compliance with the new law. The key points of the guidelines are summarized below. 2. Primary offence under the ordinance It is an offence to give false or misleading product information to consumers or to supply/offer to supply goods to consumers or businesses to which false or misleading product information is attached The offence covers: (a) any information (eg. descriptions, claims, photos); (b) in any form (eg. statements, notices, advertisements); (c) communicated by whatever means (eg. paper, media, electronic, by conduct). Information includes information on promotional sales, offers of discounts, price reductions, offers of free gifts or samples, advertising and product warranties. The information provided has to be false to a material degree (or misleading so as to produce the same effect). Trivial errors or discrepancies do not constitute an offence. Set out below are relevant examples to illustrate offences under the law. 3. Misleading product information A member of the public sees a bottle marked mineral water and would reasonably expect the product, in terms of composition, to contain a higher mineral content than standard tap water. The trade description mineral water when applied to bottles of tap water that do not have a higher mineral content than ordinary water is misleading of its composition and constitutes an offence under the law. 4. Inaccurate information relating to the availability of a product for supply A statement that a product is a limited edition version or in short supply or that a particular company is the only company possessing stock of the product when there are other sources of the product available in the market, is a misleading statement, and its circulation to consumers could constitute an offence under the law. 5. Misleading notification that a person has acquired the product In the promotion of a slimming product, a statement telling consumers that the product has been acquired by a celebrity for their personal use with good results would be an offence if the celebrity has never acquired or agreed to acquire the product. 2 Freshfields Bruckhaus Deringer Changes to unfair trade practices law in Hong Kong
6. Price comparisons If companies make price comparisons, they should be able to show clearly what prices are being compared, and that any claims made are accurate and any price advantage is genuine. If a soap manufacturer claims that its hand soap is the cheapest in Hong Kong by comparing the price of its soap with those offered by its competitors but the comparison is not made on a like-for-like basis (the soaps compared have material differences in ingredients and size), the statement would be in breach of the law and constitute an offence. 7. Claims of discounted prices Terms in relation to prices (like sale, original price or reduced price ) should be used with caution to avoid misleading consumers. Companies which use these terms must make sure that the price reduction or discount is genuine. If the original price is quoted together with the reduced price, the original price must be a price which has been applied by the company to the same product before. A price should not be regarded as the original price if it has never been applied to the product for sale or has only been applied to the product for an unreasonably short period. 8. Product availability at discounted prices When advertising products at a specified price, companies should ensure that the products are available for a reasonable period and in quantities that are reasonable, taking into consideration the nature of the advertisement and the nature of the market in which the company carries on business. The typical size of consumer demand for the relevant product and the extent of the advertisement s reach (ie. the size of the readership) are taken into consideration to determine what quantities of the product would be deemed reasonable. Factors which are not reasonably foreseeable and may have a substantial impact on size of demand can be taken into account, eg. a sudden outbreak of flu prompting consumers to rush for flu remedy medicines on special offer. On the supply side, it is recognized that some products are inherently limited in quantity, such as perishable goods, and may be subject to capacity constraints. Before placing advertisements or initiating marketing promotions, companies should review their previous sales trends and promotion records and assess if the size of the stock in hand is sufficient to meet the reasonably projected consumer demand. The inclusion of a hotline number or website address which allows consumers to check the most up-to-date information about product availability is encouraged. If the actual demand is greater than the originally projected demand, companies should stop or withdraw the relevant advertisement, cease the related promotional activities and notify consumers as soon as possible so that no further surplus demand will be generated. The use of the disclaimer while stocks last or subject to product availability is unlikely to protect companies from liability for the bait advertising offence under the Ordinance. If the company is not able to supply the products at the specified price for a period and in quantities that are reasonable, the company will be liable for the offence. If an advertisement states clearly the periods or the quantities in which the products will be supplied at the specific price, and the products are offered for supply accordingly, the advertisement is not bait advertising and no offence will have been committed (eg 10,000 bottles of Pink Rose deodorant at HK$1). 9. Performance claims False or misleading claims on the effectiveness of a product without sufficient supporting (generally scientific) evidence may constitute an offence. A statement that describes shampoos as 100% natural should not be used for shampoos that contain synthetic materials, Freshfields Bruckhaus Deringer Changes to unfair trade practices law in Hong Kong 3
such as preservatives. A claim that a shampoo can repair hair damage should not be used if laboratory tests merely prove that the product can only slow down hair damage caused by pollutants. Photographs of subjects taken before and after the use of a certain product that demonstrate its effectiveness should not give a misleading indication as to the efficacy of the product. Companies should ensure there is relevant evidence to substantiate the impression created by the image. 10. Misleading insinuations Statements that may mislead consumers to a material degree due to the context in which the statement constitute an offence under the law. A statement on a medicinal product that the product was formally registered in Hong Kong in 2010 may mislead consumers into believing the product was registered with the Hong Kong Department of Health in 2010. However, the advertised medicinal product does not fall within the definition of medicine under the Pharmacy and Poisons Ordinance and cannot be registered as a medicine in Hong Kong. The statement would be misleading to a material degree and constitute an offence under the Ordinance. 11. Claims as to place of manufacture/ country of origin Goods will be deemed to be manufactured in the place where they last underwent a treatment or process which changed permanently and substantially the shape, nature, form or utility of the basic materials used in their manufacture. For example, a hair product made from ingredients grown in Turkey and Peru, but manufactured in China, should be considered to have been made in China and any claims as to the product s place of origin should refer to China. 