Feed aggregator

China-US Trade: Why Donald Trump Would be a Horrible Fantasy Baseball League Commissioner

China Law Blog - Wed, 03/29/2017 - 06:58

Trading Babe Ruth was a big mistake. So what?Donald Trump is that fantasy sports team owner who vetoed every trade involving Team China or Team Mexico (except his own, of course).  But now he’s become the league commissioner and he’s promised to fix or renegotiate all of those “bad” trade deals. Yikes.

Donald Trump and Peter Navarro, head of the newly formed White House National Trade Council, are always bitterly complaining about the huge trade deficit the United States has with China and other “bad” countries. But trade deficits should not be equated with unfair trade or with the alleged utter destruction of American manufacturing. This is like complaining that a baseball trade was so bad it caused the team not to win the World Series for, say, 86 years. Or, complaining that your team is suffering from a seven-to-one player trade deficit even though your team gave up seven players who were either nobodies, soon to be has beens, or never will bes, and your team gained a perennial All-Star or future Hall-of Famer in return.

The U.S. trade deficit with China does not mean the United States is losing to unfair trade. Trade of goods is just one part of what drives our economy. Though the United States may run a deficit in the trade of goods (both overall and with China), we run a surplus in the trade of services.  Also, China and Japan each own more than $1 trillion in U.S. Treasury bills, bonds, and other securities. Moreover, foreign companies are “insourcing” and purchasing U.S. assets, such as buying U.S. companies or investing in building new factories, shopping malls, hotels, etc. Harping on the United States’ trade deficit while completely ignoring other economic factors in which the United States has a surplus is an incomplete and misguided way to evaluate how the U.S. economy is performing. Full disclosure: my firm and especially our international trade and our China lawyers have a lot of skin in this game as we generate millions of dollars a year in services directly related to US-China trade.

Looking at trade balances between countries as if they were a zero-sum game to be “won” or “lost” does not make sense because countries don’t actually engage in trade with each other on a national level. Only companies and individuals in each country trade with one another. A trade (for fantasy league baseball players or for real life goods) happens only if both sides believe they are exchanging comparable value with each other. China exports boatloads of goods to the United States because U.S. companies and individuals see those imports as the best value for their specific needs. A good chunk of the imports contributing to the U.S. trade deficit are used to manufacture higher value-added products in the United States. The U.S. imports crude oil for U.S. refineries to produce gasoline and other higher-value petroleum products. Boeing airplanes include all sorts of parts imported from around the world. If Party A and Party B each a consensus that a trade is mutually acceptable, and there is no sign of fraud or collusion, why should the President/League Commissioner intervene and try to fix those so-called “terrible” trade deals?

Even those trades perceived to have been lopsided or unfair does not mean that the losing team on the deal needs rescuing or that the deal should be voided or undone. Teams make stupid deals all the time.

Every team hopes to avoid making bad trades, just as reducing the U.S. trade deficit is not wholly a bad idea. But reducing trade deficits by itself will not restore America’s manufacturing jobs any more than avoiding bad trade deals by itself will get teams a championship ring. The effects of a huge trade deficit or a bad trade deal, either in the market place or on the playing field, tend to work themselves out over time because there are so many other factors that go into the country’s economic performance or team’s performance. A good President/League Commissioner would know better than to try to fix every “bad” trade deal or trade deficit he doesn’t like.

Editor’s Note:  If you talk with people who regularly do business with China, especially people with companies that do business in China, they will mostly tell you that what they/we need is not so much higher duties on imports, but more pressure exerted on China to level the playing field for foreign companies doing business in China.

Categories: Chinese IP

Alibaba and Small Business Owners

China Law Blog - Tue, 03/28/2017 - 05:58

The New York Times had a fascinating piece recently on the problems small business are having with knockoffs on Chinese e-commerce sites run by Alibaba. The story presented three case studies of companies making custom products: Vintage Industrial, a 25-person furniture maker based in Phoenix, All Earz Jewelry, a 1-person online jewelry shop based in Atlanta, and Reignland Concept, a 2-person online clothing store based in Los Angeles.

These companies all discovered multiple Alibaba listings for products that had been reverse engineered based on photographs on the companies’ own websites. Finding the counterfeit listings was the easy part, not least because the infringing listings use photos from the companies’ own websites. Removing those listings, and keeping new ones from cropping back up, has proven to be difficult and time-consuming, so much so that the small business owners are at their wits’ end.

I don’t blame them. Alibaba has a platform where IP owners can request removal of infringing listings, but it’s far from user-friendly. Our firm has never failed to remove an infringing listing, but we’ve been doing it for years and we have a team of Chinese-speaking lawyers and paralegals who understand China’s laws on intellectual property.

The best strategy, of course, would be to design a product that cannot be reverse engineered from a photo. But only a few products can be designed and marketed this way. For everyone else, protecting against infringement starts with registering your IP in China, and in particular any relevant trademarks, design patents, and copyrights. Without China registered IP, asking Alibaba to take down infringing listings will usually be an exercise in frustration.

Trademarks are the easiest to understand and the most important, because as we’ve discussed ad nauseam, China is a first to file country and once your brand gains notice in China, if you haven’t already filed for it someone else will. None of the products in the Times article were even remotely famous, which just goes to show how low the bar is in terms of gaining notice in China. A brand does not need to be famous to be profitable. And here’s the thing: a canny Alibaba seller will not only use the name of the brand but also register it himself, and thereby prevent not only the “true” brand owner but also other infringers from using that brand in China.

Are you listening, startups? I ask this because it is the smaller companies that so often have the problems described in the New York Times article, not because they are small, but because they did not do the registrations necessary to help prevent such problems or to be in a position to solve them if and when they occur. Our China IP team does a lot of work for big companies as well but much of that work is like shooting fish in a barrel. We send Alibaba the proof of our client having registered its trademark or its copyright in China and the offending product comes down.

Design patents protect product designs or aesthetic appearance. In the Times article, both the furniture and jewelry could maybe be protected by a design patent. But a design patent has an absolute novelty requirement: if a product isn’t new, it isn’t eligible for patent protection. And patent protection is country-by-country, so even if the products were protected by patents in the U.S. they wouldn’t be protected in China unless the owner had also filed in China. For companies that can easily tweak their product, this problem can be easily sidestepped; make a new version and it’s eligible for a design patent.

Copyrights protect original creative works in a fixed medium. In the Times piece, the furniture and jewelry could probably also be protected by copyright. China recognizes the validity of copyrights from any WTO signatory country, but if you are serious about taking down infringing listings on Alibaba, you’ll want to register your copyright in China. It just makes the process more smoothly and it increases your chances in making the process go at all.

Unfortunately for Reignland Concept, clothing designs can be difficult to protect under IP laws. Sometimes a clothing pattern can be protected by a copyright and/or trademark (e.g., the Burberry plaid) but that is more the exception than the rule. So although Reignland Concept may legitimately feel that its clothing is being knocked off by an Alibaba, that may just be the way fashion works.

However, Reignland could almost certainly use the protection of copyright infringement in one way: when the infringing listings use the exact photographs from Reignland’s website. The clothing may not be protected by copyright, but the photographs of the clothing are. This takedown approach works when Alibaba sellers are too lazy to take their own photographs, which is shockingly often.

Small business owners should take the Times article as a shot across the bow: no one is too small to need a China IP strategy.

Categories: Chinese IP

Why NOW is the Time to Comply with China’s Employment Laws, Part 2

China Law Blog - Mon, 03/27/2017 - 06:44

In part one of this series, I explained what has changed in China to make employer compliance — especially for foreign companies doing business in China — so important. In this part two, I explain what our China employment lawyers do in our HR audits to ensure that our clients are in compliance with China’s increasingly complicated, increasingly localized and increasingly important labor and employment laws.

An HR or employer audit will make sure you are complying with relevant employer laws (both national and local) and will reduce your regulatory, liability and lawsuit risks. Moreover, a comprehensive review and a full analysis can give you a clearer picture of what’s going on in your workforce and once you have the big picture, you can then determine (and we help our clients with this) the employer-employee problem(s) you need to remedy first.

We usually begin our HR audits by sending our clients a questionnaire to gain a basic understanding of their employer-employee situation in China.  We first ask our clients to provide the registered entity name and address (in both English and Chinese), as well as the official company registration document (usually: business license) for their China office(s). If you don’t have a China entity, there is no way your direct employment of a China employee is deemed legal under Chinese laws and your problems extend way beyond anything an HR audit can fix. See Doing Business in China with Deportation or Worse Hanging Over Your Head. We also ask our clients for an organizational chart of their China office(s), including the employee count for each location and a brief (1-2 paragraph) narrative describing how their China offices are organized and managed, including how HR matters are handled.

