Generally speaking, once an employee has completed his or her probation period, termination requires severance payment. Note also that even when the employer and the employee mutually decide to terminate their employment relationship, a severance payment is usually required if the employer is the one that initiated the conversation about ending the employment relationship.
Under the PRC Labor Contract Law, the amount of severance that must be paid to the employee is based primarily on the employee’s wages and years of employment. The law provides that for each year (which is any period longer than 6 months) the employee has worked for the employer, the employee will be entitled one month’s wages. For any period of employment of less than 6 months, the employee will be entitled to half a month’s wages. So for example, if your employee worked for you for 30 years and 4 months, you must pay 30.5 months of his or her wages as severance payment.
However, as one of my favorite law professors at Beida used to say: in your practice, you will find a general rule on a particular issue and then you will find an exception to the basic rule and then you will find an exception to that exception. One exception to the basic rule above is that if your employee’s monthly wage exceeds 300% of the local average monthly wage, then the latter should be used in calculating his or her severance payment. Here is an additional wrinkle: in this situation, the number of years of service used to calculate statutory severance will be capped at 12 years.
However, this is not the end of the story. For example, things can get even more complicated when you are dealing with an employee who started working for you before the current PRC Labor Contract Law came into effect on January 1, 2008. Suppose you are terminating an employee whose monthly wage during the last 12 months of employment is higher than 300% of the local average monthly wage. Because the Labor Contract Law does not operate retroactively on this, the employee’s years of employment before 2008 will not be subject to the 300%-local-average-monthly-wage cap and thus the employee’s actual monthly wage should be used for those years. The years of employment after 2008, however, will be subject to the 300% cap.
As is true of nearly everything related to China employment law, the application of what is a relatively clear national law can vary on the local level. For instance, some municipalities apply a 12-month cap under a wider range of circumstances than the national rule. And in Shanghai, if the employee is forced to unilaterally terminate the employment contract due to the employer’s fault (e.g., violence or threats by the employer), the statutory severance will also be subject to a 12-month cap.
At the end of an initial employment term, if an employer does not wish to extend the contract to its employee, it must pay severance. Furthermore, if the employee quits because of employer abuse (e.g., failure to pay the employee wages on time per the employment contract), the employer must pay statutory severance to the employee as well. And don’t forget that the employer is required to withhold any applicable individual income tax on the severance payment.
The post China Employment Law: The Myths and the Realities of Employee Severance appeared first on China Law Blog.
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.
The below is from an email that one of our China lawyers got this week and it if we had a series of common myths about Chinese law, this one would certainly make the top ten.
I am trying to work out a distributorship arrangement with a company in China and they are saying that Chinese law requires we give it an exclusive for all of China. Is this true?
No. This is not true. Nor is it true that you must give your distributer an absolute minimum to make a go as your distributer (which is also often claimed).
For more on the exclusivity issue check out China Distribution Agreements: Exclusivity Is NOT Required and for more on what should go into your China distributor contract, check out China Distribution Agreements In Real Life.
The post Quick Question Friday, China Law Answers, Part XXIII appeared first on China Law Blog.
I regularly read of the Quality Inspection Blog because it consistently provides actionable and accurate advise to companies looking to have their products manufactured in China. It’s written by Renaud Anjoran, who has more than a decade of China sourcing experience and he just gets it. Last year, Renaud wrote a post, entitled, How Can Inventors Develop a Custom-Made Product in China? I somehow missed that post but I learned of it today when a potential client looking to have its IoT product made in China told me that what I was telling him about IP in China “completely matched” what Renaud had said in this post.
It did and here’s what Renaud and I agreed upon:
OEM factories generally don’t invoice customers for new product developments — that cost is factored in the product price.
Chinese companies tend to believe the IP rights of the products they have developed are theirs — even if they assure you that’s not the case when you interview them. When the time comes to give you critical files, they might say no.
What this means in real life — and trust me when I tell you that our China lawyers see this all the time — is that you will have spent years thinking up and prototyping your product in your home country. And then you spend many months working with a Chinese factory to develop your product further so it can be easily and cheaply produced. And then: you have nothing. No rights to your own product. No molds or tooling that relates to your own product. And maybe no files on your own product. You are back to square one. In the meantime, the Chinese manufacturer that now possesses all of these things can easily go off and sell your product to whomever it wants or manufacture it for whomever it wants. The latest trend here (of which we will be writing shortly is for Chinese manufacturers to design patent your product in these situations (and in many other situations) so as to slow you down even further.
Now if you are wondering why or how this so often happens, I will tell you via an example. We had a company that made a unique water bottle. This company had spent a year or so developing the product and prototyping it in the United States. It then went off to China for further development work on its “revolutionary” product. It found a leading water bottle manufacturer “willing” to further refine the water bottle for “free.” Six months later the finished water bottle was ready and the two companies sat down to negotiate pricing. The U.S. company wanted to pay around $2.50 for the water bottles, basing that price on the pricing for fairly comparable water bottles priced elsewhere, along with the proviso that the Chinese company could not sell these same water bottles to anyone else. The Chinese company wanted to charge around $7.50 for the water bottles, allegedly basing this price on its need to “make up for all the time and money incurred in developing it.”
The U.S. company came to us and there was pretty much nothing we could do beyond tell this already pulverized American company that the reason the Chinese manufacturer would not budge even one RMB from its pricing was because it did not want to sell the water bottles to our new client under an exclusive arrangement at all. And why should it? It now had everything it needed to make these water bottles and sell them to whomever it wanted. In other words, the Chinese manufacturer had no further need for the U.S. water bottle company.
You want to pay your China manufacturer to help you develop your product. Because if you don’t pay your Chinese manufacturer to develop your product, the Chinese manufacture WILL believe (not just tend to believe) that the product the two of you developed together belongs to the Chinese manufacturer and not to you. And guess what? You will not have any good proof otherwise. And you also, of course, want a China-specific product development contract documenting what you have paid and who owns what. That is unless you have no problem giving away your product and its associated IP.
Our China employment lawyer, Grace Yang has been writing often of late regarding the finer points of China employment law, in large part because Chinese downturn has led to a substantial increase in ill-conceived employee terminations. See e.g., Grace’s relatively recent posts on China Employment Laws and Lifetime Employment, China Employee Vacation Law, China Employee Probation, Dealing with Pregnant and Nursing Employees, and China Employee Mass Layoff Laws.
Today, I am going to reveal an email I sent to a potential client, a company that had messed up on many of China’s employment law technicalities in large part because it had simply not realized that the applicable local employment rules were different from the national rules. This company had shut down an office and terminated a number of employees in a number of different China cities, without any regard for how those cities differed with respect to their local employment laws. The below email has been modified so as to make it impossible for anyone to know the company involved.
I think it important that I be upfront on how we view China employment arbitration cases. We view them as nearly unwinnable and, more importantly, almost never worth the money to fight. Your case is no different, especially since it appears that your company’s termination violates local laws.
Take the Qingdao matter. For us to sort through all of the legal issues would likely cost you close to what it will likely cost you to strike a deal with this employee. And once we sort through all of the legal issues, the best we could probably tell you is that you have somewhat of a chance to prevail on a few of them, virtually no chance to prevail on most of them, and absolutely no chance to prevail on some of them. I say this based on having briefly discussed your factual situation with our China employment attorney.
Employers very seldom win against their employees in China employment arbitration, foreign employers even less so. And with the recent downturn in China’s economy, the odds for employers have gotten even worse. And if you did anything wrong in shutting down your Qingdao office (and the odds are good that you did), your chances will be even lower. Even foreign employees (and I see some of those were involved here) nearly always win at these arbitrations.
And then there is the cost of preparing for the arbitration and the cost of arbitrating.
