Legal issues around KOL marketing in Hong Kong and mainland China
31 May 2022
With the development of social media, key opinion leader (KOL) marketing has become widely popular around the world. KOLs, who are more commonly known as “influencers” in other parts of the world, usually have a sizeable online following on social media. They are called key opinion leaders or influencers because they can influence their followers to purchase certain products or services by making recommendations on social media. Brand owners are often keen to leverage the value of KOL marketing given its effectiveness: a recent study in China found that over 60 percent of consumers were influenced to purchase products after watching KOLs’ product review videos or promotions in livestreams. This article discusses the key legal issues in Hong Kong and mainland China that brand owners should be aware of and consider when working with KOLs.
Trends in KOL marketing
Many brand owners cooperate with KOLs to promote products and services by uploading photos or videos onto social media (such as Instagram and TikTok), and having KOLs post product reviews. Many KOLs also show their use of products, or advertise products through livestreams where they can interact with the audience in real time. These livestreams are sometimes hosted on e-commerce platforms, where viewers can easily purchase the products on the spot while watching the livestream. Just on the first day of Double 11 shopping festival in 2021, the top two KOLs in China already generated staggering sales of Rmb19 billion (US$2.86 billion) through livestreaming. One of them even made it on the list of Next Top 100 Most Influential People by the Time Magazine in 2021.
One of the reasons why KOL marketing has become so popular is that KOLs are considered more down-to-earth and relatable to the targeted consumers as compared to traditional celebrities.
Virtual KOLs, which are digital characters generated by computer graphics, have also become increasingly adopted by brand owners. Some of them look like anime characters, while others may look realistic or may have even been designed based on the appearance of real people. It is not uncommon for virtual KOLs to even have their own social media accounts and to collaborate with other KOLs or real persons (such as celebrities) in marketing efforts. For example, a Chinese entertainment agency partnered with a major technology company to create a virtual idol group, and their most popular video garnered over 5.3 million views on a video-sharing platform. It is estimated that the market size influenced by virtual KOLs may reach over Rmb180 billion (US$27.05 billion) in China in 2022.
The growing popularity of virtual KOL marketing can be explained by a number of advantages that real-person KOLs cannot provide. For example, virtual KOLs can be tailor-made to suit brand owners’ specific requirements, and they are also less likely to get caught up in PR scandals than real-person KOLs, as we have seen some famous actors and KOLs accused of tax evasion in recent years in China. As the hype for the metaverse continues to sweep the world, we expect to see even more growth in the use of virtual KOLs by a wider range of brand owners in the future.
While there are a number of advantages in KOL marketing, it also comes with various legal issues that brand owners should be aware of. In the following sections, we will dive into some frequently encountered issues relating to false or misleading advertising content, and services contracts.
Accuracy of promotional content
Some KOLs may not be very familiar with the features of the products that they are promoting, and they may inadvertently make inaccurate or misleading statements when they try to answer the audiences’ questions on the spot during livestreaming, or when they prepare posts, captions or other promotional materials for use on social media. This sort of inaccurate or misleading statements may potentially lead to legal liability.
No specific KOL marketing law in Hong Kong
In Hong Kong, there is no overarching advertising law. There are also no specific laws or regulations on KOLs, social media marketing, or livestreaming. The main piece of relevant legislation is the Trade Descriptions Ordinance (the TDO), which is broadly applicable to all goods and services offered in Hong Kong (except for certain goods and services which are subject to other regulations, such as insurance and banking).
Under the TDO, “trade description” is broadly defined and basically covers any indication with respect to the goods or services, communicated through any means, including any form of media, electronic means or even orally. A “false trade description” refers to a trade description which is false to a material degree or misleading. If a KOL engaged by the brand owner gives a false or misleading description of its product's composition, fitness for purpose, performance, etc. during promotion, it would fall within the ambit of the TDO.
Notably, it is a criminal offence under the TDO for any trader to make a false trade description to any goods. A director, officer or manager of a company may also incur personal liability if it can be proved that the offence was committed with the person's consent, connivance, or otherwise attributable to his or her negligence.
In addition to the TDO, the Misrepresentation Ordinance is also applicable to KOL marketing. Misrepresentation commonly arises where one party to a contract makes a false statement of past or present fact to another intending to induce another to enter into a contract. If a misrepresentation is made by a KOL who is engaged by a brand owner, a civil claim may then be brought against the KOL and also the brand owner.
Advertising Law in China
On the other hand, China has a comprehensive Advertising Law that regulates various forms of commercial advertising activities, and KOL marketing would fall within the scope of the Advertising Law.
The Advertising Law has a number of provisions on what can or cannot be mentioned in advertisements. Some noteworthy requirements and restrictions include:
Advertisements shall not contain any false or misleading information;
Where an advertisement indicates the function, place of origin, ingredients, etc. of a product, such indication must be accurate, clear, and understandable;
Advertisements shall not disparage the goods or services of other producers or traders; and
“National”, “highest”, “best” or similar superlative words shall not be used.
Furthermore, additional regulations are imposed on endorsers, which would also apply to KOLs who act as endorsers. A person must have used the products or services before the person can act as an endorser for such products or services. In the case of a false advertisement, if the endorser knew or should have known that the advertisement was false but still provided the recommendation, then the endorser would be subject to joint and several liability.
