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Copyright Pledges in China Film & TV Finance

China Law Blog - Mon, 10/05/2015 - 09:07

Copyright pledges in China. Difficult, but not impossible.

Copyright in China is a bundle of personal and property rights attaching to certain types of works. Copyright works include written works (such as screenplays) and cinematographic works (such as motion pictures). The rights in written works include a right of cinematography, being the right to adapt the written work into a cinematographic work. Producers exercise this adaptation right when they turn a screenplay into a motion picture. The rights in the resulting cinematographic work include the right of public presentation or exhibition, certain broadcast rights and the right to communicate through an information network.

Chinese law provides for the registration of a pledge over copyright works. The regulations refer to the “recordal of a copyrighted work deposit.” China’s pledge system is recognized by WIPO. The pledge is a kind of security interest in support of a loan. An advance of funds on account of development, production or distribution costs, under a contract, can qualify as a loan for the purposes of a pledge. The lender need not be a Chinese entity. It could be a foreign studio, producer, distributor, investor or bank, as long as the copyright concerned is owned by a Chinese entity.

Assembly, a 2007 Huayi Brothers release, was reportedly the first motion picture over which a pledge was registered. China Merchants Bank was the lender. There have since been many accounts of pledges over motion picture copyright and broadcast rights in television programs. Deutsche Bank and Standard Chartered Bank Hong Kong are among the lenders reported to have relied on this form of security.

Though a framework exists, the registration of pledges is not yet common in the Chinese film and TV business. There are several reasons for this. Completion bonds or completion guarantees are only in their infancy here. The existing regulations are not comprehensive and they lack clarity in key areas. There is also no reliable system for assessing the value of copyrights. The main difficulty is the registration of a pledge over future copyright or a copyright expectancy. But, as with so many things in China, difficult does not mean impossible.

The post Copyright Pledges in China Film & TV Finance appeared first on China Law Blog.

Categories: Chinese IP

China Manufacturing Contracts: Yet Another Reason Why You Should Have One

China Law Blog - Sun, 10/04/2015 - 15:28

Drop the stick and back slowly away from the horse carcass/Know when to walk away.

What with China’s economy slowing, our China lawyers are getting a fairly steady stream of emails and phone calls from companies (mostly America) whose Chinese manufacturers have shut down and/or disappeared. The below is email correspondence I recently had with one of these companies, changed to camouflage anything that might enable anyone to identify this company. I chose this American company simply because its sitaution nicely highlights what so may companies that engage in China OEM manufacturing have been going through the last few months. I start with this company’s initial email to me:

Hi Dan,

I’m running into an issue with one of my factories getting ready to close their doors and they have about $210K of our deposits. The factory is broke but they have a lot of assets in the factory.

Is this something that you can help with? Is there something that we can do?

After I determined that the potential client did not have a written contract with its China manufacturer nor did it have anything in writing that would have allowed us to trace its payments to ownership of any specific product made by the Chinese manufacturer:

To put it bluntly, your chances of ever seeing your money again are not terribly good, especially if they do shut down and the creditors come calling. Those creditors will say that, yes, maybe the factory owes you $210,000, but you have no claim to anything specifically owned by the factory (including the products it has sitting there that we would argue were made just for you). Wit this being the case, these other creditors probably will take priority over you or you will be thrown in with them. Many of these other creditors probably have contracts with the Chinese manufacturer making clear that money paid to the factory belongs to them unless and until the factory provides them with the product for which they have paid. Others probably have security interests in factory property.

Your only shot is to move as quickly as possible to try to get what you can though various tactics (letter writing, suing, etc.) before this company actually shuts down completely and starts the creditor feeding frenzy, but even there, your lack of a written contract will make things tough.

We’d be happy to try to help you but I have to tell you that your chances of success are probably less than 50% and so you have to ask whether your paying our hourly attorneys’ fees would be just throwing good money after bad. I do suggest though that you check in with your insurance broker/agent to see whether you might have any coverage for this sort of thing.

I am going to be traveling over the next few days with marginal internet so please text me if you want to get started on this. Like I said, it is urgent and the last thing I want is for any slowdowns to come on our end.

Just as is usually the case in these sort of situations (where we tell them that their chances are not good), the American company chose not to pursue things further in China, but instead to just walk away.

What are you seeing out there?


The post China Manufacturing Contracts: Yet Another Reason Why You Should Have One appeared first on China Law Blog.

Categories: Chinese IP

China Trade Terms: Just Do It Right

China Law Blog - Mon, 09/28/2015 - 10:09

We are not being pedantic. We just want to help. (photo by aliceinflowers, http://bit.ly/1L0l3Lp)

Listen everyone: if you purchase product from China, do not use FOB as a shipping term. Use FCA or CIF (my favorite) or even EXW. But eliminate FOB from your vocabulary today. After you do that, get a copy of Incoterms and learn what the above shipping terms mean and use them exactly as specified. Do not use the UCC: Incoterms only. Do not edit the terms. Just do do it right. If you do this, you do not need to read this post. But if you want some background, read on.

Before you decide this is just a trivial issue, think again. Before you go on, I want you to get on the Internet and look at some photos of the Tianjin Port after the recent tragic explosion. Now consider: reports are that over $600 million of autos and other items were destroyed while sitting in the port. Now consider: who bore the loss of that destruction. Was it the seller or the buyer? Now consider: did any insurance company pay for the loss? Or did they escape the obligation to pay because in fact no insurance covered the items sitting in the port waiting for delivery? If you thought the issue was trivial before, maybe that $600 million bill will make you think again.

So think about it. You are an U.S. company that purchases product from China pursuant to an contract manufacturing arrangement. The completed product is packed into a container at the factory, transported from the factory to the port by truck. The container sits in a processing yard at the port for a week and then is finally loaded onto the ship.

There is a lot that can go wrong in this process. For today, we will consider the issue of risk of loss. That is, who gets paid if the container is lost? What happens if the truck carrying the container to the port is involved in an accident and the entire shipment is destroyed? What happens if the container is stolen from the port? What happens if there is an explosion at the port and the container is destroyed? What happens if the ship sinks in a storm in the Gulf of Alaska? What happens if the container is offloaded and the same misadventures happen before the container is delivered to you, the buyer, at your facility in the United States?

Risk of loss is determined by the shipping terms used for the transaction. For international shipments, shipping terms have been carefully developed over many years and are currently embodies in Incoterms document written by the International Chamber of Commerce. Incoterms cover virtually all of the important issues relating to the international shipment of goods. Selection of a single term resolves virtually all of the important issues. For this reason, every buyer must decide what term will be used and then must operate in compliance with the selected term.

When I discuss this with clients, I find that they are indifferent. When I insist that the issue be confronted, they become irritated. They suggest that my insistence on precision is just the pedantic obsession of a lawyer that has no application to the real world of business. The opposite is true. Risk of loss is a fundamental issue for all international trade business. Failure to do it right is not a technical issue. Failure to do it right is a life and death issue for both sellers and buyers. The Tianjin explosion illustrates why.

So the issue is: where does risk of loss transfer? This issue is decided by the choice of shipping terms. In my experience, most U.S. buyers make the mistake of choosing Free On Board (FOB) as their shipping term. They make this choice as a pricing term. That is, they chose FOB to ensure that the price of the product does not include the price of insurance and freight to ship the product from China to the U.S.

