Law Articles
2021-04-21
MLM
Advertising Statements for MLM Cosmetic Products
【Partner Lawyer Charlotte Wu, Zhong Yin Law Firm】
Advertising Statements for MLM Cosmetic Products
Advertising Statements for MLM Cosmetic Products
Case:
Multi-level marketing Company A, on its website regarding the popular cosmetic product it sells, "Firming Youth Essence," uses the advertising copy: "Effectively smooths skin scars, makes past acne scars disappear, and returns to you the confidence of youth." Question: Are the cosmetic claims described in that website advertisement legally permissible?
Cosmetics are applied externally to the human body and primarily function to moisturize skin and hair, stimulate the sense of smell, mask body odor, or improve appearance; they are fundamentally different in nature from pharmaceuticals that have therapeutic effects [1]. Nevertheless, to attract consumers' attention, producers often spend heavily to hire attractive models as product endorsers for cosmetic advertisements, and they also use descriptions of product effects such as "whitening" or "promotes skin metabolism" to entice consumers to buy. Sometimes the promotional language used may lead consumers to mistakenly believe the product has medical effects, or even that the product was developed to target a specific condition, causing them to purchase the product based on incorrect information.
According to Article 6, Paragraph 1, Subparagraph 5 of the Multi-Level Marketing Control Act: "If other laws stipulate that a method of marketing goods or services or require permission from the competent authority of the target industry before promotion or sale, the marketing method must comply with those laws or obtain proof of permission from the competent authority of the target industry." Therefore, even though the competent authority for multi-level marketing enterprises is the Fair Trade Commission, under the intent of that provision, the marketing of cosmetics must still comply with the regulatory requirements of the competent authority for that field, the Ministry of Health and Welfare. To prevent harm to consumers' physical health caused by false cosmetics advertising, the more concrete current regulations are mainly the Cosmetics Hygiene Management Act, and there are also self-regulatory codes of conduct in the private sector governing advertising of cosmetic products in the multi-level marketing industry. Below, this article briefly explains our country's legal regulations and the commercial ethics rules by which the Direct Selling Association of the Republic of China binds its member companies, to provide reference for multi-level marketing operators when promoting cosmetic products.
1. Legal regulations in our country
(A) Cosmetics Hygiene Management Act
(1) Legal provisions before the Judicial Yuan Interpretation No. 744 was rendered
In the past, the administrative authority regulated cosmetic advertising under Article 24 of the Cosmetics Hygiene and Management Act[2], prohibiting advertising content that promoted obscenity, harmed public decency, or was falsely exaggerated. That law further required businesses to submit all advertising text, images, or wording to the health competent authority for approval before publication; thus, it constituted a "prior review" model of speech control.
However, to ensure clarity and fairness in enforcement about what advertising claims are regulated, the Department of Health of the Executive Yuan (now the Ministry of Health and Welfare) on March 26, 2013 issued Order No.1021600202—"Illustrative Acceptable and Inappropriate Phrases for Cosmetic Claims"—as the standard for determining whether advertising content involves medical efficacy, falsity, or exaggeration. If a product’s promotional wording claims to "improve allergic skin constitution, improve internal constitution" or "resolve dynamic lines such as expression lines, nasolabial folds, crow's feet," such wording is deemed not to fall within cosmetic efficacy and thus violates that provision, subject to corresponding administrative penalties [3]. Other standards for reviewing statements can be found in Tables 1 and 2 below (Tables 1 and 2 are taken from Order No. 1021600202 of the Ministry of Health and Welfare dated March 26, 2013, as revised on September 6, 2016; this text cites only several examples from that order and does not exhaust all forms).