In general, all parties involved in advertising – including the brand owner, the advertisement company, the KOL and the advertising publisher (such as the broadcasting company) – may potentially be legally liable if false information is advertised.
New regulations governing KOL marketing in China
In view of the growing popularity of online advertising, the State Administration for Market Regulation issued the draft Measures for the Administration of Internet Advertising (the Draft Measures) for public comments in November 2021. The Draft Measures have not yet come into effect.
The Draft Measures require advertisements to be marked as such. For example, if goods or services are promoted in the form of “experience sharing” or “evaluation”, they should be clearly marked as “advertisement”. This requirement may seriously affect KOL marketing because soft marketing (such as by tagging the brand owners’ official accounts on social media) is one of the main selling points of KOL marketing. Having to mark the relevant posts as “advertisement” may affect consumers’ perceptions, and thereby reduce the business value of KOL marketing.
Besides, commercial livestreaming is now officially considered as a form of advertisement under the trial Measures for the Administration of Livestreaming Marketing (the Livestreaming Trial Measures), which took effect in May 2021. If brand owners promote their products through livestreams, both the Advertising Law and the Livestreaming Trial Measures would apply.
Similar to the requirements in the Advertising Law, false or misleading descriptions are prohibited under the Livestreaming Trial Measures. The Livestreaming Trial Measures also require proper management of interactive contents during livestreams, and unfavourable comments cannot be deleted or blocked in an attempt to deceive or mislead consumers.
To mitigate the risks related to inaccurate promotional statements made by KOLs, brand owners should ensure that KOLs have a good understanding of the products or services that are being promoted. Brand owners can also consider providing preapproved scripts to KOLs before filming or livestreams. For livestreams, brand owners are recommended to instruct KOLs not to answer any questions if the KOL does not know or is uncertain of the answer, so as to minimize the risk of inadvertently making false statements. Brand owners may also consider using virtual KOLs, as brand owners normally have greater control over the content published by virtual KOLs (as opposed to real person KOLs), so that inaccurate product descriptions will be less likely made.
When engaging KOLs, having a well-drafted written contract serves an important role in protecting brand owners’ interests and reducing legal uncertainties.
Written contract advisable in Hong Kong
At the outset, there is no legal requirement of written contracts in Hong Kong. Indeed, from what we have seen in Hong Kong, the common practice appears to be that brand owners and KOLs would agree on the fee quote and the content of the marketing material through informal arrangements, such as emails and WhatsApp messages. As some forms of KOL marketing are relatively straightforward (for example, the KOL may only need to publish a post on social media and tag the brand owner or use designated hashtags) and the amount of remuneration may not be substantial, some brand owners may consider the risk of disputes resulting from such arrangements to be low. Some brand owners may also find it time consuming and not cost-effective to negotiate and execute a written contract. For this reason, formal written contracts are not always entered into between brand owners and KOLs.
However, if there is no written contract in place and a dispute unfortunately arises, it may be difficult for the brand owner to rely on some of the contractual rights that are normally found in written commercial contracts (such as dispute resolution clauses). The court may also not easily find that there are implied terms in the informal unwritten contract, if other essential terms of the agreement have already been agreed between the brand owners and KOLs.
Written contract is a legal requirement in China
The Advertising Law in China requires written contracts to be entered into between the advertisers, advertising agents and publishers. In terms of livestreaming, the Livestreaming Trial Measures also require an agreement to be entered into between the livestream platform and the manager company. As the same KOL may be represented by different manager companies in different contexts in China (for example drama contracts, music contracts), brand owners are reminded to make sure that they find the right manager companies when engaging KOLs.
To avoid triggering an employer’s legal liability under labour law, brand owners should be careful when drafting contracts and emphasize that the KOLs are independent third parties and are not the brand owner’s employees.
Key elements of brand services agreement
To mitigate the risk of disputes, brand owners are encouraged to enter into brand services agreements with KOLs, so as to clearly set out the respective obligations and rights of the brand owners, KOLs and any agencies involved. As KOLs may lack knowledge and expertise in contractual matters, it may be best to directly engage the KOL’s manager wherever possible.
A properly drafted contract can also help with enforcement. For example, in 2020, a KOL livestreaming company in China was ordered to return the contract price and pay damages to the brand owner after the KOL failed to follow the pre-approved script and made false statements on the price and function of the products during livestreaming.
A brand services agreement should contain at least the following key terms:
Details of the parties involved
Term (e.g. promotional period)
Content and deliverables
Date of publishing
Exclusivity obligation, if any
Indemnification obligations, if any
Morality clause, if any
When engaging external parties to create virtual KOLs, written contracts are important in delineating the ownership of IP rights in the design of the virtual KOL (such as copyright that may subsist in the appearance of the virtual KOLs created), as well as the ownership of copyright in any artwork, music, video or other content created for use by the virtual KOLs. Brand owners are advised to pay attention to the relevant provisions in contracts so as to avoid any subsequent disputes.
While there are no specific laws regulating KOL marketing activities in Hong Kong, existing general laws such as the Trade Descriptions Ordinance and Misrepresentation Ordinance may apply. On the other hand, mainland China has developed more specific laws to regulate KOL marketing and livestreaming activities, and continuous efforts have been made by the Chinese authorities to catch up with new trends in KOL marketing. As additional new guidance (such as the finalized version of the Draft Measures) can be expected in the near future, brand owners would be well advised to keep a close eye on further developments in this space.