When they chose FOB, these inexperienced buyers do not take into account the issue of risk of loss. Under FOB, risk of loss passes only after the product has been loaded onto the vessel (crosses the rail). Since risk of loss transfers when the product crosses the rail, the buyer purchases insurance that covers the product at that point. Now ask yourself: who has the risk of loss from the time when the product leaves the factory until the time the product is loaded onto the ship? The answer of course is that the factory has the risk of loss.

But I have NEVER encountered a case where a Chinese factory purchased insurance for the brief period between when the product leaves the factory and the time the product is loaded on the vessel. The factory just assumes the buyer has purchased insurance AS IF the risk transfers when the carrier takes delivery. But this is not true.

In my experience, during the period between delivery to the carrier and loading on the vessel, the risk of loss for the product is uninsured. If the buyer is aware that the product in uninsured, then that is a risk that the buyer willingly assumes. However, once again, I have never worked with a buyer that understood that they were taking this considerable risk with product that they may already have paid for. That is, many Chinese factories will demand full payment at the time the product is put into the control of the carrier. They do not want to wait until the product is loaded on the vessel since they can never be sure when this will happen.

The solution to this problem is simple. Use the right shipping term. As the drafters of Incoterms clearly state, for modern shipping by sea, the FOB term should never be used. The proper term is Free Carrier (FCA). Under FCA terms, risk of loss passes when the shipment is put into the custody of the carrier. It does not matter where the carrier takes delivery. It may be at the factory or it may be at the port. Since the buyer can be certain where risk of loss passes, the buyer can be certain that it has obtained the appropriate insurance. The issue of insurance is not left to the seller. The responsibility and benefit of insurance rests on the buyer which is where it belongs.

A related and even more difficult problem arises when buyers define their own terms that simply make no sense. In this area, the problems arise when buyers confuse risk of loss, transfer of title and acceptance of product. In a recent case, I reviewed a contract where a buyer provided that the shipping term would be FOB, but that risk of loss would transfer only after the product was delivered, inspected and accepted. FOB means risk of loss transfers when the shipment is loaded on the vessel. It does not mean anything else.

For this reason, the language provided by the buyer simply did not make sense. In fact, there is NO shipping term that provides for transfer of risk of loss under these terms. In this case, the buyer has confused risk of loss with acceptance of the goods, two entirely unrelated concepts. But, by providing internally incoherent contract language, the buyer did nothing but harm themselves. The only possible result is that insurance for the product would be purchased on entirely random terms. If the shipment is lost, will the insurance company pay? If they pay, who will they pay: the factory or the buyer? Who knows?

The purpose of a contract is to make business terms more predictable. This failure to use standard terms in the standard way just makes the situation less predictable, all to the detriment of the buyer. Why do that? It makes no sense to me. So just stop it and do the right thing. It’s for your own good.

The post China Trade Terms: Just Do It Right appeared first on China Law Blog.

Categories: Chinese IP

China Company Directors and China Criminal Liability

China Law Blog - Sat, 09/26/2015 - 10:12

Prison. It’s everywhere you don’t want to be.

I was recently asked by a reporter about China director liability and I responded as per the below. Because my answer should be of interest to anyone who is a director of a Chinese company or who is contemplating becoming the same, I thought we should run it on here (modified a bit) as well.

Directors of major Chinese companies are lining up to go to prison these days. So director liability is a big issue in China.

That said, the concept of director liability in China is different than in the U.S. In China, the directors are assumed to be directly involved in the day to day business operations of the company. It is very rare in China to have directors who do no more than attend an occasional board meeting and merely review high level documents and policy decisions. For this reason, the directors who are going to jail are going to jail not because they “should have known” about the crimes committed by the company, but because they managed, promoted and supervised those crimes. Thus, the “prudent man” standard is not an issue; the issue is “criminal intent”.

Note also that the directors being prosecuted by the state for committing crimes are not being sued by their shareholders for not properly conducting their management duties. Rather, they are being criminally prosecuted for crimes committed by the company. But, in effect, they are being prosecuted and convicted because, in effect, they committed crimes like embezzlement, tax evasion, and insider trading. There are also cases in the product safety area where director knows the company’s product is not safe but instructs company employees to make the sale anyway.

If you want examples, just Google PetroChina, Citic Securities, Gome, China railroad or “melamine in milk scandal.” Those are all cases where directors and senior management were prosecuted and convicted for major crimes. The list is virtually endless, but those are the first that come to mind.

Who wants the position now?

The post China Company Directors and China Criminal Liability appeared first on China Law Blog.

Categories: Chinese IP

China Employment Law: Hiring Employees from Hong Kong, Macau and Taiwan

China Law Blog - Thu, 09/24/2015 - 22:18


Hiring employees from Hong Kong, Macau and Taiwan. (Photo by T. Aquarium, https://bit.ly/1LB6tKl) 

Generally speaking, residents of Hong Kong, Macau and Taiwan may be employed in China if they satisfy the following conditions:

  1. They are between the ages of 18 and 60 (subject to a couple of exceptions noted below).
  2. They are in good health.
  3. They hold a valid mainland travel permit (issued by the PRC Ministry of Public Security).
  4. For certain occupations, they must also possess a qualification certificate in accordance with any applicable rules.

As mentioned above, the age requirement may be relaxed if the individual is an investor who will directly participate in the business operation, or if the candidate is a technical person immediately needed in mainland, China.

The employer needs to apply to the local labor bureau for an employment permit (台港澳人员就业证), usually by submitting the following documents:

  1. A copy of the employer’s business license
  2. A health certificate (issued by the port hospital of the relevant entry and exit inspection and quarantine department)
  3. A letter of intent or a labor contract with the employee (even though a letter of intent would usually suffice, we recommend you have a written employee agreement with the employee) or other document that can prove the employment relationship
  4. Any applicable professional qualification certificate
  5. The employee’s valid mainland travel permit

The labor bureau will usually make a determination within 10 working days after receipt of all necessary application materials.

Just make sure you do it the right way.

The post China Employment Law: Hiring Employees from Hong Kong, Macau and Taiwan appeared first on China Law Blog.

Categories: Chinese IP

China Antitrust: The Practioner’s Guide

China Law Blog - Wed, 09/23/2015 - 20:54

I began my legal career as a big firm antitrust lawyer and I have remained interested in the topic ever since. So when the good folks over at big firm Sheppard Mullin offered me a chance to review a China antitrust book by one of their China lawyers, Becky Koblitz, I jumped at the chance. Truth is that serious books in English on Chinese law are few and far between these days.  And this is a serious book. But not unenjoyable either.

Doing business in China? Get this book.

The book is The Practitioner’s Guide to Antitrust in China and (not surprisingly) that is exactly what it is. It is much more geared towards the practicing lawyer/in house general counsel than to the law student or academic.

The book does an exceptional job covering China’s anti-monopoly laws and putting them in their practical context. As a small firm that represents mostly SMEs or multinationals on specialized China matters, my firm is not going to be doing much big-time antitrust work in China. But, we constantly handle intellectual property rights issues and the book contains an excellent chapter on intellectual property and that chapter includes the following sections: 

CHAPTER 7 Intellectual Property 127

§7.01 Background 127

  • [A] Intellectual Property Rights in General 127
  • [B] IPR and Antitrust Law 128
  • [C] Intellectual Property Law in China 129

§7.02 IPR and Antitrust in China under the AML 130

  • [A] AML 130
  • [B] SAIC Rules 131
  • [C] AML and the Patent Law 132
  • [D] Other Legislation 133

§7.03 How IPR Have Been Dealt with When the AML Is Enforced 133

  • [A] MOFCOM 133
  • [B] Civil Action: Huawei v. InterDigital 136
  • [C] Government Investigations 137 [1] InterDigital 137 [2] Qualcomm 138

§7.04 Putting Things in Perspective 

I put the above in here as it is representative of how nicely arranged each chapter is and of how most of them conclude with a section entitled “putting things in perspective,” which does exactly that.

