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China and The Internet of Things: Do You Really Own “Your” IoT Product?

China Law Blog - Thu, 04/19/2018 - 05:58

China (Shenzhen mostly) is the primary destination for manufacturing of small electronic consumer products. And since Internet of Things (IoT) products are red hot, this means our China lawyers get a steady stream of China IoT legal matters.

The big issue we most often see is this: the IoT product has now reached the mass production stage and is being produced in large quantities. Now that it has a commercial product, the U.S. or European (usually) buyer now seeks financing for its start-up company. The financier (be it angel, VC, private equity, or even someone’s father-in-law) then asks who owns the intellectual property in the product? With the rise of the Internet of Things (IoT), this question is often difficult to answer definitively.

How did we get to this point where the IP rights of a product are so often vague? The process has worked its way through three general stages:

Stage One. In the good old days (roughly 1981 to 1995), the situation was simple. There were two possibilities. In the first, the Chinese manufacturer made a standard consumer product. The foreign buyer purchased that existing product and perhaps required the Chinese manufacturer take the extra step of placing the buyer’s own trademark/logo on the product. In that setting, ownership of the intellectual property was clear: the Chinese manufacturer owned the product design and the foreign buyer owned its trademark/logo. In the second, the product was a long standing, well developed product of the foreign buyer. The foreign buyer brought the completed product to the Chinese manufacturer and contracted with the Chinese manufacturer to make a copy. In that setting, ownership of the intellectual property was clear: the foreign buyer owned all the intellectual property and the Chinese manufacturer owned nothing.

The simplicity of this sort of relationship encouraged the somewhat lazy practice of documenting the entire manufacturing relationship with purchase orders. NNN agreements, product development agreements and OEM agreements were seldom used, since IP ownership was clear and the price and delivery terms were resolved via the purchase orders. This approach would often lead to product defects, but that is for another post.

Stage Two. In stage two (roughly 1995 to 2015), a new form of manufacturer-buyer relationship developed. Foreign buyers began coming to China with no completed project in mind; they instead would come with a product idea or proposal. The foreign buyer would then work with the manufacturer to co-develop a product. In some cases the Chinese manufacturer would simply take a completed prototype and commercialize that prototype for mass production. In these cases, the foreign buyer arrived with little more than a basic idea and the two sides worked to co-develop the product. See China Product Development Agreements, for pretty much everything you need to know about China product development agreements.

The Chinese manufacturer usually would perform the product development work at its own expense, with the implied agreement being that it would be the exclusive manufacturer of the product. This co-development process typically used the same lazy “purchase order only” approach from stage one. This approach then led to the many issues we see today that make answering the “who owns what IP” question so difficult. To do the co-development process properly, the parties must define their relationship with three agreements: 1) an NNN Agreement, 2) a Product Development Agreement and 3) an OEM Agreement.

When these agreements do not exist, a standard set of issues arises: Who owns the product design? Who owns the molds and other tooling? Who owns the manufacturing know-how and similar trade secrets? If the buyer decides has the product made by a different Chinese factory, what compensation is owed to the Chinese manufacturer that co-developed the product? What are the  Chinese manufacturer’s obligations to comply with the foreign buyer’s price and quantity requirements? If the Chinese manufacturer terminates its relationship with the foreign buyer and manufacturers the product under its own trademark/logo, is this a violation of any agreement between the parties? Absent clear written agreements, none of these questions have clear answers. In these unclear situations, the Chinese factory will nearly always be in a much stronger position than the foreign buyer and the Chinese factory will typically prevail in any IP dispute.

Stage Three. In stage three (2015 to today), we arrive at the IoT era. In designing, developing and manufacturing consumer products for the IoT market, the already unclear and problem-filled relationships of the stage two era are now magnified. In the IoT era a whole new set of issues has arisen. In the stage two era, there was at least the simplicity of two entities designing and/or manufacturing a single product. In the IoT era, the situation is considerably more complex. In most of the IoT projects we have done, the development process has expanded to include the following:

1. Product “concept” from the foreign (usually United States or European) buyer.

2. Product external design, from an international design firm.

3. Internal design and function, owned by:

a. The foreign buyer;

b. The Chinese manufacturer;

c. The provider of sensors and other components required to connect the IoT product to an outside network.

4. Design of the IoT product “app” (usually for smart phones). This involves two completely separate sets of software: the communication sending software residing on the IoT product and the communication receiving software residing in the application. In the same manner as the internal design, these software components may be written/designed by multiple parties: the foreign buyer, the Chinese manufacturer and (quite often) third party software design firms.

What happens then when the product is complete, and manufacturing is ready to start and the foreign buyer starts to seek funding: The funding source almost invariably will ask who owns the IoT product? Who owns its underlying IP? What our China lawyers have far too often found when we ask the foreign buyers these questions is that they usually don’t really know.

This “we don’t know” response does not sit well with potential sources of serious financing. Even worse, when the foreign buyer is pushed to answer the question, it becomes clear that it is not clear who owns the new product. Far too often the only ownership issue that is clear is that the one entity that the foreign buyer is the one entity that does NOT own the rights to the product. Even worse, it is usually not possible to fix the situation by this point.

Bottom Line: As manufacturing in China and the IP issues attendant with that become more complex, it becomes even more important that you have clear written agreements that answer the obvious IP questions in advance. It does not make sense for you to devote your time and your energy and your money developing an IoT product for someone else to own.

For more on the issues involving China and the Internet of Things, check out the following:

Categories: Chinese IP

China and International IP Protection: April 25, Live in Barcelona and Live Streaming

China Law Blog - Wed, 04/18/2018 - 16:09

On the evening of April 25, I will be speaking live in Barcelona at a Red Points event on international and China IP protection. The event will be on the eve of World International IP Day and it will be to celebrate Red Points’ launching its online brand and trademark platform offering free lessons on detecting, validating and enforcing intellectual property rights across the internet.

This event will be live-streamed on April 25th as well, at 9:00 AM PST, 12:00 PM EST, 6:00 PM CEST. For more information, go here and to register (it’s all FREE), go here to register.

 

Categories: Chinese IP

China #MeToo: The Webinar, This Wednesday, April 18

China Law Blog - Mon, 04/16/2018 - 11:36

On April 18, Grace Yang, our lead China employment lawyer, will be putting on a webinar on “Employment Laws for Female Workers in China.” To call this webinar timely would be an understatement, as the issues involving female employees in China are could not be more relevant/topical/important.F

The live webcast will be this Wednesday, April 18, 1:00-3:15pm PST / 2:00-4:15pm MST / 3:00-5:15pm CST / 4:00-6:15pm EST.

LawProCLE, who is putting on this webinar, describes it as follows:

Foreign companies doing business in China face complex China labor and employment issues every day and issues related to female workers require additional attention. The Chinese government has high expectations regarding how employers must treat female employees, especially those who are pregnant, nursing or on maternity leave. Employers need to know and follow the national, provincial and municipal laws and regulations regarding protection of female employees. Female employee disputes are increasingly common in China and both the government and the courts are getting increasingly tougher against employers that fail to treat their female employees appropriately.

This webinar will give you the information you need to spot employment law issues relating to your female employees and arm you with ways to avoid and mitigate problems.

Grace’s talk will focus on the following:

  1. The key China employment laws on protection of female workers
  2. The employer rules, regulations and policies you need for your China employees
  3. What you need in your employment toolkit to reduce your risk of sexual harassment claims
  4. Female employee special leaves
  5. Female employee terminations
  6. China employer audits

LawProCLE describes Grace as follows:

Grace focuses on international business and China law. She is Harris Bricken’s lead attorney on China labor and employment law and recently authored a book entitled the China Employment Law Guide. Grace is admitted to practice law in the States of New York and Washington. Grace received her bachelor’s degree from Peking University School of Law (“Beida”) and her J.D. from the University of Washington School of Law. During law school, Grace won “Best Written Contract” in the University of Washington Contract Drafting & Negotiation Competition and the Pro Bono Student of the Year Award for her involvement in several community-based volunteer legal service projects.

Grace has spoken at a ton of seminars and webinars on various different aspects of China employment law and always to rave reviews and you do not want to miss this one.  For more information and to sign up, click here.