| Cosmetic category | Permissible phrases |
| Hair cosmetics for use on the scalp and hair (including hair oil, temporary hair colorants, hair wax, pomade, hair tonic, hair fixatives, hair gel, hair cream, conditioner, etc.) |
|
| Cosmetic products for skin use (including toners, creams and lotions, cosmetic oils, and face masks). |
|
| Cleansing cosmetic products for skin (including soaps, bath cosmetics, and facial cleansers). |
|
| Claims involving therapeutic effects | |
| For those involving disease treatment or prevention, definitions of the relevant diseases. |
|
| The claimed content may lead consumers to mistakenly believe that the cosmetic product has therapeutic effects, or to mistakenly think it is specifically used for certain diseases. |
|
| Involves falsehoods or exaggeration | |
| Relating to physiological functions |
|
| Involves changing body appearance, etc. |
|
| Involving claims of specific functional efficacy |
|
| Involving cosmetic product manufacture, ingredients, and content |
|
| Involving place of manufacture, place of origin, or source |
|
| Involving quality or safety |
|
| Involves guarantees |
|
| Claims not related to cosmetic product efficacy |
|
(2) Interpretation No. 744 of the Judicial Yuan
On January 6, 2017, the Judicial Yuan published Interpretation No. 744, holding that the aforementioned Article 24,Paragraph 2 of the Cosmetics Hygiene and Management Act—which required operators to submit all advertising text, images, or wording to the competent health authority for approval before publication—improperly restricted the freedom of speech protected by Article 11 of the Constitution and exceeded the proportionality principle of Article 23 of the Constitution; accordingly, it was declared unconstitutional.
The reasoning for this declaration of unconstitutionality was that Article 24, Paragraph 2 and Article 30, Paragraph 1 of the same Act, which adopt a prior review regulatory approach, constitute a significant interference with freedom of expression and, absent a proportionality review, should in principle be presumed unconstitutional. In discussing whether these provisions satisfy the layers of the proportionality principle, the court noted that other provisions and penalties already govern the importation, manufacture, and labeling of cosmetics. Advertising for cosmetics functions to attract consumers to purchase, and the advertisements themselves do not cause direct, immediate, and irreparable harm to consumers’ life, body, or health. Thus, it is difficult to recognize that this legislative model of prior review Is aimed at protecting an especially important public interest, nor can it be said that the prior-review method employed by those provisions has a direct and absolutely necessary relation between restricting cosmetics manufacturers’ freedom of expression and consumers’ opportunity to obtain sufficient information and an especially important public interest. Therefore, because the contested provisions restricted cosmetics manufacturers’ freedom of expression beyond what was necessary and did not satisfy the proportionality principle, they infringed the freedom of speech guaranteed by Article 11 of the Constitution, were declared unconstitutional, and lost effect as of the date this interpretation was published.
(3) Current applicability of the regulations
After the Constitutional Court Interpretation No. 744 was issued, our country enacted the "Cosmetic Hygiene and Safety Management Act" (hereinafter the New Act), which was promulgated by the Presidential Office on May 2, 2018.However, as of the submission deadline, except for the provisions of Article 6, Paragraphs 4 to 6 and Article 23,Paragraph 1, Subparagraph 6, which will take effect on November 9, 2019, the remaining provisions have not yet come in to force. Therefore, the old "Regulations of Cosmetic Hygiene" still apply for the time being. At the current stage, to implement the intent of Constitutional Court Interpretation No. 744, the mechanism of prior review for cosmetic advertising statements has been removed and replaced by post-hoc enforcement measures. In other words, multi-level marketing operators no longer need to apply for pre-approval from the central or municipal health authorities for advertising of cosmetic products, but they may still be fined later due to public complaints or official inspections and enforcement.