The China attorneys at my firm also surprisingly often deal with Chinese unfair competition matters and the book covers that quite well too. Management and legal counsel for foreign companies operating in China or even just doing business with China should do what they can to keep up with China’s fast-paced antitrust developments and this book is the best out there for doing exactly that. It is clearly written and reads well. I mostly skimmed it from beginning to end, to get a quick overall sense of the issues, figuring that I could always return to it when a client next comes to us with a relevant issue. Of course, in the end we must go to the laws and the cases in Chinese for a deeper dive but this book serves as an excellent and fast gateway towards that.

If you are an English speaking lawyer involved with China, you should get this book, read it (quickly is fine) and then keep it nearby.

The post China Antitrust: The Practioner’s Guide appeared first on China Law Blog.

Categories: Chinese IP

China Manufacturing: NDA v. NNN v. OEM

China Law Blog - Wed, 09/23/2015 - 00:13

Want to keep your secrets secret? Use a China-focused NNN Agreement, not a US-Style NDA.

Much of our China legal work still involves helping foreign companies navigate the legal terrain with respect to their China manufacturing. This means that one of the most common things we do is alert our potential clients to the need to use a China-focused NNN Agreement with China manufacturers because US-style NDA Agreements simply do not cut it.

The below is an email that one of our China lawyers sends out pretty much every week (or some variation thereof):

Your NDA with China Company A is of almost no value with your Chinese suppliers. The only way this NDA would be relevant is if China Company A were to disclose some confidential information to these suppliers without your permission. The more likely scenario is that the Chinese factories will simply start selling your product directly to your customers or to third parties. This NDA doesn’t address that scenario, and even if it did, the only company you could hold responsible would be China Company A. I note that China Company A is a Chinese company. This NDA is governed by New York law, and requires the parties to file suit in New York City. Even if you filed suit in New York City and won, you would then need to enforce the judgment in China (which is not going to happen), and it assumes that China Company A has money, which is speculative.

The best way to protect your IP against your Chinese suppliers is to have each one sign an agreement stating that it won’t steal your IP, and if it does it will incur clearly defined damages. The NNN agreements we draft can easily be modified for use with other companies. Note, however, that if these suppliers are already making product for you, then an NNN is probably not the best agreement as it will only address a small part of the overall relationship. If you are in that situation, you really need an OEM Agreement. To know what sort of agreement you do need, I’d want to know more about what, exactly, you’re doing in China. I can say however say that an OEM/Contract Manufacturing Agreement seems the most likely possibility.

Just let me know if you have any further questions.


The post China Manufacturing: NDA v. NNN v. OEM appeared first on China Law Blog.

Categories: Chinese IP

How To Close A China WFOE Without Going To Jail

China Law Blog - Sun, 09/20/2015 - 10:58

Closing a China WFOE. It’s complicated.

Our China lawyers have of late been handling far more WFOE closures than ever. The below are composites of various recent emails we have sent to clients regarding the closing of their WFOEs. To preserve confidentially, we have removed any identifiers and shortened and simplified them for purposes of this post.

The first email is to a client whose WFOE (we will call it Beijing XYZ WFOE) has already had its license revoked.

We were asked to review your situation with respect to your Beijing XYZ WFOE in China.

Your questions concern the current status of your WFOE and the issues of formally closing it under Chinese law. You have also asked us to explain the impact of failing to close this WFOE.

As will be fully described below, the Chinese government has already revoked the business license of Beijing XYZ WFOE. As the legal representative of XYZ WFOE, you are required to carry out a proper liquidation of the company. Such liquidation requires payment of taxes, payment of salary to employees and payment of all major debts of the company. This has not been done. In this situation, you will be held personally liable for damages caused by nonpayment. This means that your entry into the PRC may be barred. More seriously, it could mean that you could be arrested after entry into the PRC. For this reason, you should not enter the PRC until after a proper liquidation of Beijing XYZ WFOE is completed. If such liquidation is not possible or if the shareholders choose not to liquidate, you should not enter into the PRC for at least the next three years, if ever.

When a license is revoked, the following is required:

  1. The company must immediately cease doing business. This means, for example, that all websites and other public announcements where the company offers to do business in China must be taken down.
  2. The official company seals must be collected and deposited with the licensing authority.
  3. All taxes and fees owed to the national and local governments must be paid.
  4. All salary owed to employees must be paid.
  5. The legal representative (you) and the directors of the company must immediately liquidate the company in accordance with the China Company Law and local procedure. All company assets must be used to pay creditors in accordance with the liquidation procedure. Use of the company assets for any other purpose is a crime.

You as the legal representative and the other directors are personally liable for any damages caused to creditors for failing to strictly comply with the above requirements. In this case, since the amount of tax owed is significant, the risk for failure to follow these rules is high.

When a proper liquidation is not completed, the names of the legal representative and the company directors (and sometimes others tied to the company) are placed on a black list. Failure to pay taxes, failure to pay employees and failure to pay a major creditor are normally noted on the black list. The black list is shared with the PRC border control authority and those on the list are usually denied entry into China. This is particularly common in Shenzhen for persons entering the PRC from Hong Kong. Though not common, persons named on this list are sometimes allowed to enter China and then immediately arrested. Entrance and arrest is more likely if the monetary amounts are large or if a government agency is involved (taxes and fees). For this reason, you should not to enter into the PRC until after a proper liquidation of Beijing XYZ WFOE has been completed.

The following are the major legal consequences resulting from the revocation of the Beijing XYZ WFOE business license:

  1. As legal representative, you will not be permitted to act as a director, manager or supervisor of a Chinese company for at least three years from the date of revocation.
  2. The shareholders of Beijing XYZ WFOE will not be permitted to invest in another Chinese company for at least three years from the date of revocation.
  3. The name of the company cannot be used for at least three years from the date of revocation.
  4. The name of the company, the representative director, the shareholder and the directors (and perhaps others tied to the company) will be placed on a national “black list” maintained by the Chinese police, border control authorities and State Administration for Industry and Commerce (SAIC). The black list period is normally for three years. However, some local authorities will maintain the black list for five years. During the black list period, it is difficult or impossible for any person or entity named on the list to engage in investment or company management in China. Though not common, such persons may also be denied entry into China. Normally, however, if proper liquidation is completed there is no risk that such persons will be arrested after entry into China. Note though that unless and until your company pays its taxes, employees and major creditors in full, the consequences for you could be much worse and the time frames much longer.

The below email relates companies whose business licenses have not been revoked, but are looking to close down their China WFOE.

We reviewed the status of Shanghai ABC WFOE with the Shanghai/Jingan office of the SAIC, which has authority over the company. The SAIC informed us that there are no current legal or administrative actions being taken against Shanghai ABC WFOE. This is confirmed by the Shanghai SAIC website. This means that the Shanghai ABC WFOE business license is currently valid and that the company is fully authorized to do business.

I must caution you that failing to properly maintain the company registration status will eventually result in a revocation of the business license. [Such a revocation would have the same consequences as reported above for Beijing XYZ WFOE].

