To Protect Consumers, China May Soon Allow Class Action Lawsuits

By David Hong  MAR 25, 2013 2:20 PM

Introducing class action lawsuits would lower the burden on individual consumers and help Chinese citizens better stand up to large corporations.

 


The National People’s Congress (NPC), China’s top legislative body, is in the process of revising China’s consumer protection law and is considering some significant changes. Although revising the Consumer Rights Protection Law, instituted nearly two decades ago, is the primary topic of discussion for the NPC, the group is also weighing the option of allowing class action lawsuits against Chinese corporations. The NPC also wants to grant additional powers to the China Consumers’ Association, China’s primary consumer protection agency.

Hong Kong Regime

It’s not just mainland China that is considering allowing class action lawsuits; the Law Reform Commission (LRC) of Hong Kong, which is the statutory body responsible for improving Hong Kong’s legislation, also published a proposal last May regarding class action claims. In Hong Kong, class action lawsuits do not exist and plaintiffs must still bring a civil case in an individual capacity. The LRC proposal recommended a phasing in of class action cases to avoid a deluge of civil litigation.

The biggest hurdle with instituting class action courses of action in a jurisdiction like Hong Kong is the financial ramifications of these lawsuits. In the US, lawyers can take a case on a contingency basis where clients do not pay upfront and the lawyers get compensated once the judgment is passed; US lawyers can receive up to one-third of the entire judgment if they win the case. Such a process allows the lawyers to bear the risk of losing the claim, and not the plaintiffs.

Unlike the US, Hong Kong prohibits contingency fee arrangements in contentious proceedings. Therefore, in Hong Kong, the plaintiffs will have to bear the financial risk of losing their case because the losers have to pay for the winners' costs associated with litigation, including attorneys’ fees. In Hong Kong, it seems the taxpayers would bear the financial burden associated with such class action claims as these lawsuits would probably be funded through the Consumer Council's Consumer Legal Action Fund of Hong Kong.

Back in 2011, a proposed draft amendment to the People's Republic of China Civil Procedure Law recommended that  “relevant authorities and social organizations” be able to file class action lawsuits to defend public interests with a focus on environmental hazards and food safety. In the past decade, less than 20 lawsuits concerning public interests have been filed and nearly all of them have focused on environmental protection. However, no decision on this proposed amendment has been made publicly available.

It looks like China is following the same path as Hong Kong in providing more protection to its consumers. However, unlike Hong Kong, China allows lawyers to operate on a contingency fee arrangement. Allowing class action lawsuits will lower the burden on individual consumers and help them better fight against large corporations that -- generally speaking -- are better equipped to defend against these claims. Part of the current five-year plan aims to lessen the income inequality gap and bring up the living standards of poor Chinese, a large majority of the population. Allowing collective class action claims will enable unsophisticated and uneducated Chinese access to the legal system and justice that they may not have had before. 

Punitive Damages

One of the considerations facing the NPC as it looks to update the consumer protection law is whether to begin instituting punitive damages -- that is, fines that can be imposed on defendants for creating a product or situation that can cause damage to consumers or that do not comply with national regulations, above and beyond any actual reported damages. Without the fear of punitive damages, companies have less incentive to be compliant with laws and standards because the penalty for any broken law would only be compensatory -- that is, based on the cost of the actual damages or losses endured. In China, where there is no risk of punitive damages, it currently makes more economic and business sense to deal with problems as they arise.

In the United States, companies live in fear of punitive damages because judgments could be a hundred times the actual damages or losses; therefore, it makes sense to make sure you are doing everything right, instead of risking a huge penalty. For example, in the case of Philip Morris USA v. Williams, the plaintiff was awarded $821,485.50 in compensatory damages and $79.5 million in punitive damages. Had it happened in China, the compensation would most likely have only been the $821,485.50.

David Hong is foreign legal counsel with King & Wood Mallesons in Shanghai. He is currently working with CRG, a multi-channel retail services company that assists retailers entering and expanding in China.
No positions in stocks mentioned.