What we do on cases like yours is try to settle, with all employees. Generally, Chinese employees want quick money and want to get on with their lives, believing that they can (and often already have) get another job. The down economy may impact this thinking somewhat, but interestingly enough, past downturns have really not. So if you were to retain us, the first thing we would do is some quick and relatively inexpensive additional research on the issues; just enough to be able to have a really good idea of the employee’s weak points that we can highlight in settlement talks. And then we work to settle and then when we settle we document the settlement in such a way as to ensure that the settling employees never assert any claims against your company again.
We would also want to look into the issues with your other (non-terminated) employees as well, to try to nip potential problems there in the bud. The earlier you can resolve these sorts of issues with employees the better. We have handled a number of office closings, including in Shenzhen, and we like to settle with the employees before the closing even happens, when they have a few more months even to work and are feeling safe.
If you agree with the above approach, we should talk some more. If you do not, well then you should not retain us.
How do you handle your employee arbitrations?
The post China Employee Terminations and the Importance of Getting It Right Beforehand appeared first on China Law Blog.
It has been nearly three years since we did a post on foreigners being held hostage in China. Since our China lawyers still regularly get contacted regarding China hostage situations, that has undoubtedly been too long. To make matters worse, we have recently started hearing of a new and horrific twist. But before I go into that, I will set the typical seen by harkening back to a 2009 post, entitled, China Hostage Situation. Now IS A Good Time To Pay Your Debts.
That post dealt with an email I had received from a trusted reader setting forth the following scenario:
Consumer product company had a rep office – staffed with people with US passports. Company had financial problems and needed to file for bankruptcy. The company sent one of their executives to China to advise their suppliers that they were declaring bankruptcy and would be unable at this point to pay their outstanding balances.
As you can imagine, the Chinese suppliers did not take this well, and they stormed the rep office and are now holding the US citizens hostage – literally. Its been days now -and neither the police nor the embassy will help to extract the people.
The whole thing was obviously not handled properly from the start – but this has turned ugly pretty quickly. Each factory is mainland owned.
I’ll let you know how this turns out – I’m not involved – just hearing most of this second-hand.
I hope to write a happy ending to this story when/if it resolves itself in a safe way that protects both the US people as well as the suppliers – but I am not so sure it will be.
Have you encountered similar experiences?
I responded to that email by saying that my firm has been involved in similar situations countless times and that had we been retained on this one, “our advice would have been so different that I would like to think things would have never reached this point. We would have told this company to get ALL of its personnel out of the country before letting suppliers know (from far far away) about the bankruptcy filing and the upcoming slow payments. That is actually always our first advice (both orally and in writing) whenever a foreign company contacts us for help with their China debt issues.
I then went on and discussed a somewhat similar situation my firm had handled and how I had written on that in a post, entitled, China, We Have A Problem. A Mostly True Story. The key takeaway from that post was the need to get everyone out of town. The situation in that post was as follows:
Young Chinese Child falls from a window in a room in which an American employee of our client is one of the few adults. Child is very badly hurt. Very badly. It now appears the child’s injuries will probably not be permanent, but he also may be in recovery for a year. His medical expenses by US standards were fairly low, but they are astronomical by Chinese standards, particularly for this less than large city. A day later, the parents of the child come with a lawyer to tell this employee that they want six figures (in US dollars, not RMB) from him and from his employer for the injuries that have befallen their child. They also go to the police and make the same request of this employee and his American employer.
The parents make clear to the employee that many in the town are behind them and that things will get much worse if payment is not received. The employer calls us and we immediately spring into action. We determine that the police do not seem to be buying into the parents’ story of guilt, yet they have not told this employee and our client’s other employees that they must remain in town as either witnesses or suspects. We learn that our client is not terribly happy with its joint venture partner in this town and that it has no problem taking its employees out of there and sending them home to sit this whole thing out. Though they feel terrible about the injuries that have befallen the kid, they do not consider themselves responsible. Our research of the facts and the law all indicate our client is not liable. However, as everyone who has ever been involved in litigation anywhere in the world knows, not being liable and not being subject to an expensive and time consuming lawsuit are two entirely different and only tangentially related things.
We determine the best course of action is to get the employees out of this town as quickly as possible and on their way back to the United States. We figure that getting them out will change the leverage game entirely. The employees leave and the settlement amount demanded by the parents immediately plunges. Now we can talk with the child’s parents and the joint venture partner (who actually owns and maintains the building from which the child fell) from afar, pretty much stripped of any imminent threats. Our client agrees to pay the parents something towards the medical bills and we (fairly publicly) ask that instead of the Chinese joint venture partner paying what it owes to our client, that it instead pay all of that to the family of the injured child. Written agreements in Chinese are signed on all of this and we move on.
If you are a foreign company without a China presence and you owe money to a Chinese company, you do not need to worry about a hostage situation (so long as you never send anyone from your company to China), but you do probably need to worry about Sinosure, and for how to deal with that you should read China Sinosure: What You NEED to Know.
Chinese Law Prof blog did an excellent post on this same topic, entitled, Debt Hostages. That post is on how the police often look the other way (or even assist) with these kidnappings:
When is kidnapping not kidnapping? Apparently when it’s for the purpose of getting a legitimate debt paid. This, at least, seems to be the social understanding of kidnapping in China, and there’s even legal support for it (the law calls it unlawful detention in that case). The latest case is reported in the Dongguan Times: a couple can’t pay the hospital bill for the wife’s delivery of a baby, so the hospital is holding the baby hostage until the parents pay up. They’ve had the baby for over 100 days so far. One amazing thing about it is that this is apparently a government-run hospital, and the hostage-takers have even held a press conference to justify their actions (apparently they felt the father had not been “sincere” in his efforts to pay). The other amazing thing about it (to me) is that this is seen as relatively acceptable. The newspaper report uses quotation marks around the word “hostage,” as if the baby somehow is not really a hostage. And the most a local lawyer can bring himself to call this is “inappropriate.”
The post goes on to note how taking debt hostages just isn’t that big a deal in China and the police even sometimes assist:
I’ve been seeing reports of creditors taking debt hostages for years, and they are always similar in key points: the creditor keeps a human being in forcible detention and demands payment of a debt as a condition for release. What’s more, the hostage-taking and the identity of the kidnapper are not secret; that would defeat the whole purpose. And finally, the police do nothing. They think of it as a civil dispute having nothing to do with them. For example, back in 1992 I read of a case where a jilted suitor took a woman’s baby as hostage for the return of over 1,000 yuan in gifts. The police didn’t immediately arrest this known kidnapper; instead, the go-between, the village committee, and “judicial departments” tried for five months to persuade him to return the child. Only then did they finally give up and arrest him.
Actually, I was wrong to say the police do nothing – sometimes they actively assist in taking debt hostages. In a book entitled One Hundred Strategies for Using Law to Clear Up Debts (运用法律手段清债百策), the writer mentions as an aside that a plaintiff trying to collect a debt asked the police and the procuracy to assist. They helpfully detained three people from the defendant organization for up to eight months, but were unsuccessful in collecting.
So what is the new twist? We are increasingly hearing of situations where someone calls up the partner (with that term so broadly defined as to include a life partner and a business partner and really anyone else who might be relevant) of the hostage and says that if that person pays x dollars (usually ⅓ to ½ of what is actually owed), the hostage will be released. The partner then pays the money and the company owed the debt then claims it never received a yuan of it. Lacking any proof that any money was paid on the debt and without anything in writing actually from the company, the hostage and its partner(s) are right back where they started from in terms of getting the hostage released, but now they are out a good chunk of money.
So what are the takeaways from all of this?