If the New Act comes into force in the future, according to Article 10 of the New Act[4], promotional advertisements for cosmetics must not contain falsehoods, exaggerations, or claims of medical efficacy, and pursuant to Paragraph 4 of the same article, the competent authority will also establish criteria for determining falsehoods, exaggerations, and the medical efficacy referred to in Paragraph 2, as well as guidelines on the content, methods, and other matters to be followed for promotions or advertisements. Article 20 of the same Act also provides corresponding penalties[5]. The future implementation of the New Act and the criteria for determining advertising content are regulatory developments that operators should pay close attention to. In summary, Table 3 consolidates the Ministry of Health and Welfare’s evolution of the regulatory system for cosmetic advertising statements for readers’reference:
| Time | Standard | Description |
| Before Judicial Yuan Order No. 744 was issued | Article 24 of the Regulations of Cosmetic Hygiene Management: "Cosmetics shall not publish or broadcast advertisements in newspapers, periodicals, leaflets, posters, slides, films, television, or other communication media that are obscene or false and exaggerated. When manufacturers of cosmetics publish or broadcast advertisements, they shall submit all texts, written materials, or verbal content in advance to the central or directly-governed municipality health authority for approval, and provide the proof of approval to the media organization. Article 30 of the Regulations of Cosmetic Hygiene Management: 'Those who violate paragraph 1 or paragraph 2 of Article 24shall be fined not more than NT$50,000; if the circumstances are serious or in the case of re-peated violations, the original licensing authority may also suspend the relevant business license or permit.'" | The regulation of cosmetic advertising speech functioned as a "prior review" regulatory approach. The Ministry of Health and Welfare also issued the "Examples of Claims Permissible for Cosmetics and Examples of Inappropriate Claims" to serve as standards for determining whether advertising content involves therapeutic efficacy, falsehood, or exaggeration. |
| After Judicial Yuan Order No. 744 was issued (current system) | Cosmetics Hygiene Management Regulation Article 24: "Cosmetic products shall not publish or advertise in newspapers, periodicals, leaflets, yellow pages, slides, films, television and other media tools any advertisements that are obscene, offensive to public morals, or falsely exaggerated. Cosmetics Hygiene Management Regulation Article 30 states: 'Anyone who violates the provisions of Article 24, paragraph 1 or paragraph 2, shall be fined not more than NT$50,000; if the circumstances are serious or there are repeated violations, the original licensing authority may also suspend the relevant manufacturing or establishment permits or licenses.' | To implement the intent of Constitutional Interpretation No. 744 of the Judicial Yuan, control of cosmetic advertising statements has been changed to a "post-hoc enforcement "measure. The standards that can be identified still adopt the previously announced examples of permissible and inappropriate advertising phrases for cosmetics published by the Ministry of Health and Welfare. |
| New law: Cosmetics Hygiene and Safety Management Act (not yet enacted into force) | Cosmetic Hygiene and Safety Management Act Article 10: "The labeling, publicity, and advertising content of cosmetics shall not contain falsehoods or exaggerations. Cosmetics shall not have labeling, publicity, or advertising that claims therapeutic effects. Publishers and broadcasters entrusted to publish cosmetic advertisements shall, within six months from the date of publication, retain the name of the advertiser, the national identification number or company name, the registration document number of the company, business, or legal per-son, the residence or address and telephone number, and other relevant information, and when requested by the competent authority, shall not evade, obstruct, or refuse to provide them. The criteria for determining falsehoods, exaggerations, and therapeutic effect claims referred to in the preceding paragraph, the con-tent and methods of publicity or advertising, and other matters to be complied with shall be prescribed by the central competent authority." Cosmetic Hygiene and Safety Management Act Article 20: "A violation of the provisions of Article 10, paragraph 1, or the provisions regarding the content and methods of publicity or advertising prescribed under paragraph 4 shall be fined not less than NT$40,000 and not more than NT$200,000; a violation of the provisions of paragraph 2 of the same article shall be fine do not less than NT$600,000 and not more than NT$5,000,000; if the circumstances are serious, the business may also be ordered to correct and may have all or part of its company, business, or factory registration items suspended. If the publicity or advertising of cosmetics violates the provisions of Article 10, paragraphs 1or 2, or the rules regarding content and methods prescribed under paragraph 4, it shall be handled per occurrence until correction