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China Holiday Schedule 2015: THE Infographic

China Law Blog - Wed, 12/17/2014 - 07:33

The China Holiday Schedule 2015 infographic below comes from Ryan McLaughlin’s consistently excellent and important Lost Laowoi Blog. Use it and you will not have to wonder why so and so is not picking up the phone on such and such date in 2015 or why nobody can meet with you between February 18 and February 24.

Categories: Chinese IP

The Classic China Scam: Done Often Because It Works

China Law Blog - Tue, 12/16/2014 - 05:48

Got an email the other day from the owner of a leading Northwest interior design firm. This person who has asked to remain anonymous, wanted to tell me about how he and his company had been scammed, so as to prevent others from suffering the same fate. 

My response was to say that we have written about this very scam a few times previously but that it has been long enough since the last one that we would do it again.

Here goes.

I want to tell you about what happened to us for the sole purpose of allowing other small businesses the chance to find this thread when searching for information on business opportunities in China, specifically Kunming in my case.

In August, 2014 I was contacted by Mr Chen _________ with the opportunity to complete interior design drawings for 56 luxury villas in Kunming.

This is the official headquarters information the scammers are using on emails: [we are leaving out the specific identifiers on the off chance that the Chinese individual and alleged company have some explanation.  I say alleged company because I would be that there is no company.]

Like many of our larger new jobs, we are expected to provide our own transportation to the first meeting. I did this by flying from San Francisco to Kunming to meet with the fraudulent company. Upon my arrival to Kunming, I was picked up by a driver and taken to my hotel, the next morning Mr Chen met with me to review the contract and the site plans. I was then taken to lunch and we discussed any changes that would need to be agreed upon with the extensive contract (written in english). At the end of lunch I was told there are some Chinese cultural differences that we must honor and one is providing gifts to the local authorities and banker. They suggested I buy 50-60 cartons of very high end cigarettes for this purpose.

At this point I had my first hint that something felt odd, but then the day was filled with a site visit, a presentation in a large conference room of my portfolio and their feedback on the likes/dislikes of the interior design. So I felt maybe they were trying to get some cigarettes from me but the project of designing 56 luxury villas in Kunming seemed legit.

The next day I met more members of the organization and we signed the contract, took celebratory photos and had a dinner with 5-6 other people that evening. I was never asked to pay for any transportation or meals/drinks while in Kunming as the host paid for these items.

Upon getting back to the US, I provided my banking information for the wire transfer of the first payment of 20% of the project before starting the work. The next few emails were from _________, Financial Manager of Yunnan ______Construction & Engineering and this is when I knew they had an elaborate scam going with interior designers. They wanted me to provide a remittance fee to ______ bank account, since this couldn’t be paid from their “corporate account.”

I had done extensive research before buying my plane ticket and I couldn’t find any negative or contrary information about the project, so I was optimistic about the project. But after receiving the emails where they are asking for large sums to be deposited to their private bank accounts I then began to search again and this new thread popped up.

I’m not sure what can be done to these people from so far away, but I’m hoping this post will help enlighten others of the scam and fraud that these people are doing in Kunming under the disguise of developers looking for interior design or interior decoration from foreign companies.

I then asked for information regarding exactly what this Northwest company had paid for and learned that they had also paid about $150 a night for hotel rooms while in Kunming. I noted that was probably three times what the hotel ordinarily charges and that these same people probably had a deal with the hotel to pocketed the difference. The Northwest company wrote back and agreed, after looking up the normal rate at the hotel at which they stayed.

There you have it. The classic China scam to get a service company to go to China, making hundreds of dollars a night on overpriced hotel rooms and with the potential to make much more on things like cigarettes and remittance fees.

Over the years, we have been asked to perform basic due diligence for many American and European service companies before they go to China. In most instances, we have relatively rapidly become convinced that our client is in fact caught up in a scam, without our client having to go to China at all. We do this by first determining whether our client is dealing with a real company — most of the time they are not. There are all sorts of other checks as well that can and should be done before you leave. In the story above, the company got off with losing money — sometimes worse happens.

You have been warned. Again.

For more on this particular scam, check out Ancient Chinese Business Scam With A New Hollywood Twist. It’s Baaaack. and Ancient China Business Scam With A New Hollywood Twist.

Categories: Chinese IP

Company Law In China: A Must Have China Law Book

China Law Blog - Mon, 12/15/2014 - 05:58

We received the book, Company Law in China: Regulation of Business Organizations in a Socialist Market Economy:  by Jiangyu Wang, a few months ago, and our China lawyers have been using it ever since. It is that good. We find ourselves using it both as a “first look” at various aspects of Chinese company law and also for its 17 page bibliography. This is a really good, really serious, really well written, really comprehensive book on China company law.  

It describes itself as follows, 100% accurately:

This accessible book offers a comprehensive and critical introduction to the law on business organizations in the People’s Republic of China. The coverage focuses on the 2005-adopted PRC Company Law and the most recent legislative and regulatory developments in the company law landscape in China. The book covers a wide range of topics including the definitions of companies as compared with other forms of business organizations, incorporation, shareholders rights and legal remedies, corporate governance (including the fiduciary and other duties and liabilities of directors, supervisors and managers), corporate finance (including capital and shares offering), fundamental corporate changes (including mergers & acquisitions, and takeovers), and corporate liquidation and bankruptcy. In addition to presenting strong doctrinal analysis, the author also considers China’s unique social, political and economic contexts.

The book is made up of the following eleven chapters:

  1. An Overview of the Company Law Regime In China
  2. Types of Companies in the Diverse World of Business Organizations in China
  3. Corporate Legal Personality and Limited Liability
  4. Formation of Companies and the Rules of Capital Maintenance
  5. Shareholders and their Rights
  6. The General Corporate Governance and Management Structure
  7. Fiduciary Duties of the Directors, Supervisors and Management Executives
  8. Shareholder Litigation
  9. Offering and Trading of Shares in Joint Stock Limited Companies
  10. Financial Affairs, Accounting and Profit Distribution
  11. Mergers, Acquisitions, and Takeovers 12. Corporate Liquidation and Bankruptcy Index

We highly recommend Company Law in China for lawyers, academics and even investors interested in understanding Chinese company law.

