Celebrity Endorsement: Meaningful Liability, or Rich and Blameless?

During the past two years, China’s online peer-to-peer (P2P) financial lending industry has been subject to a massive crackdown, with many platforms undergoing criminal investigation for illegal fundraising.  Some users have lost all of their investment due to platform incompetence and, sometimes, fraud.  In response, police have confiscated the revenue of the platforms and even the salary of its employees.  At the same time, most of these P2P platforms have celebrity endorsers who earn large fees.  This has raised the question of whether users can sue the celebrity endorsers for joint liability alongside the platform. To date, celebrity liability has paled in contrast to the endorsement amounts. However, legal practice is changing in this realm, as is the potential liability.

Current Legislation and Practice on Endorser’s Liability

Until 2015, there was no Chinese regulation on an advertisement endorser’s liability, and thus consumers lost any lawsuit against celebrity endorsers. However, in 2015, the Advertising Law was amended, Article 56 of which provides that the endorser of a false advertisement shall bear joint liability with the advertiser.

1. Definition of False Advertisement

The Advertising Law defines a “false advertisement” as one that includes false “information” that will substantially impact the purchase of the product or service.  Such information includes details on the product or service’s performance, function, place of origin, use, quality, specification, composition, price, producer, term of validity, sales status, and honors received; or falsified, forged or unverifiable scientific research achievements, statistical data, investigation results, abstracts, quotations or other false information presented as supporting materials; or claims of false effects from using the product or service.

2. Criterion of Liability

Article 56 of the Advertising Law provides various criteria of liability based on the endorser’s subjective state:

(i) If the endorser recommends commodities or services in false advertisements related to life and health and thereby causes damages, the endorser shall bear joint liability with the advertiser.

(ii) For other false advertisements that cause damage to consumers, the endorser who knows or should have known that the advertisement is false but still makes an endorsement or recommendation shall be jointly liable with the advertiser.

Thus, strict liability is only applied to false advertisements related to life and health products or services. The scope of “related to life and health” is ambiguous but generally will cover food, medicine, infant products, etc.

But the endorser has been found liable even where strict liability is not applied.  For example, in Tan Cihong vs Hubei Shijiang Decoration Design Engineer Co., Ltd and Hubei Radio Television Station (the “Shijiang Decoration Case”), the false advertisement falsely claimed to be “One of the World’s Top 500 Enterprises”, “Whole industry ISO9001 International Certification”, “National Top Double Class A qualification”.  The TV host who promoted the advertisement was regarded as an endorser, and was deemed jointly liable.

3. Administrative Punishment

Separate from civil liability under Article 56, if the endorser has undertaken one of the following behaviors, the market supervision authority will confiscate his or her illegal gains and impose a fine equivalent of 1-2 times the confiscated amount:

(i) Made an endorsement or testimonial for products or services that he or she has never used; or

(ii)Made an endorsement or testimonial while knowing, or having should have known, that the advisement is false.

The first provision above requires the endorser to have actually used the product or service before he or she makes the endorsement. For example, an advertisement where a male celebrity endorsed female sanitary products was strongly opposed by consumers and suspended after the new Advertising Law took effect. However, in practice this limitation is interpreted leniently. For instance, it is still allowable for a male celebrity to endorse baby products (e.g., diapers or milk powder) or cosmetic products (e.g., lipstick), or for a female celebrity to endorse razors or other male products, so long as there is some use of the product by the endorser (even on a third party).

The second provision reflects the language of Article 56: the endorser who makes an endorsement while knowing (or having should have known) that the underlying product or service is not accurately reflected by the advertisement, faces both civil liability and administrative punishment. While the standard of “knows or should have known” is not clearly defined, in practice the endorser should be able to prove that he or she has put reasonable efforts into knowing about the product or service.

Separate from the administrative fines, Article 3 provides that once an endorser is subject to an administrative penalty, he/she is prohibited from being an endorser for three years.

4. Other limitations on Endorsement under the Advertising Law

The Advertising Law also stipulates that, in certain industries, such as medical and health supplements, endorsements or testimonials are prohibited outright.  

Also, the Advertising Law specifies that for products and services in some industries (e.g., agricultural pesticides, academic training), specific parties cannot serve as endorsers, for example, industrial research institutes, academic institutions, and technology promotion institutions.

Finally, minors under the age of ten may not be endorsers, although they may appear in the advertisement in another capacity (e.g., a performance).

Red Flags for Celebrity Endorser

Nowadays, advertising is everywhere and there are many methods of endorsement: a celebrity can act as the image ambassador; become an investor or officer of the advertiser; promote the product via social media or by live-streaming sales events, etc. As long as the celebrity takes part in the promotional activities, he or she may be considered as the endorser and subject to the abovementioned legal liabilities.

Indeed, sometimes the celebrity can have multiple roles. Especially on an e-commerce platform, a live-streaming host can both be 1) the advertisement publisher, since he or she is authorized by the product brand to design, organize and operate the promotional event via his or her live-streaming room on a e-commerce platform; and 2) the advertisement endorser, since the host will test, introduce and persuade the audience to buy the product. Moreover, if the host is selling products for its self-owned online shop, then that individual could also be the advertiser.

When wearing multiple hats, the celebrity will need to be mindful of and fulfill all of their respective obligations under the Advertising Law.  Failure to do so could result not only in legal liability, but also a significant loss of reputation and commercial value, including receiving moral condemnation from public, and loss of fans and potential cooperation opportunities.

To avoid these risks, celebrities who are considering to endorse a product or service should first conduct background research on the product or service, as well as on the underlying company; they should actually use the products or services first hand; and fully communicate with advertisers to ensure that the description of products used in the promotion meets the legal requirements. Especially for financial products, it is necessary to have certain investment knowledge in order to competently review the legal qualifications, operational status and products of the advertiser. To protect the endorser, relevant evidence from throughout that process should be preserved.

Further, the endorsement agreement between the advertiser and celebrity should clearly set out each party’s respective liability. To minimize the celebrity’s loss, the endorsement agreement should state the compensation that the celebrity is entitled to in case the brand is in breach of the agreement or otherwise causes economic and reputational damage to the celebrity.

How do Brands protect themselves through an endorsement agreement?

While celebrity endorsement brings commercial benefits to brands, this approach can be double-edged and cause harm to the advertiser, as problems in the celebrity’s personal or professional life could reflect poorly on the brand.  To help avoid such problems, brands should make sure that the endorser’s lifestyle is in line with the brand’s values and that he or she acts in accordance with the laws and the brand’s guidelines. To achieve this, the celebrity and brand should enter into an endorsement agreement that (a) clearly prescribes the endorser’s required code of behavior to cover any permitted and prohibited language and actions as detailed as possible, (b) includes covenants by the endorser that he/she will not act in a way that adversely effects the brand’s reputation and goodwill, and (c) clearly states the endorser’s liability for violating the agreement.