 

Categories: Chinese IP

China Distribution Agreements: The Additional Questions We Ask

China Law Blog - Sun, 04/15/2018 - 04:07
China distribution contracts

Last week, in China Distribution Contracts: The Questions We Ask, we wrote about some of the initial questions we ask our clients for whom we are drafting China distribution contracts. That post started out discussing how forming and then operating a China WFOE is difficult and expensive — see Forming a China WFOE: Ten Things To Consider and Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. We then discussed how our China lawyers have been seeing many more foreign companies choosing to sell their products to China via distribution relationships rather than via a WFOE. For the basics on what it takes to establish and document distribution relationships with Chinese companies, check out the following:

Today’s post focuses on some of the additional questions we often ask our clients that have retained us to draft their distribution agreement with a Chinese company or companies. As with last week’s post, it consists mostly of an amalgamation of emails from our China attorneys seeking more client information and providing additional client assistance before drafting a China distribution agreement.

1. How are you planning to deal with warranties? A standard approach is for you to draft the warranty and then have your distributer pass on this warranty to consumers without any changes. Under this approach you will need to work with your distributor to design an appropriate warranty that a) works for your products, b) works for your company and your distributer, c) meets market demands, and d) complies with Chinese law.

The alternative is to allow your distributor to provide whatever warranty it wants to consumers. Your warranty is with the distributor and you will not cover any warranty beyond that which you have specifically agreed with your distributor. Under this sort of arrangement you have no contractual relationship with the consumers and the consumers have no legal basis to assert warranty claims against you. They are limited to making claims only against your distributor. This option is consistent with the legal status of a distributor that buys and then resells your products. However, under this approach you no longer control the nature of the warranty and many of our clients do not want to give up this control.

Much can depend on the nature of your product, your consumers and your trust in your distributer. We should discuss all of these things by telephone.

2.. Determining the sales price to consumers. Normally, the distributor is free to set the prices it wants for the products, since it has purchased the product and therefore owns them. However, many of our clients wish to exercise at least some pricing. Absolute resale price maintenance is not legal in China so you cannot dictate the sales price. You can, however, require your distributor to work with you on pricing and even set a pricing product range, both maximum and minimum. Please advise on how you want to proceed on the pricing issue.

3. What form training will you provide to your distributor? Where will your provided this (in China or in your home country)? How will training costs be determined and who will pay those costs?

4. Do you want to require all communications from your distributor be in English?

5. Will your technical documents be translated into Chinese? If yes, who will do this? You or your distributor and who will cover these costs? 

Please advise on the above. We will begin drafting your distribution agree  responses are complete.

Categories: Chinese IP

Qingdao Wanda Film Studio Opens April 28

China Law Blog - Fri, 04/13/2018 - 06:44

After years of preparation, the Wanda Film Metropolis will formally open on April 28. My friend Jason Wei handles marketing for the hotel portion of the project. Nick Zhang is in charge of marketing for the Wanda Studios portion of the project. I met with them last week at the site for a preview of what will be revealed at the opening.

The commercial part of the project includes a large retail mall, three separate amusement parks (theme park, water park, movie theme park, all indoors for year round operation), at least 6 separate hotels, two large exhibition centers, a large marina and a massive number of condos. Nothing except the condos have formally opened for business.

The movie studio project is being conducted under the heading of Wanda Studios Qingdao (青岛万达影视产业园)which operates separately from the commercial portions of the Film Metropolis. You can check out the studio complex on their beautiful website at www.wandastudios.com

Since websites and reality are often different, I below report on what I saw and heard while I was on the ground at the Qingdao facilities.

a. The projected opening date is April 28. Management expects to begin formally renting out studios soon after opening. They indicate that some of the larger studios have already been used for Chinese domestic film productions. They would not discuss pricing with me nor did the person I asked know anything about the 40% subsidy that had previously been discussed in the media for using these facilities.

b. The entire project is 2500 mu (400 acres). This is huge! The location is on the same side of the main road as the main sales buildings, away from the ocean, running up to the mountains to the west. This is a different location from what had originally been proposed, so for those of us who have been following the project for years and had been there previously, it takes a bit of effort to find the studio complex.

c. Thirty separate studio buildings have been built with another ten under construction and construction due to finish in October. The individual studios range from 10,000 square meters to 15,000 square meters. Each studio has a full sound stage, attached dressing rooms, full support set up (electronics, lighting, ventilation, etc) and 18 meter high ceilings. The studios were designed by a London architect and they have been built to meet an international standard. Management indicates that normal Chinese studios cost around 2000 rmb per square meter to build but that these cost 10,000 rmb per square meter.

Though I am not familiar with film studio construction, I have worked on construction projects all over Asia and the U.S. and i can state that the construction and facilities build-out appears to be excellent and the claim that the studios were built to an international standard seems justified. Management claims this is the largest studio facility in the world and this claim also seems reasonable to me.

d. The studio complex has a main headquarters building that can house a staff of 1000 people. The cafeteria can feed 1000 persons at a shift. Current staff is 200. The cafeteria complex is not being used. Presumably all of this will get into gear when formal rentals start in May of 2018.

My impressions are as follows:

a. Nothing at all is going on at the complex yet, so there is no way to predict what will happen down the road.

b. Nobody seems to know who owns the land or the facilities. Nobody seems to know what the financial objectives are. Everyone seems to know that Wanda has full management control.

c. Management states that they want to attract foreign movie projects and the elegant English language website evidences this. There was, however, no evidence of this at the physical site, I did not see any attempt to deal with any language other than Chinese nor any evidence that there had been any provisions made for services to any company arriving from outside China. But because I do not need any help with Chinese it is possible these services are available and I simply was not exposed to them.

d. The studio complex is located far from Qingdao in a beautiful coastal location in the middle of nowhere. That means there are no carpenters, no electronics technicians, no retail supply of equipment (no wood, no nails, no paint, no electric drills, no lights, no speakers, no recorders, no cameras) nearby. Management told me that the film producers will bring in all the equipment and workers needed. I have worked with construction and engineering projects in China in places where you cannot even buy a nail or a screw and so I know how frustrating this sort of thing can be. It is not clear management understands this nor made any concrete plans to deal with these issues.

e. The studio buildings are impressive. It was strange to tour all these expensive studios and not see a single project actually in operation. Will anyone come? And if they come, how will logistics be handled? Management seem confident enough, perhaps relying on the “if you build it and they will come” philosophy prevalent in China.

It is a great thing to see this project finally come to fruition. If any of our readers want help in making contacts with the studio please let me know and I will put you in touch with Jason or Nick and they will take it from there.

Categories: Chinese IP

China Employee Non-Competes: Clear as Mud

China Law Blog - Thu, 04/12/2018 - 05:58

As I have previously written, during its new hire on-boarding process, China employers should confirm there are no encumbrances or restrictions on any new hires coming to work for your company. In particular, employers should make sure there are no in-force non-compete agreements. Let me explain why this is so important.

Though non-compete agreements are generally disliked by China’s administrative and judicial authorities, many employers like to have a non-compete agreement in place with every employee they hire, even part-time workers. Moreover, many employers prefer to have an elective agreement where the employer has the right to decide whether or not to enforce the non-compete agreement upon termination of the employment contract. In other words, the employer gets to decide whether it will pay the employee for not competing for a certain period of time after the employee’s departure, or whether the employee can “go free” without any restraints. The legality of such an elective arrangement depends on where you are located in China, but for purposes of this discussion let’s assume such terms are in fact legal and enforceable.

It makes complete sense for the employer to want to wait until the end of the employment term to see if the employee possesses any proprietary information worth protecting, since things may change during the course of employment. This especially makes sense because in China the employer must pay its departing employee not to compete.

What though happens if the employer does nothing when the employment relationship ends. Usually,“no action” on the part of the employer means the non-compete agreement does not come into force. If this is the employer’s intention it’s probably okay. But if the employee is both expecting and wanting a non-compete payment from you as his or her employer and you have not clarified the non-compete issue at time of termination, the employee may send you a demand for payment or even bring a lawsuit against you to enforce the non-compete. To avoid this battle and headache, if you decide you are not going to enforce the non-compete provision or contract, your best course of action is to make this clear to your departing employee before the employee’s departure. Doing this virtually always stops a terminated employee from suing for non-payment on a non-compete.