In order to complete a document review, we usually request all written employment documents used in their China office(s), specifically including any of the following:

  1. Documents containing job descriptions, including any postings on internal or external websites
  2. Offer letters
  3. Labor contracts (aka employment agreements)
  4. Rules and regulations (sometimes called an employee handbook or manual)
  5. Travel expense policies
  6. Non-compete agreements
  7. Intellectual property protection and/or confidentiality agreements
  8. Education reimbursement agreements
  9. Bonus agreements
  10. Settlement and/or severance agreements
  11. Other employment-related agreements (including company policies) presented or signed by any company representative, or signed by any employee
  12. Any documents filed with the local labor authorities

We want to review the executed copy of any and every document signed by an employee, including each individual employment agreement, along with any employment-related templates or forms used in their China offices. We ask our clients to advise if any of the above documents do not exist.

We also ask our clients to tell us of any any imminent employment related issues or questions they may have, such as imminent employment contract renewals, employment contract revisions in process, employee departures, and new hires. For example, if their China office is in the process of bringing in any new hires, we want to know about any potentially unresolved issues between the new hire and his/her previous employer. See Hiring Employees in China. Ideally, we would also review the employment documents executed by this person and his/her previous employer, but this is not always realistic.

If applicable, we also want to know how past terminations at the company were handled, and to that end we usually ask for a list of any former employees, including:

  1. their hire date
  2. their last date of employment
  3. whether the termination was voluntary or involuntary
  4. whether any severance payment was made
  5. any documents issued to the employee evidencing how the employment relationship was terminated
  6. a description of how the employer handled the transfer of social insurance and employee files.

Finally, we will want to know any particular HR problems the China office has experienced and any HR concerns they may have.

We then review the materials provided to us and we then prepare a written memorandum identifying any employment issues and providing recommendations and estimated costings for remedying the problems found. The time required to complete the audit depends on when the client responds to our questions and on what we find in the files. We then work with our clients to resolve issues that are raised by the audit.

The above may seem daunting at first, however your HR auditor would essentially handle most of the “dirty work” and it certainly beats being fined, named and shamed or criminally charged!

Categories: Chinese IP

China Negotiating Lessons

China Law Blog - Sun, 03/26/2017 - 06:58

Just read a post over at Andrew Hupert’s ChinaSolved Bog, entitled, 5 Negotiating Lessons from Sec. of State Tillerson’s Beijing Trip. Hupert, who I count among the foremost experts at negotiating with Chinese companies, uses Tillerson’s recent Beijing trip as the springboard for explaining five tips on how foreign companies should negotiate with Chinese companies.

Before I get to the five tips however, I want to highlight what I see as one of the best, one of the most realistic, and — most importantly — one of the most accurate descriptions on what it is like to negotiate with a Chinese company:

We’ve seen it before. The Chinese side raises their glasses of Mao-tai and proposes a long relationship of mutual understanding and joint cooperation. The western side “gambei’s” and then makes their own polite toast about “long term cooperation, success, and prosperity”.

Now, at this point the westerners feel they are done with the preliminary small talk, and are ready to begin the opening phase of the REAL negotiation.

The Chinese side feels they are running the new partnership, co-own the intellectual property, and will make all substantive decisions about operations, hiring, and distribution.

If you for any reason do not believe the above accurately reflects how the typical Chinese company views its dealings with foreign companies you should memorize the above and then in one year of dealing with China ask yourself again whether it is accurate or not, because it just is.

Now on to a some of the Hupert five.

That treacherous opening Chinese toast. Hupert notes how Tillerson, “like many western execs before him, . . . doesn’t seem to understand what the Chinese believe he’s agreed to. This is true. Our China lawyers almost never document a China deal without there being at least one issue on which our Western client believes the China side has agreed to something to which it has not. There are many explanations for why this always seems to be the case, ranging from cultural and language differences to the China-side penchant for agreeing to something to get something in return for that agreement and then retrenching from the previously agreed upon item after it has already succeeded in getting concessions from the Western side.

Manage the agenda, and then focus on individual deal points. Western negotiating protocol is to focus on the key negotiating goals, but Chinese negotiators “always” have a larger agenda. Or as Hupert puts it, “too many western executives fighting internal deadlines and hoping to satisfy their HQ sacrifice big-picture strategy for short-term deliverables.”

Watch the timing mismatch. “Don’t make real concessions now for longer-term promises.”  Western companies too often believe that if they make xyz concession to their Chinese counterparty now, their Chinese counterparty will make the next concession the next time around. Wrong. Where we see this a lot is with Western service companies cutting their rates to Chinese customers to “get into China now”  and “build loyalty, all with the plan to raise their prices later. Problem is that the Chinese company for whom you just cut your prices will view your loss leader pricing as their ceiling, not as a floor and it will move on to another naive Western company for its next contract. Or as Hupert puts it

You’re in the same boat – but who is the captain and who is the crew? Hupert concludes his post by highlighting how different perspectives so often can lead to problems down the road. Hupert uses the example of how it is “relatively easy to get a Chinese negotiator to agree in principle to a cooperative partnership,” but how that “cooperative partnership is viewed by the two sides will be very different. “Both sides tend to walk away thinking that they will have the power and authority to protect their interests and further their positions. In practice, however, Chinese tend to feel that they will call the shots on issues pertaining to China.”

For more on how to negotiate with Chinese companies, check out the following:

Categories: Chinese IP

Apple Wins China Design Patent Case: We Told You Not to Panic

China Law Blog - Sat, 03/25/2017 - 22:06

Last year, in the midst of media hullabloo regarding Apple having lost a design patent lawsuit in China, we wrote China’s Design Patent Scourge Has Snared Apple: Nobody Panic, calling for everyone to calm down because Apple would likely prevail in the end. Well Apple just did. Prevail that is. First though a large dollop of background, taken straight from last year’s post.

Big media today has been covering Apple’s BREA design patent dispute with “a small Chinese competitor” and I woke up this morning with my inbox filled with emails from financial analysts and reporters clamoring to talk with me about this news. I assume the other China lawyers at my firm are being similarly inundated. This is obviously huge news and for more on this story, check out the following:

But first, everyone calm down and let me explain.

I went on to make clear that I did not know anything but Apple’s specific case, but felt like I did, because our own China lawyers we had seen so many facially similar design patent matters.

I do not know anything at all specific about Apple’s case. Not a thing. My law firm does not represent Apple on its IP matters, nor do we represent the Chinese company with this patent claim. Additionally, I have not looked at a single pleading in this case, nor have I discussed this case with any of the China IP attorneys in my firm who may (or probably not) know more about this case than I. This post is based on what we have seen (especially lately) happening with China design patents, which is a whole lot.

In the last six months or so, we have gone from dealing with maybe one China design patent matter a year to at least one a month. We cannot pin down this massive acceleration in design patent matters on any one thing and so we simply think that word has gotten out among Chinese companies regarding the effectiveness of engaging foreign companies in design patent disputes.

I then explained China’s design patent laws:

China law defines a design as a shape, pattern, or combination thereof or the combination of a color with a shape and pattern, with an aesthetic appeal and for industrial application. If you think this definition is incredibly vague and potentially broad enough to drive a truck through, you would be right. On top of this, China’s patent office does not “review” design patents before granting them. Or, as I love to tell our clients over the telephone, “I could probably secure a China design patent on the blue socks I am wearing right now.” When I say that, I am being intentionally dramatic, but I honestly believe my chances of securing such a design patent are not that bad.

The other things you should know about Chinese design patents are that the patent grants its holder exclusive use of the aesthetic features of a product not its functioning portion. In other words, the patent is on how the product looks; its external appearance. Not kidding, but it is quite possible that the small Chinese company with the mobile phone design patent could use its design patent against any cell phone company with a product that looks like an iPhone.

I then discussed the design patent cases our China attorneys were handling:

These cases typically start with a phone call from a Western company telling us that some company (usually a company it already knows and usually either its manufacturer or a competitor) just contacted the Western company (or the Chinese company that makes the Western company’s product) and said that the Western company’s product is violating the Chinese company’s China design patent. The Chinese company then threatens to sue the Western company for patent infringement damages and to block any of the Western company’s “infringing” product from leaving China. Needless to say, the companies that call us on these matters are more than a little bit concerned.