or cessation. Where violations of Article 10, para-graph 1 or paragraph 2 concerning publicity or advertising are serious, in addition to the pre-ceding penalties, the competent authority shall order that the product not be supplied, sold, given away, publicly displayed, or made avail-able for consumer trial. Where the preceding paragraph violates advertising regulations, a corrective advertisement of a specified number of times shall be published or broadcast within thirty days after service of the corrective notice, in the same space or time slot as the original publication, and the content shall clearly state the correction and eliminate the erroneous in-formation. If the provisions of the preceding two paragraphs are violated and the supply, sale, giveaway, public display, or provision for consumer trial continues, or if the corrective advertisement is not published, a fine of not less than NT$120,000 and not more thanNT$2,000,000 shall be imposed." |
The new law adopts a "post hoc enforcement" regulatory approach, but the provisions of the new law regarding the control of cosmetic advertising statements have not yet come into effect; after future implementation and announcement of penalty standards, changes in the criteria for determination will be a development we should monitor. |
(B) Fair Trade Act
According to Article 21, Paragraph 1 of the Fair Trade Act: "Businesses shall not make false or misleading representations or indications on goods or advertisements, or by other means known to the public, about matters related to the goods that are sufficient to affect transaction decisions." Article 42 of the same Act provides penalties: "The competent authority may order businesses that violate Article 21 ... to stop or correct their actions or take necessary corrective measures within a prescribed period, and may impose a fine of not less than NT$50,000 and not more than NT$25,000,000; if they still do not stop or correct their actions or have not taken necessary corrective measures after the deadline, the authority may continue to order them to stop or correct their actions or take necessary corrective measures within a prescribed period, and impose a fine of not less than NT$100,000 and not more thanNT$50,000,000 each time, until the actions are stopped, corrected, or necessary corrective measures are taken. "Therefore, multi-level marketing sellers of cosmetics must also pay attention to whether the advertising content for cosmetics is appropriate.
(C) Consumer Protection Act
Because multi-level marketing companies that distribute products fall under "businesses engaged in product distribution" as defined in Article 2, Subparagraph 2 [6]of the Consumer Protection Act and thus qualify as business operators under that Act, pursuant to Article 22, Paragraph 1 of the Consumer Protection Act they must ensure the truthfulness of advertising content, and their obligations to consumers must not be lower than the content of the advertisements. If a multi-level marketing company makes false or untrue cosmetics advertisements with intent, gross negligence, or negligence, causing consumer harm, consumers may, under Article 51 [7]of the Consumer Protection Act, claim punitive damages from the multi-level marketing company in an amount of one to five times the damages.
Industry Self-Regulation: Code of Business Ethics of the Direct Selling Association of the Republic of China
In addition to our national legal regulations, the Republic of China Direct Selling Association, voluntarily formed by direct selling companies to enhance the industry's image, established the "Business Ethics Charter." Its contents regulate member companies' codes of conduct and consumer protection matters, aiming to safeguard the rights of both parties. However, it is worth noting that among the nation's 410 multi-level marketing enterprises [8], only 52 are members of the Direct Selling Association [9], so only member companies are bound by the Business Ethics Charter; non-member companies are not subject to its regulations.
Regarding product advertising content, Article 2.8 of the Business Ethics Charter [10] sets forth a code of conduct, stipulating that member companies' promotional materials, advertisements, or mailed communications must not contain exaggerated, untrue, deceptive, or misleading product introductions, statements, descriptions, photos, or illustrations, in order to avoid consumer disputes and damages to buyers and sellers arising from false product advertising.
If consumer disputes arise due to false advertising of products sold by a member company then, pursuant to Article 5.4 of the Business Ethics Charter [11], the member company, the Direct Selling Association, or the Business Ethics Charter supervisor may determine sanctions to be taken against the direct seller, including allowing consumers to cancel orders, return purchased products, receive refunds, or other appropriate measures; or admonish the involved direct seller, terminate the contractual relationship between the direct seller and the member company, or admonish the member company that violated the rules. In the most severe cases, membership in the association may be terminated and the sanction may be publicly announced.