But what if you as the employer want to enforce your non-compete provision or agreement? In this case, you will need to inform the employee that you are electing to enforce the non-compete and you should also be sure to comply with all of the terms of the non-compete, including paying all non-compete compensation due to your departing employee. You should put your employee(s) on notice of your intent to enforce the non-compete via a clear writing to the employee. And by this I mean a hard copy document with clear language (in Chinese if your employee is Chinese) setting out your intention to enforce the non-compete. In most China jurisdictions, an employer who does not affirmatively confirm its desire to enforce a non-compete will be deemed to have waived its right to enforce the non-compete after three or so months. The exact number of months an employer can go without being deemed to have relinquished its rights to enforce a non-compete depends on the locale — as is true for just about everything else relating to China’s employment laws. See China Employment Law: Local and Not So Simple.

In the old days, when China non-competes were less complicated, our China employment lawyers pretty much always suggested to our clients that they put non-compete provisions in their China employment contracts. Nowadays though, we suggest they balance their need for a non-compete against the risks that such a provision or contract could eventually cause them problems. For example, what happens if you use a non-compete that automatically takes effect upon the employee’s termination and you have no intention of enforcing it when the employee leaves but you forget to terminate the non-compete when processing the employee’s departure? Though this too depends on your locale, in many of China’s cities, this will mean you will either need to reach agreement to pay your employee for a mutual termination of the non-compete or you do not pay any non-compete compensation and you run the risk of a Chinese arbitrator or judge determining that you are “stuck” with the non-compete because you knowingly signed a binding agreement that included one..

The bottom line is that you should be careful with your non-competes and that means not just inserting one without thinking through the repercussions of doing so and being very careful to act on any non-competes before any impending employee termination.

Categories: Chinese IP

China Online Gaming: Trademark and Copyright and Patent Protections

China Law Blog - Wed, 04/11/2018 - 07:28

China presents a wealth of opportunities for foreign gaming companies, but (and this is true of pretty much every IP-laden industry), it also presents substantial risks. See Gaming the System? Foreign Access to China’s Online Gaming Industry.

This post sets out the basics on how online gaming companies can protect their IP in China via China IP registrations. Though our law firm represents a host (sort-of-pun intended) of online gaming companies, we have been hesitant to write specifically about largely because it is not all that legally different from other industries. But because we have lately been getting emails requesting we do so, we will. Starting now.

The big thing to know about China IP laws as they relate to online gaming is that there really are no IP laws specific to online gaming. China’s IP laws relevant to online gaming are the same trademark and copyright and patent and IP licensing and trade secret and unfair competition laws we constantly write about on here. But though the laws are the same, how best to apply them to the particular product/industry — online gaming — differs. Our China IP lawyers generally view the IP work we do for our gaming company clients as similar to what we do for our movie and music and software and publishing (especially comic books) and toy company (especially dolls and character figures) clients.

China Online Gaming Copyright Protections. Copyright laws usually come into play when you are talking about “content” and when you are talking about online gaming, you are essentially talking about content. Online games are typically rife with copyrightable content, including the characters in the game, the music, the speaking, the story-line, and the animation. Oh, and of course the code

Registering copyrights for online games in China is very much like doing so in the United States and in Europe. Because of this, when we do such registrations, we usually just track what has already been done in the U.S. or in Europe. Registering video game source code in China typically consists of registering the source code using China’s special software registration rules. When it comes to registering the artwork in games, our normal strategy is to treat each character as a work of art. If there are special locations, these are also treated as a work of art. All the artwork is usually then collected into a bundle and is registered in one filing. The exact physical item that is sent to the registration authority depends on the nature of the work. Registration is not expensive and it is better to register too much rather than too little.

China Online Gaming Trademark Protections. As regular readers of this blog well know, we are huge fans of registering China trademarks. It is bad enough if someone copies your game but if they can legally give it and its characters the same names you gave them, it becomes nearly impossible for you to distinguish your game from the copy. Enforcing trademark rights in China is generally easier than enforcing a copyright rights and that’s why trademarks should always be considered for the name of the game and the names of the characters. The key thing you should know about China trademarks is that they usually take around a year to secure. This means you should file for your China trademarks as soon as you have an idea of what you will be calling your game and/or its characters.

China Online Gaming Patent Protections. Patents are still pretty uncommon in China for online games, but there will be instances where securing one will make sense. It really just depends.

Protecting your gaming IP requires you think ahead and act ahead. And as is true for pretty much all industries in China, the biggest benefit in your securing China trademarks and copyrights and patents will likely not so much to give you the ability to prevail in a lawsuit against an infringer, but to make potential infringers think twice before copying you. If given the choice (and to a certain extent infringers are given this choice) between copying your game that is loaded with registered China IP protections or copying a game with few or no China IP protections, the infringer more likely to pass your game by, which is exactly what you want.

 

Categories: Chinese IP

China Distribution Contracts: The Questions We Ask

China Law Blog - Tue, 04/10/2018 - 07:25

Forming a WFOE in China and then operating that business in China is difficult and expensive. See e.g., Forming a China WFOE: Ten Things To Consider and also Doing Business in China with Deportation or Worse Hanging Over Your Head on why having a WFOE is a must if you will be doing business within China. Because of this, our China lawyers are seeing increasing numbers of foreign companies choosing to sell their products in China via distribution relationships rather than via a WFOE. For the basics on what is involved in establishing a distribution relationship with a Chinese company, check out the following:

Today’s post focuses on some of the questions we often ask our clients that are looking to do distribution agreements with a Chinese company. It consists mostly of an amalgamation of emails from our China attorneys seeking more client information and providing additional client assistance before drafting a China distribution agreement.

 

I have the following basic questions and comments regarding your agreement.

1). For payment terms. The standard is as follows:

a. Shipping terms can be CIF or ExWorks. For products like yours, ExWorks is common, since estimating shipping and insurance costs can be quite difficult. If you do not know the port, you should not quote prices CIF and you should instead quote either Free Carrier (most common) or Ex Works. Either way, your distributor would be responsible for the shipping cost to the port of its choosing. It might be Shanghai for one shipment, it might be Qingdao for another shipment. That would be their decision and you want to leave the terms flexible so they can make the decision in a way that will not put you at a financial disadvantage.

I recommend you do not include price in the agreement but instead provide that your products will be sold at your normal distributor export price pursuant to a price list you will periodically provide to your distributor.

b. China’s letter of credit system is not very effective. If you ship your products before receiving payment for them, you are taking the full risk that the Chinese side will not pay. Our clients usually deal with this in two ways:

i. Conservative manufacturers require full payment before they ship.

ii. Less risk averse manufacturers ship on 30 days after the date of shipment (Net30) terms. These manufacturers provide for the right to shift to payment before ship terms if there is a problem.

2. You indicate wanting your proposed distributor to make advance payment for enough product to cover three months of projected sales. You need to specify an exact amount that must be purchased of each product and you also need to specify the sales terms. Your situation is further complicated by your not having Chinese government import approval yet for any of your products. For the first shipment, even where Net 30 terms are standard, most manufacturers require payment in advance of shipment. If you are not able to provide specific details in the agreement, we will provide that the exact terms of the first shipment will be determined after import approval is received. The agreement will terminate if that purchase is not completed by some certain date.

3. You have provided us with the sales milestones you want for your China distributor. This is always a good idea in a exclusive distributor arrangement but more detail is necessary, including the following:

a. You have discussed milestones for only one of your products. Will you have milestones for your other products as well? If yes, when will they be established and in what quantities?

b. Sales milestones for China distributors are usually set on a quarterly basis and not broken down by province. In formulating your sales milestones, you probably will want to account for the fact that there is not yet China government approval to import your products. If you plan to set sales milestones now for your other products we can do that as part of this agreement.

c. You can, of course, set the sales milestones at whatever level of specificity you desire. This is a business matter, not a legal requirement.

The issue of sales milestone is usually a big issue in this kind of agreement, so setting the milestones in a way that is clear and simple to understand is important.

4. When there is an exclusive agreement the term/length of the agreement becomes of critical importance. The normal procedure is to provide for a term long enough to give the Chinese distributor time to earn back its efforts in promoting your products. A three year term is typically the minimum, with five years more common. Most China distributors that plan to put in substantial work to market and sell your products will require the distribution agreement to automatically renew if they achieve their sales milestones. The China side will often want a provision saying that if the parties cannot agree on new milestones after the end of the first term, renewal will be automatic based on some predetermined formula. Chinese distributors that do not require something like this are oftentimes not planning to do the work necessary to succeed.