Though I am not going to claim that these are pleasant situations or inexpensive for our clients, but I will claim that they are not as bad as they initially appear. I have heard that China issues around ten times more design patents than the United States patent office, which reinforces my contention that I could get a China design patent for my blue socks. There is no substantive examination of a design patent application in China. Instead, all you really need to do to get a China design patent is to complete your design patent application properly. So if I complete the design patent application on my blue socks, and attach a proper and appropriate drawing of them, along with a proper power of attorney and I make the right claims regarding my having designed my blue socks and regarding their being of a new design, I almost certainly will get my design patent.

I then explained why design patents are so weak as are most design patent cases filed by Chinese company plaintiffs:

BUT, my blue sock design patent will be as weak as a kitten. And it is for this reason why China design patent actions are not as scary as they first appear and why I am calling for nobody to panic on Apple’s behalf either.

In the cases we handle nobody has yet actually had customs block their product from leaving China. The reason is because China customs generally requires a party seeking such a block to post a substantial bond. That substantial bond then becomes available to the party whose product has been blocked by customs. Again though, you want to avoid these cases if at all possible because even if you end up prevailing, you will need to incur considerable time, trouble and money to get there.

The difference between the cases we have handled and the Apple one, however, is that in our cases the Chinese companies threaten to get an order blocking our client from having its product made in China, but they never do. They never do because they know the cost of doing so is high and the likelihood of their getting such an order and having that order stick is very low. I read somewhere once that something like 70 to 90 percent of all Chinese design patents get invalidated when challenged. These Chinese companies know that if we were to challenge their design patents we would prevail, so why spend big money only to lose in the end. The Chinese company’s power comes from the design patent threat, not from reality.

In the Apple case, the Chinese company has brought a lawsuit and by doing so it has increased its threat value. Did the Chinese company do this because it has a valid patent? Or is it because it views Apple has having such deep pockets it has decided to go strong in the belief that doing so will get Apple to pay big money in settlement to end the issue? I don’t have the answers.

Most importantly, I predicted both in my blog posts (“Based … on our own history with China design patents, I am guessing Apple will prevail in the end”) and in a CNBC article in which I was interviewed, that Apple would eventually prevail.

Well guess what. Apple just did prevail before the Beijing Intellectual Property Court: “The court ruled that the regulator {that previously ruled against Apple] did not follow due procedures in ordering the ban while there was no sufficient proof to claim the designs constituted a violation of intellectual property rights.” China design patents: fear them just enough to get your own as an offensive weapon, but not too much.

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part XXXVIX

China Law Blog - Fri, 03/24/2017 - 07:46

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

Though it is getting more difficult and expensive for foreign companies to do business in China, China’s burgeoning wealth means the number of companies wanting to sell one shirt to 1 percent of China’s middle class just keeps increasing. Many of those companies are realizing that one of the easiest ways to accomplish that is via their own distributer in China. See That’s Hot: China Distribution Contracts. One of the most common questions posed to our China attorneys about distribution relationships in China is whether they need to be exclusive or not. Oftentimes, these are not even in the form of a question, but rather the potential client or client telling us that they will be giving their distributor an exclusive for all of China because they “understand” the Chinese government requires that.

As we wrote in China Distribution Agreements: Exclusivity Is NOT Required, this is simply not true. Unfortunately, Chinese companies frequently claim this and sometimes even get away with it, sometimes with disastrous results for the foreign company.

Let me explain.

There is no exclusivity requirement in China. None. Nada. Zero. Zilch. 没有.

This means you can have five distributors of your product or in just Shanghai if you want, and then add ten more later. This means you can have an exclusive distribution relationship with one distributor for all of Shandong Province and still have ten distributors for just Beijing. You are legally free to do what you want when it comes to exclusivity in your distributor relationship in China; you are constrained only by the deal you are able to make.

Oh, and one more thing, Chinese companies love to use the term Greater China in their distribution contracts with foreign companies as many foreign companies do not realize that includes Hong Kong and Taiwan and Macao. So be careful about that also.

Categories: Chinese IP

China Policy: READ IT

China Law Blog - Thu, 03/23/2017 - 08:47

Foreign Policy Magazine just came out with an exceptionally clear-headed, exceptionally valuable article on the derivations/influences of China’s foreign policy, entitled (in part and when you see the full title you will probably understand why I shortened it) How China’s History Shapes its Policies Today.

I posted it on our China Law Blog Facebook page with the following lead-in:

Great article by some truly great people. Read it. Study it. This is the sort of article that could become seminal for understanding China foreign policy. Then read it again.

Not much more to say about it other than that if you have any interest at all in China foreign policy, in China’s place in the world, or even in China at all you need (yes need, not should) go read it. Now. Oh, okay, I cannot resist: Those who cannot remember the past are condemned to repeat it.

Your thoughts?

Categories: Chinese IP

China Trademarks: So-So Vibrations

China Law Blog - Wed, 03/22/2017 - 09:28
by Meaghan O’Malley. http://bit.ly/2nE4kcw

The Boston-based hamburger chain Wahlburgers, founded by Hollywood star Mark Wahlberg and his brothers, recently announced plans to open three restaurants in China, with an ambitious goal of opening up to 100 restaurants in China over the next ten years.

The project was announced as a joint venture between Wahlburgers and the Shanghai-based Cachet Hospitality Group. I have no opinion on the deal Wahlburgers struck (aside from a general lack of enthusiasm for joint ventures), but I do have an opinion about their trademark protection: they don’t have enough.

According to the Chinese Trademark Office website, the only trademark registration for “Wahlburgers” is in Class 43 for restaurants (餐馆). Yes, covering restaurant services is essential, but it’s really the bare minimum, and almost certainly won’t provide as much protection as Wahlburgers would want.

To understand why, it’s important to realize how the Chinese trademark system works. With few exceptions, a trademark registration for goods or services in a particular subclass only provides protection for that particular subclass. That’s a double-edged sword. It means that you don’t have to worry about your trademark being rejected because someone else has a confusingly similar trademark in another class (or even another subclass within the same class). But it also means that your trademark registration won’t prevent third parties from registering your exact trademark in other classes.

Here, Wahlburgers should have filed a trademark application to cover not only restaurants but also food. Their trademark registration prevents third parties from operating a restaurant called Wahlburgers, but has zero effect on anyone calling their hamburgers “Wahlburgers.” Moreover, anyone else could register the trademark “Wahlburgers” to cover hamburgers and other food, and then use the tagline “Home of the Wahlburger®” on their menu and in their advertising. I’m sure that wouldn’t sit well with the Wahlbergs or with their Chinese partners.

It’s possible Wahlburgers was under an actual or imputed contractual constraint, as the US registration for “Wahlburgers” had already been licensed from Tom Wahl’s, a Rochester, NY-based hamburger chain whose website proudly proclaims it is “Home of the Wahlburger®.” But any dispute about who had the right to file trademark applications in China should have been sorted out quietly before holding a press conference to announce that Wahlburgers would be opening branches in Shanghai, Hangzhou, and Wuhan. If Chinese trademark squatters haven’t already filed applications for Wahlburgers to cover hamburgers and other food, they will soon.

It’s 2017. American companies going to China need to get their trademark act together. When you’re filing for trademarks in China, don’t think that the same rules apply as in the United States. Operate within the system as it actually is, not as you think it ought to be.

Categories: Chinese IP

How to Sell Your High Value Equipment to China, Part 3

China Law Blog - Mon, 03/20/2017 - 05:58

In my first post in this series (here), I described the five basic attitudes Chinese companies have regarding advanced equipment being sold into China.  In part 2 (here), I set out two of five tactics high value equipment sellers should follow when selling advanced (and therefore expensive) equipment into China: One, do not discount, and two, get paid before you deliver your equipment to your China buyer.

In this, part 3, I wrap up this series by setting forth the remaining three tactics equipment sellers should employ when selling their equipment to Chinese companies.

3. Do not deliver the equipment until first verifying that the conditions for its installation have been met. Remember that the Chinese side believes your equipment works based on an almost “magic” formula and your rules on how to set up for its installation and the specifications for its use are just a subterfuge you use to “hide the magic.” The detailed set up work is therefore unnecessary. Meeting the specifications is not necessary. So the Chinese side will not do the proper set up and they will ignore the specifications. But then when your equipment does not work as it was supposed to, the Chinese side will blame you for its failures.

