Opinion Leaders, Endorsers and other influencers: legal risks in digital marketing

By Sven-Michael Werner, Grace Zhao, Tiantian Ke

01-2021

As the next big thing after the traditional “celebrity endorsements”, engaging influencers, also referred to as Key Opinion Leaders (KOLs) has become one of the most effective ways to create brand exposure, engage target consumers and drive sales revenue in China.  Chinese consumers are more likely to consider buying a product if they see it discussed positively on platforms like Xiaohongshu or WeChat. Influencer marketing allows brands to locate and advertise directly to their target audience.  Although this marketing method has been around for many years now, the legal framework is still underdeveloped and partly unclear.

The laws governing influencer marketing in China generally come under marketing and advertising, consumer protection or competition laws.  Regulators include the State and local market regulation departments, the State and local radio and television administration authorities (for internet audio visual programs) and state and local cyberspace administration authorities (for online live-streaming), etc.  

The main business model of the multi-channel network (MCN) lies in the incubation and cultivation of KOLs, output content through cooperation with online platforms to realize traffic monetization in exchange for a percentage of revenue or commission. In practice, there are many disputes in relation to the contracts entered into by MCNs and KOLs, whether it constitutes an employer-employee relationship or simply an entrustment relationship, whether the ownership of social media platform accounts and related rights and interests of e-commerce platform accounts (such as account and data ownership and usage rights) belongs to MCNs or KOLs, whether the intellectual property rights of the fruit of co-operation belongs to MCNs or KOLs, and what is an appropriate amount of liquidated damages to be payable by a KOL when he/she unilaterally terminates the contract or otherwise causes significant losses to the MCN.  Furthermore, an influencer may under exclusive promotion agreement with a brand/advertiser which prohibiting the influencer from promoting similar products.  It is therefore advisable to have a clear agreement on the terms of co-operation, geographical scope, termination and indemnification, and intellectual property ownership, etc. amongst Influencers, MCNs and brand owners. 

When it comes to promotional or advertising activities, several important legal requirements shall be kept in mind:

Clear indication to consumers that this is an advertisement. Many advertisers prefer to hire an influencer to make a judgement or simply show that he/she is using thus appreciating a particular product and consequently the respective brand on a social medical and e-commerce platform, and the influencer’s post will be presented as personal recommendation hence difficult for the consumers to distinguish whether it is an advertisement or not.  From a compliance perspective, if the post is published for commercial and promotional purposes, it should be clearly marked as an advertisement.  

Joint and several liability for false advertisement. Based on the definition of “advertisement endorser" under the PRC Advertising Law, an influencer is likely to be viewed as someone other than an advertiser that uses his/her own name or image to make endorsements or testimonials for a product or service in an advertisement. Hence, responsibilities are attached to that advertisement endorser.  For instance, an influencer may bear joint and several liability when he/she knows or should have known that the content he/she advertises is false and causes damage to the consumers unless he/she can prove that due care has been taken or it is unable to find out that the advertisement is false, as per Article 56 of the PRC Advertising Law.  

A recent headline case under which top-level Chinese e-commerce livestreamer Xinba who is considered the “sales king” on the short-video app “Kuaishou” has been exposed for hyping a bogus nutritional drink that he claimed contained bird’s nest soup. Both the broadcasting company and the brand owner have been fined RMB 0.9 million and RMB 2 million respectively by the Guangzhou market regulatory department for violation of Article 8 (1) of the PRC Anti-Unfair Competition Law [1]. Meanwhile, the broadcasting company’s parent company (which entered into the brand promotion cooperation agreement with the brand owner) issued a letter to the Netizens proposing an advanced compensation plan to provide full refunds for customers who had issues with the drink and compensate three times of the cost of the products purchased (total compensation amount is approx. RMB 61.98 million [2]).  However, the livestreamer’s initial defense was that he was not aware that the health claims made by the manufacturer were flat-out lies [3].    

Content limitations for certain products. It is prohibited to engage the advertisement endorsers/influencers to make endorsements or testimonials for the advertisement of medical treatment, pharmaceuticals or medical devices or healthcare food in accordance with Article 16 and 18 of the PRC Advertising Law.  In a recent case in Shanghai, Abbott Trading (Shanghai) Co., Ltd. has been fined nearly 2 million RMB. Part of the reason was the engagement of an endorser to recommend formula food products for special medical purpose on Douyin which was seen in violation of Article 16 (4) of the PRC Advertising Law [4].   

No false promotion of data related to goods or services.  Live-streaming data falsification used to be a common practice that creates a grey supply chain in the industry, and related news reports continue to be followed by major media.  As a result, the Provisions on the Governance of Network Information Content Ecology, the Code of Conduct for Livestreaming Promotion, and the Administrative Provisions on Live Streaming Marketing Information Content Services (Draft for public consultation) (together, the “Live-streaming Provisions”) issued in 2020 have specially addressed this, mandating that neither the influencer nor the advertiser/brand owner shall attract consumers by organizing false transactions, fictitious clicks and attention. This may further violate the advertising law, anti-unfair competition law and potentially criminal law if the consequence is serious.  

Licensing/recordal requirements and protection mechanisms for live-streaming platforms. Depending on the specific business model and activities on the platforms, live-streaming platform operators are likely to be subject to telecommunications services licensing (e.g. the B25 type Internet Content Provider (“ICP”) license) and/or recordal obligations. In addition, the Live-streaming Provisions mandates these platforms to establish sound mechanisms for account and marketing business registration and cancellation, information security management, codes of conduct for marketing, protection of children and user’s rights, personal information protection, credit evaluation and data security, etc.  

With the rapid development of influencer marketing in China, companies should pay more attention to the risks and compliance in this area.

 

[1] https://finance.sina.com.cn/chanjing/gsnews/2020-12-23/doc-iiznctke8102264.shtml 

[2] https://video.sina.com.cn/p/finance/2020-12-10/detail-iiznctke5760104.d.html 

[3] https://supchina.com/2020/12/01/chinese-commercial-livestreamer-caught-selling-counterfeit-birds-nest-soup-reigniting-criticism-of-delicacy/

[4] http://www.cqn.com.cn/ms/content/2020-10/29/content_8641225.htm