For those interested in a shorter overview of China’s company law, we shamelessly suggest you read co-blogger Steve Dickinson’s law review article in Pacific Law & Policy Journal.

Categories: Chinese IP

Wal-Mart In China. What Does That Tell Us?

China Law Blog - Sun, 12/14/2014 - 06:48

Read this amazing article entitled, How Wal-Mart Made Its Crumbling China Business Look So Good for So Long. Then please answer some or all of the following questions:

1. Is this a China issue?

2. To what extent is this Wal-Mart’s fault and to what extent was it unpreventable?

3. Are the issues Wal-Mart faced here similar to those faced by OSI Group earlier this year relating to the meat it supplied to McDonald’s in China?

3. Can Western companies succeed in China retail beyond a really small scale?

4. What Western companies have succeeded in China retail beyond a really small scale? Please name names.

I can tell you that from my vantage point and that of my firm’s China lawyers, American companies’ succeeding in China retail by having stores and locations in China are few and far between. Starbucks, KFC, Carrefour, and Pizza Hut immediately spring to mind. How do these companies succeed and why do so many others fail?

There is a story co-blogger Steve Dickinson loves to tell. He had an Australian friend who managed a high end health club in Shanghai. This friend would constantly complain to Steve about how he could not get the Chinese employees to provide even middling customer service to health club members. One day, Steve was at the club and his friend was instructing an employee not to answer her cell phone in front of a guest waiting to check in (live). Seconds after he explained that to her, a guest came in and she answered her phone. Steve’s friend quit on the spot and went back to Australia. Is this story even relevant to the above? Why or why not? Do you know people who spent years doing business in China who are now convinced that it is “impossible?” Did they just burn out or is there some wisdom there?

I am asking these questions because I would love to see a discussion on the above because I think it important. Do you?


Categories: Chinese IP

China Culture By The Numbers

China Law Blog - Sat, 12/13/2014 - 06:48

If you have not played around with the Geert-Hofstede country comparison tool, you should. It seems accurate to me (but what do I know), but even if it isn’t, it sure is great fun.

It examines more than 100 countries on the following cultural traits:

  1. Power Distance
  2. Individualism
  3. Masculinity
  4. Uncertainty Avoidance
  5. Pragmatism
  6. Indulgence

China scores off the charts on pragmatism.  Have fun with it and please let us know what you think.

Categories: Chinese IP

China Labor Dispatch Rules. Almost Fresh Off The Presses.

China Law Blog - Fri, 12/12/2014 - 11:57

China is continually tightening its requirements for proper usage of workers through third party hiring agencies and this is causing all sorts of confusion for foreign companies doing business in China or seeking to do business there. With this post we seek to clarify the current rules.

China permits only the following three categories of “dispatched” employees to be hired by a third party hiring agency:

  1. Temporary employees with a term of no longer than 6 months.
  2. Auxiliary employees who provide supporting services that are not central to the employer’s core business.
  3. Substitute employees who perform tasks in replacement of permanent employees during a period when permanent employees are unable to work due to off-the-job training, vacation, maternity leave, etc.

A company cannot have more than 10% of its workforce be made up of dispatched employees. The denominator for calculating this 10% figure shall be all employees who have a labor contract directly with the employer and all dispatched employees. If your dispatched employees make up more than 10% of your workforce, you have until March 1, 2016 (two years from the date on which the Interim Provisions on Labor Dispatch were enacted) to get the percentage to 10% or lower. During this two year transition period you cannot take on more dispatched workers if your current number of dispatched workers exceeds 10%. There is no grace period for the other rules.

And as we always stress when it comes to China labor and employment laws, you must always be mindful of local rules. For example, in Shanghai, employers must file with the relevant labor bureau a plan detailing how they intend to get their percentage of dispatched workers to 10% or less.

There is one exception to the above. Employment agreements executed before December 28, 2012 (when the Standing Committee of the National People’s Congress issued the decision to amend China’s Labor Contract Law can be carried out to their full terms and even beyond March 1, 2016.

Bottom line: If you have not already done so, you need to start bringing your business into compliance with the applicable labor dispatch rules. For many WFOEs operating in China, this will mean terminating labor dispatch agreements and contracting directly with your employees. This also will mean many WFOEs cannot make any new hires unless and until they start complying with  the 10% rule.


Categories: Chinese IP

Maybe Owe Money To China? Don’t Go There.

China Law Blog - Thu, 12/11/2014 - 13:51

Back in 2011, Richard Wagner, a Chicago-based Baker & McKenzie international arbitration and litigation lawyer, wrote an article entitled, Permission denied: The curious case of exit restrictions in Chinese commercial litigation. The article explains why personnel of foreign companies involved in Chinese litigation are often denied permission to leave China. Most importantly, that article details why denying a foreigner permission to leave can be completely legal.

Wagner’s article details how China’s Supreme People’s Court has made clear that foreigners who work for a foreign company involved in a China commercial case may be blocked from leaving China, by stating the following:

When foreign-related commercial disputes are handled by people’s courts, the courts may adopt exit restriction measures if all of the following conditions are met:

(1) the foreign-related commercial case has not yet been concluded;

(2) the person against whom the restriction would be levied is a party to the case, the legal representative of a party to the case or a responsible person with a party to the case;

(3) there exists the possibility that the party with whom the person is affiliated would evade the litigation or the performance of a statutory obligation;

(4) if the person in question left China the court might have difficulty conducting the trial or enforcing the judgment if levied against the party with whom the person was affiliated.

Richard goes on to explain how the term “Legal Representative” is a “term of art under Chinese law and easily determined from a company’s business license,” but the meaning of the term “responsible person” is “far more elusive” and “ultimately subject to court discretion.” According to the article, a foreigner need not be a senior executive to be stopped from leaving China; they need merely “be perceived by the court to have a high enough or important enough position in the company to be able to have some impact on the case (for example, some knowledge about the case or some influence on decisions concerning settlement.”

I completely agree with Richard’s assessment but raise him one. In our experience, the courts can and will hold someone hostage in China if they believe that doing so will speed up resolution/settlement. And since most American companies will settle cases rather quickly when any of their employees are being prevented from leaving a particular Chinese city, China’s courts are willing to hold just about any foreigner in China.