The following are two (of many) true stories that illustrate how this typically goes down:

  • A heavy equipment manufacturing company delivers iron pipe casting equipment. The conditions of sale provide that the floor of the casting room must be perfectly level. When the equipment is delivered, the casting room has an uneven dirt floor. The casting machine does not work and the Chinese side does not pay a single penny on the contract. The Chinese bank that guaranteed the payment sides with the Chinese buyer. Why create a level, clean concrete floor for a dirty machine used for metal castings, one of the China company’s engineers asked at one point.
  • A water power equipment manufacturing company delivers a new hydropower generation set of equipment. The specifications provide that the current flow can never exceed 6 knots. When the equipment is delivered, the Chinese side installs it in an unapproved location where it is well known the current exceeds 8.5 knots. Within one year, the entire facility is destroyed. The Chinese side defaults on the last payment and the reputation of the foreign company is destroyed. The foreign company lost money on the project and never did another sale in China.

Foreign equipment sellers cannot rely just on clear contractual specifications and then relying on the specifications when there is a problem. The foreign seller should itself ensure the conditions are met before it delivers the equipment. And if the conditions are not met, the foreign seller should not deliver. If there is a cost in confirming your Chinese buyer has met the specifications (and there usually will be), you should build that cost into the cost for your product. Remember: the failure of the installation is always your fault and the Chinese side will always find a way to make you pay for that failure. We have said this before and it made people mad, but some of our most experienced and sophisticated and successful China essentially charge a premium to Chinese buyers simply to cover themselves in advance against these sorts of problems.

4. Build required training and after sales maintenance and support into the price of the equipment. No matter how much your potential Chinese buyer tries to get you to decouple the pricing for maintenance and support (and then eliminate it entirely) do not make these optional add-ons that are billed for an additional fee. If you make these optional and charge extra for them, the Chinese side will almost always choose not to pay. So you have to force them to accept training and support as part of your sales price.

Why do the Chinese refuse to pay? Your trying to require them to pay for after sales maintenance is just you admitting that your product is somehow defective and why should they buy a defective product. If properly manufactured your equipment should work forever, with no service or maintenance required and your trying to make the Chinese side pay for training and service as an add-on is you unfairly seeking to increase the price of a product that is already unfairly expensive.

There is one exception related to training. If the Chinese side is planning to clone your equipment, they will seek extensive training in how the equipment operates. Their goal though is not training; their goal is to somehow obtain the formula that will allow them to clone your machine. For this reason, you should carefully control your training with Chinese companies.

During training, the Chinese side will ask for more information and more training time than is necessary. They will also insist on visiting the U.S. manufacturing facility and they will expect to spend substantial time in that facility. For this reason, all training obligations must be carefully defined to prevent your costs from skyrocketing out of control. You should carefully limit time, location and access to information. One good way to control this is to require the Chinese pay by the hour for all training provided in excess of the basic training included in the purchase price.

Many foreign equipment suppliers say they will provide whatever training proves “reasonably” necessary. This sort of an approach is nearly always a mistake because neither Chinese companies nor Chinese courts truly understand or employ the concept of reasonable. You therefore should state state with precision the training you will be providing, where you be providing it, who will be providing it, and for how many hours you will be providing it. The same rules apply to provision for after sales support. Chinese companies tend to abuse after sales support obligations. So those obligations should also be spelled out clearly in your contracts as well. Again, I base this not on any “feelings” I have about China, but based on my having represented countless foreign equipment sellers on countless China equipment transactions and on what I have heard from other equipment companies and from other China lawyers who represent them.

5. Protect your IP through with a China-centric contract. Protecting the intellectual property you have in the advanced equipment you sell into China should be a core goal in all of your sales. Understand the basic approach from the Chinese side: your product is too expensive and b) any form of IP protection is just a unfair device you are using to force them to pay the unfair price of the machine. So the goal of the typical Chinese company is to purchase one or two items at a bargain price and then clone them in China at a “fair” price.

The obvious way to protect the intellectual property in your advanced equipment is to register your patents in China. But for various reasons (including time bars) this is often not possible. Where there is no patent registration (and oftentimes even when there is), your best solution is to incorporate basic IP protections into your sales agreement. This is essential for China.

To accomplish this, either your sales contract or a collateral agreement must provide for the buyer agreeing to the following:

  • Buyer will not reverse engineer or manufacture a copy/clone of the product or engage any affiliate or third party to do the same. A complex legal definition is not required. A blunt, simple statement (in Chinese) is what is required.
  • Define confidential information information (such as the information you provide in training and support) and require no confidential information can be used by your buyer or by any affiliate or by any third party to infringe on your product.
  • Provide for monetary damages if these restrictions are violated. Injunctions rarely work in China, so contract damages are required.
  • Impose these restrictions with a written agreement enforceable by litigation in China. This is a key requirement. Your English language sales agreement that is enforceable in the New York or in London or in Geneva is not going to be helpful in protecting your IP and if it makes sense for you to use that sort of agreement on the sell side (and sometimes it does), you should have a separate IP protection agreement in Chinese, subject to Chinese law and enforceable by litigation in China.
Categories: Chinese IP

Why NOW is the Time to Comply with China’s Employment Laws

China Law Blog - Mon, 03/20/2017 - 05:58

This is the first of a two part series on why it has become so important to comply with China’s labor and employment laws and how best to make sure your company is in compliance. In this first part, I briefly explain what has changed in China to make employer compliance — especially for foreign companies doing business in China so important. And in part 2, I explain what our China employment lawyers do by way of Human Relations audits to ensure our clients are in compliance.

Over the last few years China and Chinese employees have become serious about enforcing China’s labor and employment laws. I defy you to find any foreign employer in China that has not had their employer decisions legally tested in the last few years. And thanks to a new law called Measures of Public Disclosure of Significant Violations of Labor Protection Laws that took effect on January 1, 2017, China employers that violate China’s labor protection laws face the additional threat of being “named and shamed.” The following violations of China’s labor laws may be made public by the relevant labor authorities:

  • Failing to pay “substantial” employee remuneration
  • Violating the laws on working time or rest or vacation and the circumstances are “serious”
  • Violating any child labor laws
  • Failing to pay employee social insurance and the circumstances are “serious”
  • Violating the special rules on protecting female workers and underage workers and the circumstances are “serious”
  • Causing significantly bad social consequences due to violations of labor laws
  • Other serious illegal conduct

Like pretty much everything related to China’s employment laws, enforcement of these naming and shaming measures is going to depend on the locale. Guangdong Province, for example, has been disclosing labor authorities’ rulings on employer violations even before the new law was implemented. According to Guangdong published rulings for the first three quarters in 2016, the first three violations mentioned above: (1) failure to pay employee remuneration, (2) overtime law violations and (3) using child labor have been the most common illegal practices. Labor authorities are cracking down particularly hard on employer failure to pay employee remuneration.

What is considered a “substantial” failure to pay? If you owe 10 employees wages, you will no doubt be penalized and your violation will be made public. If you owe one employee a substantial amount (could be as low as 20,000 RMB), you may be listed as well. In other words, the threshold is not terribly high, especially for foreign companies whose employee wages tend to be higher. And since the labor authorities have gobs of discretion in deciding whom to name and shame, we are expecting foreign companies to get less slack. Egregious violations subject employer companies and the person-in-charge to criminal liabilities. Failing to pay substantial employee remuneration is a crime and will be prosecuted. This is not something you want to get wrong.

So if you employ anyone in China, now is the time for you to get compliant. In tomorrow’s post, I will set out our method for accomplishing that.

Editor’s Note: Whenever we write something related to ensuring compliance with China’s employment laws, companies with no legal entity in China contact us “to get into compliance.” If you have “employees” in China but no company in China, your problems go way beyond what is written above. For how to handle that sort of situation, you should check out Doing Business in China with Deportation or Worse Hanging Over Your Head and follow and read the links in that post. Now!

Categories: Chinese IP

How to Sell Your High Value Equipment to China, Part 2

China Law Blog - Sun, 03/19/2017 - 05:58

In my previous post in this series (here), I described the five basic attitudes Chinese companies have regarding advanced equipment being sold into China. Given these attitudes, what should a foreign seller do? In this part 2 post I set out two of five tactics high value equipment sellers should follow when selling advanced (and therefore expensive) equipment into China. In part 3, I will wrap it up with the remaining three tactics.

1. Do not discount. The first mistake most Western companies make when selling their high end equipment to China is to discount its price. The usual explanation my clients give me for doing this is that “we will discount the first equipment sale and then make up for that discount on future sales.” Wrong.