- If you are in a debt dispute with a Chinese company and you have people in China, you should try to get them all out of China as quickly as possible.
- If you are in a debt dispute with someone in China you should not go to China to try to resolve it.
- If you must go to China or if your employee(s) must remain in China, think about using a bodyguard or two and think very carefully about where you or your employee(s) stay and go. Most importantly, be careful with whom you meet.
- Consider preemptively suing the alleged creditor somewhere (preferably in US Federal Court) so that you can very plausibly claim to the Chinese police and other authorities that you –or your employee(s) — have been seized and held hostage not because of a debt owed, but out of retaliation for your having sued. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.
- Take these situations very seriously and get experienced assistance immediately.
- Do not pay money to anyone without a good mechanism in place (and in writing) to ensure that your payment will resolve the debt and immediately lead to a release of the hostage. We typically structure these resolutions where full payment of any settlement amount does not occur until all hostages have been released and are out of China.
What are you seeing out there?
In China Employment Contracts: Ten Things To Consider, I wrote about the importance of selecting an appropriate initial fixed employment term because in most places in China employees are automatically converted into “open contract” employees when the fixed term concludes. An open-term labor contract means the employer must (with very few exceptions) retain the employee until his or her retirement age.
China’s labor law provides that an employee is entitled to an open-term contract under the following circumstances:
- The employee has been continuously working for the employer for ten years.
- The employer is implementing the labor contract system for the first time or the employer is a state-owned enterprise and went through reorganization and executes a labor contract with the employee, and the employee has been continuously working for the employer for ten years and is less than 10 years from his or her legal retirement age;
- After execution of two consecutive fixed-term labor contracts (unless grounds for termination exists).
The PRC Labor Contract Law is very pro-employee when it comes to conversions to a open-term labor contract. At renewal or execution of the labor contract, unless the employee requests a fixed-term labor contract, an open-term labor contract shall be concluded. And many Chinese courts (especially outside Shanghai) strictly read this language and nearly always find that an open-term labor contract has been created.
For example, in a Jiangsu Province case, after executing two consecutive fixed- term contracts, the employer and the employee entered into a third fixed term contract, at the end of which, the employer chose not to extend the contract. The employee sued and the court held that the employer bore the burden of producing evidence proving the employee had been the one to request the third fixed term labor contract. Lacking conclusive proof of this, the court held that the employer had failed to meet its burden of proof and its decision to execute the third fixed term labor contract was wrongful. Since the employer’s decision to end the employment relationship upon expiration of the third fixed-term contract was illegal, the employee was entitled to be converted to a lifetime employee and the employer was ordered to pay the employee double the employee’s monthly wage from the time an open-term contract should have been entered.
Oh, and don’t forget that you could be deemed to have entered into an open-term employment contract with your employee if the employee works for you for more than a year without having a written employment contract.
Bottom line: I am going to keep it simple her: make sure your employment contracts are current and you are using the right term of employment.
China film IP is hot.
During the Beijing International Film Festival last month, Mathew Alderson, who heads up our China media and entertainment practice, gave a presentation on China film IP. Presenting alongside Mathew was Tom Duke, Senior IP Liaison Officer at the British Embassy Beijing. This was a special event for the British Film Institute delegation to China.
Topics covered in the presentation included:
- Top tips for film IP in China
- The film business as a “restricted sector”
- Sino-foreign film collaborations and co-productions
- The UK-China Co-Production Treaty
- Copyright in China
- Contracts in China
- The Internet and digital ancillaries
The UK Government recently published a Factsheet based on the presentation, stating as follows:
Increasing UK-China film cooperation is offering British films access to revenue streams in the Chinese market through a variety of business models. The Chinese intellectual property (IP) system has developed rapidly over the past 30 years. But a number of differences remain between international norms and the structures of the Chinese film industry and IP system. It is important for British companies to be aware of these differences and to prepare accordingly.
For more on China film IP see:
China Distribution and Reseller and Licensing Agreements: An Almost Completely Made Up Story Because Your Name is Everything
With China shifting from “factory to the world” to “market to the world,” our China lawyers have been getting a ton of new clients seeking our firm’s help in drafting agreements with distributers and resellers and licensees in China. Many of these clients are worried about some vague (usually almost non-existent) threat of “violating Chinese law.” They virtually never are concerned with the biggest threat of all: having their name and reputation trashed beyond recognition.
Let me explain as briefly as I can, which isn’t all that briefly at all.
Many many years ago, there was a really really big company (easily a Fortune 100) that was (and still is) involved in the maritime industry. This company got sued on some sort of personal injury lawsuit by a really good Seattle lawyer. I have to confess that I do not remember the core facts of this case very well at all because it was so long ago and because other lawyers in my firm worked on it, not me. Anyway, this prominent company got sued and as part of its settlement, it assigned over to the client of this really good Seattle lawyer, the right to pursue a fairly large and very well-respected international fishing company.
The Seattle lawyer sued the international fishing company on behalf of the really really big company and our firm was called on to represent this fishing company. In the lawsuit, the Seattle lawyer argued that because it had a mortgage on our client’s vessel, it was entitled to seize our client’s vessel AND our client’s fishing rights because those rights were a part of the vessel. I do not remember how it is that this really really big company thought it was entitled to seize our client’s vessel but what is relevant here is that this was pretty much (I think) the first time anyone had claimed fishing rights are part of a vessel, and it was this really really big company making this new claim. And remember, this really really big company had assigned all of its rights in this lawsuit over to essentially this one Seattle lawyer (who was representing someone, but essentially free to do whatever he wanted).
Now if you know fishing you may know where I am going with this. Fishing rights are a fishing company’s lifeblood and if you are going to go after fishing rights, you are in for a tough fight and there was no way my law firm was going to curl up and die on this one. So what we immediately did was to call our friends in the maritime press and publicize the hell out of this case, but in a certain way of course. We pitched the story as a family fishing company. As I recall, the face of our client — at least the person we made the face of the company for these stories — had started fishing at age 16. And now, we have this really really big company trying to crush his company and extinguish his livelihood. Our theme in every story was the following: this really really big company claims to be a friend of the fishing industry, but look at what it is doing here. Obviously, this really really big company cannot be trusted. So, hint, hint, fellow fishing industry people, do not buy from this company and certainly do not borrow from it either.
Remember, this Seattle lawyer was suing my firm’s client in the name of the really really big company, but the really really big company had zero control over this lawsuit and would garner zero reward from any result. So why then were we trying to embarrass this really really big company? Because we figured that eventually the marketing and sales people at this really really big company would start screaming so loudly about the damage this lawsuit and its resulting publicity was causing that the company would step in and buy the lawsuit back from the really good Seattle lawyer. The Seattle lawyer didn’t really care where his and his client’s money would come from, so long as it would come. And our plan worked. The really really big company stepped in and ended the lawsuit before we expanded our publicity blitz.
Why did I tell this story in a post on China distribution and reseller agreements? Because what this really really big company did was what my mentor when I started out practicing law said that you absolutely never never never do: it gave a third party essentially unlimited use of its name. Yes it was within the confines of a lawsuit, but you get the picture. Anyway, my mentor’s advice was spot on and it applies to distribution, and reseller and licensing agreements with equal force.
If you are going to let someone in China use your name as part of a reseller or licensing or distribution arrangement, you must put limits on that.
Time for another factually questionable story, and this one both because I do not remember all of the facts and also because I need to twist them so nobody can recognize the company, including the company itself.