On top of that, it is not at all uncommon for foreigners to be held in China over a debt without a court order. Our China lawyers have handled a number of instances where foreigners were being held over a debt and there was no court order. These people were being held by private parties, usually with local government and/or local police acquiescence. In other words, though it can be legal to prohibit a foreigner to leave China over a debt, much of the time, the alleged creditors (the Chinese parties claiming to be owed money) take the law into their own hands.

Bottom Line: If you or your company are being sued in China or if a Chinese company or individual is threatening to sue you or your company in China or if someone in China is merely claiming that you or your company owe money, you should think long and hard about whether to go to China until that issue is resolved.

For more on China hostage taking, check out the following:



Categories: Chinese IP

China IP Summer Program Information Session

Other Chinese IP Events - Wed, 12/10/2014 - 14:13
Start Time:  Wed, 02/04/2015 - 12:00pm End Time:  Wed, 02/04/2015 - 1:00pm Date: Wednesday, February 4, 2014
Time: Noon - 1 p.m.

China’s Foreign Company Double Standard: How To Fight Back

China Law Blog - Wed, 12/10/2014 - 13:14

Last week, China government news agency Xinhua announced that the government would be cracking down on foreign company tax avoidance. To anyone familiar with doing business in China, the Chinese government singling out foreign businesses should come as no surprise; the only surprise should be that it would announce that openly.

Foreign companies doing business in China are under a government and media microscope. Both the Chinese government and the Chinese media hold foreign companies to a higher standard than their Chinese competitors. Behaving badly in China just because the local competition does so is not an acceptable defense.

American companies generally approach compliance issues in China in one of the following three ways, going from worst to best:

1. On the bottom rung are companies with the attitude that “it is so fun to ignore the laws in China and to act like I am a Chinese company, and I pity the naive foreign companies that don’t realize how things ‘are really done’ in China.” This sort of company typically gets shut down in a year or two.

2. In the middle rung are the American companies that believe that “we can just leave it up to our Chinese partner or our Chinese employees on how to handle things in China because they have to know better than us how to deal with things there.” This sort of company seems to believe that everyone in China knows everything there is to know about what foreign companies must do in China to remain in legal compliance. This sort of company typically gets shut down in a few years, or gets smart and changes and survives.

3. At the top rung are the American companies that do all that they can to handle China without self-immolating. These companies are the majority, and the percentage of these companies seems to increase every year.

To remain on top of your compliance and ethical issues, you should constantly be asking the following four questions

1.  What do our local competitors do to get business and what of that should we — as a foreign company — not be doing?

2.  What would this particular employee or that particular Chinese counterparty do if they had to choose between compliance and doing the deal?

3.  What can we do better to ensure compliance?

4.  Is there any way we can use our strict compliance standards to our competitive advantage?

You must constantly make your compliance principles clear to your employees, both in writing and with live presentations. You need to always be emphasizing that compliance is essential to your company’s health and reputation. Your employees must know — really know – that if they are ever forced to choose between compliance and doing a deal, they should choose compliance.

If your profits in China depend on your operating on the compliance margins, you should figure out now how to change or you should start formulating your exit strategy. As China’s economy continues to slow, the pressure on foreign companies will continue to accelerate.

You just have to read the paper for proof of this.

Categories: Chinese IP

What’s Your Vietnam Strategy?

China Law Blog - Tue, 12/09/2014 - 11:23

I spent much of May in Vietnam on business. While I was there, anti-Chinese riots broke out and I saw first hand in both Hanoi and in Ho Chi Minh how the government responded to them. More importantly, during my time there, I spoke with U.S. and Vietnamese government personnel and private practice lawyers and all of those things caused me to write an article, entitled, China Plus One: How Vietnam’s Riots Help American Businesses. I wrote that article from Vietnam, in May, and I am referring to that article now because virtually everything I said in that article has since been borne out.

I started that article talking about how Vietnam had risen to the top for most American companies looking to diversify or expand beyond China:

I am writing this from Hanoi, Vietnam, where I have been for the last week, working on legal matters for American companies doing business in Vietnam. Viewing firsthand how Vietnam has responded to this week’s anti-Chinese riots has prompted me to write on the impact those riots and the sentiments that led to them might have for American businesses in Vietnam.

Many American companies doing business in China have what is commonly referred to as a “China plus one strategy.” Such companies will have the bulk of their Asian operations in China, but will also be active in at least one other Asian country to hold down costs or reduce over-dependence on China. The increasing cost of labor (and other inputs) in China has accelerated the number of companies considering this strategy.

If you do a Google search for “China plus one,” Vietnam is listed one, two and three as the “plus one” that specifically mentions another country. It is also the country my law firm’s clients most often mention when considering where to go outside China.

I then discussed why I (and so many others) see Vietnam as the ideal plus one country?

It is a safe (for Americans anyway) and beautiful country. It has great food (sorry, but that matters to me). It is a relatively inexpensive place to live well and its wages are low. Its people generally like Americans, and English is by far the leading foreign language in its schools. Vietnam (not China) is a member of ASEAN and Vietnam (not China) will be a member of the Trans-Pacific Partnership. All of these things are plusses for business.

Its main minuses are that its electrical and transportation are relatively undeveloped and it is certainly no less corrupt than China.

I then confronted the rioting and its potential repercussions, but argued that would actually lead to increased investment by American companies:

But what about the rioting and the fact that the Vietnamese government has felt compelled to post 3-6 police or army personnel on virtually every street corner in both Ho Chi Minh City (where I was earlier today) and Hanoi to quell protests? Though thousands of Chinese have fled Vietnam — fearing for their lives — none of the riots nor any of the violence has been directed at any American or American company. Though there was initially some speculation among the expat business community here that the riots may have been a manifestation of worker discontent, the rioters have, when interviewed, made it a point to stress that their actions were for “patriotic” reasons, and did not stem from labor grievances.

The Vietnamese with whom I have met on this trip and heard on the news are uniformly emphasizing that Vietnam wants American investment, and that the riots should not be viewed otherwise. Both through official and unofficial channels, the government has made clear that it values the Americans here and it badly wants their businesses to stay. The Vietnamese lawyers and businesspeople are all telling me the same thing.