If you offer a discount you are simply confirming the China side’s basic assumption that your price is too high and you will virtually never get the opportunity to make up for the discount. The Chinese side will do one of two things. Some buyers (especially state owned enterprises or SOEs) will treat the initial discounted items as “samples” they will distribute to other enterprises to be cloned in China. For other buyers, the discounted price will treated as a new floor price for the product. If additional purchases are discussed, the Chinese company will then ask for an additional discount against your already discounted price.

It is therefore critical you hold the line on price. You may perhaps offer a very small quantity discount for purchases of multiple units. You may even offer a small “customer loyalty” discount for return purchases. But never offer a major discount for the initial purchase. Hold the line and explain that your price is both fair and the same price you offer to everyone in the world, on the same terms. What reason is there to change this policy for China?

2. Get paid before you deliver. For companies that are successful in selling to China, this is the golden rule. There really is no alternative. In many countries, issues related to payment can be resolved through the use of carefully drafted letters of credit. Chinese buyers, however, will only use Chinese banks for their letters of credit and those banks will always favor their Chinese buyer customers, so the letter of credit approach will not work for China.

For Chinese companies planning to clone your equipment in China, paying you by installments fits perfectly into their plan. The standard approach works as follows. Set up a system with five installment payments. The equipment will be delivered and installed in stages, in accordance with the installments. Then, the Chinese company will delay payment from the very start and then use the payment delay (which it will usually blame on China’s capital controls or some tax issue) to push the foreign side to deliver more than is required for each installment. The Chinese company will then reluctantly make a payment or two, all the while extracting equipment, training and know-how. When the Chinese side thinks it has gained  “enough” from what you have already provided it, the payments stop. The common standard is to make two of five payments in exchange for 50% of the product and expertise. Our China lawyers warn our clients about this all the time and yet it just keeps happening.

Other Chinese companies will use installment payments to force you to discount. The Chinese side will negotiate for a series of installment payments with a major final installment to be paid after installation and approval by the Chinese side. This approach virtually never works well for the foreign seller as Chinese companies are expert at finding problems with the equipment. The Chinese side will raise these problems as excuses for continual payment delays and then use their own delays to seek an after the fact discount in price from you, while holding the installment payments as hostage to achieve this goal.

If the Chinese company is unable to secure its desired discount from you during the basic installment period, it simply will not make the final payment, achieving a 10% to 15% discount by that single refusal to pay. If the foreign side threatens to sue for that final payment, the Chinese side will trot out a list of problems with the product and its installation — normally problems the Chinese company itself caused. However, this will still be enough to convince the foreign side seller that it will need to mount a long and expensive legal battle to get that final payment and that doing so probably will not make sense.

It is important to note that these tactics by Chinese companies are not unusual. Your price is too high, so they do not see themselves as acting unethically; they are just leveling the playing field. I have spent about half of my life in China and I have heard this reasoning about once a month while there.

Categories: Chinese IP

Your China Counter-Party Has a U.S. Subsidiary: So What!

China Law Blog - Sat, 03/18/2017 - 13:01

Does the Chinese company with which you are doing a deal have a United States subsidiary? Does this mere fact make you feel better about doing a deal with its China parent company? Why? Do you not realize that it is likely to be legally irrelevant?

The always excellent, always informative, Hague Law Blog (by Aaron Lukken) wrote about this in the context of service of process in its post, You can’t simply serve a U.S. subsidiary. Aaron starts out by discussing how you need a compelling reason to “pierce the corporate veil” of a subsidiary company to each through and assert claims against its corporate parent since “the whole purpose of a corporation is to be a separate entity, a separate being from its owners, shielding the owners from liability if they didn’t have a part in wrongdoing.”

A couple years ago I was retained as an expert on corporate veil piercing for a case in Korea. As part of my work on that case, I researched the current state of corporate veil piercing and since that time I’ve probably stated something like the following to fellow lawyers at least a dozen times: “You know how difficult it is to pierce a corporate veil, well it’s even more difficult than you think. It seems that courts are now pretty much uniformly of the view that everyone now understands that Limited Liability companies and corporations protect the owners of those entities and corporate veil piercing is now nearly impossible unless there has been real fraud somewhere along the way.” Or to put it in non-legal terms, it ain’t gonna happen.

And yet again and again really smart in-house lawyers seem to ignore this when doing deals with big Chinese companies with U.S. subsidiaries. I cannot even count the times where such a lawyer has told me that they are not terribly worried about being able to pursue the big Chinese company on the other side of their deal because “we can always go after them here in the United States.” Wrong. Wrong. Wrong. Unless the U.S. subsidiary is a party to the contract or a guarantor on the contract, to go after that subsidiary you need to be able to pierce the corporate veil and that ain’t gonna happen. When I tell them this, they then talk about how they still can seize the Chinese companies ownership interest in that U.S. subsidiary as if that is no big deal. But the problem is that is a really big deal and any Chinese company worth its salt has structured its ownership of its U.S. subsidiary through various levels of Hong Kong and Cayman Island and Virgin Island companies. So yes, if you are willing to spend hundreds of thousands of dollars investigating the corporate trail and engaging in discovery on just this one issue, you might succeed. But really?

Our China lawyers see the result of this thinking with contracts between American and Chinese companies that call for disputes to be resolved in a U.S. court. At least once a month, one of our China attorneys will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays. As we have so often written, this will not work:

After we tell the American lawyers how difficult it is to collect on a U.S. judgment against a Chinese company (note that I say difficult and not impossible — it is possible to employ “other methods” to collect on such a judgment), they will sometimes explain that is okay because they can still go after the U.S. subsidiary of the Chinese company with which they have the contract. But as stated above, that is expensive and difficult and may or may not lead to a good result.

Aaron’s post focuses on how service of process on a foreign company’s U.S. subsidiary does not constitute service on the parent company and he uses Chrysler Motors as an example:

Take Chrysler, for example. When you sue Chrysler over a defective Jeep, you’re pretty solid in just serving the Michigan outfit. But if you allege liability on the part of the parent company, Fiat Chrysler Automobiles, N.V. (which we’ll just call FCA here– and I don’t mean the Fellowship of Christian Athletes), serving in Michigan ain’t gonna cut the mustard. You have to go abroad to get FCA on the hook. You can’t just hit Chrysler and assume that FCA is in the case, too.

The corporate veil doesn’t get pierced just because it hangs overseas.

Which means that if you want to serve Chrysler Automobiles N.V. you must do so in the Netherlands, where it is based. Again, it’s because the subsidiary is not the equivalent of the parent and vice-versa and as much as you may wish it otherwise, it ain’t. The same holds true for your China contract.

 

Categories: Chinese IP

China Product Manufacturing and Protecting IP: It’s Complicated

China Law Blog - Fri, 03/17/2017 - 10:33

When our law firm started drafting manufacturing agreements on behalf of Western companies having their products made by Chinese manufacturers, we mostly dealt with simple items like socks, shoes, rubber duckies, etc. Those contracts were relatively fast and cheap and easy. You Chinese company will make rubber duckies out of these specific materials and with these additional specifications and you will delivery them to our facility in the United States or in Spain or in Australia within 45 days after we issue our purchase order. We pretty much always charged a flat fee for these agreements. Those days are mostly over for China, though these sorts of agreements are still relatively common for Vietnam, Cambodia, Thailand and Sri Lanka. These days the typical manufacturing agreement on which our China lawyers work is far more complicated because the products made in China are far more complicated. And with complicated products comes complicated intellectual property issues involving trade secrets, trademarks, copyrights and patents.

I called up an email this morning to review a China intellectual property issue on an existing matter. That first email led me to a couple more emails and today’s idea for a blog post. The below is a merger of three emails (further modified to remove any identifiers), which should be helpful to anyone looking to manufacture IP sensitive products in China, especially those that include software.

Oh, and for further incentive to get you to parse through the below email, you may want to first read China and The Internet of Things and How to Destroy Your Own Company to see what can happen to companies that fail to realize how critical intellectual property protections have become when having their products made in China.

 

We still need more clarification regarding the issue of ownership of the various technologies that will be going into your product.

Based on my review, there are four separate forms of technology embodied in this single product:

  1. The case or external shell.
  2. The internal mechanism: electrical/mechanical.
  3. The internal mechanism: firmware.
  4. The smartphone/computer application software.