So many years ago, a Canadian company called us (I actually do not remember in what country this company was based) because it had licensed its restaurant name (it wasn’t really a restaurant) to a company in China but had set no limits on the use of its name. Anyway, this Chinese company had gone out and used the name to make food and that food had poisoned people and all of this made the news under the name of this Canadian company (this part is also not what happened, but it is close and the problems did make the news worldwide). Anyway, this Canadian company called us to see what it could do to end its relationship with this horrible Chinese company and our answer was exactly what it did not want to hear: you entered into a ten year licensing relationship and your agreement does not really limit what this Chinese company can do with your name, nor does it have any provisions that would allow you to terminate the licensing agreement due to what just happened. But hey, if it makes you feel any better, your licensing agreement does not include North America and it will end in nine years.
We then talked about other options for this company, ranging from it changing its name to seeking to pay the Chinese company to go away. I think this company chose just to ride it out and since I cannot remember its name I cannot research what it ended up doing.
Anyway, there is a bottom line here and that is that you must must must always be sure to protect your name, because it is probably the most valuable thing you have.
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.
Just one question this week and it came in about ten minutes ago. But it is a really good one. It is from a friend of mine who teaches business at a University in Shanghai, and it is the following:
Greetings from Shanghai!
You wrote in a recent blog post,” one lesson should be clear from this: if your brand is at all famous and you have the means, strongly consider the Starbucks approach and register your brand in all 45 classes”
My question is – how does Starbucks avoid getting some (or most) of these 45 registrations cancelled after 3 years because of non-use?
My students here in Shanghai often ask me this question.
Thank you for your insight.
Our China trademark lawyer, Matthew Dresden gave this answer:
1. It is true that three years after the registration date, Starbucks’ trademarks could be challenged for non-use (for those goods and services that they are not actually using in commerce). But in China, trademark owners do not have to affirmatively prove use, so these marks will remain valid (and can be renewed after 10 years) unless and until someone files a non-use cancellation against them.
2. Moreover, if Starbucks wants to foreclose the possibility that a third party would cancel these trademarks for non-use, at about the three-year mark they could file new trademark applications in the at-risk classes. Once those applications proceed to registration (and they inevitably would), they would have a new three-year window during which the marks could not be challenged.
3. Note that the above two steps would apply to any company. If we’re talking about Starbucks in particular, they have established that they are a well-known brand and could also fight trademark squatters that way. But that’s a defensive action, and Starbucks has made the tactical decision that it is better to play offense than defense.
For more on China trademarks, check out the following, all of which were written within the last month:
- China Trademarks: Facebook FTW
- China Trademarks and My Favorite (Uncle) Martian
- China’s Trademark Laws vs. the Biggest Company in the World, or Apple’s Cruelest Month
- China Trademark Registration: Keep it Real
The post Quick Question Thursday, China Law Answers, Part XXII appeared first on China Law Blog.
Unlike Apple (which lost a big trademark case) and Under Armour (which had to contend with an annoying trademark copycat), Facebook had a pretty good week in China. In a case decided in late April (but not publicized until last week), the Beijing High People’s Court invalidated Zhongshan Pearl River Beverages’ three trademark registrations for “face book” and sent them back to the Trademark Review and Adjudication Board (TRAB) for reconsideration.
Many of the news stories I’ve read about this case characterize it as a sign that Facebook’s charm offensive may be working—in sharp contrast to Apple’s recent travails, which portend poorly for Apple’s future in China. I find this narrative a bit facile. I think both the Apple and Facebook cases were decided correctly according to Chinese trademark law, and the analysis doesn’t need to go any further. It’s convenient to put a political spin on the outcomes, but it’s hardly necessary.
Apple lost its case because Xintong Tiandi Technology submitted a trademark application for IPHONE just a few months after Apple announced the iPhone in San Francisco, and years before the iPhone went on the market in China. Apple was unable to provide sufficient evidence to the court that IPHONE was a well-known brand at the time of the application, which is why Apple lost.
In contrast, Zhongshan Pearl River’s applications for “face book” was submitted on Jan. 24, 2011. (To be precise, the applications were submitted by Liu Hongqun, the company’s marketing director.) By 2011, Facebook had been widely covered in the Chinese media for years; it wasn’t even blocked in China until 2009. Moreover, the Beijing High Court deemed Liu Hongqun a trademark squatter, noting that he had previously attempted to register trademarks for other famous brands such as 黑人, the alarmingly racist toothpaste that you can still find in stores all over Asia. In other words, the court wasn’t inclined to give Liu the benefit of the doubt, and it had enough evidence to find that Facebook was a well known mark at the time of Liu Honghan’s application.
I also would be reluctant to call the Facebook trademark decision a harbinger of better IP protection for non-Chinese brands. Facebook is a huge, powerful company, and it was quite well-known even back in 2011. How many other companies are as big as Facebook? Still, one lesson should be clear from this: if your brand is at all famous and you have the means, strongly consider the Starbucks approach and register your brand in all 45 classes. I haven’t talked to anyone at Facebook about it, but I am certain they would have gladly paid extra costs upfront to avoid the hassle and cost of having to litigate this case.
It’s also worth remembering that Apple has earned, and is still earning, billions of dollars every year in China. Facebook still isn’t allowed to operate there. So tell me again, how is Facebook coming out ahead here?
Due diligence is an investigation of a business or person prior to entering a contract. It often involves a comprehensive appraisal to establish assets and liabilities or to evaluate commercial potential. Though due diligence is important anywhere, it is doubly so in China where things are often not what they seem.
A failure to undertake due diligence is usually a factor, if not the decisive factor, in losses suffered by foreigners in their dealings with Chinese businesses. My firm’s China lawyers regularly encounter contracts signed with non-existent Chinese companies. We see deals with companies that are not owned or controlled by the people who handled the negotiations or made the promises. We see deals with companies that can never lawfully do what they promised to do. All of these problems could have been avoided with a basic company search report. By the time they came to light was too late to fix them.
China company search reports are an important part of due diligence. They can confirm whether the Chinese company exists and, if so, whether it is in good standing with all of its annual filings up to date. Critically for enforceable contract formation, search reports confirm the full name and registered address of a company. A company search report will identify the individuals with effective control over the management and operations of the company. It will identify the stockholders. It will confirm the business scope, i.e., the business activities in which the company may lawfully engage. Depending on the relevant industry or business activity, lawful operations may require a number of other permits or licenses. These too can be found as part of the search process. In many cases, company search reports can garner other useful information published by the authorities.
Most of the important records publicly available at the national Administration of Industry and Commerce (AIC) or the AIC offices in the municipality or the province where the relevant company is registered. The search process is relatively straightforward for anyone with the expertise and language skills. Searches should only ever be based on publicly available records but the information revealed should nonetheless be regarded as sensitive. Particular care should always be taken to ensure that captured information could not be regarded as secret.
So when things go wrong, don’t blame your Chinese counter-party if you never even bothered to check things out. China has a good system in place for anyone who cares to use it. In our experience, reputable Chinese businesspeople are untroubled by company searches and will readily provide key documents and information to make your search go faster and easier. All you need to do is ask politely at the right time.
The post Doing a deal in China? Get a company search report first appeared first on China Law Blog.
On May 24, China Law Blog’s own Dan Harris will be putting on a webinar on the legal aspects of doing business in China, with a focus on how to structure your Chinese operations and deals so as to protect your IP. This webinar is being put on by CommercialLawWebAdvisor, which describes it as follows:
Companies often cannot afford not to do business in China. Whether producing goods there or selling to the Chinese market, companies that engage in business with Chinese partners need up-to-date legal advice on how to protect their technology and other intellectual property (IP) interests from being counterfeited, pirated, or otherwise misappropriated. As IP theft is one of the top issues facing businesses operating in China, there are substantial risks companies must identify and address proactively to protect their valuable IP assets. Deals made in China can threaten IP rights not just in China, but in markets around the world. Understanding the Chinese IP landscape and how to manage the pertinent issues can go a long way to safeguarding your client’s valuable IP interests.