The American businesspeople here are saying the riots are irrelevant to their Vietnam plans. They view the riots as having been against China and against Taiwanese factory owners whom the Vietnamese view as in league with China. Some are even saying that Vietnam’s “China problem” will better position American companies seeking to do business in Vietnam. They see the possibility of increased sales of American goods and services and Vietnamese more likely to choose employment with American companies. To a person, all are convinced that the Vietnamese government takes the rioting seriously and will make every effort to prevent any recurrence.

They also talked of how the extent of the rioting, destruction and even deaths have exceeded that written about by Western media. Some mused about what this might mean for treatment of foreigners generally (to include Americans) but none saw it as presaging any threat. Some expressed concerns about what the closure of so many Chinese factories might mean for the supply chain needs of various American companies and some insisted that at least some American companies would experience problems.

I even predicted that Vietnam’s problems with China would actually jump-start its opening up more to American companies:

Many businesspeople here view Vietnam’s dispute with China as what Vietnam needs to jump-start its efforts to increase trade with the United States and facilitate U.S. companies doing business here. One person even mentioned how he thought that Chinese companies leaving would reduce corruption.

Though virtually all expats here side with Vietnam in its dispute with China, none made any effort to justify the violence, though quite a few seemed to enjoy analogizing it to China violence against Japanese businesses when disputes between those two countries heat up.

Last month, Barron’s did a cover story on Vietnam, calling it “The New China” and extolling its rapidly surging export base and the clothing and shoe trade press seems to have taken to writing about Vietnam pretty much every week. In our business, it has reached the point where many of our China clients in certain industries (shoes, clothing, fashion, cosmetics, kitchen utensils, ceramics, food, and small appliances and electronics) are considering Vietnam in addition to China or instead of China. Our lead Vietnam lawyer, Greg Buhyoff is there right now on behalf of clients and he will upon his return in a few weeks be writing on his trip.

Vietnam’s growth and relevance have led me and some of our other China lawyers to add this question to many of our conversations with clients and potential clients: What’s your Vietnam strategy?

What’s yours?

Categories: Chinese IP

China Employment Contracts: Why Ours Are In Chinese

China Law Blog - Mon, 12/08/2014 - 08:12

Our China lawyers sometimes get “simple” questions from our WFOE clients regarding China’s labor law. One such question is whether they must use Chinese as the prevailing language for their labor contracts with their employees, especially with their expat employees. This question is not as simple as it may first appear.

First off, there is little national guidance on this other than an “ancient” 1995 document with the long title of Letter of the General Office of the Ministry of Labor on Implementation of the Regulation on the Labor Administration of Enterprises with Foreign Investment (the “Letter”). The Letter explicitly requires that the language of a China labor contract be in Chinese. However, the authority of this document is questionable because its underlying regulation is no longer in effect, having been replaced in 2007 by the PRC Labor Law and other relevant laws and regulations. So just as is the case with so much of employment law in China, it is important to look into how each locale deals with this issue.

In Shanghai, you must have a Chinese version for your labor contract. Though you may have an English language translation of your contract, Chinese must be the controlling language. Shanghai (more so than many other Chinese cities) generally takes a liberal view on freedom of contract and when it comes to labor contracts between Shanghai employers and their expat employees, Shanghai generally will respect the parties’ own arrangement so long as those terms do not contradict matters covered in the relevant laws. Notwithstanding Shanghai’s general approach, if there is a conflict between a Chinese language employment contract and an English language version, the Chinese version will control.

Similarly, Jiangsu Province explicitly states in its provincial Labor Contract Regulations that in the event of a dispute involving an employment contract written in a foreign language and in Chinese, the Chinese language will prevail.

What happens in legal disputes where the employment contract is in just English? The courts will sometimes have the contract translated but other times, they will simply rule that there is no valid employment contract and penalize the employer accordingly.

Bottom line: We recommend inserting a provision into your labor contract making it clear that the Chinese language will control. We make this recommendation because the Chinese language version almost certainly will be the one that applies anyway, but also because this lets everyone know exactly what will happen if there is any dispute regarding the applicable language — which disputes happen more often than you would think.

For our clients, we virtually always write their employment contracts in both English and Chinese, even though the Chinese will control. We do this because it is critical that our clients fully understand their employment contracts (and with that, the company rules and regulations relating to their employees) so that they can be sure to abide by them. Employer-employee disputes are incredibly common in China, particularly for foreign companies doing business in China. Having clearly written employment contracts in both Chinese and in English can go a long way towards reducing those disputes.

You might also want to check out this post (from way back in 2009),China OEM Agreements. Why Ours Are In Chinese. Flat Out. on why — for similar reasons — we typically write our OEM manufacturing agreements in Chinese as well.

Categories: Chinese IP

China Trademark Appeals: Watching The Sausage Get Made

China Law Blog - Sat, 12/06/2014 - 08:58

One of the most common and best ways to get an already rejected China trademark registered is by using an appeal to show that the Chinese Trademark Office was wrong to believe that some other company rightfully owned the trademark. The below email is an amalgamation of emails our China trademark lawyers have sent to clients, with the trademark names and any other possible identifiers redacted or changed:

I am writing with an update regarding your China trademarks. As a preliminary matter, you should know that the China Trademark Office is somewhat in disarray — in addition to implementing a new trademark law this year, their main computer system was offline for more than six months. Long story short, everything is behind schedule, and some notices are coming out that only give the addressees a few days to respond. With that as prelude, I have bad news and good news regarding the trademark application for BLANK:

The bad news is that the application for “BLANK” has been rejected by the Chinese Trademark Office (CTMO). The reason for the rejection is that there is a preexisting trademark for “BANC” covering similar goods. We picked this up during the pre-registration screening, but did not flag it as a possible basis for rejection because the difference in pronunciation should have been sufficient to distinguish the two English-language marks. However, the CTMO did not see it that way.