Based on this, my questions are as follows:

1. For the external shell (Item 1):

a. Who will do the design? Who will prepare the actual CAD drawings for the mold? Who will fabricate the physical molds?

b. How and when will you pay for the molds to be made? Will you do this as part of a separate contract or will you fold this process into the manufacturing agreement?

c. Note that you will need to be clear that you own the shell design. If it will be done before/outside the manufacturing agreement, we will a clear document that provides for ownership and control. Note that if a third party does the mold (which is likely), there is a risk of the third party appropriating the design and selling it to someone else. However, for this specialized product, the risk is low.

2. For the application software (Item 4):

a. Who will create the application software? If it will be outsourced, you need to know. If it will be done in-house, will it be done by _________? You need to know.

b. Has a fee and timeline been determined for the software application? If so, what is it? If not, when will this be done?

c. What if the application software does not work? What if the application software does not have the “look and feel” you want? How will you work with the programmers to ensure all this is done how you want?

d. The fee, once determined, will be amortized against the purchase of the first 200 units. Does this mean the price of each of the first 200 units will be increased by 1/200 of the application software fee? What happens if you never buy more than 200 units? What happens if you end up buying only 100 units? You need to determine the fee to be sure this makes economic sense for you.

e. Will you own the application software copyright for the entire world? If so, we will need to specifically provide that the application software will be done as a “work for hire” and that your company will own the copyright on it. If you own the copyright, the Chinese side cannot sell the software to anyone else or use it for their own purposes. Will they agree to this? If the Chinese side is sophisticated, they will NOT provide you with the software copyright because they plan to reuse the core software for other projects. In fact, they may not even own the copyright to the core software. They may instead agree only to provide you with the rights to the “look and feel.”  Many U.S. buyers ignore these software issues, leading to many problems down the road. You may recall that the multi-billion dollar legal battle between Apple and Samsung is centered on these difficult “look and feel” issues.

3. For the electro-mechanical/firmware (Items 2 and 3).

It is not clear who will own and control this item because there is an internal contradiction in the description. On the one hand, the Chinese side says it will provide you with all data necessary for your company to patent and copyright items 2 and 3 in the U.S. (Note that firmware is protected by copyright, as are mask works and related). This means you would then own 100% of the rights to items 2 and 3 for the United States: permanently and forever, to the exclusion of everyone, including _________. This means you would not even be required to purchase the product from ________ because you could have it manufactured by anyone in any location where a conflicting patent and copyright has not been registered. It also means even if you do not secure a patent or copyright on this, you still have an exclusive and perpetual license to the technology for the U.S. This perpetual license would have essentially the same effect as a patent or copyright registration with respect to your relation to __________ and its attempts to license to any third parties in the future. The point here is that a patent is not revokable; once you have it, it is yours for the term. On the other hand, the Chinese side wants to have the right to allow other U.S. entities to make use of the technology to sell competing products in the United States if your company does not meet certain sales quotas. Under this approach, the Chinese side is providing you with essentially a limited license with these terms: a) the product must be purchased from _________ and no one else, b) your sales territory is limited to the United Sates, and c) your license terminates if you fail to meet the sales quota. This has in fact become the normal approach for sophisticated Chinese companies making products like yours.

The issue though is that these two approaches are contradictory. Only one can stand. So which one is it? As I have noted, the second option (limited license) is most common. However, that means your company’s product development would be placed on a very weak footing because your entire product line could be terminated if you fail to meet the sales quotas. This termination could come either from the license becoming non-exclusive, (allowing the Chinese side to license to and manufacture for other U.S. companies) or from the Chinese side terminating the agreement.

This issue goes to the core of your agreement and so it is crucial that we get clear on on this for the agreement. As noted, most Chinese manufacturers/designers will take the limited license approach instead of terminating the agreement. If this is their approach here, their offer to provide you information for a patent application is not consistent because a limited license and absolute ownership rights are contradictory.

4. There is an additional issue related to the rights of non-U.S. entities to sell into the U.S. market. This can only be resolved after we get answers to the questions above.

5. There is an additional issue concerning what to do if _________ is unable or unwilling to manufacture your product at an acceptable price, at acceptable quantities, with acceptable delivery dates and at an acceptable level of quality. If ________ owns the core technology and is merely providing you with a limited license you could find yourself “stuck” with bad pricing, bad quantities, bad delivery times and/or bad quality products. The normal remedy would be for us to state that if any of the above problems occur, you have the right to have your product made by some other manufacturer and that ________ will provide you with a license to the technology that will allow this. Though this is the normal remedy, many Chinese manufacturers strongly resist this, putting you in a difficult position. You have indicated that ____________ will be required to accept purchase orders that meet the price agreement. You have also provided for penalties for late delivery and for defect issues. Though this is not ideal, it may be the best you can do in your current bargaining position. So the key issue is whether you are required to purchase from __________ or not. If you are required to purchase exclusively from ___________, you will need to face the fact that you are in a very weak bargaining position on many critical business issues and ____________ can fairly easily make life difficult for you by forcing you to fail to meet the sales quotas that will then enable it to start working with U.S. company that competes with you.

Please advise on the above. After we get clear on these various issues, I can begin drafting the agreement. I realize these issues are difficult, but it it is best to take a clear position from the start. Please let me know if you have any questions or if you need any additional explanations.

Categories: Chinese IP

China Employee Social Insurance: Make Your Payments In Full

China Law Blog - Thu, 03/16/2017 - 08:41

Chinese law mandates employers provide their employees certain mandatory benefits, including social insurance. China has five types of social insurance: pension, medical, unemployment, maternity and work-related injury insurance. The specific types of social insurance employers must provide and their contribution formulas vary depending on the employer’s location. Many foreign employers in China do not realize that failing to make full payments on required social insurance gives their employees the legal right to unilaterally terminate the employment agreement without providing any prior notice and then turn around and sue the employer for damages.

Just to make things more complicated for China’s employers, China has several forms of social insurance violations. You obviously violate the law if you don’t pay any social insurance at all, but the violations by foreign employers in China I most commonly see are more subtle and complicated than that. We see violations when employers fail to pay social insurance for the entire term of employment. This violation often happens when the employer thinks it need not pay social insurance during an employee’s probation period. We also see violations involving employers failing to pay for all five types of social insurance. And with rising wages in China, we have lately been seeing a rash of employer problems arising from paying social insurance based on a lower salary than is actually being paid, either because the employer failed to update the salary amount or because it intentionally reported a lower salary so as to reduce its employer contribution. These are the sorts of things we constantly look out for in our HR audits.

Employees may consent to the employer claiming a lower salary but that is irrelevant once caught or even once reported by the employee who consented. In a fairly recent case out of Jiangsu Province, the court reinstated the employer’s obligation to pay for all required types of social insurances at full rates the entire time. I am simplifying the facts for this post, but basically the employee’s monthly salary was higher than 7000 RMB, and the employer only contributed social insurance as though the salary had been 2200 RMB. The employee terminated the employment relationship and sued the employer for severance, arguing that he had been forced to leave his job because the employer failed to pay mandatory social insurance. The case went from labor arbitration, to trial, to appeal and then the employer petitioned for re-consideration by the Jiangsu Province High People’s Court. The employer lost every single step of the way (which really should have been no surprise to any experienced China employment lawyer, sorry!) and was required — among other things — to pay the employee for statutory severance.

Each step of the litigation process, the employer made the following three (futile) arguments. One, the employee never objected to the arrangement of the employer misstating the employee’s salary and therefore underpaid the employee’s social insurance. Two, because the employee never voiced any objection to the social insurance payment arrangement, the parties essentially agreed on a different base for social insurance payments. Three, the employer’s failure to contribute the full amount of social insurance was not the same thing as failing to make any contributions at all, so the employee was not entitled to statutory severance. The Jiangsu Province High People’s Court rejected all arguments and explicitly (and rightly) stated that the laws on social insurance are clear and the employer’s failure to contribute the full amounts based on the employee’s actual wages entitled the employee to terminate the employment contract and receive statutory severance pay from his employer.

To reiterate what is becoming a fairly regular theme of my China employment law posts, most China employment laws cannot be contracted away and an employee’s written consent does not change that. An employee’s written acknowledgement that he or she specifically asked for a particular employment arrangement also does not change that.

As a foreign company doing business in China, you are under a microscope and you will be treated differently than domestic Chinese companies. This means that you are both more likely to get caught on employer violations and more likely to get called out and treated harshly when caught. In our experience, if the labor authorities are not pursuing you for non-compliance, your employees almost certainly will either before or certainly after they leave. This brings me to another point. If your employee tells you she is leaving her employment and alleges she has been forced to quit because of employer wrongdoing (or even just provides inconsistent stories about why she is leaving), you should immediately work on resolving those problems (which is exactly what they are) before she takes you to court.