Please join Dan Harris as he explores the nuts and bolts of constructing a good business deal with a Chinese partner, what your agreements should include, and how to manage the Chinese IP rights framework to minimize your client’s IP-related risks.
WHAT YOU WILL LEARN
This webinar will cover:
- How to choose a good Chinese partner
- Identifying the IP assets that need protection
- How to structure your deal
- Drafting your deal papers
- Drafting China employee contracts to protect your IP
- IP registrations: What you should know about trademarks, patents, copyrights, and licensing agreements
YOUR CONFERENCE LEADER
Your conference leader for “Doing Business in China: Structuring Your Deal and Protecting Intellectual Property” is Dan Harris. Dan is an attorney with Harris Moure, PLLC, in Seattle. He is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players have looked to him for his perspective on international law issues.
Dan writes and speaks extensively on Chinese law with a focus on protecting foreign businesses and his China Law Blog is regarded as one of the best law blogs on the web today. The ABA Journal recently named the China Law Blog to its Blawg Hall of Fame (a designation given to the top 20 law blogs of all time).
This session is recommended for corporate and in-house counsel, as well as attorneys advising companies or organizations and intellectual property attorneys and any business looking at tightening up its China legal situation. Find out more about costs and registration here, and note that China Law Blog readers can use promo code cw16dbc to get a $35 discount on the event.
We look forward to “seeing” you there.
The post Doing Business in China: Structuring Your Deal and Protecting Intellectual Property: May 24 Webinar appeared first on China Law Blog.
“It just goes to show you. It’s always something. If it’s not one thing, it’s another.” Gilda Radner, as Roseanne Roseannadanna
Now I know Roseanne Roseannadanna was never referring to China’s labor laws when she would say the above, but considering how frequently they change (especially lately) she should have been. China wants its labor laws to more closely correspond to its current economic situation and more closely jibe with a modern service economy and it is moving at full force to achieve that.
Last month, China’s Ministry of Education, Ministry of Finance, Ministry of Human Resources and Social Security, State Administration of Work Safety, and Insurance Regulatory Commission jointly promulgated the Administrative Measures on Regulation of Hiring of Career School Student Interns (职业学校学生实习管理规定). This post highlights a few key aspects of these new Measures, with a focus on how they might impact you as a China employer.
The Measures apply to students enrolled at senior-high-level career schools and college-level career schools. China has three levels of career schools in China: junior high (for students who have completed elementary school), senior high (for students who have graduated from junior high) and college (for students who have completed their senior high school studies). Career schools are usually meant for technicians, production/service workers and elementary school teachers. These new Measures do not apply to normal universities. Many foreign businesses (including many of our law firm’s clients) hire in substantial numbers students from all levels of these schools.
Prior to commencement of an internship, an employer entity hiring a student intern must allow the school to conduct an onsite inspection to gather the following information: the entity’s basic information, the nature and content of the internship, the intern’s responsibilities, working and health conditions, and work safety measures. The hiring entity must limit the number of student interns at its workplace to no more than ten percent and the number of student interns at a particular position cannot exceed twenty percent of the total number of workers at similar positions. These restrictions apply only to student interns hired to work relatively independently (“working interns”) and do not apply to those who are merely shadowing.
The duration of the internship should usually be for six months. Before the internship can start, the school, the hiring entity and the student must enter into a three-party agreement, that should include, at minimum, the following:
- The parties’ basic information (generally include their legal names, contact addresses and phone numbers, and the ID number of the student)
- The term/duration of the internship
- The workplace
- The type of work the intern will be doing and the relevant requirements
- The hours and shifts of the internship
- Vacation and rest days
- Lodging and accommodation
- The intern’s compensation and method of payment
- Applicable provisions on labor protection, work safety and health conditions, and occupational hazard prevention measures
- Evaluation and examination of the intern
- Liability for breach of agreement
- Insurance for the intern and applicable provisions addressing accidents, injury, and death.
If the student is under 18, a legal guardian’s written consent is also required. If the student is under 16, you cannot hire him or her as a working intern. Even students over the age of 16 cannot be hired as working interns if the student is still in his or her freshman year at the school. Just as a bit of a side-note, we have lately been getting involved with video gaming contracts involving “employees” under the age of 18 and whether or not they are void due to the “employee” being a minor. Some of these contracts are for surprisingly (to us lawyers anyway) large amounts.
The provincial/municipal education administrative departments and labor bureaus are expected to come up with detailed implementing rules pursuant to these Measures. This means that as with almost all aspects of Chinese employment laws, you need to keep in mind that local rules will also apply.
It’s been a wild week in China trademark news. We’ve already written about Apple’s defeat in the “IPHONE” trademark case. But the story that just keeps getting better is the Uncle Martian/Under Armour trademark row.
The story began last week, when Fujian-based Tingfeilong Sporting Goods, a low-end sneaker manufacturer, debuted its new “Uncle Martian” line of athletic apparel and footwear and released a bunch of photos on Weibo. Anyone with even a passing knowledge of sportswear brands can see that the Uncle Martian logo is nearly identical to the Under Armour logo. Every news story I’ve read has the same take: half dismay, half incredulity at yet another Chinese ripoff of a famous American brand. And it only fans the flames when Tingfeilong issues who, me? denials that disclaim any similarity to Under Armour, while simultaneously posting a scan of Under Armour’s Hong Kong subsidiary on its website as if the companies were connected, along with photos of Under Armour gear with the “Uncle Martian” logo crudely photoshopped in.
But I think the media are missing the point by failing to see this for what it actually is: a brilliant and very conscious marketing ploy by Tingfeilong that has already been successful beyond their wildest dreams. Tingeilong has to know it cannot prevail in a trademark infringement lawsuit brought by Under Armour. I checked the Chinese Trademark Office database and Under Armour has clear ownership of its logo in Class 25, which covers clothing. (Its brand control in other classes of goods is not as strong as it should be, but that’s another story.)
On the other hand, the CTMO only shows one trademark registration on file for “Uncle Martian.” It is also in Class 25, and it was registered on June 6, 2007 by someone named Ma Chenbing, whose registered address was a high school dormitory in Shantou (a city in Guangdong Province). Yes, a high school dorm. Believe me, I have the same questions as you.
If there’s an application on file for Uncle Martian’s copycat logo, it hasn’t shown up yet on the CTMO website. And I don’t think it ever will. I predict Tingfeilong will milk this media coverage for as long as it can, and then as soon as Under Armour gets serious with a lawsuit, Tingfeilong will stop using the copycat logo and just keep the Uncle Martian name. It may not become an international brand, but Tingfeilong was never going to compete on quality. And after all this news coverage, I bet a lot more people will be interested. I’m not sure how big the market is for ironic t-shirts in China, but this American would totally buy one.
Meanwhile, the other component of the Uncle Martian logo, the laurel wreath around the almost-interlocking letters, is an equally blatant ripoff of the Fred Perry logo. Where’s the outrage there? C’mon, mods!
Note: The above photos are from RocketNews24
If you plan to bring on new China employees, there are a number of employment law issues you should consider. This post briefly discusses a few of these issues.
If your new hire had a previous job in China, you should require your new hire to provide proof (usually consisting of a document from his or her previous employer) that the previous employment relationship ended properly. This is not a legal requirement, but rather, for your own benefit. You want your employee to be dedicated to working for just you and so you want to make sure he or she will not continue working for some other employer. You would be surprised (or maybe you wouldn’t) at how often someone seeks to secretly hold two jobs in China, especially for two different WFOEs. To that same end, you will also want to make clear in your offer letter and in your contract and in your rules and regulations that holding more than one job is prohibited. We see it all the time in China: an employee believes he or she is underpaid and so they get a second job or start their own side business in competition with yours. Though you may not care if your employee is selling Gucci bags on WeChat, you will want to make sure your employee’s moonlighting does not adversely affect work performance or your company. You want to make it easy to terminate an employee whose extracurriculars is harming your business.