With respect to Shanghai ABC WFOE, the shareholders have the following two options:

  • Maintain the legal status of the company. This requires 1) filing of all annual reports and the annual audit, 2) filing of annual tax return and payment of all taxes, 3) maintaining a legal office.
  • Liquidate the company in accordance with PRC law. With respect to liquidation, the process is complex and time consuming. Though you indicate that you believe that no taxes are due and that there are no company debts, this cannot be confirmed without a proper liquidation. The Jingan authorities can be quite creative in finding taxes and fees that have not been paid.

The alternative to proper liquidation has been described above.

For more on what it takes to shut down and liquidate your China company, check out the following (but please note that some of what is required is local — very local):

The post How To Close A China WFOE Without Going To Jail appeared first on China Law Blog.

Categories: Chinese IP

Product Molds And Tooling In China: Three Things You Must Do to Hang on to Yours

China Law Blog - Sat, 09/19/2015 - 07:54

You may own it, but if you have not done the right things to hang on to it, you ain’t gonna get it.

What with China’s economic downturn, our China lawyers are getting an increasing number of emails and phone calls from companies seeking our help to “get their molds” back from their Chinese manufacturers. 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. And what we are seeing more of these days is the situation where a Chinese manufacturer shuts down and one of the manufacturer’s creditors swoops in to take the foreign company’s mold.

And the thing about molds is that their true value so often exceeds their actual value. We have on more than one occasion been retained by American companies who have expressed a willingness to pay 2-3 times the actual value of their tooling to get it back. They are willing to do this is because they want to prevent their former manufacturer or some other company that has bought their molds from their former manufacturer from being able to use their molds and duplicate their product or because they need their molds fast to be able to fulfill already pending orders.

If you want to position yourself to be able to hang on to your mold, there are some relatively simple and inexpensive steps you should take.

The first thing you should do is identify the heck out of your molds by etching or engraving (in Chinese) the fact that the mold is your property and, if possible, do this both where it is obvious (to deter others) and where it is well hidden (to deter those who might try to remove your markings).

The second thing you should do is require your manufacturer sign (and properly seal) a contract (in Chinese) making clear that you own the molds 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. In other words, your contract needs to work for China because that is where your dispute over your molds will need to be resolved.

The third thing you can do, if possible get a deposit from your manufacturer for your molds, which deposit you will return when your molds are returned to you. If your Chinese manufacturer refuses to give you a deposit for your molds, (which is what happens way more often than not), use its refusal as a leverage point to justify your putting in the 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 or tooling ownership/return agreement or when we put a mold or a tooling provision in a China OEM Agreement, we start by sending the following questions (among others) to our client:

  • Please provide a 1-2 paragraph description of what you will be doing in China that will be covered by this mold/tooling agreement.
  • What kind of items will be the subject of the agreement: molds, tooling, equipment?
  • Where will the tooling be located? One manufacturer? Numerous?
  • Do you have a direct relationship with the manufacturer, or are you working with an intermediary (sourcing agent or similar)?
  • What agreements do you already have in place concerning the basic business relationship with the various parties? If you have any written agreements, please send them.
  • Does the tooling already exist?
  • 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?
  • What will be the payment method for the tooling, and who will pay?
  • Who will design the tooling? In what form will the design be provided to whoever will manufacture the tooling?

Do the above and your odds of keeping your molds will go way up.

The post Product Molds And Tooling In China: Three Things You Must Do to Hang on to Yours appeared first on China Law Blog.

Categories: Chinese IP

China Experts: Really?

China Law Blog - Thu, 09/17/2015 - 07:52

There are experts; just no “China experts.”

David Wolf over at Silicon Hutong just did a blog post that everyone should know about — at least anyone who has ever used the term “China expert.” In his post, entitled, No China Experts, Wolf talks about how there is no such thing as a China expert. Does anyone know a United States expert? I rest my case.

Wolf lays out the following disclaimer:

I am not a “China expert.”
There is no such thing as a “China expert.”

Anyone who comes to you claiming to be a “China expert” is either deluded (and thus to be pitied), lying (and thus suspect), or out to separate you from your money (and thus to be avoided.)

In my experience, those who claim to be China experts virtually always fall into one of the last two categories, which probably should be conflated into just the last one.

Wolf then writes about how “China is too large, too old, and too complex to be sufficiently understood by a single individual. At the very most, we can be ‘specialists.’ We can never be ‘experts.'” Amen.

Wolf then issues the following counsel:

When doing business in China, you thus cannot rely on the counsel of a single individual, regardless of how experienced, well-connected or erudite. Instead, seek and genuinely consider the advice of a range of people of different backgrounds, and in so doing form your own view based on a synthesis of their views.

China “experts” will only get you into trouble.

Of course he is right.

For another spin on this issue, check out Your Chinese-American VP Don’t Know Diddley ‘Bout China Law And I Have Friggin Had It

The post China Experts: Really? appeared first on China Law Blog.

Categories: Chinese IP

China Fashion Law Symposium: New York City, September 24

China Law Blog - Wed, 09/16/2015 - 06:48

If we can make it in NYC…. (Photo by glynlowe.com)

The Cardozo Journal of International and Comparative Law and the Fashion, Arts, Media & Entertainment (FAME) Center will be putting on US & China: Perspectives on Brand Protection and Intellectual Property on September 24 at 5 PM in New York City.

Here is the agenda:

5:00 p.m. Registration opens

5:30 p.m. Opening remarks by Dean Leslie

5:45 – 7 p.m. U.S. Issues for Chinese Businesses


  • Geoffrey Sant, Special Counsel at Dorsey & Whitney LLP
  • Barbara Kolsun, Professor and Director of FAME at Cardozo School of La


  • Cindy Yang | Partner, Schiff Hardin LLP
  • Helen Su | Counsel, Alston & Bird LLP
  • Mark Cohen | Senior Counsel, U.S. Patent and Trademark Office and author of the China IP Blog

7:10 – 8:35 p.m. China Issues for U.S. Businesses


  • Geoffrey Sant | Special Counsel at Dorsey & Whitney LLP
  • Barbara Kolsun | Professor and Director of FAME at Cardozo School of Law


  • Dan Harris | Founding Partner, Harris Moure and author of the China Law Blog
  • Cedric Lam | Hong Kong Partner, Dorsey & Whitney LLP
  • Ling Zhao | CCPIT Patent and Trademark Law Office and Cardozo LLM Student
  • Lara Miller | Associate Counsel, International AntiCounterfeiting Coalition
  • Stephen Lamar | Executive Vice President, American Apparel & Footwear Association

8:35 p.m. Reception in the main lobby

Looking forward to seeing you there.

The post China Fashion Law Symposium: New York City, September 24 appeared first on China Law Blog.

Categories: Chinese IP

Unmade In China: The Perfect Book For Right Now

China Law Blog - Tue, 09/15/2015 - 08:18

Just finished reading Jeremy Haft’s book, Unmade in China: The Hidden Truth about China’s Economic Miracle.

Let me start by saying that I greatly enjoyed it and I learned a lot from it. It made for a fast and easy read. It was just released and its timing could not have been better because one of its main themes is that China’s economy is not nearly as robust as is (was?) so widely believed. It helps explain some of what is going on with China’s economy today.

Get the book

The book sets out to debunk the following three “myths.”