The good news is that the owner of the “BANC” trademark is a _______ company that registered “BANC” in all 45 classes, and has no history of having used this trademark for ______, _______, or ________ [our client's products] in the last three years.  All evidence suggests that if we file a non-use cancellation against this mark, we should be able to cancel it and then register “BLANK”

We therefore advise the following course of action:

  1. File a non-use cancellation of the “BANC” trademark, while simultaneously appealing the rejection of the “BLANK” trademark. In an ideal world, the officials adjudicating the appeal would “suspend” the appeal pending the results of the cancellation. Supposedly this is happening with the implementation of the new trademark law, but it is still unclear how it works in practice. Still, it is worth trying.
  2. To gain more certainty, you could also file a new trademark application a little while after filing the non-use cancellation. This would cover the scenario in which the appeal was not suspended pending the results of the non-use cancellation, and you lost the appeal. In that situation, the non-use cancellation would still be decided before the new trademark application gets processed.
  3. Given the initial finding of the CTMO, we would not advise filing an appeal solely on the basis that “BLANK” and “BANC” are in fact distinguishable. This would have less than a 50/50 chance of success, whereas an appeal combined with a successful non-use cancellation should have a 90% chance of success, reserving the other 10% for the sheer unpredictability of the China trademark office.

For more on what it takes to succeed with filing China trademarks, check out the following:

Categories: Chinese IP

Starting A China Company: Seven Basic Issues

China Law Blog - Wed, 12/03/2014 - 15:24

Though China’s economy is slowing, our work in helping foreign companies start a business in China is soaring. Though this might sound counterintuitive, it actually makes complete sense. It makes complete sense because whenever China’s economy slows, China’s government steps up its crackdown on businesses operating in China without an entity and, in turn, foreign businesses to realize that it is time they got legal.

Starting a business in China these days usually means forming a WFOE. Our China lawyers also do a large number of joint ventures, but we hardly ever help in forming Representative Offices any more. Rep Offices almost never make sense and when they do, they are usually so simple that we refer the business to an entity formation company to do the work.

There will always be more to being legal to operate in China than simply forming an entity and there will always be more needed to be truly operational in China than simply being legal.

When forming a China entity for our clients, we typically also work with them on the following before the China company formation process starts, during it, or immediately thereafter:

  1. We advise on whether it makes sense for our client to form a Hong Kong company to own the China WFOE or to own the interest in the China Joint Venture. Forming a Hong Kong company to own your China entity makes sense more often than not, but it certainly depends on the specific situation. For more on whether it makes sense to use a Hong Kong parent company, check out How To Form A China WFOE: Hong Kong Parent Company Is Optional.
  2. We work to ensure that our client’s lease is suitable for a China WFOE or Joint Venture. If the lease is not suitable, no China company can be formed. For more on WFOE leases, check out China WFOE Lease Reviews
  3. We seek to ensure that our client’s business location makes sense. With an office, this is usually a non-issue, but with something like a retail establishment, it can be a big issue. You typically do not want your official business location to be the same as your initial retail location because if you end up deciding to close down your initial retail location, you will then have to deal with the added hassle of having to deal with securing approvals from the bureaucracy to change your business location. There are also all sorts of issues that can arise from having a location in one place and your employees in another. For more on choosing your business location, check out Where To Locate Your Business In China Or Asia.
  4. We prepare Chinese-language employment documents. This includes mandatory documents such as labor contracts and company rules and regulations, as well as optional documents such as confidentiality agreements, non-compete agreements, and educational reimbursement agreements. For more on China employment contracts, check out China Employment Contracts: Do Not Try This At Home
  5. We ensure that our client has maximized its IP protection in China. We do this both by figuring out what can and should be registered in China by way of trademarks, copyrights and patents in China and by drafting appropriate contracts and provisions with our client’s vendors, suppliers, counter-parties, and employees to protect their IP as well. For more on China IP protection, check out this post and the four that preceded it.  How To Protect Your IP From China. Part 5.
  6. We oftentimes assist our clients in opening their China bank account and in retaining a China accountant and a China bookkeeper. We typically work with the accountant on capital requirements and on transfer pricing.
  7. We seek to ensure that our client’s compliance house is in order. This includes our working with them on a compliance program that fits their needs and their risks and that, in particular, protects against anti-corruption problems. Compliance is of particular concern to SMEs, who typically name the parent company’s CEO as the WFOE’s legal representative, and thereby expose the CEO to criminal liability in China for employees’ misdeeds. For more on China compliance, check out this post and the three that preceded it.  China Compliance: Don’t Rely On Your China Staff, Part IV.

Anything else that anyone thinks should be added to the above?

Categories: Chinese IP

China Manufacturing: How To Hang On To YOUR Molds

China Law Blog - Tue, 12/02/2014 - 05:58

Every couple of months, someone calls or emails one of our China lawyers for help in “getting their molds” back from their Chinese manufacturer. Whenever a foreign company terminates its Chinese manufacturer, it is at great risk of having the Chinese manufacturer keep the foreign company’s molds. The Chinese manufacturer typically holds on to the molds to extract money from the foreign company, but sometimes it does this simply for revenge.

We have not once pursued any claims against a Chinese manufacturer for the return of molds because none of the people who have contacted us had contracts good enough on which to base a lawsuit. On the flip side, our mold contracts have always worked so as to prevent the manufacturer from even trying to hang on to our client’s molds.

How can you achieve that sort of result?

The way to avoid having your Chinese manufacturer run off with your molds is to make sure you require the manufacture to sign (and seal) a contract (preferably in Chinese) that makes clear to whom the molds belong (to you) and what will happen to the Chinese manufacturer (specific damages) if it fails to return your molds to you. It is also critical that your contract be written with a Chinese (civil) law system in mind and not a U.S./British common law system.

Even better, you should, if possible, get a deposit for your molds, which deposit you will return when your molds are returned to you. If the Chinese manufacturer will not give you a deposit for your molds, (most will not), put in a liquidated damages provision that applies if your mold is not returned when specified. That provision alone goes a long way towards taking away any incentive for your Chinese manufacturer to hang on to your molds.