Before you bring on any new China employee, you should also make sure there are no unresolved issues between your new hire and his or her previous employer. One issue that comes up often is the non-compete. If you did not ask your new hire if he or she ever signed a non-compete with the previous employer, you may be at risk. It does not matter if the new hire is a relatively low level employee; it is still possible the employee signed a non-compete. If you are considered a competitor under that non-compete, your hiring this person could subject you to liability. Get your potential hire to provide you with a copy of any non-compete agreement and a copy of his or her current or previous labor contract. Chinese courts have upheld the validity of one sentence non-compete provisions in labor contract.
You also should confirm whether your new China hire has completed the hand-over and exit procedures of his or her previous employer. Many China employers require their employees cooperate during the exit process and a failure to do so could subject the employee to liability. We have found it very helpful to learn how new hires handled these exit procedures because how they did so can tell you a lot about them.
It also makes sense to try to determine whether your potential new employee gave adequate notice of leaving to his or her previous employer. If he or she did not, the previous employer can sue your new hire for damages, which is not something you want new employees to be bogged down with during their first few months with your company. And how they treated their previous employer will be a good indication of how they will treat you.
Once your new hire officially starts working for you under a written labor contract, you can now sit back and relax and revel in your ability to recruit great new talent, right? Not exactly. Under China employment law, your new hire can leave just by giving you 3 days notice and this notice need not be in writing. Don’t bother trying to enlarge this notice requirement either as you cannot make it any longer than what the law requires.
Do not forget to have your new hire’s social insurance and employee files properly transferred and set up in a timely manner. The probation period is considered part of the employment period, and just because an employee will not complete his or her probation period for six months does not mean you can wait that long to pay his or her social insurance.
Oh, and lastly, keep in mind that if an “employee” has been working for you as a dispatched worker, he or she should not be considered a new hire for purposes of China’s labor laws. Therefore, you may not set an additional probation period for this employee when he or she becomes your direct hire.
For more on what it takes to incorporate new hires in China, check out China Employment Contracts: Ten Things To Consider and if you ever start getting comfortable with China’s employment laws, I urge you read this. We think it a good idea for you to audit your employment situation yearly.
After the month it just had, Apple is probably sick of hearing T.S. Eliot references. First China cut off access to iTunes movies and books. Then Apple reported a 26% drop in quarterly sales in China, Hong Kong, and Taiwan, after which Apple’s stock price took a header. Topping it all off, last week China’s Legal Daily reported Apple’s defeat in a trademark-infringement case, in which the Beijing Municipal High People’s Court upheld the validity of Xintong Tiandi Technology (Beijing) Co., Ltd.’s trademark application for “IPHONE” covering leather goods such as handbags, belts, and yes, cellphone cases. This decision was an affirmation of a Dec. 16, 2013 decision by the Trademark Review and Adjudication Board (TRAB).
Apple’s chief argument in the trademark case was that “IPHONE” is a well-known trademark in China, and therefore any third-party registration – regardless of the product or service – should be invalidated. The TRAB and the Chinese court both rejected this argument, and if you look at the timeline, it was a fairly easy call.
Apple had submitted a trademark application for “IPHONE” on October 18, 2002, and received a registration on November 21, 2003. This trademark registration was in Trademark Class 9 only, covering computer hardware and computer software. Apple first announced the iPhone in public on January 9, 2007 at the Macworld Expo in San Francisco. The first iPhones were available later that year in the U.S., but did not arrive in China until October 30, 2009, after Apple signed a deal with China Unicom.
Meanwhile, on September 29, 2007, Xintong Tiandi Technology (Beijing) Co., Ltd. submitted a trademark application for IPHONE in Class 18 for leather goods.
The only question before the TRAB, and the Beijing Municipal High People’s Court, was this: was “IPHONE” a well-known trademark at the time that Xintong Tiandi filed its application? As we have discussed numerous times (see here, here, and here), it is extremely difficult to prove you have a well-known trademark in China. Generally speaking, to succeed at this, the mark needs to be widely known to the general public in China. And in October 2007 — two years before the first iPhone was sold in China — the mark “iPhone” was not well-known to China’s general public. Accordingly, Apple was held to have had no basis to invalidate Xintong Tiandi’s trademark application.
We can take a few simple lessons from this case:
- If you really don’t want to see your trademark on some random products in China, submit a trademark application to cover more products than what you will be selling. Starbucks has done a great job with this “offensive” strategy in China, filing trademark applications in all 45 classes of goods and services. For brand-conscious companies, this is just the cost of doing business. Would you rather see “your” brand on a line of diapers or lawn furniture? And it almost always makes sense to file for China trademarks in China, not in Madrid. See China Trademarks. Register Them In China Not Madrid.
- Regardless of what you might think, your trademark is almost certainly not well known in China. There are only a handful of non-Chinese brands that would qualify as well known trademarks, and they already have trademark registrations in China. You might have the most famous natural foods store in America, but in China, you might as well be a guy from Inner Mongolia with a backyard chicken coop. You think I just made that up, but I just checked the CTMO website out of curiosity and someone from Hohhot has in fact registered a trademark for “Whole Foods Market” to cover eggs. Just eggs! There’s got to be a story there. See Think You Have A Well Known China Trademark. Think Again.
- If you’re going to file trademark applications in China, do it before you make a big public announcement. The general public in China may not follow all the latest press releases, but you can bet someone in China does, and that someone could very easily file an application for “your” trademark before you ever come to market in China. This applies to movie studios announcing their summer tentpoles just as much as it does to tech companies debuting their new gadget. We’ve said it before and we will say it again. China is a first to file country and this means (with very few exceptions) that whoever files for a trademark first gets it. See Register Your Trademark In China: Now. Just Ask Mike.
- If you’re going to file a China trademark application early, don’t file too early. By filing in 2002 but not announcing its product until 2007, Apple exposed itself to a non-use cancellation action. If one of their competitors had bothered to check the CTMO database, they could have filed a non-use cancellation on “IPHONE” the day after Apple’s announcement in 2007, and then Apple would have been in deep, deep trouble. See China IP Protection: The Force Is Strong With This Blog Post.
Xintong Tiandi’s trademark application will proceed to registration on May 14, 2016, so in about a week you can buy an IPHONE cellphone case from Xintong Tiandi to protect your iPhone. Actually, you can buy one right now, but next week Xintong Tiandi can start legally using the ® symbol on its goods. The Quartz piece on this topic has some nice pictures of those goods, taken from Xintong Tiandi’s website. You might notice that Xintong Tiandi is already using the ® symbol. I guess they were optimistic.
China trademark problems. Don’t let them happen to you.
The post China’s Trademark Laws vs. the Biggest Company in the World, or Apple’s Cruelest Month appeared first on China Law Blog.
Our China lawyers are always asking our clients to secure a copy of their Chinese counter-party’s China business license because a quick review of that license so often provides us with valuable information. I was reminded of that today when I came across a 2012 email while doing a company search. This email is from one of our China attorneys to the client (I was cc’ed), setting forth what we learned just from looking at the Chinese company’s business license, a copy of which our client had.
Just by way of a bit of background, the license was actually for a WFOE (not a Chinese domestic company) and we were looking at the license because our client was trying to determine what had gone on with the Chinese WFOE that was owned by a US company in which it was an investor. I have stripped the email of any identifiers, but you can still get the point.