  • China’s Economy is about to surpass the U.S.
  • Everything is made in China
  • China’s currency manipulation kills jobs

One of Haft’s big themes is that we tend to give far too much credit for the good that comes from China and fail to realize how much bad comes from China, especially when it comes to product manufacturing. Haft plays up how so much of what is manufactured in China is really just assembled there from components made elsewhere. He also highlights how so many of the products China makes are of abysmal quality.

Take baby formula in China. Please. Haft questions why we should expect china to be able to develop and build high end nuclear power plants or airplanes when it cannot even make safe baby formula. Haft sees China’s inability to make good products as an opportunity for US-made products and services to thrive in China.

I agree and I disagree. All that Haft says about China products is true, but at the same time, more and more China designed and made products are competing worldwide. Are these top of the line products? Very very rarely. But they are oftentimes quite good products produced and sold at lower prices than their competitors. And what about all the made in China products we buy every day that work just fine?

Unmade in China did an excellent job of debunking the notion that China’s economy is a juggernaut surpassing that of any other country. I recall reading once how a majority of Americans believe China is already richer than the United States. Haft very nicely takes apart this notion using cold hard facts.

He notes that the United States has $40 trillion more in household, corporate and government assets than China. In other words, the United States is a way, way, way richer country than China. Anyone who has been to China would readily agree on this. And in terms of China’s economy going forward, Haft sees it growing old before it grows rich.

Haft also does a good job (though he is certainly not the first to do this) of highlighting how so much of the revenues and profits from products that are made in China actually goes to the US. He writes of how nearly all of the revenues/profits from a $70 pair of US-branded sneakers made in China goes to the U.S. companies that designed them, handled their transportation, warehousing, advertising and retail costs. He does, however, neglect to mention that Chinese and other foreign companies are increasingly taking on some of these ancillary services tied to products. For example, warehousing of products is increasingly being done in China as is the transporting of products on Chinese made and owned vessels with Chinese crews.

Though Haft does a good job on a micro level explaining how the United States benefits from using China for so much of its product manufacturing, like so many “China people” (this blogger included), he too often glides over the bigger picture. Haft’s arguments very much remind me of a Forbes article, entitled, One Way To Save U.S. Manufacturing Jobs, highlighting a small Midwest windmill company that had unequivocally saved American jobs by moving a large portion of its production to China. The genesis for the Forbes article was one of our posts, China. Friend Or Foe? Opportunity Or Challenge? Or, Why Can’t We All Just Get Along? detailing how our client had managed to save the jobs. All good, but if there were no China, this company would never have had to send any jobs to China in the first place.

But what about on a macro level? Does sending manufacturing to China really help the people who 30 years ago would have worked at a factory making $20 an hour plus benefits, but now work at a fast food stand making $9 without benefits? Does sending manufacturing to China strengthen our country? Does anyone really believe that China will not slowly but surely keep closing the gap with the United States on product quality? What will happen then?

Overall though, I very much liked Unmade in China and I see it as an important and accurate counterweight to so much of what is written and believed about China. It is the perfect book for right now

The post Unmade In China: The Perfect Book For Right Now appeared first on China Law Blog.

Categories: Chinese IP

China As Middle Income Country: Is The Downturn The New Normal?

China Law Blog - Mon, 09/07/2015 - 15:17

Why do so many just assume China’s economy will iveorever rise?  Photo by Daniel Oines (http://bit.ly/1UCVgtu)

Way back in 2011, when China’s economy was still going gonzo, Economist Magazine came out with a special report on whether China would be able to escape the Middle Income Trap. The lead article in that report was titled: Beware the middle-income trap: China’s roaring growth cannot last indefinitely, and I remember it well. I remember it well because I back then sought to engage many people in discussing whether China would ever escape the middle income trap and very few would Then, as now, just about everyone who does business in China or with China is reluctant to admit it possible that the real issue with China’s economy is not its short term gyrations, but rather, whether China will soon plateau at an economic level more akin to Thailand or Malaysia or Brazil or Russia, rather than reach the heights of a Japan or a United States.

Back in 2012, I was on a “Doing Business in China” panel at a Wharton Business School China Forum and while there I had the opportunity to listen to a great lecture by world-renowned economist, Augusto Lopez-Claros. I asked Professor Lopez-Claros whether he thought China would be one of the rare countries that breaks through the middle income trap and his answer was a resounding “it’s possible.” He then went on to note how only six countries have really done that and become developed: South Korea, Japan, Taiwan, Singapore, Hong Kong and Chile. I’m not even sure Singapore and Hong Kong are even large enough to count.

I am not prepared to say that China will not be able to burst through the middle income trap, but I will say that I think those who just assume that it will are ignoring all sorts of things. I will also say that since that 2012 event I have asked a number of other economists and a number of people with deep knowledge of China and of its business climate/economy this same question. And the most common answer I get is that it’s possible, but that it hasn’t really shown much evidence that it will yet. These people talk of how, yes, the complexity of the widgets China is building is growing, but that there are so many other factors indicating it is not heading for first world status, including governance, corruption, massive numbers of rural poor, exodus of talent, and stifling of innovation.

Will China ever become a developed country? If you think it will, what do you think China has that that will enable it to do so? Conversely, if you think it will not, please explain why you think that. I see China doing just fine, a la Malaysia, but becoming an economy like Japan’s, no I don’t see that. Do you? And if you do, what are you seeing that I am not?

The post China As Middle Income Country: Is The Downturn The New Normal? appeared first on China Law Blog.

Categories: Chinese IP

The China Blogroll That Died, Part 1

China Law Blog - Sat, 09/05/2015 - 07:18

Might we be overdoing the death thing?

Teddy sniffing glue he was 12 years old

Fell from the roof on east two-nine
Cathy was 11 when she pulled the plug
On 26 reds and a bottle of wine
Bobby got leukemia, 14 years old
He looked like 65 when he died
He was a friend of mine

Those are people who died, died
Those are people who died, died
Those are people who died, died
Those are people who died, died
They were all my friends, and they died

Jim Carroll, People Who Died

Though I realize that shutting down a blogroll is not the equivalent of friends dying, my shutting down our blogroll today does feel a bit like losing good friends. As I wrote a few weeks ago, in What To Read On China: The End Of Our Blogroll, we chose to shut down our blogroll simply because it had become more trouble than it was worth. As I also wrote in that post, we will be writing a post every once in a while memoralizing three of the deleted blogs at a time. Today’s is the first in that series.

I also want to remind everyone that throughout this “deletion period” we will be gathering up any and all good reads on China, consisting of the following:

1. Good China blogs. “Good” shall mean helpful to those doing business in China or just interested in China.

3. Good podcasts related to China.

4. Good websites related to China.

5. Good twitter accounts related to China.

6. Good Facebook pages related to China.

7. Good books related to China.

8. Good Linkedin Groups related to China.

This is going to be a massive and long-term undertaking and it is going need your help. And so towards that end I ask that you send your suggestions and your lists to us at “firm at harrismoure dot com” and that you put “China List” in your email’s subject. We will over the next few months be reviewing what you send us and doing our own research and then eventually come out with a bunch of blog posts with the results.

We will be doing this alphabetically in threes, and so I start with Asia Health Care Blog, Atlas China and Beijing Boyce.