 

Categories: Chinese IP

Doing Business in China: Structuring Your Deal and Protecting Intellectual Property: A March 30 Webinar.

China Law Blog - Wed, 03/15/2017 - 05:58

 

On March 30, China Law Blog’s own Dan Harris will be putting on a webinar on the legal aspects of doing business in China, with a focus on how to structure your Chinese operations and deals so as to protect your IP. This webinar is being put on by CommercialLawWebAdvisor, which describes it as follows:

Companies often cannot afford not to do business in China. Whether producing goods there or selling to the Chinese market, companies that engage in business with Chinese partners need up-to-date legal advice on how to protect their technology and other intellectual property (IP) interests from being counterfeited, pirated, or otherwise misappropriated. As IP theft is one of the top issues facing businesses operating in China, there are substantial risks companies must identify and address proactively to protect their valuable IP assets. Deals made in China can threaten IP rights not just in China, but in markets around the world. Understanding the Chinese IP landscape and how to manage the pertinent issues can go a long way to safeguarding your client’s valuable IP interests.

Please join Dan Harris as he explores the nuts and bolts of constructing a good business deal with a Chinese partner, what your agreements should include, and how to manage the Chinese IP rights framework to minimize your client’s IP-related risks.

WHAT YOU WILL LEARN
This webinar will cover:

  • How to choose a good Chinese partner
  • Identifying the IP assets that need protection
  • How to structure your deal
  • Drafting your deal papers
  • Drafting China employee contracts to protect your IP
  • IP registrations: What you should know about trademarks, patents, copyrights, and licensing agreements

YOUR CONFERENCE LEADER
Your conference leader for “Doing Business in China: Structuring Your Deal and Protecting Intellectual Property” is Dan Harris. Dan is an attorney with Harris Bricken, LLP, in Seattle. He is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players have looked to him for his perspective on international law issues.

Dan writes and speaks extensively on Chinese law with a focus on protecting foreign businesses and his China Law Blog is regarded as one of the best law blogs on the web today. The ABA Journal recently named the China Law Blog to its Blawg Hall of Fame (a designation given to the top 20 law blogs of all time).

This session is recommended for corporate and in-house counsel and really for any attorney who advises companies or organizations on China and on China IP issues. It also is good for intellectual property attorneys looking to learn more about China IP law and what makes it so different from common law countries.. Find out more about costs and registration here and for a $35 discount use promo code cw17bc.

We hope to “see” you there.

Categories: Chinese IP

The China Company within YOUR Company

China Law Blog - Tue, 03/14/2017 - 14:33

Many years ago, a very good client of mine in the international food brokerage business learned that one of its employees had set up a rival company and was using my client’s resources to generate business for that rival company. To grossly oversimplify, whenever this employee would find a particularly good deal on product, it would buy and then resell that product on behalf of its own company, not on its employer’s behalf. I lead with this to emphasize that this sort of thing can and does go on everywhere. It also gives me an opportunity to relive how much fun it is for us lawyers when a US company discovers an employee doing this sort of thing.

We also once had a client that sold $1500 consumer products and received a complaint email from one of its retailers claiming to have received more than $80,000 of product in less than stellar condition from “XYZ distributer.” This email alarmed our client as it had NO distributers and it had no record of any sales to this retailer. To make a long story short, the profit margins from selling millions of dollars of products that cost you nothing to make are astronomical.

This sort of thing — what some call a company within a company is very common in China. See this classic Financial Times story from many years ago. So common in fact that when our China lawyers have been involved in confronting employees that engaged in such conduct, their usual reaction is not one of “I’m really sorry, go ahead and fire me, but rather something more like the following:

  • You never told me I could not do this.
  • The employer rules and regulations do not prohibit this so I did it.
  • If you fire me, I will sue you for xyz.
  • If you fire me, I will report you for xyz.

We typically advice our clients not to confront China employees that have gone rogue without first making sure that they have good grounds for termination and that such a confrontation will not be putting the company at great risk. See China Employee Termination: Avoid These Mistakes.

What though can and should you do to prevent this sort of thing from happening to you in China?

  • Recognize that you cannot just turn over your China operations to any one person and essentially just walk away. Do not have a business in China unless you are prepared to operate it and monitor it.
  • Do not put too much trust into a small core of employees, shutting out the lines of communication to the other employees, and failing to engage in even basic monitoring of the business.
  • Listen to your China employees and talk with your China employees. It is a big deal for one Chinese employee to “rat” on another, but in most instances where we have come across “a company within a company situation” there has been at least one employee who has been hinting at problems and the foreign office has just shrugged them off. Oftentimes, the employee will have sought to convey information about the problem in the form of a question, such as “do you think it might make sense to have our books audited early this year” and then been “shot down” by a foreign office that does not press for why this question is being asked.
  • There are certain “tells” for which you should also be looking. Is there a small group of employees that seem to want to block other employees from receiving critical information or data? Are you seeing invoices or purchase orders that do not make sense? Does what is happening on the ground look or even feel very different from what the books say.

I could go on and on with how to prevent this sort of thing and there are tons of articles out there on this as well. I will instead simply conclude by saying that this sort of thing is far more likely to happen to the company that believes it cannot happen to them than to the company that believes vigilance is necessary.

Not trying to scare anyone here, but do be careful out there.

 

Categories: Chinese IP

China-Hollywood Deals: Not So Fast

China Law Blog - Mon, 03/13/2017 - 09:08

Several stories came out this past week reporting on the recent failure of Chinese investments in Hollywood. Wanda’s highly publicized purchase of Dick Clark Productions, long rumored to be on the rocks, has fallen through for good, because Wanda paid only $25 million out of the $1 billion purchase price. Paramount’s deal with Huahua Media and Shanghai Film Group is foundering because Paramount hasn’t seen a red cent of the promised $1 billion. And more than a few people doubt whether Recon Holding’s $100 million deal to purchase 51% of Millenium Pictures will close.

Most – okay, all – of the lawyers who deal with China on a regular basis saw this coming from a mile away. Some context:

  1. Hollywood deals fall apart all the time. It’s the nature of the business, and hardly unique to Chinese-invested projects. But those deals have been getting more attention lately because so much of the money coming in is from China.
  1. Chinese investors have developed a not-completely-undeserved reputation as “tourist investors,” particularly when it comes to Hollywood: arriving with great fanfare, taking meetings with players across town, kicking the tires of every studio and production company that may be interested in Chinese investment (which is to say, every studio and production company in Hollywood), suggesting that a deal might be imminent … and then going back to China without agreeing to anything. See China Business Deals: What China Business Deal and China MOU. Like I Really Care.
  1. Because the Chinese yuan is a regulated currency, it’s always been difficult to get money out of China. We’ve been writing about this for a while, and in fact almost exactly one year ago I wrote a post in which I said, “Long story short, we can expect to see more US-China film deals fall through for lack of funding, and it won’t necessarily be the fault of the Chinese company.” Then my colleague Mathew Alderson wrote a three-part series of blog posts during the summer, followed by Dan Harris’ own five-part series in December. Chinese film companies are simply not free to do whatever they want with their own money; the government gets to decide.
  1. Chinese regulators are clamping down on any foreign investment deals, both because of the hundreds of billions of dollars leaving the country as capital flight, and because as a policy matter China wants to discourage “inefficient, uncreative Chinese companies that are simply achieving growth through acquisition.” Add to that increased scrutiny from U.S. politicians, and it’s not exactly Springtime for Renminbi.

Hollywood can bemoan the spigot being turned off, but there wasn’t nearly as much money coming in as was previously thought. It’s still not impossible to get money out of China, but you should say goodbye to buying sprees by Chinese companies snapping up Hollywood assets for no other reason than to convert their currency (cf: the scrapped sale of Voltage Pictures to Chinese metals company Anhui Xinke New Materials).