When we are retained to draft a stand-alone mold agreement or when we put a mold provision in an OEM Agreement, we usually start out by sending the following questionaire to our client, which in turn is typically followed by a subsequent set of more specific questions:

  1. Please provide a 1-2 paragraph description of what you will be doing in China that will be covered by this mold agreement. This is essential: we need to know, in layman’s terms, what is going on
  2. What kind of items will be the subject of the agreement: molds, tooling, equipment?
  3. Where will the tooling be located? One manufacturer? Numerous?
  4. Do you have a direct relationship with the manufacturer, or are you working with an intermediary (sourcing agent or similar)?
  5. What agreements are now in place concerning the basic business relationship with the various parties? If you have any written agreements, please send them.
  6. Does the tooling already exist?
  7. What will be the source of the tooling? Will the manufacturer design and manufacture the tooling? Will the manufacturer purchase from others? If yes, under what kind of agreement? Will the tooling be contributed to the manufacturer by the buyer? By the buyer’s agent? Some other entity?
  8. What will be the method of payment for the tooling, and who will pay?
  9. Who will design the tooling? In what form will the design be provided to whoever will manufacture the tooling?

What do you think?

Categories: Chinese IP

China Employee Probation: You May Have Just One Shot

China Law Blog - Mon, 12/01/2014 - 08:06

As I wrote in China Employee Probation: Don’t Let It Slip Away, labor contracts for new employees often include a probation period (试用期) designed to give the employer (mostly) and the employee time to test each other out. The big thing you must remember is that terminating a Chinese employee who is  not on probation is usually difficult and expensive and it therefore nearly always makes sense to consider a probation period for any new employee.

Our China lawyers usually (but not always) recommend an initial employment term of three years with a six month probation period — six months is the longest probation period typically allowed. We recommend a six month probation period for a number of reasons, chief of which is that you may only get one shot at any probation period at all.

The general rule under China’s Labor Contract Law is that employers may use only one probation period for the same employee. In other words, you may not set up another probation period for the same employee when you renew his or her labor contract and any failure to follow the Labor Contract Law rules subjects employers to administrative and civil liability.

But what if you initially set a probation period that is less than the maximum period? For instance, what if you initially set a two-month probation period for an employee with whom you contract for an initial employment term of three years, can you extend the probation period for another four months via an amendment to the existing labor contract? It mostly depends on the employer’s location, but the usual answer is no.

In some municipalities (Beijing and Shenzhen immediately spring to mind), you cannot extend the probation period even if the employee’s initial probation period was less than the legal limit. Once you have set a probation period, you are bound by it and under no circumstances can you extend it. In cities like Beijing and Shenzhen, extending a probation period will be treated as the equivalent of setting a new probation period for purposes of the Labor Contract Law, and for that reason, not allowed.

As is so often the case when it comes to employer-employee legal issues, the Shanghai Labor Bureau’s position is completely different. Shanghai generally allows employers to extend a probation period, provided the following are all true:

  1. The entire probation period (after extension) is within the legal limit;
  2. The employee agrees to the arrangement;
  3. The extension occurs before the end of the probation period; and
  4. The employer and the employee enter into a written amendment to the existing labor contract documenting the probation extension.

Bottom line: If you are unsure about whether you wish to retain an employee beyond his or her probation period, you need to think long and hard before you give that employee “a second chance” by extending his or her probation period. If you do not think the employee is a good fit for your company, letting him or her go right then might be your only good option. But as is true of so much employment law in China, it all depends on where you and your employee are.

Categories: Chinese IP

Happy Thanksgiving To You Our Wonderful Readers

China Law Blog - Thu, 11/27/2014 - 09:01

On this Thanksgiving Day, we want to take a bit of a time out to express those things related to China for which we are thankful. Just to be clear, we are focusing on China, not because we think China takes priority over everything else (because it does not), but merely because this is a China blog. So with that caveat, here goes:

1. We are thankful for our readers, here and on our Linkedin and Facebook pages. We are thankful for your loyalty and we are especially thankful for our being able to interact with you. We are thankful for your comments, from which we learn all sorts of new things and from which we are challenged. But most of all, we are thankful and we are honored that you trust us for your information. Before we even started this blog, way back in January, 2006, we wrote the following Mission Statement for it:

We want to start a conversation with, for and about the person who wants practical information on starting and growing a business in or involved with China.

We will be challenging various misconceptions the West has about law in China, including that the law in China does not really matter or that guanxi can supplant it. We will help you figure out how you can use the law as both a shield and a sword. We will give insights to achieve practical solutions, while doing our best to entertain. We know lawyers are not popular, and though we are ourselves really quite likable, we recognize the need to avoid those things that incite lawyer hatred. We will strive to avoid legal jargon and namby-pamby language that attempts to camouflage our views or to avoid controversy.

We want our blog to be a place for both conversation and controversy. We expect many of you will disagree with us much of the time and we are fine with that. We will always strive to avoid boring you or being unwilling to take a stand. We are not going to be afraid of being wrong—in fact, we want you to tell us when and how we are wrong. If you want “legalese” or long strings of caveats, you are going to have to pay exorbitant legal fees to get that elsewhere.

We will tell you more than just that the law is this and this is what needs to be done to comply. We will discuss how the laws as written may say one thing, but our experience dictates something else. We will tell you when you need to do more than just follow the law to succeed, and we will set out exactly what that something else is. We will regale you with stories about the Chinese lawyers with whom we work, the foreign and Chinese businesspeople with whom we deal, and even the places we go. There will be times where our lawyer ethical rules will make us unable to name names, but we will always work to tell the full story.

It has become a blog cliché to implore readers for their input, but it is so important we must join the crowd on this. We do not purport to know everything about Chinese law. That is impossible. Our strengths are forming companies in Chinadrafting international contracts with Chinese companies (in English and in Chinese), intellectual property protection and international litigation and arbitration. We welcome your comments, suggestions and ideas on any area of law relating to conducting business in China. China is anything but monolithic and we will be relying in large part on you, our readers, to round out this site with your own stories.

In plain language, we ask that you write us early and often. We will review your comments before we post them, but that does NOT mean you should not criticize us or disagree with us. Our review will be to filter out comments that are without substance and/or personally abusive. We want to encourage a high level of discussion, but we will not ban or delete your comments just because you come after us.

You, our readers, have exceeded our wildest dreams by not only commenting often, but commenting with intelligence.

2. We are thankful that whenever relations between the United States seem to be on the brink, both countries seem to re-realize the importance of the other and pull back, even if just a little.

3. We are thankful for each and every award we have received, both as China bloggers and as China lawyers because we know none of those would have been possible without you.