  • Asia Health Care Blog. This blog is actually now called Health Intel Asia, and it is still vibrant and excellent. Its tagline is “We want to help you better understand Asia’s healthcare markets” and it succeeds in doing exactly that. It is written by the Rubicon Strategy Group, an Asia health care consultancy led by Benjamin Shobert and Damjon De Noble, two leading experts in the Asian health care industry. This blog has been churning out great posts since 2009 and if you have any interest in China’s or Asia’s health care industry, this very much remains a must-read.
  • Atlas China. This blog/journal is on “Hiring trends. Workplace strategy. Executive interviews. The ATLAS-Journal is designed to give you applicable insight that will get you hired or promoted.” It is written by Abe Sorock, a Beijing-based employment/recruiting company. Abe has lived and worked and done business in China for a long time and he is truly insightful on what those entail. I do however need to mention that Abe has not posted since March.
  • Beijing Boyce. Jim Boyce of Beijing Boyce has been eloquently writing about Beijing’s food and beverage scene for just about as long as I can remember. And though I cannot prove it, I believe that Beijing Boyce went up on our blogroll in our first year, 2006. I can prove that we referred to his somewhat eponymous blog in a post for the first (and not the last) time way back in 2007. Jim’s blog is still very much alive and though nominally about Beijing food and wine, the blog is actually great reading for anyone with any interest in China. The blog’s tagline is “a somewhat steady hand on the China F&B scene” and take away the “somewhat” and if you take away the “somewhat” I would heartily concur.

The post The China Blogroll That Died, Part 1 appeared first on China Law Blog.

Categories: Chinese IP

China’s Washington State Connections

China Law Blog - Fri, 09/04/2015 - 11:32

When we first starting writing this blog nearly ten years ago, we often heard from people surprised by our having an international law firm based in Seattle. Why Seattle, we were often asked. Back then I would patiently (well patiently for me anyway) explain how Washington State is more dependent on and probably more open to international trade than any other state. Boeing, Microsoft, Starbucks, Expedia, Expeditors International, Weyerhaeuser, Paccar…. the list of trade dependent companies here goes on and on.

Chou En-Lai and Warren Magnuson sharing a joke

And then I would explain how so many of the small and medium sized companies our firm mostly represents are also international. Software companies, fishing companies, education companies, timber companies….that list goes on and on as well.

Only over time though have I come to realize how unique Washington is when it comes to its internationalism. I saw it as a huge baseball fan when it looked like a group of Japanese businesspeople from Nintendo were going to buy the team. Friends would call to ask how up in arms Seattle was about its team being sold to foreigners. I would have to tell them that absolutely nobody, including the local media, had raised that as an issue; that we were all just focused on keeping the team in town. They would say things like, “well it would be very different here in Chicago/Cincinnati/Milwaukee/St. Louis, I’m telling you that.” And then there are the clients from various parts of the country who tell me of how they have been berated even for doing business with China or Vietnam, by people who ask them if they do not realize that they are “the enemy.” And now we get Donald Trump….

Now I am not going to say that this sort of thing does not happen in Washington, because it absolutely does. And it happens in Seattle too. But I think it happens in Seattle probably (and I have to say probably because there is no way to know) less than just about everywhere else. And that is due not just to its location and to its being a key Pacific port, but also to its history (which I realize is based on its location and to its being a key Pacific port).

Henry “Scoop” Jackson. A great senator.

I thought of the Washington State Asia connection the other day when a reader brought my attention to a new website set up to highlight that. The website is called WA China Watch Digest, and it was created as a labor of love by Wen Liu (刘雯), who has also written a couple of books on the Washington-China connections: My First Impression of China: Washingtonians’ First Trips to the Middle Kingdom and Connecting Washington and China: The Story of The Washington State China Relations Council.

My favorite part of her new website is the page detailing Washington State’s history with China since 1973. Thanks to Senators Henry M. Jackson and Warren Magnuson, Washington State has always punched above its weight when it comes to foreign policy, including China. I also greatly enjoyed the page on China-related Washington luminaries, especially since it contains my ugly mug.

I recommend you check out Ms. Liu’s site.


The post China’s Washington State Connections appeared first on China Law Blog.

Categories: Chinese IP

Importing From China: New California Rules May Help You Assert Made In USA Claims

China Law Blog - Thu, 09/03/2015 - 23:08

If your finished good is ultimately manufactured in the United States and contains only a small amount of China-origin material, California’s new Made in U.S.A. labeling rules may make it easier for you to label your products as Made in U.S.A.  

What is required for your China product to say “made in the USA”?

Prior to California’s new Made in U.S.A. labeling rules, the state prohibited labeling a product as Made in U.S.A. if a product or any of its subcomponent parts were produced or substantially produced outside the United States. By requiring all subcomponent parts to be of U.S. origin, California’s Made in U.S.A. requirement was stricter than the U.S. Federal Trade Commission’s (“FTC”) standard.

The FTC’s Made in U.S.A. standard requires that “all or virtually all” of a product be made in the United States; the FTC has not established a bright-line rule for what constitutes “all or virtually all” of a product. The FTC explains that this standard will typically be satisfied if all of a product’s significant parts and processing are of U.S. origin. Products with Made in U.S.A. labels must contain only negligible amounts of foreign-sourced parts or materials.

California’s new Made in U.S.A. rule, which goes into effect on January 1, 2016, allows products manufactured in the United States to be sold in California with Made in U.S.A. or similar labeling claims under two scenarios:

(1)  The foreign content of the product represents no more than 5% of the product’s final wholesale value; or

(2)  The manufacturer uses foreign-sourced parts and can demonstrate that it cannot make the finished good without the particular foreign-sourced parts and the value of such foreign-sourced parts or articles does not exceed 10% of the product’s wholesale value.

For manufacturers and companies selling products throughout the United States, California’s new law is a big deal. Companies’ marketing departments like to use Made in U.S.A. claims because U.S. customers generally prefer to purchase goods with such labels. They feel such purchases support U.S. commercial efforts.

Because California is such a large market, companies may have been cautious in the past about labeling their goods as Made in U.S.A. if such labels would not have complied with California law. Companies would not have used two different labels – one without a Made in U.S.A. claim to comply with California’s higher labeling standards and one with such a claim for all other states. Corporate administrative, regulatory and logistics costs would have outweighed any value gained from using two different labels, even if the Made in U.S.A. label could have resulted in greater sales outside California.

California’s new law moves the state closer to federal standards for Made in U.S.A. claims and may open up new opportunities for companies to assert such claims. Even so, companies sourcing components from China should ensure that the value of such components is not significant, especially under California’s new bright-line rules, before labeling their products as Made in U.S.A. The real test now is whether companies will be able to demonstrate that their Made in U.S.A. labels comply with California and federal legal requirements.



The post Importing From China: New California Rules May Help You Assert Made In USA Claims appeared first on China Law Blog.

Categories: Chinese IP

China’s Legal Landscape

China Law Blog - Wed, 09/02/2015 - 18:53

A real landscape.

One of our China lawyers, Dan Harris, was recently interviewed regarding China law and lawyering in general in this article, entitled Legal Landscape. Large portions of this interview are China relevant, particularly for foreign companies doing business in China, and so if you are one of those companies, we recommend you read it. The below is an excerpt from the article and we urge you to read the whole thing.


Looking at your practice area, what has been the biggest development in the last five years?

Things that American companies could get away with in China five years ago, they can’t anymore. China now has sophisticated tax and tax collection systems. China has gotten a flavor of what it means to collect taxes, and they love it. Like all governments, they want your money. And if you’re not going to pay them the money that they believe they are owed, they will make your life miserable beyond any conception of the word miserable.

Americans are getting in major trouble for this. We see it in two areas constantly.