You mention wanting either party to be able to terminate the agreement with 90 days notice. Though such a provision is legally acceptable under Chinese law (which generally is far more liberal in what it allows in these agreements than either the EU or the United States), this sort of provision will normally be rejected by a serious distributor. Why would they do all the work necessary to get your product into China and to become well-known in China only to have you shut them down for any reason and with only three months notice?

5. When selling products in China, you need Chinese and English trademark protection for each product that will be sold. Serious distributors will insist that such protection is in place. Our China trademark lawyers can handle the appropriate China trademark registrations or you can have your distributor take care of this on your behalf as your agent. In either case, you should take care of the trademark registrations as soon as possible See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. If your distributor takes care of this for you, you will want to ensure that the registrations are done in your name and not in theirs.

6. Your distribution agreement must be enforceable in the PRC. To make it enforceable we will draft it with Chinese law as the governing law, with the Chinese language as its controlling language, and with enforcement is in a Chinese court. For why we draft these contracts this way, check out China Contracts that Work and China Contracts: Make Them Enforceable Or Don’t Bother.

7. The confidentiality agreement you attach is not enforceable in China. See Why Your NDA is WORSE Than Nothing for China. Rather than draft a separate agreement, we will insert standard China NNN (non-use, no disclosure, non-circumvention) language into the main agreement.

8. The concepts of “hold harmless and indemnify” are pretty much foreign to the Chinese system and there is no effective commercial insurance program for this sort of coverage. We therefore normally provide a simple statement of the parties’ basic duties and liabilities. We normally provide that the distributor will be liable for damage caused to you by their actions in violation of the agreement. Since your proposed China distributor is a relatively small company you should assume it lacks the financial wherewithal to deal with a major claim and you should consider securing your own insurance.

9. I note that you are expecting your China distributor to do a fair amount of work prior before there will be a flow of products that will provide an income stream to your distributor to do that work. It appears you intend for your distributor to do this work at its own expense. In that regard:

a. Have you discussed this with your distributor? Have they agreed?

b. If you are expecting this preliminary work to be independent of the distributor achieving its sales milestones, the agreement should give you the right to terminate the contract if your distributor never does the preliminary work or does an inadequate job at it, solely in your discretion. You can do this by basing termination on your distributor’s failure to meet an early milestone or  by providing for a separate right to terminate. We should discuss.

 

For more on doing China distribution deals check out the following:

 

Categories: Chinese IP

China Sourcing 101

China Law Blog - Mon, 04/09/2018 - 05:58

China sourcing is complicated. And that’s talking strictly about the non-legal side of it. Our China lawyers who draft manufacturing contracts (typically NNN Agreements, Product Development Agreements and Contract Manufacturing Agreements) have seen enough mistakes to write a book. Well someone sort of just did. Renaud Anjouran, of Quality Inspection Blog, essentially just did, in his post, China Sourcing 101: the 15-Part Guide for New Buyers. He describes it as a “15-part series for new buyers who are starting to work with Chinese suppliers (and for more experienced people who want to double-check whether they are working in a smart way)” and it consists of the following 15 articles:

  1. Do You Need a Sourcing Agent?
  2. How to Identify Potential Suppliers?
  3. How to Verify a Manufacturer
  4. Second Choices vs. “Never Again”
  5. Negotiation: The Terms you Need to Discuss
  6. Keep Some Leverage with Suppliers
  7. Pre-Production: Describing What You Want
  8. Project Management of Your Orders
  9. Check Quality Early in the Manufacturing Cycle
  10. Always Verify Quality Before Shipment
  11. Build Good rapport with Suppliers
  12. How Closely Do You Follow Your Productions?
  13. The 5 Steps to Developing a Chinese Supplier
  14. How a Factory Can Improve Quality
  15. How a Factory Can Improve Productivity

If you want help in figuring out how to better source your product from China, I suggest you work your way through this series. And if you want help on the legal side, I suggest you read some or all of the following:

China Factory Problems: Always YOUR Fault?

How To Get Good Product From China; Specificity is THE Key To Your OEM Agreement.

China OEM Agreements. Ten Things To Consider

China OEM Agreements. Yet Another Reason To Have One

China Supply Agreements. Why The “Perfect” OEM Agreement Should Cost Less

OEM Agreements With Your China Supplier. Not Just For The Big Boys

China OEM Agreements. Why Ours Are In Chinese. Flat Out

The Five Steps To Successfully Buying Product From China.

China Manufacturing Agreements. Make Liquidated Damages Your Friend.

How To Get Bad Product From China With No Legal Recourse.

Any questions?

Categories: Chinese IP

China’s Artificial Intelligence Plan and IP theft

China Law Blog - Sun, 04/08/2018 - 05:58

I have received a number of emails in response to my recent post on China’s artificial intelligence plan. Many who wrote me seek to reduce China’s plan to the following simple, three step process:

  • Catch up in AI by 2020.
  • Learn to make some basic products by 2025.
  • Lead the world by 2030.

This does not accurately summarize the plan, though it is how much of the English language media describe it. The full PRC AI plan is set out in 35 pages of dense, jargon heavy, Chinese bureaucratic prose. I will be doing a series of blog posts seeking to explain the full plan. My first post, China’s Artificial Intelligence Plan — Stage 1, dealt only with stage one, and as you can see from that post, stage one is not written as “catch up.” Stage one is a full-on plan to continue developing technologies with which Chinese companies are already working. I note also that manufacturing automation robotics is not featured. On the robotics side, the emphasis is on service robots.

Note also that the Chinese companies are already way ahead of this plan. They are not waiting around for guidance from the government on their AI projects; they are moving ahead full speed. In general, Chinese companies are succeeding most with the software/network based applications of AI. This is the focus of the Baidu research center in Silicon Valley. They are not doing as well with mechanical devices such as robotics and smart vehicles and sensor based IoT devices. However, they know that and they are making strong efforts to advances in these areas. We touch on this a bit in China IP Challenges for Automotive Suppliers. One of the areas on which many Chinese companies are focusing is on human/AI interaction and they are having good success with that in the field of medical imaging and diagnosis.

There is little doubt that part of China’s AI strategy involves acquiring technology and then selling in back into the developed market from which it came. This has been and still is the strategy of businesses in pretty much every developing country. The U.S. followed this approach during the entire 19th and early 20th centuries. Japan and Korea and Taiwan did it with great success in the post WWII era. China and India are now moving into that phase. That is how technical progress is made and we write about to guard against this sort of IP appropriation nearly every week. See How To Give Away Your IP In China, How to Give Away Your IP in China Without Realizing It and China and the Internet of Things and How to Destroy Your Own Company. The real question is whether this strategy will work in the AI era  In general, Chinese companies are not good at working on their own to appropriate foreign technology. They prefer to enter into a manufacturing or joint venture arrangement where they convince the foreign entity to teach them how to use the technology. See China Joint Ventures: Keeping Your Friends Close and Your IP Closer. Then, later, they appropriate the technology and sell the cheaper product back into the same market. This is what Chinese companies did with high speed rail and with the Russian designed fighter jet and this is what they are trying to do it now with commercial aircraft. They will undoubtedly seek to do the same thing with AI and robotics. See China-US Trade Wars and the IP Elephant in the Room. Will China succeed it purloining AI IP? It depends on a couple of factors. First, if the technology is protected by patent and copyright and trade secrecy, then they cannot sell into the markets where those IP protections exist. This would mean that North America and the EU would be closed to them, at least during the period where the IP protections are in place. Second, can Chinese companies master the technology to point where they can really compete? Normally, the Chinese companies simply clone the product and then seek to compete solely on the basis of price. For some products, this works. For more sophisticated IoT, AI, “smart” products, the success rate of the Chinese companies has been low. How many U.S. consumers get excited about the purchase of a Lenovo computer or a Xiaomi cell phone? How many U.S. customers are interested in buying PRC knock offs of virtual reality headsets? Not many. Price is not the significant issue for these more technically sophisticated products. When Chinese companies cannot compete on price, they traditionally don’t know what to do. There are many programs in place in China focused on changing this “price is the only issue” mindset. So far, progress has been sporadic at best. However, without regard to whether China can succeed with its AI program, it is clear that appropriating foreign AI technology is the goal of most Chinese companies operating in this sector. For that reason, foreign entities that work with Chinese companies need to be aware of the significant risk and take the necessary steps to protect themselves. There are many ways to do this, using a mix of IP registrations and carefully drafted agreements. See China Contracts: Make Them Enforceable or Don’t Bother. This is what the China lawyers at my firm focus on and this is the issue we discuss most often on this blog. So stay tuned.
Categories: Chinese IP

China Joint Ventures: Keeping Your Friends Close and Your IP Closer

China Law Blog - Fri, 04/06/2018 - 08:01

United States media has recently been frequently writing of how China forces foreign companies to relinquish their intellectual property to Chinese companies to be able to do business in China. This issue has been getting a ton of press lately because this is one of the justifications President Trump has been using to increase import tariffs on imports from China. It really isn’t this simple though. Many stories make it seem foreign companies must always relinquish their IP or at least must always do a joint venture to do business in China and doing a joint venture will mean losing your intellectual property.