12. Use of exaggerated statements Common advertising practices of making exaggerated statements such as the best and the most popular are legitimate. The average consumer would be unlikely to take literally the meaning of obvious exaggerations, such as the coolest cream in the world, or it energizes you instantly. However, such claims should be used with caution when made with quantifiable standards or references, for example, the best-selling toothpaste in 2011. Companies should be prepared to give sufficient evidence to show that the toothpaste was sold in a quantity in 2011 which out-numbered the sales of other toothpastes. 13. Misleading statements by omission It is an offence to make a misleading omission under the Ordinance. This includes: (a) omitting or hiding material information; or (b) providing material information in a manner that is unclear, unintelligible, ambiguous or untimely; or (c) failing to identify commercial intent, unless this is already apparent from the context, so as to cause the average consumer to make a transactional decision that it would not otherwise have made. Basic product information not to be omitted For simple products, the basic information that should be communicated to consumers are: price, quantity, ingredients and instructions for use. Where the quantity of the product is displayed in small fine print, so that the average consumer is not able to read it in a readily comprehensible manner, the company may be deemed to have committed the misleading omission offence. The limitations of the communication method used, including limitations of space or time, will be considered in determining 4 Freshfields Bruckhaus Deringer Changes to unfair trade practices law in Hong Kong
whether a misleading omission offence has been committed. If it is impractical for companies to provide the necessary information to consumers due to constraints on space (eg. SMS message length in SMS promotion of products) companies should use other means of communication to make all the relevant information available to consumers for an informed purchasing decision. Companies should make it clear to consumers where omitted information can be found, for example by providing a website address or hotline telephone number, and inviting consumers to contact the company for more detailed information on the promoted products. 14. Failing to identify commercial intent Companies may commit an offence if they or their agents disguise themselves as consumers and post comments in discussion forums or on social media platforms in an attempt to promote their own products or to undermine a competitor s products. Where a company instructs its employees or a blogging agent to post favourable comments to promote its products on online forums and social networking websites and the comments are posted under the pretext of consumers comments who have purchased the products, if the commercial intent of these comments is not disclosed and leads the average consumer to make a transactional decision regarding the product that they would not otherwise have made, this will constitute a misleading omission and an offence. 15. New enforcement mechanisms for offences under the ordinance Civil enforcement undertakings The authorities can now accept an undertaking from a company or an individual that has committed an offence under the Ordinance as an alternative to initiating prosecution of the offence. The undertaking is a commitment not to continue or repeat the conduct or commercial practice concerned. Where an undertaking has been accepted by the authorities, investigations cannot be commenced or continued, and criminal proceedings cannot be brought or continued for a matter to which the undertaking relates. Injunctions The authorities can apply to the courts for an injunction to order an entity not to continue, repeat or engage in contravening conduct. The court may grant an injunction as well as an interim injunction pending the determination of the injunction application. Criminal prosecution Criminal proceedings can be brought against a company or an individual for serious breaches of the Ordinance. Cases for serious prosecution will depend on a range of factors, including length of time over which the conduct continues, number of victims, financial loss or other damage suffered by the victims, the impact on the community (including risks posed to public health and safety), the offender s compliance history and any previous conviction record. Offenders are liable on conviction on indictment to a fine of up to HK$500,000 and imprisonment of up to 5 years. 16. Personal liability of company management for offences Directors, shadow directors, company secretaries, principal officers or managers of companies, or any person acting in such capacity, may also incur personal liability for offences committed by the company. To establish liability of such individuals, it must be proven that the offence has been committed with their consent or connivance or was attributable to their neglect. A person will not be personally liable for an offence merely because of their position or role in the company. To determine liability, the following factors are taken into account: (a) whether there is a sufficient link between the offence and the person; Freshfields Bruckhaus Deringer Changes to unfair trade practices law in Hong Kong 5
(b) whether the person is in a position or has an ability to make, or participate in making, decisions that influence the company in relation to the offence; (c) whether the person knows or is negligent that the offence would occur but fails to take all reasonable steps to prevent the offence. 17. Company s liability for employees action Companies will be liable for the acts of their employees or agents, acting within the scope of their employment (or service agreement, or scope of assigned authority) where this intends to benefit the company. A company can use the general defence against liability for an agent where it can show the offence was committed outside of its control and it had made reasonable efforts to avoid the commission of the offence by the agent. In the case of a suspected offence, the authorities can investigate the supplier, retailer and any intermediary agent based on the relevant facts and circumstances. As good practice, companies should devise and implement detailed guidance on company marketing policies/procedures that are enforced through monitoring and supervisory tools. Where a company employs a team of sales staff to promote a product, even if the company has issued detailed guidance to its staff to comply with the Ordinance and the company s marketing policy/procedures, the company s management may still be liable for an offence committed by its staff if it is proven that the offence was committed with the management s consent or connivance. For example, the company did not monitor compliance with its marketing policy/ procedures or turned a blind eye to the sales staff s actual conduct. freshfields.com Freshfields Bruckhaus Deringer llp is a limited liability partnership registered in England and Wales with registered number OC334789. It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to www.freshfields.com/support/legalnotice. Any reference to a partner means a member, or a consultant or employee with equivalent standing and qualifications, of Freshfields Bruckhaus Deringer llp or any of its affiliated firms or entities. This material is for general information only and is not intended to provide legal advice. Freshfields Bruckhaus Deringer llp,, 36407