An American company will hire, say, three “independent contractors” in China. The Chinese government will come to the American company three years later and say, “What are you doing? You have three employees but haven’t paid employer taxes for the last three years or withheld employee taxes. We’re going to say that you’re doing business in China because you have these three employees, so you owe company income taxes. And by the way, employer taxes and benefit taxes equal, like, 40% of what you paid them in salary for the last three years. And we’re going to charge you interest and a penalty. And if you don’t pay, we will shut down your business here and we may not let you leave the country.”

“What? They’re just independent contractors,” the Americans argue. Well, guess what? If they’re not your cleaning person, or your plumber who’s coming to fix your sink for two days, and you’re paying them money and they don’t have a company, they are your employees.

The other thing is that Americans will set up a company in China that sells a service or a product back to the parent company in the United States. They set it up so that the company in China makes no profit. It is called transfer pricing. But the Chinese government will come in and say, “People don’t run businesses for no profit. We’re going to impute a 30% profit, and you need to pay the last three years’ taxes on that plus penalties, plus interest.” And the Americans freak out.

What you should do is bring on accountants who understand transfer pricing and they will figure out that the typical profit margin is, say, 6-10%, so maybe they put you down for 8%. The Chinese tax authorities will look at that and won’t mess with you. But if they have to come in and you’re making no profit, they don’t start at 8%. They come in at 30%.

That’s how governments always work. Americans need to start realizing that what American companies got away with five years ago, that era is no more. And the things Chinese companies down the street are getting away with? Well, you’re not a Chinese company.

The post China’s Legal Landscape appeared first on China Law Blog.

Categories: Chinese IP

Are You Operating Legally In China? Now Is The Time To Be Sure

China Law Blog - Tue, 09/01/2015 - 08:46

We’ve been accused of trying to scare people. This time we cop to that.

We have been through many China downturns and they all have one thing in common: they cause the Chinese government to get even tougher with foreign companies. But when it comes to getting tough with foreign companies not complying with China’s laws, our China lawyers have never seen anything like the current one. We think it is due more to China’s better capabilities at catching the non-compliant than to an increased desire to do so. Either way, it is happening out there, and in buckets.

Today’s post will focus on the foreign companies that are getting called out on employment matters. In a subsequent posts we will discuss foreign companies getting in trouble for operating beyond the scope of their formation documents.

In the last couple of months we have received more emails and phone calls regarding companies being “summoned” to their local labor bureaus than we received in the last few years. Though these phone calls and emails are coming from all over China, we have no way to know whether the summons are based on local initiatives or whether they are being directed from Beijing.

The below email is an amalgamation of some that we recently have received:

We are in the ________ industry and I have been coming to China for about 10 years. Our business in Europe kept growing at a good rate and so to improve quality, get better prices and avoid agents getting a percentage from us plus a percentage from the factories and making our goods too expensive we decided to start a company in Guangdong 5 years ago and last year we opened a factory to do most of our production.

We have been using a Chinese accounting firm to help us with our accounting and labour matters. The accounting they do is very strange to me, but they insist this is how all Chinese companies work. On labour contracts they told us that we do not need contracts with all of our workers, but just with a few key members of our staff. So out of our 75 workers only 16 have contracts.

Last week we got a letter from a government labour department, summoning us to their offices in two weeks time because they had received a complaint. One of our workers reported us for firing him for no reason. The letter from the labor bureau says that they are claiming ________ rmb for the dismissal and for not having a contract and for making this person work overtime.

Our response to these is typically along the following lines:

ALL of your employees should have had written contracts (in Chinese). Failing to have a written contract opens your company up to substantial penalties. Are you paying all of the required employee taxes on ALL of your employees? I am very concerned that you are not. Here is an article I wrote recently for detailing how (and why) China is going after foreign companies so strongly on labor tax issues. I would not want to see this one problem escalate into a massive tax issue for your China company and I am very concerned that the labor bureau is just using this one case as an excuse to force you to open up all your books on all of your employees. Trust me when I tell you that we have seen this sort of thing happen countless times before.

We like to nip in the bud situations like the one you describe before they reach the government stage, where pretty much nothing good is going to happen. By “nip in the bud,” I mean that we would try to settle with this employee to try to end the government proceeding entirely. Our goal would be to end government involvement as quickly as possible and then clean up your company so as to prevent future problems. We may be too late for that, but there is at least a decent chance that we are not. The first thing we would try to do is to seek to move the meeting with the government back a few weeks to give us time to try to negotiate a settlement with this one employee.

Internally at our firm we had a discussion among some of our China attorneys regarding this sort of situation and one of them (via a long series of emails regarding multiple companies) wrote something like the following:

Yes, this company is in big trouble. And that is because it took advice from a Chinese accounting firm. But what are these guys supposed to do? It should be completely safe to take advice from Chinese lawyers and accountants. But the opposite is too often true, especially outside Shanghai and Beijing. These firms believe that they are doing right by their foreign clients by telling them to do what their Chinese clients do. Do they not know that foreign companies will be treated differently in China? Do they not care? Or is this a situation where both sides (the accounting firm and the client) are deliberately wallowing in silence when both must know that what has been proposed makes no sense and cannot be legal?

Consider, however if this company had operated legally from day one. It probably never would have opened a factory because it would have been clear that it would not be profitable. We can add this to the examples of operating outside the law in China. But what is the advice we give here? We always advise ignoring these sorts of Chinese professionals and stress the need to operate 100% legally. This advice is sound, but for many companies operating 100% legally means not operating at all in China. This accounting firm helped to bring jobs to China that would not otherwise have gone to China and, more importantly, it brought itself years of good fees. Did the company benefit from this “bad” advice? We don’t even know. But we do know that we have seen many foreign companies that have benefitted by operating illegally for three, five and even ten years before they got called out and shut down. This is just another example of how China makes it easy for you to come in with your money but difficult to leave with it.

But again, it is hard to have a lot of sympathy here because these companies did operate illegally and should have known that they were operating illegally. Some of them have to have known that they were operating illegally, but were happy to use their Chinese “professionals” as their cover because they profited handsomely by doing so. And of course they did benefit by operating illegally and we should not forget that either.

But this sort of thing is part of the new anti-corruption moves and so foreign companies are going to need to change their thinking and fast. Three years ago, this sort of company would not even have contacted us. They would have just gone to their Chinese accounting firm and the Chinese accounting firm would have asked for $5,000 and “presto” the problem is solved for a few more years. For all we know, that has been exactly what this company has done many times before. But doing that now would be the worst thing it could possibly do because it then puts it and its top people at great risk of expulsion and even jail time. But do they even have sufficient funds to really try to clean it all up? And is that worth it to them at this point even if they do? So what can they do? If this is as big an issue as we think it is, their best strategy may just be to pack up their bags and leave today. Just another company caught in yet another China paradigm shift.

Bottom Line. If you want to stay in China, now is the time to make sure that you are operating legally there and to take immediate action if you are not. The Chinese government goes considerably easier on companies that self-report their problems and propose solutions than on companies it discovers with problems.

The post Are You Operating Legally In China? Now Is The Time To Be Sure appeared first on China Law Blog.

Categories: Chinese IP

Getting Your Product Into China With China Distributors: The Yin And Yang

China Law Blog - Sun, 08/30/2015 - 08:41

Don’t let your China distributor relationships muddy your path to China success.

We are big fans of Western companies using China distributors to market and sell our client’s products in China. Our thinking on this goes as follows:

1. We have seen far too many Western companies spend way too much time and way too much money trying to sell their products into China.