Truth is that for most industries doing a joint venture is 100% voluntary on the part of the foreign party and truth also is that doing a joint venture need not include relinquishing your intellectual property. Much of the time foreign companies lose their IP to Chinese companies by falling prey to what the China lawyers in my firm call “the joint venture scam.” This scam is quite old — old enough for many Chinese companies to have thoroughly mastered it by now — and it usually works as follows:

  • The foreign company seeks to sell its complex and expensive technology to a Chinese company on a standard technology licensing basis.
  • After much discussion, the Chinese company asserts that the price is too high for an untested technology. The Chinese company then offers to establish a China joint venture company with the foreign company owning a percentage of the China Joint Venture.
  • The foreign company contributes its technical system in exchange for its ownership interest in the China Joint Venture and the China company contributes the rest. The IP contribution by the foreign company means the China JV now owns the technology for China. The China JV agrees to purchase more technology from the foreign company at full prices after the Joint Venture is up and running.
  • The foreign company then delivers and fully trains the Chinese side in how to operate the foreign company’s technology.
  • The China JV never purchases anything from the foreign company claiming that the foreign company’s technology does not work properly or as claimed. The foreign company eventually discovers that its technology has been cloned and is being used by a facially unrelated company in China. Since the China JV owns the technology, this unauthorized use probably infringes on the Joint Venture’s intellectual property rights, but so what? The JV must sue to defend its rights but because it is  controlled by the Chinese company its management refuses to take any legal action.
  • The JV then disappears, sometimes with the Chinese side buying out the foreign company at a substantial discount.

This system in various forms is still being actively used in China. And foreign companies still sometimes fall for it, but not you. Right?

For more on China Joint Ventures, check out China Joint Ventures, the 101.

Categories: Chinese IP

China IP Challenges for Automotive Suppliers

China Law Blog - Thu, 04/05/2018 - 12:13

I did an audio interview the other day with GlobalAutoIndustry.com, a very international site dedicated to the auto industry. The topic was China IP Challenges for Automotive Suppliers, but it dealt mostly with automotive high-tech. I urge you to go here to listen to the entire interview as the below is just a hastily put together transcript of it and it does not include all of it.

For anyone who has been living in a cave, the auto industry has changed, is changing, and is very much on the cusp of more change, much of this stemming from cutting edge and rapidly advancing technologies. Or to borrow from a mega-famous car ad, this is not your father’s auto industry.

And with these technological advances comes massive IP needing protection. Our China lawyers have mostly represented American (and a smattering of European) auto tech companies that have been approached by Chinese companies interested in our client’s intellectual property. Just as is true of the United States, some of China’s largest tech companies are interested in developing and commercializing automobile technologies and they are searching the world to find such technologies. These massive Chinese companies (and some not so massive ones as well) are reaching out in droves to foreign companies to try to supplement their automobile technologies. Our job as their China IP attorneys is to help them protect their IP. My interview discusses some of the IP issues these foreign tech companies face and some of the things they can and should do to protect their IP. I urge you to give it a listen because it includes a few things not covered below (including church bells going off in Madrid — that’s a long story). Anyway, please enjoy.

 

What are the big issues you are seeing with China and the automotive world?  The auto industry is changing and fast and a large part of the rapid changes are happening with technology. What we are seeing is Chinese companies wanting access to auto technology that is being developed outside China. Ten years ago, we were talking about things like transmission mechanics and technology, but today, we are seeing this in all sorts of cutting-edge technologies, like driverless cars, battery charging, sensors, always-on cameras, artificial intelligence, composite materials technology, adaptive headlights, Internet of Things (connectivity).

 

What sort of companies want these technologies and from whom? On the China side, it is mostly just the big and powerful Chinese auto and technology companies that are looking to get access to these new technologies. On the foreign side, all sorts of companies are being contacted for their technology, but mostly ranging from one product start-ups to mid-sized companies. What these foreign companies usually have in common is that they have no experience in dealing with China.

 

What sort of deals do the Chinese companies usually propose and what should the foreign companies do in response? The Chinese companies oftentimes do not propose anything at all; they simply tell the foreign company about the massive opportunities in China and ask to be able to test out the technology. Fortunately, at least some of these foreign companies reach out to lawyers experienced in dealing with China for help on what they should be doing at this point.
And what should they be doing at this point? Not just handing over their technology, that’s for sure. At this stage, we advocate our clients do two things right away. One, register whatever IP they have in China. This IP typically consists of patents and trademarks (and sometimes copyrights) and we explain how a US trademarks and patents do not provide protections in China and how it is necessary to register those in China to protect them in China from Chinese companies. Then we explain how they need an NDA Agreement for China that is very different from the NDA Agreements they use in the United States or in Europe – so different in fact that their home-country NDAs almost never provide any protection in China. They almost always need a China NNN (Non-Compete, Non-Disclosure, Non-Circumvent) Agreement in Chinese and drafted for China. Once they have done the IP filings and have an NNN in place, they are much safer in providing their technology to the Chinese auto or technology company.

 

Are the IP registrations in place and a signed NNN Agreement enough to make it safe to turn over the IP? Not exactly. The more companies to which any company turns over its IP, the greater the risk of losing the IP. So, we also always advocate for first making sure that the company to which our client is turning over its IP is a legitimate company and we usually determine that after some level of due diligence on that company. And, most importantly, we want there to be at least some chance of a deal happening before the technology is revealed. By this I mean that if the Chinese company wants to buy the technology for a million dollars and our client would never sell it for less than ten million dollars, than it might as well just walk away without ever revealing its technology. Maybe 25% of the time just a few forthright conversations reveal there will never be a deal and our client walks away without a deal, but also without having put its technology at any risk.

What usually happens once the parties start talking is that the Chinese company wants to form some sort of Joint Venture with our client in which our client puts its technology into a joint venture entity that will be formed in China and then if the joint venture entity does well, our client will supposedly do well. We as China lawyers do not usually like these sorts of arrangements because once IP/technology goes into a joint venture it virtually never comes back and it is the rare foreign company that takes home profits from a China joint venture.

 

What sort of deals do you prefer? I’m going to have to give you a lawyer’s answer here, and say that it depends, but usually something more along the lines of a straight licensing deal is safer for our clients. Something where our client keeps all its IP and simply licenses it out to the Chinese company for ten million dollars a year or $2 per widget into which its technology goes.

Do the Chinese companies go for these licensing deals? Yes, but usually only after our clients have held out long enough so that the Chinese company is convinced this will be the only way it will get access to the IP or the technology.

 

How do you ensure your client will get paid the ten million dollars? I’ve heard getting money from Chinese companies can be difficult? You have heard right and there are many reasons for this, ranging from Chinese government capital controls to Chinese companies wanting to get technology by paying as little as possible. There are all sorts of solutions that increase the likelihood of foreign companies getting paid, with the best being to require some or all payments be made before some or all the technology is revealed.

 

 

Categories: Chinese IP

Dual Language China Contracts: Don’t Get Fooled!

China Law Blog - Wed, 04/04/2018 - 05:58
Don’t trust the translation

Can’t believe this still happens, but it is, and in numbers that would likely surprise many people. The “this” to which I am referring is foreign companies signing dual language contracts without knowing exactly what the Chinese language portion of their contract says. This is really risky dangerous and below I explain why.

Many dual language Chinese-English contracts are silent on which language controls. For some unknown reason, foreign companies far too often just assume that the English language portion controls or they just assume that it does not matter because the meaning of both the English and the Chinese portions is exactly the same. Wrong, wrong, wrong.

What language controls when you have a dual-language contract?  If both languages say the same one language controls, that one language will control. If both the English language and the Chinese language portions say the Chinese language portion controls, the Chinese language portion will control. Similarly, if both the Chinese language and the English language portions say the English language portion controls, the English language portion will control. These are the easy and safe examples.