4. We are thankful for our (relatively) new firm webpage. We thank the wonderful, talented and diligent folks over at Conflare for this. Hardly a week goes by without our getting a compliment on that. Our webpage better enables us to convey who we are to the world.

5. Most of all though, we are thankful for all the great friends we have made through this blog and through our work, who are far far far too numerous to mention. You are our everything.

Again, thank you from all of us (both in the U.S. and in China) to all of you!

May each and every one of you have a Happy Thanksgiving.

From the Harris Moure China team:

Mathew Alderson

Greg Buhyoff

Steve Dickinson

Ben Dietz

Matthew Dresden

Dan Harris

Arlo Kipfer

Chris Priddy

Li Xuihua

Grace Yang

Categories: Chinese IP

How To Sue Chinese Companies, Part 4

China Law Blog - Tue, 11/25/2014 - 09:41

This is Part 4 of this series on how to sue a China company. This is the final post explaining what you can do to try to secure redress against a Chinese company that owes you money or has wronged you. Part 1 dealt with jurisdiction and on Hague Convention service of process. Part 2 was on conducting discovery against a Chinese company. Part 3 discussed overall litigation strategies and how to enforce a judgment against a Chinese company. This final post will focus on arbitrating against Chinese companies in the United States and in China and on litigating against Chinese companies in China’s courts.

Arbitration in the United States. China is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This means that its courts generally enforce foreign arbitral awards from recognized foreign arbitral bodies. Chinese courts, however, are considerably less likely to enforce foreign arbitral awards obtained by default. Chinese courts also sometimes stall foreign arbitration award cases for years as a way to avoid enforcement while making their enforcement numbers look better than they really are. You will find this most likely to be true if your award if the Chinese courts consider your award to be inequitable or if it is against a powerful company in a small town.

Arbitration in China. China has some legitimate arbitral bodies, with the China International Economic Arbitration Commission (CIETAC) probably being the most prominent. China’s arbitral bodies allow little to no discovery and they oftentimes do not even allow live testimony. Even if live testimony is allowed, you should expect your case to be won or lost on the documents.

If your contract with your Chinese counter-party is going to call for arbitrating disputes in China, it will typically make sense for you to provide for English language arbitration and as many foreign arbitrators as your Chinese counter-party will accept.

Suing in a China Court. If suing a Chinese company in the United States does not make sense (see Part 3 as to why it usually does not), pursuing litigation in China may. Though China’s court system is very different from that to which American lawyers are accustomed, it is more navigable than many American lawyers believe it to be. Foreign companies can and do win cases against Chinese companies in Chinese courts. Before suing in a Chinese court, though, it is important to understand some basics about its court system.

First, though Chinese courts will enforce the law prescribed in a contract, Chinese judges place more emphasis on the overall context and “fairness” of the case and much less on legal technicalities than their American counterparts. For example, if an incompetent or uncaring low-level employee causes a company to violate its contract, a U.S. court would almost certainly hold the company liable for all damages arising from the breach. A Chinese court, on the other hand, might either not find liability at all or severely limit the damages, believing it unfair to penalize a company for the incompetence of one employee.

Second, Chinese courts prohibit nearly all discovery. Companies suing in China without a strong case at the outset seldom prevail. This also means that you should have your proof ready to go before you sue, especially since the time from filing to trial is usually less than a year.

Third, Chinese courts base their rulings almost exclusively on documentary evidence, not testimony. So as we said about arbitration in China, you should be prepared to win or lose your case based on the documents. What this also means is that you need to have your documents ready before you sue or if sued, you had better get your documents ready as soon as possible. This is critical because oftentimes “having your documents ready” means that they have been appostilled somewhere outside China and then consularized by the appropriate Chinese Consulate or Embassy.

We cannot stress enough the need to move quickly in getting documents appostilled and consularized for a Chinese trial. Twice in the last year, American companies have called one of our China lawyers asking how they can appeal Chinese lawsuits they lost because — in their own words — they were not able to get critical documents documents appostilled and consularized soon enough to be admitted into evidence by the Chinese court for the trial.

Fourth, settlement is rare in Chinese business litigation matters. The cost of litigating in China is typically much lower than in the United States, and once a complaint has been filed, settling a case is often viewed as losing face. The Chinese company you are suing may prefer to lose the case and blame it on the judge than to settle and be viewed by its employees and its customers as having been at fault.

Fifth, Chinese courts rarely issue large damage awards, no matter the case and no matter the plaintiff. Chinese companies generally operate at low margins and Chinese courts are loath to badly harm a functioning business or to cause layoffs. In particular, Chinese judges are hesitant to award damages for lost profits or for pain and suffering. Chinese courts simply do not award the sort of damages available in a U.S. court. This is one of the reasons why we so often put liquidated damages provisions into our China contracts. See How To Write A China Contract. Liquidated Damages.

Sixth, though the ability to collect on judgments in China is improving, it is still not near the level of the United States. Chinese courts often lack the authority and fail to receive the assistance from other law enforcement agencies necessary to enforce collection on their judgments. In addition, Chinese companies sometimes find it more cost effective to avoid a judgment by shutting down and re‐opening under a new name. In other words, just as is true in the United States, you should consider the collectability of your judgment before you sue in China, only more so.

Categories: Chinese IP

China Guanxi: You Don’t Have It.

China Law Blog - Sun, 11/23/2014 - 05:58

Five days ago, I wrote a post on Linkedin, entitled, China Guanxi: You Don’t Have It.  That post essentially counsels to be skeptical of any foreigner who claims to have guanxi and goes on to discuss why this is so and why guanxi is overrated in any event. The post lists out the following reasons for why guanxi is not as valuable as touted:

No foreigner can create a Chinese-style guanxi network. Guanxi refers to a vast network of connections arising from party, family, and work connections that may go back several generations. No guanxi network relies on a single individual. The elimination of one member of the network is therefore not fatal. Foreigners almost always rely on only one or two individuals for their supposed connection. This kind of network is too fragile to be of enduring value. Foreign investors who think they have created a guanxi network in China are usually deluding themselves.

Connections with local government officials are short-term and can be abruptly terminated. Government officials in China are regularly moved from office to office and from region to region. As a result, any connection you build with a local government official is unlikely to be long-term.