2. We have seen far too many Western companies fail in selling their products into China.

3. China is a difficult country. Most of the marketing clichés about it are true. It is not one market. For instance, you can succeed in Shanghai and never succeed anywhere else. You can succeed in one province and never succeed anywhere else. China is big and China is diverse. And for many products, its distribution and retail or wholesale networks are a mess. Add in the cultural and language unfamiliarity that accompanies all of this for most Western companies and. . ., well you get the point.

4. From a legal prospective, China distribution agreements are relatively easy in the sense that we can draft a distribution agreement that works for China and for our own clients. As can be seen in the following posts, we have for years we have been extolling the ease of “doing” China distribution contracts and of setting up a sound legal foundation for a successful China distributorship:

China Distributor Agreements: A Relatively Easy Way To Sell Your Products Into China

Selling Your Product To China Through A Distributor. Just The Basics.

Selling Your Product In China Through A China Distributor. Easy-Peasy.

Getting Your Product Into China Via Distributorship. A Legal Piece Of Cake.


Getting the right distributor and then establishing the right distribution relationship is not so easy. Not so easy at all.

I was reminded of that today when a food client of mine sent me an email with a link to a Shanghai Scrap post, entitled, The More Things Change in China – Hershey’s Chocolate Edition. The post seeks to dissect what is going wrong for Hershey’s in China, as evidenced by its most recent earnings report showing that sales are “suffering” in China:

Was this just another case of China’s souring economy dragging down another venerable American company? Or was there something else at play here – something more subtle. In search of an answer, I emailed a gentlemen whose judgment on foreign investments in China I trust, and who asked that – for the purposes of this blog – he be referred to as “Cocoa.” He took a look at Hershey’s attempt at an explanation, and used it to form his own. So, with Cocoa’s permission, I reprint Cocoa’s sound explanation for why Hershey’s is tanking in China.

“I think Hershey’s problems in China – and as judged by China – have nothing to do with Hershey’s chocolates taste which is acceptable, design and packaging which is okay, price which is reasonable and all in all an acceptable value (I pointedly dismiss all other products but the chocolates no matter in what form; peanut butter cups probably make the average Chinese gag). Rather, the company bought a pig in a poke, to wit Shanghai Golden Monkey which Hershey now understands has an “unstable distributor network” (call that distributors disloyal to the brand who can’t be won over to push sales without hefty rebates coming into their pockets) and so the “retail customer reach is not as broad as we (Hershey) believed it to be” (meaning the customer base is much, much smaller than was presented to Hershey) and so the consequence that sales in 2015 are US$90 million less than the US$200 million they expected – well, that’s 45% below projections which to anyone in industry is a sure-fire pink slip to all involved. In short, Hershey’s problems in China have nothing to do with chocolates but everything to do with newbies coming to China and being sold a bill of goods. Yep, it’s that simple.”

I have nothing to add to this except to say that, a) I agree, and b) it’s remarkable that after three decades, well-heeled, established companies continue to allow their enthusiasm to run past their common sense when seeking growth in China.

Let me say that I have no idea as to why Hershey’s sales in China are hurting, but both I and the other China lawyers at my firm have most definitely seen our own clients have their China sales stymied due to their distributor. Of course, on the flip side, we have also seen our clients’ China sales soar due to their distributor in China.

So now that you understand the issue, how can you as a Western company choose the right China distributor and then make your arrangement with that distributor work. Two answers, neither of which I realize are going to be terribly satisfying. One, engage in extensive due diligence when choosing your China distributor. That does NOT mean automatically choosing Chinese Company A simply because Chinese Company A called you. That means first understanding your industry and your market in China and then choosing a reputable distributor best equipped to service your industry and your market. Two, think long and hard about what you want your distributor to do in China and about what you want your distribution relationship to look like in China and about all of the things you need to do to protect yourself in China. And then have a contract drafted that advances all of these things.

Not so hard/hard.

The post Getting Your Product Into China With China Distributors: The Yin And Yang appeared first on China Law Blog.

Categories: Chinese IP

The China Bank Switch Scam: It Gets Hotter When China’s Economy Cools

China Law Blog - Sat, 08/29/2015 - 10:30

Our China lawyers have received at least five emails this past month from companies that have fallen victim to the China bank switch scam, in amounts ranging from USD$12,000 to $383,000. We are getting these at such a pace of late that I have formulated the following automatic response:

Your chances of getting back all of your money are very low.

The China bank switch scam and what to do if it happens to you.

If you were to retain us, we would do the following:

1. Work with your insurance broker and your insurance company to see if it will cover you for this loss. This is pretty much your only real chance of recovering all that you have lost.

2. Try to get some monetary contribution from your Chinese supplier by pointing out to it that it was their computer system that the scammer hacked and therefore it should pay at least some of your loss. This works maybe half the time in getting maybe half of the money back, usually over time. Much will depend on your existing relationship with your Chinese supplier and on what it perceives its future relationship with you will be.

3. Try to determine if there is any chance in recovering anything from the perpetrator. This virtually never leads to any recovery.

As we have frequently written on here, this bank switch scam is the most common, most pernicious and most difficult to detect China scam of which I am aware, and it just unrelentingly keeps happening.

This scam usually involves your regular Chinese supplier asking you to make your next payment to a new bank account, though it sometimes can involve your very first payment to a new Chinese supplier. Then even after you make the payment, your China supplier insists that you still owe it the full amount (oftentimes with added fees) because it never received your payment. When you explain to your China supplier that you in fact did pay it, your supplier points out that the bank account to which you sent the funds is not theirs and that you still owe the money.

What happened? Your Chinese supplier got hacked, either by someone outside or within the company and you indeed have yet to pay it.

Here is the latest one, with all identifiers changed so as to disguise identity:

Dear Harrismoure,

My name is ____________, I am the president of __________, a manufacturing company in Spain.

We had a supplier in china that is selling ________ to us (for over 5 years) and we got a recent request from our supplier asking us to do the deposit on a different account in China and we did for over 230,000 USD.

Then we found out that our supplier did not have the money. Now we do not know who has our money.

I saw your article in Forbes about this and I would like to know whether you can help us.

I wish that I had some new method of preventing this scam (just as I wish that everyone who does business internationally would read this post so that this scam never happens again). But I must resort to saying what we have been saying all along.

This is a scam that can happen to YOU. We have seen many smart, worldly, sophisticated companies of all sizes get caught up in this scam.

What then should you be doing to prevent it from happening to you? Do the following (h/t to Renaud Anjoran for these):

1. Get to know your suppliers who speak English (if you don’t speak Chinese) and get your supplier’s landline phone numbers as that cannot be hacked. Call if you have any concerns.

2. Get your supplier’s bank account information in advance and ask them to refer to “bank account information document” on their invoices, rather than listing out full bank details every time.

3. Ask your suppliers to fax you their invoice and make sure the sending fax number belongs to your supplier’s company.

4. Do a first small wire to confirm the account.

5. Have a special procedure for confirming the company name. Note also “that paying a Chinese company in mainland China is safer for you” than paying them overseas in Hong Kong, Taiwan or elsewhere.

6. Have a special procedure for confirming bank account changes. “Follow the same procedure as point 5, but also call several people in the company. They will understand your attitude if you tell them you are worried about the “different bank account scam” — they are also a victim when it happens to their customers.

And please just be careful out there.

The post The China Bank Switch Scam: It Gets Hotter When China’s Economy Cools appeared first on China Law Blog.

Categories: Chinese IP
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