It is everything else that so often cause problems for American and European and Australian companies in  trouble.

If both your English language and your Chinese language portions are silent as to which portion controls, the Chinese language portion will control in Chinese courts and in China arbitrations. In real life this means that if the English language portion of your joint venture contract says that you get 10 percent of the joint venture’s revenue  but the Chinese portion says you get 10 percent of the profits (which will of course be way less than revenues) you will have no legal basis for claiming anything more than 10 percent of the profits. Not surprisingly it is joint venture contracts and licensing agreements where our China lawyers most often see this sort of meaningful dichotomy between the English and the Chinese portions of the contract.

Of the hundreds of dual language contracts proposed by Chinese companies and reviewed by one of my firm’s China attorneys, we’ve never seen a single one where the Chinese portion was less favorable to the Chinese company than the English portion. But we’ve seen plenty where the Chinese portion is better or much better for the Chinese company than the English portion. Chinese companies love using a contract with an English portion that is more favorable to the foreign company than the Chinese portion and then relying on the English speaking company to assume that the English language portion will control.

But what if the English language portion explicitly states that it will control? This works right? Not necessarily. If the Chinese language portion also explicitly states that it will control, the Chinese language portion will control under Chinese law. If the Chinese language portion is silent or says that the English language portion controls, the English language portion will control.

As we noted in China Contracts: Make Them Enforceable Or Don’t Bother, it usually makes sense to draft contracts with Chinese companies in Chinese with an English language translation. But this also requires that if that contract is going to be enforced in China (as should usually be the case), you absolutely positively need to be certain that you know exactly what the Chinese language portion of that contract actually says. No matter what the English language portion of your contract says, it behooves you to know exactly what the Chinese language portion says as well.

Categories: Chinese IP

China Manufacturing and Product Type Chaos

China Law Blog - Tue, 04/03/2018 - 06:52

In the old days, purchasing products from China was relatively simple. The product was a basic “off the shelf’ product. The product was a fungible, internationally traded products, such as white t-shirts, underwear, medical gauze, rubber gloves, tableware and similar. For that reason, specifications were set based on an internationally accepted standard. Neither party set the standards; the standards were set by the market. For these types of products, purchases based on standard international purchase orders was the norm. Though the purchase order approach never worked well, at least for outlining the basic quality standards and business terms, purchase orders were adequate.

The first stage in complicating the system was when foreign buyers began requiring their Chinese factories to do some simple customization of the factory’s off the shelf product. This usually involved little more than putting the buyer’s brand name on the item and its packaging. The next stage of complication came when foreign buyers came to China with a completed product and requested their factory copy it. Since there was a physical item as a basis, there was a clear standard for determining specifications and quality. The copy was either good or bad and it was relatively easy to decide. So even in this era, a simple purchase order usually was sufficient to set out the basic terms of the agreement between the parties.

In the current world of contract manufacturing in China, the situation has become far more complex. It is no longer sufficient to simply set out the terms of the agreement in a simple purchase order or a purchase memorandum. One reason for this complexity is that there is no longer a single type of product being purchased. Dealing with the proliferation in product types has made drafting contract manufacturing agreements progressively more challenging.

For example, even in a very basic contract manufacturing relationship, the foreign buyer is typically dealing with four completely different types of product. The China lawyers at my firm call that the “standard mix.” For this set of products, we typically use the following terms:

1. Manufacturer Standard Product (“Standard Product”).

2. Customized Standard Product (“Custom Product”).

3. Buyer Designed Product.

4. Co-Designed Product, where Buyer claims to own the design IP.

We often call call both 3 and 4 “Buyer Designed Product,” since the buyer claims to own the intellectual property in each case, so there is no real need for two different terms. However, one of the first issues we often confront is that in the case of 4, Co-Designed Product, the Chinese factory usually does not agree that the buyer owns all the intellectual property. For this reason, in defining the term, we make clear the entire ownership rests with the buyer, without regard to the participation of the factory in the design process. This forces the factory to make clear at the start whether will it assert that its own the IP.

Working with these four categories of product in a single contract manufacturing agreement is difficult, but there are other types of products where IP ownership is even more difficult to nail down, making drafting (and doing business) even more difficult. Consider the following:

1). Buyer standard product, base product, or “off the shelf” product is often what we can more technically call an “open source” product where specifications are an industry standard. That is, no one owns the design of a white t-shirt or a pair of flip flops or surgical gauze. These products are standard and made all over the world and they are international set specifications. For these products, the specifications are taken from the international industry standard and the factory is held to that standard. An example is thread count for the fabric used to make t-shirts or underwear.

2. There is, however, another type of “off the shelf” product: this is product for which the factory claims that it owns the design of that product. In some cases, the manufacturer did the design and really does own the design. In other cases, the factory “borrowed” or “appropriated” the design from someone else. Often, these are more complex devices like equipment, machines and electronic devices for which the patent has expired and anyone is free to make a copy. However, in other cases, the factory did in fact steal the design from some other entity that claims design ownership.

In the past, we tended to call both 1. and 2. above “manufacturer base product” or “standard product” or “off the shelf product”. But it is important to note that these two types of product are really quite different. For example, for 2, the specifications come from the factory (not industry standard), the warranty is that the factory will meet its own specifications and there should be an additional warranty from the factory that the manufacturer really does own the IP rights in the product.

Since the issue is usually ignored, there has been no good term for identifying product type number 2. That is, buyers tend to treat product type number 2 as if it were the same as number 1, which is a mistake. For clarity, 1 should be called “off-the-shelf” product or “standard product” or “base product” while 2 should be called “manufacturer proprietary product” or something like that. On the ground, these two types of products are often not clearly identified by the factory, making it even more difficult to determine what is going on.

But the fact is the legal situation for these two types of product is entirely different. In some cases, truly fungible product of type number 1 can be purchased using a purchase order or a standard form agreement. This is not true for the type 2 product where a  completely different legal approach is required. But it is not possible to know what to do until the type of product has been properly identified.

3. There then is a third type of product where the factory owns the core technology but the foreign buyer owns the external “shell.” We see this a lot with medical and electronic devices. The factory owns the technical internals and the foreign buyer owns the design in the case and other housing for the technical internals. The normal position of the IP ownership taken by the factory is that the buyer is free to take the shell to another factory, is not free to take the technical internals to any other factory.

Many buyers do not understand this. They come to the factory with the opposite interpretation. The foreign buyer believes they should be free to take the entire unit to another factory for manufacturing. This mistake in interpretation has become quite common in the past three years and it has caused many disputes and eventual failures in production. In every instance seen by the China attorneys at my firm, the foreign buyer wanted to take the entire product to a different factory and just assumed it could do so and actually built its business model on that assumption. In each case, the Chinese factory refused late in the process and basically halted the product commercialization process. No venture capital fund would provide funds for a product where a single Chinese factory controls production.

4. Finally, there is a the truly co-designed product. In this case, both the buyer and the factory developed the product working together. This is the type of product for which a Product Ownership or Co-Development agreement is required. See Hardware Co-Development in China: Do it Right, Part 4 (and the previous three posts in this series). Without such an agreement, the buyer often believes it owns the design, but in fact either a) both parties have equal ownership in the design or even worse b) the Chinese factory owns the entire design because it did the hard creative work. The foreign buyers are usually unaware of the basic legal rules in this area and during the co-design process they lose ownership and control over their key product IP. Usually this happens before the buyer contacts a lawyer with China manufacturing experience. For examples of how companies lose their IP, check out China and The Internet of Things and How to Destroy Your Own Company.

As you can see, the issue of just what type of product is being purchased from a Chinese factory has become complex. The situation will become even more complex as more IoT and related smart products are produced that combine design, hardware and software with inputs from heterogenous sources, many of which are not in the control of either the buyer or the manufacturer. So the days of a bare purchase order are long over. Moreover, the days of a simple, one size fits all purchase agreement are also over. But many buyers still think of the process as being the same as in the old days of purchasing fungible off the shelf products.

Categories: Chinese IP

China Trademarks: One Belt, One Suspenders

China Law Blog - Mon, 04/02/2018 - 10:14
How many China trademarks do you need?

Our trademark clients often ask how many trademarks they ought to register in China. The answer is not as straightforward as it may seem.