The China Business License you provided us stated as follows:
- Company name: _____________in Chinese]. No English language equivalent is given in the documents (which is unusual), but this translates as ____________(Beijing) International Trading Company Limited.
- Company address: Beijing City, Dongcheng District__________________. This is a prestigious location in the center of a high-end retail/office district.
- Registered Capital: $600,000 US. The amount is high because high registered capital is required for trading companies. A Chinese CPA must verify all registered capital contributions. You should obtain a copy of the verification. Note also that all WFOEs must undergo an annual audit and file an annual tax return. We should obtain a copy of the audit and the filed tax return(s).
- Representative Director: __________. This person has primary authority for all company operations. We should ensure that you have complete control over this person together with the company seals/chops, bank accounts/bankcards and primary company documents. We should also immediately determine 1) who is the general manager and 2) who are the members of the board of directors.
- Formation date: 8/–/2011. Inspected and approved: 9/–/2012. It is good that the company has been formally inspected. It means someone at the company is trying to follow proper procedure.
- Scope of Business: Wholesale for various consumer goods; financial and business management; import and export of goods and technology, including export-import agency. This is a very broad scope of business that allows for them to do consulting business in addition to trading. This is somewhat unusual and is a very good thing for you since it maximizes the flexibility of the WFOE. However, this scope of business does NOT allow the WFOE to operate as an advertising agency (see discussion below). On the other hand, the existing scope of business allows you to advise your customers on where and how they should place advertising and you can charge a fee for the service. You can also act as an intermediary in arranging with an advertising agency for placement. However, you cannot contract directly to place the advertising. Only an advertising agency can do that.
- Shareholder: _______________ Holding Company. This appears to be the proper shareholder.
Advertising Agency Issue. Here is a brief review of the advertising agency rules. To place advertising in China, a company must be a licensed advertising agency. Foreign companies are permitted to form a wholly foreign owned advertising agency but the rules for doing so are quite strict. The primary rule is that you must prove that 85% of your income over the last 3 years comes from advertising. How you “prove” this is not stated in the rules. There are also special rules for advertising companies related to staffing and registered capital that add extra burdens. The main issue, however, is the one I raised above. You cannot simply amend your current scope of business to add operation as an advertising agency as an additional item within the scope. Instead, you must form an entirely separate company, with a separate office address, staff, registered capital and the rest. As we discussed, you can, of course, enter into contracts between your Chinese entities that would allow you to offer an integrated package of services to your customers.
But beneath that integrated package you will need to maintain a strict separation between the entities. Thus the person who formed the existing WFOE trading company did not make a mistake with respect to the scope of business. Rather, no one has taken the additional step of forming the additional company that would act as an advertising agency
China (Shenzhen mostly) remains 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 are getting a steady diet of China IoT legal matters.
The issue we see on a day to day basis 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. buyer now seeks financing for its young company. The financier (be it angel, VC, private equity, or even someone’s father-in-law) then asks: who really owns the intellectual property in the product? Do you own it, does the Chinese factory own it, or does some third party own it? It is always awkward for the (usually) young entrepreneur to answer that question. However, with the rise of the Internet of Things (IoT), the question has become even more difficult to answer in a definitive way.
How did we get to this point? The process has worked its way through three general stages:
Stage One. In the good old days (say 1981 to 1995), the situation was simple. There were two possibilities. In the first, the Chinese manufacturer made a standard consumer product. The U.S. buyer merely purchased that existing product and perhaps required the manufacturer take the extra step of placing the U.S. 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 U.S. buyer owned its trademark/logo. In the second, the product was a long standing, well developed product of the U.S. buyer. The buyer brought the completed product to the Chinese manufacturer and contracted with the manufacturer to make a copy. In that setting, ownership of the intellectual property was clear: the U.S. buyer owned all of the intellectual property and the Chinese manufacturer owned nothing.
The simplicity of the relationship encouraged the lazy practice of documenting the entire manufacturing relationship through simple purchase orders. NNN agreements, product development agreements and OEM agreements were seldom used, since the IP ownership was clear and the price and delivery terms were taken care of by the purchase order. This lazy approach then led to the subsequent disasters resulting from product defects. But that is an issue for another post.
Stage Two. In stage two (1995 to 2015), a new form of relationship developed. U.S buyers began coming to China with no completed project in mind. Instead, they came to China with a product idea or proposal. The buyer then worked with the manufacturer to co-develop the product. In some cases the role of the Chinese manufacturer was simply to take a completed prototype and then commercialize that prototype for mass production. In these cases, the U.S. buyer arrived with little more than a very basic idea, and the two sides worked to co-develop the product.
Normally, the Chinese manufacturer offered to perform all of the development work at its own expense, with the implied agreement that the manufacturer would be the exclusive manufacturer of the product. This co-development process typically proceeded using the same lazy “purchase order only” approach from stage one. This lazy approach then has led to the typical issues we see today that make answering the “who owns what” question so difficult. In order to do the co-development process properly, the parties must define their relationship with three agreements: 1) NNN Agreement, 2) Development Agreement and 3) OEM Agreement.
Where these agreements do not exist, as is common, a set of standard 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 to have the product made by a different factory, what compensation is owed to the manufacturer who co-developed the product? What is the obligation of the manufacturer to comply with price and quantity requirements of the buyer? If the manufacturer terminates its relationship with the buyer and manufacturers the product under the manufacturer’s own trademark/logo, is this a violation? Absent clear, written agreements, all of these questions have very unclear answers. In that unclear situation, the Chinese factory will generally be in the strongest position and in the event of a dispute the Chinese factory will typically prevail.
Stage Three. In stage three (2015 to today), we arrive at the IoT era. In the design, development and manufacture of consumer products for the IoT market, the already unclear and problem-filled relationships of the stage two era have now become magnified. In the IoT era we are now just entering, 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 much more complex. In most of the IoT projects we have seen over the last six months, the development process has expanded to include the following:
1. Product “concept” from the U.S. buyer.
2. Product external design, from an international design firm.
3. Internal design and function, owned by:
a. The U.S. 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 a smart phone). This then involves two completely separate sets of software: the communication sending software residing on the IoT product and the communication receiving software residing on the application in possibly multiple forms. In the same manner as the internal design, these software components may be written/designed by multiple parties: the U.S. buyer, the Chinese manufacturer and (quite often) third party software design firms.
So now consider: the product is complete, manufacturing is ready to start, and the U.S. buyer goes out for funding. The funding source then says: who owns this IoT product? Who owns its underlying IP? What we have found when we ask the U.S. buyers is that they usually don’t know. And their initial backers and sourcing companies don’t know either.
As you can imagine, the “we don’t know” response does not sit well with sources of serious financing. Even worse, when the U.S. buyer is now pushed to answer the question, they more often than not find out that the answer is that it is not clear who owns the new product, but what is clear is that the one entity that clearly does NOT own the rights to the product is the U.S. buyer. Even worse, it is often not possible to fix the situation when this stage is reached.
So the message is that as the manufacturing setting becomes more complex, it becomes even more important to enter into clear written agreements that answer the obvious questions in advance. It makes little sense to devote time, energy and money on developing an IoT product that someone else will own.
For more on the issues we are saying involving China and the Internet of Things, check out the following:
- China and the Internet of Things: A Love Story
- China and The Internet of Things and How to Destroy Your Own Company
- China and the Internet of Things, Part 3 of 228
Got the below great comment/question today:
I would love to see you write about Taiwan / HK being “not” China, but from a different perspective. What advice do you give to a foreign company that plans to engage TW-based (or truly HK-based, e.g. been based in HK for 30-40 years) manufacturer, and said TW/HK company owns (though often, especially in the case of TW companies, via some Cayman/BVI/offshore entity) it’s own factory in China where the goods will actually be produced.