In light of the new reality, here are some tips on how everyone from studios to production companies to producers should proceed:

  1. Require the Chinese counterparty to pay a nontrivial amount of money upfront, and don’t begin performance until you receive it. If your contract doesn’t pass muster with Chinese regulators, you need to know as soon as possible. Your not receiving the upfront money is a really good sign that the deal itself will never work.
  1. If your deal is with a Chinese company with no presence in the U.S., don’t negotiate or draft it like a typical Hollywood deal. We review entertainment agreements all the time that are in English, governed by California law, and enforceable via arbitration or litigation in Los Angeles – and therefore virtually unenforceable against the Chinese party. You need an agreement written in Chinese, governed by Chinese law, and enforceable in Chinese courts. Do not fall into the trap of believing that because your counterpart Chinese company appears to have a tiny U.S. affiliate company that setting up your dispute for U.S. court resolution will work, because it almost certainly will not.
  1. Instead of fixating on money that your Chinese partner can transfer to the US to finance your slate of American films, start thinking about money that your Chinese partner can spend in China. Perhaps that means a shift toward co-productions in China. It might also mean more deals like the one for Resident Evil: The Final Chapter – ostensibly a buyout, but with profit participation for the production company.
  1. Consider forming a WFOE in China and having it becoming a profit center. China generally has no problem with WFOEs remitting money to their parent companies once all of the WFOE’s taxes have been paid.

It would be a mistake to assume this is just a temporary hiccup and that Chinese companies will be back investing huge amounts in Hollywood in a few months. China still has a ton of money, but for the foreseeable future, the money is staying in China.

Categories: Chinese IP

China’s New Laws on Employment of Foreign Recent Graduates

China Law Blog - Sun, 03/12/2017 - 11:17

China’s Ministry of Social Security and Human Resources, Ministry of Foreign Affairs and Department of Education recently jointly promulgated new rules for new graduates from foreign countries without working experiences. These rules apply to foreign graduates who obtained their master’s degree or higher education in China and to foreign graduates who received advanced degrees from a well-recognized foreign institution (whatever that means). Those who meet either of the above qualifications must then meet the following additional qualifications to be eligible for China employment must also meet the following additional requirements:

  • have graduated within the past year
  • be over 18 years of age
  • have no criminal record
  • have good grades (no lower than 80 out of 100 or B/B+) and no record of infractions during school
  • be in good health
  • have a specified employer and a position relevant to the job candidate’s field(s) of study
  • hold a valid passport or any other valid travel document in lieu of a passport

In addition, the candidate’s proposed salary cannot be lower than the local average salary. This will be vigorously reviewed as part of the work permit application.

The prospective employer will need to apply for a work permit for the foreign recent graduate and the authorities will usually require all of the following:

  • the candidate’s resume
  • a proposed letter of intent regarding the employment. This letter of intent must also specify the expected salary.
  • a report specifying why employing this individual is necessary, including certification that the position was advertised to Chinese candidates for at least 30 days
  • a certificate of no criminal record
  • all relevant diplomas
  • a school-issued certificate confirming the potential foreign employee has no record of infractions at school
  • relevant school transcripts
  • a medical certificate showing good health
  • a recent photo (within the last 6 months)

Once approved, the foreign employee can get a China Z work visa. The initial term of employment cannot exceed one year, but employment can then be renewed for subsequent terms of up to five years. Applications will be subject to the applicable national/local quota.

It should go without saying (but since I am a lawyer I am not willing to risk that) that you as the employer should have in place for this new hire all of the usual safeguards you use (or should use) with any of your other China employees, be they foreign or Chinese. In other words, you should at minimum, enter into an employment contract with this new hire.

Local labor authorities are expected to come up with specific measures and local standards in implementing these new rules. Those local standards likely will determine whether this new employment category will become a big deal or rarely be used. I will report back on what I learn from compiling and submitting these applications on behalf of clients.

Categories: Chinese IP

There’s More to China (and Life) Than Gloom and Doom

China Law Blog - Sat, 03/11/2017 - 08:56

In the last week, from most recent to oldest, we wrote about the following:

1.  How Chinese companies steal your intellectual property.

2. How terminating your employees in China can come back and bite you.

3. How difficult it can be to figure out the capital requirements for your WFOE.

4. How complicated it can be drafting a China sales agency contract. This post not only started out with the following preamble: “With China getting more expensive and more difficult for foreign companies, and with many foreign companies choosing to leave China rather than risk getting caught for operating there illegally.”

5. How China companies will counterfeit your products.

6. How China is cracking down like never before on companies with “independent contractors” in China. This was I think our third or fourth post on this just this month as we just keep seeing the number of American companies getting caught for this increasing and the penalties become more onerous. We titled this article Doing Business in China with Deportation or Worse Hanging Over Your Head and we used the following picture with that post:

7. A Chinese Law Bibliography.

A psychologist would look at the above seven and quickly find that they all have one theme in common. China is a difficult, even dangerous place for foreign companies doing business there, seeking to do business there, or even doing business with Chinese companies. And your salvation comes from knowing and obeying the law and being able to use the law to your advantage. Hey, that’s what we do for a living: we are China attorneys and we help foreign companies gain an advantage over Chinese companies by using the law.

But I have to admit that this all can get a bit unrelenting and that there is more to life than gloom and doom. And hey, if you knew us, you would quickly learn that in real life we are some of the nicest most optimistic upbeat people  you could ever hope to meet. Truly.

And today I aim to show that with the following link to an amazing video on North Korea/South Korea relations by a true expert in the field. Now I could tell you that I am posting this video because the relations between North Korea and South Korea are in many ways a proxy for the relations between China and the United States, and then I could go on to discuss how the relations between these four countries might impact your business with China. But I won’t even try that. Instead, I will admit that I am posting this for one reason and one reason only. Because I found this to be one of the funniest things I’ve ever seen. Maybe it is because I have done many a TV (and radio) interview myself (too early in the morning or too late at night) in a room with the door closed and sometimes with one or both of my daughters making noise in the background, and always living in fear that one just might burst in while I am talking, as they so often used to do when I was on my cell phone talking to a client. Heck, at a certain age, they used to mimic me or try to get me to laugh while on those calls. So maybe I find the following video and article so incredibly funny simply because I can so relate to it. Be that as it may. No ulterior motives here. No China business scare tactics here. Just an attempt to get you to laugh and enjoy.

Watch the video first then read this article (please, please, please read the article, which analysis heightens the video and is almost as funny as the video itself) and then watch the video again. Then let us know what you think. I’m guessing many of you have already seen it, but enjoy it again; it does not get old.

Nobody panic, we will eventually return to our regularly scheduled programming. In the meantime though, have a great day. 

Categories: Chinese IP

China IP Theft: Why Pay for Technology?

China Law Blog - Fri, 03/10/2017 - 08:29

Our China lawyers do the legal work on all sorts of transactions with China, ranging from relatively simply manufacturing contracts to purchase widgets to relatively complicated joint venture deals to technology licensing deals to mergers and acquisitions (involving both the purchasing of a Chinese company by a Western company to the purchasing of a Western company by a Chinese company). Nearly all of these deals have one thing in common: intellectual property. And on many (most?) of these deals, our lawyers will be far more skeptical of the intentions of the Chinese side than will our clients. We are perpetually concerned that the overriding goal of the Chinese side is to walk away with our client’s intellectual property without fairly compensating our client for that. That leads us to today’s question, which is one we are constantly asked in some form resembling the following: Do you really think XYZ Chinese company wants to steal our IP? To which the answer is pretty much invariably yes.

You can give all sorts of politically correct or politically incorrect answers as to why this is so, but it generally is. The answer I give is that Western companies want to steal your IP also, but because IP laws in the West are more developed and more likely to be enforced, their cost-benefit analysis is going to be different and so it will far less often make sense for them to try to steal your IP than it will for a Chinese company.

I was reminded of this ultra-common question today upon reading Mark Cohen’s always good China IPR Blog and his most recent post, entitled, Stealing IP from the Steel Sector. Mark’s post is about another article, Make the Foreign Serve China: How Foreign Science and Technology Helped China Dominate Global Metallurgical Industries, by Michael Komesaroff. Komesaroff nicely sums up China’s general thinking on IP with the following:

Chinese companies will infringe the proprietary technology of national champions as readily as they do to foreign competitors and the absence of an enforced intellectual property law accelerates diffusion of any new technology….with an endless supply of smart engineers and scientists, why pay for technology, something that you cannot touch, see, taste, or smell.

A reporter called me yesterday to check in on the “hot topic’ issues my firm’s China attorneys have been seeing lately. I told her of how my firm was getting a ton of matters involving Chinese companies claiming to want to invest in or buy out US technology companies, but in many instances, just using that claim as an excuse to “kick the tires” to see if there might be some way they can walk off our client’s technology for little to nothing. Just a more recent version of what Komesaroff describes in his article. For more on how Chinese companies have updated (but only slightly) their tactics of making off with Western IP and, more importantly, how to prevent that from happening to you, I urge you to check out the following.

Oh, and be careful out there.

Categories: Chinese IP

Pages