It is common to negotiate a project for several years and then learn that the official in charge has been transferred to a new post. If the project is not in compliance with the law, the replacement government officials often will refuse to sign the documents that have already been negotiated. Even worse, we have seen replacement government officials shut down previously approved and already started projects. If your project depends on the protection of a single individual, you need to be asking what will happen if that person dies, is demoted, or prosecuted for corruption.

A project based on guanxi gives too much power to the Chinese side of the deal. In many cases, the provider of guanxi will use the fact that the project is not in compliance with the law to ask for additional benefits. If the foreign investor seeks help from a lawyer, the lawyer can do little since the project itself is either illegal or poorly documented.

This post has already drawn nearly 100 likes and, more importantly, 46 comments, most of which agree (many vehemently) with the post’s thesis. I urge everyone to go read that post and provide your coments either here or there. Guanxi is a controversial topic and I am of the view that we all benefit by talking about it openly. I urge all of you to go read it.

If you like my guanxi post or if you like this blog, or even if you just have an interest in China (which I am guessing that you do simply because you are here) please join our China Law Blog Group on Linkedin while you are there. We are nearing 10,000 members and I really want to hit that magical number by the end of the year! What separates our China Law Blog Group from the other Linkedin Groups are the following:

  • Great members. Of course.
  • Great discussions. Of course.
  • No spam. This is key. We moderate everything and we do so to prevent wasting your time!

We’ll see you there.

Categories: Chinese IP

China NDA: A Day In The Life Of A China Lawyer, Part II

China Law Blog - Sat, 11/22/2014 - 08:19

Someone in our China Law Blog Linkedin Group (please check it out and join if you are not yet a member — we keep it entirely spam-free) asked a question regarding an NDA with a Chinese supplier. Someone else in the group responded by referring the questioner to this free online NDA.

I (and most other lawyers) virtually never weigh in on specific legal matters online because it does not make sense to provide legal advice without knowing all of the facts specific to the individual situation, I could not resist doing so here and I did. I had a vision that someone somewhere might actually think that this agreement would work when dealing with a China company and I could not allow that to stand. So I wrote the following:

This online NDA is of ZERO value when dealing with China and I would strongly urge that nobody use it for that. I do not believe any Chinese court would enforce it, and even if they did, it is not clear what there is in it that would help. Do not use domestic NDAs for China as they just do not work! Start by reading China NDA. A Day In The Life Of A China Lawyer.

That post dealt with my response to someone who had reluctantly written me at the very last minute, but only because his client “insisted” that he do so. This person then proceeded to explain why he did not think that he needed me and essentially challenged me to prove my worth before he would even consider hiring me. I did not take too well to his email and I responded with the following, all of which makes equal sense true today:

I hesitate to spend time on this because I do not think that you will retain us both because you have come to us too late for us to fix your NDA (which, quite frankly, does not achieve what you want it to achieve) and because you are neither going to believe nor like what I have to say. So I instead urge you to read  How To Stop Your Chinese Supplier From Becoming Your Competitor and China Contracts. Why Even Bother? and all of the links contained in these.

What you have done so far is unlikely to help you in dealing with Chinese manufacturers. It just does not sound like you have received good advice so far and I have to wonder whether that is because you have been hiring the wrong China attorneys (or no attorneys at all) or if it is because you are not interested in changing how you do business with China.

An American NDA with jurisdiction in Chicago is not likely to have any impact on a Chinese company. What you need is not really a China NDA at all, but an NNN (Non-Disclosure, Non-Use, Non-Circumvention) Agreement that protects you before you have actually chosen a particular manufacturer for your product.  This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.

The ability to sue in Chicago is not likely to give you any power over a Chinese manufacturer. The bottom line is that Chinese manufacturers do not fear foreign litigation as much as they fear being hauled into a Chinese court and hit with liquidated damages (or even worse, a pre-judgment seizure of their assets). The goal with our NNN agreements (and of all our China contracts) is to prevent the Chinese company from doing what you don’t want them to do, not so much to beat them if you end up having to sue.

There is no point in our using your existing NDA as a template because it would take us more time to do that than for us to use our own template and then modify that to suit your current needs. More importantly, non-disclosure isn’t really the risk you face; it’s non compete that really matters and your NDA is completely silent on that. Your biggest risk isn’t your Chinese manufacturer disclosing your product to someone else; your biggest risk is your Chinese manufacturer making your product.

I spent five minutes reviewing your manufacturing agreement and that was enough time for me to determine that too also isn’t close to what you need for China. Honestly, it isn’t close for what you would need in the United States either. It does not mention any penalties for bad quality nor does it set forth any sort of timeline. These two things are the most basic provisions one expects to see in such an agreement. It reads as though a non-lawyer cobbled it together from various contracts on the internet. You probably would be better off with no contract at all.

And there is no way that we can promise you anything by the end of the week because we do not even have a good idea yet of exactly what it is you really need. You are going to need to determine whether you are prepared to spend money to do things right in China contractually or just continue muddling through. You know what I would recommend, but of course it is entirely up to you.

 China NDA Agreements. Heck any China contract. Do not do them at home…. What do you think?
Categories: Chinese IP

China Trademark Registrations: The Latest News From The Front

China Law Blog - Fri, 11/21/2014 - 07:00

One of our China lawyers sent an email to a client yesterday, updating the client on the status of its trademark filings. I am republishing that email below because it succinctly sets out the current timelines for the various stages of trademark filings in China:

Good to hear from you. We submitted the trademark applications to the Chinese Trademark Office (CTMO) a few weeks ago, and are now just waiting for an official filing receipt from them. These are usually issued within 2 months, but the CTMO has been experiencing a number of delays recently, so I wouldn’t be surprised if it takes even longer. If everything goes smoothly, from that point it usually takes 12-15 months to receive preliminary approval from the CTMO, and then another 3 months after that for the trademark to be registered. Either way it will be a long wait, but the important thing to remember is that because China is a first-to-file country, the fact that you have filed your application first means that no one can cut in ahead of you.

We will keep you updated on the status of your trademark application. Don’t hesitate to contact me should you have any further questions.

There you have it: around 17-20 months from filing to registration.

Categories: Chinese IP
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