For many good business and tax reasons, the TW/HK company wants their HQ office to be the supplier of record to the foreign (e.g. US/UK) customer, and for the customer to pay the HQ office for the goods (usually so the factory can keep most profits outside of China and not have the problem of extracting money from China, which you write about so well).
So the US/UK customer will buy goods from (and pay money to) a TW/HK HQ operation, which in turn will sub-contract the manufacturing to their China-mainland subsidiary. In these cases, does your firm typically advise the client to have a contract with the TW/HK HQ, or solely with the China factory (even though they are not paying the China factory directly), or separate contracts with both entities?
You’ve written so much wonderful work on working with “Chinese suppliers” but in so many cases these suppliers are the product of FDI from TW or HK (or Korean, Japanese, US, German, etc) companies. Are the rules of Development Agreements and OEM contracts fundamentally different when a) the china factory has a foreign owner) and b) the customer will pay the foreign owner (rather than factory directly) for the goods?
It is a great question because the situation of a foreign company operating a Chinese factory has become so common and it presents legal problems just about every time it shows up. This issue usually shows up when a Hong Kong (most commonly) or a Taiwan company wants the OEM agreement (a/k/a the manufacturing contract or the supplier agreement) to be with it and not with the Mainland China (PRC) company that owns the Mainland China factory that will be manufacturing the product. I estimate that our China lawyers deal with this issue at least a third of the time when writing China manufacturing contracts, usually in one of the following three situations:
- The Hong Kong or Taiwan entity owns a PRC WFOE as its subsidiary, which WFOE in turn owns the PRC factory.
- There is no parent company-subsidiary link between Hong Kong or Taiwan and the PRC factory. Rather, all or some of the owners of the PRC factory-owning company are also owners of the Hong Kong or the Taiwan company. Or maybe the owners of the Hong Kong or the Taiwan company are simply part of the same extended family as the owners of the PRC factory-owning company.
- There is no ownership connection between the Hong Kong or the Taiwan company and the Chinese factory. The Hong Kong or the Taiwan entity is simply a broker for the Chinese factory.
Though it is nice to know the real relationship between the Hong Kong or Taiwan entity and the PRC factory, it usually isn’t critical for determining how to write the OEM contract. We generally like to see our clients’ OEM agreements be with the PRC company and not solely with the Hong Kong or the Taiwan company, for the following reasons, among others:
- If the manufactured product is of poor quality or delivered late, it is easier to threaten or sue the manufacturer.
- We want the payments to go to the company that actually owns the factory that is doing the manufacturing, rather than an interposed Hong Kong or Taiwan company that receives payment for the manufacturing and we want the OEM agreement to reflect this. This is because there is always the possibility that the PRC factory will claim it was never paid by the Hong Kong or the Taiwan factory to use that as a reason for refusing to manufacture for our client. Yes, this problem can be dealt with by contract(s), but doing so complicates things.
- Our OEM agreements almost always contain non-disclosure, non-compete and non-circumvention provisions. See China NNN Agreements. The PRC manufacturer (not the company in Hong Kong or Taiwan) is best positioned to manufacture and sell our clients’ products in competition with our client. We therefore very much want that manufacturer to have signed a contract that prevents them from doing such a thing.
- We know the PRC manufacturer has assets because we know it owns a factory. Oftentimes the Hong Kong or the Taiwan company has no assets beyond a rented office with a few chairs, desks and computers. We would much prefer our client have contract and litigation leverage over a company with a factory than a company with some chairs. Also, a company with a factory is more likely to abide by a contract so as to avoid being sued than a company with some chairs.
For more on why it almost always makes sense to contract with your PRC manufacturer, check out China Product Outsourcing. How To Distinguish Between An Agent And A Manufacturer and China Contracts, But With Whom?
The post Who Should Sign Your China OEM Agreement? Not Some Hong Kong Company if You Can Help It appeared first on China Law Blog.
Saw the following comment today and thought it would make sense to respond via this blog post, rather than directly:
I never seem to have any luck getting a response on Facebook so I’ll repeat a query here: is it legal to pay the standard 13th month bonus without specifying it in the labour contract? My understanding was that the annual bonus is discretionary, unless you make it otherwise.
We have written 3,865 posts and almost all of them get some comments. Some get a lot of comments. Some get more than 200 comments. Many of those comments are questions. We review the comments to determine whether they are spam or not and if they are not we post them — with a few very rare other exceptions. See China Law Blog Commenting Policies.
Our China lawyers simply do not have the time to read and respond to all of the comments. Sorry.
We are always going to be reluctant to respond to comments that seek from us what is essentially a legal opinion, like the one above. In large part because there is seldom an easy answer for legal questions. Why do you think lawyers charge by the hour?
First off, what is meant by “without specifying it in the labour contract”? Specifying that the 13th payment is discretionary? Specifying that any 13th payment is discretionary? Or not saying anything at all about a 13th payment. These three things can be very different.
If the contract mentions a 13th payment but says it is discretionary but the employer has made the 13th payment for the last 20 years and has on many occasions told its employees that they can expect it every year, how discretionary is it? Has it now de facto become mandatory? Can you see why this situation might be different from a situation where the contract makes very clear that the employer may from time to time make a 13th payment but that doing so expressly does not waive its right not to make a 13th payment and that employer only makes a 13th payment every few years? Can you see why both of these might be different from a situation where the contract is completely silent about a 13th payment but the employer has made one every year for twenty years or has made one only every few years? The comment itself implicitly seems to recognize this, by stating the belief that the 13th month is discretionary, unless the employer makes it otherwise. Our job as attorneys is to determine whether the employer has “made it otherwise.”
Many times our clients tell us their contracts say one thing when they actually say the opposite. Many times our clients are working with an English language contract that says one thing when the official Chinese language version says another. Many times our clients think they have an enforceable contract when under Chinese law they really don’t. See How to Draft a Contract for China. Many times our clients think they don’t have an enforceable contract under Chinese law when they really do. See China LOI and MOU: Don’t Let Them Happen to You. Does this commenter have enforceable written labour contracts with his employees or not? Are those contracts in just English or just Chinese? If they are in both languages, are they clear about the official language or are they explicitly dual-language contracts? All of this could influence both what this commenter wrote to us and, more importantly, the legal reality.
And then there is the fact that so much of China’s employment laws are local. See China Employment Law: Local and Not So Simple. Maybe Shanghai treats this situation (and again, we do not even know what the situation really is) completely differently than Qingdao. Even if we did know where this person is located, we could not answer unless we had that very week answered the very same question with the very same relevant facts in the very same city, unless we were to spend hours reading the local rules for this person’s particular city and then spend more time trying to reach the appropriate government official and then speaking with that official to confirm our legal research.
I wrote this post in less than 20 minutes. If I had spent more time on it and if I had circulated it to some of the other China attorneys in my office (especially if I had sent it to Grace Yang, our lead China employment lawyer), I am certain we together easily could have written at least another ten paragraphs as to why we cannot give any real answer to the above comment without knowing more and without doing our research.
Last week, Grace wrote a post (DIY China Employment Law. Really?) on the problems she sees with foreign companies trying to handle their China employment law matters without a lawyer. Our giving knee-jerk answers to China legal questions would be the China lawyers equivalent.
So for future questions regarding your specific legal issues, please consider the below to be our answer:
We do not know enough to be able to answer your question. For us to be able to answer your question we would need to know a lot more facts and then we would need to conduct legal research into the written laws for wherever it is that you are located and then we would probably want to discuss your situation and our legal findings with the relevant government officials as well. Until we do these things, we simply cannot give you an answer that would be helpful to you.