As an initial matter, companies should register the brands that they are actually using and on the goods or services that are actually in use in China. But sometimes clients are unable to register their actual trademark (either because it was too descriptive or too similar to an existing registration) and instead opt to file applications for a similar trademark they have no intention of ever using. Their rationale is that if they can register the similar trademark, it would block any applications for their actual trademark. This is not an approach we recommend, but it’s not as crazy as it sounds. Just because their application was rejected doesn’t mean a trademark squatter’s application for the exact same mark would be rejected. CTMO examiners are not bound by previous decisions and their decisions do not always make sense. More on this below.

The more famous the brand, the more likely a trademark squatter will attempt to file a phonetically or orthographically similar mark, so as to take advantage of credulous consumers. This is especially common with the Chinese version of a foreign brand; the Chinese brand name is often new and not well known, so who’s to say which Chinese name is accurate? Companies that can afford it should apply for as many similar trademarks as you can afford, especially Chinese-language marks. See Chinese Brand Names, Copycats, and Soundalikes.

Chinese law also allows (if not implicitly encourages) trademark applicants to file in multiple classes, covering a range of goods and services far beyond what the applicant actually provides. We often cite Starbucks as a prime example of a company that has taken full advantage of this strategy by (for example) registering “STARBUCKS” as a trademark in all 45 classes of goods and services. See China Trademarks: Register in More Classes, Take Down More Counterfeit Goods.

Another question is whether companies with a logo that contains some text should file separate applications for both the logo and the text itself. The short answer is yes: filing separate applications for both the logo and the word mark provides more protection than just the logo by itself. You can use the word mark with all fonts and in all contexts, and you won’t need to file a new word mark application if you change your logo (which happens all the time). And although a logo that includes text is typically considered more distinctive than a word mark by itself – and therefore more likely to be registered – the CTMO examiners are unpredictable enough that even this isn’t always true. I was reminded of this recently when we received different decisions on two almost-identical trademarks. One was a word mark; it was approved without incident. The other was a slightly stylized version of the word mark; it was rejected due to a perceived conflict with a preexisting mark. It makes zero sense that the CTMO issued these two decisions, but consistency has never been that agency’s strong suit.

You never know for sure what will work with the CTMO, but on a sheer numbers basis, the more trademark applications you file, the more likely one is to be registered.

Categories: Chinese IP

Improving Mexico and China Business Relations: Make it the Law

China Law Blog - Sun, 04/01/2018 - 12:11
State dinners are nice, but….

The following is a guest post by Adrián Cisneros Aguilar.*

Over the past decade, I have come to the reluctant conclusion that most Mexican companies are unwilling to spend the time or the money to get timely, experienced, and appropriate help when doing business with China. I cannot tell you how many times in just the last year a Mexican company has come to me for my “quick” advice on “a few key terms” of a deal they are just about to close without having ever conducted even the most basic legal due diligence. Is the Chinese side a real company? Are they dealing with an authorized representative? Is the deal legal under Chinese law? Will they have any recourse if something goes wrong?

Mexican companies doing business with China (and many of the business consultancy firms advising them) do not seem to care about these questions, and it stems from a false distinction between “business” and “legal” affairs. A company is both empowered and constrained by business norms, but those norms have no meaning without a legal framework. It’s not one or the other – it’s both. And comprehending the importance of both business and legal affairs is all the more important in countries like China where the law is often interpreted with an eye to both politics and the economy. But few Mexican entrepreneurs see law that way – they only care about the deal, and they tend to think of the law as an obstacle.

Many Mexico experts boldly claim that Mexico can rely on its treaty network to expand its imports and exports, but this is a triumph of theory over practice. Few Mexican companies truly understand how to conduct business internationally, as witnessed by the underutilization of the free trade agreement network already available to them. According to a report by the Congressional Research Service, approximately 80% of Mexican exports go to the United States (don’t get me started on the amount of FDI we get from America), but most Mexican companies are not familiar with the applicable terms of NAFTA. This lack of sophistication leads to bad business decisions. I regularly receive emails from Mexican companies that have fallen for the Chinese bank switch scam and hope that I can help get their money back.

Having worked with many Mexican companies in improving how they do business in China and with China, I worry that too many Mexican companies continue to ignore the law (largely because they don’t care about it) and never truly become “international.” Plenty of Mexican companies buy low cost off-the-shelf Chinese products to import into Mexico and there are also a number of Mexican companies that intermittently supply products to China with little or no added value. But how many Mexican companies have strong investments in China or regularly sell large amounts of product there? Not many.

To put it bluntly, if our government and our companies do not start spending more money for high-level assistance to get more sophisticated about China, our government’s current international diversification strategy will fail, at least for China. Before we spend more money encouraging Mexican companies to go abroad (or at least to somewhere other than to the United States), or promoting Mexico as a target for foreign investment, we need to spend more money educating Mexican companies on how to conduct business internationally. We need to get them to think more about the importance of the relationship between China law and business.

Otherwise, we’re just going to be spinning our wheels.

For more on business between Mexico and China, check out the following:

 

*Adrián Cisneros Aguilar is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalization services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

Categories: Chinese IP

China Non Disclosure Agreements: Please do Not Try This at Home

China Law Blog - Sat, 03/31/2018 - 12:30
Protect your IP from China with an NNN Agreement

United States companies all too often make the mistake of trying to protect their intellectual property from China by using a U.S. style non-disclosure agreement (NDA). These agreements do not work for China. Chinese companies know this and so they willingly sign them.

U.S. style NDAs focus on preventing disclosure of trade secrets to the public and they are written in English, subject to U.S. law, and exclusively enforceable in a U.S. city. These things all make complete sense if you are looking to stop an American company from revealing your trade secret, but this kind of NDA is of no value when dealing with your typical Chinese company based in China.

None.  

First off, the fundamental issue when dealing with a Chinese company is not protecting your trade secret from being disclosed to the general public. The Chinese company that wants to steal your idea does not want to do so to reveal it to the general public; it steals your idea to use for its own benefit. This means your non disclosure contract with your Chinese counter-party must make clear that whether the information you provide is a trade secret or not, the Chinese company cannot use that information in competition with you.

The other fundamental problem with U.S.-style NDA agreements is that it they are not enforceable in China. Chinese law allows for protecting trade secrets and for contracts that provide NNN protections. But for such a contract to be effective and enforceable in China it should be written in Chinese, governed by Chinese law, and exclusively enforceable in a Chinese court. See China Contracts That Work.
Do not use a U.S. style non-disclosure agreement. Instead, use an NNN (non-disclosure, non-use, non-circumvention) agreement written to be enforceable in China. For all that entails, check out China NNN Agreements.

Categories: Chinese IP

Quick Question Friday, China Law Answers, Part 59

China Law Blog - Fri, 03/30/2018 - 10:25

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 or phone calls 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 provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

I got an email this week from someone I’ve known since forever, telling me that his company was looking to start selling its products to China and “what’s the one thing we should look out for.”

My response was that there are two key issues when selling to China. The first is one we have covered here again and again and that is to register your IP in China before you start doing business with China See China Trademarks: Register Yours BEFORE You Do ANYTHING Else. The second should be a lot more obvious, but too often it isn’t, and that is make sure you get paid. Getting paid is most definitely a key issue when doping business with China. If a foreign seller allows its China buyer to get behind on payment, the result is never good. To quote a Chinese attorney friend of mine, “Chinese buyers don’t do letters of credit. They instead seek to impose the payment risk on the eager foreign seller who is living the ‘one toothbrush to every PRC citizen’ dream. The problem is that if the foreign seller insists on protective payment terms, the Chinese company just moves on. There are so many suckers available, they don’t need to worry.”

What then can you as a company do if you are going to be selling your products or your services to a Chinese company? One, conduct due diligence on your potential buyers. See China Business Due Diligence. Two, don’t do the deal unless you get a substantial amount paid upfront. See Getting Money out of China: Part 6 (and read the previous five parts of this series as well) Three, have a contract that works. See China Contracts that Work.

Just be smart….

 

 

Categories: Chinese IP

China Employee Terminations: Five Common Mistakes to Avoid

China Law Blog - Thu, 03/29/2018 - 11:58

Because China is not an employment at will jurisdiction, mutual termination of an employee is usually the safest path for China employers that wish to terminate a China employee. Many foreign employers understand the risks of terminating a China employee (whether on a fixed-term or open-term contract or even on probation) and seek a mutual termination to reduce those risks. Nonetheless, mutual termination of a China employee requires much care and our China employment lawyers keep seeing the following mistakes.