Conclusion
Returning to the case in this article: multi-level marketing Company A described the popular cosmetic product it sold on its website, "Firming Youth Serum," as: "Effectively smooths skin scars, makes past acne scars disappear, and returns to you the confidence of youth." Does this violate relevant laws?
As noted above: both the Fair Trade Act and the Consumer Protection Act contain relevant provisions, but the regulation that is more detailed and gives businesses concrete guidance is the Regulations of Cosmetics Hygiene. Pursuant to that regulation, the Ministry of Health and Welfare has additionally promulgated the "Examples of Permissible and Inappropriate Claims for Cosmetics" as detailed guidelines to follow. According to the Constitutional Court Interpretation No. 744, multi-level marketing operators' cosmetic product advertisements no longer need prior approval from the competent authority; however, the authority may still enforce sanctions ex post facto.
In this case, promotional phrases such as "effectively smooths skin scars, makes past acne scars disappear"—the term "smooths scars"—fall under the "Examples of Permissible and Inappropriate Claims for Cosmetics" as an inappropriate claim that "is likely to lead consumers to mistakenly believe the cosmetic has medical effects, or to mistake it as intended for a specific disease." Therefore, the advertisement's claims in this case may be deemed to involve medical efficacy and violate Article 24, Paragraph 1, and Article 30 of the Regulations of Cosmetics Hygiene, and may be subject to administrative penalties. However, how the standards of such determinations will change after the implementation of the newly revised Cosmetics Hygiene and Safety Management Act and its penalty criteria is also a development we are watching.
In addition to the laws of our country, if in this case multi-level marketing Company A is a member of the Direct Selling Association of the Republic of China, it will also be bound by the association’s Code of Commercial Ethics .Advertisements used to promote products must not contain exaggerated, untrue, deceptive, or misleading descriptions, photos, or illustrations; otherwise, under Article 5.4 of the Code of Commercial Ethics, appropriate measures will betaken, which requires special attention.
If you require legal advice regarding trust structures, or need to review the legal terms of trust contracts provided by financial institutions or trust companies, please feel free to contact:
Attorney Wu Jiehua
charlotte.wu@zhongyinlawyer.com.tw
tel +886 2 2377 1858 ext 8888
[1] Article 2, Paragraph 2 of the Consumer Protection Act: "Business operator: refers to a person who designs, produces, manufactures, imports, distributes goods, or provides services as a business."
[2] Article 51 of the Consumer Protection Act: "In lawsuits filed under this Act, for damages caused by the intentional act of a business operator, the consumer may request punitive damages of up to five times the amount of damages; for damages caused by gross negligence, the consumer may request punitive damages of up to three times the amount of damages; for damages caused by negligence, the consumer may request punitive damages of up to one times the amount of damages."
[3] Fair Trade Commission, Executive Yuan, Multi-level Marketing Business Filing Statistics, https://www.ftc.gov.tw/internet/main/doc/docDetail.aspx?uid=487&docid=904. (Last accessed: 2018/12/12)
[4] Taiwan Direct Selling Association Member Companies, http://www.dsa.org.tw/Member.php. (Last accessed: 2018/12/12)
[5] Article 2.8 of the Code of Ethics: "Promotional materials, advertisements, or mailings shall not contain exaggerated, false, deceptive, or misleading product introductions, statements, descriptions, photographs, or illustrations, and shall bear the full name and address or telephone number of the company or direct seller."
[6] Article 5.4 of the Code of Ethics: "Penalties for violations of the Code of Ethics may be determined at the discretion of the direct selling company, direct selling association, or Code of Ethics supervisor, including cancellation of orders, return of ordered goods, refund of payments, or other appropriate penalties, including warning the direct seller involved in the violation, terminating the contractual relationship between the direct seller and the direct selling company, warning the direct selling company involved in the violation, terminating association membership, and publicizing the penalty."