Using a non-Chinese style settlement agreement. An employer that uses a non China-centric settlement agreement probably will not have much problem getting its employee to sign it because the employee knows this agreement will not be enforced. I cannot tell you how many times one of our China attorneys has been contacted by a China WFOE needing help one or two months after having “settled” with an employee because that employee has returned to ask for more money or has just gone ahead and sued for it. If you are going to pay money to settle with one of your employees, you must get them to sign an agreement that will actually work.

Sending a mutual termination agreement as a total surprise to the employee. If you choose to go for a mutual termination, it usually means you lack a firm legal basis for termination and your employee almost certainly knows this. Just sending a mutual termination agreement to an employee to be signed usually leads to the employee rejecting the proposed agreement or to the employer having to pay much more than it would have otherwise. If the employee refuses to sign, the odds are good you will be stuck with this employee until the end of his or her employment term or perhaps until the employee reaches his or her mandatory retirement age. If you unilaterally terminate the employee, the employee will probably sue for unlawful termination and this may lead to his or reinstatement with the company. The better way to approach a mutual termination is to go to the employee seeking his or her buy-in and with a practical negotiation plan in place.

Presenting a mutual termination agreement with no or close-to-zero severance. China employees usually will agree to a mutual termination agreement with a quick and fair payout. But virtually no employee will agree to a mutual termination with no severance. In fact, the reason why this type of termination is called mutual termination is because the employee’s “price” for voluntary termination is a severance payment. If you offer no severance pay, you might as well forget about mutual termination. Since a mutual termination is like a contract negotiation, your offer will be perceived as negotiating in bad faith and the employee will not move forward with the negotiation. You should instead offer a fair amount in exchange for the employee’s voluntary departure and a written release of all claims against you.

Mailing a mutual termination agreement to the employee for signature. It is best to have the employee do this signing right in front of you on or before the employee’s last working day. If you mail a hard copy to the employee to sign, you had better take all necessary steps to ensure you receive an original of the fully executed agreement because if you don’t get that, it is essentially the same as having no written agreement at all. And with no written agreement, you as the employer will be at great risk of later legal action by the employee for the exact same issues you thought you had settled.

Leaving important matters open when concluding the mutual termination agreement. You need to carefully consider and seek to resolve all outstanding issues before the employee’s termination. Are there unpaid wages? Did the employee give up unused vacation days for your business and not get compensated for that? Is the employee owed any bonus? Did the employee get all overtime compensation due? Act slowly and carefully and do not allow an employee to rush you into signing an incomplete agreement. Employees will often say something about how these agreements are “just a formality and we can figure out by email later how much more you need to pay me for things like the statutory vacations days I did not take while working for you.” Do not go along with this! The goal of your termination agreement and your severance payment should be to end the matter once and for all. If “tying up” all loose ends means you will have to pay a little extra, so be it.

Slow down and get your mutual termination agreements right.

Categories: Chinese IP

Litigating or Arbitrating Against Chinese Companies: Settlement May NOT be an Option

China Law Blog - Wed, 03/28/2018 - 07:34

American and European companies often reach out to my law firm after having spent 4-6 months trying to reach a settlement with their Chinese counter-party and then given up. These companies tend to be quite frustrated and I find telling them that what has  happened to them is actually quite common and that Chinese companies rarely settle disputed matters early. Reaching settlement with a Chinese company without a live case or arbitration is very difficult.

Chinese companies tend to view litigation differently from Western companies. Western companies generally know litigation to be very expensive, very risky, and very time-consuming and they typically strive to avoid it. Chinese companies tend to be reluctant to engage in serious good faith settlement negotiations for fear the opposing side will view their having done so as a concession that their position is not all that strong.

Often, Western companies will engage in months and months of settlement negotiations with the Chinese side barely budging and/or constantly changing its negotiating position. Eventually the Western company gives up and calls one of our China lawyers for help in deciding whether it should just walk away or pursue litigation.

Faced with these matters, our China attorneys typically do the following:

  1. Review all relevant contracts.
  2. Gather up all relevant facts.
  3. Research the Chinese company.
  4. Conduct any necessary legal research.
  5. Review the settlement negotiations. Carefully.

Items 1-4 above are going to look very familiar to Western lawyers, but item five less so. This is because, settlement negotiations in the Western world usually cannot be used as evidence at trial or arbitration, but this evidentiary exclusion generally does not apply in Chinese courts or before Chinese arbitral bodies. Because of this, Chinese companies will sometimes drag out settlement negotiations in an effort to get YOU to put forth even lower (or even higher) settlement amounts and then use YOUR lowest/highest settlement offer to argue that YOUR case is worth a lot less or a lot more than you are now claiming. They will also use your factual admissions against you.

Western companies tend not to be prepared for this and we constantly see them saying things in writing like “though we admit we could have been clearer in our instructions to you” or “we do not dispute that if we had spotted this sooner our damages would have been less.” Very roughly speaking, Western negotiators often use “win-win” tactics in an effort to meet their opponent half-way. Using this sort of tactic in trying to settle with a Chinese company can be dangerous. In Chinese Business Negotiation – Guarding Your Virtue, China negotiation expert Andrew Hupert extorts companies “to stop bargaining like an American and give away nothing for free”:

Are you a withholding, passive-aggressive manipulator who makes promises he can’t or won’t keep? Well, maybe it is time to start — at least in China. No one buys the cow when they can get the milk for free. In China, technology, IP and business methodology is the milk of profitable transactions. If you’re giving it away too early or too cheaply, then you are the expensive cow no one buys. Sorry.

*    *    *    *

Americans new to Chinese negotiation think they can build up a bank of good will and trust by “front loading” their benefit package. Novices think that doing business in China is about having Chinese partners owe them favors. They are kidding themselves — and forcing conflict. If the Chinese side of the deal feels that it is ahead of the game, their best move is to terminate the partnership and lock in their gains — not wait around for you to collect on what you feel is owed to you.

Hupert is correct. According to Hupert, Americans seek to demonstrate their good will be over-delivering, hoping to build up a goodwill bank that will be reciprocated by the Chinese side. The Chinese side often encourages this by talking up the importance of the relationship or by acting as though it really truly does want to resolve the dispute. I have found that Korean and Japanese companies value “the relationship” considerably more than the typical Chinese companies, but far too many Americans think China and Korea and Japan are pretty much the same on this, but they most certainly are not. Hupert explains China “relationships” in the real world:

Win-Win type negotiators often feel that the best way to approach a negotiation is to demonstrate their good will, trust and value by “over-delivering.” They feel that if they provide the Chinese side with what it wants now (technology, brand, product designs), that the Chinese side will feel obligated to reciprocate later (distribution, execution, quality control). The western side has read up on guanxi and harmony, and believes this is the way to develop loyalty and respect.

Hupert sets out five ways to protect yourself in and from China and the following portions of his advice apply to settlement negotiations as well:

  • Don’t project your desires on your Chinese partners. Find out what they really want. Assume nothing.
  • Know what you want. Withholding is easy. Knowing what you want from your China counter-party is tougher. Good negotiators in China are able to articulate a graduated list of goals and demands. Prepare for a “YES” when you negotiate.
  • Ask for a specific plan for your future together and negotiate the specifics of what the Chinese company is offering.
  • Walk away smiling, if you have to. Some Chinese negotiators are too grabby for your own good. Don’t stick around hoping things will magically get better on their own because they won’t. If a China deal is going to die, than quick and clean is the best way. Don’t hang around to get abused and battered, praying that they’ll eventually see what a great partner you could be. Get the hell out of there now.

Despite the long odds of settling with a Chinese company without first filing for litigation or arbitration, our China dispute resolution lawyers usually (but certainly not always) counsel our clients to at least try, but to be careful when doing so. Among other things, we urge them to do all that they can to protect the confidentiality of their settlement communications and yet still be mindful of every communication they send. Make clear on all your settlement communications that they are “Without Prejudice and for Settlement Purposes Only.” Doing this will make it less likely your communications show up at trial or arbitration, but it will not guarantee it. We also urge them not to move too quickly off their initial positions, unless and until they see real and permanent movement from the other side. We also work with them to help figure out when good faith settlement negotiations have ended and why at that point the risk of continuing to talk usually outweighs the possible benefits of doing so.

What have you seen when trying to settle with a Chinese company before litigating or arbitrating?

For more on negotiating with Chinese companies check out the following:

Categories: Chinese IP

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