[7] Article 10 of the Cosmetics Hygiene and Safety Management Act: "The labeling, promotion, and advertising content of cosmetics shall not be false or exaggerated. Cosmetics shall not be labeled, promoted, or advertised for medical efficacy. Media agencies commissioned to broadcast or publish cosmetics advertisements shall, within six months from the date of broadcast or publication, retain the name or title, national ID number or establishment registration document number of the commissioning company, business, legal entity, or organization, residence or address, and telephone number of the advertiser, and shall not evade, obstruct, or refuse when requested by the competent authority to provide such information. The criteria for determining falsehood, exaggeration, and medical efficacy as mentioned in the first and second paragraphs, the content and method of promotion or advertising, and other matters to be complied with shall be prescribed by the central competent authority."
[8] Article 20 of the Cosmetics Hygiene and Safety Management Act: "Those who violate the provisions of the first paragraph of Article 10 or the provisions concerning the content and method of promotion or advertising as prescribed in the criteria set forth in the fourth paragraph shall be fined not less than NT$40,000 but not more than NT$200,000; those who violate the provisions of the second paragraph of the same article shall be fined not less than NT$600,000 but not more than NT$5,000,000; in cases of serious violation, an order may be issued to cease business and revoke all or part of the registration matters of their company, business, or factory. If the promotion or advertising of cosmetics violates the provisions of the first or second paragraph of Article 10 or the provisions concerning content and method as prescribed in the criteria set forth in the fourth paragraph, penalties shall be imposed consecutively until correction or cessation. For serious violations of the provisions concerning promotion or advertising in the first or second paragraph of Article 10, in addition to the penalties under the preceding two paragraphs, the competent authority shall order them not to supply, sell, give away, publicly display, or provide consumer trials. Those who violate the advertising provisions under the preceding paragraph shall, within thirty days of the service of the penalty notice, broadcast or publish correction advertisements a certain number of times in the same space or time slot as the original broadcast or publication, the content of which shall express apology and eliminate erroneous information. Those who continue to supply, sell, give away, publicly display, or provide consumer trials or fail to broadcast or publish correction advertisements in violation of the preceding two paragraphs shall be fined not less than NT$120,000 but not more than NT$2,000,000."
[9] According to Article 3 of the Cosmetic Hygiene Management Act regarding the definition of cosmetics: "The term 'cosmetics' as used in this Act refers to articles applied to the external parts of the human body for the purpose of moisturizing the hair and skin, stimulating the sense of smell, concealing body odor, or modifying appearance; their scope and categories shall be announced by the central competent health authority." In the Cosmetic Hygiene and Safety Act, which was enacted and promulgated this year (but not yet in effect), Article 3 regarding the definition of cosmetics states: "refers to preparations applied to the external parts of the human body, teeth, or oral mucosa for the purpose of moisturizing the hair and skin, stimulating the sense of smell, improving body odor, modifying appearance, or cleansing the body. However, this shall not apply to items that are recognized as drugs under other laws and regulations." It is evident that both the new and old laws distinguish between cosmetics and drugs for regulatory purposes.
[10] Article 24 of the Cosmetic Hygiene Management Act: "Cosmetics shall not have obscene, indecent, or false and exaggerated advertisements published or broadcast in newspapers, periodicals, leaflets, radio, slides, films, television, or other media. When manufacturers of cosmetics publish or broadcast advertisements, they shall apply in advance to the central or municipal competent health authority for approval of all text, images, or wording, and submit the certificate of approval to the media organization."
[11] According to Article 30 of the Cosmetic Hygiene Management Act: "Those who violate the provisions of Article 24, paragraph 1 or paragraph 2, shall be fined not more than fifty thousand New Taiwan Dollars; in cases of serious circumstances or repeated violations, the original issuing authority may additionally revoke their related business or factory establishment permits. Those who violate orders issued by the municipal, county (city) competent health authority or industrial competent authority in accordance with the provisions of Article 26-1 shall be fined not more than fifty thousand New Taiwan Dollars, and shall be ordered again to improve within a time limit; in cases of serious circumstances or repeated violations, the original issuing authority may additionally revoke their related business or factory establishment permits."